Attached files
file | filename |
---|---|
EX-31.1 - EX-31.1 - CITIZENS REPUBLIC BANCORP, INC. | k50290exv31w1.htm |
EX-32.1 - EX-32.1 - CITIZENS REPUBLIC BANCORP, INC. | k50290exv32w1.htm |
EX-31.2 - EX-31.2 - CITIZENS REPUBLIC BANCORP, INC. | k50290exv31w2.htm |
EX-10.63 - EX-10.63 - CITIZENS REPUBLIC BANCORP, INC. | k50290exv10w63.htm |
EX-10.64 - EX-10.64 - CITIZENS REPUBLIC BANCORP, INC. | k50290exv10w64.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2011
or
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file Number 001-33063
CITIZENS REPUBLIC BANCORP, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN | 38-2378932 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
328 S. Saginaw St., Flint, Michigan | 48502 | |
(Address of principal executive offices) | (Zip Code) |
(810) 766-7500
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(check one)
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Class | Outstanding at April 29, 2011 | |
Common Stock, No Par Value | 397,777,045 Shares |
Citizens Republic Bancorp, Inc.
Index to Form 10-Q
Index to Form 10-Q
2
Table of Contents
Consolidated Balance Sheets (Unaudited)
Citizens Republic Bancorp, Inc.
Citizens Republic Bancorp, Inc.
March 31, | December 31, | March 31, | ||||||||||
(in thousands, except share amounts) | 2011 | 2010 | 2010 | |||||||||
Assets |
||||||||||||
Cash and due from banks |
$ | 136,638 | $ | 127,585 | $ | 148,161 | ||||||
Money market investments |
495,562 | 409,079 | 760,746 | |||||||||
Investment Securities: |
||||||||||||
Securities available for sale, at fair value |
2,119,416 | 2,049,528 | 2,057,599 | |||||||||
Securities held to maturity, at amortized cost
(fair value of $541,646, $469,421 and $115,484, respectively) |
547,449 | 474,832 | 113,259 | |||||||||
Total investment securities |
2,666,865 | 2,524,360 | 2,170,858 | |||||||||
FHLB and Federal Reserve stock |
143,873 | 143,873 | 155,084 | |||||||||
Portfolio loans: |
||||||||||||
Commercial and industrial |
1,353,167 | 1,474,227 | 1,824,801 | |||||||||
Commercial real estate |
1,794,284 | 2,120,735 | 2,768,299 | |||||||||
Total commercial |
3,147,451 | 3,594,962 | 4,593,100 | |||||||||
Residential mortgage |
727,304 | 756,245 | 877,201 | |||||||||
Direct consumer |
1,006,424 | 1,045,530 | 1,174,726 | |||||||||
Indirect consumer |
823,019 | 819,865 | 794,183 | |||||||||
Total portfolio loans |
5,704,198 | 6,216,602 | 7,439,210 | |||||||||
Less: Allowance for loan losses |
(224,117 | ) | (296,031 | ) | (322,377 | ) | ||||||
Net portfolio loans |
5,480,081 | 5,920,571 | 7,116,833 | |||||||||
Loans held for sale |
38,121 | 40,347 | 107,772 | |||||||||
Premises and equipment |
102,162 | 104,714 | 108,680 | |||||||||
Goodwill |
318,150 | 318,150 | 318,150 | |||||||||
Other intangible assets |
9,626 | 10,454 | 13,247 | |||||||||
Bank owned life insurance |
218,016 | 217,757 | 216,179 | |||||||||
Other assets |
115,019 | 148,755 | 212,115 | |||||||||
Assets of discontinued operations |
| | 324,097 | |||||||||
Total assets |
$ | 9,724,113 | $ | 9,965,645 | $ | 11,651,922 | ||||||
Liabilities |
||||||||||||
Noninterest-bearing deposits |
$ | 1,413,920 | $ | 1,325,383 | $ | 1,239,352 | ||||||
Interest-bearing demand deposits |
956,676 | 947,953 | 1,057,094 | |||||||||
Savings deposits |
2,646,851 | 2,600,750 | 2,533,002 | |||||||||
Time deposits |
2,674,058 | 2,852,748 | 3,651,750 | |||||||||
Total deposits |
7,691,505 | 7,726,834 | 8,481,198 | |||||||||
Federal funds purchased and securities sold under agreements to repurchase |
40,069 | 41,699 | 30,209 | |||||||||
Other short-term borrowings |
690 | 620 | 2,920 | |||||||||
Other liabilities |
139,819 | 152,072 | 133,893 | |||||||||
Long-term debt |
906,629 | 1,032,689 | 1,337,746 | |||||||||
Liabilities of discontinued operations |
| | 421,562 | |||||||||
Total liabilities |
8,778,712 | 8,953,914 | 10,407,528 | |||||||||
Shareholders Equity |
||||||||||||
Preferred stock no par value
Authorized 5,000,000 shares; Issued and outstanding 300,000 at
3/31/11, 12/31/10, and 3/31/10, redemption value of $300 million |
279,955 | 278,300 | 273,522 | |||||||||
Common stock no par value
Authorized 1,050,000,000 shares at 3/31/11,12/31/10, and 3/31/10;
Issued and outstanding 397,782,546 at 3/31/11, 397,167,137 at 12/31/10
and 394,391,857 at 3/31/10 |
1,432,271 | 1,431,829 | 1,430,273 | |||||||||
Retained deficit |
(752,547 | ) | (678,242 | ) | (453,910 | ) | ||||||
Accumulated other comprehensive loss |
(14,278 | ) | (20,156 | ) | (5,491 | ) | ||||||
Total shareholders equity |
945,401 | 1,011,731 | 1,244,394 | |||||||||
Total liabilities and shareholders equity |
$ | 9,724,113 | $ | 9,965,645 | $ | 11,651,922 | ||||||
See notes to consolidated financial statements.
3
Table of Contents
Consolidated Statements of Operations (Unaudited)
Citizens Republic Bancorp, Inc.
Citizens Republic Bancorp, Inc.
Three Months Ended | ||||||||
March 31, | ||||||||
(in thousands, except per share amounts) | 2011 | 2010 | ||||||
Interest Income |
||||||||
Interest and fees on loans |
$ | 80,711 | $ | 101,742 | ||||
Interest and dividends on investment securities: |
||||||||
Taxable |
19,610 | 18,261 | ||||||
Tax-exempt |
3,086 | 5,285 | ||||||
Dividends on FHLB and Federal Reserve stock |
1,125 | 1,002 | ||||||
Money market investments |
253 | 424 | ||||||
Total interest income |
104,785 | 126,714 | ||||||
Interest Expense |
||||||||
Deposits |
16,375 | 29,511 | ||||||
Short-term borrowings |
18 | 24 | ||||||
Long-term debt |
9,778 | 15,990 | ||||||
Total interest expense |
26,171 | 45,525 | ||||||
Net Interest Income |
78,614 | 81,189 | ||||||
Provision for loan losses |
88,724 | 101,355 | ||||||
Net interest loss after provision for loan losses |
(10,110 | ) | (20,166 | ) | ||||
Noninterest Income |
||||||||
Service charges on deposit accounts |
9,429 | 9,684 | ||||||
Trust fees |
3,923 | 3,795 | ||||||
Mortgage and other loan income |
2,942 | 2,589 | ||||||
Brokerage and investment fees |
1,108 | 933 | ||||||
ATM network user fees |
1,755 | 1,597 | ||||||
Bankcard fees |
2,238 | 2,007 | ||||||
Net loss on loans held for sale |
(1,106 | ) | (7,702 | ) | ||||
Investment securities (losses) gains |
(383 | ) | 6,016 | |||||
Other income |
3,237 | 3,474 | ||||||
Total noninterest income |
23,143 | 22,393 | ||||||
Noninterest Expense |
||||||||
Salaries and employee benefits |
31,018 | 29,947 | ||||||
Occupancy |
7,562 | 7,461 | ||||||
Professional services |
2,219 | 2,253 | ||||||
Equipment |
3,052 | 3,072 | ||||||
Data processing services |
4,352 | 4,629 | ||||||
Advertising and public relations |
569 | 1,297 | ||||||
Postage and delivery |
1,116 | 1,014 | ||||||
Other loan expenses |
5,255 | 5,974 | ||||||
Losses on other real estate (ORE) |
9,122 | 6,763 | ||||||
ORE expenses |
1,768 | 1,190 | ||||||
Intangible asset amortization |
828 | 1,130 | ||||||
Other expense |
14,795 | 13,373 | ||||||
Total noninterest expense |
81,656 | 78,103 | ||||||
Loss from Continuing Operations Before Income Taxes |
(68,623 | ) | (75,876 | ) | ||||
Income tax provision from continuing operations |
55 | 147 | ||||||
Loss from Continuing Operations |
(68,678 | ) | (76,023 | ) | ||||
Discontinued operations: |
||||||||
Loss from income from discontinued operations (net of income tax) |
| (8,973 | ) | |||||
Net Loss |
(68,678 | ) | (84,996 | ) | ||||
Dividend on redeemable preferred stock |
(5,627 | ) | (5,282 | ) | ||||
Net Loss Attributable to Common Shareholders |
$ | (74,305 | ) | $ | (90,278 | ) | ||
Loss Per Share from Continuing Operations |
||||||||
Basic |
$ | (0.19 | ) | $ | (0.21 | ) | ||
Diluted |
(0.19 | ) | (0.21 | ) | ||||
Loss Per Share from Discontinued Operations |
||||||||
Basic |
$ | | $ | (0.02 | ) | |||
Diluted |
| (0.02 | ) | |||||
Net Loss Per Common Share |
||||||||
Basic |
$ | (0.19 | ) | $ | (0.23 | ) | ||
Diluted |
(0.19 | ) | (0.23 | ) | ||||
Average Common Shares Outstanding |
||||||||
Basic |
394,060 | 393,779 | ||||||
Diluted |
394,060 | 393,779 |
See notes to consolidated financial statements
4
Table of Contents
Consolidated Statements of Changes in Shareholders Equity (Unaudited)
Citizens Republic Bancorp, Inc.
Citizens Republic Bancorp, Inc.
Accumulated | ||||||||||||||||||||||||
Other | ||||||||||||||||||||||||
Preferred | Common Stock | Retained | Comprehensive | |||||||||||||||||||||
(in thousands) | Stock | Shares | Amount | Deficit | Income (Loss) | Total | ||||||||||||||||||
Balance at December 31, 2010 |
$ | 278,300 | 397,167 | $ | 1,431,829 | $ | (678,242 | ) | $ | (20,156 | ) | $ | 1,011,731 | |||||||||||
Comprehensive loss, net of tax: |
||||||||||||||||||||||||
Net loss |
(68,678 | ) | (68,678 | ) | ||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||
Net unrealized gain on securities available-for-sale |
7,418 | |||||||||||||||||||||||
Net change in unrealized loss on qualifying cash flow hedges |
(1,540 | ) | ||||||||||||||||||||||
Other comprehensive income total |
5,878 | |||||||||||||||||||||||
Total comprehensive loss |
(62,800 | ) | ||||||||||||||||||||||
Accrued dividend on redeemable preferred stock |
(3,972 | ) | (3,972 | ) | ||||||||||||||||||||
Accretion of preferred stock discount |
1,655 | (1,655 | ) | | ||||||||||||||||||||
Proceeds from restricted stock activity |
617 | | | |||||||||||||||||||||
Recognition of stock-based compensation |
443 | 443 | ||||||||||||||||||||||
Shares purchased for taxes |
(1 | ) | (1 | ) | (1 | ) | ||||||||||||||||||
Balance March 31, 2011 |
$ | 279,955 | 397,783 | $ | 1,432,271 | $ | (752,547 | ) | $ | (14,278 | ) | $ | 945,401 | |||||||||||
Balance at December 31, 2009 |
$ | 271,990 | 394,397 | $ | 1,429,771 | $ | (363,632 | ) | $ | (7,093 | ) | $ | 1,331,036 | |||||||||||
Comprehensive loss, net of tax: |
||||||||||||||||||||||||
Net loss |
(84,996 | ) | (84,996 | ) | ||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||
Net unrealized gain on securities available-for-sale |
2,299 | |||||||||||||||||||||||
Net change in unrealized loss on qualifying cash flow hedges |
(697 | ) | ||||||||||||||||||||||
Other comprehensive income total |
1,602 | |||||||||||||||||||||||
Total comprehensive loss |
(83,395 | ) | ||||||||||||||||||||||
Accrued dividend on preferred stock |
(3,750 | ) | (3,750 | ) | ||||||||||||||||||||
Accretion of preferred stock discount |
1,532 | (1,532 | ) | | ||||||||||||||||||||
Proceeds from restricted stock activity |
(5 | ) | | | ||||||||||||||||||||
Recognition of stock-based compensation |
502 | 502 | ||||||||||||||||||||||
Balance March 31, 2010 |
$ | 273,522 | 394,392 | $ | 1,430,273 | $ | (453,910 | ) | $ | (5,491 | ) | $ | 1,244,394 | |||||||||||
See notes to consolidated financial statements.
5
Table of Contents
Consolidated Statements of Cash Flows (Unaudited)
Citizens Republic Bancorp, Inc.
Citizens Republic Bancorp, Inc.
Three Months Ended | ||||||||
March 31, | ||||||||
(in thousands) | 2011 | 2010 | ||||||
Operating Activities: |
||||||||
Net Loss |
$ | (68,678 | ) | $ | (84,996 | ) | ||
Less: Loss from discontinued operations, net of income tax |
| (8,973 | ) | |||||
Loss from continuing operations |
(68,678 | ) | (76,023 | ) | ||||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Provision for loan losses |
88,724 | 101,355 | ||||||
Deferred
tax expense |
55 | 147 | ||||||
Depreciation and software amortization |
2,844 | 3,041 | ||||||
Amortization of intangibles |
828 | 1,130 | ||||||
Amortization and fair value adjustments of purchase accounting mark-to-market, net |
(1,504 | ) | (2,054 | ) | ||||
Fair value adjustment on loans held for sale and other real estate |
6,177 | 6,897 | ||||||
Net amortization on investment securities |
4,109 | 539 | ||||||
Investment securities losses (gains) |
383 | (6,016 | ) | |||||
Loans originated for sale |
(50,032 | ) | (37,909 | ) | ||||
Proceeds from loans held for sale |
61,706 | 40,537 | ||||||
Net gains from loan sales |
(1,446 | ) | (968 | ) | ||||
Net loss on other real estate |
2,946 | 1,150 | ||||||
Recognition of stock-based compensation expense |
443 | 502 | ||||||
Other |
(2,133 | ) | 7,376 | |||||
Discontinued operations, net |
| (7,508 | ) | |||||
Net cash provided by operating activities |
44,422 | 32,196 | ||||||
Investing Activities: |
||||||||
Net increase in money market investments |
(86,483 | ) | (74,460 | ) | ||||
Securities available-for-sale: |
||||||||
Proceeds from sales |
2,369 | 153,463 | ||||||
Proceeds from maturities and payments |
167,857 | 306,062 | ||||||
Purchases |
(236,673 | ) | (432,675 | ) | ||||
Securities held-to-maturity: |
||||||||
Proceeds from maturities and payments |
8,552 | 995 | ||||||
Purchases |
(81,621 | ) | | |||||
Net decrease in loans and leases |
337,039 | 188,860 | ||||||
Proceeds from sales of other real estate |
15,809 | 10,281 | ||||||
Net increase in properties and equipment |
(292 | ) | (1,018 | ) | ||||
Discontinued operations, net |
| 10,131 | ||||||
Net cash provided by investing activities |
126,557 | 161,639 | ||||||
Financing Activities: |
||||||||
Net increase in demand and savings deposits |
143,360 | 25,740 | ||||||
Net decrease in time deposits |
(178,689 | ) | (45,427 | ) | ||||
Net decrease in short-term borrowings |
(1,560 | ) | (6,670 | ) | ||||
Principal reductions in long-term debt |
(125,036 | ) | (174,912 | ) | ||||
Shares purchased for taxes |
(1 | ) | (498 | ) | ||||
Net cash used by financing activities |
(161,926 | ) | (201,767 | ) | ||||
Net increase
(decrease) in cash and due from banks |
9,053 | (7,932 | ) | |||||
Cash and due from banks at beginning of period, continuing operations |
127,585 | 149,049 | ||||||
Cash and due from banks at beginning of period, discontinued operations |
| 7,044 | ||||||
Cash and due from banks at beginning of period |
127,585 | 156,093 | ||||||
Cash and due from banks at end of period, continuing operations |
136,638 | 143,259 | ||||||
Cash and due from banks at end of period, discontinued operations |
| 4,902 | ||||||
Cash and due from banks at end of period |
$ | 136,638 | $ | 148,161 | ||||
Supplemental Cash Flow Information: |
||||||||
Interest paid |
$ | 25,531 | $ | 55,832 | ||||
Income tax
paid, net of refunds |
3,000 | | ||||||
Supplemental Disclosures of noncash items: |
||||||||
Loans transferred to other real estate owned |
4,469 | 11,961 | ||||||
Loans transferred to held-for-sale |
75,696 | 41,054 | ||||||
Held for sale loans transferred to other real estate owned |
184 | 538 | ||||||
Accrued dividend on redeemable preferred stock |
3,972 | 3,750 | ||||||
Accretion of preferred stock discount |
1,655 | 1,532 |
See notes to consolidated financial statements.
6
Table of Contents
Part I Financial Information
Item 1 Consolidated Financial Statements
Notes to Consolidated Financial Statements (Unaudited)
Citizens Republic Bancorp, Inc.
Citizens Republic Bancorp, Inc.
Note 1. Basis of Presentation and Accounting Policies
The accompanying unaudited consolidated financial statements of Citizens Republic Bancorp, Inc.
(Citizens or the Corporation) have been prepared in accordance with U.S. generally accepted
accounting principles (GAAP) for interim financial information and the instructions for Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
notes required by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three months ended March 31, 2011 are not
necessarily indicative of the results that may be expected for the year ending December 31, 2011.
Certain amounts have been reclassified to conform with the current year presentation. Citizens
significant accounting policies are described in Note 1 of the Notes to Consolidated Financial
Statements included in Citizens 2010 Annual Report on Form 10-K. For interim reporting purposes,
Citizens follows the same basic accounting policies, as updated by the information contained in
this report. For further information, refer to the consolidated financial statements and footnotes
included in Citizens 2010 Annual Report on Form 10-K. Citizens maintains an internet website at
www.citizensbanking.com where the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and all amendments to those reports are available without charge, as
soon as reasonably practicable after Citizens files each such report with, or furnishes it to, the
U.S. Securities and Exchange Commission (SEC). The information on Citizens website does not
constitute a part of this report.
The Corporation has two active wholly owned trusts formed for the purpose of issuing securities
which qualify as regulatory capital and are considered Variable Interest Entities (VIEs). The
Corporation is not the primary beneficiary, and consequently, the trusts are not consolidated in
the consolidated financial statements. Each of the two active trusts issued trust preferred
securities to investors in 2006 and 2003, with respect to which there remain $48.7 million and
$25.8 million in aggregate liquidation amounts outstanding, respectively. The gross proceeds from
the issuances were used to purchase junior subordinated deferrable interest debentures issued by
Citizens, which is the sole asset of each trust. The trust preferred securities held by these
entities qualify as Tier 1 capital and are classified as long-term debt on the Consolidated
Balance Sheets, with the associated interest expense recorded in long-term debt on the
Consolidated Statements of Operations. The expected losses and residual returns of these entities
are absorbed by the trust preferred security holders, and consequently the Corporation is not
exposed to loss related to these VIEs.
Discontinued Operations
On January 29, 2010 Citizens entered into a stock purchase agreement with Great Western Bank
whereby Great Western Bank agreed to acquire all of the stock of Citizens wholly owned subsidiary,
F&M Bank Iowa (F&M). On April 23, 2010, Citizens completed the
stock sale in exchange for $50.0 million in cash. Citizens has no continuing cash flow from F&M. As of the
transaction sale date, the assets and liabilities of F&M were removed from Citizens consolidated
balance sheet. The financial condition and operating results for this subsidiary have been
segregated from the financial condition and operating results of Citizens continuing operations
throughout this report and, as such, are presented as a discontinued operation.
7
Table of Contents
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) Accounting Standards Codification (the
Codification or ASC)
Accounting Standard Update (ASU)
FASB ASU 2010-28, Intangibles Goodwill and Other (Topic 350): When to Perform Step 2 of the
Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts
The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with
zero or negative carrying amounts. For those reporting units, an entity is required to perform
Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment
exists. In determining whether it is more likely than not that a goodwill impairment exists, an
entity should consider whether there are any adverse qualitative factors indicating that an
impairment may exist. The qualitative factors are consistent with the existing guidance and
examples, which require that goodwill of a reporting unit be tested for impairment between annual
tests if an event occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying amount. ASU 2010-28 was effective for Citizens in the
first quarter of 2011. The adoption of ASU 2010-28 did not have a material impact on Citizens
financial condition, results of operations or liquidity.
FASB ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses
The portion of this ASU effective for the current reporting period includes new disclosures about
activity that occurs during a reporting period. The activity-based disclosures required by ASU
2010-20 were effective for Citizens in the first quarter of 2011. The adoption of these
disclosures did not have a material impact on Citizens financial condition, results of operations
or liquidity.
FASB ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about
Fair Value Measurements
The portion of this ASU effective for the current reporting period includes new disclosures about
purchases, sales, issuances, and settlements in the roll-forward of activity in Level 3 fair value
measurements. The roll-forward disclosures required by ASU 2010-06 were effective for Citizens in
the first quarter of 2011. The adoption of these disclosures did not have a material impact on
Citizens financial condition, results of operations or liquidity.
Note 2. Pending Accounting Pronouncements
FASB ASU 2011-02, Receivables (Topic 310): A Creditors Determination of Whether a Restructuring
Is a Troubled Debt Restructuring
The amendments in this ASU clarify which loan modifications constitute troubled debt
restructurings. It is intended to assist creditors in determining whether a modification of the
terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for
purposes of recording an impairment loss and for disclosure of troubled debt restructurings. The
amendments to Topic 310 clarify the guidance on a creditors evaluation of whether it has granted a
concession and whether a debtor is experiencing financial difficulties. ASU 2011-02 is effective
for Citizens in the third quarter of 2011. Citizens does not expect the adoption of the amendments
to have a material impact on Citizens financial condition, results of operations or liquidity;
however, the adoption will have an impact on Citizens disclosures about troubled debt
restructurings.
8
Table of Contents
Note 3. Investment Securities
The amortized cost, estimated fair value and gross unrealized gains and losses on investment
securities as of March 31, 2011 and December 31, 2010 follow:
March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||
Estimated | Estimated | |||||||||||||||||||||||||||||||
Amortized | Fair | Gross Unrealized | Amortized | Fair | Gross Unrealized | |||||||||||||||||||||||||||
(in thousands) | Cost | Value | Gains | Losses | Cost | Value | Gains | Losses | ||||||||||||||||||||||||
Securities available for sale: |
||||||||||||||||||||||||||||||||
Federal agencies |
$ | | $ | | $ | | $ | | $ | 5,510 | $ | 5,557 | $ | 47 | $ | | ||||||||||||||||
Collateralized mortgage obligations |
619,985 | 624,256 | 7,843 | 3,572 | 596,308 | 599,264 | 8,181 | 5,225 | ||||||||||||||||||||||||
Mortgage-backed |
1,295,977 | 1,327,735 | 33,807 | 2,049 | 1,232,571 | 1,259,131 | 30,661 | 4,101 | ||||||||||||||||||||||||
State and municipal |
163,626 | 166,510 | 3,523 | 639 | 181,719 | 183,584 | 3,188 | 1,323 | ||||||||||||||||||||||||
Other |
913 | 915 | 42 | 40 | 1,985 | 1,992 | 45 | 38 | ||||||||||||||||||||||||
Total available for sale |
$ | 2,080,501 | $ | 2,119,416 | $ | 45,215 | $ | 6,300 | $ | 2,018,093 | $ | 2,049,528 | $ | 42,122 | $ | 10,687 | ||||||||||||||||
Securities held to maturity: |
||||||||||||||||||||||||||||||||
Mortgage-backed(1) |
$ | 438,316 | $ | 429,835 | $ | | $ | 8,481 | $ | 363,427 | $ | 356,652 | $ | | $ | 6,775 | ||||||||||||||||
State and municipal |
109,133 | 111,811 | 3,199 | 521 | 111,405 | 112,769 | 2,269 | 905 | ||||||||||||||||||||||||
Total held to maturity |
$ | 547,449 | $ | 541,646 | $ | 3,199 | $ | 9,002 | $ | 474,832 | $ | 469,421 | $ | 2,269 | $ | 7,680 | ||||||||||||||||
FHLB and Federal Reserve stock |
$ | 143,873 | $ | 143,873 | $ | | $ | | $ | 143,873 | $ | 143,873 | $ | | $ | | ||||||||||||||||
(1) | Amortized cost includes adjustments for the unamortized portion of unrealized gains on securities transferred from available for sale. |
Securities with amortized cost of $0.8 billion at March 31, 2011 and December 31, 2010 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 March 31, 2011 and December 31, 2010.
In December 2010, Citizens transferred certain mortgage-backed securities from the
available-for-sale to the held-to-maturity category. Management determined that it had both the
ability to hold these investments and the intent to do so. The securities transferred had a total
amortized cost of $179.2 million and a fair value of $181.8 million. The unrealized gain of $2.6
million will be amortized over the remaining life of the security as
an adjustment of the yield, offset against the amortization of the
unrealized gain maintained in accumulated other comprehensive income.
The amortized cost and estimated fair value of debt securities by maturity at March 31, 2011 are
shown below. Maturities of mortgage-backed securities are based upon current industry prepayment
schedules. Expected maturities may differ significantly from contractual maturities, as borrowers
may have the right to call or prepay obligations with or without call or prepayment penalties.
9
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March 31, 2011 | ||||||||
Amortized | Estimated Fair | |||||||
(in thousands) | Cost | Value | ||||||
Securities available for sale: |
||||||||
State and municipal and other |
||||||||
Contractual maturity within one year |
$ | 25,221 | $ | 25,372 | ||||
After one year through five years |
25,732 | 26,559 | ||||||
After five years through ten years |
67,327 | 68,801 | ||||||
After ten years |
45,346 | 45,778 | ||||||
Subtotal |
163,626 | 166,510 | ||||||
Collateralized mortgage obligations and mortgage-backed |
1,915,962 | 1,951,991 | ||||||
Other |
913 | 915 | ||||||
Total available for sale |
$ | 2,080,501 | $ | 2,119,416 | ||||
Securities held to maturity: |
||||||||
State and municipal and other |
||||||||
Contractual maturity within one year |
$ | 2,958 | $ | 2,996 | ||||
After one year through five years |
1,153 | 1,196 | ||||||
After five years through ten years |
58,291 | 60,397 | ||||||
After ten years |
46,731 | 47,222 | ||||||
Subtotal |
109,133 | 111,811 | ||||||
Mortgage-backed |
438,316 | 429,835 | ||||||
Total held to maturity |
$ | 547,449 | $ | 541,646 | ||||
As of March 31, 2011, 152 securities had unrealized losses compared with 229 securities as of
December 31, 2010. Securities with unrealized losses, categorized by length of time the security
has been in an unrealized loss position, as of March 31, 2011 and December 31, 2010 are displayed
in the following tables.
