Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005
or
o | 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 incorporation or organization) | (I.R.S. Employer Identification No.) |
525 Water Street, Port Huron, Michigan | 48060 | |
(Address of principal executive offices) | (Zip Code) |
(810) 987-8300
(Issuer’s telephone number, including area code)
Not Applicable
(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. Yesþ Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yesþ Noo
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The Issuer had 8,451,014 shares of common stock, par value $0.01 per share, outstanding as of November 2, 2005.
CITIZENS FIRST BANCORP, INC.
FORM 10-Q
FORM 10-Q
INDEX
Page | ||||||||
FINANCIAL INFORMATION | ||||||||
Financial Statements | ||||||||
Controls and Procedures | ||||||||
OTHER INFORMATION | ||||||||
Legal Proceedings | ||||||||
Unregistered Sales of Equity Securities and Use of Proceeds | ||||||||
Defaults Upon Senior Securities | ||||||||
Submission of Matters to a Vote of Security Holders | ||||||||
Other Information | ||||||||
Exhibits | ||||||||
Signatures | ||||||||
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||||||
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||||||||
Certification of Chief Executive Officer Pursuant to Section 302 | ||||||||
Certification of Chief Financial Officer Pursuant to Section 302 | ||||||||
Certification of Chief Executive Officer Pursuant to Section 906 | ||||||||
Certification of Chief Financial Officer Pursuant to Section 906 |
Table of Contents
PART 1 — FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
CITIZENS FIRST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(IN THOUSANDS, EXCEPT SHARE DATA)
Unaudited | ||||||||
September 30, | December 31, | |||||||
2005 | 2004 | |||||||
ASSETS | ||||||||
Cash and due from depository institutions | $ | 42,987 | $ | 27,937 | ||||
Federal funds sold | 577 | — | ||||||
Interest-bearing deposits in other depository institutions | 11,129 | — | ||||||
Total cash and cash equivalents | 54,693 | 27,937 | ||||||
Securities available for sale, at fair value | 92,218 | 93,839 | ||||||
Federal Home Loan Bank stock, at cost | 17,700 | 13,536 | ||||||
Loans held for sale | 8,100 | 192 | ||||||
Loans — less allowance for loan losses of $14,292 and $13,472, (Note 6) | 1,346,924 | 1,192,057 | ||||||
Premises and equipment, net | 35,753 | 30,680 | ||||||
Goodwill (Note 5) | 9,814 | 9,814 | ||||||
Other intangible assets, net of amortization of $1,081 and $660 (Note 5) | 3,319 | 3,740 | ||||||
Accrued interest receivable and other assets | 23,706 | 21,569 | ||||||
Total assets | $ | 1,592,227 | $ | 1,393,364 | ||||
LIABILITIES | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 120,781 | $ | 89,416 | ||||
Interest-bearing | 967,718 | 843,688 | ||||||
Total deposits | 1,088,499 | 933,104 | ||||||
Federal Home Loan Bank advances | 271,440 | 232,209 | ||||||
Bank line of credit | 11,000 | 10,000 | ||||||
Federal funds purchased | 44,061 | 45,527 | ||||||
Accrued interest payable and other liabilities | 9,802 | 9,630 | ||||||
Total liabilities | 1,424,802 | 1,230,470 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued and outstanding | ||||||||
Common stock, $.01 par value, 20,000,000 shares authorized, 9,526,761 issued | 95 | 95 | ||||||
Additional paid-in capital | 93,731 | 93,409 | ||||||
Retained earnings | 102,418 | 98,068 | ||||||
Accumulated other comprehensive income (loss) | (751 | ) | (621 | ) | ||||
Treasury stock, at cost (1,347,912 and 1,278,891 shares) | (23,739 | ) | (23,004 | ) | ||||
Deferred compensation obligation | 2,833 | 2,632 | ||||||
Unearned compensation — ESOP | (7,162 | ) | (7,685 | ) | ||||
Total stockholders’ equity | 167,425 | 162,894 | ||||||
Total liabilities and stockholders’ equity | $ | 1,592,227 | $ | 1,393,364 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
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CITIZENS FIRST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Unaudited | Unaudited | |||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
INTEREST INCOME | ||||||||||||||||
Loans, including fees | $ | 21,961 | $ | 16,575 | $ | 60,623 | $ | 48,324 | ||||||||
Federal funds sold and interest bearing deposits | 93 | 22 | 181 | 70 | ||||||||||||
Securities: | ||||||||||||||||
Tax-exempt | 343 | 259 | 908 | 668 | ||||||||||||
Taxable | 857 | 788 | 2,733 | 2,260 | ||||||||||||
Total interest income | 23,254 | 17,644 | 64,445 | 51,322 | ||||||||||||
INTEREST EXPENSE | ||||||||||||||||
Deposits | 6,364 | 3,602 | 16,130 | 10,804 | ||||||||||||
Short-term borrowings | 443 | 294 | 1,212 | 524 | ||||||||||||
FHLB advances | 3,278 | 2,473 | 9,383 | 7,444 | ||||||||||||
Total interest expense | 10,085 | 6,369 | 26,725 | 18,772 | ||||||||||||
NET INTEREST INCOME | 13,169 | 11,275 | 37,720 | 32,550 | ||||||||||||
PROVISION FOR LOAN LOSSES | 560 | 470 | 1,820 | 758 | ||||||||||||
NET INTEREST INCOME, after provision for loan losses | 12,609 | 10,805 | 35,900 | 31,792 | ||||||||||||
NONINTEREST INCOME | ||||||||||||||||
Service charges and other fees | 676 | 469 | 1,787 | 1,777 | ||||||||||||
Mortgage banking activities | 1,250 | 382 | 2,247 | 942 | ||||||||||||
Trust fee income | 252 | 205 | 793 | 582 | ||||||||||||
Gain(loss) on sale of securities available for sale | — | (240 | ) | — | 448 | |||||||||||
Other | 9 | (18 | ) | 222 | 98 | |||||||||||
Total noninterest income | 2,187 | 798 | 5,049 | 3,847 | ||||||||||||
NONINTEREST EXPENSE | ||||||||||||||||
Compensation, payroll taxes and employee benefits | 5,015 | 3,561 | 14,268 | 12,015 | ||||||||||||
Office occupancy and equipment | 1,715 | 1,246 | 4,779 | 4,164 | ||||||||||||
Advertising and business promotion | 351 | 379 | 1,172 | 1,350 | ||||||||||||
Stationery, printing and supplies | 547 | 427 | 1,473 | 1,310 | ||||||||||||
Data processing | 498 | 293 | 1,424 | 980 | ||||||||||||
Professional fees | 1,034 | 860 | 3,230 | 2,413 | ||||||||||||
Core deposit intangible amortization | 140 | 165 | 421 | 495 | ||||||||||||
Other | 1,627 | 1,325 | 4,322 | 3,764 | ||||||||||||
