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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required] For the fiscal year ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the transition period from to
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Commission file Number 0-10535
CITIZENS BANKING CORPORATION
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(Exact name of registrant as specified in its charter)
MICHIGAN 38-2378932
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Citizens Banking Center,
328 S. Saginaw Street, Flint, Michigan 48502
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (810) 766-7500
Securities registered pursuant to Section 12(b) of the Act: None
--------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - No Par Value
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(Title of class)
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $979,963,000 as of March 11, 1998.
The number of shares outstanding of the registrant's Common Stock (No
par value) was 28,100,347 as of March 11, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Citizens Banking Corporation Proxy Statement for its
annual meeting of shareholders to be held April 21, 1998 are incorporated by
reference into Part III.
(Exhibit Index - Pages 13 through 15)
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CITIZENS BANKING CORPORATION
1997 Annual Report on Form 10-K
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business ...................................................................................... 3
Item 2. Properties .................................................................................... 7
Item 3. Legal Proceedings ............................................................................. 7
Item 4. Submission of Matters To a Vote of Security Holders .......................................... 7
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters ............................................................... 8
Item 6. Selected Financial Data ....................................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..................................................................... 8
Item 8. Financial Statements and Supplementary Data ................................................... 8
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .................................................................. 8
PART III
Item 10. Directors and Executive Officers of the Registrant ............................................ 9
Item 11. Executive Compensation ........................................................................ 9
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................... 9
Item 13. Certain Relationships and Related Transactions ................................................ 9
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............................. 10
SIGNATURES .......................................................................................... 11
EXHIBIT INDEX .......................................................................................... 13
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Part I
Item 1. Business.
General
Citizens Banking Corporation ("Corporation") was organized January 1,
1982. It is a multibank holding company registered under the Bank Holding
Company Act of 1956, as amended, and is incorporated in the State of Michigan.
On December 31, 1997, the Corporation directly or indirectly owned two banking
subsidiaries and five nonbanking subsidiaries and had 1978 full-time equivalent
employees. Additional information related to the subsidiaries at year-end 1997
is provided below.
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Principal Number of Total Date
Subsidiary Office Offices Assets Acquired
(in millions)
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Citizens Bank(1) Flint, MI 124 $4,166.4 01/01/1982
Citizens Bank - Illinois, N.A. Berwyn, IL 4 247.5 05/01/1987
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(1) Consolidated totals of Citizens Bank include its wholly owned nonbank
subsidiaries, Citizens Commercial Leasing Corporation ("CCLC"); CB
Financial Services, Inc.; Citizens Bank Mortgage Corporation; Citizens
Title Services, Inc. and Lakeshore Insurance Agency, Inc. (not active).
All of the named subsidiaries are based in Flint, Michigan except for CCLC
which is based in Saginaw, Michigan.
The Corporation's subsidiary banks are full service commercial banks
offering a variety of financial services to corporate, commercial, correspondent
and individual bank customers. These services include commercial, mortgage and
consumer lending, demand and time deposits, trust services, investment services,
safe deposit facilities, and other financial products and services. The bank
subsidiaries are wholly owned by the Corporation and operate through 128 banking
offices. The offices are located along the Interstate 75 corridor within the
State of Michigan from northern suburban Detroit to the greater Grayling/Gaylord
area as well as western suburban Detroit and central and southwestern Michigan.
On July 1, 1997, the Corporation expanded its market presence in
Michigan due to the merger with CB Financial Corporation headquartered in
Jackson, Michigan. The merger resulted in an expanded presence in the greater
Jackson/Lansing markets and in northwestern Michigan with over thirty new
Citizens branch locations. As part of the merger, Citizens issued 6,256,355
shares of its common stock in a tax free exchange for all of the outstanding
shares of CB Financial Corporation. The merger was accounted for as a pooling of
interests resulting in the restatement of all financial information presented.
Citizens Commercial Leasing Corporation, a wholly owned nonbank
subsidiary of Citizens Bank, engages in direct lease financing of office,
medical and other equipment, and participates in high quality indirect lease
participations.
On December 29, 1994 the State of Michigan amended the State's Banking
Code of 1969 to allow banks to engage in the insurance business and to own an
insurance agency. Although the National Bank Holding Company Act prohibits the
holding company from direct ownership of an insurance agency, banks within the
holding company may now do so. During the second quarter of 1997, Citizens Bank
established a wholly owned subsidiary, called CB Financial Services, Inc.
Through this subsidiary, the Corporation sells life insurance and annuity
products to clients subject to certain restrictions.
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In the fourth quarter of 1997, Citizens Bank established a wholly owned
subsidiary, Citizens Bank Mortgage Corporation. The new Corporation originates
new mortgage loans to be held by the subsidiary or sold to the secondary market.
The new Corporation provides residential mortgage services similar to those
previously provided by Citizens Bank. Also in the fourth quarter of 1997,
Citizen Bank established a wholly owned subsidiary, Citizens Title Services,
Inc. This new subsidiary provides title insurance to buyers and sellers of
residential and commercial mortgage properties including those occurring due to
loan refinancing.
Competition
The financial services industry is highly competitive. The banking
subsidiaries compete with other commercial banks, many of which are subsidiaries
of other bank holding companies, for loans, deposits, trust accounts and other
business on the basis of interest rates, fees, convenience and quality of
service. They also actively compete with a variety of other financial services
organizations including savings and loan associations, finance companies,
mortgage banking companies, brokerage firms, credit unions and other
organizations. Citizens Commercial Leasing Corporation competes directly with
other leasing companies. Citizens Title Services, Inc. competes directly with
other title insurance companies.
Loans comprise 77.3% of the Corporation's average assets and are made
in the normal course of business to individuals, partnerships, municipalities
and corporations. Credit is extended to customers within the commercial,
commercial mortgage, real estate construction, real estate mortgage, consumer
and lease financing categories. Consumer loans are primarily composed of
automobile, personal, marine, home equity and bankcard loans and represent 38.2%
of the 1997 average loan portfolio. Consumer loans originated follow strict
Corporate credit underwriting procedures. Real estate mortgage loan extensions
are primarily first liens on one to four family structures and unless insured by
a private mortgage insurance company typically have traditional loan to
appraisal ratios of 80% or less. Commercial and commercial mortgage loan
originations generally do not rely on the performance of the real estate market
to generate funds for repayment and do not represent a concentration in any one
industry or company. Additional information on the composition of the loan
portfolio and the related nonperforming assets is incorporated herein by
reference from Exhibit 13 of this document on pages 11 to 13 under the captions
"Loans" and "Nonperforming Assets".
Mergers between and the expansion of financial institutions both within
and outside of our primary markets of Michigan and Illinois have provided
significant competitive pressure in those markets. In addition, the passage of
federal interstate banking legislation has expanded the banking market and
heightened competitive forces. The affect of this legislation is further
discussed on page 5 under the caption "Supervision and Regulation".
On June 1, 1996, the Corporation consolidated its six Michigan
chartered banks into one bank called Citizens Bank. The consolidation further
streamlined operations and reduced certain costs however, local management was
retained and the local boards of directors were retained as "community boards".
Other factors such as employee relations and environmental laws also
impact the Corporation's competitiveness. Presently, none of the Corporation's
employees are covered by collective bargaining agreements and the Corporation
maintains a favorable relationship with it's employees. The impact of
environmental laws is further discussed in "Item 3. Legal Proceedings" of this
document.
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Supervision and Regulation
Citizens Banking Corporation is subject to supervision and regulation
by the Federal Reserve Board under the Bank Holding Company Act of 1956, as
amended (the "Act"). The Act requires the Corporation to provide notice or
obtain the prior approval of the Board of Governors of the Federal Reserve
System for bank and nonbank acquisitions and prescribes limitations on the
nonbanking activities of the Corporation. As a bank holding company, the
Corporation and its subsidiaries are able only to conduct the business of
banking and activities so closely related to banking or managing or controlling
banks as to be a proper incident thereto.
The Corporation's subsidiary banks are subject to various regulatory
authorities. Citizens Bank is chartered by the State of Michigan and is subject
to supervision, regulation and examination by the Financial Institutions Bureau
of the State of Michigan as well as the Federal Reserve Board. Citizens Bank -
Illinois, N.A. is chartered under federal law and is subject to supervision,
regulation and examination by the Comptroller of the Currency. Both banks are
subject to supervision and examination by the Federal Deposit Insurance
Corporation ("FDIC"), as their deposits are insured by the FDIC to the extent
provided by the law. In addition, both banks are members of the Federal Reserve
System. The Corporation's nonbank companies are supervised and examined by the
Federal Reserve System.
Certain regulatory matters concerning capital adequacy guidelines for
the Corporation and its banking subsidiaries, limitations on the payment of
dividends to the Corporation by its banking subsidiaries and maintenance of
minimum average reserve balances by the banking subsidiaries with the Federal
Reserve Bank are incorporated herein by reference from Exhibit 13 of this
document on pages 16 through 17 and 36 through 37 under the captions, "Liquidity
and Debt Capacity" and "Note 16. Regulatory Matters", respectively.
The 1994 passage of the federal Riegle-Neal Interstate Banking and
Branching Efficiency Act allows states the ability to enact legislation
permitting interstate branching but have no choice in opting out of provisions
related to interstate banking. The effect of the interstate banking provisions
do not impact Michigan or neighboring states since these states have previously
passed legislation allowing bank holding companies to own bank affiliates in
multiple states. On November 29, 1995 the Michigan legislature passed Public Act
202 permitting interstate branching. This law allows a bank the ability to
establish branches outside of the State of Michigan provided that state adopts
similar legislation. However, since Citizens is headquartered in Michigan and
currently has only one subsidiary outside of the state this does not
significantly affect the Corporation. The Corporation may be impacted as states
adjacent to Michigan pass similar legislation. The impact of this is not
expected to significantly affect the Corporation's strategic plan, except to
allow potentially greater consolidation benefits if the Corporation acquires
banks outside of Michigan.
The Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA") adopted in August 1989 significantly affected financial
institutions. Key provisions of FIRREA provided for the acquisition of thrift
institutions by bank holding companies (previously only failing thrifts were
permitted to be acquired), increased deposit insurance assessments for insured
banks, redefined applicable capital standards for banks and thrifts, broadened
the enforcement power of federal bank regulatory agencies, and required that any
FDIC-insured depository institution be held liable for any loss incurred by the
FDIC in connection with the default of any commonly controlled FDIC-insured
depository institution or any assistance provided by the FDIC to any such
institution in danger of default.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), signed into law on December 19, 1991, imposed on banks relatively
detailed standards and
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mandated the development of additional regulations governing nearly every aspect
of the operations and management of banks, in addition to many aspects of bank
holding companies. Some of the major provisions contained in FDICIA includes
recapitalization of the Bank Insurance Fund ("BIF"), a risk-based insurance
premium assessment system, a capital-based supervision system that links
supervisory intervention to the deterioration of a bank's capital level, new
auditing and accounting and examination requirements, and mandated standards for
bank lending and operation.
FDICIA provides the FDIC with the authority to impose assessments on
insured BIF member depository institutions to maintain the fund at the
designated reserve ratio defined in FDICIA. In response to the BIF attaining the
designated reserve ratio in 1995, FDIC assessments were effectively eliminated
in 1996 for banks meeting the requirements of supervisory risk subgroup 1.A.
"well capitalized". Both of the Corporation's subsidiaries have sufficient
capital to maintain this designation (the FDIC's highest rating). In 1998, banks
maintaining the "well capitalized" designation will again have no FDIC insurance
premium requirements except for a special assessment of 1.3 cents per 100
dollars of deposits. This special assessment resulted from the September 30,
1996 passage of Deposit Insurance Funds Act of 1996 by Congress and applies to
all commercial banks regardless of risk subgroup classification. Further
regulatory changes could impact the amount and type of assessments paid by the
Corporation's subsidiary banks.
Monetary Policy
The monetary and fiscal policies of regulatory authorities, including
the Federal Reserve System, strongly influence the banking industry. Through
open market securities transactions, variations in the discount rate and the
establishment of reserve requirements, the Board of Governors of the Federal
Reserve System exerts considerable influence on interest rates and the supply of
money and credit. The effect of these measures on future business and earnings
of the Corporation cannot be predicted.
Environmental Matters
The Corporation's primary exposure to environmental risk is through its
provision of trust services and its lending activities. In each instance, the
Corporation has policies and procedures in place to mitigate its environmental
risk exposures. With respect to lending activities, environmental site
assessments at the time of loan origination are mandated by the Corporation to
confirm collateral quality as to commercial real estate parcels posing higher
than normal potential for environmental impact, as determined by reference to
present and past uses of the subject property and adjacent sites. Environmental
assessments are also mandated prior to any foreclosure activity involving
non-residential real estate collateral. In the case of trust services, the
Corporation utilizes various types of environmental transaction screening to
identify actual and potential risks arising from any proposed holding of
non-residential real estate for trust accounts. Consequently the Corporation
does not anticipate any material effect on capital expenditures, earnings or the
competitive position of itself or any of its subsidiaries with regard to
compliance with federal, state or local environmental protection laws or
regulations. Additional information is provided in the "Item 3. Legal
Proceedings" section of this document.
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ITEM 2. PROPERTIES.
The Corporation's offices are located at One Citizens Banking Center,
328 South Saginaw Street, Flint, Michigan in the main office building of
Citizens Bank, its largest bank subsidiary. The Corporation's subsidiaries
operate through 131 banking offices. Of these, 40 are leased and the remaining
are owned. Rent expense on the leased properties totaled $1,889,067 in 1997.
The banking offices are located in various communities throughout the
State of Michigan and in the Chicago suburbs of Berwyn, Cicero and Elk Grove,
Illinois. At certain Citizens Bank locations a portion of the office buildings
are leased to tenants.
Additional information related to the property and equipment owned or
leased by the Corporation and its subsidiaries is incorporated herein by
reference from Exhibit 13 on page 29 under the caption "Note 7. Premises and
Equipment" of this document.
ITEM 3. LEGAL PROCEEDINGS.
The Corporation and its subsidiaries are parties to a number of
lawsuits incidental to its business. Although litigation is subject to many
uncertainties and the ultimate exposure with respect to many of these matters
cannot be ascertained, management does not believe the ultimate outcome of these
matters will have a materially adverse effect on the financial condition or the
liquidity of the Corporation.
From time to time, certain of the Corporation's subsidiaries are
notified by applicable environmental regulatory agencies, pursuant to State or
Federal environmental statutes or regulations, that they may be potentially
responsible parties ("PRPs") for environmental contamination on or emanating
from properties currently or formerly owned. Typically, exact costs of
remediating the contamination cannot be fully determined at the time of initial
notification. While, as PRPs, these subsidiaries are potentially liable for the
costs of remediation, in most cases, a number of other PRPs have been identified
as being jointly and severally liable for remediation costs. Additionally, in
certain cases, statutory defenses to liability for remediation costs may be
asserted based on the subsidiaries' status as lending institutions that acquired
ownership of the contaminated property through foreclosure. The Corporation's
management is not presently aware of any environmental liabilities which pose a
reasonable possibility of future material impact on the Corporation or its
earnings. It is the Corporation's policy to establish and accrue appropriate
reserves for all such identified exposures during the accounting period in which
a loss is deemed to be probable and the amount is determinable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of 1997 to a vote
of security holders through the solicitation of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER'S MATTERS.
The information required by this item is incorporated herein by
reference from Exhibit 13 on page 19 under the caption "Table 13. Selected
Quarterly Information" of this document.
The approximate number of shareholders of the Registrant's common stock
is 11,338 as of December 31, 1997. This number includes an estimate for
individual participants in the security positions of certain shareholders of
record.
Restrictions on the Registrant's ability to pay dividends is
incorporated herein by reference from Exhibit 13 on pages 36 and 37 under the
caption "Note 18. Regulatory Matters" of this document.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is incorporated herein by
reference from Exhibit 13 on page 1 under the caption "Table 1. Selected
Financial Data" of this document.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and
Results of Operations required by this item is incorporated herein by reference
from Exhibit 13 on pages 1 through 20 of this document.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements are incorporated herein by reference from
Exhibit 13 on pages 21 through 41 of this document.
Supplementary data of the Corporation's quarterly results of operations
required by this item are incorporated herein by reference from Exhibit 13 on
page 19 of this document under the caption "Table 13. Selected Quarterly
Information".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item appears in the Corporation's
proxy statement for its annual meeting of shareholders to be held April 21, 1998
("1997 Proxy Statement"), and is incorporated herein by reference as follows:
Regulation S-K Item 401 disclosures: Appear under the captions
"Election of Directors" and "Executive Officers" on pages 4 through 7
and on pages 12 through 14, respectively, of the 1997 Proxy Statement.
Regulation S-K Item 405 disclosure: Appears under the caption "Section
16(a) Beneficial Ownership Reporting Compliance" on page 25 of the 1997
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item appears under the caption
"Compensation of Directors," on page 9 and under the captions "Executive
Compensation", "Compensation and Benefits Committee Report on Executive
Compensation", "Shareholder Return", and "Compensation Committee Interlocks and
Certain Transactions and Relationships" on pages 15 through 25 of the 1997 Proxy
Statement, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item appears under the captions
"Security Ownership of Certain Beneficial Owners" and "Security Ownership of
Management" on page 2 and on pages 3 and 4, respectively, of the 1997 Proxy
Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item appears under the caption
"Compensation Committee Interlocks and Certain Transactions and Relationships"
on page 25 of the 1997 Proxy Statement, and is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements:
The following consolidated financial statements of the Corporation and
Report of Ernst & Young LLP, Independent Auditors are incorporated by
reference under Item 8 "Financial Statements and Supplementary Data" of
this document:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
2. Financial Statement Schedules:
All schedules are omitted -- see Item 14(d) below.
3. Exhibits:
The exhibits listed on the "Exhibit Index" on pages 13 through 15
of this report are filed herewith and are incorporated herein by
reference.
(b) Reports on Form 8-K
No reports of Form 8-K were filed for the quarter ended
December 31, 1997.
(c) Exhibits:
The "Exhibit Index" is filed herewith on pages 13 through 15 of
this report and is incorporated herein by reference.
(d) Financial Statement Schedules:
All financial statement schedules normally required by Article 9
of Regulation S-X are omitted since they are either not applicable or
the required information is shown in the consolidated financial
statements or notes thereto.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) 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
(Registrant)
by /s/Robert J. Vitito Date: March 19, 1998
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Robert J. Vitito
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
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Signature Capacity Date
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/s/Charles R. Weeks Chairman of the Board and March 19, 1998
- ----------------------------------------- Director
Charles R. Weeks
/s/Robert J. Vitito President, Chief Executive March 19, 1998
- ----------------------------------------- Officer and Director
Robert J. Vitito
/s/John W. Ennest Vice Chairman of the Board, March 19, 1998
- ----------------------------------------- Chief Financial Officer,
John W. Ennest Treasurer and Director
/s/Edward P. Abbott Director March 19, 1998
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Edward P. Abbott
/s/Hugo E. Braun, Jr. Director March 19, 1998
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Hugo E. Braun, Jr.
/s/Jonathan E. Burroughs II Director March 19, 1998
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Jonathan E. Burroughs II
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Signature Capacity Date
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/s/Joseph P. Day Director March 19, 1998
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Joseph P. Day
/s/Lawrence O. Erickson Director March 19, 1998
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Lawrence O. Erickson
/s/Victor E. George Director March 19, 1998
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Victor E. George
/s/William J. Hank Director March 19, 1998
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William J. Hank
/s/Stephen J. Lazaroff Director March 19, 1998
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Stephen J. Lazaroff
/s/William F. Nelson, Jr. Director March 19, 1998
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William F. Nelson, Jr.
/s/Gerald Schrieber Director March 19, 1998
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Gerald Schrieber
/s/William C. Shedd Director March 19, 1998
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William C. Shedd
/s/James E. Truesdell, Jr. Director March 19, 1998
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James E. Truesdell, Jr.
/s/Ada C. Washington Director March 19, 1998
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Ada C. Washington
/s/Kendall B. Williams Director March 19, 1998
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Kendall B. Williams
/s/James L. Wolohan Director March 19, 1998
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James L. Wolohan
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CITIZENS BANKING CORPORATION
1997 Annual Report on Form 10-K
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EXHIBIT INDEX
(FILED AS PART OF THIS REPORT ON FORM 10-K)
Exhibit Form 10-K
No. Exhibit Page No.
