<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement. [ ] Confidential, for use of the
Commission only (as permitted by
Rule 14a-6(e)(2).
[x] Definitive proxy statement.
[ ] Definitive additional materials.
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12.
Citizens Banking Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of filing fee (check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
[CITIZENS BANKING CORPORATION LOGO]
THOMAS W. GALLAGHER
Senior Vice President, General
Counsel and Secretary
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS, APRIL 18, 2000
To the Shareholders of Citizens Banking Corporation:
Notice is hereby given that the annual meeting of shareholders of
Citizens Banking Corporation (the "Corporation") will be held in the
Presidential Ball Room located in the Holiday Inn, Gateway Centre, Flint,
Michigan, on Tuesday, April 18, 2000, at 10:00 a.m., local time, for the
following purposes:
(1) To elect six (6) Class II directors to serve a three (3) year
term and until their successors are duly elected and qualify.
(2) To transact such other business as may properly come before the
meeting or any adjournment or adjournments thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE DIRECTORS
NOMINATED IN THE PROXY STATEMENT.
Shareholders of record of the Corporation's common stock outstanding at
the close of business on February 29, 2000 are entitled to notice of and to vote
at the meeting.
You are invited to attend this meeting. Please date, sign and return
your proxy promptly in the enclosed, stamped envelope whether or not you plan to
be present at the meeting. In the alternative you may vote via the Internet or
by telephone by following the procedures set forth on the enclosed proxy card.
You may still vote in person if you attend the meeting.
By Order of the Board of Directors
/s/ Thomas W. Gallagher
Thomas W. Gallagher
Secretary
Flint, Michigan
March 15, 2000
<PAGE> 3
[CITIZENS BANKING CORPORATION LOGO]
Citizens Banking Corporation
328 South Saginaw Street
Flint, Michigan 48502
- -------------------------------------------------------------------------------
PROXY STATEMENT
- -------------------------------------------------------------------------------
This proxy statement is furnished in connection with the solicitation
of proxies by the board of directors of Citizens Banking Corporation (the
"Corporation") to be used at the annual meeting of shareholders of the
Corporation and any adjournments thereof. The annual meeting will be held on
April 18, 2000 at the time and place and for the purposes set forth in the
accompanying notice of annual meeting of shareholders.
This proxy statement, the proxy, and notice of annual meeting of
shareholders are first being provided to shareholders on or about March 15,
2000.
The shareholders of the common stock of the Corporation ("Common
Stock") as of the close of business on February 29, 2000 will be entitled to be
present and to vote at the meeting. Each share is entitled to one vote on each
matter to be voted upon at the meeting. On February 29, 2000, there were
47,528,985 shares of Common Stock outstanding and entitled to vote. The
Corporation has no other class of stock issued and outstanding at this time that
is entitled to vote at the meeting. The board of directors requests that you
execute and return the proxy promptly, whether or not you plan to attend the
meeting. Instead of returning signed proxy cards, shareholders of record can
vote their shares over the Internet, or by calling a specially designated
telephone number. These new Internet and telephone voting procedures are
designed to authenticate shareholders' identities, allow shareholders to give
their voting instructions and confirm that shareholders' instructions have been
recorded properly. Specific instructions for shareholders of record that wish to
use the Internet or telephone voting procedures are included on the enclosed
proxy card. Shareholders who vote via the Internet or by telephone do not need
to mail their proxy cards. Any proxy may be revoked by the person giving it at
any time before it is exercised by giving written notice of such revocation to
the secretary of the Corporation, by executing a later dated proxy or by voting
in person at the annual meeting.
The shares represented by properly executed proxies will be voted in
accordance with the instructions provided therein and where no instructions are
given, will be voted in favor of the election of the Class II nominees
identified herein. For purposes of determining the number of votes cast with
respect to the election of directors, only those cast "for" are included.
Withheld votes are counted only for purposes of determining whether a quorum is
present at the annual meeting.
The costs of soliciting proxies will be borne by the Corporation. The
solicitation of proxies will be made primarily by mail. The Corporation has,
however, retained the firm of Georgeson Shareholder Communications, Inc.,
specialists in proxy solicitation, to solicit proxies on its behalf from
brokers, bank nominees, and other institutional holders of its stock at an
anticipated cost of $8,500 plus certain out-of-pocket expenses. Proxies may also
be solicited by directors, officers, and other employees of the Corporation and
its subsidiaries personally, and by telephone, facsimile, or other means. No
additional compensation will be paid to directors, officers, or employees for
any such solicitation nor is any such solicitation expected to result in more
than a minimal cost to the Corporation. Arrangements may also be made directly
by the Corporation with banks, brokerage houses, custodians, nominees, and
fiduciaries to forward solicitation material to the beneficial owners of stock
held of record by them and to obtain authorization for the execution of proxies.
The Corporation may reimburse such institutional holders for reasonable expenses
incurred by them in connection therewith.
The persons named in the proxy to represent shareholders who are
present by proxy at the meeting are Edward P. Abbott and William C. Shedd.
1
<PAGE> 4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below includes all of the shareholders of the Corporation
known by the Corporation to beneficially own more than five percent of its
Common Stock as of December 31, 1999.
<TABLE>
<CAPTION>
COMMON
STOCK
BENEFICIALLY
OWNED AS A
PERCENTAGE
OF
COMMON STOCK OUTSTANDING
NAME AND ADDRESS OF BENEFICIALLY INVESTMENT POWER VOTING POWER COMMON
BENEFICIAL OWNER OWNED --------------------------- --------------------------- STOCK
SOLE SHARED NONE SOLE SHARED NONE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Citizens Bank
328 S. Saginaw St.
Flint, Michigan
485021/ 3,834,685 1,015,990 927,978 1,890,717 1,384,487 460,227 1,989,971 8.06%
CenTra, Inc.
12225 Stephens
Warren, Michigan
480892/ 3,094,379 2,987,226 107,153 -0- 2,987,226 107,153 -0- 6.51%
</TABLE>
- -------------------
(1/)As sole or co-fiduciary, Citizens Bank will generally vote the shares held
by it in trusts or estates in which the indenture creating the same specifically
grants such power. Shares held in all other trusts or estates in which the bank
acts as co-fiduciary will generally be voted by the other co-fiduciary or by the
bank at the direction of such co-fiduciary.
(2/)The information furnished for CenTra, Inc. is based upon data which have
been supplied to the Corporation by CenTra, Inc. As set forth in the table,
CenTra, Inc. shares investment and voting power with respect to 107,153 shares.
Such powers are shared with the Manuel J. Moroun Trust under agreement dated
March 4, 1977, for the benefit of Manuel J. Moroun.
2
<PAGE> 5
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the number of shares of the
Corporation's Common Stock beneficially owned as of December 31, 1999, together
with the percentage of the outstanding shares which such ownership represents,
by (i) each director and nominee for election to the board of directors, (ii)
each executive officer named in the Summary Compensation Table under "Executive
Compensation" and (iii) all directors and executive officers of the Corporation
as a group. The information with respect to directors and executive officers has
been obtained from the respective individuals and is reported in accordance with
the beneficial ownership rules of the Securities and Exchange Commission (the
"Commission") under which a person may be deemed to be the beneficial owner of a
security if such person has or shares voting power or investment power with
respect to such security or has the right to acquire such ownership within the
next 60 days. Accordingly, the amounts shown in the following table do not
purport to represent beneficial ownership for any purpose other than compliance
with the Commission's reporting requirements.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED AS A
COMMON STOCK PERCENTAGE OF OUTSTANDING
BENEFICIALLY OWNED SOLE VOTING AND SHARED VOTING AND COMMON STOCK AS OF
NAME OF DECEMBER 31, 1999 DISPOSITIVE POWER DISPOSITIVE POWER DECEMBER 31, 1999
<S> <C> <C> <C> <C>
Edward P. Abbott1/ 25,150 25,011 139 *
Hugo E. Braun Jr.1/ 27,204 27,204 --- *
Jonathan E. Burroughs II1/ 2/ 310,388 266,300 44,088 *
Joseph P. Day3/ 8,265 8,265 --- *
Gary P. Drainville4/ 136,631 136,631 --- *
John W. Ennest5/ 287,726 287,726 --- *
Lawrence O. Erickson1/ 438,844 7,500 431,344 *
Ronald E. Fenton6/ 252,175 252,175 --- *
Victor E. George1/ 12,587 12,587 --- *
William J. Hank3/ 293,343 141,798 151,545 *
Gail E. Janssen7/ 131,933 127,705 4,228 *
Stephen J. Lazaroff8/ 33,445 30,045 3,400 *
William F. Nelson Jr.1/ 17,178 14,466 2,712 *
Robert C. Safford9/ 179,287 179,287 --- *
Wayne G. Schaeffer10/ 160,436 111,413 49,023 *
William C. Shedd3/ 15,393 8,360 7,033 *
James E. Truesdell Jr.3/ 43,263 43,263 --- *
James M. VanTiflin11/ 89,974 89,974 --- *
Robert J. Vitito12/ 431,076 345,495 85,580 *
Ada C. Washington8/ 5,330 5,330 --- *
Charles R. Weeks13/ 178,327 171,870 6,457 *
Kendall B. Williams1/ 9,834 8,846 987 *
James L. Wolohan13/14/ 25,191 13,500 11,691 *
All Directors, Director Nominees and
Executive Officers as a Group (30) 15/ 3,546,351 2,705,285 841,066 7.5%
</TABLE>
* Represents holdings of less than one percent.
(1/)Includes 7,500 exercisable options to purchase Common Stock, which were
granted pursuant to the provisions of the Stock Option Plan for Directors.
3
<PAGE> 6
(2/)The shares shown for Mr. Burroughs II, include 40,050 shares held in the
Burroughs' Memorial Trust, to which Mr. Burroughs II serves as one of 5
trustees. Mr. Burroughs II disclaims beneficial ownership of such shares.
(3/)Includes 6,000 exercisable options to purchase Common Stock, which were
granted pursuant to the provisions of the Stock Option Plan for Directors.
(4/)Includes 97,431 exercisable options to purchase Common Stock.
(5/)Includes 190,908 exercisable options to purchase Common Stock.
(6/)Includes 1,734 exercisable options to purchase Common Stock which were
originally granted as option shares of F&M Bancorporation, Inc. pursuant to the
1993 Stock Option Plan for Non-Employee Directors of F&M Bancorporation, Inc.
and which were converted to options to purchase Common Stock.
(7/)Includes 6,034 exercisable options to purchase Common Stock which were
originally granted as option shares of F&M Bancorporation, Inc. pursuant to the
1993 Stock Option Plan for Non-Employee Directors of F&M Bancorporation, Inc.
and which were converted to options to purchase Common Stock.
(8/)Includes 3,000 exercisable options to purchase Common Stock, which were
granted pursuant to the provisions of the Stock Option Plan for Directors.
(9/)Includes 8,670 exercisable options to purchase Common Stock which were
originally granted as option shares of F&M Bancorporation, Inc. pursuant to the
1993 Stock Option Plan for Non-Employee Directors of F&M Bancorporation, Inc.
and which were converted to options to purchase Common Stock.
(10/)Includes 93,354 exercisable options to purchase Common Stock.
(11/)Includes 67,625 exercisable options to purchase Common Stock.
(12/)Includes 296,390 exercisable options to purchase Common Stock.
(13/)Includes 4,500 exercisable options to purchase Common Stock, which were
granted pursuant to the provisions of the Stock Option Plan for Directors.
(14/)The shares shown for Mr. Wolohan includes 11,691 shares held by the Wolohan
Family Foundation to which Mr. Wolohan serves as a trustee. Mr. Wolohan
disclaims beneficial ownership of such shares.
(15/)The directors, director nominees and executive officers disclaim beneficial
ownership of 258,194 of these shares. Also, of the 3,546,351 shares shown as
being beneficially owned by such group, 1,160,687 represent exercisable options
to purchase Common Stock.
4
<PAGE> 7
ELECTION OF DIRECTORS
In accordance with the Corporation's restated articles of
incorporation, the board of directors is divided into three classes. Each year,
on a rotating basis, the terms of office of the directors in one of the three
classes will expire. Successors to the class of directors whose terms have
expired will be elected for a three-year term. The directors whose terms expire
at the 2000 annual meeting of shareholders ("Class II directors") are Joseph P.
Day, John W. Ennest, Ronald E. Fenton, Victor E. George, Ada C. Washington, and
James L. Wolohan. All of the current Class II directors have previously been
elected as directors by the shareholders, except Mr. Fenton, who was appointed
to the board of directors pursuant to the agreement and plan of merger between
the Corporation and F&M Bancorporation, Inc. dated as of April 18, 1999 (the
"F&M Merger Agreement"). The board of directors has nominated each of these
individuals for re-election as Class II directors at the 2000 annual meeting of
shareholders. The term for the Class II directors will expire at the 2003 annual
meeting of shareholders or upon the election and qualification of their
successors. If any of the nominees should be unable to serve, the proxies may be
voted for the election of such other person or persons as the board of directors
may recommend or the number of directors will be automatically reduced by the
number of nominees unable to serve if no substitute is recommended by the board
of directors.
Six nominees will be elected as Class II directors at the 2000 annual
meeting of shareholders. On the basis of information presently available to the
board of directors, only the six persons named above as nominees will be
nominated for election as directors. PROXIES IN THE ACCOMPANYING FORM WILL BE
VOTED FOR THE ELECTION OF SUCH NOMINEES UNLESS A CONTRARY DIRECTION IS
INDICATED. The affirmative vote of a majority of the votes cast at the meeting
is required for election. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
FOR EACH OF THE NOMINEES.
The name and age of each nominee and incumbent director, positions and
offices currently held with the Corporation and its subsidiaries, his or her
five-year business experience, and the year each became a director of the
Corporation, according to information furnished by such nominees and incumbent
directors, are set forth below.
5
<PAGE> 8
CLASS II (1)
NOMINEES TO SERVE THREE (3) YEARS
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE DURING THE
PAST FIVE YEARS, DIRECTORSHIPS
SERVED IN CERTAIN CORPORATIONS, AND
CONTINUOUSLY AS PRINCIPAL OCCUPATION IF OTHER
POSITIONS AND OFFICES WITH A DIRECTOR OF THAN CURRENT POSITION WITH
NAME AGE CORPORATION AND ITS SUBSIDIARIES CORPORATION CORPORATION AND ITS SUBSIDIARIES
<S> <C> <C> <C> <C>
Joseph P. Day 60 Director of Corporation and 1992 President, Banner Engineering & Sales,
Director of Citizens Bank. Inc., a combustion engineering and
manufacturing firm.
John W. Ennest 57 Vice Chairman of the Board Chief 1991
Financial Officer and Treasurer
of Corporation; Vice Chairman of
the Board and Chief Financial
Officer of Citizens Bank.
Ronald E. Fenton2/ 71 Director of Corporation. 1999 Retired President and Chief Executive
Officer of predecessor banks to F&M
Bank - Iowa.
Victor E. George 68 Director of Corporation and 1982 Chairman of the Board, Victor George
Director of Citizens Bank. Oldsmobile, Inc., an automobile
dealership.
Ada C. Washington 49 Director of Corporation and 1997 Community volunteer.
Director of Citizens Bank.
James L. Wolohan 48 Director of Corporation and 1997 Chairman, President and Chief
Director of Citizens Bank. Executive Officer of Wolohan Lumber
Co., a retailer of lumber, building
materials and home improvement products;
Director, Jacobson Stores, Inc.
</TABLE>
(1/)Gerald Schreiber, a former Class II director of the Corporation died on
March 27, 1999.
(2/)Mr. Fenton was appointed to the board of directors pursuant to the F&M
Merger Agreement and, assuming his re-election by shareholders, will be eligible
to serve until April 2001 pursuant to an exception to the age limitation
provisions set forth in the Corporation's Retirement Policy for Directors.
6
<PAGE> 9
CLASS III (3)
CONTINUING DIRECTORS - TERM EXPIRING IN 2001
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE DURING THE
PAST FIVE YEARS, DIRECTORSHIPS
SERVED IN CERTAIN CORPORATIONS, AND
CONTINUOUSLY PRINCIPAL OCCUPATION IF OTHER
POSITIONS AND OFFICES WITH AS A DIRECTOR THAN CURRENT POSITION WITH
NAME AGE CORPORATION AND ITS SUBSIDIARIES OF CORPORATION CORPORATION AND ITS SUBSIDIARIES
<S> <C> <C> <C> <C>
Stephen J. Lazaroff 46 Director of Corporation. 1997 President, Diversified Precision
Products, Inc., a special cutting
tool manufacturer serving the
automotive and hydraulic fittings
industries.
William F. Nelson Jr. 66 Director of Corporation. 1986 President, Director, and Owner,
William F. Nelson Electric, Inc.,
an electrical contractor for
commercial and industrial
businesses.
Robert C. Safford4/ 69 Director of Corporation. 1999 President and sole shareholder,
Realty Development Corporation, a
firm which owns, operates and
develops commercial real estate.
William C. Shedd 60 Director of Corporation and 1982 Attorney, Winegarden, Shedd,
Director of Citizens Bank. Haley, Lindholm & Robertson.
Charles R. Weeks 65 Director of Corporation. 1982 Retired Chairman, President and
Chief Executive Officer of the
Corporation; Director, Wolohan
Lumber Co.
Kendall B. Williams 47 Director of Corporation and 1992 Attorney and Counselor,
Director of Citizens Bank. The Williams Firm, P.C.
Previously an attorney with Gault
Davison, P.C. from January 1980 to
September 1997.
</TABLE>
(3/)James E. Truesdell Jr., a former Class III director of the Corporation, is
retiring from the board of directors of the Corporation as of March 31, 2000
pursuant to the age limitation provisions set forth in the Corporation's
Retirement Policy for Directors.
(4/)Mr. Safford was appointed to the board of directors of the Corporation
pursuant to the F&M Merger Agreement.
7
<PAGE> 10
CLASS I
CONTINUING DIRECTORS - TERM EXPIRING IN 2002
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE DURING THE
PAST FIVE YEARS, DIRECTORSHIPS
SERVED IN CERTAIN CORPORATIONS, AND
CONTINUOUSLY PRINCIPAL OCCUPATION IF OTHER
POSITIONS AND OFFICES WITH AS A DIRECTOR THAN CURRENT POSITION WITH
NAME AGE CORPORATION AND ITS SUBSIDIARIES OF CORPORATION CORPORATION AND ITS SUBSIDIARIES
<S> <C> <C> <C> <C>
Edward P. Abbott 60 Director of Corporation and 1982 President and Chief Executive
Director of Citizens Bank. Officer, Abbott's Meat, Inc., a
wholesale and retail meat
distributor.
Hugo E. Braun Jr. 67 Director of Corporation and 1986 Attorney & Partner, Braun Kendrick
Director of Citizens Bank. Finkbeiner; Director, Wolohan
Lumber Co.
Jonathan E. 57 Director of Corporation. 1986 President, JEB Enterprises, an
Burroughs II investment consulting firm.
Lawrence O. Erickson 64 Director of Corporation. 1993 Chief Executive Officer, Four-Way
Tool & Die, Inc., an engineering
consulting firm for metal stamping
fabrication and tool manufacturing.
William J. Hank 67 Director of Corporation and 1987 Chairman and Chief Executive
Director of Citizens Bank - Officer, Farnham Investments Group;
Illinois, N.A. Retired Executive Vice President of
the Corporation; Retired Chairman
of the Board, Citizens Bank -
Illinois, N.A.
Gail E. Janssen5/ 69 Director of Corporation. 1999 Retired Chairman of the Board of
F&M Bancorporation, Inc. 1980 to
1999. Also Chief Executive Officer
from 1980 to 1997 and President
from 1980 to 1996.
Robert J. Vitito 57 Chairman of the Board, 1991
President, Chief Executive
Officer and Director of
Corporation and of Citizens
Bank.
</TABLE>
(5/)Mr. Janssen was appointed to the board of directors of the Corporation
pursuant to the F&M Merger Agreement.
8
<PAGE> 11
MEETINGS OF DIRECTORS
During 1999, 4 regular meetings and 4 special meetings of the board of
directors of the Corporation were held. During such period, all incumbent
directors attended at least 75% of the aggregate of the number of meetings of
the board of directors and the number of meetings held by the committees on
which they serve.
COMMITTEES OF THE BOARD OF DIRECTORS
The Corporation has several committees on which members of the board of
directors serve, including an audit committee, a compensation and human
resources committee, and a directors nominating committee. The audit committee
meets quarterly and on call when needed, and the compensation and human
resources committee and directors nominating committee meet on call.
The AUDIT COMMITTEE met 4 times during 1999 and is currently comprised
of the following outside directors: James E. Truesdell Jr., chairman; Edward P.
Abbott; Joseph P. Day; Stephen J. Lazaroff; and William F. Nelson Jr. The
responsibilities of the committee include oversight of the internal accounting
controls for and internal audit function of the Corporation and its
subsidiaries; recommending to the board of directors the independent auditors to
be retained to conduct the annual audit of the Corporation; reviewing the annual
audit plan with the independent auditors and the internal auditors; serving as
the Compliance Review Committee pursuant to the provisions of the Corporation's
compliance policy; and reviewing the results of the internal and independent
audits of the Corporation.
The COMPENSATION AND HUMAN RESOURCES COMMITTEE met 4 times during 1999
and is currently comprised of the following directors: Hugo E. Braun Jr.,
chairman; Lawrence O. Erickson; Victor E. George; James E. Truesdell Jr.; and
Kendall B. Williams. The responsibilities of the committee include approval of
all aspects of corporate executive compensation and administration of the
Corporation's compensation and benefits plans.
The DIRECTORS NOMINATING COMMITTEE met 1 time during 1999 and is
currently comprised of the following directors: Robert J. Vitito, chairman; Hugo
E. Braun Jr.; Jonathan E. Burroughs II; Victor E. George; and Stephen J.
Lazaroff. The responsibilities of the committee are: to determine a desirable
balance of expertise among board members; to identify qualified candidates to
fill board positions; to provide aid in attracting qualified candidates to the
board of directors; to recommend the slate of director nominees to the board of
directors for inclusion in the Corporation's proxy statement for election by the
shareholders at the annual meetings; to consider director nominees proposed by
shareholders; and to handle such other matters as may be properly delegated to
the committee by the board of directors. Shareholders proposing director
nominees at any annual meeting of shareholders must provide written notice of
such intention in accordance with the bylaws to the secretary of the Corporation
at least 90 days prior to an annual shareholders meeting for which such
nominations are proposed. If the annual meeting date has been advanced to a date
earlier than the last Thursday in January then notice of such intention must be
given within 10 days after the first public disclosure of the date of the annual
meeting. With respect to an election to be held at a special meeting of
shareholders, such notice must be given by the close of business on the seventh
day following the date on which notice of such meeting is first given to
shareholders.
9
<PAGE> 12
COMPENSATION OF DIRECTORS
During 1999, directors of the Corporation (with the exception of Mr.
Weeks who during a portion of the year had a separate arrangement as described
below) were paid an annual retainer of $9,000 plus the sum of $900 for
attendance at each meeting of the board of directors. Non-officer directors were
paid $600 for each committee meeting attended with the exception of the
committee chairpersons who were paid $900. Committee member directors who are
also employees of the Corporation do not receive fees for committee meeting
attendance.
The Corporation also maintains the Stock Option Plan for Directors.
Annually during the ten year term of the Plan, each nonemployee director serving
on the board of directors immediately following the annual meeting of
shareholders will receive an automatic grant of a non-qualified stock option to
purchase 1,500 shares of Common Stock at an exercise price equal to the fair
market value per share of Common Stock on the date of the annual meeting of
shareholders. Each such option will become exercisable six months following the
grant date and expire five years after grant. On April 20, 1999, pursuant to the
Plan, nonemployee directors received a stock option grant to purchase 1,500
shares of Common Stock of the Corporation at an exercise price of $32.60 per
share.
In April 1996, the Corporation entered into a contractual arrangement
with Mr. Weeks, pursuant to which he agreed to serve as chairman of the board of
the Corporation and as chairman of the executive and nominating committees of
the Corporation's board of directors. Pursuant to such arrangement, which
terminated in April 1999, Mr. Weeks was paid an annual fee of $212,180 which was
paid in quarterly installments and which was inclusive of any other annual
retainer or meeting fees otherwise normally paid to directors of the
Corporation. Pursuant to such arrangement, Mr. Weeks was also entitled to be
reimbursed by the Corporation for reasonable out-of-pocket expenses incurred
while serving in the capacity of chairman upon presentation of an appropriate
accounting to the Corporation. As of April 1999, Mr. Weeks resigned as chairman
of the board of directors and as chairman of the executive and nominating
committees of the Corporation's board of directors. He continues to serve as a
director of the Corporation and, as of the date of such resignation, is
compensated on the same basis as all other nonemployee directors.
10
<PAGE> 13
EXECUTIVE OFFICERS
The following information is provided for those officers currently
designated as executive officers by the Corporation's board of directors and
includes the president, chief financial officer, controller, and secretary of
the Corporation, officers of the Corporation who are in charge of principal
business units, divisions or functions, and officers of the Corporation or its
subsidiaries who perform significant policy making functions for the
Corporation.
<TABLE>
<CAPTION>
YEAR BECAME
EXECUTIVE OFFICER OF
NAME AGE FIVE-YEAR BUSINESS EXPERIENCE THE CORPORATION
<S> <C> <C> <C>
Richard T. Albee 56 Executive Vice President of Corporation (April 1996
1999 to present); Executive Vice President of
Citizens Bank (December 1997 to present); Senior
Vice President of Citizens Bank (April 1994 to
December 1997).
Daniel E. Bekemeier 43 Senior Vice President and Controller of Citizens 1996
Bank (April 1995 to present); Vice President and
Controller of Citizens Bank (September 1989 to
April 1995).
Nicholas J. Cilfone 49 Executive Vice President of Corporation (April 1985
1999 to present); Senior Vice President of
Corporation (August 1988 to April 1999);
Executive Vice President of Citizens Bank (June
1996 to present). Also served as Executive Vice
President of former subsidiary bank of the
Corporation which was consolidated with Citizens
Bank (October 1991 to June 1996).
Gary P. Drainville 50 Executive Vice President of Corporation and of 1985
Citizens Bank (December 1993 to present);
Director of Human Resources of Corporation and
of Citizens Bank (December 1985 - June 1996).
John W. Ennest 57 Vice Chairman of the Board of Corporation 1983
(October 1991 to present); Chief Financial
Officer and Treasurer of Corporation (July 1994
to present); Vice Chairman of the Board and
Chief Financial Officer of Citizens Bank (June
1996 to present) Chairman of the Board, Citizens
Bank - Illinois, N.A. (August 1992 to May 1999).
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
YEAR BECAME
EXECUTIVE OFFICER OF
NAME AGE FIVE-YEAR BUSINESS EXPERIENCE THE CORPORATION
<S> <C> <C> <C>
Thomas W. Gallagher 47 Senior Vice President of Corporation (July 1993 1989
to present); General Counsel of Corporation
(August 1988 to present); Secretary of
Corporation (January 1989 to present); Senior
Vice President, General Counsel and Secretary of
Citizens Bank (August 1988 to present).
