-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AP24VDg5HAtOLF5DD+ks6aVeRI9tNQD8DJ1VcrpIdBUJlPmgnk9ei6hcC1EA0jmg 7rqu0cwRS7tEwKvGjp5zYg== 0000950124-00-001874.txt : 20000504 0000950124-00-001874.hdr.sgml : 20000504 ACCESSION NUMBER: 0000950124-00-001874 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 DATE AS OF CHANGE: 20000503 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS BANKING CORP CENTRAL INDEX KEY: 0000351077 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 382378932 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-10535 FILM NUMBER: 589258 BUSINESS ADDRESS: STREET 1: ONE CITIZENS BANKING CTR STREET 2: 328 SOUTH SAGINAW STREET CITY: FLINT STATE: MI ZIP: 48502 BUSINESS PHONE: 8107667761 MAIL ADDRESS: STREET 1: 1 CITIZENS BANKING CENTER STREET 2: 328 SOUTH SAGINAW STREET CITY: FLINT STATE: MI ZIP: 48502 10-K 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the fiscal year ended December 31, 1999 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from to ---------------- ----------------- Commission file Number 0-10535 ------------ CITIZENS BANKING CORPORATION - - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) MICHIGAN 38-2378932 - - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Citizens Banking Center, 328 S. Saginaw Street, Flint, Michigan 48502 - - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (810) 766-7500 --------------------- Securities registered pursuant to Section 12(b) of the Act: None ---------- Securities registered pursuant to Section 12(g) of the Act: Common Stock - No Par Value - - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $835,092,000 as of March 24, 2000. The number of shares outstanding of the registrant's Common Stock (No par value) was 47,544,549 as of March 24, 2000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Citizens Banking Corporation Proxy Statement for its annual meeting of shareholders to be held April 18, 2000 are incorporated by reference into Part III. (Exhibit Index - Pages 14 through 16) 2 CITIZENS BANKING CORPORATION 1999 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
Page ---- PART I Item 1. Business ............................................................................................... 3 Item 2. Properties ............................................................................................. 8 Item 3. Legal Proceedings ...................................................................................... 8 Item 4. Submission of Matters To a Vote of Security Holders .................................................... 8 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters .............................. 9 Item 6. Selected Financial Data ................................................................................ 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .................. 9 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............................................. 9 Item 8. Financial Statements and Supplementary Data ............................................................ 9 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... 9 PART III Item 10. Directors and Executive Officers of the Registrant ..................................................... 10 Item 11. Executive Compensation ................................................................................. 10 Item 12. Security Ownership of Certain Beneficial Owners and Management ......................................... 10 Item 13. Certain Relationships and Related Transactions ......................................................... 10 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ....................................... 11 SIGNATURES ........................................................................................................ 12 EXHIBIT INDEX ........................................................................................................ 14
2 3 PART I - - -------------------------------------------------------------------------------- ITEM 1. BUSINESS General Citizens Banking Corporation ("Citizens") was organized January 1, 1982. It is a multibank holding company registered under the Bank Holding Company Act of 1956, as amended, and is incorporated in the State of Michigan. On December 31, 1999, Citizens had 3,220 full-time equivalent employees and directly or indirectly owned the following subsidiaries at year-end 1999. - - --------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------------------------- Total Principal Number of Assets Date Subsidiary Office Offices (in millions) Acquired - - -------------------------------------------------------------------------------------------------------------------------- Citizens Bank (1) Flint, MI 136 $4,930.1 01/01/82 Citizens Bank - Illinois, N.A. Berwyn, IL 3 251.6 05/01/87 F&M Bancorporation, Inc. (2) F&M Merger Corporation F&M Bank - Cannon Valley Dundas, MN 1 27.9 11/01/99 F&M Bank - Central Stevens Point, WI 5 140.9 11/01/99 F&M Bank - East Troy East Troy, WI 2 59.2 11/01/99 F&M Bank - Elkhorn Elkhorn, WI 1 96.9 11/01/99 F&M Bank - Jefferson Jefferson, WI 2 96.6 11/01/99 F&M Bank - Grant County Fennimore, WI 4 134.4 11/01/99 F&M Bank - Kiel Kiel, WI 1 45.2 11/01/99 F&M Bank - Lakeland Woodruff, WI 7 198.9 11/01/99 F&M Bank - Landmark Clear Lake, WI 4 45.4 11/01/99 F&M Bank - Northeast Pulaski, WI 11 377.6 11/01/99 F&M Bank - Prairie du Chien Prairie du Chien, WI 5 98.5 11/01/99 F&M Bank - Superior Superior, WI 2 35.7 11/01/99 F&M Bank - Winnebago County Omro, WI 3 104.7 11/01/99 BancSecurity Corporation F&M Bank - Iowa Central (3) Marshalltown, IA 14 614.7 11/01/99 F&M Bank - Algoma Algoma, WI 3 100.9 11/01/99 F&M Bank - Appleton Appleton, WI 4 81.6 11/01/99 F&M Bank - Brodhead Brodhead, WI 1 36.2 11/01/99 F&M Bank - Darlington, N.A. Darlington, WI 4 113.9 11/01/99 F&M Bank - Hilbert Hilbert, WI 3 33.3 11/01/99 F&M Bank - Kaukauna Kaukauna, WI 5 160.6 11/01/99 F&M Bank - New London New London, WI 1 39.3 11/01/99 F&M Bank - Waushara County Watoma, WI 4 107.4 11/01/99 - - --------------------------------------------------------------------------------------------------------------------------
(1) Consolidated totals of Citizens Bank include its wholly owned non-bank subsidiaries, Citizens Commercial Leasing Corporation ("CCLC"), CB Financial Services, Inc., Citizens Bank Mortgage Corporation and Citizens Title Services. All of the named subsidiaries are based in Flint, Michigan except for CCLC, which is based in Saginaw, Michigan. (2) At year-end 1999, F&M Bancorporation, Inc. directly owned two bank holding companies and eight banks. Effective January 3, 2000, Citizens dissolved the two bank holding companies and consolidated the Wisconsin banks into one Wisconsin bank. (3) Consolidated totals of F&M Bank - Iowa Central include its wholly owned non-bank subsidiary, Security Bancservices, Inc. based in Marshalltown, Iowa. 3 4 Citizens' subsidiary banks are full service commercial banks offering a variety of financial services to corporate, commercial, correspondent and individual bank customers. These services include commercial, agricultural, mortgage and consumer lending, demand and time deposits, trust services, investment services, safe deposit facilities, and other financial products and services. The bank subsidiaries are wholly owned by Citizens and operate through 226 banking offices located in the five midwestern states of Michigan, Wisconsin, Illinois, Iowa, and Minnesota. Areas served include most of Michigan's Lower Peninsula, most of Wisconsin, central Iowa, the western suburban market of Chicago, Illinois and Dundas, Minnesota. On December 29, 1994, the State of Michigan amended the State's Banking Code of 1969 to allow banks to engage in the insurance business and to own an insurance agency. Although the National Bank Holding Company Act prohibits the holding company from direct ownership of an insurance agency, banks within the holding company may now do so. During the second quarter of 1997, Citizens Bank established a wholly owned subsidiary, called CB Financial Services, Inc. Through this subsidiary, Citizens sells life insurance and annuity products to clients subject to certain restrictions. In 1997, Citizens