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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 June 30, 2003
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
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
----------------------------------------------------
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [X] No [ ]
The Issuer had 8,484,135 shares of common stock, par value $0.01 per share,
outstanding as of August 10, 2003.
CITIZENS FIRST BANCORP, INC.
FORM 10-Q
INDEX
PAGE
----
PART I FINANCIAL INFORMATION..........................................
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet as of
June 30, 2003 and December 31, 2002............................ 1
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2003 and 2002............................ 2
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2003 and 2002........................ 3
Notes to Consolidated Financial Statements..................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 15
Item 4. Controls and Procedures........................................ 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 15
Item 2. Changes in Securities and Use of Proceeds...................... 16
Item 3. Defaults Upon Senior Securities................................ 16
Item 4. Submission of Matters to a Vote of Security Holders............ 16
Item 5. Other Information.............................................. 16
Item 6. Exhibits and Reports on Form 8-K............................... 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CITIZENS FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
UNAUDITED
AT JUNE 30, AT DECEMBER 31,
2003 2002
----------- ---------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents:
Cash and due from depository institutions $ 38,542 $ 10,893
Interest-bearing deposits in other depository institutions 8,324 29,463
Federal Funds Sold - -
---------- ----------
Total cash and cash equivalents 46,866 40,356
Securities available for sale 134,756 100,382
Loans held for sale 823 1,557
Loans - Net 841,872 819,136
Federal Home Loan Bank stock 9,180 9,180
Accrued interest receivable and other assets 15,301 14,584
Premises and equipment - Net 18,184 14,989
---------- ----------
Total assets $1,066,982 $1,000,184
========== ==========
LIABILITIES
Deposits:
Noninterest-bearing $ 100,153 $ 22,675
Interest-bearing 628,485 649,155
---------- ----------
Total deposits 728,638 671,830
---------- ----------
Federal Home Loan Bank advances 172,804 173,003
Accrued interest and other liabilities 12,112 7,196
---------- ----------
Total liabilities 913,554 852,029
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 June 30, 2003 and
December 31, 2002 95 95
Additional paid-in capital 92,528 92,528
Unearned compensation - ESOP (9,082) (9,082)
Retained earnings 88,268 83,044
Accumulated other comprehensive income 903 322
Common stock in treasury at cost (June 30, 2003 - 1,046,626;
December 31, 2002 - 1,023,126 shares) (19,149) (18,752)
Treasury Stock shares held in rabbi trust at cost (1,819) (1,590)
Deferred compensation obligation 1,684 1,590
---------- ----------
Total stockholders' equity 153,428 148,155
---------- ----------
Total liabilities and stockholders' equity $1,066,982 $1,000,184
========== ==========
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
JUNE 30, JUNE 30, JUNE 30,
---------------------- -------- --------
2003 2002 2003 2002
------- ------- ------- -------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
INTEREST INCOME:
Loans $13,269 $13,650 $26,059 $27,068
Federal funds sold and other cash equivalents 127 110 226 216
Securities:
Tax-exempt 130 122 251 244
Taxable 867 1,448 1,827 3,271
------- ------- ------- -------
Total interest income 14,393 15,330 28,363 30,799
INTEREST EXPENSE
Deposits 3,427 4,456 7,319 9,023
FHLB advances 2,368 2,258 4,677 4,431
------- ------- ------- -------
Total interest expense 5,795 6,714 11,996 13,454
------- ------- ------- -------
NET INTEREST INCOME - Before provision for loan losses 8,598 8,616 16,367 17,345
PROVISION FOR LOAN LOSSES 360 274 720 523
------- ------- ------- -------
NET INTEREST INCOME 8,238 8,342 15,647 16,822
NON-INTEREST INCOME:
Service charges and other fees 1,254 957 2,281 1,949
Loan servicing fees 275 144 463 291
Mortgage banking activities 1,620 (81) 4,503 138
Gain on sale of securities - 108 - 108
Other 313 475 695 577
------- ------- ------- -------
Total noninterest income 3,462 1,603 7,942 3,063
NON-INTEREST EXPENSE:
Compensation, payroll taxes and employee benefits 3,569 2,919 7,021 5,814
Office occupancy and equipment 690 873 1,565 1,735
Advertising and business promotion 339 163 622 326
Stationery, printing and supplies 399 353 733 704
Data processing 25 118 171 238
Deposit statement preparation and collections 163 179 292 375
Professional Fees 487 262 923 545
Appraisal Fees 205 75 480 214
Other 1,030 628 1,897 1,522
------- ------- ------- -------
Total noninterest expense 6,907 5,570 13,704 11,473
------- ------- ------- -------
INCOME - Before federal income tax expense 4,793 4,375 9,885 8,412
FEDERAL INCOME TAX EXPENSE 1,517 1,544 3,408 2,906
------- ------- ------- -------
NET INCOME $ 3,276 $ 2,831 $ 6,477 $ 5,506
======= ======= ======= =======
Basic EPS $ 0.42 $ 0.34 $ 0.82 $ 0.66
Diluted EPS $ 0.42 $ 0.34 $ 0.82 $ 0.66
See accompanying notes to unaudited consolidated financial statements.
