Item 1 Consolidated Financial Statements
Notes to
Consolidated Financial Statements (Unaudited)
Citizens Republic Bancorp, Inc.
Note 1. Basis of Presentation and Accounting Policies
The accompanying unaudited consolidated financial statements of Citizens Republic Bancorp, Inc. (Citizens, the
Company, or the Corporation) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. Certain amounts have
been reclassified to conform with the current year presentation. Citizens significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in Citizens 2011 Annual Report on Form 10-K. For
interim reporting purposes, Citizens follows the same basic accounting policies, as updated by the information contained in this report. For further information, refer to the Consolidated Financial Statements and footnotes included in Citizens
2011 Annual Report on Form 10-K. Citizens maintains an internet website at www.citizensbanking.com where the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available
without charge, as soon as reasonably practicable after Citizens files each such report with, or furnishes it to, the U.S. Securities and Exchange Commission (SEC). The information on Citizens website does not constitute a part of
this report.
The Corporation has two active wholly owned trusts formed for the purpose of issuing securities which qualify as regulatory
capital and are considered Variable Interest Entities (VIEs). The Corporation is not the primary beneficiary, and consequently, the trusts are not consolidated in the Consolidated Financial Statements. Each of the two active trusts
issued trust preferred securities to investors in 2006 and 2003. The gross proceeds from the issuances were used to purchase junior subordinated deferrable interest debentures issued by Citizens, which is the sole asset of each trust. The trust
preferred securities held by these entities qualify as Tier 1 capital and are classified as long-term debt on the Consolidated Balance Sheets, with the associated interest expense recorded in long-term debt on the
Consolidated Statements of Operations. The expected losses and residual returns of these entities are absorbed by the trust preferred security holders, and consequently the Corporation is not exposed to loss related to these VIEs.
New Accounting Pronouncements
The
Financial Accounting Standards Board (FASB) Accounting Standards Codification (the Codification or ASC) Accounting Standard Update (ASU)
FASB ASU 2012-02, IntangiblesGoodwill and Other (Topic 350)Testing Indefinite-Lived Intangible Assets for Impairment
The objective of the amendments in this update is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets
for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived
intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, IntangiblesGoodwill and OtherGeneral Intangibles Other than Goodwill. The
more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. This ASU was adopted by Citizens in the third quarter of 2012. The adoption of the amendments did not have a material impact on Citizens financial
condition, results of operations or liquidity.
8
FASB ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for
Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05
The amendments in this ASU defer the ASU 2011-05 requirement that companies present reclassification adjustments for each component of accumulated other comprehensive income (AOCI) in both net
income and other comprehensive income (OCI) on the face of the financial statements. Companies are still required to present reclassifications out of AOCI on the face of the financial statements or disclose those amounts in the notes to
the financial statements. This ASU also defers the requirement to report reclassification adjustments in interim periods.
FASB ASU 2011-08, IntangiblesGoodwill and
Other (Topic 350): Testing Goodwill for Impairment
The amendments in this ASU are intended to simplify goodwill impairment testing
by permitting assessment of qualitative factors to determine whether events and circumstances lead to the conclusion that it is necessary to perform the two-step goodwill impairment test currently required under Topic 350. Entities will not be
required to calculate the fair value of a reporting unit unless they conclude that it is more likely than not that the units carrying value is greater than its fair value based on an assessment of events and circumstances; however, they may
bypass the qualitative assessment during any reporting period. The amendment also provides examples of events and circumstances that entities should consider. This ASU was adopted by Citizens in the first quarter of 2012. The adoption of the
amendments did not have a material impact on Citizens financial condition, results of operations or liquidity.
FASB ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income
The amendments in this ASU will result in more converged guidance on how comprehensive income is presented under GAAP and International Financial
Reporting Standards (IFRS), although some differences remain. The new guidance gives companies two choices of how to present items of net income, items of other comprehensive income and total comprehensive income: They can create one
continuous statement of comprehensive income or two separate consecutive statements. Companies will no longer be allowed to present OCI only in the statement of shareholders equity. Earnings per share would continue to be based on net income
attributable to common shareholders. Although existing guidance related to items that must be presented in OCI has not changed, companies will be required to display reclassification adjustments for each component of OCI in both net income and OCI.
Also, companies will need to present the components of OCI in their interim and annual financial statements. This ASU was adopted by Citizens in the first quarter of 2012, applied retrospectively. The adoption of the amendments did not have a
material impact on Citizens financial condition, results of operations or liquidity; however, the adoption did have an impact on Citizens presentation of comprehensive income.
FASB ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
The ASU amends the fair value measurement and disclosure
guidance in Topic 820 to converge GAAP and IFRS requirements for measuring amounts at fair value as well as disclosures about these measurements. Many of the amendments clarify existing concepts and are generally not expected to result in
significant changes to how Citizens applies the fair value principles. This ASU was adopted by Citizens in the first quarter of 2012, applied prospectively. The adoption of the amendments did not have a material impact on Citizens financial
condition, results of operations or liquidity; however, the adoption did require additional fair value disclosures.
FASB ASU 2011-03, Transfers and Servicing (Topic 860): Reconsideration
of Effective Control for Repurchase Agreements
The amendments in this ASU are 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. This ASU was adopted by Citizens in the first quarter of 2012 and applies
prospectively to transactions or modifications of existing transactions that occur on or after January 1, 2012. The adoption of the amendments did not have a material impact on Citizens financial condition, results of operations or
liquidity.
Pending Accounting Pronouncements
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 IFRS related to the offsetting of financial instruments. ASU 2011-11 is effective for Citizens in the first quarter of 2013, and will 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.
9
Note 2. Investment Securities
The amortized cost, estimated
fair value and gross unrealized gains and losses on investment securities follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 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
|
|
$
|
404,391
|
|
|
$
|
411,731
|
|
|
$
|
7,857
|
|
|
$
|
517
|
|
|
$
|
364,262
|
|
|
$
|
365,302
|
|
|
$
|
6,811
|
|
|
$
|
5,771
|
|
Mortgage-backed
|
|
|
971,546
|
|
|
|
1,018,853
|
|
|
|
47,307
|
|
|
|
|
|
|
|
784,476
|
|
|
|
823,852
|
|
|
|
39,408
|
|
|
|
32
|
|
State and municipal
|
|
|
104,093
|
|
|
|
110,696
|
|
|
|
6,620
|
|
|
|
17
|
|
|
|
116,411
|
|
|
|
123,308
|
|
|
|
7,019
|
|
|
|
122
|
|
Other
|
|
|
289
|
|
|
|
287
|
|
|
|
51
|
|
|
|
53
|
|
|
|
280
|
|
|
|
271
|
|
|
|
24
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
1,480,319
|
|
|
$
|
1,541,567
|
|
|
$
|
61,835
|
|
|
$
|
587
|
|
|
$
|
1,265,429
|
|
|
$
|
1,312,733
|
|
|
$
|
53,262
|
|
|
$
|
5,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
(1)
|
|
$
|
304,462
|
|
|
$
|
313,835
|
|
|
$
|
9,373
|
|
|
$
|
|
|
|
$
|
350,160
|
|
|
$
|
356,031
|
|
|
$
|
5,871
|
|
|
$
|
|
|
Mortgage-backed
(1)
|
|
|
907,361
|
|
|
|
955,140
|
|
|
|
47,779
|
|
|
|
|
|
|
|
988,930
|
|
|
|
1,018,765
|
|
|
|
29,883
|
|
|
|
48
|
|
State and municipal
|
|
|
101,681
|
|
|
|
109,335
|
|
|
|
7,654
|
|
|
|
|
|
|
|
104,964
|
|
|
|
112,754
|
|
|
|
7,836
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
1,313,504
|
|
|
$
|
1,378,310
|
|
|
$
|
64,806
|
|
|
$
|
|
|
|
$
|
1,444,054
|
|
|
$
|
1,487,550
|
|
|
$
|
43,590
|
|
|
$
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
(1)
|
Amortized cost includes adjustments for the unamortized portion of unrealized gains on securities transferred from available for sale.
|
Securities with amortized cost of $560.1 million at September 30, 2012 and $665.8 million at December 31, 2011 were pledged
to secure public deposits, repurchase agreements and other liabilities.
In June 2011, 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 the positive intent and ability to hold these investments to maturity.
The securities transferred had a total amortized cost of $924.6 million and a fair value of $943.1 million. The unrealized gain of $18.5 million is being 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.
10
The amortized cost and estimated fair value of debt
securities by maturity are shown below.
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|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
|
Amortized
|
|
|
Estimated Fair
|
|
(in thousands)
|
|
Cost
|
|
|
Value
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
State and municipal
|
|
|
|
|
|
|
|
|
Contractual maturity within one year
|
|
$
|
14,591
|
|
|
$
|
14,804
|
|
After one year through five years
|
|
|
14,785
|
|
|
|
15,410
|
|
After five years through ten years
|
|
|
57,915
|
|
|
|
62,130
|
|
After ten years
|
|
|
16,802
|
|
|
|
18,352
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
104,093
|
|
|
|
110,696
|
|
Collateralized mortgage obligations and mortgage-backed
|
|
|
1,375,937
|
|
|
|
1,430,584
|
|
Other
|
|
|
289
|
|
|
|
287
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
1,480,319
|
|
|
$
|
1,541,567
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
State and municipal
|
|
|
|
|
|
|
|
|
Contractual maturity within one year
|
|
$
|
3,560
|
|
|
$
|
3,660
|
|
After one year through five years
|
|
|
21,656
|
|
|
|
23,081
|
|
After five years through ten years
|
|
|
51,300
|
|
|
|
54,771
|
|
After ten years
|
|
|
25,165
|
|
|
|
27,823
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
101,681
|
|
|
|
109,335
|
|
Collateralized mortgage obligations and mortgage-backed
|
|
|
1,211,823
|
|
|
|
1,268,975
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
1,313,504
|
|
|
$
|
1,378,310
|
|
|
|
|
|
|
|
|
|
|
A total of 16 securities had unrealized losses at September 30, 2012, compared with 45 securities as of 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.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
More than 12 Months
|
|
|
Total
|
|
September 30, 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
|
|
$
|
44,532
|
|
|
$
|
137
|
|
|
$
|
9,693
|
|
|
$
|
380
|
|
|
$
|
54,225
|
|
|
$
|
517
|
|
|
|
|
|
|
|
|
State and municipal
|
|
|
303
|
|
|
|
1
|
|
|
|
233
|
|
|
|
16
|
|
|
|
536
|
|
|
|
17
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
149
|
|
|
|
53
|
|
|
|
149
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
44,835
|
|
|
$
|
138
|
|
|
$
|
10,075
|
|
|
$
|
449
|
|
|
$
|
54,910
|
|
|
$
|
587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 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 September 30, 2012, Citizens has concluded that all issuers have the ability to pay contractual cash flows. The unrealized losses displayed in the above tables are believed to be temporary and thus no
impairment loss has been realized in the Consolidated Statements of Operations. Citizens has not decided to sell securities with any significant unrealized losses nor does Citizens believe it will be required to sell securities before the value is
recovered, but may change its intent in response to significant, unanticipated changes in policies, regulations, legislation or other previously mentioned criteria.
The collateralized mortgage obligations (CMO) sector includes securities where the underlying collateral consists of agency issued or whole loan mortgages. At September 30, 2012, the
whole loan CMOs had a market value of $54.2 million with gross unrealized losses of $0.5 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 September 30, 2012 credit review demonstrated no material degradation in the holdings.
Citizens has
determined there is no other-than-temporary impairment at September 30, 2012.
Citizens maintains several nonqualified deferred
compensation plans for its executive officers, senior management, and directors permitting the deferral of a portion of compensation. Citizens obligation under the plans represents an unsecured promise to pay benefits in the future. Changes in this
obligation are recognized as salaries and employee benefits expense in the Consolidated Statements of Operations. In the event of bankruptcy or insolvency, assets of the plans would be available to satisfy the claims of general creditors. Plan
participants choose to receive a return on their account balances equal to the return on various investment options. The assets held by the plans as well as the corresponding obligations were $8.8 million and $8.5 million at September 30, 2012
and December 31, 2011, respectively. The assets of the plans are classified as trading securities and are carried at fair value within Other Assets in the Consolidated Balance Sheets. Realized and unrealized gains and losses from plan assets
are recorded in Other Income in the Consolidated Statements of Operations. Realized gains of $1.0 million and realized losses of $0.6 million for the nine months ended September 30, 2012 and 2011, respectively, were recognized during the period
for trading assets as of the report date.
No security sales were completed during 2012. During the third quarter of 2011, Citizens completed
sales of available for sale securities with an amortized cost of $3.9 million, recording a net loss of less than $0.1 million. Citizens completed sales of available for sale securities with an amortized cost of $13.1 million during the first nine
months ended September 30, 2011, recording a net loss of $1.4 million.
12
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 using established guidelines to review its aggregate outstanding commitments and loans to particular borrowers, industries, and geographic areas. Collateral is secured based on the nature of the
credit and managements credit assessment of the customer. Total portfolio loans outstanding are recorded net of unearned income, unamortized premiums and discounts, deferred loan fees and costs, and fair value adjustments.
The 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 the collection of principal or interest, in full, 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. 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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 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
|
|
$
|
|
|
|
$
|
|
|
|
$
|
326
|
|
|
$
|
326
|
|
|
$
|
4,658
|
|
|
$
|
4,984
|
|
Land development
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
7,518
|
|
|
|
7,521
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,689
|
|
|
|
6,689
|
|
Income producing
|
|
|
1,104
|
|
|
|
|
|
|
|
12,904
|
|
|
|
14,008
|
|
|
|
753,194
|
|
|
|
767,202
|
|
Owner-occupied
|
|
|
4,598
|
|
|
|
|
|
|
|
13,146
|
|
|
|
17,744
|
|
|
|
531,461
|
|
|
|
549,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
5,702
|
|
|
|
|
|
|
|
26,379
|
|
|
|
32,081
|
|
|
|
1,303,520
|
|
|
|
1,335,601
|
|
Commercial and industrial
|
|
|
253
|
|
|
|
57
|
|
|
|
3,139
|
|
|
|
3,449
|
|
|
|
1,413,103
|
|
|
|
1,416,552
|
|
Small business
(1)
|
|
|
627
|
|
|
|
|
|
|
|
6,051
|
|
|
|
6,678
|
|
|
|
265,766
|
|
|
|
272,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
6,582
|
|
|
|
57
|
|
|
|
35,569
|
|
|
|
42,208
|
|
|
|
2,982,389
|
|
|
|
3,024,597
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
6,029
|
|
|
|
|
|
|
|
15,271
|
|
|
|
21,300
|
|
|
|
548,995
|
|
|
|
570,295
|
|
Direct consumer
|
|
|
11,435
|
|
|
|
3
|
|
|
|
10,552
|
|
|
|
21,990
|
|
|
|
843,787
|
|
|
|
865,777
|
|
Indirect consumer
|
|
|
7,514
|
|
|
|
|
|
|
|
2,391
|
|
|
|
9,905
|
|
|
|
960,330
|
|
|
|
970,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
24,978
|
|
|
|
3
|
|
|
|
28,214
|
|
|
|
53,195
|
|
|
|
2,353,112
|
|
|
|
2,406,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financing receivables
|
|
$
|
31,560
|
|
|
$
|
60
|
|
|
$
|
63,783
|
|
|
$
|
95,403
|
|
|
$
|
5,335,501
|
|
|
$
|
5,430,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts contained in Commercial and industrial on Consolidated Balance Sheets.
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
September 30, 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
|
|
$
|
|
|
|
$
|
|
|
|
$
|
167
|
|
|
$
|
167
|
|
|
$
|
6,651
|
|
|
$
|
6,818
|
|
Land development
|
|
|
216
|
|
|
|
|
|
|
|
12
|
|
|
|
228
|
|
|
|
22,004
|
|
|
|
22,232
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
257
|
|
|
|
257
|
|
|
|
5,153
|
|
|
|
5,410
|
|
Income producing
|
|
|
3,325
|
|
|
|
|
|
|
|
23,227
|
|
|
|
26,552
|
|
|
|
948,710
|
|
|
|
975,262
|
|
Owner-occupied
|
|
|
5,817
|
|
|
|
|
|
|
|
27,540
|
|
|
|
33,357
|
|
|
|
600,822
|
|
|
|
634,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
9,358
|
|
|
|
|
|
|
|
51,203
|
|
|
|
60,561
|
|
|
|
1,583,340
|
|
|
|
1,643,901
|
|
Commercial and industrial
|
|
|
1,055
|
|
|
|
1,344
|
|
|
|
13,603
|
|
|
|
16,002
|
|
|
|
1,215,363
|
|
|
|
1,231,365
|
|
Small business
(1)
|
|
|
1,539
|
|
|
|
|
|
|
|
4,933
|
|
|
|
6,472
|
|
|
|
293,655
|
|
|
|
300,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
11,952
|
|
|
|
1,344
|
|
|
|
69,739
|
|
|
|
83,035
|
|
|
|
3,092,358
|
|
|
|
3,175,393
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
9,079
|
|
|
|
|
|
|
|
13,074
|
|
|
|
22,153
|
|
|
|
632,408
|
|
|
|
654,561
|
|
Direct consumer
|
|
|
18,629
|
|
|
|
24
|
|
|
|
14,704
|
|
|
|
33,357
|
|
|
|
921,474
|
|
|
|
954,831
|
|
Indirect consumer
|
|
|
9,898
|
|
|
|
|
|
|
|
1,256
|
|
|
|
11,154
|
|
|
|
876,388
|
|
|
|
887,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
37,606
|
|
|
|
24
|
|
|
|
29,034
|
|
|
|
66,664
|
|
|
|
2,430,270
|
|
|
|
2,496,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financing receivables
|
|
$
|
49,558
|
|
|
$
|
1,368
|
|
|
$
|
98,773
|
|
|
$
|
149,699
|
|
|
$
|
5,522,628
|
|
|
$
|
5,672,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts contained in Commercial and industrial on Consolidated Balance Sheets.
|
Credit Quality Indicators.
Citizens categorizes commercial loans into risk categories based on relevant information about
the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Citizens analyzes commercial loans
individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $0.5 million and non-homogeneous loans, such as commercial and industrial and commercial real estate loans. Credit quality
indicators are reviewed and updated as applicable on an ongoing basis in accordance with Citizens credit policy. The Company uses the following definitions for risk ratings:
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.
14
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
(in thousands)
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
Land hold
|
|
$
|
2,021
|
|
|
$
|
745
|
|
|
$
|
2,218
|
|
|
$
|
|
|
|
$
|
4,984
|
|
Land development
|
|
|
7,174
|
|
|
|
144
|
|
|
|
203
|
|
|
|
|
|
|
|
7,521
|
|
Construction
|
|
|
6,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,689
|
|
Income producing
|
|
|
541,963
|
|
|
|
131,769
|
|
|
|
93,204
|
|
|
|
266
|
|
|
|
767,202
|
|
Owner-occupied
|
|
|
445,623
|
|
|
|
58,424
|
|
|
|
45,071
|
|
|
|
87
|
|
|
|
549,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
1,003,470
|
|
|
|
191,082
|
|
|
|
140,696
|
|
|
|
353
|
|
|
|
1,335,601
|
|
Commercial and industrial
|
|
|
1,266,471
|
|
|
|
111,694
|
|
|
|
38,191
|
|
|
|
196
|
|
|
|
1,416,552
|
|
Small business
(1)
|
|
|
236,974
|
|
|
|
14,975
|
|
|
|
20,432
|
|
|
|
63
|
|
|
|
272,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
$
|
2,506,915
|
|
|
$
|
317,751
|
|
|
$
|
199,319
|
|
|
$
|
612
|
|
|
$
|
3,024,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
(in thousands)
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
Land hold
|
|
$
|
2,548
|
|
|
$
|
820
|
|
|
$
|
3,450
|
|
|
$
|
|
|
|
$
|
6,818
|
|
Land development
|
|
|
12,397
|
|
|
|
295
|
|
|
|
9,540
|
|
|
|
|
|
|
|
22,232
|
|
Construction
|
|
|
3,304
|
|
|
|
1,525
|
|
|
|
577
|
|
|
|
4
|
|
|
|
5,410
|
|
Income producing
|
|
|
627,636
|
|
|
|
182,762
|
|
|
|
163,238
|
|
|
|
1,626
|
|
|
|
975,262
|
|
Owner-occupied
|
|
|
504,172
|
|
|
|
47,759
|
|
|
|
77,649
|
|
|
|
4,599
|
|
|
|
634,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
1,150,057
|
|
|
|
233,161
|
|
|
|
254,454
|
|
|
|
6,229
|
|
|
|
1,643,901
|
|
Commercial and industrial
|
|
|
1,051,254
|
|
|
|
99,868
|
|
|
|
79,944
|
|
|
|
299
|
|
|
|
1,231,365
|
|
Small business
(1)
|
|
|
255,237
|
|
|
|
23,113
|
|
|
|
21,623
|
|
|
|
154
|
|
|
|
300,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
$
|
2,456,548
|
|
|
$
|
356,142
|
|
|
$
|
356,021
|
|
|
$
|
6,682
|
|
|
$
|
3,175,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Amounts contained in Commercial and industrial on Consolidated Balance Sheets.
|
|
|
|
|
|
15
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
(in thousands)
|
|
Residential
Mortgage
|
|
|
Direct
Consumer
|
|
|
Indirect
Consumer
|
|
|
Total Consumer
Loans
|
|
Performing
|
|
$
|
555,024
|
|
|
$
|
855,222
|
|
|
$
|
967,844
|
|
|
$
|
2,378,090
|
|
Nonperforming
|
|
|
15,271
|
|
|
|
10,555
|
|
|
|
2,391
|
|
|
|
28,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
570,295
|
|
|
$
|
865,777
|
|
|
$
|
970,235
|
|
|
$
|
2,406,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
(in thousands)
|
|
Residential
Mortgage
|
|
|
Direct
Consumer
|
|
|
Indirect
Consumer
|
|
|
Total Consumer
Loans
|
|
Performing
|
|
$
|
641,487
|
|
|
$
|
940,103
|
|
|
$
|
886,286
|
|
|
$
|
2,467,876
|
|
Nonperforming
|
|
|
13,074
|
|
|
|
14,728
|
|
|
|
1,256
|
|
|
|
29,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
654,561
|
|
|
$
|
954,831
|
|
|
$
|
887,542
|
|
|
$
|
2,496,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. For additional information regarding Citizens policies and methodology used to estimate the
allowance for loan losses, see Note 1 to the Consolidated Financial Statements of Citizens 2011 Annual Report on Form 10-K.
