-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O2M0uWBFNuXAPk6R4uXyFcR5sEKIudzQQ39SlRLwn2IPhzdimUsCMEjZy5+RvNps APsBTzinGX2Av3f2ycdSEg== 0000950124-02-001014.txt : 20020415 0000950124-02-001014.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950124-02-001014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS BANKING CORP CENTRAL INDEX KEY: 0000351077 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 382378932 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10535 FILM NUMBER: 02586956 BUSINESS ADDRESS: STREET 1: ONE CITIZENS BANKING CTR STREET 2: 328 SOUTH SAGINAW STREET CITY: FLINT STATE: MI ZIP: 48502 BUSINESS PHONE: 5177767568 MAIL ADDRESS: STREET 1: 1 CITIZENS BANKING CENTER STREET 2: 328 SOUTH SAGINAW STREET CITY: FLINT STATE: MI ZIP: 48502 10-K 1 k68118e10-k.txt FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the fiscal year ended December 31, 2001. or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from _________ to ______ Commission file Number 0-10535 CITIZENS BANKING CORPORATION - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) MICHIGAN 38-2378932 - ----------------------------------------- ------------------------------ (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 328 S. Saginaw Street, Flint, Michigan 48502 - ----------------------------------------- ------------------------------ (Address of Principal Executive Offices) (ZIP Code) Registrant's telephone number, including area code: (810) 766-7500 Securities registered pursuant to Section 12(b) of the Act: none Securities registered pursuant to Section 12(g) of the Act: Citizens Banking Corporation Common Stock - No Par Value - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting common stock held by non-affiliates of the Registrant as of March 14, 2002 was $1,438,583,351. The number of shares outstanding of the Registrant's No Par Value Common Stock as of March 14, 2002 was 44,981,654. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Citizens Banking Corporation's Proxy Statement for its annual meeting of shareholders to be held April 16, 2002 are incorporated by reference into Part III. CITIZENS BANKING CORPORATION 2001 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
Page ---- PART I Item 1. Business ................................................................................................ 3 Item 2. Properties .............................................................................................. 8 Item 3. Legal Proceedings ....................................................................................... 8 Item 4. Submission of Matters to a Vote of Security Holders ..................................................... 9 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ............................... 10 Item 6. Selected Financial Data ................................................................................. 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ................... 10 Item 7A. Quantitative and Qualitative Disclosures about Market Risk .............................................. 10 Item 8. Financial Statements and Supplementary Data ............................................................. 10 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... 10 PART III Item 10. Directors and Executive Officers of the Registrant ...................................................... 11 Item 11. Executive Compensation .................................................................................. 11 Item 12. Security Ownership of Certain Beneficial Owners and Management .......................................... 11 Item 13. Certain Relationships and Related Transactions .......................................................... 11 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................................ 12 SIGNATURES ......................................................................................................... 13 EXHIBIT INDEX ......................................................................................................... 15
2 PART I ITEM 1. BUSINESS General Citizens Banking Corporation (Citizens) was organized January 1, 1982. It is a multibank holding company registered under the Bank Holding Company Act of 1956, as amended, and is incorporated in the State of Michigan. On December 31, 2001, Citizens had 2,776 full-time equivalent employees and directly or indirectly owned the following subsidiaries.
- --------------------------------------------------------------------------------------------------------------------------- Number Total Date Principal of Assets Acquired/ zubsidiary Office Offices (in millions) Established - --------------------------------------------------------------------------------------------------------------------------- Citizens Bank (1) Flint, MI 127 $5,066.6 01/01/82 Citizens Bank -- Illinois, N.A. Berwyn, IL 3 241.5 05/01/87 F&M Bancorporation, Inc Kaukauna, WI N/A 11/01/99 F&M Bank -- Wisconsin (2) Kaukauna, WI 57 1,963.1 01/03/00 F&M Bank -- Iowa (3) Marshalltown, IA 14 509.0 11/01/99 - ---------------------------------------------------------------------------------------------------------------------------
(1) Consolidated totals of Citizens Bank include its non-bank subsidiaries: Citizens Commercial Leasing Corporation (CCLC) -- 100% owned, CB Financial Services, Inc. -- 100% owned, Citizens Bank Mortgage Corporation -- 100% owned, Citizens Title Services, Inc -- 100% owned, Citizens Service Company, Inc -- 100% owned, Citizens Bank Consumer Finance, LLC -- 99% owned, Citizens Card Company -- 100% owned and CB Capital Management, Inc -- 100% owned. All of the named subsidiaries are based in Flint, Michigan except for CCLC, which is based in Saginaw, Michigan. Citizens Service Company, Inc. owns the other 1% of Citizens Bank Consumer Finance, LLC. (2) Consolidated totals of F&M Bank -- Wisconsin include its wholly owned non-bank subsidiary, Pulaski Capital Corporation, based in the state of Nevada. (3) Consolidated totals of F&M Bank -- Iowa include its wholly owned non-bank subsidiary, Security Bancservices, Inc., based in Marshalltown, Iowa. Citizens provides a full range of banking and financial services to individuals and businesses, including commercial and retail banking, consumer finance, asset management, trust services, and mortgage financing and servicing. Operations are primarily conducted through more than 201 banking offices, 245 ATM locations and 33 brokerage centers in Michigan, Illinois, Wisconsin and Iowa. Citizens Bank, a wholly owned bank subsidiary of Citizens, directly owns several non-bank subsidiaries as follows: 1. CB Financial Services, Inc. -- a seller of life insurance and annuity products to clients subject to certain restrictions, 2. Citizens Bank Mortgage Corporation -- a provider of mortgage financing and servicing to individuals and businesses, 3. Citizens Title Services, Inc. -- an issuer of title insurance to buyers and sellers of residential and commercial mortgage properties including those occurring due to loan refinancing, 4. Citizens Commercial Leasing Company -- a participant in high quality indirect lease participations, 3 5. Citizens Service Company, Inc -- a holding company owning 1% of Citizens Bank Consumer Finance, LLC, 6. Citizens Bank Consumer Finance, LLC -- a partnership established to provide indirect consumer lending services to clients in Citizens' markets 7. Citizens Card Company -- a company established to sell credit card loans to a third party credit card company, and 8. CB Capital Management, Inc. -- a registered broker-dealer for Golden Oak mutual funds. Pulaski Capital Corporation, a wholly owned non-bank subsidiary of F&M Bank -- Wisconsin organized and existing under the laws of the State of Nevada, holds and manages the majority of the bank's investment portfolio. Security Bancservices, Inc, a wholly owned non-bank subsidiary of F&M Bank -- Iowa, sells property and casualty insurance to clients in the Wisconsin and Iowa markets. In March 2002, Citizens Banking Corporation formed a non-bank wholly owned subsidiary, CB Wealth Management, NA. This subsidiary was formed to provide trust services. Mergers, Acquisitions and Divestitures In November 2001, Citizens sold F&M Bank -- Minnesota with assets of $27 million. The bank was Citizens' sole location in Minnesota. On May 12, 2000, Citizens purchased three Jackson, Michigan offices of Great Lakes National Bank. The purchase added approximately $31 million in deposits for which Citizens paid a premium of $3.9 million. On October 8, 1999, Citizens acquired seventeen former Bank One offices located in the northern section of Michigan's Lower Peninsula. This purchase added approximately $88 million in loans and $442 million in deposits. Citizens paid a premium of $36.1 million or 10.13% on certain core deposits. These transactions were accounted for as purchases; accordingly, the financial statements include their results of operations only since the respective acquisition dates. On November 1, 1999, Citizens expanded its primary market area to Wisconsin, Iowa, and Minnesota through merger with F&M Bancorporation, Inc. (F&M) headquartered in Kaukauna, Wisconsin. As part of the merger, Citizens issued 21.0 million shares of its common stock, based on a fixed exchange ratio of 1.303, for all of the outstanding shares of F&M. The merger was accounted for as a pooling of interests resulting in the restatement of all financial information presented. Additional information regarding Citizens' mergers, acquisitions and divestitures is incorporated by reference from Exhibit 13 on page A-28 of such document under the caption, "Note 2. Mergers, Acquisitions and Divestitures". Lines of Business The performance of Citizens is monitored by an internal profitability measurement system that provides line of business results and key performance measures. Citizens operates along the following business lines: Commercial Banking, Retail Banking, Financial Services, F&M, and Other. Additional information regarding Citizens' business lines is incorporated herein by reference from Exhibit 13 on pages A-5 and A-6, and on pages A-41 and A-42 of such document under the captions, "Lines of Business Reporting" and "Note 18. Lines of Business", respectively. 4 Competition The financial services industry is highly competitive. The banking subsidiaries of Citizens compete with other commercial banks, many of which are subsidiaries of other bank holding companies, for loans, deposits, trust accounts and other business on the basis of interest rates, fees, convenience and quality of service. They also actively compete with a variety of other financial service organizations including savings associations, finance companies, mortgage banking companies, brokerage firms, credit unions and other organizations. The non-banking subsidiaries compete with other companies in related industries including other leasing companies, title insurance companies, mortgage banking companies, insurance companies, consumer finance companies and other organizations. Loans comprise 77.0% of Citizens' average assets in 2001 and are made in the normal course of business to individuals, partnerships, municipalities and corporations. Credit is extended to clients within the commercial, commercial mortgage, real estate construction, real estate mortgage, consumer and lease financing categories. Consumer loans are primarily composed of automobile, personal, marine, recreational vehicle, home equity and credit card loans and represent 25.1% of the 2001 average loan portfolio. Consumer loans originated follow strict corporate credit underwriting procedures. Real estate mortgage loan extensions are primarily first liens on one-to-four family structures and, unless insured by a private mortgage insurance company, typically have traditional loan to appraisal ratios of 80% or less. Commercial and commercial mortgage loan originations generally do not rely on the performance of the real estate market to generate funds for repayment and do not represent a concentration in any one industry or company. Additional information on the composition of the loan portfolio and the related nonperforming assets is incorporated herein by reference from Exhibit 13 on pages A-14 to A-16 and page A-32 of such document under the captions "Loans", "Nonperforming Assets", and "Note 6. Loans and Nonperforming Assets". Mergers between and the expansion of financial institutions both within and outside of our primary Midwest banking markets have provided significant competitive pressure in those markets. In addition, the passage of Federal interstate banking legislation has expanded the banking market and heightened competitive forces. The affect of this legislation is further discussed under the caption "Supervision and Regulation". On November 1, 1999, Citizens entered the Wisconsin, Iowa, and Minnesota markets through a merger with F&M. F&M, headquartered in Kaukauna, Wisconsin, included twenty subsidiary banks in Wisconsin, one subsidiary bank in Iowa, and one subsidiary bank in Minnesota. Most of the banks are located in small cities and rural areas that have diverse economies and a mix of manufacturing, service, retailing, and agricultural businesses. F&M has a dominant market position in many of the markets it serves, which we believe provides a competitive advantage. On January 3, 2000, the twenty Wisconsin bank charters were consolidated into one bank and in December 2000 the local boards of directors for the Wisconsin banks were consolidated into one statutory board. In November 2001, Citizens sold F&M Bank -- Minnesota with assets of $27 million. Other factors such as employee relations and environmental laws also impact Citizens' competitiveness. Citizens maintains a favorable relationship with its employees. The impact of environmental laws is further discussed in "Item 3. Legal Proceedings" of this document. 5 Supervision and Regulation Citizens is a multi-bank holding company and, as such, is subject to supervision and regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The BHC Act requires Citizens to provide notice or obtain the prior approval of the Board of Governors of the Federal Reserve System to acquire or hold more than a 5% voting interest in any bank, restricts interstate banking activities and prescribes limitations on the non-banking activities of Citizens. The BHC Act allows interstate bank acquisitions anywhere in the country and interstate branching by acquisition and consolidation in those states that had not opted out by January 1, 1997. The BHC Act restricts Citizens' non-banking activities to those which are determined by the Federal Reserve Board to be financial in nature, incidental to such financial activity, or complementary to a financial activity. The BHC does not place territorial restrictions on the activities of non-bank subsidiaries of bank holding companies. Citizens banking subsidiaries are subject to limitations with respect to transactions with affiliates. The enactment of the Graham-Leach-Bliley Act of 1999 (the "GLB Act") swept away large parts of a regulatory framework that had its origins in the Depression Era of the 1930s. On March 11, 2000, banks, other depository institutions, insurance companies and securities firms were allowed to enter into combinations that permit a single financial services organization to offer customers a more complete array of financial products and services. The GLB Act provides a new regulatory framework for regulation through the financial holding company, which has as its umbrella regulator the Federal Reserve Board. Functional regulation of the financial holding company's separately regulated subsidiaries is conducted by their primary functional regulator. The GLB Act makes "satisfactory" or higher Community Reinvestment Act and other types of regulatory compliance for insured depository institutions and their financial holding companies necessary in order for them to engage in new financial activities. The GLB Act provides a federal right to privacy of non-public personal information of individual customers. Citizens Banking Corporation and its subsidiaries are also subject to certain state laws that deal with the use and distribution of non-public personal information. A substantial portion of Citizens' cash revenue is derived from dividends paid by its subsidiary banks. The dividends are subject to various legal and regulatory restrictions. Regulatory matters concerning payment of dividends to Citizens by its banking subsidiaries, capital adequacy guidelines for Citizens and its banking subsidiaries and maintenance of minimum average reserve balances by the banking subsidiaries with the Federal Reserve Bank are incorporated herein by reference from Exhibit 13 on pages A-18 and A-43 of such document under the captions, "Liquidity and Debt Capacity" and "Note 19 Regulatory Matters", respectively. Citizens' subsidiary banks are subject to the provisions of the National Bank Act or the banking laws of their respective states. They are under the supervision of, and are subject to periodic examination by, the Comptroller of the Currency (OCC) or the respective state banking departments, and are subject to the rules and regulations of the OCC, Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (FDIC). Citizens Bank, F&M Bank -- Wisconsin and F&M Bank -- Iowa are chartered by their respective states and are therefore subject to supervision, regulation and examination by the Michigan Office of Financial and Insurance Services, the Wisconsin Department of Financial Institutions and the Iowa Division of Banking, respectively, as well as the Federal Reserve Board. Citizens Bank - Illinois, N.A. is chartered under federal law and is subject to supervision, regulation and examination by the OCC. All of Citizens' subsidiary banks are subject to supervision 6 and examination by the FDIC, as the FDIC, to the extent provided by the law, insures their deposits. In addition, all banks are members of the Federal Reserve System. Citizens' non-bank companies are supervised and examined by the Federal Reserve System. Citizens' subsidiary banks are also subject to certain laws of each state in which such banks are located. Such state laws may restrict branching of banks within the state and acquisition or merger involving banks located in other states. Michigan, Illinois and Wisconsin have all adopted nationwide reciprocal interstate banking. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) adopted in August 1989 provided for the acquisition of thrift institutions by bank holding companies (previously only failing thrifts were permitted to be acquired), increased deposit insurance assessments for insured banks, redefined applicable capital standards for banks and thrifts, broadened the enforcement power of federal bank regulatory agencies, and required that any FDIC-insured depository institution be held liable for any loss incurred by the FDIC in connection with the default of any commonly controlled FDIC-insured depository institution or any assistance provided by the FDIC to any such institution in danger of default. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), signed into law on December 19, 1991, imposed on banks relatively detailed standards and mandated the development of additional regulations governing nearly every aspect of the operations and management of banks, in addition to many aspects of bank holding companies. FDICIA established a risk-based insurance premium assessment system, a capital-based supervision system that links supervisory intervention to the deterioration of a bank's capital level, new auditing and accounting and examination requirements, and mandated standards for bank lending and operation. FDICIA also provides the FDIC with the authority to impose assessments on insured Bank Insurance Fund (BIF) member depository institutions to maintain the fund at the designated reserve ratio defined in FDICIA. In response to the BIF attaining the designated reserve ratio in 1995, FDIC assessments were effectively eliminated in 1996 for banks meeting the requirements of supervisory risk subgroup 1.A. "well capitalized". All of Citizens' subsidiaries have sufficient capital to maintain this designation (the FDIC's highest rating). In 2002, banks maintaining the "well capitalized" designation will again have no FDIC insurance premium requirements except for a special base assessment that applies to all commercial banks regardless of risk subgroup classification. Further regulatory changes could impact the amount and type of assessments paid by Citizens' subsidiary banks. During 2000, the Securities and Exchange Commission issued Regulation FD that established affirmative disclosure requirements on public corporations such that material nonpublic information must be widely, rather than selectively, disseminated. Regulation FD is based on the premise that full and fair disclosure is the cornerstone of an efficient market system. Citizens is subject to Regulation FD. Through Regulation FD, the Securities and Exchange Commission seeks to encourage broad public disclosure in order to increase investor confidence in the integrity of the capital markets. Monetary Policy The monetary and fiscal policies of regulatory authorities, including the Federal Reserve System, strongly influence the banking industry. Through open market securities transactions, variations in the discount rate and the establishment of reserve requirements, the Board of Governors of the Federal 7 Reserve System exerts considerable influence on interest rates and the supply of money and credit. The effect of these measures on future business and earnings of Citizens cannot be predicted. Environmental Matters Citizens' primary exposure to environmental risk is through its trust services and its lending activities. In each instance, Citizens has policies and procedures in place to mitigate its environmental risk exposures. With respect to lending activities, environmental site assessments at the time of loan origination are mandated by Citizens to confirm collateral quality as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites. Environmental assessments are also mandated prior to any foreclosure activity involving non-residential real estate collateral. In the case of trust services, Citizens utilizes various types of environmental transaction screening to identify actual and potential risks arising from any proposed holding of non-residential real estate for trust accounts. Consequently Citizens does not anticipate any material effect on capital expenditures, earnings or the competitive position of itself or any of its subsidiaries with regard to compliance with federal, state or local environmental protection laws or regulations. Additional information is provided in the "Item 3. Legal Proceedings" section of this document. ITEM 2. PROPERTIES Citizens' offices are located at 328 South Saginaw Street, Flint, Michigan in the main office building of Citizens Bank, its largest bank subsidiary. Citizens' bank subsidiaries operate through 201 branch and financial banking offices. Of these, 39 are leased and the remaining are owned. Rent expense on the leased properties totaled $2,123,147 in 2001. The banking offices are located in various communities throughout the states of Michigan and Wisconsin, in parts of Iowa and in the western suburbs of Chicago, Illinois. At certain Citizens Bank locations a portion of the office buildings are leased to tenants. Additional information related to the property and equipment owned or leased by Citizens and its subsidiaries is incorporated herein by reference from Exhibit 13 on page A-33 under the caption "Note 8. Premises and Equipment" of such document. ITEM 3. LEGAL PROCEEDINGS Citizens and its subsidiaries are parties to a number of lawsuits incidental to its business. Although litigation is subject to many uncertainties and the ultimate exposure with respect to many of these matters cannot be ascertained, management does not believe the ultimate outcome of these matters will have a material adverse effect on the financial condition or the liquidity of Citizens. From time to time, certain of Citizens' subsidiaries are notified by applicable environmental regulatory agencies, pursuant to State or Federal environmental statutes or regulations, that they may be potentially responsible parties ("PRPs") for environmental contamination on or emanating from properties currently or formerly owned. Typically, exact costs of remediating the contamination cannot be fully determined at the time of initial notification. While, as PRPs, these subsidiaries are potentially liable for the costs of remediation, in most cases, a number of other PRPs have been identified as being jointly and severally liable for remediation costs. Additionally, in certain cases, statutory defenses to liability for remediation costs may be asserted based on the subsidiaries' status as lending institutions that acquired ownership of 8 the contaminated property through foreclosure. Citizens' management is not presently aware of any environmental liabilities that pose a reasonable possibility of future material impact on Citizens or its earnings. It is Citizens' policy to establish and accrue appropriate reserves for all such identified exposures during the accounting period in which a loss is deemed to be probable and the amount is determinable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 2001 to a vote of security holders through the solicitation of proxies or otherwise. 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER'S MATTERS The information required by this item is incorporated herein by reference from Exhibit 13 on page A-21 under the caption "Table 12. Selected Quarterly Information" of such document. As of December 31, 2001, the approximate number of shareholders of the Registrant's common stock is 16,400. This number includes an estimate for individual participants in the security positions of certain shareholders of record. Restrictions on the Registrant's ability to pay dividends are incorporated herein by reference from Exhibit 13 on page A-43 under the caption "Note 19. Regulatory Matters" of such document. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated herein by reference from Exhibit 13 on page A-3 under the caption "Table 1. Five Year Summary of Selected Financial Data" of such document. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations required by this item is incorporated herein by reference from Exhibit 13 on pages A-4 through A-22 of such document. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated by reference from Exhibit 13 on pages A-18 through A-20 under the captions "Interest Rate Risk" and "Interest Rate Sensitivity" of such document. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements are incorporated herein by reference from Exhibit 13 on pages A-23 through A-47 of such document. Supplementary data of Citizens' quarterly results of operations required by this item are incorporated herein by reference from Exhibit 13 on page A-21 of such document under the caption "Table 12. Selected Quarterly Information". ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 10 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item appears in Citizens' proxy statement for its annual meeting of shareholders to be held April 16, 2002 ("Proxy Statement"), and is incorporated herein by reference as follows: Regulation S-K Item 401 disclosures: Appear under the captions "Election of Directors" and "Executive Officers" on pages 5 through 7 and on pages 14 through 16, respectively, of the Proxy Statement. Regulation S-K Item 405 disclosure: Appears under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 30 of the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this item appears under the caption "Compensation of Directors," on page 10 and under the captions "Executive Compensation", "Compensation and Human Resources Committee Report on Executive Compensation", "Shareholder Return", and "Compensation Committee Interlocks and Certain Transactions and Relationships" on pages 17 through 30 of the Proxy Statement, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item appears under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" on pages 2 through 4 of the Proxy Statement, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item appears under the caption "Compensation Committee Interlocks and Certain Transactions and Relationships" on pages 29 and 30 of the Proxy Statement, and is incorporated herein by reference. 11 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements: The following consolidated financial statements of Citizens and Report of Ernst & Young LLP, Independent Auditors are incorporated by reference under Item 8 "Financial Statements and Supplementary Data" of this document: Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Auditors 2. Financial Statement Schedules: All schedules are omitted - see Item 14(d) below. 3. Exhibits: The exhibits listed on the "Exhibit Index" on pages 15 through 17 of this report are filed herewith and are incorporated herein by reference. (b) Reports on Form 8-K No reports of Form 8-K were filed for the quarter ended December 31, 2001. (c) Exhibits: The "Exhibit Index" is filed herewith on pages 15 through 17 of this report and is incorporated herein by reference. (d) Financial Statement Schedules: All financial statement schedules normally required by Article 9 of Regulation S-X are omitted since they are either not applicable or the required information is shown in the consolidated financial statements or notes thereto. 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CITIZENS BANKING CORPORATION (Registrant) by /s/William R. Hartman Date: March 25, 2002 - -------------------------------------- William R. Hartman President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Capacity Date - ---------------------------------------- ---------------------------------------------- ---------------------------------- /s/Robert J. Vitito Chairman of the Board and Director March 25, 2002 - ---------------------------------------- Robert J. Vitito /s/John W. Ennest Vice Chairman of the Board, March 25, 2002 - ---------------------------------------- Chief Financial Officer, John W. Ennest Treasurer and Director /s/Edward P. Abbott Director March 25, 2002 - ---------------------------------------- Edward P. Abbott /s/Jonathan E. Burroughs II Director March 25, 2002 - ---------------------------------------- Jonathan E. Burroughs II /s/Joseph P. Day Director March 25, 2002 - ---------------------------------------- Joseph P. Day /s/Richard J. Dolinski Director March 25, 2002 - ---------------------------------------- Richard J. Dolinski /s/Lawrence O. Erickson Director March 25, 2002 - ---------------------------------------- Lawrence O. Erickson /s/Benjamin W. Laird Director March 25, 2002 - ---------------------------------------- Benjamin W. Laird /s/Stephen J. Lazaroff Director March 25, 2002 - ---------------------------------------- Stephen J. Lazaroff
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Signature Capacity Date - ---------------------------------------- ---------------------------------------------- ---------------------------------- /s/William C. Shedd Director March 25, 2002 - ---------------------------------------- William C. Shedd /s/Ada C. Washington Director March 25, 2002 - ---------------------------------------- Ada C. Washington /s/Kendall B. Williams Director March 25, 2002 - ---------------------------------------- Kendall B. Williams /s/James L. Wolohan Director March 25, 2002 - ---------------------------------------- James L. Wolohan
14 CITIZENS BANKING CORPORATION 2001 Annual Report on Form 10-K EXHIBIT INDEX (FILED AS PART OF THIS REPORT ON FORM 10-K)
Exhibit Form 10-K No. Exhibit Page No. - --------- ----------------------------------------------------------------------------------------------- -------- 3 Restated Articles of Incorporation, as amended. (incorporated by reference from Exhibit 3(a) of Citizens' 1995 Annual Report on Form 10K, file number 0-10535). N/A 3.1 Amended and Restated Bylaws (incorporated by reference from Exhibit 3(b) of Citizens' 1997 Third Quarter Report on Form 10-Q, file number 0-10535). N/A 4 Rights Agreement, dated May 23, 2000, between Citizens and Citizens Bank, as Rights Agent (incorporated by reference from Exhibit 4.1 of Citizens' Current Report on Form 8-K filed June 8, 2000, file number 0-10535). N/A 10 Citizens Banking Corporation Second Amended Stock Option Plan (incorporated by reference from Exhibit 4 of Citizens' registration statement on Form S-8 filed May 5, 1992, Registration No. 33-47686). N/A 10.1 Citizens Banking Corporation Third Amended Stock Option Plan (incorporated by reference from Exhibit 10(r) of Citizens' 1997 Second Quarter Report on Form 10-Q, file number 0-10535). N/A 10.2 First Amendment to Citizens Banking Corporation Third Amended Stock Option Plan (incorporated by reference from Exhibit 10.2 of Citizens' 2000 Second Quarter Report on Form 10-Q, file number 0-10535). N/A 10.3 Citizens Banking Corporation All-Employee Stock Option Plan (incorporated by reference from Exhibit 99 of Citizens' registration statement on Form S-8 filed June 26, 2000, Registration No. 333-40100). N/A 10.4 Citizens Banking Corporation Stock Option Plan for Directors (incorporated by reference from Exhibit 99 of Citizens' registration statement on Form S-8 filed July 21, 1995, Registration No. 33-61197). N/A 10.5 First Amendment to Citizens Banking Corporation Stock Option Plan for Directors (incorporated by reference from Exhibit 10.3 of Citizens' 2000 Second Quarter Report on Form 10-Q, file number 0-10535). N/A
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Exhibit EXHIBIT INDEX (continued) Form 10-K No. Exhibit Page No. - --------- ----------------------------------------------------------------------------------------------- -------- 10.6 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" (incorporated by reference to Form S-8 filed December 22, 1999, file number 333-86569). N/A 10.7 Citizens Banking Corporation Amended and Restated Section 401(k) Plan (incorporated by reference from Exhibit 99.1 of Citizens' registration statement on Form S-8 filed August 2, 1996 -- Registration No. 333-09455). N/A 10.8 Citizens Banking Corporation Management Incentive Compensation Plan. (1) 10.9 Citizens Banking Corporation Amended and Restated Director's Deferred Compensation Plan (incorporated by reference from Exhibit 10(h) of Citizens' 1994 Annual Report on Form 10-K, file number 0-10535). N/A 10.10 Amended and Restated Citizens Banking Corporation Supplemental Retirement Benefits Plan for John W. Ennest. N/A 10.11 Amended and Restated Citizens Banking Corporation Supplemental Retirement Benefits Plan for Robert J. Vitito. N/A 10.12 Amended and Restated Change in Control Agreement. N/A 10.13 Citizens Banking Corporation Stock Compensation Plan. (1) 10.14 Employment Agreement between William R. Hartman and Citizens Banking Corporation dated February 11, 2002 together with A. Form of Stock Compensation Plan, B. Restricted Stock Award Agreement, C. Nonqualified Stock Option Agreement, D. Management Incentive Plan, E. Supplemental Executive Retirement Plan, F. Change in Control Agreement, and G. Director Indemnification Agreement. (1) 11 Computation of Per Share Earnings (incorporated by reference from Exhibit 13 on page A-37 of such document under the caption "Note 14. Earnings Per Share"). N/A 13 Citizens Banking Corporation 2001 Annual Report (except as to portions expressly incorporated herein, said Annual Report is included only for information). (1)
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Exhibit EXHIBIT INDEX (continued) Form 10-K No. Exhibit Page No. - --------- ----------------------------------------------------------------------------------------------- -------- 21 Subsidiaries of the Registrant (1) 23 Consent of Ernst & Young LLP (1) - ----------------------------------------------------------------------------------------------------------------------------
N/A -- not applicable, exhibit incorporated by reference. (1) Exhibit included in the following pages of this Annual Report on Form 10-K. All other Exhibits required to be filed with this Form are not applicable and have therefore been omitted. 17 EX-10.8 3 k68118ex10-8.txt MANAGEMENT INCENTIVE COMPENSATION PLAN EXHIBIT 10.8 (FORM 10-K) CITIZENS BANKING CORPORATION MANAGEMENT INCENTIVE PLAN I. PURPOSE: 1. Ensure achievement of strategic goals. 2. Strengthen links between pay and performance. 3. Align management more closely with shareholder. II. ELIGIBILITY: Senior Vice Presidents and above and certain other officers based upon corporate responsibility who are not participants in another established incentive plan with payment amounts determined by performance in relation to goal. Awards will be pro-rated based on months served for staff members with less than 12 months of service in a Plan Year. Staff members become eligible to participate in the plan by virtue of promotion or new hire. A staff member who terminates employment before the Plan Year is not eligible to receive an award. III. PERFORMANCE MEASUREMENT FACTORS: Individual bonus awards will be based on corporate and individual performance. - *Providing the stock buy back program continues- - Upon reaching 96.5% of EPS, the factor will pay out at 50%. - Upon reaching 98.25% of EPS, the factor will pay out at 75%. - Upon reaching 100% of EPS, the factor will pay out at 100%. - Achievement over 100% of plan will result in a factor pay out multiplier prorated at 10% for every 1% by which Earnings Per Share exceeds the Plan Goal with a maximum pay out percent of 150% For example: -
PERCENT OF TARGET PAYOUT PERCENT EPS FACTOR* ----------------- -------------- ----------- 100% 100% 60% 101% 110% X 60% 102% 120% 60%
- Should the buy back program be discontinued- - Net income will be recalculated on a comparable basis and paid out at either 50%, 75%, 100% or more accordingly. - Direct Contribution, Key Success Factors and Special Initiatives should be achieved at 100% for pay out and may be multiplied by a performance factor of 100% to 150% at the discretion of the CEO. - Special initiatives are defined as producing revenue enhancement or expense reduction. IV. PARTICIPATION RATE: The participation rate for individual positions is benchmarked from market data research provided by various surveys and consultants. V. AWARD DETERMINATION: EXECUTIVE MANAGEMENT -- ----- | 60% 25% | | --- -- | Salary Midpoint x | EPS | Direct Contribution and Performance | | Participation Rate x X | Payout + | or Key Success Factor X Factor | | Service Factor | Percent | + Special Initiatives (100% TO 150%) | | | | | | | --- -- | | (96.50% 15% | | TO 150%) | -- -----
CBC SENIOR MANAGEMENT -- ----- | 60% 40% | | --- -- | Salary Midpoint x | EPS | Performance | | Participation Rate x X | Payout + | Key Success Factor X Factor | | Service Factor | Percent | (100% TO 150%) | | | --- -- | | (96.50% | | TO 150%) | -- -----
The incentive award for the Chairman, President and CEO will be determined by the Compensation and Human Resources Committee of Citizens Banking Corporation Board of Directors. A special award fund (Discretionary) equal to 15% of the aggregate incentive award will be available for individual awards as determined by the Chairman, President and CEO. Awards from this fund are made to staff members who are not participants in the Management Incentive Plan. Awards for the Discretionary Fund will be made only in recognition of exemplary achievements. Distribution of all available amounts in this fund is not mandatory. VI. AWARD LIMITATIONS: No awards will be made unless the corporation meets or exceeds 96.5% of the Earnings Per Share Goal (EPS). VII. AWARD PAYMENTS: All awards earned under Management Incentive Plan will be paid as soon as practical following approval by the Compensation and Human Resources Committee. VIII. ADDITIONAL PROVISIONS: The Management Incentive Plan shall be administered by the Compensation and Human Resources Committee of the Corporation. Participation in the Management Incentive Plan shall not be construed as giving any employee the right to continued employment with the corporation for the full or for any subsequent period. IX. DISCRETIONARY GUIDELINES: OBJECTIVES: Recognize and promote exemplary individual performance or initiative. ELIGIBLE PARTICIPANTS: All staff members are eligible except staff members who are in established incentive plans with payment amounts determined by performance in relation to established goals. NOMINATION PROCESS: Managers would nominate staff member(s) according to established guidelines. They would also obtain concurrence and approval from their respective Direct Report to the CEO. MONETARY GUIDELINES: Range of $500 to $3000. Larger amounts could be given in exceptional circumstances. GUIDELINES: Discretionary awards should be given in recognition for one or more of the following performance criteria: Earnings: - Expense reduction - Revenue enhancement Innovation: - Continuous improvement efforts - Innovative delivery alternatives - Foresight and planning to prevent crises Achievement: - Unique/specialized skills or knowledge of value to the company, i.e., Key Performers - Sustained high performance - Exemplary performance during unusual circumstances or specific events - Special projects completed in an exceptional manner or ahead of schedule - Superior client service EX-10.13 4 k68118ex10-13.txt STOCK COMPENSATION PLAN EXHIBIT 10.13 (FORM 10-K) CITIZENS BANKING CORPORATION STOCK COMPENSATION PLAN EFFECTIVE JANUARY 18, 2002 I. GENERAL PROVISIONS 1.01 PURPOSE. The Plan, which was adopted by the Company's Board on the Effective Date, is intended to attract and retain highly competent, effective and loyal Employees and Non-Employee Directors so as to further the growth and profitable operation of the Company and its Affiliates by encouraging Employees and Non-Employee Directors of the Company and its Affiliates to acquire an ownership interest in the Company through Options, Restricted Stock Awards, Restricted Stock Units and Performance Awards, thus identifying their interests with those of shareholders and encouraging them to make greater efforts on behalf of the Company and its Affiliates to achieve the Company's long-term business plans and objectives. 1.02 PARTICIPANTS. Participants in the Plan shall be such Employees (including Employees who are directors) and Non-Employee Directors of the Company and its Affiliates as the Committee may select from time to time. The Committee may grant Options, Restricted Stock Awards, Restricted Stock Units and Performance Awards to an individual upon the condition that the individual become an Employee or Non-Employee Director of the Company or of an Affiliate, provided that the Option, Restricted Stock Award, Restricted Stock Unit or Performance Award shall be deemed to be granted only on the date that the individual becomes an Employee or Non-Employee Director. 1.03 DEFINITIONS. As used in this Plan, the following terms have the meaning described below: (a) "AFFILIATE" OR "AFFILIATES" means a corporation or other entity that is affiliated with the Company and includes any parent or subsidiary of the Company, as defined in Code Sections 424(e) and (f), respectively. (b) AGREEMENT" means the written agreement that sets forth the terms of a Participant's Option, Restricted Stock Award, Restricted Stock Unit or Performance Award. (c) "BOARD" means the Board of Directors of the Company. (d) "BUSINESS COMBINATION" means (1) any reorganization, merger, share exchange or consolidation of the Company, or (2) any sale, lease, exchange or other transfer of all or substantially all of the assets of the Company. (e) "CASHLESS EXERCISE PROCEDURE" means delivery to the Company by a Participant exercising an Option of a properly executed exercise notice, acceptable to the Company, together with irrevocable instructions to the Participant's broker to deliver to the Company sufficient cash to pay the exercise price and any applicable income and employment withholding taxes, in accordance with a written agreement between the Company and the brokerage firm. (f) "CAUSE" means (1) with respect to any Participant who is a party to a written employment agreement with the Company or any Affiliate, "Cause" as defined in such employment agreement, or (2) with respect to any Participant who is not a party to a written employment agreement with the Company or any Affiliate, personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or receipt of a final cease-and-desist order. In determining willfulness, no act or failure to act on a Participant's part shall be considered "willful" unless done or omitted to be done by the Participant not in good faith and without reasonable belief that the Participant's action or omission was in the best interests of the Company. (g) "CHANGE IN CONTROL" means the occurrence of any of the following events: (1) If any "person" (as such term is used in Sections 13(d) and 14(d) under the Exchange Act in effect on the date hereof), or group of persons acting in concert, other than the Company or any Affiliate or any employee benefit plan of the Company or an Affiliate becomes the "beneficial owner" (as such term is defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of either the Common Stock or the combined voting power of all classes of the Company's Voting Stock. Notwithstanding the immediately preceding sentence, (A) the beneficial ownership condition in this Section 1.03(g)(1) shall not be deemed satisfied if the attainment of the applicable percentage of beneficial ownership is the result of an acquisition of Common Stock or Voting Stock by the Company which, by reducing the number of shares outstanding increases the proportionate number of shares beneficially owned by any person; provided, however, that if a person shall become the beneficial owner of 20% or more of the outstanding Common Stock or Voting Stock then outstanding by reason of share purchases by the Company and shall, after such share purchases become the beneficial owner of any additional Common Stock or Voting Stock other than by a purchase from the Company, then the beneficial ownership condition in this Section 1.03(g)(1) shall be deemed to have been satisfied; (B) the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Corporation, or (ii) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of Section 1.03(g)(3)(B). (2) If the Incumbent Directors cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election or nomination for 2 election by the Company's shareholders was approved by a vote of at least a majority of the directors then comprising the Incumbent Directors (either by a specific vote or by approval of the proxy statement of the Corporation in which such person is named as a nominee for director, without written objection to such nomination) shall be considered to be an Incumbent Director; provided further, that any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies by or on behalf of a person other than the Board shall not be considered an Incumbent Director. (3) If there shall be consummated a Business Combination, other than (A) a merger or consolidation effected to implement a reorganization of the Company's ownership wherein the Company shall become a wholly-owned subsidiary of another corporation and the shareholders of the Company shall become shareholders of such other corporation without any material change in each shareholder's proportionate ownership of such other corporation from that owned in the Company prior to such merger or consolidation; and (B) a Business Combination following which: (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the outstanding Common Stock and outstanding Voting Stock immediately prior to such Business Combination beneficially own, directly or indirectly, more than 65% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the Surviving Corporation in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the outstanding Common Stock and Voting Stock, as the case may be; (ii) no person or entity beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the Surviving Corporation or the combined voting power of the then outstanding voting securities of the Surviving Corporation (excluding any person or entity who beneficially owned 20% or more of the outstanding Common Stock or Voting Stock prior to such Business Combination, the Surviving Corporation and any employee benefit plan (or related trust) of the Company or the Surviving Corporation); and (iii) at least a majority of the members of the board of directors of the Surviving Corporation were Incumbent Directors immediately prior to the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination. (4) Approval by the shareholders of the Company of any plan or proposal for the liquidation or dissolution of the Company. (h) "CODE" means the Internal Revenue Code of 1986, as amended. (i) "COMMITTEE" means the Board acting as a whole, or a committee of two or more "non-employee directors" (as defined in Rule 16b-3 under the Exchange Act) who also constitute "outside directors" (as defined under Code Section 162(m) if applicable at the time) if designated by the Board to administer the Plan. The fact that a Committee member shall fail to qualify under Rule 16b-3 under the Exchange Act or 3 Code Section 162(m) shall not invalidate any grant or award made by the Committee, if the grant or award is otherwise validly granted under the Plan. (j) "COMMON STOCK" means shares of the Company's authorized and unissued common stock, or reacquired shares of such common stock. (k) "COMPANY" means Citizens Banking Corporation and any successor thereto. (l) "DISABILITY" means disability as defined in Section 22(e) of the Code. (m) "EFFECTIVE DATE" means January 18, 2002, the date on which the Board adopted the Plan. (n) "EMPLOYEE" means an employee of the Company or Affiliate, who has an "employment relationship" with the Company or an Affiliate, as defined in Treasury Regulation 1.421-7(h); and the term "employment" means employment with the Company, or an Affiliate of the Company. (o) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time and any successor thereto. (p) "FAIR MARKET VALUE" means, with respect to a share of Common Stock on the Grant Date, the average of the high and low sale prices of Common Stock on the Nasdaq Stock Market ("NSM") as reported in The Wall Street Journal for the Grant Date. In the event that there were no Common Stock transactions on such date, the Fair Market Value shall be determined as of the immediately preceding date on which there were Common Stock transactions. Unless otherwise specified in the Plan, "Fair Market Value" for purposes of determining the value of Common Stock on the date of exercise means the average of the high and low sale prices of such Common Stock on the NSM on the last date preceding the exercise on which there were Common Stock transactions, as reported in The Wall Street Journal. If the Common Stock is not listed for trading on the NSM on the relevant date, (1) the average of the high and low sale prices on the securities exchange (or, if there is more than one, the principal such exchange) on which the Common Stock is traded as reported in The Wall Street Journal for the relevant date; (2) if the shares are not listed for trading on any securities exchange or the NSM on such date but bid and ask information is reported by Nasdaq or another generally accepted reporting service, the average of the high bid and low asked prices of the shares, as so reported by Nasdaq or, if not reported by Nasdaq, another generally accepted reporting service, for the relevant date; (3) if none of the foregoing is applicable, the fair market value of a share as of the relevant date, as determined by the Committee. (q) "GRANT DATE" means the date on which the Committee authorizes an individual Option, Restricted Stock Award, Restricted Stock Unit or Performance Award, or such later date as shall be designated by the Committee. 4 (r) "INCENTIVE STOCK OPTION" means an Option that is intended to meet the requirements of Section 422 of the Code and is designated as such in the Agreement evidencing the grant. (s) "INCUMBENT DIRECTORS" means the members of the Board on the Effective Date. (t) "NON-EMPLOYEE DIRECTOR" means a director of the Company or an Affiliate who is not an Employee. (u) "NONQUALIFIED STOCK OPTION" means an Option that is not an Incentive Stock Option. (v) "OPTION" means either an Incentive Stock Option or a Nonqualified Stock Option. (w) "PARTICIPANT" means the individuals described in Section 1.02. (x) "PERFORMANCE AWARD" means a performance award granted pursuant to Article IV. (y) "PLAN" means the Citizens Banking Corporation Stock Compensation Plan, the terms of which are set forth herein, as amended from time to time. (z) "RESTRICTED PERIOD" means the period of time during which Common Stock subject to a Restricted Stock Award or Restricted Stock Unit is subject to transfer restrictions that make it nontransferable. (aa) "RESTRICTED STOCK" means Common Stock that is subject to a Restricted Period, pursuant to Article III. (bb) "RESTRICTED STOCK AWARD" means an award of Common Stock that is subject to a Restricted Period, granted pursuant to Article III. (cc) "RESTRICTED STOCK UNIT" means a right granted pursuant to Article III to receive Restricted Stock or an equivalent value in cash pursuant to the terms of the Plan and the related Agreement. (dd) "RETIREMENT" means a Participant's voluntary cessation of employment or status as a Non-Employee Director following the Participant's 65th birthday. (ee) "SURVIVING CORPORATION" means the corporation resulting from a Business Combination referred to in Section 1.03(g)(3)(B) of the Plan, including, without 5 limitation, the surviving corporation in a merger involving the Company and a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries. (ff) "VOTING STOCK" means the securities ordinarily having the right to vote in the election of directors to the Board. 1.04 ADMINISTRATION. (a) The Plan shall be administered by the Committee, in accordance with Rule 16b-3 under the Exchange Act and Code Section 162(m), if applicable. The Committee, at any time and from time to time, subject to Sections 2.02 and 7.07, may grant Options, Restricted Stock Awards, Restricted Stock Units and Performance Awards to such Employees and Non-Employee Directors and for such number of shares of Common Stock as it shall designate. The Committee shall interpret the Plan, prescribe, amend, and rescind rules and regulations relating to the Plan, and make all other determinations necessary or advisable for its administration. The decision of the Committee on any question concerning the interpretation of the Plan or its administration with respect to any Option, Restricted Stock Award, Restricted Stock Unit or Performance Award granted under the Plan shall be final and binding upon all Participants. (b) The Committee may delegate to one or more officers or managers of the Company or a committee of such officers or managers, the authority, subject to such terms and limitations as the Committee shall determine, to grant Options, Restricted Stock Awards, Restricted Stock Units and Performance Awards to, or to cancel, modify, waive rights with respect to, alter, discontinue or terminate Options, Restricted Stock Awards, Restricted Stock Units or Performance Awards held by Participants who are not officers or directors of the Company for purposes of Section 16 of the Exchange Act. 1.05 STOCK. The total number of shares of Company Common Stock available for grants and awards under this Plan shall be 7,000,000; provided, however, that the number of shares subject to Restricted Stock Awards, Restricted Stock Units and Performance Awards under this Plan shall not exceed 2,000,000. The maximum number of shares of Common Stock that may be subject to Option grants under the Plan to any salaried employee during any two-year period shall not exceed 500,000 shares. Shares subject to any portion of a terminated, forfeited, cancelled or expired Option, Restricted Stock Award, Restricted Stock Unit or Performance Award granted hereunder may again be subjected to grants and awards under the Plan as of the date of such termination, forfeiture, cancellation or expiration. All amounts in this Section 1.05 shall be adjusted, as applicable, in accordance with Article VI. II. STOCK OPTIONS 2.01 GRANT OF OPTIONS. The Committee may grant Options to Participants and, to the extent Options are granted, shall determine the general terms and conditions of exercise, including any applicable vesting or performance requirements, which shall be 6 set forth in a Participant's Agreement. The Committee may designate any Option granted as either an Incentive Stock Option or a Nonqualified Stock Option, or the Committee may designate a portion of an Option as an Incentive Stock Option and the remainder as a Nonqualified Stock Option. No Option shall have an exercise period that extends beyond 10 years from the Grant Date. Any Participant may hold more than one Option, Restricted Stock Award, Restricted Stock Unit or Performance Award under the Plan and any other plan of the Company or Affiliate. 