<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 March 31, 2000
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
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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 May 5, 2000
- -------------------------- --------------------------
Common Stock, No Par Value 47,651,439 Shares
<PAGE> 2
Citizens Banking Corporation
Index to Form 10-Q
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
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............................................... 22
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings..................................................................................... 23
Item 2 - Changes in Securities................................................................................. 23
Item 3 - Defaults upon Senior Securities....................................................................... 23
Item 4 - Submission of Matters to a Vote of Security Holders................................................... 23
Item 5 - Other Information..................................................................................... 23
Item 6 - Exhibits and Reports on Form 8-K...................................................................... 23
SIGNATURES.......................................................................................................... 23
EXHIBIT INDEX ...................................................................................................... 24
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
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CONSOLIDATED BALANCE SHEETS
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
March 31, December 31,
(in thousands) 2000 1999
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(unaudited) (Note 1)
<S> <C> <C>
ASSETS
Cash and due from banks $ 230,880 $ 250,745
Money market investments:
Interest-bearing deposits with banks 1,722 755
Federal funds sold -- 63,048
------------ ------------
Total money market investments 1,722 63,803
Securities available-for-sale:
U.S. Treasury and federal agency securities 900,824 920,435
State and municipal securities 399,095 368,732
Other securities 89,779 108,180
------------ ------------
Total investment securities 1,389,698 1,397,347
Loans:
Commercial 2,981,937 2,875,387
Real estate construction 186,125 185,352
Real estate mortgage 1,456,423 1,440,104
Consumer 1,420,051 1,416,640
------------ ------------
Total loans 6,044,536 5,917,483
Less: Allowance for loan losses (79,073) (76,397)
------------ ------------
Net loans 5,965,463 5,841,086
Premises and equipment 140,471 141,460
Intangible assets 95,030 97,032
Other assets 113,041 107,884
------------ ------------
TOTAL ASSETS $ 7,936,305 $ 7,899,357
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 941,446 $ 965,849
Interest-bearing 5,164,591 5,163,149
------------ ------------
Total deposits 6,106,037 6,128,998
Federal funds purchased and securities sold
under agreements to repurchase 222,115 276,805
Other short-term borrowings 689,791 660,474
Other liabilities 77,116 72,307
Long-term debt 197,504 127,104
------------ ------------
Total liabilities 7,292,563 7,265,688
Shareholders' Equity:
Preferred stock - No par value -- --
Common stock - No par value 226,564 226,972
Retained earnings 434,852 424,140
Accumulated other comprehensive income (17,674) (17,443)
------------ ------------
Total shareholders' equity 643,742 633,669
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,936,305 $ 7,899,357
============ ============
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</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES Three Months Ended
March 31,
(in thousands, except per share
amounts 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 125,064 $ 110,250
Interest and dividends on investment securities:
Taxable 17,048 12,760
Nontaxable 4,931 4,139
Money market investments 43 1,375
------------ ------------
Total interest income 147,086 128,524
------------ ------------
INTEREST EXPENSE
Deposits 52,708 49,250
Short-term borrowings 12,595 2,062
Long-term debt 2,322 3,038
------------ ------------
Total interest expense 67,625 54,350
------------ ------------
NET INTEREST INCOME 79,461 74,174
Provision for loan losses 5,284 4,071
------------ ------------
Net interest income after provision for loan losses 74,177 70,103
------------ ------------
NONINTEREST INCOME
Trust fees 6,200 5,586
Service charges on deposit accounts 6,009 4,704
Bankcard fees 2,521 2,196
Brokerage and investment fees 1,960 793
Mortgage and other loan income 770 2,331
Cash management services 692 604
Investment securities gains (losses) (1) 192
Premium on sale of deposits -- 1,348
Other 2,977 3,023
------------ ------------
Total noninterest income 21,128 20,777
------------ ------------
NONINTEREST EXPENSE
Salaries and employee benefits 31,498 30,137
Equipment 4,696 4,089
Occupancy 4,392 3,867
Data processing fees 2,743 2,326
Professional services 2,502 1,540
Intangible asset amortization 2,590 1,874
Bankcard fees 2,113 1,466
Postage and delivery 1,667 1,606
Advertising and public relations 1,470 1,643
Special charge 3,999 --
Other 7,207 8,158
------------ ------------
Total noninterest expense 64,877 56,706
------------ ------------
INCOME BEFORE INCOME TAXES 30,428 34,174
Income taxes 8,543 10,731
------------ ------------
NET INCOME $ 21,885 $ 23,443
============ ============
NET INCOME PER SHARE:
Basic $ 0.46 $ 0.48
Diluted 0.46 0.47
AVERAGE SHARES OUTSTANDING:
Basic 47,614 48,807
Diluted 47,723 49,408
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</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
<TABLE>
<CAPTION>
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
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 - MARCH 31, 1999 $ 257,955 $ 417,597 $ 4,070 $ 679,622
Net income 24,355 24,355
Net unrealized loss on securities available-for-sale,
net of tax effect (8,278) (8,278)
-----------
Total comprehensive income 16,077
Exercise of stock options, net of
shares purchased 1,607 1,607
Shares acquired for exercise of stock options (20,979) (20,979)
Cash dividends - $0.235 per share (6,489) (6,489)
Cash dividends of pooled company, pre-merger (3,844) (3,844)
----------- ----------- ------------- -----------
BALANCE - JUNE 30, 1999 238,583 431,619 (4,208) 665,994
Net income 23,425 23,425
Net unrealized loss on securities available-for-sale,
net of tax effect (4,439) (4,439)
-----------
Total comprehensive income 18,986
Exercise of stock options, net of
shares purchased 288 288
Shares acquired for exercise of stock options (8,580) (8,580)
Cash dividends - $0.235 per share (6,471) (6,471)
Cash dividends of pooled company, pre-merger (4,022) (4,022)
----------- ----------- ------------- -----------
BALANCE - SEPTEMBER 30, 1999 230,291 444,551 (8,647) 666,195
Net income (9,229) (9,229)
Net unrealized loss on securities available-for-sale,
net of tax effect (8,796) (8,796)
-----------
Total comprehensive income (18,025)
Exercise of stock options, net of
shares purchased 830 830
Shares acquired for retirement (4,149) (4,149)
Cash dividends - $0.235 per share (11,182) (11,182)
----------- ----------- ------------- -----------
BALANCE - DECEMBER 31, 1999 226,972 424,140 (17,443) 633,669
Net income 21,885 21,885
Net unrealized loss on securities available-for-sale,
net of tax effect (231) (231)
-----------
Total comprehensive income 21,654
Exercise of stock options, net of
shares purchased 261 261
Shares acquired for retirement (669) (669)
Cash dividends - $0.235 per share (11,173) (11,173)
----------- ----------- ------------- -----------
BALANCE - MARCH 31, 2000 $ 226,564 $ 434,852 $ (17,674) $ 643,742
=========== =========== ============= ===========
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</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
<TABLE>
<CAPTION>
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Three Months Ended
March 31,
(in thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 21,885 $ 23,443
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 5,284 4,071
Depreciation 3,918 3,449
Amortization of intangibles 2,590 1,874
Net amortization on investment securities 17 714
Investment securities losses (gains) 1 (192)
Loans originated for sale (8,008) (47,562)
Proceeds from loan sales 8,062 48,005
Donation of equity security 1,116 --
Accrued merger related and other charges (4,731) --
Other 2,557 5,650
------------- -----------
Net cash provided by operating activities 32,691 39,452
INVESTING ACTIVITIES:
Net decrease in money market investments 62,081 71,658
Securities available-for-sale:
Proceeds from sales 1 474
Proceeds from maturities 62,535 125,663
Purchases (54,937) (195,314)
Securities held-to-maturity:
Proceeds from maturities -- 1,119
Purchases -- (11,501)
Net increase in loans (129,661) (10,024)
Net increase in premises and equipment (2,929) (6,693)
Acquisitions (net of cash acquired) -- 5,447
------------- -----------
Net cash used by investing activities (62,910) (19,171)
FINANCING ACTIVITIES:
Net decrease in demand and savings deposits (66,865) (121,114)
Net increase in time deposits 43,904 64,901
Net increase (decrease) in short-term borrowings (25,373) 56,835
Proceeds from issuance of long-term debt 120,000 1,670
Principal reductions in long-term debt (49,731) (116)
Cash dividends paid (11,173) (9,793)
Proceeds from stock options exercised 261 623
Shares acquired for retirement (669) (20,158)
------------- ----------
Net cash provided by financing activities 10,354 (27,152)
------------- ----------
Net decrease in cash and due from banks (19,865) (6,871)
Cash and due from banks at beginning of period 250,745 221,880
Cash and due from banks at end of period $ 230,880 $ 215,009
============= ===========
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</TABLE>
See notes to consolidated financial statements.