The activity within the allowance for loan losses is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2012
|
|
(in thousands)
|
|
Allowance for
Loan Losses
at
June 30, 2012
|
|
|
Provision for
Loan Losses
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Net charge-offs
|
|
|
Allowance for
Loan Losses
at
September 30, 2012
|
|
Commercial and industrial
|
|
$
|
8,900
|
|
|
$
|
5,525
|
|
|
$
|
(4,552
|
)
|
|
$
|
108
|
|
|
$
|
(4,444
|
)
|
|
$
|
9,981
|
|
Small business
|
|
|
9,702
|
|
|
|
673
|
|
|
|
(1,039
|
)
|
|
|
120
|
|
|
|
(919
|
)
|
|
|
9,456
|
|
Commercial real estate
|
|
|
48,567
|
|
|
|
(5,222
|
)
|
|
|
(5,452
|
)
|
|
|
1,008
|
|
|
|
(4,444
|
)
|
|
|
38,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
67,169
|
|
|
|
976
|
|
|
|
(11,043
|
)
|
|
|
1,236
|
|
|
|
(9,807
|
)
|
|
|
58,338
|
|
Residential mortgage
|
|
|
27,686
|
|
|
|
1,957
|
|
|
|
(3,261
|
)
|
|
|
746
|
|
|
|
(2,515
|
)
|
|
|
27,128
|
|
Direct consumer
|
|
|
31,736
|
|
|
|
263
|
|
|
|
(6,067
|
)
|
|
|
1,277
|
|
|
|
(4,790
|
)
|
|
|
27,209
|
|
Indirect consumer
|
|
|
9,529
|
|
|
|
1,999
|
|
|
|
(3,172
|
)
|
|
|
1,094
|
|
|
|
(2,078
|
)
|
|
|
9,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
136,120
|
|
|
$
|
5,195
|
|
|
$
|
(23,543
|
)
|
|
$
|
4,353
|
|
|
$
|
(19,190
|
)
|
|
$
|
122,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2011
|
|
(in thousands)
|
|
Allowance for
Loan Losses at
June 30, 2011
|
|
|
Provision for
Loan Losses
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Net charge-offs
|
|
|
Allowance for
Loan Losses at
September 30, 2011
|
|
Commercial and industrial
|
|
$
|
17,618
|
|
|
$
|
(4,122
|
)
|
|
$
|
(994
|
)
|
|
$
|
721
|
|
|
$
|
(273
|
)
|
|
$
|
13,223
|
|
Small business
|
|
|
12,933
|
|
|
|
(1,161
|
)
|
|
|
(1,132
|
)
|
|
|
180
|
|
|
|
(952
|
)
|
|
|
10,820
|
|
Commercial real estate
|
|
|
83,627
|
|
|
|
(1,065
|
)
|
|
|
(5,860
|
)
|
|
|
537
|
|
|
|
(5,323
|
)
|
|
|
77,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
114,178
|
|
|
|
(6,348
|
)
|
|
|
(7,986
|
)
|
|
|
1,438
|
|
|
|
(6,548
|
)
|
|
|
101,282
|
|
Residential mortgage
|
|
|
43,925
|
|
|
|
11,856
|
|
|
|
(18,369
|
)
|
|
|
5
|
|
|
|
(18,364
|
)
|
|
|
37,417
|
|
Direct consumer
|
|
|
32,688
|
|
|
|
10,888
|
|
|
|
(6,398
|
)
|
|
|
688
|
|
|
|
(5,710
|
)
|
|
|
37,866
|
|
Indirect consumer
|
|
|
15,501
|
|
|
|
1,085
|
|
|
|
(3,430
|
)
|
|
|
633
|
|
|
|
(2,797
|
)
|
|
|
13,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
206,292
|
|
|
$
|
17,481
|
|
|
$
|
(36,183
|
)
|
|
$
|
2,764
|
|
|
$
|
(33,419
|
)
|
|
$
|
190,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2012
|
|
(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
September 30, 2012
|
|
Commercial and industrial
|
|
$
|
14,044
|
|
|
$
|
5,482
|
|
|
$
|
(10,607
|
)
|
|
$
|
1,062
|
|
|
$
|
(9,545
|
)
|
|
$
|
9,981
|
|
Small business
|
|
|
12,230
|
|
|
|
1,321
|
|
|
|
(4,575
|
)
|
|
|
480
|
|
|
|
(4,095
|
)
|
|
|
9,456
|
|
Commercial real estate
|
|
|
63,999
|
|
|
|
(8,609
|
)
|
|
|
(22,542
|
)
|
|
|
6,053
|
|
|
|
(16,489
|
)
|
|
|
38,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
90,273
|
|
|
|
(1,806
|
)
|
|
|
(37,724
|
)
|
|
|
7,595
|
|
|
|
(30,129
|
)
|
|
|
58,338
|
|
Residential mortgage
|
|
|
36,460
|
|
|
|
1,765
|
|
|
|
(12,443
|
)
|
|
|
1,346
|
|
|
|
(11,097
|
)
|
|
|
27,128
|
|
Direct consumer
|
|
|
33,020
|
|
|
|
15,580
|
|
|
|
(24,762
|
)
|
|
|
3,371
|
|
|
|
(21,391
|
)
|
|
|
27,209
|
|
Indirect consumer
|
|
|
12,973
|
|
|
|
3,352
|
|
|
|
(9,580
|
)
|
|
|
2,705
|
|
|
|
(6,875
|
)
|
|
|
9,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
172,726
|
|
|
$
|
18,891
|
|
|
$
|
(84,509
|
)
|
|
$
|
15,017
|
|
|
$
|
(69,492
|
)
|
|
$
|
122,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2011
|
|
(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
September 30, 2011
|
|
Commercial and industrial
|
|
$
|
26,619
|
|
|
$
|
18,478
|
|
|
$
|
(34,722
|
)
|
|
$
|
2,848
|
|
|
$
|
(31,874
|
)
|
|
$
|
13,223
|
|
Small business
|
|
|
16,334
|
|
|
|
3,026
|
|
|
|
(9,063
|
)
|
|
|
523
|
|
|
|
(8,540
|
)
|
|
|
10,820
|
|
Commercial real estate
|
|
|
156,623
|
|
|
|
59,880
|
|
|
|
(140,952
|
)
|
|
|
1,688
|
|
|
|
(139,264
|
)
|
|
|
77,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
199,576
|
|
|
|
81,384
|
|
|
|
(184,737
|
)
|
|
|
5,059
|
|
|
|
(179,678
|
)
|
|
|
101,282
|
|
Residential mortgage
|
|
|
47,623
|
|
|
|
15,989
|
|
|
|
(26,431
|
)
|
|
|
236
|
|
|
|
(26,195
|
)
|
|
|
37,417
|
|
Direct consumer
|
|
|
32,255
|
|
|
|
22,422
|
|
|
|
(19,388
|
)
|
|
|
2,577
|
|
|
|
(16,811
|
)
|
|
|
37,866
|
|
Indirect consumer
|
|
|
16,577
|
|
|
|
4,006
|
|
|
|
(8,541
|
)
|
|
|
1,747
|
|
|
|
(6,794
|
)
|
|
|
13,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
296,031
|
|
|
$
|
123,801
|
|
|
$
|
(239,097
|
)
|
|
$
|
9,619
|
|
|
$
|
(229,478
|
)
|
|
$
|
190,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
A summary of the allowance for loan losses, segregated by portfolio
segment follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 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
|
|
$
|
195
|
|
|
$
|
9,619
|
|
|
$
|
167
|
|
|
$
|
9,981
|
|
Small business
|
|
|
|
|
|
|
9,295
|
|
|
|
161
|
|
|
|
9,456
|
|
Commercial real estate
|
|
|
402
|
|
|
|
37,843
|
|
|
|
656
|
|
|
|
38,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
597
|
|
|
|
56,757
|
|
|
|
984
|
|
|
|
58,338
|
|
Residential mortgage
|
|
|
3,724
|
|
|
|
23,005
|
|
|
|
399
|
|
|
|
27,128
|
|
Direct consumer
|
|
|
428
|
|
|
|
26,325
|
|
|
|
456
|
|
|
|
27,209
|
|
Indirect consumer
|
|
|
|
|
|
|
9,289
|
|
|
|
161
|
|
|
|
9,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
4,749
|
|
|
$
|
115,376
|
|
|
$
|
2,000
|
|
|
$
|
122,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
(in thousands)
|
|
Recorded Investment
of Loans Individually
Evaluated for
Impairment
|
|
|
Recorded Investment
of Loans Collectively
Evaluated for
Impairment
|
|
|
Deferred
(Fees)/Costs
|
|
|
Total
Recorded
Investment
|
|
Commercial and industrial
|
|
$
|
2,360
|
|
|
$
|
1,419,537
|
|
|
$
|
(5,345
|
)
|
|
$
|
1,416,552
|
|
Small business
(1)
|
|
|
188
|
|
|
|
271,981
|
|
|
|
275
|
|
|
|
272,444
|
|
Commercial real estate
|
|
|
35,806
|
|
|
|
1,300,963
|
|
|
|
(1,168
|
)
|
|
|
1,335,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
38,354
|
|
|
|
2,992,481
|
|
|
|
(6,238
|
)
|
|
|
3,024,597
|
|
Residential mortgage
|
|
|
17,036
|
|
|
|
553,551
|
|
|
|
(292
|
)
|
|
|
570,295
|
|
Direct consumer
|
|
|
7,897
|
|
|
|
855,504
|
|
|
|
2,376
|
|
|
|
865,777
|
|
Indirect consumer
|
|
|
|
|
|
|
945,098
|
|
|
|
25,137
|
|
|
|
970,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio loans
|
|
$
|
63,287
|
|
|
$
|
5,346,634
|
|
|
$
|
20,983
|
|
|
$
|
5,430,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts contained
in Commercial and industrial on Consolidated Balance Sheets.
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Deferred
(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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 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
|
|
$
|
96
|
|
|
$
|
13,127
|
|
|
$
|
|
|
|
$
|
13,223
|
|
Small business
|
|
|
3
|
|
|
|
10,817
|
|
|
|
|
|
|
|
10,820
|
|
Commercial real estate
|
|
|
6,148
|
|
|
|
67,091
|
|
|
|
4,000
|
|
|
|
77,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
6,247
|
|
|
|
91,035
|
|
|
|
4,000
|
|
|
|
101,282
|
|
Residential mortgage
|
|
|
2,540
|
|
|
|
34,877
|
|
|
|
|
|
|
|
37,417
|
|
Direct consumer
|
|
|
184
|
|
|
|
37,682
|
|
|
|
|
|
|
|
37,866
|
|
Indirect consumer
|
|
|
|
|
|
|
13,789
|
|
|
|
|
|
|
|
13,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
8,971
|
|
|
$
|
177,383
|
|
|
$
|
4,000
|
|
|
$
|
190,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
(in thousands)
|
|
Recorded Investment
of Loans Individually
Evaluated for
Impairment
|
|
|
Recorded Investment
of Loans Collectively
Evaluated for
Impairment
|
|
|
Deferred
(Fees)/Costs
|
|
|
Total
Recorded
Investment
|
|
Commercial and industrial
|
|
$
|
11,588
|
|
|
$
|
1,219,532
|
|
|
$
|
245
|
|
|
$
|
1,231,365
|
|
Small business
(1)
|
|
|
562
|
|
|
|
299,361
|
|
|
|
204
|
|
|
|
300,127
|
|
Commercial real estate
|
|
|
52,452
|
|
|
|
1,593,357
|
|
|
|
(1,908
|
)
|
|
|
1,643,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
64,602
|
|
|
|
3,112,250
|
|
|
|
(1,459
|
)
|
|
|
3,175,393
|
|
Residential mortgage
|
|
|
14,392
|
|
|
|
640,891
|
|
|
|
(722
|
)
|
|
|
654,561
|
|
Direct consumer
|
|
|
4,615
|
|
|
|
950,813
|
|
|
|
(597
|
)
|
|
|
954,831
|
|
Indirect consumer
|
|
|
474
|
|
|
|
866,996
|
|
|
|
20,072
|
|
|
|
887,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio loans
|
|
$
|
84,083
|
|
|
$
|
5,570,950
|
|
|
$
|
17,294
|
|
|
$
|
5,672,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts contained
in Commercial and industrial on Consolidated Balance Sheets.
|
Impaired loans
. A loan is 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 interest income on nonperforming loans of $0.4 million and $1.9 million for the three and nine months ended September 30, 2012, respectively, and $0.3 million and $1.9 million for
the three and nine months ended September 30, 2011, respectively. Had nonaccrual loans performed in accordance with their original contract terms, Citizens would have recognized additional interest income of approximately $1.7 million and $2.7
million for the three and nine months ended September 30, 2012, respectively, and approximately $1.6 million and $3.6 million for the three and nine months ended September 30, 2011, respectively. There were no significant commitments
outstanding to lend additional funds to clients whose loans were classified as restructured at September 30, 2012, December 31, 2011, or September 30, 2011.
20
A summary of information regarding loans individually reviewed for impairment, segregated by class
are set forth in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Quarter To
Date
|
|
|
Year To
Date
|
|
Nonaccrual loans (impaired)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income producing
|
|
$
|
17,333
|
|
|
$
|
10,644
|
|
|
$
|
657
|
|
|
$
|
11,301
|
|
|
$
|
267
|
|
|
$
|
14,356
|
|
|
$
|
15,636
|
|
Owner-occupied
|
|
|
13,547
|
|
|
|
7,149
|
|
|
|
1,664
|
|
|
|
8,813
|
|
|
|
129
|
|
|
|
11,025
|
|
|
|
13,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
30,880
|
|
|
|
17,793
|
|
|
|
2,321
|
|
|
|
20,114
|
|
|
|
396
|
|
|
|
25,381
|
|
|
|
29,042
|
|
Commercial and industrial
|
|
|
10,941
|
|
|
|
1,623
|
|
|
|
736
|
|
|
|
2,359
|
|
|
|
195
|
|
|
|
8,296
|
|
|
|
7,993
|
|
Small business
|
|
|
193
|
|
|
|
188
|
|
|
|
|
|
|
|
188
|
|
|
|
|
|
|
|
191
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
42,014
|
|
|
|
19,604
|
|
|
|
3,057
|
|
|
|
22,661
|
|
|
|
591
|
|
|
|
33,868
|
|
|
|
37,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
3,762
|
|
|
|
230
|
|
|
|
3,532
|
|
|
|
3,762
|
|
|
|
814
|
|
|
|
4,065
|
|
|
|
4,770
|
|
Direct consumer
|
|
|
1,183
|
|
|
|
301
|
|
|
|
882
|
|
|
|
1,183
|
|
|
|
82
|
|
|
|
1,158
|
|
|
|
1,096
|
|
Indirect consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
4,945
|
|
|
|
531
|
|
|
|
4,414
|
|
|
|
4,945
|
|
|
|
896
|
|
|
|
5,223
|
|
|
|
6,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans (impaired)
|
|
|
46,959
|
|
|
|
20,135
|
|
|
|
7,471
|
|
|
|
27,606
|
|
|
|
1,487
|
|
|
|
39,091
|
|
|
|
43,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual loans (impaired)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income producing
|
|
|
873
|
|
|
|
|
|
|
|
873
|
|
|
|
873
|
|
|
|
3
|
|
|
|
439
|
|
|
|
3,957
|
|
Owner-occupied
|
|
|
14,820
|
|
|
|
14,176
|
|
|
|
644
|
|
|
|
14,820
|
|
|
|
3
|
|
|
|
15,098
|
|
|
|
15,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
15,693
|
|
|
|
14,176
|
|
|
|
1,517
|
|
|
|
15,693
|
|
|
|
6
|
|
|
|
15,537
|
|
|
|
19,145
|
|
Small business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
15,693
|
|
|
|
14,176
|
|
|
|
1,517
|
|
|
|
15,693
|
|
|
|
6
|
|
|
|
15,537
|
|
|
|
19,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
13,275
|
|
|
|
2,707
|
|
|
|
10,568
|
|
|
|
13,275
|
|
|
|
2,910
|
|
|
|
12,019
|
|
|
|
10,835
|
|
Direct consumer
|
|
|
6,713
|
|
|
|
4,478
|
|
|
|
2,235
|
|
|
|
6,713
|
|
|
|
346
|
|
|
|
6,782
|
|
|
|
5,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
19,988
|
|
|
|
7,185
|
|
|
|
12,803
|
|
|
|
19,988
|
|
|
|
3,256
|
|
|
|
18,801
|
|
|
|
16,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrual loans (impaired)
|
|
|
35,681
|
|
|
|
21,361
|
|
|
|
14,320
|
|
|
|
35,681
|
|
|
|
3,262
|
|
|
|
34,338
|
|
|
|
35,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
82,640
|
|
|
$
|
41,496
|
|
|
$
|
21,791
|
|
|
$
|
63,287
|
|
|
$
|
4,749
|
|
|
$
|
73,429
|
|
|
$
|
79,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Quarter To
Date
|
|
|
Year To
Date
|
|
Nonaccrual loans (impaired)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land hold
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
45
|
|
Land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
|
|
|
|
224
|
|
Income producing
|
|
|
23,394
|
|
|
|
9,163
|
|
|
|
8,838
|
|
|
|
18,001
|
|
|
|
2,686
|
|
|
|
18,989
|
|
|
|
19,516
|
|
Owner-occupied
|
|
|
22,338
|
|
|
|
13,276
|
|
|
|
3,694
|
|
|
|
16,970
|
|
|
|
1,424
|
|
|
|
19,267
|
|
|
|
17,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
45,732
|
|
|
|
22,439
|
|
|
|
12,532
|
|
|
|
34,971
|
|
|
|
4,110
|
|
|
|
38,385
|
|
|
|
36,939
|
|
Commercial and industrial
|
|
|
17,197
|
|
|
|
8,196
|
|
|
|
646
|
|
|
|
8,842
|
|
|
|
42
|
|
|
|
10,215
|
|
|
|
12,499
|
|
Small business
|
|
|
131
|
|
|
|
66
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
66
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
63,060
|
|
|
|
30,701
|
|
|
|
13,178
|
|
|
|
43,879
|
|
|
|
4,152
|
|
|
|
48,666
|
|
|
|
49,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
6,610
|
|
|
|
587
|
|
|
|
6,023
|
|
|
|
6,610
|
|
|
|
1,346
|
|
|
|
9,075
|
|
|
|
10,592
|
|
Direct consumer
|
|
|
1,168
|
|
|
|
647
|
|
|
|
500
|
|
|
|
1,147
|
|
|
|
55
|
|
|
|
1,757
|
|
|
|
1,519
|
|
Indirect consumer
|
|
|
478
|
|
|
|
478
|
|
|
|
|
|
|
|
478
|
|
|
|
|
|
|
|
476
|
|
|
|
474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
8,256
|
|
|
|
1,712
|
|
|
|
6,523
|
|
|
|
8,235
|
|
|
|
1,401
|
|
|
|
11,308
|
|
|
|
12,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans (impaired)
|
|
|
71,316
|
|
|
|
32,413
|
|
|
|
19,701
|
|
|
|
52,114
|
|
|
|
5,553
|
|
|
|
59,974
|
|
|
|
62,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual loans (impaired)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income producing
|
|
|
7,476
|
|
|
|
7,476
|
|
|
|
|
|
|
|
7,476
|
|
|
|
|
|
|
|
7,497
|
|
|
|
7,524
|
|
Owner-occupied
|
|
|
15,115
|
|
|
|
15,115
|
|
|
|
|
|
|
|
15,115
|
|
|
|
|
|
|
|
9,125
|
|
|
|
6,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
22,591
|
|
|
|
22,591
|
|
|
|
|
|
|
|
22,591
|
|
|
|
|
|
|
|
16,622
|
|
|
|
13,690
|
|
Small business
|
|
|
491
|
|
|
|
491
|
|
|
|
|
|
|
|
491
|
|
|
|
|
|
|
|
494
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
23,082
|
|
|
|
23,082
|
|
|
|
|
|
|
|
23,082
|
|
|
|
|
|
|
|
17,116
|
|
|
|
14,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
8,530
|
|
|
|
2,088
|
|
|
|
6,442
|
|
|
|
8,530
|
|
|
|
1,491
|
|
|
|
5,691
|
|
|
|
3,966
|
|
Direct consumer
|
|
|
3,460
|
|
|
|
3,360
|
|
|
|
100
|
|
|
|
3,460
|
|
|
|
15
|
|
|
|
2,854
|
|
|
|
2,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
11,990
|
|
|
|
5,448
|
|
|
|
6,542
|
|
|
|
11,990
|
|
|
|
1,506
|
|
|
|
8,545
|
|
|
|
6,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrual loans (impaired)
|
|
|
35,072
|
|
|
|
28,530
|
|
|
|
6,542
|
|
|
|
35,072
|
|
|
|
1,506
|
|
|
|
25,661
|
|
|
|
20,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
106,388
|
|
|
$
|
60,943
|
|
|
$
|
26,243
|
|
|
$
|
87,186
|
|
|
$
|
7,059
|
|
|
$
|
85,635
|
|
|
$
|
83,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Quarter To
Date
|
|
|
Year To
Date
|
|
Nonaccrual loans (impaired)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land hold
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
551
|
|
Land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169
|
|
|
|
761
|
|
Construction
|
|
|
491
|
|
|
|
93
|
|
|
|
164
|
|
|
|
257
|
|
|
|
4
|
|
|
|
329
|
|
|
|
1,930
|
|
Income producing
|
|
|
27,646
|
|
|
|
12,432
|
|
|
|
7,545
|
|
|
|
19,977
|
|
|
|
1,626
|
|
|
|
18,513
|
|
|
|
28,706
|
|
Owner-occupied
|
|
|
24,955
|
|
|
|
10,384
|
|
|
|
11,181
|
|
|
|
21,565
|
|
|
|
4,518
|
|
|
|
18,697
|
|
|
|
20,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
53,092
|
|
|
|
22,909
|
|
|
|
18,890
|
|
|
|
41,799
|
|
|
|
6,148
|
|
|
|
37,708
|
|
|
|
52,929
|
|
Commercial and industrial
|
|
|
20,099
|
|
|
|
10,689
|
|
|
|
899
|
|
|
|
11,588
|
|
|
|
96
|
|
|
|
12,448
|
|
|
|
20,920
|
|
Small business
|
|
|
131
|
|
|
|
|
|
|
|
65
|
|
|
|
65
|
|
|
|
3
|
|
|
|
65
|
|
|
|
698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
73,322
|
|
|
|
33,598
|
|
|
|
19,854
|
|
|
|
53,452
|
|
|
|
6,247
|
|
|
|
50,221
|
|
|
|
74,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
13,381
|
|
|
|
1,841
|
|
|
|
11,540
|
|
|
|
13,381
|
|
|
|
2,509
|
|
|
|
13,749
|
|
|
|
11,371
|
|
Direct consumer
|
|
|
2,471
|
|
|
|
844
|
|
|
|
1,524
|
|
|
|
2,368
|
|
|
|
169
|
|
|
|
1,831
|
|
|
|
1,632
|
|
Indirect consumer
|
|
|
474
|
|
|
|
474
|
|
|
|
|
|
|
|
474
|
|
|
|
|
|
|
|
474
|
|
|
|
472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
16,326
|
|
|
|
3,159
|
|
|
|
13,064
|
|
|
|
16,223
|
|
|
|
2,678
|
|
|
|
16,054
|
|
|
|
13,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans (impaired)
|
|
|
89,648
|
|
|
|
36,757
|
|
|
|
32,918
|
|
|
|
69,675
|
|
|
|
8,925
|
|
|
|
66,275
|
|
|
|
88,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual loans (impaired)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income producing
|
|
|
7,519
|
|
|
|
7,519
|
|
|
|
|
|
|
|
7,519
|
|
|
|
|
|
|
|
7,533
|
|
|
|
5,639
|
|
Owner-occupied
|
|
|
3,134
|
|
|
|
3,134
|
|
|
|
|
|
|
|
3,134
|
|
|
|
|
|
|
|
3,144
|
|
|
|
3,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
10,653
|
|
|
|
10,653
|
|
|
|
|
|
|
|
10,653
|
|
|
|
|
|
|
|
10,677
|
|
|
|
9,185
|
|
Small business
|
|
|
497
|
|
|
|
497
|
|
|
|
|
|
|
|
497
|
|
|
|
|
|
|
|
500
|
|
|
|
376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
11,150
|
|
|
|
11,150
|
|
|
|
|
|
|
|
11,150
|
|
|
|
|
|
|
|
11,177
|
|
|
|
9,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
1,011
|
|
|
|
850
|
|
|
|
161
|
|
|
|
1,011
|
|
|
|
31
|
|
|
|
1,068
|
|
|
|
1,283
|
|
Direct consumer
|
|
|
2,247
|
|
|
|
2,147
|
|
|
|
100
|
|
|
|
2,247
|
|
|
|
15
|
|
|
|
2,262
|
|
|
|
2,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
3,258
|
|
|
|
2,997
|
|
|
|
261
|
|
|
|
3,258
|
|
|
|
46
|
|
|
|
3,330
|
|
|
|
3,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrual loans (impaired)
|
|
|
14,408
|
|
|
|
14,147
|
|
|
|
261
|
|
|
|
14,408
|
|
|
|
46
|
|
|
|
14,507
|
|
|
|
12,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
104,056
|
|
|
$
|
50,904
|
|
|
$
|
33,179
|
|
|
$
|
84,083
|
|
|
$
|
8,971
|
|
|
$
|
80,782
|
|
|
$
|
100,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 September 30, 2012 the majority of Citizens TDRs were on accrual status and all were 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.
The recorded investment balance of TDRs approximated $27.8 million at
September 30, 2012. TDRs of $21.4 million were on accrual status and TDRs of $6.4 million were on nonaccrual status at September 30, 2012. TDRs are evaluated separately in Citizens allowance for loan loss methodology based on the
expected cash flows or underlying collateral of loans in this status. At September 30, 2012, the allowance for loan losses included specific reserves of $4.2 million related to TDRs, which included $3.7 million related to mortgage TDRs and $0.5
million related to direct consumer TDRs, compared to $2.7 million of specific reserves related to TDRs at September 30, 2011, which included $2.5 million related to mortgage TDRs and $0.2 million related to direct consumer TDRs . Citizens
charged off $0.4 million and $1.1 million for the three and nine months ended September 30, 2012, respectively, and $2.1 million and $6.0 million for the three and nine months ended September 30, 2011, respectively, for the portion of TDRs
deemed to be uncollectible.