John W. Johnson 45 President of F&M Bank - Wisconsin (January 2000 1999
to present); Chief Executive Officer and
President F&M Bancorporation, Inc. (November
1997 to December 1999); Vice President F&M
Bancorporation, Inc. (July 1994 to July 1997);
President and Director F&M Bank - Northeast
(March 1994 to July 1997).
Wayne G. Schaeffer 53 Executive Vice President of Corporation 1987
(December 1993 to present); Chief Financial
Officer and Treasurer of Corporation (August
1988 to July 1994); President - Flint, Citizens
Bank (June 1996 to present); Senior Executive
Vice President and Chief Operating Officer,
Citizens Bank (July 1994 to June 1996).
Thomas C. Shafer 41 Executive Vice President of Corporation (April 1996
1999 to present); Executive Vice President of
Citizens Bank (June 1996 to present); Senior
Vice President of Citizens Bank (November 1994
to June 1996).
James M. VanTiflin 52 Executive Vice of Corporation (April 1999 to 1996
present); President - Saginaw, Citizens Bank
(June 1996 to present); President and Chief
Executive Officer of former subsidiary bank of
the Corporation which was consolidated with
Citizens Bank (February 1995 to June 1996).
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
YEAR BECAME
EXECUTIVE OFFICER OF
NAME AGE FIVE-YEAR BUSINESS EXPERIENCE THE CORPORATION
<S> <C> <C> <C>
Robert J. Vitito 57 Chairman of the Board of Corporation (April 1999 1986
to present); President and Chief Executive
Officer of Corporation (April 1996 to present);
President and Chief Administrative Officer of
Corporation (July 1994 to April 1996); Chairman,
President and Chief Executive Officer of
Citizens Bank (May 1996 to present); also served
as Chairman of the Board of former subsidiary
bank of the Corporation which was consolidated
with Citizens Bank (January 1987 to June 1996).
Jack S. Werner 52 Executive Vice President of Corporation (April 1996
1999 to present); President - Bay City/Midland,
Citizens Bank (June 1996 to present). Also
served as Chairman and Chief Executive Officer
of former subsidiary bank of the Corporation
which was consolidated with Citizens Bank (May
1991 to June 1996).
</TABLE>
Citizens Bank, Citizens Bank - Illinois, N.A. and F&M Bank-Wisconsin
are wholly-owned subsidiaries of the Corporation.
13
<PAGE> 16
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid or accrued by the Corporation and its subsidiaries, to or on
behalf of the Corporation's Chief Executive Officer and each of the four other
most highly compensated executive officers during 1999 (the "Named Officers") of
the Corporation (determined as of the end of the last fiscal year) for the
fiscal years ended December 31, 1997, 1998, and 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM
COMPENSATION
NAME AND PRINCIPAL
POSITION
---------------- ------------------ ----------------------
ALL OTHER
SALARY ($) BONUS ($) OPTIONS/ COMPENSATION(1) ($)
YEAR SARS(#)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Robert J. Vitito 1999 425,046 -0- 80,000 26,126
Chairman, President and 1998 339,999 213,197 62,000 25,950
Chief Executive Officer 1997 313,000 168,859 110,667 22,418
- -----------------------------------------------------------------------------------------------------------------------------------
John W. Ennest 1999 272,850 53,195 23,000 26,247
Vice Chairman, Treasurer 1998 262,850 79,879 20,500 25,950
and Chief Financial 1997 252,850 94,870 66,580 23,596
Officer
- -----------------------------------------------------------------------------------------------------------------------------------
Wayne G. Schaeffer 1999 176,073 39,337 22,000 8,050
Executive Vice President 1998 166,500 64,978 17,700 8,165
1997 157,000 70,156 39,870 7,764
- -----------------------------------------------------------------------------------------------------------------------------------
James M. VanTiflin 1999 162,383 42,428 18,500 7,989
Executive Vice President 1998 153,554 50,969 12,700 7,030
1997 145,196 56,765 16,200 6,462
- -----------------------------------------------------------------------------------------------------------------------------------
Gary P. Drainville 1999 156,800 42,428 18,500 8,004
Executive Vice President 1998 148,000 58,614 13,500 7,649
1997 139,500 60,535 35,326 7,383
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1/)The amounts set forth in the "All Other Compensation" column for 1999
represent: (i) matching contributions on behalf of the Named Officers to the
Corporation's Section 401(k) Plan as follows: Mr. Vitito, $7,500, Mr. Ennest,
$7,500, Mr. Schaeffer, $7,500, Mr. VanTiflin, $7,500, and Mr. Drainville,
$7,056; (ii) insurance payments with respect to term life insurance as follows:
Mr. Vitito $2,426, Mr. Ennest $2,547, Mr. Schaeffer $550, Mr. VanTiflin $489 and
Mr. Drainville $948; and (iii) director fees in the amount of $16,200 paid to
each of Messrs. Vitito and Ennest for services as a director of the Corporation.
14
<PAGE> 17
STOCK OPTION GRANTS
The following table contains information concerning the grant of stock
options under the Corporation's Third Amended Stock Option Plan (the "Option
Plan") to the Named Officers during 1999:
-------------------------------------------------------------------------------
OPTION/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------------------------------------------------
INDIVIDUAL GRANTS
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/ POTENTIAL REALIZABLE
UNDERLYING SARS VALUE AT ASSUMED ANNUAL
OPTIONS GRANTED TO EXERCISE OR RATE OF STOCK PRICE
/SARS EMPLOYEES IN BASE PRICE EXPIRATION APPRECIATION FOR
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE OPTION TERM(1/)
-----------
5%($) 10%($)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
R.J. Vitito 80,000(2/) 19.02% 30.50 5/21/09 1,534,503 3,888,732
J.W. Ennest 23,000(2/) 5.47% 30.50 5/21/09 441,170 1,118,010
W.G. Schaeffer 22,000(2/) 5.23% 30.50 5/21/09 421,988 1,069,401
J.M. VanTiflin 18,500(2/) 4.40% 30.50 5/21/09 354,854 899,269
G.P. Drainville 18,500(2/) 4.40% 30.50 5/21/09 354,854 899,269
------------------------------------------------------------------------------------------------------------------
</TABLE>
(1/)Such "potential realizable values" represent the value of such options at
the end of their term, assuming a 5% and 10% appreciation in the price of the
Common Stock compounded annually over the term without discounting for
inflation. The actual value of such options is dependent upon actual
appreciation in the market price of the Common Stock during the term of the
options.
(2/)These stock options are non-qualified stock options granted pursuant to the
Option Plan. The options are exercisable in whole or in part during the term
thereof once vested, beginning November 21, 1999. Generally, such options will
become 100% vested after 5 years from the date of grant or earlier on a
graduated basis in accordance with a pre-determined option vesting schedule.
Such vesting schedule is based upon a rolling 4 quarter earnings per share
("EPS") target for the Corporation with a minimum vesting of 8% upon the
Corporation's achieving an average EPS of $2.06 and a 100% vesting upon the
Corporation's achieving an average EPS of $2.54.
15
<PAGE> 18
OPTION/SAR EXERCISES AND HOLDINGS
The following table provides information, with respect to the Named
Officers, about the exercise of options and/or SARs during the last fiscal year,
and the unexercised options and SARs held as of the end of the fiscal year:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED ON VALUE OPTIONS/SARS AT FISCAL IN-THE-MONEY OPTIONS/SARS AT
NAME EXERCISE (#) REALIZED ($) YEAR END (#) FISCAL YEAR END ($)(1/)
----------------------- ---------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
R.J. Vitito 1,616 39,319 296,390 99,000 924,235 -0-
J.W. Ennest 29,634 666,202 190,908 29,800 856,643 -0-
W.G. Schaeffer 28,500 711,481 93,354 27,550 159,385 -0-
J.M. VanTiflin 17,700 440,861 67,625 22,075 243,535 -0-
G.P. Drainville 8,100 194,295 97,431 22,475 419,191 -0-
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
1/The value set forth in the table was calculated by subtracting the exercise
price of the options from the closing price of the Common Stock at year end and
then multiplying the difference by the number of shares subject to such options.
PENSION PLANS
The following table shows the estimated annual pension benefits payable
to the Named Officers at normal retirement age(1/) under the Corporation's
qualified defined benefit pension plan, based on remuneration that is covered
under the plan and years of service with the Corporation and its subsidiaries:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
YEARS OF CREDITED SERVICE
-------------------------
REMUNERATION(2/)
15 20 25 30 35
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$125,000 $29,000 $39,000 $49,000 $59,000 $69,000
150,000 36,000 48,000 60,000 72,000 84,000
175,000 43,000 57,000 71,000 86,000 100,000
200,000 50,000 66,000 83,000 99,000 116,000
------------------------------------------------------------------------------------------------
</TABLE>
(1/)Normal retirement age for the Named Officers is age 65.
(2/)The law in effect throughout calendar year 1999 limits remuneration
considered for benefit purposes to $160,000. Messrs. Vitito and Ennest have
supplemental plans that pay benefits based upon earnings in excess of the
pension plan limitations, which plans are described below.
16
<PAGE> 19
A participant's remuneration covered by the Corporation's pension plan
is his or her "average monthly compensation," which is computed over the 60
consecutive months of the participant's last 120 months in which he or she
received the greatest compensation, multiplied by 12 months. For this purpose,
compensation is defined as the participant's base salary, exclusive of bonuses,
overtime, and fringe benefits, but includes the participant's 401(k) salary
reduction contributions. Covered remuneration for the named executives as of the
end of the last calendar year is $160,000 for Messrs. Vitito and Ennest,
$149,741 for Mr. Schaeffer, $139,350 for Mr. VanTiflin and $142,132 for Mr.
Drainville. The estimated credited years of service for each named executive is
as follows: Mr. Vitito, 32; Mr. Ennest, 17; Mr. Schaeffer, 16; Mr. VanTiflin,
25; and Mr. Drainville, 14. Benefits are computed as a straight single life
annuity beginning at normal retirement age and are not subject to offset for
social security or other benefits.
The Corporation has an agreement with Mr. Vitito and Mr. Ennest which
provides that they shall be entitled to receive a retirement benefit at age 65
equal to 60%, and 50%, respectively, of their average annual base salary over
the consecutive 60-month period in which they received the highest compensation
during their final 120 months of employment with appropriate percentage
reductions in the event of retirement before age 65. That portion of the
retirement benefit not covered by the Corporation's pension plan and social
security is covered by a supplemental retirement benefits plan. Under the
combined plans, the estimated annual benefits payable to Mr. Vitito and Mr.
Ennest upon retirement at age 65 would be approximately $373,356 and $175,011,
respectively.
CHANGE-IN-CONTROL AGREEMENTS
The Corporation has entered into change-in-control agreements with each
of the Named Officers. Each agreement provides severance benefits to the Named
Officer if there is a change-in-control of the Corporation and the Named
Officer's employment with the Corporation is actually or constructively
terminated within twenty-four (24) months thereafter. A "change-in-control" of
the Corporation is generally defined as the acquisition by any person or group
of 20% or more of the outstanding Common Stock in a transaction which has not
been approved by a majority of the board of directors, a liquidation or
dissolution of the Corporation, a sale of substantially all of the assets of the
Corporation, or a merger, consolidation or combination in which the Corporation
is not the survivor or, under certain circumstances, a change in the majority of
the members of the board of directors within a two-year period. A Named
Officer's employment is deemed to have been constructively terminated following
a change-in-control if (i) there is a significant reduction in the scope of the
Named Officer's authority or in the extent of such Officer's powers, functions,
duties or responsibilities, or (ii) there is a reduction in the Named Officer's
rate of compensation, or (iii) fringe benefits are not provided to such Named
Officer on a basis commensurate with other executives of the Corporation, or
(iv) there are changes in the Named Officer's responsibilities which would
require moving such Officer's job location outside of lower Michigan.
Each Agreement continues until two years after a change-in-control of
the Corporation and generally provides severance benefits of a lump-sum payment
equal to two years salary and bonus plus medical, dental and life insurance
coverage for a period of eighteen months. Further, each Agreement provides for
additional payments to make the Named Officer whole, on an after-tax basis, for
any excise tax imposed by Section 4999 of the Internal Revenue Code. Any Named
Officer whose employment is terminated and who thereafter receives the benefits
provided under such change-in-control agreement may not, for a period of
twenty-four months following termination of employment, accept employment,
consult for or otherwise assist any other financial institution which conducts
business from a location within fifty (50) miles of any location of the
Corporation or its subsidiary banks.
17
<PAGE> 20
COMPENSATION AND HUMAN RESOURCES COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The compensation and human resources committee of the board of
directors of the Corporation consists of five directors who are not employed by
the Corporation and are not eligible to participate in any of the Corporation's
benefit plans other than the Stock Option Plan for Directors. The following
report is submitted by the Committee.
OVERVIEW AND PHILOSOPHY
The Committee, pursuant to authority delegated by the board of
directors of the Corporation, is responsible for determining and implementing
compensation and benefit systems for executive officers and other employees of
the Corporation. The Committee determines the annual salaries and other
compensation for executive officers based upon recommendations from the
Corporation's chairman, president and chief executive officer, as well as
information from the Corporation's human resources department and independent
outside consultants. With respect to the compensation of the Corporation's
chairman, president and chief executive officer, in addition to the utilization
of the Corporation's human resources department and independent outside
consultants, the members of the board of directors also provide input and
recommendations. The Committee's determinations relating to executive
compensation are intended to:
* align the financial interests of the executive officers
with the long-term interests of the Corporation's
shareholders;
* attract and retain high performing executive officers to
lead the Corporation to greater levels of profitability; and
* motivate executive officers to attain the Corporation's
performance goals by placing a significant portion of such
officers' financial reward at risk relative to achievement of
Corporate goals.
In furtherance of these objectives, the compensation package structured
for the Corporation's executive officers has three primary components: base
compensation (including salary, pension and welfare benefits and perquisites),
annual cash awards under the Management Incentive Plan ("MIP") for performance
during the year, and long term, stock-based compensation generally awarded under
the Corporation's Third Amended Stock Option Plan (the "Option Plan").
18
<PAGE> 21
BASE COMPENSATION
Given the Committee's continuing emphasis on performance-based
long-term and short-term compensation, base compensation for executive officers
has been established by the Committee at competitive levels based upon
information available to the Committee relating to compensation for
corresponding executive positions at similarly situated financial institutions.
Executive officer salaries are evaluated by the Committee on a periodic basis
utilizing information from independent outside compensation consultants, the
Corporation's human resources department, and input from the Corporation's
chairman, president and chief executive officer. Input from the members of the
Corporation's board of directors is utilized with respect to the salary of the
chairman, president and chief executive officer. To determine the actual base
salary for each executive officer, the Committee also takes into account
individual performance, experience, and unique contributions or needs for
certain expertise required by the Corporation.
Base Compensation of Chief Executive Officer.
The Committee reviewed Mr. Vitito's performance for 1998 in December of
that year and awarded him an 8.5% merit increase effective January 1, 1999. In
support of such increase, the Committee first noted that the Corporation had
achieved record earnings in 1998 while continuing to maintain strong credit
quality. Secondly, the Committee noted the successful implementation of the
Corporation's decision to outsource the data processing and computer operations
of the Corporation to M&I Data Services, a division of Marshall & Ilsley
Corporation ("M&I"). With respect to such accomplishment, the Committee noted
that all of the data processing and computer systems conversions were
accomplished in accordance with the timeline established with the board of
directors and that all of the various systems were effectively converted to the
M&I platform with an acceptable amount of disruption given the magnitude of such
undertaking. Also, with respect to Mr. Vitito's 1998 performance, the Committee
noted the significant undertaking of the Corporation to install a process, which
would set the stage to transform the Corporation into an exemplary sales
organization. Specifically, the Committee noted Mr. Vitito's participation and
oversight in implementing a major restructuring of all sales related activities
of the Corporation including identification of appropriate sales related
competencies, the conducting of sales training, the development of sales related
measurement and compensation systems as well as significant sales related
undertakings in the areas of marketing, communications, operations and financial
reporting.
In April 1999, Mr. Charles R. Weeks retired as chairman of the
Corporation and Mr. Vitito was appointed to such position, thereby increasing
his responsibilities. At that time, the Committee reviewed information provided
by the Corporation's independent outside compensation consultants noting that
Mr. Vitito's base salary was significantly below the median for similarly sized
and situated financial institutions. Based upon Mr. Vitito's increased
responsibilities and such compensation data, the Committee determined to
increase Mr. Vitito's base salary in April 1999 by an additional 21.98%.
MANAGEMENT INCENTIVE PLAN
All of the Corporation's executive officers participate in the MIP. The
MIP is designed to motivate participating officers of the Corporation and its
subsidiaries to attain goals based upon earnings of the Corporation and its
subsidiaries and the achievement of individual objectives. The amount of an
individual's MIP award is a function of (i) the midpoint of the salary range for
the individual's position, (ii) the "participation rate" established by the
Committee for the individual, (iii) the performance of the Corporation, and (iv)
the extent to which the individual achieved agreed-upon objectives for the year.
Each of these factors is described below.
19
<PAGE> 22
Midpoint of Salary Range and Participation Rate. As described under
"Base Compensation," the Committee determines a salary range for each executive
officer's position based upon competitive factors. Similarly, the Committee
assigns a "participation rate" to each position based on the same factors
ranging from 15% for lower level executive officers to 45% for the Chief
Executive Officer. The participation rate multiplied by the midpoint of the
individual's salary range is that individual's "Award Base" under the MIP, which
is subject to adjustment based on Corporate and individual performance as
described below.
Corporate Performance. As a general practice under the MIP, no amounts
will be awarded unless the Corporation's earnings per share ("EPS") for the year
equals or exceeds: (i) 95% of the EPS target approved by the Corporation's board
of directors for that year, and (ii) 100% of the previous year's EPS (the
greater of these amounts is referred to as the "Threshold"). Nonrecurring
expenses or income items affecting EPS are evaluated and may be excluded in the
discretion of the Committee from the profit plan EPS calculation to the extent
of management's inability to control such items. EPS below the profit plan
target, but higher than the Threshold, automatically reduce the Award Base while
EPS above the profit plan target automatically increase the Award Base. For
1999, the Corporation's EPS exceeded 1998 EPS but was somewhat below the 1999
profit plan.
Individual Objectives. Individual executive performance also affects
the amount of a participant's individual award. Annually, each executive officer
establishes objectives, subject to approval by the officer's supervisor.
Depending upon the extent to which these objectives are achieved during the
year, a participant will be eligible to receive from 0 to 150 percent of the
Award Base, adjusted for Corporate performance as described above.
Chief Executive Officer Award. Mr. Vitito did not receive an award
under the MIP in 1999. EPS for the Corporation was somewhat below the 1999
profit plan due to a significant fraud-related loss incurred by the Corporation.
Such loss had the effect of lowering the Award Base for participants in the MIP.
The Committee noted that the participants in the MIP had worked diligently
throughout 1999 and would have exceeded the 1999 Profit Plan but for the
fraud-related loss. In order to lessen the impact of the loss upon the other
participants and to make additional funds available for payouts, Mr. Vitito
requested that he be excluded from participation in the Plan for 1999. The
Committee accepted Mr. Vitito's recommendation.
LONG-TERM STOCK-BASED COMPENSATION
The Option Plan provides for a variety of different types of
compensation arrangements, such as stock options, restricted stock, and stock
appreciation rights, which increase in value as the value of the Common Stock
increases. The purpose of these and similar long-term compensation arrangements
is to more closely align the financial interests of executive officers and other
key employees with the long-term interests of the Corporation's shareholders by
linking a significant portion of their compensation directly to stock price
growth or decline.
In furtherance of such purpose, the Committee generally makes annual
grants to executive officers of stock options with an exercise price equal to
the fair market value of the Common Stock on the date of grant. Such options
vest and generally become exercisable as the Corporation's EPS increases in
accordance with a vesting schedule pertaining to such option grants. The
Committee has adopted option grant guidelines to reflect competitive practices
of other similarly situated financial institutions. These guidelines,
implemented by the Committee with the assistance of the Corporation's outside
compensation consultants, employ a modified Black-Scholes option valuation model
to estimate the
20
<PAGE> 23
present value of long-term incentive compensation for corresponding executive
positions at similarly situated and performing financial institutions. A similar
analysis is performed to determine the comparative value of an option to be
awarded under the Option Plan. Based upon this information and other information
concerning compensation practices within the financial services industry, an
appropriate participation rate for each of the executive officers in the Plan is
assigned. The option grant size for each executive officer is then determined by
dividing the product of the position's salary mid-point and participation rate
by the current market price of Common Stock, subject to being increased or
decreased by the Committee based upon its evaluation of the officer's individual
performance.
Chief Executive Officer Long Term Compensation. Mr. Vitito received an
option grant from the Committee in the amount of 80,000 shares during 1999 in
accordance with the formula described above.
Deductibility of Executive Compensation. Section 162(m) of the Internal
Revenue Code of 1986, as amended, restricts the deductibility of executive
compensation paid to the Corporation's Chief Executive Officer and any of the
four other most highly compensated executive officers at the end of any fiscal
year to not more than $1,000,000 in annual compensation (including gain from the
exercise of certain stock option grants). Certain performance-based compensation
is exempt from this limitation if it complies with the various conditions
described in Section 162(m). The Option Plan contains a restriction on the
number of options that may be granted which is intended to cause compensation
realized in connection with the exercise of options granted under the Option
Plan to comply with these conditions and be exempt from the Section 162(m)
restriction on deductibility.
The Committee does not believe that other components of the
Corporation's compensation program are likely to result in payments to any
executive officer in any year which would be subject to the restriction on
deductibility and has concluded that no further action with respect to
qualifying such compensation for deductibility is necessary at this time. The
Committee intends to continue to evaluate from time to time the advisability of
qualifying future executive compensation programs for exemption from the Section
162(m) restriction on deductibility.
HUGO E. BRAUN JR. VICTOR E. GEORGE
LAWRENCE O. ERICKSON JAMES E. TRUESDELL JR.
KENDALL B. WILLIAMS
21
<PAGE> 24
SHAREHOLDER RETURN
Set forth below is a graph which summarizes the cumulative return
experienced by the Corporation's shareholders over the past five years compared
with the S&P 500 Index, the Keefe, Bruyette & Woods, Inc. 50 Bank Index, and the
Keefe, Bruyette & Woods Midwestern Regional Sub-Index. This last index has been
included in this year's proxy statement to demonstrate the cumulative return
experience for shareholders of those banking corporations which operate in
geographic markets similar to those in which the Corporation operates. Such
presentation assumes that the value of the investment in the Corporation's
Common Stock and each index was $100 on December 31, 1994 and that all dividends
were reinvested.
Cumulative Total Returns
Five Years Ended December 31, 1999
[LINE GRAPH]
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C>
Citizens $100 $111 $121 $205 $205 $140
KBW 50 $100 $160 $227 $331 $359 $346
S&P 500 $100 $138 $169 $226 $290 $351
KBW Midwest $100 $152 $207 $308 $338 $261
</TABLE>
22
<PAGE> 25
COMPENSATION COMMITTEE INTERLOCKS AND
CERTAIN TRANSACTIONS AND RELATIONSHIPS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Hugo E. Braun Jr., Lawrence O. Erickson, Victor E. George,
James E. Truesdell Jr., and Kendall B. Williams served on the compensation and
human resources committee of the board of directors of the Corporation
throughout the last completed fiscal year. None of these individuals are or have
been employees of the Corporation.
Committee member Braun is a partner in the law firm of Braun Kendrick
Finkbeiner which rendered legal services during 1999 to the Corporation's
Michigan banking subsidiary, Citizens Bank. Citizens Bank plans to employ this
firm for additional services in 2000.
OTHER TRANSACTIONS WITH OFFICERS AND DIRECTORS
During 1999 the banking subsidiaries of the Corporation had, and expect
to have in the future, banking transactions, in the ordinary course of business,
with directors, officers and their associates. Except as set forth below, these
transactions were made on substantially the same terms, including interest rate
charges and collateral requirements, as comparable transactions made with
unrelated parties prevailing at the time of such transactions and did not
involve more than the normal risk of collectability or present other unfavorable
features.
In connection with its acquisition of F&M Bancorporation, Inc. ("F&M")
the Corporation assumed certain obligations of F&M relative to F&M's Officers'
Stock Purchase Plan (the "F&M Purchase Plan"). Pursuant to the F&M Purchase
Plan, covered executives were expected to own shares of F&M common stock in
recommended minimum amounts. To facilitate ownership, the F&M Purchase Plan
included provisions which permitted F&M to make loans for the purchase of shares
of F&M common stock. Such loans were secured by shares of F&M common stock with
a market value equal to at least 110% of the loan at the date of the loan and
for a term of either three or five years, as selected by the executive. Under
the F&M Purchase Plan, loans bear interest at the "Applicable Federal Rate" as
provided in the Internal Revenue Code. It is presently contemplated that the F&M
Purchase Plan will be terminated effective December 31, 2000. No new loans would
be made under the F&M Purchase Plan and no renewals of existing loans would be
made with a maturity date beyond December 31, 2000. All other existing loans
under the F&M Purchase Plan would be due in accordance with the scheduled
maturity date.
Under the F&M Purchase Plan, through December 31, 1999, loans totaling
in excess of $60,000 to persons who became directors or executive officers of
the Corporation were outstanding as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NAME HIGHEST BALANCE(1/) INTEREST RATE MATURITY
---- --------------- ------------- --------
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gail E. Janssen $369,627 5.58% 04/29/03
$ 95,000 5.79% 12/18/00
$ 51,000 5.49% 02/02/01
- ----------------------------------------------------------------------------------------------------------------------
John W. Johnson $ 75,000 5.98% 11/20/00
$ 18,000 4.81% 05/20/02
$ 11,595 5.57% 11/11/00
$ 11,595 5.45% 08/04/03
$ 10,545 5.03% 10/19/03
$ 17,575 4.74% 03/29/04
$ 35,564 5.32% 08/13/02
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1/)Also represents the year end balance.
23
<PAGE> 26
During 1999, the firm of Winegarden, Shedd, Haley, Lindholm &
Robertson, of which director William C. Shedd served as a partner, rendered
legal services to Citizens Bank. Citizens Bank expects to employ this firm for
additional services in 2000.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Corporation's
directors, executive officers, and any persons holding more than 10% of the
Common Stock (collectively, the "Reporting Persons") are required to report
their ownership of the Common Stock and any changes in that ownership to the
Commission and to the Nasdaq Stock Market ("Nasdaq"). Specific due dates for
these reports have been established and pursuant to applicable rules, the
Corporation is required to report in its proxy statement any failure to file by
these due dates. Based on corporate records and certifications received from the
Reporting Persons, all required reports of Reporting Persons have been timely
filed with the Commission and the Nasdaq. In making these statements, the
Corporation has relied on the written representations of its directors,
executive officers, and its principal shareholder, and on copies of the reports
that such persons have filed with the Commission.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
In 1999, Ernst & Young LLP performed audit and audit related services
for the Corporation and its subsidiaries which included examination of the
consolidated financial statements of the Corporation, and consultation with the
Corporation and its subsidiaries on accounting and reporting matters. Upon
recommendation of the audit committee, the board of directors has again selected
Ernst & Young LLP as independent auditors. Representatives of Ernst & Young LLP
will attend the annual meeting, will have an opportunity to make a statement,
and will be available to answer questions that may be asked by shareholders.