2
CITIZENS FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
SIX MONTHS ENDED
JUNE 30,
------------------------
2003 2002
--------- --------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,477 $ 5,506
Adjustments to reconcile net income to net cash operating activities:
Provision for deferred taxes - 420
Provision for loan losses 360 523
Depreciation 527 593
Amortization (Accretion) 72 (259)
Proceeds from sale of mortgage loans held for sale 203,095 73,518
Origination of mortgage loans held for sale (198,942) (71,828)
Gain on sale of mortgage loans (3,419) (663)
Loss on sale of fixed asset - 22
Gain on sale of investment securities - (108)
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable and other assets (1,152) 1,360
Increase in accrued interest payable and other liabilities 4,916 2,243
--------- --------
Net cash provided by operating activities 11,934 11,327
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale 11,125 21,394
Proceeds from sale of securities available-for-sale - 33,882
Purchase of FHLB stock - (500)
Purchase of available-for-sale securities (44,690) (29,202)
Net increase in loans (23,096) (55,507)
Purchases of premises and equipment (3,722) (1,325)
--------- --------
Net cash used in investing activities (60,383) (31,258)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 56,808 32,841
Dividends declared (1,253) (1,331)
Purchase of treasury stock (397) (6,963)
Repayment of FHLB advances (3,522) (14,478)
Proceeds from FHLB advances 3,323 23,193
--------- --------
Net cash provided by financing activities 54,959 33,262
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,510 13,331
CASH AND CASH EQUIVALENTS - Beginning of year 40,356 32,425
--------- --------
CASH AND CASH EQUIVALENTS - End of year $ 46,866 $ 45,756
--------- --------
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 December 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 six months ended June 30, 2003 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 June 30, 2003, the Company had 170,800 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 six months ended
June 30, 2003 and the three months ended June 30, 2003 and March 31, 2003 are
detailed in the table below.
For the For the For the
Six Months Ended Three Months Ended Three Months Ended
June 30, June 30, March 31,
2003 2003 2003
---------------- ------------------ ------------------
Average common shares outstanding 8,524,906 8,455,539 8,564,743
Less: Unallocated ESOP shares 660,522 660,522 660,522
---------- ---------- ----------
Shares used in the earnings per share calculation 7,864,384 7,795,017 7,904,221
Dilutive impact of stock options 11,620 11,620 93
---------- ---------- ----------
Dilutive common shares outstanding 7,876,004 7,806,637 7,904,314
========== ========== ==========
Net income $ 6,477 $ 3,276 $ 3,201
========== ========== ==========
Basic Earnings Per Share $ 0.82 $ 0.42 $ 0.40
========== ========== ==========
Diluted Earnings Per Share $ 0.82 $ 0.42 $ 0.40
========== ========== ==========
(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. On May 9, 2002, the Company granted 23,100 stock options with an
exercise price of $19.85 per share. The options become fully vested at the grant
date and are exercisable over a 10-year period. On March 11, 2003, the Company
granted 147,700 stock options with an exercise price of $18.88 per share to all
employees of the bank. These options were awarded as part of the bank's
incentive based compensation program that rewards employees for reaching or
exceeding targeted company and individual performance. All employees are
eligible with the exception of the President and CEO who, due to his own
request, does not participate in the option program. The options vest 20% per
year over five years from the grant date and are exercisable over a 10-year
period. On June 30, 2003, the Company had 170,800 options outstanding.
The Company applies APB Opinion 25 and related Interpretations in accounting for
the stock option plan. Accordingly, no compensation cost has been recognized in
determining net income as reported. Had compensation cost for the Company's
stock option plan been determined based on the fair value at the grant dates for
awards under the plan consistent with the method prescribed by FASB Statement
No. 123, the Company's net income and earnings per share would have been
adjusted to the pro forma amounts indicated below (000s omitted, except per
share data):
Six Months Ended
June 30, 2003
----------------
Net Income, as reported 6,477
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (34)
------
Pro forma net income $6,443
======
Earnings per share
Basic - as reported $ 0.82
Basic - pro forma $ 0.82
Diluted - as reported $ 0.82
Diluted - Pro forma $ 0.82
The fair value of each option grant is estimated on the date of grant using
Black-Scholes option-pricing model with the following weighted-average
assumptions:
5
June 30,
2003
--------
Dividend Yield 1.59%
Expected life 8 Years
Volatility 21.59%
Risk-free interest rate 4.00%
A summary of the status of the Company's stock option plan is presented below:
June 30, 2003
-----------------------------
Weighted
Average
Shares Exercise Price
-------- --------------
Outstanding at beginning of year 23,100 $19.85
Granted 147,700 18.88
Exercised - -
Forfeited - -
-------
Outstanding at end of year 170,800 $19.01
=======
Options exercisable at year-end 23,100 $19.85
Weighted-average fair
value of options granted
during the year. $ 5.29
Information pertaining to options outstanding at June 30, 2003 is as follows:
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
- ------------------------ ----------- ----------- ------- ----------- --------
$18.00 - $19.00 147,700 9.7 years $18.88 - $ -
$19.00 - $20.00 23,100 8.8 years $19.85 23,100 $19.85
------- ------
Outstanding at end of year. 170,800 23,100 $19.85
======= ======
(4) RECENT ACCOUNTING PRONOUNCEMENTS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 147, ACQUISITIONS OF CERTAIN
FINANCIAL INSTITUTIONS, (SFAS 147), effective October 1, 2002, supercedes SFAS
72 and requires the acquisition of financial institutions to be accounted for in
accordance with SFAS 141, Business Combinations, and SFAS 142, Goodwill and
Other Intangible Assets. In addition, SFAS 147 amends SFAS 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, to include in its scope
long-term customer-relationship intangible assets of financial institutions. The
adoption of SFAS 147 will not have an effect on the Company's financial
statements.
