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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, 2006
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
(Registrant’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 a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filero Accelerated filerþ Non-accelerated filero
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
The Issuer had 8,423,414 shares of common stock, par value $0.01 per share, outstanding as of November 2, 2006.
CITIZENS FIRST BANCORP, INC.
FORM 10-Q
FORM 10-Q
INDEX
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PART 1 — FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
CITIZENS FIRST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Unaudited | ||||||||
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
ASSETS | ||||||||
Cash and due from depository institutions | $ | 22,875 | $ | 38,217 | ||||
Federal funds sold | 397 | 2,029 | ||||||
Interest-bearing deposits in other depository institutions | 104 | 7,345 | ||||||
Total cash and cash equivalents | 23,376 | 47,591 | ||||||
Securities available for sale, at fair value | 75,578 | 87,510 | ||||||
Federal Home Loan Bank stock, at cost | 19,326 | 17,700 | ||||||
Loans held for sale | 1,693 | 2,126 | ||||||
Loans — less allowance for loan losses of $14,278 and $13,546 (Note 6) | 1,573,595 | 1,425,036 | ||||||
Premises and equipment, net | 43,125 | 36,228 | ||||||
Goodwill (Note 5) | 9,814 | 9,814 | ||||||
Other intangible assets, net of amortization of $1,579 and $1,221 (Note 5) | 2,821 | 3,179 | ||||||
Accrued interest receivable and other assets | 29,156 | 25,039 | ||||||
Total assets | $ | 1,778,484 | $ | 1,654,223 | ||||
LIABILITIES | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 87,937 | $ | 112,609 | ||||
Interest-bearing | 1,090,859 | 959,586 | ||||||
Total deposits | $ | 1,178,796 | $ | 1,072,195 | ||||
Federal Home Loan Bank advances | 351,695 | 346,500 | ||||||
Bank line of credit | — | 3,950 | ||||||
Federal funds purchased | 61,898 | 52,013 | ||||||
Accrued interest payable and other liabilities | 12,041 | 10,995 | ||||||
Total liabilities | $ | 1,604,430 | $ | 1,485,653 | ||||
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 | 94,556 | 93,848 | ||||||
Retained earnings | 108,011 | 104,054 | ||||||
Accumulated other comprehensive loss | (613 | ) | (898 | ) | ||||
Treasury stock, at cost (1,373,424 and 1,364,561 shares) | (25,432 | ) | (24,653 | ) | ||||
Deferred compensation obligation | 3,901 | 3,111 | ||||||
Unearned compensation — ESOP | (6,464 | ) | (6,987 | ) | ||||
Total stockholders’ equity | $ | 174,054 | $ | 168,570 | ||||
Total liabilities and stockholders’ equity | $ | 1,778,484 | $ | 1,654,223 | ||||
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)
Unaudited | Unaudited | |||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
INTEREST INCOME | ||||||||||||||||
Loans, including fees | $ | 27,885 | $ | 21,893 | $ | 79,543 | $ | 60,402 | ||||||||
Federal funds sold and interest bearing deposits | 27 | 93 | 98 | 181 | ||||||||||||
Securities: | ||||||||||||||||
Tax-exempt | 281 | 343 | 716 | 908 | ||||||||||||
Taxable | 848 | 857 | 2,623 | 2,687 | ||||||||||||
Total interest income | 29,041 | 23,186 | 82,980 | 64,178 | ||||||||||||
INTEREST EXPENSE | ||||||||||||||||
Deposits | 10,385 | 6,364 | 27,748 | 16,130 | ||||||||||||
Short-term borrowings | 823 | 443 | 2,663 | 1,212 | ||||||||||||
FHLB advances | 4,281 | 3,278 | 12,078 | 9,383 | ||||||||||||
Total interest expense | 15,489 | 10,085 | 42,489 | 26,725 | ||||||||||||
NET INTEREST INCOME | 13,552 | 13,101 | 40,491 | 37,453 | ||||||||||||
PROVISION FOR LOAN LOSSES | 605 | 560 | 2,185 | 1,820 | ||||||||||||
NET INTEREST INCOME, after provision for loan losses | 12,947 | 12,541 | 38,306 | 35,633 | ||||||||||||
NONINTEREST INCOME | ||||||||||||||||
Service charges and other fees | 664 | 676 | 1,901 | 1,787 | ||||||||||||
Mortgage banking activities | 506 | 1,250 | 1,515 | 2,247 | ||||||||||||
Trust fee income | 301 | 252 | 980 | 793 | ||||||||||||
Other | 15 | (64 | ) | 139 | 26 | |||||||||||
Total noninterest income | 1,486 | 2,114 | 4,535 | 4,853 | ||||||||||||
NONINTEREST EXPENSE | ||||||||||||||||
Compensation, payroll taxes and employee benefits | 5,669 | 5,015 | 17,321 | 14,268 | ||||||||||||
Office occupancy and equipment | 2,102 | 1,715 | 5,766 | 4,789 | ||||||||||||
Advertising and business promotion | 402 | 351 | 969 | 1,172 | ||||||||||||
Stationery, printing and supplies | 385 | 547 | 1,597 | 1,473 | ||||||||||||
Data processing | 2 | 498 | 683 | 1,424 | ||||||||||||
Professional fees | 1,087 | 1,034 | 2,962 | 3,230 | ||||||||||||
Core deposit intangible amortization | 119 | 140 | 358 | 420 | ||||||||||||
Other | 1,135 | 1,486 | 3,787 | 3,850 | ||||||||||||