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-month period
ended March 31, 2000 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2000. The balance sheet at
December 31, 1999 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 1999 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, F&M and all other. Selected
lines of business segment information for the first quarter of 2000 and 1999
is provided below. Total assets by business segment did not change materially
from that previously disclosed in the Corporation's 1999 Annual Report on
Form 10-K. Prior year amounts have been restated to reflect the current
business unit structure and cost allocation methodology. There are no
significant intersegment revenues.
<TABLE>
<CAPTION>
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Special
Charge
Net And
Commercial Retail Financial Operating Other
(in thousands) Banking Banking Services F&M Other Income Items Total
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
EARNINGS SUMMARY - THREE MONTHS ENDED MARCH 31, 2000
Net interest income (taxable equivalent) $ 20,585 $ 31,923 $ 298 $ 27,387 $ 2,650 $ 82,843 -- $ 82,843
Provision for loan losses 414 3,235 -- 784 851 5,284 -- 5,284
---------- --------- --------- -------- -------- --------- -------- --------
Net interest income after provision 20,171 28,688 298 26,603 1,799 77,559 -- 77,559
Noninterest income 2,799 7,111 6,734 3,719 765 21,128 -- 21,128
Noninterest expense 9,934 24,907 4,527 14,910 6,600 60,878 3,999 64,877
---------- --------- --------- -------- -------- --------- -------- --------
Income (loss) before income taxes 13,036 10,892 2,505 15,412 (4,036) 37,809 (3,999) 33,810
Income tax expense (taxable equivalent) 4,563 3,812 877 5,332 (1,069) 13,515 (1,590) 11,925
---------- --------- --------- -------- -------- --------- -------- --------
Net income (loss) 8,473 7,080 1,628 10,080 (2,967) $ 24,294 (2,409) 21,885
=========
Allocation of special charge and
other unusual items -- -- -- (2,228) (181) 2,409 --
---------- --------- --------- -------- -------- -------- --------
Net income (loss) $ 8,473 $ 7,080 $ 1,628 $ 7,852 $ (3,148) $ -- $ 21,885
========== ========= ========= ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY - THREE MONTHS ENDED MARCH 31, 1999
Net interest income (taxable equivalent) $ 17,395 $ 28,337 $ 355 $ 26,816 $ 4,237 $ 77,140 $ 77,140
Provision for loan losses 394 5,088 -- 471 (1,882) 4,071 4,071
---------- --------- --------- -------- -------- --------- --------
Net interest income after provision 17,001 23,249 355 26,345 6,119 73,069 73,069
Noninterest income 2,262 6,779 5,753 4,263 372 19,429 1,348 20,777
Noninterest expense 8,495 21,370 4,001 15,873 6,967 56,706 56,706
---------- --------- --------- -------- -------- --------- -------- --------
Income (loss) before income taxes 10,768 8,658 2,107 14,735 (476) 35,792 1,348 37,140
Income tax expense (taxable equivalent) 3,769 3,030 737 5,715 (26) 13,225 472 13,697
---------- --------- --------- -------- -------- --------- -------- --------
Net income (loss) 6,999 5,628 1,370 9,020 (450) $ 22,567 876 23,443
=========
Allocation of special charge and
other unusual items -- 876 -- -- -- (876) --
---------- --------- --------- -------- -------- -------- --------
Net income (loss) $ 6,999 $ 6,504 $ 1,370 $ 9,020 $ (450) $ -- $ 23,443
========== ========= ========= ======== ======== ======== ========
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</TABLE>
7
<PAGE> 8
NOTE 3. ACQUISITIONS AND MERGER-RELATED EXPENSES
On February 2, 2000, Citizens Banking Corporation announced an agreement to
purchase three Jackson, Michigan offices of Great Lakes National Bank with
approximately $33 million in deposits. The transaction closed on May 12,
2000.
In the fourth quarter of 1999, Citizens merged with F&M Bancorporation, Inc.
("F&M") headquartered in Kaukauna, Wisconsin and completed the acquisition of
seventeen (17) former Bank One offices located in the northern section of
Michigan's Lower Peninsula (the "Branch Purchase"). The Branch Purchase added
approximately $88 million in loans and $442 million in deposits.
Merger-related, restructuring and other integration costs (the "Special
Charge") totaled $4.0 million ($2.4 million after tax), or $0.05 per share,
in the first quarter of 2000. Merger related and other costs recorded in the
fourth quarter of 1999 totaled $50.6 million ($35.2 million after tax) of
which $40.2 million was recorded as a separate component of noninterest
expense, $6.8 million as additional provision for loan losses and $3.6
million as securities losses. Actions incorporated in the business
combination and restructuring plan for the Branch Purchase were completed in
1999. Certain ongoing merger integration activities pertaining to the
November 1, 1999 merger with F&M are targeted for implementation over a 12
month period following the merger. Approximately $8 million to $10 million of
additional merger-related and other costs are expected to be incurred through
the remainder of year 2000 for these activities. The Noninterest Expense
section, under the subheading Special Charge, of Management's Discussion and
Analysis of Financial Condition and Results of Operations" provides
additional details. As of March 31, 2000, the remaining liabilities
associated with these costs were approximately $12.7 million. As shown in the
following table, the majority the remaining balance represents
personnel-related expenses and contract termination and other conversion
costs (primarily recognition of obligations under existing contractual
agreements related to system conversions).