2.02 INCENTIVE STOCK OPTIONS. Any Option intended to constitute an Incentive Stock Option shall comply with the requirements of this Section 2.02 and shall only be granted to an Employee. No Incentive Stock Option shall be granted with an exercise price below its Fair Market Value on the Grant Date. An Incentive Stock Option shall not be granted to any Participant who owns (within the meaning of Code Section 424(d)) stock of the Company or any Affiliate possessing more than 10% of the total combined voting power of all classes of stock of the Company or a Affiliate unless, at the Grant Date, the exercise price for the Option is at least 110% of the Fair Market Value of the shares subject to the Option and the Option, by its terms, is not exercisable more than 5 years after the Grant Date. The aggregate Fair Market Value of the underlying Common Stock (determined at the Grant Date) as to which Incentive Stock Options granted under the Plan (including a plan of an Affiliate) may first be exercised by a Participant in any one calendar year shall not exceed $100,000. To the extent that an Option intended to constitute an Incentive Stock Option shall violate the foregoing $100,000 limitation (or any other limitation set forth in Code Section 422), the portion of the Option that exceeds the $100,000 limitation (or fails any other Code Section 422 requirement) shall be deemed to constitute a Nonqualified Stock Option. 2.03 OPTION PRICE. The Committee shall determine the per share exercise price for each Option granted under the Plan, but no Option shall be granted with an exercise price below 100% of the Fair Market Value of Common Stock on the Grant Date. 2.04 PAYMENT FOR OPTION SHARES. The purchase price for shares of Common Stock to be acquired upon exercise of an Option granted hereunder shall be paid in full in cash or by personal check, bank draft or money order at the time of exercise; provided, however, that in lieu of such form of payment, the Committee may permit a Participant to pay such purchase price in whole or in part by tendering shares of Common Stock that have been held at least six months, which are freely owned and held by the Participant independent of any restrictions, hypothecations or other encumbrances, duly endorsed for transfer (or with duly executed stock powers attached), or in any combination of the above. If shares of Common Stock are tendered in payment of all or part of the exercise price, they shall be valued for such purpose at their Fair Market Value on the date of exercise. At the discretion of the Committee, as set forth in a Participant's Option Agreement, the purchase price may be paid by using the Cashless Exercise Procedure if the relevant agreement between the Company and the Participant's broker referred to in the definition of such term has been executed by the Company and such broker. 7 2.05 ACCELERATION. The Committee may, in its discretion, accelerate a Participant's right to exercise an Option. III. RESTRICTED STOCK AWARDS AND UNITS 3.01 TERMS OF RESTRICTED STOCK AWARDS AND RESTRICTED STOCK UNITS. The Committee shall have the authority to grant Restricted Stock Awards and Restricted Stock Units to such Participants and for such number of shares of Common Stock as it shall designate. Such Awards and Units shall be evidenced by an Agreement that shall specify the terms thereof, including the Restricted Period, the number of shares of Common Stock subject to the Award or Unit, and such other provisions, which may include, among other things, vesting and performance goals, as the Committee shall determine. 3.02 TRANSFERABILITY. Except as provided in this Article III of the Plan, the shares of Common Stock subject to a Restricted Stock Award or Restricted Stock Unit may not be transferred, pledged, assigned, or otherwise alienated or hypothecated until the termination of (a) the applicable Restricted Period or for such period of time as shall be established by the Committee and specified in the applicable Agreement, or (b) upon the earlier satisfaction of other conditions as specified by the Committee and set forth in the applicable Agreement. Prior to the end of the Restricted Period, all rights with respect to the Common Stock subject to a Restricted Stock Award or Restricted Stock Unit granted to a Participant shall be exercisable during the Participant's lifetime only by the Participant or the Participant's legal representative. 3.03 OTHER RESTRICTIONS. The Committee shall impose such other restrictions on any shares of Common Stock subject to a Restricted Stock Award or Restricted Stock Unit as it may deem advisable including, without limitation, restrictions under applicable federal or state securities laws, and shall legend any certificates representing such shares to give appropriate notice of such restrictions. 3.04 CERTIFICATE LEGEND. In addition to any legends placed on certificates pursuant to Section 3.03, any certificate representing shares of Common Stock subject to a Restricted Stock Award or Restricted Stock Unit shall bear the following legend: The sale or other transfer of the shares of stock represented by this certificate, whether voluntary, involuntary or by operation of law, is subject to certain restrictions on transfer set forth in the Citizens Banking Corporation Stock Compensation Plan (the "Plan"), rules and administrative guidelines adopted pursuant to such Plan and an Agreement dated , . A copy of the Plan, such rules and such Agreement may be obtained from the Secretary of the Company. 3.05 REMOVAL OF RESTRICTIONS. Except as otherwise provided under the Plan, if the Restricted Period has elapsed or been waived by the Committee with respect to all or 8 a portion of the Restricted Shares represented by a certificate, the holder thereof shall be entitled to have the legend required by Section 3.04 removed from such stock certificate with respect to the shares as to which the Restricted Period has elapsed. Any certificate evidencing the remaining shares shall bear the legend required by Section 3.04. The Committee shall have the discretion to waive the applicable Restricted Period with respect to all or any part of the Common Stock subject to a Restricted Stock Award or Restricted Stock Unit. The Company shall have the right to retain any certificate representing shares of Common Stock subject to a Restricted Stock Award or Restricted Stock Unit until such time as all conditions and/or restrictions applicable to such shares of Common Stock have been satisfied. 3.06 VOTING AND DIVIDEND RIGHTS. During the Restricted Period, Participants shall be considered record owners of any shares of Common Stock subject to any Restricted Stock Award or Restricted Stock Unit held by them for purposes of determining who is entitled to vote or receive dividends with respect to such shares. If any dividends or distributions are paid in shares of Common Stock during the Restricted Period, the dividend or other distribution shares shall be subject to the same restrictions on transferability as the shares of Common Stock with respect to which they were paid. IV. PERFORMANCE AWARDS 4.01 PERFORMANCE AWARDS. The Committee is authorized to grant Performance Awards to eligible Participants. Subject to the terms of the Plan, a Performance Award granted under the Plan (a) may be denominated or payable in cash or shares of Common Stock (including, without limitation, Restricted Stock), and (b) shall confer on the holder thereof rights valued as determined by the Committee and payable to, or exercisable by, the holder of the Performance Award, in whole or in part, upon the achievement of such performance goals during such performance period, as the Committee shall establish. Subject to the terms of the Plan, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award granted, the amount of any payment or transfer to be made pursuant to any Performance Award, and the other terms and conditions of any Performance Award, including the effect upon such Award of termination of the Participant's employment and/or directorship, shall be determined by the Committee. V. TERMINATION OF EMPLOYMENT AND SERVICES 5.01. OPTIONS. (a) Unless otherwise provided in the applicable Agreement, if, prior to the date that an Option first becomes exercisable, a Participant's status as an Employee and Non-Employee Director is terminated for any reason, the Participant's right to exercise the Option shall terminate and all rights thereunder shall cease as of the close of business on the date of such termination. 9 (b) For any Nonqualified Stock Option unless otherwise provided in the applicable Agreement and for any Incentive Stock Option, if, on or after the date that the Option first becomes exercisable, a Participant's status as an Employee and Non-Employee Director is terminated (1) for Cause, any unexercised portion of the Option (whether then exercisable or not) shall, as of the time of the Cause determination, immediately terminate, (2) due to death or Disability, then the Option, to the extent that it is exercisable on the date of termination, shall be exercisable only until the earlier of the one year anniversary of such termination or the "expiration date" set forth in the applicable Agreement, (3) for any other reason (except as provided in the next sentence), then the Option, to the extent that it is exercisable on the date of termination, shall be exercisable only until the earlier of the three month anniversary of such termination or the "expiration date" set forth in the applicable Agreement. For any Nonqualified Stock Option, unless otherwise provided in the applicable Agreement, if, on or after the date that the Option first becomes exercisable, a Participant's status as an Employee and Non-Employee Director is terminated due to Retirement, or if a Participant is a party to a Change in Control Agreement with the Company (as amended and restated on November 28, 2000) and such Participant's status as an Employee and Non-Employee Director is terminated involuntarily or constructively in accordance with paragraph 3 thereof, then the Option, to the extent that it is exercisable on the date of termination, shall be exercisable until the "expiration date" set forth in the applicable Agreement. The Committee, at its discretion, may designate in the applicable Agreement a different post-termination period for exercise of a Nonqualified Stock Option and may extend the exercise period of any Option, but in no event may the post-termination exercise period exceed the tenth anniversary of the Grant Date; it being understood that the extension of the exercise term for an Incentive Stock Option may cause such Option to become a Nonqualified Stock Option. (c) Shares subject to Options that are not exercised within the time allotted for exercise shall expire and be forfeited by the Participant as of the close of business on the date they are no longer exercisable. 5.02 RESTRICTED STOCK AWARDS AND RESTRICTED STOCK UNITS. Unless otherwise provided in the applicable Agreement, if the status as an Employee and Non-Employee Director of a Participant holding a Restricted Stock Award or Restricted Stock Unit terminates for any reason other than Retirement, death or Disability prior to the lapse of the Restricted Period, any shares of Common Stock subject to a Restricted Stock Award or Restricted Stock Unit as to which the Restricted Period has not yet lapsed or been waived shall be forfeited by the Participant; provided, however, that the Committee, in its sole discretion, may waive or change the remaining restrictions or add additional restrictions with respect to any Restricted Stock Award or Restricted Stock Unit that would otherwise be forfeited, as it deems appropriate. Unless otherwise provided in the applicable Agreement, if the status as an Employee and Non-Employee Director of a Participant holding a Restricted Stock Award or Restricted Stock Unit terminates due to Retirement, death or Disability, any remaining Restricted Period with respect to Restricted Stock Awards or Restricted Stock Units held by such Participant shall lapse as of the date of such termination. 10 5.03 PERFORMANCE AWARDS. Unless otherwise provided in the applicable Agreement, if the status as an Employee and Non-Employee Director of a Participant holding a Performance Award terminates for any reason other than Retirement, death or Disability prior to satisfaction of the performance requirements of such Award, such Award automatically shall be forfeited by the Participant to the extent such requirements are not satisfied; provided, however, that the Committee, in its sole discretion, may waive or change the remaining requirements or add additional requirements with respect to any Performance Award or portion thereof that would otherwise be forfeited, as it deems appropriate. Unless otherwise provided in the applicable Agreement, if the status as an Employee and Non-Employee Director of a Participant holding a Performance Award terminates due to Retirement, death or Disability, the performance requirements of such Award shall be deemed to have been fully satisfied. 5.04 OTHER PROVISIONS. Neither the transfer of a Participant from one corporation or division to another corporation or division among the Company and any of its Affiliates nor a leave of absence under the Company's leave policy shall be deemed to constitute a termination of status as a Participant for purposes of the Plan, except that no new awards or grants may be made to a Participant during a leave of absence. VI. ADJUSTMENTS AND CHANGE IN CONTROL 6.01 ADJUSTMENTS. (a) If the Committee shall determine that any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Common Stock or other securities of the Company, issuance of warrants or other rights to purchase Common Stock or other securities of the Company, or other corporate transaction or event affects the Common Stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (1) the number and type of shares of Common Stock which thereafter may be made the subject of Options, Restricted Stock Awards, Restricted Stock Units and Performance Awards, (2) the number and type of shares of Common Stock subject to outstanding Options, Restricted Stock Awards, Restricted Stock Units and Performance Awards, and (3) the exercise price with respect to any Option; provided, however, in each case, that with respect to Incentive Stock Options any such adjustment shall be made in accordance with Section 422 of the Code or any successor provision thereto to the extent that such Option is intended to remain an Incentive Stock Option. (b) The foregoing adjustments shall be made by the Committee or, if such adjustment is required by the Board, then by the Board at the recommendation of the Committee. Any such adjustment shall provide for the elimination of any fractional share 11 that might otherwise become subject to an Option, Restricted Stock Award, Restricted Stock Unit or Performance Award. 6.02 CHANGE IN CONTROL. Upon the occurrence of a Change in Control, or if the Committee determines in its sole discretion that a Change in Control has occurred, then (a) any Option granted hereunder immediately shall become exercisable in full, regardless of any installment provision applicable to such Option; (b) any remaining Restricted Period on any shares of Common Stock subject to a Restricted Stock Award or Restricted Stock Unit granted hereunder immediately shall lapse; and (c) the performance requirements for a Performance Award granted hereunder shall be deemed to have been satisfied in full. 6.03 MERGER. If the Company is a party to any merger, consolidation, reorganization, or sale of substantially all of its assets, each holder of outstanding Option, Restricted Stock Award, Restricted Stock Unit or Performance Award, to the extent that such Option, Award or Unit remains outstanding thereafter, shall be entitled to receive, in lieu of the shares of Common Stock to which such holder would otherwise be entitled, upon the exercise of such Option or the lapse of the Restricted Period on shares of Common Stock subject to a Restricted Stock Award or Restricted Stock Unit or the satisfaction of the performance requirements for a Performance Award, the securities and/or property which a shareholder owning the number of shares subject to the holder's Option, Restricted Stock Award, Restricted Stock Unit or Performance Award would be entitled to receive pursuant to such merger, consolidation, reorganization or sale of assets. VII. MISCELLANEOUS 7.01 PARTIAL EXERCISE/FRACTIONAL SHARES. The Committee may permit, and shall establish procedures for, the partial exercise of Options granted under the Plan. No fractional shares shall be issued in connection with the exercise or payment of a grant or award under the Plan; instead, the Fair Market Value of the fractional shares shall be paid in cash, or at the discretion of the Committee, the number of shares shall be rounded down to the nearest whole number of shares, and any fractional shares shall be disregarded. 7.02 RULE 16B-3 REQUIREMENTS. Notwithstanding any other provision of the Plan, the Committee may impose such conditions on a Restricted Stock Award, Restricted Stock Unit, Performance Award or the exercise of an Option (including, without limitation, the right of the Committee to limit the time of exercise to specified periods) as may be required to satisfy the requirements of Rule 16b-3 of the Exchange Act (as such rule may be in effect at such time). 7.03 RIGHTS PRIOR TO ISSUANCE OF SHARES. No Participant shall have any rights as a shareholder with respect to shares covered by an Option, Restricted Stock Award, Restricted Stock Unit or Performance Award until the issuance of such shares. No 12 adjustment shall be made for dividends or other rights with respect to such shares for which the record date is prior to the date the shares are issued. 7.04 NON-ASSIGNABILITY. No Option, Restricted Stock Award, Restricted Stock Unit or Performance Award shall be transferable by a Participant except by will or the laws of descent and distribution. During the lifetime of a Participant, an Incentive Stock Option shall be exercised only by the Participant. No transfer of an Option, Restricted Stock Award, Restricted Stock Unit or Performance Award shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and a copy of the will or such evidence as the Company may deem necessary to establish the validity of the transfer and the acceptance by the transferee of the terms and conditions of the Option, Restricted Stock Grant Award, Restricted Stock Unit or Performance Award. 7.05 SECURITIES LAWS. (a) Anything to the contrary herein notwithstanding, the Company's obligation to sell and deliver Common Stock pursuant to the exercise of an Option, or deliver Common Stock pursuant to a Restricted Stock Award, Restricted Stock Unit or Performance Award is subject to such compliance with federal and state laws, rules and regulations applying to the authorization, issuance or sale of securities as the Company deems necessary or advisable. The Company shall not be required to sell or deliver Common Stock unless and until it receives satisfactory assurance that the issuance or transfer of such shares shall not violate any of the provisions of the Securities Act of 1933, the Exchange Act, any other applicable federal laws, or the rules and regulations of the Securities and Exchange Commission promulgated thereunder or those of any stock exchange or stock market on which the Common Stock may be listed or traded, the provisions of any state laws governing the sale of securities, or that there has been compliance with the provisions of such acts, rules, regulations and laws. (b) The Committee may impose such restrictions on any shares of Common Stock subject to or underlying an Option, Restricted Stock Award, Restricted Stock Unit or Performance Award as it may deem advisable, including, without limitation, restrictions (i) under applicable federal securities laws, (ii) under the requirements of any stock exchange or other recognized trading market upon which such shares of Common Stock are then listed or traded, or (iii) under any blue sky or state securities laws applicable to such shares. No shares shall be issued until counsel for the Company has determined that the Company has complied with all requirements under appropriate securities laws. 7.06 WITHHOLDING AND TAXES. The Company shall have the right to withhold from a Participant's compensation or require a Participant to remit sufficient funds to satisfy applicable withholding for income and employment taxes upon the exercise of an Option, the lapse of a Restriction Period or the satisfaction of the performance requirements relating to a Performance Award. A Participant may use the Cashless Exercise Procedure or may tender previously acquired shares of Common Stock that have been held at least six months to satisfy the withholding obligation in whole or in part, 13 such shares being valued for such purpose at Fair Market Value; provided that the Company shall not withhold from exercise more shares than are necessary to satisfy the established requirements of federal, state and local tax withholding obligations. 7.07 TERMINATION AND AMENDMENT. (a) The Board may terminate the Plan, or the granting of Options, Restricted Stock Awards, Restricted Stock Units or Performance Awards under the Plan, at any time. No new grants or awards shall be made under the Plan after the tenth anniversary of the Effective Date. (b) The Board may amend or modify the Plan at any time and from time to time. (c) No amendment, modification or termination of the Plan shall adversely affect any Option, Restricted Stock Award, Restricted Stock Unit or Performance Award previously granted under the Plan in any material way without the consent of the Participant holding the Option, Restricted Stock Award, Restricted Stock Unit or Performance Award. (d) An Agreement relating to an Option shall not be amended to change the exercise price of the Option evidenced by such Agreement, other than pursuant to Article VI. 7.08 EFFECT ON EMPLOYMENT OR SERVICES. Neither the adoption of the Plan nor the granting of any Option, Restricted Stock Award, Restricted Stock Unit or Performance Award pursuant to the Plan shall be deemed to create any right in any individual to be retained or continued in the employment or services of the Company or an Affiliate. 7.09 USE OF PROCEEDS. The proceeds received from the sale of Common Stock pursuant to the Plan shall be used for general corporate purposes of the Company. 7.10 APPROVAL OF PLAN. The Plan shall be subject to the approval of the holders of at least a majority of the Common Stock of the Company present and entitled to vote at a meeting of shareholders of the Company held within 12 months after adoption of the Plan by the Board. No Option, Restricted Stock Award, Restricted Stock Unit or Performance Award granted under the Plan may be exercised or paid out in whole or in part unless the Plan has been approved by the shareholders as provided herein. If not approved by shareholders within 12 months after approval by the Board, the Plan and any Options, Restricted Stock Awards, Restricted Stock Units or Performance Awards granted under the Plan shall be rescinded. 7.11 GOVERNING LAW. The Plan and all actions taken under the Plan shall be governed and construed in accordance with Michigan law. 14 THIS PLAN is hereby executed as of January 18, 2002 in accordance with the Board resolutions adopted on such date. CITIZENS BANKING CORPORATION By: /s/ Robert J. Vitito ---------------------------- Its: Chairman, President, and ---------------------------- Chief Executive Officer ---------------------------- 15 EX-10.14 5 k68118ex10-14.txt EMPLOYMENT AGREEMENT WITH WILLIAM R. HARTMAN EXHIBIT 10.14 (Form 10.K) EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of February 11, 2002, by and between William R. Hartman (the "Executive") and Citizens Banking Corporation, a Michigan corporation (the "Company"), WITNESSETH THAT: WHEREAS, the parties desire to enter into this Agreement pertaining to the employment of the Executive by the Company; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below, it is hereby covenanted and agreed by the Executive and the Company as follows: 1. Employment. Subject to the terms of this Agreement, the Company hereby agrees to employ the Executive as its President and Chief Executive Officer during the Agreement Term (as defined below), with such authority, power, responsibilities and duties customarily exercised by a person holding such positions in a company of the size and nature of the Company. Executive shall also hold the titles of Chairman, President and Chief Executive Officer of Citizens Bank, a subsidiary of the Company (the "Bank"). In his positions with the Company and the Bank, the Executive shall only report directly to the Board of Directors of the Company (the "Board"). Executive shall also become a member of the Board at the next regularly scheduled meeting of the Board. The Executive shall commence his employment with the Company on February 25, 2002 (the "Effective Date"). The "Agreement Term" shall be the period beginning on the Effective Date and ending on the third anniversary of the Effective Date; provided, however, the Agreement Term will be automatically extended by twelve months on the first anniversary of the Effective Date and on each anniversary thereof, unless one party to this Agreement provides written notice of non- renewal to the other party within 30 days prior to the date of such automatic extension. 2. Performance of Duties. The Executive agrees that during his employment with the Company, he shall devote his full business time, energies and talents to serving in the positions described in Section 1 and that he shall perform his duties faithfully and efficiently subject to the directions of the Board. Notwithstanding the foregoing provisions of this Section 2, the Executive may (i) serve as a director, trustee or officer or otherwise participate in not-for-profit educational, welfare, social, religious and civic organizations; (ii) serve as a director of any for-profit business, with the prior consent of the Board (which consent shall not be unreasonably withheld); and (iii) acquire passive investment interests in one or more entities, to the extent that such other activities do not inhibit or interfere with the performance of the Executive's duties under this Agreement, or to the knowledge of the Executive conflict in any material way with the business or policies of the Company or any subsidiary or affiliate thereof. 1 3. Compensation. Subject to the terms of this Agreement, during the Agreement Term, while the Executive is employed by the Company, the Company shall compensate him for his services as follows: (a) Base Salary. The Executive shall receive an annual base salary of $525,000 payable in monthly or more frequent installments in accordance with the Company's payroll policies (such annual base salary as adjusted pursuant to this Section 3(a) shall hereinafter be referred to as "Base Salary"). The Executive's Base Salary shall be reviewed, and may be increased but not decreased, annually, by the Board pursuant to its normal performance review policies for senior executives, with the first such review occurring not later than December 2002. (b) Restricted Stock Award. The Company shall make an award to the Executive as of the Effective Date of 20,000 restricted shares of the Company's common stock under and subject to the terms and conditions of the Stock Compensation Plan (the "Stock Plan"), a copy of which is attached hereto as Exhibit A. The Executive shall vest in 20% of such shares on the 90th day following the Effective Date and 20% on each of the first four anniversaries of the Effective Date. The foregoing award of restricted stock shall be evidenced by a restricted stock award agreement which is attached hereto as Exhibit B and made a part of this Agreement. (c) Initial Option Award. The Company shall make an award to the Executive under the Stock Plan within 90 days of the Effective Date of a nonqualified option to purchase 225,000 shares of the Company's common stock at a per share price equal to the fair market value of the common stock on the grant date (which will be the Effective Date) and an exercise period equal to ten (10) years (the "Initial Option"), subject to the following: (i) The grant of the Initial Option is conditioned upon, and cannot be exercised unless, shareholders of the Company at the next meeting of such shareholders vote to approve the Stock Plan for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). If such approval is not obtained, the grant of the Initial Option shall be null and void, and Executive's rights with respect thereto shall terminate in full. The Company shall use its commercially reasonable efforts to obtain shareholder approval of the Stock Plan for purposes of Code Section 162(m) at the next meeting of shareholders of the Company. (ii) Subject to the foregoing subsection 3(c)(i), the Initial Option shall vest and become exercisable on the fifth anniversary of the Effective Date or sooner based upon the Company's performance, in accordance with the option vesting formula utilized for other Company executives under the Stock Plan as provided in the Executive's stock option agreement. 2 (iii) The foregoing award of the Initial Option shall be evidenced by a stock option agreement which is attached hereto as Exhibit C and made a part of this Agreement. (d) Subsequent Option Award. In 2003, the Executive shall be entitled to receive a nonqualified option to purchase an additional 225,000 shares of the Company's common stock under the Stock Plan or a successor thereto, such award to be made by the Board (or the appropriate committee thereof) not later than May 31, 2003 (the "Subsequent Option"). The Subsequent Option (i) shall have a per share exercise price equal to the fair market value of the common stock on the date of grant, (ii) shall have an exercise period equal to ten (10) years, (iii) shall vest and become exercisable on the fifth anniversary of the date of grant or sooner based upon the Company's performance, in accordance with the option vesting formula utilized for other Company executives under the Stock Plan at that time, and (iv) if the employment of the Executive is terminated by the Company without Cause (other than as a result of an Employment Order), shall vest, become immediately exercisable and shall expire, if not exercised, at the earlier of the third anniversary of such termination of employment or the "expiration date" set forth in the applicable stock option agreement. Any remaining terms shall be determined by the Company in accordance with the terms of the Stock Plan or successor thereto on a basis consistent with awards granted to other senior executives. (e) Annual Incentive Payments. The Executive shall be eligible to receive an annual incentive payment (the "Incentive Payment") as determined in accordance with the Company's Management Incentive Plan or any successor thereto (the "Incentive Plan"), a copy of which is attached hereto as Exhibit D. The Executive's target Incentive Payment for 2002 shall be 50% of his salary range midpoint for such year, such target percentage for 2003 to be reviewed by the Board not later than February 2003. Notwithstanding any provision contained in this Section 3(e) or in the Incentive Plan, the minimum guaranteed Incentive Payment payable to the Executive for the period commencing on the Effective Date and ending on December 31, 2002 shall be $200,000. (f) Supplemental Pension Benefits. The Executive shall be entitled to supplemental pension benefits pursuant to a Supplemental Executive Retirement Plan ("SERP") which is attached hereto as Exhibit E and made a part of this Agreement. (g) Employee Benefits, Fringe Benefits and Perquisites. The Executive shall be provided with employee benefits, fringe benefits and perquisites on a basis no less favorable than such benefits and perquisites are provided by the Company from time to time to the Company's other senior executives, including, but not limited to, five weeks vacation, a leased American-made automobile selected by the Executive, and life insurance and AD&D coverage (commencing at the end of the 30 day waiting period). Notwithstanding any provision contained herein, at the time that the Executive is eligible to participate in the Company's group health plan, neither he nor any of his dependents will be subject to any pre-existing condition provision contained in such plan. 3 (h) Other Benefits. The Company shall reimburse the Executive for the initiation fees and annual dues associated with the Executive maintaining membership in one country club within 30 miles of Flint, Michigan. Alternatively, the Company may choose, at its option, to pay such initiation fees and dues directly. The Company shall also reimburse the Executive for COBRA payments made with respect to healthcare benefits during the 90-day waiting period for participation in the Company's group health plan and for any life insurance and AD&D coverage payments made by the Executive to extend insurance coverage (if available) under his prior employment plans during the 30 day insurance waiting period under the Company's plans. Executive will receive a tax gross-up payment in an amount that after all Federal, state and local income taxes thereon shall equal the aggregate amount of additional Federal, state and local income taxes payable by Executive from time to time by reason of the receipt of such reimbursements (or direct payment of initiation fees and dues for country club membership) under this Section 3(h). (i) Relocation Benefits. Executive understands that, as a condition of his employment by the Company, he is required, within 15 months following the Effective Date, to relocate his residence within 50 miles of the Company's headquarters in Flint, Michigan. In connection with such relocation, he shall be entitled to reimbursement for reasonable expenses incurred in moving his principal residence (including, but not limited to, loading, transportation and unloading) to the Flint, Michigan area, in accordance with the Company's relocation policy for senior executives, including two house hunting trips for Executive and his spouse and closing costs associated with the purchase of his principal residence within a 50 mile radius of Flint, Michigan. The Company will purchase the Executive's principal residence in Columbus, Ohio at its fair market value as determined by the average of two independent appraisals obtained by the Company and pay all closing costs associated with such purchase. Executive shall receive a monthly relocation allowance of $2,000 for housing and transportation, for a period commencing on the Effective Date and ending upon the earlier of the establishment of his principal residence as contemplated by this Section 3(i) or 15 months after the Effective Date. Executive shall receive a relocation bonus of $20,000 to be paid at the time Executive has established his principal residence within a 50 mile radius of Flint, Michigan. Executive will receive a tax gross-up payment in an amount that after all Federal, state and local income taxes thereon shall equal the aggregate amount of additional Federal, state and local income taxes payable by Executive from time to time by reason of the receipt of any payment (except the relocation bonus) under this Section 3(i). (j) Change In Control. Upon the execution of this Agreement, the Executive and the Company shall also execute a Change in Control Agreement which is attached hereto as Exhibit F (the "Change in Control Agreement") and made a part of this Agreement. (k) Expense Reimbursement. The Company will reimburse the Executive for all reasonable expenses incurred by him in the performance of his duties in accordance with the Company's policies applicable to senior executives. 4 4. Indemnification. Upon the execution of this Agreement, the Executive and the Company shall also execute an Indemnification Agreement which is attached hereto as Exhibit G and made a part of this Agreement. 5. Termination of Employment. Upon termination of the Executive's employment for any reason, the Executive or, in the event of death, the Executive's estate shall be entitled to the Executive's Base Salary pro rated through the date of termination. Any annual Incentive Payment earned by the Executive for a prior award period, but not yet paid to the Executive, and any employee benefits to which the Executive is entitled by reason of his employment shall be paid to the Executive or his estate at such time as is provided by the terms of the applicable Company plan or policy. If the Executive's employment is terminated during the Agreement Term, the Executive's right to additional payments and benefits under this Agreement for periods after his date of termination shall be determined in accordance with the following provisions of this Section 5. (a) Death. If Executive's employment is terminated by reason of his death, the Executive's spouse and eligible dependents, shall be eligible for continued participation in all medical, dental, vision and hospitalization insurance plans in which they were participating at the time of the Executive's death for 18 months after the Executive's date of death, which shall run concurrently with their COBRA rights. For the 18-month period described in this Section 5(a), the Executive's spouse and eligible dependents shall pay no portion of the premium or cost for such coverage. (b) Termination for Cause or Voluntary Resignation. If the Executive's employment is terminated by the Company for Cause or if the Executive voluntarily resigns from the employ of the Company, other than pursuant to a Constructive Discharge (as described in paragraph (d) of this Section 5), all payments and benefits to which the Executive would otherwise be entitled under this Agreement shall immediately cease, except as otherwise specifically provided above in this Section 5 with respect to his pro rated Base Salary through the date of termination, his annual Incentive Payment, if any, earned for a prior award period and his previously earned employee benefits. For purposes of this Agreement, the term "Cause" shall mean: (i) the Executive is convicted of (i) a felony or (ii) any crime involving moral turpitude resulting in reputational harm causing material injury to the Company; or (ii) a reasonable determination by a majority vote of directors at a meeting at which a quorum was present, that, in carrying out his duties, the Executive has engaged in gross neglect or gross misconduct, resulting in economic harm to the Company; (iii) theft or embezzlement from the Company or any subsidiary; or (iv) repeated violations of material Company policies, as may be adopted by the Board from time to time, provided that the Company has given the Executive 5 written notice of each such violation and the Executive fails to cure or is unable to cure each such violation within 10 days after such respective notice. (c) Termination Without Cause. If the Company terminates the Executive without Cause: (i) The Executive shall be entitled to a lump sum payment, within 60 days following termination of his employment, of (A) three times his then current Base Salary, plus (B) three times the average annual Incentive Bonus paid to or earned by the Executive (whichever is larger) during the three previous fiscal years during the Agreement Term or, if there have not been three previous fiscal years during the Agreement Term, such fewer number of fiscal years as shall have occurred during the Agreement Term, or, if the Company terminates the Executive without Cause prior to January 1, 2003, $600,000; (ii) The Executive and his eligible dependents shall be entitled to continued participation, at no cost to the Executive or his eligible dependents, in all medical, dental, vision and hospitalization insurance coverage, until the earlier of 18 months following termination of employment or the date on which he receives equivalent coverage and benefits from a subsequent employer. The time period described in this Section 5(c)(ii) shall run concurrently with the COBRA rights of the Executive and his eligible dependents. (iii) All outstanding unvested stock options granted to the Executive prior to his termination of employment shall vest, become immediately exercisable and shall expire, if not exercised, at the earlier of the third anniversary of such termination of employment or the "expiration date" set forth in the applicable stock option agreement. (iv) All outstanding unvested restricted shares of the Company's stock awarded to the Executive prior to his termination of employment shall vest immediately upon the Executive's termination of employment. (d) Constructive Discharge. A Constructive Discharge by the Company shall be treated for all purposes of this Agreement as a termination by the Company without Cause. If (x) the Executive provides written notice to the Company of the occurrence of Good Reason (as defined below) within a reasonable time after the Executive has knowledge of the circumstances constituting Good Reason, which notice shall specifically identify the circumstances which the Executive believes constitute Good Reason; (y) the Company fails to correct the circumstances within 30 days after such notice; and (z) the Executive resigns within ninety days after the date of delivery of the notice referred to in clause (x) above, then the Executive shall be considered to have been subject to a Constructive Discharge by the Company. For purposes of this Agreement, "Good Reason" shall mean, without the Executive's express written consent (and except in consequence of a prior termination of the Executive's employment), the occurrence of any of the following circumstances: 6 (i) A reduction by the Company in the Executive's Base Salary to an amount that is less than required under Section 3(a). (ii) The failure of the Executive to be elected or reelected to any of the positions described in Section 1 or his removal from any such position. (iii) A material diminution in the Executive's duties. In the event of a Change of Control (as defined in the Change in Control Agreement), the mere fact that the Company ceases to be publicly traded or is a subsidiary of another corporation shall not constitute Good Reason under this clause (iii). (iv) A change in the Executive's reporting relationship such that the Executive no longer reports directly to the Board. (v) Any adverse amendment (not required by law) to or termination of the SERP by the Company without the written consent of the Executive. (vi) A breach by the company of any of its material obligations to the Executive under this Agreement. (e) Termination Due to Employment Order. It shall be grounds for termination of this Agreement by the Company if the Executive is prohibited from substantially fulfilling his obligations under this Agreement as a result of an injunction or other order that (i) was obtained from a court of competent jurisdiction by any former employer of the Executive, and (ii) has been or will be in effect for a period of at least 60 days (an "Employment Order"). If the Company terminates the Executive due to an Employment Order: (i) The Executive shall be entitled to a lump sum payment, within 60 days following termination of his employment, of (A) 1.5 times his then current Base Salary, plus (B) 1.5 times the average annual Incentive Bonus paid to or earned by the Executive (whichever is larger) during the three previous fiscal years during the Agreement Term or, if there have not been three previous fiscal years during the Agreement Term, such fewer number of fiscal years as shall have occurred during the Agreement Term, or, if the Company terminates the Executive due to an Employment Order prior to January 1, 2003, $300,000; (ii) The Executive and his eligible dependents shall be entitled to continued participation, at no cost to the Executive or his eligible dependents, in all medical, dental, vision and hospitalization insurance coverage, until the earlier of 18 months following termination of employment or the date on which he receives equivalent coverage and benefits from a subsequent employer. The time period described in this Section 5(e)(ii) shall run concurrently with the COBRA rights of the Executive and his eligible dependents. 7 (iii) One-half of all outstanding unvested stock options granted to the Executive prior to his termination of employment shall vest, become immediately exercisable and shall expire, if not exercised, at the earlier of the third anniversary of such termination of employment or the "expiration date" set forth in the applicable stock option agreement. The remaining one-half of such stock options shall terminate. (iv) One-half of all outstanding unvested restricted shares of the Company's stock awarded to the Executive prior to his termination of employment shall vest immediately upon the Executive's termination of employment. The remaining one-half of such restricted shares shall be forfeited. (f) Non-renewal of Agreement by the Company. The normal expiration of this Agreement at the end of the Agreement Term shall be treated for all purposes of this Agreement as a termination by the Company without Cause, if: (i) The Company provides written notice to the Executive of non-renewal of the Agreement Term in accordance with Section 1; (ii) The Executive continues to serve the Company in accordance with this Agreement for the remainder of the Agreement Term; and (iii) The Executive's employment with the Company is terminated after the expiration of this Agreement and prior to age 65 for any reason other than disability. (g) No Mitigation; No Offset. In the event of any termination of employment under this Section 5, the Executive shall be under no obligation to seek other employment and there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration received by the Executive from any subsequent employer, except as provided in Sections 5(c)(ii) or 5(e)(ii). (h) Nature of Payments. Any amounts due under this Section 5 are in the nature of severance payments considered to be reasonable by the Company and are not in the nature of a penalty. (i) Effect of Termination on Other Positions. If, on the date of his termination of employment with the Company, the Executive is a member of the Board of Directors of the Company or any of the Company's subsidiaries, or holds any other position with the Company, the Bank or other subsidiaries of the Company, the Executive shall be deemed to have resigned from all such positions as of the date of his termination of employment with the Company. Executive agrees to execute such documents and take such other actions as the Company may request to reflect such resignation. (j) Benefit Plans. If, for any period during which the Executive is entitled to continued benefits under this Agreement, the Company reasonably determines that the Executive cannot participate in any benefit plan because he is not actively performing 8 services for the Company, then, in lieu of providing benefits under any such plan, the Company shall provide comparable benefits or the cash equivalent of the cost thereof (after taking into account all tax consequences thereof to the Executive and the Executive's dependents as the case may be) to the Executive and, if applicable, the Executive's dependents through other arrangements. (k) Other Severance Arrangements. Except as may be otherwise specifically provided in the Change In Control Agreement, the Executive's rights under this Section 5 shall be in lieu of any benefits that may be otherwise payable to or on behalf of the Executive pursuant to the terms of any severance pay arrangement of the Company or any subsidiary or any other similar arrangement of the Company or any subsidiary providing benefits upon involuntary termination of employment (including, without limitation, any executive management separation plan). In the event of a change in control as defined under the Change In Control Agreement, the benefits provided under the Change In Control Agreement shall be in lieu of any severance benefits that may be otherwise payable under this Agreement. (l) Return of Company Property. Upon his termination of employment with the Company for any reason, the Executive shall promptly return to the Company any keys, credit cards, passes, confidential documents or material, or other property belonging to the Company, and the Executive shall also return all writings, files, records, correspondence, notebooks, notes and other documents and things (including any copies thereof) containing confidential information or relating to the business or proposed business of the Company or its subsidiaries or affiliates or containing any trade secrets relating to the Company or its subsidiaries or affiliates except any personal diaries, calendars, rolodexes or personal notes or correspondence. For purposes of the preceding sentence, the term "trade secrets" shall have the meaning ascribed to it under the Uniform Trade Secrets Act. The Executive agrees to represent in writing to the Company upon termination of employment that he has complied with the foregoing provisions of this Section 5(l). (m) Adverse Actions. Executive agrees that following his termination of employment with the Company for any reason until the second anniversary of such termination of employment without the prior written consent of the Company the Executive shall not, in any manner, solicit, request, advise or assist any other person or entity to (a) undertake any action that would be reasonably likely to, or is intended to, result in a Change in Control (as defined in the Change in Control Agreement), or (b) seek to control in any material manner the Board. (n) Mutual Nondisparagement. Each party agrees that, following the Executive's termination of employment, such party will not make any public statements which materially disparage the other party. Notwithstanding the foregoing, nothing in this Section 5(n) shall prohibit any person from making truthful statements when required by order of a court or other governmental or regulatory body having jurisdiction. 9 6. Confidential Information. The Executive agrees that, during his employment by the Company and at all times thereafter, he shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its subsidiaries or affiliates, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or during his consultation with the Company after his termination of employment, and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). Except in the good faith performance of his duties for the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. 7. Nonsolicitation. For the three year period following his termination of employment with the Company, the Executive shall not solicit any individual who is, on the date of his termination of employment, employed by the Company or its subsidiaries or affiliates to terminate or refrain from renewing or extending such employment or to become employed by or become a consultant to any other individual or entity other than the Company or its subsidiaries or affiliates, and the Executive shall not initiate discussion with any such employee for any such purpose or authorize or knowingly cooperate with the taking of any such actions by any other individual or entity on behalf of the Executive's employer. 8. Noncompetition. The Executive agrees that he will not engage in Competition (as defined below) while he is employed by the Company. In the event that the Executive engages in Competition within the three-year period immediately following the termination of his employment with the Company for any reason, (i) his Initial Option shall be immediately forfeited to the extent not previously exercised and (ii) he shall forfeit (or, in the case of prior payment to the Executive, shall repay together with interest at the Applicable Federal Rate, determined in accordance with Section 1274(d) of the Internal Revenue Code or any successor provision thereto) a pro rata portion of the severance payment provided for in Section 5(c)(i). Such pro rata portion shall be based upon (x) the number of days remaining between the first day on which the Executive engages in Competition and the third anniversary of his last day of employment by the Company, divided by (y) 1095. The Company's sole remedy for the breach of this Section following his termination of employment shall be as set forth in the preceding two sentences. The Executive shall be deemed to be engaging in "Competition" if he directly or indirectly, owns, manages, operates, controls or participates in the ownership, management, operation or control of or is connected as an officer, employee, partner, director, consultant or otherwise with, or has any financial interest in, any business engaged in the financial services business (a "Competing Business") in any state in which the Company or its subsidiaries or affiliates now or hereafter operate a commercial banking or other material financial services business which is a material part of such business and is in material competition with the business conducted by the Company at the time of the termination of his employment with the Company or its subsidiaries or 10 affiliates. Notwithstanding the foregoing sentence, the Executive shall not be deemed to be engaging in Competition under the circumstances described in the foregoing sentence if the Executive (i) does not own or control the Competing Business, (ii) does not serve as a director or a consultant to the Competing Business, and (iii) does not have any management or operational responsibility for the Competing Business in any such state. Ownership for personal investment purposes only of less than 2% of the voting stock of any publicly held corporation shall not constitute a violation hereof. 9. Equitable Remedies. The Executive acknowledges that the Company would be irreparably injured by a violation of Section 5(m), 6 or 7 or the first sentence of Section 8 (Competition while employed by the Company) and he agrees that the Company, in addition to any other remedies available to it for such breach or threatened breach, shall be entitled to a preliminary injunction, temporary restraining order, or other equivalent relief, restraining the Executive from any actual or threatened breach of Section 5(m), 6 or 7 or the first sentence of Section 8. If a bond is required to be posted in order for the Company to secure an injunction or other equitable remedy, the parties agree that said bond need not be more than a nominal sum. 10. Assistance with Claims. Executive agrees that, consistent with the Executive's business and personal affairs, during and after his employment by the Company, he will assist the Company and its subsidiaries and affiliates in the defense of any claims, or potential claims that may be made or threatened to be made against any of them in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), and will assist the Company and its affiliates in the prosecution of any claims that may be made by the Company or any subsidiary or affiliate in any Proceeding, to the extent that such claims may relate to the Executive's employment or the period of Executive's employment by the Company. Executive agrees, unless precluded by law, to promptly inform the Company if Executive is asked to participate (or otherwise become involved) in any Proceeding involving such claims or potential claims. Executive also agrees, unless precluded by law, to promptly inform the Company if Executive is asked to assist in any investigation (whether governmental or private) of the Company or any subsidiary or affiliate (or their actions), regardless of whether a lawsuit has then been filed against the Company or any subsidiary or affiliate with respect to such investigation. The Company agrees to reimburse Executive for all of Executive's reasonable out-of- pocket expenses associated with such assistance, including travel expenses and any attorneys' fees and shall pay a reasonable per diem fee for Executive's services. 11. Assignability, Binding Nature. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of the Executive) and assigns. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee 11 assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law. The Company further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall take whatever action it legally can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Company hereunder. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his rights to compensation and benefits, which may be transferred only by will or operation of law. 12. Amendment. This Agreement, including any Exhibit made a part hereof, may be amended or canceled only by mutual agreement of the parties in writing without the consent of any other person. So long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof except that in the event of the Executive's disability so as to render him incapable of such action, his legal representative may be substituted for purposes of such amendment. 13. Applicable Law. The provisions of this Agreement shall be construed in accordance with the internal laws of the State of Michigan, without regard to the conflict of law provisions of any state. Any action to enforce this Agreement shall be brought within the State of Michigan, in a court of competent jurisdiction. 14. Severability. The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, and this Agreement will be construed as if such invalid or unenforceable provision were omitted (but only to the extent that such provision cannot be appropriately reformed or modified). 