<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended June 30, 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
------------------------------
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 August 7, 2000
------------------------------- -----------------------------
Common Stock, No Par Value 47,243,609 Shares
<PAGE> 2
CITIZENS BANKING CORPORATION
Index to Form 10-Q
<TABLE>
<CAPTION>
Page
<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............................................................................. 11
Item 3. - Quantitative and Qualitative Disclosure of Market Risk............................................... 24
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings..................................................................................... 24
Item 2 - Changes in Securities................................................................................. 24
Item 3 - Defaults upon Senior Securities....................................................................... 24
Item 4 - Submission of Matters to a Vote of Security Holders................................................... 24
Item 5 - Other Information..................................................................................... 24
Item 6 - Exhibits and Reports on Form 8-K...................................................................... 24
SIGNATURES.......................................................................................................... 25
EXHIBIT INDEX....................................................................................................... 26
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
JUNE 30, December 31,
(in thousands) 2000 1999
---------------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (Note 1)
ASSETS
<S> <C> <C>
Cash and due from banks $ 247,896 $ 250,745
Money market investments:
Interest-bearing deposits with banks 1,336 755
Federal funds sold 229 63,048
----------- -----------
Total money market investments 1,565 63,803
Securities available-for-sale:
U.S. Treasury and federal agency securities 890,059 920,435
State and municipal securities 401,565 368,732
Other securities 84,598 108,180
----------- -----------
Total investment securities 1,376,222 1,397,347
Loans:
Commercial 3,073,750 2,875,387
Real estate construction 211,601 185,352
Real estate mortgage 1,485,398 1,440,104
Consumer 1,479,782 1,416,640
----------- -----------
Total loans 6,250,531 5,917,483
Less: Allowance for loan losses (80,047) (76,397)
----------- -----------
Net loans 6,170,484 5,841,086
Premises and equipment 142,180 141,460
Intangible assets 96,269 97,032
Other assets 111,277 107,884
----------- -----------
TOTAL ASSETS $ 8,145,893 $ 7,899,357
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 971,704 $ 965,849
Interest-bearing 5,152,950 5,163,149
----------- -----------
Total deposits 6,124,654 6,128,998
Federal funds purchased and securities sold
under agreements to repurchase 356,994 276,805
Other short-term borrowings 667,561 660,474
Other liabilities 71,588 72,307
Long-term debt 272,663 127,104
----------- -----------
Total liabilities 7,493,460 7,265,688
Shareholders' Equity:
Preferred stock - No par value -- --
Common stock - No par value 223,773 226,972
Retained earnings 445,181 424,140
Accumulated other comprehensive income (16,521) (17,443)
----------- -----------
Total shareholders' equity 652,433 633,669
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,145,893 $ 7,899,357
=========== ===========
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except per share amounts) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest and fees on loans $131,607 $112,594 $ 256,671 $222,844
Interest and dividends on investment securities:
Taxable 16,622 13,328 33,667 26,088
Nontaxable 5,162 4,109 10,093 8,248
Money market investments 15 408 61 1,783
-------- -------- --------- --------
Total interest income 153,406 130,439 300,492 258,963
-------- -------- --------- --------
INTEREST EXPENSE
Deposits 53,900 47,812 106,608 97,062
Short-term borrowings 16,697 3,391 29,292 5,453
Long-term debt 3,281 3,200 5,603 6,238
-------- -------- --------- --------
Total interest expense 73,878 54,403 141,503 108,753
-------- -------- --------- --------
NET INTEREST INCOME 79,528 76,036 158,989 150,210
Provision for loan losses 5,162 4,812 10,446 8,883
-------- -------- --------- --------
Net interest income after provision for loan losses 74,366 71,224 148,543 141,327
-------- -------- --------- --------
NONINTEREST INCOME
Trust fees 6,211 5,342 12,411 10,928
Service charges on deposit accounts 6,719 5,200 12,728 9,904
Bankcard fees 2,840 2,203 5,361 4,399
Brokerage and investment fees 2,058 1,232 4,018 2,025
Mortgage and other loan income 954 1,757 1,724 4,088
Investment securities gains (losses) -- 301 (1) 493
Premium on sale of deposits -- -- -- 1,348
Gain on sale of equity security -- 5,693 -- 5,693
Other 3,844 4,002 7,513 7,629
-------- -------- --------- --------
Total noninterest income 22,626 25,730 43,754 46,507
-------- -------- --------- --------
NONINTEREST EXPENSE
Salaries and employee benefits 31,694 30,688 63,192 60,825
Equipment 4,702 4,064 9,398 8,153
Occupancy 4,259 3,632 8,651 7,499
Data processing fees 2,970 2,501 5,713 4,827
Professional services 2,506 1,619 5,008 3,159
Intangible asset amortization 2,649 1,872 5,239 3,746
Bankcard fees 2,398 1,804 4,511 3,270
Postage and delivery 1,730 1,526 3,397 3,132
Advertising and public relations 1,571 1,615 3,041 3,258
Special charge 3,289 -- 7,288 --
Other 7,256 12,095 14,463 20,253
-------- -------- --------- --------
Total noninterest expense 65,024 61,416 129,901 118,122
-------- -------- --------- --------
INCOME BEFORE INCOME TAXES 31,968 35,538 62,396 69,712
Income taxes 9,277 11,183 17,820 21,914
-------- -------- --------- --------
NET INCOME $ 22,691 $ 24,355 $ 44,576 $ 47,798
======== ======== ========= ========
NET INCOME PER SHARE:
Basic $ 0.48 $ 0.50 $ 0.94 $ 0.98
Diluted 0.47 0.50 0.93 0.97
AVERAGE SHARES OUTSTANDING:
Basic 47,639 48,514 47,626 48,660
Diluted 47,739 48,996 47,731 49,201
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
<TABLE>
<CAPTION>
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 - 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
Net income 22,691 22,691
Net unrealized gain on securities available-for-sale,
net of tax effect 1,153 1,153
---------
Total comprehensive income 23,844
Exercise of stock options, net of
shares purchased 380 380
Shares acquired for retirement (3,171) (3,171)
Cash dividends - $0.26 per share (12,362) (12,362)
--------- -------- --------- ---------
BALANCE - JUNE 30, 2000 $ 223,773 $445,181 $ (16,521) $ 652,433
========== ========= ========== =========
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Six Months Ended
June 30,
(in thousands) 2000 1999
-----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 44,576 $ 47,798
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 10,446 8,883
Depreciation 7,847 6,892
Amortization of intangibles 5,239 3,746
Net amortization on investment securities (3) 1,638
Investment securities gains (losses) 1 (493)
Loans originated for sale (8,658) (82,336)
Proceeds from loan sales 8,726 83,009
Donation of equity security 1,116 --
Accrued merger related and other charges (7,344) --
Other 608 (8,295)
--------- ---------
Net cash provided by operating activities 62,554 60,842
INVESTING ACTIVITIES:
Net decrease in money market investments 62,238 79,298
Securities available-for-sale:
Proceeds from sales 1 13,560
Proceeds from maturities 100,316 243,099
Purchases (77,348) (422,544)
Securities held-to-maturity:
Proceeds from maturities -- 13,309
Purchases -- (33,220)
Net increase in loans (339,780) (197,417)
Net increase in premises and equipment (7,457) (11,568)
Acquisitions (net of cash acquired) 26,008 5,447
--------- ---------
Net cash used by investing activities (236,022) (310,036)
FINANCING ACTIVITIES:
Net decrease in demand and savings deposits (153,516) (100,923)
Net increase in time deposits 118,165 10,015
Net increase in short-term borrowings 87,276 404,224
Proceeds from issuance of long-term debt 220,300 13,253
Principal reductions in long-term debt (74,872) (123)
Cash dividends paid (23,535) (20,126)
Proceeds from stock options exercised 641 2,230
Shares acquired for retirement (3,840) (41,137)
--------- ---------
Net cash provided by financing activities 170,619 267,413
--------- ---------
Net decrease in cash and due from banks (2,849) 18,219
Cash and due from banks at beginning of period 250,745 221,880
--------- ---------
Cash and due from banks at end of period $ 247,896 $ 240,099
========= =========
------------------------------------------------------------------------------------------------------------------------
</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-and six
month periods ended June 30, 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. ACQUISITIONS AND MERGER-RELATED EXPENSES
On May 12, 2000, Citizens Banking Corporation completed the purchase of three
Jackson, Michigan offices of Great Lakes National Bank with approximately $31
million in deposits.