Less than 12 Months | More than 12 Months | Total | ||||||||||||||||||||||
March 31, 2011 | Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | ||||||||||||||||||
(in thousands) | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
Securities available for sale: |
||||||||||||||||||||||||
Collateralized mortgage
obligations |
$ | 164,383 | $ | 1,918 | $ | 16,250 | $ | 1,654 | $ | 180,633 | $ | 3,572 | ||||||||||||
Mortgage-backed |
320,116 | 2,046 | 131 | 3 | 320,247 | 2,049 | ||||||||||||||||||
State and municipal |
19,933 | 436 | 3,297 | 203 | 23,230 | 639 | ||||||||||||||||||
Other |
| | 102 | 40 | 102 | 40 | ||||||||||||||||||
Total available for sale |
$ | 504,432 | $ | 4,400 | $ | 19,780 | $ | 1,900 | $ | 524,212 | $ | 6,300 | ||||||||||||
Securities held to maturity: |
||||||||||||||||||||||||
Mortgage-backed |
$ | 429,835 | $ | 8,481 | $ | | $ | | $ | 429,835 | $ | 8,481 | ||||||||||||
State and municipal |
14,565 | 521 | | | 14,565 | 521 | ||||||||||||||||||
Total held to maturity |
$ | 444,400 | $ | 9,002 | $ | | $ | | $ | 444,400 | $ | 9,002 | ||||||||||||
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Less than 12 Months | More than 12 Months | Total | ||||||||||||||||||||||
December 31, 2010 | Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | ||||||||||||||||||
(in thousands) | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
Securities available for sale: |
||||||||||||||||||||||||
Collateralized mortgage
obligations |
$ | 151,618 | $ | 2,417 | $ | 25,726 | $ | 2,808 | $ | 177,344 | $ | 5,225 | ||||||||||||
Mortgage-backed |
293,745 | 4,098 | 135 | 3 | 293,880 | 4,101 | ||||||||||||||||||
State and municipal |
41,580 | 1,138 | 3,289 | 185 | 44,869 | 1,323 | ||||||||||||||||||
Other |
| | 102 | 38 | 102 | 38 | ||||||||||||||||||
Total available for sale |
$ | 486,943 | $ | 7,653 | $ | 29,252 | $ | 3,034 | $ | 516,195 | $ | 10,687 | ||||||||||||
Securities held to maturity: |
||||||||||||||||||||||||
Mortgage-backed |
$ | 356,652 | $ | 6,775 | $ | | $ | | $ | 356,652 | $ | 6,775 | ||||||||||||
State and municipal |
32,082 | 905 | | | 32,082 | 905 | ||||||||||||||||||
Total held to maturity |
$ | 388,734 | $ | 7,680 | $ | | $ | | $ | 388,734 | $ | 7,680 | ||||||||||||
Citizens performs a review of securities with unrealized losses at each reporting period. Citizens
assesses each holding to determine whether and when a security will recover in value, whether it
intends to sell the security and whether it is more likely than not that Citizens will be required
to sell the security before the value is recovered. In assessing the recovery of value, the key
factors reviewed include the length of time and the extent the fair value has been less than the
carrying cost, adverse conditions, if any, specifically related to the security, industry or
geographic area, historical and implied volatility of the fair value of the security, credit
quality factors affecting the issuer or the underlying collateral, payment structure of the
security, payment history of the security, changes to the credit rating of the security, recoveries
or declines in value subsequent to the balance sheet date or any other relevant factors.
Evaluations are performed on a more frequent basis as the degree to which fair value is below
carrying cost or the length of time that the fair value has been continuously below carrying cost
increases. As of March 31, 2011, Citizens has concluded that all issuers have the ability to pay
contractual cash flows. The unrealized losses displayed in the above tables are believed to be
temporary and thus no impairment loss has been realized in the Consolidated Statement of
Operations. Citizens has not decided to sell securities with any significant unrealized losses nor
does Citizens believe it will be required to sell securities before the value is recovered, but may
change its intent in response to significant, unanticipated changes in policies, regulations,
statutory legislation or other aforementioned criteria.
The collateralized mortgage obligations (CMO) sector includes securities where the underlying
collateral consists of agency issued or whole loan mortgages. At March 31, 2011, the whole loan
CMOs had a market value of $180.6 million with gross unrealized losses of $3.6 million. Citizens
performs a thorough credit review on a quarterly basis for the underlying mortgage collateral as
well as the supporting credit enhancement and structure. The results of the March 31, 2011 credit
review demonstrated continued strength and no material degradation in the holdings.
Citizens has determined there is no other-than-temporary impairment at March 31, 2011.
For the three months ended March 31, 2011, Citizens completed
security sales with an amortized cost of $2.8 million of available for sale securities and recorded
a net loss of $0.4 million, in accordance with Citizens policy regarding security downgrades. During the first three months of 2010, Citizens completed security
sales with an amortized cost of $147.6 million and recorded a gain of $6.0 million.
Note 4. Loans, Nonperforming Assets, Allowance for Loan Losses, and Loans Held for Sale
Citizens primarily extends credit within the Midwestern states of Michigan, Wisconsin, and Ohio.
Citizens seeks to limit its credit risk by using established guidelines to review its aggregate
outstanding commitments and loans to particular borrowers, industries and geographic areas.
Collateral is secured based on the nature of the credit and managements credit assessment of the
customer. Total portfolio loans outstanding are recorded net of unearned income, unamortized
premiums and discounts, deferred loan fees and costs, and fair value adjustments.
The majority of Citizens commercial real estate loans consist of mortgages on non-owner occupied
properties. Those borrowers are involved in real estate business activities and the sources of
repayment are dependent on the performance of the real estate market. In such cases, Citizens
generally requires the borrower to have a proven
11
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record of success and to meet Citizens underwriting criteria for this type of credit risk. Citizens does not have a concentration in any
single industry that exceeds 10% of total loans.
Past Due Loans, Nonaccrual Loans and Nonperforming Assets. Loans are considered past due if the
required principal and interest payments have not been received as of the date such payments were
due. Loans are placed on nonaccrual status when the collection of principal or interest is
considered doubtful or payment of principal or interest is past due 90 days or more. When loans
are placed on nonaccrual status, all interest previously accrued but unpaid is reversed against
current year interest income. Loans are normally restored to accrual status if and when interest
and principal payments are current and it is believed that the financial condition of the borrower
has improved to the extent that future principal and interest payments will be met on a timely
basis. Nonperforming assets are comprised of nonaccrual loans, loans past due over 90 days and
still accruing interest, restructured loans, nonperforming loans held for sale, and other
repossessed assets acquired.
Citizens recognized $0.3 million of interest income on nonperforming loans during the first quarter
of 2011. Had nonaccrual loans performed in accordance with their original contract terms, the
Corporation would have recognized additional interest income of approximately $2.1 million in the
first quarter of 2011. There were no significant commitments outstanding to lend additional funds
to clients whose loans were classified as nonaccrual or restructured at March 31, 2011.
An age analysis of financing receivables, segregated by class, as of March 31, 2011 and December
31, 2010 follows:
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March 31, 2011 | ||||||||||||||||||||||||
Loans 90+ Days Past | ||||||||||||||||||||||||
Loans Accruing | Due & Still | Current Portfolio | Total Portfolio | |||||||||||||||||||||
(in thousands) | 30-89 Days Past Due | Accruing | Non-Accruing Loans | Total Past Due Loans | Loans | Loans | ||||||||||||||||||
Land hold |
$ | 509 | $ | | $ | 1,154 | $ | 1,663 | $ | 15,610 | $ | 17,273 | ||||||||||||
Land development |
| | 78 | 78 | 22,666 | 22,744 | ||||||||||||||||||
Construction |
| | 395 | 395 | 22,902 | 23,297 | ||||||||||||||||||
Income producing |
4,817 | | 28,250 | 33,067 | 1,005,607 | 1,038,674 | ||||||||||||||||||
Owner-occupied |
1,981 | | 21,738 | 23,719 | 668,577 | 692,296 | ||||||||||||||||||
Total commercial real estate |
7,307 | | 51,615 | 58,922 | 1,735,362 | 1,794,284 | ||||||||||||||||||
Commercial and industrial |
1,454 | 660 | 19,494 | 21,608 | 1,012,529 | 1,034,137 | ||||||||||||||||||
Small business |
4,723 | | 6,291 | 11,014 | 308,016 | 319,030 | ||||||||||||||||||
Total commercial |
13,484 | 660 | 77,400 | 91,544 | 3,055,907 | 3,147,451 | ||||||||||||||||||
Residential mortgage |
10,279 | | 30,385 | 40,664 | 686,640 | 727,304 | ||||||||||||||||||
Direct consumer |
17,210 | | 13,043 | 30,253 | 976,171 | 1,006,424 | ||||||||||||||||||
Indirect consumer |
10,187 | | 1,169 | 11,356 | 811,663 | 823,019 | ||||||||||||||||||
Total consumer |
37,676 | | 44,597 | 82,273 | 2,474,474 | 2,556,747 | ||||||||||||||||||
Total financing receivables |
$ | 51,160 | $ | 660 | $ | 121,997 | $ | 173,817 | $ | 5,530,381 | $ | 5,704,198 | ||||||||||||
December 31, 2010 | ||||||||||||||||||||||||
Loans 90+ Days Past | ||||||||||||||||||||||||
Loans Accruing | Due & Still | Current Portfolio | Total Portfolio | |||||||||||||||||||||
(in thousands) | 30-89 Days Past Due | Accruing | Non-Accruing Loans | Total Past Due Loans | Loans | Loans | ||||||||||||||||||
Land hold |
$ | 2,233 | $ | | $ | 3,250 | $ | 5,483 | $ | 22,776 | $ | 28,259 | ||||||||||||
Land development |
216 | | 3,070 | 3,286 | 31,514 | 34,800 | ||||||||||||||||||
Construction |
464 | | 7,472 | 7,936 | 95,751 | 103,687 | ||||||||||||||||||
Income producing |
20,643 | | 62,021 | 82,664 | 1,088,318 | 1,170,982 | ||||||||||||||||||
Owner-occupied |
14,705 | | 42,826 | 57,531 | 725,476 | 783,007 | ||||||||||||||||||
Total commercial real estate |
38,261 | | 118,639 | 156,900 | 1,963,835 | 2,120,735 | ||||||||||||||||||
Commercial and industrial |
5,801 | 1,573 | 47,508 | 54,882 | 1,085,645 | 1,140,527 | ||||||||||||||||||
Small business |
3,257 | | 10,244 | 13,501 | 320,199 | 333,700 | ||||||||||||||||||
Total commercial |
47,319 | 1,573 | 176,391 | 225,283 | 3,369,679 | 3,594,962 | ||||||||||||||||||
Residential mortgage |
15,389 | | 22,076 | 37,465 | 718,780 | 756,245 | ||||||||||||||||||
Direct consumer |
22,379 | | 12,562 | 34,941 | 1,010,589 | 1,045,530 | ||||||||||||||||||
Indirect consumer |
13,287 | | 1,279 | 14,566 | 805,299 | 819,865 | ||||||||||||||||||
Total consumer |
51,055 | | 35,917 | 86,972 | 2,534,668 | 2,621,640 | ||||||||||||||||||
Total financing receivables |
$ | 98,374 | $ | 1,573 | $ | 212,308 | $ | 312,255 | $ | 5,904,347 | $ | 6,216,602 | ||||||||||||
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Impaired loans. A loan is considered impaired when Citizens determines that it is probable
that all the contractual principal and interest due under the loan may not be collected. If a loan
is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is
reported net, at the present value of estimated future cash flows using the loans existing rate or
at the fair value of collateral if repayment is expected solely from the collateral. Interest
payments on impaired loans are typically applied to principal unless collectability of the
principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or
portions thereof, are charged off when deemed uncollectible.
A summary of information regarding loans individually reviewed for impairment, segregated by class, as of March 31, 2011 and December 31, 2010, are
set forth in the following table.
14
Table of Contents
March 31, 2011 | ||||||||||||||||||||||||
Unpaid Contractual | Recorded Investment | Recorded Investment | Total Recorded | Specific | Average Recorded | |||||||||||||||||||
(in thousands) | Principal Balance | with No Specific Allowance | with Specific Allowance | Investment | Related Allowance | Investment | ||||||||||||||||||
Nonaccrual loans (impaired) |
||||||||||||||||||||||||
Land hold |
$ | 553 | $ | | $ | 183 | $ | 183 | $ | 22 | $ | 1,095 | ||||||||||||
Land development |
| | | | | 1,341 | ||||||||||||||||||
Construction |
471 | 238 | | 238 | | 3,503 | ||||||||||||||||||
Income producing |
27,931 | 6,534 | 16,570 | 23,104 | 6,085 | 38,783 | ||||||||||||||||||
Owner-occupied |
18,713 | 10,296 | 3,566 | 13,862 | 630 | 23,176 | ||||||||||||||||||
Total commercial real estate |
47,668 | 17,068 | 20,319 | 37,387 | 6,737 | 67,898 | ||||||||||||||||||
Commercial and industrial |
26,213 | 12,381 | 3,963 | 16,344 | 617 | 29,297 | ||||||||||||||||||
Small business |
710 | | 688 | 688 | 78 | 971 | ||||||||||||||||||
Total commercial |
74,591 | 29,449 | 24,970 | 54,419 | 7,432 | 98,166 | ||||||||||||||||||
Residential mortgage |
10,058 | | 10,058 | 10,058 | 1,988 | 7,627 | ||||||||||||||||||
Direct consumer |
1,119 | | 1,048 | 1,048 | 114 | 1,061 | ||||||||||||||||||
Total consumer |
11,177 | | 11,106 | 11,106 | 2,102 | 8,688 | ||||||||||||||||||
Total nonaccrual loans (impaired) |
85,768 | 29,449 | 36,076 | 65,525 | 9,534 | 106,854 | ||||||||||||||||||
Accrual loans (impaired) |
||||||||||||||||||||||||
Residential mortgage |
162 | | 162 | 162 | 31 | 162 | ||||||||||||||||||
Direct consumer |
620 | | 620 | 620 | 70 | 361 | ||||||||||||||||||
Total accrual loans (impaired) |
782 | | 782 | 782 | 101 | 523 | ||||||||||||||||||
Total impaired loans |
$ | 86,550 | $ | 29,449 | $ | 36,858 | $ | 66,307 | $ | 9,635 | $ | 107,377 | ||||||||||||
December 31, 2010 | ||||||||||||||||||||||||
Unpaid Contractual | Recorded Investment | Recorded Investment | Total Recorded | Specific | Average Recorded | |||||||||||||||||||
(in thousands) | Principal Balance | with No Specific Allowance | with Specific Allowance | Investment | Related Allowance | Investment | ||||||||||||||||||
Nonaccrual loans (impaired) |
||||||||||||||||||||||||
Land hold |
$ | 2,007 | $ | | $ | 2,007 | $ | 2,007 | $ | 1,719 | $ | 2,882 | ||||||||||||
Land development |
5,954 | 1,224 | 1,458 | 2,682 | 842 | 16,526 | ||||||||||||||||||
Construction |
9,151 | | 6,769 | 6,769 | 1,413 | 22,752 | ||||||||||||||||||
Income producing |
76,310 | 21,315 | 33,145 | 54,460 | 11,759 | 112,214 | ||||||||||||||||||
Owner-occupied |
39,018 | 13,153 | 19,337 | 32,490 | 7,786 | 50,976 | ||||||||||||||||||
Total commercial real estate |
132,440 | 35,692 | 62,716 | 98,408 | 23,519 | 205,350 | ||||||||||||||||||
Commercial and industrial |
51,300 | 9,357 | 32,894 | 42,251 | 9,298 | 45,521 | ||||||||||||||||||
Small business |
1,272 | 445 | 809 | 1,254 | 173 | 714 | ||||||||||||||||||
Total commercial |
185,012 | 45,494 | 96,419 | 141,913 | 32,990 | 251,585 | ||||||||||||||||||
Residential mortgage |
5,196 | | 5,196 | 5,196 | 1,079 | 5,129 | ||||||||||||||||||
Direct consumer |
1,127 | | 1,074 | 1,074 | 115 | 1,107 | ||||||||||||||||||
Total consumer |
6,323 | | 6,270 | 6,270 | 1,194 | 6,236 | ||||||||||||||||||
Total nonaccrual loans (impaired) |
191,335 | 45,494 | 102,689 | 148,183 | 34,184 | 257,821 | ||||||||||||||||||
Accrual loans (impaired) |
||||||||||||||||||||||||
Residential mortgage |
162 | | 162 | 162 | 31 | 163 | ||||||||||||||||||
Direct consumer |
101 | | 101 | 101 | 15 | 26 | ||||||||||||||||||
Total accrual loans (impaired) |
263 | | 263 | 263 | 46 | 189 | ||||||||||||||||||
Total impaired loans |
$ | 191,598 | $ | 45,494 | $ | 102,952 | $ | 148,446 | $ | 34,230 | $ | 258,010 | ||||||||||||
Credit Quality Indicators. Citizens categorizes commercial loans into risk categories based on
relevant information about the ability of borrowers to service their debt such as: current
financial information, historical payment experience, credit documentation, public information, and
current economic trends, among other factors. Citizens analyzes commercial loans individually by
classifying the loans as to credit risk. This analysis includes loans with an outstanding balance
greater than $0.5 million and non-homogeneous loans, such as commercial and industrial and
commercial real estate loans. Credit quality indicators are reviewed and updated as applicable on
an ongoing basis in accordance with Citizens credit policy. The Company uses the following
definitions for risk ratings:
15
Table of Contents
Special Mention. Loans classified as special mention have a potential weakness that deserves managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institutions credit position at some future date. |
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. |
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation for full value, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Commercial loans considered doubtful are evaluated for impairment as part of the specific allocated allowance. |
Loans not meeting the criteria above that are analyzed individually as part of the above described
process are considered to be pass rated loans. As of March 31, 2011 and December 31, 2010, the
risk category of commercial loans by class follows.
March 31, 2011 | ||||||||||||||||||||
(in thousands) | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||
Land hold |
$ | 3,533 | $ | 8,382 | $ | 5,336 | $ | 22 | $ | 17,273 | ||||||||||
Land development |
12,823 | 682 | 9,239 | | 22,744 | |||||||||||||||
Construction |
18,385 | 4,635 | 238 | 39 | 23,297 | |||||||||||||||
Income producing |
685,242 | 202,405 | 144,882 | 6,145 | 1,038,674 | |||||||||||||||
Owner-occupied |
540,822 | 64,876 | 85,894 | 704 | 692,296 | |||||||||||||||
Total commercial real estate |
1,260,805 | 280,980 | 245,589 | 6,910 | 1,794,284 | |||||||||||||||
Commercial and industrial |
801,754 | 106,382 | 125,158 | 843 | 1,034,137 | |||||||||||||||
Small business |
268,790 | 24,814 | 25,061 | 365 | 319,030 | |||||||||||||||
Total commercial |
$ | 2,331,349 | $ | 412,176 | $ | 395,808 | $ | 8,118 | $ | 3,147,451 | ||||||||||
December 31, 2010 | ||||||||||||||||||||
(in thousands) | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||
Land hold |
$ | 3,611 | $ | 10,126 | $ | 12,803 | $ | 1,719 | $ | 28,259 | ||||||||||
Land development |
13,057 | 693 | 20,209 | 841 | 34,800 | |||||||||||||||
Construction |
62,981 | 18,809 | 20,253 | 1,644 | 103,687 | |||||||||||||||
Income producing |
664,151 | 198,323 | 296,771 | 11,737 | 1,170,982 | |||||||||||||||
Owner-occupied |
550,074 | 81,133 | 143,928 | 7,872 | 783,007 | |||||||||||||||
Total commercial real estate |
1,293,874 | 309,084 | 493,964 | 23,813 | 2,120,735 | |||||||||||||||
Commercial and industrial |
799,823 | 140,099 | 191,144 | 9,461 | 1,140,527 | |||||||||||||||
Small business |
280,697 | 23,483 | 28,994 | 526 | 333,700 | |||||||||||||||
Total commercial |
$ | 2,374,394 | $ | 472,666 | $ | 714,102 | $ | 33,800 | $ | 3,594,962 | ||||||||||
For the residential and consumer loan class, Citizens evaluates credit quality based on the aging
status of the loan and by payment activity. The following table presents the recorded investment
in residential and consumer loans based on payment activity as of March 31, 2011 and December 31,
2010.
16
Table of Contents
March 31, 2011 | ||||||||||||||||
(in thousands) | Residential Mortgage | Direct Consumer | Indirect Consumer | Total Consumer Loans | ||||||||||||
Performing |
$ | 695,501 | $ | 991,098 | $ | 821,850 | $ | 2,508,449 | ||||||||
Nonperforming |
31,803 | 15,326 | 1,169 | 48,298 | ||||||||||||
Total |
$ | 727,304 | $ | 1,006,424 | $ | 823,019 | $ | 2,556,747 | ||||||||
December 31, 2010 | ||||||||||||||||
(in thousands) | Residential Mortgage | Direct Consumer | Indirect Consumer | Total Consumer Loans | ||||||||||||
Performing |
$ | 732,309 | $ | 1,031,430 | $ | 818,586 | $ | 2,582,325 | ||||||||
Nonperforming |
23,936 | 14,100 | 1,279 | 39,315 | ||||||||||||
Total |
$ | 756,245 | $ | 1,045,530 | $ | 819,865 | $ | 2,621,640 | ||||||||
Allowance for Loan Losses. The allowance for loan losses is a reserve established through a
provision for possible loan losses charged to expense, which represents managements best estimate
of probable losses that have been incurred within the existing portfolio of loans. The methodology
used for measuring the appropriateness of the allowance for loan losses relies on several key
elements, which include specific allowances for identified impaired loans, a formula-based
risk-allocated allowance for the remainder of the portfolio and a general valuation allowance
calculation. A summary of changes in the allowance for loan losses follows:
Allowance for | Allowance for | |||||||||||||||||||||||
Loan Losses at | Provision for | Loan Losses at | ||||||||||||||||||||||
(in thousands) | December 31, 2010 | Loan Losses | Charge-offs | Recoveries | Net charge-offs | March 31, 2011 | ||||||||||||||||||
Commercial and industrial |
$ | 26,619 | $ | 17,635 | $ | (29,712 | ) | $ | 1,603 | $ | (28,109 | ) | $ | 16,145 | ||||||||||
Small business |
16,334 | 1,495 | (4,078 | ) | 174 | (3,904 | ) | 13,925 | ||||||||||||||||
Commercial real estate |
156,623 | 56,425 | (118,721 | ) | 913 | (117,808 | ) | 95,240 | ||||||||||||||||
Total commercial |
199,576 | 75,555 | (152,511 | ) | 2,690 | (149,821 | ) | 125,310 | ||||||||||||||||
Residential mortgage |
47,623 | 7,679 | (3,403 | ) | 3 | (3,400 | ) | 51,902 | ||||||||||||||||
Direct consumer |
32,255 | 5,237 | (6,468 | ) | 972 | (5,496 | ) | 31,996 | ||||||||||||||||
Indirect consumer |
16,577 | 253 | (2,472 | ) | 551 | (1,921 | ) | 14,909 | ||||||||||||||||
Total |
$ | 296,031 | $ | 88,724 | $ | (164,854 | ) | $ | 4,216 | $ | (160,638 | ) | $ | 224,117 | ||||||||||
A summary of allowance for loan losses, segregated by portfolio segment, as of March 31, 2011 and December 31, 2010 was as follows:
17
Table of Contents
March 31, 2011 | ||||||||||||||||
Loans Individually | Loans Collectively | Total | ||||||||||||||
Evaluated for | Evaluated for | Allowance for | ||||||||||||||
(in thousands) | Impairment | Impairment | Unallocated | Loan Losses | ||||||||||||
Commercial and industrial |
$ | 617 | $ | 15,528 | $ | | $ | 16,145 | ||||||||
Small business |
78 | 13,847 | | 13,925 | ||||||||||||
Commercial real estate |
6,736 | 84,754 | 3,750 | 95,240 | ||||||||||||
Total commercial |
7,431 | 114,129 | 3,750 | 125,310 | ||||||||||||
Residential mortgage |
2,019 | 49,883 | | 51,902 | ||||||||||||
Direct consumer |
185 | 31,811 | | 31,996 | ||||||||||||
Indirect consumer |
| 14,909 | | 14,909 | ||||||||||||
Total allowance for loan losses |
$ | 9,635 | $ | 210,732 | $ | 3,750 | $ | 224,117 | ||||||||
December 31, 2010 | ||||||||||||||||
Loans Individually | Loans Collectively | Total | ||||||||||||||
Evaluated for | Evaluated for | Allowance for | ||||||||||||||
(in thousands) | Impairment | Impairment | Unallocated | Loan Losses | ||||||||||||
Commercial and industrial |
$ | 9,298 | $ | 17,321 | $ | | $ | 26,619 | ||||||||
Small business |
173 | 16,161 | | 16,334 | ||||||||||||
Commercial real estate |
23,519 | 128,604 | 4,500 | 156,623 | ||||||||||||
Total commercial |
32,990 | 162,086 | 4,500 | 199,576 | ||||||||||||
Residential mortgage |
1,110 | 46,513 | | 47,623 | ||||||||||||
Direct consumer |
130 | 32,125 | | 32,255 | ||||||||||||
Indirect consumer |
| 16,577 | | 16,577 | ||||||||||||
Total allowance for loan losses |
$ | 34,230 | $ | 257,301 | $ | 4,500 | $ | 296,031 | ||||||||
A summary of the recorded investment in loans, segregated by portfolio segment, as of March 31,
2011 and December 31, 2010 was as follows:
18
Table of Contents
March 31, 2011 | ||||||||||||||||
Loans Individually | Loans Collectively | Total | ||||||||||||||
Evaluated for | Evaluated for | Unearned | Recorded | |||||||||||||
(in thousands) | Impairment | Impairment | (Fees)/Costs | Investment | ||||||||||||
Commercial and industrial |
$ | 16,344 | $ | 998,266 | $ | 19,527 | $ | 1,034,137 | ||||||||
Small business |
688 | 318,158 | 184 | 319,030 | ||||||||||||
Commercial real estate |
37,387 | 1,760,171 | (3,274 | ) | 1,794,284 | |||||||||||
Total commercial |
54,419 | 3,076,595 | 16,437 | 3,147,451 | ||||||||||||
Residential mortgage |
10,220 | 718,804 | (1,720 | ) | 727,304 | |||||||||||
Direct consumer |
1,668 | 1,005,628 | (872 | ) | 1,006,424 | |||||||||||
Indirect consumer |
| 805,788 | 17,231 | 823,019 | ||||||||||||
Total portfolio loans |
$ | 66,307 | $ | 5,606,815 | $ | 31,076 | $ | 5,704,198 | ||||||||
December 31, 2010 | ||||||||||||||||
Loans Individually | Loans Collectively | Total | ||||||||||||||
Evaluated for | Evaluated for | Unearned | Recorded | |||||||||||||
(in thousands) | Impairment | Impairment | (Fees)/Costs | Investment | ||||||||||||
Commercial and industrial |
$ | 42,251 | $ | 1,085,404 | $ | 12,872 | $ | 1,140,527 | ||||||||
Small business |
1,254 | 332,267 | 179 | 333,700 | ||||||||||||
Commercial real estate |
98,408 | 2,024,321 | (1,994 | ) | 2,120,735 | |||||||||||
Total commercial |
141,913 | 3,441,992 | 11,057 | 3,594,962 | ||||||||||||
Residential mortgage |
5,358 | 749,368 | 1,519 | 756,245 | ||||||||||||
Direct consumer |
1,175 | 1,047,286 | (2,931 | ) | 1,045,530 | |||||||||||
Indirect consumer |
| 802,894 | 16,971 | 819,865 | ||||||||||||
Total portfolio loans |
$ | 148,446 | $ | 6,041,540 | $ | 26,616 | $ | 6,216,602 | ||||||||
Loans
Held for Sale. During the first
quarter of 2011, $53.7 million in commercial loans were
transferred to held for sale and then subsequently sold.