Total noninterest expense | 10,901 | 10,786 | 33,443 | 30,626 | ||||||||||||
INCOME, before federal income tax expense | 3,532 | 3,869 | 9,398 | 9,860 | ||||||||||||
Federal income tax expense | 1,204 | 1,386 | 3,166 | 3,225 | ||||||||||||
NET INCOME | $ | 2,328 | $ | 2,483 | $ | 6,232 | $ | 6,635 | ||||||||
EARNINGS PER SHARE, BASIC | $ | 0.29 | $ | 0.32 | $ | 0.78 | $ | 0.84 | ||||||||
EARNINGS PER SHARE, DILUTED | $ | 0.29 | $ | 0.31 | $ | 0.78 | $ | 0.84 | ||||||||
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 STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(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, 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 | |||||||||||||
Nine months ended September 30, 2006 | ||||||||||||||||||||||||||||||||
Balance, January 1, 2006 | $ | 95 | $ | 93,848 | $ | 104,054 | $ | (898 | ) | $ | (24,653 | ) | $ | 3,111 | $ | (6,987 | ) | $ | 168,570 | |||||||||||||
Exercise of stock options | 205 | 987 | 1,192 | |||||||||||||||||||||||||||||
Purchase of treasury stock | (1,766 | ) | (1,766 | ) | ||||||||||||||||||||||||||||
Deferred compensation | 790 | 790 | ||||||||||||||||||||||||||||||
Allocation of ESOP shares | 503 | 523 | 1,026 | |||||||||||||||||||||||||||||
Dividends paid ($.27 per share) | (2,275 | ) | (2,275 | ) | ||||||||||||||||||||||||||||
Net income | 6,232 | 6,232 | ||||||||||||||||||||||||||||||
Change in net unrealized loss on securities available for sale, net of tax effect of $153 | 285 | 285 | ||||||||||||||||||||||||||||||
Total comprehensive income | 6,517 | |||||||||||||||||||||||||||||||
Balance, September 30, 2006 | $ | 95 | $ | 94,556 | $ | 108,011 | $ | (613 | ) | $ | (25,432 | ) | $ | 3,901 | $ | (6,464 | ) | $ | 174,054 | |||||||||||||
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)
Unaudited | ||||||||
Nine Months Ended | ||||||||
September 30, | ||||||||
2006 | 2005 | |||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 6,232 | $ | 6,635 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 2,185 | 1,820 | ||||||
Deferred compensation and ESOP | 1,816 | 1,045 | ||||||
Depreciation | 2,076 | 1,734 | ||||||
Core deposit intangible amortization | 358 | 421 | ||||||
Amortization of securities | 204 | 632 | ||||||
Proceeds from sale of mortgage loans held for sale | 85,082 | 82,555 | ||||||
Origination of mortgage loans held for sale | (84,462 | ) | (89,922 | ) | ||||
Gain on sale of mortgage loans | (187 | ) | (541 | ) | ||||
(Gain) loss on sale of premises and equipment | 22 | (72 | ) | |||||
Changes in assets and liabilities: | ||||||||
Increase in accrued interest receivable and other assets | (5,569 | ) | (2,070 | ) | ||||
Increase in accrued interest payable and other liabilities | 1,046 | 172 | ||||||
Net cash provided by (used in) operating activities | 8,803 | 2,409 | ||||||
LENDING AND INVESTING ACTIVITIES | ||||||||
Proceeds from maturities of securities available for sale | 13,655 | 11,067 | ||||||
Proceeds from sale of securities available for sale | — | 95 | ||||||
Purchase of securities available for sale | (1,489 | ) | (10,370 | ) | ||||
Purchase of Federal Home Loan Bank stock | (1,985 | ) | (4,164 | ) | ||||
Proceeds from redemptions of Federal Home Loan Bank stock | 359 | — | ||||||
Net increase in loans | (149,445 | ) | (156,687 | ) | ||||
Proceeds from sale of premises and equipment | 23 | 257 | ||||||
Purchase of premises and equipment | (9,018 | ) | (6,992 | ) | ||||
Net cash used in lending and investing activities | (147,900 | ) | (166,794 | ) | ||||
DEPOSIT AND FINANCING ACTIVITIES | ||||||||
Net increase in deposits | 106,601 | 155,395 | ||||||
Net increase/(decrease) in federal funds purchased | 9,885 | (1,466 | ) | |||||
Proceeds from exercises of stock options | 1,192 | 48 | ||||||
Repayment of line of credit | (3,950 | ) | — | |||||
Payment of dividends | (2,275 | ) | (2,285 | ) | ||||
Purchase of treasury stock | (1,766 | ) | (782 | ) | ||||
Proceeds from line of credit | — | 1,000 | ||||||
Repayment of FHLB advances | (537,705 | ) | (136,269 | ) | ||||
Proceeds from FHLB advances | 542,900 | 175,500 | ||||||
Net cash provided by deposit and financing activities | 114,882 | 191,141 | ||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | (24,215 | ) | 26,756 | |||||
CASH AND CASH EQUIVALENTS,beginning of period | 47,591 | 27,937 | ||||||
CASH AND CASH EQUIVALENTS,end of period | $ | 23,376 | $ | 54,693 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
Cash paid for: | ||||||||
Interest | $ | 41,531 | $ | 27,560 | ||||
Federal income taxes | 2,120 | 2,600 | ||||||
Supplemental noncash disclosure: | ||||||||
Transfers from loans to other real estate | 1,299 | 654 |
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)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, 2005.
