-----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, VBYZ0LexSWyrJYEmZ6MjAfsF3Lc+GVa8Je/87aGYu2c9cg0vR1gxhgDp+p4rkchH y9gk2YNU7WFVeO4Q+TQklA== 0000950124-97-001531.txt : 19970317 0000950124-97-001531.hdr.sgml : 19970317 ACCESSION NUMBER: 0000950124-97-001531 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970314 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS BANKING CORP CENTRAL INDEX KEY: 0000351077 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 382378932 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-10535 FILM NUMBER: 97557183 BUSINESS ADDRESS: STREET 1: ONE CITIZENS BANKING CTR CITY: FLINT STATE: MI ZIP: 48502 BUSINESS PHONE: 8102572500 MAIL ADDRESS: STREET 1: 1 CITIZENS BANKING CENTER CITY: FLINT STATE: MI ZIP: 48502 10-K405 1 10-K405 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, 1996 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. [ X ] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $428,304,762 as of February 27, 1997. The number of shares outstanding of the registrant's Common Stock (No par value) was 14,352,107 as of February 27, 1997. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Citizens Banking Corporation Proxy Statement for its annual meeting of shareholders to be held April 15, 1997 are incorporated by reference into Part III. (Exhibit Index - Pages 13 through 15) 2 CITIZENS BANKING CORPORATION 1996 Annual Report on Form 10-K TABLE OF CONTENTS
Page ---- PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Item 4. Submission of Matters To a Vote of Security Holders . . . . . . . . . . . . . . . . . 7 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . 8 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 PART III Item 10. Directors and Executive Officers of Registrant . . . . . . . . . . . . . . . . . . . 9 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . 9 Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . 9 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . 10 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2 3 Part I ITEM 1. BUSINESS. General Citizens Banking Corporation ("Corporation") 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, 1996, the Corporation directly or indirectly owned two banking subsidiaries and two nonbanking subsidiaries and had 1825 full-time equivalent employees. Additional information related to the subsidiaries at year-end 1996 is provided below.
============================================================================================= Total Principal Number of Assets Date Subsidiary Office Offices (in millions) Acquired - --------------------------------------------------------------------------------------------- Citizens Bank(1)(2) Flint, MI 90 $3,220.5 01/01/1982 Citizens Bank - Illinois, N.A. Berwyn, IL 3 255.3 05/01/1987 =============================================================================================
(1) Consolidated totals of Citizens Bank include its wholly owned nonbank subsidiary, Citizens Commercial Leasing Corporation ("CCLC") based in Saginaw, MI. (2) Citizens Bank also owns Lakeshore Insurance Agency, Inc. a wholly owned nonbank subsidiary established as a "de novo" insurance agency. The Corporation's 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, 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 the Corporation and operate through 93 banking offices. The offices are located along the Interstate 75 corridor within the State of Michigan from northern and western suburban Detroit to the greater Grayling/Gaylord areas. Expansion through the acquisition of the four Michigan affiliates of Banc One Corporation purchased at the close of business on February 28, 1995 established a new market presence in the central and southwest Michigan areas. The transaction was accounted for as a purchase and the four banks ("acquired banks") were merged into Citizens Bank headquartered in Flint, Michigan effective immediately after the acquisition. Total assets acquired of $670 million included net loans of $532 million and investment securities and money market investments of $57 million. The three banking offices in Illinois are located in the suburban market of Chicago. In January 1997, the Corporation announced an agreement to acquire CB Financial Corporation headquartered in Jackson, Michigan. CB Financial Corporation has a combined asset base of $826 million and operates thirty-nine offices throughout Michigan. The Corporation will issue approximately 4.2 million shares of its common stock in a tax free exchange for all of the outstanding stock of CB Financial Corporation. The acquisition will be accounted for as a pooling of interests and is expected to be completed by the end of the second quarter of 1997. This transaction is subject to regulatory and shareholder approval. Citizens Commercial Leasing Corporation, a wholly owned nonbank subsidiary of Citizens Bank, engages in direct lease financing of office, medical and other equipment, and participates in high quality indirect lease participations. 3 4 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. In the first quarter of 1996, the Corporation's lead bank Citizens Bank established a "de novo" insurance agency, Lakeshore Insurance Agency, Inc.. Through this subsidiary, the Corporation sells life insurance and annuity products to clients subject to certain restrictions. 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. CCLC, a wholly owned subsidiary of Citizens Bank, competes directly with other leasing companies. Loans comprise 73.3% of the Corporation's 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 35.0% of the 1996 average loan portfolio. Consumer loans originated follow strict Corporate credit screening 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%. 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 of this document on pages 11 to 14 under the captions "Loans" and "Nonperforming Assets". Mergers between and the expansion of financial institutions both within and outside of our primary markets of Michigan and Illinois 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. On June 1, 1996, the Corporation consolidated its six Michigan chartered banks into one bank called Citizens Bank. The consolidation further streamlined operations and reduced certain costs but retained local management and the respective boards of directors. Other factors such as employee relations and environmental laws also impact the Corporation's competitiveness. Presently, none of the Corporation's employees are covered by collective bargaining agreements and the Corporation maintains a favorable relationship with it's employees. The impact of environmental laws is further discussed in "Item 3. Legal Proceedings" of this document. 4 5 Supervision and Regulation Citizens Banking Corporation 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 the Corporation to obtain the prior approval of the Board of Governors of the Federal Reserve System for bank acquisitions, limits the acquisition of shares of out-of-state banking organizations unless permitted by state law and prescribes limitations on the nonbanking activities of the Corporation. As a bank holding company, the Corporation 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. The Corporation's 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. Citizens Bank - Illiniois, N.A. is chartered under federal law and is subject to supervision, regulation and examination by the Comptroller of the Currency. Both 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, both banks are members of the Federal Reserve System. The Corporation's nonbank company is supervised and examined by the Federal Reserve System. Certain regulatory matters concerning capital adequacy guidelines for the Corporation and its banking subsidiaries, limitations on the payment of dividends to the Corporation 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 of this document on pages 16 and 36 through 37 under the captions, "Liquidity and Debt Capacity" and "Note 16. 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 have 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. However, since Citizens is headquartered in Michigan and currently has only one subsidiary outside of the state this does not significantly affect the Corporation. The Corporation may be impacted as states adjacent to Michigan pass similar legislation. The impact of this is not expected to significantly affect the Corporation's strategic plan, except to allow potentially greater consolidation benefits if the Corporation acquires banks outside of Michigan. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") adopted in August 1989 has significantly affected financial institutions. Key provisions of FIRREA provide for the acquisition of thrift institutions by bank holding companies (previously only failing thrifts were permitted to be acquired), increase deposit insurance assessments for insured banks, redefine applicable capital standards for banks and thrifts, broaden the enforcement power of federal bank regulatory agencies, and require 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. 5 6 The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), signed into law on December 19, 1991, imposes on banks relatively detailed standards and mandates 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 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". Both of the Corporation's subsidiaries have sufficient captial to maintain this designation (the FDIC's highest rating). In 1997, banks maintaining the "well capitalized" designation will again have no FDIC insurance premium requirements except for a special assessment of 1.3 cents per 100 dollars of deposits. This special assessment resulted from the September 30, 1996 passage of Deposit Insurance Funds Act of 1996 by Congress and applies to all commercial banks regardless of risk subgroup classification. Further regulatory changes could impact the amount and type of assessments paid by the Corporation's subsidiary banks. 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 the Corporation cannot be predicted. Environmental Matters The Corporation's primary exposure to environmental risk is through its provision of trust services and its lending activities. In each instance, the Corporation has policies and procedures in place to mitigate its environmental risk exposures to the fullest extent possible. With respect to lending activities, environmental site assessments at the time of loan origination are mandated by the Corporation 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, the Corporation 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 the Corporation 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. 6 7 ITEM 2. PROPERTIES. The Corporation's 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. The Corporation's subsidiaries operate through 93 banking offices. Of these, 27 are leased, three are owned by the banks involved but on leased land, and the remaining are owned. Rent expense on the leased properties totaled $1,080,000 in 1996. The banking offices are located in various communities throughout the State of Michigan and in the Chicago suburbs of Berwyn, Cicero and Elk Grove, Illinois. At certain Citizens Bank locations a portion of the office building is leased to tenants. Additional information related to the property and equipment owned or leased by the Corporation and its subsidiaries is incorporated herein by reference from Exhibit 13 on page 28 under the caption "Note 6. Premises and Equipment" of this document. ITEM 3. LEGAL PROCEEDINGS. From time to time, certain of the Corporation's 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, there are a number of other PRPs 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. The Corporation's management is not presently aware of any environmental liabilities which pose a reasonable possibility of future material impact on the Corporation or its earnings. It is the Corporation's 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 1996 to a vote of security holders through the solicitation of proxies or otherwise. 7 8 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 18 under the caption "Table 13. Selected Quarterly Information" of this document. The approximate number of shareholders of the Registrant's common stock is 6,700 as of December 31, 1996. 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 is incorporated herein by reference from Exhibit 13 on pages 36 and 37 under the caption "Note 16. Regulatory Matters" of this 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 this 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 20 of this document. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Financial Statements are incorporated herein by reference from Exhibit 13 on pages 21 through 38 of this document. Supplementary data of the Corporation's quarterly results of operations required by this item are incorporated herein by reference from Exhibit 13 on page 18 of this document under the caption "Table 13. Selected Quarterly Information". ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 8 9 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item appears in the Corporation's proxy statement for its annual meeting of shareholders to be held April 15, 1997 ("1996 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 4 through 7 and on pages 13 through 15, respectively, of the 1996 Proxy Statement. Regulation S-K Item 405 disclosure: Appears under the caption "Securities Transactions Reporting" on page 26 of the 1996 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item appears under the caption "Compensation of Directors," on pages 9 and 10 and under the captions "Executive Compensation", "Compensation and Benefits Committee Report on Executive Compensation", "Shareholder Return", and "Compensation Committee Interlocks and Certain Transactions and Relationships" on pages 16 through 26 of the Corporation's 1996 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 Corporation's 1996 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 page 26 of the Corporation's 1996 Proxy Statement, and is incorporated herein by reference. 9 10 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements: The following consolidated financial statements of the Corporation and Report of Ernst & Young 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 2. Financial Statement Schedules: All schedules are omitted -- see Item 14(d) below. 3. Exhibits: The exhibits listed on the "Exhibit Index" on pages 13 through 15 of this report are filed herewith and are incorporated herein by reference. (b) Reports on Form 8-K No reports of Form 8-K were filed for the quarter ended December 31, 1996. (c) Exhibits: The "Exhibit Index" is filed herewith on pages 13 through 15 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. 10 11 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 10, 1997 - ----------------------------- Robert J. Vitito 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/Charles R. Weeks Chairman of the Board and March 10, 1997 - ------------------------------ Director Charles R. Weeks /s/Robert J. Vitito President, Chief Executive March 10, 1997 - ------------------------------ Officer and Director Robert J. Vitito /s/John W. Ennest Vice Chairman of the Board, March 10, 1997 - ------------------------------ Chief Financial Officer, John W. Ennest Treasurer and Director /s/Edward P. Abbott Director March 10, 1997 - ------------------------------ Edward P. Abbott /s/Hugo E. Braun, Jr. Director March 10, 1997 - ------------------------------ Hugo E. Braun, Jr. /s/Jonathan E. Burroughs II Director March 10, 1997 - ------------------------------ Jonathan E. Burroughs II
11 12
Signature Capacity Date - ------------------------------ ------------------------------------- -------------- /s/Joseph P. Day Director March 10, 1997 - ------------------------------ Joseph P. Day /s/Lawrence O. Erickson Director March 10, 1997 - ------------------------------ Lawrence O. Erickson /s/Victor E. George Director March 10, 1997 - ------------------------------ Victor E. George /s/William J. Hank Director March 10, 1997 - ------------------------------ William J. Hank /s/George H. Kossaras Director March 10, 1997 - ------------------------------ George H. Kossaras /s/Patricia L. Learman Director March 10, 1997 - ------------------------------ Patricia L. Learman /s/William F. Nelson, Jr. Director March 10, 1997 - ------------------------------ William F. Nelson, Jr. /s/Paul A. Rowley Director March 10, 1997 - ------------------------------ Paul A. Rowley /s/William C. Shedd Director March 10, 1997 - ------------------------------ William C. Shedd /s/James E. Truesdell, Jr. Director March 10, 1997 - ------------------------------ James E. Truesdell, Jr. /s/Kendall B. Williams Director March 10, 1997 - ------------------------------ Kendall B. Williams
12 13 CITIZENS BANKING CORPORATION 1996 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(a) Restated Articles of Incorporation, as amended. (incorporated by reference from Exhibit 3(a) of the Corporation's 1995 Annual Report on Form 10K, file number 0-10535). N/A 3(b) Amended and Restated Bylaws. (incorporated by reference from Exhibit 3(d) of the Corporation's 1994 Annual Report on Form 10-K, file number 0-10535). N/A 4 Rights Agreement, dated July 20, 1990, between the Corporation and Citizens Bank, as Rights Agent (incorporated by reference from Exhibit 4(a) of the Corporation's Report on Form 8-K filed July 26, 1990, file number 0-10535). N/A 10(a) Citizens Banking Corporation Stock Option Plan and Citizens Banking Corporation First Amended Stock Option Plan (incorporated by reference from Exhibit 4(a) of the Corporation's registration statement on Form S-8 filed November 26, 1986 as amended April 21, 1987--Registration No. 33-10007). N/A 10(b) Citizens Banking Corporation Amended and Restated Section 401(k) Plan. (incorporated by reference from Exhibit 4a of the Corporation's registration statement on Form S-8 filed April 26, 1989--Registration No. 33-28354). N/A 10(c) Citizens Banking Corporation Second Amended Stock Option Plan. (incorporated by reference from Exhibit 4 of the Corporation's registration statement on Form S-8 filed May 5, 1992--Registration No. 33-47686). N/A 10(d) Composite form of "Performance Partnership Program Grant Agreement" executed between the Corporation and certain executive officers of the Corporation pursuant to the Corporation's Second Amended Stock Option Plan (incorporated by reference from Exhibit 10(d) of the Corporation's 1992 Annual Report on Form 10-K, file number 0-10535). N/A 10(e) Composite form of "Stock Option Agreement" executed between the Corporation and certain executive officers of the Corporation pursuant to the Corporation's Second Amended Stock Option Plan (incorporated by reference from Exhibit 10(e) of the Corporation's 1992 Annual Report on Form 10-K, file number 0-10535). N/A 10(f) Grant Agreement For Charles R. Weeks executed between the Corporation and Charles R. Weeks pursuant to the Corporation's Second Amended Stock Option Plan (incorporated by reference from Exhibit 10(f) of the Corporation's 1992 Annual Report on Form 10-K, file number 0-10535). N/A
13 14 EXHIBIT INDEX (continued)
Exhibit Form 10-K No. Exhibit Page No. - --------- -------------------------------------------------------------------------------------------- ---------- 10(g) Citizens Banking Corporation Management Incentive Compensation Program (incorporated by reference from page 22 of the Corporation's Proxy Statement for its 1996 Annual Meeting of Shareholders under the caption "Management Incentive Plan", file number 0-10535). N/A 10(h) Citizens Banking Corporation Amended and Restated Director's Deferred Compensation Plan. (incorporated by reference from Exhibit 10(h) of the Corporation's 1994 Annual Report on Form 10-K, file number 0-10535). N/A 10(i) 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 the Corporation's 1989 Annual Report on Form 10-K, file number 0-10535). N/A 10(j) Citizens Banking Corporation Supplemental Retirement Benefits Plan for Charles R. Weeks, as amended. (incorporated by reference from Exhibit 10(e) of the Corporation's 1989 Annual Report on Form 10-K, file number 0-10535). N/A 10(k) Citizens Bank Supplemental Retirement Benefits Plan for David A. Thomas Jr. (incorporated by reference from Exhibit 10(f) of the Corporation's 1990 Annual Report on Form 10-K, file number 0-10535). N/A 10(l) Citizens Banking Corporation Stock Option Plan for Directors (incorporated by reference from Exhibit 99 of the Corporation's registration statement on Form S-8 filed July 21, 1995-- Registration No. 33-61197). N/A 10(m) Agreement between Charles R. Weeks and Citizens Banking Corporation to continue as Chairman of the Board of Directors. (1) 10(n) Citizens Banking Corporation Amended and Restated Section 401(k) Plan (incorporated by reference from Exhibit 99.1 of the Corporation's registration statement on Form S-8 filed August 2, 1996 -- Registration No. 333-09455). N/A 10(o) Citizens Banking Corporation Supplemental Retirement Benefits Plan for Gary O. Clark. (1) 10(p) Citizens Banking Corporation Supplemental Retirement Benefits Plan for John W. Ennest. (1) 10(q) Citizens Banking Corporation Supplemental Retirement Benefits Plan for Robert J. Vitito. (1)
14 15 EXHIBIT INDEX (continued)
Exhibit Form 10-K No. Exhibit Page No. - --------- -------------------------------------------------------------------------------------------- ---------- 11 Computation of Per Share Earnings (1) 13 Citizens Banking Corporation 1996 Annual Report (except as to portions expressly incorporated herein, said Annual Report is included only for information). (1) 21 Subsidiaries of the Corporation (1) 23 Consents of Independent Accountants (1) 27 Financial Data Schedule (1)
N/A - not applicable, exhibit incorporated by reference. (1) Exhibit included on the following pages of this Annual Report on Form 10K filing. All other Exhibits required to be filed with this Form are not applicable and have therefore been omitted. 15 EX-10.(M) 2 EXHIBIT-10.(M) 1 FORM 10K EXHIBIT 10(m) April 16, 1996 Mr. Charles R. Weeks 817 Boutell Drive Grand Blanc, Michigan Re: Appointment as Chairman of the Board Dear Chuck: I am writing on behalf of the Citizens Banking Corporation ("CBC") Board of Directors to confirm your appointment as Chairman of the Board and to set forth the parameters of the position. 1. Term. Subject to paragraph 7 below, your term as Chairman of the CBC Board as governed by the provision of this Agreement will commence May 1, 1996 and end April 30, 1999. 2. Duties. In general, as Chairman, you will fulfill the duties of that position as set forth in CBC's bylaws. In addition, the Board requests that you serve as Chairman of the Executive Committee of the Board and of its Nominating Committee. You also will serve as a director of Citizens Commercial & Savings Bank. You will be responsible for monitoring and assisting the CBC Board of Directors in evaluating the performance of CBC's Chief Executive Officer. 3. Fees. You will be paid an annual fee of $200,000, which is payable in quarterly installments beginning May 1, 1996. This fee is inclusive of any other annual retainer or meeting fees otherwise normally paid to directors of CBC. This fee will be increased 3.0% annually as of May 1, beginning May 1, 1997. In addition, you will be paid the normal fee for services as a director of Citizens Commercial & Savings Bank, at the times and in amounts as established for directors of that bank. 4. Expenses. Upon presentation to CBC's Treasurer of an appropriate accounting and supporting documentation, you will be reimbursed by CBC for all reasonable travel and entertainment expenses incurred by you in your capacity as Chairman. 5. Deferred Fee Plan and Stock Options. You will be eligible to participate in the Board's deferred fee plan and stock option plan on the same basis as other non-employee directors of CBC. 1 2 Mr. Charles R. Weeks April 16, 1996 Page 2 6. Office Space and Secretarial Assistance. For your convenience, an office will be made available for your use at CBC's main location, and reasonable secretarial assistance will be provided at that location. However, we understand that much of your work will be performed at home or elsewhere; equipment and clerical service outside the CBC offices will be at your own expense. 7. Termination. In the event you should fail to be re-elected as a director of the Corporation prior to the expiration of the term specified in Paragraph 1. above or you should be removed as Chairman of the Board prior to the expiration of the term specified in paragraph 1 above, for reasons other than willful misconduct or negligence in your performance, you will be entitled to one-half of the annual fees provided in paragraph 3 prorated for the remainder of the term. If you should voluntarily resign as Chairman of the Board prior to the expiration of your term, you will forfeit all right to future payment under this agreement. In the event of your death or permanent and total disability, your fee for the year will be prorated through the date of death or permanent and total disability and any unpaid amount will be paid to you or your estate as the case may be. No payments will be made under this agreement to your spouse or any other beneficiary. 8. Governing Law. The Board intends that this agreement shall be governed by Michigan law. Please acknowledge your acceptance of this Agreement by signing and returning to me the extra copy of this letter that is enclosed. Sincerely, /s/Hugo E. Braun, Jr. ------------------------------------- Hugo E. Braun, Jr. for the Citizens Banking Corporation Board of Directors Acknowledged and Agreed: /s/Charles R. Weeks - -------------------------------- Charles R. Weeks Dated: April 16, 1996 ---------------- 2 EX-10.(O) 3 EXHIBIT-10.(O) 1 FORM 10K EXHIBIT 10(o) CITIZENS BANKING CORPORATION SUPPLEMENTAL RETIREMENT BENEFITS PLAN FOR GARY O. CLARK 1. ADOPTION OF PLAN. Effective July 19, 1996, Citizens Banking Corporation ("Corporation") hereby establishes the Supplemental Retirement Benefits Plan for Gary O. Clark ("Plan"). 2. COVERAGE. The coverage of the Plan shall be limited to Gary O. Clark ("Participant"). 