22
The following table provides information on loans modified as a TDR.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
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
|
|
Residential mortgage
|
|
|
15
|
|
|
$
|
2,399
|
|
|
$
|
2,399
|
|
|
|
2.91
|
%
|
|
|
10
|
|
|
$
|
2,265
|
|
|
$
|
2,411
|
|
|
|
2.25
|
%
|
Direct consumer
|
|
|
5
|
|
|
|
360
|
|
|
|
360
|
|
|
|
3.39
|
|
|
|
1
|
|
|
|
331
|
|
|
|
336
|
|
|
|
5.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio loans
|
|
|
20
|
|
|
$
|
2,759
|
|
|
$
|
2,759
|
|
|
|
2.97
|
|
|
|
11
|
|
|
$
|
2,596
|
|
|
$
|
2,747
|
|
|
|
2.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
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
|
|
|
2
|
|
|
$
|
1,839
|
|
|
$
|
1,500
|
|
|
|
6.50
|
%
|
|
|
2
|
|
|
$
|
1,807
|
|
|
$
|
1,807
|
|
|
|
6.45
|
%
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
11,988
|
|
|
|
8,283
|
|
|
|
7.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
2
|
|
|
|
1,839
|
|
|
|
1,500
|
|
|
|
6.50
|
|
|
|
4
|
|
|
|
13,795
|
|
|
|
10,090
|
|
|
|
7.25
|
|
Residential mortgage
|
|
|
29
|
|
|
|
4,732
|
|
|
|
4,732
|
|
|
|
2.69
|
|
|
|
32
|
|
|
|
8,092
|
|
|
|
8,365
|
|
|
|
2.76
|
|
Direct consumer
|
|
|
57
|
|
|
|
4,163
|
|
|
|
4,082
|
|
|
|
4.30
|
|
|
|
7
|
|
|
|
1,599
|
|
|
|
1,605
|
|
|
|
6.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio loans
|
|
|
88
|
|
|
$
|
10,734
|
|
|
$
|
10,314
|
|
|
|
3.88
|
|
|
|
43
|
|
|
$
|
23,486
|
|
|
$
|
20,060
|
|
|
|
5.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides information on how loans were modified as a TDR.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Post Modification Recorded Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extended maturity
|
|
$
|
493
|
|
|
$
|
|
|
|
$
|
2,486
|
|
|
$
|
2,202
|
|
Interest rate adjustments
|
|
|
679
|
|
|
|
2,215
|
|
|
|
3,304
|
|
|
|
6,989
|
|
Combination of rate and maturity
|
|
|
1,562
|
|
|
|
532
|
|
|
|
3,735
|
|
|
|
10,869
|
|
Other
(1)
|
|
|
25
|
|
|
|
|
|
|
|
789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,759
|
|
|
$
|
2,747
|
|
|
$
|
10,314
|
|
|
$
|
20,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Other includes covenant modification, forebearance 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 September 30, 2012,
there were three loans of approximately $0.3 million modified as a TDR within the last twelve months that were in payment default.
23
Note 5. Long-Term Debt
The components of long-term debt are presented below.
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
Citizens (Parent only):
|
|
|
|
|
|
|
|
|
Subordinated debt:
|
|
|
|
|
|
|
|
|
5.75% subordinated notes due February 2013
|
|
$
|
17,214
|
|
|
$
|
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
|
|
Subsidiaries:
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
656,700
|
|
|
|
658,484
|
|
Other borrowed funds
|
|
|
104,116
|
|
|
|
104,149
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
852,481
|
|
|
$
|
854,185
|
|
|
|
|
|
|
|
|
|
|
Citizens restructured $350.0 million of FHLB advances during the first nine months of 2012, extending the average remaining term on
these advances to 9.0 years from 3.2 years and reducing the average interest rate to 2.55% from 3.50%. Throughout 2011, Citizens restructured $245.0 million in FHLB advances extending the average remaining term to 5.8 years from 3.3 years and
reducing the average interest rate to 3.32% from 4.84%.
During the first quarter of 2010, Citizens decided to defer regularly scheduled
quarterly interest payments on its outstanding junior subordinated debentures relating to its two trust preferred securities. While Citizens accrues for this obligation it is currently in arrears with the interest payments as contractually
permitted. As of September 30, 2012 and December 31, 2011, the amount of the arrearage on the payments on the subordinated debentures associated with the trust preferred securities is $13.8 million and $9.8 million, respectively.
Note 6. Income Taxes
Citizens recorded income tax expense of $1.3 million for the third quarter of 2012, compared to a benefit of $12.6 million for the
third quarter of 2011. The tax benefit in 2011 was largely due to Citizens recording a receivable as a result of a revocation of a tax election. For the first nine months of 2012, the income tax benefit totaled $275.5 million, compared with a
benefit of $22.8 million for the same period of 2011. The increase in the tax benefit for 2012 was primarily the result of eliminating the valuation allowance against the deferred tax asset. The deferred tax asset is reviewed on a quarterly basis
and based on the analysis of positive and negative evidence at June 30, 2012, including the Companys return to profitability over the past five quarters, no deferred tax asset valuation allowance was deemed necessary as of June 30,
2012. As a result, the deferred tax asset valuation allowance was reversed in the second quarter of 2012. As of September 30, 2012, the recorded balance of the deferred tax asset was $268.3 million, reported in Other Assets on the Consolidated
Balance Sheets.
Note 7. 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
24
brokerage network, net deferred tax assets (and the related valuation reserves), and premises and equipment. In addition, tax ramifications related to the recognition of unrealized gains and
losses such as those within the investment securities portfolio can have a significant effect on estimated fair values and have not been considered in the estimates. For these reasons, the aggregate fair value should not be considered an indication
of Citizens value.
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 follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Fair Value Measurements
|
|
(in thousands)
|
|
Amount
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
162,705
|
|
|
$
|
162,705
|
|
|
$
|
|
|
|
$
|
162,705
|
|
|
$
|
|
|
Money market investments
|
|
|
223,818
|
|
|
|
223,818
|
|
|
|
|
|
|
|
223,818
|
|
|
|
|
|
Securities held to maturity
|
|
|
1,313,504
|
|
|
|
1,378,310
|
|
|
|
|
|
|
|
1,378,310
|
|
|
|
|
|
FHLB and Federal Reserve stock
|
|
|
122,123
|
|
|
|
122,123
|
|
|
|
|
|
|
|
122,123
|
|
|
|
|
|
Net portfolio loans
|
|
|
5,308,779
|
|
|
|
5,163,239
|
|
|
|
|
|
|
|
|
|
|
|
5,163,239
|
|
Loans held for sale
|
|
|
30,062
|
|
|
|
30,062
|
|
|
|
|
|
|
|
11,815
|
|
|
|
18,247
|
|
Accrued interest receivable
|
|
|
32,088
|
|
|
|
32,088
|
|
|
|
|
|
|
|
32,088
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
7,302,965
|
|
|
|
7,324,879
|
|
|
|
|
|
|
|
7,324,879
|
|
|
|
|
|
Short-term borrowings
|
|
|
42,796
|
|
|
|
42,796
|
|
|
|
|
|
|
|
42,796
|
|
|
|
|
|
Long-term debt
|
|
|
852,481
|
|
|
|
933,690
|
|
|
|
56,952
|
|
|
|
876,738
|
|
|
|
|
|
Accrued interest payable
|
|
|
16,900
|
|
|
|
16,900
|
|
|
|
|
|
|
|
16,900
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
25
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 if the instrument is carried at fair value or not, are set forth below. There were no changes in the valuation methods used to estimate fair value
during the period ended September 30, 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.
Securities Held to Maturity.
The fair value of securities classified as held to maturity are based upon quoted prices for similar
assets, if available, or matrix pricing models. 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 September 30, 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 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.
26
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 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. 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. Fair value may also be measured using the present value of expected future cash flows discounted at the loans
effective interest rate. Since certain assumptions and unobservable inputs related to loss severity are currently being used in both techniques, impaired loans are recorded as Level 3 in the fair value hierarchy. Citizens measures impairment on all
nonaccrual commercial and industrial and commercial real estate loans for which it has established specific reserves as part of the specific allocated allowance component of the allowance for loan losses. Citizens measures impairment on all
residential mortgage loans over 120 days 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.
Commercial loans held for sale are comprised primarily of loans identified for sale that are recorded at the lower of carrying amount or market value
based on appraisals of the underlying collateral, which are also subject to management adjustments for loss severity 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 the loans effective interest rate. Citizens records commercial loans held for sale as nonrecurring Level 3.
Other Real Estate.
Other real estate (ORE) is comprised of commercial and residential real estate acquired through foreclosure proceedings or acceptance of a deed-in-lieu of
foreclosure. 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. 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
27
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 below carrying value.
The following table presents the balances of assets
and liabilities that were measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
411,731
|
|
|
$
|
|
|
|
$
|
411,725
|
|
|
$
|
6
|
|
Mortgage-backed
|
|
|
1,018,853
|
|
|
|
|
|
|
|
1,018,853
|
|
|
|
|
|
State and municipal
|
|
|
110,696
|
|
|
|
|
|
|
|
109,988
|
|
|
|
708
|
|
Other
|
|
|
287
|
|
|
|
|
|
|
|
54
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
|
1,541,567
|
|
|
|
|
|
|
|
1,540,620
|
|
|
|
947
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
|
1,217
|
|
|
|
|
|
|
|
1,217
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
14,898
|
|
|
|
|
|
|
|
14,898
|
|
|
|
|
|
Deferred compensation assets
|
|
|
8,796
|
|
|
|
6,915
|
|
|
|
|
|
|
|
1,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
24,911
|
|
|
|
6,915
|
|
|
|
16,115
|
|
|
|
1,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,566,478
|
|
|
$
|
6,915
|
|
|
$
|
1,556,735
|
|
|
$
|
2,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
$
|
7,515
|
|
|
$
|
|
|
|
$
|
7,515
|
|
|
$
|
|
|
Derivatives not designated as hedging instruments
|
|
|
15,521
|
|
|
|
|
|
|
|
15,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,036
|
|
|
$
|
|
|
|
$
|
23,036
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 transfers between levels within the fair value hierarchy nor were there any purchases, sales, or issuances during the
three and nine month periods ended September 30, 2012.
The following table presents the reconciliation of Level 3 assets held by Citizens.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized/Unrealized Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Recorded in
Other
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Recorded in Earnings
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
End of
|
|
(in thousands)
|
|
of Period
|
|
|
Realized
(1)
|
|
|
Unrealized
|
|
|
Income (Pretax)
|
|
|
Purchases
|
|
|
Sales
|
|
|
Settlements
|
|
|
Period
|
|
Three Months Ended
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
6
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6
|
|
State and municipal
|
|
|
1,447
|
|
|
|
612
|
|
|
|
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
(1,450
|
)
|
|
|
708
|
|
Other
|
|
|
233
|
|
|
|
3
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
233
|
|
Deferred compensation assets
|
|
|
1,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
538
|
|
|
|
(508
|
)
|
|
|
|
|
|
|
1,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,537
|
|
|
$
|
615
|
|
|
$
|
|
|
|
$
|
96
|
|
|
$
|
538
|
|
|
$
|
(508
|
)
|
|
$
|
(1,450
|
)
|
|
$
|
2,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
$
|
6
|
|
State and municipal
|
|
|
1,446
|
|
|
|
628
|
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
(1,450
|
)
|
|
|
708
|
|
Other
|
|
|
233
|
|
|
|
10
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
233
|
|
Deferred compensation assets
|
|
|
1,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
825
|
|
|
|
(630
|
)
|
|
|
|
|
|
|
1,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,373
|
|
|
$
|
638
|
|
|
$
|
|
|
|
$
|
74
|
|
|
$
|
825
|
|
|
$
|
(630
|
)
|
|
$
|
(1,452
|
)
|
|
$
|
2,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net realized gains
and losses recorded in earnings include discount accretions.
|
29
The following table includes assets measured at fair value on a nonrecurring basis that have
had a fair value adjustment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
Initial Carrying
|
|
|
Fair Value
|
|
(in thousands)
|
|
Value
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Impaired loans
|
|
$
|
78,200
|
|
|
$
|
31,101
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31,101
|
|
Commercial loans held for sale
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans held for sale
|
|
|
708
|
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
214
|
|
Other real estate
|
|
|
3,764
|
|
|
|
2,244
|
|
|
|
|
|
|
|
|
|
|
|
2,244
|
|
Repossessed assets
|
|
|
2,566
|
|
|
|
1,412
|
|
|
|
|
|
|
|
|
|
|
|
1,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
85,274
|
|
|
$
|
34,971
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
34,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table represents quantitative information about Level 3 fair value measurements.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Fair Value
at
September 30, 2012
|
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range (Weighted
Average)
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
6
|
|
|
Cost
|
|
None
(1)
|
|
|
None
|
|
State and municipal
|
|
|
708
|
|
|
Discounted Cash Flow
|
|
Liquidity Premium
|
|
|
1.0% - 1.5% (1.4%
|
)
|
|
|
|
|
|
|
|
|
Credit Premium
|
|
|
1.3% - 2.7% (2.3%
|
)
|
|
|
|
|
|
|
|
|
Fail Rate
|
|
|
1.2% - 2.0% (1.8%
|
)
|
Other
|
|
|
233
|
|
|
Discounted Cash Flow
|
|
Liquidity Premium
|
|
|
2.0% - 2.5% (2.4%
|
)
|
|
|
|
|
|
|
|
|
Credit Premium
|
|
|
2.8% - 5.5% (4.5%
|
)
|
|
|
|
|
|
|
|
|
Fail Rate
|
|
|
1.2% - 1.5% (1.4%
|
)
|
Deferred compensation assets
|
|
|
1,881
|
|
|
Contract Value
|
|
None
(2)
|
|
|
None
|
|
Impaired loans
|
|
|
31,101
|
|
|
Comparative Sales
|
|
Loss Severity Discount
|
|
|
0% - 100% (65%
|
)
|
Residential mortgage loans held for sale
|
|
|
214
|
|
|
Comparative Sales
|
|
Loss Severity Discount
|
|
|
6% - 100% (70%
|
)
|
Other real estate
|
|
|
2,244
|
|
|
Comparative Sales
|
|
Loss Severity Discount
|
|
|
2% - 100% (40%
|
)
|
Repossessed assets
|
|
|
1,412
|
|
|
Comparative Sales
|
|
Loss Severity Discount
|
|
|
45% - 45% (45%
|
)
|
(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.
Note 8. Pension Benefit Cost
Effective December 31, 2006, Citizens defined benefit pension plan was frozen, preserving prior earned benefits
but discontinuing the accrual of further benefits. Citizens recognizes the change in the funded status (i.e. the difference between the fair value of plan assets and the projected benefit obligations) of its retirement plans as an adjustment to
accumulated other comprehensive income, net of tax. This adjustment represents the unrecognized actuarial losses and unrecognized prior service costs. The components of retirement benefit cost are presented below.
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Defined benefit pension plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
847
|
|
|
$
|
955
|
|
|
$
|
2,610
|
|
|
$
|
2,865
|
|
Expected return on plan assets
|
|
|
(1,055
|
)
|
|
|
(1,018
|
)
|
|
|
(3,165
|
)
|
|
|
(3,053
|
)
|
Amortization of unrecognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
8
|
|
|
|
8
|
|
|
|
23
|
|
|
|
23
|
|
Net actuarial loss
|
|
|
761
|
|
|
|
833
|
|
|
|
2,346
|
|
|
|
2,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension cost
|
|
|
561
|
|
|
|
778
|
|
|
|
1,814
|
|
|
|
2,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental pension plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
|
11
|
|
|
|
189
|
|
|
|
221
|
|
|
|
567
|
|
Amortization of unrecognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
|
6
|
|
|
|
5
|
|
|
|
29
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension cost
|
|
|
17
|
|
|
|
194
|
|
|
|
250
|
|
|
|
581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
|
19
|
|
|
|
(43
|
)
|
|
|
59
|
|
|
|
245
|
|
Amortization of unrecognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
(229
|
)
|
|
|
(107
|
)
|
|
|
(688
|
)
|
|
|
(251
|
)
|
Net actuarial gain
|
|
|
(45
|
)
|
|
|
37
|
|
|
|
(135
|
)
|
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net postretirement benefit cost
|
|
|
(255
|
)
|
|
|
(113
|
)
|
|
|
(764
|
)
|
|
|
(113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined contribution retirement and 401(k) plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
403
|
|
|
|
|
|
|
|
1,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total periodic benefit cost
|
|
$
|
726
|
|
|
$
|
859
|
|
|
$
|
2,641
|
|
|
$
|
2,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Citizens maintains multiple employee benefit plans, including defined benefit pension, supplemental pension, postretirement healthcare,
and defined contribution retirement 401(k). Citizens made a cash contribution of $2.7 million to the defined benefit pension plan during the first nine months of 2012 and does not expect to make an additional contribution for the remainder of the
year. During the first nine months of 2012, Citizens contributed $0.4 million to the supplemental pension plans and anticipates that an additional $0.1 million of contributions will be made during the remaining three months of the year. Citizens
contributed $0.1 million to the postretirement benefit plan during the first nine months of 2012 and anticipates making an additional $0.1 million in contributions for the remaining portion of the year. Citizens suspended the 401(k) matching funds
and annual discretionary contributions during the third quarter of 2009. The Board of Directors approved the reinstatement of the 401(k) matching funds effective January 1, 2012. Contributions to the 401(k) savings plan will be matched 50% on
the first 2% of salary deferred and 25% on the next 6% deferred.
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 September 30, 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 annual
testing on valuations received from third parties. There are no significant restrictions on Citizens ability to sell any of the investments in the pension plan.
31
The estimated fair values of Citizens pension plan assets follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
|
|
|
|
(in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Asset Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term pooled money fund
|
|
$
|
2,880
|
|
|
$
|
|
|
|
$
|
2,880
|
|
|
$
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large cap
|
|
|
19,005
|
|
|
|
|
|
|
|
19,005
|
|
|
|
|
|
Mid-cap
|
|
|
4,639
|
|
|
|
|
|
|
|
4,639
|
|
|
|
|
|
Small-cap
|
|
|
6,631
|
|
|
|
|
|
|
|
6,631
|
|
|
|
|
|
International equity
|
|
|
9,967
|
|
|
|
|
|
|
|
9,967
|
|
|
|
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate term fixed
|
|
|
22,105
|
|
|
|
|
|
|
|
22,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
65,227
|
|
|
$
|
|
|
|
$
|
65,227
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9. Stock-Based Compensation
Citizens has a stock-based compensation plan authorizing the granting of incentive and nonqualified stock options, nonvested stock
awards (also known as restricted stock), restricted stock units, and performance awards to employees and non-employee directors. At September 30, 2012, Citizens had 934,192 shares of common stock reserved for future issuance under the current
plan. The compensation cost for share based awards is recognized over the requisite service period of the award. The requisite service period is presumed to be the stated vesting period or the estimated time that will be required to satisfy any
performance conditions. Restricted shares are included in outstanding stock totals, and are entitled to receive dividends and have voting rights. Restricted stock units have no voting or dividend rights but have dividend equivalent rights entitling
them to additional shares at the time the units are settled for common stock. There have been no options granted since 2006 and no recognized costs associated with stock options since 2009.
The
following table sets forth the total stock-based compensation expense resulting from restricted stock units and restricted stock awards included in the Consolidated Statements of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Restricted stock compensation and restricted stock unit compensation
|
|
$
|
1,100
|
|
|
$
|
713
|
|
|
$
|
2,717
|
|
|
$
|
2,079
|
|
Income tax benefit
|
|
|
(385
|
)
|
|
|
(250
|
)
|
|
|
(951
|
)
|
|
|
(728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense after income taxes
|
|
$
|
715
|
|
|
$
|
463
|
|
|
$
|
1,766
|
|
|
$
|
1,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New shares are issued when stock options are exercised. Citizens presents excess tax benefits from the exercise of stock options, if
any, as financing cash inflows and as operating cash outflows on the Consolidated Statements of Cash Flows.
As of September 30, 2012,
$6.5 million of total unrecognized compensation cost related to restricted stock is expected to be recognized over a weighted average period of 1.8 years.
32
The following table summarizes restricted stock
activity.
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-Average
Per Share Grant
Date Fair Value
|
|
Restricted stock at December 31, 2011
|
|
|
825,969
|
|
|
$
|
9.27
|
|
Granted
|
|
|
299,788
|
|
|
|
16.85
|
|
Vested
|
|
|
(81,299
|
)
|
|
|
11.33
|
|
Forfeited
|
|
|
(26,127
|
)
|
|
|
11.59
|
|
|
|
|
|
|
|
|
|
|
Restricted stock at September 30, 2012
(1)
|
|
|
1,018,331
|
|
|
$
|
11.28
|
|
|
|
|
|
|
|
|
|
|
(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 the nine months ended September 30, 2012 was $1.3 million.
Note 10. Earnings Per Common Share
Earnings per common share is computed using the two-class method. As of September 30, 2012, potential common stock that would be
generated from restrictions lapsing on unvested shares as well as additional shares issued through the exercise of stock options and warrants totaled 2,919,231 shares. As a result of being anti-dilutive, these shares were excluded from the
computation of dilutive earnings per share.
A reconciliation of the numerators and denominators of the basic and diluted earnings per common share computations follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in thousands, except per share amounts)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
20,991
|
|
|
$
|
32,944
|
|
|
$
|
349,028
|
|
|
$
|
(11,577
|
)
|
Dividend on redeemable preferred stock
|
|
|
(6,130
|
)
|
|
|
(5,761
|
)
|
|
|
(18,127
|
)
|
|
|
(17,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
|
|
14,861
|
|
|
|
27,183
|
|
|
|
330,901
|
|
|
|
(28,665
|
)
|
Net income allocated to participating securities
|
|
|
374
|
|
|
|
553
|
|
|
|
7,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) after allocation to participating securities
|
|
$
|
14,487
|
|
|
$
|
26,630
|
|
|
$
|
323,330
|
|
|
$
|
(28,665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
40,507
|
|
|
|
40,251
|
|
|
|
40,393
|
|
|
|
39,997
|
|
Less: participating securities included in weighted average shares outstanding
|
|
|
(1,018
|
)
|
|
|
(818
|
)
|
|
|
(924
|
)
|
|
|
(579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic and dilutive earnings per common share
|
|
|
39,489
|
|
|
|
39,433
|
|
|
|
39,469
|
|
|
|
39,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share
|
|
$
|
0.37
|
|
|
$
|
0.68
|
|
|
$
|
8.19
|
|
|
$
|
(0.73
|
)
|
Diluted net income (loss) per common share
|
|
|
0.37
|
|
|
|
0.68
|
|
|
|
8.19
|
|
|
|
(0.73
|
)
|
During the first quarter of 2010, Citizens suspended quarterly cash dividend payments on its fixed-rate cumulative perpetual preferred
stock, Series A 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 $44.2 million and $31.5 million with the dividend payments on the Series A Preferred Stock as of September 30, 2012 and December 31, 2011, respectively. For additional
information about the Series A Preferred Stock, see Note 14 to the Consolidated Financial Statements of Citizens 2011 Annual Report on Form 10-K.
Note 11. Lines of Business
Citizens is managed along the following business lines: Regional Banking, Specialty Consumer, Specialty Commercial, Wealth Management,
and Other.