Note 5. Long-Term Debt
The components of long-term debt as of March 31, 2011 and December 31, 2010 are presented below.
March 31, | December 31, | |||||||
(in thousands) | 2011 | 2010 | ||||||
Citizens (Parent only): |
||||||||
Subordinated debt: |
||||||||
5.75% subordinated notes due February 2013 |
$ | 16,973 | $ | 16,932 | ||||
Variable rate junior subordinated debenture due June 2033 |
25,774 | 25,774 | ||||||
7.50% junior subordinated debentures due September 2066 |
48,479 | 48,382 | ||||||
Subsidiaries: |
||||||||
Federal Home Loan Bank advances |
711,222 | 837,410 | ||||||
Other borrowed funds |
104,181 | 104,191 | ||||||
Total long-term debt |
$ | 906,629 | $ | 1,032,689 | ||||
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During the first quarter of 2010, Citizens decided to defer regularly scheduled quarterly interest
payments on its outstanding junior subordinated debentures relating to its two trust preferred
securities. While Citizens accrues for this obligation, it is currently in arrears with the
interest payments on the junior subordinated debentures as permitted by the related documentation.
As of March 31, 2011 and December 31, 2010, the amount of the arrearage on the payments on the
subordinated debt associated with the trust preferred securities is $6.0 million and $4.9 million,
respectively.
Note 6. Income Taxes
The income tax provision for the first quarter of 2011 was $0.1 million, essentially unchanged from
the first quarter of 2010. The effective tax rate for the first quarter of 2011 was (0.08) %,
which includes adjustments for tax-exempt income and the deferred tax
asset valuation allowance. The expense for the first quarter of 2011
is directly related to the deferred tax expense from the
amortization of tax deductible goodwill.
Note 7. Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss), net of tax, for the three months
ended March 31, 2011 and 2010 are presented below.
Net Unrealized | ||||||||||||||||
Net Unrealized | Gain(Loss) On | |||||||||||||||
Gain(Loss) On | Derivative | Pension and Post- | ||||||||||||||
(in thousands) | Investments | Instruments | Retirement | Total | ||||||||||||
Balance at December 31, 2010 |
$ | 3,963 | $ | 7,368 | $ | (31,487 | ) | $ | (20,156 | ) | ||||||
Comprehensive income (loss), net of tax: |
||||||||||||||||
Net loss |
||||||||||||||||
Other comprehensive (loss) income, net of tax: |
||||||||||||||||
Net unrealized gain on securities available-for-sale |
7,801 | | | 7,801 | ||||||||||||
Reclassification adjustment for net loss on securities
included in net income |
(383 | ) | | | (383 | ) | ||||||||||
Net unrealized loss on qualifying cash flow hedges |
| (1,540 | ) | | (1,540 | ) | ||||||||||
Other comprehensive income (loss) total |
7,418 | (1,540 | ) | | 5,878 | |||||||||||
Balance at March 31, 2011 |
$ | 11,381 | $ | 5,828 | $ | (31,487 | ) | $ | (14,278 | ) | ||||||
Balance at December 31, 2009 |
$ | 10,593 | $ | 13,089 | $ | (30,775 | ) | $ | (7,093 | ) | ||||||
Comprehensive income (loss), net of tax: |
||||||||||||||||
Net loss |
||||||||||||||||
Other comprehensive (loss) income, net of tax: |
||||||||||||||||
Net unrealized loss on securities available-for-sale |
(3,717 | ) | | | (3,717 | ) | ||||||||||
Reclassification adjustment for net gain on securities
included in net income |
6,016 | | | 6,016 | ||||||||||||
Net unrealized loss on qualifying cash flow hedges |
| (697 | ) | | (697 | ) | ||||||||||
Other comprehensive income (loss) total |
2,299 | (697 | ) | | 1,602 | |||||||||||
Balance at March 31, 2010 |
$ | 12,892 | $ | 12,392 | $ | (30,775 | ) | $ | (5,491 | ) | ||||||
The accumulated net unrealized gain on cash flow hedges was $5.8 million at March 31, 2011 and $7.4
million at December 31, 2010.
Note 8. Fair Values of Assets and Liabilities
Fair value estimates are intended to represent the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Given that there is no active market for many of Citizens financial
instruments, Citizens has made estimates using discounted cash flow or other valuation techniques.
Inputs to these valuation methods are subjective in nature, involve uncertainties, and require
significant judgment and therefore can not be determined with precision. Accordingly, the derived
fair value estimates presented herein are not necessarily indicative of the amounts Citizens could
realize in a current market exchange.
The fair value estimates are based on existing on- and off-balance sheet financial instruments and
do not attempt to estimate the value of anticipated future business or the value of assets and
liabilities that are not considered financial instruments. For example, Citizens has a substantial
trust department that contributes net fee income annually. The trust department is not considered
a financial instrument and its value has not been incorporated into the fair value
20
Table of Contents
estimates. Other significant assets and liabilities that are not considered financial assets
or liabilities include Citizens brokerage network, net deferred tax assets (and the related
valuation reserves), and premises and equipment. In addition, tax ramifications related to the
recognition of unrealized gains and losses such as those within the investment securities portfolio
can have a significant effect on estimated fair values and have not been considered in the
estimates. For these reasons, the aggregate fair value should not be considered an indication of
the value of the Corporation.
Citizens groups assets and liabilities which are recorded at fair value in three levels, based on
the markets in which the assets and liabilities are traded and the reliability of the assumptions
used to determine fair value. An asset or liabilitys level within the fair value hierarchy is
based on the lowest level of input that is significant to the fair value measurement (with Level 1
considered highest and Level 3 considered lowest). A brief description of each level follows.
Level 1 Valuation is based upon quoted prices for identical instruments in active markets.
Level 2 Valuation is based upon quoted prices for similar instruments in active markets,
quoted prices for identical or similar instruments in markets that are not active, and
model-based valuation techniques for which all significant assumptions are observable in the
market.
Level 3 Valuation is generated from model-based techniques that use at least one
significant assumption not observable in the market. These unobservable assumptions reflect
estimates that market participants would use in pricing the asset or liability. Valuation
techniques include the use of discounted cash flow models and similar techniques.
The estimated fair values of Citizens financial instruments follow.
March 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
(in thousands) | Amount | Fair Value | Amount | Fair Value | ||||||||||||
Financial assets: |
||||||||||||||||
Cash and due from banks |
$ | 136,638 | $ | 136,638 | $ | 127,585 | $ | 127,585 | ||||||||
Money market investments |
495,562 | 495,562 | 409,079 | 409,079 | ||||||||||||
Securities available for sale |
2,119,416 | 2,119,416 | 2,049,528 | 2,049,528 | ||||||||||||
Securities held to maturity |
547,449 | 541,646 | 474,832 | 469,421 | ||||||||||||
FHLB and Federal Reserve stock |
143,873 | 143,873 | 143,873 | 143,873 | ||||||||||||
Net portfolio loans |
5,480,081 | 4,763,621 | 5,920,571 | 5,157,339 | ||||||||||||
Deferred compensation assets |
10,341 | 10,341 | 10,951 | 10,951 | ||||||||||||
Loans held for sale |
38,121 | 38,121 | 40,347 | 40,347 | ||||||||||||
Accrued interest receivable |
32,545 | 32,545 | 33,310 | 33,310 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Deposits |
7,691,505 | 7,731,530 | 7,726,834 | 7,778,461 | ||||||||||||
Short-term borrowings |
40,759 | 40,759 | 42,319 | 42,319 | ||||||||||||
Long-term debt |
906,629 | 941,416 | 1,032,689 | 1,071,250 | ||||||||||||
Accrued interest payable |
11,541 | 11,541 | 10,901 | 10,901 | ||||||||||||
Financial instruments with off-balance sheet risk(1) : |
||||||||||||||||
Letters of credit(2) |
(944 | ) | (3,480 | ) | (1,357 | ) | (4,980 | ) | ||||||||
Derivative instruments |
247 | 247 | 1,862 | 1,862 |
(1) | Positive amounts represent assets, whereas negative amounts represent liabilities. | |
(2) | The carrying amount for letters of credit is part of the total carrying amount of net loans. It is shown here separately to disclose the estimated fair value which is based on a discounted cash flow method utilizing current market pricing. This amount is not included in the net loans estimate of fair value. |
The carrying amount approximates fair value for cash, money market investments, and accrued
interest. The methods and assumptions used to estimate the fair value for other financial
instruments are set forth below. There
21
Table of Contents
were no changes in the valuation methods used to estimate fair value during the three month period
ended March 31, 2011.
Securities Available for Sale. Fair value measurement is based upon quoted prices for similar
assets, if available, or matrix pricing models. Matrix pricing is a mathematical technique widely
used in the banking industry to value debt securities without relying exclusively on quoted market
prices for the specific securities but rather by relying on the securities relationship to other
benchmark quoted prices. The securities in the available for sale portfolio are priced by
independent providers. In obtaining such valuation information from third parties, Citizens has
evaluated their valuation methodologies used to develop the fair values in order to determine
whether such valuations are representative of an exit price in Citizens principal markets.
Further, Citizens has developed an internal, independent price verification function that performs
testing on valuations received from third parties. Citizens principal markets for its securities
portfolios are the secondary institutional markets, with an exit price that is predominantly
reflective of bid level pricing in those markets.
Recurring Level 3 securities include auction rate securities issued by student-loan authorities and
a taxable municipal Qualified Zone Academy Bond (QZAB). Due to the nature of the auction rate
securities and the lack of a secondary market with active fair value indicators, Citizens used an
income approach based on a discounted cash flow model utilizing significant unobservable inputs
(Level 3) in the valuation process to estimate the transaction price between market participants
for each group of securities as of the valuation date. The significant assumptions made in this
modeling process included the discount rate, the term over which this discount rate would
stabilize, and fail rate formulas utilizing assumed interest payments. Due to the current illiquid
market for QZAB bonds, Citizens relies on models containing significant unobservable market-based
inputs to determine the fair-value of these bonds. The primary unobservable pricing input was the
assumption made regarding the ability for market participants to utilize the tax credits associated
with this type of instrument.
Securities Held to Maturity. The fair value of securities classified as held to maturity are based
upon quoted prices for similar assets, if available, or matrix pricing models.
FHLB and Federal Reserve Stock. The carrying amount of FHLB and Federal Reserve stock is used to
approximate the fair value of these investments. These securities are not readily marketable, are
recorded at cost (par value), and are evaluated for impairment based on the ultimate recoverability
of the par value. Citizens considers positive and negative evidence, including the profitability
and asset quality of the issuer, dividend payment history and recent redemption experience, when
determining the ultimate recoverability of the par value. Citizens believes its investments in
FHLB and Federal Reserve stock are ultimately recoverable at par.
Net Portfolio Loans. The fair value of loans and loan commitments is estimated based on discounted
cash flows. The cash flows take into consideration current portfolio interest rates and repricing
characteristics as well as assumptions relating to prepayment speeds. The discount rates take into
consideration the current market interest rate environment, a credit risk component based on the
credit characteristics of each loan portfolio, and a liquidity premium reflecting the liquidity or
illiquidity of the market.
Deposits. The estimated fair value of demand deposits (e.g., noninterest and interest bearing
demand, savings, and certain types of money market accounts) are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for
certificates of deposit are based on the discounted value of contractual cash flows at current
interest rates. The estimated fair value of deposits does not take into account the value of
Citizens long-term relationships with depositors, commonly known as core deposit intangibles,
which are separate intangible assets, and not considered financial instruments.
Short-Term Borrowings. The carrying amounts of federal funds purchased, securities sold under
agreement to repurchase and other short-term borrowings approximate their fair values because they
frequently reprice to a market rate.
Long-Term Debt. The fair value is estimated using observable market prices and by discounting
future cash flows using current interest rates for similar financial instruments.
Derivative Instruments. Substantially all derivative instruments held or issued by Citizens are
traded in over-the-counter markets where quoted market prices are not readily available.
Derivative instruments are priced by independent providers using observable market assumptions with
adjustments based on widely accepted valuation techniques. For those derivatives, Citizens
measures fair value with models that use primarily market observable
22
Table of Contents
inputs, such as yield curves and option volatilities, and include the value associated with
counterparty credit risk (credit valuation adjustments). Citizens assessed the significance of the
impact of the credit valuation adjustments on the overall valuation of its derivative positions,
and determined that the credit valuation adjustments were not significant to the overall valuation
of its derivatives.
Deferred Compensation Assets. Citizens has a portfolio of mutual fund investments which hedge the
deferred compensation liabilities for various employees, former employees and directors. These
investments are traded on active exchanges with valuations obtained from readily available pricing
sources for market transactions involving identical assets. Additionally, Citizens invests in a
Guaranteed Income Fund which is valued based on similar assets in an active market.
Impaired Loans. A loan is considered to be impaired when it is probable that all of the principal
and interest due under the original underwriting terms of the loan may not be collected.
Impairment is typically measured based on the fair value of the underlying collateral. The fair
value of the underlying collateral is determined, where possible, using market prices derived from
appraisals or broker price opinions, which are considered to be Level 2. Fair value may also be measured using the present value of expected future cash flows discounted at the loan's effective interest rate. Since certain
assumptions and unobservable inputs are currently being used in both techniques, impaired loans are recorded
as Level 3 in the fair-value hierarchy. Citizens measures impairment on all
nonaccrual commercial and industrial and commercial real estate loans for which it has established
specific reserves as part of the specific allocated allowance component of the allowance for loan
losses.
Loans Held for Sale. Residential mortgage loans held for sale are comprised
of loans originated for sale in the ordinary course of business and selected nonperforming
residential mortgage loans. The fair value of residential mortgage loans originated for sale in
the secondary market is based on purchase commitments or quoted prices for the same or similar
loans and are classified as nonrecurring Level 2. The fair value of nonperforming residential
mortgage loans is based on the fair value of the underlying collateral, net of estimated costs to
sell, using market prices derived from indicative pricing models which utilize projected
assumptions Citizens believes potential investors would make, broker price opinions or appraisals,
and are classified as nonrecurring Level 3.
Commercial loans held for sale are comprised primarily of loans identified for sale that are recorded at the lower of carrying amount or market value based on
appraisals of the underlying collateral, adjusted based on managements
judgment due to current market conditions. Fair value may also be measured using the
present value of expected future cash flows discounted at the loan's effective inters
rate. Citizens records commercial loans held for sale as nonrecurring Level 3.
Other Real Estate. Other real estate (ORE)
is comprised of commercial and residential real
estate acquired through foreclosure proceedings or acceptance of a deed-in-lieu of foreclosure, and
former branch locations. Commercial properties and former branch locations are carried at the
lower of cost or market value at the time of acquisition based on the fair value of the underlying
property, net of estimated costs to sell. This is determined using market prices derived from
appraisals or broker price opinions, which are considered to be Level 2. However, certain
assumptions and unobservable inputs are currently being used by appraisers and brokers, therefore,
qualifying the assets as Level 3 in the fair value hierarchy. Residential real estate is recorded
at the fair value of the underlying property, net of estimated costs to sell, using market prices
derived from indicative pricing models which utilize projected assumptions Citizens believes
potential investors would make, broker price opinions or appraisals, and are classified as
nonrecurring Level 3. Losses arising from the initial acquisition of such properties are charged
against the allowance for loan losses at the time of transfer. Subsequent valuation adjustments to
reflect the lower of cost or market value, as well as gains and losses on disposal of these
properties, are charged to other expenses as incurred. Citizens records ORE properties as
nonrecurring Level 3.
Repossessed Assets. Repossessed assets consist of consumer assets acquired to satisfy the
consumers outstanding delinquent debt. These assets consist of automobiles, boats, recreational
vehicles and other personal items. These assets are carried at the lower of cost or market value,
net of estimated costs to sell, based on internally developed procedures.
Some of the assets and liabilities discussed above are measured on a recurring basis while others
are measured on a nonrecurring basis, with the determination based upon applicable existing
accounting pronouncements. For example, investment securities available for sale, derivative
instruments and deferred compensation assets are recorded at fair value on a recurring basis.
Other assets, such as loans held for sale, impaired loans, other real estate, and repossessed
assets are recorded at fair value on a nonrecurring basis. Goodwill and core deposit intangibles
are measured for impairment on a nonrecurring basis and are written down when the value of the
individual asset has declined.
23
Table of Contents
The following table presents the balances of assets and liabilities that were measured at fair
value on a recurring basis as of March 31, 2011.
March 31, 2011 | ||||||||||||||||
(in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Securities available for sale: |
||||||||||||||||
Collateralized mortgage obligations |
$ | 624,256 | $ | | $ | 624,246 | $ | 10 | ||||||||
Mortgage-backed |
1,327,735 | | 1,327,735 | | ||||||||||||
State and municipal |
166,510 | | 162,819 | 3,691 | ||||||||||||
Other |
915 | | 657 | 258 | ||||||||||||
Total available for sale |
2,119,416 | | 2,115,457 | 3,959 | ||||||||||||
Other assets: |
||||||||||||||||
Derivatives designated as hedging instruments |
473 | | 473 | | ||||||||||||
Derivatives not designated as hedging instruments |
20,614 | | 20,614 | | ||||||||||||
Deferred compensation assets |
10,341 | 7,569 | 2,772 | | ||||||||||||
Total other assets |
31,428 | 7,569 | 23,859 | | ||||||||||||
Total |
$ | 2,150,844 | $ | 7,569 | $ | 2,139,316 | $ | 3,959 | ||||||||
Other liabilities: |
||||||||||||||||
Derivatives not designated as hedging instruments |
$ | 20,840 | $ | | $ | 20,840 | $ | | ||||||||
Total other liabilities |
20,840 | | 20,840 | | ||||||||||||
Total |
$ | 20,840 | $ | | $ | 20,840 | $ | | ||||||||
There were no transfers between levels within the fair value hierarchy during the three month
period ended March 31, 2011. The following table presents the reconciliation of Level 3 assets
held by Citizens at March 31, 2011.
Net Realized/Unrealized Gains (Losses) | ||||||||||||||||||||||||||||||||
Recorded in | ||||||||||||||||||||||||||||||||
Balance at | Other | Balance at | ||||||||||||||||||||||||||||||
December 31, | Recorded in Earnings | Comprehensive | March 31, | |||||||||||||||||||||||||||||
(in thousands) | 2010 | Realized (1) | Unrealized | Income (Pretax) | Settlements | Transfers In | Transfers Out | 2011 | ||||||||||||||||||||||||
| | | | | | | | | ||||||||||||||||||||||||||||||||
Securities available for sale |
||||||||||||||||||||||||||||||||
Collateralized mortgage obligations |
$ | 11 | $ | | $ | | $ | | $ | (1 | ) | $ | | $ | | $ | 10 | |||||||||||||||
State and municipal |
3,812 | 48 | | (19 | ) | (150 | ) | | | 3,691 | ||||||||||||||||||||||
Other |
336 | 22 | | | (100 | ) | | | 258 | |||||||||||||||||||||||
Total |
$ | 4,159 | $ | 70 | $ | | $ | (19 | ) | $ | (251 | ) | $ | | $ | | $ | 3,959 | ||||||||||||||
(1) | Recorded through Interest Income on the Consolidated Statement of Operations. No purchases, sales, or issuances for the period. |
The following table includes assets measured at fair value on a nonrecurring basis that have had a
fair value adjustment as of March 31, 2011.
March 31, 2011 | Initial Carrying | Fair Value | ||||||||||||||||||
(in thousands) | Value | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||
Impaired loans |
$ | 172,338 | $ | 21,302 | $ | | $ | | $ | 21,302 | ||||||||||
Commercial loans held for sale |
5,379 | 3,111 | | | 3,111 | |||||||||||||||
Residential mortgage loans held for sale |
12 | | | | | |||||||||||||||
Other real estate |
8,753 | 4,261 | | | 4,261 | |||||||||||||||
Repossessed assets |
2,571 | 1,311 | | | 1,311 | |||||||||||||||
Total |
$ | 189,053 | $ | 29,985 | $ | | $ | | $ | 29,985 | ||||||||||
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Note 9. Pension Benefit Cost
Citizens recognizes the change in the funded status (i.e. the difference between the fair value of
plan assets and the projected benefit obligations) of its retirement plans as an adjustment to
accumulated other comprehensive income, net of tax. This adjustment represents the unrecognized
actuarial losses and unrecognized prior service costs. The components of retirement benefit cost
for the three months ended March 31, 2011 and 2010 are presented below.
Three Months Ended | ||||||||
March 31, | ||||||||
(in thousands) | 2011 | 2010 | ||||||
Defined Benefit Pension Plans |
||||||||
Interest cost |
$ | 955 | $ | 1,039 | ||||
Expected return on plan assets |
(1,018 | ) | (1,200 | ) | ||||
Amortization of unrecognized: |
||||||||
Prior service cost |
8 | 8 | ||||||
Net actuarial loss |
832 | 556 | ||||||
Net pension cost |
777 | 403 | ||||||
Supplemental Pension Plans |
||||||||
Interest cost |
189 | 188 | ||||||
Amortization of unrecognized: |
||||||||
Net actuarial loss |
5 | 3 | ||||||
Net pension cost |
194 | 191 | ||||||
Postretirement Benefit Plans |
||||||||
Interest cost |
144 | 152 | ||||||
Amortization of unrecognized: |
||||||||
Prior service cost |
(72 | ) | (67 | ) | ||||
Net actuarial gain |
(72 | ) | (8 | ) | ||||
Net postretirement benefit cost |
| 77 | ||||||
Total periodic benefit cost |
$ | 971 | $ | 671 | ||||
Citizens maintains multiple employee benefit plans, including defined benefit pension, supplemental
pension, postretirement healthcare, and defined contribution retirement 401(k) plans. Citizens
made a cash contribution of $0.1 million to the defined benefit pension plan during the first three
months of 2011 and expects to make a contribution of $0.2 million during the remaining nine months
of the year. During the first three months of 2011, Citizens contributed $0.1 million to the
supplemental pension plans and anticipates that an additional $0.4 million of contributions will be
made during the remaining nine months of the year. Citizens contributed $0.1 million to the
postretirement benefit plan during the first three months of 2011 and anticipates making an
additional $0.4 million in contributions for the remaining portion of the year. Citizens suspended
the 401(k) matching funds and annual discretionary contributions during the third quarter of 2009.
The pension plan assets for which Citizens determines fair value include short-term pooled money
fund, equity, and fixed income securities, all of which fall into Level 2 in the fair value
hierarchy at March 31, 2011. Citizens pension plan assets are invested solely in pooled separate
account funds, which are managed by Prudential. The net asset values (NAV) are based on the
value of the underlying assets owned by the fund, minus its liabilities, and then
divided by the number of units outstanding. The NAVs unit price of the pooled separate accounts
is not quoted on any market; however, the unit price is based on the underlying investments which
are traded in an active market and are priced by independent providers. Citizens has evaluated
their valuation methodologies used to develop the fair values in order to determine whether such
valuations are representative of an exit price in Citizens principal markets. Further, Citizens
has developed an internal, independent price verification function that performs annual testing on
valuations received from third parties. There are no significant restrictions on Citizens ability
to sell any of the investments in the pension plan.
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The estimated fair values of Citizens pension plan assets at March 31, 2011 are as follows:
March 31, 2011 | ||||||||||||||||
(in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Asset Category |
||||||||||||||||
Short-term pooled money fund |
$ | 2,495 | $ | | $ | 2,495 | $ | | ||||||||
Equity securities |
||||||||||||||||
Large cap (1) |
19,736 | | 19,736 | | ||||||||||||
Mid-cap |
5,002 | | 5,002 | | ||||||||||||
Small-cap |
7,230 | | 7,230 | | ||||||||||||
International equity |
10,281 | | 10,281 | | ||||||||||||
Fixed income securities |
||||||||||||||||
Intermediate term fixed (2) |
22,112 | | 22,112 | | ||||||||||||
Total |
$ | 66,856 | $ | | $ | 66,856 | $ | | ||||||||
(1) | This category is comprised of not actively managed low-cost equity index funds that track the S&P 500 and Russell 1000. | |
(2) | This category represents investment grade bonds of U.S. issuers from diverse industries. |
Note 10. Stock-Based Compensation
Citizens has a stock-based compensation plan authorizing the granting of incentive and nonqualified
stock options, nonvested stock awards (also known as restricted stock), restricted stock units, and
performance awards to employees and non-employee directors. At March 31, 2011, Citizens had
16,536,230 shares of common stock reserved for future issuance under the current plan. The
compensation cost for share based awards is recognized over the requisite service period of the
award. The requisite service period is presumed to be the stated vesting period or the estimated
time that will be required to satisfy any performance conditions. Restricted shares are included
in outstanding stock totals, and are entitled to receive dividends and have voting rights.
Restricted stock units have no voting or dividend rights but have dividend equivalent rights
entitling them to additional shares at the time the units are settled
for common stock. There have been no options granted since 2006 and
no amortized costs associated with stock options since 2009.
The following table sets forth the total stock-based compensation expense resulting from stock
options, restricted stock units, and restricted stock awards included in the Consolidated
Statements of Operations for the three months ended March 31, 2011 and 2010.
Three Months Ended | ||||||||
March 31, | ||||||||
(in thousands) | 2011 | 2010 | ||||||
Restricted stock compensation and restricted stock unit compensation |
$ | 486 | $ | 502 | ||||
Stock-based compensation expense before income taxes |
486 | 502 | ||||||
Income tax benefit (1) |
(170 | ) | (176 | ) | ||||
Total stock-based compensation expense after income taxes |
$ | 316 | $ | 326 | ||||
(1) | The income tax benefit is calculated based on the statutory rate. Due to the fact that Citizens has a valuation allowance, the income tax benefit may not be realized. |
New shares are issued when stock options are exercised. Citizens presents excess tax
benefits from the exercise of stock
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options, if any, as financing cash inflows and as operating cash outflows on the Consolidated
Statement of Cash Flows.
