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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, 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
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(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 8,518,902 shares of common stock, par value $0.01 per share,
outstanding as of November 4, 2003.
CITIZENS FIRST BANCORP, INC.
FORM 10-Q
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet as of
September 30, 2003 and December 31, 2002..................... 1
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2003 and 2002..................... 2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 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............................................ 16
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 SEPTEMBER 30, AT DECEMBER 31,
2003 2002
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents:
Cash and due from depository institutions $ 24,589 $ 10,893
Interest-bearing deposits in other depository institutions 17,156 29,463
Federal funds sold - -
---------- ----------
Total cash and cash equivalents 41,745 40,356
Securities available for sale 96,784 100,382
Loans held for sale 909 1,557
Loans - Net of Allowance of $11,730 and $11,356 877,072 819,136
Federal Home Loan Bank stock 9,180 9,180
Accrued interest receivable and other assets 17,669 14,584
Premises and equipment -- Net 21,319 14,989
---------- ----------
Total assets $1,064,678 $1,000,184
========== ==========
LIABILITIES
Deposits:
Noninterest-bearing $ 49,951 $ 22,675
Interest-bearing 677,603 649,155
---------- ----------
Total deposits 727,554 671,830
---------- ----------
Federal Home Loan Bank advances 173,291 173,003
Accrued interest and other liabilities 9,043 7,196
---------- ----------
Total liabilities 909,888 852,029
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 September 30, 2003 and
December 31, 2002 95 95
Additional paid-in capital 92,528 92,528
Retained earnings 90,550 83,044
Accumulated other comprehensive income 490 322
Common stock in treasury at cost (September 30, 2003 -
1,007,859; December 31, 2002 - 1,023,126 shares) (18,584) (18,752)
Treasury stock shares held in rabbi trust at cost (3,111) (1,590)
Unearned compensation -- ESOP (9,082) (9,082)
Deferred compensation obligation 1,904 1,590
---------- ----------
Total stockholders' equity 154,790 148,155
---------- ----------
Total liabilities and stockholders' equity $1,064,678 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2003 2002 2003 2002
------- ------- ------- -------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
INTEREST INCOME:
Loans, including fees $13,267 $14,500 $39,326 $41,568
Federal funds sold and other cash equivalents 71 57 297 273
Securities:
Tax-exempt 129 123 380 367
Taxable 822 1,248 2,649 4,519
------- ------- ------- -------
Total interest income 14,289 15,928 42,652 46,727
INTEREST EXPENSE
Deposits 3,410 4,425 10,729 13,448
FHLB advances 2,352 2,282 7,029 6,713
------- ------- ------- -------
Total interest expense 5,762 6,707 17,758 20,161
------- ------- ------- -------
NET INTEREST INCOME - Before provision for loan losses 8,527 9,221 24,894 26,566
PROVISION FOR LOAN LOSSES 360 289 1,080 812
------- ------- ------- -------
NET INTEREST INCOME 8,167 8,932 23,814 25,754
NON-INTEREST INCOME:
Service charges and other fees 1,433 1,169 3,714 3,118
Loan servicing fees 299 139 762 430
Mortgage banking activities 1,600 266 6,103 404
Gain (Loss) on sale of securities (78) - (78) 108
Other 364 (34) 1,059 543
------- ------- ------- -------
Total noninterest income 3,618 1,540 11,560 4,603
NON-INTEREST EXPENSE:
Compensation, payroll taxes and employee benefits 3,305 2,813 10,326 8,627
Office occupancy and equipment 962 769 2,527 2,504
Advertising and business promotion 335 218 957 544
Stationery, printing and supplies 358 400 1,091 1,104
Data processing 16 113 187 351
Deposit statement preparation and collections 231 187 523 562
Professional fees 480 353 1,403 898
Appraisal fees 296 303 776 517
Other 1,098 689 2,995 2,211
------- ------- ------- -------
Total noninterest expense 7,081 5,845 20,785 17,318
------- ------- ------- -------
INCOME - Before federal income tax expense 4,704 4,627 14,589 13,039
FEDERAL INCOME TAX EXPENSE 1,718 1,610 5,126 4,516
------- ------- ------- -------
NET INCOME $ 2,986 $ 3,017 $ 9,463 $ 8,523
======= ======= ======= =======
Basic EPS $ 0.38 $ 0.38 $ 1.20 $ 1.05
Diluted EPS $ 0.38 $ 0.38 $ 1.20 $ 1.05
See accompanying notes to unaudited consolidated financial statements.