15. Waiver of Breach. No waiver by any party hereto of a breach of any provision of this Agreement by any other party, or of compliance with any condition or provision of this Agreement to be performed by such other party, will operate or be construed as a waiver of any subsequent breach by such other party of any similar or dissimilar provisions and conditions at the same or any prior or subsequent time. The failure of any party hereto to take any action by reason of such breach will not deprive such party of the right to take action at any time while such breach continues. 16. Compliance with Law. Notwithstanding any provision contained in this Agreement to the contrary, in the event the FDIC, Office of the Comptroller of the Currency or the Federal Reserve Board commences an appropriate proceeding, action or order challenging the payment to Executive of any benefit hereunder, or in the event any such payment hereunder is otherwise prohibited by law, such benefit payment shall be suspended until such time as the challenge is fully and finally resolved and the applicable regulatory authority does not object to the payments or until such payments are otherwise permitted by law. In the event that any challenge to the payments required by this Agreement is initiated by a regulatory authority or other person, the Company shall notify Executive of such challenge and shall promptly proceed to attempt to resolve such 12 challenge in a manner that enables the Company to make to Executive all payments required hereunder. 17. Notices. Notices and all other communications provided for in this Agreement shall be in writing and shall be delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid, or prepaid overnight courier to the parties at the addresses set forth below (or such other addresses as shall be specified by the parties by like notice): to the Company: Citizens Banking Corporation One Citizens Banking Center 328 South Saginaw St, Flint, Michigan 48502 Attention: General Counsel and Secretary or to the Executive: At the most recent address maintained by the Company in its personnel records with a copy to: Anthony C. Ciriaco Vorys, Sater, Seymour and Pease LLP 52 East Gay Street Columbus, Ohio 43215 Each party, by written notice furnished to the other party, may modify the applicable delivery address, except that notice of change of address shall be effective only upon receipt. Such notices, demands, claims and other communications shall be deemed given in the case of delivery by overnight service with guaranteed next day delivery, the next day or the day designated for delivery; or in the case of certified or registered U.S. mail, five days after deposit in the U.S. mail; provided, however, that in no event shall any such communications be deemed to be given later than the date they are actually received. 18. Executive's Representations. Executive hereby represents and warrants to the Company that (i) except to the extent previously disclosed to the Company in writing, the execution delivery and performance of this Agreement by Executive does not and shall not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which Executive is a party or by which he is bound; (ii) except to the extent previously disclosed to the Company in writing, Executive is not a party to or bound by an employment agreement, noncompete agreement or confidentiality agreement with any other person or entity which would interfere in any material respect with the performance of his duties hereunder; and (iii) 13 Executive shall not use any confidential information or trade secrets in connection with the performance of his duties hereunder. 19. Company's Representations. The Company represents and warrants that it is fully authorized and empowered to enter into this Agreement, that the Agreement has been duly authorized by all necessary corporate action, that the performance of its obligations under this Agreement will not violate any agreement between it and any other person, firm or organization or any applicable law or regulation and that this Agreement is enforceable in accordance with its terms. 20. Survivorship. Upon the expiration or other termination of this Agreement, the respective rights and obligations of the parties hereto shall survive such expiration or other termination to the extent necessary to carry out the intentions of the parties under this Agreement. 21. Entire Agreement. Except as otherwise noted herein, this Agreement, including the Exhibits thereto, constitutes the entire agreement between the parties concerning the subject matter hereof and supersedes all prior and contemporaneous agreements, if any, between the parties relating to the subject matter hereof. 22. Counterparts. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. 14 IN WITNESS THEREOF, the Executive has hereunto set his hand, and the Company has caused these presents to be executed in its name and on its behalf, all as of the day and year first above written. WILLIAM R. HARTMAN /s/ William R. Hartman ----------------------------------- Executive CITIZENS BANKING CORPORATION By: /s/ Hugo E. Braun Jr. ----------------------------------- Its: Chairman of the Candidate Evaluation Committee 15 EXHIBIT A STOCK COMPENSATION PLAN CITIZENS BANKING CORPORATION STOCK COMPENSATION PLAN EFFECTIVE JANUARY 18, 2002 I. GENERAL PROVISIONS 1.01 PURPOSE. The Plan, which was adopted by the Company's Board on the Effective Date, is intended to attract and retain highly competent, effective and loyal Employees and Non-Employee Directors so as to further the growth and profitable operation of the Company and its Affiliates by encouraging Employees and Non-Employee Directors of the Company and its Affiliates to acquire an ownership interest in the Company through Options, Restricted Stock Awards, Restricted Stock Units and Performance Awards, thus identifying their interests with those of shareholders and encouraging them to make greater efforts on behalf of the Company and its Affiliates to achieve the Company's long-term business plans and objectives. 1.02 PARTICIPANTS. Participants in the Plan shall be such Employees (including Employees who are directors) and Non-Employee Directors of the Company and its Affiliates as the Committee may select from time to time. The Committee may grant Options, Restricted Stock Awards, Restricted Stock Units and Performance Awards to an individual upon the condition that the individual become an Employee or Non-Employee Director of the Company or of an Affiliate, provided that the Option, Restricted Stock Award, Restricted Stock Unit or Performance Award shall be deemed to be granted only on the date that the individual becomes an Employee or Non-Employee Director. 1.03 DEFINITIONS. As used in this Plan, the following terms have the meaning described below: (a) "AFFILIATE" OR "AFFILIATES" means a corporation or other entity that is affiliated with the Company and includes any parent or subsidiary of the Company, as defined in Code Sections 424(e) and (f), respectively. (b) AGREEMENT" means the written agreement that sets forth the terms of a Participant's Option, Restricted Stock Award, Restricted Stock Unit or Performance Award. (c) "BOARD" means the Board of Directors of the Company. (d) "BUSINESS COMBINATION" means (1) any reorganization, merger, share exchange or consolidation of the Company, or (2) any sale, lease, exchange or other transfer of all or substantially all of the assets of the Company. (e) "CASHLESS EXERCISE PROCEDURE" means delivery to the Company by a Participant exercising an Option of a properly executed exercise notice, acceptable to the Company, together with irrevocable instructions to the Participant's broker to deliver to the Company sufficient cash to pay the exercise price and any applicable income and employment withholding taxes, in accordance with a written agreement between the Company and the brokerage firm. (f) "CAUSE" means (1) with respect to any Participant who is a party to a written employment agreement with the Company or any Affiliate, "Cause" as defined in such employment agreement, or (2) with respect to any Participant who is not a party to a written employment agreement with the Company or any Affiliate, personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or receipt of a final cease-and-desist order. In determining willfulness, no act or failure to act on a Participant's part shall be considered "willful" unless done or omitted to be done by the Participant not in good faith and without reasonable belief that the Participant's action or omission was in the best interests of the Company. (g) "CHANGE IN CONTROL" means the occurrence of any of the following events: (1) If any "person" (as such term is used in Sections 13(d) and 14(d) under the Exchange Act in effect on the date hereof), or group of persons acting in concert, other than the Company or any Affiliate or any employee benefit plan of the Company or an Affiliate becomes the "beneficial owner" (as such term is defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of either the Common Stock or the combined voting power of all classes of the Company's Voting Stock. Notwithstanding the immediately preceding sentence, (A) the beneficial ownership condition in this Section 1.03(g)(1) shall not be deemed satisfied if the attainment of the applicable percentage of beneficial ownership is the result of an acquisition of Common Stock or Voting Stock by the Company which, by reducing the number of shares outstanding increases the proportionate number of shares beneficially owned by any person; provided, however, that if a person shall become the beneficial owner of 20% or more of the outstanding Common Stock or Voting Stock then outstanding by reason of share purchases by the Company and shall, after such share purchases become the beneficial owner of any additional Common Stock or Voting Stock other than by a purchase from the Company, then the beneficial ownership condition in this Section 1.03(g)(1) shall be deemed to have been satisfied; (B) the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Corporation, or (ii) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of Section 1.03(g)(3)(B). (2) If the Incumbent Directors cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election or nomination for 2 election by the Company's shareholders was approved by a vote of at least a majority of the directors then comprising the Incumbent Directors (either by a specific vote or by approval of the proxy statement of the Corporation in which such person is named as a nominee for director, without written objection to such nomination) shall be considered to be an Incumbent Director; provided further, that any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies by or on behalf of a person other than the Board shall not be considered an Incumbent Director. (3) If there shall be consummated a Business Combination, other than (A) a merger or consolidation effected to implement a reorganization of the Company's ownership wherein the Company shall become a wholly-owned subsidiary of another corporation and the shareholders of the Company shall become shareholders of such other corporation without any material change in each shareholder's proportionate ownership of such other corporation from that owned in the Company prior to such merger or consolidation; and (B) a Business Combination following which: (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the outstanding Common Stock and outstanding Voting Stock immediately prior to such Business Combination beneficially own, directly or indirectly, more than 65% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the Surviving Corporation in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the outstanding Common Stock and Voting Stock, as the case may be; (ii) no person or entity beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the Surviving Corporation or the combined voting power of the then outstanding voting securities of the Surviving Corporation (excluding any person or entity who beneficially owned 20% or more of the outstanding Common Stock or Voting Stock prior to such Business Combination, the Surviving Corporation and any employee benefit plan (or related trust) of the Company or the Surviving Corporation); and (iii) at least a majority of the members of the board of directors of the Surviving Corporation were Incumbent Directors immediately prior to the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination. (4) Approval by the shareholders of the Company of any plan or proposal for the liquidation or dissolution of the Company. (h) "CODE" means the Internal Revenue Code of 1986, as amended. (i) "COMMITTEE" means the Board acting as a whole, or a committee of two or more "non-employee directors" (as defined in Rule 16b-3 under the Exchange Act) who also constitute "outside directors" (as defined under Code Section 162(m) if applicable at the time) if designated by the Board to administer the Plan. The fact that a Committee member shall fail to qualify under Rule 16b-3 under the Exchange Act or 3 Code Section 162(m) shall not invalidate any grant or award made by the Committee, if the grant or award is otherwise validly granted under the Plan. (j) "COMMON STOCK" means shares of the Company's authorized and unissued common stock, or reacquired shares of such common stock. (k) "COMPANY" means Citizens Banking Corporation and any successor thereto. (l) "DISABILITY" means disability as defined in Section 22(e) of the Code. (m) "EFFECTIVE DATE" means January 18, 2002, the date on which the Board adopted the Plan. (n) "EMPLOYEE" means an employee of the Company or Affiliate, who has an "employment relationship" with the Company or an Affiliate, as defined in Treasury Regulation 1.421-7(h); and the term "employment" means employment with the Company, or an Affiliate of the Company. (o) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time and any successor thereto. (p) "FAIR MARKET VALUE" means, with respect to a share of Common Stock on the Grant Date, the average of the high and low sale prices of Common Stock on the Nasdaq Stock Market ("NSM") as reported in The Wall Street Journal for the Grant Date. In the event that there were no Common Stock transactions on such date, the Fair Market Value shall be determined as of the immediately preceding date on which there were Common Stock transactions. Unless otherwise specified in the Plan, "Fair Market Value" for purposes of determining the value of Common Stock on the date of exercise means the average of the high and low sale prices of such Common Stock on the NSM on the last date preceding the exercise on which there were Common Stock transactions, as reported in The Wall Street Journal. If the Common Stock is not listed for trading on the NSM on the relevant date, (1) the average of the high and low sale prices on the securities exchange (or, if there is more than one, the principal such exchange) on which the Common Stock is traded as reported in The Wall Street Journal for the relevant date; (2) if the shares are not listed for trading on any securities exchange or the NSM on such date but bid and ask information is reported by Nasdaq or another generally accepted reporting service, the average of the high bid and low asked prices of the shares, as so reported by Nasdaq or, if not reported by Nasdaq, another generally accepted reporting service, for the relevant date; (3) if none of the foregoing is applicable, the fair market value of a share as of the relevant date, as determined by the Committee. (q) "GRANT DATE" means the date on which the Committee authorizes an individual Option, Restricted Stock Award, Restricted Stock Unit or Performance Award, or such later date as shall be designated by the Committee. 4 (r) "INCENTIVE STOCK OPTION" means an Option that is intended to meet the requirements of Section 422 of the Code and is designated as such in the Agreement evidencing the grant. (s) "INCUMBENT DIRECTORS" means the members of the Board on the Effective Date. (t) "NON-EMPLOYEE DIRECTOR" means a director of the Company or an Affiliate who is not an Employee. (u) "NONQUALIFIED STOCK OPTION" means an Option that is not an Incentive Stock Option. (v) "OPTION" means either an Incentive Stock Option or a Nonqualified Stock Option. (w) "PARTICIPANT" means the individuals described in Section 1.02. (x) "PERFORMANCE AWARD" means a performance award granted pursuant to Article IV. (y) "PLAN" means the Citizens Banking Corporation Stock Compensation Plan, the terms of which are set forth herein, as amended from time to time. (z) "RESTRICTED PERIOD" means the period of time during which Common Stock subject to a Restricted Stock Award or Restricted Stock Unit is subject to transfer restrictions that make it nontransferable. (aa) "RESTRICTED STOCK" means Common Stock that is subject to a Restricted Period, pursuant to Article III. (bb) "RESTRICTED STOCK AWARD" means an award of Common Stock that is subject to a Restricted Period, granted pursuant to Article III. (cc) "RESTRICTED STOCK UNIT" means a right granted pursuant to Article III to receive Restricted Stock or an equivalent value in cash pursuant to the terms of the Plan and the related Agreement. (dd) "RETIREMENT" means a Participant's voluntary cessation of employment or status as a Non-Employee Director following the Participant's 65th birthday. (ee) "SURVIVING CORPORATION" means the corporation resulting from a Business Combination referred to in Section 1.03(g)(3)(B) of the Plan, including, without 5 limitation, the surviving corporation in a merger involving the Company and a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries. (ff) "VOTING STOCK" means the securities ordinarily having the right to vote in the election of directors to the Board. 1.04 ADMINISTRATION. (a) The Plan shall be administered by the Committee, in accordance with Rule 16b-3 under the Exchange Act and Code Section 162(m), if applicable. The Committee, at any time and from time to time, subject to Sections 2.02 and 7.07, may grant Options, Restricted Stock Awards, Restricted Stock Units and Performance Awards to such Employees and Non-Employee Directors and for such number of shares of Common Stock as it shall designate. The Committee shall interpret the Plan, prescribe, amend, and rescind rules and regulations relating to the Plan, and make all other determinations necessary or advisable for its administration. The decision of the Committee on any question concerning the interpretation of the Plan or its administration with respect to any Option, Restricted Stock Award, Restricted Stock Unit or Performance Award granted under the Plan shall be final and binding upon all Participants. (b) The Committee may delegate to one or more officers or managers of the Company or a committee of such officers or managers, the authority, subject to such terms and limitations as the Committee shall determine, to grant Options, Restricted Stock Awards, Restricted Stock Units and Performance Awards to, or to cancel, modify, waive rights with respect to, alter, discontinue or terminate Options, Restricted Stock Awards, Restricted Stock Units or Performance Awards held by Participants who are not officers or directors of the Company for purposes of Section 16 of the Exchange Act. 1.05 STOCK. The total number of shares of Company Common Stock available for grants and awards under this Plan shall be 7,000,000; provided, however, that the number of shares subject to Restricted Stock Awards, Restricted Stock Units and Performance Awards under this Plan shall not exceed 2,000,000. The maximum number of shares of Common Stock that may be subject to Option grants under the Plan to any salaried employee during any two-year period shall not exceed 500,000 shares. Shares subject to any portion of a terminated, forfeited, cancelled or expired Option, Restricted Stock Award, Restricted Stock Unit or Performance Award granted hereunder may again be subjected to grants and awards under the Plan as of the date of such termination, forfeiture, cancellation or expiration. All amounts in this Section 1.05 shall be adjusted, as applicable, in accordance with Article VI. II. STOCK OPTIONS 2.01 GRANT OF OPTIONS. The Committee may grant Options to Participants and, to the extent Options are granted, shall determine the general terms and conditions of exercise, including any applicable vesting or performance requirements, which shall be 6 set forth in a Participant's Agreement. The Committee may designate any Option granted as either an Incentive Stock Option or a Nonqualified Stock Option, or the Committee may designate a portion of an Option as an Incentive Stock Option and the remainder as a Nonqualified Stock Option. No Option shall have an exercise period that extends beyond 10 years from the Grant Date. Any Participant may hold more than one Option, Restricted Stock Award, Restricted Stock Unit or Performance Award under the Plan and any other plan of the Company or Affiliate. 2.02 INCENTIVE STOCK OPTIONS. Any Option intended to constitute an Incentive Stock Option shall comply with the requirements of this Section 2.02 and shall only be granted to an Employee. No Incentive Stock Option shall be granted with an exercise price below its Fair Market Value on the Grant Date. An Incentive Stock Option shall not be granted to any Participant who owns (within the meaning of Code Section 424(d)) stock of the Company or any Affiliate possessing more than 10% of the total combined voting power of all classes of stock of the Company or a Affiliate unless, at the Grant Date, the exercise price for the Option is at least 110% of the Fair Market Value of the shares subject to the Option and the Option, by its terms, is not exercisable more than 5 years after the Grant Date. The aggregate Fair Market Value of the underlying Common Stock (determined at the Grant Date) as to which Incentive Stock Options granted under the Plan (including a plan of an Affiliate) may first be exercised by a Participant in any one calendar year shall not exceed $100,000. To the extent that an Option intended to constitute an Incentive Stock Option shall violate the foregoing $100,000 limitation (or any other limitation set forth in Code Section 422), the portion of the Option that exceeds the $100,000 limitation (or fails any other Code Section 422 requirement) shall be deemed to constitute a Nonqualified Stock Option. 2.03 OPTION PRICE. The Committee shall determine the per share exercise price for each Option granted under the Plan, but no Option shall be granted with an exercise price below 100% of the Fair Market Value of Common Stock on the Grant Date. 2.04 PAYMENT FOR OPTION SHARES. The purchase price for shares of Common Stock to be acquired upon exercise of an Option granted hereunder shall be paid in full in cash or by personal check, bank draft or money order at the time of exercise; provided, however, that in lieu of such form of payment, the Committee may permit a Participant to pay such purchase price in whole or in part by tendering shares of Common Stock that have been held at least six months, which are freely owned and held by the Participant independent of any restrictions, hypothecations or other encumbrances, duly endorsed for transfer (or with duly executed stock powers attached), or in any combination of the above. If shares of Common Stock are tendered in payment of all or part of the exercise price, they shall be valued for such purpose at their Fair Market Value on the date of exercise. At the discretion of the Committee, as set forth in a Participant's Option Agreement, the purchase price may be paid by using the Cashless Exercise Procedure if the relevant agreement between the Company and the Participant's broker referred to in the definition of such term has been executed by the Company and such broker. 7 2.05 ACCELERATION. The Committee may, in its discretion, accelerate a Participant's right to exercise an Option. III. RESTRICTED STOCK AWARDS AND UNITS 3.01 TERMS OF RESTRICTED STOCK AWARDS AND RESTRICTED STOCK UNITS. The Committee shall have the authority to grant Restricted Stock Awards and Restricted Stock Units to such Participants and for such number of shares of Common Stock as it shall designate. Such Awards and Units shall be evidenced by an Agreement that shall specify the terms thereof, including the Restricted Period, the number of shares of Common Stock subject to the Award or Unit, and such other provisions, which may include, among other things, vesting and performance goals, as the Committee shall determine. 3.02 TRANSFERABILITY. Except as provided in this Article III of the Plan, the shares of Common Stock subject to a Restricted Stock Award or Restricted Stock Unit may not be transferred, pledged, assigned, or otherwise alienated or hypothecated until the termination of (a) the applicable Restricted Period or for such period of time as shall be established by the Committee and specified in the applicable Agreement, or (b) upon the earlier satisfaction of other conditions as specified by the Committee and set forth in the applicable Agreement. Prior to the end of the Restricted Period, all rights with respect to the Common Stock subject to a Restricted Stock Award or Restricted Stock Unit granted to a Participant shall be exercisable during the Participant's lifetime only by the Participant or the Participant's legal representative. 3.03 OTHER RESTRICTIONS. The Committee shall impose such other restrictions on any shares of Common Stock subject to a Restricted Stock Award or Restricted Stock Unit as it may deem advisable including, without limitation, restrictions under applicable federal or state securities laws, and shall legend any certificates representing such shares to give appropriate notice of such restrictions. 3.04 CERTIFICATE LEGEND. In addition to any legends placed on certificates pursuant to Section 3.03, any certificate representing shares of Common Stock subject to a Restricted Stock Award or Restricted Stock Unit shall bear the following legend: The sale or other transfer of the shares of stock represented by this certificate, whether voluntary, involuntary or by operation of law, is subject to certain restrictions on transfer set forth in the Citizens Banking Corporation Stock Compensation Plan (the "Plan"), rules and administrative guidelines adopted pursuant to such Plan and an Agreement dated , . A copy of the Plan, such rules and such Agreement may be obtained from the Secretary of the Company. 3.05 REMOVAL OF RESTRICTIONS. Except as otherwise provided under the Plan, if the Restricted Period has elapsed or been waived by the Committee with respect to all or 8 a portion of the Restricted Shares represented by a certificate, the holder thereof shall be entitled to have the legend required by Section 3.04 removed from such stock certificate with respect to the shares as to which the Restricted Period has elapsed. Any certificate evidencing the remaining shares shall bear the legend required by Section 3.04. The Committee shall have the discretion to waive the applicable Restricted Period with respect to all or any part of the Common Stock subject to a Restricted Stock Award or Restricted Stock Unit. The Company shall have the right to retain any certificate representing shares of Common Stock subject to a Restricted Stock Award or Restricted Stock Unit until such time as all conditions and/or restrictions applicable to such shares of Common Stock have been satisfied. 3.06 VOTING AND DIVIDEND RIGHTS. During the Restricted Period, Participants shall be considered record owners of any shares of Common Stock subject to any Restricted Stock Award or Restricted Stock Unit held by them for purposes of determining who is entitled to vote or receive dividends with respect to such shares. If any dividends or distributions are paid in shares of Common Stock during the Restricted Period, the dividend or other distribution shares shall be subject to the same restrictions on transferability as the shares of Common Stock with respect to which they were paid. IV. PERFORMANCE AWARDS 4.01 PERFORMANCE AWARDS. The Committee is authorized to grant Performance Awards to eligible Participants. Subject to the terms of the Plan, a Performance Award granted under the Plan (a) may be denominated or payable in cash or shares of Common Stock (including, without limitation, Restricted Stock), and (b) shall confer on the holder thereof rights valued as determined by the Committee and payable to, or exercisable by, the holder of the Performance Award, in whole or in part, upon the achievement of such performance goals during such performance period, as the Committee shall establish. Subject to the terms of the Plan, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award granted, the amount of any payment or transfer to be made pursuant to any Performance Award, and the other terms and conditions of any Performance Award, including the effect upon such Award of termination of the Participant's employment and/or directorship, shall be determined by the Committee. V. TERMINATION OF EMPLOYMENT AND SERVICES 5.01. OPTIONS. (a) Unless otherwise provided in the applicable Agreement, if, prior to the date that an Option first becomes exercisable, a Participant's status as an Employee and Non-Employee Director is terminated for any reason, the Participant's right to exercise the Option shall terminate and all rights thereunder shall cease as of the close of business on the date of such termination. 9 (b) For any Nonqualified Stock Option unless otherwise provided in the applicable Agreement and for any Incentive Stock Option, if, on or after the date that the Option first becomes exercisable, a Participant's status as an Employee and Non-Employee Director is terminated (1) for Cause, any unexercised portion of the Option (whether then exercisable or not) shall, as of the time of the Cause determination, immediately terminate, (2) due to death or Disability, then the Option, to the extent that it is exercisable on the date of termination, shall be exercisable only until the earlier of the one year anniversary of such termination or the "expiration date" set forth in the applicable Agreement, (3) for any other reason (except as provided in the next sentence), then the Option, to the extent that it is exercisable on the date of termination, shall be exercisable only until the earlier of the three month anniversary of such termination or the "expiration date" set forth in the applicable Agreement. For any Nonqualified Stock Option, unless otherwise provided in the applicable Agreement, if, on or after the date that the Option first becomes exercisable, a Participant's status as an Employee and Non-Employee Director is terminated due to Retirement, or if a Participant is a party to a Change in Control Agreement with the Company (as amended and restated on November 28, 2000) and such Participant's status as an Employee and Non-Employee Director is terminated involuntarily or constructively in accordance with paragraph 3 thereof, then the Option, to the extent that it is exercisable on the date of termination, shall be exercisable until the "expiration date" set forth in the applicable Agreement. The Committee, at its discretion, may designate in the applicable Agreement a different post-termination period for exercise of a Nonqualified Stock Option and may extend the exercise period of any Option, but in no event may the post-termination exercise period exceed the tenth anniversary of the Grant Date; it being understood that the extension of the exercise term for an Incentive Stock Option may cause such Option to become a Nonqualified Stock Option. (c) Shares subject to Options that are not exercised within the time allotted for exercise shall expire and be forfeited by the Participant as of the close of business on the date they are no longer exercisable. 5.02 RESTRICTED STOCK AWARDS AND RESTRICTED STOCK UNITS. Unless otherwise provided in the applicable Agreement, if the status as an Employee and Non-Employee Director of a Participant holding a Restricted Stock Award or Restricted Stock Unit terminates for any reason other than Retirement, death or Disability prior to the lapse of the Restricted Period, any shares of Common Stock subject to a Restricted Stock Award or Restricted Stock Unit as to which the Restricted Period has not yet lapsed or been waived shall be forfeited by the Participant; provided, however, that the Committee, in its sole discretion, may waive or change the remaining restrictions or add additional restrictions with respect to any Restricted Stock Award or Restricted Stock Unit that would otherwise be forfeited, as it deems appropriate. Unless otherwise provided in the applicable Agreement, if the status as an Employee and Non-Employee Director of a Participant holding a Restricted Stock Award or Restricted Stock Unit terminates due to Retirement, death or Disability, any remaining Restricted Period with respect to Restricted Stock Awards or Restricted Stock Units held by such Participant shall lapse as of the date of such termination. 10 5.03 PERFORMANCE AWARDS. Unless otherwise provided in the applicable Agreement, if the status as an Employee and Non-Employee Director of a Participant holding a Performance Award terminates for any reason other than Retirement, death or Disability prior to satisfaction of the performance requirements of such Award, such Award automatically shall be forfeited by the Participant to the extent such requirements are not satisfied; provided, however, that the Committee, in its sole discretion, may waive or change the remaining requirements or add additional requirements with respect to any Performance Award or portion thereof that would otherwise be forfeited, as it deems appropriate. Unless otherwise provided in the applicable Agreement, if the status as an Employee and Non-Employee Director of a Participant holding a Performance Award terminates due to Retirement, death or Disability, the performance requirements of such Award shall be deemed to have been fully satisfied. 5.04 OTHER PROVISIONS. Neither the transfer of a Participant from one corporation or division to another corporation or division among the Company and any of its Affiliates nor a leave of absence under the Company's leave policy shall be deemed to constitute a termination of status as a Participant for purposes of the Plan, except that no new awards or grants may be made to a Participant during a leave of absence. VI. ADJUSTMENTS AND CHANGE IN CONTROL 6.01 ADJUSTMENTS. (a) If the Committee shall determine that any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Common Stock or other securities of the Company, issuance of warrants or other rights to purchase Common Stock or other securities of the Company, or other corporate transaction or event affects the Common Stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (1) the number and type of shares of Common Stock which thereafter may be made the subject of Options, Restricted Stock Awards, Restricted Stock Units and Performance Awards, (2) the number and type of shares of Common Stock subject to outstanding Options, Restricted Stock Awards, Restricted Stock Units and Performance Awards, and (3) the exercise price with respect to any Option; provided, however, in each case, that with respect to Incentive Stock Options any such adjustment shall be made in accordance with Section 422 of the Code or any successor provision thereto to the extent that such Option is intended to remain an Incentive Stock Option. (b) The foregoing adjustments shall be made by the Committee or, if such adjustment is required by the Board, then by the Board at the recommendation of the Committee. Any such adjustment shall provide for the elimination of any fractional share 11 that might otherwise become subject to an Option, Restricted Stock Award, Restricted Stock Unit or Performance Award. 6.02 CHANGE IN CONTROL. Upon the occurrence of a Change in Control, or if the Committee determines in its sole discretion that a Change in Control has occurred, then (a) any Option granted hereunder immediately shall become exercisable in full, regardless of any installment provision applicable to such Option; (b) any remaining Restricted Period on any shares of Common Stock subject to a Restricted Stock Award or Restricted Stock Unit granted hereunder immediately shall lapse; and (c) the performance requirements for a Performance Award granted hereunder shall be deemed to have been satisfied in full. 6.03 MERGER. If the Company is a party to any merger, consolidation, reorganization, or sale of substantially all of its assets, each holder of outstanding Option, Restricted Stock Award, Restricted Stock Unit or Performance Award, to the extent that such Option, Award or Unit remains outstanding thereafter, shall be entitled to receive, in lieu of the shares of Common Stock to which such holder would otherwise be entitled, upon the exercise of such Option or the lapse of the Restricted Period on shares of Common Stock subject to a Restricted Stock Award or Restricted Stock Unit or the satisfaction of the performance requirements for a Performance Award, the securities and/or property which a shareholder owning the number of shares subject to the holder's Option, Restricted Stock Award, Restricted Stock Unit or Performance Award would be entitled to receive pursuant to such merger, consolidation, reorganization or sale of assets. VII. MISCELLANEOUS 7.01 PARTIAL EXERCISE/FRACTIONAL SHARES. The Committee may permit, and shall establish procedures for, the partial exercise of Options granted under the Plan. No fractional shares shall be issued in connection with the exercise or payment of a grant or award under the Plan; instead, the Fair Market Value of the fractional shares shall be paid in cash, or at the discretion of the Committee, the number of shares shall be rounded down to the nearest whole number of shares, and any fractional shares shall be disregarded. 7.02 RULE 16B-3 REQUIREMENTS. Notwithstanding any other provision of the Plan, the Committee may impose such conditions on a Restricted Stock Award, Restricted Stock Unit, Performance Award or the exercise of an Option (including, without limitation, the right of the Committee to limit the time of exercise to specified periods) as may be required to satisfy the requirements of Rule 16b-3 of the Exchange Act (as such rule may be in effect at such time). 7.03 RIGHTS PRIOR TO ISSUANCE OF SHARES. No Participant shall have any rights as a shareholder with respect to shares covered by an Option, Restricted Stock Award, Restricted Stock Unit or Performance Award until the issuance of such shares. No 12 adjustment shall be made for dividends or other rights with respect to such shares for which the record date is prior to the date the shares are issued. 7.04 NON-ASSIGNABILITY. No Option, Restricted Stock Award, Restricted Stock Unit or Performance Award shall be transferable by a Participant except by will or the laws of descent and distribution. During the lifetime of a Participant, an Incentive Stock Option shall be exercised only by the Participant. No transfer of an Option, Restricted Stock Award, Restricted Stock Unit or Performance Award shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and a copy of the will or such evidence as the Company may deem necessary to establish the validity of the transfer and the acceptance by the transferee of the terms and conditions of the Option, Restricted Stock Grant Award, Restricted Stock Unit or Performance Award. 7.05 SECURITIES LAWS. (a) Anything to the contrary herein notwithstanding, the Company's obligation to sell and deliver Common Stock pursuant to the exercise of an Option, or deliver Common Stock pursuant to a Restricted Stock Award, Restricted Stock Unit or Performance Award is subject to such compliance with federal and state laws, rules and regulations applying to the authorization, issuance or sale of securities as the Company deems necessary or advisable. The Company shall not be required to sell or deliver Common Stock unless and until it receives satisfactory assurance that the issuance or transfer of such shares shall not violate any of the provisions of the Securities Act of 1933, the Exchange Act, any other applicable federal laws, or the rules and regulations of the Securities and Exchange Commission promulgated thereunder or those of any stock exchange or stock market on which the Common Stock may be listed or traded, the provisions of any state laws governing the sale of securities, or that there has been compliance with the provisions of such acts, rules, regulations and laws. (b) The Committee may impose such restrictions on any shares of Common Stock subject to or underlying an Option, Restricted Stock Award, Restricted Stock Unit or Performance Award as it may deem advisable, including, without limitation, restrictions (i) under applicable federal securities laws, (ii) under the requirements of any stock exchange or other recognized trading market upon which such shares of Common Stock are then listed or traded, or (iii) under any blue sky or state securities laws applicable to such shares. No shares shall be issued until counsel for the Company has determined that the Company has complied with all requirements under appropriate securities laws. 7.06 WITHHOLDING AND TAXES. The Company shall have the right to withhold from a Participant's compensation or require a Participant to remit sufficient funds to satisfy applicable withholding for income and employment taxes upon the exercise of an Option, the lapse of a Restriction Period or the satisfaction of the performance requirements relating to a Performance Award. A Participant may use the Cashless Exercise Procedure or may tender previously acquired shares of Common Stock that have been held at least six months to satisfy the withholding obligation in whole or in part, 13 such shares being valued for such purpose at Fair Market Value; provided that the Company shall not withhold from exercise more shares than are necessary to satisfy the established requirements of federal, state and local tax withholding obligations. 7.07 TERMINATION AND AMENDMENT. (a) The Board may terminate the Plan, or the granting of Options, Restricted Stock Awards, Restricted Stock Units or Performance Awards under the Plan, at any time. No new grants or awards shall be made under the Plan after the tenth anniversary of the Effective Date. (b) The Board may amend or modify the Plan at any time and from time to time. (c) No amendment, modification or termination of the Plan shall adversely affect any Option, Restricted Stock Award, Restricted Stock Unit or Performance Award previously granted under the Plan in any material way without the consent of the Participant holding the Option, Restricted Stock Award, Restricted Stock Unit or Performance Award. (d) An Agreement relating to an Option shall not be amended to change the exercise price of the Option evidenced by such Agreement, other than pursuant to Article VI. 7.08 EFFECT ON EMPLOYMENT OR SERVICES. Neither the adoption of the Plan nor the granting of any Option, Restricted Stock Award, Restricted Stock Unit or Performance Award pursuant to the Plan shall be deemed to create any right in any individual to be retained or continued in the employment or services of the Company or an Affiliate. 7.09 USE OF PROCEEDS. The proceeds received from the sale of Common Stock pursuant to the Plan shall be used for general corporate purposes of the Company. 7.10 APPROVAL OF PLAN. The Plan shall be subject to the approval of the holders of at least a majority of the Common Stock of the Company present and entitled to vote at a meeting of shareholders of the Company held within 12 months after adoption of the Plan by the Board. No Option, Restricted Stock Award, Restricted Stock Unit or Performance Award granted under the Plan may be exercised or paid out in whole or in part unless the Plan has been approved by the shareholders as provided herein. If not approved by shareholders within 12 months after approval by the Board, the Plan and any Options, Restricted Stock Awards, Restricted Stock Units or Performance Awards granted under the Plan shall be rescinded. 7.11 GOVERNING LAW. The Plan and all actions taken under the Plan shall be governed and construed in accordance with Michigan law. 14 THIS PLAN is hereby executed as of January 18, 2002 in accordance with the Board resolutions adopted on such date. CITIZENS BANKING CORPORATION By: ___________________________ Its: __________________________ 15 EXHIBIT B RESTRICTED STOCK AWARD AGREEMENT RESTRICTED STOCK AGREEMENT (EMPLOYEE VERSION) THIS RESTRICTED STOCK AGREEMENT is made the __ day of February __, 2002, by and between Citizens Banking Corporation ("Company") and the undersigned ("Grantee"), pursuant to the Citizens Banking Corporation Stock Compensation Plan ("Plan"). Capitalized terms not defined in this Agreement shall have the meanings respectively ascribed to them in the Plan. WHEREAS, the Company desires to encourage the Grantee to make greater efforts on behalf of the Company and its Affiliates to achieve the Company's long-term business plans and objectives and to further identify the interests of Grantee with the interests of the Company's shareholders; WHEREAS, the Company desires to grant this restricted stock award to the Grantee pursuant to the Plan, a copy of which is attached hereto; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, it is agreed between the parties as follows: 1. GRANT OF RESTRICTED STOCK AWARD. Subject to the terms and conditions hereof, including without limitation the restrictions set forth in Section 2(a) of this Agreement, the Company hereby grants to the Grantee a total of 20,000 shares of the Company's Common Stock. 2. RESTRICTIONS ON TRANSFER OF SHARES SUBJECT TO AWARD. (a) The shares under the award shall not be transferred, pledged, assigned, or otherwise alienated or hypothecated until the occurrence of the events set forth in this Section 2, at which time such restrictions shall lapse. Except as set forth below, the restrictions on such shares shall lapse as follows, if the Grantee is still employed with the Company or an Affiliate on such dates:
Percentage of Award Period After Grant Date As to Which Restrictions Lapse ----------------------- ------------------------------ 90 days 20% One year 40% Two years 60% Three years 80% Four years 100%
Restrictions shall be deemed to lapse at the close of business on such date. Notwithstanding the foregoing, the restrictions set forth above also shall lapse as follows: (1) the restrictions set forth above shall immediately lapse upon the Grantee's death or termination of employment due to Disability or Retirement; (2) the restrictions set forth above shall immediately lapse upon a Change in Control of the Company; (3) the restrictions set forth above shall immediately lapse as to one-half of all outstanding unvested restricted stock subject to this award in the event of a termination of employment by the Company due to an Employment Order, as such term is defined in the Employment Agreement between Company and Grantee dated February __, 2002 ("Employment Agreement") and whether or not that employment agreement is in effect when employment terminates under this subsection, the remaining one-half of such outstanding unvested restricted stock being forfeited, (4) the restrictions set forth above shall immediately lapse upon the termination of the Grantee by the Company for any reason other than Cause (including Constructive Discharge but excluding termination due to an Employment Order) as such terms are defined in the Employment Agreement, whether or not that employment agreement is in effect when employment terminates under this subsection, or (5) action by the Committee to waive the remaining restricted period in its sole discretion. Upon the lapse of such restrictions, the shares under the restricted stock award granted hereunder shall be freely transferable. If the Grantee's employment with the Company or its Affiliates terminates other than under the circumstances described in the next preceding sentence, any portion of the restricted stock award as to which such restrictions have not lapsed at the time of such termination shall be forfeited. (b) Until the lapse of all restrictions provided in Section 2(a) on the shares subject to this restricted stock award, any certificate evidencing the shares subject to the award shall carry the following restrictive legend: The sale or other transfer of the shares of stock represented by this certificate, whether voluntary, involuntary or by operation of law, is subject to certain restrictions on transfer set forth in the Citizens Banking Corporation Stock Compensation Plan (the "Plan"), rules and administrative guidelines adopted pursuant to such Plan and an Agreement dated ___________, ___. A copy of the Plan, such rules and such Agreement may be obtained from the Secretary of the Company. The Company shall also have the right to place stop transfer instructions on shares which are subject to the restrictions described in Section 2(a). Grantee shall be entitled to removal of such legend and stop transfer instructions at the time or times provided by, and in accordance with, Section 3.05 of the Plan. 3. NON-ASSIGNABILITY OF AWARD. The award hereby granted shall not be transferable. No purported assignment or transfer of this award, or of the rights represented thereby, whether voluntary or involuntary, by operation of law or otherwise, shall vest in the purported assignee or transferee any interest or right whatsoever. For the avoidance of doubt, the parties acknowledge that this Section 3 applies to the award itself, not to the shares subject to the award, and that the transferability of the shares subject to the award shall be governed by Section 2 of this Agreement. 2 4. ADJUSTMENTS. In the event of any stock dividend, reclassification, subdivision or combination, or similar transaction affecting the shares covered by this award, the rights of the Grantee are subject to adjustment as provided in Section 6.01 of the Plan to the extent deemed necessary by the Committee. 5. RIGHTS AS SHAREHOLDER. Subject to the restrictions and risk of forfeiture set forth in Section 2, the Grantee shall have all rights of a shareholder (including voting and dividend rights) with respect to the shares subject to the award commencing on the date on which the shares subject to the award are issued. 6. WITHHOLDING. The Grantee authorizes the Company to withhold from his or her compensation to satisfy any income and employment tax withholding obligations in connection with the award. If the Grantee is no longer employed by the Company at the time any applicable taxes are due and must be remitted by the Company, the Grantee agrees to pay applicable taxes to the Company, and the Company may delay removal of the restrictive legend until proper payment of such taxes has been made by the Grantee. The Grantee may satisfy such obligations under this Section 6 by any method authorized under Section 7.06 of the Plan. 7. NOTICES. Every notice relating to this Agreement shall be in writing and if given by mail shall be given by registered or certified mail with return receipt requested. All notices to the Company shall be delivered to the President of the Company at the Company's headquarters. All notices by the Company to the Grantee shall be delivered to the Grantee personally or addressed to the Grantee at the Grantee's last residence address as then contained in the records of the Company or such other address as the Grantee may designate. Either party by notice to the other may designate a different address to which notices shall be addressed. Any notice given by the Company to the Grantee at the Grantee's last designated address shall be effective to bind any other person who shall acquire rights hereunder. 8. GOVERNING LAW. This Agreement (a) shall be governed by and construed in accordance with the laws of the State of Michigan without giving effect to conflict of laws, and (b) is not valid unless it has been manually signed by the Grantee and the Company. 9. PROVISIONS OF PLAN CONTROLLING. The provisions hereof are subject to the terms and provisions of the Plan. In the event of any conflict between the provisions of this Agreement and the provisions of the Plan, the provisions of the Plan shall control. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. GRANTEE CITIZENS BANKING CORPORATION __________________________________ By: ____________________________________ __________________________, President 3 EXHIBIT C NONQUALIFIED STOCK OPTION AGREEMENT NONQUALIFIED STOCK OPTION AGREEMENT (EMPLOYEE VERSION) THIS AGREEMENT is entered into as of February __, 2002 ("Grant Date"), by and between Citizens Banking Corporation ("Company") and the undersigned ("Optionee"), pursuant to the Citizens Banking Corporation Stock Compensation Plan ("Plan"). The Company hereby grants to the Optionee a Nonqualified Stock Option to purchase 225,000 shares of Common Stock, subject to the terms and conditions contained in the Plan and as hereinafter provided (the "Option"). Capitalized terms not defined in this Agreement shall have the meanings respectively ascribed to them in the Plan. 1. EXERCISE PRICE. The Option shall be exercisable at $______ per share. 2. OPTION EXERCISE. (a) Vesting. The Option shall become exercisable in full at the close of business on the fifth anniversary of the Grant Date. Notwithstanding the foregoing, the Option also shall become exercisable as follows: (1) the Option shall become exercisable to the extent provided in the attached SCHEDULE A, if the performance goals specified therein are met within the prescribed time periods, (2) the Option shall become exercisable in full upon a Change in Control of the Company (as defined in the Change in Control Agreement between the Company and the Optionee dated February __, 2002); (3) one-half of the Option shall become exercisable upon termination of the Optionee by the Company due to an Employment Order, as such term is defined in the Employment Agreement between Company and Optionee dated February __, 2002 ("Employment Agreement"), whether or not that employment agreement is in effect when employment terminates under this subsection, and (4) the Option shall become exercisable in full upon termination of the Optionee by the Company for any reason other than Cause (including Constructive Discharge but excluding termination due to an Employment Order), as such terms are defined in the Employment Agreement, whether or not that employment agreement is in effect when employment terminates under this subsection. If the Company is a party to any merger, consolidation, reorganization, or sale of substantially all of its assets, Optionee shall, in connection with such transaction, to the extent that the Option is not cancelled, cashed-out or previously exercised, be entitled to receive upon exercise of the Option, in lieu of shares of Common Stock to which the Optionee would otherwise be entitled, the securities or property which a shareholder owning the number of shares of Common Stock for which the Option is then exercisable would be entitled to receive pursuant to such transaction. Any provision of this Agreement to the contrary notwithstanding, the Option shall expire and no longer be exercisable after close of business on the date which is the tenth anniversary of the Grant Date (the "Expiration Date"). (b) Notice. The Option may be exercised only by delivery to the President of the Company of a written and duly executed notice in the form attached hereto accompanied by payment in the form or forms permitted by Section 2(c) below. (c) Payment Terms. The purchase price for shares of Common Stock to be acquired upon exercise of the Option shall be paid in full at the time of exercise (1) in cash; (2) by personal check, bank draft or money order; (3) by tendering shares of Common Stock that have been held at least six months and which are freely owned and held by the Optionee independent of any restrictions, hypothecations or other encumbrances, duly endorsed for transfer (or with duly executed stock powers attached); (4) through the Cashless Exercise Procedure by delivery to the Company of a properly executed exercise notice, acceptable to the Company, together with irrevocable instructions to the Optionee's broker to deliver to the Company sufficient cash to pay the exercise price and any applicable income and employment withholding taxes, in accordance with a written agreement between the Company and the applicable brokerage firm; or (5) any combination of the above. 3. TERMINATION OF EMPLOYMENT. (a) If, prior to the date that the Option first becomes exercisable, Optionee' s employment is terminated for any reason, Optionee's right to exercise the Option shall terminate and all rights thereunder shall cease as of the close of business on the date of such termination. (b) If, on or after the date that the Option first becomes exercisable, Optionee's employment is terminated (1) for Cause (as defined in the Employment Agreement), any unexercised portion of the Option (whether then exercisable or not) shall, as of the time of the Cause determination, immediately terminate, (2) due to death or Disability, then the Option, to the extent that it is exercisable on the date of termination, shall be exercisable only until the earlier of the one year anniversary of such termination or the Expiration Date, (3) due to Retirement, or if Optionee is a party to a Change in Control Agreement with the Company (dated ____________________, 2002) and Optionee's employment is terminated involuntarily or constructively in accordance with paragraph 3 thereof, then the Option, to the extent that it is exercisable on the date of termination, shall be exercisable until the Expiration Date, or (4) for any other reason, then the Option, to the extent that it is exercisable on the date of employment termination, shall be exercisable only until the earlier of the thirty six month anniversary of such termination or the Expiration Date. 4. OPTIONEE'S AGREEMENT. The Optionee agrees to all the terms stated in this Agreement, as well as to the terms of the Plan, a copy of which is attached hereto and of which the Optionee acknowledges receipt. To the extent any provision of this Agreement conflicts with the terms of the Plan, the terms of the Plan shall control. Pursuant to the Plan, the Committee is vested with conclusive authority to administer the Plan (which includes, among other things, the authority to determine the terms and conditions of this Agreement and the Option). 5. WITHHOLDING. The Optionee consents to withholding from his or her compensation of all applicable payroll and income taxes with respect to the Option. If the Optionee is no longer employed by the Company at the time any applicable taxes with respect to the Option are due and must be remitted by the Company, the Optionee agrees to pay applicable taxes to the Company, and the Company may delay issuance of a certificate until proper payment 2 of such taxes has been made by the Optionee. The Optionee may satisfy such obligations under this Section 5 by any method authorized under Section 7.06 of the Plan. 6. RIGHTS AS SHAREHOLDER. The Optionee shall have no rights as a shareholder of the Company with respect to any of the shares covered by the Option until the issuance of such shares. No adjustment shall be made for dividends or other rights with respect to such shares for which the record date is prior to the date such shares are issued. 7. NON-TRANSFERABILITY OF OPTION. The Option shall not be transferred in any manner other than by will, the laws of descent and distribution or any other manner permitted by the Plan at the time of such purported transfer. No transfer of the Option shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and such evidence as the Company may deem necessary to establish the validity of the transfer and the acceptance by the transferee of the terms and conditions of the Option. 8. ADJUSTMENTS. The number of shares of Common Stock to which the Option is subject and the exercise price are subject to adjustment in accordance with Section 6.01 of the Plan. Such adjustment will be determined by the Committee, in its sole discretion. 9. NO RIGHT TO EMPLOYMENT. The granting of the Option does not confer upon the Optionee any right to be retained as an Employee. 10. AMENDMENT AND TERMINATION OF OPTION. Except as otherwise provided in this Agreement or in the Plan, the Company may not, without the consent of the Optionee, amend, modify or terminate this Agreement if such amendment, modification or termination would adversely affect the Option in any material way. 11. NOTICES. Every notice relating to this Agreement shall be in writing and if given by mail shall be given by registered or certified mail with return receipt requested. All notices to the Company or the Committee shall be sent or delivered to the President of the Company at the Company's headquarters. All notices by the Company to the Optionee shall be delivered to the Optionee personally or addressed to the Optionee at the Optionee's last residence address as then contained in the records of the Company or such other address as the Optionee may designate. Either party by notice to the other may designate a different address to which notices shall be addressed. Any notice given by the Company to the Optionee at the Optionee's last designated address shall be effective to bind any other person who shall acquire rights hereunder. 12. APPLICABLE LAW. This Agreement (a) shall be governed by and construed in accordance with the laws of the State of Michigan without giving effect to conflict of laws, and (b) is not valid unless it has been manually signed by the Optionee and the Company. IN WITNESS WHEREOF, this Agreement has been executed as of February __, 2002, by the parties set forth below. 3 OPTIONEE: CITIZENS BANKING CORPORATION ____________________________________ By:_________________________ Its: President 4 NOTICE OF EXERCISE President Citizens Banking Corporation One Citizens Banking Center 328 South Saginaw St. Flint, Michigan 48502 An Option was granted to me on , to purchase shares of Citizens Banking Corporation common stock at a price of $ per share (the "Option"). I hereby elect to exercise the Option with respect to shares. Payment of the exercise price is being made as follows (check all that apply): - Cash delivered with this notice. - Certified check, bank draft or money order delivered with this notice. - I am tendering shares of Common Stock that I currently own. I certify that I have owned such shares for at least the six months prior to the date of this notice. - Subject to Section 2.04(b) of the Stock Compensation Plan, I am making a "cashless exercise" and have given the designated broker the irrevocable instructions required by the applicable agreement between the broker and Citizens Banking Corporation. The stock certificate for the shares acquired upon exercise should be issued to: (name) -------------------------------------- (address) -------------------------------------- (Social Security No.) -------------------------------------- Dated: , (signature) --------------------------- (print name) -------------------------- 5 CITIZENS BANKING CORPORATION 2002 OPTION GRANT VESTING SCHEDULE*
