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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, 1998
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
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 $852,687,000 as of March 12, 1999.
The number of shares outstanding of the registrant's Common Stock (No par
value) was 27,620,505 as of March 12, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Citizens Banking Corporation Proxy Statement for its annual
meeting of shareholders to be held April 20, 1999 are incorporated by reference
into Part III.
(Exhibit Index - Pages 13 through 15)
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CITIZENS BANKING CORPORATION
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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Page
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PART I
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Item 1. Business ................................................................................................ 3
Item 2. Properties .............................................................................................. 6
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 7A. Quantitative and Qualitative Disclosures About Market Risk .............................................. 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, 1998, the Corporation directly or indirectly owned two banking
subsidiaries and four nonbanking subsidiaries and had 2102 full-time equivalent
employees. Additional information related to the subsidiaries at year-end 1998
is provided below.
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Total
Principal Number of Assets Date
Subsidiary Office Offices (in millions) Acquired
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Citizens Bank(1) Flint, MI 120 $4,264.9 01/01/1982
Citizens Bank - Illinois, N.A. Berwyn, IL 4 239.5 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; and
Citizens Title Services. 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 124 banking
offices. The offices are located along the Interstate 75 corridor within the
State of Michigan from northern suburban Detroit to the Gaylord area as well as
western suburban Detroit and central, northwestern and southwestern Michigan.
The Illinois bank serves the western suburban market of Chicago.
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. 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.
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
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buyers and sellers of residential and commercial mortgage properties including
those occurring due to loan refinancing.
Lines of Business
The performance of the Corporation is monitored by an internal
profitability measurement system that provides line of business results and key
performance measures. The Corporation operates along the following business
lines: Commercial Banking, Retail Banking, Financial Services, and all other.
Additional information regarding the Corporation's business lines is
incorporated herein by reference from Exhibit 13 of this document on page 4 and
on pages 34 and 35 under the captions, "Lines of Business Reporting" and "Note
17. Lines of Business", respectively.
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 78.8% 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 35.3% of the 1998
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 9 to 11 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.
Supervision and Regulation
Citizens Banking Corporation is subject to supervision and regulation by
the Federal Reserve Board
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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 14, 15 and 36 under the captions, "Liquidity and Debt
Capacity" and "Note 18. 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 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.
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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 1999, banks
maintaining the "well capitalized" designation will again have no FDIC insurance
premium requirements except for a special assessment of approximately 1.2 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
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.
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 124 banking offices. Of these, 37 are leased and the remaining are
owned. Rent expense on the leased properties totaled $1,933,815 in 1998.
The banking offices are located in various communities throughout the
State of Michigan and in the suburbs of Chicago, 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 27 under the caption "Note 7. Premises and
Equipment" of this document.
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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 1998 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 18 under the caption "Table 13. Selected Quarterly
Information" of this document.
The approximate number of shareholders of the Registrant's common stock
is 11,000 as of December 31, 1998. 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 page 36 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 19 of this document.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated by reference from
Exhibit 13 on pages 15 through 17 under the caption "Interest Rate Risk" of this
document.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are incorporated herein by reference from
Exhibit 13 on pages 20 through 40 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 18 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 20, 1999
("1998 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
10 through 12, respectively, of the 1998 Proxy Statement.
Regulation S-K Item 405 disclosure: Appears under the caption "Section
16(a) Beneficial Ownership Reporting Compliance" on page 22 of the 1998
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 Human Resources Committee Report on Executive
Compensation", "Shareholder Return", and "Compensation Committee Interlocks and
Certain Transactions and Relationships" on pages 13 through 22 of the 1998 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 1998 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 22 of the 1998 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,
1998.
(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, 1999
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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, 1999
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Charles R. Weeks Director
/s/Robert J. Vitito President, Chief Executive March 19, 1999
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Robert J. Vitito Officer and Director
/s/John W. Ennest Vice Chairman of the Board, March 19, 1999
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John W. Ennest Chief Financial Officer,
Treasurer and Director
/s/Edward P. Abbott Director March 19, 1999
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Edward P. Abbott
/s/Hugo E. Braun, Jr. Director March 19, 1999
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Hugo E. Braun, Jr.
/s/Jonathan E. Burroughs II Director March 19, 1999
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Jonathan E. Burroughs II
/s/Joseph P. Day Director March 19, 1999
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Joseph P. Day
/s/Lawrence O. Erickson Director March 19, 1999
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Lawrence O. Erickson
/s/Victor E. George Director March 19, 1999
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Victor E. George
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<TABLE>
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Signature Capacity Date
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/s/William J. Hank Director March 19, 1999
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William J. Hank
/s/Stephen J. Lazaroff Director March 19, 1999
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Stephen J. Lazaroff
/s/William F. Nelson, Jr. Director March 19, 1999
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William F. Nelson, Jr.
Director March 19, 1999
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Gerald Schreiber
/s/William C. Shedd Director March 19, 1999
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William C. Shedd
/s/James E. Truesdell, Jr. Director March 19, 1999
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James E. Truesdell, Jr.
/s/Ada C. Washington Director March 19, 1999
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Ada C. Washington
/s/Kendall B. Williams Director March 19, 1999
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Kendall B. Williams
/s/James L. Wolohan Director March 19, 1999
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James L. Wolohan
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CITIZENS BANKING CORPORATION
1998 Annual Report on Form 10-K
EXHIBIT INDEX
(FILED AS PART OF THIS REPORT ON FORM 10-K)
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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 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(b) 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(c) Citizens Banking Corporation Management Incentive Compensation
Program (incorporated by reference from pages 18 and 19 of the
Corporation's Proxy Statement for its 1999 Annual Meeting of
Shareholders under the caption "Management Incentive Plan", file
number 0-10535).
N/A
10(d) 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(e) 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(f) 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
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<TABLE>
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Exhibit EXHIBIT INDEX (continued) 10-KForm
No. Exhibit Form 10-K
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10(g) 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(h) Agreement between Charles R. Weeks and Citizens Banking Corporation to continue as Chairman of
the Board of Directors (incorporated by reference from Exhibit 10(m) of the Corporations
1996 Annual Report on Form 10-K file number 0-10535). N/A
10(i) 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(j) 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(k) 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
10(l) 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(m) Citizens Banking Corporation Third Amended Stock Option Plan (incorporated by reference from
Exhibit 10(r) of the Corporation's 1997 Second Quarter Report on Form 10-Q, file number
0-10535). N/A
10(n) Citizens Banking Corporation Change in Control Agreement
(incorporated by reference form Exhibit 10(s) of the
Corporation's 1997 Annual Report on Form 10-K, file number
0-10535).
N/A
11 Computation of Per Share Earnings (incorporated by reference from Exhibit 13 on page 30 under
the caption "Note 13. Earnings Per Share" of this document).
N/A
13 Citizens Banking Corporation 1998 Annual Report (except as to
portions expressly incorporated herein, said Annual Report is
included only for information).
(1)
21 Subsidiaries of the Corporation
(1)
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
Exhibit EXHIBIT INDEX (continued) 10-KForm
No. Exhibit Form 10-K
- --------- ----------------------------------------------------------------------------------------- Page No.
----------
<S> <C> <C>
23 Consents of Ernst Young LLP (1)
23A Consents of Arthur Andersen LLP
27 Financial Data Schedules (1)
99 Report of Arthur Andersen on CB Financial Corporation's consolidated statements of income,
shareholders's equity and cash flows as of December 31, 1996.
99A 1998 Annual Report on Form 11-K for the Citizens Banking Corporation amended and Restated
Section 401(k) plan. (1)
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.
</TABLE>
15
<PAGE> 1
FORM 10-K
EXHIBIT 13
CITIZENS BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND
CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
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...................................................... 8
Liquidity and Debt Capacity, Interest Rate Risk
and Impact of Inflation................................................. 14
Year Ended December 31, 1997
Compared with 1996...................................................... 19
II. Consolidated Financial Statements.............................................. 20
Consolidated Balance Sheets............................................... 20
Consolidated Statements of Income......................................... 21
Consolidated Statements of Changes
in Shareholders' Equity................................................. 22
Consolidated Statements of Cash Flow...................................... 23
III. Notes to Consolidated Financial Statements..................................... 24
IV. Report of Independent Auditors................................................. 39
V. Report of Management........................................................... 40
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
===================================================================================================================================
TABLE 1. SELECTED FINANCIAL DATA(4)
(in thousands, except per share data) 1998 1997 1996 1995 (1) 1994
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Net interest income $ 197,846 $ 191,848 $ 178,645 $ 167,926 $ 148,006
Provision for loan losses 14,090 15,332 12,126 7,112 5,837
Investment securities gains (losses) 145 (787) 611 281 1,099
Noninterest income 56,107 47,481 47,393 42,405 39,786
Noninterest expense before special charge 158,291 153,427 155,056 150,332 133,767
Special charge, net of tax --- 17,263 --- --- ---
Income taxes 24,932 21,012 17,042 14,957 13,279
Net income before special charge 56,785 48,771 42,425 38,211 36,008
Net income 56,785 31,508 42,425 38,211 36,008
Cash dividends 22,991 19,286 17,890 16,131 14,918
PER COMMON SHARE DATA (3)
Net income:
Basic $ 2.02 $ 1.13 $ 1.52 $ 1.39 $ 1.31
Diluted 1.98 1.11 1.50 1.36 1.29
Diluted before special charge 1.98 1.72 1.50 1.36 1.29
Cash dividends 0.82 0.74 0.67 0.60 0.55
Book value, end of year 15.70 14.61 14.12 13.50 12.12
Market value, end of year 33.75 34.50 21.00 19.83 18.50
AT YEAR END
Assets $ 4,501,409 $ 4,439,271 $ 4,305,973 $ 4,175,544 $ 3,424,087
Loans 3,584,511 3,541,619 3,229,809 2,867,427 2,209,340
Deposits 3,764,356 3,694,346 3,598,751 3,478,268 2,872,967
Long-term debt 130,937 108,165 86,826 110,022 11,775
Shareholders' equity 441,082 409,842 392,021 374,644 332,739
AVERAGE FOR THE YEAR
Assets $ 4,450,293 $ 4,371,509 $ 4,212,380 $ 3,969,702 $ 3,383,403
Earning assets 4,154,693 4,076,185 3,884,446 3,634,095 3,105,736
Loans 3,506,812 3,380,652 3,062,021 2,706,855 2,142,105
Deposits 3,695,310 3,647,302 3,515,498 3,297,528 2,840,894
Interest-bearing deposits 3,097,211 3,081,736 2,950,398 2,750,265 2,359,558
Repurchase agreements and
other short-term borrowings 130,406 178,267 170,916 152,997 145,592
Long-term debt 138,793 90,822 86,788 108,209 16,070
Shareholders' equity 425,301 400,715 381,377 354,224 331,674
FINANCIAL RATIOS
Return on average:(2)
Shareholders' equity 13.85% 7.86% 11.12% 10.79% 10.86%
Earning assets 1.37 0.77 1.09 1.05 1.16
Assets 1.28 0.72 1.01 0.96 1.06
Average shareholders' equity/ave. assets 9.56 9.17 9.05 8.91 9.80
Dividend payout ratio 40.49 61.21 42.17 42.22 41.43
Net interest margin (FTE) 4.91 4.86 4.77 4.80 4.99
Tier I leverage 8.68 7.98 7.52 7.13 9.49
Risk-based capital:
Tier I capital 10.52 9.78 9.83 9.76 13.74
Total capital 11.77 11.03 11.08 11.01 14.98
===================================================================================================================================
</TABLE>
(1) 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.
(2) 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.
(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.
(4) All information presented has been restated to reflect the July 1, 1997
merger with CB Financial Corporation, accounted for as a pooling of
interests.
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, 1998, Citizens Banking Corporation earned $56,785,000 or $1.98 per
share compared with $31,508,000 or $1.11 per share in 1997. The results for 1997
include a 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. Excluding the
special charge, net income for 1997 was $48,771,000 or $1.72 per share. Net
income was up $8,014,000 or $0.26 per share over the prior year (before the
special charge) a 16.4% increase. The corresponding returns on average assets
and equity were 1.28% and 13.35%, respectively, as compared with 0.72% and 7.86%
in 1997 (1.12% and 12.17% before the special charge).
The earnings improvement reflects increased noninterest income and higher
net interest income from growth in earning assets and lower interest expense.
Average shareholders' equity was $425.3 million or 9.56% of total average assets
for 1998, compared with $400.7 million or 9.17% for 1997. 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.
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 1998 from
1997 is presented below. Overall, excluding the special charge in 1997, the
increase in net income reflects improvement in noninterest income from higher
trust fees, mortgage income and other sources and increased net interest income.
Higher levels of earning assets, particularly commercial loans, and a lower cost
of interest bearing liabilities 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 1998
----------------------- ----------------------
(in thousands) 1998 1997 Amount Percent
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $339,880 $335,863 $ 4,017 1.2%
Interest expense 142,034 144,015 (1,981) (1.4)
Net interest income 197,846 191,848 5,998 3.1
Provision for loan losses 14,090 15,332 (1,242) (8.1)
Noninterest income 56,252 46,694 9,558 20.5
Noninterest expense before special charge 158,291 153,427 4,864 3.2
Special charge, net of tax -- 17,263 (17,263) (100.0)
Income taxes 24,932 21,012 3,920 18.7
Net income 56,785 31,508 25,277 80.2
Net income before special charge(1) 56,785 48,771 8,014 16.4
==============================================================================================
</TABLE>
(1) Operating income before 1997 special charge associated with CB Financial
Corporation merger and information technology reorganization.
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>
<CAPTION>
- ------------------------------------------------------------------------
CASH EARNINGS SUMMARY (1)
(in thousands except per
share amounts) 1998 1997 % Change
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Cash income before
special charge $ 60,885 $ 53,290 14.3%
Diluted earnings per share 2.12 1.88 12.8
Book value per share 13.76 12.47 10.3
Return on average assets 1.39% 1.24% 12.1
Return on average equity 16.54 16.03 3.2
========================================================================
</TABLE>
(1) Excludes 1997 special charge of $17,263 associated with CB Financial
Corporation merger and information technology reorganization.
2
<PAGE> 5
===============================================================================
TABLE 2. AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
<TABLE>
<CAPTION>
1998 1997
----------------------------------- ------------------------------
YEAR ENDED DECEMBER 31 AVERAGE AVERAGE AVERAGE AVERAGE
(IN MILLIONS) BALANCE INTEREST(1) RATE(2) BALANCE INTEREST(1) RATE(2)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Money market investments:
Federal funds sold $ 39.2 $ 2.1 5.45 % $ 14.5 $ 0.8 5.57 %
Term federal funds sold and other 9.7 0.5 5.38 5.4 0.3 4.90
Investment securities(3):
Taxable 448.7 28.5 6.35 510.9 31.8 6.23
Nontaxable 144.0 7.6 8.13 163.5 8.7 8.26
Loans(4):
Commercial 1,477.1 123.7 8.51 1,312.1 114.4 8.82
Real estate mortgage 793.3 64.4 8.12 778.0 62.8 8.07
Consumer 1,236.4 113.0 9.14 1,290.5 117.1 9.08
---------- ---------- -------- ---------
Total earning assets(3) 4,148.4 339.8 8.34 4,074.9 335.9 8.39
NONEARNING ASSETS
Cash and due from banks 159.8 145.9
Premises and equipment 72.7 72.8
Other assets 116.2 122.5
Allowance for loan losses (46.8) (44.6)
---------- --------
Total assets $ 4,450.3 $4,371.5
========== ========
INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing demand $ 389.0 6.0 1.54 $ 381.7 6.1 1.61
Savings 1,029.1 27.7 2.69 1,047.5 29.6 2.83
Time 1,679.1 94.3 5.62 1,652.5 93.5 5.66
Short-term borrowings 130.4 6.0 4.60 178.3 8.7 4.87
Long-term debt 138.8 8.0 5.81 90.8 6.1 6.67
---------- ----- -------- -----
Total interest-bearing liabilities 3,366.4 142.0 4.22 3,350.8 144.0 4.30
NONINTEREST-BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 598.1 565.6
Other liabilities 60.5 54.4
Shareholders' equity 425.3 400.7
---------- --------
Total liabilities and shareholders' equity $ 4,450.3 $4,371.5
========== ========
NET INTEREST INCOME $ 197.8 $ 191.9
========== =========
NET INTEREST INCOME AS A
PERCENT OF EARNING ASSETS 4.91 % 4.86 %
================================================================================================================================
<CAPTION>
1996
--------------------------------------
YEAR ENDED DECEMBER 31 AVERAGE AVERAGE
(IN MILLIONS) BALANCE INTEREST(1) RATE(2)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EARNING ASSETS
Money market investments:
Federal funds sold $ 44.9 $ 2.4 5.37 %
Term federal funds sold and other 26.7 1.4 5.07
Investment securities(3):
Taxable 568.0 33.7 5.94
Nontaxable 183.1 9.7 8.20
Loans(4):
Commercial 1,236.3 106.5 8.73
Real estate mortgage 677.6 56.2 8.29
Consumer 1,148.1 102.4 8.92
---------- ----------
Total earning assets(3) 3,884.7 312.3 8.21
NONEARNING ASSETS
Cash and due from banks 164.4
Premises and equipment 77.1
Other assets 125.7
Allowance for loan losses (39.5)
----------
Total assets $ 4,212.4
==========
INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing demand $ 396.6 7.1 1.79
Savings 1,077.3 29.3 2.72
Time 1,476.5 82.8 5.61
Short-term borrowings 170.9 8.0 4.66
Long-term debt 86.8 6.5 7.54
---------- ----------
Total interest-bearing liabilities 3,208.1 133.7 4.17
NONINTEREST-BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 565.1
Other liabilities 57.8
Shareholders' equity 381.4
----------
Total liabilities and shareholders' equity $ 4,212.4
==========
NET INTEREST INCOME $ 178.6
==========
NET INTEREST INCOME AS A
PERCENT OF EARNING ASSETS 4.77 %
============================================================================================
</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
$6,005,000, $6,132,000 and $6,665,000 for the years ended December 31, 1998,
1997, and 1996, 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.
3
<PAGE> 6
LINES OF BUSINESS REPORTING
Citizen's Bank operates along three major lines: commercial banking,
retail banking and financial services. For more information about each line of
business see Note 17. A summary of the net income by each business line for the
last three years is presented below.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Net Income
-----------------------------------
(in thousands) 1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Commercial Banking $ 21,684 $ 17,819 $ 16,912
Retail Banking 29,819 28,548 22,800
Financial Services 3,161 1,366 1,563
Other 2,121 (16,225) 1,150
-------- -------- --------
Total $ 56,785 $ 31,508 $ 42,425
======== ======== ========
=============================================================
</TABLE>
The increase in commercial banking net income in 1998 is due to growth in
overall commercial account relationships, including increased demand deposits,
strong loan growth and expanded cash management services. Retail banking net
income grew in 1998 as a result of higher mortgage banking and related title
insurance revenues and improved pricing strategies on deposit products.