2
CITIZENS FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2003 2002
--------- --------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,463 $ 8,523
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses 1,080 812
Depreciation 765 807
Amortization 158 121
Proceeds from sale of mortgage loans held for sale 305,548 126,741
Origination of mortgage loans held for sale (300,820) (125,941)
Gain on sale of mortgage loans (4,080) (1,004)
Loss on sale of premises and equipment - 22
(Gain) Loss on sale of investment securities 78 (108)
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable and other assets (3,535) 2,581
Provision for deferred taxes 228 420
Increase (Decrease) in accrued interest payable and other liabilities 2,062 (854)
--------- --------
Net cash provided by operating activities 10,947 12,120
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale 21,710 30,386
Proceeds from sale of securities available-for-sale 27,206 33,882
Purchase of FHLB stock - (1,674)
Purchase of available-for-sale securities (45,299) (35,202)
Net increase in loans (59,016) (87,091)
Purchases of premises and equipment (7,095) (1,965)
--------- --------
Net cash used in investing activities (62,494) (61,664)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 55,724 32,700
Dividends declared (1,957) (2,018)
Purchase of treasury stock (1,119) (9,865)
Repayment of FHLB advances (3,522) (14,718)
Proceeds from FHLB advances 3,810 48,193
--------- --------
Net cash provided by financing activities 52,936 54,292
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,389 4,748
CASH AND CASH EQUIVALENTS - Beginning of period 40,356 32,425
--------- --------
CASH AND CASH EQUIVALENTS - End of period $ 41,745 $ 37,173
--------- --------
See accompanying notes to unaudited consolidated financial statements.
3
CITIZENS FIRST BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) 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.
(2) 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 operations and cash flows, have been made. The results of
operations for the nine months ended September 30, 2003 are not necessarily
indicative of the results that may be expected for another quarterly period or
for a full year.
(3) 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, 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 calculations.
4
The weighted-average shares and earnings per share for the three and nine
months ended September 30, 2003 and 2002 are detailed in the table below.
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Average common shares outstanding 8,545,043 8,582,416 8,545,161 8,859,890
Less: Unallocated ESOP shares 660,522 711,331 660,522 711,331
---------- ---------- ---------- ----------
Shares used in the earnings per share calculation 7,884,521 7,871,085 7,884,639 8,148,559
Dilutive impact of stock options 12,705 299 12,705 434
---------- ---------- ---------- ----------
Dilutive common shares outstanding 7,897,226 7,871,384 7,897,344 8,148,993
========== ========== ========== ==========
Net income (in thousands) $ 2,986 $ 3,017 $ 9,463 $ 8,523
========== ========== ========== ==========
Basic Earnings Per Share $ 0.38 $ 0.38 $ 1.20 $ 1.05
========== ========== ========== ==========
Diluted Earnings Per Share $ 0.38 $ 0.38 $ 1.20 $ 1.05
========== ========== ========== ==========
(4) 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 September 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):
Nine Months Ended Nine Months Ended
September 30, September 30,
2003 2002
------ ------
Net income, as reported $9,463 $8,523
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (59) (82)
------ ------
Pro forma net income $9,404 $8,441
====== ======
Earnings per share
Basic - as reported $ 1.20 $ 1.05
Basic - pro forma $ 1.19 $ 1.04
Diluted - as reported $ 1.20 $ 1.05
Diluted - pro forma $ 1.19 $ 1.04
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
September 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:
September 30, 2003
Weighted
Average
Shares Exercise Price
Outstanding at
January 1 23,100 $19.85
Granted 147,700 18.88
Exercised - -
Forfeited - -
-------
Outstanding at
September 30 170,800 $19.01
=======
Options exercisable at
September 30 40,332 $19.44
Weighted-average fair
value of options granted
during the year
$781,333
Information pertaining to options outstanding at September 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 9.4 years $18.88 17,232 $18.88
$19.00 - $20.00 23,100 8.5 years $19.85 23,100 $19.85
------- ------
Outstanding at
September 30 181,333 40,332 $19.85
======= ======
(5) RECENT ACCOUNTING PRONOUNCEMENTS
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
6
(DIG) and in other FASB projects or deliberations. SFAS No. 149 became effective
in 2003 and did not 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 became effective in 2003 and did not have a material
effect on the Company's Financial Statements.