Total noninterest expense | 10,927 | 8,256 | 31,089 | 26,491 | ||||||||||||
INCOME, before federal income tax expense | 3,869 | 3,347 | 9,860 | 9,148 | ||||||||||||
Federal income tax expense | 1,386 | 1,142 | 3,225 | 3,113 | ||||||||||||
NET INCOME | $ | 2,483 | $ | 2,205 | $ | 6,635 | $ | 6,035 | ||||||||
EARNINGS PER SHARE, BASIC | $ | 0.32 | $ | 0.28 | $ | 0.84 | $ | 0.77 | ||||||||
EARNINGS PER SHARE, DILUTED | $ | 0.31 | $ | 0.28 | $ | 0.84 | $ | 0.76 | ||||||||
DIVIDENDS PER SHARE | $ | 0.09 | $ | 0.09 | $ | 0.27 | $ | 0.27 | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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CITIZENS FIRST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Deferred | Unearned | Total | ||||||||||||||||||||||||||||
Common | Paid-in | Retained | Comprehensive | Treasury | Compensation | Compensation | Stockholders’ | |||||||||||||||||||||||||
Stock | Capital | Earnings | Income (Loss) | Stock | Obligation | - ESOP | Equity | |||||||||||||||||||||||||
Nine months ended September 30, 2004 | ||||||||||||||||||||||||||||||||
Balance, January 1, 2004 | $ | 95 | $ | 92,911 | $ | 92,684 | $ | 613 | $ | (21,787 | ) | $ | 2,054 | $ | (8,383 | ) | $ | 158,187 | ||||||||||||||
Exercise of stock options | 8 | 84 | 92 | |||||||||||||||||||||||||||||
Purchase of treasury stock | (1,046 | ) | (1,046 | ) | ||||||||||||||||||||||||||||
Deferred compensation | 383 | 383 | ||||||||||||||||||||||||||||||
Allocation of ESOP shares | 353 | 523 | 876 | |||||||||||||||||||||||||||||
Dividends paid ($.27 per share) | (2,256 | ) | (2,256 | ) | ||||||||||||||||||||||||||||
Net income | 6,035 | 6,035 | ||||||||||||||||||||||||||||||
Change in net unrealized gain on securities available for sale, net of tax effect of ($268) | (521 | ) | (521 | ) | ||||||||||||||||||||||||||||
Total comprehensive income | 5,514 | |||||||||||||||||||||||||||||||
Balance, September 30, 2004 | $ | 95 | $ | 93,272 | $ | 96,463 | $ | 92 | $ | (22,749 | ) | $ | 2,437 | $ | (7,860 | ) | $ | 161,750 | ||||||||||||||
Nine months ended September 30, 2005 | ||||||||||||||||||||||||||||||||
Balance, January 1, 2005 | $ | 95 | $ | 93,409 | $ | 98,068 | $ | (621 | ) | $ | (23,004 | ) | $ | 2,632 | $ | (7,685 | ) | $ | 162,894 | |||||||||||||
Exercise of stock options | 1 | 47 | 48 | |||||||||||||||||||||||||||||
Purchase of treasury stock | (782 | ) | (782 | ) | ||||||||||||||||||||||||||||
Deferred compensation | 201 | 201 | ||||||||||||||||||||||||||||||
Allocation of ESOP shares | 321 | 523 | 844 | |||||||||||||||||||||||||||||
Dividends paid ($.27 per share) | (2,285 | ) | (2,285 | ) | ||||||||||||||||||||||||||||
Net income | 6,635 | 6,635 | ||||||||||||||||||||||||||||||
Change in net unrealized loss on securities available for sale, net of tax effect of ($67) | (130 | ) | (130 | ) | ||||||||||||||||||||||||||||
Total comprehensive income | 6,505 | |||||||||||||||||||||||||||||||
Balance, September 30, 2005 | $ | 95 | $ | 93,731 | $ | 102,418 | $ | (751 | ) | $ | (23,739 | ) | $ | 2,833 | $ | (7,162 | ) | $ | 167,425 | |||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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CITIZENS FIRST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(IN THOUSANDS)
Unaudited | ||||||||
Nine Months Ended | ||||||||
September 30, | ||||||||
2005 | 2004 | |||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 6,635 | $ | 6,035 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 1,820 | 758 | ||||||
Deferred compensation and ESOP | 1,045 | 1,259 | ||||||
Depreciation | 1,734 | 1,500 | ||||||
Core deposit intangible amortization | 421 | 495 | ||||||
Amortization of securities | 632 | 2,157 | ||||||
Proceeds from sale of mortgage loans held for sale | 82,555 | 100,572 | ||||||
Origination of mortgage loans held for sale | (89,922 | ) | (98,831 | ) | ||||
Gain on sale of mortgage loans | (541 | ) | (9 | ) | ||||
Gain on sale of securities available for sale | — | (448 | ) | |||||
(Gain)/loss on sale of premises and equipment | (72 | ) | 144 | |||||
Changes in assets and liabilities, net of acquisition: | ||||||||
Increase in accrued interest receivable and other assets | (2,070 | ) | (2,188 | ) | ||||
Increase in accrued interest payable and other liabilities | 172 | 4,750 | ||||||
Net cash provided by operating activities | 2,409 | 16,194 | ||||||
LENDING AND INVESTING ACTIVITIES | ||||||||
Proceeds from maturities of securities available for sale | 11,067 | 18,927 | ||||||
Proceeds from sale of securities available for sale | 95 | 63,261 | ||||||
Purchase of securities available for sale | (10,370 | ) | (59,933 | ) | ||||
Purchase of Federal Home Loan Bank stock | (4,164 | ) | (1,441 | ) | ||||
Acquisition, net of cash acquired | — | (24,398 | ) | |||||
Net increase in loans | (156,687 | ) | (104,591 | ) | ||||
Proceeds from sale of premises and equipment | 257 | 4 | ||||||
Purchase of premises and equipment | (6,992 | ) | (4,762 | ) | ||||
Net cash used in lending and investing activities | (166,794 | ) | (112,933 | ) | ||||
DEPOSIT AND FINANCING ACTIVITIES | ||||||||
Net increase in deposits | 155,395 | 49,848 | ||||||
Net (decrease)/increase in federal funds purchased | (1,466 | ) | 14,343 | |||||
Proceeds from exercises of stock options | 48 | 92 | ||||||
Payment of dividends | (2,285 | ) | (2,256 | ) | ||||
Purchase of treasury stock | (782 | ) | (1,046 | ) | ||||
Proceeds from line of credit | 1,000 | 10,000 | ||||||
Repayment of FHLB advances | (136,269 | ) | (36,916 | ) | ||||
Proceeds from FHLB advances | 175,500 | 72,500 | ||||||
Net cash provided by deposit and financing activities | 191,141 | 106,565 | ||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | 26,756 | 9,826 | ||||||
CASH AND CASH EQUIVALENTS,beginning of period | 27,937 | 33,647 | ||||||
CASH AND CASH EQUIVALENTS,end of period | $ | 54,693 | $ | 43,473 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
Cash paid for: | ||||||||
Interest | $ | 27,560 | $ | 18,992 | ||||
Federal income taxes | 2,600 | 2,550 |
See accompanying notes to unaudited condensed consolidated financial statements.
