<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, 1998
---------------------
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 31, 1998
- -------------------------------- -----------------------------
Common Stock, No Par Value 28,181,636 Shares
(This report contains 23 pages)
<PAGE> 2
Citizens Banking Corporation
Index to Form 10-Q
Page
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements............................. 3
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................ 22
Item 2 - Changes in Securities........................................ 22
Item 3 - Defaults Upon Senior Securities.............................. 22
Item 4 - Submission of Matters to a Vote of Security Holders.......... 22
Item 5 - Other Information............................................ 22
Item 6 - Exhibits and Reports on Form 8-K............................. 22
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) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 182,517 $ 168,351
Money market investments:
Interest-bearing deposits with banks 29 246
Term federal funds and other 2,813 11,976
----------- -----------
Total money market investments 2,842 12,222
Securities available-for-sale:
U.S. Treasury and federal agency securities 418,711 390,046
State and municipal securities 161,493 166,877
Other securities 26,925 18,459
----------- -----------
Total investment securities 607,129 575,382
Loans:
Commercial 1,367,307 1,317,213
Real estate construction 77,208 71,035
Real estate mortgage 783,187 779,567
Consumer 1,241,914 1,336,120
Lease financing 26,890 37,684
----------- -----------
Total loans 3,496,506 3,541,619
Less: Allowance for loan losses (46,956) (45,911)
----------- -----------
Net loans 3,449,550 3,495,708
Premises and equipment 72,287 69,415
Intangible assets 57,243 60,016
Other assets 64,354 58,177
----------- -----------
TOTAL ASSETS $ 4,435,922 $ 4,439,271
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 608,103 $ 600,498
Interest-bearing 3,044,718 3,093,848
----------- -----------
Total deposits 3,652,821 3,694,346
Federal funds purchased and securities sold
under agreements to repurchase 138,526 141,713
Other short-term borrowings 32,381 33,153
Other liabilities 54,800 52,052
Long-term debt 130,611 108,165
----------- -----------
Total liabilities 4,009,139 4,029,429
SHAREHOLDERS' EQUITY
Preferred stock - No par value --- ---
Common stock - No par value 121,460 120,274
Retained earnings 301,678 285,706
Accumulated other comprehensive income 3,645 3,862
----------- -----------
Total shareholders' equity 426,783 409,842
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,435,922 $ 4,439,271
=========== ===========
- --------------------------------------------------------------------------------------------------------------
</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, except per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 75,465 $ 72,957 $151,140 $ 142,354
Interest and dividends on investment securities:
Taxable 7,447 8,698 14,302 16,999
Nontaxable 1,921 2,263 3,844 4,570
Money market investments 637 78 1,391 300
-------- -------- -------- ---------
Total interest income 85,470 83,996 170,677 164,223
-------- -------- -------- ---------
INTEREST EXPENSE
Deposits 32,260 31,931 65,200 62,600
Short-term borrowings 1,576 2,522 3,057 4,728
Long-term debt 2,172 1,405 4,182 2,876
-------- -------- -------- ---------
Total interest expense 36,008 35,858 72,439 70,204
-------- -------- -------- ---------
NET INTEREST INCOME 49,462 48,138 98,238 94,019
Provision for loan losses 3,510 3,742 7,020 6,952
-------- -------- -------- ---------
Net interest income after provision for loan losses 45,952 44,396 91,218 87,067
-------- -------- -------- ---------
NONINTEREST INCOME
Trust fees 4,635 3,840 9,248 7,814
Service charges on deposit accounts 3,246 3,076 6,255 6,034
Bankcard fees 1,797 1,700 3,570 3,354
Mortgage and other loan income 806 336 1,335 631
Investment securities gains (losses) 4 (33) 54 (57)
Other 3,479 2,623 6,496 5,111
-------- -------- -------- ---------
Total noninterest income 13,967 11,542 26,958 22,887
-------- -------- -------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits 20,802 20,534 41,199 40,792
Equipment 3,051 3,164 6,158 6,359
Occupancy 2,834 2,851 5,671 5,880
Intangible asset amortization 1,387 1,663 2,773 3,326
Bankcard fees 1,510 1,148 2,693 2,178
Stationery and supplies 910 1,016 1,920 2,108
Postage and delivery 1,123 1,080 2,212 2,189
Advertising and public relations 1,203 1,340 2,405 2,440
Other 7,379 6,933 13,860 13,074
-------- -------- -------- ---------
Total noninterest expense 40,199 39,729 78,891 78,346
-------- -------- -------- ---------
INCOME BEFORE INCOME TAXES 19,720 16,209 39,285 31,608
Income taxes 6,037 4,894 12,080 9,404
-------- -------- -------- ---------
NET INCOME $ 13,683 $ 11,315 $ 27,205 $ 22,204
======== ======== ======== =========
NET INCOME PER SHARE:
Basic $ 0.49 $ 0.41 $ 0.97 $ 0.80
Diluted 0.48 0.40 0.95 0.79
AVERAGE SHARES OUTSTANDING:
Basic 28,173 27,824 28,124 27,802
Diluted 28,799 28,280 28,773 28,262
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive
(in thousands except per share amounts) Stock Earnings Income Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE - JUNE 30, 1997 $ 118,781 $ 287,027 $ 543 $ 406,351
Net income (4,951) (4,951)
Net unrealized gain on securities available-for-sale,
net of tax effect 2,753 2,753
---------
Total comprehensive income (2,198)
Exercise of stock options, net of
shares purchased 250 250
Cash dividends-$0.19 per share (5,298) (5,298)
--------- --------- --------- ---------
BALANCE - SEPTEMBER 30, 1997 119,031 276,778 3,296 399,105
Net income 14,255 14,255
Net unrealized gain on securities available-for-sale,
net of tax effect 566 566
---------
Total comprehensive income 14,821