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, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.
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 (the “Bank”), a state-chartered savings bank headquartered in Port Huron, Michigan. The consolidated financial statements include the accounts of the Bancorp and its wholly owned subsidiary, the Bank (collectively referred to as the “Company”). The Bank also includes the accounts of its wholly owned subsidiaries, Metrobank Financial Services, Citizens First Mortgage, LLC and Metrobank Mortgage, LLC (collectively “Mortgage LLC’s”) and Citizens Financial Services, Inc. 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. The Mortgage, LLC’s receive revenue from interest income on loans and sale of loans. All significant intercompany transactions and balances have been eliminated in consolidation.
NEW ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155,Accounting for Certain Hybrid Instruments, which is an amendment of SFAS No: 133 and 140. SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. The Statement also establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation and clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Adoption of this statement is not expected to have a material effect on results of operations or financial condition of the Company.
In March 2006, the FASB issued SFAS No. 156,Accounting for Servicing of Financial Assets- an amendment of FASB Statement No. 140. SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in specific situations. Additionally, the servicing asset or servicing liability shall be initially measured at fair value; however, an entity may elect the “amortization method” or “fair value method” for subsequent balance sheet reporting periods. SFAS No. 156 is effective as of an entity’s first fiscal year beginning after September 15, 2006. Early adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. Adoption of this statement is not expected to have a material effect on results of operations or financial condition of the Company.
In July 2006, the FASB issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109(FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal
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year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its financial statements.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements. SFAS No. 157 enhances existing guidance for measuring assets and liabilities using fair value. Prior to the issuance of SFAS No. 157, guidance for applying fair value was incorporated in several accounting pronouncements. SFAS No. 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. SFAS No. 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under SFAS No. 157, fair value measurements are disclosed by level within that hierarchy. While SFAS No. 157 does not add any new fair value measurements, it does change current practice. Changes to practice include: (1) a requirement for an entity to include its own credit standing in the measurement of its liabilities; (2) a modification of the transaction price presumption; (3) a prohibition on the use of block discounts when valuing large blocks of securities for broker-dealers and investment companies; and (4) a requirement to adjust the value of restricted stock for the effect of the restriction even if the restriction lapses within one year. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has not determined the impact of adopting SFAS No. 157 on its financial statements.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB No. 108). Due to diversity in practice among registrants, SAB No. 108 expresses SEC staff views regarding the process by which misstatements in financial statements are evaluated for purposes of determining whether financial statement restatement is necessary. SAB No. 108 is effective for fiscal years ending after November 15, 2006, and early application is encouraged. The Company does not believe SAB No. 108 will have a material impact on the consolidated financial statements.
NOTE 3 — STOCK BASED COMPENSATION
Under the Company’s stock-based incentive plan, the Company may grant restricted stock awards and options to its directors, officers, and employees for up to 476,338 and 1,429,014 shares of common stock, respectively. Prior to January 1, 2006, the Company accounted 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. The Company adopted the fair value recognition provisions of Statement of Financial Standards (SFAS) No. 123 (R),Share Based Payment effective January 1, 2006 using the modified-prospective transition method. SFAS No. 123(R),Share Based Payment, established a 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. The Company recognizes compensation expense related to restricted stock awards over the period the services are performed. No options were granted during 2006. The Company determined that implementation of SFAS No. 123(R) did not have a material impact on the financial results of the Company. The Company has provided below pro forma disclosures of net income and earnings per share for the three and nine months ended September 30, 2005, as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except per share data):
Three Months Ended | Nine Months Ended | |||||||
September 30, | September 30, | |||||||
2005 | ||||||||
Net income as reported | $ | 2,483 | $ | 6,635 | ||||
Deduct: Stock based employee compensation expense determined under fair-value based method, net of related tax effects | (31 | ) | (626 | ) | ||||
Pro forma net income | $ | 2,452 | $ | 6,009 | ||||
Earnings per share | ||||||||
Basic — as reported | $ | 0.32 | $ | 0.84 | ||||
Basic — pro forma | $ | 0.31 | $ | 0.76 | ||||
Diluted — as reported | $ | 0.31 | $ | 0.84 | ||||
Diluted — pro forma | $ | 0.31 | $ | 0.76 |
At September 30, 2006, stock options outstanding had a weighted average remaining contractual life of 7.6 years. The following table summarizes stock options outstanding segregated by exercise price range and summarizes aggregate intrinsic value at September 30, 2006:
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Weighted Average | ||||||||||||||
Remaining | Aggregate | |||||||||||||
Number | Contractual | Exercise | Intrinsic | |||||||||||
Range of Exercise Prices | Outstanding | Life | Price | Value | ||||||||||
$23.00 - $24.00 | 20,323 | 7.4 years | $ | 23.90 | $ | 31,704 | ||||||||
$20.00 - $22.99 | 3,000 | 8.6 years | 21.91 | 10,650 | ||||||||||
$19.00 - $19.99 | 85,382 | 8.5 years | 19.93 | 472,162 | ||||||||||
$18.00 - $18.99 | 92,060 | 6.5 years | 18.81 | 612,199 | ||||||||||
Total | 200,765 | $ | 19.85 | $ | 1,126,715 | |||||||||
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, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Net income | $ | 2,328 | $ | 2,483 | $ | 6,232 | $ | 6,635 | ||||||||
Average number of common shares outstanding used to calculate basic earnings per common share | 7,927,896 | 7,857,423 | 7,953,301 | 7,882,827 | ||||||||||||
Effect of dilutive securities | 20,729 | 38,706 | 30,700 | 38,852 | ||||||||||||
Average number of common shares outstanding used to calculate diluted earnings per common share | 7,948,625 | 7,896,129 | 7,984,001 | 7,921,679 | ||||||||||||
Number of antidilutive stock options excluded from diluted earnings per share computation | — | 38,356 | — | 35,356 | ||||||||||||
NOTE 5 — GOODWILL AND INTANGIBLES
Goodwill at September 30, 2006 and December 31, 2005 was $9.8 million. Goodwill is at least reviewed annually for impairment. The Company completed this review during the fourth quarter of 2005 and determined that goodwill was not impaired.