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 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
by the plan for implementation over a 12 month period following the merger.
Merger-related, restructuring and other integration costs (the "Special
Charge") totaled $3.3 million ($2.0 million after tax), or $0.05 per share,
in the second quarter of 2000 and $7.3 ($4.4 million after tax), or $0.10 per
share, for the six month period ended June 30, 2000. The second quarter
Special Charge was reduced by a $0.6 million noncash reversal of previously
accrued severence and employee contract termination costs for F&M's converted
banks. For the remainder of 2000, Citizens expects to incur approximately $5
million to $6 million of merger-related and other integration costs that will
be recorded as part of the Special Charge. In the third quarter of 2000,
Citizens successfully settled a contract dispute with a former vendor of F&M.
As a result, Citizens will reverse against the Special Charge approximately
$4 million in previously accrued contract termination costs. 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 June 30, 2000, the remaining liabilities associated with the business
combination and restructuring plan were approximately $10 million ($6 million
if adjusted for the third quarter reversal of accrued contract termination
costs). As shown in the following table, 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).
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Estimated
DESCRIPTION OF COSTS Liability At Liability At Liability At Liability At
(in thousands) Acquisition 12/31/99 3/31/00 6/30/00
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Employee benefits and severance $ 7,481.9 $ 7,337.9 $ 6,680.0 $ 5,232.4
Contract termination and other conversion costs 13,597.8 9,356.9 5,810.7 4,678.5
Professional fees 6,345.2 634.5 165.6 132.3
Facilities and equipment 3,354.9 --- --- ---
Goodwill & core deposit premium write-down 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 $ 10,043.2
=========== =========== =========== ===========
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 8
NOTE 3. 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 three and six month periods
ended June 30, 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>
------------------------------------------------------------------------------------------------------------------------------------
Special
Charge
Net And
Commercial Retail Financial Operating Other
(in thousands) Banking Banking Services F&M Other Income Items Total
------------------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY - THREE MONTHS ENDED JUNE 30, 2000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income (taxable equivalent) $21,588 $34,023 $ 360 $ 26,370 $ 699 $ 83,040 -- $ 83,040
Provision for loan losses 1,912 2,509 -- 92 649 5,162 -- 5,162
------- ------- ------ -------- ------- -------- -------- --------
Net interest income after provision 19,676 31,514 360 26,278 50 77,878 -- 77,878
Noninterest income 2,721 8,335 6,739 3,957 874 22,626 -- 22,626
Noninterest expense 10,505 27,443 4,722 15,633 3,432 61,735 3,289 65,024
------- ------- ------ -------- ------- -------- -------- --------
Income (loss) before income taxes 11,892 12,406 2,377 14,602 (2,508) 38,769 (3,289) 35,480
Income tax expense (taxable equivalent) 4,162 4,342 832 5,551 (803) 14,084 (1,295) 12,789
------- ------- ------ -------- ------- -------- -------- --------
Net income (loss) 7,730 8,064 1,545 9,051 (1,705) $ 24,685 (1,994) 22,691
========
Allocation of special charge and
other unusual items -- -- -- (1,829) (165) 1,994 --
------- ------- ------ -------- ------- -------- -----=--
Net income (loss) $ 7,730 $ 8,064 $1,545 $ 7,222 $(1,870) $ -- $ 22,691
======= ======= ====== ======== ======= ======== ========
====================================================================================================================================
EARNINGS SUMMARY - THREE MONTHS ENDED JUNE 30, 1999
Net interest income (taxable equivalent) $18,102 $28,251 $ 359 $ 27,461 $ 4,821 $ 78,994 $ 78,994
Provision for loan losses 256 3,376 -- 712 468 4,812 4,812
------- ------- ------ -------- ------- -------- --------
Net interest income after provision 17,846 24,875 359 26,749 4,353 74,182 74,182
Noninterest income 2,270 7,106 6,001 4,109 551 20,037 5,693 25,730
Noninterest expense 8,646 23,223 4,073 15,744 5,730 57,416 4,000 61,416
------- ------- ------ -------- ------- -------- -------- --------
Income (loss) before income taxes 11,470 8,758 2,287 15,114 (826) 36,803 1,693 38,496
Income tax expense (taxable equivalent) 4,014 3,066 801 5,825 (158) 13,548 593 14,141
------- ------- ------ -------- ------- -------- -------- --------
Net income (loss) 7,456 5,692 1,486 9,289 (668) $ 23,255 1,100 24,355
========
Allocation of special charge and
other unusual items -- -- -- -- 1,100 (1,100) --
------- ------- ------ -------- ------- -------- -----=--
Net income (loss) $ 7,456 $ 5,692 $1,486 $ 9,289 $ 432 $ -- $ 24,355
======= ======= ====== ======== ======= ======== ========
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Special
Charge
Net And
Commercial Retail Financial Operating Other
(in thousands) Banking Banking Services F&M Other Income Items Total
------------------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY - SIX MONTHS ENDED JUNE 30, 2000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income (taxable equivalent) $42,173 $65,946 $ 658 $ 53,757 $ 3,350 $ 165,884 --- $ 165,884
Provision for loan losses 2,326 5,744 --- 876 1,500 10,446 --- 10,446
------- ------- ------- -------- -------- --------- --------- ---------
Net interest income after provision 39,847 60,202 658 52,881 1,850 155,438 --- 155,438
Noninterest income 5,520 15,446 13,473 7,676 1,639 43,754 --- 43,754
Noninterest expense 20,439 52,350 9,249 30,543 10,032 122,613 7,288 129,901
------- ------- ------- -------- -------- --------- --------- ---------
Income (loss) before income taxes 24,928 23,298 4,882 30,014 (6,543) 76,579 (7,288) 69,291
Income tax expense (taxable equivalent) 8,725 8,154 1,709 10,883 (1,871) 27,600 (2,885) 24,715
------- ------- ------- -------- -------- --------- --------- ---------