Exercise of stock options, net of
shares purchased 1,243 1,243
Cash dividends-$0.19 per share (5,327) (5,327)
--------- --------- --------- ---------
BALANCE - DECEMBER 31, 1997 120,274 285,706 3,862 409,842
Net income 13,522 13,522
Net unrealized loss on securities available-for-sale,
net of tax effect (352) (352)
---------
Total comprehensive income 13,170
Exercise of stock options, net of
shares purchased 1,139 1,139
Cash dividends-$0.19 per share (5,324) (5,324)
--------- --------- --------- ---------
BALANCE - MARCH 31, 1998 121,413 293,904 3,510 418,827
Net income 13,683 13,683
Net unrealized gain on securities available-for-sale,
net of tax effect 135 135
---------
Total comprehensive income 13,818
Exercise of stock options, net of
shares purchased 2,142 2,142
Shares acquired for exercise of stock options (2,095) (2,095)
Cash dividends-$0.21 per share (5,909) (5,909)
--------- --------- --------- ---------
BALANCE - JUNE 30, 1998 $ 121,460 $ 301,678 $ 3,645 $ 426,783
========= ========= ========= =========
==========================================================================================================
</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) 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 27,205 $ 22,204
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 7,020 6,952
Depreciation 4,163 4,555
Amortization of intangibles 2,773 3,326
Net amortization on investment securities 1,014 524
Investment securities (gains) losses (54) 57
Other (3,312) (7,918)
--------- ---------
Net cash provided by operating activities 38,809 29,700
INVESTING ACTIVITIES:
Net decrease in money market investments 9,380 13,788
Securities available-for-sale:
Proceeds from sales 9,625 48,278
Proceeds from maturities 118,490 59,760
Purchases (161,156) (130,431)
Net decrease (increase) in loans 39,138 (154,239)
Purchases of premises and equipment (7,035) (2,351)
--------- ---------
Net cash used by investing activities 8,442 (165,195)
FINANCING ACTIVITIES:
Net decrease in demand and savings deposits (4,087) (19,099)
Net (decrease) increase in time deposits (37,438) 77,263
Net (decrease) increase in short-term borrowings (3,959) 56,849
Proceeds from issuance of long-term debt 60,000 30,000
Principal reductions in long-term debt (37,554) (26,513)
Cash dividends paid (11,233) (8,662)
Proceeds from stock options exercised 3,281 469
Shares repurchased (2,095) 1
--------- ---------
Net cash provided by financing activities (33,085) 110,308
--------- ---------
Net increase (decrease) in cash and due from banks 14,166 (25,187)
Cash and due from banks at beginning of period 168,351 182,039
--------- ---------
Cash and due from banks at end of period $ 182,517 $ 156,852
========= =========
- ----------------------------------------------------------------------------------------------------------------
</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 six month period
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998.
NOTE 2. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year financial statement presentation. All financial information presented
reflects the consolidated results of Citizens Banking Corporation and CB
Financial Corporation.
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 period ended June 30, 1998. 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 1997
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) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOR THE PERIOD
Interest income $ 85,470 $ 83,996 $ 170,677 $ 164,223
Net interest income 49,462 48,138 98,238 94,019
Provision for loan losses 3,510 3,742 7,020 6,952
Investment securities gains (losses) 4 (33) 54 (57)
Other noninterest income 13,963 11,575 26,904 22,944
Noninterest expense 40,199 39,729 78,891 78,346
Income taxes 6,037 4,894 12,080 9,404
Net income 13,683 11,315 27,205 22,204
Cash dividends 5,909 4,094 11,233 8,661
PER SHARE DATA
Basic net income $ 0.49 $ 0.41 $ 0.97 0.80
Diluted net income 0.48 0.40 0.95 0.79
Cash dividends 0.21 0.19 0.40 0.36
Book value (end of period) --- --- 15.14 14.60
Market value (end of period close) --- --- 33.63 22.83
FINANCIAL RATIOS (ANNUALIZED)
Return on average:
Shareholders' equity 13.03% 11.37% 13.16% 11.29%
Assets 1.23 1.04 1.23 1.03
Net interest margin (taxable equivalent) 4.89 4.88 4.89 4.83
Net loan charge-offs to average loans 0.35 0.28 0.34 0.24
Average equity to average total assets 9.43 9.13 9.39 9.15
Nonperforming assets to loans plus other repossessed
assets acquired (end of period) --- --- 0.76 0.75
Nonperforming assets to total assets (end of period) --- --- 0.60 0.57
BALANCE SHEET TOTALS Percent
At Period End (June 30) Change
-------
Assets 0.0% $4,435,922 $4,436,347
Loans 3.4 3,496,506 3,380,128
Deposits (0.1) 3,652,821 3,656,915
Shareholders' equity 5.0 426,783 406,351
Average balances
Assets 2.6 4,442,184 4,330,749
Loans 6.4 3,506,450 3,295,775
Deposits 2.8 3,700,392 3,601,290
Shareholders' equity 5.2 416,985 396,432
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
PERFORMANCE SUMMARY
Selected financial data as of June 30, 1998 and 1997 and for the three and six
month periods then ended are presented in the table on page 8. As shown,
earnings increased in both the three and six month period ended June 30,1998
versus the same periods of 1997, as a result of higher net interest income and
noninterest income. This improvement was partially offset by higher operating
expenses and income taxes. Higher net interest income was due to loan growth
and increased earning asset levels, while noninterest income increased due
primarily to growth in trust fees, brokerage and investment fees and mortgage
and other loan income, as well as new title insurance services. Noninterest
expense increased only modestly due to cost savings derived from the 1997 merger
with CB Financial Corporation.