Net other intangible assets at September 30, 2006 and December 31, 2005 were $2.8 million and $3.2 million, respectively. These assets consist primarily of core deposit intangibles and amortization expense for the next five years is as follows: $477,000 in 2006, $405,000 in 2007 and $383,000 in 2008, 2009 and 2010, respectively.
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NOTE 6 — LOANS
Loans were as follows (in thousands):
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
Real estate loans: | ||||||||
One-to four-family | $ | 500,677 | $ | 427,714 | ||||
Commercial and multi-family | 431,986 | 418,314 | ||||||
Residential construction | 119,559 | 82,328 | ||||||
Home equity and lines of credit | 137,178 | 131,378 | ||||||
1,189,400 | 1,059,734 | |||||||
Commercial loans | 287,311 | 271,436 | ||||||
Consumer loans: | ||||||||
Vehicles | 87,482 | 84,189 | ||||||
Other | 24,491 | 24,421 | ||||||
111,973 | 108,610 | |||||||
Total loans | 1,588,684 | 1,439,780 | ||||||
Less: | ||||||||
Allowance for loan losses | 14,278 | 13,546 | ||||||
Net deferred loan fees | 811 | 1,198 | ||||||
Net loans | $ | 1,573,595 | $ | 1,425,036 | ||||
The decrease in deferred loan fees of $387,000 from December 31, 2005 to September 30, 2006 was primarily a result of an evaluation performed by management in conjunction with our periodic review of our costs to originate mortgage loans. Our analysis determined that the estimated deferred costs to originate mortgage loans should be adjusted from a flat $850.00 to a charge of $550.00 plus any commissions paid to the loan closing officer, which will increase the total deferred costs per loan. The result was an increase in income of approximately $132,000, net of tax, during the quarter.
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 $11.2 million and $9.1 million at September 30, 2006 and December 31, 2005, respectively. There were no contractual amounts outstanding of commercial letters of credit at September 30, 2006 or December 31, 2005.
At September 30, 2006, the Company had outstanding commitments to originate loans of $373.3 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 $4.3 million and $3.5 million at September 30, 2006 and December 31, 2005, respectively. The fair value of forward contracts was insignificant at September 30, 2006 and December 31, 2005.
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
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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 Bank 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.
OVERVIEW. The Company currently operates as a community-oriented financial institution that accepts deposits from the general public in the communities surrounding its 24 full-service banking centers along with a loan production office in Ft. Myers, Florida. The deposited funds, together with funds generated from operations and borrowings, are used by the Company to originate loans. The Company’s principal lending activity is the origination of mortgage loans for the purchase or refinancing of one-to-four family residential properties. The Company also originates commercial and multi-family real estate loans, construction loans, commercial loans, automobile loans, home equity loans and lines of credit, and a variety of other consumer loans.
CRITICAL ACCOUNTING POLICIES. As of September 30, 2006, 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, 2005. The Company’s critical accounting policies are described in the financial section of its 2005 Annual Report. Management believes its critical accounting policies relate to the Company’s securities, allowance for loan losses, its valuation of mortgage servicing rights and goodwill and intangibles.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2006 AND DECEMBER 31, 2005
Summary.Total assets increased $124.3 million, or 7.5% to $1.778 billion at September 30, 2006 from $1.654 billion at December 31, 2005, primarily due to an increase of $110.2 million, or 21.6% in the residential real estate portfolio. A significant amount of the residential real estate mortgage growth was due an increase in the volume of adjustable rate mortgages generated from our experienced mortgage loan officers located in the Macomb and Oakland county markets.
Total liabilities increased $118.8 million, or 8.0%, to $1.604 billion at September 30, 2006 from $1.486 billion at December 31, 2005. Total deposits increased $106.6 million, or 9.9%, from December 31, 2005, primarily due to an increase of $46.6 million in brokered deposits, supplemented by our increased efforts to attract new deposits in the Oakland and Macomb counties. At September 30, 2006, brokered deposits totaled $88.2 million or 7.5% of total deposits. Based on our forecasted 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 after analyzing maturity and repricing data and balancing interest rate risk.
