<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended June 30, 1997
-------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
-------------- --------------
Commission file Number 0-10535
-------
CITIZENS BANKING CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2378932
- ------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Citizens Banking Center Flint, Michigan 48502
- --------------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
(810) 766-7500
----------------------------------------------------
(Registrant's telephone number, including area code)
None
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at July 22, 1997
- --------------------------- -----------------------------
Common Stock, No Par Value 18,592,492 Shares
<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
Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 23
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
JUNE 30, December 31,
(in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 121,174 $ 137,867
Money market investments:
Interest-bearing deposits with banks 50 84
Federal funds sold 35,000 ---
Term federal funds and other 2,692 12,043
---------- ----------
Total money market investments 37,742 12,127
Securities available-for-sale:
U.S. Treasury and federal agency securities 386,254 374,617
State and municipal securities 178,032 191,373
Other securities 16,754 14,181
---------- ----------
Total investment securities 581,040 580,171
Loans:
Commercial 987,291 975,628
Real estate construction 30,534 37,803
Real estate mortgage 553,228 541,809
Consumer 1,145,351 1,018,318
Lease financing 40,895 47,173
---------- ----------
Total loans 2,757,299 2,620,731
Less: Allowance for loan losses (37,618) (35,997)
---------- ----------
Net loans 2,719,681 2,584,734
Premises and equipment 59,989 61,331
Intangible assets 62,175 64,916
Other assets 45,110 42,704
---------- ----------
TOTAL ASSETS $3,626,911 $3,483,850
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 484,266 $ 471,780
Interest-bearing 2,467,517 2,393,027
---------- ----------
Total deposits 2,951,783 2,864,807
Federal funds purchased and securities sold
under agreements to repurchase 151,810 146,903
Other short-term borrowings 66,806 29,515
Other liabilities 40,284 43,250
Long-term debt 88,581 84,133
---------- ----------
Total liabilities 3,299,264 3,168,608
SHAREHOLDERS' EQUITY
Preferred stock - No par value --- ---
Common stock - No par value 89,698 89,231
Retained earnings 236,605 225,112
Net unrealized gain on securities available-for-sale, net of tax 1,344 899
---------- ----------
Total shareholders' equity 327,647 315,242
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,626,911 $3,483,850
========== ==========
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $59,585 $54,646 $115,897 $107,782
Interest and dividends on investment securities:
Taxable 6,736 6,387 13,137 12,175
Nontaxable 2,136 2,301 4,306 4,561
Money market investments 211 578 412 2,363
------- --------- -------- --------
Total interest income 68,668 63,912 133,752 126,881
------- --------- -------- --------
INTEREST EXPENSE
Deposits 25,299 23,709 49,542 47,854
Short-term borrowings 2,358 1,790 4,324 3,512
Long-term debt 1,378 1,546 2,806 3,403
------- --------- -------- --------
Total interest expense 29,035 27,045 56,672 54,769
------- --------- -------- --------
NET INTEREST INCOME 39,633 36,867 77,080 72,112
Provision for loan losses 2,147 1,771 4,292 3,542
------- --------- -------- --------
Net interest income after provision for loan
losses 37,486 35,096 72,788 68,570
NONINTEREST INCOME
Trust fees 3,289 3,076 6,735 6,230
Service charges on deposit accounts 2,571 2,483 5,019 4,918
Bankcard fees 1,480 1,448 2,945 2,792
Other loan income 232 360 446 892
Investment securities gains (losses) (36) 7 (50) 59
Other 2,294 2,374 4,431 4,397
------- --------- -------- --------
Total noninterest income 9,830 9,748 19,526 19,288
------- --------- -------- --------
NONINTEREST EXPENSE
Salaries and employee benefits 17,335 17,201 34,414 33,959
Equipment 2,566 2,434 5,159 4,858
Occupancy 2,272 2,382 4,663 4,734
Intangible asset amortization 1,371 1,370 2,741 2,727
Bankcard fees 963 891 1,865 1,663
Stationery and supplies 808 897 1,754 1,675
Postage and delivery 895 895 1,813 1,719
Advertising and public relations 1,038 898 2,032 1,892
Other 5,583 4,885 10,452 9,450
------- --------- -------- --------
Total noninterest expense 32,831 31,853 64,893 62,677
------- --------- -------- --------
INCOME BEFORE INCOME TAXES 14,485 12,991 27,421 25,181
Income taxes 4,378 3,731 8,106 7,180
------- --------- -------- --------
Net Income $10,107 $ 9,260 $ 19,315 $ 18,001
======= ========= ======== ========
PRIMARY AND FULLY DILUTED INCOME PER SHARE $ 0.69 $ 0.63 $ 1.32 $ 1.23
======= ========= ======== ========
AVERAGE SHARES OUTSTANDING:
Primary 14,656 14,694 14,646 14,684
Fully Diluted 14,688 14,694 14,680 14,684
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
SECOND First Fourth Third
(in thousands) QUARTER Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCK
Balance, beginning of quarter $ 89,380 $ 89,231 $ 91,394 $ 92,677
Exercise of stock options, net of shares purchased 318 149 188 138
Shares acquired for retirement --- --- (2,351) (1,421)
--------- --------- --------- ---------
Balance, end of quarter 89,698 89,380 89,231 91,394
--------- --------- --------- ---------
RETAINED EARNINGS
Balance, beginning of quarter 230,593 225,112 219,027 213,182
Net income 10,107 9,208 9,817 9,603
Cash dividends (4,095) (3,727) (3,732) (3,758)
--------- --------- --------- ---------
Balance, end of quarter 236,605 230,593 225,112 219,027
--------- --------- --------- ---------
UNREALIZED GAIN (LOSS) ON SECURITIES
AVAILABLE-FOR-SALE
Balance, beginning of quarter (1,891) 899 (634) (2,327)
Net unrealized gain (loss), net of tax benefit 3,235 (2,790) 1,533 1,693
--------- --------- --------- ---------
Balance, end of quarter 1,344 (1,891) 899 (634)
--------- --------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY $ 327,647 $ 318,082 $ 315,242 $ 309,787
========= ========= ========= =========
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 19,315 $ 18,001
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 4,292 3,542
Depreciation and amortization 3,607 3,586
Amortization of intangibles 2,741 2,727
Net amortization on investment securities 345 911
Investment securities losses (gains) 50 (59)
Other (5,612) (4,285)
-------- ---------
Net cash provided by operating activities 24,738 24,423
-------- ---------
INVESTING ACTIVITIES:
Net decrease (increase) in money market investments (25,615) 126,241
Securities available-for-sale:
Proceeds from sales 41,287 ---
Proceeds from maturities 53,565 283,001
Purchases (95,431) (322,186)
Net increase in loans (139,239) (125,973)
Purchases of premises and equipment (2,265) (3,037)
-------- ---------
Net cash used by investing activities (167,698) (41,954)
-------- ---------
FINANCING ACTIVITIES:
Net decrease in demand and savings deposits (4,460) (21,226)
Net increase in time deposits 91,436 23,233
Net increase in short-term borrowings 42,198 37,369
Proceeds from issuance of long-term debt 30,000 ---
Principal reductions in long-term debt (25,552) (30,069)
Cash dividends paid (7,822) (7,038)
Proceeds from stock options exercised 467 1,197
-------- ---------
Net cash provided by financing activities 126,267 3,466
-------- ---------
Net decrease in cash and due from banks (16,693) (14,065)
Cash and due from banks at beginning of period 137,867 172,754
-------- ---------
Cash and due from banks at end of period $121,174 $ 158,689
======== =========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six month
periods ended June 30, 1997 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1997.
NOTE 2. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year financial statement presentation.
7
<PAGE> 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a review of the Corporation's performance during the three and
six month periods ended June 30, 1997. This discussion should be read in
conjunction with the accompanying unaudited financial statements and notes
thereto appearing on pages 3 through 7 of this report and the Corporation's 1996
Annual Report on Form 10-K.
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except per share data) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOR THE PERIOD
Interest income $ 68,668 $ 63,912 $ 133,752 $ 126,881
Net interest income 39,633 36,867 77,080 72,112
Provision for loan losses 2,147 1,771 4,292 3,542
Investment securities gains (losses) (36) 7 (50) 59
Other noninterest income 9,866 9,741 19,576 19,229
Noninterest expense 32,831 31,853 64,893 62,677
Income taxes 4,378 3,731 8,106 7,180
Net income 10,107 9,260 19,315 18,001
Cash dividends 4,095 3,745 7,822 7,039
PER SHARE DATA
Net income:
Primary $ 0.69 $0.63 $ 1.32 $1.23
Fully diluted 0.69 0.63 1.32 1.23
Cash dividends 0.285 0.26 0.545 0.49
Book value (end of period) --- --- 22.77 21.02
Market value (end of period close) --- --- 34.25 29.00
FINANCIAL RATIOS (ANNUALIZED)
Return on average:
Shareholders' equity 12.62% 12.40% 12.22% 12.09%
Assets 1.14 1.08 1.11 1.05
Net interest margin (FTE) 4.95 4.83 4.89 4.74
Net loan charge-offs to average loans 0.22 0.22 0.20 0.25
Average equity to average total assets 9.02 8.68 9.04 8.67
Nonperforming assets to loans plus other real estate
(end of period) --- --- 0.68 0.74
Nonperforming assets to total assets (end of period) --- --- 0.52 0.55
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET TOTALS Percent
Change
-------
<S> <C> <C> <C>
At Period End (June 30):
Assets 4.3 $ 3,626,911 $ 3,475,939
Loans 8.1 2,757,299 2,551,429
Deposits 3.0 2,951,783 2,866,708
Shareholders' equity 7.9 327,647 303,532
Average balances:
Assets 2.1 3,524,659 3,453,124
Loans 7.7 2,673,457 2,481,829
Deposits 1.3 2,897,988 2,860,879
Shareholders' equity 6.4 318,672 299,420
</TABLE>
8
<PAGE> 9
PERFORMANCE SUMMARY
Selected financial data as of June 30, 1997 and 1996 and for the three and six
month periods then ended are presented in the table on page 8. As shown,
earnings increased in 1997 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.
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 six
months ended June 30, 1997 and 1996 are summarized on pages 11 and 12,
respectively. The effects of changes in average market rates of interest
("rate") and average balances ("volume") are quantified in the table below.