3. SUPPLEMENTAL RETIREMENT BENEFIT. Participant shall, subject to paragraph 4, be entitled to the supplemental retirement benefit described below: (a) AMOUNT AT AGE 65. The annual amount of the Supplemental Retirement Benefit, when expressed in the form of a single life annuity commencing at age 65, shall be equal to the excess of (i) over (ii), where-- (i) is 55.0% of the highest average base salary paid to Participant by Corporation during any consecutive five years out of the final ten years of employment by Corporation, and (ii) is the sum of Participant's normal retirement benefit under the Citizens Banking Corporation Pension Plan for Employees ("Pension Plan") calculated as of his attainment of age 65, and the Participant's Social Security benefit also calculated as of age 65, in each case without regard to any changes in either benefit amount that may occur subsequent to that age due to increases for cost-of-living or other factors. (b) AMOUNT AT AGE PRIOR TO AGE 65. If Participant elects early retirement under the Pension Plan, the annual amount of the Supplemental Retirement Benefit, when expressed in the form of a single life annuity commencing at such early retirement date, shall be equal to the excess of (i) over (ii), where-- (i) is 55.0% of the highest average base salary paid to Participant by Corporation during any consecutive five years out of the final ten years of employment by Corporation, reduced by 5/9ths of 1.0% for each complete calendar month that the Participant's retirement date precedes his 65th birthday, and (ii) is the sum of Participant's early retirement benefit under the Pension Plan calculated as a Participant's early retirement age, and the Participant's Social Security benefit also calculated as of Participant's early retirement age (or, if later, the earliest age at which the Participant is entitled to receive a Social Security benefit, but with that Social Security amount reduced by 5/9th of 1.0% for each complete calendar month that the Participant's early retirement date precedes his first eligibility for such benefit), in each case without regard to any changes in either benefit amount that may 1 2 occur subsequent to such age due to increases for cost-of-living or other factors. (c) COMMENCEMENT AND FORM OF BENEFIT. Supplemental Retirement Benefit payments shall be made in monthly installments at the same time as normal or early retirement benefits, as the case may be, under the Pension Plan, but in no event earlier than Participant's attainment of age 60. If Participant is married at the time benefits commence hereunder, the Supplemental Retirement Benefit shall be converted to and paid in the form of a 50% joint and survivor annuity with Participant's spouse as the joint annuitant, unless Participant validly elects another form of payment for benefits under the Pension Plan, in which case the Supplemental Retirement Benefit shall be converted to and payable in the same form as elected under the Pension Plan. In all events, all forms of payment of the Supplemental Retirement Benefit shall be computed using the same formulas and actuarial factors set forth in the Pension Plan for the determination of optional forms of benefits. For purposes of this paragraph 3, Participant's "spouse" shall be determined in accordance with the Pension Plan. 4. CONDITIONS. Payment of benefits under the Plan shall be made only upon receipt of benefits from the Pension Plan, and only if Participant retires on or after the date of his attainment of age 60 or such earlier age as may be determined by resolution of Corporation's Board of Directors. Prior to Participant's attainment of such age, the benefits under this Plan shall be forfeitable, unless Participant terminates employment with Corporation subsequent to a change in control (as defined in Corporation's Second Amended Stock Option Plan) which occurs subsequent to the effective date of this Plan, or unless otherwise determined by resolution of Corporation's Board of Directors. 5. COST OF PLAN. (a) The entire cost of providing benefits under the Plan shall be paid by Corporation out of its current operating budget, and Corporation's obligations under the Plan shall be an unfunded and unsecured promise to pay. Corporation shall not be obligated under any circumstances to fund its obligations under the Plan. (b) Notwithstanding paragraph (a), Corporation may, at its sole option, or by agreement, informally fund its obligations under the Plan in whole or in part, through a group or individual rabbi or similar trust established with a banking institution unaffiliated with Corporation; provided, however, in no event shall such informal funding be construed to create any trust fund, escrow account or other security for Participant with respect to the payment of benefits under the Plan, other than as permitted under Internal Revenue Service and Department of Labor rules and regulations for unfunded supplemental retirement plans. (c) If Corporation decides to fund the Plan informally, in whole or in part, by procuring, as owner, life insurance for its own benefit on the life of Participant, the form of such insurance and the amounts thereof shall be the sole decision of Corporation, and in no event shall Participant or any beneficiary have any incidents of ownership in any such policies of insurance. If a physical examination is required for Corporation to obtain insurance for Participant under this 2 3 paragraph, Participant agrees to undergo such physical examinations as may be required by the insurance carrier. Such physical examinations shall be conducted by a physician approved by Corporation, at the expense of Corporation. (d) No contributions by Participant are required or permitted under the Plan. (e) All taxes on benefits payable to Participant under the Plan, except for the employer's share of applicable employment taxes, shall be the obligation of Participant. To the extent that benefits (or their present value) become taxable to Participant at any time prior to actual payment of those benefits, such as in the case of the Medicare tax, and to the extent that Corporation is required to withhold taxes, those taxes shall be withheld from other compensation payable by Corporation to Participant. 7. LIMITATION OF PARTICIPANT'S RIGHTS. (a) The Plan not be deemed to create a contract of employment between Corporation and Participant and shall create no right in Participant to continue in Corporation's employment for any specific period of time, or to create any other rights in Participant or obligations on the part of Corporation, except as are set forth herein or in any written employment contract. Nor shall the Plan restrict the right of Corporation to terminate Participant, or restrict the right of Participant to terminate his employment, except as otherwise provided by written employment contract. (b) The rights of Participant or any person claiming through Participant under the Plan shall be solely those of an unsecured general creditor of Corporation. Participant, or any person claiming through Participant, shall have the right to receive from Corporation only those payments as specified herein. Participant agrees that he or any person claiming through him shall have no rights or interests in any asset of Corporation. (c) Except to the extent provided by paragraph 5(b) and as permitted by applicable tax law, no asset used or acquired by Corporation in connection with the liabilities it has assumed under the Plan shall be deemed to be held under any trust for the benefit of Participant. Nor shall it be considered security for the performance of the obligations of Corporation, except as provided by separate agreement and as permitted under Internal Revenue Service and Department of Labor rules and regulations for unfunded supplemental retirement plans. 8. PLAN ADMINISTRATOR AND CLAIMS PROCEDURE. (a) The Plan Administrator and Named Fiduciary of the Plan for purposes of the Employee Retirement Income Security Act of 1974, as amended, shall be the Compensation and Benefits Committee of Corporation's Board of Directors, whose business address is c/o Citizens Banking Corporation, One Citizens Banking Center, Flint, Michigan 48502-9985, and whose telephone number is (810) 766-7500. Corporation's Board of Directors shall have the right to change the Plan Administrator and Named Fiduciary of the Plan at any time, and to change the address and 3 4 telephone number of the same. Corporation shall give Participant written notice of any such change in the Plan Administrator and Named Fiduciary or in the address or telephone number of the same. (b) Participant, or other person claiming through Participant, must file a written claim for benefits with the Plan Administrator as a prerequisite to the payment of benefits under the Plan. Any denial by the Plan Administrator of a claim for benefits under the Plan by Participant or other person (collectively referred to as "claimant") shall be stated in writing by the Plan Administrator and delivered or mailed to the claimant within 90 days after receipt of the claim, unless special circumstances require an extension of time for processing the claim. If such an extension of time is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 90-day period. In no event shall such extension exceed a period of 90 days from the end of the initial period. Any notice of denial shall set forth the specific reasons for the denial, specific reference to pertinent provisions of the Plan upon which the denial is based, a description of any additional material or information necessary for the claimant to perfect his claim, with an explanation of why such material or information is necessary, and any explanation of claim review procedures under the Plan, written to the best of the Plan Administrator's ability in a manner that may be understood without legal or actuarial counsel. (c) A claimant whose claim for benefits has been wholly or partially denied by the Plan Administrator may request, within 90 days following the date of such denial, in a writing addressed to the Plan Administrator, a review of such denial. The claimant shall be entitled to submit such issues or comments in writing or otherwise, as he shall consider relevant to a determination of his claim, and may include a request for a hearing in person before the Plan Administrator. Prior to submitting his request, the claimant shall be entitled to review such documents as the Plan Administrator shall agree are pertinent to his claim. The claimant may, at all stages of review, be represented by counsel, legal or otherwise, of his choice, provided that the fees and expenses of such counsel shall be borne by the claimant. All requests for review shall be promptly resolved. The Plan Administrator's decision with respect to any such review shall be set forth in writing and shall be mailed to the claimant not later than 60 days following receipt by the Plan Administrator of the claimant's request unless special circumstances, such as the need to hold a hearing, require an extension of time for processing, in which case the Plan Administrator's decision shall be so mailed not later than 120 days after receipt of such request. In no decision or review is rendered within this 120 day period, the claimant's appeal shall be deemed denied and the Plan Administrator's original denial of the claim affirmed. (d) Any claim under this claims procedure must be submitted within twelve months from the earlier of (1) the date on which the claimant learned of facts sufficient to enable him to formulate such claim, or (2) the date on which the claimant reasonable should have been expected to learn of facts sufficient to enable him to formulate such claim. (e) The decision of the Plan Administrator upon review of any claim shall be binding upon the claimant, his heirs and assigns, and all other persons claiming by, through or under him. 4 5 (f) The timely filing of a request for review in the manner specified above shall be a condition precedent to obtaining review before the Plan Administrator, and the Plan Administrator shall have no jurisdiction to entertain a request for review unless so filed. A failure to file a claim and a request for review in the manner and within the time limits set forth above shall be deemed a failure by the aggrieved party to exhaust his administrative remedies and shall constitute a waiver of the rights sought to be established under the Plan. (g) Any suit brought to contest or set aside a decision of the Plan Administrator shall be filed in a court of competent jurisdiction within one year from the date of receipt of written notice of the Plan Administrator's final decision or from the date the appeal is deemed denied, if later. No legal action to recover Plan benefits or to enforce or clarify rights under the Plan shall be commenced until the claimant first shall have exhausted the claims and review procedures available to him hereunder. 9. INDEPENDENCE OF BENEFITS. Except as otherwise provided herein, the benefits payable under the Plan shall be independent of, and in addition to, any other benefits or compensation, whether by salary, or bonus or otherwise, payable under any employment agreements that now exist or may hereafter exist from time to time between Corporation and Participant. The Plan does not involve a reduction in salary or foregoing of an increase in future salary by Participant. Nor does the Plan in any way affect or reduce the existing and future compensation and other benefits of Participant. 10. NON-ALIENATION OF BENEFITS. Except in so far as this provision may be contrary to applicable law, no sale, transfer, alienation, assignment, pledge, collateralization, or attachment of any benefits under the Plan shall be valid. 11. RIGHT TO AMEND OR TERMINATE PLAN. (a) Corporation reserves the right to amend the Plan in any manner, and Corporation reserves the right to terminate the Plan at any time in whole or part. Amendment or termination of the Plan shall be accomplished by resolution of Corporation's Board of Directors. (b) Notwithstanding paragraph (a), no such amendment or termination shall reduce or otherwise affect the benefits payable to or on behalf of Participant that have accrued prior to such amendment or termination without the written consent of Participant (or beneficiary, if applicable). 12. CONSTRUCTION AND GOVERNING LAW. (a) Wherever any words are used in the Plan in the masculine gender, they shall be construed as though they also were used in the feminine gender in all cases where they would so apply, and wherever any words are used in the Plan in the singular form, they shall be construed as though they also were used in the plural form in all cases where they would so apply, and vice versa. 5 6 (b) Headings of paragraphs herein are inserted for convenience of reference. They constitute no part of the Plan and are not to be considered in the construction of the Plan. (c) If any provisions of the Plan shall be for any reason invalid or unenforceable, the remaining provisions nevertheless shall be carried into effect. (d) Except in the case of preemption by applicable federal law, the Plan shall be governed by the laws of the State of Michigan. It is intended that the Plan shall be unfunded and maintained by Corporation primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, so that the Plan is exempt from the requirements of Parts 2, 3 and 4 of the Employee Retirement Income Security Act of 1974, as amended. All provisions shall be interpreted in accordance with such intentions. Citizens Banking Corporation has caused the Plan to be executed on July, 1996. Citizens Banking Corporation By: /s/ Robert J. Vitito -------------------------- President and Chief Executive Officer 6 EX-10.(P) 4 EXHIBIT-10.(P) 1 FORM 10K EXHIBIT 10(p) CITIZENS BANKING CORPORATION SUPPLEMENTAL RETIREMENT BENEFITS PLAN FOR JOHN W. ENNEST 1. ADOPTION OF PLAN. Effective July 19, 1996, Citizens Banking Corporation ("Corporation") hereby establishes the Supplemental Retirement Benefits Plan for John W. Ennest ("Plan"). 2. COVERAGE. The coverage of the Plan shall be limited to John W. Ennest ("Participant"). 3. SUPPLEMENTAL RETIREMENT BENEFIT. Participant shall, subject to paragraph 4, be entitled to the supplemental retirement benefit described below: (a) AMOUNT AT AGE 65. The annual amount of the Supplemental Retirement Benefit, when expressed in the form of a single life annuity commencing at age 65, shall be equal to the excess of (i) over (ii), where-- (i) is 50.0% of the highest average base salary paid to Participant by Corporation during any consecutive five years out of the final ten years of employment by Corporation, and (ii) is the sum of Participant's normal retirement benefit under the Citizens Banking Corporation Pension Plan for Employees ("Pension Plan") calculated as of his attainment of age 65, and the Participant's Social Security benefit also calculated as of age 65, in each case without regard to any changes in either benefit amount that may occur subsequent to that age due to increases for cost-of-living or other factors. (b) AMOUNT AT AGE PRIOR TO AGE 65. If Participant elects early retirement under the Pension Plan, the annual amount of the Supplemental Retirement Benefit, when expressed in the form of a single life annuity commencing at such early retirement date, shall be equal to the excess of (i) over (ii), where-- (i) is 50.0% of the highest average base salary paid to Participant by Corporation during any consecutive five years out of the final ten years of employment by Corporation, reduced by 5/9ths of 1.0% for each complete calendar month that the Participant's retirement date precedes his 65th birthday, and (ii) is the sum of Participant's early retirement benefit under the Pension Plan calculated as a Participant's early retirement age, and the Participant's Social Security benefit also calculated as of Participant's early retirement age (or, if later, the earliest age at which the Participant is entitled to receive a Social Security benefit, but with that Social Security amount reduced by 5/9th of 1.0% for each complete calendar month that the Participant's early retirement date precedes his first eligibility for such benefit), in each case without regard to any changes in either benefit amount that may 1 2 occur subsequent to such age due to increases for cost-of-living or other factors. (c) COMMENCEMENT AND FORM OF BENEFIT. Supplemental Retirement Benefit payments shall be made in monthly installments at the same time as normal or early retirement benefits, as the case may be, under the Pension Plan, but in no event earlier than Participant's attainment of age 60. If Participant is married at the time benefits commence hereunder, the Supplemental Retirement Benefit shall be converted to and paid in the form of a 50% joint and survivor annuity with Participant's spouse as the joint annuitant, unless Participant validly elects another form of payment for benefits under the Pension Plan, in which case the Supplemental Retirement Benefit shall be converted to and payable in the same form as elected under the Pension Plan. In all events, all forms of payment of the Supplemental Retirement Benefit shall be computed using the same formulas and actuarial factors set forth in the Pension Plan for the determination of optional forms of benefits. For purposes of this paragraph 3, Participant's "spouse" shall be determined in accordance with the Pension Plan. 4. CONDITIONS. Payment of benefits under the Plan shall be made only upon receipt of benefits from the Pension Plan, and only if Participant retires on or after the date of his attainment of age 60 or such earlier age as may be determined by resolution of Corporation's Board of Directors. Prior to Participant's attainment of such age, the benefits under this Plan shall be forfeitable, unless Participant terminates employment with Corporation subsequent to a change in control (as defined in Corporation's Second Amended Stock Option Plan) which occurs subsequent to the effective date of this Plan, or unless otherwise determined by resolution of Corporation's Board of Directors. 5. COST OF PLAN. (a) The entire cost of providing benefits under the Plan shall be paid by Corporation out of its current operating budget, and Corporation's obligations under the Plan shall be an unfunded and unsecured promise to pay. Corporation shall not be obligated under any circumstances to fund its obligations under the Plan. (b) Notwithstanding paragraph (a), Corporation may, at its sole option, or by agreement, informally fund its obligations under the Plan in whole or in part, through a group or individual rabbi or similar trust established with a banking institution unaffiliated with Corporation; provided, however, in no event shall such informal funding be construed to create any trust fund, escrow account or other security for Participant with respect to the payment of benefits under the Plan, other than as permitted under Internal Revenue Service and Department of Labor rules and regulations for unfunded supplemental retirement plans. (c) If Corporation decides to fund the Plan informally, in whole or in part, by procuring, as owner, life insurance for its own benefit on the life of Participant, the form of such insurance and the amounts thereof shall be the sole decision of Corporation, and in no event shall Participant or any beneficiary have any incidents of ownership in any such policies of insurance. If a physical examination is required for Corporation to obtain insurance for Participant under this 2 3 paragraph, Participant agrees to undergo such physical examinations as may be required by the insurance carrier. Such physical examinations shall be conducted by a physician approved by Corporation, at the expense of Corporation. (d) No contributions by Participant are required or permitted under the Plan. (e) All taxes on benefits payable to Participant under the Plan, except for the employer's share of applicable employment taxes, shall be the obligation of Participant. To the extent that benefits (or their present value) become taxable to Participant at any time prior to actual payment of those benefits, such as in the case of the Medicare tax, and to the extent that Corporation is required to withhold taxes, those taxes shall be withheld from other compensation payable by Corporation to Participant. 7. LIMITATION OF PARTICIPANT'S RIGHTS. (a) The Plan not be deemed to create a contract of employment between Corporation and Participant and shall create no right in Participant to continue in Corporation's employment for any specific period of time, or to create any other rights in Participant or obligations on the part of Corporation, except as are set forth herein or in any written employment contract. Nor shall the Plan restrict the right of Corporation to terminate Participant, or restrict the right of Participant to terminate his employment, except as otherwise provided by written employment contract. (b) The rights of Participant or any person claiming through Participant under the Plan shall be solely those of an unsecured general creditor of Corporation. Participant, or any person claiming through Participant, shall have the right to receive from Corporation only those payments as specified herein. Participant agrees that he or any person claiming through him shall have no rights or interests in any asset of Corporation. (c) Except to the extent provided by paragraph 5(b) and as permitted by applicable tax law, no asset used or acquired by Corporation in connection with the liabilities it has assumed under the Plan shall be deemed to be held under any trust for the benefit of Participant. Nor shall it be considered security for the performance of the obligations of Corporation, except as provided by separate agreement and as permitted under Internal Revenue Service and Department of Labor rules and regulations for unfunded supplemental retirement plans. 8. PLAN ADMINISTRATOR AND CLAIMS PROCEDURE. (a) The Plan Administrator and Named Fiduciary of the Plan for purposes of the Employee Retirement Income Security Act of 1974, as amended, shall be the Compensation and Benefits Committee of Corporation's Board of Directors, whose business address is c/o Citizens Banking Corporation, One Citizens Banking Center, Flint, Michigan 48502-9985, and whose telephone number is (810) 766-7500. Corporation's Board of Directors shall have the right to change the Plan Administrator and Named Fiduciary of the Plan at any time, and to change the address and 3 4 telephone number of the same. Corporation shall give Participant written notice of any such change in the Plan Administrator and Named Fiduciary or in the address or telephone number of the same. (b) Participant, or other person claiming through Participant, must file a written claim for benefits with the Plan Administrator as a prerequisite to the payment of benefits under the Plan. Any denial by the Plan Administrator of a claim for benefits under the Plan by Participant or other person (collectively referred to as "claimant") shall be stated in writing by the Plan Administrator and delivered or mailed to the claimant within 90 days after receipt of the claim, unless special circumstances require an extension of time for processing the claim. If such an extension of time is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 90-day period. In no event shall such extension exceed a period of 90 days from the end of the initial period. Any notice of denial shall set forth the specific reasons for the denial, specific reference to pertinent provisions of the Plan upon which the denial is based, a description of any additional material or information necessary for the claimant to perfect his claim, with an explanation of why such material or information is necessary, and any explanation of claim review procedures under the Plan, written to the best of the Plan Administrator's ability in a manner that may be understood without legal or actuarial counsel. (c) A claimant whose claim for benefits has been wholly or partially denied by the Plan Administrator may request, within 90 days following the date of such denial, in a writing addressed to the Plan Administrator, a review of such denial. The claimant shall be entitled to submit such issues or comments in writing or otherwise, as he shall consider relevant to a determination of his claim, and may include a request for a hearing in person before the Plan Administrator. Prior to submitting his request, the claimant shall be entitled to review such documents as the Plan Administrator shall agree are pertinent to his claim. The claimant may, at all stages of review, be represented by counsel, legal or otherwise, of his choice, provided that the fees and expenses of such counsel shall be borne by the claimant. All requests for review shall be promptly resolved. The Plan Administrator's decision with respect to any such review shall be set forth in writing and shall be mailed to the claimant not later than 60 days following receipt by the Plan Administrator of the claimant's request unless special circumstances, such as the need to hold a hearing, require an extension of time for processing, in which case the Plan Administrator's decision shall be so mailed not later than 120 days after receipt of such request. In no decision or review is rendered within this 120 day period, the claimant's appeal shall be deemed denied and the Plan Administrator's original denial of the claim affirmed. (d) Any claim under this claims procedure must be submitted within twelve months from the earlier of (1) the date on which the claimant learned of facts sufficient to enable him to formulate such claim, or (2) the date on which the claimant reasonable should have been expected to learn of facts sufficient to enable him to formulate such claim. (e) The decision of the Plan Administrator upon review of any claim shall be binding upon the claimant, his heirs and assigns, and all other persons claiming by, through or under him. 4 5 (f) The timely filing of a request for review in the manner specified above shall be a condition precedent to obtaining review before the Plan Administrator, and the Plan Administrator shall have no jurisdiction to entertain a request for review unless so filed. A failure to file a claim and a request for review in the manner and within the time limits set forth above shall be deemed a failure by the aggrieved party to exhaust his administrative remedies and shall constitute a waiver of the rights sought to be established under the Plan. (g) Any suit brought to contest or set aside a decision of the Plan Administrator shall be filed in a court of competent jurisdiction within one year from the date of receipt of written notice of the Plan Administrator's final decision or from the date the appeal is deemed denied, if later. No legal action to recover Plan benefits or to enforce or clarify rights under the Plan shall be commenced until the claimant first shall have exhausted the claims and review procedures available to him hereunder. 