-----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, PnsfFiKxzCRrXSMs9AF7af5iurmxl5/2sp5pWud+5+g04eqJWj60RKIVo+nnoaGT JfQZFAd+mzQCLTenpEt1wg== 0000950124-97-001434.txt : 19970312 0000950124-97-001434.hdr.sgml : 19970312 ACCESSION NUMBER: 0000950124-97-001434 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970415 FILED AS OF DATE: 19970311 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: DEF 14A SEC ACT: 1934 Act SEC FILE NUMBER: 000-10535 FILM NUMBER: 97554618 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 DEF 14A 1 DEF 14A 1 SCHEDULE 14A (Rule 14a-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ) Filed by the registrant [X] Filed by a party other than the registrant [ ] Check the appropriate box: [ ] Preliminary proxy statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [X] Definitive proxy statement [ ] Definitive additional materials [ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12 CITIZENS BANKING CORPORATION - ------------------------------------------------------------------------------- (Name of Registrant as Specified in Its Charter) CITIZENS BANKING CORPORATION - ------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of filing fee (Check the appropriate box): [X] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: - -------------------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: - -------------------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): - -------------------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: - -------------------------------------------------------------------------------- (5) Total fee paid: - -------------------------------------------------------------------------------- [ ] Fee paid previously with preliminary materials. - -------------------------------------------------------------------------------- [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. (1) Amount previously paid: - -------------------------------------------------------------------------------- (2) Form, schedule or registration statement no.: - -------------------------------------------------------------------------------- (3) Filing party: - -------------------------------------------------------------------------------- (4) Date filed: - -------------------------------------------------------------------------------- 2 [CITIZENS BANKING CORPORATION LETTERHEAD] March 14, 1997 To The Shareholders: The annual meeting of shareholders of Citizens Banking Corporation will be held in the Carriage Hall Room of the Radisson Riverfront Hotel Flint, One Riverfront Center West, Flint, Michigan 48502, on Tuesday, April 15, 1997, at 10:00 a.m., local time, in accordance with the provisions of our bylaws. You are cordially invited to attend this meeting. It is important that your shares be represented, regardless of the number you own. Therefore, we request that you please date, sign and return your proxy promptly in the enclosed envelope whether or not you plan to attend the meeting. Voting by proxy will not affect your ability to attend the meeting or to change your vote. Sincerely yours, /s/ Charles R. Weeks Charles R. Weeks Chairman of the Board 3 [CITIZENS BANKING CORPORATION LETTERHEAD] THOMAS W. GALLAGHER Senior Vice President, General Counsel and Secretary NOTICE OF ANNUAL MEETING OF SHAREHOLDERS, APRIL 15, 1997 To the Shareholders of Citizens Banking Corporation: Notice is hereby given that the annual meeting of shareholders of Citizens Banking Corporation (the "Corporation") will be held in the Carriage Hall Room of the Radisson Riverfront Hotel Flint, One Riverfront Center West, Flint, Michigan 48502, on Tuesday, April 15, 1997, at 10:00 a.m., local time, for the following purposes: (1) To elect six (6) Class II directors to serve a three (3) year term and until their successors are duly elected and qualify. (2) To amend the Corporation's Third Amended Stock Option Plan to limit the number of options that may be granted to participants during any two (2) year period. (3) To transact such other business as may properly come before the meeting or any adjournment or adjournments thereof. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE DIRECTORS NOMINATED AND FOR THE PROPOSAL SET FORTH. Shareholders of record of the Corporation's common stock outstanding at the close of business on February 28, 1997 are entitled to notice of and to vote at the meeting. You are invited to attend this meeting. Please date, sign and return your proxy promptly in the enclosed, stamped envelope whether or not you plan to be present at the meeting. You may still vote in person if you attend the meeting. By Order of the Board of Directors /s/ Thomas W. Gallagher Thomas W. Gallagher Secretary Flint, Michigan March 14, 1997 4 [CITIZENS BANKING CORPORATION LETTERHEAD] PROXY STATEMENT This proxy statement is furnished in connection with the solicitation of proxies by the board of directors of Citizens Banking Corporation (the "Corporation") to be used at the annual meeting of shareholders of the Corporation and any adjournments thereof. The annual meeting will be held on April 15, 1997 at the time and place and for the purposes set forth in the accompanying notice of annual meeting of shareholders. This proxy statement, the proxy, and notice of annual meeting of shareholders are first being provided to shareholders on or about March 14, 1997. The shareholders of the common stock of the Corporation ("Common Stock") as of the close of business on February 28, 1997 will be entitled to be present and to vote at the meeting. Each share is entitled to one (1) vote on each matter to be voted upon at the meeting. On February 28, 1997, there were 14,352,107 shares of Common Stock outstanding and entitled to vote. The Corporation has no other class of stock issued and outstanding at this time that is entitled to vote at the meeting. The board of directors requests that you execute and return the proxy promptly, whether or not you plan to attend the meeting. Any proxy may be revoked by the person giving it at any time prior to its being exercised by giving written notice of such revocation to the secretary of the Corporation, by executing a later dated proxy or by voting in person at the annual meeting. The shares represented by properly executed proxies will be voted in accordance with the instructions provided therein and where no instructions are given, will be voted in favor of the proposal and the election of the Class II nominees identified herein. For purposes of determining the number of votes cast with respect to the election of directors, only those cast "for" are included. Abstentions and withheld votes are counted only for purposes of determining whether a quorum is present at the annual meeting and determining whether the requisite vote is received on the proposal. Abstentions will have no effect on the vote on the proposal. Broker non-votes are not counted for any purposes and have no effect. The costs of soliciting proxies will be borne by the Corporation. The solicitation of proxies will be made primarily by mail. The Corporation has, however, retained the firm of Kissel-Blake Inc., specialists in proxy solicitation, to solicit proxies on its behalf from brokers, bank nominees, and other institutional holders of its stock at an anticipated cost of $6,500 plus certain out-of-pocket expenses. Proxies may also be solicited by directors, officers, and other employees of the Corporation and its subsidiaries personally, and by telephone, facsimile, or other means. No additional compensation will be paid to directors, officers, or employees for any such solicitation nor will any such solicitation result in more than a minimal cost to the Corporation. Arrangements may also be made directly by the Corporation with banks, brokerage houses, custodians, nominees, and fiduciaries to forward solicitation material to the beneficial owners of stock held of record by them and to obtain authorization for the execution of proxies. The Corporation may reimburse such institutional holders for reasonable expenses incurred by them in connection therewith. The persons named in the proxy to represent shareholders who are present by proxy at the meeting are William F. Nelson Jr. and James E. Truesdell Jr. 1 5 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The table below includes all of the shareholders of the Corporation known by the Corporation to beneficially own more than five percent of its Common Stock as of December 31, 1996.
COMMON STOCK BENEFICIALLY OWNED AS A PERCENTAGE OF COMMON INVESTMENT POWER VOTING POWER OUTSTANDING NAME AND ADDRESS STOCK ------------------------------ ----------------------------- COMMON OF BENEFICIAL OWNER BENEFICIALLY SOLE SHARED NONE SOLE SHARED NONE STOCK OWNED Citizens Bank 328 S. Saginaw St. Flint, Michigan 48502(1) 2,355,508 674,071 1,539,429 142,008 1,190,454 1,126,503 38,551 16.4% CenTra, Inc. 12225 Stephens Warren, Michigan 48089(2) 1,839,203 1,800,091 39,112 -0- 1,800,091 39,112 -0- 12.8%
- ------------------- (1) As sole or co-fiduciary, Citizens Bank will generally vote the shares held by it in trusts or estates in which the indenture creating the same grants such power. Shares held in all other trusts or estates in which the bank acts as co-fiduciary will generally be voted by the other co-fiduciary or by the bank at the direction of such co-fiduciary. (2) The information furnished for CenTra, Inc. is based upon data which have been supplied to the Corporation by CenTra, Inc. As set forth in the table, CenTra, Inc. shares investment and voting power with respect to 39,112 shares. The persons with whom such powers are shared and the amounts attributable to each such person are as follows: Matthew T. Moroun, 408; Nora M. Moroun, 100 and the Manuel J. Moroun Trust under agreement dated March 4, 1977, for the benefit of Manuel J. Moroun, 38,604. 2 6 SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth the number of shares of the Corporation's Common Stock beneficially owned as of December 31, 1996, together with the percentage of the outstanding shares which such ownership represents, by (i) each director and nominee for election to the board of directors, (ii) each executive officer named in the Summary Compensation Table under "Executive Compensation" and (iii) all directors and executive officers of the Corporation as a group. The information with respect to directors and executive officers has been obtained from the respective individuals and is reported in accordance with the beneficial ownership rules of the Securities and Exchange Commission (the "Commission") under which a person may be deemed to be the beneficial owner of a security if such person has or shares voting power or investment power with respect to such security or has the right to acquire such ownership within the next 60 days. Accordingly, the amounts shown in the following table do not purport to represent beneficial ownership for any purpose other than compliance with the Commission's reporting requirements.
