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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________________to___________________
Commission File Number 0-32041
CITIZENS FIRST BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-3573582
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
525 Water Street, Port Huron, Michigan 48060
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(810) 987-8300
- --------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The Issuer had 8,564,035 shares of common stock, par value $0.01 per share,
outstanding as of November 11, 2002.
CITIZENS FIRST BANCORP, INC.
FORM 10-Q
INDEX
PAGE
----
PART I FINANCIAL INFORMATION..........................................
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of
September 30, 2002 and March 31, 2002.......................... 1
Consolidated Statements of Income for the Three and Six
Months Ended September 30, 2002 and 2001....................... 2
Consolidated Statements of Cash Flows for the
Six Months Ended September 30, 2002 and 2001................... 3
Notes to Consolidated Financial Statements..................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 11
Item 4. Controls and Procedures........................................ 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 11
Item 2. Changes in Securities and Use of Proceeds...................... 11
Item 3. Defaults Upon Senior Securities................................ 11
Item 4. Submission of Matters to a Vote of Security Holders............ 11
Item 5. Other Information.............................................. 12
Item 6. Exhibits and Reports on Form 8-K............................... 16
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CITIZENS FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
UNAUDITED
AT SEPTEMBER 30, AT MARCH 31,
2002 2002
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents:
Cash and due from depository institutions $ 10,321 $ 6,971
Interest-bearing deposits in other depository institutions 26,852 50,955
--------- ---------
Total cash and cash equivalents 37,173 57,926
Securities available for sale 103,995 118,547
Loans held for sale 1,514 126
Loans - Net 805,833 735,564
Federal Home Loan Bank stock 9,179 7,505
Accrued interest receivable and other assets 15,069 16,688
Premises and equipment - Net 10,929 10,000
--------- ---------
Total assets $ 983,692 $ 946,356
========= =========
LIABILITIES
Deposits:
Noninterest-bearing $ 19,332 $ 30,357
Interest-bearing 630,031 603,657
--------- ---------
Total deposits 649,363 634,014
--------- ---------
Federal Home Loan Bank advances 178,568 151,415
Accrued interest and other liabilities 9,756 9,487
--------- ---------
Total liabilities 837,687 794,916
STOCKHOLDERS' EQUITY
Preferred stock - $.01 par value; Authorized - 1,000,000 shares;
No shares issued and outstanding -- --
Common stock - $.01 par value; Authorized - 20,000,000 shares;
Issued - 9,526,761 shares at September 30, 2002 and
March 31, 2002 95 95
Additional paid-in capital 92,210 92,210
Unearned compensation - ESOP (9,780) (9,780)
Retained earnings 80,221 75,784
Accumulated other comprehensive income 586 593
Common stock in treasury at cost (September 30, 2002 - 952,726;
March 31, 2002 - 476,388 shares) (17,327) (7,462)
--------- ---------
Total stockholders' equity 146,005 151,440
--------- ---------
Total liabilities and stockholders' equity $ 983,692 $ 946,356
========= =========
See accompanying notes to unaudited consolidated financial statements.
1
CITIZENS FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED UNAUDITED
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
INTEREST INCOME:
Loans $ 14,500 $ 14,414 $ 28,150 $ 29,066
Federal funds sold and other cash equivalents 57 523 167 946
Securities:
Tax-exempt 123 123 245 245
Taxable 1,248 2,043 2,696 3,871
-------- -------- -------- --------
Total interest income 15,928 17,103 31,258 34,128
INTEREST EXPENSE
Deposits 4,425 6,302 8,881 12,641
FHLB advances 2,282 2,264 4,540 4,324
-------- -------- -------- --------
Total interest expense 6,707 8,566 13,421 16,965
-------- -------- -------- --------
NET INTEREST INCOME - Before provision for loan losses 9,221 8,537 17,837 17,163
PROVISION FOR LOAN LOSSES 289 249 563 498
-------- -------- -------- --------
NET INTEREST INCOME 8,932 8,288 17,274 16,665
NON-INTEREST INCOME:
Service charges and other fees 1,169 603 2,126 1,066
Loan servicing fees 139 156 283 325
Mortgage banking activities 266 (276) 185 (169)
Gain on sale of securities -- 11 108 11
Other (34) 109 441 225
-------- -------- -------- --------
Total noninterest income 1,540 603 3,143 1,458
NON-INTEREST EXPENSE:
Compensation, payroll taxes and employee benefits 2,813 2,178 5,732 4,556
Office occupancy and equipment 769 1,041 1,642 1,870
Advertising and business promotion 218 170 381 338
Stationery, printing and supplies 400 460 753 751
Data processing 113 98 231 209
Deposit statement preparation and collections 187 187 366 351
Professional Fees 353 84 615 181
Appraisal Fees 303 170 378 417
Other 689 1,001 1,317 1,804
-------- -------- -------- --------
Total noninterest expense 5,845 5,389 11,415 10,477
-------- -------- -------- --------
INCOME - Before federal income tax expense 4,627 3,502 9,002 7,646
FEDERAL INCOME TAX EXPENSE 1,610 1,155 3,154 2,577