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, 1998 and 1997 are summarized on page 11. The effects of
changes in average market rates of interest ("rate") and average balances
("volume") are quantified in the table below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
Three Months Ended June 30 Six Months Ended June 30
------------------------------------- ------------------------------------
1998 Compared With 1997 1998 Compared With 1997
------------------------------------- ------------------------------------
Increase (Decrease) Increase (Decrease)
Three Months Ended June 30 Net Due To Change In Net Due To Change In
-------------------- ---------------------
(In Thousands) Change(1) Rate(2) Volume Change(1) Rate(2) Volume
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Money market investments:
Time deposits with banks $ (1) $ 3 $ (4) $ (2) $ 4 $ (6)
Federal funds sold 569 3 566 1,167 (1) 1,168
Term federal funds sold and
other (9) (5) (4) (74) (7) (67)
Investment securities:
Taxable (1,251) 366 (1,617) (2,697) 674 (3,371)
Tax-exempt (342) (42) (300) (726) (63) (663)
Loans 2,508 (1,165) 3,673 8,786 (610) 9,396
--------- --------- -------- ------- ------- -------
Total 1,474 (840) 2,314 6,454 (3) 6,457
--------- --------- -------- ------- ------- -------
INTEREST EXPENSE:
Deposits:
Demand (51) (49) (2) (129) (66) (63)
Savings (362) (184) (178) (440) (28) (412)
Time 742 (122) 864 3,169 346 2,823
Short-term borrowings (946) (122) (824) (1,671) (33) (1,638)
Long-term debt 767 (167) 934 1,306 (266) 1,572
--------- --------- -------- ------- ------- -------
Total 150 (644) 794 2,235 (47) 2,282
--------- --------- -------- ------- ------- -------
NET INTEREST INCOME $ 1,324 $ (196) $ 1,520 $ 4,219 $ 44 $ 4,175
========= ========= ======== ======= ======= =======
- ------------------------------------------------------------------------------------------------------------
</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 volume.
9
<PAGE> 10
Favorable volume related variances partially offset by unfavorable rate related
variances resulted in an increase of $1,324,000 in net interest income for the
three months ended June 30, 1998 as compared to the same period in 1997. For the
six months ended June 30, 1998, favorable volume and rate related variances
resulted in an increase in net interest income of $4,219,000 as compared to the
same period in 1997. Overall, higher loan balances partially offset by time
deposit growth and decreased levels of investment securities accounted for the
majority of the three and six-month volume increases.
Yields on earning assets decreased to 8.36% from 8.41% for the three months
ended June 30, 1998 as compared with the same period in 1997 due to lower yields
in the commercial and consumer loan portfolios. Yields on earning assets
increased to 8.41% from 8.34% for the six months ended June 30, 1998 as compared
with the same period in 1997. The increase resulted from higher yields on
taxable investment securities, and a higher concentration of loans to earning
assets. This improved composition of assets and the overall higher level of
earning assets resulted in net volume related increases in interest income of
$2,314,000 and $6,457,000 for the three and six month periods ended June 30,
1998, respectively, as compared to the same periods in 1997.
The cost of interest-bearing liabilities decreased to 4.25% from 4.28% for the
three months ended June 30, 1998 as compared with the same period in 1997 but
reflected an increase to 4.31% from 4.24% for the six month periods ended June
30, 1998 as compared to the prior year. The decrease in the second quarter
reflected the overall lower interest rate environment as the cost of all
categories of interest bearing liabilities declined compared with the same
period of 1997. The increase for the six month period was the result of higher
rates on time deposits as well as a continued shift in deposits from lower rate
savings and demand accounts to higher cost time deposit accounts. Increased
amounts of long-term debt were offset by lower short term borrowings as the
corporation extended certain debt maturities in the favorable interest rate
environment.
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 1998, 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
- --------------------------------------------------------------------------------
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
<TABLE>
<CAPTION>
1998 1997
------------------------------------- -------------------------------------
Three Months Emded June 30
(In Thousands)
AVERAGE AVERAGE Average Average
BALANCE INTEREST(1) RATE(2) Balance Interest(1) Rate(2)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Money market investments:
Interest earning deposits with banks $ 23 $ 1 8.71 $ 194 $ 2 5.19%
Federal funds sold 44,087 607 5.52 2,999 38 5.12
Term federal funds sold and other 2,803 29 4.14 3,287 38 4.88
Investment securities(3):
Taxable 461,885 7,447 6.45 562,362 8,698 6.19
Tax-exempt 145,664 1,921 8.16 169,415 2,263 8.26
Loans:
Commercial 1,422,730 30,381 8.66 1,246,570 27,693 9.01
Real estate 798,989 16,161 8.09 778,295 15,654 8.05
Consumer 1,260,413 28,360 9.02 1,269,138 28,893 9.13
Lease financing 29,349 563 7.68 42,261 717 6.79
----------- ------- ---- ----------- ------- ----
Total earning assets(3) 4,165,943 85,470 8.36 4,074,521 83,996 8.41
NONEARNING ASSETS
Cash and due from banks 153,941 143,325
Bank premises and equipment 71,647 73,305
Other nonearning assets 120,626 121,531
Allowance for loan losses (46,949) (44,306)
----------- -----------
Total assets $ 4,465,208 $ 4,368,376
=========== ===========
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits $ 384,544 1,497 1.56 $ 385,420 1,548 1.61
Savings deposits 1,032,020 7,043 2.74 1,056,119 7,405 2.81
Time deposits 1,694,892 23,720 5.61 1,632,997 22,978 5.64
Short-term borrowings 133,551 1,576 4.73 203,541 2,522 4.97
Long-term debt 150,660 2,172 5.78 85,827 1,405 6.56