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3(a) Restated Articles of Incorporation, as amended. (incorporated by
reference from Exhibit 3(a) of the Corporation's 1995 Annual
Report on Form 10K, file number 0-10535). N/A
3(b) Amended and Restated Bylaws. (incorporated by reference from
Exhibit 3(b) of the Corporation's 1997 Third Quarter Report on
Form 10-Q, file number 0-10535). N/A
4 Rights Agreement, dated July 20, 1990, between the Corporation
and Citizens Bank, as Rights Agent (incorporated by reference
from Exhibit 4(a) of the Corporation's Report on Form 8-K filed
July 26, 1990, file number 0-10535). N/A
10(a) Citizens Banking Corporation Stock Option Plan and Citizens
Banking Corporation First Amended Stock Option Plan (incorporated
by reference from Exhibit 4(a) of the Corporation's registration
statement on Form S-8 filed November 26, 1986 as amended
April 21, 1987--Registration No. 33-10007). N/A
10(b) Citizens Banking Corporation Amended and Restated Section 401(k)
Plan. (incorporated by reference from Exhibit 4a of the
Corporation's registration statement on Form S-8 filed April 26,
1989--Registration No. 33-28354). N/A
10(c) Citizens Banking Corporation Second Amended Stock Option Plan.
(incorporated by reference from Exhibit 4 of the Corporation's
registration statement on Form S-8 filed May 5, 1992--
Registration No. 33-47686). N/A
10(d) Composite form of "Performance Partnership Program Grant
Agreement" executed between the Corporation and certain executive
officers of the Corporation pursuant to the Corporation's Second
Amended Stock Option Plan (incorporated by reference from Exhibit
10(d) of the Corporation's 1992 Annual Report on Form 10-K, file
number 0-10535). N/A
10(e) Composite form of "Stock Option Agreement" executed between the
Corporation and certain executive officers of the Corporation
pursuant to the Corporation's Second Amended Stock Option Plan
(incorporated by reference from Exhibit 10(e) of the
Corporation's 1992 Annual Report on Form 10-K, file
number 0-10535). N/A
10(f) Grant Agreement For Charles R. Weeks executed between the
Corporation and Charles R. Weeks pursuant to the Corporation's
Second Amended Stock Option Plan (incorporated by reference from
Exhibit 10(f) of the Corporation's 1992 Annual Report on Form
10-K, file number 0-10535). N/A
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Exhibit EXHIBIT INDEX (continued) Form 10-K
No. Exhibit Page No.
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10(g) Citizens Banking Corporation Management Incentive Compensation
Program (incorporated by reference from page 22 of the
Corporation's Proxy Statement for its 1997 Annual Meeting of
Shareholders under the caption "Management Incentive Plan", file
number 0-10535). N/A
10(h) Citizens Banking Corporation Amended and Restated Director's
Deferred Compensation Plan. (incorporated by reference from
Exhibit 10(h) of the Corporation's 1994 Annual Report on Form
10-K, file number 0-10535). N/A
10(i) Deferred Compensation Agreement for Charles R. Weeks, as amended,
and related Citizens Banking Corporation Deferred Benefits
Trust Agreement. (incorporated by reference from Exhibit 10(d) of
the Corporation's 1989 Annual Report on Form 10-K, file
number 0-10535). N/A
10(j) Citizens Banking Corporation Supplemental Retirement Benefits
Plan for Charles R. Weeks, as amended. (incorporated by reference
from Exhibit 10(e) of the Corporation's 1989 Annual Report on
Form 10-K, file number 0-10535). N/A
10(k) Citizens Bank Supplemental Retirement Benefits Plan for David A.
Thomas Jr. (incorporated by reference from Exhibit 10(f) of the
Corporation's 1990 Annual Report on Form 10-K, file
number 0-10535). N/A
10(l) Citizens Banking Corporation Stock Option Plan for Directors
(incorporated by reference from Exhibit 99 of the Corporation's
registration statement on Form S-8 filed July 21, 1995--
Registration No. 33-61197). N/A
10(m) Agreement between Charles R. Weeks and Citizens Banking
Corporation to continue as Chairman of the Board of Directors. N/A
10(n) Citizens Banking Corporation Amended and Restated Section 401(k)
Plan (incorporated by reference from Exhibit 99.1 of the
Corporation's registration statement on Form S-8 filed
August 2, 1996 -- Registration No. 333-09455). N/A
10(o) Citizens Banking Corporation Supplemental Retirement Benefits
Plan for Gary O. Clark. (incorporated by reference from Exhibit
10(o) of the Corporation's 1996 Annual Report on Form 10-K, file
number 0-10535) N/A
10(p) Citizens Banking Corporation Supplemental Retirement Benefits
Plan for John W. Ennest. (incorporated by reference from Exhibit
10(p) of the Corporation's 1996 Annual Report on Form 10-K, file
number 0-10535) N/A
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
Exhibit EXHIBIT INDEX (continued) Form 10-K
No. Exhibit Page No.
------- ------- ---------
<S> <C> <C>
10(q) Citizens Banking Corporation Supplemental Retirement Benefits Plan
for Robert J. Vitito. (incorporated by reference from Exhibit
10(q) of the Corporation's 1996 Annual Report on Form 10-K, file
number 0-10535) N/A
10(r) Citizens Banking Corporation Third Amended Stock Option Plan N/A
(incorporated by reference from Exhibit 10(r) of the
Corporation's 1997 Second Quarter Report on Form 10-Q, file
number 0-10535).
10(s) Citizens Banking Corporation Change in Control Agreement (1)
11 Computation of Per Share Earnings (1)
13 Citizens Banking Corporation 1997 Annual Report (except as to
portions expressly incorporated herein, said Annual Report is
included only for information). (1)
21 Subsidiaries of the Corporation (1)
23 Consents of Independent Accountants (1)
27 Financial Data Schedules (1)
</TABLE>
N/A - not applicable, exhibit incorporated by reference.
(1) Exhibit included on the following pages of this Annual Report on Form 10K
filing.
All other Exhibits required to be filed with this Form are not applicable and
have therefore been omitted.
15
<PAGE> 1
Form 10K
Exhibit 10(s)
CHANGE IN CONTROL AGREEMENT
This Change in Control Agreement ("Agreement") is made by and between
Citizens Banking Corporation, a Michigan corporation ("Corporation"), and
"Executive" (see schedule A attached).
The Executive has been effective in his service to the Corporation as a
key executive employee of the Corporation or a subsidiary bank of the
Corporation;
The Corporation recognizes the valuable services that the Executive has
rendered and is desirous of having some assurance that the Executive will
continue as an employee; and
The Executive is willing to continue to serve as an employee of the
Corporation or a subsidiary bank but desires assurance that in the event of a
change in control of the Corporation, he will continue to have the
responsibility and status he has earned.
Accordingly, the Corporation and the Executive agree as follows:
1. In order to protect the Executive against the possible consequences
of a change in control of the Corporation, as defined in paragraph 2 below, and
thereby to induce the Executive to serve as an officer of the Corporation or a
subsidiary bank, the Corporation agrees that if (a) there is such a change in
control of the Corporation and (b) the Executive's employment with the
Corporation or a subsidiary bank is terminated under the circumstances described
in paragraph 3 below, then:
A. The Corporation shall pay the Executive a lump sum amount in cash
equal to: (i) two times the combined annual salary and bonus (under the Citizens
Banking Corporation Management Incentive Plan) earned by the Executive in his
last full calendar year of employment with the Corporation or a subsidiary bank;
or (ii) if termination of the Executive's employment occurs on or after the
one-year anniversary of this Agreement, two times the average combined annual
salary and bonus earned by the Executive in the last two full calendar years of
such employment; or (iii) in the event of termination of the Executive's
employment on or after the two-year anniversary of this Agreement, two times the
average combined annual salary and bonus earned by the Executive in the last
three full calendar years of such employment. The applicable amount shall be
payable within 60 days following the date of the Executive's termination of
employment.
B. The Executive shall continue to be covered, at the Corporation's
cost, by the medical, dental and life insurance benefit plans that are in effect
on the date of his termination and that cover executive employees, for a period
of 18 months after his termination of employment; provided, however, that if
during such time period the Executive should enter into other employment
providing comparable benefits, his participation in such plans of the
Corporation shall cease to the extent of his coverage by his new employer's
plans. Any such non-cash benefit that is tied to compensation shall be based on
the Executive's annual compensation averaged over the same period as applicable
under paragraph A above.
<PAGE> 2
C. If the Executive has been furnished with an automobile for business
or personal use at the Corporation's expense within the previous 12 months prior
to the change in control, then the Corporation shall offer that automobile (or
one of comparable value) for sale to the Executive at a price equal to the
residual lease value or so-called "blue-book value" in the case of a vehicle
owned by the Corporation. Similarly, if the Executive was furnished with a club
membership, that membership will be transferred by the Corporation to the
Executive at no cost to the Executive, who immediately following the transfer
shall become subject to monthly dues charges of the club.
D. All stock options previously granted by the Corporation to the
Executive, whether or not then exercisable, shall become immediately vested and
exercisable upon the Executive's termination of employment in accordance with
the change in control provisions of the Citizens Banking Corporation Stock
Option Plan.
E. If the payment of any of the foregoing amounts or benefits (when
added to any other payments or benefits provided to the Executive in the nature
of compensation) will result in the payment of an excess parachute payment as
that term is defined in Section 280G of the Internal Revenue Code of 1986
("Code"), then in such event, the Corporation shall pay the Executive an
additional amount for each calendar year in which an excess parachute payment is
received by the Executive. The additional amount is intended to cover the
Executive's liability for any parachute tax under Code Section 4999 on such
excess parachute payment, as well as federal and state income taxes and
parachute tax on the additional amount, and shall be computed as follows:
A = Pt/(1 - T -t), where --
A is the additional amount for any calendar year,
P is the amount of the excess parachute payment for the calendar
year in excess of the allocable base amount as defined in Code
Section 280G(b)(3),
T is the effective marginal rate of federal and state income tax
applicable to the Executive for the calendar year; and
t is the rate of parachute tax under Code Section 4999.
The effective marginal rate of federal and state income tax shall be
computed as follows:
T = F + S(1 - 0.8F) + m, where --
F is the highest marginal rate of federal income tax applicable to
the Executive for the calendar year, currently 39.5%, and
S is the highest marginal rate of state income tax applicable to the
Executive for the calendar year in the State of Michigan, currently
4.40%, and
2
<PAGE> 3
m is the employee's portion of the Medicare tax, currently 1.45%.
Payment of the additional amount shall be made to the Executive on or
before December 31 of each calendar year for which an excess parachute
payment is received by the Executive.
2. For purposes of this Agreement, a change in control of the
Corporation means the occurrence of any of the following events: (a) 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 Securities Exchange Act
of 1934 and Rule 12b-2 promulgated under such 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 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; (b) 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 (c) 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 (i) incumbent members of the board in office prior to the
commencement of such 24-month period, plus (ii) 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.
3. Termination of the Executive's employment shall mean the Executive's
termination of employment at any time on or within 24 months after a change in
control of the Corporation as defined in paragraph 2 above either by (a)
involuntary dismissal by the Corporation or (b) the Executive's constructive
termination as described in the following sentences of this paragraph 3. If (i)
there is a significant reduction in the scope of the Executive's authority or in
the extent of his powers, functions, duties or responsibilities, or (ii) the
Executive's annual rate of compensation is reduced or fringe benefits, including
relocation benefits, are not provided to him on a basis commensurate with other
executives of the Corporation and its subsidiary banks, or (iii) there are
changes in the Executive's responsibilities for the Corporation which require
moving the Executive's job location to a location outside of the lower peninsula
of the State of Michigan, then the Executive shall be entitled to give written
notice thereof to the board of directors of the Corporation. If within 60 days
following such notice, the Executive and the board of directors of the
Corporation do not resolve the Executive's concerns to the satisfaction of the
Executive (the Executive's satisfaction or dissatisfaction to be communicated to
the board of directors in writing within such 60 days), the Executive's
employment shall be deemed to be constructively terminated at the end of such
60-day period.
3
<PAGE> 4
4. The specific arrangements referred to above are not intended to
exclude the Executive's participation in other benefits available to executive
personnel of the Corporation generally or to preclude other compensation or
benefits as may be authorized by the Corporation's board of directors from time
to time.
5. As partial consideration for the above, the Executive agrees not to
disclose any confidential information about the Corporation and its operation to
which the Executive was privy during the course of his employment by the
Corporation. Further, the Executive agrees not to accept employment or consult
for or otherwise assist any competitor of the Corporation for a period of 24
months following his termination of employment. For purposes of the foregoing,
"competitor" means any financial institution that conducts business from any
location within 50 miles of any Corporation or subsidiary bank location.
6. This Agreement shall be binding upon and shall inure to the benefit
of the respective successors, assigns, legal representatives and heirs to the
parties.
7. Any payment or delivery required under this Agreement shall be
subject to all requirements of the law with regard to withholding, filing,
making of reports and the like, and the Corporation shall use its best efforts
to satisfy promptly all such requirements.
8. Notwithstanding anything contained herein to the contrary, this
Agreement shall be terminated and no benefits to the Executive shall be payable
if, at any time, the Executive shall resign voluntarily, retire at or after
normal retirement age, become incapacitated, voluntarily take another position
requiring a substantial portion of his time, or die. This Agreement also shall
terminate upon termination for cause of the Executive's employment as an officer
of the Corporation or any subsidiary bank by the board of directors of the
Corporation, as that board is constituted prior to any change in control of the
Corporation as defined in paragraph 2. For purposes of the foregoing,
"termination for cause" means termination due to the Executive's conviction of a
felony, a determination that the Executive is guilty of sexual harassment of
another employee, the Executive's proven embezzlement from the Corporation or a
subsidiary bank, the Executive's gross misconduct or incompetence, the
Executive's disclosure of confidential information of the Corporation or
intentional assistance of a competitor of the Corporation (as defined in
paragraph 5), or any other activity of the Executive which has or may have a
serious adverse impact on the finances or business reputation of the Corporation
or a subsidiary bank.
9. Any and all disputes, controversies or claims arising out of or in
connection with or relating to this Agreement or any breach or alleged breach
thereof shall, upon the request of either party, be submitted to and settled by
arbitration in the State of Michigan pursuant to the Voluntary Labor Arbitration
Rules, then in effect, of the American Arbitration Association (or at any other
place or under any other form of arbitration mutually acceptable to the parties
involved). The parties hereto specifically agree to arbitrate with the other
party in a proceeding with regard to all issues and disputes, and to permit
pre-hearing discovery in the time and manner provided by the then applicable
Federal Rules of Civil Procedure. This agreement to arbitrate shall be
specifically enforceable under the prevailing arbitration law. Notice of the
demand for arbitration shall be filed, in writing, with the other
4
<PAGE> 5
party to this Agreement and with the American Arbitration Association. The
demand for arbitration shall be made within a reasonable time after the claim,
dispute, or other matter in question arose where the party asserting the claim
should reasonably have been aware of the same, but in no event later than the
applicable Michigan or Federal statute of limitations. The arbitrator shall have
no power to add to, subtract from, or alter the terms of this Agreement, and
shall render a written decision setting forth findings and conclusions only as
to the claims or disputes at issue. Any award by the arbitrator shall be final
and conclusive upon the parties, and a judgment thereon may be entered in the
highest court for the forum, state or federal, having jurisdiction. All expenses
of the arbitration process shall be borne by the Corporation, except for
attorneys' fees and fees of experts, which shall be paid by the respective
parties that retain them.
10. The invalidity or unenforceability of any provision of this
Agreement shall not affect the enforceability or validity of any other provision
hereof.
11. This Agreement shall be governed by the laws of the State of
Michigan.
This Agreement has been executed by the parties on and effective as of
November 6, 1997.
CITIZENS BANKING CORPORATION
/s/ Virginia S. Carmody By: /s/ Charles R. Weeks
- --------------------------------- -----------------------------------
Witness
Its: Chairman of the Board of Directors
----------------------------------
EXECUTIVE
See attached schedule A
- --------------------------------- ---------------------------------------
Witness
5
<PAGE> 6
SCHEDULE A - LIST OF EXECUTIVES COVERED BY CHANGE IN CONTROL AGREEMENT:
Robert J. Vitito
John W. Ennest
Wayne G. Schaeffer
Nicholas J. Cilfone
Gary P. Drainville
James M. VanTiflin
Thomas C. Shafer
Richard T. Albee
Thomas W. Gallagher
Jack S. Werner
Richard J. Mitsdarfer
Marilyn K. Allor
Daniel E. Bekemeier
6
<PAGE> 1
FORM 10K
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 employee stock options, as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
(in thousands, except per share amounts) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME: $ 31,508 $ 42,425 $ 38,211
=========== =========== ===========
BASIC EARNINGS PER SHARE:
Actual average shares outstanding 27,879 27,845 27,575
Basic Earnings Per Share: $ 1.13 $ 1.52 $ 1.39
=========== =========== ===========
DILUTED EARNINGS PER SHARE:
Actual average shares outstanding 27,879 27,845 27,575
Effect of dilutive securities -- potential conversion of employee
stock options 541 414 549
----------- ----------- -----------
Pro forma average shares outstanding 28,420 28,259 28,124
=========== =========== ===========
Diluted Earnings Per Share: $ 1.11 $ 1.50 $ 1.36
=========== =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 13
CITIZENS BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND
CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 2
TABLE OF CONTENTS
I. Financial Review including
Management's Discussion and Analysis . . . . . . . . . . . . . . . . 1
Selected Financial Data . . . . . . . . . . . . . . . . . . . . 1
Performance Summary . . . . . . . . . . . . . . . . . . . . . . 2
Net Interest Income . . . . . . . . . . . . . . . . . . . . . . 4
Provision and Allowance for Loan Losses . . . . . . . . . . . . 5
Noninterest Income and Expense . . . . . . . . . . . . . . . . . 6
Balance Sheet Review . . . . . . . . . . . . . . . . . . . . . . 9
Liquidity and Debt Capacity, Interest Rate Risk
and Impact of Inflation . . . . . . . . . . . . . . . . . . . 16
Year Ended December 31, 1996
Compared with 1995 . . . . . . . . . . . . . . . . . . . . . . 20
II. Consolidated Financial Statements . . . . . . . . . . . . . . . . . 21
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 21
Consolidated Statements of Income . . . . . . . . . . . . . . . 22
Consolidated Statements of Changes
in Shareholders' Equity . . . . . . . . . . . . . . . . . . . 23
Consolidated Statements of Cash Flow . . . . . . . . . . . . . . 24
III. Notes to Consolidated Financial Statements . . . . . . . . . . . . . 25
IV. Report of Independent Auditors . . . . . . . . . . . . . . . . . . . 40
V. Report of Management . . . . . . . . . . . . . . . . . . . . . . . . 41
<PAGE> 3
TABLE 1. SELECTED FINANCIAL DATA (5)
<TABLE>
<CAPTION>
(in thousands except per share data) 1997 1996 1995(2) 1994 1993(1)
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Net interest income $ 191,848 $ 178,645 $ 167,926 $ 148,006 $ 134,643
Provision for loan losses 15,332 12,126 7,112 5,837 5,989
Investment securities gains
(losses) (787) 611 281 1,099 2,550
Noninterest income 47,481 47,393 42,405 39,786 36,578
Noninterest expense before
special charge 153,427 155,056 150,332 133,767 124,671
Special charge 23,734 --- --- --- ---
Income taxes 14,541 17,042 14,957 13,279 10,003
Net income before special
charge 48,771 42,425 38,211 36,008 33,108
Net income 31,508 42,425 38,211 36,008 33,108
Cash dividends 19,286 17,890 16,131 14,918 13,243
PER COMMON SHARE DATA (4)
Net income:
Basic $ 1.13 $ 1.52 $ 1.39 $ 1.31 $ 1.26
Diluted 1.11 1.50 1.36 1.29 1.23
Diluted before special
charge 1.72 1.50 1.36 1.29 1.23
Cash dividends 0.74 0.67 0.60 0.55 0.50
Book value, end of year 14.61 14.12 13.50 12.12 11.90
Market value, end of year 34.50 21.00 19.83 18.50 16.67
AT YEAR END
Assets $4,439,271 $4,305,973 $4,175,544 $3,424,087 $3,385,003
Loans 3,541,619 3,229,809 2,867,427 2,209,340 2,115,678
Deposits 3,694,346 3,598,751 3,478,268 2,872,967 2,830,296
Long-term debt 108,165 86,826 110,022 11,775 19,394
Shareholders' equity 409,842 392,021 374,644 332,739 326,486
AVERAGE FOR THE YEAR
Assets $4,371,509 $4,212,380 $3,969,702 $3,383,403 $3,212,416
Earning assets 4,076,185 3,884,446 3,634,095 3,105,736 2,958,028
Loans 3,380,652 3,062,021 2,706,855 2,142,105 1,977,009
Deposits 3,647,302 3,515,498 3,297,528 2,840,894 2,694,142
Interest-bearing deposits 3,081,736 2,950,398 2,750,265 2,359,558 2,268,850
Repurchase agreements and
other short-term borrowings 178,267 170,916 152,997 145,592 146,829
Long-term debt 90,822 86,788 108,209 16,070 22,111
Shareholders' equity 400,715 381,377 354,224 331,674 300,482
FINANCIAL RATIOS
Return on average:(3)
Shareholders' equity 7.86% 11.12% 10.79% 10.86% 11.02%
Earning assets 0.77 1.09 1.05 1.16 1.12
Assets 0.72 1.01 0.96 1.06 1.03
Average shareholders' equity/ave.
assets 9.17 9.05 8.91 9.80 9.35
Dividend payout ratio 61.21 42.17 42.22 41.43 40.00
Net interest margin (FTE) 4.86 4.77 4.80 4.99 4.82
Tier I leverage 7.98 7.52 7.13 9.49 8.95
Risk-based capital:
Tier I capital 9.78 9.83 9.76 13.74 13.95
Total capital 11.03 11.08 11.01 14.98 15.17
</TABLE>
(1) The year 1993 reflects the acquisition of National Bank of Royal Oak
("NBRO"), accounted for as a purchase, and includes the related
results of operations and financial results subsequent to its October
1, 1993 acquisition date.