------------------------------- ---------------------------- Four Quarter Diluted Earnings Per Share % Vesting ------------------------------- ---------------------------- ------------------------------- ---------------------------- 2.25 0% ------------------------------- ---------------------------- 2.30 9% ------------------------------- ---------------------------- 2.35 17% ------------------------------- ---------------------------- 2.40 26% ------------------------------- ---------------------------- 2.45 34% ------------------------------- ---------------------------- 2.50 43% ------------------------------- ---------------------------- 2.54 50% ------------------------------- ---------------------------- 2.59 59% ------------------------------- ---------------------------- 2.64 67% ------------------------------- ---------------------------- 2.69 76% ------------------------------- ---------------------------- 2.74 84% ------------------------------- ---------------------------- 2.79 93% ------------------------------- ---------------------------- 2.83 100% ------------------------------- ----------------------------
*The options will become 100% vested on the fifth (5th) anniversary of the ten year option grant, or earlier as outlined in the above Option vesting schedule upon the Earnings Per Share ("EPS") targets set forth therein being met. In determining vesting under the above schedule, the "% vesting" shall be based upon the highest rolling four quarter average diluted EPS for Citizens Banking Corporation for each consecutive four quarter period completed. For this purpose, the highest attained EPS shall, at the discretion of the Compensation and Human Resources Committee, exclude extraordinary gains and losses not related to normal business operations. 6 EXHIBIT D MANAGEMENT INCENTIVE PLAN CITIZENS BANKING CORPORATION MANAGEMENT INCENTIVE PLAN I. PURPOSE: 1. Ensure achievement of strategic goals. 2. Strengthen links between pay and performance. 3. Align management more closely with shareholder. II. ELIGIBILITY: Senior Vice Presidents and above and certain other officers based upon corporate responsibility who are not participants in another established incentive plan with payment amounts determined by performance in relation to goal. Awards will be pro-rated based on months served for staff members with less than 12 months of service in a Plan Year. Staff members become eligible to participate in the plan by virtue of promotion or new hire. A staff member who terminates employment before the Plan Year is not eligible to receive an award. III. PERFORMANCE MEASUREMENT FACTORS: Individual bonus awards will be based on corporate and individual performance. - *Providing the stock buy back program continues- - Upon reaching 96.5% of EPS, the factor will pay out at 50%. - Upon reaching 98.25% of EPS, the factor will pay out at 75%. - Upon reaching 100% of EPS, the factor will pay out at 100%. - Achievement over 100% of plan will result in a factor pay out multiplier prorated at 10% for every 1% by which Earnings Per Share exceeds the Plan Goal with a maximum pay out percent of 150% For example: -
PERCENT OF TARGET PAYOUT PERCENT EPS FACTOR* ----------------- -------------- ----------- 100% 100% 60% 101% 110% X 60% 102% 120% 60%
- Should the buy back program be discontinued- - Net income will be recalculated on a comparable basis and paid out at either 50%, 75%, 100% or more accordingly. - Direct Contribution, Key Success Factors and Special Initiatives should be achieved at 100% for pay out and may be multiplied by a performance factor of 100% to 150% at the discretion of the CEO. - Special initiatives are defined as producing revenue enhancement or expense reduction. IV. PARTICIPATION RATE: The participation rate for individual positions is benchmarked from market data research provided by various surveys and consultants. V. AWARD DETERMINATION: EXECUTIVE MANAGEMENT -- ----- | 60% 25% | | --- -- | Salary Midpoint x | EPS | Direct Contribution and Performance | | Participation Rate x X | Payout + | or Key Success Factor X Factor | | Service Factor | Percent | + Special Initiatives (100% TO 150%) | | | | | | | --- -- | | (96.50% 15% | | TO 150%) | -- -----
CBC SENIOR MANAGEMENT -- ----- | 60% 40% | | --- -- | Salary Midpoint x | EPS | Performance | | Participation Rate x X | Payout + | Key Success Factor X Factor | | Service Factor | Percent | (100% TO 150%) | | | --- -- | | (96.50% | | TO 150%) | -- -----
The incentive award for the Chairman, President and CEO will be determined by the Compensation and Human Resources Committee of Citizens Banking Corporation Board of Directors. A special award fund (Discretionary) equal to 15% of the aggregate incentive award will be available for individual awards as determined by the Chairman, President and CEO. Awards from this fund are made to staff members who are not participants in the Management Incentive Plan. Awards for the Discretionary Fund will be made only in recognition of exemplary achievements. Distribution of all available amounts in this fund is not mandatory. VI. AWARD LIMITATIONS: No awards will be made unless the corporation meets or exceeds 96.5% of the Earnings Per Share Goal (EPS). VII. AWARD PAYMENTS: All awards earned under Management Incentive Plan will be paid as soon as practical following approval by the Compensation and Human Resources Committee. VIII. ADDITIONAL PROVISIONS: The Management Incentive Plan shall be administered by the Compensation and Human Resources Committee of the Corporation. Participation in the Management Incentive Plan shall not be construed as giving any employee the right to continued employment with the corporation for the full or for any subsequent period. IX. DISCRETIONARY GUIDELINES: OBJECTIVES: Recognize and promote exemplary individual performance or initiative. ELIGIBLE PARTICIPANTS: All staff members are eligible except staff members who are in established incentive plans with payment amounts determined by performance in relation to established goals. NOMINATION PROCESS: Managers would nominate staff member(s) according to established guidelines. They would also obtain concurrence and approval from their respective Direct Report to the CEO. MONETARY GUIDELINES: Range of $500 to $3000. Larger amounts could be given in exceptional circumstances. GUIDELINES: Discretionary awards should be given in recognition for one or more of the following performance criteria: Earnings: - Expense reduction - Revenue enhancement Innovation: - Continuous improvement efforts - Innovative delivery alternatives - Foresight and planning to prevent crises Achievement: - Unique/specialized skills or knowledge of value to the company, i.e., Key Performers - Sustained high performance - Exemplary performance during unusual circumstances or specific events - Special projects completed in an exceptional manner or ahead of schedule - Superior client service EXHIBIT E SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN CITIZENS BANKING CORPORATION SUPPLEMENTAL RETIREMENT BENEFITS PLAN FOR WILLIAM R. HARTMAN EFFECTIVE February __, 2002 Citizens Banking Corporation ("Corporation") hereby establishes the Supplemental Retirement Benefits Plan for William R. Hartman ("Plan"). 1. COVERAGE. The coverage of the Plan shall be limited to William R. Hartman ("Participant"). 2. SUPPLEMENTAL RETIREMENT BENEFIT. Participant shall, subject to paragraph 3, be entitled to the supplemental retirement benefit ("Supplemental Retirement Benefit") described below: (a) AMOUNT AT OR AFTER AGE 65. The annual amount of the Supplemental Retirement Benefit, when expressed in the form of a single life annuity commencing at age 65, shall be equal to the excess of (i) over (ii), where-- (i) is 60.0% of the highest average base salary paid and bonus earned during any consecutive thirty-six months out of the last sixty months of employment (or, if fewer, the period Participant has been an employee of the Corporation) by Corporation, and (ii) is the sum of Participant's normal retirement benefit under the Citizens Banking Corporation Pension Plan for Employees ("Pension Plan") calculated as of his attainment of age 65, and Participant's Social Security benefit also calculated as of age 65, in each case without regard to any changes in either benefit amount that may occur subsequent to that age due to increases for cost-of-living or other factors. If Participant's employment continues after age 65, his benefit otherwise calculated under Section 2(a)(i) will be actuarially adjusted on the same basis that post-age 65 benefits are adjusted under the Pension Plan or, if no such adjustment is made under the Pension Plan, on the basis of the most generous actuarial and other permissible assumptions that may be applied for such purposes. (b) AMOUNT AT AGE PRIOR TO AGE 65. If Participant elects early retirement under the Pension Plan, the annual amount of the Supplemental Retirement Benefit, when expressed in the form of a single life annuity commencing at such early retirement date, shall be equal to the excess of (i) over (ii), where-- (i) is 60.0% of the highest average base salary paid and bonus earned during any consecutive thirty-six months out of the last sixty months of employment (or, if fewer, the period Participant has been an employee of the Corporation) by Corporation, reduced by 1/3rd of 1.0% for each complete calendar month that the Participant's retirement date precedes his 65th birthday, and (ii) is the sum of Participant's early retirement benefit under the Pension Plan calculated as of Participant's early retirement age, and Participant's Social Security benefit also calculated as of Participant's early retirement age (or, if later, the earliest age at which Participant is entitled to receive a Social Security benefit, but with that Social Security amount reduced by 5/9th of 1.0% for each complete calendar month that Participant's early retirement date precedes his first eligibility for such benefit), in each case without regard to any changes in either benefit amount that may occur subsequent to such age due to increases for cost-of-living or other factors. (c) COMMENCEMENT AND FORM OF BENEFIT. Supplemental Retirement Benefit payments shall be made in monthly installments at the same time as normal or early retirement benefits, as the case may be, under the Pension Plan, but in no event earlier than Participant's attainment of age 61. If Participant is married at the time Supplemental Retirement Benefits commence hereunder, the Supplemental Retirement Benefit shall be converted to and paid in the form of a 50% joint and survivor annuity with Participant's spouse as the joint annuitant, unless Participant validly elects another form of payment for benefits under the Pension Plan, in which case the Supplemental Retirement Benefit shall be converted to and payable in the same form as elected under the Pension Plan. In all events, all forms of payment of the Supplemental Retirement Benefit shall be computed using the same formulas and actuarial factors set forth in the Pension Plan for the determination of optional forms of benefits. For purposes of this paragraph 2, Participant's "spouse" shall be determined in accordance with the Pension Plan. 3. CONDITIONS. Payment of benefits under the Plan shall be made only upon receipt of benefits from the Pension Plan. Nevertheless, all benefits calculated under this Plan will be fully vested (a) upon a Change in Control as defined in the Change in Control Agreement between the Corporation and the Participant dated February __, 2002, and (b) after the earlier of the date Participant is fully vested under the pension Plan or the fifth anniversary of the date of this Agreement, provided that Participant is an employee of the Corporation as of such date. 4. SPECIAL DISTRIBUTION. If any taxing authority finally establishes that the Participant is constructively in receipt of any Plan benefit that has not actually been distributed and that the Participant is immediately liable for any income or other taxes (other than any taxes within the scope of the second sentence of Section 5(e)) that normally would not be imposed until the Plan benefit is actually paid to the Participant, the Committee (as defined in Section 7) will immediately distribute to the Participant a lump sum amount equal to that which the taxing authority has deemed the Participant to have constructively received. The Participant's ultimate benefit under Section 2(a) shall be actuarially adjusted to account for any special distributions under this Section 4. 2 5. COST OF PLAN. (a) The entire cost of providing benefits under the Plan shall be paid by Corporation out of its current operating budget, and Corporation's obligations under the Plan shall be an unfunded and unsecured promise to pay. Corporation shall not be obligated under any circumstances to fund its obligations under the Plan. (b) Notwithstanding paragraph (a), Corporation may, at its sole option, or by agreement, informally fund its obligations under the Plan in whole or in part, through a group or individual rabbi or similar trust(s) established with a banking institution unaffiliated with Corporation; provided, however, in no event shall such informal funding be construed to create any trust fund, escrow account or other security for Participant with respect to the payment of benefits under the Plan, other than as permitted under Internal Revenue Service and Department of Labor rules and regulations for unfunded supplemental retirement plans. (c) If Corporation decides to fund the Plan informally, in whole or in part, by procuring, as owner, life insurance for its own benefit on the life of Participant, the form of such insurance and the amounts thereof shall be the sole decision of Corporation, and in no event shall Participant or any beneficiary have any incidents of ownership in any such policies of insurance. If a physical examination is required for Corporation to obtain insurance for Participant under this paragraph, Participant agrees to undergo such physical examinations as may be required by the insurance carrier. Such physical examinations shall be conducted by a physician approved by Corporation, at the expense of Corporation. (d) No contributions by Participant are required or permitted under the Plan. (e) All taxes on benefits payable to Participant under the Plan, except for the employer's share of applicable employment taxes, shall be the obligation of Participant. To the extent that benefits (or their present value) become taxable to Participant at any time prior to actual payment of those benefits, such as in the case of the Medicare tax, and to the extent that Corporation is required to withhold taxes, those taxes shall be withheld from other compensation payable by Corporation to Participant. 6. LIMITATION OF PARTICIPANT'S RIGHTS. (a) The Plan shall not be deemed to create a contract of employment between Corporation and Participant and shall create no right in Participant to continue in Corporation's employment for any specific period of time, or to create any other rights in Participant or obligations on the part of Corporation, except as are set forth herein or in any written employment contract. Nor shall the Plan restrict the right of Corporation to terminate Participant, or restrict the right of Participant to terminate his employment, except as otherwise provided by written employment contract. 3 (b) The rights of Participant or any person claiming through Participant under the Plan shall be solely those of an unsecured general creditor of Corporation. Participant, or any person claiming through Participant, shall have the right to receive from Corporation only those payments as specified herein. Participant agrees that he or any person claiming through him shall have no rights or interests in any asset of Corporation. (c) Except to the extent provided by paragraph 5(b) and as permitted by applicable tax law, no asset used or acquired by Corporation in connection with the liabilities it has assumed under the Plan shall be deemed to be held under any trust for the benefit of Participant. Nor shall it be considered security for the performance of the obligations of Corporation, except as provided by separate agreement and as permitted under Internal Revenue Service and Department of Labor rules and regulations for unfounded supplemental retirement plans. 7. PLAN ADMINISTRATOR AND CLAIMS PROCEDURE. (a) The Plan Administrator and Named Fiduciary of the Plan for purposes of the Employee Retirement Income Security Act of 1974, as amended, shall be the Compensation and Benefits Committee of Corporation's Board of Directors ("Committee"), whose business address is c/o Citizens Banking Corporation, 328 S. Saginaw St., Flint, Michigan 48502-9985, and whose telephone number is (810) 766-7500. Corporation's Board of Directors shall have the right to change the Plan Administrator and Named Fiduciary of the Plan at any time, and to change the address and telephone number of the same. Corporation shall give Participant written notice of any such change in the Plan Administrator and Named Fiduciary or in the address or telephone number of the same. (b) Participant, or other person claiming through Participant, must file a written claim for benefits with the Plan Administrator as a prerequisite to the payment of benefits under the Plan. Any denial by the Plan Administrator of a claim for benefits under the Plan by Participant or other person (collectively referred to as "claimant") shall be stated in writing by the Plan Administrator and delivered or mailed to the claimant within 90 days after receipt of the claim unless special circumstances require an extension of time for processing the claim. If such an extension of time is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 90-day period. In no event shall such extension exceed a period of 90 days from the end of the initial period. Any notice of denial shall set forth the specific reasons for the denial, specific reference to pertinent provisions of the Plan upon which the denial is based, a description of any additional material or information necessary for the claimant to perfect his claim, with an explanation of why such material or information is necessary, and any explanation of claim review procedures under the Plan, written to the best of the Plan Administrator's ability in a manner that may be understood without legal or actuarial counsel. (c) A claimant whose claim for benefits has been wholly or partially denied by the Plan Administrator may request, within 90 days following the date of such denial, in a writing addressed to the Plan Administrator, a review of such denial. The claimant shall be 4 entitled to submit such issues or comments in writing or otherwise, as he shall consider relevant to a determination of his claim, and may include a request for a hearing in person before the Plan Administrator. Prior to submitting his request, the claimant shall be entitled to review such documents as the Plan Administrator shall agree are pertinent to his claim. The claimant may, at all stages of review, be represented by counsel, legal or otherwise, of his choice, provided that the fees and expenses of such counsel shall be borne by the claimant. All requests for review shall be promptly resolved. The Plan Administrator's decision with respect to any such review shall be set forth in writing and shall be mailed to the claimant not later than 60 days following receipt by the Plan Administrator of the claimant's request unless special circumstances, such as the need to hold a hearing, require an extension of time for processing, in which case the Plan Administrator's decision shall be so mailed not later than 120 days after receipt of such request. In no decision or review is rendered within this 120 day period, the claimant's appeal shall be deemed denied and the Plan Administrator's original denial of the claim affirmed. (d) Any claim under this claims procedure must be submitted within twelve months from the earlier of (1) the date on which the claimant learned of facts sufficient to enable him to formulate such claim or (2) the date on which the claimant reasonably should have been expected to learn of facts sufficient to enable him to formulate such claim. Also, the Corporation may not reduce any benefit under this Plan (including a reduction attributable to an increase in the amount payable under Section 2(a)(ii), the flush language following Section 2(a)(ii) or 2(b)(ii)) unless it gives Participant written notice of that intent within 12 months from the date benefit become payable under this Plan. If the notice described in the preceding sentence is given, the Participant will be entitled to dispute that reduction under the procedures described in this Section 6 but based on time periods running from the date the written notice is given and whether or not that special claims period overlaps an existing claims period. (e) The decision of the Plan Administrator upon review of any claim shall be binding upon the claimant, his heirs and assigns and the Corporation, and all other persons claiming by, through or under him. (f) The timely filing of a request for review in the manner specified above shall be a condition precedent to obtaining review before the Plan Administrator, and the Plan Administrator shall have no jurisdiction to entertain a request for review unless so filed. A failure to file a claim and a request for review in the manner and within the time limits set forth above shall be deemed a failure by the aggrieved party to exhaust his administrative remedies and shall constitute a waiver of the rights sought to be established under the Plan. (g) Any suit brought to contest or set aside a decision of the Plan Administrator shall be filed in a court of competent jurisdiction within one year from the date of receipt of written notice of the Plan Administrator's final decision or from the date the appeal is deemed denied, if later. No legal action to recover Plan benefits or to enforce or clarify rights under the Plan shall be commenced until the claimant first shall have exhausted the claims and review procedures available to him hereunder. 5 (h) Any claim filed under the Pension Plan relating to any matter that may affect benefits under this Plan shall be treated as a claim filed under this section. 7. INDEPENDENCE OF BENEFITS. Except as otherwise provided herein, the benefits payable under the Plan shall be independent of, and in addition to, any other benefits or compensation, whether by salary, or bonus or otherwise, payable under any employment agreements that now exist or may hereafter exist from time to time between Corporation and Participant. The Plan does not involve a reduction in salary or foregoing of an increase in future salary by Participant. Nor does the Plan in any way affect or reduce the existing and future compensation and other benefits of Participant. 8. NON-ALIENATION OF BENEFITS. Except in so far as this provision may be contrary to applicable law, no sale, transfer, alienation, assignment, pledge, collateralization, or attachment of any benefits under the Plan shall be valid. 9. RIGHT TO AMEND OR TERMINATE PLAN. (a) Corporation reserves the right to amend the Plan in any manner, and Corporation reserves the right to terminate the Plan at any time in whole or part. Amendment or termination of the Plan shall be accomplished by resolution of Corporation's Board of Directors. (b) Notwithstanding paragraph (a), no such amendment or termination shall be effective without the explicit written consent of the Participant (or beneficiary, if applicable). 10. CONSTRUCTION AND GOVERNING LAW. (a) Wherever any words are used in the Plan in the masculine gender, they shall be construed as though they also were used in the feminine gender in all cases where they would so apply, and wherever any words are used in the Plan in the singular form they shall be construed as though they also were used in the plural form in all cases where they would so apply, and vice versa. (b) Headings of paragraphs herein are inserted for convenience of reference. They constitute no part of the Plan and are not to be considered in the construction of the Plan. (c) If any provisions of the Plan shall be for any reason invalid or unenforceable, the remaining provisions nevertheless shall be carried into effect. (d) Except in the case of preemption by applicable federal law, the Plan shall be governed by the laws of the State of Michigan. (e) This Plan constitutes the entire arrangement between Corporation and Participant with respect to the subject matter addressed herein. This Plan amends, restates, supercedes and replaces the Prior Plan in its entirety. 6 It is intended that the Plan shall be unfunded and maintained by Corporation primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, so that the Plan is exempt from the requirements of Parts 2, 3 and 4 of the Employee Retirement Income Security Act of 1974, as amended. All provisions shall be interpreted in accordance with such intentions. Citizens Banking Corporation has caused the Plan, as amended and restated herein, to be executed on February , 2002. CITIZENS BANKING CORPORATION By: ------------------------------------- 7 EXHIBIT F CHANGE IN CONTROL AGREEMENT CHANGE IN CONTROL AGREEMENT This Change in Control Agreement ("Agreement") is made by and between Citizens Banking Corporation, a Michigan corporation ("Corporation"), and William R. Hartman ("Executive"). The Corporation anticipates the valuable services that the Executive will render on behalf of the Corporation and its subsidiary banks and is desirous of having some assurance that the Executive will continue as an employee and that, in the event of a possible Change in Control of the Corporation, the Executive will be able to perform his duties without undue concern for the Executive's personal financial well-being; and The Executive is willing to serve as an employee of the Corporation but desires assurance that in the event of a Change in Control of the Corporation, he will continue to have the responsibility and status he has earned. Accordingly, the Corporation and the Executive agree as follows: 1. In order to protect the Executive against the possible consequences of a Change in Control of the Corporation, as defined in paragraph 2 of this Agreement, and thereby to induce the Executive to serve as an officer of the Corporation or a subsidiary bank the Corporation agrees that if (a) there is such a Change in Control of the Corporation and (b) the Executive's employment with the Corporation or a subsidiary bank is terminated under the circumstances described in paragraph 3 of this Agreement, then: A. The Corporation shall pay the Executive a lump sum amount in cash equal to the sum of (i) three times the Executive's annual base salary immediately prior to the Change in Control (or if higher, the annual base salary on the date the Executive's employment is terminated) and (ii) three times the greater of (x) the anticipated bonus amount under the Citizens Banking Corporation Management Incentive Plan to be earned in accordance with the plan in the year in which the termination occurs or (y) the highest bonus paid to the Executive in the last three full calendar years of such employment. The applicable amount shall be payable within 60 days following the date of the Executive's termination of employment. B. The Executive shall continue to be covered, at the Corporation's cost, by the medical, dental and life insurance benefit plans that are in effect on the date of his termination and that cover executive employees, for a period of thirty-six (36) months after his termination of employment; provided, however, that if during such time period the Executive should enter into other employment providing comparable benefits, his participation in such plans of the Corporation shall cease to the extent of his coverage by his new employer's plans. Any such non-cash benefit that is tied to compensation shall be based on the Executive's annual compensation averaged over the same period as applicable under paragraph A of this Agreement. C. If the Executive has been furnished with an automobile for business or personal use at the Corporation's expense within the previous 12 months prior to the Change in Control, then the Corporation shall offer that automobile (or one of comparable value) for sale to the Executive at a price equal to the residual lease value or so-called "book value" in the case of a vehicle owned by the Corporation. Similarly, if the Executive was furnished with a club membership, that membership will be transferred by the Corporation to the Executive at no cost to the Executive, who immediately following the transfer shall become subject to monthly dues charges of the club. D. All stock options and restricted stock previously granted by the Corporation to the Executive, whether or not then exercisable, shall become immediately vested and exercisable. E. For a period of one year following termination of the Executive's employment, the Executive shall be entitled to outplacement services provided by an outplacement service provider designated by the Corporation. The cost of providing the outplacement services shall be borne solely by the Corporation, and shall be equal to the lesser of (i) 10% of the Executive's annual base salary immediately prior to the Change in Control (or, if higher, the Executive's annual base salary as of the date of termination of the Executive's employment) and (ii) $20,000. F. If the payment of any of the foregoing amounts or benefits (when added to any other payments or benefits provided to the Executive in the nature of compensation) will result in the payment of an excess parachute payment as that term is defined in Section 280G of the Internal Revenue Code of 1986 ("Code"), then in such event, the Corporation shall pay the Executive an additional amount for each calendar year in which an excess parachute payment is received by the Executive (the "Gross-Up Payment"). The Gross-Up Payment is intended to cover the Executive's liability for any parachute tax under Code Section 4999 on such excess parachute payment, as well as federal and state income taxes and parachute tax on the additional amount, and shall be computed as follows: A=Pt/(1 - T - t), where - A is the additional amount for any calendar year; P is the amount of the excess parachute payment for the calendar year in excess of the allocable base amount as defined in Code Section 28OG(b)(3); T is the effective marginal rate of federal and state income tax applicable to the Executive for the calendar year; and T is the rate of parachute tax under Code Section 4999. The effective marginal rate of federal and state income tax shall be computed as follows: 2 T = F + S(l - 0.8F) + m, where - F is the highest marginal rate of federal income tax applicable to the Executive for the calendar year; and S is the highest aggregate marginal rate of state income tax applicable to the Executive for the calendar year in the state or states and municipalities to which he is then required to pay income taxes as a result of his employment by the Corporation; and m is the employee's portion of the Medicare tax, currently 1.45%. Payment of the Gross-Up Payment shall be made to the Executive on or before December 31 of each calendar year for which an excess parachute payment is received by the Executive. G. Subject to the provisions of paragraph G, all determinations required to be made under these paragraphs E, F and G, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Ernst & Young, LLP or such other certified public accounting firm reasonably acceptable to the Corporation as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Corporation and the Executive within 15 business days of the receipt of notice from the Executive that there has been an excess parachute payment, or such earlier time as is requested by the Corporation. All fees and expenses of the Accounting Firm shall be borne solely by the Corporation. Any determination by the Accounting Firm shall be binding upon the Corporation and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Corporation should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Corporation exhausts its remedies pursuant to paragraph G and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Corporation to or for the benefit of the Executive. H. The Executive shall notify the Corporation in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Corporation of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Corporation of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Corporation (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Corporation notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Corporation any information reasonably requested by the Corporation relating to such claim, (ii) take such action in connection with contesting such claim 3 as the Corporation shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Corporation, (iii) cooperate with the Corporation in good faith in order effectively to contest such claim, and (iv) permit the Corporation to participate in any proceedings relating to such claim; provided, however, that the Corporation shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this subparagraph H, the Corporation shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Corporation shall determine; provided, however, that if the Corporation directs the Executive to pay such claim and sue for a refund, the Corporation shall advance the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax and income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance calculated as described in subparagraph F of this section; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Corporation's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to this subparagraph H, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Corporation's complying with the requirements of this subparagraph H) promptly pay to the Corporation the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to this subparagraph H, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Corporation does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 2. For purposes of this Agreement, a "Change in Control" shall mean: A. The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule l3d-3 promulgated under the 4 Exchange Act) of 20% or more of either (1) the then outstanding shares of common stock of the Corporation (the "Outstanding Corporation Common Stock") or (2) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); provided, however, that for purposes of this subparagraph A, the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Corporation, (H) any acquisition by the Corporation, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation, or.(iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (1), (2) and (3) of subparagraph C of this paragraph 2; or B. Individuals who, as of the date hereof, constitute the Board of Directors of the Corporation (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Corporation's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Corporation in which such person is named as a nominee for director, without written objection to such nomination) shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or contests by or on behalf of a person other than the Board of Directors of the Corporation; or C. Consummation of a reorganization, merger, share exchange or consolidation or sale of other disposition of all or substantially all of the assets of the Corporation (a "Business Combination"), in each case, unless, following such Business Combination: (1) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 65% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Corporation or all or substantially all of the Corporation's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be; (2) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Corporation or such corporation resulting from the Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination; and (3) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were 5 members of the Incumbent Board immediately prior to the time of the execution of the initial agreement, or of the action of the Board of Directors of the Corporation, providing for such Business Combination; or D. Approval by the stockholders of the Corporation of a complete liquidation or dissolution of the Corporation. 3. Termination of the Executive's employment shall mean the Executive's termination of employment at any time within 3 months prior to, on the date of, or within 24 months after a Change in Control of the Corporation as defined in paragraph 2 of this Agreement either by (a) involuntary dismissal by the Corporation; or (b) the Executive's Constructive Discharge as defined in (and subject to the procedures described therein) Section 5(d) of the Employment Agreement. 4. The specific arrangements referred to above are not intended to exclude the Executive's participation in other benefits available to executive personnel of the Corporation generally or to preclude other compensation or benefits as may be authorized by the Corporation's Board of Directors from time to time. 5. As partial consideration for the above, the Executive agrees not to disclose any confidential information about the Corporation and its operation to which the Executive was privy during the course of his employment by the Corporation. Further, the Executive agrees not to accept employment or consult for or otherwise assist any competitor of the Corporation for a period of 24 months following his termination of employment. For purposes of the foregoing, "competitor" means any financial institution that conducts business from any location within 50 miles of any location at which the Corporation or any subsidiary bank had an office on the day immediately prior to the day on which the Change of Control of the Corporation occurred. 6 6. This Agreement shall be binding upon and shall inure to the benefit of the respective successors, assigns, legal representatives and heirs to the parties. 7. Any payment or delivery required under this agreement shall be subject to all requirements of the law with regard to withholding, filing, making of reports and the like, and the Corporation shall use its best efforts to satisfy promptly all such requirements. 8. Notwithstanding anything contained herein to the contrary, this Agreement shall be terminated and no benefits to the Executive shall be payable if, at any time, the Executive shall resign voluntarily (other than as provided in Section 3) , retire at or after normal retirement age, become incapacitated, voluntarily take another position requiring a substantial portion of his time, or die. This Agreement also shall terminate upon termination for cause of the Executive's employment as an officer of the Corporation or any subsidiary bank by the Incumbent Board. For purposes of the foregoing, "Cause" has the meaning given in the Employment Agreement between the Corporation and Executive dated February __, 2002. 9. Any and all disputes, controversies or claims arising out of or in connection with or relating to this Agreement or any breach or alleged breach thereof shall, upon the request of either party, be submitted to and settled by arbitration in the State of Michigan pursuant to the Voluntary Labor Arbitration Rules, then in effect, of the American Arbitration Association (or at any other place or under any other form of arbitration mutually acceptable to the parties involved). The parties hereto specifically agree to arbitrate with the other party in a proceeding with regard to all issues and disputes, and to permit pre-hearing discovery in the time and manner provided by the then applicable Federal Rules of Civil Procedure. This agreement to arbitrate shall be specifically enforceable under the prevailing arbitration law. Notice of the demand for arbitration shall be filed, in writing, with the other party to this Agreement and with the American Arbitration Association. The demand for arbitration shall be made within a reasonable time after the claim, dispute, or other matter in question arose where the party asserting the claim should reasonably have been aware of the same, but in no event later than the applicable Michigan or federal statute of limitations. The arbitrator shall have no power to add to, subtract from, or alter the terms of this Agreement, and shall render a written decision setting forth findings and conclusions only as to the claims or disputes at issue. Any award by the arbitrator shall be final and conclusive upon the parties, and a judgement thereon may be entered in the highest court for the forum, state or federal, having jurisdiction. All expenses of the arbitration process shall be borne by the Corporation. The Corporation shall reimburse the Executive for the reasonable fees of legal counsel as incurred in connection with arbitrating the enforcement of any of the Executive's rights under this Agreement. However, in no event shall the Executive be entitled to retain any fees so reimbursed if the claim brought by the Executive against the Corporation is in the arbitrator's sole determination frivolous or was brought in bad faith, and the Corporation will be entitled to seek repayment from the Executive for such fees after such determination by the arbitrator. 10. The invalidity or unenforceability of any provision of this Agreement shall not affect the enforceability or validity of any other provision hereof. 7 11. This Agreement constitutes the entire agreement of the parties with respect to the subject matter addressed in this Agreement. This Agreement may be amended only in a written document signed by both the Corporation and the Executive. 12. This Agreement shall be governed by the laws of the State of Michigan. This Agreement has been executed by the parties on and effective as of , 2002. CITIZENS BANKING CORPORATION By: ------------------------------------- Date: February , 2002 WILLIAM R. HARTMAN By: ------------------------------------- Date: February , 2002 8 EXHIBIT G INDEMNIFICATION AGREEMENT DIRECTOR INDEMNIFICATION AGREEMENT This Indemnification Agreement (the "Agreement") is made as of the _______ day of __________________ , _______, by and between CITIZENS BANKING CORPORATION, a bank holding company organized under the laws of the State of Michigan (the "Company"), and ________________________________ (the "Director"). W I T N E S S E T H WHEREAS, it is essential to the Company to retain and attract as directors the most capable persons available; and WHEREAS, the substantial increase in corporate litigation subjects directors to expensive litigation risks; and WHEREAS, it is reasonable, prudent and necessary for the Company to contractually obligate itself to indemnify directors to the fullest extent permitted by the Michigan Business Corporation Act so that capable persons will serve or continue to serve the Company; and WHEREAS, the Director is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that the Director be so indemnified. NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and the Director do hereby agree as follows: 1. Definitions. The following terms as used in this Agreement shall have the following respective meanings: "Expenses" means all expenses, liabilities and losses, including attorneys' fees, judgments, fines, and amounts paid or to be paid in settlement of a Proceeding. "Proceeding" means any action, suit or proceeding (or part thereof), whether civil, criminal, administrative or investigative. 2. Services by Director. The Director agrees to serve as a director of the Company for so long as the Director is duly elected or appointed or until the tender of the Director's written resignation. 1 3. Indemnification. Subject to the terms and conditions of this Agreement, the Company shall indemnify and hold harmless the Director to the fullest extent authorized by the Michigan Business Corporation Act, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than said law permitted the Company to provide prior to such change), against all Expenses reasonably incurred or suffered by the Director in connection with any Proceeding in which the Director is or was a party or is threatened to be made a party or is involved by reason of the fact that the Director is or was a director, officer or employee of the Company or is or was serving at the request of the Company as a director, officer, partner, trustee, administrator, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of the Proceeding is alleged action in an official capacity as a director, officer, partner, trustee, administrator, employee or agent or in any other capacity while serving as a director, officer, partner, trustee, administrator, employee or agent; provided however, that, except as provided in Section 5 hereof with respect to Proceedings to enforce rights to indemnification, the Company shall indemnify the Director seeking indemnification in connection with a Proceeding (or part thereof) initiated by the Director only if such proceeding (or part thereof) was authorized by the Board of Directors of the Company. 4. Expenses. The right to indemnification conferred under Section 3 hereof shall include the right to be paid by the Company Expenses incurred in defending any such Proceeding in advance of its final disposition; provided however, that the payment of such Expenses incurred by the Director in advance of the final disposition of a Proceeding shall be made only upon (i) delivery to the Company of (A) a written affirmation by the Director of the Director's good faith belief that the Director has met the standard of conduct set forth in Section 561 of the Michigan Business Corporation Act, and (B) an undertaking, by or on behalf of the Director, to repay all advances if it shall ultimately be determined by final judicial decision that the Director did not meet such standard of conduct and (ii) a determination that the facts then known to those making the determination to advance payment of such Expenses would not preclude indemnification under the Michigan Business Corporation Act. 5. Right of the Director to Bring Suit. (a) If a claim under Section 3 hereof is not paid in full by the Company within thirty (30) days after notice to the Company as provided in Section 10 hereof, the Director may at any time thereafter bring suit against the Company in any court of competent jurisdiction to recover the unpaid amount of the claim, and if successful in whole or in part, the Director shall be entitled to be paid also the expense of prosecuting such claim. (b) It shall be a defense to any such action seeking indemnification under Section 3 hereof (other than an action brought to enforce a claim for Expenses incurred in defending any Proceeding in advance of its final disposition where the required affirmation and undertaking have been tendered to the Company in accordance with Section 4 hereof) that the Director has not met the applicable standard of conduct set forth in the Michigan Business Corporation Act. Further, in any action brought by the Company to recover advances the Company shall be entitled to recover such advances if the Director has not met the applicable standard of conduct set forth in the Michigan Business Corporation Act. Neither the failure of the Company (including its Board of Directors, independent legal counsel, or its shareholders) to have made a determination prior to the 2 commencement of such action that indemnification of the Director is proper in the circumstances because the Director has met the applicable standard of conduct set forth in the Michigan Business Corporation Act, nor an actual determination by the Company (including its Board of Directors, independent legal counsel, or its shareholders) that the Director has not met such applicable standard of conduct, shall be a defense to an action brought by the Director or create a presumption that the Director has not met the applicable standard of conduct. In any action brought by the Director to enforce a right hereunder, or by the Company to recover payments by the Company of advances, the burden of proof shall be on the Company. 6. Assumption of Claim. The Company shall be entitled, but not obligated, to assume the defense of any Proceeding with respect to which indemnification is sought, with counsel satisfactory to the Director, upon the delivery to the Director of written notice of the Company's election to do so. After delivery of such notice, the Company will not be liable to the Director under this Agreement for any expenses (including legal expenses) subsequently incurred by the Director in defending such Proceeding; provided however, that the Director shall have the right to employ his or her own counsel in any Proceeding but the fees and expenses of such counsel incurred after delivery of notice from the Company of its assumption of such defense shall be at the Director's expense; and provided however that if (i) the employment of such counsel by the Director has been previously authorized by the Company, (ii) the Director shall have reasonably concluded that there may be a conflict of interest between the Company and the Director in the conduct of any such defense or (iii) the Company shall not, in fact, have employed counsel to assume the defense of such action, the fees and expenses of such counsel shall be at the expense of the Company. 7. Establishment of Trust. In the event of a Potential Change in Control of the Company, as hereinafter defined, the Company shall, upon written request by the Director, create a trust for the benefit of the Director and from time to time upon written request of the Director shall fund such trust in an amount sufficient to satisfy any and all Expenses that may properly be subject to indemnification under Section 3 above anticipated at the time of each such request. The amount or amounts to be deposited in the trust pursuant to this funding obligation shall be determined by a majority vote of a quorum consisting of directors who are not parties to such Proceeding, if any, the executive committee of the Board of Directors or the President of the Corporation. If all such individuals are parties to the Proceeding, if any, the amount or amounts to be deposited in the trust shall be determined by independent legal counsel. The terms of the trust shall provide that upon a Change in Control (i) the trust shall not be revoked or the principal thereof invaded, without the written consent of the Director; (ii) the trustee shall advance, within two (2) business days of a request by the Director, any amount properly payable to the director under Section 3 of this Agreement; (iii) the trust shall continue to be funded by the Company in accordance with the funding obligation set forth above; (iv) the trustee shall promptly pay to the Director all amounts for which the Director shall be entitled to indemnification pursuant to this Agreement or otherwise; and (v) all expended funds in such trust shall revert to the Company upon a final determination by a court of competent jurisdiction that the Director has been fully indemnified under the terms of this Agreement. The trustee shall be chosen by the Director and shall be a national or state chartered commercial bank. Nothing in this Section shall relieve the Company of any of its obligations under this Agreement. At the time of each draw from the trust fund, the Director shall provide the trustee with a written request providing that the Director undertakes to repay such amount to the extent that 3 it is ultimately determined that the Director is not entitled to such indemnification. Any funds, including interest or investment earnings thereon, remaining in the trust shall revert and be paid to the Company if (i) a Change in Control has not occurred and (ii) the Board of Directors, the executive committee of the Board of Directors or the President of the Company determines that the circumstances giving rise to that particular funding of the trust no longer exists. For purposes of this Section and Section 9 hereof, a "Change in Control" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14a promulgated under the Securities Exchange Act of 1934, as amended, provided that, without limitation, such a change in control shall be deemed to have occurred if (i) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; (ii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 80% of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iii) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. For purposes of this Section, a "Potential Change in Control" shall be deemed to have occurred if (i) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) any person (including the Company) publicly announces an intention to take or to consider taking actions which once consummated would constitute a Change in Control; or (iii) the Board of Directors adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 8. Non-Exclusivity of Rights. The rights provided hereunder shall not be deemed exclusive of any other rights which the Director may be entitled under any statute, agreement, provision of the Articles of Incorporation or Bylaws of the Company, vote of shareholders or disinterested directors of the Company, or otherwise, and such rights shall continue after the Director ceases to serve the Company as a director. 9. Settlement. Unless and until a Change in Control has occurred, the Company shall have no obligation to indemnify the Director under this Agreement for any amounts paid in settlement of any Proceeding effected without the Company's prior written consent. The Company shall not settle any claim in any manner which would impose any obligation on the Director without the Director's written consent. Neither the Company nor the Director shall unreasonably withhold their consent to any proposed settlement. 4 10. Notice of Claim. The Director, as a condition precedent to his right to be indemnified under this Agreement, shall give to the Company notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under the Agreement. Notice to the Company shall be directed to CITIZENS BANKING CORPORATION, Attention: President (or such other address as the Company shall designate in writing to the Director). Notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, the Director shall give the Company such information and cooperation as it may reasonably request. 11. Severability. In the event that any provision of this Agreement is determined by a court to require the Company to do or to fail to do an act which is in violation of applicable law, such provision shall be limited or modified in its application to the minimum extent necessary to avoid a violation of law, and, as so limited or modified, such provision and the balance of this Agreement shall be enforceable in accordance with their terms. 12. Choice of Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Michigan. 13. Successors and Assigns. This Agreement shall be (i) binding upon all successors and assigns of the Company (including any transferee of all or substantially all of its assets and any successor by merger or otherwise by operation of law) and (ii) shall be binding on and inure to the benefit of the heirs, personal representatives, executors and administrators of the Director. 14. Amendment. No amendment, modification, termination or cancellation of this Agreement shall be effective unless made in writing and signed by each of the parties hereto. IN WITNESS WHEREOF, the Company and the Director have executed this Agreement as of the day and year first above written. CITIZENS BANKING CORPORATION By: ------------------------------------- DIRECTOR ---------------------------------------- 5 EX-13 6 k68118ex13.txt ANNUAL REPORT INFORMATION EXHIBIT 13 (FORM 10-K) CITIZENS BANKING CORPORATION ANNUAL REPORT INFORMATION TABLE OF CONTENTS I. Financial Review including Management's Discussion and Analysis......................................... 3 Five-Year Summary of Selected Financial Data.............................. 3 Mergers, Acquisitions, Divestitures and Other Initiatives................. 4 Financial Highlights...................................................... 4 Lines of Business Reporting............................................... 5 Net Interest Income....................................................... 6 Provision and Allowance for Loan Losses................................... 9 Noninterest Income ....................................................... 11 Noninterest Expense....................................................... 12 Federal Income Taxes...................................................... 12 Financial Condition....................................................... 12 Liquidity and Debt Capacity and Interest Rate Risk ....................... 18 Interest Rate Sensitivity................................................. 20 Recent Accounting Pronouncements.......................................... 20 Forward-Looking Statements................................................ 20 Selected Quarterly Information............................................ 21 Year Ended December 31, 2000 Compared with 1999...................................................... 22 II. Consolidated Financial Statements.............................................. 23 Consolidated Balance Sheets............................................... 23 Consolidated Statements of Income......................................... 24 Consolidated Statements of Changes in Shareholders' Equity................................................. 25 Consolidated Statements of Cash Flows..................................... 26 III. Notes to Consolidated Financial Statements..................................... 27 IV. Report of Independent Auditors................................................. 46 V. Report of Management........................................................... 47
