<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended September 30, 1999
----------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
---------------------- -------------------
Commission file Number 0-10535
--------------
CITIZENS BANKING CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2378932
- ------------------------------ ----------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
328 S. Saginaw St., Flint, Michigan 48502
- -------------------------------------- ----------
Address of principal executive offices) (Zip Code)
(810) 766-7500
----------------------------------------------------
(Registrant's telephone number, including area code)
None
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
X Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1999
- --------------------------------- -------------------------------
Common Stock, No Par Value 26,579,670 Shares
<PAGE> 2
Citizens Banking Corporation
Index to Form 10-Q
<TABLE>
<CAPTION>
Page
----
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1 - Consolidated Financial Statements.............................................. 3
Item 2 - Management's Discussion and Analysis of Financial Condition
And Results of Operations...................................................... 10
Item 3 - Quantitative and Qualitative Disclosure of Market Risk......................... 24
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.............................................................. 25
Item 2 - Changes in Securities.......................................................... 25
Item 3 - Defaults upon Senior Securities................................................ 25
Item 4 - Submission of Matters to a Vote of Security Holders............................ 25
Item 5 - Other Information.............................................................. 25
Item 6 - Exhibits and Reports on Form 8-K............................................... 25
SIGNATURES................................................................................... 25
</TABLE>
2
<PAGE> 3
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(in thousands) 1999 1998
- --------------------------------------------------------------------------------------
(UNAUDITED) (Note 1)
<S> <C> <C>
ASSETS
Cash and due from banks $ 151,107 $ 140,543
Money market investments:
Interest-bearing deposits with banks 48 304
Federal funds sold -- 8,500
Term federal funds and other 2,669 17,435
----------- -----------
Total money market investments 2,717 26,239
Securities available-for-sale:
U.S. Treasury and federal agency securities 674,198 430,676
State and municipal securities 152,939 157,551
Other securities 31,538 25,302
----------- -----------
Total investment securities 858,675 613,529
Loans:
Commercial 1,652,016 1,594,113
Real estate construction 89,547 89,623
Real estate mortgage 708,719 741,358
Consumer 1,261,296 1,159,417
----------- -----------
Total loans 3,711,578 3,584,511
Less: Allowance for loan losses (46,675) (46,449)
----------- -----------
Net loans 3,664,903 3,538,062
Premises and equipment 81,678 78,248
Intangible assets 50,311 54,470
Other assets 53,519 50,318
----------- -----------
TOTAL ASSETS $ 4,862,910 $ 4,501,409
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 620,887 $ 636,059
Interest-bearing 3,103,916 3,128,297
----------- -----------
Total deposits 3,724,803 3,764,356
Federal funds purchased and securities sold
under agreements to repurchase 199,376 111,336
Other short-term borrowings 384,993 12,971
Other liabilities 46,203 40,727
Long-term debt 100,257 130,937
----------- -----------
Total liabilities 4,455,632 4,060,327
SHAREHOLDERS' EQUITY
Preferred stock - No par value -- --
Common stock - No par value 69,918 117,525
Retained earnings 344,038 319,500
Accumulated other comprehensive income (6,678) 4,057
----------- -----------
Total shareholders' equity 407,278 441,082
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,862,910 $ 4,501,409
=========== ===========
</TABLE>
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See notes to consolidated financial statements (unaudited).
3
<PAGE> 4
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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 76,228 $ 75,848 $222,048 $226,988
Interest and dividends on investment securities:
Taxable 11,040 7,179 25,572 21,481
Nontaxable 1,816 1,877 5,483 5,721
Money market investments 88 551 981 1,942
-------- -------- -------- --------
Total interest income 89,172 85,455 254,084 256,132
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 29,081 31,951 88,124 97,151
Short-term borrowings 6,317 1,512 9,379 4,569
Long-term debt 1,831 1,956 5,398 6,138
-------- -------- -------- --------
Total interest expense 37,229 35,419 102,901 107,858
-------- -------- -------- --------
NET INTEREST INCOME 51,943 50,036 151,183 148,274
Provision for loan losses 3,600 3,510 11,300 10,530
-------- -------- -------- --------
Net interest income after provision for loan losses 48,343 46,526 139,883 137,744
-------- -------- -------- --------
NONINTEREST INCOME
Trust fees 5,104 4,633 15,408 13,881
Service charges on deposit accounts 3,751 3,258 10,198 9,513
Bankcard fees 2,303 2,083 6,661 5,653
Brokerage and investment fees 1,239 663 3,071 1,860
Mortgage and other loan income 488 1,534 2,466 2,869
Investment securities gains 47 49 211 103
Equity security gain -- -- 5,693 --
Premium from sale of deposits -- -- 1,348 --
Other 2,709 2,518 8,161 7,817
-------- -------- -------- --------
Total noninterest income 15,641 14,738 53,217 41,696
-------- -------- -------- --------
NONINTEREST EXPENSE
Salaries and employee benefits 21,253 20,145 63,868 61,344
Equipment 2,881 2,921 8,498 9,079
Occupancy 2,920 2,845 8,167 8,516
Data processing fees 1,810 1,873 5,452 4,174
Bankcard fees 2,108 1,680 5,378 4,373
Intangible asset amortization 1,386 1,386 4,159 4,159
Postage and delivery 1,121 953 3,311 3,165
Advertising and public relations 731 1,072 3,152 3,477
Net charge from fraud loss 2,496 -- 6,246 --
Other 7,195 7,394 22,175 20,873
-------- -------- -------- --------
Total noninterest expense 43,901 40,269 130,406 119,160
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 20,083 20,995 62,694 60,280
Income taxes 6,181 6,406 19,303 18,486
-------- -------- -------- --------
NET INCOME $ 13,902 $ 14,589 $ 43,391 $ 41,794
======== ======== ======== ========
NET INCOME PER SHARE:
Basic $ 0.52 $ 0.52 $ 1.58 $ 1.49
Diluted 0.51 0.50 1.56 1.45
AVERAGE SHARES OUTSTANDING:
Basic 26,790 28,164 27,389 28,138
Diluted 27,136 28,754 27,833 28,767
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements (unaudited).
4
<PAGE> 5
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive
(in thousands except per share amounts) Stock Earnings Income Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE - SEPTEMBER 30, 1998 $ 118,488 $ 310,353 $ 5,957 $ 434,798
Net income 14,991 14,991
Net unrealized loss on securities available-for-sale,
net of tax effect (1,900) (1,900)
---------
Total comprehensive income 13,091
Exercise of stock options, net of
shares purchased 771 771
Shares acquired for exercise of stock options (1,734) (1,734)
Cash dividends - $0.21 per share (5,844) (5,844)
--------- --------- --------- ---------
BALANCE - DECEMBER 31, 1998 117,525 319,500 4,057 441,082
Net income 14,423 14,423
Net unrealized loss on securities available-for-sale,
net of tax effect (1,185) (1,185)
---------
Total comprehensive income 13,238
Exercise of stock options, net of
shares purchased 575 575
Shares acquired for retirement (20,158) (20,158)
Cash dividends - $0.21 per share (5,893) (5,893)
--------- --------- --------- ---------
BALANCE - MARCH 31, 1999 97,942 328,030 2,872 428,844
Net income 15,066 15,066
Net unrealized loss on securities available-for-sale,
net of tax effect (6,714) (6,714)
---------
Total comprehensive income 8,352
Exercise of stock options, net of
shares purchased 1,331 1,331
Shares acquired for retirement (20,979) (20,979)
Cash dividends - $0.235 per share (6,489) (6,489)
--------- --------- --------- ---------
BALANCE - JUNE 30, 1999 78,294 336,607 (3,842) 411,059
Net income 13,902 13,902
Net unrealized loss on securities available-for-sale,
net of tax effect (2,836) (2,836)
---------
Total comprehensive income 11,066
Exercise of stock options, net of
shares purchased 204 204
Shares acquired for retirement (8,580) (8,580)
Cash dividends - $0.235 per share (6,471) (6,471)
--------- --------- --------- ---------
BALANCE - SEPTEMBER 30, 1999 $ 69,918 $ 344,038 $ (6,678) $ 407,278
========= ========= ========= =========
</TABLE>
- ------------------------------- ------------------------------------------------
See notes to consolidated financial statements (unaudited).