Bank established a wholly owned subsidiary, Citizens Bank Mortgage Corporation, to originate new mortgage loans to be sold to the secondary market or held in portfolio. The Mortgage Corporation provides residential mortgage services similar to those previously provided by Citizens Bank. Also in 1997, Citizen Bank established a wholly owned subsidiary, Citizens Title Services, Inc. This subsidiary provides title insurance to buyers and sellers of residential and commercial mortgage properties including those occurring due to loan refinancing. Citizens Commercial Leasing Company, a wholly owned subsidiary of Citizens Bank, participates in high quality indirect lease participations. Security Bancservices, Inc, a wholly owned subsidiary of F&M Bank - Iowa Central, sells property and casualty insurance to clients in the F&M markets. On July 1, 1997, Citizens merged with CB Financial Corporation headquartered in Jackson, Michigan. The merger resulted in an expanded presence in the greater Jackson/Lansing markets and in northwestern Michigan. As part of the merger, Citizens issued 6.3 million shares of its common stock for all of the outstanding shares of CB Financial Corporation. The merger was accounted for as a pooling of interests resulting in the restatement of all financial information presented. On October 8, 1999, Citizens acquired seventeen former Bank One offices located in the northern section of Michigan's Lower Peninsula. The transaction was accounted for as a purchase; accordingly, the assets acquired and liabilities assumed were recorded at estimated fair value. The purchase added approximately $88 million in loans and $442 million in deposits. Citizens paid a premium of $36.1 million or 10.13% on certain core deposits. The acquired branches' results of operations have been included in Citizens' consolidated totals from the date of acquisition only. On November 1, 1999, Citizens expanded into the new market areas of Wisconsin, Iowa, and Minnesota through the merger with F&M Bancorporation, Inc. ("F&M") headquartered in Kaukauna, Wisconsin. As part of the merger, 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. The merger was accounted for as a pooling of interests resulting in the restatement of all financial information presented. Addition information regarding Citizens' mergers and acquisition is incorporated by reference from Exhibit 13 on page 27 of such document under the caption, "Note 2. Mergers and Acquisition." Lines of Business The performance of Citizens is monitored by an internal profitability measurement system that provides line of business results and key performance measures. Citizens operates along the following business lines: Commercial Banking, Retail Banking, Financial Services, F&M, and all other. Additional information regarding Citizens' business lines is incorporated herein by reference from Exhibit 13 on page 4 5 4 and on pages 39 and 40 of such document under the captions, "Lines of Business Reporting" and "Note 17. Lines of Business", respectively. Competition The financial services industry is highly competitive. The banking subsidiaries compete with other commercial banks, many of which are subsidiaries of other bank holding companies, for loans, deposits, trust accounts and other business on the basis of interest rates, fees, convenience and quality of service. They also actively compete with a variety of other financial services organizations including savings and loan associations, finance companies, mortgage banking companies, brokerage firms, credit unions and other organizations. The non-banking subsidiaries compete with other companies in related industries including other leasing companies, title insurance companies, mortgage banking companies, insurance companies and other organizations. Loans comprise 75.3% of Citizens' average assets and are made in the normal course of business to individuals, partnerships, municipalities and corporations. Credit is extended to customers within the commercial, commercial mortgage, real estate construction, real estate mortgage, consumer and lease financing categories. Consumer loans are primarily composed of automobile, personal, marine, home equity and bankcard loans and represent 25.4% of the 1999 average loan portfolio. Consumer loans originated follow strict corporate credit underwriting procedures. Real estate mortgage loan extensions are primarily first liens on one to four family structures and unless insured by a private mortgage insurance company typically have traditional loan to appraisal ratios of 80% or less. Commercial and commercial mortgage loan originations generally do not rely on the performance of the real estate market to generate funds for repayment and do not represent a concentration in any one industry or company. Additional information on the composition of the loan portfolio and the related nonperforming assets is incorporated herein by reference from Exhibit 13 on pages 12 to 14 of such document under the captions "Loans" and "Nonperforming Assets". Mergers between and the expansion of financial institutions both within and outside of our primary Midwest banking markets have provided significant competitive pressure in those markets. In addition, the passage of federal interstate banking legislation has expanded the banking market and heightened competitive forces. The affect of this legislation is further discussed under the caption "Supervision and Regulation". On November 1, 1999, Citizens entered the Wisconsin, Iowa, and Minnesota markets through a merger with F&M headquartered in Kaukauna, Wisconsin, which included twenty subsidiary banks in Wisconsin, one subsidiary bank in Iowa, and one subsidiary bank in Minnesota. Most of the banks are located in small cities and rural areas that have diverse economies and a mix of manufacturing, service, retailing, and agricultural businesses. F&M has a dominant market position in many of the markets it serves, which we believe provides a competitive advantage. The local management of the banks was retained and the local boards of directors were consolidated into regional "community boards". Effective January 3, 2000, the twenty Wisconsin bank charters were consolidated into one bank. Other factors such as employee relations and environmental laws also impact Citizens' competitiveness. Presently, none of Citizens' employees are covered by collective bargaining agreements and Citizens maintains a favorable relationship with its employees. The impact of environmental laws is further discussed in "Item 3. Legal Proceedings" of this document. Supervision and Regulation Citizens is subject to supervision and regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the "Act"). The Act requires Citizens to provide notice or obtain the prior approval of the Board of Governors of the Federal Reserve System for bank and non-bank 5 6 acquisitions and prescribes limitations on the non-banking activities of Citizens. As a bank holding company, Citizens and its subsidiaries are able only to conduct the business of banking and activities so closely related to banking or managing or controlling banks as to be a proper incident thereto. Citizens' subsidiary banks are subject to various regulatory authorities. Citizens Bank is chartered by the State of Michigan and is subject to supervision, regulation and examination by the Financial Institutions Bureau of the State of Michigan as well as the Federal Reserve Board. Citizens Bank - Illinois, N.A. is chartered under federal law and is subject to supervision, regulation and examination by the Comptroller of the Currency. All but one of the Wisconsin F&M Banks are incorporated under the banking laws of Wisconsin and is therefore subject to supervision, regulation, and examination by the Wisconsin Department of Financial Institutions. F&M Bank -Darlington is chartered under federal law and is subject to supervision, regulation and examination by the Comptroller of the Currency. The other F&M Banks are chartered in Iowa and Minnesota, and are subject to the supervision, regulation, and examination by the Iowa Division of Banking and the Minnesota Department of Commerce, respectively. All of Citizens' subsidiary banks are subject to supervision and