UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2009.
or
o 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 001-33063
CITIZENS REPUBLIC BANCORP, INC.
(Exact name of Registrant as specified in its charter)
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MICHIGAN
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38-2378932 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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328 S. Saginaw Street, Flint, Michigan
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48502 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (810) 766-7500
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of exchange on which registered |
Common Stock, no par value
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The NASDAQ Global Select Market® |
7.50% Trust Preferred Securities (issued by Citizens Funding Trust I)
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: none
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
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. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of the voting common stock held by non-affiliates of the registrant as
of June 30, 2009 was $87,949,671. For purposes of this computation, all officers, directors and
10% beneficial owners of the registrant are assumed to be affiliates. Such determination should
not be deemed an admission that such officers, directors and beneficial owners are, in fact,
affiliates of the registrant.
The number of shares outstanding of the registrants no par value common stock as of February 25,
2010 was 394,395,139.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Citizens Republic Bancorp, Inc.s Proxy Statement for its 2010 annual meeting of
shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
CITIZENS REPUBLIC BANCORP, INC.
2009 Annual Report on Form 10-K
TABLE OF CONTENTS
2
PART I
ITEM 1. BUSINESS
Unless the context indicates otherwise, all references in this Form 10-K to Citizens or the
Corporation, refer to Citizens Republic Bancorp, Inc. and its subsidiaries. References to the
Holding Company refer to Citizens Republic Bancorp, Inc. alone. Citizens common stock is traded
on the NASDAQ (NASDAQ) Global Select Market® under the symbol CRBC. Citizens
principal executive offices are located at 328 South Saginaw Street, Flint, Michigan 48502, and the
telephone number is (810) 766-7500. Citizens maintains an internet website at
www.citizensbanking.com where the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and all amendments to those reports are available without charge, as
soon as reasonably practicable after Citizens files each such report with, or furnishes it to, the
U.S. Securities and Exchange Commission (the SEC), which are also available at the SECs website
www.sec.gov. The information on Citizens website does not constitute a part of this report.
Investors may also contact Kristine Brenner, Director of Investor Relations, at the corporate
address listed above to receive copies of these reports without charge.
GENERAL
Citizens Republic Bancorp, Inc., incorporated in the State of Michigan in 1980, is a
diversified banking and financial services company that is registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended (the Bank Holding Company Act). Citizens
provides a full range of banking and financial services to individuals and businesses through its
subsidiaries Citizens Bank and F&M BankIowa (F&M). These services include deposit products,
loan products, and other consumer-oriented financial services such as safe deposit and night
depository facilities, and Automated Teller Machines (ATMs). Among the services designed
specifically to meet the needs of businesses are various types of specialized financing, treasury
management services, and transfer/collection facilities. Citizens also provides wealth management
services through Citizens Bank Wealth Management, N.A., and through the affiliate trust department
of F&M. The Corporation is not dependent upon any single or limited number of customers, the loss
of which would have a material adverse effect on the Corporation. No material portion of the
business is seasonal.
At December 31, 2009, Citizens directly or indirectly owned the following subsidiaries:
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Total |
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Date |
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Principal |
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Number of |
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Assets |
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Acquired / |
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Subsidiary |
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Office |
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Offices |
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(in millions) |
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Established |
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Citizens Bank (1) |
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Flint, MI |
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219 |
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$ |
11,318.5 |
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1871 |
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F&M Bank Iowa (1) |
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Marshalltown, IA |
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10 |
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467.9 |
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11/01/99 |
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Citizens Bank Wealth Management, N.A. |
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Flint, MI |
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(2) |
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(2) |
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03/01/02 |
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(1) |
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Consolidated totals include its non-bank subsidiaries. F&M had total trust assets under administration of $22.8 million at December
31, 2009. Citizens signed an agreement on January 29, 2010 to sell F&M. See Recent Developments. |
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(2) |
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Citizens Bank Wealth Management, N.A. conducts business at most Citizens Bank locations and had total assets under administration of $2.1
billion at December 31, 2009. |
RECENT DEVELOPMENTS
On January 29, 2010, Citizens entered into a stock purchase agreement with Great Western Bank
whereby Great Western Bank agreed to acquire all of the stock of Citizens wholly owned subsidiary,
F&M. Great Western Bank will pay a purchase price of approximately $50 million in cash, subject to
a possible adjustment based upon F&Ms net worth at closing. The transaction includes
approximately $132.5 million in net portfolio loans and $408.6 million in deposits. The
transaction is expected to close in the second quarter of 2010, subject to certain required
regulatory approvals and fulfillment of customary conditions.
3
As part of the stock purchase agreement, Citizens will be required to exchange selected loans with
F&M at or near the closing date for a cash payment equal to the book value of the specified loans
less related allowance for loan losses. As of December 31, 2009, the loans to be exchanged had a
net book value of $9.9 million.
On September 23, 2009, Citizens was notified by the NASDAQ Listing Qualifications Department that
they could initiate steps to delist Citizens common stock from trading on the NASDAQ anytime after
March 22, 2010 if the closing bid price of Citizens common stock does not exceed $1.00 per share
for at least 10 consecutive trading days. The notice was a result of Citizens failing to satisfy
the NASDAQ listing requirements that the bid price of Citizens common shares not close below $1.00
per share for more than 30 consecutive trading days. Citizens is considering several alternatives,
including applying to transfer its stock listing to the NASDAQ Capital Market, which would maintain
an active trading market for Citizens stock and provide an additional six month grace period to
regain compliance, and certain other actions. However, there can be no assurance that these
actions will be successful in maintaining the NASDAQ listing.
GEOGRAPHIC LOCATIONS
As of December 31, 2009, Citizens conducts operations through 229 offices and 267 ATM
locations throughout Michigan, Wisconsin, Ohio, Iowa, and Indiana with 2,125 full-time equivalent
employees. In Michigan, the primary markets are concentrated in the Lower Peninsula, with a small
presence in the Upper Peninsula. In Wisconsin, the primary markets include the greater Green Bay
Metropolitan area, the Fox Valley region which extends from Appleton to Oshkosh, suburban
Milwaukee, and also rural markets in southern and northern Wisconsin. In Ohio, the primary market
is the greater Cleveland area. In Iowa, the primary market is the central region of the state. In
Indiana, the primary market is Indianapolis.
PRINCIPAL SOURCES OF REVENUE
The Corporations primary source of revenue is interest income. The table below shows the
amount of total consolidated revenues resulting from interest and fees on loans, interest and
dividends on investment securities, money market investments, FHLB and Federal Reserve stock, and
noninterest income for each of the last three years:
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Year Ended December 31, |
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2009 |
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2008 |
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2007 |
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Interest and fees on loans |
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456,347 |
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586,073 |
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684,047 |
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Interest and dividends on investment securities, money
market investments, FHLB and Federal Reserve stock |
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112,332 |
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114,838 |
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123,864 |
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Noninterest income |
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67,421 |
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101,742 |
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122,568 |
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Total revenues |
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636,100 |
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$ |
802,653 |
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930,479 |
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Citizens revenue tends to be influenced by overall economic factors, including market interest
rates, business spending, consumer confidence, and competitive conditions within the marketplace,
as well as residential housing markets in the communities Citizens serves.
LINES OF BUSINESS
Citizens performance is monitored by an internal profitability measurement system that
provides line of business results and key performance measures. Citizens operates along four major
business lines: Regional Banking, Specialty Consumer, Specialty Commercial, and Wealth Management.
The Regional Banking, Specialty Consumer, and Specialty Commercial business lines are involved in
lending activity. Lending involves credit risk which is controlled and monitored through active
asset quality management, the use of lending standards, and thorough review of potential borrowers.
Credit risk management is discussed in Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations under the captions Critical Accounting
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Policies, Loan Portfolio, Credit Risk Management, Nonperforming Assets, Allowance for Loan Losses, and
Contractual Obligations and Off-Balance Sheet Arrangements and under Notes 1, 4, and 16 to the
Consolidated Financial Statements.
Additional information regarding the business lines is incorporated herein by reference from Item
7 Managements Discussion and Analysis of Financial Condition and Results of Operations Line of
Business Results and in Note 15 of the Consolidated Financial Statements.
COMPETITION
The financial services industry is highly competitive. Citizens banking subsidiaries compete
with other commercial banks, many of which are subsidiaries of other bank holding companies, for
loans, deposits, trust accounts and other business on the basis of interest rates, fees,
convenience and quality of service. Major competitors include commercial banks, community banks,
savings associations and thrifts, finance companies, mortgage banking companies, brokerage firms,
insurance companies, credit unions and other organizations.
Mergers between financial institutions and the expansion of financial institutions both within and
outside of the primary Midwest banking markets have provided significant competitive pressure in
those markets. In addition, the passage of Federal interstate banking legislation has expanded the
banking market and heightened competitive forces. The effect of this legislation is further
discussed under the caption Supervision and Regulation.
Many of Citizens offices are located in small cities and rural areas that have diverse economies
and a mix of manufacturing, service, retail and agricultural businesses. In many of these
localities, Citizens is the largest bank, which is believed to be a competitive advantage. In
other markets, Citizens competitors may enjoy a competitive advantage, including greater financial
resources, more aggressive marketing campaigns, better brand recognition and more branch locations.
Citizens competitors may also offer higher interest rates, which could decrease Citizens ability
to retain existing deposits or attract new deposits or require Citizens to increase its rates to
attract deposits.
Other factors such as employee relations and environmental laws also impact the Corporations
competitiveness. Citizens maintains a favorable relationship with its employees and none of its
employees are represented by a collective bargaining group.
SUPERVISION AND REGULATION
General
The banking industry is subject to extensive state and federal regulation and continues to undergo
significant change. Proposals to change the laws and regulations governing the banking industry
are frequently raised in Congress, in state legislatures, and before the various bank regulatory
agencies. The likelihood and timing of any
changes and the impact such changes might have on Citizens are impossible to determine with any
certainty. A change in applicable laws or regulations, or a change in the way such laws or
regulations are interpreted by regulatory agencies or courts, may have a material impact on the
business, operations and earnings of Citizens. Citizens expects that the financial services
industry will remain heavily regulated and that additional laws or regulations may be adopted. The
following discussion summarizes certain aspects of the banking laws and regulations that affect
Citizens. To the extent that the following information describes statutory or regulatory
provisions, it is qualified entirely by reference to the particular statutory or regulatory
provision.
The Holding Company is a bank holding company registered with the Federal Reserve Board (FRB) and
is subject to regulation under the Bank Holding Company Act. The Bank Holding Company Act requires
the FRBs prior approval of an acquisition of assets or of ownership or control of voting shares of
any bank or bank holding company if the acquisition would give the holder more than 10% of the
voting shares of that bank or bank holding company. It also imposes restrictions, summarized
below, on the assets or voting shares of non-banking companies that Citizens may acquire.
5
Under FRB policy, a bank holding company is expected to serve as a source of financial strength to
each of its subsidiary banks and to stand prepared to commit resources to support each of them.
There are no specific quantitative rules on a holding companys potential liability. If one of
Citizens subsidiary banks were to encounter financial difficulty, the FRB could invoke the
doctrine and require a capital contribution from the Holding Company. In addition, and as a
separate legal matter, a holding company is required to guarantee the capital plan of an
undercapitalized subsidiary bank. See Capital Adequacy and Prompt Corrective Action below.
Citizens subsidiary banks are subject to the provisions of the banking laws of their respective
states of organization or the National Bank Act. Both of Citizens banking subsidiaries are
state-chartered banks and are therefore subject to supervision, regulation and examination by state
banking regulators; Citizens Bank by the Michigan Office of Financial and Insurance Regulation and
F&M by the Iowa Division of Banking. Citizens Bank and F&M are also subject to supervision and
examination by the FRB because they are members of the Federal Reserve System and by the Federal
Deposit Insurance Corporation (FDIC), because the FDIC insures their deposits to the extent
provided by law. Citizens Bank Wealth Management, N.A., a national non-depository trust bank, is
subject to supervision, regulation and examination by the Office of the Comptroller of the Currency
(OCC). Additionally, the other non-bank subsidiaries are supervised and examined by the FRB and
various other federal and state agencies.
Citizens insured depository institution subsidiaries are also subject to cross-guaranty liability
under federal law. This means that if one FDIC-insured depository institution subsidiary of a
multi-institution bank holding company fails or requires FDIC assistance, the FDIC may assess
commonly controlled depository institutions for the estimated losses suffered by the FDIC. Such
liability could have a material adverse effect on the financial condition of any assessed
subsidiary institution and on Citizens as the common parent. While the FDICs cross-guaranty claim
is generally junior to the claims of depositors, holders of secured liabilities, general creditors
and subordinated creditors, it is generally superior to the claims of shareholders and affiliates.
Payment of Dividends
There are various statutory restrictions on the ability of Citizens banking subsidiaries to pay
dividends or make other payments to the Holding Company. Each of the state-chartered banking
subsidiaries is subject to dividend limits under the laws of the state in which it is chartered.
In addition, Citizens Bank and F&M are member banks of the Federal Reserve System, subject to the
dividend limits of the FRB. The FRB allows a member bank to make dividends or other capital
distributions in an amount not exceeding the current calendar years net income, plus retained net
income of the preceding two years. Distributions in excess of this limit require prior approval of
the FRB. FRB policy provides that, as a matter of prudent banking, a bank holding company
generally should not maintain a rate of cash dividends unless its net income available to common
shareholders has been sufficient to fully fund the dividends, and the prospective rate of earnings
retention appears to be consistent with the holding companys capital needs, asset quality and
overall financial condition.
As a national non-depository trust bank, Citizens Bank Wealth Management, N.A. (CB Wealth
Management) is subject to the regulations of the OCC regarding limits on dividends paid to the
Holding Company. Under such regulations, CB Wealth Management may declare dividends only from its
undivided profits, dividends can not
reduce surplus funds to a level less than common capital, and dividends may not be declared unless
at least 10% of net income for a given time period has been carried to the surplus fund, depending
on the frequency of dividend payments in a given year. Approval of the OCC is required if the
total of all dividends declared by CB Wealth Management in any calendar year exceed the sum of its
net income combined with its retained net income for the preceding two years.
Refer to Item 7 Managements Discussion and Analysis of Financial Condition and Results of
Operations Liquidity Risk Management for Citizens banking subsidiaries current dividend
capacity to the Holding Company.
On April 17, 2008, Citizens Board of Directors voted to suspend the common stock quarterly
dividend. On December 12, 2008, Citizens issued fixed-rate cumulative perpetual preferred stock,
Series A (the TARP Preferred Stock) with liquidation value of $300 million to the U.S. Department
of the Treasury (Treasury) as part of the Treasurys Capital Purchase Program. Terms of the
issuance prohibit the payment of dividends by the Holding Company without the prior approval of the
Treasury until the earlier of December 12, 2011 or such time as Treasury no longer holds the
preferred stock.
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On January 28, 2010 Citizens announced that it will suspend the dividend payments on its trust
preferred securities and on its TARP Preferred Stock, issued to the
Treasury. Refer to Item 7
Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity
Risk Management for additional information.
Capital Adequacy and Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires federal
regulators to take prompt corrective action against any undercapitalized institution. FDICIA
establishes five capital categories: well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. Regulatory capital requirements
for bank holding companies are evaluated using three capital measures: (i) leverage capital
expressed as a percentage of total assets, (ii) risk-based capital expressed as a percentage of
total risk-weighted assets, and (iii) Tier 1 leverage capital expressed as a percentage of total
assets.
Pursuant to the FRBs regulations implementing the prompt corrective action provisions of FDICIA, a
bank will be deemed to be: (i) well-capitalized if the bank has a total risk-based capital ratio of
10% or greater, Tier 1 risk-based capital ratio of 6% or greater and leverage ratio of 5% or
greater; (ii) adequately capitalized if the bank has a total risk-based capital ratio of 8% or
greater, Tier 1 risk-based capital ratio of 4% or greater and leverage ratio of 4% or greater (3%
for the most highly rated banks); (iii) undercapitalized if the bank has a total risk-based capital
ratio of less than 8%, Tier 1 risk-based capital ratio of less than 4% or leverage ratio of less
than 4% (less than 3% for the most highly rated banks); (iv) significantly undercapitalized if the
bank has a total risk-based capital ratio of less than 6%, Tier 1 risk-based capital ratio of less
than 3% or leverage ratio of less than 3%; and (v) critically undercapitalized if the bank has a
ratio of tangible equity to total assets of 2% or less.
Under certain circumstances, a well-capitalized, adequately capitalized or undercapitalized
institution may be treated as if the institution were in the next lower capital category. A
depository institution is generally prohibited from making capital distributions, including paying
dividends, or paying management fees to a holding company if the institution would thereafter be
undercapitalized. Institutions that are adequately but not well-capitalized cannot accept, renew
or rollover brokered deposits except with a waiver from the FDIC and are subject to restrictions on
the interest rates that can be paid on such deposits. Undercapitalized institutions may not
accept, renew or rollover brokered deposits.
The banking regulatory agencies are permitted or, in certain cases, required to take certain
actions with respect to institutions falling within one of the three undercapitalized categories.
Depending on the level of an institutions capital, the agencies corrective powers include, among
other things:
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prohibiting the payment of principal and interest on subordinated debt; |
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prohibiting the holding company from making distributions without prior regulatory
approval; |
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placing limits on asset growth and restrictions on activities; |
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placing additional restrictions on transactions with affiliates; |
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restricting the interest rate the institution may pay on deposits; |
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prohibiting the institution from accepting deposits from correspondent banks; and |
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in the most severe cases, appointing a conservator or receiver for the institution. |
A banking institution that is in any of the three undercapitalized categories is required to submit
a capital restoration plan, and such a plan will not be accepted unless, among other things, the
banking institutions holding company guarantees the plan up to a certain specified amount. Any
such guarantee from a depository institutions holding company is entitled to a priority of payment
in bankruptcy.
FDICIA also contains a variety of other provisions that may affect Citizens operations, including
reporting requirements, regulatory standards for real estate lending, truth in savings
provisions, and the requirement that a depository institution give 90 days prior notice to
customers and regulatory authorities before closing any branch.
7
At December 31, 2009 and 2008, the most recent notification from the FRB categorized Citizens and
all of its depository institution subsidiaries as well-capitalized under the regulatory framework
for prompt corrective action. Information concerning capital adequacy guidelines for Citizens and
its banking subsidiaries including their regulatory capital position at December 31, 2009 and
maintenance of minimum average reserve balances by the banking subsidiaries with the FRB is
incorporated herein by reference from Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations under the captions Capital Resources and Liquidity Risk
Management and Note 18 to the Consolidated Financial Statements.
FDIC Insurance Assessments
The FDIC calculates deposit insurance based on a risk-based system that places a bank in one of
four risk categories, principally on the basis of its capital level and an evaluation of the banks
risk to the relevant deposit insurance fund, and bases premiums on the probability of loss to the
FDIC with respect to each individual bank. Under the Federal Deposit Insurance Act, depository
institutions such as Citizens subsidiary banks may not pay interest on indebtedness, if such
interest is required to be paid out of net profits, or distribute any of its capital assets while
it remains in default on any assessment due to the FDIC.
The calculation of the FDIC assessment includes the Financing Corporation (FICO) assessment.
FICO was established to finance the Federal Savings and Loan Insurance Corporation resolution fund.
All FDIC insured banks are required to pay into this resolution fund through the Deposit Insurance
Fund (DIF).
Temporary Liquidity Guarantee Program
On November 21, 2008, the Board of Directors of the FDIC adopted a final rule relating to the
Temporary Liquidity Guarantee Program (TLGP). The TLGP was announced by the FDIC on October 14,
2008, as an initiative to counter the system-wide crisis in the nations financial sector. Under
the TLGP, the FDIC will (i) guarantee, through the earlier of maturity or December 31, 2012,
certain newly issued senior unsecured debt issued by participating institutions on or after October
14, 2008 and before October 31, 2009 and (ii) provide full FDIC deposit insurance coverage for
noninterest bearing transaction deposit accounts, Negotiable Order of Withdrawal (NOW) accounts
paying less than 0.5% interest per annum and Interest on Lawyers Trust Accounts (IOLTA) accounts
held at participating FDIC-insured institutions through June 30, 2010. Coverage under the TLGP was
available for the first 30 days without charge. The fee assessment for coverage of senior
unsecured debt ranges from 50 basis points to 100 basis points per annum, depending on the initial
maturity of the debt. The fee assessment for deposit insurance coverage was 10 basis points per
quarter during 2009 on amounts in covered accounts exceeding $250,000 and will increase for the
first six months of 2010. The Corporation and two of its subsidiaries, Citizens Bank and F&M
participate in these guarantee programs.
Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Riegle-Neal Act),
as amended, a bank holding company may acquire banks in states other than its home state, subject
to any state requirement that the bank has been organized and operating for a minimum period of
time (not to exceed five years) and the requirement that the bank holding company not control,
prior to or following the proposed acquisition, more than 10% of the total amount of deposits of
insured depository institutions nationwide or, unless the acquisition is the bank holding companys
initial entry into the state, more than 30% of such deposits in the state, or such lesser or
greater amount set by the state. The Riegle-Neal Act also authorizes banks to merge across state
lines, thereby creating interstate branches. Banks are also permitted to acquire and to establish
de novo branches in other states where authorized under the laws of those states.
Transactions with Affiliates
Transactions between Citizens subsidiary banks and their affiliates are governed by Sections 23A
and 23B of the Federal Reserve Act. The affiliates of the banks include any entity controlled by
Citizens. Generally, Sections 23A and 23B (i) limit the extent to which the subsidiary banks may
engage in covered transactions with any one affiliate to an amount equal to 10% of the
Corporations capital stock and surplus, and maintain an aggregate limit on all such transactions
with affiliates to an amount equal to 20% of the banks capital stock and surplus, (ii) require
that a banks extensions of credit to such affiliates be fully collateralized (with 100% to 130%
collateral coverage, depending on the type of collateral), (iii) prohibit the bank from purchasing
or accepting as collateral from an affiliate any low quality assets (including nonperforming
loans) and (iv) require that all covered transactions be on terms substantially the same, or at
least as favorable, to the bank or its subsidiary as those
8
provided to a non-affiliate. The term covered transaction includes the making of loans, purchase of assets, issuance of a guarantee and
other types of similar transactions.
Loans to Insiders
The Federal Reserve Act and related regulations impose specific restrictions on loans to directors,
executive officers and principal stockholders of banks. Under Section 22(h) of the Federal Reserve
Act and its implementing regulations, loans to a director, an executive officer or a principal
shareholder of a bank, and some affiliated entities of any of the foregoing, may not exceed,
together with all other outstanding loans to such person and affiliated entities, the banks
loan-to-one-borrower limit. Loans in the aggregate to insiders and their related interests as a
class may not exceed the banks unimpaired capital and unimpaired surplus. Section 22(h) and its
implementing regulations also prohibit loans, above amounts prescribed by the appropriate federal
banking agency to directors, executive officers and principal shareholders of a bank or bank
holding company, and their respective affiliates, unless such loan is approved in advance by a
majority of the board of directors of the bank with any interested director not participating in
the voting. Section 22(h) generally requires that loans to directors, executive officers and
principal shareholders be made on terms and underwriting standards substantially the same as
offered in comparable transactions to other persons.
Community Reinvestment Act
Under the Community Reinvestment Act (CRA) and related regulations, depository institutions have
an affirmative obligation to assist in meeting the credit needs of their market areas, including
low and moderate income areas, consistent with safe and sound banking practice. Depository
institutions are periodically examined for compliance with CRA and are periodically assigned
ratings in this regard. Banking regulators consider a depository institutions CRA rating when
reviewing applications to establish new branches, undertake new lines of business, and/or acquire
part or all of another depository institution. An unsatisfactory rating can significantly delay or
even prohibit regulatory approval of a proposed transaction by a bank holding company or its
depository institution subsidiary.
Fair Lending and Consumer Laws
In addition to CRA, other federal and state laws regulate various lending and consumer aspects of
the banking business. Governmental agencies, including the Department of Housing and Urban
Development, the Federal Trade Commission and the Department of Justice, have become concerned that
in some cases prospective borrowers experience unlawful discrimination in their efforts to obtain
loans from depository and other lending institutions. These agencies have brought litigation
against some depository institutions alleging discrimination against borrowers. Many of these
suits have been settled, in some cases for material sums, short of a full trial.
These governmental agencies have clarified what they consider to be lending discrimination and have
specified various factors that they will use to determine the existence of lending discrimination
under the Equal Credit Opportunity Act and the Fair Housing Act. These factors include evidence
that a lender discriminated on a prohibited basis, evidence that a lender treated applicants
differently based on prohibited factors in the absence of evidence that the treatment was the
result of prejudice or a conscious intention to discriminate, and evidence that a lender applied an
otherwise neutral non-discriminatory policy uniformly to all applicants, but the practice had a
discriminatory effect, unless the practice could be justified as a business necessity.
Banks and other depository institutions also are subject to numerous consumer-oriented laws and
regulations. These laws, which include the Truth in Lending Act, the Truth in Savings Act, the
Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Equal Credit
Opportunity Act, and the Fair Housing Act, require compliance by depository institutions with
various disclosure requirements and requirements regulating the availability of funds after deposit
or the making of certain loans to customers.
Gramm-Leach-Bliley Act of 1999
The Gramm-Leach-Bliley Act of 1999 (the GLBA) covers a broad range of issues, including a repeal
of most of the restrictions on affiliations among depository institutions, securities firms and
insurance companies. The following description summarizes some of its significant provisions.
The GLBA repealed sections 20 and 32 of the Glass-Steagall Act, thus permitting unrestricted
affiliations between banks and securities firms. It also permits bank holding companies to elect
to become financial holding
9
companies. A financial holding company may engage in or acquire
companies that engage in a broad range of financial services, including securities activities such
as underwriting, dealing, investment, merchant banking, insurance underwriting, sales and brokerage
activities. In order to become a financial holding company, the bank holding company and all of
its affiliated depository institutions must be well-capitalized, well-managed and have at least a
satisfactory CRA rating. Citizens has determined not to become certified as a financial holding
company at this time. The Corporation may reconsider this determination in the future.
The GLBA provides that the states continue to have the authority to regulate insurance activities,
but prohibits the states in most instances from preventing or significantly interfering with the
ability of a bank, directly or through an affiliate, to engage in insurance sales, solicitations or
cross-marketing activities. Although the states generally must regulate bank insurance activities
in a non-discriminatory manner, the states may continue to adopt and enforce rules that
specifically regulate bank insurance activities in specific areas identified under the law. The
federal bank regulatory agencies adopted insurance consumer protection regulations that apply to
sales practices, solicitations, advertising and disclosures.
The GLBA repealed the broad exemption of banks from the definitions of broker and dealer for
purposes of the Securities Exchange Act of 1934, as amended. It also identifies a set of specific
activities, including traditional bank trust and fiduciary activities, in which a bank may engage
without being deemed a broker, and a set of activities in which a bank may engage without being
deemed a dealer. Additionally, the law makes conforming changes in the definitions of broker
and dealer for purposes of the Investment Company Act of 1940, as amended, and the Investment
Advisers Act of 1940, as amended.
The GLBA also contains extensive customer privacy protection provisions. Under these provisions, a
financial institution must provide to its customers, both at the inception of the customer
relationship and on an annual basis, the institutions policies and procedures regarding the
handling of customers nonpublic personal financial information. The new law provides that, except
for specific limited exceptions, an institution may not provide such personal information to
unaffiliated third parties unless the institution discloses to the customer that such information
may be so provided and the customer is given the opportunity to opt out of such disclosure. An
institution may not disclose to a non-affiliated third party, other than to a consumer reporting
agency, customer account numbers or other similar account identifiers for marketing purposes. The
GLBA also provides that the states may adopt customer privacy protections that are more strict than
those contained in the GLBA.
Anti-Money Laundering and the USA Patriot Act of 2001
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (the Patriot Act) is designed to deny terrorists and criminals the
ability to obtain access to the United States financial system and has significant implications
for depository institutions, brokers, dealers, and other businesses involved in the transfer of
money. The Patriot Act mandates that financial services companies implement policies and
procedures with respect to additional measures designed to address the following matters: money
laundering, terrorist financing, identifying and reporting suspicious activities and currency
transactions, and currency crimes.
The Patriot Act also substantially broadened existing anti-money laundering legislation, imposed
new compliance and due diligence obligations, created new crimes and penalties, and compelled the
production of documents located both inside and outside the United States. The Treasury has issued
a number of regulations that apply some of these requirements to financial institutions such as
Citizens banking subsidiaries. The regulations impose new obligations on financial institutions
to maintain appropriate policies, procedures and controls to detect, prevent and report money
laundering and terrorist financing. Pursuant to the Patriot Act and the related regulations,
Citizens has established anti-money laundering compliance and due diligence programs that include,
among other things, the designation of a Bank Secrecy Act officer, employee training programs and
an independent audit function to review and test the program.
EESA and Troubled Asset Relief Capital Purchase Program
In response to the financial crises affecting the financial markets and the banking system, on
October 3, 2008, the Emergency Economic Stabilization Act of 2008 (EESA) was signed into law and
established the Troubled Asset Relief Program (TARP). On October 14, 2008, the Treasury
announced the Capital Purchase Program (CPP) to encourage U.S. financial institutions to build
capital to increase the flow of financing to U.S. businesses and
10
consumers and to support the U.S. economy. Under CPP, the Treasury made $250 billion of capital available to U.S. financial
institutions in the form of senior preferred stock (preferred stock) and warrants which qualify
as Tier 1 capital. On December 12, 2008, Citizens issued $300.0 million of TARP Preferred Stock
and a warrant to purchase 17,578,125 shares of its common stock at $2.56 per share to the Treasury
as part of this program. The preferred stock pays a cumulative dividend rate of 5 percent per
annum for the first five years and will reset to a rate of 9 percent per annum after year five.
The preferred stock is callable at par after three years. Prior to the end of three years, the
preferred stock may be redeemed with the proceeds from a qualifying equity offering of any Tier 1
perpetual preferred or common stock. Participating financial institutions were required to adopt
the Treasurys standard for executive compensation and corporate governance for the period during
which the Treasury holds equity issued under the CPP. These standards generally apply to our chief
executive officer, chief financial officer, and our next three most highly compensated executive
officers.
The Treasury has been given authority to promulgate regulations under the EESA. Any new
regulations implemented by the Treasury under the EESA may be applied retroactively to recipients
of TARP funding under the CPP. In addition, the U.S. government could in the future pass new
legislation which may have a similar effect. In either case, any such new regulations or
legislation may have the effect of imposing additional economic restrictions or obligations on
Citizens under the TARP CPP, at least for as long as any of Citizens obligations under the CPP
remain outstanding.
The Special Inspector General for the Troubled Asset Relief Program (SIGTARP) was established
pursuant to Section 121 of the EESA, and has the duty among other things, to conduct, supervise,
and coordinate audits and investigations of the purchase, management, and sale of assets by the
Treasury under TARP and the CPP including the preferred stock purchased from Citizens.
American Recovery and Reinvestment Act
The American Recovery and Reinvestment Act of 2009 (ARRA) was signed into law on February 17,
2009. ARRA includes a wide variety of programs intended to stimulate the economy. In addition,
ARRA imposes new executive compensation and expenditure limits on all previous and future TARP CPP
recipients, such as Citizens, and expands the class of employees to whom the limits and
restrictions apply. ARRA also provides the opportunity for additional repayment flexibility for
existing TARP CPP recipients. The Treasury published interim final rules to implement the
compensation and corporate governance provisions of the ARRA effective as of June 15, 2009.
Among other things, ARRA prohibits the payment of bonuses, other incentive compensation and
severance to certain of Citizens most highly paid employees (except in the form of restricted
stock subject to specified limitations and conditions), and requires each TARP recipient to comply
with certain other executive compensation related requirements. These provisions modify the
executive compensation provisions that were included in the EESA, and in most instances apply
retroactively for so long as any obligation arising from financial assistance provided to the
recipient under TARP remains outstanding. The new ARRA guidelines generally supersede the
executive compensation and corporate governance standards for TARP recipients set forth in the
EESA.
In addition, the ARRA directs the Secretary of the Treasury to review previously-paid bonuses,
retention awards and other compensation paid to the senior executive officers and certain other
highly-compensated employees of each TARP recipient to determine whether any such payments were
excessive, inconsistent with the purposes of the ARRA or the TARP, or otherwise contrary to the
public interest. If the Secretary determines that any such payments have been made by a TARP
recipient, the Secretary will seek to negotiate with the TARP recipient and the subject employee
for appropriate reimbursements to the U.S. government (not the TARP recipient) with respect to any
such compensation or bonuses. The ARRA also permits the Secretary, subject to consultation with
the appropriate federal banking agency, to allow a TARP recipient to repay any assistance
previously provided to such TARP recipient under the TARP, without regard to whether the TARP
recipient has replaced such funds from any source, and without regard to any waiting period. Any
TARP recipient that repays its TARP assistance pursuant to this provision would no longer be
subject to the executive compensation provisions under the ARRA.
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Proposed Regulatory Reform
In June 2009, the U.S. Presidents administration proposed a wide range of regulatory reforms that,
if enacted, may have significant effects on the financial services industry. Significant aspects
of the administrations proposals that may affect Citizens include proposals: (i) to reassess and
increase capital requirements for banks and bank holding companies and examine the types of
instruments that qualify as regulatory capital; (ii) to combine the OCC and the Office of Thrift
Supervision into a National Bank Supervisor with a unified federal bank charter; (iii) to expand
the current eligibility requirements for financial holding companies so that they must be
well-capitalized and well managed on a consolidated basis; (iv) to create a federal consumer
financial protection agency to be the primary federal consumer protection supervisor with broad
examination, supervision, and enforcement authority with respect to consumer financial products and
services; (v) to further limit banks ability to engage in transactions with affiliates; and (vi)
to subject all over-the-counter derivatives markets to comprehensive regulation.
The U.S. Congress, state lawmaking bodies, and federal and state regulatory agencies continue to
consider a number of wide-ranging and comprehensive proposals to alter the structure, regulation
and competitive relationships of the nations financial institutions, including rules and
regulations related to the administrations proposals. Separate comprehensive financial reform
bills intended to address the proposals set forth by the administration were introduced in both
houses of Congress during the second half of 2009 and remain under review. In addition, both the
Treasury and the Basel Committee have issued policy statements regarding significant proposed
changes to the regulatory capital framework for banking organizations. Citizens cannot predict
whether or in what form further legislation or regulations may be adopted or the extent to which
Citizens may be affected.
In October 2009, the Federal Reserve issued a comprehensive proposal on incentive compensation
policies (the Incentive Compensation Proposal) intended to ensure that the incentive compensation
policies of banking organizations do not undermine their safety and soundness by encouraging
excessive risk-taking. The Incentive Compensation Proposal, which covers all employees that have
the ability to materially affect a banks risk profile, either individually or as part of a group,
is based upon the key principles that incentive compensation arrangements should (i) provide
incentives that do not encourage risk-taking beyond the organizations ability to effectively
identify and manage risks, (ii) be compatible with effective internal controls and risk management,
and (iii) be supported by strong corporate governance, including active and effective oversight by
the board of directors. Banks were instructed to begin an immediate review of their incentive
compensation policies to ensure that they do not encourage excessive risk-taking and implement
corrective programs as needed. Where deficiencies in incentive compensation arrangements exist,
they must be immediately addressed.
The Federal Reserve will review, as part of its regular, risk-focused examination process, the
incentive compensation of banks, such as Citizens, that are not large, complex banking
organizations. These reviews will be tailored based on the scope and complexity of the banks
activities and the prevalence of incentive compensation arrangements. The findings of the
supervisory initiatives will be included in its examination reports and deficiencies will be
incorporated into the banks supervisory ratings, which can affect the banks ability to make
acquisitions and take other actions. Enforcement actions may be taken against a bank if its
incentive compensation arrangements, or related risk-management control or governance processes,
pose a risk to the
organizations safety and soundness and it is not taking prompt and effective measures to correct
the deficiencies.
In January 2010, the FDIC announced that it would seek public comment on whether banks with
compensation plans that encourage risky behavior should be charged with higher deposit assessment
rates than such banks would otherwise be charged. The scope and content of the U.S. banking
regulators policies on executive compensation are continuing to develop and are likely to continue
evolving in the near future. It cannot be determined at this time whether compliance with such
policies will adversely affect Citizens ability to hire, retain and motivate its key employees.
In addition to the specific proposals described above, various legislative and regulatory
initiatives are introduced in Congress and state legislatures from time to time, as well as by
regulatory agencies. Such initiatives may include proposals to expand or contract the powers of
bank holding companies and depository institutions or proposals to substantially change the
financial institution regulatory system. Such legislation could change
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banking statutes and the operating environment in substantial and unpredictable ways. If enacted, such legislation could
increase or decrease the cost of doing business, limit or expand permissible activities or affect
the competitive balance among banks, savings associations, credit unions, and other financial
institutions. Citizens cannot predict whether any such legislation will be enacted, and, if
enacted, the effect that it, or any impending regulations, would have on Citizens financial
condition and results of operations. A change in statutes, regulations or regulatory policies
applicable to Citizens or any of its subsidiaries could have a material effect on Citizens
business.
Potential Administrative Action
The Federal Reserve Bank of Chicago and the State of Michigan Office of Financial and Insurance
Regulation, the primary regulators of the Holding Company and its Citizens Bank subsidiary,
recently completed an interim supervisory assessment, pursuant to their continuous supervisory
program, based on data as of September 30, 2009. As a result of that examination and based on
recent communications with these regulatory authorities, Citizens expects that the Holding Company
and Citizens Bank will become subject to the issuance of a formal administrative action, probably
in the form of a written agreement, due to their high level of nonperforming assets and the
resulting impact on its earnings.
ECONOMIC FACTORS AND MONETARY POLICY
Citizens earnings and business are affected by the general economic and political conditions
in the United States and abroad and by the monetary and fiscal policies of various federal
regulatory authorities, including the Federal Reserve System. Citizens policy for addressing
credit risk, the effect of the economy on credit risk in 2009, 2008, and 2007 and its potential
effect on future periods is discussed in Item 7 Managements Discussion and Analysis of
Financial Condition and Results of Operations under the captions Critical Accounting Policies,
Loan Portfolio, Credit Risk Management, Nonperforming Assets, and Allowance for Loan Losses
and incorporated herein by reference. Through open market securities transactions, variations in
the Federal Funds rate and the establishment of reserve requirements, the Board of Governors of the
Federal Reserve System exerts considerable influence on interest rates and the supply of money and
credit. Citizens strives to manage the effects of interest rates through its asset/liability
management process but the effect of fluctuating economic conditions and federal regulatory
policies on Citizens future profitability cannot be predicted with any certainty. The effect of
the economy and changes in interest rates on Citizens net interest margin and net interest income
in 2009, 2008, and 2007 and their potential effect on future periods is discussed in Item 7
Managements Discussion and Analysis of Financial Condition and Results of Operations Net
Interest Income and is incorporated herein by reference. Citizens sensitivity to changes in
interest rates and the potential effect of changes in interest rates on net interest income is
presented in Item 7 Managements Discussion and Analysis of Financial Condition and Results of
Operations Interest Rate Risk and incorporated herein by reference.
ENVIRONMENTAL MATTERS
Citizens primary exposure to environmental risk is through lending activities and trust
services. In each instance, policies and procedures are in place to mitigate environmental risk
exposures. With respect to lending activities, Citizens requires environmental site assessments at
the time of loan origination to confirm collateral quality on
commercial real estate parcels posing higher than normal potential for environmental impact, as
determined by reference to present and past uses of the subject property and adjacent sites.
Environmental assessments are also mandated prior to any foreclosure activity involving
non-residential real estate collateral. In the case of trust services, Citizens utilizes various
types of environmental transaction screening to identify actual and potential risks arising from
any proposed holding of non-residential real estate for trust accounts. Consequently, the
Corporation does not anticipate any material effect on capital expenditures, earnings or the
competitive position of Citizens or any of its subsidiaries with regard to compliance with federal,
state or local environmental protection laws or regulations. Additional information is provided in
Item 3. Legal Proceedings.
ITEM 1A. RISK FACTORS
Unless otherwise noted or the context indicates otherwise, all references in this Item to
we, us, or our, refer to Citizens and its subsidiaries. An investment in our common stock is
subject to risks inherent to our business.
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The material risks and uncertainties that we believe affect us are described below. The risks and uncertainties described below are not the only ones
we face. Additional risks and uncertainties that we are not aware of or focused on or currently
deem immaterial may also impair business operations. This report is qualified in its entirety by
these risk factors. If any of the following risks actually occur, our financial condition and
results of operations could be materially and adversely affected. If this were to happen, the
value of our common stock could decline significantly, and shareholders could lose all or part of
their investment.
We face the risk that loan losses, including unanticipated loan losses due to changes in loan
portfolios, fraud and economic factors, could exceed the allowance for loan losses and that
additional increases in the allowance will be required. Additions to the allowance for loan losses
would cause our net income to decline and could have a negative impact on our capital and financial
position.
Making loans is an essential element of our business, and there is a risk that customer loans will
not be repaid. The risk of nonpayment is affected by a number of factors, including:
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the duration of the loan; |
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credit risks of a particular borrower; |
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changes in economic and industry conditions; and |
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in the case of a collateralized loan, the potential inadequacy of the value of the
collateral in the event of default, such as has resulted from the deterioration in commercial
and residential real estate values. |
We attempt to maintain an appropriate allowance for loan losses to provide for potential losses in
our loan portfolio. We periodically determine the amount of the allowance based on consideration
of several factors including, among others, the ongoing review and grading of the loan portfolio,
consideration of past loan loss experience as well as that of the banking industry, trends in past
due and nonperforming loans, risk characteristics of the various classifications of loans, existing
economic conditions, the fair value of underlying collateral, the size and diversity of individual
credits, and other qualitative and quantitative factors which could affect probable credit losses.
We determine the amount of the allowance for loan losses by considering these factors and by using
estimates related to the amount and timing of expected future cash flows on impaired loans,
estimated losses on pools of homogeneous loans based on our historical loss experience with
additional qualitative factors for various issues, and allocation of reserves for special
situations that are unique to the measurement period with consideration of current economic trends
and conditions, all of which are susceptible to significant change. Because current economic
conditions can change and future events are inherently difficult to predict, the anticipated amount
of estimated loan losses, and therefore the adequacy of the allowance, could change significantly.
A significant portion of our loan portfolio is secured by commercial and residential real estate.
These portfolios are comprised of borrowers primarily located in Michigan, Wisconsin, and Northern
Ohio. The Michigan and Northern Ohio markets have been particularly adversely affected by job
josses, declines in real estate value, declines in home sale volumes, and declines in new home
building. Declining real estate values in our markets have resulted in sharp increases in losses
on certain segments of our portfolio, particularly the land hold, land
development, and construction loan portfolios. We have ceased extending land hold and land
development loans and are working actively to manage our remaining land hold, land development, and
construction portfolios. The credit performance of loans secured by commercial income producing
properties has recently been negatively affected by tenant losses and reduced rental rates,
contributing to the decline in values associated with the income producing loan portfolio. We may
suffer further losses in these segments if market conditions continue to deteriorate and our
efforts to limit losses through execution of prudent workout strategies are unsuccessful. Although
we do not engage in subprime lending, the credit performance of the residential mortgage portfolio
has been negatively impacted by borrowers loss of or reduction in income. The decline in the
residential real estate values, particularly in Michigan and Northern Ohio, and the extended time
frame associated with the sale of repossessed residential properties has led to increased loss
severity in this loan portfolio.
Increased stress on borrowers cash flow due to job loss, reduced rental income, higher interest
rates or other factors could lead to even higher payment delinquencies and defaults. Continued
declines in real estate values could lead to higher loss severity. Although our most significant
loan losses to date have been concentrated in
14
our commercial real estate loan portfolio, continued adverse economic conditions could adversely affect other portions of our loan portfolio.
There is no precise method of predicting loan losses, and therefore we always face the risk that
charge-offs in future periods will exceed our allowance for loan losses or that additional
increases in the allowance for loan losses will otherwise be required. Additions to the allowance
for loan losses would cause net income to decline in the period(s) in which such additions occur
and could also have a material adverse impact on our capital and financial position.
Our core lending and other businesses continue to be adversely affected by the historic weakness in
the national and regional economies in which we operate, particularly Michigan. Our ability to
generate earnings and maintain regulatory capital ratios at acceptable levels at our Holding
Company and the bank subsidiaries depends substantially on developments in those economies. Also,
our potential inability to comply with applicable laws, regulations and regulatory policies or
standards due to the effects of these conditions on our results of operations and financial
condition may result in heightened regulatory scrutiny and require us to take actions to protect
depositors that are not in the best interests of our shareholders.
Our businesses face substantial challenges for the foreseeable future. In particular:
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A substantial amount of our lending business originates in Michigan. Of our total
portfolio loans, approximately 70% are to borrowers located, or secured by properties, in
Michigan and approximately 10% are to borrowers located, or secured by properties, in Ohio.
These states have been severely and disproportionately affected by the economic downturn in
general, and by the bankruptcy filings of General Motors Corporation, Chrysler LLC and a
number of automobile parts suppliers in particular. Unemployment rates in these states have
been substantially higher than the national average and real estate collateral values have
fallen significantly. |
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Our ability to return to a positive net income is largely dependent upon our future credit
costs. Our loan portfolios particularly our commercial real estate and residential
mortgage loan portfolios, which have accounted for a disproportionate amount of our loan loss
provisions since the fourth quarter of 2008 continue to be adversely affected by economic
conditions and the on-going correction in real estate prices in our markets. A significant
portion of our commercial loan portfolio is classified as nonperforming loans or watchlist
loans. The latter are loans that have migrated within our loan rating system to a level that
requires increased oversight. We attempt to maintain an appropriate allowance for loan losses
to provide for potential losses in our loan portfolios. In view of the weakness and
uncertainties in the national and regional economies in which we operate and the inherent
difficulty in predicting future events, we may find it necessary to continue to take loan loss
provisions in future periods in amounts that substantially exceed loan loss provisions in
prior periods in order to maintain our allowance for loan losses at a level we deem
appropriate. |
As a result of the weakness in the economy nationally and particularly in our primary markets, and
the effect of this weakness on unemployment rates and the value of real estate collateralizing many
of our loans, we have incurred substantial losses, our nonperforming assets and charged-off loans
have increased substantially and our
capital levels have been adversely affected. These effects have, in turn, hampered our ability to
comply with various standards and policies of our various banking regulators which are intended
primarily for the protection of depositors and the FDIC, not shareholders or holders of
subordinated debt or trust preferred securities. Any failure to comply with laws, regulations or
regulatory policies or standards, such as maintenance of capital ratios and reduction of
nonperforming asset levels due to the deterioration in our financial condition and operating
results, could also result in heightened regulatory scrutiny and in sanctions by regulatory
agencies (such as a memorandum of understanding, a written supervisory agreement or a cease and
desist order), civil money penalties and/or reputation damage. Any of these consequences could
restrict our ability to expand our business, could require us to raise additional capital or sell
assets on terms that are not advantageous to us or our shareholders and could have a material
adverse effect on our business, financial condition, results of operations, and stock price.
The Federal Reserve Bank of Chicago and the State of Michigan Office of Financial and Insurance
Regulation, the primary regulators of the Holding Company and its Citizens Bank subsidiary,
recently completed an interim
15
supervisory assessment, pursuant to their continuous supervisory
program, based on data as of September 30, 2009. As a result of that examination and based on
recent communications with these regulatory authorities, we expect that the Holding Company and
Citizens Bank will become subject to the issuance of a formal administrative action, probably in
the form of a written agreement, due to their high level of nonperforming assets and the resulting
impact on its earnings.
Although we do not currently anticipate that compliance with any such administrative action would
materially impact our operations, we cannot provide any assurance as to the potential impact of
such action on our business, financial condition and results of operations. Any administrative
action proposed by the regulators would be designed to remediate certain deficiencies noted by the
regulators for the protection of depositors rather than the benefit of shareholders or debt
holders. Moreover, if we are unable to comply with the terms of the anticipated supervisory
action, we could become subject to additional, heightened supervisory actions and orders. If our
regulators were to take such additional actions, we could become subject to various requirements
limiting the ability to develop new business lines, mandating additional capital, and/or requiring
the sale of certain assets and liabilities, which could have a material adverse effect on our
business, financial condition and results of operations.
Our business may be adversely affected by the highly regulated environment in which we operate.
Changes in applicable laws, regulations, and regulatory practices at either the federal or state
level may result in the imposition of additional costs or restrict our ability to operate our
business in the manner most beneficial to our shareholders.
The banking industry is heavily regulated, and such regulations are intended primarily for the
protection of depositors and the federal deposit insurance funds, not shareholders or holders of
subordinated debt or trust preferred securities. As a bank holding company, the Holding Company is
subject to regulation by the FRB. Our bank subsidiaries are subject to federal regulation
primarily by the FRB and are also subject to regulation by the state banking departments of the
state in which they are chartered. These regulations affect lending practices, capital structure,
investment practices, dividend policy and growth. In addition, we have non-bank operating
subsidiaries from which we derive income. Certain of these non-bank subsidiaries engage in
providing investment management and insurance brokerage services, which industries are also heavily
regulated on both a state and federal level.
Various legislative and regulatory initiatives have been introduced in Congress and state
legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand
or contract the powers of bank holding companies and depository institutions or proposals to
substantially change the financial institution regulatory system. Such legislation could change
banking statutes and the operating environment in substantial and unpredictable ways. If enacted,
such legislation could increase or decrease the cost of doing business, limit or expand permissible
activities or affect the competitive balance among banks, savings associations, credit unions, and
other financial institutions. We cannot predict whether any such legislation will be enacted, and,
if enacted, the effect that it, or any impending regulations, would have on our financial condition
and results of operation. A change in statutes, regulations or regulatory policies applicable to
us could subject us to additional costs, limit the types of financial services and products we may
offer and/or increase the ability of non-banks to offer competing financial services and products,
among other things, any of which could have a material effect on our business.
In addition, changes in laws, regulations and regulatory practices affecting the financial services
industry could subject us to additional costs, limit the types of financial services and products
we may offer and/or increase the ability of non-banks to offer competing financial services and
products, among other things. Failure to comply with laws, regulations or policies could also
result in heightened regulatory scrutiny and in sanctions by regulatory agencies (such as a
memorandum of understanding, a written supervisory agreement or a cease and desist order), civil
money penalties and/or reputation damage. Any of these consequences could restrict our ability to
expand our business or could require us to raise additional capital or sell assets on terms that
are not advantageous to us or our shareholders and could have a material adverse effect on our
business, financial condition and results of operations. While we have policies and procedures
designed to prevent any such violations, such violations may occur despite our best efforts.
While we attempt to manage the risk from changes in market interest rates, interest rate risk
management techniques are not exact. In addition, we may not be able to economically hedge our
interest rate risk. A
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rapid or substantial increase or decrease in interest rates could adversely
affect our net interest income and results of operations.
Our net income depends primarily upon our net interest income. Net interest income is income that
remains after deducting, from total income generated by earning assets, the interest expense
attributable to the acquisition of the funds required to support earning assets. Income from
earning assets includes income from loans, investment securities and short-term investments. The
amount of interest income is dependent on many factors including the volume of earning assets, the
general level of interest rates, the dynamics of the change in interest rates and the levels of
nonperforming loans. The cost of funds varies with the amount of funds necessary to support
earning assets, the rates paid to attract and hold deposits, rates paid on borrowed funds and the
levels of noninterest-bearing demand deposits and equity capital.
Different types of assets and liabilities may react differently, and at different times, to changes
in market interest rates. We expect that we will periodically experience gaps in the interest
rate sensitivities of our assets and liabilities. That means either our interest-bearing
liabilities will be more sensitive to changes in market interest rates than our interest earning
assets, or vice versa. When interest-bearing liabilities mature or reprice more quickly than
interest-earning assets, an increase in market rates of interest could reduce our net interest
income. Likewise, when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could reduce net interest income. We are
unable to predict changes in market interest rates which are affected by many factors beyond our
control including inflation, recession, unemployment, money supply, domestic and international
events and changes in the United States and other financial markets. 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, client loan and deposit preferences and the timing of changes in these
variables.
We attempt to manage risk from changes in market interest rates, in part, by controlling the mix of
interest rate-sensitive assets and interest rate-sensitive liabilities. We continually review our
interest rate risk position and modify our strategies based on projections to minimize the impact
of future interest rate changes. We also use derivative financial instruments to modify our
exposure to changes in interest rates. However, interest rate risk management techniques are not
exact. A rapid increase or decrease in interest rates could adversely affect results of operations
and financial performance.
The negative economic effects caused by terrorist attacks, potential attacks and other
destabilizing events would likely contribute to the deterioration of the quality of our loan
portfolio and could reduce our customer base, our level of deposits, and demand for our financial
products such as loans.
High inflation, natural disasters, acts of terrorism, an escalation of hostilities or other
international or domestic occurrences, and other factors could have a negative impact on the
economy of the Upper Midwest regions in which we operate. A sustained economic downturn in our
markets would likely contribute to the deterioration of the quality of our loan portfolio by
impacting the ability of our customers to repay loans, the value of the collateral securing loans,
and may reduce the level of deposits in our banking subsidiaries and the stability of our deposit
funding sources. A sustained economic downturn could also have a significant impact on the demand
for our products and services. The cumulative effect of these matters on our results of operations and
financial condition would likely be adverse and material.
If we are unable to continue to attract and retain core deposits, to obtain third party financing
on favorable terms, or to have access to interbank or other liquidity sources (as a result of
rating agency downgrades or other market factors), our cost of funds will increase, adversely
affecting the ability to generate the funds necessary for lending operations, reducing net interest
margin and negatively affecting results of operations.
Our subsidiary banks derive liquidity 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 financial market borrowing sources on an unsecured, and a
collateralized basis for both short-term and long-term purposes including, but not limited to, the
Federal Reserve, Federal Home Loan Banks of which the subsidiary banks are members, and other
correspondent banks. If these funding sources are not sufficient or available, we may have to
acquire funds through higher-cost sources.
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Our credit rating was downgraded by Moodys Investor Service, Standard and Poors, Dominion Bond
Rating Service, and Fitch Ratings throughout 2009. Although we currently have the ability to
borrow funds on both a short-term and long-term basis as an additional source of liquidity, our
ability to borrow funds at favorable rates may be negatively impacted if our ratings were
downgraded from their current level, and could adversely affect our results of operations and
financial condition.
Increased competition with other financial institutions or an adverse change in our relationship
with a number of major customers could reduce our net interest margin and net income by decreasing
the number and size of loans originated, the interest rates charged on these loans and the fees
charged for services to customers.
Our banking subsidiaries face substantial competition in originating commercial and consumer loans.
This competition comes principally from other banks, savings institutions, mortgage banking
companies and other lenders. Many of our competitors have competitive advantages, including
greater financial resources and higher lending limits, a wider geographic presence, more accessible
branch office locations, the ability to offer a wider array of services or more favorable pricing
alternatives, as well as lower origination and operating costs. This competition could reduce our
net income by decreasing the number and size of the loans that we originate and the interest rates
we charge on these loans.
In attracting business and consumer deposits, we face substantial competition from other insured
depository institutions such as banks, savings institutions and credit unions, as well as
institutions offering uninsured investment alternatives, including money market funds. Many
competitors enjoy advantages, including greater financial resources, more aggressive marketing
campaigns and better brand recognition and more branch locations. These competitors may offer
higher interest rates, which could decrease the deposits that we attract or require us to increase
rates to retain existing deposits or attract new deposits. Increased deposit competition could
adversely affect our ability to generate the funds necessary for lending operations which could
increase our cost of funds.