Selected line of business information for the three and nine months
33
ended September 30, 2012 and 2011 is provided below. Certain amounts have been reclassified to conform with the current year presentation. These reclassifications do not have a significant
effect on any one line of business and do not change the total results of the company. There are no significant intersegmental revenues. For additional information about the business lines, see Note 15 to the Consolidated Financial Statements of
Citizens 2011 Annual Report on Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Regional
Banking
|
|
|
Specialty
Consumer
|
|
|
Specialty
Commercial
|
|
|
Wealth
Mgmt
|
|
|
Other
|
|
|
Total
|
|
Earnings Summary - Three Months Ended September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (taxable equivalent)
|
|
$
|
53,366
|
|
|
$
|
8,985
|
|
|
$
|
16,622
|
|
|
$
|
29
|
|
|
$
|
(1,694
|
)
|
|
$
|
77,308
|
|
Provision for loan losses
|
|
|
5,692
|
|
|
|
4,045
|
|
|
|
(4,542
|
)
|
|
|
|
|
|
|
|
|
|
|
5,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision
|
|
|
47,674
|
|
|
|
4,940
|
|
|
|
21,164
|
|
|
|
29
|
|
|
|
(1,694
|
)
|
|
|
72,113
|
|
Noninterest income
|
|
|
17,817
|
|
|
|
179
|
|
|
|
531
|
|
|
|
3,635
|
|
|
|
1,548
|
|
|
|
23,710
|
|
Noninterest expense
|
|
|
50,555
|
|
|
|
4,092
|
|
|
|
3,104
|
|
|
|
2,394
|
|
|
|
11,910
|
|
|
|
72,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
14,936
|
|
|
|
1,027
|
|
|
|
18,591
|
|
|
|
1,270
|
|
|
|
(12,056
|
)
|
|
|
23,768
|
|
Income tax expense (benefit) (taxable equivalent)
|
|
|
5,228
|
|
|
|
359
|
|
|
|
6,507
|
|
|
|
445
|
|
|
|
(9,762
|
)
|
|
|
2,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,708
|
|
|
$
|
668
|
|
|
$
|
12,084
|
|
|
$
|
825
|
|
|
$
|
(2,294
|
)
|
|
$
|
20,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets
(in millions)
|
|
$
|
2,989
|
|
|
$
|
1,600
|
|
|
$
|
1,244
|
|
|
$
|
22
|
|
|
$
|
3,869
|
|
|
$
|
9,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Summary - Three Months Ended September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (taxable equivalent)
|
|
$
|
53,340
|
|
|
$
|
9,962
|
|
|
$
|
12,917
|
|
|
$
|
125
|
|
|
$
|
4,323
|
|
|
$
|
80,667
|
|
Provision for loan losses
|
|
|
5,292
|
|
|
|
15,267
|
|
|
|
(3,078
|
)
|
|
|
|
|
|
|
|
|
|
|
17,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision
|
|
|
48,048
|
|
|
|
(5,305
|
)
|
|
|
15,995
|
|
|
|
125
|
|
|
|
4,323
|
|
|
|
63,186
|
|
Noninterest income
|
|
|
18,662
|
|
|
|
59
|
|
|
|
2,262
|
|
|
|
3,620
|
|
|
|
(176
|
)
|
|
|
24,427
|
|
Noninterest expense
|
|
|
53,429
|
|
|
|
4,010
|
|
|
|
3,329
|
|
|
|
2,567
|
|
|
|
2,076
|
|
|
|
65,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
13,281
|
|
|
|
(9,256
|
)
|
|
|
14,928
|
|
|
|
1,178
|
|
|
|
2,071
|
|
|
|
22,202
|
|
Income tax expense (benefit) (taxable equivalent)
|
|
|
4,649
|
|
|
|
(3,240
|
)
|
|
|
5,224
|
|
|
|
412
|
|
|
|
(17,787
|
)
|
|
|
(10,742
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,632
|
|
|
$
|
(6,016
|
)
|
|
$
|
9,704
|
|
|
$
|
766
|
|
|
$
|
19,858
|
|
|
$
|
32,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets
(in millions)
|
|
$
|
3,196
|
|
|
$
|
1,650
|
|
|
$
|
1,041
|
|
|
$
|
18
|
|
|
$
|
3,691
|
|
|
$
|
9,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Regional
Banking
|
|
|
Specialty
Consumer
|
|
|
Specialty
Commercial
|
|
|
Wealth
Mgmt
|
|
|
Other
|
|
|
Total
|
|
Earnings Summary - Nine Months Ended September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (taxable equivalent)
|
|
$
|
156,909
|
|
|
$
|
25,882
|
|
|
$
|
48,670
|
|
|
$
|
87
|
|
|
$
|
661
|
|
|
$
|
232,209
|
|
Provision for loan losses
|
|
|
24,024
|
|
|
|
6,666
|
|
|
|
(11,799
|
)
|
|
|
|
|
|
|
|
|
|
|
18,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
|
|
|
132,885
|
|
|
|
19,216
|
|
|
|
60,469
|
|
|
|
87
|
|
|
|
661
|
|
|
|
213,318
|
|
Noninterest income
|
|
|
52,512
|
|
|
|
546
|
|
|
|
1,914
|
|
|
|
10,819
|
|
|
|
4,505
|
|
|
|
70,296
|
|
Noninterest expense
|
|
|
151,905
|
|
|
|
12,692
|
|
|
|
9,573
|
|
|
|
7,377
|
|
|
|
23,947
|
|
|
|
205,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
33,492
|
|
|
|
7,070
|
|
|
|
52,810
|
|
|
|
3,529
|
|
|
|
(18,781
|
)
|
|
|
78,120
|
|
Income tax expense (benefit) (taxable equivalent)
|
|
|
11,722
|
|
|
|
2,475
|
|
|
|
18,484
|
|
|
|
1,235
|
|
|
|
(304,824
|
)
|
|
|
(270,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
21,770
|
|
|
$
|
4,595
|
|
|
$
|
34,326
|
|
|
$
|
2,294
|
|
|
$
|
286,043
|
|
|
$
|
349,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets
(in millions)
|
|
$
|
3,016
|
|
|
$
|
1,576
|
|
|
$
|
1,225
|
|
|
$
|
22
|
|
|
$
|
3,720
|
|
|
$
|
9,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Summary - Nine Months Ended September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (taxable equivalent)
|
|
$
|
162,701
|
|
|
$
|
28,132
|
|
|
$
|
34,247
|
|
|
$
|
423
|
|
|
$
|
15,370
|
|
|
$
|
240,873
|
|
Provision for loan losses
|
|
|
56,710
|
|
|
|
26,533
|
|
|
|
40,558
|
|
|
|
|
|
|
|
|
|
|
|
123,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision
|
|
|
105,991
|
|
|
|
1,599
|
|
|
|
(6,311
|
)
|
|
|
423
|
|
|
|
15,370
|
|
|
|
117,072
|
|
Noninterest income
|
|
|
53,208
|
|
|
|
1,716
|
|
|
|
3,181
|
|
|
|
11,355
|
|
|
|
1,435
|
|
|
|
70,895
|
|
Noninterest expense
|
|
|
164,598
|
|
|
|
13,997
|
|
|
|
12,100
|
|
|
|
7,226
|
|
|
|
18,590
|
|
|
|
216,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(5,399
|
)
|
|
|
(10,682
|
)
|
|
|
(15,230
|
)
|
|
|
4,552
|
|
|
|
(1,785
|
)
|
|
|
(28,544
|
)
|
Income tax expense (benefit) (taxable equivalent)
|
|
|
(1,890
|
)
|
|
|
(3,739
|
)
|
|
|
(5,331
|
)
|
|
|
1,593
|
|
|
|
(7,600
|
)
|
|
|
(16,967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,509
|
)
|
|
$
|
(6,943
|
)
|
|
$
|
(9,899
|
)
|
|
$
|
2,959
|
|
|
$
|
5,815
|
|
|
$
|
(11,577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets
(in millions)
|
|
$
|
3,324
|
|
|
$
|
1,645
|
|
|
$
|
1,055
|
|
|
$
|
18
|
|
|
$
|
3,677
|
|
|
$
|
9,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12. Commitments, Contingent Liabilities and Guarantees
In accordance with GAAP, the unaudited Consolidated Financial Statements do not reflect various loan commitments (unfunded loans and
unused lines of credit) and letters of credit originated in the normal course of business. Loan commitments are made to accommodate the financial needs of clients. 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. 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
34
expiration dates or other termination clauses, most expire unfunded and do not necessarily represent future liquidity requirements. Collateral is obtained based on Citizens assessment of
the client and may include receivables, inventories, real property, and equipment.
Amounts available to clients under loan commitments and
standby letters of credit follow.
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
Loan commitments and letters of credit:
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
$
|
943,985
|
|
|
$
|
932,435
|
|
Asset-based lending participations
|
|
|
86,467
|
|
|
|
151,194
|
|
Financial standby letters of credit
|
|
|
109,611
|
|
|
|
125,401
|
|
Performance standby letters of credit
|
|
|
1,756
|
|
|
|
3,571
|
|
Deferred standby letter of credit fees
|
|
|
601
|
|
|
|
1,123
|
|
At September 30, 2012 and December 31, 2011, a liability of $1.9 million was recorded for possible 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.
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. For the three month
periods ended September 30, 2012 and 2011, Citizens repurchased $2.3 million and $1.0 million of loans, respectively, pursuant to such provisions. Citizens recorded $1.3 million and $0.5 million for the three month periods ended
September 30, 2012 and 2011, respectively, in Other Expense on the Consolidated Statements of Operations related to repurchasing or indemnifying such loans. For the nine month periods ended September 30, 2012 and 2011, Citizens repurchased
$4.7 million and $1.5 million of loans, respectively, pursuant to such provisions. Citizens recorded $4.9 million and $3.5 million for the nine month periods ended September 30, 2012 and 2011, respectively, in Other Expense on the Consolidated
Statements of Operations related to repurchasing or indemnifying such loans.
Note 13. 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.
35
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)
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate products
|
|
$
|
1,217
|
|
|
$
|
3,791
|
|
|
$
|
7,515
|
|
|
$
|
2,317
|
|
Derivatives
not
designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate products
|
|
|
14,898
|
|
|
|
17,088
|
|
|
|
15,521
|
|
|
|
17,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
$
|
16,115
|
|
|
$
|
20,879
|
|
|
$
|
23,036
|
|
|
$
|
19,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges of Interest Rate Risk.
Citizens objective 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 swaps and caps 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 September 30, 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. 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 the three and nine
months ended September 30, 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. Citizens accelerated the reclassification of unrealized gains in accumulated other comprehensive income of less than $0.1 million for the nine
months ended September 30, 2012 and $0.2 million and $0.7 million for the three and nine months ended September 30, 2011, respectively, to earnings as a result of the hedged forecasted transactions becoming probable not to occur. There was
no reclassification of unrealized gains accelerated for the three months ended September 30, 2012. During the next twelve months, Citizens estimates that there will be no derivatives reclassified as an increase to interest income and $2.6
million as an increase to interest expense.
36
The following tables summarize
the impact of cash flow hedges on the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Impact on OCI Gain (Loss)
|
|
Derivatives Relationship
(in thousands)
|
|
Recognized in OCI
|
|
|
Location
Reclassified in
Statement of
Operations
|
|
Reclassified from
Accumulated OCI into
Statement of Operations
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
2012
|
|
|
2011
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
34
|
|
|
$
|
547
|
|
Interest rate products
|
|
$
|
(2,665
|
)
|
|
$
|
(697
|
)
|
|
Interest expense
|
|
|
(634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(2,665
|
)
|
|
$
|
(697
|
)
|
|
|
|
$
|
(600
|
)
|
|
$
|
729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Impact on OCI Gain (Loss)
|
|
Derivatives Relationship
(in thousands)
|
|
Recognized in OCI
|
|
|
Location
Reclassified in
Statement of
Operations
|
|
Reclassified from
Accumulated OCI into
Statement of Operations
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
2012
|
|
|
2011
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
406
|
|
|
$
|
2,418
|
|
Interest rate products
|
|
$
|
(9,541
|
)
|
|
$
|
(680
|
)
|
|
Interest expense
|
|
|
(1,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
6
|
|
|
|
717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(9,541
|
)
|
|
$
|
(680
|
)
|
|
|
|
$
|
(1,431
|
)
|
|
$
|
3,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. At September 30, 2012, Citizens had no derivatives 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 Statements of Operations as the offsetting loss or gain on the
related derivatives. During the three and nine months ended September 30, 2012 and the three months ended September 30, 2011, 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 nine months ended September 30, 2011. Citizens recognized no net reduction to interest expense during the three and nine months ended September 30, 2012 and
the three months ended September 30, 2011. Citizens recognized a net reduction to interest expense of $0.4 million during the nine months ended September 30, 2011, which includes net settlements of the derivatives and any amortization
adjustment in the basis of the hedged item. In addition, during the three and nine months ended September 30, 2012 and September 30, 2011, Citizens recognized a net reduction to interest expense of $0.1 million, $0.4 million, $0.2 million
and $0.6 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.
37
The following table
summarizes the impact of fair value hedges on the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Contract (Loss) Gain
|
|
|
Hedged Item Gain (Loss)
|
|
Derivatives Relationship
(in thousands)
|
|
Location in
Statement of
Operations
|
|
|
Three Months Ended
September 30,
|
|
|
Location in
Statement of
Operations
|
|
|
Three Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
2012
|
|
|
2011
|
|
Fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate products
|
|
|
Interest expense
|
|
|
$
|
|
|
|
$
|
|
|
|
|
Interest expense
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
Derivative Contract (Loss) Gain
|
|
|
Hedged Item Gain (Loss)
|
|
|
|
Location in
Statement of
Operations
|
|
|
Nine Months Ended
September 30,
|
|
|
Location in
Statement of
Operations
|
|
|
Nine Months Ended
September 30,
|
|
Derivatives Relationship
(in thousands)
|
|
|
2012
|
|
|
2011
|
|
|
|
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 into earnings. Additionally, Citizens holds interest rate derivatives, including interest rate swaps and option products, resulting from a service
Citizens provides to certain clients. Citizens executes interest rate derivatives with commercial banking clients to facilitate their respective risk management strategies. Those derivatives are simultaneously hedged by offsetting derivatives that
Citizens executes with a third party, such that Citizens minimizes its net risk exposure resulting from such transactions. As of September 30, 2012 and December 31, 2011, Citizens had 140 derivative transactions with an aggregate notional
amount of $501.3 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss) Gain
Recognized in Statement of
Operations
|
|
Derivatives Relationship
|
|
Location of (Loss) Gain
Recognized in Statement of
Operations
|
|
Three Months Ended
September 30,
|
|
(in thousands)
|
|
|
2012
|
|
|
2011
|
|
Derivatives
not
designated as hedges - Interest rate products
|
|
Other income
|
|
$
|
(83
|
)
|
|
$
|
(268
|
)
|
|
|
|
|
|
|
|
Amount of (Loss) Gain
|
|
Derivatives Relationship
|
|
Location of (Loss) Gain
Recognized in Statement of
Operations
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
|
2012
|
|
|
2011
|
|
Derivatives
not
designated as hedges - Interest rate products
|
|
Other income
|
|
$
|
(96
|
)
|
|
$
|
(458
|
)
|
Credit-Risk-Related Contingent Features.
Citizens has agreements with its derivative counterparties that
contain a provision where if Citizens defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, then it could also be declared in default on its derivative
obligations. Citizens also has agreements with certain derivative counterparties that contain a provision where if it fails to maintain its status as a well or adequately capitalized institution, then the counterparty could terminate the derivative
positions and Citizens would be required to settle its obligations under the agreements.
38
As of September 30, 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 $21.8 million. As of September 30, 2012, Citizens had minimum collateral posting requirements with its
derivative counterparties resulting in assigned collateral of $30.6 million. As of September 30, 2012 no circumstances could have been triggered to require Citizens 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 September 30, 2012, the termination value
approximated $5.6 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 $30.6 million.
Note 14. Regulatory Matters
On April 19, 2012, Citizens announced that, effective April 17, 2012, the Federal Reserve Bank of Chicago and the Michigan
Office of Financial and Insurance Regulation have terminated their written agreement with Citizens, and its subsidiary, Citizens Bank dated July 28, 2010.
Note 15. 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 shareholders 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 $345
million of TARP preferred stock, which includes $45 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 the third quarter of 2012, Citizens recorded $4.4 million of merger-related expenses in professional services. The
transaction is expected to close in the second quarter of 2013.
39
Item 2 Managements Discussion and Analysis of Financial
Condition and Results of Operations
Selected Quarterly Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
(in thousands, except per share amounts)
|
|
2012
|
|
|
2012
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
Summary of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
75,805
|
|
|
$
|
75,680
|
|
|
$
|
76,119
|
|
|
$
|
78,049
|
|
|
$
|
78,841
|
|
Provision for loan losses
|
|
|
5,195
|
|
|
|
5,299
|
|
|
|
8,397
|
|
|
|
15,007
|
|
|
|
17,481
|
|
Noninterest income
|
|
|
23,710
|
|
|
|
22,345
|
|
|
|
24,240
|
|
|
|
24,363
|
|
|
|
24,427
|
|
Noninterest expense
|
|
|
72,055
|
|
|
|
66,339
|
|
|
|
67,101
|
|
|
|
66,640
|
|
|
|
65,411
|
|
Income before income taxes
|
|
|
22,265
|
|
|
|
26,387
|
|
|
|
24,861
|
|
|
|
20,765
|
|
|
|
20,376
|
|
Income tax provision (benefit)
(1)
|
|
|
1,274
|
|
|
|
(276,789
|
)
|
|
|
|
|
|
|
2,521
|
|
|
|
(12,568
|
)
|
Net income
|
|
|
20,991
|
|
|
|
303,176
|
|
|
|
24,861
|
|
|
|
18,244
|
|
|
|
32,944
|
|
Net income attributable to common shareholders
(2)
|
|
|
14,861
|
|
|
|
297,134
|
|
|
|
18,906
|
|
|
|
12,347
|
|
|
|
27,183
|
|
Taxable equivalent adjustment
|
|
|
1,503
|
|
|
|
1,532
|
|
|
|
1,571
|
|
|
|
1,670
|
|
|
|
1,827
|
|
|
|
|
|
|
|
Per Common Share Data
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
|
$
|
7.35
|
|
|
$
|
0.47
|
|
|
$
|
0.31
|
|
|
$
|
0.68
|
|
Diluted
|
|
|
0.37
|
|
|
|
7.35
|
|
|
|
0.47
|
|
|
|
0.31
|
|
|
|
0.68
|
|
Common book value
|
|
|
26.36
|
|
|
|
25.85
|
|
|
|
18.83
|
|
|
|
18.24
|
|
|
|
18.03
|
|
Tangible book value (non-GAAP)
|
|
|
25.53
|
|
|
|
24.97
|
|
|
|
17.88
|
|
|
|
17.24
|
|
|
|
16.96
|
|
Tangible common book value (non-GAAP)
|
|
|
18.36
|
|
|
|
17.84
|
|
|
|
10.75
|
|
|
|
10.16
|
|
|
|
9.92
|
|
Shares outstanding, end of period
(4)
|
|
|
40,508,823
|
|
|
|
40,504,637
|
|
|
|
40,247,241
|
|
|
|
40,260,213
|
|
|
|
40,255,758
|
|
|
|
|
|
|
|
At Period End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
9,724,790
|
|
|
$
|
9,670,493
|
|
|
$
|
9,577,346
|
|
|
$
|
9,462,849
|
|
|
$
|
9,600,188
|
|
Earning assets
|
|
|
8,600,731
|
|
|
|
8,588,343
|
|
|
|
8,774,119
|
|
|
|
8,680,995
|
|
|
|
8,824,183
|
|
Portfolio loans
|
|
|
5,430,904
|
|
|
|
5,521,748
|
|
|
|
5,528,063
|
|
|
|
5,529,535
|
|
|
|
5,672,327
|
|
Allowance for loan losses
|
|
|
122,125
|
|
|
|
136,120
|
|
|
|
153,007
|
|
|
|
172,726
|
|
|
|
190,354
|
|
Deposits
|
|
|
7,302,965
|
|
|
|
7,287,709
|
|
|
|
7,490,362
|
|
|
|
7,394,941
|
|
|
|
7,539,904
|
|
Long-term debt
|
|
|
852,481
|
|
|
|
853,042
|
|
|
|
853,599
|
|
|
|
854,185
|
|
|
|
855,670
|
|
Shareholders equity
|
|
|
1,358,197
|
|
|
|
1,335,855
|
|
|
|
1,044,619
|
|
|
|
1,019,537
|
|
|
|
1,009,143
|
|
|
|
|
|
|
|
Average for the Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
9,723,587
|
|
|
$
|
9,429,050
|
|
|
$
|
9,521,386
|
|
|
$
|
9,523,184
|
|
|
$
|
9,596,275
|
|
Earning assets
|
|
|
8,638,390
|
|
|
|
8,622,067
|
|
|
|
8,750,078
|
|
|
|
8,761,435
|
|
|
|
8,856,072
|
|
Portfolio loans
|
|
|
5,501,400
|
|
|
|
5,517,726
|
|
|
|
5,508,528
|
|
|
|
5,632,432
|
|
|
|
5,663,058
|
|
Allowance for loan losses
|
|
|
135,968
|
|
|
|
152,154
|
|
|
|
172,509
|
|
|
|
190,163
|
|
|
|
206,119
|
|
Deposits
|
|
|
7,323,753
|
|
|
|
7,317,653
|
|
|
|
7,441,693
|
|
|
|
7,452,137
|
|
|
|
7,546,615
|
|
Long-term debt
|
|
|
852,776
|
|
|
|
853,333
|
|
|
|
853,912
|
|
|
|
856,206
|
|
|
|
862,479
|
|
Shareholders equity
|
|
|
1,345,817
|
|
|
|
1,061,519
|
|
|
|
1,028,494
|
|
|
|
1,017,082
|
|
|
|
991,602
|
|
|
|
|
|
|
|
Financial Ratios (annualized)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
0.86
|
%
|
|
|
12.93
|
%
|
|
|
1.05
|
%
|
|
|
0.76
|
%
|
|
|
1.36
|
%
|
Return on average shareholders equity
|
|
|
6.20
|
|
|
|
114.87
|
|
|
|
9.72
|
|
|
|
7.12
|
|
|
|
13.18
|
|
Average shareholders equity / average assets
|
|
|
13.84
|
|
|
|
11.26
|
|
|
|
10.80
|
|
|
|
10.68
|
|
|
|
10.33
|
|
Net interest margin (FTE)
(5)
|
|
|
3.57
|
|
|
|
3.60
|
|
|
|
3.56
|
|
|
|
3.62
|
|
|
|
3.63
|
|
Efficiency ratio (non-GAAP)
(6)
|
|
|
65.20
|
|
|
|
65.99
|
|
|
|
65.20
|
|
|
|
61.39
|
|
|
|
59.89
|
|
Allowance for loan losses as a percent of portfolio loans
|
|
|
2.25
|
|
|
|
2.47
|
|
|
|
2.77
|
|
|
|
3.12
|
|
|
|
3.36
|
|
Allowance for loan losses as a percent of nonperforming loans
(7)
|
|
|
191.29
|
|
|
|
161.53
|
|
|
|
202.56
|
|
|
|
197.56
|
|
|
|
190.09
|
|
Allowance for loan losses as a percent of nonperforming assets
(7)
|
|
|
141.69
|
|
|
|
144.85
|
|
|
|
168.87
|
|
|
|
168.97
|
|
|
|
139.01
|
|
Nonperforming loans as a percent of portfolio
loans
(7)
|
|
|
1.18
|
|
|
|
1.53
|
|
|
|
1.37
|
|
|
|
1.58
|
|
|
|
1.77
|
|
Nonperforming assets as a percent of total loans plus ORAA
(7)(8)
|
|
|
1.58
|
|
|
|
1.69
|
|
|
|
1.63
|
|
|
|
1.84
|
|
|
|
2.39
|
|
Nonperforming assets as a percent of total assets
(7)
|
|
|
0.89
|
|
|
|
0.97
|
|
|
|
0.95
|
|
|
|
1.08
|
|
|
|
1.43
|
|
Ratio of net charge-offs during period to average portfolio loans
|
|
|
1.39
|
|
|
|
1.62
|
|
|
|
2.05
|
|
|
|
2.30
|
|
|
|
2.34
|
|
Leverage ratio
|
|
|
9.66
|
|
|
|
9.77
|
|
|
|
8.71
|
|
|
|
8.45
|
|
|
|
8.21
|
|
Tier 1 capital ratio
|
|
|
15.09
|
|
|
|
14.70
|
|
|
|
13.70
|
|
|
|
13.51
|
|
|
|
12.81
|
|
Total capital ratio
|
|
|
16.35
|
|
|
|
15.96
|
|
|
|
14.97
|
|
|
|
14.84
|
|
|
|
14.14
|
|
(1)
|
Second quarter 2012 benefit is directly related to the restoration of the deferred tax asset.
|
(2)
|
Net income attributable to common shareholders includes a non-cash dividend to preferred shareholders of $6.0 million in the third, second, and first
quarters of 2012 and $5.9 million, and $5.8 million in the fourth and third quarters of 2011.
|
(3)
|
Earnings per share
in the second quarter of 2012 includes a tax benefit of $6.85 per share related to restoring the deferred tax asset.
|
(4)
|
Includes participating shares which are restricted stock units and restricted shares.
|
(5)
|
Net interest margin is presented on an annual basis, includes taxable equivalent adjustments to interest income and is based on a tax rate of 35%.
|
(6)
|
Efficiency ratio (non-GAAP) is calculated as follows: (Noninterest expense-Losses on other real estate (ORE)-ORE expenses-Intangible
amortization-Merger related expenses)/(Net interest income+Taxable equivalent adjustment+Total noninterest income-Investment securities gains(losses)).
|
(7)
|
Nonperforming loans/assets exclude troubled debt restructurings (TDRs) that are on an accrual status and performing in accordance with their modified
terms.
|
(8)
|
Other real estate assets acquired (ORAA) include loans held for sale.
|
40
Introduction
The following presents managements discussion and analysis of Citizens Republic Bancorp, Inc.s financial condition and results of operations for the three and nine months ended
September 30, 2012. It should be read in conjunction with the unaudited Consolidated Financial Statements and Notes included elsewhere in this report and the audited Consolidated Financial Statements and Notes contained in Citizens 2011
Annual Report on Form 10-K. In addition, the following discussion and analysis should be read together with Managements Discussion and Analysis of Financial Condition and Results of Operations contained in Citizens 2011
Annual Report on Form 10-K, which contains important additional information that is necessary to understand Citizens and its financial condition and results of operations for the periods covered by this report. Unless the context indicates
otherwise, all references in the discussion to Citizens, the Company, the Corporation, we, or our, refer to Citizens Republic Bancorp, Inc. and its subsidiary. References to the
Holding Company refer solely to Citizens Republic Bancorp, Inc. References to the Bank refer solely to our banking subsidiary, Citizens Bank.
Forward Looking Statements
Discussions and statements in this report that are not
statements of historical fact, including without limitation, statements that include terms such as will, may, should, believe, expect, anticipate, estimate,
project, intend, and plan, and statements regarding Citizens future financial and operating results, plans, objectives, expectations and intentions, are forward-looking statements that involve risks and
uncertainties, many of which are beyond Citizens control or are subject to change. No forward-looking statement is a guarantee of future performance and actual results could differ materially.