examination by the Federal Deposit Insurance Corporation ("FDIC"), as their deposits are insured by the FDIC to the extent provided by the law. In addition, all banks are members of the Federal Reserve System. Citizens' non-bank companies are supervised and examined by the Federal Reserve System. Certain regulatory matters concerning capital adequacy guidelines for Citizens and its banking subsidiaries, limitations on the payment of dividends to Citizens by its banking subsidiaries and maintenance of minimum average reserve balances by the banking subsidiaries with the Federal Reserve Bank are incorporated herein by reference from Exhibit 13 on pages 16, 17 and 41 of such document under the captions, "Liquidity and Debt Capacity" and "Note 18 Regulatory Matters", respectively. The 1994 passage of the federal Riegle-Neal Interstate Banking and Branching Efficiency Act allows states the ability to enact legislation permitting interstate branching but gives them no choice in opting out of provisions related to interstate banking. The effect of the interstate banking provisions do not impact Michigan or neighboring states since these states have previously passed legislation allowing bank holding companies to own bank affiliates in multiple states. On November 29, 1995 the Michigan legislature passed Public Act 202 permitting interstate branching. This law allows a bank the ability to establish branches outside of the State of Michigan provided that state adopts similar legislation. The law may impact Citizens as states adjacent to Michigan pass similar legislation. The impact of this is not expected to significantly affect Citizens' strategic plan, except to allow potentially greater consolidation benefits if Citizens continues to acquire additional banks outside of Michigan. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") adopted in August 1989 significantly affected financial institutions. Key provisions of FIRREA provided for the acquisition of thrift institutions by bank holding companies (previously only failing thrifts were permitted to be acquired), increased deposit insurance assessments for insured banks, redefined applicable capital standards for banks and thrifts, broadened the enforcement power of federal bank regulatory agencies, and required that any FDIC-insured depository institution be held liable for any loss incurred by the FDIC in connection with the default of any commonly controlled FDIC-insured depository institution or any assistance provided by the FDIC to any such institution in danger of default. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), signed into law on December 19, 1991, imposed on banks relatively detailed standards and mandated the development of additional regulations governing nearly every aspect of the operations and management of banks, in addition to many aspects of bank holding companies. Some of the major provisions contained in FDICIA includes recapitalization of the Bank Insurance Fund ("BIF"), a risk-based insurance premium assessment system, a capital-based supervision system that links supervisory intervention to the deterioration of a bank's capital level, new auditing and accounting and examination requirements, and mandated standards 6 7 for bank lending and operation. FDICIA provides the FDIC with the authority to impose assessments on insured BIF member depository institutions to maintain the fund at the designated reserve ratio defined in FDICIA. In response to the BIF attaining the designated reserve ratio in 1995, FDIC assessments were effectively eliminated in 1996 for banks meeting the requirements of supervisory risk subgroup 1.A. "well capitalized". All of Citizens' subsidiaries have sufficient capital to maintain this designation (the FDIC's highest rating). In 2000, banks maintaining the "well capitalized" designation will again have no FDIC insurance premium requirements except for a special base assessment of approximately 2.08 cents per 100 dollars of deposits. This special assessment, authorized by the Deposit Insurance Funds Act of 1996 passed by Congress on September 30, 1996, applies to all commercial banks regardless of risk subgroup classification. Further regulatory changes could impact the amount and type of assessments paid by Citizens' subsidiary banks. The enactment of the Graham-Leach-Bliley Act of 1999 (the "GLB Act") sweeps away large parts of a regulatory framework that had its origins in the Depression Era of the 1930s. Effective March 11, 2000, new opportunities will be available for banks, other depository institutions, insurance companies and securities firms to enter into combinations that permit a single financial services organization to offer customers a more complete array of financial products and services. The GLB Act provides a new regulatory framework for regulation through the financial holding company, which will have as its umbrella regulator the Federal Reserve Board. Functional regulation of the financial holding company's separately regulated subsidiaries will be conducted by their primary functional regulator. The GLB Act makes satisfactory or above Community Reinvestment Act compliance for insured depository institutions and their financial holding companies necessary in order for them to engage in new financial activities. The GLB Act provides a federal right to privacy of non-public personal information of individual customers. Citizens Banking Corporation and its subsidiaries are also subject to certain state laws that deal with the use and distribution of non-public personal information. Monetary Policy The monetary and fiscal policies of regulatory authorities, including the Federal Reserve System, strongly influence the banking industry. Through open market securities transactions, variations in the discount rate and the establishment of reserve requirements, the Board of Governors of the Federal Reserve System exerts considerable influence on interest rates and the supply of money and credit. The effect of these measures on future business and earnings of Citizens cannot be predicted. Environmental Matters Citizens' primary exposure to environmental risk is through its trust services and its lending activities. In each instance, Citizens has policies and procedures in place to mitigate its environmental risk exposures. With respect to lending activities, environmental site assessments at the time of loan origination are mandated by Citizens to confirm collateral quality as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites. Environmental assessments are also mandated prior to any foreclosure activity involving non-residential real estate collateral. In the case of trust services, Citizens utilizes various types of environmental transaction screening to identify actual and potential risks arising from any proposed holding of non-residential real estate for trust accounts. Consequently Citizens does not anticipate any material effect on capital expenditures, earnings or the competitive position of itself or any of its subsidiaries with regard to compliance with federal, state or local environmental protection laws or regulations. Additional information is provided in the "Item 3. Legal Proceedings" section of this document. 