We also compete for deposits with non-bank providers of financial services, such as brokerage
firms, consumer finance companies, credit unions, insurance companies and governmental
organizations which may offer more favorable terms. Some non-bank competitors are not subject to
the same extensive regulations that govern banking operations. As a result, such non-bank
competitors may have advantages over us in providing certain products and services. This
competition may reduce or limit our margins on banking and non-banking services, reduce our market
share and adversely affect our earnings and financial condition.
The financial services industry could become even more competitive as a result of legislative,
regulatory and technological changes and continued consolidation. Banks, securities firms and
insurance companies can merge under the umbrella of a financial holding company, which can offer
virtually any type of financial service, including banking, securities underwriting, insurance
(both agency and underwriting) and merchant banking. Also, technology has lowered barriers to
entry and made it possible for non-banks to offer products and services traditionally provided by
banks, such as automatic transfer and automatic payment systems.
Events such as significant adverse changes in the business climate, adverse action by a regulator,
unanticipated changes in the competitive environment, and a decision to change our operations or
dispose of an operating unit could have a negative effect on our goodwill or other intangible
assets such that we may need to record an impairment charge, which could have a material adverse
impact on our results of operations.
Under current accounting standards, goodwill and certain other intangible assets with indeterminate
lives are assessed at least annually for impairment, or more frequently when impairment indicators
are present. After evaluating goodwill and other intangible assets, we may determine that one or
both are deemed to be impaired for accounting purposes. During the second quarter of 2009, we
performed an interim goodwill impairment test and determined that the goodwill allocated to the
Regional Banking line of business was impaired due to continued deterioration in commercial real
estate collateral values and continued challenges in the Midwest economy. As a result, we recorded
a $266.5 million goodwill impairment charge, which contributed significantly to our loss for the
year. We will continue to evaluate the remaining goodwill on a frequent basis if events or
circumstances indicate that it is more likely than not that the fair values of our reporting units
are below their respective carrying amounts.
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Further deterioration in the outlook for credit quality, changes in the value of the loan or deposit portfolios, or increases in the discount rates
could have a material impact on future goodwill impairment testing results. If we identify any
impairment, it would be reflected as a charge to earnings in the period during which such
impairment is identified and could have a material adverse effect on our results of operations. If
any impairment is significant enough to result in net loss for the period, it might affect the
banks ability to pay dividends to the Holding Company, which could have a material adverse effect
on our liquidity and ability to pay dividends to shareholders or repurchase outstanding shares of
our common stock.
If the FDIC raises the assessment rate charged to its insured financial institutions, our FDIC
insurance premium may increase and this could have a negative effect on our expenses and results of
operations.
During 2008 and continuing in 2009, higher levels of bank failures and temporary programs
increasing deposit insurance limits have dramatically increased resolution costs for the FDIC and
depleted its deposit insurance fund.
In order to maintain a strong funding position and restore reserve ratios for the deposit insurance
fund, the FDIC increased assessment rates for all insured institutions by 7 cents for every $100 of
deposits, beginning with the first quarter of 2009. Beginning April 1, 2009, additional rule
changes required institutions to pay their premiums using a risk-weighted factor, which increased
our FDIC insurance premiums for 2009 and is likely to further increase our future premiums. On May
22, 2009, the FDIC voted to amend the restoration plan and impose a special assessment of 10 cents
for every $100 of deposits at June 30, 2009, which was payable on September 30, 2009. The interim
rule also permits the FDIC to impose an additional emergency special assessment after June 30,
2009, of up to 5 cents per $100 of deposits, if necessary.
If there are additional financial institution failures, we may be required to pay even higher FDIC
insurance premiums than the recently increased levels. These announced increases and any future
increase in FDIC insurance premiums may materially adversely affect our results of operations and
financial condition.
We may not realize our deferred income tax assets and certain built-in losses.
The realization of our deferred income tax assets is dependent on utilizing taxable income in prior
carryback years, generating future taxable income, executing tax planning strategies, and reversing
existing taxable temporary differences. As of December 31, 2009,
we maintained a $235.5 million
valuation allowance. The valuation allowance may be adjusted as conditions change and the
underlying tax assets remain available to potentially offset future taxable income. In the event
that future taxable income does not occur in the manner projected, it could affect the valuation
allowance and have a material impact on our financial position and results of operations.
Companies are subject to a change of ownership test under Section 382 of the Internal Revenue Code
of 1986, as amended, that, if met, would limit the annual utilization of the pre-change of
ownership carryforward as well as the ability to use certain unrealized built-in losses. A change
of ownership occurred under Section 382 as a result of the exchange offers of common stock for
long-term debt in the third quarter of 2009. Generally, under Section 382, the yearly limitation
on our ability to utilize such deductions will be equal to the product of the applicable long-term
tax exempt rate and the sum of the values of our common stock and our TARP Preferred Stock
immediately before the ownership change. Our ability to utilize deductions related to credit
losses during the twelve-month period following such an ownership change would also be limited
under Section 382, together with net operating loss carryforwards, to the extent that such
deductions reflect a net loss that was built-in to our assets immediately prior to the ownership
change.
Because the exchange offers triggered an ownership change, our ability to use the net operating
loss carryforwards and certain built-in losses existing at the time of the deemed change in
ownership to offset future income will be substantially limited. Therefore, we may suffer
higher-than-anticipated tax expense, and consequently lower net income and cash flow, in those
future years.
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Our stock price can be volatile.
Stock price volatility may make it more difficult for you to resell your common stock when you want
and at prices you find attractive. Our stock price can fluctuate significantly in response to a
variety of factors including, among other things:
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Actual or anticipated negative variations in quarterly results of operations; |
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Negative recommendations by securities analysts; |
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Poor operating and stock price performance of other companies that investors deem
comparable to us; |
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News reports relating to negative trends, concerns and other issues in the financial
services industry; |
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Negative perceptions in the marketplace regarding us and/or our competitors; |
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New technology used, or services offered, by competitors; |
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Significant acquisitions or business combinations, strategic partnerships, joint ventures
or capital commitments by or involving us or our competitors; |
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Our failure to integrate acquisitions or realize anticipated benefits from acquisitions; |
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Adverse changes in government regulations; |
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Delisting of our common stock from NASDAQ; and |
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Geopolitical conditions such as acts or threats of terrorism or military conflicts. |
General market fluctuations, industry factors and general economic and political conditions and
events, such as economic slowdowns or recessions, interest rate changes or credit loss trends,
could also cause our stock price to decrease regardless of operating results.
The trading volume in our common stock is less than that of other larger financial services
companies.
Although our common stock is listed for trading on NASDAQ, the trading volume in our common stock
is less than that of other, larger financial services companies. A public trading market having
the desired characteristics of depth, liquidity and orderliness depends on the presence in the
marketplace of willing buyers and sellers of the Corporations common stock at any given time.
This presence depends on the individual decisions of investors and general economic and market
conditions over which we have no control. Given the lower trading volume of our common stock,
significant sales of our common stock, or the expectation of these sales, could cause our stock
price to fall.
If our common stock fails to meet the listing requirements of NASDAQ and is delisted from trading
on the NASDAQ, the market price of our common stock could be adversely affected.
Our common stock is currently listed on the NASDAQ Global Select Market under the symbol CRBC.
The NASDAQs listing requirements include a requirement that, for continued listing, an issuers
common shares trade at a minimum bid price of $1.00 per share. This requirement is deemed breached
when the bid price of an issuers common shares closes below $1.00 per share for 30 consecutive
trading days. We were notified on September 23, 2009 that our shares failed to meet the
requirement for the specified time period and NASDAQs Listing Qualifications Department notified
us that they could initiate steps to delist our common stock from trading on the NASDAQ anytime
after March 22, 2010 unless our closing bid price exceeds $1.00 per share for at least 10
consecutive trading days prior to that date. Although we may transfer our stock listing to the
NASDAQ Capital Market following receipt of a notice of delisting and receive an additional six
month grace period to regain compliance, take certain other actions to increase our stock price
prior to being delisted from NASDAQ or otherwise challenge any action by NASDAQ to delist our
common stock, there can be no assurance that these actions will be successful in maintaining our
listing on NASDAQ or the trading market for our stock. A delisting of
our common stock from the NASDAQ or a transfer to the Capital Market tier of NASDAQ could adversely
affect the liquidity of the trading market for our stock and therefore the market price of our
common stock.
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the Federal
Deposit Insurance Corporation, any other deposit insurance fund or by any other public or private
entity. Investment in our common stock is inherently risky for the reasons described in this
section and elsewhere in this report and is subject to the same market forces that affect the price
of common stock in any company. As a result, if you acquire our common stock, you could lose some
or all of your investment.
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We may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or
other relationships. We have exposure to many different industries and counterparties, and
routinely execute transactions with counterparties in the financial services industry, including
commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of
these transactions expose us to credit risk in the event of a default by a counterparty or client.
In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized
upon or is liquidated at prices not sufficient to recover the full amount of the credit or
derivative exposure due to us. Any such losses could have a material adverse effect on our
financial condition and results of operations.
We could face unanticipated environmental liabilities or costs related to real property owned or
acquired through foreclosure. Compliance with federal, state and local environmental laws and
regulations, including those related to investigation and clean-up of contaminated sites, could
have a negative effect on expenses and results of operations.
A significant portion of our loan portfolio is secured by real property. During the ordinary
course of business, we may foreclose on and take title to properties securing certain loans. In
doing so, there is a risk that hazardous or toxic substances could be found on these properties.
If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for
personal injury and property damage. Environmental laws may require us to incur substantial
expenses and may materially reduce the affected propertys value or limit our ability to use or
sell the affected property. In addition, future laws or more stringent interpretations or
enforcement policies with respect to existing laws may increase our exposure to environmental
liability. Although we have policies and procedures to perform an environmental review before
initiating any foreclosure action on real property, these reviews may not be sufficient to detect
all potential environmental hazards. The remediation costs and any other financial liabilities
associated with an environmental hazard could have a material adverse effect on results of
operations.
We are party to various lawsuits incidental to our business. Litigation is subject to many
uncertainties such that the expenses and ultimate exposure with respect to many of these matters
cannot be ascertained.
From time to time, customers and others make claims and take legal action pertaining to our
performance of fiduciary responsibilities. Whether customer claims and legal action are legitimate
or unfounded, if such claims and legal actions are not resolved in our favor they may result in
significant financial liability and/or adversely affect the market perception of us and our
products and services as well as impact customer demand for those products and services. Any
financial liability or reputation damage could have a material adverse effect on our business,
which, in turn, could have a material adverse effect on our financial condition and results of
operations.
The financial services industry is undergoing rapid technological changes. If we are unable to
adequately invest in and implement new technology-driven products and services, we may not be able
to compete effectively, or the cost to provide products and services may increase significantly.
The financial services industry is undergoing rapid technological changes with frequent
introduction of new technology-driven products and services. In addition to providing better
customer service, the effective use of technology increases efficiency and enables financial
service institutions to reduce costs. Our future success will depend, in part, upon our ability to
address the customer needs by using technology to provide products and
services to enhance customer convenience, as well as to create additional operational efficiencies.
Many of our competitors have substantially greater resources to invest in technological
improvements. We may not be able to effectively implement new technology-driven products and
services, which could reduce our ability to effectively compete and, in turn, have a material
adverse effect on our financial condition and results of operations.
The products and services offered by the banking industry and customer expectations regarding them
are subject to change. We attempt to respond to perceived customer needs and expectations by
offering new products and services, which are often costly to develop and market initially. A lack
of market acceptance of these products and services would have a negative effect on our financial
condition and results of operations.
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From time to time, we implement new lines of business or offer new products and services within
existing lines of business. There are substantial risks and uncertainties associated with these
efforts, particularly in instances where the markets are not fully developed. In developing and
marketing new lines of business and/or new products and services we may invest significant time and
resources. We may not achieve initial timetables for the introduction and development of new lines
of business and/or new products or services and price and profitability targets may not prove
feasible. External factors, such as compliance with regulations, competitive alternatives, and
shifting market preferences, may also impact the successful implementation of a new line of
business or a new product or service. Furthermore, any new line of business and/or new product or
service could have a significant impact on the effectiveness of our system of internal controls.
Failure to successfully manage these risks in the development and implementation of new lines of
business or new products or services could have a material adverse effect on business, results of
operations and financial condition.
As a bank holding company that conducts substantially all of our operations through our
subsidiaries, the ability of our Holding Company to pay dividends, repurchase our shares or to
repay our indebtedness depends upon the results of operations of our subsidiaries and their ability
to pay dividends to our Holding Company. Dividends paid by these subsidiaries are subject to
limits imposed by federal and state law.
The Holding Company is a separate and distinct legal entity from our subsidiaries and it receives
substantially all of its revenue from dividends from its subsidiaries and sales of its securities
to investors. Dividends from subsidiaries are an important source of funds to pay dividends on
common stock and interest and principal on debt. Various federal and/or state laws and regulations
limit the amount of dividends that our bank subsidiaries and certain non-bank subsidiaries may pay
to the Holding Company. At January 1, 2010, our subsidiaries were permitted to pay $4.3 million in
dividends. Also, our Holding Companys right to participate in a distribution of assets upon a
subsidiarys liquidation or reorganization is subject to the prior claims of the subsidiarys
creditors. In the event its subsidiaries are unable to pay dividends to our Holding Company, we
may not be able to service debt, pay obligations or, should we have the ability to do so in the
future, pay dividends on common stock.
On April 17, 2008, our Board of Directors voted to suspend the common stock quarterly dividend. On
December 12, 2008, we issued TARP Preferred Stock with a liquidation value of $300 million to the
Treasury as part of the Treasurys Capital Purchase Program. Prior to December 12, 2011, and
unless we have redeemed all of the TARP Preferred Stock or Treasury has transferred all of the TARP
Preferred Stock to a third party, the approval of Treasury will be required for us to pay any
common stock dividend or, except in limited circumstances, repurchase our common stock or other
equity or capital securities.
As of December 31, 2009, the Holding Companys cash resources totaled $110.7 million. During 2009,
the Holding Company contributed an aggregate amount of $74.0 million to Citizens Bank to bolster
capital levels at the bank. The Holding Companys interest and preferred dividend payment
obligations are approximately $21 million annually, down from approximately $35 million annually at
December 31, 2008 due to the completion of the exchange offers that occurred in the third quarter
of 2009.
On January 28, 2010 we announced that we will suspend the dividend payments on our trust preferred
securities and on our TARP Preferred Stock issued to the Treasury. This action will preserve $4.9
million in cash on a quarterly basis and reduces the need for us to raise additional capital.
In order to maintain and strengthen our capital base, we may need to raise additional capital in
transactions that may be highly dilutive to our common shareholders. If such capital becomes
needed, our failure to raise additional capital could have serious consequences for our business.
We regularly perform a variety of analyses on our assets and the impact of credit losses on our
capital base, including the preparation of stress case scenarios. Due to continuing economic
conditions in the markets in which we operate and the challenges posed to our business, including
those described in other Risk Factors, we may determine, based on these analyses, that we need to
raise additional Tier 1 common equity to maintain and strengthen our capital base as the effects of
these events impact our business over the coming months and years. Any potential capital raising
transaction could be highly dilutive to our common shareholders. The market price of our common
stock could decline as a result of the dilutive effect of the capital raising transactions we may
enter into, or the perception that such transactions could occur.
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In connection with the issuance of the TARP Preferred Stock, we also issued a warrant to Treasury
to purchase approximately 17.6 million additional shares of our common stock at an initial per
share exercise price of $2.56, subject to adjustment, which expires ten years from the issuance
date. Even if we were to redeem the TARP Preferred Stock, we may not fully retire this warrant
and, therefore, this warrant may be exercised, in whole or part, prior to its expiration date.
Furthermore, the terms of the warrant provide that, if we issue common stock or securities
convertible or exercisable into, or exchangeable for, common stock at a price that is less than 90%
of the market price of such shares on the last trading day preceding the date of the agreement to
sell such shares, the number and the per share price of common stock to be purchased pursuant to
the warrant will be adjusted pursuant to its terms. As part of our potential capital raising
efforts, we could issue securities convertible into or exercisable for our common stock, which may
trigger the anti-dilution provisions of the warrant issued to the Treasury. If we issue such
securities and they are subsequently exercised, converted into or exchanged for common stock such
transactions would have a further dilutive effect on other holders of our common stock.
Also, if we determine that we need to raise additional capital, our capital raising efforts may not
be successful, or we may be required to raise additional capital on terms that are unfavorable to
us. A failure to maintain capital above well-capitalized levels could require us to reduce the
size of our business and would likely have serious negative consequences for our business.
Our Holding Company may not have sufficient resources to make capital contributions to our bank
subsidiaries if required by bank regulatory agencies, or if we might otherwise wish to do so, in
order to maintain the bank subsidiaries capital ratios at acceptable levels.
Our Holding Company is required by banking regulation to act as a source of strength to our bank
subsidiaries. If losses at our bank subsidiaries continue, whether because credit costs continue
at high levels or for other reasons, and regulatory capital levels at the bank subsidiaries
decline, our Holding Company may be required by the bank regulatory agencies to contribute capital
to our bank subsidiaries. Although we currently have substantial liquidity at our Holding Company
level that would be available for that purpose, we may not have sufficient funds at our Holding
Company level to make required capital contributions to our bank subsidiaries if the weakness in
the economies in which we operate continues over a substantial period of time and our bank
subsidiaries continue to incur losses.
We may not be able to attract and retain skilled people. If we were to lose key employees, we may
experience a disruption our relationship with certain customers.
Our success depends, in large part, on our ability to attract and retain skilled people.
Competition for the best people in most of our business activities can be intense, and we may not
be able to hire sufficiently skilled people or to retain them. The unexpected loss of services of
one or more of our key personnel could have a material adverse impact on our business because of
their skills, knowledge of our markets, years of industry experience, and the difficulty of
promptly finding qualified replacement personnel.
Many of our key employees have extensive customer relationships. Loss of a key employee with such
customer relationships may lead to the loss of customers if they were to follow that employee to a
competitor. While we believe that our relationship with our key producers is good, we cannot
guarantee that all of our key personnel will remain with us.
New accounting or tax pronouncements or interpretations may be issued by the accounting profession,
regulators or other government bodies which could change existing accounting methods. Changes in
accounting methods could negatively impact our results of operations and financial condition.
Current accounting and tax rules, standards, policies, and interpretations influence the methods by
which financial institutions conduct business, implement strategic initiatives and tax compliance,
and govern financial reporting and disclosures. These laws, regulations, rules, standards,
policies, and interpretations are constantly evolving and may change significantly over time.
Events that may not have a direct impact on us, such as the bankruptcy of major U.S. companies,
have resulted in legislators, regulators, and authoritative bodies, such as the Financial
Accounting Standards Board, the SEC, the Public Company Accounting Oversight Board, and various
taxing authorities, responding by adopting and/or proposing substantive revision to laws,
regulations, rules, standards, policies, and interpretations. New accounting pronouncements and
varying interpretations of accounting
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pronouncements have occurred and may occur in the future. A change in accounting standards may adversely affect reported financial condition and results of
operations.
Our business continuity plans or data security systems could prove to be inadequate, resulting in a
material interruption in, or disruption to, our business and a negative impact on our results of
operations.
We rely heavily on communications and information systems to conduct our business. Any failure,
interruption or breach in security of these systems, whether due to severe weather, natural
disasters, acts of war or terrorism, criminal activity or other factors, could result in failures
or disruptions in general ledger, deposit, loan, customer relationship management, and other
systems. While we have disaster recovery and other policies and procedures designed to prevent or
limit the effect of the failure, interruption or security breach of our information systems, there
can be no assurance that any such failures, interruptions or security breaches will not occur or,
if they do occur, that they will be adequately addressed. The occurrence of any failures,
interruptions or security breaches of our information systems could damage our reputation, result
in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil
litigation and possible financial liability, any of which could have a material adverse effect on
our results of operations.
Our vendors could fail to fulfill their contractual obligations, resulting in a material
interruption in, or disruption to, our business and a negative impact on our results of operations.
We have entered into subcontracts for the supply of current and future services, such as data
processing and certain property management functions. These services must be available on a
continuous and timely basis and be in compliance with any regulatory requirements. Failure to do
so could substantially harm our business.
We often purchase services from vendors under agreements that typically can be terminated on a
periodic basis. There can be no assurance, however, that vendors will be able to meet their
obligations under these agreements or that we will be able to compel them to do so. Risks of
relying on vendors include the following.
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If an existing agreement expires or a certain service is discontinued by a vendor, then we
may not be able to continue to offer our customers the same breadth of products and our
operating results would likely suffer unless we are able to find an alternate supply of a
similar service. |
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Agreements we may negotiate in the future may commit us to certain minimum spending
obligations. It is possible we will not be able to create the market demand to meet such
obligations. |
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If market demand for our products increases suddenly, our current vendors might not be able
to fulfill our commercial needs, which would require us to seek new arrangements or new
sources of supply, and may result in substantial delays in meeting market demand. |
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We may not be able to control or adequately monitor the quality of services we receive from
our vendors. Poor quality services could damage our reputation with our customers. |
Potential problems with vendors such as those discussed above could have a significant adverse
effect on our business, lead to higher costs and damage our reputation with our customers and, in
turn, have a material adverse effect on our financial condition and results of operations.
Our potential inability to integrate companies we may acquire in the future could have a negative
effect on our expenses and results of operations.
On occasion, we may engage in a strategic acquisition when we believe there is an opportunity to
strengthen and expand our business. To fully benefit from such acquisition, however, we must
integrate the administrative, financial, sales, lending, collections, and marketing functions of
the acquired company. If we are unable to successfully integrate an acquired company, we may not
realize the benefits of the acquisition, and our financial results may be negatively affected. A
completed acquisition may adversely affect our financial condition and results of operations,
including our capital requirements and the accounting treatment of the acquisition. Completed
acquisitions may also lead to significant unexpected liabilities after the consummation of these
acquisitions.
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Our controls and procedures may fail or be circumvented which could have a material adverse
effect on our business, results of operations and financial condition.
We regularly review and update our internal controls, disclosure controls and procedures, and
corporate governance policies and procedures. Any system of controls, however well designed and
operated, is based in part on certain assumptions and can provide only reasonable, not absolute,
assurances that the objectives of the system are met. Any failure or circumvention of our controls
and procedures or failure to comply with regulations related to controls and procedures could have
a material adverse effect on our business, results of operations and financial condition.
Our articles of incorporation and bylaws as well as certain banking laws may have an anti-takeover
effect.
Provisions of our articles of incorporation and bylaws and federal banking laws, including
regulatory approval requirements, could make it more difficult for a third party to acquire our
Holding Company, even if doing so would be perceived to be beneficial to shareholders. The
combination of these provisions effectively inhibits a non-negotiated merger or other business
combination, which, in turn, could adversely affect the market price of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
Citizens executive offices are located at 328 South Saginaw Street, Flint, Michigan in the
main office building of Citizens Bank, the largest bank subsidiary. The bank subsidiaries operate
through 229 offices. Of these, 59 are leased and the remainder are owned and not subject to any
material liens. Rent expense on the leased properties totaled $5.8 million in 2009. The banking
offices are located in various communities throughout the states of Michigan and Wisconsin, and in
parts of Ohio, Iowa, and Indiana and are used by all of Citizens business segments. At certain
Citizens Bank and F&M locations a portion of the office buildings are leased to tenants.
Additional information related to the property and equipment owned or leased by Citizens and its
subsidiaries is incorporated herein by reference from Notes 1 and 5 to the Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
Citizens is party to a number of lawsuits incidental to its business. Although litigation is
subject to many uncertainties and the ultimate exposure with respect to many of these matters
cannot be ascertained, Citizens does not believe the ultimate outcome of these matters will have a
material adverse effect on its financial condition or liquidity.
From time to time, certain of the Corporations subsidiaries are notified by applicable
environmental regulatory agencies, pursuant to state or federal environmental statutes or
regulations, that they may be potentially responsible parties (PRP) for environmental
contamination on or emanating from properties currently or formerly owned. Typically, exact costs
of remediation of the contamination cannot be fully determined at the time of initial notification.
While, as PRPs, these subsidiaries are potentially liable for the costs of remediation, in most
cases, a number of other PRPs have been identified as being jointly and severally liable for
remediation costs. Additionally, in certain cases, statutory defenses to liability for remediation
costs may be asserted based on the subsidiaries status as lending institutions that acquired
ownership of the contaminated property through foreclosure. Citizens is not presently aware of any
environmental liabilities that pose a reasonable possibility of future material impact on its
earnings. It is Citizens policy to establish and accrue appropriate reserves for all such
identified exposures during the accounting period in which a loss is deemed to be probable and the
amount is determinable.
25
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
The Holding Companys common stock is traded on NASDAQ under the symbol CRBC. There were
approximately 32,000 shareholders of the Holding Companys common stock as of December 31, 2009,
which includes record holders and individual participants in security position listings.
Information regarding the Holding Companys high and low stock prices and cash dividends declared
during each quarter of the last two fiscal years is set forth in the table below. The Holding
Company is currently prohibited from paying cash dividends or repurchasing shares of common stock
pursuant to the Letter Agreement, dated December 12, 2008 (the CPP Letter Agreement), pursuant to
which the Holding Company completed its sale to the Treasury as part of the Treasurys CPP of
certain preferred shares and a warrant to purchase common shares. This restriction will remain in
effect until the earlier of December 12, 2011 or such time as Treasury no longer holds the
preferred shares. Other restrictions on the Holding Companys ability to pay dividends are
incorporated herein by reference from Note 18 to the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
Common Stock |
|
|
|
|
|
Declared |
|
|
Price Range |
|
Closing |
|
|
|
Per Share |
|
|
High |
|
|
Low |
|
Price |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
|
|
|
$ |
3.26 |
|
|
$ |
0.65 |
|
|
$ |
1.55 |
|
Second quarter |
|
|
|
|
|
|
2.25 |
|
|
|
0.71 |
|
|
|
0.71 |
|
Third quarter |
|
|
|
|
|
|
1.18 |
|
|
|
0.50 |
|
|
|
0.76 |
|
Fourth quarter |
|
|
|
|
|
|
0.78 |
|
|
|
0.48 |
|
|
|
0.69 |
|
|
|
|
Year |
|
$ |
|
|
|
$ |
3.26 |
|
|
$ |
0.48 |
|
|
$ |
0.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
0.290 |
|
|
$ |
14.74 |
|
|
$ |
10.41 |
|
|
$ |
12.43 |
|
Second quarter |
|
|
|
|
|
|
13.97 |
|
|
|
2.67 |
|
|
|
2.82 |
|
Third quarter |
|
|
|
|
|
|
11.00 |
|
|
|
1.75 |
|
|
|
3.08 |
|
Fourth quarter |
|
|
|
|
|
|
4.75 |
|
|
|
1.34 |
|
|
|
2.98 |
|
|
|
|
Year |
|
$ |
0.290 |
|
|
$ |
14.74 |
|
|
$ |
1.34 |
|
|
$ |
2.98 |
|
|
|
|
In addition, the information under the caption Equity Compensation Plan Information under
Item 12 of this Report is incorporated herein by reference.
Stock Performance Graph
The following graph summarizes the annual percentage change in the cumulative total
shareholder return of the Holding Companys common stock for the last five years compared with the
S&P 500 Index (Ticker: SPX), the Keefe, Bruyette & Woods Regional Banking Index (Ticker: KRX), and
the Keefe, Bruyette & Woods, Inc. 50 Bank Index (KBW50). Effective December 31, 2009, the KBW50
Index is no longer being calculated and will be replaced with the KRX Index, which is a modified
capitalization weighted index, created by Keefe, Bruyette & Woods, designed to effectively
represent the performance of the broad and diverse U.S. Regional banking industry. The graph
assumes the investment in Citizens common stock and each index was $100 on December 31, 2004 and
the reinvestment of all dividends. The returns shown are not necessarily indicative of future
performance.
26
|
|
|
* |
|
KBW50 Index was discontinued effective 12/31/2009. |
The information furnished under the heading Stock Performance Graph shall not be deemed filed
for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject
to the liabilities of that Section, and such information shall not be deemed incorporated by
reference in any filing under the Securities Act of 1933, as amended.
Issuer Repurchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Maximum Number of |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
Shares That May Yet |
|
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
|
Be Purchased Under |
|
|
|
Total Number of |
|
|
Average Price Paid |
|
|
Announced Plans or |
|
|
The Plans or Programs |
|
Period |
|
Shares Purchased |
|
|
Per Share |
|
|
Programs |
|
|
(2) |
|
October 2009 |
|
|
940 |
(1) |
|
|
0.71 |
|
|
|
|
|
|
|
1,241,154 |
|
November 2009 |
|
|
2,434 |
(1) |
|
|
0.76 |
|
|
|
|
|
|
|
1,241,154 |
|
December 2009 |
|
|
871 |
(1) |
|
|
0.61 |
|
|
|
|
|
|
|
1,241,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,245 |
|
|
|
0.72 |
|
|
|
|
|
|
|
1,241,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Shares repurchased in connection with taxes due from employees as a result of the
vesting of certain restricted share awards in accordance with the related grant agreements. These
repurchases were not part of the repurchase program approved in October 2003. |
|
(2) |
|
In October 2003, the Board of Directors approved the repurchase of 3,000,000 shares
of common stock from time to time in the market. There is no expiration date for the repurchase
program. The repurchase of shares is generally prohibited, with certain exceptions, by the CPP
Letter
Agreement while Treasury continues to hold the related TARP Preferred Stock and by the terms of
Citizens outstanding trust preferred securities, and is also subject to limitations that may be
imposed by applicable securities laws and regulations and the rules of NASDAQ. The timing of the
purchases and the number of shares to be bought at any one time also depend on market conditions
and Citizens capital requirements. There can be no assurance that Citizens will repurchase the
remaining shares authorized to be repurchased |
The stock repurchase program is discussed in more detail in Note 14 to the Consolidated
Financial Statements.
27
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below is derived from Citizens audited consolidated
financial statements and should be read in conjunction with its Consolidated Financial Statements
for the years ended December 31, 2009, 2008, and 2007, and notes thereto and Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in
this Annual Report. Material events or changes that affect the comparability of information in the
table are described in Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations Recent Developments in 2009 and Significant Developments in 2008 and
2007.
Citizens completed its merger with Republic Bancorp Inc. (Republic) on December 29, 2006. As a
result, balances in the following table beginning as of December 31, 2006 include all of Republics
assets and liabilities at estimated fair value. Average balances and income and expense amounts
for 2006 and 2005, however, reflect only legacy Citizens results.
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Year Summary of Selected Financial Data |
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data) |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
For The Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
317,368 |
|
|
$ |
348,932 |
|
|
$ |
382,179 |
|
|
$ |
263,120 |
|
|
$ |
275,749 |
|
Provision for loan losses(1) |
|
|
325,955 |
|
|
|
282,054 |
|
|
|
45,177 |
|
|
|
11,265 |
|
|
|
1,109 |
|
Noninterest income(2) |
|
|
67,421 |
|
|
|
101,742 |
|
|
|
122,568 |
|
|
|
90,627 |
|
|
|
80,508 |
|
Noninterest expense(3) |
|
|
603,021 |
|
|
|
490,702 |
|
|
|
327,423 |
|
|
|
259,827 |
|
|
|
243,042 |
|
Income tax (benefit) provision(4) |
|
|
(29,974 |
) |
|
|
70,970 |
|
|
|
31,305 |
|
|
|
19,319 |
|
|
|
31,581 |
|
Net (loss) income |
|
|
(514,213 |
) |
|
|
(393,052 |
) |
|
|
100,842 |
|
|
|
63,336 |
|
|
|
80,525 |
|
Net (loss) income attributable to common shareholders(5) |
|
|
(533,990 |
) |
|
|
(405,016 |
) |
|
|
100,842 |
|
|
|
63,336 |
|
|
|
80,525 |
|
Taxable equivalent adjustment |
|
|
16,450 |
|
|
|
18,402 |
|
|
|
18,547 |
|
|
|
13,717 |
|
|
|
13,392 |
|
Cash dividends |
|
|
|
|
|
|
21,959 |
|
|
|
87,798 |
|
|
|
49,530 |
|
|
|
49,311 |
|
|
|
|
|
|
|
|
|
|
Per Common Share Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(2.75 |
) |
|
$ |
(4.30 |
) |
|
$ |
1.33 |
|
|
$ |
1.48 |
|
|
$ |
1.87 |
|
Diluted |
|
|
(2.75 |
) |
|
|
(4.30 |
) |
|
|
1.33 |
|
|
|
1.47 |
|
|
|
1.85 |
|
Cash dividends |
|
|
|
|
|
|
0.290 |
|
|
|
1.160 |
|
|
|
1.155 |
|
|
|
1.140 |
|
Market value |
|
|
0.69 |
|
|
|
2.98 |
|
|
|
14.51 |
|
|
|
26.50 |
|
|
|
27.75 |
|
Common book value |
|
|
2.69 |
|
|
|
10.60 |
|
|
|
20.84 |
|
|
|
20.58 |
|
|
|
15.28 |
|
Tangible book value(6) |
|
|
2.50 |
|
|
|
7.80 |
|
|
|
10.20 |
|
|
|
9.65 |
|
|
|
13.75 |
|
Tangible common book value(7) |
|
|
1.81 |
|
|
|
5.69 |
|
|
|
10.20 |
|
|
|
9.65 |
|
|
|
13.75 |
|
Shares outstanding |
|
|
394,397 |
|
|
|
125,997 |
|
|
|
75,722 |
|
|
|
75,676 |
|
|
|
42,968 |
|
|
|
|
|
|
|
|
|
|
At Year End |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
11,931,631 |
|
|
$ |
13,086,016 |
|
|
$ |
13,505,983 |
|
|
$ |
14,002,612 |
|
|
$ |
7,750,688 |
|
Total earning assets |
|
|
11,169,458 |
|
|
|
11,973,735 |
|
|
|
11,969,389 |
|
|
|
12,483,630 |
|
|
|
7,274,057 |
|
Portfolio loans |
|
|
7,905,859 |
|
|
|
9,102,598 |
|
|
|
9,501,244 |
|
|
|
9,231,082 |
|
|
|
5,616,119 |
|
Allowance for loan losses |
|
|
342,370 |
|
|
|
255,321 |
|
|
|
163,353 |
|
|
|
169,104 |
|
|
|
116,400 |
|
Deposits |
|
|
8,909,340 |
|
|
|
9,052,406 |
|
|
|
8,301,925 |
|
|
|
8,698,061 |
|
|
|
5,473,839 |
|
Shareholders equity |
|
|
1,331,036 |
|
|
|
1,601,321 |
|
|
|
1,577,880 |
|
|
|
1,557,686 |
|
|
|
656,463 |
|
|
|
|
|
|
|
|
|
|
Average For The Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
12,483,109 |
|
|
$ |
13,241,553 |
|
|
$ |
13,320,121 |
|
|
$ |
7,704,231 |
|
|
$ |
7,776,522 |
|
Total earning assets |
|
|
11,555,721 |
|
|
|
11,888,252 |
|
|
|
11,847,221 |
|
|
|
7,259,956 |
|
|
|
7,338,328 |
|
Portfolio loans |
|
|
8,473,946 |
|
|
|
9,433,952 |
|
|
|
9,212,066 |
|
|
|
5,657,476 |
|
|
|
5,493,280 |
|
Allowance for loan losses |
|
|
306,971 |
|
|
|
189,072 |
|
|
|
173,148 |
|
|
|
114,613 |
|
|
|
119,925 |
|
Deposits |
|
|
8,913,811 |
|
|
|
8,715,210 |
|
|
|
8,168,893 |
|
|
|
5,587,967 |
|
|
|
5,286,390 |
|
Shareholders equity |
|
|
1,444,733 |
|
|
|
1,558,414 |
|
|
|
1,549,961 |
|
|
|
660,996 |
|
|
|
653,004 |
|
|
|
|
|
|
|
|
|
|
Financial Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
(4.12) |
% |
|
|
(2.97 |
)% |
|
|
0.76 |
% |
|
|
0.82 |
% |
|
|
1.04 |
% |
Return on average shareholders equity |
|
|
(35.59 |
) |
|
|
(25.22 |
) |
|
|
6.51 |
|
|
|
9.58 |
|
|
|
12.33 |
|
Average shareholders equity/avg. assets |
|
|
11.57 |
|
|
|
11.77 |
|
|
|
11.64 |
|
|
|
8.58 |
|
|
|
8.40 |
|
Net interest margin (FTE)(8) |
|
|
2.89 |
|
|
|
3.09 |
|
|
|
3.38 |
|
|
|
3.81 |
|
|
|
3.94 |
|
Efficiency ratio(9) |
|
|
83.88 |
|
|
|
66.64 |
|
|
|
62.57 |
|
|
|
70.71 |
|
|
|
65.75 |
|
Allowance for loan losses as a percent of portfolio loans |
|
|
4.33 |
|
|
|
2.80 |
|
|
|
1.72 |
|
|
|
1.83 |
|
|
|
2.07 |
|
Allowance for loan losses as a percent of nonperforming loans |
|
|
72.01 |
|
|
|
83.43 |
|
|
|
86.27 |
|
|
|
286.44 |
|
|
|
359.50 |
|
Nonperforming loans as a percent of portfolio loans |
|
|
6.01 |
|
|
|
3.36 |
|
|
|
1.99 |
|
|
|
0.64 |
|
|
|
0.58 |
|
Nonperforming assets as a percent of portfolio loans plus ORAA |
|
|
7.48 |
|
|
|
4.79 |
|
|
|
2.64 |
|
|
|
1.10 |
|
|
|
0.71 |
|
Nonperforming assets as a percent of total assets |
|
|
4.99 |
|
|
|
3.36 |
|
|
|
1.86 |
|
|
|
0.73 |
|
|
|
0.51 |
|
Net loans charged off as a percent of average portfolio loans |
|
|
2.82 |
|
|
|
2.01 |
|
|
|
0.55 |
|
|
|
0.29 |
|
|
|
0.13 |
|
Tier 1 leverage(10) |
|
|
9.21 |
|
|
|
9.66 |
|
|
|
7.53 |
|
|
|
7.22 |
|
|
|
7.98 |
|
Tier 1 risk-based capital |
|
|
12.52 |
|
|
|
12.21 |
|
|
|
9.18 |
|
|
|
9.41 |
|
|
|
9.94 |
|
Total risk-based capital |
|
|
13.93 |
|
|
|
14.49 |
|
|
|
11.66 |
|
|
|
11.90 |
|
|
|
13.22 |
|
|
|
|
|
(1) |
|
Provision for loan losses in 2005 includes a $9.1 million insurance settlement
relating to a claim for recovery of fraud losses suffered in connection with two loans made by the
Corporation and subsequently charged-off in 2002 and 2003. |
|
(2) |
|
Noninterest income includes a net loss on debt extinguishment of $15.9 million in
2009, a fair-value adjustment on loans held for sale of $20.1 million and $9.4 million in 2009 and
2008, respectively and a charge of $3.6 million related to a fair value change in CD swap
derivatives in 2005. |
|
(3) |
|
Noninterest expense includes goodwill impairment of $266.5 million and $178.1
million in 2009 and 2008, respectively; fair-value adjustments on ORE properties of $23.5
million and $8.1 million in 2009 and 2008, respectively; and restructuring and merger-related
expenses of $8.2 million in 2007 and $11.3 million in 2006, related to the Republic merger. |
|
(4) |
|
Income tax (benefit) provision includes a deferred tax valuation allowance of $79.8
million and $136.6 million in 2009 and 2008, respectively. |
|
(5) |
|
Net loss attributable to common shareholders includes the following items: $19.8
million dividend to preferred shareholders in 2009, $0.2 million dividend on redeemable preferred
stock and $11.7 million deemed dividend on convertible preferred stock in 2008. |
|
(6) |
|
Tangible book value is an estimate of a companys worth, if liquidated, to
shareholders. The calculation using ending balances is as follows: (Shareholders equity -
Goodwill - Intangible assets)/Common shares outstanding. |
|
(7) |
|
Tangible common book value is an estimate of a companys worth, if it was liquidated,
to common shareholders. The calculation using ending balances is as follows: (Shareholders equity
- Preferred stock - Goodwill - Intangible assets)/Common shares outstanding. |
|
(8) |
|
Net interest margin includes taxable equivalent adjustments to interest income based
on a tax rate of 35%. |
|
(9) |
|
Efficiency ratio is calculated as follows: (Noninterest expense -
Goodwill impairment)/(Net interest income + Taxable equivalent adjustment +
Noninterest income). |
|
(10) |
|
In 2006, the Tier 1 leverage is calculated using
ending assets instead of average assets due to the Republic merger on December 29,
2006. |
29
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following presents managements discussion and analysis of Citizens financial condition
and results of operations for each of the past three years and should be read in conjunction with
the accompanying Consolidated Financial Statements and Notes. The discussion highlights the
principal factors affecting earnings (loss) for the years 2009, 2008, and 2007 and the significant
changes in balance sheet items from December 31, 2008 to December 31, 2009 and is intended to help
the reader understand, from managements perspective, the consolidated financial statements, notes
to financial statements, and the accompanying tables, charts and financial statistics appearing
elsewhere in this report. Where applicable, this discussion also reflects managements insights
regarding known events and trends that have or may reasonably be expected to have a material effect
on the Corporations operations and financial condition.
ForwardLooking Statements
Discussions and statements in this report that are not statements of historical fact,
including without limitation statements that include terms such as will, may, should,
believe, expect, anticipate, estimate, project, intend, and plan, and statements
regarding Citizens future financial and operating results, plans, objectives, expectations and
intentions, are forward-looking statements that involve risks and uncertainties, many of which are
beyond Citizens control or are subject to change. No forward-looking statement is a guarantee of
future performance and actual results could differ materially. Factors that could cause or
contribute to such differences include, without limitation, risks and uncertainties detailed from
time to time in Citizens filings with the SEC, including those listed in Item 1A. Risk Factors
of this report.
Other factors not currently anticipated may also materially and adversely affect Citizens results
of operations, cash flows, financial position, and prospects. There can be no assurance that
future results will meet expectations. While Citizens believes that the forward-looking statements
in this report are reasonable, the reader should not place undue reliance on any forward-looking
statement. In addition, these statements speak only as of the date made. Citizens does not
undertake, and expressly disclaims any obligation to update or alter any statements, whether as a
result of new information, future events or otherwise, except as may be required by applicable law.
OVERVIEW
Nature of Citizens Business
Citizens is a diversified banking and financial services company that provides a full range of
banking and financial services to individuals and businesses through its subsidiaries, Citizens
Bank and F&M. The Corporation also provides wealth management services through CB Wealth
Management and through the affiliate trust department of F&M. Citizens conducts operations through
229 offices and 267 ATM locations throughout Michigan, Wisconsin, Ohio, Iowa, and Indiana.
Citizens operates in four major business lines: Regional Banking, Specialty Consumer, Specialty
Commercial, and Wealth Management. Citizens performance is monitored by an internal profitability
measurement system that provides line of business results as presented in Line of Business
Results and Note 15 to the Consolidated Financial Statements, incorporated herein by reference.
The Corporations primary source of revenue is net interest income, which is the difference between
interest income on earning assets (such as loans and securities) and interest expense on
liabilities (such as interest-bearing deposits and borrowings) used to fund those assets. 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. The Corporation measures the level of interest income relative to earning assets and
interest bearing liabilities 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. Citizens sensitivity to changes in interest rates and
the potential effect of changes in interest rates on net interest income is presented in more
detail in Interest Rate Risk.
30
Proper management of the volume and composition of the Corporations earning assets and funding
sources is essential for ensuring strong and consistent earnings performance, maintaining adequate
liquidity and limiting exposure to risks caused by changing market conditions. Citizens
investment securities portfolio is structured to provide a source of liquidity 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 the highest yielding assets. Client deposits are the primary source of funding for earning
assets while short-term debt and other managed sources of funds are utilized as market conditions
and liquidity needs change.
The Corporation monitors and manages its liquidity position so that funds will be available at a
reasonable cost to meet client cash flow needs, while maintaining funds available for loan and
investment opportunities as well as to service debt, invest in subsidiaries, finance business
expansion, satisfy other operating requirements and take advantage of unforeseen opportunities.
Citizens derives its liquidity through core deposit growth, maturity of money market investments,
and maturity and sale of investment securities and loans. The Corporation also has access to
market borrowing sources for both short-term and long-term purposes.
Citizens other principal source of revenue is noninterest income, particularly fees and other
revenue from financial services provided to customers. Citizens noninterest income includes
service charges on deposit accounts, trust fees related to personal, institutional and employee
benefit products and services, revenue related to loan products, including commercial loan fees and
mortgage banking revenue, and fees for various other services, such as brokerage and investment
services, ATM network use, and other financial services.
Use of Non-GAAP Financial Measures
In addition to results presented in accordance with GAAP, this report includes non-GAAP
financial measures such as net interest margin, the efficiency ratio, tangible equity to tangible
assets ratio, tangible common equity to tangible assets ratio, Tier 1 common equity ratio, and
pre-tax pre-provision core operating earnings. Citizens believes these non-GAAP financial measures
provide information useful to investors in understanding the underlying operational performance of
Citizens, its business, and performance trends and facilitates performance comparisons with others
in the banking industry. Non-GAAP financial measures have inherent limitations, are not required
to be uniformly applied and are not audited. To mitigate these limitations, Citizens has
procedures in place to ensure that these measures are calculated using the appropriate GAAP or
regulatory components and to ensure that the capital performance is properly reflected to
facilitate period-to-period comparisons. Although Citizens believes the above non-GAAP financial
measures enhance investors understanding of its business and performance, these non-GAAP measures
should not be considered in isolation, or as a substitute for GAAP basis financial measures.
Net Interest Margin and Efficiency Ratio
In accordance with industry standards, certain designated net interest income amounts are presented
on a taxable equivalent basis, including the calculation of net interest margin and the efficiency
ratio. Citizens believes the presentation of net interest margin on a taxable equivalent basis
allows comparability of net interest margin with industry peers by eliminating the effect of the
differences in portfolios attributable to the proportion represented by both taxable and tax-exempt
investments.
Tangible Equity, Tangible Common Equity and Tier 1 Common Equity Ratios
Citizens believes the exclusion of goodwill and other intangible assets to create tangible assets
and tangible equity facilitates the period to period comparison of results for Citizens ongoing
business operations. Citizens management internally assesses the companys performance based, in
part, on these non-GAAP financial measures. The tangible common equity ratio and Tier 1 common
equity ratio have become a focus of some investors and management believes that these ratios may
assist investors in analyzing Citizens capital position absent the effects of intangible assets
and preferred stock. Because tangible common equity and Tier 1 common equity are not formally
defined by GAAP or codified in the federal banking regulations, these measures are considered to be
non-GAAP financial measures. Because analysts and banking regulators may assess Citizens capital
adequacy using tangible common equity and Tier 1 common equity, Citizens believes that it is useful
to provide investors the ability to assess its capital adequacy on these same bases. Tier 1 common
equity is often expressed as a percentage of net risk-weighted assets. Under the risk-based
capital framework, a banks balance sheet assets and credit equivalent amounts of off-balance sheet
items are assigned to one of four broad
31
risk categories. The aggregated dollar amount in each
category is then multiplied by the risk weight assigned to that category. The resulting weighted
values from each of the four categories are added together and this sum is the risk-weighted assets
total that, as adjusted, comprises the denominator of certain risk-based capital ratios. Tier 1
capital is then divided by this denominator (net risk-weighted assets) to determine the Tier 1
capital ratio. Adjustments are made to Tier 1 capital to arrive at Tier 1 common equity. The
amounts disclosed as net risk-weighted assets are calculated consistent with banking regulatory
requirements.
Pre-tax Pre-Provision Core Operating Earnings
Pre-tax pre-provision core operating earnings, as defined by management, represents net income
(loss) excluding income tax provision (benefit), the provision for loan losses, and any impairment
charges or special assessments (including goodwill, credit writedowns, fair-value adjustments, and
FDIC special assessments). Citizens believes presenting pre-tax pre-provision core operating
earnings provides investors with the ability to better understand Citizens underlying operating
trends separate from the direct effects of the impairment charges, net loss on debt extinguishment,
credit issues, fair value adjustments, challenges inherent in the real estate downturn and other
economic cycle issues and displays a consistent core operating earnings trend before the impact of
these challenges. The Allowance for Loan Losses section of this report isolates the
challenges and issues related to the credit quality of Citizens loan portfolio and their impact on
Citizens earnings as reflected in the provision for loan losses.
The following table displays the calculation for the past three years of these non-GAAP measures
other than pre-tax pre-provision core operating earnings, the calculation of which is set forth in
the Performance Summary section.
32
Non-GAAP
Reconciliation
Citizens Republic Bancorp and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Net Interest Income (A) |
|
$ |
317,368 |
|
|
$ |
348,932 |
|
|
$ |
382,179 |
|
Taxable equivalent adjustment (B) |
|
|
16,450 |
|
|
|
18,402 |
|
|
|
18,547 |
|
Noninterest income (C) |
|
|
67,421 |
|
|
|
101,742 |
|
|
|
122,568 |
|
Noninterest expense (D) |
|
|
603,021 |
|
|
|
490,702 |
|
|
|
327,423 |
|
Goodwill impairment (E) |
|
|
266,474 |
|
|
|
178,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency Ratio: (D-E)/(A+B+C) |
|
|
83.88 |
% |
|
|
66.64 |
% |
|
|
62.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balances (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible Common Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
11,932 |
|
|
$ |
13,086 |
|
|
$ |
13,506 |
|
Goodwill |
|
|
(331 |
) |
|
|
(597 |
) |
|
|
(775 |
) |
Other intangible assets |
|
|
(14 |
) |
|
|
(21 |
) |
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
Tangible assets (non-GAAP) |
|
$ |
11,587 |
|
|
$ |
12,468 |
|
|
$ |
12,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
$ |
1,331 |
|
|
$ |
1,601 |
|
|
$ |
1,578 |
|
Goodwill |
|
|
(331 |
) |
|
|
(597 |
) |
|
|
(775 |
) |
Other intangible assets |
|
|
(14 |
) |
|
|
(21 |
) |
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
Tangible equity (non-GAAP) |
|
$ |
986 |
|
|
$ |
983 |
|
|
$ |
772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible equity |
|
$ |
986 |
|
|
$ |
983 |
|
|
$ |
772 |
|
Preferred Stock |
|
|
(272 |
) |
|
|
(266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity (non-GAAP) |
|
$ |
714 |
|
|
$ |
717 |
|
|
$ |
772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Common Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
$ |
1,331 |
|
|
$ |
1,601 |
|
|
$ |
1,578 |
|
Qualifying capital securities |
|
|
73 |
|
|
|
174 |
|
|
|
175 |
|
Goodwill |
|
|
(331 |
) |
|
|
(597 |
) |
|
|
(775 |
) |
Accumulated other comprehensive loss (income) |
|
|
7 |
|
|
|
50 |
|
|
|
(5 |
) |
Other intangible assets |
|
|
(14 |
) |
|
|
(21 |
) |
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (regulatory) |
|
$ |
1,066 |
|
|
$ |
1,207 |
|
|
$ |
942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (regulatory) |
|
$ |
1,066 |
|
|
$ |
1,207 |
|
|
$ |
942 |
|
Qualifying capital securities |
|
|
(73 |
) |
|
|
(174 |
) |
|
|
(175 |
) |
Preferred Stock |
|
|
(272 |
) |
|
|
(266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tier 1 common equity (non-GAAP) |
|
$ |
721 |
|
|
$ |
767 |
|
|
$ |
767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net risk-weighted assets (regulatory) |
|
$ |
8,516 |
|
|
$ |
9,883 |
|
|
$ |
10,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity to Assets |
|
|
11.16 |
% |
|
|
12.24 |
% |
|
|
11.68 |
% |
Tangible Equity to Tangible Assets |
|
|
8.51 |
|
|
|
7.88 |
|
|
|
6.08 |
|
Tangible Common Equity to Tangible Assets |
|
|
6.16 |
|
|
|
5.75 |
|
|
|
6.08 |
|
Tier 1 Common Equity |
|
|
8.47 |
|
|
|
7.76 |
|
|
|
7.48 |
|
|
33
Performance Summary
An analysis of the major components of net income for 2009, 2008 and 2007 is presented below.
Three Year Summary of Net Income Components
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Interest income |
|
$ |
568,679 |
|
|
$ |
700,911 |
|
|
$ |
807,911 |
|
Interest expense |
|
|
251,311 |
|
|
|
351,979 |
|
|
|
425,732 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
317,368 |
|
|
|
348,932 |
|
|
|
382,179 |
|
Provision for loan losses |
|
|
325,955 |
|
|
|
282,054 |
|
|
|
45,177 |
|
Noninterest income |
|
|
67,421 |
|
|
|
101,742 |
|
|
|
122,568 |
|
Noninterest expense |
|
|
603,021 |
|
|
|
490,702 |
|
|
|
327,423 |
|
Income tax (benefit) provision |
|
|
(29,974 |
) |
|
|
70,970 |
|
|
|
31,305 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(514,213 |
) |
|
|
(393,052 |
) |
|
|
100,842 |
|
Deemed dividend on convertible preferred stock |
|
|
|
|
|
|
(11,737 |
) |
|
|
|
|
Dividend on redeemable preferred stock |
|
|
(19,777 |
) |
|
|
(227 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common shareholders |
|
$ |
(533,990 |
) |
|
$ |
(405,016 |
) |
|
$ |
100,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax pre-provision core operating earnings |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(514,213 |
) |
|
$ |
(393,052 |
) |
|
$ |
100,842 |
|
Income tax (benefit) provision |
|
|
(29,974 |
) |
|
|
70,970 |
|
|
|
31,305 |
|
Provision for loan losses |
|
|
325,955 |
|
|
|
282,054 |
|
|
|
45,177 |
|
Goodwill impairment |
|
|
266,474 |
|
|
|
178,089 |
|
|
|
|
|
Net loss on debt extinguishment |
|
|
15,929 |
|
|
|
|
|
|
|
|
|
FDIC special assessment |
|
|
5,533 |
|
|
|
|
|
|
|
|
|
Fair value adjustment on loans held for sale |
|
|
20,086 |
|
|
|
9,373 |
|
|
|
508 |
|
Fair value adjustment on ORE |
|
|
23,453 |
|
|
|
8,063 |
|
|
|
(866 |
) |
Fair value adjustment on bank owned life insurance |
|
|
(144 |
) |
|
|
3,447 |
|
|
|
|
|
Loss on auction rate securities repurchase |
|
|
|
|
|
|
2,406 |
|
|
|
|
|
(Gain) loss related to Visa USA shares |
|
|
|
|
|
|
(2,124 |
) |
|
|
872 |
|
Fair value adjustment on swaps |
|
|
606 |
|
|
|
(1,287 |
) |
|
|
|
|
Captive insurance impairment charge |
|
|
|
|
|
|
1,053 |
|
|
|
|
|
Expenses
related to merger activities but not treated as restructuring or merger-related |
|
|
|
|
|
|
|
|
|
|
10,142 |
|
Restructuring and merger related expenses |
|
|
|
|
|
|
|
|
|
|
8,247 |
|
Loss on 1998 venture capital investment in limited partnership |
|
|
|
|
|
|
|
|
|
|
1,085 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax pre-provision core operating earnings |
|
$ |
113,705 |
|
|
$ |
158,992 |
|
|
$ |
197,312 |
|
|
|
|
|
|
|
|
|
|
|
Key factors behind the results for 2009 compared with 2008 were:
|
|
The decrease in net interest income from 2008 was primarily a result of a decline in net
interest margin from 3.09% to 2.89% and a $332.5 million decrease in average earning assets.