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CITIZENS FIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(UNAUDITED)
NOTE 1 — BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and with the 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 financial statements should be read in conjunction with the financial statements of Citizens First Bancorp, Inc. and Subsidiaries and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2004.
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 three and nine months ended September 30, 2005, are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.
As previously discussed in prior quarterly reports, the Company’s Board of Directors approved the merger of Metrobank’s charter into Citizens First’s charter. Management has received approval for this merger from the regulatory authorities effective October 1, 2005.
Certain amounts in the prior period’s financial statements have been reclassified to conform to the current period’s presentation.
NOTE 2 — PRINCIPLES OF CONSOLIDATION
Citizens First Bancorp, Inc. (the “Bancorp”), a Delaware company, is the holding company for Citizens First Savings Bank (“Citizens”) and Metrobank (“Metrobank”), both state-chartered savings banks headquartered in Port Huron and Farmington Hills, Michigan, respectively. The consolidated financial statements include the accounts of the Bancorp and its wholly owned subsidiaries (the “Company”) Citizens and Metrobank (the “Banks”). Citizens also includes the accounts of its wholly owned 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. Metrobank includes the accounts of its wholly owned subsidiaries, Metrobank Financial Services, Inc. and Metrobank Mortgage, LLC. Both Citizens First Mortgage, LLC and Metrobank Mortgage, LLC receive revenue from interest income on loans and the sale of loans.
NEW ACCOUNTING PRONOUNCEMENTS
On November 3, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 115-1. This FSP addresses the determination as to when an investment in a debt or equity security is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment loss and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary. Although management has not completed its assessment of the impact of this FSP, which is effective for the Company January 1, 2006, it is not expected to have a material impact on the financial position, results of operations or liquidity of the Company.
SFAS No. 123(R),Share Based Payment, establishes accounting requirements for share-based compensation to employees and carries forward prior guidance on accounting for awards to non-employees. This Statement requires an entity to recognize the cost of employee services received in share-based payment transactions as compensation expense and measure the cost based on the grant-date fair value of the award. The Company is required to adopt SFAS 123(R) no later than January 1, 2006. Currently the Company uses the intrinsic-value method which does not result in expense recognition but, instead, requires pro forma presentation of what compensation expense would have been recorded if the fair-value measurement and expense recognition provisions had been applied. Effective June 30, 2005, the Company’s Board of Directors approved the acceleration of the vesting of substantially all of the company's outstanding stock options in conjunction with an overall review of the compensation system and in anticipation of implementation of Statement No. 123(R). See Note 3 for the stock based compensation pro forma disclosures and the related effects on basic and diluted earnings per share.
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In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections. This Statement replaces APB Opinion No. 20,Accounting Changes, and FASB Statement No. 3,Reporting Accounting Changes in Interim Financial Statements. SFAS 154 carries forward the guidance contained in Opinion 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. However, SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Under this Statement, every voluntary change in accounting principle requires retrospective application to prior periods’ financial statements, unless it is impracticable. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. This Statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, although earlier application is permitted for changes and corrections made in fiscal years beginning after June 1, 2005. The Company expects no significant effect on the its financial statements as a result of the adoption of this Statement.
NOTE 3 — STOCK BASED COMPENSATION
Under the Company’s stock based incentive plan, the Company may grant up to 476,338 stock awards and 1,429,014 stock options to its directors, officers and employees. The Company accounts for stock awards and options under the recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations. No compensation expense related to stock options is reflected in net income as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. SFAS No. 123,Accounting for Stock-Based Compensation, establishes an alternative fair value method of accounting for stock options whereby compensation expense would be recognized based on the computed fair value of the options on the grant date. As discussed in the section labeled NEW ACCOUNTING PRONOUNCEMENTS above, the Company vested substantially all of its stock options effective June 30, 2005. By not electing this fair value alternative, certain pro forma disclosures of the expense recognition provisions of Statement No. 123 are required, and include the effects of such immediate vesting of substantially all of the stock options are as follows (in thousands, except per share data):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income as reported | $ | 2,483 | $ | 2,205 | $ | 6,635 | $ | 6,035 | ||||||||
Deduct: Stock-based employee compensation expense determined under fair-value based method, net of related tax effects | (31 | ) | (34 | ) | (626 | ) | (96 | ) | ||||||||
Pro forma net income | $ | 2,452 | $ | 2,171 | $ | 6,009 | $ | 5,939 | ||||||||
Earnings per share | ||||||||||||||||
Basic — as reported | $ | 0.32 | $ | 0.28 | $ | 0.84 | $ | 0.77 | ||||||||
Basic — pro forma | $ | 0.31 | $ | 0.28 | $ | 0.76 | $ | 0.75 | ||||||||
Diluted — as reported | $ | 0.31 | $ | 0.28 | $ | 0.84 | $ | 0.76 | ||||||||
Diluted — pro forma | $ | 0.31 | $ | 0.28 | $ | 0.76 | $ | 0.75 |
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NOTE 4 — EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period, including vested stock awards. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options and restricted stock awards and are determined using the treasury stock method. Treasury and unallocated ESOP shares are not considered outstanding for purposes of calculating basic or diluted earnings per share.
