ITEM 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following presents managements discussion and analysis of Citizens financial condition and results of operations for each of the past
three years and should be read in conjunction with the accompanying Consolidated Financial Statements and Notes. The discussion highlights the principal factors affecting earnings (loss) for the years 2012, 2011, and 2010 and the significant changes
in balance sheet items from December 31, 2011 to December 31, 2012 and is intended to help the reader understand, from managements perspective, the consolidated financial statements, notes to financial statements, and the
accompanying tables, charts and financial statistics appearing elsewhere in this report. Where applicable, this discussion also reflects managements insights regarding known events and trends that have or may reasonably be expected to have a
material effect on Citizens operations and financial condition. All share and per share amounts have been adjusted to reflect the 1-for-10 reverse stock split that became effective July 1, 2011.
ForwardLooking Statements
Discussions and statements in this report that are not statements of historical fact, including without limitation statements that include terms such as
will, may, should, believe, expect, anticipate, estimate, project, intend, and plan, and statements regarding Citizens
future financial and operating results, plans, objectives, expectations and intentions, are forward-looking statements that involve risks and uncertainties, many of which are beyond Citizens control or are subject to change. No forward-looking
statement is a guarantee of future performance and actual results could differ materially. Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detailed from time to time in Citizens
filings with the SEC, including those listed in Item 1A. Risk Factors of this report.
Other factors not currently anticipated may
also materially and adversely affect Citizens results of operations, cash flows, financial position, and prospects. There can be no assurance that future results will meet expectations. While Citizens believes that the forward-looking
statements in this report are reasonable, the reader should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. Citizens does not undertake, and expressly disclaims any obligation
to update or alter any statements, whether as a result of new information, future events or otherwise, except as may be required by applicable law.
OVERVIEW
Nature of Citizens Business
Citizens is a diversified banking and financial services company that provides a full range of banking, financial services and wealth management services
to individuals and businesses through its subsidiary, Citizens Bank. Citizens conducts operations through 219 offices and 248 ATM locations throughout Michigan, Wisconsin, and Ohio. Citizens operates in five major business lines: Regional Banking,
Specialty Consumer, Specialty Commercial, Wealth Management, and Other. Citizens performance is monitored by an internal profitability measurement system that provides line of business results as presented in Line of Business
Results and Note 15 to the Consolidated Financial Statements, incorporated herein by reference.
Citizens primary source of
revenue is net interest income, which is the difference between interest income on earning assets (such as loans and securities) and interest expense on liabilities (such as interest-bearing deposits and borrowings) used to fund those assets. Net
interest income is affected by fluctuations in the amount and composition of earning assets and funding sources and in the yields earned and rates paid, respectively, on these assets and liabilities. Citizens measures the level of interest
income relative to earning assets and interest bearing liabilities through two statisticsinterest spread and net interest margin. The interest spread represents the difference between the taxable equivalent yields on earning assets and the
rates paid for interest-bearing liabilities. The net interest margin is expressed as the percentage of taxable equivalent net interest income to average earning assets. Citizens sensitivity to changes in interest rates and the potential effect
of changes in interest rates on net interest income is presented in more detail in Interest Rate Risk.
33
Proper management of the volume and composition of the Citizens earning assets and funding sources is
essential for ensuring strong and consistent earnings performance, maintaining adequate liquidity and limiting exposure to risks caused by changing market conditions. Citizens investment securities portfolio is structured to provide a source
of liquidity principally through the maturity of the securities held in the portfolio and to generate an income stream with relatively low levels of principal risk. Loans comprise the largest component of earning assets and are the highest yielding
assets. Client deposits are the primary source of funding for earning assets while short-term debt and other managed sources of funds are utilized as market conditions and liquidity needs change.
Citizens monitors and manages its liquidity position so that funds will be available at a reasonable cost to meet client cash flow needs, while
maintaining funds available for loan and investment opportunities as well as to service debt, invest in its subsidiary, finance business expansion, satisfy other operating requirements and take advantage of unforeseen opportunities. Citizens derives
its liquidity through core deposit growth, maturity of money market investments, and maturity and sale of investment securities and loans. Citizens also has access to market borrowing sources for both short-term and long-term purposes.
Citizens other principal source of revenue is noninterest income, particularly fees and other revenue from financial services provided to
customers. Citizens noninterest income includes service charges on deposit accounts, trust fees related to personal, institutional and employee benefit products and services, revenue related to loan products, including commercial loan fees and
mortgage banking revenue, and fees for various other services, such as brokerage and investment services, ATM network use, and other financial services.
34
Performance Summary
An analysis of the major components of net income (loss) is presented below.
Three Year
Summary of Net Income Components
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Interest income
|
|
$
|
371,928
|
|
|
$
|
407,819
|
|
|
$
|
484,444
|
|
Interest expense
|
|
|
71,156
|
|
|
|
94,709
|
|
|
|
155,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
300,772
|
|
|
|
313,110
|
|
|
|
329,064
|
|
Provision for loan losses
|
|
|
23,204
|
|
|
|
138,808
|
|
|
|
392,882
|
|
Noninterest income
|
|
|
92,320
|
|
|
|
95,257
|
|
|
|
94,659
|
|
Noninterest expense
|
|
|
270,622
|
|
|
|
283,150
|
|
|
|
307,087
|
|
Income tax (benefit) provision from continuing operations
|
|
|
(273,009
|
)
|
|
|
(20,258
|
)
|
|
|
12,858
|
|
Loss from discontinued operations (net of income tax)
|
|
|
|
|
|
|
|
|
|
|
(3,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
372,275
|
|
|
|
6,667
|
|
|
|
(292,925
|
)
|
Dividend on redeemable preferred stock
|
|
|
(24,347
|
)
|
|
|
(22,985
|
)
|
|
|
(21,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
|
$
|
347,928
|
|
|
$
|
(16,318
|
)
|
|
$
|
(314,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax pre-provision profit (non-GAAP)
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
372,275
|
|
|
$
|
6,667
|
|
|
$
|
(289,104
|
)
|
Income tax (benefit) provision from continuing operations
|
|
|
(273,009
|
)
|
|
|
(20,258
|
)
|
|
|
12,858
|
|
Provision for loan losses
|
|
|
23,204
|
|
|
|
138,808
|
|
|
|
392,882
|
|
Net (gains) losses on loans held for sale
|
|
|
984
|
|
|
|
(1,808
|
)
|
|
|
20,617
|
|
Merger-related expenses
|
|
|
5,008
|
|
|
|
|
|
|
|
|
|
Investment securities (gains) losses
|
|
|
|
|
|
|
1,336
|
|
|
|
(13,896
|
)
|
(Gains) losses on other real estate (ORE)
|
|
|
(214
|
)
|
|
|
12,768
|
|
|
|
13,438
|
|
Fair value adjustment on bank owned life insurance
(1)
|
|
|
(71
|
)
|
|
|
233
|
|
|
|
(67
|
)
|
Fair value adjustment on swaps
(1)
|
|
|
11
|
|
|
|
413
|
|
|
|
782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax pre-provision profit (non-GAAP)
|
|
$
|
128,188
|
|
|
$
|
138,159
|
|
|
$
|
137,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts contained
in Other Income on Consolidated Statement of Operations.
|
(2)
|
Pre-tax
pre-provision profit (non-GAAP) defined in Use of Non-GAAP Financial Measures.
|
Key factors behind the changes
in results for 2012 compared with 2011 were:
|
|
|
The decrease in net interest income was primarily a result of a decrease of $317.3 million in average earning assets. Additionally, net interest margin
dropped by two basis points to 3.56%. The decrease in average earning assets was primarily due to reductions in our loan portfolio, particularly in the commercial real estate business, as well as smaller decreases in the residential mortgage and
direct consumer portfolios. These reductions were partially offset by substantial increases in the commercial and industrial and indirect portfolios, as well as investment securities. The decrease in net interest margin was primarily the result of
the continued low interest rate environment, which has resulted in reduced yields on our earning assets. The negative effects on asset yields were almost fully offset by a more advantageous funding mix and reduced funding costs.
|
|
|
|
The decrease in the provision for loan losses in 2012 was primarily a result of the continuing improvement of the credit metrics within our business.
During 2012, we experienced improvement in virtually every credit metric including delinquencies, non-performing assets, and charge offs.
|
|
|
|
Noninterest income dropped 3% compared to 2011 as clients changed their behavior relative to penalty fees and product choices. Additionally, we
experienced a net loss in loans held for sale in 2012 while we recorded gains in 2011. The loss in 2012 was driven by a $2.7 million charge related to one commercial loan relationship in the loans held for sale portfolio.
|
35
|
|
|
The decrease in noninterest expense was the result of a reduction in credit related expenses including gains or losses on ORE, ORE expenses and other
loan expense. These reductions were partially offset by increased employment and merger related costs.
|
|
|
|
The large increase in the income tax benefit was driven almost entirely by the elimination of our valuation allowance on the deferred tax asset.
|
|
|
|
Pre-tax pre-provision profit decreased approximately $10.0 million due largely to reduced net interest income discussed above.
|
SIGNIFICANT DEVELOPMENTS
Business Combination
On September 13, 2012, Citizens and FirstMerit Corporation
(FirstMerit) announced the signing of a definitive agreement under which FirstMerit will acquire Citizens in a stock-for-stock merger transaction. Under the terms of the agreement, Citizens common shareholders will receive 1.37
shares of FirstMerit common stock in exchange for each share of Citizens common stock.
FirstMerit is also required to repay at closing
Citizens approximately $355 million of TARP preferred stock, which includes $55 million of estimated deferred dividends, held by the U.S. Treasury. The merger has been unanimously approved by the Boards of Directors of both Citizens and
FirstMerit and is subject to customary closing conditions, including receipt of regulatory approvals and approval by both companies shareholders. The transaction is expected to close in the second quarter of 2013.
Payments resumed on Trust Preferred Securities
On December 10, 2012, Citizens announced that it will resume interest payments on its outstanding junior subordinated debentures relating to its two trust preferred securities. Regularly scheduled
quarterly interest payments were deferred in January 2010 although Citizens continued to accrue for the obligations. Payment on the variable rate junior subordinated debentures due June 2033 was made on December 26, 2012 for the 12 payments due
or deferred plus interest and dividends on the associated trust preferred securities were made to holders of record on December 15, 2012. Payment on the 7.50% junior subordinated debentures due September 2066 (NYSE: CTZ-PrA) along with
dividends on the associated trust preferred securities will be made in March 2013. In the aggregate, Citizens accrued obligation for these deferred payments as of December 31, 2012 was approximately $12 million. Citizens intends to resume
the regular quarterly interest payment schedule.
Reversal of the Valuation Allowance on our Deferred Tax Asset
During 2012, Citizens recorded an income tax benefit of $273.0 million primarily the result of eliminating the valuation allowance against our deferred
tax asset that had been established as of December 2008. Following Citizens quarterly review of the deferred tax asset at June 30, 2012, Citizens determined that the deferred tax asset valuation allowance was no longer necessary. As of
December 31, 2012, the recorded balance of the net deferred tax asset was $272.9 million.
Termination of the Written Agreement with
FRBC and OFIR
On July 28, 2010, Citizens and Citizens Bank entered into a written supervisory agreement with the FRBC and OFIR, their
primary regulators. Effective April 17, 2012, the Federal Reserve Bank of Chicago and the Michigan Office of Financial and Insurance Regulation terminated the written agreement.
Reverse Stock Split
Citizens affected a 1-for-10 reverse stock split of its common stock
effective after the close of trading on July 1, 2011. Citizens common stock began trading on a split adjusted basis on The NASDAQ Capital Market at the opening of trading on July 5, 2011.
Proportional adjustments were made to Citizens equity based plans as well as outstanding options, warrants and other securities entitling their
holders to purchase or receive shares of Citizens common stock so that the reverse stock split did not materially affect any of the rights of holders of those securities.
36
Resolution of Problem Assets
In an effort to reduce overall problem asset levels, Citizens resolved $460.0 million of problem assets in the first quarter of 2011 and $466.2 million of problem assets in the fourth quarter of 2010
through a combination of bulk sales and individual workouts, recording a provision for loan losses of $88.7 million and $131.3 million and net charge-offs of $160.6 million and $159.3 million in the first quarter of 2011 and fourth quarter of 2010,
respectively. These resolution efforts led to substantial decreases in the provision for loan losses in the second half of 2011, significantly reduced the outstanding amount of nonperforming loans and watchlist loans and improved the credit quality
of our loan portfolio.
Discontinued Operations
On April 23, 2010, Citizens completed the sale of its wholly owned subsidiary, F&M Bank-Iowa (F&M) to Great Western Bank in exchange for $50.0 million in cash. The price
represented approximately 25 times F&Ms average earnings and 1.10 times its tangible book value. The sale proceeds improved Citizens capital and liquidity positions in a manner that was non-dilutive to shareholders.
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.
Use of Non-GAAP Financial Measures
In addition to results presented in accordance with generally accepted accounting principles in the United States (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 Item 6
Selected Financial Data, 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
37
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 basis. 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, merger-related expenses, 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 Statements 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.
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 discusses the quality of Citizens loan portfolio and the 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 2011 and 2012 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 2011 full year results, the total cash compensation award linked to PTPP was $0.8 million. Additionally, during 2011, approximately 186,500 shares of restricted stock were granted which have a two-year
vesting period based partially on PTPP results and partially on net income. Based on 2012 full year results, the total potential cash compensation award linked to PTPP is $1.6 million, payable in early 2013. The grants are designed so that a
portion of the compensation is based on net income while the remainder does not depend on managements performance with regard to managing loan losses, securities impairments, merger related expenses, and other asset impairments.
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
38
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 for the past three years of these non-GAAP measures other than pre-tax pre-provision profit, the calculation of which is set forth in the Performance Summary section.
39
Non-GAAP Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Efficiency Ratio (non-GAAP)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (A)
|
|
$
|
300,772
|
|
|
$
|
313,110
|
|
|
$
|
329,064
|
|
Taxable equivalent adjustment (B)
|
|
|
6,074
|
|
|
|
7,482
|
|
|
|
10,582
|
|
Investment securities (losses) gains (C)
|
|
|
|
|
|
|
(1,336
|
)
|
|
|
13,896
|
|
Noninterest income (D)
|
|
|
92,320
|
|
|
|
95,257
|
|
|
|
94,659
|
|
Noninterest expense (E)
|
|
|
270,622
|
|
|
|
283,150
|
|
|
|
307,087
|
|
Losses on ORE and ORE Expenses (F)
|
|
|
1,045
|
|
|
|
17,090
|
|
|
|
18,408
|
|
Intangible amortization (G)
|
|
|
2,120
|
|
|
|
3,027
|
|
|
|
3,923
|
|
Merger related expenses (H)
|
|
|
5,008
|
|
|
|
|
|
|
|
|
|
Efficiency ratio: (E-F-G-H)/(A+B-C+D) (non-GAAP)
|
|
|
65.75
|
%
|
|
|
63.05
|
%
|
|
|
67.73
|
%
|
Tangible Common Equity to Tangible Assets (non-GAAP)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,586,683
|
|
|
$
|
9,462,849
|
|
|
$
|
9,965,645
|
|
Goodwill
|
|
|
(318,150
|
)
|
|
|
(318,150
|
)
|
|
|
(318,150
|
)
|
Other intangible assets
|
|
|
(5,308
|
)
|
|
|
(7,428
|
)
|
|
|
(10,454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible assets (non-GAAP)
|
|
$
|
9,263,225
|
|
|
$
|
9,137,271
|
|
|
$
|
9,637,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
1,370,505
|
|
|
$
|
1,019,537
|
|
|
$
|
1,011,731
|
|
Goodwill
|
|
|
(318,150
|
)
|
|
|
(318,150
|
)
|
|
|
(318,150
|
)
|
Other intangible assets
|
|
|
(5,308
|
)
|
|
|
(7,428
|
)
|
|
|
(10,454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible equity (non-GAAP)
|
|
$
|
1,047,047
|
|
|
$
|
693,959
|
|
|
$
|
683,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible equity
|
|
$
|
1,047,047
|
|
|
$
|
693,959
|
|
|
$
|
683,127
|
|
Preferred stock
|
|
|
(292,473
|
)
|
|
|
(285,114
|
)
|
|
|
(278,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity (non-GAAP)
|
|
$
|
754,574
|
|
|
$
|
408,845
|
|
|
$
|
404,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Common Equity (non-GAAP)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
1,370,505
|
|
|
$
|
1,019,537
|
|
|
$
|
1,011,731
|
|
Qualifying capital securities and other adjustments
|
|
|
73,667
|
|
|
|
73,558
|
|
|
|
73,489
|
|
Goodwill
|
|
|
(318,150
|
)
|
|
|
(318,150
|
)
|
|
|
(318,150
|
)
|
Accumulated other comprehensive loss (income)
|
|
|
13,213
|
|
|
|
5,820
|
|
|
|
20,156
|
|
Disallowed deferred tax asset
|
|
|
(241,535
|
)
|
|
|
|
|
|
|
|
|
Other intangible assets
|
|
|
(5,308
|
)
|
|
|
(7,428
|
)
|
|
|
(10,454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (regulatory)
|
|
$
|
892,392
|
|
|
$
|
773,337
|
|
|
$
|
776,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (regulatory)
|
|
$
|
892,392
|
|
|
$
|
773,337
|
|
|
$
|
776,772
|
|
Qualifying capital securities and other adjustments
|
|
|
(73,667
|
)
|
|
|
(73,558
|
)
|
|
|
(73,489
|
)
|
Preferred stock
|
|
|
(292,473
|
)
|
|
|
(285,114
|
)
|
|
|
(278,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tier 1 common equity (non-GAAP)
|
|
$
|
526,252
|
|
|
$
|
414,665
|
|
|
$
|
424,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net risk-weighted assets (regulatory)
|
|
$
|
5,695,254
|
|
|
$
|
5,723,333
|
|
|
$
|
6,416,792
|
|
Equity to assets
|
|
|
14.30
|
%
|
|
|
10.77
|
%
|
|
|
10.15
|
%
|
Tier 1 common equity (non-GAAP)
|
|
|
9.24
|
|
|
|
7.24
|
|
|
|
6.62
|
|
Tangible equity to tangible assets (non-GAAP)
|
|
|
11.30
|
|
|
|
7.59
|
|
|
|
7.09
|
|
Tangible common equity to tangible assets (non-GAAP)
|
|
|
8.15
|
|
|
|
4.47
|
|
|
|
4.20
|
|
40
RESULTS OF OPERATIONS
NET INTEREST INCOME
An analysis of net interest income, interest spread and net interest
margin with average balances and related interest rates is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances/Net Interest Income/Average Rates
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
(in thousands)
|
|
Average
Balance
|
|
|
Interest
(1)
|
|
|
Average
Rate
(2)
|
|
|
Average
Balance
|
|
|
Interest
(1)
|
|
|
Average
Rate
(2)
|
|
|
Average
Balance
|
|
|
Interest
(1)
|
|
|
Average
Rate
(2)
|
|
Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments
|
|
$
|
251,169
|
|
|
$
|
626
|
|
|
|
0.25
|
%
|
|
$
|
340,482
|
|
|
$
|
840
|
|
|
|
0.25
|
%
|
|
$
|
605,217
|
|
|
$
|
1,501
|
|
|
|
0.25
|
%
|
Investment securities
(3)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
2,573,740
|
|
|
|
63,912
|
|
|
|
2.48
|
|
|
|
2,444,539
|
|
|
|
79,281
|
|
|
|
3.24
|
|
|
|
1,901,195
|
|
|
|
72,545
|
|
|
|
3.82
|
|
Tax-exempt
|
|
|
207,726
|
|
|
|
8,711
|
|
|
|
6.45
|
|
|
|
250,098
|
|
|
|
10,800
|
|
|
|
6.64
|
|
|
|
366,044
|
|
|
|
16,035
|
|
|
|
6.74
|
|
FHLB and Federal Reserve stock
|
|
|
121,107
|
|
|
|
4,897
|
|
|
|
4.04
|
|
|
|
132,101
|
|
|
|
4,152
|
|
|
|
3.14
|
|
|
|
154,959
|
|
|
|
3,776
|
|
|
|
2.44
|
|
Portfolio loans
(4)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1,647,813
|
|
|
|
89,944
|
|
|
|
5.54
|
|
|
|
1,438,292
|
|
|
|
72,194
|
|
|
|
5.13
|
|
|
|
1,728,712
|
|
|
|
81,069
|
|
|
|
4.80
|
|
Commercial real estate
|
|
|
1,415,141
|
|
|
|
69,652
|
|
|
|
4.92
|
|
|
|
1,776,292
|
|
|
|
90,862
|
|
|
|
5.12
|
|
|
|
2,631,901
|
|
|
|
139,307
|
|
|
|
5.30
|
|
Residential mortgage
|
|
|
591,946
|
|
|
|
25,595
|
|
|
|
4.32
|
|
|
|
700,257
|
|
|
|
32,539
|
|
|
|
4.65
|
|
|
|
867,500
|
|
|
|
43,862
|
|
|
|
5.06
|
|
Direct consumer
|
|
|
884,745
|
|
|
|
51,490
|
|
|
|
5.82
|
|
|
|
981,396
|
|
|
|
59,273
|
|
|
|
6.04
|
|
|
|
1,133,691
|
|
|
|
68,794
|
|
|
|
6.07
|
|
Indirect consumer
|
|
|
921,429
|
|
|
|
56,639
|
|
|
|
6.15
|
|
|
|
856,279
|
|
|
|
56,947
|
|
|
|
6.65
|
|
|
|
813,845
|
|
|
|
55,629
|
|
|
|
6.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio loans
|
|
|
5,461,074
|
|
|
|
293,320
|
|
|
|
5.40
|
|
|
|
5,752,516
|
|
|
|
311,815
|
|
|
|
5.45
|
|
|
|
7,175,649
|
|
|
|
388,661
|
|
|
|
5.44
|
|
Loans held for sale
(4)
|
|
|
14,091
|
|
|
|
462
|
|
|
|
3.28
|
|
|
|
26,451
|
|
|
|
931
|
|
|
|
3.52
|
|
|
|
69,705
|
|
|
|
1,926
|
|
|
|
2.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
8,628,907
|
|
|
|
371,928
|
|
|
|
4.38
|
|
|
|
8,946,187
|
|
|
|
407,819
|
|
|
|
4.64
|
|
|
|
10,272,769
|
|
|
|
484,444
|
|
|
|
4.82
|
|
Nonearning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
143,639
|
|
|
|
|
|
|
|
|
|
|
|
142,721
|
|
|
|
|
|
|
|
|
|
|
|
163,203
|
|
|
|
|
|
|
|
|
|
Premises and equipment
|
|
|
93,953
|
|
|
|
|
|
|
|
|
|
|
|
101,009
|
|
|
|
|
|
|
|
|
|
|
|
107,382
|
|
|
|
|
|
|
|
|
|
Investment security fair value adjustment
|
|
|
54,149
|
|
|
|
|
|
|
|
|
|
|
|
44,712
|
|
|
|
|
|
|
|
|
|
|
|
54,451
|
|
|
|
|
|
|
|
|
|
Other nonearning assets
|
|
|
795,051
|
|
|
|
|
|
|
|
|
|
|
|
663,477
|
|
|
|
|
|
|
|
|
|
|
|
725,101
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,615
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(145,566
|
)
|
|
|
|
|
|
|
|
|
|
|
(228,509
|
)
|
|
|
|
|
|
|
|
|
|
|
(325,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,570,133
|
|
|
|
|
|
|
|
|
|
|
$
|
9,669,597
|
|
|
|
|
|
|
|
|
|
|
$
|
11,105,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
1,026,098
|
|
|
$
|
1,437
|
|
|
|
0.14
|
|
|
$
|
953,187
|
|
|
$
|
2,021
|
|
|
|
0.21
|
|
|
$
|
1,008,871
|
|
|
$
|
2,741
|
|
|
|
0.27
|
|
Savings deposits
|
|
|
2,639,803
|
|
|
|
5,901
|
|
|
|
0.22
|
|
|
|
2,636,422
|
|
|
|
9,315
|
|
|
|
0.35
|
|
|
|
2,561,596
|
|
|
|
15,785
|
|
|
|
0.62
|
|
Time deposits
|
|
|
1,902,397
|
|
|
|
30,121
|
|
|
|
1.58
|
|
|
|
2,489,703
|
|
|
|
45,991
|
|
|
|
1.85
|
|
|
|
3,405,281
|
|
|
|
80,000
|
|
|
|
2.35
|
|
Short-term borrowings
|
|
|
41,676
|
|
|
|
53
|
|
|
|
0.13
|
|
|
|
42,760
|
|
|
|
79
|
|
|
|
0.18
|
|
|
|
36,744
|
|
|
|
80
|
|
|
|
0.22
|
|
Long-term debt
|
|
|
852,932
|
|
|
|
33,644
|
|
|
|
3.94
|
|
|
|
898,501
|
|
|
|
37,303
|
|
|
|
4.15
|
|
|
|
1,280,839
|
|
|
|
56,774
|
|
|
|
4.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
6,462,906
|
|
|
|
71,156
|
|
|
|
1.10
|
|
|
|
7,020,573
|
|
|
|
94,709
|
|
|
|
1.35
|
|
|
|
8,293,331
|
|
|
|
155,380
|
|
|
|
1.87
|
|
Noninterest-Bearing Liabilities
and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand
|
|
|
1,747,544
|
|
|
|
|
|
|
|
|
|
|
|
1,503,430
|
|
|
|
|
|
|
|
|
|
|
|
1,306,881
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
158,816
|
|
|
|
|
|
|
|
|
|
|
|
151,833
|
|
|
|
|
|
|
|
|
|
|
|
146,669
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,851
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
1,200,867
|
|
|
|
|
|
|
|
|
|
|
|
993,761
|
|
|
|
|
|
|
|
|
|
|
|
1,229,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
9,570,133
|
|
|
|
|
|
|
|
|
|
|
$
|
9,669,597
|
|
|
|
|
|
|
|
|
|
|
$
|
11,105,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Spread
(5)
|
|
|
|
|
|
$
|
300,772
|
|
|
|
3.28
|
%
|
|
|
|
|
|
$
|
313,110
|
|
|
|
3.29
|
%
|
|
|
|
|
|
$
|
329,064
|
|
|
|
2.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution of noninterest bearing sources of funds
|
|
|
|
|
|
|
|
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin
(5)(6)
|
|
|
|
|
|
|
|
|
|
|
3.56
|
%
|
|
|
|
|
|
|
|
|
|
|
3.58
|
%
|
|
|
|
|
|
|
|
|
|
|
3.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $6.1 million, $7.5 million and $10.6 million for the years ended December 31, 2012, 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)
|
Because noninterest-bearing funding souces, demand deposits, other
liabilities and shareholders equity also support earning assets, the net interest margin exceeds the interest spread.
|
2012 compared with 2011
The
decrease in net interest margin was primarily the result of lower earning assets and the continued low interest rate environment, which resulted in a slightly reduced yield on our earning assets. The negative effects on asset yields were almost
fully offset by a more advantageous funding mix and reduced funding costs. Average earning assets decreased $317.3 million. Additionally, net interest margin dropped by two basis points to 3.56%. The decrease in average earning assets was primarily
due to reductions in our loan portfolio, particularly in the commercial real estate business, as well as smaller decreases in the residential mortgage and direct consumer portfolios. These reductions were partially offset by substantial increases in
the commercial and industrial and indirect portfolios as well as investment securities.
41
2011 compared with 2010
The increase in net interest margin was primarily the result of declining deposit costs, reductions in high-cost funding, lower levels of nonperforming assets and a planned reduction in excess cash and
money market investments, partially offset by lower investment securities yields. The decrease in net interest income was primarily the result of a decrease in average earning assets due to the effects of the accelerated problem asset resolution
initiatives completed during the first half of 2011.
The table below shows changes in interest income, interest expense and net interest
income due to volume and rate variances for major categories of earning assets and interest-bearing liabilities.
Analysis of Changes in
Interest Income and Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 Compared to 2011
|
|
|
2011 Compared to 2010
|
|
|
|
Net
|
|
|
Increase (Decrease)
Due to Change
in
|
|
|
Net
|
|
|
Increase (Decrease)
Due to Change
in
|
|
(in thousands)
|
|
Change
(1)
|
|
|
Rate
(2)
|
|
|
Volume
(2)
|
|
|
Change
(1)
|
|
|
Rate
(2)
|
|
|
Volume
(2)
|
|
Interest Income on Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments
|
|
$
|
(214
|
)
|
|
$
|
9
|
|
|
$
|
(223
|
)
|
|
$
|
(661
|
)
|
|
$
|
(8
|
)
|
|
$
|
(653
|
)
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(15,369
|
)
|
|
|
(19,379
|
)
|
|
|
4,010
|
|
|
|
6,736
|
|
|
|
(11,957
|
)
|
|
|
18,693
|
|
Tax-exempt
|
|
|
(2,089
|
)
|
|
|
(304
|
)
|
|
|
(1,785
|
)
|
|
|
(5,235
|
)
|
|
|
(225
|
)
|
|
|
(5,010
|
)
|
FHLB and Federal Reserve stock
|
|
|
745
|
|
|
|
1,113
|
|
|
|
(368
|
)
|
|
|
376
|
|
|
|
987
|
|
|
|
(611
|
)
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
17,750
|
|
|
|
6,659
|
|
|
|
11,091
|
|
|
|
(8,875
|
)
|
|
|
5,420
|
|
|
|
(14,295
|
)
|
Commercial real estate
|
|
|
(21,210
|
)
|
|
|
(3,325
|
)
|
|
|
(17,885
|
)
|
|
|
(48,445
|
)
|
|
|
(4,536
|
)
|
|
|
(43,909
|
)
|
Residential mortgage loans
|
|
|
(6,944
|
)
|
|
|
(2,152
|
)
|
|
|
(4,792
|
)
|
|
|
(11,323
|
)
|
|
|
(3,349
|
)
|
|
|
(7,974
|
)
|
Direct consumer
|
|
|
(7,783
|
)
|
|
|
(2,101
|
)
|
|
|
(5,682
|
)
|
|
|
(9,521
|
)
|
|
|
(321
|
)
|
|
|
(9,200
|
)
|
Indirect consumer
|
|
|
(308
|
)
|
|
|
(4,476
|
)
|
|
|
4,168
|
|
|
|
1,318
|
|
|
|
(1,531
|
)
|
|
|
2,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio loans
|
|
|
(18,495
|
)
|
|
|
(5,395
|
)
|
|
|
(13,100
|
)
|
|
|
(76,846
|
)
|
|
|
(4,317
|
)
|
|
|
(72,529
|
)
|
Loans held for sale
|
|
|
(469
|
)
|
|
|
(60
|
)
|
|
|
(409
|
)
|
|
|
(995
|
)
|
|
|
427
|
|
|
|
(1,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(35,891
|
)
|
|
|
(24,016
|
)
|
|
|
(11,875
|
)
|
|
|
(76,625
|
)
|
|
|
(15,093
|
)
|
|
|
(61,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense on Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
|
(583
|
)
|
|
|
(728
|
)
|
|
|
145
|
|
|
|
(720
|
)
|
|
|
(575
|
)
|
|
|
(145
|
)
|
Savings deposits
|
|
|
(3,414
|
)
|
|
|
(3,426
|
)
|
|
|
12
|
|
|
|
(6,470
|
)
|
|
|
(6,918
|
)
|
|
|
448
|
|
Time deposits
|
|
|
(15,870
|
)
|
|
|
(5,986
|
)
|
|
|
(9,884
|
)
|
|
|
(34,009
|
)
|
|
|
(15,060
|
)
|
|
|
(18,949
|
)
|
Short-term borrowings
|
|
|
(26
|
)
|
|
|
(24
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(13
|
)
|
|
|
12
|
|
Long-term debt
|
|
|
(3,660
|
)
|
|
|
(1,816
|
)
|
|
|
(1,844
|
)
|
|
|
(19,471
|
)
|
|
|
(3,409
|
)
|
|
|
(16,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(23,553
|
)
|
|
|
(11,980
|
)
|
|
|
(11,573
|
)
|
|
|
(60,671
|
)
|
|
|
(25,975
|
)
|
|
|
(34,696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
$
|
(12,338
|
)
|
|
$
|
(12,036
|
)
|
|
$
|
(302
|
)
|
|
$
|
(15,954
|
)
|
|
$
|
10,882
|
|
|
$
|
(26,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
2012 compared with 2011
The decrease in net interest income reflects rate and
volume variances that are unfavorable in the aggregate. The unfavorable rate variance was primarily the result of the continued low interest rate environment, which has resulted in reduced yields on our earning assets. The negative effects on asset
yields were partially offset by a more advantageous funding mix and reducing funding costs. The negative volume variance is the result of a lower level of average earning assets.
2011 compared with 2010
The decrease in net interest income reflects volume
variances that were unfavorable in the aggregate and rate variances that were favorable in the aggregate. The unfavorable volume variance was 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 portfolio and a decrease in time deposits and long term debt.
42
The favorable rate variance was primarily the result of borrowings repricing to lower rates as a result of
lower market interest rates in 2011 and reduced deposit price competition, partially offset by lower reinvestment yields for investment securities and intensified price competition for commercial and industrial loans.
PROVISION FOR LOAN LOSSES
After
determining what Citizens believes is an appropriate allowance for loan losses based on the inherent risk in the portfolio, the provision for loan losses is calculated each quarter as a result of the net effect of the quarterly change in the
allowance for loan losses and the quarterly net charge-offs. The decreases in the provision for loan losses for 2012 compared with 2011 as well as 2011 to 2010 were primarily due to our focused efforts to improve asset quality, stabilized portfolio
credit metrics and an overall decrease in loan balances. See Critical Accounting Policies Allowance for Loan Losses and Allowance for Loan Losses for a discussion of the calculation of the allowance and the related
methodology.
NONINTEREST INCOME
An analysis of the components of noninterest income is presented in the table below.
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
$ Change
|
|
|
% Change
|
|
(dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2012-2011
|
|
|
2011-2010
|
|
|
2012-2011
|
|
|
2011-2010
|
|
Service charges on deposit accounts
|
|
$
|
37,308
|
|
|
$
|
39,268
|
|
|
$
|
40,336
|
|
|
$
|
(1,960
|
)
|
|
$
|
(1,068
|
)
|
|
|
(5.0
|
)%
|
|
|
(2.6
|
)%
|
Trust fees
|
|
|
14,601
|
|
|
|
15,103
|
|
|
|
15,603
|
|
|
|
(502
|
)
|
|
|
(500
|
)
|
|
|
(3.3
|
)
|
|
|
(3.2
|
)
|
Mortgage and other loan income
|
|
|
8,104
|
|
|
|
9,620
|
|
|
|
10,486
|
|
|
|
(1,516
|
)
|
|
|
(866
|
)
|
|
|
(15.8
|
)
|
|
|
(8.3
|
)
|
Brokerage and investment fees
|
|
|
6,055
|
|
|
|
5,072
|
|
|
|
4,579
|
|
|
|
983
|
|
|
|
493
|
|
|
|
19.4
|
|
|
|
10.8
|
|
Card-based and other nondeposit fees
|
|
|
17,507
|
|
|
|
17,167
|
|
|
|
15,916
|
|
|
|
340
|
|
|
|
1,251
|
|
|
|
2.0
|
|
|
|
7.9
|
|
(Losses) gains on loans held for sale
|
|
|
(984
|
)
|
|
|
1,808
|
|
|
|
(20,617
|
)
|
|
|
(2,792
|
)
|
|
|
22,425
|
|
|
|
(154.4
|
)
|
|
|
(108.8
|
)
|
Investment securities (losses) gains
|
|
|
|
|
|
|
(1,336
|
)
|
|
|
13,896
|
|
|
|
1,336
|
|
|
|
(15,232
|
)
|
|
|
(100.0
|
)
|
|
|
(109.6
|
)
|
Other
|
|
|
9,729
|
|
|
|
8,555
|
|
|
|
14,460
|
|
|
|
1,174
|
|
|
|
(5,905
|
)
|
|
|
13.7
|
|
|
|
(40.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
$
|
92,320
|
|
|
$
|
95,257
|
|
|
$
|
94,659
|
|
|
$
|
(2,937
|
)
|
|
$
|
598
|
|
|
|
(3.1
|
)
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 compared with 2011
Noninterest income dropped 3.1% compared to 2011. We experienced a net loss on loans held for sale in 2012 while we recorded gains in 2011. The loss in 2012 was driven by a $2.7 million charge related to
one commercial loan relationship in the category. Changes in the other noninterest items were largely offsetting. Service charges on deposit accounts were lower as clients changed their behavior relative to penalty fees and product choices. Mortgage
and other loan income were down due to a decline in commercial letter of credit fees and derivative income, partially offset by increased mortgage origination volume. Brokerage and investment fees performed well due to increased focus to improve
performance.
2011 compared with 2010
Noninterest income was essentially unchanged from last year, with gains on loans held for sale, offset by investment securities losses and lower other income. The gain on loans held for sale was offset by
fewer writedowns to reflect fair value declines of the underlying collateral in 2011 compared to 2010. Citizens recorded net losses on investment securities compared to net gains in 2010 directly related to the sale of four CMOs during 2011 at a
loss, and a gain on sale of securities in 2010 as part of Citizens capital strategy. The decline in other income reflects a decrease in interest rate swap income recognition and unrealized losses on deferred compensation plans.
43
NONINTEREST EXPENSE
An analysis of the components of noninterest expense is presented in the table below.
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
$ Change
|
|
|
% Change
|
|
(
dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2012-2011
|
|
|
2011-2010
|
|
|
2012-2011
|
|
|
2011-2010
|
|
Salaries and employee benefits
|
|
$
|
132,850
|
|
|
$
|
123,514
|
|
|
$
|
126,384
|
|
|
$
|
9,336
|
|
|
$
|
(2,870
|
)
|
|
|
7.6
|
%
|
|
|
(2.3
|
)%
|
Occupancy
|
|
|
24,997
|
|
|
|
26,059
|
|
|
|
26,963
|
|
|
|
(1,062
|
)
|
|
|
(904
|
)
|
|
|
(4.1
|
)
|
|
|
(3.4
|
)
|
Professional services
|
|
|
13,772
|
|
|
|
9,331
|
|
|
|
10,550
|
|
|
|
4,441
|
|
|
|
(1,219
|
)
|
|
|
47.6
|
|
|
|
(11.6
|
)
|
Equipment
|
|
|
12,001
|
|
|
|
12,136
|
|
|
|
12,482
|
|
|
|
(135
|
)
|
|
|
(346
|
)
|
|
|
(1.1
|
)
|
|
|
(2.8
|
)
|
Data processing services
|
|
|
16,717
|
|
|
|
16,131
|
|
|
|
18,734
|
|
|
|
586
|
|
|
|
(2,603
|
)
|
|
|
3.6
|
|
|
|
(13.9
|
)
|
Advertising and public relations
|
|
|
5,904
|
|
|
|
5,848
|
|
|
|
6,530
|
|
|
|
56
|
|
|
|
(682
|
)
|
|
|
1.0
|
|
|
|
(10.4
|
)
|
Postage and delivery
|
|
|
4,456
|
|
|
|
4,543
|
|
|
|
4,571
|
|
|
|
(87
|
)
|
|
|
(28
|
)
|
|
|
(1.9
|
)
|
|
|
(0.6
|
)
|
Other loan expenses
|
|
|
13,224
|
|
|
|
16,007
|
|
|
|
20,311
|
|
|
|
(2,783
|
)
|
|
|
(4,304
|
)
|
|
|
(17.4
|
)
|
|
|
(21.2
|
)
|
(Gains) losses on other real estate (ORE)
|
|
|
(214
|
)
|
|
|
12,768
|
|
|
|
13,438
|
|
|
|
(12,982
|
)
|
|
|
(670
|
)
|
|
|
(101.7
|
)
|
|
|
(5.0
|
)
|
ORE expenses
|
|
|
1,259
|
|
|
|
4,322
|
|
|
|
4,970
|
|
|
|
(3,063
|
)
|
|
|
(648
|
)
|
|
|
(70.9
|
)
|
|
|
(13.0
|
)
|
Intangible asset amortization
|
|
|
2,120
|
|
|
|
3,027
|
|
|
|
3,923
|
|
|
|
(907
|
)
|
|
|
(896
|
)
|
|
|
(30.0
|
)
|
|
|
(22.8
|
)
|
Other
|
|
|
43,536
|
|
|
|
49,464
|
|
|
|
58,231
|
|
|
|
(5,928
|
)
|
|
|
(8,767
|
)
|
|
|
(12.0
|
)
|
|
|
(15.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
270,622
|
|
|
$
|
283,150
|
|
|
$
|
307,087
|
|
|
$
|
(12,528
|
)
|
|
$
|
(23,937
|
)
|
|
|
(4.4
|
)
|
|
|
(7.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 compared with 2011
The decrease in noninterest expense was the result of a substantial reduction in credit related expenses including reduced losses on ORE, ORE expenses and other loan expense. These expenses were lower in
2012 due to the continued improvement in our credit quality. These reductions were partially offset by increased salaries and benefits costs resulting from increased incentives due to better performance and a fuller staff compliment. The increase in
professional services is related to our pending merger with FirstMerit.