Net income (loss) 16,203 15,144 3,173 19,131 (4,672) $ 48,979 (4,403) 44,576
=========
Allocation of special charge and
other unusual items --- --- --- (4,057) (346) 4,403 ---
------- ------- ------- -------- -------- --------- ---------
Net income (loss) $16,203 $15,144 $ 3,173 $ 15,074 $ (5,018) $ --- $ 44,576
======= ======= ======= ======== ======== ========= =========
====================================================================================================================================
EARNINGS SUMMARY - SIX MONTHS ENDED JUNE 30, 1999
Net interest income (taxable equivalent) $35,497 $56,588 $ 714 $ 54,277 $ 9,058 $ 156,134 $ 156,134
Provision for loan losses 650 8,464 --- 1,183 (1,414) 8,883 8,883
------- ------- ------- -------- -------- --------- ---------
Net interest income after provision 34,847 48,124 714 53,094 10,472 147,251 147,251
Noninterest income 4,532 13,885 11,754 8,372 923 39,466 7,041 46,507
Noninterest expense 17,141 44,593 8,074 31,617 12,697 114,122 4,000 118,122
------- ------- ------- -------- -------- --------- --------- ---------
Income (loss) before income taxes 22,238 17,416 4,394 29,849 (1,302) 72,595 3,041 75,636
Income tax expense (taxable equivalent) 7,783 6,096 1,538 11,540 (184) 26,773 1,065 27,838
------- ------- ------- -------- -------- --------- --------- ---------
Net income (loss) 14,455 11,320 2,856 18,309 (1,118) $ 45,822 1,976 47,798
=========
Allocation of special charge and
other unusual items --- 876 --- --- 1,100 (1,976) ---
------- ------- ------- -------- -------- --------- ---------
Net income (loss) $14,455 $12,196 $ 2,856 $ 18,309 $ (18) $ -- $ 47,798
======= ======= ======= ======== ======== ========= =========
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
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>
------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except per share amounts) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NUMERATOR:
Numerator for basic and dilutive earnings per share -- net
income available to common shareholders $22,691 $24,355 $44,576 $47,798
======= ======= ======= =======
DENOMINATOR:
Denominator for basic earnings per share -- weighted average
shares 47,639 48,514 47,626 48,660
Effect of dilutive securities -- potential conversion of employee
stock options 100 482 105 541
------- ------- ------- -------
Denominator for diluted earnings per share -- adjusted weighted-
average shares and assumed conversions 47,739 48,996 47,731 49,201
======= ======= ======= =======
BASIC EARNINGS PER SHARE $ 0.48 $ 0.50 $ 0.94 $ 0.98
======= ======= ======= =======
DILUTED EARNINGS PER SHARE $ 0.47 $ 0.50 $ 0.93 $ 0.97
======= ======= ======= =======
====================================================================================================================================
</TABLE>
During the second quarter of 2000, employees exercised stock options to
acquire 42,954 shares at an average exercise price of $8.83 per share.
NOTE 5. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year financial statement presentation.
10
<PAGE> 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
<TABLE>
<CAPTION>
FIVE-QUARTER SUMMARY OF SELECTED FINANCIAL INFORMATION
CITIZENS BANKING CORPORATION AND SUBSIDIARIES FOR QUARTER ENDED
----------------------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
2000 2000 1999 (1) 1999 (1) 1999 (1)
------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS (THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income $ 153,406 $ 147,086 $ 144,531 $ 138,163 $ 130,439
Net interest income 79,528 79,461 81,140 78,390 76,037
Provision for loan losses 5,162 5,284 11,422 4,370 4,812
Investment securities gains (losses) --- (1) (3,584) 39 301
Other noninterest income 22,626 21,129 19,390 19,542 25,429
Noninterest expense before special charge 61,735 60,878 59,105 59,551 61,416
Special charge:
Before-tax 3,289 3,999 40,198 --- ---
After-tax 1,994 2,409 28,403 --- ---
Income taxes 9,277 8,543 (4,550) 10,625 11,183
Net income 22,691 21,885 (9,229) 23,425 24,355
Net operating income (2) 24,685 24,294 25,833 25,047 23,255
Cash dividends (3) 12,362 11,173 11,182 10,493 10,333
------------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Basic net income $ 0.48 $ 0.46 $ (0.19) $ 0.49 $ 0.50
Diluted net income 0.47 0.46 (0.19) 0.49 0.50
Diluted - net operating income (2) 0.52 0.51 0.54 0.52 0.47
Cash dividends (3) 0.26 0.235 0.235 0.235 0.235
Market value (end of period) 16.23 19.50 22.38 26.13 30.06
Book value (end of period) 13.73 13.52 13.32 13.95 13.89
------------------------------------------------------------------------------------------------------------------------------------
AT PERIOD END (MILLIONS)
Assets $ 8,146 $ 7,936 $ 7,899 $ 7,530 $ 7,351
Loans 6,251 6,045 5,918 5,649 5,517
Deposits 6,125 6,106 6,129 5,787 5,782
Shareholders' equity 652 644 634 666 666
------------------------------------------------------------------------------------------------------------------------------------
AVERAGE FOR THE QUARTER (MILLIONS)
Assets $ 8,016 $ 7,865 $ 7,759 $ 7,448 $ 7,103
Loans 6,148 5,954 5,803 5,575 5,415
Deposits 6,036 6,109 6,144 5,817 5,811
Shareholders' equity 641 635 657 664 679
------------------------------------------------------------------------------------------------------------------------------------
RATIOS (ANNUALIZED)
Return on average assets 1.14 % 1.12 % (0.47)% 1.25 % 1.38 %
Net operating return on average assets (2) 1.24 1.24 1.32 1.33 1.31
Return on average shareholders' equity 14.24 13.86 (5.57) 14.00 14.39
Net operating return on average shareholders' equity (2) 15.49 15.39 15.60 14.97 13.74
Net interest margin (FTE) 4.40 4.49 4.63 4.65 4.74
Net loans charged off to average loans 0.27 0.18 0.53 0.29 0.26
Average equity to average assets 8.00 8.07 8.47 8.92 9.56
Allowance for loan losses ratio 1.28 1.31 1.29 1.26 1.29
Nonperforming assets to loans plus ORAA (end of period) 0.75 0.67 0.59 0.69 0.73
Nonperforming assets to total assets (end of period) 0.58 0.51 0.45 0.52 0.55
Leverage ratio 7.23 7.30 7.20 8.40 8.60
Tier 1 capital ratio 9.25 9.40 9.20 11.30 10.50
Total capital ratio 10.50 10.60 10.50 12.50 11.70
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Certain amounts have been reclassified to conform with current year
presentation.