The decrease in the net interest margin was primarily the result of deposit price competition,
the transfer of loans to nonperforming status, and an increase in short-term investments to
provide additional on-balance sheet liquidity. The decrease was partially offset by expanding
commercial and consumer loan spreads and retail time deposits repricing to a lower rate. The
decrease in average earning assets was primarily the result of lower loan demand in the
current Midwest economic environment, partially offset by an increase in investment securities
and money market investments. |
|
|
The increase in the provision for loan losses over 2008 was primarily a result of higher
net charge-offs and the continued migration of commercial real estate and residential mortgage
loans to nonperforming status during 2009. Total net charge-offs increased $48.8 million or
25.7% over 2008 to 2.82% of average portfolio |
34
|
|
loans outstanding compared with 2.01% for 2008.
The increase was primarily the result of higher charge-offs on commercial and industrial loans
related to stress on the automotive industry in 2009. |
|
|
|
The decrease in noninterest income from 2008 was primarily due to a net loss on debt
extinguishment ($15.9 million) in connection with the exchange offers completed in the third
quarter of 2009 and higher net losses on loans held for sale ($10.7 million), as well as lower
service charges on deposit accounts ($3.5 million), and lower trust fees ($2.9 million). |
|
|
|
The increase in noninterest expense over 2008 was primarily the result of a higher goodwill
impairment charge ($88.4 million), as well as higher other expense ($20.3 million), Other Real
Estate (ORE) expense and losses ($16.8 million), and other loan expense ($11.5 million),
partially offset by lower salaries and employee benefits ($19.0 million) and a net decline in
all other noninterest expense categories. |
|
|
|
The decrease in the income tax expense from 2008 was primarily the result of recording a
valuation allowance against deferred tax assets during the fourth quarter of 2008, as well as
recognizing the tax impact of changes in other comprehensive income during 2009. |
|
|
|
The decrease in pre-tax pre-provision core operating earnings from 2008 was primarily the
result of lower net interest income (primarily due to a decline in average earning assets),
lower noninterest income (primarily due to reductions in most categories) and higher
noninterest expense (due to higher FDIC insurance premiums). The increase in noninterest
expense was partially offset by various expense management initiatives implemented throughout
the company. |
Citizens maintains a strong liquidity position due to its on-balance sheet liquidity sources and
very stable funding base, comprised of approximately 75% deposits, 13% long-term debt, 11% equity,
and 1% short-term liabilities. Citizens also has access to high levels of untapped liquidity
through collateral-based borrowing capacity provided by portions of both the loan and investment
securities portfolios. Additionally, money market investments and securities available-for-sale
could be sold for cash to provide liquidity, if necessary.
Citizens continues to maintain a strong capital position, and its regulatory capital ratios are
above well-capitalized standards, as evidenced by the increases in the tangible equity to
tangible assets, tangible common equity to tangible assets and Tier 1 common equity ratios over
2008.
CRITICAL ACCOUNTING POLICIES
Citizens Consolidated Financial Statements are prepared in accordance with U.S. generally
accepted accounting principles (GAAP) and follow general practices within the industry in which
the Corporation operates. Application of these principles requires management to make estimates,
assumptions, and complex 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. Actual results
could differ significantly from those estimates. 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.
Estimates that are particularly susceptible to significant change include the determination of the
allowance for loan losses, goodwill, fair value measurements, pension and postretirement benefits,
income taxes, derivative financial instruments and hedging activities. Citizens believes that
these estimates and the related policies discussed below are important to the portrayal of the
Corporations financial condition and results of operations. Therefore, management considers them
to be critical accounting policies and discusses them directly with the Audit Committee of the
Board of Directors. Citizens significant accounting policies are more fully described in Note 1
to the Consolidated Financial Statements.
Allowance for Loan Losses
The allowance for loan losses represents Citizens estimate of probable losses inherent in the loan
portfolio, the largest asset category on the consolidated balance sheet. Determining the amount of
the allowance for loan
35
losses is considered a critical accounting policy because it requires
significant judgment and the evaluation of several factors: the ongoing review and grading of the
loan portfolio, consideration of past Citizens and relevant banking industry loan loss experience,
trends in past due and nonperforming loans, risk characteristics of the various classifications of
loans, existing economic conditions, the fair value of underlying collateral, the size and
diversity of individual large credits, and other qualitative and quantitative factors which could
affect probable credit losses. Other considerations include the use of estimates related to the
amount and timing of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on Citizens historical loss
experience and additional qualitative factors for various issues. Additionally, an allocation of
reserves is established for special situations that are unique to the measurement period with
consideration of current economic trends and conditions. Because current economic conditions can
change and future events are inherently difficult to predict, the anticipated amount of estimated
loan losses, and therefore the adequacy of the allowance, could change significantly.
The Corporations allowance for loan loss methodology is based on GAAP and SEC guidance. Portions
of the allowance may be allocated for specific credits; however, the entire allowance is available
for any credit that, in managements judgment, should be charged off. While management utilizes
its best judgment and information available, the ultimate adequacy of the allowance is dependent
upon a variety of factors beyond the Corporations control, including the performance of the
Corporations loan portfolio, the economy, changes in interest rates and the view of the regulatory
authorities toward loan classifications. See Allowance for Loan Losses for further details of
the risk factors considered by management in estimating the necessary level of the allowance for
loan losses.
The Corporations allowance for loan losses consists of three elements: (i) specific allocated
allowances based on probable losses on specific commercial or commercial real estate loans or
restructured residential mortgage or consumer loans; (ii) risk allocated allowance which is
comprised of several loan pool valuation allowances based on Citizens historical quantitative loan
loss experience for similar loans with similar risk characteristics, including additional
qualitative risks and (iii) general valuation allowances based on existing regional and local
economic factors, including deterioration in commercial and residential real estate values, a
macroeconomic adjustment factor used to calibrate for the current economic cycle the Corporation is
experiencing, and other judgmental factors supported by qualitative documentation such as the
inherent imprecision of loan loss projection models.
Specific allocated allowances are established in cases where management has identified significant
conditions or circumstances related to a credit that management believes indicate it is probable
that Citizens will be unable to collect all amounts due according to the contractual terms of the
loan. The specific credit allocations are based on a regular analysis of all commercial and
commercial real estate loans over a fixed dollar amount where the internal credit rating is at or
below a predetermined classification and on all restructured residential mortgage and consumer
loans over a fixed dollar amount.
Citizens risk allocated allowance, which is comprised of several loan pool valuation allowances is
calculated based on historical data with additional qualitative risk determined by the judgment of
management. Qualitative factors, both internal and external to the Corporation, considered by
management include: (i) the experience, ability and effectiveness of Citizens lending management
and staff; (ii) the effectiveness of the Corporations loan policies, procedures and internal
controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the
composition and concentrations of credit; (vi) the impact of competition on loan structuring and
pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of
environmental risks on the portfolio (ix) the impact of rising interest rates on the portfolio and
(x) the impact of loan modification programs. Citizens evaluates the degree of risk that these
components have on the quality of the loan portfolio on a quarterly basis. Based upon the
Corporations analysis, appropriate estimates for qualitative risks are established. Included in
the qualitative valuations are allocations for groups of similar loans with risk characteristics
that exceed certain concentration limits. Concentration risk guidelines have been established,
among other things, for certain industry concentrations, large balance and highly leveraged credit
relationships, and loans originated with policy exceptions. Qualitative allowances may also
include estimates of inherent but undetected losses within the portfolio due to uncertainties in
economic conditions, delays in obtaining information, including unfavorable information about a
borrowers financial condition, the difficulty in identifying triggering events that correlate
perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in
loss allocation
36
factors. The historical losses used may not be representative of actual losses
inherent in the portfolio that have not yet been realized.
The general valuation allowance is based on managements estimate of the effect of current general
economic conditions on current loan pools and the inherent imprecision in loan loss projection
models. The uncertainty surrounding the strength and timing of economic cycles, including concerns
over the effects of the prolonged economic downturn for the Corporations business footprint in the
current cycle, also affects the estimates of loss.
Continuous credit monitoring processes and the analysis of loss components are the principal
methods relied upon by management to ensure that changes in estimated credit loss levels are
reflected in Citizens allowance for loan losses on a timely basis. Citizens utilizes regulatory
guidance and its own experience in this analysis. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the allowance for loan losses.
Such agencies may require additions to the allowance based on their judgment on information
available to them at the time of their examination.
Actual loss ratios experienced in the future may vary from those projected. In the event that
management overestimates future cash flows or underestimates losses on loan pools, the Corporation
may be required to increase the allowance for loan losses through the provision for loan losses,
which would have a negative impact on the results of operations in the period in which the increase
occurred. Note 1 to the Consolidated Financial Statements describes the methodology used to
determine the allowance for loan losses, and a discussion of the factors driving changes in the
amount of the allowance for loan losses is included under Allowance for Loan Losses.
Goodwill
Goodwill arises from business acquisitions and is initially measured as the excess of the cost of
the acquired business over the sum of the amounts assigned to assets acquired less liabilities
assumed. Goodwill, which resides almost entirely in the Regional Banking reporting unit, is
evaluated at least annually for impairment and Citizens performs this annual test on its major
reporting units (lines of business) as of October 1 of each year. Goodwill impairment analyses are
performed on a more frequent basis if events or circumstances indicate that it is more likely than
not that the fair values of the reporting units are below their respective carrying amounts. Such
events could include a significant adverse change in legal factors or in the business climate, an
adverse action by a regulator, an unanticipated change in the competitive environment, an
unanticipated loss of key employees, a decision to change the operations or dispose of a reporting
unit, cash or operating losses, significant revisions to forecasts, or a long-term negative outlook
for the industry.
In Step 1 of the test, Citizens estimates the fair value of the reporting units using discounted
cash flow models derived from internal earnings forecasts. The primary assumptions used by
Citizens include ten-year earnings forecasts, terminal values based on estimated future growth
rates, and discount rates based on capital asset pricing models. A Step 1 analysis is prepared for
each reporting unit, including those without goodwill, in order to analyze the implied control
premium, which measures the difference between the combined fair value of Citizens reporting units
calculated in Step 1 and Citizens total market value as a percentage of total market value. If
the carrying amount of a reporting unit exceeds its estimated fair value, Step 2 is required for
those reporting units that have goodwill to measure the amount of impairment, if any.
In Step 2 of the test, Citizens estimates the fair value of a reporting units assets and
liabilities in the same manner as if a purchase of the reporting unit was taking place using exit
pricing, which includes estimating the fair value of other implied intangibles. Any excess of this
hypothetical purchase price over the fair value of the reporting units net assets (excluding
goodwill) represents the implied fair value of the goodwill. If the implied fair value of goodwill
calculated in Step 2 is less than the carrying amount of goodwill, an impairment loss is charged to
noninterest expense to reduce the carrying amount to the implied fair value. The writedown cannot
exceed the carrying amount and goodwill cannot be adjusted upward for any subsequent reversal of
previously recognized goodwill writedowns.
As a result of ongoing volatility in the financial industry, the challenging economic conditions in
Michigan and the Upper Midwest, and continued deterioration in the credit quality of Citizens loan
portfolios, Citizens determined that it was more likely than not that the fair value of a reporting
unit may have been reduced below its carrying
37
amount. Therefore, Citizens performed an interim
goodwill impairment test during the second quarter of 2009. The Step 1 analysis indicated that the
carrying amount exceeded estimated fair value for the Regional Banking reporting unit; therefore,
Step 2 testing was required. Citizens determined, as a result of the Step 2 analysis, that the
goodwill allocated to Regional Banking was impaired. During the second quarter of 2009, Citizens
recorded a non-cash goodwill impairment charge against the goodwill allocated to the Regional
Banking reporting unit of $266.5 million. The goodwill impairment charge was not tax deductible,
did not impact Citizens tangible equity or regulatory capital ratios, and did not adversely affect
Citizens overall liquidity position.
The interim goodwill analysis did not change the timing of Citizens annual goodwill impairment
test, which was performed during the fourth quarter of 2009. As of October 1, 2009, the annual
impairment test was performed and concluded that no additional impairment existed as the implied
fair value of goodwill allocated to Regional Banking exceeded its carrying value by over 30%. In
estimating the fair value of the reporting units in the annual review, a 13% discount rate was used
based on a capital asset pricing model. Simulations were performed to evaluate the impact of
discount rate changes on the fair value of the reporting unit. If the discount rate was to
increase by 100 or 200 basis points the fair value would be expected to decrease by 13% and 23%,
respectively. Simulations for 100 and 200 basis point decrease in the discount rate were not
performed as the results would increase the implied value of goodwill.
Citizens performed an evaluation to determine if events or circumstances indicated additional
goodwill impairment at December 31, 2009. As the key inputs and drivers remained consistent with
those used as of the annual impairment testing date, Citizens concluded that no additional
impairment was indicated.
Citizens management believes that the estimates and assumptions used in its goodwill impairment
analyses are reasonable. Further deterioration in the outlook for credit quality, changes in the
value of the loan or deposit portfolios, or increases in the discount rates could have a material
impact on future goodwill impairment testing results. Due to the ongoing uncertainty regarding
market conditions, which may continue to negatively impact the performance of the Regional Banking
line of business, Citizens will continue to monitor the goodwill impairment indicators and perform
additional interim tests, if necessary. Since this evaluation process requires Citizens to make
estimates and assumptions with regard to the fair value of the Corporations reporting units,
actual values may differ significantly from these estimates. Such differences could result in
future impairment of goodwill that would, in turn, negatively impact the Corporations results of
operations and the business segments where the goodwill is recorded. For more information on
goodwill, see Note 6 to the Consolidated Financial Statements.
Fair Value Measurements
A number of valuation techniques are used to determine the fair value of assets and liabilities in
Citizens financial statements. These include quoted market prices for securities, interest rate
swap valuations based upon the modeling of termination values adjusted for credit spreads with
counterparties and appraisals of real estate from independent licensed appraisers, among other
valuation techniques. Fair value measurements for assets and liabilities where there exists
limited or no observable market data are based primarily upon estimates, and are often calculated
based on the economic and competitive environment, the characteristics of the asset or liability
and other factors. Therefore, the results cannot be determined with precision and may not be
realized in an actual sale or immediate settlement of the asset or liability. Additionally, there
are inherent weaknesses in any calculation technique, and changes in the underlying assumptions
used, including discount rates and estimates of future cash flows, could significantly affect the
results of current or future values. Significant changes in the aggregate fair value of assets and
liabilities required to be measured at fair value or for impairment will be recognized in the
income statement. If an impairment is determined, it could limit the ability of Citizens banking
subsidiaries to pay dividends or make other payments to the Holding Company. See Note 10 to the
Consolidated Financial Statements for more information on fair value measurements.
Pension and Postretirement Benefits
Pension liabilities are established and pension costs are charged to current operations based on
actuarially determined present value calculations. The valuation of the pension obligation and net
periodic pension expense is considered critical as it requires management to make estimates
regarding the amount and timing of expected future cash outflows including assumptions about
employee mortality, assumed return on cash balances, assumed discount rate used to determine the
current benefit obligation, and the long-term rate of return expected on plan assets. The
long-term rate of return expected on plan assets is finalized after considering long-term
38
returns
in the general market, long-term
returns experienced by the assets in the plan, and projected plan
expenses. The assets are invested in certain investment funds administered by a third party.
Citizens reviews its pension plan assumptions on an annual basis with an actuarial consultant to
determine if the assumptions are reasonable and adjusts the assumptions to reflect changes in
expectations. If Citizens were to determine that more conservative assumptions were necessary,
costs would likely increase and have a negative impact on results of operations in the period in
which the increase occurred.
The assumed future earnings on cash balance pension plan accounts were reduced from 5.25% for 2008
to 5.00% for 2009, which reflects the current rate environment, and will cause a slight decrease in
pension expense for future periods. The determination of the discount rate used for calculating
pension benefit and postretirement benefit obligations was based on a cash flow matching method. A
spot yield curve for high quality bonds rated AA- or better was converted to zero coupon equivalent
bond rates. These zero coupon bond rates were matched to the actuarially determined benefit
obligation annual cash flows. The resulting single discount rate was rounded to a 25 basis point
increment. Based on this methodology, the discount rate used for the pension obligation decreased
to 5.75% at the end of 2009 from 6.00% at the end of 2008 and 2007, which resulted in an increase
to the associated liability for 2009. The discount rate used for the postretirement healthcare
obligation as well as the supplemental pension benefit plans decreased to 5.25% at the end of 2009
from 6.00% at the end of 2008 and 2007 also resulting in an increase to the associated liabilities.
Rates are set at the end of each year for use in determining the following years expense.
Citizens has recognized the funded status (i.e. the difference between the fair value of plan
assets and the projected benefit obligations) of its pension plan in the consolidated balance
sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The
adjustment to accumulated other comprehensive income represents the net unrecognized actuarial
losses and unrecognized prior service costs that will be subsequently recognized as net periodic
pension cost pursuant to Citizens historical accounting policy for amortizing such amounts.
Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net
periodic pension cost in the same periods will be recognized as a component of other comprehensive
income. Those amounts will be subsequently recognized as a component of net periodic pension cost.
Note 11 to the Consolidated Financial Statements provides further discussion on the accounting for
Citizens employee benefit plans and the estimates used in determining the actuarial present value
of the benefit obligations and the net periodic pension expense.
Income Taxes
Income tax liabilities or assets are established for the amount of taxes payable or refundable for
the current year. Deferred tax liabilities and assets are also established for the future tax
consequences of events that have been recognized in the Corporations financial statements or tax
returns. A deferred tax liability or asset is recognized for the estimated future tax effects
attributable to temporary differences and deductions that can be carried forward (used) in future
years. Citizens assesses whether a valuation allowance should be established against their
deferred tax assets based on the consideration of all available evidence using a more likely than
not standard. In making such judgments, significant weight is given to evidence that can be
objectively verified. For example, a cumulative loss in recent years is significant negative
evidence in considering whether deferred tax assets are realizable and also restricts the amount of
evidence on projections of future taxable income to support the recovery of deferred tax assets.
As of December 31, 2009, Citizens held a $235.5 million valuation allowance. Despite the valuation
allowance, these assets remain available to potentially offset future taxable income.
The valuation of current and deferred tax liabilities and assets is considered critical as it
requires management to make estimates based on provisions of the enacted tax laws and other future
events. The assessment of tax assets and liabilities involves the use of estimates, assumptions,
interpretations, and judgments concerning certain accounting pronouncements and federal and state
tax codes. There can be no assurance that future events, such as court decisions or positions of
federal and state taxing authorities, will not differ from managements current assessment, the
impact of which could be significant to the consolidated results of operations and reported
earnings. The Corporation believes its tax assets and liabilities are adequate and are properly
recorded in the consolidated financial statements. For more information regarding income tax
accounting, see Notes 1 and 13 to the Consolidated Financial Statements.
39
Derivative Financial Instruments and Hedging Activities
In various aspects of its business, Citizens uses derivative financial instruments to modify its
exposure to changes in interest rates and market prices for other financial instruments. Many of
these derivative financial instruments are designated as hedges for financial accounting purposes.
Citizens hedge accounting policy requires the assessment of hedge effectiveness, identification of
similar hedged item groupings, and measurement of changes in the fair value of hedged items. If in
the future the derivative financial instruments identified as hedges no longer qualify for hedge
accounting treatment, changes in the fair value of these hedged items would be recognized in
current period earnings, and the impact on the consolidated results of operations and reported
earnings could be significant. For more information on derivative financial instruments and hedge
accounting, see Notes 1 and 17 to the Consolidated Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
Notes 1 and 2 to the Consolidated Financial Statements discuss new accounting policies adopted
by Citizens during 2009 and 2008 and the expected impact of accounting policies recently issued or
proposed but not yet required to be adopted. To the extent the adoption of new accounting
standards materially affects Citizens financial condition, results of operations or liquidity, the
impact is discussed elsewhere in Managements Discussion and Analysis of Financial Condition and
Results of Operations.
SUBSEQUENT EVENTS
On January 29, 2010, Citizens entered into a stock purchase agreement with Great Western Bank
whereby Great Western Bank agreed to acquire all of the stock of Citizens wholly owned subsidiary,
F&M. Great Western Bank will pay a purchase price of approximately $50 million in cash, subject to
a possible adjustment based upon F&Ms net worth at closing. The transaction includes $132.5
million in net portfolio loans and $408.6 million in deposits. The transaction is expected to
close in the second quarter of 2010, subject to certain required regulatory approvals and
fulfillment of customary conditions.
As part of the stock purchase agreement, Citizens will be required to exchange selected loans with
F&M at or near the closing date for a cash payment equal to the book value of the specified loans
less related allowance for loan losses. As of December 31, 2009, the loans to be exchanged had a
net book value of $9.9 million. For more information regarding the sale of F&M, see Note 20 to the
Consolidated Financial Statements.
The Federal Reserve Bank of Chicago and the State of Michigan Office of Financial and Insurance
Regulation, the primary regulators of the Holding Company and its Citizens Bank subsidiary,
recently completed an interim supervisory assessment, pursuant to their continuous supervisory
program, based on data as of September 30, 2009. As a result of that examination and based on
recent communications with these regulatory authorities, Citizens expects that the Holding Company
and Citizens Bank will become subject to the issuance of a formal administrative action, probably
in the form of a written agreement, due to their high level of nonperforming assets and the
resulting impact on its earnings.
SIGNIFICANT DEVELOPMENTS IN 2009
Goodwill Impairment Charge
During the second quarter of 2009, Citizens recorded a non-cash, not tax-deductible goodwill
impairment charge of $266.5 million against the goodwill allocated to Regional Banking (which had
no impact on regulatory capital ratios or Citizens overall liquidity). For more information
regarding this goodwill impairment charge, see the Goodwill headings under Managements
Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting
Policies and Financial Condition as well as Note 6 to the Consolidated Financial Statements.
Exchange of Common Stock for Long-Term Debt
On September 30, 2009, Citizens completed its exchange offers to issue common stock in exchange for
its outstanding 5.75% Subordinated Notes due 2013 (the Subordinated Notes) and outstanding 7.50%
Enhanced
40
Trust Preferred Securities of Citizens Funding Trust I (the Exchange Offers). In
aggregate, 268.2 million shares at a fair value of $219.9 million ($0.82 per common share as of the
expiration date of the Exchange Offers) were issued in exchange for long term debt with a carrying
value of $204.0 million. The consummation of the Exchange Offers created a net loss on the early
extinguishment of debt totaling $15.9 million, which represented the difference between the fair
value of Citizens common stock issued and the carrying value of the retired debt. After taking
into account $6.4 million of issuance costs, the transaction resulted in an increase to common
equity of $197.6 million. For more information regarding this transaction, see Managements
Discussion and Analysis of
Financial Condition and results of Operations Liquidity Risk Management and Notes 9 and 14 to
the Consolidated Financial Statements.
SIGNIFICANT DEVELOPMENTS IN 2008 AND 2007
Issuances of Capital in 2008
On June 11, 2008, Citizens issued $79.6 million of common stock and $120.4 million of contingent
convertible perpetual non-cumulative preferred stock that together increased shareholders equity
by $189.0 million (net of issuance costs and the underwriting discount). The preferred stock
subsequently converted to common stock in September 2008 after shareholders approved a charter
amendment to increase authorized common shares by 50 million.
On December 12, 2008, Citizens issued an aggregate of $300.0 million of TARP Preferred Stock and a
ten-year warrant to purchase up to 17,578,125 shares of Citizens common stock to the Treasury as
part of the Treasurys Capital Purchase Program.
For more information regarding these issuances, see Note 14 to the Consolidated Financial
Statements.
Goodwill Impairment Charge
During the second quarter of 2008, Citizens recorded a non-cash goodwill impairment charge of
$178.1 million, representing the entire amount of goodwill previously allocated to Specialty
Commercial. The goodwill impairment charge was not tax deductible and did not impact Citizens
tangible equity or regulatory capital ratios and did not adversely affect Citizens overall
liquidity position. For more information regarding this goodwill impairment charge, see Goodwill
headings under Managements Discussion and Analysis of Financial Condition and results of
Operations Critical Accounting Policies and Financial Condition as well as Note 6 to the
Consolidated Financial Statements.
Branch Consolidation and Sale
During the second quarter of 2007, Citizens consolidated eighteen branches due to market overlap
and divested seven branches in the Flint, Michigan banking market. The branch sales included $26.4
million in loans and $200.9 million in deposits.
Strategic Business Alliance for the Mortgage Operations and Secondary Marketing Functions
On December 10, 2007, Citizens entered into a contract with PHH Mortgage Corporation (PHH) to
perform mortgage loan processing, mortgage loan servicing, secondary marketing functions, and other
mortgage-related loan origination services. The strategic business alliance was fully implemented
in March 2008. PHH served in a similar capacity from March 2006 until the Republic merger in
December 2006.
RESULTS OF OPERATIONS
NET INTEREST INCOME
An analysis of net interest income, interest spread and net interest margin with average balances
and related interest rates for the full years of 2009, 2008, and 2007 is presented below.
41
Average Balances/Net Interest Income/Average Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
(in thousands) |
|
Balance |
|
|
Interest(1) |
|
|
Rate(2) |
|
|
Balance |
|
|
Interest (1) |
|
|
Rate (2) |
|
|
Balance |
|
|
Interest (1) |
|
|
Rate (2) |
|
|
Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments |
|
$ |
519,224 |
|
|
$ |
1,300 |
|
|
|
0.25 |
% |
|
$ |
40,551 |
|
|
$ |
384 |
|
|
|
0.95 |
% |
|
$ |
1,940 |
|
|
$ |
104 |
|
|
|
5.37 |
% |
Investment securities (3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
1,715,605 |
|
|
|
80,437 |
|
|
|
4.69 |
|
|
|
1,503,983 |
|
|
|
78,089 |
|
|
|
5.19 |
|
|
|
1,726,042 |
|
|
|
88,078 |
|
|
|
5.10 |
|
Tax-exempt |
|
|
617,070 |
|
|
|
26,340 |
|
|
|
6.57 |
|
|
|
673,395 |
|
|
|
29,096 |
|
|
|
6.65 |
|
|
|
671,753 |
|
|
|
29,268 |
|
|
|
6.70 |
|
FHLB and Federal Reserve stock |
|
|
153,951 |
|
|
|
4,255 |
|
|
|
2.76 |
|
|
|
148,806 |
|
|
|
7,269 |
|
|
|
4.89 |
|
|
|
137,676 |
|
|
|
6,414 |
|
|
|
4.66 |
|
Portfolio Loans (4): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
2,237,534 |
|
|
|
103,434 |
|
|
|
4.72 |
|
|
|
2,656,982 |
|
|
|
144,025 |
|
|
|
5.52 |
|
|
|
2,138,853 |
|
|
|
155,182 |
|
|
|
7.38 |
|
Commercial real estate |
|
|
2,921,569 |
|
|
|
154,991 |
|
|
|
5.31 |
|
|
|
3,104,815 |
|
|
|
200,071 |
|
|
|
6.45 |
|
|
|
3,103,082 |
|
|
|
238,240 |
|
|
|
7.68 |
|
Residential mortgage |
|
|
1,147,921 |
|
|
|
57,819 |
|
|
|
5.04 |
|
|
|
1,334,706 |
|
|
|
81,610 |
|
|
|
6.11 |
|
|
|
1,490,447 |
|
|
|
98,678 |
|
|
|
6.62 |
|
Direct consumer |
|
|
1,355,078 |
|
|
|
82,215 |
|
|
|
6.07 |
|
|
|
1,507,073 |
|
|
|
101,509 |
|
|
|
6.74 |
|
|
|
1,638,084 |
|
|
|
127,768 |
|
|
|
7.80 |
|
Indirect consumer |
|
|
811,844 |
|
|
|
55,144 |
|
|
|
6.79 |
|
|
|
830,376 |
|
|
|
56,067 |
|
|
|
6.75 |
|
|
|
841,600 |
|
|
|
56,881 |
|
|
|
6.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio loans |
|
|
8,473,946 |
|
|
|
453,603 |
|
|
|
5.38 |
|
|
|
9,433,952 |
|
|
|
583,282 |
|
|
|
6.21 |
|
|
|
9,212,066 |
|
|
|
676,749 |
|
|
|
7.38 |
|
Loans held for sale (4) |
|
|
75,925 |
|
|
|
2,744 |
|
|
|
3.61 |
|
|
|
87,565 |
|
|
|
2,791 |
|
|
|
3.19 |
|
|
|
97,744 |
|
|
|
7,298 |
|
|
|
7.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets (3) |
|
|
11,555,721 |
|
|
|
568,679 |
|
|
|
5.06 |
|
|
|
11,888,252 |
|
|
|
700,911 |
|
|
|
6.05 |
|
|
|
11,847,221 |
|
|
|
807,911 |
|
|
|
6.98 |
|
Nonearning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
165,294 |
|
|
|
|
|
|
|
|
|
|
|
203,431 |
|
|
|
|
|
|
|
|
|
|
|
198,908 |
|
|
|
|
|
|
|
|
|
Bank premises and equipment |
|
|
121,392 |
|
|
|
|
|
|
|
|
|
|
|
126,255 |
|
|
|
|
|
|
|
|
|
|
|
136,135 |
|
|
|
|
|
|
|
|
|
Investment security
fair value adjustment |
|
|
24,524 |
|
|
|
|
|
|
|
|
|
|
|
6,544 |
|
|
|
|
|
|
|
|
|
|
|
3,879 |
|
|
|
|
|
|
|
|
|
Other nonearning assets |
|
|
923,149 |
|
|
|
|
|
|
|
|
|
|
|
1,206,143 |
|
|
|
|
|
|
|
|
|
|
|
1,307,126 |
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(306,971 |
) |
|
|
|
|
|
|
|
|
|
|
(189,072 |
) |
|
|
|
|
|
|
|
|
|
|
(173,148 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
12,483,109 |
|
|
|
|
|
|
|
|
|
|
$ |
13,241,553 |
|
|
|
|
|
|
|
|
|
|
$ |
13,320,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand |
|
|
979,590 |
|
|
|
4,226 |
|
|
|
0.43 |
|
|
|
771,735 |
|
|
|
5,076 |
|
|
|
0.66 |
|
|
|
831,983 |
|
|
|
5,742 |
|
|
|
0.69 |
|
Savings deposits |
|
|
2,610,246 |
|
|
|
20,309 |
|
|
|
0.78 |
|
|
|
2,551,570 |
|
|
|
44,046 |
|
|
|
1.73 |
|
|
|
2,188,296 |
|
|
|
63,942 |
|
|
|
2.92 |
|
Time deposits |
|
|
4,097,896 |
|
|
|
135,263 |
|
|
|
3.30 |
|
|
|
4,268,931 |
|
|
|
171,761 |
|
|
|
4.02 |
|
|
|
4,008,919 |
|
|
|
187,510 |
|
|
|
4.68 |
|
Short-term borrowings |
|
|
61,638 |
|
|
|
227 |
|
|
|
0.37 |
|
|
|
317,404 |
|
|
|
8,191 |
|
|
|
2.58 |
|
|
|
719,791 |
|
|
|
34,700 |
|
|
|
4.81 |
|
Long-term debt |
|
|
1,904,955 |
|
|
|
91,286 |
|
|
|
4.79 |
|
|
|
2,521,181 |
|
|
|
122,905 |
|
|
|
4.87 |
|
|
|
2,729,476 |
|
|
|
133,838 |
|
|
|
4.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities |
|
|
9,654,325 |
|
|
|
251,311 |
|
|
|
2.60 |
|
|
|
10,430,821 |
|
|
|
351,979 |
|
|
|
3.37 |
|
|
|
10,478,465 |
|
|
|
425,732 |
|
|
|
4.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-Bearing Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand |
|
|
1,226,079 |
|
|
|
|
|
|
|
|
|
|
|
1,122,974 |
|
|
|
|
|
|
|
|
|
|
|
1,139,695 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
157,972 |
|
|
|
|
|
|
|
|
|
|
|
129,344 |
|
|
|
|
|
|
|
|
|
|
|
152,000 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
1,444,733 |
|
|
|
|
|
|
|
|
|
|
|
1,558,414 |
|
|
|
|
|
|
|
|
|
|
|
1,549,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders equity |
|
$ |
12,483,109 |
|
|
|
|
|
|
|
|
|
|
$ |
13,241,553 |
|
|
|
|
|
|
|
|
|
|
$ |
13,320,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
|
|
|
|
$ |
317,368 |
|
|
|
|
|
|
|
|
|
|
$ |
348,932 |
|
|
|
|
|
|
|
|
|
|
$ |
382,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Spread (5) |
|
|
|
|
|
|
|
|
|
|
2.46 |
% |
|
|
|
|
|
|
|
|
|
|
2.68 |
% |
|
|
|
|
|
|
|
|
|
|
2.92 |
% |
Contribution of noninterest bearing sources of funds |
|
|
|
|
|
|
|
|
|
|
0.43 |
|
|
|
|
|
|
|
|
|
|
|
0.41 |
|
|
|
|
|
|
|
|
|
|
|
0.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin (5)(6) |
|
|
|
|
|
|
|
|
|
|
2.89 |
% |
|
|
|
|
|
|
|
|
|
|
3.09 |
% |
|
|
|
|
|
|
|
|
|
|
3.38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest income is shown on an unadjusted basis and therefore does not include
taxable equivalent adjustments. |
|
(2) |
|
Average rates are presented on an annual basis and include taxable equivalent
adjustments to interest income of $16.4 million, $18.4 million, and $18.5 million for the years
ended December 31, 2009, 2008, and 2007, repectively, 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. |
|
(4) |
|
Nonaccrual loans are included in
average balances for each applicable loan category. |
|
(5) |
|
The interest spread and net interest
margin are presented on a tax-equivalent basis. |
|
(6) |
|
Net interest margin exceeds the interest spread due to noninterest-bearing funding
sources, demand deposits, other liabilities and shareholders equity supporting earning assets. |
2009 compared with 2008
The decrease in net interest margin was primarily a result of deposit price competition, the
transfer of loans to nonperforming status during 2009, and an increase in short-term investments to
provide additional on-balance sheet liquidity. The decrease was partially offset by expanding
commercial and consumer loan spreads and retail time deposits repricing to a lower rate. The
decrease in net interest income was primarily a result of the lower net interest margin and a
decrease in average earning assets due to a decline in loan portfolio balances caused by lower
demand in the current Midwest economic environment, partially offset by the effects of an increase
in investment securities and money market investments.
2008 compared with 2007
The decrease in net interest margin was primarily a result of deposit price competition, the
movement of loans to nonperforming status during 2008, and increased funding costs related to
extending short-term borrowings, partially offset by expanding commercial and consumer loan spreads
and retail time deposits repricing to a lower rate. The decrease in net interest income was
primarily a result of the lower net interest margin, partially offset by
42
a small increase in
average earning assets. The increase in average earning assets was the result of an increase
in commercial loan balances due to new relationships and money market investments balances to
provide liquidity, partially offset by decreases in the investment portfolio due to using portfolio
cash flow to reduce short-term borrowings, and declines in residential mortgage and consumer loan
portfolio balances due to low customer demand.
The table below shows changes in interest income, interest expense and net interest income due to
volume and rate variances for major categories of earning assets and interest-bearing liabilities.
Analysis of Changes in Interest Income and Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Compared to 2008 |
|
|
2008 Compared to 2007 |
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
|
|
|
|
Increase (Decrease) |
|
|
|
Net |
|
|
Due to Change in |
|
|
Net |
|
Due to Change in |
(in thousands) |
|
Change(1) |
|
|
Rate(2) |
|
|
Volume(2) |
|
|
Change(1) |
|
|
Rate (2) |
|
|
Volume(2) |
|
Interest Income on Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments |
|
$ |
916 |
|
|
$ |
(476 |
) |
|
$ |
1,392 |
|
|
$ |
280 |
|
|
$ |
(154 |
) |
|
$ |
434 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
2,348 |
|
|
|
(8,009 |
) |
|
|
10,357 |
|
|
|
(9,989 |
) |
|
|
1,517 |
|
|
|
(11,506 |
) |
Tax-exempt |
|
|
(2,756 |
) |
|
|
(348 |
) |
|
|
(2,408 |
) |
|
|
(172 |
) |
|
|
(243 |
) |
|
|
71 |
|
FHLB and
Federal Reserve stock |
|
|
(3,014 |
) |
|
|
(3,257 |
) |
|
|
243 |
|
|
|
855 |
|
|
|
321 |
|
|
|
534 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
(40,591 |
) |
|
|
(19,396 |
) |
|
|
(21,195 |
) |
|
|
(11,157 |
) |
|
|
(44,331 |
) |
|
|
33,174 |
|
Commercial real estate |
|
|
(45,080 |
) |
|
|
(33,662 |
) |
|
|
(11,418 |
) |
|
|
(38,169 |
) |
|
|
(38,304 |
) |
|
|
135 |
|
Residential mortgage |
|
|
(23,791 |
) |
|
|
(13,261 |
) |
|
|
(10,530 |
) |
|
|
(17,068 |
) |
|
|
(7,212 |
) |
|
|
(9,856 |
) |
Direct consumer |
|
|
(19,294 |
) |
|
|
(9,434 |
) |
|
|
(9,860 |
) |
|
|
(26,259 |
) |
|
|
(16,677 |
) |
|
|
(9,582 |
) |
Indirect consumer |
|
|
(923 |
) |
|
|
444 |
|
|
|
(1,367 |
) |
|
|
(814 |
) |
|
|
(178 |
) |
|
|
(636 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio loans |
|
|
(129,679 |
) |
|
|
(75,309 |
) |
|
|
(54,370 |
) |
|
|
(93,467 |
) |
|
|
(106,702 |
) |
|
|
13,235 |
|
Loans held for sale |
|
|
(47 |
) |
|
|
349 |
|
|
|
(396 |
) |
|
|
(4,507 |
) |
|
|
(3,814 |
) |
|
|
(693 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(132,232 |
) |
|
|
(87,050 |
) |
|
|
(45,182 |
) |
|
|
(107,000 |
) |
|
|
(109,075 |
) |
|
|
2,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense on Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand |
|
|
(850 |
) |
|
|
(2,004 |
) |
|
|
1,154 |
|
|
|
(666 |
) |
|
|
(271 |
) |
|
|
(395 |
) |
Savings |
|
|
(23,737 |
) |
|
|
(24,723 |
) |
|
|
986 |
|
|
|
(19,896 |
) |
|
|
(29,314 |
) |
|
|
9,418 |
|
Time |
|
|
(36,498 |
) |
|
|
(29,758 |
) |
|
|
(6,740 |
) |
|
|
(15,749 |
) |
|
|
(27,540 |
) |
|
|
11,791 |
|
Short-term borrowings |
|
|
(7,964 |
) |
|
|
(4,099 |
) |
|
|
(3,865 |
) |
|
|
(26,509 |
) |
|
|
(12,072 |
) |
|
|
(14,437 |
) |
Long-term debt |
|
|
(31,619 |
) |
|
|
(1,744 |
) |
|
|
(29,875 |
) |
|
|
(10,933 |
) |
|
|
(1,103 |
) |
|
|
(9,830 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(100,668 |
) |
|
|
(62,328 |
) |
|
|
(38,340 |
) |
|
|
(73,753 |
) |
|
|
(70,300 |
) |
|
|
(3,453 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
$ |
(31,564 |
) |
|
$ |
(24,722 |
) |
|
$ |
(6,842 |
) |
|
$ |
(33,247 |
) |
|
$ |
(38,775 |
) |
|
$ |
5,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
2009 compared with 2008
The decrease in net interest income reflects rate and volume variances that were unfavorable in the
aggregate. The unfavorable rate variance was primarily the result of lower market interest rates
in 2009 and deposit price competition, partially offset by expanding commercial and consumer loan
spreads. The unfavorable volume variance was primarily due to weak customer demand from credit
worthy clients in all loan categories, growth in the commercial on-balance sheet sweep product, and
a strategic shift in the funding mix from wholesale borrowings to customer deposits. This was
partially offset by an increase in the investment securities and money market investment portfolios
as a result of using the proceeds from the preferred stock issuance in the fourth quarter of 2008
and a decrease in short-term borrowings and long-term debt due to the aforementioned shift in
funding.
43
2008 compared with 2007
The decrease in net interest income reflects rate variances that were unfavorable in the aggregate
and volume variances that were favorable in the aggregate. The unfavorable rate variance was
primarily the result of lower
market interest rates in 2008, deposit price competition, the movement of loans to nonperforming
status, and increased funding costs related to extending short-term borrowings, partially offset by
expanding commercial and consumer loan spreads and retail time deposits repricing to a lower rate.
The favorable volume variances were primarily the result of growth in commercial and industrial
loans due to new client relationships and a decline in short-term and long-term borrowings due to a
shift in funding mix to time deposits and paying down the outstanding debt, partially offset by
growth in savings accounts due to a new on-balance sweep product for Citizens commercial clients
introduced in late 2007 and growth in time deposits due to the aforementioned shift in funding mix
and focused deposit generation during 2008.
PROVISION FOR LOAN LOSSES
After determining what Citizens believes is an adequate allowance for loan losses based on the risk
in the portfolio, the provision for loan losses is calculated each quarter as a result of the net
effect of the quarterly change in the allowance for loan losses and the quarterly net charge-offs.
The increases in the provision for loan losses for 2009 as compared with 2008 and 2008 as compared
with 2007 were primarily a result of higher net charge-offs and the continued migration of
commercial real estate and residential mortgage loans to nonperforming status during 2009. This
migration, and evaluation of the underlying collateral supporting these loans, caused an increase
in the allowance for loan losses due to the higher likelihood that portions of these loans may
eventually be charged-off. See Critical Accounting Policies Allowance for Loan Losses and
Allowance for Loan Losses for a discussion of the calculation of the allowance and the
related methodology.
NONINTEREST INCOME
An analysis of the components of noninterest income is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009-2008 |
|
|
2008-2007 |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
|
$ Change |
|
|
% Change |
|
Service charges on deposit accounts |
|
$ |
43,927 |
|
|
$ |
47,470 |
|
|
$ |
48,051 |
|
|
$ |
(3,543 |
) |
|
|
(7.5 |
)% |
|
$ |
(581 |
) |
|
|
(1.2 |
)% |
Trust fees |
|
|
15,082 |
|
|
|
17,967 |
|
|
|
20,106 |
|
|
|
(2,885 |
) |
|
|
(16.1 |
) |
|
|
(2,139 |
) |
|
|
(10.6 |
) |
Mortgage and other loan income |
|
|
12,609 |
|
|
|
11,443 |
|
|
|
16,021 |
|
|
|
1,166 |
|
|
|
10.2 |
|
|
|
(4,578 |
) |
|
|
(28.6 |
) |
Brokerage and investment fees |
|
|
5,445 |
|
|
|
7,109 |
|
|
|
7,901 |
|
|
|
(1,664 |
) |
|
|
(23.4 |
) |
|
|
(792 |
) |
|
|
(10.0 |
) |
ATM network user fees |
|
|
6,607 |
|
|
|
6,319 |
|
|
|
6,283 |
|
|
|
288 |
|
|
|
4.6 |
|
|
|
36 |
|
|
|
0.6 |
|
Bankcard fees |
|
|
7,972 |
|
|
|
7,440 |
|
|
|
6,124 |
|
|
|
532 |
|
|
|
7.2 |
|
|
|
1,316 |
|
|
|
21.5 |
|
Losses on loans held for sale |
|
|
(20,086 |
) |
|
|
(9,373 |
) |
|
|
(508 |
) |
|
|
(10,713 |
) |
|
|
114.3 |
|
|
|
(8,865 |
) |
|
|
N/M |
|
Net loss on debt extinguishment |
|
|
(15,929 |
) |
|
|
|
|
|
|
|
|
|
|
(15,929 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
11,794 |
|
|
|
13,367 |
|
|
|
18,590 |
|
|
|
(1,573 |
) |
|
|
(11.8 |
) |
|
|
(5,223 |
) |
|
|
(28.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
67,421 |
|
|
$ |
101,742 |
|
|
$ |
122,568 |
|
|
$ |
(34,321 |
) |
|
|
(33.7 |
)% |
|
$ |
(20,826 |
) |
|
|
(17.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 compared with 2008
The decrease in noninterest income was primarily due to a net loss on the early extinguishment of
debt created when Citizens completed settlement of the Exchange Offers, higher net losses on loans
held for sale, and to a lesser extent, lower service charges on deposit accounts, trust fees, and
brokerage and investment fees. The increase in net losses on loans held for sale was primarily the
result of higher writedowns to reflect market-value declines for the underlying collateral. The
decrease in service charges on deposit accounts was primarily the result of a decline in customer
transaction volume. The decline in trust fees as well as brokerage and investment fees were
primarily the result of negative market conditions.
2008 compared with 2007
The decrease in noninterest income was primarily due to a higher net loss on loans held for sale,
lower other income, lower mortgage and other loan income, lower trust fees, and a net decrease from
minor changes in several other categories, partially offset by higher bankcard fees. The net loss
on loans held for sale was primarily the result of higher writedowns to reflect market-value
declines for the underlying collateral. The decrease in the other income category was primarily
the result of lower swap income recognition and lower
44
revenue on bank owned life insurance
policies, both of which declined due to negative market conditions in 2008, partially offset by a
$2.1 million gain in the first quarter of 2008 due to Citizens receipt of proceeds from the
partial redemption of its Visa USA shares. The decrease in mortgage and other loan income was
primarily the result of lower mortgage sales during 2008. The decline in trust fees was primarily
the result of negative market conditions and lower demand for investment products due to
attractively-priced traditional certificates of deposit in Citizens markets. Bankcard fees
increased as a result of higher client debit card volume.
NONINTEREST EXPENSE
An analysis of the components of noninterest expense is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009-2008 |
|
|
2008-2007 |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
|
$ Change |
|
|
% Change |
|
Salaries and employee benefits |
|
$ |
139,193 |
|
|
$ |
158,193 |
|
|
$ |
175,895 |
|
|
$ |
(19,000 |
) |
|
|
(12.0 |
)% |
|
$ |
(17,702 |
) |
|
|
(10.1 |
)% |
Occupancy |
|
|
27,820 |
|
|
|
28,592 |
|
|
|
30,971 |
|
|
|
(772 |
) |
|
|
(2.7 |
) |
|
|
(2,379 |
) |
|
|
(7.7 |
) |
Professional services |
|
|
11,996 |
|
|
|
15,184 |
|
|
|
18,031 |
|
|
|
(3,188 |
) |
|
|
(21.0 |
) |
|
|
(2,847 |
) |
|
|
(15.8 |
) |
Equipment |
|
|
11,989 |
|
|
|
12,966 |
|
|
|
14,650 |
|
|
|
(977 |
) |
|
|
(7.5 |
) |
|
|
(1,684 |
) |
|
|
(11.5 |
) |
Data processing services |
|
|
18,017 |
|
|
|
16,470 |
|
|
|
16,234 |
|
|
|
1,547 |
|
|
|
9.4 |
|
|
|
236 |
|
|
|
1.5 |
|
Advertising and public relations |
|
|
7,146 |
|
|
|
5,897 |
|
|
|
7,282 |
|
|
|
1,249 |
|
|
|
21.2 |
|
|
|
(1,385 |
) |
|
|
(19.0 |
) |
Postage and delivery |
|
|
5,844 |
|
|
|
7,342 |
|
|
|
7,800 |
|
|
|
(1,498 |
) |
|
|
(20.4 |
) |
|
|
(458 |
) |
|
|
(5.9 |
) |
Other loan expenses |
|
|
24,913 |
|
|
|
13,381 |
|
|
|
5,518 |
|
|
|
11,532 |
|
|
|
86.2 |
|
|
|
7,863 |
|
|
|
142.5 |
|
Other real estate (ORE) expenses and losses |
|
|
27,852 |
|
|
|
11,008 |
|
|
|
325 |
|
|
|
16,844 |
|
|
|
153.0 |
|
|
|
10,683 |
|
|
|
N/M |
|
Intangible asset amortization |
|
|
7,036 |
|
|
|
9,132 |
|
|
|
11,534 |
|
|
|
(2,096 |
) |
|
|
(23.0 |
) |
|
|
(2,402 |
) |
|
|
(20.8 |
) |
Goodwill impairment |
|
|
266,474 |
|
|
|
178,089 |
|
|
|
|
|
|
|
88,385 |
|
|
|
49.6 |
|
|
|
178,089 |
|
|
|
100.0 |
|
Restructuring and merger related expenses |
|
|
|
|
|
|
|
|
|
|
8,247 |
|
|
|
|
|
|
|
|
|
|
|
(8,247 |
) |
|
|
(100.0 |
) |
Other expense |
|
|
54,741 |
|
|
|
34,448 |
|
|
|
30,936 |
|
|
|
20,293 |
|
|
|
58.9 |
|
|
|
3,512 |
|
|
|
11.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
603,021 |
|
|
$ |
490,702 |
|
|
$ |
327,423 |
|
|
$ |
112,319 |
|
|
|
22.9 |
% |
|
$ |
163,279 |
|
|
|
49.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 compared with 2008
The increase in noninterest expense was primarily the result of a higher goodwill impairment
charge, as well as higher other expense, ORE expenses and losses, and other loan expenses,
partially offset by lower salaries and employee benefits, as well as a net decline in all other
noninterest expense categories. The increase in other expense was primarily the result of an
increase in FDIC insurance premiums due to an industry-wide rate increase and special assessment.
The increase in ORE expenses and losses was primarily the result of higher carrying costs related
to holding the ORE properties and mark-to-market charges related to additional declines in market
values on the ORE assets. The increase in other loan expense was primarily the result of higher
foreclosure expenses associated with repossessing collateral underlying commercial and residential
real estate loans. The decrease in salaries and employee benefits was primarily due to lower
staffing levels and suspending employer contributions to the 401(k) plan in 2009. The net decline
in all other noninterest expense categories was primarily the result of various expense management
initiatives implemented throughout the company.
2008 compared with 2007
The increase in noninterest expense was primarily the result of the goodwill impairment charge, as
well as higher ORE expenses and losses, higher other loan expenses, and higher other expense,
partially offset by the general decline in all other expense categories due to cost savings and
efficiencies implemented during 2007 and 2008 as well as the effect of $8.2 million in
restructuring and merger-related expenses incurred in 2007. The increase in ORE expenses and
losses was primarily the result of higher carrying costs related to holding the ORE properties and
mark-to-market charges related to additional declines in market values on the ORE assets. The
increase in other loan expenses was primarily the result of higher mortgage processing fees due to
the alliance with PHH Mortgage being implemented in the first quarter of 2008 and higher
foreclosure expenses associated with repossessing collateral underlying commercial and residential
real estate loans, partially offset by lower provisioning to fund the reserve for unused loan
commitments, which fluctuates with the amount of unadvanced customer lines of credit. The increase
in the other expense category was primarily the result of: a $2.4 million loss related to the
repurchase of all auction rate securities sold to wealth management clients ($8.5 million in par
45
value) to restore liquidity to their accounts, higher FDIC premiums due to a mandatory phase out of
FDIC credits and industry-wide increases on FDIC insurance, and a loss on a captive insurance
program.
FDIC insurance premiums
In December 2008, the FDIC increased the assessment rate for all insured institutions by 7 cents
for every $100 of qualifying deposits in order to maintain a strong funding position and restore
reserve ratios for the deposit insurance fund. This increase was included in Citizens 2009
noninterest expense. Beginning April 1, 2009, additional rule changes required institutions,
including Citizens, to pay their premiums using a risk-weighted
factor. As a result, Citizens 2009 FDIC insurance premium increased again and this methodology is
likely to further increase future insurance premiums.
Additionally, on May 22, 2009, the FDIC voted to impose an emergency special assessment of 10
cents for every $100 of deposits at June 30, 2009, which was payable on September 30, 2009. As a
result, Citizens recorded $5.5 million for the assessment during 2009.
Potential additional emergency special assessments of up to 5 cents for every $100 of deposits may
be charged at the end of any calendar quarter hereafter. Citizens cannot provide any assurance as
to the ultimate amount or timing of any such emergency special assessments, should such special
assessments occur, as such special assessments are dependent upon a variety of factors which are
beyond Citizens control.
FEDERAL AND STATE INCOME TAXES
Citizens recorded an income tax benefit of $30.0 million for 2009 compared with a tax expense of
$71.0 million for 2008 and $31.3 million in 2007. The decrease in the tax expense from 2008 was
primarily the result of establishing a $155.7 million valuation allowance against deferred tax
assets during the fourth quarter of 2008 as well as recognizing the tax impact of changes in other
comprehensive income during 2009. The increase in the 2008 expense over 2007 was due to recording
the aforementioned valuation allowance, partially offset by the effect of the pre-tax loss,
excluding the non-tax deductible goodwill impairment charge recorded in the second quarter of 2008.
The effective tax rate, computed by dividing the provision for income taxes by income before
taxes, was 5.51% in 2009, compared with (22.03%) in 2008 and 23.69% in 2007. The 2009 effective
rate is less than the statutory rate and more than the effective rate in 2008, primarily due to the
relationships between the pre-tax losses and the adjustments for the valuation allowance. The 2008
effective rate is less than the effective rate in 2007 primarily due to differences in pre-tax
income as well as the adjustments for the valuation allowance and the goodwill impairment in 2008.
In accordance with GAAP, Citizens assessed whether a valuation allowance needed to be established
against its deferred tax assets at the end of 2008 based on the consideration of all available
evidence using a more likely than not standard. Due to the significant pre-tax loss in 2008, its
impact on cumulative pre-tax income, and the uncertain economic environment affecting estimates of
future taxable income, Citizens determined it must establish a valuation allowance against the
entire net deferred tax assets, excluding the deferred tax liability for tax deductible goodwill,
which has an indefinite life.
As of
December 31, 2009, Citizens maintained a $235.5 million valuation allowance. Despite the valuation
allowance, these assets remain available to potentially offset future taxable income. The deferred
tax asset are analyzed quarterly for changes affecting realizability and the valuation allowance
may be adjusted in future periods accordingly. In making such judgments, significant weight is
given to evidence that can be objectively verified. Citizens analyzes changes in near-term market
conditions and considers both positive and negative evidence as well as other factors which may
impact future operating results in making the decision to adjust the valuation allowance.
Companies are subject to a change of ownership test under Section 382 of the Internal Revenue Code
of 1986, as amended, that, if met, would limit the annual utilization of the pre-change of
ownership carryforward as well as the ability to use certain unrealized built-in losses. A change
of ownership occurred under Section 382 as a result of the exchange offers of common stock for
long-term debt in the third quarter of 2009. Generally, under Section 382, the yearly limitation
on our ability to utilize such deductions will be equal to the product of the applicable long-term
tax exempt rate and the sum of the values of our common stock and our TARP Preferred Stock
immediately before the ownership change. Our ability to utilize deductions related to credit
losses during the
46
twelve-month period following such an ownership change would also be limited
under Section 382, together with net operating loss carryforwards, to the extent that such
deductions reflect a net loss that was built-in to our assets immediately prior to the ownership
change.
For further discussion of federal and state income taxes, see Note 13 to the Consolidated Financial
Statements.
LINE OF BUSINESS RESULTS
Net (loss) income by line of business is presented in the table below. A description of each
business line, important financial performance data and the methodologies used to measure financial
performance are presented in Note 15 to the Consolidated Financial Statements. Certain amounts
have been reclassified between segments to conform to current year presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Regional Banking |
|
$ |
(163,741 |
) |
|
$ |
21,658 |
|
|
$ |
85,444 |
|
Specialty Consumer |
|
|
(66,589 |
) |
|
|
(35,667 |
) |
|
|
7,828 |
|
Specialty Commercial |
|
|
(71,174 |
) |
|
|
(174,115 |
) |
|
|
23,074 |
|
Wealth Management |
|
|
2,790 |
|
|
|
547 |
|
|
|
3,327 |
|
Other |
|
|
(215,499 |
) |
|
|
(205,475 |
) |
|
|
(18,832 |
) |
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(514,213 |
) |
|
$ |
(393,052 |
) |
|
$ |
100,842 |
|
|
|
|
|
|
|
|
|
|
|
2009 compared with 2008
Net income for Regional Banking declined primarily as the result of higher provision for loan
losses, lower noninterest income and higher noninterest expense, partially offset by higher net
interest income. The increase in the provision for loan losses was primarily due to higher net
charge-offs. Noninterest income declined primarily due to lower service charges on deposit
accounts. Noninterest expense increased primarily because of the aforementioned goodwill
impairment charge in the second quarter of 2009 and the industry-wide increase in FDIC insurance
rates. The increase in net interest income was primarily the result of expanding loan spreads,
clients holding higher deposit balances in transaction accounts and declining deposit costs,
partially offset by lower earning assets and increased nonaccrual commercial loans.