5
<PAGE> 6
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 43,391 $ 41,794
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 11,300 10,530
Depreciation 7,147 6,108
Amortization of intangibles 4,159 4,159
Net amortization on investment securities 2,180 1,250
Investment securities gains (211) (103)
Equity security gain (5,693) --
Premium on sale of branch deposits (1,359) --
Increase in deferred tax asset on AFS securities net unrealized losses 5,780 --
Increase in deferred tax liability on AFS securities net unrealized gains -- (1,128)
Other 2,275 2,778
--------- ---------
Net cash provided by operating activities 68,969 65,388
INVESTING ACTIVITIES:
Net decrease in money market investments 23,522 9,800
Securities available-for-sale:
Proceeds from sales 12,316 9,625
Proceeds from maturities 194,506 199,562
Purchases (470,452) (247,881)
Proceeds from sale of Magic Line, Inc. stock 5,693 --
Net increase in loans (138,141) (6,973)
Purchases of premises and equipment (10,577) (11,133)
--------- ---------
Net cash used by investing activities (383,133) (47,000)
FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings deposits (86,777) 2,427
Net increase (decrease) in time deposits 48,583 (49,017)
Net increase in short-term borrowings 460,062 12,635
Proceeds from issuance of long-term debt 22,000 77,550
Principal reductions in long-term debt (52,680) (44,547)
Cash dividends paid (18,853) (17,147)
Proceeds from stock options exercised 2,110 3,463
Shares acquired for retirement (49,717) (5,249)
--------- ---------
Net cash provided by financing activities 324,728 (19,885)
--------- ---------
Net increase in cash and due from banks 10,564 (1,497)
Cash and due from banks at beginning of period 140,543 168,351
--------- ---------
Cash and due from banks at end of period $ 151,107 $ 166,854
========= =========
</TABLE>
- ------------------------------------------------------------------------------
See notes to consolidated financial statements (unaudited).
6
<PAGE> 7
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions for Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-and nine
month periods ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Corporation's 1998 Annual Report on Form
10-K.
NOTE 2. LINES OF BUSINESS INFORMATION
The Corporation is managed along the following business lines: Commercial
Banking, Retail Banking, Financial Services, and all other. Selected lines of
business segment information for the three and nine-month periods ended
September 30, 1999 and 1998 is provided below. Total assets by business
segment did not change materially from that previously disclosed in the
Corporation's 1998 Annual Report on Form 10-K. There are no significant
intersegment revenues.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Commercial Retail Financial
(in thousands) Banking Banking Services Other Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS SUMMARY - THREE MONTHS ENDED SEPTEMBER 30, 1999
Net interest income (taxable equivalent) $ 18,219 $ 28,802 $ 324 $ 6,150 $ 53,495
Provision for loan losses 1,073 3,136 -- (609) 3,600
-------- -------- --------- ------- --------
Net interest income after provision 17,146 25,666 324 6,759 49,895
Noninterest income 2,674 6,910 6,198 (141) 15,641
Noninterest expense 9,784 24,823 4,839 4,455 43,901
-------- -------- --------- ------- --------
Income (loss) before income taxes 10,036 7,753 1,683 2,163 21,635
Income tax expense (taxable equivalent) 3,513 2,713 589 918 7,733
-------- -------- --------- ------- --------
Net income (loss) $ 6,523 $ 5,040 $ 1,094 $ 1,245 $ 13,902
======== ======== ========= ======= ========
- ------------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY - THREE MONTHS ENDED SEPTEMBER 30, 1998
Net interest income (taxable equivalent) $ 17,400 $ 28,718 $ 466 $ 4,949 $ 51,533
Provision for loan losses 1,351 1,904 -- 255 3,510
-------- -------- --------- ------- --------
Net interest income after provision 16,049 26,814 466 4,694 48,023
Noninterest income 2,183 7,093 5,242 220 14,738
Noninterest expense 9,716 23,193 4,544 2,816 40,269
-------- -------- --------- ------- --------
Income (loss) before income taxes 8,516 10,714 1,164 2,098 22,492
Income tax expense (taxable equivalent) 2,981 3,750 407 765 7,903
-------- -------- --------- ------- --------
Net income (loss) $ 5,535 $ 6,964 $ 757 $ 1,333 $ 14,589
======== ======== ========= ======= ========
</TABLE>
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7
<PAGE> 8
<TABLE>
<CAPTION>
Commercial Retail Financial
(in thousands) Banking Banking Services Other Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS SUMMARY - NINE MONTHS ENDED SEPTEMBER 30, 1999
Net interest income (taxable equivalent) $ 53,716 $ 85,950 $ 1,038 $ 15,208 $155,912
Provision for loan losses 1,723 11,600 -- (2,023) 11,300
-------- -------- ------- -------- --------
Net interest income after provision 51,993 74,350 1,038 17,231 144,612
Noninterest income 7,206 21,584 17,952 6,475 53,217
Noninterest expense 26,925 69,416 12,913 21,152 130,406
-------- -------- ------- -------- --------
Income (loss) before income taxes 32,274 26,518 6,077 2,554 67,423
Income tax expense (taxable equivalent) 11,296 9,281 2,127 1,328 24,032
-------- -------- ------- -------- --------
Net income (loss) $ 20,978 $ 17,237 $ 3,950 $ 1,226 $ 43,391
======== ======== ======= ======== ========
- ------------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY - NINE MONTHS ENDED SEPTEMBER 30, 1998
Net interest income (taxable equivalent) $ 49,486 $ 89,521 $ 1,402 $ 12,271 $152,680
Provision for loan losses 2,853 7,949 -- (272) 10,530
-------- -------- ------- -------- --------
Net interest income after provision 46,633 81,572 1,402 12,543 142,150
Noninterest income 6,506 19,024 15,586 580 41,696
Noninterest expense 28,020 65,994 13,569 11,577 119,160
-------- -------- ------- -------- --------
Income (loss) before income taxes 25,119 34,602 3,419 1,546 64,686
Income tax expense (taxable equivalent) 8,792 12,111 1,196 793 22,892
-------- -------- ------- -------- --------
Net income (loss) $ 16,327 $ 22,491 $ 2,223 $ 753 $ 41,794
======== ======== ======= ======== ========
</TABLE>
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NOTE 3. EARNINGS PER SHARE
Net income per share is computed based on the weighted-average number of
shares outstanding, including the dilutive effect of stock options, as
follows:
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share amounts) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NUMERATOR:
Numerator for basic and dilutive earnings per share --
net income available to common shareholders $ 13,902 $14,589 $ 43,391 $41,794
======== ======= ======== =======
DENOMINATOR:
Denominator for basic earnings per share --
weighted average shares 26,790 28,164 27,389 28,138
Effect of dilutive securities --
potential conversion of employee stock options 346 590 444 629
-------- ------- -------- -------
Denominator for diluted earnings per share --
adjusted weighted-average shares and assumed conversions 27,136 28,754 27,833 28,767
======== ======= ======== =======
BASIC EARNINGS PER SHARE $ 0.52 $ 0.52 $ 1.58 $ 1.49
======== ======= ======== =======
DILUTED EARNINGS PER SHARE $ 0.51 $ 0.50 $ 1.56 $ 1.45
======== ======= ======== =======
</TABLE>
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During the third quarter of 1999, employees exercised stock options to acquire
20,578 shares at an average exercise price of $9.02 per share.
8
<PAGE> 9
NOTE 4. SUBSEQUENT EVENTS - ACQUISITIONS
On November 1, 1999, the Corporation completed its acquisition of F&M
Bancorporation, Inc. ("F&M"), a multi-bank holding company headquartered in
Wisconsin, in a stock-for-stock merger transaction. The Corporation issued
20,986,939 shares of its common stock in a tax-free exchange for all the
outstanding shares of F&M. At the acquisition date, F&M had total assets of
approximately $2.7 billion and stockholders' equity of approximately $260
million. The Merger was accounted for as a pooling-of-interests. Historical
financial information presented in this Form 10-Q has not been restated to
reflect this acquisition.
On October 8, 1999, Citizens Bank, a wholly owned subsidiary of the
Corporation, completed its acquisition of seventeen former Bank One branch
offices located in northern lower Michigan. Citizens Bank assumed
approximately $442 million in deposits and acquired approximately $89 million
in loans and $5 million of fixed assets. Citizens paid an acquisition premium
of 10.13%, on certain core deposits, or approximately $36.1 million.
Approximately 7% of the premium was recognized on the balance sheet as a core
deposit intangible and is being amortized over ten years using the
straight-line method. The remaining 3.13% was recognized on the balance sheet
as goodwill and is being amortized over twenty years using the straight-line
method.
The Corporation expects to incur pre-tax restructuring and merger-related
charges of approximately $40 to $50 million in connection with these
acquisitions. Approximately $30 to $40 million of which will be recorded as a
one-time charge in the fourth quarter of 1999. The remaining merger related
charges are expected to be incurred throughout year 2000. Restructuring and
merger related charges include severance and employee related costs; balance
sheet restructuring charges to conform the combined company to the
Corporation's asset and liability management policies, which includes
liquidity, interest rate risk and investment policies; additional loan loss
provision to conform with the Corporation's credit policies; merger
transaction costs consisting primarily of investment banking, legal and
accounting fees; a contribution to augment a charitable foundation and other
merger-related costs including system conversion costs and the write-off of
various tangible and intangible assets acquired. These expenses will be
partially offset by additional cost savings and other revenue enhancements
from the consolidation of operations, improved efficiencies and new markets
for the Corporation's products and services.