7 8 ITEM 2. PROPERTIES Citizens' offices are located at One Citizens Banking Center, 328 South Saginaw Street, Flint, Michigan in the main office building of Citizens Bank, its largest bank subsidiary. Citizens' subsidiaries operate through 226 banking offices. Of these, 42 are leased and the remaining are owned. Rent expense on the leased properties totaled $2,264,373 in 1999. The banking offices are located in various communities throughout the states of Michigan and Wisconsin, parts of Iowa, in Dundas, Minnesota, and in the western suburbs of Chicago, Illinois. At certain Citizens Bank locations a portion of the office buildings are leased to tenants. Additional information related to the property and equipment owned or leased by Citizens and its subsidiaries is incorporated herein by reference from Exhibit 13 on page 30 under the caption "Note 7. Premises and Equipment" of such document. ITEM 3. LEGAL PROCEEDINGS Citizens and its subsidiaries are parties to a number of lawsuits incidental to its business. Although litigation is subject to many uncertainties and the ultimate exposure with respect to many of these matters cannot be ascertained, management does not believe the ultimate outcome of these matters will have a materially adverse effect on the financial condition or the liquidity of Citizens. From time to time, certain of Citizens' subsidiaries are notified by applicable environmental regulatory agencies, pursuant to State or Federal environmental statutes or regulations, that they may be potentially responsible parties ("PRPs") for environmental contamination on or emanating from properties currently or formerly owned. Typically, exact costs of remediating the contamination cannot be fully determined at the time of initial notification. While, as PRPs, these subsidiaries are potentially liable for the costs of remediation, in most cases, a number of other PRPs have been identified as being jointly and severally liable for remediation costs. Additionally, in certain cases, statutory defenses to liability for remediation costs may be asserted based on the subsidiaries' status as lending institutions that acquired ownership of the contaminated property through foreclosure. Citizens' management is not presently aware of any environmental liabilities that pose a reasonable possibility of future material impact on Citizens or its earnings. It is Citizens' policy to establish and accrue appropriate reserves for all such identified exposures during the accounting period in which a loss is deemed to be probable and the amount is determinable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1999 to a vote of security holders through the solicitation of proxies or otherwise. 8 9 PART II - - -------------------------------------------------------------------------------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER'S MATTERS The information required by this item is incorporated herein by reference from Exhibit 13 on page 20 under the caption "Table 12. Selected Quarterly Information" of such document. The approximate number of shareholders of the Registrant's common stock is 15,000 as of December 31, 1999. This number includes an estimate for individual participants in the security positions of certain shareholders of record. Restrictions on the Registrant's ability to pay dividends are incorporated herein by reference from Exhibit 13 on page 41 under the caption "Note 18. Regulatory Matters" of such document. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated herein by reference from Exhibit 13 on page 1 under the caption "Table 1. Selected Financial Data" of such document. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations required by this item is incorporated herein by reference from Exhibit 13 on pages 1 through 21 of such document. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated by reference from Exhibit 13 on pages 17 and 18 under the captions "Interest Rate Risk" and "Interest Rate Sensitivity" of such document. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements are incorporated herein by reference from Exhibit 13 on pages 22 through 46 of such document. Supplementary data of Citizens' quarterly results of operations required by this item are incorporated herein by reference from Exhibit 13 on page 20 of such document under the caption "Table 12. Selected Quarterly Information". ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 9 10 PART III - - -------------------------------------------------------------------------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item appears in Citizens' proxy statement for its annual meeting of shareholders to be held April 18, 2000 ("1999 Proxy Statement"), and is incorporated herein by reference as follows: Regulation S-K Item 401 disclosures: Appear under the captions "Election of Directors" and "Executive Officers" on pages 5 through 8 and on pages 11 through 13, respectively, of the 1999 Proxy Statement. Regulation S-K Item 405 disclosure: Appears under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 24 of the 1999 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this item appears under the caption "Compensation of Directors," on page 10 and under the captions "Executive Compensation", "Compensation and Human Resources Committee Report on Executive Compensation", "Shareholder Return", and "Compensation Committee Interlocks and Certain Transactions and Relationships" on pages 14 through 24 of the 1999 Proxy Statement, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item appears under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" on page 2 and on pages 3 and 4, respectively, of the 1999 Proxy Statement, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item appears under the caption "Compensation Committee Interlocks and Certain Transactions and Relationships" on pages 23 and 24 of the 1999 Proxy Statement, and is incorporated herein by reference. 10 11 PART IV - - -------------------------------------------------------------------------------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements: The following consolidated financial statements of Citizens, Report of Ernst & Young LLP, Independent Auditors and Report of Wipfli Ulrich Bertelson LLP, Independent Auditors are incorporated by reference under Item 8 "Financial Statements and Supplementary Data" of this document: Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Auditors Report of Wipfli Ullrich Bertelson LLP, Independent Auditors 2. Financial Statement Schedules: All schedules are omitted - see Item 14(d) below. 3. Exhibits: The exhibits listed on the "Exhibit Index" on pages 14 through 16 of this report are filed herewith and are incorporated herein by reference. (b) Reports on Form 8-K Form 8-K, filed November 9, 1999, announcing completion of Citizens' merger with F&M Bancorporation, Inc. on November 1, 1999. (c) Exhibits: The "Exhibit Index" is filed herewith on pages 14 through 16 of this report and is incorporated herein by reference. (d) Financial Statement Schedules: All financial statement schedules normally required by Article 9 of Regulation S-X are omitted since they are either not applicable or the required information is shown in the consolidated financial statements or notes thereto. 11 12 SIGNATURES - - -------------------------------------------------------------------------------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CITIZENS BANKING CORPORATION (Registrant) by /s/Robert J. Vitito Date: March 24, 2000 - - ------------------------------------- Robert J. Vitito Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Capacity Date - - ---------------------------------------- ---------------------------------------------- ---------------------------------- /s/Robert J. Vitito Chairman of the Board, President, March 24, 2000 - - ---------------------------------------- Chief Executive Officer and Director Robert J. Vitito /s/John W. Ennest Vice Chairman of the Board, March 24, 2000 - - ---------------------------------------- Chief Financial Officer, John W. Ennest Treasurer and Director /s/Edward P. Abbott Director March 24, 2000 - - ---------------------------------------- Edward P. Abbott /s/Hugo E. Braun, Jr. Director March 24, 2000 - - ---------------------------------------- Hugo E. Braun, Jr. /s/Jonathan E. Burroughs II Director March 24, 2000 - - ---------------------------------------- Jonathan E. Burroughs II /s/Joseph P. Day Director March 24, 2000 - - ---------------------------------------- Joseph P. Day /s/Lawrence O. Erickson Director March 24, 2000 - - ---------------------------------------- Lawrence O. Erickson /s/Ronald E. Fenton Director March 24, 2000 - - ---------------------------------------- Ronald E. Fenton /s/Victor E. George Director March 24, 2000 - - ---------------------------------------- Victor E. George
12 13