SHAREHOLDER PROPOSALS
Any proposal by a shareholder of the Corporation to be considered for
inclusion in the proxy statement for the 2001 annual meeting must be received by
Thomas W. Gallagher, the secretary of the Corporation, by the close of business
on November 15, 2000. In addition to applicable rules of the Commission for
inclusion of shareholder proposals in the Corporation's proxy statement, the
Corporation's bylaws provide that, in order for a shareholder proposal to be
properly brought before the annual meeting, written notice of such proposal must
be given by the shareholder to the secretary of the Corporation, either by
personal delivery or by United States mail, postage prepaid, not later than 90
days in advance of such meeting. If the annual meeting date has been advanced to
a date earlier than the last Thursday in January, then in order to be brought
properly before the annual meeting, notice of such proposal must be given within
10 days after the first public disclosure of the date of such meeting in
accordance with the procedures set forth in the Corporation's bylaws. The
Corporation also expects the persons named as proxies for the 2001 annual
meeting of shareholders to use their discretionary voting authority with respect
to any proposal presented at that meeting by a shareholder who does not provide
the Corporation with written notice of such proposal during the period provided
in the Corporation's bylaws.
24
<PAGE> 27
ANNUAL REPORTS
Appendix A to this proxy statement contains the information required to
be included in an annual report pursuant to the rules of the Commission,
including audited financial statements, management's discussion and analysis of
financial condition, and results of operations and five year selected financial
data. Upon request, the Corporation will provide without charge a copy of its
annual report on Form 10-K.
OTHER MATTERS
The board of directors is not aware of any other matters which may come
before the meeting. However, should any such matters properly come before the
meeting, it is the intention of the persons named in the accompanying proxy to
vote in accordance with their judgment on such matters.
CITIZENS BANKING CORPORATION
/S/ Thomas W. Gallagher
Thomas W. Gallagher
Senior Vice President, General
Counsel and Secretary
Flint, Michigan
March 15, 2000
25
<PAGE> 28
Appendix A
CITIZENS BANKING CORPORATION
ANNUAL REPORT INFORMATION
<PAGE> 29
TABLE OF CONTENTS
<TABLE>
<S> <C>
I. Financial Review including
Management's Discussion and Analysis......................................... 2
Mergers, Acquisitions and Other Initiatives............................... 2
Earnings Summary.......................................................... 3
Lines of Business Reporting............................................... 4
Net Interest Income....................................................... 4
Provision and Allowance for Loan Losses................................... 7
Noninterest Income and Expense............................................ 8
Financial Condition....................................................... 10
Liquidity and Debt Capacity, Interest Rate Risk
and Impact of Inflation................................................. 16
Other..................................................................... 19
Forward-Looking Statements................................................ 19
Year Ended December 31, 1998
Compared with 1997...................................................... 20
II. Consolidated Financial Statements.............................................. 22
Consolidated Balance Sheets............................................... 22
Consolidated Statements of Income......................................... 23
Consolidated Statements of Changes
in Shareholders' Equity................................................. 24
Consolidated Statements of Cash Flow...................................... 25
III. Notes to Consolidated Financial Statements..................................... 26
IV. Report of Independent Auditors................................................. 44
V. Report of Management........................................................... 46
</TABLE>
<PAGE> 30
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 1. SELECTED FINANCIAL DATA(1)
(in thousands, except per share data) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Net interest income $ 310,490 $ 293,044 $ 274,857 $ 250,313 $ 233,114
Provision for loan losses 24,675 16,528 20,511 15,725 9,918
Investment securities gains (losses) (3,052) 475 (572) 827 355
Noninterest income 84,196 70,793 58,969 57,376 51,091
Noninterest expense before special charge 236,778 218,219 208,921 201,460 193,207
Special charge:
Before-tax 40,198 --- 23,734 --- ---
After-tax 28,403 --- 17,263 --- ---
Income taxes 27,989 39,283 25,197 26,727 23,332
Net income 61,994 90,282 54,891 64,604 58,103
Net operating income (2) 97,154 90,282 72,154 64,604 58,103
Cash dividends (3) 30,035 22,991 19,286 17,890 16,131
PER COMMON SHARE DATA
Net income:
Basic $ 1.29 $ 1.86 $ 1.17 $ 1.41 $ 1.33
Diluted 1.28 1.84 1.15 1.40 1.31
Diluted - net operating income (2) 2.00 1.84 1.51 1.40 1.31
Cash dividends (3) 0.915 0.82 0.74 0.67 0.60
Book value, end of year 13.32 14.07 12.93 12.36 11.66
Market value, end of year 22.38 33.75 34.50 21.00 19.83
AT YEAR END
Assets $7,899,357 $ 6,930,533 $ 6,630,974 $ 6,173,515 $ 5,835,888
Loans 5,917,483 5,264,706 5,074,230 4,517,814 3,961,255
Deposits 6,128,998 5,772,792 5,514,313 5,176,033 4,900,233
Long-term debt 127,104 226,171 179,191 114,732 138,719
Shareholders' equity 633,669 680,501 610,775 565,264 529,787
AVERAGE FOR THE YEAR
Assets $7,342,167 $ 6,792,829 $ 6,439,737 $ 5,972,417 $ 5,558,425
Earning assets 6,875,643 6,367,284 6,033,874 5,550,463 5,138,033
Loans 5,528,963 5,159,584 4,843,507 4,258,404 3,774,001
Deposits 5,906,664 5,616,894 5,359,464 5,012,387 4,654,600
Interest-bearing deposits 5,002,135 4,787,143 4,602,093 4,284,919 3,964,099
Repurchase agreements and other short-term borrowing 478,920 202,639 259,040 227,415 191,050
Long-term debt 210,289 228,969 144,306 107,669 137,590
Shareholders' equity 672,227 655,034 597,242 546,463 500,160
FINANCIAL RATIOS
Return on average:(4)
Shareholders' equity 9.22% 13.78% 9.19% 11.82% 11.62%
Earning assets 1.41 1.42 1.20 1.16 1.13
Assets 0.84 1.33 0.85 1.08 1.05
Average shareholders' equity/avg. assets 9.16 9.64 9.27 9.15 9.00
Dividend payout ratio (3) 59.13 40.49 61.21 42.17 42.22
Net interest margin (FTE) 4.69 4.79 4.74 4.69 4.73
Tier I leverage 7.21 8.95 8.00 N/A N/A
Risk-based capital:
Tier I capital 9.23 11.01 10.50 N/A N/A
Total capital 10.48 12.26 11.76 N/A N/A
====================================================================================================================================
</TABLE>
(1) Except as indicated, all financial data have been restated for stock splits
and pooling of interests transactions. Results of operations for
acquisitions accounted for as purchases have been included effective with
the respective dates of acquisition.
(2) Net operating income is based on net income that excludes special charges,
restructuring and other one-time expenses incurred in the connection with
acquisitions and other corporate initiatives in 1999 and 1997, as discussed
herein.
(3) Cash dividends and cash dividends per share are for Citzens Banking
Corporation only, not restated for pooling of interests.
(4) Returns on average assets and shareholders' equity computed on net
operating income were 1.32% and 14.45%, respectively in 1999 and 1.12% and
12.08%, respectively in 1997.
Page 1
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following commentary presents Management's discussion and analysis of
Citizens' financial condition and results of operations. All financial data have
been restated to give effect to mergers accounted for on a pooling of interests
basis and stock splits in previous periods. The results of other acquisitions,
accounted for as purchases, have been included effective with the respective
dates of acquisition.
MERGERS, ACQUISITIONS AND OTHER INITIATIVES
On July 1, 1997, Citizens merged with CB Financial Corporation
headquartered in Jackson, Michigan. As part of the merger, Citizens issued 6.3
million shares of its common stock for all of the outstanding shares of CB
Financial Corporation. On November 1, 1999, Citizens merged with F&M
Bancorporation, Inc. ("F&M") headquartered in Kaukauna, Wisconsin. Citizens
issued 21.0 million shares of its common stock, based on a fixed exchange ratio
of 1.303, for all of the outstanding shares of F&M. These transactions were
accounted for as poolings of interests. All financial data presented have been
restated to reflect these combinations.
On October 8, 1999, Citizens completed the acquisition of seventeen
former Bank One offices located in the northern section of Michigan's Lower
Peninsula (the "Branch Purchase"). The transaction was accounted for as a
purchase; accordingly, the assets acquired and liabilities assumed were recorded
at estimated fair value. The Branch Purchase added approximately $88 million in
loans and $442 million in deposits. Citizens paid a premium of $36.1 million or
10.13% of certain core deposits. The acquired branches' results of operations
have been included in Citizens' consolidated totals from the date of acquisition
only.
In the third quarter of 1997, Citizens recorded a special charge of $23.7
million ($17.3 million after-tax) related to the July 1, 1997 merger with CB
Financial Corporation and the reorganization of Citizens' information technology
operations. The special charge consisted of $16.1 million of merger-related
expenses and $7.6 million related to the information technology reorganization.
Merger-related charges, restructuring 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 (the
"Special Charge"), $6.8 million as additional provision for loan losses and $3.6
million as securities losses. Approximately $13 million to $15 million of
additional merger-related and other costs are expected to be incurred during
2000 for system integration and conversions, branches closures and other items.
The Special Charge in 1999 consists of $36.3 million ($25.9 million
after-tax) in merger-related integration costs and $3.9 million ($2.5 million
after-tax) of restructuring and other costs related to separate corporate
initiatives. Merger integration costs include $7.1 million of personnel-related
expenses, $5.6 million of transaction costs, $13.6 million of contract
terminations and other conversion costs (primarily recognition of obligations
under existing contractual agreements related to system conversions), $1.5
million of asset-related write-downs, a $2.1 million write-down of impaired
goodwill at an F&M bank, a $2.5 million contribution to Citizens' Charitable
Trust for the acquired entities and $3.9 million of other transaction related
costs. The corporate initiatives included realignment of Citizens' branch
network, including closure of 18 branches in Michigan and Illinois and transfer
of Citizens' internal audit and corporate loan review functions to a third
party. See Note 3 to the Consolidated Financial Statements for additional
information regarding the 1999 Special Charge.
The $6.8 million in additional loan loss provision was provided to
conform F&M's allowance to that which results from applying Citizens' allowance
methodology and credit risk standards to F&M's loan portfolio. The $3.6 million
in securities losses resulted from the sale of $122.8 million of securities, in
the fourth quarter of 1999, to reposition the securities portfolios of the
combined entities to normalize Citizens' total investment exposure based on the
current rate environment and to reduce overall interest rate risk.
"Net operating income" and "operating" results, as used below, refers to
Citizens' financial performance before the impact of special charges,
restructuring and other one-time expenses incurred in connection with the
acquisitions and other corporate initiatives as described above. The following
table reconciles net operating income to net income as reported in the
Consolidated Financial Statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
(in thousands) 1999 1998 1997
- --------------------------------------------------------------
<S> <C> <C> <C>
NET OPERATING INCOME $ 97,154 $ 90,282 $ 72,154
-------- -------- --------
Special charge 40,198 --- 23,734
Additional loan loss
provision 6,800 --- ---
Securities loss to
reposition portfolio 3,596 --- ---
-------- -------- --------
Net pre-tax adjustments 50,594 --- 23,734
Tax benefit (15,434) --- (6,471)
-------- -------- --------
NET INCOME AS REPORTED $ 61,994 $ 90,282 $ 54,891
======== ======== ========
- --------------------------------------------------------------
</TABLE>
Page 2
<PAGE> 32
EARNINGS SUMMARY
Citizens Banking Corporation's ("Citizens") net operating income totaled
$97.2 million, or $2.00 per diluted share, compared with $90.3 million or $1.84
per diluted share in 1998. Reported net income for 1999, was $62.0 million, or
$1.28 per diluted share. Operating returns on average assets and equity were
1.32% and 14.45%, respectively, in 1999, as compared with 1.33% and 13.78% in
1998.
The improvement in operating income reflects increased noninterest income
and higher net interest income from growth in earning assets. Average
shareholders' equity was $672.2 million or 9.16% of total average assets for
1999, compared with $655.0 million or 9.64% for 1998. Citizens' risk-based
capital levels exceeded all regulatory requirements. An analysis of changes in
major income statement components in 1999 and 1998 is presented below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, Changes in 1999
----------------------------------------------------------------
(in thousands) 1999 1998 Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 542,407 $522,317 $ 20,090 3.8 %
Interest expense 231,917 229,273 2,644 1.2
Net interest income 310,490 293,044 17,446 6.0
Provision for loan losses 24,675 16,528 8,147 49.3
Noninterest income 81,144 71,268 9,876 13.9
Noninterest expense before special charge 236,778 218,219 18,559 8.5
Special charge
Before tax 40,198 --- 40,198 ---
After-tax 28,403 --- 28,403 ---
Income taxes 27,989 39,283 (11,294) (28.8)
Net income 61,994 90,282 (28,288) (31.3)
Net operating income 97,154 90,282 6,872 7.6
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net interest income increased 6.0% in 1999 over 1998. Higher levels of
earning assets, particularly commercial and commercial real estate loans
resulted in higher net interest income. The increase in noninterest income,
excluding net non-recurring items of $3.4 million ($2.2 million after-tax) in
1999, reflects higher trust, brokerage and deposit account revenues.
Nonrecurring items in 1999 consist of a gain of $1.3 million from the sale of
branch deposits in Homer, Michigan, a gain of $5.7 million from the sale of an
equity investment in Magic Line, Inc. due to its June 30, 1999 merger with NYCE
Corporation and a $3.6 million loss to reposition the securities portfolio
following the merger with F&M. Noninterest expense in 1999 included a pre-tax
charge of $6.1 million ($3.9 million after-tax) resulting from a fraudulent
check-kiting scheme perpetrated by a customer against Citizens in the third
quarter of 1999 and reflects increases primarily in data processing fees,
intangible asset amortization, bankcard fees, consulting and other professional
services. Additional data on Citizens' performance during the past five years
appear in Table 1.
The following table presents operating "cash earnings" for Citizens' most
recent two years. "Cash earnings" add back the amortization of intangible assets
arising from acquisitions that were accounted for as purchases and assumes that
all intangibles were charged off against retained earnings at the original date
of acquisition. All financial information presented reflects favorable earnings
improvement when adjusted for the intangibles.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
CASH EARNINGS SUMMARY
(in thousands except per share
amounts) 1999 1998 % Change
- ---------------------------------------------------------------
<S> <C> <C> <C>
Operating cash income $102,771 $ 95,403 7.7%
Diluted earnings per share 2.11 1.94 8.8
Book value per share 11.35 12.71 (10.7)
Return on average assets 1.41% 1.41% ---
Return on average equity 17.09 16.05 6.5
- ---------------------------------------------------------------
</TABLE>
Page 3
<PAGE> 33
LINES OF BUSINESS REPORTING
Citizens operates along four major business lines: commercial banking,
retail banking, financial services and F&M, the pooled subsidiary. A description
of each business, selected financial performance and the methodologies used to
measure financial performance are presented in Note 17 to the Consolidated
Financial Statements. Prior year amounts have been restated to reflect the
current business unit structure and cost allocation methodology. The following
table summarizes net operating income by line of business for each of the last
three years:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Net Operating Income
---------------------------------
- -----------------------------------------------------------
(in thousands) 1999 1998 1997
- -----------------------------------------------------------
<S> <C> <C> <C>
Commercial Banking $ 26,292 $ 23,016 $ 21,019
Retail Banking 22,205 26,536 23,592
Financial Services 4,794 3,161 1,366
F&M 37,950 33,497 23,383
Other 5,913 4,072 2,794
-------- -------- --------
Total $ 97,154 $ 90,282 $ 72,154
======== ======== ========
- -----------------------------------------------------------
</TABLE>
The increase in commercial banking operating income in 1999 is due to
growth in overall commercial account relationships, including increased demand
deposits, strong loan growth and expanded cash management services. Retail
banking operating income decreased in 1999 as a result of lower yields on the
mortgage and consumer loan portfolios, higher net charge-offs on direct and
indirect consumer loans, decreased profit on sale of mortgage loans and related
servicing release premiums and higher operating costs. Financial services
operating income improved in 1999 due to growth in trust, brokerage and
investment advisory services, introduction of new products and services,
successful retail sales efforts, strong equity markets and enhanced pricing
strategy. Growth in operating income from F&M reflects strong loan and deposit
growth and increased noninterest income in its core markets.
NET INTEREST INCOME
The primary source of Citizens' traditional banking revenue is net interest
income. Net interest income is the difference between interest income on earning
assets, such as loans and securities, and interest expense on liabilities,
including interest-bearing deposits and borrowings, used to fund those assets.
Net interest income is affected by market interest rates on both earning assets
and interest-bearing liabilities, the level of earning assets being funded by
interest-bearing liabilities, noninterest-bearing liabilities and equity and the
volume and composition of earning assets and funding sources. Other factors,
such as Federal Reserve Board monetary policy and changes in tax laws, may also
have an impact on changes in net interest income from one period to another.
Net interest income, on a fully-tax equivalent basis, increased $18.2
million, or 6.0%, to $322.7 million in 1999, from $304.5 million in 1998. A
higher level of earning assets, partially offset by an increase in short-term
borrowing balances and a lower net interest margin, led to the increase in 1999.
A detailed analysis of net interest income, with average balances and related
interest rates for the past three years, appears in Table 3. An analysis of how
changes in volume and rates have affected net interest income for the years
ended December 31, 1999 and 1998 is presented in Table 2. Interest income
increased in 1999 as higher earning asset volumes outpaced the decline in
earning asset yields. Average earning assets grew to $6.876 billion in 1999 from
$6.367 billion in 1998, an increase of 8.0%. Loan production, principally
commercial and commercial real estate loans, and purchases of Federal agency
securities contributed to the growth in earning assets. Average loans, the
highest yielding category of earning assets, decreased to 80.4% of average
earning assets, compared with 81.0% in 1998. Investment securities, including
money market investments, comprised 19.6% of earning assets in 1999, up from
19.0% in 1998. The average yield on earning assets declined to 8.06% in 1999
from 8.39% in 1998 reflecting a lower interest rate environment in the first
half of 1999 and growth in relatively lower-yielding investment securities in
the second half of 1999.
Increased interest expense was volume related as higher interest-bearing
liability balances were only partially offset by lower rates paid on funding
sources. Average deposits grew to $5.907 billion in 1999, from $5.617 billion in
1998, an increase of 5.2%. Average short- and long-term borrowings comprised
12.1% of interest bearing liabilities in 1999, up from 8.3% in 1998. Although
Citizens has been successful in attracting new deposits, loan growth outpaced
deposit growth and Citizens used short-term FHLB advances and other purchased
funds to support the higher level of earning assets. The average rate paid on
interest-bearing deposits was 3.33%, down from 3.68% in 1998. The average rate
on long-term debt was 5.40% in 1999, down from 5.62% in 1998. Lower rates on
interest-bearing deposits and long-term debt decreased the cost of
interest-bearing funding sources to 4.07% in 1999 from 4.39% in 1998.
Net interest margin, the percentage of net interest income to average
earning assets, was 4.69% in 1999 and 4.79% in 1998. The decrease in net
interest margin reflects a change in funding mix and the cost of funding
Citizens' share repurchase program. The change in funding mix reflects, in part,
a planned strategy to leverage deposits from the Branch Purchase. Prior to the
acquisition of these deposits, Citizens' utilized short-term Federal Home Loan
Bank ("FHLB") advances to fund purchases of Federal agency securities and
support loan growth. Approximately $300 million of these advances matured in
October 1999 and were replaced with the new, lower rate core deposits as the
primary funding source for earning assets. Additional short-term FHLB advances
borrowed in late 1999 were used to support continued loan growth in Citizens'
core markets.
Page 4
<PAGE> 34
During 1999, Citizens' repurchased 1.8 million shares for an aggregate
cost of $53.8 million. The repurchase program enhanced shareholder returns but
resulted in incremental funding costs and reduced the net interest margin by an
estimated three basis points. Recent increases in short-term interest rates by
the Federal Reserve have also pressured Citizens' net interest margin. A planned
shift in 2000 toward higher-yielding loans and away from lower-yielding
investment securities is expected to help mitigate this trend.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
TABLE 2. ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
1999 COMPARED TO 1998 1998 Compared to 1997
----------------------------- ------------------------------------
INCREASE (DECREASE) Increase (Decrease)
Year Ended December 31 NET DUE TO CHANGE IN Net Due to Change in
--------------------- ------------------------
(in millions) CHANGE(1) RATE VOLUME(2) Change(1) Rate Volume(2)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Money market investments:
Federal funds sold $ (2.5) $ --- $ (2.5) $ 2.4 $ (0.2) $ 2.6
Other (0.2) (0.2) --- --- --- ---
Investment securities:
Taxable 9.7 (1.5) 11.2 (2.6) (0.1) (2.5)
Tax-exempt 0.2 (0.8) 1.0 (0.3) (0.5) 0.2
Loans 12.9 (15.9) 28.8 24.0 (5.0) 29.0
------ ------ ------ ------ ------ ------
Total 20.1 (18.4) 38.5 23.5 (5.8) 29.3
------ ------ ------ ------ ------ ------
INTEREST EXPENSE:
Deposits:
Demand (0.1) (0.5) 0.4 0.1 0.1 ---
Savings (0.9) (5.9) 5.0 1.3 (3.5) 4.8
Time (8.7) (11.2) 2.5 3.8 (1.2) 5.0
Short-term borrowings 13.9 0.2 13.7 (3.4) (1.1) (2.3)
Long-term debt (1.6) (0.1) (1.5) 3.6 (0.9) 4.5
------ ------ ------ ------ ------ ------
Total 2.6 (17.5) 20.1 5.4 (6.6) 12.0
------ ------ ------ ------ ------ ------
NET INTEREST INCOME $ 17.5 $ (0.9) $ 18.4 $ 18.1 $ 0.8 $ 17.3
====== ====== ====== ====== ====== ======
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Changes are based on actual interest income and do not reflect taxable
equivalent adjustments.
(2)Rate/Volume variances are allocated to changes due to volume.
Page 5
<PAGE> 35
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 3. AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
1999 1998 1997
------------------------------- ----------------------------- ----------------------------
Year Ended December 31 Average Average Average Average Average Average
(in millions) Balance Interest(1) Rate(2) Balance Interest(1) (Rate(2) Balance Interest(1) Rate(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Money market investments:
Federal funds sold $ 45.6 $ 2.4 5.22 % $ 94.1 $ 4.9 5.21 % $ 43.1 $ 2.5 5.76 %
Other 15.8 0.7 4.58 15.5 0.9 5.70 15.5 0.9 5.49
Investment securities (3):
Taxable 961.5 59.1 6.14 779.5 49.4 6.34 823.4 52.0 6.32
Nontaxable 328.3 17.2 8.06 312.3 16.9 8.35 311.1 17.2 8.53
Loans (4):
Commercial 2,525.1 212.1 8.51 2,155.3 187.9 8.83 1,918.0 171.6 9.04
Real estate mortgage 1,601.9 123.4 7.71 1,589.7 129.9 8.17 1,489.0 121.6 8.16
Consumer 1,401.9 127.5 9.10 1,414.6 132.4 9.36 1,432.5 133.0 9.29
--------- ------- --------- ------ --------- -------
Total earning assets (3) 6,880.1 542.4 8.06 6,361.0 522.3 8.39 6,032.6 498.8 8.45
NONEARNING ASSETS
Cash and due from banks 231.3 214.4 195.0
Premises and equipment 135.1 120.5 114.4
Other assets 167.1 166.9 161.4
Allowance for loan losses (71.4) (70.0) (63.7)
--------- --------- ---------
Total assets $ 7,342.2 $ 6,792.8 $ 6,439.7
========= ========= =========
INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing demand $ 578.5 9.0 1.55 $ 547.4 $ 9.1 1.67 $ 535.1 $ 9.0 1.69
Savings 1,751.6 49.5 2.83 1,635.1 50.4 3.08 1,551.0 49.1 3.17
Time 2,672.0 138.4 5.18 2,604.6 147.1 5.65 2,515.9 143.3 5.69
Short-term borrowings 478.9 23.7 4.95 202.6 9.8 4.84 259.1 13.2 5.10
Long-term debt 210.3 11.3 5.40 229.0 12.9 5.62 144.3 9.3 6.38
--------- ------- --------- ------ --------- -------
Total interest-bearing
liabilities 5,691.3 231.9 4.07 5,218.7 229.3 4.39 5,005.4 223.9 4.47
NONINTEREST-BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 904.6 829.8 757.4
Other liabilities 74.1 89.3 79.7
Shareholders' equity 672.2 655.0 597.2
Total liabilities and --------- --------- ---------
shareholders' equity $ 7,342.2 $ 6,792.8 $ 6,439.7
========= ========= =========
NET INTEREST INCOME $310.5 $293.0 $274.9
====== ====== ======
NET INTEREST INCOME AS A
PERCENT OF EARNING ASSETS 4.69 % 4.79 % 4.74 %
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Interest income is shown on an unadjusted basis and therefore does not
include taxable equivalent adjustments.
(2) Average rates include taxable equivalent adjustments to interest income of
$12,204,000, $11,508,000 and $11,154,000 for the years ended December 31,
1999, 1998, and 1997, respectively, based on a 35% tax rate.
(3) For presentation in this table, average balances and the corresponding
average rates for investment securities are based upon historical cost,
adjusted for amortization of premiums and accretion of discounts.
(4) Nonaccrual loans are included in average balances.
Page 6
<PAGE> 36
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 $24.7 million in 1999. Without the additional provision attributable
to applying Citizens' allowance methodology and credit risk standards to F&M's
portfolio, the provision was $17.9 million in 1999, up 8.5% from $16.5 million a
year ago. Net charge-offs were 0.37% of average loans in 1999, up from 0.30% in
1998 reflecting increases in the commercial and consumer loan portfolios in
1999. The increases in these portfolios were largely due to charge-offs of $4.9
million recorded in F&M's loan portfolio after the merger. Additionally, during
the year, losses in the direct and indirect consumer loan portfolio were higher
than in the recent past. A summary of Citizens' loan loss experience from 1995
through 1999 appears in Table 4.
Citizens' maintains what management believes is an adequate allowance for
possible loan losses to meet presently known credit risks in the loan portfolio.
The allowance for loan losses at December 31, 1999 was $76.4 million, or 1.29%
of loans, compared with $69.7 million, or 1.32% of loans at the end of 1998. The
allowance equaled 245.8% of nonperforming loans at year-end 1999, compared with
184.8% at year-end 1998.
The allowance for loan losses is based upon an assessment of the losses
inherent in the loan portfolio. Management provides for possible loan losses by
dividing the allowance into two components: allocated and unallocated. Consumer
loans are charged-off based on delinquency status within industry guidelines and
commercial loans are evaluated individually.
The allocated component of the allowance is based on expected losses from
analysis of specific loans and historical loss experience for each category of
loans. The analysis of individual loans is based on a regular review of all
loans and commitments over a fixed dollar amount. The historical loan losses are
determined by loss experience over the past three years and a reserve formula
allocation method, which uses factors such as loan quality ratings, independent
assessment and charge-off history. This analysis is performed throughout the
year and is updated based on actual experience and loan reviews.
