As filed with the Securities and Exchange Commission on May 12, 1994
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-8413
CITIZENS FIRST BANCORP, INC.
(Exact name of Registrant as specified in its charter)
NEW JERSEY 22-2395812
(State of Incorporation) (I.R.S. Employer Identification Number)
208 HARRISTOWN ROAD, GLEN ROCK, NEW JERSEY 07452-3306
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 445-3400
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 requirements for the past 90 days. Yes X No
--- ---
Number of shares outstanding on May 4, 1994:
Common Stock, no par value - 49,935,647 shares
Series A Preferred Stock, no par value - 65,943 shares
The Exhibit Index for this document appears on page 16.
PART 1 FINANCIAL INFORMATION
CITIZENS FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, 1994 December 31,
(unaudited) 1993
Assets
Cash and due from banks $ 106,144 $ 111,295
Interest-bearing balances with banks 15,500 500
Federal Funds sold 90,000 50,000
Total cash and cash equivalents 211,644 161,795
Investment securities:
U.S. treasury and government agencies 139,560 97,652
States and political subdivisions 48,730 25,522
Other 160 11,736
Total investment securities(market value:
1994, $186,967; 1993, $135,899) 188,450 134,910
Securities available for sale:
U.S. treasury and government agencies 262,867 417,033
Other 17,554 --
Total securities available for sale (1994 amortized
cost: $283,370; 1993 market value: $418,616) 280,421 417,033
Total securities 468,871 551,943
Term Federal Funds sold -- 30,000
Loans 1,775,400 1,750,834
Total loans 1,775,400 1,780,834
Less: Allowance for loan losses 63,936 63,788
Net loans 1,711,464 1,717,046
Premises and equipment 36,039 36,472
Foreclosed real estate, net 41,921 45,003
Accrued income receivable 16,236 16,353
Other assets 39,923 37,735
Total assets $2,526,098 $2,566,347
Liabilities & Shareholders' Equity
Deposits:
Demand (non-interest bearing) $ 414,851 $ 424,238
Savings 1,083,861 1,094,709
Time 777,804 802,028
Total deposits 2,276,516 2,320,975
Short-term borrowings 7,076 6,795
Accrued expenses and other liabilities 21,369 22,312
Long-term debt 19,240 19,240
Total liabilities 2,324,201 2,369,322
Shareholders' Equity
Preferred stock, authorized 3,000,000 shares, Series A,
$2.50 cumulative convertible, no par value
Issued and outstanding: 1994, 66,102 shares; 1993,
68,815 shares; liquidation preference $23.00 per share 1,520 1,583
Common stock, no par value
Authorized 56,393,972 shares
Issued: 1994, 50,041,699 shares;
1993, 50,006,514 shares 62,552 62,508
Paid-in capital 107,986 107,904
Retained earnings 33,165 26,587
Net unrealized holding gains (losses) on securities
available for sale (1,769) --
Treasury stock, at cost, 146,690 shares (1,557) (1,557)
Total shareholders' equity 201,897 197,025
Total liabilities & shareholders' equity $2,526,098 $2,566,347
See notes to interim consolidated financial statements.
2
CITIZENS FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME(unaudited)
(dollars in thousands, except per share amounts)
For the Three Months
Ended March 31
1994 1993
Interest Income
Loans $34,766 $ 34,085
Securities:
Taxable interest 5,701 6,793
Tax-exempt interest 301 41
Federal Funds sold 675 729
Other 29 10
Total interest income 41,472 41,658
Interest Expense
Savings deposits 6,094 6,541
Time deposits 7,857 9,766
Short-term borrowings 52 40
Long-term debt 325 325
Total interest expense 14,328 16,672
Net interest income 27,144 24,986
Provision for loan losses 3,500 5,000
Net interest income after provision for loan losses 23,644 19,986
Non-Interest Income
Trust department income 913 833
Service charges on deposits 2,387 2,495
Credit card merchant income 592 623
Gain on sale of securities -- 2,161
Commissions & other income 793 826
Total non-interest income 4,685 6,938
Operating Expenses
Salaries & employee benefits 9,340 8,711
Net occupancy 1,956 1,854
Furniture & equipment 808 799
Foreclosed real estate expense, net 1,737 1,462
Insurance premium on deposits 1,436 1,580
Credit card merchant expense 455 447
Other operating expenses 3,853 4,188
Total operating expenses 19,585 19,041
Income before income taxes and cumulative effect
of change in accounting principle 8,744 7,883
Income tax expense 5 192
Income before cumulative effect of change in
accounting principle 8,739 7,691
Cumulative effect of change in accounting principle -- 7,168
Net income $ 8,739 $14,859
Weighted Average Number Of Common Shares Outstanding
Primary 50,230,394 50,035,839
Fully Diluted 52,685,866 52,628,252
Income Per Common Share
Primary
Income before cumulative effect of change in
accounting principle $.17 $.15
Cumulative effect of change in accounting principle -- .15
Net income .17 .30
Fully diluted
Income before cumulative effect of change in
accounting principle .17 .15
Cumulative effect of change in accounting principle -- .14
Net income .17 .29
See notes to interim consolidated financial statements.