As of March 31, 2011, $2.4 million of total unrecognized compensation cost related to stock options
and restricted stock is expected to be recognized over a weighted average period of 1.8 years.
The following table summarizes restricted stock activity for the three months ended March 31, 2011.
Weighted-Average | ||||||||
Number of | Per Share Grant | |||||||
Shares | Date Fair Value | |||||||
Restricted stock at December 31, 2010 |
3,109,998 | $ | 1.33 | |||||
Granted |
724,308 | 0.81 | ||||||
Vested |
(14,727 | ) | 9.02 | |||||
Forfeited |
(107,248 | ) | 1.54 | |||||
Restricted stock at March 31, 2011(1) |
3,712,331 | $ | 1.19 | |||||
(1) | Includes 273,374 vested shares under restriction prohibiting sale until conditions are met, inluding two years from grant date and certain TARP payments are made. |
The total fair value of restricted stock vested during the three months ended March 31, 2011 was
less than $0.1 million.
Note 11. Shareholders Equity and Earnings Per Share
During the
first quarter of 2010, Citizens suspended quarterly cash dividend payments on
its Series A Preferred Stock. While Citizens accrues for this obligation, it is currently in arrears
in the amount of $19.3 million and $15.4 million with the
dividend payments on the Series A Preferred
Stock as of March 31, 2011 and December 31, 2010, respectively.
Earnings per common share is computed using the two-class method. As of March 31, 2011, potential
common stock that would be generated from restrictions lapsing on unvested shares as well as
additional shares issued through the exercise of stock options and warrants totaled 25,041,895
shares. As a result of being anti-dilutive, these shares were excluded from the computation of
dilutive earnings per share. A reconciliation of the numerators and denominators of the basic and
diluted earnings per common share computations follows.
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Three Months Ended | ||||||||
March 31, | ||||||||
(in thousands, except per share amounts) | 2011 | 2010 | ||||||
Numerator: |
||||||||
Loss from continuing operations |
$ | (68,678 | ) | $ | (76,023 | ) | ||
Dividend on redeemable preferred stock |
(5,627 | ) | (5,282 | ) | ||||
Net loss from continuing operations available to common shareholders |
(74,305 | ) | (81,305 | ) | ||||
Loss from discontinued operations (net of income tax) |
| (8,973 | ) | |||||
Net loss attributable to common shareholders |
$ | (74,305 | ) | $ | (90,278 | ) | ||
Denominator: |
||||||||
Weighted average shares outstanding |
397,298 | 394,393 | ||||||
Less: participating securities included in weighted average shares outstanding |
(3,238 | ) | (614 | ) | ||||
Weighted average shares outstanding for basic and dilutive earnings per common share |
394,060 | 393,779 | ||||||
Basic loss per common share from continuing operations |
$ | (0.19 | ) | $ | (0.21 | ) | ||
Diluted loss per common share from continuing operations |
$ | (0.19 | ) | $ | (0.21 | ) | ||
Basic loss per common share from discontinued operations |
$ | | $ | (0.02 | ) | |||
Diluted loss per common share from discontinued operations |
$ | | $ | (0.02 | ) | |||
Basic net loss per common share |
$ | (0.19 | ) | $ | (0.23 | ) | ||
Diluted net loss per common share |
$ | (0.19 | ) | $ | (0.23 | ) | ||
Note 12. Lines of Business
Citizens is managed along the following business lines: Regional Banking, Specialty Consumer,
Specialty Commercial, Wealth Management, and Other. Selected line of business information for the
three months ended March 31, 2011 and 2010 is provided below. Certain amounts have been
reclassified to conform with the current year presentation. These reclassifications do not have a
significant effect on any one line of business and do not change the total for the Corporation.
There are no significant intersegmental revenues.
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Regional | Specialty | Specialty | Wealth | |||||||||||||||||||||
(in thousands) | Banking | Consumer | Commercial | Mgmt | Other | Total | ||||||||||||||||||
Earnings Summary Three Months Ended March 31, 2011 |
||||||||||||||||||||||||
Net interest income (taxable equivalent) |
$ | 56,279 | $ | 8,615 | $ | 9,962 | $ | 144 | $ | 5,716 | $ | 80,716 | ||||||||||||
Provision for loan losses |
40,419 | 8,222 | 40,083 | | | 88,724 | ||||||||||||||||||
Net interest income after provision |
15,860 | 393 | (30,121 | ) | 144 | 5,716 | (8,008 | ) | ||||||||||||||||
Noninterest income |
17,572 | 1,435 | (1,557 | ) | 3,923 | 1,770 | 23,143 | |||||||||||||||||
Noninterest expense |
57,286 | 14,646 | 5,588 | 2,343 | 1,793 | 81,656 | ||||||||||||||||||
Income (loss) before income taxes |
(23,854 | ) | (12,818 | ) | (37,266 | ) | 1,724 | 5,693 | (66,521 | ) | ||||||||||||||
Income tax expense-taxable equivalent |
(8,114 | ) | (4,486 | ) | (12,992 | ) | 610 | 27,139 | 2,157 | |||||||||||||||
Net (loss) income |
$ | (15,740 | ) | $ | (8,332 | ) | $ | (24,274 | ) | $ | 1,114 | $ | (21,446 | ) | $ | (68,678 | ) | |||||||
Average assets (in millions) |
$ | 3,229 | $ | 1,620 | $ | 1,125 | $ | 17 | $ | 3,908 | $ | 9,899 | ||||||||||||
Earnings Summary Three Months Ended March 31, 2010 |
||||||||||||||||||||||||
Net interest income (taxable equivalent) |
$ | 64,016 | $ | 7,491 | $ | 16,477 | $ | 145 | $ | (3,583 | ) | $ | 84,546 | |||||||||||
Provision for loan losses |
23,067 | 35,987 | 42,301 | | | 101,355 | ||||||||||||||||||
Net interest income after provision |
40,949 | (28,496 | ) | (25,824 | ) | 145 | (3,583 | ) | (16,809 | ) | ||||||||||||||
Noninterest income |
16,478 | (1,023 | ) | (5,007 | ) | 3,850 | 8,095 | 22,393 | ||||||||||||||||
Noninterest expense |
53,023 | 13,242 | 4,283 | 3,082 | 4,473 | 78,103 | ||||||||||||||||||
Income (loss) before income taxes |
4,404 | (42,761 | ) | (35,114 | ) | 913 | 39 | (72,519 | ) | |||||||||||||||
Income tax expense-taxable equivalent |
1,865 | (14,952 | ) | (11,797 | ) | 326 | 28,062 | 3,504 | ||||||||||||||||
Net income (loss) from continuing operations |
2,539 | (27,809 | ) | (23,317 | ) | 587 | (28,023 | ) | (76,023 | ) | ||||||||||||||
Income (loss) from discontinued operations |
986 | (89 | ) | 162 | 78 | (10,110 | ) | (8,973 | ) | |||||||||||||||
Net income (loss) |
$ | 3,525 | $ | (27,898 | ) | $ | (23,155 | ) | $ | 665 | $ | (38,133 | ) | $ | (84,996 | ) | ||||||||
Average assets (in millions) |
$ | 4,513 | $ | 1,861 | $ | 1,700 | $ | 13 | $ | 3,816 | $ | 11,903 | ||||||||||||
Note 13. Commitments, Contingent Liabilities and Guarantees
The unaudited Consolidated Financial Statements do not reflect various loan commitments (unfunded
loans and unused lines of credit) and letters of credit originated in the normal course of
business. Loan commitments are made to accommodate the financial needs of clients. Generally, new
loan commitments do not extend beyond 90 days and unused lines of credit are reviewed at least
annually. Letters of credit guarantee future payment of client financial
obligations to third parties. They are normally issued for services provided or to facilitate the
shipment of goods, and generally expire within one year. Both arrangements have essentially the
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 Citizens assessment of the client and may
include receivables, inventories, real property and equipment.
Amounts available to clients under loan commitments and standby letters of credit follow.
March 31, | December 31, | |||||||
(in thousands) | 2011 | 2010 | ||||||
Loan commitments and letters of credit: |
||||||||
Commitments to extend credit |
$ | 897,321 | $ | 953,340 | ||||
Financial standby letters of credit |
162,747 | 164,640 | ||||||
Performance standby letters of credit |
5,885 | 7,015 | ||||||
Total loan commitments and letters of credit |
$ | 1,065,953 | $ | 1,124,995 | ||||
Commitments outstanding to extend credit include home equity credit lines which totaled $363.8
million and $376.2 million at March 31, 2011 and December 31, 2010, respectively.
At March 31, 2011 and December 31, 2010, a liability of $1.9 million was recorded for possible
losses on commitments to extend credit. A liability of $1.1 million and $1.5 million was recorded
at March 31, 2011 and December 31, 2010, respectively, representing the deferred revenue associated
with certain letters of credit, which
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are amortized into income over the life of the commitments. These balances are included in
other liabilities on the Consolidated Balance Sheets.
Note 14. Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
Citizens is exposed to certain risks arising from both its business operations and economic
conditions. Citizens manages economic risks, including interest rate, liquidity, and credit risk,
primarily through the amount, sources, and duration of its assets and liabilities and the use of
derivative financial instruments. Specifically, Citizens enters into derivative financial
instruments to manage exposures that arise from business activities that result in the receipt or
payment of future known and uncertain cash amounts, the value of which are determined by interest
rates. Citizens derivative financial instruments are used to manage differences in the amount,
timing, and duration of its known or expected cash receipts and cash payments principally related
to certain variable-rate loan assets and fixed-rate borrowings.
Fair Values of Derivative Instruments on the Consolidated Balance Sheets
The table below presents the fair value of Citizens derivative financial instruments as well as
their classification on the Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010.
Other Assets | Other Liabilities | |||||||||||||||
March 31, | December 31, | March 31, | December 31, | |||||||||||||
(in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Derivatives designated as hedging instruments
Interest rate products |
$ | 473 | $ | 1,976 | $ | | $ | | ||||||||
Derivatives not designated as hedging
instruments
Interest rate products |
20,614 | 26,409 | 20,840 | 26,523 | ||||||||||||
Total derivatives |
$ | 21,087 | $ | 28,385 | $ | 20,840 | $ | 26,523 | ||||||||
Cash Flow Hedges of Interest Rate Risk
Citizens objectives in using interest rate derivatives are to add stability to interest income and
to manage its exposure to interest rate movements. To accomplish this objective, Citizens
primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest
rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a
counterparty in exchange for Citizens making variable-rate payments over the life of the agreements
without exchange of the underlying notional amount. As of March 31, 2011 and December 31, 2010,
Citizens had 2 interest rate swaps with an aggregate notional amount of $60.0 million and 3
interest rate swaps with an aggregate notional amount of $160.0 million, respectively, that were
designated as cash flow hedges of interest rate risk.
The effective portion of changes in the fair value of derivatives that are designated and qualify
as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently
reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
During the three months ended March 31, 2011, such derivatives were used to hedge the variable cash
inflows associated with existing pools of prime and LIBOR-based loan assets. The ineffective
portion of the change in fair value of the derivatives is recognized directly in earnings. No
hedge ineffectiveness was recognized during the three months ended March 31, 2011 and 2010.
In addition, one swap failed to qualify for hedge accounting due to a mismatch between the swap
notional and the aggregate principal amount of the designated loan during the first quarter of 2010
and was subsequently terminated in
April 2010. Accordingly, the change in fair value of this swap during the period from failure
through termination was recognized directly in earnings. The fair value of this swap at March 31,
2010 and the change in fair value during the three months ended
March 31, 2010 are disclosed under
the section entitled Derivatives Not Designated as Hedging Instruments throughout this footnote.
Amounts reported in accumulated other comprehensive income related to derivatives are reclassified
to interest income as interest payments are received on Citizens variable-rate assets. Citizens
accelerated the reclassification of an unrealized gain in accumulated other comprehensive income of
$0.5 million and $1.2 million for the three
30
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months ended March 31, 2011 and 2010, respectively, to earnings as a result of the hedged
forecasted transactions becoming probable not to occur. During the next twelve months, Citizens
estimates that $2.2 million will be reclassified as an increase to interest income.
The following tables summarize the impact of cash flow hedges on the unaudited Consolidated
Financial Statements for the three months ended March 31, 2011 and 2010.
Derivative Impact on OCI Gain (Loss) | Derivative Ineffectiveness Gain (Loss) | |||||||||||||||||||||||||||||||
Location | Location | |||||||||||||||||||||||||||||||
Reclassified in | Reclassified from | Recognized in | ||||||||||||||||||||||||||||||
Derivatives Relationship | Statement of | Accumulated OCI into | Statement of | |||||||||||||||||||||||||||||
(in thousands) | Recognized in OCI | Operations | Statement of Operations | Operations | Amount | |||||||||||||||||||||||||||
Three Months Ended | Three Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||
March 31, | March 31, | March 31, | ||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||
Cash flow hedges: |
||||||||||||||||||||||||||||||||
Interest rate products |
$ | 18 | $ | 2,554 | Interest income | $ | 1,046 | $ | 2,052 | |||||||||||||||||||||||
Other income |
513 | 1,199 | Other income |
$ | | $ | | |||||||||||||||||||||||||
Total |
$ | 18 | $ | 2,554 | $ | 1,559 | $ | 3,251 | $ | | $ | | ||||||||||||||||||||
Fair Value Hedges of Interest Rate Risk
Citizens is exposed to changes in the fair value of certain of its fixed-rate obligations due to
changes in LIBOR, the benchmark interest rate. Interest rate swaps designated as fair value hedges
involve the receipt of fixed-rate amounts from a counterparty in exchange for Citizens making
variable-rate payments over the life of the agreements without the exchange of the underlying
notional amount. As of March 31, 2011 and December 31, 2010, Citizens had 2 fair value interest
rate swaps with an aggregate notional balance of $35.0 million and 4 fair value interest rate swaps
with an aggregate notional balance of $170.0 million, respectively.
For derivatives that are designated and qualify as fair value hedges, the gain or loss on the
derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged
risk are recognized in earnings. Citizens includes the gain or loss on the hedged items in the
same line item as the offsetting loss or gain on the related derivatives. During the three months
ended March 31, 2011 and 2010, Citizens recognized gains of $0.5 million, and $1.6 million,
respectively, in interest expense related to hedge ineffectiveness. Citizens also recognized a net
reduction to interest expense of $0.6 million and $0.4 million for the three months ended March 31,
2011 and 2010, respectively, related to Citizens fair value hedges, which includes net settlements
on the derivatives and any amortization adjustment in the basis of the hedged items.
The following table summarizes the impact of fair value hedges on the unaudited Consolidated
Financial Statements for the three months ended March 31, 2011 and 2010.
Derivative Contract (Loss) Gain | Hedged Item Gain (Loss) | |||||||||||||||||||||||
Location in | Three Months Ended | Location in | Three Months Ended | |||||||||||||||||||||
Derivatives Relationship | Statement of | March 31, | Statement of | March 31, | ||||||||||||||||||||
(in thousands) | Operations | 2011 | 2010 | Operations | 2011 | 2010 | ||||||||||||||||||
Fair value hedges: |
||||||||||||||||||||||||
Interest rate products |
Interest expense | $ | (990 | ) | $ | 89 | Interest expense | $ | 1,460 | $ | 1,524 |
Non-designated Hedges
Citizens does not use derivatives for trading or speculative purposes and does not use credit
derivatives for any purpose. Derivatives not designated as hedges are used to manage Citizens
exposure to interest rate movements and other identified risks but do not satisfy the conditions
for hedge accounting. Changes in the fair value of derivatives not designated in hedging
relationships are recorded directly into earnings. Additionally, Citizens holds interest rate
derivatives, including interest rate swaps and option products, resulting from a service Citizens
provides to certain clients. Citizens executes interest rate derivatives with commercial banking
clients to facilitate their
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respective risk management strategies. Those derivatives are simultaneously hedged by offsetting
derivatives that Citizens executes with a third party, such that Citizens minimizes its net risk
exposure resulting from such
transactions. As of March 31, 2011 and December 31, 2010, Citizens had 200 derivative transactions
with an aggregate notional amount of $712.1 million and 230 derivative transactions with an
aggregate notional amount of $765.5 million, respectively, related to this program.
The following table summarizes the impact of derivatives not designated as hedges on the unaudited
Consolidated Financial Statements for the three months ended March 31, 2011 and 2010.
Amount of (Loss) Gain | ||||||||||||
Recognized in Statement | ||||||||||||
of Operations | ||||||||||||
Location of (Loss) Gain | Three Months Ended | |||||||||||
Derivatives Relationship | Recognized in | March 31, | ||||||||||
(in thousands) | Statement of Operations | 2011 | 2010 | |||||||||
Derivatives not designated as hedges Interest rate products |
Other income | $ | (112 | ) | $ | (490 | ) |
Credit-Risk-Related Contingent Features
Citizens has agreements with its derivative counterparties that contain a provision where if
Citizens defaults on any of its indebtedness, including a default where repayment of the
indebtedness has not been accelerated by the lender, then it could also be declared in default on
its derivative obligations. Citizens also has agreements with certain derivative counterparties
that contain a provision where if it fails to maintain its status as a well or adequately
capitalized institution, then the counterparty could terminate the derivative positions and
Citizens would be required to settle its obligations under the agreements.
As of March 31, 2011, the fair value of derivatives in a net liability position with all
counterparties, which includes accrued interest, but excludes any adjustment for non performance
risk related to these agreements was $20.4 million. As of March 31, 2011, Citizens had minimum
collateral posting with its derivative counterparties and assigned collateral of $20.9 million. If
credit risk related contingent features underlying these agreements had been triggered as of March
31, 2011, Citizens would not be required to pledge any additional collateral.
In addition, if Citizens credit rating is reduced below investment grade, then a termination event
is deemed to have occurred with one of its counterparties and the counterparty has the right to
terminate all affected transactions under the related agreement. Citizens has breached these
provisions with respect to a Moodys rating below investment grade at August 6, 2009 and may be
required to settle its obligations under the agreement at the termination value. Citizens may be
required to pay additional amounts due in excess of amounts previously posted as collateral. As of
March 31, 2011, the aforementioned termination value approximated $0.7 million.
Citizens does not offset fair value amounts recognized for the right to reclaim cash collateral (a
receivable) or the obligation to return cash collateral (a payable) against recognized fair value
amounts of derivatives executed with the same counterparty under a master netting agreement. The
Corporation has the right to reclaim collateral assigned of $20.9 million.
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Item 2 Managements Discussion and Analysis of Financial Condition and Results of
Operations
Selected Quarterly Information | ||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||
March 31, | December 31, | September 30, | June 30, | March 31, | ||||||||||||||||
2011 | 2010 | 2010 | 2010 | 2010 | ||||||||||||||||
Summary of Operations (in thousands) |
||||||||||||||||||||
Net interest income |
$ | 78,614 | $ | 81,731 | $ | 81,558 | $ | 84,586 | $ | 81,189 | ||||||||||
Provision for loan losses |
88,724 | 131,296 | 89,617 | 70,614 | 101,355 | |||||||||||||||
Noninterest income (1) |
23,143 | 24,028 | 25,956 | 22,282 | 22,393 | |||||||||||||||
Noninterest expense |
81,656 | 77,234 | 74,740 | 77,010 | 78,103 | |||||||||||||||
Income tax provision from continuing operations |
55 | 3,383 | 5,628 | 3,700 | 147 | |||||||||||||||
Loss from continuing operations before income taxes |
(68,678 | ) | (106,154 | ) | (62,471 | ) | (44,456 | ) | (76,023 | ) | ||||||||||
Income (loss) from discontinued operations (after tax) |
| | | 5,151 | (8,973 | ) | ||||||||||||||
Net loss |
(68,678 | ) | (106,154 | ) | (62,471 | ) | (39,305 | ) | (84,996 | ) | ||||||||||
Net loss attributable to common shareholders (2) |
(74,305 | ) | (111,699 | ) | (67,922 | ) | (44,711 | ) | (90,278 | ) | ||||||||||
Taxable equivalent adjustment |
2,102 | 2,247 | 2,372 | 2,605 | 3,357 | |||||||||||||||
Per Common Share Data |
||||||||||||||||||||
Loss from continuing operations: |
||||||||||||||||||||
Basic |
$ | (0.19 | ) | $ | (0.28 | ) | $ | (0.17 | ) | $ | (0.12 | ) | $ | (0.21 | ) | |||||
Diluted |
(0.19 | ) | (0.28 | ) | (0.17 | ) | (0.12 | ) | (0.21 | ) | ||||||||||
Discontinued operations: |
||||||||||||||||||||
Basic |
$ | | $ | | $ | | $ | 0.01 | $ | (0.02 | ) | |||||||||
Diluted |
| | | 0.01 | (0.02 | ) | ||||||||||||||
Net loss: |
||||||||||||||||||||
Basic |
$ | (0.19 | ) | $ | (0.28 | ) | $ | (0.17 | ) | $ | (0.11 | ) | $ | (0.23 | ) | |||||
Diluted |
(0.19 | ) | (0.28 | ) | (0.17 | ) | (0.11 | ) | (0.23 | ) | ||||||||||
Common book value |
1.67 | 1.85 | 2.22 | 2.37 | 2.46 | |||||||||||||||
Tangible book value (non-GAAP) |
1.55 | 1.72 | 2.08 | 2.24 | 2.28 | |||||||||||||||
Tangible common book value (non-GAAP) |
0.85 | 1.02 | 1.39 | 1.54 | 1.59 | |||||||||||||||
Shares outstanding, end of period (000)(3) |
397,783 | 397,167 | 397,071 | 396,979 | 394,392 | |||||||||||||||
At Period End (millions) |
||||||||||||||||||||
Assets |
$ | 9,724 | $ | 9,966 | $ | 10,639 | $ | 10,834 | $ | 11,328 | ||||||||||
Earning assets |
9,010 | 9,303 | 9,932 | 10,098 | 10,595 | |||||||||||||||
Portfolio loans |
5,704 | 6,217 | 6,888 | 7,138 | 7,439 | |||||||||||||||
Allowance for loan losses |
224 | 296 | 324 | 322 | 322 | |||||||||||||||
Deposits |
7,692 | 7,727 | 8,101 | 8,222 | 8,481 | |||||||||||||||
Long-term debt |
907 | 1,033 | 1,185 | 1,211 | 1,338 | |||||||||||||||
Shareholders equity |
945 | 1,012 | 1,157 | 1,218 | 1,244 | |||||||||||||||
Average for the Quarter (millions) |
||||||||||||||||||||
Assets |
$ | 9,899 | $ | 10,468 | $ | 10,803 | $ | 11,156 | $ | 11,575 | ||||||||||
Earning assets |
9,231 | 9,769 | 10,065 | 10,432 | 10,839 | |||||||||||||||
Portfolio loans |
6,051 | 6,682 | 7,059 | 7,318 | 7,654 | |||||||||||||||
Allowance for loan losses |
295 | 324 | 322 | 322 | 336 | |||||||||||||||
Deposits |
7,730 | 7,965 | 8,198 | 8,431 | 8,544 | |||||||||||||||
Long-term debt |
971 | 1,160 | 1,203 | 1,315 | 1,450 | |||||||||||||||
Shareholders equity |
1,002 | 1,145 | 1,215 | 1,239 | 1,323 | |||||||||||||||
Financial Ratios (annualized)(4) |
||||||||||||||||||||
Return on average assets |
(2.81 | )% | (4.02) | % | (2.29) | % | (1.60) | % | (2.66 | )% | ||||||||||
Return on average shareholders equity |
(27.79 | ) | (36.78 | ) | (20.40 | ) | (14.40 | ) | (23.30 | ) | ||||||||||
Average shareholders equity / average assets |
10.13 | 10.94 | 11.25 | 11.10 | 11.43 | |||||||||||||||
Net interest margin (FTE) (5) |
3.53 | 3.42 | 3.32 | 3.35 | 3.14 | |||||||||||||||
Efficiency ratio (non-GAAP) (6) |
78.33 | 71.39 | 68.02 | 75.93 | 77.39 | |||||||||||||||
Allowance for loan losses as a percent of portfolio loans |
3.93 | 4.76 | 4.70 | 4.51 | 4.33 | |||||||||||||||
Allowance for loan losses as a percent of nonperforming loans |
165.56 | 134.39 | 88.98 | 83.67 | 77.94 | |||||||||||||||
Allowance for loan losses as a percent of nonperforming assets |
119.18 | 103.30 | 73.10 | 68.11 | 57.96 | |||||||||||||||
Nonperforming loans as a percent of portfolio loans |
2.37 | 3.54 | 5.29 | 5.39 | 5.56 | |||||||||||||||
Nonperforming assets as a percent of portfolio loans plus ORAA(7) |
3.26 | 4.55 | 6.35 | 6.53 | 7.32 | |||||||||||||||
Nonperforming assets as a percent of total assets |
1.93 | 2.88 | 4.17 | 4.36 | 4.91 | |||||||||||||||
Net loans charged off as a percent of average portfolio loans (annualized) |
10.77 | 9.46 | 4.91 | 3.90 | 6.25 | |||||||||||||||
Leverage ratio |
7.39 | 7.71 | 8.50 | 8.72 | 8.47 | |||||||||||||||
Tier 1 capital ratio |
11.90 | 12.11 | 12.41 | 12.79 | 12.12 | |||||||||||||||
Total capital ratio |
13.24 | 13.51 | 13.80 | 14.17 | 13.49 |
(1) | Noninterest income includes a gain on investment securities of $8.0 million and $6.0 million in the second and first quarter of 2010. | |
(2) | Net loss attributable to common shareholders includes a non-cash dividend to preferred shareholders of $5.6 million in the first quarter of 2011 and $5.5 million, $5.4 million, $5.4 million and $5.3 million in the fourth, third, second and first quarters of 2010. | |
(3) | Includes participating shares, which are restricted stock units and restricted shares. | |
(4) | Financial ratios are based on continuing operations. | |
(5) | Net interest margin is presented on an annual basis, includes taxable equivalent adjustments to interest income and is based on a tax rate of 35%. | |
(6) | The Efficiency Ratio measures how efficiently a bank spends its revenues. The formula is: (Noninterest expense - Goodwill impairment)/(Net interest income + taxable equivalent adjustment + Total noninterest income - Investment securities (losses) gains). | |
(7) | Other real estate assets acquired (ORAA) include loans held for sale. |
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Introduction
The following presents managements discussion and analysis of Citizens Republic Bancorp,
Inc.s financial condition and results of operations for the three months ended March 31, 2011. It
should be read in conjunction with the unaudited Consolidated Financial Statements and Notes
included elsewhere in this report and the audited Consolidated Financial Statements and Notes
contained in the Corporations 2010 Annual Report on Form 10-K. In addition, the following
discussion and analysis should be read together with Managements Discussion and Analysis of
Financial Condition and Results of Operations contained in Citizens 2010 Annual Report on Form
10-K, which contains important additional information that is necessary to understand the
Corporation and its financial condition and results of operations for the periods covered by this
report. Unless the context indicates otherwise, all references in the discussion to Citizens or
the Corporation refer to Citizens Republic Bancorp, Inc. and its subsidiaries. References to the
Holding Company refer solely to Citizens Republic Bancorp, Inc. References to the Bank refer
solely to the Corporations banking subsidiary, Citizens Bank.