Signature Capacity Date - - ---------------------------------------- ---------------------------------------------- ---------------------------------- /s/William J. Hank Director March 24, 2000 - - ---------------------------------------- William J. Hank /s/Gail E. Janssen Director March 24, 2000 - - ---------------------------------------- Gail E. Janssen /s/Stephen J. Lazaroff Director March 24, 2000 - - ---------------------------------------- Stephen J. Lazaroff /s/William F. Nelson, Jr. Director March 24, 2000 - - ---------------------------------------- William F. Nelson, Jr. /s/Robert C. Safford Director March 24, 2000 - - ---------------------------------------- Robert C. Safford /s/William C. Shedd Director March 24, 2000 - - ---------------------------------------- William C. Shedd /s/James E. Truesdell, Jr. Director March 24, 2000 - - ---------------------------------------- James E. Truesdell, Jr. /s/Ada C. Washington Director March 24, 2000 - - ---------------------------------------- Ada C. Washington /s/Charles R. Weeks Director March 24, 2000 - - ---------------------------------------- Charles R. Weeks /s/Kendall B. Williams Director March 24, 2000 - - ---------------------------------------- Kendall B. Williams /s/James L. Wolohan Director March 24, 2000 - - ---------------------------------------- James L. Wolohan
13 14 CITIZENS BANKING CORPORATION 1999 Annual Report on Form 10-K EXHIBIT INDEX (FILED AS PART OF THIS REPORT ON FORM 10-K)
Exhibit Form 10-K No. Exhibit Page No. ------- ------------------------------------------------------------------------------------------------ --------- 3 Restated Articles of Incorporation, as amended. (incorporated by reference from Exhibit 3(a) of Citizens' 1995 Annual Report on Form 10K, file number 0-10535). N/A 3.1 Amended and Restated Bylaws (incorporated by reference from Exhibit 3(b) of Citizens' 1997 Third Quarter Report on Form 10-Q, file number 0-10535). N/A 4 Rights Agreement, dated July 20, 1990, between Citizens and Citizens Bank, as Rights Agent (incorporated by reference from Exhibit 4(a) of Citizens' Report on Form 8-K filed July 26, 1990, file number 0-10535). N/A 10 Citizens Banking Corporation Second Amended Stock Option Plan (incorporated by reference from Exhibit 4 of Citizens' registration statement on Form S-8 filed May 5, 1992--Registration No. 33-47686). N/A 10.1 Composite form of "Stock Option Agreement" executed between Citizens and certain executive officers of Citizens pursuant to Citizens' Second Amended Stock Option Plan (incorporated by reference from Exhibit 10(e) of Citizens' 1992 Annual Report on Form 10-K, file number 0-10535). N/A 10.2 Citizens Banking Corporation Management Incentive Compensation Program (incorporated by reference from pages 18 and 19 of Citizens' Proxy Statement for its 1999 Annual Meeting of Shareholders under the caption "Management Incentive Plan", file number 0-10535). N/A 10.3 Citizens Banking Corporation Amended and Restated Director's Deferred Compensation Plan (incorporated by reference from Exhibit 10(h) of Citizens' 1994 Annual Report on Form 10-K, file number 0-10535). N/A 10.4 Deferred Compensation Agreement for Charles R. Weeks, as amended, and related Citizens Banking Corporation Deferred Benefits Trust Agreement (incorporated by reference from Exhibit 10(d) of Citizens' 1989 Annual Report on Form 10-K, file number 0-10535). N/A 10.5 Citizens Banking Corporation Supplemental Retirement Benefits Plan for Charles R. Weeks, as amended (incorporated by reference from Exhibit 10(e) of Citizens' 1989 Annual Report on Form 10-K, file number 0-10535). N/A
14 15
Exhibit EXHIBIT INDEX (continued) Form 10-K No. Exhibit Page No. ------- ------------------------------------------------------------------------------------------------ --------- 10.6 Citizens Banking Corporation Stock Option Plan for Directors (incorporated by reference from Exhibit 99 of Citizens' registration statement on Form S-8 filed July 21, 1995--Registration No. 33-61197). N/A 10.7 Citizens Banking Corporation Amended and Restated Section 401(k) Plan (incorporated by reference from Exhibit 99.1 of Citizens' registration statement on Form S-8 filed August 2, 1996 - Registration No. 333-09455). N/A 10.8 Citizens Banking Corporation Supplemental Retirement Benefits Plan for John W. Ennest. (incorporated by reference from Exhibit 10(p) of Citizens' 1996 Annual Report on Form 10-K, file number 0-10535). N/A 10.9 Citizens Banking Corporation Supplemental Retirement Benefits Plan for Robert J. Vitito. (incorporated by reference from Exhibit 10(q) of Citizens' 1996 Annual Report on Form 10-K, file number 0-10535). N/A 10.10 Citizens Banking Corporation Third Amended Stock Option Plan (incorporated by reference from Exhibit 10(r) of Citizens' 1997 Second Quarter Report on Form 10-Q, file number 0-10535). N/A 10.11 Citizens Banking Corporation Change in Control Agreement (incorporated by reference form Exhibit 10(s) of Citizens' 1997 Annual Report on Form 10-K, file number 0-10535). N/A 10.12 F&M Bancorporation, Inc.'s Deferred Compensation Agreement with Gail E. Janssen (incorporated N/A by reference from Exhibit 10.6 of F&M's Report on Form 10-K for the year ended December 31, 1992, file number 0-14553). N/A 10.13 F&M Bancorporation, Inc.'s Officers' Stock Purchase Plan (incorporated by reference from F&M's Proxy Statement for its 1996 Annual Meeting of Shareholders under the caption "Officers' Stock Purchase Plan", file number 0-14553). N/A 10.14 Employment Agreement dated as of August 1, 1998 between F&M Bancorporation Inc. and John W. Johnson (incorporated by reference from Exhibit 10.1 of F&M's Report on Form 10-Q for the quarter ended September 30, 1998, file number 0-14553). N/A 11 Computation of Per Share Earnings (incorporated by reference from Exhibit 13 on page 35 under the caption "Note 13. Earnings Per Share" of such document). N/A 13 Citizens Banking Corporation 1999 Annual Report (except as to portions expressly incorporated herein, said Annual Report is included only for information). (1)
15 16
Exhibit EXHIBIT INDEX (continued) Form 10-K No. Exhibit Page No. ------- ------------------------------------------------------------------------------------------------ --------- 21 Subsidiaries of the Registrant (1) 23 Consent of Ernst & Young LLP (1) 23.1 Consent of Wipfli Ullrich Bertelson LLP (1) 27 Financial Data Schedules (1) - - -------------------------------------------------------------------------------------------------------------------------------
N/A - not applicable, exhibit incorporated by reference. (1) Exhibit included on the following pages of this Annual Report on Form 10-K filing. All other Exhibits required to be filed with this Form are not applicable and have therefore been omitted. 16 EX-13 2 ANNUAL REPORT TO SHAREHOLDERS 1999 1 Exhibit 13 (Form 10-K) CITIZENS BANKING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS AND CONSOLIDATED FINANCIAL STATEMENTS 17 2 TABLE OF CONTENTS 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
3
- - ------------------------------------------------------------------------------------------------------------------------------------ TABLE 1. SELECTED FINANCIAL DATA(1) (in thousands, except per share data) 1999 1998 1997 1996 1995 - - ------------------------------------------------------------------------------------------------------------------------------------ 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 ====================================================================================================================================
(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 4 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.
- - -------------------------------------------------------------- (in thousands) 1999 1998 1997 - - -------------------------------------------------------------- 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 ======== ======== ======== - - --------------------------------------------------------------
Page 2 5 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.
- - ---------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, Changes in 1999 ---------------------------------------------------------------- (in thousands) 1999 1998 Amount Percent - - ---------------------------------------------------------------------------------------------------------------------------- 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 - - ----------------------------------------------------------------------------------------------------------------------------
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.
