As filed with the Securities and Exchange Commission on August 15, 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 June 30, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from..........to .........
Commission file number 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 August 1, 1994:
Common Stock, no par value - 50,501,467 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) June 30, 1994 December 31,
1993
Assets
Cash and due from banks $ 137,853 $ 111,295
Interest-bearing balances with banks 500 500
Federal Funds sold 75,000 50,000
Total cash and cash equivalents 213,353 161,795
Investment securities:
U.S. treasury and government agencies 136,460 97,652
States and political subdivisions 81,542 25,522
Other 160 11,736
Total investment securities(market value:
1994, $214,035; 1993, $135,899) 218,162 134,910
Securities available for sale:
U.S. treasury and government agencies 228,900 417,033
Other 6,247 -
Total securities available for sale (1994 amortized
cost: $241,795; 1993 market value: $418,616) 235,147 417,033
Total securities 453,309 551,943
Term Federal Funds sold - 30,000
Loans 1,786,801 1,750,834
Total loans 1,786,801 1,780,834
Less: Allowance for loan losses 62,936 63,788
Net loans 1,723,865 1,717,046
Premises and equipment 35,407 36,472
Foreclosed real estate, net 38,740 45,003
Accrued income receivable 15,881 16,353
Other assets 45,298 37,735
Total assets $2,525,853 $2,566,347
Liabilities & Shareholders' Equity
Deposits:
Demand (non-interest bearing) $ 452,559 $ 424,238
Savings 1,089,008 1,094,709
Time 729,121 802,028
Total deposits 2,270,688 2,320,975
Short-term borrowings 6,662 6,795
Accrued expenses and other liabilities 21,305 22,312
Long-term debt 19,240 19,240
Total liabilities 2,317,895 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, 38,702 shares; 1993,
68,815 shares; liquidation preference $23.00 per share 890 1,583
Common stock, no par value
Authorized 56,393,972 shares
Issued: 1994, 50,324,207 shares;
1993, 50,006,514 shares 62,905 62,508
Paid-in capital 108,448 107,904
Retained earnings 41,261 26,587
Net unrealized holding losses on securities available
for sale (3,989) -
Treasury stock, at cost, 146,690 shares (1,557) (1,557)
Total shareholders' equity 207,958 197,025
Total liabilities & shareholders' equity $2,525,853 $2,566,347
See notes to interim consolidated financial statements.
2
CITIZENS FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
For The Three Months For The Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
Interest Income
Loans $36,443 $33,814 $ 71,209 $ 67,899
Securities:
Taxable interest 5,156 6,654 10,857 13,447
Tax-exempt interest 521 41 822 82
Federal Funds sold 627 516 1,302 1,245
Other 123 17 152 27
Total interest income 42,870 41,042 84,342 82,700
Interest Expense
Savings deposits 6,332 6,332 12,426 12,873
Time deposits 7,491 8,910 15,348 18,676
Short-term borrowings 68 38 120 78
Long-term debt 323 325 648 650
Total interest expense 14,214 15,605 28,542 32,277
Net interest income 28,656 25,437 55,800 50,423
Provision for loan losses 3,000 4,500 6,500 9,500
Net interest income after provision
for loan losses 25,656 20,937 49,300 40,923
Non-Interest Income
Trust department income 803 810 1,716 1,643
Service charges on deposits 2,627 2,503 5,014 4,998
Credit card merchant income 610 607 1,202 1,230
Gain on sale of securities - - - 2,161
Commissions & other income 876 1,081 1,669 1,907
Total non-interest income 4,916 5,001 9,601 11,939
Operating Expense
Salaries & employee benefits 9,428 9,077 18,768 17,788
Net occupancy 1,957 1,703 3,913 3,557
Furniture & equipment 847 741 1,655 1,540
Foreclosed real estate expense, net 1,691 2,136 3,428 3,598
Insurance premium on deposits 1,437 1,418 2,873 2,998
Credit card merchant expense 518 514 973 961
Other operating expenses 4,448 3,726 8,301 7,914
Total operating expenses 20,326 19,315 39,911 38,356
Income before income taxes and cumulative
effect of change in accounting principle 10,246 6,623 18,990 14,506
Income tax expense 4 98 9 290
Income before cumulative effect of change
in accounting principle 10,242 6,525 18,981 14,216
Cumulative effect of change in accounting
principle - - - 7,168
Net Income $10,242 $ 6,525 $18,981 $21,384
Weighted Average Number Of Common
Shares Outstanding
Primary 50,708,942 50,144,890 50,340,697 50,090,363
Fully Diluted 53,150,174 52,621,517 52,818,971 52,624,883
Income Per Common Share
Primary
Income before cumulative effect of
change in accounting principle $.21 $.13 $.38 $.28
Cumulative effect of change in
accounting principle - - - .15
Net Income .21 .13 .38 .43
Fully Diluted
Income before cumulative effect of
change in accounting principle .20 .12 .37 .27
Cumulative effect of change in
accounting principle - - - .14
Net Income .20 .12 .37 .41
See notes to interim consolidated financial statements.