Earnings per common share have been computed based on the following (in thousands, except per share data):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income | $ | 2,483 | $ | 2,205 | $ | 6,635 | $ | 6,035 | ||||||||
Average number of common shares outstanding used to calculate basic earnings per common share | 7,857,423 | 7,855,771 | 7,882,827 | 7,881,175 | ||||||||||||
Effect of dilutive securities | 38,706 | 30,835 | 38,852 | 35,509 | ||||||||||||
Average number of common shares outstanding used to calculate diluted earnings per common share | 7,896,129 | 7,886,606 | 7,921,679 | 7,916,684 | ||||||||||||
Number of antidilutive stock options excluded from diluted earnings per share computation | 38,356 | 38,410 | 35,356 | 38,410 | ||||||||||||
NOTE 5 — GOODWILL AND INTANGIBLES
Goodwill at September 30, 2005 and December 31, 2004 was $9.8 million. Goodwill is reviewed annually for impairment. The Company completed this review during the fourth quarter of 2004 and determined that goodwill was not impaired.
Net other intangible assets at September 30, 2005 and December 31, 2004 were $3.3 million and $3.7 million, respectively. These assets consist primarily of core deposit intangibles and are being amortized as follows: $561,000, $477,000, $405,000, $383,000 and $383,000 in 2005, 2006, 2007, 2008, and 2009, respectively.
NOTE 6 — LOANS
Loans were as follows (in thousands):
September 30, | December 31, | |||||||
2005 | 2004 | |||||||
Real estate loans: | ||||||||
One-to four-family | $ | 400,298 | $ | 404,655 | ||||
Commercial and multi-family | 392,728 | 345,936 | ||||||
Residential construction | 65,674 | 30,917 | ||||||
Home equity and lines of credit | 127,737 | 113,202 | ||||||
986,437 | 894,710 | |||||||
Commercial loans | 264,903 | 222,403 | ||||||
Consumer loans: | ||||||||
Vehicles | 85,008 | 66,463 | ||||||
Other | 26,105 | 24,184 | ||||||
111,113 | 90,647 | |||||||
Total loans | 1,362,453 | 1,207,760 | ||||||
Less: | ||||||||
Allowance for loan losses | 14,292 | 13,472 | ||||||
Net deferred loan fees | 1,237 | 2,231 | ||||||
Net loans | $ | 1,346,924 | $ | 1,192,057 | ||||
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NOTE 7 — OFF BALANCE SHEET ITEMS
The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.
The total contractual amounts of standby letters of credit were $8.3 million and $6.4 million at September 30, 2005 and December 31, 2004, respectively. There were no contractual amounts outstanding of commercial letters of credit at September 30, 2005 or December 31, 2004.
At September 30, 2005, the Company had outstanding commitments to originate loans of $355.5 million.
The Company uses forward contracts as part of its mortgage banking activities. Forward contracts provide for the delivery of financial instruments at a specified future date and at a specified price or yield. Outstanding forward contracts to sell residential mortgage loans were approximately $58.0 million and $6.5 million at September 30, 2005 and December 31, 2004, respectively. The fair value of forward contracts was insignificant at September 30, 2005 and December 31, 2004.
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 for the periods presented 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 may from time to time make written or oral “forward-looking statements.” These forward-looking statements may be contained in the Company’s 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, 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. Those 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 Company’s Annual Report to Stockholders, 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 and its operations or cause its financial performance to differ materially from the plans, objectives, expectations, estimates or intentions expressed in the Company’s forward-looking statements. The impact of technological changes implemented by the Company and the Banks and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers. In this regard, the Company is in the process of bringing the function of data processing in-house (see below for further discussion). There can be no assurance, however, that the planned data processing conversion will not be more difficult or expensive than anticipated or have unforeseen consequences.
OVERVIEW. The Company is a community-oriented financial institution, offering a wide range of deposit, loan and trust management products to its customers. The Company’s commitment to community oriented banking is reflected in its Certificate of Incorporation, which is posted on the Company’s website (www.cfsbank.com), as well as in its corporate governance. In recent years, the Company’s strategy has been one of controlled balance sheet growth and broader diversification of its loan products and loan portfolio. The Company 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 while maintaining asset quality and improving profitability on these products. The Company originates fixed-rate one-to-four-family residential mortgage loans primarily for sale, while generally retaining the servicing rights as to those mortgages. Loans that do not meet the standards of the investors for a variety of reasons and reasons that do not impair the value of the loan remain in the Company’s loan portfolio. We continue to focus on opportunities to increase sources of noninterest income through service fees and other value added products which we believe would benefit our customers.
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We are in the process of securing facilities for a data processing center, in addition to extensive remodeling of our main office to accommodate our growth in full time equivalents. Additionally, we are building a strong and effective team of staff to execute the necessary daily data processing activities and other processes necessary to bring the item processing function in-house, which is expected to take place in the first half of 2006.
CRITICAL ACCOUNTING POLICIES. As of September 30, 2005, there have been no material changes in the disclosures regarding critical accounting policies as disclosed in the Company’s Form 10-K for the year ended December 31, 2004. The Company’s critical accounting policies are described in the financial section of its 2004 Annual Report. Management believes its critical accounting policies relate to the allowance for loan losses, the valuation of mortgage servicing rights and goodwill.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
Summary.Total assets increased $198.9 million, or 14.3%, to $1.592 billion at September 30, 2005, from $1.393 billion at December 31, 2004, primarily due to the increase in net loans of $154.9 million, or 13.0%, due to the increased emphasis in commercial and consumer loan originations in the Oakland and Macomb markets. Our market share is beginning to realize the benefits of hiring seasoned loan officers where necessary at our recently opened retail banking centers in Chesterfield Township, Marysville and in the city of Lapeer. Loan and deposit growth in these areas are improving as expected with new retail branches. Premises and equipment increased $5.1 million or 16.5% due to these locations and renovations to the main office. Additionally, Federal Home Loan Bank (FHLB) stock increased $4.2 million, or 30.8%, due to the increase in FHLB advances. The FHLB requires its members to maintain certain capital holdings based on advances outstanding.