6
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE (SFAS 148), effective for
fiscal years ending December 15, 2002, amends FASB Statement No. 123, Accounting
for Stock-Based Compensation. SFAS 148 provides alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation and also requires more prominent and more
frequent disclosures in financial statements about the effects of stock-based
compensation. The adoption of SFAS 148 will not have an effect on the Company's
financial statements.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 149, AMENDMENT OF STATEMENT
133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (SFAS 149) In April 2003,
the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." This Statement amends and clarifies
financial accounting and reporting for derivative instruments, including certain
embedded derivatives, and for hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This Statement amends SFAS
No. 133 to reflect the decisions made as part of the Derivatives Implementation
Group (DIG) and in other FASB projects or deliberations. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. Adoption of this Standard
is not expected to have a material effect on the Company's Financial Statements.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 150, ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY (SFAS
150) In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." This
Statement establishes standards for how an entity classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This Statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. Adoption of this Standard
did not have a material effect on the Company's Financial Statements.
In November 2002, the FASB issued Interpretation No. 45, (FIN 45)
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The Interpretation expands on
the accounting guidance of SFAS No. 5, "Accounting for Contingencies," SFAS No.
57, "Related Party Disclosures," and SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments." It also incorporates without change the provisions of
FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness
of Others," which is superseded. The initial recognition and measurement
provisions of this Interpretation apply on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements in this
Interpretation were effective for periods ending after December 15, 2002.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." This Interpretation clarifies the
application of ARB No. 51, "Consolidated Financial Statements," for certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated support from
other parties. This Interpretation requires variable interest entities to be
consolidated by the primary beneficiary which represents the enterprise that
will absorb the majority of the variable interest entities' expected losses if
they occur, receive a majority of the variable interest entities' residual
returns if they occur, or both. Qualifying Special Purpose Entities (QSPE) are
exempt from the consolidation requirements of FIN 46. This Interpretation was
effective for variable interest entities created after January 31, 2003 and for
variable interest entities in which an enterprise obtains an interest after that
date. This Interpretation is effective in the first fiscal year or interim
period beginning after June 15, 2003 for variable interest entities in which an
enterprise holds a variable interest that was acquired before February 1, 2003,
with earlier adoption permitted.
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
June 30, 2003 and 2002 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. The Company or the Bank may from time to time
make written or oral "forward-looking statements." These forward-looking
statements may be contained in this Annual Report to Stockholders, in the
Company's Form 10-K filed with the Securities and Exchange Commission (the
"SEC"), in other filings with the SEC and in other communications by the Company
and the Bank, which are made in good faith pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include, without limitation, statements with respect
to anticipated future
7
operating and financial performance, including revenue creation, lending
origination, operating efficiencies, loan sales, charge-offs, loan loss
allowances and provisions, growth opportunities, interest rates, acquisition and
divestiture opportunities, capital and other expenditures and synergies,
efficiencies, cost savings and funding and other advantages expected to be
realized from various activities. The words "may," "could," "should," "would,"
"will", "believe," "anticipate," "estimate," "expect," "intend," "plan,"
"project," "predict," "continue" and similar expressions are intended to
identify forward-looking statements.
Forward-looking statements include statements with respect to the Company's
beliefs, plans, strategies, objectives, goals, expectations, anticipations,
estimates or intentions that are subject to significant risks or uncertainties
or that are based on certain assumptions. Future results and the actual effect
of plans and strategies are inherently uncertain, and actual results could
differ materially from those anticipated in the forward-looking statements,
depending upon various important factors, risks or uncertainties. The following
factors, many of which are subject to change based on various other factors,
including factors beyond the Company's control, and other factors, including
others discussed in this Annual Report to Stockholders, in the Company's Form
10-K, other factors identified in the Company's other filings with the SEC, as
well as other factors identified by management from time to time, could have a
material adverse effect on the Company, the Bank and their subsidiaries and
their operations or cause their financial performance to differ materially from
the plans, objectives, expectations, estimates or intentions expressed in the
Company's or the Bank's forward-looking statements:
o The strength of the United States economy in general and the strength of
the local economies in which the Company and the Bank conduct operations
which may be less favorable than expected and may result in, among other
things, a deterioration in the credit quality and value of the Company's
assets.
o The economic impact of past and any future terrorist attacks, acts of war
or threats of war and the response of the United States to any of these
threats or attacks.
o The effects of, and changes in, federal, state and local laws, regulations,
rules and policies, including laws, regulations, rules and policies
affecting taxes, banking, securities, insurance and monetary and financial
matters.
o The effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate and other policies of the Federal Reserve
Board and policies of the United States Treasury.
o Inflation, interest rates, market and monetary fluctuations, including the
effects of changes in the rate of prepayments of the Bank's assets.
o The quality or composition of the Bank's loan portfolio.
o Demand for loan products and services.
o Deposit flows.
o The ability of the Company and the Bank to compete with other financial
institutions due to increases in competitive pressures in the financial
services sector.
o The ability of the Company to obtain new customers and to retain existing
customers.
o The timely development of, and acceptance of, products and services of the
Company and the Bank and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services.
o The willingness of users to substitute competitors' products and services
for the Company' s and the Bank's products and services.
o The Company's and the Bank's success in gaining regulatory approval of
their products and services, when required.