A-2 MANAGEMENT'S DISCUSSION AND ANALYSIS CITIZENS BANKING CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------------------------------------- TABLE 1. FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (1) (in thousands, except per share data) 2001 2000 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- FOR THE YEAR Net interest income $ 307,981 $ 314,874 $ 309,642 $ 292,424 $ 274,134 Provision for loan losses 26,407 20,983 24,675 16,528 20,511 Noninterest income before securities gains (losses) 111,286 90,344 85,044 71,413 59,692 Investment securities gains (losses) 6,195 --- (3,052) 475 (572) Noninterest expense before special charges 251,183 242,221 236,778 218,219 208,921 Special charge --- 15,541 40,198 --- 23,734 Income taxes 43,215 35,813 27,989 39,283 25,197 Net income 104,657 90,660 61,994 90,282 54,891 Cash dividends (2) 50,158 48,108 30,035 22,991 19,286 PER COMMON SHARE DATA Net income: Basic $ 2.27 $ 1.92 $ 1.29 $ 1.86 $ 1.17 Diluted 2.25 1.91 1.28 1.84 1.15 Cash dividends (2) 1.085 1.015 0.915 0.82 0.74 Book value, end of year 15.46 14.62 13.32 14.07 12.93 Market value, end of year 32.88 29.06 22.38 33.75 34.50 AT YEAR END Assets $ 7,678,875 $ 8,405,091 $ 7,899,357 $6,930,533 $6,630,974 Loans 5,922,406 6,422,806 5,917,483 5,264,706 5,074,230 Deposits 5,965,126 6,244,141 6,128,998 5,772,792 5,514,313 Long-term debt 629,099 471,117 127,104 226,171 179,191 Shareholders' equity 697,464 679,979 633,669 680,501 610,775 AVERAGE FOR THE YEAR Assets $ 7,935,843 $ 8,073,021 $ 7,342,167 $6,792,829 $6,439,737 Earning assets 7,510,332 7,584,932 6,875,643 6,367,284 6,033,874 Loans 6,109,111 6,202,157 5,528,963 5,159,584 4,843,507 Deposits 6,008,096 6,121,373 5,906,664 5,616,894 5,359,464 Interest-bearing deposits 5,126,928 5,175,252 5,002,135 4,787,143 4,602,093 Repurchase agreements and other short-term borrowings 538,673 920,323 478,920 202,639 259,040 Long-term debt 596,380 303,597 210,289 228,969 144,306 Shareholders' equity 702,381 650,251 672,227 655,034 597,242 FINANCIAL RATIOS Return on average: Shareholders' equity 14.90% 13.94% 9.22% 13.78% 9.19% Earning assets 1.39 1.20 0.90 1.42 0.91 Assets 1.32 1.12 0.84 1.33 0.85 Average shareholders' equity/avg. assets 8.85 8.05 9.16 9.64 9.27 Dividend payout ratio (2) 47.93 53.06 59.13 40.49 61.21 Net interest margin (FTE) 4.32 4.32 4.68 4.78 4.73 Tier I leverage 7.79 7.11 7.21 8.95 8.00 Risk-based Tier I capital ratio 9.87 9.05 9.22 11.01 10.50 Risk-based Total capital ratio 11.12 10.30 10.47 12.26 11.76 - ---------------------------------------------------------------------------------------------------------------------------------
(1) Except as indicated, all financial data have been restated for stock splits and pooling of interests transactions. Results of operations for acquisitions accounted for as purchases have been included effective with the respective dates of acquisition. (2) Cash dividends and cash dividends per share are for Citizens Banking Corporation only, not restated for pooling of interests. A-3 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) CITIZENS BANKING CORPORATION AND SUBSIDIARIES The following commentary presents Management's discussion and analysis of Citizens Banking Corporations' (Citizens) financial condition and results of operations. All financial data have been restated to give effect to mergers accounted for on a pooling of interests basis and stock splits in previous periods. The results of other acquisitions, accounted for as purchases, have been included effective with the respective dates of acquisition. MERGERS, ACQUISITIONS, DIVESTITURES AND OTHER INITIATIVES MERGERS, ACQUISITIONS AND DIVESTITURES In November 2001, Citizens sold F&M Bank-Minnesota with assets of $27 million. The bank was Citizens' sole location in Minnesota. On May 12, 2000, Citizens purchased three Jackson, Michigan offices of Great Lakes National Bank. The purchase added approximately $31 million in deposits for which Citizens paid a premium of $3.9 million. On October 8, 1999, Citizens completed the acquisition of seventeen former Bank One offices located in the northern section of Michigan's Lower Peninsula. The purchase added approximately $88 million in loans and $442 million in deposits. Citizens paid a premium of $36.1 million or 10.13% of certain core deposits. These transactions were accounted for as purchases. On November 1, 1999, Citizens merged with F&M Bancorporation, Inc. (F&M), a $2.7 billion bank holding company headquartered in Kaukauna, Wisconsin. As part of the merger, Citizens issued 21.0 million shares of its common stock, based on a fixed exchange ratio of 1.303, for all of the outstanding shares of F&M. This transaction was accounted for as a pooling of interests. SPECIAL CHARGES AND OTHER ONE-TIME COSTS During 2000, conversion and integration efforts resulting from the merger with F&M were completed. Net costs of $12.3 million ($7.4 million after-tax) incurred to complete these efforts (including system conversions, business unit integration, branch closures and other items) were recorded in noninterest expense as the "Special Charge". The net costs included reversals of prior year business restructuring reserves of $6.2 million, pre-tax, due to successful settlement of a contract with a former vendor of F&M and favorable experience in employee separations. In the fourth quarter of 2000, Citizens recorded an additional pre-tax charge of $3.2 million ($2.1 million after-tax) consisting of restructuring costs of $2.0 million and asset impairment and other charges of $1.2 million associated with corporate and organizational re-engineering initiatives. The restructuring plans include reorganization of Citizens' trust and investment management business into one nationally chartered trust bank, streamlining of Citizens' community bank organizational structure, consolidation of its direct and indirect lending operations, and exiting of certain unprofitable indirect lending dealer relationships. These initiatives were completed by year-end 2001. In 1999, the Special Charge included a fourth quarter pre-tax charge of $40.2 million consisting of $36.3 million ($25.9 million after-tax) in merger-related integration costs and $3.9 million ($2.5 million after-tax) of restructuring and other costs related to separate strategic initiatives and impairment write-offs. Merger-related integration costs included employee termination benefits of $7.1 million, transaction costs of $5.6 million, contract termination and other conversion costs (primarily recognition of obligations under existing contractual agreements related to system conversions) of $13.6 million, asset-related write-downs of $1.5 million, a $2.1 million write-down of impaired goodwill at an F&M bank, a $2.5 million contribution to Citizens' Charitable Trust for the acquired entities and other transaction related costs of $3.9 million. Restructuring plans related to the strategic initiatives, approved in the fourth quarter of 1999, included realignment of Citizens' branch network, including closure of selected branches in Michigan and Illinois, and transfer of certain financial and credit audit functions to a third party. Also, in the fourth quarter of 1999, Citizens recorded $6.8 million ($4.4 million after-tax) of additional provision for loan losses and $3.6 million ($2.4 million after-tax) of securities losses related to the F&M merger. The additional loan loss provision was provided to conform F&M's allowance to that which results from applying Citizens' allowance methodology and credit risk standards to F&M's loan portfolio. The security losses resulted from the sale of $122.8 million of securities to reposition the portfolios of Citizens and F&M after the merger to normalize investment exposure and reduce overall interest rate risk. At year-end 2001 Citizens' Special Charge reserve was fully utilized. Total deductions to the Special Charge reserve were $3.3 million in 2001, and $16.0 million in 2000 and $22.8 million in 1999. Included in these deductions were cash payments of $3.3 million, $9.7 million and $15.4 million in 2001, 2000 and 1999, respectively. See Note 3 to the Consolidated Financial Statements for additional information regarding the Special Charges in 2000 and 1999. FINANCIAL HIGHLIGHTS Citizens reported net income of $104.7 million, or $2.25 per diluted share in 2001, compared with $90.7 million, or $1.91 per diluted share in 2000. Net income increased 15.4% over the prior year while net income per diluted share increased 17.8%. The corresponding returns on average assets and equity were 1.32% and 14.90%, respectively, in 2001, as compared with 1.12% and 13.94% in 2000. Net income for 2001 included after tax gains of $13.5 million or $0.29 per share from sales of securitized mortgage loans, sale of NYCE stock, sale of credit card assets and the sale of F&M Bank-Minnesota. Net income for 2000 included after-tax merger, restructuring and other charges of $9.5 million, or $0.20 per diluted share. A-4 The improvement in net income reflects increased noninterest income partially offset by lower net interest income, a higher loan loss provision and higher noninterest expenses. Net interest income decreased 2.2% in 2001 from 2000. The decline in net interest income in 2001 was primarily due to a decline in earning assets as a result of balance sheet restructuring. Noninterest income, before nonrecurring gains of $19.8 million in 2001 (see Noninterest Income table on page 11), reflects increases in mortgage fees, title insurance fees, deposit account revenues, annuity sales and bankcard fees, partially offset by a decline in trust fees. Operating noninterest expense, excluding a special charge of $15.5 million in 2000, increased 3.7%. Average shareholders' equity was $702.4 million or 8.85% of total average assets for 2001, compared with $650.3 million or 8.05% for 2000. At December 31, 2001, Citizens' risk-based capital levels exceeded all regulatory requirements to be designated "well capitalized". An analysis of the major components of net income in 2001, 2000 and 1999 is presented below. Additional data on Citizens' performance during the past five years appear in Table 1, "Five-Year Summary of Selected Financial Data".
- ----------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, -------------------------------------------------------- (in thousands) 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------------- Interest income $ 573,559 $ 622,008 $541,559 Interest expense 265,578 307,134 231,917 ---------- --------- -------- Net interest income 307,981 314,874 309,642 Provision for loan losses 26,407 20,983 17,875 Noninterest income 97,676 90,344 79,895 Noninterest expense 251,183 242,221 230,683 Income taxes 36,878 41,890 43,825 ---------- --------- -------- NET INCOME BEFORE NONRECURRING ITEMS 91,189 100,124 97,154 ---------- --------- -------- Nonrecurring gains on sale of equity investments and assets 19,805 --- 5,693 Nonrecurring expenses, special charges and merger related expenses: Special charge --- 15,541 40,198 Other merger related expenses --- --- 10,396 Check kiting fraud loss --- --- 6,095 Tax expense (benefit) on nonrecurring items 6,337 (6,077) (15,836) ---------- --------- -------- Subtotal 13,468 (9,464) (35,160) ---------- --------- -------- NET INCOME AS REPORTED $ 104,657 $ 90,660 $ 61,994 ========== ========= ======== - -----------------------------------------------------------------------------------------------------------------------------------
LINES OF BUSINESS REPORTING Citizens is managed along the following business lines: Commercial Banking, Retail Banking, Financial Services, F&M and Other. A description of each business, selected financial performance and the methodologies used to measure financial performance are presented in Note 18 to the Consolidated Financial Statements. Prior year amounts have been restated to reflect the current business unit structure and cost allocation methodology. The following table summarizes net income by line of business for each of the last three years:
- ------------------------------------------------------------- Net Income ------------------------------ (in thousands) 2001 2000 1999 - ------------------------------------------------------------- Commercial Banking $ 35,723 $ 35,789 $ 30,410 Retail Banking 40,409 33,401 20,430 Financial Services 6,508 6,354 4,794 F&M 20,065 25,967 11,202 Other 1,952 (10,851) (4,842) -------- -------- -------- Total $104,657 $ 90,660 $ 61,994 ======== ======== ======== - -------------------------------------------------------------
Commercial Banking net income in 2001 was consistent with the prior year as higher net interest income and noninterest income were offset by an increased provision for loan losses and higher operating expenses. Net interest income increased due to higher average commercial loan balances in 2001. The improvement in noninterest income reflects greater deposit service charges and increased cash management fees. The increased loan loss provision is the result of higher loan charge-offs. Operating expenses increased due to higher compensation and loan collection costs. Retail Banking net income improved due to increased noninterest income, nonrecurring gains on sale of assets and a lower provision for loan losses offset, in part, by a decline in net interest income and higher operating expenses. The growth in noninterest income before nonrecurring gains reflects increased mortgage income from higher mortgage loan origination volume and increased sales of new mortgage production into the secondary market. Noninterest income also increased due to greater title insurance fees and higher annuity sales by licensed retail bankers. In 2001, nonrecurring gains from the sale of securitized mortgages and the sale of the A-5 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) CITIZENS BANKING CORPORATION AND SUBSIDIARIES Michigan-based credit card portfolio totaled $5.2 million after tax. The provision for loan loss declined due to lower net charge-offs in the indirect loan and credit card portfolio. The decline in net interest income was due in part to the sale of the Michigan-based credit card portfolio in June 2001 and narrower interest spreads on retail deposits due to the lower interest rate environment. Net interest income also declined as a result of lower average balances in the mortgage portfolio. Mortgage loan balances declined due to the securitization and sale of $247 million of seasoned mortgage loans in the first half of 2001 and the sale of most new mortgage loan production throughout 2001. Financial Services net income improved slightly in 2001 despite lower revenue as operating expenses decreased more than the decline in noninterest income. Noninterest income decreased due to lower trust and brokerage revenues. Trust fees were impacted by the weak equity markets, which reduced asset values upon which fees are based. Lower transaction volume led to the decline in brokerage revenue. Operating expenses decreased due to lower volume-oriented incentive compensation and efficiencies achieved from the strategic realignment of the financial services organizational structure. The decline in net income at F&M reflects lower net interest income, a higher provision for loan losses and higher operating expenses, partially offset by an increase in noninterest income. The decrease in net interest income resulted from a decline in earning assets and a lower net interest margin. The higher loan loss provision resulted primarily from an increase in commercial loan net charge-offs. Net income in the Other category was favorably affected by an improvement in net interest income. Net interest income improved due to a decline in the cost of borrowed funds. The lower cost of borrowed funds resulted from the decrease in interest rates and a reduced reliance on borrowed funds due to the balance sheet restructuring activities. Net income was also favorably affected by a nonrecurring gain of $7.2 million after tax, on the sale of NYCE stock, an ATM network provider in which Citizens held an equity position. NET INTEREST INCOME The primary source of Citizens' traditional banking revenue is net interest income. Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, including interest-bearing deposits and borrowings, used to fund those assets. Net interest income is affected by market interest rates on both earning assets and interest-bearing liabilities, the level of earning assets being funded by interest-bearing liabilities, noninterest-bearing liabilities and equity, and the volume and composition of earning assets and funding sources. Other factors, such as Federal Reserve Board monetary policy and changes in tax laws, may also have an impact on changes in net interest income from one period to another. Net interest income, on a fully-taxable equivalent basis, decreased 1.9% to $322.8 million in 2001 from $329.0 million in 2000. A lower level of earning assets led to the decline. Earning assets were lower during 2001 due to balance sheet restructuring initiated to reduce interest rate risk and decrease reliance on borrowed funds. This balance sheet restructuring included the securitization and sale of $247 million of seasoned mortgage loans, the sale of most new mortgage loan production into the secondary market, the sale of the $30 million Michigan-based credit card portfolio, and the sale of the $27 million F&M Bank-Minnesota. Additionally, Citizens limited growth in its indirect lending portfolio and refocused the commercial loan portfolio in Wisconsin to de-emphasize certain types of commercial real estate lending. This resulted in lower earning assets in 2001 but improved net interest margin throughout the year. Net interest margin improved from 4.10% in the fourth quarter of 2000 to 4.48% in the fourth quarter of 2001. For the full year, net interest margin was 4.32%, unchanged from the prior year. An analysis of how changes in volume and rates have affected net interest income for the years ended December 31, 2001 and 2000 is presented in Table 2. A detailed analysis of net interest income, with average balances and related interest rates for the past three years, appears in Table 3. Interest income declined $48.4 million in 2001 due primarily to the lower interest rate environment and, to a lesser extent, the balance sheet restructuring. Yields on commercial loans were particularly impacted by lower interest rates as many of these loans vary directly with the prime interest rate. The prime rate was reduced 475 basis points throughout 2001 in response to the slower economy and Federal Reserve Board monetary policy. Certain consumer home equity loan yields, which vary with prime, were also negatively affected by the lower interest rate environment. The ratio of average loans to total earning assets declined slightly in 2001 to 81.3% from 81.8% in the prior year. Investment securities, including money market investments, comprise the remaining 18.7% of earning assets, up from 18.2% in 2000. The average yield on earning assets decreased to 7.87% in 2001 from 8.36% in 2000. Interest expense decreased $41.5 million in 2001 reflecting the lower interest rate environment and the reduction in borrowed funds due to the balance sheet restructuring. The average rates paid on all categories of interest bearing liabilities, except interest bearing demand deposits, decreased significantly in 2001 from the prior year reflecting the lower interest rate environment. Average rates paid on interest bearing demand accounts increased due to growth of a highly successful new product offering with a tiered rate structure, which pays higher rates of interest. Average interest bearing deposits declined $48.3 million or 0.9% in 2001 from the prior year as clients sought higher yielding investment alternatives such as fixed and variable annuities offered through Citizens' retail and brokerage units and to a lesser extent the sale of F&M Bank-Minnesota. Average short-term and long-term borrowings comprised 18.1% of interest bearing liabilities in 2001 down from 19.1% in the prior year. Average short-term borrowings declined A-6 $381.6 million as Citizens reduced reliance on borrowed funds through the balance sheet restructuring and extended maturities of borrowed funds as long term debt in the lower interest rate environment.
- --------------------------------------------------------------------------------------------------------------------------------- TABLE 2. ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE 2001 COMPARED TO 2000 2000 Compared to 1999 --------------------------------------------- ------------------------------------------ INCREASE (DECREASE) Increase (Decrease) Year Ended December 31 DUE TO CHANGE IN Due to Change in NET -------------------------- Net ------------------------- (in thousands) CHANGE(1) RATE VOLUME(2) Change(1) Rate Volume(2) - --------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Money market investments $ 2,091 $ (120) $ 2,211 $ (2,298) $ 493 $ (2,791) Investment securities: Taxable (9,107) (653) (8,454) 6,536 4,409 2,127 Tax-exempt 1,365 21 1,344 3,199 (163) 3,362 Loans: Commercial (9,614) (32,461) 22,847 67,166 9,684 57,482 Real estate (27,914) (943) (26,971) (8,734) 190 (8,924) Consumer (5,270) (4,384) (886) 14,580 1,724 12,856 -------- -------- -------- -------- -------- -------- Total (48,449) (38,540) (9,909) 80,449 16,337 64,112 -------- -------- -------- -------- -------- -------- INTEREST EXPENSE: Deposits: Demand 5,495 2,774 2,721 (479) (522) 43 Savings (20,410) (16,786) (3,624) 5,718 4,439 1,279 Time (9,293) (10,473) 1,180 27,027 13,916 13,111 Short-term borrowings (31,074) (10,060) (21,014) 34,840 6,767 28,073 Long-term debt 13,726 (2,866) 16,592 8,111 2,129 5,982 -------- -------- -------- -------- -------- -------- Total (41,556) (37,411) (4,145) 75,217 26,729 48,488 -------- -------- -------- -------- -------- -------- NET INTEREST INCOME $ (6,893) $ (1,129) $ (5,764) $ 5,232 $(10,392) $ 15,624 ======== ======== ======== ======== ======== ======== - ---------------------------------------------------------------------------------------------------------------------------------
(1) Changes are based on actual interest income and do not reflect taxable equivalent adjustments. (2) Rate/Volume variances are allocated to changes due to volume. A-7 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) CITIZENS BANKING CORPORATION AND SUBSIDIARIES
TABLE 3. AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES 2001 2000 1999 -------------------------------- -------------------------------- ---------------------------- Year Ended December 31 AVERAGE AVERAGE Average Average Average Average (in millions) BALANCE INTEREST(1) RATE(2) Balance Interest(1) Rate(2) Balance Interest(1) Rate(2) - ------------------------------------------------------------------------------------------------------------------------------------ EARNING ASSETS Money market investments $ 65.9 $ 2.3 3.50% $ 4.1 $ 0.3 5.67% $ 48.3 $ 2.5 5.24% Investment securities (3): Taxable 877.1 57.1 6.51 1,007.0 66.2 6.57 974.6 59.6 6.12 Tax-exempt 419.2 21.7 7.97 393.2 20.3 7.96 328.3 17.2 8.04 Loans (4): Commercial 3,440.8 269.7 7.93 3,178.2 279.3 8.89 2,525.1 212.1 8.51 Real estate mortgage 1,133.1 85.9 7.57 1,488.7 113.8 7.64 1,601.9 122.6 7.65 Consumer 1,535.2 136.8 8.91 1,535.2 142.1 9.26 1,401.9 127.5 9.10 -------- ------- -------- -------- ---------- ------- Total earning assets (3) 7,471.3 573.6 7.87 7,606.4 622.0 8.36 6,880.1 541.5 8.05 NONEARNING ASSETS Cash and due from banks 201.8 222.6 231.3 Premises and equipment 132.5 141.5 135.1 Investment security fair value adjustment 39.0 (21.5) (4.5) Other assets 172.4 204.2 171.6 Allowance for loan losses (81.2) (80.2) (71.4) -------- -------- ---------- Total assets $7,935.8 $8,073.0 $ 7,342.2 ======== ======== ========== INTEREST-BEARING LIABILITIES Deposits: Interest-bearing demand $ 744.8 14.0 1.88 $ 581.5 8.5 1.46 $ 578.5 9.0 1.55 Savings 1,474.5 34.8 2.36 1,701.7 55.2 3.24 1,751.6 49.5 2.83 Time 2,907.6 156.2 5.37 2,892.1 165.4 5.72 2,672.0 138.4 5.18 Short-term borrowings 538.7 27.5 5.09 920.3 58.5 6.36 478.9 23.7 4.95 Long-term debt 596.4 33.2 5.57 303.6 19.5 6.41 210.3 11.3 5.40 -------- ------- -------- -------- ---------- ------- Total interest-bearing liabilities 6,262.0 265.6 4.24 6,399.2 307.1 4.80 5,691.3 231.9 4.07 NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 881.2 946.1 904.6 Other liabilities 90.3 77.5 74.1 Shareholders' equity 702.4 650.2 672.2 -------- -------- ---------- Total liabilities and shareholders' equity $7,935.8 $8,073.0 $ 7,342.2 ======== ======== ========== NET INTEREST INCOME $ 308.0 $ 314.9 $ 309.6 ======= ======== ======= NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 4.32% 4.32% 4.68% - ------------------------------------------------------------------------------------------------------------------------------------
(1) Interest income is shown on an unadjusted basis and therefore does not include taxable equivalent adjustments. (2) Average rates include taxable equivalent adjustments to interest income of $14,835,000, $14,097,000, and $12,204,000 for the years ended December 31, 2001, 2000, and 1999, respectively, based on a 35% tax rate. (3) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts. (4) Nonaccrual loans are included in average balances. A-8
- -------------------------------------------------------------------------------------------------------------------------------- TABLE 4. SUMMARY OF LOAN LOSS EXPERIENCE Year Ended December 31 (in thousands) 2001 2000 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses - January 1 $ 80,070 $ 76,397 $ 69,740 $ 67,010 $ 59,029 Allowance of acquired (sold) banks and branches (240) -- 2,400 1,745 1,329 Provision for loan losses 26,407 20,983 24,675 16,528 20,511 CHARGE-OFFS: Commercial 18,265 10,920 8,675 4,557 4,555 Real estate 189 169 436 359 861 Consumer 14,278 14,359 17,751 14,879 13,064 ----------- ----------- ----------- ----------- ----------- Total charge-offs 32,732 25,448 26,862 19,795 18,480 ----------- ----------- ----------- ----------- ----------- RECOVERIES: Commercial 1,950 3,577 2,483 1,387 1,581 Real estate 47 45 149 28 12 Consumer 4,797 4,516 3,812 2,837 3,028 ----------- ----------- ----------- ----------- ----------- Total recoveries 6,794 8,138 6,444 4,252 4,621 ----------- ----------- ----------- ----------- ----------- Net charge-offs 25,938 17,310 20,418 15,543 13,859 ----------- ----------- ----------- ----------- ----------- Allowance for loan losses - December 31 $ 80,299 $ 80,070 $ 76,397 $ 69,740 $ 67,010 =========== =========== =========== =========== =========== Loans outstanding at year-end $ 5,922,406 $ 6,422,806 $ 5,917,483 $ 5,264,706 $ 5,074,230 Average loans outstanding 6,109,111 6,202,157 5,528,963 5,159,584 4,843,507 Ratio of allowance for loan losses to loans outstanding at year-end 1.36% 1.25% 1.29% 1.32% 1.32% Ratio of net loans charged off as a percentage of average loans outstanding 0.42 0.28 0.37 0.30 0.29 - --------------------------------------------------------------------------------------------------------------------------------
PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses represents a charge against income and a corresponding increase in the allowance for loan losses. The provision for loan losses was $26.4 million in 2001, up from $21.0 million in 2000. Net charge-offs in 2001 as a percentage of average loans were 0.42%, compared with 0.28% in 2000. The increase is the result of higher net charge-offs in the commercial loan portfolio, particularly in the F&M markets. A summary of Citizens' loan loss experience from 1997 through 2001 appears in Table 4. The allowance for loan losses at December 31, 2001 was $80.3 million, or 1.36% of loans, compared with $80.1 million, or 1.25% of loans at the end of 2000. At December 31, 2001, the allowance equaled 109.6% of nonperforming loans, compared with 130.5% at year-end 2000. The decline in the ratio of allowance for loan losses to nonperforming loans primarily reflects increases in nonperforming commercial and commercial real estate loans in 2001. The increase in nonperforming loans in these categories is reflected in the allowance for loan losses through specific and formula based allocations, as discussed below under the caption "Allowance Policy and Methodology". The allowance also incorporates the results of measuring impaired loans as provided in Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan". At December 31, 2001 total impaired loans were $62.1 million and the associated impairment allowance was $10.4 million, compared with $52.9 million and $5.1 million, respectively, at December 31, 2000. Citizens' maintains what management believes is an adequate allowance for possible loan losses to meet presently known credit risks in the loan portfolio. Citizens' loan portfolio has no significant concentrations in any one industry nor any exposure in foreign loans. Citizens has generally not extended credit to finance highly leveraged transactions nor does it intend to do so in the future. Employment levels and other economic conditions in Citizens' local markets may have a significant impact on the level of credit losses. Management continues to identify and devote attention to credits that may not be performing as well as expected. Nonperforming loans are further discussed in the section titled "Nonperforming Assets". ALLOWANCE POLICY AND METHODOLOGY Citizens maintains an allowance for credit losses to absorb losses inherent in the loan portfolio. The allowance analysis is based on a regular, quarterly assessment of the probable losses inherent in the loan portfolios. The methodology for measuring the adequacy of the allowance relies on several key elements, which include specific allowances for identified problem loans, reserves by formula and the unallocated allowance. A-9 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) CITIZENS BANKING CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------ TABLE 5. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES(1) 2001 2000 1999 1998 1997 ----------------- ----------------- ----------------- ----------------- ----------------- LOAN Loan Loan Loan Loan December 31 (in millions) AMOUNT PERCENT(2) Amount Percent(2) Amount Percent(2) Amount Percent(2) Amount Percent(2) - ------------------------------------------------------------------------------------------------------------------------------------ Commercial $ 42.0 54.8% $ 35.2 51.9% $ 21.3 48.6% $ 19.2 45.8% $ 16.7 40.7% Real estate construction 0.5 3.7 1.1 3.7 0.8 3.2 0.3 2.8 0.2 2.2 Real estate mortgage 3.5 16.4 5.9 20.0 6.0 24.3 8.2 26.9 7.9 28.4 Consumer 16.2 25.1 16.4 24.4 23.5 23.9 21.4 24.5 18.0 28.7 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total allocated 62.2 100.0% 58.6 100.0% 51.6 100.0% 49.1 100.0% 42.8 100.0% ======= ======= ======= ======= ======= Unallocated 18.1 21.5 24.8 20.6 24.2 ------- ------- ------- ------- ------- Total $ 80.3 $ 80.1 $ 76.4 $ 69.7 $ 67.0 ======= ======= ======= ======= ======= ====================================================================================================================================
(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) Percentage reflects the ratio of outstanding loans by category to total outstanding loans at the end of the respective year. Specific 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 a loss has been or will be incurred. Credits are identified based on quarterly reviews by our Credit Risk department 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. The allowance amount is determined by analyzing the financial condition, collateral value and other qualitative factors as well as by a method prescribed by SFAS No. 114, "Accounting by Creditors for Impairment of a Loan". The formula allowance is calculated by applying loss factors to outstanding loans (excluding specifically identified credits) based on loan type, accrual status and internal risk grade of such loans and pools of loans. Minimum loss factors for criticized loan categories are consistent with regulatory agency factors. Loss factors for non-criticized loan categories are determined based on historical (generally three-year) averages adjusted quarterly for recent loss experience in the specific portfolios. In addition, adjustments are made to any loss factor used in the computation of the formula allowance in the event that, in management's judgment, significant factors which affect the collectibility of the portfolio as of the valuation date, are not reflected in the loss factors. The unallocated portion of the allowance is determined based upon management's evaluation of various conditions, the effects of which are not directly measured in the determination of the specific and formula allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits. The conditions evaluated in connection with the unallocated allowance at December 31, 2001, included general economic and business conditions in Citizens' key lending markets, the level and composition of nonperforming loans, underwriting standards within specific portfolio segments, specific industry conditions within portfolio segments, collateral values, loan volumes and concentrations, regulatory examination results, internal credit examination results and other factors. Management reviews these conditions quarterly in discussion with Citizens' senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment, as of the evaluation date, management's estimate of the effect of such condition may be reflected as a specific allowance, applicable to such specific credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment, as of the evaluation date, management's evaluation of the probable loss related to such condition is reflected in the unallocated allowance. An allocation of the allowance for loan losses by major loan type at year-end for each of the last five years is presented in Table 5. CHANGES IN THE ALLOWANCE ALLOCATION The total "allocated" portion of the allowance for loan losses increased $3.6 million in 2001. This included an increase of $4.0 million in the specific allowance due to growth in the commercial and commercial real estate portfolios as well as increases in both the level of impaired loans and the degree of the impairment. The formula based allocated allowance decreased $0.4 million reflecting primarily a lower allocation factor for 2001 in the mortgage portfolio, offset in part, by an increase in classified credits. At December 31, 2001, the allocated portion of the allowance for credit losses included $29.8 million related to classified credits, compared to $21.0 million at December 31, 2000. Classified credits are those that are internally risk rated, special mention, or 8, substandard, or doubtful. Credits considered a loss are charged off. Special mention credits are potentially weak, as the borrower has begun to exhibit deteriorating trends which, if not corrected, could jeopardize A-10 repayment of the loan and result in further downgrade. Substandard credits have well-defined weaknesses which, if not corrected, could jeopardize the full satisfaction of the debt. A credit classified as "doubtful" has critical weaknesses that make full collection improbable. The allocation methods used for December 31, 2001 and 2000 were consistent. As shown in Table 5, the allocation of the allowance for loan losses related to commercial and commercial real estate loans, increased $6.8 million to $42.0 million at December 31, 2001 from the prior year-end. The increase was a function of changes in the commercial and commercial real estate category, including: a greater amount of loans in criticized categories and a corresponding increase in specific allocations in 2001 compared to 2000. Nonperforming commercial and commercial real estate loans increased to $48.0 million, or 1.5% of total commercial loans, at year-end 2001 from $37.2 million, or 1.1%, a year ago. Commercial real estate loans represented $11.1 million in 2001 and $12.5 million in 2000 of such nonperforming loans. Management believes the risk of loss in the commercial real estate nonperforming loans is significantly less than the total principal balance, due to the nature of the underlying collateral and the value of such collateral to the total credit exposure. These loans are generally for owner-occupied properties and do not rely on the performance of the real estate market to generate funds for repayment. The amount allocated to residential construction and real estate loans at December 31, 2001 decreased to 5.0% of the allowance for loan losses from 8.7% in 2000. This decrease was predominately a function of lower loan balances from balance sheet restructuring efforts in 2001 and a reduction in the allocation factor. Nonperforming loans in this portfolio remained essentially the same from the prior year and historical loss ratios in this portfolio are very low. The decrease in amount allocated to the consumer loan portfolio in 2001 was predominantly a function of the sale of $30 million of credit card receivables in mid 2001 and fewer net loan losses in the remaining consumer portfolio for the year ended December 31, 2001. Nonperforming consumer loans comprised 0.54% of total consumer loans at year-end 2001, up from 0.45% a year ago. Management expects net loan charge-offs in this portfolio to remain stable, primarily due to a risk-adjusted pricing structure and aggressive collection efforts. At December 31, 2001, the unallocated allowance decreased $3.4 million from the previous year-end because management believed that the inherent losses related to certain conditions, described previously under the caption "Allowance Policy and Methodology" considered in its evaluation of the unallocated allowance at December 31, 2000 had been recognized through charge-off, had been reflected in the formula or specific allowance, or had declined. NONINTEREST INCOME Noninterest income, before nonrecurring items and securities gains and losses, increased to $96.9 million in 2001 from $90.3 million in 2000, an improvement of 7.2%. On this same basis, noninterest income accounted for 23.9% of total operating revenue in 2001, compared with 22.3% in 2000. The increase is primarily due to higher mortgage loan originations and the subsequent sale of those mortgages in the secondary market. - --------------------------------------------------------------------------------
NONINTEREST INCOME Year Ended December 31, Changes in 2001 ---------------------- ------------------------ (in thousands) 2001 2000 Amount Percent - ----------------------------------------------------------------------------------- Service charges on deposit accounts $ 27,773 $ 26,260 $ 1,513 5.8% Trust fees 21,028 24,253 (3,225) (13.3) Mortgage and other loan income 13,159 4,997 8,162 163.3 Bankcard fees 11,799 11,258 541 4.8 Brokerage and investment fees 8,157 7,693 464 6.0 ATM network user fees 3,448 3,202 246 7.7 Cash management services 2,855 2,651 204 7.7 Title insurance fees 1,906 1,121 785 70.0 Other 6,728 8,909 (2,181) (24.5) -------- -------- ------- TOTAL FEES & OTHER INCOME 96,853 90,344 6,509 7.2 Securities gains 823 -- 823 -- -------- -------- ------- TOTAL BEFORE NONRECURRING ITEMS 97,676 90,344 7,332 8.1 Equity investment gain 11,017 -- 11,017 -- Gain on securitized mortgages 5,372 -- 5,372 -- Gain on sale of credit card 2,623 -- 2,623 -- Gain on sale of bank 793 -- 793 -- -------- -------- -------- TOTAL NONINTEREST INCOME $117,481 $ 90,344 $ 27,137 30.0 ======== ======== ========
=============================================================================== Service charges on deposit accounts increased $1.5 million or 5.8% reflecting new marketing strategies and pricing structures. Trust fees were down $3.2 million in 2001 as the value of managed assets upon which fees are based declined due to the weak equity markets. Total trust assets under administration were $3.162 billion at December 31, 2001 compared to $3.448 billion at December 31, 2000. Mortgage and other loan income was up $8.2 million, or 163.3% in 2001 due to higher gains on the sale of loans. Mortgage originations totaled $1.1 billion in 2001 compared to $457 million in 2000. The majority of all new mortgage loan originations were sold in the secondary market during 2001 resulting in higher gains on the sale of such loans and the related servicing. The higher mortgage loan volume also resulted in increased title insurance fees of 70.0% in 2001 over the comparable period in 2000. Bankcard fees increased 4.8% in 2001 generated by higher volume of debit card and merchant transactions, offset in part by lower credit card fees due to the midyear sale of the Michigan credit card portfolio. Brokerage and investment fees increased 6.0% to $8.2 million in 2001 compared to $7.7 million in 2000 due to successful A-11 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) CITIZENS BANKING CORPORATION AND SUBSIDIARIES retail efforts. Citizens recorded a gain of $5.4 million from the sale of $247 million of securitized mortgage loans in the first half of 2001. This sale was part of Citizens' strategy to restructure the balance sheet to decrease reliance on borrowed funds and minimize interest rate risk. In addition to the gain on sale of securitized mortgages, Citizens recorded net gains of $823,000 on other investment securities during 2001. As presented in Note 5 to the Consolidated Financial Statements, Citizens realized gross gains on sale of investment securities of $6.2 million and gross losses of $7,000 in 2001. In 2000 gross realized gains of $67,000 were offset by losses realized of $67,000. Nonrecurring income in 2001 consisted of a $793,000 gain on the sale of F&M Bank-Minnesota, $2.6 million gain on sale of credit card assets, the aforementioned $5.4 million gain from the securitization and subsequent sale of $247 million of portfolio mortgage loans and a gain on the sale of NYCE stock of $11.0 million. NYCE Corporation was an ATM network provider in which Citizens held an equity interest. NONINTEREST EXPENSE Excluding the Special Charge in 2000, noninterest expense increased $9.0 million, or 3.7%, to $251.2 million in 2001 from $242.2 million in the prior year. Increased incentive-based compensation, pension costs and professional service expenses generated the majority of the increase. Salaries and employee benefits increased $3.7 million, or 3.0%, in 2001 over 2000 due to normal merit increases, higher incentive-based compensation and increased pension costs. Occupancy costs were up $943,000 or 5.6% due to increased maintenance and energy costs. Professional services increased $2.2 million, or 21.7% due to higher legal costs associated with loan and other collection activities, increased technology support costs at F&M and other Corporate initiatives. Postage and delivery expenses increased 11.9% due to centralization of the check processing operations and outsourcing of the cash vault function. Partially offsetting this increase were reductions in staffing costs. Telephone and stationery and supplies expense decreased $2.0 million due to efficiencies from the F&M merger and expense reduction initiatives. Other expenses increased to $19.2 million in 2001 from $17.3 million in the prior year primarily due to an increase of $1.6 million in forgery, fraud and other losses. The Special Charge in 2000 included $12.3 million of merger-related integration costs and an additional $3.2 million of restructuring and other costs associated with separate strategic initiatives and impairment write-offs. These charges are more fully described under the caption "Mergers, Acquisitions, Divestitures and Other Initiatives" on page 4 of this report and in Note 3 of the Consolidated Financial Statements. All initiatives in respect to these Special Charges were completed by December 31, 2001. - --------------------------------------------------------------------------------
NONINTEREST EXPENSE Year Ended December 31, Changes in 2001 -------------------------- ------------------------------ (in thousands) 2001 2000 Amount Percent - ------------------------------------------------------------------------------------------ Salaries and employee benefits $126,278 $122,577 $ 3,701 3.0% Equipment 19,317 19,264 53 0.3 Occupancy 17,713 16,770 943 5.6 Data processing services 13,101 12,608 493 3.9 Professional services 12,277 10,088 2,189 21.7 Intangible asset amortization 11,063 10,733 330 3.1 Bankcard fees 9,308 8,959 349 3.9 Postage and delivery 7,746 6,924 822 11.9 Telephone 5,556 6,364 (808) (12.7) Advertising and public relations 5,219 5,034 185 3.7 Stationery and supplies 4,426 5,602 (1,176) (21.0) Other 19,179 17,298 1,881 10.9 -------- -------- -------- SUBTOTAL 251,183 242,221 8,962 3.7 Special Charge -- 15,541 (15,541) (100.0) -------- -------- -------- TOTAL NONINTEREST EXPENSE $251,183 $257,762 $ (6,579) (2.6) ======== ======== ========
- -------------------------------------------------------------------------------- FEDERAL INCOME TAXES Income tax expense was $43.2 million in 2001, an increase of 20.7% over the 2000 total of $35.8 million. The increase reflected higher pre-tax earnings. The Corporation's effective tax rate was 29.2% in 2001 and 28.3% in 2000. The Corporation's effective tax rate is lower than the statutory tax rate due to tax-exempt interest income. FINANCIAL CONDITION Proper management of the volume and composition of Citizens' earning assets and funding sources is essential for ensuring strong and consistent earnings performance, maintaining adequate liquidity and limiting exposure to risks caused by changing market conditions. Citizens' investment securities portfolio is structured to provide a source of liquidity through maturities and generate an income stream with relatively low levels of principal risk. Loans comprise the largest component of earning assets and are Citizens' highest yielding assets. Client deposits are the primary source of funding for earning assets while short-term debt and other managed sources of funds are utilized as market conditions and liquidity needs change. Average total assets for 2001 were $7.936 billion, a decrease of $137 million or 1.7% from 2000. Average earning assets as a percent of average total assets was 94.6% for 2001, up from 94.0% in 2000. Average loans comprised 77.0% of average assets during 2001, up slightly from 76.8% in 2000. Interest-bearing deposits comprised 81.9% of average interest-bearing liabilities for 2001, increasing from 80.9% in 2000. The ratio of average noninterest-bearing deposits to average deposits decreased to 14.7% in 2001, from 15.5% in 2000. A-12 INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS Average investment securities, including money market investments, comprised 18.7% of total average earning assets in 2001, up from 18.2% in 2000. The increase is consistent with the overall balance sheet restructuring initiatives and the decline in loans as a percentage of earning assets. Mortgage-backed assets declined $22.4 million or 3.7% in 2001 as prepayment rates increased on these securities in the declining rate environment. State and municipal securities were purchased during 2001 due to their higher tax equivalent yields and Citizens' capacity to utilize tax-exempt income. At December 31, 2001, state and municipal securities represented 35.2% of total investment securities, compared with 31.1% in the prior year. Other securities, consisting primarily of Federal Reserve stock, Federal Home Loan Bank stock and privately issued asset-backed securities, remained virtually unchanged from 2000 as a percentage of total investment securities. Money market investments primarily federal funds sold and government money market investments averaged $65.9 million for 2001, up from $4.1 million in 2000. The amount of funds invested in these assets is based on the present and anticipated interest rate environment, liquidity needs and other economic factors. Citizens' present policies with respect to the classification of investments in debt and equity securities are discussed in Note 1 to the Consolidated Financial Statements. A summary of investment securities available for sale at December 31, 2001 and 2000 is presented below. Maturities and average yields of available for sale securities at year-end 2001 is presented in Table 6. As of December 31, 2001, the estimated aggregate fair value of Citizens' investment securities portfolio was $34.3 million above amortized cost consisting of gross unrealized gains of $36.9 million and gross unrealized losses of $2.6 million. A summary of estimated fair values and unrealized gains and losses for the major components of the investment securities portfolio is provided in Note 5 to the Consolidated Financial Statements. - --------------------------------------------------------------------------------
AVAILABLE FOR SALE SECURITIES Balances Changes in 2001 ------------------------------ ---------------------------- Year Ended December 31 (in thousands) 2001 2000 Amount Percent - ----------------------------------------------------------------------------------------------------------------- U.S. Treasury $ 8,163 $ 21,490 $ (13,327) (62.0)% Federal agencies Mortgage-backed securities 565,393 582,618 (17,225) (3.0) Other agencies 166,236 269,127 (102,891) (38.2) State and municipal: Taxable 10,776 12,257 (1,481) (12.1) Tax-exempt 433,180 418,518 14,662 3.5 Mortgage and asset-backed 10,558 15,755 (5,197) (33.0) Other securities 65,200 64,343 857 1.3 ---------- ---------- ---------- Total $1,259,506 $1,384,108 $ (124,602) (9.0) ========== ========== ========== ================================================================================================================== - ------------------------------------------------------------------------------------------------------------------
TABLE 6. MATURITIES AND AVERAGE YIELDS OF AVAILABLE FOR SALE SECURITIES AT DECEMBER 31, 2001 U.S. Treasury and Federal Agency(1) State and Municipal(1), (2) --------------------------------- ------------------------------------------ Amortized Fair Amortized Fair (in millions) Cost Value Yield Cost Value Yield - ---------------------------------------------------------------------------------------------------------- Due within one year $ 114.6 $ 115.7 4.96% $18.8 $ 19.1 7.80% One to five years 493.6 515.6 6.60 79.1 82.3 7.71 Five to ten years 94.7 94.3 6.92 157.6 163.5 8.00 After ten years 14.3 14.2 4.98 176.9 179.1 7.46 -------- -------- -------- -------- Total $ 717.2 $ 739.8 6.35 $ 432.4 $ 444.0 7.66 ======== ======== ======== ======== ======= Average maturity (3) 3.62 yrs 7.63 yrs. Other(1) Total ---------------------------------- -------------------------------------------- Amortized Fair Amortized Fair Cost Value Yield Cost Value Yield -------------------------------------------------------------------------------- Due within one year $ 4.3 $ 4.7 6.27% $ 137.7 $ 139.5 5.39% One to five years 7.7 6.0 5.70 580.4 603.9 6.74 Five to ten years 1.4 2.5 5.46 253.7 260.3 7.58 After ten years 62.2 62.5 6.21 253.4 255.8 7.02 ------ ------- --------- --------- Total $ 75.6 $ 75.7 6.18 $ 1,225.2 $ 1,259.5 6.82 ====== ======= ========= ========= Average maturity (3) 3.25 yrs. 5.09 yrs. ================================================================================================================== (1) Maturities for Federal agency, collateralized mortgage obligations and asset-backed securities are based upon projections of independent cash flow models. Maturities for state and municipal securities incorporate early call features, if applicable. (2) Yields for state and municipal securities are calculated on a tax equivalent basis using a 35% tax rate. (3) Average maturity information excludes Federal Reserve and Federal Home Loan Bank stocks with no stated maturity.
