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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2003
--------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
----------------- -----------------
Commission file Number 000-10535
--------------------------
CITIZENS BANKING CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2378932
- ----------------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
328 S. Saginaw St., Flint, Michigan 48502
- ----------------------------------------- ---------------------------
(Address of principal executive offices) (Zip Code)
(810) 766-7500
----------------------------------------------------
(Registrant's telephone number, including area code)
None
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
X Yes No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
X Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 5, 2003
- ---------------------------- --------------------------
Common Stock, No Par Value 43,265,567 Shares
CITIZENS BANKING CORPORATION
Index to Form 10-Q
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements..................................................................... 3
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................................. 12
Item 3. - Quantitative and Qualitative Disclosures about Market Risk........................................... 27
Item 4. - Controls and Procedures.............................................................................. 27
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds............................................................. 28
Item 6 - Exhibits and Reports on Form 8-K...................................................................... 28
SIGNATURES.......................................................................................................... 29
EXHIBIT INDEX....................................................................................................... 32
2
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
CITIZENS BANKING CORPORATION AND SUBSIDIARIES MARCH 31, December 31,
(in thousands) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (Note 1)
ASSETS
Cash and due from banks $ 215,693 $ 171,864
Money market investments:
Federal funds sold --- 69,000
Interest-bearing deposits with banks 1,059 2,332
----------- -----------
Total money market investments 1,059 71,332
Securities available-for-sale:
U.S. Treasury and federal agency securities 1,340,751 942,643
State and municipal securities 442,356 444,951
Other securities 69,461 69,687
----------- -----------
Total investment securities 1,852,568 1,457,281
Mortgage loans held for sale 128,108 160,743
Loans:
Commercial 3,047,441 3,111,208
Real estate construction 240,865 262,363
Real estate mortgage 525,719 545,834
Consumer 1,488,578 1,513,156
----------- -----------
Total loans 5,302,603 5,432,561
Less: Allowance for loan losses (112,385) (109,467)
----------- -----------
Net loans 5,190,218 5,323,094
Premises and equipment 115,017 117,704
Goodwill 54,785 54,785
Other intangible assets 19,137 19,862
Bank owned life insurance 78,926 78,434
Other assets 109,799 66,935
----------- -----------
TOTAL ASSETS $ 7,765,310 $ 7,522,034
=========== ===========
LIABILITIES
Noninterest-bearing deposits $ 869,728 $ 900,674
Interest-bearing deposits 4,942,006 5,036,239
----------- -----------
Total deposits 5,811,734 5,936,913
Federal funds purchased and securities sold
under agreements to repurchase 465,073 223,289
Other short-term borrowings 8,380 79,062
Other liabilities 89,188 32,988
Long-term debt 750,561 599,313
----------- -----------
Total liabilities 7,124,936 6,871,565
SHAREHOLDERS' EQUITY
Preferred stock - no par value --- ---
Common stock - no par value 103,314 112,253
Retained earnings 498,173 495,570
Other accumulated comprehensive net income 38,887 42,646
----------- -----------
Total shareholders' equity 640,374 650,469
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,765,310 $ 7,522,034
=========== ===========
===========================================================================================================================
See notes to consolidated financial statements.
3
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES Three Months Ended
March 31,
(in thousands, except per share amounts) 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 84,504 $100,163
Interest and dividends on investment securities:
Taxable 14,434 12,369
Tax-exempt 5,184 5,384
Money market investments 87 359
-------- --------
Total interest income 104,209 118,275
-------- --------
INTEREST EXPENSE
Deposits 25,037 34,570
Short-term borrowings 620 965
Long-term debt 7,046 7,781
-------- --------
Total interest expense 32,703 43,316
-------- --------
NET INTEREST INCOME 71,506 74,959
Provision for loan losses 18,992 5,250
-------- --------
Net interest income after provision for loan losses 52,514 69,709
-------- --------
NONINTEREST INCOME
Service charges on deposit accounts 6,590 6,632
Trust fees 4,220 4,858
Mortgage and other loan income 5,154 4,025
Brokerage and investment fees 1,768 2,050
Bankcard fees 735 2,758
Investment securities gains 48 2
Other 4,772 4,401
-------- --------
Total noninterest income 23,287 24,726
-------- --------
NONINTEREST EXPENSE
Salaries and employee benefits 30,112 32,200
Equipment 4,169 4,858
Occupancy 4,695 4,615
Professional services 3,708 2,835
Data processing services 3,316 3,125
Advertising and public relations 2,049 1,831
Postage and delivery 1,678 1,758
Intangible asset amortization 725 725
Bankcard expenses 91 2,082
Other 6,038 7,162
-------- --------
Total noninterest expense 56,581 61,191
-------- --------
INCOME BEFORE INCOME TAXES 19,220 33,244
Income tax provision 4,162 9,141
-------- --------
NET INCOME $ 15,058 $ 24,103
======== ========
NET INCOME PER SHARE:
Basic $ 0.35 $ 0.53
Diluted 0.34 0.53
CASH DIVIDENDS DECLARED PER SHARE 0.285 0.275
AVERAGE SHARES OUTSTANDING:
Basic 43,505 45,062
Diluted 43,748 45,642
=======================================================================================================================
See notes to consolidated financial statements.
4
- --------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES Other
Accumulated
Common Retained Comprehensive
(in thousands except per share amounts) Stock Earnings Net Income Total
- --------------------------------------------------------------------------------------------------------------------------
BALANCE - MARCH 31, 2002 $ 151,023 $ 532,889 $ 16,062 $ 699,974
Comprehensive income:
Net income 25,339 25,339
Other comprehensive income:
Net unrealized gain on securities available-for-sale,
net of tax effect of $10,246 19,028
Less: Reclassification adjustment for net gains included
in net income, net of tax effect of $832 (1,545)
---------
Other comprehensive income total 17,483
---------
Total comprehensive income 42,822
Exercise of stock options, net of shares purchased 3,756 3,756
Shares acquired for retirement (19,198) (19,198)
Net change in deferred compensation, net of tax effect 148 148
Cash dividends - $0.285 per share (12,818) (12,818)
--------- --------- --------- ---------
BALANCE - JUNE 30, 2002 $ 135,729 $ 545,410 $ 33,545 $ 714,684
Comprehensive income:
Net loss (45,929) (45,929)
Other comprehensive income:
Net unrealized gain on securities available-for-sale,
net of tax effect of $6,538 12,142
Less: Reclassification adjustment for net gains included
in net income, net of tax effect of $16 (29)
---------
Other comprehensive income total 12,113
---------
Total comprehensive income (33,816)
Exercise of stock options, net of shares purchased 50 50
Net change in deferred compensation, net of tax effect 54 54
Cash dividends - $0.285 per share (12,719) (12,719)
--------- --------- --------- ---------
BALANCE - SEPTEMBER 30, 2002 $ 135,833 $ 486,762 $ 45,658 $ 668,253
Comprehensive income:
Net income 21,525 21,525
Other comprehensive income:
Net unrealized loss on securities available-for-sale,
net of tax effect of $(2,343) (4,352)
Less: Reclassification adjustment for net gains included
in net income, net of tax effect of $4 (8)
Minimum pension liablity 1,348
---------
Other comprehensive income total (3,012)
---------
Total comprehensive income 18,513
Exercise of stock options, net of shares purchased 131 131
Shares acquired for retirement (23,776) (23,776)
Net change in deferred compensation, net of tax effect 65 65
Cash dividends - $0.285 per share (12,717) (12,717)
--------- --------- --------- ---------
BALANCE - DECEMBER 31, 2002 $ 112,253 $ 495,570 $ 42,646 $ 650,469
Comprehensive income:
Net income 15,058 15,058
Other comprehensive income:
Net unrealized loss on securities available-for-sale,
net of tax effect of $(2,007) (3,728)
Less: Reclassification adjustment for net gains included
in net income, net of tax effect of $17 (31)
---------
Other comprehensive income total (3,759)
---------
Total comprehensive income 11,299
Exercise of stock options, net of shares purchased 1,991 1,991
Shares acquired for retirement (11,177) (11,177)
Net change in deferred compensation, net of tax effect 47 47
Stock issued for compensation 200 200
Cash dividends - $0.285 per share (12,455) (12,455)
--------- --------- --------- ---------
BALANCE - MARCH 31, 2003 $ 103,314 $ 498,173 $ 38,887 $ 640,374
========= ========= ========= =========
==========================================================================================================================
See notes to consolidated financial statements.
5
- ----------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES Three Months Ended
March 31,
(in thousands) 2003 2002
- ----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 15,058 $ 24,103
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 18,992 5,250
Depreciation 3,576 4,054
Amortization of intangibles 725 725
Net amortization on investment securities 813 76
Investment securities gains (48) (2)
Loans originated for sale (298,903) (220,234)
Proceeds from loan sales 334,935 262,819
Net gain from loan sales (3,397) (2,054)
Other 16,614 30,496
--------- ---------
Net cash provided by operating activities 88,365 105,233
INVESTING ACTIVITIES:
Net (increase) decrease in money market investments 70,273 (28,561)
Securities available-for-sale:
Proceeds from sales 48 2
Proceeds from maturities 94,787 75,203
Purchases (496,670) (131,007)
Net decrease in loans 113,884 154,140
Net increase in premises and equipment (889) (3,087)
--------- ---------
Net cash provided by (used in) investing activities (218,567) 66,690
FINANCING ACTIVITIES:
Net decrease in demand and savings deposits (375) (43,216)
Net decrease in time deposits (124,804) (61,128)
Net increase (decrease) in short-term borrowings 171,102 (113,710)
Proceeds from issuance of long-term debt 149,558 26,000
Principal reductions in long-term debt (56) (24,952)
Cash dividends paid (12,455) (12,405)
Proceeds from stock options exercised 1,991 2,625
Shares acquired for retirement (11,177) (7,322)
Shares issued for compensation 200 ---
Net change in deferred compensation, net of tax effect 47 ---
--------- ---------
Net cash provided by (used in) financing activities 174,031 (234,108)
--------- ---------
Net increase (decrease) in cash and due from banks 43,829 (62,185)
Cash and due from banks at beginning of period 171,864 224,416
--------- ---------
Cash and due from banks at end of period $ 215,693 $ 162,231
========= =========
====================================================================================================
See notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Citizens Banking
Corporation ("Citizens") have been prepared in accordance with accounting
principles generally accepted in the United States ("GAAP") for interim
financial information and the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month period ended March 31, 2003 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2003. The balance
sheet at December 31, 2002 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by GAAP for complete financial statements. For further
information, refer to the consolidated financial statements and footnotes
thereto included in Citizens' 2002 Annual Report on Form 10-K.
STOCK-BASED COMPENSATION: Citizens' stock-based compensation plans are accounted
for based on the intrinsic value method set forth in Accounting Principles Board
("APB") Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations. Compensation expense for employee stock options is generally
not recognized if the exercise price of the option equals or exceeds the fair
value of the stock on the date of grant. Compensation expense for restricted
share awards is ratably recognized over the period of service, usually the
restricted period, based on the fair value of the stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
if Citizens had applied the fair value recognition provisions of Statement of
Financial Accounting Standards ("SFAS") 123, Accounting for Stock-Based
Compensation, to its stock option awards.