o The impact of technological changes recently implemented by the Company and
the Bank and by other parties, including third party vendors. In this
regard, in October 2002, Citizens First entered into an agreement with
Fiserv Solutions, Inc. ("Fiserv") relating to Fiserv's ITI software
package. Citizens First believes that the Fiserv ITI software package,
together with upgrades to the Bank's PCs and data line connectivity, should
provide it with significant processing improvements that it believes will
allow enhanced customer service and efficiencies within the Bank. The
conversion was successfully completed during this quarterly reporting
period. For additional information about the computer conversion, see
"Planned Computer Conversion" in the Company's "Business" section of its
Form 10-K filed with the SEC for the transition period ended December 31,
2002.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
o Consumer spending and saving habits which may change in a manner that
adversely affects the Company's business.
o Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
o Unanticipated litigation or disputes and the costs, effects and outcomes of
existing or future litigation or disputes.
o The effects of, and changes in, accounting principles, guidelines, policies
and practices, as may be adopted by state and federal regulatory agencies
and the Financial Accounting Standards Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
8
This list of important factors is not exclusive. These risks and uncertainties
should be considered in evaluating forward-looking statements, and undue
reliance should not be placed on these statements. Neither the Company nor the
Bank undertakes - and each specifically disclaims any obligation - to update any
forward-looking statement, whether written or oral, that may be made from time
to time by or on behalf of the Company or the Bank or to release publicly the
result of any revisions that may be made to any forward-looking statements,
including revisions to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
OPERATING STRATEGY. Citizens First is a community-oriented financial
institution, offering a wide range of deposit and loan products to its
customers. In recent years, Citizens First's strategy has been one of controlled
balance sheet growth and broader diversification of its loan products and loan
portfolio. Beginning in 1995, Citizens First determined that it would originate
its fixed-rate one-to-four-family residential mortgage loans primarily for sale,
while generally retaining the servicing rights as to those mortgages. Since that
time, Citizens First has emphasized originating residential mortgage loans,
commercial and multi-family real estate loans, construction loans, commercial
loans, automobile loans, home equity loans and lines of credit and a variety of
consumer loans. It has also emphasized increasing sources of noninterest income.
CRITICAL ACCOUNTING POLICIES. Management has established various accounting
policies that govern how accounting principles generally accepted in the United
States of America are used to prepare the Company's financial statements. The
Company's significant accounting policies are described in the Notes to the
Consolidated Financial Statements of this Annual Report to Stockholders. Certain
accounting policies require management to make estimates and assumptions about
matters that are highly uncertain and as to which different estimates and
assumptions would have a material impact on the carrying value of certain of the
Company's assets and liabilities, on the Company's net income and on the
Company's overall financial condition and results of operations. The estimates
and assumptions management uses are based on historical experience and other
factors, which management believes to be reasonable under the circumstances.
Actual results could differ significantly as a result of these estimates and
assumptions, and different estimates and assumptions could have a material
impact on the carrying value of certain of the Company's assets and liabilities,
on the Company's net income and on the Company's overall financial condition and
results of operations for future reporting periods. Management believes that the
Company's "critical accounting policies" relate to the Bank's allowance for loan
losses and its valuation of its mortgage servicing rights. These policies are
described in more detail below.
ALLOWANCE FOR LOAN LOSSES. Citizens First recognizes that losses will be
experienced from originating loans and that the risk of loss will vary with,
among other factors, the type of loan being made, the creditworthiness of the
borrower over the term of the loan, general economic conditions and, in the case
of a secured loan, the quality of the security for the loan. To reflect the
perceived risk associated with the Bank's loan portfolio, the Bank maintains an
allowance for loan losses to absorb potential losses from loans in its loan
portfolio. As losses are estimated to have occurred, management establishes a
provision for loan losses, which is then charged directly against earnings. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance.
The allowance for loan losses represents management's estimate of probable
losses based on information as of the date of the financial statements.
Management evaluates whether the Bank's loan loss allowance is adequate at least
quarterly by assessing the expected losses inherent in its loan portfolio.
Management first reviews perceived higher risk loans, such as commercial and
multi-family real estate loans and loans with significant balances, and
establishes an allowance for those loans. Second, management reviews loans that
have deteriorated below certain levels of credit risk, including impaired, or
likely uncollectible loans, and loans that have been classified as "watch list"
loans, and attributes a specified loan loss allowance to these reviewed loans.
For additional information regarding how management determines whether a loan is
impaired, or likely uncollectible, see Note 1 to the Company's Consolidated
Financial Statements. Third, an appropriate level of loan loss is then
determined for the remaining balance of the loan portfolio by applying varying
loan loss factors. Management then analyzes whether the combined loan loss
allowance is adequate by considering other factors that may have an impact on
the performance of the loan portfolio, such as trends in real estate and
collateral values, and adjusts the overall loan loss allowance. For additional
information on how management determines the allowance for loan losses, see
"Allowance for Loan Losses" in the "Business" section of the Company's Form 10-K
relating to the transition period ended December 31, 2002 that was filed with
the SEC.
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 differ substantially from the
economic and other conditions used by management to determine the current level
of the allowance for loan losses or if historical trends change. Nevertheless,
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. In addition, it is uncertain
9
whether various regulatory agencies, as an integral part of their examination
process and in reviewing Citizens First's loan portfolio, will request that
Citizens First increase its allowance for loan losses. Citizens First believes,
however, that it has established its existing loan loss allowance in conformity
with generally accepted accounting principles. These agencies could,
nevertheless, require Citizens First to provide additions to the allowance for
loan losses based upon judgments of the agencies that are different from the
judgments of management. For additional information about the regulation and
supervision applicable to Citizens First and the Bancorp, see "Regulation and
Supervision" in the "Business" section of the Company's Form 10-K relating to
the transition period ended December 31, 2002 that was filed with the SEC.