IN NOVEMBER 2002, THE FASB ISSUED INTERPRETATION NO. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS, (FIN 45), 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 initial recognition and
measurement provisions of this Interpretation apply on a prospective basis to
guarantees issued or modified after December 31, 2002, and did not have a
material effect on the Company's Financial Statements. The disclosure
requirements in this Interpretation were effective for periods ending after
December 15, 2002.
IN JANUARY 2003, THE FASB ISSUED INTERPRETATION NO. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, (FIN 46 ), 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. 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 ending
after December 15, 2003 for variable interest entities in which an enterprise
holds a variable interest that were created before February 1, 2003, with
earlier adoption permitted. Although management is currently evaluating the
interpretation, it is not expected to have a material effect on the Company's
Financial Statements.
(6) PROPOSED ACQUISITION ACTIVITY
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.
7
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 nine months ended
September 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 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 the 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:
* 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.
* 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.
* 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.
* 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.
* Inflation, interest rates, market and monetary fluctuations, including the
effects of changes in the rate of prepayments of the Bank's assets.
* The quality or composition of the Bank's loan portfolio.
* Demand for loan products and services.
* Deposit flows.
* 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.
* The ability of the Company to obtain new customers and to retain existing
customers.
* 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.
* The willingness of users to substitute competitors' products and services
for the Company' s and the Bank's products and services.
* 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 the second
8
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.
* The ability of the Company to develop and maintain secure and reliable
electronic systems.
* 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.
* Consumer spending and saving habits which may change in a manner that
adversely affects the Company's business.
* Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
* Unanticipated litigation or disputes and the costs, effects and outcomes of
existing or future litigation or disputes.
* 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.
* The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
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 the 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 of the Annual Report to Stockholders. Third, an appropriate
level of loan loss is then determined for the
9
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 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 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 $471.6 million and $322.0 million at September 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 against 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 September 30,
2003 and December 31, 2002 were $3,962,000 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 14.94% and 33.93% and
discount rates of 7.36% and 7.02% at September 30, 2003 and December 31, 2002,
respectively. (Constant prepayment speeds are a statistical measure of the
historical or expected
10
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 SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
Total assets increased $64.5 million, or 6.4%, to $1.06 billion at September
30, 2003 from $1.0 billion at December 31, 2002, primarily due to a $57.9
million, or 7.1%, increase in loans primarily commercial and commercial real
estate partially offset by a $30.3 million decrease in one- to four-family
mortgage loans as those loan were sold to third party investors, a $6.3 million,
or 42.2%, increase in premises and equipment due to construction of new or
remodeling of existing offices and computer equipment for the data processing
conversion. Cash and cash equivalents also increased $1.4 million, or 3.4%.
Citizens First's net loans to assets ratio at September 30, 2003 was 82.4%
compared to 81.9% at December 31, 2002.
Nonperforming loans totaled $4.3 million at September 30, 2003 compared to
$2.4 million at December 31, 2002, an increase of $1.9 million, or 77.9%. This
increase consists of $1.5 million in real estate loans, $334,000 in consumer
loans and $93,000 in commercial loans all due to the slow economy.
Nonperforming assets also increased $2.3 million due to the increase in
non-accruing loans and an increase of $391,000 in real estate owned.
The following table sets forth information regarding non-accrual loans and
real estate owned.
At September 30, At December 31,
2003 2002
------ ------
(Dollars in thousands)
Non-accruing loans:
Real Estate $3,330 $1,876
Consumer 516 182
Commercial 449 356
------ ------
Total non-accruing loans (1) 4,295 2,414
Real estate owned (2) 744 353
------ ------
Total non-performing assets $5,039 $2,767
====== ======
Total non-performing loans as a percentage of
total loans 0.48% 0.29%
Total non-performing loans as a percentage of
total assets 0.40% 0.24%
Total non-performing assets as a percentage of
total loans 0.57% 0.33%
Total non-performing assets as a percentage of
total assets 0.47% 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 $103,600 and $62,000 at
September 30, 2003 and December 31, 2002, respectively.