-------- -------- -------- --------
NET INCOME $ 3,017 $ 2,347 $ 5,848 $ 5,069
======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
2
CITIZENS FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
September 30,
---------------------------
2002 2001
-------- --------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,848 $ 5,069
Adjustments to reconcile net income to net cash operating activities:
Provision for loan losses 563 498
Depreciation 506 610
Amortization (Accretion) 219 (224)
Proceeds from sale of mortgage loans held for sale 83,320 86,364
Origination of mortgage loans held for sale (84,132) (84,552)
Gain on sale of mortgage loans (576) (587)
Gain on sale of investment securities (108) (11)
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable and other assets 1,623 (829)
Increase in accrued interest payable and other liabilities 269 692
-------- --------
Net cash provided by operating activities 7,532 7,030
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale 14,530 38,931
Proceeds from sale of securities available-for-sale 6,900 8,058
Purchase of FHLB stock (1,674) (976)
Purchase of available-for-sale securities (7,000) (98,350)
Net increase in loans (70,832) (31,787)
Purchases of premises and equipment (1,435) (464)
-------- --------
Net cash used in investing activities (59,511) (84,588)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 15,349 48,529
Dividends declared (1,411) (762)
Purchase of treasury stock (9,865) --
Repayment of FHLB advances (3,240) (23,323)
Proceeds from FHLB advances 30,393 35,900
-------- --------
Net cash provided by financing activities 31,226 60,344
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (20,753) (17,214)
CASH AND CASH EQUIVALENTS - Beginning of year 57,926 53,618
-------- --------
CASH AND CASH EQUIVALENTS - End of year $ 37,173 $ 36,404
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Cash paid for:
Interest $ 14,384 $ 18,560
Federal income taxes 1,300 2,870
See accompanying notes to unaudited consolidated financial statements.
3
CITIZENS FIRST BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STOCK OFFERING AND BUSINESS
Citizens First Bancorp, Inc. (the "Company") was organized as a Delaware
corporation at the direction of Citizens First Savings Bank (the "Bank" or
"Citizens First") in October 2000 to become the holding company for the Bank
upon the completion of its conversion from the mutual to stock form of
ownership. The conversion was completed on March 7, 2001. In connection with the
conversion, the Company sold 8,821,075 shares of its common stock, par value
$0.01 per share, at a purchase price of $10 per share to depositors of the Bank
in a subscription offering raising approximately $85.1 million in net conversion
proceeds. Additionally, on March 7, 2001, the Company issued 705,686 shares to
Citizens First Foundation, a charitable foundation established by the Company.
The Bank, a state-chartered savings bank headquartered in Port Huron,
Michigan, operates predominately in the mid-eastern portion of Michigan's lower
peninsula. The Bank's primary services include accepting deposits, making loans
and engaging in mortgage banking activities. The Bank's loan portfolio is
concentrated in residential first-mortgage loans, commercial and commercial real
estate loans, property improvement and automobile loans. The Bank is not
dependent upon any single industry or customer.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated interim financial statements have
been prepared in conformity with accounting principles generally accepted in the
United States of America and with instructions to Form 10-Q. Accordingly,
certain information and disclosures required by accounting principles generally
accepted in the United States of America for complete financial statements are
not included herein. The interim statements should be read in conjunction with
the financial statements of the Company and the notes thereto included in the
Company's annual report on Form 10-K for the year ended March 31, 2002.
The consolidated financial statements include the accounts of the Company,
the Bank and the Bank's subsidiaries, Citizens Financial Services, Inc. and
Citizens First Mortgage LLC. Citizens Financial Services, Inc. includes the
accounts of its wholly owned subsidiary, CFS Insurance Agency. Citizens
Financial Services, Inc. receives revenue from its subsidiary, which provides
insurance services to individuals and small businesses in the Port Huron area.
Citizens First Mortgage LLC receives revenue from interest income on loans. All
significant intercompany transactions and balances have been eliminated in the
consolidation. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates and assumptions.
All adjustments, consisting only of normal recurring adjustments, which in
the opinion of management are necessary for a fair presentation of financial
position, results of operation and cash flows, have been made. The results of
operations for the three and six months ended September 30, 2002 are not
necessarily indicative of the results that may be expected for another quarterly
period or for a full year.
(2) EARNINGS PER SHARE
Basic earnings per share represents income available to the Company's common
stockholders divided by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential shares had been issued.