A-13 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) CITIZENS BANKING CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------ TABLE 7. LOAN PORTFOLIO (in millions) 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ LOANS OUTSTANDING AT DECEMBER 31 Commercial $ 1,923.4 $ 2,127.2 $ 1,822.4 $ 1,619.9 $ 1,370.3 Commercial real estate 1,323.0 1,205.0 1,053.0 790.5 694.0 Real estate construction 216.0 235.1 185.4 149.5 113.5 Real estate mortgage 971.5 1,282.8 1,440.1 1,417.9 1,439.4 Consumer 1,488.5 1,572.7 1,416.6 1,286.9 1,457.0 ---------- ---------- ---------- ---------- ---------- Total $ 5,922.4 $ 6,422.8 $ 5,917.5 $ 5,264.7 $ 5,074.2 ========== ========== ========== ========== ========== LOAN MATURITIES AND INTEREST RATE SENSITIVITY AT DECEMBER 31, 2001 Within One to After One Year Five Years Five Years Total - --------------------------------------------------------------------------------------------------------------- Commercial and commercial real estate $ 1,363.7 $ 1,669.6 $ 213.1 $ 3,246.4 Real estate construction 216.0 -- -- 216.0 ---------- ---------- -------- ---------- Total $ 1,579.7 $ 1,669.6 $ 213.1 $ 3,462.4 ========== ========== ======== ========== Loans above: With floating interest rates $ 994.5 $ 414.9 $ 96.4 $ 1,505.8 With predetermined interest rates 585.2 1,254.7 116.7 1,956.6 ---------- ---------- -------- ---------- Total $ 1,579.7 $ 1,669.6 $ 213.1 $ 3,462.4 ========== ========== ======== ========== ===============================================================================================================
LOANS Citizens extends credit primarily within the local markets of its banking subsidiaries located in Michigan, Wisconsin, Iowa and Illinois. Citizens' loan portfolio contains no loans to foreign governments, enterprises or foreign operations of domestic companies and is widely diversified by borrowers with no concentration within a single industry that exceeds 10% of total loans. Loan balances at December 31 and an analysis of the maturity and interest rate sensitivity of commercial and real estate construction loans is presented above. Total loans decreased $500.4 million or 7.8% in 2001 with average loans comprising 81.3% of total average earning assets during 2001, as compared with 81.8% during 2000. Commercial and commercial real estate loans decreased $85.8 million, or 2.6%, in 2001 from year-end 2000. A reduction of $182.0 million in commercial loans occurred within the F&M markets as a result of business loan portfolio restructuring and the implementation of Citizens' credit standards and loan structuring criteria in these markets. Commercial loans in the Michigan market grew 4.9% in 2001 from the prior year-end, a slower rate than the previous year due to the slowing economy. Residential mortgage loan balances declined $311.3 million, or 24.3% in 2001 from the prior year-end. The decline in mortgage loans reflects the securitization and sale of $247 million of portfolio mortgage loans and the sale of new mortgage loan production into the secondary market as part of the balance sheet restructuring initiatives. Consumer loans, which include installment and home equity loans, decreased $84.2 million, or 5.4%, to $1.489 billion at year-end 2001. The decline in consumer loans reflects the sale of $30 million of credit card assets, declines in the indirect lending portfolio and decreased direct auto loans, partially offset by growth in home equity loans. At December 31, 2001 and 2000, $257.9 million and $362.3 million, respectively, of residential real estate loans originated and subsequently sold in the secondary market were being serviced by Citizens bank. Capitalized servicing rights relating to the service loans totaled $1.7 million at December 31, 2001 and $2.7 million at year-end 2000. NONPERFORMING ASSETS A five-year history of nonperforming assets is presented in Table 8. Nonperforming assets are comprised of nonaccrual, restructured loans and repossessed assets. Although these assets have more than a normal risk of loss, they will not necessarily result in a higher level of losses in the future. Nonperforming assets totaled $79.2 million as of December 31, 2001, an increase of 19.5% from the year-end 2000 balance of $66.3 million. As a percentage of total assets, nonperforming assets increased to 1.03% at December 31, 2001, from 0.79% at December 31, 2000. The increase is primarily attributable to higher nonperforming commercial loans at the F&M Banks. A-14
- ------------------------------------------------------------------------------------------------------------------------ TABLE 8. NONPERFORMING ASSETS AND PAST DUE LOANS December 31 (in thousands) 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ NONPERFORMING LOANS(1),(2) Nonaccrual Less than 30 days past due $ 6,528 $ 7,237 $ 1,661 $ 2,016 $ 5,128 From 30 to 89 days past due 5,218 7,297 772 1,641 2,021 90 or more days past due 57,047 44,881 26,498 31,485 28,813 ------- ------- ------- ------- ------- Total 68,793 59,415 28,931 35,142 35,962 90 days past due and still accruing 4,168 889 2,139 2,474 3,022 Restuctured (1) 337 1,068 9 114 446 ------- ------- ------- ------- ------- Total nonperforming loans 73,298 61,372 31,079 37,730 39,430 OTHER REPOSSESSED ASSETS ACQUIRED 5,947 4,917 4,039 4,790 4,869 ------- ------- ------- ------- ------- Total nonperforming assets $79,245 $66,289 $35,118 $42,520 $44,299 ======= ======= ======= ======= ======= Nonperforming assets as a percent of total loans plus other repossessed assets acquired 1.34% 1.03% 0.59% 0.81% 0.87% Nonperforming assets as a percent of total assets 1.03 0.79 0.45 0.61 0.67 NONPERFORMING LOANS BY TYPE Commercial $47,978 $37,229 $18,005 $19,830 $23,031 Real estate mortgage 17,304 17,057 7,366 8,032 9,487 Consumer 8,016 7,086 5,708 9,868 6,912 ------- ------- ------- ------- ------- Total $73,298 $61,372 $31,079 $37,730 $39,430 ======= ======= ======= ======= ======= ========================================================================================================================
(1) Nonperforming loans include loans on which interest is being recognized only upon receipt (nonaccrual), those on which interest has been renegotiated to lower than market rates because of the financial condition of the borrowers (restructured), and loans 90 days past due and still accruing. (2) Gross interest income that would have been recorded in 2001 for nonaccrual and restructured loans, as of December 31, 2001, assuming interest had been accrued throughout the year in accordance with original terms was $6.392 million. The comparable 2000 and 1999 totals were $4.953 million, and $3.383 million, respectively. Interest collected on these loans and included in income was $3.344 million in 2001, $3.045 million in 2000 and $1.861 million in 1999. Therefore, on a net basis, total income foregone due to these loans was $3.048 million in 2001, $1.908 million in 2000 and $1.522 million in 1999. Nonperforming commercial and commercial real estate loans increased to $48.0 million at year-end 2001 from $37.2 million a year ago. These loans comprised 65.5% of total nonperforming loans at December 31, 2001, compared with 60.7% in 2000. Commercial real estate loans represented $11.1 million in 2001 and $12.5 million in 2000 of such nonperforming loans. The increase in nonperforming commercial and commercial real estate loans is reflected in the allowance for loan losses through specific and formula based loss allocations as of December 31, 2001. The loss allocation for commercial and commercial real estate loans increased $6.8 million to $42.0 million at December 31, 2001 from the prior year-end. Management believes, as previously stated, that the risk of loss in the commercial real estate nonperforming loans is significantly less than the total principal balance, due to the nature of the underlying collateral and the value of such collateral to the total credit exposure. These loans are generally for owner-occupied properties and do not rely on the performance of the real estate market to generate funds for repayment. The consumer portfolio is comprised of automobile, personal, marine and other recreational vehicle, home equity and credit card loans of which automobile and home equity comprise 50.0% of 2001 average balances. At December 31, 2001, consumer loans represented 10.9% of nonperforming loans, down from 11.5% in 2000. Citizens maintains formal policies and procedures to control and monitor credit risk within these portfolios. Based upon present information, management believes the allowance for loan losses is adequate to meet presently known credit risks. The level and composition of nonperforming assets are affected by economic conditions in Citizens' local markets. Nonperforming assets, charge-offs and provisions for loan losses tend to decline in a strong economy and increase in a weak economy, potentially impacting Citizens' results. In addition to loans classified as nonperforming, management carefully monitors other credits that are current in terms of principal and interest payments but, in management's opinion, may deteriorate in quality if economic conditions change. As of December 31, 2001, such loans amounted to $78.9 million or 1.3% of total loans compared with $70.2 million or 1.1% of total loans as of December 31, 2000. These loans are primarily commercial and commercial real estate loans made in the normal course of business and do not represent a concentration in any one industry. Under Citizens' credit policies and practices, a loan is placed on nonaccrual status when there is doubt regarding A-15 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) CITIZENS BANKING CORPORATION AND SUBSIDIARIES collection of principal or interest, or when principal or interest is past due 90 days or more and the loan is not well secured and in the process of collection. Interest accrued but not collected is reversed and charged against income when the loan is placed on nonaccrual status. A loan is considered impaired when management determines it is probable that all the principal and interest due under the contractual terms of the loans 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 loan's effective interest rate. Citizens maintains a valuation allowance for impaired loans. Interest income on impaired nonaccrual loans is recognized on a cash basis. Interest income on all other impaired loans is recorded on an accrual basis. Certain of Citizens' nonperforming loans included in Table 8 are considered to be impaired. Citizens measures impairment on all large balance nonaccrual commercial and commercial real estate loans. Certain large balance accruing loans rated substandard or lower are also measured for impairment. Impairment losses are included in the provision for loan losses. The policy does not apply to large groups of smaller balance homogeneous loans that are collectively evaluated for impairment, except for those loans restructured under a troubled debt restructuring. Loans collectively evaluated for impairment include certain smaller balance commercial loans, consumer loans, residential real estate loans, and credit card loans, and are not included in the impaired loan data in the following paragraphs. At December 31, 2001, loans considered to be impaired totaled $62.1 million of which $43.5 million were on a nonaccrual basis. Included within this amount is $39.8 million of impaired loans for which the related allowance for loan losses is $10.4 million and $22.3 million of impaired loans for which fair value exceeded the recorded investment in the loan. The average recorded investment in impaired loans during the year ended December 31, 2001 was approximately $78.0 million. For the year ended December 31, 2001, Citizens recognized interest income of $3.3 million on impaired loans. Cash collected on nonaccrual impaired loans totaled $3.1 million which was applied to principal. At December 31, 2000, loans considered to be impaired totaled $52.9 million of which $36.3 million were on a nonaccrual basis. Included with this amount is $32.5 million of impaired loans for which the related allowance for loan losses is $5.1 million and $20.4 million of impaired loans for which the fair value exceeded the recorded investment in the loan. The average recorded investment in impaired loans during the year ended December 31, 2000 was approximately $38.9 million. For the year ended December 31, 2000, Citizens recognized interest income of $2.5 million on impaired loans. Cash collected on nonaccrual impaired loans totaled $2.3 million of which $1.2 million was applied to principal and $1.1 million was recognized using the cash basis method of income recognition. During 2001, Citizens' banking subsidiaries received a normally scheduled examination by their governing regulatory agencies. There was no material reclassification of assets as nonperforming resulting from these examinations.
- ---------------------------------------------------------------------------------------------------------------------------- TABLE 9. AVERAGE DEPOSITS 2001 2000 1999 -------------------- ---------------------- ---------------------- AVERAGE AVERAGE Average Average Average Average Year Ended December 31 (in millions) BALANCE RATE Balance Rate Balance Rate - --------------------------------------------------------------- ---------------------- ---------------------- Noninterest-bearing demand $ 881.2 --% $ 946.1 --% $ 904.6 --% Interest-bearing demand 744.8 1.88 581.5 1.46 578.5 1.55 Savings 1,474.5 2.36 1,701.7 3.24 1,751.6 2.83 Time 2,907.6 5.37 2,892.1 5.72 2,672.0 5.18 ---------- ---------- ---------- Total $ 6,008.1 3.41 $ 6,121.4 3.74 $ 5,906.7 3.33 ========== ========== ========== ============================================================================================================================
DEPOSITS Average deposit balances and rates for the past three years are summarized in Table 9. Total average deposits were 1.9% lower in 2001 as compared with 2000. Time and interest bearing demand deposits increased while savings deposits and noninterest bearing demand deposits decreased. Average interest-bearing demand balances increased 28.1% in 2001 versus the prior year primarily due to growth of a highly successful new product offering which pays higher rates of interest. Time deposits increased 0.5% in 2001 as compared with 2000 primarily due to an increase in average brokered deposit balances. Savings accounts and noninterest bearing demand deposits declined 13.4% and 6.9%, respectively, in 2001 due to a shift in client preferences, particularly in F&M's Wisconsin market, from noninterest bearing demand and money market savings accounts to the new higher-rate interest bearing demand product. The overall average rate for the deposit portfolio declined in 2001 to 3.41% from 3.74% in 2000. The decrease was the result of the lower interest rate environment in 2001. As of December 31, 2001, certificates of deposits of $100,000 or more accounted for approximately 13.7% of total deposits. The maturities of these deposits are summarized in Table 10. A-16 - -------------------------------------------------------------------------------- TABLE 10. MATURITY OF TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE AT DECEMBER 31, 2001 (in thousands) - -------------------------------------------------------------------------------- Three months or less $314,552 After three but within six months 90,901 After six but within twelve months 261,996 After twelve months 150,926 --------- Total $818,375 =========
================================================================================ Citizens gathers deposits primarily from the local markets of its banking subsidiaries and has not traditionally relied on purchased deposits for any significant funding. Brokered deposits and time deposits greater than $100,000 declined $219 million at December 31, 2001 from the prior year end due to the balance sheet restructuring initiatives. Citizens will continue to evaluate the use of alternative funding sources such as brokered deposits as funding needs change. Management continues to promote relationship driven core deposit growth and stability through focused marketing efforts and competitive pricing strategies. BORROWED FUNDS Short-term borrowings are comprised primarily of Federal funds purchased, securities sold under agreements to repurchase, FHLB advances and Treasury Tax and Loan notes. Total short-term borrowings averaged $538.7 million in 2001 or 8.6% of total average interest-bearing liabilities, compared with $920.3 million or 14.4% during 2000. The decline in short-term borrowings is a result of the balance sheet restructuring and the extension of debt maturities in the lower interest rate environment. See Note 10 to the Consolidated Financial Statements for additional information on short-term borrowings. As of December 31, 2001, Citizens' Parent company maintained a $75 million short-term revolving credit facility with three unaffiliated banks, which had an unused commitment of $45 million. The current facility will mature on August 29, 2002 and is expected to renew at that time. The interest rate on the $30 million outstanding at December 31, 2001 reprices daily and is based on the Federal funds rate. The Parent company services the debt's principal and interest payments with dividends from the subsidiary banks. The agreement also requires Citizens to maintain certain financial covenants. Citizens is in full compliance with all debt covenants as of December 31, 2001. Long-term debt comprised primarily of FHLB notes, accounted for $596.4 million, or 9.5%, of average interest-bearing funds during 2001 increasing from $303.6 million or 4.7% during 2000. This increase reflects an extension of wholesale funding maturities in the low interest rate environment. A summary of long-term debt balances as of December 31, 2001 and 2000 appears in Note 11 to the Consolidated Financial Statements. Borrowed funds are expected to remain an important, reliable and cost-effective funding vehicle for Citizens and its subsidiary banks. CAPITAL RESOURCES Citizens continues to maintain a strong capital position which supports its current needs and provides a sound foundation to support further expansion. At December 31, 2001, shareholders' equity was $697.5 million, compared with $680.0 million at December 31, 2000. Book value per common share at December 31, 2001 and 2000 was $15.46 and $14.62, respectively. Citizens has consistently maintained regulatory capital ratios at or above the "well-capitalized" standards and all bank subsidiaries of Citizens have sufficient capital to maintain a well-capitalized designation. Citizens' capital ratios for the past three years are presented below. - --------------------------------------------------------------------------------
Regulatory Minimum ---------------------- "Well- December 31, ---------------------------- Required Capitalized" 2001 2000 1999 - ------------------------------------------------------------------- Risk based: Tier 1 capital 4.00% 6.00% 9.87% 9.05% 9.22% Total capital 8.00 10.00 11.12 10.30 10.47 Tier 1 leverage 4.00 5.00 7.79 7.11 7.21 - -------------------------------------------------------------------
During 2001, Citizens maintained two stock repurchase plans. The stock repurchase plan initiated in May 2000 allowed for the repurchase of up to 3,000,000 shares of common stock for general bank purposes. As of December 31, 2000, 1,234,100 shares had been purchased under this plan. Citizens purchased the remaining 1,765,900 shares under this plan in 2001. In October 2001, a new plan was approved to repurchase up to an additional 3,000,000 shares of Citizens common stock for general corporate purposes. At December 31, 2001, 187,700 shares of common stock had been purchased under this plan. For the year ended December 31, 2001 a total of 1,953,600 shares were purchased under the plans at an average price of $29.94. Citizens declared cash dividends of $1.085 per share in 2001, an increase of 6.9% over 2000 dividends of $1.015 per share. Citizens has paid dividends every year since 1892 except for several years during the depression of the 1930's. A-17 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) CITIZENS BANKING CORPORATION AND SUBSIDIARIES LIQUIDITY AND DEBT CAPACITY The liquidity position of Citizens is monitored for its subsidiaries and its Parent company to ensure that funds are available at a reasonable cost to meet financial commitments, to finance business expansion and to take advantage of unforeseen opportunities. Citizens' subsidiary banks derive liquidity primarily through core deposit growth, maturity of money market investments, and maturity and sale of investment securities and loans. Additionally, Citizens' subsidiary banks have access to market borrowing sources on an unsecured, as well as a collateralized basis, for both short-term and long-term purposes including, but not limited to, the Federal Reserve and Federal Home Loan Banks where the subsidiary banks are members. Another source of liquidity is the ability of Citizens' Parent company to borrow funds on both a short-term and long-term basis. The parent has established borrowing facilities with a group of unaffiliated banks and has used portions of this revolving credit agreement for various corporate purposes. Proactive management of Citizens' liquidity capacity and generation has increased sources of funds and borrowing capacities enabling Citizens and its subsidiary banks to operate effectively, safely and with improved profitably. The subsidiary banks manage liquidity to meet client cash flow needs while maintaining funds available for loan and investment opportunities. As discussed in Note 19 to the Consolidated Financial Statements, the Federal Reserve Bank requires Citizens' banking subsidiaries to maintain certain noninterest-bearing deposits with the Federal Reserve Bank. These balance requirements averaged $41.9 million and $56.8 million during 2001 and 2000, respectively, and were primarily satisfied with cash balances maintained by Citizens' subsidiaries. The liquidity of the Parent company is managed to provide funds to pay dividends to shareholders, service debt, invest in subsidiaries and to satisfy other operating requirements. The primary source of liquidity for the Parent company is dividends and returns of investment from its subsidiaries. During 2001, the Parent company received $107.4 million in dividends from subsidiaries and paid $50.2 million in dividends to its shareholders. Despite the higher level of dividends to the Parent, all Citizens' subsidiary banks maintained sufficient capital to be designated well capitalized. As discussed in Note 19 to the Consolidated Financial Statements, approximately $24.8 million was available as of January 1, 2002 for payment to the Parent company as dividends by Citizens' banking subsidiaries without further regulatory approval. Amounts earned by subsidiaries in 2002 will also become available for such dividend payments. Additional amounts may be available for payment subject to regulatory approval. Citizens' long-term debt to equity ratio was 90.2% as of December 31, 2001 compared to 69.3% in 2000. Changes in long-term debt during 2001 are discussed in the section titled "Borrowed Funds". Management believes that Citizens has sufficient liquidity and capacity sources to meet presently known cash flow requirements arising from ongoing business transactions. INTEREST RATE RISK Interest rate risk generally arises when the maturity or repricing structure of Citizens' assets and liabilities differ significantly. Asset/liability management, used by Citizens to address such risk, is the process of developing, testing and implementing strategies that seek to maximize net interest income, maintain sufficient liquidity and minimize exposure to significant changes in interest rates. This process includes monitoring contractual and expected repricing of assets and liabilities as well as forecasting earnings under different interest rate scenarios and balance sheet structures. Generally, management seeks a structure that insulates net interest income from large swings attributable to changes in market interest rates. Table 11 depicts Citizens' asset/liability static sensitivity (GAP) as of December 31, 2001 and 2000. As shown, Citizens' interest rate risk position at December 31, 2001 is asset sensitive in the less than one-year time frame with rate sensitive assets exceeding rate sensitive liabilities by $308.5 million. Application of GAP theory would suggest that with such a position Citizens' net interest income could decline if interest rates fall; i.e., assets are likely to reprice faster than liabilities, resulting in a decrease in net income in a declining rate environment. Conversely, net income could increase in a rising rate environment. Net interest income is not only affected by the level and direction of interest rates, but also by the shape of the yield curve, relationships between interest sensitive instruments and key driver rates, as well as balance sheet growth and the timing of changes in these variables. Management is continually reviewing its interest rate risk position and modifying its strategies based on projections to minimize the impact of future interest rate changes. While traditional GAP analysis does not always incorporate adjustments for the magnitude or timing of non-contractual repricing, Table 11 does incorporate appropriate adjustments as indicated in footnotes 1 and 2 to the table. Because of these and other inherent limitations of any GAP analysis, management utilizes net interest income simulation modeling as its primary tool to evaluate the impact of changes in interest rates and balance sheet strategies. Management uses these simulations to develop strategies that can limit interest rate risk and provide liquidity to meet client loan demand and deposit preferences. A-18 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) CITIZEN'S BANKCORP CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------ TABLE 11. INTEREST RATE SENSITIVITY TOTAL 0 - 3 4 - 6 7 - 12 WITHIN 1 - 5 (dollars in millions) Months Months Months 1 YEAR Years - ------------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 2001 RATE SENSITIVE ASSETS(1) Loans and leases $ 2,486.5 $ 271.4 $ 516.5 $ 3,274.4 $ 2,175.6 Investment securities 95.5 21.5 47.1 164.1 568.0 Short-term investments 42.5 -- -- -- 42.5 ----------- ----------- ----------- ----------- ----------- Total $ 2,624.5 $ 292.9 $ 563.6 $ 3,481.0 $ 2,743.6 =========== ========== ========== ========== =========== RATE SENSITIVE LIABILITIES Deposits (2) $ 873.6 $ 666.4 $ 1,192.5 $ 2,732.5 $ 2,029.2 Other interest bearing liabilities 320.2 19.7 100.1 440.0 221.0 ----------- ----------- ----------- ----------- ----------- Total $ 1,193.8 $ 686.1 $ 1,292.6 $ 3,172.5 $ 2,250.2 =========== ========== ========== ========== =========== Period GAP (3) $ 1,430.7 $ (393.2) $ (729.0) $ 308.5 $ 493.4 Cumulative GAP 1,430.7 1,037.5 308.5 801.9 1,219.7 Cumulative GAP to total assets 18.63% 13.51% 4.02% 4.02% 10.44% Multiple of rate sensitive assets to liabilities 2.20 0.43 0.44 1.10 1.22 - -------------------------------------------------------------------------------- Over 5 Years Total - -------------------------------------------------------------------------------- DECEMBER 31, 2001 RATE SENSITIVE ASSETS(1) Loans and leases $ 472.4 $ 5,922.4 Investment securities 527.4 1,259.5 Short-term investments -- 42.5 --------- ----------- Total $ 999.8 $ 7,224.4 ========= =========== RATE SENSITIVE LIABILITIES Deposits (2) $ 299.5 $ 5,061.2 Other interest bearing liabilities 282.5 943.5 --------- ----------- Total $ 582.0 $ 6,004.7 ========= =========== Period GAP (3) $ 417.8 $ 1,219.7 Cumulative GAP Cumulative GAP to total assets 15.88% 15.88% Multiple of rate sensitive assets to liabilities 1.72 1.20 ==================================================================================================================================== DECEMBER 31, 2000 RATE SENSITIVE ASSETS(1) Loans and leases $ 2,128.9 $ 350.2 $ 669.6 $ 3,148.7 $ 2,581.4 Investment securities 64.1 40.1 30.0 134.2 589.7 Short-term investments 27.5 -- -- -- 27.5 ----------- --------- ----------- ----------- ----------- Total $ 2,220.5 $ 390.3 $ 699.6 $ 3,310.4 $ 3,171.1 =========== ========= =========== =========== =========== RATE SENSITIVE LIABILITIES Deposits (2) $ 990.2 $ 842.5 $ 1,414.2 $ 3,246.9 $ 1,799.6 Other interest bearing liabilities 1,029.1 75.0 210.2 1,314.3 81.5 ----------- --------- ----------- ----------- ----------- Total $ 2,019.3 $ 917.5 $ 1,624.4 $ 4,561.2 $ 1,881.1 =========== ========= =========== =========== =========== Period GAP (3) $ 201.2 $ (527.2) $ (924.8) $ (1,250.8) $ 1,290.0 Cumulative GAP 201.2 (326.0) (1,250.8) 39.2 Cumulative GAP to total assets 2.39% (3.88)% (14.88)% (14.88)% 0.47% Multiple of rate sensitive assets to liabilities 1.10 0.43 0.43 0.73 1.69 DECEMBER 31, 2000 RATE SENSITIVE ASSETS(1) Loans and leases $ 692.7 $ 6,422.8 Investment securities 660.2 1,384.1 Short-term investments -- 27.5 ----------- ----------- Total $ 1,352.9 $ 7,834.4 =========== =========== RATE SENSITIVE LIABILITIES Deposits (2) $ 223.7 $ 5,270.2 Other interest bearing liabilities 8.6 1,404.4 ----------- ----------- Total $ 232.3 $ 6,674.6 =========== =========== Period GAP (3) 1,120.6 $ 1,159.8 Cumulative GAP 1,159.8 Cumulative GAP to total assets 13.80% 13.80% Multiple of rate sensitive assets to liabilities 5.82 1.17
================================================================================ (1) Incorporates prepayment projections for certain assets which may shorten the time frame for repricing or maturity compared to contractual runoff. (2) Includes interest bearing savings and demand deposits without contractual maturities of $770 million in the less than one year category and $1.636 billion in the over one year category as of December 31, 2001. The same amounts as of December 31, 2000 were $779 million and $1.414 billion, respectively. This runoff is based on historical trends, which reflects industry standards. (3) GAP is the excess of rate sensitive assets (liabilities). A-19 INTEREST RATE SENSITIVITY A number of measures are used to monitor and manage interest rate risk, including income simulation and interest sensitivity GAP analyses. An income simulation model is management's primary tool used to assess the direction and magnitude of variations in net interest income resulting from changes in interest rates. Key assumptions in the model include prepayment speeds on various loan and investment assets; cash flows and maturities of financial instruments held for purposes other than trading; changes in market conditions, loan volumes, and pricing; deposit sensitivity; client preferences; and management's financial capital plans. These assumptions are inherently uncertain, subject to fluctuation and revision in a dynamic environment and, as a result, the model cannot precisely estimate net interest income nor exactly predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of balance sheet component and interest rate changes, differences in client behavior, market conditions and management strategies, among other factors. Results of the multiple simulations done as of December 31, 2001 suggest that Citizens could expect net interest income to decrease by $3.7 million (if asset and liability balances remain static and interest rates gradually decline by 200 basis points over the next twelve months) and, to increase by $8.3 million (if asset and liability balances remain static and interest rates gradually increase by 200 basis points over the next twelve months) from 2001 levels of net interest income. These variances in net interest income were well within Citizens' policy parameters established to manage such risk. Management performed a large number of net interest income simulations using varying balance sheet scenarios and differing interest rate environments. The model results presented herein are intended to illustrate the potential variation in net interest income from the indicated changes in interest rates, and not to project future levels of net interest income. In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables, including the growth, composition and absolute levels of deposits, loans, and other earning assets and interest bearing liabilities, economic and competitive conditions, client preferences and other factors. RECENT ACCOUNTING PRONOUNCEMENTS Please refer to Note 4 of the Consolidated Financial Statements "Recent Accounting Pronouncements". FORWARD-LOOKING STATEMENTS The foregoing disclosure contains "forward-looking statements" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, both as amended, with respect to expectations for future periods. These forward looking statements involved are subject to risk and uncertainties that could cause actual results to differ. These risks and uncertainties include unanticipated changes in the competitive environment and relationships with third party vendors and clients and certain other factors discussed in this report. Management believes that the expectations used in the forward looking statements are reasonable, however actual results may vary significantly. A-20
- ------------------------------------------------------------------------------------------------------------------------- TABLE 12. SELECTED QUARTERLY INFORMATION 2001 2000 ----------------------------------------- ----------------------------------- (in thousands except, per share data) FOURTH THIRD SECOND FIRST Fourth Third - ------------------------------------------------------------------------------------------------------------------------- Interest income $ 129,335 $ 140,406 $ 147,260 $ 156,558 $ 161,169 $ 160,347 Interest expense 51,659 62,146 70,835 80,938 84,909 80,722 Net interest income 77,676 78,260 76,425 75,620 76,260 79,625 Provision for loan losses 7,496 8,500 6,362 4,049 5,895 4,642 Noninterest income before securities gains (losses) (1) 25,599 34,658 28,587 22,442 23,015 23,215 Investment securities gains (losses) (2) 423 49 3,504 2,219 6 (5) Noninterest expense before special charge 60,586 64,270 63,616 62,711 57,579 61,670 Special charges (3) -- -- -- -- 8,352 (99) Net income (loss) 25,742 27,962 27,148 23,805 20,355 25,729 PER SHARE OF COMMON STOCK Net income (loss): Basic 0.57 0.60 0.59 0.51 0.44 0.54 Diluted 0.56 0.60 0.58 0.51 0.44 0.54 Cash dividends declared 0.275 0.275 0.275 0.260 0.260 0.260 Market value:(4) High 34.02 32.75 30.55 29.38 29.81 23.94 Low 27.70 27.30 24.51 23.69 21.19 16.00 Close 32.88 32.08 29.25 26.69 29.06 23.00 - ------------------------------------------------------------------------ 2000 Second First - ------------------------------------------------------------------------ Interest income $ 153,406 $ 147,086 Interest expense 73,878 67,625 Net interest income 79,528 79,461 Provision for loan losses 5,162 5,284 Noninterest income before securities gains (losses) (1) 22,819 21,295 Investment securities gains (losses) (2) -- (1) Noninterest expense before special charge 61,928 61,044 Special charges (3) 3,289 3,999 Net income (loss) 22,691 21,885 PER SHARE OF COMMON STOCK Net income (loss): Basic 0.48 0.46 Diluted 0.47 0.46 Cash dividends declared 0.260 0.235 Market value:(4) High 20.00 22.50 Low 16.00 15.50 Close 16.23 19.50
================================================================================ (1) Noninterest income in 2001 includes a $2.6 million gain on the sale of the credit card portfolio in the second quarter, an $11.0 million gain on sale of NYCE stock in the third quarter and a $793,000 gain on the sale of F&M Bank-Minnesota in the fourth quarter. (2) In 2001 investment securities gains include $2.1 million in the first quarter and $3.3 million in the second quarter from the securitization of mortgages and subsequent sale of mortgage-backed securities. (3) Special charges in 2000 includes restructuring, conversion, integration and other non-recurring costs incurred in connection with mergers, acquisitions and other corporate initiatives. (4) Citizens Banking Corporation common stock is traded on the National Market tier of the Nasdaq stock market (trading symbol: CBCF). At December 31, 2001, there were approximately 16,354 shareholders of the Corporation's common stock. A-21 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) CITIZEN'S BANKCORP CORPORATION AND SUBSIDIARIES YEAR ENDED DECEMBER 31, 2000 COMPARED WITH 1999 Citizens reported net income of $90.7 million, or $1.91 per diluted share, in 2000 compared with $62.0 million, or $1.28 per diluted share, in 1999. Net income included after-tax merger, restructuring, conversion and other non-recurring items of $9.5 million in 2000 and $35.2 million in 1999. Returns on average assets and equity were 1.12% and 13.94%, respectively, in 2000, as compared with 0.84% and 9.22% in 1999. Excluding nonrecurring items, the increase in net income in 2000 reflects improvement in net interest income from growth in earning assets and higher noninterest income, partially offset, by higher loan loss provision and noninterest expense. Net interest income increased 1.7% in 2000 to $314.9 million as compared with $309.6 million in 1999. Higher levels of earning assets, particularly commercial and commercial real estate loans, partially offset by an increase in short-term borrowings and a lower net interest margin, led to the increase in 2000. Yields on earning assets increased to 8.36%, from 8.05% in 1999 reflecting a rising interest rate environment in the first half of 2000 and a favorable shift in the earning asset mix to higher yielding loans. Loan growth outpaced deposit growth and Citizens used short-term FHLB advances and other purchased funds to support the higher level of earning assets. This change in the funding mix increased average borrowings to 19.1% of interest-bearing liabilities in 2000, up from 12.1% in 1999. Higher rates paid on interest-bearing deposits and long-term debt increased the cost of interest-bearing funding sources to 4.80% in 2000 from 4.07% in 1999. Net interest margin declined to 4.32% in 2000 as compared with 4.68% in 1999. The provision for loan losses decreased to $21.0 million in 2000 from $24.7 million in 1999. The 1999 provision included a $6.8 million special provision to conform F&M's allowance for loan losses to Citizens' methodology and credit risk standards. Net loan charge-offs to average total loans decreased nine basis points to 0.28% as compared to 0.37% in 1999. The improvement is the result of lower net charge-offs in Citizens' indirect consumer loan portfolio and to a lessor extent, lower net charge-offs at the F&M banks. The allowance for loan losses as a percentage of total loans was 1.25% at December 31, 2000 compared to 1.29% at the end of 1999. Noninterest income, before nonrecurring income and securities gains and losses, increased to $90.3 million in 2000 from $79.9 million in 1999, an improvement of 13.1%. On the same basis, noninterest income accounted for 22.3% of total operating revenues in 2000, compared with 20.5% in 1999. Noninterest income increased $10.4 million from 1999 primarily due to growth in deposit service charges, trust fees, bankcard fees and brokerage and investment fees. Excluding nonrecurring items, noninterest expense increased $11.5 million or 5.0% to $242.2 million in 2000, up from $230.7 million in 1999. Growth from the October 1999 and May 2000 branch purchases, partially offset by efficiencies achieved in 2000 from the conversion and integration of F&M and other cost savings initiatives, generated most of the increase. Compensation was unchanged from 1999 as the full year effect of additional staff from the branch purchases, higher health care costs and increased incentive pay were offset by decreased staffing levels at F&M and lower pension costs. Occupancy and equipment expenses were up a combined $4.0 million or 12.4%, due to the branch purchases and installation of new equipment and operating systems at F&M. Higher data processing costs reflect increased processing volumes and new services and information technology costs associated with the branch purchases and conversion of F&M onto Citizens' operating systems. Professional services were up due to the outsourcing in 2000 of Citizens' computer technology support functions and certain financial and credit audit procedures. Intangible asset amortization increased due to additional goodwill from the branch purchases and bankcard fees were higher due to additional transaction volume and costs from the full year effect of outsourcing bankcard operations in 1999. Citizens had total average assets of $8.073 billion during 2000, up from 1999 average assets of $7.342 billion. Total loans increased $505.3 million or 8.5% in 2000 with average loans comprising 81.8% of total earning assets in 2000, up from 80.4% in 1999. Growth occurred primarily in the commercial loan and commercial real estate portfolios due to enhanced sales efforts and strong loan demand. Average investment securities, including money market investments, comprised 18.2% of total average earning assets in 2000, down from 19.6% in 1999. Total average deposits were 3.6% higher in 2000 as compared with 1999. Average short-term borrowings, comprised primarily of FHLB advances, Federal funds purchased, and securities sold under agreements to repurchase; averaged $920.3 million in 2000, or 14.4% of total average interest-bearing liabilities, compared with $478.9 million or 8.4% during 1999. The increase reflects additional borrowings to fund growth in loans and other earning assets. Long-term debt accounted for $303.6 million or 4.7% of average interest-bearing funds during 2000, increasing from $210.3 million or 3.7% in 1999. Average shareholders' equity was $650.2 million in 2000, a 3.3% decrease over the 1999 average of $672.2 million. A-22 - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS CITIZENS BANKING CORPORATION AND SUBSIDIARIES
December 31, (in thousands, except share amounts) 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 224,416 $ 318,115 Money market investments: Interest-bearing deposits with banks 3,455 2,547 Short-term government fund 38,190 --- Federal funds sold 891 24,986 ------------ ------------ Total money market investments 42,536 27,533 Securities available for sale (amortized cost $1,225,230 in 2001; $1,366,063 in 2000) 1,259,506 1,384,108 Loans: Commercial 3,246,380 3,332,156 Real estate construction 216,041 235,096 Real estate mortgage 971,533 1,282,834 Consumer 1,488,452 1,572,720 ------------ ------------ Total loans 5,922,406 6,422,806 Less: Allowance for loan losses (80,299) (80,070) ------------ ------------ Net loans 5,842,107 6,342,736 Premises and equipment 128,805 137,094 Intangible assets 79,405 90,808 Other assets 102,100 104,697 ------------ ------------ TOTAL ASSETS $ 7,678,875 $ 8,405,091 ============ ============ LIABILITIES Noninterest-bearing deposits $ 903,900 $ 973,938 Interest-bearing deposits 5,061,226 5,270,203 ------------ ------------ Total deposits 5,965,126 6,244,141 Federal funds purchased and securities sold under agreements to repurchase 233,077 394,466 Other short-term borrowings 81,353 538,784 Other liabilities 72,756 76,604 Long-term debt 629,099 471,117 ------------ ------------ Total liabilities 6,981,411 7,725,112 SHAREHOLDERS' EQUITY Preferred stock - no par value: Authorized - 5,000,000 shares; Issued - none Common stock - no par value: Authorized - 100,000,000 shares Issued and outstanding - 45,097,614 in 2001; 46,510,111 in 2000 155,720 201,549 Retained earnings 521,191 466,692 Other accumulated comprehensive net income 20,553 11,738 ------------ ------------ Total shareholders' equity 697,464 679,979 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,678,875 $ 8,405,091 ============ ============ - ----------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. A - 23 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME CITIZENS BANKING CORPORATION AND SUBSIDIARIES