3
CITIZENS FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(dollars in thousands)
For the Three Months Ended March 31 1994 1993
Operating Activities
Net income $ 8,739 $ 14,859
Adjustments to reconcile net income to net cash flows
provided from operating activities:
Provision for loan losses 3,500 5,000
Provision for losses on foreclosed real estate 1,217 843
Amortization of unearned income on loans 17 39
Amortization of intangible assets 387 387
Depreciation on premises and equipment 967 762
Gain on sale of securities -- (2,161)
Proceeds from sales of trading account securities -- 9,932
Purchase of trading account securities -- (9,801)
Changes in operating assets and liabilities:
Decrease in accrued income receivable 117 1,063
Increase in deferred income taxes, net (420) (8,647)
Increase in other assets (975) (2,797)
Decrease in accrued expenses & other liabilities (943) (484)
Net cash flows provided from operating activities 12,606 8,995
Investing Activities
Proceeds from maturities of securities available for sale 151,254 --
Proceeds from sales of securities available for sale -- 155,240
Purchases of securities available for sale (6,015) (46,441)
Proceeds from maturities of investment securities 4,692 37,739
Purchase of investment securities (69,808) (190,024)
Net decrease in loans 551 15,190
Sales of and payments on foreclosed real estate 3,379 2,002
Purchases of premises and equipment (534) (672)
Net cash flows provided from (used in) investing activities 83,519 (26,966)
Financing Activities
Net decrease in demand and savings deposits (20,235) (30,779)
Net decrease in time deposits (24,224) (32,038)
Net increase (decrease) in short-term borrowings 281 (1,206)
Proceeds from the issuance of common stock 63 --
Cash dividends on stock (2,161) (480)
Net cash flows used in financing activities (46,276) (64,503)
Net increase (decrease) in cash & cash equivalents 49,849 (82,474)
Cash & cash equivalents, beginning of year 161,795 250,913
Cash & cash equivalents, end of period $211,644 $168,439
Supplemental Cash Flow Information
Amount paid during the period for:
Interest $ 16,648 $ 17,736
Income taxes 425 1,671
Supplemental schedule of noncash investing activities
Transfers from investment securities to securities
available for sale 11,576 --
Transfers from loans to foreclosed real estate 1,514 312
See notes to interim consolidated financial statements.
4
CITIZENS FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
(dollars in thousands)
For the Three Months Ended March 31 1994 1993
Balance, beginning of year $197,025 $163,328
Net income 8,739 14,859
Issuance of common stock due to exercise
of stock options (11,367 shares) 63 --
Common stock dividend declared (2,120) --
Preferred stock dividend declared (41) (480)
Change in net unrealized holding gains (losses)
on securities available for sale (1,769) --
Balance, end of period $201,897 $177,707
See notes to interim consolidated financial statements.
CITIZENS FIRST BANCORP, INC. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1 Financial Statements:
The accompanying interim consolidated balance sheets and the comparative interim
consolidated statements of income, statements of cash flows, and statements of
changes in shareholders' equity are condensed. The statements do not contain
all of the information and footnotes required by generally accepted accounting
principles to be included in a full set of financial statements, and have not
been independently audited. As used in this report, unless the context
indicates otherwise, the term "Citizens" refers to Citizens First Bancorp, Inc.
and its subsidiary and the term "Bank" refers to Citizens First National Bank of
New Jersey and its subsidiaries. The information furnished by means of this
Quarterly Report on Form 10Q reflects all normal recurring adjustments which
are, in the opinion of management, considered necessary for a fair presentation
of the financial condition and results of operations for the interim periods.
The interim results of consolidated operations presented in this report may not
necessarily be indicative of the consolidated results for the full year. The
accompanying financial statements should be read in conjunction with Citizens'
Annual Report on Form 10-K for the year ended December 31, 1993.
In the first quarter of 1994, Citizens was required to adopt Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Debt and Equity
Securities" ("SFAS 115"). SFAS 115 establishes accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. As a result of adopting SFAS 115 at
March 31, 1994, Citizens recorded a mark-to-market adjustment on the available
for sale portfolio of $2,949,000 and an adjustment to reduce shareholders'
equity by $1,769,000, net of income taxes, in accordance with SFAS 115. The
holding of these securities to maturity would result in the recapture of the
adjustment provided for under SFAS 115. Certain transfers from the investment
securities portfolio to the securities available for sale portfolio were
required due to the adoption of SFAS 115.