Potential common shares that may be issued by the Company relate solely to
outstanding stock options, and are determined using the treasury stock method.
At September 30, 2002, the Company had 23,100 outstanding dilutive stock
options. Allocated and committed to be released ESOP shares are considered
outstanding for earnings per share calculation based on debt service payments.
Other ESOP shares are excluded from earnings per share calculation.
4
The weighted-average shares and earnings per share for the three and six
months ended September 30, 2002 are detailed in the table below.
For the For the
Three Months Ended Six Months Ended
At September 30, At September 30,
2002 2002
------------------ ----------------
Average common shares outstanding 8,582,416 8,763,653
Less: Unallocated ESOP shares 711,331 711,331
---------- ----------
Shares used in the earnings per share calculation 7,871,085 8,052,322
Dilutive impact of stock options 299 299
---------- ----------
Dilutive common shares outstanding 7,871,384 8,052,621
========== ==========
Net income $ 3,017 $ 5,848
========== ==========
Basic Earnings Per Share $ 0.38 $ 0.73
========== ==========
Diluted Earnings Per Share $ 0.38 $ 0.73
========== ==========
(3) STOCK-BASED INCENTIVE PLAN
On October 8, 2001, the Company's stockholders approved a stock-based
incentive plan with provisions to grant up to 476,338 stock awards and
1,429,014 stock options. During May 2002, the Company granted 23,100
options with an exercise price of $19.85 per share. The options become
fully vested at the grant date and are exercisable over a ten-year period.
On September 30, 2002, the Company had 23,100 options outstanding.
(4) RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS. Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, (SFAS 142),
issued in June 2001, changed the accounting for goodwill and other intangible
assets. Generally, intangible assets that meet certain criteria will be
recognized and subsequently amortized over their estimated useful lives.
Goodwill and intangible assets with indefinite lives will not be amortized.
However, such assets will be tested for impairment at adoption of SFAS 142 and
at least annually thereafter. The adoption of this Statement did not have an
impact on the consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following analysis discusses changes in the financial condition and
results of operations of the Company at and for the three and six months ended
September 30, 2002 and 2001 and should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto, appearing in Part I,
Item 1 of this document.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are based on
assumptions and may describe future plans, strategies, and expectations of the
Company and the Bank. These forward-looking statements are generally identified
by use of the words "believe," "expect," "intend," "anticipate," "estimate,"
"project," "should," "planned" or similar expressions. Such forward-looking
statements are based on current expectations, but may differ materially from
those currently anticipated. The Company's ability to predict results or the
actual effect of future plans or strategies is inherently uncertain. Factors
which could have a material adverse effect on the Company and its subsidiaries,
their operations and their results, include, but are not limited to, changes in
interest rates, general economic conditions, legislative and regulatory changes
(including changes in securities laws and regulations), monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality and composition of loan and investment
portfolios, demand for loan products, deposit flows, competition, demand for
financial services in the Bank's market area, changes in relevant accounting
principles and guidelines and other factors over which management has no
control. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Except as required by applicable law and regulation, the Company and
the Bank do not undertake, and specifically disclaim any obligation, to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of the statements
or to reflect the occurrence of anticipated or unanticipated events.
5
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2002 AND MARCH 31, 2002
Total assets increased $37.3 million, or 3.9%, to $983.7 million at
September 30, 2002 from $946.4 million at March 31, 2002, primarily due to a
$70.3 million, or 9.6%, increase in net loans, a $1.7 million, or 22.3%,
increase in Federal Home Loan Bank Stock, a $1.4 million, or 1,101.6%, increase
in loans held for sale, a $1.0 million, or 9.3%, increase in Premises and
Equipment and a $3.4 million, or 48.1%, increase in cash and due from depository
institutions. The increase in net loans was due primarily to a $18.3 million, or
43.4% increase in commercial loans, a $30.3 million, or 20.9%, increase in
commercial real estate loans, a $16.3 million, or 4.2%, increase in one- to
four-family residential loans, a $3.7 million, or 5.2%, increase in home equity
and line of credit loans, a $4.4 million, or 29.1%, increase in other consumer
loans and a $1.2 million, or 2.0%, increase in automobile loans. This growth was
offset by a $3.3 million, or 12.2%, decrease in one- to four-family construction
loans. Citizens First's net loans to assets ratio at September 30, 2002 was
81.9% compared to 77.7% at March 31, 2002. These increases were offset by a
$24.1 million, or 47.3%, decrease in interest-bearing deposits in other
depository institutions and by a $14.6 million, or 12.3% decrease in securities
available-for-sale, which resulted in an aggregate decrease in cash and cash
equivalents of $20.8 million, or 35.8%. This decrease in cash was used to fund
loan growth. In addition, there was a $1.6 million, or 9.7%, decrease in accrued
interest receivable and other assets due in part to lower market interest rates
on loans and securities.