- --------------------------------------------------------------------------------
ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-----------------------------------------------------------------------------------
1997 Compared With 1996 1997 Compared With 1996
-----------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Net Due to Change in Net Due to Change in
------------------------- -------------------------
(in thousands) Change(1) Volume Rate(2) Change(1) Volume Rate(2)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Money market investments:
Time deposits with banks $ 1 $ 1 $ 0 $ (77) $ (75) $ (2)
Federal funds sold (353) (350) (3) (1,035) (1,040) 5
Term federal funds sold and
other (15) (22) 7 (839) (827) (12)
Investment securities:
Taxable 349 (140) 489 962 110 852
Tax-exempt (165) (185) 20 (255) (314) 59
Loans 4,939 4,488 451 8,115 8,300 (185)
--------- --------- ------- -------- -------- --------
Total 4,756 3,792 964 6,871 6,154 717
--------- --------- ------- -------- -------- --------
Interest Expense:
Deposits:
Demand (183) (55) (128) (419) (100) (319)
Savings 152 (115) 267 102 (251) 353
Time 1,621 1,462 159 2,005 2,191 (186)
Short-term borrowings 568 462 106 812 731 81
Long-term debt (168) 35 (203) (597) (328) (269)
--------- --------- ------- -------- -------- --------
Total 1,990 1,789 201 1,903 2,243 (340)
--------- --------- ------- -------- -------- --------
Net Interest Income $ 2,766 $ 2,003 $ 764 $ 4,968 $ 3,911 $ 1,057
========= ========= ======= ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------
</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 volume and rate related variances in net interest income resulted in
an increase in net interest income of $2,766,000 and $4,968,000 for the three
and six months ended June 30, 1997 as compared to the same periods in 1996.
Overall, loan growth partially offset by time deposit growth and increased
short-term borrowings accounted for the three and six month volume increases.
Yields on earning assets increased from 8.25% and 8.21% to 8.45% and 8.37% for
the three and six months ended June 30, 1997, respectively, as compared with
the same periods of 1996. The increase resulted from higher yields on
investment securities, consumer loans and a higher concentration of loans
to earning assets. Commercial loan yields remained nearly unchanged for the
six months and increased during the three months ended June 30, 1997 when
compared to the same periods in 1996. Real estate mortgage yields were lower
for the three and six month periods ended June 30, 1997 as compared to the same
periods in 1996 due to the sale of the Corporation's mortgage servicing rights
in the third quarter of 1996. The resulting impact of the third party mortgage
servicing costs are now reflected in portfolio yields. Costs savings as a
result of this servicing transfer are reflected in non-interest expense.
Higher interest income due to loan growth was partially offset by reduced
short-term investment securities income as the Corporation continued to
partially fund loan growth with short-term investment assets. This resulted in
$3,792,000 and $6,154,000 in volume related increases for interest income when
comparing the three and six months ended June 30, 1997 to the same periods in
1996.
The cost of interest bearing liabilities increased from 4.12% and 4.17% to
4.24% and 4.21% for the three and six months ended June 30, 1997, respectively,
as compared with the same periods in 1996. The three and six month cost
increase was the result of higher rates on savings deposits and long-term
borrowings as well as a continued shift in deposits from lower rate savings and
demand accounts to higher cost time deposit accounts. These changes are
partially offset by decreased costs for demand deposit and long-term
debt. Rates on time deposits have increased five basis points for the three
months and declined three basis points for the six months ended June 30, 1997
as compared to the same periods in the prior year. These time deposit rate
fluctuations are the result of certain promotional campaigns occurring
through-out the periods. Increased volumes for time deposits and short-term
borrowings resulted in higher interest expense for the three and six month
periods ended June 30, 1997 as compared to the same periods in 1996.
Favorable rate variances on earning assets and improved volumes of higher
yielding loans partially offset by increased costs on interest bearing
liabilities resulted in higher net interest margins for the three and six month
periods ended June 30, 1997 as compared to the same periods in 1996.
Management continually monitors the Corporation's balance sheet to insulate net
interest income from significant swings caused by interest rate volatility. If
market rates change in 1997, corresponding changes in funding costs would be
considered to avoid any potential negative impact on net interest income.
The Corporation's policies in this regard are further discussed in the section
titled "Interest Rate Risk".
10
<PAGE> 11
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
1997 1996
------------------------------ ------------------------------
Three Months Ended June 30 AVERAGE AVERAGE Average Average
(in thousands) BALANCE INTEREST(1) RATE(2) Balance Interest(1) Rate(2)
- -------------------- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Money market investments:
Interest earning deposits with banks $194 $2 5.19% $54 $1 2.75%
Federal funds sold 7,939 109 5.51 32,806 462 5.67
Term federal funds sold and other 7,675 100 5.20 9,654 115 4.86
Investment securities(3):
Taxable 434,470 6,736 6.21 447,682 6,387 5.72
Nontaxable 160,991 2,136 8.19 175,752 2,301 8.10
Loans:
Commercial 999,792 22,281 9.03 970,933 21,133 8.83
Real estate 558,600 11,262 8.06 507,283 10,693 8.43
Consumer 1,109,595 25,325 9.15 980,219 21,853 8.97
Lease financing 42,261 717 6.79 57,461 967 6.73
--------- ------ ---- --------- ------ ----
Total earning assets(3) 3,321,517 68,668 8.45 3,181,844 63,912 8.25
NONEARNING ASSETS
Cash and due from banks 113,883 141,635
Bank premises and equipment 60,276 62,661
Other nonearning assets 104,493 109,024
Allowance for loan losses (37,319) (35,190)
---------- ----------
Total assets $3,562,850 $3,459,974
========== ==========
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits $302,583 1,131 1.50 $315,831 1,314 1.67
Savings deposits 891,877 6,221 2.80 910,971 6,069 2.68
Time deposits 1,275,579 17,947 5.64 1,175,397 16,326 5.59
Repurchase agreements and other short-term
borrowings 192,563 2,358 4.91 153,550 1,790 4.69
Long-term debt 84,006 1,378 6.57 82,475 1,546 7.54
--------- ------ ---- --------- ------ ----
Total interest-bearing liabilities 2,746,608 29,035 4.24 2,638,224 27,045 4.12
NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS'
EQUITY
Demand deposits 451,547 471,786
Other liabilities 43,464 49,600
Shareholders' equity 321,231 300,364
---------- ----------
Total liabilities and shareholders' equity $3,562,850 $3,459,974
========== ==========
NET INTEREST INCOME $39,633 $36,867
======= =======
NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 4.95% 4.83%
====================================================================================================================================
</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 $1,392 and $1,521 for the
three months ended June 30, 1997 and 1996, respectively, based on a tax rate
of 35%.
(3)For presentation in this table, average balances and the corresponding
average rates for investment securities are based upon historical
cost, adjusted for amortization of premiums and accretion of discounts.
11
<PAGE> 12
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
1997 1996
----------------- ----------------
Six Months Ended June 30 AVERAGE AVERAGE Average Average
(in thousands) BALANCE INTEREST(1) RATE(2) Balance Interest(1) Rate(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Money market investments:
Interest earning deposits with banks $194 $4 4.72% $2,819 $81 5.76%
Federal funds sold 8,126 226 5.60 46,101 1,261 5.50
Term federal funds sold and other 7,223 182 5.07 38,055 1,021 5.41
Investment securities(3):
Taxable 429,042 13,137 6.14 428,619 12,175 5.69
Nontaxable 162,567 4,306 8.18 175,099 4,561 8.05
Loans:
Commercial 1,001,033 43,537 8.85 957,468 41,776 8.86
Real estate 554,964 22,280 8.03 491,175 20,674 8.42
Consumer 1,073,802 48,572 9.12 975,525 43,376 8.94
Lease financing 43,658 1,508 57,661 1,956 6.78
---------- -------- ---- ---------- -------- ----
Total earning assets(3) 3,280,609 133,752 8.37 3,172,522 126,881 8.21
-------- -------
NONEARNING ASSETS
Cash and due from banks 115,321 141,484
Bank premises and equipment 60,601 62,711
Other nonearning assets 105,065 111,469
Allowance for loan losses (36,937) (35,062)
---------- ----------
Total assets $3,524,659 $3,453,124
========== ==========
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits $304,927 2,266 1.50 $315,488 2,685 1.71
Savings deposits 890,872 12,296 2.78 908,780 12,194 2.70
Time deposits 1,257,410 34,980 5.61 1,176,166 32,975 5.64
Repurchase agreements and other
short-term borrowings 181,894 4,324 4.79 150,379 3,512 4.70
Long-term debt 82,212 2,806 6.87 90,890 3,403 7.53
---------- -------- ---- ---------- -------- ----
Total interest-bearing liabilities 2,717,315 56,672 4.21 2,641,703 54,769 4.17
-------- --------
NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS'
EQUITY
Demand deposits 444,779 460,445
Other liabilities 43,893 51,556
Shareholders' equity 318,672 299,420
Total liabilities and ---------- ----------
shareholders' equity $3,524,659 $3,453,124
========== ==========
NET INTEREST INCOME $77,080 $72,112
======= =======
NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 4.89% 4.74%
====================================================================================================================================
</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 $2,814 and $3,009 for
the six months ended June 30, 1997 and 1996, respectively, based on a tax
rate of 35%.
(3) For presentation in this table, average balances and the
corresponding average rates for investment securities are based upon
historical cost, adjusted for amortization of premiums and accretion of
discounts.
12
<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 six months ended June 30,
1997 and 1996 is provided below. The provision for loan losses increased
$376,000 and $750,000 during the three and six months ended June 30, 1997,
respectively, as compared with the same periods in 1996. The allowance for
loan losses increased $2.4 million to $37.6 million at June 30, 1997 compared
to June 30, 1996. The ratio of net loans charged off to average loans
outstanding remained unchanged for the three months ended and decreased 5 basis
points for the six months ended June 30, 1997, respectively, as compared to
the same periods in 1996. The decrease resulted from lower charge-offs in the
commercial loan portfolio.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for loan losses - beginning of period $36,975 $34,840 $35,997 $34,771
Charge-offs 2,224 2,243 4,037 4,695
Recoveries 720 888 1,366 1,638
------- ------- ------- -------
Net charge-offs 1,504 1,355 2,671 3,057
Provision for loan losses 2,147 1,771 4,292 3,542
------- ------- ------- -------
Allowance for loan losses - end of period $37,618 $35,256 $37,618 $35,256
======= ======= ======= =======
Loans outstanding at period end $2,757,299 $2,551,429 $2,757,299 $2,551,429
Average loans outstanding during period 2,710,248 2,515,896 2,673,457 2,481,829
Allowance for loan losses as a percentage of loans
outstanding at period end 1.36% 1.38% 1.36% 1.38%
Ratio of net charge-offs during period to average loans
outstanding (annualized) 0.22 0.22 0.20 0.25
Loan loss coverage (allowance as a multiple of net
charge-offs, annualized) 6.3X 6.5x 7.0X 5.8X
- ------------------------------------------------------------------------------------------------------------------------------------
</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."