- ---------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
(in thousands, except per share amounts) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
Net income, as reported $15,058 $ 24,103
Less pro forma expense related to options granted (556) (473)
-------- ---------
Pro forma net income $14,502 $ 23,630
======== =========
Net income per share:
Basic - as reported $0.35 $0.53
Basic - pro forma 0.33 0.52
Diluted - as reported 0.34 0.53
Diluted - pro forma 0.33 0.52
=====================================================================================================================
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
CONSOLIDATION OF VARIABLE INTEREST ENTITIES: In January 2003, the Financial
Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN
46"), Consolidation of Variable Interest Entities. The objective of this
interpretation is to provide guidance on how to identify a variable interest
entity ("VIE") and determine when the assets, liabilities, non-controlling
interests, and results of operations of a VIE need to be included in a company's
consolidated financial statements. A company that holds variable interests in an
entity will need to consolidate the entity if the company's interest in the VIE
is such that the company will absorb a majority of the VIE's expected losses
and/or receive a majority of the entity's expected residual returns, if they
occur. FIN 46 also requires additional disclosures by primary beneficiaries and
other significant variable interest holders. The provisions of this
interpretation became effective upon issuance. Citizens has adopted FIN 46,
effective January 1, 2003. The adoption of this interpretation had no impact on
Citizens' financial position, results of operations or cash flows as Citizens
does not hold any variable interests in any entities.
GUARANTEES: In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. This interpretation
expands the disclosures to be made by a guarantor in its financial statements
about its obligations under certain guarantees and requires the guarantor to
recognize a liability for the fair value of an obligation assumed under a
guarantee. FIN 45 clarifies the requirements of SFAS 5, Accounting for
Contingencies, relating to guarantees. In general, FIN 45 applies to contracts
or indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying, such as a
specified interest rate, security price, commodity price, or other variable,
that is related to an asset, liability, or equity security of the guaranteed
party. Certain guarantee contracts are excluded from both the disclosure and
recognition requirements of this interpretation, including, among others,
guarantees relating to employee
7
compensation, residual value guarantees under capital lease arrangements,
commercial letters of credit, loan commitments, subordinated interests in a
special purpose entity, and guarantees of a company's own future performance.
Other guarantees are subject to the disclosure requirements of FIN 45 but not to
the recognition provisions and include, among others, a guarantee accounted for
as a derivative instrument under SFAS 133, a parent's guarantee of debt owed to
a third party by its subsidiary or vice versa, and a guarantee which is based on
performance not price. The disclosure requirements of FIN 45, which were
effective for Citizens as of December 31, 2002, require disclosure of the nature
of the guarantee, the maximum potential amount of future payments that the
guarantor could be required to make under the guarantee, and the current amount
of the liability, if any, for the guarantor's obligations under the guarantee.
The recognition requirements of FIN 45 were adopted by Citizens effective
January 1, 2003 and will be applied prospectively to guarantees issued or
modified after December 31, 2002. Significant guarantees that have been entered
into by Citizens are disclosed in Note 9. The adoption did not have a material
impact on results of operations, financial position, or liquidity.
NOTE 3. SPECIAL CHARGE
In the third quarter of 2002, Citizens recorded a special charge of $13.8
million ($9.0 million after-tax) that included restructuring and impairment
costs associated with reorganization of our consumer, business and wealth
management lines of business. The reorganization resulted from a detailed review
of our consumer banking, business banking and wealth management areas by key
members of management with assistance from industry consultants. This review
revealed opportunities for process change, staff reassignment, reporting
structure changes, branch closures, expense reduction and business growth. As a
result of the reorganization, Citizens displaced 140 employees. As of March 31,
2003, 133 of these employees had been released. The remaining employees will be
released in the second quarter of 2003. Displaced employees are offered
severance packages and outplacement assistance. Additionally, twelve banking
offices were closed in the fourth quarter of 2002 and six additional offices
have been identified for closure during the second quarter of 2003.
The following provides details on the special charge and the related remaining
liability as of March 31, 2003.
- ----------------------------------------------------------------------------------------------------------------------------
Original 2002 Reserve 2003 Reserve
Reserve/ ----------- Balance ------------------------ Balance
Special Net December 31, Cash March 31,
(in thousands) Charge Activity(1) 2002 Payments Reversal(2) 2003
- ----------------------------------------------------------------------------------------------------------------------------
Employee benefits and severance $ 8,072 $ (3,791) $ 4,281 $ (1,283) $ (100) $ 2,898
Professional fees 2,369 (1,961) 408 (53) --- 355
Facilities and lease impairment 2,358 (2,036) 322 (18) --- 304
Contract termination fees and write-off of
obsolete equipment, software and supplies 1,008 (826) 182 (22) --- 160
-------- -------- ------- -------- ------ -------
Total $ 13,807 $ (8,614) $ 5,193 $ (1,376) $ (100) $ 3,717
======== ======== ======= ======== ====== =======
============================================================================================================================
(1)Includes cash payments of $6,134,000 and a reversal of $404,600 for items
included in the original charge that are no longer expected to be paid -
primarily employee benefits and severance and professional fees.
(2)Reversal of employee benefits and severance included in the original charge
that are no longer expected to be paid.
NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS
On January 1, 2002, Citizens adopted SFAS No. 142 which changed the accounting
for intangible assets. The effect of this statement was to eliminate
amortization of indefinite life intangibles (i.e. goodwill) beginning January 1,
2002. SFAS No. 142 also requires that goodwill be tested for impairment at least
annually. Citizens has chosen to complete its annual goodwill impairment tests
as of October 1 for all its reporting units. Citizens has evaluated its goodwill
and other intangible assets in accordance with SFAS 142 and has determined that
such assets are not impaired at this time. Goodwill at March 31, 2003, December
31, 2002 and March 31, 2002 was allocated to Citizens' lines of business as
follows:
--------------------------------------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
(in thousands) 2003 2002 2002
--------------------------------------------------------------------------------------------------------------------
Business Banking $ 23,982 $ 23,982 $ 23,982
Consumer Banking 29,002 29,002 29,002
Wealth Management 1,801 1,801 1,801
Other --- --- ---
-------- -------- --------
Total Goodwill $ 54,785 $ 54,785 $ 54,785
======== ======== ========
====================================================================================================================
8
Citizens' other intangible assets as of March 31, 2003, December 31, 2002 and
March 31,2002 are shown in the table below.
---------------------------------------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
(in thousands) 2003 2002 2002
---------------------------------------------------------------------------------------------------------------------
Core deposit intangibles $ 28,989 $ 28,989 $ 28,989
Accumulated amortization 9,885 9,160 6,985
-------- -------- --------
Net core deposit intangibles 19,104 19,829 22,004
Minimum pension liability 33 33 3,304
-------- -------- --------
Total other intangibles $ 19,137 $ 19,862 $ 25,308
======== ======== ========
=====================================================================================================================
The estimated annual amortization expense for core deposit intangibles for each
of the next five years is $2.9 million.
NOTE 5. LINES OF BUSINESS INFORMATION
Citizens is managed along the following business lines: Business Banking,
Consumer Banking, Wealth Management, and Other. Selected lines of business
segment information for the three month periods ended March 31, 2003 and 2002
are provided below. There are no significant intersegment revenues.
- ----------------------------------------------------------------------------------------------------------------------------
Business Consumer Wealth
(in thousands) Banking Banking Management Other Total
- ----------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY - THREE MONTHS ENDED MARCH 31, 2003
Net interest income (taxable equivalent) $34,823 $35,856 $ 17 $ 4,286 $74,982
Provision for loan losses 15,498 3,416 --- 78 18,992
------- ------- ------- ------- -------
Net interest income after provision 19,325 32,440 17 4,208 55,990
Noninterest income 4,322 12,549 5,322 1,094 23,287
Noninterest expense 13,986 33,003 4,528 5,064 56,581
------- ------- ------- ------- -------
Income before income taxes 9,661 11,986 811 238 22,696
Income tax expense (taxable equivalent) 3,426 4,193 284 (265) 7,638
------- ------- ------- ------- -------
Net income $ 6,235 $ 7,793 $ 527 $ 503 $15,058
======= ======= ======= ======= =======
Average assets (in millions) $ 3,164 $ 2,585 $ 2 $ 1,703 $ 7,454
======= ======= ======= ======= =======
============================================================================================================================
EARNINGS SUMMARY - THREE MONTHS ENDED MARCH 31, 2002
Net interest income (taxable equivalent) $34,505 $38,930 $ 217 $ 4,947 $78,599
Provision for loan losses 3,091 2,743 --- (584) 5,250
------- ------- ------- ------- -------
Net interest income after provision 31,414 36,187 217 5,531 73,349
Noninterest income 4,353 13,660 5,900 813 24,726
Noninterest expense 16,572 34,601 4,144 5,874 61,191
------- ------- ------- ------- -------
Income before income taxes 19,195 15,246 1,973 470 36,884
Income tax expense (taxable equivalent) 6,719 5,336 691 35 12,781
------- ------- ------- ------- -------
Net income $12,476 $ 9,910 $ 1,282 $ 435 $24,103
======= ======= ======= ======= =======
Average assets (in millions) $ 3,398 $ 2,829 $ 7 $ 1,331 $ 7,565
======= ======= ======= ======= =======
============================================================================================================================
9
NOTE 6. EARNINGS PER SHARE
Net income per share is computed based on the weighted-average number of shares
outstanding, including the dilutive effect of stock options, as follows:
- --------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
(in thousands, except per share amounts) 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
Basic and dilutive earnings per share -- net income available to common shareholders $ 15,058 $ 24,103
======== ========
DENOMINATOR:
Basic earnings per share -- weighted average shares 43,505 45,062
Effect of dilutive securities -- potential conversion of employee stock options 243 580
-------- --------
Diluted earnings per share -- adjusted weighted-average shares and assumed conversions 43,748 45,642
======== ========
BASIC EARNINGS PER SHARE $ 0.35 $ 0.53
======== ========
DILUTED EARNINGS PER SHARE $ 0.34 $ 0.53
======== ========
==========================================================================================================================
During the first quarter of 2003, employees exercised stock options to acquire
31,894 shares at an average exercise price of $18.53 per share.
NOTE 7. LONG-TERM DEBT
The components of long-term debt as of March 31, 2003, December 31, 2002 and
March 31, 2002 are presented below.
- --------------------------------------------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
(in thousands) 2003 2002 2002
- --------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank advances (1) $ 624,094 599,139 $ 629,668
Subordinated debt (2) 126,304 --- ---
Other borrowed funds 163 174 479
--------- --------- ---------
Total long-term debt $ 750,561 $ 599,313 $ 630,147
========= ========= =========
==========================================================================================================================
(1)At March 31, 2003, rates on FHLB advances are fixed and variable ranging
from 1.34% to 7.10% maturing in 2003 through 2021. In 2002, rates on FHLB
advances were fixed and variable ranging from 1.86% to 7.73% maturing in
2002 through 2021. The majority of the fixed rate FHLB advances are
convertible to a floating rate at the option of the Federal Home Loan
Bank.
(2)On January 27, 2003, Citizens issued $125 million of 5.75% subordinated
notes maturing February 1, 2013. Citizens entered into a fair value hedge
to hedge the interest rate risk on the subordinated debt. As of March 31,
2003, the fair value of the hedge was a $1.7 million gain.