9. INDEPENDENCE OF BENEFITS. Except as otherwise provided herein, the benefits payable under the Plan shall be independent of, and in addition to, any other benefits or compensation, whether by salary, or bonus or otherwise, payable under any employment agreements that now exist or may hereafter exist from time to time between Corporation and Participant. The Plan does not involve a reduction in salary or foregoing of an increase in future salary by Participant. Nor does the Plan in any way affect or reduce the existing and future compensation and other benefits of Participant. 10. NON-ALIENATION OF BENEFITS. Except in so far as this provision may be contrary to applicable law, no sale, transfer, alienation, assignment, pledge, collateralization, or attachment of any benefits under the Plan shall be valid. 11. RIGHT TO AMEND OR TERMINATE PLAN. (a) Corporation reserves the right to amend the Plan in any manner, and Corporation reserves the right to terminate the Plan at any time in whole or part. Amendment or termination of the Plan shall be accomplished by resolution of Corporation's Board of Directors. (b) Notwithstanding paragraph (a), no such amendment or termination shall reduce or otherwise affect the benefits payable to or on behalf of Participant that have accrued prior to such amendment or termination without the written consent of Participant (or beneficiary, if applicable). 12. CONSTRUCTION AND GOVERNING LAW. (a) Wherever any words are used in the Plan in the masculine gender, they shall be construed as though they also were used in the feminine gender in all cases where they would so apply, and wherever any words are used in the Plan in the singular form, they shall be construed as though they also were used in the plural form in all cases where they would so apply, and vice versa. 5 EX-10.(Q) 5 EXHIBIT-10.(Q) 1 FORM 10K EXHIBIT 10(q) CITIZENS BANKING CORPORATION SUPPLEMENTAL RETIREMENT BENEFITS PLAN FOR ROBERT J. VITITO 1. ADOPTION OF PLAN. Effective July 19, 1996, Citizens Banking Corporation ("Corporation") hereby establishes the Supplemental Retirement Benefits Plan for Robert J. Vitito ("Plan"). 2. COVERAGE. The coverage of the Plan shall be limited to Robert J. Vitito ("Participant"). 3. SUPPLEMENTAL RETIREMENT BENEFIT. Participant shall, subject to paragraph 4, be entitled to the supplemental retirement benefit described below: (a) AMOUNT AT AGE 65. The annual amount of the Supplemental Retirement Benefit, when expressed in the form of a single life annuity commencing at age 65, shall be equal to the excess of (i) over (ii), where-- (i) is 60.0% of the highest average base salary paid to Participant by Corporation during any consecutive five years out of the final ten years of employment by Corporation, and (ii) is the sum of Participant's normal retirement benefit under the Citizens Banking Corporation Pension Plan for Employees ("Pension Plan") calculated as of his attainment of age 65, and the Participant's Social Security benefit also calculated as of age 65, in each case without regard to any changes in either benefit amount that may occur subsequent to that age due to increases for cost-of-living or other factors. (b) AMOUNT AT AGE PRIOR TO AGE 65. If Participant elects early retirement under the Pension Plan, the annual amount of the Supplemental Retirement Benefit, when expressed in the form of a single life annuity commencing at such early retirement date, shall be equal to the excess of (i) over (ii), where-- (i) is 60.0% of the highest average base salary paid to Participant by Corporation during any consecutive five years out of the final ten years of employment by Corporation, reduced by 5/9ths of 1.0% for each complete calendar month that the Participant's retirement date precedes his 65th birthday, and (ii) is the sum of Participant's early retirement benefit under the Pension Plan calculated as a Participant's early retirement age, and the Participant's Social Security benefit also calculated as of Participant's early retirement age (or, if later, the earliest age at which the Participant is entitled to receive a Social Security benefit, but with that Social Security amount reduced by 5/9th of 1.0% for each complete calendar month that the Participant's early retirement date precedes his first eligibility for such benefit), in each case without regard to any changes in either benefit amount that may 1 2 occur subsequent to such age due to increases for cost-of-living or other factors. (c) COMMENCEMENT AND FORM OF BENEFIT. Supplemental Retirement Benefit payments shall be made in monthly installments at the same time as normal or early retirement benefits, as the case may be, under the Pension Plan, but in no event earlier than Participant's attainment of age 60. If Participant is married at the time benefits commence hereunder, the Supplemental Retirement Benefit shall be converted to and paid in the form of a 50% joint and survivor annuity with Participant's spouse as the joint annuitant, unless Participant validly elects another form of payment for benefits under the Pension Plan, in which case the Supplemental Retirement Benefit shall be converted to and payable in the same form as elected under the Pension Plan. In all events, all forms of payment of the Supplemental Retirement Benefit shall be computed using the same formulas and actuarial factors set forth in the Pension Plan for the determination of optional forms of benefits. For purposes of this paragraph 3, Participant's "spouse" shall be determined in accordance with the Pension Plan. 4. CONDITIONS. Payment of benefits under the Plan shall be made only upon receipt of benefits from the Pension Plan, and only if Participant retires on or after the date of his attainment of age 60 or such earlier age as may be determined by resolution of Corporation's Board of Directors. Prior to Participant's attainment of such age, the benefits under this Plan shall be forfeitable, unless Participant terminates employment with Corporation subsequent to a change in control (as defined in Corporation's Second Amended Stock Option Plan) which occurs subsequent to the effective date of this Plan, or unless otherwise determined by resolution of Corporation's Board of Directors. 5. COST OF PLAN. (a) The entire cost of providing benefits under the Plan shall be paid by Corporation out of its current operating budget, and Corporation's obligations under the Plan shall be an unfunded and unsecured promise to pay. Corporation shall not be obligated under any circumstances to fund its obligations under the Plan. (b) Notwithstanding paragraph (a), Corporation may, at its sole option, or by agreement, informally fund its obligations under the Plan in whole or in part, through a group or individual rabbi or similar trust established with a banking institution unaffiliated with Corporation; provided, however, in no event shall such informal funding be construed to create any trust fund, escrow account or other security for Participant with respect to the payment of benefits under the Plan, other than as permitted under Internal Revenue Service and Department of Labor rules and regulations for unfunded supplemental retirement plans. (c) If Corporation decides to fund the Plan informally, in whole or in part, by procuring, as owner, life insurance for its own benefit on the life of Participant, the form of such insurance and the amounts thereof shall be the sole decision of Corporation, and in no event shall Participant or any beneficiary have any incidents of ownership in any such policies of insurance. If a physical examination is required for Corporation to obtain insurance for Participant under this 2 3 paragraph, Participant agrees to undergo such physical examinations as may be required by the insurance carrier. Such physical examinations shall be conducted by a physician approved by Corporation, at the expense of Corporation. (d) No contributions by Participant are required or permitted under the Plan. (e) All taxes on benefits payable to Participant under the Plan, except for the employer's share of applicable employment taxes, shall be the obligation of Participant. To the extent that benefits (or their present value) become taxable to Participant at any time prior to actual payment of those benefits, such as in the case of the Medicare tax, and to the extent that Corporation is required to withhold taxes, those taxes shall be withheld from other compensation payable by Corporation to Participant. 7. LIMITATION OF PARTICIPANT'S RIGHTS. (a) The Plan not be deemed to create a contract of employment between Corporation and Participant and shall create no right in Participant to continue in Corporation's employment for any specific period of time, or to create any other rights in Participant or obligations on the part of Corporation, except as are set forth herein or in any written employment contract. Nor shall the Plan restrict the right of Corporation to terminate Participant, or restrict the right of Participant to terminate his employment, except as otherwise provided by written employment contract. (b) The rights of Participant or any person claiming through Participant under the Plan shall be solely those of an unsecured general creditor of Corporation. Participant, or any person claiming through Participant, shall have the right to receive from Corporation only those payments as specified herein. Participant agrees that he or any person claiming through him shall have no rights or interests in any asset of Corporation. (c) Except to the extent provided by paragraph 5(b) and as permitted by applicable tax law, no asset used or acquired by Corporation in connection with the liabilities it has assumed under the Plan shall be deemed to be held under any trust for the benefit of Participant. Nor shall it be considered security for the performance of the obligations of Corporation, except as provided by separate agreement and as permitted under Internal Revenue Service and Department of Labor rules and regulations for unfunded supplemental retirement plans. 8. PLAN ADMINISTRATOR AND CLAIMS PROCEDURE. (a) The Plan Administrator and Named Fiduciary of the Plan for purposes of the Employee Retirement Income Security Act of 1974, as amended, shall be the Compensation and Benefits Committee of Corporation's Board of Directors, whose business address is c/o Citizens Banking Corporation, One Citizens Banking Center, Flint, Michigan 48502-9985, and whose telephone number is (810) 766-7500. Corporation's Board of Directors shall have the right to change the Plan Administrator and Named Fiduciary of the Plan at any time, and to change the address and 3 4 telephone number of the same. Corporation shall give Participant written notice of any such change in the Plan Administrator and Named Fiduciary or in the address or telephone number of the same. (b) Participant, or other person claiming through Participant, must file a written claim for benefits with the Plan Administrator as a prerequisite to the payment of benefits under the Plan. Any denial by the Plan Administrator of a claim for benefits under the Plan by Participant or other person (collectively referred to as "claimant") shall be stated in writing by the Plan Administrator and delivered or mailed to the claimant within 90 days after receipt of the claim, unless special circumstances require an extension of time for processing the claim. If such an extension of time is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 90-day period. In no event shall such extension exceed a period of 90 days from the end of the initial period. Any notice of denial shall set forth the specific reasons for the denial, specific reference to pertinent provisions of the Plan upon which the denial is based, a description of any additional material or information necessary for the claimant to perfect his claim, with an explanation of why such material or information is necessary, and any explanation of claim review procedures under the Plan, written to the best of the Plan Administrator's ability in a manner that may be understood without legal or actuarial counsel. (c) A claimant whose claim for benefits has been wholly or partially denied by the Plan Administrator may request, within 90 days following the date of such denial, in a writing addressed to the Plan Administrator, a review of such denial. The claimant shall be entitled to submit such issues or comments in writing or otherwise, as he shall consider relevant to a determination of his claim, and may include a request for a hearing in person before the Plan Administrator. Prior to submitting his request, the claimant shall be entitled to review such documents as the Plan Administrator shall agree are pertinent to his claim. The claimant may, at all stages of review, be represented by counsel, legal or otherwise, of his choice, provided that the fees and expenses of such counsel shall be borne by the claimant. All requests for review shall be promptly resolved. The Plan Administrator's decision with respect to any such review shall be set forth in writing and shall be mailed to the claimant not later than 60 days following receipt by the Plan Administrator of the claimant's request unless special circumstances, such as the need to hold a hearing, require an extension of time for processing, in which case the Plan Administrator's decision shall be so mailed not later than 120 days after receipt of such request. In no decision or review is rendered within this 120 day period, the claimant's appeal shall be deemed denied and the Plan Administrator's original denial of the claim affirmed. (d) Any claim under this claims procedure must be submitted within twelve months from the earlier of (1) the date on which the claimant learned of facts sufficient to enable him to formulate such claim, or (2) the date on which the claimant reasonable should have been expected to learn of facts sufficient to enable him to formulate such claim. (e) The decision of the Plan Administrator upon review of any claim shall be binding upon the claimant, his heirs and assigns, and all other persons claiming by, through or under him. 4 5 (f) The timely filing of a request for review in the manner specified above shall be a condition precedent to obtaining review before the Plan Administrator, and the Plan Administrator shall have no jurisdiction to entertain a request for review unless so filed. A failure to file a claim and a request for review in the manner and within the time limits set forth above shall be deemed a failure by the aggrieved party to exhaust his administrative remedies and shall constitute a waiver of the rights sought to be established under the Plan. (g) Any suit brought to contest or set aside a decision of the Plan Administrator shall be filed in a court of competent jurisdiction within one year from the date of receipt of written notice of the Plan Administrator's final decision or from the date the appeal is deemed denied, if later. No legal action to recover Plan benefits or to enforce or clarify rights under the Plan shall be commenced until the claimant first shall have exhausted the claims and review procedures available to him hereunder. 9. INDEPENDENCE OF BENEFITS. Except as otherwise provided herein, the benefits payable under the Plan shall be independent of, and in addition to, any other benefits or compensation, whether by salary, or bonus or otherwise, payable under any employment agreements that now exist or may hereafter exist from time to time between Corporation and Participant. The Plan does not involve a reduction in salary or foregoing of an increase in future salary by Participant. Nor does the Plan in any way affect or reduce the existing and future compensation and other benefits of Participant. 10. NON-ALIENATION OF BENEFITS. Except in so far as this provision may be contrary to applicable law, no sale, transfer, alienation, assignment, pledge, collateralization, or attachment of any benefits under the Plan shall be valid. 11. RIGHT TO AMEND OR TERMINATE PLAN. (a) Corporation reserves the right to amend the Plan in any manner, and Corporation reserves the right to terminate the Plan at any time in whole or part. Amendment or termination of the Plan shall be accomplished by resolution of Corporation's Board of Directors. (b) Notwithstanding paragraph (a), no such amendment or termination shall reduce or otherwise affect the benefits payable to or on behalf of Participant that have accrued prior to such amendment or termination without the written consent of Participant (or beneficiary, if applicable). 12. CONSTRUCTION AND GOVERNING LAW. (a) Wherever any words are used in the Plan in the masculine gender, they shall be construed as though they also were used in the feminine gender in all cases where they would so apply, and wherever any words are used in the Plan in the singular form, they shall be construed as though they also were used in the plural form in all cases where they would so apply, and vice versa. 5 6 (b) Headings of paragraphs herein are inserted for convenience of reference. They constitute no part of the Plan and are not to be considered in the construction of the Plan. (c) If any provisions of the Plan shall be for any reason invalid or unenforceable, the remaining provisions nevertheless shall be carried into effect. (d) Except in the case of preemption by applicable federal law, the Plan shall be governed by the laws of the State of Michigan. It is intended that the Plan shall be unfunded and maintained by Corporation primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, so that the Plan is exempt from the requirements of Parts 2, 3 and 4 of the Employee Retirement Income Security Act of 1974, as amended. All provisions shall be interpreted in accordance with such intentions. Citizens Banking Corporation has caused the Plan to be executed on July, 1996. Citizens Banking Corporation By: /s/ Charles R. Weeks -------------------------- Chairman of the Board 6 EX-11 6 EXHIBIT-11 1 FORM 10K EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Net income per share is computed based on the weighted average number of shares outstanding, including the dilutive effect of stock options, as follows:
- ------------------------------------------------------------------------------------------------------------ Year Ended December 31, (in thousands, except per share amounts) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ NET INCOME: $37,421 $33,596 $29,414 ======= ======= ======= PRIMARY EARNINGS PER SHARE: Actual average shares outstanding 14,392 14,213 14,096 Net effect of the assumed exercise of stock options -- based on the treasury stock method using average market price for the period 274 362 367 ------- ------- ------- Pro forma average shares outstanding 14,666 14,575 14,463 ======= ======= ======= Net Income Per Common Share: $ 2.55 $ 2.31 $ 2.03 ======= ======= ======= FULLY DILUTED EARNINGS PER SHARE: Actual average shares outstanding 14,392 14,213 14,096 Net effect of the assumed exercise of stock options -- based on the treasury stock method using year end market price 305 399 416 ------- ------- ------- Pro forma average shares outstanding 14,697 14,612 14,512 ======= ======= ======= Net Income Per Common Share: $ 2.55 $ 2.30 $ 2.03 ======= ======= =======
1 EX-13 7 EXHIBIT-13 1 EXHIBIT 13 CITIZENS BANKING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS AND CONSOLIDATED FINANCIAL STATEMENTS 2 TABLE OF CONTENTS I. Financial Review including Management's Discussion and Analysis ............ 1 Selected Financial Data ....................... 1 Performance Summary ........................... 2 Net Interest Income ........................... 4 Provision and Allowance for Loan Losses ....... 5 Noninterest Income and Expense ................ 6 Balance Sheet Review .......................... 9 Liquidity and Debt Capacity, Interest Rate Risk and Impact of Inflation ...................... 16 Year Ended December 31, 1995 Compared with 1994 ........................... 19 II. Consolidated Financial Statements ................ 21 Consolidated Balance Sheets ................... 21 Consolidated Statements of Income ............. 22 Consolidated Statements of Changes in Shareholders' Equity ...................... 23 Consolidated Statements of Cash Flow .......... 24 III. Notes to Consolidated Financial Statements ..... 25 IV. Report of Independent Auditors ................. 39 V. Report of Management ........................... 40 3 TABLE 1. SELECTED FINANCIAL DATA
(in thousands except per share data 1996 1995(4) 1994 1993(2) 1992(1) ---------------------------------------------------------------------------------------------------------------------- FOR THE YEAR Net interest income $ 146,116 $ 137,495 $ 118,400 $ 104,334 $ 99,975 Provision for loan losses 8,334 6,441 5,303 5,597 6,251 Investment securities gains (losses) 101 198 157 763 (17) Noninterest income 40,429 36,236 33,697 30,452 27,082 Noninterest expense 125,986 121,087 107,245 97,268 92,555 Income taxes 14,905 12,805 10,292 6,914 4,765 Income before cumulative effect of change in accounting principle 37,421 33,596 29,414 25,770 23,469 Net income 37,421 33,596 29,414 25,770 10,564 Cash dividends 14,528 12,770 11,557 9,937 9,027 PER COMMON SHARE DATA Primary: Income before cumulative effect of change in accounting principle $ 2.55 $ 2.31 $ 2.03 $ 1.88 $ 1.77 Net income 2.55 2.31 2.03 1.88 0.79 Fully diluted: Income before cumulative effect of change in accounting principle 2.55 2.30 2.03 1.87 1.75 Net income 2.55 2.30 2.03 1.87 0.79 Cash dividends 1.010 0.900 0.820 0.745 0.690 Book value, end of year 21.98 20.73 18.31 18.08 16.73 Market value, end of year 31.50 29.75 27.75 25.00 19.25 AT YEAR END Assets $3,483,850 $3,463,922 $2,703,823 $2,714,112 $2,498,934 Loans 2,620,731 2,428,513 1,816,221 1,780,180 1,557,423 Deposits 2,864,807 2,864,701 2,252,318 2,246,750 2,086,144 Long-term debt 84,133 105,411 5,249 10,865 15,093 Shareholders' equity 315,242 297,186 258,730 255,163 219,276 AVERAGE FOR THE YEAR Assets $3,455,290 $3,279,646 $2,710,747 $2,535,068 $2,472,245 Earning assets 3,186,631 3,002,753 2,500,215 2,348,691 2,290,884 Loans 2,532,639 2,302,414 1,797,153 1,643,327 1,539,332 Deposits 2,856,567 2,702,346 2,262,182 2,109,269 2,061,613 Interest-bearing deposits 2,395,818 2,250,711 1,882,451 1,783,718 1,769,078 Repurchase agreements and other short-term borrowings 161,964 146,000 141,230 138,375 135,624 Long-term debt 83,308 102,813 8,667 13,112 16,965 Shareholders' equity 304,022 277,597 256,607 231,160 210,193 FINANCIAL RATIOS Return on average:(3) Shareholders' equity 12.31% 12.10% 11.46% 11.15% 11.17% Earning assets 1.17 1.12 1.18 1.10 1.02 Assets 1.08 1.02 1.09 1.02 0.95 Average shareholders' equity/ave. 8.80 8.46 9.47 9.12 8.50 assets Dividend payout ratio (3) 38.83 38.01 39.29 38.56 38.46 Net interest margin (FTE) 4.77 4.77 4.99 4.74 4.71 Tier I leverage 7.33 6.65 9.52 8.90 8.57 Risk-based capital: Tier I capital 9.39 8.79 13.44 13.12 12.73 Total capital 10.64 10.04 14.69 14.36 13.90
(1) 1992 income and income per common share were affected by nonrecurring items. Nonrecurring items included restructuring expenses related to the leasing subsidiary, employee benefit costs related to adopting the accrual method of accounting for retiree benefits and a curtailment gain resulting from modification of retiree benefit plans. If the nonrecurring items had been excluded from the results of operations for 1992, income before cumulative effect of change in accounting principle would have been reduced by $1.152 million or $0.08 per fully diluted share. (2) The year 1993 reflects the acquisition of National Bank of Royal Oak ("NBRO"), accounted for as a purchase, and includes the related results of operations and financial results subsequent to its October 1, 1993 acquisition date. (3) Based on income before cumulative effect of change in accounting principle. (4) The year 1995 reflects the acquisition of the Michigan affiliates of Banc One Corporation accounted for as a purchase, and includes the related results of operations and financial results subsequent to the February 28, 1995 acquisition date. Page 1 4 PERFORMANCE SUMMARY The following discussion provides a more comprehensive review of the Corporation's operating results and financial condition than could be obtained from reading the Consolidated Financial Statements alone. Citizens Banking Corporation earned $37,421,000 or $2.55 per fully diluted share during 1996 compared with $33,596,000 or $2.30 per share in 1995. Net income was up $3,825,000 or $0.25 per fully diluted share over the prior year and reflected an 11.4% increase in net income. This marked the Corporation's fourteenth consecutive year of increased net operating income and ninth consecutive year of record earnings. Return on average assets was 1.08% in 1996, a 5.9% increase from 1.02% in 1995. The earnings improvement reflects lower FDIC insurance premiums, the full year earnings effect of the acquired banks and the efficiencies gained from the 1995 operational integration and conversion of the acquired banks to Citizens' corporate systems. Return on average equity improved to 12.31% in 1996 compared with 12.10% last year. Average shareholders' equity was $304.0 million or 8.80% of total average assets for 1996 compared with $277.6 million or 8.46% for 1995. The Corporation's risk-based capital levels exceeded all regulatory requirements. The Corporation's 1996 results reflect a full year of operations compared with ten months of operations in 1995 for the four Michigan affiliates of Banc One Corporation purchased at the close of business on February 28, 1995. The transaction was accounted for as a purchase and the four banks ("acquired banks") were merged into Citizens Bank headquartered in Flint, Michigan immediately after the acquisition. Total assets acquired of $670 million included net loans of $532 million and investment securities and money market investments of $57 million. Cost-in-excess of the fair value of identifiable net assets acquired ("intangible assets") of $59.2 million is being amortized over 15 years. In January 1997, the Corporation announced an agreement to acquire CB Financial Corporation headquartered in Jackson, Michigan. CB Financial Corporation has a combined asset base of $826 million and operates thirty-nine offices throughout Michigan. The Corporation will issue approximately 4.2 million shares of its common stock in a tax free exchange for all of the outstanding stock of CB Financial Corporation. The acquisition will be accounted for as a pooling of interests and is expected to be completed by the end of the second quarter of 1997. An analysis of changes in major income statement components in 1996 from 1995 is presented below. Overall, the increase in net income reflects improvement in net interest income and noninterest income, offset, in part, by increases in the provision for loan losses, noninterest expense and income taxes. Higher levels of earning assets, primarily loans, resulted in higher net interest income. Additional data on the Corporation's performance during the past five years appears in Table 1.