Nonperforming assets totaled $3.6 million at September 30, 2002 compared to
$2.7 million at March 31, 2002, an increase of $885,000, or 32.2%. This increase
was primarily due to a $595,000 increase in non-accruing real estate loans due
to higher vacancy rates for investment property owners and a slowdown in
investment property sales. Since September 30, 2002, nearly $1.0 million of
these nonperforming loans have been brought current. Nonperforming assets also
increased due to a $32,000 increase in non-accruing consumer loans and a
$736,000 increase in non-accruing commercial loans, offset by a $478,000
decrease in real estate owned due to sales of repossessed and foreclosed
properties.
The following table sets forth information regarding non-accrual loans and
real estate owned.
At September 30, At March 31,
2002 2002
---------------- ------------
(Dollars in thousands)
Non-accruing loans:
Real Estate $2,032 $1,437
Consumer 93 61
Commercial 1,031 295
------ ------
Total non-accruing loans (1) 3,156 1,793
Real Estate Owned (2) 475 953
------ ------
Total non-performing assets $3,631 $2,746
====== ======
Total non-performing loans as a percentage of
total loans 0.39% 0.24%
Total non-performing loans as a percentage of
total assets 0.32% 0.19%
---------------------------
(1) Total non-accruing loans equal total non-performing loans.
(2) Real estate owned balances are shown net of related loss allowances and
include repossessed automobiles, which totaled $36,220 and $62,000 at
September 30, 2002 and March 31, 2002, respectively.
The allowance for loan losses was $11.4 million at September 30, 2002, or
1.39% of total loans, as compared to $11.0 million, or 1.47% of total loans, at
March 31, 2002 and $11.1 million, or 1.55%, at September 30, 2001. The following
table sets forth activity in the allowance for loan losses for the periods set
forth in the table.
6
At or For the Six Months
Ended September 30,
2002 2001
---- ----
(Dollars in thousands)
Allowance for loan losses, beginning of period $11,020 $10,831
Charged-off loans 387 330
Recoveries 160 125
------- -------
Net charge-offs (recoveries) 227 205
Provision for loan losses 563 498
------- -------
Allowance for loan losses, end of period $11,356 $11,124
======= =======
Allowance for loan losses to total loans 1.39% 1.55%
Allowance for loans losses to nonperforming loans 359.94% 373.79%
Total liabilities increased $42.8 million, or 5.4%, from $794.9 million at
March 31, 2002 to $837.7 million at September 30, 2002. The increase was
primarily due to a $27.2 million, or 17.9%, increase in FHLB advances from
$151.4 million at March 31, 2002 to $178.6 million and a $26.4 million, or 4.4%,
increase in interest-bearing deposits to $630.1 million at September 30, 2002
from $603.7 million at March 31, 2002. The $26.4 million increase in
interest-bearing deposits consisted of increases in NOW checking accounts (which
increased $10.9 million, or 14.3%, to $87.7 million as a result of increased
advertising and product promotion), increases in money market deposit accounts
(which increased $17.9 million, or 11.3%, to $175.9 million primarily due to new
accounts from municipalities and other public entities and funds transferring
from maturing certificates of deposits), and increases in passbook and savings
accounts (which increased $5.7 million, or 7.1%, to $85.2 million). These
increases were offset by an $8.1 million decrease in certificates of deposit as
a result of maturing CD's transferring to money market deposit accounts as a
result of customer's apparent preference to the liquidity of that type of
account. These increases were used to fund loan growth. Additionally, accrued
interest and other liabilities increased $269,000, or 2.8%. Non-interest bearing
deposits decreased $11.0 million, or 36.3%, to $19.3 million at September 30,
2002 from $30.4 million at March 31, 2002 as depositors moved these funds to
interest bearing accounts.
Total equity was $146.0 million at September 30, 2002 compared to $151.4
million at March 31, 2002, a decrease of $5.4 million, or 3.6%, due to the
payment of dividends, the repurchase of 476,338 shares at a cost of $9.9 million
and a decrease in unrealized gains on available for sale securities offset by
net income.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
AND 2001
NET INCOME. Net income increased $670,000, or 28.5%, to $3.0 million for the
three months ended September 30, 2002 from $2.3 million for the previous period.
The increase was primarily due to an increase of $937,000, or 155.4%, in
noninterest income and a $644,000, or 7.8%, increase in net interest income
after provision for loan losses offset by a $456,000, or 8.5%, increase in
noninterest expense and a $455,000, 39.4%, increase in federal income tax
expense.