<TABLE>
<CAPTION>
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Estimated
DESCRIPTION OF COSTS Liability At Liability At Liability At
(in thousands) Acquisition 12/31/99 3/31/00
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee benefits and severance $ 7,481.9 $ 7,337.9 $ 6,680.0
Contract termination and
other conversion costs 13,597.8 9,356.9 5,810.7
Professional fees 6,345.2 634.5 165.6
Facilities and equipment 3,354.9 --- ---
Goodwill & core deposit
premium write-downs 2,349.1 --- ---
Equity investment write-down 519.9
Charitable trust 2,500.0 --- ---
Other 4,049.4 57.6 ---
------------- ------------- -------------
Total $ 40,198.2 $ 17,386.9 $ 12,656.3
============= ============= =============
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</TABLE>
8
<PAGE> 9
NOTE 4. 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:
<TABLE>
<CAPTION>
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Three Months Ended
March 31,
- -------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2000 1999
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<S> <C> <C>
NUMERATOR:
Numerator for basic and dilutive earnings per share -- net income available to common
shareholders $ 21,885 $ 23,443
======== ========
DENOMINATOR:
Denominator for basic earnings per share -- weighted-average shares 47,614 48,807
Effect of dilutive securities -- potential conversion of employee stock options 109 601
-------- --------
Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed
conversions 47,723 49,408
======== ========
BASIC EARNINGS PER SHARE $ 0.46 $ 0.48
======== ========
DILUTED EARNINGS PER SHARE $ 0.46 $ 0.47
======== ========
========================================================================================================================
</TABLE>
During the first quarter of 2000, employees exercised stock options to acquire
36,688 shares at an average exercise price of $9.15 per share.
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
<TABLE>
<CAPTION>
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SELECTED FINANCIAL DATA (1) Three Months Ended
March 31,
(in thousands, except per share data) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE PERIOD
Interest income $ 147,086 $ 128,524
Net interest income 79,461 74,174
Provision for loan losses 5,284 4,071
Investment securities gains (1) 192
Other noninterest income 21,129 20,585
Noninterest expense before special charge 60,878 56,706
Special charge:
Before-tax 3,999 ---
After-tax 2,409 ---
Income taxes 8,543 10,731
Net income 21,885 23,443
Net operating income (2) 24,294 22,567
Cash dividends (3) 11,173 9,792
PER SHARE DATA
Basic net income $ 0.46 $ 0.48
Diluted net income 0.46 0.47
Diluted net operating income (2) 0.51 0.46
Cash dividends (3) 0.235 0.21
Book value (end of period) 13.52 14.02
Market value (end of period close) 19.50 36.00
FINANCIAL RATIOS (ANNUALIZED)
Net operating return on average: (2) , (4)
Shareholders' equity 15.39 % 13.42 %
Assets 1.24 1.30
Net interest margin (taxable equivalent) 4.49 4.70
Net loan charge-offs to average loans 0.18 0.39
Average equity to average total assets 8.07 9.68
Nonperforming assets to loans plus other repossessed
assets acquired (end of period) 0.67 0.76
Nonperforming assets to total assets (end of period) 0.51 0.58
BALANCE SHEET TOTALS Percent
At Period End (March 31) Change
-------
Assets 12.6% $7,936,305 $7,046,019
Loans 13.3 6,044,536 5,333,329
Deposits 5.0 6,106,037 5,816,561
Shareholders' equity (5.3) 643,742 679,622
Average balances
Assets 11.7 7,864,962 7,042,420
Loans 12.0 5,953,556 5,317,030
Deposits 4.2 6,108,719 5,862,758
Shareholders' equity (6.9) 635,055 682,205
==============================================================================================================================
</TABLE>
(1) Except as indicated, all financial data have been restated for pooling
of interests transactions.
(2) Net operating income is based on net income that excludes special
charges, restructuring and other unusual income or expense incurred in
the connection with acquisitions and other corporate initiatives.
(3) Cash dividends and cash dividends per share are for Citizens Banking
Corporation only, not restated for pooling of interests.
(4) Returns on average shareholders' equity and assets computed on
reported net income were 13.86% and 1.12%, respectively in 2000 and
13.94% and 1.35%, respectively, in 1999.
10
<PAGE> 11
INTRODUCTION
The following is a review of Citizens Banking Corporation's ("Citizens")
performance during the three-month period ended March 31, 2000. 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
Citizens' 1999 Annual Report on Form 10-K.
To better understand underlying trends and performance, and to present financial
performance on an "operating basis" Citizens has excluded special charges
associated with merger and integration costs as well as the effects of unusual
events or transactions. Operating results should be reviewed in conjunction with
reported results. Selected financial data as of March 31, 2000 and 1999 and for
the three month periods then ended are presented in the table on page 10.
EARNINGS SUMMARY
Citizens earned net operating income of $24,294,000 for the three months ended
March 31, 2000 or $0.51 per share, compared with $22,567,000 or $0.46 per share
for the same period in 1999. On the same basis, returns on average assets and
average equity for the first quarter were 1.24% and 15.39%, respectively, in
2000 compared with 1.30% and 13.42% in 1999. Net operating income for the first
quarter of 2000 excludes special charges of $4.0 million ($2.4 million
after-tax) for the on-going conversion and integration of F&M Bancorporation,
Inc. (F&M), which merged with Citizens on November 1, 1999. Net operating income
for the first quarter of 1999 excludes a non-recurring gain of $1,348,000
($876,000 after-tax) from the sale of a branch. Reported net income for the
first quarter of 2000 was $21,885,000 or $0.46 per share.
The improvement in operating income reflects increased noninterest income and
higher net interest income from growth in earning assets offset, in part, by a
higher provision for loan losses and increases in operating expense. On an
operating basis, noninterest income, excluding securities gains and losses, was
$21,129,000 in the first quarter of 2000, an increase of $1,892,000 or 9.8% over
the same period in 1999. Notable increases were achieved in brokerage and
investment fees (147%), deposit service charges (28%), bankcard fees (15%), and
trust fees (11%). Noninterest expense, on an operating basis, was $60,878,000 in
the first quarter of 2000, an increase of $4,172,000 or 7.4% over the same
period of 1999. This increase reflects higher compensation, professional
services costs, intangible asset amortization, bankcard fees, data processing
and telecommunication costs, equipment and occupancy costs.
LINES OF BUSINESS REPORTING
The Corporation operates along four major business segments: Commercial Banking,
Retail Banking, Financial Services and F&M. For more information about each line
of business, see Note 17 to the Corporation's 1999 Annual Report on Form 10-K
and Note 2 of this Quarterly Report on Form 10Q. A summary of net operating
income by each business line is presented below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
(in thousands) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial Banking $ 8,473 $ 6,999
Retail Banking 7,080 5,628
Financial Services 1,628 1,370
F&M 10,080 9,020
Other (2,967) (450)
------- -------
Total operating income $24,294 $22,567
======= =======
==========================================================================================================================
</TABLE>
The increase in commercial banking operating income in 2000 is due to growth in
overall commercial account relationships, including strong loan growth,
increased demand deposits and related service charges, and expanded cash
management services. Retail banking operating income increased in 2000 as a
result of higher net interest income, generated from greater direct and indirect
consumer loan volumes and increased deposit levels, and reduced loan charge-offs
partially offset by higher operating expense. Financial services operating
income improved in 2000 due to strong growth in trust, brokerage and investment
advisory services revenue (partially offset by higher compensation and other
expense), introduction of new products and services and successful retail sales
efforts. Growth in operating income from F&M reflects strong loan and deposit
growth and increased noninterest income in its core markets.