The unallocated portion of the allowance is determined based on the
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 yet be reflected in historical
loss factors used to determine the allocated portion of the allowance. An
allocation of the ending allowance for loan losses by major loan type is
presented in Table 5.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
TABLE 4. SUMMARY OF LOAN LOSS EXPERIENCE
Year Ended December 31 (in thousands) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses - January 1 $ 69,740 $ 67,010 $ 59,029 $ 53,431 $ 41,719
Allowance of acquired banks and branches 2,400 1,745 1,329 587 7,235
Provision for loan losses 24,675 16,528 20,511 15,725 9,918
CHARGE-OFFS:
Commercial 8,675 4,557 4,555 6,222 4,874
Real estate 436 359 861 114 167
Consumer 17,751 14,879 13,064 9,045 5,426
----------- ---------- ----------- ----------- ----------
Total charge-offs 26,862 19,795 18,480 15,381 10,467
----------- ---------- ----------- ----------- ----------
RECOVERIES:
Commercial 2,483 1,387 1,581 1,485 1,937
Real estate 149 28 12 33 75
Consumer 3,812 2,837 3,028 3,149 3,014
----------- ---------- ----------- ----------- -----------
Total recoveries 6,444 4,252 4,621 4,667 5,026
----------- ---------- ----------- ----------- -----------
Net charge-offs 20,418 15,543 13,859 10,714 5,441
----------- ---------- ----------- ----------- -----------
Allowance for loan losses - December 31 $ 76,397 $ 69,740 $ 67,010 $ 59,029 $ 53,431
=========== ========== =========== =========== ===========
Loans outstanding at year-end $ 5,917,483 $5,264,706 $ 5,074,230 $ 4,517,814 $ 3,961,255
Average loans outstanding 5,528,963 5,159,584 4,843,507 4,258,404 3,774,001
Ratio of allowance for loan losses
to loans outstanding at year-end 1.29% 1.32% 1.32% 1.31% 1.35%
Ratio of net loans charged off as a
percentage of average loans outstanding 0.37 0.30 0.29 0.25 0.14
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 7
<PAGE> 37
Citizens' loan portfolio has no significant concentrations in any one
industry or any exposure in foreign loans. Citizens has generally not extended
credit to finance highly leveraged transactions nor does it intend to do so in
the future. Employment levels and other economic conditions in Citizens' local
markets may have a significant impact on the level of credit losses. Management
continues to identify and devote attention to credits that may not be performing
as well as expected. Nonperforming loans are further discussed in the section
titled "Nonperforming Assets".
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
TABLE 5. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES(1)
1999 1998 1997 1996 1995
------------------ ----------------- ----------------- ------------------ ------------------
LOAN LOAN Loan Loan Loan
December 31 (in millions) AMOUNT PERCENT(2) Amount Percent(2) Amount Percent(2) Amount Percent(2) Amount Percent(2)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 22.0 48.6 % $19.2 45.8 % $16.7 40.7 % $17.2 40.3 % $17.2 41.3 %
Real estate construction --- 3.2 0.3 2.8 0.2 2.2 0.3 2.5 0.2 2.0
Real estate mortgage 6.1 24.3 8.2 26.9 7.9 28.4 5.6 28.6 4.6 26.5
Consumer 23.5 23.9 21.4 24.5 18.0 28.7 17.4 28.6 15.7 30.2
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Total allocated 51.6 100.0 % 49.1 100.0 % 42.8 100.0 % 40.5 100.0 % 37.7 100.0 %
===== ===== ===== ===== =====
Unallocated 24.8 20.6 24.2 18.5 15.7
------ ----- ----- ----- -----
Total $ 76.4 $69.7 $67.0 $59.0 $53.4
====== ===== ===== ===== =====
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)The allocation of the allowance for loan losses in the above table is based
upon ranges of estimates and are not intended to imply either limitations on
the usage of the allowance or precision of the specific amounts. Citizens
and its subsidiaries do not view the allowance for loan losses as being
divisible among the various categories of loans. The entire allowance is
available to absorb any future losses without regard to the category or
categories in which the charged-off loans are classified.
(2)Percentage reflects the ratio of outstanding loans by category to total
outstanding loans at the end of the respective year.
NONINTEREST INCOME
Noninterest income, before nonrecurring income and securities gains and
losses, increased to $77.2 million in 1999 from $70.2 million in 1998, an
improvement of 10.0%. On this same basis, noninterest income accounted for 19.9%
of total operating revenue in 1999, compared with 19.3% in 1998. Increases in
most categories below reflect Citizens' continued emphasis on a relationship
sales strategy, "Clients First!sm", and client access to new financial products,
services and distribution channels due, in part, to our investments in
technology that support and enhance client service.
Trust fees increased 10.6% or $2.1 million in 1999 over 1998. Successful
sales efforts resulted in new business volume, which along with equity market
appreciation, new mutual fund administrative fees on commercial deposit sweep
accounts and full year effect of a new uniform fee structure led to the revenue
growth. At December 31, 1999, Citizens had total assets under administration of
$3.843 billion, a $114 million increase over year-end 1998. Brokerage and
investment fees were up $1.6 million or 61.6%, propelled by successful retail
sales efforts, strength in the equity markets and solid growth in new mutual
fund and annuity products. Improvements in service charges on deposit accounts,
bankcard fees, ATM network user fees and cash management service fees reflect
higher transaction volume and enhanced marketing strategies. Title insurance
fees and mortgage and other loan income decreased in 1999 as higher interest
rates in the latter half of 1999 reduced closing volume and refinance activity,
which in turn resulted in fewer gains on sale of residential mortgage loans and
the related servicing. Partially offsetting this decrease were increases in
letter of credit commissions and commercial line of credit fees.
Citizens "Clients First!sm" relationship sales strategy, initiated in
1998, was a significant factor in the creation of new business volumes mentioned
above. During the year, Citizens' employees continued to participate in
comprehensive training programs designed to improve product knowledge, sales and
sales-management skills. Citizens' has also continued to explore the way we use
technology to reach new clients and expand their financial choices. In 1999,
Citizens expanded its network of ATMs and introduced its Internet banking
solution, Clients First On-LineSM, which allows clients to access information,
pay bills, open accounts, and conduct other banking business when and where it's
most convenient. With these initiatives, as well as the yet untapped
opportunities provided by our merger with F&M and the Branch Purchase in 1999,
Citizens believes it is well positioned to achieve additional growth in
noninterest income in the future.
Page 8
<PAGE> 38
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
NONINTEREST INCOME
Year Ended
December 31, Changes in 1999
-------------------------------------------------
(in thousands) 1999 1998 Amount Percent
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust fees $ 21,701 $ 19,627 $ 2,074 10.6%
Service charges
on deposit accounts 21,378 18,803 2,575 13.7
Bankcard fees 9,163 7,899 1,264 16.0
Brokerage and
investment fees 4,325 2,677 1,648 61.6
Mortgage and
other loan income 5,230 6,668 (1,438) (21.6)
ATM network user fees 3,310 3,077 233 7.6
Cash management services 2,556 2,405 151 6.3
Title insurance fees 987 1,137 (150) (13.2)
Other 8,505 7,870 635 8.1
-------- -------- -------
TOTAL FEES AND
OTHER INCOME 77,155 70,163 6,992 10.0
Securities gains 544 475 69 14.5
-------- -------- -------
TOTAL BEFORE
NONRECURRING ITEMS 77,699 70,638 7,061 10.0
Student loan portfolio gain -- 630 (630) (100.0)
Securities loss on repo-
sitioning the portfolio (3,596) -- (3,596) (1)
Equity investment gain 5,693 -- 5,693 (1)
Premium on sale of deposits 1,348 -- 1,348 (1)
-------- -------- --------
TOTAL NONINTEREST INCOME $ 81,144 $ 71,268 $ 9,876 13.9
======== ======== ========
- ------------------------------------------------------------------------------
</TABLE>
(1) Not meaningful.
Nonrecurring items in 1999 consisted of a premium of $1.3 million received from
the sale of deposits of a branch office in March 1999, a gain of $5.7 million
from the sale of Citizens' equity investment in Magic Line, Inc. to NYCE
Corporation due to their merger in June 1999 and a one-time securities loss
described below. The year 1998 included a nonrecurring gain of $0.6 million from
the sale of a student loan portfolio in third quarter of 1998.
Citizens realized a net loss of $3.1 million on sales of investment
securities during 1999 as compared to a net gain of $475,000 during 1998. As
presented in Note 4 to the Consolidated Financial Statements, gross realized
gains on sales of investment securities amounted to $561,000 in 1999 while gross
realized losses amounted to $3.613 million. The comparable amounts in 1998 were
$504,000 and $29,000. During the fourth quarter of 1999, Citizens repositioned
the securities portfolios of the combined entities to normalize its total
investment exposure based on the current rate environment and to reduce overall
interest rate risk. As a result, Citizens realized a securities loss of $3.6
million during the period.
NONINTEREST EXPENSE
Excluding nonrecurring expenses, noninterest expense increased $12.5
million, or 5.7%, to $230.7 million from $218.2 million in 1998. As shown below,
primarily higher data processing fees, intangible asset amortization, bankcard
fees, and consulting and other professional services fueled this increase.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
NONINTEREST EXPENSE
Year Ended
December 31, Changes in 1999
---------------------------------------------------
(in thousands) 1999 1998 Amount Percent
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and
employee benefits $ 122,572 $ 115,088 $ 7,484 6.5%
Equipment 16,645 17,088 (443) (2.6)
Occupancy 15,414 15,074 340 2.3
Data processing
services 9,924 7,943 1,981 24.9
Intangible asset
amortization 8,363 7,631 732 9.6
Bankcard fees 7,477 5,894 1,583 26.9
Telephone 5,601 5,168 433 8.4
Postage and delivery 5,985 5,925 60 1.0
Stationery and supplies 5,674 5,609 65 1.2
Advertising and
public relations 5,223 5,842 (619) (10.6)
Consulting and other
professional fees 4,082 2,813 1,269 45.1
Legal, audit and
examination fees 3,248 3,530 (282) (8.0)
Other 20,475 20,614 (139) (0.7)
--------- --------- --------
SUBTOTAL 230,683 218,219 12,464 5.7
Fraud loss, net 6,095 --- 6,095 (1)
Special Charge 40,198 --- 40,198 (1)
--------- --------- --------
TOTAL NONINTEREST
EXPENSE $ 276,976 $ 218,219 $ 58,757 26.9
========= ========= ========
- --------------------------------------------------------------------------
</TABLE>
(1) Not meaningful.
Salaries and employee benefits were up $7.5 million or 6.5% as a result of
acquisitions, higher healthcare costs, new sales support staff and increased
incentive commissions related to additional sales activity and Citizens
continued rollout of pay for performance sales initiatives. Partially offsetting
these increases were lower staffing levels from the synergies of the information
technology partnership with M&I Data Services and lower pension costs.
Page 9
<PAGE> 39
Data processing expenses increased 24.9% in 1999 reflecting a full-year
of processing with M&I Data Services following system conversions in May 1998,
higher processing volumes and new services and costs associated with information
technology and Year 2000 initiatives. Synergies achieved through Citizens'
information technology partnership with M&I Data Services led to reductions in
equipment and supplies and mitigated increases in occupancy and staffing costs.
Bankcard fees were up due to higher transaction volume and system processing
costs, and new fees associated with the recent outsourcing of bankcard
operations. The additional intangible asset amortization was attributable to the
Branch Purchase. Consulting services were up due to future revenue enhancing
programs and other strategic actions.
In the fourth quarter of 1999, Citizens management approved a series of
initiatives designed to achieve future cost efficiencies. They include plans to
combine and integrate operations of the merged entities and institute other
efficiency measures, including consolidation of all F&M Wisconsin bank charters
into one Wisconsin bank charter, conversion of data processing systems to a
common operating platform, elimination and consolidation of various back room
operations and business activities, consolidation of Citizens' branch network
including closure of approximately eighteen Citizens Bank branches in Michigan
and Illinois and fifteen F&M branches in Wisconsin and Iowa and transfer of
Citizens' internal audit and corporate loan review functions to a third party.
Moreover, in December 1999, Citizens contributed $2.5 million to its Charitable
Trust for the newly acquired entities and wrote-down $2.1 million of goodwill at
F&M and $0.3 million of core deposit premium from a previous acquisition. In
connection with these initiatives, Citizens expects a net reduction of
approximately 200 positions or 6.2% of its work force. Consolidation of F&M's
bank charters was completed in January 2000. The movement to a common operating
platform is complete for the Branch Purchase and is expected to continue
throughout 2000 for the F&M merger.
As a result of the above-mentioned initiatives and actions, Citizens
recorded a $40.2 million ($28.4 million net of taxes, or $0.58 per share)
Special Charge. It is anticipated that the exit activities and the closure of
banking offices will be completed by the end of year 2000. Approximately $13
million to $15 million of additional merger-related and other costs are expected
to be incurred during 2000 for system conversions, branches closures and other
items. See Note 3 to the Consolidated Financial Statements for additional
information regarding the 1999 Special Charge.
Nonrecurring expense included the 1999 Special Charge and a $6.1 million
($3.9 million, after-tax) loss resulting from a fraudulent check-kiting scheme
perpetrated by a customer against Citizens in the third quarter of 1999. In
response to the third quarter fraud loss, Citizens took immediate action to
review and strengthen its procedures in an effort to prevent future occurrences.
FEDERAL INCOME TAXES
Income tax expense was $28.0 million in 1999, a decrease of 28.8% over
the 1998 total of $39.3 million. The decrease resulted from lower pre-tax
earnings associated with the Special Charge and other one-time costs and a
higher level of tax-exempt interest income in 1999 as compared with 1998.
FINANCIAL CONDITION
Proper management of the volume and composition of Citizens' earning
assets and funding sources is essential for ensuring strong and consistent
earnings performance, maintaining adequate liquidity and limiting exposure to
risks caused by changing market conditions. Citizens' investment securities
portfolio is structured to provide a source of liquidity through maturities and
generate an income stream with relatively low levels of principal risk. Loans
comprise the largest component of earning assets and are Citizens' highest
yielding assets. Client deposits are the primary source of funding for earning
assets while short-term debt and other managed sources of funds are utilized as
market conditions and liquidity needs change.
Average total assets for 1999 were $7.342 billion, an increase of $549
million or 8.1% from 1998. Average earning assets as a percent of average total
assets was 93.6% for 1999, down slightly from 93.7% in 1998. Average loans
comprised 75.3% of average assets during 1999, down from 76.0% in 1998.
Interest-bearing deposits comprised 87.9% of average interest-bearing
liabilities for 1999, decreasing from 91.7% in 1998. The ratio of average
noninterest-bearing deposits to average deposits increased to 15.3% in 1999,
from 14.8% in 1998.
INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
Average investment securities, including money market investments,
comprised 19.6% of total average earning assets in 1999, up from 19.0% in 1998.
The increase primarily reflects 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. A summary
of investment securities available for sale and held to maturity at December 31,
1999 and 1998 follows:
Page 10
<PAGE> 40
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE AND HELD TO MATURITY SECURITIES
Balances(1) Changes in 1999
---------------------------------- ---------------------------------
Year Ended December 31 (in thousands) 1999 1998 Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 34,487 $ 56,026 $ (21,539) (38.4)%
Federal agencies
Mortgage-backed securities 643,219 497,474 145,745 29.3
Other agencies 242,729 146,950 95,779 65.2
State and municipal:
Taxable 12,359 12,693 (334) (2.6)
Tax-exempt 356,373 311,883 44,490 14.3
Other 83,019 98,460 (15,441) (15.7)
----------- ---------- ---------
Total $ 1,372,186 $ 1,123,486 $ 248,700 22.1
=========== =========== =========
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) All securities were designated available for sale at December 31, 1999.
Balances at December 31, 1998 included $160,132 of tax-exempt state and
municipal securities held to maturity.
Investment in U.S. Treasury and Federal agency securities totaled $920.4
million, or 67.1% of total investment securities at December 31, 1999, compared
with $700.5, or 62.3% at year-end 1998. The portfolio has continued to shift
toward investments in mortgage-backed and other Federal agency securities.
Citizens' mortgage-backed securities are predominantly underwritten to the
standards of and guaranteed by government sponsored agencies. These securities
generally yield 70-100 basis points more than comparable U.S. Treasury
securities but differ from traditional debt securities in that they have
uncertain maturity dates and are priced based on estimated prepayment rates on
the underlying mortgages. Prepayment rates generally can be expected to increase
during periods of lower interest rates as some of the underlying mortgages are
refinanced at lower rates. Conversely, the average lives of these securities
generally are extended as interest rates increase. Mortgage-backed securities
represented 48.9% and 47.1% of total investment securities at December 31, 1999
and 1998, respectively. Additional state and municipal securities were also
purchased in 1999 due to their higher tax equivalent yields, but they decreased
as a percent of total investment securities. At December 31, 1999, state and
municipal securities represented 26.9% of total investment securities, compared
with 28.9% in the prior year. Purchases of these securities remain dependent on
Citizens' capacity to effectively utilize tax-exempt income and the availability
of such securities at attractive yields with acceptable risk. Other securities,
consisting primarily of Federal Reserve stock, Federal Home Loan Bank stock and
privately issued asset-backed securities, decreased to 6.1% of total investment
securities from 8.8% a year ago.
Year-end 1999 investment securities balances were also affected by
management's decision to reposition the securities portfolio, following the
merger with F&M in November 1999, in order to normalize total investment
exposure based on the then current rate environment and to reduce overall
interest rate risk. Citizens sold mostly U.S. Treasury and Federal agency
securities and reinvested the proceeds in longer duration other Federal agency
securities and to a lesser degree in Federal agency mortgaged-backed securities
at higher yields. The increase in annual interest income from the newly acquired
securities is expected to recover the $3.6 million loss from the securities sold
in approximately eighteen months. Additionally, in December 1999, in order to
provide for more effective asset/liability management, the entire held to
maturity securities portfolio of F&M was transferred to available for sale. The
held to maturity portfolio had an amortized cost of $208.3 million and fair
value of $204.7 million at the date of transfer. The unrealized loss of $3.6
million is included, net of tax, in accumulated other comprehensive income.
Money market investments, primarily federal funds sold, commercial paper
and mutual funds, averaged $61.4 million for 1999, down from $109.6 million in
1998. The amount of funds invested in these assets is based on the present and
anticipated interest rate environment, liquidity needs and other economic
factors.
Citizens' present policies with respect to the classification of
investments in debt and equity securities are discussed in Note 1 to the
Consolidated Financial Statements. Maturities and average yields of available
for sale securities at year-end 1999 is presented in Table 6. As of December 31,
1999, the estimated aggregate fair value of Citizens' investment securities
portfolio was $26.8 million below amortized cost consisting of gross unrealized
gains of $4.8 million and gross unrealized losses of $31.6 million. A summary of
estimated fair values and unrealized gains and losses for the major components
of the investment securities portfolio is provided in Note 4 to the Consolidated
Financial Statements.
Page 11
<PAGE> 41
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
TABLE 6. MATURITIES AND AVERAGE YIELDS OF AVAILABLE FOR SALE SECURITIES AT DECEMBER 31, 1999
U.S. Treasury and
Federal Agency(1) State and Municipal(1),(2) Other(1) Total
--------------------------- -------------------------- ------------------------ ----------------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
(in millions) Cost Value Yield Cost Value Yield Cost Value Yield Cost Value Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DUE WITHIN ONE YEAR $ 88.1 $ 87.2 6.34% $ 18.6 $ 18.9 8.41% $ 10.4 $ 10.4 7.20% $ 117.1 $ 116.5 6.75%
ONE TO FIVE YEARS 467.9 457.6 6.22 69.9 70.4 8.15 18.2 18.0 6.60 556.0 546.0 6.48
FIVE TO TEN YEARS 324.4 316.7 6.74 131.0 130.4 8.10 3.2 3.2 6.33 458.6 450.3 7.12
AFTER TEN YEARS 60.4 58.9 7.09 156.4 149.1 7.77 50.5 51.4 7.30 267.3 259.4 7.53
------- ------ ------ ------ ------ ------ -------- --------
TOTAL $ 940.8 $920.4 6.47 $375.9 $368.8 7.96 $ 82.3 $ 83.0 7.10 $1,399.0 $1,372.2 6.90
======= ====== ====== ====== ====== ====== ======== ========
AVERAGE MATURITY (3) 4.75 yrs. 8.75 yrs. 1.24 yrs. 5.62 yrs.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Maturities for Federal agency, collateralized mortgage obligations and
asset-backed securities are based upon projections of independent cash flow
models. Maturities for state and municipal securities incorporate early
call features, if applicable.
(2) Yields for state and municipal securities are calculated on a tax equivalent
basis using a 35% tax rate.
(3) Average maturity information excludes Federal Reserve and Federal Home Loan
Bank stocks with no stated maturity.
LOANS
Citizens extends credit primarily within the local markets of its banking
subsidiaries located in Michigan, Wisconsin, Iowa, Illinois and Minnesota.
Citizens' loan portfolio contains no loans to foreign governments, enterprises
or foreign operations of domestic companies and is widely diversified by
borrowers with no concentration within a single industry that exceeds 10% of
total loans. Loan balances at December 31 and an analysis of the maturity and
interest rate sensitivity of commercial and real estate construction loans is
presented below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
TABLE 7. LOAN PORTFOLIO
(in millions) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LOANS OUTSTANDING AT DECEMBER 31
Commercial $ 1,822.4 $1,619.9 $ 1,370.3 $ 1,176.8 $1,025.0
Commercial real estate 1,053.0 790.5 694.0 642.8 609.3
Real estate construction 185.4 149.5 113.5 112.9 81.2
Real estate mortgage 1,440.1 1,417.9 1,439.4 1,291.8 1,049.0
Consumer 1,416.6 1,286.9 1,457.0 1,293.5 1,196.7
--------- -------- --------- --------- --------
Total $ 5,917.5 $5,264.7 $ 5,074.2 $ 4,517.8 $3,961.2
========= ======== ========= ========= ========
</TABLE>
LOAN MATURITIES AND INTEREST RATE SENSITIVITY AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
Within One to After
One Year Five Years Five Years Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and commercial real estate $1,261.0 $ 1,340.4 $ 274.0 $2,875.4
Real estate construction 185.4 --- --- 185.4
-------- --------- ------- --------
Total $1,446.4 $ 1,340.4 $ 274.0 $3,060.8
======== ========= ======= ========
Loans above:
With floating interest rates $ 863.8 $ 221.3 $ 108.7 $1,193.8
With predetermined
interest rates 582.6 1,119.1 165.3 1,867.0
-------- --------- ------- --------
Total $1,446.4 $ 1,340.4 $ 274.0 $3,060.8
======== ========= ======= ========
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 12
<PAGE> 42
Total loans increased $652.8 million or 12.4% in 1999 with average loans
comprising 80.4% of total average earning assets during 1999, as compared with
81.0% during 1998. Enhanced sales efforts and strong demand for business loans
in Citizens' markets along with the acquisition of approximately $88 million of
commercial loans from the Branch Purchase, increased commercial and commercial
real estate portfolio balances by 19.3% in 1999 from year-end 1998. Consumer
loans, which include installment and home equity loans, increased $129.7
million, or 10.1%, to $1.417 billion at year-end 1999 reflecting increased sales
efforts, higher marine loan balances and strong demand for home equity and
recreational vehicle loans in the latter half of 1999. Residential mortgage loan
balances increased $22.2 million or 1.6% in 1999. Demand for new residential
mortgage loans remained strong throughout most of 1999, but Citizens sold a
significant portion of that production to reduce its long-term interest rate
exposure and prepayment risk along with generating fee income. Prior to the F&M
merger, Citizens did not service its portfolio and servicing rights were sold
with the related loans. At December 31, 1999, $374.8 million of residential
mortgage loans originated by F&M and subsequently sold in the secondary market
were being serviced. Capitalized servicing rights relating to the serviced loans
totaled $3.3 million. Citizens intends to continue to service these loans and
may sell a portion of its future residential mortgage production with servicing
rights retained.
NONPERFORMING ASSETS
A five-year history of nonperforming assets is presented in Table 8.
Nonperforming assets are comprised of nonaccrual, restructured loans and
repossessed assets. Although these assets have more than a normal risk of loss,
they will not necessarily result in a higher level of losses in the future.
Nonperforming assets totaled $35.1 million as of December 31, 1999, a decrease
of 17.4% from the year-end 1998 balance of $42.5 million. As a percentage of
total assets, nonperforming assets declined to 0.45% at December 31, 1999, from
0.61% at December 31, 1998. The decline resulted from Citizens' continued
management of loan portfolio quality, favorable economic conditions and
additional charge-offs at F&M from implementing Citizens' charge-off guidelines
and credit risk policies after the merger.
Nonperforming commercial and commercial real estate loans decreased to
$18.0 million at year-end 1999 from $19.8 million a year ago. These loans
comprised 57.9%, of total nonperforming loans at December 31, 1999, compared
with 52.6% in 1998. Citizens' commercial real estate portfolio represents 17.8%
of total loans at December 31, 1999 as compared with 15.0% at year 1998. Within
this portfolio, nonperforming loans represented 19.6% of total nonperforming
loans at December 31, 1999.
Management believes the risk of loss on such nonperforming loans is
significantly less than the total principal balance, due to the nature of the
underlying collateral. These loans are generally for owner-occupied properties
and do not rely on the performance of the real estate market to generate funds
for repayment. One to four family residential home loans comprise the majority
of the real estate mortgage balance.
The consumer portfolio is comprised of automobile, personal, marine, home
equity and bankcard loans of which automobile and home equity comprise 62.5% of
1999 average balances. At December 31, 1999, consumer loans represented 18.4% of
nonperforming loans, down from 26.2% in 1998. A lower delinquency rate on
automobile loans and higher charge-offs in the first half of 1999 accounted for
most of this decrease.
Citizens maintains formal policies and procedures to control and monitor
credit risk within these portfolios. Based upon present information, management
believes the allowance for loan losses is adequate to meet presently known
credit risks.
The level and composition of nonperforming assets are affected by
economic conditions in Citizens' local markets. Nonperforming assets,
charge-offs and provisions for loan losses tend to decline in a strong economy
and increase in a weak economy, potentially impacting Citizens' results. In
addition to loans classified as nonperforming, management carefully monitors
other credits that are current in terms of principal and interest payments but,
in management's opinion, may deteriorate in quality if economic conditions
change. As of December 31, 1999, such loans amounted to $18.9 million or 0.3% of
total loans compared with $14.5 million or 0.3% of total loans as of December
31, 1998. These loans are primarily commercial and commercial real estate loans
made in the normal course of business and do not represent a concentration in
any one industry.
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.