2011 compared with 2010
The decrease in noninterest expense was the result of decreases in all noninterest expense categories, primarily lower other expenses, lower other loan
expense, lower salaries and employee benefits, lower data processing services and lower professional services. The decline in other expenses was primarily related to reductions in FDIC insurance costs. Lower other loan expense was primarily the
result of lower commercial and residential mortgage origination volume and foreclosure-related expenses. The decline in salaries and employee benefits, professional services and data processing services reflect the continued focus on improving
efficiencies.
FDIC insurance premiums
In 2011, the FDIC implemented a rule that changed the assessment base from domestic deposits to average assets minus average tangible equity, adopted a new large-bank pricing assessment scheme, and set a
target size for the Deposit Insurance Fund. The rule finalized a target size for the DIF at 2 percent of insured deposits. It also implemented a lower assessment rate schedule when the fund reaches 1.15 percent so that the average rate over time
should be about 8.5 basis points of the assessment base and, in lieu of dividends, provides for a lower rate schedule when the reserve ratio reaches 2 percent and 2.5 percent. The rule, in aggregate, increased the share of assessments paid by large
institutions and created a scorecard-based assessment system for banks with more than $10 billion in assets. The scorecards include financial measures that the FDIC believes are predictive of long-term performance. The new rule did not have a
material effect on our results of operations and financial condition as assets were below $10 billion in 2012 and 2011.
FEDERAL AND STATE
INCOME TAXES
Citizens recorded an income tax benefit of $273.0 million for 2012 compared with a tax benefit of $20.3 million for 2011 and
a tax expense of $12.9 million in 2010. The tax benefit in 2012 was primarily the result of eliminating the valuation allowance against our deferred tax asset. The tax benefit in 2011 was primarily the result of recording a receivable due to the
change in a tax election and changes in other components of income that are included in the calculation of the tax provision. The tax expense in 2010 was primarily the result of alternative minimum tax calculations.
44
In assessing whether or not some or all of our deferred tax assets are more likely than not to be realized
in the future, we consider all available positive and negative evidence, including projected future taxable income, tax planning strategies and recent financial operations. Based on an evaluation of the then-available positive and negative evidence,
Citizens determined it was appropriate to establish a full valuation allowance on our deferred tax asset as of December 31, 2008. At that time, and in subsequent quarters, negative evidence, including a recent cumulative history of operating
losses, outweighed the positive evidence.
However, at June 30, 2012, the positive evidence outweighed the negative evidence and Citizens
determined that a deferred tax asset valuation allowance was no longer necessary. The significant positive evidence in our analysis included: five consecutive quarters of profitability, termination of the written agreement with our primary
regulators, improved capital levels, solid credit metrics, strong deposit mix, reduced regulatory risk, and a stabilizing economy.
The
positive evidence continued through the remainder of 2012 including seven consecutive quarters of profitability, continued strong credit metrics, and other items noted above. As a result we continue to believe that the positive evidence outweighs
the negative evidence and no valuation allowance is necessary at December 31, 2012.
During 2009, we incurred an ownership change within
the meaning of Section 382 of the Internal Revenue Code. As a result, federal tax law places an annual limitation of approximately $17.7 million on the amount of certain loss carryforwards that may be used.
For further discussion of federal and state income taxes, see Note 13 to the Consolidated Financial Statements.
LINE OF BUSINESS RESULTS
Net income or
loss by line of business is presented in the table below. A description of each business line, important financial performance data and the methodologies used to measure financial performance are presented in Note 15 to the Consolidated Financial
Statements. Certain amounts have been revised retrospectively for discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Regional Banking
|
|
$
|
31,716
|
|
|
$
|
695
|
|
|
$
|
(4,904
|
)
|
Specialty Consumer
|
|
|
4,495
|
|
|
|
(4,831
|
)
|
|
|
(45,316
|
)
|
Specialty Commercial
|
|
|
47,062
|
|
|
|
(2,670
|
)
|
|
|
(98,847
|
)
|
Wealth Management
|
|
|
3,160
|
|
|
|
3,587
|
|
|
|
2,716
|
|
Other
|
|
|
285,842
|
|
|
|
9,886
|
|
|
|
(142,753
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from Continuing Operations
|
|
$
|
372,275
|
|
|
$
|
6,667
|
|
|
$
|
(289,104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 compared with 2011
Net income for Regional Banking increased primarily due to lower provision for loan losses, partially offset by lower net interest income and increased income tax expense. The decrease in the provision
for loan losses reflected the results of our focused efforts to improve asset quality and stabilized portfolio credit metrics. The decrease in net interest income reflected the decline in loan balances. Income taxes increased due to the improvement
in pre-tax earnings.
Specialty Consumer recorded net income in 2012, compared to a net loss in 2011 primarily due to lower provision for loan
losses, which reflects the results of our focused efforts to improve asset quality, stabilized portfolio credit metrics as well as an overall decrease in loan balances.
45
Specialty Commercial recorded net income in 2012, compared to a net loss in 2011 primarily due to lower
provision for loan losses and higher net interest income. The decrease in the provision for loan losses reflected the results of our focused efforts to improve asset quality and stabilized portfolio credit metrics. The increase in net interest
income was directly related to an increase in commercial and industrial lending.
Net income for Wealth Management decreased primarily as a
result of lower trust income due to a lower level of trust assets under administration.
Activities that are not directly attributable to one
of the primary lines of business are included in the Other business line. Included in this category are the Holding Company; the shared services unit; Citizens treasury unit, including the securities portfolio, short-term borrowing and
asset/liability management activities; inter-company eliminations; and the economic impact of certain assets, capital and support functions not specifically identifiable with the four primary lines of business. Net income for the Other line of
business increased primarily as a result of lower income taxes as a result of the reversal of the deferred tax valuation allowance, partially offset by lower net interest income. Changes in income taxes reflect an allocation of 35% to all other
lines of businesses in 2012 and 2011.
2011 compared with 2010
Regional Banking recorded net income in 2011, compared to a net loss in 2010 primarily due to lower provision for loan losses, partially offset by lower net interest income. The decrease in the provision
for loan losses reflected the results of our focused efforts to improve asset quality and stabilized portfolio credit metrics as well as an overall decrease in loan balances. The decrease in net interest income reflected the decline in loan balances
due to the resolution of problem assets.
Net losses for Specialty Consumer decreased primarily due to lower provision for loan losses and
higher noninterest income due to credit writedowns in 2010 associated with the bulk sale of nonperforming residential mortgage loans.
Net
losses for Specialty Commercial decreased primarily due to lower provision for loan losses and higher noninterest income, partially offset by lower net interest income. The decrease in the provision for loan losses reflected the results of our
focused efforts to improve asset quality and stabilized portfolio credit metrics as well as an overall decrease in loan balances. The increase in noninterest income reflected fewer writedowns associated with loans held for sale. The decrease in net
interest income reflected the decline in loan balances due to the resolution of problem assets.
Net income for Wealth Management increased
primarily as a result of a decrease in noninterest expense relating to decreases in salaries and employee benefits expense and lower data processing expenses.
The Other line of business recorded net income for 2011, compared to a net loss in 2010 primarily as a result of higher net interest income, lower noninterest expense, lower discontinued operations and
lower taxes. These improvements were partially offset by lower noninterest income. The increases in net interest income were 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 FDIC insurance costs, as well as a
continued focus on improving efficiencies. The 2010 loss on discontinued operations was directly related to the fair value adjustment related to the sale of F&M. The decrease in noninterest income was primarily the result of net gains on
investment securities sales during 2010. Changes in income taxes reflect an allocation of 35% to all other lines of businesses in 2011 and 2010.
46
FINANCIAL CONDITION
TOTAL ASSETS
Total assets at December 31, 2012 were $9.6 billion, an increase of
$123.8 million or 1.3% from December 31, 2011. The increase was due to the restoration of the deferred tax asset, and increases in investment securities, partially offset by a reduction in loan balances.
MONEY MARKET INVESTMENTS AND INVESTMENT SECURITIES
Objectives in managing the securities portfolio are driven by the dynamics of the balance sheet, including growth, maturity, management of interest rate risk and maximizing return. On October 6, 2008
the FRB announced that it would pay interest on required and excess reserve balances at rates close to the targeted federal funds rates. Citizens has chosen to utilize this program while adverse conditions exist in the credit markets. Securities are
classified as available for sale or held to maturity and as of December 31, 2012, 58.1% of the securities in Citizens investment securities portfolio were classified as available for sale. A summary of investment securities balances is
provided below.
Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Securities available for sale, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,557
|
|
Collaterized mortgage obligations
|
|
|
661,743
|
|
|
|
365,302
|
|
|
|
599,264
|
|
Mortgage-backed
|
|
|
933,143
|
|
|
|
823,852
|
|
|
|
1,259,131
|
|
State and municipal
|
|
|
102,436
|
|
|
|
123,308
|
|
|
|
183,584
|
|
Other
|
|
|
303
|
|
|
|
271
|
|
|
|
1,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
|
1,697,625
|
|
|
|
1,312,733
|
|
|
|
2,049,528
|
|
Securities held to maturity, at amortized cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaterized mortgage obligations
|
|
|
283,264
|
|
|
|
350,160
|
|
|
|
|
|
Mortgage-backed
|
|
|
844,086
|
|
|
|
988,930
|
|
|
|
363,427
|
|
State and municipal
|
|
|
98,918
|
|
|
|
104,964
|
|
|
|
111,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
|
1,226,268
|
|
|
|
1,444,054
|
|
|
|
474,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
2,923,893
|
|
|
$
|
2,756,787
|
|
|
$
|
2,524,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Citizens maintained the risk profile of its investment securities portfolio during 2012 by increasing holdings of GNMA or
agency-issued mortgage-backed securities and decreasing holdings of municipal and whole-loan mortgage-backed securities.
In June 2011 and
December 2010, Citizens transferred certain mortgage-backed securities from the available for sale to the held to maturity category in accordance with Topic 320 Investments-Debt and Equity Securities. Management determined that it had
both the ability to hold these investments to maturity and the positive intent to do so. The securities transferred in June 2011 had a total amortized cost of $924.6 million and a fair value of $943.1 million. The securities transferred in December
2010 had a total amortized cost of $179.2 million and a fair value of $181.8 million. The unrealized gain of $18.5 million in June 2011 and $2.6 million in December 2010 will be amortized over the remaining life of the securities as an adjustment of
the yield, offset against the amortization of the unrealized gain maintained in accumulated other comprehensive income.
The collateralized
mortgage obligations (CMO) sector includes securities where the underlying collateral consists of agency issued or whole loan mortgages. At December 31, 2012, the whole loan CMOs had a market value of $58.9 million with gross
unrealized losses of $0.6 million. Citizens performs a thorough
47
credit review on a quarterly basis on the underlying mortgage collateral as well as the supporting credit enhancement and structure. The results of the December 31, 2012 credit review
demonstrated continued strength and no material degradation to the holdings. Additionally, Citizens determined there is no other-than-temporary impairment on any security in the investment portfolio at December 31, 2012.
Maturities and average yields of investment securities are presented in the table below.
Maturity Distribution of Investment Securities Portfolio
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due Within
|
|
|
One to
|
|
|
Five to
|
|
|
After
|
|
|
|
|
|
|
One Year
|
|
|
Five Years
|
|
|
Ten Years
|
|
|
Ten Years
|
|
|
Total
|
|
December 31, 2012
|
|
|
|
|
Avg.
|
|
|
|
|
|
Avg.
|
|
|
|
|
|
Avg.
|
|
|
|
|
|
Avg.
|
|
|
|
|
|
Avg.
|
|
(in thousands)
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
Securities available for sale
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
(3)
|
|
$
|
80,155
|
|
|
|
2.63
|
%
|
|
$
|
580,049
|
|
|
|
2.07
|
%
|
|
$
|
1,539
|
|
|
|
4.33
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
661,743
|
|
|
|
2.14
|
%
|
Mortgage-backed
(3)
|
|
|
20,225
|
|
|
|
4.10
|
|
|
|
854,637
|
|
|
|
3.15
|
|
|
|
42,066
|
|
|
|
3.22
|
|
|
|
16,215
|
|
|
|
3.22
|
|
|
|
933,143
|
|
|
|
3.18
|
|
State and municipal
(4)
|
|
|
9,369
|
|
|
|
7.04
|
|
|
|
16,311
|
|
|
|
6.85
|
|
|
|
61,794
|
|
|
|
6.23
|
|
|
|
14,962
|
|
|
|
6.10
|
|
|
|
102,436
|
|
|
|
6.38
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
303
|
|
|
|
4.57
|
|
|
|
303
|
|
|
|
4.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
109,749
|
|
|
|
3.28
|
|
|
$
|
1,450,997
|
|
|
|
2.76
|
|
|
$
|
105,399
|
|
|
|
5.00
|
|
|
$
|
31,480
|
|
|
|
4.60
|
|
|
$
|
1,697,625
|
|
|
|
2.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
(3)
|
|
$
|
7,107
|
|
|
|
2.38
|
%
|
|
$
|
276,157
|
|
|
|
3.19
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
283,264
|
|
|
|
3.17
|
%
|
Mortgage-backed
(3)
|
|
|
|
|
|
|
|
|
|
|
593,149
|
|
|
|
3.16
|
|
|
|
218,028
|
|
|
|
3.26
|
|
|
|
32,909
|
|
|
|
2.82
|
|
|
|
844,086
|
|
|
|
3.17
|
|
State and municipal
(4)
|
|
|
4,489
|
|
|
|
4.25
|
|
|
|
21,202
|
|
|
|
4.04
|
|
|
|
55,962
|
|
|
|
4.11
|
|
|
|
17,265
|
|
|
|
4.10
|
|
|
|
98,918
|
|
|
|
4.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
11,596
|
|
|
|
3.11
|
|
|
$
|
890,508
|
|
|
|
3.19
|
|
|
$
|
273,990
|
|
|
|
3.43
|
|
|
$
|
50,174
|
|
|
|
3.26
|
|
|
$
|
1,226,268
|
|
|
|
3.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
This table excludes stock holdings of the Federal Home Loan Bank and Federal Reserve.
|
(2)
|
Yields are based
on amortized cost and are purchase yields.
|
(3)
|
Maturity
distributions for collateralized mortgage obligations and mortgage-backed securities are based on estimated average lives.
|
(4)
|
Average yields on
tax-exempt obligations have been computed on a tax equivalent basis, based on a 35% federal tax rate.
|
As of
December 31, 2012, the estimated aggregate fair value of the investment securities portfolio was $109.2 million above amortized cost, consisting of gross unrealized gains of $109.9 million and gross unrealized losses of $0.7 million. Except for
obligations of the U.S. Government and its agencies, no holdings of securities of any single issuer exceeded 10% of consolidated shareholders equity at December 31, 2012 or 2011. A summary of estimated fair values and unrealized gains and
losses for the major components of the investment securities portfolio is provided in Note 2 to the Consolidated Financial Statements. Citizens policies with respect to the classification of investments in debt and equity securities are
discussed in Note 1 to the Consolidated Financial Statements. During 2012, money market deposits decreased to $186.3 million from $313.6 million as funds were invested in higher yielding assets.
LOAN PORTFOLIO
Citizens primarily
extends credit within its local markets in Michigan, Wisconsin, and Ohio. Citizens generally lends to consumers and small to mid-sized businesses and, consistent with its emphasis on relationship banking, most of these credits represent core,
multi-relationship customers who also maintain deposit relationships and utilize other banking services such as treasury management. The loan portfolio is diversified by borrower and industry, with no concentration within a single industry segment
that exceeds 10% of total portfolio loans. Citizens has minimal loans to foreign debtors. Citizens seeks to limit its credit risk by reviewing the aggregate outstanding commitments and loans to particular borrowers and industries. Citizens obtains
and monitors collateral based on the nature of the credit and the risk assessment of the customer. See Underwriting for a discussion of Citizens underwriting policies and practices.
Loan balances by category for the past five years and an analysis of the maturity and interest rate sensitivity of commercial and industrial, and
commercial real estate loans at December 31, 2012 are presented below.
48
Portfolio Loans
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Commercial and industrial
|
|
$
|
1,656,292
|
|
|
$
|
1,543,529
|
|
|
$
|
1,474,227
|
|
|
$
|
1,921,755
|
|
|
$
|
2,540,925
|
|
Commercial real estate
|
|
|
1,242,348
|
|
|
|
1,544,361
|
|
|
|
2,120,735
|
|
|
|
2,811,539
|
|
|
|
2,947,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
2,898,640
|
|
|
|
3,087,890
|
|
|
|
3,594,962
|
|
|
|
4,733,294
|
|
|
|
5,487,947
|
|
Residential mortgage
|
|
|
546,513
|
|
|
|
637,245
|
|
|
|
756,245
|
|
|
|
1,025,248
|
|
|
|
1,248,622
|
|
Direct consumer
|
|
|
844,240
|
|
|
|
933,314
|
|
|
|
1,045,530
|
|
|
|
1,224,182
|
|
|
|
1,406,070
|
|
Indirect consumer
|
|
|
969,583
|
|
|
|
871,086
|
|
|
|
819,865
|
|
|
|
805,181
|
|
|
|
820,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,258,976
|
|
|
$
|
5,529,535
|
|
|
$
|
6,216,602
|
|
|
$
|
7,787,905
|
|
|
$
|
8,963,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Loan Maturities and Interest Rate Sensitivity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Within
One Year
|
|
|
One to
Five Years
|
|
|
After
Five Years
|
|
|
Total
|
|
Commercial and industrial
|
|
$
|
995,218
|
|
|
$
|
572,998
|
|
|
$
|
88,076
|
|
|
$
|
1,656,292
|
|
Commercial real estate
|
|
|
411,490
|
|
|
|
701,457
|
|
|
|
109,419
|
|
|
|
1,222,366
|
|
Real estate construction
|
|
|
5,686
|
|
|
|
6,951
|
|
|
|
7,345
|
|
|
|
19,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
$
|
1,412,394
|
|
|
$
|
1,281,406
|
|
|
$
|
204,840
|
|
|
$
|
2,898,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With floating interest rates
|
|
|
596,170
|
|
|
|
742,553
|
|
|
|
112,900
|
|
|
|
1,451,623
|
|
With predetermined interest rates
|
|
|
816,224
|
|
|
|
538,853
|
|
|
|
91,940
|
|
|
|
1,447,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,412,394
|
|
|
$
|
1,281,406
|
|
|
$
|
204,840
|
|
|
$
|
2,898,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes mortgage
loans held for sale
|
Increases in commercial and industrial, as well as indirect loans, in 2012 reflect our targeted lending
efforts during the year. Decreases in the other categories of portfolio loans during 2012 reflect the paydowns as a result of normal client activity, and continuing efforts to improve the risk profile of Citizens.
Commercial and Industrial.
The commercial and industrial loan portfolio includes a diverse group of loans to companies in a variety of
businesses across many industries. The purpose of these loans varies from supporting seasonal working capital needs to term financing of equipment purchases. While some short-term loans may be made on an unsecured basis, the large majority are
secured by the assets being financed with collateral margins consistent with Citizens loan underwriting guidelines. Commercial and industrial loans are evaluated for adequacy of repayment sources at the time of approval and are regularly
reviewed for any possible deterioration in the ability of the borrower to repay on agreed terms. Credit risk in commercial and industrial loans arises due to fluctuations in borrowers financial condition, deterioration in collateral values,
and changes in market conditions.
Commercial Real Estate.
The majority of this portfolio consists of commercial real estate
intermediate-term loans to developers and owners of commercial real estate for single and multiple family residential as well as multi-unit commercial properties. These loans are viewed first as cash-flow loans and secondarily as loans secured by
real estate.
Commercial real estate loans are subject to underwriting standards and processes specific to the risks embedded in each of the
geographic markets served by Citizens, primarily Michigan and Ohio. Management monitors commercial real estate loans based on sustainable cash flow, collateral, geography, and risk rating criteria. As a general rule, Citizens avoids financing
single-purpose projects unless other underwriting factors are present to help mitigate risk. Management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied investment real estate loans. At
December 31, 2012, approximately 43% of commercial real estate loans were secured by owner-occupied properties.
49
Citizens proactively manages the credit performance of loans secured by commercial income producing
properties. The value of loans in this portfolio have been negatively affected by tenant losses and reduced rental rates. While market conditions have stabilized, Citizens may suffer losses in these segments if market conditions deteriorate or do
not continue to improve and efforts to limit these losses through execution of prudent workout strategies are unsuccessful.
Residential
Mortgage Loans
.
The residential mortgage loan category is predominately comprised of single family owner-occupied residential properties primarily located in Michigan and Ohio. Residential mortgage loans are evaluated based on credit
scores, debt-to-income ratios and loan-to-collateral value ratios.
Residential Mortgage Loan Balances By Category
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
Fixed rate
|
|
$
|
170,289
|
|
|
$
|
203,318
|
|
Adjustable rate
|
|
|
375,232
|
|
|
|
430,802
|
|
Construction
(1)
|
|
|
992
|
|
|
|
3,125
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
546,513
|
|
|
$
|
637,245
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage Loan Origination Volume
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
Fixed rate
|
|
$
|
188,248
|
|
|
$
|
147,889
|
|
Adjustable rate
|
|
|
9,982
|
|
|
|
9,547
|
|
Construction
(1)
|
|
|
911
|
|
|
|
1,090
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
199,141
|
|
|
$
|
158,526
|
|
|
|
|
|
|
|
|
|
|
(1)
|
All construction
mortgages are retained by Citizens in the residential mortgage portfolio.
|
In June 2008, Citizens entered into a master
sales agreement to sell its residential mortgage originations to a third-party servicer at a fixed rate with no recourse. Under this agreement, Citizens sells more than 95% of new mortgage origination, resulting in minimal new loans being retained
in the residential mortgage portfolio. During 2012, a total of $3.4 million in originated residential mortgage loans were returned to our portfolios since these loans had characteristics (other than loan amount or new construction) that made them
non-compliant with the underwriting standards of government-sponsored entities (GSE) Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National Mortgage
Association (GNMA). These loans were underwritten with compensating factors such as mortgage insurance, maximum debt to income ratios, maximum loan-to-value ratios and minimum credit scores which Citizens believes offset the additional
risks.
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. Citizens repurchased $6.2 million and $2.2 million in 2012 and
2011, respectively, of loans pursuant to such provisions. Citizens recorded $6.4 million and $4.3 million in 2012 and 2011, respectively, in Other Expense on the Consolidated Statements of Operations related to repurchasing or indemnifying such
loans.
50
Citizens proactively manages the residential loan portfolio, and in 2011 we started to experience stability
with declining levels of delinquencies and nonaccrual loans. While delinquency rates continued to stabilize and drop slightly in 2012, non-accrual loans increased largely due to our adoption of new regulatory guidance relating to clients who filed
for bankruptcy and have not reaffirmed the obligation. While real estate values continue to slowly recover, the extended time frame associated with the sale of repossessed residential properties continues to stress this asset category.
Direct Consumer.
The direct consumer loan category includes home equity loans and direct installment loans to individuals used to purchase
boats, recreational vehicles, automobiles, and other personal items. Home equity loans consist of revolving lines of credit and fixed rate loans to consumers that are secured by residential real estate. Credit risks for these types of loans are
influenced by general economic conditions, the financial strength of individual borrowers, and the value of the loan collateral. Credit risk in the direct consumer loan portfolio arises from the borrowers potentially being unable to repay the loan
on agreed terms, or by a shortfall in the collateral value in relation to the outstanding loan balance in the event of default and subsequent liquidation of collateral.
Citizens originates consumer loans utilizing a credit scoring model to supplement the underwriting process. To monitor and manage consumer loan risk, policies and underwriting guidelines are developed and
modified as market conditions require. This monitoring activity, coupled with relatively small loan amounts spread across many individual borrowers, reduces risk. Additionally, trend and outlook reports are reviewed by management on a regular basis.
Indirect Consumer.
The indirect consumer loan category includes indirect installment loans used by customers to purchase boats
and recreational vehicles. Credit risks for these types of loans are influenced by general economic conditions, the characteristics of individual borrowers, and the value of loan collateral. Additionally, credit risk may include the dealers
ability to collect proper customer information, and adhere to appropriate lending guidelines, including but not limited to, evaluating collateral value, accurately capturing property identification numbers, and following related documentation
guidelines. Credit risk in the indirect consumer loan portfolio arises from a borrowers potential inability to repay their loan and by a potential shortfall in the collateral value in relation to the outstanding loan balance in the event of
default and subsequent liquidation of collateral. Credit risk is generally controlled by reviewing the creditworthiness of the borrowers as well as taking appropriate collateral and guaranty positions.
LOANS HELD FOR SALE
Loans that Citizens
has the intent and ability to sell are classified as held for sale and are carried at the lower of cost or fair value, net of estimated costs to sell. Commercial loans held for sale are comprised primarily of loans identified for sale that are
recorded at the lower of carrying amount or fair value based on appraisals of the underlying collateral, which are also subject to management adjustments based on current market conditions and recent sales activity. Fair value may also be measured
using the present value of expected future cash flows discounted at an appropriate interest rate. 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 similar loans. 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. Gains and losses on the sales of loans are determined using the specific identification method. Subsequent valuation adjustments to reflect current fair value, as well as gains and losses on disposal of these loans are
charged to noninterest income as incurred.
Held for sale loans at December 31, 2012 totaled $10.7 million, a $0.3 million or 3% increase
from December 31, 2011.
51
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.
The commercial Underwriting Guidelines outline productand 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
delineate 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%. 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 productand 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
FNMA, FHLMC and 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 December 31, 2012 and 2011, the outstanding balance of these loans and the
associated interest income was immaterial.
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 lien
52
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 December 31, 2012,
Citizens home equity portfolio totaled $682.7 million, and had an average loan size of $35,851 with an average refreshed FICO score of 741. As of December 31, 2012, other direct installment loans totaled $161.5 million and had an average
loan size of $19,497 with an average refreshed FICO score of 728.
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
December 31, 2012, indirect consumer loans had an average loan size of $24,276 with an average refreshed FICO score of 742.
CREDIT
RISK MANAGEMENT
Extending credit to businesses and consumers exposes Citizens to credit risk, which is the risk that the principal balance
of a loan and any related interest will not be collected under the original underwriting terms due to the inability or unwillingness of the borrower to repay the loan. Citizens lending policies and underwriting guidelines, discussed above, are
designed to maximize loan income within an acceptable level of risk. Credit risk is mitigated through a comprehensive system of internal controls, which includes adherence to conservative lending practices, underwriting guidelines, collateral
monitoring, and oversight of financial performance. Credit risk associated with fluctuations in economic conditions is mitigated through portfolio diversification that limits exposure to any single industry or customer. Lending policies and
guidelines are reviewed by credit administration and modified on an ongoing basis as conditions change and new credit products are offered. The commercial and industrial and commercial real estate credit administration policies include a two-tier
loan rating system that incorporates probability of default and loss given default to estimate a borrowers ability to repay and the strength of the collateral supporting their loan obligation. To strengthen and monitor loan structuring and
collateral position, collateral field audits are regularly performed on those credits that have a significant reliance on accounts receivable and inventory. Additionally, a reporting system supplements the review process by providing management with
frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potentially problematic loans. Citizens monitors its loans in an effort to proactively identify, manage, and mitigate any
potential credit quality issues and losses.
The quality of Citizens loan portfolio is impacted by numerous factors, including the
economic environment in the markets in which Citizens operates. Citizens carefully monitors its loans in an effort to identify and mitigate any potential credit quality issues and losses in a proactive manner. Citizens performs quarterly reviews of
the non-watchlist commercial credit portfolio. This process seeks to validate each reviewed credits risk rating, underwriting structure and exposure management under current and stressed economic scenarios while strengthening these
relationships and improving communication with these clients.
Citizens maintains an independent loan review department that reviews the
quality, trends, collectability and collateral margins within the loan portfolio. The loan review department validates the credit risk profile on a regular basis by sampling loans using criteria such as loan size, delinquency status, loan officer
coverage and other factors. This process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel. Results of these reviews are presented to management and to the Risk Committee of the Board of
Directors.
As part of the overall credit underwriting and review process, Citizens carefully monitors commercial and industrial and
commercial real estate credits that are current in terms of principal and interest payments but may deteriorate in quality as economic conditions change. Commercial relationship officers monitor their clients financial condition and initiate
changes in loan ratings based on their findings. Loans that have migrated within the loan rating system to a level that requires increased oversight, at managements discretion, are considered watchlist loans (generally consistent
with the regulatory definition of special mention, substandard, and doubtful loans) and include loans that are in accruing or nonperforming status.
53
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 appropriate credit and market officers to assess cash flows, collateral valuations, guarantor liquidity, and other pertinent trends. During these reviews, action plans are developed to
address emerging problem loans or to implement specific actions for alternatives to strengthen the credit and/or for removing the loans from the portfolio. Additionally, loans viewed as substandard or doubtful are transferred to Citizens
special loans or small business workout groups and are subjected to an even higher level of monitoring and workout activity.
The following
table illustrates the commercial loans on the watchlist that, while still accruing interest, may be at risk due to general economic conditions or changes in borrowers financial status.
Commercial Watchlist
Accruing loans only
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
(in thousands)
|
|
$
|
|
|
% of
Portfolio
|
|
|
$
|
|
|
% of
Portfolio
|
|
|
$
|
|
|
% of
Portfolio
|
|
Land hold
|
|
$
|
2,457
|
|
|
|
56.28
|
%
|
|
$
|
4,115
|
|
|
|
62.90
|
%
|
|
$
|
21,575
|
|
|
|
76.35
|
%
|
Land development
|
|
|
303
|
|
|
|
4.84
|
|
|
|
804
|
|
|
|
6.14
|
|
|
|
18,674
|
|
|
|
53.66
|
|
Construction
|
|
|
6,832
|
|
|
|
77.11
|
|
|
|
1,658
|
|
|
|
28.36
|
|
|
|
33,234
|
|
|
|
32.05
|
|
Income producing
|
|
|
196,685
|
|
|
|
28.51
|
|
|
|
259,971
|
|
|
|
28.45
|
|
|
|
444,450
|
|
|
|
37.96
|
|
Owner-occupied
|
|
|
94,940
|
|
|
|
17.81
|
|
|
|
112,756
|
|
|
|
18.63
|
|
|
|
196,915
|
|
|
|
25.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
301,217
|
|
|
|
24.25
|
|
|
|
379,304
|
|
|
|
24.56
|
|
|
|
714,848
|
|
|
|
33.71
|
|
Commercial and industrial
|
|
|
136,207
|
|
|
|
8.22
|
|
|
|
227,487
|
|
|
|
14.74
|
|
|
|
347,180
|
|
|
|
23.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
437,424
|
|
|
|
15.09
|
|
|
$
|
606,791
|
|
|
|
19.65
|
|
|
$
|
1,062,028
|
|
|
|
29.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decreases in watchlist credits were primarily due to a reduction in the level of new inflows, and continued emphasis
on improving the risk profile through resolutions.
The following table illustrates 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.
54
Delinquency Rates By Loan Portfolio
30 to 89 days past due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
(in thousands)
|
|
$
|
|
|
% of
Portfolio
|
|
|
$
|
|
|
% of
Portfolio
|
|
|
$
|
|
|
% of
Portfolio
|
|
Land hold
|
|
$
|
|
|
|
|
|
%
|
|
$
|
21
|
|
|
|
0.32
|
%
|
|
$
|
2,233
|
|
|
|
7.90
|
%
|
Land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216
|
|
|
|
0.62
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
464
|
|
|
|
0.45
|
|
Income producing
|
|
|
1,470
|
|
|
|
0.21
|
|
|
|
2,508
|
|
|
|
0.27
|
|
|
|
20,643
|
|
|
|
1.76
|
|
Owner-occupied
|
|
|
695
|
|
|
|
0.13
|
|
|
|
2,345
|
|
|
|
0.39
|
|
|
|
14,705
|
|
|
|
1.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
2,165
|
|
|
|
0.17
|
|
|
|
4,874
|
|
|
|
0.32
|
|
|
|
38,261
|
|
|
|
1.80
|
|
Commercial and industrial
|
|
|
1,949
|
|
|
|
0.12
|
|
|
|
2,454
|
|
|
|
0.16
|
|
|
|
9,058
|
|
|
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
4,114
|
|
|
|
0.14
|
|
|
|
7,328
|
|
|
|
0.24
|
|
|
|
47,319
|
|
|
|
1.32
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
7,641
|
|
|
|
1.40
|
|
|
|
9,544
|
|
|
|
1.50
|
|
|
|
15,389
|
|
|
|
2.03
|
|
Direct consumer
|
|
|
13,354
|
|
|
|
1.58
|
|
|
|
17,810
|
|
|
|
1.91
|
|
|
|
22,379
|
|
|
|
2.14
|
|
Indirect consumer
|
|
|
8,356
|
|
|
|
0.86
|
|
|
|
13,067
|
|
|
|
1.50
|
|
|
|
13,287
|
|
|
|
1.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
29,351
|
|
|
|
1.24
|
|
|
|
40,421
|
|
|
|
1.66
|
|
|
|
51,055
|
|
|
|
1.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,465
|
|
|
|
0.64
|
|
|
$
|
47,749
|
|
|
|
0.86
|
|
|
$
|
98,374
|
|
|
|
1.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decreases in total delinquencies were primarily the result of continued emphasis on proactively managing and
resolving delinquent commercial and consumer loans along with a more stable economic environment.
NONPERFORMING ASSETS
Loans are generally placed on nonaccrual status when there is substantial doubt regarding collection of principal or interest, in full, based on
Citizens credit policies and practices or when principal or interest is past due in excess of 90 days. When a loan is placed on nonaccrual status, interest that is accrued but not collected is reversed and charged against income. Nonperforming
assets are comprised of nonaccrual loans, loans past due over 90 days and still accruing interest, nonperforming loans held for sale, and other repossessed assets acquired. Although these assets have more than a normal risk of loss, they may not
necessarily result in future losses. A five-year history of nonperforming assets is presented below. The nonperforming commercial loans in this table are also reviewed as part of the watchlist process.
55
Nonperforming Assets and Past Due Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Nonperforming Assets
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 30 days past due
|
|
$
|
20,141
|
|
|
$
|
19,225
|
|
|
$
|
46,419
|
|
|
$
|
89,235
|
|
|
$
|
35,157
|
|
From 30 to 89 days past due
|
|
|
3,232
|
|
|
|
9,428
|
|
|
|
27,450
|
|
|
|
63,261
|
|
|
|
25,209
|
|
90 or more days past due
|
|
|
35,571
|
|
|
|
58,005
|
|
|
|
138,439
|
|
|
|
316,361
|
|
|
|
242,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
58,944
|
|
|
|
86,658
|
|
|
|
212,308
|
|
|
|
468,857
|
|
|
|
303,296
|
|
Loans 90 days or more past due and still accruing
|
|
|
68
|
|
|
|
770
|
|
|
|
1,573
|
|
|
|
3,039
|
|
|
|
1,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming portfolio loans
|
|
|
59,012
|
|
|
|
87,428
|
|
|
|
213,881
|
|
|
|
471,896
|
|
|
|
304,782
|
|
Nonperforming loans held for sale
|
|
|
3,190
|
|
|
|
2,372
|
|
|
|
24,073
|
|
|
|
65,189
|
|
|
|
74,938
|
|
Other repossessed assets acquired
|
|
|
5,811
|
|
|
|
12,422
|
|
|
|
42,216
|
|
|
|
54,394
|
|
|
|
57,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
68,013
|
|
|
$
|
102,222
|
|
|
$
|
280,170
|
|
|
$
|
591,479
|
|
|
$
|
437,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans as a percent of portfolio loans
|
|
|
1.12
|
%
|
|
|
1.58
|
%
|
|
|
3.44
|
%
|
|
|
6.06
|
%
|
|
|
3.40
|
%
|
Nonperforming assets as a percent of portfolio loans plus ORAA
(2)
|
|
|
1.29
|
|
|
|
1.84
|
|
|
|
4.45
|
|
|
|
7.47
|
|
|
|
4.80
|
|
Nonperforming assets as a percent of total assets
(3)
|
|
|
0.71
|
|
|
|
1.08
|
|
|
|
2.81
|
|
|
|
5.10
|
|
|
|
3.44
|
|
Restructured loans and still accruing
|
|
$
|
21,033
|
|
|
$
|
32,347
|
|
|
$
|
6,392
|
|
|
$
|
2,629
|
|
|
$
|
256
|
|
|
|
|
|
|
|
Nonperforming Portfolio Loans by Type
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
6,220
|
|
|
$
|
17,712
|
|
|
$
|
59,316
|
|
|
$
|
86,284
|
|
|
$
|
66,019
|
|
Commercial real estate
|
|
|
20,479
|
|
|
|
45,332
|
|
|
|
118,639
|
|
|
|
236,551
|
|
|
|
162,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
26,699
|
|
|
|
63,044
|
|
|
|
177,955
|
|
|
|
322,835
|
|
|
|
228,144
|
|
Residential mortgage
|
|
|
17,500
|
|
|
|
11,312
|
|
|
|
22,076
|
|
|
|
125,082
|
|
|
|
59,238
|
|
Direct consumer
|
|
|
12,730
|
|
|
|
12,119
|
|
|
|
12,571
|
|
|
|
21,349
|
|
|
|
14,785
|
|
Indirect consumer
|
|
|
2,083
|
|
|
|
953
|
|
|
|
1,279
|
|
|
|
2,630
|
|
|
|
2,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming portfolio loans
|
|
$
|
59,012
|
|
|
$
|
87,428
|
|
|
$
|
213,881
|
|
|
$
|
471,896
|
|
|
$
|
304,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Refer to Note 4
for a summary of interest income foregone on nonaccrual and restructured loans, as of December 31, 2012.
|
(2)
|
Other real estate
assets acquired (ORAA) includes nonaccrual loans held for sale.
|
(3)
|
Total assets
exclude assets from discontinued operations.
|
Nonperforming assets decreased in 2012 from the previous year end due to
reductions of new inflows to commercial nonperforming assets as well as continued efforts to reduce overall problem loans. Additionally, Citizens has selectively reduced the level of nonperforming loans held for sale and other repossessed assets
through sales.
Some of the nonperforming loans included in the nonperforming asset table above are considered to be impaired. A loan is
impaired when, based on current information and events, Citizens determines it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In most instances, impairment is measured
based on the fair value of the underlying collateral. Impairment may also be measured based on the present value of expected future cash flows discounted at the loans effective interest rate. Citizens measures impairment on all nonaccrual
commercial and industrial and commercial real estate loans for which it has established specific reserves. This policy does not apply to large groups of smaller balance homogeneous loans, such as smaller balance commercial loans, direct and indirect
consumer loans and residential mortgage loans, which are collectively evaluated for impairment, except for those loans restructured under a troubled debt restructuring. Citizens maintains a valuation reserve for impaired loans as a part of the
specific allocated allowance component of the allowance for loan losses. Cash collected on impaired nonaccrual loans is generally applied to outstanding principal.
Citizens recognizes that elevated levels of unemployment and depressed real estate values may result 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
56
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 nonperforming 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 impairment. As a result of 2012 guidance from the Office of the Comptroller of the
Currency, approximately $4.0 million of residential mortgage and consumer loans were identified as TDRs because the borrowers obligation to Citizens has been discharged in bankruptcy and the borrower has not reaffirmed the debt. These loans
were reclassified as TDRs as of December 31, 2012 and consisted of $2.9 million residential mortgage loans and $1.1 million of consumer loans.
The recorded investment balance of TDRs approximated $29.1 million at December 31, 2012. TDRs of $21.0 million were on accrual status and $8.1 million of TDRs were on nonaccrual status at
December 31, 2012. Of this total, $27.1 million were consumer and residential TDRs that carried a total specific reserve of $4.0 million. Of these TDRs, 37.7% involved only a reduction in interest rate, 36.8% involved both reduced interest rate
and term extensions, 12.1% involved only term extensions and 13.4% were related to bankruptcies. See Note 4 to the Consolidated Financial Statements in this report for information on impaired loans.
ALLOWANCE FOR LOAN LOSSES
A summary of
loan loss experience for the past five years appears below.