13
<PAGE> 14
NONINTEREST INCOME
A summary of significant sources of noninterest income during the three and
six months ended June 30, 1997 and 1996 follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME Three Months Ended Six Months Ended Percent
June 30, June 30, Change in 1997
----------------- ---------------- --------------
Three Six
(in thousands) 1997 1996 1997 1996 months months
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Trust fees $3,289 $3,076 $6,735 $6,230 6.9% 8.1%
Service charges on deposit accounts 2,571 2,483 5,019 4,918 3.5 2.1
Bankcard fees 1,480 1,448 2,945 2,792 2.2 5.5
Brokerage and investment fees 377 579 824 977 (34.9) (15.7)
Other loan income 232 360 446 892 (35.6) (50.0)
ATM network user fees 678 492 1,153 954 37.8 20.9
Cash management services 373 373 767 652 0.0 17.6
Safe deposit rentals 281 283 591 556 (0.7) 6.3
Investment securities gains (losses) (36) 7 (50) 59 (1) (1)
Other, net 585 647 1,096 1,258 (9.6) (12.9)
------ ------ ------- -------
Total noninterest income $9,830 $9,748 $19,526 $19,288 0.8% 1.2%
====== ====== ======= =======
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Not meaningful
Noninterest income increased 0.8% and 1.2% in the three and six month periods
ended June 30, 1997 as compared to the same periods in 1996 primarily due to
enhanced trust fees, ATM network user fees and cash management services fees
partially offset by declines in brokerage and investment fees and other loan
income.
Increased trust fees in the investment management and advisory, estate and
employee benefit areas resulted in a 6.9% and 8.1% increase for the three and
six months ended June 30, 1997 as compared to the same periods in the prior
year. Brokerage and investment fees declined for the three and six months
ended June 30, 1997 as compared to the same periods in 1996 due to lower market
penetration. This temporary decline was attributable to the change in the
brokerage provider utilized by the Corporation to sell brokerage and insurance
products and the subsequent transfer of accounts for clients. The new
brokerage provider is expected to enhance future revenue for the Corporation
through higher profit margins, enhanced marketing and improved management
reporting. Other loan income declined $128,000 and $446,000 for the three and
six months ended June 30, 1997 as compared to the same periods in the prior
year due to the Corporation's sale of its mortgage servicing operations in the
third quarter of 1996 resulting in the curtailment of loan servicing fees.
Increased volume and improved pricing strategies resulted in higher ATM network
user fees for both the three and six months ended June 30, 1997 as compared to
the same periods in the prior year. A significant portion of the increase
resulted from the June 1997 implementation of a convenience fee assessed only
to non-client users of the Corporation's ATM network. Cash management services
fees increased $115,000 for the six months ended as compared to the same period
in the year. This increase is volume related as clients have responded to
enhanced investment options which include various money market mutual funds
from which the Corporation receives a management fee. Other miscellaneous
income decreased $62,000 and $162,000 for the three and six months ended June
30, 1997 as compared to the same periods in the previous year due to a declines
in several fee categories, none of which were individually material.
The 1997 and 1996 second quarter and year to date gains and losses on the sale
of investment securities resulted from the sale of certain securities to
reposition the investment portfolio based on the current rate environment.
14
<PAGE> 15
NONINTEREST EXPENSE
Significant changes in noninterest expense during the three and six months
ended June 30, 1997 as compared with the same periods in 1996 are summarized in
the table below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE Three Months Ended Six Months Ended Percent
June 30, June 30, Changes in 1997
----------------- ---------------- ---------------
Three Six
(in thousands) 1997 1996 1997 1996 Months Months
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $17,335 $17,201 $34,414 $33,959 0.8% 1.3%
Equipment 2,566 2,434 5,159 4,858 5.4 6.2
Occupancy 2,272 2,382 4,663 4,734 (4.6) (1.5)
Intangible asset amortization 1,371 1,370 2,741 2,727 0.1 0.5
Bankcard fees 963 891 1,865 1,663 8.1 12.1
Stationery and supplies 808 897 1,754 1,675 (9.9) 4.7
Postage and delivery 895 895 1,813 1,719 0.0 5.5
Advertising and public relations 1,038 948 2,032 1,892 9.5 7.4
Taxes, other than income taxes 603 647 1,263 1,301 (6.8) (2.9)
Other loan fees 819 857 1,569 1,576 (4.4) (0.4)
Consulting and other professional fees 792 584 1,439 1,038 35.6 38.6
Legal, audit and examination fees 449 339 849 729 32.4 16.5
Other, net 2,920 2,408 5,332 4,806 21.3 10.9
------- ------- ------- -------
Total noninterest expense $32,831 $31,853 $64,893 $62,677 3.1% 3.5%
======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
SALARIES AND EMPLOYEE BENEFITS
Salaries and employee benefits expense increased 0.8% and 1.3% for the three
and six months ended June 30, 1997 as compared to the same periods in the prior
year. Salary expense declined 0.6% and 0.1% for the three and six month
comparison due to savings attributable to staff reductions through attrition
partially offset by the effects of normal merit increases. These staff
reductions were associated with the consolidation of the Corporation's six
Michigan bank charters into one called Citizens Bank and the sale of the
Corporation's mortgage servicing operations. These changes both occurred in
1996. Benefit expenses increased 7.2% and 7.9% for the three and six month
comparison as a result of higher costs for retirement plans and health care
benefits.
OTHER NONINTEREST EXPENSE
Other noninterest expenses increased 5.8% and 6.1% for the three and six months
ended June 30, 1997 as compared to the same periods in the prior year. The
most significant increases were attributable to bankcard fees, consulting and
other professional fees, legal, audit and examination fees and other expenses.
Increases in bankcard expenses resulted from higher costs associated with the
Corporation's outside provider for processing services and enhanced loss
prevention efforts. Consulting and other professional services increased
significantly for the three and six months ended June 30, 1997 as compared with
the same periods in the prior year due to various ongoing corporate automation
projects. Legal fees increased for the three and six months ended June 30,
1997 as compared to the same periods in the prior year due to various recurring
legal consultation partially offset by lower audit and examination fees the
result of the 1996 consolidation of the Corporation's Michigan charters. Other
expenses increased primarily due to higher telephone expense as compared to the
same periods in the prior year.
On August 5, 1997, the Corporation announced that it will take a special charge
in the third quarter of approximately $16 to $18 million, after tax (of which
approximately $9 million is non-cash), in connection with its merger with CB
Financial Corporation and the reorganization of its Information Technology
operations. See Item 5. Other Information on page 22 of this filing for
further discussion.
15
<PAGE> 16
INCOME TAXES
Higher pre-tax earnings and a slightly lower level of tax-exempt interest
income resulted in increased federal income tax expense of $647,000 and
$926,000 for the three and six months ended June 30, 1997 as compared to the
same periods in the prior year.
BALANCE SHEET
The Corporation had total assets of $3.627 billion as of June 30, 1997, an
increase of $143 million or 4.1% from $3.484 billion as of December 31, 1996.
Average earning assets comprised 93.1% of average total assets during the first
six months of 1997 compared with 91.9% in the first six months of 1996. This
increase is the result of enhanced cash management techniques implemented
during 1996 and early 1997 which lowered the Corporation's cash and
correspondent bank balances.
INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
Total average investments, including money market investments, comprised 18.5%
of average earning assets during the first six months of 1997, compared with
21.8% for the same period of 1996. Average money market investment decreased
to 0.5% of total average earning assets during the first six months of 1997,
from 2.7% during the corresponding period of 1996. This decline resulted from
funding requirements to support strong loan growth.
LOANS
The Corporation extends credit primarily within the market areas of its two
banking subsidiaries; one located in Michigan and one in Illinois. The loan
portfolio is widely diversified by borrowers and industry groups with no
significant concentrations in any industry. Total average loans increased 7.7%
in the first six months of 1997 as compared to the same period in 1996. This
growth occurred in all categories except lease financing.
NONPERFORMING ASSETS
Financial Accounting Standards Board Statement ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS 118, "Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures" requires creditors
to establish a valuation allowance for impaired loans. A loan is considered
impaired when management determines it is probable that all the principal and
interest due under the contractual terms of the loan will not be collected.
The impairment is measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's observable
market price, or the fair value of the collateral if the loan is collateral
dependent. For all impaired loans, other than nonaccrual loans, interest
income is recorded on an accrual basis. Interest income on impaired nonaccrual
loans is recognized on a cash basis.
The Corporation measures impairment on all large balance nonaccrual commercial
and commercial real estate loans. Certain large balance accruing loans rated
substandard or worse are also measured for impairment. In most instances,
impairment is measured based on the fair value of the underlying collateral.
Impairment losses are included in the provision for loan losses. SFAS 114 does
not apply to large groups of smaller balance homogeneous loans that are
collectively evaluated for impairment, except for those loans restructured
under a troubled debt restructuring. Loans collectively evaluated for
impairment include certain smaller balance commercial loans, consumer loans,
residential real estate loans, and credit card loans, and are not included in
the impaired loan data that follows.
At June 30, 1997, loans considered to be impaired under the Statements totalled
$14.0 million (of which $10.2 million were on a nonaccrual basis). Included
within this amount was $7.3 million of impaired loans for which the related
allowance for loan losses was $1.3 million and $6.7 million of impaired loans
for which the fair value exceeded the recorded investment in the loan. The
average recorded investment in impaired loans during the quarter ended June 30,
1997 was approximately $15.6 million. For the quarter ended June 30, 1997, the
Corporation recognized interest income of $0.3 million which included $0.2
million of interest income recognized using the cash basis method of income
recognition.
At June 30, 1996, loans considered to be impaired under the Statements totalled
$21.9 million (of which $10.4 million were on a nonaccrual basis). Included
within this amount is $6.6 million of impaired loans for which the related
allowance for loan losses was $0.8 million and $15.3 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 June 30,
1996 was approximately $17.0 million. For the quarter ended June 30, 1996, the
Corporation recognized interest income of $0.4 million which included $0.3
million of interest income recognized using the cash basis method of income
recognition.
16
<PAGE> 17
Nonperforming assets consist of nonaccrual loans, restructured loans, loans 90
days past due and still accruing interest, and other real estate owned.