Financial services income improved in 1998 due to growth in trust and investment
advisory services from enhanced pricing strategies and greater sales volumes,
increased brokerage activity and the introduction of new products and services.
Excluding the 1997 special charge, the other category is consistent over all
years.
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 1.8% higher during 1998 compared with 1997.
The composition of average earning assets changed in 1998 as total average loans
increased $126.2 million to 84.5% of average earning assets from 83.0% in 1997.
Average investment securities including money market investments represented
15.5% of average earning assets in 1998 compared with 17.0% in 1997. Total
average interest-bearing liabilities increased 0.5% in 1998 compared to 1997,
while average noninterest-bearing deposits grew by 5.7%.
<TABLE>
<CAPTION>
TABLE 3. ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
- ----------------------------------------------------------------------------------------------------
1998 COMPARED TO 1997 1997 Compared to 1996
----------------------------- ------------------------------
INCREASE (DECREASE) Increase (Decrease)
DUE TO CHANGE IN Net Due to Change in
Year Ended December 31 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:
Federal funds sold $ 1.3 $ -- $ 1.3 $ (1.6) $ 0.1 $ (1.7)
Term federal funds sold 0.2 -- 0.2 (1.1) 0.0 (1.1)
Investment securities:
Taxable (3.3) 0.4 (3.7) (1.9) 1.0 (2.9)
Tax-exempt (1.1) (0.2) (0.9) (1.0) 0.0 (1.0)
Loans 6.8 (4.5) 11.3 29.2 0.1 29.1
------ ------ ------- ------- ------ -------
Total 3.9 (4.3) 8.2 23.6 1.2 22.4
------ ------ ------- ------- ------ -------
Interest Expense:
Deposits:
Demand (0.1) (0.1) -- (1.0) (0.5) (0.5)
Savings (1.9) (2.8) 0.9 0.3 0.1 0.2
Time 0.8 (0.7) 1.5 10.7 0.3 10.4
Short-term borrowings (2.7) (0.8) (1.9) 0.7 0.1 0.6
Long-term debt 1.9 (0.6) 2.5 (0.4) (0.3) (0.1)
------ ------ ------- ------- ------ -------
Total (2.0) (5.0) 3.0 10.3 (0.3) 10.6
------ ------ ------- ------- ------ -------
Net Interest Income $ 5.9 $ 0.7 $ 5.2 $ 13.3 $ 1.5 $ 11.8
====== ====== ======= ======= ====== =======
====================================================================================================
</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.
4
<PAGE> 7
The average yield on earning assets decreased to 8.34% in 1998 from 8.39%
in 1997. The decrease resulted from lower yields principally on commercial loans
and to a lesser extent tax exempt investment securities. Yields on taxable
investment securities, real estate mortgages and consumer loans were higher in
1998, as compared to 1997. Higher interest income due to loan growth was
partially offset by reduced investment securities income as the Corporation
continued to partially fund loan growth with investment assets.
The cost of interest-bearing liabilities decreased eight basis points to
4.22% in 1998 from 4.30% in 1997. This decrease was attributable to lower rates
on all interest-bearing liabilities categories. Lower yields on interest-bearing
liabilities in 1998 more than offset decreased rates on earning assets 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 five basis points to 4.91% in
1998 from 4.86% in 1997.
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 $5.9 million in 1998 with $5.2 million of this due
to volume-related increases primarily attributable to loan growth partially
offset by volume-related decreases in investment securities. In addition, the
lower cost of interest-bearing deposits and both short-term and long-term
borrowings, partially offset by lower yields on commercial loans, resulted in a
favorable net rate-related variance of $700,000 in 1998 over 1997.
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 1999, 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
The allowance for loan losses increased slightly in 1998 to $46.4
million, or 1.30% of total loans from $45.9 million in 1997. The provision for
loan losses decreased 8.1% to $14.1 million in 1998. Net loan charge-offs were
.39% of average loans in 1998 up from .34% in 1997. Gross charge-offs increased
$1.8 million or 11.5% in 1998 primarily as a result of higher consumer loan
losses. A summary of the Corporation's loan loss experience from 1994 through
1998 appears in Table 4.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
TABLE 4. SUMMARY OF LOAN LOSS EXPERIENCE
Year Ended December 31 (in thousands) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses - January 1 $ 45,911 $ 42,166 $ 38,705 $ 28,579 $ 26,164
Allowance of acquired banks -- -- -- 7,235 289
Provision for loan losses 14,090 15,332 12,126 7,112 5,837
CHARGE-OFFS:
Commercial 3,207 2,772 4,460 3,705 3,351
Real estate 266 541 42 69 82
Consumer 13,906 12,272 8,393 4,949 3,434
---------- ---------- ---------- ---------- ----------
Total charge-offs 17,379 15,585 12,895 8,723 6,867
---------- ---------- ---------- ---------- ----------
RECOVERIES:
Commercial 1,212 1,267 1,229 1,664 1,501
Real estate 14 2 16 22 4
Consumer 2,601 2,729 2,985 2,816 1,651
---------- ---------- ---------- ---------- ----------
Total recoveries 3,827 3,998 4,230 4,502 3,156
---------- ---------- ---------- ---------- ----------
Net charge-offs 13,552 11,587 8,665 4,221 3,711
---------- ---------- ---------- ---------- ----------
Allowance for loan losses - December 31 $ 46,449 $ 45,911 $ 42,166 $ 38,705 $ 28,579
========== ========== ========== ========== ==========
Loans outstanding at year-end $3,584,511 $3,541,619 $3,229,809 $2,867,427 $2,209,340
Average loans outstanding 3,506,812 3,380,652 3,062,021 2,706,855 2,142,105
Ratio of allowance for loan losses
to loans outstanding at year-end 1.30% 1.30% 1.31% 1.35% 1.29%
Ratio of net loans charged off as a
percentage of average loans outstanding 0.39 0.34 0.28 0.16 0.17
=============================================================================================================
</TABLE>
5
<PAGE> 8
The allowance for loan losses is divided into two components, allocated
and unallocated. The allowance is based upon an assessment of the losses
inherent in the loan portfolio. Consumer loans are charged-off based on
delinquency status within industry guidelines and commercial loans are evaluated
individually.
The allocated component of the allowance is based on expected losses from
analysis of specific loans and historical loss experience for each category of
loans. The analysis of individual loans is based on a regular review of all
loans and commitments over a fixed dollar amount. The historical loan losses are
determined by loss experience over the past three years and a reserve formula
allocation method which uses factors such as loan quality ratings, independent
assessment and charge-off history. This analysis is performed throughout the
year and is updated based on actual experience and loan reviews.
The unallocated portion of the allowance is determined based on the
Corporation's assessment of general economic conditions, the economic conditions
in the markets in which the Corporation operates, the level and composition of
nonperforming loans and other factors. This analysis involves a higher degree of
uncertainty and considers factors which may not yet be reflected in historical
loss factors used to determine the allocated portion of the allowance. An
allocation of the ending allowance for loan losses by major loan type is
presented in Table 5.
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".
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 5. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES(1)
1998 1997 1996 1995 1994
-------------------- ------------------- ------------------- ------------------- --------------------
LOAN Loan Loan Loan Loan
December 31 (in 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 $13.4 44.5 % $11.1 38.3 % $12.5 38.3 % $12.9 39.9 % $12.5 45.6 %
Real estate construction 0.1 2.5 0.1 2.0 0.1 2.2 0.1 1.8 0.1 1.3
Real estate mortgage 1.9 20.7 2.0 22.0 1.5 22.7 1.2 20.2 1.0 21.9
Consumer 18.8 32.3 16.0 37.7 15.6 36.8 14.0 38.1 7.5 31.2
----- ----- ----- ----- ----- ----- ----- ----- ---- -----
Total allocated 34.2 100.0 % 29.2 100.0 % 29.7 100.0 % 28.2 100.0 % 21.1 100.0 %
===== ===== ===== ===== =====
Unallocated 12.2 16.7 12.5 10.5 7.5
----- ----- ----- ----- -----
Total $46.4 $45.9 $42.2 $38.7 $28.6
===== ===== ===== ===== =====
===================================================================================================================================
</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.
NONINTEREST INCOME
Noninterest income accounted for 22.1% of total operating revenue or 1.3%
of average assets in 1998, compared with 19.6% and 1.1%, respectively, in 1997.
Noninterest income increased 20.5%, or $9.6 million in 1998 as compared to the
prior year. This increase resulted from enhanced trust fees, brokerage and
investment fees, mortgage and other loan income, cash management fees and other
noninterest income. An analysis of the components of noninterest income is
presented in the table below.
Trust fees for personal and employee benefit trust services increased
20.6% in 1998 from 1997. The increase is the result of improved pricing
strategies and higher levels of managed assets. Brokerage and investment fees
increased 35.0% in 1998 over 1997, due to higher sales volume.
Mortgage and other loan income grew by 134.7% in 1998 as compared to
1997. The increase reflects higher servicing release premiums from the sale of
residential mortgages into the secondary market and gains from the sale of the
student loans. Mortgage originations have grown 102% in 1998 due to a focused
sales effort and a favorable interest rate environment. The 31.9% 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 gains of $145,000 on sales of investment
securities during 1998 as compared to net losses of $787,000 during 1997. As
presented in Note 4 to the Consolidated Financial Statements, gross realized
gains on sales of investment securities amounted to $151,000 in
6
<PAGE> 9
1998 while gross realized losses amounted to $6,000. The comparable amounts in
1997 were $98,000 and $885,000, respectively. Proceeds from sales of investment
securities during 1998 totaled $11.6 million or 1.9% of total average security
holdings compared with $171.2 million or 25.3% in 1997. The Corporation sold
certain securities to fund loan growth and reposition the investment portfolio
based on the current rate environment.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
NONINTEREST INCOME
Year Ended
December 31, Changes in 1998
--------------------- -------------------
(in thousands) 1998 1997 Amount Percent
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust fees $18,722 $ 15,527 $ 3,195 20.6%
Service charges
on deposit accounts 12,449 12,342 107 0.9
Bankcard fees 7,780 7,092 688 9.7
Brokerage and
investment fees 2,405 1,782 623 35.0
Mortgage and
other loan income 4,098 1,746 2,352 134.7
ATM network
user fees 2,909 2,956 (47) (1.6)
Cash management
services 2,405 1,823 582 31.9
Title insurance fees 1,137 18 1,119 (1)
Investment securities
gains (losses) 145 (787) 932 118.4
Other 4,202 4,195 7 0.2
------- -------- -------
Total $56,252 $ 46,694 $ 9,558 20.5
======= ======== =======
=============================================================
</TABLE>
(1) Not meaningful.
NONINTEREST EXPENSE
Operating expenses increased 3.2% in 1998 as compared with 1997
(excluding the special charge discussed below). The increase in operating
expenses is primarily attributable to increased data processing service costs as
a result of the 1997 information technology operations reorganization.
The increase in data processing service costs was partially offset by
declines in occupancy, supplies and a minimal 1.3% increase in compensation
expense. Compensation expense has increased only marginally, as normal merit and
promotional salary increases have been offset by a reduction in salary expense
due to the information technology operations reorganization. Telephone expense
was up in 1998 due to higher data communication costs resulting from the
information technology operations reorganization. Intangible asset amortization
expense declined due to the prior year write-down of goodwill and core deposit
intangibles.
In 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 1997, 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 provides 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 also addressed 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 special charge.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
NONINTEREST EXPENSE
Year Ended
December 31, Changes in 1998
---------------------------------------------
(in thousands) 1998 1997 Amount Percent
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and
employee benefits $81,189 $ 80,119 $ 1,070 1.3%
Equipment 12,329 12,327 2 0.0
Occupancy 11,134 11,446 (312) (2.7)
Data processing
services 6,018 1,130 4,888 432.6
Intangible asset
amortization 5,545 6,098 (553) (9.1)
Bankcard fees 5,894 5,152 742 14.4
Telephone 4,161 3,440 721 21.0
Postage
and delivery 4,145 4,387 (242) (5.5)
Stationery
and supplies 3,761 4,042 (281) (7.0)
Advertising and
public relations 3,543 3,953 (410) (10.4)
Consulting and other
professional fees 2,805 2,733 72 2.6
Legal, audit and
examination fees 1,955 2,318 (363) (15.7)
Special charge --- 23,734 (23,734) (100.0)
Other 15,812 16,282 (470) (2.9)
------- ------- -----
Total $158,291 $177,161 $(18,870) (10.7)
======== ======== ========
=================================================================
</TABLE>
7
<PAGE> 10
FEDERAL INCOME TAXES
Income tax expense was $24.9 million in 1998, an increase of 18.7% over
the 1997 total of $21.0 million (excluding the tax effect of the special
charge). The increase was due to higher pre-tax earnings and lower tax-exempt
interest income in 1998 as compared with 1997.
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 $4.45 billion for 1998, up $78
million from 1997, primarily due to loan and deposit growth. The ratio of
average earning assets to total average assets improved to 93.4% during 1998
compared to 93.2% for 1997. Average loans comprised 78.8% of total assets during
1998, up from 77.3% in 1997. The ratio of average noninterest-bearing deposits
to total deposits increased to 16.2% in 1998 from 15.5% in 1997.
Interest-bearing deposits comprised 92.0% of total average interest-bearing
liabilities during 1998 unchanged from 1997. Average long and short-term debt
also remained unchanged at 8.0% of average interest-bearing liabilities.
INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
Average investment securities, including money market investments, comprised
15.5% of total average earning assets in 1998, down from 17.0% in 1997. The
decline resulted from the use of the proceeds of investment securities sales and
maturities to fund loan growth. A summary of average investment securities
balances during 1998 and 1997 follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
INVESTMENT SECURITIES
Average Balances(1) Changes in 1998
---------------------- -----------------------
Year Ended December 31 (in thousands) 1998 1997 Amount Percent
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 63,690 $158,757 $(95,067) (59.9)%
Federal agencies:
Mortgage-backed 215,912 132,802 83,110 62.6
Other 134,868 183,151 (48,283) (26.4)
State and municipal:
Taxable 11,178 17,213 (6,035) (35.1)
Tax-exempt 148,353 166,428 (18,075) (10.9)
Other 25,008 17,269 7,739 44.8
-------- -------- --------
Total $599,009 $675,620 $(76,611) (11.3)
======== ======== ========
==============================================================================================
</TABLE>
(1) Average balances reflect the estimated fair value of investment securities.
Average investment in U.S. Treasury securities comprised 10.6% of average
total investment securities during 1998, decreasing from 23.5% in 1997. Average
federal agency mortgage-backed securities, primarily collateralized mortgage
obligations ("CMO's"), increased 62.6% in 1998 as proceeds from the maturities
of U.S. Treasuries and other federal agency securities were used to purchase
these 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 26.6% of total average
investment securities during 1998 as compared with 27.2% in 1997. 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 44.8%.
The increase resulted primarily from the purchase of additional CMO's.
Money market investments, primarily federal funds sold and term federal
funds sold, averaged $48.9 million in 1998, up from $19.9 million in 1997. The
amount of funds invested in these assets is based on the present and anticipated
interest rate environment, liquidity needs and other economic factors.
8
<PAGE> 11
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 6. As of
December 31, 1998, the estimated aggregate fair value of the Corporation's
investment securities portfolio was $6.2 million above amortized cost. At
December 31, 1998 gross unrealized gains were $7.6 million and gross unrealized
losses were $1.4 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>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
TABLE 6. ANALYSIS OF INVESTMENT SECURITIES
U.S. Treasury and
Federal Agency(1) State and Municipal(1),(2)
----------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
(in millions) Cost Value Yield Cost Value Yield
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
MATURITIES AT DECEMBER 31, 1998
DUE WITHIN ONE YEAR $193.0 $193.6 6.22% $ 14.1 $ 14.4 9.92%
ONE TO FIVE YEARS 190.8 191.3 6.39 50.8 52.1 8.10
FIVE TO TEN YEARS 44.6 44.8 6.26 38.2 39.8 8.06
AFTER TEN YEARS 1.0 1.0 7.11 49.7 51.2 7.88
------ ------ ------ ------
TOTAL $429.4 $430.7 6.31 $152.8 $157.5 8.19
====== ====== ====== ======
AVERAGE MATURITY 2.04 yrs. 5.68 yrs.
At December 31, 1997
Total $388.7 $390.0 5.96 $162.4 $166.9 8.23
====== ====== ====== ======
Average maturity 1.92 yrs. 5.06 yrs.
At December 31, 1996
Total $504.6 $502.0 $198.0 $200.9
====== ====== ====== ======
=============================================================================================================================
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Other Total
------------------------ -----------------------------------------------------------
Amortized Fair Amortized Fair
(in millions) Cost Value Yield Cost Value Yield
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
MATURITIES AT DECEMBER 31, 1998
DUE WITHIN ONE YEAR $ 2.2 $ 1.9 6.35% $209.3 $209.9 6.47%
ONE TO FIVE YEARS 2.5 2.8 6.45 244.1 246.2 6.75
FIVE TO TEN YEARS 0.0 0.0 6.72 82.8 84.6 7.09
AFTER TEN YEARS 20.4 20.6 7.08 71.1 72.8 7.64
----- ----- ------ ------
TOTAL $25.1 $25.3 6.95 $607.3 $613.5 6.80
===== ===== ====== ======
AVERAGE MATURITY 1.36 yrs.(3) 2.88 yrs.
At December 31, 1997
Total $18.3 $18.5 7.12 $569.4 $575.4 6.72
===== ===== ====== ======
Average maturity 3.37 yrs. 2.85 yrs.
At December 31, 1996
Total $14.1 $14.2 $716.7 $717.1 6.49
===== ===== ====== ======
===========================================================================================================================
</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.
(3) Average maturity information excludes Federal Reserve and Federal Home Loan
Bank stocks with no stated maturity.
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 Gaylord area as well as western suburban Detroit, central, northwestern and
southwestern 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 7.