----------- ------- ---- ----------- ------- ----
Total interest-bearing liabilities 3,395,667 36,008 4.25 3,363,904 35,858 4.28
------- -------
NONINTEREST-BEARING LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits 594,458 553,622
Other liabilities 53,939 51,825
Shareholders' equity 421,144 399,025
Total liabilities and shareholders' equity $ 4,465,208 $ 4,368,376
=========== ===========
NET INTEREST INCOME $49,462 $48,138
======= =======
NET INTEREST INCOME AS A PERCENT OF EARNING
ASSETS 4.89% 4.88%
=================================================================================================================================
</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 $1,463 and $1,567 for the
three months ended June 30, 1998 and 1997, 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
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
<TABLE>
<CAPTION>
1998 1997
--------------------------------------- ---------------------------------
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 $ 33 $ 2 7.55% $ 194 $ 4 4.72%
Federal funds sold 48,227 1,325 5.54 5,741 158 5.56
Term federal funds sold and other 2,972 64 4.36 5,671 138 4.92
Investment securities(3):
Taxable 445,208 14,302 6.43 554,564 16,999 6.15
Tax-exempt 145,279 3,844 8.18 171,339 4,570 8.25
Loans:
Commercial 1,390,409 59,459 8.71 1,242,789 54,094 8.86
Real estate 797,253 32,551 8.17 770,036 30,892 8.02
Consumer 1,286,778 57,957 9.08 1,239,292 55,860 9.09
Lease financing 32,010 1,173 7.33 43,658 1,508 6.91
----------- -------- ----- ----------- -------- -----
Total earning assets(3) 4,148,169 170,677 8.41 4,033,284 164,223 8.34
NONEARNING ASSETS
Cash and due from banks 150,851 144,567
Bank premises and equipment 70,698 73,872
Other nonearning assets 119,108 122,289
Allowance for loan losses (46,642) (43,263)
---------- -----------
Total assets $ 4,442,184 $ 4,330,749
=========== ===========
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits $ 380,298 2,968 1.57 $ 388,037 3,097 1.61
Savings deposits 1,028,823 14,236 2.79 1,057,531 14,676 2.80
Time deposits 1,710,057 47,996 5.66 1,609,245 44,827 5.62
Short-term borrowings 128,829 3,057 4.79 196,246 4,728 4.86
Long-term debt 141,800 4,182 5.95 84,303 2,876 6.87
----------- -------- ----- ----------- -------- -----
Total interest-bearing liabilities 3,389,807 72,439 4.31 3,335,362 70,204 4.24
-------- --------
NONINTEREST-BEARING LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits 581,214 546,477
OTHER LIABILITIES 54,178 52,478
Shareholders' equity 416,985 396,432
----------- -----------
Total liabilities and shareholders' equity $ 4,442,184 $ 4,330,749
=========== ===========
NET INTEREST INCOME $ 98,238 $ 94,019
======== ========
NET INTEREST INCOME AS A PERCENT OF EARNING
ASSETS 4.89% 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 $2,909 and $3,169 for the
three months ended June 30, 1998 and 1997, 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 months and six months ended
June 30, 1998 and 1997 is provided below. The provision for loan losses
decreased $232,000 during the three months ended June 30, 1998, as compared with
the same period in 1997, and increased $68,000 in the first six months of 1998
versus the same period of 1997.
The ratio of net loans charged off to average loans outstanding increased seven
and ten basis points for the three and six months ended June 30, 1998, compared
to the same periods in 1997, respectively. The change resulted from increased
loan charge-off's in the corporation's indirect consumer loan portfolio.
- --------------------------------------------------------------------------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for loan losses - beginning of period $ 46,480 $ 43,773 $ 45,911 $ 42,166
Charge-offs 3,962 3,206 7,813 5,777
Recoveries 928 889 1,838 1,857
---------- ---------- ---------- ----------
Net charge-offs 3,034 2,317 5,975 3,920
Provision for loan losses 3,510 3,742 7,020 6,952
---------- ---------- ---------- ----------
Allowance for loan losses - end of period $ 46,956 $ 45,198 $ 46,956 $ 45,198
========== ========== ========== ==========
Loans outstanding at period end $3,496,506 $3,380,128 $3,496,506 $3,380,128
Average loans outstanding during period
3,511,481 3,336,264 3,506,450 3,295,775
Allowance for loan losses as a percentage of loans
outstanding at period end 1.34% 1.34% 1.34% 1.34%
Ratio of net charge-offs during period to average loans
outstanding (annualized) 0.35 0.28 0.34 0.24
Loan loss coverage (allowance as a multiple of net
charge-offs, annualized) 3.9X 4.9x 3.9X 5.7x
- ----------------------------------------------------------------------------------------------------------------------
</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, 1998 and 1997 follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME Three Months Ended Six Months Ended Percent
June 30, June 30, Change in 1998
-------------------- --------------------- -----------------------
(in thousands) Three Six
1998 1997 1998 1997 months months
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Trust fees $ 4,635 $ 3,840 $ 9,248 $ 7,814 20.7% 18.4%
Service charges on deposit accounts 3,246 3,076 6,255 6,034 5.5 3.7
Bankcard fees 1,797 1,700 3,570 3,354 5.7 6.4
Brokerage and investment fees 713 384 1,197 839 85.7 42.7
Mortgage and other loan income 806 336 1,335 631 139.9 111.6
ATM network user fees 721 723 1,443 1,240 (0.3) 16.4
Cash management services 565 437 1,102 909 29.3 21.2
Title insurance fees 265 --- 488 --- (1) (1)
Investment securities gains (losses) 4 (33) 54 (57) (1) (1)
Other, net 1,215 1,079 2,266 2,123 12.6 6.7
-------- -------- -------- --------
Total noninterest income $ 13,967 $ 11,542 $ 26,958 $ 22,887 21.0% 17.8%
======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Not meaningful
Noninterest income increased 21.0% and 17.8% in the three and six month periods
ended June 30, 1998 as compared to the same periods in 1997, respectively.