In the last few years, although the percentage of the loan loss allowance to
total loans has decreased, the Bank has increased the total amount of its
allowance for loan losses to a level that it believes is consistent with that of
other comparable financial institutions. For information on the Company's
allowance for loan losses over the last five years, see "Historical Analysis of
Loan Loss Allowance" in the "Business" section of the Company's Form 10-K
relating to the transition period ended December 31, 2002 that was filed with
the SEC. Because the estimates and assumptions underlying Citizens First's
allowance for loan losses are inherently uncertain, different estimates and
assumptions could require a material increase in the allowance for loan losses.
Any material increase in the allowance in the allowance for loan losses could
have a material adverse effect on Citizens First's net income and results of
operations.
VALUATION OF MORTGAGE SERVICING RIGHTS.
The Bank routinely sells its originated residential mortgage loans to investors,
mainly Freddie Mac. Although Citizens First sells the mortgage loans, it
frequently retains the servicing rights, or the rights to collect payments and
otherwise service these loans, for an administrative or servicing fee. The
mortgage loans that the Bank services for others are not included as assets in
the Company's consolidated statement of financial condition. Loans serviced for
others were approximately $433.6 million and $322.0 million at June 30, 2003 and
December 31, 2002, respectively.
Citizens First's mortgage servicing rights relating to loans serviced for others
represent an asset of the Bank. This asset is initially capitalized and included
in other assets on the Company's balance sheet. The mortgage servicing rights
are then amortized into noninterest income in proportion to, and over the period
of, the estimated future net servicing income of the underlying mortgage
servicing rights. There are a number of factors, however, that can affect the
ultimate value of the mortgage servicing rights to the Bank, including the
estimated prepayment speed of the loan and the discount rate used to present
value the loan. For example, if the mortgage loan is prepaid, the Bank will
receive fewer servicing fees, meaning that the present value of the mortgage
servicing rights is less than the carrying value of those rights on the Bank's
balance sheet. Therefore, in an attempt to reflect an accurate expected value to
the Bank of the mortgage servicing rights, the Bank receives a valuation of its
mortgage servicing rights from an independent third party. The independent third
party's valuation of the mortgage servicing rights is based on relevant
characteristics of the Bank's loan servicing portfolio, such as loan terms,
interest rates and recent prepayment experience, as well as current market
interest rate levels, market forecasts and other economic conditions. Based upon
the independent third party's valuation of the Bank's mortgage servicing rights,
management then establishes a valuation allowance to quantify the likely
impairment of the value of the mortgage servicing rights to the Bank. The
estimates of prepayment speeds and discount rates are inherently uncertain, and
different estimates could have a material impact on the Company's net income and
results of operations. The valuation allowance is evaluated and adjusted
quarterly by management to reflect changes in the fair value of the underlying
mortgage servicing rights based on market conditions.
The balances of the Bank's capitalized mortgage servicing rights, net of
valuation allowance, included in the Company's other assets at June 30, 2003 and
December 31, 2002 were $2,854,000 and $1,939,000, respectively. These balances
approximate the fair value of the Bank's mortgage servicing rights at these
dates. The fair values of the Bank's mortgage servicing rights were determined
using annual constant prepayment speeds of 21.35% and 33.93% and discount rates
of 7.36% and 7.02% at June 30, 2003 and December 31, 2002, respectively.
(Constant prepayment speeds are a statistical measure of the historical or
expected prepayment of principal on a mortgage.) Different estimates of the
prepayment speeds and discount rates or different assumptions could have a
material impact on the value of the mortgage servicing rights and, therefore, on
the Company's valuation allowance. These estimates and assumptions, in turn,
could have a material impact on the Company's assets, net income and results of
operations, and, accordingly, the Company considers the Bank's valuation of
mortgage servicing rights to be a "critical accounting policy."
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2003 AND DECEMBER 31, 2002
Total assets increased $66.8 million, or 6.7%, to $1.07 billion at June 30,
2003 from $1.0 billion at December 31, 2002, primarily due to a $34.4 million,
or 34.2%, increase in securities available-for-sale, a $6.5 million, or 16.1%,
increase in cash and cash equivalents due to sales of fixed rate loans to third
parties and a $22.7 million, or 2.8%, increase in net loans. The increase in net
10
loans was primarily due to increased originations of commercial and commercial
real estate loans of approximately $41.9 million and an $9.8 million increase in
other consumer loans offset by a decline in one- to four-family real estate
loans and construction loans of $26.7 million and $1.7 million respectively.
Premises and Equipment increased $3.2 million, or 21.3%, due to the recent
branch expansion in Wadhams and an increase in furniture and equipment due to
branch renovations and computer equipment for the data processing conversion.
Citizens First's net loans to assets ratio at June 30, 2003 was 78.9% compared
to 81.9% at December 31, 2002.
Nonperforming loans totaled $3.4 million at June 30, 2003 compared to $2.4
million at December 31, 2002, an increase of $1.0 million, or 39.7%. This
increase was primarily due to a $760,000 increase in commercial loans and a
$254,000 increase in real estate loans due to the slow economy offset by a
$55,000 decrease in non-accruing consumer loans. Nonperforming assets also
increased $1.2 million due to the increase in non-accruing loans and an increase
of $194,000 in real estate owned.
The following table sets forth information regarding non-accrual loans and
real estate owned.