Portfolio Loans and Asset Quality.Nonperforming loans totaled $24.9 million at September 30, 2006 compared to $21.4 million at December 31, 2005, an increase of $3.5 million, or 16.5%. Correspondingly, nonperforming assets as a percentage of total assets increased to 1.61% at September 30, 2006 compared to 1.38% at December 31, 2005. As indicated by the table below, a majority of the increase in total nonperforming assets 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 assets are regularly monitored, have been under the management of our experienced special asset team and workout plans are in place to mitigate any potential losses.
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The following table sets forth information regarding nonperforming assets (in thousands):
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
Nonperforming loans: | ||||||||
Real estate | $ | 7,833 | $ | 8,467 | ||||
Commercial | 15,893 | 12,094 | ||||||
Consumer | 1,178 | 813 | ||||||
Total | 24,904 | 21,374 | ||||||
Real estate and other assets owned | 3,665 | 1,471 | ||||||
Total nonperforming assets | $ | 28,569 | $ | 22,845 | ||||
Total nonperforming loans as a percentage of total loans | 1.57 | % | 1.48 | % | ||||
Total nonperforming assets as a percentage of total assets | 1.61 | % | 1.38 | % |
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, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Balance, beginning of period | $ | 13,953 | $ | 13,917 | $ | 13,546 | $ | 13,472 | ||||||||
Provision for loan losses | 605 | 560 | 2,185 | 1,820 | ||||||||||||
Charge-offs | (375 | ) | (259 | ) | (1,725 | ) | (1,230 | ) | ||||||||
Recoveries | 95 | 74 | 272 | 230 | ||||||||||||
Balance, end of period | $ | 14,278 | $ | 14,292 | $ | 14,278 | $ | 14,292 | ||||||||
Allowance for loan losses to total loans | 0.90 | % | 1.05 | % | ||||||||||||
Allowance for loans losses to nonperforming loans | 57.33 | % | 69.81 | % |
Deposits.Deposits increased $106.6 million, or 9.9%, from December 31, 2005 to $1.179 billion at September 30, 2006. The increase of $131.3 million, or 13.7%, in interest bearing deposits was primarily due to an increase of $117.8 million, or 23.7%, in certificates of deposits, of which brokered deposits increased $46.6 million, or 112.2%. Certificates of deposits, excluding brokered deposits, increased 15.6% due to various promotions of these types of deposits implemented during the year. Additionally, passbook and savings account deposits increased $12.2 million, or 12.3%, to $111.4 million at September 30, 2006, primarily due the implementation of new savings account products and an increase of deposits held from municipalities and other public entities. Non-interest bearing accounts decreased by 21.9% from $112.6 million at December 31, 2005 to $87.9 million at September 30, 2006, primarily due to transfers as a result of new products and incentives to increase balances in the savings accounts and certificates of deposits.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2006 and 2005
Summary. Net income for the three months ended September 30, 2006 decreased $155,000, or 6.2% to $2.3 million from $2.5 million compared the same period in 2005. Net income for the nine months ended September 30, 2006 decreased $403,000, or 6.1%, to $6.2 million from $6.6 million for nine months ended September 30, 2005. These decreases were primarily due to a decrease of $318,000, or 6.6% in noninterest income as a result of a sale of loans discussed in Form 10-Q for the period ending September 30, 2005. During the third quarter of 2005, the Company sold approximately $62 million in loans and recognized a gross gain of $937,000. Excluding this third quarter 2005 transaction, noninterest income for the three and nine months ended September 30, 2006 would have increased 26.3% and 15.8%, respectively. Other noninterest expense increased $2.8 million, or 9.2%, offset by an increase of $3.0 million, or 8.1% in net interest income for the nine months ended September 30, 2006 compared to the same period in 2005. Compensation and employee benefits expense also increased $.7 million, or 13.0% and $3.1 million, or 21.4% for the three and nine
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months ended September 30, 2006. These increases in compensation over the nine month period are a result of additional staff hired for new banking centers, for in-house processing of data and for commissions paid to loan officers due to increases in the average dollar amount of new residential mortgage loans.
Net Interest Income. Net interest income, before provision for loan losses, for the three months ended September 30, 2006 totaled $13.6 million, an increase of 3.4% as compared to $13.1 million for the same period in the prior year. Net interest income, before provision for loan losses, for the nine months ended September 30, 2006 totaled $40.5 million, an increase of 8.1% as compared to $37.5 million for the same period in the prior year. Due to the competitive nature in attracting new deposits, offering rates increased at a faster rate than market lending rates during the three and nine months ended September 30, 2006 as compared to the previous period, 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 has continued to compress net interest margin, which fell 30 basis points to 3.22% for the three month period and 27 basis points to 3.33% for the nine month period ended September 30, 2006 compared to the same periods in 2005.
The following tables present an analysis of net interest margin for the three and nine month periods ending September 30, 2006 and 2005 (in thousands).