Net losses for Specialty Consumer increased primarily as the result of lower net interest income,
higher provision for loan losses, and higher noninterest expense. The decrease in net interest
income was primarily the result of lower residential mortgage loan balances as this portfolio is
primarily in a runoff pattern as over 90% of new origination is sold into the secondary market.
The increase in the loan loss provision was due to higher nonperforming residential mortgage loan
levels throughout 2009. The increase in noninterest expense was primarily the result of higher
expenses related to ORE properties.
Net losses for Specialty Commercial declined primarily as the result of lower noninterest expense,
partially offset by higher provision for loan losses and lower noninterest income. The decrease in
noninterest expense was primarily due to the effects of the aforementioned goodwill impairment
charge in the second quarter of 2008. The increase in loan loss provision was due to higher
nonperforming commercial loan levels throughout 2009. The decrease in noninterest income was
primarily a result of higher net losses on loans held for sale.
Net income for Wealth Management increased primarily as the result of lower noninterest expense,
partially offset by lower noninterest income. The decrease in noninterest expense was primarily
due to lower salary expense as a result of lower staffing levels and commission-based compensation.
The decrease in noninterest income was primarily due to lower trust fees as a result of declines
in average market valuation for these assets, as well as a decrease in brokerage income due to
lower demand for investment products. Trust assets under administration were $2.1 billion at
December 31, 2009, an increase of $0.1 billion over December 31, 2008.
47
Activities that are not directly attributable to one of the primary lines of business are included
in the Other business line. Included in this category are the Holding Company; the shared services
unit; Citizens treasury unit, including the securities portfolio, short-term borrowing and
asset/liability management activities; inter-company eliminations; and the economic impact of
certain assets, capital and support functions not specifically identifiable with the four primary
lines of business. Net loss for Other increased primarily as the result of lower net interest
income, lower noninterest income, and higher noninterest expense, partially offset by a lower
income tax provision. The decline in net interest income was primarily the result of the internal
profitability methodology utilized at Citizens that insulates the other lines of business from
interest-rate risk and assigns the risk to the asset/liability management function, which is a
component of this segment. The declines in net interest income were partially offset by income
provided by higher short-term investment balances. The decrease in noninterest income was
primarily the result of a decline in income from bank owned life insurance policies due to
decreased returns on the underlying investments. Noninterest expense increased due to an
arbitration award payout and higher volume-based data processing expense. The income tax provision
decreased primarily as a result of lower pre-tax income as well as recognizing changes in other
comprehensive income during 2009.
2008 compared with 2007
Net income for Regional Banking declined primarily as the result of lower net interest income and
lower noninterest income, along with an increase in provision for loan losses. The decrease in net
interest income was primarily a result of narrower spreads on deposits due to competitive pricing
pressure, partially offset by an increase in both commercial and consumer loan spreads. The
decrease in noninterest income was primarily a result of lower mortgage origination income, driven
by overall lower demand for residential mortgages. The increase in provision for loan losses was
due to an increase in net charge-offs, primarily in the commercial loan portfolio and, to a lesser
extent, in the direct consumer loan portfolio.
Net income for Specialty Consumer decreased primarily as the result of lower net interest income,
higher provision for loan losses, and higher noninterest expense. The decrease in net interest
income was primarily the result lower residential mortgage loan balances as this portfolio is
primarily in a runoff pattern. The increase in the loan loss provision was due to higher
nonperforming residential mortgage loan levels throughout 2008 and an increase in net charge-offs.
The increase in noninterest expense was primarily the result of higher expenses related to ORE
properties.
Net income for Specialty Commercial decreased primarily as the result of lower net interest income,
higher provision for loan losses, lower noninterest income and higher noninterest expense. The
decrease in net interest income was driven by increased nonaccrual commercial real estate loans.
The increase in loan loss provision was a result of higher net charge-offs related to the
commercial real estate loan portfolio. The decrease in noninterest income was primarily a result
of higher net losses on loans held for sale. The increase in noninterest expense was primarily the
result of the aforementioned goodwill impairment charge in the second quarter of 2008 as well as
higher foreclosure related expenses, partially offset by lower compensation costs.
The net income for Wealth Management decreased primarily as the result of lower noninterest income
and an increase in noninterest expense. The decrease in noninterest income was primarily the
result of lower trust fee income due to a decline in assets under administration driven by ongoing
declines in market valuation. The increase in noninterest expense was primarily the result of a
$2.4 million loss related to the repurchase of all auction rate securities sold to wealth
management clients to restore liquidity to their accounts. Trust assets under administration were
$2.0 billion at December 31, 2008, a decline of $0.7 billion from $2.7 billion at December 31,
2007.
The net loss for the Other business line increased primarily as the result of lower net interest
income, lower noninterest income and higher income tax provision, partially offset by lower
noninterest expense. The decrease in net interest income was primarily due to the internal
profitability methodology utilized at Citizens, which insulates the other lines of business from
interest-rate risk and assigns the risk to the asset/liability management function, which is a
component of this segment. The decrease in noninterest income was primarily due to a decrease in
income from bank owned life insurance policies due to lower market interest rates and decreases in
mortgage and other loan income. The increase in the income tax provision was primarily due to
establishing the aforementioned deferred tax valuation allowance in 2008. The decrease in
noninterest expense was primarily due to lower compensation expense.
48
FINANCIAL CONDITION
TOTAL ASSETS
Total assets at December 31, 2009 were $11.9 billion, a decrease of $1.2 billion or 8.8% from
December 31, 2008. The decline was primarily the result of reductions in total portfolio loans and
a non-cash and not tax-deductible goodwill impairment charge recorded in the second quarter of
2009, partially offset by higher money market investments.
MONEY MARKET INVESTMENTS AND INVESTMENT SECURITIES
Objectives in managing the securities portfolio are driven by the dynamics of the balance sheet,
including growth, maturity, management of interest rate risk and maximizing return.
Interest-bearing deposits with banks increased $491.2 million in 2009. On October 6, 2008 the
Federal Reserve announced that it would pay interest on required and excess reserve balances at
rates close to the targeted federal funds rates. Citizens has chosen to utilize this program while
adverse conditions exist in the credit markets. Securities are classified as available for sale or
held to maturity and as of December 31, 2009, 94.2% of the securities in Citizens investment
securities portfolio were classified as available for sale. A summary of investment securities
balances at December 31, 2009, 2008 and 2007 is provided below:
Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Securities available for sale, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies |
|
$ |
149,033 |
|
|
$ |
257,445 |
|
|
$ |
304,074 |
|
Collaterized mortgage obligations |
|
|
442,989 |
|
|
|
471,010 |
|
|
|
586,954 |
|
Mortgage-backed |
|
|
1,164,450 |
|
|
|
973,961 |
|
|
|
670,565 |
|
State and municipal |
|
|
450,647 |
|
|
|
538,761 |
|
|
|
569,466 |
|
Other |
|
|
17,946 |
|
|
|
7,595 |
|
|
|
1,105 |
|
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
$ |
2,225,065 |
|
|
$ |
2,248,772 |
|
|
$ |
2,132,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity, at amortized cost |
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal |
|
$ |
137,094 |
|
|
$ |
138,575 |
|
|
$ |
129,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
$ |
2,362,159 |
|
|
$ |
2,387,347 |
|
|
$ |
2,261,290 |
|
|
|
|
|
|
|
|
|
|
|
Total investment securities at December 31, 2009 were essentially unchanged from December 31,
2008. The increase in investment securities at December 31, 2008 over December 31, 2007 was
primarily due to the investment of the proceeds from the sale of the TARP Preferred Stock and
warrant in the fourth quarter of 2008, partially offset by paydowns and maturities received during
the year.
The collateralized mortgage obligations (CMO) sector includes securities where the underlying
collateral consists of agency issued or whole loan mortgages. At December 31, 2009, the whole loan
CMOs had a market value of $188.7 million with gross unrealized losses of $15.0 million. Citizens
performs a thorough credit review on a quarterly basis on the underlying mortgage collateral as
well as the supporting credit enhancement and structure. The results of the December 31, 2009
credit review demonstrated continued strength and no material degradation to the holdings.
Additionally, Citizens determined there is no other-than-temporary impairment on the entire
investment portfolio at December 31, 2009.
Maturities and average yields of investment securities at December 31, 2009 are presented in the
table below:
49
Maturity Distribution of Investment Securities Portfolio (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due Within |
|
|
One to |
|
|
Five to |
|
|
After |
|
|
|
|
|
|
One Year |
|
|
Five Years |
|
|
Ten Years |
|
|
Ten Years |
|
|
Total |
|
December 31, 2009 |
|
|
|
|
|
Avg. |
|
|
|
|
|
|
Avg. |
|
|
|
|
|
|
Avg. |
|
|
|
|
|
|
Avg. |
|
|
|
|
|
|
Avg. |
|
(in thousands) |
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Securities available for sale, at fair value (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies(3) |
|
$ |
97,591 |
|
|
|
4.88 |
% |
|
$ |
36,309 |
|
|
|
3.55 |
% |
|
$ |
15,133 |
|
|
|
4.46 |
% |
|
$ |
|
|
|
|
|
% |
|
$ |
149,033 |
|
|
|
4.51 |
% |
Collateralized
mortgage
obligations
(3) |
|
|
35,368 |
|
|
|
4.72 |
|
|
|
272,240 |
|
|
|
4.65 |
|
|
|
135,351 |
|
|
|
4.80 |
|
|
|
30 |
|
|
|
6.83 |
|
|
|
442,989 |
|
|
|
4.70 |
|
Mortgage-backed(3) |
|
|
4,661 |
|
|
|
6.59 |
|
|
|
659,511 |
|
|
|
4.80 |
|
|
|
430,607 |
|
|
|
4.46 |
|
|
|
69,671 |
|
|
|
4.63 |
|
|
|
1,164,450 |
|
|
|
4.67 |
|
State and municipal(4) |
|
|
45,698 |
|
|
|
5.14 |
|
|
|
115,340 |
|
|
|
4.28 |
|
|
|
184,308 |
|
|
|
4.13 |
|
|
|
105,301 |
|
|
|
3.99 |
|
|
|
450,647 |
|
|
|
4.24 |
|
Other |
|
|
17,616 |
|
|
|
1.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
330 |
|
|
|
10.47 |
|
|
|
17,946 |
|
|
|
1.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
$ |
200,934 |
|
|
|
4.61 |
% |
|
$ |
1,083,400 |
|
|
|
4.66 |
% |
|
$ |
765,399 |
|
|
|
4.45 |
% |
|
$ |
175,332 |
|
|
|
4.26 |
% |
|
$ |
2,225,065 |
|
|
|
4.55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity, at amortized cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal(2)(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held to maturity |
|
$ |
|
|
|
|
0.00 |
% |
|
$ |
3,905 |
|
|
|
0.92 |
% |
|
$ |
55,973 |
|
|
|
3.51 |
% |
|
$ |
77,216 |
|
|
|
4.05 |
% |
|
$ |
137,094 |
|
|
|
3.74 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This table excludes stock holdings of the
Federal Home Loan Bank and Federal Reserve. |
|
(2) |
|
Yields are based on amortized cost. |
|
(3) |
|
Maturity distributions for collateralized mortgage obligations and
mortgage-backed securities are based on estimated average lives. |
|
(4) |
|
Average yields on tax-exempt obligations have been computed on a tax equivalent
basis, based on a 35% federal tax rate. |
As of December 31, 2009, the estimated aggregate fair value of the investment securities
portfolio was $44.0 million above amortized cost, consisting of gross unrealized gains of $61.8
million and gross unrealized losses of $17.8 million. A summary of estimated fair values and
unrealized gains and losses for the major components of the investment securities portfolio is
provided in Note 3 to the Consolidated Financial Statements. Citizens policies with respect to
the classification of investments in debt and equity securities are discussed in Note 1 to the
Consolidated Financial Statements.
LOAN PORTFOLIO
Citizens primarily extends credit within the local markets of its banking subsidiaries located in
Michigan, Wisconsin, Ohio, and Iowa. Citizens generally lends to consumers and small to mid-sized
businesses and, consistent with its emphasis on relationship banking, most of these credits
represent core, multi-relationship customers who also maintain deposit relationships and utilize
other banking services such as treasury management. The loan portfolio is diversified by borrower
and industry, with no concentration within a single industry that exceeds 10% of total portfolio
loans. Citizens has minimal loans to foreign debtors and does not actively solicit nationally
syndicated loans or participate in highly leveraged transactions. Citizens seeks to limit its
credit risk by establishing guidelines to review the aggregate outstanding commitments and loans to
particular borrowers and industries. Citizens obtains and monitors collateral based on the nature
of the credit and the risk assessment of the customer.
Loan balances by category for the past five years and an analysis of the maturity and interest rate
sensitivity of commercial and industrial, commercial real estate, and real estate construction
loans at December 31, 2009 are presented below.
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Loans |
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
Commercial and industrial |
|
$ |
1,976.1 |
|
|
$ |
2,602.3 |
|
|
$ |
2,557.1 |
|
|
$ |
2,004.9 |
|
|
$ |
1,688.1 |
|
Commercial real estate (1) |
|
|
2,504.0 |
|
|
|
2,565.9 |
|
|
|
2,549.6 |
|
|
|
2,442.5 |
|
|
|
1,190.4 |
|
Real estate construction (2) |
|
|
322.7 |
|
|
|
398.9 |
|
|
|
547.6 |
|
|
|
678.1 |
|
|
|
211.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
4,802.8 |
|
|
|
5,567.1 |
|
|
|
5,654.3 |
|
|
|
5,125.5 |
|
|
|
3,090.2 |
|
Residential mortgage |
|
|
1,036.5 |
|
|
|
1,262.8 |
|
|
|
1,445.2 |
|
|
|
1,543.5 |
|
|
|
539.8 |
|
Direct consumer |
|
|
1,261.4 |
|
|
|
1,452.2 |
|
|
|
1,572.3 |
|
|
|
1,721.4 |
|
|
|
1,142.0 |
|
Indirect consumer |
|
|
805.2 |
|
|
|
820.5 |
|
|
|
829.4 |
|
|
|
840.6 |
|
|
|
844.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,905.9 |
|
|
$ |
9,102.6 |
|
|
$ |
9,501.2 |
|
|
$ |
9,231.0 |
|
|
$ |
5,616.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loan Maturities and Interest Rate Sensitivity at December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
|
One to |
|
|
After |
|
|
|
|
|
|
One Year |
|
|
Five Years |
|
|
Five Years |
|
|
Total |
|
|
Commercial and industrial |
|
$ |
575.7 |
|
|
$ |
1,216.6 |
|
|
$ |
183.8 |
|
|
$ |
1,976.1 |
|
Commercial real estate |
|
|
830.0 |
|
|
|
1,452.5 |
|
|
|
221.5 |
|
|
|
2,504.0 |
|
Real estate construction |
|
|
164.0 |
|
|
|
156.9 |
|
|
|
1.8 |
|
|
|
322.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
$ |
1,569.7 |
|
|
$ |
2,826.0 |
|
|
$ |
407.1 |
|
|
$ |
4,802.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans above: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With floating interest rates |
|
$ |
1,067.6 |
|
|
$ |
1,762.7 |
|
|
$ |
327.6 |
|
|
$ |
3,157.9 |
|
With predetermined interest rates |
|
|
502.1 |
|
|
|
1,004.8 |
|
|
|
138.0 |
|
|
|
1,644.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,569.7 |
|
|
$ |
2,767.5 |
|
|
$ |
465.6 |
|
|
$ |
4,802.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Commercial real estate consists of income producing and owner occupied loan
types |
|
(2) |
|
Real estate construction consists of land hold, land development, and commercial
real estate construction loan types |
The decrease in all categories comprising total portfolio loans from December 31, 2008 was
primarily the result of a decline in customer demand from credit-worthy clients, paydowns as a
result of normal client activity, and charge-offs. Also contributing to the decrease was the
transfer of $55.5 million of nonperforming land hold, land development, and commercial construction
loans to loans held for sale ($35.2 million after market-value adjustments) during the fourth
quarter of 2009.
Citizens transferred $127.9 million of nonperforming commercial real estate and residential
mortgage loans to loans held for sale ($92.8 million after market-value adjustments) during the
second quarter of 2008.
Commercial and Industrial. The commercial and industrial loan portfolio includes a diverse group of
loans largely to in-market business banking (relationships less than $3.0 million) and corporate
banking (relationships over $3.0 million) companies in a variety of businesses across many
industries. The purpose of these loans varies from supporting seasonal working capital needs to
term financing of equipment purchases. While some short-term loans may be made on an unsecured
basis, the large majority are secured by the assets being financed with collateral margins
consistent with the Corporations loan underwriting guidelines. Commercial and industrial loans
are evaluated for adequacy of repayment sources at the time of approval and are regularly reviewed
for any possible deterioration in the ability of the borrower to repay on agreed terms. Credit
risk in commercial and industrial loans arises due to fluctuations in borrowers financial
condition, deterioration in collateral values, and changes in market conditions.
Commercial and industrial loans are underwritten after evaluating and understanding the borrowers
financial need and ability to repay any loans on a basis and within a timetable that makes sense
for both the borrower and Citizens. Having determined that the borrowers management possesses
sound business acumen, the Corporations management examines current and projected cash flows to
determine the ability of the borrower to repay their obligations as agreed. Underwriting
guidelines are designed to promote ongoing relationship banking which allows both the customer and
the Corporation to make changes commensurate with current economic and performance results.
51
Commercial Real Estate. The majority of this portfolio consists of commercial real estate
intermediate-term loans to developers and owners of commercial real estate for single and multiple
family residential as well as multi-unit commercial properties. These loans are viewed first as
cash-flow loans and secondarily as loans secured by real estate.
Commercial real estate loans are subject to underwriting standards and processes specific to the
risks embedded in each of the geographic markets served by Citizens, with approximately 40% of the
portfolio located in southeast Michigan and 20% located in Ohio. As detailed in the discussion of
real estate construction loans below, the properties securing the Corporations commercial real
estate portfolio are diverse in both type and geographic location. This diversity reduces the
Corporations exposure to adverse economic events that impact any individual market. Management
monitors commercial real estate loans based on sustainable cash flow, collateral, geography, and
risk rating criteria. As a general rule, the Corporation avoids financing single-purpose projects
unless other underwriting factors are present to help mitigate risk. Management tracks the level
of owner-occupied commercial real estate loans versus non-owner occupied investment real estate
loans. At December 31, 2009, approximately 35% of the Corporations commercial real estate loans
were secured by owner-occupied properties.
The credit performance of loans secured by commercial income producing properties has recently been
negatively affected by tenant losses and reduced rental rates; contributing to the decline in
values associated with the income producing loan portfolio. Citizens may suffer further losses in
these segments if market conditions continue to deteriorate and efforts to limit losses through
execution of prudent workout strategies are unsuccessful.
Real Estate Construction. Loans in this classification are short-term interim loans that provide
financing for the acquisition or development of commercial real estate, such as multifamily or
other commercial development projects. Real estate construction loans are made to developers and
project managers who are generally well known to the Corporation, have prior successful project
experience, and are well-capitalized. Projects undertaken by these developers are carefully
reviewed by the Corporation to ensure that they are economically viable and are underwritten
utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption
and lease rates, and financial analysis of the developers and property owners. Loans of this type
are generally made to customers based in the Corporations markets in which the Corporation has a
thorough knowledge of the local market economy. The credit risk associated with real estate
construction loans is generally confined to specific geographic areas, but is also influenced by
general economic conditions. These loans are considered to have higher risks than other real
estate loans due to the inherent construction risk and their ultimate repayment being sensitive to
interest rate changes, general economic conditions, absorption dynamics, and the availability of
long-term financing. The Corporation controls the credit risk on these types of loans by making
loans in familiar markets to developers, underwriting the loans to meet the requirements of
institutional investors in the secondary market, reviewing the merits of individual projects,
controlling loan structure, and monitoring project progress and construction advances. Sources of
repayment for these types of loans may be pre-committed permanent take out loans from long-term
lenders, residential mortgage financing, sales of developed property or an interim loan commitment
from the Corporation until permanent financing is obtained.
This portfolio has been particularly adversely affected by job josses, declines in real estate
value, declines in home sale volumes, and declines in new home building. Declining real estate
values have resulted in sharp increases in losses, particularly in the land hold, land development,
and construction loan portfolios. Since January 1, 2007, Citizens no longer underwrites new
commercial real estate, land hold and land development construction loans and is actively managing
the remaining portfolio. However, Citizens underwrites new construction loans supporting
owner-occupied projects where these loans are viewed first as cash-flow loans and secondarily as
loans secured by real estate.
Residential Mortgage Loans. The residential mortgage loan category is predominately comprised of
owner-occupied residential properties of which over 85% were located in Michigan and Ohio .
Residential mortgage loans are evaluated based on credit scores, debt-to-income ratios and
loan-to-collateral value ratios. They are predominately originated in accordance with underwriting
standards set forth by the government-sponsored entities (GSE), Federal National Mortgage
Association (FNMA), Federal Home Loan Mortgage Corporation
52
(FHLMC) and the Government National
Mortgage Association (GNMA), who serve as the primary purchasers of loans sold in the secondary
market by mortgage lenders. These underwriting standards generally require that the loans be
collateralized by one-to-four family residential real estate. Automated underwriting engines
deployed by a GSE are used to determine creditworthiness of the vast majority of borrowers.
Maximum allowable loan-to-value (LTV)/combined loan-to-value (CLTV) on these loan products do
not exceed 95% at origination. At December 31, 2009, Citizens had $226.9 million of loans that
were originated in excess of 80%, which were generally covered by mortgage insurance providing at
least 20% of coverage, except as noted below.
Citizens sells over 90% of new mortgage originations into the secondary market. The right to
service the loans and receive servicing fee income is typically sold along with the underlying
mortgages. All residential mortgage loans that were sold in 2009 were sold without recourse.
However, for loans that were sold prior to the second quarter of 2008, Citizens remains
contractually liable for credit risk for such loans experiencing early payment defaults, and loans
containing errors and/or omissions in documentation according to the standards delineated within
the loan sale agreements. Citizens believes these risks are immaterial.
Residential Mortgage Loan Balances By Category
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
| | |
Fixed rate mortgages |
|
$ |
339,019 |
|
|
$ |
423,698 |
|
Adjustable rate mortgages |
|
|
679,577 |
|
|
|
795,482 |
|
Construction mortgages |
|
|
17,847 |
|
|
|
43,661 |
|
|
|
|
|
|
|
|
Total residential mortgages |
|
$ |
1,036,443 |
|
|
$ |
1,262,841 |
|
|
|
|
|
|
|
|
In 2009 a total of $2.6 million in originated loans had characteristics (other than loan amount or
new construction) that made them non-GSE eligible. These loans were underwritten with compensating
factors such as mortgage insurance, maximum debt to income ratios, maximum loan-to-value ratios and
minimum credit scores which Citizens believed offset the additional risks.
Residential Mortgage Loan Origination Volume
|
|
|
|
|
|
|
|
|
(In thousands) |
|
2009 |
|
|
2008 |
|
|
Fixed rate mortgages |
|
$ |
298,743 |
|
|
$ |
273,901 |
|
Adjustable rate mortgages |
|
|
2,399 |
|
|
|
48,593 |
|
Construction mortgages |
|
|
3,878 |
|
|
|
20,325 |
|
|
|
|
|
|
|
|
Total |
|
$ |
305,020 |
|
|
$ |
342,819 |
|
|
|
|
|
|
|
|
Citizens has not originated subprime, initial teaser rate, or negative amortization loans in over
three years. The credit performance of the residential mortgage portfolio has been negatively
impacted by borrowers loss of or reduction in income during 2008 and 2009. The decline in the
residential real estate values, particularly in Michigan and Northern Ohio, and the extended time
frame associated with the sale of repossessed residential properties has led to increased loss
severity in this loan portfolio. Increased stress on borrowers cash flow due to job loss, reduced
rental income, higher interest rates or other factors could lead to higher payment delinquencies
and defaults. Continued declines in real estate values could lead to higher loss severity.
Direct Consumer. The direct consumer loan category includes home equity loans, and direct
installment loans to individuals used to purchase boats, recreational vehicles, automobiles, and
other personal items. At December 31, 2009, Citizens had $1.0 billion of home equity loans, of
which 76% were secured by residential real estate located in Michigan. Over 67% of the home equity
portfolio has refreshed FICO scores of 720 or better. Home equity loans consist of revolving lines
of credit and fixed rate loans to consumers that are secured by residential real estate. These
loans are generally in a junior lien position and are originated through Citizens branches with
loan-to-value ratios generally less than 80% of appraised collateral value. Individual borrowers
may be required to provide additional collateral or a satisfactory endorsement or guaranty from
another person, depending on the
53
creditworthiness of the borrower. Credit risks for these types of
loans are influenced by general economic conditions, the financial strength of individual
borrowers, and the value of the loan collateral. Credit risk in the direct consumer loan portfolio
arises from the borrowers potentially being unable to repay the loan on agreed terms, or by a
shortfall in the collateral value in relation to the outstanding loan balance in the event of
default and subsequent liquidation of collateral. Credit risk is generally controlled by
evaluating the creditworthiness of the borrowers as well as taking appropriate collateral and
guaranty positions.
The Corporation originates consumer loans utilizing a credit scoring model to supplement the
underwriting process. To monitor and manage consumer loan risk, policies and underwriting
guidelines are developed and modified as market conditions require. This monitoring activity,
coupled with relatively small loan amounts spread across many individual borrowers, reduces risk.
Additionally, trend and outlook reports are reviewed by management on a regular basis.
Underwriting guidelines for home equity loans are heavily influenced by statutory requirements,
which include, but are not limited to maximum loan-to-value ratios, credit scoring results, ability
to service overall debt, and documentation requirements.
Indirect Consumer. The indirect consumer loan category includes indirect installment loans used by
customers to purchase boats and recreational vehicles. These loans are originated mainly within
Citizens markets and through its centralized underwriting group that has established relationships
with certain dealers which meet Citizens underwriting guidelines and adhere to prudent business
practices. The dealers are evaluated on their creditworthiness and business practices with
performance monitored on an annual basis. The dealers refer customers to the centralized
underwriting group, which utilizes a credit scoring model to supplement the underwriting process,
and then complete the loans utilizing Citizens loan documents. Credit risks for these types of
loans, are influenced by general economic conditions, the characteristics of individual borrowers,
and the value of loan collateral. Additionally, credit risk may include the dealers ability to
collect proper customer information, and adhere to appropriate lending guidelines, including but
not limited to evaluating collateral value, accurately capturing property identification numbers,
and following related documentation guidelines. Credit risk in the indirect consumer loan
portfolio arises from a borrowers potential inability to repay their loan and by a potential
shortfall in the collateral value in relation to the outstanding loan balance in the event of
default and subsequent liquidation of collateral. Credit risk is generally controlled by reviewing
the creditworthiness of the borrowers as well as taking appropriate collateral and guaranty
positions.
LOANS HELD FOR SALE
Loans held for sale are comprised of commercial real estate and residential mortgage loans. Held
for sale loans at December 31, 2009 totaled $80.5 million, a decrease of $10.9 million or 11.9%
from December 31, 2008. The decrease reflects a decline in commercial loans held for sale due to
customer paydowns, workout activities, writedowns to reflect market-value declines for the
underlying collateral and transfers to ORE. The decrease was partially offset by the
aforementioned transfer of nonperforming land hold, land development, and commercial construction
loans from the loan portfolio at fair value.
CREDIT RISK MANAGEMENT
Extending credit to businesses and consumers exposes the Corporation to credit risk, which is the
risk that the principal balance of a loan and any related interest will not be collected under the
original underwriting terms due to the inability or unwillingness of the borrower to repay the
loan. Citizens has a platform of lending policies and underwriting guidelines that are designed to
maximize loan income within an acceptable level of risk. Credit risk is mitigated through a
comprehensive system of internal controls, which includes adherence to conservative lending
practices, underwriting guidelines, collateral monitoring, and oversight of financial performance.
Credit risk associated with fluctuations in economic conditions is mitigated through portfolio
diversification that limits exposure to any single industry or customer. Lending policies and
guidelines are reviewed by credit administration and modified on an ongoing basis as conditions
change and new credit products are offered. The commercial and industrial and commercial real
estate credit administration policies include a two-tier loan rating system that incorporates
probability of default and loss given default to estimate a borrowers ability to repay and the
strength of the collateral behind their loan obligation. To strengthen and monitor loan
structuring and collateral position, collateral field audits are regularly performed on those
credits that have a significant reliance on accounts receivable and inventory. Additionally, a
reporting system supplements the review process by providing management with frequent reports
related to loan production, loan quality, concentrations of credit, loan
54
delinquencies and
nonperforming and potentially problematic loans. Citizens monitors its loans in an effort to
proactively identify, manage, and mitigate any potential credit quality issues and losses.
The quality of Citizens loan portfolio is impacted by numerous factors, including the economic
environment in the markets in which Citizens operates. Citizens carefully monitors its loans in an
effort to identify and mitigate any potential credit quality issues and losses in a proactive
manner. Citizens performs quarterly reviews of the non-watch commercial credit portfolio focusing
on industry segments and asset classes that have or may be expected to experience stress due to
economic conditions. This process seeks to validate each such credits risk rating, underwriting
structure and exposure management under current and stressed economic scenarios while strengthening
these relationships and improving communication with these clients.
The Corporation maintains an independent loan review department that reviews the quality, trends,
collectibility and collateral margins within the loan portfolio. The loan review department
validates the credit risk profile on a regular basis by sampling loans using criteria such as loan
size, delinquency status, loan officer coverage and other factors. This process complements and
reinforces the risk identification and assessment decisions made by
lenders and credit personnel. Results of these reviews are presented to management and to the Risk
Committee of the Board of Directors.
As part of the overall credit underwriting and review process, Citizens carefully monitors
commercial and industrial and commercial real estate credits that are current in terms of principal
and interest payments but may deteriorate in quality as economic conditions change. Commercial
relationship officers monitor their clients financial condition and initiate changes in loan
ratings based on their findings. Loans that have migrated within the loan rating system to a level
that requires increased oversight, at managements discretion, are considered watchlist loans
(generally consistent with the regulatory definition of special mention, substandard, and doubtful
loans) and include loans that are in accruing or nonperforming status. Citizens utilizes the
watchlist process as a proactive credit risk management practice to help mitigate the migration of
commercial loans to nonperforming status and potential loss. Once a loan is placed on the
watchlist, it is reviewed quarterly by the chief credit officer, senior credit officers, senior
market managers, and commercial relationship officers to assess cash flows, collateral valuations,
guarantor liquidity, and other pertinent trends. During these reviews, action plans are developed
to address emerging problem loans or to implement specific actions for alternatives to strengthen
the credit and/or for removing the loans from the portfolio. Additionally, loans viewed as
substandard or doubtful are transferred to Citizens Special Loans or small business workout groups
and are subjected to an even higher level of monitoring and workout activity. During 2009,
Citizens expanded the watchlist process to include non-watch commercial credits with significant
credit exposure, businesses affected by the automotive industry, other manufacturers in stressed
industries, and additional segments of income producing commercial real estate.
The following table illustrates the commercial loans on the watchlist at December 31, 2009, 2008,
and 2007 that, while still accruing interest, may be at risk due to general economic conditions or
changes in borrowers financial status.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
Commercial Watchlist |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Accruing loans only |
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
(in millions) |
|
$ |
|
|
Portfolio |
|
|
$ |
|
|
Portfolio |
|
|
$ |
|
|
Portfolio |
|
|
|
|
|
|
|
|
Land Hold |
|
$ |
24.8 |
|
|
|
68.99 |
% |
|
$ |
18.5 |
|
|
|
41.11 |
% |
|
$ |
25.1 |
|
|
|
40.81 |
% |
Land Development |
|
|
88.0 |
|
|
|
80.78 |
|
|
|
49.3 |
|
|
|
37.15 |
|
|
|
66.3 |
|
|
|
41.72 |
|
Construction |
|
|
63.5 |
|
|
|
35.68 |
|
|
|
74.8 |
|
|
|
28.39 |
|
|
|
81.6 |
|
|
|
25.59 |
|
Income Producing |
|
|
521.9 |
|
|
|
34.37 |
|
|
|
401.0 |
|
|
|
25.77 |
|
|
|
211.2 |
|
|
|
14.12 |
|
Owner-Occupied |
|
|
247.3 |
|
|
|
25.09 |
|
|
|
178.4 |
|
|
|
18.44 |
|
|
|
184.1 |
|
|
|
17.34 |
|
|
|
|
|
|
|
|
Total Commercial Real Estate |
|
|
945.5 |
|
|
|
33.45 |
|
|
|
722.0 |
|
|
|
24.35 |
|
|
|
568.3 |
|
|
|
18.35 |
|
Commercial and Industrial |
|
|
475.3 |
|
|
|
24.05 |
|
|
|
436.8 |
|
|
|
16.78 |
|
|
|
387.4 |
|
|
|
15.15 |
|
|
|
|
|
|
|
|
Total Watchlist Loans |
|
$ |
1,420.8 |
|
|
|
29.58 |
% |
|
$ |
1,158.8 |
|
|
|
20.82 |
% |
|
$ |
955.7 |
|
|
|
16.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
The annual increases in watchlist loans were primarily the result of proactive commercial real
estate downgrades as Citizens closely monitors borrowers repayment capacity in this environment
and continued declines in commercial real estate values in Michigan and Northern Ohio.
Additionally, the increase over December 31, 2008 was the result of proactive downgrades to
commercial and industrial relationships related to the automotive industry due to the uncertainty
of that industry during the first half of 2009. Some of the automotive-related credits continued
to perform during 2009, and were subsequently upgraded and removed from the watchlist during the
fourth quarter of 2009.
The following table illustrates loans where the contractual payment is 30 to 89 days past due and
interest is still accruing at December 31, 2009, 2008, and 2007. While these loans are actively
worked to bring them current, past due loan trends may be a leading indicator of potential future
nonperforming loans and charge-offs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
Delinquency Rates By Loan Portfolio |
|
2009 |
|
|
2008 |
|
|
2007 |
|
30 to 89 days Past Due |
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
(in millions) |
|
$ |
|
|
Portfolio |
|
|
$ |
|
|
Portfolio |
|
|
$ |
|
|
Portfolio |
|
|
|
|
|
|
|
|
Land Hold |
|
$ |
0.6 |
|
|
|
1.56 |
% |
|
$ |
3.9 |
|
|
|
8.67 |
% |
|
$ |
4.6 |
|
|
|
7.48 |
% |
Land Development |
|
|
4.7 |
|
|
|
4.34 |
|
|
|
5.2 |
|
|
|
3.92 |
|
|
|
28.7 |
|
|
|
18.06 |
|
Construction |
|
|
1.7 |
|
|
|
0.95 |
|
|
|
27.3 |
|
|
|
10.36 |
|
|
|
31.7 |
|
|
|
9.94 |
|
Income Producing |
|
|
40.8 |
|
|
|
2.69 |
|
|
|
76.7 |
|
|
|
4.93 |
|
|
|
54.0 |
|
|
|
3.61 |
|
Owner-Occupied |
|
|
25.0 |
|
|
|
2.53 |
|
|
|
37.5 |
|
|
|
3.88 |
|
|
|
20.3 |
|
|
|
1.91 |
|
|
|
|
|
|
|
|
Total Commercial Real Estate |
|
|
72.8 |
|
|
|
2.57 |
|
|
|
150.6 |
|
|
|
5.08 |
|
|
|
139.3 |
|
|
|
4.50 |
|
Commercial and Industrial |
|
|
17.0 |
|
|
|
0.86 |
|
|
|
56.5 |
|
|
|
2.17 |
|
|
|
39.0 |
|
|
|
1.53 |
|
|
|
|
|
|
|
|
Total Commercial Loans |
|
|
89.8 |
|
|
|
1.87 |
|
|
|
207.1 |
|
|
|
3.72 |
|
|
|
178.3 |
|
|
|
3.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage |
|
|
22.2 |
|
|
|
2.15 |
|
|
|
39.5 |
|
|
|
3.13 |
|
|
|
46.4 |
|
|
|
3.21 |
|
Direct Consumer |
|
|
27.0 |
|
|
|
2.14 |
|
|
|
25.5 |
|
|
|
1.76 |
|
|
|
24.3 |
|
|
|
1.55 |
|
Indirect Consumer |
|
|
16.3 |
|
|
|
2.02 |
|
|
|
18.5 |
|
|
|
2.25 |
|
|
|
15.9 |
|
|
|
1.92 |
|
|
|
|
|
|
|
|
Total Consumer Loans |
|
|
65.5 |
|
|
|
2.11 |
|
|
|
83.5 |
|
|
|
2.36 |
|
|
|
86.6 |
|
|
|
2.25 |
|
|
|
|
|
|
|
|
Total Delinquent Loans |
|
$ |
155.3 |
|
|
|
1.96 |
% |
|
$ |
290.6 |
|
|
|
3.19 |
% |
|
$ |
264.9 |
|
|
|
2.79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in delinquent loans from December 31, 2008 was primarily the result of continued
emphasis on proactively managing all delinquent loans, with particular emphasis on delinquent
commercial and residential mortgage loans. The majority of the delinquent direct consumer loans
represent loans in a junior lien position. The increase in delinquent loans at December 31, 2008
as compared with December 31, 2007 was primarily the result of the continued weak economy in the
Midwest, which primarily affected delinquencies in the commercial loan portfolios while total
consumer loan delinquencies decreased slightly.
NONPERFORMING ASSETS
Loans are placed on nonaccrual status when there is substantial doubt regarding collection of
principal or interest based on Citizens credit policies and practices or when principal or
interest is past due in excess of 90 days. When a loan is placed on nonaccrual status, interest
that is accrued but not collected is reversed and charged against income. Nonperforming assets are
comprised of nonaccrual loans, loans past due over 90 days and still accruing interest,
restructured loans, nonperforming loans held for sale, and other repossessed assets acquired.
Although these assets have more than a normal risk of loss, they may not necessarily result in
future losses. A five-year history of nonperforming assets is presented below. The nonperforming
commercial loans in this table are also reviewed as part of the watchlist process.
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming Assets and Past Due Loans |
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
Nonperforming Portfolio Loans (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 30 days past due |
|
$ |
89,241 |
|
|
$ |
35,168 |
|
|
$ |
8,133 |
|
|
$ |
4,305 |
|
|
$ |
4,206 |
|
From 30 to 89 days past due |
|
|
63,464 |
|
|
|
25,257 |
|
|
|
11,617 |
|
|
|
1,413 |
|
|
|
1,136 |
|
90 or more days past due |
|
|
317,048 |
|
|
|
243,868 |
|
|
|
165,647 |
|
|
|
52,174 |
|
|
|
26,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
469,753 |
|
|
|
304,293 |
|
|
|
185,397 |
|
|
|
57,892 |
|
|
|
32,140 |
|
Loans 90 days or more past due and still accruing |
|
|
3,039 |
|
|
|
1,486 |
|
|
|
3,650 |
|
|
|
767 |
|
|
|
238 |
|
Restructured loans and still accruing |
|
|
2,629 |
|
|
|
256 |
|
|
|
315 |
|
|
|
378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming portfolio loans |
|
|
475,421 |
|
|
|
306,035 |
|
|
|
189,362 |
|
|
|
59,037 |
|
|
|
32,378 |
|
Nonperforming loans held for sale |
|
|
65,247 |
|
|
|
75,142 |
|
|
|
21,676 |
|
|
|
22,846 |
|
|
|
|
|
Other repossessed assets acquired |
|
|
54,394 |
|
|
|
58,037 |
|
|
|
40,502 |
|
|
|
20,165 |
|
|
|
7,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets(2) |
|
$ |
595,062 |
|
|
$ |
439,214 |
|
|
$ |
251,540 |
|
|
$ |
102,048 |
|
|
$ |
39,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans as a percent of
portfolio loans |
|
|
6.01 |
% |
|
|
3.36 |
% |
|
|
1.99 |
% |
|
|
0.64 |
% |
|
|
0.58 |
% |
Nonperforming assets as a percent of portfolio loans
plus other repossessed assets acquired |
|
|
7.48 |
|
|
|
4.79 |
|
|
|
2.64 |
|
|
|
1.10 |
|
|
|
0.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets as a percent of total assets |
|
|
4.99 |
|
|
|
3.36 |
|
|
|
1.86 |
|
|
|
0.73 |
|
|
|
0.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming Portfolio Loans by Type (1) (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
86,337 |
|
|
$ |
66,285 |
|
|
$ |
16,581 |
|
|
$ |
8,843 |
|
|
$ |
12,118 |
|
Commercial real estate |
|
|
236,753 |
|
|
|
162,544 |
|
|
|
110,159 |
|
|
|
14,915 |
|
|
|
5,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
323,090 |
|
|
|
228,829 |
|
|
|
126,740 |
|
|
|
23,758 |
|
|
|
17,186 |
|
Residential mortgage |
|
|
127,100 |
|
|
|
59,515 |
|
|
|
46,865 |
|
|
|
28,428 |
|
|
|
8,412 |
|
Direct Consumer |
|
|
22,601 |
|
|
|
15,076 |
|
|
|
13,700 |
|
|
|
6,041 |
|
|
|
4,326 |
|
Indirect Consumer |
|
|
2,630 |
|
|
|
2,615 |
|
|
|
2,057 |
|
|
|
810 |
|
|
|
2,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming portfolio loans |
|
$ |
475,421 |
|
|
$ |
306,035 |
|
|
$ |
189,362 |
|
|
$ |
59,037 |
|
|
$ |
32,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Refer to Note 4 for a summary of interest income foregone on nonaccrual and restructured loans, as of December 31, 2009, 2008 and 2007. |
|
(2) |
|
December 31, 2006 amounts include the following nonperforming asset balances acquired in the Republic merger:
Less than 30 days past due and nonaccrual $0.6 million, from 30 to 89 days past due and nonaccrual $0.9 million, 90 days or more past due and nonaccrual $29.2 million, no 90 days or more past due and still accruing
and no restructured loans, nonperforming held for sale $21.6 million, and other repossessed assets acquired $12.6 million. |
|
(3) |
|
December 31, 2006 amounts include the following nonperforming loan balances acquired in the Republic merger: Commercial
$0.2 million, commercial real estate $8.4 million, residential mortgage $19.4 million, direct consumer $2.6 million, indirect consumer $0.1 million. |
The increase in nonperforming assets over December 31, 2008 was primarily the result of
deterioration in the real estate secured portfolios, especially residential mortgage loans due to
the effects of the national mortgage foreclosure moratorium in early 2009, and general economic
conditions in the Midwest during 2009. Nonperforming assets at December 31, 2009 include $152.7
million of loans that were proactively moved to nonperforming status by their respective
relationship officer prior to the loans becoming 90 days past due and $30.9 million of restructured
residential mortgage loans. The increase in nonperforming assets at December 31, 2008 as compared
with December 31, 2007 was primarily the result of significant deterioration in the real estate
secured portfolios (particularly commercial) and general economic deterioration in the Midwest.
Certain of the nonperforming loans included in the table above are considered to be impaired. A
loan is considered impaired when Citizens determines it is probable that the principal and interest
due under the original underwriting terms of the loan may not be collected. In most instances,
impairment is measured based on the fair value of the underlying collateral. Impairment may also
be measured based on the present value of expected future cash flows discounted at the loans
effective interest rate. The Corporation measures impairment on all nonaccrual commercial and
industrial and commercial real estate loans for which it has established specific
57
reserves. This
policy does not apply to large groups of smaller balance homogeneous loans, such as smaller balance
commercial loans, direct and indirect consumer loans and residential mortgage loans, which are
collectively evaluated for impairment, except for those loans restructured under a troubled debt
restructuring. The Corporation maintains a valuation reserve for impaired loans as a part of the
specific allocated allowance component of the allowance for loan losses. Cash collected on
impaired nonaccrual loans is generally applied to outstanding principal. At December 31, 2009 and
2008, all of the impaired loans were on a nonaccrual basis so there was no interest income
recognized in these years after they were identified as impaired. For further discussion, see Note
4 to the Consolidated Financial Statements.
ALLOWANCE FOR LOAN LOSSES
A summary of Citizens loan loss experience for the past five years appears below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Loan Loss Experience |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
Allowance for loan losses at January 1 |
|
$ |
255,321 |
|
|
$ |
163,353 |
|
|
$ |
169,104 |
|
|
$ |
116,400 |
|
|
$ |
122,184 |
|
Provision for loan losses |
|
|
325,955 |
|
|
|
282,054 |
|
|
|
45,177 |
|
|
|
11,265 |
|
|
|
1,109 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
63,849 |
|
|
|
27,001 |
|
|
|
6,123 |
|
|
|
4,468 |
|
|
|
9,165 |
|
Commercial real estate |
|
|
123,858 |
|
|
|
112,478 |
|
|
|
27,194 |
|
|
|
2,826 |
|
|
|
3,755 |
|
Residential mortgage |
|
|
18,965 |
|
|
|
24,569 |
|
|
|
5,141 |
|
|
|
1,640 |
|
|
|
1,152 |
|
Direct consumer |
|
|
24,901 |
|
|
|
16,995 |
|
|
|
11,007 |
|
|
|
5,823 |
|
|
|
5,290 |
|
Indirect consumer |
|
|
21,234 |
|
|
|
16,889 |
|
|
|
10,126 |
|
|
|
9,062 |
|
|
|
9,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
252,807 |
|
|
|
197,932 |
|
|
|
59,591 |
|
|
|
23,819 |
|
|
|
28,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
6,392 |
|
|
|
3,153 |
|
|
|
3,144 |
|
|
|
3,022 |
|
|
|
16,526 |
|
Commercial real estate |
|
|
3,590 |
|
|
|
716 |
|
|
|
1,303 |
|
|
|
648 |
|
|
|
1,195 |
|
Residential mortgage |
|
|
34 |
|
|
|
29 |
|
|
|
184 |
|
|
|
154 |
|
|
|
69 |
|
Direct consumer |
|
|
1,557 |
|
|
|
1,726 |
|
|
|
1,723 |
|
|
|
1,389 |
|
|
|
1,419 |
|
Indirect consumer |
|
|
2,328 |
|
|
|
2,222 |
|
|
|
2,309 |
|
|
|
2,342 |
|
|
|
2,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
13,901 |
|
|
|
7,846 |
|
|
|
8,663 |
|
|
|
7,555 |
|
|
|
21,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
238,906 |
|
|
|
190,086 |
|
|
|
50,928 |
|
|
|
16,264 |
|
|
|
6,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance of acquired bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at December 31 |
|
$ |
342,370 |
|
|
$ |
255,321 |
|
|
$ |
163,353 |
|
|
$ |
169,104 |
|
|
$ |
116,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for losses on lending-related
commitments at December 31 |
|
$ |
3,166 |
|
|
$ |
3,941 |
|
|
$ |
5,571 |
|
|
$ |
6,119 |
|
|
$ |
3,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio loans at year-end |
|
$ |
7,905,859 |
|
|
$ |
9,102,598 |
|
|
$ |
9,501,244 |
|
|
$ |
9,231,082 |
|
|
$ |
5,616,119 |
|
Average portfolio loans |
|
|
8,473,946 |
|
|
|
9,433,952 |
|
|
|
9,212,066 |
|
|
|
5,657,476 |
|
|
|
5,493,280 |
|
Allowance for loan losses as a percent of
nonperforming loans |
|
|
72.01 |
% |
|
|
83.43 |
% |
|
|
86.27 |
% |
|
|
286.44 |
% |
|
|
359.50 |
% |
Allowance for loan losses as a percent of
loans outstanding at year-end |
|
|
4.33 |
|
|
|
2.80 |
|
|
|
1.72 |
|
|
|
1.83 |
|
|
|
2.07 |
|
Net loans charged off as a percent
of average loans |
|
|
2.82 |
|
|
|
2.01 |
|
|
|
0.55 |
|
|
|
0.29 |
|
|
|
0.13 |
|
|
Loan losses are charged against, and recoveries are credited to, the allowance for loan
losses. The increase in net charge-offs for 2009 as compared with 2008 was primarily the result of
higher charge-offs on commercial and industrial loans related to continued stress on the economic
conditions in the markets Citizens serves. In 2008, commercial real estate charge-offs were
recorded primarily in the land development, construction, and income producing categories
portfolios. While the land development and construction losses for 2009 remained higher than
historical trends, the losses on these portfolios decreased from 2008. Citizens also began to
experience higher losses in the income producing and owner-occupied portfolios during 2009, which
represents a shift in the risk profile in Citizens commercial real estate portfolio that was
consistent with the experience of other financial institutions.
The allowance for loan losses represents managements estimate of an amount adequate to provide for
probable credit losses inherent in the loan portfolio as of the balance sheet date. To assess the
adequacy of the allowance for loan losses, an allocation methodology is applied that focuses on
changes in the size and character of the loan
58
portfolio, changes in the levels of impaired or other nonperforming loans, the risk inherent
in specific loans, concentrations of loans to specific borrowers or industries, existing economic
conditions, underlying collateral, historical losses on each portfolio category and other
qualitative and quantitative factors which could affect probable loan losses. The evaluation
process is inherently subjective, as it requires estimates that may be susceptible to significant
change and have the potential to affect net income materially. Citizens did not substantively
change its overall approach in the calculation of the allowance for loan losses in 2009 from 2008
and the allocation methods used at December 31, 2009 and December 31, 2008 were consistent. The
methodology used 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 a general valuation allowance calculation. Management also
considers overall portfolio indicators, including trends in historical charge-offs, a review of
industry, geographic and portfolio performance, and other qualitative factors. This methodology is
discussed in Critical Accounting Policies and Note 1 to the Consolidated Financial Statements.
The table below summarizes the allocation of the allowance for loan losses for specific allocated,
risk allocated, and general valuation allowances by loan type and the proportion of total portfolio
loans represented by each loan type.
Allocation of the Allowance for Loan Losses (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
December 31, |
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
(in millions) |
|
Amount |
|
|
Loans |
|
|
Amount |
|
|
Loans |
|
|
Amount |
|
|
Loans |
|
|
Amount |
|
|
Loans |
|
|
Amount |
|
|
Loans |
|
|
Specific allocated allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial (2) |
|
$ |
45.9 |
|
|
|
|
|
|
$ |
39.9 |
|
|
|
|
|
|
$ |
17.8 |
|
|
|
|
|
|
$ |
7.6 |
|
|
|
|
|
|
$ |
5.1 |
|
|
|
|
|
Residential mortgage |
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk allocated allowances: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial (2) |
|
|
158.5 |
|
|
|
60.8 |
% |
|
|
112.0 |
|
|
|
61.2 |
% |
|
|
85.4 |
|
|
|
59.5 |
% |
|
|
94.8 |
|
|
|
55.5 |
% |
|
|
55.2 |
|
|
|
55.1 |
% |
Residential mortgage |
|
|
51.2 |
|
|
|
13.1 |
|
|
|
25.4 |
|
|
|
13.9 |
|
|
|
14.2 |
|
|
|
15.2 |
|
|
|
15.1 |
|
|
|
16.7 |
|
|
|
6.3 |
|
|
|
9.6 |
|
Direct Consumer |
|
|
34.0 |
|
|
|
15.9 |
|
|
|
29.2 |
|
|
|
15.9 |
|
|
|
16.3 |
|
|
|
16.6 |
|
|
|
16.7 |
|
|
|
18.7 |
|
|
|
12.4 |
|
|
|
20.3 |
|
Indirect Consumer |
|
|
39.5 |
|
|
|
10.2 |
|
|
|
35.9 |
|
|
|
9.0 |
|
|
|
23.6 |
|
|
|
8.7 |
|
|
|
25.5 |
|
|
|
9.1 |
|
|
|
27.5 |
|
|
|
15.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk
allocated allowance |
|
|
283.2 |
|
|
|
|
|
|
|
202.5 |
|
|
|
|
|
|
|
139.5 |
|
|
|
|
|
|
|
152.1 |
|
|
|
|
|
|
|
101.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allocated |
|
|
336.0 |
|
|
|
100.0 |
% |
|
|
242.4 |
|
|
|
100.0 |
% |
|
|
157.3 |
|
|
|
100.0 |
% |
|
|
159.7 |
|
|
|
100.0 |
% |
|
|
106.5 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General valuation allowances |
|
|
6.4 |
|
|
|
|
|
|
|
12.9 |
|
|
|
|
|
|
|
6.1 |
|
|
|
|
|
|
|
9.4 |
|
|
|
|
|
|
|
9.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
342.4 |
|
|
|
|
|
|
$ |
255.3 |
|
|
|
|
|
|
$ |
163.4 |
|
|
|
|
|
|
$ |
169.1 |
|
|
|
|
|
|
$ |
116.4 |
|
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(1) |
|
The allocation of the allowance for loan losses in the above table is based upon ranges of estimates and is not intended to imply either limitations on the usage of the allowance or
precision of the specific amounts. Citizens and its subsidiaries do not view the allowance for loan losses as being divisible among the various categories of loans.
The entire allowance is available to absorb any future losses without regard to the category or categories in which the charged-off loans are classified. |
|
(2) |
|
The commercial category includes both commercial and commercial real estate loans. |
Specific Allocated Allowance. The specific allocated allowance is determined based on probable
losses on specific commercial and industrial or commercial real estate loans as well as impairment
on restructured residential mortgage loans. The increase over December 31, 2008 was primarily the
result of the continued general economic conditions in the Midwest, and Citizens proactive credit
culture to identify and reserve for commercial credits with material collateral shortfalls. During
2009, Citizens restructured $30.9 million of residential mortgage loans and the specific allocated
allowance for these loans represents the potential shortfall in interest and principal as a result
of the new loan terms. Appraisals are refreshed at least annually on commercial real estate loans
and quarterly on residential mortgage loans, or more frequently if changes in the borrowers
financial condition or market conditions warrant.
Risk Allocated Allowance. The risk allocated allowance is comprised of several loan pool valuation
allowances determined based on Citizens quantitative loan loss experience for similar loans with
similar risk characteristics, including additional qualitative risks such as changes in asset
quality; the experience, ability and effectiveness of Citizens lending management; and the
composition and concentrations of credit as well as other factors based upon the best judgment of
management. The increase over December 31, 2008 was primarily the result of an
59
increase in the recent loss migration rates and extended duration of commercial real estate, residential mortgage
and consumer loans.
General Valuation Allowances. The general valuation allowances are based on existing regional and
local economic factors, a macroeconomic adjustment factor used to calibrate for the current
economic cycle the Corporation is experiencing, and other judgmental factors supported by
qualitative documentation such as the inherent imprecision of the loan loss projection models. These factors could have a potentially
negative impact on credit quality and result in future additional losses. These factors, coupled
with an increase in other credits that are current in terms of principal and interest payments, but
which may deteriorate in quality if economic conditions change, indicate that additional undetected
losses exist in the loan portfolios. Based on these factors and recognizing the inherent
imprecision of any loan loss allocation models, management believes that the general valuation
reserve allowances at December 31, 2009 appropriately reflect probable inherent but undetected
losses in the portfolio. The decrease in the general valuation allowance from December 31, 2008
reflects a shift from perceived risks in the manufacturing sector associated with the automotive
industry from one year ago to uncertainty in the severity of losses related to residential mortgage
loans due to the continued economic conditions in the markets Citizens serves.