NOTE 5. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year financial statement presentation.
9
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a review of the Corporation's performance for the
three and nine-month periods ended September 30, 1999. This discussion should be
read in conjunction with the accompanying unaudited financial statements and
notes thereto appearing on pages 3 through 9 of this report and the
Corporation's 1998 Annual Report on Form 10-K.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share data) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOR THE PERIOD
Interest income $ 89,172 $ 85,455 $ 254,084 $ 256,132
Net interest income 51,943 50,036 151,183 148,274
Provision for loan losses 3,600 3,510 11,300 10,530
Investment securities gains 47 49 211 103
Other noninterest income 15,594 14,689 53,006 41,593
Noninterest expense 43,901 40,269 130,406 119,160
Income taxes 6,181 6,406 19,303 18,486
Net income 13,902 14,589 43,391 41,794
Cash dividends 6,471 5,914 18,853 17,147
PER SHARE DATA
Basic net income $ 0.52 $ 0.52 $ 1.58 $ 1.49
Diluted net income 0.51 0.50 1.56 1.45
Cash dividends 0.235 0.21 0.68 0.61
Book value (end of period) -- -- 15.24 15.46
Market value (end of period close) -- -- 26.13 32.88
FINANCIAL RATIOS (ANNUALIZED)
Return on average shareholders' equity 13.65% 13.46% 13.78% 13.26%
Return on average assets 1.14 1.30 1.25 1.26
Net interest margin (taxable equivalent) 4.70 4.98 4.80 4.92
Net loan charge-offs to average loans 0.37 0.38 0.41 0.35
Average equity to average total assets 8.38 9.67 9.10 9.48
Nonperforming assets to loans plus other
repossessed assets acquired (end of period) -- -- 0.53 0.78
Nonperforming assets to total assets (end of period) -- -- 0.40 0.62
<CAPTION>
BALANCE SHEET TOTALS Percent
At Period End (September 30) Change
-------
<S> <C> <C> <C>
Assets 9.0% $4,862,910 $4,462,543
Loans 4.9 3,711,578 3,539,287
Deposits 2.1 3,724,803 3,647,756
Shareholders' equity (6.4) 407,278 434,798
Average Balances
Assets 4.1 4,628,098 4,444,185
Loans 2.8 3,605,194 3,505,735
Deposits 1.8 3,759,172 3,694,325
Shareholders' equity (0.1) 421,127 421,353
</TABLE>
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10
<PAGE> 11
PERFORMANCE SUMMARY
Selected financial data as of September 30, 1999 and 1998 and for the three and
nine month periods then ended are presented in the table on page 10. Earnings
for three and nine months ended September 30, 1999, reflect a net one-time
charge of $2.5 million ($1.6 million net of tax) in the third quarter of 1999
from a check-kiting scheme offset, in part, by the reversal of a previously
accrued commitment to fund a charitable trust. Excluding this charge, net income
increased in both periods due to higher net interest income and noninterest
income. This improvement was partially offset by a slightly higher provision for
loan losses and increases in operating expense and income taxes. Net interest
income increased due to higher earning asset levels and lower cost of interest
bearing liabilities. Noninterest income reflects a premium of $1.3 million from
the sale of branch deposits in the first quarter of 1999, and a $5.7 million
gain on the sale of Magic Line, Inc. stock in June 1999. In addition, in both
the three and nine month periods there was significant growth in trust fees,
deposit service charges, bankcard fees, brokerage and investment fees and cash
management fees. Noninterest expense increased in both the three and nine month
periods ended September 30, 1999, reflecting higher salaries and benefits,
bankcard fees, professional services, postage and delivery, stationery and
supplies and telecommunication costs.
LINES OF BUSINESS REPORTING
The Corporation operates along three major business segments: Commercial
Banking, Retail Banking and Financial Services. For more information about each
line of business see Note 17 to the Corporation's 1998 Annual Report on Form
10-K and Note 2 of this Quarterly Report on Form 10-Q. A summary of net income
by each business line is presented below.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial Banking $ 6,523 $ 5,535 $20,978 $16,327
Retail Banking 5,040 6,964 17,237 22,491
Financial Services 1,094 757 3,950 2,223
Other 1,245 1,333 1,226 753
------- ------- ------- -------
Total $13,902 $14,589 $43,391 $41,794
======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
The increase in commercial banking net income 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
decreased due to a higher loan loss provision, associated primarily with the
indirect consumer lending portfolio, and increased overhead costs resulting from
increased data processing, and equipment and software costs related to the
Corporation's information technology partnership with M&I Data Services and
additional sales staff. Lower net interest income in the first nine-months of
1999 also contributed to this decrease. Net interest income for the third
quarter of 1999, however, was up over the same period in 1999 due to higher
interest rates and additional volume in the direct and indirect consumer
portfolios. Financial services income improved due to growth in trust and
investment advisory services from enhanced pricing strategies, higher sales
volumes, increased brokerage activity and the introduction of new products and
services.
NET INTEREST INCOME
Tax equivalent net interest income, the Corporation's principal source of
earnings, was $53.5 million for the third quarter of 1999 and $155.9 million for
the nine-month period ended September 30, 1999, an increase of 3.8% and 2.1%,
respectively, over the same periods in 1998. Net interest income and average
balances and yields on major categories of interest-earning assets and
interest-bearing liabilities during the three and nine months of 1999 and 1998
are summarized on pages 13 and 14. The effects of changes in average market
rates of interest ("rate") and average balances ("volume") are quantified in the
table on page 12.
Net interest income increased $1.9 million in the third quarter of 1999 and $2.9
million for the nine months ended September 30, 1999, as compared to the same
periods in 1998. Growth in net interest income in both periods, benefited from
an increase in earning assets, primarily commercial loans and federal agency CMO
("collateralized mortgage obligation") securities, and lower rates paid on
interest-bearing liabilities. This improvement was offset, in part, by lower
yields in most categories of earning assets and an increase in deposits and
short-term borrowing balances.
Yields on earning assets decreased 42 basis points in both the three and
nine-month periods ended September 30, 1999, as compared to the same periods in
1998. The cost of interest-bearing liabilities decreased 27 basis points to
3.95% in the third quarter of 1999, as compared to the third quarter of 1998.
For the nine months ended September 30, 1999, the cost of interest-bearing
liabilities decreased 40 basis points to 3.88% from 4.28% in 1998
11
<PAGE> 12
Net interest margin, the difference between rates earned on earning assets
compared to the rates paid on supporting funds, was 4.70% for the third quarter
of 1999, 28 basis points lower than the third quarter of 1998. Net interest
margin for the nine-month period ended September 30, 1999 was 4.80%, 12 basis
points lower than the same period in 1998. The decrease in net interest margin
reflects a reduced interest rate spread on earning assets and a less favorable
funding mix. The funding mix reflects management's decision, in June 1999, to
restructure its balance sheet in anticipation of the announced purchase of 17
former Bank One branches in the fourth quarter of 1999. The Corporation
leveraged its future core deposit growth by utilizing short-term FHLB advances
to pre-fund purchases of federal agency CMO securities. Net interest margin is
anticipated to improve in the remainder of 1999 as core deposits acquired in the
October 8, 1999 purchase of the 17 former Bank One branches replaces higher rate
FHLB advances as a primary funding source for earning assets.
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 limit 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".
- --------------------------------------------------------------------------------
ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
<TABLE>
<CAPTION>
1999 COMPARED WITH 1998 Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
Increase (Decrease) Increase (Decrease)
Net Due to Change in Net Due to Change in
------------------------ -----------------------
(in thousands) Change (1) Rate Volume (2) Change (1) Rate Volume (2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Money market investments:
Time Deposits with banks $ -- $ -- $ -- $ -- $ (1) $ 1
Federal funds sold (496) 5 (501) (1,058) (251) (807)
Term federal funds sold and other 33 -- 33 97 (15) 112
Investment securities:
Taxable 3,861 (183) 4,044 4,091 (891) 4,982
Tax-exempt (61) (125) 64 (238) (347) 109
Loans 380 (3,036) 3,416 (4,940) (9,388) 4,448
------ -------- ------ ------- -------- -------
Total 3,717 (3,339) 7,056 (2,048) (10,893) 8,845
------- -------- ------ ------- -------- -------
INTEREST EXPENSE
Deposits:
Demand (147) (175) 28 (286) (448) 162
Savings (1,081) (1,505) 424 (3,622) (4,692) 1,070
Time (1,642) (2,274) 632 (5,119) (5,445) 326
Short-term borrowings 4,805 (368) 5,173 4,810 (757) 5,567
Long-term debt (125) (41) (84) (740) (382) (358)
------ -------- ------ ------- -------- -------
Total 1,810 (4,363) 6,173 (4,957) (11,724) 6,767
------- ------- ------ ------- -------- -------
NET INTEREST INCOME $ 1,907 $ 1,024 $ 883 $ 2,909 $ 831 $ 2,078
======= ======= ====== ======= ======== =======
</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.