NET INTEREST INCOME. Net interest income, after provision for loan loss,
increased $644,000, or 7.8% to $8.9 million for the three months ended September
30, 2002 from $8.3 million at September 30, 2001 primarily due to a $1.9
million, or 21.7%, decrease in interest expense offset by a $1.2 million, or
6.9%, decrease in interest income. The decrease in interest income was due to a
$795,000, or 38.9%, decrease to interest income from taxable securities due to
maturities and a $466,000, or 89.1%, decrease in income from interest bearing
deposits due to lower market interest rates and lower average balances. These
decreases were offset by an $86,000 increase in interest on loans. Total
interest expense decreased $1.9 million, or 21.7%, from $8.6 million for the
three months ended September 30, 2001 to $6.7 million for the three months ended
September 30, 2002. The decrease was primarily due to a $1.9 million, or 29.8%,
decrease in retail deposit interest expense from $6.3 million at September 30,
2001 to $4.4 million for the three months ended September 30, 2002 as a result
of lower market interest rates. This decrease was offset by an $18,000 increase
to interest expense on Federal Home Loan Bank advances due to higher average
balances.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased $40,000,
or 16.1%, from $249,000 for the three months ended September 30, 2001 to
$289,000 for the three months ended September 30, 2002. The additional provision
for loan losses for the three
7
months ended September 30, 2002 reflects management's determination to maintain
the overall loan loss allowance in consideration of its applied methodology, the
assessment of the increase in non-accruing loans and the actual growth in the
loan portfolio. Provisions for loan losses are charges to earnings to bring the
total allowance for loan losses to a level considered by management as adequate
to provide for estimated loan losses based on management's evaluation of the
collectibility of the loan portfolio. Management assesses the adequacy of the
allowance for loan losses based on known and inherent risks in the loan
portfolio and upon management's continuing analysis of the factors underlying
the quality of the loan portfolio. In this regard, management assesses the
estimated losses inherent in its portfolio primarily by applying its estimates
of losses for various types of loan categories, which yields an aggregate
estimate of estimated losses. Such estimate is then considered by management in
relation to other factors such as trends in real estate and collateral values
and trends in the regional and local economies. While management believes that,
based on information currently available, Citizens First's allowance for loan
losses is sufficient to cover losses inherent in its loan portfolio at this
time, no assurances can be given that Citizens First's level of allowance for
loan losses will be sufficient to cover future loan losses incurred by Citizens
First or that future adjustments to the allowance for loan losses will not be
necessary if economic and other conditions or considerations differ
substantially from the economic and other conditions or considerations used by
management to determine the current level of the allowance for loan losses.
Management may increase its level of allowance for losses as a percentage of
total loans and nonperforming loans if the level of commercial real estate,
commercial or consumer lending as a percentage of its total loan portfolio
increases. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review Citizens First's allowance for
loan losses. These agencies may require Citizens First to provide additions to
the allowance based upon judgments different from management. Due to the
increase in non-accruing loans and the increasing origination of commercial real
estate, commercial and consumer loans, which bear a higher degree of risk than
one- to four-family loans, management felt the increased provision was
warranted. Despite the increased provision, the loan loss allowance as a
percentage of total loans decreased from 1.47% at March 31, 2002 to 1.39% at
September 30, 2002. The allowance for loan losses as a percentage of
nonperforming loans decreased from 614.61% at March 31, 2002 to 359.9% at
September 30, 2002.
NONINTEREST INCOME. Non-interest income increased $937,000, or 155.4%. One
primary factor for the increase was a $542,000, or 196.4%, increase in income
from mortgage banking activities due to an increase in the sale of fixed-rate
residential loans to third parties offset by a $248,000 increase in the
valuation allowance for mortgage servicing assets as a result of increased
prepayment assumptions. Another important factor for the increase in noninterest
income was the increase in service charges and other fees, which increased
$566,000, or 93.9%, primarily as a result of the increase in the number of
accounts and increased fees to deposit accountholders. These increases were
offset by a decrease of $143,000 in other noninterest income due primarily to
the market value adjustments of deferred benefit programs, a $17,000, or 10.9%,
decrease in loan servicing fees and an $11,000, or 100%, decrease in gain on
sale of securities.
NONINTEREST EXPENSE. Noninterest expense increased $456,000, or 8.5%, to
$5.8 million for the three months ended September 30, 2002, compared to $5.4
million in the three months ended September 30, 2001. The increase was primarily
due to a $635,000, or 29.2%, increase in compensation and employee benefits due
to increases to wages, additions to staff, increased direct costs of benefits
and fair market value adjustments to employee benefit programs, and a $269,000
increase in professional fees due to the increased costs associated with being a
public company including regulatory changes, advice sought on issues related to
employee benefit programs and the work being done in the process of converting
from our current data processing vendor to a new system. In addition,
advertising and business promotion expenses increased $48,000, or 28.2%, data
processing expenses increased $15,000, or 15.3% and appraisal fees increased
$133,000, or 78.2%. Office occupancy and equipment decreased $272,000, or 26.1%
primarily due to decreased equipment expenses, stationery, printing and supplies
decreased $60,000, or 13.0%, and other noninterest expenses decreased $312,000,
or 31.2%, primarily as a result of decreased consulting expenses from the three
months ended September 30, 2001.