The subordinated debt qualifies under the risk-based capital guidelines
as Tier 2 supplementary capital for regulatory purposes.
NOTE 8. DERIVATIVES AND HEDGING ACTIVITIES
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," (collectively referred to as "SFAS 133") establish
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
All derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value.
Citizens designates its derivatives based upon criteria established by SFAS No.
133. For a derivative designated as a fair value hedge, the derivative is
recorded at fair value on the consolidated balance sheet. Any difference between
the fair value change of the hedge versus the fair value change of the hedged
item is considered to be the "ineffective" portion of the hedge. The
ineffectiveness of the hedge is recorded in current earnings. For a derivative
designated as a cash flow hedge, the effective portion of the derivative's gain
or loss is initially reported as a component of accumulated other comprehensive
income (loss) and subsequently reclassified into earnings when the hedged
exposure affects earnings. Any ineffective portion of a gain or loss must be
reported in earnings immediately.
Citizens may use derivative instruments to hedge the variability in interest
payments or protect the value of certain assets and liabilities recorded in its
balance sheet from changes in interest rates. Citizens uses interest rate
contracts such as interest
10
swaps to manage its interest rate risk. These contracts are designated as hedges
of specific assets or liabilities. The net interest receivable or payable on
swaps is accrued and recognized as an adjustment to the interest income or
expense of the hedged asset or liability. At March 31, 2003, Citizens had
interest rate swaps with a notional value of $125 million. The fair value of the
swaps was $1.7 million as of March 31, 2003. Citizens receives an average fixed
rate of 4.36% and pays a variable rate based on six-month LIBOR. The contracts
terminate on February 1, 2013.
NOTE 9. OBLIGATIONS UNDER STANDBY LETTERS OF CREDIT AND OTHER CONTINGENT
GUARANTEES
Citizens in the normal course of business provides financial and performance
standby letters of credit to its clients. Financial standby 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. Performance standby letters of credit are irrevocable guarantees to make
payment in the event a specified third party fails to perform under a
nonfinancial contractual obligation. Standby letters of credit arrangements
generally expire within one year and have essentially the same level of credit
risk as extending loans to clients and are subject to Citizens' normal credit
policies. Inasmuch as these arrangements generally have fixed expiration dates
or other termination clauses, most expire unfunded and do not necessarily
represent future liquidity requirements. Collateral is obtained based on
management's assessment of the client and may include receivables, inventories,
real property and equipment.
Amounts available to clients under standby letters of credit follow:
-------------------------------------------------------------------------------------------------------
MARCH 31, December 31,
(in thousands) 2003 2002
-------------------------------------------------------------------------------------------------------
CONTINGENT GUARANTEES:
Financial standby letters of credit $ 32,479 $ 28,783
Performance standby letters of credit 7,653 7,613
=======================================================================================================
NOTE 10. ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, for the three month periods
ended March 31, 2003 and 2002 are presented below.
----------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
(in thousands) 2003 2002
----------------------------------------------------------------------------------------------------------------------
Net unrealized gains on investment securities available for sale:
Balance at beginning of period $ 42,646 $ 20,553
Net unrealized loss on securities, net of tax effect of $(2,007) (3,728) (4,490)
in 2003 and $(2,418) in 2002
Less: Reclassification adjustment for net losses included in net
income, net of tax effect of $17 in 2003 and $1 in 2002 (31) (1)
-------- --------
Accumulated other comprehensive income, net of tax $ 38,887 $ 16,062
======== ========
======================================================================================================================
11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
FIVE-QUARTER SUMMARY OF SELECTED FINANCIAL INFORMATION
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
FOR THE QUARTER ENDED
------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
2003 2002 2002 2002 2002
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS (THOUSANDS)
Interest income $ 104,209 $112,558 $115,558 $ 116,993 $ 118,275
Net interest income 71,506 76,232 75,182 75,409 74,959
Provision for loan losses 18,992 16,300 89,250 9,400 5,250
Noninterest income 23,287 26,701 19,734 30,615 24,726
Noninterest expense 56,581 57,126 79,545 (1) 61,521 61,191
Income tax provision (benefit) 4,162 7,982 (27,950) 9,764 9,141
Net income (loss) 15,058 21,525 (45,929) 25,339 24,103
Cash dividends 12,455 12,717 12,719 12,818 12,405
- ------------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Basic net income (loss) $ 0.35 $ 0.49 $ (1.03) $ 0.57 $ 0.53
Diluted net income (loss) 0.34 0.48 (1.03) 0.56 0.53
Cash dividends 0.285 0.285 0.285 0.285 0.275
Market value (end of period) 23.62 24.78 24.17 28.98 32.47
Book value (end of period) 14.79 14.88 14.97 16.02 15.55
- ------------------------------------------------------------------------------------------------------------------------------------
AT PERIOD END (MILLIONS)
Assets $ 7,765 $ 7,522 $ 7,614 $ 7,547 $ 7,482
Portfolio Loans (2) 5,303 5,433 5,524 5,567 5,613
Deposits 5,812 5,937 5,904 5,866 5,861
Shareholders' equity 640 650 668 715 700
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE FOR THE QUARTER (MILLIONS)
Assets $ 7,454 $ 7,564 $ 7,616 $ 7,533 $ 7,565
Portfolio Loans (2) 5,343 5,470 5,577 5,536 5,623
Deposits 5,853 5,922 5,951 5,900 5,924
Shareholders' equity 643 654 711 702 701
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS (ANNUALIZED)
Return on average assets 0.82 % 1.13 % (2.39)% 1.35 % 1.29 %
Return on average shareholders' equity 9.50 13.06 (25.63) 14.48 13.94
Net interest margin (FTE) 4.33 4.49 4.40 4.45 4.45
Efficiency ratio 57.58 53.61 80.75 56.11 59.22
Net loans charged off to average loans 1.20 0.80 4.70 0.68 0.37
Average equity to average assets 8.63 8.65 9.34 9.32 9.27
Allowance for loan losses as a percent of loans 2.12 2.02 1.89 1.45 1.43
Nonperforming assets to loans plus ORAA (end of period) 1.76 1.76 1.95 1.57 1.43
Nonperforming assets to total assets (end of period) 1.20 1.27 1.42 1.16 1.07
Leverage ratio 7.21 7.18 7.26 8.09 8.08
Tier 1 capital ratio 9.15 9.18 9.27 10.18 10.17
Total capital ratio 12.59 10.43 10.52 11.43 11.42
====================================================================================================================================
(1)Includes special charge of $13.8 million -- see Note 3 to the consolidated
financial statements included in this report.
(2)Balances exclude mortgage loans held for sale.
12
INTRODUCTION
The following commentary presents management's discussion and analysis of
Citizens Banking Corporation's financial condition and results of operations for
the three months ended March 31, 2003 and should be read in conjunction with the
unaudited consolidated financial statements and notes included elsewhere in this
report and the audited consolidated financial statements and notes contained in
our 2002 Annual Report on Form 10-K. Unless the context indicates otherwise, all
references in the discussion to "Citizens," the "Company," "our," "us" and "we"
refer to Citizens Banking Corporation and its subsidiaries.
Discussions in this quarterly report that are not statements of historical fact
(including statements that include terms such as "believe", "expect", and
"anticipate") are forward-looking statements that involve risks and
uncertainties, and our actual future results could materially differ from those
discussed. Factors that could cause or contribute to such differences include,
but are not limited to, adverse changes in our loan portfolios and the resulting
credit risk-related losses and expenses, our future lending and collections
experience and the potential inadequacy of our loan loss reserves, interest rate
fluctuations and other adverse changes in economic or financial market
conditions, the potential inability to hedge certain risks economically, adverse
changes in competition and pricing environments, our potential failure to
maintain or improve loan quality levels and origination volume, our potential
inability to continue to attract core deposits, the potential lack of market
acceptance of our products and services, adverse changes in our relationship
with major customers, unanticipated technological changes that require major
capital expenditures, adverse changes in applicable laws and regulatory
requirements, unanticipated environmental liabilities or costs, our potential
inability to integrate acquired operations or complete our restructuring, the
effects of terrorist attacks and potential attacks, our success in managing the
risks involved in the foregoing, and other risks and uncertainties detailed from
time to time in our filings with the Securities and Exchange Commission.
Other factors not currently anticipated by management may also materially and
adversely affect our results of operations. We do not undertake, and expressly
disclaim any obligation, to update or alter our forward-looking statements
whether as a result of new information, future events or otherwise, except as
required by applicable law.
CRITICAL ACCOUNTING POLICIES
Citizens' consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States and follow general
practices within the industries in which it operates. Application of these
principles requires management to make estimates, assumptions, and judgments
that affect the amounts reported in the financial statements and accompanying
notes. These estimates, assumptions and judgments are based on information
available as of the date of the financial statements; accordingly, as this
information changes, the financial statements could reflect different estimates,
assumptions and judgments. Certain policies inherently have a greater reliance
on the use of estimates, assumptions, and judgments and as such, have a greater
possibility of producing results that could be materially different than
originally reported. Based on the valuation techniques used and the sensitivity
of financial statement amounts to the methods, assumptions and estimates
underlying those amounts, management has identified the determination of the
allowance for loan losses and the benefit obligation and net periodic pension
expense for our employee pension and postretirement benefit plans to be the
accounting areas that require the most subjective or complex judgments, and,
therefore, the most subject to revision as new information becomes available.
Our significant accounting policies are more fully described in Item 7 of our
2002 Annual Report on Form 10-K and in Note 1 to the audited consolidated
financial statements contained in that report. There have been no material
changes to those policies or the estimates made pursuant to those policies
during the most recent quarter.
RESULTS OF OPERATIONS
EARNINGS SUMMARY
Citizens recorded net income of $15,058,000, or $0.34, per diluted share for the
three months ended March 31, 2003, compared with net income of $24,103,000, or
$0.53 per diluted share, for the same quarter of 2002. Returns on average assets
and average equity for the quarter were 0.82% and 9.50%, respectively, compared
with 1.29% and 13.94%, respectively, in 2002. The decline in net income for the
quarter compared to the first quarter of 2002 was due primarily to a higher loan
loss provision and lower net interest income partially offset by lower
noninterest expense.
The increase in the loan loss provision was due primarily to an unanticipated
credit-related charge-off of $11.5 million. This charge-off was on a single
credit in which collateral value was materially overstated (based on borrowing
base reports falsified by the borrower). Net interest income decreased primarily
due to a lower net interest margin and a lower average volume of earning assets.
The decrease in noninterest expense primarily reflects lower bankcard expense
resulting from the sale of our merchant services business in the second quarter
of 2002 and cost savings from our third quarter 2002 restructuring initiatives.
13
NET INTEREST INCOME AND NET INTEREST MARGIN
The primary source of our revenue is net interest income. Net interest income is
the difference between interest income on earning assets, such as loans and
securities, and interest expense on liabilities, including interest-bearing
deposits and borrowings, used to fund those assets. The amount of net interest
income is affected by fluctuations in the amount and composition of earning
assets and funding sources and in the yields earned and rates paid, respectively
on these assets and liabilities. Changes in net interest income are most often
measured through two statistics - interest spread and net interest margin. The
interest spread represents the difference between yields on earning assets and
the rates paid for interest-bearing liabilities. The net interest margin is
expressed as the percentage of net interest income to average earning assets.