2 Regulatory Proceedings:
On March 15, 1994, the Federal Reserve Bank of New York terminated a written
agreement with Citizens which had been in effect since December 1990. Also, the
Office of the Comptroller of the Currency ("OCC") terminated the Memorandum of
Understanding ("MOU") between the OCC and the Bank. Both the written agreement
and the MOU had required the maintenance of certain capital levels and placed
certain restrictions on Citizens and the Bank.
5
3 Merger Agreement:
On March 21, 1994, Citizens announced the execution of a definitive merger
agreement among National Westminster Bank Plc ("NatWest"), NatWest Holdings
Inc., a subsidiary of NatWest, and Citizens. Under the terms of the merger
agreement, Citizens will be merged into NatWest Holdings Inc. Shareholders of
Citizens will have the option to elect to convert the common stock into $9.75
per share in cash or .22034 American Depository Receipts ("ADRs") of NatWest per
share, or a combination of the two. Each ADR represents six ordinary shares of
NatWest. After taking into account shareholder elections, no more than 60% nor
less than 50% of Citizens shares will be converted into ADRs and the remaining
Citizens shares will be converted into cash. The transaction is designed to be
tax-free to Citizens shareholders electing to receive ADRs. The agreement is
subject to approvals by the Federal Reserve Board, other regulatory authorities
and the shareholders of Citizens. It is intended that the transaction will be
completed as soon as possible after approvals are obtained and is expected to
occur in the Fall of 1994.
4 Allowance for Loan Losses:
An analysis of the allowance for loan losses follows:
(in thousands)
For the Three Months Ended March 31 1994 1993
Balance, beginning of period $63,788 $75,838
Provision charged to operations 3,500 5,000
Recoveries on loans 672 823
Loans charged off (4,024) (5,753)
Balance, end of period $63,936 $75,908
5 Nonperforming Assets:
Nonperforming assets of $105,591,000, $109,194,000, and $160,532,000 which
represent 5.81%, 5.98%, and 9.20% of total loans and foreclosed real estate as
of March 31, 1994, December 31, 1993, and March 31, 1993, respectively, consist
of all nonperforming loans and foreclosed real estate. Gross interest income of
approximately $1,300,000 and $1,940,000 would have been recorded for the three
months ended March 31, 1994 and 1993, respectively, if nonaccrual loans had been
current. Interest earned and recognized on a cash basis on nonaccrual loans
amounted to $190,000 and $204,000 for the three months ended March 31, 1994 and
1993, respectively. In addition, interest earned on restructured loans that are
performing in accordance with their modified terms amounted to $409,000 and
$565,000 for the three months ended March 31, 1994 and 1993, respectively.
These loans would have earned $934,000 and $1,280,000 for the three months ended
March 31, 1994 and 1993, respectively, had they performed in accordance with
their original terms. For additional discussion, see page 13 under the caption
"Asset Quality."
6 Income Taxes:
Effective January 1, 1993, Citizens adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires a
change from the "deferred method" to the "liability method" of accounting for
income taxes. The cumulative effect of adopting SFAS 109 on years prior to 1993
aggregated to an increase in net income of $7,168,000 due to the accelerated
recognition of the deferred tax assets, net of a valuation allowance.
The provision for income taxes is based on pre-tax income which differs in some
respects from taxable income. Beginning in 1993, all cumulative temporary
differences, as defined by SFAS 109, are tax effected using the current tax
rate.
The Omnibus Budget Reconciliation Act of 1993, (the "Act"), which was signed
into law on August 10, 1993, enacts certain income tax changes that affect
Citizens. Adjustments required to deferred tax assets or liabilities are
recognized as income tax expense or benefit as of the enactment date of the Act.
The provisions of the Act did not materially impact the financial statements of
Citizens for the three months ended March 31, 1994.