Discontinued Operations
As a result of the sale of Citizens wholly-owned subsidiary, F&M Bank-Iowa (F&M) on April 23,
2010, the financial condition and operating results for this subsidiary have been segregated from
the financial condition and operating results of Citizens continuing operations throughout this
report and, as such, are presented as a discontinued operation. While all prior periods have been
revised retrospectively to align with this treatment, these changes do not affect Citizens
reported consolidated financial condition or operating results for any of the prior periods.
Forward Looking Statements
Discussions and statements in this report that are not statements of historical fact,
including without limitation statements that include terms such as will, may, should,
believe, expect, anticipate, estimate, project, intend, and plan, and statements
regarding Citizens future financial and operating results, plans, objectives, expectations and
intentions, are forward-looking statements that involve risks and uncertainties, many of which are
beyond Citizens control or are subject to change. No forward-looking statement is a guarantee of
future performance and actual results could differ materially.
Factors that could cause or contribute to such differences include, without limitation, the
following:
| Citizens faces the risk that loan losses, including unanticipated loan losses due to changes in loan portfolios, fraud and economic factors, could exceed the allowance for loan losses and that additional increases in the allowance will be required. Additions to the allowance for loan losses would cause Citizens net income to decline and could have a negative impact on its capital and financial position. | |
| Citizens core lending and other businesses continue to be adversely affected by the historic weakness in the national and regional economies in which it operates, particularly Michigan. Citizens ability to generate earnings and maintain regulatory capital ratios at acceptable levels at the Holding Company and the Bank depends substantially on developments in those economies. Also, Citizens potential inability to comply with applicable laws, regulations and regulatory policies or standards due to the effects of these conditions on its results of operations and financial condition may result in heightened regulatory scrutiny and require Citizens to take actions to protect depositors that are not in the best interests of its shareholders. | |
| Citizens business may be adversely affected by the highly regulated environment in which it operates. Changes in applicable laws, regulations, and regulatory practices at either the federal or state level may result in the imposition of additional costs or restrict Citizens ability to operate its business in the manner most beneficial to its shareholders. | |
| While Citizens attempts to manage the risk from changes in market interest rates, interest rate risk management techniques are not exact. In addition, Citizens may not be able to economically hedge its interest rate risk. A rapid or substantial increase or decrease in interest rates could adversely affect Citizens net interest income and results of operations. | |
| The negative economic effects caused by terrorist attacks, potential attacks and other destabilizing events, would likely contribute to the deterioration of the quality of Citizens loan portfolio and could reduce its customer base, its level of deposits, and demand for its financial products such as loans. |
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| If Citizens is unable to continue to attract and retain core deposits, to obtain third party financing on favorable terms, or to have access to interbank or other liquidity sources (as a result of rating agency downgrades or other market factors), its cost of funds will increase, adversely affecting its ability to generate the funds necessary for lending operations, reducing net interest margin and negatively affecting its results of operations. | |
| Increased competition with other financial institutions or an adverse change in Citizens relationship with a number of major customers could reduce its net interest margin and net income by decreasing the number and size of loans originated, the interest rates charged on these loans and the fees charged for services to customers. | |
| Events such as significant adverse changes in the business climate, adverse action by a regulator, unanticipated changes in the competitive environment, and a decision to change Citizens operations or dispose of an operating unit could have a negative effect on its goodwill or other intangible assets such that it may need to record an impairment charge, which could have a material adverse impact on its results of operations. | |
| If the FDIC raises the assessment rate charged to its insured financial institutions, Citizens FDIC insurance premium may increase, which could have a negative effect on expenses and results of operations. | |
| Citizens may not realize its deferred income tax assets and loss carryforwards. | |
| Citizens stock price can be volatile. | |
| If Citizens common stock fails to meet the listing requirements of NASDAQ and is delisted from trading on the NASDAQ, the market price of its common stock could be adversely affected. | |
| An investment in Citizens common stock is not an insured deposit. | |
| Citizens may be adversely affected by the soundness of other financial institutions. | |
| In order to maintain and strengthen its capital base, Citizens may need to raise additional capital in transactions that may be highly dilutive to its common shareholders. If such capital becomes needed, Citizens failure to raise additional capital could have serious consequences for its business. | |
| The Holding Company may not have sufficient resources to make capital contributions to the Bank if required by bank regulatory agencies, or if it might otherwise wish to do so, in order to maintain the Banks capital ratios at acceptable levels. | |
| As a bank holding company that conducts substantially all of its operations through its subsidiaries, the ability of the Holding Company to pay dividends, repurchase its shares or to repay its indebtedness depends upon the results of operations of its subsidiaries and their ability to pay dividends to the Holding Company. Dividends paid by these subsidiaries are subject to limits imposed by federal and state law and are restricted by a supervisory agreement with its regulators. | |
| Our efforts to resolve problem assets in a manner beneficial to the Corporation may not be successful. | |
| Citizens could face unanticipated environmental liabilities or costs related to real property owned or acquired through foreclosure. Compliance with federal, state and local environmental laws and regulations, including those related to investigation and clean-up of contaminated sites, could have a negative effect on expenses and results of operations. | |
| Citizens is a party to various lawsuits incidental to its business. Litigation is subject to many uncertainties such that the expenses and ultimate exposure with respect to many of these matters cannot be ascertained. | |
| The financial services industry is undergoing rapid technological changes. If Citizens is unable to adequately invest in and implement new technology-driven products and services, it may not be able to compete effectively, or the cost to provide products and services may increase significantly. | |
| The products and services offered by the banking industry and customer expectations regarding them are subject to change. Citizens attempts to respond to perceived customer needs and expectations by offering new products |
35
Table of Contents
and services, which are often costly to develop and market initially. A lack of market acceptance of these products and services would have a negative effect on its financial condition and results of operations. | ||
| Citizens may not be able to attract and retain skilled people. If Citizens were to lose key employees, it may experience a disruption in its relationship with certain customers. | |
| The recently enacted Dodd-Frank Act may adversely impact Citizens results of operations, financial condition or liquidity. | |
| New accounting or tax pronouncements or interpretations may be issued by the accounting profession, regulators or other government bodies which could change existing accounting methods. Changes in accounting methods could negatively impact Citizens results of operations and financial condition. | |
| Citizens business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in, or disruption to, its business and a negative impact on its results of operations. | |
| Citizens vendors could fail to fulfill their contractual obligations, resulting in a material interruption in, or disruption to, its business and a negative impact on its results of operations. | |
| Citizens controls and procedures may fail or be circumvented which could have a material adverse effect on its business, results of operations and financial condition. | |
| Citizens articles of incorporation and bylaws as well as certain banking laws may have an anti-takeover effect. |
These factors also include risks and uncertainties detailed from time to time in Citizens other
filings with the Securities and Exchange Commission (SEC), such as the risk factors listed in
Item 1A, Risk Factors, of Citizens 2010 Annual Report on Form 10-K and subsequent Forms 10-Q,
which are available at the SECs web site www.sec.gov. Other factors not currently anticipated may
also materially and adversely affect Citizens results of operations, cash flows, financial
position and prospects. There can be no assurance that future results will meet expectations.
While Citizens believes that the forward-looking statements in this report are reasonable, the
reader should not place undue reliance on any forward-looking statement. In addition, these
statements speak only as of the date made. Citizens does not undertake, and expressly disclaims
any obligation to update or alter any statements, whether as a result of new information, future
events or otherwise, except as may be required by applicable law.
Critical Accounting Policies
Citizens Consolidated Financial Statements are prepared in accordance with U.S. generally
accepted accounting principles (GAAP) and follow general practices within the industry in which
the Corporation operates. Application of these principles requires management to make estimates,
assumptions, and complex judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions and judgments are based on information available
as of the date of the financial statements; accordingly, as this information changes, the financial
statements could reflect different estimates, assumptions and judgments. Actual results could
differ significantly from those estimates. Certain policies inherently have a greater reliance on
the use of estimates, assumptions, and judgments and as such, have a greater possibility of
producing results that could be materially different than originally reported. Estimates that are
particularly susceptible to significant change include those relating to the allowance for loan
losses, goodwill, fair value measurements, pension and postretirement benefits, and income taxes.
Citizens believes that these estimates and the related policies are important to the portrayal of
the Corporations financial condition and results of operations. Therefore, management considers
them to be critical accounting policies and discusses them directly with the Audit Committee of the
Board of Directors. Citizens significant accounting policies are more fully described in Note 1
to the audited Consolidated Financial Statements contained in the Corporations 2010 Annual Report
on Form 10-K and the more significant assumptions and estimates made by management are more fully
described in Managements Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies in the Corporations 2010 Annual Report on Form 10-K. For
additional information regarding updates during 2011, see Notes 1 and 2 to the unaudited
Consolidated Financial Statements in this report.
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Use of Non-GAAP Financial Measures
In addition to results presented in accordance with GAAP, this report includes non-GAAP
financial measures such as net interest margin, efficiency ratio, tangible equity to tangible
assets ratio, tangible common equity to tangible assets ratio, Tier 1 common equity ratio and
pre-tax pre-provision profit. Citizens believes these non-GAAP financial measures provide
additional information that is useful to investors in understanding the underlying performance of
Citizens, its business, and performance trends and, to a lesser degree, such measures may help
facilitate performance comparisons with others in the banking industry. Non-GAAP financial
measures have inherent limitations, are not required to be uniformly applied and are not audited.
Readers should be aware of these limitations and should be cautious as to their use of such
measures. To mitigate these limitations, Citizens has procedures in place to ensure that these
measures are calculated using the appropriate GAAP or regulatory components in their entirety and
to ensure that Citizens performance is properly reflected to facilitate consistent
period-to-period comparisons. Although Citizens believes the non-GAAP financial measures disclosed
in this report enhance investors understanding of its business and performance, these non-GAAP
measures should not be considered in isolation, or as a substitute for GAAP basis financial
measures.
Net Interest Margin and Efficiency Ratio (non-GAAP financial measures)
In accordance with industry standards, certain designated net interest income amounts are presented
on a taxable equivalent basis, including the calculation of net interest margin and the efficiency
ratio. Citizens believes the presentation of net interest margin on a taxable equivalent basis
using a 35% effective tax rate allows comparability of net interest margin with industry peers by
eliminating the effect of the differences in portfolios attributable to the proportion represented
by both taxable and tax-exempt investments. See the Selected Quarterly Information Table, the
Non-GAAP Reconciliation Table, and the Average Balances/Net Interest Income/Average Rates Table
later in this report for additional information.
Tangible Equity, Tangible Common Equity and Tier 1 Common Equity Ratios (non-GAAP financial
measures)
Citizens believes the exclusion of goodwill and other intangible assets to create tangible assets
and tangible equity facilitates the comparison of results for ongoing business operations.
Citizens management internally assesses the companys performance based, in part, on these
non-GAAP financial measures. The tangible common equity ratio and Tier 1 common equity ratio have
become a focus of some investors and management believes that these ratios may assist investors in
analyzing Citizens capital position absent the effects of intangible assets and preferred stock.
Because tangible common equity and Tier 1 common equity are not formally defined by GAAP or
codified in the federal banking regulations, these measures are considered to be non-GAAP financial
measures. Because analysts and banking regulators may assess Citizens capital adequacy using
tangible common equity and Tier 1 common equity, Citizens believes that it is useful to provide
investors the ability to assess its capital adequacy on the same bases. Tier 1 common equity is
often expressed as a percentage of net risk-weighted assets. Under the risk-based capital
framework, a banks balance sheet assets and credit equivalent amounts of off-balance sheet items
are assigned to one of four broad risk categories. The aggregated dollar amount in each category
is then multiplied by the risk weight assigned to that category. The resulting weighted values
from each of the four categories are added together and this sum is the risk-weighted assets total
that, as adjusted, comprises the denominator of certain risk-based capital ratios. Tier 1 capital
is then divided by this denominator (net risk-weighted assets) to determine the Tier 1 capital
ratio. Adjustments are made to Tier 1 capital to arrive at Tier 1 common equity as shown in the
Non-GAAP Reconciliation Table below. The amounts disclosed as net risk-weighted assets are
calculated consistent with banking regulatory requirements.
Pre-Tax Pre-Provision Profit (non-GAAP financial measure)
Pre-tax pre-provision profit (PTPP), as defined by Citizens management represents total revenue
(total net interest income and noninterest income) excluding any securities gains/losses,
fair-value adjustments on loans held for sale, interest rate swaps, and bank owned life insurance,
less noninterest expense excluding any goodwill impairment charges, credit writedowns, fair-value
adjustments and special assessments. While certain of these items are an integral part of
Citizens banking operations, in each case, the excluded items are items that management believes
are particularly impacted by economic stress or significant changes in the credit cycle and are
therefore likely to make it more difficult to understand our underlying performance trends and the
ability of our banking operations to generate revenue. Net interest income, noninterest income and
noninterest expense are all calculated in accordance with GAAP and are presented in the
consolidated statement of operations. While noninterest income and noninterest expense are
adjusted for the specific items listed above in the calculation of PTPP, these adjustments
represent the excluded items in their entirety for each period presented to better facilitate
period to period comparisons.
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Viewed together with Citizens GAAP results, PTPP provides management, investors and others with a
useful metric to evaluate and better understand trends in Citizens period-to-period earnings power
and ability to generate capital to cover credit losses, in each case exclusive of the effects of
the current and recent economic stress and the credit cycle. As recent results for the banking
industry demonstrate, loan charge-offs, related credit provision, and credit writedowns can vary
significantly from period to period, making a measure that helps isolate the impact of credit costs
on profitability all the more important to investors. The Credit Quality section of this report
isolates the challenges and issues related to the credit quality of Citizens loan portfolio and
their impact on Citizens earnings as reflected in the provision for loan losses.
A portion of the compensation awarded to Citizens Named Executive Officers and certain other
management employees for their performance in 2010 and 2011 is measured against a PTPP performance
target as Citizens believes that PTPP is a key measurement that helps keep revenue generation as a
focus for its business and a particularly valuable measure during challenging credit cycles. Based
on 2010 full year results, the total cash compensation award linked to PTPP was $1.1 million.
Additionally, during 2010, approximately 1,129,000 shares of restricted stock and restricted stock
units were granted which have a two-year vesting period based partially on PTPP results and
partially on total provision expense. The grants are designed so that a portion of the
compensation is based on provision expense while the remainder does not depend on managements
performance with regard to managing loan losses, securities impairments, and other asset
impairments. The total potential cash compensation award linked to PTPP for 2011 is $0.9 million.
Like all non-GAAP metrics, PTPPs usefulness is inherently limited. Because Citizens calculation
of PTPP may differ from the calculation of similar measures used by other bank holding companies,
PTPP should be used to determine and evaluate period to period trends in Citizens performance and
in comparison to Citizens loan charge-offs, related credit provision, and credit writedowns,
rather than in comparison to non-GAAP metrics used by other companies. In addition, investors
should bear in mind that income tax expense (benefit), the provision for loan losses, and the other
items excluded from revenues and expenses in the PTPP calculation are recurring and integral
expenses to Citizens banking operations, and that these expenses will still accrue under GAAP,
thereby reducing GAAP earnings and, ultimately, shareholders equity.
The following table displays the calculation of the efficiency ratio for the past five quarters and
the calculation of the remainder of these non-GAAP measures other than pre-tax pre-provision
profit, the calculation of which is set forth in the Results of Operations Summary section, as
of the end of each of those periods.
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Non-GAAP Reconciliation | ||||||||||||||||||||
March 31, | December 31, | September 30, | June 30, | March 31, | ||||||||||||||||
2011 | 2010 | 2010 | 2010 | 2010 | ||||||||||||||||
Efficiency Ratio (non-GAAP) (in thousands) |
||||||||||||||||||||
Net interest income (A) |
$ | 78,614 | $ | 81,731 | $ | 81,558 | $ | 84,586 | $ | 81,189 | ||||||||||
Taxable equivalent adjustment (B) |
2,102 | 2,247 | 2,372 | 2,605 | 3,357 | |||||||||||||||
Investment securities (losses) gain (C) |
(383 | ) | (171 | ) | | 8,051 | 6,016 | |||||||||||||
Noninterest income (D) |
23,143 | 24,028 | 25,956 | 22,282 | 22,393 | |||||||||||||||
Noninterest expense (E) |
81,656 | 77,234 | 74,740 | 77,010 | 78,103 | |||||||||||||||
Efficiency ratio: E/(A+B-C+D) (non-GAAP) |
78.33 | % | 71.39 | % | 68.02 | % | 75.93 | % | 77.39 | % | ||||||||||
Tangible Common Equity to
Tangible Assets (non-GAAP) (in millions) |
||||||||||||||||||||
Total assets(1) |
$ | 9,724 | $ | 9,966 | $ | 10,639 | $ | 10,834 | $ | 11,652 | ||||||||||
Goodwill(2) |
(318 | ) | (318 | ) | (318 | ) | (318 | ) | (331 | ) | ||||||||||
Other intangible assets |
(10 | ) | (11 | ) | (11 | ) | (12 | ) | (13 | ) | ||||||||||
Tangible assets (non-GAAP) |
$ | 9,396 | $ | 9,637 | $ | 10,310 | $ | 10,504 | $ | 11,308 | ||||||||||
Total shareholders equity |
$ | 945 | $ | 1,012 | $ | 1,157 | $ | 1,218 | $ | 1,244 | ||||||||||
Goodwill(2) |
(318 | ) | (318 | ) | (318 | ) | (318 | ) | (331 | ) | ||||||||||
Other intangible assets |
(10 | ) | (11 | ) | (11 | ) | (12 | ) | (13 | ) | ||||||||||
Tangible equity (non-GAAP) |
$ | 617 | $ | 683 | $ | 828 | $ | 888 | $ | 900 | ||||||||||
Tangible equity |
$ | 617 | $ | 683 | $ | 828 | $ | 888 | $ | 900 | ||||||||||
Preferred stock |
(280 | ) | (278 | ) | (277 | ) | (275 | ) | (274 | ) | ||||||||||
Tangible common equity (non-GAAP) |
$ | 337 | $ | 405 | $ | 551 | $ | 613 | $ | 626 | ||||||||||
Tier 1 Common Equity (non-GAAP) (in millions) |
||||||||||||||||||||
Total shareholders equity |
$ | 945 | $ | 1,012 | $ | 1,157 | $ | 1,218 | $ | 1,244 | ||||||||||
Qualifying capital securities |
74 | 74 | 74 | 74 | 74 | |||||||||||||||
Goodwill(2) |
(318 | ) | (318 | ) | (318 | ) | (318 | ) | (331 | ) | ||||||||||
Accumulated other comprehensive loss (income) |
14 | 20 | (16 | ) | (10 | ) | 6 | |||||||||||||
Other intangible assets |
(10 | ) | (11 | ) | (11 | ) | (12 | ) | (13 | ) | ||||||||||
Tier 1 capital (regulatory) |
$ | 705 | $ | 777 | $ | 886 | $ | 952 | $ | 980 | ||||||||||
Tier 1 capital (regulatory) |
$ | 705 | $ | 777 | $ | 886 | $ | 952 | $ | 980 | ||||||||||
Qualifying capital securities |
(74 | ) | (74 | ) | (74 | ) | (74 | ) | (74 | ) | ||||||||||
Preferred stock |
(280 | ) | (278 | ) | (277 | ) | (275 | ) | (274 | ) | ||||||||||
Total Tier 1 common equity (non-GAAP) |
$ | 351 | $ | 425 | $ | 535 | $ | 603 | $ | 632 | ||||||||||
Net risk-weighted assets (regulatory)(3) |
$ | 5,930 | $ | 6,417 | $ | 7,133 | $ | 7,432 | $ | 8,083 | ||||||||||
Equity to assets |
9.72 | % | 10.15 | % | 10.88 | % | 11.24 | % | 10.68 | % | ||||||||||
Tier 1 common equity (non-GAAP) |
5.93 | 6.62 | 7.50 | 8.10 | 7.82 | |||||||||||||||
Tangible equity to tangible assets (non-GAAP) |
6.57 | 7.09 | 8.03 | 8.45 | 7.96 | |||||||||||||||
Tangible common equity to tangible assets (non-GAAP) |
3.59 | 4.20 | 5.34 | 5.83 | 5.54 |
(1) | Total asset represents assets for continuing operations, as shown on the balance sheet, and includes assets of discontinued operations of $324 million in the first quarter of 2010. | |
(2) | Goodwill represents goodwill for continuing operations, as shown on the balance sheet, and includes goodwill for discontinued operations of $12.6 million in the first quarter of 2010. | |
(3) | Net risk-weighted assets (regulatory) for second quarter 2010 were calculated on a combined basis. |
Written
Agreement with FRBC and OFIR
In the third quarter of 2010, the Holding Company and the Bank, entered into
a written supervisory agreement (the Written Agreement)
with the Federal Reserve Bank of Chicago (FRBC) and the
Michigan Office of Financial and Insurance Regulation
(OFIR). The Written Agreement requires the Holding Company
and the Bank to take various actions intended by the regulators to
improve the operations of the Holding Company and the Bank, requires
capital and liquidity plans be submitted that are acceptable to the
regulators, and prohibits taking certain actions, such as paying
dividends and amounts owed in connection with their outstanding trust
preferred securities, without regulatory approval.
During the first quarter of 2011, Citizens
submitted a modified capital plan within the required timeframe that was approved by the regulators.
Enhancements to the ALLL methodology continue to be made, primarily related to additional documentation,
but did not have an impact on the overall methodology or the recorded balance for the allowance for loan losses.
Citizens and the Bank continue to address the
ongoing affirmative obligations and negative covenants and are committed to resolving the matters raised
in the Written Agreement on a timely basis and maintaining the safety and soundness of the Bank. Citizens
has complied with the requirements of the Written Agreement to date and is on target in meeting all other
required deadlines included in the Written Agreement. Because substantially all of the requirements of the
Written Agreement relate to operational improvements or codify actions already being taken by Citizens at
the time the Written Agreement became binding, Citizens does not currently anticipate that compliance with
the Written Agreement will have a material adverse impact on its business, financial condition or results
of operations. For a more detailed description of the Written Agreement, see Item 1 Business
Supervision and Regulation in the Corporations 2010 Annual Report on Form 10-K.
Results of Operations
Summary
Citizens reported a net loss from continuing operations of $68.7 million for the three months ended
March 31, 2011, compared with net loss of $76.0 million for the first quarter of 2010. After
incorporating the $5.6 million accrued but unpaid dividend to the preferred shareholder, Citizens
reported a net loss attributable to common shareholders of $74.3 million for the three months ended
March 31, 2011, compared with $90.3 million for the first quarter of 2010. Results for the first
quarter of 2010 included net loss from discontinued operations of $9.0 million. Diluted net loss
from continuing operations per share was $0.19 for the first quarter
of 2011, compared with $0.21 for the first quarter of 2010.
Key
factors behind the results for the first quarter of 2011 compared with the first quarter of 2010
were:
39
Table of Contents
| The decrease in net interest income from 2010 was primarily a result of a decrease of $1.6 billion in average earning assets, partially offset by an increase in net interest margin from 3.14% to 3.53%. | ||
| The decrease in the provision for loan losses over 2010 was primarily a result of resolving $466.2 million and $460.0 million in problem assets through a combination of bulk sales and individual workouts during the fourth quarter of 2010 and the first quarter of 2011, respectively which significantly reduced the outstanding amount of nonperforming loans and watchlist loans and improved the credit quality of our loan portfolio. | ||
| The increase in noninterest income from 2010 was primarily the result of fewer writedowns to reflect fair-value declines of the underlying collateral on commercial loans held for sale. | ||
| The increase in noninterest expense from 2010 was primarily the result of increased valuation writedowns and losses incurred as a result of the increase in property dispositions in the first quarter of 2011. |
The following table displays pre-tax pre-provision profit (non-GAAP) for each of the last five
quarters.
Pre-tax pre-provision profit (non-GAAP )
Three Months Ended | ||||||||||||||||||||
March 31, | December 31, | September 30, | June 30, | March 31, | ||||||||||||||||
(in thousands) | 2011 | 2010 | 2010 | 2010 | 2010 | |||||||||||||||
Loss from continuing operations |
$ | (68,678 | ) | $ | (106,154 | ) | $ | (62,471 | ) | $ | (44,456 | ) | $ | (76,023 | ) | |||||
Income tax provision from continuing operations |
55 | 3,383 | 5,628 | 3,700 | 147 | |||||||||||||||
Provision for loan losses |
88,724 | 131,296 | 89,617 | 70,614 | 101,355 | |||||||||||||||
Net loss on loans held for sale |
1,106 | 3,069 | 1,441 | 8,405 | 7,702 | |||||||||||||||
Investment securities losses (gains) |
383 | 171 | | (8,051 | ) | (6,016 | ) | |||||||||||||
Losses on other real estate (ORE) |
9,122 | 930 | 1,967 | 3,778 | 6,763 | |||||||||||||||
Fair-value adjustment on bank owned life insurance (1) |
(100 | ) | (105 | ) | (159 | ) | 280 | (83 | ) | |||||||||||
Fair-value adjustment on swaps (1) |
114 | (535 | ) | 202 | 279 | 836 | ||||||||||||||
Pre-tax pre-provision profit (non-GAAP) |
$ | 30,726 | $ | 32,055 | $ | 36,225 | $ | 34,549 | $ | 34,681 | ||||||||||
(1) | Fair-value adjustment amounts contained in line item Other income on Consolidated Statements of Operations |
Total assets at March 31, 2011 were $9.7 billion, a decrease of $241.5 million or 2.4% from
December 31, 2010 and a decrease of $1.9 billion or 16.5% from March 31, 2010. The declines were
primarily due to reductions in total portfolio loans as a result of the accelerated resolution of
problem assets, which consisted primarily of substandard commercial real estate loans. The decrease from March 31, 2010 was also due to the sale of Citizens
wholly-owned subsidiary, F&M during the second quarter of 2010.
Citizens maintains a strong liquidity position, with on- and off-balance sheet liquidity sources
and a stable funding base comprised of approximately 79% deposits, 9% long-term debt, 10% equity,
and 2% short-term liabilities. Citizens also continues to maintain a strong capital position, and
its regulatory capital ratios are above well-capitalized standards.
40
Table of Contents
Net Interest Income and Net Interest Margin
An analysis of net interest income, interest spread and net interest margin with average balances
and related interest rates for the three months ended March 31, 2011 and 2010 is presented below.