57
Summary of Loan Loss Experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Allowance for loan losses - January 1
|
|
$
|
172,726
|
|
|
$
|
296,031
|
|
|
$
|
338,940
|
|
|
$
|
252,938
|
|
|
$
|
161,635
|
|
Provision for loan losses
|
|
|
23,204
|
|
|
|
138,808
|
|
|
|
392,882
|
|
|
|
323,820
|
|
|
|
280,961
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
11,400
|
|
|
|
36,211
|
|
|
|
54,015
|
|
|
|
59,311
|
|
|
|
23,671
|
|
Small business
|
|
|
6,132
|
|
|
|
9,462
|
|
|
|
7,375
|
|
|
|
4,525
|
|
|
|
3,065
|
|
Commercial real estate
|
|
|
25,641
|
|
|
|
162,533
|
|
|
|
233,056
|
|
|
|
123,247
|
|
|
|
112,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
43,173
|
|
|
|
208,206
|
|
|
|
294,446
|
|
|
|
187,083
|
|
|
|
139,214
|
|
Residential mortgage
|
|
|
17,055
|
|
|
|
27,796
|
|
|
|
110,928
|
|
|
|
18,964
|
|
|
|
24,438
|
|
Direct consumer
|
|
|
31,559
|
|
|
|
26,932
|
|
|
|
31,392
|
|
|
|
24,388
|
|
|
|
16,657
|
|
Indirect consumer
|
|
|
13,415
|
|
|
|
11,771
|
|
|
|
14,295
|
|
|
|
21,234
|
|
|
|
16,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
105,202
|
|
|
|
274,705
|
|
|
|
451,061
|
|
|
|
251,669
|
|
|
|
197,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
2,099
|
|
|
|
3,457
|
|
|
|
3,860
|
|
|
|
5,783
|
|
|
|
2,732
|
|
Small business
|
|
|
1,048
|
|
|
|
771
|
|
|
|
483
|
|
|
|
590
|
|
|
|
175
|
|
Commercial real estate
|
|
|
6,460
|
|
|
|
2,511
|
|
|
|
5,540
|
|
|
|
3,580
|
|
|
|
715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
9,607
|
|
|
|
6,739
|
|
|
|
9,883
|
|
|
|
9,953
|
|
|
|
3,622
|
|
Residential mortgage
|
|
|
1,934
|
|
|
|
433
|
|
|
|
720
|
|
|
|
33
|
|
|
|
29
|
|
Direct consumer
|
|
|
4,555
|
|
|
|
3,189
|
|
|
|
1,877
|
|
|
|
1,537
|
|
|
|
1,667
|
|
Indirect consumer
|
|
|
3,615
|
|
|
|
2,231
|
|
|
|
2,790
|
|
|
|
2,328
|
|
|
|
2,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
19,711
|
|
|
|
12,592
|
|
|
|
15,270
|
|
|
|
13,851
|
|
|
|
7,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
85,491
|
|
|
|
262,113
|
|
|
|
435,791
|
|
|
|
237,818
|
|
|
|
189,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses - December 31
|
|
$
|
110,439
|
|
|
$
|
172,726
|
|
|
$
|
296,031
|
|
|
$
|
338,940
|
|
|
$
|
252,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio loans at year-end
(1)
|
|
$
|
5,258,976
|
|
|
$
|
5,529,535
|
|
|
$
|
6,216,602
|
|
|
$
|
7,787,905
|
|
|
$
|
8,963,175
|
|
Average portfolio loans
(1)
|
|
|
5,461,074
|
|
|
|
5,752,516
|
|
|
|
7,175,649
|
|
|
|
8,349,387
|
|
|
|
9,274,707
|
|
Allowance for loan losses as a percent nonperforming loans
|
|
|
187.15
|
%
|
|
|
197.56
|
%
|
|
|
138.41
|
%
|
|
|
71.83
|
%
|
|
|
82.99
|
%
|
Allowance for loan losses as a percent of portfolio loans
|
|
|
2.10
|
|
|
|
3.12
|
|
|
|
4.76
|
|
|
|
4.35
|
|
|
|
2.82
|
|
Net loans charged off as a percent of average portfolio loans
|
|
|
1.57
|
|
|
|
4.56
|
|
|
|
6.07
|
|
|
|
2.85
|
|
|
|
2.04
|
|
(1)
|
Balances exclude
mortgage loans held for sale.
|
Loan losses are charged against, and recoveries are credited to, the allowance for loan
losses. The significant decrease in net charge-offs for 2012 compared with 2011 reflects the continued stability and steady improvement in credit metrics and economic trends.
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, management considers and evaluates such factors as changes in the size and character of 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 groups of borrowers, existing economic conditions, underlying collateral, and other qualitative and quantitative factors which could affect probable loan losses. The evaluation process
is inherently subjective, as it requires estimates that may be susceptible to significant change and have the potential to affect net income materially. 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 migration methodology based risk allocated allowance for the remainder of the portfolio and a general valuation allowance 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. During 2012 an independent validation of the process and methodology utilized to
establish the allowance for loan losses was completed with no material findings or recommendations noted. Further discussion regarding the process for establishing the allowance for loan losses can be found in Critical Accounting
Policies and Note 1 to the Consolidated Financial Statements.
58
The allowance for loan losses is comprised of three parts: specific allocated, risk allocated, and general
valuation. Nonperforming loans are reviewed under the specific allocated reserve for impairment analysis. Loss expectations are established based on specific impairment by loan. 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 portfolio loans represented by each loan type.
Allocation of the Allowance for Loan Losses
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
(in thousands)
|
|
ALLL
|
|
|
Related
NPL
(2)
|
|
|
ALLL
|
|
|
Related
NPL
(2)
|
|
|
ALLL
|
|
|
Related
NPL
(2)
|
|
|
ALLL
|
|
|
Related
NPL
(2)
|
|
|
ALLL
|
|
|
Related
NPL
(2)
|
|
Specific allocated allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
124
|
|
|
$
|
577
|
|
|
$
|
42
|
|
|
$
|
8,908
|
|
|
$
|
9,471
|
|
|
$
|
43,505
|
|
|
$
|
16,280
|
|
|
$
|
65,208
|
|
|
$
|
16,827
|
|
|
$
|
49,037
|
|
Commercial real estate
|
|
|
1,007
|
|
|
|
14,152
|
|
|
|
4,110
|
|
|
|
34,071
|
|
|
|
23,519
|
|
|
|
98,408
|
|
|
|
29,656
|
|
|
|
208,310
|
|
|
|
23,069
|
|
|
|
141,578
|
|
Residential mortgage
|
|
|
3,369
|
|
|
|
5,771
|
|
|
|
2,837
|
|
|
|
6,610
|
|
|
|
1,110
|
|
|
|
5,196
|
|
|
|
6,790
|
|
|
|
26,414
|
|
|
|
|
|
|
|
|
|
Direct consumer
|
|
|
657
|
|
|
|
2,059
|
|
|
|
70
|
|
|
|
1,147
|
|
|
|
130
|
|
|
|
1,074
|
|
|
|
114
|
|
|
|
1,142
|
|
|
|
|
|
|
|
|
|
Indirect consumer
|
|
|
|
|
|
|
252
|
|
|
|
|
|
|
|
478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specific allocated allowance
|
|
|
5,157
|
|
|
|
22,811
|
|
|
|
7,059
|
|
|
|
51,214
|
|
|
|
34,230
|
|
|
|
148,183
|
|
|
|
52,840
|
|
|
|
301,074
|
|
|
|
39,896
|
|
|
|
190,615
|
|
Risk allocated allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
17,405
|
|
|
|
5,643
|
|
|
|
25,032
|
|
|
|
8,804
|
|
|
|
33,482
|
|
|
|
15,811
|
|
|
|
40,235
|
|
|
|
21,076
|
|
|
|
18,977
|
|
|
|
16,982
|
|
Commercial real estate (CRE)
|
|
|
26,690
|
|
|
|
6,327
|
|
|
|
58,589
|
|
|
|
11,261
|
|
|
|
99,104
|
|
|
|
20,231
|
|
|
|
116,386
|
|
|
|
28,242
|
|
|
|
91,753
|
|
|
|
20,547
|
|
Incremental risk allocated allowance - CRE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
44,095
|
|
|
|
11,970
|
|
|
|
83,621
|
|
|
|
20,065
|
|
|
|
162,086
|
|
|
|
36,042
|
|
|
|
156,621
|
|
|
|
49,318
|
|
|
|
110,730
|
|
|
|
37,529
|
|
Residential mortgage
|
|
|
23,110
|
|
|
|
11,729
|
|
|
|
33,623
|
|
|
|
4,702
|
|
|
|
46,513
|
|
|
|
16,880
|
|
|
|
50,631
|
|
|
|
98,668
|
|
|
|
25,163
|
|
|
|
59,238
|
|
Direct consumer
|
|
|
27,335
|
|
|
|
10,671
|
|
|
|
32,950
|
|
|
|
10,972
|
|
|
|
32,125
|
|
|
|
11,497
|
|
|
|
33,012
|
|
|
|
20,206
|
|
|
|
28,329
|
|
|
|
14,785
|
|
Indirect consumer
|
|
|
8,742
|
|
|
|
1,831
|
|
|
|
12,973
|
|
|
|
475
|
|
|
|
16,577
|
|
|
|
1,279
|
|
|
|
39,462
|
|
|
|
2,630
|
|
|
|
35,860
|
|
|
|
2,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk allocated allowance
|
|
|
103,282
|
|
|
|
36,201
|
|
|
|
163,167
|
|
|
|
36,214
|
|
|
|
257,301
|
|
|
|
65,698
|
|
|
|
279,726
|
|
|
|
170,822
|
|
|
|
200,082
|
|
|
|
114,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
108,439
|
|
|
|
59,012
|
|
|
|
170,226
|
|
|
|
87,428
|
|
|
|
291,531
|
|
|
|
213,881
|
|
|
|
332,566
|
|
|
|
471,896
|
|
|
|
239,978
|
|
|
|
304,782
|
|
General valuation allowances
|
|
|
2,000
|
|
|
|
|
|
|
|
2,500
|
|
|
|
|
|
|
|
4,500
|
|
|
|
|
|
|
|
6,374
|
|
|
|
|
|
|
|
12,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
110,439
|
|
|
$
|
59,012
|
|
|
$
|
172,726
|
|
|
$
|
87,428
|
|
|
$
|
296,031
|
|
|
$
|
213,881
|
|
|
$
|
338,940
|
|
|
$
|
471,896
|
|
|
$
|
252,938
|
|
|
$
|
304,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL as a percentage of NPL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific allocated allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
21.39
|
%
|
|
|
|
|
|
|
0.48
|
%
|
|
|
|
|
|
|
21.77
|
%
|
|
|
|
|
|
|
24.97
|
%
|
|
|
|
|
|
|
34.32
|
%
|
|
|
|
|
Commercial real estate
|
|
|
7.12
|
|
|
|
|
|
|
|
12.06
|
|
|
|
|
|
|
|
23.90
|
|
|
|
|
|
|
|
14.24
|
|
|
|
|
|
|
|
16.29
|
|
|
|
|
|
Residential mortgage
|
|
|
58.39
|
|
|
|
|
|
|
|
42.93
|
|
|
|
|
|
|
|
21.37
|
|
|
|
|
|
|
|
25.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct consumer
|
|
|
31.90
|
|
|
|
|
|
|
|
6.08
|
|
|
|
|
|
|
|
12.06
|
|
|
|
|
|
|
|
10.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specific allocated allowance
|
|
|
22.61
|
|
|
|
|
|
|
|
13.78
|
|
|
|
|
|
|
|
23.10
|
|
|
|
|
|
|
|
17.55
|
|
|
|
|
|
|
|
20.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk allocated allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
308.47
|
|
|
|
|
|
|
|
284.31
|
|
|
|
|
|
|
|
211.76
|
|
|
|
|
|
|
|
190.91
|
|
|
|
|
|
|
|
111.75
|
|
|
|
|
|
Commercial real estate (CRE)
|
|
|
421.85
|
|
|
|
|
|
|
|
520.33
|
|
|
|
|
|
|
|
489.86
|
|
|
|
|
|
|
|
412.10
|
|
|
|
|
|
|
|
446.56
|
|
|
|
|
|
Incremental risk allocated allowance - CRE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
368.40
|
|
|
|
|
|
|
|
416.76
|
|
|
|
|
|
|
|
449.71
|
|
|
|
|
|
|
|
317.58
|
|
|
|
|
|
|
|
295.05
|
|
|
|
|
|
Residential mortgage
|
|
|
197.03
|
|
|
|
|
|
|
|
N/M
|
|
|
|
|
|
|
|
275.55
|
|
|
|
|
|
|
|
51.31
|
|
|
|
|
|
|
|
42.48
|
|
|
|
|
|
Direct consumer
|
|
|
256.15
|
|
|
|
|
|
|
|
300.31
|
|
|
|
|
|
|
|
279.43
|
|
|
|
|
|
|
|
163.37
|
|
|
|
|
|
|
|
191.61
|
|
|
|
|
|
Indirect consumer
|
|
|
477.46
|
|
|
|
|
|
|
|
N/M
|
|
|
|
|
|
|
|
N/M
|
|
|
|
|
|
|
|
N/M
|
|
|
|
|
|
|
|
N/M
|
|
|
|
|
|
Total risk allocated allowance
|
|
|
285.30
|
|
|
|
|
|
|
|
450.55
|
|
|
|
|
|
|
|
391.65
|
|
|
|
|
|
|
|
163.75
|
|
|
|
|
|
|
|
175.25
|
|
|
|
|
|
Total
|
|
|
187.15
|
|
|
|
|
|
|
|
197.56
|
|
|
|
|
|
|
|
138.41
|
|
|
|
|
|
|
|
71.83
|
|
|
|
|
|
|
|
82.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL as a percentage of portfolio
loans
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk allocated allowance:
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1.05
|
|
|
|
|
|
|
|
1.63
|
|
|
|
|
|
|
|
2.34
|
|
|
|
|
|
|
|
2.17
|
|
|
|
|
|
|
|
0.76
|
|
|
|
|
|
Commercial real estate (CRE)
|
|
|
2.17
|
|
|
|
|
|
|
|
3.88
|
|
|
|
|
|
|
|
4.90
|
|
|
|
|
|
|
|
4.47
|
|
|
|
|
|
|
|
3.27
|
|
|
|
|
|
Incremental risk allocated allowance - CRE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
1.53
|
|
|
|
|
|
|
|
2.75
|
|
|
|
|
|
|
|
4.69
|
|
|
|
|
|
|
|
3.51
|
|
|
|
|
|
|
|
2.09
|
|
|
|
|
|
Residential mortgage
|
|
|
4.27
|
|
|
|
|
|
|
|
5.33
|
|
|
|
|
|
|
|
6.19
|
|
|
|
|
|
|
|
5.07
|
|
|
|
|
|
|
|
2.02
|
|
|
|
|
|
Direct consumer
|
|
|
3.25
|
|
|
|
|
|
|
|
3.53
|
|
|
|
|
|
|
|
3.08
|
|
|
|
|
|
|
|
2.70
|
|
|
|
|
|
|
|
2.01
|
|
|
|
|
|
Indirect consumer
|
|
|
0.90
|
|
|
|
|
|
|
|
1.49
|
|
|
|
|
|
|
|
2.02
|
|
|
|
|
|
|
|
4.90
|
|
|
|
|
|
|
|
4.37
|
|
|
|
|
|
Total risk allocated allowance
|
|
|
1.97
|
|
|
|
|
|
|
|
2.98
|
|
|
|
|
|
|
|
4.24
|
|
|
|
|
|
|
|
3.74
|
|
|
|
|
|
|
|
2.28
|
|
|
|
|
|
Total allowance
|
|
|
2.10
|
|
|
|
|
|
|
|
3.12
|
|
|
|
|
|
|
|
4.76
|
|
|
|
|
|
|
|
4.35
|
|
|
|
|
|
|
|
2.82
|
|
|
|
|
|
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 nonperforming loans (NPL) amounts in risk allocated allowances include loans 90+ days past due and still accruing but classified as
nonperforming. NPLs now exclude troubled debt restructurings (TDRs) that are on an accrual status and performing in accordance with their modified terms.
|
(3)
|
The portfolio balance of the loans with a specific allocated allowance is equal to the related NPL for said loans.
|
(4)
|
Portfolio loans only include loan balances evaluated for risk allocated allowance.
|
59
Total Allowance for Loan Losses
.
The decrease in the total allowance as of
December 31, 2012 compared to December 31, 2011 was primarily the result of the improved risk profile of all asset classes and improvement in both local and macro economic trends.
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
December 31, 2012. 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 change in the allowance
for loan losses.
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 TDRs. The allowance allocated to nonperforming commercial real estate loans is typically based on the underlying collaterals appraised value, updated at least
annually, less managements estimates of cost to sell. The allowance allocated to nonperforming commercial and industrial loans is typically based on collateral liquidation value estimates, frequently validated by third parties. Valuations are
obtained more frequently if changes in the collateral or market conditions warrant. Deterioration in individual asset values, underlying commercial loans, evidenced by refreshed appraisals and liquidation valuations, is reflected in the specific
allocated allowance for commercial nonperforming loans.
The fair value of nonperforming residential mortgage loans is based on the underlying
collaterals value obtained through appraisals, updated at least semi-annually, less managements estimates of cost to sell. The allowance allocated to restructured residential loans is typically based on the present value of the expected
future cash flows discounted at the loans effective interest rate.
The specific allocated allowance decreased both in amount and as a
percentage of nonperforming loans from 2011, primarily as a result of the decline in loan portfolio balances identified and evaluated for specific reserves.
Risk Allocated Allowance
.
The risk allocated allowance is comprised of several loan pool valuation allowances developed utilizing migration modeling techniques and incorporating
Probability of Default and Loss Given Default assumptions which are derived from Citizens historical loan portfolio experience. Additionally management evaluates qualitative risks such as changes in asset quality; the experience, ability and
effectiveness of Citizens lending management; the composition and concentrations of credit; and macro and local economic trends, as well as other factors to determine if adjustments to the quantitative results are appropriate.
The decrease in risk allocated allowance from 2011 was primarily related to the improved risk profile as evidenced in our improving credit metrics, as
well as a stabilizing economy. A decrease in the loan portfolio balances that are evaluated for this reserve also contributed to the reduction.
General Valuation Allowance
.
The general valuation allowance is established to provide for potential model imprecision and other
risks not entirely captured within the Risk Allocated portion of the allowance. Management considers factors such as current economic and credit metric trends along with actions or activities that may result in outcomes that differ from those
historically experienced, to develop an appropriate reserve level.
As discussed in Critical Accounting Policies, nonperforming
commercial and industrial and commercial real estate loans are generally charged off to the extent principal due exceeds the fair value of the collateral less estimated cost to sell 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 five payments past due. Nonperforming direct and indirect consumer loans (open and closed end) are generally charged off before the loan becomes 120 days past due.
60
GOODWILL
Goodwill at December 31, 2012 was $318.2 million, unchanged from December 31, 2011. Citizens elected to perform the qualitative assessment in 2012. No events (individually or in aggregate) have
occurred since the annual goodwill impairment analysis that indicates a potential impairment of goodwill. Citizens will continue to perform evaluations on an interim basis if events or circumstances indicate that impairment may exist. There can be
no assurance that such tests will not result in additional material impairment charges due to further developments in the banking industry or Citizens markets. For further discussion of the evaluation of goodwill, see Note 6 to the
Consolidated Financial Statements.
DEPOSITS
The table below provides a year-to-year comparison of average deposit balances over the last three years. Average, rather than period-end, balances can be more meaningful in analyzing deposit funding
sources because of inherent fluctuations that occur on a monthly basis within most deposit categories.
Average Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
(dollars in thousands)
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
Noninterest-bearing demand
|
|
$
|
1,747,544
|
|
|
|
|
%
|
|
$
|
1,503,430
|
|
|
|
|
%
|
|
$
|
1,306,881
|
|
|
|
|
%
|
Interest-bearing demand
|
|
|
1,026,098
|
|
|
|
0.14
|
|
|
|
953,187
|
|
|
|
0.21
|
|
|
|
1,008,871
|
|
|
|
0.27
|
|
Savings
|
|
|
2,639,803
|
|
|
|
0.22
|
|
|
|
2,636,422
|
|
|
|
0.35
|
|
|
|
2,561,596
|
|
|
|
0.62
|
|
Time
|
|
|
1,902,397
|
|
|
|
1.58
|
|
|
|
2,489,703
|
|
|
|
1.85
|
|
|
|
3,405,281
|
|
|
|
2.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,315,842
|
|
|
|
0.51
|
|
|
$
|
7,582,742
|
|
|
|
0.76
|
|
|
$
|
8,282,629
|
|
|
|
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average time deposits declined due to the intentional non-renewal of high cost rate sensitive retail and brokered
balances. Savings deposit balances remained relatively unchanged, as the shift in funding mix was offset by a reduction in brokered balances. The decrease in the average cost of the deposit portfolio resulted from the lower interest rate
environment, partially offset by competitive deposit pricing pressures.
As of December 31, 2012, certificates of deposit of $100,000 or
more accounted for approximately 7.1% of total deposits. The maturities of these deposits are summarized below.
Maturity of Time
Certificates of Deposit of
$100,000 or more at December 31, 2012
|
|
|
|
|
(in thousands)
|
|
|
|
Three months or less
|
|
$
|
101,662
|
|
After three but within six months
|
|
|
84,221
|
|
After six but within twelve months
|
|
|
137,503
|
|
After twelve months
|
|
|
187,034
|
|
|
|
|
|
|
Total
|
|
$
|
510,420
|
|
|
|
|
|
|
Citizens gathers deposits from its markets and has used brokered deposits from time to time when cost effective. Time
deposits greater than $100,000 decreased by $105.6 million at December 31, 2012 over the prior year-end primarily as a result of a planned reduction in brokered deposits and a shift in funding mix from customer time deposits to core deposits.
Citizens will continue to evaluate the use of alternative funding sources such as brokered deposits to best meet its funding objectives. Citizens continues to promote relationship driven core deposit growth and stability through focused marketing
efforts and competitive pricing strategies.
61
BORROWED FUNDS
Short-term borrowings consists of federal funds purchased, securities sold under agreements to repurchase, and other bank borrowings. The increase in short-term borrowings to $42.7 million at
December 31, 2012 from $40.1 million at December 31, 2011 was primarily the result of an increase in short-term repurchase agreements. See Note 8 to the Consolidated Financial Statements for additional information on short-term borrowings.
Long-term debt consists of FHLB debt, subordinated notes, other promissory notes and other borrowed funds. Long-term debt totaled $850.9
million at December 31, 2012, compared with $854.2 million at December 31, 2011. FHLB debt decreased $3.4 million to $655.1 million at December 31, 2012, due to maturing advances not being replaced. Citizens restructured $350.0
million and $245.0 million in FHLB advances during 2012 and 2011, respectively which locked in lower term funding rates. The average interest rate on the 2012 restructured advances was reduced to 2.55% from 3.50% and the average remaining term was
extended to 9.0 years from 3.2 years. The average interest rate on the 2011 restructured advances was reduced to 3.32% from 4.84% and the average remaining term was extended to 5.8 years from 3.3 years. As of December 31, 2012, other borrowed
funds remained essentially unchanged from December 31, 2011. See Note 9 to the Consolidated Financial Statements for additional information.
CAPITAL RESOURCES
Citizens continues to maintain a strong capital position which supports
current needs and provides a sound foundation to support lending in the communities in which we operate. Regulatory capital ratios for Citizens have remained above the well capitalized standards. Capital ratios are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Minimum
|
|
|
|
|
|
|
|
|
|
|
|
|
Adequately
|
|
|
Well
|
|
|
December 31,
|
|
|
|
Capitalized
|
|
|
Capitalized
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Risk based:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital
|
|
|
4.00
|
%
|
|
|
6.00
|
%
|
|
|
15.71
|
%
|
|
|
13.51
|
%
|
|
|
12.11
|
%
|
Total capital
|
|
|
8.00
|
|
|
|
10.00
|
|
|
|
16.97
|
|
|
|
14.84
|
|
|
|
13.51
|
|
Tier 1 Leverage
|
|
|
4.00
|
|
|
|
5.00
|
|
|
|
9.95
|
|
|
|
8.45
|
|
|
|
7.71
|
|
Shareholders equity at December 31, 2012 totaled $1.4 billion, an increase of $351.0 million or 34.4% from
December 31, 2011. Book value per common share at December 31, 2012 and 2011 was $26.62 and $18.24, respectively. Both increases are due almost entirely to the net income recorded in 2012 which was heavily impacted by the elimination of
the deferred tax valuation allowance.
During 2012, the Holding Company did not purchase any shares of common stock pursuant to its share
repurchase program and is not likely to do so for the foreseeable future. Information regarding the Citizens share repurchase program and current limitations on share repurchases is set forth under Item 5 Market for
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
CONTRACTUAL OBLIGATIONS AND
OFF-BALANCE SHEET ARRANGEMENTS
Contractual Obligations
In the ordinary course of business, Citizens has entered into certain contractual arrangements that require future cash payments and may impact liquidity. These obligations include deposits, issuance of
debt to fund operations, purchase obligations to acquire goods or services, and property leases. The table below summarizes contractual obligations and future required minimum payments as of December 31, 2012. Refer to Notes to the Consolidated
Financial Statements for further discussion of these contractual obligations.
62
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Payments Due by Period
|
|
December 31, 2012
(in thousands)
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
More than
5 years
|
|
Deposits without stated maturities
(1)(2)
|
|
$
|
5,466,465
|
|
|
$
|
5,466,465
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Deposits with stated maturities
(1)(2)
|
|
|
1,694,337
|
|
|
|
1,082,449
|
|
|
|
521,072
|
|
|
|
81,557
|
|
|
|
9,259
|
|
Fed funds purchased and securities sold under agreements to repurchase
(1)
|
|
|
42,747
|
|
|
|
42,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB borrowings
(1)( 2)
|
|
|
652,002
|
|
|
|
|
|
|
|
5,000
|
|
|
|
220,400
|
|
|
|
426,602
|
|
Other borrowed debt
(1)(2)
|
|
|
104,088
|
|
|
|
25
|
|
|
|
61,690
|
|
|
|
41,827
|
|
|
|
546
|
|
Subordinated debt
(1)(2)
|
|
|
91,717
|
|
|
|
17,266
|
|
|
|
|
|
|
|
|
|
|
|
74,451
|
|
Purchase obligations
|
|
|
106,092
|
|
|
|
45,721
|
|
|
|
47,371
|
|
|
|
13,000
|
|
|
|
|
|
Operating leases and non-cancelable contracts
|
|
|
22,761
|
|
|
|
5,752
|
|
|
|
7,709
|
|
|
|
4,386
|
|
|
|
4,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,180,209
|
|
|
$
|
6,660,425
|
|
|
$
|
642,842
|
|
|
$
|
361,170
|
|
|
$
|
515,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In the banking
industry, interest-bearing obligations are principally utilized to fund interest-bearing assets. As such, interest charges on related contractual obligations were excluded from reported amounts as the potential cash outflows would have corresponding
cash inflows from interestbearing assets.
|
(2)
|
This schedule
excludes all carrying value adjustments, such as purchase accounting fair value adjustments, hedge accounting fair value adjustments, and unamortized premiums and discounts, that will not affect future cash payments associated with the maturity of
this debt.
|
At December 31, 2012, Citizens liability for uncertain tax positions, including associated interest
and penalties and net of related federal tax benefits, was $0.2 million. This liability represents an estimate of income taxes and other state taxes which may ultimately not be sustained upon examination by the tax authorities. Since the
ultimate amount and timing of any future cash settlements cannot be predicted with reasonable certainty, this estimated liability has been excluded from the contractual obligations table.
Citizens has obligations not included in the above table under its retirement plans as described in Note 11 to the Consolidated Financial Statements. At December 31, 2012, the underfunded status of
the cash balance pension plan for employees, the retirement health plan and the supplemental pension plans is recognized in the Consolidated Balance Sheet as an accrued liability. Citizens anticipates contributing $1.2 million in 2013 to the defined
benefit pension plan as required under current funding regulations. Citizens anticipates making a contribution of $0.5 million to the nonqualified supplemental benefit plans during 2013. In addition, Citizens expects to pay $0.2 million in
contributions to the postretirement healthcare benefit plan during 2013.
Off-Balance Sheet Arrangements
In the normal course of business, in order to meet the financing needs of customers and to manage exposure to interest rate risk, Citizens enters into
various transactions, which, in accordance with U.S. generally accepted accounting principles, are not included in its Consolidated Balance Sheets. These transactions include commitments to extend credit, standby letters of credit, commercial
letters of credit, forward commitments to sell mortgage loans, and interest rate swaps. These transactions involve, to varying degrees, elements of credit risk, market risk and liquidity risk in excess of the amount recognized in the Consolidated
Balance Sheets, however, they do not represent unusual risks. Citizens minimizes its exposure to loss under these transactions by subjecting them to credit approval and monitoring procedures.
The following table presents the total notional amounts and expected maturity of off-balance sheet financial instruments outstanding at December 31, 2012 and the notional amounts outstanding at
December 31, 2011.
63
Off-Balance Sheet Financial Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Expiration Dates by Period
|
|
|
|
|
(in thousands)
|
|
December 31,
2012
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
More than
5 years
|
|
|
December 31,
2011
|
|
Financial instruments whose contract amounts represent credit risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan commitments to extend credit
|
|
$
|
961,419
|
|
|
$
|
507,041
|
|
|
$
|
112,548
|
|
|
$
|
158,453
|
|
|
$
|
183,377
|
|
|
$
|
932,435
|
|
Asset-based lending participations
|
|
$
|
104,518
|
|
|
$
|
2,547
|
|
|
$
|
16,851
|
|
|
$
|
85,120
|
|
|
$
|
|
|
|
$
|
151,194
|
|
Standby letters of credit
|
|
|
90,306
|
|
|
|
40,929
|
|
|
|
27,395
|
|
|
|
14,859
|
|
|
|
7,123
|
|
|
|
128,972
|
|
Financial instruments subject to interest rate risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive fixed and pay fixed swaps
|
|
|
185,000
|
|
|
|
|
|
|
|
|
|
|
|
135,000
|
|
|
|
50,000
|
|
|
|
385,000
|
|
Customer initiated swaps and corresponding offsets
|
|
|
537,600
|
|
|
|
135,663
|
|
|
|
148,275
|
|
|
|
170,125
|
|
|
|
83,537
|
|
|
|
527,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,878,843
|
|
|
$
|
686,180
|
|
|
$
|
305,069
|
|
|
$
|
563,557
|
|
|
$
|
324,037
|
|
|
$
|
2,124,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan commitments are legally binding agreements to lend cash to a customer as long as there is no breach of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee.
Standby letters of credit are written conditional commitments issued by Citizens to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with
the terms of the agreement with the third party, Citizens would be required to fund the commitment. The maximum potential amount of future payments Citizens could be required to make is represented by the contractual amount of the commitment. If the
commitment is funded, Citizens would be entitled to seek recovery from the customer. Standby letters of credit at December 31, 2012 decreased from December 31, 2011 primarily as a result of the current economic climate and reduced customer
demand. Commercial letters of credit are written conditional commitments issued by Citizens to guarantee the performance of a customer to a third party. These guarantees are issued specifically to facilitate commerce and typically result in the
commitment being drawn on when the underlying transaction is consummated between the customer and the third party.
The credit risk associated
with commitments to extend credit and letters of credit is essentially the same as that involved with direct lending. Therefore, these agreements are subject to loan review and approval procedures and credit policies. Based upon managements
credit evaluation of the counter-party, collateral may be required as security for the agreement, including real estate, accounts receivable, inventories, and investment securities. The maximum credit risk associated with these instruments is equal
to their contractual amounts, assuming that the counter-party defaults and the collateral proves to be worthless. The total contractual amounts of commitments to extend credit and letters of credit do not necessarily represent future cash
requirements, since many of these agreements may expire without being drawn upon. Citizens commitments to extend credit and letters of credit are described in further detail in Note 16 to the Consolidated Financial Statements.
Refer to Notes 1 and 17 to the Consolidated Financial Statements for further discussion of derivative instruments.
Citizens 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). Citizens is not the primary beneficiary, and consequently, the trusts are not consolidated in the consolidated financial statements. Each of the two active trusts issued trust preferred securities to investors
in 2006 and 2003, with respect to which there remain $48.7 million and $25.8 million in aggregate liquidation amounts outstanding, respectively. The trust preferred securities held by these entities qualify as Tier 1 capital and are classified as
long-term debt on the Consolidated Balance Sheets, with the associated interest expense recorded in long-term debt on the Consolidated Statements of Operations. The expected losses and residual returns of these entities are
absorbed by the trust preferred stock holders, and consequently Citizens is not exposed to loss related to these VIEs. Refer to Note 9 to the Consolidated Financial Statements for further discussion.
64
At December 31, 2012, the unpaid principal balance of mortgage loans serviced for others was $237.3
million. These loans are not recorded on the Consolidated Financial Statements. Capitalized servicing rights relating to the serviced loans were $0.8 million at December 31, 2012.
Assets held in a fiduciary or agency capacity are not included in the Consolidated Financial Statements because they are not assets of Citizens. The total assets managed or administered by Citizens at
December 31, 2012, in its fiduciary or agency capacity, were $2.1 billion.
LIQUIDITY RISK MANAGEMENT
Citizens monitors and manages its liquidity position so that funds will be available at a reasonable cost to meet financial commitments, to finance
business expansion and to take advantage of unforeseen opportunities. Liquidity management involves projecting funding requirements and maintaining sufficient capacity to meet those needs and accommodate fluctuations in asset and liability levels
due to changes in business operations or unanticipated events. Sources of liquidity include deposits and other customer-based funding, and wholesale market funding.
Citizens manages liquidity at two levels. The first level is at the Holding Company which owns the Bank. The second level is at the Bank. The management of liquidity at both levels is essential because
the Holding Company and the 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 could impact Citizens 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 ratings were downgraded throughout 2009 and 2010. In January of 2012, Fitch Ratings raised Citizens long-term issuer rating from CCC to B with a positive outlook. In February of 2012, Moodys affirmed
Citizens ratings and raised the long-term issuer rating outlook to stable. Following the September 13, 2012 announcement of the pending merger with FirstMerit, both Moodys and Fitch raised Citizens rating outlook to watch
positive. 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 status of the ratings are displayed in the following table. An explanation of these ratings may be obtained from the respective rating agency.
65
Credit Ratings
|
|
|
|
|
|
|
Moodys
|
|
Fitch Ratings
|
Citizens Republic Bancorp (Holding Company)
|
|
|
|
|
Long-term Issuer
|
|
B2 (WP)
|
|
B (WP)
|
|
|
9/13/2012
|
|
9/17/2012
|
Short-term/Commercial Paper
|
|
NP (WP)
|
|
B (WP)
|
|
|
9/13/2012
|
|
9/17/2012
|
Trust Preferred
|
|
Caa2 (WP)
|
|
C (WP)
|
|
|
9/13/2012
|
|
9/17/2012
|
Citizens Bank
|
|
|
|
|
Certificate of Deposit
|
|
Ba3 (WP)
|
|
B+ (WP)
|
|
|
9/13/2012
|
|
9/17/2012
|
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 subsidiary 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. During 2012, the Bank paid dividends
in the amount of $25.0 million to the Holding Company and did not pay any dividends in 2011 or 2010. 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 current cash available for use totaled $81.8 million as of December 31, 2012. 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.
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.
Citizens maintains a strong liquidity position, with substantial
onand off-balance sheet liquidity sources and a very stable funding base comprised of approximately 75% deposits, 9% long-term debt, 14% equity, and 2% short-term liabilities. Securities available for sale and money market investments can be
sold for cash to provide additional liquidity, if necessary.
Since the first quarter of 2010, Citizens has deferred regularly scheduled
quarterly interest payments on its outstanding junior subordinated debentures relating to its two trust preferred securities and suspended quarterly cash dividend payments on its fixed-rate cumulative perpetual preferred stock, TARP Preferred Stock,
issued to and owned by the U.S Treasury as part of the Treasurys Capital Purchase Program, in each case, as permitted by the underlying documentation. During the fourth quarter of 2012 Citizens began paying interest on the 2003 Debenture held
by its Statutory Trust 1 including deferred interest and interest accrued on the deferred interest and Statutory Trust 1 made the related dividend payments to its associated trust preferred holders. During the first quarter of 2013 Citizens will
begin paying interest on the 2006 Debenture held by its Citizens Funding Trust I including paying all previously deferred interest
66
and interest accrued on the deferred interest and Citizens Funding Trust 1 will pay the related dividend payments to its associated trust preferred holders. Citizens will resume paying dividends
on both series of trust preferred securities on the normal quarterly payment dates going forward. Dividends for Citizens TARP Preferred Stock, including deferred dividends are expected to be paid as part of the completion of a merger with FirstMerit
Corporation. The Holding Company is unable to pay common stock dividends or engage in common stock repurchases until the TARP Preferred Stock dividend payments and payments deferred under our trust preferred securities are no longer in arrears.
Effective April 17, 2012, the Federal Reserve Bank of Chicago and the Michigan Office of Financial and Insurance Regulation terminated
their written agreement with Citizens and its subsidiary, Citizens Bank, dated July 28, 2010.
Citizens long-term debt to equity
ratio was to 62.1% as of December 31, 2012 compared with 83.8% as of December 31, 2011. Changes in deposit obligations and short-term and long-term debt during the fourth quarter of 2012 are further discussed in the sections titled
Deposits and Borrowed Funds. Citizens 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 Citizens. 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,
Citizens 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 Citizens
balance sheet as of a point in time. This measurement is accomplished through stratification of Citizens 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 $906.3 million or 9.5% of total assets as of December 31, 2012 compared with $843.0 million or 8.9% of total assets at December 31, 2011. These results incorporate the impact of off-balance sheet derivatives
and reflect interest rates consistent with December 31, 2012 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.
67
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 the timing, magnitude, and frequency of balance sheet component and interest rate changes, and differences in client behavior, market conditions and
management strategies, among other factors.
Net interest income simulations were performed as of December 31, 2012 to evaluate the
impact of market rate changes on net interest income over the subsequent 12 months assuming expected changes in balance sheet composition over that time period. If market interest rates were to increase immediately by 100 or 200 basis points (a
parallel and immediate shift of the yield curve) net interest income would be expected to increase by 0.2% and 1.6%, respectively, from what it would be if rates were to remain at December 31, 2012 levels. Net interest income simulation
for 100 and 200 basis point parallel declines in market rates were not performed at December 31, 2012, 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 at December 31, 2011. 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. Citizens has agreements with
certain of its derivative counterparties containing provisions that require its debt to maintain an investment grade credit rating from each of the major credit rating agencies. Although Citizens was not in compliance at December 31, 2012, the
value required to be paid under these agreements at that date if the counterparties had exercised their rights to terminate was not material. Further discussion of derivative instruments is included in Note 17 to the Consolidated Financial
Statements.
CRITICAL ACCOUNTING POLICIES
Citizens Consolidated Financial Statements are prepared in accordance with GAAP and follow general practices within the industry in which it 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,
68
the financial statements could reflect different estimates, assumptions and judgments. Actual results could differ significantly from those estimates. Certain policies inherently have a greater
reliance on the use of estimates, assumptions, and judgments and as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates that are particularly susceptible to significant change
include the determination of the allowance for loan losses, goodwill, fair value measurements, pension and postretirement benefits, and income taxes. Citizens believes that these estimates and the related policies discussed below are important to
the portrayal of its financial condition and results of operations. Therefore, management considers them to be critical accounting policies and discusses them directly with the Audit Committee of the Board of Directors. Citizens significant
accounting policies are more fully described in Note 1 to the Consolidated Financial Statements.
Allowance for Loan Losses
The allowance for loan losses represents Citizens estimate of probable losses inherent in the loan portfolio, the largest asset category on the
consolidated balance sheet. Determining the amount of the allowance for loan losses is considered a critical accounting policy because it requires significant judgment and the evaluation of numerous factors including: loan migration and performance
trends, historical and current trends in past due and nonperforming loans, risk characteristics of the various classifications of loans, existing economic conditions, the fair value of underlying collateral, the size and diversity of individual
large credits, and other qualitative and quantitative factors which could affect probable credit losses. Because current economic conditions can change and future events are inherently difficult to predict, the anticipated amount of estimated loan
losses, and therefore the adequacy of the allowance, could change significantly.
Citizens allowance for loan loss methodology is based
on GAAP and SEC guidance. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in managements judgment, should be charged off. While management utilizes its best
judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the performance of the loan portfolio, the economy, changes in interest rates and the view of the
regulatory authorities toward loan classifications. Refer to Item 7Managements Discussion and Analysis of Financial Condition and Results of Operations under the caption Allowance for Loan Losses for further
details of the risk factors considered by management in estimating the necessary level of the allowance for loan losses.