GOODWILL
Goodwill at December 31, 2009 was $330.7 million, a decrease of $266.5 million or 44.6% from
December 31, 2008. The decline was due to a non-cash and non-tax deductible $266.5 million
goodwill impairment charge recorded in the second quarter of 2009 related to the Regional Banking
line of business described in Note 6 to the Consolidated Financial Statements. Citizens will
continue to perform evaluations on an interim basis if events or circumstances indicate that
impairment may exist. There can be no assurance that such tests will not result in additional
material impairment charges due to further developments in the banking industry or Citizens
markets.
DEPOSITS
The table below provides a year-to-year comparison of average deposit balances over the last three
years. Average, rather than period-end, balances can be more meaningful in analyzing deposit
funding sources because of inherent fluctuations that occur on a monthly basis within most deposit
categories.
|
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|
|
|
|
Average Deposits |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Average |
|
(in thousands) |
|
Balance |
|
|
Rate |
|
|
Balance |
|
|
Rate |
|
|
Balance |
|
|
Rate |
|
Noninterest-bearing deposits |
|
$ |
1,226,079 |
|
|
|
|
% |
|
$ |
1,122,974 |
|
|
|
|
% |
|
$ |
1,139,695 |
|
|
|
|
% |
Interest-bearing demand deposits |
|
|
979,590 |
|
|
|
0.43 |
|
|
|
771,735 |
|
|
|
0.66 |
|
|
|
831,983 |
|
|
|
0.69 |
|
Savings deposits |
|
|
2,610,246 |
|
|
|
0.78 |
|
|
|
2,551,570 |
|
|
|
1.73 |
|
|
|
2,188,296 |
|
|
|
2.92 |
|
Time deposits |
|
|
4,097,896 |
|
|
|
3.30 |
|
|
|
4,268,931 |
|
|
|
4.02 |
|
|
|
4,008,919 |
|
|
|
4.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
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|
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|
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|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
8,913,811 |
|
|
|
1.79 |
% |
|
$ |
8,715,210 |
|
|
|
2.53 |
% |
|
$ |
8,168,893 |
|
|
|
3.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
The increase in noninterest-bearing demand and interest-bearing demand balances over 2008 was
primarily the result of customers holding higher balances in transaction accounts due to changes in
FDIC coverage thresholds and a shift in funding mix from customer time deposits. Average time
deposits declined primarily due to the aforementioned shift in funding mix. Savings deposits
increased primarily as a result of growth in the new commercial on-balance sheet sweep product.
The decrease in the average cost of the deposit portfolio resulted from the lower interest rate
environment, partially offset by competitive deposit pricing pressures and a shift in deposit mix
from lower cost noninterest-bearing demand and interest-bearing demand deposits to higher cost
savings and time deposits.
As of December 31, 2009, certificates of deposit of $100,000 or more accounted for approximately
20.6% of total deposits. The maturities of these deposits are summarized below.
60
Maturity of Time Certificates of Deposit of
$100,000 or more at December 31, 2009
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Three months or less |
|
$ |
293,700 |
|
After three but within six months |
|
|
188,828 |
|
After six but within twelve months |
|
|
225,518 |
|
After twelve months |
|
|
1,130,142 |
|
|
|
|
|
Total |
|
$ |
1,838,188 |
|
|
|
|
|
Citizens gathers deposits from the local markets of its banking subsidiaries and has used
brokered deposits from time to time when cost effective. Time deposits greater than $100,000
decreased by $595.5 million at December 31, 2009 over the prior year-end primarily as a result of a
planned reduction in brokered deposits and a shift in funding mix from customer time deposits to
core deposits. The Corporation will continue to evaluate the use of alternative funding sources
such as brokered deposits to best meet its funding objectives. Citizens continues to promote
relationship driven core deposit growth and stability through focused marketing efforts and
competitive pricing strategies.
BORROWED FUNDS
Short-term borrowings are comprised of Federal funds purchased, securities sold under agreements to
repurchase, other bank borrowings, and Treasury Tax and Loan borrowings. Short-term borrowings
totaled $51.1 million at December 31, 2009 compared with $74.4 million at December 31, 2008. The
decrease from December 31, 2008 was primarily the result of a decrease in short-term repurchase
agreements. See Note 8 to the Consolidated Financial Statements for additional information on
short-term borrowings.
Long-term debt is comprised of FHLB debt, subordinated notes, other promissory notes and other
borrowed funds. Long-term debt totaled $1.5 billion at December 31, 2009, compared with $2.2
billion at December 31, 2008. FHLB debt decreased $347.8 million or 20.9% to $1.3 billion at
December 31, 2009, primarily due to a run-off of FHLB debt. As of December 31, 2009, other
borrowed funds decreased $332.3 million or 63.0% compared with December 31, 2008. This decrease
was due primarily to Citizens Exchange Offers for long-term debt with a carrying value of $204.0
million and to a $128.6 million reduction in long-term securities repurchase agreements. The
extinguished long-term debt was comprised of $107.8 million principal amount of its 5.75%
Subordinated Notes ($104.2 million, net of early amortization of prior debt issuance costs) and
$101.3 million aggregate liquidation amount of the 7.50% trust preferred securities of Citizens
Funding Trust I ($99.8 million, net of early amortization of prior debt issuance costs). See Note
9 to the Consolidated Financial Statements for additional information.
CAPITAL RESOURCES
Citizens continues to maintain a strong capital position which supports current needs and provides
a sound foundation to support further expansion. Regulatory capital ratios are consistently at or
above the well-capitalized standards and all bank subsidiaries have sufficient capital to
maintain a well-capitalized designation. The Corporations capital ratios for the past three years
are presented below.
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|
|
Regulatory Minimum |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adequately |
|
|
Well- |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
Capitalized |
|
|
Capitalized |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Risk based: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital |
|
|
4.00 |
% |
|
|
6.00 |
% |
|
|
12.52 |
% |
|
|
12.21 |
% |
|
|
9.18 |
% |
Total capital |
|
|
8.00 |
|
|
|
10.00 |
|
|
|
13.93 |
|
|
|
14.49 |
|
|
|
11.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Leverage |
|
|
4.00 |
|
|
|
5.00 |
|
|
|
9.21 |
|
|
|
9.66 |
|
|
|
7.53 |
|
|
Shareholders equity at December 31, 2009 decreased $270.3 million or 16.9% from December 31,
2008 to $1.3 billion. The decrease was primarily the result of the net losses incurred during
2009, partially offset by $197.6
61
million of common equity generated in the Exchange Offers in the
third quarter of 2009. Book value per common share at December 31, 2009 and 2008 was $2.69 and
$10.60, respectively. The decrease in book value per common share from December 31, 2008 was due
to the increase in the number of outstanding shares of Citizens common stock as a result of the Exchange Offers and, to a lesser extent, the net loss incurred for
the year. See Note 14 to the Consolidated Financial Statements for additional information on the
Exchange Offers.
During 2009, the Holding Company did not purchase any shares of common stock pursuant to the
Corporations share repurchase program and is not likely to do so for the foreseeable future.
Information regarding the Corporations share repurchase program is set forth later in this report
under Item 5 Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Contractual Obligations
In the ordinary course of business, Citizens has entered into certain contractual arrangements that
require future cash payments and may impact liquidity. These obligations include deposits,
issuance of debt to fund operations, purchase obligations to acquire goods or services, and
property leases. The table below summarizes contractual obligations and future required minimum
payments as of December 31, 2009. Refer to Notes 5, 7, 8, and 9 to the Consolidated Financial
Statements for further discussion of these contractual obligations.
Contractual Obligations
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Payments Due by Period |
|
December 31, 2009 |
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
(in thousands) |
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
4-5 years |
|
|
5 years |
|
|
Deposits without stated maturities(1)(2) |
|
$ |
5,018,203 |
|
|
$ |
5,018,203 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Deposits with stated maturities(1)(2) |
|
|
3,890,363 |
|
|
|
1,941,417 |
|
|
|
1,254,705 |
|
|
|
688,920 |
|
|
|
5,321 |
|
Fed funds purchased and securities sold under
agreements to repurchase(1) |
|
|
43,780 |
|
|
|
43,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other short-term borrowings(1) |
|
|
7,283 |
|
|
|
7,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB borrowings(1)( 2) |
|
|
1,305,627 |
|
|
|
475,210 |
|
|
|
487,822 |
|
|
|
500 |
|
|
|
342,095 |
|
Other borrowed debt(1)(2) |
|
|
104,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,154 |
|
Subordinated debt(1)(2) |
|
|
91,717 |
|
|
|
|
|
|
|
|
|
|
|
17,266 |
|
|
|
74,451 |
|
Purchase obligations |
|
|
143,277 |
|
|
|
46,355 |
|
|
|
81,944 |
|
|
|
12,565 |
|
|
|
2,413 |
|
Operating leases and non-cancelable contracts |
|
|
26,914 |
|
|
|
5,868 |
|
|
|
8,882 |
|
|
|
5,291 |
|
|
|
6,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,631,318 |
|
|
$ |
7,538,116 |
|
|
$ |
1,833,353 |
|
|
$ |
724,542 |
|
|
$ |
535,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In the banking industry, interest-bearing obligations are principally utilized to fund
interest-bearing assets. As such, interest charges on related contractual obligations were
excluded from reported amounts as the potential cash outflows would have corresponding cash
inflows from interest-bearing assets. |
|
(2) |
|
This schedule excludes all carrying value adjustments, such as purchase
accounting fair value adjustments, hedge accounting fair value adjustments, and
unamortized premiums and discounts, that will not affect future cash payments associated
with the maturity of this debt. |
At December 31, 2009, the Corporations liability for uncertain tax positions, including
associated interest and penalties and net of related federal tax benefits, was $2.3 million. This
liability represents an estimate of income taxes and other state tax matters which may ultimately
not be sustained upon examination by the tax authorities. Since the ultimate amount and timing of
any future cash settlements cannot be predicted with reasonable certainty, this estimated liability
has been excluded from the contractual obligations table.
Citizens has obligations not included in the above table under its retirement plans as described in
Note 11 to the Consolidated Financial Statements. At December 31, 2009, the under funded status of
the Cash Balance Pension Plan for Employees, the Retirement Health Plan and the Supplemental
Pension Plans is recognized in the Corporations consolidated balance sheet as an accrued
liability. Under current ERISA funding rules there is no required contribution to the defined
benefit pension plan during calendar year 2010.
62
Off-Balance Sheet Arrangements
In the normal course of business, in order to meet the financing needs of customers and to manage
exposure to interest rate risk, Citizens enters into various transactions, which, in accordance
with U.S. generally accepted accounting principles, are not included in its consolidated balance
sheets. These transactions include commitments to extend credit, standby letters of credit,
commercial letters of credit; forward commitments to sell mortgage loans, and interest rate swaps.
These transactions involve, to varying degrees, elements of credit risk, market risk and liquidity risk in excess of the amount recognized in the consolidated balance
sheets, however, they do not represent unusual risks. The Corporation minimizes its exposure to
loss under these transactions by subjecting them to credit approval and monitoring procedures.
The following table presents the total notional amounts and expected maturity of off-balance sheet
financial instruments outstanding at December 31, 2009 and the notional amounts outstanding at
December 31, 2008.
Off Balance Sheet Financial Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Expiration Dates by Period |
|
|
|
|
|
|
December 31, |
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
December 31, |
|
(in thousands) |
|
2009 |
|
|
1 year |
|
|
1-3 years |
|
|
4-5 years |
|
|
5 years |
|
|
2008 |
|
Financial
instruments whose contract amounts represent credit risk: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan commitments to extend credit |
|
$ |
1,371,626 |
|
|
$ |
874,080 |
|
|
$ |
173,450 |
|
|
$ |
126,918 |
|
|
$ |
197,178 |
|
|
$ |
2,048,258 |
|
Standby letters of credit |
|
|
236,006 |
|
|
|
111,524 |
|
|
|
79,698 |
|
|
|
9,940 |
|
|
|
34,844 |
|
|
|
247,367 |
|
Commercial letters of credit |
|
|
23 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments subject to interest rate risk: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive fixed and pay fixed swaps |
|
|
845,000 |
|
|
|
135,000 |
|
|
|
710,000 |
|
|
|
|
|
|
|
|
|
|
|
1,005,000 |
|
Customer initiated swaps and corresponding offsets |
|
|
1,040,336 |
|
|
|
115,292 |
|
|
|
418,195 |
|
|
|
307,913 |
|
|
|
198,936 |
|
|
|
1,120,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,492,991 |
|
|
$ |
1,235,919 |
|
|
$ |
1,381,343 |
|
|
$ |
444,771 |
|
|
$ |
430,958 |
|
|
$ |
4,420,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit are legally binding agreements to lend cash to a customer as long
as there is no breach of any condition established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may require the payment of a fee.
Commitments to extend credit at December 31, 2009 decreased from December 31, 2008 primarily as a
result of the current economic climate and reduced customer demand.
Standby letters of credit are written conditional commitments issued by the Corporation to
guarantee the performance of a customer to a third party. In the event the customer does not
perform in accordance with the terms of the agreement with the third party, the Corporation would
be required to fund the commitment. The maximum potential amount of future payments the
Corporation could be required to make is represented by the contractual amount of the commitment.
If the commitment is funded, the Corporation would be entitled to seek recovery from the customer.
Standby letters of credit at December 31, 2009 decreased from December 31, 2008 primarily as a
result of the current economic climate and reduced customer demand.
Commercial letters of credit are written conditional commitments issued by the Corporation to
guarantee the performance of a customer to a third party. These guarantees are issued specifically
to facilitate commerce and typically result in the commitment being drawn on when the underlying
transaction is consummated between the customer and the third party.
The credit risk associated with commitments to extend credit and letters of credit is essentially
the same as that involved with direct lending. Therefore, these agreements are subject to loan
review and approval procedures and credit policies. Based upon managements credit evaluation of
the counter-party, collateral may be required as security for the agreement, including real estate,
accounts receivable, inventories, and investment securities. The maximum credit risk associated
with these instruments is equal to their contractual amounts, assuming that the counter-party
defaults and the collateral proves to be worthless. The total contractual amounts of commitments
to extend credit and letters of credit do not necessarily represent future cash requirements, since
many of these agreements may expire without being drawn upon. Citizens commitments to extend
credit and letters of credit are described in further detail in Note 16 to the Consolidated
Financial Statements.
Refer to Notes 1 and 16 to the Consolidated Financial Statements for further discussion of
derivative instruments.
63
The Corporation has two active wholly owned trusts formed for the purpose of issuing securities
which qualify as regulatory capital and are considered Variable Interest Entities (VIEs). The
Corporation is not the primary beneficiary, and consequently, the trusts are not consolidated in
the consolidated financial statements. Each of the two active trusts issued trust preferred securities to investors in 2006 and 2003, with respect
to which there remain $48.7 million and $25.8 million in aggregate liquidation amounts outstanding,
respectively. The trust preferred securities held by these entities qualify as Tier 1 capital and
are classified as long-term debt on the Consolidated Balance Sheets, with the associated interest
expense recorded in long-term debt on the Consolidated Statements of Operations. The expected
losses and residual returns of these entities are absorbed by the trust preferred stock holders,
and consequently the Corporation is not exposed to loss related to these VIEs. Refer to Note 9 to
the Consolidated Financial Statements for further discussion.
At December 31, 2009, the unpaid principal balance of mortgage loans serviced for others was $372.1
million. These loans are not recorded on the Consolidated Financial Statements. Capitalized
servicing rights relating to the serviced loans were $2.1 million at December 31, 2009.
Assets held in a fiduciary or agency capacity are not included in the Consolidated Financial
Statements because they are not assets of Citizens. The total assets managed or administered by
Citizens at December 31, 2009, in its fiduciary or agency capacity, were $2.1 billion.
LIQUIDITY RISK MANAGEMENT
Citizens monitors and manages its 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. Liquidity management involves projecting funding requirements and
maintaining sufficient capacity to meet those needs and accommodate fluctuations in asset and
liability levels due to changes in business operations or unanticipated events. Sources of
liquidity include deposits and other customer-based funding, and wholesale market funding.
Citizens manages liquidity at two levels. The first level is at the Holding Company, which owns
the banking subsidiaries. The second level is at the banking subsidiaries. The management of
liquidity at both levels is essential because the Holding Company and banking subsidiaries have
different funding needs and sources, and are subject to certain regulatory guidelines and
requirements. The Asset Liability Committee is responsible for establishing a liquidity policy,
approving operating and contingency procedures and monitoring liquidity on an ongoing basis. In
order to maintain adequate liquidity through a wide range of potential operating environments and
market conditions, Citizens conducts liquidity management and business activities in a manner
designed to preserve and enhance funding stability, flexibility and diversity of funding sources.
Key components of this operating strategy include a strong focus on customer-based funding,
maximizing secured borrowing capacity, maintaining relationships with wholesale market funding
providers, and maintaining the ability to liquidate certain assets if conditions warrant.
Credit ratings by the nationally recognized statistical rating agencies are an important component
of Citizens liquidity profile. Credit ratings relate to the Corporations ability to issue debt
securities and the cost to borrow money, and should not be viewed as an indication of future stock
performance or a recommendation to buy, sell, or hold securities. Among other factors, the credit
ratings are based on financial strength, credit quality and concentrations in the loan portfolio,
the level and volatility of earnings, capital adequacy, the quality of management, the liquidity of
the balance sheet, the availability of a significant base of core deposits, and Citizens ability
to access a broad array of wholesale funding sources. Adverse changes in these factors could
result in a negative change in credit ratings and impact not only the ability to raise funds in the
capital markets, but also the cost of these funds. Citizens credit rating was downgraded by
Moodys Investor Service, Standard and Poors, Dominion Bond Rating Service, and Fitch Ratings
throughout 2009. Ratings are subject to revision or withdrawal at any time and each rating should
be evaluated independently of any other rating. The current credit ratings for the Holding Company
and its subsidiary banks are displayed in the following table.
64
Credit Ratings
|
|
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|
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|
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|
|
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|
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|
Moodys |
|
|
|
|
|
|
Dominion |
|
|
|
Standard & |
|
|
Investor |
|
|
Fitch |
|
|
Bond Rating |
|
|
|
Poors |
|
|
Service |
|
|
Ratings |
|
|
Service |
|
Citizens
Republic Bancorp (Holding Company) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt |
|
|
B- |
|
|
|
B2 |
|
|
|
B- |
|
|
|
B (high) |
|
Short-Term Debt |
|
|
C |
|
|
|
Not Prime |
|
|
|
B |
|
|
|
R-4 |
|
Trust Preferred |
|
|
C |
|
|
|
Caa2 |
|
|
|
C |
|
|
|
B |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Citizens Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of Deposit |
|
|
|
|
|
|
Ba3 |
|
|
|
B |
|
|
|
BB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F&M Bank-Iowa |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of Deposit |
|
|
|
|
|
|
|
|
|
|
B |
|
|
|
BB |
|
The primary sources of liquidity for the Holding Company are dividends from and returns on
investments in its subsidiaries and existing cash resources. Banking regulations limit the amount
of dividends a financial institution may declare to a parent company in any calendar year. Each of
the banking subsidiaries is subject to dividend limits under the laws of the state in which it is
chartered and to the banking regulations mentioned above. Federal and national chartered financial
institutions are allowed to make dividends or other capital distributions in an amount not
exceeding the current calendar years net income, plus retained net income of the preceding two
years. Distributions in excess of this limit require prior regulatory approval. Throughout 2009,
the Holding Company chose not to receive dividends from subsidiaries and paid no dividends to its
common shareholders. In April 2008, the Holding Companys board voted to suspend the common stock
quarterly cash dividend as a means of bolstering the Holding Companys capital position and
strengthening its balance sheet. As of January 1, 2010 the subsidiary banks had the capacity to
pay dividends of $4.3 million to the Holding Company without prior regulatory approval. The
ability to borrow funds on both a short-term and long-term basis and to sell equity securities
provides an additional source of liquidity for the Holding Company.
As of December 31, 2009, the Holding Companys cash resources totaled $110.7 million. During 2009,
the Holding Company contributed an aggregate amount of $74.0 million to Citizens Bank to bolster
capital levels. The Holding Companys interest and preferred dividend payment obligations are
approximately $21 million annually, down from approximately $35 million annually at December 31,
2008 due to the completion of the Exchange Offers. Citizens monitors the relationship between cash
obligations and available cash resources, and believes that the Holding Company has sufficient
liquidity to meet its currently anticipated short and long-term needs.
In January 2010, Citizens suspended the dividend payments on its trust preferred securities and on
the TARP Preferred Stock issued to the Treasury. This action will preserve $4.9 million in cash on
a quarterly basis and reduces the need for Citizens to raise additional capital.
In January 2010, Citizens agreed to sell its F&M subsidiary to Great Western Bank. This
transaction is expected to close in the second quarter of 2010 and will increase the Holding
Companys cash resources by approximately $50 million, improving its liquidity and strengthening
its capital position.
The primary source of liquidity for the banking subsidiaries is customer deposits raised through
the branch offices. Additional sources are wholesale borrowing, unencumbered or unpledged
investment securities, and access to secured borrowing at the Federal Reserve Bank of Chicago, the
Federal Home Loan Bank of Indianapolis, and the Federal Home Loan Bank of Des Moines.
Citizens maintains a very strong liquidity position due to its on-balance sheet liquidity sources
and very stable funding base comprised of approximately 75% deposits, 13% long-term debt, 11%
equity, and 1% short-term liabilities. Citizens also has access to high levels of untapped
liquidity through collateral-based borrowing
65
capacity provided by portions of both the loan and investment securities portfolios. Additionally,
money market investments and securities available-for-sale could be sold for cash to provide
liquidity.
The Corporations long-term debt to equity ratio was 114.0% as of December 31, 2009 compared with
137.0% at December 31, 2008. Changes in deposit obligations and short-term and long-term debt
during 2009 are further discussed in the sections titled Deposits and Borrowed Funds. The
Corporation believes that it has sufficient liquidity to meet presently known short and long-term
cash-flow requirements arising from ongoing business transactions.
INTEREST RATE RISK
Interest rate risk refers to the risk of loss arising from changes in market interest rates.
The risk of loss can be assessed by examining the potential for adverse changes in fair values,
cash flows, and future earnings resulting from changes in market interest rates. Interest rate
risk on Citizens balance sheet consists of reprice, option, and basis risks. Reprice risk results
from differences in the maturity or repricing timing of asset and liability portfolios. Option
risk arises from embedded options present in many financial instruments such as loan prepayment
options, deposit early withdrawal options, and interest rate options. These options allow certain
of Citizens customers and counterparties to the investment and wholesale funding portfolios the
opportunity to benefit when market interest rates change, which typically results in higher costs
or lower revenues for the Corporation. Basis risk results when assets and liabilities reprice at
the same time but based on different market rates or indices, which can change by different
amounts, resulting in a narrowing of profit spread.
The asset/liability management process seeks to insulate net interest income from large
fluctuations attributable to changes in market interest rates and to maximize net interest income
within acceptable levels of risk through periods of changing interest rates. Accordingly, the
Corporations interest rate sensitivity is monitored on an ongoing basis by its Asset Liability
Committee, which oversees interest rate risk management and establishes risk measures, limits and
policy guidelines. A combination of complementary techniques is used to measure interest rate risk
exposure, the distribution of risk, the level of risk over time, and the exposure to changes in
certain interest rate relationships. These measures include static repricing gap analysis,
simulation of earnings, and estimates of economic value of equity.
Static repricing gap analysis provides a measurement of reprice risk on the Corporations balance
sheet as of a point in time. This measurement is accomplished through stratification of the
Corporations rate sensitive assets and liabilities into repricing periods. The sums of assets and
liabilities maturing or repricing in each of these periods are compared for mismatches within each
time segment. Core deposits lacking contractual maturities or repricing frequencies are placed
into repricing and maturity periods based upon historical experience. Repricing periods for assets
include the effects of expected prepayments on cash flows.
Rate sensitive assets repricing within one year exceeded rate sensitive liabilities repricing
within one year by $886.8 million or 7.4% of total assets as of December 31, 2009 compared with
$215.6 million or 1.6% of total assets at December 31, 2008. This reflects a more asset-sensitive
position than at December 31, 2008 primarily due to the renewal and extension of a large amount of
retail time deposits during 2009. These results incorporate the impact of off-balance sheet
derivatives and reflect interest rates consistent with December 31, 2009 levels. Repricing gap
analysis is limited in its ability to measure interest rate sensitivity, as embedded options can
change the repricing characteristics of assets, liabilities, and off-balance sheet derivatives in
different interest rate scenarios, thereby changing the repricing position from that outlined
above. Further, basis risk is not captured by repricing gap analysis.
Citizens utilizes a net interest income simulation model as the primary quantitative tool in
measuring the amount of interest rate risk associated with changing market rates. The model
measures the impact to net interest income relative to a base case scenario of hypothetical
fluctuations in interest rates over the next 12 months. These simulations incorporate assumptions
including prepayment speeds on various loan and investment assets, cash flows and maturities of
financial instruments, market conditions, balance sheet growth and mix, pricing, client
preferences, and Citizens financial capital plans. These assumptions are inherently uncertain and
subject to fluctuation and revision in a dynamic environment and as a result the model cannot
perfectly forecast net interest
66
income nor exactly predict the impact of higher or lower interest rates on net interest
income. Actual results will differ from simulated results due to the timing, magnitude, and
frequency of balance sheet component and interest rate changes, and differences in client behavior,
market conditions and management strategies, among other factors.
Net interest income simulations were performed as of December 31, 2009 to evaluate the impact of
market rate changes on net interest income over the subsequent 12 months assuming expected changes
in balance sheet composition over that time period. If market interest rates were to increase
immediately by 100 or 200 basis points (a parallel and immediate shift of the yield curve) net
interest income would be expected to increase by 0.5% and 1.0%, respectively, from what it would be
if rates were to remain at December 31, 2009 levels. Net interest income simulation for 100 and
200 basis point parallel declines in market rates were not performed at December 31, 2009 as the
results would not have been meaningful given the current levels of short term market interest
rates. These measurements represent less exposure to rising interest rates than at December 31,
2008, resulting from a reduction in fixed-rate assets and the aforementioned extension of retail
time deposit maturities. Net interest income is not only affected by the level and direction of
interest rates, but also by the shape of the yield curve, pricing spreads in relation to market
rates, balance sheet growth, the mix of different types of assets and liabilities, and the timing
of changes in these variables. Scenarios different from those outlined above, whether different by
timing, level, or a combination of factors, could produce different results.
From time to time, derivative contracts are used to help manage or hedge exposure to interest rate
risk and market value risk. Citizens enters into derivative financial instruments to manage
exposures that arise from business activities that result in the receipt or payment of future known
and uncertain cash amounts, the value of which are determined by interest rates. Citizens
derivative financial instruments are used to manage differences in the amount, timing, and duration
of its known or expected cash receipts and expected cash payments principally related to certain
variable-rate loan assets and fixed-rate borrowings. Citizens has agreements with its derivative
counterparties that contain a provision where if Citizens defaults on any of its indebtedness,
including a default where repayment of the indebtedness has not been accelerated by the
lender, then it could also be declared in default on its derivative obligations. Citizens also has
agreements with certain of its derivative counterparties that contain a provision where if it fails
to maintain its status as a well/adequately capitalized institution, then the counterparty could
terminate the derivative positions and Citizens would be required to settle its obligations under
the agreements. Citizens has agreements with certain of its derivative counterparties containing
provisions that require its debt to maintain an investment grade credit rating from each of the
major credit rating agencies. Further discussion of derivative instruments is included in Note 17
to the Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated by reference from Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations Interest Rate Risk.
67
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
Citizens Republic Bancorp and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(in thousands, except share amounts) |
|
2009 |
|
|
2008 |
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
163,137 |
|
|
$ |
171,695 |
|
Money market investments |
|
|
706,163 |
|
|
|
214,925 |
|
Investment Securities: |
|
|
|
|
|
|
|
|
Securities available for sale, at fair value |
|
|
2,225,065 |
|
|
|
2,248,772 |
|
Securities held to maturity, at amortized cost
(fair value of $139,665 and $137,846, respectively) |
|
|
137,094 |
|
|
|
138,575 |
|
|
|
|
|
|
|
|
Total investment securities |
|
|
2,362,159 |
|
|
|
2,387,347 |
|
FHLB and Federal Reserve stock |
|
|
156,278 |
|
|
|
148,764 |
|
Portfolio loans: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
1,976,105 |
|
|
|
2,602,334 |
|
Commercial real estate |
|
|
2,826,741 |
|
|
|
2,964,721 |
|
|
|
|
|
|
|
|
Total commercial |
|
|
4,802,846 |
|
|
|
5,567,055 |
|
Residential mortgage |
|
|
1,036,443 |
|
|
|
1,262,841 |
|
Direct consumer |
|
|
1,261,389 |
|
|
|
1,452,166 |
|
Indirect consumer |
|
|
805,181 |
|
|
|
820,536 |
|
|
|
|
|
|
|
|
Total portfolio loans |
|
|
7,905,859 |
|
|
|
9,102,598 |
|
Less: Allowance for loan losses |
|
|
(342,370 |
) |
|
|
(255,321 |
) |
|
|
|
|
|
|
|
Net portfolio loans |
|
|
7,563,489 |
|
|
|
8,847,277 |
|
Loans held for sale |
|
|
80,459 |
|
|
|
91,362 |
|
Premises and equipment |
|
|
117,095 |
|
|
|
124,217 |
|
Goodwill |
|
|
330,744 |
|
|
|
597,218 |
|
Other intangible assets |
|
|
14,378 |
|
|
|
21,414 |
|
Bank owned life insurance |
|
|
220,190 |
|
|
|
218,333 |
|
Other assets |
|
|
217,539 |
|
|
|
263,464 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
11,931,631 |
|
|
$ |
13,086,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
$ |
1,330,707 |
|
|
$ |
1,143,294 |
|
Interest-bearing demand deposits |
|
|
1,114,863 |
|
|
|
780,176 |
|
Savings deposits |
|
|
2,561,819 |
|
|
|
2,504,320 |
|
Time deposits |
|
|
3,901,951 |
|
|
|
4,624,616 |
|
|
|
|
|
|
|
|
Total deposits |
|
|
8,909,340 |
|
|
|
9,052,406 |
|
Federal funds purchased and securities sold
under agreements to repurchase |
|
|
43,780 |
|
|
|
64,072 |
|
Other short-term borrowings |
|
|
7,283 |
|
|
|
10,377 |
|
Other liabilities |
|
|
126,705 |
|
|
|
164,274 |
|
Long-term debt |
|
|
1,513,487 |
|
|
|
2,193,566 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
10,600,595 |
|
|
|
11,484,695 |
|
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
|
|
|
|
|
|
Preferred stock no par value: |
|
|
|
|
|
|
|
|
Authorized - 5,000,000 shares; Issued and outstanding -
300,000 at 12/31/09
and 12/31/08, redemption value of $300 million |
|
|
271,990 |
|
|
|
266,088 |
|
Common stock no par value |
|
|
|
|
|
|
|
|
Authorized - 1,050,000,000 shares at 12/31/09,
150,000,000 shares at 12/31/08; |
|
|
|
|
|
|
|
|
Issued and outstanding - 394,397,406 at 12/31/09;
125,996,938 at 12/31/08 |
|
|
1,429,771 |
|
|
|
1,214,469 |
|
Retained (deficit) earnings |
|
|
(363,632 |
) |
|
|
170,358 |
|
Accumulated other comprehensive loss |
|
|
(7,093 |
) |
|
|
(49,594 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
1,331,036 |
|
|
|
1,601,321 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
11,931,631 |
|
|
$ |
13,086,016 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
68
Consolidated Statements of Operations
Citizens Republic Bancorp and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Interest Income |
Interest and fees on loans |
|
$ |
456,347 |
|
|
$ |
586,073 |
|
|
$ |
684,047 |
|
Interest and dividends on investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
80,437 |
|
|
|
78,089 |
|
|
|
88,078 |
|
Tax-exempt |
|
|
26,340 |
|
|
|
29,096 |
|
|
|
29,268 |
|
Dividends on FHLB and Federal Reserve stock |
|
|
4,255 |
|
|
|
7,269 |
|
|
|
6,414 |
|
Money market investments |
|
|
1,300 |
|
|
|
384 |
|
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
568,679 |
|
|
|
700,911 |
|
|
|
807,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
159,798 |
|
|
|
220,883 |
|
|
|
257,194 |
|
Short-term borrowings |
|
|
227 |
|
|
|
8,191 |
|
|
|
34,700 |
|
Long-term debt |
|
|
91,286 |
|
|
|
122,905 |
|
|
|
133,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
251,311 |
|
|
|
351,979 |
|
|
|
425,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
|
317,368 |
|
|
|
348,932 |
|
|
|
382,179 |
|
Provision for loan losses |
|
|
325,955 |
|
|
|
282,054 |
|
|
|
45,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (loss) income after provision for loan losses |
|
|
(8,587 |
) |
|
|
66,878 |
|
|
|
337,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income |
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
43,927 |
|
|
|
47,470 |
|
|
|
48,051 |
|
Trust fees |
|
|
15,082 |
|
|
|
17,967 |
|
|
|
20,106 |
|
Mortgage and other loan income |
|
|
12,609 |
|
|
|
11,443 |
|
|
|
16,021 |
|
Brokerage and investment fees |
|
|
5,445 |
|
|
|
7,109 |
|
|
|
7,901 |
|
ATM network user fees |
|
|
6,607 |
|
|
|
6,319 |
|
|
|
6,283 |
|
Bankcard fees |
|
|
7,972 |
|
|
|
7,440 |
|
|
|
6,124 |
|
Losses on loans held for sale |
|
|
(20,086 |
) |
|
|
(9,373 |
) |
|
|
(508 |
) |
Net loss on debt extinguishment |
|
|
(15,929 |
) |
|
|
|
|
|
|
|
|
Other income |
|
|
11,794 |
|
|
|
13,367 |
|
|
|
18,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
67,421 |
|
|
|
101,742 |
|
|
|
122,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
139,193 |
|
|
|
158,193 |
|
|
|
175,895 |
|
Occupancy |
|
|
27,820 |
|
|
|
28,592 |
|
|
|
30,971 |
|
Professional services |
|
|
11,996 |
|
|
|
15,184 |
|
|
|
18,031 |
|
Equipment |
|
|
11,989 |
|
|
|
12,966 |
|
|
|
14,650 |
|
Data processing services |
|
|
18,017 |
|
|
|
16,470 |
|
|
|
16,234 |
|
Advertising and public relations |
|
|
7,146 |
|
|
|
5,897 |
|
|
|
7,282 |
|
Postage and delivery |
|
|
5,844 |
|
|
|
7,342 |
|
|
|
7,800 |
|
Other loan expenses |
|
|
24,913 |
|
|
|
13,381 |
|
|
|
5,518 |
|
Other real estate (ORE) expenses and losses |
|
|
27,852 |
|
|
|
11,008 |
|
|
|
325 |
|
Intangible asset amortization |
|
|
7,036 |
|
|
|
9,132 |
|
|
|
11,534 |
|
Goodwill impairment |
|
|
266,474 |
|
|
|
178,089 |
|
|
|
|
|
Restructuring and merger related expenses |
|
|
|
|
|
|
|
|
|
|
8,247 |
|
Other expense |
|
|
54,741 |
|
|
|
34,448 |
|
|
|
30,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
603,021 |
|
|
|
490,702 |
|
|
|
327,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income Before Income Taxes |
|
|
(544,187 |
) |
|
|
(322,082 |
) |
|
|
132,147 |
|
Income tax (benefit) provision |
|
|
(29,974 |
) |
|
|
70,970 |
|
|
|
31,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income |
|
|
(514,213 |
) |
|
|
(393,052 |
) |
|
|
100,842 |
|
Deemed dividend on convertible preferred stock |
|
|
|
|
|
|
(11,737 |
) |
|
|
|
|
Dividend on redeemable preferred stock |
|
|
(19,777 |
) |
|
|
(227 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income Attributable to Common Shareholders |
|
$ |
(533,990 |
) |
|
$ |
(405,016 |
) |
|
$ |
100,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(2.75 |
) |
|
$ |
(4.30 |
) |
|
$ |
1.33 |
|
Diluted |
|
|
(2.75 |
) |
|
|
(4.30 |
) |
|
|
1.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Common Shares Outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
193,832,747 |
|
|
|
94,155,551 |
|
|
|
75,339,430 |
|
Diluted |
|
|
193,853,037 |
|
|
|
94,169,844 |
|
|
|
75,522,807 |
|
See notes to consolidated financial statements.
69
Consolidated Statements of Changes in Shareholders Equity
Citizens Republic Bancorp and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Stock |
|
|
Common Stock |
|
|
Retained |
|
|
Comprehensive |
|
|
|
|
(in thousands, except per share amounts) |
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Total |
|
|
Balance at January 1, 2007 |
|
|
|
|
|
|
75,676 |
|
|
$ |
980,772 |
|
|
$ |
584,289 |
|
|
$ |
(7,375 |
) |
|
$ |
1,557,686 |
|
Comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,842 |
|
|
|
|
|
|
|
100,842 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on securities available-for-sale,
net of tax effect of $5,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,991 |
|
|
|
|
|
Less: Reclassification adjustment for net losses included
in net income, net of tax effect of $9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
|
|
Net change in unrealized loss on qualifying cash flow
hedges, net of tax effect of ($451) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(838 |
) |
|
|
|
|
Net change in unrecognized pension and post retirement costs,
net of tax effect of $1,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,318 |
|
Proceeds from stock options exercised and restricted stock activity |
|
|
|
|
|
|
709 |
|
|
|
4,833 |
|
|
|
|
|
|
|
|
|
|
|
4,833 |
|
Recognition of stock-based compensation |
|
|
|
|
|
|
|
|
|
|
3,355 |
|
|
|
|
|
|
|
|
|
|
|
3,355 |
|
Cash dividends declared on common shares $1.160 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87,798 |
) |
|
|
|
|
|
|
(87,798 |
) |
Shares acquired for retirement and purchased for taxes |
|
|
|
|
|
|
(663 |
) |
|
|
(13,514 |
) |
|
|
|
|
|
|
|
|
|
|
(13,514 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
|
|
|
|
75,722 |
|
|
$ |
975,446 |
|
|
$ |
597,333 |
|
|
$ |
5,101 |
|
|
$ |
1,577,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(393,052 |
) |
|
|
|
|
|
|
(393,052 |
) |
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,725 |
) |
|
|
|
|
Net change in unrealized gain on qualifying cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,578 |
|
|
|
|
|
Net change in unrecognized pension and post retirement costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,548 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54,695 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(447,747 |
) |
Issuance of preferred stock (2,408 shares), net of costs of $6,221 |
|
|
114,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,161 |
|
Deemed dividend on preferred stock |
|
|
11,737 |
|
|
|
|
|
|
|
|
|
|
|
(11,737 |
) |
|
|
|
|
|
|
|
|
Conversion of preferred stock to common stock |
|
|
(125,898 |
) |
|
|
30,096 |
|
|
|
125,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of costs of $4,774 |
|
|
|
|
|
|
19,904 |
|
|
|
74,844 |
|
|
|
|
|
|
|
|
|
|
|
74,844 |
|
Issuance of redeemable preferred stock and warrant (300,000 shares) |
|
|
265,861 |
|
|
|
|
|
|
|
34,139 |
|
|
|
|
|
|
|
|
|
|
|
300,000 |
|
Dividend on redeemable preferred stock |
|
|
227 |
|
|
|
|
|
|
|
|
|
|
|
(227 |
) |
|
|
|
|
|
|
|
|
Proceeds from stock options exercised and restricted stock activity |
|
|
|
|
|
|
307 |
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
66 |
|
Recognition of stock-based compensation |
|
|
|
|
|
|
|
|
|
|
4,520 |
|
|
|
|
|
|
|
|
|
|
|
4,520 |
|
Cash dividends declared on common shares $0.290 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,959 |
) |
|
|
|
|
|
|
(21,959 |
) |
Shares purchased for taxes |
|
|
|
|
|
|
(32 |
) |
|
|
(444 |
) |
|
|
|
|
|
|
|
|
|
|
(444 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008 |
|
$ |
266,088 |
|
|
|
125,997 |
|
|
$ |
1,214,469 |
|
|
$ |
170,358 |
|
|
$ |
(49,594 |
) |
|
$ |
1,601,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(514,213 |
) |
|
|
|
|
|
|
(514,213 |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on securities available-for-sale,
net of tax effect of ($24,572) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,626 |
|
|
|
|
|
Net change in unrealized loss on qualifying cash flow hedges,
net of tax effect $3,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,459 |
) |
|
|
|
|
Net change in unrecognized pension and post retirement costs, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of tex effect of ($1,795) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(471,712 |
) |
Exchange of subordinated debt and trust preferred stock
for common stock, net of costs of $6,368 |
|
|
|
|
|
|
268,216 |
|
|
|
213,569 |
|
|
|
|
|
|
|
|
|
|
|
213,569 |
|
Cash dividend on preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,875 |
) |
|
|
|
|
|
|
(13,875 |
) |
Accretion of preferred stock discount |
|
|
5,902 |
|
|
|
|
|
|
|
|
|
|
|
(5,902 |
) |
|
|
|
|
|
|
|
|
Proceeds from restricted stock activity |
|
|
|
|
|
|
235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of stock-based compensation |
|
|
|
|
|
|
|
|
|
|
1,803 |
|
|
|
|
|
|
|
|
|
|
|
1,803 |
|
Shares purchased for taxes |
|
|
|
|
|
|
(51 |
) |
|
|
(70 |
) |
|
|
|
|
|
|
|
|
|
|
(70 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2009 |
|
$ |
271,990 |
|
|
|
394,397 |
|
|
$ |
1,429,771 |
|
|
$ |
(363,632 |
) |
|
$ |
(7,093 |
) |
|
$ |
1,331,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
70
Consolidated Statements of Cash Flows
Citizens Republic Bancorp and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(514,213 |
) |
|
$ |
(393,052 |
) |
|
$ |
100,842 |
|
Adjustments to reconcile net (loss) income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
325,955 |
|
|
|
282,054 |
|
|
|
45,177 |
|
Goodwill impairment |
|
|
266,474 |
|
|
|
178,089 |
|
|
|
|
|
Net increase in deferred tax asset valuation allowance |
|
|
79,788 |
|
|
|
136,568 |
|
|
|
|
|
Net (decrease) increase in current and deferred income taxes |
|
|
(95,138 |
) |
|
|
(55,697 |
) |
|
|
21,782 |
|
Depreciation and software amortization |
|
|
12,472 |
|
|
|
11,646 |
|
|
|
13,108 |
|
Amortization of intangibles |
|
|
7,036 |
|
|
|
9,132 |
|
|
|
11,534 |
|
Amortization
and fair value adjustments of purchase accounting mark to market, net |
|
|
(10,270 |
) |
|
|
(15,588 |
) |
|
|
(24,847 |
) |
Fair value adjustment on loans held for sale and other real estate |
|
|
26,307 |
|
|
|
15,341 |
|
|
|
|
|
Discount
accretion and amortization of issuance costs on long term debt |
|
|
1,062 |
|
|
|
1,176 |
|
|
|
978 |
|
Net amortization (accretion) on investment securities |
|
|
803 |
|
|
|
(4,509 |
) |
|
|
(4,517 |
) |
Net loss on debt extinguishment |
|
|
15,929 |
|
|
|
|
|
|
|
|
|
Loans originated for sale |
|
|
(300,677 |
) |
|
|
(280,475 |
) |
|
|
(504,672 |
) |
Proceeds from loans held for sale |
|
|
311,185 |
|
|
|
328,500 |
|
|
|
590,283 |
|
Net gains from loan sales |
|
|
(7,280 |
) |
|
|
(6,473 |
) |
|
|
(9,036 |
) |
Net loss (gain) on other real estate |
|
|
2,653 |
|
|
|
2,068 |
|
|
|
(866 |
) |
Recognition of stock-based compensation expense |
|
|
1,803 |
|
|
|
4,520 |
|
|
|
3,355 |
|
Restructure and merger related |
|
|
|
|
|
|
(3,260 |
) |
|
|
(34,435 |
) |
Other |
|
|
(7,884 |
) |
|
|
(14,961 |
) |
|
|
3,537 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
116,005 |
|
|
|
195,079 |
|
|
|
212,223 |
|
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in money market investments |
|
|
(491,238 |
) |
|
|
(214,753 |
) |
|
|
31 |
|
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales |
|
|
1,945 |
|
|
|
3 |
|
|
|
364,421 |
|
Proceeds from maturities and payments |
|
|
656,564 |
|
|
|
453,033 |
|
|
|
521,453 |
|
Purchases |
|
|
(572,948 |
) |
|
|
(610,964 |
) |
|
|
(174,633 |
) |
Securities held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities and payments |
|
|
1,508 |
|
|
|
2,505 |
|
|
|
|
|
Purchases |
|
|
|
|
|
|
(12,777 |
) |
|
|
(19,387 |
) |
Sale of branches, net of cash received |
|
|
|
|
|
|
|
|
|
|
(163,592 |
) |
Net decrease (increase) in loans and leases |
|
|
900,129 |
|
|
|
99,357 |
|
|
|
(339,498 |
) |
Proceeds from sales of other real estate |
|
|
43,347 |
|
|
|
31,476 |
|
|
|
13,385 |
|
Net increase in properties and equipment |
|
|
(6,878 |
) |
|
|
(6,771 |
) |
|
|
(7,043 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities |
|
|
532,429 |
|
|
|
(258,891 |
) |
|
|
195,137 |
|
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in demand and savings deposits |
|
|
579,599 |
|
|
|
297,122 |
|
|
|
(95,886 |
) |
Net (decrease) increase in time deposits |
|
|
(724,070 |
) |
|
|
451,391 |
|
|
|
(97,431 |
) |
Net decrease in short-term borrowings |
|
|
(23,385 |
) |
|
|
(466,613 |
) |
|
|
(396,420 |
) |
Proceeds from issuance of long-term debt |
|
|
|
|
|
|
1,550,000 |
|
|
|
1,591,750 |
|
Principal reductions in long-term debt |
|
|
(475,191 |
) |
|
|
(2,304,165 |
) |
|
|
(1,295,537 |
) |
Net proceeds from issuance of preferred convertible stock |
|
|
|
|
|
|
114,161 |
|
|
|
|
|
Proceeds from issuance of preferred redeemable stock and warrant |
|
|
|
|
|
|
300,000 |
|
|
|
|
|
Net proceeds from issuance of common stock |
|
|
|
|
|
|
74,844 |
|
|
|
|
|
Cash dividends paid on common stock |
|
|
|
|
|
|
(21,959 |
) |
|
|
(87,798 |
) |
Cash dividends paid on preferred stock |
|
|
(13,875 |
) |
|
|
|
|
|
|
|
|
Proceeds from stock options exercised and restricted stock activity |
|
|
|
|
|
|
66 |
|
|
|
4,833 |
|
Shares acquired for retirement and purchased for taxes |
|
|
(70 |
) |
|
|
(444 |
) |
|
|
(13,514 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
(656,992 |
) |
|
|
(5,597 |
) |
|
|
(390,003 |
) |
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and due from banks |
|
|
(8,558 |
) |
|
|
(69,409 |
) |
|
|
17,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at beginning of period |
|
|
171,695 |
|
|
|
241,104 |
|
|
|
223,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at end of period |
|
$ |
163,137 |
|
|
$ |
171,695 |
|
|
$ |
241,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
261,523 |
|
|
$ |
359,685 |
|
|
$ |
430,064 |
|
Exchange of long-term debt for common stock |
|
|
209,067 |
|
|
|
|
|
|
|
|
|
Exchange of subordinated debt and preferred stock for common stock |
|
|
(219,937 |
) |
|
|
|
|
|
|
|
|
Income taxes (refund) paid, net |
|
|
(14,624 |
) |
|
|
(9,902 |
) |
|
|
9,523 |
|
Loans transferred to other real estate owned |
|
|
53,320 |
|
|
|
46,826 |
|
|
|
37,868 |
|
Loans transferred to held-for-sale |
|
|
35,221 |
|
|
|
80,044 |
|
|
|
|
|
Held for sale loans transferred to other real estate |
|
|
13,167 |
|
|
|
12,453 |
|
|
|
|
|
Deemed dividend on convertible preferred stock |
|
|
|
|
|
|
11,737 |
|
|
|
|
|
Dividend on redeemable preferred stock |
|
|
5,902 |
|
|
|
227 |
|
|
|
|
|
See notes to consolidated financial statements.
71
Citizens Republic Bancorp, Inc.
Notes To Consolidated Financial Statements
December 31, 2009, 2008, and 2007
Unless the context indicates otherwise, all references in this Form 10-K to Citizens or the
Corporation, refer to Citizens Republic Bancorp, Inc. and its subsidiaries. References to the
Holding Company refer to Citizens Republic Bancorp, Inc. alone. Citizens was incorporated in
the State of Michigan in 1980, is a diversified banking and financial services company that is
registered as a bank holding company under the Bank Holding Company Act of 1956, as amended.
Citizens provides a full range of banking and financial services to individuals and businesses
through its subsidiaries Citizens Bank and F&M Bank-Iowa (F&M). These services include deposit
products, loan products, and other consumer-oriented financial services such as safe deposit and
night depository facilities, and Automated Teller Machines (ATMs). Among the services designed
specifically to meet the needs of businesses are various types of specialized financing, treasury
management services, and transfer/collection facilities. Citizens also provides wealth management
services through Citizens Bank Wealth Management, N.A., and through the affiliate trust department
of F&M. The Corporation is not dependent upon any single or limited number of customers, the loss
of which would have a material adverse effect on the Corporation. No material portion of the
business of the Corporation is seasonal.
Note 1. Summary of Significant Accounting Policies
The accounting and reporting policies for Citizens conform to U.S. generally accepted
accounting principles (GAAP). The following describes Citizens policies:
Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of the Corporation and its
wholly owned subsidiaries. All material intercompany transactions have been eliminated in
consolidation.
In preparing the consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results could differ significantly
from those estimates. Estimates that are particularly susceptible to significant change include
the determination of the allowance for loan losses, loans held for sale, other real estate owned,
goodwill and core deposit intangible assets, fair value measurements, pension and postretirement
benefits, derivative instruments and income taxes.
In the third quarter of 2009, Citizens adopted Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) Topic 105 FASB Accounting Standards
CodificationTM. ASC Topic 105 establishes the ASC as the single source of
authoritative GAAP recognized by the FASB, superseding existing FASB, American Institute of
Certified Public Accounts (AICPA), Emerging Issues Task Force (EITF) and related literature for
all public and non-public non-governmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (SEC) under authority of federal securities laws are also
sources of GAAP for SEC registrants. All other accounting literature is considered
non-authoritative. The switch to the ASC affects the way companies refer to GAAP in financial
statements and accounting policies. Citing particular content in the ASC involves specifying the
unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.
The Codification is effective for financial statements issued for interim and annual periods ending
after September 15, 2009. Adoption did not have an impact on Citizens financial condition,
results of operations or liquidity.
The Corporation also determines whether it should consolidate other entities or account for them on
the equity method of accounting depending on whether it has a controlling financial interest in an
entity of less than 100% of the voting interest of that entity to determine if it is a Variable
Interest Entity (VIE). A VIE is a corporation, partnership, trust or any other legal structure
used for business purposes that either (a) does not have equity investors with voting rights or (b)
has equity investors that do not provide sufficient financial resources for the entity to support
its activities. An entity that holds a variable interest in a VIE is required to consolidate the
VIE if the entity is subject to a majority of the risk of loss from the VIEs activities, is
entitled to receive a majority of the entitys residual returns or both. VIE treatment is
considered for entities in which the total equity investment at
72
risk is sufficient to enable the entity to finance itself independently and provides the equity
holders with the obligation to absorb losses, the right to receive residual returns and the right
to make financial and operating decisions.
The Corporation has two active wholly owned trusts formed for the purpose of issuing securities
which qualify as regulatory capital and are considered VIEs. The Corporation is not the primary
beneficiary, and consequently, the trusts are not consolidated in the consolidated financial
statements. Each of the two active trusts has issued separate offerings of trust preferred
securities to investors in 2006 and 2003, with respect to which there remain $48.7 million
and $25.8 million in aggregate liquidation amount outstanding, respectively. The gross
proceeds from the issuances were used to purchase junior subordinated deferrable interest
debentures issued by Citizens, which is the sole asset of each trust. The trust preferred
securities held by these entities qualify as Tier 1 capital and are classified as long-term debt
on the Consolidated Balance Sheets, with the associated interest expense recorded in long-term
debt on the Consolidated Statements of Operations. The expected losses and residual returns of
these entities are absorbed by the trust preferred stock holders, and consequently the Corporation
is not exposed to loss related to these VIEs.
Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to
Repurchase
Securities purchased under agreements to resell and securities sold under agreements to repurchase
are generally accounted for as collateralized financing transactions and are recorded at the
amounts at which the securities were acquired or sold plus accrued interest. Generally, U.S.
government and Federal agency securities are pledged as collateral under these financing
arrangements and cannot be sold or repledged by the secured party. The fair value of collateral
either received from or provided to a third party is continually monitored and additional
collateral is obtained or requested to be returned to Citizens as deemed appropriate.
Investment Securities
At the time of purchase, securities are classified as held to maturity or available for sale.
Investment securities classified as held to maturity, which management has the positive intent and
ability to hold to maturity, are reported at amortized cost, and adjusted for amortization of
premiums and accretion of discounts, using the effective yield method. The amortized cost of debt
securities classified as held to maturity or available for sale is adjusted for amortization of
premiums and accretion of discounts, or in the case of mortgage-related securities, over the
estimated life of the security. Such amortization and accretion is included in interest income
from the related security. Available for sale securities are reported at fair value with
unrealized gains and losses, net of related deferred income taxes, included in shareholders equity
as a separate component of other comprehensive income. The cost of securities sold is based on the
specific identification method. An investment is considered impaired if its fair value is less
than its amortized cost. Impairment is considered temporary if there is no intent or requirement
to sell the impaired security. Any security for which there has been an other-than-temporary
impairment of value is written down to its estimated fair value through a charge to earnings for
the amount representing the credit loss on the security and a charge recognized in other
comprehensive income related to all other factors. Realized securities gains or losses and
declines in value judged to be other-than-temporary representing credit losses are included in
investment securities gains (losses), net, in the consolidated statements of income.
In April 2009, Citizens adopted new guidance for determining whether an impairment is other than
temporary to debt securities, which replaced existing requirements that Citizens management assert
it has both the intent and ability to hold an impaired security until recovery with a requirement
that management assert: (a) it does not have the intent to sell the security; and (b) it is more
likely than not it will not have to sell the security before recovery of its cost basis. Declines
in fair value of held to maturity and available for sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses to the extent the
impairment is related to credit losses. The amount of impairment related to other factors is
recognized in other comprehensive income. The new guidance was effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for periods ending after March
15, 2009. Citizens adopted this guidance in the second quarter of 2009, and it did not have a
material impact on Citizens financial condition, results of operations or liquidity.
Loans
Loans are reported at the principal amount outstanding, net of unearned income. Interest income is
recognized on an accrual basis. Loan origination fees, certain direct and indirect costs,
unamortized premiums and unearned discounts are deferred and amortized into interest income as an
adjustment to the yield over the term of the loan.
73
Loan commitment fees are generally deferred and amortized into fee income on a straight-line basis
over the commitment period. Other credit-related fees, including letter and line of credit fees,
are amortized into fee income on a straight-line basis over their contractual life.
Loans are placed on nonaccrual status when the collection of principal or interest is considered
doubtful or payment of principal or interest is past due 90 days or more. When loans are placed on
nonaccrual status, all interest previously accrued but unpaid is reversed against current year
interest income. Loans are normally restored to accrual status when interest and principal
payments are current and it is believed that the financial condition of the borrower has improved
to the extent that future principal and interest payments will be met on a timely basis.