6
7 Legal Proceedings:
In 1990, two class action lawsuits against Citizens and certain of its present
and former directors and officers were filed in the United States District Court
for the District of New Jersey. These actions have been consolidated since they
involve common questions of law and fact. The plaintiffs allege that purchasers
of Citizens' stock during a certain period were victims of knowing or reckless
misrepresentations by the defendants concerning the financial condition of
Citizens. The court has certified October 4, 1989 through August 31, 1990 as
the class period. Specifically, the plaintiffs claim that the defendants
knowingly or recklessly stated that Citizens' allowance for loan losses at
December 31, 1989 was adequate; overstated Citizens' income for 1989; and
artificially inflated the value of Citizens' stock. The plaintiffs claim
similar misrepresentations by the defendants with respect to the March 31, 1990
interim financial statements of Citizens. Plaintiffs claim that the
misrepresentations of the defendants violate Section 10(b) of the Securities
Exchange Act, Rule 10(b) of the Rules and Regulations promulgated thereunder,
Section 20 of the Exchange Act, and constitute common law fraud and negligent
omissions. The plaintiffs demand unspecified compensatory damages, punitive
damages and costs of the suits. Citizens believes that the allegations of
wrongdoing by it and its directors and officers are without merit and is
vigorously defending the action. However, in consideration of the uncertainties
of litigation, preliminary analyses of potential liability prepared by experts
and the coverage of certain defendants under a Directors and Officers liability
insurance policy, management determined it prudent to accrue $875,000 for this
matter during the year ended December 31, 1993. Based upon these and other
factors and advice received from Citizens' legal counsel, management currently
believes that the outcome of the litigation will not result in an additional
liability which would be material to Citizens' consolidated results of
operations or financial position.
Citizens is also subject to other claims and litigation that arise primarily in
the ordinary course of business. Based on information presently available and
advice received from legal counsel representing Citizens, it is the opinion of
management that the disposition or ultimate determination of such other claims
and litigation will not have a material adverse effect on the consolidated
financial position of Citizens.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Financial Condition
Citizens reported net income of $8,739,000 for the three months ended March 31,
1994, compared with $14,859,000 for the same period in the prior year. In the
first quarter of 1993 Citizens recorded a credit of $7,168,000 resulting from
the adoption of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109"). Exclusive of the one-time benefit from the
adoption of SFAS 109, net income from operations increased $1,048,000 or 13.6%.
On a fully diluted per share basis, income for the three months ended March 31,
1994, was $.17 compared with $.15 for the first three months of 1993 before the
cumulative effect of the change in accounting principle. Net income was $.17
per share for the first three months of 1994, compared with $.29 for the
comparable period of 1993.
Excluding the benefit derived from the change in accounting principle, Citizens'
improved performance for the first three months of 1994 was attributable to net
interest income of $27,144,000, an 8.6% improvement from the comparable period
last year. In addition, the provision for loan losses was reduced to $3,500,000
for the quarter ended March 31, 1994 from $5,000,000 for the comparable prior
year period. Contributing to the 1993 first quarter net income was a gain on
sale of securities available for sale of $2,161,000. No gain on sale was
recorded in the three months ended March 31, 1994.
Citizens' assets at March 31, 1994 were $2,526,098,000, a decrease of 1.6% from
the December 31, 1993 total of $2,566,347,000. Deposits decreased 1.9% to
$2,276,516,000 over the same prior year period. At December 31, 1993 total
loans included $30,000,000 of Term Federal Funds sold representing short-term
loans made to other banks. Total loans, excluding Term Federal Funds sold,
amounted to $1,775,400,000 at March 31, 1994, an increase of 1.4% compared to
$1,750,834,000 at December 31, 1993. The investment securities portfolio
amounted to $188,450,000 at March 31, 1994, compared with $134,910,000 at
December 31, 1993. Securities available for sale amounted to $280,421,000 at
March 31, 1994, compared with $417,033,000 at December 31, 1993.
Total shareholders' equity at March 31, 1994 of $201,897,000 represents an
increase of 2.5% over the December 31, 1993 total of $197,025,000 primarily as a
result of net income for the quarter of $8,739,000 less the dividends declared
on Citizens' common stock and Citizens' Series A $2.50 cumulative convertible
preferred stock of $2,120,000 and $41,000, respectively. Additionally, due to
the adoption of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Debt and Equity Securities ("SFAS 115"), shareholders' equity has
been reduced by $1,769,000 representing an adjustment for the change in net
unrealized holding gains (losses) on securities available for sale.
Nonperforming assets at March 31, 1994 were $105,591,000, or 5.81% of total
loans and foreclosed real estate, compared with $109,194,000 or 5.98% and
$160,532,000 or 9.20% of total loans and foreclosed real estate at December 31,
1993 and March 31, 1993, respectively.
Return on average assets is an important measure of profitability. Citizens'
annualized return on average assets was 1.38% for the three months ended March
31, 1994, compared with 1.25%, based on income before the cumulative effect of a
change in accounting principle for the same period in the prior year. The
annualized return on average shareholders' equity was 17.49% for the three
months ended March 31, 1994, compared with 18.56%, based on income before the
cumulative effect of a change in accounting principle for the three months ended
March 31, 1993. Book value per share was $4.02 at March 31, 1994 compared with
$3.92 per share at December 31, 1993 and $3.53 per share at March 31, 1993.