At June 30, At December 31,
2003 2002
----------- ---------------
(Dollars in thousands)
Non-accruing loans:
Real Estate $2,130 $1,876
Consumer 127 182
Commercial 1,116 356
------ ------
Total non-accruing loans (1) 3,373 2,414
Real Estate Owned (2) 547 353
------ ------
Total non-performing assets 3,920 $2,767
====== ======
Total non-performing loans as a percentage of
total loans 0.39% 0.29%
Total non-performing loans as a percentage of
total assets 0.32% 0.24%
Total non-performing assets as a percentage of
total loans 0.46% 0.33%
Total non-performing assets as a percentage of
total assets 0.37% 0.28%
- ---------------------------
(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 $96,900 and $62,000 at
June 30, 2003 and December 31, 2002, respectively.
The allowance for loan losses was $11.2 million at June 30, 2003, or 1.34%
of total loans, as compared to $11.1 million, or 1.33% of total loans, at
December 31, 2002. The following table sets forth activity in the allowance for
loan losses for the periods set forth in the table.
11
For Six Months At
Ended June 30, December 31,
2003 2002
-------------- ------------
(Dollars in thousands)
Allowance for loan losses, beginning of period $11,082 $11,020
Charged-off loans 416 1,102
Recoveries 97 272
------- -------
Net charge-offs (recoveries) 319 830
Provision for loan losses 720 892
------- -------
Allowance for loan losses, end of period $11,483 $11,082
======= =======
Allowance for loan losses to total loans 1.34% 1.33%
Allowance for loans losses to nonperforming loans 340.44% 459.07%
Total liabilities increased $61.5 million, or 7.2%, from $852.0 million at
December 31, 2002 to $913.6 million at June 30, 2003. The increase was primarily
due to a $77.5 million, or 341.7%, increase in noninterest bearing deposits from
$22.7 million at December 31, 2002 to $100.2 million at June 30, 2003. The
increase in total liabilities is also due to a $4.9 million, or 68.3%, increase
in accrued interest and other liabilities to $12.1 million at June 30, 2003 from
$7.2 million at December 31, 2002 offset by a $199,000, or 0.1%, decrease in
Federal Home Loan Bank advances and a $20.7 million, or 3.2%, decrease in
interest bearing deposits. The $77.5 million increase in noninterest-bearing
deposits consisted of increases in noninterest bearing checking accounts. The
decrease in interest bearing deposits consisted of a $14.1 million decrease in
certificates of deposit and a $16.2 million decrease in money market deposit
accounts offset by a $5.8 million increase in passbook savings accounts and a
$3.8 million increase in NOW checking accounts.
Total equity was $153.4 million at June 30, 2003 compared to $148.2 million
at December 31, 2002, an increase of $5.3 million, or 3.6%, due to net income, a
$582,000 increase in unrealized gains on available for sale securities offset by
the payment of dividends.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND
2002
NET INCOME. Net income increased $445,000, or 15.7%, to $3.3 million for
the three months ended June 30, 2003 from $2.8 million for the previous period.
The increase was primarily due to an increase of $1.9 million, or 116.0%, in
noninterest income offset by a $1.3 million, or 24.0%, increase in noninterest
expense and a $104,000 decrease in net interest income after provision for loans
losses.
NET INTEREST INCOME. Net interest income, after provision for loan loss,
decreased $104,000, or 1.2%, to $8.2 million for the three months ended June 30,
2003 from $8.3 million at June 30, 2002 primarily due to a $937,000, or 6.1%,
decrease in total interest income offset by a $919,000, or 13.7%, decrease in
interest expense. The decrease in interest income was due to an $581,000, or
40.1%, decrease to interest income from taxable securities due to shifting of
investments to lower interest earning investments and a $381,000, or 2.8%,
decrease in income on loans both due to sustained lower market rates. Total
interest expense decreased $919,000, or 13.7%, from $6.7 million for the three
months ended June 30, 2002 to $5.8 million for the three months ended June 30,
2003. The decrease was primarily due to a $1.0 million, or 23.1%, decrease in
retail deposit interest expense from $4.5 million at June 30, 2002 to $3.4
million for the three months ended June 30, 2003 as a result of lower market
interest rates. This decrease was offset by an $110,000 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 $86,000,
or 31.4%, from $274,000 for the three months ended June 30, 2002 to $360,000 for
the three months ended June 30, 2003. The increased provision for loan losses is
the result of management's estimates and loan loss methodology. The loan loss
allowance as a percentage of total loans increased from 1.33% at December 31,
2002 to 1.34% at June 30, 2003, and the allowance for loan losses as a
percentage of non-performing loans decreased from 459.07% at December 31, 2003
to 340.44% at June 30, 2003. Management considers its allowance for loan losses
to be one of its critical accounting policies, meaning that in order to
determine the allowance and provision for loan losses, management must make
estimates and assumptions about matters that are highly uncertain and as to
which different estimates and assumptions would have a material impact on the
Company's net income and on the Company's overall financial condition and
results of operations. For
12
more information, see the caption "Critical Accounting Policies" in this section
of "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
NONINTEREST INCOME. Non-interest income increased $1.9 million, or 116.0%.
The primary factor for this increase was a $1.7 million, or 2,100.0%, increase
in income from mortgage banking activities due to an increase in the sale of
fixed-rate residential loans to third parties accompanied by a $297,000 increase
in service charges and other fees and a $131,000 increase in loan servicing
fees. These increases were offset by a decrease of $108,000 in gains on sales of
securities and a $162,000, or 34.1%, decrease in other noninterest income due to
fees waived during the process of the conversion.