For the Three Months Ended September 30, | ||||||||||||||||||||||||||||||||||||
2006 | 2005 | 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) | $ | 1,567,463 | $ | 27,885 | 7.06 | % | $ | 1,356,060 | $ | 21,893 | 6.41 | % | $ | 3,388 | $ | 2,604 | $ | 5,992 | ||||||||||||||||||
Securities (2): | ||||||||||||||||||||||||||||||||||||
Taxable | 48,872 | 629 | 5.11 | % | 61,138 | 671 | 4.35 | % | (133 | ) | 91 | (42 | ) | |||||||||||||||||||||||
Tax-exempt | 30,499 | 281 | 3.66 | % | 31,820 | 343 | 4.28 | % | (14 | ) | (48 | ) | (62 | ) | ||||||||||||||||||||||
Federal funds sold | 1,900 | 22 | 4.59 | % | 1,777 | 8 | 1.79 | % | 1 | 13 | 14 | |||||||||||||||||||||||||
Federal Home Loan Bank stock | 19,364 | 219 | 4.49 | % | 17,700 | 186 | 4.17 | % | 17 | 16 | 33 | |||||||||||||||||||||||||
Interest earning deposits | 191 | 5 | 10.39 | % | 9,793 | 85 | 3.44 | % | (83 | ) | 3 | (80 | ) | |||||||||||||||||||||||
Total interest-earning assets | 1,668,289 | 29,041 | 6.91 | % | 1,478,288 | 23,186 | 6.22 | % | 3,176 | 2,679 | 5,855 | |||||||||||||||||||||||||
Noninterest-earning assets | 87,669 | 68,753 | ||||||||||||||||||||||||||||||||||
Total assets | $ | 1,755,958 | $ | 1,547,041 | ||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||||||||||
Savings | $ | 112,812 | $ | 455 | 1.60 | % | $ | 94,031 | $ | 144 | 0.61 | % | $ | 29 | $ | 282 | $ | 311 | ||||||||||||||||||
NOW | 83,688 | 148 | 0.70 | % | 78,505 | 166 | 0.84 | % | 11 | (29 | ) | (18 | ) | |||||||||||||||||||||||
Money market | 282,202 | 2,735 | 3.85 | % | 296,761 | 2,010 | 2.69 | % | (98 | ) | 823 | 725 | ||||||||||||||||||||||||
Certificates of deposit | 593,840 | 7,047 | 4.71 | % | 457,162 | 4,044 | 3.51 | % | 1,199 | 1,804 | 3,003 | |||||||||||||||||||||||||
Total interest bearing deposits | 1,072,542 | 10,385 | 3.84 | % | 926,459 | 6,364 | 2.73 | % | 1,141 | 2,880 | 4,021 | |||||||||||||||||||||||||
Short-term borrowings | 56,634 | 823 | 5.77 | % | 41,482 | 443 | 4.24 | % | 161 | 219 | 380 | |||||||||||||||||||||||||
FHLB advances | 345,713 | 4,281 | 4.91 | % | 283,052 | 3,278 | 4.59 | % | 719 | 284 | 1,003 | |||||||||||||||||||||||||
Total interest-bearing liabilities | 1,474,889 | 15,489 | 4.17 | % | 1,250,993 | 10,085 | 3.20 | % | 2,021 | 3,383 | 5,404 | |||||||||||||||||||||||||
Non-interest bearing deposits | 92,864 | 116,127 | ||||||||||||||||||||||||||||||||||
Other Noninterest-bearing liabilities | 15,651 | 12,607 | ||||||||||||||||||||||||||||||||||
Total liabilities | 1,583,404 | 1,379,727 | ||||||||||||||||||||||||||||||||||
Stockholders’ equity | 172,554 | 167,314 | ||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,755,958 | $ | 1,547,041 | ||||||||||||||||||||||||||||||||
Net interest-earning assets | $ | 193,400 | $ | 227,295 | ||||||||||||||||||||||||||||||||
Net interest income | $ | 13,552 | $ | 13,101 | $ | 451 | ||||||||||||||||||||||||||||||
�� | ||||||||||||||||||||||||||||||||||||
Interest rate spread (3) | 2.74 | % | 3.02 | % | ||||||||||||||||||||||||||||||||
Net interest margin as a percentage of interest-earning assets (4) | 3.22 | % | 3.52 | % | ||||||||||||||||||||||||||||||||
Ratio of interest-earning assets to interest-bearing liabilities | 113.11 | % | 118.17 | % |
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For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||
2006 | 2005 | 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) | $ | 1,522,829 | $ | 79,543 | 6.98 | % | $ | 1,272,677 | $ | 60,402 | 6.35 | % | $ | 3,971 | $ | 15,170 | $ | 19,141 | ||||||||||||||||||||
Securities (2): | ||||||||||||||||||||||||||||||||||||||
Taxable | 52,397 | 1,963 | 5.01 | % | 63,807 | 2,214 | 4.64 | % | (132 | ) | (119 | ) | (251 | ) | ||||||||||||||||||||||||
Tax-exempt | 31,000 | 716 | 3.09 | % | 30,518 | 908 | 3.98 | % | 5 | (197 | ) | (192 | ) | |||||||||||||||||||||||||
Federal funds sold | 2,038 | 69 | 4.53 | % | 1,717 | 36 | 2.80 | % | 2 | 31 | 33 | |||||||||||||||||||||||||||
Federal Home Loan Bank stock | 19,153 | 660 | 4.61 | % | 16,287 | 473 | 3.88 | % | 28 | 159 | 187 | |||||||||||||||||||||||||||
Interest earning deposits | 639 | 29 | 6.07 | % | 7,801 | 145 | 2.49 | % | (45 | ) | (71 | ) | (116 | ) | ||||||||||||||||||||||||
Total interest-earning assets | 1,628,056 | 82,980 | 6.81 | % | 1,392,807 | 64,178 | 6.16 | % | 3,829 | 14,973 | 18,802 | |||||||||||||||||||||||||||
Noninterest-earning assets | 87,974 | 93,912 | ||||||||||||||||||||||||||||||||||||
Total assets | $ | 1,716,030 | $ | 1,486,719 | ||||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||||||||||||