COMMON STOCK BENEFICIALLY OWNED COMMON STOCK AS A PERCENTAGE OF BENEFICIALLY OWNED OUTSTANDING COMMON AS OF DECEMBER 31, SOLE VOTING AND SHARED VOTING AND STOCK AS OF NAME 1996 DISPOSITIVE POWER DISPOSITIVE POWER DECEMBER 31, 1996 Edward P. Abbott(1) 13,764 13,674 90 * Hugo E. Braun Jr.(1) 15,136 15,136 - - * Jonathan E. Burroughs II(1)(2) 195,321 151,664 43,657 1.4% Gary O. Clark(3) 115,001 109,087 5,914 * Joseph P. Day(1) 2,510 2,510 - - * John W. Ennest(4) 177,495 177,495 - - 1.2% Lawrence O. Erickson(1) 289,240 2,000 287,240 2.0% Victor E. George(1) 5,118 5,118 - - * William J. Hank(5) 267,029 106,011 161,018 1.9% George H. Kossaras(1) 50,864 16,142 34,722 * Patricia L. Learman(1) 5,213 2,300 2,913 * William F. Nelson Jr.(1) 6,652 4,844 1,808 * Paul A. Rowley(1) 4,294 3,112 1,182 * Wayne G. Schaeffer(6) 67,978 58,098 9,880 * Gerald Schrieber 7,535 7,535 - - * William C. Shedd(1) 6,830 2,808 4,022 * David A. Thomas Jr.(7) 94,643 94,643 - - * James E. Truesdell Jr.(1) 27,842 27,842 - - * Robert J. Vitito(8) 183,719 138,881 44,838 1.3% Ada C. Washington 102 102 - - * Charles R. Weeks(9) 199,028 194,693 4,335 1.4% Kendall B. Williams(1) 2,825 2,220 605 * James L. Wolohan 6,000 6,000 - - * All Directors, Director Nominees and Executive Officers as a Group (31)(10) 2,012,891 1,386,996 625,895 14.0%
- --------------- * Represents holdings of less than one percent. (1) Includes 2000 exercisable options to purchase Common Stock which were granted pursuant to the provisions of the Stock Option Plan for Directors. 3 7 (2) The shares shown for Mr. Burroughs II, include: 28,794 shares held in the Burroughs' Memorial Trust, to which Mr. Burroughs II serves as one of 5 trustees. Mr. Burroughs II disclaims beneficial ownership of such shares. (3) Includes 44,520 exercisable options to purchase Common Stock. (4) Includes 137,139 exercisable options to purchase Common Stock. (5) Includes 1,000 exercisable options to purchase Common Stock which were granted pursuant to the provisions of the Stock Option Plan for Directors. (6) Includes 47,886 exercisable options. (7) Includes 70,156 exercisable options to purchase Common Stock. (8) Includes 109,741 exercisable options to purchase Common Stock. (9) Includes 111,000 exercisable options to purchase Common Stock. (10) The directors, director nominees and executive officers disclaim beneficial ownership of 187,463 of these shares. Also, of the 2,012,891 shares shown as being beneficially owned by such group,746,050 represent exercisable options to purchase Common Stock. ELECTION OF DIRECTORS In accordance with the Corporation's restated articles of incorporation, the board of directors is divided into three classes. Each year, on a rotating basis, the terms of office of the directors in one of the three classes will expire. Successors to the class of directors whose terms have expired will be elected for a three-year term. The directors whose terms expire at the 1997 annual meeting of shareholders ("Class II directors") are Joseph P. Day, John W. Ennest, Victor E. George, George H. Kossaras, Patricia L. Learman, and Paul A. Rowley. Mrs. Learman and Messrs. Kossaras and Rowley are not eligible to continue to serve as members of the Corporation's board of directors under the provisions of the Corporation's retirement policy for directors. Upon the recommendation of the directors nominating committee, the board of directors has nominated Messrs. Day, Ennest and George for re-election as Class II Directors along with Gerald Schrieber, Ada C. Washington, and James L. Wolohan as newly proposed nominees (to replace retiring directors Kossaras, Learman, and Rowley) for election as Class II Directors at the 1997 annual meeting of shareholders. The term for the Class II directors will expire at the 2000 annual meeting of shareholders or upon the election and qualification of their successors. If any of the nominees should be unable to serve, the proxies may be voted for the election of such other person or persons as the board of directors may recommend or the number of directors will be automatically reduced by the number of nominees unable to serve if no substitute is recommended by the board of directors. Six nominees will be elected as Class II directors at the 1997 annual meeting of shareholders. On the basis of information presently available to the board of directors, only the six persons named above as nominees will be nominated for election as directors. Shares represented by proxies in the accompanying form will be voted for the election of such nominees unless a contrary direction is indicated. The affirmative vote of a plurality of the votes cast at the meeting is required for election. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR EACH OF THE NOMINEES. 4 8 The name and age of each nominee and incumbent director, positions and offices currently held with the Corporation and its subsidiaries, his or her five-year business experience, and the year each became a director of the Corporation, according to information furnished by such nominees and incumbent directors, are set forth below. CLASS II NOMINEES TO SERVE THREE (3) YEARS
BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS, DIRECTORSHIPS IN CERTAIN CORPORATIONS, AND PRINCIPAL OCCUPATION IF OTHER POSITIONS AND OFFICES SERVED CONTINUOUSLY THAN CURRENT POSITION WITH WITH CORPORATION AND ITS AS A DIRECTOR OF CORPORATION AND ITS NAME AGE SUBSIDIARIES CORPORATION SUBSIDIARIES Joseph P. Day 57 Director of Corporation 1992 President, Banner Engineering and Director of Citizens & Sales, Inc., a combustion Bank. engineering and manufacturing firm. John W. Ennest 54 Vice Chairman of the 1991 Board, Chief Financial Officer, and Treasurer of Corporation; Vice Chairman of the Board and Chief Financial Officer, Citizens Bank; Chairman of the Board, Citizens Bank - Illinois, N.A. Victor E. George 65 Director of Corporation 1982 Chairman of the Board, Victor and Director of Citizens George Oldsmobile, Inc., an Bank. automobile dealership. Gerald Schrieber 62 Director of Citizens Bank. Vice President - Sales, Royalite Co., an electrical wholesale distributor. Ada C. Washington 46 Director of Citizens Bank. Community Volunteer. James L. Wolohan 45 Director of Citizens Bank. Chairman, President and Chief Executive Officer of Wolohan Lumber Co., a retailer of lumber, building materials and home improvement products; Director, Jacobson Stores, Inc.
5 9 CLASS III CONTINUING DIRECTORS - TERM EXPIRING IN 1998(1)
BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS, DIRECTORSHIPS IN CERTAIN CORPORATIONS, AND PRINCIPAL OCCUPATION IF OTHER POSITIONS AND OFFICES SERVED CONTINUOUSLY THAN CURRENT POSITION WITH WITH CORPORATION AND AS A DIRECTOR OF CORPORATION AND ITS NAME AGE ITS SUBSIDIARIES CORPORATION SUBSIDIARIES William F. Nelson Jr. 63 Director of Corporation. 1986 President, Director, and Owner, William F. Nelson Electric, Inc., an electrical contractor for commercial and industrial businesses. William C. Shedd 57 Director of Corporation 1982 Attorney and Partner, and Director of Winegarden, Shedd, Haley, Citizens Bank. Lindholm & Robertson. James E. Truesdell Jr. 66 Director of Corporation 1982 President-Secretary, J. and Director of Austin Oil Company of Flint, Citizens Bank. Inc., an investment and real estate development firm. Charles R. Weeks 62 Chairman of the Board 1982 Retired President and Chief of Corporation and Executive Officer of the Director of Citizens Corporation; Director, Bank. Wolohan Lumber Co. Kendall B. Williams 44 Director of Corporation 1992 Attorney and Vice President, and Director of Gault Davison, P.C. Citizens Bank.