11
<PAGE> 12
NET INTEREST INCOME
Tax equivalent net interest income, Citizens' principal source of earnings,
increased $5.7 million, or 7.4%, to $82.8 million in the first quarter of 2000
from $77.1 million for the same period in 1999. A higher level of earning
assets, partially offset by increases in interest-bearing deposits and
short-term borrowings, and a lower net interest margin, led to this increase. A
detailed analysis of net interest income, with average balances and related
interest rates for the first three months of 2000 and 1999 is presented on page
13. An analysis of how changes in average balances ("volume") and market rates
of interest ("rates") have effected net interest income appears in the table
below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
2000 Compared with 1999
------------------------------------------
Increase (Decrease)
Three Months Ended March 31 Net Due to Change in
---------------------------
(in thousands) Change (1) Rate Volume (2)
- ---------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
<S> <C> <C> <C>
Money market investments $ (1,332) $ 199 $ (1,531)
Investment securities:
Taxable 4,288 1,122 3,166
Tax-exempt 792 (123) 915
Loans:
Commercial 12,003 3,598 8,405
Real estate 150 (1,050) 1,200
Consumer 2,661 (219) 2,880
--------- -------- ---------
Total 18,562 3,527 15,035
--------- -------- ---------
INTEREST EXPENSE
Deposits:
Demand (76) (187) 111
Savings 1,855 759 1,096
Time 1,679 83 1,596
Short-term borrowings 10,533 492 10,041
Long-term debt (716) 485 (1,201)
--------- -------- ---------
Total 13,275 1,632 11,643
--------- -------- ---------
NET INTEREST INCOME $ 5,287 $ 1,895 $ 3,392
========= ======== =========
===================================================================================================================
</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.
For the first quarter of 2000, net favorable volume and rate related variances
in net interest income resulted in an increase of $5,287,000 in net interest
income, as compared to the same period in 1999. Yields on earning assets
increased to 8.17% for the first quarter of 2000 from 8.06% for the year-ended
1999 and 8.05% for the quarter ended March 31, 1999. Management's decision to
reposition the securities portfolio following the merger with F&M, in November
1999, as well as recent increases in Citizens' prime lending rate late in 1999
and in the first quarter of 2000 were the major factors in this increase. The
cost of interest-bearing liabilities increased to 4.37% from 4.06% for the three
months ended March 31, 2000, as compared with the same period in 1999. A higher
overall interest rate environment and increased levels of relatively higher cost
short-term borrowings fueled this increase. Although Citizens continues to be
successful at attracting new deposits, loan growth has outpaced deposit growth
and Citizens used short-term Federal Home Loan Bank ("FHLB") advances and other
purchased funds to support the higher level of earning assets.
Net interest margin, the difference between yields earned on earning assets
compared to the rates paid on supporting funds, was 4.49% for the first quarter
of 2000, 21 basis points lower than the same period in 1999. The decrease in net
interest margin is primarily due to a change in funding mix and increases in
short-term interest rates by the Federal Reserve. The change in mix reflects the
growth in lower spread investment securities and increased reliance on
short-term borrowings, which are more expensive than deposits, to support loan
growth in Citizens' markets.
12
<PAGE> 13
Going forward, a modest decline in the net interest margin is expected, as mix
and recent rate increases will reduce interest spreads and earning asset growth
is expected to continue to outpace traditional deposit growth. Management
continually monitors the Corporation's balance sheet to insulate net interest
income from significant swings caused by interest rate volatility. The
Corporation's policies in this regard are further discussed in the section
titled "Interest Rate Risk".
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
2000 1999
-------------------------------------- -----------------------------------
Three Months Ended March 31 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:
Federal funds sold $ 1,366 $ 18 $ 5.37 $ 117,392 $ 1,306 $ 4.51
Other 1,841 25 5.60 5,320 69 5.27
Investment securities(3):
Taxable 1,051,279 17,048 6.49 851,111 12,760 6.00
Tax-exempt 380,180 4,931 7.98 310,503 4,139 8.20
Loans:
Commercial 2,852,077 60,992 8.68 2,397,444 48,989 8.41
Real estate 1,625,734 31,000 7.64 1,582,941 30,850 7.85
Consumer 1,475,745 33,072 9.01 1,336,645 30,411 9.22
------------ ----------- ----------- ---------
Total earning assets(3) 7,388,222 147,086 8.17 6,601,356 128,524 8.05
NONEARNING ASSETS
Cash and due from banks 236,116 221,736
Bank premises and equipment 143,852 131,490
Other nonearning assets 175,725 157,732
Allowance for loan losses (78,953) (69,894)
------------ -----------
Total assets $ 7,864,962 $7,042,420
============ ===========
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits 601,203 2,194 1.47 573,640 2,270 1.61
Savings deposits 1,788,436 13,541 3.05 1,746,301 11,686 2.71
Time deposits 2,771,941 36,973 5.35 2,678,718 35,294 5.34
Short-term borrowings 903,917 12,595 5.60 199,542 2,062 4.19
Long-term debt 147,975 2,322 6.29 224,512 3,038 5.49
------------ ----------- ----------- ---------
Total interest-bearing liabilities 6,213,472 67,625 4.37 5,422,713 54,350 4.06
----------- ---------
NONINTEREST-BEARING LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits 947,139 864,099
Other liabilities 69,296 73,403
Shareholders' equity 635,055 682,205
----------- ----------
Total liabilities and shareholders' equity $ 7,864,962 $7,042,420
=========== ==========
NET INTEREST INCOME $ 79,461 $ 74,174
=========== ==========
NET INTEREST INCOME AS A PERCENT OF
EARNING ASSETS 4.49 % 4.70 %
- ---------------------------------------------------------------------------------------------------------------------------
</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 $3,382 and $2,966 for the
three months ended March 31, 2000 and 1999, 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
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses represents a charge against income and a
corresponding increase in the allowance for loan losses. The provision for loan
losses was $5,284,000 in the first quarter of 2000, an increased of $1,213,000
over the same period in 1999. Net charge-offs were 0.18% of average loans in the
first three months of 2000, down from 0.39% in the same period a year ago. The
change primarily reflects fewer charge-offs and higher recoveries in Citizens'
indirect consumer portfolio in the first quarter of 2000, as compared to the
same period in 1999. A summary of loan loss experience during the three months
ended March 31, 2000 and 1999 is provided below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended
March 31,
(in thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses - beginning of period $ 76,397 $ 70,842
Charge-offs 4,260 6,319
Recoveries 1,652 1,169
---------- -----------
Net charge-offs 2,608 5,150
Provision for loan losses 5,284 4,071
---------- -----------
Allowance for loan losses - end of period $ 79,073 $ 69,763
========== ===========
Loans outstanding at period end $6,044,536 $ 5,333,329
Average loans outstanding during period 5,953,556 5,317,030
Allowance for loan losses as a percentage of loans outstanding at period end 1.31 % 1.31 %
Ratio of net charge-offs during period to average loans outstanding (annualized) 0.18 0.39
Loan loss coverage (allowance as a multiple of net charge-offs, annualized) 7.6 x 3.4 x
=============================================================================================================================
</TABLE>
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 Citizens'
assessment of general economic and conditions, the economic conditions in the
markets in which Citizens 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.