Both the interest spread and net interest margin are presented on a
tax-equivalent basis. Because noninterest-bearing funding sources or free
funding, primarily demand deposits and shareholders' equity, also support
earning assets, the net interest margin exceeds the interest spread.
Net interest margin declined to 4.33% in the first quarter of 2003 compared to
4.45% in the first quarter of 2002. While our interest spread widened slightly
period over period, the contribution of net noninterest bearing sources of funds
declined as a percent of earning assets resulting in a lower overall net
interest margin. The decline in net noninterest bearing sources of funds,
(noninterest bearing liabilities and shareholders' equity less nonearning
assets) resulted from our investment in bank owned life insurance in the third
quarter of 2002 and a decline in shareholders' equity due to share repurchases
and dividends exceeding net income.
Net interest income declined $3.5 million to $71.5 million in the first quarter
of 2003 compared to $75.0 million in the first quarter of 2002 due to the lower
net interest margin and a decline in average earning assets. The table below
shows the effect of changes in average balances ("volume") and market rates of
interest ("rate") on interest income, interest expense and net interest income
for major categories of earning assets and interest-bearing liabilities. An
analysis of net interest income, interest spread and net interest margin with
average balances and related interest rates for the three months ended March 31,
2003 and 2002 is presented on the following page.
- -----------------------------------------------------------------------------------------------------------------------
ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
2003 Compared with 2002
--------------------------------------------
Increase (Decrease)
Three Months Ended March 31, Due to Change in
Net ---------------------------
(in thousands) Change (1) Rate (2) Volume (2)
- -----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Money market investments $ (272) $ (133) $ (139)
Investment securities:
Taxable 2,065 (908) 2,973
Tax-exempt (200) (20) (180)
Mortgage loans held for sale (690) (560) (130)
Loans:
Commercial (7,074) (6,144) (930)
Real estate (4,959) (1,478) (3,481)
Direct consumer (1,752) (1,818) 66
Indirect consumer (1,184) (869) (315)
-------- -------- -------
Total (14,066) (11,930) (2,136)
-------- -------- -------
INTEREST EXPENSE
Deposits:
Demand (430) (1,124) 694
Savings (1,099) (1,146) 47
Time (8,004) (5,529) (2,475)
Short-term borrowings (345) (295) (50)
Long-term debt (735) (1,364) 629
-------- -------- -------
Total (10,613) (9,458) (1,155)
-------- -------- -------
NET INTEREST INCOME $ (3,453) $ (2,472) $ (981)
======== ======== =======
=======================================================================================================================
(1) Changes are based on actual interest income and do not reflect taxable
equivalent adjustments.
(2) The change in interest not solely due to changes in volume or rates has been
allocated in proportion to the absolute dollar amounts of the change in
each.
14
- ---------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
2003 2002
-------------------------------------- -------------------------------------
Three Months Ended March 31 AVERAGE AVERAGE Average Average
(in thousands) BALANCE INTEREST(1) RATE(2) Balance Interest(1) Rate(2)
- ---------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Money market investments:
Federal funds sold $ 29,171 $ 84 1.16 % $ 68,149 $ 283 1.66 %
Other 1,898 3 0.66 17,930 76 1.71
Investment securities(3):
Taxable 1,061,281 14,434 5.44 842,657 12,369 5.87
Tax-exempt 405,524 5,184 7.87 419,629 5,384 7.89
Mortgage loans held for sale 138,275 2,022 5.85 147,181 2,712 7.37
Loans:
Commercial 3,256,707 46,214 5.84 3,340,999 53,288 6.56
Real estate mortgage 587,692 9,313 6.34 807,369 14,272 7.07
Direct consumer 857,422 14,633 6.92 817,145 16,385 8.12
Indirect consumer 640,807 12,322 7.80 657,138 13,506 8.34
---------- ---------- ---------- ---------
Total earning assets(3) 6,978,777 104,209 6.23 7,118,197 118,275 6.92
NONEARNING ASSETS
Cash and due from banks 171,491 187,363
Bank premises and equipment 116,264 128,782
Investment security fair value adjustment 64,090 39,004
Other nonearning assets 238,294 172,294
Allowance for loan losses (114,692) (80,933)
---------- ----------
Total assets $7,454,224 $7,564,707
========== ==========
INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing demand 1,314,615 3,710 1.14 1,068,838 4,140 1.57
Savings deposits 1,369,434 2,910 0.86 1,368,753 4,009 1.19
Time deposits 2,316,693 18,417 3.22 2,631,974 26,421 4.07
Short-term borrowings 214,786 620 1.17 232,045 965 1.69
Long-term debt 690,122 7,046 4.13 628,399 7,781 5.02
---------- ---------- ---------- ---------
Total interest-bearing liabilities 5,905,650 32,703 2.24 5,930,009 43,316 2.96
---------- ---------
NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing demand 851,929 854,106
Other liabilities 53,284 79,994
Shareholders' equity 643,361 700,598
---------- ----------
Total liabilities and shareholders' equity $7,454,224 $7,564,707
========== ==========
INTEREST SPREAD $ 71,506 3.99 % $ 74,959 3.96 %
========== =========
Contribution of net noninterest bearing sources of funds 0.34 0.49
----- -----
NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 4.33 % 4.45 %
=================================================================================================================================
(1) Interest income shown on actual basis and does not include taxable
equivalent adjustments.
(2) Average rates are presented on an annual basis and include taxable
equivalent adjustments to interest income of $3,476,000 and $3,640,000 for
the three months ended March 31, 2003 and 2002, respectively, based on a
tax rate of 35%.
(3) For presentation in this table, average balances and the corresponding
average rates for investment securities are based upon historical cost,
adjusted for amortization of premiums and accretion of discounts.
15
The decrease in net interest income reflected both net unfavorable volume and
rate-related variances. The net unfavorable volume variance was caused primarily
by a decline in loans, particularly real estate mortgage loans. Mortgage loans
declined due to high prepayment activity, sale of most new mortgage loan
production into the secondary market and securitization in 2002 of $28.6 million
of mortgage loan originations and $114.3 million of seasoned portfolio mortgage
loans through Federal National Mortgage Association ("FNMA") and Federal Home
Loan Mortgage Corporation ("FHLMC"). The decline in loan volume was partially
offset by a favorable volume variance in the taxable investment securities
portfolio, as we retained a portion of the mortgage backed securities created
from the aforementioned FNMA and FHLMC securitizations in 2002 and grew, during
the first quarter of 2003, the investment portfolio by $395 million, largely
with medium-term, mortgage backed securities. The net unfavorable rate-related
variance primarily reflects our asset-sensitive interest rate risk position
coupled with the Federal Reserve's action in the fourth quarter of 2002 to lower
short-term interest rates by 50 basis points. Yields on commercial loans and
certain consumer home equity loans were particularly impacted as many of these
loans are tied to the prime interest rate, which declined in step with the
aforementioned decline in short-term interest rates. Funding costs have declined
in step with the decline in asset yields as we refinanced $75 million of high
cost FHLB debt in the third quarter of 2002 and continue to see a shift in
deposit accounts from higher cost savings and time deposits to lower cost demand
deposits.
To offset, in part, the effects on net interest income of slow loan growth, we
elected in the first quarter of 2003 to grow our investment security portfolio.
We use our investment portfolio as a component in our overall asset liability
management process, including how we structure our desired interest rate risk
profile. Approximately $228 million of the $395 million increase in investment
securities during the quarter was funded in the latter half of March 2003 with
cash flow from loan repayments, runoff of investments and short-term borrowings.
The $228 million in purchased securities currently generates on average a
positive net interest spread of approximately 250 basis points over our
short-term borrowing costs. Growth in the investment securities portfolio is
expected to provide additional net interest income in future periods compared to
the first quarter of 2003, albeit with a somewhat lower net interest margin,
while moving us closer to a more neutral interest rate risk profile. We continue
to monitor the balance sheet to insulate net interest income from significant
swings caused by interest rate volatility. Our policies in this regard are
further discussed in "-- Interest Rate Risk".
NONINTEREST INCOME
Noninterest income for the quarter was $23.3 million, a decrease of $1.4
million, or 5.8%, from the first quarter of 2002. The decrease primarily
reflects lower bankcard and trust fees partially offset by higher mortgage
banking revenue. An analysis of significant sources of noninterest income during
the three months ended March 31, 2003 and 2002 are summarized in the table
below.
- -------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME Three Months Ended
March 31, Change in 2003
------------------------- -------------------------
(in thousands) 2003 2002 Amount Percent
- -------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 6,590 $ 6,632 $ (42) (0.6)%
Trust fees 4,220 4,858 (638) (13.1)
Mortgage and other loan income 5,154 4,025 1,129 28.0
Brokerage and investment fees 1,768 2,050 (282) (13.8)
Bankcard fees 735 2,758 (2,023) (73.4)
Investment securities gains 48 2 46 N/M
Other, net 4,772 4,401 371 8.4
-------- --------- --------
Total noninterest income $ 23,287 $ 24,726 $ (1,439) (5.8)
======== ========= ========
=========================================================================================================================
N/M - Not Meaningful
Trust fees for the quarter, which are generated from personal, institutional and
employee benefit products and services, decreased $0.6 million, or 13.1%,
compared to the first quarter of 2002. These fees are based primarily on the
market value of assets under administration. Trust fees have declined since the
first quarter of 2002, principally as a result of the decline in the equity
markets. Client retention, net new business acquisition and investment market
stability all contribute to assets under administration. Total trust assets
under administration were $2.478 billion at March 31, 2003, down $635 million
from March 31, 2002, and $76.7 million from December 31, 2002.
Mortgage and other loan income increased $1.1 million, or 28.0%, in the first
quarter of 2003 compared to the same period in 2002 due to higher mortgage
banking revenue. Mortgage banking revenue, which includes mortgage loan
origination, servicing and sales activity, increased $1.0 million, or 29.8%, in
the first quarter of 2003 compared to the same quarter in 2002. The increase was
primarily due to higher gains on the sale of mortgage loans and the related
servicing rights. A strong mortgage origination market, spurred by low mortgage
interest rates, helped push total mortgage originations to $350 million
16
in the first quarter, up $128 million, or 57.8%, compared to the first quarter
of 2002. The majority of all new mortgage loan originations in both quarters
were sold in the secondary market.
Bankcard fees, which includes revenue generated from personal and business
credit and/or debit cards as well as merchant services, declined $2.0 million,
or 73.4%, in the first quarter of 2003 compared to the same period of 2002. The
decline resulted primarily from the sale of the merchant services business in
the second quarter of 2002.
Other noninterest income increased $0.4 million, or 8.4%, compared to the first
quarter of 2002 due primarily to higher ATM network fees, title insurance fees
and life insurance income. The increase in ATM network fees primarily reflects
higher surcharge revenue due to increases in the convenience fee charged to
non-client users of our ATM network in March 2002 and March 2003. Title
insurance fees increased due to higher mortgage origination volume. Higher life
insurance income reflects the purchase of $78 million of separate account bank
owned life insurance in the third quarter of 2002.