- -------------- (1) David A. Thomas Jr., a former Class III Director of the Corporation, retired from the employment of the Corporation and its subsidiary, Citizens Bank effective December 31, 1996. At such time, Mr. Thomas also retired as a Director of the Corporation and of Citizens Bank. The number of positions comprising Class III of the Corporation's Board of Directors was reduced by the Board of Directors from 6 to 5 positions following Mr. Thomas' retirement. 6 10 CLASS I CONTINUING DIRECTORS - TERM EXPIRING IN 1999
BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS, DIRECTORSHIPS IN CERTAIN CORPORATIONS, AND POSITIONS AND OFFICES SERVED CONTINUOUSLY PRINCIPAL OCCUPATION IF OTHER WITH CORPORATION AND AS A DIRECTOR OF THAN CURRENT POSITION WITH NAME AGE ITS SUBSIDIARIES CORPORATION CORPORATION AND ITS SUBSIDIARIES Edward P. Abbott 57 Director of Corporation 1982 President and Chief Executive and Director of Officer, Abbott's Meat, Inc., a Citizens Bank. wholesale and retail meat distributor. Hugo E. Braun Jr. 64 Director of Corporation 1986 Attorney & Partner, Braun and Director of Kendrick Finkbeiner; Director, Citizens Bank. Wolohan Lumber Co. Jonathan E. Burroughs II 54 Director of Corporation. 1986 President, JEB Enterprises, an investment consulting firm. Lawrence O. Erickson 61 Director of Corporation 1993 Chief Executive Officer, and Director of Four-Way Tool & Die, Inc., an Citizens Bank. engineering consulting firm for metal stamping fabrication and tool manufacturing. William J. Hank 64 Director of Corporation 1987 Chairman and Chief Executive and Director of Officer, Farnham Investments Citizens Bank - Group; Retired Executive Vice Illinois, N.A. President, Citizens Banking Corporation; Retired Chairman of the Board, Citizens Bank - Illinois, N.A. Robert J. Vitito 54 President, Chief 1991 Executive Officer and Director of Corporation; Chairman of the Board and Chief Executive Officer of Citizens Bank.
7 11 MEETINGS OF DIRECTORS During calendar year 1996, four (4) regular meetings and two (2) special meetings of the board of directors of the Corporation were held. During such period, all incumbent directors attended at least 75% of the aggregate of the number of meetings of the board of directors and the number of meetings held by the committees on which they serve. COMMITTEES OF THE BOARD OF DIRECTORS The Corporation has several committees on which members of the board of directors serve, including an audit committee, a compensation and benefits committee, and a directors nominating committee. The audit committee meets quarterly and on call when needed, and the compensation and benefits committee and directors nominating committee meet on call. The AUDIT COMMITTEE met 4 times during 1996 and is currently comprised of the following outside directors: James E. Truesdell Jr., chairman; Edward P. Abbott; Joseph P. Day; and William F. Nelson Jr.(1) The responsibilities of the committee are: to oversee the internal accounting controls for the Corporation and its subsidiaries; to oversee the internal audit function of the Corporation and its subsidiaries; to recommend to the board of directors the independent auditors to be retained to conduct the annual audit of the Corporation; to review the annual audit plan with the independent auditors and the internal auditors; to review the results of internal audit examinations and management's responses thereto; to review the financial results and the results of the independent audit, including "Management Letter" comments; to prepare summary reports to the board of directors together with any recommendations for action; to review the non-audit services performed by the independent auditors to ensure that performance of such services does not impair the independence of the auditors; to oversee special investigations; to review with management the programs and procedures to avoid conflicts of interest, as well as those covering other aspects of business ethics; to review annually the performance of the general auditor; and to handle such other matters as may be properly delegated to the committee by the board of directors. The COMPENSATION AND BENEFITS COMMITTEE met 5 times during 1996 and is currently comprised of the following directors: Hugo E. Braun Jr., chairman; Lawrence O. Erickson; Victor E. George; James E. Truesdell Jr.; and Kendall B. Williams. The responsibilities of the committee are: to approve all of corporate executive compensation such as merit increases, salary ranges, and special employment or post employment arrangements; to determine and grant awards under the Corporation's Third Amended Stock Option Plan (provided that Messrs. Braun and George do not participate and are required to recuse themselves or abstain from voting with respect to such matters) and to amend or change the Plan within the parameters of the Plan and as permitted by law; to review and approve adjustments to the Corporation's annual Management Incentive Plan target as well as awards under such Plan; to approve amendments or changes to the pension plan and to review the actions of the pension plan administrative committee; to approve amendments or changes to the Corporation's Directors Deferred Compensation Plan; to approve amendments and changes to other employee benefit plans of the Corporation including welfare, defined benefit, defined contribution and deferred income plans; to review other corporate-wide benefit plans and to determine their - ------------------- (1) George H. Kossaras and Patricia L. Learman, former members of the audit committee, retired from the committee and from the board of directors of the Corporation in March of this year pursuant to the provisions of the Corporation's retirement policy for directors. 8 12 appropriateness and dimensions; to approve any salary reduction plan or any other employee stock purchase, savings, pension, profit sharing, or similar benefit plan or amendments to such plans which authority and powers shall extend to the issuance of stock in connection with such plans; and to handle such other matters as may be properly delegated to the committee by the board of directors. The DIRECTORS NOMINATING COMMITTEE met 1 time during 1996 and is currently comprised of the following directors: Charles R. Weeks, chairman; Hugo E. Braun Jr.; Jonathan E. Burroughs II; and Victor E. George.(2) The responsibilities of the committee are: to determine a desirable balance of expertise among board members; to identify qualified candidates to fill board positions; to provide aid in attracting qualified candidates to the board of directors; to recommend the slate of director nominees to the board of directors for inclusion in the Corporation's proxy statement for election by the shareholders at the annual meetings; to consider director nominees proposed by shareholders; and to handle such other matters as may be properly delegated to the committee by the board of directors. Shareholders proposing director nominees shall provide written notice of such intention to the president or secretary of the Corporation at least thirty days prior to the shareholders meeting for which such nominations are proposed and shall, in accordance with the bylaws of the Corporation, provide for each such nominee all of the information that would be required under the rules of the Commission in a proxy statement soliciting proxies for the election of such nominees as directors of the Corporation. COMPENSATION OF DIRECTORS During 1996, directors of the Corporation (with the exception of Mr. Weeks who has a separate arrangement as described below) were paid an annual retainer of $6,000 plus the sum of $900 for attendance at each meeting of the board of directors. Non-officer directors were paid $600 for each committee meeting attended with the exception of the committee chairpersons who were paid $900. Committee member directors who are also employees of the Corporation do not receive fees for committee meeting attendance. The Corporation also maintains the Stock Option Plan for Directors. Annually during the ten year term of the Plan, each nonemployee director serving on the board of directors immediately following the meeting of shareholders will receive an automatic grant of a non-qualified stock option to purchase 1,000 shares of Common Stock at an exercise price equal to the fair market value per share of Common Stock on the date of the annual meeting of shareholders. Each such option will become exercisable in full, six months following the grant date and expire five years after grant. On April 16, 1996, pursuant to the Plan, nonemployee directors received a stock option grant to purchase 1,000 shares of Common Stock of the Corporation at an exercise price of $29.50 per share. In April of 1996, the Corporation entered into a contractual arrangement with Mr. Weeks, pursuant to which he agreed to serve as chairman of the board of the Corporation and as chairman of the executive and nominating committees of the Corporation's board of directors. Pursuant to such arrangement, Mr. Weeks is paid an annual fee of $200,000.00 which is inclusive of any other annual retainer or meeting fees otherwise normally paid to directors of the Corporation. Such fee is paid on a quarterly basis commencing May 1, 1996 until the end of the term of the appointment on April 30, 1999. The fee is increased annually by 3% beginning - --------------------- (2) Paul A. Rowley, a former member of the directors nominating committee, retired from the committee and from the board of directors of the Corporation in March of this year pursuant to the provisions of the Corporation's retirement policy for directors. 9 13 May 1, 1997. In addition to such fee, Mr. Weeks is entitled to be reimbursed by the Corporation for reasonable out-of-pocket expenses incurred in his capacity as chairman upon presentation of an appropriate accounting to the Corporation. In the event Mr. Weeks should fail to be re-elected as a director of the Corporation or be removed as chairman of the board (for reasons other than willful misconduct or neglect) prior to the expiration of the term of the appointment, Mr. Weeks would be entitled to one half of the annual fees prorated for the remainder of the term. If Mr. Weeks should voluntarily resign as chairman of the board prior to the expiration of the term, he will forfeit all right to future payment under the agreement. In the event of the death or permanent and total disability of Mr. Weeks, any unpaid fees will be prorated to the date of death or permanent and total disability. PROPOSAL TO APPROVE AN AMENDMENT TO THE THIRD AMENDED STOCK OPTION PLAN PROPOSED AMENDMENT. The board of directors is seeking approval of an amendment to the Third Amended Stock Option Plan (the "Option Plan") which will limit the number of shares of Common Stock that may be subject to options granted to any salaried employee in any two-year period. The amendment has been approved by the board of directors, subject to shareholder approval. Approval of the Option Plan amendment requires the affirmative vote of the holders of a majority of the shares of Common Stock voted at the Annual Meeting on this proposal. The board of directors recommends a vote FOR the approval of the proposal. REASONS FOR PROPOSED AMENDMENT. The Option Plan is a key element of the Corporation's executive compensation program. The purpose of this program is to attract and retain executive officers and key employees to lead the Corporation toward its goals while aligning the financial interests of the Corporation's executive officers and key employees with the long-term interests of the Corporation and its shareholders. 