12
<PAGE> 13
- --------------------------------------------------------------------------------
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
<TABLE>
<CAPTION>
1999 1998
-------------------------------------- -------------------------------------
Three Months Ended September 30 AVERAGE AVERAGE Average Average
(in thousands) BALANCE INTEREST (1) RATE (2) Balance Interest (1) Rate (2)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Money market investments:
Interest earning deposits with banks $ 62 $ 1 4.31% $ 54 $ 1 4.44%
Federal funds sold 1,413 20 5.64 36,685 516 5.59
Term federal funds sold and other 6,351 67 4.20 3,195 34 4.24
Investment securities(3):
Taxable 700,815 11,040 6.30 444,145 7,179 6.45
Tax-exempt 144,196 1,816 7.79 143,185 1,877 8.11
Loans:
Commercial 1,712,017 34,584 8.14 1,492,968 31,552 8.49
Real estate 730,305 14,078 7.71 798,059 16,245 8.14
Consumer 1,238,151 27,566 8.84 1,213,299 28,051 9.18
---------- --------- ---------- -------
Total earning assets(3) 4,533,310 89,172 7.96 4,131,590 85,455 8.38
NONEARNING ASSETS
Cash and due from banks 153,783 176,799
Bank premises and equipment 81,258 73,924
Other nonearning assets 101,449 112,744
Allowance for loan losses (46,953) (46,935)
---------- ----------
Total assets $4,822,847 $4,448,122
========== ==========
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits 401,410 1,353 1.34 393,436 1,500 1.51
Savings deposits 1,015,433 6,107 2.39 1,031,503 7,188 2.76
Time deposits 1,693,059 21,621 5.07 1,642,983 23,263 5.62
Short-term borrowings 497,907 6,317 5.03 127,738 1,512 4.70
Long-term debt 132,659 1,831 5.48 135,808 1,956 5.72
---------- ---------- ---------- -------
Total interest-bearing liabilities 3,740,468 37,229 3.95 3,331,468 35,419 4.22
========== =======
NONINTEREST-BEARING LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits 625,246 614,466
Other liabilities 53,079 72,241
Shareholders' equity 404,054 429,947
---------- ----------
Total liabilities and shareholders' equity $4,822,847 $4,448,122
========== ==========
NET INTEREST INCOME $ 51,943 $50,036
========= =======
NET INTEREST INCOME AS A PERCENT OF
EARNING ASSETS 4.70% 4.98%
</TABLE>
- --------------------------------------------------------------------------------
(1) Interest income shown on actual basis and does not include taxable
equivalent adjustments.
(2) Average rates are presented on an annual basis and include taxable
equivalent adjustments to interest income of $1,552 and $1,497
for the three months ended September 30, 1999 and 1998, respectively, based
on a tax rate of 35%.
(3) For presentation in this table, average balances and the corresponding
average rates for investment securities are based upon historical cost
adjusted for amortization of premiums and accretion of discounts.
13
<PAGE> 14
- --------------------------------------------------------------------------------
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
<TABLE>
<CAPTION>
1999 1998
-------------------------------------- ------------------------------------
Nine Months Ended September 30 AVERAGE AVERAGE Average Average
(in thousands) BALANCE INTEREST (1) RATE (2) Balance Interest (1) Rate (2)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Money market investments:
Interest earning deposits with banks $ 61 $ 2 4.06% $ 40 $ 2 6.26%
Federal funds sold 21,834 783 4.80 44,337 1,841 5.55
Term federal funds sold and other 6,051 196 4.34 3,047 99 4.32
Investment securities(3):
Taxable 554,403 25,572 6.15 444,850 21,481 6.44
Tax-exempt 144,512 5,483 7.82 144,573 5,721 8.16
Loans:
Commercial 1,680,031 99,806 8.08 1,446,194 92,184 8.61
Real estate 738,889 43,236 7.80 797,524 48,796 8.16
Consumer 1,186,274 79,006 8.90 1,262,017 86,008 9.11
---------- -------- ---------- -------
Total earning assets(3) 4,332,055 254,084 7.98 4,142,582 256,132 8.40
NONEARNING ASSETS
Cash and due from banks 156,686 159,596
Bank premises and equipment 80,319 71,785
Other nonearning assets 105,098 116,963
Allowance for loan losses (46,060) (46,741)
---------- ----------
Total assets $4,628,098 $4,444,185
========== ==========
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits 404,693 4,182 1.38 384,725 4,468 1.55
Savings deposits 1,026,283 17,802 2.32 1,029,727 21,424 2.78
Time deposits 1,713,528 66,140 5.16 1,687,453 71,259 5.65
Short-term borrowings 263,246 9,379 4.76 128,461 4,569 4.76
Long-term debt 135,532 5,398 5.33 139,781 6,138 5.87
---------- -------- ---------- -------
Total interest-bearing liabilities 3,543,282 102,901 3.88 3,370,147 107,858 4.28
-------- -------
NONINTEREST-BEARING LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits 614,668 592,420
Other liabilities 49,021 60,265
Shareholders' equity 421,127 421,353
---------- ----------
Total liabilities and shareholders' equity $4,628,098 $4,444,185
========== ==========
NET INTEREST INCOME $151,183 $148,274
======== ========
NET INTEREST INCOME AS A PERCENT OF
EARNING ASSETS 4.80% 4.92%
</TABLE>
- --------------------------------------------------------------------------------
(1) Interest income shown on actual basis and does not include taxable
equivalent adjustments.
(2) Average rates are presented on an annual basis and include taxable
equivalent adjustments to interest income of $4,729 and $4,406 for the nine
months ended September 30, 1999 and 1998, respectively, based on a tax rate
of 35%.
(3) For presentation in this table, average balances and the corresponding
average rates for investment securities are based upon historical cost,
adjusted for amortization of premiums and accretion of discounts.
14
<PAGE> 15
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Management provides for possible loan losses by dividing the allowance into two
components, allocated and unallocated. The allocated component of the allowance
is based on expected losses from the analysis of specific loans and historical
loss experience for each category of loans. 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 and 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 be reflected
in historical loss factors used to determine the allocated portion of the
allowance. A summary of loan loss experience during the three and nine months
ended September 30, 1999 and 1998 is provided below.
- --------------------------------------------------------------------------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for loan losses - beginning of period $ 46,551 $ 46,956 $ 46,449 $ 45,911
Charge-offs 4,981 4,127 14,959 11,940
Recoveries 1,505 797 3,885 2,635
---------- ---------- ----------- ----------
Net charge-offs 3,476 3,330 11,074 9,305
Provision for loan losses 3,600 3,510 11,300 10,530
---------- ---------- ----------- ----------
Allowance for loan losses - end of period $ 46,675 $ 47,136 $ 46,675 $ 47,136
========== ========== =========== ==========
Loans outstanding at period end $3,711,578 $3,539,287 $ 3,711,578 $3,539,287
Average loans outstanding during period 3,680,473 3,504,326 3,605,194 3,505,735
Allowance for loan losses as a percentage of
loans outstanding at period end 1.26% 1.33% 1.26% 1.33%
Ratio of net charge-offs during period to
average loans outstanding (annualized) 0.37 0.38 0.41 0.35
Loan loss coverage (allowance as a multiple of
net charge-offs, annualized) 3.4x 3.5x 3.2X 3.8x
</TABLE>
- --------------------------------------------------------------------------------
The provision for loan losses increased $90,000 during the three months ended
September 30, 1999, as compared with the same period in 1998, and increased
$770,000 in the first nine months of 1999 versus the same period in 1998.
The ratio of net loans charged off to average loans outstanding decreased one
basis point in the three month period ended September 30, 1999 and increased six
basis points for the nine months ended September 30, 1999, compared to the same
periods in 1998. The decrease in the third quarter of 1999 is primarily due to
growth in average loans outstanding as higher charge-offs, primarily in the
commercial and consumer portfolios, were offset with an almost equal level of
recoveries. The increase in the nine-month period of 1999 primarily reflects
higher net charge-offs, mostly in the indirect consumer loan portfolio.
The Corporation maintains formal policies and procedures to monitor and control
credit risk. The Corporation's loan portfolio has no significant concentrations
in any one industry or any exposure to foreign loans. The Corporation has
generally not extended credit to finance highly leveraged transactions nor does
it intend to do so in the future. Based on present information, management
believes the allowance for loan losses is adequate to meet known risks in the
loan portfolio.