Year Ended December 31, ----------------------- % (in thousands) 1996 1995 Change - --------------------------------------------------------------------- Interest income $255,914 $240,600 6.4% Interest expense 109,798 103,105 6.5 -------- -------- Net interest income 146,116 137,495 6.3 Provision for loan losses 8,334 6,441 29.4 Noninterest income 40,530 36,434 11.2 Noninterest expense 125,986 121,087 4.0 Income taxes 14,905 12,805 16.4 -------- -------- Net income $ 37,421 $ 33,596 11.4 ======== ========
The following table presents "cash earnings" for the Corporation's most recent three years. "Cash earnings" add back the amortization of intangible assets arising from mergers that were accounted for as a purchase 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) 1996 1995 1994 - --------------------------------------------------------------------------------- Net Income $41,449 $37,128 $31,016 Fully diluted earnings per share 2.82 2.54 2.14 Book value per share 17.46 15.82 17.19 Return on average assets 1.22% 1.15% 1.15% Return on average equity 17.52 17.18 12.88 - ---------------------------------------------------------------------------------
Page 2 5 TABLE 2. AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
1996 1995 1994 ----------------------------- ------------------------------ ----------------------------- 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: Time deposits with banks $ 1.5 $ 0.1 5.62% $ 4.9 $ 0.3 5.87% $ 5.4 $ 0.2 4.65% Federal funds sold 41.6 2.2 5.27 74.1 4.4 6.01 43.0 1.9 4.46 Term federal funds sold and other 23.2 1.2 5.33 47.2 2.7 5.69 5.1 0.3 5.21 Investment securities(3): Taxable 414.4 24.0 5.80 402.1 22.5 5.60 447.9 22.7 5.07 Nontaxable 172.9 9.1 8.12 175.4 9.4 8.30 208.1 10.6 7.86 Loans(4): Commercial 970.1 84.2 8.78 902.4 81.9 9.17 756.2 59.7 8.01 Real estate 514.0 42.7 8.30 436.1 36.2 8.29 389.7 31.8 8.16 Consumer installment 994.2 88.7 8.92 900.1 79.0 8.78 569.4 47.3 8.30 Lease financing 54.3 3.7 6.79 63.8 4.2 6.55 81.9 5.5 6.71 -------- ----- -------- ----- -------- ----- Total earning assets(3) 3,186.2 255.9 8.22 3,006.1 240.6 8.20 2,506.7 180.0 7.45 NONEARNING ASSETS Cash and due from banks 133.3 141.6 124.3 Premises and equipment 62.3 61.9 53.6 Other assets 108.9 102.4 49.8 Allowance for loan losses (35.4) (32.4) (23.7) -------- -------- -------- Total assets $3,455.3 $3,279.6 $2,710.7 ======== ======== ======== INTEREST-BEARING LIABILITIES Deposits: Interest-bearing demand $312.7 5.4 1.73 $309.4 5.8 1.87 $256.1 4.4 1.71 Savings 900.9 24.5 2.71 909.7 25.6 2.82 909.4 21.7 2.39 Time 1,182.2 66.2 5.60 1,031.6 56.8 5.50 717.0 29.9 4.17 Short-term borrowings 162.0 7.4 4.61 146.0 7.2 4.95 141.2 5.1 3.62 Long-term debt 83.3 6.3 7.56 102.8 7.7 7.52 8.7 0.5 5.24 -------- ----- -------- ----- -------- ----- Total interest-bearing liabilities 2,641.1 109.8 4.16 2,499.5 103.1 4.12 2,032.4 61.6 3.03 NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 460.7 451.6 379.7 Other liabilities 49.5 50.9 42.0 Shareholders' equity 304.0 277.6 256.6 ----------- --------- -------- Total liabilities and shareholders' equity $3,455.3 $3,279.6 $2,710.7 ======== ======== ======== NET INTEREST INCOME $ 146.1 $137.5 $ 118.4 ======= ====== ======= NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 4.77% 4.77% 4.99%
(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 $5,931,000, $5,983,000 and $6,684,000 for the years ended December 31, 1996, 1995, and 1994, 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 3 6 NET INTEREST INCOME The largest segment of the Corporation's operating income is net interest income, which is the sum of interest and certain fees derived from earning assets minus interest paid on deposits and other funding sources. Net interest income is impacted by changes in the volume and mix of earning assets and funding sources, market rates of interest, demand for loans and the availability of deposits. 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. Average balances and rates on major categories of interest-earning assets and interest-bearing liabilities during the past three years appear in Table 2. Total average earning assets were 6.1% higher during 1996 compared with 1995. The composition of average earning assets changed in 1996 as total average loans increased $230 million to 79.5% of average earning assets from 76.7% in 1995. Average investment securities including money market investments represented 20.5% of average earning assets in 1996 compared with 23.3% in 1995. Total average interest-bearing liability balances increased 5.7% in 1996 compared to 1995, while average noninterest-bearing deposit balances increased 2.0%. The average yield on earning assets remained consistent with the prior year increasing two basis points to 8.22% in 1996. Yields increased up to 24 basis points in all loan categories except commercial which declined 39 basis points. This decline was primarily due to reductions in the prime lending rate which occurred in the latter portion of 1995 and early 1996. The cost of interest-bearing liabilities increased four basis points to 4.16% in 1996 from 4.12% in 1995. This increase was attributable to higher rates on time deposits and long-term debt partially offset by lower rates on demand, savings and short-term borrowings. The increased rates on interest bearing liabilities were partially offset by increased yields on earning assets causing the interest spread on earning assets (the difference between the average yield on earning assets and the average rate on interest-bearing liabilities) to decrease only two basis points. As a result, net interest margin remained unchanged at 4.77% for both 1996 and 1995. TABLE 3. ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
1996 COMPARED TO 1995 1995 Compared to 1994 ------------------------------------- ------------------------------------ INCREASE (DECREASE) Increase (Decrease) Year Ended December 31 DUE TO CHANGE IN Due to Change in NET ----------------------- Net ----------------------- (in millions) CHANGE(1) RATE (2) VOLUME Change(1) Rate (2) Volume - ----------------------------------------------------------------------------------------------------------- INTEREST INCOME: Money market investments: Time deposits with banks $ (0.2) $ (0.0) $ (0.2) $ 0.1 $ 0.1 $(0.0) Federal funds sold (2.2) (0.3) (1.9) 2.5 1.1 1.4 Term federal funds sold (1.5) (0.1) (1.4) 2.4 0.2 2.2 Investment securities: Taxable 1.5 0.8 0.7 (0.2) 1.8 (2.0) Tax-exempt (0.3) (0.2) (0.1) (1.2) 0.5 (1.7) Loans 18.0 (0.2) 18.2 57.0 16.2 40.8 ----- ------ ------ ----- ------ ------ Total 15.3 0.0 15.3 60.6 19.9 40.7 ----- ------ ------ ----- ------ ------ INTEREST EXPENSE: Deposits: Demand (0.4) (0.4) 0.0 1.4 0.4 1.0 Savings (1.1) (1.5) 0.4 3.9 4.1 (0.2) Time 9.4 1.0 8.4 26.9 13.2 13.7 Short-term borrowings 0.2 (0.4) 0.6 2.1 1.9 0.2 Long-term debt (1.4) 0.1 (1.5) 7.2 2.3 4.9 ------ ------ ------ ----- ------ ------ Total 6.7 (1.2) 7.9 41.5 21.9 19.6 ------ ------ ------ ----- ------ ------ NET INTEREST INCOME $ 8.6 $ 1.2 $ 7.4 $19.1 $ (2.0) $ 21.1 ====== ====== ====== ===== ====== ======
(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 rate. Page 4 7 The effect on net interest income of changes in average balances ("volume") and yields and rates ("rate") are quantified in Table 3. As shown, net interest income improved $8.6 million in 1996 due to volume-related increases primarily attributable to loan growth partially offset by increased time deposits. Lower rates for demand and savings deposits and short term borrowings offset the effect of higher rates on time deposits resulting in a favorable rate related variance of $1.2 million. Management continually monitors the Corporation's balance sheet to insulate net interest income from significant swings caused by interest rate volatility. If market rates change in 1997, corresponding changes in funding costs would be considered to avoid any potential negative impact on net interest income. The Corporation's policies in this regard are further discussed in the section titled "Interest Rate Risk". PROVISION AND ALLOWANCE FOR LOAN LOSSES Management provides for possible loan losses at a level determined adequate based upon judgements regarding historical loss experience, the financial condition of borrowers, the size and composition of the loan portfolio, the level and composition of nonperforming loans, estimated future net charge-offs, present and anticipated economic conditions and other factors. A summary of the Corporation's loan loss experience from 1992 through 1996 appears in Table 4. TABLE 4. SUMMARY OF LOAN LOSS EXPERIENCE
Year Ended December 31 (in thousands) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------------ Allowance for loan losses - January 1 $ 34,771 $ 24,714 $ 22,547 $ 19,404 $ 19,759 Allowance of acquired banks --- 7,235 --- 1,642 --- Provision for loan losses 8,334 6,441 5,303 5,597 6,251 CHARGE-OFFS: Commercial 4,078 2,971 1,869 2,629 2,781 Real estate(1) 42 69 72 403 946 Consumer 6,505 4,362 3,020 3,182 4,169 Lease financing 70 519 1,153 182 803 ---------- ---------- ---------- ---------- ---------- Total charge-offs 10,695 7,921 6,114 6,396 8,699 ---------- ---------- ---------- ---------- ---------- RECOVERIES: Commercial 1,079 1,534 1,390 673 601 Real estate(1) 16 22 4 177 10 Consumer 2,446 2,675 1,510 1,362 1,474 Lease financing 46 71 74 88 8 ---------- ---------- ---------- ---------- ---------- Total recoveries 3,587 4,302 2,978 2,300 2,093 ---------- ---------- ---------- ---------- ---------- Net charge-offs 7,108 3,619 3,136 4,096 6,606 ---------- ---------- ---------- ---------- ---------- Allowance for loan losses - December 31 $ 35,997 $ 34,771 $ 24,714 $ 22,547 $ 19,404 ========== ========== ========== ========== ========== Loans outstanding at year-end $2,620,731 $2,428,513 $1,816,221 $1,780,180 $1,557,423 Average loans outstanding 2,532,639 2,302,414 1,797,153 1,643,327 1,539,332 Ratio of allowance for loan losses to loans outstanding at year-end 1.37% 1.43% 1.36% 1.27% 1.25% Ratio of net loans charged off as a percentage of average loans outstanding 0.28% 0.16% 0.17% 0.25% 0.43%
(1) 1996, 1995 and 1994 commercial real estate loan balances and related charge-offs and recoveries are reflected in the commercial loan category. Previous years' balances have not been reclassified. Page 5 8 Management increased the provision for loan losses in 1996 by $1.9 million from 1995, primarily due to loan growth of $192.2 million and higher charge-offs in 1996. Net loan charge-offs were 0.28% of average loans in 1996, up from 0.16% in 1995. Gross charge-offs increased $2.8 million, or 35.0% from 1995. Nearly half of this increase is due to the charge-off of a single commercial credit. Recoveries on loans previously charged off decreased 16.6% as compared to the prior year due to unusually high recoveries in 1995. At year end, the allowance for loan losses was $36.0 million or 1.37% of total loans, up $1.2 million from December 31, 1995. The Corporation maintains formal policies and procedures to control and monitor credit risk. Management believes the allowance for loan losses is adequate to meet presently known credit risks in the loan portfolio. The Corporation's loan portfolio has no significant concentrations in any one industry nor any exposure in foreign loans. The Corporation 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 the Corporation's 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". NONINTEREST INCOME Noninterest income accounted for 21.7% of total operating income or 1.2% of average assets in 1996, increasing from 20.9% and 1.1%, respectively, in 1995. Noninterest income is up 11.2% or $4,096,000 in 1996 as compared to 1995 due to significant increases in trust fees, brokerage and investment fees, cash management and other loan income. A portion of the increase is due to a full year of operations of the acquired banks as compared to ten months of results for 1995. An analysis of the components of noninterest income is on the following page. Trust fees increased $1,002,000 or 8.9%. The largest increases occurred in personal trust and employee benefit plan services. The Corporation offers comprehensive trust services to its clients including investment management services, in the personal trust, institutional and employee benefit plan market segments. Deposit service charges increased 5.4% which is attributable to standardization of all deposit fees and services offered to our clients. This change resulted in enhanced fees in several of the Corporation's market areas and product lines. Brokerage and investment fees increased $635,000 or 57.5% as a result of increased market penetration. Increased volume and improved pricing strategies resulted in higher ATM network user fees in 1996 as compared to 1995. Cash management service fees increased 36.0% in 1996 as compared to the previous year. This increase is volume related as clients have responded to enhanced investment options which include various money market funds from which the Corporation receives a management fee. Safe deposit rental fees increased 9.0% as compared to the prior year, as a result of pricing increases. In July 1996, the Corporation announced the sale of its residential mortgage loan servicing operations to LaSalle Home Mortgage Corporation. The transaction was completed in September and resulted in an immediate gain of $1,550,000 related to mortgage loans previously serviced by the Corporation for other investors. An additional deferred gain of $5.1 million related to mortgages owned by the Corporation will be recognized over the estimated life of the loans. Excluding this gain, other loan income declined in 1996 primarily due to the discontinuance of the mortgage servicing function and fewer sales of mortgage loans into the secondary market. The Corporation realized net gains on sales of investment securities of $101,000 during 1996 compared with net gains of $198,000 during 1995. As presented in Note 3 to the Consolidated Financial Statements, gross realized gains on sales of investment securities amounted to $103,000 in 1996 while gross realized losses amounted to $2,000. The comparable amounts in 1995 were $202,000 and $4,000, respectively. Proceeds from sales of investment securities during 1996 totaled $2.8 million or 0.5% of total average security holdings compared with $7.0 million or 1.2% in 1995. The 1996 and 1995 net gains resulted from the sale of certain securities to reposition the investment portfolio based on the current rate environment. Page 6 9
NONINTEREST INCOME Year Ended December 31, Changes in 1996 ---------------- ------------------ (in thousands) 1996 1995 Amount Percent - ----------------------------------------------------------------------------------- Trust fees $12,316 $11,314 $1,002 8.9% Service charges on deposit accounts 10,242 9,717 525 5.4 Bankcard fees 5,968 5,635 333 5.9 Brokerage and investment fees 1,740 1,105 635 57.5 Other loan income 3,166 1,925 1,241 64.5 ATM network user fees 1,993 1,665 328 19.7 Cash management services 1,412 1,038 374 36.0 Safe deposit rentals 1,103 1,012 91 9.0 Investment securities gains 101 198 (97) (49.0) Other 2,489 2,825 (336) (11.9) ------- ------- ------ Total noninterest income $40,530 $36,434 $4,096 11.2 ======= ======= ====== Noninterest Expense Year Ended December 31, Changes in 1996 ------------------ ------------------ (in thousands) 1996 1995 Amount Percent - -------------- -------- -------- -------- -------- Salaries and employee benefits $ 68,242 $ 64,357 $ 3,885 6.0% Equipment 9,804 9,709 95 1.0 Occupancy 9,294 9,000 294 3.3 Intangible asset amortization 5,469 4,687 782 16.7 FDIC insurance premiums 9 3,250 (3,241) (99.7) Bankcard fees 3,831 3,418 413 12.1 Stationery and supplies 3,649 3,570 79 2.2 Postage and delivery 3,419 3,189 230 7.2 Advertising and public relations 3,247 2,386 861 36.1 Taxes, other than income taxes 2,703 2,448 255 10.4 Consulting and other professional fees 2,783 1,782 1,001 56.2 Legal, audit and examination fees 1,475 1,762 (287) (16.3) Other loan fees 2,701 1,860 841 45.2 Other 9,360 9,669 (309) (3.2) -------- -------- ------- Total noninterest expense $125,986 $121,087 $ 4,899 4.0 ======== ======== =======
Page 7 10 NONINTEREST EXPENSE The major components of noninterest expense are summarized on the previous page. Noninterest expense increased $4,899,000, or 4.0% in 1996 as compared to 1995. SALARIES AND BENEFITS Compensation is the Corporation's largest noninterest expense. Total compensation expense increased 6.0% to $68,242,000 from $64,357,000 in 1995 partially due to the full year effect of the acquired banks. In addition to the effect of the acquired banks, higher costs for pension, workers compensation and medical insurance, increased incentive pay and normal merit increases also contributed to the rise in compensation costs. The Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock Based Compensation" in October 1995, effective for the Corporation's year end 1996 financial statements. The Corporation did not adopt the recognition provisions of the Statement but will continue accounting for stock options in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" as permitted by the new Statement. Therefore, adoption has not materially impacted the Corporation. See Note 13, Shareholders' Equity in the Notes to the Consolidated Financial Statements for further discussion. OTHER NONINTEREST EXPENSES Noninterest expense excluding salaries and benefits increased 1.8% due in part to the full year effect of the acquired banks. Other increases were primarily offset by a decline in FDIC insurance assessment expense to $9,000 in 1996 from $3,250,000 in 1995. The assessments were essentially eliminated in 1996 as the FDIC's Bank Insurance Fund maintained a designated reserve to deposit ratio of at least 1.25%. Beginning in January 1997, the Corporation's two banks will pay FDIC assessments of approximately $1.3 cents per $100 of deposits. Consulting and other professional fees, advertising and public relations and the loan fee expense categories reflect the most significant increases in 1996 as compared to 1995. Deposit and loan product standardization and other ongoing corporate automation initiatives attributed to the increase in consulting and other professional services in 1996 as compared to 1995. Higher mortgage loan volumes resulted in additional mortgage appraisal and processing fees expense. The additional mortgage costs are more than offset by increases in mortgage application, origination and processing income collected as a result of higher loan volumes originated in 1996. This related income is reflected in the Corporation's net interest income. In October 1995, the Corporation announced the consolidation of its six Michigan chartered banks into one bank called Citizens Bank. The consolidation, which occurred in June 1996, further streamlined operations and reduced certain costs but retained local management and community boards of directors. The promotional campaign associated with the consolidation increased advertising and public relations expenses during 1996 as compared to the prior year. Legal, audit and examination fees decreased in 1996 as compared to 1995 primarily due to a reduction in loan collection related expenses and regulatory examination fees. The examination fees reduction is the result of the consolidation of the Michigan subsidiaries into one bank in 1996. Excluding the impact of the first quarter 1995 acquisition, occupancy and equipment expense declined in 1996 while postage increased a modest 2.7% as compared to the previous year. These were the result of continued cost containment efforts. Intangible asset amortization increased $781,000 in 1996 as compared with 1995 as a result of a full year of amortization of intangible assets acquired associated with the February 28, 1995 acquisition. FEDERAL INCOME TAXES Income tax expense was $14,905,000 in 1996, an increase of 16.4% over the 1995 total of $12,805,000. The increase was due to higher pre-tax earnings and lower tax-exempt interest income in 1996 as compared to 1995. Page 8 11 BALANCE SHEET Proper management of the volume and composition of the Corporation's 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. The Corporation's investment security portfolio is structured to provide a source of liquidity through maturities and generate an income stream with relatively low levels of principal risk. The Corporation does not engage in active securities trading. Loans comprise the largest component of earning assets and are the Corporation's 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. The Corporation's total assets averaged $3.455 billion for 1996, up $175.6 million from 1995, primarily due to loan growth and the full year impact of the first quarter 1995 acquisition. The ratio of average earning assets to total average assets during 1996 was 92.2%, compared to 91.6% for 1995. Average loans and leases comprised 73.3% of total assets during 1996, up from 70.2% in 1995. The ratio of average noninterest-bearing deposits to total deposits decreased 0.6% to 16.1% as compared to 1995. Interest-bearing deposits comprised 90.7% of total average interest-bearing liabilities during 1996, up from 90.0% in 1995. Average long-term debt decreased $19.5 million to 3.2% of average interest-bearing liabilities as a result of current year principal payments on the debt associated with the 1995 acquisition. INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS Total investment securities, including money market investments, comprised 20.5% of total average earning assets in 1996, down from 23.3% in 1995. A summary of average investment security balances during 1996 and 1995 follows: INVESTMENT SECURITIES