INCOME TAXES. Income taxes for the three months ended September 30, 2002
were $1.6 million, an increase of $455,000, or 39.4%, from $1.2 million for the
three months ended September 30, 2001. The effective tax rates for the three
months ended September 30, 2002 and the three months ended September 30, 2001
were 34.8% and 33.0%, respectively.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2002 AND
2001
NET INCOME. Net income increased $779,000, or 15.4%, to $5.8 million for the
six months ended September 30, 2002 from $5.1 million for the previous period.
The increase was primarily due to a decrease of $3.5 million, or 20.9%, to
interest expense (primarily interest on deposits which decreased $3.8 million,
or 29.7%) and a $1.7 million, or 115.6%, increase in noninterest income, offset
by a $2.9 million, or 8.4%, decrease in interest income, a $938,000, or 9.0%,
increase in noninterest expense and a $577,000, or 22.4%, increase in federal
tax expense.
8
NET INTEREST INCOME. Net interest income, after provision for loan loss,
increased $609,000, or 3.7%, to $17.3 million for the six months ended September
30, 2002 from $16.7 million at September 30, 2001 primarily due to a $3.5
million, or 20.9%, decrease in interest expense offset by a $2.9 million, or
8.4%, decrease in interest income and a $65,000 increase in the provision for
loan losses. The decrease in interest income was primarily the result of a $1.2
million, or 30.4%, decrease in interest on taxable securities due to maturities
and lower market rates on new securities purchased combined with a $916,000, or
3.2%, decrease in interest on loans due to lower market interest rates on new
loans and a reduction of portfolio rates on adjustable loans and a $779,000, or
82.3%, decrease in income from interest bearing deposits. Total interest expense
decreased $3.5 million, or 20.9%, from $17.0 million for the six months ended
September 30, 2001 to $13.4 million for the six months ended September 30, 2002.
The decrease was primarily due to a $3.8 million, or 29.7%, decrease in retail
deposit interest expense from $12.6 million for the six months ended September
30, 2001 to $8.9 million for the six months ended September 30, 2002 as a result
of lower market interest rates. This decrease was offset by a $216,000, or 5.0%,
increase to interest expense on Federal Home Loan Bank advances due to higher
average balances.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased $65,000,
or 13.1%, from $498,000 for the six months ended September 30, 2001 to $563,000
for the six months ended September 30, 2002. The addition to the allowance
reflects management's determination to maintain the overall loan loss allowance
in consideration of its applied methodology, the assessment of the increase in
non-accruing loans and growth in the loan portfolio, particularly higher risk
commercial and consumer loans. As a result of the increase in non-accruing
loans, management felt the increased provision was warranted and may increase
its level of allowance for losses as a percentage of total loans and
nonperforming loans if the level of commercial real estate, commercial or
consumer lending as a percentage of its total loan portfolio increases.
NONINTEREST INCOME. Non-interest income increased $1.7 million, or 115.6%,
primarily due to a $1.1 million, or 99.4%, increase in service charges and other
fees, primarily as a result of the increase in the number of accounts and
increased fees to deposit accountholders. Also contributing to the increase were
a $97,000 or 881.8% increase in the gain on sale of securities, as well as a
$354,000, or 209.5%, increase in income from mortgage banking activities due to
gains on sales of fixed rate loans to third parties offset by $544,000 increase
in valuation allowances for mortgage servicing assets as a result of increased
pre-payment assumptions. Other noninterest income increased $216,000, or 96.0%,
primarily due to income from trust department fees and income from subsidiaries.
Offsetting these increases was a $42,000, or 12.9%, decrease in loan servicing
fees.
NONINTEREST EXPENSE. Noninterest expense increased $938,000, or 9.0%, to
$11.4 million for the six months ended September 30, 2002, compared to $10.5
million in the six months ended September 30, 2001, primarily due to a $1.2
million, or 25.8%, increase in compensation and employee benefits due to normal
increases to wages and benefits, additional staff and fair market value
adjustments to employee benefit programs, and a $434,000, or 239.8%, increase in
professional fees due to the increased costs associated with being a public
company and additional advice sought for employee benefit programs, data
processing system changes and a review of corporate structure. Advertising
expenses increased $43,000, or 12.7%. These increases were offset by a $228,000,
or 12.2%, decrease in office occupancy and equipment expense primarily due to
decreased equipment expenses from the previous six-month period ended September
30, 2001, a $39,000, or 9.4%, decrease in appraisal fees and a $487,000, or
27.0%, decrease in other non-interest expenses. This decrease came primarily as
a result of a decrease in consulting expenses from the previous six-month period
ended September 30, 2001.