Factors that could cause or contribute to such differences include, without limitation, the following.
|
|
|
Citizens faces the risk that loan losses, including unanticipated loan losses due to changes in loan portfolios, fraud and economic factors, could
exceed the allowance for loan losses and that additional increases in the allowance will be required. Additions to the allowance for loan losses would cause Citizens operating results to decline and could have a negative impact on its capital
and financial position.
|
|
|
|
Citizens core lending and other businesses have been adversely affected by the historic weakness in the national and regional economies in which
it operates, particularly Michigan. Citizens ability to generate earnings and maintain regulatory capital ratios at acceptable levels at the Holding Company and the Bank depends substantially on developments in those economies. Also,
Citizens potential inability to comply with applicable laws, regulations, and regulatory policies or standards due to the effects of these conditions on its results of operations and financial condition may result in heightened regulatory
scrutiny and require Citizens to take actions to protect depositors that are not in the best interests of its shareholders.
|
|
|
|
Citizens business may be adversely affected by the highly regulated environment in which it operates. Changes in applicable laws, regulations,
and regulatory practices at either the federal or state level may result in the imposition of additional costs or restrict Citizens ability to operate its business in the manner most beneficial to its shareholders.
|
|
|
|
While Citizens attempts to manage the risk from changes in market interest rates, interest rate risk management techniques are not exact. In addition,
Citizens may not be able to economically hedge its interest rate risk. A rapid or substantial increase or decrease in interest rates could adversely affect Citizens net interest income and results of operations.
|
|
|
|
The negative economic effects caused by terrorist attacks, including cyber attacks, potential attacks and other destabilizing events, would likely
contribute to the deterioration of the quality of Citizens loan portfolio and could reduce its customer base, its level of deposits, and demand for its financial products such as loans.
|
|
|
|
If Citizens is unable to continue to attract and retain core deposits, to obtain third party financing on favorable terms, or to have access to
interbank or other liquidity sources (as a result of rating agency downgrades or other market factors), its cost of funds will increase, adversely affecting its ability to generate the funds necessary for lending operations, reducing net interest
margin and negatively affecting its results of operations.
|
41
|
|
|
Increased competition with other financial institutions or an adverse change in Citizens relationship with a number of major customers could
reduce its net interest margin and net income by decreasing the number and size of loans originated, the interest rates charged on these loans and the fees charged for services to customers.
|
|
|
|
Events such as significant adverse changes in the business climate, adverse action by a regulator, unanticipated changes in the competitive
environment, or a decision to change Citizens operations or dispose of an operating unit could have a negative effect on its goodwill or other intangible assets such that it may need to record an impairment charge, which could have a material
adverse impact on its results of operations.
|
|
|
|
If the FDIC raises the assessments charged to its insured financial institutions, Citizens FDIC insurance premium may increase, which could have
a negative effect on expenses and results of operations.
|
|
|
|
Citizens may not realize its deferred income tax assets and loss carryforwards.
|
|
|
|
Citizens stock price can be volatile.
|
|
|
|
An investment in Citizens common stock is not an insured deposit.
|
|
|
|
Citizens may be adversely affected by the soundness of other financial institutions.
|
|
|
|
In order to maintain and strengthen its capital base or to repay outstanding obligations, Citizens may need to raise additional capital in transactions
that may be highly dilutive to its common shareholders. If such capital becomes needed, Citizens failure to raise additional capital could have serious consequences for its business.
|
|
|
|
The Holding Company may not have sufficient resources to make capital contributions to the Bank if required by bank regulatory agencies, or if it might
otherwise wish to do so, in order to maintain the Banks capital ratios at acceptable levels.
|
|
|
|
As a bank holding company that conducts substantially all of its operations through its operating subsidiary, the ability of the Holding Company to pay
dividends, repurchase its shares or to repay its indebtedness depends upon the results of operations of its subsidiary and its ability to pay dividends to the Holding Company. Dividends paid by the subsidiary are subject to limits imposed by federal
and state law.
|
|
|
|
Citizens could face unanticipated environmental liabilities or costs related to real property owned or acquired through foreclosure. Compliance with
federal, state, and local environmental laws and regulations, including those related to investigation and clean-up of contaminated sites, could have a negative effect on expenses and results of operations.
|
|
|
|
Citizens is a party to various lawsuits. Litigation is subject to many uncertainties such that the expenses and ultimate exposure with respect to many
of these matters cannot be ascertained.
|
|
|
|
The financial services industry is undergoing rapid technological changes. If Citizens is unable to adequately invest in and implement new
technology-driven products and services, it may not be able to compete effectively, or the cost to provide products and services may increase significantly.
|
|
|
|
The products and services offered by the banking industry and customer expectations regarding them are subject to change. Citizens attempts to respond
to perceived customer needs and expectations by offering new products and services, which are often costly to develop and market initially. A lack of market acceptance of these products and services would have a negative effect on its financial
condition and results of operations.
|
|
|
|
Citizens may not be able to attract and retain skilled people. If Citizens were to lose key employees, it may experience a disruption in its
relationship with certain customers.
|
|
|
|
The Standard & Poors downgrade in the U.S. governments sovereign credit rating, and in the credit ratings of instruments issued,
insured or guaranteed by certain related institutions, agencies and instrumentalities, creates risks to our net income, capital levels, financial condition and liquidity and causes uncertainties in general economic conditions that may adversely
impact us.
|
42
|
|
|
New accounting or tax pronouncements or interpretations may be issued by the accounting profession, regulators, or other government bodies which could
change existing accounting methods. Changes in accounting methods could negatively impact Citizens results of operations and financial condition.
|
|
|
|
Citizens business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in or disruption
to, its business and a negative impact on its results of operations.
|
|
|
|
Citizens vendors could fail to fulfill their contractual obligations, resulting in a material interruption in or disruption to, its business and
a negative impact on its results of operations.
|
|
|
|
Citizens controls and procedures may fail or be circumvented which could have a material adverse effect on its business, results of operations and
financial condition.
|
|
|
|
Citizens potential inability to integrate companies it may acquire in the future could have a negative effect on our expenses and results of
operations.
|
|
|
|
Citizens articles of incorporation and bylaws as well as certain banking laws may have an anti-takeover effect.
|
|
|
|
Citizens will be subject to contractual restrictions and business uncertainties while the FirstMerit merger is pending.
|
|
|
|
The merger is subject to certain closing conditions that, if not satisfied or waived, will result in the merger not being completed. Failure to
complete the merger with FirstMerit could negatively affect our business.
|
|
|
|
The merger is subject to the receipt of consents and approvals from governmental entities that may impose conditions that could have an adverse effect
on the combined company following the merger.
|
|
|
|
Citizens cannot be sure of the market value of the merger consideration that its common shareholders will receive as a result of the announced merger
with FirstMerit.
|
|
|
|
Citizens may fail to realize all of the anticipated benefits of the merger.
|
|
|
|
The merger agreement limits Citizens ability to pursue an alternative acquisition proposal and requires Citizens to pay a termination fee of
$37.5 million under limited circumstances relating to alternative acquisition proposals.
|
These factors also include risks
and uncertainties detailed from time to time in Citizens other filings with the Securities and Exchange Commission (SEC), such as the risk factors listed in Item 1A, Risk Factors, of Citizens 2011 Annual Report on
Form 10-K and subsequent Forms 10-Q, which are available at the SECs website
www.sec.gov
. Other factors not currently anticipated may also materially and adversely affect Citizens results of operations, cash flows, financial
position, and prospects. There can be no assurance that future results will meet expectations. While Citizens believes that the forward-looking statements in this report are reasonable, the reader should not place undue reliance on any
forward-looking statement. In addition, these statements speak only as of the date made. Citizens does not undertake, and expressly disclaims any obligation to update or alter any statements, whether as a result of new information, future events or
otherwise, except as may be required by applicable law.
Recent Developments
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 shareholders 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 is also required to repay Citizens approximately $345 million of TARP preferred stock, which
includes $45 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. The transaction is expected to close in the second quarter of 2013. For additional information, please refer to the Merger Agreement that was filed by Citizens with
the SEC as an Exhibit to Form 8-K on September 14, 2012.
43
Critical Accounting Policies
Citizens Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP) and follow general practices within the industry in which
Citizens operates. Application of these principles requires management to make estimates, assumptions, and complex judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and
judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Actual results could differ
significantly from those estimates. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such, have a greater possibility of producing results that could be materially different than
originally reported. Estimates that are particularly susceptible to significant change include those relating to the allowance for loan losses, goodwill, fair value measurements, pension and postretirement benefits, and income taxes. Citizens
believes that these estimates and the related policies are important to the portrayal of Citizens financial condition and results of operations. Therefore, management considers them to be critical accounting policies and discusses them
directly with the Audit Committee of the Board of Directors. Citizens significant accounting policies are more fully described in Note 1 to the audited Consolidated Financial Statements contained in Citizens 2011 Annual Report on Form
10-K and the more significant assumptions and estimates made by management are more fully described in Managements Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies in our
2011 Annual Report on Form 10-K. For additional information regarding updates during 2012, see Note 1 to the unaudited Consolidated Financial Statements in this report.
Use of Non-GAAP Financial Measures
In addition to results presented in accordance with
GAAP, this report includes non-GAAP financial measures such as net interest margin, efficiency ratio, tangible equity to tangible assets ratio, tangible common equity to tangible assets ratio, Tier 1 common equity ratio and pre-tax pre-provision
profit. Citizens believes these non-GAAP financial measures provide additional information that is useful to investors in understanding the underlying performance of Citizens, its business, and performance trends and, to a lesser degree, such
measures may help facilitate performance comparisons with others in the banking industry. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. Readers should be aware of these
limitations and should be cautious as to their use of such measures. To mitigate these limitations, Citizens has procedures in place to ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety
and to ensure that Citizens performance is properly reflected to facilitate consistent period-to-period comparisons. Although Citizens believes the non-GAAP financial measures disclosed in this report enhance investors understanding of
its business and performance, these non-GAAP measures should not be considered in isolation, or as a substitute for GAAP basis financial measures.
Net Interest Margin and Efficiency Ratio (non-GAAP financial measures)
In
accordance with industry standards, certain designated net interest income amounts are presented on a taxable equivalent basis, including the calculation of net interest margin and the efficiency ratio. Citizens believes the presentation of net
interest margin on a taxable equivalent basis using a 35% effective tax rate allows comparability of net interest margin with industry peers by eliminating the effect of the differences in portfolios attributable to the proportion represented by
both taxable and tax-exempt investments. See the Selected Quarterly Information Table, the Non-GAAP Reconciliation Table, and the Average Balances/Net Interest Income/Average Rates Table later in this report for additional information.
Tangible Equity, Tangible Common Equity and Tier 1 Common Equity Ratios (non-GAAP financial measures)
Citizens believes the exclusion of goodwill and other intangible assets to create tangible assets and tangible equity facilitates
the comparison of results for ongoing business operations. Citizens management internally assesses the companys performance based, in part, on these non-GAAP financial measures. The tangible common equity ratio and Tier 1 common equity
ratio have become a focus of some investors and management believes that these ratios may assist investors in analyzing Citizens capital position absent the effects of intangible assets and preferred stock. Because tangible common equity and
Tier 1 common equity are not formally defined by GAAP or codified in the federal banking regulations, these measures are considered to be non-GAAP financial measures. Because analysts
44
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 defined above) 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 $1.3 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, 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 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.
45
The following tables display the calculation of the efficiency ratio for the past five quarters and the
calculation of the remainder of these non-GAAP measures other than pre-tax pre-provision profit, the calculation of which is set forth in the Results of Operations Summary section, as of the end of each of those periods. The
quantitative reconciliation of adjusted net income attributable to common shareholders to GAAP net income attributable to common shareholders is provided for the three and nine months ending September 30, 2012 and 2011, respectively.
Non-GAAP Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
September 30,
2012
|
|
|
June 30,
2012
|
|
|
March 31,
2012
|
|
|
December 31,
2011
|
|
|
September 30,
2011
|
|
Efficiency Ratio (non-GAAP)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (A)
|
|
$
|
75,805
|
|
|
$
|
75,680
|
|
|
$
|
76,119
|
|
|
$
|
78,049
|
|
|
$
|
78,841
|
|
Taxable equivalent adjustment (B)
|
|
|
1,503
|
|
|
|
1,532
|
|
|
|
1,571
|
|
|
|
1,670
|
|
|
|
1,827
|
|
Investment securities gains (losses) (C)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
3
|
|
Noninterest income (D)
|
|
|
23,710
|
|
|
|
22,345
|
|
|
|
24,240
|
|
|
|
24,363
|
|
|
|
24,427
|
|
Noninterest expense (E)
|
|
|
72,055
|
|
|
|
66,339
|
|
|
|
67,101
|
|
|
|
66,640
|
|
|
|
65,411
|
|
(Gains) losses on ORE and ORE expenses (F)
|
|
|
1,264
|
|
|
|
93
|
|
|
|
65
|
|
|
|
2,076
|
|
|
|
1,739
|
|
Intangible amortization (G)
|
|
|
513
|
|
|
|
545
|
|
|
|
578
|
|
|
|
688
|
|
|
|
732
|
|
Merger-related expenses (H)
|
|
|
4,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio: (E-F-G-H)/(A+B-C+D) (non-GAAP)
|
|
|
65.20
|
%
|
|
|
65.99
|
%
|
|
|
65.20
|
%
|
|
|
61.39
|
%
|
|
|
59.89
|
%
|
|
|
|
|
|
|
Tangible Common Equity to Tangible Assets (non-GAAP)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,724,790
|
|
|
$
|
9,670,493
|
|
|
$
|
9,577,346
|
|
|
$
|
9,462,849
|
|
|
$
|
9,600,188
|
|
Goodwill
|
|
|
(318,150
|
)
|
|
|
(318,150
|
)
|
|
|
(318,150
|
)
|
|
|
(318,150
|
)
|
|
|
(318,150
|
)
|
Other intangible assets
|
|
|
(5,792
|
)
|
|
|
(6,305
|
)
|
|
|
(6,850
|
)
|
|
|
(7,428
|
)
|
|
|
(8,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible assets (non-GAAP)
|
|
$
|
9,400,848
|
|
|
$
|
9,346,038
|
|
|
$
|
9,252,346
|
|
|
$
|
9,137,271
|
|
|
$
|
9,273,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
1,358,197
|
|
|
$
|
1,335,855
|
|
|
$
|
1,044,619
|
|
|
$
|
1,019,537
|
|
|
$
|
1,009,143
|
|
Goodwill
|
|
|
(318,150
|
)
|
|
|
(318,150
|
)
|
|
|
(318,150
|
)
|
|
|
(318,150
|
)
|
|
|
(318,150
|
)
|
Other intangible assets
|
|
|
(5,792
|
)
|
|
|
(6,305
|
)
|
|
|
(6,850
|
)
|
|
|
(7,428
|
)
|
|
|
(8,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible equity (non-GAAP)
|
|
$
|
1,034,255
|
|
|
$
|
1,011,400
|
|
|
$
|
719,619
|
|
|
$
|
693,959
|
|
|
$
|
682,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible equity
|
|
$
|
1,034,255
|
|
|
$
|
1,011,400
|
|
|
$
|
719,619
|
|
|
$
|
693,959
|
|
|
$
|
682,877
|
|
Preferred stock
|
|
|
(290,580
|
)
|
|
|
(288,723
|
)
|
|
|
(286,901
|
)
|
|
|
(285,114
|
)
|
|
|
(283,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity (non-GAAP)
|
|
$
|
743,675
|
|
|
$
|
722,677
|
|
|
$
|
432,718
|
|
|
$
|
408,845
|
|
|
$
|
399,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Common Equity (non-GAAP)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
1,358,197
|
|
|
$
|
1,335,855
|
|
|
$
|
1,044,619
|
|
|
$
|
1,019,537
|
|
|
$
|
1,009,143
|
|
Qualifying capital securities
|
|
|
73,667
|
|
|
|
73,667
|
|
|
|
73,667
|
|
|
|
73,667
|
|
|
|
73,667
|
|
Goodwill
|
|
|
(318,150
|
)
|
|
|
(318,150
|
)
|
|
|
(318,150
|
)
|
|
|
(318,150
|
)
|
|
|
(318,150
|
)
|
Accumulated other comprehensive loss
|
|
|
5,649
|
|
|
|
10,268
|
|
|
|
1,955
|
|
|
|
5,820
|
|
|
|
1,075
|
|
Disallowed deferred tax asset
|
|
|
(235,461
|
)
|
|
|
(235,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets
|
|
|
(5,792
|
)
|
|
|
(6,305
|
)
|
|
|
(6,850
|
)
|
|
|
(7,428
|
)
|
|
|
(8,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (regulatory)
|
|
$
|
878,110
|
|
|
$
|
859,806
|
|
|
$
|
795,241
|
|
|
$
|
773,446
|
|
|
$
|
757,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (regulatory)
|
|
$
|
878,110
|
|
|
$
|
859,806
|
|
|
$
|
795,241
|
|
|
$
|
773,446
|
|
|
$
|
757,619
|
|
Qualifying capital securities
|
|
|
(73,667
|
)
|
|
|
(73,667
|
)
|
|
|
(73,667
|
)
|
|
|
(73,667
|
)
|
|
|
(73,667
|
)
|
Preferred stock
|
|
|
(290,580
|
)
|
|
|
(288,723
|
)
|
|
|
(286,901
|
)
|
|
|
(285,114
|
)
|
|
|
(283,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tier 1 common equity (non-GAAP)
|
|
$
|
513,863
|
|
|
$
|
497,416
|
|
|
$
|
434,673
|
|
|
$
|
414,665
|
|
|
$
|
400,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net risk-weighted assets (regulatory)
|
|
$
|
5,821,748
|
|
|
$
|
5,851,871
|
|
|
$
|
5,803,811
|
|
|
$
|
5,723,333
|
|
|
$
|
5,912,527
|
|
|
|
|
|
|
|
Equity to assets
|
|
|
13.97
|
%
|
|
|
13.81
|
%
|
|
|
10.91
|
%
|
|
|
10.77
|
%
|
|
|
10.51
|
%
|
Tier 1 common equity (non-GAAP)
|
|
|
8.83
|
|
|
|
8.50
|
|
|
|
7.49
|
|
|
|
7.24
|
|
|
|
6.77
|
|
Tangible equity to tangible assets (non-GAAP)
|
|
|
11.00
|
|
|
|
10.82
|
|
|
|
7.78
|
|
|
|
7.59
|
|
|
|
7.36
|
|
Tangible common equity to tangible assets (non-GAAP)
|
|
|
7.91
|
|
|
|
7.73
|
|
|
|
4.68
|
|
|
|
4.47
|
|
|
|
4.31
|
|
46
Non-GAAP Reconciliation
Adjusted earnings per share
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands, except per share amounts)
|
|
2012
|
|
|
2011
|
|
Earnings per Share
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
8.19
|
|
|
$
|
(0.73
|
)
|
Restoration of the deferred tax asset
|
|
|
6.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share (non-GAAP)
|
|
$
|
1.37
|
|
|
$
|
(0.73
|
)
|
|
|
|
|
|
|
|
|
|
An itemized reconciliation between net income on a GAAP basis and net income excluding the benefit of restoring the
deferred tax asset (non-GAAP) follows:
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
349,028
|
|
|
$
|
(11,577
|
)
|
Restoration of the deferred tax asset
|
|
|
(275,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (non-GAAP)
|
|
|
73,544
|
|
|
|
(11,577
|
)
|
Dividend on redeemable preferred stock
|
|
|
(18,127
|
)
|
|
|
(17,088
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders (non-GAAP)
|
|
|
55,417
|
|
|
|
(28,665
|
)
|
Net income allocated to participating securities
|
|
|
1,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) after allocation to participating securities (non-GAAP)
|
|
$
|
54,149
|
|
|
$
|
(28,665
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic and dilutive earnings per common share
|
|
|
39,469
|
|
|
|
39,418
|
|
|
|
|
Basic net income (loss) per common share (non-GAAP)
|
|
$
|
1.37
|
|
|
$
|
(0.73
|
)
|
Diluted net income (loss) per common share (non-GAAP)
|
|
|
1.37
|
|
|
|
(0.73
|
)
|
Results of Operations
Summary
Citizens reported net income of $21.0 million for the three months ended
September 30, 2012, compared to $32.9 million for the third quarter of 2011. After incorporating the $6.1 million accrued but unpaid dividend to the preferred shareholder, Citizens reported net income attributable to common shareholders of
$14.9 million for the three months ended September 30, 2012, compared to $27.2 million for the third quarter of 2011. Diluted net income per share was $0.37 for the third quarter of 2012, compared to $0.68 for the third quarter of 2011. For the
nine months ended September 30, 2012, Citizens recorded net income attributable to common shareholders of $330.9 million, compared with a net loss attributable to common shareholders of $28.7 million for the same period of 2011. Year to date
2012 results include $275.5 million or $6.82 per share tax benefit related to the restoration of the companys deferred tax asset in the second quarter of 2012.
Key factors behind the results for the third quarter of 2012 compared with the third quarter of 2011 follow.
|
|
|
An income tax expense of $1.3 million for the third quarter of 2012 compared to a $12.6 million tax benefit in the third quarter of 2011. The tax
benefit in 2011 was largely due to Citizens recording a receivable as a result of a revocation of a tax election.
|
|
|
|
A decrease in provision for loan losses from 2011, which reflects the results of our focused efforts to improve asset quality and stabilized portfolio
credit metrics.
|
|
|
|
An increase in noninterest expense from 2011 as a result of $4.4 million in merger-related expenses, higher salaries, incentives and costs related to
the reinstatement of the employer matching in the 401(k) plan, and higher data processing services.
|
|
|
|
A decrease in net interest income from 2011 reflecting lower net interest margin and a reduction in average earning assets.
|
47
The following table displays pre-tax pre-provision profit (non-GAAP) for each of the last five quarters.
Pre-tax pre-provision profit (non-GAAP)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
(in thousands)
|
|
September 30,
2012
|
|
|
June 30,
2012
|
|
|
March 31,
2012
|
|
|
December 31,
2011
|
|
|
September 30,
2011
|
|
Net income
|
|
$
|
20,991
|
|
|
$
|
303,176
|
|
|
$
|
24,861
|
|
|
$
|
18,244
|
|
|
$
|
32,944
|
|
Income tax provision (benefit)
|
|
|
1,274
|
|
|
|
(276,789
|
)
|
|
|
|
|
|
|
2,521
|
|
|
|
(12,568
|
)
|
Provision for loan losses
|
|
|
5,195
|
|
|
|
5,299
|
|
|
|
8,397
|
|
|
|
15,007
|
|
|
|
17,481
|
|
Net losses (gains) on loans held for sale
|
|
|
184
|
|
|
|
(6
|
)
|
|
|
(916
|
)
|
|
|
217
|
|
|
|
(1,952
|
)
|
Investment securities (gains) losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38
|
)
|
|
|
(3
|
)
|
Losses (gains) on other real estate (ORE)
|
|
|
941
|
|
|
|
(173
|
)
|
|
|
(385
|
)
|
|
|
1,081
|
|
|
|
1,210
|
|
Merger-related expenses
(1)
|
|
|
4,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair-value adjustment on bank owned life insurance
(2)
|
|
|
(31
|
)
|
|
|
118
|
|
|
|
(205
|
)
|
|
|
(100
|
)
|
|
|
385
|
|
Fair-value adjustment on swaps
(2)
|
|
|
83
|
|
|
|
74
|
|
|
|
(61
|
)
|
|
|
(46
|
)
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax pre-provision profit (non-GAAP)
|
|
$
|
33,048
|
|
|
$
|
31,699
|
|
|
$
|
31,691
|
|
|
$
|
36,886
|
|
|
$
|
37,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Merger-related expenses are contained in line item Professional services on Consolidated Statements of Operations.
|
(2)
|
Fair-value adjustment amounts contained in line item Other income on Consolidated Statements of Operations.
|
The balance sheet grew $261.9 million to $9.7 billion compared to December 31, 2011 as a result of restoring the deferred tax asset in the second
quarter of 2012. Core deposits were up $328.5 million or 6.3% over December 31, 2011, reflecting our focus on generating and growing core deposit relationships. Time deposits at September 30, 2012 decreased $420.4 million or 19.1% from the
end of last year as we continue to strategically reduce high cost single service and brokered time deposits. Loan balances were essentially unchanged as the growth in our C&I and indirect portfolios was offset by declines in our CRE, residential
mortgage, and direct portfolios.
Compared to September 30, 2011, the balance sheet grew $124.6 million as a result of restoring the
deferred tax asset. Core deposits were up $302.9 million or 5.8% compared to September 2011, reflecting our focus on generating and growing core deposit relationships. This growth in core deposits was utilized to reduce reliance on more expensive
time deposits. Time deposits at September 30, 2012 decreased $539.8 million or 23.3% from last September as we continue to strategically reduce high cost single service and brokered time deposits. Loan balances declined as the growth in our
C&I and indirect portfolios was more than offset by declines in our CRE, direct, and residential mortgage portfolios. The decline in our loan portfolio was more than offset by reductions in the allowance for loan losses and the restoration of
the deferred tax asset.
Citizens maintains a strong liquidity position, with on- and off-balance sheet liquidity sources and a stable funding
base comprised of approximately 75% deposits, 9% long-term debt, 14% equity, and 2% short-term liabilities. Citizens also continues to maintain a strong capital position, and its regulatory capital ratios are above well-capitalized
standards.