(2) The year 1995 reflects the acquisition of the Michigan affiliates of
Banc One Corporation accounted for as a purchase, and includes the
related results of operations and financial results subsequent to the
February 28, 1995 acquisition date.
(3) Returns on average shareholders' equity, earning assets and assets
before the 1997 special charge associated with the CB Financial
Corporation merger and information technology operations
reorganization were 12.17%, 1.20% and 1.12%, respectively.
(4) Per share information is computed, and where necessary, restated to
comply with Statement of Financial Accounting Standard No. 128
"Earnings per share" and reflects a three for two stock split effected
in the form of a dividend paid to shareholders on November 18, 1997.
(5) All information presented has been restated to reflect the July 1,
1997 merger with CB Financial Corporation, accounted for as a pooling
of interests.
Page 1
<PAGE> 4
PERFORMANCE SUMMARY
The following discussion provides a more comprehensive review of the
Corporation's operating results and financial condition than could be obtained
from reading the Consolidated Financial Statements alone. For the year ended
December 31, 1997, Citizens Banking Corporation earned $31,508,000 or $1.11 per
share. The results include a third quarter special charge of $23,734,000
($17,263,000 after tax) related to Citizens' July 1, 1997 merger with CB
Financial Corporation and the reorganization of Citizens' information
technology operations. See further discussion under the caption "Noninterest
Expense" regarding the special charge. Excluding the special charge, net
income was $48,771,000 or $1.72 per share an increase of 15.0% or $0.22 per
share over 1996 earnings of $42,425,000 or $1.50 per share. The corresponding
returns on average assets and equity were 1.12% and 12.17%, respectively, as
compared with 1.01% and 11.12% in 1996. On a post-charge basis, returns on
average assets and equity were 0.72% and 7.86%, respectively.
Excluding the special charge, the earnings improvement reflects higher net
interest income from strong loan growth and lower noninterest expense due to
cost savings derived from the 1997 merger with CB Financial Corporation and the
1996 consolidation and integration of the Corporation's Michigan banks into one
charter. Average shareholders' equity was $400.7 million or 9.17% of total
average assets for 1997 compared with $381.4 million or 9.05% for 1996. The
Corporation's risk-based capital levels exceeded all regulatory requirements.
On July 1, 1997, the Corporation merged with CB Financial Corporation
headquartered in Jackson, Michigan. As part of the merger, Citizens issued
6,256,355 shares of its common stock in a tax free exchange for all of the
outstanding shares of CB Financial Corporation. The merger was accounted for
as a pooling of interests resulting in the restatement of all financial
information presented.
At the close of business on February 28, 1995, the Corporation purchased
the four Michigan affiliates of Bank One Corporation, located in East Lansing,
Fenton, Sturgis and Ypsilanti, for $115 million in cash. The transaction was
accounted for as a purchase and the four banks ("acquired banks") were merged
into Citizens Bank headquartered in Flint, Michigan effective immediately after
the acquisition.
All common stock per share amounts have been adjusted to reflect a
three-for-two stock split effected in the form of a dividend paid to
shareholders on November 18, 1997.
An analysis of changes in major income statement components in 1997 from
1996 is presented below. Overall, excluding the special charge, the increase
in net income reflects improvement in net interest income and lower noninterest
expenses, offset, in part, by increases in the provision for loan losses and
income taxes. Higher levels of earning assets, primarily loans, resulted in
higher net interest income. Additional data on the Corporation's performance
during the past five years appears in Table 1.
<TABLE>
<CAPTION>
Year Ended December 31, Changes in 1997
-------------------------- -------------------
(in thousands) 1997 1996 Amount Percent
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $335,863 $312,336 $ 23,527 7.5%
Interest expense 144,015 133,691 10,324 7.7
Net interest income 191,848 178,645 13,203 7.4
Provision for loan losses 15,332 12,126 3,206 26.4
Noninterest income 46,694 48,004 (1,310) (2.7)
Noninterest expense before special charge 153,427 155,056 (1,629) (1.1)
Special charge 23,734 --- 23,734 (2)
Income taxes 14,541 17,042 (2,501) (14.7)
Net income 31,508 42,425 (10,917) (25.7)
Net income before special charge (1) 48,771 42,425 6,346 15.0
</TABLE>
(1) Operating income before 1997 special charge associated with CB Financial
Corporation merger and information technology reorganization.
(2) Not meaningful
The following table presents "cash earnings" for the Corporation's most
recent two years. "Cash earnings" add back the amortization of intangible
assets arising from mergers that were accounted for as a purchase and assumes
that all intangibles were charged off against retained earnings at the original
date of acquisition. All financial information presented reflects favorable
earnings improvement when adjusted for the intangibles.
<TABLE>
CASH EARNINGS SUMMARY (1)
(in thousands except per share amounts) 1997 1996 % Change
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash income before special charge $53,290 $47,356 12.5%
Diluted earnings per share 1.88 1.68 11.9
Book value per share 12.47 11.46 8.8
Return on average assets 1.24% 1.15% 7.8
Return on average equity 16.03 15.55 3.1
</TABLE>
(1) Excludes special charge of $17,263 associated with CB Financial
Corporation merger and information technology reorganization.
Page 2
<PAGE> 5
TABLE 2. AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ------------------------------ -----------------------------
Year Ended December 31 AVERAGE AVERAGE Average Average Average Average
(in millions) BALANCE INTEREST(1) RATE(2) Balance Interest(1) Rate(2) Balance Interest(1) Rate(2)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Money market investments:
Time deposits with banks $ 0.1 $ --- 4.90% $ 1.5 $ 0.1 5.62% $ 4.9 $ 0.3 5.87%
Federal funds sold 14.5 0.8 5.57 44.9 2.4 5.37 80.5 4.9 6.05
Term federal funds sold and
other 5.3 0.3 4.90 25.2 1.3 5.05 50.8 2.7 5.41
Investment securities(3):
Taxable 510.9 31.8 6.23 568.0 33.7 5.94 607.1 35.4 5.84
Nontaxable 163.5 8.7 8.26 183.1 9.7 8.20 186.6 10.1 8.37
Loans(4):
Commercial 1,270.2 111.5 8.89 1,182.0 102.8 8.81 1,088.1 99.0 9.22
Real estate mortgage 778.0 62.8 8.07 677.6 56.2 8.29 544.1 45.5 8.35
Consumer 1,290.5 117.1 9.08 1,148.1 102.4 8.92 1,010.9 88.8 8.79
Lease financing 41.9 2.9 6.87 54.3 3.7 6.79 63.8 4.2 6.55
-------- ------ -------- ------ -------- ------
Total earning assets(3) 4,074.9 335.9 8.39 3,884.7 312.3 8.21 3,636.8 290.9 8.19
NONEARNING ASSETS
Cash and due from banks 145.9 164.4 169.1
Premises and equipment 72.8 77.1 78.4
Other assets 122.5 125.7 121.8
Allowance for loan losses (44.6) (39.5) (36.4)
-------- -------- --------
Total assets $4,371.5 $4,212.4 $3,969.7
======== ======== ========
INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing demand $ 381.7 6.1 1.61 $ 396.6 7.1 1.79 $ 399.3 7.8 1.95
Savings 1,047.5 29.6 2.83 1,077.3 29.3 2.72 1,095.8 30.8 2.81
Time 1,652.5 93.5 5.66 1,476.5 82.8 5.61 1,255.1 68.7 5.48
Short-term borrowings 178.3 8.7 4.87 170.9 8.0 4.66 153.0 7.6 4.95
Long-term debt 90.8 6.1 6.67 86.8 6.5 7.54 108.2 8.1 7.48
-------- ------ -------- ------ -------- ------
Total interest-bearing
liabilities 3,350.8 144.0 4.30 3,208.1 133.7 4.17 3,011.4 123.0 4.08
NONINTEREST-BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 565.6 565.1 547.3
Other liabilities 54.4 57.8 56.8
Shareholders' equity 400.7 381.4 354.2
-------- -------- --------
Total liabilities and
shareholders' equity $4,371.5 $4,212.4 $3,969.7
======== ======== ========
NET INTEREST INCOME $191.9 $178.6 $167.9
====== ====== ======
NET INTEREST INCOME AS A PERCENT
OF EARNING ASSETS 4.86% 4.77% 4.80%
</TABLE>
(1) Interest income is shown on an unadjusted basis and therefore
does not include taxable equivalent adjustments.
(2) Average rates include taxable equivalent adjustments to
interest income of $6,132,000, $6,665,000 and $6,781,000 for the
years ended December 31, 1997, 1996, and 1995, respectively, based
on a 35% tax rate.
(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.
(4) Nonaccrual loans are included in average balances.
Page 3
<PAGE> 6
NET INTEREST INCOME
The largest segment of the Corporation's operating income is net interest
income, which is the sum of interest and certain fees derived from earning
assets minus interest paid on deposits and other funding sources. Net interest
income is impacted by changes in the volume and mix of earning assets and
funding sources, market rates of interest, demand for loans and the
availability of deposits. Other factors, such as Federal Reserve Board
monetary policy and changes in tax laws, may also have an impact on changes in
net interest income from one period to another.
Average balances and rates on major categories of interest-earning assets
and interest-bearing liabilities during the past three years appear in Table 2.
Total average earning assets were 4.9% higher during 1997 compared with 1996.
The composition of average earning assets changed in 1997 as total average
loans increased $318.6 million to 83.0% of average earning assets from 78.8% in
1996. Average investment securities including money market investments
represented 17.0% of average earning assets in 1997 compared with 21.2% in
1996. Total average interest-bearing liabilities increased 4.4% in 1997
compared to 1996, while average noninterest-bearing deposits were unchanged.
The average yield on earning assets increased to 8.39% from 8.21% in 1996.
The increase resulted from higher yields on investment securities, commercial
and consumer loans and a higher concentration of loans to earning assets. Real
estate mortgage yields were lower in 1997 as compared to 1996 due to the impact
of third party mortgage servicing costs resulting from the sale of the
Corporation's mortgage servicing rights in the third quarter of 1996. Cost
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 money market and investment securities income as the Corporation
continued to partially fund loan growth with investment assets. This resulted
in $22.4 million in volume-related increases for interest income when comparing
1997 results with 1996.
TABLE 3. ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
<TABLE>
<CAPTION>
1997 COMPARED TO 1996 1996 Compared to 1995
---------------------------------- -----------------------------------
INCREASE (DECREASE) Increase (Decrease)
DUE TO CHANGE IN Due to Change in
Year Ended December 31 NET ---------------------- Net -----------------------
(in millions) 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 $(0.1) $ 0.0 $(0.1) $(0.2) $ 0.0 $(0.2)
Federal funds sold (1.6) 0.1 (1.7) (2.5) (0.5) (2.0)
Term federal funds sold (1.0) 0.0 (1.0) (1.4) (0.3) (1.1)
Investment securities:
Taxable (1.9) 1.0 (2.9) (1.7) 0.2 (1.9)
Tax-exempt (1.0) 0.0 (1.0) (0.4) (0.2) (0.2)
Loans 29.2 0.1 29.1 27.6 (6.0) 33.6
----- ----- ----- ----- ----- -----
Total 23.6 1.2 22.4 21.4 (6.8) 28.2
----- ----- ----- ----- ----- -----
INTEREST EXPENSE:
Deposits:
Demand (1.0) (0.5) (0.5) (0.7) (0.6) (0.1)
Savings 0.3 0.1 0.2 (1.5) (2.3) 0.8
Time 10.7 0.3 10.4 14.1 1.5 12.6
Short-term borrowings 0.7 0.1 0.6 0.4 (0.4) 0.8
Long-term debt (0.4) (0.3) (0.1) (1.6) 0.1 (1.7)
----- ----- ----- ----- ----- -----
Total 10.3 (0.3) 10.6 10.7 (1.7) 12.4
----- ----- ----- ----- ----- -----
NET INTEREST INCOME $13.3 $ 1.5 $11.8 $10.7 $(5.1) $15.8
===== ===== ===== ===== ===== =====
</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.
Page 4
<PAGE> 7
The cost of interest-bearing liabilities increased 13 basis points to
4.30% in 1997 from 4.17% in 1996. This increase was attributable to higher
rates on time and savings deposits and short-term borrowings partially offset
by lower rates on demand deposits and long-term borrowings. Higher yields on
earning assets in 1997 more than offset these increased rates on
interest-bearing liabilities resulting in an improved interest spread on
earning assets (the difference between the average yield on earning assets and
the average rate on interest-bearing liabilities). The net interest margin
increased nine basis points to 4.86% in 1997 from 4.77% in 1996.
The effect on net interest income of changes in average balances
("volume") and yields and rates ("rate") are quantified in Table 3. As shown,
net interest income improved $13.3 million in 1997 with $11.8 million of this
due to volume-related increases primarily attributable to loan growth partially
offset by volume-related increases in time deposit interest expense. Higher
yields on investment securities combined with lower rates for demand deposits
and long-term borrowings partially offset by higher time deposits rates
resulted in a favorable net rate-related variance of $1.5 million.
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".
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Management provides for possible loan losses at a level determined
adequate based upon judgements regarding historical loss experience, the
financial condition of borrowers, the size and composition of the loan
portfolio, the level and composition of nonperforming loans, estimated future
net charge-offs, present and anticipated economic conditions and other factors.
A summary of the Corporation's loan loss experience from 1993 through 1997
appears in Table 4.
TABLE 4. SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
Year Ended December 31 (in thousands) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses - January 1 $ 42,166 $ 38,705 $ 28,579 $ 26,164 $ 22,677
Allowance of acquired banks --- --- 7,235 289 1,883
Provision for loan losses 15,332 12,126 7,112 5,837 5,989
CHARGE-OFFS:
Commercial 1,486 4,390 3,186 2,198 2,731
Real estate(1) 541 42 69 82 428
Consumer 12,272 8,393 4,949 3,434 3,466
Lease financing 1,286 70 519 1,153 182
---------- ---------- ---------- ---------- ----------
Total charge-offs 15,585 12,895 8,723 6,867 6,807
---------- ---------- ---------- ---------- ----------
RECOVERIES:
Commercial 1,232 1,183 1,593 1,427 683
Real estate(1) 2 16 22 4 201
Consumer 2,729 2,985 2,816 1,651 1,450
Lease financing 35 46 71 74 88
---------- ---------- ---------- ---------- ----------
Total recoveries 3,998 4,230 4,502 3,156 2,422
---------- ---------- ---------- ---------- ----------
Net charge-offs 11,587 8,665 4,221 3,711 4,385
---------- ---------- ---------- ---------- ----------
Allowance for loan losses - December 31 $ 45,911 $ 42,166 $ 38,705 $ 28,579 $ 26,164
========== ========== ========== ========== ==========
Loans outstanding at year-end $3,541,619 $3,229,809 $2,867,427 $2,209,340 $2,115,678
Average loans outstanding 3,380,652 3,062,021 2,706,855 2,142,105 1,977,009
Ratio of allowance for loan losses
to loans outstanding at year-end 1.30% 1.31% 1.35% 1.29% 1.24%
Ratio of net loans charged off as a
percentage of average loans
outstanding 0.34 0.28 0.16 0.17 0.22
</TABLE>
(1) Commercial real estate loan balances and related charge-offs and
recoveries are reflected in the commercial loan category for all years
except 1993.
Page 5
<PAGE> 8
Management increased the provision for loan losses in 1997 by $3.2 million
from 1996, primarily due to loan growth of $311.8 million and higher consumer
charge-offs in 1997. Net loan charge-offs were 0.34% of average loans in 1997,
up from 0.28% in 1996. Gross charge-offs increased $2.7 million, or 20.9%
from 1996 resulting from higher bankruptcies and repossessions for consumer
loans. Recoveries on loans previously charged off decreased 5.5% as compared
to the prior year. At year end, the allowance for loan losses was $45.9
million or 1.30% of total loans, up $3.7 million from December 31, 1996.
The Corporation maintains formal policies and procedures to control and
monitor credit risk. Management believes the allowance for loan losses is
adequate to meet presently known credit risks in the loan portfolio. The
Corporation's loan portfolio has no significant concentrations in any one
industry nor any exposure in foreign loans. The Corporation has generally not
extended credit to finance highly leveraged transactions nor does it intend to
do so in the future. Employment levels and other economic conditions in the
Corporation's local markets may have a significant impact on the level of
credit losses. Management continues to identify and devote attention to
credits that may not be performing as well as expected. Nonperforming loans
are further discussed in the section titled "Nonperforming Assets".
NONINTEREST INCOME
Noninterest income accounted for 19.6% of total operating income or 1.1%
of average assets in 1997, compared with 21.2% and 1.1%, respectively, in 1996.
Noninterest income declined 2.7%, or $1.3 million in 1997 as compared to the
prior year due to the 1996 $1.6 million gain on the sale of the Corporation's
mortgage loan servicing rights and curtailment of the residential mortgage
servicing operations. Excluding the effects of the sale of mortgage servicing
rights and investment securities gains and losses, noninterest income increased
4.9% in 1997 as compared to 1996. This increase resulted from enhanced trust
fees, ATM network user fees and cash management services fees. An analysis of
the components of noninterest income is on the following page.
Trust fees increased 7.3% in 1997 as compared with 1996 due to increases
in personal trust and employee benefit plan service fees. The Corporation
offers comprehensive trust services to its clients including investment
management services, in the personal trust, institutional and employee benefit
plan market segments.
Improved pricing strategies resulted in higher ATM network user fees in
1997 as compared to 1996. A significant portion of the increase resulted from
the June 1997 implementation of a convenience fee assessed to non-client users
of the Corporation's ATM network. The 8.1% increase in cash management
services fees is primarily 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.
The Corporation realized net losses of $787,000 on sales of investment
securities during 1997 as compared to net gains of $611,000 during 1996. As
presented in Note 4 to the Consolidated Financial Statements, gross
realized gains on sales of investment securities amounted to $98,000 in 1997
while gross realized losses amounted to $885,000. The comparable amounts in
1996 were $660,000 and $49,000, respectively. Proceeds from sales of
investment securities during 1997 totaled $171.2 million or 25.4% of total
average security holdings compared with $116.2 million or 15.5% in 1996. The
Corporation sold certain securities to fund loan growth and reposition the
investment portfolio based on the current rate environment.
Page 6
<PAGE> 9
NONINTEREST INCOME
<TABLE>
<CAPTION>
Year Ended
December 31, Changes in 1997
----------------- ------------------
(in thousands) 1997 1996 Amount Percent
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust fees $15,527 $14,466 $ 1,061 7.3%
Service charges on deposit accounts 12,342 12,481 (139) (1.1)
Bankcard fees 7,092 6,780 312 4.6
Brokerage and investment fees 1,782 1,775 7 0.4
Other loan income 1,746 3,572 (1,826) (51.1)
ATM network user fees 2,956 2,211 745 33.7
Cash management services 1,823 1,686 137 8.1
Safe deposit rentals 1,182 1,255 (73) (5.8)
Investment securities gains (losses) (787) 611 (1,398) (1)
Other 3,031 3,167 (136) (4.3)
------- ------- -------
Total noninterest income $46,694 $48,004 $(1,310) (2.7)
======= ======= =======
</TABLE>
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Year Ended
December 31, Changes in 1997
------------------ ------------------
(in thousands) 1997 1996 Amount Percent
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 80,119 $ 81,288 $(1,169) (1.4)%
Equipment 12,327 12,374 (47) (0.4)
Occupancy 11,446 12,153 (707) (5.8)
Intangible asset amortization 6,098 6,637 (539) (8.1)
Bankcard fees 5,152 4,702 450 9.6
Stationery and supplies 4,042 4,416 (374) (8.5)
Postage and delivery 4,387 4,254 133 3.1
Advertising and public relations 3,953 3,946 7 0.2
Taxes, other than income taxes 3,001 3,267 (266) (8.1)
Consulting and other professional fees 2,733 3,191 (458) (14.4)
Legal, audit and examination fees 2,318 2,402 (84) (3.5)
Other loan fees 3,169 2,922 247 8.5
Special charge 23,734 --- 23,734 (1)
Other 14,682 13,504 1,178 8.7
-------- -------- -------
Total noninterest expense $177,161 $155,056 $22,105 14.3
======== ======== =======
</TABLE>
(1) Not meaningful
Page 7
<PAGE> 10
NONINTEREST EXPENSE
SPECIAL CHARGE
In the third quarter of 1997, the Corporation incurred a special charge of
$23.7 million related to its July 1, 1997, merger with CB Financial Corporation
and the reorganization of Citizens' information technology operations. The
special charge includes $16.1 million of merger related expenses comprised of
$8.5 million of direct merger and restructuring-related charges and a $7.6
million write-down of goodwill and core deposit intangibles. This write-down
reflects the impairment of assets related to previous acquisitions of CB
Financial Corporation. The merger related expenses reflect the cost of
integrating and consolidating branch network and administrative facilities,
severance arrangements, professional services and other expenses directly
related to the merger.