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 became available for grant in the prior year. As of January 31, 1997, options for 1,194,576 shares were outstanding, options for 1,336,052 shares have been exercised, and 386,272 shares are available for future grants to key employees of the Corporation and its subsidiaries. There are currently 63 persons eligible to receive options under the Option Plan. Options may be granted under the Option Plan until January 16, 2002. The proposed amendment will limit the number of shares that may be subject to options granted to any salaried employee in any two-year period in accordance with certain provisions of Section 162(m) of Internal Revenue Code of 1986, as amended (the "Code"). Section 162(m) and certain regulations and transitional rules promulgated thereunder by the Internal Revenue Service contain new rules regarding the federal income tax deductibility of compensation paid to a publicly traded corporation's chief executive officer and to each of its four most highly paid executive officers. Under Section 162(m), the Corporation may deduct compensation paid to such an executive only to the extent that it does not exceed $1,000,000 during any fiscal year, unless the compensation constitutes "performance-based" compensation. In general, compensation attributable to a stock option is deemed to be based on performance if: (i) the grant is made by the corporation's compensation committee; (ii) the plan under which the grant is made includes a per-employee limit on the number of shares with respect to which options may be granted during a specific period; and (iii) the amount of compensation the employee could receive under the terms of the option is based solely on the increase in value of the stock after the date of the grant. The board of directors concluded that it would be advisable to establish certain restrictions on the granting of options under the Option Plan to exempt from Section 162(m) compensation realized in connection with future exercises of options. Accordingly, the Option Plan has been amended, subject to shareholder approval, to limit to 250,000 the number of shares of Common Stock that may be included in options granted to any salaried employee in any two-year period. If this amendment is approved by the shareholders, 10 14 compensation deductions available to the Corporation arising from the exercise of options granted under the Option Plan generally should not be limited by Section 162(m). The Board believes it is in the best interests of the shareholders to maximize available tax deductions without unduly burdening the discretion of the compensation and benefits committee (the "Committee") in establishing executive compensation. The permitted size of option awards to a single individual was established based on the Board's determination of the maximum number of option shares which would be required to be granted in any two-year period to retain or attract an executive officer of the Corporation. DESCRIPTION OF OPTION PLAN. The Option Plan which is administered by the Committee, provides for grants of stock options, stock appreciation rights, restricted stock and performance share awards. Options to be granted under the Option Plan may be incentive stock options ("ISOs") meeting the requirements of Section 422 of the Code or may be options other than ISOs (non-qualified options or "NQSOs"). The exercise price of an ISO will generally be equal to the fair market value (as defined in the Option Plan) per share of the Common Stock on the date of the grant, but will be higher if the grantee is a substantial shareholder of the Corporation. The aggregate fair market value of the Common Stock on the date of grant for which any participant may be granted ISOs first exercisable in any year may not exceed $100,000. The exercise price of NQSOs will be determined by the Committee and may be less than 100% of the fair market value per share of the Common Stock on the date of grant. The closing price per share of the Common Stock on January 31, 1997 was $30.00. The exercise price is required to be paid in full at the time of exercise in cash or its equivalent or in shares of Common Stock. ISOs and NQSOs granted under the Option Plan will be exercisable for a term of not more than ten years as determined by the Committee and will terminate upon the participant's termination of employment to the extent not then exercisable. ISOs that have become exercisable on or prior to the date of termination of employment terminate at the earlier of the expiration date of the option or three months after termination of employment except: (i) where such termination occurs as a result of disability, such options terminate at the earlier of the expiration date of the option or one year after termination of employment and (ii) where such termination occurs as a result of death such options terminate on the expiration date of the option. NQSO's that have become exercisable on or prior to the date of termination of employment terminate upon the expiration date of the option. Options granted under the Option Plan are not transferable by the grantee other than by will, the laws of descent and distribution and, in the case of NQSOs, pursuant to a qualified domestic order. All other terms, including the time or times at which an option becomes exercisable, are determined by the Committee in its discretion. Options become immediately exercisable upon a change in control of the Corporation (as defined in the Option Plan). The Option Plan may be amended from time to time by the board of directors. No new grants may be authorized under the Option Plan after January 16, 2002. The number of shares of Common Stock authorized for issuance under the Option Plan, the number of shares subject to individual grants under the Option Plan, and the number of shares in the limitation included in the proposed amendment will be adjusted pro rata by the Committee in the event of any increase or decrease in the number of outstanding shares of Common Stock due to a dividend of Common Stock, subdivision or combination of shares or a reclassification of Common Stock. GRANTS UNDER OPTION PLAN. The following table sets forth the number of shares subject to options granted under the Option Plan to the officers named in the Summary Compensation Table under "Executive Compensation," all persons who received 5% or more of the options granted (other than persons whose relationship with the Corporation has terminated), all current executive officers as a group and all current employees as a group. None of the director-nominees and no associate of any of the current directors, current executive officers or director-nominees have received any options under the Option Plan. The exercise prices of all options granted under the Option Plan, ranging from $9.875 to $31.875, were at least equal to the fair market 11 15 value of the Common Stock as of the respective grant dates. Options granted under the Option Plan generally vest in accordance with increases in the Corporation's ROA and terminate ten years after the date of grant or earlier if employment is terminated.
NUMBER OF SHARES OF COMMON STOCK SUBJECT TO OPTIONS NAMES OF PERSON OR GROUP PREVIOUSLY GRANTED --------------------------------------------- ------------------ Charles R. Weeks 168,000(a) Robert J. Vitito 291,105(b) John W. Ennest 319,782(c) David A. Thomas Jr. 265,854(d) Wayne G. Schaeffer 120,683(e) Gary O. Clark 153,031(f) All Current Executive Officers as a Group 1,722,918(g) All Current Non-Employee Directors as a Group 205,000(h) All Other Current Employees as a Group 831,235(i)
- -------------------- (a) Includes 57,000 exercised options. (b) Includes 145,994 exercised options. (c) Includes 166,738 exercised options. (d) Includes 195,698 exercised options. (e) Includes 60,281 exercised options. (f) Includes 101,594 exercised options. (g) Includes 872,354 exercised options. (h) Includes 94,000 exercised options. (i) Includes 463,598 exercised options. FEDERAL INCOME TAX CONSEQUENCES. Under the Code as now in effect, at the time an ISO is granted or exercised, the optionee will not be deemed to receive any income and the Corporation will not be entitled to any deduction. However, the difference between the exercise price and the fair market value of the shares of Common Stock on the date of exercise is a tax preference item, which may subject the optionee to the alternative minimum tax in the year of exercise. The holder of an ISO generally will be accorded capital gain or loss treatment on the disposition of Common Stock acquired by exercise of an ISO, provided the disposition occurs more than two years after the date of grant and more than one year after exercise. An optionee who disposes of shares acquired upon exercise of an ISO prior to the expiration of the foregoing holding periods, recognizes ordinary income upon the disposition equal to the difference between the exercise price and the lesser of the fair market value of the shares on the date of exercise or the disposition price. To the extent ordinary income is recognized by the optionee, the Corporation may deduct a corresponding amount as compensation expense. Payment of the exercise price by surrendering shares of Common Stock generally will not result in the recognition of a capital gain or loss on the shares surrendered. Upon the exercise of an NQSO, an optionee will recognize ordinary income equal to the difference between the exercise price and the fair market value of the Common Stock acquired at the time of exercise and the Corporation will receive a corresponding deduction upon withholding for income and employment taxes. Payment of the exercise price by surrendering shares of Common Stock generally will not result in the recognition of a capital gain or loss on the shares surrendered. When the optionee disposes of the shares acquired by the exercise of the option, any difference from the fair market value of the shares on the date of exercise will be treated as capital gain or loss. 12 16 EXECUTIVE OFFICERS The following information is provided for those officers currently designated as executive officers by the Corporation's Board of Directors and includes the President, Chief Financial Officer, Controller, and Secretary of the Corporation, officers of the Corporation who are in charge of principal business units, divisions or functions, and officers of the Corporation or its subsidiaries who perform significant policy making functions for the Corporation.
YEAR BECAME EXECUTIVE OFFICER NAME AGE FIVE-YEAR BUSINESS EXPERIENCE OF THE CORPORATION Richard T. Albee 53 Senior Vice President of 1996 Citizens Bank (April 1994 to present). Also served as President of former subsidiary bank of the Corporation which was consolidated with Citizens Bank (January 1988 to April 1994). Daniel E. Bekemeier 40 Senior Vice President and 1996 Controller of Citizens Bank (April 1995 to present); Vice President and Controller of Citizens Bank (September 1989 to April 1995). Nicholas J. Cilfone 46 Senior Vice President of 1985 Corporation (August 1988 - present); Executive Vice President of Citizens Bank (June 96 to present). Also served as Executive Vice President of former subsidiary bank of the Corporation which was consolidated with Citizens Bank (October 91 to June 96). Gary O. Clark 55 Executive Vice President of 1986 Corporation (July 1986 - present); President and Chief Executive Officer, Citizens Bank - Illinois, N.A. (February 1994 - present); Senior Executive Vice President, Chief Operating Officer and Senior Credit Officer of Citizens Bank (October 1991 - February 1994). Gary P. Drainville 47 Executive Vice President of 1985 Corporation and of Citizens Bank (December 1993 - present); Director of Human Resources of Corporation and of Citizens Bank (December 1985 - June 1996); Senior Vice President of Corporation and of Citizens Bank (December 1985 - December 1993).