Total loans increased $42.9 million in 1998 with average loans comprising
84.5% of total average earning assets during 1998, as compared with 82.9% during
1997. Increased demand for business loans in the Corporation's local markets and
improved economic conditions expanded the average commercial and commercial real
estate loan portfolio 12.6% in 1998 from 1997 levels. Average consumer loan
balances decreased to $1.236 billion in 1998, or 4.2% over 1997, due to higher
repayments in the Corporation's home equity and vehicle loan portfolios. Average
residential mortgage loan balances increased $15.3 million or 2.0% in 1998, from
$778.0 million in 1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TABLE 7. LOAN PORTFOLIO
December 31 (in millions) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $1,114.2 $ 967.9 $ 831.3 $ 740.2 $ 649.1
Real estate commercial 479.9 387.0 393.1 403.3 357.5
Real estate construction 89.6 71.0 71.1 53.3 29.2
Real estate mortgage 741.4 779.6 744.6 579.2 484.1
Consumer 1,159.4 1,336.1 1,189.7 1,091.4 689.4
-------- -------- -------- -------- --------
Total $3,584.5 $3,541.6 $3,229.8 $2,867.4 $2,209.3
======== ======== ======== ======== ========
================================================================================
</TABLE>
9
<PAGE> 12
NONPERFORMING ASSETS
A five-year history of nonperforming assets is presented in Table 8.
Nonperforming assets are comprised of nonaccrual loans, loans 90 days past due
and still accruing, restructured loans and repossessed assets. Nonperforming
assets totaled $24.3 million as of December 31, 1998, a decrease of 2.9% from
the year-end 1997 balance of $25.0 million. As a percentage of total assets,
nonperforming assets declined to 0.54% at December 31, 1998, from 0.56% at
December 31, 1997. The decline resulted from the Corporation's continued
management of loan portfolio quality and favorable economic conditions.
In 1998 consumer loans represented 38.1% of nonperforming loans, an
increase from 28.1% in 1997. The consumer portfolio is composed of automobile,
personal, marine, home equity and bankcard loans of which automobile and home
equity comprise 75.3% of the portfolio. The increase in nonperforming consumer
loans is due primarily to higher delinquencies on automobile loans and increased
personal bankruptcies.
One to four family residential home loans comprise the majority of the
real estate mortgage balances. The Corporation's commercial real estate
portfolio represents 13.4% of total loans at December 31, 1998 as compared with
10.9% at year end 1997. Within this portfolio, nonperforming loans represented
12.7% of total nonperforming loans at December 31, 1998. 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.
Nonperforming commercial loans were 31.1% of total nonperforming loans at
December 31, 1998, compared with 43.6% in 1997. The decrease in nonperforming
commercial loans is due to favorable economic factors which have allowed certain
previously nonperforming loans to return to current status or payoff.
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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
TABLE 8. NONPERFORMING ASSETS AND PAST DUE LOANS
December 31 (in thousands) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
NONPERFORMING LOANS(1),(2)
<S> <C> <C> <C> <C> <C>
Nonaccrual
Less than 30 days past due $ 2,016 $ 5,128 $ 5,555 $ 4,794 $ 5,203
From 30 to 89 days past due 1,641 2,021 1,370 828 1,421
90 or more days past due 18,134 12,840 12,856 14,593 12,595
------- ------- ------- ------- -------
Total 21,791 19,989 19,781 20,215 19,219
90 days past due and still accruing 801 1,185 1,874 849 1,577
Restructured(1) 114 446 502 502 299
------- ------- ------- ------- -------
Total nonperforming loans 22,706 21,620 22,157 21,566 21,095
OTHER REPOSSESSED ASSETS ACQUIRED 1,547 3,348 3,118 3,067 3,113
------- ------- ------- ------- -------
Total nonperforming assets $24,253 $24,968 $25,275 $24,633 $24,208
======= ======= ======= ======= =======
Nonperforming assets as a percent of total loans
plus other repossessed assets acquired 0.68% 0.70% 0.78% 0.86% 1.09%
Nonperforming assets as a percent of total assets 0.54 0.56 0.59 0.59 0.71
NONPERFORMING LOANS BY TYPE
Commercial $ 7,070 $ 9,435 $13,299 $15,592 $18,137
Real Estate Mortgage 6,995 6,103 4,273 2,688 1,425
Consumer 8,641 6,082 4,585 3,286 1,533
------- ------- ------- ------- -------
Total $22,706 $21,620 $22,157 $21,566 $21,095
======= ======= ======= ======= =======
- ----------------------------------------------------------------------------------------------------------------------------
</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 1998 for nonaccrual
and restructured loans, as of December 31, 1998, assuming interest had been
accrued throughout the year in accordance with original terms was $1.946
million. The comparable 1997 and 1996 totals were $1.861 million, and $1.702
million, respectively. Interest collected on these loans and included in
income was $1.247 million in 1998, $0.965 million in 1997 and $0.913 million
in 1996. Therefore, on a net basis, total income foregone due to these loans
was $0.699 million in 1998, $0.896 million in 1997 and $0.789 million in
1996.
10
<PAGE> 13
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, 1998, such loans amounted to $14.5 million or 0.4% of total
loans compared with $22.0 million or 0.6% of total loans as of December 31,
1997. These loans are primarily commercial and commercial real estate loans made
in the normal course of business and do not represent a concentration in any one
industry. Collectively, these loans and the nonperforming assets in Table 8
represent 1.0% of total loans as of December 31, 1998 decreasing from 1.2% as of
December 31, 1997.
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 8 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, 1998, loans considered to be impaired totaled $15.2
million (of which $9.3 million were on a nonaccrual basis). Included within this
amount is $8.8 million of impaired loans for which the related allowance for
loan losses is $1.5 million and $6.4 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, 1998 was
approximately $17.9 million. For the year ended December 31, 1998, the
Corporation recognized interest income of $0.9 million which included $0.4
million of interest income recognized using the cash basis method of income
recognition.
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.
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 1998, 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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
TABLE 9. AVERAGE DEPOSITS
1998 1997 1996
-------------------- --------------------- --------------------
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 $ 598.1 -- $ 565.6 -- $ 565.1 --
Interest-bearing demand 389.0 1.54% 381.7 1.61% 396.6 1.79%
Savings 1,029.1 2.69 1,047.5 2.83 1,077.3 2.72
Time 1,679.1 5.62 1,652.5 5.66 1,476.5 5.61
--------- --------- ---------
Total $ 3,695.3 3.46 $ 3,647.3 3.54 $ 3,515.5 3.39
========= ========= =========
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
DEPOSITS
The Corporation's average deposit balances and rates for the past three years
are summarized in Table 9. Total average deposits were 1.3% higher in 1998 as
compared with 1997. Deposit growth was derived primarily from
noninterest-bearing demand accounts which increased 5.7% from 1997 average
balances. The increase is due to growth in overall commercial account
relationships, including demand deposits, loans and sweep accounts. As of
December 31, 1998, certificates of deposits of $100,000 or more accounted for
approximately 11.9% of total deposits compared with 12.4% as of December 31,
1997. The maturities of these deposits are summarized in Table 10.
<TABLE>
<CAPTION>
- --------------------------------------------------------
TABLE 10. MATURITY OF TIME CERTIFICATES OF
DEPOSIT OF $100,000 OR MORE
December 31,
(in thousands) 1998
- --------------------------------------------------------
<S> <C>
Three months or less $ 228,358
After three but within six months 84,210
After six but within twelve months 63,300
After twelve months 72,891
---------
Total $ 448,759
=========
========================================================
</TABLE>
The Corporation gathers deposits primarily from the local markets of its
banking subsidiaries and has not relied on brokered deposits for any significant
funding. At December 31, 1998, the Corporation had approximately $14.9 million
in brokered deposits as an alternative source of funding. These brokered
deposits mature in July, 2001. 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 $130.4
million or 3.9% of total average interest-bearing liabilities during 1998
compared with $178.3 million or 5.3% during 1997. Long-term debt accounted for
$138.8 million or 4.1% of average interest-bearing funds during 1998, increasing
from $90.8 million in 1997.
In 1998 and 1997, the Corporation's Michigan subsidiary originated five
long-term borrowings with the Federal Home Loan Bank for a total of $117.6
million. The interest rates on the borrowings range from 4.86% to 5.77% with
original maturities from one to ten years.
The Corporation's Parent company maintains an amortizing revolving credit
facility with an unused commitment at December 31, 1998 of $36 million. The
outstanding balance at December 31, 1998 of $13 million currently has an
interest rate of 6.76% and will reprice in 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, 1998.
A summary of long-term debt balances as of December 31, 1998 and 1997
appears in Note 10 to the Consolidated Financial Statements.
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
------------------
"Well December 31,
------------------------
Required Capitalized" 1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Risk based:
Tier I capital 4.00% 6.00% 10.52% 9.78% 9.83%
Total capital 8.00 10.00 11.77 11.03 11.08
Tier I leverage 4.00 5.00 8.68 7.98 7.52
=================================================================
</TABLE>
The Corporation declared cash dividends of $0.82 per share in 1998, an
increase of 10.8% over 1997 dividends of $0.74 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.
In May, 1998 the Corporation initiated a new stock repurchase program.
The program allows the Corporation to purchase up to 600,000 shares for treasury
to satisfy shares issued upon the exercise of stock options. A total of 209,300
shares have been purchased under this program at an average price of $33.36 per
share as of December 31, 1998. A total of 100,890 of these shares have been
reissued for exercise of stock options. On January 15, 1999 the Corporation
initiated a second stock repurchase program to provide for purchases of up to
1,400,000 shares of its common stock, or approximately 5% of the outstanding
shares. The Corporation currently anticipates that such purchases will occur
during 1999. A previous stock repurchase program, initiated in November 1987,
was formally rescinded by Citizens' Board of Directors on January 27, 1997, 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131 "Disclosure about Segments
12
<PAGE> 15
of an Enterprise and Related Information". This statement requires disclosure of
financial and descriptive information about a company's operating segments in
annual and interim financial reports issued to shareholders. The Corporation
adopted this statement for year-end 1998 reporting. These disclosure
requirements had no impact on financial position or results of operations. See
Note 17 for further information on Lines of Business reporting.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for hedging activities and for derivative instruments,
including certain derivative instruments embedded in other contracts. This
statement requires a company to recognize all derivatives as either assets or
liabilities in its balance sheet and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
fair value, cash flow, or foreign currency hedge. The accounting for changes in
the fair value of a derivative (i.e., gains and losses) depends on the intended
use of the derivative and the resulting designation. For derivative instruments
not accounted for as hedges, changes in fair value are required to be recognized
in earnings. If the Corporation elects to apply hedge accounting, offsetting
changes in fair value or cash flows of both the derivative and the hedged asset
or liability are recognized in earnings in the same period. Changes in fair
value or cash flow that represent the ineffective portion of a hedge are
required to be recognized in earnings and cannot be deferred. The Corporation is
also required to establish at the inception of the hedge the method it will use
for assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Corporation plans to adopt this Statement effective January 1, 2000. This
statement is not anticipated to have a material impact on the Corporation.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs that utilize two digits
rather than four digits to define years for computer calculations. Any computer
or electronic calculation recognizing a two digit date rather than a four digit
date may incur system failure or miscalculate information when using a date
after December 31, 1999, resulting in potentially serious impairment to business
operations.
In September 1996, the Corporation formed a task force to identify Year
2000 related issues and develop an enterprise-wide strategy to prepare for the
Year 2000, which would encompass in-house systems, service bureaus for
outsourced systems, vendors, customers, and suppliers. The project began with an
assessment of the information technology and non-information technology systems
that required modification for the Year 2000. The Corporation inventoried
hardware and software systems, surveyed all vendors for their Year 2000 status,
identified resources required to resolve the problems, and developed a Year 2000
implementation plan with specific goals and target dates. Further, in 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.
Concurrently, another task force was formed to provide a solution for the
previously planned replacement of the Corporation's core application systems.
The primary objectives of this second task force were (a) to select an
integrated suite of applications that the Corporation could use to leverage its
ability to quickly respond to the demands of its market place and provide fast
track support of the Corporation's strategic initiatives, and (b) to position
the Corporation with the professional expertise and technological resources to
take advantage of new developments in technology and put information to work for
clients and staff members alike. As a result, the Corporation formed an
information technology partnership with M&I Data Services in the third quarter
of 1997. The Corporation completed integrating its primary data processing
systems with those of M&I Data Services in the second quarter of 1998. In the
third quarter of 1998, M&I Data Services upgraded its systems to be Year 2000
compliant and is currently processing the Corporation's core applications on
these compliant systems. The Corporation expects testing of these systems to be
completed in the first quarter of 1999. The application systems run by M&I Data
Services represent approximately 70% of the Corporation's mission critical
systems.
The Corporation believes that it has completed its assessment of the
remaining computer-based systems and applications and non-information technology
systems. The majority of those applications that are not Year 2000 compliant
have been, or will be, upgraded or replaced by new systems. The costs of new
systems have been, or will be, recorded as an asset and amortized. System
assessment and conversion costs to upgrade the remaining noncompliant systems
are expensed as incurred. A significant portion of the costs associated with
making the remaining applications not covered by new systems Year 2000 compliant
do not represent incremental costs to the Corporation, as they are covered under
current maintenance agreements or involve the redeployment of existing
information technology resources. Costs related to the year 2000 issue are
funded through operating cash flows. The Corporation estimates that it will
spend less than $3.0 million for its Year 2000 compliance efforts. Approximately
$2.0 million to $2.5 million of these expenditures is for new hardware and
software and has or will be capitalized. Year 2000 compliance costs expended
through December 31, 1998 were approximately $390,000. These estimates do not
include the cost of the Corporation's previously planned core application
systems replacement
13
<PAGE> 16
which was not accelerated due to the Year 2000 problem.
Currently, the Corporation's remediation efforts are at different phases
of completion. Remediation and testing activities are underway on all of the
Corporation's mission critical information technology and non-information
technology systems and applications. For the Corporation's information
technology exposures, to date the remediation phase is 81% complete (100% of
mission critical applications and 73% of non-mission critical applications). The
Corporation expects to complete software replacement or upgrades in the first
quarter of 1999. Once software is replaced or upgraded for a system, the
Corporation begins implementation and testing. The phases run concurrently for
different systems. To date, the Corporation has implemented 97% and 72% of its
mission critical and non-mission critical remediated systems, respectively, and
completed 48% of its testing. Completion of the implementation and testing
phases for all significant information technology systems is expected by June
30, 1999. The Corporation's exposure to non-information technology systems (i.e.
systems with date sensitive embedded technology requiring Year 2000 upgrades)
relates primarily to the Corporation's operating equipment and facilities (e.g.,
security access and alarm systems, elevators, heating and air conditioning
units, etc.). Completion of the implementation and testing of non-information
technology systems is expected by June 30, 1999.
The Corporation is also addressing the readiness of critical suppliers,
customers, governmental agencies and other third parties that provide services
to or receive services from the Corporation. Primarily, the Corporation is
surveying its suppliers and large customers to assess the extent to which the
Corporation is vulnerable to those third parties' failures to resolve their own
Year 2000 issues. The Corporation has received responses from the majority of
its third party vendors and suppliers, confirming that the third parties'
software systems are Year 2000 compliant or, if not compliant, that these third
parties have an action plan in place to have them compliant by mid 1999. The
testing of mission critical third party software systems is also in progress.
The Corporation is on schedule to have all testing of third party software
systems completed by June 30, 1999. The Corporation is continuing to seek
assurances that the systems of other companies on which the Corporation's
systems rely will be timely converted or modified. Failure of such entities, or
one of their suppliers or customers, to become compliant in a timely manner
could have an adverse effect on the Corporation's results of operations or
financial condition.
As a bank holding company, the Corporation is also exposed to the credit
risk of its loan customers ("borrowers"). To the extent that major borrowers
fail to adequately address Year 2000 issues, the credit worthiness of these
borrowers may deteriorate and adversely impact the Corporation's subsidiary
banks. As a result, the Corporation has identified material borrowers and has
assessed these borrowers' Year 2000 preparedness. The Year 2000 readiness of
material borrowers will be monitored periodically, to assess their Year 2000
compliance and evaluate any further risk to the Corporation.
The Corporation is enhancing its existing business resumption plans to
reflect known Year 2000 issues and is preparing general contingency plans to
address unforeseen Year 2000 issues. These contingency plans involve, among
other actions, manual workarounds and coordination of personnel and resources.
The Corporation has determined that it must rely primarily on its software
vendors to remedy, in a timely manner, any unforeseen situations of its mission
critical systems. There can be no assurance that any plans will fully mitigate
all difficulties. Furthermore, there may be certain mission critical third
parties, such as utilities or telecommunication companies, where alternative
arrangements or other sources are limited or unavailable.
The failure to identify and correct a material Year 2000 issue could
result in an interruption in, or failure of, certain normal business activities
or operations and could materially and adversely affect the Corporation. The
Corporation, however, has identified and assessed its areas of risk related to
the Year 2000 issue and is not aware of any noncompliant system or application
for which a solution is not available or which would impair the Corporation's
business operations. In addition, the Corporation has not, nor does it intend
to, defer any other projects that could have a material impact on its normal
business activities or operations. The Corporation believes that with upgrades
to existing software, new hardware and software purchases, and the conversion of
the Corporation's core application systems to M&I Data Services Year 2000
compliant systems, the Year 2000 issue will not pose significant operational
disruptions. Further, the additional costs to be incurred are not expected to be
material to the Corporation's results of operations, liquidity, financial
condition or capital resources.
The anticipated costs and projected dates for completion of the
Corporation's Year 2000 projects, were based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. Other
unanticipated Year 2000 issues could arise and there can be no assurance that
these estimates will be achieved and actual results could differ from those
anticipated. These unanticipated issues may include, but are not limited to, the
ability to identify and correct all noncompliant systems and applications, the
ability of third parties to become Year 2000 compliant, 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
14
<PAGE> 17
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
including but not limited to the Federal Home Loan Bank. 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 1998, the Corporation continued its strategy to operate at
lower levels of liquidity, thereby improving the asset mix, resulting in
increased net interest income. The Corporation experienced no liquidity or
operational problems as a result of its liquidity levels. 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>
- -----------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Average loans to deposits 94.9 % 92.7 % 87.1 %
Liquid assets to volatile
funding 46.0 34.5 74.0
Core funding to total funding 88.8 88.1 89.4
- -----------------------------------------------------------
</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 $32.5 million and $32.6 million during 1998 and 1997,
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 1998, the Parent company received
$48.6 million in dividends from subsidiaries and paid $23.0 million in dividends
to its shareholders. The amount of the upstream dividends increased $27.1
million in 1998 from $21.5 million 1997. The increased dividend was attributable
to higher subsidiary bank income in 1998 over 1997, primarily because of the
special charge in 1997. The increase in the dividend to the parent still allowed
the subsidiary banks to maintain sufficient capital to be designated
well-capitalized. As discussed in Note 18 to the Consolidated Financial
Statements, approximately $21.7 million was available as of January 1, 1999 for
payment to the Parent company as dividends by the Corporation's banking
subsidiaries without further regulatory approval. Amounts earned by subsidiaries
in 1999 will 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 29.7% as of December
31, 1998 compared to 26.4% in 1997. Changes in 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, 1998 and December 31, 1997.