Citizens maintains formal policies and procedures to monitor and control credit
risk. Citizen's loan portfolio has no significant concentrations in any one
industry or any exposure to foreign loans. Citizens 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."
14
<PAGE> 15
NONINTEREST INCOME
A summary of significant sources of noninterest income during the first three
months of 2000 and 1999 follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Three Months Ended Change in 2000
March 31, ----------------------
(in thousands) 2000 1999 Amount Percent
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust fees $ 6,200 $ 5,586 $ 614 11.0 %
Service charges on deposit accts 6,009 4,704 1,305 27.7
Bankcard fees 2,521 2,196 325 14.8
Brokerage and investment fees 1,960 793 1,167 147.2
Mortgage and other loan income 770 2,331 (1,561) (67.0)
ATM network user fees 753 663 90 13.6
Cash management services 692 604 88 14.6
Title insurance fees 233 274 (41) (15.0)
Other, net 1,991 2,086 (95) (4.6)
-------- -------- --------
Total fees and other income 21,129 19,237 1,892 9.8
Investment securities gains (losses) (1) 192 (193) (100.5)
-------- -------- --------
Noninterest income - operating basis 21,128 19,429 1,699 8.7
Premium on sale of deposits --- 1,348 (1,348) (100.0)
-------- -------- --------
Total noninterest income $ 21,128 $ 20,777 $ 351 1.7
======== ======== ========
==========================================================================================================================
</TABLE>
On an operating basis, noninterest income for the first quarter of 2000, before
securities gains and loss, increased 9.8% over the first quarter of 1999 levels.
Operating income in first quarter 1999 excludes a premium of $1.3 million
received from the sale of deposits of a bank branch office in March 1999. Most
categories of noninterest income were higher in 2000 than in 1999. Citizens
experienced significant increases in trust fees, deposit service charges,
bankcard fees, brokerage and investment fees, ATM network user fees and cash
management service fees.
Fee income for personal and employee benefit trust services increased 11.0% in
the first quarter of 2000, as compared to the same period in 1999. Primarily new
business volume from successful sales efforts and equity market appreciation led
to the revenue growth. Brokerage and investment fees were up 147.2%, propelled
by successful retail sales efforts, strength in the equity markets and growth in
new mutual fund and annuity products. Improvements in service charges on deposit
accounts, bankcard fees, ATM network fees and cash management service fees
reflect higher transaction volume due to the purchase of the seventeen Bank One
branches (the "Branch Purchase") and enhanced marketing strategies. Title
insurance fees and mortgage and other loan income decreased as higher interest
rates reduced origination volume and refinance activity, which in turn resulted
in fewer gains on sale of residential mortgage loans and related servicing and
title insurance fees.
The 2000 and 1999 first quarter gains and losses on the sale of investment
securities resulted from the sale of certain securities to reposition the
investment portfolio based on the current rate environment and, in part, to fund
loan growth and meet liquidity needs.
15
<PAGE> 16
NONINTEREST EXPENSE
Significant changes in noninterest expense during the three months ended March
31, 2000 and 1999 is summarized in the table below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Three Months Ended Change in 2000
March 31, ----------------------
(in thousands) 2000 1999 Amount Percent
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $31,498 $30,137 1,361 4.5 %
Equipment 4,696 4,089 607 14.8
Occupancy 4,392 3,867 525 13.6
Data processing services 2,743 2,326 417 17.9
Professional services 2,502 1,540 962 62.5
Intangible asset amortization 2,590 1,874 716 38.2
Bankcard fees 2,113 1,466 647 44.1
Postage and delivery 1,667 1,606 61 3.8
Telephone 1,514 1,229 285 23.2
Advertising and public relations 1,470 1,643 (173) (10.5)
Stationery and supplies 1,359 1,346 13 1.0
Other loan fees 909 1,098 (189) (17.2)
Other, net 3,425 4,485 (1,060) (23.6)
-------- -------- --------
Noninterest expense - operating basis 60,878 56,706 4,172 7.4
Special charge 3,999 --- 3,999 (1)
-------- -------- --------
Total noninterest expense $64,877 $56,706 $ 8,171 14.4
======== ======== ========
==========================================================================================================================
</TABLE>
(1) Not Meaningful
On an operating basis, noninterest expense for the first quarter of 2000
increased 7.4% over the first quarter 1999 levels. Growth from the Branch
Purchase and ongoing initiatives designed to provide future revenue and
cost efficiencies generated most of the increase. Operating income excludes
ongoing merger related restructuring and integration costs which have been
recorded as a "Special charge."
Salaries and employee benefits expense increased 4.5% for the three-month period
ended March 31, 2000, as compared to the same period in the prior year. The
variances in salaries reflect increased incentive based compensation and higher
staffing levels to support growth in certain business units and from
acquisitions, partially offset by the reduction in staff due to merger synergies
and outsourcing of internal audit, loan review and micro computer support
functions. The cost of employee benefits was up slightly reflecting higher
health care costs and additional benefits resulting from conforming and
combining of certain benefit plans.
Occupancy and equipment expense was up $1.1 million, compared with the first
quarter of 1999. The increase reflected the growth in facilities and equipment
costs associated, in part, with the Branch Purchase transaction in October 1999.
Growth in data processing and telephone costs is also primarily attributable to
the Branch Purchase. The increase in professional services expenses reflects the
cost of outsourcing the internal audit, loan review and microcomputer support
functions, but was offset by related reductions in salaries and benefits.
Bankcard fees were up due to higher transaction volume and system processing
costs as well as new fees associated with outsourcing of bankcard operations.
The additional intangible asset amortization was attributable to the Branch
Purchase. The decrease in other expenses is attributable to fewer losses on
deposit accounts, recoveries from previous fraud-related losses and lower state
taxes.
Special Charge
On November 1, 1999, Citizens merged with F&M. As a result, Citizens management
approved, in 1999, a series of initiatives designed to achieve future cost
efficiencies. Actions incorporated in the business combination and restructuring
plan are targeted for implementation over a 12 month period following the
merger. Ongoing costs associated with these actions are recorded as a Special
Charge. The Special Charge totaled $4.0 million (2.4 million after tax or 5
cents per share) in the first quarter of 2000 and was comprised primarily of
system conversion and merger-related integration costs. Approximately $8 million
to $10 million of additional merger-related and other costs are expected to be
incurred through the remainder of year 2000.
16
<PAGE> 17
Major merger integration achievements in 2000 include:
- - Consolidation of F&M's 22 separate banking subsidiaries into three banks,
organized by state;
- - Closing of 13 F&M Bank branch offices located in Wisconsin; and
- - Completion of the first two of a total of seven planned operating system
conversions scheduled for 2000. Five of F&M's former banks were converted to
Citizens' integrated system on February 14, 2000 and an additional three
banks were converted on April 10, 2000. These conversions represented 25% of
F&M's loans and deposits and 20% of F&M's branch offices.