Management currently expects noninterest income for 2003 to be lower than in
2002 due primarily to the sale of the merchant services business in 2002. The
gain of $5.4 million recorded in 2002 for this sale, as well as the loss of
revenue from the business, is expected to decrease noninterest income by
approximately $8.7 million in 2003. Based on the current economic and interest
rate environment, the remaining components of noninterest income are anticipated
to remain relatively flat on a collective basis in 2003.
NONINTEREST EXPENSE
Noninterest expense for the quarter was $56.6 million compared to $61.2 million
for the first quarter of 2002. In general, the 7.5% decrease reflected payroll
and other cost savings from the third quarter 2002 restructuring initiatives,
and lower bankcard expenses, partially offset by higher professional fees. An
analysis of significant components of noninterest expense during the three
months ended March 31, 2003 and 2002 are summarized in the table below.
- ----------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE Three Months Ended
March 31, Change in 2003
-------------------------- ------------------------
(in thousands) 2003 2002 Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits $30,112 $ 32,200 $ (2,088) (6.5)%
Equipment 4,169 4,858 (689) (14.2)
Occupancy 4,695 4,615 80 1.7
Professional services 3,708 2,835 873 30.8
Data processing services 3,316 3,125 191 6.1
Bankcard expenses 91 2,082 (1,991) (95.6)
Advertising and public relations 2,049 1,831 218 11.9
Postage and delivery 1,678 1,758 (80) (4.6)
Telephone 1,175 1,376 (201) (14.6)
Stationery and supplies 895 1,078 (183) (17.0)
Other, net 4,693 5,433 (740) (13.6)
------- -------- --------
Total noninterest expense $56,581 $ 61,191 $ (4,610) (7.5)
======= ======== ========
============================================================================================================================
As a result of the third quarter 2002 restructuring initiatives, noninterest
expense for the first quarter of 2003 compared to the first quarter of 2002
decreased in a number of categories. Salaries and employee benefits, equipment
expense (primarily depreciation and equipment maintenance), postage and
delivery, telephone, and stationery and supplies expense were all down due to
these initiatives, which included branch closures and staff reductions. Related
reductions in building depreciation and utilities expense (components of
occupancy expense) were more than offset, however, by higher maintenance and
janitorial costs unrelated to the restructuring. The decreases in equipment and
telephone expense also reflect improved pricing from new or renegotiated
contracts. The decrease in staffing costs was partially offset by higher medical
expenses. We had 2,415 full time equivalent employees at March 31, 2003, down
from 2,735 at March 31, 2002.
Professional services expense, comprised primarily of legal, consulting, audit
and examination costs, increased $0.9 million, or 30.8%, during the quarter
compared to the first quarter of 2002. The increase was primarily due to the
engagement of banking industry consultants to assist in implementing the new
business model and to reorganize the consumer, business and wealth management
lines of business. As a result of these expenditures, we anticipate future
improvement in customer service levels, lower operating expenses, increased
revenue generation capacity, improved credit quality and enhanced risk
management techniques following the near term expense increases incurred as we
implement these changes relating to the new business model.
17
Bankcard expense declined $2.0 million, or 95.6%, in the first quarter of 2003
compared to the same quarter in 2002 due to the previously mentioned sale of our
merchant services business.
Other noninterest expense decreased primarily due to the reversal in the first
quarter of 2003 of $0.1 million in accrued reserves for employee severance and
benefits related to the third quarter 2002 special charge and the payment in the
first quarter of 2002 of $0.5 million in partial settlement of an early contract
termination fee associated with the sale of our merchant services business.
During 2002, noninterest expense included special and other significant charges
of $20.5 million relating to restructuring and other key actions previously
reported, which are not expected to recur in 2003. We expect the remaining
components of noninterest expense on a collective basis to decrease in 2003 from
2002 levels due to anticipated cost savings from the restructuring announced in
September 2002 and other ongoing strategic initiatives.
INCOME TAXES
Income tax provision was $4,162,000 in the first quarter of 2003 compared to
$9,141,000 during the same period last year. The effective tax rate, computed by
dividing the provision for income taxes by income before taxes was 21.7% for the
first quarter of 2003 compared with 27.5% for the first quarter of 2002. The
decline in income tax provision for the three months ended March 31, 2003 was
caused by lower pre-tax income, attributable primarily to the higher provision
for loan losses.
LINES OF BUSINESS REPORTING
We monitor our financial performance using an internal profitability measurement
system, which provides line of business results and key performance measures.
Our business line results are divided into four major business segments:
Business Banking, Consumer Banking, Wealth Management and Other. For additional
information about each line of business, see Note 19 to the consolidated
financial statements of our 2002 Annual Report on Form 10-K and Note 5 to the
consolidated financial statements of this report. A summary of net income by
each business line is presented below.
- ---------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
(in thousands) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
Business Banking $ 6,235 $12,476
Consumer Banking 7,793 9,910
Wealth Management 527 1,282
Other 503 435
------- -------
Net income $15,058 $24,103
======= =======
=====================================================================================================================
Business Banking net income declined to $6.2 million in the first quarter of
2003 from $12.5 million in the same quarter of the prior year due to a higher
provision for loan losses partially offset by lower noninterest expense and
income taxes. The higher provision for loan losses was caused largely by the
aforementioned $11.5 million unanticipated charge-off on a single credit. The
decline in noninterest expense was primarily due to lower compensation and other
expenses as a result of the third quarter 2002 restructuring initiatives.
Consumer Banking net income declined to $7.8 million in the first quarter of
2003 from $9.9 million in the same quarter of the prior year due to lower net
interest income and noninterest income and a higher provision for loan losses.
The decline in net interest income was caused by a lower volume of residential
mortgage loans and narrower interest spreads on deposits (the difference between
deposit rates and their match-funded credit from our funds transfer pricing
system). Mortgage loans declined as a result of the prior year securitizations,
prepayments on portfolio loans and the sale of most new mortgage loan production
throughout 2002 and the first quarter of 2003. Interest spreads on deposits
declined due to the lower interest rate environment in the first quarter of 2003
compared with the same quarter of the prior year. Noninterest income declined
due to lower bankcard fees as a result of the second quarter 2002 sale of the
merchant services business, partially offset by higher mortgage banking revenue.
The provision for loan losses increased as a result of higher net charge-offs in
the first quarter of 2003 due to a discount on the sale of nonperforming
residential mortgage loans.
Wealth Management net income declined to $0.5 million in the first quarter of
2003 from $1.3 million in the first quarter of 2002 due to lower noninterest
income and higher noninterest expense. Noninterest income declined due to lower
trust fees. Trust fees decreased due to a lower level of assets under
administration resulting primarily from weak equity markets. Noninterest expense
increased due in part to costs associated with ongoing restructuring
initiatives.
18
FINANCIAL CONDITION
Proper management of the volume and composition of our 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. Our investment securities portfolio is
structured to provide a source of liquidity principally through the maturity of
the securities held in the portfolio and to generate an income stream with
relatively low levels of principal risk. Loans comprise the largest component of
earning assets and are some of our 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 used as market conditions and liquidity needs
change.
We had total assets of $7.765 billion as of March 31, 2003, an increase of $243
million, or 3.2%, from $7.522 billion as of December 31, 2002. Total assets
increased as we expanded our investment securities portfolio by $395 million
during the quarter to offset the effects of weak loan demand due to the slow
economy and the prospect of net interest margin pressure from continued low
interest rates. Average earning assets comprised 93.6% of average total assets
during the first three months of 2003 compared with 94.1% in the first three
months of 2002.
INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
Total average investments, including money market investments, comprised 21.5%
of average earning assets during the first three months of 2003, compared with
18.9% for the same period of 2002. Average investment securities for the quarter
were up $86.6 million from year 2002 average levels and $204.5 million from
first quarter 2002 levels. The increase was primarily due to retention of
securities created from mortgage loan securitizations in the second half of 2002
and purchases of securities since the first quarter of 2002. In March 2003, we
implemented an investment portfolio expansion plan to help offset the effect on
net interest income of weak loan demand. We purchased approximately $228 million
of largely medium-term, mortgage backed securities in the latter half of March
2003 with cash flow from loan repayments, runoff of investments and short-term
borrowings.
For the first three months of 2003, average money market investments were down
$55.0 million from first quarter 2002 levels. We held higher levels of money
market investments during most of 2002 in anticipation of purchasing bank-owned
life insurance. We completed a $78 million purchase of bank-owned life insurance
in the third quarter of 2002.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale were $128.1 million at March 31, 2003, down $32.6
million from year-end 2002 but up $18.2 million from March 31, 2002. These
balances generally track the level of originations as we are selling most of our
new residential mortgage loan production into the secondary market due to the
low interest rate environment. Mortgage originations were down in the quarter to
$349.5 million from $467.7 million during the fourth quarter of 2002 but are
still significantly higher than the $221.5 million originated in the first
quarter of 2002. Average mortgage loans held for sale during the first three
months of 2003 comprised 2.0% of average earning assets compared with 2.5%
during the fourth quarter of 2002. Mortgages held for sale are accounted for on
the lower of cost or market basis.
PORTFOLIO LOANS
We extend credit primarily within the local markets of our banking subsidiaries
located in Michigan, Wisconsin, Iowa and Illinois. We generally lend to
consumers and small to mid-sized businesses and, consistent with our emphasis on
relationship banking, most of these credits represent core, multi-relationship
customers who also maintain deposit relationships and use other banking services
such as cash management. Our loan portfolio is diversified by borrower and
industry with no concentration within a single industry that exceeds 10% of
total loans. We do not have any loans to foreign debtors and do not purchase
nationally syndicated loans or participate in highly leveraged transactions. We
seek to limit our credit risk by establishing guidelines to review the aggregate
outstanding commitments and loans to particular borrowers, industries, and
geographic areas. We obtain collateral based on the nature of the credit and our
credit assessment of the customer.
Total portfolio loans at March 31, 2003 were down $130 million, or 2.4%, from
December 31, 2002. The decline in total portfolio loans from year end 2002 was
caused primarily by lower demand for commercial loans in the current sluggish
economy, tightening of our credit standards and, to a lesser extent, a decline
in mortgage loans. Commercial and commercial real estate loan balances,
including construction loans, at March 31, 2003 declined $85 million from
December 31, 2002, again due to weak demand caused by the sluggish economy.
Mortgage loans declined $20 million from December 31, 2002 as we continued
selling the majority of our current mortgage loan production into the secondary
market. Consumer loans, other than mortgage loans, decreased $25 million from
December 31, 2002 as growth in home equity loans was more than offset by a
decline in indirect and other consumer loans. Direct consumer loans declined $3
million, or 0.4%, and indirect consumer loans declined $21 million, or 3.2%,
from December 31, 2002. The decline in indirect and other direct loans
19
occurred primarily in auto lending as a result of increased competition from
captive finance subsidiaries of auto manufacturers and from other lenders.
Total loans are expected to decline slightly during the remainder of 2003 as
growth in consumer loans (primarily home equity) is anticipated to be more than
offset by declines in commercial and mortgage loans. Commercial loans are
expected to decline slowly throughout the year due to lower demand and the
continued implementation of our credit improvement initiatives. Mortgage loans
are also anticipated to decline slowly due to expected prepayments on portfolio
loans and due to the sale of our current mortgage originations into the
secondary market.