(2) Net operating income is based on net income that excludes special charges,
restructuring and other non-recurring items incurred in the connection with
acquisitions and other corporate initiatives.
(3) Cash dividends and cash dividends per share are for Citzens Banking
Corporation only, not restated for pooling of interests.
11
<PAGE> 12
INTRODUCTION
The following is a review of Citizens Banking Corporation's ("Citizens")
performance during the three-and six months ended June 30, 2000. This discussion
should be read in conjunction with the accompanying unaudited financial
statements and notes thereto appearing on pages 3 through 10 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. A quarterly summary of selected financial data for the
five-quarter period ended June 30, 2000 is presented in the table on page 11.
EARNINGS SUMMARY
Citizens earned net operating income of $24,685,000 for the three months ended
June 30, 2000 or $0.52 per share, compared with $23,255,000 or $0.47 per share
for the same period in 1999. This represents an increase of 10.6% in operating
earnings per diluted share. On the same basis, returns on average assets and
average equity for the second quarter of 2000 were 1.24% and 15.49%,
respectively, compared with 1.31% and 13.74% in 1999. For the first six months
of 2000, net operating income was $48,979,000 or $1.03 per share, compared to
$45,822,000 or $0.93 per share for the same period in 1999, representing an
increase of 10.8% on a per diluted share basis. Returns on average assets and
average equity during the first six months of 2000 were 1.24% and 15.44%,
respectively, compared with 1.31% and 13.57%, respectively, in 1999.
Net operating income for the three and six months ended June 30, 2000 exclude
special charges of $3,289,000 ($1,994,000 after-tax) and $7,288,000 ($4,403,000
after-tax), respectively, 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 1999 excludes non-recurring gains of $1,348,000 ($876,000
after-tax) in the first quarter of 1999 from the sale of a branch and $5,693,000
($3,700,000 after-tax) from the sale of Citizens' equity position in Magic Line,
Inc., an ATM processor in the second quarter of 1999. The second quarter gain
was partially offset by a $4,000,000 ($2,600,000 after-tax) accrued contribution
to a charitable trust.
The improvement in operating income for three and six months ended June 30, 2000
reflect 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 $22,626,000 for the second quarter of
2000 and $43,755,000 for the first half of 2000, reflecting increases of
$2,890,000, or 14.6%, and $4,782,000, or 12.3%, respectively, over the same
periods in 1999. In both the three and six month periods there was significant
increases in brokerage and investment fees, deposit service charges, bankcard
fees, and trust fees. Mortgage and related fee income continued to experience a
decline. Noninterest expense, on an operating basis, was $61,735,000 in the
second quarter of 2000, an increase of $4,319,000 or 7.5% over the same period
of 1999. For the first six months of 2000, noninterest expense was $122,613,000,
an increased of $8,491,000, or 7.4%, over the first half of 1999. Increases in
both the three and six month periods reflect higher compensation, professional
services costs, intangible asset amortization, bankcard fees, data processing
fees, telecommunication costs, and equipment and occupancy costs. Growth from
the Branch Purchase along with costs associated with ongoing revenue enhancement
and cost efficiency initiatives generated most of the increases.
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 Six Months Ended
June 30, June 30,
(in thousands) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial Banking $ 7,730 $ 7,456 $ 16,203 $ 14,455
Retail Banking 8,064 5,692 15,144 11,320
Financial Services 1,545 1,486 3,173 2,856
F&M 9,051 9,289 19,131 18,309
Other (1,705) (668) (4,672) (1,118)
------- -------- -------- --------
Total operating income $24,685 $ 23,255 $ 48,979 $ 45,822
======= ======== ======== ========
======================================================================================================
</TABLE>
12
<PAGE> 13
The increase in commercial banking operating income for the three and six months
ended June 30, 2000 was 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, higher noninterest income, 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
expenses), introduction of new products and services and successful sales
efforts. Growth in operating income from F&M in the first half of 2000 reflects
primarily lower operating costs from merger synergies. The slight decrease in
F&M's operating income in the second quarter of 2000 reflects lower net interest
income from a declining net interest margin, partially offset by merger cost
efficiencies and a lower provision for loan losses.
NET INTEREST INCOME
Tax equivalent net interest income, Citizens' principal source of earnings,
increased $4.046 million, or 5.1%, to $83.040 million in the second quarter of
2000 from $78.994 million for the same period in 1999. For the first six months
of 2000, tax equivalent net interest income increased $9.750 million, or 6.2%,
to $165.884 million from $156.134 million a year ago. 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.
Detailed analyses of net interest income, with average balances and related
interest rates for the three and six months ended June 30, 2000 and 1999 are
presented on pages 14 and 15. 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.
ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
<TABLE>
<CAPTION>
2000 Compared with 1999
--------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------- -----------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
Net ------------------------- Net -------------------------------
(in thousands) Change (1) Rate Volume (2) Change (1) Rate Volume (2)
--------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
<S> <C> <C> <C> <C> <C> <C>
Money market investments $ (393) $ 115 $ (508) $ (1,722) $ 381 $ (2,103)
Investment securities:
Taxable 3,294 932 2,362 7,579 2,096 5,483
Tax-exempt 1,053 -- 1,053 1,845 (114) 1,959
Loans:
Commercial 16,492 2,900 13,592 28,495 5,366 23,129
Real estate (1,137) (435) (702) (987) (1,274) 287
Consumer 3,658 198 3,460 6,319 (21) 6,340
-------- ------- -------- -------- ------- --------
Total 22,967 3,710 19,257 41,529 6,434 35,095
-------- ------- -------- -------- ------- --------
INTEREST EXPENSE
Deposits:
Demand (56) (125) 69 (132) (294) 162
Savings 1,955 1,089 866 3,810 1,934 1,876
Time 4,189 2,109 2,080 5,868 2,619 3,249
Short-term borrowings 13,306 1,082 12,224 23,839 1,570 22,269
Long-term debt 81 466 (385) (635) 953 (1,588)
-------- ------- -------- -------- ------- --------
Total 19,475 4,621 14,854 32,750 6,782 25,968
-------- ------- -------- -------- ------- --------
NET INTEREST INCOME $ 3,492 $ (911) $ 4,403 $ 8,779 $ (348) $ 9,127
======== ======= ======== ======== ======= ========
---------------------------------------------------------------------------------------------------------------------------------
</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.