Average Balances/Net Interest Income/Average Rates | ||||||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||
March 31, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
(in thousands) | Balance | Interest(1) | Rate(2) | Balance | Interest (1) | Rate (2) | ||||||||||||||||||
Earning Assets |
||||||||||||||||||||||||
Money market investments |
$ | 416,756 | $ | 253 | 0.25 | % | $ | 696,016 | $ | 424 | 0.25 | % | ||||||||||||
Investment securities: (3) |
||||||||||||||||||||||||
Taxable |
2,313,467 | 19,610 | 3.39 | 1,756,812 | 18,261 | 4.16 | ||||||||||||||||||
Tax-exempt |
278,679 | 3,086 | 6.81 | 492,968 | 5,285 | 6.60 | ||||||||||||||||||
FHLB and Federal Reserve stock |
143,873 | 1,125 | 3.16 | 155,084 | 1,002 | 2.61 | ||||||||||||||||||
Portfolio Loans: (4) |
||||||||||||||||||||||||
Commercial and industrial |
1,422,574 | 15,673 | 4.59 | 1,874,944 | 22,047 | 4.87 | ||||||||||||||||||
Commercial real estate |
2,045,360 | 26,707 | 5.30 | 2,791,395 | 36,049 | 5.24 | ||||||||||||||||||
Residential mortgage |
741,818 | 8,818 | 4.76 | 988,859 | 11,820 | 4.78 | ||||||||||||||||||
Direct consumer |
1,024,979 | 15,463 | 6.12 | 1,201,799 | 17,921 | 6.05 | ||||||||||||||||||
Indirect consumer |
816,676 | 13,681 | 6.79 | 797,482 | 13,509 | 6.87 | ||||||||||||||||||
Total portfolio loans |
6,051,407 | 80,342 | 5.40 | 7,654,479 | 101,346 | 5.39 | ||||||||||||||||||
Loans held for sale (4) |
26,860 | 369 | 5.50 | 83,972 | 396 | 1.90 | ||||||||||||||||||
Total earning assets (3) |
9,231,042 | 104,785 | 4.67 | 10,839,331 | 126,714 | 4.85 | ||||||||||||||||||
Nonearning Assets |
||||||||||||||||||||||||
Cash and due from banks |
143,957 | 209,126 | ||||||||||||||||||||||
Bank premises and equipment |
104,399 | 109,696 | ||||||||||||||||||||||
Investment security fair value adjustment |
32,229 | 42,462 | ||||||||||||||||||||||
Other nonearning assets |
682,526 | 710,158 | ||||||||||||||||||||||
Assets of discontinued operations |
| 328,378 | ||||||||||||||||||||||
Allowance for loan losses |
(295,232 | ) | (335,970 | ) | ||||||||||||||||||||
Total assets |
$ | 9,898,921 | $ | 11,903,181 | ||||||||||||||||||||
Interest-Bearing Liabilities |
||||||||||||||||||||||||
Deposits: |
||||||||||||||||||||||||
Interest-bearing demand deposits |
$ | 951,770 | 548 | 0.23 | $ | 1,075,943 | 814 | 0.31 | ||||||||||||||||
Savings deposits |
2,629,296 | 2,594 | 0.40 | 2,490,158 | 4,215 | 0.69 | ||||||||||||||||||
Time deposits |
2,753,306 | 13,233 | 1.95 | 3,709,529 | 24,482 | 2.68 | ||||||||||||||||||
Short-term borrowings |
41,187 | 18 | 0.18 | 36,542 | 24 | 0.27 | ||||||||||||||||||
Long-term debt |
971,076 | 9,778 | 4.08 | 1,449,748 | 15,990 | 4.47 | ||||||||||||||||||
Total interest-bearing liabilities |
7,346,635 | 26,171 | 1.44 | 8,761,920 | 45,525 | 2.11 | ||||||||||||||||||
Noninterest-Bearing Liabilities and |
||||||||||||||||||||||||
Shareholders Equity |
||||||||||||||||||||||||
Noninterest-bearing demand |
1,395,588 | 1,268,583 | ||||||||||||||||||||||
Other liabilities |
154,408 | 134,510 | ||||||||||||||||||||||
Liabilities of discontinued operations |
| 415,154 | ||||||||||||||||||||||
Shareholders equity |
1,002,290 | 1,323,014 | ||||||||||||||||||||||
Total liabilities and shareholders equity |
$ | 9,898,921 | $ | 11,903,181 | ||||||||||||||||||||
Net Interest Income |
$ | 78,614 | $ | 81,189 | ||||||||||||||||||||
Interest Spread (5) |
3.23 | % | 2.74 | % | ||||||||||||||||||||
Contribution of noninterest bearing sources of funds |
0.30 | 0.40 | ||||||||||||||||||||||
Net Interest Margin (5)(6) |
3.53 | % | 3.14 | % | ||||||||||||||||||||
(1) | Interest income is shown on actual basis and does not include taxable equivalent adjustments. | |
(2) | Average rates are presented on an annual basis and include taxable equivalent adjustments to interest income of $2.1 million and $3.4 million for the three months ended March 31, 2011 and 2010, respectively, based on a tax rate of 35%. | |
(3) | For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts. | |
(4) | Nonaccrual loans are included in average balances for each applicable loan category. | |
(5) | The interest spread and net interest margin are presented on a tax-equivalent basis. | |
(6) | Net interest margin exceeds the interest spread due to noninterest-bearing funding sources, demand deposits, other liabilities and shareholders equity supporting earning assets. |
The increase in net interest margin in the three months ended March 31, 2011 over the
comparable period of 2010 was the result of declining deposit costs, reductions in high-cost
funding, and wholesale funding repricing to lower fixed rates, partially offset by the effect of
replacing declining loan balances with lower-yielding investment securities.
41
Table of Contents
The decrease in net interest income in the three months ended March 31, 2011 from the
comparable period of 2010 was the result of lower average earning assets, partially offset by the
effects of the higher net interest margin.
The table below shows changes in interest income, interest expense and net interest income due to
rate and volume variances for major categories of earning assets and interest-bearing liabilities.
Analysis of Changes in Interest Income and Interest Expense
Three Months Ended March 31, | ||||||||||||
Increase (Decrease) | ||||||||||||
2011 compared with 2010 | Net | Due to Change in | ||||||||||
(in thousands) | Change(1) | Rate(2) | Volume(2) | |||||||||
Interest Income on Earning Assets: |
||||||||||||
Money market investments |
$ | (171 | ) | $ | (1 | ) | $ | (170 | ) | |||
Investment securities: |
||||||||||||
Taxable |
1,349 | (3,762 | ) | 5,111 | ||||||||
Tax-exempt |
(2,199 | ) | 169 | (2,368 | ) | |||||||
FHLB and Federal Reserve stock |
123 | 199 | (76 | ) | ||||||||
Loans: |
||||||||||||
Commercial and industrial |
(6,374 | ) | (1,321 | ) | (5,053 | ) | ||||||
Commercial real estate |
(9,342 | ) | 395 | (9,737 | ) | |||||||
Residential mortgage loans |
(3,002 | ) | (65 | ) | (2,937 | ) | ||||||
Direct consumer |
(2,458 | ) | 207 | (2,665 | ) | |||||||
Indirect consumer |
172 | (151 | ) | 323 | ||||||||
Total portfolio loans |
(21,004 | ) | (935 | ) | (20,069 | ) | ||||||
Loans held for sale |
(27 | ) | 377 | (404 | ) | |||||||
Total |
(21,929 | ) | (3,953 | ) | (17,976 | ) | ||||||
Interest Expense on Interest-Bearing Liabilities: |
||||||||||||
Deposits: |
||||||||||||
Interest-bearing demand deposits |
(266 | ) | (179 | ) | (87 | ) | ||||||
Savings deposits |
(1,621 | ) | (1,845 | ) | 224 | |||||||
Time deposits |
(11,249 | ) | (5,773 | ) | (5,476 | ) | ||||||
Short-term borrowings |
(6 | ) | (9 | ) | 3 | |||||||
Long-term debt |
(6,212 | ) | (1,296 | ) | (4,916 | ) | ||||||
Total |
(19,354 | ) | (9,102 | ) | (10,252 | ) | ||||||
Net Interest Income |
$ | (2,575 | ) | $ | 5,149 | $ | (7,724 | ) | ||||
(1) | Changes are based on actual interest income and do not reflect taxable equivalent adjustments. | |
(2) | The change in interest not solely due to changes in volume or rates has been allocated in proportion to the absolute dollar amounts of the change in each. |
The decrease in net interest income in the three months ended March 31, 2011 from the
comparable period of 2010 reflects volume variances that were unfavorable in the aggregate,
partially offset by rate variances that were favorable in the aggregate. The unfavorable volume
variances were primarily due to the reduction in the loan portfolios as a result of the accelerated
problem asset resolution initiative, partially offset by an increase in the taxable investment
securities portfolios and a decrease in brokered time deposits and long term debt. The rate
variances were primarily the result of borrowings repricing to lower rates as a result of the lower
market interest rates and reduced deposit price competition, partially offset by lower reinvestment
yields for investment securities and intensified price competition for commercial and industrial
loans.
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Table of Contents
Noninterest Income
The components of noninterest income for the three months ended March 31, 2011 and 2010 are
presented below.
Noninterest Income
Three Months Ended | ||||||||||||||||
March 31, | Change in 2011 | |||||||||||||||
(dollars in thousands) | 2011 | 2010 | Amount | Percent | ||||||||||||
Service charges on deposit accounts |
$ | 9,429 | $ | 9,684 | $ | (255 | ) | (2.6 | )% | |||||||
Trust fees |
3,923 | 3,795 | 128 | 3.4 | ||||||||||||
Mortgage and other loan income |
2,942 | 2,589 | 353 | 13.6 | ||||||||||||
Brokerage and investment fees |
1,108 | 933 | 175 | 18.8 | ||||||||||||
ATM network user fees |
1,755 | 1,597 | 158 | 9.9 | ||||||||||||
Bankcard fees |
2,238 | 2,007 | 231 | 11.5 | ||||||||||||
Losses on held for sale loans |
(1,106 | ) | (7,702 | ) | 6,596 | 85.6 | ||||||||||
Investment securities (losses) gains |
(383 | ) | 6,016 | (6,399 | ) | N/M | ||||||||||
Other income |
3,237 | 3,474 | (237 | ) | (6.8 | ) | ||||||||||
Total noninterest income |
$ | 23,143 | $ | 22,393 | $ | 750 | 3.4 | |||||||||
N/M Not Meaningful |
The increase in noninterest income from the first quarter of 2010 was primarily a result of
lower losses on loans held for sale, and to a lesser extent was due to higher mortgage and other
loan income as well as increases in most other categories. The increase was partially offset by
losses on investment securities as compared to gains in the first quarter of 2010. The decrease in
losses on loans held for sale was primarily the result of fewer writedowns to reflect fair-value
declines of the underlying collateral. The higher mortgage and other loan income was primarily the
result of higher residential mortgage origination volume as compared to the first quarter of 2010.
The loss on investment securities as compared to a gain in the first quarter of 2010 was directly
related to the sale of $147.6 million of municipal bonds in the
first quarter of 2010, completed in accordance with
Citizens policy.
Noninterest Expense
The components of noninterest expense for the three months ended March 31, 2011 and 2010 are
presented below.
Noninterest Expense
Three Months Ended | ||||||||||||||||
March 31, | Change in 2011 | |||||||||||||||
(dollars in thousands) | 2011 | 2010 | Amount | Percent | ||||||||||||
Salaries and employee benefits |
$ | 31,018 | $ | 29,947 | $ | 1,071 | 3.6 | % | ||||||||
Occupancy |
7,562 | 7,461 | 101 | 1.4 | ||||||||||||
Professional services |
2,219 | 2,253 | (34 | ) | (1.5 | ) | ||||||||||
Equipment |
3,052 | 3,072 | (20 | ) | (0.7 | ) | ||||||||||
Data processing services |
4,352 | 4,629 | (277 | ) | (6.0 | ) | ||||||||||
Advertising and public relations |
569 | 1,297 | (728 | ) | (56.1 | ) | ||||||||||
Postage and delivery |
1,116 | 1,014 | 102 | 10.1 | ||||||||||||
Other loan expenses |
5,255 | 5,974 | (719 | ) | (12.0 | ) | ||||||||||
Losses on other real estate (ORE) |
9,122 | 6,763 | 2,359 | 34.9 | ||||||||||||
ORE expenses |
1,768 | 1,190 | 578 | 48.6 | ||||||||||||
Intangible asset amortization |
828 | 1,130 | (302 | ) | (26.7 | ) | ||||||||||
Other expense |
14,795 | 13,373 | 1,422 | 10.6 | ||||||||||||
Total noninterest expense |
$ | 81,656 | $ | 78,103 | $ | 3,553 | 4.5 | |||||||||
The increase over the first quarter of 2010 was primarily the result of higher losses on other
real estate, higher ORE expenses, higher other expenses, and higher salaries and employee benefits
expense, partially offset by
a net decline in most other noninterest expense categories. The
increase in losses on other real estate was primarily the result of additional writedowns in 2011
to reflect fair-value declines for the underlying collateral related to the problem asset
resolution initiatives. The increase in ORE expenses was the result of additional carrying costs
related to holding the ORE properties. The increase in other expenses was related to higher fraud
and other losses, but partially offset by
43
Table of Contents
savings on FDIC insurance from opting out of the
Transaction Account Guarantee Program. The increase in salaries and employee benefits was related
to higher pension costs primarily due to the decrease in discount rate and amortization of losses
from previous years as well as higher incentive and commission costs. The net decline in other
noninterest expense categories was primarily the result of various expense management initiatives
implemented throughout the company.
Income Taxes
The income tax provision for the first quarter of 2011 was $0.1 million, essentially unchanged from
the first quarter of 2010. The effective tax rate for the first quarter of 2011 was (0.08)%
compared to (0.19%) in the first quarter of 2010, which includes adjustments for tax-exempt income
and the deferred tax asset valuation allowance.
Discontinued Operations
For the first three months of 2010, the net loss from discontinued operations was $9.0 million.
During the first quarter of 2010, the carrying value of F&Ms equity exceeded the contractual sales
price, therefore Citizens recorded a $10.2 million loss to mark the assets (primarily loans) and
liabilities being sold to fair-value, less cost to sell.
Lines of Business Results
Citizens monitors financial performance using an internal profitability measurement system, which
provides line of business results and key performance measures. Business line results are divided
into five major business segments: Regional Banking, Specialty Consumer, Specialty Commercial,
Wealth Management and Other. For additional information about each line of business, see Note 15
to the Consolidated Financial Statements of the Corporations 2010 Annual Report on Form 10-K and
Note 12 to the unaudited Consolidated Financial Statements in this report.
Regional Banking recorded a net loss for the three months ended March 31, 2011 compared to net
income in same period of the prior year, primarily due to higher
provision for loan losses, lower net interest income and higher noninterest expense. The variances were the result of
Citizens accelerated problem asset resolution initiatives which were
substantially completed in the first quarter of 2011.
Net losses for Specialty Consumer for the three months ended March 31, 2011 decreased as compared
with the same period of the prior year, primarily due to a decrease in the provision for loan
losses. The variance in the provision was the result of the credit writedowns during the first
quarter of 2010 associated with nonperforming residential mortgage loans.
Net losses for Specialty Commercial for the three months ended March 31, 2011 increased as compared
with the same period of the prior year primarily due to a decrease in net interest income,
partially offset by an increase in noninterest income. The decrease in net interest income was the
result of declining loan balances due to the resolution of problem assets. The increase in
noninterest income was due to the better execution on loans held for sale.
Net income
for Wealth Management for the three months ended March 31, 2011
was increased over the prior year primarily due to a decrease in
noninterest expense relating to a decrease in salaries and employee
benefits expense and lower data processing expenses.
Net losses for the Other line of business for the three months ended March 31, 2011 decreased as
compared with the same period of the prior year primarily as a result of higher net interest
income, lower noninterest expenses, and losses from discontinued operations in 2010, partially
offset by lower noninterest income. The increase in net interest income was primarily the result
of the internal profitability methodology utilized at Citizens that insulates the other lines of
business from interest-rate risk and assigns the risk to the asset/liability management function,
which is a component of this segment. The decrease in noninterest expense was primarily the result
of a decrease in the FDIC insurance costs. The 2010 loss on discontinued operations was directly
related to the fair-value adjustment in the first quarter of 2010 related to the sale of F&M. The
decrease in noninterest income was primarily the result of a net gain on investment securities
sales of $6.0 million in the first quarter of 2010.
Financial Condition
Total assets at March 31, 2011 were $9.7 billion, a decrease of $241.5 million or 2.4% from
December 31, 2010 and a decrease of $1.9 billion or 16.5% from March 31, 2010. The declines were
primarily due to reductions in total portfolio loans as a result of the accelerated resolution of
problem assets. The decrease from March 31, 2010 was also due to the sale of Citizens
wholly-owned subsidiary, F&M during the second quarter of 2010.
44
Table of Contents
Money Market Investments
Money market investments at March 31, 2011 totaled $495.6 million, an increase of $86.5 million or
21.1% from December 31, 2010 and a decrease of $265.2 million or 34.9% from March 31, 2010. The
increase from December 31, 2010 was directly related to reinvesting a portion of the loan portfolio
paydowns and proceeds from loan sales into money market investments. The decrease from March 31,
2010 was primarily the result of using money market investments to payoff maturing wholesale
funding.
Investment Securities
Investment securities at March 31, 2011 totaled $2.7 billion, an increase of $142.5 million or 5.6%
from December 31, 2010 and an increase of $496.0 million or 22.8% over March 31, 2010. Increases
in investment securities were largely due to reinvesting a portion of the loan portfolio paydowns
and proceeds from loan sales.
Portfolio Loans
The following definitions are provided to clarify the types of loans included in each of the
commercial real estate segments identified in the table below. Land hold loans are secured by
undeveloped land which has been acquired for future development. Land development loans are
secured by land being developed in terms of infrastructure
improvements to create finished marketable lots for commercial or residential construction.
Construction loans are secured by commercial, retail and residential real estate in the
construction phase with the intent to be sold or become an income producing property. Income
producing loans are secured by non-owner occupied real estate leased to one or more tenants. Owner
occupied loans are secured by real estate occupied by the owner.
Loan Portfolios
(in millions) | March 31, 2011 | December 31, 2010 | September 30, 2010 | June 30, 2010 | March 31, 2010 | |||||||||||||||
Land hold |
$ | 17.3 | $ | 28.3 | $ | 37.1 | $ | 37.8 | $ | 39.3 | ||||||||||
Land development |
22.7 | 34.8 | 73.8 | 84.3 | 101.0 | |||||||||||||||
Construction |
23.3 | 103.7 | 155.4 | 156.3 | 164.4 | |||||||||||||||
Income producing |
1,038.7 | 1,171.0 | 1,382.3 | 1,481.7 | 1,532.1 | |||||||||||||||
Owner-occupied |
692.3 | 783.0 | 855.1 | 886.1 | 931.5 | |||||||||||||||
Total commercial real estate |
1,794.3 | 2,120.8 | 2,503.7 | 2,646.2 | 2,768.3 | |||||||||||||||
Commercial and industrial |
1,353.2 | 1,474.2 | 1,657.4 | 1,686.8 | 1,824.8 | |||||||||||||||
Total commercial |
3,147.5 | 3,595.0 | 4,161.1 | 4,333.0 | 4,593.1 | |||||||||||||||
Residential mortgage |
727.3 | 756.2 | 800.5 | 858.9 | 877.2 | |||||||||||||||
Direct consumer |
1,006.4 | 1,045.5 | 1,091.7 | 1,132.2 | 1,174.7 | |||||||||||||||
Indirect consumer |
823.0 | 819.9 | 834.7 | 814.0 | 794.2 | |||||||||||||||
Total consumer |
2,556.7 | 2,621.6 | 2,726.9 | 2,805.1 | 2,846.1 | |||||||||||||||
Total portfolio loans |
$ | 5,704.2 | $ | 6,216.6 | $ | 6,888.0 | $ | 7,138.1 | $ | 7,439.2 | ||||||||||
Decreases in total portfolio loans in the first quarter of 2011 compared to the prior quarters
reflect the results of the accelerated problem asset resolution initiatives, paydowns as a result
of normal client activity, and charge-offs.
Underwriting
Citizens Commercial Credit Policy and Underwriting Guidelines and Citizens Consumer Loan Credit
Policy and Underwriting Guidelines (together, the Underwriting Guidelines) are written in a
manner that is consistent with prudent banking practices and regulatory guidance applicable to each
loan product. Citizens Underwriting Guidelines outline loan requirements and structuring
parameters to determine the borrowers financial capacity to repay under the terms of the loan and
evaluate the collateral pledged to secure the loan and are designed to provide an adequate margin
of safety for full collection of both principal and interest, within contractual terms. The
Underwriting Guidelines provide the framework to determine that the borrower has the financial
capacity to fully repay the loan, structurally mitigate credit risks and monitor the loans credit
performance over the term of the loan. Additionally, the Underwriting Guidelines are updated
periodically in response to market and economic conditions and are reviewed by the Risk Management
Committee of the Board as well as Citizens full Board of Directors.
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The commercial Underwriting Guidelines outline product- and collateral-specific acceptable loan
terms and conditions, including maximum loan to value ratios for real estate collateral, advance
rates for non-real estate collateral, and debt
service coverage. Acceptable credit management practices require that the borrowers financial
capacity to repay the loan be analyzed based on the most recent financial information as specified
by the loans documented structure. It is Citizens general practice to obtain personal guarantees
and underwrite the guarantors capacity to support the loan no less frequently than annually, and
more frequently if changes occur in the borrowers capacity to repay or in general economic
conditions that might affect the borrower. Citizens Underwriting Guidelines for non-owner
occupied commercial real estate loans delineates maximum terms, amortizations and loan to value
ratios as well as minimum equity investments and debt service coverage ratios based on property
type. Generally, maximum loan terms are five years, maximum amortizations are 25 years, minimum
equity requirements range from 10% to 25%, debt service coverage ratios range from 1.2 to 1.5 times
and loan to value ratios range from 65% to 80%. Currently, new commercial land hold and land
development loans are not being originated by Citizens. Citizens Real Estate Appraisal and
Environmental Policy specifies the Banks requirements for obtaining appraisals from licensed or
certified appraisers to assess the value of the underlying collateral. New variable rate
commercial loans are underwritten at fully indexed rates. Additionally, variable rate commercial
loan underwriting includes stress tests of the borrowers debt service capabilities with higher
than existing interest rates and fluctuations in the underlying cash flows available for repayment.
The consumer Underwriting Guidelines outline product- and collateral-specific loan terms and
conditions, including maximum debt ratios and advance rates based on the borrowers credit score.
Residential mortgage loans are evaluated based on credit scores, debt-to-income ratios and
loan-to-collateral value ratios. They are predominately originated in accordance with underwriting
standards set forth by the government-sponsored entities (GSEs) Federal National Mortgage
Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National
Mortgage Association (GNMA), which serve as the primary purchasers of loans sold in the secondary
market by mortgage lenders. These underwriting standards generally require that the loans be
collateralized by one-to-four family residential real estate. Automated underwriting engines
deployed by a GSE are used to determine creditworthiness of the vast majority of borrowers.
Maximum allowable loan-to-value (LTV)/combined loan-to-value (CLTV) on these loan products
generally do not exceed 95% at origination. Citizens has not offered no-doc/low doc and stated
income/stated asset loans since January 1, 2007 and does not have any of these loans in its
residential mortgage portfolio. Sub-prime, initial teaser rate and negative amortization loans
were originated on an exception basis prior to 2007 and have not been offered since January 1,
2007. At March 31, 2011, December 31, 2010 and March 31, 2010, the outstanding balance of these
loans was $0.8 million or 0.1%, $1.9 million or 0.3%, and $2.4 million or 0.3% of the total
residential mortgage portfolio, respectively. The interest income associated with these loans was
immaterial.
In June 2008, Citizens entered into a master sales agreement to sell its residential mortgage
originations to its third-party servicer at a fixed rate with no recourse. Under this agreement,
Citizens sells more than 90% of new mortgage origination, resulting in minimal new loans being
retained in the residential mortgage portfolio. During 2011, the amount of new mortgage loans
underwritten to non-GSE standards, all of which are retained in the residential mortgage loan
portfolio, was immaterial. Prior to June 2008, when Citizens sold its residential mortgage
originations to several secondary market participants, it made various standard representations and
warranties. The specific representations and warranties made by Citizens depended on the nature of
the transaction and the requirements of the buyer. In the event of a breach of the representations
and warranties, Citizens may be required to either repurchase the mortgage loans (generally at
unpaid principal balance plus accrued interest) with the identified defects or indemnify the
investor. During the first three months of 2011 and 2010, Citizens repurchased $0.1 million and
$1.2 million of loans, respectively, pursuant to such provisions. Citizens estimates its exposure
to losses from its obligation to repurchase previously sold loans based on the individual
circumstances applicable to each loan submitted for potential repurchase by an investor, and as a
result, Citizens maintains a liability included in Other Liabilities on the balance sheet for
estimated losses on loans expected to be repurchased or on which indemnification is expected to be
provided. Citizens recorded $1.1 million and $0.4 million in the first three months of 2011 and
2010, respectively in Other Expense on the Consolidated Statements of Operations related to
repurchasing or indemnifying such loans.
Direct consumer loans include home equity loans, and direct installment loans to individuals used
to purchase boats, recreational vehicles, automobiles and other personal items. Underwriting
guidelines for these loans are heavily influenced by statutory requirements, which include, but are
not limited to maximum loan-to-value ratios, credit scoring results, ability to service overall
debt, and documentation requirements. Individual borrowers may be required to provide additional
collateral or a satisfactory endorsement or guaranty from another person, depending on the
creditworthiness of the borrower. Home equity loans consist of fully-indexed variable rate
revolving lines of credit and fixed rate loans to consumers that are secured by residential real
estate. Home equity loans are generally in a junior
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lien position and are originated through
Citizens branches with cumulative loan-to-value ratios generally at or less than 80% of appraised
collateral value. As of March 31, 2011, Citizens home equity portfolio totaled $821.9 million,
and had an average loan size of $36,871 with average refreshed FICO score of 738. As of March 31,
2011, other direct installment loans totaled $184.5 million and had an average loan size of $18,894
with an average refreshed FICO score of 718.
Indirect consumer loans are originated through our centralized underwriting group that has
established relationships with certain dealers which meet Citizens underwriting guidelines and
adhere to prudent business practices. The dealers are evaluated on their creditworthiness and
business practices with performance monitored on an annual basis. The dealers refer customers to
the centralized underwriting group, which utilizes a credit scoring model to supplement the
underwriting process, and then complete the loans utilizing Citizens loan documents. As of March
31, 2011, indirect consumer loans had an average loan size of $22,730 with an average refreshed
FICO score of 734.
Citizens maintains an independent loan review department that reviews the quality, trends,
collectibility and collateral margins within the loan portfolio. The loan review department
validates the credit risk profile on a regular basis by sampling loans using criteria such as loan
size, delinquency status, loan officer coverage and other factors. This process complements and
reinforces the risk identification and assessment decisions made by lenders and credit personnel.
Results of these reviews are presented to management and to the Risk Committee of the Board of
Directors.