Total liabilities increased $194.3 million, or 15.8%, from $1.230 billion at December 31, 2004 to $1.425 billion at September 30, 2005. Total deposits increased $155.4 million, or 16.7%, primarily due to an increase of $41.9 million in brokered deposits supplemented by increased efforts to attract new deposits in the Oakland and Macomb Counties. FHLB advances have increased by $39.2 million or 16.9% primarily to fund the loan growth experienced during the quarter. Based on our expected loan growth versus the expected deposit growth, management expects that FHLB advances and/or brokered deposits will increase in subsequent periods, depending on which borrowing opportunity makes the most economic sense upon analyzing maturity and repricing data and balancing interest rate risk in a rising rate environment.
Portfolio Loans and Asset Quality.Nonperforming assets totaled $21.7 million at September 30, 2005 compared to $11.7 million at December 31, 2004, an increase of $10.1 million, or 86.3%. Correspondingly, nonperforming assets as a percentage of total assets increased to 1.4% at September 30, 2005 compared to 0.84% at December 31, 2004. As indicated by the table below, a majority of the increase was in commercial loans. The majority of the increase resulted from the downgrade of previously recognized “watch” rated credits to nonperforming status. These downgrades were the result of deterioration in the financial condition of certain borrowers. These credits are regularly monitored, have been under the management of an experienced special asset officer and workout plans are in place to mitigate any potential losses.
The following table sets forth information regarding nonperforming assets (in thousands):
September 30, | December 31, | |||||||
2005 | 2004 | |||||||
Nonperforming loans: | ||||||||
Real estate | 6,424 | $ | 5,745 | |||||
Commercial | 12,088 | 3,343 | ||||||
Consumer | 1,960 | 1,543 | ||||||
Total | 20,472 | 10,631 | ||||||
Real estate and other assets owned | 1,260 | 1,032 | ||||||
Total nonperforming assets | $ | 21,732 | $ | 11,663 | ||||
Total nonperforming loans as a percentage of total loans | 1.50 | % | 0.88 | % | ||||
Total nonperforming assets as a percentage of total assets | 1.36 | % | 0.84 | % |
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The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance is increased by provisions charged to operations and reduced by net charge-offs. The following table sets forth activity in the allowance for loan losses for the interim periods (in thousands):
Three Months | Nine Months | |||||||||||||||
ended September, 30 | ended September, 30 | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Balance, beginning of period | $ | 13,917 | $ | 12,900 | $ | 13,472 | $ | 11,664 | ||||||||
Acquired from acquisition | — | — | — | 1,135 | ||||||||||||
Provision for loan losses | 560 | 470 | 1,820 | 758 | ||||||||||||
Charge-offs | (259 | ) | (169 | ) | (1,230 | ) | (857 | ) | ||||||||
Recoveries | 74 | (96 | ) | 230 | 405 | |||||||||||
Balance, end of period | $ | 14,292 | $ | 13,105 | $ | 14,292 | $ | 13,105 | ||||||||
Allowance for loan losses to total loans | 1.05 | % | 1.15 | % | ||||||||||||
Allowance for loans losses to nonperforming loans | 69.81 | % | 157.17 | % |
Deposits.Deposits increased $155.4 million, or 16.7%, from December 31, 2004 to $1.089 billion at September 30, 2005. The increase of $124.0 million, or 14.7%, in interest bearing deposits was primarily due to an increase in certificates of deposits of $121.0 million, or 33.5%, to $482.0 million due to various promotions of these types of deposits implemented during the quarter, supplemented by a net increase of $41.9 million of brokered deposits. Additionally, money market deposits increased $47.5 million, or 18.6%, to $303.3 million primarily due to an increase of deposits held from municipalities and other public entities. The increase in deposits was partially offset by a decrease in NOW accounts of $37.9 million, or 29.3%, some of which can be attributable to the various promotions in other types of deposit accounts.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004
Summary. Net income for the three months ended September 30, 2005 increased $278,000, or 12.6%, to $2.5 million from $2.2 million for the previous period. Net income for the nine months ended September 30, 2005 increased $600,000, or 9.9%, to $6.6 million from $6.0 million for the previous period. The increases for both periods were primarily due to an increase of $1.8 million, or 16.7%, and $4.1 million, or 12.9%, in net interest income after provision for loan losses for the three and nine month periods, respectively. Additionally, the loan sale of $62 million in 5/1 adjustable rate mortgages during the recent third quarter resulted in a pre tax gain of $937,000. As discussed in previous quarterly filings, the current rising interest rate environment and the composition of our loan portfolio is yielding the results expected during this time period. The increase in net interest income was offset by increases in noninterest expense of $2.7 million, or 32.4%, and $4.6 million, or 17.4%, for the three and nine month periods ended September 30, 2005 compared to September 30, 2004, respectively.
Net Interest Income. Net interest income, after provision for loan losses, for the third quarter of 2005 totaled $12.6 million, an increase of 16.7% as compared to the 2004 third quarter. Net interest income, after provision for loan losses, for the first nine months of 2005 totaled $35.9 million, an increase of 12.9% as compared to $31.8 million for the same period in 2004. This increase was primarily a result of the prime rate increase of 200 basis points from September 30, 2004 and the growth in the average balance in the loan portfolio of 19.9% and 16.0% for the three and nine months ending September 30, 2005 compared to the previous periods, respectively. Due to our efforts in attracting new deposits, offering rates increased as evidenced by the average rate on interest bearing liabilities as noted in the tables below. The increased costs of attracting new deposits, an increase in the cost of borrowings and the brokered deposits costs to fund loan growth affected net interest margin. Management expects net interest income to increase slightly through the end of 2005 as we continue to monitor interest rate risk in a rising rate environment. Loan growth is expected to continue slightly over the subsequent quarters as we continue to implement certain phases of our long term strategic plan.
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The following tables present an analysis of net interest margin for the three and nine month periods ending September 30, 2005 and 2004 (in thousands).