As shown, the Corporation's interest rate risk position at December 31,
1998 is well balanced in the less than one year time frame with rate sensitive
assets exceeding rate sensitive liabilities by $10.6 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 non-contractual 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
15
<PAGE> 18
analysis, management utilizes simulation modeling as its primary tool to
evaluate the impact of changes in interest rates and balance sheet strategies.
Management uses these simulations to develop strategies that can limit interest
rate risk and provide liquidity to meet client loan demand and deposit
preferences.
<TABLE>
<CAPTION>
==============================================================================================================================
Table II Interest Rate Sensitivity TOTAL
1 2 - 3 4 - 6 7 - 12 WITHIN 1 - 5 Over
(dollars in millions) Month Months Months Months 1 YEAR Years 5 Years Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31,1998
RATE SENSITIVE ASSETS(3)
Loans and leases $ 1,084.1 $ 141.9 $ 200.1 $ 318.8 $ 1,744.9 $ 1,387.4 $ 452.2 $ 3,584.5
Investment securities 49.0 31.9 58.3 75.9 215.1 243.9 154.5 613.5
Short-term investments 26.2 -- -- -- 26.2 -- -- 26.2
----------- --------- --------- --------- ----------- ----------- --------- -----------
Total $ 1,159.3 $ 173.8 $ 258.4 $ 394.7 $ 1,986.2 $ 1,631.3 $ 606.7 $ 4,224.2
=========== ========= ========= ========= =========== =========== ========= ===========
RATE SENSITIVE LIABILITIES
Deposits(2) $ 239.6 $ 365.7 $ 473.0 $ 652.3 $ 1,730.6 $ 1,209.8 $ 187.9 $ 3,128.3
Short-term borrowings 124.3 -- -- -- 124.3 -- -- 124.3
Long-term debt -- 63.0 0.1 57.6 120.7 10.1 0.1 130.9
----------- --------- --------- --------- ----------- ----------- --------- -----------
Total $ 363.9 $ 428.7 $ 473.1 $ 709.9 $ 1,975.6 $ 1,219.9 $ 188.0 $ 3,383.5
=========== ========= ========= ========= =========== =========== ========= ===========
Period GAP(1) $ 795.4 $ (254.9) $ (214.7) $ (315.2) $ 10.6 $ 411.4 $ 418.7 $ 840.7
Cumulative GAP 795.4 540.5 325.8 10.6 422.0 840.7
Cumulative GAP to
total assets 17.67% 12.01% 7.24% 0.24% 0.24% 9.37% 18.68% 18.68%
Multiple of rate sensitive
assets to liabilities 3.19 0.41 0.55 0.56 1.01 1.34 3.23 1.25
===============================================================================================================================
DECEMBER 31,1997
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 $474 million in the less than one year category and $995
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.
16
<PAGE> 19
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, 1998 suggest
that the Corporation could expect net interest income to increase by $2.3
million (if asset and liability balances remain static and interest rates
gradually decline by 200 basis points over the next twelve months) and, to
increase by $600,000 (if asset and liability balances remain static and interest
rates gradually increase by 200 basis points over the next twelve months) from
1998 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 earning 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 $ 767.1 $ 701.1 $ 125.9 $ 1,594.1
Real estate construction 89.6 -- -- 89.6
-------- -------- -------- ----------
Total $ 856.7 $ 701.1 $ 125.9 $ 1,683.7
======== ======== ======== ==========
Loans above:
With floating interest rate $ 562.2 $ 156.8 $ 58.0 $ 777.0
With predetermined
interest rates 294.5 544.3 67.9 906.7
-------- -------- -------- ----------
Total $ 856.7 $ 701.1 $ 125.9 $ 1,683.7
======== ======== ======== ==========
- -------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 13. SELECTED QUARTERLY INFORMATION
1998 1997
------------------------------------------- --------------------------------------------------
(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 $83,748 $ 85,455 $ 85,470 $85,207 $ 85,992 $ 85,648 $ 83,996 $ 80,227
Interest expense 34,176 35,419 36,008 36,431 36,908 36,903 35,858 34,346
Net interest income 49,572 50,036 49,462 48,776 49,084 48,745 48,138 45,881
Provision for loan losses 3,560 3,510 3,510 3,510 3,135 5,245 3,742 3,210
Investment securities gains (losses) 42 49 4 50 25 (755) (33) (24)
Noninterest income 14,514 14,689 13,963 12,941 12,115 12,422 11,575 11,369
Noninterest expense 39,131 40,269 40,199 38,692 37,475 61,340 (2) 39,729 38,617
Net income (loss) 14,991 14,589 13,683 13,522 14,255 (4,951) (2) 11,315 10,889
PER SHARE OF COMMON STOCK(3)
Net income (loss):
Basic 0.53 0.52 0.49 0.48 0.51 (0.18) (2) 0.41 0.39
Diluted 0.53 0.50 0.48 0.47 0.50 (0.18) (2) 0.40 0.39
Cash dividends declared 0.21 0.21 0.21 0.19 0.19 0.19 0.19 0.17
Market value:(1)
High 35.38 36.13 37.00 37.13 34.75 29.42 23.83 22.33
Low 26.75 28.00 32.88 27.50 27.17 22.33 20.33 20.00
Close 33.75 32.88 33.63 35.69 34.50 29.33 22.83 22.00
- ------------------------------------------------------------------------------------------------------------------------------------
</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,
1998, there were approximately 11,000 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 involved are subject to risk 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. Management believes that the expectations used in the forward looking
statements are reasonable, however actual results may vary significantly.
18
<PAGE> 21
YEAR ENDED DECEMBER 31, 1997
COMPARED WITH 1996
Citizen's Banking Corporation earned $31,508,000 or $1.11 per diluted
share during 1997. The results for 1997 include a special charge of $23,734,000
($17,263,000 after tax) related to the July 1, 1997 merger with CB Financial
Corporation and the reorganization of information technology operations.
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 return on average assets was 1.12% (0.72% with the
special charge) as compared with 1.01% in 1996. Overall, the increase in net
income in 1997 reflects improvement in net interest income and lower noninterest
expenses, offset in part by an increase in the provision for loan losses, lower
noninterest income and higher income tax expense. The 1996 financial information
has been restated to include the merger of CB Financial Corporation on July 1,
1997, which was accounted for as a pooling of interests. 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.
Net interest income for 1997 was $191,848,000, an increase of 7.4% over
1996 net interest income of $178,645,000. This increase resulted from higher
levels of earning assets partially offset by increased interest bearing
liabilities. Yields on earning assets increased to 8.39% as compared with 8.21%
in 1996. Rates paid on funding sources increased thirteen basis points to 4.30%
due to higher rates paid on savings deposits, time deposits and short-term
borrowings partially offset by lower rates on interest bearing demand and
long-term debt. As a result, the net interest margin increased to 4.86% in 1997
as compared with 4.77% in 1996.
The provision for loan losses increased to $15,332,000 in 1997 as
compared with $12,126,000 in 1996. The increase resulted from loan growth of
$311.8 million and higher net loan charge-offs. Net loan charge-offs were 0.34%
of average total loans in 1997, up from 0.28% in 1996.
Noninterest income accounted for 19.6% of total operating revenues or
1.1% of average assets in 1997, decreasing from 21.2% or 1.2%, respectively, in
1996. Noninterest income decreased $1,310,000 from 1996 partially attributable
to a $1.6 million gain in 1996 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 security 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 service fees.
Excluding the special charge, noninterest expense decreased $1,629,000 or
1.1% in 1997, from 1996. The decrease is primarily attributable to operating
efficiencies achieved from the 1997 merger with CB Financial Corporation.
Intangible asset amortization expense decreased 8.1% in 1997 as compared
with 1996. This decline was the result of the 1997 write-down of goodwill and
core deposit intangibles. Income tax expense for 1997 increased 23.3% (before
the special charge) compared with 1996. This increase resulted from higher
pretax earnings combined with lower tax-exempt interest income.
The Corporation had total average assets of $4.372 billion in 1997, up
from 1996 average assets of $4.212 billion. Average loans comprise 82.9% of
total earning assets in 1997, up from 78.8% in 1996. The growth occurred in the
consumer, residential mortgage and commercial loan portfolios due to improved
economic conditions and increased demand in the Corporation's local markets.
Average investments securities, including money market investments, decreased to
17.0% of average earning assets in 1997 from 21.2% in 1996. The decline in
investment securities was used to fund new loan growth.
Total average deposits were 3.7% higher in 1997 compared with 1996, due
to higher time deposit balances. Client preferences resulted in deposit balance
shifts from interest bearing demand and savings to time accounts in 1997 as
compared with 1996. Average short-term borrowings, comprised primarily of
securities sold under agreements to repurchase, remained constant in 1997 at
5.3% of average interest-bearing liabilities as compared to 1996.
Long-term debt accounted for $90.8 million or 2.7% of average
interest-bearing funds during 1997, increasing slightly from $86.8 million in
1996. Average shareholders' equity was $400.7 million in 1997, a 5.1% increase
over the 1996 average of $381.4 million.
19
<PAGE> 22
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
(in thousands, except share amounts) December 31,
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 140,543 $ 168,351
Money market investments:
Interest-bearing deposits with banks 304 246
Federal funds sold 8,500 ---
Term federal funds sold and other 17,435 11,976
---------- ----------
Total money market investments 26,239 12,222
Investment securities available-for-sale (amortized cost
$607,287 in 1998; $569,440 in 1997) 613,529 575,382
Loans:
Commercial 1,594,113 1,354,897
Real estate construction 89,623 71,035
Real estate mortgage 741,358 779,567
Consumer 1,159,417 1,336,120
---------- ----------
Total loans 3,584,511 3,541,619
Less: Allowance for loan losses (46,449) (45,911)
---------- ----------
Net loans 3,538,062 3,495,708
Premises and equipment 78,248 69,415
Intangible assets 54,470 60,016
Other assets 50,318 58,177
---------- ----------
Total assets $4,501,409 $4,439,271
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 636,059 $ 600,498
Interest-bearing deposits 3,128,297 3,093,848
---------- ----------
Total deposits 3,764,356 3,694,346
Federal funds purchased and securities sold
under agreements to repurchase 111,336 141,713
Other short-term borrowings 12,971 33,153
Other liabilities 40,727 52,052
Long-term debt 130,937 108,165
---------- ----------
Total liabilities 4,060,327 4,029,429
SHAREHOLDERS' EQUITY
Preferred stock - no par value:
Authorized - 5,000,000 shares
Issued - none
Common stock - no par value:
Authorized - 100,000,000 shares
Issued and outstanding - 28,099,615 in 1998;
28,047,518 in 1997 117,525 120,274
Retained earnings 319,500 285,706
Other accumulated comprehensive net income 4,057 3,862
---------- ----------
Total shareholders' equity 441,082 409,842
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,501,409 $4,439,271
========== ==========
======================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
20
<PAGE> 23
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
(in thousands, except share amounts) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 301,138 $ 294,258 $ 265,139
Interest and dividends on investment securities:
Taxable 28,511 31,811 33,731
Nontaxable 7,575 8,721 9,700
Money market investments 2,656 1,073 3,766
---------- ---------- ----------
Total interest income 339,880 335,863 312,336
INTEREST EXPENSE
Deposits 127,966 129,267 119,185
Short-term borrowings 6,004 8,689 7,959
Long-term debt 8,064 6,059 6,547
---------- ---------- ----------
Total interest expense 142,034 144,015 133,691
---------- ---------- ----------
NET INTEREST INCOME 197,846 191,848 178,645
Provision for loan losses 14,090 15,332 12,126
---------- ---------- ----------
Net interest income after provision for loan losses 183,756 176,516 166,519
---------- ---------- ----------
NONINTEREST INCOME
Trust fees 18,722 15,527 14,466
Service charges on deposit accounts 12,449 12,342 12,481
Bankcard fees 7,780 7,092 6,780
Mortgage and other loan income 4,098 1,746 3,572
Brokerage and investment fees 2,405 1,782 1,775
Cash management services 2,405 1,823 1,686
Investment securities gains (losses) 145 (787) 611
Other 8,248 7,169 6,633
---------- ---------- ----------
Total noninterest income 56,252 46,694 48,004
---------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 81,189 80,119 81,288
Equipment 12,329 12,327 12,374
Occupancy 11,134 11,446 12,153
Intangible asset amortization 5,545 6,098 6,637
Bankcard fees 5,894 5,152 4,702
Stationery and supplies 3,761 4,042 4,416
Postage and delivery 4,145 4,387 4,254
Advertising and public relations 3,543 3,953 3,946
Data processing fees 6,018 1,130 345
Special charge --- 23,734 ---
Other 24,733 24,773 24,941
---------- ---------- ----------
Total noninterest expense 158,291 177,161 155,056
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 81,717 46,049 59,467
Income taxes 24,932 14,541 17,042
---------- ---------- ----------
NET INCOME $ 56,785 $ 31,508 $ 42,425
========== ========== ==========
NET INCOME PER SHARE:
Basic $ 2.02 $ 1.13 $ 1.52
Diluted 1.98 1.11 1.50
AVERAGE SHARES OUTSTANDING:
Basic 28,127,647 27,878,990 27,844,341
Diluted 28,742,615 28,419,676 28,258,591
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE> 24
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity
Citizens Banking Corporation and Subsidiaries
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
(in thousands, except per share amounts) STOCK EARNINGS INCOME TOTAL
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance - January 1, 1996 $120,561 $248,949 $5,134 $374,644
Net income -- 42,425 -- 42,425
Net unrealized gain 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
Net income -- 56,785 -- 56,785
Net unrealized loss on securities available-for-sale,
net of tax effect of $105 -- -- 195 195
--------
Total comprehensive income -- -- -- 56,980
Exercise of stock options, net of
shares purchased 4,234 -- -- 4,234
Cash dividends - $0.82 per share -- (22,991) -- (22,991)
Shares acquired for retirement (6,983) -- -- (6,983)
-------- -------- ------ --------
Balance - December 31, 1998 $117,525 $319,500 $4,057 $441,082
======== ======== ====== ========
- ----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
22
<PAGE> 25
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31,
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 56,785 $ 31,508 $ 42,425
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 14,090 15,332 12,126
Depreciation 8,524 8,927 9,335
Amortization of goodwill and other intangibles 5,545 6,098 6,637
Intangible asset impairment --- 7,570 ---
Deferred income tax (credit) 1,699 (4,714) (2,391)
Net amortization on investment securities 1,994 1,061 2,080
Investment securities losses (gains) (145) 787 (611)
Other (5,268) (3,104) (4,508)
--------- --------- ---------
Net cash provided by operating activities 83,224 63,465 65,093
INVESTING ACTIVITIES:
Net (increase) decrease in money market investments (14,017) 6,649 132,753
Securities available-for-sale:
Proceeds from sales 11,628 171,240 116,190
Proceeds from maturities 342,637 144,916 403,835
Purchases (393,962) (170,749) (463,394)
Net increase in loans and leases (56,444) (323,397) (371,047)
Purchases of premises and equipment (17,357) (3,483) (5,408)
--------- --------- ---------
Net cash used by investing activities (127,515) (174,824) (187,071)
FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings deposits 99,704 (27,076) (73,779)
Net increase (decrease) in time deposits (29,694) 122,671 194,262
Net increase (decrease) in short-term borrowings (50,559) (1,939) 24,266
Proceeds from issuance of long-term debt 77,550 70,000 20,000
Principal reductions in long-term debt (54,778) (48,661) (43,196)
Cash dividends paid (22,991) (19,286) (17,890)
Proceeds from stock options exercised 4,234 1,962 1,523
Shares acquired for retirement (6,983) --- (3,772)
--------- --------- ---------
Net cash provided by financing activities 16,483 97,671 101,414
--------- --------- ---------
Net decrease in cash and due from banks (27,808) (13,688) (20,564)
Cash and due from banks at beginning of period 168,351 182,039 202,603
--------- --------- ---------
Cash and due from banks at end of period $ 140,543 $ 168,351 $ 182,039
========= ========= =========
Supplemental Cash Flow Information:
Interest paid $ 145,837 $ 146,917 $ 136,331
Income taxes paid 24,426 17,790 19,560
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
23
<PAGE> 26
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 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 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.
24
<PAGE> 27
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.
NET INCOME PER SHARE
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 upon the
assumed exercise of stock options granted under the Corporation's stock option
plans, using the treasury stock method.
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 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 year ending December 31, 1996 for CB
Financial Corporation and Citizens Banking Corporation:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
(unaudited)
(in thousands,except Six Months Ended Year Ended
per share data) June 30, 1997 December 31, 1996
- --------------------------------------------------------------------
<S> <C> <C>
Net Interest Income
Citizens $ 77,080 $ 146,116
CB Financial 16,939 32,508
-------- ---------
Combined $ 94,019 $ 178,624
======== =========
Net Income
Citizens $ 19,315 $ 37,421
CB Financial 2,889 5,004
-------- ---------
Combined $ 22,204 $ 42,425
======== =========
Diluted net income per
common share
Citizens $ 0.88 $ 1.70
CB Financial 1.03 1.79
Combined 0.79 1.50
- --------------------------------------------------------------------
</TABLE>
NOTE 3. SPECIAL CHARGE
In the third quarter of 1997 a 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 was recorded. The special charge consisted of $16.1 million of merger
related expenses and $7.6 million related to the information technology
reorganization. An adjustment of $931,000 was recorded against noninterest
expense to eliminate the restructuring liability in 1998.