Certain of these loans, as defined above, are considered to be impaired under
the Statements. The Corporation maintains policies and procedures to identify
and monitor nonaccrual loans. A loan (including a loan impaired under the
Statements) is placed on nonaccrual status when there is doubt regarding
collection of principal or interest, or when principal or interest is past due
90 days or more and the loan is not well secured and in the process of
collection. Interest accrued but not collected is reversed and charged against
income when the loan is placed on nonaccrual status.
The table below provides a summary of nonperforming assets as of June 30, 1997,
December 31, 1996 and June 30, 1996. Total nonperforming assets amounted to
$18.8 million as of June 30, 1997, compared with $20.4 million as of December
31, 1996 and $19.0 million as of June 30, 1996. Nonperforming assets as a
percent of total assets are comparable for all three periods presented.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
JUNE 30, December 31, June 30,
1997 1996 1996
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NONPERFORMING LOANS
Nonaccrual:
Less than 30 days past due $4,189 $5,531 $4,705
From 30 to 89 days past due 1,259 1,278 1,344
90 or more days past due 11,618 10,979 10,163
------ ------ ------
Total 17,066 17,788 16,212
90 days past due and still accruing 388 1,362 834
Restructured 420 502 568
------ ------ ------
Total nonperforming loans 17,874 19,652 17,614
OTHER REAL ESTATE OWNED ("OREO") 881 749 1,350
------ ------ ------
Total nonperforming assets $18,755 $20,401 $18,964
======= ======= =======
Nonperforming assets as a percent of total
loans plus OREO 0.68% 0.78% 0.74%
Nonperforming assets as a percent of total assets 0.52 0.59 0.55
- ------------------------------------------------------------------------------------------------------------------------------------
</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 June 30, 1997 such credits amounted to $11.6 million or 0.4% of
total loans, compared with $12.3 million or 0.5% at December 31, 1996 and $11.8
million or 0.5% as of June 30, 1996. These loans are primarily commercial and
commercial real estate loans made in the normal course of business and do not
represent a concentration in any one industry.
DEPOSITS
The Corporation gathers deposits primarily in its local markets and
historically has not relied on brokered funds to sustain liquidity. Average
deposits increased 1.3% in the first six months of 1997 as compared to the same
period in 1996. The shift in customer preferences from demand and savings
deposits to time deposits reflects changing customer liquidity preferences and
the desire for higher yields. Management seeks to maintain core deposit
stability by offering clients a wide range of deposit products at competitive
rates.
17
<PAGE> 18
SHORT-TERM BORROWINGS AND LONG-TERM DEBT
On average, total short-term borrowings increased to $181.9 million during the
first six months of 1997 compared with $150.4 million during the same period of
1996. This increase is attributable to greater utilization of short-term
borrowings from the Federal Home Loan Bank and overnight federal funds.
Long-term debt accounted for $82.2 million or 3.0% of average interest-bearing
funds for the first six months of 1997, decreasing from $90.9 million or 3.4%
for the same period in 1996. To finance the February 28, 1995 acquisition, the
Corporation's Parent company obtained a $115 million seven year amortizing
revolving credit facility. The Corporation has reduced the outstanding balance
to $33.0 million at June 30, 1997. Of this amount, $13 million reprices in
1997, $7 million in March 1998 and $13 million in 1999. 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 June 30, 1997.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996 the Financial Accounting Standards Board issued Statement No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities". In December 1996, the Financial Accounting Standards Board
issued Statement No. 127 which delayed the effective dates of certain
provisions of the original Statement. The Statements establish accounting and
reporting standards to assist in determining when to recognize or derecognize
financial assets and liabilities in the financial statements after a transfer
of financial assets has occurred. The Corporation has adopted the Statements
to the extent permitted and will adopt the remaining provisions effective
January 1, 1998. The adoption is not expected to be material.
In March 1997, the Financial Accounting Standards Board issued Statement No.
128 "Earnings per Share". The Statement establishes standards for computing
and presenting earnings per share (EPS), simplifies the standards for computing
and makes the calculation comparable to international standards. Primary EPS
would be replaced by basic EPS and requires basic and fully diluted EPS to be
presented on the face of the income statement. The Statement is effective for
periods ending after December 15, 1997 and supersedes APB Opinion No. 15 and
AICPA Accounting interpretations 1-102 of Opinion 15. Early adoption is not
permitted and full restatement of EPS must occur upon adoption. The
Corporation will adopt the Statement for year end 1997 reporting and does not
expect the impact to the current EPS calculation to be material.
In June 1997, the Financial Accounting Standards Board issued Statement No. 130
"Reporting Comprehensive Income". The Statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Presently, the only addition to net
income necessary to disclose net income on a comprehensive basis would be the
addition of unrealized gains or losses on available-for-sale investment
securities. The Statement is effective for fiscal years beginning after
December 15, 1997 with reclassification of the financial statements for earlier
periods required for comparative purposes. The Corporation plans to adopt the
Statement in 1998 and does not expect the change to be material.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131
"Disclosure about Segments of an Enterprise and Related Information". The
Statement changes the manner in which public companies report segment
information in annual reports and requires companies to report selected segment
information in interim financial reports. Public companies will be required to
report financial and descriptive information about the company's operating
segments. The Statement is effective for fiscal years beginning after December
15, 1997 with reclassification of the financial statements for earlier periods
required for comparative purposes. In the year of adoption, companies will not
be required to disclose interim period information. The Corporation plans to
adopt the Statement in 1998.
18
<PAGE> 19
CAPITAL RESOURCES
REGULATORY CAPITAL REQUIREMENTS
Bank holding companies, such as the Corporation, and their bank subsidiaries
are required by banking regulators to meet certain minimum levels of capital
adequacy. These are expressed in the form of certain ratios. Capital is
separated into Tier I capital (essentially common stockholders' equity less
goodwill) and Tier II capital (essentially the allowance for loan losses
limited to 1.25% of risk-weighted assets). The first two ratios, which are
based on the degree of credit risk in the company's assets, provide for
weighting assets based on assigned risk factors and include off-balance sheet
items such as loan commitments and stand-by letters of credit. The ratio of
Tier I capital to risk-weighted assets must be at least 4.0% and the ratio of
Total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must
be at least 8.0%. The capital leverage ratio supplements the risk-based
capital guidelines. Banks and bank holding companies are required to maintain
a minimum ratio of Tier 1 capital to adjusted quarterly average total assets of
4.0%
The FDIC, the insurer of deposits in financial institutions, has adopted a
risk-based insurance premium system based in part on an institution's capital
adequacy. Under this system, a depository institution is classified into one
of three capital categories (well-capitalized, adequately capitalized or
undercapitalized) according to its risk-based capital and leverage ratios and
is required to pay successively higher premiums depending on its capital levels
and its supervisory rating by its primary regulator. It is the Corporation's
intention to maintain sufficient capital in each of its bank subsidiaries to
permit them to maintain a "well capitalized" designation (the FDIC's highest
rating).
As summarized below, the Corporation's risk based capital levels were well in
excess of all regulatory standards.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS Regulatory
Minimum For
"Well JUNE 30, December 31, June 30,
Capitalized" 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk based capital:
Tier I 6.0% 9.4% 9.4% 9.1%
Total capital 10.0 10.6 10.6 10.3
Tier I leverage 5.0 7.6 7.3 7.0
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
COMMON AND PREFERRED STOCK
The Corporation initiated a stock repurchase program in November 1987. A
total of 1,260,970 shares have been purchased under this program at an average
price of $15.84 per share. Effective January 27, 1997, the Corporation's stock
repurchase program was formally rescinded by its Board of Directors in
conjunction with the agreement to acquire CB Financial Corporation.
OTHER
Total shareholders' equity was $327.6 million or $22.77 per share as of June
30, 1997, compared with $315.2 million or $21.98 per share as of December 31,
1996 and $303.5 million or $21.02 per share as of June 30, 1996. The
Corporation declared cash dividends of $0.545 per share during the first six
months of 1997, an increase of 11.2% over the $0.49 per share declared during
the same period in 1996.
19
<PAGE> 20
LIQUIDITY AND DEBT CAPACITY
The level of liquid assets available to meet ongoing funding needs and to
capitalize on opportunities for business expansion is closely monitored by
management. It is management's intent to maintain adequate liquidity so that
sufficient funds are readily available at a reasonable cost. Various
techniques are used by the Corporation to measure liquidity, including ratio
analysis. Some ratios monitored by the Corporation include: loans to
deposits, core funding (deposits plus a portion of repurchase agreements and
long term debt less single maturity certificates of deposits) to total funding
(volatile funding plus core funding) and liquid assets to volatile funding
(interest bearing liabilities plus noninterest bearing deposits less core
funding). During 1997, the Corporation's strategy to operate at lower levels
of liquid assets to volatile funding and a higher loan to deposit ratio
improved the asset mix, resulting in increased net interest income. The
Corporation experienced no liquidity or operational problems as a result of the
reduced liquidity levels. These ratios are summarized in the following table:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
KEY LIQUIDITY RATIOS
JUNE 30, December 31, June 30,
1997 1996 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Quarterly average:
Loans to deposits 92.8% 90.7% 87.5%
Liquid assets to volatile funding 32.5 56.8 68.1
Core funding to total funding 87.9 89.3 87.6
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation's quarterly average loan to deposit ratio increased to 92.8% at
June 30, 1997 from 90.7% at December 31, 1996 as a result of loan growth
surpassing deposit growth. The parent will continue to service the scheduled
principal and interest payments with dividends from the Corporation's
subsidiary banks. Management believes that the Corporation has sufficient
liquidity to meet presently known cash flow requirements arising from ongoing
business transactions.
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 sufficient liquidity and minimize
exposure to significant changes in interest rates. This process includes
monitoring contractual and expected repricing of assets and liabilities as well
as forecasting earnings under different interest rate scenarios and balance
sheet structures. Generally, management seeks a structure that insulates net
interest income from large swings attributable to changes in market interest
rates. The Corporation's static interest rate sensitivity ("GAP") as of June
30, 1997 is illustrated in the following table.
As shown, the Corporation's interest rate risk position is well balanced in the
less than one year time frame with rate sensitive assets slightly below rate
sensitive liabilities by $15.6 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 declines. While
traditional GAP analysis does not always incorporate adjustments for the
magnitude or timing of noncontractual repricing, this table does incorporate
appropriate adjustments as indicated in footnotes 2 and 3 to the table.