At March 31, 2003 and 2002, $125.5 million and $232.7 million, respectively, of
residential real estate loans originated and subsequently sold in the secondary
market were being serviced by Citizens. Capitalized servicing rights relating to
the serviced loans totaled $0.2 million at March 31, 2003 and $1.4 million at
March 31, 2002.
CREDIT RISK MANAGEMENT
Extending credit to businesses and consumers exposes us to credit risk. Credit
risk is the risk that the principal balance of a loan and any related interest
will not be collected due to the inability or unwillingness of the borrower to
repay the loan. Credit risk is mitigated through portfolio diversification that
limits exposure to any single industry or customer. Similarly, credit risk is
also mitigated through the establishment of a comprehensive system of internal
controls, which includes standard lending policies and procedures, underwriting
criteria, collateral safeguards, and surveillance and evaluation by an
independent internal loan review staff of the quality, trends, collectibility
and collateral protection within the loan portfolio. Lending policies and
procedures are reviewed and modified on an ongoing basis as conditions change
and new credit products are offered. Our commercial and commercial real estate
credit administration policies include a loan rating system and an analysis by
the internal loan review staff of loans over a fixed amount and of a sampling of
loans under such amount. Furthermore, account officers are vested with the
responsibility of monitoring their customer relationships and act as the first
line of defense in determining changes in the loan ratings on credits for which
they are responsible. Loans that have migrated within the loan rating system to
a level that requires remediation are actively reviewed by senior management at
regularly scheduled quarterly meetings with the credit administration staff and
the account officers. At these meetings, action plans are developed to either
remediate any emerging problem loans or develop a specific plan for removing
such loans from the portfolio within a short time frame.
Recently, we experienced several unanticipated loan losses resulting from
collateral value shortfalls. To reduce our risk of any further unforeseen losses
from collateral issues, we have, in addition to our normal credit review
procedures, hired outside collateral auditors to conduct field audits on all
loans in excess of $5 million and risk selected loans in excess of $1 million
that are secured by accounts receivable and inventory. A field audit focuses on
the value of the collateral and validates the borrower's reporting processes.
The field audits, which began in late March, are anticipated to be completed
during the second quarter of 2003.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses represents a charge against income and a
corresponding increase in the allowance for loan losses. Credit losses are
charged and recoveries are credited to the allowance for loan losses. The amount
of the provision for loan losses is based on our review of the historical credit
loss experience and such factors that, in our judgment, deserve consideration
under existing economic conditions in estimating probable credit losses. While
we consider the allowance for loan losses to be adequate based on information
currently available, future adjustments to the allowance may be necessary due to
changes in economic conditions, delinquencies or loss rates. See "-- Critical
Accounting Policies."
The provision for loan losses was $19.0 million in the first quarter of 2003, an
increase of $13.7 million over the same period in 2002. This increase was due
primarily to elevated past-due and nonperforming loan levels, a weakened economy
and enhancements to the loan loss allocation model that result in relatively
higher allocations. These enhancements include the incorporation of more recent
historical loss data in the determination of projected loss rates for pools of
loans evaluated collectively.
Net loans charged off during the quarter totaled $16.1 million, or 1.20%, of
average loans (annualized), compared with $5.1 million, or 0.37%, in the first
quarter of 2002. The charge-off of one large commercial credit comprised $11.5
million of the $16.1 million in net charge-offs for the quarter. We also
incurred a $0.7 million charge-off in connection with the sale of $2.8 million
of nonperforming residential mortgage loans at a discount in March 2003. Many of
our commercial clients have been negatively affected by a weak economy that has
yet to show significant signs of recovery. Consequently, business expansion
plans have been curtailed, inventory levels have been reduced and our clients'
ability to repay their debt, in some cases, has been compromised. Based on
current economic conditions, we expect net charge-offs to continue at higher
than historical levels through the remainder of 2003, but to trend downward from
first quarter 2003 levels.
20
A summary of loan loss experience during the three months ended March 31, 2003
and 2002 is provided below.
- -------------------------------------------------------------------------------------------------------------------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES Three Months Ended
March 31,
----------------------------
(in thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses - beginning of period $ 109,467 $ 80,299
Provision for loan losses 18,992 5,250
Charge-offs:
Commercial 14,133 2,646
Commercial real estate 955 ---
Small business 264 239
--------- --------
Total commercial 15,352 2,885
Real estate mortgage 625 53
Consumer - Direct 1,748 1,593
Consumer - Indirect 2,511 2,201
--------- --------
Total charge-offs 20,236 6,732
--------- --------
Recoveries:
Commercial 2,032 356
Commercial real estate 465 ---
Small business 362 42
--------- --------
Total commercial 2,859 398
Real estate mortgage 1 ---
Consumer - Direct 439 395
Consumer - Indirect 863 815
--------- --------
Total recoveries 4,162 1,608
--------- --------
Net charge-offs 16,074 5,124
--------- --------
Allowance for loan losses - end of period $ 112,385 $ 80,425
========= ========
Portfolio loans outstanding at period end (1) $ 5,302,603 $ 5,612,699
Average portfolio loans outstanding during period (1) 5,342,628 5,622,651
Allowance for loan losses as a percentage of portfolio loans 2.12 % 1.43 %
Ratio of net charge-offs during period to average portfolio loans (annualized) 1.20 0.37
Loan loss coverage (allowance as a multiple of net charge-offs, annualized) 1.7 X 3.9 X
=========================================================================================================================
(1) Balances exclude mortgage loans held for sale.
The allowance for credit losses represents our estimate of probable losses
inherent in the loan portfolio. The allowance is based on ongoing quarterly
assessments and is maintained at a level management considers to be adequate to
absorb probable loan losses identified with specific customer relationships and
for probable losses believed to be inherent in the loan portfolio, which have
not been specifically identified. Our evaluation process is inherently
subjective as it requires estimates that may be susceptible to significant
change and have the potential to materially affect net income. Default
frequency, internal risk ratings, expected future cash collections, loss
recovery rates, and general economic factors, among other things, are considered
in this evaluation, as are the size and diversity of individual large credits.
We have not substantively changed our overall approach in the determination of
the allowance for loan losses in 2003 from 2002. Our methodology for measuring
the adequacy of the allowance relies on several key elements, which include
specific allowances for identified problem loans, a formula-based risk-allocated
allowance for the remainder of the portfolio and an unallocated allowance. This
methodology is discussed at length in our 2002 Annual Report on Form 10-K.
The allowance for loan losses was $112.4 million at March 31, 2003, an increase
of $2.9 million compared to December 31, 2002. The higher allowance at March 31,
2003, reflects an increase in both the specific allocated and risk allocated
reserves. At March 31, 2003 the allowance allocated to specific commercial and
commercial real estate credits was $21.0 million, up from $18.7 million at
December 31, 2002. The increase reflects an increase in classified credits
(i.e., those internally risk rated as special mention, substandard or doubtful)
and migration of such credits to higher risk ratings due primarily to the
sluggish economy. Classified credits subject to specific reserves increased to
$90.7 million at March 31, 2003 from $90.4 million at December 31, 2002.
21
The total risk allocated allowance was $87.4 million at March 31, 2003, up from
$83.4 million at December 31, 2002. The amount allocated to commercial and
commercial real estate loans, including construction loans, increased to $70.4
million at March 31, 2003 from $65.5 million at December 31, 2002. The increase
reflected a higher level of classified and nonperforming loans, migration of
loans to higher risk ratings as well as our assessment of current economic
conditions within our local markets. The risk allocated allowance for
residential real estate loans declined to $1.9 million at March 31, 2003, a
decrease of $0.4 million from December 31, 2002, reflecting lower loan balances
and a reduction in nonaccrual loans. Lower nonaccrual loan levels were due, in
part, to the sale in January 2003 of $2.1 million of nonperforming
residential mortgage loans from the F&M banks and the aforementioned sale of
$2.8 million of nonperforming residential loans in March 2003. Even with the
discounts taken for these sales, historical loss ratios in the residential
mortgage portfolio remain very low. The risk allocated allowance for consumer
loans declined to $15.1 million at March 31, 2003 from $15.6 million at December
31, 2002. The decline primarily reflected a decrease in nonaccrual loans and our
continued expectation of stable net charge-offs in this portfolio, primarily due
to a risk-adjusted pricing structure and aggressive collection efforts.
The unallocated allowance was $4.0 million at March 31, 2003, down $3.4 million
from December 31, 2002. The decrease reflects our view that the inherent losses
related to certain factors, such as general economic and business conditions and
the possible imprecision due to changes in the portfolio mix, which we
considered in our evaluation of the unallocated allowance at December 31, 2002
are now recognized at March 31, 2003 in the allocated allowance through
increased specific reserves or migration to higher loss factors used in
determining the risk allocated allowance.
NONPERFORMING ASSETS
The table below provides a summary of nonperforming assets as of March 31, 2003,
December 31, 2002 and March 31, 2002. Nonperforming assets are comprised of
nonaccrual loans, loans with restructured terms and other repossessed assets,
primarily other real estate. Although these assets have more than a normal risk
of loss, they will not necessarily result in a higher level of losses in the
future. Nonperforming assets totaled $93.3 million as of March 31, 2003,
compared with $95.7 million as of December 31, 2002 and $80.1 million as of
March 31, 2002.
- --------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
MARCH 31, December 31, March 31,
(in thousands) 2003 2002 2002
- --------------------------------------------------------------------------------------------------------------------------
Nonperforming Loans
Nonaccrual Commercial:
Commercial $ 49,275 $ 50,231 $ 28,679
Commercial real estate 20,433 19,301 16,802
Small business 1,459 813 1,417
-------- -------- --------
Total commercial 71,167 70,345 46,898
Nonaccrual Consumer:
Direct 3,416 3,704 4,366
Indirect 1,646 1,803 1,686
-------- -------- --------
Total consumer 5,062 5,507 6,052
Nonaccrual Mortgage 7,878 10,865 15,048
-------- -------- --------
Total nonaccrual loans 84,107 86,717 67,998
Loans 90 days past due and still accruing 990 860 3,176
Restructured loans --- --- 336
-------- -------- --------
Total nonperforming loans 85,097 87,577 71,510
Other Repossessed Assets Acquired (ORAA) 8,226 8,094 8,600
-------- -------- --------
Total nonperforming assets $ 93,323 $ 95,671 $ 80,110
======== ======== ========
Nonperforming assets as a percent of portfolio loans plus ORAA (1) 1.76 % 1.76 % 1.43 %
Nonperforming assets as a percent of total assets 1.20 1.27 1.07
Allowance for loan loss as a percent of nonperforming loans 132.07 125.00 112.47
Allowance for loan loss as a percent of nonperforming assets 120.43 114.42 100.39
==========================================================================================================================
(1) Portfolio loans exclude mortgage loans held for sale.