Also in the third quarter, the Corporation entered into a strategic
arrangement with M & I Data Services of Milwaukee, Wisconsin, as part of its
efforts to upgrade its information technology operations. This arrangement
will provide the Corporation with the professional expertise and technological
resources necessary to improve its competitive position in a rapidly changing
technological environment. The Corporation believes it will enhance its
position to quickly respond to the demands of its markets and support future
strategic initiatives. The strategic arrangement will also address many Year
2000 information systems-related issues. The third quarter special charge
includes expenses of $7.6 million related to this arrangement, comprised of
up-front conversion and reorganization costs. See Note 3 for further
discussion on the third quarter special charge.
The Corporation 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.
OTHER NONINTEREST EXPENSES
Excluding the special charge, operating expenses were down 1.1% in 1997 as
compared with 1996. The decline in operating expenses is primarily
attributable to operating efficiencies achieved from the 1997 merger with CB
Financial Corporation and the 1996 consolidation and integration of the
Corporation's Michigan banks into one bank. Compensation is the Corporation's
largest noninterest expense and represented the most significant component of
the decline. Total compensation expense decreased 1.4% to $80.1 million from
$81.3 million in 1996.
Noninterest expense excluding salaries and benefits and the third quarter
1997 special charge, decreased 0.6%. The decline is primarily due to lower
costs for occupancy and equipment, stationery and supplies, consulting and
other professional fees, legal, audit and examination fees and intangible asset
amortization.
Occupancy and equipment cost declines are attributable to lower utility,
maintenance and depreciation costs. Stationery and supplies, consulting and
other professional fees and legal, audit and examination fees all declined in
1997 due to higher 1996 costs attributed to the consolidation and integration
of the Corporation's Michigan banks into one charter. 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.
Higher loan volumes resulted in additional mortgage appraisal and mortgage
and consumer processing fees. For mortgages, the additional costs are more
than offset by increases in mortgage application, origination and processing
income collected as a result of higher loan volumes originated in 1997. This
related income is reflected in the Corporation's net interest income.
Increases in bankcard expenses resulted from higher costs associated with
the Corporation's outside provider for processing services and enhanced loss
prevention efforts.
The category "other noninterest expense" increased 8.7% due to higher
voice and data communication costs and data processing fees associated with the
information technology operations arrangement beginning in the third quarter of
1997. Declines in compensation and equipment costs are expected to offset the
increased data processing fees.
FEDERAL INCOME TAXES
Excluding the effect of the special charge, income tax expense was $21.0
million in 1997, an increase of 23.3% over the 1996 total of $17.0 million.
The increase was due to higher pre-tax earnings and lower tax-exempt interest
income in 1997 as compared with 1996.
Page 8
<PAGE> 11
BALANCE SHEET
Proper management of the volume and composition of the Corporation's
earning assets and funding sources is essential for ensuring strong and
consistent earnings performance, maintaining adequate liquidity and limiting
exposure to risks caused by changing market conditions. The Corporation's
investment securities portfolio is structured to provide a source of liquidity
through maturities and generate an income stream with relatively low levels of
principal risk. The Corporation does not engage in active securities trading.
Loans comprise the largest component of earning assets and are the Corporation's
highest yielding assets. Client deposits are the primary source of funding for
earning assets while short-term debt and other managed sources of funds are
utilized as market conditions and liquidity needs change.
The Corporation's total assets averaged $4.372 billion for 1997, up $159
million from 1996, primarily due to loan and deposit growth. The ratio of
average earning assets to total average assets during 1997 was 93.2%, compared
to 92.2% for 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. Average loans comprised
77.3% of total assets during 1997, up from 72.7% in 1996. The ratio of average
noninterest-bearing deposits to total deposits decreased from 16.1% in 1996 to
15.5% in 1997. Interest-bearing deposits comprised 92.0% of total average
interest-bearing liabilities during 1997 unchanged from 1996. Average
long-term debt also remained unchanged at 2.7% of average interest-bearing
liabilities.
INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
Average investment securities, including money market investments, comprised
17.1% of total average earning assets in 1997, down from 21.2% in 1996. The
overall decline resulted from the use of proceeds from investment securities
sales and maturities to fund loan growth. A summary of average investment
securities balances during 1997 and 1996 follows:
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
Average Balances(1) Changes in 1997
------------------- ------------------
Year Ended December 31 (in thousands) 1997 1996 Amount Percent
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $158,757 $257,436 $(98,679) (38.3)%
Federal agencies:
Mortgage-backed 132,802 91,057 41,745 45.8
Other 183,151 172,334 10,817 6.3
State and municipal:
Taxable 17,213 30,256 (13,043) (43.1)
Tax-exempt 166,428 185,735 (19,307) (10.4)
Other 17,269 13,967 3,302 23.6
---------- ---------- --------
Total $675,620 $750,785 $(75,165) (10.0)
========== ========== ========
</TABLE>
(1) Average balances reflect the estimated fair value of investment securities
Average investment in U.S. Treasury securities comprised 23.5% of average
total investment securities during 1997, decreasing from 34.3% in 1996.
Average Federal agency mortgage-backed securities, primarily collateralized
mortgage obligations ("CMO's"), and other Federal agency securities increased
45.8% and 6.3%, respectively, in 1997 as proceeds from the maturities of U.S.
Treasuries were used to purchase other securities. The Corporation continues
to invest in U.S. Treasury and Federal agency securities which offer increased
creditworthiness and liquidity compared with other securities.
Total state and municipal securities comprised 27.2% of total average
investment securities during 1997 as compared with 28.8% in 1996. Purchases
of these securities remain dependent on the Corporation's capacity to
effectively utilize tax-exempt income and the availability of such securities
at attractive yields with acceptable risk characteristics.
Other securities consisting of Federal Reserve stock, Federal Home Loan
Bank stock, privately issued CMO's and asset backed securities increased 23.6%.
The increase resulted primarily from the purchase of additional Federal
Reserve Bank stock due to the July 1, 1997 CB Financial Corporation merger.
Page 9
<PAGE> 12
Money market investments, primarily federal funds sold and term federal
funds sold, averaged $19.9 million in 1997, down 72.2% from $71.6 million in
1996. The amount of funds invested in these assets is based on the present
and anticipated interest rate environment, liquidity needs and other economic
factors.
The Corporation's present policies with respect to the classification of
investments in debt and equity securities are discussed in Note 1 to the
Consolidated Financial Statements. An analysis of investment securities at
year-end for each of the last three years is presented in Table 5. As of
December 31, 1997, the estimated aggregate fair value of the Corporation's
investment securities portfolio was $5.9 million above amortized cost. At
December 31, 1997 gross unrealized gains were $6.9 million and gross unrealized
losses were $1.0 million. A summary of estimated fair values and unrealized
gains and losses for the major components of the investment securities
portfolio is provided in Note 4 to the Consolidated Financial Statements.
TABLE 5. ANALYSIS OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
U.S. Treasury and
Federal Agency(1) State and Municipal(1), (2) Other(1) Total
------------------------- --------------------------- --------------------- ------------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
(in millions) Cost Value Yield Cost Value Yield Cost Value Yield Cost Value Yield
- ------------- ---- ------ ----- ---- ----- ----- ---- ----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
MATURITES AT
DECEMBER 31, 1997
DUE WITHIN ONE YEAR $160.7 $160.9 6.01% $ 26.3 $ 26.4 7.89% $ 0.2 $ 0.2 7.86% $187.2 $187.5 6.53%
ONE TO FIVE YEARS 199.7 200.5 5.86 45.2 46.6 8.80 0.5 0.5 7.89 245.4 247.6 6.38
FIVE TO TEN YEARS 25.0 25.2 7.27 48.0 49.4 8.01 0.2 0.2 7.22 73.2 74.8 7.85
AFTER TEN YEARS 3.3 3.4 7.42 42.9 44.5 8.07 17.4 17.6 7.05 63.6 65.5 7.81
------ ------ ------ ------ ----- ----- ------ ------
TOTAL $388.7 $390.0 5.96 $162.4 $166.9 8.23 $18.3 $18.5 7.12 $569.4 $575.4 6.72
====== ====== ====== ====== ===== ===== ====== ======
AVERAGE MATURITY 1.92 YRS. 5.06 YRS. 3.37 YRS. 2.85 YRS.
At December 31, 1996
Total $504.6 $502.0 $198.0 $200.9 $14.1 $14.2 $716.7 $717.1 6.49%
====== ====== ====== ====== ===== ===== ====== ======
At December 31, 1995
Total $544.0 $546.9 $219.8 $224.7 $10.9 $11.1 $774.7 $782.6 6.43%
====== ====== ====== ====== ===== ===== ====== ======
</TABLE>
(1) Maturities for Federal agency, collateralized mortgage obligations and
asset-backed securities are based upon projections of independent cash
flow models. Maturities for state and municipal securities incorporate
early call features, if applicable.
(2) Yields for state and municipal securities are calculated on a tax
equivalent basis using a 35% tax rate.
The Financial Accounting Standards Board Statement No. 119 defines a
derivative as a future, forward, swap, option contract or other financial
instrument with similar characteristics. The Corporation has not utilized
derivatives or related types of financial instruments except for Federal agency
collateralized mortgage obligations and, therefore, this Statement does not
have a material impact. The Corporation's policy only allows the purchase of
collateralized mortgage obligations that are composed of mortgage backed
securities issued by a Federal Agency. Most CMO's purchased are in early
tranches with short average lives. These tranches are generally classified in
the Planned Amortization Class and have well-defined prepayment assumptions
(Super PAC's). The Corporation's CMO's are periodically tested to ensure
compliance with guidelines established by the Federal Financial Institutions
Examination Council.
Page 10
<PAGE> 13
LOANS
The Corporation extends credit primarily within the local markets of its two
bank subsidiaries located in Michigan and Illinois. In Michigan, the market
areas extend along the Interstate 75 corridor from northern suburban Detroit to
the greater Grayling/Gaylord area as well as western suburban Detroit and
central and southwestern Michigan. During 1997, the Corporation expanded its
market share in Michigan due to the merger with CB Financial Corporation. The
merger resulted in an expanded presence in the greater Jackson/ Lansing markets
and in northwestern Michigan. The Illinois affiliate extends credit within the
western suburban market of Chicago. The Corporation's loan portfolio is widely
diversified by borrowers with no concentration within a single industry that
exceeds 10% of total loans. The Corporation's respective year end loan
portfolio balances are summarized in Table 6.
Total loans increased $318.6 million in 1997 with average loans comprising
82.9% of total average earning assets during 1997 as compared with 78.8% during
1996. As the economy continued to expand in 1997, the Corporation experienced
greater loan demand with total average loans increasing 10.4%.
Increased demand for business loans in the Corporation's local markets and
improved economic conditions expanded the commercial and commercial real estate
loan portfolio 7.5% in 1997 from 1996 levels. Average consumer loan balances
increased to $1.291 billion in 1997, or 12.4% over 1996 due to growth in the
Corporation's home equity, vehicle and marine loan portfolios. Average
residential mortgage loan balances increased $100.4 million or 14.8% in 1997,
from $677.6 million in 1996.
TABLE 6. LOAN PORTFOLIO
<TABLE>
<CAPTION>
December 31 (in millions) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 930.2 $ 784.1 $ 680.1 $ 571.8 $ 505.4
Real estate commercial 387.0 393.1 403.3 357.5 344.2
Real estate construction 71.0 71.1 53.3 29.2 44.9
Real estate mortgage 779.6 744.6 579.2 484.1 494.3
Consumer 1,336.1 1,189.7 1,091.4 689.4 631.3
Lease financing 37.7 47.2 60.1 77.3 95.6
-------- -------- -------- -------- --------
Total $3,541.6 $3,229.8 $2,867.4 $2,209.3 $2,115.7
======== ======== ======== ======== ========
</TABLE>
NONPERFORMING ASSETS
A five year history of nonperforming assets is presented in Table 7.
Nonperforming assets are comprised of nonaccrual loans, loans 90 days past due
and still accruing, restructured loans and other real estate. These amounted
to $25.0 million as of December 31, 1997, a decrease of 1.2% from the year-end
1996 balance of $25.3 million. Nonperforming assets as a percentage of total
assets declined to 0.56% at December 31, 1997, from 0.59% at December 31, 1996,
a decrease of 5.1%. The decline resulted from the Corporation's continued
management of loan portfolio quality and favorable economic conditions.
During 1997 consumer loans grew at a faster rate than other segments of
the portfolio. The consumer portfolio is composed of automobile, personal,
marine, home equity and bankcard loans of which automobile and home equity
comprise 70.1% of the 1997 average balances, a decrease from 71.2% in 1996.
One to four family residential home loans comprise the majority of the real
estate mortgage balances. The Corporation's commercial real estate portfolio
represents 10.9% of total loans at December 31, 1997 as compared with 12.2% at
year end 1996. Within this portfolio, nonperforming loans represented 17.7% of
total nonperforming loans at December 31, 1997. Management believes the risk
of loss on such nonperforming loans is significantly less than the total
principal balance, due to the nature of the underlying collateral. These loans
are generally for owner-occupied properties and do not rely on the performance
of the real estate market to generate funds for repayment.
The Corporation maintains formal policies and procedures to control and
monitor credit risk within these portfolios. Based upon present information,
management believes the allowance for loan losses is adequate to meet presently
known credit risks.
Page 11
<PAGE> 14
TABLE 7. NONPERFORMING ASSETS AND PAST DUE LOANS
<TABLE>
<CAPTION>
December 31 (in thousands) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NONPERFORMING LOANS(1),(2)
Nonaccrual
Less than 30 days past due $ 5,128 $ 5,555 $ 4,794 $ 5,203 $ 2,518
From 30 to 89 days past due 2,021 1,370 828 1,421 940
90 or more days past due 12,840 12,856 14,593 12,595 19,460
------- ------- ------- ------- -------
Total 19,989 19,781 20,215 19,219 22,918
90 days past due and still accruing 1,185 1,874 849 1,577 643
Restructured(1) 446 502 502 299 238
------- ------- ------- ------- -------
Total nonperforming loans 21,620 22,157 21,566 21,095 23,799
OTHER REPOSSESSED ASSETS ACQUIRED 3,348 3,118 3,067 3,113 2,933
------- ------- ------- ------- -------
Total nonperforming assets $24,968 $25,275 $24,633 $24,208 $26,732
======= ======= ======= ======= =======
Nonperforming assets as a percent
of total loans plus other
repossessed assets acquired 0.70% 0.78% 0.86% 1.09% 1.26%
Nonperforming assets as a percent
of total assets 0.56 0.59 0.59 0.71 0.79
NONPERFORMING LOANS BY TYPE
Commercial $ 8,962 $11,626 $14,244 $16,568 $14,607
Real Estate(3) 6,103 4,273 2,688 1,425 5,487
Consumer 6,082 4,585 3,286 1,533 1,881
Lease financing 473 1,673 1,348 1,569 1,824
------- ------- ------- ------- -------
Total $21,620 $22,157 $21,566 $21,095 $23,799
======= ======= ======= ======= =======
</TABLE>
(1) Nonperforming loans include loans on which interest is being recognized
only upon receipt (nonaccrual), those on which interest has been
renegotiated to lower than market rates because of the financial condition
of the borrowers (restructured), and loans 90 days past due and still
accruing.
(2) Gross interest income that would have been recorded in 1997 for
nonaccrual and restructured loans, as of December 31, 1997, assuming
interest had been accrued throughout the year in accordance with original
terms was $1.861 million. The comparable 1996 and 1995 totals were $1.702
million, and $2.660 million, respectively. Interest collected on these
loans and included in income was $0.965 million in 1997, $0.913 million in
1996 and $1.489 million in 1995. Therefore, on a net basis, total income
foregone due to these loans was $0.896 million in 1997, $0.788 million in
1996 and $1.171 million in 1995.
(3) 1993 nonperforming commercial real estate loan balances have not been
reclassified into the nonperforming commercial loan category.
The level and composition of nonperforming assets are affected by economic
conditions in the Corporation's local markets. Nonperforming assets,
charge-offs and provisions for loan losses tend to decline in a strong economy
and increase in a weak economy, potentially impacting the Corporation's
results. In addition to nonperforming loans, management carefully 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 December 31, 1997, such loans amounted to $22.0 million or 0.6%
of total loans compared with $12.6 million or 0.4% of total loans as of
December 31, 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. Collectively, these loans and the
nonperforming assets in Table 7 represent 1.3% of total loans as of December
31, 1997 increasing from 1.2% as of December 31, 1996.
Page 12
<PAGE> 15
TABLE 8. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (1)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------------------- -------------------- ------------------- ------------------- --------------------
December 31 (in LOAN Loan Loan Loan Loan
millions) AMOUNT PERCENT(2) Amount Percent(2) Amount Percent(2) Amount Percent(2) Amount Percent(2)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $10.6 37.2% $12.0 36.8% $11.7 37.8% $11.3 42.1% $ 9.4 40.2%
Real estate
construction 0.1 2.0 0.1 2.2 0.1 1.8 0.1 1.3 0.2 2.1
Real estate
mortgage 2.0 22.0 1.5 22.7 1.1 20.2 1.0 21.9 1.0 23.4
Consumer 16.0 37.7 15.6 36.8 14.0 38.1 7.5 31.2 7.0 29.8
Lease financing 0.5 1.1 0.5 1.5 1.2 2.1 1.2 3.5 1.1 4.5
----- ----- ----- ----- ----- ----- ------ ----- ----- -----
Total allocated 29.2 100.0% 29.7 100.0% 28.2 100.0% 21.1 100.0% 18.7 100.0%
===== ===== ===== ===== =====
Unallocated 16.7 12.5 10.5 7.5 7.5
----- ----- ----- ------ -----
Total $45.9 $42.2 $38.7 $28.6 $26.2
===== ===== ===== ====== =====
</TABLE>
(1) The allocation of the allowance for loan losses in the above table is
based upon ranges of estimates and are not intended to imply either
limitations on the usage of the allowance or precision of the specific
amounts. The Corporation and its subsidiaries do not view the allowance
for loan losses as being divisible among the various categories of loans.
The entire allowance is available to absorb any future losses without
regard to the category or categories in which the charged-off loans are
classified.
(2) Percentage reflects the ratio of outstanding loans by category to total
outstanding loans at the end of the respective year.
The following describes the Corporation's policy and related disclosures
for impaired loans. The Corporation maintains 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, 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. Interest income on impaired nonaccrual
loans is recognized on a cash basis. Interest income on all other impaired
loans is recorded on an accrual basis.
Certain of the Corporation's nonperforming loans included in Table 7 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. 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 December 31, 1997, loans considered to be impaired totaled $16.8
million (of which $9.9 million were on a nonaccrual basis). Included within
this amount is $6.1 million of impaired loans for which the related allowance
for loan losses is $0.9 million and $10.7 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 year ended December 31, 1997
was approximately $18.2 million. For the year ended December 31, 1997, the
Corporation recognized interest income of $1.5 million which included $1.0
million of interest income recognized using the cash basis method of income
recognition.
At December 31, 1996, loans considered to be impaired totaled $17.3
million (of which $10.2 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 is $0.8 million and $8.4 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 year ended December 31, 1996
was approximately $20.4 million. For the year ended December 31, 1996, the
Corporation recognized interest income of $1.7 million which included $0.9
million of interest income recognized using the cash basis method of income
recognition.
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.
During 1997, each of the Corporation's banking subsidiaries received a
normally scheduled examination by its governing regulatory agency. There was
no material reclassification of assets as nonperforming resulting from these
examinations.
Page 13
<PAGE> 16
TABLE 9. AVERAGE DEPOSITS
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
AVERAGE AVERAGE Average Average Average Average
Year Ended December 31 (in millions) BALANCE RATE Balance Rate Balance Rate
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $ 565.6 --- $ 565.1 --- $ 547.3 ---
Interest-bearing demand 381.7 1.61% 396.6 1.79% 399.3 1.95%
Savings 1,047.5 2.83 1,077.3 2.72 1,095.8 2.81
Time 1,652.5 5.66 1,476.5 5.61 1,255.1 5.48
-------- -------- --------
Total $3,647.3 3.54 $3,515.5 3.39 $3,297.5 3.25
======== ======== ========
</TABLE>
DEPOSITS
The Corporation's average deposit balances and rates for the past three years
are summarized in Table 9. Total average deposits were 3.7% higher in 1997 as
compared with 1996. Deposit growth was derived primarily from time accounts
which increased 11.9% from 1996 average balances. Noninterest-bearing demand
accounts comprised 15.5% of total average deposits during 1997, as compared
with 16.1% in 1996. The shift in deposits from demand and savings accounts to
time accounts reflects changing client liquidity preferences and the desire for
higher yields. As of December 31, 1997, certificates of deposits of $100,000
or more accounted for approximately 12.4% of total deposits compared with 10.7%
as of December 31, 1996. The maturities of these deposits are summarized in
Table 10.