Page 13
<PAGE> 43
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
TABLE 8. NONPERFORMING ASSETS AND PAST DUE LOANS
December 31 (in thousands) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NONPERFORMING LOANS(1),(2)
Nonaccrual
Less than 30 days past due $ 1,661 $ 2,016 $ 5,128 $ 5,555 $ 4,794
From 30 to 89 days past due 772 1,641 2,021 1,370 828
90 or more days past due 26,498 31,485 28,813 33,025 26,063
------- ------- ------- ------- -------
Total 28,931 35,142 35,962 39,950 31,685
90 days past due and still accruing 2,139 2,474 3,022 2,773 1,602
Restructured(1) 9 114 446 718 1,208
------- ------- -------- ------- -------
Total nonperforming loans 31,079 37,730 39,430 43,441 34,495
OTHER REPOSSESSED ASSETS ACQUIRED 4,039 4,790 4,869 4,996 4,290
------- ------- -------- ------- -------
Total nonperforming assets $35,118 $42,520 $ 44,299 $48,437 $38,785
======= ======= ======== ======= =======
Nonperforming assets as a percent of total loans
plus other repossessed assets acquired 0.59 % 0.81 % 0.87 % 1.07 % 0.98 %
Nonperforming assets as a percent of total assets 0.45 0.61 0.67 0.78 0.66
NONPERFORMING LOANS BY TYPE (3)
Commercial $18,005 $19,830 $ 23,031 $13,299 $15,592
Real estate mortgage 7,366 8,032 9,487 4,273 2,688
Consumer 5,708 9,868 6,912 4,585 3,286
------- ------- -------- ------- -------
Total $31,079 $37,730 $ 39,430 $22,157 $21,566
======= ======= ======== ======= =======
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Nonperforming loans include loans on which interest is being recognized
only upon receipt (nonaccrual), those on which interest has been
renegotiated to lower than market rates because of the financial condition
of the borrowers (restructured), and loans 90 days past due and still
accruing.
(2) Gross interest income that would have been recorded in 1999 for nonaccrual
and restructured loans, as of December 31, 1999, assuming interest had
been accrued throughout the year in accordance with original terms was
$3.383 million. The comparable 1998 and 1997 totals were $3.315 million,
and $3.586 million, respectively. Interest collected on these loans and
included in income was $1.861 million in 1999, $1.845 million in 1998 and
$1.334 million in 1997. Therefore, on a net basis, total income foregone
due to these loans was $1.522 million in 1999, $1.470 million in 1998 and
$2.252 million in 1997.
(3) Nonperforming loans by type for F&M were not available in 1996 and 1995
and have, therefore, been excluded.
Certain of Citizens' nonperforming loans included in Table 8 are
considered to be impaired. Citizens measures impairment on all large balance
nonaccrual commercial and commercial real estate loans. Certain large balance
accruing loans rated substandard or worse are also measured for impairment.
Impairment losses are included in the provision for loan losses. The policy does
not apply to large groups of smaller balance homogeneous loans that are
collectively evaluated for impairment, except for those loans restructured under
a troubled debt restructuring. Loans collectively evaluated for impairment
include certain smaller balance commercial loans, consumer loans, residential
real estate loans, and credit card loans, and are not included in the impaired
loan data in the following paragraphs.
At December 31, 1999, loans considered to be impaired totaled $27.5
million of which $18.5 million were on a nonaccrual basis. Included within this
amount is $13.1 million of impaired loans for which the related allowance for
loan losses is $1.5 million and $14.4 million of impaired loans for which fair
value exceeded the recorded investment in the loan. The average recorded
investment in impaired loans during the year ended December 31, 1999 was
approximately $32.5 million. For the year ended December 31, 1999, Citizens
recognized interest income of $1.3 million. Cash collected on nonaccrual
impaired loans totaled $1.5 million of which $0.9 million was applied to
principal and $0.6 million was recognized using the cash basis method of income
recognition.
At December 31, 1998, loans considered to be impaired totaled $22.8
million of which $13.0 million were on a nonaccrual basis). Included with this
amount is $16.4 million of impaired loans for which the related allowance for
loan losses is $3.8 million and $6.4 million of impaired loans for which the
fair value exceeded the recorded investment in the loan. The average recorded
investment in impaired loans during the year ended December 31, 1998 was
approximately $27.5 million. For the year ended December 31, 1998, Citizens
recognized interest income of $1.3 million, which included $0.8 million of
interest income recognized using the cash basis method of income recognition.
During 1999, the Corporation's banking subsidiaries received a normally
scheduled examination by its governing regulatory agency. There was no material
reclassification of assets as nonperforming resulting from these examinations.
Page 14
<PAGE> 44
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
TABLE 9. AVERAGE DEPOSITS
1999 1998 1997
----------------------- ---------------------- -------------------------
AVERAGE AVERAGE Average Average Average Average
Year Ended December 31 (in millions) BALANCE RATE Balance Rate Balance Rate
- ------------------------------------------------------------------------ -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $ 904.6 --- $ 829.8 --- $ 757.4 ---
Interest-bearing demand 578.5 1.55 % 547.4 1.67 % 535.1 1.69 %
Savings 1,751.6 2.83 1,635.1 3.08 1,551.0 3.17
Time 2,672.0 5.18 2,604.6 5.65 2,515.9 5.69
--------- -------- --------
Total $ 5,906.7 3.33 $5,616.9 3.68 $5,359.4 3.76
========= ======== ========
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
DEPOSITS
Average deposit balances and rates for the past three years are
summarized in Table 9. Average 1999 deposit balances include the partial-year
effect of $442 million in deposits acquired from the Branch Purchase. Total
average deposits were 5.2% higher in 1999 as compared with 1998. Deposits
increased in all categories with significant increases in noninterest-bearing
demand and savings accounts. Average noninterest-bearing demand balances
increased 9.0% in 1999 versus the prior year. The increase is due to strong
growth from commercial deposit accounts, and to a lesser extent, balances
acquired from the Branch Purchase. Saving accounts increased 7.1% in 1999
primarily from significant increases in money market and investment rate savings
products. The overall average rate for the deposit portfolio decreased in 1999
to 3.33% from 3.68% in 1998. The decrease was the result of the lower overall
interest rate environment in the first half of 1999. As of December 31, 1999,
certificates of deposits of $100,000 or more accounted for approximately 11.3%
of total deposits. The maturities of these deposits are summarized in Table 10.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
TABLE 10. MATURITY OF TIME CERTIFICATES OF
DEPOSIT OF $100,000 OR MORE
December 31,
(in thousands) 1999
- -------------------------------------------------------------
<S> <C>
Three months or less $ 340,999
After three but within six months 139,787
After six but within twelve months 92,549
After twelve months 121,980
---------
Total $ 695,315
=========
- -------------------------------------------------------------
</TABLE>
Citizens gathers deposits primarily from the local markets of its banking
subsidiaries and has not relied on purchased deposits for any significant
funding. Citizens may use brokered deposits as an ancillary source of funding
and during 1999, average brokered deposit balances were $14.9 million, compared
with $17.7 million in 1998. 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.
BORROWED FUNDS
Short-term borrowings are comprised primarily of Federal funds purchased,
securities sold under agreements to repurchase, FHLB advances and Treasury Tax
and Loan notes. Total short-term borrowings averaged $478.9 million in 1999, or
8.4% of total average interest-bearing liabilities, compared with $202.6 million
or 3.9% during 1998. 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. Additionally, for a four-month
period prior to the Branch Purchase transaction, Citizens leveraged its
anticipated core deposit growth by utilizing short-term FHLB advances to fund
purchases of Federal agency securities prior to the Branch Purchase.
Approximately $300 million of these advances matured in October 1999 and were
replaced with the new, lower rate core deposits. Additional short-term FHLB
advances borrowed in late 1999 were used to support continued loan growth in
Citizens' core markets. Long-term debt accounted for $210.3 million, or 3.7%, of
average interest-bearing funds during 1999, decreasing slightly from $229.0
million, or 4.4% during 1998. 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.
A summary of long-term debt balances as of December 31, 1999 and 1998
appears in Note 10 to the Consolidated Financial Statements. Citizens' Parent
company maintains a revolving $60.0 million credit facility with an unused
commitment of $18.0 million at December 31, 1999. The current facility will
mature on September 2, 2000 and is expected to renew for a similar period at
that time. The interest rate on the $42 million outstanding at December 31, 1999
reprices daily and is based on the Federal funds rate. The Parent company
services the debt's principal and interest
Page 15
<PAGE> 45
payments with dividends from the subsidiary banks. The agreement also requires
Citizens to maintain certain financial covenants. Citizens is in full compliance
with all debt covenants as of December 31, 1999.
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 December 31, 1999, shareholders' equity was $633.7 million, compared with
$680.5 million at December 31, 1998. Repurchase of Citizens common stock and
unrealized fair value depreciation in the available for sale securities
portfolio along with a reduction in net earnings retained after payment of cash
dividends led to the decline in stockholders' equity. Book value per common
share at December 31, 1999 and 1998 was $13.32 and $14.07, 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 for the past three years is presented below.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Regulatory Minimum
------------------
"Well December 31,
-----------------------------
Required Capitalized" 1999 1998 1997
- -------------------------------------------------------------------
Risk based:
<S> <C> <C> <C> <C> <C>
Tier I capital 4.00% 6.00% 9.22% 11.01% 10.50%
Total capital 8.00 10.00 10.47 12.26 11.76
Tier I leverage 4.00 5.00 7.21 8.95 8.00
- -------------------------------------------------------------------
</TABLE>
During 1999, Citizens maintained two stock repurchase plans. The stock
repurchase plan initiated in May 1998 ("Plan I"), allows 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
December 31, 1999, 567,200 shares were repurchased under Plan I. In January
1999, Citizens initiated a second stock repurchase plan ("Plan II") 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 $0.915 per share in 1999, an increase
of 11.6% over 1998 dividends of $0.82 per share. Citizens Banking Corporation or
its predecessor, Citizens Commercial & Savings Bank, have paid dividends every
year since 1892 except for several years during the depression of the 1930's.
LIQUIDITY AND DEBT CAPACITY
The liquidity position of Citizens is monitored for both its subsidiaries
and its 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.
During 1999, 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.
The subsidiary banks manage liquidity to meet client cash flow needs
while maintaining funds available for loan and investment opportunities. As
discussed in Note 18 to the Consolidated Financial Statements, the Federal
Reserve Bank requires Citizens' banking subsidiaries to maintain certain
noninterest-bearing deposits with the Federal Reserve Bank. These balance
requirements averaged $45.7 million and $40.3 million during 1999 and 1998,
respectively, and were primarily satisfied with cash balances maintained by
Citizens' subsidiaries.
The liquidity of the Parent company is managed to provide funds to pay
dividends to shareholders, service debt, invest in subsidiaries and to satisfy
other operating requirements. The primary source of liquidity for the Parent
company is dividends and returns of investment from its subsidiaries. During
1999, the Parent company received $42.9 million in dividends from subsidiaries
and paid $30.0 million in dividends to its shareholders. The amount of dividends
to the Parent still allowed the subsidiary banks to maintain sufficient capital
to be designated well-capitalized.
Page 16
<PAGE> 46
As discussed in Note 18 to the Consolidated Financial Statements, approximately
$31.7 million was available as of January 1, 2000 for payment to the Parent
company as dividends by Citizens' banking subsidiaries without further
regulatory approval. Amounts earned by subsidiaries in 2000 will also become
available for such dividend payments. Additional amounts may be available for
payment subject to regulatory approval.
Citizens' long-term debt to equity ratio was 20.1% as of December 31,
1999 compared to 33.2% in 1998. Changes in long-term debt during 1999 are
discussed in the section titled "Borrowed Funds". Management believes that
Citizens has sufficient liquidity and capacity sources to meet presently known
cash flow requirements arising from ongoing business transactions.
INTEREST RATE RISK
Interest rate risk generally arises when the maturity or repricing
structure of Citizens' assets and liabilities differ significantly.
Asset/liability management, used by Citizens to address such risk, is the
process of developing, testing and implementing strategies that seek to maximize
net interest income, maintain sufficient liquidity and minimize exposure to
significant changes in interest rates. This process includes monitoring
contractual and expected repricing of assets and liabilities as well as
forecasting earnings under different interest rate scenarios and balance sheet
structures. Generally, management seeks a structure that insulates net interest
income from large swings attributable to changes in market interest rates. Table
11 depicts Citizens' asset/liability static sensitivity ("GAP") as of December
31, 1999 and 1998.
As shown, Citizens' interest rate risk position at December 31, 1999 is
liability sensitive in the less than one year time frame with rate sensitive
liabilities exceeding rate sensitive assets by $979.1 million. 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, Table 11 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.
INTEREST RATE SENSITIVITY
A number of measures are used to monitor and manage interest rate risk,
including income simulation and interest sensitivity (GAP) analyses. An income
simulation model is management's primary tool used to assess the direction and
magnitude of variations in net interest income resulting from changes in
interest rates. Key assumptions in the model include prepayment speeds on
various loan and investment assets; cash flows and maturities of financial
instruments held for purposes other than trading; changes in market conditions,
loan volumes, and pricing; deposit sensitivity; client preferences; and
management's financial capital plans. These assumptions are inherently
uncertain, subject to fluctuation and revision in a dynamic environment and, as
a result, the model cannot precisely estimate net interest income or exactly
predict the impact of higher or lower interest rates on net interest income.
Actual results will differ from simulated results due to timing, magnitude, and
frequency of balance sheet component and interest rate changes and changes in
market conditions and management strategies, among other factors.
Results of the multiple simulations done as of December 31, 1999 suggest
that Citizens could expect net interest income to increase by $23.2 million (if
asset and liability balances remain static and interest rates gradually decline
by 200 basis points over the next twelve months) and, to increase by $3.2
million (if asset and liability balances remain static and interest rates
gradually increase by 200 basis points over the next twelve months) from 1999
levels of net interest income. These variances in net interest income were well
within Citizens' policy parameters established to manage such risk. Management
performed a large number of net interest income simulations using varying
balance sheet scenarios and differing interest rate environments. The model
results presented herein are intended to illustrate the potential variation in
net interest income from the indicated changes in interest rates, and not to
project future levels of net interest income. In addition to changes in interest
rates, the level of future net interest income is also dependent on a number of
other variables, including the growth, composition and absolute levels of
deposits, loans, and other earning assets and interest bearing liabilities,
economic and competitive conditions, client preferences and other factors.
Page 17
<PAGE> 47
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
TABLE 11. INTEREST RATE SENSITIVITY
TOTAL
0 - 3 4 - 6 7 - 12 WITHIN 1 - 5 Over
(dollars in millions) Months Months Months 1 YEAR Years 5 Years Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1999
RATE SENSITIVE ASSETS(1)
Loans and leases $1,699.8 $ 355.9 $ 549.9 $2,605.6 $2,601.9 $ 710.0 $5,917.5
Investment securities 106.5 40.1 49.0 195.6 522.3 654.3 1,372.2
Short-term investments 88.9 --- --- 88.9 0.1 --- 89.0
-------- ------- -------- -------- -------- --------- --------
Total $1,895.2 $ 396.0 $ 598.9 $2,890.1 $3,124.3 $ 1,364.3 $7,378.7
RATE SENSITIVE LIABILITIES
Deposits (2) $1,037.5 $ 689.7 $1,122.4 $2,849.6 $2,036.7 $ 276.8 $5,163.1
Other interest bearing
liabilities 937.9 81.3 0.4 1,019.6 14.7 30.1 1,064.4
-------- ------- -------- -------- -------- --------- --------
Total $1,975.4 $ 771.0 $1,122.8 $3,869.2 $2,051.4 $ 306.9 $6,227.5
Period GAP (3) $ (80.2) $(375.0) $ (523.9) $ (979.1) $1,072.9 $ 1,057.4 $1,151.2
Cumulative GAP (80.2) (455.2) (979.1) 93.8 1,151.2
Cumulative GAP to
total assets (1.00)% (5.76)% (12.39)% (12.39)% 1.19% 14.57% 14.57%
Multiple of rate sensitive
assets to liabilities 0.96 0.51 0.53 0.75 1.52 4.45 1.18
- ----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
RATE SENSITIVE ASSETS(1)
Loans and leases $1,657.7 $ 343.9 $ 562.3 $2,563.9 $1,958.4 $ 742.4 $5,264.7
Investment securities 151.7 87.0 149.3 388.0 410.2 325.3 1,123.5
Short-term investments 108.6 --- --- 108.6 --- --- 108.6
-------- ------- ------- -------- -------- -------- --------
Total $1,918.0 $ 430.9 $ 711.6 $3,060.5 $2,368.6 $1,067.7 $6,496.8
======== ======= ======= ======== ======== ======== ========
RATE SENSITIVE LIABILITIES
Deposits (2) $ 920.4 $ 726.1 $1,034.9 $2,681.4 $1,898.4 $ 279.1 $4,858.9
Other interest bearing
liabilities 245.9 0.5 65.9 312.3 26.8 72.2 411.3
-------- ------- -------- -------- -------- --------- --------
Total $1,166.3 $ 726.6 $1,100.8 $2,993.7 $1,925.2 $ 351.3 $5,270.2
======== ======= ======= ======== ======== ======== ========
Period GAP (3) $ 751.7 $(295.7) $ (389.2) $ 66.8 $ 443.4 $ 716.4 $1,226.6
Cumulative GAP 751.7 456.0 66.8 510.2 1,226.6
Cumulative GAP to
total assets 10.85% 6.58% 0.96% 0.96% 7.36% 17.70% 17.70%
Multiple of rate sensitive
assets to liabilities 1.64 0.59 0.65 1.02 1.23 3.04 1.23
- ----------------------------------------------------------------------------------------------------------------------------
</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 without contractual
maturities of $839 million in the less than one year category and $1.581
billion in the over one year category as of December 31, 1999. The same
amounts as of December 31, 1998 were $767 million and $1.538 billion,
respectively. This runoff is based on historical trends, which reflects
industry standards.
(3) GAP is the excess of rate sensitive assets (liabilities).
Page 18
<PAGE> 48
IMPACT OF INFLATION
Substantially all of the assets and liabilities of a financial
institution are monetary. Therefore, inflation generally has a less significant
impact on financial institutions than fluctuations in market interest rates.
Inflation can lead to accelerated growth in noninterest expenses, which can
adversely impact results of operations. Additionally, inflation may impact the
rate of deposit growth and necessitate increased growth in equity to maintain a
strong capital position. Management believes the most significant impact on
financial results is Citizens' ability to respond to changes in interest rates.
OTHER
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133, establishes accounting and reporting standards for hedging activities and
for derivative instruments, including certain derivative instruments embedded in
other contracts. This statement requires a company to recognize all derivatives
as either assets or liabilities in its balance sheet and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a fair value, cash flow, or foreign currency hedge.
The accounting for changes in the fair value of a derivative (i.e., gains and
losses) depends on the intended use of the derivative and the resulting
designation. For derivative instruments not accounted for as hedges, changes in
fair value are required to be recognized in earnings. If Citizens elects to
apply hedge accounting, offsetting changes in fair value or cash flows of both
the derivative and the hedged asset or liability would be recognized in earnings
in the same period. Changes in fair value or cash flow that represent the
ineffective portion of a hedge are required to be recognized in earnings and
cannot be deferred. Citizens is also required to establish at the inception of
the hedge the method it will use for assessing the effectiveness of the hedging
derivative and the measurement approach for determining the ineffective aspect
of the hedge. Citizens plans to adopt the provision of this Statement, as
amended, for its quarterly and annual reporting beginning January 1, 2001. The
impact of adopting the provisions of this Statement on Citizens' financial
position, results of operations and cash flow subsequent to the effective date
is not currently estimable and will depend on the financial position of Citizens
and the nature and purpose of any derivative instruments in use at that time.
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.
Cost 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. Additional costs to be incurred in 2000 for
ongoing monitoring and support activities are not expected to be material.
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.
Page 19
<PAGE> 49
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 12. SELECTED QUARTERLY INFORMATION
1999 1998
----------------------------------------------- -------------------------------------------
(in thousands except per share data) FOURTH THIRD SECOND FIRST Fourth Third Second First
- --------------------------------------------------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 144,531 $ 138,354 $ 130,687 $ 128,835 $ 129,509 $ 131,375 $ 131,105 $130,328
Interest expense 63,391 59,773 54,402 54,351 55,310 57,433 58,048 58,482
Net interest income 81,140 78,581 76,285 74,484 74,199 73,942 73,057 71,846
Provision for loan losses 11,422 (2) 4,370 4,812 4,071 4,185 3,867 4,273 4,203
Investment securities gains (losses) (3,584)(2) 39 301 192 227 191 7 50
Other noninterest income 19,390 19,351 25,180 20,275 18,162 18,574 17,925 16,132
Noninterest expense 99,303 (2) 59,551 61,416 56,706 54,293 55,730 54,944 53,252
Net income (loss) (9,229)(2) 23,425 24,355 23,443 23,859 23,175 22,029 21,219
PER SHARE OF COMMON STOCK(3)
Net income (loss):
Basic (0.19)(2) 0.49 0.50 0.48 0.49 0.48 0.45 0.44
Diluted (0.19)(2) 0.49 0.50 0.47 0.49 0.47 0.45 0.43
Cash dividends declared 0.235 0.235 0.235 0.21 0.21 0.21 0.21 0.19
Market value:(1)
High 29.94 31.25 42.25 36.06 35.38 36.13 37.00 37.13
Low 21.25 25.19 28.63 31.00 26.75 28.00 32.88 27.50
Close 22.38 26.13 30.06 36.00 33.75 32.88 33.63 35.69
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Citizens Banking Corporation common stock is traded on the National Market
tier of the Nasdaq stock market (trading symbol: CBCF). At December 31,
1999, there were approximately 15,000 shareholders of the Corporation's
common stock.
(2) Fourth quarter 1999 results include after-tax charges of $35.2 million or
$0.72 per diluted share. Pre-tax, the charges consist of $40.2 million for
F&M Bancorporation merger, purchase of 17 offices of Banc One Corporation,
branch reconfigurations and other non-recurring items; $3.6 million for
repositioning of the securities portfolio; and $6.8 million for additional
loan loss provision at the merged banks.
(3) Per share information reflects a three-for-two stock split effected in the
form of a dividend paid to shareholders on November 18, 1997.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH 1997
Citizens reported net income of $90.3 million, or $1.84 per diluted
share, in 1998, compared with $54.9 million, or $1.15 per diluted share, in
1997. Reported net income for 1997 included a special charge of $23.7 million
($17.3 million after tax) for costs associated with Citizens merger with CB
Financial Corporation ("CB") and the reorganization Citizens' information
technology operations. Excluding this special charge, 1998 net income increased
25.1% or $0.33 per share over 1997 net operating earnings of $72.2 million or
$1.51 per share. On this same basis, return on average assets for 1998 was
1.33%, compared with 1.12% in 1997. Overall, the increase in net income in 1998
reflects improvement in net interest income and higher noninterest income,
offset in part by higher noninterest expenses and higher income tax expense.
Net interest income for 1998 was $293.0 million, an increase of 6.6% over
1997 net interest income of $274.9 million. This increase resulted from higher
levels of earning assets partially offset by increased interest bearing
liabilities. Yields on earning assets decreased to 8.39%, compared with 8.45% in
1997. The decrease resulted from lower yields principally on commercial loans
and, to a lesser extent tax-exempt investment securities. Rates paid on funding
sources decreased eight basis points to 4.39% due to lower rates paid on all
interest-bearing liability categories. As a result, the net interest margin
increased to 4.79% in 1998 as compared with 4.74% in 1997.
The provision for loan losses decreased to $16.5 million in 1998 from
$20.5 million in 1997. The decrease in 1998 is due to a higher than normal loan
loss provision taken in 1997 by F&M in anticipation of certain nonaccrual loan
charge-offs and a decrease in nonperforming assets. Net loan charge-offs to
average total loans increased one basis point to 0.30% as compared to 0.29% in
1997. The allowance for loan losses as a percentage of total loans remained
unchanged at 1.32%.
Noninterest income accounted for 12.0% of total operating revenues or
1.0% of average assets in 1998, increasing from 10.5% or 0.9%, respectively, in
1997. Noninterest income increased $12.9 million from 1997 primarily due to
growth in trust fees, cash management fees, brokerage and investment fees,
mortgage and other loan income, and new title insurance services.
Excluding the special charge, noninterest expense increased $9.3 million
or 4.5% in 1998, from 1997. This increase is primarily due to new data
processing and data communication costs and higher training and travel costs
resulting from Citizens' information technology partnership with M&I Data
Services, entered into in the third quarter of
Page 20
<PAGE> 50
1997. Income tax expense for 1998 increased 24.0% compared with 1997 (before the
special charge). This increase resulted from higher pre-tax operating earnings
offset, in part, by slightly higher tax-exempt interest income.
Citizens had total average assets of $6.793 billion in 1998, up from 1997
average assets of $6.440 billion. Average loans comprise 81.0% of total earning
assets in 1998, up from 80.3% in 1997. The growth occurred primarily in the
commercial loan and commercial real estate portfolios due to focused sales
efforts and a relatively low interest rate environment. Average investment
securities, including money market investments, decreased to 19.0% of average
earning assets in 1998 from 19.7% in 1997. The decline in investment securities
was used to fund loan growth.
Total average deposits were 4.8% higher in 1998, compared with 1997.
Average short-term borrowings, comprised primarily of securities sold under
agreements to repurchase, decreased to 3.9% of average interest-bearing funds in
1998, compared to 5.2% in 1997. Long-term debt accounted for $229.0 million or
4.4% of average interest-bearing funds during 1998, increasing from $144.3
million or 2.9% in 1997. The shift from short-term borrowings to long-term debt
reflected the attractiveness of long-term financing versus short-term borrowings
in a relatively low interest rate environment. Average shareholders' equity was
$655.0 million in 1998, a 9.7% increase over the 1997 average of $597.2 million.