Citizens
allowance for loan losses consists of three elements: (i) specific allocated allowances based on probable losses on specific commercial or commercial real estate loans, restructured residential mortgage or consumer loans; (ii) risk
allocated allowance which is comprised of several loan pool valuation allowances developed utilizing migration modeling techniques and incorporating Probability of Default (PD) and Loss Given Default (LGD) assumptions which
are derived from Citizens historical loan portfolio experience, and may also include additional qualitative adjustments for risks determined by the judgment of management; and (iii) the general valuation allowance is based on existing regional
and local economic trends, and other judgmental factors supported by qualitative documentation.
Specific allocated allowances are established
in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate it is probable that Citizens will be unable to collect all amounts due according to the contractual terms of the
loan. The specific allocated allowance is based on probable losses on specific commercial and industrial or commercial real estate loans as well as impairment on TDRs. The allowance allocated to nonperforming commercial real estate loans is
typically based on the underlying collaterals appraised value, updated at least annually, less managements estimates of cost to sell. The allowance allocated to nonperforming commercial and industrial loans is typically based on
collateral liquidation value estimates, frequently validated by third parties. Valuations are obtained more frequently if changes in the collateral or market conditions warrant. Deterioration in individual asset values, underlying commercial loans,
evidenced by refreshed appraisals and liquidation valuations, is reflected in the specific allocated allowance for commercial nonperforming loans. TDRs are evaluated for impairment under specific allocated reserve guidance.
69
Citizens risk allocated allowance, which is comprised of several loan pool valuation allowances,
employs migration modeling techniques to estimate incurred losses in each portfolio segment. The analysis utilizes PD and LGD assumptions which are applied to risk ratings assigned to commercial loans and credit scores assigned to consumer loans to
develop quantitative estimates of imbedded losses. Management also evaluates internal and external qualitative factors including: (i) the experience, ability and effectiveness of Citizens lending management and staff; (ii) the
effectiveness of loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan
structuring and pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of environmental risks on the portfolio (ix) the impact of rising interest rates on the portfolio and (x) the impact of loan
modification programs. Citizens evaluates the degree of risk that these components have on the quality of the loan portfolio on a quarterly basis and incorporates appropriate adjustments to quantitative estimates if necessary. Adjustments to
quantitative model generated projections may also include estimates of inherent but undetected losses within the portfolio due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a
borrowers financial condition, and the difficulty in identifying triggering events that correlate perfectly to subsequent default rates. The PD and LGD assumptions derived from the historical performance of the portfolio may not be
representative of actual losses inherent in the portfolio that have not yet been realized.
The general valuation allowance is based on
managements estimate of other risks not entirely captured within the Risk Allocated portion of the allowance, such as the inherent imprecision in loan loss projection models, and is established through the consideration and evaluation of
factors such as current economic and credit metric trends along with actions or activities that may result in outcomes that differ from those historically experienced.
Continuous credit monitoring processes and the analysis of loss components are the principal methods relied upon by management to ensure that changes in estimated credit loss levels are reflected in
Citizens allowance for loan losses on a timely basis. Citizens utilizes regulatory guidance and its own experience in this analysis. In addition, various regulatory agencies, as an integral part of their examination process, periodically
review the allowance for loan losses. Such agencies may require additions to the allowance based on their judgment on information available to them at the time of their examination.
Actual loss ratios experienced in the future may vary from those projected. In the event that management overestimates future cash flows or underestimates losses on loan pools, we may be required to
increase the allowance for loan losses through the provision for loan losses, which would have a negative impact on the results of operations in the period in which the increase occurred. Note 1 to the Consolidated Financial Statements describes the
allowance for loan losses accounting policy, and a discussion of the factors driving changes in the amount of the allowance for loan losses is included in Item 7Managements Discussion and Analysis of Financial Condition and Results
of Operations included under the caption Allowance for Loan Losses.
Goodwill
Goodwill arises from business acquisitions and is initially measured as the excess of the cost of the acquired business over the sum of the amounts
assigned to assets acquired less liabilities assumed. Citizens goodwill, which resides almost entirely in the Regional Banking reporting unit, is evaluated at least annually for impairment. Citizens performs this annual test on its major
reporting units (which are equivalent to Citizens lines of business) as of October 1 of each year. Goodwill impairment analyses are performed on a more frequent basis if events or circumstances indicate that it is more likely than not
that the fair values of the reporting units are below their respective carrying amounts. Such events could include a significant adverse change in legal factors or in the business climate, an adverse action by a regulator, an unanticipated change in
the competitive environment, an unanticipated loss of key employees, a decision to change the operations or dispose of a reporting unit, cash or operating losses, significant revisions to forecasts, or a long-term negative outlook for the industry.
70
With the issuance of ASU 2011-08, IntangiblesGoodwill and Other (Topic 350): Testing Goodwill
for Impairment the FASB introduced an optional qualitative assessment for testing goodwill for impairment. Citizens adopted this ASU in the first quarter of 2012. The qualitative screen permits companies to qualitatively assess whether it is
more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative screen suggests that the fair value may be less than its carrying amount, the company would have to perform the annual two-step test.
If a company concludes otherwise, it has completed its goodwill impairment test and does not need to perform the two-step test.
In Step 1 of
the test, Citizens estimates the fair value of the reporting units using discounted cash flow models derived from internal earnings forecasts. The primary assumptions used by Citizens include ten-year earnings forecasts, terminal values based on
estimated future growth rates, and discount rates based on capital asset pricing models. A Step 1 analysis is prepared for each reporting unit, including those without goodwill, in order to analyze the implied control premium, which measures the
difference between the combined estimated fair value of Citizens reporting units calculated in Step 1 and total market value. If the carrying amount of a reporting unit exceeds its estimated fair value, Step 2 is required for those reporting
units that have goodwill to measure the amount of impairment, if any.
In Step 2 of the test, if necessary, Citizens estimates the fair value
of a reporting units assets and liabilities in the same manner as if a purchase of the reporting unit was taking place using exit pricing, which includes estimating the fair value of other implied intangibles. Any excess of this hypothetical
purchase price over the fair value of the reporting units net assets (excluding goodwill) represents the implied fair value of the goodwill. If the implied fair value of goodwill calculated in Step 2 is less than the carrying amount of
goodwill, an impairment loss is charged to noninterest expense to reduce the carrying amount to the implied fair value. The write down cannot exceed the carrying amount and goodwill cannot be adjusted upward for any subsequent reversal of previously
recognized goodwill write downs.
The recorded balance of goodwill has not changed during 2012 and 2011. Citizens elected to perform the
qualitative assessment to determine whether it is more likely than not that the fair value of goodwill was below its carrying amount as of October 1, 2012. As a starting point, Citizens considered the results of the prior year quantitative
(Step 1) impairment test conducted as of October 1, 2011. The results indicated that the estimated fair value of the goodwill exceeded its carrying value by approximately 15%. Citizens then considered several factors including, but not limited
to, the anticipated purchase premium related to the pending merger with FirstMerit, macroeconomic conditions, industry and market considerations, and company financial performance of Citizens. Based on the positive evidence in the analysis, Citizens
concluded that it is more likely than not that our fair value of goodwill exceeds its carrying value. Citizens performed a review of events or circumstances that would require an additional analysis as of December 31, 2012. Citizens determined
that no events or circumstances existed which indicated the need for an additional impairment test.
Citizens management believes that
the estimates and assumptions used in its goodwill impairment analyses are reasonable. Further deterioration in the outlook for credit quality, changes in the value of the loan or deposit portfolios, or increases in the discount rates could have a
material impact on future goodwill impairment testing results. Due to the ongoing uncertainty regarding market conditions, which may negatively impact the performance of the Regional Banking line of business, Citizens will continue to monitor the
goodwill impairment indicators and perform additional interim tests, if necessary. Since this evaluation process requires Citizens to make estimates and assumptions with regard to the fair value of its reporting units, actual values may differ
significantly from these estimates. Such differences could result in future impairment of goodwill that would, in turn, negatively impact Citizens results of operations and the business segments where the goodwill is recorded. For more
information on goodwill, see Note 6 to the Consolidated Financial Statements.
Fair Value Measurements
Fair value is defined as the exit price in the principal market (or, if lacking a principal market, the most advantageous market) in which Citizens would
complete a transaction. Fair value is based on managements best estimate of the assumptions market participants would use when pricing an asset or liability and a fair value hierarchy that prioritizes the information used to develop those
assumptions. The
71
fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. Citizens bases fair values on the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. For assets and liabilities recorded at fair value, it is Citizens policy to maximize the use of observable inputs and
minimize the use of unobservable inputs when developing fair value measurements.
A number of valuation techniques are used to determine the
fair value of assets and liabilities in Citizens financial statements. These include quoted market prices for securities, interest rate swap valuations based upon the modeling of termination values adjusted for credit spreads with
counterparties and appraisals of real estate from independent licensed appraisers, among other valuation techniques. Fair value measurement for investment securities 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 investment portfolio are priced by independent providers. These providers utilize pricing models that vary by asset class and incorporate available trade, bid and other market
information and for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, the pricing applications apply available information as applicable through processes
such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. In addition, model processes to assess interest rate impact and develop prepayment scenarios are used. The impact of unobservable inputs and proprietary
models are not material to the determination of fair values of these securities. 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 completes a comparison of the fair value estimates quarterly by validating the data received to date provided by a separate third
party. In order to then evaluate reasonableness of the market data, Citizens also independently prices a sampling of securities using data from an independent source. Should Citizens find variances, the prices are then challenged and prices are
adjusted accordingly. To date, there have been no significant findings or adjustments made by Citizens. 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.
Fair value measurements for assets and liabilities where there exists limited or no
observable market data are based primarily upon estimates which require significant judgment, and are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the
results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there are inherent weaknesses in any calculation technique, and changes in the underlying
assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. The fair value when the market for an asset is not active is the price that would be received to sell
the asset in an orderly transaction and considers additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. Significant changes in the aggregate
fair value of assets and liabilities required to be measured at fair value or for impairment will be recognized in the statement of operations. If an impairment is determined, it could limit the ability of Citizens Bank to pay dividends or make
other payments to the Holding Company.
Pension and Postretirement Benefits
Pension liabilities are established and pension costs are charged to current operations based on actuarially determined present value calculations. The valuation of the pension obligation and net periodic
pension expense is considered critical as it requires management to make estimates regarding the amount and timing of expected future cash outflows including assumptions about employee mortality, assumed return on cash balances, assumed discount
rate used to determine the current benefit obligation, and the long-term rate of return expected on plan assets. The long-term rate of return expected on plan assets is finalized after considering long-term returns in the general market, long-term
returns experienced by the assets in the plan, and projected plan expenses. The assets are invested in certain investment funds administered by a third party. Citizens reviews its pension plan assumptions on
72
an annual basis with an actuarial consultant to determine if the assumptions are reasonable and adjusts the assumptions to reflect changes in expectations. If Citizens were to determine that more
conservative assumptions were necessary, costs would likely increase and have a negative impact on results of operations in the period in which the increase occurred.
The assumed future interest crediting rate on cash balance pension plan accounts was reduced from 4.50% for 2011 to 3.50% for 2012, which reflects the current rate environment, and will cause a slight
decrease in pension expense for future periods. The determination of the discount rate used for calculating pension benefit and postretirement benefit obligations was based on a cash flow matching method. A spot yield curve for A rated
finance bonds was converted to zero coupon equivalent bond rates. These zero coupon bond rates were matched to the actuarially determined benefit obligation annual cash flows. The resulting single discount rate was rounded to a 25 basis point
increment. Based on this methodology, the discount rate used for the pension obligation was reduced to 3.50% at the end of 2012 from 4.50% and 5.00% at the end of 2011 and 2010, respectively. The discount rate used for the postretirement healthcare
obligation as well as the supplemental pension benefit plans was reduced to 3.00% at the end of 2012 from 4.00% and 4.50% at the end of 2011 and 2010, respectively. Rates are set at the end of each year for use in determining the following
years expense.
Citizens has recognized the funded status (i.e. the difference between the fair value of plan assets and the projected
benefit obligations) of its pension plan in the consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income represents the net
unrecognized actuarial losses and unrecognized prior service costs that will be subsequently recognized as net periodic pension cost pursuant to Citizens historical accounting policy for amortizing such amounts. Further, actuarial gains and
losses that arise in subsequent periods and are not recognized as net periodic pension cost in the same periods will be recognized as a component of other comprehensive income. Those amounts will be subsequently recognized as a component of net
periodic pension cost. Note 11 to the Consolidated Financial Statements provides further discussion of the accounting for Citizens employee benefit plans and the estimates used in determining the actuarial present value of the benefit
obligations and the net periodic pension expense.
Income Taxes
Income tax liabilities or assets are established for the amount of taxes payable or refundable for the current year. Deferred tax liabilities and assets are also established for the future tax
consequences of events that have been recognized in Citizens financial statements or tax returns. A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and deductions that
can be carried forward (used) in future years. Citizens assesses whether a valuation allowance should be established against its deferred tax assets based on the consideration of all available evidence using a more likely than not
standard. In making such judgments, significant weight is given to evidence that can be objectively verified. For example, a cumulative loss in recent years is significant verifiable negative evidence, however, it can be overcome with significant
verifiable positive evidence, such as multiple recent consecutive quarters of profitability, improved standing with regulators and improved capital levels. As of December 31, 2012, Citizens had no valuation allowance against our deferred tax
assets.
The valuation of current and deferred tax liabilities and assets is considered critical as it requires management to make estimates
based on provisions of the enacted tax laws and other future events. The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and federal and
state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from managements current assessment, the impact of which could be significant to the
consolidated results of operations and reported earnings. Citizens believes its tax assets and liabilities are properly recorded in the consolidated financial statements. For more information regarding income tax accounting, see Notes 1 and 13 to
the Consolidated Financial Statements.
73
RECENT ACCOUNTING PRONOUNCEMENTS
Note 1 to the Consolidated Financial Statements discusses new accounting policies adopted by Citizens during 2012 and 2011 and the expected impact of accounting policies recently issued or proposed but
not yet required to be adopted. To the extent the adoption of new accounting standards materially affects Citizens financial condition, results of operations or liquidity, the impact is discussed elsewhere in Managements Discussion
and Analysis of Financial Condition and Results of Operations.
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
74
Consolidated Balance Sheets
Citizens Republic Bancorp, Inc.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands, except share amounts)
|
|
2012
|
|
|
2011
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
173,510
|
|
|
$
|
153,418
|
|
Money market investments
|
|
|
186,349
|
|
|
|
313,632
|
|
Investment Securities:
|
|
|
|
|
|
|
|
|
Securities available for sale, at fair value
|
|
|
1,697,625
|
|
|
|
1,312,733
|
|
Securities held to maturity, at amortized cost
|
|
|
|
|
|
|
|
|
(fair value of $1,282,244 and $1,487,550, respectively)
|
|
|
1,226,268
|
|
|
|
1,444,054
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
2,923,893
|
|
|
|
2,756,787
|
|
FHLB and Federal Reserve stock
|
|
|
126,763
|
|
|
|
117,943
|
|
Portfolio loans:
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1,656,292
|
|
|
|
1,543,529
|
|
Commercial real estate
|
|
|
1,242,348
|
|
|
|
1,544,361
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
2,898,640
|
|
|
|
3,087,890
|
|
Residential mortgage
|
|
|
546,513
|
|
|
|
637,245
|
|
Direct consumer
|
|
|
844,240
|
|
|
|
933,314
|
|
Indirect consumer
|
|
|
969,583
|
|
|
|
871,086
|
|
|
|
|
|
|
|
|
|
|
Total portfolio loans
|
|
|
5,258,976
|
|
|
|
5,529,535
|
|
Less: Allowance for loan losses
|
|
|
(110,439
|
)
|
|
|
(172,726
|
)
|
|
|
|
|
|
|
|
|
|
Net portfolio loans
|
|
|
5,148,537
|
|
|
|
5,356,809
|
|
Loans held for sale
|
|
|
10,719
|
|
|
|
10,402
|
|
Premises and equipment
|
|
|
90,291
|
|
|
|
97,970
|
|
Goodwill
|
|
|
318,150
|
|
|
|
318,150
|
|
Other intangible assets
|
|
|
5,308
|
|
|
|
7,428
|
|
Bank owned life insurance
|
|
|
223,235
|
|
|
|
220,280
|
|
Deferred tax assets
|
|
|
272,891
|
|
|
|
|
|
Other assets
|
|
|
107,037
|
|
|
|
110,030
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,586,683
|
|
|
$
|
9,462,849
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
$
|
1,754,248
|
|
|
$
|
1,614,311
|
|
Interest-bearing demand deposits
|
|
|
1,100,763
|
|
|
|
951,590
|
|
Savings deposits
|
|
|
2,594,378
|
|
|
|
2,627,665
|
|
|
|
|
|
|
|
|
|
|
Core deposits
|
|
|
5,449,389
|
|
|
|
5,193,566
|
|
Time deposits
|
|
|
1,711,396
|
|
|
|
2,201,375
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
7,160,785
|
|
|
|
7,394,941
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
42,747
|
|
|
|
40,098
|
|
Other liabilities
|
|
|
161,736
|
|
|
|
154,088
|
|
Long-term debt
|
|
|
850,910
|
|
|
|
854,185
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,216,178
|
|
|
|
8,443,312
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Preferred stock - no par value:
|
|
|
|
|
|
|
|
|
Authorized - 5,000,000 shares; Issued and outstanding - 300,000 at 12/31/12 and 12/31/11, redemption value of $300
million
|
|
|
292,473
|
|
|
|
285,114
|
|
Common stock - no par value:
|
|
|
|
|
|
|
|
|
Authorized - 105,000,000 shares at 12/31/12 and 12/31/11; Issued and outstanding - 40,171,238 at 12/31/12 and 40,049,198 at
12/31/11
|
|
|
1,437,877
|
|
|
|
1,434,803
|
|
Retained deficit
|
|
|
(346,632
|
)
|
|
|
(694,560
|
)
|
Accumulated other comprehensive loss
|
|
|
(13,213
|
)
|
|
|
(5,820
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
1,370,505
|
|
|
|
1,019,537
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
9,586,683
|
|
|
$
|
9,462,849
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
75
Consolidated Statements of Operations
Citizens Republic Bancorp, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in thousands, except per share amounts)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
293,782
|
|
|
$
|
312,746
|
|
|
$
|
390,587
|
|
Interest and dividends on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
63,912
|
|
|
|
79,281
|
|
|
|
72,545
|
|
Tax-exempt
|
|
|
8,711
|
|
|
|
10,800
|
|
|
|
16,035
|
|
Dividends on FHLB and Federal Reserve stock
|
|
|
4,897
|
|
|
|
4,152
|
|
|
|
3,776
|
|
Money market investments
|
|
|
626
|
|
|
|
840
|
|
|
|
1,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
371,928
|
|
|
|
407,819
|
|
|
|
484,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
37,459
|
|
|
|
57,327
|
|
|
|
98,526
|
|
Short-term borrowings
|
|
|
53
|
|
|
|
79
|
|
|
|
80
|
|
Long-term debt
|
|
|
33,644
|
|
|
|
37,303
|
|
|
|
56,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
71,156
|
|
|
|
94,709
|
|
|
|
155,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
300,772
|
|
|
|
313,110
|
|
|
|
329,064
|
|
Provision for loan losses
|
|
|
23,204
|
|
|
|
138,808
|
|
|
|
392,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision for loan losses
|
|
|
277,568
|
|
|
|
174,302
|
|
|
|
(63,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
37,308
|
|
|
|
39,268
|
|
|
|
40,336
|
|
Trust fees
|
|
|
14,601
|
|
|
|
15,103
|
|
|
|
15,603
|
|
Mortgage and other loan income
|
|
|
8,104
|
|
|
|
9,620
|
|
|
|
10,486
|
|
Brokerage and investment fees
|
|
|
6,055
|
|
|
|
5,072
|
|
|
|
4,579
|
|
Card-based and other nondeposit fees
|
|
|
17,507
|
|
|
|
17,167
|
|
|
|
15,916
|
|
Net (losses) gains on loans held for sale
|
|
|
(984
|
)
|
|
|
1,808
|
|
|
|
(20,617
|
)
|
Investment securities (losses) gains
|
|
|
|
|
|
|
(1,336
|
)
|
|
|
13,896
|
|
Other income
|
|
|
9,729
|
|
|
|
8,555
|
|
|
|
14,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
92,320
|
|
|
|
95,257
|
|
|
|
94,659
|
|
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
132,850
|
|
|
|
123,514
|
|
|
|
126,384
|
|
Occupancy
|
|
|
24,997
|
|
|
|
26,059
|
|
|
|
26,963
|
|
Professional services
|
|
|
13,772
|
|
|
|
9,331
|
|
|
|
10,550
|
|
Equipment
|
|
|
12,001
|
|
|
|
12,136
|
|
|
|
12,482
|
|
Data processing services
|
|
|
16,717
|
|
|
|
16,131
|
|
|
|
18,734
|
|
Advertising and public relations
|
|
|
5,904
|
|
|
|
5,848
|
|
|
|
6,530
|
|
Postage and delivery
|
|
|
4,456
|
|
|
|
4,543
|
|
|
|
4,571
|
|
Other loan expenses
|
|
|
13,224
|
|
|
|
16,007
|
|
|
|
20,311
|
|
(Gains) losses on other real estate (ORE)
|
|
|
(214
|
)
|
|
|
12,768
|
|
|
|
13,438
|
|
ORE expenses
|
|
|
1,259
|
|
|
|
4,322
|
|
|
|
4,970
|
|
Intangible asset amortization
|
|
|
2,120
|
|
|
|
3,027
|
|
|
|
3,923
|
|
Other expense
|
|
|
43,536
|
|
|
|
49,464
|
|
|
|
58,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
270,622
|
|
|
|
283,150
|
|
|
|
307,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations Before Income Taxes
|
|
|
99,266
|
|
|
|
(13,591
|
)
|
|
|
(276,246
|
)
|
Income tax (benefit) provision from continuing operations
|
|
|
(273,009
|
)
|
|
|
(20,258
|
)
|
|
|
12,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
372,275
|
|
|
|
6,667
|
|
|
|
(289,104
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations (net of income tax)
|
|
|
|
|
|
|
|
|
|
|
(3,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
372,275
|
|
|
|
6,667
|
|
|
|
(292,925
|
)
|
Dividend on redeemable preferred stock
|
|
|
(24,347
|
)
|
|
|
(22,985
|
)
|
|
|
(21,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Attributable to Common Shareholders
|
|
$
|
347,928
|
|
|
$
|
(16,318
|
)
|
|
$
|
(314,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Per Share from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
8.61
|
|
|
$
|
(0.41
|
)
|
|
$
|
(7.89
|
)
|
Diluted
|
|
|
8.61
|
|
|
|
(0.41
|
)
|
|
|
(7.89
|
)
|
Loss Per Share from Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(0.10
|
)
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
(0.10
|
)
|
Net Income (Loss) Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
8.61
|
|
|
$
|
(0.41
|
)
|
|
$
|
(7.99
|
)
|
Diluted
|
|
|
8.61
|
|
|
|
(0.41
|
)
|
|
|
(7.99
|
)
|
Average Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
39,475
|
|
|
|
39,422
|
|
|
|
39,392
|
|
Diluted
|
|
|
39,475
|
|
|
|
39,422
|
|
|
|
39,392
|
|
See notes to consolidated financial statements.
76
Consolidated Statements of Comprehensive Income
Citizens Republic Bancorp, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Net Income (Loss)
|
|
$
|
372,275
|
|
|
$
|
6,667
|
|
|
$
|
(292,925
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gains, net of tax of $2,059, $5,052, and ($1,715)
|
|
|
3,824
|
|
|
|
9,481
|
|
|
|
5,585
|
|
Unrealized gain on securities transferred from available for sale to held to maturity, net of tax of $0, $6,479, and
$912
|
|
|
|
|
|
|
12,032
|
|
|
|
1,693
|
|
Reclassification adjustment on securities, net of tax of $0, $468, and $0
|
|
|
|
|
|
|
868
|
|
|
|
(13,896
|
)
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrealized loss previously recognized in other comprehensive income, net of tax of ($2,524), ($1,365), and
($6)
|
|
|
(4,687
|
)
|
|
|
(2,535
|
)
|
|
|
(12
|
)
|
Defined benefit pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in prior service cost and actuarial loss, net of tax of ($842), ($364), and $0
|
|
|
(1,564
|
)
|
|
|
(676
|
)
|
|
|
(712
|
)
|
Unrealized loss on qualifying cash flow hedges, net of tax of ($2,674), ($2,603), and $0
|
|
|
(4,966
|
)
|
|
|
(4,834
|
)
|
|
|
(5,721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
(7,393
|
)
|
|
|
14,336
|
|
|
|
(13,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
364,882
|
|
|
$
|
21,003
|
|
|
$
|
(305,988
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
Consolidated Statements of Changes in Shareholders Equity
Citizens Republic Bancorp, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
Common Stock
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
|
|
|
|
|
(in thousands)
|
|
|
Shares
|
|
|
Amount
|
|
|
(Deficit)
|
|
|
Income (Loss)
|
|
|
Total
|
|
Balance at January 1, 2010
|
|
$
|
271,990
|
|
|
|
39,440
|
|
|
$
|
1,429,771
|
|
|
$
|
(363,632
|
)
|
|
$
|
(7,093
|
)
|
|
$
|
1,331,036
|
|
Comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(292,925
|
)
|
|
|
|
|
|
|
(292,925
|
)
|
Other comprehensive loss net of tax effect of $809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,063
|
)
|
|
|
(13,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(305,988
|
)
|
Accretion of preferred stock discount
|
|
|
6,310
|
|
|
|
|
|
|
|
|
|
|
|
(6,310
|
)
|
|
|
|
|
|
|
|
|
Accrued dividend on redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,375
|
)
|
|
|
|
|
|
|
(15,375
|
)
|
Proceeds from restricted stock activity
|
|
|
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
2,086
|
|
|
|
|
|
|
|
|
|
|
|
2,086
|
|
Shares purchased
|
|
|
|
|
|
|
(3
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
278,300
|
|
|
|
39,635
|
|
|
$
|
1,431,829
|
|
|
$
|
(678,242
|
)
|
|
$
|
(20,156
|
)
|
|
$
|
1,011,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,667
|
|
|
|
|
|
|
|
6,667
|
|
Other comprehensive income net of tax effect of ($7,667)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,336
|
|
|
|
14,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,003
|
|
Accretion of preferred stock discount
|
|
|
6,814
|
|
|
|
|
|
|
|
|
|
|
|
(6,814
|
)
|
|
|
|
|
|
|
|
|
Accrued dividend on redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,171
|
)
|
|
|
|
|
|
|
(16,171
|
)
|
Proceeds from restricted stock activity
|
|
|
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
3,008
|
|
|
|
|
|
|
|
|
|
|
|
3,008
|
|
Shares purchased
|
|
|
|
|
|
|
(6
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
$
|
285,114
|
|
|
|
40,049
|
|
|
$
|
1,434,803
|
|
|
$
|
(694,560
|
)
|
|
$
|
(5,820
|
)
|
|
$
|
1,019,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
372,275
|
|
|
|
|
|
|
|
372,275
|
|
Other comprehensive loss net of tax effect of $3,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,393
|
)
|
|
|
(7,393
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
364,882
|
|
Accretion of preferred stock discount
|
|
|
7,359
|
|
|
|
|
|
|
|
|
|
|
|
(7,359
|
)
|
|
|
|
|
|
|
|
|
Accrued dividend on redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,988
|
)
|
|
|
|
|
|
|
(16,988
|
)
|
Proceeds from restricted stock activity
|
|
|
|
|
|
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
3,510
|
|
|
|
|
|
|
|
|
|
|
|
3,510
|
|
Shares purchased
|
|
|
|
|
|
|
(27
|
)
|
|
|
(436
|
)
|
|
|
|
|
|
|
|
|
|
|
(436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
292,473
|
|
|
|
40,171
|
|
|
$
|
1,437,877
|
|
|
$
|
(346,632
|
)
|
|
$
|
(13,213
|
)
|
|
$
|
1,370,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
77
Consolidated Statements of Cash Flows
Citizens Republic Bancorp, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
372,275
|
|
|
$
|
6,667
|
|
|
$
|
(292,925
|
)
|
Less: Loss from discontinued operations, net of income tax
|
|
|
|
|
|
|
|
|
|
|
(3,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
372,275
|
|
|
|
6,667
|
|
|
|
(289,104
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
23,204
|
|
|
|
138,808
|
|
|
|
392,882
|
|
Net (decrease) increase in deferred tax asset valuation allowance
|
|
|
(311,484
|
)
|
|
|
18,570
|
|
|
|
52,597
|
|
Net increase (decrease) in current and deferred income taxes
|
|
|
29,203
|
|
|
|
(37,876
|
)
|
|
|
(24,357
|
)
|
Depreciation and amortization
|
|
|
9,825
|
|
|
|
11,418
|
|
|
|
12,215
|
|
Amortization of intangibles
|
|
|
2,120
|
|
|
|
3,027
|
|
|
|
3,923
|
|
Amortization and fair value adjustments of purchase accounting mark-to-market, net
|
|
|
(3,715
|
)
|
|
|
(4,759
|
)
|
|
|
(8,030
|
)
|
Fair value adjustment on loans held for sale and other real estate
|
|
|
2,396
|
|
|
|
8,790
|
|
|
|
14,939
|
|
Net amortization on investment securities
|
|
|
38,369
|
|
|
|
22,739
|
|
|
|
8,376
|
|
Investment securities losses (gains)
|
|
|
|
|
|
|
1,336
|
|
|
|
(13,896
|
)
|
Loans originated for sale
|
|
|
(198,302
|
)
|
|
|
(157,001
|
)
|
|
|
(193,313
|
)
|
Proceeds from loans held for sale
|
|
|
203,253
|
|
|
|
171,032
|
|
|
|
192,122
|
|
Net gains from loan sales
|
|
|
(5,549
|
)
|
|
|
(5,648
|
)
|
|
|
(4,318
|
)
|
Net (gains) losses on other real estate
|
|
|
(2,614
|
)
|
|
|
3,920
|
|
|
|
1,399
|
|
Recognition of stock-based compensation expense
|
|
|
3,510
|
|
|
|
3,008
|
|
|
|
2,086
|
|
Other
|
|
|
(19,348
|
)
|
|
|
(4,672
|
)
|
|
|
33,205
|
|
Discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
10,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
143,143
|
|
|
|
179,359
|
|
|
|
191,432
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in money market investments
|
|
|
127,283
|
|
|
|
95,447
|
|
|
|
277,206
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales
|
|
|
2,500
|
|
|
|
16,781
|
|
|
|
417,582
|
|
Proceeds from maturities and payments
|
|
|
414,461
|
|
|
|
513,896
|
|
|
|
873,768
|
|
Purchases
|
|
|
(820,642
|
)
|
|
|
(687,658
|
)
|
|
|
(1,469,007
|
)
|
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities and payments
|
|
|
287,295
|
|
|
|
112,866
|
|
|
|
4,847
|
|
Purchases
|
|
|
(91,746
|
)
|
|
|
(152,078
|
)
|
|
|
(183,802
|
)
|
Net decrease in loans and leases
|
|
|
180,797
|
|
|
|
426,283
|
|
|
|
1,125,985
|
|
Proceeds from sales of other real estate
|
|
|
12,156
|
|
|
|
35,751
|
|
|
|
53,542
|
|
Increase in properties and equipment
|
|
|
(2,147
|
)
|
|
|
(4,674
|
)
|
|
|
(6,381
|
)
|
Proceeds from sale of discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
35,369
|
|
Discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
312,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
109,957
|
|
|
|
356,614
|
|
|
|
1,441,511
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in deposits
|
|
|
(234,156
|
)
|
|
|
(331,893
|
)
|
|
|
(774,512
|
)
|
Net (increase) decrease in short-term borrowings
|
|
|
2,649
|
|
|
|
(2,221
|
)
|
|
|
2,519
|
|
Principal reductions in long-term debt
|
|
|
(1,065
|
)
|
|
|
(175,992
|
)
|
|
|
(476,134
|
)
|
Shares purchased
|
|
|
(436
|
)
|
|
|
(34
|
)
|
|
|
(28
|
)
|
Discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
(420,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities
|
|
|
(233,008
|
)
|
|
|
(510,140
|
)
|
|
|
(1,668,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and due from banks
|
|
|
20,092
|
|
|
|
25,833
|
|
|
|
(35,552
|
)
|
Cash and due from banks at beginning of period, continuing operations
|
|
|
153,418
|
|
|
|
127,585
|
|
|
|
156,093
|
|
Cash and due from banks at beginning of period, discontinued operations
|
|
|
|
|
|
|
|
|
|
|
7,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at beginning of period
|
|
|
153,418
|
|
|
|
127,585
|
|
|
|
163,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at end of period, continuing operations
|
|
|
173,510
|
|
|
|
153,418
|
|
|
|
127,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at end of period, discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at end of period
|
|
$
|
173,510
|
|
|
$
|
153,418
|
|
|
$
|
127,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
71,237
|
|
|
$
|
93,369
|
|
|
$
|
154,288
|
|
Income tax paid (refund), net
|
|
|
10,600
|
|
|
|
(969
|
)
|
|
|
(16,214
|
)
|
Supplemental Disclosures of noncash items
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities transferred to held to maturity from available for sale
|
|
|
270
|
|
|
|
943,092
|
|
|
|
181,768
|
|
Properties transferred to other real estate owned
|
|
|
|
|
|
|
1,347
|
|
|
|
|
|
Loans transferred to other real estate owned
|
|
|
6,235
|
|
|
|
14,843
|
|
|
|
38,056
|
|
Loans transferred to held for sale
|
|
|
24,048
|
|
|
|
90,593
|
|
|
|
112,070
|
|
Held for sale loans transferred to other real estate owned
|
|
|
65
|
|
|
|
1,780
|
|
|
|
17,063
|
|
Accretion of preferred stock discount
|
|
|
7,359
|
|
|
|
6,814
|
|
|
|
6,310
|
|
Accrued dividend on redeemable preferred stock
|
|
|
16,988
|
|
|
|
16,171
|
|
|
|
15,375
|
|
See notes to consolidated financial statements.
78
Citizens Republic Bancorp, Inc.
Notes To Consolidated Financial Statements
Unless the context indicates otherwise, all
references in this Form 10-K to Citizens or the Corporation, refer to Citizens Republic Bancorp, Inc. and its subsidiary, Citizens Bank. References to the Holding Company refer to Citizens Republic Bancorp, Inc.
alone. Citizens was incorporated in the State of Michigan in 1980, and is a diversified banking and financial services company that is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Citizens provides a
full range of banking and financial services to individuals and businesses through its subsidiary Citizens Bank. These services include deposit products, loan products, and other consumer-oriented financial services such as safe deposit and night
depository facilities, wealth management services, and Automated Teller Machines (ATMs). Among the services designed specifically to meet the needs of businesses are various types of specialized financing, treasury management services,
and transfer/collection facilities. Citizens is not dependent upon any single or limited number of customers, the loss of which would have a material adverse effect. No material portion of Citizens business is seasonal.
Note 1. Basis of Presentation and Accounting Policies
The accounting and reporting policies for Citizens conform to U.S. generally accepted accounting principles (GAAP). The
following describes Citizens policies:
Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of Citizens and its wholly owned subsidiary. All material intercompany
transactions have been eliminated in consolidation.
In preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are
particularly susceptible to significant change include the determination of the allowance for loan losses, loans held for sale, other real estate owned, goodwill and core deposit intangible assets, fair value measurements, pension and postretirement
benefits, derivative instruments and income taxes.
Citizens also determines whether it should consolidate other entities or account for them
on the equity method of accounting depending on whether it has a controlling financial interest in an entity of less than 100% of the voting interest of that entity to determine if it is a Variable Interest Entity (VIE). A VIE is a
corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. An entity that holds a variable interest in a VIE is required to consolidate the VIE if the entity is subject to a majority of the risk of loss from the VIEs activities, is entitled to receive a majority
of the entitys residual returns or both. VIE treatment is considered for entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the
obligation to absorb losses, the right to receive residual returns and the right to make financial and operating decisions.
Citizens has two
active wholly owned trusts formed for the purpose of issuing securities which qualify as regulatory capital and are considered VIEs. Citizens is not the primary beneficiary, and consequently, the trusts are not consolidated in the consolidated
financial statements. Each of the two active trusts has issued separate offerings of trust preferred securities to investors in 2006 and 2003. 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.
79
The expected losses and residual returns of these entities are absorbed by the trust preferred stock
holders, and consequently Citizens is not exposed to loss related to these VIEs.
On June 14, 2011, Citizens announced a 1-for-10 reverse
stock split of Citizens common stock effective after the close of trading on July 1, 2011. Citizens common stock began trading on a split adjusted basis on The NASDAQ Capital Market at the opening of trading on July 5, 2011. All share and
per share amounts herein reflect the 1-for-10 reverse stock split. Refer to Note 14 for additional disclosures.
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.
Securities Purchased
Under Agreements to Resell and Securities Sold Under Agreements to Repurchase
Securities purchased under agreements to resell and
securities sold under agreements to repurchase are accounted for as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. Generally, U.S. government and Federal
agency securities are pledged as collateral under these financing arrangements and cannot be sold or re-pledged by the secured party. The fair value of collateral either received from or provided to a third party is continually monitored and
additional collateral is obtained, or requested to be returned to Citizens as deemed appropriate.
In the first quarter of 2012, Citizens
adopted new guidance (amended by ASU 2011-03) intended to improve the accounting for repurchase agreements by removing from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the
financial assets. The adoption of this amendment did not have a material impact on Citizens financial condition, results of operations or liquidity.
Investment Securities
At the time of purchase, securities are classified as held to maturity or available for sale. Investment securities classified as held to maturity, which management has the positive intent and ability to
hold to maturity, are reported at amortized cost, and adjusted for amortization of premiums and accretion of discounts, using the effective yield method. The amortized cost of debt securities classified as held to maturity or available for sale is
adjusted for amortization of premiums and accretion of discounts, or in the case of mortgage-related securities, over the estimated life of the security. Such amortization and accretion from the related security is included in interest income.
Available for sale securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes, included in shareholders equity as a separate component of other comprehensive income. The cost of securities sold
is based on the specific identification method. An investment is considered impaired if its fair value is less than its amortized cost. When determining whether an impairment is other than temporary to debt securities, management asserts:
(a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Any security for which there has been an other-than-temporary impairment of
value is written down to its estimated fair value through a charge to earnings for the amount representing the credit loss on the security and a charge recognized in other comprehensive income related to all other factors. Realized securities gains
or losses and declines in value judged to be other-than-temporary representing credit losses are included in investment securities gains (losses) in the consolidated statements of operations.
80
Loans
Loans are reported at the principal amount outstanding, net of unearned income. Interest income is recognized on an accrual basis. Loan origination fees, certain direct and indirect costs, unamortized
premiums and unearned discounts are deferred and amortized into interest income as an adjustment to the yield over the term of the loan. Loan commitment fees are generally deferred and amortized into fee income on a straight-line basis over the
commitment period. Other credit-related fees, including letter and line of credit fees, are amortized into fee income on a straight-line basis over their contractual life.
Loans are placed on nonaccrual status when the collection of principal or interest is considered doubtful or payment of principal or interest is past due 90 days or more. When loans are placed on
nonaccrual status, all interest previously accrued but unpaid is reversed against current year interest income. Loans are normally restored to accrual status 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 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 is five payments past due. Nonperforming direct and indirect consumer loans (open and closed end) are generally charged off before the loan becomes 120 days past due.
Allowance for Loan Losses
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents managements best
estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses inherent in the loan portfolio. The level of the allowance
reflects managements continuing evaluation of specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio, as
well as trends in these items. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in managements judgment, should be charged off. While management utilizes its best
judgment and information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors beyond Citizens control, including the performance of its loan portfolio, the economy, changes in interest rates and the
view of the regulatory authorities toward loan classifications.
Citizens allowance for loan losses consists of three elements:
(i) specific allocated allowances based on probable losses on specific commercial or commercial real estate loans or restructured residential mortgage or consumer loans; (ii) risk allocated allowance which is comprised of several loan pool
valuation allowances based on Citizens historical quantitative loan loss experience for similar loans with similar risk characteristics, including additional qualitative risks determined by the judgment of management; and (iii) general
valuation allowances determined based on existing regional and local economic factors, including deterioration in commercial and residential real estate values, a macroeconomic adjustment factor used to calibrate for the current economic cycle the
bank is experiencing, and other judgmental factors supported by qualitative and quantitative documentation such as the inherent imprecision of the loan loss projection models.