The following presents a summary of the special charge activity for 1998
and 1997:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Year Ended December 31,
(in thousands) 1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
Beginning balance $ 4,895 $ 23,734
Intangible assets impairment --- (7,570)
Premises and equipment writedown (202) (2,773)
Cash payments (3,762) (8,496)
Adjustment (931) ---
-------- ----------
Balance at December 31 $ --- $ 4,895
======== ==========
- -----------------------------------------------------------------
</TABLE>
NOTE 4. INVESTMENT SECURITIES
The amortized cost, estimated fair value and gross unrealized gains and
losses of investment securities follow:
<TABLE>
- --------------------------------------------------------------------------------------------------------------
December 31, 1998
-------------------------------------------------------------------
Estimated Gross Gross
Amortized Fair Unrealized Unrealized
(in thousands) Cost Value Gains Losses
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 43,621 $ 44,180 $ 559 $ ---
Federal agencies:
Mortgage-backed 276,855 277,053 1,292 1,094
Other 108,915 109,411 640 144
State and municipal 152,681 157,551 5,020 150
Mortgage and asset-backed 4,852 4,906 54 ---
Other 20,363 20,428 68 3
----------- ---------- ---------- --------
Total $ 607,287 $ 613,529 $ 7,633 $ 1,391
=========== ========== ========== ========
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------
December 31, 1997
-------------------------------------------------------
Estimated Gross Gross
Amortized Fair Unrealized Unrealized
(in thousands) Cost Value Gains Losses
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 78,458 $ 78,805 $ 458 $ 111
Federal agencies:
Mortgage-backed 142,344 143,173 1,071 242
Other 167,949 168,069 498 378
State and municipal 162,351 166,876 4,762 237
Mortgage and asset-backed 934 959 25 ---
Other 17,404 17,500 96 ---
-------- ----------- ------- -----------
Total $569,440 $ 575,382 $ 6,910 $ 968
======== =========== ======= ===========
- --------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 28
The amortized cost and estimated fair value of debt securities by
contractual maturity at December 31, 1998 are shown below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Estimated
Amortized Fair
(in thousands) Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Due within one year $ 102,637 $ 103,170
One to five years 99,729 101,817
Five to ten years 53,174 54,946
After ten years 49,677 51,209
--------- ---------
305,217 311,142
Equity securities 20,363 20,428
Mortgage and asset-backed
securities 281,707 281,959
--------- ---------
Total $ 607,287 $ 613,529
========= =========
- --------------------------------------------------------------------------------
</TABLE>
Sales of investment securities resulted in realized gains and losses as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31,
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities gains $ 151 $ 98 $ 660
Securities losses (6) (885) (49)
----- ------ -----
Net gain (loss) $ 145 $ (787) $ 611
===== ====== =====
- --------------------------------------------------------------------------------
</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. The Corporation
currently holds all investment securities in the available-for-sale category.
The Financial Accounting Standards Board Statement No. 133 establishes
accounting and reporting standards for hedging activities and for derivative
instruments, including certain derivative instruments embedded in other
contracts. This statement requires a company to recognize all derivatives as
either assets or liabilities in its balance sheet and measure those instruments
at fair value. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Corporation plans to adopt this
statement effective January 1, 2000. The adoption is not expected to have a
material impact on the Corporation.
Securities with amortized cost of $218.3 million at December 31, 1998,
and $217.9 million at December 31, 1997, 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, 1998 or 1997.
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. The market areas extend
along the Interstate 75 corridor from northern Detroit to the Gaylord area as
well as western suburban Detroit, central, northwestern and southwestern
Michigan. 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 a 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>
- -------------------------------------------------------------------------------------------------------------
December 31,
(in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------
Nonperforming loans:
<S> <C> <C>
Nonaccrual $ 21,791 $ 19,989
Loans 90 days past due (still accruing) 801 1,185
Restructured 114 446
-------- --------
Total nonperforming loans 22,706 21,620
Other real estate 508 1,005
Other assets acquired by repossession 1,039 2,343
-------- --------
Total nonperforming assets $ 24,253 $ 24,968
======== ========
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The effect of nonperforming loans on interest income follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Year Ended December 31,
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
At original contract rates $ 1,946 $ 1,861 $ 1,702
As actually recognized 1,247 965 913
-------- -------- --------
Interest foregone $ 699 $ 896 $ 789
======== ======== ========
- -------------------------------------------------------------------------
</TABLE>
There are no significant commitments outstanding to lend additional funds
to clients whose loans were classified as nonaccrual or restructured at December
31, 1998.
At December 31, 1998, loans considered to be impaired totaled $15.2
million (of which $9.3 million were on a nonaccrual basis). Included within this
amount is $8.8
26
<PAGE> 29
million of impaired loans for which the related allowance for loan losses is
$1.5 million and $6.4 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, 1998 was approximately $17.9
million. For the year ended December 31, 1998, the Corporation recognized
interest income of $.9 million which included $.4 million of interest income
recognized using the cash basis method of income recognition.
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.
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 subsidiaries. Total
loans to these clients aggregated $22.0 million and $17.1 million at December
31, 1998 and 1997, respectively. During 1998, new loans of $17.2 million were
made and repayments totaled $12.3 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) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance - January 1 $ 45,911 $ 42,166 $ 38,705
Provision for loan losses 14,090 15,332 12,126
Charge-offs (17,379) (15,585) (12,895)
Recoveries 3,827 3,998 4,230
-------- -------- --------
Net charge-offs (13,552) (11,587) (8,665)
-------- -------- --------
Balance - December 31 $ 46,449 $ 45,911 $ 42,166
======== ======== ========
================================================================================
</TABLE>
NOTE 7. PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
December 31,
(in thousands) 1998 1997
- -------------------------------------------------------------
<S> <C> <C>
Land $ 12,698 $ 12,655
Buildings 84,003 83,810
Leasehold improvements 5,362 5,391
Furniture and equipment 86,227 84,552
--------- ---------
188,290 186,408
Accumulated depreciation
and amortization (110,042) (116,993)
--------- ---------
Total $ 78,248 $ 69,415
========= =========
=============================================================
</TABLE>
Certain branch facilities and equipment are leased under various
operating leases. Total rental expense, including expenses related to these
operating leases, was $4.3 million in 1998, $3.5 million in 1997 and $3.4
million in 1996. Future minimum rental commitments under noncancelable operating
leases are as follows at December 31, 1998: $3.1 million in 1999, $2.8 million
in 2000, $2.1 million in 2001, $1.7 million in 2002, $0.3 million in 2003, and
$1.7 million after 2003.
NOTE 8. DEPOSITS
A summary of deposits follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
December 31,
(in thousands) 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C>
Noninterest-bearing demand $ 636,059 $ 600,498
Interest-bearing demand 425,711 376,698
Savings 1,042,631 1,027,501
Time deposits over $100,000 448,759 457,277
Other time deposits 1,211,196 1,232,372
------------- -----------
Total $ 3,764,356 $ 3,694,346
============= ===========
======================================================================
</TABLE>
Excluded from total deposits are demand deposit account overdrafts which
have been reclassified as loans. At December 31, 1998 and 1997, these overdrafts
totaled $3.4 million and $2.1 million, respectively. Time deposits with
remaining maturities of one year or more are $402.9 million at December 31,
1998. The maturities of these time deposits are as follows: $259.7 million in
2000, $91.2 million in 2001, $22.2 million in 2002, $15.8 million in 2003 and
$14.0 million after 2003.
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.
27
<PAGE> 30
Information relating to federal funds purchased and securities sold under
agreements to repurchase follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
(in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
At December 31:
<S> <C> <C> <C>
Balance $ 111,336 $ 141,713 $ 146,903
Weighted average
interest rate paid 3.76% 5.12% 4.43%
During the year:
Maximum outstanding
at any month-end $ 159,940 $ 226,214 $ 189,504
Daily average 109,175 145,152 153,193
Weighted average
interest rate paid 4.47% 4.72% 4.56%
=============================================================================
</TABLE>
NOTE 10. LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
December 31,
(in thousands) 1998 1997
- -----------------------------------------------------------------
Citizens Banking Corporation
(Parent only):
Revolving credit facility
<S> <C> <C>
maturing December 2001 $ 13,000 $ 32,991
----------- ---------
Total 13,000 32,991
Subsidiaries:
FHLB Notes 117,550 70,000
Subordinated debt --- 4,179
Other 387 995
----------- ---------
Total 117,937 75,174
----------- ---------
Total long-term debt $ 130,937 $ 108,165
=========== =========
=================================================================
</TABLE>
The Corporation's Parent company maintains an amortizing revolving credit
facility. As of December 31, 1998, the Corporation had an unused commitment of
$36 million and had repaid the scheduled 1999, 2000 and a portion of the 2001
amount due. The outstanding balance of $13 million at December 31, 1998 is
currently at 6.76% and reprices in March 1999. Interest is payable quarterly and
the remaining principal is due December, 2001. 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, 1998.
At December 31, 1998 five long-term debt borrowings totaling $117.6
million from the Federal Home Loan Bank are outstanding. The details are as
follows: The first originated in September 1997, for $25 million on a five year
note at an interest rate of 5.68% which may reprice on September 30, 1999. The
second in October 1997 was for $15 million on a two year note at an interest
rate of 5.77%. The third in January 1998 was for $10 million on a ten year term
at an interest rate of 5.53% which may reprice in January 2003. The fourth in
February 1998 was for $50 million, 10 year term at an interest rate of 4.86%
which may reprice after 1 year. The fifth in August 1998 was for $17.6 million
on a one-year note at an interest rate of 5.46%. For those that may reprice
prior to maturity, repricing will be based upon the three month LIBOR rate.
Maturities of long-term debt during the next five years follow:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
(in thousands) Parent Subsidiaries Consolidated
- --------------------------------------------------------------------------
<C> <C> <C> <C>
1999 $ --- $ 32,687 $ 32,687
2000 --- 31 31
2001 13,000 36 13,036
2002 --- 25,042 25,042
2003 --- 48 48
Over 5 Years --- 60,093 60,093
--------- ---------- ----------
Total $ 13,000 $ 117,937 $ 130,937
========= ========== ==========
=========================================================================
</TABLE>
NOTE 11. EMPLOYEE BENEFIT PLANS
PENSION AND POSTRETIREMENT BENEFITS
The Corporation has a noncontributory, defined benefit pension plan covering
substantially all employees. Retirement benefits are based on the employee's
length of service and salary levels. Actuarially determined pension costs are
charged to current operations. The 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. The Corporation also maintains
nonqualified supplemental benefit plans for certain key employees. The defined
pension benefits provided under these plans are unfunded and any payments to
plan participants are made by the Corporation.
The Corporation has a postretirement benefit plan offering medical and
life insurance benefits (the "Corporate Plan"). The plan, as amended, is
available 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. The medical
portion of the plan is contributory to the participants. The life insurance
coverage is noncontributory and provided on a reducing basis for 5 years. Those
retired prior to January 1, 1993 receive benefits provided by the plan prior to
its amendment. That plan included dental care, had some contribution
requirements, and has less restrictive eligibility requirements. In addition,
the Corporation also maintains a postretirement benefit plan offering subsidized
health care to full-time employees of the former CB Financial Corporation, (the
"merged bank") acquired on July 1, 1997. In January 1998, the plan was amended
to match benefits with the Corporate Plan. In December 1997, the employee
eligibility requirements of the plan were modified, effective January 1, 1998,
to conform to the Corporate Plan. This resulted in a curtailment gain of
$272,000 offset by a corresponding reduction in the plan's previously
unrecognized net deferred loss.
28
<PAGE> 31
The following table summarizes plan asset and benefit obligation
activity, reconciles the funded status of the plans with amounts reported in the
Corporation's consolidated balance sheets, and lists the assumptions used in
determining the actuarial present value of the benefit obligation.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Other Post-
Pension Retirement
Benefits Benefits
------------------------- ---------------------
(in thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
<S> <C> <C> <C> <C>
Fair value of plan assets
at beginning of year $ 52,417 $ 45,638 $ --- $ ---
Actual return on plan assets 6,554 8,654 --- ---
Employer contribution 214 218 920 1,112
Participant contribution --- --- 83 83
Expenses paid (99) (90) --- ---
Benefits paid (2,293) (2,003) (1,003) (1,195)
-------- -------- ------- -------
Fair value of plan assets
at end of year 56,793 52,417 --- ---
-------- -------- ------- -------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation
at beginning of year 43,337 39,010 13,513 12,907
Service cost 2,023 2,021 16 40
Interest cost 3,259 3,038 936 995
Participant contribution --- --- 83 83
Actuarial (gains) losses 3,138 1,271 (122) 955
Curtailment gain --- --- --- (272)
Plan amendment --- --- (192) ---
Benefits paid (2,293) (2,003) (1,003) (1,195)
-------- -------- ------- -------
Benefit obligation
at end of year 49,464 43,337 13,231 13,513
-------- -------- ------- -------
RECONCILIATION OF FUNDED STATUS
Funded status of the plans 7,329 9,080 (13,231) (13,513)
Unrecognized:
Net asset at transition -
recognized over 16 yrs. (537) (701) --- ---
Prior service cost 436 543 (886) (1,154)
Net actuarial gain (11,023) (12,149) (1,885) (1,825)
-------- -------- ------- -------
Accrued benefit cost
recognized in the
consolidated balance
sheets $ (3,795) $ (3,227) $ (16,002) $ (16,492)
======== ======== ========= =========
======================================================================================
WEIGHTED-AVERAGE ASSUMPTIONS
AS OF DECEMBER 31
Discount rate 7.25% 7.75% 7.25% 7.75%
Rate of compensation
increase (1) (1) (1) (1)
Expected return on
plan assets 9.75 9.25 --- ---
======================================================================================
</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 accrued pension benefit cost shown above includes the pension
liabilities for plans where accumulated plan benefits exceed assets. The
projected benefit obligation and accumulated benefit obligation for these
supplemental benefit plans were approximately $3.2 and $3.0 million,
respectively, as of December 31, 1998 and $3.0 and $2.8 million, respectively,
as of December 31, 1997.
Plan assets of the defined benefit pension plan consisted primarily of
mutual and money market funds, and listed bonds and equity securities, including
$704,000 and $674,000 of Citizens Banking Corporation common stock at December
31, 1998 and 1997, respectively.
The components of net periodic benefit cost charged to operations each
year follow:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------
(in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
DEFINED BENEFIT PENSION PLANS:
<S> <C> <C> <C>
Service cost $ 2,023 $ 2,021 $ 2,085
Interest cost 3,259 3,038 2,779
Expected return on plan assets (4,235) (3,824) (3,631)
Amortization of unrecognized:
Net transition asset (164) (164) (164)
Prior service cost 107 125 88
Net actuarial gain (209) (212) (102)
------- ------- -------
Net pension cost 781 984 1,055
------- ------- -------
POSTRETIREMENT BENEFIT PLANS:
Service cost 16 40 32
Interest cost 936 995 984
Amortization of unrecognized:
Prior service cost (460) (438) (438)
Net actuarial gain (62) (127) (115)
------- ------- -------
Net postretirement benefit cost 430 470 463
------- ------- -------
DEFINED CONTRIBUTION RETIREMENT
AND 401(K) PLANS
Employer contributions 2,102 2,111 2,446
------- ------- -------
Total periodic benefit cost $ 3,313 $ 3,565 $ 3,964
======= ======= =======
==============================================================================
</TABLE>
Prior service pension costs are amortized on a straight-line basis over
the average remaining service period of employees expected to receive benefits
under the plans. For the postretirement benefit plans, the Corporation assumed a
6% weighted-average annual rate of increase in the per capita cost of covered
health care benefits (the health care cost trend rate) for 1999, decreasing 1%
annually to 5% by the year 2000, after which the costs would remain level. This
assumption has a significant effect on the amounts reported. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
One Percentage One Percentage
(in thousands) Point Increase Point Decrease
- ----------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and
interest cost components $ 82 $ (71)
Effect on the postretirement
benefit obligation 1,184 (1,028)
======================================================================
</TABLE>
29
<PAGE> 32
DEFINED CONTRIBUTION SAVINGS AND RETIREMENT 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 the merged bank into the
Corporate 401(k) Plan.
The merged bank also maintained a defined contribution retirement plan.
Under this plan, the company contributed 8% of the qualifying salary for each
eligible employee. The merged bank terminated this plan, effective June 30,
1997. Plan assets of $3.2 million at December 31, 1997 were distributed to
eligible employees. Employer contributions to defined contribution plans, shown
in the net periodic benefit cost table presented above, included $335,000 in
1997 and $594,000 in 1996 for this plan.
NOTE 12. 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, 1998 and 1997 follow:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
(in thousands) 1998 1997
- ------------------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses $ 16,257 $ 16,069
Accrued postemployment
benefits other than pensions 5,601 5,772
Accrued restructuring charge - 1,713
Other deferred tax assets 5,509 5,702
-------- --------
Total deferred tax assets 27,367 29,256
-------- --------
Deferred tax liabilities:
Acquisition premium on loans 3,753 4,222
Tax over book depreciation 2,214 1,783
Net unrealized gains on securities 2,185 2,080
Other deferred tax liabilities 1,157 1,681
-------- --------
Total deferred tax liabilities 9,309 9,766
-------- --------
Net deferred tax assets $ 18,058 $ 19,490
======== ========
============================================================
</TABLE>
Income tax expense consists of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Year Ended December 31,
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable $ 23,233 $ 19,255 $ 19,433
Deferred taxes (credit) 1,699 (4,714) (2,391)
-------- -------- --------
Total income tax expense $ 24,932 $ 14,541 $ 17,042
======== ======== ========
====================================================================
</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>
<CAPTION>
- ----------------------------------------------------------------------
Year Ended December 31,
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Tax at federal statutory rate
applied to income before
income taxes $ 28,601 $ 16,117 $ 20,813
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (3,474) (3,534) (3,887)
Other (195) 1,958 116
-------- -------- --------
Total income tax expense $ 24,932 $ 14,541 $ 17,042
======== ======== ========
=======================================================================
</TABLE>
NOTE 13. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Year Ended December 31,
(in thousands) 1998 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Numerator for basic and
dilutive earnings per share --
net income available to
common shareholders $ 56,785 $ 31,508 $ 42,425
======== ======== ========
Denominator:
Denominator for basic
earnings per share --
weighted average shares 28,128 27,879 27,844
Effect of dilutive
securities - potential
conversion of employee
stock options 615 541 415
-------- -------- --------
Denominator for diluted
earnings per share --
adjusted weighted-average
shares and assumed 28,743 28,420 28,259
======== ======== ========
Basic earnings per share $ 2.02 $ 1.13 $ 1.52
======== ======== ========
Diluted earnings per share $ 1.98 $ 1.11 $ 1.50
======== ======== ========
========================================================================
</TABLE>
All employee stock options were dilutive except for options granted in
1998. See Note 14 for additional disclosures regarding employee stock options.
30
<PAGE> 33
NOTE 14. 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,
each right entitles the holder (other than the acquiror) 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 May 1998. This program
authorizes the Corporation to purchase up to 600,000 shares for treasury in
satisfaction of its obligation to issue shares upon the exercise of stock
options. As of December 31, 1998, a total of 209,300 shares have been purchased
at an average price of $33.36. A total of 100,890 of these shares have been
reissued for the exercise of stock options. The remaining treasury shares have
been accorded the accounting treatment as if retired.
Through January 1997, the Corporation had acquired 1,891,455 shares under
the previous stock repurchase program. The Corporation's Board of Directors
rescinded this plan on January 27, 1997 in conjunction with the agreement to
acquire CB Financial Corporation. All shares purchased under the rescinded plan
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
stock appreciation 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. All stock options
outstanding under the plan have been granted at a price not less than the fair
market value of the shares on the date of grant.
Replacement options were granted under certain circumstances upon
exercise of a nonqualified stock option by payment of the exercise price with
shares of the Corporation's common stock. A replacement option provided 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 was exercised. During 1997 and
1996, a total of 167,705 and 215,397 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. No replacement options have
been granted since May 1997.