3
CITIZENS FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the Six Months Ended June 30 1994 1993
Operating Activities
Net income $ 18,981 $ 21,384
Adjustments to reconcile net income to net cash flows
provided from operating activities:
Provision for loan losses 6,500 9,500
Provision for losses on foreclosed real estate 2,229 1,712
Amortization of unearned income on loans 32 71
Amortization of intangible assets 775 775
Depreciation on premises and equipment 1,958 1,521
Gain on sale of securities - (2,161)
Proceeds from sales of trading account securities - 24,252
Purchase of trading account securities - (23,128)
Changes in operating assets and liabilities:
Decrease in accrued income receivable 472 125
Increase in deferred income taxes, net (6,418) (14,042)
Decrease (increase) in other assets 739 (1,736)
(Decrease) increase in accrued expenses & other liabilities (1,007) 1,036
Net cash flows provided from operating activities 24,261 19,309
Investing Activities
Proceeds from maturities of securities available for sale 192,829 583
Proceeds from sales of securities available for sale - 155,240
Purchases of securities available for sale (6,015) (14,519)
Proceeds from maturities of investment securities 15,792 40,608
Purchase of investment securities (110,620) (199,624)
Net (increase) decrease in loans (16,346) 6,021
Sales of and payments on foreclosed real estate 7,029 6,988
Purchases of premises and equipment (893) (1,300)
Net cash flows provided from (used in) investing activities 81,776 (6,003)
Financing Activities
Net increase in demand and savings deposits 22,620 19,615
Net decrease in time deposits (72,907) (75,864)
Net decrease in short-term borrowings (133) (429)
Proceeds from the issuance of common stock 248 28
Cash dividends on stock (4,307) (524)
Net cash flows used in financing activities (54,479) (57,174)
Net increase (decrease) in cash & cash equivalents 51,558 (43,868)
Cash & cash equivalents, beginning of year 161,795 250,913
Cash & cash equivalents, end of period $213,353 $207,045
Supplemental Cash Flow Information
Amount paid during the period for:
Interest $ 30,825 $ 33,637
Income taxes 6,427 7,180
Supplemental schedule of noncash investing activities
Transfers from investment securities to securities
available for sale 11,576 -
Net unrealized holding losses on securities available for sale (3,989) -
Transfers from loans to foreclosed real estate 2,995 952
See notes to interim consolidated financial statements.
4
CITIZENS FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands)
For the Six Months Ended June 30 1994 1993
Balance, beginning of year $197,025 $163,328
Net income 18,981 21,384
Issuance of common stock due to exercise
of stock options (53,370 shares; 6,074 shares) 248 28
Common stock dividend declared (4,266) -
Preferred stock dividend declared (41) (524)
Change in net unrealized holding losses on
securities available for sale (3,989) -
Balance, end of period $207,958 $184,216
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. Subsequent to adoption, Citizens
recorded a mark-to-market adjustment on the available for sale portfolio of
$6,648,000 and an adjustment to reduce shareholders' equity by $3,989,000, net
of income taxes, in accordance with SFAS 115, at June 30, 1994. 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, on
March 15, 1994, 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. (the "Merger").