Savings | $ | 110,634 | $ | 1,190 | 1.44 | % | $ | 96,707 | $ | 421 | 0.58 | % | $ | 20 | $ | 749 | $ | 769 | ||||||||||||||||||||
NOW | 88,708 | 413 | 0.62 | % | 94,022 | 650 | 0.92 | % | (12 | ) | (225 | ) | (237 | ) | ||||||||||||||||||||||||
Money market | 281,379 | 7,815 | 3.71 | % | 268,838 | 4,515 | 2.25 | % | 71 | 3,229 | 3,300 | |||||||||||||||||||||||||||
Certificates of deposit | 554,163 | 18,330 | 4.42 | % | 418,484 | 10,544 | 3.37 | % | 1,143 | 6,643 | 7,786 | |||||||||||||||||||||||||||
Total interest bearing deposits | 1,034,884 | 27,748 | 3.58 | % | 878,051 | 16,130 | 2.46 | % | 1,222 | 10,396 | 11,618 | |||||||||||||||||||||||||||
Short-term borrowings | 67,365 | 2,663 | 5.29 | % | 41,775 | 1,212 | 3.88 | % | 248 | 1,203 | 1,451 | |||||||||||||||||||||||||||
FHLB advances | 334,623 | 12,078 | 4.83 | % | 279,045 | 9,383 | 4.50 | % | 625 | 2,070 | 2,695 | |||||||||||||||||||||||||||
Total interest-bearing liabilities | 1,436,872 | 42,489 | 3.95 | % | 1,198,871 | 26,725 | 2.98 | % | 2,095 | 13,669 | 15,764 | |||||||||||||||||||||||||||
Non-interest bearing deposits | 93,165 | 111,792 | ||||||||||||||||||||||||||||||||||||
Other Noninterest-bearing liabilities | 15,036 | 10,437 | 1,734 | 1,304 | 3,038 | |||||||||||||||||||||||||||||||||
Total liabilities | 1,545,073 | 1,321,100 | ||||||||||||||||||||||||||||||||||||
Stockholders’ equity | 170,957 | 165,619 | ||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,716,030 | $ | 1,486,719 | ||||||||||||||||||||||||||||||||||
Net interest-earning assets | $ | 191,184 | $ | 193,936 | ||||||||||||||||||||||||||||||||||
Net interest income | $ | 40,491 | $ | 37,453 | $ | 3,038 | ||||||||||||||||||||||||||||||||
Interest rate spread (3) | 2.86 | % | 3.18 | % | ||||||||||||||||||||||||||||||||||
Net interest margin as a percentage of interest-earning assets (4) | 3.33 | % | 3.60 | % | ||||||||||||||||||||||||||||||||||
Ratio of interest-earning assets to interest-bearing liabilities | 113.31 | % | 116.18 | % |
(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, 2006 were $605,000 and $2.2 million, respectively, as compared to $560,000 and $1.8 million for the same period in the prior year. The changes in the provision for loan losses is thoroughly reviewed and is 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. Reserves were provided in line with the loan growth and actual net charge offs. The loan loss allowance as a percentage of total loans decreased slightly from 0.94% at December 31, 2005 to 0.90% at September 30, 2006, based upon our detailed analysis of the allowance for loan losses performed at September 30, 2006. The allowance for loan losses as a percentage of nonperforming loans decreased from 63.4% at December 31, 2005 to 57.3% at September 30, 2006 as a result of the increase in nonperforming loans compared to the increase in the allowance for loan losses. The allowance for loan loss analysis includes potential 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, 2006.
Management considers its allowance for loan losses to be one of its critical accounting policies. Management reviews the allowance for loan losses on a monthly basis and establishes a provision based on actual and estimated losses in the portfolio. Because the estimates and assumptions underlying the Company’s allowance for loan losses are uncertain, different
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estimates and assumptions could require a material increase in the allowance for loan losses. Any material increase in the allowance for loan losses could also have a material adverse effect on the Company’s net income and results of operations.
Noninterest Income. Noninterest income for the three and nine months ended September 30, 2006 decreased 29.7% to $1.5 million and 6.6% to $4.5 million compared to $2.1 million and $4.9 million, respectively, for the same periods in the prior year. As discussed in Form 10-Q for the period ending September 30, 2005, the Company sold approximately $62 million in loans and recognized a gross gain of $937,000. Excluding this 3rd quarter 2005 transaction, noninterest income for the three and nine months ended September 30, 2006 would have increased 26.3% and 15.8%, respectively. Trust fees continue to provide additional income as expected, growing $49,000 and $187,000 for the three and nine months ended September 30, 2006, respectively. Management remains focused in our efforts to continue the expansion of trust services throughout our branch network and, more specifically, in the Macomb, Lapeer and Oakland counties.