Nonperforming commercial and industrial and commercial real estate loans are generally charged off
to the extent principal and interest due exceed the net realizable value of the collateral, with
the charge-off occurring when the loss is reasonably quantifiable but not later than when the loan
becomes 180 days past due. Nonperforming residential mortgage loans are generally charged off at
foreclosure to the extent principal exceeds the current appraised value less estimated costs to
sell. Nonperforming direct and indirect consumer loans (open and closed end) are generally charged
off before the loan becomes 120 days past due.
Allowance for Loan Losses
The allowance for loan losses is a reserve established through a provision for possible loan losses
charged to expense, which represents managements best estimate of probable losses that will be
incurred within the existing portfolio of loans. The allowance, in the judgment of management, is
necessary to reserve for estimated loan losses inherent in the loan portfolio. The level of the
allowance reflects managements continuing evaluation of industry concentrations, specific credit
risks, loan loss experience, current loan portfolio quality, present economic, political and
regulatory conditions and unidentified losses inherent in the current loan portfolio, as well as
trends in the foregoing. Portions of the allowance may be allocated for specific credits; however,
the entire allowance is available for any credit that, in managements judgment, should be charged
off. While management utilizes its best judgment and information available, the ultimate adequacy
of the allowance is dependent upon a variety of factors beyond the Corporations control, including
the performance of the Corporations loan portfolio, the economy, changes in interest rates and the
view of the regulatory authorities toward loan classifications.
The Corporations allowance for loan losses consists of three elements: (i) specific allocated
allowances determined based on probable losses on specific commercial loans; (ii) risk allocated
allowance which is comprised of several loan pool valuation allowances based on quantitative
Citizens loan loss experience for similar loans with similar risk characteristics, with additional
qualitative risks determined by the judgment of management; and (iii) general valuation allowances
determined based on existing regional and local economic factors, including deterioration in
commercial and residential real estate values, a macroeconomic adjustment factor used to calibrate
for the current economic cycle the bank is experiencing, and other judgmental factors supported by
qualitative documentation such as the inherent imprecision of the loan loss projection models.
Based on internal credit rating, commercial and industrial and commercial real estate loans
exceeding certain fixed dollar amounts are evaluated for impairment on a loan-by-loan basis whereby
an allowance is established as a component of the allowance for loan losses when it is probable all
amounts due will not be collected pursuant to the contractual terms of the loan and the recorded
investment in the loan exceeds its fair value. In most instances the fair value is measured based
on the fair value of the collateral. Fair value may also be measured using the present value of
expected future cash flows discounted at the loans effective interest rate.
Loans Held for Sale
Loans that the Corporation has the intent to sell are classified as held for sale and are carried
at the lower of cost or fair value, net of estimated costs to sell. The fair value of commercial
real estate loans held for sale is measured based on the fair value of the underlying collateral
adjusted for managements best estimate due to current market conditions. The fair value of
residential mortgage loans originated for sale in the secondary market is based on purchase
commitments or quoted prices for the same or similar loans. The fair value of nonperforming
residential mortgage loans is based on the fair value of the underlying collateral adjusted for
managements best estimate due to current market conditions. Gains and losses on the sales of
loans are
74
determined using the specific identification method. Subsequent valuation adjustments to reflect
current fair value, as well as gains and losses on disposal of these loans are charged to
noninterest income as incurred.
On December 10, 2007, Citizens entered into a contract with PHH Mortgage Corporation (PHH). In
March 2008, PHH began performing mortgage loan processing, servicing, secondary market functions
and other mortgage-related loan origination services. Citizens sells substantially all of its
mortgage originations to PHH at a contractual price, generally within 10 days after closing. Prior
to the PHH alliance, Citizens sold substantially all fixed-rate single-family mortgage loans
originated, including adjustable-rate loans that convert to fixed-rate loans within 60 days after
closing.
Premises and Equipment
Premises and equipment, including leasehold improvements, are carried at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed principally on a
straight-line basis and are charged to expense over the lesser of the estimated useful life of the
assets or lease term. Useful lives range from three to seven years for furniture, fixtures, and
equipment and seven to forty years for buildings and improvements. Maintenance and repairs are
charged to expense as incurred. Gains and losses on dispositions are charged to income as
incurred.
Long-lived depreciable assets are evaluated periodically for impairment when events or changes in
circumstances indicate the carrying amount may not be recoverable. Impairment exists when the
expected undiscounted future cash flows of a long-lived asset are less than its carrying value. In
that event, Citizens recognizes a loss for the difference between the carrying amount and the
estimated fair value of the asset based on a quoted market price, if applicable, or a discounted
cash flow analysis.
Other Real Estate Owned
Other real estate owned is comprised of commercial and residential real estate properties acquired
through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure. These properties
are carried at the lower of cost or fair value at the time of acquisition, net of estimated costs
to sell, based upon current appraised value adjusted for managements best estimate due to current
market conditions. Losses arising from the initial acquisition of such properties are charged
against the allowance for loan losses at the time of transfer. Subsequent valuation adjustments to
reflect the lower of cost or fair value, as well as gains and losses on disposal of these
properties are charged to noninterest expense as incurred.
Bank Owned Life Insurance
Bank Owned Life Insurance is recorded as an asset at the amount that could be realized under the
insurance contracts as of the date of the consolidated balance sheets. The change in cash
surrender value during the period is an adjustment of premiums paid in determining the expense or
income to be recognized under the contracts for the period. This change is recorded in noninterest
income as cash surrender value of life insurance revenue.
Goodwill and Core Deposit Intangible Assets
Goodwill represents the excess of the cost of an acquisition over the fair value of net
identifiable tangible and intangible assets acquired. Other intangible assets represent purchased
assets that also lack physical substance but can be distinguished from goodwill because of
contractual or other legal rights or because the asset is capable of being sold or exchanged either
on its own or in combination with a related contract, asset, or liability. Goodwill is tested at
least annually for impairment and Citizens performs its annual impairment test as of October 1 each
year. Evaluations are also performed on a more frequent basis if events or circumstances indicate
that it is more likely than not that the fair values of the reporting units are below their
respective carrying amounts. Such events could include a significant adverse change in legal
factors or in the business climate, an adverse action by a regulator, an unanticipated change in
the competitive environment, an unanticipated loss of key employees, a decision to change the
operations or dispose of a reporting unit, cash or operating losses, significant revision to
forecasts, or a long-term negative outlook for the industry.
Impairment of goodwill is evaluated by reporting unit, which is the equivalent to Citizens lines
of business. For the Step 1 analysis, the fair value of the reporting units is estimated using
discounted cash flow models derived from internal earnings forecasts. The primary assumptions used
by Citizens include ten-year earnings forecasts,
75
terminal values based on estimated future growth rates, and discount rates based on capital asset
pricing models. A Step 1 analysis is prepared for each reporting unit, including those without
goodwill, in order to analyze the implied control premium, which measures the difference between
the combined fair value of Citizens reporting units calculated in Step 1 and Citizens total
market value as a percentage of total market value. If the carrying amount of a reporting unit
exceeds its estimated fair value, the second step (Step 2) of the goodwill impairment test is
required for those reporting units that have goodwill to measure the amount of impairment, if any.
In Step 2 of the test, Citizens estimates the fair value of a reporting units assets and
liabilities in the same manner as if a purchase of the reporting unit was taking place using exit
pricing, which includes estimating the fair value of other implied intangibles. Any excess of this
hypothetical purchase price over the fair value of the reporting units net assets (excluding
goodwill) represents the implied fair value of goodwill. If the implied fair value of goodwill
calculated in Step 2 is less than the carrying amount of goodwill, an impairment loss is charged to
noninterest expense to reduce the carrying amount to the implied fair value. The writedown cannot
exceed the carrying amount and goodwill cannot be adjusted upward for any subsequent reversal of
previously recognized goodwill writedowns.
Core deposit intangible assets represent the present value of the cost savings obtained from
funding associated with the purchase of core deposits through an acquisition. Core deposit
intangible assets are valued using a discounted cost savings approach. All of Citizens core
deposit intangible assets have finite lives, are amortized on an accelerated basis corresponding
with the anticipated lives of the underlying deposits over varying periods not exceeding 10 years,
and are subject to impairment testing.
Pension and Postretirement Benefits
Citizens has recognized the funded status (i.e. the difference between the fair value of plan
assets and the projected benefit obligations) of its pension plan in the consolidated balance
sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The
adjustment to accumulated other comprehensive income represents the net unrecognized actuarial
losses and unrecognized prior service costs that will be subsequently recognized as net periodic
pension cost pursuant to Citizens historical accounting policy for amortizing such amounts.
Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net
periodic pension cost in the same periods will be recognized as a component of other comprehensive
income. Those amounts will be subsequently recognized as a component of net periodic pension cost.
As of December 31, 2009, Citizens adopted new guidance that requires fair value disclosures for
each major pension asset category on the basis of the net asset value per share of the investment
(or its equivalent). The adoption did not have an impact on Citizens financial condition,
results of operations, or liquidity. Refer to Note 11 for additional disclosures.
Fair Value Measurements
Fair value is defined as the exit price in the principal market (or, if lacking a principal market,
the most advantageous market) in which Citizens would complete a transaction. Fair value is based
on managements best estimate of the assumptions market participants would use when pricing an
asset or liability and a fair value hierarchy that prioritizes the information used to develop
those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active
markets and the lowest priority to unobservable data. Citizens bases fair values on the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. For assets and liabilities recorded at fair
value, it is Citizens policy to maximize the use of observable inputs and minimize the use of
unobservable inputs when developing fair value measurements.
Fair value measurements for assets and liabilities where there exists limited or no observable
market data are based primarily upon estimates which require significant judgment, and are often
calculated based on the economic and competitive environment, the characteristics of the asset or
liability and other factors. Therefore, the results cannot be determined with precision and may
not be realized in an actual sale or immediate settlement of the asset or liability. There are
inherent weaknesses in any calculation technique, and changes in the underlying assumptions used,
including discount rates and estimates of future cash flows, could significantly affect the results
of current or future values. The fair value when the market for an asset is not active is the
price that would be received to sell the asset in an orderly transaction and considers additional
factors for determining
76
whether there has been a significant decrease in market activity for an asset when the market for
that asset is not active.
In February 2007, the FASB issued new guidance, which was effective January 1, 2008, allowing an
entity to elect to measure certain financial assets and liabilities at fair value with changes in
fair value recognized in the income statement each period. To date, Citizens has not elected to
adopt the fair value option for any financial assets or financial liabilities at this time.
In 2009, Citizens adopted new guidance to expand its fair value disclosures to include nonfinancial
assets and liabilities, enhance its fair value disclosures for financial assets and liabilities,
and provide disclosures on financial instruments in interim financial reports. Citizens discloses
in the body or in the accompanying notes of its summarized financial information for interim
reporting periods and in its financial statements for annual reporting periods the fair value of
all financial instruments for which it is practicable to estimate that value, whether recognized or
not recognized in the balance sheet. These changes did not have a material impact on Citizens
financial condition, results of operations, or liquidity. Refer to Note 10 for additional
disclosures.
Derivative Instruments
Citizens enters into derivative transactions from time to time to protect against the risk of
adverse price or interest rate movements on the value of certain assets and liabilities and on
future cash flows. Under the guidelines of ASC 815, as amended, all derivative instruments are
required to be carried at fair value on the balance sheet. ASC 815 also provides special hedge
accounting provisions. Derivative instruments designated in a hedge relationship to mitigate
exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a
particular risk, such as interest rate risk, are considered fair value hedges under ASC 815.
Derivative instruments designated in a hedge relationship to mitigate exposure to variability in
expected future cash flows, or other types of forecasted transactions, are considered cash flow
hedges.
Fair value hedges are accounted for by recording the fair value of the derivative instrument and
the fair value related to the risk being hedged of the hedged asset or liability on the balance
sheet with corresponding offsets recorded in the income statement. The adjustment to the hedged
asset or liability is included in the basis of the hedged item, while the fair value of the
derivative is recorded as a freestanding asset or liability. Actual cash receipts or payments and
related amounts accrued during the period on derivatives included in a fair value hedge
relationship are recorded as adjustments to the interest income or expense recorded on the hedged
asset or liability.
Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the
balance sheet as either a freestanding asset or liability, with a corresponding offset recorded in
other comprehensive income within shareholders equity, net of tax. Amounts are reclassified from
other comprehensive income to the income statement in the period or periods the hedged forecasted
transaction affects earnings.
Under both the fair value and cash flow hedge methods, derivative gains and losses not effective in
hedging the change in fair value or expected cash flows of the hedged item are recognized
immediately in noninterest income.
Prior to the PHH alliance, Citizens sold substantially all fixed-rate single-family mortgage loans
originated, including adjustable-rate loans that convert to fixed-rate loans. Citizens utilized
mandatory forward commitments to protect against changes in interest rates and prices on its
mortgage pipeline. These derivatives were marked to market through earnings. Citizens was also
required to recognize certain contracts and commitments as derivatives when the characteristics of
those contracts and commitments met the definition of a derivative. Citizens also recorded as
derivatives, residential loan commitments associated with loans held for sale. These derivatives
were marked to market through earnings.
Citizens enters into various derivative agreements with customers desiring protection from possible
adverse future fluctuations in interest rates. As an intermediary, Citizens generally maintains a
portfolio of matched offsetting derivative agreements. These contracts are marked to market
through earnings.
In January 2009, Citizens adopted new guidance to enhance required disclosures regarding
derivatives and hedging activities, including enhanced disclosures regarding (a) how and why an
entity uses derivative
77
instruments; (b) how derivative instruments and related hedged items are accounted for; and (c) how
derivative instruments and related hedged items affect an entitys financial position, financial
performance, and cash flows. Disclosures include objectives and strategies for using derivatives,
quantitative disclosures about the fair value of, and gains and losses on, derivative instruments
and disclosures about credit-risk-related contingent features in derivative instruments. Citizens
records all derivatives on the balance sheet at fair value. The accounting for changes in the fair
value of derivatives depends on the intended use of the derivative, whether Citizens has elected to
designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging
relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives
designated and qualifying as a hedge of the exposure to changes in the fair value of an asset,
liability, or firm commitment attributable to a particular risk, such as interest rate risk, are
considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to
variability in expected future cash flows, or other types of forecasted transactions, are
considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of
gain or loss recognition on the hedging instrument with the recognition of the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk in a fair value
hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. Citizens
may enter into derivative contracts that are intended to economically hedge certain of its risks,
even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
The adoption had no impact on Citizens financial condition, results of operations, or liquidity.
Refer to Note 17 for additional disclosures.
Income Taxes
Amounts provided for income tax expense (benefit) are based on income reported for financial
statement purposes and do not necessarily represent amounts currently payable (receivable) under
tax laws. Deferred income taxes, which arise principally from temporary differences between the
period in which certain income and expenses are recognized for financial accounting purposes and
the period in which they affect taxable income, are included in the amounts provided for income
taxes. In assessing the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be realized. The
realization of deferred tax assets is dependent on utilizing taxable income in prior carryback
years, generating future taxable income, executing tax planning strategies, and reversing existing
taxable temporary differences. Currently, the ultimate realization of deferred tax assets is
dependent on the generation of future taxable income during the periods in which those temporary
differences become deductible.
The Corporation utilizes a two-step approach for evaluating tax positions. Recognition (step one)
occurs when an enterprise concludes that a tax position, based solely on its technical merits, is
more likely than not to be sustained upon examination. Measurement (step two) is only addressed if
step one has been satisfied (i.e., the position is more likely than not to be sustained). Under
step two, the tax benefit is measured as the largest amount of benefit, determined on a cumulative
probability basis, which is more likely than not to be realized on ultimate settlement.
The Corporation files a consolidated federal income tax return and various Holding Company and
subsidiary state income tax returns. When income and expenses are recognized in different periods
for tax purposes, applicable deferred taxes are provided in the Consolidated Financial Statements.
Accordingly, amounts equal to the tax benefits of those subsidiaries having taxable federal losses
or credits are offset by other subsidiaries that incur federal tax liabilities. Citizens
recognizes interest and penalties accrued relative to unrecognized tax benefits in their respective
federal or state income tax accounts.
Stock-Based Compensation
Compensation expense for stock options and restricted stock awards are recognized in salaries and
employee benefits based on the fair value at the date of grant and is recognized on a straight line
basis over the requisite service period of the awards. Refer to Note 12 for additional
disclosures.
Net Income per Common Share
Basic net income (loss) per common share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding in each period. Diluted
net income per common share shows the dilutive effect of additional common shares issuable upon the
assumed exercise of stock options granted under Citizens stock option plans, using the treasury
stock method, and restricted stock awards granted but not yet vested. In January 2009, Citizens
adopted new guidance which provides that unvested share-based
78
payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and are included in the computation of earnings per
share pursuant to the two-class method, which was applied retrospectively to all periods presented.
The adoption did not have a material impact on Citizens financial condition, results of
operations, or liquidity. Refer to Note 14 for additional disclosures.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents are considered to include cash and
due from banks, interest-bearing deposits in other financial institutions, federal funds sold and
securities purchased under agreements to resell.
Reclassifications
Certain amounts have been reclassified to conform to the current year presentation.
Note 2. Pending Accounting Pronouncements
Accounting Standard Updates (ASU)
Statements of Financial Accounting Standards (SFAS)
FASB ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about
Fair Value Measurements
This ASU requires new disclosures and clarifies existing disclosure requirements about fair value
measurement as set forth in Codification Subtopic 820-10. The FASBs objective is to improve these
disclosures and, thus, increase the transparency in financial reporting, as well as clarify the
requirements of existing disclosures. ASU 2010-06 is effective for interim and annual reporting
periods beginning after December 15, 2009, except for the certain disclosure requirements which are
effective for fiscal years beginning after December 15, 2010, and for interim periods within those
fiscal years. The adoption of ASU 2010-06 is expected to have a significant impact on Citizens
future fair value disclosures.
SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (subsequently codified by ASU 2009-17,
Consolidations Topic 810)
This ASU replaces the quantitative-based risks and rewards calculation for determining which
enterprise, if any, is the primary beneficiary and is required to consolidate a VIE with a
qualitative approach focused on identifying which enterprise has both the power to direct the
activities of the VIE that most significantly impact the entitys economic performance and the
obligation to absorb losses or the right to receive benefits that could be significant to the
entity. In addition, ASU 2009-17 requires continuous assessments of whether an enterprise is the
primary beneficiary of a VIE and requires enhanced disclosures about an enterprises involvement
with a VIE. ASU 2009-17 is effective at the start of fiscal years beginning after November 15,
2009, or January 1, 2010, for a calendar year-end entity. The adoption is not expected to have a
material impact on Citizens financial condition, results of operations, or liquidity.
SFAS No. 166, Accounting for Transfers of Financial Assets (subsequently codified by ASU 2009-16,
Transfers and Servicing Topic 860)
This ASU was issued in response to the FASBs concerns about certain transfers of financial assets
that should not qualify as sales. The most significant amendment resulting from this statement
consists of removing the concept of a qualifying special-purpose entity. It also changes the
requirements for derecognizing financial assets, and requires additional disclosures as well as
more information about transfers of financial assets, including securitization transactions, where
entities have continuing exposure to the risks related to transferred financial assets. ASU
2009-16 is effective at the start of fiscal years beginning after November 15, 2009, or January 1,
2010, for a calendar year-end entity. The adoption is not expected to have a material impact on
Citizens financial condition, results of operations, or liquidity.
79
Note 3. Investment Securities
The amortized cost, estimated fair value and gross unrealized gains and losses of investment
securities follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Gross Unrealized |
|
|
Amortized |
|
|
Fair |
|
|
Gross Unrealized |
|
(in thousands) |
|
Cost |
|
|
Value |
|
|
Gains |
|
|
Losses |
|
|
Cost |
|
|
Value |
|
|
Gains |
|
|
Losses |
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies |
|
$ |
145,782 |
|
|
$ |
149,033 |
|
|
$ |
3,251 |
|
|
$ |
|
|
|
$ |
248,819 |
|
|
$ |
257,445 |
|
|
$ |
8,626 |
|
|
$ |
|
|
Collateralized mortgage obligations |
|
|
451,134 |
|
|
|
442,989 |
|
|
|
7,202 |
|
|
|
15,347 |
|
|
|
528,626 |
|
|
|
471,010 |
|
|
|
4,147 |
|
|
|
61,763 |
|
Mortgage-backed |
|
|
1,129,146 |
|
|
|
1,164,450 |
|
|
|
36,521 |
|
|
|
1,217 |
|
|
|
960,841 |
|
|
|
973,961 |
|
|
|
13,929 |
|
|
|
809 |
|
State and municipal |
|
|
439,587 |
|
|
|
450,647 |
|
|
|
11,741 |
|
|
|
681 |
|
|
|
531,625 |
|
|
|
538,761 |
|
|
|
10,990 |
|
|
|
3,854 |
|
Other |
|
|
17,951 |
|
|
|
17,946 |
|
|
|
|
|
|
|
5 |
|
|
|
7,598 |
|
|
|
7,595 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
$ |
2,183,600 |
|
|
$ |
2,225,065 |
|
|
$ |
58,715 |
|
|
$ |
17,250 |
|
|
$ |
2,277,509 |
|
|
$ |
2,248,772 |
|
|
$ |
37,692 |
|
|
$ |
66,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity |
|
$ |
137,094 |
|
|
$ |
139,665 |
|
|
$ |
3,116 |
|
|
$ |
545 |
|
|
$ |
138,575 |
|
|
$ |
137,846 |
|
|
$ |
1,708 |
|
|
$ |
2,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB and Fed Reserve stock |
|
$ |
156,278 |
|
|
$ |
156,278 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
148,764 |
|
|
$ |
148,764 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with amortized cost of $1.1 billion at December 31, 2009, and $1.3 billion at
December 31, 2008 were pledged to secure public deposits, repurchase agreements and other
liabilities. Except for obligations of the U.S. Government and its agencies, no holdings of
securities of any single issuer exceeded 10% of consolidated shareholders equity at December 31,
2009 or 2008.
The amortized cost, estimated fair value, and weighted average yields of debt securities by
maturity at December 31, 2009 are shown below. Maturities of mortgage-backed securities are based
upon current industry prepayment schedules.
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
Amortized |
|
|
Estimated Fair |
|
(in thousands) |
|
Cost |
|
|
Value |
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
Federal agencies and state and municipal |
|
|
|
|
|
|
|
|
Contractual maturity within one year |
|
$ |
139,841 |
|
|
$ |
143,289 |
|
After one year through five years |
|
|
146,717 |
|
|
|
151,649 |
|
After five years through ten years |
|
|
194,403 |
|
|
|
199,441 |
|
After ten years |
|
|
104,408 |
|
|
|
105,301 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
585,369 |
|
|
|
599,680 |
|
Collateralized mortgage obligations and mortgage-backed |
|
|
1,580,280 |
|
|
|
1,607,439 |
|
Other |
|
|
17,951 |
|
|
|
17,946 |
|
|
|
|
|
|
|
|
Total available for sale |
|
$ |
2,183,600 |
|
|
$ |
2,225,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
State and municipal |
|
|
|
|
|
|
|
|
After one year through five years |
|
$ |
3,905 |
|
|
$ |
4,106 |
|
After five years through ten years |
|
|
55,973 |
|
|
|
57,611 |
|
After ten years |
|
|
77,216 |
|
|
|
77,948 |
|
|
|
|
|
|
|
|
Total held to maturity |
|
$ |
137,094 |
|
|
$ |
139,665 |
|
|
|
|
|
|
|
|
80
A total of 239 securities had unrealized losses at December 31, 2009 compared with 486
securities at December 31, 2008. These securities, with unrealized losses aggregated by investment
category and length of time in a continuous unrealized loss position, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
Less than 12 Months |
|
|
More than 12 Months |
|
|
Total |
|
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
(in thousands) |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
| | | | | | |
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
$ |
51,985 |
|
|
$ |
452 |
|
|
$ |
146,052 |
|
|
$ |
14,895 |
|
|
$ |
198,037 |
|
|
$ |
15,347 |
|
Mortgage-backed |
|
|
110,191 |
|
|
|
1,211 |
|
|
|
264 |
|
|
|
6 |
|
|
|
110,455 |
|
|
|
1,217 |
|
State and municipal |
|
|
29,398 |
|
|
|
402 |
|
|
|
9,471 |
|
|
|
279 |
|
|
|
38,869 |
|
|
|
681 |
|
Other |
|
|
324 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
324 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
$ |
191,898 |
|
|
$ |
2,070 |
|
|
$ |
155,787 |
|
|
$ |
15,180 |
|
|
$ |
347,685 |
|
|
$ |
17,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity |
|
$ |
20,271 |
|
|
$ |
319 |
|
|
$ |
2,290 |
|
|
$ |
226 |
|
|
$ |
22,561 |
|
|
$ |
545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
212,169 |
|
|
$ |
2,389 |
|
|
$ |
158,077 |
|
|
$ |
15,406 |
|
|
$ |
370,246 |
|
|
$ |
17,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
Less than 12 Months |
|
|
More than 12 Months |
|
|
Total |
|
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
(in thousands) |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
| | | | | | |
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
$ |
231,892 |
|
|
$ |
61,436 |
|
|
$ |
3,085 |
|
|
$ |
327 |
|
|
$ |
234,977 |
|
|
$ |
61,763 |
|
Mortgage-backed |
|
|
74,081 |
|
|
|
796 |
|
|
|
421 |
|
|
|
13 |
|
|
|
74,502 |
|
|
|
809 |
|
State and municipal |
|
|
112,353 |
|
|
|
3,688 |
|
|
|
3,220 |
|
|
|
166 |
|
|
|
115,573 |
|
|
|
3,854 |
|
Other |
|
|
7 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
$ |
418,333 |
|
|
$ |
65,923 |
|
|
$ |
6,726 |
|
|
$ |
506 |
|
|
$ |
425,059 |
|
|
$ |
66,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity |
|
$ |
51,896 |
|
|
$ |
1,967 |
|
|
$ |
6,481 |
|
|
$ |
470 |
|
|
$ |
58,377 |
|
|
$ |
2,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
470,229 |
|
|
$ |
67,890 |
|
|
$ |
13,207 |
|
|
$ |
976 |
|
|
$ |
483,436 |
|
|
$ |
68,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Citizens performs a review of securities with unrealized losses at each reporting period. Citizens
assesses each holding to determine whether and when a security will recover in value, whether it
intends to sell the security and whether it is more likely than not that Citizens will be required
to sell the security before the value is recovered. In assessing the recovery of value, the key
factors reviewed include the length of time and the extent the fair value has been less than the
carrying cost, adverse conditions, if any, specifically related to the security, industry or
geographic area, historical and implied volatility of the fair value of the security, credit
quality factors affecting the issuer or the underlying collateral, payment structure of the
security, historical payment history of the security, changes to the credit rating of the security,
recoveries or declines in value subsequent to the balance sheet date or any other relevant factors.
Evaluations are performed on a more frequent basis as the degree to which fair value is below
carrying cost or the length of time that the fair value has been continuously below carrying cost,
increases. As of December 31, 2009, Citizens has concluded that all issuers have the ability to
pay contractual cash flows. The unrealized losses displayed in the above table are believed to be
temporary and thus no impairment loss has been realized in the Consolidated Statement of
Operations. Citizens has not decided to sell
81
securities with unrealized losses nor does Citizens believe it will be required to sell securities before the value is recovered, but may change its
intent in response to significant, unanticipated changes in policies, regulations, statutory
legislation or other aforementioned criteria.
The collateralized mortgage obligations (CMO) sector includes securities where the underlying
collateral consists of agency issued or whole loan mortgages. At December 31, 2009, the whole loan
CMOs had a market value of $188.7 million with gross unrealized losses of $15.0 million. Citizens
performs a thorough credit review on a quarterly basis for the underlying mortgage collateral as
well as the supporting credit enhancement and structure. The results of the December 31, 2009
credit review demonstrated continued strength and no material degradation in the holdings.
Citizens has determined there is no other-than-temporary impairment at December 31, 2009.
For the year ending December 31, 2009, Citizens sold available for sale securities with proceeds of
$1.9 million and recorded a loss of less than $0.1 million. Citizens completed security sales of
$0.3 million and recorded a loss of less than $0.1 million in 2008.
Note 4. Loans, Nonperforming Assets, Allowance for Loan Losses, and Loans Held for Sale
Citizens primarily extends credit within the Midwestern states of Michigan, Wisconsin, Ohio,
Iowa, and Indiana. In Michigan, the primary market is concentrated in the Lower Peninsula with a
small presence in the Upper Peninsula. In Wisconsin, the primary markets include the greater Green
Bay Metropolitan area, the Fox Valley region which extends from Appleton to Oshkosh, suburban
Milwaukee, and also rural markets in southern and northern Wisconsin. In Ohio, the primary market
is the greater Cleveland area. In Iowa, the primary market is the central region of the state. In
Indiana, the primary market is Indianapolis. Citizens seeks to limit its credit risk by using
established guidelines to review its aggregate outstanding commitments and loans to particular
borrowers, industries and geographic areas. Collateral is secured based on the nature of the
credit and managements credit assessment of the customer. Total portfolio loans outstanding are
recorded net of unearned income, unamortized premiums and discounts, deferred loan fees and costs,
and fair value adjustments.
The majority of Citizens commercial real estate loans consist of mortgages on non-owner occupied
properties. Those borrowers are involved in real estate business activities and the sources of
repayment are dependent on the performance of the real estate market. In such cases, Citizens
generally requires the borrower to have a proven record of success and to meet Citizens
underwriting criteria for this type of credit risk. Citizens does not have a concentration in any
single industry that exceeds 10% of total loans which is not disclosed on the face of the balance
sheet.
A summary of nonperforming assets follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
Nonperforming portfolio loans: |
|
|
|
|
|
|
|
|
Nonaccrual |
|
$ |
469,753 |
|
|
$ |
304,293 |
|
Loans 90 days or more past due and still accruing |
|
|
3,039 |
|
|
|
1,486 |
|
Restructured loans and still accruing |
|
|
2,629 |
|
|
|
256 |
|
|
|
|
|
|
|
|
Total nonperforming portfolio loans |
|
|
475,421 |
|
|
|
306,035 |
|
Nonperforming loans held for sale |
|
|
65,247 |
|
|
|
75,142 |
|
Other repossessed assets acquired |
|
|
54,394 |
|
|
|
58,037 |
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
595,062 |
|
|
$ |
439,214 |
|
|
|
|
|
|
|
|
82
There are no significant commitments outstanding to lend additional funds to clients whose
loans were classified as nonaccrual or restructured at December 31, 2009.
The effect of nonperforming portfolio loans on interest income follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
At contract rates |
|
$ |
29,963 |
|
|
$ |
25,131 |
|
|
$ |
13,557 |
|
As actually recognized |
|
|
6,801 |
|
|
|
7,987 |
|
|
|
6,307 |
|
|
|
|
|
|
|
|
|
|
|
Interest foregone |
|
$ |
23,162 |
|
|
$ |
17,144 |
|
|
$ |
7,250 |
|
|
|
|
|
|
|
|
|
|
|
A summary of impaired loans and their effect on interest income follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Reserve |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Balances at December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with valuation reserve |
|
$ |
162,962 |
|
|
$ |
101,671 |
|
|
$ |
52,840 |
|
|
$ |
39,885 |
|
Impaired loans with no valuation reserve |
|
|
141,408 |
|
|
|
87,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
304,370 |
|
|
$ |
189,001 |
|
|
$ |
52,840 |
|
|
$ |
39,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans on nonaccrual basis |
|
$ |
304,370 |
|
|
$ |
189,001 |
|
|
$ |
52,840 |
|
|
$ |
39,885 |
|
Impaired loans on accrual basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
304,370 |
|
|
$ |
189,001 |
|
|
$ |
52,840 |
|
|
$ |
39,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance for the year |
|
$ |
318,709 |
|
|
$ |
113,553 |
|
|
|
|
|
|
|
|
|
Interest income recognized for the year |
|
|
403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collected applied to outstanding principal |
|
|
11,560 |
|
|
|
11,163 |
|
|
|
|
|
|
|
|
|
The Consolidated Financial Statements do not include loans serviced for others, which totaled
$372.1 million, and $450.2 million at December 31, 2009 and 2008, respectively.
A summary of changes in the allowance for loan losses follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Allowance for loan losses at January 1 |
|
$ |
255,321 |
|
|
$ |
163,353 |
|
|
$ |
169,104 |
|
Provision for loan losses |
|
|
325,955 |
|
|
|
282,054 |
|
|
|
45,177 |
|
Charge-offs |
|
|
(252,807 |
) |
|
|
(197,932 |
) |
|
|
(59,591 |
) |
Recoveries |
|
|
13,901 |
|
|
|
7,846 |
|
|
|
8,663 |
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(238,906 |
) |
|
|
(190,086 |
) |
|
|
(50,928 |
) |
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at December 31 |
|
$ |
342,370 |
|
|
$ |
255,321 |
|
|
$ |
163,353 |
|
|
|
|
|
|
|
|
|
|
|
Allowance for losses on lending-related commitments December 31 |
|
$ |
3,166 |
|
|
$ |
3,941 |
|
|
$ |
5,571 |
|
|
|
|
|
|
|
|
|
|
|
Loans Held for Sale. Loans held for sale are comprised of commercial real estate and
residential mortgage loans. Held for sale loans at December 31, 2009 totaled $80.5 million, a
decrease of $10.9 million or 11.9% from December 31, 2008. The decrease reflects a decline in
commercial loans held for sale due to customer paydowns, workout activities, writedowns to reflect
market-value declines for the underlying collateral and transfers to ORE. The decrease was
partially offset by the transfer of $35.2 million in nonperforming land hold, land development, and
commercial construction loans from the loan portfolio at fair value.
83
Note 5. Premises and Equipment
A summary of premises and equipment follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
Land |
|
$ |
28,320 |
|
|
$ |
29,621 |
|
Buildings |
|
|
163,637 |
|
|
|
164,177 |
|
Leasehold improvements |
|
|
13,718 |
|
|
|
13,234 |
|
Furniture and equipment |
|
|
132,739 |
|
|
|
131,961 |
|
|
|
|
|
|
|
|
|
|
|
338,414 |
|
|
|
338,993 |
|
Accumulated depreciation and amortization |
|
|
(221,319 |
) |
|
|
(214,776 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
117,095 |
|
|
$ |
124,217 |
|
|
|
|
|
|
|
|
Certain branch facilities and equipment are leased under various operating contracts. Total
rental expense, including expenses related to these operating leases, was $6.3 million in 2009,
$6.8 million in 2008, and $7.7 million in 2007. Future minimum rental commitments under
non-cancelable operating leases are as follows at December 31, 2009:
|
|
|
|
|
|
|
Rental |
|
(in thousands) |
|
Commitments |
|
|
2010 |
|
$ |
5,868 |
|
2011 |
|
|
4,783 |
|
2012 |
|
|
4,099 |
|
2013 |
|
|
3,318 |
|
2014 |
|
|
1,973 |
|
Thereafter |
|
|
6,873 |
|
|
|
|
|
Total |
|
$ |
26,914 |
|
|
|
|
|
Note 6. Goodwill and Core Deposit Intangible Assets
As a result of ongoing volatility in the financial industry, the challenging economic
conditions in Michigan and the Upper Midwest, and continued deterioration in the credit quality of
Citizens loan portfolios, Citizens determined that it was more likely than not that the fair value
of a reporting unit may have been reduced below its carrying amount. Therefore, Citizens performed
an interim goodwill impairment test during the second quarter of 2009.
The Step 1 analysis indicated that the carrying amount exceeded estimated fair value for the
Regional Banking line of business; therefore, Step 2 testing was required. Citizens determined, as
a result of the Step 2 analysis, that the goodwill allocated to Regional Banking was impaired.
During the second quarter of 2009, Citizens recorded a non-cash goodwill impairment charge against
the goodwill allocated to the Regional Banking line of business of $266.5 million. The goodwill
impairment charge was not tax deductible, did not impact Citizens tangible equity or regulatory
capital ratios, and did not adversely affect Citizens overall liquidity position. Previously,
Citizens recorded a goodwill impairment charge during the second quarter of 2008, when it
determined that the fair value of the Specialty Commercial reporting unit was below its carrying
value. At that time, Citizens recorded a non-cash, not tax-deductive goodwill impairment charge of
$178.1 million, representing the entire amount of goodwill allocated to the Specialty Commercial
reporting unit.
The interim goodwill analysis performed did not change the timing of Citizens annual goodwill
impairment test, which was performed during the fourth quarter of 2009.
84
As of October 1, 2009, the annual impairment test was performed using managements most recent
long-term financial projections and current risk-adjusted discount rates. The Step 1 analysis
indicated that the carrying amount exceeded estimated fair value for the Regional Banking reporting
unit; therefore, Step 2 testing was required. Citizens determined, as a result of the Step 2
analysis, that the remaining goodwill allocated to Regional Banking was not impaired due to the
implied fair value of goodwill exceeding the carrying amount of goodwill. Citizens performed an
evaluation to determine if events or circumstances indicated additional goodwill impairment at
December 31, 2009. As the key inputs and drivers remained consistent with those used as of the
annual impairment testing date, Citizens concluded that no additional impairment was indicated.
A summary of goodwill allocated to the lines of business as of December 31, 2009 and December 31,
2008 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional |
|
|
Specialty |
|
|
Wealth |
|
|
Total |
|
(in thousands) |
|
Banking |
|
|
Commercial |
|
|
Management |
|
|
Goodwill |
|
|
Balance at December 31, 2007 |
|
$ |
595,418 |
|
|
$ |
178,089 |
|
|
$ |
1,801 |
|
|
$ |
775,308 |
|
Impairment Loss |
|
|
|
|
|
|
(178,089 |
) |
|
|
|
|
|
|
(178,089 |
) |
Tax Benefits on Share Based Payments |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
595,417 |
|
|
$ |
|
|
|
$ |
1,801 |
|
|
$ |
597,218 |
|
Impairment Loss |
|
|
(266,474 |
) |
|
|
|
|
|
|
|
|
|
|
(266,474 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
328,943 |
|
|
$ |
|
|
|
$ |
1,801 |
|
|
$ |
330,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of core deposit intangibles at December 31, 2009 and 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
Core deposit intangibles |
|
$ |
62,835 |
|
|
$ |
62,835 |
|
Accumulated amortization |
|
|
(48,457 |
) |
|
|
(41,421 |
) |
|
|
|
|
|
|
|
Total other intangibles |
|
$ |
14,378 |
|
|
$ |
21,414 |
|
|
|
|
|
|
|
|
The following presents the estimated future amortization expense of core deposit intangible
assets.
|
|
|
|
|
|
|
Intangible |
|
|
|
Amortization |
|
(in thousands) |
|
Expense |
|
|
2010 |
|
$ |
3,923 |
|
2011 |
|
|
3,027 |
|
2012 |
|
|
2,120 |
|
2013 |
|
|
1,727 |
|
2014 |
|
|
1,421 |
|
Thereafter |
|
|
2,160 |
|
|
|
|
|
Total |
|
$ |
14,378 |
|
|
|
|
|
All of Citizens core deposit intangible assets have finite lives and are amortized on an
accelerated basis corresponding with the anticipated lives of the underlying deposits over varying
periods not exceeding 10 years. The weighted-average amortization period for core deposit
intangible assets is 2.6 years.
85
Note 7. Deposits
Overdrafts on demand accounts are classified as loans, rather than deposits, on the face of
the balance sheet and totaled $10.2 million and $23.7 million at December 31, 2009 and 2008,
respectively. Time deposits over $100,000 totaled $1.8 billion at December 31, 2009, compared with
$2.4 billion at December 31, 2008. The scheduled maturities for time deposits over $100,000 at
December 31, 2009 were as follows:
|
|
|
|
|
|
|
Deposit |
|
(in millions) |
|
Maturities |
|
|
2010 |
|
$ |
708.0 |
|
2011 |
|
|
371.0 |
|
2012 |
|
|
316.6 |
|
2013 |
|
|
246.8 |
|
2014 |
|
|
194.8 |
|
Thereafter |
|
|
1.0 |
|
|
|
|
|
Total |
|
$ |
1,838.2 |
|
|
|
|
|
Note 8. Short-Term Borrowings
Short-term borrowings consist of federal funds purchased and securities sold under agreements
to repurchase and other short-term borrowings (which consist primarily of Treasury, Tax and Loan
borrowings). Federal funds purchased are overnight borrowings from other financial institutions.
Securities sold under agreements to repurchase are secured transactions done principally with
investment banks. Maturities of securities sold under agreements to repurchase are generally 90
days or less.
Information relating to federal funds purchased and securities sold under agreements to repurchase
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
At December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
$ |
43,780 |
|
|
$ |
64,072 |
|
|
$ |
486,934 |
|
Weighted average interest rate paid |
|
|
0.33 |
% |
|
|
0.47 |
% |
|
|
3.89 |
% |
During the year: |
|
|
|
|
|
|
|
|
|
|
|
|
Maximum outstanding at any month-end |
|
$ |
60,873 |
|
|
$ |
662,726 |
|
|
$ |
1,274,000 |
|
Daily average |
|
|
52,030 |
|
|
|
303,931 |
|
|
|
652,825 |
|
Weighted average interest rate paid |
|
|
0.37 |
% |
|
|
2.60 |
% |
|
|
4.98 |
% |
Weighted average interest rate paid, including effects of swaps |
|
|
0.37 |
% |
|
|
2.60 |
% |
|
|
4.77 |
% |
86
Note 9. Long-Term Debt
A summary of long-term debt follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
Citizens (Parent only): |
|
|
|
|
|
|
|
|
Subordinated debt: |
|
|
|
|
|
|
|
|
5.75% subordinated notes due February 2013 |
|
$ |
16,773 |
|
|
$ |
120,136 |
|
Variable rate junior subordinated debenture due June 2033 |
|
|
25,774 |
|
|
|
25,774 |
|
7.50% junior subordinated debentures due September 2066 |
|
|
48,010 |
|
|
|
146,927 |
|
Subsidiaries: |
|
|
|
|
|
|
|
|
Federal Home Loan Bank advances |
|
|
1,318,700 |
|
|
|
1,666,483 |
|
Other borrowed funds |
|
|
104,230 |
|
|
|
234,246 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
1,513,487 |
|
|
$ |
2,193,566 |
|
|
|
|
|
|
|
|
On January 27, 2003, Citizens issued $125.0 million of 5.75% subordinated notes, maturing
February 1, 2013. Issuance costs were capitalized and are included in the long-term debt total on
the balance sheet. The issuance costs are being amortized over ten years as a component of
interest expense. Under the risk-based capital guidelines, the subordinated debt currently
qualifies as Tier 2 supplementary capital.
On June 26, 2003, Citizens issued $25.8 million of floating rate, 30 year trust preferred
securities through an unconsolidated special purpose trust to unrelated institutional investors.
The gross proceeds from issuance were used to purchase a floating rate junior subordinated
deferrable interest debenture (the Debenture) issued by Citizens, which is the sole asset of the
trust. The Debenture matures in thirty years and bears interest at an annual rate equal to the
three-month LIBOR plus 3.10%, payable quarterly beginning in September, 2003. Interest is adjusted
on a quarterly basis not to exceed 11.75%. The Debenture is an unsecured obligation of Citizens
and is junior in right of payment to all future senior indebtedness of Citizens. Citizens has
guaranteed that interest payments on the Debenture made to the trust will be distributed by the
trust to the holders of the trust preferred securities. The trust preferred securities of the
special purpose trust are callable at par and must be redeemed in thirty years after issuance. The
issuance costs were amortized to the call date over five years as a component of interest expense,
as Citizens believed this was the most probable life of these securities. Under the risk-based
capital guidelines, the trust preferred securities currently qualify as Tier 1 capital.
On October 3, 2006, Citizens Funding Trust I (the 2006 Trust) completed an offering of $150.0
million aggregate liquidation amount of enhanced trust preferred securities. The gross proceeds
from issuance were used to purchase a junior subordinated deferrable interest debenture issued by
Citizens, which is the sole asset of the 2006 Trust. The 2006 debentures rank junior to Citizens
outstanding debt, including the other outstanding junior subordinated debentures. The enhanced
trust preferred securities are listed on the New York Stock Exchange (NYSE symbol CTZ-PA).
Distributions on the securities, which represent undivided beneficial interests in the assets of
the 2006 Trust, accrue from the original issue date and are payable quarterly in arrears at an
annual rate of 7.50%, beginning December 15, 2006. The securities are callable on or after
September 15, 2011 and mature on September 15, 2066. Issuance costs of $5.1 million were
capitalized and are amortized through the long-term debt total on the balance sheet. The issuance
costs are amortized to the call date over five years as a component of interest expense. The
proceeds were used to finance the cash portion of the consideration paid in Citizens merger with
Republic and for general corporate purposes.
On September 30, 2009, Citizens exchanged shares of common stock for long-term debt with a carrying
value of $204.0 million. The extinguished long-term debt was comprised of $107.8 million principal
amount of its 5.75% subordinated notes ($104.2 million, net of early amortization of prior debt
issuance costs) and $101.3 million aggregate liquidation amount of the 7.50% trust preferred
securities of the 2006 Trust ($99.8 million, net of early amortization of prior debt issuance
costs). Refer to Note 14 for additional information.
87
On January 28, 2010 Citizens announced that it was suspending the dividend payments on its trust
preferred securities and on its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the
TARP Preferred Stock), issued to the Treasury.
As of December 31, 2009, advances from the FHLB are at fixed rates ranging from 4.28% to 7.10% and
mature from 2010 through 2021. FHLB advances totaling $240.0 million may be put back to Citizens
at the option of the FHLB. Advances totaling $1.1 billion are non-convertible and subject to
neither put nor call options. Citizens advances from the FHLB were collateralized at December 31,
2009 with $3.5 billion of residential and commercial loans secured by real estate and securities
held for pledging.
As of December 31, 2009, $103.4 million of long-term repurchase agreements with interest rates up
to 4.69%, maturing between August 2015 and May 2016 were outstanding. Long-term repurchase
agreements are classified under Other borrowed funds.
The par value of long-term debt is scheduled to mature as shown in the table below. This schedule
excludes all carrying value adjustments, such as purchase accounting fair value adjustments, hedge
accounting fair value adjustments, and unamortized premiums and discounts, that will not affect
future cash payments associated with the maturity of this debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
Par Value of Long Term Debt |
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Parent |
|
|
Subsidiaries |
|
|
Consolidated |
|
|
2010 |
|
$ |
|
|
|
$ |
475,230 |
|
|
$ |
475,230 |
|
2011 |
|
|
|
|
|
|
300,022 |
|
|
|
300,022 |
|
2012 |
|
|
|
|
|
|
187,847 |
|
|
|
187,847 |
|
2013 |
|
|
17,266 |
|
|
|
527 |
|
|
|
17,793 |
|
2014 |
|
|
|
|
|
|
30 |
|
|
|
30 |
|
Thereafter |
|
|
74,451 |
|
|
|
446,126 |
|
|
|
520,577 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
91,717 |
|
|
$ |
1,409,782 |
|
|
$ |
1,501,499 |
|
|
|
|
|
|
|
|
|
|
|
Note 10. Fair Values of Assets and Liabilities
Fair value estimates are intended to represent the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Given that there is no active market for many of Citizens financial
instruments, Citizens has made estimates using discounted cash flow or other valuation techniques.
Inputs to these valuation methods are subjective in nature, involve uncertainties, and require
significant judgment and therefore can not be determined with precision. Accordingly, the derived
fair value estimates presented herein are not necessarily indicative of the amounts Citizens could
realize in a current market exchange.
The fair value estimates are based on existing on- and off-balance sheet financial instruments and
do not attempt to estimate the value of anticipated future business or the value of assets and
liabilities that are not considered financial instruments. For example, Citizens has a substantial
trust department that contributes net fee income annually. The trust department is not considered
a financial instrument and its value has not been incorporated into the fair value estimates.
Other significant assets and liabilities that are not considered financial assets or liabilities
include Citizens brokerage network, net deferred tax assets (and the related valuation reserves),
and premises and equipment. In addition, tax ramifications related to the recognition of
unrealized gains and losses such as those within the investment securities portfolio can have a
significant effect on estimated fair values and have not been considered in the estimates. For
these reasons, the aggregate fair value should not be considered an indication of the value of the
Corporation.
Citizens groups assets and liabilities which are recorded at fair value in three levels, based on
the markets in which the assets and liabilities are traded and the reliability of the assumptions
used to determine fair value. An asset or liabilitys level within the fair value hierarchy is
based on the lowest level of input that is significant to the
88
fair value measurement (with Level 1
considered highest and Level 3 considered lowest). A brief description of each level follows.
Level 1 Valuation is based upon quoted prices for identical instruments in active
markets.
Level 2 Valuation is based upon quoted prices for similar instruments in active markets,
quoted prices for identical or similar instruments in markets that are not active, and
model-based valuation techniques for which all significant assumptions are observable in
the market.
Level 3 Valuation is generated from model-based techniques that use at least one
significant assumption not observable in the market. These unobservable assumptions
reflect estimates that market participants would use in pricing the asset or liability.
Valuation techniques include use of discounted cash flow models and similar techniques.
The estimated fair values of Citizens financial instruments follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
December 31, 2008 |
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
(in thousands) |
|
Amount |
|
Fair Value |
|
Amount |
|
Fair Value |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
163,137 |
|
|
$ |
163,137 |
|
|
$ |
171,695 |
|
|
$ |
171,695 |
|
Money market investments |
|
|
706,163 |
|
|
|
706,163 |
|
|
|
214,925 |
|
|
|
214,925 |
|
Securities available for sale |
|
|
2,225,065 |
|
|
|
2,225,065 |
|
|
|
2,248,772 |
|
|
|
2,248,772 |
|
Securities held to maturity |
|
|
137,094 |
|
|
|
139,665 |
|
|
|
138,575 |
|
|
|
137,846 |
|
FHLB and Federal Reserve stock |
|
|
156,278 |
|
|
|
156,278 |
|
|
|
148,764 |
|
|
|
148,764 |
|
Net portfolio loans |
|
|
7,563,489 |
|
|
|
6,545,517 |
|
|
|
8,847,277 |
|
|
|
7,606,291 |
|
Deferred compensation assets |
|
|
11,138 |
|
|
|
11,138 |
|
|
|
10,652 |
|
|
|
10,652 |
|
Loans held for sale |
|
|
80,459 |
|
|
|
80,459 |
|
|
|
91,362 |
|
|
|
91,362 |
|
Accrued interest receivable |
|
|
43,270 |
|
|
|
43,270 |
|
|
|
55,663 |
|
|
|
55,663 |
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
8,909,340 |
|
|
|
8,945,262 |
|
|
|
9,052,406 |
|
|
|
9,103,392 |
|
Short-term borrowings |
|
|
51,063 |
|
|
|
51,063 |
|
|
|
74,449 |
|
|
|
74,449 |
|
Long-term debt |
|
|
1,513,487 |
|
|
|
1,566,212 |
|
|
|
2,193,566 |
|
|
|
2,248,060 |
|
Accrued interest payable |
|
|
10,292 |
|
|
|
10,292 |
|
|
|
20,268 |
|
|
|
20,268 |
|
Financial instruments with off-balance sheet risk(1) : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit(2) |
|
|
(913 |
) |
|
|
(5,185 |
) |
|
|
(521 |
) |
|
|
(6,080 |
) |
Derivative instruments |
|
|
17,959 |
|
|
|
17,959 |
|
|
|
34,097 |
|
|
|
34,097 |
|
|
|
|
(1) |
|
Positive amounts represent assets, whereas negative amounts represent
liabilities. |
|
(2) |
|
The carrying amount for letters of credit is part of the total carrying amount of
net loans. It is shown here separately to disclose the estimated fair value which is based on a
discounted cash flow method utilizing current market pricing. This amount is not included in the
net loans estimate of fair value. |
The carrying amount approximates fair value for cash, money market investments, FHLB stock,
Federal Reserve stock, and accrued interest. The methods and assumptions used to estimate the fair
value for other financial instruments are set forth below.
Securities Available for Sale. Fair value measurement is based upon quoted prices for similar
assets, if available. If quoted prices are not available, fair values are measured using matrix
pricing models, or other model-based valuation techniques requiring observable inputs other than
quoted prices such as yield curves, prepayment speeds, and default rates. The securities in the
available for sale portfolio are priced by independent providers. In obtaining such valuation
information from third parties, Citizens has evaluated their valuation methodologies used to
develop the fair values in order to determine whether such valuations are representative of an exit
price in Citizens principal markets. Further, Citizens has developed an internal, independent
price verification function that performs testing on valuations received from third parties.
Citizens principal markets for
89
its securities portfolios are the secondary institutional markets,
with an exit price that is predominantly reflective of bid level pricing in those markets.
Recurring Level 3 securities include auction rate securities issued by student-loan authorities and
a taxable municipal Qualified Zone Academy Bond (QZAB). Due to the nature of the auction rate
securities and the current illiquid market, Citizens used unobservable inputs (Level 3) in the
valuation process. In conducting the fair value analysis Citizens relies on a model to estimate
the transaction price between market participants for each group of securities as of the valuation
date. Due to the current illiquid market for QZAB bonds, Citizens relies on models containing
significant unobservable market-based inputs to determine the fair-value of these bonds.
Securities Held to Maturity. The fair value of securities classified as held to maturity are based
upon quoted prices for similar assets, if available. If quoted prices are not available, fair
values are measured using model based valuation techniques requiring observable inputs such as
yield curves, prepayment speeds, and default rates.
Net Portfolio Loans. The fair value of loans and loan commitments is estimated based on discounted
cash flows. The cash flows take into consideration current portfolio interest rates and repricing
characteristics as well as assumptions relating to prepayment speeds. The discount rates take into
consideration the current market interest rate environment, a credit risk component based on the
credit characteristics of each loan portfolio, and a liquidity premium reflecting the liquidity or
illiquidity of the market.
Deposits. The estimated fair value of demand deposits (e.g., noninterest and interest bearing
demand, savings, and certain types of money market accounts) are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for
certificates of deposit are based on the discounted value of contractual cash flows at current
interest rates. The estimated fair value of deposits does not take into account the value of
Citizens long-term relationships with depositors, commonly known as core deposit intangibles,
which are separate intangible assets, and not considered financial instruments.
Short-Term Borrowings. The carrying amounts of federal funds purchased, securities sold under
agreement to repurchase and other short-term borrowings approximate their fair values because they
frequently reprice to a market rate.
Long-Term Debt. The fair value is estimated using observable market prices and by discounting
future cash flows using current interest rates for similar financial instruments.
Derivative Instruments. Substantially all derivative instruments held or issued by Citizens are
traded in over-the-counter markets where quoted market prices are not readily available.
Derivative instruments are priced by independent providers using observable market assumptions with
adjustments based on widely accepted valuation techniques. For those derivatives, Citizens
measures fair value with models that use primarily market observable inputs, such as yield curves
and option volatilities, and include the value associated with counterparty credit risk (credit
valuation adjustments). Citizens assessed the significance of the impact of the credit valuation
adjustments on the overall valuation of its derivative positions, and determined that the credit
valuation adjustments were not significant to the overall valuation of its derivatives.
Deferred Compensation Assets. Citizens has a portfolio of mutual fund investments which hedge the
deferred compensation liabilities for various employees, former employees and directors. These
investments are traded on active exchanges with valuations obtained from readily available pricing
sources for market transactions involving identical assets. Additionally, Citizens invests in a
Guaranteed Income Fund which is valued based on similar assets in an active market.
90
Impaired Loans. A loan is considered to be impaired when it is probable that all of the
principal and interest due under the original underwriting terms of the loan may not be collected.