(in thousands, except share amounts) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Interest and fees on loans $ 492,437 $ 535,235 $ 462,223 Interest and dividends on investment securities: Taxable 57,083 66,190 59,654 Tax-exempt 21,715 20,350 17,151 Money market investments 2,324 233 2,531 ----------- ----------- ------------ Total interest income 573,559 622,008 541,559 INTEREST EXPENSE Deposits 204,929 229,137 196,871 Short-term borrowings 27,458 58,532 23,692 Long-term debt 33,191 19,465 11,354 ----------- ----------- ------------ Total interest expense 265,578 307,134 231,917 ----------- ----------- ------------ NET INTEREST INCOME 307,981 314,874 309,642 Provision for loan losses 26,407 20,983 24,675 ----------- ----------- ------------ Net interest income after provision for loan losses 281,574 293,891 284,967 ----------- ----------- ------------ NONINTEREST INCOME Service charges on deposit accounts 27,773 26,260 21,378 Trust fees 21,028 24,253 21,701 Mortgage and other loan income 13,159 4,997 6,078 Bankcard fees 11,799 11,258 9,163 Brokerage and investment fees 8,157 7,693 4,325 Investment securities gains (losses) 6,195 -- (3,052) Equity security gains 11,017 -- 5,693 Gain on sale of credit card assets 2,623 -- -- Gain on sale of bank 793 -- -- Other 14,937 15,883 16,706 ----------- ----------- ------------ Total noninterest income 117,481 90,344 81,992 ----------- ----------- ------------ NONINTEREST EXPENSE Salaries and employee benefits 126,278 122,577 122,572 Equipment 19,317 19,264 16,645 Occupancy 17,713 16,770 15,414 Data processing fees 13,101 12,608 9,924 Professional services 12,277 10,088 7,330 Intangible asset amortization 11,063 10,733 8,363 Bankcard fees 9,308 8,959 7,477 Postage and delivery 7,746 6,924 5,985 Telephone 5,556 6,364 5,601 Advertising and public relations 5,219 5,034 5,223 Stationery and supplies 4,426 5,602 5,674 Special charges -- 15,541 40,198 Other 19,179 17,298 26,570 ----------- ----------- ------------ Total noninterest expense 251,183 257,762 276,976 ----------- ----------- ------------ INCOME BEFORE INCOME TAXES 147,872 126,473 89,983 Income taxes 43,215 35,813 27,989 ----------- ----------- ------------ NET INCOME $ 104,657 $ 90,660 $ 61,994 =========== =========== ============ NET INCOME PER SHARE: Basic $ 2.27 $ 1.92 $ 1.29 Diluted 2.25 1.91 1.28 AVERAGE SHARES OUTSTANDING: Basic 46,085,405 47,310,375 48,169,121 Diluted 46,589,962 47,542,815 48,617,207 - --------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. A - 24
- ----------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY CITIZENS BANKING CORPORATION AND SUBSIDIARIES Accumulated Other Common Retained Comprehensive (in thousands, except per share amounts) Stock Earnings Income (loss) Total - ----------------------------------------------------------------------------------------------------------------------------- BALANCE - JANUARY 1, 1999 $ 276,439 $ 396,516 $ 7,546 $ 680,501 Net income 61,994 61,994 Net unrealized loss on securities available-for-sale, net of tax effect of $13,913 (24,989) (24,989) --------- Total comprehensive income 37,005 Exercise of stock options, net of shares purchased 3,349 3,349 Cash dividends - $0.915 per share (30,035) (30,035) Cash dividends of pooled company, pre-merger (11,766) (11,766) Shares acquired for retirement (53,866) (53,866) Pre-merger transactions of pooled company 1,050 7,431 8,481 ---------- ---------- --------- --------- BALANCE - DECEMBER 31, 1999 226,972 424,140 (17,443) 633,669 Net income 90,660 90,660 Net unrealized gain on securities available-for-sale, net of tax effect of $15,718 29,181 29,181 -------- Total comprehensive income 119,841 Exercise of stock options, net of shares purchased 1,879 1,879 Cash dividends - $1.015 per share (48,108) (48,108) Shares acquired for retirement (27,302) (27,302) ---------- ---------- --------- --------- BALANCE - DECEMBER 31, 2000 201,549 466,692 11,738 679,979 Net income 104,657 104,657 Net unrealized gain on securities available-for-sale, net of tax effect of $5,690 10,542 Minimum pension liability (1,727) ---------- Total comprehensive income 8,815 8,815 Exercise of stock options, net of shares purchased 12,662 12,662 Cash dividends - $1.085 per share (50,158) (50,158) Shares acquired for retirement (58,491) (58,491) ---------- ---------- --------- --------- BALANCE - DECEMBER 31, 2001 $ 155,720 $ 521,191 $ 20,553 $ 697,464 ========== ========== ========= ========= - -----------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. A - 25
- --------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS CITIZENS BANKING CORPORATION AND SUBSIDIARIES YEAR ENDED DECEMBER 31, (in thousands) 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 104,657 $ 90,660 $ 61,994 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 26,407 20,983 24,675 Depreciation and amortization 16,241 15,995 14,148 Amortization of goodwill and other intangibles 11,063 10,733 8,363 Intangible asset impairment -- -- 2,349 Deferred income tax (credit) (279) 3,585 (7,953) Net amortization on investment securities (563) (147) 2,743 Investment securities losses (gains) (6,195) -- 3,052 Loans originated for sale (824,449) (132,878) (117,603) Proceeds from sales of mortgage loans held for sale 831,138 134,020 120,283 Gains from loan sales (6,689) (1,142) (2,471) Donation of equity security -- 1,116 -- Gains on sale of equity securities, credit card assets and bank (14,433) -- (5,693) Accrued merger related and other charges (3,337) (14,050) 17,387 Other (4,720) 87 (9,592) --------- --------- --------- Net cash provided by operating activities 128,841 128,962 111,682 INVESTING ACTIVITIES: Net (increase) decrease in money market investments (15,003) 36,270 45,745 Securities available-for-sale: Proceeds from sales 297,492 6,755 85,288 Proceeds from maturities 352,369 183,185 373,228 Purchases (502,261) (131,311) (697,238) Securities held-to-maturity: Proceeds from maturities -- -- 25,304 Purchases -- -- (71,454) Sale of credit card assets 29,454 Net (increase) decrease in loans and leases 444,768 (522,569) (520,999) Net increase in properties and equipment (7,952) (10,519) (20,221) Proceeds from sale of equity securities, credit card assets and bank 14,433 -- 5,693 Acquisitions (net of cash acquired) -- 26,008 317,214 --------- --------- --------- Net cash used by investing activities 613,300 (412,181) (457,440) FINANCING ACTIVITIES: Net increase (decrease) in demand and savings deposits 143,669 (231,753) (115,749) Net increase (decrease) in time deposits (422,684) 315,889 (70,131) Net increase (decrease) in short-term borrowings (618,820) (4,029) 751,888 Proceeds from issuance of long-term debt 183,182 740,150 58,598 Principal reductions in long-term debt (25,200) (396,137) (157,665) Cash dividends paid (50,158) (48,108) (41,801) Proceeds from stock options exercised 12,662 1,879 3,349 Shares acquired for retirement (58,491) (27,302) (53,866) --------- --------- --------- Net cash provided by financing activities (835,840) 350,589 374,623 --------- --------- --------- Net increase (decrease) in cash and due from banks (93,699) 67,370 28,865 Cash and due from banks at beginning of period 318,115 250,745 221,880 --------- --------- --------- Cash and due from banks at end of period $ 224,416 $ 318,115 $ 250,745 ========= ========= ========= Supplemental Cash Flow Information: Interest paid $ 278,979 $ 297,396 $ 233,689 Income taxes paid 40,481 30,647 38,444 - ---------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. A - 26 NOTE 1. SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Citizens Banking Corporation (Citizens) and its subsidiaries conform to generally accepted accounting principles in the United States. Management makes estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. The following describes Citizens' policies: CONSOLIDATION: The Consolidated Financial Statements include the accounts of Citizens and its subsidiaries after elimination of all material intercompany transactions and accounts. INVESTMENT SECURITIES: Citizens classifies all debt and equity securities as available for sale. Available for sale securities are reported at fair value with unrealized gains and losses included in shareholders' equity. In the event that an investment security is sold, the adjusted cost of the specific security sold is used to compute the applicable gain or loss. ALLOWANCE FOR LOAN LOSSES: Citizens maintains an allowance for credit losses to absorb losses inherent in the loan portfolio. The allowance is based on a regular, quarterly assessment of the probable losses inherent in the loan portfolios. The allowance is increased by the provision charged to income and reduced by the amount charged-off, net of recoveries. Citizens' methodology for measuring the adequacy of the allowance relies on several key elements, which include specific allowances for identified problem loans, reserves by formula and the unallocated allowance. Specific 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 a loss has been or will be incurred. The specific credit allocations are based on a regular analysis of all commercial and commercial mortgage loans over a fixed dollar amount where the internal credit rating is at or below a predetermined classification. The allowance amount is determined by analyzing the financial condition, collateral value and other qualitative factors as well as by a method prescribed by Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan". The formula allowance is calculated by applying loss factors to outstanding loans (excluding specifically identified credits) based on loan type, accrual status and internal risk grade of such loans and pools of loans. Minimum loss factors for criticized loan categories are consistent with regulatory agency factors. For non-criticized loan categories loss factors are determined based on historical averages (generally three-year) adjusted quarterly for recent loss experience in the specific portfolios. The unallocated portion of the allowance is determined based upon management's assessment of general economic conditions, as well as specific economic factors in the individual markets in which Citizens operates. This determination inherently involves a higher degree of uncertainty and considers current risk factors that may not have yet manifested themselves in the Company's specific allowances or in the historical loss factors used to determine the formula allowances. The allowance also incorporates the results of measuring impaired loans as provided in SFAS No. 114. Reserve allocations established for impaired loans are determined based on the fair value of the investment measured using either the present value of expected future cash flows discounted at the initial effective interest rate on the loan, the observable market price of the loan, or the fair value of the collateral if the loan is collateral dependent. A loan is considered impaired when management determines it is probable that all the principal and interest due under the contractual terms of the loan will not be collected. PREMISES AND EQUIPMENT: Premises and equipment, including leasehold improvements, are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed principally on a straight-line basis and are charged to expense over the lesser of the estimated useful life of the assets or lease term. Maintenance and repairs as well as gains and losses on dispositions are charged to expense as incurred. OTHER REAL ESTATE: Other real estate includes properties acquired in satisfaction of a debt. These properties are carried at the lower of cost or fair value, net of estimated costs to sell, based upon current appraised value. Losses arising from the acquisition of such properties are charged against the allowance for loan losses. Subsequent valuation adjustments and gains or losses on disposal of these properties are charged to other expenses as incurred. INTANGIBLE ASSETS: Goodwill, the excess of cost over the fair value of net identifiable tangible and intangible assets acquired in acquisitions accounted for as purchases, is amortized on a straight-line basis over periods ranging from 10 to 20 years. The carrying amount of goodwill is reviewed for impairment as events or changes in facts and circumstances warrant. Impairment of goodwill is evaluated by geographic region and is based on a comparison of the recorded balance of goodwill to the applicable discounted cash flows over the remaining amortization period of the associated goodwill. To the extent that impairment may exist, the current carrying amount is reduced by the estimated shortfall. Effective January 1, 2002 with the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", goodwill will no longer be amortized. See Note 4. Recent Accounting Pronouncements, "Accounting for Goodwill and Other Intangible Assets." A - 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS LOAN SALES AND SERVICING RIGHTS: Gains and losses on the sales of loans are determined using the specific-identification method. When servicing is retained, the servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment of servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate. For purposes of measuring impairment, the rights are stratified by rate in the quarter in which the related loans were sold. INCOME TAXES: Citizens and its subsidiaries file a consolidated federal income tax return. Income tax expense is based on income as reported in the Consolidated Statements of Income. When income and expenses are recognized in different periods for tax purposes, applicable deferred taxes are provided in the Consolidated Financial Statements. LOAN INTEREST AND FEE INCOME: Interest on loans is generally accrued and credited to income based upon the principal amount outstanding. Loans are placed on nonaccrual status when the collection of principal or interest is considered doubtful, or payment of principal or interest is past due 90 days or more and the loan is not well secured and in the process of collection. When these loans (including a loan impaired) are placed on nonaccrual status, all interest previously accrued but unpaid is reversed against current year interest income. Interest payments received on nonaccrual loans are credited to income if future collection of principal is probable. Loans are normally restored to accrual status when interest and principal payments are current and it is believed that the financial condition of the borrower has improved to the extent that future principal and interest payments will be met on a timely basis. Loan origination fee income, net of direct origination costs and certain incremental direct costs, is deferred and amortized as a yield adjustment over the estimated term of the related loans by methods that approximate the level yield method. NET INCOME PER SHARE: Basic net income per share is based on net income divided by the weighted average number of shares outstanding in each period. Diluted net income per share shows the dilutive effect of additional common shares issuable upon the assumed exercise of stock options granted under Citizens' stock option plans, using the treasury stock method. CASH FLOWS: For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks. RECLASSIFICATIONS: Certain amounts have been reclassified to conform to the current year presentation. NOTE 2. MERGERS, ACQUISITIONS AND DIVESTITURES In November 2001, Citizens sold F&M Bank-Minnesota with assets of $27 million. The bank was Citizens' sole location in Minnesota. On May 12, 2000, Citizens purchased three Jackson, Michigan offices of Great Lakes National Bank. The purchase added approximately $31 million in deposits, for which Citizens paid a premium of $3.9 million. On October 8, 1999, Citizens acquired seventeen offices of Bank One located in the northern section of Michigan's Lower Peninsula. This purchase added approximately $88 million in loans and $442 million in deposits, for which Citizens paid a premium of $36.1 million or 10.13% of certain core deposits. These transactions were accounted for as purchases; accordingly, the financial statements include their results of operations only since the acquisition dates. On November 1, 1999, Citizens acquired F&M Bancorporation, Inc. (F&M) a $2.7 billion bank holding company headquartered in Kaukauna, Wisconsin. As part of the acquisition, Citizens issued 21 million shares of its common stock, based on a fixed exchange ratio of 1.303, for all of the outstanding shares of F&M. This transaction was accounted for as a pooling of interests and, accordingly, all periods presented include the results of F&M. A - 28 NOTE 3. MERGER, BUSINESS RESTRUCTURING AND OTHER CHARGES The following provides details on reserve activity in 2001, 2000 and 1999 in connection with mergers, business restructuring and other charges associated with various corporate initiatives.
- ------------------------------------------------------------------------------------------------------------------------------------ Contract termination Goodwill & Employee and other Facilities core deposit Equity Charitable benefits and conversion Professional and premium investment trust (in thousands) severance costs fees equipment write-downs write-down contribution Other Total - ------------------------------------------------------------------------------------------------------------------------------------ FOURTH QUARTER 1999 CHARGE $ 7,482 $ 13,598 $ 6,345 $ 3,355 $ 2,349 $ 520 $ 2,500 $ 4,049 $ 40,198 Amount Utilized: Cash Payments (144) (4,241) (5,711) (2,500) (2,788) (15,384) Noncash -- -- -- (3,355) (2,349) (520) -- (1,203) (7,427) -------- -------- ------- ------- -------- ----- ------- ------- -------- RESERVE BALANCE AT DECEMBER 31, 1999 7,338 9,357 634 -- -- -- -- 58 17,387 Additional 4th Qtr. Reserve 1,962 1,962 Amount Utilized: Cash Payments (3,660) (5,387) (607) (30) (9,684) Noncash (2,324) (3,951) (25) -- -- -- -- (28) (6,328) -------- -------- ------- ------- -------- ----- ------- ------- -------- RESERVE BALANCE AT DECEMBER 31, 2000 3,316 19 2 -- -- -- -- -- 3,337 Amount Utilized: Cash Payments (3,316) (19) (2) (3,337) Noncash -- -- -- -- -- -- -- -- -- -------- -------- ------- ------- -------- ----- ------- ------- -------- RESERVE BALANCE AT DECEMBER 31, 2001 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- ======== ======== ======= ======= ======== ===== ======= ======= ======== - ------------------------------------------------------------------------------------------------------------------------------------
In the fourth quarter of 1999, Citizens recorded a pre-tax charge of $40.2 million consisting of $36.3 million ($25.9 million after-tax) in merger-related integration costs and $3.9 million ($2.5 million after-tax) of restructuring and other costs related to separate strategic initiatives and impairment write-offs. The charge was recorded as a separate component of noninterest expense, the "Special Charge." Merger-related integration costs recorded included employee termination benefits, transaction costs, contract termination and other conversion costs (primarily recognition of obligations under existing contractual agreements related to system conversions), asset-related write-downs, a write-down of impaired goodwill at an F&M bank, a contribution to Citizens' Charitable Trust for the acquired entities and other transaction related costs. Restructuring and other costs for non-merger activities consisted of employee termination benefits of $0.4 million, professional fees of $0.7 million, asset related write-downs of $1.8 million, and other costs of $0.1 million for strategic initiatives approved in the fourth quarter of 1999 as well as a write-down of a core deposit premium from a previous acquisition of $0.3 million and a loss for an other than temporary decline in the market value of an equity investment of $0.5 million. The approved initiatives included realignment of Citizens branch network, including closure of selected branches in Michigan and Illinois, and transfer of certain financial and credit audit functions to a third party. Also, in the fourth quarter of 1999, Citizens recorded $6.8 million ($4.4 million after-tax) of additional provision for loan losses and $3.6 million ($2.4 million after-tax) of securities losses related to the F&M merger. The additional loan loss provision was provided to conform F&M's allowance to that which results from applying Citizens' allowance methodology and credit risk standards to F&M's loan portfolio. The security losses resulted from the sale of $122.8 million of securities to reposition the portfolios of Citizens and F&M after the merger to normalize investment exposure and reduce overall interest rate risk. In 2000, net merger-related integration costs of $12.3 million ($7.4 million after-tax) were charged to the Special Charge for system conversions, business unit integration, branch closures and other items associated with the F&M merger. Included in this amount were reversals of prior year business restructuring reserves of $6.2 million due to successful settlement of a contract with a former vendor of F&M and favorable experience in employee separations. All system conversion activities related to the F&M merger were completed in 2000. In the fourth quarter of 2000, Citizens recorded an additional pre-tax charge of $3.2 million ($2.1 million after-tax) for restructuring costs of $2.0 million and asset impairment and other charges of $1.2 million associated with A - 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS new corporate and organizational re-engineering initiatives. The restructuring plans included reorganization of Citizens' trust and investment management business into one nationally chartered trust bank, streamlining of the Company's community bank organizational structure, consolidation of its direct and indirect lending operations, and exiting of certain unprofitable indirect lending dealer relationships. These initiatives were completed by year-end 2001. As shown in the table above, total deductions to Citizens' Special Charge reserve were $3.3 million in 2001, $16.0 million in 2000 and $22.8 million in 1999. Included in these deductions were cash payments of $3.3 million, $9.7 million and $15.4 million in 2001, 2000 and 1999, respectively. The components of the Special Charges in 2000 and 1999 recorded in noninterest expense were as follows:
(in thousands) 2000 1999 - -------------------------------------------------------------------------------- MERGER, RESTRUCTURING & OTHER COSTS RELATED TO 1999 ACQUISITIONS & STRATEGIC INITIATIVES APPROVED IN 1999 Employee salaries, benefits & severance $ 2,098 $ 7,482 Contract termination and other conversion costs 9,981 13,598 Professional fees 477 6,345 Charitable Trust contribution -- 2,500 Other merger integration costs 3,838 2,845 Asset impairment and other writeoffs: Facilities and equipment 1,207 3,355 Goodwill & core deposit premium -- 2,349 Other real estate -- 964 Equity investment -- 520 Other writeoffs 982 240 Changes in 1999 reserve estimates: Contract settlement less than amount accrued (3,900) -- Changes in benefits and severance estimates (2,324) -- -------- -------- Subtotal 12,359 40,198 ADDITIONAL RESTRUCTURING & OTHER COSTS FOR STRATEGIC INITIATIVES APPROVED IN 2000 Employee benefits and severance 1,962 -- Software & equipment writeoffs 654 -- Professional fees 463 -- Other 103 -- -------- -------- Subtotal 3,182 -- -------- -------- Total $ 15,541 $ 40,198 ======== ======== - --------------------------------------------------------------------------------
No special charges were recorded in 2001. NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, establishes accounting and reporting standards for hedging activities and for derivative instruments, including certain derivative instruments embedded in other contracts. This statement requires a company to recognize all derivatives as either assets or liabilities in its balance sheet and measure those instruments at fair value. Citizens adopted this statement as amended effective January 1, 2001. At year-end 2001, Citizens did not have any outstanding material derivatives or hedging activities. Therefore the impact of adopting the provisions of this statement on Citizens' financial position, results of operations and cash flow was not material. ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES: SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--A Replacement of FASB Statement 125" was issued in September 2000 and replaces SFAS No. 125. SFAS No. 140, like SFAS No. 125, establishes accounting and reporting standards to assist in determining when to recognize or derecognize financial assets and liabilities in the financial statements after a transfer of financial assets has occurred. SFAS 140, however, requires certain additional disclosures related to transferred assets and is more restrictive in defining what constitutes a qualified special purpose entity (QSPE) as well as when transfers to a QSPE will be accorded sales treatment. SFAS No. 140 is effective for transfers occurring after March 31, 2001. The expanded disclosures, however, are effective for years ending after December 15, 2000, but are not required to be applied to prior periods. There was no impact to Citizens upon adoption of this statement as Citizens does not use unconsolidated special purpose entities. ACCOUNTING FOR BUSINESS COMBINATIONS: SFAS No. 141, "Business Combinations" supercedes APB Opinion No. 16, "Business Combinations", and FASB No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises", establishes financial accounting and reporting for all business combinations. This statement requires all business combinations be accounted for by a single method, the purchase method. The statement also requires that intangible assets be recognized apart from goodwill if they meet certain criteria and the disclosure of the primary reasons for the business combination and the allocation of the purchase price paid to the assets acquired and liabilities assumed by major balance sheet caption. The statement is effective for all business combinations initiated after June 30, 2001. Citizens adopted this statement July 1, 2001 and will apply its provisions to any future business combination. A - 30 ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS: SFAS No. 142, "Goodwill and Other Intangible Assets" - a replacement of APB Opinion No. 17, "Intangible Assets", addresses how intangible assets should be accounted for that are acquired outside of a business combination and also addresses how intangibles should be accounted for once the intangibles have been initially recognized in the financial statements. The statement no longer assumes a finite life for all intangibles, but now requires that intangible assets with indefinite lives be tested at least annually for impairment with impairment losses recognized immediately and intangible assets with finite lives be amortized over an appropriate period. Citizens has adopted this statement effective January 1, 2002. Citizens anticipates no impairment under Statement No. 142. The effect of this statement will be to reduce goodwill amortization by $7.2 million ($5.4 million after tax) in 2002 from the prior year. NOTE 5. INVESTMENT SECURITIES The amortized cost, estimated fair value and gross unrealized gains and losses of investment securities follow:
- ------------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 2001 December 31, 2000 --------------------------------------------------- --------------------------------------------------- ESTIMATED GROSS GROSS Estimated Gross Gross AMORTIZED FAIR UNREALIZED UNREALIZED Amortized Fair Unrealized Unrealized (in thousands) COST VALUE GAINS LOSSES Cost Value Gains Losses - ------------------------------------------------------------------------------------------------------------------------------------ AVAILABLE FOR SALE: U.S. Treasury $ 7,949 $ 8,163 $ 214 $ -- $ 21,555 $ 21,490 $ 27 $ 92 Federal agencies: Mortgage-backed 551,377 565,393 14,714 698 579,096 582,618 5,659 2,137 Other 157,921 166,236 8,316 1 264,348 269,127 5,205 426 State and municipal 432,425 443,956 13,378 1,847 420,835 430,775 11,925 1,985 Mortgage and asset-backed 10,448 10,558 170 60 15,884 15,755 9 138 Other 65,110 65,200 90 -- 64,345 64,343 4 6 ---------- ---------- ---------- -------- ---------- ---------- ---------- ---------- Total available for sale $1,225,230 $1,259,506 $ 36,882 $ 2,606 $1,366,063 $1,384,108 $ 22,829 $ 4,784 ========== ========== ========== ========== ========== ========== ========== ========== - ------------------------------------------------------------------------------------------------------------------------------------
The amortized cost and estimated fair value of debt securities by contractual maturity at December 31, 2001 are shown below.
- -------------------------------------------------------- Estimated Amortized Fair (in thousands) Cost Value - -------------------------------------------------------- Due within one year $ 57,419 $ 57,877 One to five years 175,845 189,789 Five to ten years 191,407 194,878 After ten years 176,869 179,060 ---------- ---------- 601,540 621,604 Equity securities 61,865 61,951 Mortgage and asset-backed securities 561,825 575,951 ---------- ---------- Total $1,225,230 $1,259,506 ========== ========== - --------------------------------------------------------
Sales of investment securities resulted in realized gains and losses as follows:
- ------------------------------------------------------------ Year Ended December 31, (in thousands) 2001 2000 1999 - ------------------------------------------------------------ Securities gains $ 6,202 $ 67 $ 561 Securities losses (7) (67) (3,613) -------- ------ --------- Net gain (loss) $ 6,195 $ --- $ (3,052) ======== ====== ========= - ------------------------------------------------------------
Securities with amortized cost of $799.3 million at December 31, 2001, and $530.4 million at December 31, 2000, 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, 2001 or 2000. A - 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6. LOANS AND NONPERFORMING ASSETS Citizens extends credit primarily within the Midwestern states of Michigan, Wisconsin, Illinois and Iowa. In Michigan the primary market includes most parts of the Lower Peninsula. In Wisconsin the primary market area is the Fox Valley region extending from Green Bay to Appleton to Oshkosh as well as northeastern and southwestern Wisconsin. Other primary market areas are central Iowa and the western suburban market of Chicago, Illinois. Citizens seeks to limit its credit risk by establishing guidelines to review its aggregate outstanding commitments and loans to particular borrowers, industries and geographic areas. Collateral is secured based on the nature of the credit and management's credit assessment of the customer. Citizens' loan portfolio is widely diversified by borrowers with no concentration within a single industry that exceeds 10% of total loans. Citizens has no loans to foreign countries and generally does not participate in large national loan syndications or highly leveraged transactions. Most of Citizens' commercial real estate loans consist of mortgages on owner-occupied properties. Those borrowers are involved in business activities other than real estate, and the sources of repayment are not dependent on the performance of the real estate market. A summary of nonperforming assets follows:
- -------------------------------------------------------------- December 31, (in thousands) 2001 2000 - -------------------------------------------------------------- Nonperforming loans: Nonaccrual $68,793 $59,415 Loans 90 days past due (still accruing) 4,168 889 Restructured 337 1,068 ------- ------- Total nonperforming loans 73,298 61,372 Other real estate 4,463 3,734 Other assets acquired by repossession 1,484 1,183 ------- ------- Total nonperforming assets $79,245 $66,289 ======= ======= - --------------------------------------------------------------
The effect of nonperforming loans on interest income follows:
- -------------------------------------------------------------- Year Ended December 31, (in thousands) 2001 2000 1999 - -------------------------------------------------------------- Interest income: At original contract rates $6,392 $4,953 $3,383 As actually recognized 3,344 3,045 1,861 ------ ------ ------ Interest foregone $3,048 $1,908 $1,522 ====== ====== ====== - --------------------------------------------------------------
There are no significant commitments outstanding to lend additional funds to clients whose loans were classified as nonaccrual or restructured at December 31, 2001. At December 31, 2001, loans considered to be impaired totaled $62.1 million of which $43.5 million were on a nonaccrual basis. Included within this amount is $39.8 million of impaired loans for which the related allowance for loan losses is $10.4 million and $22.3 million of impaired loans for which fair value exceeded the recorded investment in the loan. The average recorded investment in impaired loans during the year ended December 31, 2001 was approximately $78.0 million. For the year ended December 31, 2001, Citizens recognized interest income of $3.3 million on impaired loans. Cash collected on nonaccrual impaired loans totaled $3.1 million which was applied to principal. At December 31, 2000, loans considered to be impaired totaled $52.9 million of which $36.3 million were on a nonaccrual basis. Included with this amount is $32.5 million of impaired loans for which the related allowance for loan losses is $5.1 million and $20.4 million of impaired loans for which the fair value exceeded the recorded investment in the loan. The average recorded investment in impaired loans during the year ended December 31, 2000 was approximately $38.9 million. For the year ended December 31, 2000, Citizens recognized interest income of $2.5 million on impaired loans. Cash collected on nonaccrual impaired loans totaled $2.3 million of which $1.2 million was applied to principal and $1.1 million was recognized using the cash basis method of income recognition. Certain directors and executive officers of Citizens and its significant subsidiaries, including their families and entities in which they have 10% or more ownership, were clients of the banking subsidiaries. Total loans to these clients aggregated $13.2 million and $19.1 million at December 31, 2001 and 2000, respectively. During 2001, new loans of $4.5 million were made and repayments totaled $10.4 million. Substantially all such loans were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those for comparable transactions with unrelated parties and did not involve more than normal risk of collectibility. The consolidated financial statements do not include loans serviced for others, which totaled $257.9 million and $362.3 million at December 31, 2001 and 2000, respectively. The carrying value of mortgage servicing rights approximates fair value at December 31, 2001 and 2000. At year-end 2000, Citizens recognized impairment of $260,000 on mortgage servicing rights to mark them to market. Changes in originated mortgage servicing rights for the years ended December 31 were as follows:
(in thousands) 2001 2000 - ----------------------------------------------------------------------------- Balance - January 1 $ 2,680 $ 3,335 Mortgage servicing rights capitalized -- 161 Amortization (947) (556) Impairment loss -- (260) ------- ------- Balance - December 31 $ 1,733 $ 2,680 ======= ======= - -----------------------------------------------------------------------------
A - 32 NOTE 7. ALLOWANCE FOR LOAN LOSSES A summary of changes in the allowance for loan losses follows:
- ------------------------------------------------------------------------------- (in thousands) 2001 2000 1999 - ------------------------------------------------------------------------------- Balance - January 1 $ 80,070 $ 76,397 $ 69,740 Allowance of acquired (sold) banks and branches (240) -- 2,400 Provision for loan losses 26,407 20,983 24,675 Charge-offs (32,732) (25,448) (26,862) Recoveries 6,794 8,138 6,444 -------- -------- -------- Net charge-offs (25,938) (17,310) (20,418) -------- -------- -------- Balance - December 31 $ 80,299 $ 80,070 $ 76,397 ======== ======== ======== - -------------------------------------------------------------------------------
NOTE 8. PREMISES AND EQUIPMENT A summary of premises and equipment follows:
- ------------------------------------------------------------- December 31, (in thousands) 2001 2000 - ------------------------------------------------------------- Land $ 21,806 $ 21,812 Buildings 146,775 142,814 Leasehold improvements 5,750 6,221 Furniture and equipment 124,939 132,026 --------- --------- 299,270 302,873 Accumulated depreciation and amortization (170,465) (165,779) --------- --------- Total $ 128,805 $ 137,094 ========= ========= - -------------------------------------------------------------
Certain branch facilities and equipment are leased under various operating leases. Total rental expense, including expenses related to these operating leases, was $4.8 million in 2001, $4.8 million in 2000 and $4.1 million in 1999. Future minimum rental commitments under non-cancelable operating leases are as follows at December 31, 2001: $4.3 million in 2002, $3.5 million in 2003, $1.6 million in 2004, $1.1 million in 2005, $0.8 million in 2006, and $2.2 million after 2006. NOTE 9. DEPOSITS A summary of deposits follows:
- --------------------------------------------------------------- December 31, (in thousands) 2001 2000 - --------------------------------------------------------------- Noninterest-bearing demand $ 903,900 $ 973,938 Interest-bearing demand 995,191 574,029 Savings 1,411,429 1,618,884 Time deposits over $100,000 818,375 971,251 Other time deposits 1,836,231 2,106,039 ---------- ---------- Total $5,965,126 $6,244,141 ========== ========== - ---------------------------------------------------------------
Excluded from total deposits are demand deposit account overdrafts, which have been reclassified as loans. At December 31, 2001 and 2000, these overdrafts totaled $5.6 million and $7.4 million, respectively. Time deposits with remaining maturities of one year or more are $686.9 million at December 31, 2001. The maturities of these time deposits are as follows: $441.9 million in 2003, $156.7 million in 2004, $52.4 million in 2005, $28.9 million in 2006 and $7.0 million after 2006. NOTE 10. SHORT-TERM BORROWINGS Short-term borrowings consist of Federal funds purchased and securities sold under agreements to repurchase, Federal Home Loan Bank (FHLB) borrowings, other bank borrowings, and demand notes to the U.S. Treasury. Federal funds purchased are overnight borrowings from other financial institutions. Securities sold under agreements to repurchase are secured transactions done principally with clients and generally mature within thirty days. Information relating to federal funds purchased and securities sold under agreements to repurchase follows:
- ----------------------------------------------------------------------------- (in thousands) 2001 2000 1999 - ----------------------------------------------------------------------------- At December 31: Balance $233,077 $394,466 $276,805 Weighted average interest rate paid 1.81% 6.35% 5.20% During the year: Maximum outstanding at any month-end $354,612 $540,652 $326,339 Daily average 242,945 305,402 256,718 Weighted average interest rate paid 4.32% 6.18% 4.74% - -----------------------------------------------------------------------------
A - 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A significant amount of short-term borrowings also consisted of FHLB advances and lines of credit to Citizens' subsidiary banks. Information relating to short-term FHLB borrowings follows:
- ------------------------------------------------------------------------------ (in thousands) 2001 2000 1999 - ------------------------------------------------------------------------------ At December 31: Balance $ -- $450,074 $555,874 Weighted average interest rate paid -- 6.54% 5.34% During the year: Maximum outstanding at any month-end $425,200 $622,874 $555,874 Daily average 222,310 581,467 196,055 Weighted average interest rate paid 6.25% 6.47% 5.26% - ------------------------------------------------------------------------------
Citizens' Parent company maintains a short-term line of credit with three unaffiliated banks totaling $75 million. The interest rate on the outstanding balance of $30 million at December 31, 2001 reprices daily and is based upon the Federal funds rate. Interest is payable monthly and the remaining principal is due in August 2002. The Parent company services the debt's principal and interest payments with dividends from the subsidiary banks. The agreement also requires Citizens to maintain certain financial covenants. Citizens is in full compliance with all debt covenants as of December 31, 2001. NOTE 11. LONG-TERM DEBT A summary of long-term debt follows:
- ------------------------------------------------------------- December 31, (in thousands) 2001 2000 - ------------------------------------------------------------- CITIZENS SUBSIDIARIES: FHLB Notes $628,818 $ 470,767 Other 281 350 -------- --------- Total long-term debt $629,099 $ 471,117 ======== ========= - -------------------------------------------------------------
Long-term advances from the FHLB are at fixed and variable rates ranging from 2.13% to 7.73% and have original maturities ranging from three to fifteen years. Interest is paid monthly. At December 31, 2001 and 2000, qualifying mortgage loans of $899 million and $1.3 billion, respectively, as well as FHLB stock collateralized long and short-term advances from the FHLB. Maturities of long-term debt during the next five years follow:
- -------------------------------------------------------------- (in thousands) - -------------------------------------------------------------- 2002 $ 125,729 2003 101,209 2004 973 2005 120,769 2006 981 Over 5 Years 279,438 --------- Total $ 629,099 ========= - --------------------------------------------------------------
NOTE 12. EMPLOYEE BENEFIT PLANS PENSION AND POSTRETIREMENT BENEFITS: Citizens maintains defined benefit pension plans covering the majority of its employees, and postretirement benefit plans for retirees that include health care benefits and life insurance coverage. Pension retirement benefits are based on the employee's length of service and salary levels. Actuarially determined pension costs are charged to current operations. 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 that allowable by federal tax regulations. Citizens also maintains nonqualified supplemental benefit plans for certain key employees. These plans are provided for by charges to earnings sufficient to meet the projected benefit obligation. The defined pension benefits provided under these plans are unfunded and any payments to plan participants are made by Citizens. Effective January 1, 2002 the defined benefit plan for Citizens' Michigan and Illinois employees (CBC Plan) was amended to provide for a new cash balance pension benefit. This amendment increased the projected benefit obligation of the CBC Plan by $1.1 million. Full-time employees that retire within the next five years with at least 10 years of service under the CBC Plan may elect to receive a benefit under the old formula, which is, in part, based on the employees' final five-year average base pay. In 2000, Citizens changed its pension plan benefit for its F&M employees. Previously only two of the 24 former F&M banks provided defined benefit plans to their employees. Effective January 1, 2000, Citizens extended coverage to substantially all F&M employees. These employees receive a pension benefit under a new cash balance plan. The assets and benefit obligation liabilities of the two previous F&M Plans were rolled into the new plan. A plan amendment to retroactively provide benefits as of January 1, 2000 increased the projected benefit obligation by $0.8 million. Citizens' postretirement benefit plan, as amended, is available to full-time employees who retire at normal retirement age, were age 50 prior to January 1, 1993 and have A - 34 at least 15 years of credited service under Citizens' defined benefit pension plan. The medical portion of the plan is contributory to the participants. The life insurance coverage is noncontributory and provided on a reducing basis for 5 years. Those retired prior to January 1, 1993 receive benefits provided by the plan prior to its amendment. That plan included dental care, had some retiree contribution requirements, and had less restrictive eligibility requirements. The following information summarizes activity in Citizens' pension and postretirement benefit plans.