13
<PAGE> 14
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
2000 1999
------------------------------------- ----------------------------------------
Three Months Ended June 30 AVERAGE AVERAGE Average Average
(in thousands) BALANCE INTEREST (1) RATE (2) Balance Interest (1) Rate (2)
------------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
<S> <C> <C> <C> <C> <C> <C>
Money market investments:
Federal funds sold $ 242 $ 4 6.21 % $ 31,577 $ 388 4.93 %
Other 710 11 6.00 1,577 20 5.13
Investment securities(3):
Taxable 1,018,097 16,622 6.53 900,939 13,328 5.92
Tax-exempt 394,402 5,162 8.05 314,088 4,109 8.05
Loans:
Commercial 3,094,350 67,962 8.93 2,469,348 51,470 8.48
Real estate 1,536,279 29,000 7.55 1,579,317 30,137 7.63
Consumer 1,517,200 34,645 9.18 1,366,450 30,987 9.09
----------- -------- ----------- -------
Total earning assets(3) 7,561,280 153,406 8.33 6,663,296 130,439 8.02
NONEARNING ASSETS
Cash and due from banks 215,192 214,764
Bank premises and equipment 141,540 133,913
Investment security fair value adjustment (33,593) 695
Other nonearning assets 211,729 160,807
Allowance for loan losses (80,428) (70,348)
----------- -----------
Total assets $ 8,015,720 $ 7,103,127
=========== ===========
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits 591,795 2,166 1.47 568,011 2,222 1.57
Savings deposits 1,728,059 13,782 3.21 1,742,546 11,827 2.72
Time deposits 2,766,894 37,952 5.52 2,620,910 33,763 5.17
Short-term borrowings 1,049,955 16,697 6.40 300,802 3,391 4.52
Long-term debt 210,129 3,281 6.28 235,894 3,200 5.44
----------- -------- ----------- -------
Total interest-bearing liabilities 6,346,832 73,878 4.67 5,468,163 54,403 3.99
-------- -------
NONINTEREST-BEARING LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits 949,118 878,583
Other liabilities 78,734 77,003
Shareholders' equity 641,036 679,378
----------- -----------
Total liabilities and shareholders' equity $ 8,015,720 $ 7,103,127
=========== ===========
NET INTEREST INCOME $ 79,528 $ 76,036
======== ========
NET INTEREST INCOME AS A PERCENT OF
EARNING ASSETS 4.40 % 4.74 %
====================================================================================================================================
</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 $3,512,000 and $2,958,000 for
the three months ended June 30, 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.
14
<PAGE> 15
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
2000 1999
------------------------------------- ----------------------------------------
Six Months Ended June 30 AVERAGE AVERAGE Average Average
(in thousands) BALANCE INTEREST (1) RATE (2) Balance Interest (1) Rate (2)
------------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
<S> <C> <C> <C> <C> <C> <C>
Money market investments:
Federal funds sold $ 769 $ 22 5.77 % $ 72,076 $ 1,694 4.74 %
Other 1,385 39 5.60 3,428 89 5.26
Investment securities(3):
Taxable 1,034,723 33,667 6.51 878,135 26,088 5.94
Tax-exempt 387,291 10,093 8.02 312,305 8,248 8.13
Loans:
Commercial 2,973,213 128,954 8.79 2,433,594 100,459 8.44
Real estate 1,581,007 60,000 7.59 1,581,119 60,987 7.71
Consumer 1,496,472 67,717 9.10 1,351,631 61,398 9.16
----------- ----------- ----------- -----------
Total earning assets(3) 7,474,860 300,492 8.24 6,632,288 258,963 8.03
NONEARNING ASSETS
Cash and due from banks 225,544 218,240
Bank premises and equipment 142,696 132,708
Investment security fair value adjustment (33,463) 3,086
Other nonearning assets 210,395 156,881
Allowance for loan losses (79,691) (70,122)
----------- -----------
Total assets $ 7,940,341 $ 7,073,081
=========== ===========
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits 596,499 4,360 1.47 570,810 4,492 1.59
Savings deposits 1,758,248 27,323 3.13 1,744,413 23,513 2.72
Time deposits 2,769,417 74,925 5.43 2,649,655 69,057 5.26
Short-term borrowings 976,936 29,292 6.03 250,452 5,453 4.39
Long-term debt 179,052 5,603 6.28 230,234 6,238 5.46
----------- ----------- ----------- -------
Total interest-bearing liabilities 6,280,152 141,503 4.52 5,445,564 108,753 4.03
----------- -------
NONINTEREST-BEARING LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits 948,128 871,381
Other liabilities 74,015 75,204
Shareholders' equity 638,046 680,932
----------- -----------
Total liabilities and shareholders' equity $ 7,940,341 $ 7,073,081
=========== ===========
NET INTEREST INCOME $ 158,989 $ 150,210
========= =========
NET INTEREST INCOME AS A PERCENT OF
EARNING ASSETS 4.44 % 4.72 %
------------------------------------------------------------------------------------------------------------------------------------
</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 $6,895,000 and $5,924,000 for
the six months ended June 30, 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.
15
<PAGE> 16
For both the three and six month periods ended June 30, 2000, net favorable
volume variances, offset in part, by unfavorable rate related variances in net
interest income resulted in an increases of $3,492,000 and $8,779,000,
respectively, in net interest income, as compared to the same periods in 1999.
Yields on earning assets for the three and six months ended June 30, 2000
increased to 8.33% and 8.24%, respectively, from 8.06% for the year-ended 1999
and 8.02% and 8.03% for three and six months ended June 30, 1999, respectively.
Management's decision to reposition the securities portfolio following the
merger with F&M, in November 1999, as well as increases in Citizens' prime
lending rate in the last two months of 1999 and in the first half of 2000 were
the major factors in this increase. The cost of interest-bearing liabilities for
the three and six-months ended June 30, 2000 increased to 4.67% from 3.99% and
to 4.52% from 4.03%, respectively, as compared with the same periods 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 4.40% for the second quarter
and 4.44% for the first half of 2000, 34 and 28 basis points, respectively,
lower than the same periods 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.