The allowance for loan losses was $11.7 million at September 30, 2003, or
1.32% of total loans, as compared to $11.3 million, or 1.39% of total loans, at
September 30, 2002. The following table sets forth activity in the allowance for
loan losses for the periods set forth in the table.
11
Nine Months
Ended September 30,
2003 2002
-------- --------
(Dollars in thousands)
Allowance for loan losses, beginning of period $ 11,082 $ 11,224
Charged-off loans (702) (952)
Recoveries 270 272
-------- --------
Net charge-offs (432) (680)
Provision for loan losses 1,080 812
-------- --------
Allowance for loan losses, end of period $ 11,730 $ 11,356
======== ========
Allowance for loan losses to total loans 1.32% 1.39%
Allowance for loans losses to nonperforming loans 273.11% 359.94%
Total liabilities increased $57.9 million, or 6.8%, from $852.0 million at
December 31, 2002 to $909.9 million at September 30, 2003. The increase was
primarily due to a $28.4 million, or 4.4%, increase in interest bearing
deposits, primarily money market deposit accounts, from $649.2 million at
December 31, 2002 to $677.6 million at September 30, 2003. Noninterest-bearing
deposits increased $27.3 million, or 120.3%, as a result of increased market
share penetration made by the commercial sales department. The increase in total
liabilities is also due to a $1.8 million, or 25.7%, increase in accrued
interest and other liabilities to $9.0 million at September 30, 2003 from $7.2
million at December 31, 2002. The increase in interest bearing deposits
consisted of a $71.2 million increase in money market deposit accounts and a
$9.2 million increase in passbook accounts offset partially by a $25.5 million
decrease in NOW checking accounts and a $26.4 million decrease in certificates
of deposit.
Total equity was $154.8 million at September 30, 2003 compared to $148.2
million at December 31, 2002, an increase of $6.6 million, or 4.5%, due to net
income, a $168,000 increase in unrealized gains on available for sale securities
offset partially by the issuance of stock awards, the repurchase of 54,500
shares of the Company's stock and the payment of dividends.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
AND 2002
NET INCOME. Net income decreased $31,000, or 1.0%, to $2.99 million for the
three months ended September 30, 2003 from $3.0 million for the previous period.
The decrease was primarily due to a decrease of $765,000, or 8.6%, in net
interest income after provision for loan losses and an increase of $1.2 million
in noninterest expenses partially offset by a $2.1 million, or 134.9%, increase
in noninterest income.
NET INTEREST INCOME. Net interest income, after provision for loan losses,
decreased $765,000, or 8.6%, to $8.2 million for the three months ended
September 30, 2003 from $8.9 million for the three months ended September 30,
2002 primarily due to a $1.6 million, or 10.3%, decrease in total interest
income partially offset by a $945,000, or 14.1%, decrease in total interest
expense. The decrease in interest income was due to a $1.2 million, or 8.5%,
decrease to interest income from loans due to sustained lower market rates and a
$426,000, or 34.1%, decrease in income from taxable securities due to a decrease
in average balances and lower market rates. The decrease in total interest
expense was primarily due to a $1.0 million, or 22.9%, decrease in retail
deposit interest expense as a result of lower market interest rates. This
decrease was partially offset by a $70,000 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 $71,000,
or 24.6%, from $289,000 for the three months ended September 30, 2002 to
$360,000 for the three months ended September 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 decreased
from 1.33% at December 31, 2002 to 1.32% at September 30, 2003, and the
allowance for loan losses as a percentage of non-performing loans decreased from
459.07% at December 31, 2002 to 273.1% at September 30, 2003. Due to a prolonged
slow economy and continued weakness in the job market, delinquent loans over 60
days past due have increased $922,000. Of that increase, delinquent real estate
loans have increased $1.2 million, delinquent consumer loans have increased
$389,000 and delinquent commercial loans have decreased $667,000 for the nine
months. 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
12
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 $2.1 million, or 134.9%,
primarily as a result of a $1.3 million, or 501.5%, increase in income from
mortgage banking activities due to an increase in the sale of fixed-rate
residential loans to third parties over the same period last year and a
reduction of the valuation allowance for mortgage servicing rights. Sales,
however, compared to the quarter ended June 30, 2003 have declined due to less
refinancing applications and it appears as though that trend will continue into
the fourth quarter. This increase was accompanied by a $264,000 increase in
service charges and other fees, a $160,000 increase in loan servicing fees and a
$398,000 increase in other noninterest income, partially due to trust department
income. These increases were partially offset by a decrease of $78,000 on sales
of securities.