- ---------------------------------------------------------------------------------------------------- Pension Postretirement Benefits Benefits ------------------------------------------------------------ (in thousands) 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation, beginning of year $ 63,825 $ 47,846 $ 15,613 $ 14,423 Benefit obligation of former F&M plans, January 1 -- 6,621 -- -- Service cost 2,988 2,922 12 12 Interest cost 4,878 4,420 1,148 1,094 Participant contribution -- -- 304 150 Actuarial (gains) losses 3,916 3,453 160 1,285 Plan amendments 1,123 2,561 -- -- Benefits paid (3,200) (3,998) (1,523) (1,351) -------- -------- -------- -------- Benefit obligation, end of year $ 73,530 $ 63,825 $ 15,714 $ 15,613 ======== ======== ======== ======== CHANGE IN PLAN ASSETS Fair value of plan assets, beginning of year $ 69,036 $ 63,647 $ -- $ -- Actual return on plan assets (3,813) 943 -- -- Employer contribution 1,439 288 1,219 1,201 Participant contribution -- -- 304 150 Assets of F&M plans -- 8,260 -- -- Expenses paid (335) (104) -- -- Benefits paid (3,200) (3,998) (1,523) (1,351) -------- -------- -------- -------- Fair value of plan assets, end of year $ 63,127 $ 69,036 $ -- $ -- ======== ======== ======== ======== RECONCILIATION OF FUNDED STATUS (Under)/Over funded $(10,403) $ 5,211 $(15,714) $(15,613) Unrecognized: Net transition asset - 16 yr amortization (42) (163) -- -- Prior service cost (benefit) 3,404 2,908 (37) (42) Net actuarial (gain) loss 4,001 (11,544) 930 793 Adjustment to recognize minimum liability (5,961) -- -- -- -------- -------- -------- -------- Net amount recognized in the consolidated balance sheets $ (9,001) $ (3,588) $(14,821) $(14,862) ======== ======== ======== ======== - ----------------------------------------------------------------------------------------------------
Pension plan assets consisted primarily of mutual and money market funds, and listed bonds and equity securities, including $686,000 and $606,000 of Citizens common stock at December 31, 2001 and 2000, respectively. The accrued pension benefit cost shown above includes the pension liabilities for plans where accumulated plan benefits exceed assets. In 2001, all plans had accumulated plan benefits in excess of assets. In 2000, only the supplemental benefit plans were under funded. The projected benefit obligation and accumulated benefit obligation for these plans were approximately $5.2 and $4.7 million, respectively, as of December 31, 2000. During 2000, the supplemental benefit plans were amended to enhance the benefit for active employees. This amendment increased Citizens' projected benefit obligation at December 31, 2000 by $1.8 million. The assumptions used in determining the actuarial present value of the benefit obligations and the net periodic pension expense follow:
- --------------------------------------------------------------------- Pension Postretirement Benefits Benefits ----------------- ------------------- 2001 2000 2001 2000 - --------------------------------------------------------------------- WEIGHTED-AVERAGE ASSUMPTIONS DECEMBER 31 Discount rate 7.25% 7.75% 7.25% 7.75% Expected return on plan assets 9.75 9.75 -- -- Rate of compensation increase (1) (1) -- -- - ---------------------------------------------------------------------
(1) Scaled by age of plan participant - 9.00% at age 24 or under declining to 4.00% at age 50 or older. 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 postretirement health care benefit plans, Citizens assumed a constant 5% annual health care cost trend rate in 2001 and for all future years. This assumption can have a significant effect on the amounts reported. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
- ---------------------------------------------------------------- One Percentage One Percentage (in thousands) Point Increase Point Decrease - --------------------------------------------------------------- Effect on total of service and interest cost components $ 97 $ (86) Effect on the postretirement benefit obligation 1,389 (1,234) - ---------------------------------------------------------------
A - 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of net periodic benefit cost charged to operations each year for all plans follow:
- ------------------------------------------------------------------------------------ Year Ended December 31, (in thousands) 2001 2000 1999 - ------------------------------------------------------------------------------------ DEFINED BENEFIT PENSION PLANS Service cost $ 2,988 $ 2,922 $ 2,304 Interest cost 4,878 4,420 4,018 Expected return on plan assets (6,873) (6,568) (5,554) Amortization of unrecognized: Net transition asset (123) (218) (218) Prior service cost 626 180 114 Net actuarial gain (586) (808) (464) ------- ------- ------- Net pension cost (income) 910 (72) 200 ------- ------- ------- POSTRETIREMENT BENEFIT PLANS Service cost 12 12 12 Interest cost 1,148 1,094 919 Amortization of unrecognized: Prior service cost (5) (385) (460) Net actuarial gain -- -- (57) ------- ------- ------- postretirement benefit cost 1,155 721 414 ------- ------- ------- DEFINED CONTRIBUTION RETIREMENT AND 401(K) PLANS Employer contributions 2,850 3,584 4,662 ------- ------- ------- Total periodic benefit cost $ 4,915 $ 4,233 $ 5,276 ======= ======= ======= - ------------------------------------------------------------------------------------
In the third quarter of 1999, Citizens adopted an alternative market-related value methodology for pension plan assets to better reflect plan asset earnings, a component of pension expense, in 1999 and future years. The change reduced 1999 annual pension expense by approximately $556,000. DEFINED CONTRIBUTION SAVINGS AND RETIREMENT PLANS: Substantially all employees are eligible to contribute a portion of their pre-tax salary to a defined contribution 401(k) savings plan. Under the plan, employee contributions are partially matched by Citizens. The employer matching contribution is 75 percent of the first 6% (100 percent of the first 3% plus 50 percent of the next 3%) of each eligible employee's qualifying salary contributed to the plan. In addition, one third of these matching contributions are used to fund a postretirement medical savings account established within the plan for each contributing employee. Plan assets from a defined contribution 401(k) savings plan and an Employee Stock Ownership Plan maintained by F&M and one of its subsidiaries prior to the merger were transferred into Citizens' plan during 2000. Employer matching contributions for the F&M 401(k) savings plan were based on the company's return on equity and incorporated a discretionary profit-sharing contribution. NOTE 13. INCOME TAXES Significant components of income taxes are as follows:
- ---------------------------------------------------------------------- Year Ended December 31, (in thousands) 2001 2000 1999 - ---------------------------------------------------------------------- Current tax expense: Federal $ 42,926 $ 31,773 $ 33,870 State 568 455 2,072 --------- --------- -------- Total current tax expense 43,494 32,228 35,942 Deferred tax expense (credit) (279) 3,585 (7,953) --------- -------- -------- Total income tax expense $ 43,215 $ 35,813 $ 27,989 ========= ========= ======== - ----------------------------------------------------------------------
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, 2001 and 2000 follow:
- -------------------------------------------------------------------- (in thousands) 2001 2000 - -------------------------------------------------------------------- Deferred tax assets: Allowance for loan losses $29,349 $29,211 Accrued special charges -- 1,227 Accrued postemployment benefits other than pensions 5,288 5,395 Other deferred tax assets 9,366 7,794 ------- ------- Deferred tax assets 44,003 43,627 ------- ------- Deferred tax liabilities: Tax over book depreciation 4,212 4,551 Acquisition premium on loans 4,027 3,689 Net unrealized gains on securities 11,067 6,306 Other deferred tax liabilities 3,949 3,851 ------- ------- Deferred tax liabilities 23,255 18,397 ------- ------- Net deferred tax assets $20,748 $25,230 ======= ======= - --------------------------------------------------------------------
A reconciliation of income tax expense to the amount computed by applying the federal statutory rate of 35% to income before income taxes follows:
- -------------------------------------------------------------------------------- Year Ended December 31, (in thousands) 2001 2000 1999 - -------------------------------------------------------------------------------- Tax at federal statutory rate applied to income before income taxes $ 51,755 $ 44,266 $ 31,494 Increase (decrease) in taxes resulting from: Tax-exempt interest (8,793) (8,229) (7,230) Other 253 (224) 3,725 -------- -------- -------- Total income tax expense $ 43,215 $ 35,813 $ 27,989 ======== ======== ======== - --------------------------------------------------------------------------------
A - 36 NOTE 14. EARNINGS PER SHARE A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations follows:
- -------------------------------------------------------------------------------- Year Ended December 31, (in thousands) 2001 2000 1999 - ------------------------------------------------------------------------------- NUMERATOR: Numerator for basic and dilutive earnings per share -- net income available to common shareholders $ 104,657 $ 90,660 $ 61,994 ========= ======== ======== DENOMINATOR: Denominator for basic earnings per share -- weighted average shares 46,085 47,310 48,169 Effect of dilutive securities - potential conversion of employee stock options 505 233 448 --------- -------- -------- Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed 46,590 47,543 48,617 ========= ======== ======== BASIC EARNINGS PER SHARE $ 2.27 $ 1.92 $ 1.29 ========= ======== ======== DILUTED EARNINGS PER SHARE $ 2.25 $ 1.91 $ 1.28 ========= ======== ======== - --------------------------------------------------------------------------------
All employee stock options were dilutive except for options granted in 1998 and 1999. See Note 15 for additional disclosures regarding employee stock options. NOTE 15. SHAREHOLDERS' EQUITY RIGHTS AGREEMENT: Citizens is a party to a Rights Agreement, dated May 23, 2000, designed to protect shareholders from unfair takeover offers by encouraging a potential buyer to negotiate with Citizens' board prior to attempting a takeover. Owners of Citizens' common shares have been granted rights under the Rights Agreement to purchase one one-thousandth of a share of Series B Preferred Stock at an exercise price of $65, subject to adjustment. The rights are not exercisable or separately tradable until after a public announcement that a person or group, without board approval, has acquired 15% or more of Citizens' common shares or has commenced a tender offer to do so. If a person or group acquires 15% or more of the common shares, the rights (other than those held by the acquiror, which become void) become exercisable to purchase common shares having a fair value of $130 for $65, or the board may exchange one common share for each outstanding right (other than those held by the acquiror). If the acquiror merges Citizens into another entity, the rights become exercisable for common shares of the surviving entity having a fair value of $130 for $65. The rights are redeemable by the board at any time prior to May 23, 2010 for $.001 per right. The Rights Agreement may be amended by the board without shareholder or right holder approval at any time prior to the acquisition by a person or group of 15% or more of the common shares. The rights will cause substantial dilution to a person or group attempting to acquire Citizens without action by Citizens' board to deactivate the rights. STOCK REPURCHASE PLANS: Citizens purchased shares under a stock repurchase program initiated May 2000. This program authorized Citizens to purchase up to 3,000,000 shares for treasury. During the year, 1,765,900 shares were purchased under this plan, completing that program. Citizens initiated a new stock repurchase program of 3,000,000 shares in October 2001. A total of 187,700 shares were purchased under this program through year-end. For the year ended December 31, 2001, a total of 1,953,600 shares were purchased under the plans at an average price of $29.94. As of December 31, 2001, there were 2,812,300 shares available for purchase under the current program. The treasury shares have been accorded the accounting treatment as if retired. STOCK OPTION PLAN: Citizens' stock option plan, as amended and restated in April 1997, authorizes the granting of incentive and nonqualified stock options, tandem stock appreciation rights, restricted stock and performance share grants to key employees. Aggregate grants under the plan may not exceed 3,000,000 shares within any six-year period and are limited annually to 3% of Citizens' outstanding common stock as of the first day of the year, plus any unused shares that first become available for grants in the prior year. The exercise price of all options granted under the plan is equal to the market price of Citizens' stock on the date of grant. Options may be granted until January 16, 2002 and expire ten years from the date of grant. Options granted since April 1992 are exercisable subject to a predetermined vesting schedule based on achievement of certain return on average asset or earnings per share targets. At December 31, 2001, options outstanding under the plan totaled 2,502,940 shares of which 1,115,941 shares are exercisable subject to future achievement of the performance targets. These options become exercisable after five years if the performance targets are not met. Canceled or expired options become available for future grants. OTHER STOCK OPTIONS: On May 18, 2000, Citizens granted stock options to all employees who did not receive grants under the key employee stock option plan. Each full-time employee received 200 shares and each part-time employee received 100 shares. The $16.66 exercise price of the grant was the market price of Citizens' stock on the grant date. The options are exercisable subject to Citizens achieving $2.65 earnings per share on a rolling four-quarter basis or three years, whichever comes first. No shares of this option grant are yet exercisable. The options expire ten years from A - 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the date of grant. A total of 550,700 shares were granted of which 398,900 shares were outstanding as of December 31, 2001. Citizens maintains a stock option plan for its directors. Under this plan, each non-employee director of Citizens serving on the board immediately following an annual meeting of shareholders receives an option grant of 1,500 shares. Options outstanding under the plan totaled 90,000 shares as of December 31, 2001. Other stock options of Citizens include those granted by F&M to its directors and key employees and converted into Citizens' options at the time of the merger. A total of 51,033 shares of these options were outstanding at year-end 2001. Citizens has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options as permitted by Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation." Under APB 25, no compensation expense is recognized by Citizens because the exercise price of the stock options equals the market price of the underlying stock on the date of grant. Statement 123 requires certain pro forma disclosures regarding net income and earnings per share as if Citizens had accounted for its stock options under the fair value method of that statement. The following table provides these disclosures along with significant assumptions used to estimate the fair value of these options:
- ------------------------------------------------------------------------------------------ 2001 2000 1999 - ------------------------------------------------------------------------------------------ Pro forma amounts: Net income (in thousands) $ 102,808 $ 89,020 $ 60,590 Net income per share: Basic 2.23 1.88 1.26 Diluted 2.21 1.87 1.25 Assumptions: Dividend yield 3.5% 3.5% 3.0% Expected volatility 28.0% 25.0% 19.5% Risk-free interest rate 5.02% 6.80% 5.59% Expected lives 5 YRS. 5 yrs. 5 yrs. - ------------------------------------------------------------------------------------------
A summary of stock option transactions under the plans for 2001, 2000 and 1999 follows:
- --------------------------------------------------------------------------------------------------------------------------- Options Option Price ------------------------------------- --------------------------------------- Available Per Share for Grant Outstanding Range Average - --------------------------------------------------------------------------------------------------------------------------- January 1, 1999 845,402 2,128,461 $ 5.40-36.31 $ 20.33 Authorized 201,237 -- -- -- Granted (455,229) 455,229 22.93-32.59 29.99 Exercised -- (287,906) 5.40-27.51 11.70 Canceled 29,287 (29,287) 24.85-35.63 31.88 ---------- ---------- ------------- --------- December 31, 1999 620,697 2,266,497 5.40-36.31 23.22 Authorized 803,897 -- -- -- Granted (1,224,350) 1,224,350 16.66-16.91 16.67 Exercised -- (158,544) 5.40-21.83 12.32 Canceled 52,336 (141,299) 16.66-35.63 20.54 ---------- ---------- ------------- --------- December 31, 2000 252,580 3,191,004 8.50-36.31 21.36 AUTHORIZED 566,858 -- -- -- GRANTED (651,200) 651,200 25.42-25.72 25.43 EXERCISED -- (591,602) 8.50-28.21 18.07 CANCELED 117,277 (207,729) 16.66-36.31 20.45 ---------- ---------- ------------- --------- DECEMBER 31, 2001 285,515 3,042,873 $ 11.75-36.31 $ 22.94 ========== ========== ============= ========= - ---------------------------------------------------------------------------------------------------------------------------
A - 38 The following table summarizes information on stock options outstanding as of December 31, 2001:
--------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable --------------------------------------------- ---------------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Range Amount Life Exercise Price Amount Exercise Price --------------------------------------------------------------------------------------------------------- $ 11.75 - 17.00 1,007,535 8.0 years $ 16.54 194,350 $16.03 17.00 - 25.00 717,801 4.5 20.22 717,801 20.22 25.00 - 36.31 1,317,537 7.8 29.31 615,881 31.22 --------- -------- $ 11.75 - 36.31 3,042,873 7.1 22.94 1,528,032 24.12 -----------------------------------------------------------------------------------------------------------
NOTE 16. COMMITMENTS AND CONTINGENT LIABILITIES The Consolidated Financial Statements do not reflect various loan commitments (unfunded loans and unused lines of credit) and letters of credit originated in the normal course of business. Loan commitments are made to accommodate the financial needs of clients. Generally, new loan commitments do not extend beyond 90 days and unused lines of credit are reviewed at least annually. Letters of credit guarantee future payment of client financial obligations to third parties. They are issued primarily for services provided or to facilitate the shipment of goods, and generally expire within one year. Both arrangements have essentially the same level of credit risk as that associated with extending loans to clients and are subject to Citizens' normal credit policies. Inasmuch as these arrangements generally have fixed expiration dates or other termination clauses, most expire unfunded and do not necessarily represent future liquidity requirements. Collateral is obtained based on management's assessment of the client and may include receivables, inventories, real property and equipment. Amounts available to clients under loan commitments and letters of credit follow:
- ------------------------------------------------------------- December 31, (in thousands) 2001 2000 - ------------------------------------------------------------- LOAN COMMITMENTS AND LETTERS OF CREDIT: Commitments to extend credit $ 1,683,239 $1,699,174 Standby letters of credit 53,718 55,469 Commercial letters of credit 91,807 95,385 - -------------------------------------------------------------
Loan commitments outstanding include $75.6 million of credit card commitments and $263.2 million of home equity credit lines in 2001. The same amounts for 2000 were $247.4 million and $230.0 million, respectively. Citizens and its subsidiaries are parties to litigation arising in the ordinary course of business. Management believes that the aggregate liability, if any, resulting from these proceedings would not have a material effect on Citizens' consolidated financial position. NOTE 17. FAIR VALUES OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosure About Fair Value of Financial Instruments". Where quoted market prices are not available, as is the case for a significant portion of Citizens' financial instruments, the fair values are based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the derived fair value estimates presented herein cannot be substantiated by comparison to independent markets and are not necessarily indicative of the amounts Citizens could realize in a current market exchange. In addition, the fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, Citizens has a substantial trust department that contributes net fee income annually. The trust department is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include Citizens' brokerage network, net deferred tax asset, premises and equipment, goodwill and deposit based intangibles. In addition, tax ramifications related to the recognition of unrealized gains and losses such as those within the investment securities portfolio can also have a significant effect on estimated fair values and have not been considered in the estimates. Accordingly, the aggregate fair value amounts do not represent the underlying value of Citizens. A-39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The estimated fair values of Citizens' financial instruments follow:
- --------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2001 December 31, 2000 --------------------------- --------------------------- CARRYING ESTIMATED Carrying Estimated (in millions) AMOUNT FAIR VALUE Amount Fair Value - --------------------------------------------------------------------------------------------------------------------------------- Financial assets: Cash and money market investments $ 267.0 $ 267.0 $ 345.6 $ 345.6 Investment securities 1,259.5 1,259.5 1,384.1 1,384.1 Net loans 5,842.1 5,965.8 6,342.7 6,376.5 Financial liabilities: Deposits 5,965.1 6,008.6 6,244.1 6,256.4 Short-term borrowings 314.4 314.6 933.3 933.5 Long-term debt 629.1 648.0 471.1 471.5 Off-balance sheet financial instrument liabilities: Loan commitments --- 3.2 --- 2.5 Standby and commercial letters of credit --- 0.7 --- 0.8 - ---------------------------------------------------------------------------------------------------------------------------------
The various methods and assumptions used by Citizens in estimating fair value for its financial instruments are set forth below: CASH AND MONEY MARKET INVESTMENTS: The carrying amounts reported in the balance sheet for cash and money market investments approximate those assets' fair values because they mature within six months and do not present unanticipated credit concerns. INVESTMENT SECURITIES: The carrying amounts reported in the balance sheet for investment securities approximate those assets' fair values as all investment securities are classified as available for sale. SFAS No. 115 requires securities carried in the available for sale category to be carried at fair value - see Note 5. The fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. LOANS RECEIVABLE: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage, credit card, and other consumer. Each loan category is further segmented into fixed and variable-rate interest types and for certain categories by performing and nonperforming. For performing variable-rate loans that reprice frequently (within twelve months) and with no significant change in credit risk, fair values are based on carrying values. Similarly, for credit card loans with no significant credit concerns and average interest rates approximating current market origination rates, the carrying amount is a reasonable estimate of fair value. Fair values of other loans (e.g., fixed-rate commercial, commercial real estate, residential mortgage and other consumer loans) are estimated by discounting the future cash flows using interest rates currently being offered by Citizens for loans with similar terms and remaining maturities (new loan rates). Management believes the risk factor embedded in the new loan rates adequately represents the credit risk within the portfolios. Fair values for nonperforming loans are estimated after giving consideration to credit risk and estimated cash flows and discount rates based on available market and specific borrower information. The carrying amount of accrued interest for all loan types approximates its fair value. DEPOSIT LIABILITIES: Under SFAS 107, the fair value of demand deposits (e.g., interest and noninterest checking, passbook savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for certificates of similar remaining maturities. SHORT-TERM BORROWINGS: The carrying amounts of federal funds purchased, securities sold under agreement to repurchase and other short-term borrowings approximate their fair values. LONG-TERM DEBT: The carrying value of Citizens' variable-rate long-term debt approximates its fair value. The fair value of fixed-rate long-term debt is estimated using discounted cash flow analyses, based on Citizens' current incremental borrowing rates for similar types of borrowing arrangements. LOAN COMMITMENTS AND LETTERS OF CREDIT: The fair value of loan commitments and letter of credit guarantees is based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. A-40 NOTE 18. LINES OF BUSINESS The financial performance of Citizens is monitored by an internal profitability measurement system, which provides line of business results and key performance measures. The profitability measurement system is based on internal management methodologies designed to produce consistent results and reflect the underlying economics of the businesses. The development and application of these methodologies is a dynamic process. Accordingly, these measurement tools and assumptions may be revised periodically to reflect methodological, product, and/or management organizational changes. Further, these policies measure financial results that support the strategic objectives and internal organizational structure of Citizens. Consequently, the information presented is not necessarily comparable with similar information for other institutions. Citizens is managed along the following business lines: Commercial Banking, Retail Banking, Financial Services, F&M and Other. COMMERCIAL BANKING: Commercial Banking provides a full range of credit and related financial services to middle market corporate, small business, government and leasing clients. Products and services offered include commercial loans, commercial mortgages, small business loans, letters of credit, deposit accounts, cash management and international trade services. RETAIL BANKING: Retail Banking includes consumer lending and deposit gathering, electronic banking and residential mortgage loan origination and servicing. This line of business offers a variety of retail financial products and services including deposit accounts, direct and indirect installment loans, debit and credit cards, home equity lines of credit, residential mortgage loans, fixed and variable annuities and ATM network services. FINANCIAL SERVICES: Financial Services provides commercial and retail clients with private banking, trust and investment, retirement plan, and brokerage and insurance services. Private banking focuses on high net-worth customers and offers a broad array of asset management, estate settlement and administration, deposit and credit products. Trust and investment includes personal trust and planning services, investment management services, estate settlement, administration and advises the Golden Oak family of mutual funds. Retirement plan services focus on investment management and fiduciary activities with special emphasis on 401(k) plans. The brokerage and insurance businesses deliver Citizens' retail mutual funds, other securities, variable and fixed annuities, personal disability and life insurance products and discounted brokerage services. F&M: F&M provides a full range of consumer and commercial banking services to individuals, and commercial and agricultural businesses, in Wisconsin and Iowa through a network of branch locations. Products and services offered include deposit accounts; commercial, commercial mortgage, agricultural, small business, residential mortgage and consumer loans; financial planning and trust; brokerage, insurance, ATM, credit card and cash management services. OTHER: All other includes activities that are not directly attributable to one of the four major lines of business. Included in this category is the parent company, Citizens' securities portfolio and asset liability management activities, inter-company eliminations, and the economic impact of certain assets, capital and support functions not specifically identifiable with the four primary lines of business. The accounting policies on the individual business units are the same as those of Citizens described in Note 1 to the Consolidated Financial Statements. Funds transfer pricing is used in the determination of net interest income by assigning a 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 Commercial, Retail and Financial Services 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, which is a component of "Other". Changes in net interest income due to changes in interest rates for F&M are included in the operating income of F&M. Noninterest income and expenses directly attributable to a line of business are assigned to that business. Expenses for centrally provided services are allocated to the business lines as follows: product processing and technology expenditures are allocated based on standard unit costs applied to actual volume measurements; corporate overhead is allocated based on the ratio of a line of business' noninterest expenses to total noninterest expenses incurred by all business lines. The provision for loan losses was allocated in an amount based primarily upon the actual net charge-offs of each respective line of business, adjusted for loan growth and changes in risk profile. Selected segment information is included in the following table. A-41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------------------------------------------ LINE OF BUSINESS INFORMATION Net Income Before Non- Non- Commercial Retail Financial recurring recurring (in thousands) Banking Banking Services F&M Other Items Items Total - ----------------------------------------------------------------------------------------------------------------------------------- EARNINGS SUMMARY - 2001 Net interest income (taxable equivalent) $ 92,714 $ 125,418 $ 1,140 $ 94,000 $ 9,544 $ 322,816 $ -- $ 322,816 Provision for loan losses 6,949 7,046 -- 13,033 (621) 26,407 -- 26,407 --------- --------- --------- --------- --------- --------- --------- --------- Net interest income after provision 85,765 118,372 1,140 80,967 10,165 296,409 -- 296,409 Noninterest income 13,777 40,532 23,139 19,326 902 97,676 19,805 117,481 Noninterest expense 44,584 104,732 14,267 70,580 17,020 251,183 -- 251,183 --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) before income taxes 54,958 54,172 10,012 29,713 (5,953) 142,902 19,805 162,707 Income tax expense (taxable equivalent) 19,235 18,960 3,504 10,758 (744) 51,713 6,337 58,050 --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss) $ 35,723 $ 35,212 $ 6,508 $ 18,955 $ (5,209) $ 91,189 $ 13,468 $ 104,657 Allocation of nonrecurring items -- 5,197 -- 1,110 7,161 (13,468) -- --------- --------- --------- --------- --------- --------- --------- Net income (loss) $ 35,723 $ 40,409 $ 6,508 $ 20,065 $ 1,952 $ -- $ 104,657 ========= ========= ========= ========= ========= ========= ========= AVERAGE ASSETS (IN MILLIONS) $ 2,128 $ 2,804 $ 9 $ 2,633 $ 363 $ 7,936 ========= ========= ========= ========= ========= ========= - ----------------------------------------------------------------------------------------------------------------------------------- EARNINGS SUMMARY - 2000 Net interest income (taxable equivalent) $ 91,718 $ 132,582 $ 1,330 $ 104,177 $ (857) $ 328,950 $ -- $ 328,950 Provision for loan losses 6,044 10,278 -- 4,103 558 20,983 -- 20,983 --------- --------- --------- --------- --------- --------- --------- --------- Net interest income after provision 85,674 122,304 1,330 100,074 (1,415) 307,967 -- 307,967 Noninterest income 12,352 31,914 26,618 16,633 2,827 90,344 -- 90,344 Noninterest expense 42,965 102,834 18,174 63,733 14,515 242,221 15,541 257,762 --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) before income taxes 55,061 51,384 9,774 52,974 (13,103) 156,090 (15,541) 140,549 Income tax expense (taxable equivalent) 19,272 17,983 3,420 19,335 (4,044) 55,966 (6,077) 49,889 --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss) $ 35,789 $ 33,401 $ 6,354 $ 33,639 $ (9,059) $ 100,124 $ (9,464) $ 90,660 Allocation of special charge and related items -- -- -- (7,672) (1,792) 9,464 -- --------- --------- --------- --------- --------- --------- --------- Net income (loss) $ 35,789 $ 33,401 $ 6,354 $ 25,967 $ (10,851) $ -- $ 90,660 ========= ========= ========= ========= ========= ========= ========= AVERAGE ASSETS (IN MILLIONS) $ 2,025 $ 2,596 $ 17 $ 2,745 $ 690 $ 8,073 ========= ========= ========= ========= ========= ========= - ----------------------------------------------------------------------------------------------------------------------------------- EARNINGS SUMMARY - 1999 Net interest income (taxable equivalent) $ 76,788 $ 112,889 $ 1,357 $ 110,718 $ 20,095 $ 321,847 $ -- $ 321,847 Provision for loan losses 1,708 14,256 -- 2,975 (1,064) 17,875 6,800 24,675 --------- --------- --------- --------- --------- --------- --------- --------- Net interest income after provision 75,080 98,633 1,357 107,743 21,159 303,972 (6,800) 297,172 Noninterest income 10,526 28,500 24,177 15,994 6,391 85,588 2,097 87,685 Noninterest expense 38,821 95,703 18,159 63,002 21,093 236,778 46,293 283,071 --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) before income taxes 46,785 31,430 7,375 60,735 6,457 152,782 (50,996) 101,786 Income tax expense (taxable equivalent) 16,375 11,000 2,581 22,785 2,887 55,628 (15,836) 39,792 --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss) $ 30,410 $ 20,430 $ 4,794 $ 37,950 $ 3,570 $ 97,154 $ (35,160) $ 61,994 Allocation of special charge and related items -- -- -- (26,748) (8,412) 35,160 -- --------- --------- --------- --------- --------- --------- --------- Net income (loss) $ 30,410 $ 20,430 $ 4,794 $ 11,202 $ (4,842) $ -- $ 61,994 ========= ========= ========= ========= ========= ========= ========= AVERAGE ASSETS (IN MILLIONS) $ 1,655 $ 2,138 $ 16 $ 2,602 $ 931 $ 7,342 ========= ========= ========= ========= ========= ========= - 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A-42 NOTE 19. REGULATORY MATTERS The Federal Reserve Bank requires Citizens' banking subsidiaries to maintain certain noninterest-bearing deposits. These reserve balances vary depending upon the level of client deposits in the subsidiary banks. During 2001 and 2000, the average reserve balances were $41.9 million and $56.8 million, respectively. The bank subsidiaries are also subject to limitations under banking laws on extensions of credit to members of the affiliate group and on dividends that can be paid to Citizens. Generally extensions of credit are limited to 10% to any one affiliate and 20% in aggregate to all affiliates of a subsidiary bank's capital and surplus (net assets) as defined. Unless prior regulatory approval is obtained, dividends declared in any calendar year may not exceed the retained net profit, as defined, of that year plus the retained net profit of the preceding two years. At January 1, 2002, the bank subsidiaries could distribute to Citizens approximately $24.8 million in dividends without regulatory approval. Their 2002 net income will also become available for such dividends. Citizens and its banking subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines must be met that involve quantitative measures of the assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require Citizens and its banking subsidiaries to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets (as defined in the regulations), and of Tier 1 capital to average assets (as defined). Management believes, as of December 31, 2001, that Citizens and its banking subsidiaries meet all capital adequacy requirements to which it is subject. As of December 31, 2001, the most recent notification from the Federal Reserve Board categorized Citizens and its banking subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized Citizens and its banking subsidiaries must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes would result in a change.
- ----------------------------------------------------------------------------------------------------------------- RISK BASED CAPITAL REQUIREMENTS To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------- ----------------------------- ---------------------------- (in thousands) Amount Ratio Amount Ratio Amount Ratio - ----------------------------------------------------------------------------------------------------------------- CITIZENS BANKING CORPORATION AS OF DECEMBER 31, 2001: Total Capital to risk weighted assets (1) $ 669,332 11.1% $ 481,512 greater than or $ 601,889 greater than or equal to 8.0% equal to 10.0% Tier 1 Capital to risk weighted assets (1) 594,033 9.9 240,756 greater than or 361,134 greater than or equal to 4.0 equal to 6.0 Tier 1 Leverage (2) 594,033 7.8 304,854 greater than or 381,068 greater than or equal to 4.0 equal to 5.0 As of December 31, 2000: Total Capital to risk weighted assets (1) $ 659,901 10.3% $ 512,362 greater than or $ 640,453 greater than or equal to 8.0% equal to 10.0% Tier 1 Capital to risk weighted assets (1) 579,844 9.1 256,181 greater than or 384,272 greater than or equal to 4.0 equal to 6.0 Tier 1 Leverage (2) 579,844 7.1 326,142 greater than or 407,677 greater than or equal to 4.0 equal to 5.0 CITIZENS BANK AS OF DECEMBER 31, 2001: Total Capital to risk weighted assets (1) $ 425,456 10.4% $ 327,353 greater than or $ 409,191 greater than or equal to 8.0% equal to 10.0% Tier 1 Capital to risk weighted assets (1) 374,294 9.2 163,676 greater than or 245,515 greater than or equal to 4.0 equal to 6.0 Tier 1 Leverage (2) 374,294 7.5 199,801 greater than or 249,751 greater than or equal to 4.0 equal to 5.0 As of December 31, 2000: Total Capital to risk weighted assets (1) $ 435,996 10.6% $ 330,086 greater than or $ 412,608 greater than or equal to 8.0% equal to 10.0% Tier 1 Capital to risk weighted assets (1) 384,417 9.3 165,043 greater than or 247,565 greater than or equal to 4.0 equal to 6.0 Tier 1 Leverage (2) 384,417 7.5 205,479 greater than or 256,849 greater than or equal to 4.0 equal to 5.0 - -----------------------------------------------------------------------------------------------------------------
(1) Total Capital is comprised of Tier 1 Capital plus a portion of the allowance for loan losses. Tier 1 Capital consists of total equity less unrealized gains and losses accumulated in other comprehensive income, certain intangible assets and adjustments related to the valuation of mortgage servicing assets. (2) Tier 1 Capital to quarterly average assets A-43 NOTE 20. CITIZENS BANKING CORPORATION (PARENT ONLY) STATEMENTS
- ------------------------------------------------------------------------------------------------------------------------------ BALANCE SHEETS CITIZENS BANKING CORPORATION (PARENT ONLY) December 31, (in thousands) 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash $ 5 $ 5 Money market investments 2,969 7,916 Investment securities 73 63 Investment in subsidiaries - principally banks 719,422 715,726 Goodwill - net 265 1,061 Other assets 5,349 5,771 ---------- ---------- TOTAL ASSETS $ 728,083 $ 730,542 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Short-term revolving credit $ 30,000 $ 48,000 Other liabilities 619 2,563 ---------- --------- Total liabilities 30,619 50,563 Shareholders' equity 697,464 679,979 ---------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 728,083 $ 730,542 ========== ========= - ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ STATEMENTS OF INCOME CITIZENS BANKING CORPORATION (PARENT ONLY) Year Ended December 31, (in thousands) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------ INCOME Dividends from subsidiaries - principally banks $107,400 $ 79,400 $ 54,686 Interest from bank subsidiary 32 18 193 Service fees from bank subsidiaries 9,435 9,517 9,668 Equity security gain 11,017 --- 5,693 Other 890 646 205 -------- -------- -------- Total 128,774 89,581 70,445 -------- -------- -------- EXPENSES Interest 1,904 3,099 1,486 Amortization of goodwill 796 796 796 Salaries and employee benefits 9,955 9,333 9,780 Service fees paid to bank subsidiaries 1,265 1,215 1,156 Special charge --- (211) 3,464 Other noninterest expense 3,888 1,884 1,474 -------- ------ -------- Total 17,808 16,116 18,156 -------- ------- -------- Income before income taxes and equity in undistributed earnings of subsidiaries 110,966 73,465 52,289 Income tax benefit (1,197) 2,727 846 Equity in undistributed earnings of subsidiaries (5,112) 14,468 8,859 -------- -------- -------- NET INCOME $104,657 $ 90,660 $ 61,994 ======== ======== ======== - ------------------------------------------------------------------------------------------------------------------------------
A-44
- ---------------------------------------------------------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS CITIZENS BANKING CORPORATION (PARENT ONLY) Year Ended December 31, (in thousands) 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 104,657 $ 90,660 $ 61,994 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of goodwill 796 796 796 Equity security gain (11,017) --- (5,693) Accrued merger related charges --- --- 1,669 Equity in undistributed earnings of subsidiaries 5,112 (14,468) (8,859) Other (1,525) (2,657) (3,114) ------- -------- ------- Net cash provided by operating activities 98,023 74,331 46,793 ------- -------- ------- INVESTING ACTIVITIES Net decrease in interest-bearing deposit at subsidiary bank --- --- 4,500 Net (increase) decrease in money market investments 4,947 (6,814) 6,333 Purchases of investment securities --- (19) (5,996) Proceeds from sales and maturities of investment securities --- 33 5,995 Proceeds from sale of Magic Line, Inc. stock --- --- 5,693 Proceeds from sale of NYCE stock 11,017 --- --- ------- -------- -------- Net cash provided (used) by investing activities 15,964 (6,800) 16,525 ------- -------- -------- FINANCING ACTIVITIES Proceeds from short-term borrowings 6,000 6,000 42,000 Principal reductions in short-term borrowings (24,000) --- --- Proceeds from issuance of long-term debt --- --- 22,000 Principal reductions in long-term debt --- --- (35,000) Cash dividends paid (50,158) (48,108) (41,801) Proceeds from stock options exercised 12,662 1,879 3,349 Shares acquired for retirement (58,491) (27,302) (53,866) --------- -------- -------- Net cash used by financing activities (113,987) (67,531) (63,318) --------- -------- -------- Net increase in cash --- --- --- Cash at beginning of year 5 5 5 --------- -------- -------- Cash at end of year $ 5 $ 5 $ 5 ========= ======== ======== - ----------------------------------------------------------------------------------------------------------------------------
A - 45 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS BOARD OF DIRECTORS CITIZENS BANKING CORPORATION We have audited the accompanying consolidated balance sheets of Citizens Banking Corporation and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Citizens Banking Corporation and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP Detroit, Michigan January 17, 2002 A-46 REPORT OF MANAGEMENT MANAGEMENT'S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS Management is responsible for the preparation of the Consolidated Financial Statements and all other financial information appearing in this Annual Report. The Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States. SYSTEM OF INTERNAL CONTROLS Citizens maintains a system of internal controls designed to provide reasonable assurance that assets are safe-guarded and that the financial records are reliable for preparing Consolidated Financial Statements. The selection and training of qualified personnel and the establishment and communication of accounting and administrative policies and procedures are elements of this control system. The effectiveness of the internal control system is monitored by a program of internal audit and by independent certified public accountants ("independent auditors"). Management recognizes that the cost of a system of internal controls should not exceed the benefits derived and that there are inherent limitations to be considered in the potential effectiveness of any system. Management believes Citizens' system provides the appropriate balance between costs of controls and the related benefits. AUDIT COMMITTEE OF THE BOARD The Audit Committee of the Board of Directors, comprised entirely of outside directors, recommends the independent auditors who are engaged upon approval by the Board of Directors. The committee meets regularly with the internal auditor and the independent auditors to review timing and scope of audits and review audit reports. The internal auditor and the independent auditors have free access to the Audit Committee. INDEPENDENT AUDITORS The Consolidated Financial Statements in this Annual Report have been audited by Citizens' independent auditors, Ernst & Young LLP, for the purpose of determining that the Consolidated Financial Statements are free of material misstatement. Their audit considered Citizens' internal control structure to the extent necessary to determine the scope of their auditing procedures. /s/ John W. Ennest /s/ Robert J. Vitito John W. Ennest Robert J. Vitito Vice Chairman, Chairman, Chief Financial Officer and Treasurer President and Chief Executive Officer A - 47 EX-21 7 k68118ex21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 (FORM 10-K) SUBSIDIARIES OF CITIZENS BANKING CORPORATION
Jurisdiction or Ownership Incorporation of Subsidiaries Percentage Organization - ------------------------------------------------------------------------------------------------------------------- Citizens Bank Michigan Citizens Commercial Leasing Corporation 100% Michigan CB Financial Services, Inc. 100% Michigan Citizens Title Services, Inc. 100% Michigan Citizens Bank Mortgage Corporation 100% Michigan Citizens Service Company, Inc. 100% Michigan Citizens Bank Consumer Finance, LLC 1% Michigan Citizens Bank Consumer Finance, LLC 99% Michigan Citizens Card Company 100% Michigan CB Capital Management, Inc. 100% Michigan Citizens Bank - Illinois, N.A. 100% National Association F&M Bancorporation, Inc. 100% Wisconsin F&M Bank - Wisconsin 100% Wisconsin Pulaski Capital Corporation 100% Nevada F&M Bank - Iowa 100% Iowa Security Bancservices, Inc. 100% Iowa
EX-23 8 k68118ex23.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23 (FORM 10-K) CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in (1) the Registration Statement (Form S-8 No. 33-47686 dated May 5, 1992) pertaining to the Citizens Banking Corporation Second Amended Stock Option Plan; (2) the Registration Statement (Form S-8 No. 33-61197 dated July 21, 1995) pertaining to the Citizens Banking Corporation Stock Option Plan for Directors; (3) the Registration Statement (Form S-8 No. 333-09455 dated August 2, 1996) pertaining to the Citizens Banking Corporation Amended and Restated Section 401(k) Plan; (4) the Registration Statement (Post Effective Amendment No. 1 to Form S-4 on Form S-8 No. 333-86569 dated December 22, 1999) pertaining to the F&M Bancorporation, Inc. stock option plans; and (5) the Registration Statement (Form S-8 No. 333-40100 dated June 26, 2000) pertaining to the Citizens Banking Corporation All Employee Stock Option Plan, of our report dated January 17, 2002, with respect to the consolidated financial statements of Citizens Banking Corporation included in the annual report (Form 10-K) for the year ended December 31, 2001. /s/ Ernst & Young LLP - ---------------------------- Ernst & Young LLP Detroit, Michigan March 25, 2002 -----END PRIVACY-ENHANCED MESSAGE-----