Shareholders of Citizens will have the option to elect to convert their common
stock into $9.75 per share in cash, .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 who receive ADRs. The
agreement is subject to approval by certain Federal and United Kingdom
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 Six Months Ended June 30 1994 1993
Balance, beginning of period $63,788 $75,838
Provision charged to operations 6,500 9,500
Recoveries on loans 1,927 1,437
Loans charged off (9,279) (10,821)
Balance, end of period $62,936 $75,954
5 Nonperforming Assets:
Nonperforming assets of $87,746,000, $109,194,000, and $155,798,000 which
represent 4.81%, 5.98%, and 8.94% of total loans and foreclosed real estate as
of June 30, 1994, December 31, 1993, and June 30, 1993, respectively, consist of
all nonperforming loans and foreclosed real estate. Gross interest income of
approximately $2,424,000 and $4,400,000 would have been recorded for the six
months ended June 30, 1994 and 1993, respectively, if nonaccrual loans had been
current. Interest earned and recognized on a cash basis on nonaccrual loans
amounted to $346,000 and $378,000 for the six months ended June 30, 1994 and
1993, respectively. In addition, interest earned on restructured loans that are
performing in accordance with their modified terms amounted to $788,000 and
$1,047,000 for the six months ended June 30, 1994 and 1993, respectively. These
loans would have earned $1,839,000 and $2,305,000 for the six months ended June
30, 1994 and 1993, respectively, had they performed in accordance with their
original terms. For additional discussion, see page 12 under the caption "Asset
Quality."
In the second quarter, Citizens sold approximately $9,302,000 of performing and
nonperforming residential mortgages and other real estate, resulting in the
reduction of nonperforming assets of approximately $6,907,000. The transaction
resulted in a reduction of the allowance for loan losses of approximately
$2,358,000 in connection with the asset sale.
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.
6
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 six months ended June 30, 1994.
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, 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.
In April 1994 a purported class action relating to the Merger was filed by two
alleged shareholders of Citizens in the Superior Court of New Jersey, Bergen
County, Chancery Division. Named as defendants in the action are Citizens and
the members of Citizens Board. The class that plaintiffs seek to represent
consists of all holders of Citizens Common Stock as March 21, 1994. Plaintiffs
allege that in considering and approving the Merger defendants breached their
fiduciary duties to shareholders in various respects. In particular, plaintiffs
claim that defendants did not exercise independent business judgment, acted for
their own personal benefit, and failed to utilize fair and active bidding
procedures to assure that shareholder value was maximized, and that as a result,
shareholders are being deprived of the opportunity to realize a fair and
adequate price for their shares. The complaint seeks to require defendants to
immediately undertake an appropriate evaluation of Citizens' worth as a
merger/acquisition candidate, to take all appropriate steps to enhance Citizens'
value and attractiveness as a merger/acquisition candidate and expose Citizens
to the marketplace in an effort to create an active auction, to act
independently to ensure that no conflicts of interest exist and to account to
the plaintiff class for all damages suffered as a result of defendants' conduct.
Citizens believes that the claims are totally without merit and intends to
vigorously defend the action.
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
results of operations or financial position of Citizens.
8 Long Term Debt
On April 22, 1994, Citizens called for the redemption of its outstanding 6 3/4%
Convertible Subordinated Debentures due August 1, 2001. The debentures were
redeemed on August 1, 1994. A total of $18,990,000 in principal amount of the
debentures was outstanding at June 30, 1994.
The redemption price paid for the debentures was 100% of principal amount, plus
accrued interest through the date of redemption. After the redemption date,
interest ceased to accrue. The debentures were convertible into the Company's
Common Stock, at any time prior to the date of redemption, at a price of $10.27
per share.
7
9 Preferred Stock
On May 26, 1994, Citizens announced that it will redeem all of its outstanding
Preferred Stock, Series A $2.50 Cumulative Convertible on July 14, 1994. The
redemption price for each share of Preferred Stock is $23.00, plus $.51 in
accrued dividends through the date of redemption, for a total of $23.51 per
share. At any time prior to 5:00 p.m. on Thursday, July 14, 1994 each share of
Preferred Stock may be converted into 8.78 shares of the Company's Common Stock.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Financial Condition
Citizens reported net income of $18,981,000 for the six months ended June 30,
1994, compared with $21,384,000 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 $4,765,000 or 33.5%.