13 17
YEAR BECAME EXECUTIVE OFFICER NAME AGE FIVE-YEAR BUSINESS EXPERIENCE OF THE CORPORATION John W. Ennest 54 Vice Chairman of the Board 1983 of Corporation (October 1991 - present); Chief Financial Officer and Treasurer of Corporation (July 1994 - present); Vice Chairman of the Board and Chief Financial Officer of Citizens Bank (June 1996 to present) Chairman of the Board, Citizens Bank - Illinois, N.A. (August 1992 - present); Chief Executive Officer, Citizens Bank - Illinois, N.A. (August 1992 - February 1994). Thomas W. Gallagher 44 Senior Vice President of 1989 Corporation (July 1993 - present); General Counsel of Corporation (August 1988 - present); Secretary of Corporation (January 1989 - present); Vice President of Corporation (August 1988 - July 1993); Senior Vice President and General Counsel, Citizens Bank (August 1988 - Present). Wayne G. Schaeffer 50 Executive Vice President of 1987 Corporation (December 1993 - Present); Chief Financial Officer and Treasurer of Corporation (August 1988 - July 1994); Senior Vice President of Corporation (August 1988 - December 1993);President - Flint, Citizens Bank (June 1996 to Present); Senior Executive Vice President and Chief Operating Officer, Citizens Bank (July 1994 - June 1996); Chief Financial Officer, Citizens Bank (December 1985 - July 1994); Executive Vice President, Citizens Bank (December 1993 - July 1994). Thomas C. Shafer 38 Executive Vice President of 1996 Citizens Bank (June 1996 to present); Senior Vice President of Citizens Bank (November 1994 to June 1996); City President, Michigan National Bank - Flint (April 1992 to November 1994). James M. VanTiflin 49 President - Saginaw, 1996 Citizens Bank (June 1996 to present); President and Chief Executive Officer of former subsidiary bank of the Corporation which was consolidated with Citizens Bank (February 1995 to June 1996); Executive Vice President of Citizens Bank (August 1992 to February 1995).
14 18
YEAR BECAME EXECUTIVE OFFICER NAME AGE FIVE-YEAR BUSINESS EXPERIENCE OF THE CORPORATION Robert J. Vitito 54 President and Chief 1986 Executive Officer of Corporation (April 1996 to present); President and Chief Administrative Officer of Corporation (July 1994 - April 1996); Executive Vice President of Corporation (July 1986 - July 1994); also served as Chairman of the Board of former subsidiary bank of the Corporation which was consolidated with Citizens Bank (January 1987 to June 1996). Jack S. Werner 49 President - Bay 1996 City/Midland, Citizens Bank (June 1996 to present). Also served as Chairman and Chief Executive Officer of former subsidiary bank of the Corporation which was consolidated with Citizens Bank (May 1991 to June 1996).
Citizens Bank and Citizens Bank - Illinois, N.A. are wholly-owned subsidiaries of the Corporation. 15 19 EXECUTIVE COMPENSATION The following table provides certain summary information concerning compensation paid or accrued by the Corporation and its subsidiaries, to or on behalf of each of the persons who served in the capacity of Chief Executive Officer of the Corporation during 1996 as well as each of the four other most highly compensated executive officers during 1996 (the "Named Officers") of the Corporation (determined as of the end of the last fiscal year) for the fiscal years ended December 31, 1994, 1995, and 1996: SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------- ANNUAL COMPENSATION LONG TERM COMPENSATION NAME AND PRINCIPAL ------------------------------------ ALL OTHER POSITION SALARY ($) BONUS ($) OPTIONS/ COMPENSATION(1) ($) YEAR SARS(#) - ------------------------------------------------------------------------------------------- Charles R. Weeks(2) 1996 141,972 --- --- 161,870 Chairman and former 1995 394,711 209,920 36,000 20,473 Chief Executive Officer 1994 357,278 134,696 --- 19,378 Robert J. Vitito(3) 1996 278,273 143,882 61,622 20,419 President and Chief 1995 241,442 112,864 51,750 19,916 Executive Officer 1994 185,378 86,493 18,679 19,083 John W. Ennest Vice Chairman,Treasurer 1996 243,148 72,754 37,022 20,419 and Chief Financial 1995 234,414 90,442 50,582 19,982 Officer 1994 225,019 86,493 23,256 19,108 David A. Thomas Jr.(4) 1996 249,999 87,044 35,230 23,142 former Vice Chairman 1995 235,662 97,383 49,786 20,955 1994 192,072 86,493 21,702 20,080 Wayne G. Schaeffer 1996 141,476 59,778 20,815 7,653 Executive Vice President 1995 127,229 55,688 23,585 5,994 1994 117,511 37,735 8,775 6,395 Gary O. Clark 1996 164,377 28,216 18,345 10,084 Executive Vice President 1995 160,975 35,874 13,165 17,071 1994 159,962 47,802 11,463 21,228
- ----------------- (1)The amounts set forth in the "All Other Compensation" column for 1996 represent: (i) contributions of $7,125 to the Corporation's Amended and Restated Section 401(k) Plan on behalf of each of the named executives (except Mr. Weeks for which the contribution totaled $6,388) to match 1996 pre-tax elective deferral contributions (included under Salary) made by such individuals to the Plan; (ii) insurance payments with respect to term life insurance as follows: Mr. Weeks $3,182, Mr. Vitito $1,894, Mr. Ennest $1,894, Mr. Thomas Jr. $4,617, Mr. Schaeffer $528, and Mr. Clark $2,959; (iii) $11,400 paid to Messrs. Ennest, Thomas, and Vitito for services as a director of the Corporation (Messrs. Schaeffer and Clark do not serve as directors of the Corporation); and (iv) with respect to Mr. Weeks, fees of $152,300 pursuant to the provisions of a contractual arrangement entered into between the Corporation and Mr. Weeks providing for his continuing to serve as Chairman of the board following his retirement as Chief Executive Officer of the Corporation. 16 20 (2) Mr. Weeks retired from the employment of the Corporation effective April 30, 1996. Mr. Weeks continues as Chairman of the Corporation pursuant to the provisions of a contractual arrangement the terms of which are more fully described under "Compensation of Directors." (3) The amounts set forth in the Summary Compensation Table for 1996 include amounts paid to Mr. Vitito in the capacity of President and Chief Administrative Officer through April 1996 when he became Chief Executive Officer. (4) Mr. Thomas retired as an employee and as a Director of the Corporation and of Citizens Bank effective December 31, 1996. STOCK OPTION GRANTS The following table contains information concerning the grant of stock options under the Option Plan to the Named Officers during 1996:
- ---------------------------------------------------------------------------------------------------- OPTION/SAR GRANTS IN LAST FISCAL YEAR - ---------------------------------------------------------------------------------------------------- INDIVIDUAL GRANTS - ------------------------------------------------------------------- NUMBER OF % OF TOTAL POTENTIAL REALIZABLE SECURITIES OPTIONS/ VALUE AT ASSUMED ANNUAL UNDERLYING SARS RATE OF STOCK PRICE OPTIONS GRANTED TO EXERCISE OR APPRECIATION FOR /SARS EMPLOYEES IN BASE PRICE EXPIRATION OPTION TERM(3) NAME GRANTED (#) FISCAL YEAR ($/SH) DATE ------------------------ 5%($) 10%($) - ---------------------------------------------------------------------------------------------------- C.R. Weeks -0- -0- -0- -0- -0- -0- R.J. Vitito 22,922(2) 6.57% 29.21875 06/09/2002 227,780 516,754 36,000(1) 10.32% 29.375 05/16/2006 665,057 1,685,383 2,700(2) .77% 29.25 06/09/2002 26,859 60,934 J.W. Ennest 23,022(2) 6.60% 30.1875 06/09/2002 236,358 536,217 14,000(1) 4.01% 29.375 05/16/2006 258,633 655,427 D.A. Thomas Jr. 22,813(2) 6.54% 29.625 06/09/2002 229,848 521,448 10,000(1) 2.87% 29.375 05/16/2006 184,738 468,162 2,417(2) .69% 29.00 06/09/2002 23,838 54,081 W.G. Schaeffer 8,515(2) 2.44% 30.1875 06/09/2002 87,420 198,327 12,300(1) 3.53% 29.375 05/16/2006 227,227 575,839 G.O. Clark 11,006(2) 3.16% 29.50 06/09/2002 110,421 250,508 5,000(1) 1.43% 29.375 05/16/2006 92,369 234,081 2,339(2) .67% 28.1875 06/09/2002 22,423 50,870
- -------------- (1) These stock options are non-qualified stock options granted pursuant to the Option Plan of the Corporation. The options are exercisable in whole or in part during the term thereof once vested, beginning November 16, 1996. Generally such options become vested on a graduated basis in accordance with a pre-determined option vesting schedule which is based upon a rolling average 4 quarter return on average assets ratio ("ROA") for the 17 21 Corporation with a minimum vesting of 10% upon the Corporation's achieving a 1.02% ROA and a 100% vesting upon the Corporation's achieving an ROA of 1.25%. The options granted to Mr. Thomas did not contain a vesting requirement. (2) These stock options are non-qualified stock options which were automatically granted as reload options pursuant to the provisions of the Performance Partnership Program ("PPP") of the Corporation which has been established under the Corporation's Third Amended Stock Option Plan. Under the PPP, initial grants of non-qualified stock options ("Initial Grants") were made to such participants in 1992 in connection with their agreement to participate in the PPP. The provisions of the PPP require a participant to contribute currently owned shares of Common Stock to the PPP, and to subject such shares together with shares subsequently acquired under the PPP to certain transfer restrictions. Under the PPP, the vested portion of the Initial Grant is automatically exercised by the administrator pursuant to an automatic stock-for-stock exchange procedure utilizing the shares then credited to the participant's account, provided that the spread between the exercise price and the fair market value of the Common Stock at such time will result in a gain of at least a specified number of shares and at least six months and one day have lapsed since the last such exercise. Each time a portion of the Initial Grant or a subsequently granted reload option is exercised, a participant will automatically receive an additional reload option to purchase a number of shares equal to the number of shares received upon exercise less the number of shares realized as a gain from the transaction. Reload options become fully exercisable six (6) months after grant, expire June 9, 2002 and have an exercise price equal to the fair market value per share of Common Stock on the date the reload option is granted. (3) Such "potential realizable values" represent the value of such options at the end of their term, assuming a 5% and 10% appreciation in the price of the Common Stock compounded annually over the term without discounting for inflation. The actual value of such options is dependent upon actual appreciation in the market price of the Common Stock during the term of the options. OPTION/SAR EXERCISES AND HOLDINGS The following table provides information, with respect to the Named Officers, about the exercise of options and/or SARs during the last fiscal year, and the unexercised options and SARs held as of the end of the fiscal year: AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