Impairment is measured based on the fair value of the underlying collateral, adjusted based on
managements judgment due to current market conditions. Citizens measures impairment on all
nonaccrual commercial and industrial and commercial real estate loans for which it has established
specific reserves as part of the specific allocated allowance component of the allowance for loan
losses.
Repossessed Assets. Repossessed assets consist of consumer assets acquired to satisfy the
consumers outstanding delinquent debt. These assets consist of automobiles, boats, recreational
vehicles and other personal items. These assets are carried at the lower of cost or market value
at the time of acquisition, based on internally developed procedures.
Mortgage Servicing Rights. Mortgage servicing rights represent the value associated with servicing
residential mortgage loans. The value is determined through a discounted cash flow analysis which
uses interest rates, prepayment speeds and delinquency rate assumptions as inputs. All of these
assumptions require a significant degree of management judgment. Adjustments are only made when
the discounted cash flows are less than the carrying amount.
Some of these assets and liabilities are measured on a recurring basis while others are measured on
a nonrecurring basis, with the determination based upon applicable existing accounting
pronouncements. For example, investment securities available for sale, derivative instruments and
deferred compensation assets are recorded at fair value on a recurring basis. Other assets, such
as mortgage servicing rights, loans held for sale, impaired loans, other real estate, and
repossessed assets are recorded at fair value on a nonrecurring basis using the lower of cost or
market value to determine impairment of individual assets. Goodwill and core deposit intangibles
are measured for impairment on a nonrecurring basis and are written down when the value of the
individual asset has declined.
The following table presents the balances of assets and liabilities that were measured at fair
value on a recurring basis as of December 31, 2009.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
(in thousands) |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies |
|
$ |
149,033 |
|
|
$ |
|
|
|
$ |
149,033 |
|
|
$ |
|
|
Collateralized mortgage obligations |
|
|
442,989 |
|
|
|
|
|
|
|
442,974 |
|
|
|
15 |
|
Mortgage-backed |
|
|
1,164,450 |
|
|
|
|
|
|
|
1,164,450 |
|
|
|
|
|
State and municipal |
|
|
450,647 |
|
|
|
|
|
|
|
445,294 |
|
|
|
5,353 |
|
Other |
|
|
17,946 |
|
|
|
|
|
|
|
17,623 |
|
|
|
323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
|
2,225,065 |
|
|
|
|
|
|
|
2,219,374 |
|
|
|
5,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments |
|
|
47,054 |
|
|
|
|
|
|
|
47,054 |
|
|
|
|
|
Deferred compensation assets |
|
|
11,138 |
|
|
|
7,295 |
|
|
|
3,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets |
|
|
58,192 |
|
|
|
7,295 |
|
|
|
50,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
2,283,257 |
|
|
$ |
7,295 |
|
|
$ |
2,270,271 |
|
|
$ |
5,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments |
|
$ |
29,095 |
|
|
$ |
|
|
|
$ |
29,095 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities |
|
|
29,095 |
|
|
|
|
|
|
|
29,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value |
|
$ |
29,095 |
|
|
$ |
|
|
|
$ |
29,095 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
The following table presents the reconciliation of Level 3 assets held by Citizens on December
31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized/Unrealized Gains (Losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded in |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Purchases, Sales |
|
|
Transfers |
|
|
Balance at |
|
|
|
December 31, |
|
|
Recorded in Earnings |
|
|
Comprehensive |
|
|
Issuances and |
|
|
In/(Out) |
|
|
December 31, |
|
(in thousands) |
|
2008 |
|
|
Realized |
|
|
Unrealized |
|
|
Income (Pre-tax) |
|
|
Settlements, Net |
|
|
of Level 3, Net |
|
|
2009 |
|
|
Securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(2 |
) |
|
$ |
17 |
|
|
$ |
15 |
|
State and municipal |
|
|
5,733 |
|
|
|
145 |
|
|
|
|
|
|
|
(55 |
) |
|
|
(857 |
) |
|
|
387 |
|
|
|
5,353 |
|
Other |
|
|
312 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available for sale |
|
$ |
6,045 |
|
|
$ |
156 |
|
|
$ |
|
|
|
$ |
(55 |
) |
|
$ |
(859 |
) |
|
$ |
404 |
|
|
$ |
5,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table includes assets measured at fair value on a nonrecurring basis that have
had a fair value adjustment as of December 31, 2009.
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
(in thousands) |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Impaired loans (1) |
|
$ |
177,696 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
177,696 |
|
Commercial loans held for sale (2) |
|
|
18,653 |
|
|
|
|
|
|
|
|
|
|
|
18,653 |
|
Goodwill (3) |
|
|
330,744 |
|
|
|
|
|
|
|
|
|
|
|
330,744 |
|
Mortgage servicing rights (4) |
|
|
2,081 |
|
|
|
|
|
|
|
|
|
|
|
2,081 |
|
Other real estate (5) |
|
|
20,548 |
|
|
|
|
|
|
|
|
|
|
|
20,548 |
|
Repossessed assets (6) |
|
|
3,598 |
|
|
|
|
|
|
|
|
|
|
|
3,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
553,320 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
553,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Impaired loans with an initial carrying value of $378.7 million were
written down to their fair value of $177.7 million. |
|
(2) |
|
Commercial loans held for sale with an initial carrying value of $36.3 million were
written down to their fair value of $18.7 million. |
|
(3) |
|
Goodwill with an initial carrying
value of $597.2 million was written down to its fair value of $330.7 million. |
|
(4) |
|
Mortgage servicing rights with an initial carrying value of $2.2 million were
written down to their fair value of $2.1 million. |
|
(5) |
|
ORE properties with an initial
carrying value of $37.5 million were written down to their fair value of $20.5 million. |
|
(6) |
|
Repossessed assets with an initial carrying value of $8.0 million were written
down to their fair value of $3.6 million. |
Note 11. Employee Benefit Plans
Pension and Postretirement Benefits: Citizens maintains a cash balance defined benefit
pension plan. Pension retirement benefits are based on the employees length of service and salary
levels. Under the defined benefit plan, employees are eligible for early retirement at age 55 with
at least 3 years of service. It is Citizens policy to fund pension costs in an amount sufficient
to meet or exceed the minimum funding requirements of applicable laws and regulations, plus such
additional amounts as Citizens deems appropriate up to the level allowed by federal tax
regulations. Actuarially determined pension costs are charged to current operations.
Effective December 31, 2006, Citizens defined benefit pension plan was frozen, preserving prior
earned benefits but discontinuing the accrual of further benefits. Citizens did not make a cash
contribution to the defined benefit pension plan during 2009 but reviews plan funding needs
periodically and will make a contribution if appropriate.
Citizens also maintains nonqualified supplemental benefit plans for certain former key employees.
These plans are provided for by charges to earnings sufficient to meet the projected benefit
obligation under applicable
accounting standards. Benefits under the nonqualified supplemental plans are based primarily on
years of
92
service, age and compensation before retirement. The defined pension benefits provided under
these plans are unfunded and any payments to plan participants are made by Citizens. During 2009,
Citizens contributed $8.0 million to the supplemental pension plans.
Citizens postretirement benefit plan provides postretirement health and dental care to full-time
employees who retired with eligibility for coverage based on historical plan terms. Current
employees are not eligible to participate in the bank subsidized plan. Citizens contributed $1.0
million to the postretirement benefit plan during 2009.
The estimated portion of balances included in accumulated other comprehensive income at December
31, 2009 and 2008 that have not been recognized prior to December 31 are presented below.
|
|
|
|
|
|
|
|
|
|
|
Cumulative Balance |
|
|
|
at December 31, |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
Defined Benefit Pension Plans |
|
|
|
|
|
|
|
|
Prior service cost |
|
$ |
198 |
|
|
$ |
199 |
|
Net actuarial loss |
|
|
32,906 |
|
|
|
35,400 |
|
|
|
|
|
|
|
|
Unrecognized balance |
|
|
33,104 |
|
|
|
35,599 |
|
|
|
|
|
|
|
|
Supplemental Pension Plans |
|
|
|
|
|
|
|
|
Prior service cost |
|
|
|
|
|
|
447 |
|
Net actuarial loss (gain) |
|
|
534 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
Unrecognized balance |
|
|
534 |
|
|
|
435 |
|
|
|
|
|
|
|
|
Postretirement Benefit Plans |
|
|
|
|
|
|
|
|
Prior service credit |
|
|
(1,678 |
) |
|
|
(1,120 |
) |
Net actuarial gain |
|
|
(1,186 |
) |
|
|
(806 |
) |
|
|
|
|
|
|
|
Unrecognized balance |
|
|
(2,864 |
) |
|
|
(1,926 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net prior service credit |
|
$ |
(1,480 |
) |
|
$ |
(474 |
) |
Unrecognized net actuarial loss |
|
$ |
32,254 |
|
|
$ |
34,582 |
|
|
An actuarial measurement date of December 31 was utilized in the following table to determine the
projected benefit obligations, fair value of plan assets, and accumulated benefit obligation at
December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
|
Supplemental |
|
|
Postretirement |
|
|
|
Benefits |
|
|
Pension Plan |
|
|
Benefits |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Change in Benefit Obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation, beginning of year |
|
$ |
75,705 |
|
|
$ |
78,421 |
|
|
$ |
12,173 |
|
|
$ |
12,949 |
|
|
$ |
9,986 |
|
|
$ |
10,195 |
|
Interest cost |
|
|
4,366 |
|
|
|
4,586 |
|
|
|
588 |
|
|
|
761 |
|
|
|
571 |
|
|
|
583 |
|
Participant contribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
337 |
|
|
|
307 |
|
Actuarial losses (gains) |
|
|
1,126 |
|
|
|
(422 |
) |
|
|
488 |
|
|
|
(1,022 |
) |
|
|
10 |
|
|
|
60 |
|
Plan amendments |
|
|
|
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
(241 |
) |
|
|
(114 |
) |
Benefits paid |
|
|
(7,190 |
) |
|
|
(7,038 |
) |
|
|
(7,957 |
) |
|
|
(515 |
) |
|
|
(1,368 |
) |
|
|
(1,045 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation, end of year |
|
$ |
74,007 |
|
|
$ |
75,705 |
|
|
$ |
5,292 |
|
|
$ |
12,173 |
|
|
$ |
9,295 |
|
|
$ |
9,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation, end of year |
|
$ |
74,007 |
|
|
$ |
75,705 |
|
|
$ |
5,292 |
|
|
$ |
11,922 |
|
|
$ |
9,295 |
|
|
$ |
9,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year |
|
$ |
60,914 |
|
|
$ |
89,656 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Actual return on plan assets |
|
|
10,397 |
|
|
|
(21,705 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer contribution |
|
|
|
|
|
|
|
|
|
|
7,957 |
|
|
|
515 |
|
|
|
1,031 |
|
|
|
738 |
|
Participant contribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
337 |
|
|
|
307 |
|
Benefits paid |
|
|
(7,190 |
) |
|
|
(7,037 |
) |
|
|
(7,957 |
) |
|
|
(515 |
) |
|
|
(1,368 |
) |
|
|
(1,045 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of year |
|
$ |
64,121 |
|
|
$ |
60,914 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Funded Status |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underfunded status of plan |
|
$ |
(9,886 |
) |
|
$ |
(14,791 |
) |
|
$ |
(5,292 |
) |
|
$ |
(12,173 |
) |
|
$ |
(9,295 |
) |
|
$ |
(9,986 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized in the |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidated balance sheets |
|
$ |
(9,886 |
) |
|
$ |
(14,791 |
) |
|
$ |
(5,292 |
) |
|
$ |
(12,173 |
) |
|
$ |
(9,295 |
) |
|
$ |
(9,986 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the underfunded status of the Cash Balance Pension Plan for Employees,
the Supplemental Pension Plans, and the Retirement Health Plan is recognized in the Corporations
consolidated balance sheet as an accrued liability. No plan assets are expected to be returned to
Citizens during the year ending December 31, 2010.
During the first quarter of 2009, Citizens recognized a curtailment charge as a result of a
reduction in the expected years of future service for the supplemental pension plan participants.
The components of net periodic benefit cost charged to operations each year for all plans follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
| | | |
Defined Benefit Pension Plans |
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
|
$ |
4,366 |
|
|
$ |
4,586 |
|
|
$ |
4,761 |
|
Expected return on plan assets |
|
|
(6,282 |
) |
|
|
(7,601 |
) |
|
|
(7,709 |
) |
Settlement charge related to lump sum payments |
|
|
|
|
|
|
|
|
|
|
832 |
|
Amortization of unrecognized: |
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
|
26 |
|
|
|
26 |
|
|
|
11 |
|
Net actuarial loss |
|
|
1,261 |
|
|
|
194 |
|
|
|
499 |
|
|
|
|
|
|
|
|
|
|
|
Net pension cost |
|
|
(629 |
) |
|
|
(2,795 |
) |
|
|
(1,606 |
) |
|
|
|
|
|
|
|
|
|
|
Supplemental Pension Plans |
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
|
|
588 |
|
|
|
761 |
|
|
|
768 |
|
Settlement charge related to lump sum payments |
|
|
455 |
|
|
|
|
|
|
|
|
|
Curtailment loss |
|
|
941 |
|
|
|
|
|
|
|
|
|
Amortization of unrecognized: |
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
|
|
|
|
|
471 |
|
|
|
167 |
|
Net actuarial loss |
|
|
12 |
|
|
|
20 |
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
Net pension cost |
|
|
1,996 |
|
|
|
1,252 |
|
|
|
1,065 |
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefit Plans |
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
|
|
|
|
|
|
|
|
|
1 |
|
Interest cost |
|
|
571 |
|
|
|
583 |
|
|
|
578 |
|
Amortization of unrecognized: |
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
|
(267 |
) |
|
|
(256 |
) |
|
|
(256 |
) |
Net actuarial gain |
|
|
(31 |
) |
|
|
(37 |
) |
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
Net postretirement benefit cost |
|
|
273 |
|
|
|
290 |
|
|
|
278 |
|
|
|
|
|
|
|
|
|
|
|
Total pension and postretirement benefit cost |
|
|
1,640 |
|
|
|
(1,252 |
) |
|
|
(264 |
) |
|
|
|
|
|
|
|
|
|
|
Defined contribution retirement and 401(k) plans |
|
|
|
|
|
|
|
|
|
|
|
|
Employer contributions |
|
|
2,253 |
|
|
|
6,452 |
|
|
|
6,533 |
|
|
|
|
|
|
|
|
|
|
|
Total periodic benefit cost |
|
$ |
3,893 |
|
|
$ |
5,199 |
|
|
$ |
6,270 |
|
|
|
|
|
|
|
|
|
|
|
The assumptions used in determining the actuarial present value of the benefit obligations and the
net periodic pension expense follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
|
Supplemental |
|
|
Postretirement |
|
|
|
Benefits |
|
|
Pension Plan |
|
|
Benefits |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Assumptions used to compute projected benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.75 |
% |
|
|
6.00 |
% |
|
|
5.25 |
% |
|
|
6.00 |
% |
|
|
5.25 |
% |
|
|
6.00 |
% |
Rate of compensation increase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions used to compute net benefit costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.00 |
|
|
|
6.00 |
|
|
|
5.25 |
|
|
|
6.00 |
|
|
|
6.00 |
|
|
|
6.00 |
|
Expected return on plan assets |
|
|
8.25 |
|
|
|
8.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase |
|
|
|
|
|
|
|
|
|
|
3.00 |
|
|
|
3.00 |
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the projected benefit payments for the employee benefit plans over the
next ten years follow:
Projected Benefit Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined |
|
|
|
|
|
|
|
|
|
|
|
|
Benefit |
|
|
Supplemental |
|
|
Postretirement |
|
|
Total |
|
(in thousands) |
|
Pension Plan |
|
|
Pension Plan |
|
|
Benefit Plan |
|
|
Benefits |
|
|
2010 |
|
$ |
5,130 |
|
|
$ |
515 |
|
|
$ |
681 |
|
|
$ |
6,326 |
|
2011 |
|
|
5,407 |
|
|
|
500 |
|
|
|
686 |
|
|
|
6,593 |
|
2012 |
|
|
5,259 |
|
|
|
484 |
|
|
|
690 |
|
|
|
6,433 |
|
2013 |
|
|
5,163 |
|
|
|
467 |
|
|
|
758 |
|
|
|
6,388 |
|
2014 |
|
|
5,394 |
|
|
|
451 |
|
|
|
751 |
|
|
|
6,596 |
|
2015 to 2019 |
|
|
27,658 |
|
|
|
1,923 |
|
|
|
3,417 |
|
|
|
32,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
54,011 |
|
|
$ |
4,340 |
|
|
$ |
6,983 |
|
|
$ |
65,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The projected payments were calculated using the same assumptions as those used to calculate the
benefit obligations listed above. The projected benefit payments for the postretirement benefit
plan are net of the projected Medicare Part D Subsidy.
Investment Policy and Strategy: Managements investment policy and strategy for managing defined
benefit plan assets is described as growth with income. Management analyzes the potential risks
and rewards associated with the asset allocation strategies on a quarterly basis. Implementation
of the strategies includes regular rebalancing to the target asset allocation. For 2008, the
strategy target mix consisted of 70% invested in equity securities and 30% invested in fixed income
debt securities and in cash or short-term equivalents. During 2009, the target mix was adjusted to
60% and 40%, respectively. This strategy was enacted to better match the current characteristics
of the plan and reduce funding volatility. The long-term rate of return expected on plan assets is
finalized after considering long-term returns in the general market, long-term returns experienced
by the assets in the plan, and projected plan expenses.
The plans target asset allocation and the actual asset allocation at December 31, 2009 is
presented below.
|
|
|
|
|
|
|
|
|
|
|
Target |
|
2009 |
|
|
Allocation |
|
Allocation |
|
Asset Category: |
|
|
|
|
|
|
|
|
Equity securities
|
|
|
60 |
% |
|
|
61 |
% |
Debt securities
|
|
|
34 |
|
|
|
35 |
|
Short-term pooled money fund
|
|
|
6 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
The pension plan assets for which Citizens determines fair value include short-term pooled money
fund, equity, and fixed income securities, all of which fall into Level 2 in the fair value
hierarchy at December 31, 2009. Citizens pension plan assets are invested solely in pooled
separate account funds, which are managed by Prudential. The net asset values (NAV) are based on
the value of the underlying assets owned by the fund, minus its liabilities, and then divided by
the number of units outstanding. The NAVs unit price of the pooled separate accounts is not
quoted on any market; however, the unit price is based on the underlying investments which are
traded in an active market and are priced by independent providers. Citizens has evaluated their
valuation methodologies used to develop the fair values in order to determine whether such
valuations are representative of an exit price in Citizens principal markets. Further, Citizens
has developed an internal, independent price verification function that performs testing on
valuations received from third parties. There are no significant restrictions on Citizens ability
to sell any of the investments in the pension plan.
The estimated fair values of Citizens pension plan assets at December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
(in thousands) |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Asset Category |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term pooled money fund |
|
$ |
2,647 |
|
|
$ |
|
|
|
$ |
2,647 |
|
|
$ |
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large cap (1) |
|
|
18,506 |
|
|
|
|
|
|
|
18,506 |
|
|
|
|
|
Mid-cap |
|
|
4,711 |
|
|
|
|
|
|
|
4,711 |
|
|
|
|
|
Small-cap |
|
|
6,578 |
|
|
|
|
|
|
|
6,578 |
|
|
|
|
|
International Equity |
|
|
9,518 |
|
|
|
|
|
|
|
9,518 |
|
|
|
|
|
Fixed income securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate term fixed (2) |
|
|
22,161 |
|
|
|
|
|
|
|
22,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
64,121 |
|
|
$ |
|
|
|
$ |
64,121 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This category is comprised of not actively managed low-cost equity index funds that track the S&P 500 and
Russell 1000. |
|
(2) |
|
This category represents investment grade bonds of U.S. issuers from diverse industries. |
Citizens does not anticipate making a contribution to the defined benefit pension plan during
calendar year 2010. Citizens will review the funding of this plan during 2010 and will make a
contribution, if appropriate. The Corporation anticipates making a contribution of $0.5 million to
the nonqualified supplemental benefit plans during 2010. In addition, Citizens expects to pay $0.9
million in contributions to the postretirement healthcare benefit plan during 2010.
Prior service pension costs are amortized on a straight-line basis over the average remaining
service period of employees expected to receive benefits under the plans. For the postretirement
health care benefit plan, Citizens assumed a 9.0% annual health care cost trend rate for 2009,
which grades down to the ultimate trend of 5.0% by 2032. This assumption can have a significant
effect on the amounts reported. A one-percentage-point change in assumed health care trend rates
would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
One Percentage |
|
|
One Percentage |
|
(in thousands) |
|
Point Increase |
|
|
Point Decrease |
|
|
Effect on total of service and interest cost components |
|
$ |
47 |
|
|
$ |
(42 |
) |
Effect on the postretirement benefit obligation |
|
|
809 |
|
|
|
(721 |
) |
Defined Contribution Retirement and 401(k) Plans: Substantially all employees are eligible to
contribute a portion of their pre-tax salary to a defined contribution 401(k) savings plan.
Citizens suspended the 401(k) matching funds and annual discretionary contributions effective July
17, 2009.
Note 12. Stock-Based Compensation
Citizens has a stock-based compensation plan authorizing the granting of incentive and
nonqualified stock options, non-vested stock awards (also known as restricted stock), restricted
stock units, and performance awards to employees and non-employee directors. Aggregate grants
under the current shareholder approved plan may not exceed 6,000,000 shares, and grants other than
stock options are further limited to 2,000,000 shares. At December 31, 2009, Citizens had
1,349,763 shares of common stock reserved for future issuance under the current plan.
Stock options awarded under the plan expire ten years from the date of grant. Restrictions on
nonvested stock generally lapse in three annual installments beginning on the first anniversary of
the grant date. Forfeited and expired options and forfeited shares of restricted stock become
available for future grants.
Compensation expense for stock options and restricted stock awards is recognized in salaries
and employee benefits based on the fair value at the date of grant and is recognized on a straight
line basis over the requisite service period of the awards.
The following table sets forth the total stock-based compensation expense resulting from stock
options and restricted stock awards included in the Consolidated Statements of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
Analysis of Stock-Based Compensation Expense |
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
| | | |
Stock option compensation |
|
$ |
11 |
|
|
$ |
24 |
|
|
$ |
34 |
|
Restricted stock compensation |
|
|
1,792 |
|
|
|
4,496 |
|
|
|
3,321 |
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense before income taxes |
|
|
1,803 |
|
|
|
4,520 |
|
|
|
3,355 |
|
Income tax benefit (1) |
|
|
(631 |
) |
|
|
(1,582 |
) |
|
|
(1,174 |
) |
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense after income taxes |
|
$ |
1,172 |
|
|
$ |
2,938 |
|
|
$ |
2,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The income tax benefit is calculated based on the statutory rate. Due to
the fact that Citizens has a valuation allowance, the income tax benefit may not be realized.
Refer to Note 13 for additional information. |
During the first quarter of 2009, a pre-tax expense reversal of $1.3 million was made to
stock-based compensation as a result of actual forfeitures exceeding the estimated forfeiture rate
for restricted stock.
There were no stock options exercised during the year ended December 31, 2009. Cash proceeds from
the exercise of stock options during 2008 and 2007 was $0.1 million and $6.1 million, respectively.
New shares are issued when stock options are exercised. Citizens presents excess tax benefits
from the exercise of stock options, if any, as financing cash inflows and as operating cash
outflows on the Consolidated Statement of Cash Flows.
The following table summarizes stock option activity for 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Term |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2007 |
|
|
4,775,700 |
|
|
$ |
24.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(452,863 |
) |
|
|
13.57 |
|
|
|
|
|
|
|
|
|
Forfeitures or Expirations |
|
|
(292,795 |
) |
|
|
27.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007 |
|
|
4,030,042 |
|
|
|
26.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(12,134 |
) |
|
|
11.77 |
|
|
|
|
|
|
|
|
|
Forfeitures or Expirations |
|
|
(567,251 |
) |
|
|
25.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
3,450,657 |
|
|
|
26.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures or Expirations |
|
|
(383,909 |
) |
|
|
26.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
3,066,748 |
|
|
$ |
26.22 |
|
|
2.8 yrs |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
3,066,676 |
|
|
$ |
26.21 |
|
|
2.8 yrs |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value
(i.e., the difference between Citizens average closing stock price as of December 31, 2009 and the
exercise price, multiplied by the number of shares) that would have been received by the option
holders had all option holders exercised those
98
options on December 31, 2009 if the average closing
stock price exceeded the exercise price. This amount fluctuates with changes in the fair value of
Citizens stock. The total intrinsic value of options exercised during 2008 and 2007 was less than
$0.1 million and $3.3 million, respectively. The fair value of options vested during 2009, 2008
and 2007 was less than $0.1 million, $0.2 million and $0.1 million, respectively.
The following table sets forth the actual tax benefit realized for the tax deductions from vested
stock options converted in the Republic acquisition and exercised.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Tax benefit realized from reduction of income tax payable: |
|
|
|
|
|
|
|
|
|
|
|
|
Reduction of goodwill for tax benefit of vested stock options
converted in Republic acquisition and exercised |
|
$ |
|
|
|
$ |
1 |
|
|
$ |
904 |
|
Included in common stock as net stock options exercised |
|
|
|
|
|
|
(76 |
) |
|
|
(106 |
) |
|
|
|
|
|
|
|
|
|
|
Tax benefit from vested stock options converted in Republic
acquisition and exercised |
|
$ |
|
|
|
$ |
(75 |
) |
|
$ |
798 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, $1.5 million of total unrecognized compensation cost related to stock
options and restricted stock is expected to be recognized over a weighted average period of 1.1
years.
The following table summarizes restricted stock activity for 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
Number of |
|
|
Per Share Grant |
|
|
|
Shares |
|
|
Date Fair Value |
|
|
Restricted stock at January 1, 2007 |
|
|
293,087 |
|
|
$ |
25.13 |
|
|
|
|
|
|
|
|
Granted |
|
|
324,441 |
|
|
|
19.38 |
|
Vested |
|
|
(88,542 |
) |
|
|
24.92 |
|
Forfeited |
|
|
(42,144 |
) |
|
|
25.27 |
|
|
|
|
|
|
|
|
Restricted stock at December 31, 2007 |
|
|
486,842 |
|
|
|
21.32 |
|
|
|
|
|
|
|
|
Granted |
|
|
338,995 |
|
|
|
8.56 |
|
Vested |
|
|
(171,197 |
) |
|
|
22.02 |
|
Forfeited |
|
|
(45,608 |
) |
|
|
15.80 |
|
|
|
|
|
|
|
|
Restricted stock at December 31, 2008 |
|
|
609,032 |
|
|
|
14.43 |
|
|
|
|
|
|
|
|
Granted |
|
|
384,818 |
|
|
|
1.29 |
|
Vested |
|
|
(225,151 |
) |
|
|
15.58 |
|
Forfeited |
|
|
(149,940 |
) |
|
|
12.31 |
|
|
|
|
|
|
|
|
Restricted stock at December 31, 2009 |
|
|
618,759 |
|
|
$ |
6.35 |
|
|
|
|
|
|
|
|
The total fair value of restricted stock vested during 2009, 2008, and 2007 was $0.3 million,
$0.9 million, and $1.8 million respectively.
Note 13. Income Taxes
Significant components of income taxes are as follows:
99
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Current tax (benefit) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(7,993 |
) |
|
$ |
(19,351 |
) |
|
$ |
10,913 |
|
State |
|
|
(895 |
) |
|
|
(684 |
) |
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
Total current tax (benefit) expense |
|
|
(8,888 |
) |
|
|
(20,035 |
) |
|
|
11,064 |
|
Deferred tax (benefit) expense |
|
|
(100,874 |
) |
|
|
(45,563 |
) |
|
|
20,241 |
|
Change in valuation allowance |
|
|
79,788 |
|
|
|
136,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense |
|
$ |
(29,974 |
) |
|
$ |
70,970 |
|
|
$ |
31,305 |
|
|
|
|
|
|
|
|
|
|
|
Generally, the calculation for the income tax provision (benefit) does not consider the tax
effects of changes in other comprehensive income (OCI), which is a component of shareholders
equity on the balance sheet. However, an exception is provided in certain circumstances, such as
when there is a pre-tax loss from continuing operations and income in other components of the
financial statements. In such a case, pre-tax income from other categories (such as changes in
OCI) is included in the calculation of the tax provision for the current year. For 2009, this
resulted in an increase to the income tax benefit of $22.9 million.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of Citizens deferred tax assets and liabilities as of
December 31, 2009 and 2008 follow:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
122,804 |
|
|
$ |
91,060 |
|
Accrued postemployment benefits other than pensions |
|
|
4,419 |
|
|
|
4,365 |
|
Deferred compensation |
|
|
6,057 |
|
|
|
9,662 |
|
Accrued expenses |
|
|
4,176 |
|
|
|
9,037 |
|
Net operating loss carryforwards |
|
|
91,378 |
|
|
|
9,621 |
|
Tax credit carryforwards |
|
|
3,411 |
|
|
|
12,483 |
|
Minimum pension liability |
|
|
11,379 |
|
|
|
13,175 |
|
Purchase accounting adjustments |
|
|
16,830 |
|
|
|
21,840 |
|
Unrealized losses on securities and derivatives |
|
|
|
|
|
|
3,222 |
|
Other deferred tax assets |
|
|
12,281 |
|
|
|
6,329 |
|
|
|
|
|
|
|
|
Deferred tax assets |
|
|
272,735 |
|
|
|
180,794 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Pension |
|
|
8,998 |
|
|
|
8,723 |
|
Acquisition premium on loans |
|
|
2,193 |
|
|
|
3,268 |
|
Fixed assets |
|
|
1,852 |
|
|
|
4,563 |
|
Basis difference in FHLB stock |
|
|
3,637 |
|
|
|
3,618 |
|
Purchase accounting adjustments |
|
|
975 |
|
|
|
2,452 |
|
Tax deductible goodwill |
|
|
13,986 |
|
|
|
12,183 |
|
Unrealized gains on securities and derivatives |
|
|
17,872 |
|
|
|
|
|
Mortgage servicing rights |
|
|
747 |
|
|
|
1,033 |
|
Other deferred tax liabilities |
|
|
962 |
|
|
|
1,426 |
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
51,222 |
|
|
|
37,266 |
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
221,513 |
|
|
|
143,528 |
|
Valuation allowance |
|
|
(235,499 |
) |
|
|
(155,711 |
) |
|
|
|
|
|
|
|
Total net deferred tax liabilities |
|
$ |
(13,986 |
) |
|
$ |
(12,183 |
) |
|
|
|
|
|
|
|
100
Citizens reviewed its deferred tax assets and determined that, due to the significant pre-tax
loss in 2009, the impact on cumulative pre-tax income, and the uncertain economic environment
affecting estimates of future taxable income, it must continue to carry a valuation allowance
against the entire net deferred tax asset, excluding the deferred tax liability for tax deductible
goodwill.
The deferred tax asset are analyzed quarterly for changes affecting realizability and the valuation
allowance may be adjusted in future periods accordingly. The ultimate realization of these
deferred tax assets is dependent on the generation of future taxable income during the periods in
which those temporary differences become deductible. Changes in existing tax laws could also
affect actual tax results and the valuation of deferred tax assets over time. The accounting for
deferred taxes is based on an estimate of future results. Differences between anticipated and
actual outcomes of these future tax consequences could have an impact on Citizens consolidated
results of operations or financial position.
At December 31, 2009, Citizens had a gross federal net operating loss carryforward of $248.7
million that expires in 2028 and 2029, a gross state net operating loss carryforward of $82.9
million that expires in the years 2014 through 2024, general business tax credits of $0.9 million
that expire in the years 2026 through 2029, and $2.6 million of federal alternative minimum tax
credits with an indefinite life.
Companies are subject to a change of ownership test under Section 382 of the Internal Revenue Code
of 1986, as amended, that, if met, would limit the annual utilization of the pre-change of
ownership carryforward as well as the ability to use certain unrealized built-in losses. A change
of ownership occurred under Section 382 as a result of the exchange offers of common stock for
long-term debt in the third quarter of 2009. Generally, under Section 382, the yearly limitation
on our ability to utilize such deductions will be equal to the product of the applicable long-term
tax exempt rate and the sum of the values of our common stock and our TARP Preferred Stock
immediately before the ownership change. Our ability to utilize deductions related to credit
losses during the twelve-month period following such an ownership change would also be limited
under Section 382, together with net operating loss carryforwards, to the extent that such
deductions reflect a net loss that was built-in to our assets immediately prior to the ownership
change.
A reconciliation of income tax expense from continuing operations to the amount computed by
applying the federal statutory rate of 35% to income from continuing operations before income taxes
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Tax at federal statutory rate applied to income before income taxes |
|
$ |
(190,466 |
) |
|
$ |
(112,728 |
) |
|
$ |
46,252 |
|
Increase (decrease) in taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt income |
|
|
(9,803 |
) |
|
|
(10,764 |
) |
|
|
(10,694 |
) |
Officers life insurance |
|
|
(1,114 |
) |
|
|
(1,508 |
) |
|
|
(2,934 |
) |
Goodwill impairment |
|
|
93,266 |
|
|
|
62,331 |
|
|
|
|
|
Net change in valuation allowance |
|
|
79,788 |
|
|
|
136,568 |
|
|
|
|
|
Other |
|
|
(1,645 |
) |
|
|
(2,929 |
) |
|
|
(1,319 |
) |
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense |
|
$ |
(29,974 |
) |
|
$ |
70,970 |
|
|
$ |
31,305 |
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the beginning and ending amount of unrecognized tax benefits follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Balance at January 1 |
|
$ |
1,852 |
|
|
$ |
7,093 |
|
|
$ |
6,786 |
|
Additions based on tax positions related to the current year |
|
|
|
|
|
|
34 |
|
|
|
1,158 |
|
Additions for tax positions of prior years |
|
|
|
|
|
|
|
|
|
|
1,244 |
|
Reductions for tax positions of prior years |
|
|
(28 |
) |
|
|
(1,436 |
) |
|
|
(892 |
) |
Reductions due to the statute of limitations |
|
|
(302 |
) |
|
|
|
|
|
|
(269 |
) |
Settlements |
|
|
|
|
|
|
(3,839 |
) |
|
|
(934 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at December 31 |
|
$ |
1,522 |
|
|
$ |
1,852 |
|
|
$ |
7,093 |
|
|
|
|
|
|
|
|
|
|
|
101
It is Citizens policy to recognize interest and penalties accrued relative to unrecognized
tax benefits in their respective federal or state income tax accounts. Accrued interest as of
December 31, 2009 and 2008 totaled $0.4 million at each year-end. Citizens recognized less than
$0.1 million in expense for interest in each of those years. No penalties have been accrued.
During 2009, Citizens settled its 2004 and 2005 federal examinations and paid less than $0.2
million in interest expense as a result of changes in the timing of deductions between the two
years. In August 2008, the Corporation settled an outstanding issue with the State of Wisconsin and
recorded a $3.8 million decrease in unrecognized tax benefits, a reduction to operating loss
carryforward, and a $0.5 million net benefit to the income statement. In the first quarter of
2008, Citizens recognized a $1.3 million previously unrecognized tax benefit, and reversed $0.2
million in previously accrued interest, when the Internal Revenue Service announced it would not
appeal a taxpayer-favorable U.S. Tax Court decision regarding the tax effect of holding municipal
securities in an investment subsidiary.
Citizens and its subsidiaries file U.S. federal income tax returns, as well as various returns in
the states where its banking offices are located. The following tax years remain subject to
examination as of December 31, 2009:
|
|
|
|
|
Jurisdiction |
|
Tax Years |
|
|
Federal |
|
|
2006 - 2009 |
|
Indiana |
|
|
2003 - 2009 |
|
Wisconsin |
|
|
2002 - 2009 |
|
Iowa |
|
|
2003 - 2009 |
|
|
Note 14. Shareholders Equity and Earnings Per Share
On September 17, 2009, Citizens filed with the State of Michigan the amendment to its articles
of incorporation approved by shareholders on September 16, 2009. The amendment increased the total
authorized common shares from 150 million shares to 1.05 billion shares.
On September 30, 2009, Citizens completed the settlement of its exchange offers to issue common
stock in exchange for its outstanding 5.75% Subordinated Notes due 2013 and outstanding 7.50%
Enhanced Trust Preferred Securities of the 2006 Trust (the Exchange Offers). In aggregate,
268.2 million shares at a fair value of $219.9 million ($0.82 per common share as of the expiration
date of the Exchange Offers) were issued in exchange for long term debt with a carrying value of
$204.0 million. The consummation of the Exchange Offers created a net loss on the early
extinguishment of debt totaling $15.9 million, which represented the difference between the fair
value of Citizens common stock issued and the carrying value of the retired debt. After taking
into account $6.4 million of issuance costs, the transaction resulted in an increase to common
equity of $197.6 million.
In June 2008, Citizens issued $79.6 million of common stock and $120.4 million of contingent
convertible perpetual non-cumulative preferred stock that together increased shareholders equity
by $189.0 million (net of issuance costs and the underwriting discount). The preferred stock was
converted into 30.1 million shares of common stock upon shareholder approval of a charter amendment
authorizing 50 million additional shares of common stock in September 2008.
On December 12, 2008, Citizens issued 300,000 shares of TARP Preferred Stock to the Treasury as
part of the Treasurys Capital Purchase Program. In addition, Citizens issued a ten-year warrant
to the Treasury to purchase up to 17,578,125 shares of Citizens common stock, no par value at an
exercise price of $2.56 per share. The aggregate proceeds from the transaction were $300.0
million. The TARP Preferred Stock has no par value, carries a liquidation price of $1,000 per
share, and pays cumulative dividends at a rate of 5% per year for the first five years and 9% per
year thereafter. Citizens cannot redeem the preferred securities during the first three years
after issuance except with the proceeds from an offering of perpetual preferred or common stock
that qualifies as and may be included in Tier 1 capital. After three years, Citizens may redeem
the preferred stock at the
102
liquidation price plus accrued and unpaid dividends. Citizens is accreting the book value of
the preferred stock issued under the TARP using the effective interest method up to the par value
of $300 million. The preferred shares are non-voting, other than class voting rights on matters
that could adversely affect the shares. The preferred shares qualify as Tier 1 capital. The
warrant is immediately exercisable, qualifies as Tier 1 capital and expires in December 2018.
Earnings per common share is computed using the two-class method. Basic earnings per common share
is computed by dividing net income allocated to common shareholders by the weighted-average number
of common shares outstanding, excluding outstanding participating securities. Participating
securities include nonvested stock awards (also known as restricted stock) because holders of these
securities have the right to receive non-forfeitable dividends at the same rate as holders of
common stock and have voting rights. Diluted earnings per common share is computed based on the
weighted-average number of common shares outstanding including the dilutive effect of stock-based
compensation. Potential common stock that would be generated from restrictions lapsing on unvested
shares as well as additional shares issued through the exercise of stock options and warrant were
anti-dilutive and therefore excluded from the computation of dilutive earnings per share.
A reconciliation of the numerators and denominators of the basic and diluted earnings per share
computations follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and dilutive earnings per share net (loss) income |
|
$ |
(514,213 |
) |
|
$ |
(393,052 |
) |
|
$ |
100,842 |
|
Deemed dividend on convertible preferred stock |
|
|
|
|
|
|
(11,737 |
) |
|
|
|
|
Dividend on redeemable preferred stock |
|
|
(19,777 |
) |
|
|
(227 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders |
|
|
(533,990 |
) |
|
|
(405,016 |
) |
|
|
100,842 |
|
Net (loss) income allocated to participating securities |
|
|
|
|
|
|
|
|
|
|
523 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income allocated to common shareholders |
|
|
(533,990 |
) |
|
|
(405,016 |
) |
|
|
100,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
194,577 |
|
|
|
94,731 |
|
|
|
75,733 |
|
Less: Participating securities included in weighted average shares outstanding |
|
|
(744 |
) |
|
|
(575 |
) |
|
|
(393 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic earnings per common share |
|
|
193,833 |
|
|
|
94,156 |
|
|
|
75,340 |
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities potential conversion of employee stock options and restricted stock awards |
|
|
|
|
|
|
|
|
|
|
183 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for dilutive earnings per common share |
|
|
193,833 |
|
|
|
94,156 |
|
|
|
75,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per common share |
|
$ |
(2.75 |
) |
|
$ |
(4.30 |
) |
|
$ |
1.33 |
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per common share |
|
$ |
(2.75 |
) |
|
$ |
(4.30 |
) |
|
$ |
1.33 |
|
|
|
|
|
|
|
|
|
|
|
Stock Repurchase Program: Citizens purchased shares under a stock repurchase program initiated
October 2003. This program authorizes Citizens to repurchase up to 3,000,000 shares. There were
no shares purchased under this plan in 2009. Shares purchased in connection with the exercise of
certain employee stock options and the vesting of certain share awards were not part of the
repurchase program. In 2009, Citizens purchased 50,571 shares in connection with taxes due from
employees as a result of the vesting of certain share awards.
Note 15. Lines of Business
The financial performance of Citizens is monitored by an internal profitability measurement
system, which provides line of business results and key performance measures. The profitability
measurement system is based on internal management methodologies designed to produce consistent
results and reflect the underlying economics of the businesses. The development and application of
these methodologies is a dynamic process. Accordingly, these measurement tools and assumptions may
be revised periodically to reflect methodology, product, and/or management organizational changes.
Further, these policies measure financial results that
103
support the strategic objectives and internal organizational structure of Citizens. Consequently,
the information presented is not necessarily comparable with similar information for other
institutions.
During 2009, Citizens refined its lines of business to more closely align with the delivery of its
products and services. A description of each business line, selected financial performance and the
methodologies used to measure financial performance are presented below.
|
|
Regional Banking Regional Banking provides a wide range of lending, depository, and other
related financial services to both individual consumers and businesses. The products and
services offered to consumer clients include: direct loans, home equity loans and lines of
credit, checking, savings and money market accounts, certificates of deposit, and fixed and
variable annuities, as well as private banking services for affluent clients. Citizens
partners with outside providers to offer to consumer clients the availability of nationwide
ATM, debit, and credit card networks as well as mortgage origination services. The
transaction-based income and expense associated with these services are included in Regional
Banking. The products and services offered to commercial and industrial clients include:
term loans, revolving credit arrangements, inventory and accounts receivable financing,
commercial mortgages, letters of credit, and small business loans. Noncredit services for
commercial clients include deposit accounts, treasury management, corporate cash management,
international banking services, advice and assistance in the placement of securities, and
financial planning. |
|
|
|
Specialty Consumer Specialty Consumer includes the indirect consumer and the residential
mortgage portfolios. The indirect lending team partners with dealerships across the Midwest
to provide primarily marine and recreational vehicle loans to consumers. As nearly all of new
mortgage volume is originated through the Regional Banking delivery channel and sold into the
secondary market, the residential mortgage loan portfolio residing in Specialty Consumer
consists primarily of historical loan production as well as the minimal new production that is
retained. |
|
|
|
Specialty Commercial Specialty Commercial provides a full range of lending, depository,
and related financial services to commercial real estate developers, owners of multi-unit
commercial properties, middle-market companies, local governments and municipalities.
Products and services offered include commercial mortgages, real estate construction lending,
term loans, revolving credit arrangements, inventory and accounts receivable financing, and
letters of credit. Noncredit services for these customers include deposit accounts, treasury
management, corporate cash management, international banking services, advice and assistance
in the placement of securities, and financial planning. |
|
|
|
Wealth Management Wealth Management offers a broad array of asset management, financial
planning, estate settlement and administration, credit and deposit products and services.
Trust and investment services include personal trust and planning, investment management,
estate settlement and administration services. Retirement plan services focus on investment
management and fiduciary activities with special emphasis on 401(k) plans. Brokerage and
insurance delivers retail mutual funds, other securities, variable and fixed annuities,
personal disability and life insurance products and discounted brokerage services. |
|
|
|
Other The Other line of business includes activities that are not directly attributable
to one of the primary business lines. Included in this category are the Holding Company;
shared services unit; Citizens treasury unit, including the securities portfolio, short-term
borrowing and asset/liability management activities; inter-company eliminations; and the
economic impact of certain assets, capital and support functions not specifically identifiable
with the four primary lines of business. |
The accounting policies of the individual business units are the same as those of Citizens
described in Note 1 to the Consolidated Financial Statements. Funds transfer pricing is used in
the determination of net interest income by assigning a cost for funds used or credit for funds
provided to assets and liabilities within each business unit. Assets and liabilities are
match-funded based on their maturity, prepayment and/or repricing characteristics. As a result,
the Regional Banking, Specialty Consumer, Specialty Commercial, and Wealth Management units are
largely insulated from changes in interest rates. Changes in net interest income due to changes in
interest rates are reported in Citizens treasury unit. The provision for loan losses is allocated
based upon the actual net charge-offs of each respective line of business, adjusted for loan growth
and changes in risk profile. Noninterest
104
income and expenses directly attributable to a line of business are assigned to that business.
Expenses for centrally provided services are allocated to the business lines as follows: product
processing and technology expenditures are allocated based on standard unit costs applied to actual
volume measurements; corporate overhead is allocated based on the ratio of a line of business
noninterest expenses to total noninterest expenses incurred by all business lines. There are no
significant intersegmental revenues. Selected segment information is included in the following
table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of Business Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional |
|
|
Specialty |
|
|
Specialty |
|
|
Wealth |
|
|
|
|
|
|
|
(in thousands) |
|
Banking |
|
|
Consumer |
|
|
Commercial |
|
|
Mgmt |
|
|
Other |
|
|
Total |
|
|
Earnings Summary 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (taxable equivalent) |
|
$ |
276,108 |
|
|
$ |
25,500 |
|
|
$ |
64,155 |
|
|
$ |
585 |
|
|
$ |
(32,530 |
) |
|
$ |
333,818 |
|
Provision for loan losses |
|
|
105,784 |
|
|
|
80,366 |
|
|
|
139,805 |
|
|
|
|
|
|
|
|
|
|
|
325,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision |
|
|
170,324 |
|
|
|
(54,866 |
) |
|
|
(75,650 |
) |
|
|
585 |
|
|
|
(32,530 |
) |
|
|
7,863 |
|
Noninterest income |
|
|
73,381 |
|
|
|
31 |
|
|
|
(16,438 |
) |
|
|
20,501 |
|
|
|
(10,054 |
) |
|
|
67,421 |
|
Noninterest expense (1) |
|
|
495,615 |
|
|
|
47,609 |
|
|
|
17,411 |
|
|
|
16,794 |
|
|
|
25,592 |
|
|
|
603,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before income taxes |
|
|
(251,910 |
) |
|
|
(102,444 |
) |
|
|
(109,499 |
) |
|
|
4,292 |
|
|
|
(68,176 |
) |
|
|
(527,737 |
) |
Income tax (benefit) provision (taxable equivalent) |
|
|
(88,169 |
) |
|
|
(35,855 |
) |
|
|
(38,325 |
) |
|
|
1,502 |
|
|
|
147,323 |
|
|
|
(13,524 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(163,741 |
) |
|
$ |
(66,589 |
) |
|
$ |
(71,174 |
) |
|
$ |
2,790 |
|
|
$ |
(215,499 |
) |
|
$ |
(514,213 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets (in millions) |
|
$ |
5,120 |
|
|
$ |
2,206 |
|
|
$ |
1,625 |
|
|
$ |
12 |
|
|
$ |
3,520 |
|
|
$ |
12,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Summary 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (taxable equivalent) |
|
$ |
273,987 |
|
|
$ |
33,690 |
|
|
$ |
64,112 |
|
|
$ |
43 |
|
|
$ |
(4,498 |
) |
|
$ |
367,334 |
|
Provision for loan losses |
|
|
96,286 |
|
|
|
58,775 |
|
|
|
126,993 |
|
|
|
|
|
|
|
|
|
|
|
282,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision |
|
|
177,701 |
|
|
|
(25,085 |
) |
|
|
(62,881 |
) |
|
|
43 |
|
|
|
(4,498 |
) |
|
|
85,280 |
|
Noninterest income |
|
|
77,357 |
|
|
|
674 |
|
|
|
(7,596 |
) |
|
|
25,037 |
|
|
|
6,270 |
|
|
|
101,742 |
|
Noninterest expense (1) |
|
|
221,738 |
|
|
|
30,461 |
|
|
|
197,393 |
|
|
|
24,239 |
|
|
|
16,871 |
|
|
|
490,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before income taxes |
|
|
33,320 |
|
|
|
(54,872 |
) |
|
|
(267,870 |
) |
|
|
841 |
|
|
|
(15,099 |
) |
|
|
(303,680 |
) |
Income tax provision (taxable equivalent) |
|
|
11,662 |
|
|
|
(19,205 |
) |
|
|
(93,755 |
) |
|
|
294 |
|
|
|
190,376 |
|
|
|
89,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
21,658 |
|
|
$ |
(35,667 |
) |
|
$ |
(174,115 |
) |
|
$ |
547 |
|
|
$ |
(205,475 |
) |
|
$ |
(393,052 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets (in millions) |
|
$ |
5,993 |
|
|
$ |
2,370 |
|
|
$ |
2,039 |
|
|
$ |
13 |
|
|
$ |
2,827 |
|
|
$ |
13,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Summary 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (taxable equivalent) |
|
$ |
290,113 |
|
|
$ |
38,649 |
|
|
$ |
69,140 |
|
|
$ |
(45 |
) |
|
$ |
2,869 |
|
|
$ |
400,726 |
|
Provision for loan losses |
|
|
17,736 |
|
|
|
9,054 |
|
|
|
18,387 |
|
|
|
|
|
|
|
|
|
|
|
45,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision |
|
|
272,377 |
|
|
|
29,595 |
|
|
|
50,753 |
|
|
|
(45 |
) |
|
|
2,869 |
|
|
|
355,549 |
|
Noninterest income |
|
|
81,040 |
|
|
|
2,100 |
|
|
|
2,341 |
|
|
|
27,410 |
|
|
|
9,677 |
|
|
|
122,568 |
|
Noninterest expense |
|
|
221,965 |
|
|
|
19,652 |
|
|
|
17,595 |
|
|
|
22,246 |
|
|
|
45,965 |
|
|
|
327,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
131,452 |
|
|
|
12,043 |
|
|
|
35,499 |
|
|
|
5,119 |
|
|
|
(33,420 |
) |
|
|
150,694 |
|
Income tax provision (taxable equivalent) |
|
|
46,008 |
|
|
|
4,215 |
|
|
|
12,425 |
|
|
|
1,792 |
|
|
|
(14,588 |
) |
|
|
49,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
85,444 |
|
|
$ |
7,828 |
|
|
$ |
23,074 |
|
|
$ |
3,327 |
|
|
$ |
(18,832 |
) |
|
$ |
100,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets (in millions) |
|
$ |
6,183 |
|
|
$ |
2,082 |
|
|
$ |
2,005 |
|
|
$ |
13 |
|
|
$ |
3,037 |
|
|
$ |
13,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Noninterest expense includes the $266.5 million goodwill
impairment charge for Regional Banking in 2009 and
$178.1 million for Specialty Commercial in 2008 |
Note 16. Commitments, Contingent Liabilities and Guarantees
Commitments: The Consolidated Financial Statements do not reflect various loan commitments
(unfunded loans and unused lines of credit) and letters of credit originated in the normal course
of business. Loan commitments are made to accommodate the financial needs of clients. Generally,
new loan commitments do not extend beyond 90 days and unused lines of credit are reviewed at least
annually. Letters of credit guarantee future payment of client financial obligations to third
parties. They are normally issued for services provided or to facilitate the shipment of goods,
and generally expire within one year. Both arrangements have essentially the
105
same level of credit
risk as that associated with extending loans to clients and are subject to Citizens normal credit
policies. Inasmuch as these arrangements generally have fixed expiration dates or other
termination clauses, most expire unfunded and do not necessarily represent future liquidity
requirements. Collateral is obtained based on managements assessment of the client and may
include receivables, inventories, real property and equipment.
Amounts available to clients under loan commitments and letters of credit follow:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
Loan commitments and letters of credit: |
|
|
|
|
|
|
|
|
Commitments to extend credit |
|
$ |
1,371,626 |
|
|
$ |
2,048,258 |
|
Financial standby letters of credit |
|
|
228,483 |
|
|
|
225,675 |
|
Performance standby letters of credit |
|
|
7,523 |
|
|
|
21,692 |
|
Commercial letters of credit |
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,607,655 |
|
|
$ |
2,295,625 |
|
|
|
|
|
|
|
|
Commitments outstanding to extend credit include home equity credit lines which totaled $468.0
million and $579.6 million at December 31, 2009 and December 31, 2008, respectively.
At December 31, 2009 and December 31, 2008, a liability of $3.2 million and $3.9 million,
respectively, was recorded for possible losses on commitments to extend credit. A liability of
$1.1 million and $0.7 million was recorded at December 31, 2009 and December 31, 2008,
respectively, representing the value of the guarantee obligations associated with certain letters
of credit, which are amortized into income over the life of the commitments. These balances are
included in other liabilities on the Consolidated Balance Sheets.
Contingent Liabilities and Guarantees: Citizens and its subsidiaries are parties to litigation
arising in the ordinary course of business. Management believes that the aggregate liability, if
any, resulting from these proceedings would not have a material effect on Citizens consolidated
financial position or results of operations. Citizens has performance obligations upon the
occurrence of certain events under financial guarantees provided in certain contractual
arrangements.
Purchase Obligations: Citizens has entered into contracts for the supply of current and future
services incurred in the ordinary course of business, such as data processing and certain
property management functions. Citizens often purchases services from vendors under
agreements that typically can be terminated on a periodic basis.
Change in Control Agreements: The Corporation has change-in-control agreements with certain
executive officers. Under these agreements, each covered person could receive, upon the
effectiveness of a change-in-control, up to three times (i) his or her base compensation plus (ii)
the greater of the target bonus established for the year or the highest bonus paid to the executive
in the last three years. Additionally, subject to certain conditions, the executives insurance
benefits will continue for up to three full years after the termination and all long-term incentive
awards will immediately vest. The provisions of the EESA and ARRA, and Treasury regulations
promulgated thereunder, limit Citizens ability to make payments under these agreements while the
preferred stock issued to Treasury remains outstanding.
Note 17. Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
Citizens is exposed to certain risks arising from both its business operations and economic
conditions. Citizens manages economic risks, including interest rate, liquidity, and credit risk,
primarily through the amount, sources, and duration of its assets and liabilities and the use of
derivative financial instruments. Specifically, Citizens enters into derivative financial
instruments to manage exposures that arise from business activities that result in the receipt or
payment of future known and uncertain cash amounts, the value of which are determined by interest
106
rates. Citizens derivative financial instruments are used to manage differences in the
amount, timing, and duration of its known or expected cash receipts and cash payments principally
related to certain variable-rate loan assets and fixed-rate borrowings.
Fair Values of Derivative Instruments on the Consolidated Balance Sheets
The table below presents the fair value of Citizens derivative financial instruments as well as
their classification on the Consolidated Balance Sheets for years ended December 31, 2009 and 2008.
Fair Value of Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets |
|
|
Other Liabilities |
|
|
|
December 31, |
|
|
December 31, |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Derivatives designated as hedging
instruments under FASB ASC 815 Interest rate products |
|
$ |
17,279 |
|
|
$ |
30,984 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging
instruments under FASB ASC 815 Interest rate products |
|
|
29,775 |
|
|
|
47,950 |
|
|
|
29,095 |
|
|
|
44,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
$ |
47,054 |
|
|
$ |
78,934 |
|
|
$ |
29,095 |
|
|
$ |
44,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges of Interest Rate Risk
Citizens objectives in using interest rate derivatives are to add stability to interest income and
to manage its exposure to interest rate movements. To accomplish this objective, Citizens
primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest
rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a
counterparty in exchange for Citizens making variable-rate payments over the life of the agreements
without exchange of the underlying notional amount. As of December 31, 2009 and December 31, 2008,
Citizens had 13 interest rate swaps with an aggregate notional amount of $460.0 million and 19
interest rate swaps with an aggregate notional amount of $700.0 million, respectively, that were
designated as cash flow hedges of interest rate risk.