Commercial and industrial and commercial real estate loans exceeding certain fixed dollar amounts are evaluated for impairment on a loan-by-loan basis whereby an allowance is established as a component of
the allowance for loan losses when it is probable all amounts due will not be collected pursuant to the contractual terms of the loan and the recorded investment in the loan exceeds its fair value. In most instances the fair value is measured based
on the fair value of the collateral. Fair value may also be measured using the present value of expected future cash flows discounted at an appropriate interest rate.
In 2011, Citizens adopted new guidance which requires disclosures and clarifies existing disclosure requirements about an entitys allowance for credit losses and credit quality of its financing
receivables. In the third quarter of 2011, Citizens adopted new guidance that clarifies which loan modifications
81
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. The adoption of the new guidance did not have a material impact on Citizens financial condition, results of operations or liquidity; however, the adoption did have a significant impact on
Citizens credit disclosures. Refer to Note 4 for additional disclosures.
Loans Held for Sale
Loans that Citizens has the intent and ability to sell are classified as held for sale and are carried at the lower of cost or fair value, net of
estimated costs to sell. Commercial loans held for sale are comprised primarily of loans identified for sale that are recorded at the lower of carrying amount or fair value based on appraisals of the underlying collateral, which are also subject to
management adjustments based on current market conditions and recent sales activity or the present value of expected future cash flows discounted at the loans effective interest rate. 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 similar loans. 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. Gains and losses on the sales of loans are determined using the specific identification method. Subsequent valuation adjustments to reflect
current fair value, as well as gains and losses on disposal of these loans are charged to noninterest income as incurred. Citizens sells substantially all of its residential mortgage originations to PHH Mortgage Corporation (PHH) at a
contractual price, generally within 14 days after closing.
Premises and Equipment
Premises and equipment, including leasehold improvements, are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed principally on a straight-line
basis and are charged to expense over the lesser of the estimated useful life of the assets or lease term. Useful lives range from three to twenty years for furniture, fixtures, and equipment and seven to forty years for buildings and improvements.
Maintenance and repairs are charged to expense as incurred. Gains and losses on dispositions are charged to income as incurred.
Long-lived
depreciable assets are evaluated periodically for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. Impairment exists when the expected undiscounted future cash flows of a long-lived asset are
less than its carrying value. In that event, Citizens recognizes a loss for the difference between the carrying amount and the estimated fair value of the asset based on a quoted market price, if applicable, or a discounted cash flow analysis.
Other Real Estate Owned
Other Real Estate Owned is comprised of commercial and residential real estate properties acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure. These properties are
carried at the lower of cost or fair value at the time of acquisition, net of estimated costs to sell, based upon current appraised value adjusted for managements best estimate of current market conditions. Losses arising from the initial
acquisition of such properties are charged against the allowance for loan losses at the time of transfer. Subsequent valuation adjustments to reflect the lower of cost or fair value, as well as gains and losses on disposal of these properties are
charged to noninterest expense as incurred.
Bank Owned Life Insurance
Bank Owned Life Insurance is recorded as an asset at the amount that could be realized under the insurance contracts as of the date of the consolidated balance sheets, commonly referred to as cash
surrender value. The change in cash surrender value during the period is an adjustment of premiums paid in determining the expense or income to be recognized under the contracts for the period. This change is recorded in noninterest income.
82
Goodwill and Core Deposit Intangible Assets
Goodwill represents the excess of the cost of an acquisition over the fair value of net identifiable tangible and intangible assets acquired. Other
intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in
combination with a related contract, asset, or liability. Goodwill is tested at least annually for impairment and Citizens performs its annual impairment test as of October 1 each year. Evaluations are also performed on a more frequent basis if
events or circumstances indicate that it is more likely than not that the fair values of the reporting units are below their respective carrying amounts. Such events could include a significant adverse change in legal factors or in the business
climate, an adverse action by a regulator, an unanticipated change in the competitive environment, an unanticipated loss of key employees, a decision to change the operations or dispose of a reporting unit, cash or operating losses, significant
revision to forecasts, or a long-term negative outlook for the industry.
In the first quarter of 2012, Citizens adopted new guidance (amended
by ASU 2011-08) that allows an optional qualitative assessment for testing goodwill. The qualitative screen permits Citizens to qualitatively assess whether it is more likely than not that the fair value of a reporting unit is less than its carrying
amount. If that is not the case, Citizens would have to perform the annual two-step test. If Citizens concludes otherwise, it has completed its goodwill impairment test and does not need to perform the two-step test. In 2012, Citizens utilized the
qualitative assessment for the annual goodwill impairment test.
Impairment of goodwill is evaluated by reporting unit, which is equivalent to
Citizens lines of business. In Step 1 of the analysis, Citizens estimates the fair value of the reporting units using discounted cash flow models derived from internal earnings forecasts. The primary assumptions used by Citizens include
ten-year earnings forecasts, terminal values based on estimated future growth rates, and discount rates based on capital asset pricing models. A Step 1 analysis is prepared for each reporting unit, including those without goodwill, in order to
analyze the implied control premium, which measures the difference between the combined fair value of Citizens reporting units calculated in Step 1 and Citizens total market value. If the carrying amount of a reporting unit exceeds its
estimated fair value, the second step (Step 2) of the goodwill impairment test is required for those reporting units that have goodwill to measure the amount of impairment, if any. In Step 2 of the test, Citizens estimates the fair value of a
reporting units assets and liabilities in the same manner as if a purchase of the reporting unit was taking place using exit pricing, which includes estimating the fair value of other implied intangibles. Any excess of this hypothetical
purchase price over the fair value of the reporting units net assets (excluding goodwill) represents the implied fair value of goodwill. If the implied fair value of goodwill calculated in Step 2 is less than the carrying amount of goodwill,
an impairment loss is charged to noninterest expense to reduce the carrying amount to the implied fair value. The writedown cannot exceed the carrying amount and goodwill cannot be adjusted upward for any subsequent reversal of previously recognized
goodwill writedowns.
During the first quarter of 2011, new guidance was issued that modified 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.
The adoption of ASU 2010-28 did not have a material impact on Citizens financial condition, results of operations or liquidity.
83
Core deposit intangible assets represent the present value of the cost savings obtained from funding
associated with the purchase of core deposits through an acquisition. Core deposit intangible assets are valued using a discounted cost savings approach. All of Citizens core deposit intangible assets have finite lives, are amortized on an
accelerated basis corresponding with the anticipated lives of the underlying deposits over varying periods not exceeding 10 years, and are subject to impairment testing.
In the third quarter of 2012, Citizens adopted new guidance (amended by ASU 2012-02) intended to reduce the complexity of performing an impairment test for indefinite-lived intangible assets by
simplifying how Citizens tests those assets for impairment and improve consistency in impairment testing guidance among long-lived asset categories. The adoption of ASU 2012-02 did not have a material impact on Citizens financial condition,
results of operations or liquidity.
Pension and Postretirement Benefits
Citizens has recognized the funded status (i.e. the difference between the fair value of plan assets and the projected benefit obligations) of its pension
plan in the consolidated balance sheets, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income represents the net unrecognized actuarial losses and
unrecognized prior service costs that will be subsequently recognized as net periodic pension cost pursuant to Citizens accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are
not recognized as net periodic pension cost in the same periods will be recognized as a component of other comprehensive income. Those amounts will be subsequently recognized as a component of net periodic pension cost.
Fair Value Measurements
Fair value is defined as 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. Fair value is
based on managements best estimate of the assumptions market participants would use when pricing an asset or liability and a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy
gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. For assets and liabilities recorded at fair value, it is Citizens policy to maximize the use of observable inputs and minimize the use
of unobservable inputs when developing fair value measurements.
Fair value measurements for assets and liabilities where there are limited or
no observable market data are based primarily upon estimates which require significant judgment, and are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore,
the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there are inherent weaknesses in any calculation technique, and changes in the underlying
assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. The fair value when the market for an asset is not active is the price that would be received to sell
the asset in an orderly transaction and considers additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. Citizens discloses in the body or in the
accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods the fair value of all financial instruments for which it is practicable to estimate that value,
whether recognized or not recognized in the balance sheet.
In 2011, Citizens adopted new guidance which includes new disclosures about
purchases, sales, issuances, and settlements in the roll-forward of activity in Level 3 fair value measurements. In the first quarter of 2012, Citizens adopted new guidance (amended by ASU 2011-04) that requires new disclosures and clarifies
existing concepts about fair value measurement. The adoption of this guidance did not have a material impact on Citizens financial condition, results of operations or liquidity. See Note 10 to the Consolidated Financial Statements for more
information on fair value measurements.
84
Derivative Instruments
Citizens enters into derivative transactions from time to time to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash
flows. Under the guidelines of ASC Topic 815, all derivative instruments are required to be carried at fair value on the balance sheet. Topic 815 also provides special hedge accounting provisions. Derivative instruments designated in a hedge
relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges under Topic 815. Derivative instruments
designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
Fair value hedges designated as hedging instruments are accounted for by recording the fair value of the derivative instrument and the fair value related to the risk being hedged of the asset or liability
on the balance sheet with corresponding offsets recorded in the statement of operations. The adjustment to the hedged asset or liability is included in the basis of the item, while the fair value of the derivative is recorded as a freestanding asset
or liability. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in a fair value hedge relationship are recorded as adjustments to the interest income or expense recorded on the hedged asset or
liability.
Cash flow hedges designated as hedging instruments are accounted for by recording the fair value of the derivative instrument on
the balance sheet as either a freestanding asset or liability, with a corresponding offset recorded in other comprehensive income within shareholders equity, net of tax. Amounts are reclassified from other comprehensive income to the statement
of operations in the period or periods the hedged forecasted transaction affects earnings.
Under both the fair value and cash flow hedge
methods, derivative gains and losses not effective in hedging the change in fair value or expected cash flows of the hedged item are recognized immediately in noninterest income.
Citizens enters into various derivative agreements with customers desiring protection from possible adverse future fluctuations in interest rates. As an intermediary, Citizens generally maintains a
portfolio of matched offsetting derivative agreements. These contracts are marked to market through earnings.
In 2010, Citizens adopted new
guidance that clarifies the type of embedded credit derivatives that are exempt from embedded derivative bifurcation requirements. The adoption had no impact on Citizens financial condition, results of operations or liquidity. For more
information on derivative financial instruments and hedge accounting, see Note 17 to the Consolidated Financial Statements.
Income Taxes
Amounts provided for income tax expense or benefit are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable or receivable under tax laws.
Deferred income taxes, which arise principally from temporary differences between the period in which certain income and expenses are recognized for financial accounting purposes and the period in which they affect taxable income, are included in
the amounts provided for income taxes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of
deferred tax assets is dependent on utilizing taxable income in prior carryback years, generating future taxable income, executing tax planning strategies, and reversing existing taxable temporary differences. Currently, the ultimate realization of
deferred tax assets is primarily dependent on the generation of future taxable income during the periods in which those temporary differences become deductible.
Citizens utilizes a two-step approach for evaluating tax positions. Recognition (Step 1) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more likely than
not to be sustained upon examination. Measurement (Step 2) is only addressed if the result of Step 1 is that the position is more likely than not to be sustained. Under Step 2, the tax benefit is measured as the largest amount of benefit, determined
on a cumulative probability basis, which is more likely than not to be realized on ultimate settlement.
85
Citizens files a consolidated federal income tax return and various Holding Company and subsidiary state
income tax returns. When income and expenses are recognized in different periods for tax purposes, applicable deferred taxes are provided in the Consolidated Financial Statements. Citizens recognizes interest and penalties accrued relative to
unrecognized tax benefits in their respective federal or state income tax accounts.
Stock-Based Compensation
The compensation cost for share-based awards is recognized in salaries and employee benefits based on the fair value at the date of grant and is
recognized on a straight-line basis over the requisite service period of the awards. The 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. Forfeited and expired options and forfeited shares of restricted stock become available for future grants. Refer to Note 12 for additional disclosures.
Net Income per Common Share
Basic net income or loss per common share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding in each period. Diluted net income per
common share shows the dilutive effect of additional common shares issuable upon the assumed exercise of stock options granted under Citizens stock option plans, using the treasury stock method, and restricted stock awards granted but not yet
vested. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the
two-class method.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents are considered to include cash and due from banks, interest-bearing deposits in other financial institutions, federal funds sold and
securities purchased under agreements to resell.
Subsequent Events
The Company evaluated subsequent events through the date its Financial Statements were issued.
Reclassifications
Certain amounts have been reclassified to conform to the current year presentation. There was no impact on net income and shareholders equity as the
result of these reclassifications.
Accounting Standard Update (ASU)
Pending Accounting Pronouncements
FASB ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out
of Accumulated Other Comprehensive Income
The amendments in this ASU seek to improve the reporting of reclassifications out of
accumulated other comprehensive income (AOCI) by requiring an entity to report the effect of significant reclassifications out of AOCI either on the respective line items in net income or cross-reference to other disclosures required under GAAP that
provide additional detail about these amounts. ASU 2013-02 is effective for Citizens in the first quarter of 2013 and should be applied prospectively for reporting periods. Early adoption is permitted. Citizens does not expect the adoption of the
amendments to have a material impact on Citizens financial condition, results of operations or liquidity.
FASB ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting
Assets and Liabilities
The amendments in this ASU affect entities that have derivatives accounted for in accordance with Topic
815Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and
86
reverse repurchase agreements, and securities borrowing and securities lending transactions. Entities with other types of financial assets and financial liabilities subject to a master netting
arrangement or similar agreement are no longer subject to the disclosure requirements in ASU 2011-11. ASU 2013-01 is effective for Citizens in the first quarter of 2013 and should be applied retrospectively for all comparative periods presented.
Citizens does not expect the adoption of the amendments to have a material impact on Citizens financial condition, results of operations or liquidity.
FASB ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities
The amendments in this ASU allow existing GAAP guidance for balance sheet offsetting, including industry-specific guidance. However, new disclosures are required to enable users of financial statements to
understand significant quantitative differences in balance sheets prepared under GAAP and International Financial Reporting Standards (IFRS) related to the offsetting of financial instruments. ASU 2011-11 is effective for Citizens in the
first quarter of 2013, and should be applied retrospectively for all prior periods presented. Citizens does not expect the adoption of the amendments to have a material impact on Citizens financial condition, results of operations or
liquidity.
Note 2. Investment Securities
The amortized cost, estimated
fair value and gross unrealized gains and losses of investment securities follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Gross Unrealized
|
|
|
Amortized
|
|
|
Fair
|
|
|
Gross Unrealized
|
|
(in thousands)
|
|
Cost
|
|
|
Value
|
|
|
Gains
|
|
|
Losses
|
|
|
Cost
|
|
|
Value
|
|
|
Gains
|
|
|
Losses
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
654,104
|
|
|
$
|
661,743
|
|
|
$
|
8,286
|
|
|
$
|
647
|
|
|
$
|
364,262
|
|
|
$
|
365,302
|
|
|
$
|
6,811
|
|
|
$
|
5,771
|
|
Mortgage-backed
|
|
|
893,410
|
|
|
|
933,143
|
|
|
|
39,736
|
|
|
|
3
|
|
|
|
784,476
|
|
|
|
823,852
|
|
|
|
39,408
|
|
|
|
32
|
|
State and municipal
|
|
|
96,627
|
|
|
|
102,436
|
|
|
|
5,826
|
|
|
|
17
|
|
|
|
116,411
|
|
|
|
123,308
|
|
|
|
7,019
|
|
|
|
122
|
|
Other
|
|
|
293
|
|
|
|
303
|
|
|
|
65
|
|
|
|
55
|
|
|
|
280
|
|
|
|
271
|
|
|
|
24
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
1,644,434
|
|
|
$
|
1,697,625
|
|
|
$
|
53,913
|
|
|
$
|
722
|
|
|
$
|
1,265,429
|
|
|
$
|
1,312,733
|
|
|
$
|
53,262
|
|
|
$
|
5,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
(1)
|
|
$
|
283,264
|
|
|
$
|
293,010
|
|
|
$
|
9,746
|
|
|
$
|
|
|
|
$
|
350,160
|
|
|
$
|
356,031
|
|
|
$
|
5,871
|
|
|
$
|
|
|
Mortgage-backed
(1)
|
|
|
844,086
|
|
|
|
883,498
|
|
|
|
39,413
|
|
|
|
1
|
|
|
|
988,930
|
|
|
|
1,018,765
|
|
|
|
29,883
|
|
|
|
48
|
|
State and municipal
|
|
|
98,918
|
|
|
|
105,736
|
|
|
|
6,818
|
|
|
|
|
|
|
|
104,964
|
|
|
|
112,754
|
|
|
|
7,836
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
1,226,268
|
|
|
$
|
1,282,244
|
|
|
$
|
55,977
|
|
|
$
|
1
|
|
|
$
|
1,444,054
|
|
|
$
|
1,487,550
|
|
|
$
|
43,590
|
|
|
$
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amortized cost
includes adjustments for the unamortized portion of unrealized gains on securities transferred from available for sale.
|
Securities with amortized cost of $535.6 million at December 31, 2012, and $665.8 million at December 31, 2011 were pledged
to secure public deposits, repurchase agreements and other liabilities. Except for obligations of the U.S. Government and its agencies, no holdings of securities of any single issuer exceeded 10% of consolidated shareholders equity at
December 31, 2012 or 2011.
In June 2011 and December 2010, Citizens transferred certain mortgage-backed securities from the available
for sale to the held to maturity category in accordance with Topic 320 Investments-Debt and Equity Securities. Management determined that it had both the ability to hold these investments to maturity and the positive intent to do so. The
securities transferred in June 2011 had a total amortized cost of $924.6 million and a fair value of $943.1 million. The securities transferred in December 2010 had a total amortized cost of $179.2 million and a fair value of $181.8 million. The
unrealized gain of $18.5 million in June 2011 and $2.6 million in December 2010 will be amortized over the remaining life of the securities as an adjustment of the yield, offset against the amortization of the unrealized gain maintained in
accumulated other comprehensive income.
87
The amortized cost and estimated fair value of debt
securities by maturity at December 31, 2012 are shown below.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
(in thousands)
|
|
Amortized
Cost
|
|
|
Estimated Fair
Value
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
State and municipal
|
|
|
|
|
|
|
|
|
Contractual maturity within one year
|
|
$
|
9,208
|
|
|
$
|
9,369
|
|
After one year through five years
|
|
|
15,752
|
|
|
|
16,311
|
|
After five years through ten years
|
|
|
57,841
|
|
|
|
61,794
|
|
After ten years
|
|
|
13,826
|
|
|
|
14,962
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
96,627
|
|
|
|
102,436
|
|
Collateralized mortgage obligations and mortgage-backed
|
|
|
1,547,514
|
|
|
|
1,594,886
|
|
Other
|
|
|
293
|
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
1,644,434
|
|
|
$
|
1,697,625
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
State and municipal
|
|
|
|
|
|
|
|
|
Contractual maturity within one year
|
|
$
|
4,489
|
|
|
$
|
4,620
|
|
After one year through five years
|
|
|
21,202
|
|
|
|
22,484
|
|
After five years through ten years
|
|
|
55,962
|
|
|
|
59,729
|
|
After ten years
|
|
|
17,265
|
|
|
|
18,903
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
98,918
|
|
|
|
105,736
|
|
Collateralized mortgage obligations and mortgage-backed
|
|
|
1,127,350
|
|
|
|
1,176,508
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
1,226,268
|
|
|
$
|
1,282,244
|
|
|
|
|
|
|
|
|
|
|
88
A total of 18 securities had unrealized losses at December 31, 2012 compared with 45 securities at
December 31, 2011.
These securities, with unrealized losses aggregated by investment category and length of time in a continuous unrealized loss position, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
More than 12 Months
|
|
|
Total
|
|
December 31, 2012
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
(in thousands)
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
51,164
|
|
|
$
|
396
|
|
|
$
|
7,731
|
|
|
$
|
251
|
|
|
$
|
58,895
|
|
|
$
|
647
|
|
Mortgage-backed
|
|
|
2,223
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
2,223
|
|
|
|
3
|
|
State and municipal
|
|
|
|
|
|
|
|
|
|
|
233
|
|
|
|
17
|
|
|
|
233
|
|
|
|
17
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
149
|
|
|
|
55
|
|
|
|
149
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
53,387
|
|
|
$
|
399
|
|
|
$
|
8,113
|
|
|
$
|
323
|
|
|
$
|
61,500
|
|
|
$
|
722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
$
|
1,662
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,662
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
1,662
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,662
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
More than 12 Months
|
|
|
Total
|
|
December 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
|
|
$
|
56,326
|
|
|
$
|
2,858
|
|
|
$
|
20,097
|
|
|
$
|
2,913
|
|
|
$
|
76,423
|
|
|
$
|
5,771
|
|
Mortgage-backed
|
|
|
26,016
|
|
|
|
31
|
|
|
|
122
|
|
|
|
1
|
|
|
|
26,138
|
|
|
|
32
|
|
State and municipal
|
|
|
1,191
|
|
|
|
27
|
|
|
|
1,062
|
|
|
|
95
|
|
|
|
2,253
|
|
|
|
122
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
234
|
|
|
|
33
|
|
|
|
234
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
83,533
|
|
|
$
|
2,916
|
|
|
$
|
21,515
|
|
|
$
|
3,042
|
|
|
$
|
105,048
|
|
|
$
|
5,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
$
|
9,093
|
|
|
$
|
48
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,093
|
|
|
$
|
48
|
|
State and municipal
|
|
|
|
|
|
|
|
|
|
|
950
|
|
|
|
46
|
|
|
|
950
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
9,093
|
|
|
$
|
48
|
|
|
$
|
950
|
|
|
$
|
46
|
|
|
$
|
10,043
|
|
|
$
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Citizens performs a review of securities with unrealized losses at each reporting period. Citizens assesses each holding to determine
whether and when a security will recover in value, whether it intends to sell the security and whether it is more likely than not that Citizens will be required to sell the security before the value is recovered. In assessing the recovery of value,
the key factors reviewed include the length of time and the extent the fair value has been less than the carrying cost, adverse conditions, if any, specifically related to the security, industry or geographic area, historical and implied volatility
of the fair value of the security, credit quality factors affecting the issuer or the underlying collateral, payment structure of the security, historical payment history of the security, changes to the credit rating of the security, recoveries or
declines in value subsequent to the balance sheet date or any other relevant factors. Evaluations are performed on a more frequent basis as the degree to which fair value is below carrying cost or the length of time that the fair value has been
continuously below carrying cost, increases. As of December 31, 2012, Citizens has concluded that all issuers have the ability to pay contractual cash flows. The unrealized losses displayed in the above table are believed to be temporary and
thus no impairment loss has been realized in the statements of operations. Citizens has not decided to sell securities with unrealized losses nor does Citizens believe it will be required to sell securities before the value is recovered, but may
change its intent in response to significant, unanticipated changes in policies, regulations, statutory legislation or other criteria.
The
collateralized mortgage obligations (CMO) sector includes securities where the underlying collateral consists of agency issued or whole loan mortgages. At December 31, 2012, the whole loan CMOs had a market value of $58.9 million
with gross unrealized losses of $0.6 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 December 31,
2012 credit review demonstrated continued strength and no material degradation in the holdings.
89
Citizens has determined there is no other-than-temporary impairment at December 31, 2012.
For the year ended December 31, 2012, as part of its capital strategy, Citizens sold $2.5 million of available for sale securities and recorded no
gain or loss.
Note 3. Loans
Citizens has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of
risk. Citizens seeks to control its credit risk by reviewing 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. Citizens does not have a concentration in any
single industry segment that exceeds 10% of total loans.
The quality of Citizens loan portfolios is assessed as a function of net loan
losses, levels of nonperforming loans and delinquencies, and credit quality ratings. These credit quality ratings are an important part of the overall credit risk management process and evaluation of the allowance for loan losses (see Note 4
Allowance for Loan Losses).
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 generally placed on nonaccrual status when there is substantial doubt regarding collection of principal or interest, in full, based on
Citizens credit policies and practices or when principal or interest is past due in excess of 90 days. When a loan is placed on nonaccrual status, interest that is accrued but not collected is reversed and charged against income. Cash
collected on nonaccrual loans is generally applied to outstanding principal. Loans are normally restored to accrual status if and when interest and principal payments are current, 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, and the borrower has maintained the loan in a current status for a period of not less than six months. Nonperforming assets are comprised of nonaccrual
loans, loans past due over 90 days and still accruing interest, nonperforming loans held for sale, and other repossessed assets acquired.
90
A summary of nonperforming assets by class of loans follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
Land hold
|
|
$
|
291
|
|
|
$
|
|
|
Land development
|
|
|
3
|
|
|
|
213
|
|
Construction
|
|
|
|
|
|
|
150
|
|
Income producing
|
|
|
8,117
|
|
|
|
21,171
|
|
Owner-occupied
|
|
|
12,068
|
|
|
|
23,798
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
20,479
|
|
|
|
45,332
|
|
Commercial and industrial
|
|
|
1,308
|
|
|
|
10,633
|
|
Small business
|
|
|
4,854
|
|
|
|
6,313
|
|
|
|
|
|
|
|
|
|
|
Total nonaccruing commercial
|
|
|
26,641
|
|
|
|
62,278
|
|
Residential mortgage
|
|
|
17,500
|
|
|
|
11,312
|
|
Direct consumer
|
|
|
12,720
|
|
|
|
12,115
|
|
Indirect consumer
|
|
|
2,083
|
|
|
|
953
|
|
|
|
|
|
|
|
|
|
|
Total nonaccruing consumer
|
|
|
32,303
|
|
|
|
24,380
|
|
|
|
|
|
|
|
|
|
|
Total nonaccruing loans
|
|
|
58,944
|
|
|
|
86,658
|
|
Loans 90+ days still accruing
|
|
|
68
|
|
|
|
770
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming portfolio loans
|
|
|
59,012
|
|
|
|
87,428
|
|
Nonperforming loans held for sale
|
|
|
3,190
|
|
|
|
2,372
|
|
Other repossessed assets acquired
|
|
|
5,811
|
|
|
|
12,422
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
68,013
|
|
|
$
|
102,222
|
|
|
|
|
|
|
|
|
|
|
Restructured loans still accruing
|
|
$
|
21,033
|
|
|
$
|
32,347
|
|
91
The following tables provide a summary of loans by class, including the delinquency status of
those loans that continue to accrue interest and those loans that are nonaccrual.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
(in thousands)
|
|
Loans
Accruing
30-89 Days
Past Due
|
|
|
Loans 90+
Days Past
Due & Still
Accruing
|
|
|
Non-Accruing
Loans
|
|
|
Total Past Due
Loans
|
|
|
Current
Portfolio
Loans
|
|
|
Total Portfolio
Loans
|
|
Land hold
|
|
$
|
|
|
|
$
|
|
|
|
$
|
291
|
|
|
$
|
291
|
|
|
$
|
4,075
|
|
|
$
|
4,366
|
|
Land development
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
6,255
|
|
|
|
6,258
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,860
|
|
|
|
8,860
|
|
Income producing
|
|
|
1,470
|
|
|
|
|
|
|
|
8,117
|
|
|
|
9,587
|
|
|
|
680,178
|
|
|
|
689,765
|
|
Owner-occupied
|
|
|
695
|
|
|
|
|
|
|
|
12,068
|
|
|
|
12,763
|
|
|
|
520,336
|
|
|
|
533,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
2,165
|
|
|
|
|
|
|
|
20,479
|
|
|
|
22,644
|
|
|
|
1,219,704
|
|
|
|
1,242,348
|
|
Commercial and industrial
|
|
|
277
|
|
|
|
58
|
|
|
|
1,308
|
|
|
|
1,643
|
|
|
|
1,385,720
|
|
|
|
1,387,363
|
|
Small business
(1)
|
|
|
1,672
|
|
|
|
|
|
|
|
4,854
|
|
|
|
6,526
|
|
|
|
262,403
|
|
|
|
268,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
4,114
|
|
|
|
58
|
|
|
|
26,641
|
|
|
|
30,813
|
|
|
|
2,867,827
|
|
|
|
2,898,640
|
|
Residential mortgage
|
|
|
7,641
|
|
|
|
|
|
|
|
17,500
|
|
|
|
25,141
|
|
|
|
521,372
|
|
|
|
546,513
|
|
Direct consumer
|
|
|
13,354
|
|
|
|
10
|
|
|
|
12,720
|
|
|
|
26,084
|
|
|
|
818,156
|
|
|
|
844,240
|
|
Indirect consumer
|
|
|
8,356
|
|
|
|
|
|
|
|
2,083
|
|
|
|
10,439
|
|
|
|
959,144
|
|
|
|
969,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
29,351
|
|
|
|
10
|
|
|
|
32,303
|
|
|
|
61,664
|
|
|
|
2,298,672
|
|
|
|
2,360,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financing receivables
|
|
$
|
33,465
|
|
|
$
|
68
|
|
|
$
|
58,944
|
|
|
$
|
92,477
|
|
|
$
|
5,166,499
|
|
|
$
|
5,258,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts contained
in Commercial and industrial on Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
(in thousands)
|
|
Loans
Accruing
30-89
Days
Past Due
|
|
|
Loans 90+
Days Past
Due
& Still
Accruing
|
|
|
Non-Accruing
Loans
|
|
|
Total Past Due
Loans
|
|
|
Current
Portfolio
Loans
|
|
|
Total
Portfolio
Loans
|
|
Land hold
|
|
$
|
21
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
21
|
|
|
$
|
6,521
|
|
|
$
|
6,542
|
|
Land development
|
|
|
|
|
|
|
|
|
|
|
213
|
|
|
|
213
|
|
|
|
12,891
|
|
|
|
13,104
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
150
|
|
|
|
150
|
|
|
|
5,697
|
|
|
|
5,847
|
|
Income producing
|
|
|
2,508
|
|
|
|
|
|
|
|
21,171
|
|
|
|
23,679
|
|
|
|
890,076
|
|
|
|
913,755
|
|
Owner-occupied
|
|
|
2,345
|
|
|
|
|
|
|
|
23,798
|
|
|
|
26,143
|
|
|
|
578,970
|
|
|
|
605,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
4,874
|
|
|
|
|
|
|
|
45,332
|
|
|
|
50,206
|
|
|
|
1,494,155
|
|
|
|
1,544,361
|
|
Commercial and industrial
|
|
|
212
|
|
|
|
766
|
|
|
|
10,633
|
|
|
|
11,611
|
|
|
|
1,235,180
|
|
|
|
1,246,791
|
|
Small business
(1)
|
|
|
2,242
|
|
|
|
|
|
|
|
6,313
|
|
|
|
8,555
|
|
|
|
288,183
|
|
|
|
296,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
7,328
|
|
|
|
766
|
|
|
|
62,278
|
|
|
|
70,372
|
|
|
|
3,017,518
|
|
|
|
3,087,890
|
|
Residential mortgage
|
|
|
9,544
|
|
|
|
|
|
|
|
11,312
|
|
|
|
20,856
|
|
|
|
616,389
|
|
|
|
637,245
|
|
Direct consumer
|
|
|
17,810
|
|
|
|
4
|
|
|
|
12,115
|
|
|
|
29,929
|
|
|
|
903,385
|
|
|
|
933,314
|
|
Indirect consumer
|
|
|
13,067
|
|
|
|
|
|
|
|
953
|
|
|
|
14,020
|
|
|
|
857,066
|
|
|
|
871,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
40,421
|
|
|
|
4
|
|
|
|
24,380
|
|
|
|
64,805
|
|
|
|
2,376,840
|
|
|
|
2,441,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financing receivables
|
|
$
|
47,749
|
|
|
$
|
770
|
|
|
$
|
86,658
|
|
|
$
|
135,177
|
|
|
$
|
5,394,358
|
|
|
$
|
5,529,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts contained
in Commercial and industrial on Consolidated Balance Sheets.
|
92
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. Citizens uses the following definitions for risk ratings:
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 are considered to be pass
rated loans.
Commercial loans by risk category of class follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
(in thousands)
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
Land hold
|
|
$
|
1,690
|
|
|
$
|
727
|
|
|
$
|
1,949
|
|
|
$
|
|
|
|
$
|
4,366
|
|
Land development
|
|
|
5,954
|
|
|
|
106
|
|
|
|
198
|
|
|
|
|
|
|
|
6,258
|
|
Construction
|
|
|
2,028
|
|
|
|
6,773
|
|
|
|
59
|
|
|
|
|
|
|
|
8,860
|
|
Income producing
|
|
|
486,385
|
|
|
|
140,696
|
|
|
|
62,192
|
|
|
|
492
|
|
|
|
689,765
|
|
Owner-occupied
|
|
|
432,134
|
|
|
|
58,180
|
|
|
|
42,284
|
|
|
|
501
|
|
|
|
533,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
928,191
|
|
|
|
206,482
|
|
|
|
106,682
|
|
|
|
993
|
|
|
|
1,242,348
|
|
Commercial and industrial
|
|
|
1,286,982
|
|
|
|
72,470
|
|
|
|
27,787
|
|
|
|
124
|
|
|
|
1,387,363
|
|
Small business
(1)
|
|
|
234,674
|
|
|
|
15,676
|
|
|
|
18,554
|
|
|
|
25
|
|
|
|
268,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
$
|
2,449,847
|
|
|
$
|
294,628
|
|
|
$
|
153,023
|
|
|
$
|
1,142
|
|
|
$
|
2,898,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts contained
in Commercial and industrial on Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
(in thousands)
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
Land hold
|
|
$
|
2,427
|
|
|
$
|
803
|
|
|
$
|
3,312
|
|
|
$
|
|
|
|
$
|
6,542
|
|
Land development
|
|
|
12,087
|
|
|
|
252
|
|
|
|
765
|
|
|
|
|
|
|
|
13,104
|
|
Construction
|
|
|
4,039
|
|
|
|
1,508
|
|
|
|
300
|
|
|
|
|
|
|
|
5,847
|
|
Income producing
|
|
|
633,855
|
|
|
|
164,756
|
|
|
|
112,458
|
|
|
|
2,686
|
|
|
|
913,755
|
|
Owner-occupied
|
|
|
475,604
|
|
|
|
66,576
|
|
|
|
61,429
|
|
|
|
1,504
|
|
|
|
605,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
1,128,012
|
|
|
|
233,895
|
|
|
|
178,264
|
|
|
|
4,190
|
|
|
|
1,544,361
|
|
Commercial and industrial
|
|
|
1,059,316
|
|
|
|
113,126
|
|
|
|
74,307
|
|
|
|
42
|
|
|
|
1,246,791
|
|
Small business
(1)
|
|
|
251,790
|
|
|
|
21,803
|
|
|
|
22,925
|
|
|
|
220
|
|
|
|
296,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
$
|
2,439,118
|
|
|
$
|
368,824
|
|
|
$
|
275,496
|
|
|
$
|
4,452
|
|
|
$
|
3,087,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts contained
in Commercial and industrial on Consolidated Balance Sheets.
|
93
For residential and consumer loans, Citizens evaluates credit quality based on the aging status of the loan
and by payment activity. Performing loans are considered to have a lower risk of loss and are on accruing status. Nonperforming loans are comprised of nonaccrual loans and loans past due over 90 days and still accruing interest.
The following table presents the recorded investment in residential and consumer loans based on payment activity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
(in thousands)
|
|
Residential
Mortgage
|
|
|
Direct
Consumer
|
|
|
Indirect
Consumer
|
|
|
Total Consumer
Loans
|
|
Performing
|
|
$
|
529,013
|
|
|
$
|
831,510
|
|
|
$
|
967,500
|
|
|
$
|
2,328,023
|
|
Nonperforming
|
|
|
17,500
|
|
|
|
12,730
|
|
|
|
2,083
|
|
|
|
32,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
546,513
|
|
|
$
|
844,240
|
|
|
$
|
969,583
|
|
|
$
|
2,360,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
(in thousands)
|
|
Residential
Mortgage
|
|
|
Direct
Consumer
|
|
|
Indirect
Consumer
|
|
|
Total Consumer
Loans
|
|
Performing
|
|
$
|
625,933
|
|
|
$
|
921,195
|
|
|
$
|
870,133
|
|
|
$
|
2,417,261
|
|
Nonperforming
|
|
|
11,312
|
|
|
|
12,119
|
|
|
|
953
|
|
|
|
24,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
637,245
|
|
|
$
|
933,314
|
|
|
$
|
871,086
|
|
|
$
|
2,441,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Held for Sale.
Loans held for sale are comprised of commercial real estate and residential mortgage loans. Loans
held for sale were $10.7 million at December 31, 2012, compared to $10.4 million at December 31, 2011. During 2012, $24.0 million in portfolio loans and $5.2 million in repurchased loans were transferred to held for sale. Also during 2012,
$16.0 million of loans held for sale were sold, and there were $11.3 million of repayments on the held for sale portfolio.
Note 4. Allowance for Loan Losses
The allowance for loan losses is a reserve established through a provision for 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 risk-allocated allowance for the remainder of the portfolio and a general valuation allowance estimate.