Net Interest Income and Net Interest Margin
An analysis of net interest income, interest spread and net interest margin with average balances and related interest rates is presented below.
48
Average Balances/Net Interest Income/Average Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
(in thousands)
|
|
Balance
|
|
|
Interest
(1)
|
|
|
Rate
(2)
|
|
|
Balance
|
|
|
Interest
(1)
|
|
|
Rate
(2)
|
|
Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments
|
|
$
|
238,492
|
|
|
$
|
152
|
|
|
|
0.25
|
%
|
|
$
|
270,422
|
|
|
$
|
168
|
|
|
|
0.25
|
%
|
Investment securities
(3)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
2,557,793
|
|
|
|
16,034
|
|
|
|
2.51
|
|
|
|
2,536,944
|
|
|
|
20,508
|
|
|
|
3.23
|
|
Tax-exempt
|
|
|
205,572
|
|
|
|
2,157
|
|
|
|
6.46
|
|
|
|
242,494
|
|
|
|
2,613
|
|
|
|
6.63
|
|
FHLB and Federal Reserve stock
|
|
|
122,123
|
|
|
|
1,196
|
|
|
|
3.90
|
|
|
|
123,906
|
|
|
|
974
|
|
|
|
3.13
|
|
Portfolio loans
(4)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1,713,382
|
|
|
|
23,000
|
|
|
|
5.42
|
|
|
|
1,440,968
|
|
|
|
18,599
|
|
|
|
5.24
|
|
Commercial real estate
|
|
|
1,382,873
|
|
|
|
16,720
|
|
|
|
4.81
|
|
|
|
1,678,996
|
|
|
|
21,445
|
|
|
|
5.07
|
|
Residential mortgage
|
|
|
580,002
|
|
|
|
6,326
|
|
|
|
4.36
|
|
|
|
693,494
|
|
|
|
7,723
|
|
|
|
4.45
|
|
Direct consumer
|
|
|
873,057
|
|
|
|
12,741
|
|
|
|
5.81
|
|
|
|
967,443
|
|
|
|
14,634
|
|
|
|
6.00
|
|
Indirect consumer
|
|
|
952,086
|
|
|
|
14,478
|
|
|
|
6.05
|
|
|
|
882,157
|
|
|
|
14,597
|
|
|
|
6.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio loans
|
|
|
5,501,400
|
|
|
|
73,265
|
|
|
|
5.33
|
|
|
|
5,663,058
|
|
|
|
76,998
|
|
|
|
5.43
|
|
Loans held for sale
(4)
|
|
|
13,010
|
|
|
|
111
|
|
|
|
3.40
|
|
|
|
19,248
|
|
|
|
214
|
|
|
|
4.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
8,638,390
|
|
|
|
92,915
|
|
|
|
4.36
|
|
|
|
8,856,072
|
|
|
|
101,475
|
|
|
|
4.64
|
|
Nonearning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
145,961
|
|
|
|
|
|
|
|
|
|
|
|
147,044
|
|
|
|
|
|
|
|
|
|
Premises and equipment
|
|
|
92,775
|
|
|
|
|
|
|
|
|
|
|
|
99,835
|
|
|
|
|
|
|
|
|
|
Investment security fair value adjustment
|
|
|
54,807
|
|
|
|
|
|
|
|
|
|
|
|
46,558
|
|
|
|
|
|
|
|
|
|
Other nonearning assets
|
|
|
927,622
|
|
|
|
|
|
|
|
|
|
|
|
652,885
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(135,968
|
)
|
|
|
|
|
|
|
|
|
|
|
(206,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,723,587
|
|
|
|
|
|
|
|
|
|
|
$
|
9,596,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
1,073,294
|
|
|
$
|
348
|
|
|
|
0.13
|
|
|
$
|
976,637
|
|
|
$
|
510
|
|
|
|
0.21
|
|
Savings deposits
|
|
|
2,602,216
|
|
|
|
1,314
|
|
|
|
0.20
|
|
|
|
2,648,640
|
|
|
|
2,206
|
|
|
|
0.33
|
|
Time deposits
|
|
|
1,825,144
|
|
|
|
7,117
|
|
|
|
1.55
|
|
|
|
2,380,333
|
|
|
|
10,812
|
|
|
|
1.80
|
|
Short-term borrowings
|
|
|
45,974
|
|
|
|
11
|
|
|
|
0.10
|
|
|
|
43,445
|
|
|
|
20
|
|
|
|
0.18
|
|
Long-term debt
|
|
|
852,776
|
|
|
|
8,320
|
|
|
|
3.89
|
|
|
|
862,479
|
|
|
|
9,086
|
|
|
|
4.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
6,399,404
|
|
|
|
17,110
|
|
|
|
1.06
|
|
|
|
6,911,534
|
|
|
|
22,634
|
|
|
|
1.30
|
|
|
|
|
|
|
|
|
Noninterest-Bearing Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand
|
|
|
1,823,099
|
|
|
|
|
|
|
|
|
|
|
|
1,541,005
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
155,267
|
|
|
|
|
|
|
|
|
|
|
|
152,134
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
1,345,817
|
|
|
|
|
|
|
|
|
|
|
|
991,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
9,723,587
|
|
|
|
|
|
|
|
|
|
|
$
|
9,596,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Spread
(5)
|
|
|
|
|
|
$
|
75,805
|
|
|
|
3.29
|
%
|
|
|
|
|
|
$
|
78,841
|
|
|
|
3.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution of noninterest bearing sources of funds
|
|
|
|
|
|
|
|
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin
(5)(6)
|
|
|
|
|
|
|
|
|
|
|
3.57
|
%
|
|
|
|
|
|
|
|
|
|
|
3.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $1.5 million and $1.8 million, for the
three months ended September 30, 2012 and 2011, respectively, based on a tax rate of 35%.
|
(3)
|
For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted
for amortization of premiums and accretion of discounts.
|
(4)
|
Nonaccrual loans are included in average balances for each applicable loan category.
|
(5)
|
The interest spread and net interest margin are presented on a tax-equivalent basis.
|
(6)
|
Net interest margin exceeds the interest spread due to noninterest-bearing funding sources, demand deposits, other liabilities and shareholders
equity supporting earning assets.
|
49
Average Balances/Net Interest Income/Average Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
(in thousands)
|
|
Balance
|
|
|
Interest
(1)
|
|
|
Rate
(2)
|
|
|
Balance
|
|
|
Interest
(1)
|
|
|
Rate
(2)
|
|
Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments
|
|
$
|
257,535
|
|
|
$
|
481
|
|
|
|
0.25
|
%
|
|
$
|
362,983
|
|
|
$
|
670
|
|
|
|
0.25
|
%
|
Investment securities
(3)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
2,561,262
|
|
|
|
49,356
|
|
|
|
2.57
|
|
|
|
2,432,220
|
|
|
|
60,664
|
|
|
|
3.33
|
|
Tax-exempt
|
|
|
210,096
|
|
|
|
6,610
|
|
|
|
6.45
|
|
|
|
258,524
|
|
|
|
8,412
|
|
|
|
6.67
|
|
FHLB and Federal Reserve stock
|
|
|
119,834
|
|
|
|
3,487
|
|
|
|
3.88
|
|
|
|
134,998
|
|
|
|
3,143
|
|
|
|
3.11
|
|
Portfolio loans
(4)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1,651,213
|
|
|
|
66,833
|
|
|
|
5.49
|
|
|
|
1,404,081
|
|
|
|
51,955
|
|
|
|
5.07
|
|
Commercial real estate
|
|
|
1,456,217
|
|
|
|
54,143
|
|
|
|
4.97
|
|
|
|
1,828,800
|
|
|
|
70,348
|
|
|
|
5.14
|
|
Residential mortgage
|
|
|
602,970
|
|
|
|
19,650
|
|
|
|
4.35
|
|
|
|
718,039
|
|
|
|
25,177
|
|
|
|
4.68
|
|
Direct consumer
|
|
|
894,603
|
|
|
|
39,259
|
|
|
|
5.86
|
|
|
|
994,185
|
|
|
|
45,055
|
|
|
|
6.06
|
|
Indirect consumer
|
|
|
904,188
|
|
|
|
41,981
|
|
|
|
6.20
|
|
|
|
847,878
|
|
|
|
42,335
|
|
|
|
6.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio loans
|
|
|
5,509,191
|
|
|
|
221,866
|
|
|
|
5.40
|
|
|
|
5,792,983
|
|
|
|
234,870
|
|
|
|
5.44
|
|
Loans held for sale
(4)
|
|
|
12,145
|
|
|
|
339
|
|
|
|
3.72
|
|
|
|
26,739
|
|
|
|
730
|
|
|
|
3.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
8,670,063
|
|
|
|
282,139
|
|
|
|
4.42
|
|
|
|
9,008,447
|
|
|
|
308,489
|
|
|
|
4.66
|
|
Nonearning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
143,373
|
|
|
|
|
|
|
|
|
|
|
|
143,254
|
|
|
|
|
|
|
|
|
|
Premises and equipment
|
|
|
94,858
|
|
|
|
|
|
|
|
|
|
|
|
101,846
|
|
|
|
|
|
|
|
|
|
Investment security fair value adjustment
|
|
|
52,778
|
|
|
|
|
|
|
|
|
|
|
|
44,256
|
|
|
|
|
|
|
|
|
|
Other nonearning assets
|
|
|
751,020
|
|
|
|
|
|
|
|
|
|
|
|
662,565
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(153,480
|
)
|
|
|
|
|
|
|
|
|
|
|
(241,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,558,612
|
|
|
|
|
|
|
|
|
|
|
$
|
9,718,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
1,012,171
|
|
|
$
|
1,105
|
|
|
|
0.15
|
|
|
$
|
958,634
|
|
|
$
|
1,602
|
|
|
|
0.22
|
|
Savings deposits
|
|
|
2,662,533
|
|
|
|
4,722
|
|
|
|
0.24
|
|
|
|
2,633,255
|
|
|
|
7,224
|
|
|
|
0.37
|
|
Time deposits
|
|
|
1,956,304
|
|
|
|
23,416
|
|
|
|
1.60
|
|
|
|
2,564,001
|
|
|
|
36,119
|
|
|
|
1.88
|
|
Short-term borrowings
|
|
|
40,621
|
|
|
|
42
|
|
|
|
0.14
|
|
|
|
41,999
|
|
|
|
57
|
|
|
|
0.18
|
|
Long-term debt
|
|
|
853,339
|
|
|
|
25,251
|
|
|
|
3.95
|
|
|
|
912,755
|
|
|
|
28,426
|
|
|
|
4.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
6,524,968
|
|
|
|
54,536
|
|
|
|
1.12
|
|
|
|
7,110,644
|
|
|
|
73,428
|
|
|
|
1.38
|
|
|
|
|
|
|
|
|
Noninterest-Bearing Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand
|
|
|
1,729,889
|
|
|
|
|
|
|
|
|
|
|
|
1,470,866
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
157,746
|
|
|
|
|
|
|
|
|
|
|
|
151,525
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
1,146,009
|
|
|
|
|
|
|
|
|
|
|
|
985,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
9,558,612
|
|
|
|
|
|
|
|
|
|
|
$
|
9,718,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Spread
(5)
|
|
|
|
|
|
$
|
227,603
|
|
|
|
3.30
|
%
|
|
|
|
|
|
$
|
235,061
|
|
|
|
3.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution of noninterest bearing sources of funds
|
|
|
|
|
|
|
|
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin
(5)(6)
|
|
|
|
|
|
|
|
|
|
|
3.58
|
%
|
|
|
|
|
|
|
|
|
|
|
3.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $4.6 million and $5.8 million, for the
nine months ended 2012 and 2011, respectively, based on a tax rate of 35%.
|
(3)
|
For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted
for amortization of premiums and accretion of discounts.
|
(4)
|
Nonaccrual loans are included in average balances for each applicable loan category.
|
(5)
|
The interest spread and net interest margin are presented on a tax-equivalent basis.
|
(6)
|
Net interest margin exceeds the interest spread due to noninterest-bearing funding sources, demand deposits, other liabilities and shareholders
equity supporting earning assets.
|
The decrease in net interest margin in the three months ended September 30, 2012
from the comparable period of 2011 was a result of the continued low interest rate environment and competitive pressures on our loan portfolio, partially offset by reduced funding costs. The increase in net interest margin for the nine months ended
September 30, 2012 over the comparable periods of 2011 was a result of efforts to reduce funding costs by improving deposit mix, carefully managing deposit rates, reducing reliance on brokered time deposits, and reducing costs on long term debt
by extending maturities. The benefits from these initiatives were offset by lower investment securities and loan portfolio yields due to the continued low interest rate environment and competitive pressures.
The decrease in net interest income in the three months ended September 30, 2012 from the comparable periods of 2011 reflects lower net interest
margin and a reduction in average earnings assets. For the nine months ended September 30, 2012, net interest income decreased compared to the same period last year due to a reduction in average earnings assets.
The table below shows changes in interest income, interest expense and net interest income due to rate and volume variances for major categories of
earning assets and interest-bearing liabilities.
50
Analysis of Changes in Interest Income and Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
|
|
Increase (Decrease)
|
|
2012 compared with 2011
|
|
Net
|
|
|
Due to Change in
|
|
|
Net
|
|
|
Due to Change in
|
|
(in thousands)
|
|
Change
(1)
|
|
|
Rate
(2)
|
|
|
Volume
(2)
|
|
|
Change
(1)
|
|
|
Rate
(2)
|
|
|
Volume
(2)
|
|
Interest Income on Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments
|
|
$
|
(16
|
)
|
|
$
|
4
|
|
|
$
|
(20
|
)
|
|
$
|
(189
|
)
|
|
$
|
5
|
|
|
$
|
(194
|
)
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(4,474
|
)
|
|
|
(4,641
|
)
|
|
|
167
|
|
|
|
(11,308
|
)
|
|
|
(14,388
|
)
|
|
|
3,080
|
|
Tax-exempt
|
|
|
(456
|
)
|
|
|
(67
|
)
|
|
|
(389
|
)
|
|
|
(1,802
|
)
|
|
|
(271
|
)
|
|
|
(1,531
|
)
|
FHLB and Federal Reserve stock
|
|
|
222
|
|
|
|
236
|
|
|
|
(14
|
)
|
|
|
344
|
|
|
|
724
|
|
|
|
(380
|
)
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
4,401
|
|
|
|
769
|
|
|
|
3,632
|
|
|
|
14,878
|
|
|
|
5,040
|
|
|
|
9,838
|
|
Commercial real estate
|
|
|
(4,725
|
)
|
|
|
(1,098
|
)
|
|
|
(3,627
|
)
|
|
|
(16,205
|
)
|
|
|
(2,496
|
)
|
|
|
(13,709
|
)
|
Residential mortgage loans
|
|
|
(1,397
|
)
|
|
|
(156
|
)
|
|
|
(1,241
|
)
|
|
|
(5,527
|
)
|
|
|
(1,690
|
)
|
|
|
(3,837
|
)
|
Direct consumer
|
|
|
(1,893
|
)
|
|
|
(502
|
)
|
|
|
(1,391
|
)
|
|
|
(5,796
|
)
|
|
|
(1,511
|
)
|
|
|
(4,285
|
)
|
Indirect consumer
|
|
|
(119
|
)
|
|
|
(1,230
|
)
|
|
|
1,111
|
|
|
|
(354
|
)
|
|
|
(3,146
|
)
|
|
|
2,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio loans
|
|
|
(3,733
|
)
|
|
|
(2,217
|
)
|
|
|
(1,516
|
)
|
|
|
(13,004
|
)
|
|
|
(3,803
|
)
|
|
|
(9,201
|
)
|
Loans held for sale
|
|
|
(103
|
)
|
|
|
(43
|
)
|
|
|
(60
|
)
|
|
|
(391
|
)
|
|
|
16
|
|
|
|
(407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(8,560
|
)
|
|
|
(6,728
|
)
|
|
|
(1,832
|
)
|
|
|
(26,350
|
)
|
|
|
(17,717
|
)
|
|
|
(8,633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense on Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
|
(162
|
)
|
|
|
(209
|
)
|
|
|
47
|
|
|
|
(497
|
)
|
|
|
(583
|
)
|
|
|
86
|
|
Savings deposits
|
|
|
(892
|
)
|
|
|
(854
|
)
|
|
|
(38
|
)
|
|
|
(2,502
|
)
|
|
|
(2,582
|
)
|
|
|
80
|
|
Time Deposits
|
|
|
(3,695
|
)
|
|
|
(1,395
|
)
|
|
|
(2,300
|
)
|
|
|
(12,703
|
)
|
|
|
(5,003
|
)
|
|
|
(7,700
|
)
|
Short-term borrowings
|
|
|
(9
|
)
|
|
|
(10
|
)
|
|
|
1
|
|
|
|
(15
|
)
|
|
|
(13
|
)
|
|
|
(2
|
)
|
Long-term debt
|
|
|
(766
|
)
|
|
|
(665
|
)
|
|
|
(101
|
)
|
|
|
(3,175
|
)
|
|
|
(1,432
|
)
|
|
|
(1,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(5,524
|
)
|
|
|
(3,133
|
)
|
|
|
(2,391
|
)
|
|
|
(18,892
|
)
|
|
|
(9,613
|
)
|
|
|
(9,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
$
|
(3,036
|
)
|
|
$
|
(3,595
|
)
|
|
$
|
559
|
|
|
$
|
(7,458
|
)
|
|
$
|
(8,104
|
)
|
|
$
|
646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Changes are based on actual interest income and do not reflect taxable equivalent adjustments.
|
(2)
|
The change in interest not solely due to changes in volume or rates has been allocated in proportion to the absolute dollar amounts of the change in
each.
|
The decreases in net interest income in the three and nine months ended September 30, 2012 from the comparable
periods of 2011 reflect rate variances that were unfavorable in the aggregate and volume variances that were favorable in the aggregate. The rate variances were the result of the low interest rate environment, with unfavorable rate variances on
assets partially offset by favorable rate variances on liabilities. Volume variances were favorable in the aggregate, as reductions in time deposits and long-term debt balances and an increase in investment securities balances were partially offset
by a reduction in total portfolio loan balances.
51
Noninterest Income
The components of noninterest income are presented below.
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Change in 2012
|
|
|
Nine Months Ended
September 30,
|
|
|
Change in 2012
|
|
(dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
Amount
|
|
|
Percent
|
|
|
2012
|
|
|
2011
|
|
|
Amount
|
|
|
Percent
|
|
Service charges on deposit accounts
|
|
$
|
9,554
|
|
|
$
|
10,362
|
|
|
$
|
(808
|
)
|
|
|
(7.8
|
)%
|
|
$
|
27,894
|
|
|
$
|
29,544
|
|
|
$
|
(1,650
|
)
|
|
|
(5.6
|
)%
|
Trust fees
|
|
|
3,635
|
|
|
|
3,622
|
|
|
|
13
|
|
|
|
0.4
|
|
|
|
10,818
|
|
|
|
11,356
|
|
|
|
(538
|
)
|
|
|
(4.7
|
)
|
Mortgage and other loan income
|
|
|
2,028
|
|
|
|
2,089
|
|
|
|
(61
|
)
|
|
|
(2.9
|
)
|
|
|
5,839
|
|
|
|
6,915
|
|
|
|
(1,076
|
)
|
|
|
(15.6
|
)
|
Brokerage and investment fees
|
|
|
1,831
|
|
|
|
1,188
|
|
|
|
643
|
|
|
|
54.1
|
|
|
|
4,486
|
|
|
|
3,829
|
|
|
|
657
|
|
|
|
17.2
|
|
Card-based and other nondeposit fees
|
|
|
4,431
|
|
|
|
4,475
|
|
|
|
(44
|
)
|
|
|
(1.0
|
)
|
|
|
13,140
|
|
|
|
12,862
|
|
|
|
278
|
|
|
|
2.2
|
|
Net (losses) gains on loans held for sale
|
|
|
(184
|
)
|
|
|
1,952
|
|
|
|
(2,136
|
)
|
|
|
(109.4
|
)
|
|
|
739
|
|
|
|
2,025
|
|
|
|
(1,286
|
)
|
|
|
(63.5
|
)
|
Investment securities gains (losses)
|
|
|
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
(1,373
|
)
|
|
|
1,373
|
|
|
|
100.0
|
|
Other income
|
|
|
2,415
|
|
|
|
736
|
|
|
|
1,679
|
|
|
|
228.1
|
|
|
|
7,380
|
|
|
|
5,737
|
|
|
|
1,643
|
|
|
|
28.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
$
|
23,710
|
|
|
$
|
24,427
|
|
|
$
|
(717
|
)
|
|
|
(2.9
|
)
|
|
$
|
70,296
|
|
|
$
|
70,895
|
|
|
$
|
(599
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in noninterest income in the third quarter of 2012 from the third quarter of 2011 reflects net losses on
loans held for sale and, to a lesser extent, decreases in service charges on deposit accounts, partially offset by increases in other income and in brokerage and investment fees. The net losses on loans held for sale were primarily the result of
increased writedowns in the third quarter of 2012. The reduction in service charges on deposit accounts was directly related to the impact of regulatory changes resulting from the Dodd-Frank Act and guidance issued by the FDIC related to overdraft
payment programs. The increase in other income was due to unrealized gains in deferred compensation. The increase in brokerage and investment fees were due to focused efforts to increase accounts and sales.
Noninterest income for the nine months ended September 30, 2012 changed by less than 1% from the comparable period of 2011 as increases in other
income and the absence of investment securities losses were offset by decreases in service charges on deposit accounts, gains on loans held for sale, and mortgage and other loan income. Increases in other income were due primarily to unrealized
gains in deferred compensation. In addition, Citizens recorded no sales of investment securities in 2012 as compared to net losses on sales of investment securities in 2011. The reduction in service charges on deposit accounts was directly related
to the impact of regulatory changes resulting from the Dodd-Frank Act and guidance issued by the FDIC related to overdraft payment programs. The decrease in gains on loans held for sale was due primarily to increased writedowns in the third quarter
of 2012. The reduced mortgage and other loan income was primarily due to lower commitment fees.
Noninterest Expense
The components of noninterest expense are presented below.
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Change in 2012
|
|
|
Nine Months Ended
September 30,
|
|
|
Change in 2012
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
Amount
|
|
|
Percent
|
|
|
2012
|
|
|
2011
|
|
|
Amount
|
|
|
Percent
|
|
Salaries and employee benefits
|
|
$
|
33,589
|
|
|
$
|
30,280
|
|
|
$
|
3,309
|
|
|
|
10.9
|
%
|
|
$
|
99,687
|
|
|
$
|
92,563
|
|
|
$
|
7,124
|
|
|
|
7.7
|
%
|
Occupancy
|
|
|
6,129
|
|
|
|
6,125
|
|
|
|
4
|
|
|
|
0.1
|
|
|
|
18,965
|
|
|
|
19,734
|
|
|
|
(769
|
)
|
|
|
(3.9
|
)
|
Professional services
(1)
|
|
|
6,806
|
|
|
|
2,394
|
|
|
|
4,412
|
|
|
|
184.3
|
|
|
|
11,294
|
|
|
|
7,020
|
|
|
|
4,274
|
|
|
|
60.9
|
|
Equipment
|
|
|
2,937
|
|
|
|
2,918
|
|
|
|
19
|
|
|
|
0.7
|
|
|
|
9,144
|
|
|
|
8,811
|
|
|
|
333
|
|
|
|
3.8
|
|
Data processing services
|
|
|
4,427
|
|
|
|
3,823
|
|
|
|
604
|
|
|
|
15.8
|
|
|
|
12,196
|
|
|
|
12,422
|
|
|
|
(226
|
)
|
|
|
(1.8
|
)
|
Advertising and public relations
|
|
|
1,847
|
|
|
|
2,179
|
|
|
|
(332
|
)
|
|
|
(15.2
|
)
|
|
|
4,890
|
|
|
|
4,550
|
|
|
|
340
|
|
|
|
7.5
|
|
Postage and delivery
|
|
|
1,157
|
|
|
|
1,142
|
|
|
|
15
|
|
|
|
1.3
|
|
|
|
3,375
|
|
|
|
3,378
|
|
|
|
(3
|
)
|
|
|
(0.1
|
)
|
Other loan expenses
|
|
|
3,121
|
|
|
|
3,941
|
|
|
|
(820
|
)
|
|
|
(20.8
|
)
|
|
|
9,574
|
|
|
|
12,510
|
|
|
|
(2,936
|
)
|
|
|
(23.5
|
)
|
Losses on other real estate (ORE)
|
|
|
941
|
|
|
|
1,210
|
|
|
|
(269
|
)
|
|
|
(22.2
|
)
|
|
|
382
|
|
|
|
11,687
|
|
|
|
(11,305
|
)
|
|
|
(96.7
|
)
|
ORE expenses
|
|
|
323
|
|
|
|
529
|
|
|
|
(206
|
)
|
|
|
(38.9
|
)
|
|
|
1,039
|
|
|
|
3,326
|
|
|
|
(2,287
|
)
|
|
|
(68.8
|
)
|
Intangible asset amortization
|
|
|
513
|
|
|
|
732
|
|
|
|
(219
|
)
|
|
|
(29.9
|
)
|
|
|
1,636
|
|
|
|
2,338
|
|
|
|
(702
|
)
|
|
|
(30.0
|
)
|
Other expenses
|
|
|
10,265
|
|
|
|
10,138
|
|
|
|
127
|
|
|
|
1.3
|
|
|
|
33,312
|
|
|
|
38,172
|
|
|
|
(4,860
|
)
|
|
|
(12.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
72,055
|
|
|
$
|
65,411
|
|
|
$
|
6,644
|
|
|
|
10.2
|
|
|
$
|
205,494
|
|
|
$
|
216,511
|
|
|
$
|
(11,017
|
)
|
|
|
(5.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes merger-related expenses of $4.4 million in the third quarter of 2012.
|
The increase in noninterest expense in the third quarter of 2012 from the third quarter of 2011 was primarily the result of increases in professional
services, salaries and employee benefits, and data processing services, partially offset by a decrease in other loan expenses. The increase in professional services expense was due to merger-related costs. The increase in salaries and employee
benefits was primarily due to an increase in base and incentive compensation
52
driven by improved production levels and expenses directly related to the reinstatement of employer contributions to the 401(k) plan in 2012. Data processing services increased as a negotiated
reduction in expense expired. The decrease in other expenses was related to lower FDIC premiums.