Other planned initiatives accomplished in 2000 not related to the merger
include:
- - Transfer of Citizens internal audit and corporate loan review functions to a
third party
- - As part of Citizens' branch reconfiguration initiative, nine Citizens branch
offices were closed (1 in February and 8 in April) and on May 12, 2000,
Citizens acquired three Jackson, Michigan branches operated by Great Lakes
National Bank and simultaneously consolidated three existing Citizens offices
in the Jackson market into the newly acquired branches.
As of March 31, 2000, the remaining liabilities associated with Citizens
business combination and restructuring plan were approximately $12.7 million.
The majority of the remaining balance represents personnel-related expenses and
contract termination and other conversion costs (primarily recognition of
obligations under existing contractual agreements related to system
conversions). See Note 4. Acquisitions and Merger-Related Expenses
for additional details
INCOME TAXES
Income tax expense was $8.5 million in the first quarter of 2000, a decrease of
20.4% over the same period last year. Lower pre-tax earnings associated with the
special charge, a higher level of tax-exempt interest income and tax benefits
from the donation of appreciated marketable equity securities resulted in this
decrease for the three months ended March 31, 2000, as compared to the same
period in the prior year.
FINANCIAL CONDITION
The Corporation had total assets of $7.936 billion as of March 31, 2000, an
increase of $36.9 million or 0.5% from $7.899 billion as of December 31, 1999.
Average earning assets comprised 93.9% of average total assets during the first
three months of 2000 compared with 93.7% in the first three months of 1999.
INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
Total average investments, including money market investments, comprised 19.4%
of average earning assets during the first quarter of 2000, compared with 19.5%
for the same period of 1999. Average investment security balances in the first
quarter of 1999 were up $269.8 million over the same period in 1999 primarily
reflecting a balance sheet leveraging strategy deployed in the third quarter of
1999 in anticipation of the pending Branch Purchase. Citizens leveraged its
future core deposit growth by utilizing short-term FHLB advances to fund
purchases of longer-term Federal Agency securities. Average money market
investments were down $119.5 million from first quarter 1999 levels as liquidity
needs associated with strong loan growth reduced Citizens capacity to sell
Federal funds.
LOANS
Citizens extends credit primarily within the local markets of its banking
subsidiaries located in Michigan, Wisconsin, Iowa, Illinois and Minnesota. The
loan portfolio is widely diversified by borrower and industry groups with no
foreign loans or significant concentrations in any industry. Total loans at
March 31, 2000 were up $127.1 million or 2.1% from year-end 1999 and $711.2
million or 13.3% from March 31, 1999. Average loans for the first quarter of
2000 were up $636.5 million or 12.0% over the first three months of 1999
reflecting enhanced sales efforts, strong demand for business loans in Citizens'
markets and acquisition of approximately $88 million of commercial loans from
the Branch Purchase.
NONPERFORMING ASSETS
Nonperforming assets are comprised 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. Under
Citizens' credit policies and practices, 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. A loan is considered impaired when management determines it is probable
that all the principal and interest due under the contractual terms of the loans
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. Citizens maintains a valuation allowance for impaired
loans.
17
<PAGE> 18
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 the following table
are considered to be impaired. The Corporation measures impairment on all large
balance nonaccrual commercial and commercial real estate loans. Certain large
balance accruing loans rated substandard or worse are also measured for
impairment. In most instances, impairment is measured based on the fair value of
the underlying collateral. Impairment losses are included in the provision for
loan losses. The policy does not apply to large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment, except for
those loans restructured under a troubled debt restructuring. Loans collectively
evaluated for impairment include certain smaller balance commercial loans,
consumer loans, residential real estate loans, and credit card loans, and are
not included in the impaired loan data in the following paragraphs.
At March 31, 2000, loans considered to be impaired totaled $41.4 million (of
which $21.2 million were on a nonaccrual basis). Included within this amount was
$27.0 million of impaired loans for which the related allowance for loan losses
was $3.4 million and $14.4 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 quarter ended March 31, 2000 was approximately $32.1
million. For the quarter ended March 31, 2000, Citizens recognized interest
income of approximately $0.4 million. Cash collected on nonaccrual impaired
loans totaled $0.6 million of which $0.2 million was applied to principal and
$0.3 million was recognized using the cash basis method of income recognition.
At March 31, 1999, loans considered to be impaired totaled $22.8 million (of
which $12.1 million were on a nonaccrual basis). Included within this amount was
$16.2 million of impaired loans for which the related allowance for loan losses
was $4.2 million and $6.6 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 March 31, 1999 was approximately $24.8
million. For the quarter ended March 31, 1999, Citizens recognized interest
income of approximately $0.3 million. Cash collected on nonaccrual impaired
loans totaled $0.4 million of which $0.2 million was applied to principal and
$0.2 million was recognized using the cash basis method of income recognition.
The table below provides a summary of nonperforming assets as of March 31, 2000,
December 31, 1999 and March 31, 1999. Total nonperforming assets amounted to
$40.4 million as of March 31, 2000, compared with $35.1 million as of December
31, 1999 and $40.7 million as of March 31, 1999.
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
March 31, December 31, March 31,
(in thousands) 2000 1999 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming Loans
Nonaccrual
Less than 30 days past due $ 2,553 $ 1,661 $ 2,049
From 30 to 89 days past due 3,732 772 1,455
90 or more days past due 28,253 26,498 28,419
-------- -------- --------
Total 34,538 28,931 31,923
90 days past due and still accruing 1,672 2,139 3,254
Restructured 520 9 114
-------- -------- --------
Total nonperforming loans 36,730 31,079 35,291
Other Repossessed Assets Acquired (ORAA) 3,696 4,039 5,367
-------- -------- --------
Total nonperforming assets $ 40,426 $ 35,118 $ 40,658
======== ======== ========
Nonperforming assets as a percent of total loans plus ORAA 0.67 % 0.59 % 0.76 %
Nonperforming assets as a percent of total assets 0.51 0.45 0.58
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Nonperforming assets while up from year-end 1999 remain well below 1% of total
loans and other nonperforming assets and were below March 31, 1999 levels.
Citizens does not anticipate a significant increase in nonperforming in the near
term. Employment levels and other economic conditions in the Corporation's local
markets; however, 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.
18
<PAGE> 19
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 March 31, 2000, such credits amounted to $23.9 million or 0.4% of
total loans, compared with $18.9 million or 0.3% at December 31, 1999 and 18.1
million or 0.5% of total loans as of March 31, 1999. 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
Total deposits decreased $23.0 million to $6.106 billion at March 31, 2000 from
$6.129 billion at year-end 1999 but were up $289.5 million from March 31, 1999.