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 with a resulting
increase in borrowed funds. Management continually monitors Citizens' balance
sheet to insulate net interest income from significant swings caused by interest
rate volatility. Citizens' policies in this regard are further discussed in the
section titled "Interest Rate Risk".
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 $5,162,000 in the second quarter of 2000 and $10,446,000 for the
first half of the year, an increase of $350,000 and $1,563,000, respectively
over the same periods in 1999. Net charge-offs were 0.27% of average loans in
the second quarter of 2000, up slightly from 0.26% in the same period a year
ago. The increase reflects higher charge-offs in the quarter (which included a
$1.5 million charge-off for one commercial credit), partially offset, by lower
net charge-offs in the indirect consumer portfolio. For the six-month period
ended June 30, 2000, net charge-offs were 0.23% of average loans, down from
0.32% in the first half of 1999. The decrease primarily reflects fewer
charge-offs and higher recoveries in Citizens' indirect consumer portfolio in
the first half of 2000, as compared to the same period in 1999. A summary of
loan loss experience during the three and six months ended June 30, 2000 and
1999 is provided below.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for loan losses - beginning of period $ 79,073 $ 69,763 $ 76,397 $ 70,842
Charge-offs 6,367 5,057 10,627 11,376
Recoveries 2,179 1,552 3,831 2,721
---------- ---------- ---------- ----------
Net charge-offs 4,188 3,505 6,796 8,655
Provision for loan losses 5,162 4,812 10,446 8,883
---------- ---------- ---------- ----------
Allowance for loan losses - end of period $ 80,047 $ 71,070 $ 80,047 $ 71,070
========== ========== ========== ==========
Loans outstanding at period end $6,250,531 $5,517,216 $6,250,531 $5,517,216
Average loans outstanding during period 6,147,828 5,415,114 6,050,692 5,366,344
Allowance for loan losses as a percentage of loans
outstanding at period end 1.28 % 1.29 % 1.28 % 1.29 %
Ratio of net charge-offs during period to average
loans outstanding (annualized) 0.27 0.26 0.23 0.32
Loan loss coverage (allowance as a multiple of
net charge-offs, annualized) 4.8 X 5.1 x 5.9 X 4.1 x
------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
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 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. Citizens' 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."
NONINTEREST INCOME
A summary of significant sources of noninterest income during the first three
and six months of 2000 and 1999 follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Percent
Three Months Ended Six Months Ended Change in 2000
June 30, June 30, ----------------------
----------------------- ------------------------- Three Six
(in thousands) 2000 1999 2000 1999 Months Months
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Trust fees $ 6,211 $ 5,342 $ 12,411 $ 10,928 16.3 % 13.6 %
Service charges on deposit accounts 6,719 5,200 12,728 9,904 29.2 28.5
Bankcard fees 2,840 2,203 5,361 4,399 28.9 21.9
Brokerage and investment fees 2,058 1,232 4,018 2,025 67.0 98.4
Mortgage and other loan income 954 1,757 1,724 4,088 (45.7) (57.8)
ATM network user fees 799 827 1,552 1,490 (3.4) 4.2
Cash management services 640 603 1,332 1,207 6.1 10.4
Title insurance fees 295 228 528 502 29.4 5.2
Other, net 2,110 2,344 4,101 4,430 (10.0) (7.4)
--------- -------- -------- --------
Total fees and other income 22,626 19,736 43,755 38,973 14.6 12.3
Investment securities gains (losses) --- 301 (1) 493 (100.0) (100.2)
--------- -------- -------- --------
Noninterest income - operating basis 22,626 20,037 43,754 39,466 12.9 10.9
Gain on sale of Magic Line, Inc. stock --- 5,693 --- 5,693 (100.0) (100.0)
Premium on sale of deposits --- --- --- 1,348 --- (100.0)
--------- -------- -------- --------
Total noninterest income $ 22,626 $ 25,730 $ 43,754 $ 46,507 (12.1) (5.9)
========= ======== ======== ========
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
On an operating basis, noninterest income, before securities gains and losses,
increased 14.6% and 12.3% for the three and six months ended June 30, 2000,
respectively, over the same periods of 1999. Operating income excludes a premium
of $1.3 million received from the sale of deposits of a branch office in March
1999 and a gain of $5.7 million from the sale of Citizens' equity position in
Magic Line, Inc., an ATM processor in the second quarter of 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 and cash management service fees.
Fee income for personal and employee benefit trust services increased 16.3% and
13.6% for the three and six months ended June 30, 2000, respectively, as
compared to the same periods in 1999. Growth in trust fees was attributable to
continued pricing and marketing efforts, as well as the strong equity markets.
Brokerage and investment fees were up 67.0% and 98.4%, respectively, for the
three and six months, 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. Mortgage and other loan income decreased
17
<PAGE> 18
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 release premiums. Title insurance fees were up substantially
for the quarter as driven by increased demand for Citizens home equity and
construction loan products.
The gains in 1999 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.
NONINTEREST EXPENSE
Significant changes in noninterest expense during the three and six months ended
June 30, 2000 and 1999 is summarized in the table below.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE Percent
Three Months Ended Six Months Ended Change in 2000
June 30, June 30, ----------------------
----------------------- ------------------------- Three Six
(in thousands) 2000 1999 2000 1999 Months Months
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 31,694 $ 30,688 $ 63,192 $ 60,825 3.3 % 3.9 %
Equipment 4,702 4,064 9,398 8,153 15.7 15.3
Occupancy 4,259 3,632 8,651 7,499 17.3 15.4
Data processing services 2,970 2,501 5,713 4,827 18.8 18.4
Professional services 2,506 1,619 5,008 3,159 54.8 58.5
Intangible asset amortization 2,649 1,872 5,239 3,746 41.5 39.9
Bankcard fees 2,398 1,804 4,511 3,270 32.9 38.0
Postage and delivery 1,730 1,526 3,397 3,132 13.4 8.5
Telephone 1,642 1,337 3,156 2,566 22.8 23.0
Advertising and public relations 1,571 1,615 3,041 3,258 (2.7) (6.7)
Stationery and supplies 1,629 1,207 2,988 2,553 35.0 17.0
Other loan fees 1,226 1,071 2,135 2,169 14.5 (1.6)
Other, net 2,759 4,480 6,184 8,965 (38.4) (31.0)
-------- -------- --------- ---------
Noninterest expense - operating basis 61,735 57,416 122,613 114,122 7.5 7.4
Charitable trust --- 4,000 --- 4,000 (100.0) (100.0)
Special charge 3,289 --- 7,288 --- (1) (1)
-------- -------- --------- ---------
Total noninterest expense $ 65,024 $ 61,416 $ 129,901 $ 118,122 5.9 10.0
======== ======== ========= =========
====================================================================================================================================
</TABLE>
(1) Not meaningful
On an operating basis, noninterest expense for the three and six months ended
June 30, 2000 increased 7.5% and 7.4 %, respectively, over 1999 levels for the
same periods. Growth from the Branch Purchase and ongoing initiatives designed
to provide future revenue and cost efficiencies generated most of the increase.