For the Three Months Ended September 30, | ||||||||||||||||||||||||||||||||||||
2005 | 2004 | Change in Net Interest Income | ||||||||||||||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||||||||||||||
Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | |||||||||||||||||||||||||||||||
Balance | Cost | Rate | Balance | Cost | Rate | Volume | Yield/Rate | Net | ||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||
Loans (1) | $ | 1,356,060 | $ | 21,961 | 6.43 | % | $ | 1,130,742 | $ | 16,575 | 5.83 | % | $ | 13,136 | $ | (7,750 | ) | $ | 5,386 | |||||||||||||||||
Securities (2): | ||||||||||||||||||||||||||||||||||||
Taxable | 61,138 | 671 | 4.35 | % | 64,386 | 689 | 4.26 | % | (138 | ) | 120 | (18 | ) | |||||||||||||||||||||||
Tax-exempt | 31,820 | 343 | 4.28 | % | 28,931 | 259 | 3.56 | % | 103 | (19 | ) | 84 | ||||||||||||||||||||||||
Federal funds sold | 1,777 | 8 | 1.79 | % | 979 | 2 | 0.81 | % | 6 | (0 | ) | 6 | ||||||||||||||||||||||||
Federal Home Loan Bank stock | 17,700 | 186 | 4.17 | % | 11,772 | 119 | 4.02 | % | 238 | (171 | ) | 67 | ||||||||||||||||||||||||
Interest earning deposits | 9,793 | 85 | 3.44 | % | 4,969 | 20 | 1.60 | % | 77 | (12 | ) | 65 | ||||||||||||||||||||||||
Total interest-earning assets | 1,478,288 | 23,254 | 6.24 | % | 1,241,779 | 17,664 | 5.66 | % | 13,422 | (7,832 | ) | 5,590 | ||||||||||||||||||||||||
Noninterest-earning assets | 68,753 | 92,033 | ||||||||||||||||||||||||||||||||||
Total assets | $ | 1,547,041 | $ | 1,333,812 | ||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||||||||||
Savings | $ | 94,031 | $ | 144 | 0.61 | % | $ | 99,924 | $ | 147 | 0.59 | % | $ | (35 | ) | $ | 32 | $ | (3 | ) | ||||||||||||||||
NOW | 78,505 | 166 | 0.84 | % | 123,507 | 218 | 0.70 | % | (315 | ) | 263 | (52 | ) | |||||||||||||||||||||||
Money market | 296,761 | 2,010 | 2.69 | % | 264,330 | 897 | 1.35 | % | 438 | 675 | 1,113 | |||||||||||||||||||||||||
Certificates of deposit | 457,162 | 4,044 | 3.51 | % | 322,609 | 2,340 | 2.89 | % | 3,889 | (2,185 | ) | 1,704 | ||||||||||||||||||||||||
Total interest bearing deposits | 926,459 | 6,364 | 2.73 | % | 810,370 | 3,602 | 1.77 | % | 3,977 | (1,215 | ) | 2,762 | ||||||||||||||||||||||||
FHLB advances and other borrowings | 324,534 | 3,721 | 4.55 | % | 253,689 | 2,767 | 4.34 | % | 3,075 | (2,121 | ) | 954 | ||||||||||||||||||||||||
Total interest-bearing liabilities | 1,250,993 | 10,085 | 3.20 | % | 1,064,059 | 6,369 | 2.38 | % | 7,051 | (3,335 | ) | 3,716 | ||||||||||||||||||||||||
Non-interest bearing deposits | 116,127 | 98,321 | ||||||||||||||||||||||||||||||||||
Other Noninterest-bearing liabilities | 12,607 | 10,893 | ||||||||||||||||||||||||||||||||||
Total liabilities | 1,379,727 | 1,173,273 | ||||||||||||||||||||||||||||||||||
Stockholders’ equity | 167,314 | 160,539 | ||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,547,041 | $ | 1,333,812 | ||||||||||||||||||||||||||||||||
Net interest-earning assets | $ | 227,295 | $ | 177,720 | ||||||||||||||||||||||||||||||||
Net interest income | 13,169 | 11,295 | ||||||||||||||||||||||||||||||||||
Interest rate spread (3) | 3.04 | % | 3.28 | % | ||||||||||||||||||||||||||||||||
Net interest margin as a percentage of interest-earning assets (4) | 3.53 | % | 3.61 | % | ||||||||||||||||||||||||||||||||
Ratio of interest-earning assets to interest-bearing liabilities | 118.17 | % | 116.70 | % |
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For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||
2005 | 2004 | Change in Net Interest Income | ||||||||||||||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||||||||||||||
Average | Revenue/ | Yield/ | Average | Revenue/ | Yield/ | |||||||||||||||||||||||||||||||
Balance | Cost | Rate | Balance | Cost | Rate | Volume | Yield/Rate | Net | ||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||
Loans (1) | $ | 1,272,677 | $ | 60,623 | 6.37 | % | $ | 1,097,559 | $ | 48,324 | 5.88 | % | $ | 10,297 | $ | 2,002 | $ | 12,299 | ||||||||||||||||||
Securities (2): | ||||||||||||||||||||||||||||||||||||
Taxable | 63,807 | 2,260 | 4.74 | % | 76,777 | 1,896 | 3.30 | % | (428 | ) | 792 | 364 | ||||||||||||||||||||||||
Tax-exempt | 30,518 | 908 | 3.98 | % | 22,433 | 668 | 3.98 | % | 322 | (82 | ) | 240 | ||||||||||||||||||||||||
Federal funds sold | 1,717 | 36 | 2.80 | % | 4,216 | 30 | 0.95 | % | (24 | ) | 30 | 6 | ||||||||||||||||||||||||
Federal Home Loan Bank stock | 16,287 | 473 | 3.88 | % | 10,915 | 364 | 4.45 | % | 239 | (130 | ) | 109 | ||||||||||||||||||||||||
Interest earning deposits | 7,801 | 145 | 2.49 | % | 4,686 | 40 | 1.14 | % | 36 | 69 | 105 | |||||||||||||||||||||||||
Total interest-earning assets | 1,392,807 | 64,445 | 6.19 | % | 1,216,586 | 51,322 | 5.63 | % | 10,442 | 2,681 | 13,123 | |||||||||||||||||||||||||
Noninterest-earning assets | 93,912 | 88,862 | ||||||||||||||||||||||||||||||||||
Total assets | $ | 1,486,719 | $ | 1,305,448 | ||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||||||||||
Savings | $ | 96,707 | $ | 421 | 0.58 | % | $ | 100,184 | $ | 430 | 0.57 | % | $ | (20 | ) | $ | 11 | $ | (9 | ) | ||||||||||||||||
NOW | 94,022 | 650 | 0.92 | % | 120,284 | 568 | 0.63 | % | (165 | ) | 247 | 82 | ||||||||||||||||||||||||
Money market | 268,838 | 4,515 | 2.25 | % | 269,181 | 2,697 | 1.34 | % | (5 | ) | 1,823 | 1,818 | ||||||||||||||||||||||||
Certificates of deposit | 418,484 | 10,544 | 3.37 | % | 312,619 | 7,109 | 3.04 | % | 3,218 | 217 | 3,435 | |||||||||||||||||||||||||
Total interest bearing deposits | 878,051 | 16,130 | 2.46 | % | 802,268 | 10,804 | 1.80 | % | 3,028 | 2,298 | 5,326 | |||||||||||||||||||||||||
FHLB advances and other borrowings | 320,820 | 10,595 | 4.42 | % | 234,072 | 7,968 | 4.55 | % | 3,947 | (1,320 | ) | 2,627 | ||||||||||||||||||||||||
Total interest-bearing liabilities | 1,198,871 | 26,725 | 2.98 | % | 1,036,340 | 18,772 | 2.42 | % | 6,975 | 978 | 7,953 | |||||||||||||||||||||||||
Non-interest bearing deposits | 111,792 | 97,615 | ||||||||||||||||||||||||||||||||||
Other Noninterest-bearing liabilities | 10,437 | 11,179 | ||||||||||||||||||||||||||||||||||
Total liabilities | 1,321,100 | 1,145,134 | ||||||||||||||||||||||||||||||||||
Stockholders’ equity | 165,619 | 160,314 | ||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,486,719 | $ | 1,305,448 | ||||||||||||||||||||||||||||||||
Net interest-earning assets | $ | 193,936 | $ | 180,246 | ||||||||||||||||||||||||||||||||