Options may be granted until January 16, 2002 and expire ten years from
the date of grant. Options granted since April 1992 are exercisable subject to a
predetermined vesting schedule based on achievement of certain return on average
asset or earnings per share targets. As of December 31, 1998, a total of 238,582
shares were not exercisable subject to future achievement of the performance
targets. These options become exercisable after five years if the performance
targets are not met. 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.
Statement 123 requires certain pro forma disclosures regarding net income
and earnings per share as if the Corporation had accounted for its stock options
under the fair value method of that statement. The following table provides
these disclosures along with significant assumptions used to estimate the fair
value of these options:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Pro forma amounts:
Net income (in thousands) $55,881 $30,658 $41,756
Net income per share:
Basic 1.99 1.10 1.50
Diluted 1.95 1.08 1.48
Assumptions:
Dividend yield 3.0% 3.5% 3.5%
Expected volatility 18.7% 17.0% 18.6%
Risk-free interest rate 5.72% 5.46-6.57% 4.84-6.43%
Expected lives 5 YRS. 1-5 yrs. 1-5 yrs.
=============================================================
</TABLE>
31
<PAGE> 34
A summary of stock option transactions under the plan for 1998, 1997 and
1996 follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Options Option Price
-------------------------- ----------------------------
Available Per Share
for Grant Outstanding Range Average
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
January 1, 1996 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
AUTHORIZED 810,872 -- -- --
GRANTED (320,600) 320,600 35.625 35.63
EXERCISED -- (260,588) 6.583-21.833 15.02
CANCELED 5,208 (5,208) 17.333-35.625 27.77
-------- --------- ------------- ---------
DECEMBER 31, 1998 567,773 1,920,921 7.417-35.625 20.29
======== ========= ============= =========
======================================================================================
</TABLE>
The following table summarizes information on stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------- -----------------------------
Weighted-Average Weighted-Average Weighted-Average
Range Outstanding Remain Life Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
7.42 - 15.00 424,203 2.1 years $ 9.24 424,203 $ 9.24
15.00 - 21.00 648,247 6.2 18.81 648,247 18.81
21.00 - 35.63 848,471 7.9 26.95 609,889 23.56
--------- ---------
7.42 - 35.63 1,920,921 6.0 20.29 1,682,339 18.12
========= =========
=============================================================================================================
</TABLE>
NOTE 15. 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. 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) 1998 1997
- -----------------------------------------------------------
<S> <C> <C>
Loan commitments:
Commercial $ 884,811 $ 746,926
Real estate construction 58,717 32,883
Real estate mortgage 39,525 25,023
Credit card and home
equity credit lines 383,526 356,535
Other consumer 13,018 21,333
---------- ----------
Total $1,379,597 $1,182,700
========== ==========
Standby letters of credit $ 22,229 $ 32,541
Commercial letter of credit 44,154 --
===========================================================
</TABLE>
The Corporation and its subsidiaries are parties to
32
<PAGE> 35
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 16. 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
the case 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, 1998 December 31, 1997
------------------------ -------------------------
CARRYING ESTIMATED Carrying Estimated
(in thousands) AMOUNT FAIR VALUE Amount Fair Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and money market investments $ 166,782 $ 166,800 $ 180,573 $ 180,600
Investment securities 613,529 613,500 575,382 575,400
Net loans(1) 3,520,466 3,613,900 3,458,024 3,525,600
Financial liabilities:
Deposits 3,764,356 3,778,300 3,694,346 3,699,200
Short-term borrowings 124,307 124,300 174,866 174,900
Long-term debt 130,937 127,200 108,165 108,600
Off-balance sheet financial instrument liabilities:
Loan commitments -- 1,938 -- 1,614
Standby and commercial letters of credit -- 332 -- 173
====================================================================================================================
</TABLE>
(1) Excludes lease financing which for purposes of SFAS 107 disclosure is not
considered a financial instrument.
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
4. 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
33
<PAGE> 36
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 17. LINES OF BUSINESS
The financial performance of the Corporation is monitored by an internal
profitability measurement system, which provides line of business results and
key performance measures. The profitability measurement system is based on
internal management methodologies designed to produce consistent results and
reflect the underlying economics of the businesses. The development and
application of these methodologies is a dynamic process. Accordingly, these
measurement tools and assumptions may be revised periodically to reflect
methodological, product, and/or management organizational changes. Further,
these policies measure financial results that support the strategic objectives
and internal organizational structure of the Corporation. Consequently, the
information presented is not necessarily comparable with similar information for
other institutions.
The Corporation is managed along the following business lines: Commercial
Banking, Retail Banking, Financial Services, and all other.
COMMERCIAL BANKING
Commercial Banking provides a full range of credit and related financial
services to middle market corporate, government and leasing clients. Products
and services offered include commercial loans, commercial mortgages, letters of
credit, deposit accounts, cash management and international trade services.
RETAIL BANKING
Retail Banking includes consumer lending and deposit gathering, electronic
banking, residential mortgage loan origination and servicing, and small business
banking. This line of business offers a variety of retail financial products and
services including deposit accounts, direct and indirect installment loans,
debit and credit cards, home equity lines of credit, residential mortgage loans
and ATM network services.
FINANCIAL SERVICES
Financial Services provides commercial and retail clients with private banking,
trust and investment, retirement plan, and brokerage and insurance services.
Private banking focuses on high net-worth customers and offers a broad array of
asset management, estate settlement and administration, deposit and credit
products. Trust and investment includes personal trust and planning services,
investment management services, estate settlement, administration and advises
the Golden Oak family of mutual funds. Retirement plan services focus on
investment management and fiduciary activities with special emphasis on 401(k)
plans. The brokerage and insurance businesses deliver the Corporation's retail
mutual funds, other securities, variable and fixed annuities, personal
disability and life insurance products and discounted brokerage services.
ALL OTHER
All other includes activities that are not directly attributable to one of the
three major lines of business. Included in this category is the parent company,
the Corporation's securities portfolio and asset liability management
activities, inter-company eliminations, and the economic impact of certain
assets, capital and support functions not specifically identifiable with the
three primary lines of business.
34
<PAGE> 37
The accounting policies on the individual business units are the same as
those of the Corporation described in Note 1 to the Consolidated Financial
Statements. Funds transfer pricing is used in the determination of net interest
income by assigning a standard cost for funds used or credit for funds provided
to assets and liabilities within each business unit. Assets and liabilities are
match-funded based on their maturity, prepayment and/or repricing
characteristics. Noninterest income and expenses directly attributable to a line
of business are assigned to that business. Expenses for centrally provided
services are allocated to the business lines as follows: product processing and
technology expenditures are allocated based on standard unit costs applied to
actual volume measurements; corporate overhead is allocated based on the ratio
of a line of business' noninterest expenses to total noninterest expenses
incurred by all business lines. The provision for loan losses was allocated in
an amount based primarily upon the actual net charge-offs of each respective
line of business, adjusted for loan growth and changes in risk profile. Selected
segment information is included in the following table.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
LINE OF BUSINESS INFORMATION
Commercial Retail Financial
(in thousands) Banking Banking Services Other Total
- -----------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY - 1998
<S> <C> <C> <C> <C> <C>
Net interest income (taxable equivalent) $ 67,114 $ 117,784 $ 1,844 $ 17,109 $ 203,851
Provision for loan losses 4,780 9,099 --- 211 14,090
--------- --------- -------- --------- ---------
Net interest income after provision 62,334 108,685 1,844 16,898 189,761
Noninterest income 8,588 25,744 21,090 830 56,252
Noninterest expense 37,563 88,553 18,071 14,104 158,291
--------- --------- -------- --------- ---------
Income before income taxes 33,359 45,876 4,863 3,624 87,722
Income tax expense (taxable equivalent) 11,675 16,057 1,702 1,503 30,937
--------- --------- -------- --------- ---------
Net income $ 21,684 $ 29,819 $ 3,161 $ 2,121 $ 56,785
========= ========= ======== ========= =========
AVERAGE ASSETS (IN MILLIONS) $ 1,445 $ 2,112 $ 21 $ 872 $ 4,450
========= ========= ======== ========= =========
=============================================================================================================================
EARNINGS SUMMARY - 1997
Net interest income (taxable equivalent) $ 57,862 $ 119,054 $ 1,492 $ 19,572 $ 197,980
Provision for loan losses 3,340 11,435 --- 557 15,332
--------- --------- -------- --------- ---------
Net interest income after provision 54,522 107,619 1,492 19,015 182,648
Noninterest income 8,108 21,274 17,486 (174) 46,694
Noninterest expense:
Special charge --- --- --- 23,734 23,734
Other 35,215 84,973 16,877 16,362 153,427
--------- --------- -------- --------- ---------
Income (loss) before income taxes 27,415 43,920 2,101 (21,255) 52,181
Income tax expense (taxable equivalent) 9,596 15,372 735 (5,030) 20,673
--------- --------- -------- --------- ---------
Net income (loss) $ 17,819 $ 28,548 $ 1,366 $ (16,225) $ 31,508
========= ========= ======== ========= =========
AVERAGE ASSETS (IN MILLIONS) $ 1,310 $ 2,138 $ 18 $ 906 $ 4,372
========= ========= ======== ========= =========
=============================================================================================================================
EARNINGS SUMMARY - 1996
Net interest income (taxable equivalent) $ 56,098 $ 112,092 $ 1,494 $ 15,626 $ 185,310
Provision for loan losses 4,515 7,513 --- 98 12,126
--------- --------- -------- --------- ---------
Net interest income after provision 51,583 104,579 1,494 15,528 173,184
Noninterest income 7,892 22,093 16,289 1,730 48,004
Noninterest expense 33,457 89,826 15,378 16,395 155,056
--------- --------- -------- --------- ---------
Income before income taxes 26,018 36,846 2,405 863 66,132
Income tax expense (taxable equivalent) 9,106 14,046 842 (287) 23,707
--------- --------- -------- --------- ---------
Net income $ 16,912 $ 22,800 $ 1,563 $ 1,150 $ 42,425
========= ========= ======== ========= =========
==============================================================================================================================
</TABLE>
35
<PAGE> 38
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 1998
and 1997, the average reserve balances were $32.5 million and $32.6 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, 1999, the bank subsidiaries could
distribute to the Corporation approximately $21.7 million in dividends without
regulatory approval. Their 1999 net income will also become 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 to risk-weighted assets (as defined in the regulations), and of Tier I
capital to average assets (as defined). Management believes, as of December 31,
1998, that the Corporation and it's banking subsidiaries meet all capital
adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal
Reserve Board categorized the Corporation and its 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.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
RISK BASED CAPITAL REQUIREMENTS
For Capital
Actual Adequacy Purposes
-------------------------------- -------------------------
(in thousands) Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------
CITIZENS BANKING CORPORATION
AS OF DECEMBER 31, 1998:
<S> <C> <C> <C> <C>
Total Capital(1) $ 428,017 11.8 % $ 290,892 > 8.0 %
-
Tier I Capital(1) 382,553 10.5 145,446 > 4.0
-
Tier I Leverage(2) 382,553 8.7 176,342 > 4.0
-
As of December 31, 1997:
Total Capital(1) $ 390,230 11.0 % $ 283,042 > 8.0 %
-
Tier I Capital(1) 345,984 9.8 141,521 > 4.0
-
Tier I Leverage(2) 345,984 8.0 173,458 > 4.0
-
CITIZENS BANK
AS OF DECEMBER 31, 1998:
Total Capital(1) $ 404,822 11.7 % $ 276,694 > 8.0 %
-
Tier I Capital(1) 361,577 10.5 138,347 > 4.0
-
Tier I Leverage(2) 361,577 8.7 166,580 > 4.0
-
As of December 31, 1997:
Total Capital(1) $ 388,017 11.7 % $ 266,192 > 8.0 %
-
Tier I Capital(1) 346,398 10.4 133,096 > 4.0
-
Tier I Leverage(2) 346,398 8.5 163,783 > 4.0
-
===============================================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
RISK BASED CAPITAL REQUIREMENTS To Be Well Capitalized
Under Prompt Corrective
Action Provisions
-----------------------------------
(in thousands) Amount Ratio
- --------------------------------------------------------------------------------
CITIZENS BANKING CORPORATION
AS OF DECEMBER 31, 1998:
<S> <C> <C>
Total Capital(1) $ 363,615 > 10.0 %
-
Tier I Capital(1) 218,169 > 6.0
-
Tier I Leverage(2) 220,428 > 5.0
-
As of December 31, 1997:
Total Capital(1) $ 353,803 > 10.0
-
Tier I Capital(1) 212,282 > 6.0
-
Tier I Leverage(2) 216,823 > 5.0
-
CITIZENS BANK
AS OF DECEMBER 31, 1998:
Total Capital(1) $ 345,867 > 10.0 %
-
Tier I Capital(1) 207,520 > 6.0
-
Tier I Leverage(2) 208,225 > 5.0
-
As of December 31, 1997:
Total Capital(1) $ 332,740 > 10.0 %
-
Tier I Capital(1) 199,644 > 6.0
-
Tier I Leverage(2) 204,728 > 5.0
-
================================================================================
</TABLE>
(1) To risk weighted assets.
(2) To quarterly average assets.
36
<PAGE> 39
NOTE 19. CITIZENS BANKING CORPORATION (PARENT ONLY) STATEMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS
CITIZENS BANKING CORPORATION (PARENT ONLY)
December 31,
(in thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS:
<S> <C> <C>
Cash $ 5 $ 5
Interest-bearing deposit with subsidiary bank 4,500 7,000
Money market investments 7,435 3,976
Investment securities 139 135
Investment in bank subsidiaries 439,784 429,015
Goodwill - net 2,653 3,449
Other assets 3,960 3,622
--------- ---------
TOTAL ASSETS $ 458,476 $ 447,202
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Long-term debt $ 13,000 $ 32,991
Other liabilities 4,394 4,369
--------- ---------
Total liabilities 17,394 37,360
Shareholders' equity 441,082 409,842
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 458,476 $ 447,202
========= =========
==============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME
CITIZENS BANKING CORPORATION (PARENT ONLY)
Year Ended December 31,
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
INCOME
<S> <C> <C> <C>
Dividends from subsidiaries - principally banks $ 48,635 $ 21,483 $ 56,487
Interest from bank subsidiary 159 657 794
Service fees from bank subsidiaries 9,221 9,467 ---
Other 381 254 860
-------- -------- --------
Total 58,396 31,861 58,141
-------- -------- --------
EXPENSES
Interest 1,734 2,978 5,594
Amortization of goodwill 796 796 796
Salaries and employee benefits 9,524 9,731 867
Service fees paid to bank subsidiaries 1,060 1,339 1,265
Other noninterest expense 1,528 1,723 1,078
-------- -------- --------
Total 14,642 16,567 9,600
-------- -------- --------
Income before income taxes and equity in undistributed earnings of subsidiaries 43,754 15,294 48,541
Income tax benefit 2,476 2,662 3,257
Equity in undistributed (dividends in excess of) earnings of subsidiaries 10,555 13,552 (9,373)
-------- -------- --------
NET INCOME $ 56,785 $ 31,508 $ 42,425
======== ======== ========
===============================================================================================================================
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
CITIZENS BANKING CORPORATION (PARENT ONLY)
Year Ended December 31,
(in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 56,785 $ 31,508 $ 42,425
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 (10,555) (13,552) 9,373
Other (332) (945) 1,244
-------- -------- --------
Net cash provided by operating activities 46,694 17,807 53,838
-------- -------- --------
INVESTING ACTIVITIES
Net decrease in interest-bearing deposit at subsidiary bank 2,500 18,134 4,866
Net (increase) decrease in money market investments (3,459) 8,067 2,501
Purchases of investment securities (44) -- (8)
Proceeds from sales and maturities of investment securities 40 10 136
-------- -------- --------
Net cash provided (used) by investing activities (963) 26,211 7,495
-------- -------- --------
FINANCING ACTIVITIES
Principal reductions in long-term debt (19,991) (26,694) (41,194)
Cash dividends paid (22,991) (19,286) (17,890)
Proceeds from stock options exercised 4,234 1,962 1,523
Shares acquired for retirement (6,983) -- (3,772)
-------- -------- --------
Net cash used by financing activities (45,731) (44,018) (61,333)
-------- -------- --------
Net increase in cash -- -- --
Cash at beginning of year 5 5 5
-------- -------- --------
Cash at end of year $ 5 $ 5 $ 5
======== ======== ========
========================================================================================================================
</TABLE>
38
<PAGE> 41
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS CITIZENS BANKING CORPORATION
We have audited the accompanying consolidated balance sheets of
Citizens Banking Corporation and subsidiaries as of December 31, 1998 and 1997,
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, 1998. 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 audits.
We conducted our audits 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 a 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 audits provide 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, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the two years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
We previously audited and reported on the related consolidated
statements of income, changes in shareholders' equity, and cash flows of
Citizens Banking Corporation and subsidiaries for the year ended December 31,
1996 prior to the restatement for the 1997 pooling of interests as described in
Note 2. The contribution of Citizens Banking Corporation to revenues and net
income represented 82% and 88% of the 1996 restated totals. Financial statements
of the other pooled company included in the 1996 consolidated statements were
audited and reported on separately by other auditors. We also have audited, as
to combination only, the accompanying consolidated statements of income, changes
in shareholders' equity, and cash flows for the year 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 14, 1999
39
<PAGE> 42
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.
/s/John W. Ennest /s/Robert J. Vitito
- ----------------- -------------------
John W. Ennest Robert J. Vitito
Vice Chairman, President and Chief
Chief Financial Officer and Treasurer Executive Officer
40
<PAGE> 1
Form 10-K
Exhibit 21
SUBSIDIARIES OF
CITIZENS BANKING CORPORATION
Jurisdiction or
Incorporation of
Organization
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
CB Financial Services, Inc. Michigan
Citizens Title Services, Inc. Michigan
Citizens Bank Mortgage Corporation Michigan
1
<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. 33-47686 dated May 5, 1992) pertaining to the Citizens Banking
Corporation Second Amended Stock Option Plan; (2) 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 (3) 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 14, 1999, 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, 1998.
We consent to the incorporation by reference in 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 and in the related
prospectus of our report dated March 16, 1999 with respect to the financial
statements and schedules of Citizens Banking Corporation amended and restated
section 401(k) Plan included in the annual report (Form 10-K) for the year ended
December 31, 1998.