Operating income excludes a $4.0 million accrual for Citizens' contribution to a
charitable trust in the second quarter of 1999 and ongoing merger related
restructuring and integration costs in the first half of 2000, which have been
recorded as a "Special charge."
Salaries and employee benefits expense were up slightly in both the three and
six months ended June 30, 2000, as compared to the same periods in the prior
year. Higher 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 for 2000 increased $1.3 million in the second
quarter and $2.4 million in the first six months, over the same periods of 1999.
The increase reflects 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.
18
<PAGE> 19
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, comprised primarily of system conversion and
merger-related integration costs, totaled $3.3 million ($2.0 million after-tax),
or $0.05 per share in the second quarter of 2000 and $7.3 ($4.4 million after
tax), or $0.10 per share, in the first half of 2000. Through the remainder of
year 2000, Citizens expects to incur approximately $5 million to $6 million of
additional merger-related and other integration costs that will be recorded as
part of the Special Charge. In the third quarter of 2000, Citizens successfully
settled a contract dispute with a former vendor of F&M. As a result, in the
third quarter, Citizens will reverse against the Special Charge approximately $4
million of previously accrued contract termination costs.
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 four of a total of seven planned operating system conversions
scheduled for 2000. F&M Bank Iowa was successfully converted to Citizens'
integrated system on June 5, 2000. Five of F&M's former Wisconsin banks were
converted to Citizens' integrated system on February 14, 2000, three more were
converted on April 10, 2000 and an additional two were converted on July 10,
2000. These conversions represented 60% of F&M's loans and deposits and 66% 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; and
- As part of Citizens' branch reconfiguration initiative, nine Citizens branch
offices were closed (1 in February and 8 in April) and on May 12, 1999,
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 June 30, 2000, the remaining liabilities associated with Citizens business
combination and restructuring plan were approximately $10.0 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 2. Acquisitions and Merger-Related Expenses for
additional details.
INCOME TAXES
Income tax expense was $9.3 million in the second quarter of 2000, a decrease of
17.0% over the same period last year. For the six months ended June 30, 2000,
income tax expense was $17.8 million, a decrease of 18.7% over the same period
in 1999. 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 in the first quarter of 2000 resulted
in this decrease for the three and six months ended June 30, 2000, as compared
to the same period in the prior year.
FINANCIAL CONDITION
Citizens had total assets of $8.146 billion as of June 30, 2000, an increase of
$209.6 million or 2.6% from March 31, 2000 and $246.5 million or 3.1% from
$7.899 billion as of December 31, 1999. Average earning assets comprised 93.7%
of average total assets during the first six months of 2000 compared with 93.8%
in the first six months of 1999.
INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
Total average investments, including money market investments, comprised 18.7%
of average earning assets during the first half of 2000, compared with 19.1% for
the same period of 1999. Average investment security balances for the six months
ended June 30, 2000 were up $195.0 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 $73.4 million from the first half of 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 June
30, 2000 were up $333.0 million or 5.6% from year-end 1999
19
<PAGE> 20
and $733.3 million or 13.3% from June 30, 1999. Citizens experienced strong loan
growth in the second quarter of 2000 with total loans increasing $206.0 million,
an annualized growth rate of 13.6%. Commercial loans grew at an annualized rate
of 20% for the quarter and home equity and other direct consumer loans grew at
an annualized rate of 21%. Average loans for the first half of 2000 were up
$684.3 million or 12.8% over the same period 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. 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 June 30, 2000, loans considered to be impaired totaled $53.1 million (of
which $24.2 million were on a nonaccrual basis). Included within this amount was
$39.8 million of impaired loans for which the related allowance for loan losses
was $4.4 million and $13.3 million of impaired loans for which the fair value
exceeded the recorded investment in the loan. The average recorded investment in
impaired loans during the quarter ended June 30, 2000 was approximately $41.5
million. For the quarter ended June 30, 2000, Citizens recognized interest
income of approximately $0.7 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.
At June 30, 1999, loans considered to be impaired totaled $30.4 million (of
which $15.8 million were on a nonaccrual basis). Included within this amount was
$23.8 million of impaired loans for which the related allowance for loan losses
was $6.5 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 June 30, 1999 was approximately $32.4
million. For the quarter ended June 30, 1999, Citizens recognized interest
income of approximately $0.3 million. Cash collected on nonaccrual impaired
loans totaled $0.3 million of which $0.1 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 June 30, 2000,
December 31, 1999 and June 30, 1999. Total nonperforming assets amounted to
$47.1 million as of June 30, 2000, compared with $35.1 million as of December
31, 1999 and $40.5 million as of June 30, 1999. Nonperforming assets were up
from year-end 1999 and June 30, 1999, but remain well below 1% of total loans
and other nonperforming assets. 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.
In addition to nonperforming loans, management identifies and closely monitors
other credits that are current in terms of principal and interest payments but,
in management's opinion, may deteriorate in quality if economic conditions
change. As of June 30, 2000, such credits amounted to $34.9 million or 0.6% of
total loans, compared with $18.9 million or 0.3% at December 31, 1999 and $18.8
million or 0.3% of total loans as of June 30, 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.
20
<PAGE> 21
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
JUNE 30, December 31, June 30,
(IN THOUSANDS) 2000 1999 1999
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming Loans
Nonaccrual
Less than 30 days past due $ 3,687 $ 1,661 $ 1,356
From 30 to 89 days past due 2,295 772 1,569
90 or more days past due 37,461 26,498 29,719
------- ------- -------
Total 43,443 28,931 32,644
90 days past due and still accruing 664 2,139 3,318
Restructured 419 9 114
------- ------- -------
Total nonperforming loans 44,526 31,079 36,076
Other Repossessed Assets Acquired (ORAA) 2,602 4,039 4,432
------- ------- -------
Total nonperforming assets $47,128 $35,118 $40,508
======= ======= =======
Nonperforming assets as a percent of total loans plus ORAA 0.75 % 0.59 % 0.73 %
Nonperforming assets as a percent of total assets 0.58 0.45 0.55
=========================================================================================================
</TABLE>
DEPOSITS
Total deposits decreased $4.3 million to $6.125 billion at June 30, 2000 from
$6.129 billion at year-end 1999 but were up $342.8 million from June 30, 1999.