Net Interest Income
Net interest income is the interest earned on loans and other earning
assets less interest expense on deposits and borrowed money. Interest exempt
from federal taxation has been restated to a taxable-equivalent basis, which
places tax-exempt income and yields on a comparable basis with taxable income to
facilitate analysis. In calculating loan yields, the applicable loan fees have
been included in interest income, and nonperforming loans are included in the
average loan balances.
8
The following table sets forth a comparison of average daily balances,
interest income and expense, and average interest rates calculated for each
major category of interest-earning assets and interest-bearing liabilities.
Three Months Ended March 31 1994 1993
Average Average Average Average
(in thousands) Balance Interest Rate Balance Interest Rate
Interest-Earning Assets
Total loans $1,760,239 $ 35,080* 7.97% $1,692,721 $ 34,409* 8.13%
Less: Allowance for loan losses 64,760 76,529
Net loans 1,695,479 35,080* 8.28 1,616,192 34,409* 8.52
Interest-bearing balances
with banks 3,333 30 3.60 500 4 3.20
Federal Funds sold 83,889 675 3.22 96,244 729 3.03
Trading account securities -- -- -- 657 10* 6.09
Taxable securities 468,515 5,701 4.87 500,147 6,793 5.43
Tax-exempt securities 38,091 462* 4.85 2,131 62* 11.64
Total earning assets 2,289,307 41,948 7.33 2,215,871 42,007 7.58
Cash and due from banks 115,558 111,305
Foreclosed real estate, net 45,300 61,924
Other assets 88,273 77,035
Total assets $2,538,438 41,948 $2,466,135 42,007
Interest-Bearing Liabilities
Savings deposits $1,088,456 $ 6,094 2.24% $1,018,865 $ 6,541 2.57%
Time deposits 795,321 7,857 3.95 873,943 9,766 4.47
Short-term borrowings 7,216 52 2.88 7,045 40 2.27
Long-term debt 19,240 325 6.76 19,290 325 6.74
Total interest-bearing
liabilities 1,910,233 14,328 3.00 1,919,143 16,672 3.47
Demand deposits (non interest-
bearing) 407,284 362,139
Accrued expenses and other
liabilities 21,104 19,062
Shareholders' equity 199,817 165,791
Total liabilities and
shareholders' equity $2,538,438 14,328 $2,466,135 16,672
Net interest income $27,620 $25,335
Net yield on earning assets 4.83% 4.57%
<FN>
*Adjusted to a taxable-equivalent basis at a 35% tax rate.
Earning assets for the three months ended March 31, 1994 averaged
$2,289,307,000, an increase of 3.3% over the same period in 1993. The increase
in earning assets is primarily attributable to an increase in residential real
estate loans. The lower overall average balances of interest-bearing
liabilities is due to a decline in time deposits as a result of the lower
interest rate environment. Consequently, the net yield on earning assets was
4.83% during the first three months of 1994 compared with 4.57% for the same
period in 1993.
9
Rate/Volume Analysis of Net Interest Income
The following table presents an analysis of the impact on interest income and
interest expense resulting from changes in average volume (balance) and rate for
the three months ended March 31, 1994 compared to the corresponding prior
period. The volume effect of a change in average balance has been determined by
applying the average rate for the earlier period to the change in average
balance for the later period, as compared with the earlier period. The balance
of the change in interest income or expense and net interest income has been
attributed to the change in average rate.
Three Months Ended March 31, 1994 Compared with 1993
Increase (decrease) due to a change in the
(dollars in thousands) Volume Rate Total
Interest earned on:
Net loans $ 1,689 $ (1,018) $ 671
Federal Funds sold (94) 40 (54)
Taxable securities (429) (663) (1,092)
Tax-exempt securities 1,046 (646) 400
Other (820) 836 16
Total interest income* 1,392 (1,451) (59)
Interest expense on:
Savings deposits 447 (894) (447)
Time deposits (879) (1,030) (1,909)
Short-term borrowings 1 11 12
Long-term debt (1) 1 0
Total interest expense (432) (1,912) (2,344)
Change in net interest income $ 1,824 $ 461 $ 2,285
Percent increase in net interest
income over the prior period 9.0%
<FN>
*Includes a $126,000 decrease in the taxable-equivalent adjustment using a 35%
tax rate.
Net interest income, on a taxable-equivalent basis, increased $2,285,000 for
the period. The increase in net interest income resulted from a $2,344,000
decrease in interest expense offset by a $59,000 decrease in interest income.