The activity within the allowance for loan losses is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Allowance for
Loan Losses
at
December 31, 2011
|
|
|
Provision for
Loan
Losses
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Net charge-offs
|
|
|
Allowance for
Loan Losses at
December 31, 2012
|
|
Commercial and industrial
|
|
$
|
14,044
|
|
|
$
|
4,759
|
|
|
|
(11,400
|
)
|
|
$
|
2,099
|
|
|
$
|
(9,301
|
)
|
|
$
|
9,502
|
|
Small business
|
|
|
12,230
|
|
|
|
1,218
|
|
|
|
(6,132
|
)
|
|
|
1,048
|
|
|
|
(5,084
|
)
|
|
|
8,364
|
|
Commercial real estate
|
|
|
63,999
|
|
|
|
(16,604
|
)
|
|
|
(25,641
|
)
|
|
|
6,460
|
|
|
|
(19,181
|
)
|
|
|
28,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
90,273
|
|
|
|
(10,627
|
)
|
|
|
(43,173
|
)
|
|
|
9,607
|
|
|
|
(33,566
|
)
|
|
|
46,080
|
|
Residential mortgage
|
|
|
36,460
|
|
|
|
5,588
|
|
|
|
(17,055
|
)
|
|
|
1,934
|
|
|
|
(15,121
|
)
|
|
|
26,927
|
|
Direct consumer
|
|
|
33,020
|
|
|
|
22,505
|
|
|
|
(31,559
|
)
|
|
|
4,555
|
|
|
|
(27,004
|
)
|
|
|
28,521
|
|
Indirect consumer
|
|
|
12,973
|
|
|
|
5,738
|
|
|
|
(13,415
|
)
|
|
|
3,615
|
|
|
|
(9,800
|
)
|
|
|
8,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
172,726
|
|
|
$
|
23,204
|
|
|
$
|
(105,202
|
)
|
|
$
|
19,711
|
|
|
$
|
(85,491
|
)
|
|
$
|
110,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Allowance for
Loan Losses at
December 31, 2010
|
|
|
Provision for
Loan Losses
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Net charge-offs
|
|
|
Allowance for
Loan Losses at
December 31, 2011
|
|
Commercial and industrial
|
|
$
|
26,619
|
|
|
$
|
20,179
|
|
|
$
|
(36,211
|
)
|
|
$
|
3,457
|
|
|
$
|
(32,754
|
)
|
|
$
|
14,044
|
|
Small business
|
|
|
16,334
|
|
|
|
4,587
|
|
|
|
(9,462
|
)
|
|
|
771
|
|
|
|
(8,691
|
)
|
|
|
12,230
|
|
Commercial real estate
|
|
|
156,623
|
|
|
|
67,398
|
|
|
|
(162,533
|
)
|
|
|
2,511
|
|
|
|
(160,022
|
)
|
|
|
63,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
199,576
|
|
|
|
92,164
|
|
|
|
(208,206
|
)
|
|
|
6,739
|
|
|
|
(201,467
|
)
|
|
|
90,273
|
|
Residential mortgage
|
|
|
47,623
|
|
|
|
16,200
|
|
|
|
(27,796
|
)
|
|
|
433
|
|
|
|
(27,363
|
)
|
|
|
36,460
|
|
Direct consumer
|
|
|
32,255
|
|
|
|
24,508
|
|
|
|
(26,932
|
)
|
|
|
3,189
|
|
|
|
(23,743
|
)
|
|
|
33,020
|
|
Indirect consumer
|
|
|
16,577
|
|
|
|
5,936
|
|
|
|
(11,771
|
)
|
|
|
2,231
|
|
|
|
(9,540
|
)
|
|
|
12,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
296,031
|
|
|
$
|
138,808
|
|
|
$
|
(274,705
|
)
|
|
$
|
12,592
|
|
|
$
|
(262,113
|
)
|
|
$
|
172,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Allowance for
Loan Losses at
December 31, 2009
|
|
|
Provision for
Loan Losses
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Net charge-offs
|
|
|
Allowance for
Loan Losses at
December 31, 2010
|
|
Commercial and industrial
|
|
$
|
50,306
|
|
|
$
|
26,468
|
|
|
$
|
(54,015
|
)
|
|
$
|
3,860
|
|
|
$
|
(50,155
|
)
|
|
$
|
26,619
|
|
Small business
|
|
|
6,209
|
|
|
|
17,017
|
|
|
|
(7,375
|
)
|
|
|
483
|
|
|
|
(6,892
|
)
|
|
|
16,334
|
|
Commercial real estate
|
|
|
146,042
|
|
|
|
238,097
|
|
|
|
(233,056
|
)
|
|
|
5,540
|
|
|
|
(227,516
|
)
|
|
|
156,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
202,557
|
|
|
|
281,582
|
|
|
|
(294,446
|
)
|
|
|
9,883
|
|
|
|
(284,563
|
)
|
|
|
199,576
|
|
Residential mortgage
|
|
|
63,794
|
|
|
|
94,037
|
|
|
|
(110,928
|
)
|
|
|
720
|
|
|
|
(110,208
|
)
|
|
|
47,623
|
|
Direct consumer
|
|
|
33,127
|
|
|
|
28,643
|
|
|
|
(31,392
|
)
|
|
|
1,877
|
|
|
|
(29,515
|
)
|
|
|
32,255
|
|
Indirect consumer
|
|
|
39,462
|
|
|
|
(11,380
|
)
|
|
|
(14,295
|
)
|
|
|
2,790
|
|
|
|
(11,505
|
)
|
|
|
16,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
338,940
|
|
|
$
|
392,882
|
|
|
$
|
(451,061
|
)
|
|
$
|
15,270
|
|
|
$
|
(435,791
|
)
|
|
$
|
296,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the allowance for loan losses, segregated by portfolio
segment follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
(in thousands)
|
|
Allowance for
Loans
Individually
Evaluated for
Impairment
|
|
|
Allowance for
Loans Collectively
Evaluated for
Impairment
|
|
|
General
Allowance
|
|
|
Total
Allowance for
Loan
Losses
|
|
Commercial and industrial
|
|
$
|
124
|
|
|
$
|
9,200
|
|
|
$
|
178
|
|
|
$
|
9,502
|
|
Small business
|
|
|
|
|
|
|
8,205
|
|
|
|
159
|
|
|
|
8,364
|
|
Commercial real estate
|
|
|
1,007
|
|
|
|
26,690
|
|
|
|
517
|
|
|
|
28,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
1,131
|
|
|
|
44,095
|
|
|
|
854
|
|
|
|
46,080
|
|
Residential mortgage
|
|
|
3,369
|
|
|
|
23,110
|
|
|
|
448
|
|
|
|
26,927
|
|
Direct consumer
|
|
|
657
|
|
|
|
27,335
|
|
|
|
529
|
|
|
|
28,521
|
|
Indirect consumer
|
|
|
|
|
|
|
8,742
|
|
|
|
169
|
|
|
|
8,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
5,157
|
|
|
$
|
103,282
|
|
|
$
|
2,000
|
|
|
$
|
110,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
(in thousands)
|
|
Recorded Investment
of Loans Individually
Evaluated for
Impairment
|
|
|
Recorded Investment
of Loans Collectively
Evaluated for
Impairment
|
|
|
Unearned
(Fees)/Costs
|
|
|
Total
Recorded
Investment
|
|
Commercial and industrial
|
|
$
|
1,178
|
|
|
$
|
1,394,088
|
|
|
$
|
(7,903
|
)
|
|
$
|
1,387,363
|
|
Small business
(1)
|
|
|
|
|
|
|
268,612
|
|
|
|
317
|
|
|
|
268,929
|
|
Commercial real estate
|
|
|
29,663
|
|
|
|
1,213,737
|
|
|
|
(1,052
|
)
|
|
|
1,242,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
30,841
|
|
|
|
2,876,437
|
|
|
|
(8,638
|
)
|
|
|
2,898,640
|
|
Residential mortgage
|
|
|
19,024
|
|
|
|
530,211
|
|
|
|
(2,722
|
)
|
|
|
546,513
|
|
Direct consumer
|
|
|
7,873
|
|
|
|
834,627
|
|
|
|
1,740
|
|
|
|
844,240
|
|
Indirect consumer
|
|
|
252
|
|
|
|
943,999
|
|
|
|
25,332
|
|
|
|
969,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio loans
|
|
$
|
57,990
|
|
|
$
|
5,185,274
|
|
|
$
|
15,712
|
|
|
$
|
5,258,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts contained
in Commercial and industrial on Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
(in thousands)
|
|
Allowance for
Loans Individually
Evaluated for
Impairment
|
|
|
Allowance for
Loans Collectively
Evaluated for
Impairment
|
|
|
General
Allowance
|
|
|
Total
Allowance
for Loan
Losses
|
|
Commercial and industrial
|
|
$
|
42
|
|
|
$
|
13,302
|
|
|
$
|
700
|
|
|
$
|
14,044
|
|
Small business
|
|
|
|
|
|
|
11,730
|
|
|
|
500
|
|
|
|
12,230
|
|
Commercial real estate
|
|
|
4,110
|
|
|
|
58,589
|
|
|
|
1,300
|
|
|
|
63,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
4,152
|
|
|
|
83,621
|
|
|
|
2,500
|
|
|
|
90,273
|
|
Residential mortgage
|
|
|
2,837
|
|
|
|
33,623
|
|
|
|
|
|
|
|
36,460
|
|
Direct consumer
|
|
|
70
|
|
|
|
32,950
|
|
|
|
|
|
|
|
33,020
|
|
Indirect consumer
|
|
|
|
|
|
|
12,973
|
|
|
|
|
|
|
|
12,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
7,059
|
|
|
$
|
163,167
|
|
|
$
|
2,500
|
|
|
$
|
172,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
(in thousands)
|
|
Recorded Investment
of Loans Individually
Evaluated for
Impairment
|
|
|
Recorded Investment
of Loans Collectively
Evaluated
for
Impairment
|
|
|
Unearned
(Fees)/Costs
|
|
|
Total
Recorded
Investment
|
|
Commercial and industrial
|
|
$
|
8,842
|
|
|
$
|
1,245,902
|
|
|
$
|
(7,953
|
)
|
|
$
|
1,246,791
|
|
Small business
(1)
|
|
|
557
|
|
|
|
295,972
|
|
|
|
209
|
|
|
|
296,738
|
|
Commercial real estate
|
|
|
57,562
|
|
|
|
1,488,657
|
|
|
|
(1,858
|
)
|
|
|
1,544,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
66,961
|
|
|
|
3,030,531
|
|
|
|
(9,602
|
)
|
|
|
3,087,890
|
|
Residential mortgage
|
|
|
15,140
|
|
|
|
623,779
|
|
|
|
(1,674
|
)
|
|
|
637,245
|
|
Direct consumer
|
|
|
4,607
|
|
|
|
928,930
|
|
|
|
(223
|
)
|
|
|
933,314
|
|
Indirect consumer
|
|
|
478
|
|
|
|
850,868
|
|
|
|
19,740
|
|
|
|
871,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio loans
|
|
$
|
87,186
|
|
|
$
|
5,434,108
|
|
|
$
|
8,241
|
|
|
$
|
5,529,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts contained
in Commercial and industrial on Consolidated Balance Sheets.
|
96
Impaired loans
. A loan is considered impaired when, based on current information and events,
it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. 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.
Citizens recognized $2.6 million of interest income on nonperforming loans for years ended December 31, 2012. Had nonperforming loans performed in
accordance with their original contract terms, Citizens would have recognized additional interest income of approximately $3.2 million for the year ended December 31, 2012. There were no significant commitments outstanding to lend additional
funds to clients whose loans were classified as restructured at December 31, 2012 or December 31, 2011.
A summary of information regarding loans individually reviewed for impairment, segregated by
class are set forth in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest
Income
|
|
|
Average
Recorded
Investment
|
|
(in thousands)
|
|
Unpaid
Contractual
Principal
Balance
|
|
|
Recorded
Investment with
No Specific
Allowance
|
|
|
Recorded
Investment with
Specific
Allowance
|
|
|
Total Recorded
Investment
|
|
|
Specific
Related
Allowance
|
|
|
Year To
Date
|
|
|
Year To
Date
|
|
Nonaccrual loans (impaired)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income producing
|
|
$
|
7,918
|
|
|
$
|
4,825
|
|
|
$
|
1,529
|
|
|
$
|
6,354
|
|
|
$
|
492
|
|
|
$
|
58
|
|
|
$
|
12,708
|
|
Owner-occupied
|
|
|
10,739
|
|
|
|
4,620
|
|
|
|
3,178
|
|
|
|
7,798
|
|
|
|
501
|
|
|
|
183
|
|
|
|
11,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
18,657
|
|
|
|
9,445
|
|
|
|
4,707
|
|
|
|
14,152
|
|
|
|
993
|
|
|
|
241
|
|
|
|
23,809
|
|
Commercial and industrial
|
|
|
761
|
|
|
|
328
|
|
|
|
249
|
|
|
|
577
|
|
|
|
124
|
|
|
|
17
|
|
|
|
5,915
|
|
Small business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
19,418
|
|
|
|
9,773
|
|
|
|
4,956
|
|
|
|
14,729
|
|
|
|
1,117
|
|
|
|
258
|
|
|
|
29,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
5,771
|
|
|
|
3,453
|
|
|
|
2,318
|
|
|
|
5,771
|
|
|
|
608
|
|
|
|
184
|
|
|
|
4,559
|
|
Direct consumer
|
|
|
2,059
|
|
|
|
1,218
|
|
|
|
841
|
|
|
|
2,059
|
|
|
|
226
|
|
|
|
47
|
|
|
|
1,325
|
|
Indirect consumer
|
|
|
252
|
|
|
|
252
|
|
|
|
|
|
|
|
252
|
|
|
|
|
|
|
|
13
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
8,082
|
|
|
|
4,923
|
|
|
|
3,159
|
|
|
|
8,082
|
|
|
|
834
|
|
|
|
244
|
|
|
|
6,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans (impaired)
|
|
|
27,500
|
|
|
|
14,696
|
|
|
|
8,115
|
|
|
|
22,811
|
|
|
|
1,951
|
|
|
|
502
|
|
|
|
35,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual loans (impaired)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income producing
|
|
|
807
|
|
|
|
|
|
|
|
807
|
|
|
|
807
|
|
|
|
12
|
|
|
|
49
|
|
|
|
2,281
|
|
Owner-occupied
|
|
|
14,704
|
|
|
|
14,071
|
|
|
|
633
|
|
|
|
14,704
|
|
|
|
2
|
|
|
|
890
|
|
|
|
15,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
15,511
|
|
|
|
14,071
|
|
|
|
1,440
|
|
|
|
15,511
|
|
|
|
14
|
|
|
|
939
|
|
|
|
17,365
|
|
Commercial and industrial
|
|
|
601
|
|
|
|
601
|
|
|
|
|
|
|
|
601
|
|
|
|
|
|
|
|
11
|
|
|
|
151
|
|
Small business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
16,112
|
|
|
|
14,672
|
|
|
|
1,440
|
|
|
|
16,112
|
|
|
|
14
|
|
|
|
950
|
|
|
|
17,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
13,253
|
|
|
|
3,050
|
|
|
|
10,203
|
|
|
|
13,253
|
|
|
|
2,761
|
|
|
|
825
|
|
|
|
12,022
|
|
Direct consumer
|
|
|
5,814
|
|
|
|
3,596
|
|
|
|
2,218
|
|
|
|
5,814
|
|
|
|
431
|
|
|
|
360
|
|
|
|
6,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
19,067
|
|
|
|
6,646
|
|
|
|
12,421
|
|
|
|
19,067
|
|
|
|
3,192
|
|
|
|
1,185
|
|
|
|
18,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrual loans (impaired)
|
|
|
35,179
|
|
|
|
21,318
|
|
|
|
13,861
|
|
|
|
35,179
|
|
|
|
3,206
|
|
|
|
2,135
|
|
|
|
36,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
62,679
|
|
|
$
|
36,014
|
|
|
$
|
21,976
|
|
|
$
|
57,990
|
|
|
$
|
5,157
|
|
|
$
|
2,637
|
|
|
$
|
71,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest
Income
|
|
|
Average
Recorded
Investment
|
|
(in thousands)
|
|
Unpaid
Contractual
Principal
Balance
|
|
|
Recorded
Investment with
No
Specific
Allowance
|
|
|
Recorded
Investment with
Specific
Allowance
|
|
|
Total
Recorded
Investment
|
|
|
Specific
Related
Allowance
|
|
|
Year To
Date
|
|
|
Year To
Date
|
|
Nonaccrual loans (impaired)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land hold
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
45
|
|
Land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224
|
|
Income producing
|
|
|
23,394
|
|
|
|
9,163
|
|
|
|
8,838
|
|
|
|
18,001
|
|
|
|
2,686
|
|
|
|
448
|
|
|
|
19,516
|
|
Owner-occupied
|
|
|
22,338
|
|
|
|
13,276
|
|
|
|
3,694
|
|
|
|
16,970
|
|
|
|
1,424
|
|
|
|
424
|
|
|
|
17,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
45,732
|
|
|
|
22,439
|
|
|
|
12,532
|
|
|
|
34,971
|
|
|
|
4,110
|
|
|
|
872
|
|
|
|
36,939
|
|
Commercial and industrial
|
|
|
17,197
|
|
|
|
8,196
|
|
|
|
646
|
|
|
|
8,842
|
|
|
|
42
|
|
|
|
311
|
|
|
|
12,499
|
|
Small business
|
|
|
131
|
|
|
|
66
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
63,060
|
|
|
|
30,701
|
|
|
|
13,178
|
|
|
|
43,879
|
|
|
|
4,152
|
|
|
|
1,183
|
|
|
|
49,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
6,610
|
|
|
|
587
|
|
|
|
6,023
|
|
|
|
6,610
|
|
|
|
1,346
|
|
|
|
182
|
|
|
|
10,592
|
|
Direct consumer
|
|
|
1,168
|
|
|
|
647
|
|
|
|
500
|
|
|
|
1,147
|
|
|
|
55
|
|
|
|
22
|
|
|
|
1,519
|
|
Indirect consumer
|
|
|
478
|
|
|
|
478
|
|
|
|
|
|
|
|
478
|
|
|
|
|
|
|
|
|
|
|
|
474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
8,256
|
|
|
|
1,712
|
|
|
|
6,523
|
|
|
|
8,235
|
|
|
|
1,401
|
|
|
|
204
|
|
|
|
12,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans (impaired)
|
|
|
71,316
|
|
|
|
32,413
|
|
|
|
19,701
|
|
|
|
52,114
|
|
|
|
5,553
|
|
|
|
1,387
|
|
|
|
62,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual loans (impaired)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income producing
|
|
|
7,476
|
|
|
|
7,476
|
|
|
|
|
|
|
|
7,476
|
|
|
|
|
|
|
|
418
|
|
|
|
7,524
|
|
Owner-occupied
|
|
|
15,115
|
|
|
|
15,115
|
|
|
|
|
|
|
|
15,115
|
|
|
|
|
|
|
|
75
|
|
|
|
6,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
22,591
|
|
|
|
22,591
|
|
|
|
|
|
|
|
22,591
|
|
|
|
|
|
|
|
493
|
|
|
|
13,690
|
|
Small business
|
|
|
491
|
|
|
|
491
|
|
|
|
|
|
|
|
491
|
|
|
|
|
|
|
|
17
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
23,082
|
|
|
|
23,082
|
|
|
|
|
|
|
|
23,082
|
|
|
|
|
|
|
|
510
|
|
|
|
14,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
8,530
|
|
|
|
2,088
|
|
|
|
6,442
|
|
|
|
8,530
|
|
|
|
1,491
|
|
|
|
449
|
|
|
|
3,966
|
|
Direct consumer
|
|
|
3,460
|
|
|
|
3,360
|
|
|
|
100
|
|
|
|
3,460
|
|
|
|
15
|
|
|
|
225
|
|
|
|
2,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
11,990
|
|
|
|
5,448
|
|
|
|
6,542
|
|
|
|
11,990
|
|
|
|
1,506
|
|
|
|
674
|
|
|
|
6,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrual loans (impaired)
|
|
|
35,072
|
|
|
|
28,530
|
|
|
|
6,542
|
|
|
|
35,072
|
|
|
|
1,506
|
|
|
|
1,184
|
|
|
|
20,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
106,388
|
|
|
$
|
60,943
|
|
|
$
|
26,243
|
|
|
$
|
87,186
|
|
|
$
|
7,059
|
|
|
$
|
2,571
|
|
|
$
|
83,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings
. A modified loan is considered a Troubled Debt Restructuring (TDR) when two
conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made that would not otherwise be considered for a borrower with similar credit characteristics. While commercial loan modifications vary depending on
circumstances, the most common types of modifications for residential and consumer loans include below market rate reductions and/or maturity extensions, and generally do not include forgiveness of principal balances. Modified terms are dependent
upon the financial position and needs of the individual borrower. Citizens does not employ modification programs for temporary or trial periods, all modifications are permanent. The modified loan does not revert back to its original terms, even if
the modified loan agreement is violated.
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 loss. At December 31, 2012 the majority of Citizens TDRs are on accrual status and are reported as impaired. TDR classifications may be removed if the
borrower demonstrates compliance with the modified terms and the restructuring agreement specifies a market rate of interest equal to that which would be provided to a borrower with similar credit at the time of restructuring. Otherwise, the loans
remain classified as TDRs. As a result of guidance from the Office of the Comptroller of the Currency (OCC), approximately $4.0 million of residential mortgage and consumer loans were identified as TDRs whereby the borrowers
obligation to Citizens has been discharged in bankruptcy and the borrower has not reaffirmed the debt. These loans were reclassified as TDRs as of December 31, 2012 and consisted of $2.9 million of residential mortgage loans and $1.1 million of
consumer loans.
98
The recorded investment balance of TDRs approximated $29.1 million at December 31, 2012. TDRs of $21.0
million were on accrual status and $8.1 million of TDRs were on nonaccrual status at December 31, 2012. TDRs are evaluated separately in Citizens allowance for loan loss methodology based on the expected cash flows for loans in this
status. At December 31, 2012, the allowance for loan losses included specific reserves of $4.0 million related to TDRs, which included $3.3 million related to mortgage TDRs and $0.7 million related to direct consumer TDRs, compared to $2.9
million of specific reserves related to TDRs at December 31, 2011, which included $2.8 million related to mortgage TDRs and $0.1 million related to direct consumer TDRs. Citizens charged off $4.1 million and $6.1 million for the years ended
December 31, 2012 and December 31, 2011, respectively, for the portion of TDRs deemed to be uncollectible.
The following table provides information on loans modified during each
year noted as a TDR.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For TheYear Ended
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
(in thousands)
|
|
Number
of
Loans
|
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
|
Post-Modification
Outstanding
Recorded
Investment
|
|
|
Average
Coupon
Rate
|
|
|
Number
of
Loans
|
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
|
Post-Modification
Outstanding
Recorded
Investment
|
|
|
Average
Coupon
Rate
|
|
Commercial and industrial
|
|
|
3
|
|
|
$
|
601
|
|
|
$
|
601
|
|
|
|
4.55
|
%
|
|
|
2
|
|
|
$
|
1,807
|
|
|
$
|
1,807
|
|
|
|
6.50
|
%
|
Commercial real estate
|
|
|
2
|
|
|
|
1,839
|
|
|
|
1,501
|
|
|
|
6.50
|
|
|
|
4
|
|
|
|
28,632
|
|
|
|
21,183
|
|
|
|
6.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
5
|
|
|
|
2,440
|
|
|
|
2,102
|
|
|
|
5.95
|
|
|
|
6
|
|
|
|
30,439
|
|
|
|
22,990
|
|
|
|
6.60
|
|
Residential mortgage
|
|
|
84
|
|
|
|
11,564
|
|
|
|
11,564
|
|
|
|
2.69
|
|
|
|
35
|
|
|
|
9,060
|
|
|
|
9,060
|
|
|
|
2.70
|
|
Direct consumer
|
|
|
100
|
|
|
|
6,909
|
|
|
|
6,101
|
|
|
|
4.56
|
|
|
|
8
|
|
|
|
1,708
|
|
|
|
1,714
|
|
|
|
6.30
|
|
Indirect consumer
|
|
|
43
|
|
|
|
549
|
|
|
|
252
|
|
|
|
7.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio loans
|
|
|
232
|
|
|
$
|
21,462
|
|
|
$
|
20,019
|
|
|
|
3.88
|
|
|
|
49
|
|
|
$
|
41,207
|
|
|
$
|
33,764
|
|
|
|
5.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
The following table provides information on how loans were modified as a TDR.
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended
December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
Post-Modification Recorded Investment
|
|
|
|
|
|
|
|
|
Extended maturity
|
|
$
|
3,128
|
|
|
$
|
15,211
|
|
Interest rate adjustments
|
|
|
3,304
|
|
|
|
7,489
|
|
Combination of rate and maturity
|
|
|
5,051
|
|
|
|
11,064
|
|
Other
(1)
|
|
|
8,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,019
|
|
|
$
|
33,764
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Other includes
covenant modification, forebearance, loans discharged in bankruptcy and not reaffirmed, and other concessions or combination of concessions that do not consist of interest rate adjustments and/or maturity extensions.
|
A TDR loan is considered to have a payment default when one or more payments is over 90 days past due. At December 31, 2012 and
2011, respectively, there were 26 loans of approximately $1.6 million and two loans of approximately $0.4 million modified as TDRs that were in payment default.
Note 5. Premises and Equipment
A summary of premises and equipment follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
Land
|
|
$
|
26,352
|
|
|
$
|
26,443
|
|
Buildings
|
|
|
154,891
|
|
|
|
154,668
|
|
Leasehold improvements
|
|
|
13,907
|
|
|
|
13,970
|
|
Furniture and equipment
|
|
|
73,407
|
|
|
|
71,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
268,557
|
|
|
|
266,814
|
|
Accumulated depreciation and amortization
|
|
|
(178,266
|
)
|
|
|
(168,844
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
90,291
|
|
|
$
|
97,970
|
|
|
|
|
|
|
|
|
|
|
Certain branch facilities and equipment are leased under various operating contracts. Total rental expense, including expenses related
to these operating leases, was $6.1 million in 2012 and $6.0 million in both 2011 and 2010.
Future minimum rental commitments under non-cancelable operating leases are as follows.
100
|
|
|
|
|
(in thousands)
|
|
Rental
Commitments
|
|
2013
|
|
$
|
5,752
|
|
2014
|
|
|
4,324
|
|
2015
|
|
|
3,385
|
|
2016
|
|
|
2,490
|
|
2017
|
|
|
1,896
|
|
Thereafter
|
|
|
4,914
|
|
|
|
|
|
|
Total
|
|
$
|
22,761
|
|
|
|
|
|
|
Note 6. Goodwill and Core Deposit Intangible Assets
A summary of goodwill allocated to the lines of business follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
Regional Banking
|
|
$
|
316,349
|
|
|
$
|
316,349
|
|
Wealth Management
|
|
|
1,801
|
|
|
|
1,801
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
318,150
|
|
|
$
|
318,150
|
|
|
|
|
|
|
|
|
|
|
The recorded balance of goodwill has not changed during 2012 and 2011. In 2012, Citizens elected to perform the qualitative assessment
to determine whether it is more likely than not that the fair value of the reporting unit was below its carrying amount as of October 1, 2012. Based on the positive evidence in the analysis, Citizens concluded that it is more likely than not
that fair value exceeds its carrying value. Furthermore, no goodwill impairment exists on the consolidated level as the allocated goodwill resides only in these two reporting units. No events (individually or in aggregate) have occurred since the
annual goodwill impairment analysis that indicates a potential impairment of goodwill
A summary of core deposit intangibles follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
Core deposit intangibles
|
|
$
|
62,835
|
|
|
$
|
62,835
|
|
Accumulated amortization
|
|
|
(57,527
|
)
|
|
|
(55,407
|
)
|
|
|
|
|
|
|
|
|
|
Total core deposit intangibles
|
|
$
|
5,308
|
|
|
$
|
7,428
|
|
|
|
|
|
|
|
|
|
|
The following presents the estimated future amortization
expense of core deposit intangible assets.
|
|
|
|
|
(in thousands)
|
|
Intangible
Amortization
Expense
|
|
2013
|
|
$
|
1,727
|
|
2014
|
|
|
1,421
|
|
2015
|
|
|
1,179
|
|
2016
|
|
|
981
|
|
|
|
|
|
|
Total
|
|
$
|
5,308
|
|
|
|
|
|
|
101
All of Citizens core deposit intangible assets have finite lives and are amortized on an accelerated
basis corresponding with the anticipated lives of the underlying deposits over varying periods not exceeding 10 years. The weighted average amortization period for core deposit intangible assets is 1.8 years.
Note 7. Deposits
Overdrafts on demand accounts are classified as loans, rather than deposits, on the face of the balance sheet and totaled $3.0 million
and $7.2 million at December 31, 2012 and 2011, respectively. Time deposits over $100,000 totaled $510.4 million at December 31, 2012, compared with $616.0 million at December 31, 2011.
The scheduled maturities for time deposits at December 31, 2012 were as follows.
|
|
|
|
|
(in thousands)
|
|
Deposit
Maturities
|
|
2013
|
|
$
|
1,099,509
|
|
2014
|
|
|
344,440
|
|
2015
|
|
|
176,632
|
|
2016
|
|
|
59,856
|
|
2017
|
|
|
21,701
|
|
Thereafter
|
|
|
9,258
|
|
|
|
|
|
|
Total
|
|
$
|
1,711,396
|
|
|
|
|
|
|
Note 8. Short-Term Borrowings
Short-term borrowings consist of federal funds purchased and securities sold under agreements to repurchase and other short-term
borrowings. Federal funds purchased are overnight borrowings from other financial institutions. Securities sold under agreements to repurchase are secured transactions done principally with investment banks. Maturities of securities sold under
agreements to repurchase are generally 90 days or less.
Information relating to federal funds purchased and securities sold under agreements to repurchase
follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
At December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$
|
42,747
|
|
|
$
|
40,098
|
|
|
$
|
41,699
|
|
Weighted average interest rate paid
|
|
|
0.10
|
%
|
|
|
0.19
|
%
|
|
|
0.18
|
%
|
During the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum outstanding at any month-end
|
|
$
|
50,076
|
|
|
$
|
43,737
|
|
|
$
|
42,334
|
|
Daily average
|
|
|
41,676
|
|
|
|
42,064
|
|
|
|
34,683
|
|
Weighted average interest rate paid
|
|
|
0.13
|
%
|
|
|
0.19
|
%
|
|
|
0.23
|
%
|
102
Note 9. Long-Term Debt
A summary of long-term debt follows.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
Citizens (Parent only):
|
|
|
|
|
|
|
|
|
Subordinated debt:
|
|
|
|
|
|
|
|
|
5.75% subordinated notes due February 2013
|
|
$
|
17,252
|
|
|
$
|
17,101
|
|
Variable rate junior subordinated debenture due June 2033
|
|
|
25,774
|
|
|
|
25,774
|
|
7.50% junior subordinated debentures due September 2066
|
|
|
48,677
|
|
|
|
48,677
|
|
Subsidiary:
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank advances
|
|
|
655,102
|
|
|
|
658,484
|
|
Other borrowed funds
|
|
|
104,105
|
|
|
|
104,149
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
850,910
|
|
|
$
|
854,185
|
|
|
|
|
|
|
|
|
|
|
On January 27, 2003, Citizens issued $125.0 million of 5.75% subordinated notes, maturing February 1, 2013. Issuance costs
were capitalized and are included in the long-term debt total on the balance sheet. The issuance costs were amortized over ten years as a component of interest expense.
On June 26, 2003, Citizens issued $25.8 million of floating rate, 30-year trust preferred securities through an unconsolidated special purpose trust to unrelated institutional investors. The gross
proceeds from issuance were used to purchase a floating rate junior subordinated deferrable interest debenture (2003 Debenture) issued by Citizens, which is the sole asset of the trust. The 2003 Debenture matures in thirty years and
bears interest at an annual rate equal to the three-month LIBOR plus 3.10%, payable quarterly beginning in September 2003. Interest is adjusted on a quarterly basis not to exceed 11.75%. The 2003 Debenture is an unsecured obligation of Citizens and
is junior in right of payment to all future senior indebtedness of Citizens. Citizens has guaranteed that interest payments on the 2003 Debenture made to the trust will be distributed by the trust to the holders of the trust preferred securities.
The trust preferred securities of the special purpose trust are callable at par and must be redeemed in thirty years after issuance. The issuance costs were amortized to the call date over five years as a component of interest expense, as Citizens
believed this was the most probable life of these securities. Under the risk-based capital guidelines, the trust preferred securities currently qualify as Tier 1 capital.
On October 3, 2006, Citizens Funding Trust I (2006 Trust) completed an offering of $150.0 million aggregate liquidation amount of enhanced trust preferred securities. The gross proceeds
from issuance were used to purchase a junior subordinated deferrable interest debenture issued by Citizens, which is the sole asset of the 2006 Trust (the 2006 Debenture). The 2006 Debenture ranks junior to Citizens outstanding
debt, including the other outstanding junior subordinated debentures. The enhanced trust preferred securities are listed on the New York Stock Exchange (NYSE symbol CTZ-PrA). Distributions on the securities, which represent undivided beneficial
interests in the assets of the 2006 Trust, accrue from the original issue date and are payable quarterly in arrears at an annual rate of 7.50%, beginning December 15, 2006. The securities became callable on September 15, 2011 and mature on
September 15, 2066. Issuance costs of $5.1 million were capitalized and are amortized through the long-term debt total on the Consolidated Balance Sheets. The issuance costs were amortized to the call date over five years as a component of
interest expense. The proceeds were used to finance the cash portion of the consideration paid in Citizens merger with Republic Bancorp and for general corporate purposes.
On January 28, 2010 Citizens announced that it was suspending the dividend payments on its trust preferred securities. In December 2012, Citizens announced the resumption of payments on these
securities beginning in December 2012, as to the 2003 Debenture, and in March 2013 as to the 2006 Debenture. Citizens accrues for these obligations in other liabilities on the Consolidated Balance Sheets and as of December 31, 2012, the total
amount of the arrearage is $12.4 million.
103
As of December 31, 2012, advances from the FHLB are at fixed rates ranging from 2.16% to 6.93% and
mature from 2016 through 2022. Citizens restructured $350.0 million and $245.0 million in FHLB advances during 2012 and 2011, respectively. These restructures resulted in the locking in of lower term funding rates. The average interest rate on the
2012 restructured advances was reduced to 2.55% from 3.50% and the average remaining term was extended to 9.0 years from 3.2 years. The average interest rate on the 2011 restructured advances was reduced to 3.32% from 4.84% and the average remaining
term was extended to 5.8 years from 3.3 years. FHLB advances totaling $5.0 million may be put back to Citizens at the option of the FHLB. Advances totaling $462.0 million are non-convertible and subject to neither put nor call options.
Citizens advances from the FHLB were collateralized at December 31, 2012 with $2.0 billion of residential and commercial loans secured by real estate and securities held for pledging. At December 31, 2012, Citizens had $185.0 million of
variable rate advances from the FHLB outstanding. The advances are indexed to one month LIBOR with an average interest rate of 3.25% and an average remaining term to maturity of 5.0 years.
As of December 31, 2012, $103.4 million of long-term repurchase agreements with interest rates up to 4.69%, maturing between August 2015 and May 2016 were outstanding. Long-term repurchase agreements
are classified under Other borrowed funds.
The par value of long-term debt is scheduled to mature as shown in the table below.
This schedule excludes all carrying value adjustments, such as purchase accounting fair value adjustments, hedge accounting fair value adjustments, and unamortized premiums and discounts, that will not affect future cash payments
associated with the maturity of this debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Parent
|
|
|
Subsidiary
|
|
|
Consolidated
|
|
2013
|
|
$
|
17,266
|
|
|
$
|
25
|
|
|
$
|
17,291
|
|
2014
|
|
|
|
|
|
|
30
|
|
|
|
30
|
|
2015
|
|
|
|
|
|
|
66,661
|
|
|
|
66,661
|
|
2016
|
|
|
|
|
|
|
101,786
|
|
|
|
101,786
|
|
2017
|
|
|
|
|
|
|
160,440
|
|
|
|
160,440
|
|
Thereafter
|
|
|
74,451
|
|
|
|
427,148
|
|
|
|
501,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
91,717
|
|
|
$
|
756,090
|
|
|
$
|
847,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10. Fair Values of Assets and Liabilities
Fair value estimates are intended to represent the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. Given that there is no active market for many of Citizens financial instruments, Citizens has made estimates using discounted cash flow or other valuation techniques.
Inputs to these valuation methods are subjective in nature, involve uncertainties, and require significant judgment and therefore cannot be determined with precision. Accordingly, the derived fair value estimates presented herein are not necessarily
indicative of the amounts Citizens could realize in a current market exchange.
The fair value estimates are based on existing on and off
balance sheet financial instruments and do not attempt to estimate the value of anticipated future business or the value of assets and liabilities that are not considered financial instruments. For example, Citizens has a substantial trust
department that contributes net fee income annually. The trust department is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include Citizens brokerage network, net deferred tax assets (and any 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 Citizens value.
104
Citizens groups assets and liabilities which are recorded at fair value into 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 carrying amount, estimated fair value, and placement in the fair value hierarchy of
Citizens financial instruments that are not measured at fair value in their entirety on a recurring basis follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Fair Value Measurements
|
|
(in thousands)
|
|
Amount
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
173,510
|
|
|
$
|
173,510
|
|
|
$
|
|
|
|
$
|
173,510
|
|
|
$
|
|
|
Money market investments
|
|
|
186,349
|
|
|
|
186,349
|
|
|
|
|
|
|
|
186,349
|
|
|
|
|
|
Securities held to maturity
|
|
|
1,226,268
|
|
|
|
1,282,244
|
|
|
|
|
|
|
|
1,282,244
|
|
|
|
|
|
FHLB and Federal Reserve stock
|
|
|
126,763
|
|
|
|
126,763
|
|
|
|
|
|
|
|
126,763
|
|
|
|
|
|
Net portfolio loans
|
|
|
5,148,537
|
|
|
|
5,093,144
|
|
|
|
|
|
|
|
|
|
|
|
5,093,144
|
|
Loans held for sale
|
|
|
10,719
|
|
|
|
10,719
|
|
|
|
|
|
|
|
7,461
|
|
|
|
3,258
|
|
Accrued interest receivable
|
|
|
28,819
|
|
|
|
28,819
|
|
|
|
|
|
|
|
28,819
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
7,160,785
|
|
|
|
7,181,167
|
|
|
|
|
|
|
|
7,181,167
|
|
|
|
|
|
Short-term borrowings
|
|
|
42,747
|
|
|
|
42,747
|
|
|
|
|
|
|
|
42,747
|
|
|
|
|
|
Long-term debt
|
|
|
850,910
|
|
|
|
931,088
|
|
|
|
59,620
|
|
|
|
871,468
|
|
|
|
|
|
Accrued interest payable
|
|
|
15,844
|
|
|
|
15,844
|
|
|
|
|
|
|
|
15,844
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Fair Value Measurements
|
|
(in thousands)
|
|
Amount
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
153,418
|
|
|
$
|
153,418
|
|
|
$
|
|
|
|
$
|
153,418
|
|
|
$
|
|
|
Money market investments
|
|
|
313,632
|
|
|
|
313,632
|
|
|
|
|
|
|
|
313,632
|
|
|
|
|
|
Securities held to maturity
|
|
|
1,444,054
|
|
|
|
1,487,550
|
|
|
|
|
|
|
|
1,487,550
|
|
|
|
|
|
FHLB and Federal Reserve stock
|
|
|
117,943
|
|
|
|
117,943
|
|
|
|
|
|
|
|
117,943
|
|
|
|
|
|
Net portfolio loans
|
|
|
5,356,809
|
|
|
|
5,101,446
|
|
|
|
|
|
|
|
|
|
|
|
5,101,446
|
|
Loans held for sale
|
|
|
10,402
|
|
|
|
10,402
|
|
|
|
|
|
|
|
6,140
|
|
|
|
4,262
|
|
Accrued interest receivable
|
|
|
31,390
|
|
|
|
31,390
|
|
|
|
|
|
|
|
31,390
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
7,394,941
|
|
|
|
7,424,427
|
|
|
|
|
|
|
|
7,424,427
|
|
|
|
|
|
Short-term borrowings
|
|
|
40,098
|
|
|
|
40,098
|
|
|
|
|
|
|
|
40,098
|
|
|
|
|
|
Long-term debt
|
|
|
854,185
|
|
|
|
927,533
|
|
|
|
45,931
|
|
|
|
881,602
|
|
|
|
|
|
Accrued interest payable
|
|
|
14,047
|
|
|
|
14,047
|
|
|
|
|
|
|
|
14,047
|
|
|
|
|
|
105
The carrying amount approximates fair value for cash, money market investments, and accrued interest. The
methods and assumptions used to estimate the fair value of other financial instruments, regardless of whether the instrument is carried at fair value or not, are set forth below. There were no significant changes in the valuation methods used to
estimate fair value during the year ended December 31, 2012.
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 financial 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. These providers utilize pricing models that
vary by asset class and incorporate available trade, bid and other market information and for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, the
pricing applications apply available information as applicable through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. In addition, Citizens uses model processes to assess interest rate
impact and develop prepayment scenarios. The impact of unobservable inputs and proprietary models are not material to the determination of fair values of these securities. 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 the price at which a transaction would take place in current markets. Further, Citizens completes a
comparison of the fair value estimates quarterly by validating the data received to date provided by a separate third party. In order to then evaluate reasonableness of the market data, Citizens also independently prices a sampling of securities
using data from an independent source. Should Citizens find variances, the prices are then challenged and prices are adjusted accordingly. To date, there have been no significant findings or adjustments made by Citizens. 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 liquidity and credit premiums, 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 of market participants to utilize the tax credits associated with this type of instrument.
Securities Held to Maturity.
The estimated fair value of securities classified as held to maturity are based upon quoted prices for
similar assets, if available, or matrix pricing models. This process is essentially the same as the valuation methodologies and price verification functions used for securities available for sale.
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 using exit-value rates at December 31, 2012 and December 31, 2011, weighted for varying maturity dates. 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
106
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. If an entry-value rate was used to estimate fair value of loans and loan commitments, the disclosed fair value would have been higher for the periods presented.
Deposits.
The estimated fair value of demand deposits (e.g., noninterest and interest bearing demand, savings, and certain types of money market accounts) are, by definition, equal to
the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are based on the discounted value of contractual cash flows at current interest rates. The estimated fair value of deposits
does not take into account the value of Citizens long-term relationships with depositors, commonly known as core deposit intangibles, which are separate intangible assets, and not considered financial instruments.
Short-Term Borrowings.
The carrying amounts of federal funds purchased, securities sold under agreement to repurchase and other short-term
borrowings approximate their fair values because they frequently reprice to a market rate.
Long-Term Debt.
The fair value is
estimated using observable market prices and by discounting future cash flows using current interest rates for similar financial instruments.
Derivative Instruments.
Substantially all derivative instruments held or issued by Citizens are traded in over-the-counter markets
where quoted market prices are not readily available. Derivative instruments are priced by independent providers using observable market assumptions with adjustments based on widely accepted valuation techniques. For those derivatives, Citizens
measures fair value with models that use primarily market observable inputs, such as yield curves and option volatilities, and include the value associated with counterparty credit risk (credit valuation adjustments). Citizens assessed the
significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions, and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives.
Deferred Compensation Assets.
Citizens has a portfolio of mutual fund investments classified as trading securities 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 supported by a group annuity insurance contract issued by Prudential Retirement Insurance and Annuity Company. The investment is recorded at contract value and, based on the
nature of the fund, generally approximates fair value. The Guaranteed Income Fund has no maturity date and is secured only by Prudentials general account. Therefore, the Guaranteed Income Fund is recorded as recurring Level 3.
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, which are considered to be Level 2. Since certain assumptions and unobservable inputs related to loss severity are currently being used, 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. Citizens measures impairment on all
residential mortgage loans over five payments past due.
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 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 about loss severity Citizens believes potential investors would make or appraisals and are classified as nonrecurring Level 3.
107
Commercial loans held for sale are comprised primarily of loans identified for sale that are recorded at the
lower of carrying amount or fair value based on appraisals of the underlying collateral, which are also subject to management adjustments for loss severity based on current market conditions and recent sales activity. 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. Commercial properties and former branch locations are carried at fair value at the time of acquisition based on the fair value of
the underlying real property, net of estimated costs to sell and are subsequently monitored for lower of carrying value or fair value adjustments. This is determined using market prices derived from appraisals, which are considered to be Level 2.