NONINTEREST EXPENSE. Noninterest expense increased $1.2 million, or 21.1%, to
$7.1 million for the three months ended September 30, 2003, compared to $5.8
million for the three months ended September 30, 2002. The increase was
primarily due to a $492,000, or 17.5%, increase in compensation and employee
benefits due to increased wages, additions to staff, increased commissions due
to the high volume of loan production and increased costs of benefits, a
$193,000 increase in office occupancy expenses, a $117,000 increase in
advertising, marketing and business promotion partially due to the opening of
new branches and the re-opening of renovated offices, and a $127,000, or 36.0%
increase in professional fees due to the increased costs associated with being a
public company including regulatory changes specifically related to the
Sarbanes-Oxley Act and costs associated with the proposed acquisition of
Metrobank. In addition, deposit statement expenses increased $44,000, or 23.5%,
and other noninterest expenses increased $409,000, or 59.4%. These increases
were partially offset by a $97,000 decrease in data processing due to a one-time
credit as a result of the conversion and a $42,000 decrease in supplies expense.
INCOME TAXES. Income taxes for the three months ended September 30, 2003
were $1.7 million, an increase of $108,000, or 6.7%, from $1.6 million for the
three months ended September 30, 2002. The effective tax rates for the three
months ended September 30, 2003 and September 30, 2002 were 36.5% and 34.8%
respectively.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
AND 2002
NET INCOME. Net income increased $940,000, or 11.0%, to $9.5 million for the
nine months ended September 30, 2003 from $8.5 million for the previous period.
The increase was primarily due to an increase of $7.0 million, or 151.1%, in
noninterest income partially offset by a $3.5 million, or 20.0%, increase in
noninterest expense and a $1.9 million, or 7.5%, decrease in net interest income
after provision for loans losses.
NET INTEREST INCOME. Net interest income, after provision for loan losses,
decreased $1.9 million, or 7.5%, to $23.8 million for the nine months ended
September 30, 2003 from $25.7 million for the nine months ended September 30,
2002 primarily due to a $4.1 million, or 8.7%, decrease in total interest income
partially offset by a $2.4 million, or 11.9%, decrease in total interest
expense. The decrease in interest income was due to a $2.2 million, or 5.4%,
decrease to interest income from loans, primarily real estate loans and a $1.9
million, or 41.4% decrease in income from taxable securities both due to lower
interest rates. Total interest expense decreased $2.4 million from $20.2 million
for the nine months ended September 30, 2002 to $17.8 million for the nine
months ended September 30, 2003. Interest expense on deposits declined $2.7
million, or 20.2% as a result of lower rates paid on deposit accounts. Interest
expense on Federal Home Loan Bank advances increased $316,000, or 4.7%, due to
higher average balances.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased $268,000,
or 33.0%, from $812,000 for the nine months ended September 30, 2002 to $1.1
million for the nine months ended September 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 decreased
from 1.33% at December 31, 2002 to 1.32% at September 30, 2003, and the
allowance for loan losses as a percentage of non-performing loans decreased from
459.07% at December 31, 2003 to 273.11% at September 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."