The decrease in noninterest expense from the
nine month period ending September 30, 2011 was primarily the result of decreases in losses on other real estate (ORE), lower other expenses, and lower other loan expense and ORE expenses, partially offset by an increase in professional
services and in salaries and employee benefits. The losses on ORE and higher ORE expenses in 2011 were incurred as a result of the problem asset resolution initiatives that were substantially completed during the first quarter of 2011. The net
decrease in other expenses was directly related to lower FDIC premiums. Lower other loan expense was primarily the result of lower origination volume and lower foreclosure-related expenses. Professional services expense increased due to
merger-related expenses. The increase in salaries and employee benefits was primarily due to increased base and incentive compensation driven by improved production levels and expenses directly related to the reinstatement of employer contributions
to the 401(k) plan.
Income Taxes and Deferred Tax Asset
Citizens recorded income tax expense of $1.3 million for the third quarter of 2012, compared to a benefit of $12.6 million for the third quarter of 2011. For the first nine months of 2012, the income tax
benefit totaled $275.5 million, compared with a benefit of $22.8 million for the same period of 2011. The tax expense this quarter reflects the tax impact on the positive variance between our current view on earnings for the year compared to our
forecast at the time the valuation allowance was eliminated against our deferred tax asset. The tax benefit for the three months ended September 30, 2011 was largely due to Citizens recording a receivable as a result of a revocation of a tax
election. The increase in tax benefit for the nine months ended September 30, 2012 was primarily the result of eliminating the valuation allowance against our deferred tax asset. As of September 30, 2012, the recorded balance of the net
deferred tax asset was $268.3 million, reported in Other Assets on the Consolidated Balance Sheets.
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. The deferred tax asset is reviewed on a quarterly basis and based
on the analysis of positive and negative evidence at June 30, 2012, the positive evidence outweighed the negative evidence and therefore 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. As a result of this analysis, the deferred tax asset valuation allowance was reversed in the second quarter of 2012.
Line of Business Results
Citizens
monitors financial performance using an internal profitability measurement system, which provides line of business results and key performance measures. Business line results are divided into five major business segments: Regional Banking, Specialty
Consumer, Specialty Commercial, Wealth Management and Other. For additional information about each line of business, see Note 15 to the Consolidated Financial Statements of the Citizens 2011 Annual Report on Form 10-K and Note 11 to the
unaudited Consolidated Financial Statements in this report.
Net income for Regional Banking increased for the three months ended
September 30, 2012 compared to the same period of the prior year due to lower noninterest expense, partially offset by lower noninterest income. The lower noninterest expense reflects lower FDIC premiums. The lower noninterest income reflects
the reduction in service charges on deposit accounts. For the nine months ended September 30, 2012, Regional Banking recorded net income compared to a net loss for the same period of the prior year. The variance for the nine months ended
September 30, 2012 was primarily due to lower provision for loan losses and lower noninterest expense as a result of the substantial completion of Citizens accelerated problem asset resolution initiatives in early 2011. The variances were
partially offset by higher income tax expense.
Specialty Consumer recorded net income for the three and nine months ended September 30,
2012, compared to net losses for the same periods of the prior year. The variance for the three months ended September 30, 2012 was a result of lower provision for loan losses, partially offset by lower net interest income and higher income
taxes. The variance for the nine months ended September 30, 2012 was a result of lower provision for loan losses and noninterest expense, partially offset by lower net interest income, lower noninterest income and higher taxes. The lower
provision for loan losses for the three and nine months ended September 30, 2012 and the lower noninterest expense for the nine months ended September 30, 2012 reflect the results of our focused efforts to improve asset
53
quality and stabilize portfolio credit metrics as well as an overall decrease in loan balances. The lower net interest income for both periods was a result of the continued low interest rate
environment and competitive pressures on our loan portfolio as well as decreases in loan balances. The lower noninterest income for the nine months ended September 30, 2012 was a result of lower gains on loans held for sale in the residential
mortgage portfolio.
Net income for Specialty Commercial increased for the three and nine months ended September 30, 2012, compared to
the same periods of the prior year. These improvements were a result of higher net interest income and lower provision for loan losses, partially offset by lower noninterest income and higher taxes in 2012. The higher net interest income is directly
related to the increase in C&I lending. The lower provision for loan losses reflects the results of our focused efforts to improve asset quality and stabilize portfolio credit metrics. The lower noninterest income reflects lower gains in the
held for sale portfolio.
Net income for Wealth Management for the three months ended September 30, 2012 increased slightly over the
prior year primarily due to a decrease in noninterest expenses. Net income decreased for the nine months ended September 30, 2012 primarily as a result of lower trust revenues.
The Other line of business recorded a net loss for the three months ended September 30, 2012 as compared to net income for the prior year. The decrease was a result of lower net interest income and
lower tax benefit. The lower net interest income is 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. Changes in income taxes reflect an allocation of 35% to all other lines of business in 2011 and 2012 with the remainder allocated to the Other line of business. Net income for the nine
months ended September 30, 2012 increased for the Other line of business as compared to the same period of the prior year. The increase was directly related to the elimination of the valuation allowance on the deferred tax asset. These
increases were partially offset by the decrease in net interest income mentioned above.
Financial Condition
Total assets at September 30, 2012 were $9.7 billion, an increase of $261.9 million or 2.8% over December 31, 2011 and $124.6 million or 1.3%
over September 30, 2011 as a result of restoring the deferred tax asset.
Money Market Investments
Money market investments at September 30, 2012 totaled $223.8 million, a decrease of $89.8 million or 28.6% from December 31, 2011 and $59.2
million or 20.9% from September 30, 2011 primarily related to the use of funds to pay off maturing high cost funding.
Investment
Securities
Investment securities at September 30, 2012 totaled $2.9 billion, an increase of $98.3 million or 3.6% over
December 31, 2011 and $92.2 million or 3.3% from September 30, 2011. The increases were largely due to reinvesting a portion of the loan portfolio paydowns.
Portfolio Loans
The following definitions are provided to clarify the types of loans
included in each of the commercial real estate segments identified in the table below. Land hold loans are secured by undeveloped land which has been acquired for future development. Land development loans are secured by land being developed in
terms of infrastructure improvements to create finished marketable lots for commercial or residential construction. Construction loans are secured by commercial, retail, and residential real estate in the construction phase with the intent to be
sold or become an income producing property. Income producing loans are secured by non-owner occupied real estate leased to one or more tenants. Owner occupied loans are secured by real estate occupied primarily by the owner.
54
Loan Portfolios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
September 30, 2012
|
|
|
June 30, 2012
|
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
September 30, 2011
|
|
Land hold
|
|
$
|
4,984
|
|
|
$
|
5,119
|
|
|
$
|
5,387
|
|
|
$
|
6,542
|
|
|
$
|
6,818
|
|
Land development
|
|
|
7,521
|
|
|
|
7,006
|
|
|
|
7,226
|
|
|
|
13,104
|
|
|
|
22,232
|
|
Construction
|
|
|
6,689
|
|
|
|
4,591
|
|
|
|
6,410
|
|
|
|
5,847
|
|
|
|
5,410
|
|
Income producing
|
|
|
767,202
|
|
|
|
803,546
|
|
|
|
877,461
|
|
|
|
913,755
|
|
|
|
975,262
|
|
Owner-occupied
|
|
|
549,205
|
|
|
|
597,147
|
|
|
|
590,575
|
|
|
|
605,113
|
|
|
|
634,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
1,335,601
|
|
|
|
1,417,409
|
|
|
|
1,487,059
|
|
|
|
1,544,361
|
|
|
|
1,643,901
|
|
Commercial and industrial
|
|
|
1,688,996
|
|
|
|
1,711,411
|
|
|
|
1,657,140
|
|
|
|
1,543,529
|
|
|
|
1,531,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
3,024,597
|
|
|
|
3,128,820
|
|
|
|
3,144,199
|
|
|
|
3,087,890
|
|
|
|
3,175,393
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
570,295
|
|
|
|
588,144
|
|
|
|
611,166
|
|
|
|
637,245
|
|
|
|
654,561
|
|
Direct consumer
|
|
|
865,777
|
|
|
|
881,070
|
|
|
|
903,238
|
|
|
|
933,314
|
|
|
|
954,831
|
|
Indirect consumer
|
|
|
970,235
|
|
|
|
923,714
|
|
|
|
869,460
|
|
|
|
871,086
|
|
|
|
887,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
2,406,307
|
|
|
|
2,392,928
|
|
|
|
2,383,864
|
|
|
|
2,441,645
|
|
|
|
2,496,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio loans
|
|
$
|
5,430,904
|
|
|
$
|
5,521,748
|
|
|
$
|
5,528,063
|
|
|
$
|
5,529,535
|
|
|
$
|
5,672,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio loans were down slightly from December 31, 2011 as the growth in our C&I and indirect portfolios
was offset by declines in our CRE, direct and residential mortgage portfolios.
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 product- and collateral-specific acceptable loan terms
and conditions, including maximum loan to value ratios for real estate collateral, advance rates for non-real estate collateral, and debt service coverage. Acceptable credit management practices require that the borrowers financial capacity to
repay the loan be analyzed based on the most recent financial information as specified by the loans documented structure. It is Citizens general practice to obtain personal guarantees and underwrite the guarantors capacity to
support the loan no less frequently than annually and more frequently if changes occur in the borrowers capacity to repay or in the 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, at origination, 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 product- and collateral-specific loan terms and conditions, including maximum debt
ratios and advance rates based on the borrowers credit score. Residential mortgage loans are evaluated based on credit scores, debt-to-income ratios, and loan-to-collateral value ratios. They are predominately originated in accordance with
underwriting standards set forth by the government-sponsored entities (GSEs) Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National Mortgage
Association (GNMA), which serve as the primary purchasers of loans sold in the secondary market by mortgage lenders. These underwriting standards generally require that the loans be collateralized by
one-
55
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 September 30, 2012, December 31, 2011 and September 30, 2011, the outstanding balance of these loans and the associated interest income was immaterial.
In June 2008, Citizens entered into a master sales agreement to sell its residential mortgage originations to its third-party servicer at a fixed rate with no recourse. Under this agreement, Citizens
sells more than 90% of new mortgage origination, resulting in minimal new loans being retained in the residential mortgage portfolio. During 2011 and 2012, the amount of new mortgage loans underwritten to non-GSE standards, all of which are retained
in the residential mortgage loan portfolio, was immaterial. Prior to June 2008, when Citizens sold its residential mortgage originations to several secondary market participants, it made various standard representations and warranties. The specific
representations and warranties made by Citizens depended on the nature of the transaction and the requirements of the buyer. In the event of a breach of the representations and warranties, Citizens may be required to either repurchase the mortgage
loans (generally at unpaid principal balance plus accrued interest) with the identified defects or indemnify the investor for losses resulting from the breach. During the first nine months of 2012 and 2011, Citizens repurchased $4.7 million and $1.5
million of loans, respectively, pursuant to such provisions. Citizens estimates its exposure to losses from its obligation to repurchase previously sold loans based on the individual circumstances applicable to each loan submitted for potential
repurchase by an investor, and as a result, Citizens maintains a liability included in Other Liabilities on the balance sheet for estimated losses on loans expected to be repurchased or on which indemnification is expected to be provided. Citizens
recorded $4.9 million and $3.5 million in the first nine months of 2012 and 2011, respectively, in Other Expense on the Consolidated Statements of Operations related to repurchasing or indemnifying such loans.
Direct consumer loans include home equity loans, and direct installment loans to individuals used to purchase boats, recreational vehicles, automobiles
and other personal items. Underwriting guidelines for these loans are heavily influenced by statutory requirements, which include, but are not limited to maximum loan-to-value ratios, credit scoring results, ability to service overall debt, and
documentation requirements. Individual borrowers may be required to provide additional collateral or a satisfactory endorsement or guaranty from another person, depending on the creditworthiness of the borrower. Home equity loans consist of
fully-indexed variable rate revolving lines of credit and fixed rate loans to consumers that are secured by residential real estate. Home equity loans are generally in a junior lien position and are originated through Citizens branches with
cumulative loan-to-value ratios generally at or less than 80% of appraised collateral value. As of September 30, 2012, Citizens home equity portfolio totaled $699.5 million, and had an average loan size of $36,004 with an average
refreshed FICO score of 741. As of September 30, 2012, other direct installment loans totaled $166.3 million and had an average loan size of $19,679 with an average refreshed FICO score of 727.
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 September 30, 2012, indirect consumer loans had an average loan size of
$24,175 with an average refreshed FICO score of 741.
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.
Credit Quality
The quality of Citizens loan portfolio is impacted by numerous factors, including the economic environment in the markets in which Citizens
operates. Citizens carefully monitors its loans in an effort to identify and mitigate any potential credit quality issues and losses in a proactive manner. Citizens performs quarterly reviews of the
non-
56
watchlist commercial credit portfolio focusing on industry segments and asset classes that have or may be expected to experience stress due to economic conditions. This process seeks to validate
each such credits risk rating, underwriting structure and exposure management under current and stressed economic scenarios while strengthening these relationships and improving communication with these clients.
The following tables represent three qualitative aspects of the loan portfolio that illustrate the overall level of quality and risk inherent in the loan
portfolio.
|
|
|
Delinquency Rates by Loan Portfolio Loans where the contractual payment is 30 to 89 days past due and interest is still accruing. While these
loans are actively worked to bring them current, past due loan trends may be a leading indicator of potential future nonperforming loans and charge-offs.
|
|
|
|
Nonperforming Assets Loans that are in nonaccrual status, loans past due 90 days or more on which interest is still accruing, nonperforming
loans that are held for sale and other repossessed assets acquired.
|
|
|
|
Net Charge-Offs The portion of loans that have been charged-off during each quarter, net of recoveries.
|
Delinquency Rates By Loan Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
June 30, 2012
|
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
September 30, 2011
|
|
30 to 89 days past due
(in thousands)
|
|
$
|
|
|
% of
Portfolio
|
|
|
$
|
|
|
% of
Portfolio
|
|
|
$
|
|
|
% of
Portfolio
|
|
|
$
|
|
|
% of
Portfolio
|
|
|
$
|
|
|
% of
Portfolio
|
|
Land hold
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
21
|
|
|
|
0.32
|
%
|
|
$
|
|
|
|
|
|
%
|
Land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
1.81
|
|
|
|
|
|
|
|
|
|
|
|
216
|
|
|
|
0.97
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income producing
|
|
|
1,104
|
|
|
|
0.14
|
|
|
|
1,519
|
|
|
|
0.19
|
|
|
|
1,447
|
|
|
|
0.16
|
|
|
|
2,508
|
|
|
|
0.27
|
|
|
|
3,325
|
|
|
|
0.34
|
|
Owner-occupied
|
|
|
4,598
|
|
|
|
0.84
|
|
|
|
936
|
|
|
|
0.16
|
|
|
|
5,177
|
|
|
|
0.88
|
|
|
|
2,345
|
|
|
|
0.39
|
|
|
|
5,817
|
|
|
|
0.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
5,702
|
|
|
|
0.43
|
|
|
|
2,455
|
|
|
|
0.17
|
|
|
|
6,754
|
|
|
|
0.45
|
|
|
|
4,874
|
|
|
|
0.32
|
|
|
|
9,358
|
|
|
|
0.57
|
|
Commercial and industrial
|
|
|
880
|
|
|
|
0.05
|
|
|
|
1,565
|
|
|
|
0.09
|
|
|
|
2,887
|
|
|
|
0.17
|
|
|
|
2,454
|
|
|
|
0.16
|
|
|
|
2,594
|
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
6,582
|
|
|
|
0.22
|
|
|
|
4,020
|
|
|
|
0.13
|
|
|
|
9,641
|
|
|
|
0.31
|
|
|
|
7,328
|
|
|
|
0.24
|
|
|
|
11,952
|
|
|
|
0.38
|
|
Residential mortgage
|
|
|
6,029
|
|
|
|
1.06
|
|
|
|
7,731
|
|
|
|
1.31
|
|
|
|
7,568
|
|
|
|
1.24
|
|
|
|
9,544
|
|
|
|
1.50
|
|
|
|
9,079
|
|
|
|
1.39
|
|
Direct consumer
|
|
|
11,435
|
|
|
|
1.32
|
|
|
|
12,396
|
|
|
|
1.41
|
|
|
|
14,002
|
|
|
|
1.55
|
|
|
|
17,810
|
|
|
|
1.91
|
|
|
|
18,629
|
|
|
|
1.95
|
|
Indirect consumer
|
|
|
7,514
|
|
|
|
0.77
|
|
|
|
8,504
|
|
|
|
0.92
|
|
|
|
8,780
|
|
|
|
1.01
|
|
|
|
13,067
|
|
|
|
1.50
|
|
|
|
9,898
|
|
|
|
1.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
24,978
|
|
|
|
1.04
|
|
|
|
28,631
|
|
|
|
1.20
|
|
|
|
30,350
|
|
|
|
1.27
|
|
|
|
40,421
|
|
|
|
1.66
|
|
|
|
37,606
|
|
|
|
1.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total delinquent loans
|
|
$
|
31,560
|
|
|
|
0.58
|
|
|
$
|
32,651
|
|
|
|
0.59
|
|
|
$
|
39,991
|
|
|
|
0.72
|
|
|
$
|
47,749
|
|
|
|
0.86
|
|
|
$
|
49,558
|
|
|
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decreases in total delinquencies as of September 30, 2012 compared to December 31, 2011 and
September 30, 2011 were driven by the continued emphasis on proactively managing and resolving delinquent commercial and consumer loans and reflect the improving risk profile of the loan portfolio.
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. Nonperforming assets during the last five quarters are presented in the table below.
57
Nonperforming Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
June 30, 2012
|
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
September 30, 2011
|
|
(in thousands)
|
|
$
|
|
|
% of
Portfolio
|
|
|
$
|
|
|
% of
Portfolio
|
|
|
$
|
|
|
% of
Portfolio
|
|
|
$
|
|
|
% of
Portfolio
|
|
|
$
|
|
|
% of
Portfolio
|
|
Land hold
|
|
$
|
326
|
|
|
|
6.54
|
%
|
|
$
|
326
|
|
|
|
6.37
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
167
|
|
|
|
2.45
|
%
|
Land development
|
|
|
3
|
|
|
|
0.04
|
|
|
|
3
|
|
|
|
0.05
|
|
|
|
207
|
|
|
|
2.87
|
|
|
|
213
|
|
|
|
1.62
|
|
|
|
12
|
|
|
|
0.05
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150
|
|
|
|
2.34
|
|
|
|
150
|
|
|
|
2.57
|
|
|
|
257
|
|
|
|
4.76
|
|
Income producing
|
|
|
12,904
|
|
|
|
1.68
|
|
|
|
19,408
|
|
|
|
2.42
|
|
|
|
18,566
|
|
|
|
2.12
|
|
|
|
21,171
|
|
|
|
2.32
|
|
|
|
23,227
|
|
|
|
2.38
|
|
Owner-occupied
|
|
|
13,146
|
|
|
|
2.39
|
|
|
|
18,187
|
|
|
|
3.05
|
|
|
|
20,716
|
|
|
|
3.51
|
|
|
|
23,798
|
|
|
|
3.93
|
|
|
|
27,540
|
|
|
|
4.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
26,379
|
|
|
|
1.98
|
|
|
|
37,924
|
|
|
|
2.68
|
|
|
|
39,639
|
|
|
|
2.67
|
|
|
|
45,332
|
|
|
|
2.94
|
|
|
|
51,203
|
|
|
|
3.11
|
|
Commercial and industrial
|
|
|
9,190
|
|
|
|
0.54
|
|
|
|
21,676
|
|
|
|
1.27
|
|
|
|
14,629
|
|
|
|
0.88
|
|
|
|
16,946
|
|
|
|
1.10
|
|
|
|
18,536
|
|
|
|
1.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccruing commercial
|
|
|
35,569
|
|
|
|
1.18
|
|
|
|
59,600
|
|
|
|
1.90
|
|
|
|
54,268
|
|
|
|
1.73
|
|
|
|
62,278
|
|
|
|
2.02
|
|
|
|
69,739
|
|
|
|
2.20
|
|
Residential mortgage
|
|
|
15,271
|
|
|
|
2.68
|
|
|
|
13,474
|
|
|
|
2.29
|
|
|
|
11,137
|
|
|
|
1.82
|
|
|
|
11,312
|
|
|
|
1.78
|
|
|
|
13,074
|
|
|
|
2.00
|
|
Direct consumer
|
|
|
10,552
|
|
|
|
1.22
|
|
|
|
9,263
|
|
|
|
1.05
|
|
|
|
8,895
|
|
|
|
0.98
|
|
|
|
12,115
|
|
|
|
1.30
|
|
|
|
14,704
|
|
|
|
1.54
|
|
Indirect consumer
|
|
|
2,391
|
|
|
|
0.25
|
|
|
|
1,875
|
|
|
|
0.20
|
|
|
|
1,074
|
|
|
|
0.12
|
|
|
|
953
|
|
|
|
0.11
|
|
|
|
1,256
|
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccruing consumer
|
|
|
28,214
|
|
|
|
1.17
|
|
|
|
24,612
|
|
|
|
1.03
|
|
|
|
21,106
|
|
|
|
0.89
|
|
|
|
24,380
|
|
|
|
1.00
|
|
|
|
29,034
|
|
|
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccruing loans
|
|
|
63,783
|
|
|
|
1.17
|
|
|
|
84,212
|
|
|
|
1.53
|
|
|
|
75,374
|
|
|
|
1.37
|
|
|
|
86,658
|
|
|
|
1.57
|
|
|
|
98,773
|
|
|
|
1.74
|
|
Loans 90+ days still accruing
|
|
|
60
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
164
|
|
|
|
|
|
|
|
770
|
|
|
|
0.01
|
|
|
|
1,368
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming portfolio loans
|
|
|
63,843
|
|
|
|
1.18
|
|
|
|
84,271
|
|
|
|
1.53
|
|
|
|
75,538
|
|
|
|
1.37
|
|
|
|
87,428
|
|
|
|
1.58
|
|
|
|
100,141
|
|
|
|
1.77
|
|
Nonperforming held for sale
|
|
|
16,650
|
|
|
|
|
|
|
|
887
|
|
|
|
|
|
|
|
3,264
|
|
|
|
|
|
|
|
2,372
|
|
|
|
|
|
|
|
20,134
|
|
|
|
|
|
Other repossessed assets acquired
|
|
|
5,700
|
|
|
|
|
|
|
|
8,817
|
|
|
|
|
|
|
|
11,803
|
|
|
|
|
|
|
|
12,422
|
|
|
|
|
|
|
|
16,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
86,193
|
|
|
|
|
|
|
$
|
93,975
|
|
|
|
|
|
|
$
|
90,605
|
|
|
|
|
|
|
$
|
102,222
|
|
|
|
|
|
|
$
|
136,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured loans still accruing
|
|
$
|
21,433
|
|
|
|
|
|
|
$
|
18,187
|
|
|
|
|
|
|
$
|
17,911
|
|
|
|
|
|
|
$
|
32,347
|
|
|
|
|
|
|
$
|
12,206
|
|
|
|
|
|
Commercial inflows
|
|
$
|
4,572
|
|
|
|
|
|
|
$
|
23,828
|
|
|
|
|
|
|
$
|
14,027
|
|
|
|
|
|
|
$
|
13,269
|
|
|
|
|
|
|
$
|
23,901
|
|
|
|
|
|
Commercial outflows
|
|
|
(28,603
|
)
|
|
|
|
|
|
|
(18,496
|
)
|
|
|
|
|
|
|
(22,037
|
)
|
|
|
|
|
|
|
(20,730
|
)
|
|
|
|
|
|
|
(17,611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change
|
|
$
|
(24,031
|
)
|
|
|
|
|
|
$
|
5,332
|
|
|
|
|
|
|
$
|
(8,010
|
)
|
|
|
|
|
|
$
|
(7,461
|
)
|
|
|
|
|
|
$
|
6,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decreases from December 31, 2011 and September 30, 2011 were related to proactively managing and resolving
delinquent commercial and consumer loans and reflects the improving risk profile of the loan portfolio.