Employment levels and other economic conditions in the Corporation's local
markets may have a significant impact on the level of credit losses. Management
has identified and devotes appropriate attention to credits that may not be
performing as well as expected. Nonperforming loans are further discussed in the
section entitled "Nonperforming Assets."
15
<PAGE> 16
NONINTEREST INCOME
A summary of significant sources of noninterest income during the three and nine
months ended September 30, 1999 and 1998 follows:
- --------------------------------------------------------------------------------
NONINTEREST INCOME
<TABLE>
<CAPTION>
Percent
Change in 1999
Three Months Ended Nine Months Ended ---------------------
September 30, September 30, Three Nine
(in thousands) 1999 1998 1999 1998 Months Months
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Trust fees $ 5,104 $ 4,633 $15,408 $13,881 10.2 % 11.0 %
Service charges on deposit accts 3,751 3,258 10,198 9,513 15.1 7.2
Bankcard fees 2,303 2,083 6,661 5,653 10.6 17.8
Brokerage and investment fees 1,239 663 3,071 1,860 86.9 65.1
Mortgage and other loan income 488 1,534 2,466 2,869 (68.2) (14.0)
ATM network user fees 817 763 2,185 2,206 7.1 (1.0)
Cash management services 651 583 1,858 1,685 11.7 10.3
Title insurance fees 231 258 733 746 (10.5) (1.7)
Investment securities gains 47 49 211 103 (4.1) 104.9
Gain on sale of equity security -- -- 5,693 -- (1) (1)
Premium on sale of deposits -- -- 1,348 -- (1) (1)
Other, net 1,010 914 3,385 3,180 10.5 6.4
------- ------- ------- -------
Total noninterest income $15,641 $14,738 $53,217 $41,696 6.1 27.6
======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
(1) Not meaningful
The Corporation recognized a premium of $1.3 million from the sale of deposits
of a branch office in March 1999, a gain of $5.7 million from the sale of its
equity investment in Magic Line, Inc. in June 1999 and a gain of $0.6 million
from the sale of a portfolio of student loans in the third quarter of 1998.
Excluding these non-recurring gains, noninterest income increased 10.9% and
12.4% for the three and nine-months ended September 30, 1999, respectively, as
compared to the same periods in the prior year. Most categories of noninterest
income were higher in 1999 than in 1998 in both the three and nine-month periods
ended September 30. The Corporation experienced significant increases in trust
fees, bankcard fees, brokerage and investment fees, service charges on deposit
accounts and cash management fees. Title insurance fees and mortgage and other
loan income were the only categories to experience a significant decrease in
revenue.
Higher fee income for personal and employee benefit trust services and new
sub-administrative fees on commercial deposit sweep account investment in mutual
funds contributed to the increase in trust fees in both the three and nine-month
periods ended September 30, 1999, as compared to the same periods in 1998.
Higher fee income for trust services reflected improved pricing strategies and
higher stock market values. Brokerage and investment fees increased in the three
and nine-month periods ended September 30, 1999 over the same periods in 1998
due to increased sales efforts and continued growth in new mutual fund and
annuity products.
Mortgage and other loan income, excluding the gain of $0.6 million in 1998,
decreased 46.0% in the third quarter of 1999 but was up 10.1% in the nine-month
period ended September 30, 1999, as compared to the same periods in 1998. The
decrease in mortgage and other loan income in the third quarter reflected lower
gains from the sale of residential mortgage loans and related servicing as
higher interest rates reduced refinancing volumes. For the nine-month period
ended September 30, 1999 lower gains on the sale of residential mortgage loans
and related servicing was offset by higher commercial letter and unused
line-of-credit fee income. Title insurance fees were down in the three and nine
months ended September 30, 1999 over the same periods in 1998 as higher interest
rates reduced closing volume and refinance activity. Cash management service
fees increased in the three and nine-month periods ended September 30, 1999,
over the same periods in 1998, due primarily to new business development and
higher customer transaction volumes related to expanded product and service
capabilities.
16
<PAGE> 17
NONINTEREST EXPENSE
Significant changes in noninterest expense during the three and nine months
ended September 30, 1999 and 1998 are summarized in the table below.
- --------------------------------------------------------------------------------
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Percent
Change in 1999
Three Months Ended Nine Months Ended --------------------
September 30, September 30, Three Nine
(in thousands) 1999 1998 1999 1998 Months Months
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $21,253 $ 20,145 $63,868 $ 61,344 5.5% 4.1%
Equipment 2,881 2,921 8,498 9,079 (1.4) (6.4)
Occupancy 2,920 2,845 8,167 8,516 2.6 (4.1)
Data processing services 1,810 1,873 5,452 4,174 (3.4) 30.6
Bankcard fees 2,108 1,680 5,378 4,373 25.5 23.0
Intangible asset amortization 1,386 1,386 4,159 4,159 --- ---
Postage and delivery 1,121 953 3,311 3,165 17.6 4.6
Advertising and public relations 731 1,072 3,152 3,477 (31.8) (9.3)
Stationery and supplies 1,179 875 2,858 2,795 34.7 2.3
Professional services 1,419 1,094 4,306 3,376 29.7 27.5
Telephone 1,187 1,128 3,231 2,977 5.2 8.5
Other loan fees 842 1,023 2,746 2,609 (17.7) 5.3
Net charge from fraud loss 2,496 --- 6,246 -- (1) (1)
Other, net 2,568 3,274 9,034 9,116 (21.6) (0.9)
------- -------- -------- --------
Total noninterest expense $43,901 $ 40,269 $130,406 $119,160 9.0 9.4
======= ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
(1) Not meaningful
SALARIES AND EMPLOYEE BENEFITS
Salaries and employee benefits expense increased 5.5% and 4.1% for the three and
nine months ended September 30, 1999, respectively, as compared to the same
period in the prior year. The increases were due to higher incentive based
compensation, normal merit increases, increased sales and support staff and
higher healthcare cost. Partially offsetting these increases were lower staffing
levels from the synergies of the information technology partnership with M&I
Data Services, continued deferral of FASB 91 incentive compensation and lower
pension costs. Reduced pension costs reflect the adoption, in the third quarter
of 1999, of an alternative market-related value methodology for pension plan
assets to better reflect plan asset earnings, a component of pension expense, in
1999 and future years. The change reduced 1999 annual pension expense by
approximately $556,000. The cumulative effect on prior periods was not material
and they have not been restated.
OTHER NONINTEREST EXPENSES
In the third quarter of 1999, the Corporation took a one-time charge of
approximately $6.3 million ($4.0 million after tax) as a result of a fraudulent
check-kiting scheme involving a bank customer and other parties. To help lessen
the impact of the fraud, the Corporation reduced by $3.8 million ($2.4 million
after tax) its previously accrued commitment to fund a charitable trust. The net
effect was a one-time charge of $2.5 million ($1.6 million after tax) in the
third quarter of 1999. For the nine months ended September 30, 1999, the effect
was a net one-time charge of $6.3 million as the charitable trust adjustment had
no effect year-to-date (i.e., the accrual for the funding of the charitable
trust recorded in the second quarter was reversed in the third quarter). The
Corporation has taken action where appropriate to further review and strengthen
its procedures to prevent similar occurrences in the future.
Excluding the effect of this one-time charge, other noninterest expenses
increased 2.8% and 4.2% for the three and nine-month periods ended September 30,
1999 as compared to the same periods the prior year. Data processing costs
increased as a result of the new services and costs associated with the
Corporation's information technology partnership with M&I Data Services. These
increases were partially offset by related reductions in personnel, equipment,
and occupancy costs. Bankcard fees increased due to higher transaction volume,
increased outside processing costs and enhanced loss prevention efforts.
Professional services increased due to additional consulting fees related to
future revenue enhancing programs and other services. Higher stationery and
supplies costs reflect a one-time catch-up adjustment resulting from a new
electronic billing process implemented by the Corporation's primary check
vendor. In the third quarter of 1999, occupancy increased slightly due to
building renovations and related loss of sub-lease income. Advertising and
public relations costs reflect a slow down in spending due to the check kiting
fraud and in anticipation of the pending acquisitions. Other loan fees decreased
primarily due to lower mortgage volume in the third quarter of 1999. Other
expense declined primarily due to generally good discretionary expense control.
17
<PAGE> 18
FUTURE RESTRUCTURING AND MERGER RELATED CHARGES
In conjunction with its acquisition of seventeen former Bank One branch offices
in October 1999 and its acquisition of F&M Bancorporation, Inc , in November
1999, the Corporation expects to incur pre-tax restructuring and merger-related
charges of approximately $40 to $50 million over the next year. Approximately
$30 to $40 million will be recorded as a one-time charge in the fourth quarter
of 1999. These expenses will be partially offset by additional cost savings and
other revenue enhancements from the consolidation of operations, improved
efficiencies and new markets for the Corporation's products and services.