Credit Quality
The quality of Citizens loan portfolio is impacted by numerous factors, including the economic
environment in the markets in which Citizens operates. Citizens carefully monitors its loans in an
effort to identify and mitigate any potential credit quality issues and losses in a proactive
manner. Citizens performs quarterly reviews of the non-watchlist commercial credit portfolio
focusing on industry segments and asset classes that have or may be expected to experience stress
due to economic conditions. This process seeks to validate each such credits risk rating,
underwriting structure and exposure management under current and stressed economic scenarios while
strengthening these relationships and improving communication with these clients.
The following tables represent four qualitative aspects of the loan portfolio that illustrate the
overall level of quality and risk inherent in the loan portfolio.
| Delinquency Rates by Loan Portfolio Loans where the contractual payment is 30 to 89 days past due and interest is still accruing. While these loans are actively worked to bring them current, past due loan trends may be a leading indicator of potential future nonperforming loans and charge-offs. |
| Commercial Watchlist Commercial loans that, while still accruing interest, Citizens believes may be at risk due to general economic conditions or changes in a borrowers financial status and therefore require increased oversight. Watchlist loans that are in nonperforming status are included in the nonperforming assets table below. |
| Nonperforming Assets Loans that are in nonaccrual status, loans past due 90 days or more on which interest is still accruing, restructured loans, nonperforming loans that are held for sale, and other repossessed assets acquired. The commercial loans included in this table are reviewed as part of the watchlist process in addition to the loans displayed in the commercial watchlist table below. |
| Net Charge-Offs The portion of loans that have been charged-off during each quarter, net of recoveries. |
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Delinquency Rates By Loan Portfolio
March 31, 2011 | December 31, 2010 | September 30, 2010 | June 30, 2010 | March 31, 2010 | ||||||||||||||||||||||||||||||||||||
30 to 89 days past due | % of | % of | % of | % of | % of | |||||||||||||||||||||||||||||||||||
(in millions) | $ | Portfolio | $ | Portfolio | $ | Portfolio | $ | Portfolio | $ | Portfolio | ||||||||||||||||||||||||||||||
Land hold |
$ | 0.5 | 2.95 | % | $ | 2.2 | 7.90 | % | $ | | | % | $ | 1.3 | 3.34 | % | $ | 0.6 | 1.64 | % | ||||||||||||||||||||
Land development |
| | 0.2 | 0.62 | 4.5 | 6.04 | 2.0 | 2.43 | 3.0 | 3.00 | ||||||||||||||||||||||||||||||
Construction |
| | 0.5 | 0.45 | 2.4 | 1.53 | 6.4 | 4.07 | 0.9 | 0.55 | ||||||||||||||||||||||||||||||
Income producing |
4.8 | 0.46 | 20.7 | 1.76 | 35.2 | 2.55 | 22.9 | 1.55 | 51.7 | 3.37 | ||||||||||||||||||||||||||||||
Owner-occupied |
2.0 | 0.29 | 14.7 | 1.88 | 18.3 | 2.14 | 16.4 | 1.85 | 13.6 | 1.46 | ||||||||||||||||||||||||||||||
Total commercial real estate |
7.3 | 0.41 | 38.3 | 1.80 | 60.4 | 2.41 | 49.0 | 1.85 | 69.8 | 2.52 | ||||||||||||||||||||||||||||||
Commercial and industrial |
6.2 | 0.46 | 9.0 | 0.61 | 23.8 | 1.43 | 10.3 | 0.61 | 15.1 | 0.83 | ||||||||||||||||||||||||||||||
Total commercial |
13.5 | 0.43 | 47.3 | 1.32 | 84.2 | 2.02 | 59.3 | 1.37 | 84.9 | 1.85 | ||||||||||||||||||||||||||||||
Residential mortgage |
10.3 | 1.41 | 15.4 | 2.03 | 14.6 | 1.82 | 20.8 | 2.42 | 21.5 | 2.45 | ||||||||||||||||||||||||||||||
Direct consumer |
17.2 | 1.71 | 22.4 | 2.14 | 20.5 | 1.88 | 20.2 | 1.79 | 21.9 | 1.86 | ||||||||||||||||||||||||||||||
Indirect consumer |
10.2 | 1.24 | 13.3 | 1.62 | 12.2 | 1.46 | 11.4 | 1.40 | 14.8 | 1.86 | ||||||||||||||||||||||||||||||
Total consumer |
37.7 | 1.47 | 51.1 | 1.95 | 47.3 | 1.73 | 52.4 | 1.87 | 58.2 | 2.05 | ||||||||||||||||||||||||||||||
Total delinquent loans |
$ | 51.2 | 0.90 | $ | 98.4 | 1.58 | $ | 131.5 | 1.91 | $ | 111.7 | 1.57 | $ | 143.1 | 1.92 | |||||||||||||||||||||||||
The decreases in total delinquencies as of March 31, 2011 compared to December 31, 2010 and March
31, 2010 were primarily the result of continued emphasis on proactively managing and resolving
delinquent commercial and consumer loans.
As part of its overall credit underwriting and review process and loss mitigation strategy,
Citizens carefully monitors commercial credits that are current in terms of principal and interest
payments but may deteriorate in quality as economic conditions decline. Commercial relationship
officers monitor their clients financial condition and initiate changes in loan ratings based on
their findings. Loans that have migrated within the loan rating system to a level that requires
increased oversight are considered watchlist loans (generally consistent with the regulatory
definition of special mention, substandard, and doubtful loans) and include loans that are accruing
or nonperforming (included in the other tables in this section). Citizens utilizes the watchlist
process as a proactive credit risk management practice to help mitigate the migration of commercial
loans to nonperforming status and potential loss. Once a loan is placed on the watchlist, it is
reviewed quarterly by the chief credit officer, senior credit officers, senior market managers, and
commercial relationship officers to assess cash flows, collateral valuations, guarantor liquidity,
and other pertinent trends. During these meetings, action plans are implemented or reviewed to
address emerging problem loans or to remove loans from the portfolio. Additionally, loans viewed
as substandard or doubtful are transferred to Citizens special loans or small business workout
groups and are subjected to more intensive monitoring and workout activity.
Commercial Watchlist
March 31, 2011 | December 31, 2010 | September 30, 2010 | June 30, 2010 | March 31, 2010 | ||||||||||||||||||||||||||||||||||||
Accruing loans only | % of | % of | % of | % of | % of | |||||||||||||||||||||||||||||||||||
(in millions) | $ | Portfolio | $ | Portfolio | $ | Portfolio | $ | Portfolio | $ | Portfolio | ||||||||||||||||||||||||||||||
Land hold |
$ | 12.7 | 73.41 | % | $ | 21.5 | 76.35 | % | $ | 27.6 | 74.32 | % | $ | 27.8 | 73.58 | % | $ | 29.0 | 73.73 | % | ||||||||||||||||||||
Land development |
9.9 | 43.28 | 18.7 | 53.66 | 45.4 | 61.54 | 40.5 | 47.97 | 50.4 | 49.95 | ||||||||||||||||||||||||||||||
Construction |
4.6 | 19.89 | 33.2 | 32.05 | 46.5 | 29.90 | 52.5 | 33.61 | 54.4 | 33.07 | ||||||||||||||||||||||||||||||
Income producing |
325.8 | 31.37 | 444.5 | 37.96 | 543.7 | 39.33 | 553.9 | 37.38 | 523.5 | 34.17 | ||||||||||||||||||||||||||||||
Owner-occupied |
136.6 | 19.73 | 196.9 | 25.15 | 225.7 | 26.40 | 224.1 | 25.29 | 237.0 | 25.44 | ||||||||||||||||||||||||||||||
Total commercial real estate |
489.6 | 27.29 | 714.8 | 33.71 | 888.9 | 35.50 | 898.8 | 33.96 | 894.3 | 32.31 | ||||||||||||||||||||||||||||||
Commercial and industrial |
267.0 | 19.73 | 347.2 | 23.55 | 432.8 | 26.11 | 445.5 | 26.41 | 484.7 | 26.56 | ||||||||||||||||||||||||||||||
Total watchlist loans |
$ | 756.6 | 24.04 | $ | 1,062.0 | 29.54 | $ | 1,321.7 | 31.76 | $ | 1,344.3 | 31.02 | $ | 1,379.0 | 30.02 | |||||||||||||||||||||||||
Watchlist credits declined $305.4 million from December 31, 2010 and $622.4 million from March 31,
2010 to $756.6 million at March 31, 2011. The decrease was primarily due to the accelerated
problem asset resolution initiatives along with a decrease in the level of new inflows.
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Nonperforming Assets
March 31, 2011 | December 31, 2010 | September 30, 2010 | June 30, 2010 | March 31, 2010 | ||||||||||||||||||||||||||||||||||||
% of | % of | % of | % of | % of | ||||||||||||||||||||||||||||||||||||
(in millions) | $ | Portfolio | $ | Portfolio | $ | Portfolio | $ | Portfolio | $ | Portfolio | ||||||||||||||||||||||||||||||
Land hold |
$ | 1.2 | 6.68 | % | $ | 3.2 | 11.50 | % | $ | 5.6 | 15.13 | % | $ | 5.2 | 13.76 | % | $ | 4.9 | 12.49 | % | ||||||||||||||||||||
Land development |
0.1 | 0.35 | 3.1 | 8.82 | 16.0 | 21.64 | 22.3 | 26.48 | 27.1 | 26.86 | ||||||||||||||||||||||||||||||
Construction |
0.4 | 1.70 | 7.5 | 7.21 | 27.4 | 17.65 | 25.0 | 15.99 | 35.2 | 21.39 | ||||||||||||||||||||||||||||||
Income producing |
28.2 | 2.72 | 62.0 | 5.30 | 147.7 | 10.69 | 148.4 | 10.02 | 144.0 | 9.40 | ||||||||||||||||||||||||||||||
Owner-occupied |
21.7 | 3.14 | 42.8 | 5.47 | 63.3 | 7.40 | 59.5 | 6.71 | 89.0 | 9.56 | ||||||||||||||||||||||||||||||
Total commercial real estate |
51.6 | 2.88 | 118.6 | 5.59 | 260.0 | 10.39 | 260.4 | 9.84 | 300.2 | 10.85 | ||||||||||||||||||||||||||||||
Commercial and industrial |
25.8 | 1.91 | 57.8 | 3.92 | 61.5 | 3.71 | 67.0 | 3.97 | 69.7 | 3.82 | ||||||||||||||||||||||||||||||
Total nonaccruing commercial |
77.4 | 2.46 | 176.4 | 4.91 | 321.5 | 7.73 | 327.4 | 7.56 | 369.9 | 8.05 | ||||||||||||||||||||||||||||||
Residential mortgage |
30.4 | 4.18 | 22.1 | 2.92 | 16.9 | 2.11 | 31.0 | 3.61 | 17.6 | 2.01 | ||||||||||||||||||||||||||||||
Direct consumer |
13.0 | 1.30 | 12.5 | 1.20 | 15.5 | 1.42 | 18.7 | 1.65 | 16.5 | 1.41 | ||||||||||||||||||||||||||||||
Indirect consumer |
1.2 | 0.14 | 1.3 | 0.16 | 1.7 | 0.20 | 1.5 | 0.18 | 2.4 | 0.30 | ||||||||||||||||||||||||||||||
Total nonaccruing consumer |
44.6 | 1.74 | 35.9 | 1.37 | 34.1 | 1.25 | 51.2 | 1.82 | 36.5 | 1.28 | ||||||||||||||||||||||||||||||
Total nonaccruing loans |
122.0 | 2.14 | 212.3 | 3.42 | 355.6 | 5.16 | 378.6 | 5.30 | 406.4 | 5.46 | ||||||||||||||||||||||||||||||
Loans 90+ days still accruing |
0.7 | 0.01 | 1.6 | 0.03 | 1.6 | 0.02 | 1.5 | 0.02 | 2.4 | 0.03 | ||||||||||||||||||||||||||||||
Restructured loans still accruing |
12.7 | 0.22 | 6.4 | 0.10 | 7.0 | 0.10 | 4.6 | 0.06 | 4.8 | 0.06 | ||||||||||||||||||||||||||||||
Total nonperforming portfolio loans |
135.4 | 2.37 | 220.3 | 3.54 | 364.2 | 5.29 | 384.7 | 5.39 | 413.6 | 5.56 | ||||||||||||||||||||||||||||||
Nonperforming held for sale |
30.4 | 24.1 | 38.4 | 44.0 | 95.3 | |||||||||||||||||||||||||||||||||||
Other repossessed assets acquired |
22.2 | 42.2 | 40.7 | 43.9 | 47.3 | |||||||||||||||||||||||||||||||||||
Total nonperforming assets |
$ | 188.0 | $ | 286.6 | $ | 443.3 | $ | 472.6 | $ | 556.2 | ||||||||||||||||||||||||||||||
Commercial inflows |
$ | 29.5 | $ | 110.9 | $ | 95.6 | $ | 75.9 | $ | 124.8 | ||||||||||||||||||||||||||||||
Commercial outflows |
(128.5 | ) | (256.0 | ) | (101.5 | ) | (118.6 | ) | (74.8 | ) | ||||||||||||||||||||||||||||||
Net change |
$ | (99.0 | ) | $ | (145.1 | ) | $ | (5.9 | ) | $ | (42.7 | ) | $ | 50.0 | ||||||||||||||||||||||||||
Nonperforming assets decreased from December 31, 2010 and March 31, 2010, primarily due to the
accelerated problem asset resolution initiatives. In addition, nonperforming commercial inflows
dropped to $29.5 million during the first quarter of 2011. The nonperforming commercial loan
outflows were $128.5 million in the first quarter of 2011, primarily due to previously mentioned
asset resolutions. In addition, the decrease in nonperforming held for sale assets from the first
quarter of 2010 was primarily the result of the movement of certain residential nonperforming loans
to held for sale in the first quarter of 2010, that were subsequently sold in the second quarter of
2010.
Some of the nonperforming loans included in the nonperforming asset table above are considered to
be impaired. A loan is considered impaired when Citizens determines that it is probable that all
of the contractual principal and interest due under the loan may not be collected. Citizens
recognizes that, in the current economic environment, elevated levels of unemployment and depressed
real estate values have resulted in many customers facing difficult financial situations.
Distressed homeowners are identified and offered assistance. In order to avoid foreclosure,
residential mortgage loans may be restructured for certain qualified borrowers who have the ability
to make payments under the new terms of the loan. Citizens residential mortgage foreclosure
abatement program includes several different options to modify contractual payments. Modified
consumer and residential mortgage loans are considered troubled debt restructures (TDRs) when the
debt restructure, for economic or legal reasons related to the borrowers financial difficulties,
results in a concession to the debtor that otherwise would not be considered by the bank. Citizens
classifies TDRs as nonaccruing loans unless the loan qualified for accruing status at the time of
the restructure, or the loan has performed according to the new contractual terms for at least six
months. To qualify for accruing status at the time of the restructure, the original loan must have
been less than 90 days past due at the time of the restructure and the modification must not have
resulted in an impairment. At March 31, 2011, Citizens had $17.5 million of TDRs, 30.6% of which
involved both reduced interest rate and term extensions, 44.4% of which involved only an interest
rate reduction and 25.0% of which received only a term extension. Of the total TDRs, $11.9 million
are considered impaired and carry a specific allocated reserve and $5.6 million do not carry a
specific allocated reserve. See Note 4 to the unaudited Consolidated Financial Statements in this
report for information on impaired loans.
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Net Charge-Offs
Three Months Ended | ||||||||||||||||||||||||||||||||||||||||
March 31, 2011 | December 31, 2010 | September 30, 2010 | June 30, 2010 | March 31, 2010 | ||||||||||||||||||||||||||||||||||||
% of | % of | % of | % of | % of | ||||||||||||||||||||||||||||||||||||
(in millions) | $ | Portfolio | $ | Portfolio | $ | Portfolio | $ | Portfolio | $ | Portfolio | ||||||||||||||||||||||||||||||
Land hold |
$ | 4.9 | N/M | % | $ | 5.2 | 73.54 | % | $ | 0.3 | 3.30 | % | $ | 0.4 | 3.72 | % | $ | | | % | ||||||||||||||||||||
Land development |
4.4 | 79.15 | 19.7 | N/M | 9.0 | 48.29 | 9.8 | 46.68 | 0.1 | 0.49 | ||||||||||||||||||||||||||||||
Construction |
5.6 | 97.09 | 10.0 | 38.44 | 0.4 | 1.10 | 8.7 | 22.23 | | | ||||||||||||||||||||||||||||||
Income producing |
77.6 | 30.30 | 64.2 | 21.74 | 30.8 | 8.85 | 12.6 | 3.41 | 7.6 | 2.01 | ||||||||||||||||||||||||||||||
Owner-occupied |
25.3 | 14.80 | 18.1 | 9.16 | 4.8 | 2.21 | 18.9 | 8.57 | 6.9 | 3.01 | ||||||||||||||||||||||||||||||
Total commercial real estate |
117.8 | 26.63 | 117.2 | 21.92 | 45.3 | 7.18 | 50.4 | 7.63 | 14.6 | 2.13 | ||||||||||||||||||||||||||||||
Commercial and industrial |
32.0 | 9.59 | 26.0 | 7.01 | 6.8 | 1.62 | 11.4 | 2.71 | 12.9 | 2.86 | ||||||||||||||||||||||||||||||
Total commercial |
149.8 | 19.30 | 143.2 | 15.81 | 52.1 | 4.97 | 61.8 | 5.72 | 27.5 | 2.43 | ||||||||||||||||||||||||||||||
Residential mortgage |
3.4 | 1.90 | 6.1 | 3.20 | 23.3 | 11.57 | 0.6 | 0.29 | 80.1 | 37.05 | ||||||||||||||||||||||||||||||
Direct consumer |
5.5 | 2.21 | 7.1 | 2.70 | 9.8 | 3.56 | 5.5 | 1.96 | 7.1 | 2.44 | ||||||||||||||||||||||||||||||
Indirect consumer |
1.9 | 0.95 | 2.9 | 1.39 | 2.2 | 1.05 | 3.3 | 1.61 | 3.2 | 1.63 | ||||||||||||||||||||||||||||||
Total consumer |
10.8 | 1.72 | 16.1 | 2.43 | 35.3 | 5.14 | 9.4 | 1.35 | 90.4 | 12.88 | ||||||||||||||||||||||||||||||
Total net charge-offs |
$ | 160.6 | 10.77 | $ | 159.3 | 9.46 | $ | 87.4 | 4.91 | $ | 71.2 | 3.90 | $ | 117.9 | 6.25 | |||||||||||||||||||||||||
* | Represents an annualized rate. |
N/M Not Meaningful
The increase in net charge-offs compared to the first quarter of 2010 was primarily the result
of the resolution of certain problem assets through both bulk sale and individual workout efforts.
Net charge-offs were essentially unchanged from December 31, 2010.
Nonperforming commercial and industrial and commercial real estate loans are generally charged off
to the extent principal due exceeds the net realizable value of the collateral, with the charge-off
occurring when the loss is reasonably quantifiable, but not later than when the loan becomes 180
days past due. Nonperforming residential mortgage loans are generally charged off to the extent
principal exceeds the current appraised value less estimated costs to sell when the loan becomes
180 days past due. Nonperforming direct and indirect consumer loans (open and closed end) are
generally charged off before the loan becomes 120 days past due.
A summary of loan loss experience during the three months ended March 31, 2011 and 2010 is provided
below.
Analysis of Allowance for Loan Losses
Three Months Ended | ||||||||
March 31, | ||||||||
(in thousands) | 2011 | 2010 | ||||||
Allowance for loan losses beginning of period |
$ | 296,031 | $ | 338,940 | ||||
Provision for loan losses |
88,724 | 101,355 | ||||||
Charge-offs |
164,854 | 121,571 | ||||||
Recoveries |
4,216 | 3,653 | ||||||
Net charge-offs |
160,638 | 117,918 | ||||||
Allowance for loan losses end of period |
$ | 224,117 | $ | 322,377 | ||||
Portfolio loans outstanding at period end (1) |
$ | 5,704,198 | $ | 7,439,210 | ||||
Average portfolio loans outstanding during period (1) |
6,051,407 | 7,654,479 | ||||||
Allowance for loan losses as a percentage of portfolio loans |
3.93 | % | 4.33 | % | ||||
Net loans charged off as a percent of average portfolio loans (annualized) |
10.77 | 6.25 |
(1) | Balances exclude loans held for sale. |
The allowance for loan losses represents managements estimate of an amount appropriate to
provide for probable credit losses inherent in the loan portfolio as of the balance sheet date. To
assess the appropriateness of the allowance for loan losses, an allocation methodology is applied
that focuses on changes in the size and character of
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the loan portfolio, changes in the levels of
impaired or other nonperforming loans, the risk inherent in specific loans, concentrations of loans
to specific borrowers or industries, existing economic conditions, underlying collateral,
historical losses on each portfolio category and other qualitative and quantitative factors which
could affect probable loan losses. General deterioration in real estate values is one of the
factors considered when establishing valuation allowances in the allowance for loan losses. The
evaluation process is inherently subjective, as it requires estimates that may be susceptible to
significant change and have the potential to affect net income materially. The methodology used
for measuring the appropriateness of the allowance for loan losses relies on several key elements,
which include specific allowances for identified impaired loans, a formula-based risk-allocated
allowance for the remainder of the portfolio and a general valuation estimate. Management also
considers overall portfolio indicators, including trends in historical charge-offs, a review of
industry, geographic and portfolio performance, and other qualitative factors.
The following table summarizes the allocation of the allowance for loan losses for specific
allocated, risk allocated, and general valuation allowances by loan type and the proportion of
total nonperforming portfolio loans represented by each loan type.
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Allocation of the Allowance for Loan Losses(1)
March 31, 2011 | December 31, 2010 | March 31, 2010 | ||||||||||||||||||||||
Related | Related | Related | ||||||||||||||||||||||
(in millions) | ALLL | NPL(2) | ALLL | NPL (2) | ALLL | NPL (2) | ||||||||||||||||||
Specific allocated allowance: |
||||||||||||||||||||||||
Commercial and industrial |
$ | 0.7 | $ | 17.0 | $ | 9.5 | $ | 43.5 | $ | 9.4 | $ | 49.4 | ||||||||||||
Commercial real estate |
6.7 | 37.4 | 23.5 | 98.4 | 71.4 | 263.4 | ||||||||||||||||||
Residential mortgage |
2.0 | 10.2 | 1.1 | 5.4 | 1.4 | 5.8 | ||||||||||||||||||
Direct Consumer |
0.2 | 1.7 | 0.1 | 1.2 | 0.1 | 1.1 | ||||||||||||||||||
Total specific allocated allowance |
9.6 | 66.3 | 34.2 | 148.5 | 82.3 | 319.7 | ||||||||||||||||||
Risk allocated allowance: |
||||||||||||||||||||||||
Commercial and industrial |
29.4 | 9.9 | 33.5 | 16.3 | 34.7 | 22.7 | ||||||||||||||||||
Commercial real estate (CRE) |
84.7 | 22.7 | 99.1 | 22.7 | 110.8 | 36.8 | ||||||||||||||||||
Incremental risk allocated allowance CRE |
| | 29.5 | | | | ||||||||||||||||||
Total commercial |
114.1 | 32.6 | 162.1 | 39.0 | 145.5 | 59.5 | ||||||||||||||||||
Residential mortgage |
49.9 | 21.6 | 46.5 | 18.6 | 16.2 | 15.1 | ||||||||||||||||||
Direct Consumer |
31.8 | 13.7 | 32.1 | 12.9 | 33.9 | 16.5 | ||||||||||||||||||
Indirect Consumer |
14.9 | 1.2 | 16.6 | 1.3 | 37.4 | 2.8 | ||||||||||||||||||
Total risk allocated allowance |
210.7 | 69.1 | 257.3 | 71.8 | 233.0 | 93.9 | ||||||||||||||||||
Total allocated allowance |
220.3 | 135.4 | 291.5 | 220.3 | 315.3 | 413.6 | ||||||||||||||||||
General valuation allowances |
3.8 | | 4.5 | | 7.1 | | ||||||||||||||||||
Total allowance |
$ | 224.1 | $ | 135.4 | $ | 296.0 | $ | 220.3 | $ | 322.4 | $ | 413.6 | ||||||||||||
ALLL as a percentage of NPL |
||||||||||||||||||||||||
Specific allocated allowance: |
||||||||||||||||||||||||
Commercial and industrial |
4.1 | % | 21.8 | % | 19.1 | % | ||||||||||||||||||
Commercial real estate |
18.0 | 23.9 | 27.1 | |||||||||||||||||||||
Residential mortgage |
19.8 | 20.7 | 24.1 | |||||||||||||||||||||
Direct Consumer |
11.0 | 11.0 | 10.1 | |||||||||||||||||||||
Total specific allocated allowance |
14.5 | 23.1 | 25.8 | |||||||||||||||||||||
Risk allocated allowance: |
||||||||||||||||||||||||
Commercial and industrial |
296.1 | 205.1 | 153.1 | |||||||||||||||||||||
Commercial real estate (3) |
372.8 | 566.2 | 300.7 | |||||||||||||||||||||
Total commercial |
349.5 | 415.2 | 244.5 | |||||||||||||||||||||
Residential mortgage |
231.1 | 250.4 | 107.4 | |||||||||||||||||||||
Direct Consumer |
232.9 | 248.6 | 205.2 | |||||||||||||||||||||
Indirect Consumer |
N/M | N/M | N/M | |||||||||||||||||||||
Total risk allocated allowance |
305.1 | 358.2 | 248.0 | |||||||||||||||||||||
Total |
||||||||||||||||||||||||
General valuation allowances |
||||||||||||||||||||||||
Total |
165.6 | 134.4 | 77.9 | |||||||||||||||||||||
ALLL as a percentage of portfolio loans (4) |
||||||||||||||||||||||||
Risk allocated allowance: (5) |
||||||||||||||||||||||||
Commercial and industrial |
2.2 | 2.3 | 2.0 | |||||||||||||||||||||
Commercial real estate (3) |
4.8 | 6.4 | 4.4 | |||||||||||||||||||||
Total commercial |
3.7 | 4.7 | 3.4 | |||||||||||||||||||||
Residential mortgage |
7.0 | 6.2 | 1.9 | |||||||||||||||||||||
Direct Consumer |
3.2 | 3.1 | 2.9 | |||||||||||||||||||||
Indirect Consumer |
1.8 | 2.0 | 4.7 | |||||||||||||||||||||
Total risk allocated allowance |
3.7 | 4.2 | 3.3 | |||||||||||||||||||||
Total |
||||||||||||||||||||||||
General valuation allowances |
||||||||||||||||||||||||
Total allowance |
3.9 | 4.8 | 4.3 |
N/M Not Meaningful
(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 does 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) | Related NPL amounts in risk allocated allowances include restructured loans and still accruing and loans 90+ days past due and still accruing but classified as nonperforming. | |
(3) | Commercial real estate includes an incremental risk allocated allowance CRE of $29.5 million in the fourth quarter of 2010. | |
(4) | The portfolio balance of the loans with a specific allocated allowance is equal to the related NPL for said loans. | |
(5) | Portfolio loans only include loan balances evaluated for risk allocated allowance. |
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Total Allowance for Loan Losses. The decreases in the total allowance from December 31, 2010
and March 31, 2010 were primarily the result of an overall decrease in loan balances, an
improvement in risk mix of the commercial portfolio, and the continuing stability in both portfolio
and economic trends, as well as lower reserves identified for specific commercial loans. In
addition, the $29.5 million of incremental risk allocated reserves established at December 31, 2010
to incorporate the impact of Citizens initiatives to resolve problem assets was eliminated as the
resolution initiatives were substantially completed during the first quarter of 2011.