INCOME TAXES. Income taxes for the six months ended September 30, 2002 were
$3.2 million, an increase of $577,000, or 22.4%, from $2.6 million for the six
months ended September 30, 2001. The effective tax rates for the six months
ended September 30, 2002 and the six months ended September 30, 2001 were 35.0%
and 33.7%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability to meet current and future financial obligations.
Citizens First further defines liquidity as the ability to have funds available
to respond to the needs of depositors and borrowers as well as maintaining the
flexibility to take advantage of investment opportunities. Citizens First's
primary sources of funds consist of deposit inflows, loan repayments, maturities
and sales of investment securities and borrowings from the Federal Home Loan
Bank. While maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
Liquidity management is both a daily and long-term responsibility of
management. Citizens First adjusts its investments in liquid assets based upon
management's assessment of (1) expected loan demand, (2) expected deposit flows,
(3) yields available on interest-
9
earning deposits and securities, and (4) the objectives of its asset/liability
management program. Excess liquid assets are invested generally in
interest-earning overnight deposits and short- and intermediate-term U.S.
Government and agency obligations.
The primary investing activities of Citizens First are the origination of
loans and the purchase of securities. In the six months ended September 30,
2002, Citizens First originated $325.3 million of loans. In fiscal 2002,
Citizens First originated $465.9 million of loans and purchased $128.6 million
of securities. In fiscal 2001, Citizens First originated $373.1 million of loans
and purchased $48.5 million of securities. In fiscal 2000, Citizens First
originated $292.5 million of loans and purchased $95.3 of securities.
Citizens First's most liquid assets are cash and short-term investments
(securities maturing in one year or less). The levels of these assets are
dependent on Citizens First's operating, financing, lending and investing
activities during any given period. At September 30, 2002, cash and short-term
investments totaled $37.1 million and securities classified as
available-for-sale totaled $104.0 million. In addition, at September 30, 2002,
Citizens First had the ability to borrow a total of approximately $212.5 million
from the Federal Home Loan Bank of Indianapolis. On that date, Citizens First
had advances outstanding of $178.6 million from the Federal Home Loan Bank.
Citizens First originates fixed-rate loans conforming to Freddie Mac
guidelines generally for sale in the secondary market. The proceeds of such
sales provide funds for both additional lending and liquidity to meet current
obligations. Citizens First sold $191.4 million, $67.3 million and $13.8 million
of fixed-rate mortgage loans in 2002, 2001 and 2000, respectively.
Financing activities consist primarily of activity in deposit accounts and
Federal Home Loan Bank advances. Citizens First experienced a net increase in
total deposits of $15.3 million for the six months ended September 30, 2002, a
net increase of $52.7 million for fiscal 2002, a net decrease of $19.7 million
for fiscal 2001 and a net increase of $74.2 million for fiscal 2000. Deposit
flows are affected by the overall level of interest rates, the interest rates
and products offered by Citizens First and its local competitors and other
factors. Citizens First generally manages the pricing of its deposits to be
competitive and to increase core deposit relationships. Occasionally, Citizens
First offers promotional rates on certain deposit products in order to attract
deposits. In the six months ended September 30, 2002, Federal Home Loan Bank
advances increased $27.2 million. During fiscal 2002 and 2001, Federal Home Loan
Bank advances increased $36.5 million and $44.4 million, respectively.
At September 30, 2002, Citizens First had outstanding commitments to
originate loans of $66.8 million, $36.8 million of which had fixed interest
rates. These loans are to be secured by properties located in its market area.
Citizens First anticipates that it will have sufficient funds available to meet
its current loan commitments. Loan commitments have, in recent periods, been
funded through liquidity or through Federal Home Loan Bank borrowings.
Certificates of deposit that are scheduled to mature in one year or less from
September 30, 2002 totaled $109.7 million. Management believes, based on past
experience, that a significant portion of those deposits will remain with
Citizens First. Based on the foregoing, Citizens First considers its liquidity
and capital resources sufficient to meet its outstanding short-term and
long-term needs.
Citizens First is subject to various regulatory capital requirements
administered by the Federal Deposit Insurance Corporation including a risk-based
capital measure. The risk-based capital guidelines include both a definition of
capital and a framework for calculating risk-weighted assets by assigning
balance sheet assets and off-balance sheet items to broad risk categories. At
September 30, 2002, Citizens First exceeded all of its regulatory capital
requirements. Citizens First is considered "well capitalized" under regulatory
guidelines.