See Note 4 to the consolidated financial statements (unaudited) of this
Quarterly Report on Form 10Q for additional detail.
INCOME TAXES
Higher pre-tax earnings partially offset by a higher level of tax-exempt
interest income resulted in increased federal income tax expense for the nine
month period ended September 30, 1999, as compared to the same period in the
prior year. For the quarter ended September 30, 1999, lower pre-tax earnings and
a higher level of tax-exempt interest income resulted in reduced federal income
tax expense.
BALANCE SHEET
The Corporation had total assets of $4.863 billion as of September 30, 1999, an
increase of $362 million or 8.0% from $4.501 billion as of December 31, 1998.
Average earning assets comprised 93.6% of average total assets during the first
nine months of 1999 and 93.2% for same period in 1998. Changes in total assets
and earning assets since September 30, 1998 were primarily due to commercial
loan growth and higher levels of U.S. Treasury and federal agency investment
securities offset, in part, by pay downs and maturities in the consumer loan and
residential mortgage portfolio.
INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
Total average investments, including money market investments, comprised 16.8%
of average earning assets during the first nine months of 1999, compared with
15.4% for the same period of 1998. The increase in average investments was
primarily due to balance sheet restructuring in anticipation of the pending
purchase of 17 Bank One branches in the fourth quarter of 1999. The Corporation
leveraged its future core deposit growth by utilizing short-term FHLB advances
to pre-fund purchases of federal agency CMO securities.
LOANS
The Corporation extends credit primarily within the market areas of its two
banking subsidiaries located in Michigan and Illinois. The loan portfolio is
widely diversified by borrower and industry groups with no significant
concentrations in any industry. Due to increased sales efforts and a relatively
low interest rate environment, the Corporation experienced greater loan demand
with total average loans increasing 2.8% in the first nine months of 1999 as
compared to the same period in 1998. This growth occurred primarily within the
commercial and construction real estate mortgage category. Residential real
estate loans have declined reflecting lower origination volume in the third
quarter from higher interest rates and continued selling of most single-family
residential real estate loan originations into the secondary market.
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, restructured loans, loans 90
days past due and still accruing interest, and other real estate owned. Certain
of these loans, as defined below, are considered to be impaired. The Corporation
maintains policies and procedures to identify and monitor nonaccrual loans. A
loan is placed on nonaccrual status when there is doubt regarding collection of
principal or interest, or when principal or interest is past due 90 days or more
and the loan is not well secured and in the process of collection. Interest
accrued but not collected is reversed and charged against income when the loan
is placed on nonaccrual status.
The following describes the Corporation's policy and related disclosures for
impaired loans. The Corporation establishes a valuation allowance for impaired
loans. A loan is considered impaired when management determines it is probable
that all the principal and interest due under the contractual terms of the loan
will not be collected. In most instances, the impairment is measured based on
the fair value of the underlying collateral. Impairment may also be measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate. Cash collected on impaired nonaccrual loans is
applied to principle until collection of principle is no longer in doubt and
then to interest income. Interest income on all other impaired loans is
recognized on an accrual basis.
Certain of the Corporation's nonperforming loans included in the following table
are considered to be impaired. The Corporation measures impairment on all large
balance nonaccrual commercial and commercial real estate loans. Certain large
balance accruing loans rated substandard or worse are also measured for
impairment. In most instances, impairment is measured based on the fair value of
the underlying collateral. Impairment losses are included in the provision for
loan losses. The policy does not apply to large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment, except for
those loans restructured under a troubled debt restructuring. Loans collectively
evaluated for
18
<PAGE> 19
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 September 30, 1999, loans considered to be impaired under the Statements
totaled $21.0 million (of which $10.1 million were on a nonaccrual basis).
Included within this amount was $6.9 million of impaired loans for which the
related allowance for loan losses was $1.0 million and $14.1 million of impaired
loans for which the fair value exceeded the recorded investment in the loan. The
average recorded investment in impaired loans during the quarter ended September
30, 1999 was approximately $18.9 million. For the quarter ended September 30,
1999, the Corporation recognized interest income of $0.2 million. Approximately
$0.4 million of cash collected on nonaccrual impaired loans was applied to loan
principal.
At September 30, 1998, loans considered to be impaired under the Statements
totaled $17.8 million (of which $13.1 million were on a nonaccrual basis).
Included within this amount was $8.2 million of impaired loans for which the
related allowance for loan losses was $1.6 million and $9.6 million of impaired
loans for which the fair value exceeded the recorded investment in the loan. The
average recorded investment in impaired loans during the quarter ended September
30, 1998 was approximately $18.5 million. For the quarter ended September 30,
1998, the Corporation recognized interest income of approximately $0.1 million.
No interest was recognized on a cash basis as all cash collected on nonaccrual
loans was applied to loan principal.
The table below provides a summary of nonperforming assets as of September 30,
1999, December 31, 1998 and September 30, 1998. Total nonperforming assets
amounted to $19.5 million as of September 30, 1999, compared with $24.3 million
as of December 31, 1998 and $27.5 million as of September 30, 1998. During the
first nine months of 1999, several large nonaccrual commercial and commercial
mortgage loans were paid current or paid off. In addition, the Corporation
charged off approximately $7.6 million in indirect consumer loans. As a result,
nonaccrual loans 90 or more days past due at September 30, 1999 were down
$4,947,000 or 27.3% from year-end 1998.
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31, September 30,
(IN THOUSANDS) 1999 1998 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming Loans
Nonaccrual
Less than 30 days past due $ 3,460 $ 2,016 $ 2,853
From 30 to 89 days past due 881 1,641 2,117
90 or more days past due 13,187 18,134 19,370
------- ------- -------
Total 17,528 21,791 24,340
90 days past due and still accruing 674 801 908
Restructured 114 114 134
------- ------- -------
Total nonperforming loans 18,316 22,706 25,382
Other Repossessed Assets Acquired (ORAA) 1,180 1,547 2,123
------- ------- -------
Total nonperforming assets $19,496 $24,253 $27,505
======= ======= =======
Nonperforming assets as a percent of total loans plus ORAA 0.53% 0.68% 0.78%
Nonperforming assets as a percent of total assets 0.40 0.54 0.62
</TABLE>
- --------------------------------------------------------------------------------
Employment levels and other economic conditions in the Corporation's local
markets can impact the level and composition of nonperforming assets. In a
deteriorating or weak economy, higher levels of nonperforming assets,
charge-offs and provisions for loan losses could result which may adversely
impact the Corporation's results.
In addition to nonperforming loans, management identifies and closely monitors
other credits that are current in terms of principal and interest payments but,
in management's opinion, may deteriorate in quality if economic conditions
change. As of September 30, 1999, such credits amounted to $31.6 million or 0.9%
of total loans, compared with $14.5 million or 0.4% at December 31, 1998 and
$22.3 million or 0.6% as of September 30, 1998. These loans are primarily
commercial and commercial real estate loans made in the normal course of
business and do not represent a concentration in any one industry.
DEPOSITS
Average deposits increased 1.8% in the first nine months of 1999 as compared to
the same period in 1998. Deposit growth was derived primarily from noninterest
and interest-bearing demand accounts, public fund single maturity certificates
of
19
<PAGE> 20
deposit and investment rate savings accounts. The Corporation gathers deposits
primarily in its local markets and historically has not relied on brokered funds
to sustain liquidity. At September 30, 1999 and at year-end 1998, the
Corporation had approximately $14.9 million in brokered deposits as an
alternative source of funding. These 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.
SHORT-TERM BORROWINGS AND LONG-TERM DEBT
On average, total short-term borrowings increased to $263.2 million during the
first nine months of 1999 compared with $128.5 million during the same period of
1998. Long-term debt accounted for $135.5 million or 3.8% of average
interest-bearing funds for the first nine months of 1999, decreasing from $139.8
million or 4.1% of average interest-bearing funds in the same period of 1998. At
September 30, 1999, $300 million of the short-term borrowings consist of Federal
Home Loan Bank advances that mature within the next month. Proceeds from these
advances were used to support loan growth and fund purchases of federal agency
CMO securities in the Corporation's investment portfolio. At September 30, 1999,
$100 million of the long-term debt consists of borrowings from the Federal Home
Loan Bank by the Corporation's lead subsidiary bank. The borrowings mature at
different intervals over the next five years except for $60 million, which
matures in 9 years. These borrowings are utilized to fund the Corporation's loan
growth.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133 "Accounting for Derivative Instruments and Hedging Activities." In
September 1999, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 137, which delayed the effective date of the original statement. This
statement requires a company to recognize all derivatives as either assets or
liabilities in its balance sheet and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
fair value, cash flow, or foreign currency hedge. The accounting for changes in
the fair value of a derivative (i.e., gains and losses) depends on the intended
use of the derivative and the resulting designation. If the Corporation elects
to apply hedge accounting, it is required to establish at the inception of the
hedge the method it will use for assessing the effectiveness of the hedging
derivative and the measurement approach for determining the ineffective aspect
of the hedge. This statement is effective for all fiscal quarters of fiscal
years beginning after September 15, 2000. The Corporation plans to adopt this
Statement effective January 1, 2001. Presently the Corporation does not utilize
derivative or related types of financial instruments except for Federal agency
collateralized mortgage obligations. Therefore, this Statement is not
anticipated to have a material impact on the Corporation.