On a fully diluted per share basis, income for the six months ended June 30,
1994 was $.37 compared with $.27 for the first six months of 1993 before the
cumulative effect of the change in accounting principle. Net income was $.37
per share for the first six months of 1994, compared with $.41 for the
comparable period of 1993.
Excluding the benefit derived from the change in accounting principle, Citizens'
improved performance for the first six months of 1994 was attributable to net
interest income of $55,800,000, a 10.7% improvement from the comparable period
last year. In addition, the provision for loan losses was reduced to $6,500,000
for the six months ended June 30, 1994 from $9,500,000 for the comparable prior
year period. Contributing to net income for the six months ended June 30, 1993
was a gain on sale of securities available for sale of $2,161,000. No gain on
sale was recorded in the six months ended June 30, 1994.
Citizens' assets at June 30, 1994 were $2,525,853,000, a decrease of 1.6% from
the December 31, 1993 total of $2,566,347,000. Deposits decreased 2.2% to
$2,270,688,000 compared to $2,320,975,000 at December 31, 1993. 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 $1,786,801,000 at June 30, 1994, an increase of 2.1% compared
to $1,750,834,000 at December 31, 1993. The investment securities portfolio
amounted to $218,162,000 at June 30, 1994, compared with $134,910,000 at
December 31, 1993. Securities available for sale amounted to $235,147,000 at
June 30, 1994, compared with $417,033,000 at December 31, 1993.
Total shareholders' equity at June 30, 1994 of $207,958,000 represents an
increase of 5.5% over the December 31, 1993 total of $197,025,000 primarily as a
result of net income of $18,981,000 less the dividends declared on Citizens'
common stock and Citizens' Series A $2.50 cumulative convertible preferred stock
of $4,266,000 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 $3,989,000, net of taxes, representing an adjustment for the change in net
unrealized holding losses on securities available for sale.
Nonperforming assets at June 30, 1994 were $87,746,000, or 4.81% of total loans
and foreclosed real estate, compared with $109,194,000 or 5.98% and $155,798,000
or 8.94% of total loans and foreclosed real estate at December 31, 1993 and June
30, 1993, respectively.
In June, Citizens sold approximately $9,302,000 of performing and nonperforming
residential mortgages and other real estate. As a result of this sale, the
level of the Bank's nonperforming assets was reduced by approximately
$6,907,000. In addition, the transaction resulted in a reduction of the
allowance for loan losses by approximately $2,358,000.
8
Return on average assets is an important measure of profitability. Citizens'
annualized return on average assets was 1.50% for the six months ended June 30,
1994, compared with 1.15%, 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 18.69% for the six months
ended June 30, 1994, compared with 16.44%, based on income before the cumulative
effect of a change in accounting principle for the six months ended June 30,
1993. Book value per share was $4.13 at June 30, 1994 compared with $3.92 per
share at December 31, 1993 and $3.66 per share at June 30, 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.
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.
Six Months Ended June 30 1994 1993
Average Average Average Average
(in thousands) Balance Interest Rate Balance Interest Rate
Interest-Earning Assets
Total loans $1,773,933 $ 71,872 8.10% $1,690,115 $ 68,536 8.11%
Less: Allowance for loan losses 64,544 76,512
Net loans 1,709,389 71,872 8.41 1,613,603 68,536 8.49
Interest-bearing balances
with banks 8,124 151 3.72 500 8 3.20
Federal Funds sold 73,376 1,302 3.55 82,105 1,245 3.03
Trading account securities - - - 888 27 6.08
Taxable securities 434,237 10,857 5.00 509,997 13,447 5.27
Tax-exempt securities 50,954 1,262 4.95 2,109 124 11.76
Total earning assets 2,276,080 85,444 7.51 2,209,202 83,387 7.55
Cash and due from banks 118,636 112,163
Foreclosed real estate, net 43,163 60,183
Other assets 91,257 82,155
Total assets $2,529,136 85,444 $2,463,703 83,387
Interest-Bearing Liabilities
Savings deposits $1,090,652 $12,426 2.28% $1,023,371 $12,873 2.52%
Time deposits 775,349 15,348 3.96 853,876 18,676 4.37
Short-term borrowings 7,178 120 3.34 6,912 78 2.26
Long-term debt 19,240 648 6.74 19,290 650 6.74
Total interest-bearing
liabilities 1,892,419 28,542 3.02 1,903,449 32,277 3.39
Demand deposits (non interest-
bearing) 412,821 368,708
Accrued expenses and other
liabilities 20,784 18,616
Shareholders' equity 203,112 172,930
Total liabilities and
shareholders' equity $2,529,136 28,542 $2,463,703 32,277
Net interest income $56,902 $51,110
Net yield on earning assets 5.00% 4.63%
<FN>
*Adjusted to a taxable-equivalent basis at a 35% tax rate.