Nearly every category of noninterest income was higher in 1998 than in 1997, for
both the three and six month periods ended June 30. The corporation experienced
significant increases in trust fees, brokerage and investment fees, mortgage and
other loan income, cash management fees and title insurance fees. ATM fees
reflected only a slight decrease in the second quarter of .3%
Increased trust fee income for personal and employee benefit trust services
attributed to a 20.7% and 18.4% increase for the three and six months ended June
30, 1998, respectively, as compared to the same periods in the prior year. The
increases were the result of improved pricing strategies and higher volumes of
managed assets. Brokerage and investment fees increased 85.7% and 42.7% for the
three and six month periods ended June 30, 1998, respectively, as compared to
the same periods in 1997. Higher fees were the result of increased sales efforts
and better penetration of the corporation's client base.
Mortgage and other loan income increased 139.9% and 111.6% for the three and six
months ended June 30, 1998, respectively, as compared to the same periods in
1997 due to increased sales of residential mortgage loans into the secondary
market. Higher mortgage loan volumes are the result of focused sales efforts and
the more favorable interest rate environment during the first six months of 1998
as compared to the same period in the prior year. Cash management services fees
increased 29.3% and 21.2% for the three and six months period ended June 30,
1998, respectively, as compared to the same periods in the prior 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.
During the fourth quarter of 1997, the Corporation established Citizens Title
Services, Inc. a subsidiary of Citizens Bank. This new subsidiary provides title
insurance to buyers and sellers of residential and commercial mortgage
properties including those occurring due to loan refinancing. Title insurance
fees were $265,000 and $488,000 in the three and six month periods ended June
30, 1998, respectively.
14
<PAGE> 15
NONINTEREST EXPENSE
Significant changes in noninterest expense during the three and six months
ended June 30, 1998 and 1997 is summarized in the table below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE Three Months Ended Six Months Ended Percent
June 30, June 30, Changes in 1998
--------------------- ---------------------- -----------------------
(in thousands) Three Six
1998 1997 1998 1997 Months Months
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 20,802 $ 20,534 $ 41,199 $ 40,792 1.3% 1.0%
Equipment 3,051 3,164 6,158 6,359 (3.6) (3.2)
Occupancy 2,834 2,851 5,671 5,880 (0.6) (3.6)
Intangible asset amortization 1,387 1,663 2,773 3,326 (16.6) (16.6)
Bankcard fees 1,510 1,148 2,693 2,178 31.5 23.6
Stationery and supplies 910 1,016 1,920 2,108 (10.4) (8.9)
Postage and delivery 1,123 1,080 2,212 2,189 4.0 1.1
Advertising and public relations 1,203 1,340 2,405 2,440 (10.2) (1.4)
Taxes, other than income taxes 515 780 907 1,619 (34.0) (44.0)
Data processing services 1,361 110 2,301 218 (1) (1)
Consulting and other professional fees 736 890 1,464 1,562 (17.3) (6.3)
Legal, audit and examination fees 412 713 818 1,352 (42.2) (39.5)
Other loan fees 825 830 1,586 1,611 (0.6) (1.6)
Other, net 3,530 3,610 6,784 6,712 (2.2) 1.1
--------- --------- --------- ---------
Total noninterest expense $ 40,199 $ 39,729 $ 78,891 $ 78,346 1.2% 0.7%
========= ========= ========= =========
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Not meaningful.
Operating expenses increased a modest 1.2% and .7% for the three and six months
ended June 30, 1998, respectively, as compared to the same periods in 1997. The
minimal increase in operating expenses is primarily attributable to the
operating efficiencies achieved subsequent to the July 1, 1997 merger with CB
Financial Corporation.
SALARIES AND EMPLOYEE BENEFITS
Salaries and employee benefits expense increased 1.3% and 1.0% for the three and
six months ended June 30, 1998, respectively, as compared to the same periods in
the prior year. The increases for the three and six month comparison were due to
higher incentive based compensation and normal merit increases predominantly
offset by lower staffing levels due to efficiencies resulting from the CB
Financial Corporation merger and the information technology arrangement with M&I
Data Services.
OTHER NONINTEREST EXPENSE
Other noninterest expenses increased 1.1% and .4% for the three and six month
periods ended June 30, 1998 compared to the same periods the prior year. The
most significant increases occurred in data processing services and bankcard
fees. Data processing costs increased as a result of the new information
technology arrangement with M&I Data Services entered into in the third quarter
of 1997. Bankcard fees increased due to higher transaction volume, increased
costs for processing services and enhanced loss prevention efforts. The most
significant decreases were attributable to legal, audit and examination fees,
taxes, other than income taxes, and intangible asset amortization.
Lower legal, audit and examination fees are the result of the economies of scale
achieved from the July 1, 1997 CB Financial Corporation merger. Intangible asset
amortization expense declined due to the third quarter 1997 write-down of
goodwill and core deposit intangibles related to previous acquisitions of CB
Financial Corporation. Taxes, other than income taxes declined due to lower
business and intangible taxes for the first six months of 1998 as compared with
the same period in the prior year.
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 for the three and six months
ended June 30, 1998 as compared to the same periods in the prior year.
BALANCE SHEET
The Corporation assets totalled $4.436 billion as of June 30, 1998, a decrease
of $3.3 million or 0.1% from $4.439 billion as of December 31, 1997. Average
earning assets comprised 93.4% of average total assets during the first six
months of 1998 compared with 93.1% in the first six months of 1997.
INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
Total average investments, including money market investments, comprised 15.5%
of average earning assets during the first six months of 1998, compared with
18.3% for the same period of 1997. Liquidity provided from lower investment
securities was used to fund loan growth resulting in a higher composition of
loans to earning assets and improved yield on earning assets.
LOANS
The Corporation extends credit primarily within the market areas of its two
banking subsidiaries located in Michigan and Illinois. The loan portfolio is
widely diversified by borrower and industry groups with no significant
concentrations in any industry. As the economy continued to expand, the
Corporation experienced greater loan demand with total average loans increasing
6.4% in the first six months of 1998 as compared to the same period in 1997.
This growth occurred in all categories except lease financing.
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, restructured loans, loans 90
days past due and still accruing interest, and other real estate owned. Certain
of these loans, as defined below, are considered to be impaired. The Corporation
maintains policies and procedures to identify and monitor nonaccrual loans. A
loan is placed on nonaccrual status when there is doubt regarding collection of
principal or interest, or when principal or interest is past due 90 days or more
and the loan is not well secured and in the process of collection. Interest
accrued but not collected is reversed and charged against income when the loan
is placed on nonaccrual status.
The following describes the Corporation's policy and related disclosures for
impaired loans. The Corporation establishes a valuation allowance for impaired
loans. A loan is considered impaired when management determines it is probable
that all the principal and interest due under the contractual terms of the loan
will not be collected. In most instances, the impairment is measured based on
the fair value of the underlying collateral. Impairment may also be measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate. Cash collected on impaired nonaccrual loans is
applied to principle until collection of principle is no longer in doubt and
then to interest income. Interest income on all other impaired loans is
recognized on an accrual basis.
Certain of the Corporation's nonperforming loans included in the following table
are considered to be impaired. The Corporation measures impairment on all large
balance nonaccrual commercial and commercial real estate loans. Certain large
balance accruing loans rated substandard or worse are also measured for
impairment. In most instances, impairment is measured based on the fair value of
the underlying collateral. Impairment losses are included in the provision for
loan losses. The policy does not apply to large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment, except for
those loans restructured under a troubled debt restructuring. Loans collectively
evaluated for impairment include certain smaller balance commercial loans,
consumer loans, residential real estate loans, and credit card loans, and are
not included in the impaired loan data in the following paragraphs.
At June 30, 1998, loans considered to be impaired under the Statements totaled
$18.5 million (of which $13.2 million were on a nonaccrual basis). Included
within this amount was $8.0 million of impaired loans for which the related
allowance for loan losses was $2.0 million and $10.6 million of impaired loans
for which the fair value exceeded the recorded investment in the loan. The
average recorded investment in impaired loans during the quarter ended June 30,
1998 was approximately $18.7 million. For the quarter ended June 30, 1998, the
Corporation recognized interest income of $0.3 million which included $0.1
million of interest income recognized using the cash basis method of income
recognition.
16
<PAGE> 17
At June 30, 1997, loans considered to be impaired under the Statements totalled
$17.9 million (of which $11.6 million were on a nonaccrual basis). Included
within this amount is $7.9 million of impaired loans for which the related
allowance for loan losses was $1.5 million and $9.9 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 $18.0 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.
The table below provides a summary of nonperforming assets as of June 30, 1998,
December 31, 1997 and June 30, 1997. Total nonperforming assets amounted to
$26.6 million as of June 30, 1998, as compared with $25.0 million as of December
31, 1997 and $25.3 million as of June 30, 1997. 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,
(IN THOUSANDS) 1998 1997 1997
<S> <C> <C> <C>
NONPERFORMING LOANS
Nonaccrual
Less than 30 days past due $ 4,032 $ 5,128 $ 4,212
From 30 to 89 days past due 1,947 2,021 1,433
90 or more days past due 17,398 12,840 13,781
------- ------- --------
Total 23,377 19,989 19,426
90 days past due and still accruing 441 1,185 716
Restructured 231 446 498
------- ------- --------
Total nonperforming loans 24,049 21,620 20,640
Other Repossessed Assets Acquired (ORAA) 2,548 3,348 4,679
------- ------- --------
Total nonperforming assets $26,597 $24,968 $ 25,319
======= ======= ========
Nonperforming assets as a percent of total loans plus ORAA 0.76% 0.70% 0.75%
Nonperforming assets as a percent of total assets 0.60 0.56 0.57
- ---------------------------------------------------------------------------------------------------
</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, 1998 such credits amounted to $21.9 million or 0.6% of
total loans, compared with $25.0 million or 0.7% at December 31, 1997 and $20.3
million or 0.6% as of June 30, 1997. These loans are primarily commercial and
commercial real estate loans made in the normal course of business and do not
represent a concentration in any one industry.
DEPOSITS
Average deposits increased 2.8% in the first six months of 1998 as compared to
the same period in 1997. The shift in deposits from interest-bearing demand and
savings accounts to time accounts reflects changing customer liquidity
preferences and the desire for higher yields. The Corporation gathers deposits
primarily in its local markets and historically has not relied on brokered funds
to sustain liquidity. In the third quarter of 1997, the Corporation obtained
approximately $20.0 million in brokered deposits as an alternative source of
funding. The deposits mature in intervals over the next three years. The
Corporation will continue to evaluate the use of alternative funding sources
such as brokered deposits as funding needs change. Management continues to
promote relationship driven core deposit growth and stability through focused
marketing efforts and competitive pricing strategies.