Average Balances(1) Changes in 1996 ------------------------- --------------------- Year Ended December 31 (in thousands) 1996 1995 Amount Percent - ----------------------------------------------------------------------------------------------- U.S. Treasury $182,558 $206,253 $(23,695) (11.5)% Federal agencies: Mortgage-backed 91,057 76,324 14,733 19.3 Other 94,704 59,945 34,759 58.0 State and municipal: Taxable 30,256 42,033 (11,777) (28.0) Tax-exempt 175,211 177,392 (2,181) (1.2) Other 13,811 12,201 1,610 13.2 -------- -------- -------- Total $587,597 $574,148 $ 13,449 2.3% ======== ======== ========
(1) Average balances reflect the estimated fair value of investment securities Average total investment in U.S. Treasury securities comprised 31.1% of average total investment securities during 1996, decreasing slightly from 35.9% in 1995. Average Federal agency mortgage-backed securities, primarily collateralized mortgage obligations ("CMO's"), and other Federal agency securities increased 19.3% and 58.0%, respectively, in 1996 as proceeds from the maturities of other investments were used to purchase additional securities. The Corporation continues to invest in U.S. Treasury and Federal agency securities which offer increased creditworthiness and liquidity compared with other securities, primarily privately issued CMO's. Total state and municipal securities comprised 35.0% of total average investment securities during 1996 compared with 38.2% in 1995. Average tax-exempt state and municipal securities decreased 1.2% from 1995. Purchases of these securities remain dependent on the Corporation's capacity to effectively utilize tax-exempt income. Other securities consisting of Federal Reserve stock, Federal Home Loan Bank stock ("FHLB"), privately issued CMO's and asset backed securities increased 13.2%. The increase occurred as a result of one of the Corporation's subsidiaries membership in the FHLB and the subsequent purchase of its shares. Page 9 12 Money market investments, primarily federal funds sold and term federal funds sold, averaged $66.3 million in 1996, down 59.8% from $126.2 million in 1995. The amount of funds invested in these assets is based on the present and anticipated interest rate environment, liquidity needs and other economic factors. The Corporation's present policies with respect to the classification of investments in debt and equity securities are discussed in Note 1 to the Consolidated Financial Statements. An analysis of investment securities at year-end for each of the last three years is presented in Table 5. As of December 31, 1996, the estimated aggregate fair value of the Corporation's investment securities portfolio was $1.4 million above amortized cost. At December 31, 1996 gross unrealized gains were $4.2 million and gross unrealized losses were $2.8 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 3 to the Consolidated Financial Statements. TABLE 5. ANALYSIS OF INVESTMENT SECURITIES
U.S. Treasury and Federal Agency(1) State and Municipal(1), (2) Other(1) ----------------------------- ------------------------------- ------------------------ Amortized Fair Amortized Fair Amortized Fair (in millions) Cost Value Yield Cost Value Yield Cost Value Yield - --------------------------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE: MATURITES AT DECEMBER 31, 1996 DUE WITHIN ONE YEAR $107.5 $107.2 6.01% $ 41.1 $ 41.1 7.89% $ 0.3 $ 0.3 7.86% ONE TO FIVE YEARS 252.6 251.6 5.86 54.6 56.3 8.80 0.8 0.8 7.89 FIVE TO TEN YEARS 13.9 13.9 7.27 51.7 52.2 8.01 0.3 0.3 7.22 AFTER TEN YEARS 1.9 1.9 7.42 41.4 41.8 8.07 12.7 12.8 7.05 ------ ------ ------ ------ ----- ----- TOTAL $375.9 $374.6 5.96 $188.8 $191.4 8.23 $14.1 $14.2 7.12 ====== ====== ====== ====== ===== ===== AVERAGE MATURITY 1.72 YRS. 4.83 YRS. 4.08 YRS. At December 31, 1995 Total $345.6 $346.5 5.63% $209.1 $213.5 8.11% $10.8 $10.9 6.45% ====== ====== ====== ====== ===== ===== Average maturity 1.39 yrs. 4.31 yrs. 1.76 yrs. At December 31, 1994 Total $346.8 $331.0 5.27% $229.0 $226.4 7.89% $ 6.5 $ 6.6 6.67% ====== ====== ====== ====== ===== ===== Average maturity 2.00 yrs. 4.34 yrs. 3.53 yrs. Total --------------------------- Amortized Fair Cost Value Yield -------- -------- ----- AVAILABLE-FOR-SALE: MATURITES AT DECEMBER 31, 1996 DUE WITHIN ONE YEAR $148.9 $148.6 6.53% ONE TO FIVE YEARS 308.0 308.7 6.38 FIVE TO TEN YEARS 65.9 66.4 7.85 AFTER TEN YEARS 56.0 56.5 7.82 ------ ------ TOTAL $578.8 $580.2 6.72 ====== ====== AVERAGE MATURITY 2.80 YRS. At December 31, 1995 Total $565.5 $570.9 6.56% ====== ====== Average maturity 2.94 yrs. At December 31, 1994 Total $582.3 $564.0 6.32% ====== ====== Average maturity 2.94 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. The Financial Accounting Standards Board Statement No. 119 defines a derivative as a future, forward, swap, option contract or other financial instrument with similar characteristics. The Corporation has not utilized derivatives or related types of financial instruments except for Federal agency collateralized mortgage obligations and, therefore, this Statement does not have a material impact. The Corporation's policy only allows the purchase of collateralized mortgage obligations that are composed of mortgage backed securities issued by a Federal Agency. Most CMO's purchased are in early tranches with short average lives. These tranches are generally classified in the Planned Amortization Class and have well-defined prepayment assumptions (Super PAC's). The Corporation's CMO's are periodically tested to ensure compliance with guidelines established by the Federal Financial Institutions Examination Council. Page 10 13 LOANS The Corporation extends credit primarily within the local markets of its two bank subsidiaries located in Michigan and Illinois. In Michigan, the market areas extend along the Interstate 75 corridor from northern suburban Detroit to the greater Grayling/Gaylord area with expansion into western suburban Detroit and central and southwestern Michigan in 1995. The Illinois affiliate extends credit within the western suburban market of Chicago. The Corporation's loan portfolio is widely diversified by borrowers with no concentration within a single industry that exceeds 10% of total loans. The Corporation's loan portfolio balances are summarized in Table 6. Total average loans and leases comprised 79.5% of total average earning assets during 1996 compared with 76.7% during 1995. As the economy continued to expand in 1996, the Corporation experienced greater loan demand with total average loans increasing 10.0% (6.4% excluding the acquired banks). This growth occurred in all major loan categories except the lease financing portfolio. Increased demand for business loans in the Corporation's local markets and improved economic conditions modestly expanded the commercial and commercial real estate loan portfolio 6.0% (3.6% excluding the acquired banks) in 1996 from 1995 levels. Average consumer loan balances increased to $94.1 million in 1996, or 10.5% (9.1% excluding the acquired banks) compared to 1995. Average mortgage loan balances increased $77.9 million or 17.9% in 1996, from $46.4 million in 1995 (8.7% excluding the acquired banks). In May 1995, Financial Accounting Standards Board issued Statement No. 122 "Accounting for Mortgage Servicing Rights". The Statement amends FASB Statement No. 65 to require mortgage banking related companies to recognize as a separate asset the rights to service mortgage loans for others regardless of how those servicing rights are acquired. This may be through purchase or origination of the mortgage loans. The Statement is effective for years beginning after December 15, 1995. In September 1996, the Corporation sold its residential mortgage loan servicing operations to LaSalle Home Mortgage Corporation. As a result of the sale, the Statement has no material impact on the Corporation. TABLE 6. LOAN PORTFOLIO
1996 1995 1994 1993 1992 ----------------- ----------------- ----------------- ------------------ ----------------- December 31 (in millions) AMOUNT PERCENT Amount Percent Amount Percent Amount Percent Amount Percent - ------------------------------------------------------------------------------------------------------------------------- Commercial $ 680.2 26.0% $ 566.9 23.3% $ 461.9 25.4% $ 426.9 24.0% $ 398.7 25.6% Real estate commercial 295.4 11.3 339.0 14.0 286.4 15.8 286.6 16.1 247.3 15.9 Real estate construction 37.8 1.4 34.0 1.4 24.9 1.4 38.3 2.2 23.4 1.5 Real estate mortgage 541.8 20.7 457.8 18.9 384.4 21.2 398.1 22.3 336.8 21.6 Consumer 1,018.3 38.8 970.7 40.0 581.3 32.0 534.7 30.0 471.4 30.3 Lease financing 47.2 1.8 60.1 2.4 77.3 4.3 95.6 5.4 79.8 5.1 -------- ---- -------- ----- -------- ------ -------- ----- -------- ----- Total $2,620.7 100.0% $2,428.5 100.0% $1,816.2 100.0% $1,780.2 100.0% $1,557.4 100.0% ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
NONPERFORMING ASSETS A five year history of nonperforming assets is presented in Table 7. Nonperforming assets are comprised of nonaccrual loans, loans 90 days past due and still accruing, restructured loans and other real estate. These amounted to $20.4 million as of December 31, 1996, a decrease of 3.4% from the year-end 1995 total of $21.1 million. Nonperforming loans as a percentage of total loans plus other real estate declined to 0.78% at December 31, 1996 from 0.87% on December 31, 1995, a decrease of 10.3%. The decline resulted from the Corporation's continued management of loan portfolio quality and favorable economic conditions. In addition, during 1996 consumer loan balances (which historically contain lower levels of nonperforming loans) grew at a faster rate than other segments of the portfolio. The consumer portfolio is composed of automobile, personal, marine, home equity and bankcard loans of which automobile and home equity comprise 70.7% of the 1996 average balances, an increase from 66.7% over 1995. One to four family residential home loans comprise the majority of the real estate mortgage balances. The Corporation's commercial real estate portfolio represents 11.3% of total loans at December 31, 1996 compared to 14.0% at year end 1995. Within this portfolio, nonperforming loans represented 15.0% of total nonperforming loans at December 31, 1996 compared with 16.4% at December 31, 1995. 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. The Corporation 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. Page 11 14 TABLE 7. NONPERFORMING ASSETS AND PAST DUE LOANS
December 31 (in thousands) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------- NONPERFORMING LOANS(1),(2) Nonaccrual(3) Less than 30 days past due $ 5,531 $ 4,783 $ 5,185 $ 2,518 $ 3,247 From 30 to 89 days past due 1,278 784 1,405 938 1,781 90 or more days past due 10,979 13,057 11,566 17,815 15,731 ------- ------- ------- ------- ------- Total 17,788 18,624 18,156 21,271 20,759 90 days past due and still accruing 1,362 432 1,253 155 1,206 Restructured(1) 502 494 299 238 382 ------- ------- ------- ------- ------- Total nonperforming loans 19,652 19,550 19,708 21,664 22,347 OTHER REAL ESTATE(3) 749 1,568 2,230 2,185 4,333 ------- ------- ------- ------- ------- Total nonperforming assets $20,401 $21,118 $21,938 $23,849 $26,680 ======= ======= ======= ======= ======= Nonperforming loans as a percent of total loans 0.75% 0.81% 1.09% 1.22% 1.44% Nonperforming assets as a percent of total loans plus other real estate 0.78 0.87 1.21 1.34 1.71 NONPERFORMING LOANS BY TYPE Commercial $10,797 $13,059 $15,741 $13,034 $10,874 Real Estate(3),(4) 3,269 2,543 1,224 5,232 8,940 Consumer 3,913 2,600 1,174 1,574 1,503 Lease financing 1,673 1,348 1,569 1,824 1,030 ------- ------- ------- ------- ------- Total $19,652 $19,550 $19,708 $21,664 $22,347 ======= ======= ======= ======= =======
(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 1996 for nonaccrual and restructured loans, as of Decmber 31, 1996, assuming interest had been accrued throughout the year in accordance with original terms was $1.513 million. The comparable 1995 and 1994 totals were $2.509 million, and $1.879 million, respectively. Interest collected on these loans and included in income was $0.818 million in 1996, $1.427 million in 1995 and $1.128 million in 1994. Therefore, on a net basis, total income foregone due to these loans was $0.695 million in 1996, $1.082 million in 1995 and $0.751 million in 1994. (3) Assets in-substance foreclosed previously reported as other real estate were reclassified as nonaccrual loans in the fourth quarter of 1993. Assets in- substance foreclosed totaled $0 at December 31, 1996 and 1995; $0.021 million at December 31, 1994; $1.720 million at December 31, 1993 and $2.983 million at December 31, 1992. (4) 1996, 1995 and 1994 nonperforming commercial real estate loan balances have been reclassified into the nonperforming commercial loan category. Previous years' balances have not been reclassified. The level and composition of nonperforming assets are affected by economic conditions in the Corporation's 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 the Corporation's results. In addition to nonperforming loans, 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, 1996, such loans amounted to $12.3 million or 0.5% of total loans compared with $10.8 million or 0.5% of total loans as of December 31, 1995. 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. Collectively, these loans and the nonperforming assets in Table 7 represent 1.25% of total loans as of December 31, 1996 improving from 1.32% as of December 31, 1995. Page 12 15 TABLE 8. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Amount Allocated by Loan Category ---------------------------------------------------------- December 31 (in millions) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------- Commercial $10.1 $11.2 $10.6 $ 6.0 $ 6.9 Real estate construction 0.1 0.1 0.1 0.2 0.1 Real estate mortgage(1) 1.3 1.1 1.0 3.2 3.2 Consumer 12.3 13.2 7.0 6.6 5.7 Lease financing 0.5 1.2 1.2 1.1 1.0 ----- ------ ----- ----- ----- Total allocated 24.3 26.8 19.9 17.1 16.9 Unallocated 11.7 8.0 4.8 5.4 2.5 ----- ------ ----- ----- ----- Total $36.0 $34.8 $24.7 $22.5 $19.4 ===== ====== ===== ===== =====
The allocation of the allowance for loan losses in the above table are 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. The Corporation 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. (1) 1996, 1995 and 1994 commercial real estate loan allowance allocations are reflected in the commercial loan category. Prior years' allowance allocations have not been reclassified. The Corporation adopted Financial Accounting Standards Board Statement ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures" effective January 1, 1995. SFAS 114 requires creditors to establish a valuation allowance for impaired loans. A loan is considered impaired when management determines it is probable that all the principal and interest due under the contractual terms of the loan will not be collected. The impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. The adoption of the Statements did not have a material effect on the Corporation's financial position or results of operations, nor did it result in additional provisions for loan losses as the Corporation has historically established valuation allowances based on the fair value of collateral securing an impaired loan. In addition, as permitted by SFAS 118, interest income on impaired loans continues to be recognized in a manner consistent with prior income recognition policies. For all impaired loans, other than nonaccrual loans, interest income is recorded on an accrual basis. Interest income on impaired nonaccrual loans is recognized on a cash basis. Certain of the Corporation's nonperforming loans included in Table 7 are considered to be impaired under the Statements. The Corporation measures impairment on all large balance nonaccrual commercial and commercial real estate loans. Certain large balance accruing loans rated substandard or worse are also measured for impairment. In most instances, impairment is measured based on the fair value of the underlying collateral. Impairment losses are included in the provision for loan losses. SFAS 114 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 paragraph. At December 31, 1996, loans considered to be impaired under the Statements totaled $16.3 million (of which $9.2 million were on a nonaccrual basis). Included within this amount is $7.9 million of impaired loans for which the related allowance for loan losses is $0.8 million and $8.4 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, 1996 was approximately $18.8 million. For the year ended December 31, 1996, the Corporation recognized interest income of $1.7 million which included $0.9 million of interest income recognized using the cash basis method of income recognition. Page 13 16 At December 31, 1995, loans considered to be impaired under the Statements totaled $16.6 million (of which $10.1 million were on a nonaccrual basis). Included within this amount is $4.7 million of impaired loans for which the related allowance for loan losses is $0.8 million and $11.9 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, 1995 was approximately $19.9 million. For the year ended December 31, 1995, the Corporation recognized interest income of $1.5 million which included $0.8 million of interest income recognized using the cash basis method of income recognition. The Corporation maintains policies and procedures to identify and monitor nonaccrual loans. A loan (including a loan impaired under the Statements) 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. Other real estate owned is comprised of property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure and loans classified as in-substance foreclosure. In accordance with the Statements, a loan is classified as in-substance foreclosure when the Corporation has taken possession of the collateral regardless of whether formal foreclosure proceedings take place. Therefore, these Statements had no effect in 1996 since the Corporation's policy on in-substance foreclosed assets had been previously amended in 1993 to comply with new regulatory guidelines. During 1996, each of 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. TABLE 9. AVERAGE DEPOSITS
1996 1995 1994 -------------------- ------------------- --------------------- AVERAGE AVERAGE Average Average Average Average Year Ended December 31 (in millions) BALANCE RATE Balance Rate Balance Rate - --------------------------------------------------------------------------------------------------------- Noninterest-bearing demand $ 460.8 --- $ 451.6 --- $ 379.7 --- Interest-bearing demand 312.7 1.73% 309.4 1.87% 256.1 1.71% Savings 900.9 2.71 909.7 2.82 909.4 2.39 Time 1,182.2 5.60 1,031.6 5.50 717.0 4.17 -------- -------- -------- Total $2,856.6 3.36 $2,702.3 3.26 $2,262.2 2.48 ======== ======== ========
DEPOSITS The Corporation's average deposit balances and rates for the past three years are summarized in Table 9. Total average deposits were 5.7% higher (2.6% excluding the acquired banks) in 1996 compared with 1995. The Corporation experienced increases in all deposit categories, with the exception of savings, which reflected a slight decrease of 1.0%. Deposits continued to shift from savings to time accounts during 1996 reflecting the change in customer preferences for yield versus liquidity. Noninterest-bearing demand accounts comprised 16.1% of total average deposits during 1996, compared to 16.7% in 1995. As of December 31, 1996, certificates of deposits of $100,000 or more accounted for approximately 9.0% of total deposits compared with 7.6% as of December 31, 1995. 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 millions) 1996 - ----------------------------------------------- Three months or less $157,291 After three but within six months 35,343 After six but within twelve months 35,789 After twelve months 35,089 -------- Total $263,512 ========
The Corporation gathers deposits primarily from the local markets of its banking subsidiaries and has not relied on brokered deposits. Management continues to promote core deposit growth and stability through focused marketing efforts and competitive pricing strategies. Page 14 17 BORROWED FUNDS Total short-term borrowings, primarily federal funds purchased, securities sold under agreements to repurchase and Treasury Tax and Loan notes, averaged $162.0 million or 6.1% of total average interest-bearing liabilities during 1996 compared with $146.0 million or 5.8% during 1995. Long-term debt accounted for $83.3 million or 3.2% of average interest-bearing funds during 1996, decreasing from $102.8 million or 4.1% in 1995. To finance the February 28, 1995 acquisition, the Corporation's Parent company obtained a $115 million seven year amortizing revolving credit facility. The revolving credit facility requires annual principal payments of $16.5 million with a final payment of $16 million. During 1996, the Corporation prepaid the scheduled 1997 and a portion of the 1998 amounts due. The outstanding balance of $58.4 million at December 31, 1996 has a fixed interest rate of 7.65%. Of this amount, $51.4 million and $7.0 million reprice in March 1997 and March 1998, respectively. The Parent company services the debt's principal and interest payments with dividends from the subsidiary banks. The agreement also requires the Corporation to maintain certain financial covenants. The Corporation is in full compliance with all debt covenants as of December 31, 1996. A summary of long-term debt balances as of December 31, 1996 and 1995 appears in Note 9 to the Consolidated Financial Statements. In September 1996, one of the Corporation's subsidiaries obtained a $20 million one year borrowing from the Federal Home Loan Bank. The interest rate is based on the six-month LIBOR rate less three basis points and reprices on March 24, 1997. At December 31, 1996 the interest rate was 5.82%. CAPITAL RESOURCES Management closely monitors capital levels to provide for current and future business needs and to comply with regulatory requirements. Both bank subsidiaries within the Corporation have sufficient capital to maintain a "well capitalized" designation, (the FDIC's highest rating). As summarized below, the Corporation's capital ratios were in excess of regulatory requirements.