However, certain assumptions and unobservable inputs related to loss severity are currently being used by appraisers and management, therefore, qualifying the assets as Level 3 in the fair value hierarchy. Residential real estate is recorded at the
fair value of the underlying real 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 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 fair value, as well as gains
and losses on disposal of these properties, are charged to noninterest expense 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 fair value, net of estimated costs to sell, based on internally developed procedures. Citizens records repossessed assets as nonrecurring Level 3.
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.
The following table presents the balances of assets
and liabilities that were measured at fair value on a recurring basis.
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
(in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
661,743
|
|
|
$
|
|
|
|
$
|
661,738
|
|
|
$
|
5
|
|
Mortgage-backed
|
|
|
933,143
|
|
|
|
|
|
|
|
933,143
|
|
|
|
|
|
State and municipal
|
|
|
102,436
|
|
|
|
|
|
|
|
101,734
|
|
|
|
702
|
|
Other
|
|
|
303
|
|
|
|
|
|
|
|
69
|
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
|
1,697,625
|
|
|
|
|
|
|
|
1,696,684
|
|
|
|
941
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
|
1,110
|
|
|
|
|
|
|
|
1,110
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
13,425
|
|
|
|
|
|
|
|
13,425
|
|
|
|
|
|
Deferred compensation assets
|
|
|
8,978
|
|
|
|
6,295
|
|
|
|
|
|
|
|
2,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
23,513
|
|
|
|
6,295
|
|
|
|
14,535
|
|
|
|
2,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,721,138
|
|
|
$
|
6,295
|
|
|
$
|
1,711,219
|
|
|
$
|
3,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
$
|
6,979
|
|
|
$
|
|
|
|
$
|
6,979
|
|
|
$
|
|
|
Derivatives not designated as hedging instruments
|
|
|
13,964
|
|
|
|
|
|
|
|
13,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,943
|
|
|
$
|
|
|
|
$
|
20,943
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
(in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
365,302
|
|
|
$
|
|
|
|
$
|
365,294
|
|
|
$
|
8
|
|
Mortgage-backed
|
|
|
823,852
|
|
|
|
|
|
|
|
823,852
|
|
|
|
|
|
State and municipal
|
|
|
123,308
|
|
|
|
|
|
|
|
121,862
|
|
|
|
1,446
|
|
Other
|
|
|
271
|
|
|
|
|
|
|
|
38
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
|
1,312,733
|
|
|
|
|
|
|
|
1,311,046
|
|
|
|
1,687
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
|
3,791
|
|
|
|
|
|
|
|
3,791
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
17,088
|
|
|
|
|
|
|
|
17,088
|
|
|
|
|
|
Deferred compensation assets
|
|
|
8,477
|
|
|
|
6,791
|
|
|
|
|
|
|
|
1,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
29,356
|
|
|
|
6,791
|
|
|
|
20,879
|
|
|
|
1,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,342,089
|
|
|
$
|
6,791
|
|
|
$
|
1,331,925
|
|
|
$
|
3,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
$
|
2,317
|
|
|
$
|
|
|
|
$
|
2,317
|
|
|
$
|
|
|
Derivatives not designated as hedging instruments
|
|
|
17,614
|
|
|
|
|
|
|
|
17,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,931
|
|
|
$
|
|
|
|
$
|
19,931
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no significant transfers between levels within the fair value hierarchy nor were there any issuances during the 12 month
period ended December 31, 2012.
The following table presents the reconciliation of Level 3 assets held by Citizens.
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized/Unrealized Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Recorded in Earnings
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
|
2011
|
|
|
Realized
(1)
|
|
|
Unrealized
|
|
|
Income (Pretax)
|
|
|
Purchases
|
|
|
Sales
|
|
|
Settlements
|
|
|
2012
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(3
|
)
|
|
$
|
5
|
|
State and municipal
|
|
|
1,446
|
|
|
|
628
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
(1,450
|
)
|
|
|
702
|
|
Other
|
|
|
233
|
|
|
|
13
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234
|
|
Deferred compensation assets
|
|
|
1,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,826
|
|
|
|
(829
|
)
|
|
|
|
|
|
|
2,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,373
|
|
|
$
|
641
|
|
|
$
|
|
|
|
$
|
66
|
|
|
$
|
1,826
|
|
|
$
|
(829
|
)
|
|
$
|
(1,453
|
)
|
|
$
|
3,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net realized gains
and losses recorded in earnings include discount accretions.
|
The following table includes assets measured at fair value on a nonrecurring basis
that have had a fair value adjustment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Initial Carrying
|
|
|
Fair Value
|
|
(in thousands)
|
|
Value
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Impaired loans
|
|
$
|
79,996
|
|
|
$
|
25,228
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
25,228
|
|
Commercial loans held for sale
|
|
|
4,985
|
|
|
|
2,672
|
|
|
|
|
|
|
|
|
|
|
|
2,672
|
|
Residential mortgage loans held for sale
|
|
|
706
|
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
211
|
|
Other real estate
|
|
|
4,453
|
|
|
|
1,814
|
|
|
|
|
|
|
|
|
|
|
|
1,814
|
|
Repossessed assets
|
|
|
2,883
|
|
|
|
1,557
|
|
|
|
|
|
|
|
|
|
|
|
1,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
93,023
|
|
|
$
|
31,482
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table represents quantitative information about Level 3 fair value
measurements.
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
|
|
|
Range (Weighted
|
(in thousands)
|
|
December 31, 2012
|
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Average)
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
5
|
|
|
Cost
|
|
None
(1)
|
|
None
|
State and municipal
|
|
|
702
|
|
|
Discounted Cash Flow
|
|
Liquidity Premium
|
|
2.5% - 2.5%(2.5%)
|
|
|
|
|
|
|
|
|
Credit Premium
|
|
1.5% -1.7%(1.6%)
|
|
|
|
|
|
|
|
|
Fail Rate
|
|
1.2% - 2.0%(1.8%)
|
Other
|
|
|
234
|
|
|
Discounted Cash Flow
|
|
Liquidity Premium
|
|
2.0% - 2.5%(2.5%)
|
|
|
|
|
|
|
|
|
Credit Premium
|
|
2.3% - 5.5%(4.4%)
|
|
|
|
|
|
|
|
|
Fail Rate
|
|
1.2% - 1.5%(1.4%)
|
Deferred compensation assets
|
|
|
2,683
|
|
|
Contract Value
|
|
None
(2)
|
|
None
|
Impaired loans
|
|
|
25,228
|
|
|
Appraisals
|
|
Loss Severity Discount
|
|
0% - 100%(69%)
|
Commercial loans held for sale
|
|
|
2,672
|
|
|
Appraisals
|
|
Loss Severity Discount
|
|
6% - 100%(46%)
|
Residential mortgage loans held for sale
|
|
|
211
|
|
|
Appraisals
|
|
Loss Severity Discount
|
|
6% - 100%(70%)
|
Other real estate
|
|
|
1,814
|
|
|
Appraisals
|
|
Loss Severity Discount
|
|
2% - 100%(59%)
|
Repossessed assets
|
|
|
1,557
|
|
|
Comparable Sales
|
|
Loss Severity Discount
|
|
46% - 46%(46%)
|
(1)
|
Carrying value approximates fair value.
|
(2)
|
Contract value approximates fair value.
|
The significant unobservable inputs used in the fair value measurement of Citizens recurring Level 3 securities are the liquidity
and credit premiums and fail rate formula. A change in these inputs to a different amount would not result in a material change in fair value.
110
Note 11. Employee Benefit Plans
Pension and Postretirement Benefits
. Citizens maintains a cash balance defined benefit pension plan. Pension retirement benefits
are based on the employees length of service and salary levels. Under the defined benefit plan, employees are eligible for early retirement at age 55 with at least 3 years of service. It is Citizens policy to fund pension costs in an
amount sufficient to meet or exceed the minimum funding requirements of applicable laws and regulations, plus such additional amounts as Citizens deems appropriate up to the level allowed by federal tax regulations. Actuarially determined pension
costs are charged to current operations. Effective December 31, 2006, Citizens defined benefit pension plan was frozen, preserving prior earned benefits but discontinuing the accrual of further benefits. Citizens also
maintains nonqualified supplemental benefit plans for certain former key employees. These plans are provided for by charges to earnings sufficient to meet the projected benefit obligation under applicable accounting standards. Benefits under the
nonqualified supplemental plans are based primarily on years of service, age and compensation before retirement. The defined pension benefits provided under these plans are unfunded and any payments to plan participants are made by Citizens.
Citizens postretirement benefit plan provides postretirement health and dental care to full-time employees who retired with eligibility for coverage based on historical plan terms. Current employees are not eligible to participate in the
bank-subsidized retiree health and dental plan.
The estimated portion
of balances included in accumulated other comprehensive income that have not been recognized prior to December 31 are presented below.
|
|
|
|
|
|
|
|
|
|
|
Cumulative Balance
|
|
|
|
at December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
Defined Benefit Pension Plans
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
120
|
|
|
$
|
147
|
|
Net actuarial loss
|
|
|
38,831
|
|
|
|
38,498
|
|
|
|
|
|
|
|
|
|
|
Unrecognized balance
|
|
|
38,951
|
|
|
|
38,645
|
|
|
|
|
|
|
|
|
|
|
Supplemental Pension Plans
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
|
1,413
|
|
|
|
1,148
|
|
|
|
|
|
|
|
|
|
|
Unrecognized balance
|
|
|
1,413
|
|
|
|
1,148
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefit Plans
|
|
|
|
|
|
|
|
|
Prior service credit
|
|
|
(5,057
|
)
|
|
|
(6,023
|
)
|
Net actuarial gain
|
|
|
(1,582
|
)
|
|
|
(1,609
|
)
|
|
|
|
|
|
|
|
|
|
Unrecognized balance
|
|
|
(6,639
|
)
|
|
|
(7,632
|
)
|
|
|
|
|
|
|
|
|
|
Unrecognized net prior service credit
|
|
$
|
(4,937
|
)
|
|
$
|
(5,876
|
)
|
Unrecognized net actuarial loss
|
|
|
38,662
|
|
|
|
38,037
|
|
The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit costs during 2013
are amortization of prior service credits and net losses of $0.9 million and $3.4 million, respectively.
The net actuarial gain or loss and prior service cost
recognized in accumulated other comprehensive income are presented below.
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Pension
|
|
|
Non-Qualified
|
|
|
Postretirement
|
|
|
|
|
December 31,
|
|
Plan
|
|
|
Pension Plan
|
|
|
Health Plan
|
|
|
Total
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Net prior service credit
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(4,869
|
)
|
|
$
|
|
|
|
$
|
(4,869
|
)
|
Net loss (gain)
|
|
|
4,309
|
|
|
|
8,262
|
|
|
|
372
|
|
|
|
313
|
|
|
|
(185
|
)
|
|
|
148
|
|
|
|
4,496
|
|
|
|
8,723
|
|
An actuarial measurement date of
December 31 was utilized in the following table to determine the projected benefit obligations, fair value of plan assets, and accumulated benefit obligation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Supplemental
|
|
|
Postretirement
|
|
|
|
Benefits
|
|
|
Pension Plan
|
|
|
Benefits
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation, beginning of year
|
|
$
|
79,917
|
|
|
$
|
78,282
|
|
|
$
|
5,472
|
|
|
$
|
5,441
|
|
|
$
|
2,089
|
|
|
$
|
7,628
|
|
Interest cost
|
|
|
3,469
|
|
|
|
3,767
|
|
|
|
208
|
|
|
|
233
|
|
|
|
79
|
|
|
|
327
|
|
Participant contribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155
|
|
|
|
403
|
|
Actuarial losses (gains)
|
|
|
8,034
|
|
|
|
3,951
|
|
|
|
373
|
|
|
|
313
|
|
|
|
(185
|
)
|
|
|
148
|
|
Plan amendments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,869
|
)
|
Curtailments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(571
|
)
|
Benefits paid
|
|
|
(4,778
|
)
|
|
|
(6,083
|
)
|
|
|
(499
|
)
|
|
|
(515
|
)
|
|
|
(44
|
)
|
|
|
(977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation, end of year
|
|
$
|
86,642
|
|
|
$
|
79,917
|
|
|
$
|
5,554
|
|
|
$
|
5,472
|
|
|
$
|
2,094
|
|
|
$
|
2,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation, end of year
|
|
$
|
86,642
|
|
|
$
|
79,917
|
|
|
$
|
5,554
|
|
|
$
|
5,472
|
|
|
$
|
2,094
|
|
|
$
|
2,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year
|
|
$
|
59,573
|
|
|
$
|
65,658
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
7,949
|
|
|
|
(227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer contribution
|
|
|
2,675
|
|
|
|
225
|
|
|
|
499
|
|
|
|
515
|
|
|
|
(111
|
)
|
|
|
574
|
|
Participant contribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155
|
|
|
|
403
|
|
Benefits paid
|
|
|
(4,778
|
)
|
|
|
(6,083
|
)
|
|
|
(499
|
)
|
|
|
(515
|
)
|
|
|
(44
|
)
|
|
|
(977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of year
|
|
$
|
65,419
|
|
|
$
|
59,573
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underfunded status of plan
|
|
$
|
(21,223
|
)
|
|
$
|
(20,344
|
)
|
|
$
|
(5,554
|
)
|
|
$
|
(5,472
|
)
|
|
$
|
(2,094
|
)
|
|
$
|
(2,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized in the consolidated balance sheets
|
|
$
|
(21,223
|
)
|
|
$
|
(20,344
|
)
|
|
$
|
(5,554
|
)
|
|
$
|
(5,472
|
)
|
|
$
|
(2,094
|
)
|
|
$
|
(2,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in projected benefit obligation for the Defined Benefit Pension Plan, is related to a decrease in the discount rate,
partially offset by a small demographic gain and a decrease in the cash balance interest crediting rate. At December 31, 2012, the underfunded status of the Cash Balance Pension Plan for employees, the Supplemental Pension Plans, and the
Retirement Health Plan is recognized in the consolidated balance sheet as an accrued liability. No plan assets are expected to be returned to Citizens during the year ending December 31, 2013.
Effective December 31, 2011, Citizens recognized the impact of a plan amendment based upon the implementation of a new Medicare Supplemental program
for the postretirement plan participants. Additionally, this change resulted in the recognition of a curtailment benefit due to the elimination of a subsidy for a portion of the plan participants.
The components of net periodic benefit cost charged to operations each year for all
plans follow.
112
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Defined Benefit Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
3,469
|
|
|
$
|
3,767
|
|
|
$
|
4,132
|
|
Expected return on plan assets
|
|
|
(4,224
|
)
|
|
|
(4,083
|
)
|
|
|
(4,814
|
)
|
Amortization of unrecognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
26
|
|
|
|
26
|
|
|
|
26
|
|
Net actuarial loss
|
|
|
3,103
|
|
|
|
3,230
|
|
|
|
2,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension cost
|
|
|
2,374
|
|
|
|
2,940
|
|
|
|
1,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
|
208
|
|
|
|
233
|
|
|
|
264
|
|
Amortization of unrecognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
|
58
|
|
|
|
35
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension cost
|
|
|
266
|
|
|
|
268
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefit Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
|
79
|
|
|
|
327
|
|
|
|
398
|
|
Curtailment gain
|
|
|
|
|
|
|
(571
|
)
|
|
|
|
|
Amortization of unrecognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
|
|
(918
|
)
|
|
|
(335
|
)
|
|
|
(289
|
)
|
Net actuarial gain
|
|
|
(180
|
)
|
|
|
(143
|
)
|
|
|
(199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net postretirement benefit cost
|
|
|
(1,019
|
)
|
|
|
(722
|
)
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pension and postretirement benefit cost
|
|
|
1,621
|
|
|
|
2,486
|
|
|
|
1,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined contribution retirement and 401(k) plans
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
1,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total periodic benefit cost
|
|
$
|
3,381
|
|
|
$
|
2,486
|
|
|
$
|
1,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assumptions used in determining the actuarial present value of the benefit obligations and the
net periodic pension expense follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Supplemental
|
|
|
Postretirement
|
|
|
|
Benefits
|
|
|
Pension Plan
|
|
|
Benefits
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Assumptions used to compute projected benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.50
|
%
|
|
|
4.50
|
%
|
|
|
3.00
|
%
|
|
|
4.00
|
%
|
|
|
3.00
|
%
|
|
|
4.00
|
%
|
|
|
|
|
|
|
|
Assumptions used to compute net benefit costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.50
|
|
|
|
5.00
|
|
|
|
4.00
|
|
|
|
4.50
|
|
|
|
4.00
|
|
|
|
4.50
|
|
Expected return on plan assets
|
|
|
7.00
|
|
|
|
7.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The projected benefit payments for the employee benefit plans over the next ten years
follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
|
|
|
Supplemental
|
|
|
Postretirement
|
|
|
Total
|
|
(in thousands)
|
|
Pension Plan
|
|
|
Pension Plan
|
|
|
Benefit Plan
|
|
|
Benefits
|
|
2013
|
|
$
|
5,058
|
|
|
$
|
468
|
|
|
$
|
199
|
|
|
$
|
5,725
|
|
2014
|
|
|
5,424
|
|
|
|
457
|
|
|
|
197
|
|
|
|
6,078
|
|
2015
|
|
|
5,165
|
|
|
|
420
|
|
|
|
193
|
|
|
|
5,778
|
|
2016
|
|
|
5,257
|
|
|
|
406
|
|
|
|
188
|
|
|
|
5,851
|
|
2017
|
|
|
5,302
|
|
|
|
391
|
|
|
|
181
|
|
|
|
5,874
|
|
2018 to 2022
|
|
|
26,443
|
|
|
|
1,695
|
|
|
|
765
|
|
|
|
28,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,649
|
|
|
$
|
3,837
|
|
|
$
|
1,723
|
|
|
$
|
58,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113
The projected payments were calculated using the same assumptions as those used to calculate the benefit
obligations listed above.
Investment Policy and Strategy
. Managements investment policy and strategy for managing defined
benefit plan assets is described as growth with income. Management analyzes the potential risks and rewards associated with the asset allocation strategies on a quarterly basis. Implementation of the strategies includes regular rebalancing to the
target asset allocation. The target asset allocation mix remained at 60% equities and 40% fixed income debt securities and cash equivalents during 2012. The long-term rate of return expected on plan assets is finalized after considering long-term
returns in the general market, long-term returns experienced by the assets in the plan, and projected plan expenses.
The plans target asset allocation and the actual asset
allocation at December 31, 2012 are presented below.
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
|
Actual
|
|
|
|
Allocation
|
|
|
Allocation
|
|
Asset Category:
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
60
|
%
|
|
|
62
|
%
|
Debt securities
|
|
|
34
|
|
|
|
34
|
|
Short-term pooled money fund
|
|
|
6
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
The pension plan assets for which Citizens determines fair value include a short-term pooled money fund, equity, and fixed income
securities, all of which fall into Level 2 in the fair value hierarchy at December 31, 2012. Citizens pension plan assets are invested solely in pooled separate account funds, which are managed by Prudential. The net asset values (NAV)
are based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of units outstanding. The NAVs unit price of the pooled separate accounts is not quoted on any market; however, the unit
price is based on the underlying investments which are traded in an active market and are priced by independent providers. Citizens has evaluated their valuation methodologies used to develop the fair values in order to determine whether such
valuations are representative of an exit price in Citizens principal markets. Further, Citizens has developed an internal, independent price verification function that performs testing on valuations received from third parties. There are no
significant restrictions on Citizens ability to sell any of the investments in the pension plan.
The estimated fair values of Citizens pension plan assets follows.
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
(in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term pooled money fund
|
|
$
|
2,718
|
|
|
$
|
|
|
|
$
|
2,718
|
|
|
$
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large-cap
|
|
|
18,306
|
|
|
|
|
|
|
|
18,306
|
|
|
|
|
|
Mid-cap
|
|
|
4,785
|
|
|
|
|
|
|
|
4,785
|
|
|
|
|
|
Small-cap
|
|
|
6,847
|
|
|
|
|
|
|
|
6,847
|
|
|
|
|
|
International equity
|
|
|
10,508
|
|
|
|
|
|
|
|
10,508
|
|
|
|
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate term fixed
|
|
|
22,255
|
|
|
|
|
|
|
|
22,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
65,419
|
|
|
$
|
|
|
|
$
|
65,419
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Citizens contributed $2.7 million in 2012 and anticipates contributing $1.2 million in 2013 as required under current funding
regulations. Citizens anticipates making a contribution of $0.5 million to the nonqualified supplemental benefit plans during 2013. In addition, Citizens expects to pay $0.2 million in contributions to the postretirement healthcare benefit plan
during 2013.
Prior service pension costs for the Citizens Cash Balance Pension plan are amortized on a straight-line basis over average
remaining service period of employees expected to receive benefits under the plan. The annual amortization for the Postretirement Benefits Plans is calculated based on the average remaining lifetime of current retired participants. For the
postretirement health care benefit plan, Citizens assumed an 8.8% annual health care cost trend rate for 2012, which grades down to the ultimate trend of 5.0% by 2032. This assumption can have a significant effect on the amounts reported.
A one-percentage-point change in assumed health care trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
One Percentage
|
|
|
One Percentage
|
|
(in thousands)
|
|
Point Increase
|
|
|
Point Decrease
|
|
Effect on total of service and interest cost components
|
|
$
|
7
|
|
|
$
|
(7
|
)
|
Effect on the postretirement benefit obligation
|
|
|
207
|
|
|
|
(184
|
)
|
Defined Contribution Retirement and 401(k) Plans
. Substantially all employees are eligible to contribute a portion of their
pre-tax salary to a defined contribution 401(k) savings plan. Citizens suspended the 401(k) matching funds and annual discretionary contributions during the third quarter of 2009. The Board of Directors approved the reinstatement of the 401(k)
matching funds effective January 1, 2012. Contributions to the 401(k) savings plan are now matched 50% on the first 2% of salary deferred and 25% on the next 6% deferred. Under the elective contribution feature, Citizens contributed $1.8
million in 2012.
Note 12. Stock-Based Compensation
Citizens has a stock-based compensation plan authorizing the granting of incentive and nonqualified stock options, restricted stock
awards, restricted stock units, and performance awards to employees and non-employee directors. A plan amendment and restatement was approved by shareholders on May 4, 2010 that increased the number of shares reserved under the plan to
2,400,000, removed the 200,000 share sublimit for grants other than stock options and made various other changes. At December 31, 2012, Citizens had 950,248 shares of common stock reserved for future issuance under the current plan.
115
Under the provisions of the grants made pursuant to the Stock Compensation Plan in 2012 and 2011, stock
awards were divided between performance-based stock and time-based stock. The performance-based stock was measured against annual metrics over a two year period. The time-based stock will vest three years after the grant date. Once vested, these
shares will remain nontransferable until the Holding Company has redeemed all or a portion of the Troubled Asset Relief Program (TARP) Preferred Stock issued to Treasury pursuant to the Capital Purchase Program. A prorated portion of the
vested shares become transferable upon redemption of the TARP Preferred Stock based on a predefined schedule established by the Treasury.
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 recognized costs associated with stock options since 2009. Forfeited and expired options and forfeited shares of restricted
stock become available for future grants.
The
following table sets forth the total stock-based compensation expense resulting from stock options and restricted stock awards included in the Consolidated Statements of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Restricted stock compensation and restricted stock unit compensation
|
|
$
|
3,737
|
|
|
$
|
3,160
|
|
|
$
|
2,193
|
|
Income tax benefit
|
|
|
(1,308
|
)
|
|
|
(1,106
|
)
|
|
|
(768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense after income taxes
|
|
$
|
2,429
|
|
|
$
|
2,054
|
|
|
$
|
1,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New shares are issued when stock options are exercised. There were no stock options exercised during the years ended December 31,
2012, 2011, and 2010. Citizens presents excess tax benefits from the exercise of stock options, if any, as financing cash inflows and as operating cash outflows on the Consolidated Statements of Cash Flows.
The following table summarizes stock option activity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term in Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2010
|
|
|
306,675
|
|
|
$
|
262.20
|
|
|
|
|
|
|
|
|
|
Forfeitures or Expirations
|
|
|
(78,366
|
)
|
|
|
234.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
228,309
|
|
|
|
271.80
|
|
|
|
|
|
|
|
|
|
Forfeitures or Expirations
|
|
|
(53,305
|
)
|
|
|
242.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2011
|
|
|
175,004
|
|
|
|
279.35
|
|
|
|
|
|
|
|
|
|
Forfeitures or Expirations
|
|
|
(57,794
|
)
|
|
|
284.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
117,210
|
|
|
$
|
276.94
|
|
|
|
1.0
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
117,210
|
|
|
$
|
276.94
|
|
|
|
1.0
|
|
|
$
|
|
|
There were no stock options vested during 2012 and 2011. The fair value of options vested during 2010 was less than $0.1 million.
116
As of December 31, 2012, $5.7 million of total unrecognized compensation cost related to restricted
stock is expected to be recognized over a weighted average period of 1.6 years.
The following table summarizes restricted stock
activity.
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-Average
Per Share Grant Date
Fair Value
|
|
Restricted stock at January 1, 2010
|
|
|
61,876
|
|
|
$
|
63.50
|
|
Granted
|
|
|
309,260
|
|
|
|
11.70
|
|
Vested
|
|
|
(30,729
|
)
|
|
|
66.20
|
|
Forfeited
|
|
|
(29,407
|
)
|
|
|
18.80
|
|
|
|
|
|
|
|
|
|
|
Restricted stock at December 31, 2010
|
|
|
311,000
|
|
|
|
13.30
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
594,620
|
|
|
|
8.05
|
|
Vested
|
|
|
(35,802
|
)
|
|
|
24.46
|
|
Forfeited
|
|
|
(43,849
|
)
|
|
|
11.36
|
|
|
|
|
|
|
|
|
|
|
Restricted stock at December 31, 2011
|
|
|
825,969
|
|
|
|
9.27
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
305,174
|
|
|
|
16.88
|
|
Vested
|
|
|
(86,685
|
)
|
|
|
11.78
|
|
Forfeited
|
|
|
(40,494
|
)
|
|
|
11.57
|
|
|
|
|
|
|
|
|
|
|
Restricted stock at December 31, 2012
(1)
|
|
|
1,003,964
|
|
|
$
|
11.27
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes 75,814
vested shares under restriction prohibiting sale until conditions are met, including two years from grant date and certain TARP payments are made.
|
The total fair value of restricted stock vested during 2012 was $1.4 million and $0.3 million for 2011 and 2010.
Note 13. Income Taxes
Significant components of income taxes from continuing operations are as
follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Current tax (benefit) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
10,899
|
|
|
$
|
(12,750
|
)
|
|
$
|
12,337
|
|
State
|
|
|
(64
|
)
|
|
|
(167
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax expense (benefit)
|
|
|
10,835
|
|
|
|
(12,917
|
)
|
|
|
12,270
|
|
Deferred tax benefit
|
|
|
(10,974
|
)
|
|
|
(25,911
|
)
|
|
|
(52,009
|
)
|
Valuation allowance
|
|
|
(272,870
|
)
|
|
|
18,570
|
|
|
|
52,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) provision
|
|
$
|
(273,009
|
)
|
|
$
|
(20,258
|
)
|
|
$
|
12,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Generally, the calculation for the income tax provision (benefit) does not consider the tax effects of changes in OCI, which is a
component of shareholders equity on the balance sheet. However, an exception is provided in certain circumstances, such as when there is a pre-tax loss from continuing operations and income in other components of the financial statements. In
such a case, pre-tax income from other categories (such as changes in OCI) is included in the calculation of the continuing operations tax provision. For 2011, this resulted in an increase to the income tax benefit of $7.7 million.
117
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of Citizens deferred tax assets and liabilities as of December 31, 2012 and 2011 follow.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for loan losses and other credit losses
|
|
$
|
49,970
|
|
|
$
|
72,843
|
|
Accrued postemployment benefits other than pensions
|
|
|
3,535
|
|
|
|
3,853
|
|
Deferred compensation
|
|
|
3,950
|
|
|
|
4,260
|
|
Accrued expenses
|
|
|
5,602
|
|
|
|
4,906
|
|
Loss carryforwards
|
|
|
220,481
|
|
|
|
231,616
|
|
Tax credit carryforwards
|
|
|
13,819
|
|
|
|
2,820
|
|
Minimum pension liability
|
|
|
12,835
|
|
|
|
11,992
|
|
Purchase accounting adjustments
|
|
|
2,215
|
|
|
|
4,032
|
|
Other deferred tax assets
|
|
|
5,180
|
|
|
|
7,620
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
317,587
|
|
|
|
343,942
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Pension
|
|
|
7,557
|
|
|
|
7,437
|
|
Basis difference in FHLB stock
|
|
|
2,668
|
|
|
|
2,663
|
|
Tax deductible goodwill
|
|
|
15,253
|
|
|
|
14,933
|
|
Unrealized gains on securities and derivatives
|
|
|
18,192
|
|
|
|
21,330
|
|
Other deferred tax liabilities
|
|
|
1,026
|
|
|
|
1,028
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
44,696
|
|
|
|
47,391
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
272,891
|
|
|
|
296,551
|
|
Valuation allowance
|
|
|
|
|
|
|
(311,484
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liabilities)
|
|
$
|
272,891
|
|
|
$
|
(14,933
|
)
|
|
|
|
|
|
|
|
|
|
At December 31, 2012, the carrying values of certain loss carryforwards include a cumulative reduction of $39.1 million to reflect
their estimated realizability at year end. This adjustment was required due to limitations imposed by Section 382 of the Internal Revenue Code as further discussed below.
At December 31, 2012, taking into account the above noted reduction, Citizens had gross federal loss carryforwards of $618.0 million that expire in 2028 through 2032, gross state loss carryforwards
of $81.8 million that expire in 2014 through 2027, and $13.6 million of federal alternative minimum tax credits with an indefinite life. The gross loss carryforward contains $0.2 million that relates to unrealized excess benefits on stock-based
compensation for which a tax benefit will be recorded to shareholders equity when utilized.
In assessing whether or not some or all of
our deferred tax assets are more likely than not to be realized in the future, we consider all available positive and negative evidence, including projected future taxable income, tax planning strategies and recent financial operations. Based on an
evaluation of the then-available positive and negative evidence, Citizens determined it was appropriate to establish a full valuation allowance on our deferred tax asset as of December 31, 2008. At that time, and in subsequent quarters,
negative evidence, including a recent cumulative history of operating losses, outweighed the positive evidence.
However, at June 30,
2012, the positive evidence outweighed the negative evidence and Citizens determined that a deferred tax asset valuation allowance was no longer necessary. The significant positive evidence in our analysis included: five consecutive quarters of
profitability, termination of the written agreement with our primary regulators, improved capital levels, solid credit metrics, strong deposit mix, reduced regulatory risk, and a stabilizing economy.
118
At December 31, 2012, the positive evidence above including, now, seven consecutive quarters of
profitability, continues to exist and outweigh the negative evidence. Therefore, management has determined that no valuation allowance is necessary at December 31, 2012.
The deferred tax assets continue to be analyzed quarterly for changes affecting realizability and the valuation allowance may be adjusted in future periods accordingly. The ultimate realization of these
deferred tax assets is primarily dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. Changes in existing tax laws could also affect actual tax results and the valuation of
deferred tax assets over time. The accounting for deferred taxes is based on an estimate of future results. Differences between anticipated and actual outcomes of these future tax consequences could have an impact on Citizens consolidated
results of operations or financial position.
During 2009, Citizens incurred an ownership change within the meaning of Section 382 of the
Internal Revenue Code. As a result, federal tax law places an annual limitation of approximately $17.7 million on the amount of certain loss carryforwards that may be used.
Citizens effective tax rate differs from
the statutory federal tax rate. The following is a summary of such differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Tax at federal statutory rate (35%) applied to income before income taxes
|
|
$
|
34,743
|
|
|
$
|
(4,757
|
)
|
|
$
|
(96,686
|
)
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax method change
|
|
|
|
|
|
|
(12,794
|
)
|
|
|
|
|
Tax-exempt income
|
|
|
(3,769
|
)
|
|
|
(4,531
|
)
|
|
|
(6,387
|
)
|
Officers life insurance
|
|
|
(1,479
|
)
|
|
|
(1,474
|
)
|
|
|
(1,277
|
)
|
Section 382 limitations
|
|
|
6,344
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(311,484
|
)
|
|
|
2,381
|
|
|
|
112,821
|
|
Other
|
|
|
2,636
|
|
|
|
917
|
|
|
|
4,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) provision
|
|
$
|
(273,009
|
)
|
|
$
|
(20,258
|
)
|
|
$
|
12,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In December 2010, Citizens filed a request with the Internal Revenue Service (IRS) to change its tax accounting method
related to bad debts. The IRS approved the request in June 2011, which allowed Citizens to change its current method of recording tax bad debts from the book conformity method to a new specific charge-off method.
A reconciliation of the beginning and ending amount of unrecognized tax
benefits follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Balance at January 1
|
|
$
|
243
|
|
|
$
|
326
|
|
|
$
|
1,522
|
|
Additions based on tax positions related to the current year
|
|
|
|
|
|
|
|
|
|
|
|
|
Reductions for tax positions of prior years
|
|
|
|
|
|
|
|
|
|
|
(430
|
)
|
Reductions due to the statute of limitations
|
|
|
(84
|
)
|
|
|
(83
|
)
|
|
|
(766
|
)
|
Settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
159
|
|
|
$
|
243
|
|
|
$
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The entire amount of unrecognized tax benefits would affect Citizens effective tax rate if recognized. It is Citizens
policy to recognize interest and penalties accrued relative to unrecognized tax benefits in its respective federal or state income tax accounts. Accrued interest was $0.1 million as of December 31, 2012 and 2011. Citizens accrued no interest in
2012 and recognized $0.1 million benefit of interest in 2011. Citizens does not believe it is reasonably possible that unrecognized tax benefits will significantly change within the next 12 months.
During 2010, Citizens settled its 2006 through 2008 federal examinations and recognized a tax benefit of $0.5 million.
119
Citizens and its subsidiary file U.S. federal income tax returns, as well as various returns in the states
where its banking offices are located.
The following tax years remain subject to examination as of December 31, 2012.
|
|
|
Jurisdiction
|
|
Tax Years
|
Federal
|
|
2009 - 2012
|
State
|
|
2008 - 2012
|
Note 14. Shareholders Equity and Earnings Per Common Share
On June 14, 2011, Citizens announced a 1-for-10 reverse stock split of Citizens common stock effective after the close of trading
on July 1, 2011. Citizens common stock began trading on a split adjusted basis on The NASDAQ Capital Market at the opening of trading on July 5, 2011. All share and per share amounts reflect the 1-for-10 reverse stock split.
In connection with the reverse stock split, stockholders received one new share of common stock in exchange for every ten shares held at the effective
time. The reverse stock split reduced the number of shares of outstanding common stock from approximately 397.8 million to 39.8 million. The number of authorized shares of common stock was reduced from 1.05 billion to 105.0 million.
Proportional adjustments were made to Citizens outstanding options, warrants and other securities entitling their holders to purchase or receive shares of Citizens common stock so that the reverse stock split did not materially affect any of
the rights of holders of those securities. The number of shares available under Citizens equity-based plans was also proportionately reduced.
During the first quarter of 2010, Citizens suspended quarterly cash dividend payments on its fixed-rate cumulative perpetual preferred stock, TARP Preferred Stock, issued to and owned by the U.S.
Department of the Treasury as part of the Treasurys Capital Purchase Program. Citizens has both the intent and ability in the future to pay these dividends and therefore accrues for this obligation. Citizens is currently in arrears in the
amount of $48.5 million and $31.5 million with the dividend payments on the TARP Preferred Stock as of December 31, 2012 and 2011, respectively.
On December 12, 2008, Citizens issued 300,000 shares of TARP Preferred Stock to the Treasury as part of the Treasurys Capital Purchase Program. In addition, Citizens issued a ten-year warrant
to the Treasury to purchase up to 1,757,813 shares of Citizens common stock, no par value at an exercise price of $25.60 per share. The aggregate proceeds from the transaction were $300.0 million. The TARP Preferred Stock has no par value,
carries a liquidation price of $1,000 per share, and pays cumulative dividends at a rate of 5% per year for the first five years and 9% per year thereafter. Citizens may redeem the preferred stock at the liquidation price plus accrued and
unpaid dividends. Citizens is accreting the book value of the preferred stock issued under the TARP using the effective interest method up to the par value of $300 million. The preferred shares are non-voting, other than class voting rights on
matters that could adversely affect the shares. The preferred shares qualify as Tier 1 capital. The warrant is immediately exercisable, qualifies as Tier 1 capital and expires in December 2018.
Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing net income allocated to common
shareholders by the weighted average number of common shares outstanding, excluding outstanding participating securities. Participating securities include restricted stock awards because holders of these awards have the right to receive
non-forfeitable dividends at the same rate as holders of common stock and have voting rights. Diluted earnings per common share is computed based on the weighted average number of common shares outstanding including the dilutive effect of
stock-based compensation. Potential common stock that would be generated from restrictions lapsing on unvested shares as well as additional shares issued through the exercise of stock options and warrant were anti-dilutive and therefore excluded
from the computation of dilutive earnings per share.
120
A reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
372,275
|
|
|
$
|
6,667
|
|
|
$
|
(289,104
|
)
|
Loss from discontinued operations (net of income tax)
|
|
|
|
|
|
|
|
|
|
|
(3,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
372,275
|
|
|
|
6,667
|
|
|
|
(292,925
|
)
|
Dividend on redeemable preferred stock
|
|
|
(24,347
|
)
|
|
|
(22,985
|
)
|
|
|
(21,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to common shareholders
|
|
|
347,928
|
|
|
|
(16,318
|
)
|
|
|
(314,610
|
)
|
Net income allocated to participating securities
|
|
|
8,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income after allocation to participating securities
|
|
$
|
339,794
|
|
|
$
|
(16,318
|
)
|
|
$
|
(314,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
40,420
|
|
|
|
40,053
|
|
|
|
39,615
|
|
Less: participating securities included in weighted average shares outstanding
|
|
|
(945
|
)
|
|
|
(631
|
)
|
|
|
(223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic and dilutive earnings per common share
|
|
|
39,475
|
|
|
|
39,422
|
|
|
|
39,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share from continuing operations
|
|
$
|
8.61
|
|
|
$
|
(0.41
|
)
|
|
$
|
(7.89
|
)
|
Diluted income (loss) per common share from continuing operations
|
|
|
8.61
|
|
|
|
(0.41
|
)
|
|
|
(7.89
|
)
|
|
|
|
|
Basic loss per common share from discontinued operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(0.10
|
)
|
Diluted loss per common share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.10
|
)
|
|
|
|
|
Basic income (loss) per common share
|
|
$
|
8.61
|
|
|
$
|
(0.41
|
)
|
|
$
|
(7.99
|
)
|
Diluted income (loss) per common share
|
|
|
8.61
|
|
|
|
(0.41
|
)
|
|
|
(7.99
|
)
|
Stock Repurchase Program:
Citizens purchased shares under a board approved stock repurchase program initiated in October 2003.
This program authorizes Citizens to repurchase up to 300,000 shares. 124,115 shares remain available for repurchase under the program. There were no shares purchased under this plan in 2010, 2011, or 2012. Shares deemed purchased in connection with
the exercise of certain employee stock options and the vesting of certain share awards were not part of the repurchase program. In 2012 and 2011, Citizens purchased 26,707 and 1,684 shares, respectively, primarily in connection with taxes due from
employees as a result of the vesting of certain share awards.
The components of accumulated other comprehensive income (loss), net of
tax, are presented below.