TABLE 10. MATURITY OF TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
<TABLE>
<CAPTION>
December 31,
(in millions) 1997
- --------------------------------------------------------------------------
<S> <C>
Three months or less $266,760
After three but within six months 65,116
After six but within twelve months 99,301
After twelve months 26,100
--------
Total $457,277
========
</TABLE>
The Corporation gathers deposits primarily from the local markets of its
banking subsidiaries and has not relied on brokered deposits. 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.
BORROWED FUNDS
Total short-term borrowings, primarily federal funds purchased, securities sold
under agreements to repurchase and Treasury Tax and Loan notes, averaged $178.3
million or 5.3% of total average interest-bearing liabilities during 1997
compared with $170.9 million or 5.3% during 1996. Long-term debt accounted for
$90.8 million or 2.7% of average interest-bearing funds during 1997, increasing
from $86.8 million in 1996.
In 1997, the Corporation's Michigan subsidiary originated three long-term
borrowings with the Federal Home Loan Bank for a total of $70 million. The
interest rates on the three borrowings range from 5.68% to 6.07% with original
maturities from one to four years.
To finance the February 28, 1995 acquisition, the Corporation's Parent
company obtained a $115 million seven year amortizing revolving credit
facility. The interest rates range from 6.38% to 7.65% on the outstanding
balance of $33 million at December 31, 1997. Of this amount, $7 million will
reprice in March 1998 and $13 million in both September 1998 and March 1999.
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 December 31, 1997.
A summary of long-term debt balances as of December 31, 1997 and 1996
appears in Note 10 to the Consolidated Financial Statements.
Page 14
<PAGE> 17
CAPITAL RESOURCES
Management closely monitors capital levels to provide for current and future
business needs and to comply with regulatory requirements. Both bank
subsidiaries within the Corporation have sufficient capital to maintain a "well
capitalized" designation, (the FDIC's highest rating). As summarized below, the
Corporation's capital ratios were in excess of regulatory requirements.
<TABLE>
<CAPTION>
Regulatory Minimum
---------------------- December 31,
"Well -----------------------
Required Capitalized" 1997 1996 1995
- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Risk based:
Tier I capital 4.00% 6.00% 9.78% 9.83% 9.76%
Total capital 8.00 10.00 11.03 11.08 11.01
Tier I leverage 4.00 5.00 7.98 7.52 7.13
</TABLE>
The Corporation declared cash dividends of $0.74 per share in 1997, an
increase of 10.4% over 1996 dividends of $0.67 per share. Citizens Banking
Corporation or its predecessor, Citizens Commercial & Savings Bank, have paid
dividends every year since 1892 except for several years during the depression
of the 1930's.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In September 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 impact of 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
computation and makes the calculation comparable to international standards.
The Statement requires the replacement of primary EPS with basic EPS and
presentment of basic and diluted EPS on the face of the income statement. The
Corporation adopted the Statement for year end 1997 reporting and has restated
all prior period per common share data.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130 "Reporting Comprehensive Income". The Statement establishes standards
for the reporting and disclosure of comprehensive income and its components in
the financial statements. Presently, the only component of comprehensive
income not included in net income is unrealized gains or losses on
available-for-sale investment securities. The Corporation adopted the
Statement for year end 1997 reporting and has restated all prior period
amounts.
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. The Corporation plans to adopt the
Statement in 1998.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs which utilize using 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.
Page 15
<PAGE> 18
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. The arrangement allows M&I Data Services information technology
systems to replace most of the Corporation's current systems by the end of
the second quarter of 1998. 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.
LIQUIDITY AND DEBT CAPACITY
The liquidity position of the Corporation is monitored for both
subsidiaries and the Parent company to ensure that funds are available at a
reasonable cost to meet financial commitments, to finance business expansion
and to take advantage of unforeseen opportunities. The Corporation's
subsidiary banks derive liquidity primarily through core deposit growth and
maturity of money market investments, investment securities and loans.
Additionally, the Corporation's subsidiary banks have access to market
borrowing sources on an unsecured, as well as a collateralized basis, for both
short-term and long-term purposes. Management has not had to rely on
borrowings from the Federal Reserve to meet liquidity requirements. Another
source of liquidity is the ability of the Corporation's Parent company to
borrow funds on both a short-term and long-term basis.
Various techniques are used by the Corporation to measure liquidity,
including ratio analysis. Some ratios monitored by the Corporation include:
loans to deposits, liquid assets to volatile funding (interest bearing
liabilities plus noninterest bearing deposits less core funding) core funding
(most deposits plus a portion of repurchase agreements and long term debt less
single maturity certificates of deposit) to total funding (volatile funding
plus 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 levels of liquidity. Management believes that the key to operating at
lower levels of balance sheet liquidity is the establishment and subsequent
utilization of sufficient sources of liquidity. This has been accomplished by
increased sources of funds and higher capacities enabling the Corporation and
its subsidiary banks to operate effectively, safely and with improved
profitably. These ratios are summarized below for the last three years.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Average loans to deposits 92.7% 87.1% 82.1%
Liquid assets to volatile
funding 34.5 74.0 113.9
Core funding to total funding 88.1 89.4 90.3
</TABLE>
The subsidiary banks manage liquidity to meet client cash flow needs while
maintaining funds available for loan and investment opportunities. As
discussed in Note 18 to the Consolidated Financial Statements, the Federal
Reserve Bank requires the Corporation's banking subsidiaries to maintain
certain noninterest-bearing deposits with the Federal Reserve Bank. These
balance requirements averaged $28.8 million and $43.0 million during 1997 and
1996, respectively, and were primarily satisfied with cash balances maintained
by the Corporation's subsidiaries.
The liquidity of the Parent company is managed to provide funds to pay
dividends to shareholders, service debt, invest in subsidiaries and to satisfy
other operating requirements. The Parent company's primary source of liquidity
is dividends from its subsidiaries. During 1997, the Parent company received
$21.5 million in dividends from subsidiaries and paid $19.3 million in
dividends to its shareholders. The amount of the upstream dividends decreased
$32.6 million in 1997 from $56.5 million 1996. The large 1996 dividend amount
was attributable to the consolidation of the six Michigan chartered banks.
This consolidation allowed the surviving bank greater upstream dividend
capacity while still maintaining sufficient capital. As discussed in Note 18
to the Consolidated Financial Statements, no dividend amounts were available
as of January 1, 1998 for payment to the Parent company as dividends by the
Corporation's banking subsidiaries without further regulatory approval.
Amounts earned by subsidiaries in 1998 may also become available for such
dividend payments. Additional amounts may be available for payment subject to
regulatory approval.
The Corporation's long-term debt to equity ratio was 26.4% as of December
31, 1997 compared with 22.1% as of December 31, 1996. Changes in
Page 16
<PAGE> 19
long-term debt during 1997 are discussed in the section titled "Borrowed Funds".
Management believes that the Corporation has sufficient liquidity and capacity
sources to meet presently known cash flow requirements arising from ongoing
business transactions.
INTEREST RATE RISK
Interest rate risk generally arises when the maturity or repricing
structure of the Corporation's assets and liabilities differ 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. Table 11 depicts the Corporation's asset/liability static sensitivity
("GAP") as of December 31, 1997.
TABLE 11. INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
TOTAL
December 31, 1997 1 2 - 3 4 - 6 7 - 12 WITHIN 1-5 Over
(in millions) Month Months Months Months 1 Year Years 5 Years Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS(3)
Loans and leases $1,103.3 $ 142.1 $ 183.3 $ 342.0 $1,770.7 $1,249.7 $521.2 $3,541.6
Investment securities 27.3 22.7 69.2 73.8 193.0 246.1 136.3 575.4
Short-term investments 12.2 --- --- --- 12.2 --- --- 12.2
-------- ------- ------- ------- -------- -------- ------ --------
Total $1,142.8 $ 164.8 $ 252.5 $ 415.8 $1,975.9 $1,495.8 $657.5 $4,129.2
======== ======= ======= ======= ======== ======== ====== ========
RATE SENSITIVE LIABILITIES
Deposits (2) $ 272.1 $ 377.2 $ 423.3 $ 626.3 $1,698.9 $1,208.0 $186.9 $3,093.8
Short-term borrowings 174.9 --- --- --- 174.9 --- --- 174.9
Long-Term Debt 0.4 7.0 30.0 13.1 50.5 55.1 2.6 108.2
-------- ------- ------- ------- -------- -------- ------ --------
TOTAL $ 447.4 $ 384.2 $ 453.3 $ 639.4 $1,924.3 $1,263.1 $189.5 $3,376.9
======== ======= ======= ======= ======== ======== ====== ========
Period GAP (1) $ 695.4 $(219.4) $(200.8) $(223.6) $ 51.6 $ 232.7 $468.0 $ 752.3
Cumulative GAP 695.4 476.0 275.2 51.6 284.3 752.3
Cumulative GAP to
Total Assets 15.66% 10.72% 6.20% 1.16% 1.16% 6.40% 16.95% 16.95%
Multiple of Rate Sensitive
Assets to Liabilities 2.55 0.43 0.56 0.65 1.03 1.18 3.47 1.22
</TABLE>
(1) Gap is the excess of rate sensitive assets (liabilities).
(2) Includes interest bearing savings and demand deposits without contractual
maturities of $441 million in the less than one year category and $963
million in the over one year category. This runoff is based on historical
trends, 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.
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 $51.6 million. This position suggests that the
Corporation's net interest income may not be significantly impacted by changes
in interest rates over the next 12 months. Management is continually reviewing
its interest rate risk position and modifying its strategies based on
projections to minimize the impact of future interest rate changes. While
traditional GAP analysis does not always incorporate adjustments for the
magnitude or timing of noncontractual repricing, Table 11 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.
Page 17
<PAGE> 20
INTEREST RATE SENSITIVITY
A number of measures are used to monitor and manage interest rate risk,
including income simulation and interest sensitivity (GAP) analyses. An income
simulation model is management's primary tool used to assess the direction and
magnitude of variations in net interest income resulting from changes in
interest rates. Key assumptions in the model include prepayment speeds on
various loan and investment assets; cash flows and maturities of financial
instruments held for purposes other than trading; changes in market conditions,
loan volumes, and pricing; deposit sensitivity; client preferences; and
management's financial capital plans. These assumptions are inherently
uncertain, subject to fluctuation and revision in a dynamic environment and, as
a result, the model cannot precisely estimate net interest income or exactly
predict the impact of higher or lower interest rates on net interest income.
Actual results will differ from simulated results due to timing, magnitude, and
frequency of interest rate changes and changes in market conditions and
management strategies, among other factors.
Results of the multiple simulations done as of December 31, 1997 suggest
that the Corporation could expect net interest income to increase by $200,000
(if the balance sheet does not grow and interest rates gradually decline by 200
basis points over the next twelve months) and, to increase by $2.4 million (if
the balance sheet does not grow and interest rates gradually increase by 200
basis points over the next twelve months) from 1997 levels of net interest
income. These variances in net interest income were well within the
Corporation's policy parameters established to manage such risk. Management
performed a large number of net interest income simulations using varying
balance sheet scenarios and differing interest rate environments. The model
results presented herein are intended to illustrate the potential variation in
net interest income from the indicated changes in interest rates, and not to
project future levels of net interest income. In addition to changes in
interest rates, the level of future net interest income is also dependent on a
number of other variables, including the growth, composition and absolute
levels of deposits, loans, and other earnings assets and interest bearing
liabilities, economic and competitive conditions, client preferences and other
factors.
TABLE 12. LOAN MATURITIES AND INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
Due Within One to After
December 31 (in millions) One Year Five Years Five Years Total
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $674.5 $538.5 $104.2 $1,317.2
Real estate construction 43.5 18.2 9.3 71.0
------ ------ ------ --------
Total $718.0 $556.7 $113.5 $1,388.2
====== ====== ====== ========
Loans above:
With floating interest rates $492.4 $190.9 $73.5 $756.8
With predetermined interest rates 225.6 365.8 40.0 631.4
------ ------ ------ --------
Total $718.0 $556.7 $113.5 $1,388.2
====== ====== ====== ========
</TABLE>
Page 18
<PAGE> 21
TABLE 13. SELECTED QUARTERLY INFORMATION
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------- -----------------------------------------
(in thousands except per share data) FOURTH THIRD SECOND FIRST Fourth Third Second First
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $85,992 $85,648 $83,996 $80,227 $79,952 $78,764 $77,583 $76,037
Interest expense 36,908 36,903 35,858 34,346 34,568 33,309 32,705 33,109
Net interest income 49,084 48,745 48,138 45,881 45,384 45,455 44,878 42,928
Provision for loan losses 3,135 5,245 3,742 3,210 4,146 3,593 2,351 2,036
Investment securities gains
(losses) 25 (755) (33) (24) 41 134 20 416
Noninterest income 12,115 12,422 11,575 11,369 11,581 13,152 11,468 11,192
Noninterest expense 37,475 61,340(2) 39,729 38,617 38,608 38,980 39,949 37,519
Net income (loss) 14,255 (4,951)(2) 11,315 10,889 10,242 11,498 10,028 10,657
PER SHARE OF COMMON STOCK(3)
Net income (loss):
Basic 0.51 (0.18)(2) 0.41 0.39 0.37 0.41 0.35 0.38
Diluted 0.50 (0.18)(2) 0.40 0.39 0.36 0.41 0.35 0.38
Cash dividends declared 0.19 0.19 0.19 0.17 0.17 0.17 0.17 0.15
Market value:(1)
High 34.75 29.42 23.83 22.33 21.50 19.67 21.00 21.00
Low 27.17 22.33 20.33 20.00 19.17 18.17 18.33 19.00
Close 34.50 29.33 22.83 22.00 21.00 19.09 19.33 20.33
</TABLE>
(1) Citizens Banking Corporation common stock is traded on the National
Market tier of the Nasdaq stock market (trading symbol: CBCF). At
December 31, 1997, there were approximately 11,338 shareholders of the
Corporation's common stock.
(2) Amounts include special charge associated with CB Financial Corporation
merger and information technology operations reorganization of $17,263,
net of tax or $0.61 per diluted share.
(3) Per share information is computed, and where necessary, restated to
comply with Statement of Financial Accounting Standard No. 128 "Earnings
per share" and reflects a three-for-two stock split effected in the form
of a dividend paid to shareholders on November 18, 1997.
IMPACT OF INFLATION
Substantially all of the assets and liabilities of a financial institution
are monetary. Therefore, inflation generally has a less significant impact on
financial institutions than fluctuations in market interest rates. Inflation
can lead to accelerated growth in noninterest expenses, which can adversely
impact results of operations. Additionally, inflation may impact the rate of
deposit growth and necessitate increased growth in equity to maintain a strong
capital position. Management believes the most significant impact on financial
results is the Corporation's ability to respond to changes in interest rates.
FORWARD-LOOKING STATEMENTS
The foregoing disclosure contains "forward-looking statements" within the
meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934,
both as amended, with respect to expectations for future periods. These
forward looking statements relate to expected savings and effects of the
merger, the Corporation's information systems conversion to M&I Data Services
and the impact of Year 2000, changes all of 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 and
relationships with third party vendors and clients and certain other factors
discussed in this report.
Page 19
<PAGE> 22
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH 1995
The following discussion incorporates the restatement of 1995 and 1996
financial information to include the merger of CB Financial Corporation on July
1, 1997 which was accounted for as a pooling of interests. The 1996 results
reflect a full year of operations as compared with ten months of operations for
the four Michigan affiliates of Banc One Corporation purchased at the close of
business on February 28, 1995. All common stock per share amounts have been
adjusted to reflect a three-for-two stock split effected in the form of a
dividend paid to shareholders on November 18, 1997. Citizens Banking
Corporation earned $42,425,000 or $1.50 per diluted share during 1996 as
compared with $38,211,000 or $1.36 per share in 1995. Net income was up
$4,214,000 or $0.14 per diluted share over the prior year, a 10.3% increase.
Return on average assets increased 5.2% from 0.96% in 1995 to 1.01% in 1996.
Overall, the increase in net income in 1996 reflects improvement in net
interest income and noninterest income offset, in part, by increases in the
provision for loan losses, noninterest expense and income taxes.
Net interest income for 1996 was $178,645,000, an increase of 6.4% over
1995 net interest income of $167,926,000. This increase resulted from higher
levels of earning assets partially offset by increased interest bearing
liabilities. Yields on earning assets increased slightly to 8.21% as compared
with 8.19% in 1995. Rates paid on funding sources increased nine basis points
to 4.17% due to higher rates paid on time deposits and long-term debt partially
offset by lower rates on interest bearing demand and savings deposits and
short-term borrowings. As a result, the net interest margin decreased to 4.77%
in 1996 as compared with 4.80% in 1995.
The provision for loan losses increased to $12,126,000 in 1996 as compared
with $7,112,000 in 1995. The increase resulted from new loan growth of $362.4
million and higher charge offs. Net loan charge-offs were 0.28% of average
total loans in 1996, up from 0.16% in 1995.
Noninterest income accounted for 21.2% of total operating income or 1.1%
of average assets in 1996, increasing from 20.3% or 1.1%, respectively, in
1995. Noninterest income increased $5,318,000 from 1995 partially attributable
to a full year of earnings of the acquired banks as compared to ten months of
income for 1995. The third quarter 1996 sale of the Corporation's mortgage
servicing operations resulted in an immediate gain of $1,550,000 related to
loans previously serviced by the Corporation for other investors. Revenue
increases for trust of 8.6%, brokerage and investment fees of 52.8%, ATM
network user fees of 15.8% and cash management fees of 36.6% when comparing
1996 with 1995 were the result of increased volumes and enhanced marketing
strategies.
Noninterest expense increased $4,724,000, or 3.1% in 1996, from 1995. The
increase is partially attributable to a full year of expense of the acquired
banks as compared with 10 months of expense for 1995. The increase was
partially offset by a decrease in FDIC insurance assessments to $15,000 in 1996
as compared with $3,935,000 in 1995.
Compensation is the Corporation's largest noninterest expense. Total
compensation expense increased 5.1% in 1996 as compared to 1995 due to a full
year effect of the acquired banks and higher cost of employee benefits for
pension, workers compensation and medical expense.
Intangible asset amortization expense increased 11.2% in 1996 as compared
with 1995 due to a full year of amortization attributable to the 1995
acquisition. Income tax expense for 1996 increased 13.9% compared with 1995.
This increase resulted from higher pretax earnings combined with lower
tax-exempt interest income.
The Corporation had total average assets of $4.212 billion in 1996, up
from 1995 average assets of $3.970 billion. This was primarily due to loan
and core deposit growth and the full year impact of the first quarter 1995
acquisition. Average loans comprise 78.8% of total earning assets in 1996, up
from 74.5% in 1995. The growth occurred in the consumer, residential mortgage
and commercial loan portfolios due to improved economic conditions and the full
year effect of the acquisition. Average investments securities, including
money market investments, decreased to 21.2% of average earning assets in 1996
from 25.5% in 1995. The decline in investment securities was used to fund new
loan growth.
Total average deposits were 6.6% higher in 1996 compared with 1995, due
to higher time deposit balances and the acquisition. Customer preferences
resulted in deposit balance shifts from interest bearing demand and savings to
time accounts in 1996 as compared with 1995. Average short-term borrowings,
comprised primarily of securities sold under agreements to repurchase,
increased slightly to 5.3% of average interest-bearing liabilities in 1996 as
compared with 5.1% in 1995.
Long-term debt accounted for $86.8 million or 2.7% of average
interest-bearing funds during 1996, decreasing from $108.2 million or 3.6% in
1995. The decrease resulted from 1996 principal payments on the debt used to
finance the first quarter 1995 acquisition. Average shareholders' equity was
$381.4 million in 1996, a 7.7% increase over the 1995 average of $354.2
million.