Because of these and other inherent limitations of any GAP analysis, management
utilizes simulation modeling as its primary tool to evaluate the impact of
changes in interest rates and balance sheet strategies. Management uses these
simulations to develop strategies that can limit interest rate risk and provide
liquidity to meet client loan demand and deposit preferences.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY
TOTAL
June 30, 1997 1 - 30 31 - 90 91 - 180 181 - 365 WITHIN 1-5 Over
(in millions) Days Days Days Days 1 YEAR Years 5 Years Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS
Loans $873.4 $116.6 $161.5 $283.3 $1,434.8 $1,041.4 $281.1 $2,757.3
Investment securities 12.6 31.8 28.0 57.6 $130.0 311.4 139.6 581.0
Short-term investments 37.7 --- --- --- 37.7 --- --- 37.7
------ ------ ------ ------ -------- -------- ------ --------
Total $923.7 $148.4 $189.5 $340.9 $1,602.5 $1,352.8 $420.7 $3,376.0
====== ====== ====== ====== ======== ======== ====== ========
RATE SENSITIVE LIABILITIES
Deposits (2) $189.5 $282.7 $303.7 $552.3 $1,328.2 $974.1 $165.2 $2,467.5
Short-term borrowings 183.6 35.0 --- --- 218.6 --- --- 218.6
Long-term debt 51.3 13.0 --- 7.0 71.3 14.8 2.5 88.6
------ ------ ------ ------ -------- -------- ------ --------
Total $424.4 $330.7 $303.7 $559.3 $1,618.1 $988.9 $167.7 $2,774.7
====== ====== ====== ====== ======== ====== ====== ========
Period GAP (1) $499.3 $(182.3) $(114.2) $(218.4) $(15.6) $363.9 $253.0 $601.3
Cumulative GAP 499.3 317.0 202.8 (15.6) --- 348.3 601.3 ---
Cumulative GAP to
Total Assets 13.77% 8.74% 5.59% (0.43)% (0.43)% 9.60% 16.58% 16.58%
Multiple of Rate Sensitive
Assets to Liabilities 2.18 0.45 0.62 0.61 0.99 1.37 2.51 1.22
===================================================================================================================
</TABLE>
(1) GAP is the excess of rate sensitive assets (liabilities).
(2) Includes interest bearing savings and demand deposits of $359 million
in the less than one year category, and $820 million in the over
one year category, based on historical trends for these noncontractual
maturity deposit types, which reflects industry standards.
(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.
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:
On June 24, 1997, the shareholders of Citizens Banking Corporation and CB
Financial Corporation of Jackson, Michigan approved the merger between Citizens
Banking Corporation and CB Financial Corporation. Citizens issued
approximately 4.2 million shares of its common stock in exchange for all of the
outstanding shares of CB Financial. The effective date of the merger was July
1, 1997 with the subsequent 8-K filed July 10, 1997.
On August 5, 1997, the Corporation announced that it will take a special charge
in the third quarter of 1997 of approximately $16 to $18 million, after tax (of
which approximately $9 million is non-cash), in connection with its merger with
CB Financial Corporation and the reorganization of its Information Technology
operations. Prior to this announcement, the Corporation disclosed that it
anticipated incurring merger and certain restructuring charges associated
with the acquisition in its Joint Proxy Statement-Prospectus filed on May 21,
1997 (page 57 in note 3 of the unaudited proforma condensed combined financial
statements).
Merger related expenses total approximately $12.3 million, after-tax. They
include direct merger and restructuring-related charges of approximately $5.8
million, as well as, the write down of $6.5 million of goodwill and core
deposit intangibles. The $5.8 million of merger-related expenses reflect the
estimated cost of integrating and consolidating branch networks and
administrative facilities, severance arrangements, professional services and
other expenses related directly to the merger. The goodwill and core deposit
intangibles write down reflects the impairment of assets acquired by CB
Financial Corporation as part of previous acquisitions.
In the third quarter, Citizens expects to finalize negotiations with an
Information Technology partner. This partnership will provide Citizens with
the professional expertise and technological resources needed to remain a
successful competitor. Citizens also believes it will enhance its position to
quickly respond to the demands of its markets and support future strategic
initiatives. With the partnership, Citizens expects up-front conversion and
reorganization costs to approximate $4 to $6 million, after tax. This includes
one-time conversion charges in the third quarter of approximately $2 million.
The reorganization costs include severance arrangements, the planned
disposition of certain computer hardware and software, and other expenses
related directly to the transaction.
Citizens anticipates that the merger and reorganization will have a positive
effect on its future operating performance. In addition, the special charge is
not expected to adversely affect current and future dividends.
This disclosure contains forward-looking statements about expected savings and
effects of the merger and other initiatives which are subject to risks and
uncertainties that could cause actual results to differ. These risks and
uncertainties include unanticipated changes in the competitive environment.
22
<PAGE> 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 3.Exhibits:
(10r) Citizens Banking Corporation Third Amended Stock Plan
(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 August 8, 1997 By /s/ John W. Ennest
---------------------------------------
John W. Ennest
Vice Chairman of the Board,
Treasurer and Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Signatory)
23
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10(r) Citizens Banking Corporation Third Amended Stock Option Plan
11 Statement Re: Computation Per Share Earnings
27 Financial Data Schedule
</TABLE>
<PAGE> 1
CITIZENS BANKING CORPORATION
THIRD AMENDED STOCK OPTION PLAN
AS AMENDED AND RESTATED
EFFECTIVE JANUARY 16, 1997
I. GENERAL PROVISIONS
1.1 AMENDMENT AND RESTATEMENT. On February 19, 1986, the Board of
Directors ("Board") of Citizens Banking Corporation ("Corporation") adopted the
Citizens Banking Corporation Stock Option Plan, which was submitted to
shareholders for approval on April 15, 1986. Subsequently, the plan was
amended and restated as the Citizens Banking Corporation First Amended Stock
Option Plan, which was approved by the Board on January 16, 1987 and by
shareholders on April 21, 1987. Subject to shareholder approval, the Board on
January 17, 1992 approved a second restated plan effective April 21, 1992, and
the plan as described herein is amended and restated as the Citizens Banking
Corporation Third Amended Stock Option Plan ("Plan").
1.2 PURPOSE. The continuing purpose of the Plan is to promote the best
interests of the Corporation and its shareholders by encouraging Employees of
the Corporation and its Subsidiaries to acquire an ownership interest in the
Corporation through Options, Stock Appreciation Rights, Restricted Stock grants
and Performance Share Awards, thus identifying their interests with those of
shareholders and encouraging Employees to make greater efforts on behalf of the
Corporation to achieve the Corporation's long-term business plans and
objectives.
1.3 DEFINITIONS. As used in this Plan, the following terms have the
meaning described below:
(A) "AGREEMENT" means the written agreement that sets forth the terms
of a Participant's Option, Stock Appreciation Right, Restricted Stock grant or
Performance Share Award.
(B) "BOARD" means the Board of Directors of the Corporation.
(C) "CHANGE IN CONTROL" means the occurrence of any of the following
events: (i) if any "person," together with all of such person's "affiliates"
and "associates" (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act and Rule 12b-2 promulgated under the Exchange Act), or group of
persons acting in concert, other than the Corporation, a Subsidiary or an
employee benefit plan or employee benefit plan trust maintained by the
Corporation or a Subsidiary, becomes the "beneficial owner" (as such term is
defined in Rule 13d-3 promulgated under the Exchange Act, except that a person
also shall be deemed the beneficial owner of all securities which such person
may have a right to
<PAGE> 2
acquire, whether or not such right is presently exercisable), directly or
indirectly, of securities of the Corporation representing 20% or more of the
combined voting power of the Corporation's then outstanding securities
ordinarily having the right to vote in the election of directors, provided that
a person shall not be deemed the beneficial owner of shares such person has the
right to vote solely as a result of the receipt of a revocable proxy or proxies
given in response to a public solicitation made in accordance with the
applicable rules of the Exchange Act and provided further that the acquisition
of 20% or more of such securities is not approved by the Corporation's Board of
Directors; or (ii) a liquidation or dissolution of the Corporation, sale of
substantially all of the assets of the Corporation, or a merger, consolidation
or combination in which the Corporation is not the survivor; or (iii) the
addition of new members to the Board within any consecutive 24-month period,
which members constitute a majority of the Board, unless a majority of the
Board consists of (aa) incumbent members of the Board in office prior to the
commencement of such 24-month period, plus (bb) new members who were
recommended or appointed by a majority of the incumbent directors in office
immediately prior to the addition of such new members to the Board.
(D) "CODE" means the Internal Revenue Code of 1986, as amended.
(E) "COMMITTEE" means the Compensation and Benefits Committee of the
Corporation.
(F) "COMMON STOCK" means shares of the Corporation's authorized common
stock.
(G) "CORPORATION" means Citizens Banking Corporation, a Michigan
corporation.
(H) "DISABILITY" means total and permanent disability, as defined in
Code Section 22(e).
(I) "EMPLOYEE" means a key salaried employee of the Corporation or
Subsidiary, who has an "employment relationship" with the Corporation or a
Subsidiary, as defined in Treasury Regulation 1.421-7(h), and the term
"employment" means employment with the Corporation, or a Subsidiary of the
Corporation.
(J) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended from time to time and any successor thereto.
(K) "FAIR MARKET VALUE" means for purposes of determining the value of
Common Stock on the Grant Date, the average of the high and low sale prices of
Common Stock transactions on the NASDAQ Stock Market as reported in The Wall
Street Journal for the Grant Date. In the event that there were no Common
Stock transactions on such date, the Fair Market Value shall be determined as
of the immediately preceding date on which there
2
<PAGE> 3
were Common Stock transactions. Unless otherwise specified in the Plan, "Fair
Market Value" for purposes of determining the value of Common Stock on the date
of exercise means the average of the high and low sale prices of such Common
Stock on the NASDAQ Stock Market on the last date preceding the exercise on
which there were Common Stock transactions, as reported in The Wall Street
Journal.
(L) "GRANT DATE" means, except as provided by the following sentence,
the date on which the Committee authorizes an individual Option, Stock
Appreciation Right, Restricted Stock grant or Performance Share Award, or such
later date as shall be designated by the Committee. For purposes of a
Replacement Option, the Grant Date means the date on which the underlying
Option or portion of such Option is exercised pursuant to the provisions of
Section 2.5 of the Plan.
(M) "INCENTIVE STOCK OPTION" means an Option that is intended to meet
the requirements of Section 422 of the Code.