Earning assets for the six months ended June 30, 1994 averaged $2,276,080,000,
an increase of 3.0% 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 money market conditions which
made bank certificate of deposits less competitive compared to other short-term
investments. Consequently, the net yield on earning assets was 5.00% during the
first six months of 1994 compared with 4.63% 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 six months ended June 30, 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.
Six Months Ended June 30, 1994 Compared with 1993
Increase (decrease) due to a change in the
(dollars in thousands) Volume Rate Total
Interest earned on:
Net loans $ 4,066 $ (730) $ 3,336
Federal Funds sold (132) 189 57
Taxable securities (1,997) (593) (2,590)
Tax-exempt securities 2,872 (1,734) 1,138
Other (2,284) 2,400 116
Total interest income* 2,525 (468) 2,057
Interest expense on:
Savings deposits 848 (1,295) (447)
Time deposits (1,716) (1,612) (3,328)
Short-term borrowings 3 39 42
Long-term debt (2) - (2)
Total interest expense (867) (2,868) (3,735)
Change in net interest income $ 3,392 $ 2,400 $ 5,792
Percent increase in net interest
income over the prior period 11.3%
<FN>
*Includes a $416,000 increase in the taxable-equivalent adjustment using a 35%
tax rate.
Net interest income, on a taxable-equivalent basis, increased $5,792,000 for the
period. The increase in net interest income resulted from a $3,735,000 decrease
in interest expense and a $2,057,000 increase in interest income. The decline
in interest expense was largely due to the effect of (i) the average overall
lower interest rate environment during the first six months of 1994 compared
with the same period of 1993 and (ii) a decline in the average balance of
interest-bearing liabilities, primarily in time deposits, combined with an
increase in the average balance of interest-earning assets during the first six
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 $306,486,000 at June
30, 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 80.0% of interest rate-sensitive liabilities at June 30, 1994, compared
with 84.0% at June 30, 1993. The percentage decrease from June 30, 1993 to June
30, 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 June 30, 1994, $164,682,000 of Citizens' securities portfolio
was scheduled to mature within one year. In addition to its short-term
securities portfolio, Citizens had $75,000,000 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 $2,338,000 to $9,601,000 for the six months ended
June 30, 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 $1,555,000 for the six months ended June 30, 1994,
compared with the same period in 1993. More than half of this increase was
attributable to merger related costs which totaled $837,000. The largest
operating expense increase was $980,000 in salaries and employee benefits which
resulted from normal salary increases and the increased cost of employee
benefits. Other increases of $387,000 in other operating expenses and $356,000
in net occupancy were offset by decreases in net foreclosed real estate expenses
of $170,000 and in insurance premium on deposits of $125,000.