/s/ Ernst & Young LLP
Detroit, Michigan
March 26, 1999
1
<PAGE> 1
EXHIBIT 23A
CONSENT OF INDEPENDENT ACCOUNTS
As independent public accountants, we hereby consent to the incorporation by
reference in (1) Citizens Banking Corporation Registration Statement (Form S-8
No. 33-47686 dated May 5, 1992) pertaining to the Citizens Banking Corporation
Second Amended Stock Option Plan; (2) Citizens Banking Corporation Registration
Statement (Form S-8 No. 33-61197 dated July 21, 1995) pertaining to the
Citizens Banking Corporation Stock Option Plan for Directors; and (3) Citizens
Banking Corporation 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 February 4,
1997, 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, 1998. Our report dated February 4, 1997 included in Citizens
Banking Corporation's Form 10-K for the year ended December 31, 1998 is no
longer appropriate since restated financial statements have been presented
giving effect to a business combination accounted for as a pooling-of-interests.
/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan
March 29, 1999.
1
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-1-1998 OCT-1-1998
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 140,543 140,543
<INT-BEARING-DEPOSITS> 304 304
<FED-FUNDS-SOLD> 25,935 25,935
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 613,529 613,529
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 3,584,511 3,584,511
<ALLOWANCE> 46,449 46,449
<TOTAL-ASSETS> 4,501,409 4,501,409
<DEPOSITS> 3,764,356 3,764,356
<SHORT-TERM> 124,307 124,307
<LIABILITIES-OTHER> 40,727 40,727
<LONG-TERM> 130,937 130,937
0 0
0 0
<COMMON> 117,525 117,525
<OTHER-SE> 323,557 323,557
<TOTAL-LIABILITIES-AND-EQUITY> 4,501,409 4,501,409
<INTEREST-LOAN> 301,138 74,150
<INTEREST-INVEST> 38,742 9,598
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 339,880 83,748
<INTEREST-DEPOSIT> 127,966 30,815
<INTEREST-EXPENSE> 142,034 34,176
<INTEREST-INCOME-NET> 197,846 49,572
<LOAN-LOSSES> 14,090 3,560
<SECURITIES-GAINS> 145 42
<EXPENSE-OTHER> 158,291 39,131
<INCOME-PRETAX> 81,717 21,437
<INCOME-PRE-EXTRAORDINARY> 56,785 14,991
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 56,785 14,991
<EPS-PRIMARY> 2.02 0.53
<EPS-DILUTED> 1.98 0.53
<YIELD-ACTUAL> 4.91 4.92
<LOANS-NON> 21,791 21,791
<LOANS-PAST> 801 801
<LOANS-TROUBLED> 114 114
<LOANS-PROBLEM> 14,500 14,500
<ALLOWANCE-OPEN> 45,911 47,136
<CHARGE-OFFS> 17,379 5,439
<RECOVERIES> 3,827 1,192
<ALLOWANCE-CLOSE> 46,449 46,449
<ALLOWANCE-DOMESTIC> 34,200 34,200
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 12,249 12,249
</TABLE>
<PAGE> 1
EXHIBIT 99
Report of Independent Public Accountants
To CB Financial Corporation:
We have audited the consolidated statements of income, changes in shareholders'
equity and cash flows for the year ended December 31, 1996 of CB FINANCIAL
CORPORATION and subsidiaries (a Michigan corporation) not presented separately
herein. These financial statements are the responsibility of CB Financial
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. As audit includes examining, on a 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 results of operations and cash flows of CB Financial
Corporation and subsidiaries for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan
February 4, 1997.
<PAGE> 1
EXHIBIT 99A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 11-K
[x] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year end December 31, 1998
OR
[] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________to _____________
Commission file Number 0-10535
A. Full title of the plan and the address of the plan, if different from
that of the issuer named below:
CITIZENS BANKING CORPORATION
AMENDED AND RESTATED SECTION
401(k) PLAN
B. Name of issuer of the securities held pursuant to the plan and the
address of its principal executive office:
CITIZENS BANKING CORPORATION
One Citizens Banking Center
328 South Saginaw Street
Flint, Michigan 48502
<PAGE> 2
SIGNATURES
The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934,
the trustees (or other persons who administer the employee benefit plan) have
duly caused this annual report to be signed on its behalf by the undersigned
hereunto duly authorized.
Date March 31, 1999 /s/ Gary P. Drainville
- ------------------- ---------------------------------------
Gary P. Drainville
Chairman, Pension/401(k) Administration
Committee
/s/ Kurt A. Schulze
----------------------------------------
Kurt A. Schulze
Secretary, Pension/401(k) Administration
Committee
<PAGE> 3
Financial Statements
and Supplemental Schedules
Citizens Banking Corporation Amended
and Restated Section 401(k) Plan
Years ended December 31, 1998, 1997 and 1996
with Report of Independent Auditors
[ERNST & YOUNG LLP LOGO]
<PAGE> 4
Citizens Banking Corporation Amended
and Restated Section 401(k) Plan
Financial Statements
and Supplemental Schedules
December 31, 1998
CONTENTS
Report of Independent Auditors.................................................1
Financial Statements and Schedule
Statement of Assets Available for Benefits.....................................2
Statement of Changes in Assets Available for Benefits..........................4
Notes to Financial Statements..................................................7
Supplemental Schedules
Item 27(a) - Schedule of Assets Held for Investment Purposes..................13
Item 27(b) - Schedule of Loans or Fixed Income Obligations....................15
Item 27(d) - Schedule of Reportable Transactions..............................16
<PAGE> 5
Report of Independent Auditors
Administrative Committee
Citizens Banking Corporation Amended
and Restated Section 401(k) Plan
We have audited the accompanying statements of assets available for benefits of
the Citizens Banking Corporation Amended and Restated Section 401(k) Plan as of
December 31, 1998 and 1997, and the related statements of changes in assets
available for benefits for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Plan's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits 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 a 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets available for benefits of the Plan at December
31, 1998 and 1997, and the changes in its assets available for benefits for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Our audits were performed for the purpose of forming an opinion on the financial
statements taken as a whole. The accompanying supplemental schedules of Schedule
of Assets Held for Investment Purposes as of December 31, 1998, Schedule of
Loans or Fixed Income Obligations as of December 31, 1998, and Schedule of
Reportable Transactions for the year then ended are presented for the purpose of
additional analysis and are not a required part of the basic financial
statements but are supplementary information required by the Department for
Labor's Rules and Regulations for Reporting and Disclosure under the Employee
Retirement Income Security Act of 1974. These supplemental schedules are the
responsibility of the Plan's management. The fund information in the statement
of assets available for benefits and the statement of changes in assets
available for benefits is presented for purposes of additional analysis rather
than to present the assets available for benefits and the changes in assets
available for plan benefits of each fund. The supplemental schedules and fund
information have been subjected to the auditing procedures applied in our audits
of the financial statements and, in our opinion, are fairly stated in all
material respects in relation to the financial statements taken as a whole.
/s/ Ernst & Young
March 16, 1999
1
<PAGE> 6
Citizens Banking Corporation Amended
and Restated Section 401(k) Plan
Statement of Assets Available for Benefits, With Fund Information
December 31, 1998
<TABLE>
<CAPTION>
FUND INFORMATION
------------------------------------------------------------------------------------------
401(K) PARTICIPANT - DIRECTED INVESTMENT FUNDS
------------------------------------------------------------------------------------------
CITIZENS
INTERMEDIATE BANKING MONEY
INCOME EQUITY CORPORATION BALANCED MARKET
FUNDS FUNDS STOCK FUNDS FUNDS
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments at fair value:
Common stock:
Citizens Banking Corporation $ 54,698,760 $ 502,875
Mutual funds $ 7,153,103 $ 26,413,855 20,336,301
Money market account 123,359 902,051 156,301 889,368 $ 1,150,429
Loans to participants
-------------------------------------------------------------------------------------------
Total investments 7,276,462 27,315,906 54,855,061 21,728,544 1,150,429
Receivables:
Accrued income 32,569 491,853 719 344,907 4,810
Contributions - Employer 5,812 24,828 36,476 10,189 1,743
Contributions - Employee 10,178 47,841 66,798 18,105 2,748
Other 7,056 10,464 16,991 3,800 172
-------------------------------------------------------------------------------------------
55,615 574,986 120,984 377,001 9,473
Cash 1,355 1,356 100 384
-------------------------------------------------------------------------------------------
Assets available for benefits $ 7,332,077 $ 27,892,247 $ 54,977,401 $ 22,105,645 $ 1,160,286
===========================================================================================
<CAPTION>
FUND INFORMATION
---------------------------------------
PARTICIPANT
DIRECTED PARTICIPANT
SEGREGATED LOAN
FUNDS FUND TOTAL
----------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments at fair value:
Common stock:
Citizens Banking Corporation $ 55,201,635
Mutual funds 53,903,259
Money market account $ 3,644 3,225,152
Loans to participants $ 3,017,614 3,017,614
----------------------------------------------------
Total investments 3,644 3,017,614 115,347,660
Receivables:
Accrued income 874,858
Contributions - Employer 79,048
Contributions - Employee 145,670
Other 15 38,498
----------------------------------------------------
15 -- 1,138,074
Cash 343 3,538
----------------------------------------------------
Assets available for benefits $ 4,002 $ 3,017,614 $ 116,489,272
====================================================
</TABLE>
See accompanying notes.
2
<PAGE> 7
Citizens Banking Corporation Amended
and Restated Section 401(k) Plan
Statement of Assets Available for Benefits, With Fund Information
December 31, 1997
<TABLE>
<CAPTION>
FUND INFORMATION
----------------------------------------------------------------------------------------------
401(k) PARTICIPANT - DIRECTED INVESTMENT FUNDS
-----------------------------------------------------------------------------------------------
CITIZENS
INTERMEDIATE BANKING MONEY
INCOME EQUITY CORPORATION BALANCED MARKET
FUNDS FUNDS STOCK FUNDS FUNDS PAYSOP
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments at fair value:
Common stock:
Citizens Banking Corporation $ 57,772,010 $ 3,811,767 $ 270,963
Mutual funds $ 7,298,364 $ 22,568,421 21,473,846
U.S. Government securities 1,309,079 2,651,005
Money market account 159,043 2,635,830 238,339 1,070,929 $ 1,511,863
Loans to participants
-----------------------------------------------------------------------------------------------
Total investments 8,766,486 25,204,251 58,010,349 29,007,547 1,511,863 270,963
Receivables:
Accrued income 63,026 220,592 1,352 478,905 7,236 37
Contributions - Employer 8,716 39,342 38,760 22,814 4,501
Contributions - Employee 10,884 40,980 52,324 16,053 2,705
Other 8,144 10,587 15,674 4,071 157
-----------------------------------------------------------------------------------------------
90,770 311,501 108,110 521,843 14,599 37
Cash (overdraft) 1 (400) (11,236) 12,019 431 1,014
-----------------------------------------------------------------------------------------------
Assets available for benefits $ 8,857,257 $ 25,515,352 $ 58,107,223 $29,541,409 $ 1,526,893 $ 272,014
===============================================================================================
<CAPTION>
FUND INFORMATION
-----------------------------------
PARTICIPANT
DIRECTED PARTICIPANT
SEGREGATED LOAN
FUNDS FUND TOTAL
-------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments at fair value:
Common stock:
Citizens Banking Corporation $ 61,854,740
Mutual funds 51,340,631
U.S. Government securities $ 1,291,245 5,251,329
Money market account 156,541 5,772,545
Loans to participants $ 3,131,766 3,131,766
-------------------------------------------------------
Total investments 1,447,786 3,131,766 127,351,011
Receivables:
Accrued income 26,682 797,830
Contributions - Employer 114,133
Contributions - Employee 122,946
Other 38,633
-------------------------------------------------------
26,682 - 1,073,542
Cash (overdraft) 60,911 62,740
-------------------------------------------------------
Assets available for benefits $ 1,535,379 $ 3,131,766 $128,487,293
=======================================================
</TABLE>
See accompanying notes.
3
<PAGE> 8
Citizens Banking Corporation Amended
and Restated Section 401(k) Plan
Statement of Changes in Assets Available for Benefits, With Fund Information
Year ended December 31, 1998
<TABLE>
<CAPTION>
FUND INFORMATION
--------------------------------------------------------------------------------
401(K) PARTICIPANT - DIRECTED INVESTMENT FUNDS
--------------------------------------------------------------------------------
CITIZENS
INTERMEDIATE BANKING MONEY
INCOME EQUITY CORPORATION BALANCED MARKET
FUNDS FUNDS STOCK FUNDS FUNDS PAYSOP
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ADDITIONS
Investment income:
Dividends:
Citizens Banking Corporation $1,324,139 $ 64,684
Other $ 407,642 $ 1,744,855 1,477,457
Interest income 34,526 19,496 17,949 101,040 $ 60,974
--------------------------------------------------------------------------------
Total investments income 442,168 1,764,351 1,342,088 1,643,181 60,974
Contributions:
Employer 160,285 670,345 1,020,491 281,839 46,885
Employee 294,329 1,562,514 2,231,054 715,941 146,164
--------------------------------------------------------------------------------
454,614 2,232,859 3,251,545 997,780 193,049
--------------------------------------------------------------------------------
896,782 3,997,210 4,593,633 2,640,961 254,023
DEDUCTIONS
Benefit payments to participants (2,255,104) (3,657,638) (7,686,708) (11,045,768) (716,329)
Management fees (6,421) (1,252) (108) (1,188)
Transfers (net) (387,600) (195,924) 1,178,785 (25,684) 95,699 $(272,014)
--------------------------------------------------------------------------------
(2,649,125) (3,854,814) (6,508,031) (11,072,640) (620,630) (272,014)
Net realized and unrealized appreciation
(depreciation) in fair value of investments:
Realized (22,139) (194,877) 6,577,924 3,007,375
Unrealized 249,302 2,429,376 (7,793,348) (2,011,460)
--------------------------------------------------------------------------------
227,163 2,234,499 (1,215,424) 995,915
--------------------------------------------------------------------------------
Net increase (decrease) (1,525,180) 2,376,895 (3,129,822) (7,435,764) (366,607) (272,014)
Assets available for benefits at beginning
of year 8,857,257 25,515,352 58,107,223 29,541,409 1,526,893 272,014
--------------------------------------------------------------------------------
Assets available for benefits at end of year $ 7,332,077 $27,892,247 $54,977,401 $ 22,105,645 $1,160,286 $ -
================================================================================
<CAPTION>
FUND INFORMATION
--------------------------------
PARTICIPANT
DIRECTED PARTICIPANT
SEGREGATED LOAN
FUNDS FUND TOTAL
-------------------------------------------------
<S> <C> <C> <C>
ADDITIONS
Investment income:
Dividends:
Citizens Banking Corporation $ 1,388,823
Other 3,629,954
Interest income $ 20,340 $ 279,110 533,435
-------------------------------------------------
Total investments income 20,340 279,110 5,552,212
Contributions:
Employer 2,179,845
Employee 4,950,002
-------------------------------------------------
7,129,847
-------------------------------------------------
20,340 279,110 12,682,059
DEDUCTIONS
Benefit payments to participants (1,551,091) (26,912,638)
Management fees (8,969)
Transfers (net) (393,262) -
-------------------------------------------------
(1,551,091) (393,262) (26,921,607)
Net realized and unrealized appreciation
(depreciation) in fair value of investments:
Realized (4,184) 9,364,099
Unrealized 3,558 (7,122,572)
-------------------------------------------------
(626) 2,241,527
-------------------------------------------------
Net increase (decrease) (1,531,377) (114,152) (11,998,021)
Assets available for benefits at beginning
of year 1,535,379 3,131,766 128,487,293
-------------------------------------------------
Assets available for benefits at end of year $ 4,002 $3,017,614 $ 116,489,272
=================================================
</TABLE>
See accompanying notes.
4
<PAGE> 9
Citizens Banking Corporation Amended
and Restated Section 401(k) Plan
Statement of Changes in Assets Available for Benefits, With Fund Information
Year ended December 31, 1997
<TABLE>
<CAPTION>
FUND INFORMATION
-------------------------------------------------------------------------------
401(k) PARTICIPANT - DIRECTED INVESTMENT FUNDS
-------------------------------------------------------------------------------
CITIZENS
INTERMEDIATE BANKING MONEY
INCOME EQUITY CORPORATION BALANCED MARKET
FUNDS FUNDS STOCK FUNDS FUNDS PAYSOP
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ADDITIONS
Investment income:
Dividends:
Citizens Banking Corporation $ 1,243,324 $ 50,778 $ 2,977
Other $ 436,933 $ 3,172,687 1,810,032
Interest income 109,018 28,982 15,185 188,660 $ 85,514 247
------------------------------------------------------------------------------
Total investment income 545,951 3,201,669 1,258,509 2,049,470 85,514 3,224
Contributions:
Employer 192,593 577,543 870,604 218,308 43,806
Employee 332,599 1,198,367 1,644,533 469,298 72,985
------------------------------------------------------------------------------
525,192 1,775,910 2,515,137 687,606 116,791
------------------------------------------------------------------------------
1,071,143 4,977,579 3,773,646 2,737,076 202,305 3,224
DEDUCTIONS
Benefit payments to participants (1,712,961) (3,597,259) (6,641,964) (4,825,476) (1,065,642) (16,998)
Transfers (net) (71,372) 1,670,756 (973,284) (689,579) 743,415
------------------------------------------------------------------------------
(1,784,333) (1,926,503) (7,615,248) (5,515,055) (322,227) (16,998)
Net realized and unrealized appreciation
(depreciation) in fair value of investments:
Realized 1,224 2,258,955 2,366,077 5,208,469 12,184
Unrealized 111,900 (535,660) 21,061,610 (2,481,985) 88,806
------------------------------------------------------------------------------
113,124 1,723,295 23,427,687 2,726,484 100,990
------------------------------------------------------------------------------
Net increase (decrease) (600,066) 4,774,371 19,586,085 (51,495) (119,922) 87,216
Transfer in from CB Financial Retirement
Savings Plan 1,721,996 4,121,017 4,709,160 12,812,133 343,714 184,798
Assets available for benefits at beginning of year 7,735,327 16,619,964 33,811,978 16,780,771 1,303,101
------------------------------------------------------------------------------
Assets available for benefits at end of year $ 8,857,257 $25,515,352 $58,107,223 $29,541,409 $1,526,893 $272,014
==============================================================================
<CAPTION>
FUND INFORMATION
---------------------------------
PARTICIPANT
DIRECTED PARTICIPANT
SEGREGATED LOAN
FUNDS FUND TOTAL
-------------------------------------------------
<S> <C> <C> <C>
ADDITIONS
Investment income:
Dividends:
Citizens Banking Corporation $ 1,297,079
Other 5,419,652
Interest income $ 106,971 $ 314,998 849,575
-----------------------------------------------
Total investment income 106,971 314,998 7,566,306
Contributions:
Employer 1,902,854
Employee 3,717,782
-----------------------------------------------
5,620,636
-----------------------------------------------
106,971 314,998 13,186,942
DEDUCTIONS(18,813,970)
Benefit payments to participants (953,670) (18,813,970)
Transfers (net) (5,131) (674,805) -
-----------------------------------------------
(958,801) (674,805) (18,813,970)
Net realized and unrealized appreciation
(depreciation) in fair value of investments:
Realized 1,452 9,848,361
Unrealized 9,039 18,253,710
------------------------------------------------
10,491 28,102,071
------------------------------------------------
Net increase (decrease) (841,339) (359,807) 22,475,043
Transfer in from CB Financial Retirement
Savings Plan 2,376,718 26,269,536
Assets available for benefits at beginning of year 3,491,573 79,742,714
-----------------------------------------------
Assets available for benefits at end of year $1,535,379 $3,131,766 $128,487,293
===============================================
</TABLE>
See accompanying notes.