(N) "NONQUALIFIED STOCK OPTION" means an Option that is not intended to
constitute an Incentive Stock Option.
(O) "OPTION" means either an Incentive Stock Option or a Nonqualified
Stock Option.
(P) "PARTICIPANT" means an Employee designated by the Committee to
participate in the Plan.
(Q) "PERFORMANCE SHARE AWARD" means an award granted in accordance with
Article V of the Plan.
(R) "PLAN" means the Citizens Banking Corporation Second Amended Stock
Option Plan, the terms of which are set forth herein, and amendments thereto.
(S) "REPLACEMENT OPTION" means an Option that automatically is granted
upon the exercise of an underlying Nonqualified Stock Option by a Participant's
tender of previously-acquired shares of Common Stock to satisfy the exercise
price, in accordance with Section 2.5 of the Plan.
(T) "RESTRICTION PERIOD" means the period of time during which a
Participant's Restricted Stock grant is subject to restrictions and is
nontransferable.
(U) "RESTRICTED STOCK" means Common Stock that is subject to
restrictions.
3
<PAGE> 4
(V) "RETIREMENT" (including "Early Retirement" and "Normal Retirement")
means termination of a Participant's employment as defined by the terms of the
Corporation's Defined Benefit Pension Plan or its successor plan or plans.
(W) "STOCK APPRECIATION RIGHT" means the right to receive a cash or
Common Stock payment from the Corporation upon the surrender of a tandem
Option, in accordance with Article III of the Plan. Where pertinent, all
provisions of this Plan affecting the use of Options shall apply in the same
manner to Stock Appreciation Rights related to such Options.
(X) "SUBSIDIARY" means a corporation defined in Code Section 424(f).
1.4 ADMINISTRATION. The Plan shall be administered by the Committee, in
accordance with Rule 16b-3 of the Exchange Act. The Committee shall interpret
the Plan, prescribe, amend, and rescind rules and regulations relating to the
Plan, and make all other determinations necessary or advisable for its
administration. The decision of the Committee on any question concerning the
interpretation of the Plan or its administration with respect to any Option,
Stock Appreciation Right, Restricted Stock grant or Performance Share Award
granted under the Plan shall be final and binding upon all Participants.
1.5 PARTICIPANTS. Participants in the Plan shall be such Employees
(including Employees who are directors) of the Corporation and its Subsidiaries
as the Committee may select from time to time. The Committee may grant
Options, Stock Appreciation Rights, Restricted Stock and Performance Share
Awards to an individual upon the condition that the individual become an
Employee of the Corporation or of a Subsidiary, provided that the Option, Stock
Appreciation Right, Restricted Stock grant or Performance Share Award shall be
deemed to be granted only on the date that the individual becomes an Employee.
1.6 STOCK. For calendar year 1992, the total number of shares of Common
Stock available for grants and awards under the Plan shall not, in the
aggregate, exceed five percent of the total issued and outstanding shares of
Common Stock as of the first day of the calendar year, plus any shares
previously reserved under the Plan that were available for grants as of the
first day of the calendar year. For calendar years 1993 and thereafter, the
total number of shares of Common Stock available for grants and awards under
the Plan during any calendar year shall not, in the aggregate, exceed three
percent of the total issued and outstanding shares of Common Stock as of the
first day of the calendar year of the grant or award, plus any shares which
first became available for grants and awards in the previous calendar year that
were not utilized; provided, however, that aggregate grants and awards under
the Plan shall not exceed 1,000,000 shares, excluding any shares that were
granted or awarded prior to the five calendar years preceding the calendar year
of an award or grant. When making grants and awards under the Plan, the
Committee shall first utilize remaining shares from the previous calendar year.
Notwithstanding the foregoing, no more than 750,000 shares shall be
cumulatively available for the grant of Incentive Stock Options under the Plan.
Shares subject
4
<PAGE> 5
to any unexercised portion of a terminated, cancelled or expired Option, Stock
Appreciation Right, Restricted Stock grant or Performance Share Award granted
hereunder, and pursuant to which a Participant never acquired benefits of
ownership, including payment of a stock dividend (but excluding voting rights),
may again be subjected to grants and awards under the Plan, but shares
surrendered pursuant to the exercise of a tandem Option, Stock Appreciation
Right or Restricted Stock grant are not available for future grants and awards.
All provisions in this Section 1.6 shall be adjusted, as applicable, in
accordance with Article VII.
II. STOCK OPTIONS
2.1 GRANT OF OPTIONS. The Committee, at any time and from time to time,
subject to Section 8.7, may grant Options to such Employees and for such number
of shares of Common Stock as it shall designate; provided that during any two
(2) year period, no salaried employee shall receive options to purchase more
than 250,000 shares of Common Stock (as adjusted from time to time upon the
occurrence of a transaction or event described in Section 7.1). Any
Participant may hold more than one Option under the Plan and any other Plan of
the Corporation or Subsidiary. The Committee shall determine the general terms
and conditions of exercise, including any applicable vesting requirements,
which shall be set forth in a Participant's Option Agreement. The Committee
may designate any Option granted as either an Incentive Stock Option or a
Nonqualified Stock Option, or the Committee may designate a portion of an
Option as an Incentive Stock Option or a Nonqualified Stock Option. At the
discretion of the Committee, an Option may be granted in tandem with a Stock
Appreciation Right or Restricted Stock Award and a Replacement Option may be
granted with a Nonqualified Stock Option.
2.2 INCENTIVE STOCK OPTIONS. Any Option intended to constitute an
Incentive Stock Option shall comply with the requirements of this Section 2.2
No Incentive Stock Option shall be granted with an exercise price below its
Fair Market Value on the Grant Date or with an exercise term that extends
beyond 10 years from the Grant Date. An Incentive Stock Option shall not be
granted to any Participant who owns (within the meaning of Code Section 424(d))
stock of the Corporation or any Subsidiary possessing more than 10% of the
total combined voting power of all classes of stock of the Corporation or a
Subsidiary unless, at the Grant Date, the exercise price for the Option is at
least 110% of the Fair Market Value of the shares subject to the Option and the
Option, by its terms, is not exercisable more than 5 years after the Grant
Date. The aggregate Fair Market Value of the underlying Common Stock
(determined at the Grant Date) as to which Incentive Stock Options granted on
or after January 1, 1987 under the Plan (including a plan of a Subsidiary) may
first be exercised by a Participant in any one calendar year shall not exceed
$100,000. To the extent that an Option intended to constitute an Incentive
Stock Option shall violate the foregoing $100,000 limitation, the portion of
the Option that exceeds the $100,000 limitation shall be deemed to constitute a
Nonqualified Stock Option.
5
<PAGE> 6
2.3 OPTION PRICE. The Committee shall determine the per share exercise
price for each Option granted under the Plan. The Committee, at its
discretion, may grant Nonqualified Stock Options with an exercise price below
100% of the Fair Market Value of Common Stock on the Grant Date.
2.4 PAYMENT FOR OPTION SHARES.
(A) The purchase price for shares of Common Stock to be acquired upon
exercise of an Option granted hereunder shall be paid in full in cash or by
personal check, bank draft or money order at the time of exercise; provided,
however, that in lieu of such form of payment a Participant may pay such
purchase price in whole or in part by tendering shares of Common Stock, which
are freely owned and held by the Participant independent of any restrictions,
hypothecations or other encumbrances, duly endorsed for transfer (or with duly
executed stock powers attached), or in any combination of the above. Shares of
Common Stock surrendered upon exercise shall be valued at the average of the
high and low sale prices of the Corporation's Common Stock on the NASDAQ Stock
Market, as reported in The Wall Street Journal, on the business day preceding
the date on which the certificate(s) for such shares, duly endorsed for
transfer or accompanied by appropriate stock powers, are surrendered to the
Corporation
(B) At the discretion of the Committee, as set forth in a Participant's
Option Agreement, any Nonqualified Stock Option granted under the Plan, and any
Incentive Stock Option granted on or after April 21, 1992 may be deemed
exercised by delivery to the Corporation of a properly executed exercise
notice, acceptable to the Corporation, together with irrevocable instructions
to the Participant's broker to deliver to the Corporation sufficient cash to
pay the exercise price and any applicable income and employment withholding
taxes, in accordance with a written agreement between the Corporation and the
brokerage firm ("cashless exercise procedure").
2.5 REPLACEMENT OPTIONS. The Committee, at its discretion, may include a
Replacement Option in a Participant's Option Agreement. Under the terms of a
Replacement Option, upon the exercise of all or part of a Nonqualifed Stock
Option by tendering to the Corporation previously-acquired shares of Common
Stock held by the Participant for at least six months, the Participant shall be
entitled to a new Replacement Option to purchase the number of shares that were
tendered to exercise the underlying Option. For purposes of establishing the
exercise price for the Replacement Option, the Grant Date shall be the date on
which the underlying Nonqualified Stock Option is totally or partially
exercised, and the exercise price for the Replacement Option shall be the Fair
Market Value of the Common Stock on the Grant Date. The exercise term of the
Replacement Option shall be the expiration date of the underlying Option and,
unless specified otherwise in the Participant's Option Agreement, the other
terms and restrictions of the Replacement Option shall be the same as the
underlying Option.
6
<PAGE> 7
III. STOCK APPRECIATION RIGHTS
3.1 GRANT OF STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may be
granted, held and exercised in such manner as set by the Committee on an
individual basis. The Committee may grant a Stock Appreciation Right at the
time an Option is granted or may subsequently amend a Participant's Option
Agreement to add a Stock Appreciation Right to a Nonqualified Stock Option. A
Stock Appreciation Right may be granted to a Participant with respect to such
number of shares of Common Stock as the Committee may determine. The number of
shares covered by the Stock Appreciation Right shall not exceed the number of
shares of Common Stock which the Participant may purchase upon the exercise of
the related Option.
3.2 EXERCISE OF STOCK APPRECIATION RIGHTS. A Stock Appreciation Right
shall be deemed exercised upon receipt by the Corporation of the Participant's
written notice. The exercise term of each Stock Appreciation Right shall be
the period set by the related Option. A Stock Appreciation Right shall be
exercisable only at such times and in such amounts as the related Option may be
exercised. A Stock Appreciation Right granted with an Incentive Stock Option
only may be exercised if and when the Fair Market Value of the shares of Common
Stock subject to the Incentive Stock Option exceed the exercise price of such
Incentive Stock Option.