Page 21
<PAGE> 51
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
December 31,
(in thousands, except share amounts) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 250,745 $ 221,880
Money market investments:
Interest-bearing deposits with banks 755 500
Federal funds sold 63,048 86,048
Other 25,161 22,046
---------- ----------
Total money market investments 88,964 108,594
Securities available-for-sale (amortized cost $1,399,012 in 1999; $951,305 in 1998) 1,372,186 963,354
Securities held-to-maturity (fair value $168,419 in 1998) --- 160,132
Loans:
Commercial 2,875,387 2,410,419
Real estate construction 185,352 149,522
Real estate mortgage 1,440,104 1,417,856
Consumer 1,416,640 1,286,909
---------- ----------
Total loans 5,917,483 5,264,706
Less: Allowance for loan losses (76,397) (69,740)
---------- ----------
Net loans 5,841,086 5,194,966
Premises and equipment 141,460 127,980
Intangible assets 97,032 68,449
Other assets 107,884 85,178
---------- ----------
TOTAL ASSETS $7,899,357 $6,930,533
========== ==========
LIABILITIES
Noninterest-bearing deposits $ 965,849 $ 913,846
Interest-bearing deposits 5,163,149 4,858,946
---------- ----------
Total deposits 6,128,998 5,772,792
Federal funds purchased and securities sold
under agreements to repurchase 276,805 172,183
Other short-term borrowings 660,474 12,971
Other liabilities 72,307 65,915
Long-term debt 127,104 226,171
---------- ----------
Total liabilities 7,265,688 6,250,032
SHAREHOLDERS' EQUITY
Preferred stock - no par value:
Authorized - 5,000,000 shares; Issued - none
Common stock - no par value:
Authorized - 100,000,000 shares
Issued and outstanding - 47,567,809 in 1999; 48,373,307 in 1998 226,972 276,439
Retained earnings 424,140 396,516
Other accumulated comprehensive income (loss) (17,443) 7,546
---------- ----------
Total shareholders' equity 633,669 680,501
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $7,899,357 $6,930,533
========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
Page 22
<PAGE> 52
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
(in thousands, except share amounts) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $463,071 $ 450,178 $426,106
Interest and dividends on investment securities:
Taxable 59,081 49,413 52,057
Nontaxable 17,151 16,944 17,209
Money market investments 3,104 5,782 3,336
-------- --------- --------
Total interest income 542,407 522,317 498,708
INTEREST EXPENSE
Deposits 196,871 206,608 201,422
Short-term borrowings 23,692 9,806 13,223
Long-term debt 11,354 12,859 9,206
-------- --------- --------
Total interest expense 231,917 229,273 223,851
------- --------- --------
NET INTEREST INCOME 310,490 293,044 274,857
Provision for loan losses 24,675 16,528 20,511
-------- --------- --------
Net interest income after provision for loan losses 285,815 276,516 254,346
-------- --------- --------
NONINTEREST INCOME
Trust fees 21,701 19,627 16,065
Service charges on deposit accounts 21,378 18,803 18,180
Bankcard fees 9,163 7,899 7,019
Mortgage and other loan income 5,230 7,298 3,594
Brokerage and investment fees 4,325 2,677 2,021
Cash management services 2,556 2,405 1,823
Investment securities gains (losses) (3,052) 475 (572)
Equity security gain 5,693 --- ---
Premium from sale of deposits 1,348 --- ---
Other 12,802 12,084 10,267
-------- --------- --------
Total noninterest income 81,144 71,268 58,397
-------- --------- --------
NONINTEREST EXPENSE
Salaries and employee benefits 122,572 115,088 110,240
Equipment 16,645 17,088 16,259
Occupancy 15,414 15,074 14,935
Intangible asset amortization 8,363 7,631 6,787
Bankcard fees 7,477 5,894 5,152
Stationery and supplies 5,674 5,609 5,621
Postage and delivery 5,985 5,925 5,990
Advertising and public relations 5,223 5,842 5,950
Data processing fees 9,924 7,943 2,747
Special charge 40,198 --- 23,734
Other 39,501 32,125 35,240
-------- --------- --------
Total noninterest expense 276,976 218,219 232,655
-------- --------- --------
INCOME BEFORE INCOME TAXES 89,983 129,565 80,088
Income taxes 27,989 39,283 25,197
-------- --------- --------
NET INCOME $ 61,994 $ 90,282 $ 54,891
======== ========= ========
NET INCOME PER SHARE:
Basic $ 1.29 $ 1.86 $ 1.17
Diluted 1.28 1.84 1.15
AVERAGE SHARES OUTSTANDING:
Basic 48,169,121 48,426,590 47,042,744
Diluted 48,617,207 49,084,509 47,652,265
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
Page 23
<PAGE> 53
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Accumulated
Other
Common Retained Comprehensive
(in thousands, except per share amounts) Stock Earnings Income (loss) Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1997 $ 191,314 $ 372,173 $ 1,777 $ 565,264
Net income 54,891 54,891
Net unrealized gain on securities available-for-sale,
net of tax effect of $2,120 3,881 3,881
---------
Total comprehensive income 58,772
Exercise of stock options, net of
shares purchased 2,189 2,189
Cash dividends - $0.74 per share (19,286) (19,286)
Cash dividends of pooled company, pre-merger (8,984) (8,984)
Shares acquired for retirement (9) (82) (91)
Pre-merger transactions of pooled company 27,445 (14,534) 12,911
--------- --------- --------- ---------
BALANCE - DECEMBER 31, 1997 220,939 384,178 5,658 610,775
Net income 90,282 90,282
Net unrealized gain on securities available-for-sale,
net of tax effect of $1,266 1,888 1,888
---------
Total comprehensive income 92,170
Exercise of stock options, net of
shares purchased 4,738 4,738
Cash dividends - $0.82 per share (22,991) (22,991)
Cash dividends of pooled company, pre-merger (12,572) (12,572)
Shares acquired for retirement (8,846) (8,846)
Pre-merger transactions of pooled company 59,608 (42,381) 17,227
--------- --------- --------- ---------
BALANCE - DECEMBER 31, 1998 276,439 396,516 7,546 680,501
Net income 61,994 61,994
Net unrealized loss on securities available-for-sale,
net of tax effect of $13,913 (24,989) (24,989)
---------
Total comprehensive income 37,005
Exercise of stock options, net of
shares purchased 3,349 3,349
Cash dividends - $0.915 per share (30,035) (30,035)
Cash dividends of pooled company, pre-merger (11,766) (11,766)
Shares acquired for retirement (53,866) (53,866)
Pre-merger transactions of pooled company 1,050 7,431 8,481
--------- --------- --------- ---------
BALANCE - DECEMBER 31, 1999 $ 226,972 $ 424,140 $ (17,443) $ 633,669
========= ========= ========= =========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
Page 24
<PAGE> 54
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31,
(in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 61,994 $ 90,282 $ 54,891
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 24,675 16,528 20,511
Depreciation 14,148 12,391 12,293
Amortization of goodwill and other intangibles 8,363 7,631 6,787
Intangible asset impairment 2,349 --- 7,570
Deferred income tax (credit) (7,953) 1,836 (5,681)
Net amortization on investment securities 2,743 1,748 1,061
Investment securities losses (gains) 3,052 (475) 572
Loans originated for sale (117,603) (219,269) (51,510)
Proceeds from loan sales 118,477 220,674 51,736
Equity security gain (5,693) --- ---
Premium on sale of branch deposits (1,348) --- ---
Accrued merger related and other charges 17,387 --- ---
Other (8,909) (12,857) (3,887)
--------- --------- ---------
Net cash provided by operating activities 111,682 118,489 94,343
INVESTING ACTIVITIES:
Net (increase) decrease in money market investments 28,630 (44,344) 30,784
Securities available-for-sale:
Proceeds from sales 85,288 14,114 180,055
Proceeds from maturities 373,228 468,672 235,627
Purchases (680,123) (525,299) (297,132)
Securities held-to-maturity:
Proceeds from maturities 25,304 28,330 20,782
Purchases (71,454) (12,311) (25,485)
Net increase in loans and leases (520,999) (117,974) (481,054)
Net increase in properties and equipment (20,221) (23,228) (7,848)
Proceeds from sale of Magic Line, Inc. stock 5,693 --- ---
Acquisitions (net of cash acquired) 317,214 (1,066) 5,837
--------- --------- ---------
Net cash used by investing activities (457,440) (213,106) (338,434)
FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings deposits (115,749) 228,647 64,785
Net increase (decrease) in time deposits (70,131) (89,132) 130,766
Net increase (decrease) in short-term borrowings 751,888 (64,982) 4,644
Proceeds from issuance of long-term debt 58,598 129,256 267,979
Principal reductions in long-term debt (157,665) (85,978) (204,520)
Cash dividends paid (41,801) (35,563) (28,098)
Proceeds from stock options exercised 3,349 4,738 2,189
Shares acquired for retirement (53,866) (8,846) (91)
--------- --------- ---------
Net cash provided by financing activities 374,623 78,140 237,654
--------- --------- ---------
Net increase (decrease) in cash and due from banks 28,865 (16,477) (6,437)
Cash and due from banks at beginning of period 221,880 238,357 244,794
--------- --------- ---------
Cash and due from banks at end of period $ 250,745 $ 221,880 $ 238,357
========= ========= =========
Supplemental Cash Flow Information:
Interest paid $ 233,689 $ 233,443 $ 225,913
Income taxes paid 38,444 38,814 30,186
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
Page 25
<PAGE> 55
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Citizens Banking Corporation
("Citizens") and its subsidiaries conform to generally accepted accounting
principles. Management makes estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from these estimates. The following describes Citizens' policies:
CONSOLIDATION: The Consolidated Financial Statements include the accounts
of Citizens and its subsidiaries after elimination of all material intercompany
transactions and accounts.
INVESTMENT SECURITIES AND TRADING ACCOUNT ASSETS: Debt and equity
securities are classified as held-to-maturity, available-for-sale or trading.
Securities classified as held-to-maturity are reported at amortized cost, with
those available-for-sale and trading reported at fair value with unrealized
gains and losses included in shareholders' equity or other income, respectively.
In the event that an investment security is sold, the adjusted cost of the
specific security sold is used to compute the applicable gain or loss. At
year-end 1999, trading assets totaled $2.4 million. There were no trading assets
at December 31, 1998.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is maintained at a
level considered by management to be adequate to absorb losses inherent in the
loan portfolio. Management's evaluation is based on a continuing review of the
loan portfolio and includes consideration of actual loss experience, the
financial condition of borrowers, the size and composition of the loan
portfolio, current economic conditions and other pertinent factors. The
allowance is increased by the provision charged to income and recoveries of
loans previously charged off and reduced by loans charged off.
The allowance established for certain impaired loans is determined based on
the fair value of the investment measured using either the present value of
expected future cash flows discounted at the initial effective interest rate on
the loan, the observable market price of the loan, or the fair value of the
collateral if the loan is collateral dependent. A loan is considered impaired
when management determines it is probable that all the principal and interest
due under the contractual terms of the loan will not be collected.
PREMISES AND EQUIPMENT: Premises and equipment, including leasehold
improvements, are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed principally on a
straight-line basis and are charged to expense over the lesser of the estimated
useful life of the assets or lease term. Maintenance and repairs as well as
gains and losses on dispositions are charged to expense as incurred.
OTHER REAL ESTATE: Other real estate includes properties acquired in
satisfaction of a debt. These properties are carried at the lower of cost or
fair value, net of estimated costs to sell, based upon current appraised value.
Losses arising from the acquisition of such properties are charged against the
allowance for loan losses. Subsequent valuation adjustments and gains or losses
on disposal of these properties are charged to other expenses as incurred.
INTANGIBLE ASSETS: Goodwill, the excess of cost over the fair value of net
identifiable tangible and intangible assets acquired in acquisitions accounted
for as purchases, is amortized on a straight-line basis over periods ranging
from 10 to 20 years. The carrying amount of goodwill is reviewed for impairment
as events or changes in facts and circumstances warrant. Impairment of goodwill
is evaluated by geographic region and is based on a comparison of the recorded
balance of goodwill to the applicable discounted cash flows over the remaining
amortization period of the associated goodwill. To the extent that impairment
may exist, the current carrying amount is reduced by the estimated shortfall.
LOAN SALES AND SERVICING RIGHTS: Gains and losses on the sales of loans are
determined using the specific-identification method. When servicing is retained,
the servicing rights are amortized in proportion to, and over the period of,
estimated net servicing revenues. Impairment of servicing rights is assessed
based on the fair value of those rights. Fair values are estimated using
discounted cash flows based on a current market interest rate. For purposes of
measuring impairment, the rights are stratified by rate in the quarter in which
the related loans were sold.
INCOME TAXES: Citizens and its subsidiaries file a consolidated federal
income tax return. Income tax expense is based on income as reported in the
Consolidated Statements of Income. When income and expenses are recognized in
different periods for tax purposes, applicable deferred taxes are provided in
the Consolidated Financial Statements.
LOAN INTEREST AND FEE INCOME: Interest on loans is generally accrued and
credited to income based upon the principal amount outstanding. Loans are placed
on nonaccrual status when the collection of principal or interest is considered
doubtful, or payment of principal or interest is past due 90 days or more and
the loan is not well secured and in the process of collection. When these loans
(including a loan impaired) are placed on nonaccrual status, all interest
previously accrued but unpaid is reversed against current year interest income.
Interest payments received on nonaccrual loans are credited to income if future
collection of principal is probable. Loans are normally restored to accrual
status when interest and principal payments are current and it is believed that
the financial condition of the borrower has improved to the extent that future
principal and interest payments will be met on a timely basis. Loan origination
fee income, net of direct origination costs and certain incremental direct
costs, is deferred and amortized as a yield adjustment over the estimated term
of the related loans by methods that approximate the level yield method.
NET INCOME PER SHARE: Basic net income per share is based on net income
divided by the weighted average number of shares outstanding in each period.
Diluted net income per share shows the dilutive effect of additional common
shares issuable upon the assumed exercise of stock options granted
Page 26
<PAGE> 56
under Citizens' stock option plans, using the treasury stock method.
CASH FLOWS: For purposes of reporting cash flows, cash and cash equivalents
include cash on hand and amounts due from banks.
RECLASSIFICATIONS: Certain amounts have been reclassified to conform to the
current year presentation.
NOTE 2. MERGERS AND ACQUISITION
On October 8, 1999, Citizens completed the acquisition of seventeen former
Bank One offices located in the northern section of Michigan's Lower Peninsula
(the "Branch Purchase"). The transaction was accounted for as a purchase;
accordingly, the assets acquired and liabilities assumed were recorded at
estimated fair value. The Branch Purchase added approximately $88 million in
loans and $442 million in deposits. Citizens paid a premium of $36.1 million or
10.13% of certain core deposits. The acquired branches' results of operations
have been included in Citizens' consolidated totals from the date of acquisition
only.
On July 1, 1997, Citizens merged with CB Financial Corporation
headquartered in Jackson, Michigan. As part of the merger, Citizens issued 6.3
million shares of its common stock for all of the outstanding shares of CB
Financial Corporation. On November 1, 1999, Citizens merged with F&M
Bancorporation, Inc. ("F&M") headquartered in Kaukauna, Wisconsin. Citizens
issued 21.0 million shares of its common stock, based on a fixed exchange ratio
of 1.303, for all of the outstanding shares of F&M. These transactions were
accounted for as a pooling of interests. All financial data presented have been
restated to reflect these combinations. Unaudited details of the results of
operations of the previously separate corporations for the periods prior to
combinations are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(unaudited)
(in thousands,except Ten Months Ended Year Ended December 31,
per share data) October 31, 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Income
Citizens $169,351 $197,846 $174,909
CB Financial (1) -- -- 16,939
F&M Bancorporation 87,201 95,198 83,009
-------- -------- --------
Combined $256,552 $293,044 $274,857
======== ======== ========
Net Income
Citizens $ 48,459 $ 56,785 $ 28,619
CB Financial (1) -- -- 2,889
F&M Bancorporation 31,084 33,497 23,383
-------- -------- --------
Combined $ 79,543 $ 90,282 $ 54,891
======== ======== ========
Diluted net income per
common share
Citizens $ 1.75 $ 1.98 $ 1.11
CB Financial (1) -- -- 1.03
F&M Bancorporation 1.93 2.15 1.58
Combined 1.63 1.84 1.15
==================================================================================
</TABLE>
(1) Represents the results of operations for the six month period ending June
30, 1997.
NOTE 3. SPECIAL CHARGE
The following provides details on the Special Charge recorded in 1999 in
connection with the F&M merger and other corporate initiatives:
<TABLE>
<CAPTION>
4th Qtr 1999 Charge Amount Utilized Reserve
---------------------------------------- ------------------------- Balance
Merger Total December 31,
(in thousands) Related Other Expense Cash Non-cash 1999
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Employee benefits and severance $ 7,068.9 $ 413.0 $ 7,481.9 $ 144.0 $ -- $ 7,337.9
Contract termination and
other conversion costs 13,597.8 13,597.8 4,240.9 9,356.9
Professional fees 5,596.2 749.0 6,345.2 5,710.7 634.5
Facilities and equipment 1,501.5 1,853.4 3,354.9 3,354.9 --
Goodwill & core deposit
premium write-downs 2,075.0 274.1 2,349.1 2,349.1 --
Equity investment write-down 519.9 519.9 519.9 --
Charitable trust 2,500.0 2,500.0 2,500.0 --
Other 3,963.8 85.6 4,049.4 2,788.1 1,203.7 57.6
----------- ----------- ----------- ----------- ---------- -----------
Total $ 36,303.2 $ 3,895.0 $ 40,198.2 $ 15,383.7 $ 7,427.6 $ 17,386.9
=========== =========== =========== =========== ========== ===========
</TABLE>
<PAGE> 57
The Special Charge in 1999 consists of $36.3 million ($25.9 million
after-tax) in merger-related integration costs and $3.9 million ($2.5 million
after-tax) of restructuring and other costs related to separate corporate
initiatives and impairment write-offs. As shown above, merger integration costs
consisted of personnel-related expenses, transaction costs, contract termination
and other conversion costs (primarily recognition of obligations under existing
contractual agreements related to system conversions), asset-related
write-downs, a write-down of impaired goodwill at an F&M bank, a contribution to
Citizens' Charitable Trust for the acquired entities and other transaction
related costs. Costs associated with strategic initiatives approved in the
fourth quarter of 1999 as well as a write-down of a core deposit premium from a
previous acquisition and a loss for an other than temporary decline in the
market value of an equity investment makeup the $3.9 million in restructuring
and other costs. The strategic initiatives approved in 1999 included realignment
of Citizens branch network, including closure of eighteen (18) branches in
Michigan and Illinois and transfer of Citizens internal audit and corporate loan
review functions to a third party. The remaining reserve balance at December 31,
1999 of $17.4 million is related primarily to severance, employee contracts and
contractual obligations under existing agreements and is expected to be utilized
in 2000.
In the third quarter of 1997 a special charge of $23.7 million ($17.3
million after tax) related to the July 1, 1997 merger with CB Financial
Corporation and the reorganization of Citizens' information technology
operations was recorded. The special charge consisted of $16.1 million of merger
related expenses and $7.6 million related to the information technology
reorganization. An adjustment of $931,000 was recorded against noninterest
expense to eliminate the restructuring liability in 1998. The following presents
a summary of the 1997 special charge activity for 1998 and 1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Year Ended December 31,
(in thousands) 1998 1997
- -----------------------------------------------------------
<S> <C> <C>
Beginning balance $ 4,895 $ 23,734
Intangible assets impairment --- (7,570)
Premises and equipment writedown (202) (2,773)
Cash payments (3,762) (8,496)
Adjustment (931) ---
------- --------
Balance at December 31 $ --- $ 4,895
======= ========
===========================================================
</TABLE>
NOTE 4. INVESTMENT SECURITIES
The amortized cost, estimated fair value and gross unrealized gains and
losses of investment securities follow:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999 December 31, 1998
------------------------------------------------- -------------------------------------------------
ESTIMATED GROSS GROSS Estimated Gross Gross
AMORTIZED FAIR UNREALIZED UNREALIZED Amortized Fair Unrealized Unrealized
(in thousands) COST VALUE GAINS LOSSES Cost Value Gains Losses
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury $ 35,014 $ 34,487 $ 12 $ 539 $ 55,382 $ 56,026 $ 644 $ --
Federal agencies:
Mortgage-backed 657,795 643,219 683 15,259 496,475 497,474 2,800 1,801
Other 248,000 242,729 16 5,287 146,092 146,950 1,010 152
State and municipal 375,866 368,732 2,946 10,080 159,500 164,444 5,094 150
Mortgage and asset-backed 28,761 28,421 18 358 31,407 31,670 341 78
Other 53,576 54,598 1,094 72 62,449 66,790 4,520 179
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total available for sale $1,399,012 $1,372,186 $ 4,769 $ 31,595 $ 951,305 $ 963,354 $ 14,409 $ 2,360
========== ========== ========== ========== ========== ========== ========== ==========
HELD TO MATURITY:
State and municipal $ -- $ -- $ -- $ -- $ 160,132 $ 168,419 $ 8,291 $ 4
========== ========== ========== ========== ========== ========== ========== ==========
=================================================================================================================================
</TABLE>
Page 28
<PAGE> 58
The amortized cost and estimated fair value of debt securities by
contractual maturity at December 31, 1999 are shown below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Estimated
Amortized Fair
(in thousands) Cost Value
- -----------------------------------------------------------
<S> <C> <C>
Due within one year $ 35,537 $ 35,765
One to five years 232,407 229,361
Five to ten years 237,613 234,967
After ten years 156,430 149,073
----------- -----------
661,987 649,166
Equity securities 50,469 51,380
Mortgage and asset-backed
securities 686,556 671,640
----------- -----------
Total $ 1,399,012 $ 1,372,186
=========== ===========
===========================================================
</TABLE>
Sales of investment securities resulted in realized gains and losses as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Year Ended December 31,
(in thousands) 1999 1998 1997
- ------------------------------------------------------------
<S> <C> <C> <C>
Securities gains $ 561 $ 504 $ 326
Securities losses (3,613) (29) (898)
-------- ----- ------
Net gain (loss) $ (3,052) $ 475 $ (572)
======== ===== ======
=============================================================
</TABLE>
Securities with amortized cost of $717.2 million at December 31, 1999, and
$320.2 million at December 31, 1998, were pledged to secure public deposits,
repurchase agreements, and other liabilities. Except for obligations of the U.S.
Government and its agencies, no holdings of securities of any single issuer
exceeded 10% of consolidated shareholders' equity at December 31, 1999 or 1998.
In December 1999, in order to provide for more effective asset/liability
management, the entire held to maturity securities portfolio of F&M was
transferred to available for sale. The held to maturity portfolio had an
amortized cost of $208.3 million and fair value of $204.7 million at the date of
transfer. The unrealized loss of $3.6 million is included, net of tax, in
accumulated other comprehensive income.
The Financial Accounting Standards Board Statement No. 133, as amended by
SFAS No. 137, establishes accounting and reporting standards for hedging
activities and for derivative instruments, including certain derivative
instruments embedded in other contracts. This statement requires a company to
recognize all derivatives as either assets or liabilities in its balance sheet
and measure those instruments at fair value. Citizens plans to adopt this
statement as amended effective January 1, 2001. The impact of adopting the
provisions of this Statement on Citizens' financial position, results of
operations and cash flow subsequent to the effective date is not currently
estimable and will depend on the financial position of Citizens and the nature
and purpose of the derivative instruments in use at that time.
NOTE 5. LOANS AND NONPERFORMING ASSETS
With the merger of F&M on November 1, 1999, Citizens now extends credit
within the five midwestern states of Michigan, Wisconsin, Illinois, Iowa, and
Minnesota. In Michigan the primary market area includes most parts of the Lower
Peninsula. In Wisconsin the primary market area is the Fox Valley region
extending from Green Bay to Appleton to Oshkosh as well as northeastern and
southwestern Wisconsin. Other primary market areas are central Iowa; the western
suburban market of Chicago, Illinois; and Dundas, Minnesota. Citizens seeks to
limit its credit risk by establishing guidelines to review its aggregate
outstanding commitments and loans to particular borrowers, industries and
geographic areas. Collateral is secured based on the nature of the credit and
management's credit assessment of the customer.
Citizens' loan portfolio is widely diversified by borrowers with no
concentration within a single industry that exceeds 10% of total loans. Citizens
has no loans to foreign countries and generally does not participate in large
national loan syndications or highly leveraged transactions. Most of Citizens'
commercial real estate loans consist of mortgages on owner-occupied properties.
Those borrowers are involved in business activities other than real estate, and
the sources of repayment are not dependent on the performance of the real estate
market.
A summary of nonperforming assets follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
December 31,
(in thousands) 1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Nonperforming loans:
Nonaccrual $ 28,931 $ 35,142
Loans 90 days past due (still accruing) 2,139 2,474
Restructured 9 114
-------- --------
Total nonperforming loans 31,079 37,730
Other real estate 3,040 3,751
Other assets acquired by repossession 999 1,039
-------- --------
Total nonperforming assets $ 35,118 $ 42,520
======== ========
============================================================
</TABLE>
The effect of nonperforming loans on interest income follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Year Ended December 31,
(in thousands) 1999 1998 1997
- -------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
At original contract rates $ 3,383 $ 3,315 $ 3,586
As actually recognized 1,861 1,845 1,334
------- ------- -------
Interest foregone $ 1,522 $ 1,470 $ 2,252
======= ======= =======
=============================================================
</TABLE>
Page 29
<PAGE> 59
There are no significant commitments outstanding to lend additional funds
to clients whose loans were classified as nonaccrual or restructured at December
31, 1999.
At December 31, 1999, loans considered to be impaired totaled $27.5 million
of which $18.5 million were on a nonaccrual basis. Included within this amount
is $13.1 million of impaired loans for which the related allowance for loan
losses is $1.5 million and $14.4 million of impaired loans for which fair value
exceeded the recorded investment in the loan. The average recorded investment in
impaired loans during the year ended December 31, 1999 was approximately $32.5
million. For the year ended December 31, 1999, Citizens recognized interest
income of $1.3 million. Cash collected on nonaccrual impaired loans totaled $1.5
million of which $0.9 million was applied to principal and $0.6 million was
recognized using the cash basis method of income recognition.
At December 31, 1998, loans considered to be impaired totaled $22.8 million
of which $13.0 million were on a nonaccrual basis. Included with this amount is
$16.4 million of impaired loans for which the related allowance for loan losses
is $3.8 million and $6.4 million of impaired loans for which the fair value
exceeded the recorded investment in the loan. The average recorded investment in
impaired loans during the year ended December 31, 1998 was approximately $27.5
million. For the year ended December 31, 1998, Citizens recognized interest
income of $1.3 million, which included $0.8 million of interest income
recognized using the cash basis method of income recognition.
Certain directors and executive officers of Citizens and its significant
subsidiaries, including their families and entities in which they have 10% or
more ownership, were clients of the banking subsidiaries. Total loans to these
clients aggregated $20.0 million and $25.3 million at December 31, 1999 and
1998, respectively. During 1999, new loans of $7.0 million were made and
repayments totaled $12.3 million. Substantially all such loans were made in the
ordinary course of business on substantially the same terms, including interest
rates and collateral, as those for comparable transactions with unrelated
parties and did not involve more than normal risk of collectibility.
The consolidated financial statements do not include loans serviced for
others, which totaled $374.8 million and $285.7 million at December 31, 1999 and
1998, respectively. There was no impairment of mortgage servicing rights, and
the carrying value of mortgage servicing rights approximates the fair market
value at December 31, 1999 and 1998.
Changes in originated mortgage servicing rights for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
(in thousands) 1999 1998
- -----------------------------------------------------------
<S> <C> <C>
Balance - January 1 $ 2,603 $ 731
Mortgage servicing rights capitalized 1,468 2,592
Amortization (736) (720)
------- -------
Balance - December 31 $ 3,335 $ 2,603
======= =======
===========================================================
</TABLE>
NOTE 6. ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(in thousands) 1999 1998 1997
- -------------------------------------------------------------
<S> <C> <C> <C>
Balance - January 1 $ 69,740 $ 67,010 $ 59,029
Allowance of acquired banks
and branches 2,400 1,745 1,329
Provision for loan losses 24,675 16,528 20,511
Charge-offs (26,862) (19,795) (18,480)
Recoveries 6,444 4,252 4,621
-------- -------- --------
Net charge-offs (20,418) (15,543) (13,859)
-------- -------- --------
Balance - December 31 $ 76,397 $ 69,740 $ 67,010
======== ======== ========
=============================================================
</TABLE>
NOTE 7. PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
December 31,
(in thousands) 1999 1998
- -------------------------------------------------------------
<S> <C> <C>
Land $ 21,433 $ 19,415
Buildings 140,126 131,588
Leasehold improvements 6,111 5,362
Furniture and equipment 125,333 115,891
--------- --------
293,003 272,256
Accumulated depreciation
and amortization (151,543) (144,276)
--------- --------
Total $ 141,460 $127,980
========= ========
=============================================================
</TABLE>
Certain branch facilities and equipment are leased under various operating
leases. Total rental expense, including expenses related to these operating
leases, was $4.1 million in 1999, $4.7 million in 1998 and $3.8 million in 1997.