Average deposits increased 4.2% in the first three months of 2000 over the same
period in 1999. The increase over first quarter 1999 totals primarily reflects
the acquisition of $442 million in deposits from the Branch Purchase in October
1999. The Corporation gathers deposits primarily in its local markets and
historically has not relied on brokered funds to sustain liquidity. At March 31,
2000 and at year-end 1999, the Citizens had approximately $15 million in
brokered deposits as an alternative source of funding. Citizens 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 $903.9 million during the
first three months of 2000 compared with $199.5 million during the same period
of 1999. The increase primarily reflects increased borrowings at the subsidiary
bank level due to higher growth rates in loans and other earning assets than in
traditional deposit funding. Long-term debt accounted for $148.0 million or 2.4%
of average interest-bearing funds for the first three months of 2000, decreasing
from $224.5 million or 4.1% of average interest-bearing funds for the same
period in 1999. At March 31, 2000, $197.1 million of the long-term debt consists
of borrowings from the Federal Home Loan Bank with $122.9 million maturing at
different intervals over the next five years. These borrowings are utilized to
fund the Corporation's loan growth. Borrowed funds are expected to remain an
important, reliable and cost-effective funding vehicle for Citizens and its
subsidiary banks as earning asset growth opportunities are expected to continue
to outpace traditional deposit growth.
CAPITAL RESOURCES
Citizens continues to maintain a strong capital position which supports its
current needs and provides a sound foundation to support further expansion. At
March 31, 2000, shareholders' equity was $643.7 million compared with $633.7
million at December 31, 1999 and $679.6 as of March 31, 1999. Repurchase of
Citizens' common stock and unrealized fair value depreciation in the available
for sale securities portfolio led to the decline in stockholders' equity in
1999. Book value per common share at March 31, 2000, December 31, 1999 and March
31, 1998 was $13.52, $13.32 and $14.02, respectively
Citizens has consistently maintained regulatory capital ratios at or above the
"well-capitalized" standards and all bank subsidiaries of Citizens have
sufficient capital to maintain a well capitalized designation. Citizens' capital
ratios as of March 31, 2000, December 31, 1999 and March 31, 1999 is presented
below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS Regulatory
Minimum For
"Well March 31, December 31, March 31,
Capitalized" 2000 1999 1999
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk based capital:
Tier I 6.0 % 9.4 % 9.2 % 10.9 %
Total capital 10.0 10.6 10.5 12.1
Tier I leverage 5.0 7.3 7.2 8.8
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
In May 1998, Citizens initiated a stock repurchase plan that allowed for the
repurchase of up to 600,000 shares for treasury to satisfy Citizens' obligation
to issue shares under its existing employee and director stock option plans. As
of March 31, 2000 all shares had been repurchased under the Plan. In January
1999, Citizens initiated a second stock repurchase plan that provided for the
repurchase of up to 1,400,000 shares of its common stock for general bank
purposes, all of which were repurchased during 1999.
Citizens declared cash dividends of $0.235 per share in the first quarter of
2000, an increase of 11.9% over the $0.21 per share declared during the same
period in 1999.
19
<PAGE> 20
LIQUIDITY AND DEBT CAPACITY
The liquidity position of Citizens is monitored for its subsidiaries and the
Parent company to ensure that funds are available at a reasonable cost to meet
financial commitments, to finance business expansion and to take advantage of
unforeseen opportunities. Citizens' subsidiary banks derive liquidity primarily
through core deposit growth, maturity of money market investments, and maturity
and sale of investment securities and loans. Additionally, Citizens' 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 Reserve and Federal Home Loan Banks where the
subsidiary banks are members. Another source of liquidity is the ability of
Citizens' Parent company to borrow funds on both a short-term and long-term
basis. The Parent has established borrowing facilities with a group of
unaffiliated banks and has used portions of this revolving credit agreement for
various corporate purposes.
In the first quarter of 2000, Citizens continued its strategy to operate at
lower levels of on balance sheet liquidity, thereby improving the asset mix,
resulting in increased net interest income. Citizens 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.
Proactive management of Citizens' liquidity capacity and generation has
increased sources of funds and borrowing capacities enabling Citizens and its
subsidiary banks to operate effectively, safely and with improved profitably. At
March 31, 2000, Citizens had sufficient liquidity 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
Citizens' assets and liabilities differs significantly. Asset/liability
management, which among other things addresses such risk, is the process of
developing, testing and implementing strategies that seek to maximize net
interest income, maintain sufficient liquidity and minimize exposure to
significant changes in interest rates. This process includes monitoring
contractual and expected repricing of assets and liabilities as well as
forecasting earnings under different interest rate scenarios and balance sheet
structures. Generally, management seeks a structure that insulates net interest
income from large swings attributable to changes in market interest rates. The
Corporation's static interest rate sensitivity ("GAP") as of March 31, 2000 and
1999 is illustrated below in the table on page 21.
As shown, Citizens' interest rate risk position is liability sensitive in the
less than one year time frame with rate sensitive liabilities exceeding rate
sensitive assets by $1,135.7 million at March 31, 2000 and by $384.7 million at
March 31, 1999. Application of GAP theory would suggest that with such a
position Citizens' net interest income could decline if interest rates rise;
i.e., liabilities are likely to reprice faster than assets, resulting in a
decrease in net income in a rising rate environment. Conversely, net income
should increase in a falling rate environment. Net interest income is not only
affected by the level and direction of interest rates, but also by the shape of
the yield curve, relationships between interest sensitive instruments and key
driver rates, as well as balance sheet growth and the timing of changes in these
variables. 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, the above table does incorporate appropriate adjustments as indicated
in footnotes 1 and 2 to the table. Because of these and other inherent
limitations of any GAP analysis, management utilizes net interest income
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.
20
<PAGE> 21
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY Nonsensitive
TOTAL And
1-90 91-180 181-365 WITHIN 1-5 Over
(dollars in millions) Days Days Days 1 YEAR Years 5 Years Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MARCH 31, 2000
RATE SENSITIVE ASSETS (1)
Loans $ 1,771.3 $ 330.5 $ 604.8 $ 2,706.6 $ 2,642.6 $ 695.3 $ 6,044.5
Investment securities 50.4 26.8 44.4 121.6 478.7 789.4 1,389.7
Short-term investments 1.7 --- --- 1.7 --- --- 1.7
----------- --------- ----------- ----------- ----------- ----------- -----------
Total $ 1,823.4 $ 357.3 $ 649.2 $ 2,829.9 $ 3,121.3 $ 1,484.7 $ 7,435.9
=========== ========= =========== =========== =========== =========== ===========
RATE SENSITIVE LIABILITIES
Deposits (2) $ 1,057.4 $ 707.2 $ 1,138.7 $ 2,903.3 $ 2,002.2 $ 259.1 $ 5,164.6
Other interest bearing liabilities 960.7 50.2 51.4 1,062.3 32.6 14.5 1,109.4
----------- --------- ----------- ----------- ----------- ----------- -----------
Total $ 2,018.1 $ 757.4 $ 1,190.1 $ 3,965.6 $ 2,034.8 $ 273.6 $ 6,274.0
=========== ========= =========== =========== =========== =========== ===========
Period GAP (3) $ (194.7) $ (400.1) $ (540.9) $ (1,135.7) $ 1,086.5 $ 1,211.1 $ 1,161.9
Cumulative GAP (194.7) (594.8) (1,135.7) (49.2) 1,161.9
Cumulative GAP to Total Assets (2.45)% (7.49)% (14.31)% (14.31)% (0.62)% 14.64% 14.64%
Multiple of Rate Sensitive Assets to
Liabilities 0.90 0.47 0.55 0.71 1.53 5.43 1.19
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 1999
RATE SENSITIVE ASSETS (1)
Loans $ 1,657.9 $ 323.0 $ 553.2 $ 2,534.1 $ 2,129.8 $ 669.5 $ 5,333.4
Investment securities 141.1 49.8 120.0 310.9 485.3 433.3 1,229.5
Short-term investments 41.4 --- --- 41.4 --- --- 41.4
----------- --------- ----------- ----------- ----------- ----------- -----------
Total $ 1,840.4 $ 372.8 $ 673.2 $ 2,886.4 $ 2,615.1 $ 1,102.8 $ 6,604.3
=========== ========= =========== =========== =========== =========== ===========
RATE SENSITIVE LIABILITIES
Deposits (2) $ 992.4 $ 685.5 $ 1,176.6 $ 2,854.5 $ 1,819.0 $ 291.6 $ 4,965.1
Other interest bearing liabilities 279.4 42.9 94.3 416.6 15.0 38.5 470.1
----------- --------- ----------- ----------- ----------- ----------- -----------
Total $ 1,271.8 $ 728.4 $ 1,270.9 $ 3,271.1 $ 1,834.0 $ 330.1 $ 5,435.2
=========== ========= =========== =========== =========== =========== ===========
Period GAP (3) $ 568.6 $ (355.6) $ (597.7) $ (384.7) $ 781.1 $ 772.7 $ 1,169.1
Cumulative GAP 568.6 213.0 (384.7) 396.4 1,169.1
Cumulative GAP to Total Assets 8.07 % 3.02 % (5.46)% (5.46)% 5.63% 16.59% 16.59%
Multiple of Rate Sensitive Assets to
Liabilities 1.45 0.51 0.53 0.88 1.43 3.34 1.22
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Incorporates prepayment projections for certain assets which may shorten
the time frame for repricing or maturity compared to contractual runoff.