- - --------------------------------------------------------------- CASH EARNINGS SUMMARY (in thousands except per share amounts) 1999 1998 % Change - - --------------------------------------------------------------- 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 - - ---------------------------------------------------------------
Page 3 6 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:
- - ----------------------------------------------------------- Net Operating Income --------------------------------- - - ----------------------------------------------------------- (in thousands) 1999 1998 1997 - - ----------------------------------------------------------- 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 ======== ======== ======== - - -----------------------------------------------------------
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 7 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 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) - - ------------------------------------------------------------------------------------------------------------------------------ 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 ====== ====== ====== ====== ====== ====== - - ------------------------------------------------------------------------------------------------------------------------------
(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 8
- - --------------------------------------------------------------------------------------------------------------------------------- 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) - - ------------------------------------------------------------------------------------------------------------------------------------ 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 % - - ---------------------------------------------------------------------------------------------------------------------------------
(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 9 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 4. SUMMARY OF LOAN LOSS EXPERIENCE Year Ended December 31 (in thousands) 1999 1998 1997 1996 1995 - - ------------------------------------------------------------------------------------------------------------------------------- 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 - - -------------------------------------------------------------------------------------------------------------------------------
Page 7 10 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 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) - - -------------------------------------------------------------------------------------------------------------------------------- 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 ====== ===== ===== ===== ===== - - --------------------------------------------------------------------------------------------------------------------------------
(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 11
- - ------------------------------------------------------------------------------ NONINTEREST INCOME Year Ended December 31, Changes in 1999 ------------------------------------------------- (in thousands) 1999 1998 Amount Percent - - ------------------------------------------------------------------------------ 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 ======== ======== ======== - - ------------------------------------------------------------------------------
(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.
- - -------------------------------------------------------------------------- NONINTEREST EXPENSE Year Ended December 31, Changes in 1999 --------------------------------------------------- (in thousands) 1999 1998 Amount Percent - - -------------------------------------------------------------------------- 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 ========= ========= ======== - - --------------------------------------------------------------------------
(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 12 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 13
- - ------------------------------------------------------------------------------------------------------------------------------ AVAILABLE FOR SALE AND HELD TO MATURITY SECURITIES Balances(1) Changes in 1999 ---------------------------------- --------------------------------- Year Ended December 31 (in thousands) 1999 1998 Amount Percent - - ------------------------------------------------------------------------------------------------------------------------------ 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 =========== =========== ========= - - ------------------------------------------------------------------------------------------------------------------------------
(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 14
- - ----------------------------------------------------------------------------------------------------------------------------------- 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 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. - - -----------------------------------------------------------------------------------------------------------------------------------
(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 7. LOAN PORTFOLIO (in millions) 1999 1998 1997 1996 1995 - - ----------------------------------------------------------------------------------------------------------------------------- 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 ========= ======== ========= ========= ========
LOAN MATURITIES AND INTEREST RATE SENSITIVITY AT DECEMBER 31, 1999
Within One to After One Year Five Years Five Years Total - - ----------------------------------------------------------------------------------------------------------------------------- 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 ======== ========= ======= ======== - - -----------------------------------------------------------------------------------------------------------------------------
Page 12 15 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 16
- - -------------------------------------------------------------------------------------------------------------------------- TABLE 8. NONPERFORMING ASSETS AND PAST DUE LOANS December 31 (in thousands) 1999 1998 1997 1996 1995 - - -------------------------------------------------------------------------------------------------------------------------- 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 ======= ======= ======== ======= ======= - - --------------------------------------------------------------------------------------------------------------------------
(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 17
- - --------------------------------------------------------------------------------------------------------------------------- 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 - - ------------------------------------------------------------------------ ------------------------------------------------- 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 ========= ======== ======== - - ---------------------------------------------------------------------------------------------------------------------------
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 10. MATURITY OF TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE December 31, (in thousands) 1999 - - ------------------------------------------------------------- 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 ========= - - -------------------------------------------------------------
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 18 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.
- - ------------------------------------------------------------------- Regulatory Minimum ------------------ "Well December 31, ----------------------------- Required Capitalized" 1999 1998 1997 - - ------------------------------------------------------------------- Risk based: 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 - - -------------------------------------------------------------------
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 19 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 20
- - ---------------------------------------------------------------------------------------------------------------------------- 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 - - ---------------------------------------------------------------------------------------------------------------------------- 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 - - ----------------------------------------------------------------------------------------------------------------------------
(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 21 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 22
- - ------------------------------------------------------------------------------------------------------------------------------------ TABLE 12. SELECTED QUARTERLY INFORMATION 1999 1998 ----------------------------------------------- ------------------------------------------- (in thousands except per share data) FOURTH THIRD SECOND FIRST Fourth Third Second First - - --------------------------------------------------------------------------------------- ------------------------------------------- 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 - - ------------------------------------------------------------------------------------------------------------------------------------
(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 23 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 24
- - ----------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS CITIZENS BANKING CORPORATION AND SUBSIDIARIES December 31, (in thousands, except share amounts) 1999 1998 - - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS 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 ========== ========== - - -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. Page 22 25
- - ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF INCOME CITIZENS BANKING CORPORATION AND SUBSIDIARIES (in thousands, except share amounts) 1999 1998 1997 - - ------------------------------------------------------------------------------------------------------------------------------------ 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 - - ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. Page 23 26
- - ------------------------------------------------------------------------------------------------------------------------------------ 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 - - ----------------------------------------------------------------------------------------------------------------------------------- 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 ========= ========= ========= ========= - - -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. Page 24 27
- - ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS CITIZENS BANKING CORPORATION AND SUBSIDIARIES YEAR ENDED DECEMBER 31, (in thousands) 1999 1998 1997 - - ------------------------------------------------------------------------------------------------------------------------------------ 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 - - ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. Page 25 28 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 29 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:
- - -------------------------------------------------------------------------------- (unaudited) (in thousands,except Ten Months Ended Year Ended December 31, per share data) October 31, 1999 1998 1997 - - -------------------------------------------------------------------------------- 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 ==================================================================================
(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:
4th Qtr 1999 Charge Amount Utilized Reserve ---------------------------------------- ------------------------- Balance Merger Total December 31, (in thousands) Related Other Expense Cash Non-cash 1999 - - ----------------------------------------------------------------------------------------------------------------------- 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 =========== =========== =========== =========== ========== ===========
Page 27 30 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.