NONINTEREST EXPENSE. Noninterest expense increased $1.3 million, or 24.0%,
to $6.9 million for the three months ended June 30, 2003, compared to $5.6
million in the three months ended June 30, 2002. The increase was primarily due
to a $650,000, or 22.3%, increase in compensation and employee benefits due to
increases to wages, additions to staff and increased direct costs of benefits, a
$176,000 increase in advertising and promotion partially to the opening of new
branches and the re-opening of renovated offices, and a $225,000, or 85.9%
increase in professional fees due to the increased costs associated with being a
public company including regulatory changes specifically the Sarbanes-Oxley Act.
In addition, appraisal fees increased $130,000, or 173.3%, and other noninterest
expenses increased $402,000, or 64.0%. These increases were offset by a $183,000
decrease in office occupancy costs, a one-time $93,000 decrease in data
processing due to the conversion of the company's data processing system and a
$16,000 decrease in deposit statement preparation.
INCOME TAXES. Income taxes for the three months ended June 30, 2003 were
$1.52 million, a decrease of $27,000, or 1.7%, from $1.54 million for the three
months ended June 30, 2002.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
NET INCOME. Net income increased $971,000, or 17.6%, to $6.5 million for
the six months ended June 30, 2003 from $5.5 million for the previous period.
The increase was primarily due to an increase of $4.9 million, or 159.3%, in
noninterest income offset by a $2.2 million, or 19.4%, increase in noninterest
expense and a $1.2 million, or 7.0%, decrease in net interest income after
provision for loans losses.
NET INTEREST INCOME. Net interest income, after provision for loan loss,
decreased $1.2 million, or 7.0%, to $15.6 million for the six months ended June
30, 2003 from $16.8 million at June 30, 2002 primarily due to a $2.4 million, or
7.9%, decrease in total interest income offset by a $1.5 million, or 10.8%,
decrease in total interest expense. The decrease in interest income was due to
an $1.4 million, or 44.1%, decrease to interest income from taxable securities
due to lower interest rates and a $1.0 million, or 3.7%, decrease in income on
loans also due to sustained lower market rates. Total interest expense decreased
$1.5 million from $13.4 million for the six months ended June 30, 2002 to $11.9
million for the six months ended June 30, 2003. Deposit expense declined $1.7
million, or 18.9% as a result of lower rates paid on deposit accounts. Interest
expense on Federal Home Loan Bank advances increased $246,000, or 5.6%, due to
higher average rates.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased
$197,000, or 37.7%, from $523,000 for the six months ended June 30, 2002 to
$720,000 for the six months ended June 30, 2003. The increased provision for
loan losses is the result of management's estimates and loan loss methodology.
The loan loss allowance as a percentage of total loans increased from 1.33% at
December 31, 2002 to 1.34% at June 30, 2003, and the allowance for loan losses
as a percentage of non-performing loans decreased from 459.07% at December 31,
2003 to 340.44% at June 30, 2003. Management considers its allowance for loan
losses to be one of its critical accounting policies, meaning that in order to
determine the allowance and provision for loan losses, management must make
estimates and assumptions about matters that are highly uncertain and as to
which different estimates and assumptions would have a material impact on the
Company's net income and on the Company's overall financial condition and
results of operations. For more information, see the caption "Critical
Accounting Policies" in this section of "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
NONINTEREST INCOME. Non-interest income increased $4.9 million, or 159.3%
for the six months ended June 30, 2003. The increase was primarily due to a $4.4
million, or 3,163.0%, increase in income from mortgage banking activities due to
an increase in sales of fixed-rate residential loans to third parties
accompanied by a $332,000 increase in service charges and other fees and a
$172,000 increase in loan servicing fees. These increases represent a
significant portion of the increase in net income for both the three and six
month periods. As rates change and the number of customers that seek to
refinance their existing loans or borrow to purchase new
13
homes declines, the income that is generated by the sales of these loans could
be adversely affected. Other noninterest income increased $118,000, or 20.5% due
to in part to increase income from trust services. These increases were offset
by a decrease of $108,000 in gains on sales of securities.
NONINTEREST EXPENSE. Noninterest expense increased $2.2 million, or 19.4%,
to $13.7 million for the six months ended June 30, 2003, compared to $11.5
million in the six months ended June 30, 2002. The increase was primarily due to
a $1.2 million, or 20.8%, increase in compensation and employee benefits due to
normal increases to wages, increases in the number of employees and an increase
in the cost of benefits, a $296,000 increase in advertising and promotion
partially to the opening of new branches and the purchase of promotional items,
a $378,000, or 69.4% increase in professional fees due to the increased legal
and accounting costs associated with regulatory changes specifically the
Sarbanes-Oxley Act. In addition, appraisal fees increased $266,000, or 124.3%,
due to high volumes of loans being refinanced and a $375,000, or 24.6% increase
in other noninterest expenses due to increased use of outside service providers
part of which were directly related to the data processing conversion. These
increases were offset by a $170,000 decrease in office occupancy, a $67,000
decrease in data processing due to a one-time credit as a result of the
conversion of the company's data processing system and a $83,000 decrease in
deposit statement preparation.
INCOME TAXES. Income taxes for the six months ended June 30, 2003 were $3.4
million, an increase of $502,000, or 17.3%, from $2.9 million for the six months
ended June 30, 2002 reflective of the increase in net income.