IMPACT OF YEAR 2000
As is more fully described in the Corporation's 1998 Annual Report on Form 10-K,
the Corporation believes that it has completed its assessment of all
computer-based systems and applications and non-information technology systems
necessary for continued operations beyond December 31, 1999. The majority of
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 September 30,
1999 were approximately $1.7 million.
These estimates do not include the cost of the Corporation's previously planned
core application systems replacement, which were not accelerated due to the Year
2000 problem. M&I Data Services upgraded its systems to be Year 2000 compliant,
in the third quarter of 1998, and is currently processing the Corporation's core
applications on these compliant systems. Testing of these systems was 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.
Currently, the Corporation's remediation, implementation and testing efforts are
at different phases of completion. Remediation, implementation and testing
activities are underway or completed 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 and implementation phase is 98% complete (100% of mission
critical applications and 98% of non-mission critical applications) and the
testing phase is 96% complete. The phases run concurrently for different
systems. Completion of the implementation and testing phases for all significant
information technology systems is expected by year-end. 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
20
<PAGE> 21
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
November 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 November 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 has updated its contingency plans to address unforeseen Year
2000 issues and is currently in the process of validating these plans. 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.
Management's assessment of the risks associated with the Year 2000 project is
unchanged from that described in the Corporation's 1998 Annual Report on Form
10-K. The anticipated costs and projected dates for completion of the
Corporation's Year 2000 project, was 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.
The information above contains forward-looking statements, including, without
limitation, statements relating to the Corporation's plans, strategies,
objectives, expectation, intention, and adequate resources that are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that forward-looking statements about
Year 2000 should be read in conjunction with the Corporation's disclosures under
the heading Forward Looking Information.
CAPITAL RESOURCES
REGULATORY CAPITAL REQUIREMENTS
Bank holding companies, such as the Corporation, and their bank subsidiaries are
required by banking regulators to meet certain minimum levels of capital
adequacy. These are expressed in the form of certain ratios. Capital is
separated into Tier I capital (essentially common stockholders' equity less
goodwill) and Tier II capital (essentially the allowance for loan losses limited
to 1.25% of risk-weighted assets). The first two ratios, which are based on the
degree of credit risk in the company's assets, provide for weighting assets
based on assigned risk factors and include off-balance sheet items such as loan
commitments and stand-by letters of credit. The ratio of Tier I capital to
risk-weighted assets must be at least 4.0% and the ratio of Total capital (Tier
1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8.0%.
The capital leverage ratio supplements the risk-based capital guidelines. Banks
and bank holding companies are required to maintain a minimum ratio of Tier 1
capital to adjusted quarterly average total assets of 4.0%.
The FDIC, the insurer of deposits in financial institutions, has adopted a
risk-based insurance premium system based in part on an institution's capital
adequacy. Under this system, a depository institution is classified into one of
three capital categories (well-capitalized, adequately capitalized or
undercapitalized) according to its risk-based capital and leverage ratios and is
required to pay successively higher premiums depending on its capital levels and
its supervisory rating by its primary
21
<PAGE> 22
regulator. It is the Corporation's intention to maintain sufficient capital in
each of its bank subsidiaries to permit them to maintain a "well capitalized"
designation (the FDIC's highest rating).
As summarized below, the Corporation's risk based capital levels were well in
excess of all regulatory standards.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
CAPITAL RATIOS Regulatory
Minimum
For "Well SEPTEMBER 30, December 31, September 30,
Capitalized" 1999 1998 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk based capital:
Tier I 6.0 % 9.5 % 10.5 % 10.4 %
Total capital 10.0 10.7 11.8 11.6
Tier I leverage 5.0 7.6 8.7 8.5
- --------------------------------------------------------------------------------------------------
</TABLE>
COMMON AND PREFERRED STOCK
The Corporation maintains two stock repurchase plans. In May 1998, the
Corporation initiated a stock repurchase plan ("Plan I") that provides for the
repurchase of up to 600,000 shares of its stock on the open market over the next
24 months. The shares will be utilized to satisfy the Corporation's obligation
to issue shares under its existing employee and director stock option plans. In
January 1999, the Corporation initiated a second stock repurchase plan ("Plan
II") that provides for the repurchase of up to 1,400,000 shares of its common
stock (approximately 5% of the outstanding shares) for general bank purposes. In
the third quarter of 1999, management decided to accelerate the acquisition of
treasury shares under Plan II in light of the pending F&M Bancorporation, Inc.
merger. As a result all 222,000 shares remaining under Plan II were acquired in
the third quarter at an average price of $30.42 per share. In addition, a total
of 64,800 shares were purchased under Plan I at an average price of $28.18 per
share. Shares of common stock in treasury are accorded the treatment as if
retired; however, such shares remain available for reissue.
OTHER
Total shareholders' equity was $407.3 million or $15.24 per share as of
September 30, 1999, compared with $441.1 million or $15.70 per share as of
December 31, 1998 and $434.8 million or $15.46 per share as of September 30,
1998. This decrease is the result of strong corporate earnings offset by
dividend payments, the stock repurchase program and the one-time charge from the
check-kiting loss. The Corporation declared cash dividends of $0.68 per share
during the first nine months of 1999, an increase of 11.5% over the $0.61 per
share declared during the same period in 1998.
LIQUIDITY AND DEBT CAPACITY
Management closely monitors the level of liquid assets available to meet ongoing
funding needs and to capitalize on opportunities for business expansion. It is
management's intent to maintain adequate liquidity so that sufficient funds are
readily available at a reasonable cost. Various techniques are used by the
Corporation to measure liquidity, including ratio analysis. Some ratios
monitored by the Corporation include: loans to deposits, core funding (deposits
plus a portion of repurchase agreements and long term debt less single maturity
certificates of deposits) to total funding (volatile funding plus core funding)
and liquid assets to volatile funding (interest bearing liabilities plus
noninterest bearing deposits less core funding). During 1999, the Corporation
has continued its strategy to operate at lower levels of liquidity and at a
higher loan to deposit ratio to improve its asset mix and thereby increase net
interest income. The Corporation has experienced no liquidity or operational
problems as a result of the current liquidity levels. These ratios are
summarized in the following table:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
KEY LIQUIDITY RATIOS
SEPTEMBER 30, December 31, September 30,
1999 1998 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Quarterly average:
Loans to deposits 98.5 % 94.9 % 95.2 %
Liquid assets to volatile funding 17.7 46.0 52.7
Core funding to total funding 81.3 88.8 88.7
- ---------------------------------------------------------------------------------------------
</TABLE>
The corporation manages liquidity to meet client cash flow needs while
maintaining funds available for loan and investment opportunities. Management
believes that the Corporation has sufficient liquidity to meet presently known
cash flow requirements arising from ongoing business transactions.