Net interest income | 37,720 | 32,550 | ||||||||||||||||||||||||||||||||||
Interest rate spread (3) | 3.21 | % | 3.21 | % | ||||||||||||||||||||||||||||||||
Net interest margin as a percentage of interest-earning assets (4) | 3.62 | % | 3.56 | % | ||||||||||||||||||||||||||||||||
Ratio of interest-earning assets to interest-bearing liabilities | 116.18 | % | 117.39 | % |
(1) | Balances are net of deferred loan origination fees, undisbursed proceeds of construction loans in process, and include nonperforming loans. | |
(2) | Securities available for sale are not on a tax equivalent basis. | |
(3) | Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. | |
(4) | Net interest margin represents net interest income as a percentage of average interest-earning assets. |
Provision for Loan Losses. The provisions for loan losses for the three and nine months ended September 30, 2005 were $560,000 and $1.8 million, respectively, as compared to $470,000 and $758,000 for the same periods in the prior year. These increases in the provision for loan losses are the result of management’s analysis of the loan loss allowance, current and forecasted economic conditions in the regional markets where we conduct business, and historical charge off rates in the overall loan portfolio. Additional reserves were provided in line with the loan growth experienced during the more recent quarters and for problem loans that management continues to work through with our customers. The loan loss allowance as a percentage of total loans decreased from 1.12% at December 31, 2004 to 1.05% at September 30, 2005. The allowance for loan losses as a percentage of nonperforming loans decreased from 127% at December 31, 2004 to 70% at September 30, 2005 as a result of the increase in nonperforming assets compared to the increase in the allowance for loan losses. The allowance for loan losses analysis includes inherent losses in the loan portfolio. Based on our analysis, we believe that the allowance for loan losses is sufficient to cover potential losses at September 30, 2005.
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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.
Noninterest Income. Noninterest income for the three and nine months ended September 30, 2005 increased to $2.2 million and $5.1 million, respectively, as compared to $798,000 and $3.8 million for the same periods in the prior year. A majority of this increase was a result of the adjustable rate mortgage loan sale that occurred in July 2005. Excluding this specific loan sale, we do not expect a significant increase in gain on loan sales during the remainder of the year as the current interest rate environment is not the same as previous years. Trust fees continue to provide additional income and we expect this line of business to be accretive to noninterest income in the future. An area that continues to be on the forefront of management is service charges and other fees. This is an area that, compared to our peers, needs additional focus and improvement. Several initiatives are being reviewed by management in our efforts to increase this source of income.
Noninterest Expense. Noninterest expense for the three and nine months ended September 30, 2005 increased to $10.9 million and $31.1 million compared to $8.3 million and $26.5 million for the same time periods in the prior year, respectively. Compensation, payroll taxes and employee benefits increased by $1.5 million for the third quarter and $2.3 million for the nine months ended 2005. These increases were primarily due to increases in wages and additions to staff due to the new loan production offices and banking centers and one-time severance package costs incurred with the reduction of personnel at Metrobank. We expect compensation expense to increase throughout the remainder of 2005 as a result of our growth and attracting experienced personnel necessary to exceed customer needs, offset by efficiencies obtained as a result of the consolidation and streamlining of responsibilities from departed Metrobank personnel. We believe that our employees are a tremendous asset and the foundation to the success of the Company and, therefore, decided to further invest in quality personnel. Additionally, office occupancy expense increased $469,000 and $615,000 for the three and nine months ended September 30, 2005 as compared to the same time periods in the prior year, respectively, due to additional banking centers and an increase in the number of leased facilities in Oakland, Macomb and Lapeer counties over the same periods in the prior year. As previously discussed, management has decided to bring the data processing function in-house during the first half of 2006 based on an analysis that resulted in savings over a 5 year time period when compared to outsourcing this function. Additionally, management is confident that having this process in-house will provide to us the flexibility to exceed our customers’ needs and expectations. A majority of the costs will be in the form of equipment and facilities which will be capitalized. Professional fees increased $174,000 and $817,000 for the three and nine months ended September 30, 2005 over the same periods in the prior year primarily as a result of Sarbanes-Oxley (SOX) Act requirements.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability to meet current and future financial obligations, including 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. The Company’s primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities, borrowings from the FHLB, and more recently, brokered deposits. 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. The Company 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 Company’s primary investing activities are the origination of loans and the purchase of securities. In the nine months ended September 30, 2005, the Company originated $652.4 million of loans and purchased $10.4 million of securities and in fiscal 2004, originated $636.4 million of loans and purchased $63.9 million of securities.
The Company’s most liquid assets are cash and short-term investments. The levels of these assets are dependent on the Company’s operating, financing, lending and investing activities during any given period. At September 30, 2005, cash and short-term investments totaled $54.7 million and securities classified as available for sale totaled $92.2 million.