- - ----------------------------------------------------------- Year Ended December 31, (in thousands) 1998 1997 - - ----------------------------------------------------------- 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 ======= ======== ===========================================================
NOTE 4. INVESTMENT SECURITIES The amortized cost, estimated fair value and gross unrealized gains and losses of investment securities follow:
- - --------------------------------------------------------------------------------------------------------------------------------- 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 - - --------------------------------------------------------------------------------------------------------------------------------- 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 ========== ========== ========== ========== ========== ========== ========== ========== =================================================================================================================================
Page 28 31 The amortized cost and estimated fair value of debt securities by contractual maturity at December 31, 1999 are shown below.
- - ----------------------------------------------------------- Estimated Amortized Fair (in thousands) Cost Value - - ----------------------------------------------------------- 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 =========== =========== ===========================================================
Sales of investment securities resulted in realized gains and losses as follows:
- - ------------------------------------------------------------ Year Ended December 31, (in thousands) 1999 1998 1997 - - ------------------------------------------------------------ Securities gains $ 561 $ 504 $ 326 Securities losses (3,613) (29) (898) -------- ----- ------ Net gain (loss) $ (3,052) $ 475 $ (572) ======== ===== ====== =============================================================
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:
- - ------------------------------------------------------------ December 31, (in thousands) 1999 1998 - - ------------------------------------------------------------ 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 ======== ======== ============================================================
The effect of nonperforming loans on interest income follows:
- - ------------------------------------------------------------- Year Ended December 31, (in thousands) 1999 1998 1997 - - ------------------------------------------------------------- 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 ======= ======= ======= =============================================================
Page 29 32 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:
- - ----------------------------------------------------------- (in thousands) 1999 1998 - - ----------------------------------------------------------- Balance - January 1 $ 2,603 $ 731 Mortgage servicing rights capitalized 1,468 2,592 Amortization (736) (720) ------- ------- Balance - December 31 $ 3,335 $ 2,603 ======= ======= ===========================================================
NOTE 6. ALLOWANCE FOR LOAN LOSSES A summary of changes in the allowance for loan losses follows:
- - ------------------------------------------------------------- (in thousands) 1999 1998 1997 - - ------------------------------------------------------------- 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 ======== ======== ======== =============================================================
NOTE 7. PREMISES AND EQUIPMENT A summary of premises and equipment follows:
- - ------------------------------------------------------------- December 31, (in thousands) 1999 1998 - - ------------------------------------------------------------- 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 ========= ======== =============================================================
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 33 NOTE 8. DEPOSITS A summary of deposits follows:
- - ------------------------------------------------------------ December 31, (in thousands) 1999 1998 - - ------------------------------------------------------------ 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 =========== ========== ============================================================
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:
- - ---------------------------------------------------------------- (in thousands) 1999 1998 1997 - - ---------------------------------------------------------------- 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% ================================================================
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:
- - ------------------------------------ (in thousands) 1999 (1) - - ------------------------------------ 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% ====================================
(1) Prior year amounts were immaterial. NOTE 10. LONG-TERM DEBT A summary of long-term debt follows:
- - --------------------------------------------------------- December 31, (in thousands) 1999 1998 - - --------------------------------------------------------- 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 ======== ========= =========================================================
Page 31 34 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:
- - ------------------------------------------------------- (in thousands) - - ------------------------------------------------------- 2000 $ 3,131 2001 25,236 2002 25,542 2003 1,548 2004 2,256 Over 5 Years 69,391 -------- Total $127,104 ======== =======================================================
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.
- - ------------------------------------------------------------------------------------ Other Post- Pension Retirement Benefits Benefits ------------------------ ----------------------------- (in thousands) 1999 1998 1999 1998 - - ------------------------------------------------------------------------------------ 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 --- --- ====================================================================================
(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 35 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.
- - ------------------------------------------------------------------ F&M Bank BancSecurity Waushara County Corporation ----------------- ----------------- (in thousands) 1999 1998 1999 1998 - - ------------------------------------------------------------------ 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 ====== ====== ====== ====== ==================================================================
The assumption used in determining the actuarial present value of the benefit obligations for the F&M Plans follow:
- - ---------------------------------------------------------------------------------- F&M Bank BancSecurity Waushara County Corporation -------------------------- --------------------------- 1999 1998 1997 1999 1998 1997 -------------------------- --------------------------- 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 ==================================================================================
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:
- - -------------------------------------------------------------------- Year Ended December 31, -------------------------------- (in thousands) 1999 1998 1997 - - -------------------------------------------------------------------- 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 ====== ======= ======= ====================================================================
Page 33 36 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:
- - ------------------------------------------------------------- One Percentage One Percentage (in thousands) Point Increase Point Decrease - - ------------------------------------------------------------- Effect on total of service and interest cost components $ 88 $ (76) Effect on the postretirement benefit obligation 1,227 (1,127) - - ------------------------------------------------------------
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:
- - ------------------------------------------------------------ (in thousands) 1999 1998 - - ------------------------------------------------------------ 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 ======= ======= ============================================================
Income tax expense consists of the following:
- - ------------------------------------------------------------ Year Ended December 31, (in thousands) 1999 1998 1997 - - ------------------------------------------------------------ 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 ======== ======== ======== ============================================================
A reconciliation of income tax expense to the amount computed by applying the federal statutory rate of 35% to income before income taxes follows:
- - ------------------------------------------------------------ Year Ended December 31, (in thousands) 1999 1998 1997 - - ------------------------------------------------------------ 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 ======== ======== ======== ============================================================
Page 34 37 NOTE 13. EARNINGS PER SHARE A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations follows:
- - ----------------------------------------------------------------------------- Year Ended December 31, (in thousands) 1999 1998 1997 - - ----------------------------------------------------------------------------- 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 ======== ======== ======== =============================================================================
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 38 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:
- - ------------------------------------------------------------------ 1999 1998 1997 - - ------------------------------------------------------------------ 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. ==================================================================
A summary of stock option transactions under the plans for 1999, 1998 and 1997 follows: - - --------------------------------------------------------------------------------
Options Option Price ------------------------------ ------------------------------- Available Per Share for Grant Outstanding Range Average - - ----------------------------------------------------------------------------------------------------------------------- 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 ========= ========= ============= ======
================================================================================ The following table summarizes information on stock options outstanding as of December 31, 1999: - - --------------------------------------------------------------------------------
Options Outstanding Options Exercisable ----------------------------------------------------- ----------------------------- Weighted- Weighted- Weighted- Average Average Exercise Average Range Amount Remaining Life Price Amount Exercise Price - - ------------------------------------------------------------------------------------------------------------------- $ 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 ========= ========= ===================================================================================================================
Page 36 39 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 40 The estimated fair values of Citizens' financial instruments follow:
DECEMBER 31, 1999 December 31, 1998 ------------------------ ----------------------- CARRYING ESTIMATED Carrying Estimated (in millions) AMOUNT FAIR VALUE Amount Fair Value - - ---------------------------------------------------------------------------------------------------------------------------- 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 ============================================================================================================================
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 41 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 42
- - ------------------------------------------------------------------------------------------------------------------------------------ LINE OF BUSINESS INFORMATION Special Charge Net And Commercial Retail Financial Operating Related (in thousands) Banking Banking Services F&M Other Income Items Total - - ------------------------------------------------------------------------------------------------------------------------------------ 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 ========= ========= ========= ========= ========= ========= ==================================================================================================================================
Page 40 43 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.