5
<PAGE> 10
Citizens Banking Corporation Amended
and Restated Section 401(k) Plan
Statement of Changes in Assets Available for Benefits, With Fund Information
Year ended December 31, 1996
<TABLE>
<CAPTION>
FUND INFORMATION
--------------------------------------------------------------------------
401(k) PARTICIPANT - DIRECTED INVESTMENT FUNDS
--------------------------------------------------------------------------
CITIZENS
INTERMEDIATE BANKING MONEY
INCOME EQUITY CORPORATION BALANCED MARKET
FUNDS FUNDS STOCK FUNDS FUNDS
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ADDITIONS
Investment income:
Dividends:
Citizens Banking Corporation $ 1,034,439 $ 42,400
Other $ 407,751 $ 1,655,200 791,681
Interest income 45,817 6,532 8,098 28,068 $ 38,384
---------------------------------------------------------------------------
Total investment income 453,568 1,661,732 1,042,537 862,149 38,384
Contributions:
Employer 217,502 480,314 860,841 193,353 31,661
Employee 427,806 904,531 1,612,177 358,535 53,291
---------------------------------------------------------------------------
645,308 1,384,845 2,473,018 551,888 84,952
---------------------------------------------------------------------------
DEDUCTIONS 1,098,876 3,046,577 3,515,555 1,414,037 123,336
Benefit payments to participants (736,023) (1,185,012) (1,960,209) (2,295,048) (58,285)
Transfers (net) (733,539) 479,708 191,327 (533,994) 761,712
---------------------------------------------------------------------------
(1,469,562) (705,304) (1,768,882) (2,829,042) 703,427
Net realized and unrealized appreciation
(depreciation) in fair value of investments:
Realized (51,407) 45,286 (137,242) 1,163,177
Unrealized (136,607) 1,213,065 1,983,579 (80,070)
--------------------------------------------------------------------------
(188,014) 1,258,351 1,846,337 1,083,107
--------------------------------------------------------------------------
Net increase (decrease) (558,700) 3,599,624 3,593,010 (331,898) 826,763
Assets available for benefits at beginning of year 8,294,027 13,020,340 30,218,968 17,112,669 476,338
--------------------------------------------------------------------------
Assets available for benefits at end of year $ 7,735,327 $ 16,619,964 $ 33,811,978 $16,780,771 $1,303,101
==========================================================================
<CAPTION>
FUND INFORMATION
-------------------
PARTICIPANT
LOAN
FUND TOTAL
---------------------------------
<S> <C> <C>
ADDITIONS
Investment income:
Dividends:
Citizens Banking Corporation $ 1,076,839
Other 2,854,632
Interest income $ 312,530 439,429
---------------------------------
Total investment income 312,530 4,370,900
Contributions:
Employer 1,783,671
Employee 3,356,340
---------------------------------
5,140,011
---------------------------------
DEDUCTIONS 312,530 9,510,911
Benefit payments to participants (6,234,577)
Transfers (net) (165,214) -
---------------------------------
(165,214) (6,234,577)
Net realized and unrealized appreciation
(depreciation) in fair value of investments:
Realized 1,019,814
Unrealized 2,979,967
---------------------------------
3,999,781
---------------------------------
Net increase (decrease) 147,316 7,276,115
Assets available for benefits at beginning of year 3,344,257 72,466,599
---------------------------------
Assets available for benefits at end of year $ 3,491,573 $ 79,742,714
=================================
</TABLE>
See accompanying notes.
6
<PAGE> 11
Citizens Banking Corporation Amended
and Restated Section 401(k) Plan
Notes to Financial Statements
December 31, 1998
1. DESCRIPTION OF THE PLAN
The following description provides only general information. Participants should
refer to the Plan agreement for a more complete description of the Plan's
provisions.
The Citizens Banking Corporation Amended and Restated Section 401(k) Plan (the
"Plan") is a defined contribution plan which includes a 401(k) salary deferral
feature. The Plan covers substantially all employees of Citizens Banking
Corporation (the "Corporation") and its banking subsidiaries including salaried
employees and hourly employees with over 1,000 hours of credited service. The
Plan is subject to the provisions of the Employee Retirement Income Security Act
of 1974 (ERISA). Participants may contribute on a before-tax basis up to 15% of
their annual compensation (not to exceed $10,000 for 1998 and $9,500 for 1997
and 1996) and on an after-tax basis up to 10% of their compensation.
Participants may direct their contributions into either an intermediate income,
equity, balanced, money market or Citizens Banking Corporation stock fund and
may elect to change the percentage directed to each fund quarterly. On July 1,
1997 the assets of the CB Financial Corporation Retirement Savings Plan were
transferred into the Plan.
The Corporation will match the participant's pre-tax contribution up to 6% of
the participants compensation (includes regular base salary or wages,
commissions, overtime, shift premiums, incentive pay and referral pay). The
Corporation will match 100% on the first 3% of pre-tax salary deferral and 50%
on the next 3% of pre-tax salary deferral, for a total of a 75% match on a 6%
pre-tax salary deferral. In addition, a retiree medical savings account was
established for each participant. One third of the employer matching
contribution is automatically directed into this account. Employees may not
borrow against any monies residing in this account. These matching contributions
are fully vested after three years of service or upon normal or early
retirement, death or disability. All administrative costs of the plan are paid
by the Corporation.
7
<PAGE> 12
Citizens Banking Corporation Amended
and Restated Section 401(k) Plan
Notes to Financial Statements (continued)
1. DESCRIPTION OF THE PLAN (CONTINUED)
Although it has not expressed any intent to do so, the Corporation has the right
under the Plan to discontinue its contributions at any time and to terminate the
Plan subject to the provisions of ERISA. In the event of Plan termination,
participants will become 100 percent vested in their accounts.
2. SIGNIFICANT ACCOUNTING POLICIES
VALUATION OF INVESTMENTS
Marketable investments are stated at aggregate fair value. Securities traded on
a national securities exchange are valued at the last reported sales price on
the last business day of the Plan year. Investments traded in the
over-the-counter market and listed securities for which no sale was reported on
that date are valued at the average of the last reported bid and ask prices.
Loans to participants represent qualifying interest-bearing loans from
individual accounts that are valued at the amount of outstanding principal.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates that affect the
amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
8
<PAGE> 13
Citizens Banking Corporation Amended
and Restated Section 401(k) Plan
Notes to Financial Statements (continued)
3. INVESTMENTS
The Plan's investments are administered by the Citizens Bank Trust Department.
The Plan's investment fund options consist of the following:
The Intermediate Income Funds include:
The Golden Oak Intermediate-Term Income Fund,
The Federal National Mortgage Association Fund, and
U.S. Treasury Notes.
The Equity Funds consist of:
The Harbor International Fund,
The Frank Russell Quantitative Equity Fund,
The Frank Russell Diversified Fund, and
The Frank Russell Special Growth Fund.
The Balanced Fund includes:
The Golden Oak Diversified Growth Fund,
The Golden Oak Intermediate Income Fund,
The Golden Oak Value Portfolio Fund,
The Harbor International Fund,
The Harbor Capital Appreciation Fund,
The Heartland Value Fund,
The Federal National Mortgage Association Fund,
U.S. Treasury Notes,
Scudder Growth and Income Fund
Baron Asset Fund, and
Citizens Banking Corporation Stock.
The Money Market Funds are comprised of:
* The SEI Daily Income Trust Treasury II Fund and
* The Golden Oak Prime Obligation Class A Fund.
The Citizens Banking Corporation Stock Fund includes:
Citizens Banking Corporation Stock.
*These funds are also included in the other fund options within the plan for
residual cash
9
<PAGE> 14
Citizens Banking Corporation Amended
and Restated Section 401(k) Plan
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
During each of the three years in the period ended December 31, 1998, the Plan's
investments (including investment bought, sold as well as held during the year)
appreciated (depreciated) in fair value by $2,241,527, $28,102,071, and
$3,999,781, as follows:
<TABLE>
<CAPTION>
NET
APPRECIATION
(DEPRECIATION) FAIR VALUE
IN FAIR VALUE AT END COST AT END
DURING YEAR OF YEAR OF YEAR
-------------------------------------------------------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Fair value as determined by quoted
market price:
Common stocks:
Domestic:
Citizens Banking
Corporation $(1,375,580) $55,201,635 $21,858,870
Mutual funds 3,626,478 53,903,259 43,941,630
U.S. Government Securities (9,371)
Money market account 3,225,152 3,225,152
-------------------------------------------------------------
$2,241,527 $112,330,046 $69,025,652
=============================================================
YEAR ENDED DECEMBER 31, 1997
Fair value as determined by quoted
market price:
Common stocks:
Domestic:
Citizens Banking
Corporation $25,026,513 $61,854,740 $17,697,892
Other 250,183
Foreign stocks 14,512
Mutual funds 2,746,834 51,340,631 44,893,258
U.S. Government Securities 64,029 5,251,329 5,240,295
Money market account 5,772,545 5,772,545
-------------------------------------------------------------
$28,102,071 $124,219,245 $73,603,990
=============================================================
</TABLE>
10
<PAGE> 15
Citizens Banking Corporation Amended
and Restated Section 401(k) Plan
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
NET
APPRECIATION
(DEPRECIATION) FAIR VALUE
IN FAIR VALUE AT END COST AT END
DURING YEAR OF YEAR OF YEAR
-------------------------------------------------------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Fair value as determined by quoted
market price:
Common stocks:
Domestic:
Citizens Banking
Corporation $1,835,646 $33,794,523 $16,240,448
Mutual funds 2,170,005 38,778,935 34,024,164
U.S. Government securities (5,870)
Money market account 3,121,468 3,121,468
-------------------------------------------------------------
$3,999,781 $75,694,926 $53,386,080
======================-======================================
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------
<S> <C> <C> <C>
Realized gain:
Proceeds on disposition $65,259,649 $62,865,295 $23,113,326
Cost 55,895,550 53,016,934 22,093,512
-------------------------------------------------------------
9,364,099 9,848,361 1,019,814
Unrealized gain (loss) (7,122,572) 18,253,710 2,979,967
-------------------------------------------------------------
$2,241,527 $28,102,071 $ 3,999,781
=============================================================
</TABLE>
11
<PAGE> 16
Citizens Banking Corporation Amended
and Restated Section 401(k) Plan
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The Plan invests certain fund assets in the Golden Oak series of mutual funds.
Citizens Bank, a subsidiary of Citizens Banking Corporation, serves as the
investment advisor to these funds. The mutual fund portfolios were established
pursuant to the provisions of the Investment Company Act of 1940. Investments
within these portfolios were made in accordance with the applicable Department
of Labor rules and regulations concerning the investment of qualified plan
assets into mutual funds wherein the investment advisor to the portfolio is a
party-in-interest with respect to the plan.
4. INCOME TAX STATUS
The Plan has received a determination letter from the Internal Revenue Service
dated August 2, 1995, stating that the Plan is qualified under Section 401(a) of
the Internal Revenue Code (the "Code") and, therefore, the related trust is
exempt from taxation. Subsequent to the receipt of the determination letter, the
Plan has been restated in its entirety and a new determination letter request is
pending. Once qualified, the Plan is required to operate in conformity with the
Code to maintain its qualification. The Plan Administrator believes the Plan is
being operated in compliance with the applicable requirements of the Code and,
therefore, believes that the Plan is qualified and the related trust is tax
exempt.
5. BENEFITS PAYABLE
Assets available for plan benefits include amounts allocated for approved
distributions. Such balances amounted to $1,922,682 and $8,595,436 at December
31, 1998 and 1997, respectively. Such amounts are shown as a liability on the
Plan's Form 5500.
6. YEAR 2000 ISSUE (UNAUDITED)
The Corporation has developed a plan to modify its internal information
technology to be ready for the year 2000 and has begun converting critical data
processing systems. The project also includes determining whether third party
service providers have reasonable plans in place to become year 2000 compliant.
The Corporation currently expects the project to be substantially complete by
early 1999. The Corporation does not expect this project to have a significant
effect on Plan operations.
12
<PAGE> 17
SUPPLEMENTAL SCHEDULES
<PAGE> 18
Citizens Banking Corporation Amended
and Restated Section 401(k) Plan
Employer ID #38-2378932
Plan #002
Item 27(a) - Schedule of Assets Held for Investment Purposes
December 31, 1998
<TABLE>
<CAPTION>
DESCRIPTION OF INVESTMENT INCLUDING
IDENTITY OF ISSUE, BORROWER, MATURITY DATE, RATE OF INTEREST, FAIR
LESSOR OR SIMILAR PARTY COLLATERAL, PAR OR MATURITY VALUE COST VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stocks:
*Citizens Banking Corporation 1,635,604 shares $21,858,870 $55,201,635
---------------------------------
Total common stock 21,858,870 55,201,635
Mutual Funds:
*Golden Oak Diversified Growth Funds 136,328.27 units 1,489,523 2,013,569
*Golden Oak Intermediate Income Fund 1,437,507.34 units 14,152,929 14,820,701
*Golden Oak Value Portfolio Fund 223,216.17 units 2,032,541 1,944,213
Baron Asset Fund 21,453.05 units 866,821 1,084,237
Harbor International Fund 234,692 units 5,995,595 8,617,877
Harbor Capital Appreciation Fund 51,769.08 units 1,259,594 1,966,707
Heartland Value Fund 52,077.29 units 1,501,084 1,525,344
Frank Russell Quantitative Equity Fund 179,260.41 units 5,111,830 7,620,360
Frank Russell Diversified Fund 154,826.55 units 5,952,928 7,959,633
Frank Russell Special Growth Fund 105,206.86 units 3,824,759 4,582,405
Scudder Growth & Income Fund 67,206.86 units 1,754,026 1,768,213
---------------------------------
Total Mutual Funds 43,941,630 53,903,259
</TABLE>
13
<PAGE> 19
Citizens Banking Corporation Amended
and Restated Section 401(k) Plan
Employer ID #38-2378932
Plan #002
Item 27(a) - Schedule of Assets Held for Investment Purposes (continued)
<TABLE>
<CAPTION>
DESCRIPTION OF INVESTMENT INCLUDING
IDENTITY OF ISSUE, BORROWER, MATURITY DATE, RATE OF INTEREST FAIR
LESSOR OR SIMILAR PARTY COLLATERAL, PAR OR MATURITY VALUE COST VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Accounts:
SEI Daily Income Trust Treasury II $3,644 principal amount $ 3,644 $ 3,644
*Golden Oak Prime Obligation Class A $3,221,508 principal amount 3,221,508 3,221,508
--------------------------------
Total Money Market Accounts 3,225,152 3,225,152
Participant loans Interest rate range: 8.75% - 9.5% - 3,017,614
--------------------------------
Total investments $ 69,025,652 $ 115,347,660
================================
</TABLE>
*Party-in-interest.
There were no investment assets both acquired and disposed of during the Plan
year.
14
<PAGE> 20
Citizens Banking Corporation Amended
and Restated Section 401(k) Plan
Employer ID #38-2378932
Plan #002
Item 27(b) - Schedule of Loans or Fixed Income Obligations
Year ended December 31, 1998
<TABLE>
<CAPTION>
DETAILED DESCRIPTION OF LOAN
INCLUDING DATES OF MAKING AND
MATURITY, INTEREST RATE, THE TYPE AND
AMOUNT RECEIVED VALUE OF COLLATERAL, ANY
ORIGINAL DURING PLAN YEAR UNPAID RENEGOTIATION OF THE LOAN AND TERMS
IDENTIFY AND ADDRESS AMOUNT ---------------------------- BALANCE AT OF THE RENOGOTIATION, AND OTHER
OF OBLIGOR OF LOAN PRINCIPAL INTEREST END OF YEAR MATERIAL ITEMS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Paula Hillier $ 4,800 $ 41.26 $ 14.83 $ 3,814.57 Origination Date 03-09-95;
3019 Hermansau Interest rate 10%;
Saginaw, Michigan Maturity Date 03-04-99
<CAPTION>
AMOUNT OVERDUE
IDENTIFY AND ADDRESS -------------------------
OF OBLIGOR PRINCIPAL INTEREST
- ------------------------------------------------
<S> <C> <C>
Paula Hillier $3,537.84 $612.82
3019 Hermansau
Saginaw, Michigan
</TABLE>
15
<PAGE> 21
Citizens Banking Corporation Amended
and Restated Section 401(k) Plan
Employer ID #38-2378932
Plan #002
Item 27(d) - Schedule of Reportable Transactions
Year ended December 31, 1998
<TABLE>
<CAPTION>
EXPENSE
DESCRIPTION OF ASSET (INCLUDING INCURRED
INTEREST RATE AND MATURITY IN PURCHASE SELLING LEASE WITH
IDENTITY OF PARTY INVOLVED CASE OF A LOAN) PRICE PRICE RENTAL TRANSACTION
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Category iii) A series of transactions with
respect to the same issue which amount
in the aggregate to more than 5% of the
current value of total plan assets:
Citizens Banking Corporation 182 purchases, 188,996.53 shares
purchased $ 6,545,950
175 sales, 193,294.53 shares sold $ 6,440,768
Golden Oak FDS Prime Obligation
Money Market--Class A 441 purchases, 26,564,548 units
purchased 26,564,548
205 sales, 27,425,596 units sold 27,425,596
<CAPTION>
CURRENT
VALUE OF
COST ASSET OF NET
OF TRANSACTION GAIN
IDENTITY OF PARTY INVOLVED ASSET DATE (LOSS)
- ------------------------------------------- ----------------------------------------
<S> <C> <C> <C>
Category iii) A series of transactions with
respect to the same issue which amount
in the aggregate to more than 5% of the
current value of total plan assets:
Citizens Banking Corporation
$ 6,545,950 $ 6,545,950
2,384,972 6,440,768 $ 4,055,796
Golden Oak FDS Prime Obligation
Money Market--Class A
26,564,548 26,564,548
27,425,596 27,425,596 -
</TABLE>
Commissions and fees related to purchase and sales of investments are included
in the cost of the investment or proceeds from the sale.
There were no transactions reportable under categories i), ii) or iv).
16