22
Nonperforming commercial loans comprised 84.6% of total nonaccrual loans at
March 31, 2003, compared with 81.1% at December 31, 2002, and 69.0% at March 31,
2002. The increase in nonperforming commercial loans is reflected in the
allowance for loan losses through specific and risk allocated allowances as of
March 31, 2003. The allocated allowance for commercial and commercial real
estate loans increased $7.2 million to $90.4 million at March 31, 2003 from
December 31, 2002. We believe the risk of loss in the commercial real estate
nonperforming loans is significantly less than the total principal balance, due
to the nature of the underlying collateral and the value of such collateral in
relation to the total credit exposure. These loans are generally for
owner-occupied properties and the sources of repayment are not dependent on the
performance of the real estate market.
Nonperforming loans in both the residential mortgage and consumer loan
portfolios were down at March 31, 2003 from December 31, 2002. The lower level
of nonperforming residential real estate loans primarily reflects the
aforementioned sales of nonperforming residential mortgage loans, which totaled
$4.9 million during the quarter. In the consumer portfolio, a change in asset
mix, which included strong growth in home equity loans, has helped reduce
nonperforming levels.
The level and composition of nonperforming assets are affected by economic
conditions in our 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 our results. In addition to loans classified
as nonperforming, we carefully monitor other credits that are current in terms
of principal and interest payments but which we believe may deteriorate in
quality if economic conditions change. As of March 31, 2003, such loans amounted
to $157.1 million, or 3.0% of total portfolio loans, compared with $134.6
million, or 2.5%, of total portfolio loans as of December 31, 2002. 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 or
geographic location.
Certain of our nonperforming loans included in the nonperforming loan table
above are considered to be impaired. Total loans considered impaired and their
related reserve balances at March 31, 2003 and 2002 as well as their effect on
net income for the first quarter of 2003 and 2002 follows:
- --------------------------------------------------------------------------------------------------------------------
IMPAIRED LOAN INFORMATION Valuation Reserve
--------------------------
(in thousands) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Balances - March 31
Impaired loans with valuation reserve $ 48,744 $ 49,103 $ 16,318 $ 14,390
Impaired loans with no valuation reserve 37,937 15,187 --- ---
-------- -------- -------- --------
Total impaired loans $ 86,681 $ 64,290 $ 16,318 $ 14,390
======== ======== ======== ========
Impaired loans on nonaccrual basis $ 71,167 $ 46,898 $ 9,411 $ 10,975
Impaired loans on accrual basis 15,514 17,392 6,907 3,415
-------- -------- -------- --------
Total impaired loans $ 86,681 $ 64,290 $ 16,318 $ 14,390
======== ======== ======== ========
Average balance for the year $ 81,597 $ 63,170
Interest income recognized for the quarter 161 299
Cash collected applied to outstanding principal 696 348
====================================================================================================================
DEPOSITS
Average deposits declined $71 million, or 1.2%, in the first three months of
2003 compared to the same period in 2002. Total deposits decreased $125 million
to $5.812 billion at March 31, 2003 from $5.937 billion at year-end 2002.
Deposits declined from December 31, 2002 primarily due to a seasonal decrease in
commercial demand deposit accounts and lower time deposit balances. The deposit
mix improved, however, with growth in core interest bearing checking deposits
and declines in large denomination and consumer time deposits. The increase in
core interest bearing checking deposits was driven by growth of an aggressively
priced money market checking account product. Brokered and large denomination
time deposits were down as we were less aggressive in pricing such deposits.
We gather deposits primarily in our local markets and have not traditionally
relied on purchased funds for any significant funding. At March 31, 2003, we had
approximately $674 million in brokered deposits and time deposits greater than
$100,000 as an alternative source of funding, down $4 million from December 31,
2002. We will continue to evaluate the use of alternative funding sources such
as brokered deposits as funding needs change. We continue to promote
relationship driven core deposit growth and stability through focused marketing
efforts and competitive pricing strategies.
23
BORROWED FUNDS
Short-term borrowings are comprised primarily of Federal funds purchased,
securities sold under agreements to repurchase, Federal Home Loan Bank ("FHLB")
advances and Treasury Tax and Loan notes. Average short-term borrowings
decreased $17 million, or 7.4%, to $214.8 million during the first three months
of 2003 from $232.0 million during the same period of 2002. The decrease
primarily reflected reduced reliance on short-term borrowings as a funding
source due to lower earning asset levels.
Long-term debt accounted for $690.1 million, or 11.7%, of average
interest-bearing funds for the first three months of 2003, compared with $628.4
million, or 10.6%, of average interest-bearing funds for the same period in
2002. Total long-term debt of $750.6 million, at March 31, 2003, included $624.1
million of borrowings from the FHLB. Of the FHLB borrowings, $319.9 million
matures at various times over the next five years, with the remainder maturing
over the next 18 years. These borrowings are primarily used to fund our loan and
investment portfolios.
In the first quarter of 2003, we issued $125 million of subordinated debt with a
fixed coupon rate of 5.75% maturing on February 1, 2013. We also entered into a
fair value hedge to hedge the interest rate risk on the subordinated debt. As of
March 31, 2003, the notional value and fair value of the interest rate swap was
$125 million and $1.7 million, respectively. Under the contract, we receive an
average fixed rate of 4.36% and pay a variable rate equal to six month LIBOR.
The weighted-average rate is 1.35% at March 31, 2003 and reprices every six
months. The initial net interest spread on the swap contract is 3.01%,
effectively reducing the net cost of borrowing from 5.75% to 2.74% for the first
six month period.
Borrowed funds are expected to remain an important, reliable and cost-effective
funding vehicle for us.
CAPITAL RESOURCES
We continue to maintain a strong capital position which supports our current
needs and provides a sound foundation to support further expansion. Our
regulatory capital ratios are consistently at or above the "well capitalized"
standards and all our bank subsidiaries have sufficient capital to maintain a
well capitalized designation. Our capital ratios as of March 31, 2003, December
31, 2002 and March 31, 2002 are presented below.
---------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS Regulatory
Minimum For
"Well MARCH 31, December 31, March 31,
Capitalized" 2003 2002 2002
---------------------------------------------------------------------------------------------------------------
Risk based capital:
Tier I 6.0 % 9.2 % 9.2 % 10.2 %
Total capital 10.0 12.6 10.4 11.4
Tier I leverage 5.0 7.2 7.2 8.1
===============================================================================================================
Shareholders' equity at March 31, 2003 was $640.4 million, compared with $650.5
million at December 31, 2002 and $700.0 million as of March 31, 2002. Book value
per common share at March 31, 2003, December 31, 2002 and March 31, 2002 was
$14.79, $14.88 and $15.55, respectively. We declared and paid cash dividends of
$0.285 per share in the first quarter of 2003, the same as declared in the first
quarter of 2002. Shareholders' equity declined in the first quarter of 2003 as
net income was more than offset by cash dividends and the capital requirements
of our share repurchase program.
In October 2001, our board of directors approved a plan to repurchase up to
3,000,000 shares of our common stock from time to time in the market. During the
first quarter of 2003, we purchased a total of 443,400 shares for $11.2 million.
As of March 31, 2003, a total of 2,378,000 shares of common stock had been
repurchased under the repurchase plan at an average price of $28.39. Our
purchase of our shares is subject to limitations that may be imposed by
applicable securities laws and regulations and the rules of the Nasdaq Stock
Market. The timing of the purchases and the number of shares to be bought at any
one time depend on market conditions and our capital requirements. There can be
no assurance that we will repurchase the remaining shares authorized to be
repurchased, or that any additional repurchases will be authorized by our board
of directors.
24
LIQUIDITY AND DEBT CAPACITY
We monitor our liquidity position so that funds will be available at a
reasonable cost to meet financial commitments, to finance business expansion and
to take advantage of unforeseen opportunities. Our subsidiary banks derive
liquidity primarily through core deposit growth, maturity of money market
investments, and maturity and sale of investment securities and loans.
Additionally, our subsidiary banks have access to market borrowing sources on an
unsecured, as well as a collateralized basis, for both short-term and long-term
purposes including, but not limited to, the Federal Reserve and Federal Home
Loan Banks where the subsidiary banks are members. Another source of liquidity
is the ability of our parent company to borrow funds on both a short-term and
long-term basis.
Our parent company has a $75 million short-term revolving credit facility with a
group of unaffiliated banks and has used this facility for various corporate
purposes from time to time. There were no borrowings outstanding under this
credit facility as of March 31, 2003. Additionally, as discussed above, we
issued, in the first quarter of 2003, $125 million of subordinated debt maturing
on February 1, 2013. A portion of the proceeds from this new offering was used
to repay amounts outstanding under our short-term revolving credit facility. The
remainder of the net proceeds was used or is available for general corporate
purposes. The related loan documentation requires semi-annual interest payments
beginning in August 2003. Because it is subordinated debt, the new debt
qualifies as a component of our capital, bolstering our overall capital ratios.
The higher capital ratios are viewed favorably by regulators and credit rating
agencies.
Recent downgrades by FitchRatings and Standard & Poor's Rating Service of our
long-term credit rating to BBB from BBB+ due to asset quality deterioration and
increased nonperforming assets are not expected to materially affect our
liquidity position. Our short-term credit rating remained unchanged at F2 and
A-2, respectively. Our strong capital position provides enough financial
flexibility to deal with a degree of additional credit deterioration, if such
were to occur.
We manage the liquidity of our subsidiary banks to meet client cash flow needs
while maintaining funds available for loan and investment opportunities. We
manage the liquidity of our parent company provide funds to pay dividends to
shareholders, service debt, invest in subsidiaries and to satisfy other
operating requirements. The primary sources of liquidity for the parent company
are dividends and returns of investment from its subsidiaries. Our banking
subsidiaries are currently unable to pay dividends to our parent company without
further regulatory approval due to statutory restrictions resulting from our net
loss in the third quarter of 2002. Each of our banking subsidiaries is subject
to dividend limits under the laws of the state in which it is chartered and, as
member banks of the Federal Reserve System, is subject to the dividend limits of
the Federal Reserve Board. The Federal Reserve Board allows a member bank to
make dividends or other capital distributions in an amount not exceeding the
current calendar year's net income, plus retained net income of the preceding
two years. Distributions in excess of this limit require prior approval of the
Federal Reserve Board. We expect that the dividend paying capacity of our bank
subsidiaries will return to historical levels by the fourth quarter of 2003,
although there can be no assurance to that effect.
We also have certain financial guarantees and letters of credit that may impact
liquidity. Since many of these commitments historically have expired without
being drawn upon, the total amount of these commitments does not necessarily
represent our future cash requirements. Further information on these commitments
is presented in Note 9 to the consolidated financial statements in this
Quarterly Report on Form 10-Q.
INTEREST RATE RISK
Interest rate risk generally arises when the maturity or repricing structure of
our assets and liabilities differ significantly. Asset/liability management,
which we use to address such risk, is the process of developing, testing and
implementing strategies that seek to maximize net interest income, maintain
sufficient liquidity and minimize exposure to significant changes in interest
rates. This process includes monitoring contractual and expected repricing of
assets and liabilities as well as forecasting earnings under different interest
rate scenarios and balance sheet structures. Generally, we seek a structure that
insulates net interest income from large swings attributable to changes in
market interest rates. Our static interest rate sensitivity ("GAP") as of March
31, 2003 and 2002 is illustrated in the table on the following page.
As shown, our interest rate risk position at March 31, 2003 was asset sensitive
in the less than one year time frame with rate sensitive assets exceeding rate
sensitive liabilities by $1.066 billion. Our interest rate risk position at
March 31, 2002 was asset sensitive in the less than one-year time frame with
rate sensitive assets exceeding rate sensitive liabilities by $458.3 million.