Future minimum rental commitments under non-cancelable operating leases are as
follows at December 31, 1999: $3.1 million in 2000, $2.2 million in 2001, $1.9
million in 2002, $1.6 million in 2003, $0.3 million in 2004, and $1.1 million
after 2004.
Page 30
<PAGE> 60
NOTE 8. DEPOSITS
A summary of deposits follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
December 31,
(in thousands) 1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Noninterest-bearing demand $ 965,849 $ 913,846
Interest-bearing demand 609,578 598,149
Savings 1,811,142 1,705,552
Time deposits over $100,000 695,315 616,907
Other time deposits 2,047,114 1,938,338
----------- ----------
Total $ 6,128,998 $5,772,792
=========== ==========
============================================================
</TABLE>
Excluded from total deposits are demand deposit account overdrafts, which
have been reclassified as loans. At December 31, 1999 and 1998, these overdrafts
totaled $6.1 million and $4.7 million, respectively. Time deposits with
remaining maturities of one year or more are $732.1 million at December 31,
1999. The maturities of these time deposits are as follows: $349.8 million in
2001, $149.7 million in 2002, $110.8 million in 2003, $96.8 million in 2004 and
$25.0 million after 2004.
NOTE 9. SHORT-TERM BORROWINGS
Short-term borrowings consist of Federal funds purchased and securities
sold under agreements to repurchase, Federal Home Loan Bank ("FHLB") borrowings,
other bank borrowings, and demand notes to the U.S. Treasury. Federal funds
purchased are overnight borrowings from other financial institutions. Securities
sold under agreements to repurchase are secured transactions done principally
with clients and generally mature within thirty days.
Citizens' Parent company maintains a short-term line of credit with three
banks totaling $60 million. The interest rate on the outstanding balance of $42
million at December 31, 1999 reprices daily and is based upon the Federal funds
rate. Interest is payable monthly and the remaining principal is due in
September 2000. The Parent company services the debt's principal and interest
payments with dividends from the subsidiary banks. The agreement also requires
Citizens to maintain certain financial covenants. Citizens is in full compliance
with all debt covenants as of December 31, 1999.
Information relating to federal funds purchased and securities sold under
agreements to repurchase follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
(in thousands) 1999 1998 1997
- ----------------------------------------------------------------
<S> <C> <C> <C>
At December 31:
Balance $ 276,805 $172,183 $216,483
Weighted average
interest rate paid 5.20% 4.14% 5.64%
During the year:
Maximum outstanding
at any month-end $ 326,339 $233,684 $331,419
Daily average 256,718 $179,147 225,925
Weighted average
interest rate paid 4.74% 4.78% 5.04%
================================================================
</TABLE>
In 1999 a significant amount of short-term borrowings also consisted of
FHLB advances and lines of credit to subsidiary banks. Information relating to
short-term FHLB borrowings follows:
<TABLE>
<CAPTION>
- ------------------------------------
(in thousands) 1999 (1)
- ------------------------------------
<S> <C>
At December 31:
Balance $555,874
Weighted average
interest rate paid 5.34%
During the year:
Maximum outstanding
at any month-end $555,874
Daily average 196,055
Weighted average
interest rate paid 5.26%
====================================
</TABLE>
(1) Prior year amounts were immaterial.
NOTE 10. LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
December 31,
(in thousands) 1999 1998
- ---------------------------------------------------------
<S> <C> <C>
CITIZENS (PARENT ONLY):
Revolving credit facility $ --- $ 13,000
-------- ---------
Total --- 13,000
SUBSIDIARIES:
FHLB Notes 126,854 212,784
Other 250 387
-------- ---------
Total 127,104 213,171
-------- ---------
Total long-term debt $127,104 $ 226,171
======== =========
=========================================================
</TABLE>
Page 31
<PAGE> 61
Long-term advances from the FHLB are at fixed and variable rates ranging
from 4.90% to 7.73% and have maturities ranging from three to fifteen years.
Interest is paid monthly. At December 31, 1999, qualifying mortgage loans of
$1.330 billion and FHLB stock collateralized long and short-term advances from
the FHLB.
Maturities of long-term debt during the next five years follow:
<TABLE>
<CAPTION>
- -------------------------------------------------------
(in thousands)
- -------------------------------------------------------
<S> <C>
2000 $ 3,131
2001 25,236
2002 25,542
2003 1,548
2004 2,256
Over 5 Years 69,391
--------
Total $127,104
========
=======================================================
</TABLE>
NOTE 11. EMPLOYEE BENEFIT PLANS
PENSION AND POSTRETIREMENT BENEFITS: Citizens has a noncontributory,
defined benefit pension plan covering substantially all non-F&M employees.
Retirement benefits are based on the employee's length of service and salary
levels. Actuarially determined pension costs are charged to current operations.
Additionally, Citizens maintains defined benefit plans sponsored by two
subsidiary banks of F&M (the "F&M Plans") covering substantially all of the
employees of these banks. The participants in these F&M Plans do not accrue any
additional benefit for service. The funding policy for all plans is to
contribute annually an amount sufficient to meet or exceed the minimum funding
requirements of applicable laws and regulations, plus such additional amounts as
Citizens deems appropriate up to that allowable by federal tax regulations.
Nonqualified supplemental benefit plans for certain key employees are also
maintained and are being provided for by charges to earnings sufficient to meet
the projected benefit obligation. The defined pension benefits provided under
these plans are unfunded and any payments to plan participants are made by
Citizens.
Citizens also sponsors a postretirement benefit plan offering medical and
life insurance benefits. The plan, as amended, is available to full-time
employees who retire at normal retirement age, were age 50 prior to January 1,
1993 and have at least 15 years of credited service under Citizens' defined
benefit pension plan. The medical portion of the plan is contributory to the
participants. The life insurance coverage is noncontributory and provided on a
reducing basis for 5 years. Those retired prior to January 1, 1993 receive
benefits provided by the plan prior to its amendment. That plan included dental
care, had some contribution requirements, and has less restrictive eligibility
requirements.
The following table shows the benefit obligation, plan assets, funded
status, amounts recognized in the consolidated balance sheets and lists the
assumption used in determining the actuarial present value of the benefit
obligation for all plans except the F&M Plans, which are separately presented.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Other Post-
Pension Retirement
Benefits Benefits
------------------------ -----------------------------
(in thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN PLAN ASSETS
Fair value of plan assets
at beginning of year $ 56,793 $ 52,417 $ --- $ ---
Actual return on plan assets 8,967 6,554 --- ---
Employer contribution 234 214 1,052 920
Participant contribution --- 135 83
Expenses paid (89) (99) --- ---
Benefits paid (2,258) (2,293) (1,187) (1,003)
-------- -------- --------- ---------
Fair value of plan assets
at end of year 63,647 56,793 --- ---
-------- -------- --------- ---------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation
at beginning of year 49,464 43,337 13,231 13,513
Service cost 2,304 2,023 12 16
Interest cost 3,504 3,259 919 936
Participant contribution --- --- 135 83
Actuarial (gains) losses (5,084) 3,138 1,313 (122)
Curtailment gain (84) --- --- ---
Plan amendment --- --- --- (192)
Benefits paid (2,258) (2,293) (1,187) (1,003)
-------- -------- --------- ---------
Benefit obligation
at end of year 47,846 49,464 14,423 13,231
-------- -------- --------- ---------
RECONCILIATION OF FUNDED STATUS
Funded status of the plans 15,801 7,329 (14,423) (13,231)
Unrecognized:
Net asset at transition -
recognized over 16 yrs. (329) (537) --- ---
Prior service cost 463 436 (426) (886)
Net actuarial gain (19,634) (11,023) (515) (1,885)
-------- -------- --------- ---------
Accrued benefit cost
recognized in the
consolidated balance
sheets $ (3,699) $ (3,795) $ (15,364) $ (16,002)
======== ======== ========= =========
====================================================================================
WEIGHTED-AVERAGE ASSUMPTIONS
AS OF DECEMBER 31
Discount rate 8.00% 7.25% 8.00% 7.25%
Rate of compensation
increase (1) (1) (1) (1)
Expected return on
plan assets 9.75 9.75 --- ---
====================================================================================
</TABLE>
(1) Scaled by age of plan participant - 9.00% at age 24 or under declining to
4.00% at age 50 or older.
Page 32
<PAGE> 62
The accrued pension benefit cost shown above includes the pension
liabilities for plans where accumulated plan benefits exceed assets. The
projected benefit obligation and accumulated benefit obligation for these
supplemental benefit plans were approximately $3.1 and $2.9 million,
respectively, as of December 31, 1999 and $3.2 and $3.0 million, respectively,
as of December 31, 1998.
Plan assets of the defined benefit pension plan consisted primarily of
mutual and money market funds, and listed bonds and equity securities, including
$467,000 and $704,000 of Citizens common stock at December 31, 1999 and 1998,
respectively.
The following table shows the benefit obligations, plan assets, funded
status and amounts recognized in Citizens' consolidated balance sheets for the
F&M Plans.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
F&M Bank BancSecurity
Waushara County Corporation
----------------- -----------------
(in thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN PLAN ASSETS
Fair value of plan assets
at beginning of year $1,330 $1,398 $6,900 $6,629
Actual return on plan assets 74 67 322 505
Employer contribution 99 116 --- ---
Benefits paid (124) (251) (341) (234)
------ ------ ------ ------
Fair value of plan assets
at end of year 1,379 1,330 6,881 6,900
------ ------ ------ ------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation
at beginning of year 2,048 2,109 6,924 6,754
Service cost --- --- --- 354
Interest cost 119 126 395 509
Actuarial (gains) losses (509) 64 (1,891) (459)
Benefits paid (124) (251) (341) (234)
------ ------ ------ ------
Benefit obligation
at end of year 1,534 2,048 5,087 6,924
------ ------ ------ ------
RECONCILIATION OF FUNDED STATUS
Funded status of the plans (155) (718) 1,794 (24)
Unrecognized:
Net asset at transition --- --- (53) (63)
Prior service cost --- --- 62 71
Net actuarial gain (328) 158 (1,579) 63
------ ------ ------ ------
Accrued benefit cost
recognized in the
consolidated balance
sheets $ (483) $ (560) $ 224 $ 47
====== ====== ====== ======
==================================================================
</TABLE>
The assumption used in determining the actuarial present value of the
benefit obligations for the F&M Plans follow:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
F&M Bank BancSecurity
Waushara County Corporation
-------------------------- ---------------------------
1999 1998 1997 1999 1998 1997
-------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED-AVERAGE
ASSUMPTIONS
DECEMBER 31
Discount rate 8.00% 6.00% 6.00% 8.00% 5.90% 7.30%
Rate of compensation
increase 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Expected return on
plan assets 9.75 7.50 7.50 9.75 8.50 8.50
==================================================================================
</TABLE>
Plan assets of these defined benefit pension plans consisted primarily of
mutual and money market funds, and listed bonds and equity securities. Citizens
plans to transfer the assets of these plans into a new cash balance defined
benefit plan to be established, effective January 1, 2000, for the employees of
F&M.
The components of net periodic benefit cost charged to operations each year
for all plans follow:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Year Ended December 31,
--------------------------------
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------
<S> <C> <C> <C>
DEFINED BENEFIT PENSION PLANS
Service cost $2,304 $ 2,377 $ 2,351
Interest cost 4,018 3,894 3,598
Expected return on plan assets (5,554) (4,894) (4,458)
Amortization of unrecognized:
Net transition asset (218) (174) (174)
Prior service cost 114 117 135
Net actuarial gain (464) (195) (212)
------ ------- -------
Net pension cost 200 1,125 1,240
------ ------- -------
POSTRETIREMENT BENEFIT PLANS
Service cost 12 16 40
Interest cost 919 936 995
Amortization of unrecognized:
Prior service cost (460) (460) (438)
Net actuarial gain (57) (62) (127)
------ ------- -------
Net postretirement benefit cost 414 430 470
DEFINED CONTRIBUTION RETIREMENT
AND 401(K) PLANS
Employer contributions 4,662 3,894 3,563
------ ------- -------
Total periodic benefit cost $5,276 $ 5,449 $ 5,273
====== ======= =======
====================================================================
</TABLE>
Page 33
<PAGE> 63
In the third quarter of 1999, Citizens adopted an alternative
market-related value methodology for pension plan assets to better reflect plan
asset earnings, a component of pension expense, in 1999 and future years. The
change reduced 1999 annual pension expense by approximately $556,000.
Prior service pension costs are amortized on a straight-line basis over the
average remaining service period of employees expected to receive benefits under
the plans. For the postretirement benefit plans, Citizens assumed a 6%
weighted-average annual rate of increase in the per capita cost of covered
health care benefits (the health care cost trend rate) for 1999, decreasing 1%
annually to 5% by the year 2000, after which the costs would remain level. This
assumption can have a significant effect on the amounts reported. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
One Percentage One Percentage
(in thousands) Point Increase Point Decrease
- -------------------------------------------------------------
<S> <C> <C>
Effect on total of service and
interest cost components $ 88 $ (76)
Effect on the postretirement
benefit obligation 1,227 (1,127)
- ------------------------------------------------------------
</TABLE>
DEFINED CONTRIBUTION SAVINGS AND RETIREMENT PLANS: Substantially all
employees are eligible to contribute a portion of their pre-tax salary to a
defined contribution 401(k) savings plan. Under the plan, employee contributions
are partially matched by Citizens. The employer matching contribution is 75
percent of the first 6% (100 percent of the first 3% plus 50 percent of the next
3%) of each eligible employee's qualifying salary contributed to the plan. In
addition, one third of these matching contributions are used to fund a
postretirement medical savings account established within the plan for each
contributing employee. Plan assets from a defined contribution 401(k) savings
plan and an Employee Stock Ownership Plan ("ESOP") maintained by F&M and one of
its subsidiaries prior to the merger are expected to be transferred into
Citizens' plan during 2000. Employer matching contributions for the F&M 401(k)
savings plan were based on the company's return on equity and incorporated a
discretionary profit-sharing contribution. The assets of the ESOP plan are
frozen and include 181,411 shares of Citizens' stock at year-end 1999.
NOTE 12. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of Citizens' deferred tax assets and liabilities as of
December 31, 1999 and 1998 follow:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
(in thousands) 1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $27,771 $24,933
Accrued merger related charges 6,321 ---
Accrued postemployment
benefits other than pensions 5,589 5,601
Net unrealized losses on securities 9,412 ---
Other deferred tax assets 6,465 7,201
------- -------
Deferred tax assets 55,558 37,735
------- -------
Deferred tax liabilities:
Tax over book depreciation 3,893 4,037
Acquisition premium on loans 3,684 3,753
Net unrealized gains on securities --- 4,501
Other deferred tax liabilities 3,448 2,777
------- -------
Deferred tax liabilities 11,025 15,068
------- -------
Net deferred tax assets $44,533 $22,667
======= =======
============================================================
</TABLE>
Income tax expense consists of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Year Ended December 31,
(in thousands) 1999 1998 1997
- ------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense:
Federal $ 33,870 $ 35,021 $ 28,559
State 2,072 2,426 2,319
-------- -------- --------
Total current tax expense 35,942 37,447 30,878
Deferred tax expense (credit) (7,953) 1,836 (5,681)
-------- -------- --------
Total income tax expense $ 27,989 $ 39,283 $ 25,197
======== ======== ========
============================================================
</TABLE>
A reconciliation of income tax expense to the amount computed by applying
the federal statutory rate of 35% to income before income taxes follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Year Ended December 31,
(in thousands) 1999 1998 1997
- ------------------------------------------------------------
<S> <C> <C> <C>
Tax at federal statutory rate
applied to income before
income taxes $ 31,494 $ 45,348 $ 28,031
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (7,230) (6,703) (6,545)
Other 3,725 638 3,711
-------- -------- --------
Total income tax expense $ 27,989 $ 39,283 $ 25,197
======== ======== ========
============================================================
</TABLE>
Page 34
<PAGE> 64
NOTE 13. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Year Ended December 31,
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Numerator for basic and
dilutive earnings per share --
net income available to
common shareholders $ 61,994 $ 90,282 $ 54,891
======== ======== ========
Denominator:
Denominator for basic
earnings per share --
weighted average shares 48,169 48,427 47,043
Effect of dilutive
securities - potential
conversion of employee
stock options 448 658 609
-------- -------- --------
Denominator for diluted
earnings per share --
adjusted weighted-average
shares and assumed 48,617 49,085 47,652
======== ======== ========
Basic earnings per share $ 1.29 $ 1.86 $ 1.17
======== ======== ========
Diluted earnings per share $ 1.28 $ 1.84 $ 1.15
======== ======== ========
=============================================================================
</TABLE>
All employee stock options were dilutive except for options granted in 1998
and 1999. See Note 14 for additional disclosures regarding employee stock
options.
NOTE 14. SHAREHOLDERS' EQUITY
SHAREHOLDERS' RIGHTS PLAN: Citizens' Shareholders' Rights Plan is designed
to provide certain assurances that all shareholders are treated fairly in
connection with certain types of business transactions involving an attempt to
acquire controlling interest in Citizens. Under the plan, one right attaches to
each outstanding share of common stock and, adjusted for stock splits,
represents the right to purchase from Citizens one-third of 1/100th of a share
of a new series of preferred stock at a price of $25.00. The rights become
exercisable only if a person or group without Board approval acquires or
announces an intention to acquire 15% or more of Citizens' outstanding common
stock. Upon the occurrence of such an event, each right entitles the holder
(other than the acquirer) to purchase one share of common stock of Citizens or
the surviving company at 50% of the market price. These rights are redeemable by
the Board for one-third of $0.01 per right and expire July 20, 2000. The rights
will cause substantial dilution to a person or entity attempting to acquire
Citizens without conditioning the offer on the rights being redeemed by the
Board.
STOCK REPURCHASE PLANS: Citizens initiated a stock repurchase program in
May 1998. This program authorizes Citizens to purchase up to 600,000 shares for
treasury in satisfaction of its obligation to issue shares upon the exercise of
stock options. A second program to purchase up to 1,400,000 shares was initiated
in January 1999 and completed in 1999. During the year, a total of 1,757,900
shares were purchased under both plans at an average price of $30.61. As of
December 31, 1999, there were 32,800 shares to be purchased under the May 1998
program. The treasury shares have been accorded the accounting treatment as if
retired.
STOCK OPTION PLAN: Citizens' stock option plan, as amended and restated in
April 1997, authorizes the granting of incentive and nonqualified stock options,
tandem stock appreciation rights, restricted stock and performance share grants
to key employees. Aggregate grants under the plan may not exceed 3,000,000
shares within any six-year period and are limited annually to 3% of Citizens'
outstanding common stock as of the first day of the year, plus any unused shares
that first become available for grants in the prior year. The exercise price of
all options granted under the plan is equal to the market price of Citizens'
stock on the date of grant.
During 1997, replacement options were granted under certain circumstances
upon exercise of a nonqualified stock option by payment of the exercise price
with shares of Citizens' common stock. A replacement option provided the
employee with a new option to purchase the number of shares surrendered at an
option price equal to the fair market value of Citizens' common stock on the
date the underlying nonqualified stock option was exercised. No replacement
options have been granted since May 1997. In 1997, shares totaling 167,705 were
surrendered by employees for payment to Citizens for stock option exercises for
which an equal number of replacement options were granted.
Options may be granted until January 16, 2002 and expire ten years from the
date of grant. Options granted since April 1992 are exercisable subject to a
predetermined vesting schedule based on achievement of certain return on average
asset or earnings per share targets. At December 31, 1999, options outstanding
under the plan totaled 2,034,116 shares of which 472,182 shares were not
exercisable subject to future achievement of the performance targets. These
options become exercisable after five years if the performance targets are not
met. Canceled or expired options become available for future grants.
Citizens also maintains a stock option plan for its directors. Under this
plan, each non-employee director of Citizens immediately following an annual
meeting of shareholders receives an automatic option grant of 1,500 shares.
Options outstanding under the plan totaled 94,500 shares as of December 31,
1999. Other options of Citizens include those granted by F&M to its directors
and key employees that were converted into Citizens' options at the time of the
merger. At year-end 1999, 137,881 shares of these options were outstanding.
Page 35
<PAGE> 65
Citizens has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options as permitted by
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation." Under APB 25, no compensation expense is recognized
by Citizens because the exercise price of the stock options equals the market
price of the underlying stock on the date of grant.
Statement 123 requires certain pro forma disclosures regarding net income
and earnings per share as if Citizens had accounted for its stock options under
the fair value method of that statement. The following table provides these
disclosures along with significant assumptions used to estimate the fair value
of these options:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma amounts:
Net income (in thousands) $60,590 $89,257 $53,955
Net income per share:
Basic 1.26 1.84 1.15
Diluted 1.25 1.82 1.13
Assumptions:
Dividend yield 3.0% 3.0% 3.5%
Expected volatility 19.5% 18.7% 17.0%
Risk-free interest rate 5.59% 5.72% 5.46-6.57%
Expected lives 5 yrs. 5 yrs. 1 - 5 yrs.
==================================================================
</TABLE>
A summary of stock option transactions under the plans for 1999, 1998 and
1997 follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Options Option Price
------------------------------ -------------------------------
Available Per Share
for Grant Outstanding Range Average
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
January 1, 1997 764,955 1,963,190 $5.400-20.583 $14.85
Authorized 251,401 --- --- ---
Granted (616,527) 616,527 18.710-22.000 21.53
Exercised --- (503,373) 5.400-20.753 14.84
Canceled 13,938 (13,938) 17.333-19.583 18.70
--------- --------- ------------- ------
December 31, 1997 413,767 2,062,406 5.400-22.000 16.82
Authorized 810,872 --- --- ---
Granted (388,329) 388,329 27.510-36.313 34.77
Exercised --- (313,182) 5.400-21.833 14.91
Canceled 9,092 (9,092) 17.333-35.625 27.79
--------- --------- ------------- ------
December 31, 1998 845,402 2,128,461 5.400-36.313 20.33
AUTHORIZED 201,237 --- --- ---
GRANTED (455,229) 455,229 22.930-32.594 29.99
EXERCISED --- (287,906) 5.400-27.510 11.70
CANCELED 29,287 (29,287) 24.85-35.625 31.88
--------- --------- ------------- ------
DECEMBER 31, 1999 620,697 2,266,497 $5.400-36.313 $23.22
========= ========= ============= ======
</TABLE>
================================================================================
The following table summarizes information on stock options outstanding
as of December 31, 1999:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- -----------------------------
Weighted- Weighted- Weighted-
Average Average Exercise Average
Range Amount Remaining Life Price Amount Exercise Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.40 - 15.00 260,922 2.0 years $ 10.13 260,922 $ 10.13
15.00 - 21.00 699,381 5.4 18.76 699,381 18.76
21.00 - 36.32 1,306,194 7.8 28.22 834,012 25.99
--------- ---------
$ 5.40 - 36.32 2,266,497 6.4 23.22 1,794,315 20.87
========= =========
===================================================================================================================
</TABLE>
Page 36
<PAGE> 66
NOTE 15. COMMITMENTS AND CONTINGENT
LIABILITIES
The Consolidated Financial Statements do not reflect various loan
commitments (unfunded loans and unused lines of credit) and letters of credit
originated in the normal course of business. Loan commitments are made to
accommodate the financial needs of clients. Generally, new loan commitments do
not extend beyond 90 days and unused lines of credit are reviewed at least
annually. Letters of credit guarantee future payment of client financial
obligations to third parties. They are issued primarily for services provided or
to facilitate the shipment of goods, and generally expire within one year. Both
arrangements have essentially the same level of credit risk as that associated
with extending loans to clients and are subject to Citizens' normal credit
policies. Inasmuch as these arrangements generally have fixed expiration dates
or other termination clauses, most expire unfunded and do not necessarily
represent future liquidity requirements. Collateral is obtained based on
management's assessment of the client and may include receivables, inventories,
real property and equipment.
Amounts available to clients under loan commitments and letters of credit
follow:
- ---------------------------------------------------------------------
December 31,
(in thousands) 1999 1998
- ---------------------------------------------------------------------
LOAN COMMITMENTS
AND LETTERS OF CREDIT:
Commitments to extend credit $ 1,665,872 $ 1,661,726
Standby letters of credit 36,405 28,522
Commercial letters of credit 77,295 49,651
=====================================================================
Loan commitments outstanding include $240.1 million of credit card
commitments and $211.1 million of home equity credit lines in 1999. The same
amounts for 1998 were $238.5 million and $208.4 million, respectively.
Citizens and its subsidiaries are parties to litigation arising in the
ordinary course of business. Management believes that the aggregate liability,
if any, resulting from these proceedings would not have a material effect on
Citizens' consolidated financial position.
NOTE 16. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Financial Accounting
Standards Board Statement No. 107, "Disclosure About Fair Value of Financial
Instruments" ("SFAS 107"). Where quoted market prices are not available, as is
the case for a significant portion of Citizens' financial instruments, the fair
values are based on estimates using present value or other valuation techniques.
These techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Accordingly, the derived
fair value estimates presented herein cannot be substantiated by comparison to
independent markets and are not necessarily indicative of the amounts Citizens
could realize in a current market exchange.
In addition, the fair value estimates are based on existing on- and
off-balance sheet financial instruments without attempting to estimate the value
of anticipated future business and the value of assets and liabilities that are
not considered financial instruments. For example, Citizens has a substantial
trust department that contributes net fee income annually. The trust department
is not considered a financial instrument and its value has not been incorporated
into the fair value estimates. Other significant assets and liabilities that are
not considered financial assets or liabilities include Citizens' brokerage
network, net deferred tax asset, premises and equipment, goodwill and deposit
based intangibles. In addition, tax ramifications related to the recognition of
unrealized gains and losses such as those within the investment securities
portfolio can also have a significant effect on estimated fair values and have
not been considered in the estimates. Accordingly, the aggregate fair value
amounts do not represent the underlying value of Citizens.
Page 37
<PAGE> 67
The estimated fair values of Citizens' financial instruments follow:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 December 31, 1998
------------------------ -----------------------
CARRYING ESTIMATED Carrying Estimated
(in millions) AMOUNT FAIR VALUE Amount Fair Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and money market investments $ 339.7 $ 339.7 $ 330.5 $ 326.2
Investment securities 1,372.2 1,372.2 1,123.5 1,131.8
Net loans 5,841.1 5,845.3 5,195.0 5,359.5
Financial liabilities:
Deposits 6,129.0 6,112.7 5,772.8 5,789.1
Short-term borrowings 937.3 937.6 185.2 185.2
Long-term debt 127.1 122.1 226.2 226.1
Off-balance sheet financial instrument liabilities:
Loan commitments --- 2.3 --- 2.4
Standby and commercial letters of credit --- 0.6 --- 0.4
============================================================================================================================
</TABLE>
The various methods and assumptions used by Citizens in estimating fair
value for its financial instruments are set forth below:
CASH AND MONEY MARKET INVESTMENTS: The carrying amounts reported in the
balance sheet for cash and money market investments approximate those assets'
fair values because they mature within six months and do not present
unanticipated credit concerns.