Noninterest Expense. Noninterest expense for the three and nine months ended September 30, 2006 increased 1.1% to $10.9 million and 9.2% to $33.4 million compared to $10.8 million and $30.6 million, respectively, for the same time periods in the prior year. Compensation, payroll taxes and employee benefits (compensation) increased by $.7 million for the three months ended September 30, 2006 and $3.1 million for the nine months ended September 30, 2006 compared to the same time periods in the prior year. This increase was primarily due to additions in staff for the new banking centers in Lapeer and Macomb counties and staff needed as a result of bringing core and item processing in-house. Commencing this quarter, we expect compensation expense to increase slightly as compared to the same quarters of the prior year as a result of the investments in our sales force and operations staff while we continue to grow the business and take advantage of the additional capacity we have created. We expect a return of $2.5 million over the next 5 years as a result of the move to in-house core and item processing, a portion of which, has been realized beginning this quarter. Office occupancy expense increased $387,000 and $977,000 for the three and nine months ended September 30, 2006, respectively, due to additional banking centers and newly remodeled existing offices. These increases in noninterest expense were offset by decreases for the nine months ended September 30, 2006 in professional fees of $268,000 compared to the same time period in the prior year. The decrease in professional fees was a result of continued efficiencies implemented by and between management and our consultants and auditors as we continue to operate in the third year under the internal control provisions of the SOX act.
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, sales of loans in the secondary market, 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, 2006, the Company originated $592.8 million of loans and purchased $1.5 million of securities and in fiscal 2005, originated $847.1 million of loans and purchased $10.4 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, 2006, cash and short-term investments totaled $23.4 million and securities classified as available for sale totaled $75.6 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. At June 30, 2006, the Company began discussions with an investor to sell approximately $75 million in residential mortgage loans. Upon further analysis of the financial impact on the Company’s financial statements, the Company decided not to pursue this opportunity at this time. These mortgage loans are in the portfolio at September 30, 2006 and are not expected to be sold in the near future. The Company has the ability and intent to hold these loans for their remaining contractual life. Sales of fixed-rate mortgage loans were $85.1 million and $175.1 million for the nine months ended September 30, 2006 and year ended December 31, 2005, respectively.
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Financing activities consist primarily of activity in deposit accounts, overnight borrowings from our correspondent banks, FHLB advances and brokered deposits. Year to date, the Company experienced a net increase in total deposits of $106.6 million for the nine months ended September 30, verses a net increase of $139.0 million during the fiscal year ended December 31, 2005. 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 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 continues to seek new customers in our recently expanded markets of Macomb and Oakland counties.
The Company has the ability to borrow a total of approximately $589.0 million, $133.5 million from its correspondent banks and $455.5 million from the FHLB, of which $61.9 million and $351.7 million were outstanding at September 30, 2006, respectively. Included in the total amount of available borrowings from its correspondent banks is a bank line-of-credit in the amount of $25.0 million, of which $0 was outstanding at September 30, 2006.
At September 30, 2006, the Company had outstanding commitments to originate loans of $373.3 million, of which $104.6 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, 2006 totaled $458.2 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 Bank 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, 2006, the Bank exceeded all of the regulatory capital requirements and 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, 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 Bank as an additional funding source. The Bank’s 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 Bank to the Bancorp, which is otherwise permissible by regulation for safety and soundness reasons.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2006, there have been no material changes in the quantitative and qualitative disclosures about market risks as disclosed in the Company’s Form 10-Q for the quarterly period ended June 30, 2006.
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 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
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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.
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.
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 1a. Risk Factors
As of September 30, 2006, there have been no material changes in the discussion pertaining to risk factors as disclosed in the Company’s Form 10-K for the year ended December 31, 2005.
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 291 deferred compensation stock units for the aggregate consideration of approximately $7,400, which included 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.
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Issuer Purchases of Equity Securities by the Issuer
On October 1, 2002, the Company announced a share repurchase program authorizing the repurchase of up to 428,701 shares of the Company’s outstanding common stock. All share repurchases under the Company’s share repurchase program are transacted in the open market and are within the scope of Rule 10b-18, which provides a safe harbor for purchases in a given day if an issuer of equity securities satisfies the manner, timing, price and volume conditions of the rule when purchasing its own common shares in the open market. The following table summarizes the Company’s share repurchase activity for the three months ended September 30, 2006.
Total Number of | Maximum Number | |||||||||||||||
Shares Purchased | of Shares that May | |||||||||||||||
Total Number | as Part of Publicly | Yet Be Purchased | ||||||||||||||
of Shares | Average Price | Announced | Under the Plans or | |||||||||||||
Period | Purchased | Paid per Share | Programs | Programs | ||||||||||||
7/1/2006 to 7/31/2006 | — | — | — | 199,446 | ||||||||||||
8/1/2006 to 8/31/2006 | 14,000 | $ | 23.68 | — | 199,446 | |||||||||||
9/1/2006 to 9/30/2006 | 19,779 | $ | 24.00 | — | 199,446 | |||||||||||
Total | 33,779 | (1) | $ | 23.87 | — | 199,446 |
(1) | All 33,779 shares repurchased during the quarter were credited to a rabbi trust used to fund the Company’s obligations under the director deferred fee agreements. |
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
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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 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 initially filed with the commission on November 3, 2000, Registration No. 333-49234. |
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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 6, 2006 | By: | /s/ Marshall J. Campbell | ||
Marshall J. Campbell | ||||
President and Chief Executive Officer (Principal Executive Officer) | ||||
Dated: November 6, 2006 | By: | /s/ Timothy D. Regan | ||
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 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 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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