The declines in both interest income and interest expense were largely due to
the effect of (i) the average overall lower interest rate environment during the
first three months of 1994 compared with the same period of 1993 and (ii) a
decline in the average balance of interest-bearing liabilities combined with an
increase in the average balance of interest-earning assets during the first
three months of 1994, compared with the same period in 1993.
Increased residential real estate lending was the primary cause of the
increase in the average balance of the loan portfolio. An increase in the
securities portfolio was attributable to the purchase of tax-exempt securities
offset by the maturities of taxable securities. The net operating loss
carryforward position of Citizens had previously limited the attractiveness of
owning tax-exempt securities.
Asset and Liability Management
Citizens' one-year interest sensitivity gap was a negative $315,444,000 at
March 31, 1994. A negative gap indicates that interest sensitive liabilities
are greater than interest sensitive assets. As a practical matter, changes in
the level of interest rates do not affect all categories of assets and
liabilities equally or simultaneously. In addition, assets and liabilities that
can reprice within the same period may not reprice at the same time or to the
same extent. The gap presents a one-day position, while changes in the level of
interest sensitive assets and liabilities occur daily as Citizens adjusts its
interest rate sensitivity. Due to Citizens' strong liquidity position, it has
the ability to modify the interest sensitivity gap to mitigate the effect of an
upturn in interest rates on net interest income. Interest rate-sensitive assets
were 79.6% of interest rate-sensitive liabilities at March 31, 1994, compared
with 85.1% at March 31, 1993. The percentage decrease from March 31, 1993 to
March 31, 1994 was a result of management's attempts to reduce excess liquidity,
thereby increasing investments in higher yielding assets. This was accomplished
by lowering the level of overnight Federal Funds sold and by lengthening the
maturities in the securities portfolio through the purchase of mortgage-backed
securities and United States treasury securities. Additionally, the growth in
lower costing savings deposits contributed to the decrease.
10
Liquidity management provides Citizens with the ability to meet the cash flow
requirements of depositors wanting to withdraw funds and of borrowers wanting to
be assured that their credit needs will be met. Citizens also funds its own
operations and provides management with the flexibility to modify Citizens'
interest rate sensitivity position as the economic environment requires.
Management considers Citizens' liquidity position to be sufficient to meet its
foreseeable needs. Liquidity is provided through a variety of sources. One of
the most important elements in the overall liquidity of Citizens is the core
deposit base from its local marketplace. Liquidity can also be obtained by
converting readily marketable assets to cash, including securities with
maturities of less than one year, securities available for sale and other
short-term investments such as interest-bearing deposits with banks and Federal
Funds sold. At March 31, 1994, $145,552,000 of Citizens' securities portfolio
was scheduled to mature within one year. In addition to its short-term
securities portfolio, Citizens had $90,000,000 in overnight Federal Funds sold,
providing additional liquidity.
Other sources of liquidity include funds received from the repayment of loans
as well as the ability of Citizens to package and sell residential mortgage
loans in the secondary market. In addition, as a member of the Federal Reserve
System, the Bank has access to the discount window of the Federal Reserve. The
purpose of the discount window is to make available to financial institutions a
source of liquidity when other sources of funding are not available or feasible.
The Bank has not borrowed at the discount window during the past five years.
Non-Interest Income and Operating Expenses
Non-interest income decreased $2,253,000 to $4,685,000 for the three months
ended March 31, 1994, compared with the same period in 1993, primarily as a
result of a $2,161,000 gain on sale of securities in 1993.
Operating expenses increased $544,000 for the three months ended March 31,
1994, compared with the same period in 1993. Included in the 1994 quarterly
expense amount were $246,000 of merger related costs. The largest operating
expense increase was $629,000 in salaries and employee benefits which resulted
from normal salary increases and the increased cost of employee benefits. Other
increases of $275,000 in net foreclosed real estate expense and $102,000 in net
occupancy were offset by decreases in other operating expenses of $335,000.
Income Tax Expense
Effective January 1, 1993, Citizens adopted SFAS 109, which requires a change
from the "deferred method" to the "liability method" of accounting for income
taxes. The cumulative effect of adopting SFAS 109 on years prior to 1993
aggregated to an increase in net income of $7,168,000 due to the accelerated
recognition of the deferred tax asset, net of a valuation allowance.
Income tax expense was $5,000 for the three months ended March 31, 1994,
compared with $192,000 for the same period in 1993. Citizens' effective tax
rate was 0.1% for the three months ended March 31, 1994 compared with an
effective tax rate of 2.4% for the same period in the prior year. Both
effective tax rates were less than the statutory federal income tax rate of
35.0%. The difference between the statutory and the effective rates was
primarily attributable to the utilization of a net operating loss carryforward,
through the reduction of the deferred tax asset valuation allowance, and the
tax-exempt status of interest income on tax-exempt loans and securities. For
financial reporting purposes, as of March 31, 1994 Citizens had available
approximately $16,000,000 of unbooked net operating loss carryforward
represented by a $6,453,000 deferred tax asset valuation. The tax expense for
both periods was entirely due to a provision for state income taxes.