- ------------------------------------------------------------------ Regulatory Minimum ------------------------ December 31, "Well ----------------------- Required Capitalized" 1996 1995 1994 - ------------------------------------------------------------------ Risk based: Tier I capital 4.00% 6.00% 9.39% 8.79% 13.44% Total capital 8.00 10.00 10.64 10.04 14.69 Tier I leverage 4.00 5.00 7.33 6.65 9.52
The Corporation declared cash dividends of $1.01 per share in 1996, an increase of 12.2% over 1995 dividends of $0.90 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. The Corporation maintains a stock repurchase program initiated in November 1987. During 1996, 128,500 shares were purchased at an average cost of $29.34 per share. A total of 1,260,970 shares have been purchased under this program at an average price of $15.84 per share. Effective January 27, 1997, the Corporation's stock repurchase program was formally rescinded by its Board of Directors in conjunction with the agreement to acquire CB Financial Corporation. NEW ACCOUNTING PRONOUNCEMENTS In March 1995 the Financial Accounting Standards Board issued Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Statement establishes accounting standards for the impairment of long-lived assets, such as fixed assets; certain identifiable intangibles, and goodwill related to those assets. It also specifies when assets should be reviewed for impairment, how to determine whether an asset is impaired, how to measure an impairment loss and what financial disclosures are necessary. The Corporation adopted the Statement effective January 1, 1996 and the impact was not material. In June 1996 the Financial Accounting Standards Board issued Statement No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities". In December 1996, the Financial Accounting Standards Board issued Statement No. 127 which delayed the effective dates of certain provisions of the original Statement. The Statements establish accounting and reporting standards to assist in determining when to recognize or derecognize financial assets and liabilities in the financial statements after a transfer of financial assets has occurred. The Corporation will adopt the Statement effective January 1, 1997 and 1998 as permitted and does not expect the impact to be material. Page 15 18 LIQUIDITY AND DEBT CAPACITY The liquidity position of the Corporation is monitored for both subsidiaries and the Parent company to ensure that funds are available at a reasonable cost to meet financial commitments, to finance business expansion and to take advantage of unforeseen opportunities. The Corporation's subsidiary banks derive liquidity primarily through core deposit growth and maturity of money market investments, investment securities and loans. Additionally, the Corporation's subsidiary banks have access to market borrowing sources on an unsecured, as well as a collateralized basis, for short-term purposes. Management has not had to rely on borrowings from either the Federal Reserve, the Federal Home Loan Bank or the sale of investment securities to meet liquidity requirements. Another source of liquidity is the ability of the Corporation's Parent company to borrow funds on both a short-term and long-term basis. Various techniques are used by the Corporation to measure liquidity, including ratio analysis. Some ratios monitored by the Corporation include: loans to deposits, core funding (deposits plus a portion of repurchase agreements and long term debt less single maturity certificates of deposits) to total funding (volatile funding plus core funding) and liquid assets to volatile funding (interest bearing liabilities plus noninterest bearing deposits less core funding). During 1996, the Corporation's strategy to operate at lower levels of liquid assets to volatile funding and a higher loan to deposit ratio improved the asset mix, resulting in increased net interest income. The Corporation experienced no liquidity or operational problems as a result of the reduced liquidity levels. These ratios are summarized below for the last three years.
December 31 1996 1995 1994 - --------------------------------------------------------------------------------- Average loans to deposits 88.7% 85.2% 80.0% Liquid assets to volatile funding 63.1 108.5 100.9 Core funding to total funding 89.4 88.8 89.2
The subsidiary banks manage liquidity to meet client cash flow needs while maintaining funds available for loan and investment opportunities. As discussed in Note 16 to the Consolidated Financial Statements, the Federal Reserve Bank requires the Corporation's banking subsidiaries to maintain certain noninterest-bearing deposits. These balances averaged $34.7 million and $41.2 million during 1996 and 1995, respectively. 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 Parent company's primary source of liquidity is dividends from its subsidiaries. During 1996, the Parent company received $53.1 million in dividends from subsidiaries and paid $14.5 million in dividends to its shareholders. The amount of the upstream dividends increased $28.7 million in 1996 as compared to 1995 and was attributable in part, to the June 1, 1996 consolidation of the six Michigan chartered banks. This consolidation allowed the surviving bank greater upstream dividend capacity while still maintaining sufficient capital. As discussed in Note 16 to the Consolidated Financial Statements, $2.8 million was available as of January 1, 1997 for payment to the Parent company as dividends by the Corporation's banking subsidiaries without further regulatory approval. Amounts earned by subsidiaries in 1997 may also become available for such dividend payments. Additional amounts may be available for payment subject to regulatory approval. The Corporation's long-term debt to equity ratio was 26.7% as of December 31, 1996 compared with 35.5% as of December 31, 1995. Decreases in long-term debt during 1996 are discussed in the section titled "Borrowed Funds". Management believes that the Corporation has sufficient liquidity and capacity sources to meet presently known cash flow requirements arising from ongoing business transactions. Page 16 19 INTEREST RATE RISK Interest rate risk generally arises when the maturity or repricing structure of the Corporation's assets and liabilities differs significantly. Asset/liability management, which among other things addresses such risk, is the process of developing, testing and implementing strategies that seek to maximize net interest income, maintain sufficient liquidity and minimize exposure to 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 the Corporation's asset/liability static sensitivity ("GAP") as of December 31, 1996. TABLE 11. INTEREST RATE SENSITIVITY
TOTAL December 31, 1996 1 2 - 3 4 - 6 7 - 12 WITHIN 1-5 Over (in millions) Month Months Months Months 1 YEAR Years 5 Years Total - ------------------------------------------------------------------------------------------------------------------------------------ RATE SENSITIVE ASSETS(3) Loans and leases $844.6 $ 119.6 $178.4 $ 272.3 $1,414.9 $ 882.6 $323.2 $2,620.7 Investment securities 22.4 48.6 31.6 46.0 148.6 308.7 122.9 580.2 Short-term investments 2.1 10.0 --- --- 12.1 --- --- 12.1 ------ ------- ------ ------- -------- -------- ------ -------- Total $869.1 $ 178.2 $210.0 $ 318.3 $1,575.6 $1,191.3 $446.1 $3,213.0 ====== ======= ====== ======= ======== ======== ====== ======== RATE SENSITIVE LIABILITIES Deposits (2) $176.6 $ 258.5 $280.6 $ 470.4 $1,186.1 $1,029.9 $177.0 $2,393.0 Short-term borrowings 176.4 --- --- --- 176.4 --- --- 176.4 Long-term debt 21.2 51.5 0.1 --- 72.8 6.9 4.4 84.1 ------ ------- ------ ------- -------- -------- ------ -------- Total $374.2 $ 310.0 $280.7 $ 470.4 $1,435.3 $1,036.8 $181.4 $2,653.5 ====== ======= ====== ======= ======== ======== ====== ======== Period GAP (1) $494.9 $(131.8) $(70.7) $(152.1) $ 140.3 $ 154.5 $264.7 $ 559.5 Cumulative GAP 494.9 363.1 292.4 140.3 294.8 559.5 Cumulative GAP to Total Assets 14.21% 10.42% 8.39% 4.03% 4.03% 8.46% 16.06% 16.06% Multiple of Rate Sensitive Assets to Liabilities 2.32 0.57 0.75 0.68 1.10 1.15 2.46 1.21
(1) GAP is the excess of rate sensitive assets (liabilities). (2) Includes interest bearing savings and demand deposits without contractual maturities of $349 million in the less than one year category and $847 million in the over one year category. This runoff is based on historical trends, which reflects industry standards. (3) Incorporates prepayment projections for certain assets which may shorten the time frame for repricing or maturity compared to contractual runoff. As shown, the Corporation's interest rate risk position is well balanced in the less than one year time frame with rate sensitive assets exceeding rate sensitive liabilities by $140.3 million. This position suggests that the Corporation's net interest income may not be significantly impacted by changes in interest rates over the next 12 months. Management is continually reviewing its interest rate risk position and modifying its strategies based on projections to minimize the impact of future interest rate declines. While traditional GAP analysis does not always incorporate adjustments for the magnitude or timing of noncontractual repricing, Table 11 does incorporate appropriate adjustments as indicated in footnotes 2 and 3 to the table. Because of these and other inherent limitations of any GAP analysis, management utilizes simulation modeling as its primary tool to evaluate the impact of changes in interest rates and balance sheet strategies. Management uses these simulations to develop strategies that can limit interest rate risk and provide liquidity to meet client loan demand and deposit preferences. Page 17 20 TABLE 12. LOAN MATURITIES AND INTEREST RATE SENSITIVITY
Due Within One to After December 31 (in millions) One Year Five Years Five Years Total - ----------------------------------------------------------------------------------------------------------------------------- Commercial $500.8 $428.1 $46.7 $ 975.6 Real estate-construction 25.6 11.8 0.4 37.8 ------ ------ ----- -------- Total $526.4 $439.9 $47.1 $1,013.4 ====== ====== ===== ======== Loans above: With floating interest rates $353.3 $183.7 $36.8 $ 573.8 With predetermined interest rates 173.1 256.2 10.3 439.6 ------ ------ ----- -------- Total $526.4 $439.9 $47.1 $1,013.4 ====== ====== ===== ========
TABLE 13. SELECTED QUARTERLY INFORMATION
1996 1995 ---------------------------------------- ---------------------------------------- (in thousands except per share data) FOURTH THIRD SECOND FIRST Fourth Third Second First - ------------------------------------------------------------------------------------------------------------------------------ Interest income $64,632 $64,401 $63,912 $62,969 $63,752 $62,779 $62,248 $51,821 Interest expense 27,827 27,202 27,045 27,724 28,216 27,734 26,887 20,268 Net interest income 36,805 37,199 36,867 35,245 35,536 35,045 35,361 31,553 Provision for loan losses 1,771 3,021 1,771 1,771 1,937 1,504 1,580 1,420 Investment securities gains 21 21 7 52 79 15 13 91 Noninterest income 9,776 11,424 9,741 9,488 9,790 9,586 8,889 7,971 Noninterest expense 31,119 32,190 31,853 30,824 29,952 30,587 32,468 28,080 Net income 9,817 9,603 9,260 8,741 9,759 8,984 7,469 7,384 PER SHARE OF COMMON STOCK Net income: Primary 0.67 0.65 0.63 0.60 0.67 0.62 0.51 0.51 Fully diluted 0.67 0.65 0.63 0.60 0.67 0.61 0.51 0.51 Cash dividends declared 0.26 0.26 0.26 0.23 0.23 0.23 0.23 0.21 Market value:(1) High 32.25 29.50 31.50 31.50 32.50 33.25 31.00 27.00 Low 28.75 27.25 27.50 28.50 29.00 29.25 25.25 24.94 Close 31.50 28.63 29.00 30.50 29.75 30.38 29.75 26.50
(1) Citizens Banking Corporation common stock is traded on the National Market tier of the Nasdaq stock market (trading symbol: CBCF). At December 31, 1996, there were approximately 6,700 shareholders of the Corporation's common stock. 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 the Corporation's ability to respond to changes in interest rates. Page 18 21 YEAR ENDED DECEMBER 31, 1995 COMPARED WITH 1994 Citizens Banking Corporation earned $33,596,000 or $2.30 per fully diluted share during 1995 compared with $29,414,000 or $2.03 per share in 1994. Net income was up $4,182,000 or $0.27 per fully diluted share over the prior year and reflected a 14.2% increase. Return on assets declined 6.4% from 1.09% in 1994 to 1.02% in 1995. This decline is attributable to additional interest expense, intangible asset amortization costs and nonrecurring systems conversion costs associated with the first quarter 1995 acquisition. Overall, the increase in net income in 1995 reflects improvement in net interest income and noninterest income offset, in part, by increases in the provision for loan lossess, noninterest expense and income taxes. Net interest income for 1995 was $137,495,000, an increase of 16.1% over 1994 net interest income of $118,400,000. This increase resulted from higher levels of earning assets partially offset by increased interest bearing liabilities, both attributable to the first quarter 1995 acquisition. Yields on assets increased 75 basis points in 1995 from 1994. However, rates paid on funding sources increased 109 basis points due to higher rates paid on time deposits and long-term debt. As a result, the net interest margin decreased to 4.77% in 1995, a 22 basis point decline from 1994. The provision for loan losses increased to $6,441,000 in 1995 compared with $5,303,000 in 1994 as a result of the acquisition. Net loan charge-offs were 0.16% of average total loans in 1995, down from 0.17% in 1994. As of December 31, 1995, the ratio of the allowance for loan losses to net charge-offs improved to 9.6 times compared with 7.9 times as of December 31, 1994. Noninterest income accounted for 20.9% of total operating income or 1.1% of average assets in 1995, decreasing from 22.2% or 1.3%, respectively, in 1994. The decline was primarily the result of discontinuing the Travel Banking product line in early 1995, which provided bankcard merchant fee income. This decrease was more than offset by reductions in associated operating expenses, including interchange and other bankcard expenses. Excluding the effects of the Travel Banking product line and the newly acquired banks, 1995 noninterest income increased by 2.7% over 1994 levels. Excluding the results of the acquired banks, trust income increased $246,000 or 2.5%. The largest increases occurred in employee benefit trust services. Deposit service charges increased 12.7% including the results of the newly acquired banks. Brokerage and investment fees decreased $196,000, or 13.8%, excluding the impact of the acquired banks. The decrease in brokerage and investment fees is due to lower market penetration and a temporary reduction in staff during the first half of 1995. Other loan income increased $615,000 from 1994, primarily attributable to premiums on the sale of student loans and loan servicing income from the operations of the acquired banks. Net gains on sale of mortgages were $327,000 in 1995 compared with $255,000 in 1994. Excluding the acquired banks, other loan income increased $25,900 or 2.0% in 1995 as compared to 1994. ATM fees increased $222,000, or 16.9%, excluding the impact of the acquired banks, due to increased volumes. Increases in cash management services, safe deposit and the other fees resulted primarily from the acquired banks. Excluding the effects of the acquired banks, noninterest expense decreased $4,143,100, or 3.9% in 1995, from 1994 primarily due to a reduction in the FDIC insurance assessments paid by the Corporation's banks for the last seven months of 1995 and the discontinuance of the Travel Banking product line. FDIC insurance assessments decreased by $1,800,000, or 35.6% in 1995 as compared to 1994. The decline resulted from a new rate schedule implemented by the FDIC partially offset by an increase in the Corporation's deposit base due to the purchase of the acquired banks. Compensation is the Corporation's largest noninterest expense. Excluding the impact of the acquired banks, total compensation expense increased 0.2% in 1995 as compared to 1994. This modest increase was primarily due to continued health care benefit cost containment and declines in the number of full-time equivalent employees, offset in part by higher incentive compensation and merit increases. Excluding the impact of the acquired banks, occupancy expense declined $326,000, or 4.0% and equipment expense increased $119,000 or 1.4% compared to the previous year. Intangible asset amortization increased $3,085,000 in 1995 compared with 1994 as a result of the February 28, 1995 acquisition. During the second and third quarters of 1995, the Corporation completed all system integration and conversions for the acquired banks to operate within Citizens' corporate systems. This conversion allowed the Corporation to realize cost savings from the consolidated operating systems beginning in the fourth quarter of 1995. Page 19 22 Excluding the impact of the acquired banks, bankcard processing expense declined $2,882,000 or 50.3% as compared to 1994, primarily due to the discontinuance of the Travel Banking product line in early 1995 which had previously generated significant amounts of interchange and other bankcard expense. Income tax expense for 1995 increased 24.4% compared with 1994. This increase resulted from higher pretax earnings combined with lower tax-exempt interest income. The Corporation had total average assets of $3.280 billion in 1995, up from 1994 average assets of $2.711 billion, primarily due to the acquisition. Average loans and leases comprise 76.7% of total earning assets in 1995, up from 71.9% in 1994. Much of this growth occurred in the consumer and commercial loan portfolios due to improved economic conditions and the acquisition. Average money market investment balances, primarily federal funds sold and Eurodollar time deposits increased $72.7 million in 1995 from 1994 levels. Total average deposits were 19.5% higher in 1995 compared with 1994, primarily due to the acquisition. Customer preferences resulted in deposit balance shifts from savings to time accounts in 1995 as indicated by average savings deposits remaining nearly unchanged despite the acquisition. Average short-term borrowings, comprised primarily of securities sold under agreements to repurchase, decreased slightly to 5.9% of average interest-bearing liabilities in 1995 compared with 6.9% in 1994. Long-term debt accounted for $102.8 million or 4.1% of average interest-bearing funds during 1995, increasing from $8.7 million or 0.4% in 1994. To finance the acquisition of the acquired banks, the Corporation's Parent company obtained a $115 million seven year amortizing revolving credit facility. The Parent company services the debt's principal and interest payments with dividends from the subsidiary banks. Average shareholders' equity was $277.6 million at December 31, 1995, an 8.2% increase over the 1994 average of $256.6 million. Page 20 23 CONSOLIDATED BALANCE SHEETS CITIZENS BANKING CORPORATION AND SUBSIDIARIES
December 31, (in thousands except share amounts) 1996 1995 - ----------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 137,867 $ 172,754 Money market investments: Interest-bearing deposits with banks 84 10,090 Federal funds sold --- 50,000 Term federal funds sold and other 12,043 89,744 ---------- ---------- Total money market investments 12,127 149,834 Investment securities available-for-sale (amortized cost $578,788 in 1996; $565,547 in 1995) 580,171 570,912 Loans: Commercial 975,628 905,947 Real estate construction 37,803 33,984 Real estate mortgage 541,809 457,758 Consumer 1,018,318 970,755 Lease financing 47,173 60,069 ---------- ---------- Total loans 2,620,731 2,428,513 Less: Allowance for loan losses (35,997) (34,771) ---------- ---------- Net loans 2,584,734 2,393,742 Premises and equipment 61,331 63,147 Intangible assets 64,916 70,385 Other assets 42,704 43,148 ---------- ---------- Total assets $3,483,850 $3,463,922 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits $ 471,780 $ 506,116 Interest-bearing deposits 2,393,027 2,358,585 ---------- ---------- Total deposits 2,864,807 2,864,701 Federal funds purchased and securities sold under agreements to repurchase 146,903 130,556 Other short-term borrowings 29,515 15,468 Other liabilities 43,250 50,600 Long-term debt 84,133 105,411 ---------- ---------- Total liabilities 3,168,608 3,166,736 SHAREHOLDERS' EQUITY Preferred stock - no par value: Authorized - 5,000,000 shares Issued - none --- --- Common stock - no par value: Authorized - 40,000,000 shares Issued and outstanding - 14,340,020 in 1996; 14,333,920 in 1995 89,231 91,480 Retained earnings 225,112 202,219 Net unrealized gain on securities available-for-sale, net of tax 899 3,487 ---------- ---------- Total shareholders' equity 315,242 297,186 ---------- ---------- Total liabilities and shareholders' equity $3,483,850 $3,463,922 ========== ==========
See Notes to Consolidated Financial Statements. Page 21 24 CONSOLIDATED STATEMENTS OF INCOME CITIZENS BANKING CORPORATION AND SUBSIDIARIES
(in thousands except share amounts) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------ INTEREST INCOME Interest and fees on loans $219,266 $201,242 $144,263 Interest and dividends on investment securities: Taxable 24,048 22,531 22,725 Nontaxable 9,085 9,403 10,568 Money market investments 3,515 7,424 2,433 -------- -------- -------- Total interest income 255,914 240,600 179,989 -------- -------- -------- INTEREST EXPENSE Deposits 96,035 88,157 56,020 Short-term borrowings 7,466 7,221 5,115 Long-term debt 6,297 7,727 454 -------- -------- -------- Total interest expense 109,798 103,105 61,589 -------- -------- -------- NET INTEREST INCOME 146,116 137,495 118,400 Provision for loan losses 8,334 6,441 5,303 -------- -------- -------- Net interest income after provision for loan losses 137,782 131,054 113,097 -------- -------- -------- NONINTEREST INCOME Trust fees 12,316 11,314 9,697 Service charges on deposit accounts 10,242 9,717 8,619 Bankcard fees 5,968 5,635 7,694 Other loan income 3,166 1,925 1,310 Investment securities gains 101 198 157 Other 8,737 7,645 6,377 -------- -------- -------- Total noninterest income 40,530 36,434 33,854 -------- -------- -------- NONINTEREST EXPENSE Salaries and employee benefits 68,242 64,357 55,722 Equipment 9,804 9,709 8,505 Occupancy 9,294 9,000 8,050 Intangible asset amortization 5,469 4,687 1,602 FDIC insurance premiums 9 3,250 5,050 Bankcard fees 3,831 3,418 6,095 Stationery and supplies 3,649 3,570 2,762 Postage and delivery 3,419 3,189 2,359 Advertising and public relations 3,247 2,386 1,717 Other 19,022 17,521 15,383 -------- -------- -------- Total noninterest expense 125,986 121,087 107,245 -------- -------- -------- INCOME BEFORE INCOME TAXES 52,326 46,401 39,706 Income taxes 14,905 12,805 10,292 -------- -------- -------- NET INCOME $ 37,421 $ 33,596 $ 29,414 ======== ======== ======== Net Income Per Share: Primary $ 2.55 $ 2.31 $ 2.03 Fully diluted $ 2.55 $ 2.30 $ 2.03 Average shares outstanding: Primary 14,666,146 14,574,871 14,463,068 Fully diluted 14,696,805 14,611,736 14,511,706
See Notes to Consolidated Financial Statements. Page 22 25 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Common Retained Unrealized (in thousands except per share amounts) Stock Earnings Gain (Loss) Total - ---------------------------------------------------------------------------------------- BALANCE - JANUARY 1, 1994 $ 91,627 $163,536 $ --- $255,163 Net income 29,414 29,414 Exercise of stock options, net of shares purchased 1,602 1,602 Cash dividends-$0.82 per share (11,557) (11,557) Shares acquired for retirement (3,986) (3,986) Effect on January 1, 1994 of change in accounting for investment securities, net of deferred tax of $3,544 6,582 6,582 Net unrealized loss on securities available-for-sale, net of tax effect of $9,955 (18,488) (18,488) -------- -------- ------- -------- BALANCE - DECEMBER 31, 1994 89,243 181,393 (11,906) 258,730 Net income 33,596 33,596 Exercise of stock options, net of shares purchased 2,237 2,237 Cash dividends-$0.90 per share (12,770) (12,770) Net unrealized gain on securities available-for-sale, net of tax effect of $8,289 15,393 15,393 -------- -------- ------- -------- BALANCE - DECEMBER 31, 1995 91,480 202,219 3,487 297,186 Net income 37,421 37,421 Exercise of stock options, net of shares purchased 1,523 1,523 Cash dividends-$1.01 per share (14,528) (14,528) Shares acquired for retirement (3,772) (3,772) Net unrealized loss on securities available-for-sale, net of tax effect of $1,394 (2,588) (2,588) -------- -------- ------- -------- BALANCE - DECEMBER 31, 1996 $ 89,231 $225,112 $ 899 $315,242 ======== ======== ======= ========