Page 20
<PAGE> 23
CONSOLIDATED BALANCE SHEETS
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31,
(in thousands except share amounts) 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 168,351 $ 182,039
Money market investments:
Interest-bearing deposits with banks 246 83
Federal funds sold --- 4,500
Term federal funds sold and other 11,976 14,288
---------- ----------
Total money market investments 12,222 18,871
Investment securities available-for-sale (amortized cost
$569,440 in 1997; $716,695 in 1996) 575,382 717,058
Loans:
Commercial 1,317,213 1,177,098
Real estate construction 71,035 71,125
Real estate mortgage 779,567 744,606
Consumer 1,336,120 1,189,807
Lease financing 37,684 47,173
---------- ----------
Total loans 3,541,619 3,229,809
Less: Allowance for loan losses (45,911) (42,166)
---------- ----------
Net loans 3,495,708 3,187,643
Premises and equipment 69,415 74,859
Intangible assets 60,016 73,684
Other assets 58,177 51,819
---------- ----------
TOTAL ASSETS $4,439,271 $4,305,973
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 600,498 $ 580,742
Interest-bearing deposits 3,093,848 3,018,009
---------- ----------
Total deposits 3,694,346 3,598,751
Federal funds purchased and securities sold
under agreements to repurchase 141,713 146,903
Other short-term borrowings 33,153 29,902
Other liabilities 52,052 51,570
Long-term debt 108,165 86,826
---------- ----------
Total liabilities 4,029,429 3,913,952
SHAREHOLDERS' EQUITY
Preferred stock - no par value:
Authorized - 5,000,000 shares
Issued - none
Common stock - no par value:
Authorized - 40,000,000 shares
Issued and outstanding - 28,047,518 in 1997;
27,766,182 in 1996 120,274 118,312
Retained earnings 285,706 273,484
Other accumulated comprehensive net income 3,862 225
---------- ----------
Total shareholders' equity 409,842 392,021
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,439,271 $4,305,973
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
Page 21
<PAGE> 24
CONSOLIDATED STATEMENTS OF INCOME
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
(in thousands except share amounts) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $294,258 $265,139 $237,498
Interest and dividends on investment securities:
Taxable 31,811 33,731 35,441
Nontaxable 8,721 9,700 10,080
Money market investments 1,073 3,766 7,908
-------- -------- --------
Total interest income 335,863 312,336 290,927
-------- -------- --------
INTEREST EXPENSE
Deposits 129,267 119,185 107,329
Short-term borrowings 8,689 7,959 7,573
Long-term debt 6,059 6,547 8,099
-------- -------- --------
Total interest expense 144,015 133,691 123,001
-------- -------- --------
NET INTEREST INCOME 191,848 178,645 167,926
Provision for loan losses 15,332 12,126 7,112
-------- -------- --------
Net interest income after provision for loan losses 176,516 166,519 160,814
-------- -------- --------
NONINTEREST INCOME
Trust fees 15,527 14,466 13,326
Service charges on deposit accounts 12,342 12,481 12,219
Bankcard fees 7,092 6,780 5,908
Other loan income 1,746 3,572 2,409
Investment securities gains (losses) (787) 611 281
Other 10,774 10,094 8,543
-------- -------- --------
Total noninterest income 46,694 48,004 42,686
-------- -------- --------
NONINTEREST EXPENSE
Salaries and employee benefits 80,119 81,288 77,329
Equipment 12,327 12,374 12,292
Occupancy 11,446 12,153 11,562
Intangible asset amortization 6,098 6,637 5,968
Bankcard fees 5,152 4,702 4,221
Stationery and supplies 4,042 4,416 4,316
Postage and delivery 4,387 4,254 3,911
Advertising and public relations 3,953 3,946 3,103
Special charge 23,734 --- ---
Other 25,903 25,286 27,630
-------- -------- --------
Total noninterest expense 177,161 155,056 150,332
-------- -------- --------
INCOME BEFORE INCOME TAXES 46,049 59,467 53,168
Income taxes 14,541 17,042 14,957
-------- -------- --------
NET INCOME $ 31,508 $ 42,425 $ 38,211
======== ======== ========
NET INCOME PER SHARE:
Basic $ 1.13 $ 1.52 $ 1.39
Diluted 1.11 1.50 1.36
AVERAGE SHARES OUTSTANDING:
Basic 27,878,990 27,844,341 27,575,118
Diluted 28,419,676 28,258,591 28,123,783
</TABLE>
See Notes to Consolidated Financial Statements.
Page 22
<PAGE> 25
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 - JANUARY 1, 1995 $118,324 $226,869 $(12,453) $332,740
Net income 38,211 38,211
Net unrealized gain on securities
available-for-sale,
net of tax effect of $9,424 17,587 17,587
--------
Total comprehensive income 55,798
Exercise of stock options, net of
shares purchased 2,237 2,237
Cash dividends-$0.60 per share (16,131) (16,131)
-------- -------- -------- --------
BALANCE - DECEMBER 31, 1995 120,561 248,949 5,134 374,644
Net income 42,425 42,425
Net unrealized loss on securities
available-for-sale,
net of tax effect of $2,593 (4,909) (4,909)
--------
Total comprehensive income 37,516
Exercise of stock options, net of
shares purchased 1,523 1,523
Cash dividends-$0.67 per share (17,890) (17,890)
Shares acquired for retirement (3,772) (3,772)
-------- -------- -------- --------
BALANCE - DECEMBER 31, 1996 118,312 273,484 225 392,021
Net income 31,508 31,508
Net unrealized gain on securities
available-for-sale,
net of tax effect of $1,942 3,637 3,637
--------
Total comprehensive income 35,145
Exercise of stock options, net of
shares purchased 1,962 1,962
Cash dividends-$0.74 per share (19,286) (19,286)
-------- -------- -------- --------
BALANCE - DECEMBER 31, 1997 $120,274 $285,706 $ 3,862 $409,842
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
Page 23
<PAGE> 26
CONSOLIDATED STATEMENTS OF CASH FLOWS
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 31,508 $ 42,425 $ 38,211
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 15,332 12,126 7,112
Depreciation 8,927 9,335 9,197
Amortization of goodwill and other intangibles 6,098 6,637 5,968
Intangible asset impairment 7,570 --- ---
Deferred income tax credit (4,714) (2,391) (607)
Net amortization on investment securities 1,061 2,080 4,015
Investment securities losses (gains) 787 (611) (281)
Other (3,104) (4,508) 6,157
------------ ----------- -----------
Net cash provided by operating activities 63,465 65,093 69,772
INVESTING ACTIVITIES:
Net (increase) decrease in money market investments 6,649 132,753 (8,557)
Securities available-for-sale:
Proceeds from sale 171,240 116,190 20,089
Proceeds from maturity 144,916 403,835 208,087
Purchases (170,749) (463,394) (150,735)
Net increase in loans and leases (323,397) (371,047) (133,670)
Purchases of premises and equipment (3,483) (5,408) (7,879)
Net cash used for acquisition of subsidiary --- --- (59,434)
------------ ----------- -----------
Net cash used by investing activities (174,824) (187,071) (132,099)
FINANCING ACTIVITIES:
Net decrease in demand and savings deposits (27,076) (73,779) (119,285)
Net increase in time deposits 122,671 194,262 183,900
Net increase (decrease) in short-term borrowings (1,939) 24,266 (51,400)
Proceeds from issuance of long-term debt 70,000 20,000 115,000
Principal reductions in long-term debt (48,661) (43,196) (21,309)
Cash dividends paid (19,286) (17,890) (16,131)
Proceeds from stock options exercised 1,962 1,523 2,237
Shares acquired for retirement --- (3,772) ---
------------ ----------- -----------
Net cash used by financing activities 97,671 101,414 93,012
------------ ----------- -----------
Net increase (decrease) in cash and due from banks (13,688) (20,564) 30,685
Cash and due from banks at beginning of year 182,039 202,603 171,918
------------ ----------- -----------
Cash and due from banks at end of year $ 168,351 $ 182,039 $ 202,603
============ =========== ===========
Supplemental cash flow information:
Interest paid $ 146,917 $ 136,331 $ 114,396
Income taxes paid 17,790 19,560 15,308
</TABLE>
See Notes to Consolidated Financial Statements.
Page 24
<PAGE> 27
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Citizens Banking Corporation
("Corporation") and its subsidiaries conform to generally accepted accounting
principles. Management makes estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from these estimates. The following describes the Corporation's
policies:
CONSOLIDATION
The Consolidated Financial Statements include the accounts of the Corporation
and its subsidiaries after elimination of all material intercompany
transactions and accounts.
INVESTMENT SECURITIES
Investment securities must be classified into three categories:
held-to-maturity, available-for-sale or trading. Only those securities
classified as held-to-maturity are reported at amortized cost, with those
available-for-sale and trading reported at fair value with unrealized gains and
losses included in shareholders' equity or income, respectively. In the event
that an investment security is sold, the adjusted cost of the specific security
sold is used to compute the applicable gain or loss.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered by management
to be adequate to absorb losses inherent in the loan portfolio. Management's
evaluation is based on a continuing review of the loan portfolio and includes
consideration of actual loss experience, the financial condition of borrowers,
the size and composition of the loan portfolio, current and anticipated
economic conditions and other pertinent factors. The allowance is increased by
the provision charged to income and recoveries of loans previously charged off
and reduced by loans charged off.
The Corporation establishes a valuation allowance for any loans considered
impaired based on periodic review. 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.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are carried at cost
less accumulated depreciation and amortization. Depreciation and amortization
are computed principally on a straight-line basis and are charged to expense
over the lesser of the estimated useful life of the assets or lease term.
Maintenance and repairs as well as gains and losses on dispositions are charged
to expense as incurred.
OTHER REAL ESTATE
Other real estate includes properties acquired in satisfaction of a debt.
These properties are carried at the lower of cost or fair value, net of
estimated costs to sell, based upon current appraised value. Losses arising
from the acquisition of such properties are charged against the allowance for
loan losses. Subsequent valuation adjustments and gains or losses on disposal
of these properties are charged to other expenses as incurred.
INTANGIBLE ASSETS
Goodwill, the unamortized cost of acquiring subsidiaries in excess of the fair
value of identifiable net assets at the date acquired, is amortized on a
straight line basis over 15 years. The carrying amount of goodwill is reviewed
as events or changes in facts and circumstances warrant. The realizability of
goodwill is evaluated by geographic region and is based on a comparison of the
recorded balance of goodwill to the applicable discounted cash flows over the
remaining amortization period of the associated goodwill. To the extent that
impairment may exist, the current carrying amount is reduced by the estimated
shortfall.
INCOME TAXES
The Corporation and its subsidiaries file a consolidated federal income tax
return. Income tax expense is based on income as reported in the Consolidated
Statements of Income. When income and expenses are recognized in different
periods for tax purposes, applicable deferred taxes are provided in the
Consolidated Financial Statements.
LOAN INTEREST AND FEE INCOME
Interest on loans is generally accrued and credited to income based upon the
principal amount outstanding. Loans are placed on nonaccrual status when
collectibility of principal or interest is considered doubtful, or payment of
principal or interest is past due 90 days or more and the loan is not well
secured and in the process of collection. When these loans (including a loan
impaired) are placed on nonaccrual status, all
Page 25
<PAGE> 28
interest previously accrued but unpaid is reversed against current year
interest income. Interest payments received on nonaccrual loans are credited
to income if future collection of principal is probable. Loans are
normally restored to accrual status when interest and principal payments are
current and it is believed that the financial condition of the borrower has
improved to the extent that future principal and interest payments will be met
on a timely basis.
Loan origination fee income, net of direct origination costs and certain
incremental direct costs, is deferred and amortized as a yield adjustment over
the estimated term of the related loans by methods that approximate the level
yield method. Loan fees on unused commitments and fees related to loans sold
are recognized currently as other income.
NET INCOME PER SHARE
Basic and diluted earnings per share are computed under the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings per share,"
adopted by the Corporation in the quarter ended December 31, 1997. All prior
amounts have been restated. Basic net income per share is based on net income
divided by the weighted average number of shares outstanding in each period.
Diluted net income per share shows the dilutive effect of additional common
shares issuable under the assumed exercise of stock options granted upon the
Corporation's stock option plans, using the treasury stock method. The
weighted average number of share has been adjusted for a three for two stock
split effected in the form of a dividend paid to shareholders on November 18,
1997.
CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and amounts due from banks.
RECLASSIFICATIONS
Certain amounts have been reclassified to conform to the current year
presentation.
NOTE 2. ACQUISITION
On July 1, 1997, the Corporation merged with CB Financial Corporation
headquartered in Jackson, Michigan. As part of the merger, Citizens issued
6,256,355 shares of its common stock in a tax free exchange for all of the
outstanding shares of CB Financial Corporation. The merger was accounted for
as a pooling of interests resulting in the restatement of all financial
information for the periods presented. The merger resulted in no change in
either entities' fiscal reporting period or in the consolidated shareholder
equity position. No material intercompany transactions existed between the
companies prior to the merger. The following presents the separate results of
operations for the six month period ending June 30, 1997 (the latest period
immediately preceding the merger) and the years ending December 31, 1996 and
1995 for CB Financial Corporation and Citizens Banking Corporation:
<TABLE>
For the Year Ended
(unaudited) December 31,
Six Months Ended ---------------------
(DOLLARS IN THOUSANDS) June 30, 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Income
Citizens $ 77,080 $ 146,116 $ 137,495
CB Financial 16,939 32,508 30,508
----------- ---------- ----------
Combined $ 94,019 $ 178,624 $ 168,003
=========== ========== ==========
Net Income
Citizens $ 19,315 $ 37,421 $ 33,596
CB Financial 2,889 5,004 4,615
----------- ---------- ----------
Combined $ 22,204 $ 42,425 $ 38,211
=========== ========== ==========
Diluted net income per
common share
Citizens $ 0.88 $ 1.70 $ 1.53
CB Financial 1.03 1.79 1.65
Combined 0.79 1.50 1.36
</TABLE>
At the close of business on February 28, 1995, the Corporation purchased
the four Michigan affiliates of Bank One Corporation, located in East Lansing,
Fenton, Sturgis and Ypsilanti, for $115 million in cash. The transaction was
accounted for as a purchase and the four banks ("acquired banks") were merged
into Citizens Bank headquartered in Flint, Michigan effective immediately after
the acquisition.
NOTE 3. SPECIAL CHARGE
The results of operations for the year ended December 31, 1997 reflect a
third quarter special charge of $23.7 million ($17.3 million after tax)
related to the July 1, 1997 merger with CB Financial Corporation and the
reorganization of Citizens' information technology operations. The special
charge includes $16.1 million of merger related expenses comprised of $8.5
million of direct merger and restructuring-related charges and a $7.6 million
write-down of goodwill and core deposit intangibles. This write-down reflects
the impairment of assets related to previous acquisitions of CB Financial
Corporation consummated in the early 1990's. The goodwill impairment was
measured based on an analysis which estimated the discounted cash flows for CB
Financial Corporation's northern region over the remaining amortization period
of the associated goodwill of approximately twelve and a half years.
Management also performed a qualitative analysis of the recorded balance of
core deposit intangibles within this region. Based on this analysis the entire
core deposit intangible balance was written off. The primary indicators of
impairment were higher than anticipated runoff of the region's core deposit
base and operating results that
Page 26
<PAGE> 29
have fallen short of expectations since the intangibles were recorded. The
merger related expenses reflect the cost of integrating and consolidating branch
network and administrative facilities, severance arrangements, professional
services and other expenses directly related to the merger.
Also in the third quarter, the Corporation entered into a strategic
arrangement with M & I Data Services of Milwaukee, Wisconsin, as part of
its efforts to upgrade its information technology operations. This arrangement
will provide the Corporation with the professional expertise and technological
resources necessary to improve its competitive position in a rapidly changing
technological environment. The Corporation believes it will enhance its
position to quickly respond to the demands of its markets and support future
strategic initiatives. The special charge includes expenses of $7.6 million
related to this arrangement, comprised of up-front conversion and
reorganization costs. Salary and benefit costs associated with the special
charge were $5.4 million for approximately 140 employees comprised of both
management and operational staff.
The components of the special charge are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<S> <C>
Direct merger costs $ 8,562
Intangible assets impairment 7,570
Information technology conversion and reorganization costs 7,602
-------
Total special charge 23,734
Tax effect of special charge 6,471
-------
Net effect $17,263
=======
Diluted loss per share $ 0.61
=======
</TABLE>
The following presents a summary of the special charge activity:
<TABLE>
<CAPTION>
- -----------------------------------------
(IN THOUSANDS)
- -----------------------------------------
<S> <C>
Special charge $23,734
Intangible assets impairment (7,570)
Premises and equipment writedown (2,773)
Cash payments (8,496)
-------
Balance at December 31, 1997 $ 4,895
=======
</TABLE>
The remaining balance is comprised primarily of future severence and lease
payments expected to be paid by the end of the fourth quarter of 1998.
NOTE 4. INVESTMENT SECURITIES
The amortized cost, estimated fair value and gross unrealized gains and
losses of investment securities follow:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 December 31, 1996
-------------------------------------------- --------------------------------------------
ESTIMATED GROSS GROSS Estimated Gross Gross
AMORTIZED FAIR UNREALIZED UNREALIZED Amortized Fair Unrealized Unrealized
(in thousands) COST VALUE GAINS LOSSES Cost Value Gains Losses
- -------------- --------- --------- ---------- ---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 78,458 $ 78,805 $ 458 $ 111 $214,980 $213,934 $ 610 $ 1,656
Federal agencies:
Mortgage-backed 142,344 143,173 1,071 242 116,038 115,976 451 513
Other 167,949 168,069 498 378 173,592 172,132 191 1,651
State and municipal 162,351 166,876 4,762 237 197,990 200,835 3,393 548
Mortgage and asset-backed 934 959 25 --- 1,486 1,518 32 ---
Other 17,404 17,500 96 --- 12,609 12,663 54 ---
--------- --------- ---------- ---------- --------- --------- ---------- ----------
Total $569,440 $575,382 $ 6,910 $ 968 $716,695 $717,058 $ 4,731 $ 4,368
========= ========= ========== ========== ========= ========= ========== ==========
</TABLE>
The amortized cost and approximate fair value of debt securities at
December 31, 1997 are shown below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Estimated
Amortized Fair
(in thousands) Cost Value
- -----------------------------------------------------------
<S> <C> <C>
Due within one year $129,233 $129,299
One to five years 175,287 177,193
Five to ten years 61,381 62,793
After ten years 42,857 44,465
--------- ---------
408,758 413,750
</TABLE>
<TABLE>
<S> <C> <C>
Equity securities 17,404 17,500
Mortgage and asset-backed securities 143,278 144,132
--------- ---------
Total $569,440 $575,382
========= =========
</TABLE>
Sales of investment securities resulted in realized gains and losses as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------
Year Ended December 31,
(in thousands) 1997 1996 1995
- -----------------------------------------------
<S> <C> <C> <C>
Securities gains $ 98 $ 660 $ 285
Securities losses (885) (49) (4)
------- ------- -------
Net gain (loss) $ (787) $ 611 $ 281
======= ======= =======
</TABLE>
Investment securities must be classified into three categories:
held-to-maturity, available-for-sale or trading. Only those securities
classified as held-to-maturity are reported at amortized cost, with those
available-for-sale and trading reported at fair value with unrealized gains and
losses included in shareholders' equity or income, respectively.
Page 27
<PAGE> 30
The Corporation currently holds all investment securities in the
available-for-sale category.
The Financial Accounting Standards Board Statement No. 119 defines a
derivative as a future, forward, swap, option contract or other financial
instrument with similar characteristics. The Corporation has not utilized
derivatives or related types of financial instruments except for Federal agency
collateralized mortgage obligations and, therefore, this Statement does not
have a material impact. The Corporation's policy only allows the purchase of
collateralized mortgage obligations that are composed of mortgage backed
securities issued by a Federal Agency. Most CMO's purchased are in early
tranches with short average lives. These tranches are generally classified in
the Planned Amortization Class and have well-defined prepayment assumptions
(Super PAC's). The Corporation's CMO's are periodically tested to ensure
compliance with guidelines established by the Federal Financial Institutions
Examination Council.
Securities with amortized cost of $217.9 million at December 31, 1997, and
$268.2 million at December 31, 1996, were pledged to secure public deposits,
repurchase agreements, and other liabilities. Except for obligations of the
U.S. Government and its agencies, no holdings of securities of any single
issuer exceeded 10% of consolidated shareholders' equity at December 31, 1997
or 1996.
NOTE 5. LOANS AND
NONPERFORMING ASSETS
The Corporation extends credit primarily within the local markets of its two
bank subsidiaries located in Michigan and Illinois. Within the State of
Michigan, the market areas extend along the Interstate 75 corridor from
northern suburban Detroit to the greater Grayling/Gaylord area with
expansion into western suburban Detroit and central and southwestern Michigan
in 1995. The Illinois affiliate extends credit within the western suburban
market of Chicago. The Corporation seeks to limit its credit risk by
establishing guidelines to review its aggregate outstanding commitments and
loans to particular borrowers, industries and geographic areas. Collateral is
secured based on the nature of the credit and management's credit assessment of
the customer.
The Corporation's loan portfolio is widely diversified by borrowers with
no concentration within single industry that exceeds 10% of total loans. The
Corporation has no loans to foreign countries and generally does not participate
in large national loan syndications or highly leveraged transactions. Most of
the Corporation's commercial real estate loans consist of mortgages on
owner-occupied properties. Those borrowers are involved in business activities
other than real estate, and the sources of repayment are not dependent on the
performance of the real estate market.