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 $9,000 for the six months ended June 30, 1994, compared
with $290,000 for the same period in 1993. Citizens' effective tax rate was
0.1% for the six months ended June 30, 1994 compared with an effective tax rate
of 2.0% 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. The Company will return to a fully-
taxable position during the third quarter. 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 June 30, 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 June 30, 1994, the allowance for loan losses was $62,936,000, compared with
$63,788,000 at December 31, 1993 and $75,954,000 at June 30, 1993. The
provision for loan losses for the six months ended June 30, 1994 was $6,500,000,
compared with $9,500,000 for the same period in 1993. The allowance for loan
losses at June 30, 1994 was 3.52% of total loans, compared with 3.58% at
December 31, 1993 and 4.50% of total loans at June 30, 1993. The allowance for
loan losses to nonperforming loans was 128.4% at June 30, 1994 compared to 99.4%
and 75.1% at December 31, 1993 and June 30, 1993, respectively. Net charge-offs
for the six months ended June 30, 1994 were $7,352,000, compared with $9,384,000
for the same period in 1993. The decline in net charge-offs, exclusive of the
charge of approximately $2,358,000 for the asset sale, 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) 6/30/94 12/31/93 6/30/93
Nonperforming assets
Commercial and industrial $ 16,120 $ 18,632 $ 31,108
Real estate-commercial and construction 29,851 36,373 63,965
Real estate-residential 699 5,327 2,631
Consumer 1,808 3,331 2,986
Nonaccrual troubled debt restructurings 528 528 508
Total nonperforming loans 49,006 64,191 101,198
Foreclosed real estate 38,740 45,003 54,600
Total nonperforming assets 87,746 109,194 155,798
Accruing loans past due 90 days or more as to
principal or interest payments
Commercial and industrial 713 582 1,332
Real estate-commercial and construction 1,878 382 -
Real estate-residential 675 2,144 2,789
Consumer 1,056 1,413 2,195
Total loans past due 90 days or more 4,322 4,521 6,316
Other troubled debt restructurings 31,424 35,335 37,729
Total risk elements $123,492 $149,050 $199,843
Total nonperforming loans as a percentage
of total loans 2.74% 3.60% 6.00%
Total nonperforming assets as a percentage
of total loans and foreclosed real estate 4.81 5.98 8.94
Total risk elements as a percentage of total
loans and foreclosed real estate 6.76 8.16 11.46
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 $20,000,000 of potential problem loans at June 30,
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 six months ended June 30,
1994 if nonaccrual loans had been current was $2,424,000, including the reversal
of previously accrued interest, compared with $4,400,000 for the same period in
the prior year. Nonaccrual loans on which income is earned on a cash basis,
amounted to $4,037,000 at June 30, 1994 and $6,432,000 at June 30, 1993.
Interest earned on all cash basis nonaccrual loans amounted to $346,000 and
$378,000 for the six months ended June 30, 1994 and 1993, respectively. In
addition, interest earned on restructured loans that are performing in
accordance with their modified terms amounted to $788,000 and $1,047,000 for the
six months ended June 30, 1994 and 1993, respectively. These loans would have
earned $1,839,000 and $2,305,000 for the six months ended June 30, 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 June 30, 1994.
At June 30, 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 June
30, 1994 was 11.56% compared with 11.15% and 10.52% at December 31, 1993 and
June 30, 1993, respectively. Total capital as a percentage of total
risk-weighted assets was 13.91% at June 30, 1994 compared with 13.54% at year
end 1993 and 12.93% at June 30, 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 June 30, 1994 Citizens' leverage capital ratio was 8.20%.
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 April 22, 1994, Citizens First Bancorp, Inc. announced that it has
called for redemption its outstanding 6 3/4% Convertible Subordinated Debentures
due August 1, 2001. The debentures will be redeemed on August 1, 1994. A total
of $18,990,000 in principal amount of the debentures was outstanding at June 30,
1994. The redemption price to be paid for the debentures is 100% of principal
amount, plus accrued interest through the date of redemption. After the
redemption date, interest will cease to accrue. The debentures are convertible
into the Company's Common Stock, at any time prior to the date of redemption, at
a price of $10.27 per share.
On May 26, 1994, Citizens First Bancorp, Inc. announced that it will
redeem all of its outstanding Preferred Stock, Series A $2.50 Cumulative
Convertible on July 14, 1994. The redemption price for each share of Preferred
Stock is $23.00, plus $.51 in accrued dividends through the date of redemption,
for a total of $23.51 per share. At any time prior to 5:00 p.m. on Thursday,
July 14, 1994 each share of Preferred Stock may be converted into 8.78 shares of
the Company's Common Stock.
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: August 15, 1994 By: RODNEY T. VERBLAAUW
Rodney T. Verblaauw, President and
Chief Administrative Officer
Date: August 15, 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