11
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance established through
charges to income. Loan losses are charged against the allowance when
management believes the collectibility of all or a portion of the principal is
unlikely. This evaluation is based upon identification of loss elements and
known facts which are reasonably determined and quantified. If, as a result of
loans charged-off or an increase in the level of portfolio risk characteristics,
the allowance is below the level considered by management to be sufficient to
absorb future losses on outstanding loans and commitments, the provision for
loan losses is increased to the level considered necessary to provide an
adequate allowance.
In the opinion of management, the allowance for loan losses at March 31, 1994
was adequate to absorb possible future losses on existing loans and commitments.
On a monthly basis, management reviews the adequacy of the allowance. That
process includes a review of all delinquent, nonaccrual and other loans
identified as needing additional review and analysis. The evaluation of loans
in these categories involves an element of subjectivity but the process takes
into consideration the risk of loss presented by the loans and potential sources
of repayment, including collateral security. The evaluation is based upon a
credit rating system that conforms to regulatory classification definitions that
are extensively tested by management and the internal loan review department.
Consideration is also given to historical data, trends in overall delinquencies,
concentration of loans by industry and current economic conditions that may
result in increased delinquencies, as well as other relevant factors.
At March 31, 1994, the allowance for loan losses was $63,936,000, compared
with $63,788,000 at December 31, 1993 and $75,908,000 at March 31, 1993. The
provision for loan losses for the three months ended March 31, 1994 was
$3,500,000, compared with $5,000,000 for the same period of 1993. The
allowance for loan losses at March 31, 1994 was 3.60% of total loans, compared
with 3.58% at December 31, 1993 and 4.51% of total loans at March 31, 1993. The
allowance for loan losses to nonperforming loans was 100.4% at March 31, 1994
compared to 99.4% and 75.5% at December 31, 1993 and March 31, 1993,
respectively. Net charge-offs for the three months ended March 31, 1994 were
$3,352,000, compared with $4,930,000 for the same period in 1993. The decline in
net charge-offs reflected an improved stabilization of collateral values.
Asset Quality
Management has identified the following categories of risk elements: (i)
nonperforming assets, which include nonperforming loans and foreclosed real
estate (other real estate owned and insubstance foreclosures), (ii) loans
contractually past due 90 days or more as to principal or interest payments that
continue to accrue interest because the loans are well secured and in the
process of collection and (iii) other troubled debt restructurings that provide
more favorable rates or terms to the borrower to facilitate the eventual full
collection of principal. Accordingly, the risk element classification does not
necessarily mean nonearning, but rather that it is probable that the entire
interest will not be received within the original contractual term.
12
The following table sets forth the totals of the risk elements at the dates
indicated:
(dollars in thousands) 3/31/94 12/31/93 3/31/93
Nonperforming assets
Commercial and industrial $ 21,437 $ 18,632 $ 29,979
Real estate-commercial and construction 33,403 36,373 64,387
Real estate-residential 5,034 5,327 2,679
Consumer 3,268 3,331 2,986
Nonaccrual troubled debt restructurings 528 528 494
Total nonperforming loans 63,670 64,191 100,525
Foreclosed real estate 41,921 45,003 60,007
Total nonperforming assets 105,591 109,194 160,532
Accruing loans past due 90 days or more as to
principal or interest payments
Commercial and industrial 661 582 909
Real estate-commercial and construction 1,428 382 2,636
Real estate-residential 2,405 2,144 2,246
Consumer 1,385 1,413 1,881
Total loans past due 90 days or more 5,879 4,521 7,672
Other troubled debt restructurings 34,883 35,335 40,352
Total risk elements $146,353 $149,050 $208,556
Total nonperforming loans as a percentage
of total loans 3.59% 3.60% 5.97%
Total nonperforming assets as a percentage
of total loans and foreclosed real estate 5.81 5.98 9.20
Total risk elements as a percentage of total
loans and foreclosed real estate 8.05 8.16 11.96
As seen in the table, much of the concentration of risk elements is in the
real estate categories. Future levels of risk elements will continue to be
dependent upon economic conditions, and if the weakness in the New Jersey real
estate market persists, risk elements may increase. Citizens updates appraisals
on assets secured by real estate, particularly those categorized as risk
elements or otherwise internally classified as having some degree of credit
impairment.