A summary of nonperforming assets follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31,
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Nonperforming loans:
Nonaccrual $19,989 $19,781
Loans 90 days past due (still accruing) 1,185 1,874
Restructured 446 502
------- -------
Total nonperforming loans 21,620 22,157
Other real estate 1,005 1,187
Other assets acquired by repossession 2,343 1,930
------- -------
Total nonperforming assets $24,968 $25,274
======= =======
</TABLE>
The effect of nonperforming loans on interest income follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31,
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
At original contract rates $1,861 $1,702 $2,660
As actually recognized 965 913 1,489
-------- -------- --------
Interest foregone $ 896 $ 788 $1,171
======== ======== ========
</TABLE>
There are no significant commitments outstanding to lend additional funds
to clients whose loans were classified as nonaccrual or restructured at
December 31, 1997.
At December 31, 1997, loans considered to be impaired totaled $16.8
million (of which $9.9 million were on a nonaccrual basis). Included within
this amount is $6.1 million of impaired loans for which the related allowance
for loan losses is $0.9 million and $10.7 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 year ended December 31, 1997
was approximately $18.2 million. For the year ended December 31, 1997, the
Corporation recognized interest income of $1.5 million which included $1.0
million of interest income recognized using the cash basis method of income
recognition.
At December 31, 1996, loans considered to be impaired totaled $16.6
million (of which $10.1 million were on a nonaccrual basis). Included within
this amount is $4.7 million of impaired loans for which the related allowance
for loan losses is $0.8 million and $11.9 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 year ended December 31, 1996
was approximately $19.9 million. For the year ended December 31, 1996, the
Corporation recognized interest income of $1.5 million which included $0.8
million of interest income recognized using the cash basis method of income
recognition.
Certain directors and executive officers of the Corporation and its
significant subsidiaries, including their families and entities in which they
have 10% or more ownership, were clients of the banking
Page 28
<PAGE> 31
subsidiaries. Total these clients aggregated $17.1 million and $12.0 million
at December 31, 1997 and 1996, respectively. During 1997, new loans of $15.9
million were made and repayments totaled $10.8 million. All such loans were
made in the ordinary course of business on substantially the same terms,
including interest rates and collateral, as those for comparable transactions
with unrelated parties and did not involve more than normal risk of
collectibility.
NOTE 6. ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance - January 1 $ 42,166 $ 38,705 $28,579
Allowance of acquired banks --- --- 7,235
Provision for loan losses 15,332 12,126 7,112
Charge-offs (15,585) (12,895) (8,723)
Recoveries 3,998 4,230 4,502
-------- -------- -------
Net charge-offs (11,587) (8,665) (4,221)
-------- -------- -------
Balance - December 31 $ 45,911 $ 42,166 $38,705
======== ======== =======
</TABLE>
NOTE 7. PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
- -----------------------------------------------
December 31,
(in thousands) 1997 1996
- -----------------------------------------------
<S> <C> <C>
Land $ 12,655 $ 12,575
Buildings 83,810 83,714
Leasehold improvements 5,391 5,341
Furniture and equipment 84,552 82,738
-------- --------
186,408 184,368
Accumulated depreciation
and amortization (116,993) (109,509)
-------- --------
Total $ 69,415 $ 74,859
======== ========
</TABLE>
Certain branch facilities and equipment are leased under various operating
leases. Total rental expense, including expenses related to these operating
leases, was $3.5 million in 1997, $3.4 million in 1996 and $2.6 million in
1995. Future minimum rental commitments under noncancelable operating leases
are as follows at December 31, 1997: $2.7 million in 1998; $2.6 million in
1999; $2.2 million in 2000; $1.5 million in 2001; $1.1 million in 2002, and
$1.6 million after 2002.
NOTE 8. DEPOSITS
A summary of deposits follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------
December 31,
(in thousands) 1997 1996
- ---------------------------------------------------
<S> <C> <C>
Noninterest-bearing demand $ 600,498 $ 580,742
Interest-bearing demand 376,698 394,756
Savings 1,027,501 1,056,276
Time deposits over $100,000 457,277 386,287
Other time deposits 1,232,372 1,180,690
---------- ----------
Total $3,694,346 $3,598,751
========== ==========
</TABLE>
Excluded from total deposits are demand deposit account overdrafts which
have been reclassified as loans. At December 31, 1997 and 1996, these
overdrafts totaled $2.1 million and $1.1 million, respectively. Time deposits
with remaining maturities of one year or more are $432.0 million at December
31, 1997. The maturities of these time deposits are as follows: $264.0
million in 1999, $87.5 million in 2000, $48.5 million in 2001, $18.9 million in
2002 and $13.1 million after 2002.
NOTE 9. SHORT-TERM BORROWINGS
Short-term borrowings consist primarily of federal funds purchased and
securities sold under agreements to repurchase. Federal funds purchased are
overnight borrowings from other financial institutions. Securities sold under
agreements to repurchase are secured transactions done principally with clients
and generally mature within thirty days. Other short-term borrowed funds
generally consist only of Federal Home Loan Bank borrowings and demand notes to
the U.S. Treasury.
Information relating to federal funds purchased and securities sold under
agreements to repurchase follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
At December 31:
Balance $141,713 $146,903 $136,556
Weighted average
interest rate paid 5.12% 4.43% 4.77%
During the year:
Maximum outstanding
at any month-end $226,214 $189,504 $152,429
Daily average 145,152 153,193 134,562
Weighted average
interest rate paid 4.72% 4.56% 4.84%
</TABLE>
Page 29
<PAGE> 32
NOTE 10. LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
December 31,
(in thousands) 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Citizens Banking Corporation
(Parent only):
Floating rate term notes:
Maturing October 1997 $ --- $ 1,250
Revolving credit facility:
Maturing December 2001 32,991 58,435
--------- --------
Total 32,991 59,685
Subsidiaries:
FHLB Note 70,000 20,000
Subordinated debt 4,179 4,118
Other 995 3,023
--------- --------
Total 75,174 27,141
--------- --------
Total long-term debt $ 108,165 $ 86,826
========= ========
</TABLE>
To finance the February 28, 1995 acquisition, the Corporation's Parent
company obtained a $115 million seven year amortizing revolving credit
facility. The revolving credit facility, maturing in December 2001, is payable
in annual payments of $16.5 million with a final payment of $16 million. As of
December 31, 1997, the Corporation has repaid the scheduled 1998 and a portion
of the 1999 amount due. The outstanding balance of $33 million at December 31,
1997 has fixed rates of 6.38% to 7.65%. Of this amount, $7 million reprices in
March 1998 and $13 million in both September 1998 and March 1999. Interest is
payable quarterly. 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 December 31,
1997.
In 1997, one of the Corporation's subsidiaries originated three long-term
borrowings from the Federal Home Loan Bank. The first in May 1997, was for $30
million on a one year note at a fixed interest rate of 6.07%. The second in
September 1997, was for $25 million on a five year note at an interest rate of
5.68% which may reprice on September 30, 1999. The third in October 1997, was
for $15 million on a two year note at an interest rate of 5.77% which may
reprice on October 19, 1998. For the latter two borrowings, the interest rate
upon repricing will be based on the three month LIBOR rate.
The subordinated debt was assumed by the Corporation as part of the 1995
acquisition and is payable on April 15, 2003. Interest is payable semiannually
at a fixed rate of 6.72%. Subsidiary debt assumed by the Corporation as part
of the 1997 acquisition consists of a note payable due January 15, 1998.
Interest is payable quarterly at a fixed rate of 6.25%. Other subsidiary debt
assumed as part of the 1995 and 1997 acquisitions consist of two mortgages due
April 1, 2002 and August 1, 2005. Interest is payable monthly at a fixed rate
of 14.75% and 75% of the prime rate.
Maturities of long-term debt during the next five years follow:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
(in thousands) Parent Subsidiaries Consolidated
- --------------------------------------------------------------
<S> <C> <C> <C>
1998 $ --- $30,608 $ 30,608
1999 491 15,027 15,518
2000 16,500 31 16,531
2001 16,000 25,036 41,036
2002 --- 151 151
Over 5 Years --- 4,321 4,321
------- ------- --------
Total $32,991 $75,174 $108,165
======= ======= ========
</TABLE>
NOTE 11. EMPLOYEE BENEFIT PLANS
The Corporation and its subsidiaries maintain various employee benefit
plans. Costs of various benefit arrangements charged to operations each year
follow:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Year Ended December 31,
(in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Defined benefit pension plans:
Qualified plan - funded:
Service cost $ 1,848 $ 1,981 $ 1,541
Interest cost 2,817 2,615 2,339
Actual return on plan assets (8,564) (5,717) (6,825)
Net amortization and deferral 4,330 1,795 2,783
------- ------- -------
Net cost (income) 431 674 (162)
Supplemental plans - unfunded:
Service cost 173 104 103
Interest cost 221 164 119
Net amortization and deferral 159 113 38
------- ------- -------
Net cost 553 381 260
------- ------- -------
Net pension cost 984 1,055 98
Defined contribution retirement and 401(k) plans 2,111 2,446 2,511
------- ------- -------
Total benefit cost $ 3,095 $ 3,501 $ 2,609
======= ======= =======
</TABLE>
PENSION PLANS
The Corporation maintains a qualified defined benefit plan covering
substantially all full-time employees. Under the plan, benefits are based on
the employee's length of service and average compensation during the highest
consecutive 60 month period out of the final 120 months preceding retirement.
The Corporation's funding policy is to contribute annually an amount sufficient
to meet the minimum funding requirements set forth in the Employee Retirement
Income Security Act of 1974, plus such additional amounts as the Corporation
may determine to be appropriate. Contributions are intended to provide for
benefits attributed to past service and for benefits expected to be earned in
the future.
The funded status and amounts recognized in the Corporation's Consolidated
Balance Sheets for the qualified defined benefit plan follow:
Page 30
<PAGE> 33
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31,
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $30,246 $27,168
Nonvested benefits 740 652
------- -------
Accumulated benefit obligation 30,986 27,820
Effect of projected future
compensation levels 9,360 8,390
------- -------
Projected benefit obligation 40,346 36,210
Plan assets at fair value, primarily listed
stocks and bonds, corporate obligations
and money market and mutual funds 52,417 45,638
------- -------
Plan assets in excess of projected
benefit obligation 12,071 9,428
Unrecognized net gain (12,223) (8,964)
Unrecognized prior service cost 81 98
Unrecognized net asset at transition
being recognized over 16 years (723) (924)
------- -------
Accrued pension cost recognized
in the Consolidated Balance Sheets $ (794) $ (362)
======= =======
</TABLE>
Actuarial assumptions used in determining the benefit obligation at
December 31 were:
<TABLE>
<CAPTION>
- ---------------------------------------------------
1997 1996 1995
- ---------------------------------------------------
<S> <C> <C> <C>
Weighted average discount rate 7.75% 8.00% 7.75%
Rate of increase in future
compensation levels (1) (1) (1)
Long-term rate of return 9.25 9.00 9.00
</TABLE>
(1) Scaled by age of plan participant - 9.00% at age 24 or under
declining to 4.00% at age 50 or older
The Corporation also maintains unfunded supplemental benefit plans, which are
nonqualified plans providing certain officers with defined pension benefits in
excess of limits imposed by Federal tax law. At December 31, 1997, the
projected benefit obligation for these plans totaled $3.0 million, of which
$575,000 was subject to later amortization. The remaining $2.4 million is
included in other liabilities in the accompanying Consolidated Balance Sheets.
At December 31, 1996, the projected benefit obligation for these plans totaled
$2.6 million of which $761,000 was subject to later amortization. The remaining
$1.8 million is included in other liabilities in the accompanying Consolidated
Balance Sheets.
DEFINED CONTRIBUTION PLANS
The Corporation maintains a defined contribution 401(k) savings plan
("Corporate 401(k) Plan") covering substantially all full-time employees.
Under the plan, employee contributions are partially matched by the
Corporation. The employer matching contribution is 75 percent of the first 6%
(100 percent of the first 3% plus 50 percent of the next 3%) of each eligible
employee's qualifying salary contributed to the plan. In addition, one third
of these matching contributions are used to fund a postretirement medical
savings account established within the plan for each contributing employee.
Effective July 1, 1997, the Corporation merged the defined contribution
401(k) savings plan of CB Financial Corporation, the "merged bank" into the
Corporate 401(k) Plan. The plan of the merged bank featured a company matching
contribution of 25% of the first 6% of each eligible employee's qualifying
salary contributed to the plan.
The merged bank also maintained a defined contribution retirement plan
covering substantially all its full-time employees. Under this plan, the
company contributed 8% of the qualifying salary for each eligible employee.
This plan was terminated, effective June 30, 1997, by the merged bank. Plan
assets of $3.2 million at December 31, 1997 will be distributed to eligible
employees pending IRS approval. The contribution for the defined contribution
retirement plan amounted to $335,000 in 1997, $594,000 in 1996, and $706,000 in
1995.
NOTE 12. POSTRETIREMENT BENEFIT PLAN
The Corporation maintains an unfunded postretirement defined benefit plan
offering medical and life insurance benefits. This plan provides
postretirement medical benefits at its Michigan subsidiary to full-time
employees who retire at normal retirement age, have attained age 50 prior to
January 1, 1993 and have at least 15 years of credited service under the
Corporation's defined benefit pension plan. This plan is subject to a vesting
schedule, is contributory and contains other cost-sharing features such as
deductibles and coinsurance. Retirees not meeting the above eligibility
requirements may participate in the medical benefit provided by the plan, as
amended, at their own cost. Those retired prior to January 1, 1993 receive
benefits provided by the plan prior to its amendment. That plan includes
dental care, has some contribution requirements, and has less restrictive
eligibility requirements. Under either plan, life insurance is provided to all
retirees on a reducing basis for 5 years.
In addition, the merged bank maintained an unfunded postretirement defined
benefit plan providing subsidized health care to full-time employees hired
before April 1, 1993 who retire at normal retirement age with at least 10 years
of credited service or at age 60 with at least 18 years of credited service.
The Corporation maintains this plan to provide postretirement benefits to
retirees and eligible active employees of the merged bank. In December 1997,
eligibility requirements for current employees were modified, effective January
1, 1998, to conform with the Corporations' other postretirement plan, as
amended. This resulted in a curtailment gain of $272,000 which was recognized
through a reduction in
Page 31
<PAGE> 34
the plans previously unrecognized net deferred loss.
The following table presents the unfunded status of the plans reconciled
with amounts recognized in the Corporation's Consolidated Balance Sheets at
December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees $(13,011) $(12,367)
Fully eligible plan participants (37) (5)
Other active plan participants (465) (535)
-------- --------
Total unfunded obligation (13,513) (12,907)
Unrecognized net gain (1,825) (2,631)
Unrecognized prior service cost (1,154) (1,592)
-------- --------
Accrued postretirement benefit cost $(16,492) $(17,130)
======== ========
</TABLE>
Net periodic postretirement benefit cost includes the following
components:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31,
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 40 $ 32 $ 647
Interest cost 995 984 973
Net amortization and deferral (565) (553) (626)
------- ------- -------
Net periodic postretirement benefit cost $ 470 $ 463 $ 994
======= ======= =======
</TABLE>
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation is 7.75% at December 31, 1997 and was 8.00%
(7.50% for the merged bank plan) at December 31, 1996. The weighted-average
annual assumed rate of increase in the per capita cost of covered benefits
(i.e., health care cost trend rate) is 7% for 1998 (8% for 1997) and is assumed
to decrease 1% annually to 5% by the year 2000 and remain at that level
thereafter. Prior to 1997, the merged bank plan health care cost trend rate
(9.9% at December 31, 1996) was assumed to decrease 0.7% annually to 5% by the
year 2004 and remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. For example,
increasing the assumed health care cost trend rates by one percent in each year
would increase the accumulated postretirement benefit obligation as of December
31, 1997 and 1996 by $1.2 and $1.1 million, respectively, and the aggregate of
the service and interest cost components of net periodic postretirement benefit
cost for 1997 by $95,000.
NOTE 13. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Corporation's deferred tax assets and liabilities as of December 31,
1997 and 1996 follow:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $16,069 $14,696
Accrued postemployment
benefits other than pensions 5,772 6,031
Accrued restructuring charge 1,713 ---
Other deferred tax assets 5,702 5,372
------- -------
Total deferred tax assets 29,256 26,099
------- -------
Deferred tax liabilities:
Acquisition premium on loans 4,222 2,996
Tax over book depreciation 1,783 2,593
Net unrealized gains on
securities 2,079 137
Other deferred tax liabilities 1,682 3,956
------- -------
Total deferred tax liabilities 9,766 9,682
------- -------
Net deferred tax assets $19,490 $16,417
======= =======
</TABLE>
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------
Year Ended December 31,
(in thousands) 1997 1996 1995
- -------------------------------------------------
<S> <C> <C> <C>
Currently payable $19,255 $19,433 $15,564
Deferred tax credit (4,714) (2,391) (607)
------- ------- -------
Total income tax
expense $14,541 $17,042 $14,957
======= ======= =======
</TABLE>
A reconciliation of income tax expense to the amount computed by applying
the Federal statutory rate of 35% to income before income taxes follows:
<TABLE>
<Capion>
- --------------------------------------------------------------------------------
Year Ended December 31,
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at Federal statutory rate
applied to income before
income taxes $16,117 $20,813 $18,609
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (3,534) (3,887) (4,024)
Other 1,958 116 372
------- ------- -------
Total income tax
expense $14,541 $17,042 $14,957
======= ======= =======
</TABLE>
Page 32
<PAGE> 35
NOTE 14. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earning per share computations follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31,
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Numerator for basic and dilutive earnings
per share -- net income available to
common shareholders $31,508 $42,425 $38,211
Denominator:
Denominator for basic earnings per share
-- weighted average shares 27,879 27,845 27,575
Effect of dilutive securities -- potential
conversion of employee stock options 541 414 549
----------- ---------- ----------
Denominator:
Denominator for diluted earnings per share
-- adjusted weighted-average shares and
assumed conversions 28,420 28,259 28,124
=========== ========== ==========
Basic earnings per share $ 1.13 $ 1.52 $ 1.39
=========== ========== ==========
Diluted earnings per share $ 1.11 $ 1.50 $ 1.36
=========== ========== ==========
</TABLE>
At year end 1997, all outstanding employee stock options were dilutive. For
additional disclosures regarding the employee stock options see Note 15.
NOTE 15. SHAREHOLDERS' EQUITY
In October 1997, the Corporation declared a three-for-two stock split
effected in the form of a dividend paid November 18, 1997 to shareholders of
record on October 27, 1997. All share and per share amounts have been restated
to give effect to the split.
SHAREHOLDERS' RIGHTS PLAN
The Corporation's Shareholders' Rights Plan is designed to provide certain
assurances that all shareholders are treated fairly in connection with certain
types of business transactions involving an attempt to acquire controlling
interest in the Corporation. Under the plan, one right attaches to each
outstanding share of common stock and represents the right to purchase from the
Corporation 1/100th of a share of a new series of preferred stock at the
initial exercise price of $25.00 per 1/100th of a share. The rights become
exercisable only if a person or group without Board approval announces an
intention to acquire 15% or more of the Corporation's outstanding common stock
or makes a tender offer for that amount of stock. Upon the occurrence of such
an event, the right "flips in" and becomes the right to purchase one share of
common stock of the Corporation or the surviving company at 50% of the market
price. These rights are redeemable by the Board for 1/3 of $0.01 per right and
expire July 20, 2000. The rights will cause substantial dilution to a person
or entity attempting to acquire the Corporation without conditioning the offer
on the rights being redeemed by the Board.
STOCK REPURCHASE PLAN
The Corporation initiated a stock repurchase program in November 1987. This
program, which was expanded several times, allowed for the repurchase of
2,400,000 shares. Effective January 27, 1997, the Corporation's stock
repurchase plan was formally rescinded by its Board of Directors in conjunction
with the agreement to acquire CB Financial Corporation. A total of 1,891,455
shares were repurchased under the program at an average price of $10.56 per
share. Shares of common stock in treasury have been accorded the treatment as
if retired. All shares were reissued in connection with the July 1, 1997
merger.
STOCK OPTION PLAN
The Corporation's stock option plan, as amended and restated in April 1997,
authorizes the granting of incentive and nonqualified stock options, tandem
preciation rights, restricted stock and performance share grants to key
employees. Aggregate grants under the plan may not exceed 3,000,000 shares
within any six year period and are limited annually to 3% of the Corporation's
outstanding common stock as of the first day of the year, plus any unused shares
that first become available for grants in the prior year. Stock options
outstanding under the plan were granted at a price not less than the fair market
value of the shares on the date of grant.
Replacement options may be granted upon exercise of a nonqualified stock
option by payment of the exercise price with shares of the Corporation's common
stock. A replacement option provides the employee with a new option to
purchase the number of shares surrendered at an option price equal to the fair
market value of the Corporation's common stock on the date the underlying
nonqualified stock option is exercised. During 1997, 1996 and 1995, 167,705,
215,397, and 253,391 shares, respectively, were surrendered by employees for
payment to the Corporation for stock option exercises for which an equal number
of replacement options were granted.