22
<PAGE> 23
INTEREST RATE RISK
The Corporation's static interest rate sensitivity ("GAP") as of September
30, 1999 and 1998 is illustrated in the table below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY TOTAL
1-30 31-90 91-180 181-365 WITHIN 1-5 Over
(dollars in millions) Days Days Days Days 1 YEAR Years 5 Years Total
- -----------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1999
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS (3)
Loans $1,039.4 $ 117.0 $ 161.6 $ 320.7 $ 1,638.7 $ 1,550.1 $ 522.8 $ 3,711.6
Investment securities 11.0 35.2 37.9 47.8 131.9 334.3 392.5 858.7
Short-term investments 2.7 -- -- -- 2.7 -- -- 2.7
-------- ------- ------- ------- --------- --------- ------- ---------
Total $1,053.1 $ 152.2 $ 199.5 $ 368.5 $ 1,773.3 $ 1,884.4 $ 915.3 $ 4,573.0
======== ======= ======= ======= ========= ========= ======= =========
RATE SENSITIVE LIABILITIES
Deposits (2) $ 299.9 $ 358.0 $ 459.7 $ 702.8 $ 1,820.4 $ 1,114.7 $ 168.8 $ 3,103.9
Short-term borrowings 584.4 -- -- -- 584.4 -- -- 584.4
Long-term debt 15.0 50.0 -- -- 65.0 25.2 10.1 100.3
-------- ------- ------- ------- --------- --------- ------- ---------
Total $ 899.3 $ 408.0 $ 459.7 $ 702.8 $ 2,469.8 $ 1,139.9 $ 178.9 $ 3,788.6
======== ======= ======= ======= ========= ========= ======= =========
Period GAP (1) $ 153.8 $(255.8) $(260.2) $(334.3) $ (696.5) $ 744.5 $ 736.4 $ 784.4
Cumulative GAP 153.8 (102.0) (362.2) (696.5) 48.0 784.4
Cumulative GAP to Total
Assets 3.16% (2.10)% (7.45)% (14.32)% (14.32)% 0.99% 16.13% 16.13%
Multiple of Rate Sensitive
Assets to Liabilities 1.17 0.37 0.43 0.52 0.72 1.65 5.12 1.21
- -----------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1998
RATE SENSITIVE ASSETS (3)
Loans $1,053.1 $ 143.5 $ 203.9 $ 342.2 $ 1,742.7 $ 1,364.1 $432.5 $ 3,539.3
Investment securities 64.1 44.7 59.2 70.7 238.7 231.9 145.5 616.1
Short-term investments 2.4 -- -- -- 2.4 -- -- 2.4
-------- ------- ------- ------- --------- --------- ------- ---------
Total $1,119.6 $ 188.2 $ 263.1 $ 412.9 $ 1,983.8 $ 1,596.0 $ 578.0 $ 4,157.8
======== ======= ======= ======= ========= ========= ======= =========
RATE SENSITIVE LIABILITIES
Deposits (2) $ 216.8 $ 297.1 $ 440.7 $ 702.7 $ 1,657.3 $ 1,206.0 $ 180.3 $ 3,043.6
Short-term borrowings 187.5 -- -- -- 187.5 -- -- 187.5
Long-term debt 15.0 6.0 63.0 42.6 126.6 14.4 0.1 141.1
-------- ------- ------- ------- --------- --------- ------- ---------
Total $ 419.3 $ 303.1 $ 503.7 $ 745.3 $ 1,971.4 $ 1,220.4 $ 180.4 $ 3,372.2
======== ======= ======= ======= ========= ========= ======= =========
Period GAP (1) $ 700.3 $(114.9) $ (240.6) $(332.4) $ 12.4 $ 375.6 $ 397.6 $ 785.6
Cumulative GAP 700.3 585.4 344.8 12.4 388.0 785.6
Cumulative GAP to Total
Assets 15.69% 13.12% 7.73% 0.28% 0.28% 8.69% 17.60% 17.60%
Multiple of Rate Sensitive
Assets to Liabilities 2.67 0.62 0.52 0.55 1.01 1.31 3.20 1.23
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) GAP is the excess of rate sensitive assets (liabilities).
(2) Includes interest bearing savings and demand deposits of $463 million and
$452 million in 1999 and 1998, respectively, in the less than one year
category, and $932 million and $951 million, respectively in the over
one year category, based on historical trends for those noncontractual
maturity deposit types, which reflects industry standards.
(3) Incorporates prepayment projections for certain assets which may shorten
the time frame for repricing or maturity compared to contractual runoff.
Interest rate risk generally arises when the maturity or repricing structure of
the Corporation's assets and liabilities differs significantly. Asset/liability
management, which among other things addresses such risk, is the process of
developing, testing and implementing strategies that seek to maximize net
interest income, maintain sufficient liquidity and minimize exposure to
23
<PAGE> 24
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.
At September 30, 1999, the Corporation's rate sensitive assets were below rate
sensitive liabilities within the one-year time frame by $696.5 million. This
position indicates that the Corporation may earn lower net interest income
during the next twelve months if market interest rates rise. Conversely, the
Corporation may earn higher net interest income during the next twelve months if
market interest rates fall. At September 30, 1998, rate sensitive assets
exceeded rate sensitive liabilities in the one-year time frame by 12.4 million.
The Corporation's small asset sensitive interest rate risk position at September
30, 1998 was well balanced in the less than one-year time frame suggesting that
net interest income may not be significantly impacted by changes in interest
rates over the following 12 months. The Corporation's interest rate risk
position within the one year time frame is expected to be less
liability-sensitive in the fourth quarter of 1999 as core deposits from the 17
former Bank One branches, acquired on November 8, 1999, replace approximately
$200 million in short-term FHLB advances.
Management is continually reviewing its interest rate risk position and
modifying its strategies based on projections to minimize the impact of future
interest rate changes. While traditional GAP analysis does not always
incorporate adjustments for the magnitude or timing of noncontractual repricing,
this table does incorporate appropriate adjustments as indicated in footnotes 2
and 3 to the table. Because of these and other inherent limitations of any GAP
analysis, management utilizes simulation modeling as its primary tool to
evaluate the impact of changes in interest rates and balance sheet strategies.
Management uses these simulations to develop strategies that can limit interest
rate risk and provide liquidity to meet client loan demand and deposit
preferences.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The
information concerning quantitative and qualitative disclosures about market
risk contained and incorporated by reference in Item 7A of the Corporation's
1998 Annual Report on Form 10-K, is here incorporated by reference.
The Corporation faces market risk to the extent that both earnings and the fair
value of its financial instruments are affected by changes in interest rates.
The Corporation manages this risk with static GAP analysis and simulation
modeling. Throughout the third quarter of 1999, the results of these measurement
techniques were within the Corporation's policy guidelines. The Corporation does
not believe that there has been a material change in the Corporation's primary
market risk exposure (i.e., the categories of market risk to which the
Corporation is exposed and the particular markets that present the primary risk
of loss to the Corporation). As of the date of this Quarterly Report on Form
10-Q, the Corporation does not know of or expect there to be any material change
in the general nature of its primary market risk exposure in the near term.
The methods by which the Corporation manages its primary market risk exposure,
as described in the sections of its 1998 Annual Report on Form 10-K incorporated
by reference in response to this item, have not changed materially during the
current year. As of the date of this Quarterly Report on Form 10-Q, the
Corporation does not expect to change those methods in the near term. However,
the Corporation may change those methods in the future to adapt to changes in
circumstances or to implement new techniques. In this discussion, "near term"
means a period of one year following the date of the most recent balance sheet
contained in this report.
24
<PAGE> 25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - None
ITEM 2. CHANGES IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K
During the three-month period ended September 30, 1999, a report on Form
8-K was filed under Item 5, Other Events. The report dated August 31, 1999
and filed September 2 1999, announced the Corporation had been a victim of
an illegal check-kiting scheme involving a bank customer and other parties.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIZENS BANKING CORPORATION
Date November 12, 1999 By /s/ John W. Ennest
--------------------- --------------------------------
John W. Ennest
Vice Chairman of the Board, Treasurer
and Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Signatory)
25
<PAGE> 26
Exhibit Index
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 JUL-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 151,107 151,107
<INT-BEARING-DEPOSITS> 48 48
<FED-FUNDS-SOLD> 2,669 2,669
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 858,675 858,675
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 3,711,578 3,711,578
<ALLOWANCE> 46,675 46,675
<TOTAL-ASSETS> 4,862,910 4,862,910
<DEPOSITS> 3,724,803 3,724,803
<SHORT-TERM> 584,369 584,369
<LIABILITIES-OTHER> 46,203 46,203
<LONG-TERM> 100,257 100,257
0 0
0 0
<COMMON> 69,918 69,918
<OTHER-SE> 337,360 337,360
<TOTAL-LIABILITIES-AND-EQUITY> 4,862,910 4,862,910
<INTEREST-LOAN> 222,048 76,228
<INTEREST-INVEST> 32,036 12,944
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 254,084 89,172
<INTEREST-DEPOSIT> 88,124 29,081
<INTEREST-EXPENSE> 102,901 37,229
<INTEREST-INCOME-NET> 151,183 51,943
<LOAN-LOSSES> 11,300 3,600
<SECURITIES-GAINS> 211 47
<EXPENSE-OTHER> 130,406 43,901
<INCOME-PRETAX> 62,694 20,083
<INCOME-PRE-EXTRAORDINARY> 43,391 13,902
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 43,391 13,902
<EPS-BASIC> 1.58 0.52
<EPS-DILUTED> 1.56 0.51
<YIELD-ACTUAL> 4.80 4.70
<LOANS-NON> 17,528 17,528
<LOANS-PAST> 674 674
<LOANS-TROUBLED> 114 114
<LOANS-PROBLEM> 31,650 31,650
<ALLOWANCE-OPEN> 46,449 46,551
<CHARGE-OFFS> 14,959 4,981
<RECOVERIES> 3,885 1,505
<ALLOWANCE-CLOSE> 46,675 46,675
<ALLOWANCE-DOMESTIC> 34,367 34,367
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 12,308 12,308
</TABLE>