INVESTMENT SECURITIES: For investment securities classified as available-
for-sale-or trading, the carrying value approximates those assets' fair values.
SFAS 115 requires securities carried in the available-for-sale or trading
categories to be carried at fair value. See Note 4. The fair values are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. The carrying value for investment securities classified as held-to-
maturity reflects amortized cost. Fair values for these securities were obtained
from quoted market prices of these or comparable instruments, similar to
available-for-sale and trading securities.
LOANS RECEIVABLE: Fair values are estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential mortgage, credit card, and other
consumer. Each loan category is further segmented into fixed and variable-rate
interest types and for certain categories by performing and nonperforming. For
performing variable-rate loans that reprice frequently (within twelve months)
and with no significant change in credit risk, fair values are based on carrying
values. Similarly, for credit card loans with no significant credit concerns and
average interest rates approximating current market origination rates, the
carrying amount is a reasonable estimate of fair value. Fair values of other
loans (e.g., fixed-rate commercial, commercial real estate, residential mortgage
and other consumer loans) are estimated by discounting the future cash flows
using interest rates currently being offered by Citizens for loans with similar
terms and remaining maturities ("new loan rates"). Management believes the risk
factor embedded in the new loan rates adequately represents the credit risk
within the portfolios. Fair values for nonperforming loans are estimated after
giving consideration to credit risk and estimated cash flows and discount rates
based on available market and specific borrower information. The carrying amount
of accrued interest for all loan types approximates its fair value.
DEPOSIT LIABILITIES: Under SFAS 107, the fair value of demand deposits
(e.g., interest and noninterest checking, passbook savings and certain types of
money market accounts) are, by definition, equal to the amount payable on demand
at the reporting date (i.e., their carrying amounts). Fair values for
certificates of deposit are based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
certificates of similar remaining maturities.
SHORT-TERM BORROWINGS: The carrying amounts of federal funds purchased,
securities sold under agreement to repurchase and other short-term borrowings
approximate their fair values.
LONG-TERM DEBT: The carrying value of Citizens' variable-rate long-term
debt approximates its fair value. The fair value of fixed-rate long-term debt is
estimated using discounted cash flow analyses, based on Citizens' current
incremental borrowing rates for similar types of borrowing arrangements.
LOAN COMMITMENTS AND LETTERS OF CREDIT: The fair value of loan
commitments and letter of credit guarantees is based on fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
Page 38
<PAGE> 68
NOTE 17. LINES OF BUSINESS
The financial performance of Citizens is monitored by an internal
profitability measurement system, which provides line of business results and
key performance measures. The profitability measurement system is based on
internal management methodologies designed to produce consistent results and
reflect the underlying economics of the businesses. The development and
application of these methodologies is a dynamic process. Accordingly, these
measurement tools and assumptions may be revised periodically to reflect
methodological, product, and/or management organizational changes. Further,
these policies measure financial results that support the strategic objectives
and internal organizational structure of Citizens. Consequently, the information
presented is not necessarily comparable with similar information for other
institutions.
Citizens is managed along the following business lines: Commercial
Banking, Retail Banking, Financial Services, F&M and all other.
COMMERCIAL BANKING: Commercial Banking provides a full range of credit
and related financial services to middle market corporate, government and
leasing clients. Products and services offered include commercial loans,
commercial mortgages, letters of credit, deposit accounts, cash management and
international trade services.
RETAIL BANKING: Retail Banking includes consumer lending and deposit
gathering, electronic banking, residential mortgage loan origination and
servicing, and small business banking. This line of business offers a variety of
retail financial products and services including deposit accounts, direct and
indirect installment loans, small business loans, debit and credit cards, home
equity lines of credit, residential mortgage loans and ATM network services.
FINANCIAL SERVICES: Financial Services provides commercial and retail
clients with private banking, trust and investment, retirement plan, and
brokerage and insurance services. Private banking focuses on high net-worth
customers and offers a broad array of asset management, estate settlement and
administration, deposit and credit products. Trust and investment includes
personal trust and planning services, investment management services, estate
settlement, administration and advises the Golden Oak family of mutual funds.
Retirement plan services focus on investment management and fiduciary activities
with special emphasis on 401(k) plans. The brokerage and insurance businesses
deliver Citizens' retail mutual funds, other securities, variable and fixed
annuities, personal disability and life insurance products and discounted
brokerage services.
F&M: F&M provides a full range of consumer and commercial banking
services to individuals, and commercial and agricultural businesses, in
Wisconsin, Iowa and Minnesota through a network of subsidiary banks. Products
and services offered include deposit accounts; commercial, commercial mortgage,
agricultural, residential mortgage and consumer loans; financial planning and
trust; brokerage, insurance, ATM, credit card and cash management services. F&M
will continue to be managed as a separate business unit until all systems are
converted and operations have been realigned.
ALL OTHER: All other includes activities that are not directly
attributable to one of the four major lines of business. Included in this
category is the parent company, Citizens' securities portfolio and asset
liability management activities, inter-company eliminations, and the economic
impact of certain assets, capital and support functions not specifically
identifiable with the three primary lines of business.
The accounting policies on the individual business units are the same as
those of Citizens described in Note 1 to the Consolidated Financial Statements.
Funds transfer pricing is used in the determination of net interest income by
assigning a standard cost for funds used or credit for funds provided to assets
and liabilities within each business unit. Assets and liabilities are
match-funded based on their maturity, prepayment and/or repricing
characteristics. Noninterest income and expenses directly attributable to a line
of business are assigned to that business. Expenses for centrally provided
services are allocated to the business lines as follows: product processing and
technology expenditures are allocated based on standard unit costs applied to
actual volume measurements; corporate overhead is allocated based on the ratio
of a line of business' noninterest expenses to total noninterest expenses
incurred by all business lines. The provision for loan losses was allocated in
an amount based primarily upon the actual net charge-offs of each respective
line of business, adjusted for loan growth and changes in risk profile. Selected
segment information is included in the following table.
Certain amounts in prior year have been restated to reflect the current
business unit structure and cost allocation methodology. This resulted in a
transfer of certain deposits and related interest expense and funds transfer
credits from retail banking to commercial banking for prior year presentation.
Additionally, the allocation method for information systems costs was revised in
1999 resulting in additional cost allocation to retail banking for all years
presented. The effect of these changes was an increase in commercial banking
profitability and all other and a corresponding decrease in profitability in
retail banking for the periods presented.
Page 39
<PAGE> 69
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
LINE OF BUSINESS INFORMATION Special
Charge
Net And
Commercial Retail Financial Operating Related
(in thousands) Banking Banking Services F&M Other Income Items Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EARNINGS SUMMARY - 1999
Net interest income (taxable equivalent) $ 73,845 $ 116,680 $ 1,357 $ 110,718 $ 20,095 $ 322,695 $ -- $ 322,695
Provision for loan losses 1,509 14,455 -- 2,975 (1,064) 17,875 6,800 24,675
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after provision 72,336 102,225 1,357 107,743 21,159 304,820 (6,800) 298,020
Noninterest income 9,709 28,469 24,177 15,994 6,391 84,740 (3,596) 81,144
Noninterest expense 37,991 96,533 18,159 63,002 21,093 236,778 40,198 276,976
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes 44,054 34,161 7,375 60,735 6,457 152,782 (50,594) 102,188
Income tax expense (taxable equivalent) 17,762 11,956 2,581 22,785 544 55,628 (15,434) 40,194
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 26,292 $ 22,205 $ 4,794 $ 37,950 $ 5,913 $ 97,154 $ (35,160) $ 61,994
Allocation of special charge and
related items -- -- -- (26,748) (8,412) 35,160 --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 26,292 $ 22,205 $ 4,794 $ 11,202 $ (2,499) $ -- $ 61,994
========= ========= ========= ========= ========= ========= =========
AVERAGE ASSETS (IN MILLIONS) $ 1,655 $ 2,138 $ 16 $ 2,602 $ 931 $ 7,342
========= ========= ========= ========= ========= =========
===================================================================================================================================
EARNINGS SUMMARY - 1998
Net interest income (taxable equivalent) $ 69,163 $ 115,735 $ 1,844 $ 100,701 $ 17,109 $ 304,552 $ 304,552
Provision for loan losses 4,780 9,099 -- 2,438 211 16,528 16,528
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision 64,383 106,636 1,844 98,263 16,898 288,024 288,024
Noninterest income 8,588 25,744 21,090 15,016 830 71,268 71,268
Noninterest expense 37,563 91,555 18,071 59,928 11,102 218,219 218,219
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes 35,408 40,825 4,863 53,351 6,626 141,073 141,073
Income tax expense (taxable equivalent) 12,392 14,289 1,702 19,854 2,554 50,791 50,791
--------- --------- --------- --------- --------- --------- ---------
Net income $ 23,016 $ 26,536 $ 3,161 $ 33,497 $ 4,072 $ 90,282 $ 90,282
========= ========= ========= ========= ========= ========= =========
AVERAGE ASSETS (IN MILLIONS) $ 1,445 $ 2,112 $ 21 $ 2,343 $ 872 $ 6,793
========= ========= ========= ========= ======== =========
==================================================================================================================================
EARNINGS SUMMARY - 1997
Net interest income (taxable equivalent) $ 62,785 $ 114,131 $ 1,492 $ 88,031 $ 19,572 $ 286,011 $ -- $ 286,011
Provision for loan losses 3,340 11,435 -- 5,179 557 20,511 -- 20,511
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after provision 59,445 102,696 1,492 82,852 19,015 265,500 -- 265,500
Noninterest income 8,108 21,274 17,486 11,703 (174) 58,397 -- 58,397
Noninterest expense 35,215 87,675 16,877 55,494 13,660 208,921 23,734 232,655
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes 32,338 36,295 2,101 39,061 5,181 114,976 (23,734) 91,242
Income tax expense (taxable equivalent) 11,319 12,703 735 15,678 2,387 42,822 (6,471) 36,351
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 21,019 $ 23,592 $ 1,366 $ 23,383 $ 2,794 $ 72,154 $ (17,263) $ 54,891
Allocation of special charge -- -- -- -- (17,263) 17,263 --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 21,019 $ 23,592 $ 1,366 $ 23,383 $ (14,469) $ -- $ 54,891
========= ========= ========= ========= ========= ========= =========
AVERAGE ASSETS (IN MILLIONS) $ 1,310 $ 2,138 $ 18 $ 2,068 $ 906 $ 6,440
========= ========= ========= ========= ========= =========
==================================================================================================================================
</TABLE>
Page 40
<PAGE> 70
NOTE 18. REGULATORY MATTERS
The Federal Reserve Bank requires Citizens' banking subsidiaries to
maintain certain noninterest-bearing deposits. These reserve balances vary
depending upon the level of client deposits in the subsidiary banks. During 1999
and 1998, the average reserve balances were $45.7 million and $40.3 million,
respectively.
The bank subsidiaries are also subject to limitations under banking laws
on extensions of credit to members of the affiliate group and on dividends that
can be paid to Citizens. Generally extensions of credit are limited to 10% to
any one affiliate and 20% in aggregate to all affiliates of a subsidiary bank's
capital and surplus (net assets) as defined. Unless prior regulatory approval is
obtained, dividends declared in any calendar year may not exceed the retained
net profit, as defined, of that year plus the retained net profit of the
preceding two years. At January 1, 2000, the bank subsidiaries could distribute
to Citizens approximately $31.7 million in dividends without regulatory
approval. Their 2000 net income will also become available for such dividends.
Citizens and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, specific
capital guidelines must be met that involve quantitative measures of the assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require Citizens and its banking subsidiaries to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier I capital to
risk-weighted assets (as defined in the regulations), and of Tier I capital to
average assets (as defined). Management believes, as of December 31, 1999, that
Citizens and its banking subsidiaries meet all capital adequacy requirements to
which it is subject.
As of December 31, 1999, the most recent notification from the Federal
Reserve Board categorized Citizens and its banking subsidiaries as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized Citizens and its banking subsidiaries must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes would result in a change.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
RISK BASED CAPITAL REQUIREMENTS To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ----------------------- ----------------------------
(in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CITIZENS BANKING CORPORATION
AS OF DECEMBER 31, 1999:
Total Capital(1) $ 628,674 10.5 % $ 480,229 > 8.0 % $ 600,287 > 10.0 %
- -
Tier I Capital(1) 553,621 9.2 240,115 > 4.0 360,172 > 6.0
- -
Tier I Leverage(2) 553,621 7.2 307,021 > 4.0 383,776 > 5.0
- -
As of December 31, 1998:
Total Capital(1) $ 675,096 12.3 % $ 440,497 > 8.0 % $ 550,621 > 10.0 %
- -
Tier I Capital(1) 606,341 11.0 220,248 > 4.0 330,372 > 6.0
- -
Tier I Leverage(2) 606,341 8.9 271,061 > 4.0 338,827 > 5.0
- -
CITIZENS BANK
AS OF DECEMBER 31, 1999:
Total Capital(1) $ 390,956 10.1 % $ 308,720 > 8.0 % $ 385,900 > 10.0 %
- -
Tier I Capital(1) 343,917 8.9 154,360 > 4.0 231,540 > 6.0
- -
Tier I Leverage(2) 343,917 7.2 190,192 > 4.0 237,740 > 5.0
- -
As of December 31, 1998:
Total Capital(1) $ 404,822 11.7 % $ 276,694 > 8.0 % $ 345,867 > 10.0 %
- -
Tier I Capital(1) 361,577 10.5 138,347 > 4.0 207,520 > 6.0
- -
Tier I Leverage(2) 361,577 8.7 166,580 > 4.0 208,225 > 5.0
- -
==========================================================================================================================
(1)To risk weighted assets.
(2)To quarterly average assets.
</TABLE>
Page 41
<PAGE> 71
NOTE 19. CITIZENS BANKING CORPORATION (PARENT ONLY) STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCE SHEETS
CITIZENS BANKING CORPORATION (PARENT ONLY)
December 31,
(in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 5 $ 5
Interest-bearing deposit with subsidiary bank -- 4,500
Money market investments 1,102 7,435
Investment securities 132 139
Investment in subsidiaries - principally banks 672,041 679,203
Goodwill - net 1,857 2,653
Other assets 4,630 3,960
-------- --------
TOTAL ASSETS $679,767 $697,895
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 42,000 $ --
Long-term debt -- 13,000
Other liabilities 4,098 4,394
-------- --------
Total liabilities 46,098 17,394
Shareholders' equity 633,669 680,501
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $679,767 $697,895
======== ========
===========================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME
CITIZENS BANKING CORPORATION (PARENT ONLY)
Year Ended December 31,
(in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries - principally banks $54,686 $61,207 $30,467
Interest from bank subsidiary 193 159 657
Service fees from bank subsidiaries 9,668 9,221 9,467
Equity security gain 5,693 -- --
Other 205 381 254
------- ------- -------
Total 70,445 70,968 40,845
------- ------- -------
EXPENSES
Interest 1,486 1,734 2,978
Amortization of goodwill 796 796 796
Salaries and employee benefits 9,780 9,524 9,731
Service fees paid to bank subsidiaries 1,156 1,060 1,339
Special charge 3,464 -- --
Other noninterest expense 1,474 1,528 1,723
------- ------- -------
Total 18,156 14,642 16,567
------- ------- -------
Income before income taxes and equity in undistributed earnings of subsidiaries 52,289 56,326 24,278
Income tax benefit 846 2,476 2,662
Equity in undistributed earnings of subsidiaries 8,859 31,480 27,951
------- ------- -------
NET INCOME $61,994 $90,282 $54,891
======= ======= =======
===========================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 42
<PAGE> 72
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
CITIZENS BANKING CORPORATION (PARENT ONLY)
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 61,994 $ 90,282 $ 54,891
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill 796 796 796
Equity security gain (5,693) -- --
Accrued merger related charges 1,669 -- --
Equity in undistributed earnings of subsidiaries (8,859) (31,480) (27,951)
Other (3,114) (332) (945)
-------- -------- --------
Net cash provided by operating activities 46,793 59,266 26,791
-------- -------- --------
INVESTING ACTIVITIES
Net decrease in interest-bearing deposit at subsidiary bank 4,500 2,500 18,134
Net (increase) decrease in money market investments 6,333 (3,459) 8,067
Purchases of investment securities (5,996) (44) --
Proceeds from sales and maturities of investment securities 5,995 40 10
Proceeds from sale of Magic Line, Inc. stock 5,693 -- --
-------- -------- --------
Net cash provided (used) by investing activities 16,525 (963) 26,211
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from short-term borrowings 42,000 -- --
Proceeds from issuance of long-term debt 22,000 -- --
Principal reductions in long-term debt (35,000) (19,991) (26,694)
Cash dividends paid (41,801) (35,563) (28,270)
Proceeds from stock options exercised 3,349 4,234 1,962
Shares acquired for retirement (53,866) (6,983) --
-------- -------- --------
Net cash used by financing activities (63,318) (58,303) (53,002)
-------- -------- --------
Net increase in cash -- -- --
Cash at beginning of year 5 5 5
-------- -------- --------
Cash at end of year $ 5 $ 5 $ 5
======== ======== ========
=============================================================================================================================
</TABLE>
Page 43
<PAGE> 73
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS CITIZENS BANKING CORPORATION
We have audited the accompanying consolidated balance sheet of Citizens
Banking Corporation and subsidiaries as of December 31, 1999, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the year ended December 31, 1999. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Citizens
Banking Corporation and subsidiaries at December 31, 1999 and the consolidated
results of their operations and their cash flows for the year ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
We previously audited and reported on the consolidated balance sheet at
December 31, 1998 and the related consolidated statements of income, changes in
shareholders' equity, and cash flows of Citizens Banking Corporation and
subsidiaries for each of the two years in the period ended December 31, 1998
prior to their restatement for the 1999 pooling of interests as described in
Note 2. The contribution of Citizens Banking Corporation to total assets,
revenues and net income represented 65%, 65% and 63%, respectively of the 1998
restated totals and the contribution to revenues and net income represented 67%
and 57% of the 1997 restated totals, respectively. Financial statements of the
other pooled company included in the 1998 and 1997 restated consolidated
statements were audited and reported on separately by other auditors. We also
have audited, as to combination only, the accompanying consolidated balance
sheet as of December 31, 1998 and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the two years in the
period ended December 31, 1998, after restatement for the 1999 pooling of
interests, in our opinion, such consolidated financial statements have been
properly combined on the basis described in Note 2 to the consolidated financial
statements.
ERNST & YOUNG LLP
Detroit, Michigan
January 19, 2000
Page 44
<PAGE> 74
REPORT OF WIPFLI ULLRICH BERTELSON LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS F&M BANCORPORATION, INC.
We have audited the accompanying consolidated balance sheets of F&M
Bancorporation, Inc. and Subsidiaries as of December 31, 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the two years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the
first paragraph present fairly, in all material respects, the financial position
of F&M Bancorporation, Inc. and Subsidiaries at December 31, 1998 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
WIPFLI ULRIC BERTELSON LLP
- ---------------------------
Wipfli Ulric Bertelson LLP
Green Bay, Wisconsin
February 4, 1999
Page 45
<PAGE> 75
REPORT OF MANAGEMENT
MANAGEMENT'S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
Management is responsible for the preparation of the consolidated financial
statements and all other financial information appearing in this Annual Report.
The Consolidated Financial Statements have been prepared in accordance with
generally accepted accounting principles.
SYSTEM OF INTERNAL CONTROLS
The Corporation maintains a system of internal controls designed to provide
reasonable assurance that assets are safe-guarded and that the financial records
are reliable for preparing Consolidated Financial Statements. The selection and
training of qualified personnel and the establishment and communication of
accounting and administrative policies and procedures are elements of this
control system. The effectiveness of the internal control system is monitored by
a program of internal audit and by independent certified public accountants
("independent auditors").
Management recognizes that the cost of a system of internal controls should
not exceed the benefits derived and that there are inherent limitations to be
considered in the potential effectiveness of any system. Management believes the
Corporation's system provides the appropriate balance between costs of controls
and the related benefits.
AUDIT COMMITTEE OF THE BOARD
The Audit Committee of the Board of Directors, comprised entirely of
outside directors, recommends the independent auditors who are engaged upon
approval by the Board of Directors. The committee meets regularly with the
internal auditor and the independent auditors to review timing and scope of
audits and review audit reports. The internal auditor and the independent
auditors have free access to the Audit Committee.
INDEPENDENT AUDITORS
The Consolidated Financial Statements in this Annual Report have been
audited by the Corporation's independent auditors, Ernst & Young LLP, for the
purpose of determining that the Consolidated Financial Statements are free of
material misstatement. Their audit considered the Corporation's internal control
structure to the extent necessary to determine the scope of their auditing
procedures.
John W. Ennest Robert J. Vitito
John W. Ennest Robert J. Vitito
Vice Chairman, President and Chief Executive Officer
Chief Financial Officer and Treasurer
Page 46
<PAGE> 76
CITIZENS BANKING CORPORATION
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY.
<TABLE>
The Board of directors recommends a vote FOR each of the nominees listed.
<S> <C>
1. Election of directors - Class 1 (three year term): For Withhold For All
Nominees: 01-Joseph P. Day, 02-John W. Ennest, All All Except DO NOT MAIL FUTURE SUMMARY ANNUAL
03-Ronald E. Fenton, // // // REPORTS FOR THIS ACCOUNT. ACCOUNT //
04-Victor E. George, IS RECEIVED AT THIS HOUSEHOLD.
05-Ada C. Washington,
06-James L. Wolohan
-------------------------------
(Except nominees written above)
Dated:________________________ 2000
Signature(s)__________________
______________________________
Please sign exactly as name appears
hereon. When shares are held by joint
tenants, both must sign. When signing
as Attorney, Executor, Personal
Representative, Administrator,
Trustee or Guardian, please give full
title as such. If signing on behalf
of the corporation, please sign in
full corporate name by President or
other authorized officer. If signing
on behalf of a partnership, please
sign in partnership name by authorized
person.
IF YOU WISH TO VOTE BY TELEPHONE OR INTERNET, PLEASE SEE INSTRUCTION CARD BELOW
- -----------------------------------------------------------------------------------------------------------------------------------
CONTROL NUMBER /\ FOLD AND DETACH HERE /\
On a touch-tone telephone call the toll-free number 1-888-515-6262, 24 hours per day, seven
days a week.
Enter your 6-digit Control Number found in the box above.
Press 1 to vote FOR all nominees or press 8 if you do not wish to vote for the recommendations of
TELEPHONE VOTING the Board of Directors.
INSTRUCTIONS:
If you wish to withhold authority to vote for an individual nominee, Press one or more of the
following selections and then Press 0 to conclude this phone call and cast your vote:
Press 2 to withhold for Joseph P. Day
Press 3 to withhold for John W. Ennest
Press 4 to withhold for Ronald E. Fenton
Press 5 to withhold for Victor E. George
Press 6 to withhold for Ada C. Washington
Press 7 to withhold for James L. Wolohan
Press 1 if you receive more than one Summary Annual Report in your household and do not wish to
receive a Summary Annual Report on this account.
If you wish to withhold authority to vote or vote against some but not all of the recommendations of
the Board of Directors, you must do so by signing, dating and returning the proxy card in the
envelope provided or by voting via the Internet.
INTERNET VOTING Go to the following website: http://www.harrisbank.com/wproxy.
INSTRUCTIONS: Enter the information requested on your proxy screen, including your 6-digit Control Number found in
the box above.
IF YOU VOTE BY TELEPHONE OR THE INTERNET, DO NOT MAIL BACK YOUR PROXY CARD.
</TABLE>
REMINDER
Dear Shareholder(s):
Enclosed you will find material relative to the Corporation's 2000 Annual
Meeting of Shareholders. The Notice of the Annual Meeting and proxy statement
describes the formal business to be transacted at the meeting, as summarized on
the attached proxy card.
Whether or not you expect to attend the Annual Meeting, please complete and
return promptly the attached proxy card in the accompanying envelope, which
requires no postage if mailed in the United States, or cast your vote by
telephone, or by Internet, using the instructions found above. Please remember
that your vote is important to us. We look forward to hearing from you.
James M. Polehna
Vice President 5088 - CITIZENS BANKING CORPORATION
Investor Relations Manager
<PAGE> 77
PROXY PROXY
CITIZENS BANKING CORPORATION
FLINT, MICHIGAN
PROXY BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS - APRIL 18, 2000
The undersigned shareholder of Citizens Banking Corporation (the
"Corporation") hereby appoints Edward P. Abbott and William C. Shedd, and each
of them, attorneys, agents and proxies, with full power of substitution, to vote
all shares of stock of the Corporation that the undersigned is entitled to vote
at the annual meeting of shareholders of the Corporation to be held in the
Presidential Ballroom located in the Holiday Inn, Gateway Centre, Flint,
Michigan, on Tuesday, April 18, 2000 at 10:00 a.m. local time, and at any
adjournments thereof, and upon the matters as set forth on the reverse side of
this proxy, all of which are being proposed by the Corporation, and in their
discretion, upon such other matters as may properly come before the meeting
including the election of any person to the board of directors where a nominee
named in the proxy statement dated March 15, 2000 is unable to serve or, for
good cause, will not serve. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED FOR
EACH NOMINEE NAMED ON THE REVERSE SIDE OF THIS PROXY.
For participants in the Corporation's Amendment and Restated Section 401(k)
Plan ("Plan"), this card also provides voting instructions to the Trustee under
the Plan for the undersigned's allowable portion, if any, of the total number
of shares of Common Stock of the Corporation held by such Plan as indicated in
the reverse side hereof. These voting instructions are solicited and will be
carried out in accordance with the applicable provisions of the Plan.
The undersigned acknowledges receipt of the Notice of Annual Meeting of
Shareholders and the Proxy Statement dated March 15, 2000 and ratifies all
that the proxies or either of them or their substitutes may lawfully do or
cause to be done by virtue hereof and revokes all former proxies.
(Continued and to be signed on reverse side.)
- --------------------------------------------------------------------------------
VOTE YOUR SHARES BY PHONE OR OVER THE INTERNET
We encourage you to vote by telephone or over the Internet. These are two
quick and easy methods to vote your shares that are available 24 hours a day,
seven days a week, and your vote is recorded as if you mailed in your proxy
card. On the reverse side of this card are instructions on how to vote by
telephone and over the Internet. Voting by one of these convenient methods
will also save the Company money.
We also ask you to notify the Company if you are receiving multiple copies
of the Summary Annual Report at your household. You can do so by checking the
box under the signature block of the proxy card if you are mailing in your proxy
card, by following the prompt if you are voting by telephone, or by checking the
appropriate box on the electronic Internet proxy card. If you do so, the Company
can save money by reducing the number of Summary Annual Reports it must print
and mail.
Map to: Holiday Inn Gateway Centre
US 23/Hill Road
Flint, Michigan 48507
(Park in Rear For Conference Centre)
[MAP] - FROM NORTH: I-75 South to
South U.S. 23. Exit Hill Road
(East)
- FROM EAST AND WEST: I-69 to
I-75 South to U.S. 23 South.
Exit Hill Road (East)
- FROM WEST: I-94 to U.S. 23
North. Exit Hill Road (East)
- FROM SOUTH: I-75 North to
I-475 North to Hill Road
West.
Exit Hill Road west (left).
5088-CITIZENS BANKING CORPORATION