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-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 June 30, 2003,
Citizens First originated $198.98 million of loans. In fiscal 2002, Citizens
First originated $465.9 million of loans and purchased $128.6 million 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 June 30, 2003, cash and short-term
investments totaled $46.8 million and securities classified as
available-for-sale totaled $134.8 million. In addition, at June 30, 2003,
Citizens First had the ability to borrow a total of approximately $268.4 million
from the Federal Home Loan Bank of Indianapolis. On that date, Citizens First
had advances outstanding of $172.9 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. In the first six months of 2003, Citizens First sold $203.1 million
of fixed rate mortgage loans. Citizens First sold $191.4 million in loans in
2002.
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 $56.8 million for the six months ended June 30, 2003, 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 June 30, 2003, Federal Home Loan Bank advances decreased
$199,000. During fiscal 2002 and 2001, Federal Home Loan Bank advances increased
$36.5 million and $44.4 million, respectively.
14
At June 30, 2003, Citizens First had outstanding commitments to originate
loans of $82.5 million, of which $64.4 million 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 June 30, 2003 totaled
$70.3 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
June 30, 2003, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of June 30, 2003, 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 December 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 as 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
15
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 May 22,
2003. 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
--------- --------------
Marshall J. Campbell 5,569,258 86,236
Christopher A. Kellerman 5,535,713 119,781
2. The ratification of the appointment of Plante & Moran, PLLC as
independent auditors of Citizens First Bancorp, Inc. for the fiscal
year ended December 31, 2003:
FOR AGAINST ABSTAIN
--------- ------- -------
5,535,271 116,193 4,030
3. The approval of the Citizens First Bancorp, Inc. Management Restricted
Stock Purchase Plan:
FOR AGAINST ABSTAIN
--------- ------- -------
2,800,425 803,312 11,845
4. The approval of the Citizens First Bancorp, Inc. Executive Stock
Ownership Plan Agreement:
FOR AGAINST ABSTAIN
--------- ------- -------
3,043,338 555,552 16,692
5. The approval of the Citizens First Group Directors' Deferred Fee Plan:
FOR AGAINST ABSTAIN
--------- ------- -------
2,642,209 953,450 19,923
Item 5. Other Information.
None.
16
Item 6. Exhibits and Reports on Form 8-K (ss.249.308 of this Chapter).
(a) Exhibits
2.0 Merger Agreement between Citizens First Bancorp, Inc. and
Metro Bancorp, Inc. (3)
3.1 Certificate of Incorporation of Citizens First Bancorp, Inc.
(1)
3.2 Bylaws of Citizens First Bancorp, Inc. (1)
10.1 Amended and Restated Management Restricted Stock Purchase
Plan (2)
10.2 Amended and Restated Executive Stock Ownership Plan
Agreement (2)
10.3 Citizens First Group Directors' Deferred Fee Plan (2)
31.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 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
32.2 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.
(2) Incorporated by reference into this document from the Exhibits filed
with the Proxy Statement on April 21, 2003.
(3) Incorporated by reference into this document from the 8-K filed on May
22, 2003
(b) Reports on Form 8-K
1. On May 5, 2003, the Registrant announced (i) financial results
for the first quarter ended March 31, 2003, reporting earnings of
$3.2 million, or $.40 per share; and (ii) that the Company's
board of directors has declared a quarterly cash dividend of
$0.08 per share, payable on May 19, 2003 to stockholders of
record on May 8, 2003.
2. Citizens First Bancorp, Inc. (the "Company") executed an
Agreement and Plan of Merger (the "Agreement") with Metro
Bancorp, Inc. ("Metro Bancorp") dated May 21, 2003, pursuant to
which the Company will acquire Metro Bancorp. Under the terms of
the Agreement, shareholders of Metro Bancorp will receive $711.73
for each common share of Metro Bancorp outstanding on the
effective date of the Acquisition (the "Acquisition").
The Company is a unitary savings and loan holding company
headquartered in Port Huron, Michigan. Metro Bancorp is a
registered bank holding company headquartered in Farmington
Hills, Michigan.
The Acquisition is subject to approval by the shareholders of
Metro Bancorp and is subject to certain regulatory approvals.
Following the Acquisition, and upon the receipt of all necessary
regulatory approvals, Metro Bancorp's wholly owned subsidiary,
Metrobank will be operated as a wholly owned subsidiary of the
Company.
17
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: August 14, 2003 By: /s/ Marshall J. Campbell
------------------------
Marshall J. Campbell
President and Chief Executive Officer
(principal executive officer)
Dated: August 14, 2003 By: /s/ Timothy D. Regan
--------------------
Timothy D. Regan
Secretary, Treasurer and Director
(principal financial and accounting
officer)
18
Exhibit Index
EXHIBIT
NO. DESCRIPTION
------- -----------
2.0 Merger Agreement between Citizens First Bancorp, Inc. and
Metro Bancorp, Inc. (3)
3.1 Certificate of Incorporation of Citizens First Bancorp, Inc.
(1)
3.2 Bylaws of Citizens First Bancorp, Inc. (1)
10.1 Amended and Restated Management Restricted Stock Purchase
Plan (2)
10.2 Amended and Restated Executive Stock Ownership Plan
Agreement (2)
10.3 Citizens First Group Directors' Deferred Fee Plan (2)
31.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 Page 20
31.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 Page 21
32.1 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 Page 22
32.2 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 Page 23
- ------------
(1) Incorporated by reference into this document from the Exhibits filed with
the Registration Statement of Form S-1, and any amendments thereto,
Registration No. 333-49234.
(2) Incorporated by reference into this document from the Exhibits filed with
the Proxy Statement on April 21, 2003.
(3) Incorporated by reference into this document from the 8-K filed on May 22,
2003.
19