17
<PAGE> 18
SHORT-TERM BORROWINGS AND LONG-TERM DEBT
On average, total short-term borrowings decreased to $128.8 million during the
first six months of 1998 compared with $196.2 million during the same period of
1997. Long-term debt accounted for $141.8 million or 4.2% of average
interest-bearing funds for the first six months of 1998, increasing from $84.3
million or 2.5% for the same period in 1997. The shift in funding from
short-term borrowings to long-term debt reflects the relative attractiveness of
long-term financing versus short-term borrowing in the current interest rate
environment. At June 30, 1998, $100 million of the long-term debt consists of
borrowings from the Federal Home Loan Bank by the Corporation's lead subsidiary
bank. The borrowings mature at different intervals over the next five years
except for $60 million which matures in 10 years.
These borrowings are utilized to fund the Corporation's loan growth.
NEW ACCOUNTING PRONOUNCEMENTS
In September 1996, the Financial Accounting Standards Board (FASB) 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 in 1997 and has adopted the remaining
provisions effective January 1, 1998. The adoption did not have a material
effect on the Corporation.
In June 1997, the FASB 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 for year-end 1998
reporting.
In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The Statement will
standardize pension and other post employee benefit disclosures making them
easier and less costly to prepare and more understandable. The Statement will
eliminate certain existing disclosures, but adds new disclosures regarding the
benefit obligation and changes in the fair value of plan assets. The Statement
is effective for fiscal years beginning after December 31, 1997. The Statement
will be adopted for year end 1998 reporting and is not expected to materially
change the Corporation's annual employee benefit disclosures.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for hedging activities and for derivative instruments,
including certain derivative instruments embedded in other contracts. This
statement requires a company to recognize all derivatives as either assets or
liabilities in its balance sheet and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
fair value, cash flow, or foreign currency hedge. The accounting for changes in
the fair value of a derivative (i.e., gains and losses) depends on the intended
use of the derivative and the resulting designation. If the Corporation elects
to apply hedge accounting, it is required to establish at the inception of the
hedge the method it will use for assessing the effectiveness of the hedging
derivative and the measurement approach for determining the ineffective aspect
of the hedge. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Corporation plans to adopt this
Statement effective January 1, 2000. Presently the Corporation does not utilize
derivative or related types of financial instruments except for Federal agency
collateralized mortgage obligations. Therefore, this Statement is not
anticipated to have a material impact on the Corporation.
18
<PAGE> 19
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs which utilize two digits
rather than four digits to define years for computer calculations. Any computer
or electronic calculation recognizing a two digit date rather than a four digit
date may incur system failure or miscalculate information when using a date
after December 31, 1999, resulting in potentially serious impairment to business
operations. The Corporation began addressing the issue in 1996 with the
formation of a task force to identify Year 2000 related issues for any
electronic devices, such as mainframe and microcomputers, using two digits
rather than four digits for the year. The Corporation believes that it has
identified all Year 2000 noncompliant systems and devices and is working closely
with vendors and third party service providers to address solutions. Further,
during the fall of 1997, formal discussions were initiated with the
Corporation's significant commercial business clients to determine the extent to
which the client's computer systems are vulnerable to Year 2000 failure.
A significant portion of the Corporation's Year 2000 solution included the
strategic arrangement entered into with M&I Data Services in the third quarter
of 1997. During the second quarter of 1998, Citizens completed the integration
of its primary data processing systems with those of M&I Data Services. M&I has
warranted to the Corporation that all systems to be replaced by M&I Data
Services will be Year 2000 compliant by December 31, 1998.
The Corporation has not identified any noncompliant systems for which a solution
is not available and which would impair the Corporation's business operations.
All Year 2000 costs to date have not been material and are being expensed as
incurred. Anticipated future expenses are not expected to materially impair
future earnings. The Corporation anticipates that all material noncompliant
systems will be replaced and most testing completed by December 31, 1998, with
the remainder of the testing of the compliance measures to be completed in early
1999.
While the Corporation is not aware of any Year 2000 problems for which a
solution is not available, other unanticipated Year 2000 issues could arise and
there can be no assurance that actual results will be comparable to expected
results. These unanticipated issues may include the ability to identify and
correct all relevant computer codes, the availability and cost of trained
personnel, the impact of Year 2000 on our clients and other uncertainties.
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).
19
<PAGE> 20
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" 1998 1997 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk based capital:
Tier I 6.0% 10.3% 9.8% 10.0%
Total capital 10.0 11.6 11.0 11.2
Tier I Leverage 5.0 8.3 8.0 7.9
- ------------------------------------------------------------------------------------------------------------
</TABLE>
COMMON AND PREFERRED STOCK
The Corporation initiated a stock repurchase program in November 1987. 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. Prior to the rescission, a total of 1,891,455 shares
had been purchased under this program at an average price of $10.56 per share.
On May 5, 1998, the Corporation announced the initiation of a new stock
repurchase plan which provides for the repurchase of up to 600,000 shares of its
stock on the open market over the next 24 months. The shares will be utilized to
satisfy the Corporation's obligation to issue shares under its existing employee
and director stock option plans. The Corporation intends to acquire such shares
in a systematic pattern. During the second quarter, the Corporation acquired
60,000 shares at a cost of $2,094,869, or an average cost of $34.91 per share.
OTHER
Total shareholders' equity was $426.8 million or $15.14 per share as of June 30,
1998, compared with $409.8 million or $14.61 per share as of December 31, 1997
and $406.4 million or $14.60 per share as of June 30, 1997. The Corporation
declared cash dividends of $0.40 per share during the first six months of 1998,
an increase of 11.1% over the $0.36 per share declared during the same period in
1997.