- ----------------------------------------------------------------------------------------------------------------------- NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE- OPTIONS/SARS AT FISCAL MONEY OPTIONS/SARS AT SHARES ACQUIRED ON VALUE YEAR END (#) FISCAL YEAR END ($) NAME EXERCISE (#) REALIZED ($) ---------------------------- ---------------------------- EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------------------------------------------------------------------------------------------------------- C.R. Weeks -0- -0- 111,000 -0- 1,236,375 -0- R.J. Vitito 35,651 225,789 109,741 35,370 1,057,868 104,355 J.W. Ennest 33,820 242,151 137,139 15,905 1,716,343 55,820 D.A. Thomas Jr. 28,272 89,957 70,156 -0- 174,627 -0- W.G. Schaeffer 9,848 40,073 47,886 12,516 490,980 41,025 G.O. Clark 19,297 127,311 44,520 7,939 460,652 27,242
18 22 PENSION PLANS The following table shows the estimated annual pension benefits payable to the Named Officers at normal retirement age1/ under the Corporation's qualified defined benefit pension plan, based on remuneration that is covered under the plan and years of service with the Corporation and its subsidiaries: PENSION PLAN TABLE
- ------------------------------------------------------------------ YEARS OF CREDITED SERVICE ------------------------- REMUNERATION(2) 15 20 25 30 35 - ------------------------------------------------------------------ $ 75,000 $16,000 $22,000 $27,000 $33,000 $ 38,000 115,000 27,000 36,000 45,000 54,000 64,000 155,000 38,000 51,000 63,000 76,000 89,000 195,000 49,000 65,000 81,000 98,000 114,000
(1) Normal retirement age is the later of age 65 or the fifth anniversary of the participant's entry into the plan. (2) The law in effect throughout calendar year 1996 limits remuneration considered for benefit purposes to $150,000. Messrs. Weeks, Vitito, Ennest, Thomas Jr., and Clark have supplemental plans that pay benefits based upon earnings in excess of the pension plan limitations, which plans are described below. A participant's remuneration covered by the Corporation's pension plan is his or her "average monthly compensation," which is computed over the 60 consecutive months of the participant's last 120 months in which he or she received the greatest compensation, multiplied by 12 months. For this purpose, compensation is defined as the participant's base salary, exclusive of bonuses, overtime, and fringe benefits, but includes the participant's 401(k) salary reduction contributions. Covered remuneration for the named executives as of the end of the last calendar year is $150,000 for all such named executives. The estimated credited years of service for each named executive is as follows: Mr. Weeks, 14; Mr. Vitito, 29; Mr. Ennest, 14; Mr. Thomas Jr., 12; Mr. Schaeffer, 13; and Mr. Clark, 22. Benefits are computed as a straight single life annuity beginning at normal retirement age and are not subject to offset for social security or other benefits. The Corporation has an agreement with Mr. Weeks which provides that Mr. Weeks shall be entitled to receive a retirement benefit at age 65 equal to 48% of his highest annual base salary during his final ten years of employment with appropriate percentage reductions in the event of early retirement before age 65. That portion of this retirement benefit not covered by the Corporation's pension plan is covered by a supplemental retirement benefits plan for Mr. Weeks. Mr. Weeks retired as an employee of the Corporation effective April 30, 1996. Under the combined plans, the annual benefits payable to Mr. Weeks total $142,485. The Corporation has an agreement with Mr. Vitito which provides that Mr. Vitito shall be entitled to receive a retirement benefit at age 65 equal to 60% of his average annual base salary over the consecutive 60-month period in which he received the highest compensation during his final 120 months of employment with appropriate percentage reductions in the event of retirement before age 65. That portion of the retirement benefit not covered by the Corporation's pension plan and social security are covered by a supplemental retirement benefits plan for Mr. Vitito. Under the combined plans, the estimated annual benefits payable to Mr. Vitito upon retirement at age 65 would be approximately $263,638. 19 23 The Corporation has an agreement with Mr. Ennest which provides that Mr. Ennest shall be entitled to receive a retirement benefit at age 65 equal to 50% of his average annual base salary over the consecutive 60-month period in which he received the highest compensation during his final 120 months of employment with appropriate percentage reductions in the event of retirement before age 65. That portion of the retirement benefit not covered by the Corporation's pension plan and social security are covered by a supplemental retirement benefits plan for Mr. Ennest. Under the combined plans, the estimated annual benefits payable to Mr. Ennest upon retirement at age 65 would be approximately $198,787. Citizens Bank, a wholly owned subsidiary of the Corporation, has an agreement with Mr. Thomas Jr. which provides that Mr. Thomas Jr. shall be entitled to receive a retirement benefit at age 65 equal to of his average annual base salary over the consecutive 60-month period in which he received the highest compensation during his final 120 months of employment with appropriate percentage reductions in the event of early retirement before age 65. That portion of the retirement benefit not covered by the Corporation's pension plan and social security are covered by a supplemental retirement benefits plan for Mr. Thomas Jr. Mr. Thomas Jr. retired as an employee of Citizens Bank effective December 31, 1996. Under the combined plans the annual benefits payable to Mr. Thomas Jr. total $66,130. The Corporation has an agreement with Mr. Clark which provides that Mr. Clark shall be entitled to receive a retirement benefit at age 65 equal to 55% of his average annual base salary over the consecutive 60-month period in which he received the highest compensation during his final 120 months of employment with appropriate percentage reductions in the event of retirement before age 65. That portion of the retirement benefit not covered by the Corporation's pension plan and social security are covered by a supplemental retirement benefits plan for Mr. Clark. Under the combined plans, the estimated annual benefits payable to Mr. Clark upon retirement at age 65 would be approximately $141,873. COMPENSATION AND BENEFITS COMMITTEE REPORT ON EXECUTIVE COMPENSATION The compensation and benefits committee of the board of directors of the Corporation (the "Committee") consists of five directors who are not employed by the Corporation and are not eligible to participate in any of the Corporation's benefit plans other than the Stock Option Plan for Directors. The following report is submitted by the Committee. OVERVIEW AND PHILOSOPHY The Committee, pursuant to authority delegated by the board of directors of the Corporation, is responsible for determining and implementing compensation and benefit systems for executive officers and other employees of the Corporation. The Committee determines the annual salaries and other compensation for executive officers based upon recommendations from the President and Chief Executive Officer, as well as information from the Corporation's Human Resources Department and independent outside consultants. The Chairman provides input and recommendations with respect to the compensation of the Corporation's President and Chief Executive Officer. The Committee's determinations relating to executive compensation are intended to: * align the financial interests of the executive officers with the long-term interests of the Corporation's shareholders; 20 24 * attract and retain high performing executive officers to lead the Corporation to greater levels of profitability; and * motivate executive officers to attain the Corporation's performance goals by placing a significant portion of such officers' financial reward at risk relative to achievement of Corporate goals. In furtherance of these objectives, the compensation package structured for the Corporation's executive officers has three primary components: base compensation (including salary, pension and welfare benefits and perquisites), annual cash awards under the Management Incentive Plan ("MIP") for performance during the previous year, and long term, stock-based compensation generally awarded under the Corporation's Third Amended Stock Option Plan (the "Option Plan"). BASE COMPENSATION Given the Committee's continuing emphasis on performance-based long-term and short-term compensation, base compensation for executive officers has been established by the Committee at competitive levels based upon information available to the Committee relating to compensation for corresponding executive positions at similarly situated financial institutions. Executive officer salaries are evaluated by the Committee on an annual basis utilizing information from independent outside compensation consultants, the Corporation's Human Resources Department, and input from the President and Chief Executive Officer. Input from the Chairman is utilized with respect to the salary of the President and Chief Executive Officer. To determine the actual base salary for each executive officer, the Committee also takes into account individual performance, experience, and unique contributions or needs for certain expertise required by the Corporation. Base Compensation of Persons Serving as Chief Executive Officer. Mr. Weeks served as Chief Executive Officer of the Corporation until his retirement in April of 1996 at which time Mr. Vitito's appointment became effective to succeed Mr. Weeks as Chief Executive Officer. In December of 1995, the Committee reviewed Mr. Weeks' performance for that year and awarded him a 5% merit increase effective January 1, 1996. In support of such increase, the Committee noted that during 1995, the Corporation had achieved record earnings and substantial growth. The Committee specifically focused upon the Corporation's timely completion of the acquisition of the Banc One Corporation banks headquartered in East Lansing, Fenton, Sturgis and Ypsilanti, Michigan. The Committee also emphasized the continued quality of the Corporation's balance sheet. The Committee also reviewed Mr. Vitito's performance for 1995 in December of that year and awarded him an 8.0% merit increase effective January 1, 1996. In support of such increase, the Committee noted Mr. Vitito's leadership during the transition process to Chief Executive Officer. Specifically, the Committee discussed his effectiveness in engineering and implementing the Corporation's process improvement plan which produced annual operating cost reductions of $4,142,000 and revenue enhancements of $2,154,000. In April of 1996 when Mr. Vitito's appointment as Chief Executive Officer became effective, he received a promotional base salary increase of 15.6% raising his base salary to $296,500. The Committee noted that such increase would move Mr. Vitito's base salary in the range for chief executive officers of similarly situated financial institutions. Moreover, in support of such increase, the Committee recognized the significant accomplishments of Mr. Vitito in developing a new strategic plan for the Corporation and in restructuring of the Corporation's Michigan banking franchise under a single bank charter. 