3.3 STOCK APPRECIATION RIGHT ENTITLEMENT. Upon the exercise of a Stock
Appreciation Right, the associated Option automatically shall be surrendered to
the Corporation, and the Participant shall be entitled to a payment from the
Corporation in cash, shares, or partly in each (as determined by the Committee
in accordance with any applicable terms in the Agreement), of an amount equal
to the difference between --
(A) the Fair Market Value of the number of shares subject to the Stock
Appreciation Right on the date of exercise, and
(B) the exercise price of the associated Option multiplied by the
number of shares available under the Option.
IV. RESTRICTED STOCK
4.1 GRANT OF RESTRICTED STOCK. Subject to the terms and conditions of the
Plan, the Committee, at any time and from time to time, may grant shares of
Restricted Stock under this Plan to such Employees and in such amounts as it
shall determine.
7
<PAGE> 8
4.2 RESTRICTED STOCK AGREEMENT. Each grant of Restricted Stock shall be
evidenced by a Restricted Stock Agreement that shall specify the terms of the
restrictions, including the restriction period, or periods, the number of
Restricted Stock shares subject to the grant, and such other provisions,
including performance goals, as the Committee shall determine.
4.3 TANDEM RESTRICTED STOCK/OPTION GRANTS. The Committee, at its
discretion, may grant Restricted Stock in tandem with a Nonqualified Stock
Option. Upon the exercise of all or part of the tandem Option, the Participant
shall forfeit and surrender to the Corporation the applicable portion of the
tandem Restricted Stock grant. Otherwise, upon the lapse of the Restriction
Period, the Participant shall forfeit and surrender to the Corporation the
remaining unexercised portion of the tandem Option.
4.4 TRANSFERABILITY. Except as provided in this Article IV of the Plan,
the shares of Restricted Stock granted hereunder may not be transferred,
pledged, assigned, or otherwise alienated or hypothecated until the termination
of the applicable Period of Restriction or for such period of time as shall be
established by the Committee and as shall be specified in the Restricted Stock
Agreement, or upon the earlier satisfaction of other conditions as specified by
the Committee in its sole discretion and as set forth in the Restricted Stock
Agreement. All rights with respect to the Restricted Stock granted to an
Employee shall be exercisable during a Participant's lifetime only by the
Participant or the Participant's legal representative.
4.5 OTHER RESTRICTIONS. The Committee shall impose such other
restrictions on any shares of Restricted Stock granted under the Plan as it may
deem advisable including, without limitation, restrictions under applicable
Federal or State securities laws, and may legend the certificates representing
Restricted Stock to give appropriate notice of such restrictions.
4.6 CERTIFICATE LEGEND. In addition to any legends placed on certificates
pursuant to Sections 4.4 and 4.5, each certificate representing shares of
Restricted Stock shall bear the following legend:
The sale or other transfer of the shares of stock
represented by this certificate, whether voluntary,
involuntary or by operation of law, is subject to
certain restrictions on transfer set forth in the
Second Amended Citizens Banking Corporation Stock
Option Plan ("Plan"), rules and administrative
guidelines adopted pursuant to such Plan and a
Restricted Stock Agreement dated ________________,
_______. A copy of the Plan, such rules and
such Restricted Stock Agreement may be obtained from
the Treasurer of Citizens Banking Corporation.
8
<PAGE> 9
4.7 REMOVAL OF RESTRICTIONS. Except as otherwise provided in this Article
IV of the Plan, and subject to applicable federal and state securities laws,
shares covered by each Restricted Stock grant made under the Plan shall become
freely transferable by the Participant after the last day of the Restriction
Period. Once the shares are released from the restrictions, the Participant
shall be entitled to have the legend required by Section 4.6 of the Plan
removed from his Stock certificate. Provided further, the Committee shall have
the discretion to waive the applicable Restriction Period with respect to all
or any part of a Restricted Stock grant.
4.8 VOTING RIGHTS. During the Restriction Period, Participants holding
shares of Restricted Stock granted hereunder (including Restricted Stock that
has been granted in tandem with an Option) may exercise full voting rights with
respect to the Restricted Stock.
4.9 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Restriction Period, a
Participant shall be entitled to receive all dividends and other distributions
paid with respect to shares of Restricted Stock. If any dividends or
distributions are paid in shares of Common Stock during the Restriction Period,
the dividend or other distribution shares shall be subject to the same
restrictions on transferability as the shares of Restricted Stock with respect
to which they were paid.
V. PERFORMANCE SHARE AWARDS
5.1 GRANT OF PERFORMANCE SHARE AWARDS. The Committee, at its discretion,
may grant Performance Share Awards to Employees of the Corporation and its
Subsidiaries and may determine, on an individual or group basis, the
performance goals to be attained pursuant to each Performance Share Award.
5.2 TERMS OF PERFORMANCE SHARE AWARDS. In general, Performance Share
Awards shall consist of rights to receive cash, Common Stock or a combination
of each, if designated performance goals are achieved. The terms of a
Participant's Performance Share Award shall be set forth in his individual
Performance Share Agreement. Each Agreement shall specify the performance
goals applicable to a particular Employee or group of Employees, the period
over which the targeted goals are to be attained, the payment schedule if the
goals are attained, and any other terms, conditions and restrictions applicable
to an individual Performance Share Award and not inconsistent with the
provisions of the Plan. The Committee, at its discretion, may waive all or
part of the conditions, goals and restrictions applicable to the receipt of
full or partial payment of a Performance Share Award.
9
<PAGE> 10
VI. TERMINATION OF EMPLOYMENT
6.1. OPTIONS AND STOCK APPRECIATION RIGHTS.
(A) If, prior to the date that an Option or Stock Appreciation Right
first becomes exercisable, a Participant's employment is terminated for any
reason other than a Change in Control, the Participant's right to exercise the
Option or Stock Appreciation Right shall terminate and all rights thereunder
shall cease.
(B) If, on or after the date that an Option or Stock Appreciation
Right first becomes exercisable, a Participant's employment is terminated for
any reason other than death, Disability, or Retirement, the Participant shall
have the right, within the earlier of (i) the expiration of the Option or Stock
Appreciation Right, and (ii) three months after termination of employment for
an Incentive Stock Option and the period designated in the Participant's
Agreement for a Nonqualified Stock Option, to exercise the Option or Stock
Appreciation Right to the extent that it was exercisable and unexercised on the
date of the Participant's termination of employment, subject to any other
limitation on the exercise of the Option or Stock Appreciation Right in effect
on the date of exercise. The Committee may designate in a Participant's
Agreement that an Option or Stock Appreciation Right shall terminate at an
earlier time than set forth above.
(C) If, on or after the date that an Option or Stock Appreciation
Right first becomes exercisable, a Participant dies while an Option or Stock
Appreciation Right is still exercisable, the person or persons to whom the
Option or Stock Appreciation Right shall have been transferred by will or by
the laws of descent and distribution, shall have the right within the exercise
period specified in the Participant's Agreement to exercise the Option or Stock
Appreciation Right to the extent that it was exercisable and unexercised on the
Participant's date of death, subject to any other limitation on exercise in
effect on the date of exercise. Provided, however, that the beneficial tax
treatment of an Incentive Stock Option may be forfeited if the Option is
exercised more than one year after a Participant's date of death.
(D) If, on or after the date that an Option or Stock Appreciation
Right first becomes exercisable, a Participant terminates employment due to
Disability, the Participant shall have the right, within the earlier of (i) the
expiration of the Option or Stock Appreciation Right, and (ii) one year after
termination of employment for an Incentive Stock Option and the period
designated in the Participant's Agreement for a Nonqualified Stock Option, to
exercise the Option or Stock Appreciation Right to the extent that it was
exercisable and unexercised on the date of the Participant's termination of
employment, subject to any other limitation on the exercise of the Option or
Stock Appreciation Right in effect on the date of exercise. If the Participant
dies after termination of employment while the Option or Stock Appreciation
Right is still exercisable, the Option or Stock Appreciation Right shall be
exercisable in accordance with the terms of Subsection (c), above.
10
<PAGE> 11
(E) If, on or after the date that an Option or Stock Appreciation
Right first becomes exercisable, a Participant terminates employment due to
Retirement, the Participant shall have the right, within the earlier of (i) the
expiration of the Option or Stock Appreciation Right, and (ii) three months
after termination of employment for an Incentive Stock Option and the period
designated in the Participant's Agreement for a Nonqualified Stock Option, to
exercise the Option or Stock Appreciation Right to the extent that it was
exercisable and unexercised on the date of the Participant's termination of
employment, subject to any other limitation on the exercise of the Option or
Stock Appreciation Right in effect on the date of exercise. If the Participant
dies or incurs a Disability after termination of employment while the Option or
Stock Appreciation Right is still exercisable, the Option or Stock Appreciation
Right shall be exercisable in accordance with the terms of Subsections (c), or
(d) above, as applicable.
(F) The Committee, at the time of a Participant's termination of
employment, may accelerate a Participant's right to exercise an Option or
extend the exercise period of an Option or Stock Appreciation Right; provided,
however that the extension of the exercise period for an Incentive Stock Option
may cause such Option to forfeit its preferential tax treatment.
(G) Shares subject to Options and Stock Appreciation Rights that are
not exercised in accordance with the provisions of (a) through (f) above shall
expire and be forfeited by the Participant as of their expiration date and
shall become available for new grants and awards under the Plan as of such
date.
6.2 RESTRICTED STOCK. If a Participant terminates employment for any
reason other than a Change in Control, the Participant's shares of Restricted
Stock still subject to the Restriction Period automatically shall expire and be
forfeited by the Participant and shall be available for new grants and awards
under the Plan as of such termination date; provided, however, that the
Committee, in its sole discretion, may waive the restrictions remaining on any
or all shares of Restricted Stock and add such new restrictions to such shares
of Restricted Stock as it deems appropriate.
6.3 PERFORMANCE SHARES. Performance Share Awards shall expire and be
forfeited by a Participant upon the Participant's termination of employment for
any reason other than a Change in Control and such shares shall be available
for new grants and awards under the Plan as of such termination date; provided,
however, that the Committee, in its discretion, may waive all or part of the
conditions, goals and restrictions applicable to the receipt of full or partial
payment of a Performance Share Award.
6.4 OTHER PROVISIONS. The transfer of an Employee from one corporation to
another among the Corporation and any of its Subsidiaries, or a leave of
absence under the Corporation's leave policy shall not be a termination of
employment for purposes of the Plan.