Options may be granted until January 16, 2002. The options terminate ten
years from the date of grant and are exercisable beginning six months from the
date of grant or for certain options, granted since April 1992, are exercisable
subject to a predetermined option vesting schedule based on achievement of
certain return on average asset targets. As of
Page 33
<PAGE> 36
December 31, 1997, 334,452 options were not exercisable subject to future
achievement of the performance targets. Canceled or expired options become
available for future grants.
The Corporation has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options as permitted by
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation." Under APB 25, no compensation expense is recognized
by the Corporation because the exercise price of the stock options equals the
market price of the underlying stock on the date of grant. Although Statement
123 requires certain proforma disclosures regarding net income and earnings per
share, the effect of applying the fair value method of Statement 123 to the
Corporation's stock option awards results in net income and earnings per share
that are not materially different from amounts reported.
A summary of stock option transactions under the plan for 1997, 1996 and
1995 follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Options Option Price
---------------------- ----------------------
Available Per Share
for Grant Outstanding Range Average
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
January 1, 1995 971,202 1,689,983 $6.583-18.167 $11.09
Authorized 206,195 --- --- ---
Granted (582,341) 582,341 17.333-20.452 18.15
Exercised --- (561,719) 6.583-17.583 11.79
Canceled 8,295 (8,295) 14.420-17.333 17.06
-------- ---------- ------------- -------
December 31, 1995 603,351 1,702,310 6.583-20.542 13.24
Authorized 275,700 --- --- ---
Granted (523,047) 523,047 18.792-20.583 19.64
Exercised --- (417,297) 6.583-20.542 13.86
Canceled 8,955 (8,955) 17.333-19.583 17.71
-------- ---------- ------------- -------
December 31, 1996 364,959 1,799,105 6.583-20.583 14.93
Authorized 251,401 --- --- ---
Granted (558,005) 558,005 20.750-22.000 21.73
Exercised --- (477,055) 6.583-20.583 14.91
Canceled 13,938 (13,938) 17.333-19.583 18.70
-------- ---------- ------------- -------
December 31, 1997 72,293 1,866,117 6.583-22.000 16.95
- ----------------- ======== ==========
</TABLE>
The following table summarizes information on stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------- ---------------------------------
Weighted-Average Weighted-Average Weighted-Average
Range Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$6.583-11.770 473,856 2.6years $ 8.45 473,856 $ 8.45
14.420-22.000 1,392,261 7.3 19.84 1,057,809 19.59
----------- -----------
6.583-22.000 1,866,117 6.1 16.95 1,531,665 16.15
=========== ===========
</TABLE>
NOTE 16. COMMITMENTS AND CONTINGENT LIABILITIES
The Consolidated Financial Statements do not reflect various loan
commitments (unfunded loans and unused lines of credit) and letters of credit
originated in the normal course of business. Loan commitments are made to
accommodate the financial needs of clients. Generally, new loan commitments do
not extend beyond 90 days and unused lines of credit are reviewed at least
annually. Letters of credit guarantee future payment of client financial
obligations to third parties. They are issued primarily for services provided
or to facilitate the shipment of goods, and generally expire within one year.
Page 34
<PAGE> 37
Both arrangements have essentially the same level of credit risk as that
associated with extending loans to clients and are subject to the Corporation's
normal credit policies. Inasmuch as these arrangements generally have fixed
expiration dates or other termination clauses, most expire unfunded and do not
necessarily represent future liquidity requirements. Collateral is obtained
based on management's assessment of the client and may include receivables,
inventories, real property and equipment.
Amounts available to clients under loan commitments and letters of credit
follow:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31,
----------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Loan commitments:
Commercial $ 746,926 $ 708,719
Real estate construction 32,883 33,718
Real estate mortgage 25,023 24,794
Credit card and home equity
credit lines 356,535 316,785
Other consumer 21,333 20,751
---------- ----------
Total $1,182,700 $1,104,767
========== ==========
Standby letters of credit $ 32,541 $ 27,759
- --------------------------------------------------------------------------------
</TABLE>
The Corporation and its subsidiaries are parties to litigation arising in
the ordinary course of business. Management believes that the aggregate
liability, if any, resulting from these proceedings would not have a material
effect on the Corporation's consolidated financial position.
NOTE 17. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Financial Accounting
Standards Board Statement No. 107, "Disclosure About Fair Value of Financial
Instruments" ("SFAS 107"). Where quoted market prices are not available, as is
for a significant portion of the Corporation's financial instruments, the fair
values are based on estimates using present value or other valuation techniques.
These techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Accordingly, the derived
fair value estimates presented herein cannot be substantiated by comparison to
independent markets and are not necessarily indicative of the amounts the
Corporation could realize in a current market exchange.
In addition, the fair value estimates are based on existing on- and
off-balance sheet financial instruments without attempting to estimate the
value of anticipated future business and the value of assets and liabilities
that are not considered financial instruments. For example, the Corporation
has a substantial trust department that contributes net fee income annually.
The trust department is not considered a financial instrument and its value has
not been incorporated into the fair value estimates. Other significant assets
and liabilities that are not considered financial assets or liabilities include
the Corporation's brokerage network, net deferred tax asset, premises and
equipment, goodwill and deposit based intangibles. In addition, tax
ramifications related to the recognition of unrealized gains and losses such as
those within the investment securities portfolio can also have a significant
effect on estimated fair values and have not been considered in the estimates.
Accordingly, the aggregate fair value amounts do not represent the underlying
value of the Corporation.
The estimated fair values of the Corporation's financial instruments
follow:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 December 31, 1996
--------------------- ---------------------
CARRYING ESTIMATED Carrying Estimated
(in thousands) AMOUNT FAIR VALUE Amount Fair Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and money market investments $ 180,573 $ 180,600 $ 200,910 $ 200,900
Investment securities 575,382 575,400 717,058 717,100
Net loans(1) 3,458,024 3,525,600 3,140,470 3,177,300
Financial liabilities:
Deposits 3,694,346 3,699,200 3,598,751 3,608,100
Short-term borrowings 174,866 174,900 176,805 176,800
Long-term debt 108,165 108,600 86,826 87,000
Off-balance sheet financial instrument liabilities:
Loan commitments --- 1,614 --- 1,180
Standby and commercial letters of credit --- 173 --- 127
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes lease financing which for purposes of SFAS 107 disclosure is not
considered a financial instrument.
Page 35
<PAGE> 38
The various methods and assumptions used by the Corporation in estimating
fair value for its financial instruments are set forth below:
CASH AND MONEY MARKET INVESTMENTS
The carrying amounts reported in the balance sheet for cash and money market
investments approximate those assets' fair values because they mature within
six months and do not present unanticipated credit concerns.
INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED AND ASSET-BACKED SECURITIES)
The carrying amounts reported in the balance sheet for investment securities
approximate those assets' fair values as all investment securities are being
classified in the available-for-sale category. SFAS 115 requires securities
carried in the available-for-sale category to be carried at fair value. See
Note 3. The fair values are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
LOANS RECEIVABLE
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
real estate, residential mortgage, credit card, and other consumer. Each loan
category is further segmented into fixed and variable-rate interest types and
for certain categories by performing and nonperforming.
For performing variable-rate loans that reprice frequently (within six
months) and with no significant change in credit risk, fair values are based on
carrying values. Similarly, for credit card loans with no significant credit
concerns and average interest rates approximating current market origination
rates, the carrying amount is a reasonable estimate of fair value.
Fair values of other loans (e.g., fixed-rate commercial, commercial real
estate, residential mortgage and other consumer loans) are estimated by
discounting the future cash flows using interest rates currently being offered
by the Corporation for loans with similar terms and remaining maturities ("new
loan rates"). Management believes the risk factor embedded in the new loan
rates adequately represents the credit risk within the portfolios.
Fair values for nonperforming loans are estimated after giving
consideration to credit risk and estimated cash flows and discount rates based
on available market and specific borrower information. The carrying amount of
accrued interest for all loan types approximates its fair value.
DEPOSIT LIABILITIES
Under SFAS 107, the fair value of demand deposits (e.g., interest and
noninterest checking, passbook savings and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). Fair values for certificates of
deposit are based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for certificates
of similar remaining maturities.
SHORT-TERM BORROWINGS
The carrying amounts of federal funds purchased, securities sold under
agreement to repurchase and other short-term borrowings approximate their fair
values.
LONG-TERM DEBT
The carrying value of the Corporation's variable-rate long-term debt
approximates its fair value. The fair value of its fixed-rate long-term debt
(other than deposits) is estimated using discounted cash flow analyses, based
on the Corporation's current incremental borrowing rates for similar types of
borrowings arrangements.
LOAN COMMITMENTS AND LETTERS OF CREDIT
The fair value of loan commitments and letter of credit guarantees is based on
fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the counterparties' credit standing.
NOTE 18. REGULATORY MATTERS
The Federal Reserve Bank requires the Corporation's banking subsidiaries
to maintain certain noninterest-bearing deposits. These reserve balances vary
depending upon the level of client deposits in the subsidiary banks. During
1997 and 1996, the average reserve balances were $ 28.8 million and $ 43.0
million, respectively.
The bank subsidiaries are also subject to limitations under banking laws
on extensions of credit to members of the affiliate group and on dividends that
can be paid to the Corporation. Generally extensions of credit are limited to
10% to any one affiliate and 20% in aggregate to all affiliates of a subsidiary
bank's capital and surplus (net assets) as defined. Unless prior regulatory
approval is obtained, dividends declared in any calendar year may not exceed
the retained net profit, as defined, of that year plus the retained net profit
of the preceding two years. At January 1, 1998, no additional amounts could be
distributed by the bank subsidiaries to the Corporation without regulatory
approval. Any future earnings will also become
Page 36
<PAGE> 39
available for such dividends.
The Corporation and it's banking subsidiaries are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
specific capital guidelines must be met that involve quantitative measures of
the assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and it's banking subsidiaries to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined), and of
Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1997, that the Corporation and it's banking
subsidiaries meet all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal
Reserve Board categorized the Corporation and it's banking subsidiaries as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Corporation and it's banking subsidiaries
must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes would result in a change.
The Corporation and it's significant subsidiary, Citizens Bank, actual
capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
RISK BASED CAPITAL Actual Purposes Action Provisions
REQUIREMENTS -------------- -------------------- --------------------------
(in thousands) Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CITIZENS BANKING CORPORATION
AS OF DECEMBER 31, 1997:
Total Capital(1) $390,230 11.0% $283,042 > 8.0% $353,803 > 10.0%
- -
Tier I Capital(1) 345,984 9.8 141,521 > 4.0 212,282 > 6.0
- -
Tier I Leverage(2) 345,984 8.0 173,458 > 4.0 216,823 > 5.0
- -
As of December 31, 1996:
Total Capital(1) 357,416 11.1 258,887 > 8.0 323,609 > 10.0
- -
Tier I Capital(1) 318,100 9.8 129,443 > 4.0 194,165 > 6.0
- -
Tier I Leverage(2) 318,100 7.5 169,181 > 4.0 211,476 > 5.0
- -
CITIZENS BANK
AS OF DECEMBER 31, 1997:
Total Capital(1) $388,017 11.7% $266,192 > 8.0% $332,740 > 10.0%
- -
Tier I Capital(1) 346,398 10.4 133,096 > 4.0 199,644 > 6.0
- -
Tier I Leverage(2) 346,398 8.5 163,783 > 4.0 204,728 > 5.0
- -
As of December 31, 1996:
Total Capital(1) 356,633 11.9 240,653 > 8.0 300,816 > 10.0
- -
Tier I Capital(1) 320,161 10.6 120,326 > 4.0 180,490 > 6.0
- -
Tier I Leverage(2) 320,161 8.1 158,916 > 4.0 198,646 > 5.0
- -
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) To risk weighted assets.
(2) To quarterly average assets.
Page 37
<PAGE> 40
NOTE 19. CITIZENS BANKING CORPORATION (PARENT ONLY) STATEMENTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
BALANCE SHEETS
CITIZENS BANKING CORPORATION (PARENT ONLY) December 31,
(in thousands) 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash $ 5 $ 5
Interest-bearing deposit with subsidiary bank 7,000 25,134
Money market investments 1,976 2,043
Loans - commercial paper 2,000 10,000
Investment securities 135 98
Investment in subsidiaries - principally banks 429,015 411,854
Goodwill - net 3,449 4,245
Other assets 3,622 3,515
------------------- --------
TOTAL ASSETS $447,202 $456,894
=================== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Long-term debt $ 32,991 $ 59,685
Other liabilities 4,369 5,188
------------------- --------
Total liabilities 37,360 64,873
Shareholders' equity 409,842 392,021
------------------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $447,202 $456,894
=================== ========
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
CITIZENS BANKING CORPORATION (PARENT ONLY)
- ----------------------------------------------------------------------------------------------
Year Ended December 31,
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries - principally banks $21,483 $56,487 $27,749
Interest from bank subsidiary 657 794 1,413
Service fees from bank subsidiaries 9,467 --- ---
Other 254 860 1,605
------- -------- -------
Total 31,861 58,141 30,767
------- -------- -------
EXPENSES
Interest 2,978 5,594 7,374
Amortization of goodwill 796 796 796
Salaries and employee benefits 9,731 867 764
Service fees paid to subsidiaries 1,339 1,265 1,054
Other noninterest expense 1,723 1,078 949
------- -------- -------
Total 16,567 9,600 10,937
Income before income taxes and equity in
undistributed earnings of subsidiaries 15,294 48,541 19,830
Income tax benefit 2,662 3,257 3,195
Equity in undistributed (dividends in excess of)
earnings of subsidiaries - principally banks 13,552 (9,373) 15,186
------- ------ -------
NET INCOME $31,508 $42,425 $38,211
======= ======= =======
</TABLE>
Page 38
<PAGE> 41
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
CITIZENS BANKING CORPORATION (PARENT ONLY)
Year Ended December 31,
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 31,508 $ 42,425 $ 38,211
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill 796 796 796
Dividends in excess of (equity in undistributed) earnings of
subsidiaries (13,552) 9,373 (15,186)
Other (945) 1,244 (967)
------------ ------- -----------
Net cash provided by operating activities 17,807 53,838 22,854
------------ -------- -----------
INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposit at
subsidiary bank 18,134 4,866 (30,000)
Net (increase) decrease in money market investments 67 12,501 (33)
Purchases of investment securities --- (8) ---
Proceeds from sales and maturities of investment securities 10 136 5,146
Net (increase) decrease in loans 8,000 (10,000) 5,000
Capital contribution to subsidiary --- --- (85,000)
------------ -------- ------------
Net cash provided (used) by investing activities 26,211 7,495 (104,887)
------------ -------- ------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt --- --- 115,000
Principal reductions in long-term debt (26,694) (41,194) (19,072)
Cash dividends paid (19,286) (17,890) (16,131)
Proceeds from stock options exercised 1,962 1,523 2,237
Shares acquired for retirement --- (3,772) ---
------------ -------- ------------
Net cash provided (used) by financing activities (44,018) (61,333) 82,034
------------ -------- ------------
Net increase in cash --- --- 1
Cash at beginning of year 5 5 4
------------ -------- ------------
Cash at end of year $ 5 $ 5 $ 5
============ ======== ============
</TABLE>
Page 39
<PAGE> 42
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS CITIZENS BANKING CORPORATION
We have audited the accompanying consolidated balance sheet of Citizens Banking
Corporation and subsidiaries as of December 31, 1997 and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the year ended December 31, 1997. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Citizens Banking
Corporation and subsidiaries at December 31, 1997 and the consolidated results
of their operations and their cash flows for the year ended December 31, 1997,
in conformity with generally accepted accounting principles.
We previously audited and reported on the consolidated balance sheet at
December 31, 1996 and the related consolidated statements of income, changes in
shareholders' equity, and cash flows of Citizens Banking Corporation and
subsidiaries for the each of the two years in the period ended December 31,
1996 prior to their restatement for the 1997 pooling of interests as described
in Note 2. The contribution of Citizens Banking Corporation to total assets,
revenues, and net income represented 81%, 82%, and 88% of the 1996 restated
totals. Financial statements of the other pooled company included in the 1996
and 1995 restated consolidated statements were audited and reported on
separately by other auditors. We also have audited, as to combination only,
the accompanying consolidated balance sheet as of December 31, 1996 and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the two years in the period ended December 31, 1996,
after restatement for the 1997 pooling of interests; in our opinion, such
consolidated financial statements have been properly combined on the basis
described in Note 2 to the consolidated financial statements.
/s/ ERNST & YOUNG LLP
Detroit, Michigan
January 15, 1998
Page 40
<PAGE> 43
REPORT OF MANAGEMENT
MANAGEMENT'S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
Management is responsible for the preparation of the consolidated
financial statements and all other financial information appearing in this
Annual Report. The Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles.
SYSTEM OF INTERNAL CONTROLS
The Corporation maintains a system of internal controls designed to
provide reasonable assurance that assets are safe-guarded and that the
financial records are reliable for preparing Consolidated Financial Statements.
The selection and training of qualified personnel and the establishment and
communication of accounting and administrative policies and procedures are
elements of this control system. The effectiveness of the internal control
system is monitored by a program of internal audit and by independent certified
public accountants ("independent auditors").
Management recognizes that the cost of a system of internal controls
should not exceed the benefits derived and that there are inherent limitations
to be considered in the potential effectiveness of any system. Management
believes the Corporation's system provides the appropriate balance between
costs of controls and the related benefits.
AUDIT COMMITTEE OF THE BOARD
The Audit Committee of the Board of Directors, comprised entirely of
outside directors, recommends the independent auditors who are engaged upon
approval by the Board of Directors. The committee meets regularly with the
internal auditor and the independent auditors to review timing and scope of
audits and review audit reports. The internal auditor and the independent
auditors have free access to the Audit Committee.
INDEPENDENT AUDITORS
The Consolidated Financial Statements in this Annual Report have been
audited by the Corporation's independent auditors, Ernst & Young LLP, for the
purpose of determining that the Consolidated Financial Statements are free of
material misstatement. Their audit considered the Corporation's internal
control structure to the extent necessary to determine the scope of their
auditing procedures.
JOHN W. ENNEST ROBERT J. VITITO
John W. Ennest Robert J. Vitito
Vice Chairman, President and Chief Executive Officer
Chief Financial Officer and Treasurer
Page 41
<PAGE> 1
FORM 10-K
EXHIBIT 21
SUBSIDIARIES OF
CITIZENS BANKING CORPORATION
<TABLE>
<CAPTION>
Jurisdiction or
Incorporation of
Organization
------------------
<S> <C>
Direct Bank Subsidiaries (all wholly owned)
Citizens Bank Michigan
Citizens Bank - Illinois, N.A. National Association
Indirect Nonbank Subsidiaries (all wholly owned)
Citizens Commercial Leasing Corporation Michigan
Lakeshore Insurance Agency, Inc. (not active) Michigan
CB Financial Services, Inc. Michigan
Citizens Title Services, Inc. Michigan
Citizens Bank Mortgage Corporation Michigan
</TABLE>
<PAGE> 1
FORM 10-K
EXHIBIT 23
CONSENTS OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in (1) the Registration Statement
(Form S-8 No. 33-28354 dated April 26, 1989), pertaining to the Citizens Banking
Corporation Amended and Restated Section 401(k) Plan; (2) the Registration
Statement (Form S-8 No. 33-10007 dated November 26, 1986) pertaining to the
Citizens Banking Corporation Stock Option Plan and the Citizens Banking
Corporation First Amended Stock Option Plan; (3) the Registration Statement
(Form S-8 No. 33-47686 dated May 5, 1992) pertaining to the Citizens Banking
Corporation Second Amended Stock Option Plan; (4) the Registration Statement
(Form S-8 No. 33-61197 dated July 21, 1995) pertaining to the Citizens Banking
Corporation Stock Option Plan for Directors; and (5) the Registration Statement
(Form S-8 No. 333-09455 dated August 2, 1996) pertaining to the Citizens Banking
Corporation Amended and Restated Section 401(k) Plan in the related Prospectus
of our report dated January 15, 1998, with respect to the consolidated financial
statements of Citizens Banking Corporation included in the annual report (Form
10-K) for the year ended December 31, 1997.
/s/ Ernst & Young
Detroit, Michigan
March 24, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 OCT-01-1997
<PERIOD-END> DEC-31-1997 DEC-31-1997
<CASH> 168,351 168,351
<INT-BEARING-DEPOSITS> 246 246
<FED-FUNDS-SOLD> 11,976 11,976
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 575,382 575,382
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 3,541,619 3,541,619
<ALLOWANCE> 45,911 45,911
<TOTAL-ASSETS> 4,439,271 4,439,271
<DEPOSITS> 3,694,346 3,694,346
<SHORT-TERM> 174,866 174,866
<LIABILITIES-OTHER> 52,052 52,052
<LONG-TERM> 108,165 108,165
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