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 and 1998, 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 current liquidity levels. These ratios
are summarized in the following table:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
KEY LIQUIDITY RATIOS
JUNE 30, December 31, June 30,
1998 1997 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Quarterly average:
Loans to deposits 94.7% 94.6% 92.0%
Liquid assets to volatile funding 43.9 35.4 30.0
Core funding to total funding 88.2 86.5 87.7
- ----------------------------------------------------------------------------------------------------
</TABLE>
The corporation manages liquidity to meet client cash flow needs while
maintaining funds available for loan and investment opportunities. The
corporation's quarterly average loan to deposit ratio increased to 94.7% at June
30, 1998 from 94.6% at December 31, 1997. 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, 1998 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 exceeding rate
sensitive liabilities by $104 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, 1998 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(3)
Loans $ 1,091.0 $ 150.8 $ 182.6 $ 335.2 $ 1,759.6 $1,311.2 $ 425.7 $ 3,496.5
Investment securities 50.0 26.3 64.6 103.8 244.7 214.0 148.4 607.1
Short-term investments 2.8 --- --- --- 2.8 --- --- 2.8
------------ ------- -------- ------- --------- --------- -------- ---------
Total $ 1,143.8 $ 177.1 $ 247.2 $ 439.0 $ 2,007.1 $1,525.2 $ 574.1 $ 4,106.4
============ ======= ======== ======= ========= ======== ======== =========
RATE SENSITIVE LIABILITIES
Deposits (2) $ 234.6 $ 336.6 $ 374.0 $ 695.9 $ 1,641.1 $1,221.7 $ 181.9 $ 3,044.7
Short-term borrowings 170.9 --- --- --- 170.9 --- --- 170.9
Long-term debt --- 13.0 15.0 63.1 91.1 39.4 0.1 130.6
------------ ------- -------- ------- --------- -------- -------- ---------
Total $ 405.5 $ 349.6 $ 389.0 $ 759.0 $ 1,903.1 $1,261.1 $ 182.0 $ 3,346.2
============ ======= ======== ======= ========= ======== ======== =========
Period GAP (1) $ 738.3 $(172.5) $ (141.8) $(320.0) $ 104.0 $ 264.1 $ 392.1 $ 760.2
Cumulative GAP 738.3 565.8 424.0 104.0 --- 368.1 760.2 ---
Cumulative GAP to
Total Assets 16.64% 12.76% 9.56% 2.34% --- 8.30% 17.14% ---
Multiple of Rate Sensitive
Assets to Liabilities 2.82 0.51 0.64 0.58 1.05 1.21 3.15 1.23
====================================================================================================================
</TABLE>
(1) GAP is the excess of rate sensitive assets (liabilities).
(2) Includes interest bearing savings and demand deposits of $444 million
in the less than one year category, and $948 million in the over one
year category, based on historical trends for these noncontractual
maturity deposit types, which reflects industry standards.
(3) Incorporates prepayment projections for certain assets which may
shorten the time frame for repricing or maturity compared to
contractual runoff.
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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(11) Statement re: computation of per share earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K--none
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIZENS BANKING CORPORATION
Date August 12, 1998 By /s/ John W. Ennest
------------------------- -------------------
John W. Ennest
Vice Chairman of the
Board, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Signatory)
22
<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) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NUMERATOR:
Numerator for basic and dilutive earnings per share --
net income available to common shareholders $ 13,683 $ 11,315 $27,205 $22,204
DENOMINATOR:
Denominator for basic earnings per share -- weighted
average shares 28,173 27,824 28,124 27,802
Effect of dilutive securities -- potential conversion of
employee stock options 626 456 649 460
-------- -------- ------- -------
Denominator for diluted earnings per share -- adjusted
weighted-average shares and assumed conversions 28,799 28,280 28,773 28,262
======== ======== ======= =======
Basic earnings per share $ 0.49 $ 0.41 $ 0.97 $ 0.80
======== ======== ======= =======
Diluted earnings per share $ 0.48 $ 0.40 $ 0.95 $ 0.79
======== ======== ======= =======
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 182,517 182,517
<INT-BEARING-DEPOSITS> 29 29
<FED-FUNDS-SOLD> 2,813 2,813
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 607,129 607,129
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 3,496,506 3,496,506
<ALLOWANCE> 46,956 46,956
<TOTAL-ASSETS> 4,435,922 4,435,922
<DEPOSITS> 3,652,821 3,652,821
<SHORT-TERM> 170,907 170,907
<LIABILITIES-OTHER> 54,800 54,800
<LONG-TERM> 130,611 130,611
0 0
0 0
<COMMON> 121,460 121,460
<OTHER-SE> 305,323 305,323
<TOTAL-LIABILITIES-AND-EQUITY> 4,435,922 4,435,922
<INTEREST-LOAN> 75,465 151,140
<INTEREST-INVEST> 10,005 19,537
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 85,470 170,677
<INTEREST-DEPOSIT> 32,260 65,200
<INTEREST-EXPENSE> 36,008 72,439
<INTEREST-INCOME-NET> 49,462 98,238
<LOAN-LOSSES> 3,510 7,020
<SECURITIES-GAINS> 4 54
<EXPENSE-OTHER> 40,199 78,891
<INCOME-PRETAX> 19,720 39,285
<INCOME-PRE-EXTRAORDINARY> 13,683 27,205
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 13,683 27,205
<EPS-PRIMARY> .49 .97
<EPS-DILUTED> .48 .95
<YIELD-ACTUAL> 4.89 4.89
<LOANS-NON> 23,377 23,377
<LOANS-PAST> 441 441
<LOANS-TROUBLED> 231 231
<LOANS-PROBLEM> 21,900 21,900
<ALLOWANCE-OPEN> 46,480 45,911
<CHARGE-OFFS> 3,962 7,813
<RECOVERIES> 928 1,838
<ALLOWANCE-CLOSE> 46,956 46,956
<ALLOWANCE-DOMESTIC> 29,900 29,900
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 17,056 17,056
</TABLE>