See Notes to Consolidated Financial Statements. Page 23 26 CONSOLIDATED STATEMENTS OF CASH FLOWS CITIZENS BANKING CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, (in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 37,421 $ 33,596 $29,414 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 8,334 6,441 5,303 Depreciation 7,178 7,272 6,228 Amortization of goodwill and other intangibles 5,469 4,687 1,602 Deferred income taxes (credit) (1,168) 73 (171) Net amortization on investment securities 1,484 3,019 3,232 Investment securities gains (101) (198) (157) Other (4,344) 132 (2,260) -------- --------- -------- Net cash provided by operating activities 54,273 55,022 43,191 -------- --------- -------- INVESTING ACTIVITIES: Net (increase) decrease in money market investments 137,707 (21,599) (19,035) Securities available-for-sale: Proceeds from sale 2,783 6,980 190,275 Proceeds from maturity 374,675 172,975 187,561 Purchase (392,082) (130,782) (312,969) Net increase in loans and leases (199,326) (87,272) (39,177) Purchases of premises and equipment (5,362) (6,583) (4,772) Net cash used for acquisition of subsidiary --- (59,434) --- -------- --------- -------- Net cash provided (used) by investing activities (81,605) (125,715) 1,883 -------- --------- -------- FINANCING ACTIVITIES: Net decrease in demand and savings deposits (64,178) (81,726) (29,513) Net increase in time deposits 64,284 153,423 35,081 Net increase (decrease) in short-term borrowings 30,394 (45,415) (12,296) Proceeds from issuance of long-term debt 20,000 115,000 --- Principal reductions in long-term debt (41,278) (19,394) (5,616) Cash dividends paid (14,528) (12,770) (11,557) Proceeds from stock options exercised 1,523 2,237 1,602 Shares acquired for retirement (3,772) --- (3,986) -------- --------- -------- Net cash provided (used) by financing activities (7,555) 111,355 (26,285) -------- -------- -------- Net increase (decrease) in cash and due from banks (34,887) 40,662 18,789 Cash and due from banks at beginning of year 172,754 132,092 113,303 -------- -------- -------- Cash and due from banks at end of year $137,867 $172,754 $132,092 ======== ======== ======== Supplemental Cash Flow Information: Interest paid $112,522 $95,267 $61,257 Income taxes paid 16,250 12,580 10,235
See Notes to Consolidated Financial Statements. Page 24 27 NOTE 1. SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Citizens Banking Corporation ("Corporation") 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 the Corporation's policies: CONSOLIDATION The Consolidated Financial Statements include the accounts of the Corporation and its subsidiaries after elimination of all material intercompany transactions and accounts. INVESTMENT SECURITIES Investment securities must be classified into three categories: held-to-maturity, available-for-sale or trading. Only those 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 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. 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 and anticipated 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 Corporation adopted Financial Accounting Standards Board Statement ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures" effective January 1, 1995. The statements require creditors to establish a valuation allowance for impaired loans. A loan is considered impaired when management determines it is probable that all the principal and interest due under the contractual terms of the loan will not be collected. The impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Prior to 1995, the allowance for loan losses related to these loans was based on the undiscounted cash flows or the fair value of the collateral for collateral dependent loans. 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 unamortized cost of acquiring subsidiaries in excess of the fair value of identifiable net assets at the date acquired, is amortized on a straight line basis over 15 years. The carrying amount of goodwill is reviewed if the facts and information supporting the initially recorded amount changes. If the review indicates that impairment may exist, the current carrying amount is reduced by the estimated shortfall. INCOME TAXES The Corporation 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. Page 25 28 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 collectibility 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 under SFAS 114) 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. Loan fees on unused commitments and fees related to loans sold are recognized currently as other income. NET INCOME PER SHARE Primary and fully diluted net income per share are computed based on the weighted average number of shares outstanding in each period and dilutive common stock equivalents outstanding in each period. Common stock equivalents consist of common stock issuable under the assumed exercise of stock options granted under the Corporation's 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. ACQUISITIONS At the close of business on February 28, 1995, the Corporation purchased the four Michigan affiliates of Banc One Corporation, located in East Lansing, Fenton, Sturgis and Ypsilanti, for $115 million in cash. The transaction was accounted for as a purchase and the four banks ("acquired banks") were merged into Citizens Bank headquartered in Flint, Michigan effective immediately after the acquisition. Total assets acquired of $670 million included net loans of $532 million, investment securities and money market investments of $57 million and deposits of $541 million. Cost-in-excess of the fair value of identifiable net assets acquired was $59.2 million and is being amortized over 15 years. In January 1997, the Corporation announced an agreement to acquire CB Financial Corporation headquartered in Jackson, Michigan. CB Financial Corporation has a combined asset base of $826 million and operates thirty nine offices throughout Michigan. The Corporation will issue approximately 4.2 million shares of stock in a tax free exchange for all of the outstanding stock of CB Financial Corporation. The acquisition will be accounted for as a pooling of interests and is expected to be completed by the end of the second quarter of 1997. NOTE 3. INVESTMENT SECURITIES The amortized cost, estimated fair value and gross unrealized gains and losses of investment securities follow:
- --------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1996 December 31, 1995 -------------------------------------------- -------------------------------------------- ESTIMATED GROSS GROSS Estimated Gross Gross AMORTIZED FAIR UNREALIZED UNREALIZED Amortized Fair Unrealized Unrealized (in thousands) COST VALUE GAINS LOSSES Cost Value Gains Losses - --------------------------------------------------------------------------------------------------------------------- U.S. Treasury $162,217 $161,409 $402 $1,210 $197,872 $198,462 $958 $367 Federal agencies: Mortgage-backed 116,038 115,976 451 513 77,349 77,477 471 343 Other 97,645 97,232 112 525 70,436 70,546 135 25 State and municipal 188,793 191,373 3,128 548 209,068 213,491 5,183 760 Mortgage and asset-backed 1,486 1,518 32 -- 4,090 4,149 58 -- Other 12,609 12,663 54 -- 6,732 6,787 55 -- -------- -------- ------ ------ -------- -------- ------ ------ Total $578,788 $580,171 $4,179 $2,796 $565,547 $570,912 $6,860 $1,495 ======== ======== ====== ====== ======== ======== ====== ======
Page 26 29 The amortized cost and approximate fair value of debt securities at December 31, 1996, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities due to prepayment or early call privileges of the borrower.
- ------------------------------------------------------------ Estimated Amortized Fair (in thousands) Cost Value - ------------------------------------------------------------ Due within one year $ 47,687 $ 47,593 One to five years 293,585 293,783 Five to ten years 65,975 66,855 After ten years 41,408 41,783 -------- -------- 448,655 450,014 Equity securities 12,609 12,663 Mortgage and asset-backed securities 117,524 117,494 -------- -------- Total $578,788 $580,171 ======== ========
Sales of investment securities resulted in realized gains and losses as follows:
- ----------------------------------------------- Year Ended December 31, (in thousands) 1996 1995 1994 - ----------------------------------------------- Securities gains $103 $202 $326 Securities losses (2) (4) (169) ---- ---- ---- Net gain $101 $198 $157 ==== ==== ====
Investment securities must be classified into three categories: held-to-maturity, available-for-sale or trading. Only those 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 income, respectively. The Corporation currently holds all investment securities in the available-for-sale category. The Financial Accounting Standards Board Statement No. 119 defines a derivative as a future, forward, swap, option contract or other financial instrument with similar characteristics. The Corporation has not utilized derivatives or related types of financial instruments except for Federal agency collateralized mortgage obligations and, therefore, this Statement does not have a material impact. The Corporation's policy only allows the purchase of collateralized mortgage obligations that are composed of mortgage backed securities issued by a Federal Agency. Most CMO's purchased are in early tranches with short average lives. These tranches are generally classified in the Planned Amortization Class and have well-defined prepayment assumptions (Super PAC's). The Corporation's CMO's are periodically tested to ensure compliance with guidelines established by the Federal Financial Institutions Examination Council. Securities with amortized cost of $249.6 million at December 31, 1996, and $278.2 million at December 31, 1995, 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, 1996 or 1995. NOTE 4. LOANS AND NONPERFORMING ASSETS The Corporation extends credit primarily within the local markets of its two bank subsidiaries located in Michigan and Illinois. Within the State of Michigan, the market areas extend along the Interstate 75 corridor from northern suburban Detroit to the greater Grayling/Gaylord area with expansion into western suburban Detroit and central and southwestern Michigan in 1995. The Illinois affiliate extends credit within the western suburban market of Chicago. The Corporation has limited 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. The Corporation's loan portfolio is widely diversified by borrowers with no concentration within a single industry that exceeds 10% of total loans. The Corporation has no loans to foreign countries and generally does not participate in large national loan syndications or highly leveraged transactions. Most of the Corporation's 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) 1996 1995 - --------------------------------------------------- Nonperforming loans: Nonaccrual $17,788 $18,624 Loans 90 days past due (still accruing) 1,362 432 Restructured 502 494 ------- ------- Total nonperforming loans 19,652 19,550 Other real estate 749 1,568 ------- ------- Total nonperforming assets $20,401 $21,118 ======= =======
Page 27 30 The effect of nonperforming loans on interest income follows:
- ------------------------------------------------------------ Year Ended December 31, (in thousands) 1996 1995 1994 - ------------------------------------------------------------ Interest income: At original contract rates $ 1,513 $2,509 $ 1,879 As actually recognized 818 1,427 1,128 ------- ------ -------- Interest foregone $ 695 $1,082 $ 751 ======= ====== ========
There are no significant commitments outstanding to lend additional funds to clients whose loans were classified as nonaccrual or restructured at December 31, 1996. At December 31, 1996, loans considered to be impaired under the Statements totaled $16.3 million (of which $9.2 million were on a nonaccrual basis). Included within this amount is $7.9 million of impaired loans for which the related allowance for loan losses is $0.8 million and $8.4 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, 1996 was approximately $18.8 million. For the year ended December 31, 1996, the Corporation recognized interest income of $1.7 million which included $0.9 million of interest income recognized using the cash basis method of income recognition. At December 31, 1995, loans considered to be impaired totaled $16.6 million (of which $10.1 million were on a nonaccrual basis). Included within this amount is $4.7 million of impaired loans for which the related allowance for loan losses is $0.8 million and $11.9 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, 1995 was approximately $19.9 million. For the year ended December 31, 1995, the Corporation recognized interest income of $1.5 million which included $0.8 million of interest income recognized using the cash basis method of income recognition. Certain directors and executive officers of the Corporation 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 $27.5 million and $11.2 million at December 31, 1996 and 1995, respectively. During 1996, new loans of $22.0 million were made and repayments totaled $5.7 million. 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. In May 1995, Financial Accounting Standards Board issued Statement No. 122 "Accounting for Mortgage Servicing Rights". The Statement amends FASB Statement No. 65 to require mortgage banking related companies to recognize as a separate asset the rights to service mortgage loans for others regardless of how those servicing rights are acquired. This may be through purchase or origination of the mortgage loans. The Statement is effective for years beginning after December 15, 1995. In September 1996, the Corporation sold its residential mortgage loan servicing operations and as a result of the sale, the Statement has no material impact on the Corporation. NOTE 5. ALLOWANCE FOR LOAN LOSSES A summary of changes in the allowance for loan losses follows:
- ------------------------------------------------------------- (in thousands) 1996 1995 1994 - ------------------------------------------------------------- Balance - January 1 $ 34,771 $ 24,714 $ 22,547 Allowance of acquired banks -- 7,235 -- Provision for loan losses 8,334 6,441 5,303 Charge-offs (10,695) (7,921) (6,114) Recoveries 3,587 4,302 2,978 -------- -------- -------- Net charge-offs (7,108) (3,619) (3,136) -------- -------- -------- Balance - December 31 $ 35,997 $ 34,771 $ 24,714 ======== ======== ========
NOTE 6. PREMISES AND EQUIPMENT A summary of premises and equipment follows:
- ------------------------------------------------------ December 31, (in thousands) 1996 1995 - ------------------------------------------------------ Land $ 10,750 $ 10,792 Buildings 73,256 71,363 Leasehold improvements 3,416 3,391 Furniture and equipment 66,133 63,843 -------- -------- 153,555 149,389 Accumulated depreciation and amortization (92,224) (86,242) -------- -------- Total $ 61,331 $ 63,147 ======== ========
Certain branch facilities and computer equipment are leased under various operating leases. Total rental expense, including expenses related to these operating leases, was $2.4 million in 1996; $2.1 million in 1995 and $1.8 million in 1994. Future minimum rental commitments under noncancelable operating leases, net of sublease payments, are as follows at December 31, 1996: $1.1 million in 1997; $1.0 million in 1998; $0.9 million in 1999; $0.7 million in 2000; $0.5 million in 2001, and $1.1 million after 2001. Page 28 31 NOTE 7. DEPOSITS A summary of deposits follows:
- --------------------------------------------------------- (in thousands) 1996 1995 - --------------------------------------------------------- Noninterest-bearing demand $ 471,780 $ 506,116 Interest-bearing demand 311,690 318,390 Savings 884,550 907,691 Time deposits over $100,000 263,512 219,158 Other time deposits 933,275 913,346 ---------- ---------- Total $2,864,807 $2,864,701 ========== ==========
Excluded from total deposits are demand deposit account overdrafts which have been reclassified as loans. At December 31, 1996 and 1995, these overdrafts totaled $0.8 million and $2.7 million, respectively. Time deposits with remaining maturities of one year or more are $242.4 million at December 31, 1996. The maturities of these time deposits are as follows: $162.9 million in 1998, $51.3 million in 1999, $12.8 million in 2000, $13.6 million in 2001, and $1.8 million after 2001. NOTE 8. SHORT-TERM BORROWINGS Short-term borrowings consist primarily of federal funds purchased and securities sold under agreements to repurchase. 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. Other short-term borrowed funds generally consist only of demand notes to the U.S. Treasury. Information relating to federal funds purchased and securities sold under agreements to repurchase follows:
- ---------------------------------------------------------- (in thousands) 1996 1995 1994 - ---------------------------------------------------------- At December 31: Balance $146,903 $130,556 $125,581 Weighted average interest rate paid 4.43% 4.74% 4.39% During the year: Maximum outstanding at any month-end $154,160 $146,429 $129,846 Daily average 144,732 128,141 120,356 Weighted average interest rate paid 4.50% 4.83% 3.63%
NOTE 9. LONG-TERM DEBT A summary of long-term debt follows:
- ---------------------------------------------------------- December 31, (in thousands) 1996 1995 - ---------------------------------------------------------- Citizens Banking Corporation (Parent only): Floating rate term notes: Maturing October 1997 $ 1,250 $ 2,500 Revolving credit facility: Maturing December 2001 58,435 98,378 ------- -------- Total 59,685 100,878 Subsidiaries: FHLB Note 20,000 -- Subordinated debt 4,118 4,057 Nonrecourse lease financing --- 36 Other 330 440 ------- -------- Total 24,448 4,533 ------- -------- Total long-term debt $84,133 $105,411 ======= ========
The floating rate term note matures in October 1997. Interest is payable quarterly at a rate selected by the Corporation from certain indices available under the agreement. At December 31, 1996, the rate was 5.84%. To finance the February 28, 1995 acquisition, the Corporation's Parent company obtained a $115 million seven year amortizing revolving credit facility. The revolving credit facility, maturing in December 2001, is payable in annual payments of $16.5 million with a final payment of $16 million. As of December 31, 1996, the Corporation has repaid the scheduled 1997 and a portion of the 1998 amount due. The outstanding balance of $58.4 million at December 31, 1996 has a fixed rate of 7.65%. Of this amount, $51.4 million reprices in March 1997 and $7.0 million in March 1998. Interest is payable quarterly. The Parent company services the debt's principal and interest payments with dividends from the subsidiary banks. The agreement also requires the Corporation to maintain certain financial covenants. The Corporation is in full compliance with all debt covenents as of December 31, 1996. In September 1996, one of the Corporation's subsidiaries borrowed $20 million on a one year note from the Federal Home Loan Bank. The interest rate is based on the six-month LIBOR rate less three basis points and reprices on March 24, 1997. At December 31, 1996 the interest rate was 5.82%. Page 29 32 The subordinated debt was assumed by the Corporation as part of the 1995 acquisition. The total subordinated debt is payable on April 15, 2003. Interest is payable semiannually at a fixed rate of 6.72%. Other subsidiary debt also assumed as part of the acquisition consists of an EDC mortgage due April 1, 2002. Interest is payable monthly at an interest rate of 75% of the prime rate. Nonrecourse lease financing represents borrowings from unaffiliated lenders against future lease payments. These borrowings were paid in full as of December 31, 1996. Maturities of long-term debt during the next five years follow:
- ----------------------------------------------------------- (in thousands) Parent Subsidiaries Consolidated - ----------------------------------------------------------- 1997 $ 1,194 $20,110 $21,304 1998 9,491 --- 9,491 1999 16,500 --- 16,500 2000 16,500 --- 16,500 2001 16,000 --- 16,000 Over 5 Years --- 4,338 4,338 ------- ------- ------- Total $59,685 $24,448 $84,133 ======= ======= =======
NOTE 10. EMPLOYEE BENEFIT PLANS The Corporation and its subsidiaries have various employee benefit plans. Costs of various benefit arrangements charged to operations each year follow:
- ----------------------------------------------------------------------- Year Ended December 31, (in thousands) 1996 1995 1994 - ----------------------------------------------------------------------- Defined benefit pension plans: Qualified plan - funded: Service cost $ 1,981 $ 1,541 $ 1,534 Interest cost 2,615 2,339 2,188 Actual return on plan assets (5,717) (6,825) 281 Net amortization and deferral 1,795 2,783 (4,014) ------- ------- ------- Net cost (income) 674 (162) (11) ------- ------- ------- Supplemental plans - unfunded: Service cost 104 103 105 Interest cost 164 119 106 Net amortization and deferral 113 38 58 ------- ------- ------- Net cost 381 260 269 ------- ------- ------- Net pension cost 1,055 98 258 Defined contribution 401(k) plan 1,760 1,738 1,431 ------- ------- ------- Total benefit cost $ 2,815 $ 1,836 $ 1,689 ======= ======= =======
PENSION PLANS The Corporation maintains a qualified defined benefit plan covering substantially all full-time employees. Under the plan, benefits are based on the employee's length of service and average compensation during the highest consecutive 60 month period out of the final 120 months preceding retirement. The Corporation's funding policy is to contribute annually an amount sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Corporation may determine to be appropriate. Contributions are intended to provide for benefits attributed to past service and for benefits expected to be earned in the future. The funded status and amounts recognized in the Corporation's Consolidated Balance Sheets for the qualified defined benefit plan follow:
- ----------------------------------------------------------------------------- December 31, (in thousands) 1996 1995 - ----------------------------------------------------------------------------- Actuarial present value of benefit obligation: Vested benefits $27,168 $21,281 Nonvested benefits 652 623 ------- ------- Accumulated benefit obligation 27,820 21,904 Effect of projected future compensation levels 8,390 12,257 ------- ------- Projected benefit obligation 36,210 34,161 Plan assets at fair value, primarily listed stocks and bonds, corporate obligations and money market and mutual funds 45,638 41,483 ------- ------- Plan assets in excess of projected benefit obligation 9,428 7,322 Unrecognized net gain (8,964) (6,001) Unrecognized prior service cost 98 115 Unrecognized net asset at transition being recognized over 16 years (924) (1,125) ------- ------- Prepaid (accrued) pension cost recognized in the Consolidated Balance Sheets $ (362) $ 311 ======= =======
Actuarial assumptions used in determining the benefit obligation at December 31 were:
- ----------------------------------------------------------------------- 1996 1995 1994 - ----------------------------------------------------------------------- Weighted average discount rate 8.00% 7.75% 8.50% Rate of increase in future compensation levels (1) (1) (1) Long-term rate of return 9.00 9.00 9.00