13
NONINTEREST INCOME. Non-interest income increased $7.0 million, or 151.1%
for the nine months ended September 30, 2003. The increase was primarily due to
a $5.7 million increase in income from mortgage banking activities due to an
increase in sales of fixed-rate residential loans to third parties accompanied
by a $596,000 increase in service charges and other fees and a $332,000 increase
in loan servicing fees. These increases represent a significant portion of the
increase in net income for both the three and nine month periods. As rates
change and the number of customers that seek to refinance their existing loans
or borrow to purchase new homes declines, the income that is generated by the
sales of these loans could be adversely affected. Other noninterest income
increased $516,000, or 95.0% due in part to increase income from trust services.
These increases were partially offset by a loss on the sale of securities as
compared to a $108,000 gain in the previous nine month period.
NONINTEREST EXPENSE. Noninterest expense increased $3.5 million, or 20.0%,
to $20.8 million for the nine months ended September 30, 2003, compared to $17.3
million for the nine months ended September 30, 2002. The increase was primarily
due to a $1.7 million, or 19.7%, increase in compensation and employee benefits
due to normal increases to wages, increases in the number of employees as a
result of staffing for the new Wadhams office, increased commissions for higher
than normal loan production and an increase in the cost of various employee
benefit plans, a $413,000 increase in advertising, marketing and business
promotion partially due to the opening of new branches and the purchase of
promotional items, a $505,000, or 56.2% increase in professional fees due to the
increased legal and accounting costs associated with regulatory changes
specifically related to the Sarbanes-Oxley Act and cost related to the proposed
acquisition of Metrobank. In addition, appraisal fees increased $259,000, or
50.1%, due to high volumes of loans being refinanced and a $784,000, or 35.5%
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 partially offset by a $164,000 decrease in data processing
due to a one-time credit as a result of the conversion and a $39,000 decrease in
deposit statement preparation.
INCOME TAXES. Income taxes for the nine months ended September 30, 2003
were $5.1 million, an increase of $610,000, or 13.5%, from $4.5 million for the
nine months ended September 30, 2002 reflective of the increase in net income.
The effective tax rates for the nine months ended September 30, 2003 and
September 30, 2002 were 35.1% and 34.6% 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-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 nine months ended September 30,
2003, Citizens First originated $635.9 million of loans. In the nine months
ending September 30, 2002, Citizens First originated $376.3 million of loans.
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, 2003, cash and short-term
investments totaled $41.7 million and securities classified as
available-for-sale totaled $96.8 million. In addition, at September 30, 2003,
Citizens First had the ability to borrow a total of approximately $238.7 million
from the Federal Home Loan Bank of Indianapolis. On that date, Citizens First
had advances outstanding of $173.3 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 nine months of 2003, Citizens First sold $305.5
million of fixed rate mortgage loans. Citizens First sold $126.7 million in
loans in nine months that ended September 30, 2002.
14
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 $55.7 million for the nine months ended September 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 nine months ended September 30, 2003, Federal Home Loan Bank
advances increased $288,000.
At September 30, 2003, Citizens First had outstanding commitments to
originate loans of $72.8 million, of which $49.5 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
September 30, 2003 totaled $65.3 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
September 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 September 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 nine month fiscal 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 end of the period covered
by this 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 over financial reporting 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
15
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.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
16
(a) Exhibits
2.0 Merger Agreement between Citizens First Bancorp, Inc.
and Metro Bancorp, Inc. (2)
3.1 Certificate of Incorporation of Citizens First Bancorp,
Inc. (1)
3.2 Bylaws of Citizens First Bancorp, Inc. (1)
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 8-K filed on May
22, 2003
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Registrant on August 14, 2003 and
had a Report date of August 7, 2003. The report contained disclosure
under Items 9 and 12 regarding the Registrant's results of operations
for the quarter ended June 30, 2003. A press release attached to the
report as Exhibit 99.1 and incorporated into the report by reference
contained unaudited results of operations for both the three and six
month periods ended June 30, 2003 and 2002, as well as unaudited
balance sheets as of June 30, 2003 and December 31, 2002.
17
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 14, 2003 By: /s/ Marshall J. Campbell
------------------------
Marshall J. Campbell
President and Chief Executive Officer
(principal executive officer)
Dated: November 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. (2)
3.1 Certificate of Incorporation of Citizens First
Bancorp, Inc. (1)
3.2 Bylaws of Citizens First Bancorp, Inc. (1)
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 8-K filed on
May 22, 2003.
19