(2) Includes interest bearing savings and demand deposits of $827 million and
$803 million in 2000 and 1999, respectively, in the less than one year
category, and $1.551 billion and $1.521 billion, respectively in the over
one year category, based on historical trends for these noncontractual
maturity deposit types, which reflects industry standards.
(3) GAP is the excess of rate sensitive assets (liabilities).
21
<PAGE> 22
IMPACT OF YEAR 2000
During 1999, management completed the process of preparing for the Year 2000
date change. This process involved identification and remediation of date
recognition problems in all computer-based systems, applications and
non-information technology systems necessary for continued operations beyond
December 31, 1999. It also included working with third parties to address their
Year 2000 issues and developing contingency plans to address potential risks in
the event of Year 2000 failures. To date, Citizens has successfully managed the
transition with all bank systems including over 240 ATMs and more than 220
branch offices operating smoothly.
Although considered unlikely, unanticipated problems in Citizens core business
processes, including problems associated with non-compliant third parties and
disruptions to the economy in general, could still occur despite efforts to date
to remediate affected systems and develop contingency plans. Management will
continue to monitor all business processes, vendors and other third parties
throughout 2000 to address any issues and ensure all processes continue to
function properly.
Costs related to the year 2000 issue were funded by operating cash flows.
Through year-end 1999, Citizens incurred total Year 2000 project costs of $3.1
million, which included $2.0 million in capitalized costs for new hardware and
software and $1.1 million in costs primarily related to internal and external
personnel who worked on the project. Costs incurred in the first quarter of 2000
for ongoing monitoring and support activities were not material and Citizens
does not expect to incur any material cost for additional monitoring or support
activities in the future.
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 Citizens' 1999 Annual
Report on Form 10-K, is here incorporated by reference.
Citizens faces market risk to the extent that both earnings and the fair value
of its financial instruments are affected by changes in interest rates. Citizens
manages this risk with static GAP analysis and simulation modeling. Throughout
the first quarter of 2000, the results of these measurement techniques were
within Citizens' policy guidelines. Citizens does not believe that there has
been a material change in its primary market risk exposure (i.e., the categories
of market risk to which the Citizens is exposed and the particular markets that
present the primary risk of loss to the Citizens). As of the date of this
Quarterly Report on Form 10-Q, Citizens 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 Citizens manages its primary market risk exposure, as
described in the sections of its 1999 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, Citizens
does not expect to change those methods in the near term. However, Citizens 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.
22
<PAGE> 23
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
Proxies were solicited pursuant to Regulation 14 under the Securities Exchange
Act of 1934 to be voted at the annual meeting of shareholders of the Corporation
held April 18, 2000. There was no solicitation in opposition to management's
nominees for directors as set forth in the Corporation's Proxy Statement dated
March 15, 2000 and all such nominees were elected.
The results were as follows with respect to each director nominee:
<TABLE>
<CAPTION>
Votes Against/ Shares Not Voted
Director Votes For Withheld Or Abstentions
- ---------------------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
Joseph P. Day 38,169,276 950,388 8,485,457
John W. Ennest 38,149,988 969,676 8,485,457
Ronald E. Fenton 38,037,603 1,082,061 8,485,457
Victor E. George 38,099,746 1,019,917 8,485,458
Ada C. Washington 38,039,035 1,080,629 8,485,457
James L. Wolohan 37,635,637 1,484,027 8,485,457
</TABLE>
Total shares eligible to vote: 47,605,121
Broker non-votes included in non-voted shares above: 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
No report on Form 8-K was filed during the three-month period ended March
31, 2000.
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 May 15, 2000 By /s/ John W. Ennest
--------------------- -------------------------------
John W. Ennest
Vice Chairman of the Board, Treasurer
and Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Signatory)
23
<PAGE> 24
EXHIBIT INDEX
Exhibit Form 10-Q
No. Exhibit Page Nos.
- ---------- --------------------------------------------------- --------------
27 Financial Data Schedule 25
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 230,880
<INT-BEARING-DEPOSITS> 1,722
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,389,698
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 6,044,536
<ALLOWANCE> 79,073
<TOTAL-ASSETS> 7,936,305
<DEPOSITS> 6,106,037
<SHORT-TERM> 911,906
<LIABILITIES-OTHER> 77,116
<LONG-TERM> 197,504
0
0
<COMMON> 226,564
<OTHER-SE> 417,178
<TOTAL-LIABILITIES-AND-EQUITY> 7,936,305
<INTEREST-LOAN> 125,064
<INTEREST-INVEST> 22,022
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 147,086
<INTEREST-DEPOSIT> 52,708
<INTEREST-EXPENSE> 67,625
<INTEREST-INCOME-NET> 79,461
<LOAN-LOSSES> 5,284
<SECURITIES-GAINS> (1)
<EXPENSE-OTHER> 64,877
<INCOME-PRETAX> 30,428
<INCOME-PRE-EXTRAORDINARY> 8,543
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,885
<EPS-BASIC> 0.46
<EPS-DILUTED> 0.46
<YIELD-ACTUAL> 4.49
<LOANS-NON> 34,538
<LOANS-PAST> 1,672
<LOANS-TROUBLED> 520
<LOANS-PROBLEM> 23,873
<ALLOWANCE-OPEN> 76,397
<CHARGE-OFFS> 4,260
<RECOVERIES> 1,652
<ALLOWANCE-CLOSE> 79,073
<ALLOWANCE-DOMESTIC> 53,405
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 25,668
</TABLE>