The effective portion of changes in the fair value of derivatives that are designated and qualify
as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently
reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
During 2008 and 2009, such derivatives were used to hedge the variable cash inflows associated with
existing pools of prime and LIBOR-based loan assets. The ineffective portion of the change in fair
value of the derivatives is recognized directly in earnings. For the year ended December 31 2009,
Citizens recognized a gain of less than $0.1 million for hedge ineffectiveness attributable to a
mismatch between the swap notional amount and the aggregate principal amount of the designated loan
pools. Additionally, during the year ended December 31, 2009, Citizens recognized gains of $0.6
million related to the ineffective portion of the derivative net settlements on Citizens cash flow
hedges. No hedge ineffectiveness was recognized during the year ended December 31, 2008.
In addition, two swaps failed to qualify for hedge accounting due to this mismatch during the
fourth quarter of 2008 and were subsequently terminated in January 2009. Accordingly, the change
in fair value for these swaps is recognized in earnings as a gain of $1.7 million in 2008. The
fair value of these swaps and their change in fair value during the years ended December 31, 2009
and 2008 are disclosed as Derivatives Not Designated as Hedges throughout this footnote.
Amounts reported in accumulated other comprehensive income related to derivatives are reclassified
to interest income as interest payments are received on Citizens variable-rate assets. During the
years ended December 31, 2009 and 2008, Citizens accelerated the reclassification of an unrealized
gain in accumulated other comprehensive income of $0.2 million to earnings for both years as a
result of the hedged forecasted
107
transactions becoming probable not to occur. During 2010, Citizens
estimates that $7.5 million will be reclassified as an increase to interest income.
The following tables summarize the impact of cash flow hedges on the Consolidated Financial
Statements for the years ended December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Impact on OCI Gain (Loss) |
|
Derivative Ineffectiveness Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
|
Location |
|
|
|
|
|
|
|
|
|
Location |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassified in |
|
Reclassified from |
|
|
Recognized in |
|
|
|
Derivatives Relationship |
|
|
|
|
|
|
|
|
|
Statement of |
|
Accumulated OCI into |
|
|
Statement of |
|
|
|
(in thousands) |
|
Recognized in OCI |
|
|
Operations |
|
Statement of Operations |
|
|
Operations |
|
Amount |
|
|
|
December 31, |
|
|
|
|
December 31, |
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
2009 |
|
|
2008 |
|
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate products |
|
$ |
2,936 |
|
|
$ |
23,366 |
|
|
Interest income |
|
$ |
12,629 |
|
|
$ |
3,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
244 |
|
|
|
196 |
|
|
Other income |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,936 |
|
|
$ |
23,366 |
|
|
|
|
$ |
12,873 |
|
|
$ |
3,787 |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hedges of Interest Rate Risk
Citizens is exposed to changes in the fair value of certain of its fixed-rate obligations due to
changes in LIBOR, the benchmark interest rate. Interest rate swaps designated as fair value hedges
involve the receipt of fixed-rate amounts from a counterparty in exchange for Citizens making
variable-rate payments over the life of the agreements without the exchange of the underlying
notional amount. As of December 31, 2009 and December 31, 2008, Citizens had 8 fair value interest
rate swaps with an aggregate notional balance of $385.0 million and 9 fair value interest rate
swaps with an aggregate notional balance of $305.0 million, respectively.
For derivatives that are designated and qualify as fair value hedges, the gain or loss on the
derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged
risk are recognized in earnings. Citizens includes the gain or loss on the hedged items in the
same line item as the offsetting loss or gain on the related derivatives. During the year ended
December 31, 2009, Citizens recognized gains of $6.3 million in interest expense related to hedge
ineffectiveness. No hedge ineffectiveness was recognized during the year ended December 31, 2008.
Citizens also recognized a net reduction to interest expense of $8.7 million and $1.4 million for
the years ended December 31, 2009 and 2008, respectively, related to Citizens fair value hedges,
which includes net settlements on the derivatives, ineffectiveness and any amortization adjustment
in the basis of the hedged items.
The following table summarizes the impact of fair value hedges on the Consolidated Financial
Statements for the years ended December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Contract (Loss) Gain |
|
|
Hedged Item Gain (Loss) |
|
|
Location in |
|
|
|
|
|
|
|
|
|
Location in |
|
|
|
|
|
|
Derivatives Relationship |
|
Statement of |
|
|
|
|
|
|
|
|
|
Statement of |
|
|
|
|
|
|
(in thousands) |
|
Operations |
|
2009 |
|
|
2008 |
|
|
Operations |
|
2009 |
|
|
2008 |
|
Fair value hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate products |
|
Interest expense |
|
$ |
(3,846 |
) |
|
$ |
8,202 |
|
|
Interest expense |
|
$ |
10,151 |
|
|
$ |
(8,202 |
) |
Non-designated Hedges
Citizens does not use derivatives for trading or speculative purposes and does not use credit
derivatives for any purpose. Derivatives not designated as hedges are used to manage Citizens
exposure to interest rate movements and other identified risks but do not satisfy the conditions of
ASC 815 for hedge accounting. Changes in the fair value of derivatives not designated in hedging
relationships are recorded directly in earnings. Additionally, Citizens holds interest rate
derivatives, including interest rate swaps and option products, resulting from a service Citizens
provides to certain clients. Citizens executes interest rate derivatives with commercial
108
banking
clients to facilitate their respective risk management strategies. Those derivatives are
simultaneously hedged by offsetting derivatives that Citizens executes with a third party, such
that Citizens minimizes its net risk exposure resulting from such transactions. As of December 31,
2009 and December 31, 2008, Citizens had 284 derivative transactions with an aggregate notional
amount of $1.0 billion related to this program and 300 derivative transactions with an aggregate
notional amount of $1.1 billion, respectively.
The following table summarizes the impact of derivatives not designated as hedges on the
Consolidated Financial Statements for the years ended December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss) Gain |
|
|
|
|
Recognized in Statement |
|
|
|
|
of Operations |
|
|
Location of (Loss) |
|
|
|
|
|
|
|
Gain Recognized in |
|
|
|
|
|
Derivatives Relationship |
|
Statement of |
|
|
|
|
(in thousands) |
|
Operations |
|
2009 |
|
2008 |
Derivatives not designated
as hedges |
|
|
|
|
|
|
|
|
|
|
Interest rate products
|
|
Other income
|
|
$ |
(661 |
) |
|
$ |
3,194 |
|
Credit-Risk-Related Contingent Features
Citizens has agreements with its derivative counterparties that contain a provision where if
Citizens defaults on any of its indebtedness, including a default where repayment of the
indebtedness has not been accelerated by the lender, then it could also be declared in default on
its derivative obligations. Citizens also has agreements with certain of its derivative
counterparties that contain a provision where if it fails to maintain its status as a
well/adequately capitalized institution, then the counterparty could terminate the derivative
positions and Citizens would be required to settle its obligations under the agreements.
As of December 31, 2009, the fair value of derivatives in a net liability position with all
counterparties, which includes accrued interest, but excludes any adjustment for non performance
risk related to these agreements was $17.3 million. As of December 31, 2009, Citizens had minimum
collateral posting with its derivative counterparties and assigned collateral of $14.3 million. If
credit risk related contingent features underlying these agreements had been triggered as of
December 31, 2009, Citizens would have assigned additional collateral of $3.0 million.
In addition, if Citizens credit rating is reduced below investment grade, then a termination event
shall be deemed to have occurred with two of its counterparties and the counterparties shall have
the right to terminate all affected transactions under the agreement. Citizens has breached these
provisions with respect to all rating agencies below investment grade at December 31, 2009 and may
be required to settle its obligations under the agreements at the termination value. Citizens may
be required to pay additional amounts due in excess of amounts previously posted as collateral. As
of December 31, 2009, the aforementioned termination value approximated $0.7 million.
Citizens does not offset fair value amounts recognized for the right to reclaim cash collateral (a
receivable) or the obligation to return cash collateral (a payable) against recognized fair value
amounts of derivatives executed with the same counterparty under a master netting agreement. The
Corporation has the right to reclaim collateral assigned of $14.3 million.
109
Note 18. Regulatory Matters
Citizens banking subsidiaries are required to maintain a combination of cash on hand and
non-interest-bearing deposits with the Federal Reserve Bank (FRB) to meet regulatory reserve
requirements. These reserve balances vary depending upon the level of client deposits in the
subsidiary banks. During 2009 and 2008, the average reserve balances were $28.3 million and $20.7
million, respectively.
The banking subsidiaries are also subject to statutory limitations on extensions of credit to
members of the affiliate group. Generally, extensions of credit are limited to 10% to any one
affiliate and 20% in aggregate to all affiliates of a subsidiary banks capital and surplus (net
assets) as defined.
The principal source of cash flows for the Holding Company is dividends from its banking
subsidiaries. Citizens subsidiaries are state, federal or national chartered financial
institutions. Banking regulations limit the amount of dividends a financial institution may
declare to a parent company in any calendar year. Citizens subsidiary banks dividends may not
exceed the retained net profit, as defined, of that year plus the retained net profit of the
preceding two years, unless prior regulatory approval is obtained. As of January 1, 2010, the F&M
and CB Wealth subsidiaries are able to distribute dividends of $4.3 million to the Holding Company
without prior regulatory approval. FRB policy provides that, as a matter of prudent banking, a
bank holding company generally should not maintain a rate of cash dividends unless its net income
available to common shareholders has been sufficient to fully fund the dividends, and the
prospective rate of earnings retention appears to be consistent with the holding companys capital
needs, asset quality and overall financial condition.
The banking subsidiaries are subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, specific capital guidelines must be met that
involve quantitative measures of the assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy require the banking
subsidiaries to maintain minimum amounts and ratios (set forth in the table below) of Total and
Tier 1 capital to risk-weighted assets (as defined in the regulations), and of Tier 1 capital to
average assets (as defined). As of December 31, 2009, the banking subsidiaries meet all capital
adequacy requirements to which they are subject.
As of December 31, 2009, the banking subsidiaries were well-capitalized under the regulatory
framework for prompt corrective action. To be categorized as well-capitalized the banking
subsidiaries must maintain minimum Total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table below. There are no conditions or events since December 31, 2009, that
management believes would cause Citizens to fall below the well-capitalized level.
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Based Capital Requirements |
|
|
|
|
|
|
|
|
Actual |
|
Adequately Capitalized |
|
Well-Capitalized |
(in thousands) |
|
Amount |
|
Ratio |
|
Amount |
|
|
|
|
|
Ratio |
|
Amount |
|
Ratio |
|
Citizens Republic Bancorp |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to risk weighted assets (1) |
|
$ |
1,186,174 |
|
|
|
13.9 |
% |
|
$ |
681,270 |
|
|
|
> |
|
|
|
8.0 |
% |
|
$ |
851,587 |
|
|
|
> |
|
|
|
10.0 |
% |
Tier 1 Capital to risk weighted assets(1) |
|
|
1,066,414 |
|
|
|
12.5 |
|
|
|
340,635 |
|
|
|
> |
|
|
|
4.0 |
|
|
|
510,952 |
|
|
|
> |
|
|
|
6.0 |
|
Tier 1 Leverage (2) |
|
|
1,066,414 |
|
|
|
9.2 |
|
|
|
463,376 |
|
|
|
> |
|
|
|
4.0 |
|
|
|
579,220 |
|
|
|
> |
|
|
|
5.0 |
|
As of December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to risk weighted assets (1) |
|
|
1,432,080 |
|
|
|
14.5 |
|
|
|
790,628 |
|
|
|
> |
|
|
|
8.0 |
|
|
|
988,285 |
|
|
|
> |
|
|
|
10.0 |
|
Tier 1 Capital to risk weighted assets (1) |
|
|
1,206,869 |
|
|
|
12.2 |
|
|
|
395,314 |
|
|
|
> |
|
|
|
4.0 |
|
|
|
592,971 |
|
|
|
> |
|
|
|
6.0 |
|
Tier 1 Leverage (2) |
|
|
1,206,869 |
|
|
|
9.7 |
|
|
|
499,613 |
|
|
|
> |
|
|
|
4.0 |
|
|
|
624,517 |
|
|
|
> |
|
|
|
5.0 |
|
Citizens Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to risk weighted assets (1) |
|
$ |
1,024,154 |
|
|
|
12.3 |
% |
|
$ |
666,647 |
|
|
|
> |
|
|
|
8.0 |
% |
|
$ |
833,309 |
|
|
|
> |
|
|
|
10.0 |
% |
Tier 1 Capital to risk weighted assets (1) |
|
|
917,063 |
|
|
|
11.0 |
|
|
|
333,324 |
|
|
|
> |
|
|
|
4.0 |
|
|
|
499,986 |
|
|
|
> |
|
|
|
6.0 |
|
Tier 1 Leverage (2) |
|
|
917,063 |
|
|
|
8.2 |
|
|
|
449,080 |
|
|
|
> |
|
|
|
4.0 |
|
|
|
561,350 |
|
|
|
> |
|
|
|
5.0 |
|
As of December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to risk weighted assets (1) |
|
|
1,177,172 |
|
|
|
12.1 |
|
|
|
777,397 |
|
|
|
> |
|
|
|
8.0 |
|
|
|
971,746 |
|
|
|
> |
|
|
|
10.0 |
|
Tier 1 Capital to risk weighted assets (1) |
|
|
1,054,035 |
|
|
|
10.8 |
|
|
|
388,698 |
|
|
|
> |
|
|
|
4.0 |
|
|
|
583,048 |
|
|
|
> |
|
|
|
6.0 |
|
Tier 1 Leverage (2) |
|
|
1,054,035 |
|
|
|
8.7 |
|
|
|
487,181 |
|
|
|
> |
|
|
|
4.0 |
|
|
|
608,976 |
|
|
|
> |
|
|
|
5.0 |
|
|
|
|
|
(1) |
|
Total Capital is comprised of Tier 1 Capital, a portion of the allowance for loan losses and qualifying subordinated debt. Tier 1 Capital is calculated as
follows: total shareholders equity + trust preferred securities goodwill accumulated other comprehensive income (loss) other intangible assets. |
|
(2) |
|
Tier 1 Capital to quarterly average assets. |
111
Note 19. Citizens Republic Bancorp (Parent Only) Statements
|
|
|
|
|
|
|
|
|
Balance Sheets |
|
|
|
Citizens Republic Bancorp (Parent Only) |
|
|
|
|
|
December 31, |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
2,957 |
|
|
$ |
7,754 |
|
Money market investments |
|
|
107,713 |
|
|
|
253,637 |
|
Investment securities |
|
|
5,295 |
|
|
|
6,054 |
|
Investment in subsidiaries |
|
|
1,058,109 |
|
|
|
1,182,374 |
|
Goodwill |
|
|
250,672 |
|
|
|
492,488 |
|
Other assets |
|
|
12,297 |
|
|
|
11,671 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,437,043 |
|
|
$ |
1,953,978 |
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
90,557 |
|
|
$ |
292,837 |
|
Other liabilities |
|
|
15,450 |
|
|
|
59,820 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
106,007 |
|
|
|
352,657 |
|
Shareholders equity |
|
|
1,331,036 |
|
|
|
1,601,321 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,437,043 |
|
|
$ |
1,953,978 |
|
|
|
|
|
|
|
|
Statements of Operations
Citizens Republic Bancorp (Parent Only)
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Income |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries |
|
$ |
|
|
|
$ |
28,500 |
|
|
$ |
111,500 |
|
Interest on taxable investment securities |
|
|
289 |
|
|
|
|
|
|
|
|
|
Interest from bank subsidiary |
|
|
4,118 |
|
|
|
5,368 |
|
|
|
3,118 |
|
Service fees from bank subsidiaries |
|
|
13,825 |
|
|
|
14,526 |
|
|
|
14,334 |
|
Other |
|
|
(15,286 |
) |
|
|
(3,257 |
) |
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,946 |
|
|
|
45,137 |
|
|
|
128,899 |
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
17,722 |
|
|
|
23,742 |
|
|
|
25,637 |
|
Salaries and employee benefits |
|
|
17,817 |
|
|
|
18,481 |
|
|
|
20,922 |
|
Service fees paid to bank subsidiaries |
|
|
955 |
|
|
|
955 |
|
|
|
2,767 |
|
Restructuring and merger related expenses |
|
|
|
|
|
|
|
|
|
|
270 |
|
Goodwill impairment |
|
|
241,817 |
|
|
|
161,611 |
|
|
|
|
|
Other noninterest expense |
|
|
1,490 |
|
|
|
2,301 |
|
|
|
2,231 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
279,801 |
|
|
|
207,090 |
|
|
|
51,827 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income tax (benefit) provision and
equity in undistributed (loss) income |
|
|
(276,855 |
) |
|
|
(161,951 |
) |
|
|
77,072 |
|
Income tax (benefit) provision |
|
|
(2,241 |
) |
|
|
11,785 |
|
|
|
(12,650 |
) |
Equity in undistributed net (loss) income of subsidiaries |
|
|
(239,599 |
) |
|
|
(219,316 |
) |
|
|
11,120 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(514,213 |
) |
|
|
(393,052 |
) |
|
|
100,842 |
|
|
|
|
|
|
|
|
|
|
|
Deemed divided on convertible preferred stock |
|
|
|
|
|
|
(11,737 |
) |
|
|
|
|
Dividend on redeemable preferred stock |
|
|
(19,777 |
) |
|
|
(227 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common shareholders |
|
$ |
(533,990 |
) |
|
$ |
(405,016 |
) |
|
$ |
100,842 |
|
|
|
|
|
|
|
|
|
|
|
112
Statements of Cash Flows
Citizens Republic Bancorp (Parent Only)
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(514,213 |
) |
|
$ |
(393,052 |
) |
|
$ |
100,842 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment |
|
|
241,817 |
|
|
|
161,611 |
|
|
|
|
|
Deferred tax asset valuation allowance |
|
|
(1,020 |
) |
|
|
20,853 |
|
|
|
|
|
Net decrease (increase) in current and deferred income taxes |
|
|
70 |
|
|
|
(18,476 |
) |
|
|
21,306 |
|
(Decrease) increase in long-term debt interest |
|
|
(2,919 |
) |
|
|
(720 |
) |
|
|
651 |
|
(Decrease) in pension non-qualified |
|
|
(6,874 |
) |
|
|
(738 |
) |
|
|
(1,671 |
) |
Net loss on debt extinguishment |
|
|
15,929 |
|
|
|
|
|
|
|
|
|
Recognition of stock-based compensation expense |
|
|
1,803 |
|
|
|
4,520 |
|
|
|
3,355 |
|
Restructure and merger-related expense |
|
|
|
|
|
|
(53 |
) |
|
|
(27,257 |
) |
Decrease (increase) in equity in undistributed net (loss) income of subsidiaries |
|
|
239,599 |
|
|
|
219,316 |
|
|
|
(11,120 |
) |
Other |
|
|
(4,345 |
) |
|
|
311 |
|
|
|
3,841 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by operating activities |
|
|
(30,153 |
) |
|
|
(6,428 |
) |
|
|
89,947 |
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease (increase) in money market investments |
|
|
112,534 |
|
|
|
(146,441 |
) |
|
|
6,588 |
|
Sales (purchases) of investment securities |
|
|
767 |
|
|
|
(6,045 |
) |
|
|
|
|
Investments in and advances to subsidiaries |
|
|
|
|
|
|
|
|
|
|
1,546 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities |
|
|
113,301 |
|
|
|
(152,486 |
) |
|
|
8,134 |
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in short-term borrowings |
|
|
|
|
|
|
(50,000 |
) |
|
|
(51,790 |
) |
Proceeds from issuance of long-term borrowings |
|
|
|
|
|
|
|
|
|
|
50,000 |
|
Capital contribution to subsidiary bank |
|
|
(74,000 |
) |
|
|
(250,000 |
) |
|
|
|
|
Net proceeds from issuance of preferred convertible stock |
|
|
|
|
|
|
114,161 |
|
|
|
|
|
Proceeds from issuance of preferred redeemable stock and warrant |
|
|
|
|
|
|
300,000 |
|
|
|
|
|
Net proceeds from issuance of common stock |
|
|
|
|
|
|
74,844 |
|
|
|
|
|
Cash dividends paid on common stock |
|
|
|
|
|
|
(21,959 |
) |
|
|
(87,798 |
) |
Cash dividends paid on preferred stock |
|
|
(13,875 |
) |
|
|
|
|
|
|
|
|
Proceeds from stock options exercised and restricted stock activity |
|
|
|
|
|
|
66 |
|
|
|
4,833 |
|
Shares acquired for retirement and purchased for taxes |
|
|
(70 |
) |
|
|
(444 |
) |
|
|
(13,514 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by financing activities |
|
|
(87,945 |
) |
|
|
166,668 |
|
|
|
(98,269 |
) |
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and due from banks |
|
|
(4,797 |
) |
|
|
7,754 |
|
|
|
(188 |
) |
Cash and due from banks at beginning of year |
|
|
7,754 |
|
|
|
|
|
|
|
188 |
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at end of year |
|
$ |
2,957 |
|
|
$ |
7,754 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
113
Note 20. Subsequent Events
On January 29, 2010 Citizens entered into a stock purchase agreement with Great Western Bank
whereby Great Western Bank agreed to acquire all of the stock of Citizens wholly owned subsidiary,
F&M. F&M has 10 offices located in the central region of Iowa and its operations are reported
primarily within Citizens Regional Banking and Other reporting units. Great Western Bank will pay
a purchase price of approximately $50 million in cash, subject to a possible adjustment based upon
F&Ms tangible net worth at the closing date. The transaction is expected to close by the end of
the second quarter of 2010, and is subject to certain required regulatory approvals and fulfillment
of customary conditions. After the sale closes, Citizens does not expect to have any involvement in
F&Ms continuing operations.
F&M qualified as a held for sale asset on January 29, 2010, when Citizens Board of Directors
authorized the sale. As of December 31, 2009, the assets and liabilities of F&M consisted of the
following:
F&M
Bank Iowa Balance Sheet
(in thousands)
|
|
|
|
|
|
|
December 31, |
|
Assets |
|
2009 |
|
Cash and due from banks |
|
$ |
22,657 |
|
Money market investments |
|
|
129,878 |
|
Investment securities |
|
|
171,115 |
|
FHLB and Federal Reserve stock |
|
|
1,194 |
|
Net portfolio loans |
|
|
132,544 |
|
Loans held for sale |
|
|
241 |
|
Other assets |
|
|
10,318 |
|
|
|
|
|
Total assets |
|
$ |
467,947 |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
Liabilities and Shareholders' Equity |
|
2009 |
|
Deposits |
|
$ |
408,577 |
|
Short-term borrowings |
|
|
11,263 |
|
Long-term debt |
|
|
500 |
|
Other liabilities |
|
|
2,572 |
|
|
|
|
|
Total liabilities |
|
|
422,912 |
|
|
|
|
|
|
Shareholders equity |
|
|
45,035 |
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
467,947 |
|
|
|
|
|
As part of the sale, Citizens will allocate $12.6 million of goodwill to F&M and will exchange
selected loans with F&M at or near the closing date for a cash payment equal to the book value of
the specified loans less related allowance for loan losses. As of December 31, 2009, the loans to
be exchanged had a net book value of $9.9 million.
As a result of the disposition, Citizens expects to record a pre-tax tangible gain of approximately
$3.4 million. After allocating goodwill to F&M, the carrying value of F&Ms equity will exceed the
contractual sales price, and Citizens will be required to record a market value adjustment of
approximately $9.2 million in the first quarter of 2010. This adjustment represents the difference
between the sales price and F&Ms carrying value, including the allocated goodwill. This potential
charge will be based upon managements best estimate of the fair value on the underlying assets and
liabilities, less the cost to sell, and could change based on final closing adjustments.
114
Report of Independent Registered Public Accounting Firm
To the Board of Directors and the Shareholders of Citizens Republic Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Citizens Republic Bancorp, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of
operations, changes in shareholders equity, and cash flows for each of the three years in the
period ended December 31, 2009. These financial statements are the responsibility of Citizens
Republic Bancorp, Inc.s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Citizens Republic Bancorp, Inc. and subsidiaries
at December 31, 2009 and 2008, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2009, in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Citizens Republic Bancorp, Inc.s internal control over financial reporting
as of December 31, 2009, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
March 1, 2010 expressed an unqualified opinion thereon.
Detroit, Michigan
March 1, 2010
115
SELECTED QUARTERLY INFORMATION (unaudited)
The table below sets forth selected quarterly financial information for each calendar quarter
during 2009 and 2008.
Selected Quarterly Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
(in thousands, except per share amounts) |
|
Fourth |
|
|
Third |
|
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
First |
|
|
|
|
Interest income |
|
$ |
135,812 |
|
|
$ |
141,046 |
|
|
$ |
142,132 |
|
|
$ |
149,689 |
|
|
$ |
167,677 |
|
|
$ |
171,723 |
|
|
$ |
174,394 |
|
|
$ |
187,117 |
|
Interest expense |
|
|
51,876 |
|
|
|
60,161 |
|
|
|
66,531 |
|
|
|
72,743 |
|
|
|
81,990 |
|
|
|
84,405 |
|
|
|
86,779 |
|
|
|
98,805 |
|
Net interest income |
|
|
83,936 |
|
|
|
80,885 |
|
|
|
75,601 |
|
|
|
76,946 |
|
|
|
85,687 |
|
|
|
87,318 |
|
|
|
87,615 |
|
|
|
88,312 |
|
Provision for loan losses |
|
|
84,193 |
|
|
|
77,783 |
|
|
|
99,962 |
|
|
|
64,017 |
|
|
|
118,565 |
|
|
|
58,390 |
|
|
|
74,480 |
|
|
|
30,619 |
|
Noninterest income (1) |
|
|
15,380 |
|
|
|
11,842 |
|
|
|
20,966 |
|
|
|
19,233 |
|
|
|
15,754 |
|
|
|
28,005 |
|
|
|
27,058 |
|
|
|
30,925 |
|
Noninterest expense (2) |
|
|
83,196 |
|
|
|
83,614 |
|
|
|
355,433 |
|
|
|
80,778 |
|
|
|
78,611 |
|
|
|
74,301 |
|
|
|
261,228 |
|
|
|
76,562 |
|
Net (loss) income (3) |
|
|
(64,728 |
) |
|
|
(56,923 |
) |
|
|
(347,413 |
) |
|
|
(45,149 |
) |
|
|
(195,369 |
) |
|
|
(7,176 |
) |
|
|
(201,634 |
) |
|
|
11,127 |
|
Deemed dividend on convertible preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,737 |
) |
|
|
|
|
|
|
|
|
Dividend on redeemable preferred stock |
|
|
(5,254 |
) |
|
|
(5,224 |
) |
|
|
(5,196 |
) |
|
|
(4,103 |
) |
|
|
(227 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common shareholders |
|
|
(69,982 |
) |
|
|
(62,147 |
) |
|
|
(352,609 |
) |
|
|
(49,252 |
) |
|
|
(195,596 |
) |
|
|
(18,913 |
) |
|
|
(201,634 |
) |
|
|
11,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding (end of period) |
|
|
394,397 |
|
|
|
394,470 |
|
|
|
126,258 |
|
|
|
126,299 |
|
|
|
125,997 |
|
|
|
126,017 |
|
|
|
95,899 |
|
|
|
75,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.18 |
) |
|
$ |
(0.48 |
) |
|
$ |
(2.81 |
) |
|
$ |
(0.39 |
) |
|
$ |
(1.56 |
) |
|
$ |
(0.20 |
) |
|
$ |
(2.53 |
) |
|
$ |
0.15 |
|
Diluted |
|
|
(0.18 |
) |
|
|
(0.48 |
) |
|
|
(2.81 |
) |
|
|
(0.39 |
) |
|
|
(1.56 |
) |
|
|
(0.20 |
) |
|
|
(2.53 |
) |
|
|
0.15 |
|
|
|
|
(1) |
|
Noninterest income includes a net loss on debt extinguishment of $15.9 million in the third quarter of 2009, and $8.7 million, $0.9 million, $4.4 million and $6.2
million in fair-value adjustments on loans held for sale in the fourth, third, second and first quarters of 2009, respectively. Fair-value adjustments on
loans held for
sale of $5.9 million, $1.3 million and $2.2 million were included in noninterest income in the fourth, third and second quarters of 2008, respectively. |
|
(2) |
|
Noninterest expense includes a goodwill impairment charge of $266.5 million and $178.1 million in the second quarters of 2009 and 2008, respectively, and $8.2
million, $3.9 million, $3.3 million and $8.0 million in fair-value adjustments on ORE properties in the fourth, third, second and first quarters of 2009. Fair-value adjustments on ORE properties for 2008 were $5.9 million,
$1.3 million and $2.2 million in the fourth, third and second quarters, respectively. |
|
(3) |
|
Net income (loss) includes a deferred tax valuation allowance of $79.8 million and $136.6 million in the fourth quarters of 2009 and 2008, respectively. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Management is responsible for establishing and maintaining effective disclosure controls and
procedures, as defined under Rule 13a-15 of the Securities Exchange Act of 1934, that are designed
to cause the material information required to be disclosed by Citizens in the reports it files or
submits under the Securities Exchange Act of 1934 to be recorded, processed, summarized, and
reported to the extent applicable within the time periods required by the Securities and Exchange
Commissions rules and forms. In designing and evaluating the disclosure controls and procedures,
management recognized that a control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control system are met.
Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, with a company have been
detected.
As of the end of the period covered by this report, Citizens performed an evaluation under the
supervision and with the participation of management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Rule 13a-15 of the
116
Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures were effective at the reasonable assurance level.
Report on Managements Assessment of Internal Control over Financial Reporting
The management of Citizens Republic Bancorp, Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control over financial
reporting is defined under applicable Securities and Exchange Commission rules as a process
designed under the supervision of the Corporations Chief Executive Officer and Chief Financial
Officer and effected by the Corporations Board of Directors, management and other personnel to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of the Corporations financial statements for external purposes in accordance with U.S. generally
accepted accounting principles. The Corporations internal control over financial reporting
includes those policies and procedures that:
|
|
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Corporation; |
|
|
|
Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally accepted accounting
principles, and that receipts and expenditures of the Corporation are being made only in
accordance with authorizations of management and the directors of the Corporation; and |
|
|
|
Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Corporations assets that could have a material effect
on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
As of December 31, 2009, management, with the participation of the Corporations Chief Executive
Officer and Chief Financial Officer, assessed the effectiveness of the Corporations internal
control over financial reporting based on the criteria for effective internal control over
financial reporting established in Internal Control Integrated Framework, issued by the
Committee of Sponsoring Organizations (COSO) of the Treadway
Commission. Based on the assessment, management determined that the Corporations internal control
over financial reporting was effective as of December 31, 2009.
Ernst & Young LLP, the independent registered public accounting firm that audited the consolidated
financial statements of the Corporation included in this Annual Report on Form 10-K, has issued a
report on the Corporations internal control over financial reporting as of December 31, 2009. The
report, which expresses an unqualified opinion on the effectiveness of the Corporations internal
control over financial reporting as of December 31, 2009, is included in this Item under the
heading Report of Independent Registered Public Accounting Firm on Effectiveness of Internal
Control Over Financial Reporting.
|
|
|
|
/s/ Charles D. Christy
|
|
/s/ Cathleen H. Nash |
|
|
|
|
|
Charles D. Christy
Executive Vice President and Chief Financial Officer
|
|
Cathleen H. Nash
President and Chief Executive Officer |
|
Changes in Internal Control over Financial Reporting
No changes were made to the Corporations internal control over financial reporting (as
defined in Rule 13a-15 under the Securities Exchange Act of 1934) during the last fiscal quarter
that materially affected, or are reasonably likely to materially affect, the Corporations internal
control over financial reporting.
117
Report of Independent Registered Public Accounting Firm
To the Board of Directors and the Shareholders of Citizens Republic Bancorp, Inc.
We have audited Citizens Republic Bancorp, Inc.s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal ControlIntegrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Citizens
Republic Bancorp, Inc.s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Report on Managements Assessment of Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Citizens Republic Bancorp, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Citizens Republic Bancorp, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of
operations, changes in shareholders equity, and cash flows for each of the three years in the
period ended December 31, 2009 and our report dated March 1, 2010 expressed an unqualified opinion
thereon.
Detroit, Michigan
March 1, 2010
118
ITEM 9B. OTHER INFORMATION
None.
Part III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item appears under the captions Proposal 1 Election of
Directors (excluding the information under the heading Compensation of Directors); Corporate
Governance Executive Officers, Meetings of Directors and Committees of the Board of Directors,
Shareholder Nomination of Director Candidates, and Code of Ethics; and Section 16(a)
Beneficial Ownership Reporting Compliance in Citizens proxy statement for its 2010 annual meeting
of shareholders (the Proxy Statement) and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears under the caption Proposal 1 Election of
Directors Compensation of Directors, and under the caption Executive Compensation of the Proxy
Statement, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this item appears under the caption Security Ownership of the
Proxy Statement, and is incorporated herein by reference.
Equity Compensation Plan Information
Citizens has two stock-based compensation plans pursuant to which it grants incentive and
nonqualified stock options, non vested stock awards, restricted stock units, and performance awards
to employees, officers and directors. The Stock Compensation Plan (the 2002 Plan) was approved
by Citizens shareholders in 2002. The All-Employee Stock Option Plan (the All-Employee Plan)
was not submitted to Citizens shareholders for approval. The 2002 Plan replaced the Third Amended
Stock Option Plan which has expired and the Citizens Stock Option Plan for Directors which was
terminated. Both of these plans were approved by Citizens shareholders and there continue to be
options outstanding that were granted under these plans. In connection with the Republic merger in
2006, Citizens assumed Republics active stock option plans which had previously been approved by
Republics shareholders. Citizens has not made any awards under the assumed plans and treats these
plans as if they are terminated as to future grants. The following table sets forth, with respect
to all of the stock-based compensation plans, (i) the number of shares of common stock to be issued
upon the exercise of outstanding options, (ii) the weighted average exercise price of outstanding
options, and (iii) the number of shares remaining available for future issuance, as of December 31,
2009.
Citizens grants incentive and nonqualified stock options, restricted stock, restricted stock units,
and performance awards to employees, officers, and directors pursuant to the Stock Compensation
Plan (the Stock Plan), which was first approved by Citizens shareholders in 2002. There are
also options outstanding that were granted under the All-Employee Plan, which was not submitted to
our shareholders for approval, and under the Third Amended Stock Option Plan and the Citizens Stock
Option Plan for Directors, which were approved by our shareholders. No future grants may be made
under any of these plans other than the Stock Plan. The following table sets forth, with respect
to all of our stock-based compensation plans, (i) the number of shares of common stock to be issued
upon the exercise of outstanding options, (ii) the weighted average exercise price of outstanding
options, and (iii) the number of shares remaining available for future issuance.
119
At December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares |
|
|
|
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
|
|
|
|
|
|
|
|
future issuance under |
|
|
|
Number of shares to be issued |
|
|
Weighted-average |
|
|
equity compensation |
|
|
|
upon exercise of outstanding |
|
|
exercise price of |
|
|
plans (excluding shares |
|
Plan Category |
|
options |
|
|
outstanding options |
|
|
reflected in column (a)) |
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation
plans approved by
shareholders |
|
|
3,013,248(1) |
|
|
$ |
26.38 |
|
|
|
1,349,763(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved
by shareholders |
|
|
53,500(3) |
|
|
|
16.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,066,748 |
|
|
$ |
26.21 |
|
|
|
1,349,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Options for 266,296 Citizens common shares with a weighted-average exercise price of $14.64
per share were outstanding under the assumed Republic plans as of December 31, 2009 and are included in the
table. |
|
(2) |
|
Includes 591,441 shares that may be granted under the Stock Plan in the form of restricted stock,
restricted stock units or performance shares. Does not include shares that would be available for future grants
if the proposed amendment and restatement of the Stock Plan is approved by shareholders. |
|
(3) |
|
Issued under the All-Employee Plan. Under this plan, on May 18, 2000, Citizens granted stock
options to all employees who did not receive grants under the then existing but since expired Third Amended
Stock Option Plan. Each full-time employee received options for 200 shares of common stock and each part-time
employee received options for 100 shares. The $16.66 exercise price of the grant was the market price of the
common stock on the grant date. The options became exercisable three years after the date of grant. The
options expire ten years from the date of grant. Options for a total of 550,700 shares were granted of which
options for 53,500 shares were outstanding as of December 31, 2009. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item appears under the caption Executive Compensation
Compensation Committee Interlocks and Certain Transactions and Relationships of the Proxy
Statement, and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item appears under the captions Proposal 3 Appointment of
Independent Certified Public Accountants and Corporate Governance Meetings of Directors and
Committees of the Board of Directors of the Proxy Statement, and is incorporated herein by
reference.
120
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) |
|
1. Financial Statements: |
|
|
|
The following Consolidated Financial Statements of Citizens and Report of Independent
Registered Public Accounting Firm on Consolidated Financial Statements are incorporated by
reference under Item 8 Financial Statements and Supplementary Data of this document: |
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Selected Quarterly Information
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
|
2. |
|
Financial Statement Schedules:
All schedules are omitted see Item 15(c) below. |
|
|
3. |
|
Exhibits:
The exhibits listed on the Exhibit Index of this report are filed herewith and are
incorporated herein by reference. |
|
|
|
The exhibits listed on the Exhibit Index of this report are filed herewith and are
incorporated herein by reference. At the request of any shareholder, the Corporation will
furnish any exhibit upon the payment of a fee of $0.10 per page to cover the costs of
furnishing the exhibit. |
(c) |
|
Financial Statement Schedules |
|
|
|
All financial statement schedules normally required by regulation S-X are omitted since they
are either not applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto. |
121
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CITIZENS REPUBLIC BANCORP, INC.
(Registrant)
|
|
|
|
by |
|
|
Date: March 1, 2010 |
|
Cathleen H. Nash |
|
|
|
President and Chief Executive Officer
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
Signature |
|
Capacity |
|
Date |
|
|
Executive Vice President and
|
|
March 1, 2010 |
Charles D. Christy
|
|
Chief Financial Officer |
|
|
|
|
|
|
|
|
|
President and Chief Executive Officer
|
|
March 1, 2010 |
Cathleen H. Nash |
|
|
|
|
|
|
|
|
|
|
|
Controller and
|
|
March 1, 2010 |
Joseph C. Czopek
|
|
Principal Accounting Officer |
|
|
|
|
|
|
|
|
|
Director
|
|
March 1, 2010 |
Lizabeth A. Ardisana |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March 1, 2010 |
George J. Butvilas |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March 1, 2010 |
Robert S. Cubbin |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March 1, 2010 |
Richard J. Dolinski |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March 1, 2010 |
Gary J. Hurand |
|
|
|
|
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|
|
|
|
|
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Director
|
|
March 1, 2010 |
Dennis J. Ibold |
|
|
|
|
122
SIGNATURES (continued)
|
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Director
|
|
March 1, 2010 |
Benjamin W. Laird |
|
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|
|
|
|
|
|
|
Director
|
|
March 1, 2010 |
Stephen J. Lazaroff |
|
|
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|
|
|
|
|
|
|
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Director
|
|
March 1, 2010 |
Kendall B. Williams |
|
|
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|
|
|
|
|
|
|
|
Chairman of the Board
|
|
March 1, 2010 |
James L. Wolohan |
|
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|
|
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Director
|
|
March 1, 2010 |
Steven E. Zack |
|
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|
123
EXHIBIT INDEX
The following exhibits are filed as part of this report, or were previously filed and are
incorporated herein by reference to the filing indicated. Exhibits not required for this report
have been omitted. Citizens Commission file number is 001-33063.
|
|
|
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|
Exhibit |
|
|
No. |
|
Exhibit |
|
2.2 |
|
|
Agreement and Plan of Merger, dated as of June 26, 2006, by and between
Republic Bancorp, Inc. and Citizens Republic Bancorp, Inc. (Citizens Form
8-K filed June 30, 2006). |
|
|
|
|
|
|
2.3 |
|
|
Stock Purchase Agreement, dated as of January 29, 2010, by and between
Citizens Republic Bancorp, Inc. and Great Western Bank (Citizens Form 8-K
filed February 2, 2010). |
|
|
|
|
|
|
3.1 |
|
|
Amended and Restated Articles of Incorporation of Citizens Republic
Bancorp, Inc., as amended as of September 17, 2009 (Citizens 2009 Third
Quarter Report on Form 10-Q). |
|
|
|
|
|
|
3.2 |
|
|
Bylaws of Citizens Republic Bancorp, Inc., amended and restated as of
September 24, 2009 (Citizens 2009 Third Quarter Report on Form 10-Q). |
|
|
|
|
|
|
4.2 |
|
|
Indenture, dated as of January 27, 2003 among Citizens Republic Bancorp,
Inc. and JP Morgan Chase Bank, as Trustee (Citizens registration statement
on Form S-4, registration no. 333-104472). |
|
|
|
|
|
|
4.3 |
|
|
Registration Rights Agreement, dated as of January 27, 2003 among
Citizens Republic Bancorp, Inc. 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 (Citizens registration statement on Form S-4, registration no.
333-104472). |
|
|
|
|
|
|
4.4 |
|
|
Floating Rate Junior Subordinated Deferrable Interest Debentures dated as
of June 26, 2003 (Citizens 2003 Second Quarter Report on Form 10-Q). |
|
|
|
|
|
|
4.5 |
|
|
Form of Indenture between Republic Bancorp Inc. (Republic) and
Wilmington Trust Company for Republics 8.60% Subordinated Debentures due
2031 (Republics registration statement on Form S-3, registration no.
333-70062). |
|
|
|
|
|
|
4.6 |
|
|
Form of Republics 8.60% Subordinated Debenture due 2031 (Republics
registration statement on Form S-3, registration no. 333-70062). |
|
|
|
|
|
|
4.7 |
|
|
Certificate of Trust of Republic Capital Trust I, a subsidiary of
Republic (Republics registration statement on Form S-3, registration no.
333-70062). |
|
|
|
|
|
|
4.8 |
|
|
Trust Agreement of Republic Capital Trust I, a subsidiary of Republic
(Republics registration statement on Form S-3, registration no. 333-70062). |
|
|
|
|
|
|
4.9 |
|
|
Form of Amended and Restated Trust Agreement of Republic Capital Trust I,
a subsidiary of Republic (Republics registration statement on Form S-3,
registration no. 333-70062). |
|
|
|
|
|
|
4.10 |
|
|
Form of Trust Preferred Securities Certificate of Republic Capital Trust
I, a subsidiary of Republic (Republics registration statement on Form S-3,
registration no. 333-70062). |
124
EXHIBIT
INDEX (continued)
|
|
|
|
|
Exhibit |
|
|
No. |
|
Exhibit |
|
4.11 |
|
|
Form of Agreement as to Expenses and Liabilities between Republic and
Republic Capital Trust I, a subsidiary of Republic (Republics registration
statement on Form S-3, registration no. 333-70062).
|
|
|
|
|
|
|
4.12 |
|
|
Form of Trust Preferred Securities Guarantee Agreement between Republic
and Wilmington Trust Company (Republics registration statement on Form S-3,
registration no. 333-70062). |
|
|
|
|
|
|
4.13 |
|
|
Indenture, dated October 3, 2006, between Citizens Republic Bancorp,
Inc. and U.S. Bank National Association, as Trustee (Citizens Current Report
on Form 8-K filed October 3, 2006). |
|
|
|
|
|
|
4.14 |
|
|
First Supplemental Indenture, dated October 3, 2006, between Citizens
Republic Bancorp, Inc. and U.S. Bank National Association as Trustee
(Citizens Current Report on Form 8-K filed on October 3, 2006). |
|
|
|
|
|
|
4.15 |
|
|
Amended and Restated Trust Agreement, dated October 3, 2006, among
Citizens Republic Bancorp, Inc., U.S. Bank National Association, as Property
Trustee, U.S. Bank Trust National Association as Delaware Trustee, and
Administrative Trustees named therein (Citizens Current Report on Form 8-K
filed October 3, 2006). |
|
|
|
|
|
|
4.16 |
|
|
Guarantee Agreement, dated October 3, 2006, between Citizens Republic
Bancorp, Inc. as Guarantor and U.S. Bank National Association as Guarantee
Trustee (Citizens Current Report on Form 8-K filed October 3, 2006). |
|
|
|
|
|
|
4.18 |
|
|
Certificate representing the Series A Preferred Stock (Citizens Current
Report on Form 8-K filed June 11, 2008). |
|
|
|
|
|
|
4.19 |
|
|
Warrant to Purchase up to 17,578,125 shares of common stock, dated
December 12, 2008 (Citizens Current Report on Form 8-K filed December 15,
2008). |
|
|
|
|
|
|
10.2* |
|
|
Citizens Republic Bancorp, Inc. Third Amended Stock Option Plan
(Citizens 1997 Second Quarter Report on Form 10-Q). |
|
|
|
|
|
|
10.3* |
|
|
First Amendment to Citizens Republic Bancorp, Inc. Third Amended Stock
Option Plan (Citizens 2000 Second Quarter Report on Form 10-Q). |
|
|
|
|
|
|
10.4* |
|
|
Citizens Republic Bancorp, Inc. All-Employee Stock Option Plan (Citizens
registration statement on Form S-8, registration no. 333-40100). |
|
|
|
|
|
|
10.5* |
|
|
Citizens Republic Bancorp, Inc. Stock Option Plan for Directors
(Citizens registration statement on Form S-8, registration no. 33-61197). |
|
|
|
|
|
|
10.6* |
|
|
First Amendment to Citizens Republic Bancorp, Inc. Stock Option Plan for
Directors (Citizens 2000 Second Quarter Report on Form 10-Q). |
|
|
|
|
|
|
10.7* |
|
|
Citizens Republic Bancorp, Inc. Stock Compensation Plan (Citizens 2001
Annual Report on Form 10-K). |
125
EXHIBIT INDEX (continued)
|
|
|
|
|
Exhibit |
|
|
No. |
|
Exhibit |
|
10.8* |
|
|
Post Effective Amendment No. 1 to Form S-4 on Form S-8 pertaining to F&M
Bancorporation, Inc. 1993 Incentive Stock Option Plan and F&M Bancorporation,
Inc. 1993 Stock Option Plan for Non-employee Directors (Citizens registration
statement on Form S-8, registration statement no. 333-86569). |
|
|
|
|
|
|
10.9* |
|
|
Citizens Republic Bancorp, Inc. Amended and Restated Section 401(k) Plan
(Citizens registration statement on Form S-8, registration no. 333-09455). |
|
|
|
|
|
|
10.13 |
|
|
Amended and Restated Declaration of Trust dated as of June 26, 2003 by
and among U.S. Bank National Association, as institutional Trustee, Citizens
Republic Bancorp, Inc., as Sponsor, and William R. Hartman, Charles D. Christy
and Thomas W. Gallagher as Administrators (Citizens 2003 Second Quarter Report
on Form 10-Q). |
|
|
|
|
|
|
10.14 |
|
|
Placement Agreement, dated June 16, 2003, between Citizens, Citizens
Michigan Statutory Trust I, FTN Financial Capital Markets and Keefe Bruyette &
Woods, Inc. (Citizens 2003 Second Quarter Report on Form 10-Q). |
|
|
|
|
|
|
10.15 |
|
|
Guarantee Agreement dated as of June 26, 2003 by and between Citizens
Republic Bancorp, Inc. and U.S. Bank National Association (Citizens 2003
Second Quarter Report on Form 10-Q). |
|
|
|
|
|
|
10.19* |
|
|
Employment Agreement, dated as of June 26, 2006, by and between Citizens
Republic Bancorp, Inc. and William R. Hartman (Citizens Current Report on Form
8-K filed June 30, 2006). |
|
|
|
|
|
|
10.20* |
|
|
Form of Nonqualified Stock Option Agreement for Non-employee Directors
under the Citizens Republic Bancorp, Inc. Stock Compensation Plan (Citizens
2004 Third Quarter Report on Form 10-Q). |
|
|
|
|
|
|
10.21* |
|
|
Form of Nonqualified Stock Option Agreement for Employees under the
Citizens Republic Bancorp, Inc. Stock Compensation Plan (Citizens 2004 Third
Quarter Report on Form 10-Q). |
|
|
|
|
|
|
10.22* |
|
|
Form of Restricted Stock Agreement under the Citizens Republic Bancorp,
Inc. Stock Compensation Plan (Citizens 2004 Third Quarter Report on Form
10-Q). |
|
|
|
|
|
|
10.24* |
|
|
Form of Restricted Stock Agreement (Employee Version) (Citizens Current
Report on Form 8-K filed on June 7, 2005). |
|
|
|
|
|
|
10.25* |
|
|
Form of Restricted Stock Agreement (Director Version) (Citizens Current
Report on Form 8-K filed on June 7, 2005). |
|
|
|
|
|
|
10.26* |
|
|
Form of Stock Option Agreement (Employee Version) (Citizens Current
Report on Form 8-K filed on June 7, 2005). |
|
|
|
|
|
|
10.27* |
|
|
Form of Stock Option Agreement (Director Version) (Citizens Current
Report on Form 8-K filed on June 7, 2005). |
|
|
|
|
|
|
10.28* |
|
|
Form of Restricted Stock Agreement (Employee Version) (Citizens 2006
Second Quarter Report on Form 10-Q). |
126
EXHIBIT INDEX (continued)
|
|
|
Exhibit |
|
|
No. |
|
Exhibit |
10.29*
|
|
Form of Restricted Stock Agreement (Director Version) (Citizens 2006 Second Quarter Report on Form 10-Q). |
|
|
|
10.31*
|
|
Retention Agreement with each of John D. Schwab, Clinton A. Sampson, and Randall J. Peterson, dated
August 16, 2006 (Citizens 2006 Third Quarter Report on Form 10-Q). |
|
|
|
10.37*
|
|
Form of Restricted Stock Agreement (Employee Version as of May 2007) (Citizens 2007 Second Quarter
Report on Form 10-Q). |
|
|
|
10.38*
|
|
Form of Restricted Stock Agreement (Non-Employee Director Version as of May 2007) (Citizens 2007 Second
Quarter Report on Form 10-Q). |
|
|
|
10.41*
|
|
Form of Amended and Restated Change in Control Agreement between Citizens Republic Bancorp, Inc. and each
of William R. Hartman, Charles D. Christy, Roy A. Eon, Thomas W. Gallagher, Martin E. Grunst, Cathleen H. Nash,
Clinton A. Sampson, and John D. Schwab, dated February 26, 2008 (Citizens Annual Report on Form 10-K for the
year ended December 31, 2007). |
|
|
|
10.42*
|
|
Amended and Restated Change in Control Agreement between Citizens Republic Bancorp, Inc. and Randall J.
Peterson, dated February 26, 2008 (Citizens Annual Report on Form 10-K for the year ended December 31, 2007). |
|
|
|
10.43*
|
|
Supplemental Retirement Benefits Plan For William R. Hartman, dated September 19, 2007 (Citizens Annual
Report on Form 10-K for the year ended December 31, 2007). |
|
|
|
10.44*
|
|
Agreement between Citizens Republic Bancorp, Inc., and Clinton A. Sampson, dated November 4, 2008
(Citizens 2008 Third Quarter Report on Form 10-Q). |
|
|
|
10.45*
|
|
2008 Management Incentive Plan (Citizens Current Report on Form 8-K filed September 17,
2008).1 |
|
|
|
10.46*
|
|
Letter Agreement between Citizens Republic Bancorp, Inc. and the U.S. Department of the Treasury, dated
December 12, 2008 (Citizens Current Report on Form 8-K filed December 15, 2008). |
|
|
|
10.47*
|
|
Form of Waiver Executed by William R. Hartman, Charles D. Christy, Cathleen H. Nash, John D. Schwab, and
Clinton A. Sampson, dated December 12, 2008 (Citizens Current Report on Form 8-K filed December 15, 2008). |
|
|
|
10.48*
|
|
Form of Consent Executed by William R. Hartman, Charles D. Christy, Cathleen H. Nash, John D. Schwab, and
Clinton A. Sampson, dated December 12, 2008 (Citizens Current Report on Form 8-K filed December 15, 2008). |
|
|
|
10.49*
|
|
Amendment to Stock Compensation Plan as of December 10, 2008 (Citizens 2008 Form 10-K). |
|
|
|
10.50*
|
|
Letter Agreement dated January 22, 2009, between Citizens Republic Bancorp, Inc. and Cathleen H. Nash
(Citizens Current Report on Form 8-K filed on January 23, 2009). |
|
|
|
10.51*
|
|
Agreement between Citizens Republic Bancorp, Inc., and William R. Hartman, dated January 22, 2009
(Citizens Current Report on Form 8-K filed on January 23, 2009). |
|
|
|
10.52*
|
|
Form of Long Term Incentive Award Agreement, dated January 29, 2009 (Citizens 2009 First Quarter Report
on Form 10-Q). |
127
EXHIBIT INDEX (continued)
|
|
|
|
|
Exhibit |
|
|
No. |
|
Exhibit |
|
10.53* |
|
|
Amendment to the Citizens Banking Corporation Stock Compensation Plan,
dated February 21, 2007 (Citizens 2009 First Quarter Report on Form 10-Q).
|
|
|
|
|
|
|
10.54* |
|
|
Form of Indemnification Agreement with Directors, dated as of September
24, 2009, between Citizens Republic Bancorp, Inc. and each of Lizabeth A.
Ardisana, George J. Butvilas, Robert S. Cubbin, Richard J. Dolinski, Gary J.
Hurand, Dennis J. Ibold, Benjamin W. Laird, Stephen J. Lazaroff, Cathleen H.
Nash, Kendall B. Williams, James L. Wolohan, and Steven E. Zack (Citizens 2009
Third Quarter Report on Form 10-Q). |
|
|
|
|
|
|
10.55* |
|
|
Amended and Restated Deferred Compensation Plan for Directors. |
|
|
|
|
|
|
10.56* |
|
|
Amended and Restated Deferred Compensation Plan for Executives. |
|
|
|
|
|
|
12.1 |
|
|
Statement of ratio of earnings to fixed charges |
|
|
|
|
|
|
21 |
|
|
Subsidiaries of the Registrant |
|
|
|
|
|
|
23 |
|
|
Consent of Independent Registered Public Accounting Firm |
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934. |
|
|
|
|
|
|
31.2 |
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934. |
|
|
|
|
|
|
32.1 |
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350 and Rule 13a-14(b) under the Securities Exchange Act of 1934. |
|
|
|
|
|
|
32.2 |
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350 and Rule 13a-14(b) under the Securities Exchange Act of 1934. |
|
|
|
|
|
|
99.1 |
|
|
Certification of Chief Executive Officer pursuant to Section 111(b)(4) of
the Emergency Economic Stabilization Act of 2008. |
|
|
|
|
|
|
99.2 |
|
|
Certification of Chief Financial Officer pursuant to Section 111(b)(4) of
the Emergency Economic Stabilization Act of 2008. |
|
|
|
* |
|
Current management contracts or compensatory plans or arrangements. |
|
1 |
|
Portions of this exhibit have been omitted pursuant to Citizens request to the
Secretary of the Securities and Exchange Commission for confidential treatment pursuant to rule
24b-2 under the Securities Exchange Act of 1934, as amended. |
128
[THIS PAGE IS INTENTIONALLY LEFT BLANK]
129