(1) Scaled by age of plan participant - 9.00% at age 24 or under declining to 4.00% at age 50 or older The Corporation also maintains unfunded supplemental benefit plans, which are nonqualified plans providing certain officers with defined pension benefits in excess of limits imposed by Federal tax law. At December 31, 1996, the projected benefit obligation for these plans totaled $2.6 million, of which $761,000 was subject to later amortization. The remaining $1.8 million is included in other liabilities in the accompanying Consolidated Balance Sheets. At December 31, 1995, the projected benefit obligation for these plans totaled $1.7 million of which $113,000 was subject to later amortization. The remaining $1.6 million is included in other liabilities in the accompanying Consolidated Balance Sheets. Page 30 33 DEFINED CONTRIBUTION PLAN The Corporation maintains a defined contribution 401(k) savings plan covering substantially all full-time employees. Under the plan, employee contributions are partially matched by the Corporation. 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 base 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. POSTEMPLOYMENT BENEFITS Effective January 1, 1994, the Corporation adopted Financial Accounting Standards Board Statement No. 112, "Employers' Accounting for Postemployment Benefits." It requires, under certain circumstances, accrual of the estimated cost of benefits provided to former or inactive employees after employment but before retirement. Such benefits (referred to as postemployment benefits) include, but are not limited to, salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits, job training and counseling, and continuation of benefits such as health care and life insurance coverage. The unrecorded liability for these accrued benefits at adoption and at year-end 1996 and 1995 was not material. NOTE 11. POSTRETIREMENT BENEFIT PLAN The Corporation maintains an unfunded postretirement defined benefit plan offering medical and life insurance benefits. This plan, as amended effective January 1, 1993, provides postretirement medical benefits at its Michigan subsidiary to full-time employees who retire at normal retirement age, have attained age 50 prior to January 1, 1993 and have at least 15 years of credited service under the Corporation's defined benefit pension plan. This plan is subject to a vesting schedule, is contributory and contains other cost-sharing features such as deductibles and coinsurance. Retirees not meeting the above eligibility requirements may participate in the medical benefit provided by the plan, as amended, at their own cost. Those retired prior to January 1, 1993 receive benefits provided by the plan prior to its amendment. That plan includes dental care, has some contribution requirements, and has less restrictive eligibility requirements. Under either plan, life insurance is provided to all retirees on a reducing basis for 5 years. The following table presents the plan's unfunded status reconciled with amounts recognized in the Corporation's Consolidated Balance Sheets at December 31:
- -------------------------------------------------------------- (in thousands) 1996 1995 - -------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $ (9,697) $(10,073) Fully eligible plan participants (5) -- Other active plan participants (213) (218) -------- -------- Total unfunded obligation (9,915) (10,291) Unrecognized net gain (3,021) (2,878) Unrecognized prior service cost (1,745) (2,200) -------- -------- Accrued postretirement benefit cost $(14,681) $(15,369) ======== ========
Net periodic postretirement benefit cost includes the following components:
- --------------------------------------------------------------------- Year Ended December 31, (in thousands) 1996 1995 1994 - --------------------------------------------------------------------- Service cost $ 11 $ 10 $ 48 Interest cost 769 761 896 Net amortization and deferral (578) (643) (455) ----- ----- ----- Net periodic postretirement benefit cost $ 202 $ 128 $ 489 ===== ===== =====
The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 8.00% and 7.75% at December 31, 1996 and 1995, respectively. The weighted-average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is 8% for 1997 (9% for 1996) and is assumed to decrease 1% annually to 5% by the year 2000 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percent in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 and 1995 by $957,000 and $962,000, respectively, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1996 by $76,000. Page 31 34 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 the Corporation's deferred tax assets and liabilities as of December 31, 1996 and 1995 follow:
- ------------------------------------------------------------- (in thousands) 1996 1995 - ------------------------------------------------------------- Deferred tax assets: Allowance for loan losses $12,599 $12,091 Accrued postemployment benefits other than pensions 5,138 5,379 Mortgage servicing release premium 1,566 -- Other deferred tax assets 3,077 3,472 ------- ------- Total deferred tax assets 22,380 20,942 ------- ------- Deferred tax liabilities: Acquisition premium on loans 2,652 2,076 Tax over book depreciation 2,207 1,965 Net unrealized gains on securities 484 1,878 Other deferred tax liabilities 3,658 3,661 ------- ------- Total deferred tax liabilities 9,001 9,580 ------- ------- Net deferred tax assets $13,379 $11,362 ======= =======
Income tax expense (benefit) consists of the following:
- ------------------------------------------------------------ Year Ended December 31, (in thousands) 1996 1995 1994 - ------------------------------------------------------------ Currently payable $16,073 $12,732 $10,463 Deferred taxes (credit) (1,168) 73 (171) ------- ------- ------- Total income tax expense $14,905 $12,805 $10,292 ======= ======= =======
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) 1996 1995 1994 - --------------------------------------------------------------- Tax at Federal statutory rate applied to income before income taxes $18,314 $16,240 $13,897 Increase (decrease) in taxes resulting from: Tax-exempt interest (3,454) (3,539) (4,045) Other 45 104 440 ------- ------- ------- Total income tax expense $14,905 $12,805 $10,292 ======= ======= =======
NOTE 13. SHAREHOLDERS' EQUITY SHAREHOLDERS' RIGHTS PLAN The Corporation's 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 the Corporation. Under the plan, one right attaches to each outstanding share of common stock and represents the right to purchase from the Corporation 1/100 of a share of a new series of preferred stock at the initial exercise price of $37.50. The rights become exercisable only if a person or group without Board approval announces an intention to acquire 15% or more of the Corporation's outstanding common stock or makes a tender offer for that amount of stock. Upon the occurrence of such an event, the right "flips in" and becomes the right to purchase one share of common stock of the Corporation or the surviving company at 50% of the market price. These rights are redeemable by the Board for $0.01 per right and expire July 20, 2000. The rights will cause substantial dilution to a person or entity attempting to acquire the Corporation without conditioning the offer on the rights being redeemed by the Board. STOCK REPURCHASE PLAN The Corporation maintains a stock repurchase program initiated in November 1987. This program, which has been expanded several times, allows for the repurchase of 1,600,000 shares. As of December 31, 1996, a total of 1,260,970 shares have been repurchased under the program at an average price of $15.84 per share. Shares of common stock in treasury are accorded the treatment as if retired; however, such shares remain available for reissue. Effective January 27, 1997, the Corporation's stock repurchase plan was formally rescinded by its Board of Directors in conjunction with the agreement to acquire CB Financial Corporation. Page 32 35 STOCK OPTION PLAN The Corporation's stock option plan, as amended and restated in April 1992, 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 2,000,000 shares within any six year period and are limited annually to 3% of the Corporation's 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. Stock options outstanding under the plan were granted at a price not less than the fair market value of the shares on the date of grant. Replacement options may be granted upon exercise of a nonqualified stock option by payment of the exercise price with shares of the Corporation's common stock. A replacement option provides the employee with a new option to purchase the number of shares surrendered at an option price equal to the fair market value of the Corporation's common stock on the date the underlying nonqualified stock option is exercised. During 1996, 1995 and 1994, 143,598, 168,927, and 114,398 shares, respectively, were surrendered by employees for payment to the Corporation for stock option exercises for which an equal number of replacement options were granted. Options may be granted until January 16, 2002. The options terminate ten years from the date of grant and are exercisable beginning six months from the date of grant or for certain options, granted since April 1992, are exercisable subject to a predetermined option vesting schedule based on achievement of certain return on average asset targets. As of December 31, 1996, 232,422 options were not exercisable subject to future achievement of the performance targets. Canceled or expired options become available for future grants. The Corporation 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 the Corporation because the exercise price of the stock options equals the market price of the underlying stock on the date of grant. Although Statement 123 requires certain proforma disclosures regarding net income and earnings per share, the effect of applying the fair value method of Statement 123 to the Corporation's stock option awards results in net income and earnings per share that are not materially different from amounts reported. A summary of stock option transactions under the plan for 1996, 1995 and 1994 follows:
- -------------------------------------------------------------------------------- Options Option Price ------------------------- ----------------------- Available Per Share for Grant Outstanding Range Average - -------------------------------------------------------------------------------- January 1, 1994 485,541 1,249,084 $ 9.875-26.000 $15.13 Authorized 331,000 -- -- -- Granted (172,098) 172,098 23.250-27.250 25.40 Exercised -- (291,502) 9.875-21.630 15.35 Canceled 3,025 (3,025) 17.655-21.630 19.26 --------- --------- -------------- ------ December 31, 1994 647,468 1,126,655 9.875-27.250 16.63 Authorized 137,463 -- -- -- Granted (388,227) 388,227 26.000-30.813 27.22 Exercised -- (374,479) 9.875-26.375 17.68 Canceled 5,530 (5,530) 21.630-26.000 25.60 --------- --------- -------------- ------ December 31, 1995 402,234 1,134,873 9.875-30.813 19.86 Authorized 183,800 -- -- -- Granted (348,698) 348,698 28.188-30.875 29.46 Exercised -- (278,198) 9.875-30.813 20.79 Canceled 5,970 (5,970) 26.000-29.375 26.57 --------- --------- -------------- ------ December 31, 1996 243,306 1,199,403 9.875-30.875 22.40 ========= =========
Page 33 36 The following table summarizes information on stock options outstanding at December 31, 1996:
- ----------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ------------------------------------------------------- ------------------------------------ Weighted- Weighted- Weighted- Average Average Average Range Outstanding Remaining Life Exercise Price Exercisable Exercise Price - ----------------------------------------------------------------------------------------------------------------- $9.875-17.655 454,779 3.6 years $13.22 454,779 $13.22 21.630-30.875 744,624 7.5 28.01 486,867 27.99 --------- ------- ----- 9.875-30.875 1,199,403 6.0 22.40 941,646 20.86 ========= =======
NOTE 14. 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 the Corporation's 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) 1996 1995 - -------------------------------------------------------- Loan commitments: Commercial $639,765 $ 735,513 Real estate construction 14,501 19,675 Real estate mortgage 18,592 17,850 Credit card and home equity credit lines 292,179 281,233 Other consumer 13,401 11,323 -------- ---------- Total $978,438 $1,065,594 ======== ========== Standby letters of credit $ 25,425 $ 42,981 Commercial letters of credit -- 3,257
The Corporation 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 the Corporation's consolidated financial position. NOTE 15. 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 the Corporation's 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 the Corporation 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, the Corporation 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 the Corporation's brokerage network, net deferred tax asset, premises and equipment, goodwill and deposit based intangibles. Page 34 37 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 the Corporation. The estimated fair values of the Corporation's financial instruments follow:
- ------------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 1996 December 31, 1995 ------------------------ ----------------------- CARRYING ESTIMATED Carrying Estimated (IN THOUSANDS) AMOUNT FAIR VALUE Amount Fair Value - ------------------------------------------------------------------------------------------------------------------------------------ Financial assets: Cash and money market investments $ 149,994 $ 150,000 $ 322,588 $ 322,600 Investment securities 580,171 580,200 570,912 570,900 Net loans(1) 2,537,561 2,572,600 2,333,799 2,360,400 Financial liabilities: Deposits 2,864,807 2,869,700 2,864,701 2,874,000 Short-term borrowings 176,418 176,400 146,024 146,000 Long-term debt 84,133 84,600 105,411 106,600 Off-balance sheet financial instrument liabilities: Loan commitments -- 1,180 -- 1,224 Standby and commercial letters of credit -- 127 -- 231
(1) Excludes lease financing which for purposes of SFAS 107 disclosure is not considered a financial instrument. The various methods and assumptions used by the Corporation 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 (INCLUDING MORTGAGE-BACKED AND ASSET-BACKED SECURITIES) The carrying amounts reported in the balance sheet for investment securities approximate those assets' fair values as all investment securities are being classified in the available-for-sale category. SFAS 115 requires securities carried in the available-for-sale category to be carried at fair value. See Note 3. 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. 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 six 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 the Corporation 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. Page 35 38 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 the Corporation's variable-rate long-term debt approximates its fair value. The fair value of its fixed-rate long-term debt (other than deposits) is estimated using discounted cash flow analyses, based on the Corporation's current incremental borrowing rates for similar types of borrowings 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. NOTE 16. REGULATORY MATTERS The Federal Reserve Bank requires the Corporation's banking subsidiaries to maintain certain noninterest-bearing deposits. These reserve balances vary depending upon the level of client deposits in the subsidiary banks. During 1996 and 1995, the average reserve balances were $34.7 million and $41.2 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 the Corporation. 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, 1997, the bank subsidiaries could distribute to the Corporation approximately $2.8 million in dividends without regulatory approval. Their 1997 net income will also become available for such dividends. The Corporation and it's 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 the Corporation and it's banking subsidiaries to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the Corporation and it's banking subsidiaries meet all capital adequacy requirements to which it is subject. As of December 31, 1996, the most recent notification from the Federal Reserve Board categorized the Corporation and it's banking subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Corporation and it's 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. Page 36 39 The Corporation and it's significant subsidiary, Citizens Bank, actual capital amounts and ratios are also presented in the table.
- --------------------------------------------------------------------------------------------------------------- RISK BASED CAPITAL To Be Well Capitalized REQUIREMENTS Under Prompt For Capital Adequacy Corrective Action Actual Purposes Provisions ----------------- ---------------------- ------------------------ (IN THOUSANDS) Amount Ratio Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------------------- CITIZENS BANKING CORPORATION AS OF DECEMBER 31, 1996: Total Capital(1) $282,674 10.6% $212,559 > 8.0% $265,699 > 10.0% - - Tier I Capital(1) 249,427 9.4 106,280 > 4.0 159,419 > 6.0 - - Tier I Leverage(2) 249,427 7.3 136,149 > 4.0 170,186 > 5.0 - - As of December 31, 1995: Total Capital(1) 255,119 10.0 203,319 > 8.0 254,148 > 10.0 - - Tier I Capital(1) 223,313 8.8 101,659 > 4.0 152,489 > 6.0 - - Tier I Leverage(2) 223,313 6.7 134,359 > 4.0 167,949 > 5.0 - - CITIZENS BANK(3) AS OF DECEMBER 31, 1996: Total Capital(1) $281,891 11.6% $194,325 > 8.0% $242,906 > 10.0% - - Tier I Capital(1) 251,488 10.4 97,163 > 4.0 145,744 > 6.0 - - Tier I Leverage(2) 251,488 8.0 125,852 > 4.0 157,315 > 5.0 As of December 31, 1995: Total Capital(1) 170,822 12.2 111,451 > 8.0 139,313 > 10.0 - - Tier I Capital(1) 153,386 11.0 55,725 > 4.0 83,588 > 6.0 - - Tier I Leverage(2) 153,386 7.8 78,965 > 4.0 98,706 > 5.0 - -
(1) To risk weighted assets. (2) To quarterly average assets. (3) During 1996 the Corporation's six Michigan banking subsidiaries were merged into the lead bank and it's name was subsequently changed to Citizens Bank. 1995 information reflects the information for the lead bank. NOTE 17. CITIZENS BANKING CORPORATION (PARENT ONLY) STATEMENTS
- ---------------------------------------------------------------------------------------- BALANCE SHEETS CITIZENS BANKING CORPORATION (PARENT ONLY) December 31, (IN THOUSANDS) 1996 1995 - ---------------------------------------------------------------------------------------- ASSETS: Cash $ 5 $ 5 Interest-bearing deposit with subsidiary bank 25,134 30,000 Money market investments 2,043 14,544 Loans - commercial paper 10,000 -- Investment securities 98 218 Investment in bank subsidiaries 335,075 348,676 Goodwill - net 4,245 5,041 Other assets 3,515 4,890 -------- -------- TOTAL ASSETS $380,115 $403,374 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Long-term debt $ 59,684 $100,878 Other liabilities 5,189 5,310 Total liabilities 64,873 106,188 Shareholders' equity 315,242 297,186 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $380,115 $403,374 ======== ========
Page 37 40
- ------------------------------------------------------------------------------------------------------------------------------------ STATEMENTS OF INCOME CITIZENS BANKING CORPORATION (PARENT ONLY) Year Ended December 31, (IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME Dividends from bank subsidiaries $53,125 $24,388 $24,211 Interest from bank subsidiary 794 1,413 150 Other 860 1,605 646 ------- ------- ------- Total 54,779 27,406 25,007 ------- ------- ------- EXPENSES Interest 5,594 7,374 371 Amortization of goodwill 796 796 856 Salaries and employee benefits 867 764 780 Service fees paid to subsidiaries 1,265 1,054 879 Other noninterest expense 1,078 949 1,564 ------- ------- ------- Total 9,600 10,937 4,450 ------- ------- ------- Income before income taxes and equity in undistributed earnings of subsidiaries 45,179 16,469 20,557 Income tax benefit 3,257 3,195 809 Equity in undistributed (dividends in excess of) earnings of bank subsidiaries (11,015) 13,932 8,048 ------- ------- ------- NET INCOME $37,421 $33,596 $29,414 ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------------------ STATEMENTS OF CASH FLOWS CITIZENS BANKING CORPORATION (PARENT ONLY) Year Ended December 31, (IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 37,421 $ 33,596 $ 29,414 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of goodwill 796 796 856 Dividends in excess of (equity in undistributed) earnings of subsidiaries 11,015 (13,932) (8,048) Other 1,244 (967) 1,658 -------- -------- -------- Net cash provided by operating activities 50,476 19,493 23,880 -------- -------- -------- INVESTING ACTIVITIES Net (increase) decrease in interest-bearing deposit at subsidiary bank 4,866 (30,000) -- Net (increase) decrease in money market investments 12,501 (33) 1,410 Purchases of investment securities (8) -- (18,646) Proceeds from maturities of investment securities 136 5,146 16,748 Net (increase) decrease in loans (10,000) 5,000 (5,000) Capital contribution to subsidiary -- (85,000) -- -------- -------- -------- Net cash provided (used) by investing activities 7,495 (104,887) (5,488) -------- -------- -------- FINANCING ACTIVITIES Proceeds from issuance of long-term debt -- 115,000 -- Principal reductions in long-term debt (41,194) (19,072) (4,450) Cash dividends paid (14,528) (12,770) (11,557) Proceeds from stock options exercised 1,523 2,237 1,602 Shares acquired for retirement (3,772) -- (3,986) -------- -------- -------- Net cash provided (used) by financing activities (57,971) 85,395 (18,391) -------- -------- -------- Net increase in cash 0 1 1 Cash at beginning of year 5 4 3 -------- -------- -------- Cash at end of year $ 5 $ 5 $ 4 ======== ======== ========
Page 38 41 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS BOARD OF DIRECTORS CITIZENS BANKING CORPORATION We have audited the accompanying consolidated balance sheets of Citizens Banking Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Citizens Banking Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/Ernst & Young, LLP Detroit, Michigan January 15, 1997 Page 39 42 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. /s/ John W. Ennest /s/ Robert J. Vitito --------------------- ----------------------- John W. Ennest Robert J. Vitito Vice Chairman, President and Chief Executive Officer Chief Financial Officer and Treasurer Page 40 EX-21 8 EXHIBIT-21 1 FORM 10-K EXHIBIT 21 SUBSIDIARIES OF CITIZENS BANKING CORPORATION
Jurisdiction or Incorporation of Organization ---------------- Direct Bank Subsidiaries (all wholly owned) Citizens Bank Michigan Citizens Bank - Illinois, N.A. National Association Indirect Nonbank Subsidiary (all wholly owned) Citizens Commercial Leasing Corporation Michigan Lakeshore Insurance Agency, Inc. Michigan
1 EX-23 9 EXHIBIT-23 1 FORM 10-K EXHIBIT 23 CONSENTS OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in (1) the Registration Statement (Form S-8 No. 33-28354 dated April 26, 1989), pertaining to the Citizens Banking Corporation Amended and Restated Section 401(k) Plan; (2) the Registration Statement (Form S-8 No. 33-10007 dated November 26, 1986) pertaining to the Citizens Banking Corporation Stock Option Plan and the Citizens Banking Corporation First Amended Stock Option Plan; (3) the Registration Statement (Form S-8 No. 33-47686 dated May 5, 1992) pertaining to the Citizens Banking Corporation Second Amended Stock Option Plan; (4) the Registration Statement (Form S-8 No. 33-61197 dated July 21, 1995) pertaining to the Citizens Banking Corporation Stock Option Plan for Directors; and (5) 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 in the related Prospectus of our report dated January 15, 1997, 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, 1996. /s/ Ernst & Young Detroit, Michigan March 11, 1997 1 EX-27 10 EXHIBIT-27
9 1,000 YEAR 3-MOS DEC-31-1996 DEC-31-1996 JAN-01-1996 OCT-01-1996 DEC-31-1996 DEC-31-1996 137,867 137,867 84 84 0 0 0 0 580,171 580,171 0 0 0 0 2,620,731 2,620,731 35,997 35,997 3,483,850 3,483,850 2,864,807 2,864,807 176,418 176,418 43,250 43,250 84,133 84,133 0 0 0 0 89,231 89,231 226,011 226,011 3,483,850 3,483,850 219,266 55,676 36,648 8,956 0 0 255,914 64,632 96,035 24,280 109,798 27,827 146,116 36,805 8,334 1,771 101 21 125,986 31,119 52,326 13,712 37,421 9,817 0 0 0 0 37,421 9,817 2.55 .67 2.55 .67 8.22 8.22 17,788 17,788 1,362 1,362 502 502 12,300 12,300 34,711 35,337 10,695 2,073 3,587 962 35,997 35,997 24,298 24,298 0 0 11,699 11,699
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