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, it is probable that a creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Citizens recognizes that, in the current economic environment, elevated levels of unemployment and depressed real estate values have resulted in many customers facing difficult financial situations. Distressed homeowners
are identified and offered assistance. In order to avoid foreclosure, residential mortgage loans may be restructured for certain qualified borrowers who have the ability to make payments under the new terms of the loan. Citizens residential
mortgage foreclosure abatement program includes several different options to modify contractual payments. Modified consumer and residential mortgage loans are considered troubled debt restructurings (TDRs) when the debt modification, for
economic or legal reasons related to the borrowers financial difficulties, results in a concession to the debtor that otherwise would not be considered by the bank. Citizens classifies TDRs as nonaccruing loans unless the loan qualified for
accruing status at the time of the restructuring, 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 restructuring, the original loan must have been less than
90 days past due at the time of the restructuring and the modification must not have resulted in an impairment. At September 30, 2012, the recorded investment balance of TDRs approximated $27.8 million, of which $21.4 million were on accrual
status and $6.4 million were on nonaccrual status. Of this total, $24.9 million were consumer and residential TDRs that carried a total specific reserve of $4.2 million. Of these TDRs, 44.7% involved only a reduction in interest rate, 41.9% involved
both reduced interest rate and term extensions and 13.4% involved only term extensions. See Note 4 to the unaudited Consolidated Financial Statements in this report for information on impaired loans.
58
Net Charge-Offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30, 2012
|
|
|
June 30, 2012
|
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
September 30, 2011
|
|
(in thousands)
|
|
$
|
|
|
% of
Portfolio*
|
|
|
$
|
|
|
% of
Portfolio*
|
|
|
$
|
|
|
% of
Portfolio*
|
|
|
$
|
|
|
% of
Portfolio*
|
|
|
$
|
|
|
% of
Portfolio*
|
|
Land hold
|
|
$
|
|
|
|
|
|
%
|
|
$
|
(58
|
)
|
|
|
(4.58
|
)%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
(33
|
)
|
|
|
(2.00
|
)%
|
|
$
|
|
|
|
|
|
%
|
Land development
|
|
|
(8
|
)
|
|
|
(0.45
|
)
|
|
|
100
|
|
|
|
5.76
|
|
|
|
(83
|
)
|
|
|
(4.64
|
)
|
|
|
3,079
|
|
|
|
93.21
|
|
|
|
43
|
|
|
|
0.76
|
|
Construction
|
|
|
(21
|
)
|
|
|
(1.24
|
)
|
|
|
14
|
|
|
|
1.24
|
|
|
|
(101
|
)
|
|
|
(6.33
|
)
|
|
|
(4
|
)
|
|
|
(0.24
|
)
|
|
|
(5
|
)
|
|
|
(0.34
|
)
|
Income producing
|
|
|
2,582
|
|
|
|
1.34
|
|
|
|
3,100
|
|
|
|
1.55
|
|
|
|
4,151
|
|
|
|
1.90
|
|
|
|
11,924
|
|
|
|
5.18
|
|
|
|
3,156
|
|
|
|
1.28
|
|
Owner-occupied
|
|
|
1,891
|
|
|
|
1.37
|
|
|
|
2,384
|
|
|
|
1.61
|
|
|
|
2,537
|
|
|
|
1.73
|
|
|
|
5,791
|
|
|
|
3.80
|
|
|
|
2,129
|
|
|
|
1.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
4,444
|
|
|
|
1.32
|
|
|
|
5,540
|
|
|
|
1.57
|
|
|
|
6,504
|
|
|
|
1.76
|
|
|
|
20,757
|
|
|
|
5.33
|
|
|
|
5,323
|
|
|
|
1.28
|
|
Commercial and industrial
|
|
|
5,363
|
|
|
|
1.26
|
|
|
|
5,249
|
|
|
|
1.23
|
|
|
|
3,029
|
|
|
|
0.74
|
|
|
|
1,032
|
|
|
|
0.27
|
|
|
|
1,225
|
|
|
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
9,807
|
|
|
|
1.29
|
|
|
|
10,789
|
|
|
|
1.39
|
|
|
|
9,533
|
|
|
|
1.22
|
|
|
|
21,789
|
|
|
|
2.80
|
|
|
|
6,548
|
|
|
|
0.82
|
|
Residential mortgage
|
|
|
2,515
|
|
|
|
1.75
|
|
|
|
3,506
|
|
|
|
2.40
|
|
|
|
5,076
|
|
|
|
3.34
|
|
|
|
1,170
|
|
|
|
0.73
|
|
|
|
18,364
|
|
|
|
11.13
|
|
Direct consumer
|
|
|
4,790
|
|
|
|
2.20
|
|
|
|
5,666
|
|
|
|
2.59
|
|
|
|
10,935
|
|
|
|
4.87
|
|
|
|
6,930
|
|
|
|
2.95
|
|
|
|
5,710
|
|
|
|
2.37
|
|
Indirect consumer
|
|
|
2,078
|
|
|
|
0.85
|
|
|
|
2,225
|
|
|
|
0.97
|
|
|
|
2,572
|
|
|
|
1.19
|
|
|
|
2,746
|
|
|
|
1.25
|
|
|
|
2,797
|
|
|
|
1.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
9,383
|
|
|
|
1.55
|
|
|
|
11,397
|
|
|
|
1.92
|
|
|
|
18,583
|
|
|
|
3.14
|
|
|
|
10,846
|
|
|
|
1.76
|
|
|
|
26,871
|
|
|
|
4.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net charge-offs
|
|
$
|
19,190
|
|
|
|
1.39
|
|
|
$
|
22,186
|
|
|
|
1.62
|
|
|
$
|
28,116
|
|
|
|
2.05
|
|
|
$
|
32,635
|
|
|
|
2.30
|
|
|
$
|
33,419
|
|
|
|
2.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Represents an annualized rate.
|
The decreases
in net charge-offs compared to December 31, 2011 and September 30, 2011 reflect the continued stability and steady improvement in portfolio and economic trends.
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 probable, 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 to the extent principal exceeds the current appraised value less estimated costs to sell before the loan
becomes 120 days past due.
A summary of loan loss experience is provided below.
Analysis of Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Allowance for loan losses - beginning of period
|
|
$
|
136,120
|
|
|
$
|
206,292
|
|
|
$
|
172,726
|
|
|
$
|
296,031
|
|
Provision for loan losses
|
|
|
5,195
|
|
|
|
17,481
|
|
|
|
18,891
|
|
|
|
123,801
|
|
Charge-offs
|
|
|
23,543
|
|
|
|
36,183
|
|
|
|
84,509
|
|
|
|
239,097
|
|
Recoveries
|
|
|
4,353
|
|
|
|
2,764
|
|
|
|
15,017
|
|
|
|
9,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
19,190
|
|
|
|
33,419
|
|
|
|
69,492
|
|
|
|
229,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses - end of period
|
|
$
|
122,125
|
|
|
$
|
190,354
|
|
|
$
|
122,125
|
|
|
$
|
190,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio loans outstanding at period end
(1)
|
|
$
|
5,430,904
|
|
|
$
|
5,672,327
|
|
|
$
|
5,430,904
|
|
|
$
|
5,672,327
|
|
Average portfolio loans outstanding during period
(1)
|
|
|
5,501,400
|
|
|
|
5,663,058
|
|
|
|
5,509,191
|
|
|
|
5,792,983
|
|
Allowance for loan losses as a percentage of portfolio loans
|
|
|
2.25
|
%
|
|
|
3.36
|
%
|
|
|
2.25
|
%
|
|
|
3.36
|
%
|
Ratio of net charge-offs during period to average portfolio loans (annualized)
|
|
|
1.39
|
|
|
|
2.34
|
|
|
|
1.68
|
|
|
|
5.30
|
|
(1)
|
Balances exclude
loans held for sale.
|
The allowance for loan losses represents managements estimate of an amount appropriate to
provide for probable credit losses incurred in the loan portfolio as of the balance sheet date. To assess the appropriateness of the allowance for loan losses, an allocation methodology is applied that focuses on changes in the size and character of
the loan portfolio, changes in the levels of impaired or other nonperforming loans, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions, underlying collateral, historical
losses on each portfolio category and other qualitative and quantitative factors which could affect probable loan losses. The evaluation process is inherently subjective, as it requires estimates that may be susceptible to significant change and
have the potential to affect net income materially. The methodology used for measuring the appropriateness of the allowance for loan losses relies on several key elements, which include specific allowances for identified impaired loans, a
formula-based risk allocated allowance for the remainder of the portfolio and a general valuation estimate. Management also considers overall portfolio indicators, including trends in historical charge-offs, a review of industry, geographic and
portfolio performance, and other qualitative factors.
59
The following table summarizes the allocation of the allowance for loan losses for specific allocated, risk
allocated, and general valuation allowances by loan type and the proportion of total nonperforming portfolio loans represented by each loan type.
Allocation of the Allowance for Loan Losses
(
1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
September 30, 2011
|
|
|
|
|
|
|
Related
|
|
|
|
|
|
Related
|
|
|
|
|
|
Related
|
|
(in thousands)
|
|
ALLL
|
|
|
NPL
(2)
|
|
|
ALLL
|
|
|
NPL
(2)
|
|
|
ALLL
|
|
|
NPL
(2)
|
|
Specific allocated allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
195
|
|
|
$
|
2,547
|
|
|
$
|
42
|
|
|
$
|
8,908
|
|
|
$
|
99
|
|
|
$
|
11,653
|
|
Commercial real estate
|
|
|
402
|
|
|
|
20,113
|
|
|
|
4,110
|
|
|
|
34,071
|
|
|
|
6,148
|
|
|
|
41,799
|
|
Residential mortgage
|
|
|
3,724
|
|
|
|
3,762
|
|
|
|
2,837
|
|
|
|
6,610
|
|
|
|
2,540
|
|
|
|
12,595
|
|
Direct consumer
|
|
|
428
|
|
|
|
1,183
|
|
|
|
70
|
|
|
|
1,147
|
|
|
|
184
|
|
|
|
2,367
|
|
Indirect consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
478
|
|
|
|
|
|
|
|
474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specific allocated allowance
|
|
|
4,749
|
|
|
|
27,605
|
|
|
|
7,059
|
|
|
|
51,214
|
|
|
|
8,971
|
|
|
|
68,888
|
|
|
|
|
|
|
|
|
Risk allocated allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
18,914
|
|
|
|
6,700
|
|
|
|
25,032
|
|
|
|
8,804
|
|
|
|
23,944
|
|
|
|
8,227
|
|
Commercial real estate
|
|
|
37,843
|
|
|
|
6,266
|
|
|
|
58,589
|
|
|
|
11,261
|
|
|
|
67,091
|
|
|
|
9,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
56,757
|
|
|
|
12,966
|
|
|
|
83,621
|
|
|
|
20,065
|
|
|
|
91,035
|
|
|
|
17,631
|
|
Residential mortgage
|
|
|
23,005
|
|
|
|
11,509
|
|
|
|
33,623
|
|
|
|
4,702
|
|
|
|
34,877
|
|
|
|
480
|
|
Direct consumer
|
|
|
26,325
|
|
|
|
9,372
|
|
|
|
32,950
|
|
|
|
10,972
|
|
|
|
37,682
|
|
|
|
12,360
|
|
Indirect consumer
|
|
|
9,289
|
|
|
|
2,391
|
|
|
|
12,973
|
|
|
|
475
|
|
|
|
13,789
|
|
|
|
782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk allocated allowance
|
|
|
115,376
|
|
|
|
36,238
|
|
|
|
163,167
|
|
|
|
36,214
|
|
|
|
177,383
|
|
|
|
31,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
120,125
|
|
|
|
63,843
|
|
|
|
170,226
|
|
|
|
87,428
|
|
|
|
186,354
|
|
|
|
100,141
|
|
General valuation allowances
|
|
|
2,000
|
|
|
|
|
|
|
|
2,500
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
122,125
|
|
|
$
|
63,843
|
|
|
$
|
172,726
|
|
|
$
|
87,428
|
|
|
$
|
190,354
|
|
|
$
|
100,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL as a percentage of NPL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific allocated allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
7.68
|
%
|
|
|
|
|
|
|
0.48
|
%
|
|
|
|
|
|
|
0.85
|
%
|
|
|
|
|
Commercial real estate
|
|
|
2.00
|
|
|
|
|
|
|
|
12.06
|
|
|
|
|
|
|
|
14.71
|
|
|
|
|
|
Residential mortgage
|
|
|
99.00
|
|
|
|
|
|
|
|
42.93
|
|
|
|
|
|
|
|
20.17
|
|
|
|
|
|
Direct consumer
|
|
|
36.12
|
|
|
|
|
|
|
|
6.08
|
|
|
|
|
|
|
|
7.78
|
|
|
|
|
|
Total specific allocated allowance
|
|
|
17.20
|
|
|
|
|
|
|
|
13.78
|
|
|
|
|
|
|
|
13.02
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk allocated allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
282.30
|
|
|
|
|
|
|
|
284.31
|
|
|
|
|
|
|
|
291.04
|
|
|
|
|
|
Commercial real estate
|
|
|
603.99
|
|
|
|
|
|
|
|
520.33
|
|
|
|
|
|
|
|
713.46
|
|
|
|
|
|
Total commercial
|
|
|
437.75
|
|
|
|
|
|
|
|
416.76
|
|
|
|
|
|
|
|
516.34
|
|
|
|
|
|
Residential mortgage
|
|
|
199.89
|
|
|
|
|
|
|
|
N/M
|
|
|
|
|
|
|
|
N/M
|
|
|
|
|
|
Direct consumer
|
|
|
280.90
|
|
|
|
|
|
|
|
300.31
|
|
|
|
|
|
|
|
304.86
|
|
|
|
|
|
Indirect consumer
|
|
|
388.44
|
|
|
|
|
|
|
|
N/M
|
|
|
|
|
|
|
|
N/M
|
|
|
|
|
|
Total risk allocated allowance
|
|
|
318.39
|
|
|
|
|
|
|
|
450.55
|
|
|
|
|
|
|
|
567.58
|
|
|
|
|
|
Total
|
|
|
191.29
|
|
|
|
|
|
|
|
197.56
|
|
|
|
|
|
|
|
190.09
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL as a percentage of portfolio loans
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk allocated allowance:
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1.12
|
|
|
|
|
|
|
|
1.63
|
|
|
|
|
|
|
|
1.58
|
|
|
|
|
|
Commercial real estate
|
|
|
2.88
|
|
|
|
|
|
|
|
3.88
|
|
|
|
|
|
|
|
4.19
|
|
|
|
|
|
Total commercial
|
|
|
1.89
|
|
|
|
|
|
|
|
2.75
|
|
|
|
|
|
|
|
2.92
|
|
|
|
|
|
Residential mortgage
|
|
|
4.06
|
|
|
|
|
|
|
|
5.33
|
|
|
|
|
|
|
|
5.43
|
|
|
|
|
|
Direct consumer
|
|
|
3.04
|
|
|
|
|
|
|
|
3.53
|
|
|
|
|
|
|
|
3.96
|
|
|
|
|
|
Indirect consumer
|
|
|
0.96
|
|
|
|
|
|
|
|
1.49
|
|
|
|
|
|
|
|
1.55
|
|
|
|
|
|
Total risk allocated allowance
|
|
|
2.14
|
|
|
|
|
|
|
|
2.98
|
|
|
|
|
|
|
|
3.17
|
|
|
|
|
|
Total allowance
|
|
|
2.25
|
|
|
|
|
|
|
|
3.12
|
|
|
|
|
|
|
|
3.36
|
|
|
|
|
|
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 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.
|
60
Total Allowance for Loan Losses.
The decreases in the total allowance and the allowance as a
percentage of nonperforming loans from December 31, 2011 and September 30, 2011 were primarily the result of an overall decrease in loan balances, an improvement in risk mix of the commercial portfolio, and the stability in both portfolio
and 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 September 30, 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 quarterly change in the allowance for loan losses and the quarterly net charge-offs. The provision for loan losses was $5.2 million in the third quarter of 2012, compared with $17.5 million
in the third quarter of 2011. The decrease in the provision was primarily due to the previously mentioned improvements in credit quality and decline in loan balances, which resulted in a decline in the required 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 TDR loans. The allowance allocated to nonperforming commercial loans is typically based on the underlying collaterals appraised value, updated at least annually, less managements
estimates of cost to sell. Appraisals are obtained more frequently if changes in the property or market conditions warrant. Deterioration in individual asset values, underlying commercial loans, evidenced by refreshed appraisals, 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 nonperforming 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 from
December 31, 2011 and September 30, 2011, primarily as a result of the improved mix of evaluated balances where the estimated fair value of the collateral provides sufficient coverage for the remaining outstanding balance. As a percentage
of nonperforming loans, the specific allocated allowance increased from December 31, 2011 and September 30, 2011 as a result of an increase in the allowance related to accruing TDRs and a overall reduction in related nonperforming loans.
Risk Allocated Allowance.
The risk allocated allowance is comprised of several loan pool valuation allowances based on
Citizens quantitative loan loss experience for similar loans with similar risk characteristics, including additional qualitative risks such as changes in asset quality; the experience, ability and effectiveness of Citizens lending
management; the composition and concentrations of credit, changes in loss severity based on loan type, as well as other factors based upon the best judgment of management. The decrease from December 31, 2011 and September 30, 2011 reflects
the continuing stability in both portfolio and economic trends. The majority of the decline from September 30, 2011 relates to the improvement in credit quality of the remaining portfolio at September 30, 2012, as evidenced by the 44.9%
decline in commercial loans past due 30-89 days and the 49.0% decline in nonaccruing loans.
General Valuation Allowance.
The general valuation allowance is used to calibrate for the current economic cycle Citizens is experiencing along with the impact of potential strategies or initiatives that may exhibit results that differ from historical trend
experience. Recognizing the inherent imprecision of any loan loss allocation model, the incorporation of these impacts is intended to account for other incurred but not yet recognized losses that are not fully addressed in our other allowance
categories.
Loans Held for Sale
Loans held for sale at September 30, 2012 were $30.1 million, an increase of $19.7 million from December 31, 2011 and essentially unchanged from September 30, 2011. The increase from
December 31, 2011 was primarily related to the inflow of two commercial relationships into held for sale.
Deposits
Total deposits at September 30, 2012 were $7.3 billion, a decrease of $92.0 million or 1.2% from December 31, 2011 and a decrease of $236.9
million or 3.1% from September 30, 2011. Core deposits, which exclude all time deposits, totaled $5.5 billion at September 30, 2012, an increase of $328.5 million or 6.3% from December 31, 2011 and an
61
increase of $302.9 million or 5.8% over September 30, 2011. The increases in core deposits were the result of a continued focus on core deposit gathering. Time deposits totaled $1.8 billion
at September 30, 2012, a decrease of $420.4 million or 19.1% from December 31, 2011 and a decrease of $539.8 million or 23.3% from September 30, 2011. The decreases were primarily the result of strategic reductions in single service
high cost retail time deposits and brokered time deposits.
Citizens primarily gathers deposits from the local markets it serves but has
utilized brokered deposits from time to time when cost effective. Excluding brokered deposits, Citizens had $516.5 million in time deposits of $100,000 or more at September 30, 2012, compared with $614.6 million at December 31, 2011 and
$652.2 million at September 30, 2011. Time deposits greater than $100,000 decreased primarily as a result of the strategic focus on growing relationship balances, which resulted in a reduction in single service high cost retail time deposits.
At September 30, 2012, Citizens had $129.8 million in brokered deposits, compared with $248.7 million at December 31, 2011 and $261.5 million at September 30, 2011. Brokered deposit balances decreased as excess liquidity was used to
pay off maturing balances. Citizens continues to promote relationship-driven core deposit growth and stability through focused marketing efforts and competitive pricing strategies.
Borrowed Funds
Short-term borrowings are comprised of federal funds purchased, securities
sold under agreements to repurchase, and other short-term borrowings consisting primarily of treasury, tax and loan (TT&L) borrowings. Short-term borrowed funds at September 30, 2012 totaled $42.8 million, an increase of $2.7
million or 6.7% from December 31, 2011 and an increase of $1.6 million or 3.8% from September 30, 2011. The increases reflect higher short-term repurchase agreement balances.
Long-term debt consists of advances from the Federal Home Loan Bank (FHLB) to the Bank, debt issued by the Holding Company, and other borrowed funds. Long-term debt at September 30, 2012
remained essentially unchanged from December 31, 2011 and September 30, 2011 at $852.5 million.
Capital Resources
Shareholders equity at September 30, 2012 totaled $1.4 billion, an increase of $338.7 million or 33.2% from December 31,
2011 and an increase of $349.1 million or 34.6% from September 30, 2011, in each case primarily as a result of the elimination of the valuation allowance on the deferred tax asset. Book value per common share at September 30,
2012, December 31, 2011, and September 30, 2011 was $26.36, $18.24, and $18.03, respectively.
Citizens continues to maintain a
strong capital position, and its regulatory capital ratios are above well-capitalized standards. Citizens capital ratios are presented below.
Capital Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory
Minimum for
Well-
Capitalized
|
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
|
September 30,
2011
|
|
Leverage ratio
|
|
|
5.00
|
%
|
|
|
9.66
|
%
|
|
|
8.45
|
%
|
|
|
8.21
|
%
|
Tier 1 capital ratio
|
|
|
6.00
|
|
|
|
15.09
|
|
|
|
13.51
|
|
|
|
12.81
|
|
Total capital ratio
|
|
|
10.00
|
|
|
|
16.35
|
|
|
|
14.84
|
|
|
|
14.14
|
|
Tier 1 common equity (non-GAAP)
|
|
|
|
|
|
|
8.83
|
|
|
|
7.24
|
|
|
|
6.77
|
|
Tangible equity to tangible assets (non-GAAP)
|
|
|
|
|
|
|
11.00
|
|
|
|
7.59
|
|
|
|
7.36
|
|
Tangible common equity to tangible assets (non-GAAP)
|
|
|
|
|
|
|
7.91
|
|
|
|
4.47
|
|
|
|
4.31
|
|
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual obligations and off-balance sheet arrangements are described in Item 7 - Managements Discussion and Analysis of Financial
Condition and Results of Operations contained in our 2011 Annual Report on Form 10-K. There have been no material changes to those obligations or arrangements outside the ordinary course of business since the most recent fiscal year end.
Liquidity and Liquidity Risk Management
Citizens monitors and manages its liquidity position so that funds will be available at a reasonable cost to meet financial commitments, to finance business expansion and to take advantage of unforeseen
opportunities. Liquidity management involves projecting funding requirements and maintaining sufficient capacity to meet those needs and accommodate fluctuations in asset and liability levels due to changes in business operations or unanticipated
events. Sources of liquidity include deposits and other customer-based funding, and wholesale market funding.
62
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.
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)
9/13/2012
|
|
B+(WP)
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 the retained net income of the preceding two years (which was negative
63
during 2010 and 2011). Distributions in excess of this limit require prior regulatory approval. Since 2009, neither the Holding Company nor the Bank has paid any dividends. 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 $57.0 million as of September 30,
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 on- and 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, Series A Preferred Stock, issued to and owned by the U.S. Department of the Treasury as part of the
Treasurys Capital Purchase Program, in each case, as permitted by the underlying documentation. Deferral of these payments, which is permitted pursuant to the underlying documentation, preserves a total of $19.5 million of cash annually,
although such amounts continue to accrue. Citizens evaluates the deferral of these payments periodically and, in consultation with and subject to prior approval by its regulators, will reinstate these payments when appropriate. As of
September 30, 2012, the amount of the arrearage (including interest on missed dividends) on the dividend payments of the Series A Preferred Stock is $44.2 million and the amount accrued (including interest on missed interest payments) on the
subordinated debentures associated with the trust preferred securities is $13.8 million. The Holding Company is unable to pay common stock dividends or engage in common stock repurchases until the Series A Preferred Stock dividend payments and
payments deferred under our trust preferred securities are no longer in arrears.
On April 19, 2012, Citizens announced that, effective
April 17, 2012, the Federal Reserve Bank of Chicago and the Michigan Office of Financial and Insurance Regulation have terminated their written agreement with Citizens and its subsidiary, Citizens Bank, dated July 28, 2010.
Citizens long-term debt to equity ratio improved to 62.8% as of September 30, 2012 compared with 83.8% as of December 31, 2011, and 84.8%
as of September 30, 2011. Changes in deposit obligations and short-term and long-term debt during the second 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
64
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 $1.1 billion or 10.9% of total assets as of September 30, 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 September 30, 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.
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
September 30, 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 0.9% and 2.1%, respectively, from what it would be if rates were to remain at September 30, 2012
levels. Net interest income simulation for 100 and 200 basis point parallel declines in market rates were not performed at September 30, 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 as 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
65
at September 30, 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 13 to the unaudited Consolidated Financial Statements.