Because liabilities tend to reprice more slowly than assets, application of GAP
theory would suggest that with our asset sensitive position, our net interest
income could rise if interest rates rise and could decrease in a falling rate
environment. Net interest income is not only affected by the level and direction
of interest rates, but also by the shape of the yield curve, relationships
between interest sensitive instruments and key driver rates, as well as balance
sheet growth and the timing of changes in these variables.
25
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY
TOTAL
1-90 91-180 181-365 WITHIN 1-5 Over
(dollars in millions) Days Days Days 1 YEAR Years 5 Years Total
- ----------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2003
RATE SENSITIVE ASSETS (1)
Loans (2) $ 2,725.9 $ 162.0 $ 334.8 $ 3,222.7 $ 1,564.9 $ 643.1 $ 5,430.7
Investment securities 170.4 128.4 260.7 559.5 704.2 588.9 1,852.6
Short-term investments 1.1 --- --- 1.1 --- --- 1.1
--------- ------- -------- --------- --------- --------- ---------
Total $ 2,897.4 $ 290.4 $ 595.5 $ 3,783.3 $ 2,269.1 $ 1,232.0 $ 7,284.4
========= ======= ======== ========= ========= ========= =========
RATE SENSITIVE LIABILITIES
Deposits (3) $ 650.7 $ 562.3 $ 905.7 $ 2,118.7 $ 2,255.8 $ 567.5 $ 4,942.0
Other interest bearing liabilities 598.5 0.1 0.4 599.0 210.5 414.5 1,224.0
--------- ------- -------- --------- --------- --------- ---------
Total $ 1,249.2 $ 562.4 $ 906.1 $ 2,717.7 $ 2,466.3 $ 982.0 $ 6,166.0
========= ======= ======== ========= ========= ========= =========
Period GAP (4) $ 1,648.2 $ (272.0) $ (310.6) $ 1,065.6 $ (197.2) $ 250.0 $ 1,118.4
Cumulative GAP 1,648.2 1,376.2 1,065.6 868.4 1,118.4
Cumulative GAP to Total Assets 21.23 % 17.72 % 13.72 % 13.72 % 11.18 % 14.40% 14.40%
Multiple of Rate Sensitive Assets 2.32 0.52 0.66 1.39 0.92 1.25 1.18
to Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2002
RATE SENSITIVE ASSETS (1)
Loans (2) $ 2,502.4 $ 262.6 $ 477.5 $ 3,242.5 $ 2,061.0 $ 419.1 $ 5,722.6
Investment securities 101.4 34.5 56.3 192.2 630.4 523.9 1,346.5
Short-term investments 32.9 --- --- 32.9 --- --- 32.9
--------- -------- -------- --------- --------- --------- ---------
Total $ 2,636.7 $ 297.1 $ 533.8 $ 3,467.6 $ 2,691.4 $ 943.0 $ 7,102.0
========= ======== ======== ========= ========= ========= =========
RATE SENSITIVE LIABILITIES
Deposits (3) $ 873.2 $ 626.5 $1,158.2 $ 2,657.9 $ 2,072.0 $ 320.1 $ 5,050.0
Other interest bearing liabilities 326.3 25.0 0.1 351.4 171.1 308.4 830.9
--------- -------- -------- --------- --------- --------- ---------
Total $ 1,199.5 $ 651.5 $1,158.3 $ 3,009.3 $ 2,243.1 $ 628.5 $ 5,880.9
========= ======== ======== ========= ========== ========= =========
Period GAP (4) $ 1,437.2 $ (354.4) $ (624.5) $ 458.3 $ 448.3 $ 314.5 $ 1,221.1
Cumulative GAP 1,437.2 1,082.8 458.3 906.6 1,221.1
Cumulative GAP to Total Assets 19.21 % 14.47 % 6.13 % 6.13 % 12.12 % 16.32% 16.32%
Multiple of Rate Sensitive Assets 2.20 0.46 0.46 1.15 1.20 1.50 1.21
to Liabilities
============================================================================================================================
(1) Incorporates prepayment projections for certain assets which may shorten the
time frame for repricing or maturity compared to contractual runoff.
(2) Includes mortgage loans held for sale.
(3) Includes interest bearing savings and demand deposits of $715 million and
$762 million in 2003 and 2002, respectively, in the less than one year
category, and $1.981 billion and $1.694 billion, respectively in the over
one year category, based on historical trends for these noncontractual
maturity deposit types, which reflects industry standards.
(4) GAP is the excess of rate sensitive assets (liabilities).
We are continually reviewing our interest rate risk position and modifying our
strategies based on projections to minimize the impact of future interest rate
changes. While traditional GAP analysis does not always incorporate adjustments
for the magnitude or timing of non-contractual repricing, the table above does
incorporate appropriate adjustments as indicated in footnotes 1 and 3 to the
table. Because of these and other inherent limitations of any GAP analysis, we
use net interest income simulation modeling as our primary tool to evaluate the
impact of changes in interest rates and balance sheet strategies. We use these
simulations to develop strategies that can limit interest rate risk and provide
liquidity to meet client loan demand and deposit preferences. We conduct
periodic evaluations to measure net interest income sensitivity. Simulations
were done after March 31, 2003 assuming a static balance sheet and flat interest
rates as the base case. Compared to this base case, net interest income over the
next twelve months should remain stable if interest rates rise within likely
ranges, but may decline if interest rates decrease.
26
We may also, from time-to-time, use derivative contracts to help manage or hedge
our exposure to interest rate risk and in conjunction with our mortgage banking
operations. We currently use interest rate swaps, mortgage loan commitments and
forward mortgage loan sales. Interest rate swaps are contracts with a third
party (the "counter-party") to exchange interest payment streams based upon an
assumed principal amount (the "notional amount"). The notional amount is not
advanced from the counter-party. Swap contracts are carried at fair value on the
consolidated balance sheet with the fair value representing the net present
value of expected future cash receipts or payments based on market interest
rates as of the balance sheet date. The fair values of the contracts change
daily as market interest rates change. The interest rate swap contracts require
semi-annual cash settlement beginning in August 2003. Further discussion of
derivative instruments is included in Note 1 to the consolidated financial
statements in our 2002 Annual Report on Form 10-K and in Note 8 to the
consolidated financial statements presented in this report.
In February 2003, we entered into ten-year interest rate swap agreements for a
notional amount totaling $125 million to effectively convert our new fixed rate
subordinated debt into a variable rate instrument. Under this arrangement, we
receive payment from the counter-party at a specified fixed-rate (4.36%) in
exchange for payments to the counter-party at a specified floating rate index
(six-month LIBOR --1.35% initially). Thus what was a fixed rate obligation
before entering into the derivative arrangement was transformed into a variable
rate obligation.
Holding residential mortgage loans for sale and committing to fund residential
mortgage loan applications at specific rates also exposes us to interest rate
risk during the period from loan funding until sale. To minimize this risk, we
enter into mandatory forward commitments, generally entered into at time of
application, to sell residential mortgage loans. These mandatory forward
commitments are considered derivatives under SFAS 133. These forward commitments
qualify and have been designated as fair value hedges of our portfolio of loans
held for sale and our new mortgage loan commitments. Our policy to hedge our
market rate risk with mandatory forward commitments has been highly effective
and has not generated any material gains or losses. As of March 31, 2003, we had
forward commitments to sell mortgage loans of $261.5 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the information concerning quantitative and
qualitative disclosures about market risk contained in Item 7A of Citizens' 2002
Annual Report on Form 10-K, except as set forth in Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Interest Rate Risk.
ITEM 4. CONTROLS AND PROCEDURES
The management of Citizens Banking Corporation is responsible for establishing
and maintaining effective disclosure controls and procedures, as defined under
Rule 13a-14 of the Securities Exchange Act of 1934. Within the 90 days prior to
the date of this report, we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures are effective to cause the material information required to be
disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934 to be recorded, processed, summarized and reported within
the time periods specified in the Commission's rules and forms. There have been
no significant changes in our internal controls or in other factors which could
significantly affect internal controls subsequent to the date we carried out our
evaluation.
27
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On March 28, 2003, the Board of Directors adopted an amendment and
restatement of the Bylaws. Among the changes made are various amendments to
provisions in the Bylaws governing the calling of special meetings of
shareholders and the conduct of and procedure for shareholders to bring matters
before an annual or special shareholders meeting. The amendments also update
various provisions relating to indemnification of directors and officers,
electronic communications and other matters reflected in changes made to
applicable state law since the Bylaws were last revised. The Amended and
Restated Bylaws are Exhibit 3.3 to this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.3 Amended and Restated Bylaws dated March 28, 2003 (filed as Exhibit
3.2 to Citizens Banking Corporation's 2002 Annual Report on Form
10-K and incorporated herein by reference)
4.1 Indenture, dated as of January 27, 2003 among Citizens Banking
Corporation and JPMorgan Chase Bank as Trustee (filed as Exhibit
4.1 to Citizens Banking Corporation's registration statement on
Form S-4, registration no. 333-104472, and incorporated herein by
reference)
4.2 Registration Rights Agreement dated as of January 27, 2003 among
Citizens Banking Corporation and Morgan Stanley, Keefe, Bruyette
&Woods, Inc., Robert W. Baird & Co,, Credit Suisse First Boston,
Fahnestock & Co. Inc., Howe Barnes Investments, Inc. and McDonald
Investments., as Initial Purchasers (filed as Exhibit 4.2 to
Citizens Banking Corporation's registration statement on Form S-4,
registration no. 333-104472, and incorporated herein by reference)
10.17 Second Amendment to Employment Agreement between William R. Hartman
and Citizens Banking Corporation dated January 23, 2003 (filed as
Exhibit 10.17 to Citizens Banking Corporation's 2002 Annual Report
on Form 10-K and incorporated herein by reference)
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
(1) A report on Form 8-K was filed under Items 5 and 7 on January 21,
2003, announcing Citizens' results of operations for the three and
twelve month periods ended December 31, 2002. The report also
furnished information under Item 9.
(2) A report on Form 8-K was filed under Items 5 and 7 on January 27,
2003, announcing the consummation of a subordinated debt issuance.
(3) A report on Form 8-K was filed under Items 5 and 7 on March 14,
2003, announcing the distribution of Citizens' 2002 annual report
to shareholders along with its proxy materials for its 2003 annual
meeting of shareholders.
No financial statements were filed with any of these reports.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIZENS BANKING CORPORATION
Date May 12, 2003 By /s/ Charles D. Christy
--------------------- -------------------------------------
Charles D. Christy
Chief Financial Officer
(Principal Financial Officer and
duly authorized officer)
/s/ Daniel E. Bekemeier
-------------------------------------
Daniel E. Bekemeier
Controller
(Principal Accounting Officer)
29
CERTIFICATIONS
I, William R. Hartman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Citizens
Banking Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have;
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ William R. Hartman
-------------------------
William R. Hartman
Chief Executive Officer
30
CERTIFICATIONS
I, Charles D. Christy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Citizens
Banking Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have;
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Charles D. Christy
------------------------
Charles D. Christy
Chief Financial Officer
31
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
32