The Company originates fixed-rate mortgage loans conforming to Freddie Mac and Fannie Mae 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. Sales of fixed-rate mortgage loans were $82.6 million and $126.8 million for the nine months ended September 30, 2005 and year ended December 31, 2004, respectively.
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In July 2005, management securitized approximately $62 million in mortgage backed securities with Freddie Mac and sold to other investors. The sale resulted in a pre tax gain of $937,000, of which a majority of these funds were used to pay off FHLB variable rate advances and to fund loan growth. Based on our projected growth in mortgage originations, management expects to replace the pool of loans before year end with loans that have more favorable yields based on the current interest rate environment.
Financing activities consist primarily of activity in deposit accounts, overnight borrowings from our correspondent banks and FHLB advances. The Company experienced a net increase in total deposits of $155.4 million for the nine months ended September 30, 2005, verses a net increase of $50.0 million for fiscal 2004. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by the Company and its local competitors and other factors. The Company generally manages the pricing of its deposits to be competitive and to increase core deposit relationships, and occasionally offers promotional rates on certain deposit products in order to attract deposits.
The Company had the ability to borrow a total of approximately $507.5 million, $130.8 million from its correspondent banks and $376.7 million from the FHLB, of which $55.1 million and $271.4 million was outstanding at September 30, 2005, respectively. During the nine months ended September 30, 2005, the net increase in FHLB advances was $39.2 million, primarily to provide liquidity for loan growth and manage interest rate risk. Included in the total amount of available borrowings from its correspondent banks was a bank line-of-credit in the amount of $25.0 million, of which $11.0 million was outstanding at September 30, 2005.
At September 30, 2005, the Company had outstanding commitments to originate loans of $355.5 million, of which $52.3 million had fixed interest rates. The Company believes 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 FHLB borrowings. More recently, the Company has selected various brokers to originate brokered deposits in the open market. The brokered deposit relationships provide additional liquidity to fund the gap between growth in our loan portfolio and overall business and increases in deposits from customers. There are occasions, depending on the market, when the all-in interest rate costs of brokered deposits are lower than other available funding sources. Management evaluates which funding source is less expensive to manage our interest rate risk depending on the funding need. Certificates of deposit that are scheduled to mature in one year or less as of September 30, 2005 totaled $309.3 million. Management believes, based on past experience, that a significant portion of those deposits will remain with the Company. Based on the foregoing, the Company considers its liquidity and capital resources sufficient to meet its outstanding short-term and long-term needs.
The Banks are 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, 2005, the Banks exceeded all of the regulatory capital requirements and are 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, deposits held by the Company and borrowings from its correspondent banks. These funds have been used to pay dividends, repurchase the Company’s common stock and pay general corporate expenses. The Bancorp may utilize future dividend payments from its subsidiary Banks as an additional funding source. The Banks’ ability to pay dividends and other capital distributions to the Bancorp 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 Banks to the Bancorp, which are otherwise permissible by regulation for safety and soundness reasons.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2005, 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, 2004.
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized and reported on a timely basis. The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, the officers have concluded that, as of the
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Evaluation Date, the Company’s disclosure controls and procedures are effective in bringing to their attention on a timely basis, material information required to be included in the Company’s periodic filings under the Exchange Act.
Disclosure controls and procedures are designed to ensure information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer, the Chief Financial Officer (Principal Financial Officer) and the Controller and Assistant Treasurer (Principal Accounting Officer), as appropriate, to allow timely decisions regarding required disclosure. Disclosure controls include internal controls that are designed to provide reasonable assurance that transactions are properly authorized, assets are safeguarded against unauthorized or improper use and that transactions are properly recorded and reported.
No significant change in the Company’s internal controls over financial reporting occurred during the Company’s most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.
Any control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system inherently has limitations, and the benefits of controls must be weighed against their costs. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Therefore, no evaluation of a cost-effective system of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Periodically, there have been various claims and lawsuits involving the Company, such as claims to enforce liens, condemnation proceedings on properties in which the Company holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Company’s business. Neither the Company or its subsidiaries are a party to any pending legal proceedings that management believes would have a material adverse effect on the financial condition or operations the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The Company entered into deferred fee agreements with certain directors of the Company at various times during 2001 and 2002. Pursuant to these arrangements, directors may defer fees payable to them by the Company, which fees are used to purchase deferred compensation stock units. A director has the right to change or revoke his or her deferral election, but such revocation becomes effective at the beginning of the Company’s subsequent calendar year. No director has revoked his or her deferral election to date. Upon a director’s termination of service with the Board, each stock unit is to be settled on a one-for-one basis in shares of the Company’s common stock. Pursuant to these arrangements, the Company issued to directors during the third quarter approximately 2,357 deferred compensation stock units for the aggregate consideration of $39,000, which included a retainer and board fees. All transactions were effected on the last business day of each month. The stock units issued pursuant to these arrangements have not been registered under the Securities Act of 1933 in reliance upon the exemption provided by Section 4(2) thereof.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
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Item 6. Exhibits
3.1 | Certificate of Incorporation of Citizens First Bancorp, Inc. (1) | ||
3.2 | Bylaws of Citizens First Bancorp, Inc. (1) | ||
31 | Rule 13a-14(a)/15d-14(a) Certifications | ||
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32 | Section 1350 Certifications | ||
32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-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 theSarbanes-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 initially filed with the commission on November 3, 2000, Registration No. 333-49234. |
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CONFORMED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CITIZENS FIRST BANCORP, INC. | ||||||
Dated: November 8, 2005 | By: | /s/ Marshall J. Campbell | ||||
President and Chief Executive Officer | ||||||
(Principal Executive Officer) | ||||||
Dated: November 8, 2005 | By: | /s/ Timothy D. Regan | ||||
Secretary, Treasurer and Director | ||||||
(Principal Financial and Accounting Officer) |
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Exhibit Index
Exhibit No. | Description | |
3.1 | Certificate of Incorporation of Citizens First Bancorp, Inc. (1) | |
3.2 | Bylaws of Citizens First Bancorp, Inc. (1) | |
31 | Rule 13a-14(a)/15d-14(a) Certifications | |
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32 | Section 1350 Certifications | |
32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-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 theSarbanes-Oxley Act of 2002 |
(1) | Incorporated by reference into this document from the Exhibits filed with the Registration Statement of Form S-1, and any amendments thereto, initially filed with the Commission on November 3, 2000, Registration No. 333-49234. |
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