In addition to the loans included in the risk elements table, Citizens has
identified approximately $30,000,000 of potential problem loans at March 31,
1994. These loans, as well as the loans included in risk elements, have been
considered in the analysis of the adequacy of the allowance for loan losses.
Interest income that would have been recorded for the three months ended March
31, 1994 if nonaccrual loans had been current was $1,300,000, including the
reversal of previously accrued interest, compared with $1,940,000 for the same
period in the prior year. Nonaccrual loans on which income is earned on a cash
basis, amounted to $4,977,000 at March 31, 1994 and $6,647,000 at March 31,
1993. Interest earned on all cash basis nonaccrual loans amounted to $190,000
and $204,000 for the three months ended March 31, 1994 and 1993, respectively.
In addition, interest earned on restructured loans that are performing in
accordance with their modified terms amounted to $409,000 and $565,000 for the
three months ended March 31, 1994 and 1993, respectively. These loans would
have earned $934,000 and $1,280,000 for the three months ended March 31, 1994
and 1993, respectively, had they performed in accordance with their original
terms.
Management believes that the allowance for loan losses is adequate to absorb
possible future losses on existing loans and commitments. In management's
opinion, the provision for loan losses reflects the amount deemed appropriate to
produce an allowance for loan losses adequate to meet the risk of loss
characteristics of the loan portfolio at March 31, 1994.
At March 31, 1994, the loan portfolio had no concentration of loans exceeding
10% of total loans in specialized industries other than residential and
commercial real estate and was primarily comprised of loans made in Citizens'
market area.
13
Capital Adequacy
Capital adequacy is a measure of the amount of capital needed to sustain asset
growth while providing safety for depositors' funds and shareholders'
investments by acting as a means to absorb unanticipated losses.
The Board of Governors of the Federal Reserve System has issued rules
requiring banks and bank holding companies to maintain minimum levels of capital
as a percentage of risk-weighted assets. Under these rules, a banking
organization's assets and certain off-balance-sheet activities are classified
into categories, with the least capital required for the category deemed to have
the least risk, and the most capital required for the category deemed to have
the most risk.
Banking organizations are required to maintain a minimum total capital of
8.00% of risk-weighted assets, of which half must be core equity or Tier 1
capital. Citizens' Tier 1 capital as a percentage of total risk-weighted assets
at March 31, 1994 was 11.24% compared with 11.15% and 10.09% at December 31,
1993 and March 31, 1993, respectively. Total capital as a percentage of total
risk-weighted assets was 13.60% at March 31, 1994 compared with 13.54% at year
end 1993 and 12.50% at March 31, 1993.
The Board of Governors of the Federal Reserve System has also issued leverage
capital adequacy standards, under which banking organizations must maintain a
minimum ratio of Tier 1 capital to adjusted total assets of at least 3.00% to
5.00%. At March 31, 1994 Citizens' leverage capital ratio was 7.80%.
The capital ratios previously required by the Bank had been modified by a
Memorandum of Understanding ("MOU") entered into by the Board of Directors of
the Bank and the Office of the Comptroller of the Currency. As a result of the
improved financial condition of the Bank, on March 15, 1994, the MOU was
terminated.
14
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
No. Description Page
11* Computation of Per Share Income 17
b. Reports on Form 8-K.
On March 21, 1994, Citizens announced the execution of a definitive merger
agreement among National Westminster Bank Plc ("NatWest"), NatWest Holdings
Inc., a subsidiary of NatWest, and Citizens. Under the terms of the merger
agreement, Citizens will be merged into NatWest Holdings Inc. Shareholders of
Citizens will have the option to elect to convert the common stock into $9.75
per share in cash or .22034 American Depository Receipts ("ADRs") of NatWest per
share, or a combination of the two. Each ADR represents six ordinary shares of
NatWest. After taking into account shareholder elections, no more than 60% nor
less than 50% of Citizens shares will be converted into ADRs and the remaining
Citizens shares will be converted into cash. The transaction is designed to be
tax-free to Citizens shareholders electing to receive ADRs. The agreement is
subject to approvals by the Federal Reserve Board, other regulatory authorities
and the shareholders of Citizens. It is intended that the transaction will be
completed as soon as possible after approvals are obtained and is expected to
occur in the Fall of 1994.
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.
Date: May 12, 1994 By: RODNEY T. VERBLAAUW
Rodney T. Verblaauw, President and
Chief Administrative Officer
Date: May 12, 1994 By: EUGENE V. MALINOWSKI
Eugene V. Malinowski, C.P.A., Treasurer
(Principal Financial Officer and
Chief Accounting Officer)
15
Exhibit Index
No. Page
11* Computation of Per Share Income 17
16