- - --------------------------------------------------------------------------------------------------------------------------- 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 - - --------------------------------------------------------------------------------------------------------------------------- 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.
Page 41 44 NOTE 19. CITIZENS BANKING CORPORATION (PARENT ONLY) STATEMENTS - - --------------------------------------------------------------------------------
BALANCE SHEETS CITIZENS BANKING CORPORATION (PARENT ONLY) December 31, (in thousands) 1999 1998 - - --------------------------------------------------------------------------------------------------------------------------- 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 - - --------------------------------------------------------------------------------------------------------------------------- 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 ======= ======= ======= =========================================================================================================================== - - ---------------------------------------------------------------------------------------------------------------------------
Page 42 45 - - -------------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS CITIZENS BANKING CORPORATION (PARENT ONLY)
Year Ended December 31, (in thousands) 1999 1998 1997 - - ----------------------------------------------------------------------------------------------------------------------------- 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 ======== ======== ======== =============================================================================================================================
Page 43 46 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 47 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 48 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 EX-21 3 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21 (Form 10-K) SUBSIDIARIES OF CITIZENS BANKING CORPORATION Jurisdiction or Incorporation of Subsidiaries (all wholly owned) Organization - - ------------------------------- ----------------- Citizens Bank Michigan Citizens Commercial Leasing Corporation Michigan CB Financial Services, Inc. Michigan Citizens Title Services, Inc. Michigan Citizens Bank Mortgage Corporation Michigan Citizens Bank - Illinois, N.A National Association F&M Bancorporation, Inc. Wisconsin F&M Merger Corporation Wisconsin F&M Bank - Cannon Valley Minnesota F&M Bank - Central* Wisconsin F&M Bank - East Troy* Minnesota F&M Bank - Elkhorn* Wisconsin F&M Bank - Jefferson* Wisconsin F&M Bank - Grant County* Wisconsin F&M Bank - Kiel* Wisconsin F&M Bank - Lakeland* Wisconsin F&M Bank - Landmark* Wisconsin F&M Bank - Northeast* Wisconsin F&M Bank - Prairie du Chien* Wisconsin F&M Bank - Superior* Wisconsin F&M Bank - Winnebago County* Wisconsin BancSecurity Corporation Iowa F&M Bank - Iowa Central Iowa Security Bancservices, Inc. Iowa F&M Bank - Algoma* Wisconsin F&M Bank - Appleton* Wisconsin F&M Bank - Brodhead* Wisconsin F&M Bank - Darlington, N.A.* National Association F&M Bank - Hilbert* Wisconsin F&M Bank - Kaukauna* Wisconsin F&M Bank - New London* Wisconsin F&M Bank - Waushara County* Wisconsin * Each of these banks has a subsidiary organized and existing under the laws of the State of Nevada which holds and manages that bank's investments. EX-23 4 CONSENT TO ERNST & YOUNG LLP 1 Exhibit 23 (Form 10-K) CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in (1) the Registration Statement (Form S-8 No. 33-47686 dated May 5, 1992) pertaining to the Citizens Banking Corporation Second Amended Stock Option Plan; (2) the Registration Statement (Form S-8 No. 33-61197 dated July 21, 1995) pertaining to the Citizens Banking Corporation Stock Option Plan for Directors; (3) the Registration Statement (Form S-8 No. 333-09455 dated August 2, 1996) pertaining to the Citizens Banking Corporation Amended and Restated Section 401(k) Plan and (4) the Registration Statement (Post Effective Amendment No. 1 to Form S-4 on Form S-8 No. 333-86569 dated December 22, 1999) pertaining to the F & M Bancorporation, Inc. stock option plans, of our report dated January 19, 2000, with respect to the consolidated financial statements of Citizens Banking Corporation included in the annual report (Form 10-K) for the year ended December 31, 1999. /s/ Ernst & Young LLP Ernst & Young LLP Detroit, Michigan March 30, 2000 EX-23.1 5 CONSENT OF WIPFLI ULLRICH BERTELSON LLP 1 Exhibit 23.1 (Form 10-K) [WIPFLI ULLRICH BERTELSON LLP LOGO] CONSENT OF WIPFLI ULLRICH BERTELSON LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in (1) the Registration Statement (Form S-8 No. 33-47686 dated May 5, 1992) pertaining to the Citizens Banking Corporation Second Amended Stock Option Plan; (2) the Registration Statement (Form S-8 No. 33-61197 dated July 21, 1995) pertaining to the Citizens Banking Corporation Stock Option Plan for Directors; (3) the Registration Statement (Form S-8 No. 333-09455 dated August 2, 1996) pertaining to the Citizens Banking Corporation Amended and Restated Section 401(k) Plan and (4) the Registration Statement (Post Effective Amendment No. 1 to Form S-4 on Form S-8 No. 333-86569 dated December 22, 1999) pertaining to the F&M Bancorporation, Inc. stock option plans, of our report dated February 4, 1999 with respect to the consolidated financial statements of F&M Bancorporation, Inc. and Subsidiaries for the years ended December 31, 1998 and 1997 included in the annual report (Form 10-K) of Citizens Banking Corporation for the year ended December 31, 1999. /s/ Wipfli Ullrich Bertelson LLP Wipfli Ullrich Bertelson LLP Green Bay, Wisconsin March 27, 2000 EX-27 6 FINANCIAL DATA SCHEDULE
9 1,000 YEAR 3-MOS DEC-31-1999 DEC-31-1999 JAN-01-1999 OCT-01-1999 DEC-31-1999 DEC-31-1999 250,745 250,745 755 755 63,048 63,048 2,444 2,444 1,372,186 1,372,186 0 0 25,161 25,161 5,917,483 5,917,483 76,397 76,397 7,899,357 7,899,357 6,128,998 6,128,998 937,279 937,279 72,307 72,307 127,104 127,104 0 0 0 0 226,972 226,972 406,697 406,697 7,899,357 7,899,357 463,071 122,522 76,232 21,425 3,104 584 542,407 144,531 196,871 51,568 231,917 63,391 310,490 81,140 24,675 11,422 (3,052) (3,584) 276,976 99,303 89,983 (13,779) 61,994 (9,229) 0 0 0 0 61,994 (9,229) 1.29 (0.19) 1.28 (0.19) 4.69 4.63 28,931 28,931 2,139 2,139 9 9 18,900 18,900 69,740 72,689 26,862 9,795 6,444 2,081 76,397 76,397 51,600 51,600 0 0 24,797 24,797
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