11
<PAGE> 12
VII. ADJUSTMENTS AND CHANGE IN CONTROL
7.1 ADJUSTMENTS.
(A) The total amount of Common Stock for which Options, Stock
Appreciation Rights, Restricted Stock and Performance Share Awards may be
granted under the Plan, and the number of shares subject to any such
grants or awards (both as to the number of shares of Common Stock and the
Option price), shall be adjusted pro rata for any increase or decrease in the
number of outstanding shares of Common Stock resulting from payment of a stock
dividend on Common Stock, a subdivision or combination of shares of Common
Stock, or a reclassification of Common Stock.
(B) The foregoing adjustments shall be made by the Committee. Any such
adjustment shall provide for the elimination of any fractional share which
might otherwise become subject to an Option, Stock Appreciation Right,
Restricted Stock grant or Performance Share Award.
7.2 CHANGE IN CONTROL. Notwithstanding anything contained herein to the
contrary, upon a Change in Control, (i) any outstanding Option or Stock
Appreciation Right granted hereunder immediately shall become exercisable in
full, regardless of any installment provision applicable to such Option or
Stock Appreciation Right, (ii) the remaining Restriction Period on any
Restricted Stock granted hereunder immediately shall lapse and the shares shall
become fully transferable, subject to any applicable federal or state
securities laws, and (iii) all performance goals and conditions shall be deemed
to have been satisfied and all restrictions shall lapse on any outstanding
Performance Share Awards, which immediately shall become payable in full.
VIII. MISCELLANEOUS
8.1 PARTIAL EXERCISE/FRACTIONAL SHARES. The Committee may permit, and
shall establish procedures for, the partial exercise of Options and Stock
Appreciation Rights granted under the Plan. No fractional shares shall be
issued in connection with the exercise of a Stock Appreciation Right or
Performance Share Award; instead, the Fair Market Value of the fractional
shares shall be paid in cash, or at the discretion of the Committee, the number
of shares shall be rounded down to the nearest whole number of shares and any
fractional shares shall be disregarded.
8.2 RULE 16b-3 REQUIREMENTS. Notwithstanding any other provision of the
Plan, the Committee may impose such conditions on the exercise of an Option or
Stock Appreciation Right, or the grant of Restricted Stock or a Performance
Share Award (including, without
12
<PAGE> 13
limitation, the right of the Committee to limit the time of exercise to
specified periods) as may be required to satisfy the requirements of Rule 16b-3
of the Exchange Act.
8.3 RIGHTS PRIOR TO ISSUANCE OF SHARES. No Participant shall have any
rights as a shareholder with respect to shares covered by an Option, Stock
Appreciation Right, Restricted Stock grant or Share Performance Award until the
issuance of a stock certificate for such shares. No adjustment shall be made
for dividends or other rights with respect to such shares for which the record
date is prior to the date the certificate is issued.
8.4 NON-ASSIGNABILITY. No Option, Stock Appreciation Right, Restricted
Stock grant or Performance Share Award shall be transferable by a Participant
except by will or the laws of descent and distribution. During the lifetime of
a Participant, an Option or Stock Appreciation Right shall be exercised only by
the Participant. No transfer of an Option, Stock Appreciation Right,
Restricted Stock grant or Performance Share Award by will or the laws of
descent and distribution shall be effective to bind the Corporation unless the
Corporation shall have been furnished with written notice thereof and a copy of
the will or such evidence as the Corporation may deem necessary to establish
the validity of the transfer and the acceptance by the transferee of the terms
and conditions of the Option, Stock Appreciation Right, Restricted Stock grant
or Performance Share Award.
8.5. SECURITIES LAWS.
(A) Anything to the contrary herein notwithstanding, the Corporation's
obligation to sell and deliver Common Stock pursuant to the exercise of an
Option or Stock Appreciation Right or deliver Common Stock pursuant to a
Restricted Stock grant or Performance Share Award is subject to such compliance
with federal and state laws, rules and regulations applying to the
authorization, issuance or sale of securities as the Corporation deems
necessary or advisable. The Corporation shall not be required to sell and
deliver Common Stock unless and until it receives satisfactory assurance that
the issuance or transfer of such shares shall not violate any of the provisions
of the Securities Act of 1933 or the Exchange Act, or the rules and regulations
of the Securities Exchange Commission promulgated thereunder or those of the
NASDAQ Stock Market or any stock exchange on which the Common Stock may be
listed, the provisions of any state laws governing the sale of securities, or
that there has been compliance with the provisions of such acts, rules,
regulations and laws.
(B) The Committee may impose such restrictions on any shares of Common
Stock acquired pursuant to the exercise of an Option or Stock Appreciation
Right or the grant of Restricted Stock or a Performance Share Award under the
Plan as it may deem advisable, including, without limitation, restrictions (i)
under applicable federal securities laws, (ii) under the requirements of the
NASDAQ Stock Market or any stock exchange or other recognized trading market
upon which such shares of Common Stock are then listed or traded, and (iii)
under any blue sky or state securities laws applicable to such shares. No
shares shall be issued
13
<PAGE> 14
until counsel for the Corporation has determined that the Corporation has
complied with all requirements under appropriate securities laws.
8.6 WITHHOLDING TAXES.
The Corporation shall have the right to withhold from a Participant's
compensation or require a Participant to remit sufficient funds to satisfy
applicable withholding for income and employment taxes upon the exercise of an
Option or Stock Appreciation Right or the lapse of the Restriction Period on a
Restricted Stock grant or the payment of a Performance Share Award. A
Participant may make a written election to tender previously-acquired shares of
Common Stock or have shares of stock withheld from the exercise, provided that
the shares have an aggregate Fair Market Value sufficient to satisfy in whole
or in part the applicable withholding taxes. The cashless exercise procedure
of Section 2.4 may be utilized to satisfy the withholding requirements related
to the exercise of an Option. At no point shall the Corporation withhold from
the exercise an Option more shares than are necessary to meet the established
minimum tax withholding requirements of federal, state and local obligations.
8.7 TERMINATION AND AMENDMENT.
(A) The Board may terminate the Plan, or the granting of Options, Stock
Appreciation Rights, Restricted Stock or Performance Share Awards under the
Plan, at any time. No new grants or awards shall be made under the Plan after
January 16, 2002.
(B) The Board may amend or modify the Plan at any time and from time to
time.
(C) No amendment, modification, or termination of the Plan shall in any
manner affect any Option, Stock Appreciation Right, Restricted Stock grant or
Performance Share Award granted under the Plan without the consent of the
Participant holding the Option, Stock Appreciation Right, Restricted Stock
grant or Performance Share Award.
8.8 EFFECT ON EMPLOYMENT. Neither the adoption of the Plan nor the
granting of any Option, Stock Appreciation Right, Restricted Stock or
Performance Share Award pursuant to the Plan shall be deemed to create any
right in any individual to be retained or continued in the employment of the
Corporation or a Subsidiary.
8.9 USE OF PROCEEDS. The proceeds received from the sale of Common Stock
pursuant to the Plan will be used for general corporate purposes of the
Corporation.
[RESERVED]
14
<PAGE> 15
IN WITNESS WHEREOF, this Third Amended Stock Option Plan has been executed
on behalf of the Corporation on this the 15th day of April, 1997.
CITIZENS BANKING CORPORATION
By: Charles R. Weeks
-------------------------------------
Charles R. Weeks
Its: Chairman
COMPENSATION AND BENEFITS
COMMITTEE APPROVAL: JANUARY 16, 1997
SHAREHOLDER APPROVAL: APRIL 15, 1997
15
<PAGE> 1
FORM 10-Q
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Net income per share is computed based on the weighted average number of
shares outstanding, including the dilutive effect of stock options, as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
- --------------------------------------------------------------------------------------------------------------------
June 30, June 30,
(in thousands, except per share amounts) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INCOME: $10,107 $9,260 $19,315 $18,001
======= ====== ======= =======
PRIMARY EARNINGS PER SHARE:
Actual average shares outstanding 14,378 14,423 14,364 14,389
Net effect of the assumed exercise of
stock options --
based on the treasury stock method
using average market price for the period 278 271 282 295
------ ------ ------ ------
Pro forma average shares outstanding 14,656 14,694 14,646 14,684
====== ====== ====== ======
Net Income Per Share $0.69 $0.63 $1.32 $1.23
===== ===== ===== =====
FULLY DILUTED EARNINGS PER SHARE:
Actual average shares outstanding 14,379 14,423 14,364 14,389
Net effect of the assumed exercise of
stock options -- based on the treasury stock
method using higher of average or closing
market price 309 271 316 295
------ ------ ------ ------
Pro forma average shares outstanding 14,688 14,694 14,680 14,684
====== ====== ====== ======
Net Income Per Share $0.69 $0.63 $1.32 $1.23
====== ====== ====== ======
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 121,174 121,174
<INT-BEARING-DEPOSITS> 50 50
<FED-FUNDS-SOLD> 37,692 37,692
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 581,040 581,040
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 2,757,299 2,757,299
<ALLOWANCE> 37,618 37,618
<TOTAL-ASSETS> 3,626,911 3,626,911
<DEPOSITS> 2,951,783 2,951,783
<SHORT-TERM> 218,616 218,616
<LIABILITIES-OTHER> 40,284 40,284
<LONG-TERM> 88,581 88,581
0 0
0 0
<COMMON> 89,698 89,698
<OTHER-SE> 237,949 237,9494
<TOTAL-LIABILITIES-AND-EQUITY> 3,626,911 3,626,911
<INTEREST-LOAN> 59,585 115,897
<INTEREST-INVEST> 9,083 17,855
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 68,668 133,752
<INTEREST-DEPOSIT> 25,299 49,542
<INTEREST-EXPENSE> 29,035 56,672
<INTEREST-INCOME-NET> 39,633 77,080
<LOAN-LOSSES> 2,147 4,292
<SECURITIES-GAINS> (36) (50)
<EXPENSE-OTHER> 32,831 64,893
<INCOME-PRETAX> 14,485 27,421
<INCOME-PRE-EXTRAORDINARY> 10,107 19,315
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,107 19,315
<EPS-PRIMARY> .69 1.32
<EPS-DILUTED> .69 1.32
<YIELD-ACTUAL> 8.45 8.37
<LOANS-NON> 17,066 17,066
<LOANS-PAST> 388 388
<LOANS-TROUBLED> 420 420
<LOANS-PROBLEM> 11,600 11,600
<ALLOWANCE-OPEN> 36,975 35,997
<CHARGE-OFFS> 2,224 4,037
<RECOVERIES> 720 1,366
<ALLOWANCE-CLOSE> 37,618 37,618
<ALLOWANCE-DOMESTIC> 25,392 25,392
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 12,226 12,226
</TABLE>