21 25 MANAGEMENT INCENTIVE PLAN All of the Corporation's executive officers participate in the MIP. The MIP is designed to motivate participating officers of the Corporation and its subsidiaries to attain goals based upon net earnings of the Corporation and its subsidiaries and the achievement of individual objectives. The amount of an individual's MIP award is a function of (i) the midpoint of the salary range for the individual's position, (ii) the "participation rate" established by the Committee for the individual, (iii) the performance of the Corporation or the subsidiary for which the individual has or shares responsibility, and (iv) the extent to which the individual achieved agreed-upon objectives for the year. Each of these factors is described below. Midpoint of Salary Range and Participation Rate. As described under "Base Compensation," the Committee determines a salary range for each executive officer's position based upon competitive factors. Similarly, the Committee assigns a "participation rate" to each position based on the same factors ranging from 6% for lower level executive officers to 40% for the Chief Executive Officer. The participation rate multiplied by the midpoint of the individual's salary range is that individual's "Award Base" under the MIP, which is subject to adjustment based on Corporate and individual performance as described below. Corporate Performance. As a general practice under the MIP, no amounts will be awarded unless the Corporation's net earnings for the year equal or exceed: (i) 90% of the profit plan target approved by the Corporation's board of directors for that year, and; (ii) 100% of the previous year's earnings (the greater of these amounts is referred to as the "Threshold"). Nonrecurring expenses or income items affecting earnings are evaluated and may be excluded in the discretion of the Committee from the profit plan earnings calculation to the extent of management's inability to control such items. During 1996, the Named Officers (except for Mr. Weeks who retired in April of that year) participated in the MIP based only on the earnings of the consolidated Corporation. Earnings below the profit plan target, but higher than the Threshold, automatically reduce the Award Base while earnings above the profit plan target automatically increase the Award Base. For 1996, the Corporation's net operating earnings exceeded 1995 earnings as well as the profit plan target. Individual Objectives. Individual executive performance also significantly affects the amount of a participant's individual award. Annually, each executive officer establishes objectives, subject to approval by the officer's supervisor. Depending upon the extent to which these objectives are achieved during the year, a participant will be eligible to receive from 0 to 150 percent of the Award Base, adjusted for Corporate performance as described above. Chief Executive Officer Award. As noted, Mr. Weeks retired in April of last year and therefore, did not participate in the MIP for 1996. Mr. Vitito received an award of $143,882 under the MIP for his performance in 1996 on the same basis as the other executive officers participating in the plan. Mr. Vitito's primary individual MIP objective was to have the Corporation's earnings reach the 1996 profit plan target. In this regard the Committee noted that the Corporation exceeded 1995 earnings by 11.4% and that the profit plan target was exceeded as well. The Committee also noted that during 1996, Mr. Vitito aggressively began the implementation of the Corporation's new relationship banking program, being a central focus of the Corporation's new strategic plan. Further, the Committee felt that Mr. Vitito's accomplishments during 1996 with respect to product standardization and the integration of the Corporation's Michigan banking franchise under a single bank charter while preserving a community bank focus throughout the franchise served to enhance the relationship banking strategy and in addition reduced operating costs for the Corporation. The Committee concluded that Mr. Vitito had exceeded the profit plan target for 1996 and had successfully begun the implementation of the Corporation's new relationship program while achieving substantial cost savings thereby entitling him to 100% of his adjusted Award Base. 22 26 LONG-TERM STOCK-BASED COMPENSATION The Option Plan provides for a variety of different types of compensation arrangements, such as stock options, restricted stock, and stock appreciation rights, which increase in value as the value of the Common Stock increases. The purpose of these and similar long-term compensation arrangements is to more closely align the financial interests of executive officers and other key employees with the long-term interests of the Corporation's shareholders by linking a significant portion of their compensation directly to stock price growth or decline. In furtherance of such purpose, the Committee generally makes annual grants to executive officers of stock options with an exercise price equal to the fair market value of the Common Stock on the date of grant. Such options vest and generally become exercisable as the Corporation's return on average assets increases in accordance with a vesting schedule pertaining to such option grants. The Committee has adopted option grant guidelines to reflect competitive practices of other similarly situated financial institutions. These guidelines, implemented by the Committee with the assistance of the Corporation's outside compensation consultants, employ a modified Black-Scholes option valuation model to estimate the present value of long-term incentive compensation for corresponding executive positions at similarly situated and performing financial institutions. A similar analysis is performed to determine the comparative value of an option to be awarded under the Option Plan. Based upon this information and other information concerning compensation practices within the financial services industry, an appropriate participation rate for each of the executive officers in the Plan is assigned. The option grant size for each executive officer is then determined by dividing the product of the position's salary mid-point and participation rate by the current market price of Common Stock, subject to being increased or decreased by the Committee based upon its evaluation of the officer's individual performance. Other options received by the executive officers during 1996 were reload grants made automatically under the provisions of the PPP. Chief Executive Officer Long Term Compensation - As a result of his retirement in April of 1996, Mr. Weeks did not receive any option grant during 1996. Mr. Vitito received an option grant from the Committee in the amount of 36,000 shares during 1996 in accordance with the formula described above. Further during 1996, Mr. Vitito received 25,622 reload grants made automatically under the provisions of the PPP. $1,000,000 Cap - The Omnibus Budget Reconciliation Act of 1993 prohibits a publicly owned company from deducting more than $1,000,000 in annual compensation (including gain from the exercise of certain stock and option grants) paid to the chief executive officer or any of the next four most highly compensated executive officers. Certain exceptions apply involving performance-based compensation and the maximum amount of compensation that can be paid pursuant to a plan. In addition, a transition rule exempts exercises of options granted under the Option Plan prior to the 1997 annual meeting of shareholders. 23 27 In order to minimize the effect of the $1,000,000 limitation on the tax deductibility of gain from the exercise of stock options, the Committee has recommended and the board of directors has approved (subject to shareholder approval) an amendment to the Option Plan designed to cause the gain resulting from the exercises of options by executive officers granted subsequent to the 1997 annual meeting of shareholders to fall within the above-noted exceptions involving performance-based compensation. Specifically, such amendment, if approved by shareholders, will limit to 250,000 the number of shares of Common Stock that may be subject to options granted to any salaried employee in any two-year period. HUGO E. BRAUN JR. VICTOR E. GEORGE LAWRENCE O. ERICKSON JAMES E. TRUESDELL JR. KENDALL B. WILLIAMS 24 28 SHAREHOLDER RETURN Set forth below is a graph which summarizes the cumulative return experienced by the Corporation's shareholders over the past five years compared with the S&P 500 Index and the Keefe, Bruyette & Woods, Inc. 50 Bank Index. Such presentation assumes that the value of the investment in the Corporation's Common Stock and each index was $100 on December 31, 1991 and that all dividends were reinvested. CUMULATIVE TOTAL RETURNS FIVE YEARS ENDED DECEMBER 31, 1996 1991 1992 1993 1994 1995 1996 ------------------------------------------------ Citizens $100 $143 $192 $220 $244 $267 KBW 50 $100 $127 $134 $128 $204 $289 S&P 500 $100 $108 $118 $120 $165 $203 25 29 COMPENSATION COMMITTEE INTERLOCKS AND CERTAIN TRANSACTIONS AND RELATIONSHIPS COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Messrs. Hugo E. Braun Jr., Lawrence O. Erickson, Victor E. George, James E. Truesdell Jr., and Kendall B. Williams served on the compensation and benefits committee of the board of directors of the Corporation throughout the last completed fiscal year. None of these individuals are or have been employees of the Corporation. Committee member Braun is a partner in the law firm of Braun Kendrick Finkbeiner which rendered legal services during 1996 to the Corporation's Michigan banking subsidiary, Citizens Bank. Citizens Bank plans to employ this firm for additional services in 1997. OTHER TRANSACTIONS WITH OFFICERS AND DIRECTORS During 1996 the banking subsidiaries of the Corporation had, and expect to have in the future, banking