The allowance as a percentage of nonperforming loans at March 31, 2011 increased from December 31,
2010 and March 31, 2010 primarily as a result of the allowance for loan losses declining at a
slower pace than the decline in nonperforming loans. While nonperforming loans declined over both
periods, other offsetting factors that affect the risk allocated allowance such as historical loss
experience, the continued depressed values in the real estate market, and other credit metrics
result in a higher proportionate allowance.
Based on current conditions and expectations, Citizens believes that the allowance for loan losses
is appropriate to address the estimated loan losses inherent in the existing loan portfolio at
March 31, 2011. After determining what Citizens believes is an appropriate allowance for loan
losses based on the risk in the portfolio, the provision for loan losses is calculated as a result
of the net effect of the quarterly change in the allowance for loan losses and the quarterly net
charge-offs. The provision for loan losses was $88.7 million in the first quarter of 2011,
compared with $131.3 million in the fourth quarter of 2010 and $101.4 million in the first quarter
of 2010. The decreases in the provision were primarily due to the decline in the required
allowance for loan losses as a result of the previously mentioned improvements in credit quality.
Specific Allocated Allowance. The specific allocated allowance is based on probable losses on
specific commercial and industrial or commercial real estate loans as well as impairment on TDR
loans. The allowance allocated to nonperforming commercial loans is typically based on the
underlying collaterals appraised value, updated at least annually, less managements estimates of
cost to sell. Appraisals are obtained more frequently if changes in the property or market
conditions warrant. Deterioration in individual asset values evidenced by these updated appraisals
is then reflected in the specific allocated allowance. The fair value of nonperforming residential
mortgage loans is based on the underlying collaterals value obtained through appraisals or
brokers price opinions, updated at least semi-annually, less managements estimates of cost to
sell. The allowance allocated to restructured nonperforming loans is typically based on the
present value of the expected future cash flows discounted at the loans effective interest rate,
based on the original contractual rate.
The specific allocated allowance decreased both in amount and as a percentage of nonperforming loans from
December 31, 2010 and March 31, 2010. primarily as a result of the decline in loan portfolio balances
identified and evaluated for specific reserves.
The specific allowance allocated to the commercial and industrial and commercial real estate
impaired loans declined by $24.6 million, or 71 .9% from December 31,
2010 which corresponds to the decline in the balance of impaired
loans by $87.5 million, or 61.7%.
Risk Allocated Allowance. The risk allocated allowance is comprised of several loan pool valuation
allowances based on Citizens quantitative loan loss experience for similar loans with
similar risk characteristics, including additional qualitative risks such as changes in asset
quality; the experience, ability and effectiveness of Citizens lending management; the composition
and concentrations of credit, changes in loss severity based on loan type, as well as other factors
based upon the best judgment of management. The decreases in the risk allocated allowance from
December 31, 2010 and March 31, 2010 were primarily related to the decrease in the loan portfolio
balances that are evaluated for this reserve. The risk allocated allowance did not decrease to the
same extent as the portfolio balance, however, in light of other factors that affect the risk
allocated allowance, such as credit metrics, delinquencies, the depressed real estate market and
the accelerated workout of commercial real estate loans, that made it appropriate to maintain a
higher proportionate allowance.
The largest decline in the risk allocated allowance from December 31, 2010
related to the $48.0 million decline in the risk allocated allowance to the commercial
portfolio. The majority of this decline relates to the
elimination of $29.5 million of incremental risk allocated
reserves, established at December 31, 2010 to incorporate the impact of Citizens initiatives to
resolve problem assets the reduction initiatives were substantially
completed during the first quarter of 2011.
In addition, the remaining decline relates to the improvement in credit
quality of the remaining portfolio at March 31, 2011, as evidenced by
the declines in watchlist loans
of $305.4 million, or 28.8%, and commercial loans past
due 30-89 days of $33.8 million or 71.5% as well as an overall
decline in outstanding commercial loans of 12.4%.
General Valuation Allowance. The general valuation allowance is based on existing regional and
local economic factors, a macroeconomic adjustment factor used to calibrate for the current
economic cycle the Corporation is experiencing, and other judgmental factors. These factors could
have a potentially negative impact on credit quality. Recognizing the inherent imprecision of any
loan loss allocation model, management believes that the general valuation allowance at March 31,
2011 appropriately reflects probable inherent but undetected losses in the portfolio.
Loans Held for Sale
Loans held for sale at March 31, 2011 were $38.1 million, a decrease of $2.2 million or 5.5% from
December 31, 2010 and a decrease of $69.7 million or 64.6% from March 31, 2010. The variances from
both prior periods reflects declines due to customer paydowns, workout activities, sales,
writedowns to reflect further fair-value declines of the
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underlying collateral, and transfers to
ORE, partially offset by the transfer of $8.0 million of commercial loans to held for sale, net of
related charge-offs in the first quarter of 2011. In addition, the variance from March 31, 2010
was primarily the result of a bulk sale of nonperforming residential mortgage loans during the
second quarter of 2010.
Deposits
Total deposits at March 31, 2011 were $7.7 billion, essentially unchanged from December 31, 2010
and a decrease of $789.7 million or 9.3% from March 31, 2010. Core deposits, which exclude all
time deposits, totaled $5.0 billion at March 31, 2011, an increase of $143.4 million or 2.9% over
December 31, 2010 and an increase of $188.0 million or 3.9% over March 31, 2010. The increases in
core deposits were the result of a continued focus on core deposit gathering. The increase over
December 31, 2010 also resulted from seasonal increases in public funds balances. Time deposits
totaled $2.7 billion at March 31, 2011, a decrease of $178.7 million or 6.3% from December 31, 2010
and a decrease of $977.7 million or 26.8% from March 31, 2010. The decreases were primarily the
result of strategic reductions in single service high cost retail time deposits and brokered time
deposits.
Citizens gathers deposits from the local markets it serves and has used brokered deposits from time
to time when cost effective. Citizens had $747.3 million in time deposits of $100,000 or more at
March 31, 2011, compared with $816.5 million at December 31, 2010 and $882.4 million at March 31,
2010. Time deposits greater than $100,000 decreased primarily as a result of the strategic
reduction in single service high cost retail time deposits. At March 31, 2011, Citizens had $306.0
million in brokered deposits, compared with $322.6 million at December 31, 2010 and $918.4 million
at March 31, 2010. The volatility in brokered deposit balances reflects strategies to optimize
corporate funding costs and liquidity. Citizens continues to promote relationship-driven core
deposit growth and stability through focused marketing efforts and competitive pricing strategies.
Borrowed Funds
Short-term borrowings are comprised of federal funds purchased, securities sold under agreements to
repurchase, and other short-term borrowings consisting primarily of treasury, tax and loan (TT&L)
borrowings. Short-term borrowed funds at March 31, 2011 totaled $40.8 million, a decrease of $1.6
million or 3.7% from December 31, 2010 and an increase of $7.6 million or 23.0% from March 31,
2010. The decrease from December 31, 2010 reflects fewer short-term repurchase agreements, while
the increase from March 31, 2010 reflects more short-term repurchase agreements.
Long-term debt consists of advances from the Federal Home Loan Bank (FHLB) to the Bank, debt
issued by the Holding Company, and other borrowed funds. Long-term debt at March 31, 2011 totaled
$906.6 million, a decrease of $126.1 million or 12.2% from December 31, 2010 and a decrease of
$431.1 million or 32.2% from March 31, 2010. The decreases were primarily the result of using
excess liquidity to pay down wholesale funding at its contractual maturity.
Capital Resources
Shareholders equity at March 31, 2011 totaled $945.4 million, a decrease of $66.3 million or 6.6%
from December 31, 2010 and a decrease of $299.0 million or 24.0% from March 31, 2010. The
decreases were primarily the result of net losses incurred. Book value per common share at March
31, 2011, December 31, 2010, and March 31, 2010 was $1.67, $1.85, and $2.46, respectively.
Citizens continues to maintain a strong capital position, and its regulatory capital ratios are
above well-capitalized standards. The Corporations capital ratios as of March 31, 2011,
December 31, 2010 and March 31, 2010 are presented below.
Regulatory | Excess | |||||||||||||||||||
Minimum for | Capital over | |||||||||||||||||||
Well- | March 31, | December 31, | March 31, | Minimum | ||||||||||||||||
Capital Ratios | Capitalized | 2011 | 2010 | 2010 | (in millions) | |||||||||||||||
Leverage ratio |
5.00 | % | 7.39 | % | 7.71 | % | 8.47 | % | $ | 228.3 | ||||||||||
Tier 1 capital ratio |
6.00 | 11.90 | 12.11 | 12.12 | 349.6 | |||||||||||||||
Total capital ratio |
10.00 | 13.24 | 13.51 | 13.49 | 191.8 | |||||||||||||||
Tier 1 common equity (non-GAAP) |
5.93 | 6.62 | 7.82 | |||||||||||||||||
Tangible equity to tangible assets (non-GAAP) |
6.57 | 7.09 | 7.96 | |||||||||||||||||
Tangible
common equity to tangible assets (non-GAAP) |
3.59 | 4.20 | 5.54 |
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Contractual Obligations and Off-Balance Sheet Arrangements
Contractual obligations and off-balance sheet arrangements are described in Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations contained in the
Corporations 2010 Annual Report on Form 10-K. There have been no material changes to those
obligations or arrangements outside the ordinary course of business since the most recent fiscal
year end.
Liquidity and Liquidity Risk Management
Citizens monitors and manages its liquidity position so that funds will be available at a
reasonable cost to meet financial commitments, to finance business expansion and to take advantage
of unforeseen opportunities. Liquidity management involves projecting funding requirements and
maintaining sufficient capacity to meet those needs and accommodate fluctuations in asset and
liability levels due to changes in business operations or unanticipated events. Sources of
liquidity include deposits and other customer-based funding, and wholesale market funding.
Citizens manages liquidity at two levels. The first level is at the Holding Company which owns the
Bank. The second level is at the Bank. The management of liquidity at both levels is essential
because the Holding Company and Bank have different funding needs and sources, and are subject to
certain regulatory guidelines and requirements. The Asset Liability Committee is responsible for
establishing a liquidity policy, approving operating and contingency procedures and monitoring
liquidity on an ongoing basis. In order to maintain adequate liquidity through a wide range of
potential operating environments and market conditions, Citizens conducts liquidity management and
business activities in a manner designed to preserve and enhance funding stability, flexibility and
diversity of funding sources. Key components of this operating strategy include a strong focus on
customer-based funding, maximizing secured borrowing capacity, maintaining relationships with
wholesale market funding providers, and maintaining the ability to liquidate certain assets if
conditions warrant.
Credit ratings by the nationally recognized statistical rating agencies are an important component
of Citizens liquidity profile. Credit ratings relate to the Corporations ability to issue debt
securities and the cost to borrow money, and should not be viewed as an indication of future stock
performance or a recommendation to buy, sell, or hold securities. Among other factors, the credit
ratings are based on financial strength, credit quality and concentrations in the loan portfolio,
the level and volatility of earnings, capital adequacy, the quality of management, the liquidity of
the balance sheet, the availability of a significant base of core deposits, and Citizens ability
to access a broad array of wholesale funding sources. Adverse changes in these factors could
result in a negative change in credit ratings and impact not only the ability to raise funds in the
capital markets, but also the cost of these funds. Citizens credit rating was downgraded by
Moodys Investor Service, Standard & Poors, Dominion Bond Rating Service, and Fitch Ratings
throughout 2009 and 2010. During 2010, Standard & Poors and Dominion Bond Rating Service
discontinued rating Citizens. In the first quarter of 2011, Fitch Ratings lowered Citizens credit
ratings. Ratings are subject to revision or withdrawal at any time and each rating should be
evaluated independently of any other rating. The current credit ratings for the Holding Company
and the Bank, the dates on which the ratings were last issued and the outlook watch
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status of the ratings are displayed in the following table. An explanation of these ratings may be
obtained from the respective rating agency.
Credit Ratings | Moodys | Fitch Ratings | ||||||
Citizens Republic Bancorp (Holding Company) |
||||||||
Long-term Issuer |
B2 (ON) | CCC | ||||||
10/1/2009 | 2/4/2011 | |||||||
Short-term/Commercial Paper |
NP(ON) | C | ||||||
10/1/2009 | 2/4/2011 | |||||||
Trust Preferred |
Caa2 (ON) | C | ||||||
1/28/2010 | 2/4/2011 | |||||||
Citizens Bank |
||||||||
Certificate of Deposit |
Ba3 (ON) | B- | ||||||
10/1/2009 | 2/4/2011 |
Ratings Watch Action Legend: (WP) Watch Positive, (WN) Watch Negative, (WU) Watch Uncertain, (WR) Watch Removed, (OP) Outlook Positive, (ON) Outlook Negative, (OS) Outlook Stable, (OD) Outlook Developing |
The primary sources of liquidity for the Holding Company are dividends from and returns on
investment in its subsidiaries and existing cash resources. Banking regulations limit the amount
of dividends a financial institution may declare to a parent company in any calendar year. The
Bank is subject to dividend limits under the laws of the state in which it is chartered and to the
banking regulations previously discussed. Federal and national chartered financial institutions
are generally allowed to make dividends or other capital distributions in an amount not exceeding
the current calendar years net income, plus retained net income of the preceding two years.
Distributions in excess of this limit require prior regulatory approval. As described above, the
Written Agreement, requires prior regulatory approval for any dividend declared by Citizens Bank or
the Holding Company. Since 2009, neither the Holding Company nor any of its subsidiaries has paid
any dividends. As of April 1, 2011, CB Wealth Management had the capacity to pay dividends of $7.5
million to the Holding Company without prior regulatory approval. The ability to borrow
funds on both a short-term and long-term basis and to sell equity securities provides an additional
source of liquidity for the Holding Company. The Holding Companys cash totaled $61.2 million as
of March 31, 2011. Citizens monitors the relationship between cash obligations and available cash
resources, and believes that the Holding Company has sufficient liquidity to meet its currently
anticipated short and long-term needs. Since January 1, 2010, the Holding Company contributed
$100.0 million to Citizens Bank to bolster capital levels. No
contributions have been made in 2011.
The primary source of liquidity for the Bank is customer deposits raised through the branch
offices. Additional sources are wholesale borrowing, unencumbered or unpledged investment
securities, access to secured borrowing at the Federal Reserve Bank of Chicago and the Federal Home
Loan Bank of Indianapolis and contributions of capital from the Holding Company. The Written
Agreement requires prior regulatory approval for Citizens and its nonbank subsidiary to incur,
increase or guarantee any debt. The restrictions on borrowing have not had a negative effect on
liquidity and borrowings.
Citizens maintains a strong liquidity position, with substantial on- and off-balance sheet
liquidity sources and very stable funding base comprised of approximately 79% deposits, 9%
long-term debt, 10% equity, and 2% short-term liabilities. Citizens loan-to-deposit ratio,
another measure of liquidity, continues to improve with levels of 74.2%, 80.5%, and 87.7% at March
31, 2011, December 31, 2010 and March 31, 2010 respectively, as a result of the decrease in
outstanding loans. Securities available-for-sale and money market investments can be sold for cash
to provide additional liquidity, if necessary.
Citizens determined during the first quarter of 2010, in consultation with the Federal Reserve Bank
of Chicago as required by regulatory policy, to defer regularly scheduled quarterly interest
payments on its outstanding junior
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subordinated debentures relating to its two trust preferred securities and to suspend quarterly
cash dividend payments on its Series A Preferred Stock. In addition, as of July 28, 2010, the Written
Agreement prohibits such payments without prior regulatory approval. Deferral of these payments,
which is permitted pursuant to the underlying documentation, preserves a total of $19.7 million of
cash annually, although such amounts continue to accrue. Citizens reevaluates the deferral of
these payments periodically and, in consultation with and subject to prior approval by its
regulators, will reinstate these payments when appropriate.
As of March 31, 2011, the amount of the arrearage (including interest on interest)
on the dividend payments of the Series A Preferred Stock is $18.8 million and the amount
of the arrearage (including interest on interest) on the payments on the subordinated debt
associated with the trust preferred securities is $6.0 million.
The Corporations long-term debt to equity ratio was 95.9% as of March 31, 2011 compared with
102.1% as of December 31, 2010 and 107.5% at March 31, 2010. Changes in deposit obligations and
short-term and long-term debt during the first quarter of 2011 are further discussed in the
sections titled Deposits and Borrowed Funds. The Corporation believes that it has sufficient
liquidity to meet presently known short and long-term cash-flow requirements arising from ongoing
business transactions.
Interest Rate Risk
Interest rate risk refers to the risk of loss arising from changes in market interest rates. The
risk of loss can be assessed by examining the potential for adverse changes in fair values, cash
flows, and future earnings resulting from changes in market interest rates. Interest rate risk on
Citizens balance sheet consists of reprice, option, and basis risks. Reprice risk results from
differences in the maturity or repricing timing of asset and liability portfolios. Option risk
arises from embedded options present in many financial instruments such as loan prepayment options,
deposit early withdrawal options, and interest rate options. These options allow certain of
Citizens customers and counterparties of the investment and wholesale funding portfolios the
opportunity to benefit when market interest rates change, which typically results in higher costs
or lower revenues for the Corporation. Basis risk results when assets and liabilities reprice at
the same time but based on different market rates or indices, which can change by different
amounts, resulting in a narrowing of profit spread.
The asset/liability management process seeks to insulate net interest income from large
fluctuations attributable to changes in market interest rates and to maximize net interest income
within acceptable levels of risk through periods of changing interest rates. Accordingly, the
Corporations interest rate sensitivity is monitored on an ongoing basis by its Asset Liability
Committee, which oversees interest rate risk management and establishes risk measures, limits, and
policy guidelines. A combination of complementary techniques is used to measure interest rate risk
exposure, the distribution of risk, the level of risk over time, and the exposure to changes in
certain interest rate relationships. These measures include static repricing gap analysis,
simulation of earnings, and estimates of economic value of equity.
Static repricing gap analysis provides a measurement of reprice risk on the Corporations balance
sheet as of a point in time. This measurement is accomplished through stratification of the
Corporations rate sensitive assets and liabilities into repricing periods. The sums of assets and
liabilities maturing or repricing in each of these periods are compared for mismatches within each
time segment. Core deposits lacking contractual maturities or repricing frequencies are placed
into repricing and maturity periods based upon historical experience. Repricing periods for assets
include the effects of expected prepayments on cash flows.
Rate sensitive assets repricing within one year exceeded rate sensitive liabilities repricing
within one year by $799.6 million or 8.2% of total assets as of March 31, 2011 compared with $1.1
billion or 11.2% of total assets at December 31, 2010. These results incorporate the impact of
off-balance sheet derivatives and reflect interest rates consistent with March 31, 2011 levels.
Repricing gap analysis is limited in its ability to measure interest rate sensitivity, as embedded
options can change the repricing characteristics of assets, liabilities, and off-balance sheet
derivatives in different interest rate scenarios, thereby changing the repricing position from that
outlined above. Further, basis risk is not captured by repricing gap analysis.
Citizens utilizes a net interest income simulation model as the primary quantitative tool in
measuring the amount of interest rate risk associated with changing market rates. The model
measures the impact to net interest income relative to a base case scenario of hypothetical changes
in interest rates over the next 12 months. These simulations incorporate assumptions including
prepayment speeds on various loan and investment assets, cash flows and maturities of financial
instruments, market conditions, balance sheet growth and mix, pricing, client preferences, and
Citizens financial capital plans. These assumptions are inherently uncertain and subject to
fluctuation and revision in a dynamic environment and as a result the model cannot perfectly
forecast net interest 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
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the timing, magnitude, and frequency of balance sheet component and interest rate changes, and
differences in client behavior, market conditions and management strategies, among other factors.
Net interest income simulations were performed as of March 31, 2011 to evaluate the impact of
market rate changes on net interest income over the subsequent 12 months assuming expected changes
in balance sheet composition over that time period. If market interest rates were to increase
immediately by 100 or 200 basis points (a parallel and immediate shift of the yield curve) net
interest income would be expected to increase by 1.2% and 1.8%, respectively, from what it would be
if rates were to remain at March 31, 2011 levels. Net interest income simulation for 100 and 200
basis point parallel declines in market rates were not performed at March 31, 2011, as the results
would not have been meaningful given the current levels of short-term market interest rates. These
measurements represent similar exposure to rising interest rates as at December 31, 2010. Net
interest income is not only affected by the level and direction of interest rates, but also by the
shape of the yield curve, pricing spreads in relation to market rates, balance sheet growth, the
mix of different types of assets and liabilities, and the timing of changes in these variables.
Scenarios different from those outlined above, whether different by timing, level, or a combination
of factors, could produce different results.
From time to time, derivative contracts are used to help manage or hedge exposure to interest rate
risk and market value risk. Citizens enters into derivative financial instruments to manage
exposures that arise from business activities that result in the receipt or payment of future known
and uncertain cash amounts, the value of which are determined by interest rates. Citizens
derivative financial instruments are used to manage differences in the amount, timing, and duration
of its known or expected cash receipts and expected cash payments principally related to certain
variable-rate loan assets and fixed-rate borrowings. Citizens has agreements with its derivative
counterparties that contain a provision where if Citizens defaults on any of its indebtedness,
including a default where repayment of the indebtedness has not been accelerated by the lender,
then it could also be declared in default on its derivative obligations. Citizens also has
agreements with certain of its derivative counterparties that contain a provision where if it fails
to maintain its status as a well or adequately capitalized institution, then the counterparty could
terminate the derivative positions and Citizens would be required to settle its obligations under
the agreements. An agreement with one of Citizens derivative counterparties contains provisions
that require its debt to maintain an investment grade credit rating from each of the major credit
rating agencies. As of August 6, 2009, Citizens was in breach of these provisions, and may be
required to settle its obligations under the agreement at the termination value. Citizens may be
required to pay additional amounts due in excess of amounts previously posted as collateral. As of
March 31, 2011, the previously mentioned termination value approximated $0.7 million. Further
discussion of derivative instruments is included in Note 14 to the unaudited Consolidated Financial
Statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There has been no material change in the information concerning quantitative and qualitative
disclosures about market risk contained in Item 7A of Citizens 2010 Annual Report on Form 10-K,
except as set forth in Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations Interest Rate Risk of this Form 10-Q.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Management is responsible for establishing and maintaining effective disclosure controls and
procedures, as defined under Rule 13a-15 of the Securities Exchange Act of 1934, that are designed
to cause the material information required to be disclosed by Citizens in the reports it files or
submits under the Securities Exchange Act of 1934 to be recorded, processed, summarized, and
reported to the extent applicable within the time periods required by the Securities and Exchange
Commissions rules and forms. In designing and evaluating the disclosure controls and procedures,
management recognized that a control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control system are met.
Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, with a company have been
detected.
As of the end of the period covered by this report, Citizens performed an evaluation under the
supervision and with the participation of management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Rule 13a-15 of the Securities
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Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures were effective at the reasonable
assurance level.
Changes in Internal Control over Financial Reporting
No changes were made to the Corporations internal control over financial reporting (as defined in
Rule 13a-15 under the Securities Exchange Act of 1934) during the last fiscal quarter that
materially affected, or are reasonably likely to materially affect, the Corporations internal
control over financial reporting.
PART II OTHER INFORMATION
Item 1A. Risk Factors
There have been no material changes to the risk factors set forth in Item 1A of Part I of
Citizens 2010 Annual Report on Form 10-K. Those risk factors are not the only risks Citizens
faces. Additional risks and uncertainties not currently known or that Citizens currently deems to
be immaterial also may materially adversely impact Citizens business, financial condition, or
results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Period | Total
Number of Shares Purchased(1) |
Average
Price Paid Per Share |
Total
Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum
Number of Shares That May Yet Be Purchased Under The Plans or Programs(2) |
|||||
January 2011 |
819 | $0.69 | 1,241,154 | ||||||
February 2011 |
| | | 1,241,154 | |||||
March 2011 |
832 | 0.89 | | 1,241,154 | |||||
Total |
1,651 | $0.79 | | 1,241,154 | |||||
(1) | Shares repurchased in connection with taxes due from employees as a result of the vesting of certain restricted share awards in accordance with the related grant agreements. These repurchases were not part of the repurchase program approved in October 2003. | |
(2) | In October 2003, the Board of Directors approved the repurchase of 3,000,000 shares of common stock from time to time in the market. There is no expiration date for the repurchase program. The repurchase of shares is generally prohibited, with certain exceptions, by the CPP Letter Agreement while Treasury continues to hold the related TARP Preferred Stock, by the Written Agreement and by the terms of Citizens outstanding trust preferred securities, and is also subject to limitations that may be imposed by applicable securities laws and regulations and the rules of NASDAQ. The timing of the purchases and the number of shares to be bought at any one time also depend on market conditions and Citizens capital requirements. There can be no assurance that Citizens will repurchase the remaining shares authorized to be repurchased. |
Item 3. Defaults Upon Senior Securities
As previously disclosed, Citizens decided to defer regularly scheduled quarterly interest
payments on its outstanding junior subordinated debentures relating to its two trust preferred
securities and to suspend quarterly cash dividend payments on its Series A Preferred Stock.
Therefore, Citizens is currently in arrears with the dividend payments on the Series A Preferred
Stock and interest payments on the junior subordinated debentures as permitted by the related
documentation. As of March 31, 2011, the amount of the arrearage on the dividend payments of the
Series A Preferred Stock is $18.8 million and the amount of the arrearage on the payments on the
subordinated debt associated with the trust preferred securities is $6.0 million. Under the terms
of the Written Agreement, Citizens is prohibited from making these interest and dividend payments
without consent of the appropriate regulatory agency.
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Item 6. Exhibits
The exhibits listed on the Exhibit Index of this report are filed herewith and are
incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 5, 2011 | CITIZENS REPUBLIC BANCORP, INC. |
|||
By | /s/ Lisa T. McNeely | |||
Lisa T. McNeely | ||||
Chief Financial Officer (principal financial officer and duly authorized officer) |
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10-Q EXHIBIT INDEX
The following exhibits are filed as part of this report, or were previously filed and are
incorporated herein by reference to the filing indicated. Exhibits not required for this report
have been omitted. Citizens Commission file number is 001-33063.
Exhibit No. | Description | |
10.63
|
Amendment to the Amended and Restated Citizens Republic Bancorp Deferred Compensation Plan for Executives | |
10.64
|
Amendment to the Amended and Restated Citizens Republic Bancorp Deferred Compensation Plan for Directors | |
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 | |
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 | |
32.1
|
Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities Exchange Act of 1934 |
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