Average deposits increased 4.0% in the first six months of 2000 over the same
period in 1999. The increase over the June 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 June 30,
2000 Citizens had approximately $118 million in brokered deposits as an
alternative source of funding, up from $15 million at year-end 1999. 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 $976.9 million during the
first six months of 2000 compared with $250.5 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 $179.1 million or 2.9%
of average interest-bearing funds for the first six months of 2000, decreasing
from $230.2 million or 4.2% of average interest-bearing funds for the same
period in 1999. At June 30, 2000, $272.3 million of the long-term debt consists
of borrowings from the Federal Home Loan Bank with $197.8 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
June 30, 2000, shareholders' equity was $652.4 million compared with $633.7
million at December 31, 1999 and $666.0 as of June 30, 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 June 30, 2000, December 31, 1999 and June
30, 1999 was $13.73, $13.32 and $13.86, respectively.
21
<PAGE> 22
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 June 30, 2000, December 31, 1999 and June 30, 1999 is presented
below.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
CAPITAL RATIOS Regulatory
Minimum For
"Well JUNE 30, December 31, June 30,
Capitalized" 2000 1999 1999
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk based capital:
Tier I 6.0 % 9.3 % 9.2 % 10.5 %
Total capital 10.0 10.5 10.5 11.7
Tier I leverage 5.0 7.2 7.2 8.6
-----------------------------------------------------------------------------------------
</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, all
of which were repurchased by March 31, 2000. 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 these
shares were repurchased during 1999. On May 23, 2000, Citizens approved a new
stock repurchase plan that authorized the repurchase of up to 3,000,000 shares
of Citizens common stock. During the second quarter of 2000, Citizens
repurchased 175,500 shares of stock under this plan at an average price of
$18.07.
Citizens declared cash dividends of $0.26 per share in the second quarter of
2000, an increase of 10.6% over the $0.235 per share declared during the same
period in 1999.
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 half 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
June 30, 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 June 30, 2000 and
1999 is illustrated below in the table on page 23.
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 $1,113.5 million at June 30, 2000 and by $621.5 million at
June 30, 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
22
<PAGE> 23
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 table below 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.
<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>
JUNE 30, 2000
RATE SENSITIVE ASSETS (1)
Loans $ 1,990.5 $ 332.1 $ 621.5 $ 2,944.1 $ 2,559.1 $ 747.3 $ 6,250.5
Investment securities 45.9 17.6 57.0 120.5 560.8 694.9 1,376.2
Short-term investments 1.6 --- --- 1.6 --- --- 1.6
--------- ------- --------- ---------- --------- --------- ---------
Total $ 2,038.0 $ 349.7 $ 678.5 $ 3,066.2 $ 3,119.9 $ 1,442.2 $ 7,628.3
========= ======== ========= ========== ========= ========= =========
RATE SENSITIVE LIABILITIES
Deposits (2) $ 991.5 $ 660.1 $ 1,251.9 $ 2,903.5 $ 2,006.8 $ 242.6 $ 5,152.9
Other interest bearing liabilities 1,124.6 100.9 50.7 1,276.2 12.4 8.6 1,297.2
--------- -------- --------- ---------- --------- --------- ---------
Total $ 2,116.1 $ 761.0 $ 1,302.6 $ 4,179.7 $ 2,019.2 $ 251.2 $ 6,450.1
========= ======== ========= ========== ========= ========= =========
Period GAP (3) $ (78.1) $(411.3) $ (624.1) $(1,113.5) $ 1,100.7 $ 1,191.0 $ 1,178.2
Cumulative GAP (78.1) (489.4) (1,113.5) (12.8) 1,178.2
Cumulative GAP to Total Assets (0.96)% (6.01)% (13.67)% (13.67)% (0.16)% 14.46% 14.46%
Multiple of Rate Sensitive Assets
to Liabilities 0.96 0.46 0.52 0.73 1.55 5.74 1.18
====================================================================================================================================
JUNE 30, 1999
RATE SENSITIVE ASSETS (1)
Loans $ 1,666.1 $ 346.8 $ 594.4 $ 2,607.3 $ 2,255.6 $ 654.3 $ 5,517.2
Investment securities 136.0 55.4 106.3 297.7 516.2 508.5 1,322.4
Short-term investments 33.5 --- --- 33.5 --- --- 33.5
--------- -------- --------- --------- --------- --------- ---------
Total $ 1,835.6 $ 402.2 $ 700.7 $ 2,938.5 $ 2,771.8 $ 1,162.8 $ 6,873.1
========= ======== ========= ========= ========= ========= =========
RATE SENSITIVE LIABILITIES
Deposits (2) $ 933.0 $ 682.7 $ 1,185.1 $ 2,800.8 $ 1,813.2 $ 258.4 $ 4,872.4
Other interest bearing liabilities 510.0 219.8 29.4 759.2 30.7 39.0 828.9
--------- -------- --------- --------- --------- --------- ---------
Total $ 1,443.0 $ 902.5 $ 1,214.5 $ 3,560.0 $ 1,843.9 $ 297.4 $ 5,701.3
========= ======== ========= ========= ========= ========= =========
Period GAP (3) $ 392.6 $(500.3) $ (513.8) $ (621.5) $ 927.9 $ 865.4 $ 1,171.8
Cumulative GAP 392.6 (107.7) (621.5) 306.4 1,171.8
Cumulative GAP to Total Assets 5.34% (1.47)% (8.45)% (8.45)% 4.17% 15.94% 15.94%
Multiple of Rate Sensitive Assets
to Liabilities 1.27 0.45 0.58 0.83 1.50 3.91 1.21
====================================================================================================================================
</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 $794 million and
$798 million in 2000 and 1999, respectively, in the less than one year
category, and $1.479 billion and $1.513 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).
23
<PAGE> 24
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 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.
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:
10.1 Amended and Restated Change in Control Agreement
10.2 First Amendment to the Citizens Banking Corporation Third Amended
Stock Option Plan
10.3 First Amendment to the Citizens Banking Corporation Stock Option Plan
For Directors
10.4 Citizens Banking Corporation All-Employee Stock Option Plan
27 Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed during the six-month period ended June 30,
2000.
24
<PAGE> 25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIZENS BANKING CORPORATION
Date August 11, 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)
25
<PAGE> 26
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27 Financial Data Schedule
10.1 Amended and Restated
Change in Control Agreement
10.2 First Amendment to the Citizens Banking Corporation
Third Amended Stock Option plan
10.3 First Amendment to the Citizens Banking Corporation
Stock Option Plan For Directors
10.4 Citizens Banking Corporation
All Employee Stock Option Plan
</TABLE>