transactions, in the ordinary course of business, with directors, officers and their associates. These transactions were made on substantially the same terms, including interest rate charges and collateral requirements, as comparable transactions made with unrelated parties prevailing at the time of such transactions and did not involve more than the normal risk of collectability or present other unfavorable features. During 1996, the firm of Winegarden, Shedd, Haley, Lindholm & Robertson, of which director William C. Shedd is a partner, rendered legal services to Citizens Bank. During the year Citizens Bank paid that firm $192,579.60 in legal fees. Citizens Bank expects to employ this firm for additional services in 1997. During 1996, Citizens Bank - Illinois, N.A. ("Citizens - Illinois"), a wholly-owned subsidiary of the Corporation engaged in a transaction with Moore Properties, Inc. ("Moore") which is controlled by director William J. Hank. Specifically, Citizens - Illinois transferred a parcel of property noncontiguous to its existing parking lot for a parcel of property owned by Moore which is contiguous to its parking lot. Based upon current appraisals, the Citizens - Illinois parcel had a value of $150,000 and the Moore parcel had a value of $70,000. As such, in addition to the parcel of property received from Moore, Citizens - Illinois also received from Moore a cash payment of $80,000. SECURITIES TRANSACTIONS REPORTING Under the securities laws of the United States, the Corporation's directors, executive officers, and any persons holding more than 10% of the Common Stock (collectively, the "Reporting Persons") are required to report their ownership of the Common Stock and any changes in that ownership to the Commission and to the Nasdaq Stock Market ("Nasdaq"). Specific due dates for these reports have been established and pursuant to applicable rules, the Corporation is required to report in its proxy statement any failure to file by these due dates. Based on corporate records and certifications received from the Reporting Persons, all required reports of Reporting Persons have been timely filed with the Commission and the Nasdaq. In making these statements, the Corporation has relied on the written representations of directors, executive officers, and its principal shareholder, and on copies of the reports that such persons have filed with the Commission. 26 30 INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS In 1996, Ernst & Young LLP, performed audit and audit related services for the Corporation and its subsidiaries which included examination of the consolidated financial statements of the Corporation, and consultation with the Corporation and its subsidiaries on accounting and reporting matters. Upon recommendation of the audit committee, the board of directors has again selected Ernst & Young LLP, as independent auditors. Representatives of Ernst & Young LLP, will attend the annual meeting, will have an opportunity to make a statement, and will be available to answer questions that may be asked by shareholders. SHAREHOLDER PROPOSALS Any proposal by a shareholder of the Corporation to be considered for inclusion in the proxy statement for the 1998 annual meeting must be received by Thomas W. Gallagher, the secretary of the Corporation, by the close of business on November 15, 1997. ANNUAL REPORTS Appendix A to this proxy statement contains the information required to be included in an annual report pursuant to the rules of the Commission, including audited financial statements, management's discussion and analysis of financial condition, and results of operations and five year selected financial data. Upon request, the Corporation will provide without charge a copy of its annual report on FORM 10-K. OTHER MATTERS The board of directors is not aware of any other matters which may come before the meeting. However, should any such matters properly come before the meeting, it is the intention of the persons named in the accompanying proxy to vote in accordance with their judgment on such matters. CITIZENS BANKING CORPORATION Thomas W. Gallagher Thomas W. Gallagher Senior Vice President, General Counsel and Secretary Flint, Michigan March 14, 1997 27 31 APPENDIX A CITIZENS BANKING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS AND CONSOLIDATED FINANCIAL STATEMENTS 32 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 33 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 34 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 35 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 36 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 37 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 38 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 39
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 40 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 41 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 42 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 43 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 44 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 45 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 46 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 47 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 48 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 49 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 50 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 51 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 52 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 53 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 54 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 55 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 56 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 57 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 58 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 59 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 60 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 61 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 62 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 63 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 64 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 65 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 66 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 67 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 68 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 69 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 70
- ------------------------------------------------------------------------------------------------------------------------------------ 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 71 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 72 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 73 PROXY CITIZENS BANKING CORPORATION FLINT, MICHIGAN PROXY BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF SHAREHOLDERS - APRIL 15, 1997 The undersigned shareholder of Citizens Banking Corporation (the "Corporation") hereby appoints William F. Nelson Jr. and James E. Truesdell Jr. or either of them, my proxies or proxy, with full power of substitution to vote all shares of stock of the Corporation that the undersigned would be entitled to vote at the annual meeting of shareholders of the Corporation to be held in the Carriage Hall Room of the Radisson Riverfront Hotel Flint, One Riverfront Center West, Flint, Michigan, on Tuesday April 15, 1997, at 10:00 a.m. local time, and at any adjournments thereof, and upon the matters referred to on the reverse side of this proxy, all of which are being proposed by the Corporation, and in their discretion, upon such other matters as may properly come before the meeting including the election of any person to the Board of Directors where a nominee named in the Proxy Statement dated March 14, 1997 is unable to serve or, for good cause, will not serve. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED; IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR EACH NOMINEE NAMED AND FOR EACH PROPOSAL LISTED ON THE REVERSE SIDE OF THIS PROXY. For participants in the Corporation's Amended and Restated Section 401(k) Plan ("Plan"), this card also provides voting instructions to the Trustee under the Plan for the undersigned's allowable portion, if any, of the total number of shares of Common Stock of the Corporation held by such Plan as indicated on the reverse side hereof. These voting instructions are solicited and will be carried out in accordance with the applicable provisions of the Plan. The undersigned acknowledges receipt of the Notice of Annual Meeting of Shareholders and the Proxy Statement dated March 14, 1997 and ratifies all that the proxies or either of them or their substitutes may lawfully do or cause to be done by virtue hereon and revokes all former proxies. FOLD AND DETACH HERE 74 Your Votes as Indicated in This Example /X/ 1. ELECTION OF DIRECTORS For all nominees Withhold listed (except as Authority marked to the as to all nominees contrary) listed THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE NOMINEES LISTED. Class II (three year term): Joseph P. Day, John W. Ennest, Victor E. George, Gerald Schrieber, Ada C. Washington and James L. Wolohan. TO WITHHOLD AUTHORITY TO VOTE FOR ANY NOMINEE, DRAW A LINE THROUGH THE NOMINEE'S NAME. 2. Proposal to amend the Corporation, Third Amended Stock Option Plan to limit the number of options that may be granted to participants during any two (2) year period. FOR AGAINST ABSTAIN [ ] [ ] [ ] Please sign exactly as name appears hereon. When shares are held by joint tenants, both should sign. When signing as Attorney, Executor, Personal Representative, Administrator, Trustee or Guardian, please give full title as such. If signing on behalf of a corporation please sign in full corporate name by President or other authorized officer. If signing on behalf of a partnership, please sign in partnership name by authorized person. Dated:_________________________, 1997 _____________________________________ Signature _____________________________________ Signature if held jointly FOLD AND DETACH HERE DEAR SHAREHOLDER(S): Enclosed you will find material relative to the Corporation's 1997 Annual Meeting of Shareholders. The Notice of the Annual Meeting and proxy statement describe the formal business to be transacted at the meeting, as summarized on the attached proxy card. Whether or not you expect to attend the Annual Meeting, please complete and return promptly the attached proxy card in the accompanying envelope, which requires no postage if mailed in the United States. Please remember that your vote is very important to us. We look forward to hearing from you. Benjamin Acosta Vice President -----END PRIVACY-ENHANCED MESSAGE-----