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Net unrealized
gain (loss) on
investments
|
|
|
Net unrealized
gain (loss) on
derivative
instruments
|
|
|
Pension and
post-retirement
|
|
|
Total
|
|
Balance at January 1, 2010
|
|
$
|
10,593
|
|
|
$
|
13,089
|
|
|
$
|
(30,775
|
)
|
|
$
|
(7,093
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on securities available for sale net of tax effect of $1,715
|
|
|
5,585
|
|
|
|
|
|
|
|
|
|
|
|
5,585
|
|
Reclassification adjustment for net gain on securities included in net income
|
|
|
(13,896
|
)
|
|
|
|
|
|
|
|
|
|
|
(13,896
|
)
|
Net unrealized gain on securities transferred from available for sale to held to maturity, net of tax effect of
($912)
|
|
|
1,693
|
|
|
|
|
|
|
|
|
|
|
|
1,693
|
|
Amortization of unrealized loss on securities transferred from available for sale to held to maturity, net of tax effect of
$6
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
Net unrealized loss on qualifying cash flow hedges
|
|
|
|
|
|
|
(5,721
|
)
|
|
|
|
|
|
|
(5,721
|
)
|
Net change in unrecognized pension and postretirement costs
|
|
|
|
|
|
|
|
|
|
|
(712
|
)
|
|
|
(712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss total
|
|
|
(6,630
|
)
|
|
|
(5,721
|
)
|
|
|
(712
|
)
|
|
|
(13,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
3,963
|
|
|
$
|
7,368
|
|
|
$
|
(31,487
|
)
|
|
$
|
(20,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on securities available for sale net of tax effect of ($5,520)
|
|
|
10,349
|
|
|
|
|
|
|
|
|
|
|
|
10,349
|
|
Net unrealized gain on securities transferred from available for sale to held to maturity, net of tax effect of
($6,479)
|
|
|
12,032
|
|
|
|
|
|
|
|
|
|
|
|
12,032
|
|
Amortization of unrealized loss on securities transferred from available for sale to held to maturity, net of tax effect of
$1,365
|
|
|
(2,535
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,535
|
)
|
Net unrealized loss on qualifying cash flow hedges, net of tax effect of $2,603
|
|
|
|
|
|
|
(4,834
|
)
|
|
|
|
|
|
|
(4,834
|
)
|
Net change in unrecognized pension and postretirement costs, net of tax effect of $364
|
|
|
|
|
|
|
|
|
|
|
(676
|
)
|
|
|
(676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) total
|
|
|
19,846
|
|
|
|
(4,834
|
)
|
|
|
(676
|
)
|
|
|
14,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
$
|
23,809
|
|
|
$
|
2,534
|
|
|
$
|
(32,163
|
)
|
|
$
|
(5,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on securities available for sale net of tax effect of ($2,059)
|
|
|
3,824
|
|
|
|
|
|
|
|
|
|
|
|
3,824
|
|
Amortization of unrealized loss on securities transferred from available for sale to held to maturity, net of tax effect of
$2,524
|
|
|
(4,687
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,687
|
)
|
Net unrealized loss on qualifying cash flow hedges, net of tax effect of $2,674
|
|
|
|
|
|
|
(4,966
|
)
|
|
|
|
|
|
|
(4,966
|
)
|
Net change in unrecognized pension and postretirement costs, net of tax effect of $842
|
|
|
|
|
|
|
|
|
|
|
(1,564
|
)
|
|
|
(1,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) total
|
|
|
(863
|
)
|
|
|
(4,966
|
)
|
|
|
(1,564
|
)
|
|
|
(7,393
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
22,946
|
|
|
$
|
(2,432
|
)
|
|
$
|
(33,727
|
)
|
|
$
|
(13,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 15. Lines of Business
The financial performance of Citizens is monitored by an internal profitability measurement system, which provides line of business
results and key performance measures. The profitability measurement system is based on internal management methodologies designed to produce consistent results and reflect the underlying economics of the businesses. The development and application
of these methodologies is a dynamic process. Accordingly, these measurement tools and assumptions may be revised periodically to reflect methodology, product, and/or management organizational changes. Further, these policies measure financial
results that support the strategic objectives and internal organizational structure of Citizens. Consequently, the information presented is not necessarily comparable with similar information for other institutions.
A description of each business line, selected financial performance and the methodologies used to measure financial performance are presented below.
|
|
|
Regional Banking
Regional Banking provides a wide range of lending, depository, and other related financial services to both individual
consumers and businesses. The products and services offered to consumer clients include: direct loans, home equity loans and lines of credit, checking, savings and money market accounts, certificates of deposit, and fixed and variable annuities, as
well as private banking services for affluent clients. Citizens partners with outside providers to offer consumer clients the availability of nationwide ATM, debit, and credit card networks as well as mortgage origination services. The
transaction-based income and expense associated with these services are included in Regional Banking. The products and services offered to commercial and industrial clients include: term loans, revolving credit arrangements, inventory and accounts
receivable financing, commercial mortgages, letters of credit, and small business loans. Noncredit services for commercial clients include deposit accounts, treasury management, corporate cash management, international banking services, advice and
assistance in the placement of securities, and financial planning. Brokerage and insurance delivers retail mutual funds, other securities, variable and fixed annuities, personal disability and life insurance products and discounted brokerage
services.
|
122
|
|
|
Specialty Consumer
Specialty Consumer includes the indirect consumer and the residential mortgage portfolios. The indirect lending team
partners with dealerships mostly across the Midwest and adjacent states to provide primarily marine and recreational vehicle loans to consumers. As nearly all of new mortgage volume is originated through the Regional Banking delivery channel and
sold into the secondary market, the residential mortgage loan portfolio residing in Specialty Consumer consists primarily of historical loan production as well as the minimal new production that is retained.
|
|
|
|
Specialty Commercial
Specialty Commercial provides a full range of lending, depository, and related financial services to commercial real
estate developers, owners of multi-unit commercial properties, and middle-market companies. Products and services offered include commercial mortgages, term loans, revolving credit arrangements, letters of credit, inventory and accounts receivable
financing, and leveraged cash flow lending. Noncredit services for these customers include deposit accounts, treasury management, corporate cash management, international banking services, advice and assistance in the placement of securities, and
financial planning.
|
|
|
|
Wealth Management
Wealth Management offers a broad array of asset management, financial planning, estate settlement and trust
administration, credit and deposit products and services. Retirement plan services focus on investment management and fiduciary activities with special emphasis on 401(k) plans.
|
|
|
|
Other
The Other line of business includes activities that are not directly attributable to one of the primary business lines. Included in
this category are the Holding Company; shared services unit; Citizens treasury unit, including the securities portfolio, short-term borrowing and asset/liability management activities; inter-company eliminations; and the economic impact of
certain assets, capital and support functions not specifically identifiable with the four primary lines of business.
|
The
accounting policies of the individual business units are the same as those of Citizens described in Note 1 to the Consolidated Financial Statements. Funds transfer pricing is used in the determination of net interest income by assigning a cost for
funds used or credit for funds provided to assets and liabilities within each business unit. Assets and liabilities are match-funded based on their maturity, prepayment and/or repricing characteristics. As a result, the Regional Banking, Specialty
Consumer, Specialty Commercial, and Wealth Management units are largely insulated from changes in interest rates. Changes in net interest income due to changes in interest rates are reported in Citizens treasury unit. The provision for loan
losses is allocated based upon the actual net charge-offs of each respective line of business, adjusted for loan growth and changes in risk profile. Noninterest income and expenses directly attributable to a line of business are assigned to that
business. Expenses for centrally provided services are allocated to the business lines as follows: product processing and technology expenditures are allocated based on standard unit costs applied to actual volume measurements; corporate overhead is
allocated based on the ratio of either a line of business aggregate balance sheet accounts or FTE resources as a percentage of applicable business lines. There are no significant intersegmental revenues.
Selected segment information is included in the following table.
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of Business Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Regional
Banking
|
|
|
Specialty
Consumer
|
|
|
Specialty
Commercial
|
|
|
Wealth
Mgmt
|
|
|
Other
|
|
|
Total
|
|
Earnings Summary2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) (taxable equivalent)
|
|
$
|
208,880
|
|
|
$
|
37,059
|
|
|
$
|
65,042
|
|
|
$
|
116
|
|
|
$
|
(4,250
|
)
|
|
$
|
306,847
|
|
Provision for loan losses
|
|
|
26,836
|
|
|
|
13,640
|
|
|
|
(17,272
|
)
|
|
|
|
|
|
|
|
|
|
|
23,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision
|
|
|
182,044
|
|
|
|
23,419
|
|
|
|
82,314
|
|
|
|
116
|
|
|
|
(4,250
|
)
|
|
|
283,643
|
|
Noninterest income
|
|
|
68,440
|
|
|
|
677
|
|
|
|
2,640
|
|
|
|
14,602
|
|
|
|
5,961
|
|
|
|
92,320
|
|
Noninterest expense
|
|
|
201,691
|
|
|
|
17,181
|
|
|
|
12,551
|
|
|
|
9,858
|
|
|
|
29,341
|
|
|
|
270,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
48,793
|
|
|
|
6,915
|
|
|
|
72,403
|
|
|
|
4,860
|
|
|
|
(27,630
|
)
|
|
|
105,341
|
|
Income tax expense (benefit) (taxable equivalent)
|
|
|
17,077
|
|
|
|
2,420
|
|
|
|
25,341
|
|
|
|
1,700
|
|
|
|
(313,472
|
)
|
|
|
(266,934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
31,716
|
|
|
|
4,495
|
|
|
|
47,062
|
|
|
|
3,160
|
|
|
|
285,842
|
|
|
|
372,275
|
|
Average assets
(in millions)
|
|
$
|
2,984
|
|
|
$
|
1,581
|
|
|
$
|
1,214
|
|
|
$
|
22
|
|
|
$
|
3,769
|
|
|
$
|
9,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Summary2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (taxable equivalent)
|
|
$
|
216,660
|
|
|
$
|
37,596
|
|
|
$
|
48,806
|
|
|
$
|
458
|
|
|
$
|
17,071
|
|
|
$
|
320,591
|
|
Provision for loan losses
|
|
|
69,389
|
|
|
|
28,076
|
|
|
|
41,343
|
|
|
|
|
|
|
|
|
|
|
|
138,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
|
|
|
147,271
|
|
|
|
9,520
|
|
|
|
7,463
|
|
|
|
458
|
|
|
|
17,071
|
|
|
|
181,783
|
|
Noninterest income
|
|
|
71,006
|
|
|
|
1,486
|
|
|
|
4,272
|
|
|
|
15,102
|
|
|
|
3,391
|
|
|
|
95,257
|
|
Noninterest expense
|
|
|
217,207
|
|
|
|
18,438
|
|
|
|
15,843
|
|
|
|
10,042
|
|
|
|
21,620
|
|
|
|
283,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
1,070
|
|
|
|
(7,432
|
)
|
|
|
(4,108
|
)
|
|
|
5,518
|
|
|
|
(1,158
|
)
|
|
|
(6,110
|
)
|
Income tax expense (benefit) (taxable equivalent)
|
|
|
375
|
|
|
|
(2,601
|
)
|
|
|
(1,438
|
)
|
|
|
1,931
|
|
|
|
(11,044
|
)
|
|
|
(12,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
695
|
|
|
$
|
(4,831
|
)
|
|
$
|
(2,670
|
)
|
|
$
|
3,587
|
|
|
$
|
9,886
|
|
|
$
|
6,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets
(in millions)
|
|
$
|
3,273
|
|
|
$
|
1,636
|
|
|
$
|
1,089
|
|
|
$
|
18
|
|
|
$
|
3,654
|
|
|
$
|
9,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Summary2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) (taxable equivalent)
|
|
$
|
256,029
|
|
|
$
|
35,959
|
|
|
$
|
62,364
|
|
|
$
|
637
|
|
|
$
|
(15,343
|
)
|
|
$
|
339,646
|
|
Provision for loan losses
|
|
|
122,921
|
|
|
|
84,842
|
|
|
|
185,119
|
|
|
|
|
|
|
|
|
|
|
|
392,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision
|
|
|
133,108
|
|
|
|
(48,883
|
)
|
|
|
(122,755
|
)
|
|
|
637
|
|
|
|
(15,343
|
)
|
|
|
(53,236
|
)
|
Noninterest income
|
|
|
70,433
|
|
|
|
(2,021
|
)
|
|
|
(13,321
|
)
|
|
|
15,660
|
|
|
|
23,908
|
|
|
|
94,659
|
|
Noninterest expense
|
|
|
211,086
|
|
|
|
18,814
|
|
|
|
15,996
|
|
|
|
12,119
|
|
|
|
49,072
|
|
|
|
307,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(7,545
|
)
|
|
|
(69,718
|
)
|
|
|
(152,072
|
)
|
|
|
4,178
|
|
|
|
(40,507
|
)
|
|
|
(265,664
|
)
|
Income tax expense (benefit) (taxable equivalent)
|
|
|
(2,641
|
)
|
|
|
(24,402
|
)
|
|
|
(53,225
|
)
|
|
|
1,462
|
|
|
|
102,246
|
|
|
|
23,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
(4,904
|
)
|
|
|
(45,316
|
)
|
|
|
(98,847
|
)
|
|
|
2,716
|
|
|
|
(142,753
|
)
|
|
|
(289,104
|
)
|
Income (loss) from discontinued operations
|
|
|
858
|
|
|
|
(129
|
)
|
|
|
175
|
|
|
|
95
|
|
|
|
(4,820
|
)
|
|
|
(3,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,046
|
)
|
|
$
|
(45,445
|
)
|
|
$
|
(98,672
|
)
|
|
$
|
2,811
|
|
|
$
|
(147,573
|
)
|
|
$
|
(292,925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets
(in millions)
|
|
$
|
4,091
|
|
|
$
|
1,807
|
|
|
$
|
1,552
|
|
|
$
|
15
|
|
|
$
|
3,641
|
|
|
$
|
11,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 16. Commitments, Contingent Liabilities and Guarantees
Commitments.
The Consolidated Financial Statements do not reflect various loan commitments (unfunded loans and unused lines of
credit) and letters of credit originated in the normal course of business. Loan commitments are made to accommodate the financial needs of clients. Generally, new loan commitments do not extend beyond 90 days and unused lines of credit are reviewed
at least annually. Letters of credit guarantee future payment of client financial obligations to third parties. They are normally issued for services provided or to facilitate the shipment of goods, and generally expire within one year. Both
arrangements have essentially the same level of credit risk as that associated with extending loans to clients and are subject to Citizens normal credit policies. Inasmuch as these arrangements generally have fixed expiration dates or other
termination clauses, most expire unfunded and do not necessarily represent future liquidity requirements. Collateral is obtained based on managements assessment of the client and may include receivables, inventories, real property and
equipment.
124
Amounts available to clients under loan commitments and
letters of credit follow.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
Loan commitments and letters of credit:
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
$
|
961,419
|
|
|
$
|
932,435
|
|
Asset-based lending participations
|
|
|
104,518
|
|
|
|
151,194
|
|
Financial standby letters of credit
|
|
|
88,550
|
|
|
|
125,401
|
|
Performance standby letters of credit
|
|
|
1,756
|
|
|
|
3,571
|
|
Deferred standby letter of credit fees
|
|
|
708
|
|
|
|
1,123
|
|
At December 31, 2012 and December 31, 2011, a liability of $1.9 million was recorded for probable losses on commitments to
extend credit. In accordance with applicable accounting standards related to guarantees, Citizens defers fees collected in connection with the issuance of standby letters of credit. The fees are then recognized in income proportionately over the
life of the standby letter of credit agreement.
Contingent Liabilities and Guarantees:
Citizens and its subsidiary are parties to
litigation arising in the ordinary course of business. Management believes that the aggregate liability, if any, resulting from these proceedings would not have a material effect on Citizens consolidated financial position or results of
operations. Citizens has performance obligations upon the occurrence of certain events under financial guarantees provided in certain contractual arrangements.
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 both 2012 and 2011, Citizens repurchased $6.2 million and $2.2 million of loans, respectively, pursuant to such provisions. Citizens
recorded $6.4 million and $4.3 million in 2012 and 2011, respectively, in Other Expense on the Consolidated Statements of Operations related to repurchasing or indemnifying such loans.
Purchase Obligations:
Citizens has entered into contracts for the supply of current and future services incurred in the ordinary course of business, such as data processing and certain property
management functions. Citizens often purchases services from vendors under agreements that typically can be terminated on a periodic basis.
Change in Control Agreements:
Citizens has change in control agreements with certain executive officers. Under these agreements, each covered
person could receive, upon the effectiveness of a change in control, up to two times (or in the case of the CEO, three times) (i) his or her base compensation plus (ii) up to two times (or in the case of the CEO, three times) the average
of the annual bonuses paid to the executive in the last three years. Additionally, subject to certain conditions, each covered persons medical and dental insurance benefits will continue for up to eighteen months after the termination and all
long-term incentive awards will immediately vest. The provisions of the Emergency Economic Stabilization Act (EESA) and American Recovery and Reinvestment Act of 2009 (ARRA), and Treasury regulations promulgated thereunder,
limit Citizens ability to make payments under these agreements while the preferred stock issued to Treasury remains outstanding.
125
Note 17. Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
Citizens is exposed to certain risks arising from both its business operations and economic conditions. Citizens manages economic risks, including interest rate, liquidity, and credit risk, primarily
through the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, Citizens enters into derivative financial instruments to manage exposures that arise from business activities that
result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest 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 and floating rate liabilities. When entering into an interest rate swap, Citizens and a counterparty agree to exchange cash
flows based on a specified notional amount multiplied by an interest rate. Typically Citizens will pay a fixed rate and receive a floating rate (or vice versa), though paying one floating rate and receiving another is possible. In all cases the
underlying notional amount is not exchanged. When Citizens purchases an interest rate cap, it receives variable-rate amounts from a counterparty if a specific interest rate index rises above the strike rate on the contract in exchange for an upfront
premium.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
Other Liabilities
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Derivatives designated as hedging instruments Interest rate products
|
|
$
|
1,110
|
|
|
$
|
3,791
|
|
|
$
|
6,979
|
|
|
$
|
2,317
|
|
Derivatives
not
designated as hedging instruments Interest rate products
|
|
|
13,425
|
|
|
|
17,088
|
|
|
|
13,964
|
|
|
|
17,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
$
|
14,535
|
|
|
$
|
20,879
|
|
|
$
|
20,943
|
|
|
$
|
19,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges of Interest Rate Risk
Citizens objectives in using cash flow hedges is to add stability to net interest income through managing its income exposure to changes in market interest rates. To accomplish this objective,
Citizens uses interest rate caps and swaps as part of its interest rate risk management strategy. Citizens had twelve interest rate caps and swaps with an aggregate notional amount of $385.0 million at December 31, 2012 and December 31,
2011 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. The net unrealized loss in
accumulated other comprehensive income related to the effective portion of the changes of the fair value of derivatives was $11.2 million and $3.6 million at December 31, 2012 and December 31, 2011, respectively. During 2012 and 2011, such
derivatives were used to hedge the variable cash inflows and outflows associated with existing pools of prime and LIBOR-based loan assets and liabilities. The ineffective portion of the change in fair value of the derivatives is recognized directly
in earnings. No hedge ineffectiveness was recognized during 2012 and 2011.
Amounts reported in accumulated other comprehensive income related
to derivatives are reclassified to interest income as interest payments are received on Citizens variable-rate assets. During the years ended December 31, 2012 and 2011, Citizens accelerated the reclassification of unrealized gains in
accumulated other comprehensive income of less than $0.1 million and $0.7 million, respectively, to earnings as a result of the hedged forecasted transactions becoming probable not to occur. During the next twelve months, Citizens estimates that
$2.7 million will be reclassified as an increase to interest expense and there will be no reclassification to interest income.
126
The following tables summarize
the impact of cash flow hedges on the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Impact on OCI (loss) gain
|
|
|
Derivative Ineffectiveness gain
|
|
Derivatives Relationship
(in thousands)
|
|
Recognized in OCI
|
|
|
Location Reclassified in
Statement of
Operations
|
|
Reclassified from
Accumulated OCI into
Statement of Operations
|
|
|
Location Recognized in
Statement of
Operations
|
|
Amount
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
2012
|
|
|
2011
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
406
|
|
|
$
|
2,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate products
|
|
$
|
(9,732
|
)
|
|
$
|
(4,171
|
)
|
|
Other income
|
|
|
6
|
|
|
|
735
|
|
|
Other income
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(9,732
|
)
|
|
$
|
(4,171
|
)
|
|
|
|
$
|
(2,093
|
)
|
|
$
|
3,267
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hedges of Interest Rate Risk
Citizens is exposed to changes in the fair value of certain of its fixed-rate assets and liabilities due to changes in market interest rates. Citizens utilizes derivatives designated as fair value hedges
to mitigate this market value risk. As of December 31, 2012 and 2011, Citizens does not have any transactions designated as fair value hedges.
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 in the Statement of Operations as the offsetting loss or gain on the related derivatives. During the year ended December 31, 2012, Citizens did
not recognize any gains in interest expense related to hedge ineffectiveness. Citizens recognized gains of $0.7 million in interest expense related to hedge ineffectiveness for the year ended December 31, 2011. Citizens recognized no net
reduction to interest expense during the year ended December 31, 2012. Citizens recognized a net reduction to interest expense of $0.9 million for the year ended December 31, 2011, which includes net settlements on the derivatives and any
amortization adjustment in the basis of the hedged items. In addition, during the years ended December 31, 2012 and 2011, Citizens recognized a net reduction to interest expense of $0.6 million and $0.8 million, respectively, related to the
amortization adjustment of the basis in the hedged items that were in a hedging relationship with hedges that were terminated.
The following table
summarizes the impact of fair value hedges on the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Contract Loss
|
|
|
Hedged Item Gain
|
|
Derivatives Relationship
(in thousands)
|
|
Location in
Statement of
Operations
|
|
2012
|
|
|
2011
|
|
|
Location in
Statement of
Operations
|
|
2012
|
|
|
2011
|
|
Fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate products
|
|
Interest expense
|
|
$
|
|
|
|
$
|
(1,107
|
)
|
|
Interest expense
|
|
$
|
|
|
|
$
|
1,818
|
|
Derivatives Not Designated as 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 in earnings. Additionally, Citizens
holds interest rate derivatives, including interest rate swaps and option products, resulting from a service Citizens provides to certain clients. Citizens executes interest rate derivatives with commercial banking clients to facilitate their
respective risk management strategies.
127
Those derivatives are simultaneously hedged by offsetting derivatives that Citizens executes with a third party, such that Citizens minimizes its net risk exposure resulting from such
transactions. As of December 31, 2012 and 2011, Citizens had 134 derivative transactions with an aggregate notional amount of $523.4 million and 156 derivative transactions with an aggregate notional amount of $527.4 million, respectively,
related to this program.
The following table
summarizes the impact of derivatives not designated as hedges on the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
Derivatives Relationship
|
|
Location of (Loss) Gain
Recognized in Statement of
|
|
Amount of Loss
Recognized in
Statement of
Operations
|
|
(in thousands)
|
|
Operations
|
|
2012
|
|
|
2011
|
|
Derivatives
not
designated as hedges Interest rate products
|
|
Other income
|
|
$
|
(12
|
)
|
|
$
|
(412
|
)
|
Credit-Risk Related Contingent Features
Citizens has agreements with its derivative counterparties that contain a provision where if Citizens defaults on any of its indebtedness, including a default where repayment of the indebtedness
has not been accelerated by the lender, then it could also be declared in default on its derivative obligations. Citizens also has agreements with certain of its derivative counterparties that contain a provision where if it fails to maintain
its status as a well 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 December 31, 2012, the fair value of derivatives in a net liability position with all counterparties, which includes accrued interest, but
excludes any adjustment for nonperformance risk related to these agreements was $19.8 million. As of December 31, 2012, Citizens had minimum collateral posting with its derivative counterparties and assigned collateral of $28.6 million. If
credit risk related contingent features underlying these agreements had been triggered as of December 31, 2012, Citizens would not have been required to pledge 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 December 31, 2012, the termination value approximated $5.2 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. Citizens has the right to reclaim collateral assigned of $28.6 million.
128
Note 18. Regulatory Matters
Citizens Bank is required to maintain a combination of cash on hand and non-interest-bearing deposits with the Federal Reserve Bank
(FRB) to meet regulatory reserve requirements. These reserve balances vary depending upon the level of client deposits. During 2012 and 2011, the average reserve balances were $72.9 million and $37.0 million, respectively.
Citizens Bank is also subject to statutory limitations on extensions of credit to members of the affiliate group. Generally, extensions of credit are
limited to 10% to any one affiliate and 20% in aggregate to all affiliates of a subsidiary banks capital and surplus (net assets) as defined.
The principal source of cash flows for the Holding Company is dividends from the Bank. The Bank is a state chartered financial institution. Banking regulations limit the amount of dividends the Bank may
declare to the Holding Company in any calendar year. The Banks dividends may not exceed the retained net profit, as defined, of that year plus the retained net profit of the preceding two years, unless prior regulatory approval is obtained.
During 2010, in consultation with the Federal Reserve Bank of Chicago as required by regulatory policy, 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 TARP Preferred Stock issued to Treasury under its Capital
Purchase Program. During the fourth quarter of 2012 Citizens began paying interest on the 2003 Debenture held by its Statutory Trust I including deferred interest and interest accrued on the deferred interest. During the first quarter of 2013
Citizens will begin paying interest on its the 2006 Debenture held by its Citizens Funding Trust I including paying all previously deferred interest and interest accrued on the deferred interest. Citizens will resume paying on the normal
quarterly payment dates going forward. Dividends for Citizens TARP Preferred Stock, including deferred dividends are expected to be paid as part of the completion of a merger with FirstMerit Corporation.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, specific capital guidelines must be met that involve quantitative measures of the assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier 1 capital to risk-weighted assets (as defined in the regulations), and of Tier 1
capital to average assets (as defined). As of December 31, 2012, the Bank met all applicable capital adequacy requirements.
As of
December 31, 2012, the Banks and the Holding Companys capital ratios exceeded well capitalized levels under the regulatory framework for prompt corrective action.
The table below sets forth the Total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios for the Holding Company and the Bank.
There are no conditions or events since December 31, 2012 that management believes would cause Citizens to fall below the well capitalized level.
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Adequately Capitalized
|
|
|
Well Capitalized
|
|
(in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
|
|
|
Ratio
|
|
|
Amount
|
|
|
|
|
|
Ratio
|
|
Citizens Republic Bancorp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to risk weighted assets
(1)
|
|
$
|
963,901
|
|
|
|
17.0
|
%
|
|
$
|
454,343
|
|
|
³
|
|
|
|
|
8.0
|
%
|
|
$
|
567,929
|
|
|
³
|
|
|
|
|
10.0
|
%
|
Tier 1 Capital to risk weighted assets
(1)
|
|
|
892,394
|
|
|
|
15.7
|
|
|
|
227,171
|
|
|
³
|
|
|
|
|
4.0
|
|
|
|
340,757
|
|
|
³
|
|
|
|
|
6.0
|
|
Tier 1 Leverage
(2)
|
|
|
892,394
|
|
|
|
10.0
|
|
|
|
358,663
|
|
|
³
|
|
|
|
|
4.0
|
|
|
|
448,329
|
|
|
³
|
|
|
|
|
5.0
|
|
As of December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to risk weighted assets
(1)
|
|
$
|
849,605
|
|
|
|
14.8
|
%
|
|
$
|
457,867
|
|
|
³
|
|
|
|
|
8.0
|
%
|
|
$
|
572,333
|
|
|
³
|
|
|
|
|
10.0
|
%
|
Tier 1 Capital to risk weighted assets
(1)
|
|
|
773,337
|
|
|
|
13.5
|
|
|
|
228,933
|
|
|
³
|
|
|
|
|
4.0
|
|
|
|
343,400
|
|
|
³
|
|
|
|
|
6.0
|
|
Tier 1 Leverage
(2)
|
|
|
773,337
|
|
|
|
8.4
|
|
|
|
366,145
|
|
|
³
|
|
|
|
|
4.0
|
|
|
|
457,682
|
|
|
³
|
|
|
|
|
5.0
|
|
Citizens Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to risk weighted assets
(1)
|
|
$
|
962,974
|
|
|
|
17.0
|
%
|
|
$
|
454,032
|
|
|
³
|
|
|
|
|
8.0
|
%
|
|
$
|
567,541
|
|
|
³
|
|
|
|
|
10.0
|
%
|
Tier 1 Capital to risk weighted assets
(1)
|
|
|
891,521
|
|
|
|
15.7
|
|
|
|
227,016
|
|
|
³
|
|
|
|
|
4.0
|
|
|
|
340,524
|
|
|
³
|
|
|
|
|
6.0
|
|
Tier 1 Leverage
(2)
|
|
|
891,521
|
|
|
|
10.0
|
|
|
|
358,233
|
|
|
³
|
|
|
|
|
4.0
|
|
|
|
447,791
|
|
|
³
|
|
|
|
|
5.0
|
|
As of December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to risk weighted assets
(1)
|
|
$
|
843,417
|
|
|
|
14.8
|
%
|
|
$
|
457,197
|
|
|
³
|
|
|
|
|
8.0
|
%
|
|
$
|
571,497
|
|
|
³
|
|
|
|
|
10.0
|
%
|
Tier 1 Capital to risk weighted assets
(1)
|
|
|
770,707
|
|
|
|
13.5
|
|
|
|
228,599
|
|
|
³
|
|
|
|
|
4.0
|
|
|
|
342,898
|
|
|
³
|
|
|
|
|
6.0
|
|
Tier 1 Leverage
(2)
|
|
|
770,707
|
|
|
|
8.4
|
|
|
|
365,736
|
|
|
³
|
|
|
|
|
4.0
|
|
|
|
457,170
|
|
|
³
|
|
|
|
|
5.0
|
|
(1)
|
Total Capital is comprised of Tier 1 Capital, a portion of the allowance for loan losses and qualifying subordinated debt. Tier 1 Capital is calculated
as follows: total shareholders equity + trust preferred securitiesgoodwillaccumulated other comprehensive income (loss)disallowed portion of deferred tax assetother intangible assets.
|
(2)
|
Tier 1 Capital to
quarterly average assets.
|
130
Note 19. Citizens Republic Bancorp (Parent Only) Statements
Balance Sheets
Citizens Republic Bancorp (Parent Only)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5,270
|
|
|
$
|
3,625
|
|
Money market investments
|
|
|
76,482
|
|
|
|
58,321
|
|
Investment securities
|
|
|
618
|
|
|
|
1,330
|
|
Investment in subsidiariesprincipally banks
|
|
|
1,179,053
|
|
|
|
852,663
|
|
Goodwill
|
|
|
238,077
|
|
|
|
238,077
|
|
Other assets
|
|
|
31,693
|
|
|
|
6,641
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,531,193
|
|
|
$
|
1,160,657
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
91,703
|
|
|
$
|
91,552
|
|
Other liabilities
|
|
|
68,985
|
|
|
|
49,568
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
160,688
|
|
|
|
141,120
|
|
Shareholders equity
|
|
|
1,370,505
|
|
|
|
1,019,537
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,531,193
|
|
|
$
|
1,160,657
|
|
|
|
|
|
|
|
|
|
|
Statements of Operations
Citizens Republic Bancorp (Parent Only)
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries
|
|
$
|
25,000
|
|
|
$
|
|
|
|
$
|
|
|
Interest on taxable investment securities
|
|
|
688
|
|
|
|
545
|
|
|
|
284
|
|
Interest from bank subsidiary
|
|
|
160
|
|
|
|
214
|
|
|
|
1,830
|
|
Service fees from bank subsidiaries
|
|
|
|
|
|
|
|
|
|
|
14,438
|
|
Other
|
|
|
564
|
|
|
|
(387
|
)
|
|
|
884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
26,412
|
|
|
|
372
|
|
|
|
17,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
6,499
|
|
|
|
6,391
|
|
|
|
6,190
|
|
Salaries and employee benefits
|
|
|
3,632
|
|
|
|
2,747
|
|
|
|
16,499
|
|
Service fees paid to bank subsidiaries
|
|
|
608
|
|
|
|
602
|
|
|
|
955
|
|
Other noninterest expense
|
|
|
6,790
|
|
|
|
1,639
|
|
|
|
1,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,529
|
|
|
|
11,379
|
|
|
|
25,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and equity in undistributed earnings of subsidiaries
|
|
|
8,883
|
|
|
|
(11,007
|
)
|
|
|
(7,715
|
)
|
Income tax benefit
|
|
|
29,824
|
|
|
|
664
|
|
|
|
1,715
|
|
Equity in undistributed earnings (loss) of subsidiaries
|
|
|
333,568
|
|
|
|
17,010
|
|
|
|
(283,104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
372,275
|
|
|
|
6,667
|
|
|
|
(289,104
|
)
|
Loss from discontinued operations (net of income tax)
|
|
|
|
|
|
|
|
|
|
|
(3,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
|
372,275
|
|
|
|
6,667
|
|
|
|
(292,925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend on redeemable preferred stock
|
|
|
(24,347
|
)
|
|
|
(22,985
|
)
|
|
|
(21,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to common shareholders
|
|
$
|
347,928
|
|
|
$
|
(16,318
|
)
|
|
$
|
(314,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131
Statements of Cash Flows
Citizens Republic Bancorp (Parent Only)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
372,275
|
|
|
$
|
6,667
|
|
|
$
|
(292,925
|
)
|
Less: Loss from discontinued operations, net of income tax
|
|
|
|
|
|
|
|
|
|
|
(3,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
372,275
|
|
|
|
6,667
|
|
|
|
(289,104
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in deferred tax asset valuation allowance
|
|
|
(29,336
|
)
|
|
|
1,655
|
|
|
|
1,733
|
|
Net decrease (increase) in current and deferred income taxes
|
|
|
4,054
|
|
|
|
(9,097
|
)
|
|
|
2,253
|
|
Increase in long term debt interest
|
|
|
2,581
|
|
|
|
4,934
|
|
|
|
|
|
Increase in pension non-qualified
|
|
|
250
|
|
|
|
60
|
|
|
|
160
|
|
Recognition of stock-based compensation expense
|
|
|
3,510
|
|
|
|
3,008
|
|
|
|
2,086
|
|
(Increase) decrease in equity in undistributed net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
income of subsidiaries
|
|
|
(333,568
|
)
|
|
|
(17,010
|
)
|
|
|
283,104
|
|
Other
|
|
|
(360
|
)
|
|
|
1,309
|
|
|
|
1,417
|
|
Discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
5,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities
|
|
|
19,406
|
|
|
|
(8,474
|
)
|
|
|
7,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (increase) decrease in money market investments
|
|
|
(18,152
|
)
|
|
|
2,778
|
|
|
|
46,606
|
|
Proceeds from sales of investment securities
|
|
|
745
|
|
|
|
2,365
|
|
|
|
1,541
|
|
Net decrease in properties and equipment
|
|
|
82
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
48,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by investing activities
|
|
|
(17,325
|
)
|
|
|
5,143
|
|
|
|
96,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution to subsidiary bank
|
|
|
|
|
|
|
|
|
|
|
(100,000
|
)
|
Shares purchased
|
|
|
(436
|
)
|
|
|
(34
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities
|
|
|
(436
|
)
|
|
|
(34
|
)
|
|
|
(100,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
1,645
|
|
|
|
(3,365
|
)
|
|
|
4,033
|
|
Cash and due from banks at beginning of period
|
|
|
3,625
|
|
|
|
6,990
|
|
|
|
2,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at end of period
|
|
$
|
5,270
|
|
|
$
|
3,625
|
|
|
$
|
6,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 20. Business Combination
On September 13, 2012, Citizens and FirstMerit Corporation (FirstMerit) announced the signing of an agreement and plan
of merger, dated as of September 12, 2012 under which FirstMerit will acquire Citizens in a stock-for-stock merger transaction. Under the terms of the merger agreement, holders of Citizens common stock will receive a fixed 1.37 shares of
FirstMerit common stock in exchange for each share of Citizens common stock.
Subject to receipt of requisite approvals, FirstMerit also
expects to repay Citizens approximately $355 million of TARP preferred stock, which includes $55 million of estimated deferred dividends, held by the U.S. Treasury at closing. The merger has been unanimously approved by the Boards of Directors
of both Citizens and FirstMerit and is subject to customary closing conditions, including receipt of regulatory approvals and approval by both companies shareholders. In 2012, Citizens recorded $5.0 million of merger-related expenses in
professional services. The transaction is expected to close in the second quarter of 2013.
132
Report of Independent Registered Public Accounting Firm
To the Board of Directors and the Shareholders of Citizens Republic Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Citizens Republic Bancorp, Inc. as of December 31, 2012 and 2011, and the related consolidated statements of operations and
comprehensive income, changes in shareholders equity, and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial
statements referred to above present fairly, in all material respects, the consolidated financial position of Citizens Republic Bancorp, Inc. at December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Citizens Republic Bancorp, Inc.s internal control over financial reporting as of December 31, 2012, based on criteria
established in the Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2013 expressed an unqualified opinion thereon.
Detroit, Michigan
February 28, 2013
133
Schedule
SELECTED QUARTERLY INFORMATION (unaudited)
The table below sets forth selected quarterly financial information for each calendar quarter during 2012 and 2011.
Selected Quarterly Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
(in thousands, except
per share amounts)
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
Interest income
|
|
$
|
89,790
|
|
|
$
|
92,915
|
|
|
$
|
93,427
|
|
|
$
|
95,797
|
|
|
$
|
99,330
|
|
|
$
|
101,475
|
|
|
$
|
102,229
|
|
|
$
|
104,785
|
|
Interest expense
|
|
|
16,620
|
|
|
|
17,110
|
|
|
|
17,747
|
|
|
|
19,678
|
|
|
|
21,281
|
|
|
|
22,634
|
|
|
|
24,623
|
|
|
|
26,171
|
|
Net interest income
|
|
|
73,170
|
|
|
|
75,805
|
|
|
|
75,680
|
|
|
|
76,119
|
|
|
|
78,049
|
|
|
|
78,841
|
|
|
|
77,606
|
|
|
|
78,614
|
|
Provision for loan losses
(1)
|
|
|
4,314
|
|
|
|
5,195
|
|
|
|
5,299
|
|
|
|
8,397
|
|
|
|
15,007
|
|
|
|
17,481
|
|
|
|
17,596
|
|
|
|
88,724
|
|
Noninterest income
(2)
|
|
|
22,024
|
|
|
|
23,710
|
|
|
|
22,345
|
|
|
|
24,240
|
|
|
|
24,363
|
|
|
|
24,427
|
|
|
|
23,325
|
|
|
|
23,143
|
|
Noninterest expense
(1)(3)
|
|
|
65,128
|
|
|
|
72,055
|
|
|
|
66,339
|
|
|
|
67,101
|
|
|
|
66,640
|
|
|
|
65,411
|
|
|
|
69,444
|
|
|
|
81,656
|
|
Net income (loss)
(4)
|
|
|
23,247
|
|
|
|
20,991
|
|
|
|
303,176
|
|
|
|
24,861
|
|
|
|
18,244
|
|
|
|
32,944
|
|
|
|
24,157
|
|
|
|
(68,678
|
)
|
Dividend on redeemable preferred stock
|
|
|
(6,220
|
)
|
|
|
(6,130
|
)
|
|
|
(6,042
|
)
|
|
|
(5,955
|
)
|
|
|
(5,897
|
)
|
|
|
(5,761
|
)
|
|
|
(5,701
|
)
|
|
|
(5,627
|
)
|
Net income (loss) attributable to common
shareholders
(4)
|
|
|
17,027
|
|
|
|
14,861
|
|
|
|
297,134
|
|
|
|
18,906
|
|
|
|
12,347
|
|
|
|
27,183
|
|
|
|
18,456
|
|
|
|
(74,305
|
)
|
Shares outstanding
(end of period)
(5)
|
|
|
40,497,890
|
|
|
|
40,508,823
|
|
|
|
40,504,637
|
|
|
|
40,247,241
|
|
|
|
40,260,213
|
|
|
|
40,255,758
|
|
|
|
40,251,874
|
|
|
|
39,778,255
|
|
Net Income (Loss) Per Common Share:
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.42
|
|
|
$
|
0.37
|
|
|
$
|
7.35
|
|
|
$
|
0.47
|
|
|
$
|
0.31
|
|
|
$
|
0.68
|
|
|
$
|
0.46
|
|
|
$
|
(1.89
|
)
|
Diluted
|
|
|
0.42
|
|
|
|
0.37
|
|
|
|
7.35
|
|
|
|
0.47
|
|
|
|
0.31
|
|
|
|
0.68
|
|
|
|
0.46
|
|
|
|
(1.89
|
)
|
(1)
|
Decreases in Provision for loan losses in all quarters of 2012 was primarily a result of the continuing improvement of the credit metrics. Decreases in Provision for
loan losses and Noninterest expense in the second, third, and fourth quarters of 2011 reflect the completion of our accelerated problem asset resolution efforts.
|
(2)
|
Noninterest income includes a fair-value adjustment on loans held for sale of $1.7 million and $0.9 million in the fourth and first quarters of 2012, respectively.
|
(3)
|
Noninterest expense includes fair-value adjustments on other real estate (ORE) of $0.9 million in the third quarter of 2012 and $1.1 million, $1.2 million,
$1.4 million, and $9.1 million in the fourth, third, second and first quarters of 2011, respectively.
|
(4)
|
Net income (loss) includes merger-related expenses of $4.4 million and an income tax benefit of $276.8 million in the third and second quarters of 2012, respectively.
The tax benefit for the second quarter of 2012 was primarily a result from the elimination of the valuation allowance against the deferred tax asset.
|
(5)
|
Number of shares and per share data were adjusted to reflect the 1-for-10 reverse stock split effective 7/1/11 and include participating shares which are restricted
stock units and restricted shares.
|