The primary sources of funding for the Company are maturities of investment
securities and, to a lesser extent, earnings on investments and deposits held by
the Company. These funds have been used to pay dividends, repurchase the
Company's common stock and pay general corporate expenses. The Company may
utilize future dividend payments from the Bank as an additional funding source.
The Bank's ability to pay dividends and other capital distributions to the
Company is generally limited by the Michigan Banking Commissioner and Federal
Deposit Insurance Corporation. Additionally, the Michigan Banking Commissioner
and Federal Deposit Insurance Corporation may prohibit the payment of dividends
by the Bank to the Company, which are otherwise permissible by regulation for
safety and soundness reasons.
The capital from the conversion significantly increased liquidity and
capital resources. Over time, the initial level of liquidity will be reduced as
net proceeds from the stock offering are used for general corporate purposes,
including the funding of lending activities. Citizens First's financial
condition and results of operations will be enhanced by the capital from the
conversion, resulting in increased net interest-earning assets and net income.
However, due to the large increase in equity resulting from the capital
injection, return on equity will be adversely impacted until that capital can be
effectively deployed at market rates, a goal that may take a number of years to
achieve.
10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of September 30, 2002, there have been no material changes in the
quantitative and qualitative disclosures about market risks as disclosed in the
Company's Form 10-K for the year ended March 31, 2002.
Item 4. Controls and Procedures
Under the supervision and with the participation of the Company's
management, including the Company's chief executive officer and chief financial
officer, the Company has evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures within 90 days of the filing
date of this quarterly report, and, based on such evaluation, the Company's
chief executive officer and chief financial officer have concluded that these
controls and procedures are effective. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
Disclosure controls and procedures are the Company's controls and other
procedures that are designed to ensure that information required to be disclosed
by the Company in the reports that the Company files or submits under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that the Company files
under the Securities Exchange Act of 1934, as amended, is accumulated and
communicated to the Company's management, including the Company's chief
executive officer and chief financial officer, as appropriate to allow timely
decisions regarding required disclosure.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Periodically, there have been various claims and lawsuits involving the
Company and the Bank, such as claims to enforce liens, condemnation proceedings
on properties in which the Bank holds security interests, claims involving the
making and servicing of real property loans and other issues incident to the
Bank's business. Neither the Company nor the Bank is a party to any pending
legal proceedings that it believes would have a material adverse effect on the
financial condition or operations the Company.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of the stockholders of the Company was held on August 13,
2002. The results of the vote were as follows:
1. The following individuals were elected as directors, for a three-year
term:
VOTES FOR VOTES WITHHELD
--------- --------------
Ronald W. Cooley 7,569,788 197,381
Larry J. Moeller, Sr. 7,482,295 284,874
11
2. The ratification of the appointment of Plante & Moran, LLP as
independent auditors of Citizens First Bancorp, Inc. for the fiscal year
ended December 31, 2002:
FOR AGAINST ABSTAIN
--- ------- -------
7,523,341 171,702 72,126
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K (ss.249.308 of this Chapter).
(a) Exhibits
3.1 Certificate of Incorporation of Citizens First Bancorp,
Inc. (1)
3.2 Bylaws of Citizens First Bancorp, Inc. (1)
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
- ---------------
(1) Incorporated by reference into this document from the Exhibits filed
with the Registration Statement on Form S-1, and any amendments thereto,
Registration No. 333-49234.
(b) Reports on Form 8-K
None.
12
CONFORMED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIZENS FIRST BANCORP, INC.
Dated: November 12, 2002 By: /s/ Marshall J. Campbell
------------------------
Marshall J. Campbell
President and Chief Executive Officer
(principal executive officer)
Dated: November 12, 2002 By: /s/ Timothy D. Regan
--------------------
Timothy D. Regan
Secretary, Treasurer and Director
(principal financial and accounting
officer)
13
CERTIFICATIONS
I, Marshall J. Campbell, certify that:
1 I have reviewed this quarterly report on Form 10-Q of Citizens First
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Marshall J. Campbell
-----------------------------------
Marshall J. Campbell,
Chief Executive Officer
14
CERTIFICATIONS
I, Timothy D. Regan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Citizens First
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Timothy D. Regan
-----------------------------------
Timothy D. Regan,
Chief Financial Officer
15
Exhibit Index
EXHIBIT NO. DESCRIPTION
3.1 Certificate of Incorporation of Citizens First
Bancorp, Inc. (1)
3.2 Bylaws of Citizens First Bancorp, Inc. (1)
99.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- ---------
(1) Incorporated by reference into this document from the Exhibits filed with
the Registration Statement of From S-1, and any amendments thereto,
Registration No. 333-49234.
16