EXHIBIT 99.1
TABLE OF CONTENTS
PAGE
INTRODUCTION 1
I. Description of Citizens First Savings Bank
General 3
Performance Overview 7
Income and Expense 9
Yields and Costs 14
Interest Rate Sensitivity 15
Lending Activities 17
Non-Performing Assets 21
Investments 24
Deposit Activities 24
Borrowings 25
Subsidiaries 26
Office Properties 26
Management 27
II. Description of Primary Market Area 28
III. Comparable Group Selection
Introduction 34
General Parameters
Merger/Acquisition 35
Mutual Holding Companies 36
Trading Exchange 37
IPO Date 37
Geographic Location 37
Asset Size 38
Balance Sheet Parameters
Introduction 39
Cash and Investments to Assets 40
Mortgage-Backed Securities to Assets 40
One- to Four-Family Loans to Assets 41
Total Net Loans to Assets 41
Total Net Loans and Mortgage-Backed Securities to Assets 41
Borrowed Funds to Assets 42
Equity to Assets 42
Performance Parameters
Introduction 43
TABLE OF CONTENTS (cont.)
PAGE
III. Comparable Group Selection (cont.)
Performance Parameters (cont.)
Return on Average Assets 43
Return on Average Equity 44
Net Interest Margin 44
Operating Expenses to Assets 45
Noninterest Income to Assets 45
Asset Quality Parameters
Introduction 46
Nonperforming Assets to Assets 46
Repossessed Assets to Assets 47
Loan Loss Reserves to Assets 47
The Comparable Group 48
IV. Analysis of Financial Performance 49
V. Market Value Adjustments
Earnings Performance 52
Market Area 57
Financial Condition 58
Asset, Loan and Deposit Growth 60
Dividend Payments 62
Subscription Interest 62
Liquidity of Stock 63
Management 63
Marketing of the Issue 65
VI. Valuation Methods 66
Price to Book Value Method 67
Price to Earnings Method 68
Price to Assets Method 69
Valuation Conclusion 70
LIST OF EXHIBIT
NUMERICAL
EXHIBITS PAGE
1 Consolidated Balance Sheet - At August 31, 2000,
and March 31, 2000 72
2 Consolidated Balance Sheets - At March 31, 1996
through 1999 73
3 Consolidated Statements of Income - Five Months
Ended August 31, 1999 and 2000, and
Year Ended March 31, 2000 74
4 Consolidated Statements of Income - March 31,
1996 through 1999 75
5 Selected Financial Information 76
6 Income and Expense Trends 77
7 Normalized Earnings Trend 78
8 Performance Indicators 79
9 Volume/Rate Analysis 81
10 Yield and Cost Trends 82
11 Change in Annual Net Interest Income 83
12 Loan Portfolio Composition 84
13 Loan Maturity Schedule 85
14 Loan Originations and Purchases 86
15 Delinquent Loans 87
16 Nonperforming Assets 88
17 Allowance for Loan Losses 89
18 Investment Portfolio Composition 90
19 Mix of Deposits 91
20 Certificates by Maturity 92
21 Deposit Activity 93
22 Borrowed Funds Activity 94
23 Offices of Citizens First Savings Bank 95
24 Management of the Bank 96
25 Key Demographic Data and Trends 97
26 Key Housing Data 98
27 Major Sources of Employment 99
28 Unemployment Rates 100
29 Market Share of Deposits 101
30 National Interest Rates by Quarter 102
31 Thrift Stock Prices and Pricing Ratios 103
32 Key Financial Data and Ratios 113
33 Recently Converted Thrift Institutions 123
34 Acquisitions and Pending Acquisitions 124
LIST OF EXHIBITS (cont.)
NUMERICAL PAGE
EXHIBITS
35 Thrift Stock Prices and Pricing Ratios -
Mutual Holding Companies 125
36 Key Financial Data and Ratios -
Mutual Holding Companies 126
37 Balance Sheets Parameters -
Comparable Group Selection 127
38 Operating Performance and Asset Quality Parameters -
Comparable Group Selection 131
39 Balance Sheet Ratios -
Final Comparable Group 135
40 Operating Performance and Asset Quality Ratios
Final Comparable Group 136
41 Balance Sheet Totals - Final Comparable Group 137
42 Balance Sheet - Asset Composition
Most Recent Quarter 138
43 Balance Sheet - Liability and Equity
Most Recent Quarter 139
44 Income and Expense Comparison
Trailing Four Quarters 140
45 Income and Expense Comparison as a Percent of
Average Assets - Trailing Four Quarters 141
46 Yields, Costs and Earnings Ratios
Trailing Four Quarters 142
47 Dividends, Reserves and Supplemental Data 143
48 Valuation Analysis and Conclusions 144
49 Market Pricings and Financial Ratios - Stock Prices
Comparable Group 145
50 Pro Forma Minimum Valuation 146
51 Pro Forma Mid-Point Valuation 147
52 Pro Forma Maximum Valuation 148
53 Pro Forma Superrange Valuation 149
54 Summary of Valuation Premium or Discount 150
ALPHABETICAL EXHIBITS PAGE
A Background and Qualifications 151
B RB 20 Certification 155
C Affidavit of Independence 156
INTRODUCTION
Keller & Company, Inc. is an independent appraisal firm for financial
institutions and has prepared this Conversion Valuation Appraisal Report
("Report") to provide the pro forma market value of the to-be-issued common
stock of Citizens First Bancorp, Inc. (the "Corporation"), a Delaware
corporation, formed as a holding company to own all of the to-be-issued shares
of common stock of Citizens First Savings Bank ("Citizens First" or the "Bank"),
Port Huron, Michigan. The stock is to be issued in connection with the Bank's
Application for Approval of Conversion from a state chartered mutual savings
bank to a state chartered stock savings bank. The Application is being filed
with the Securities and Exchange Commission ("SEC"), the Michigan Office of
Financial and Insurance Services and the Federal Deposit Insurance Corporation
("FDIC"). In accordance with the Bank's conversion, there will be a
simultaneous issuance of all the Bank's stock to the Corporation, which will be
formed by the Bank. Such Application for Conversion has been reviewed by us,
including the Prospectus and related documents, and discussed with the Bank's
management and the Bank's conversion counsel, Muldoon, Murphy & Faucette,
Washington, D.C.
This conversion appraisal was prepared based on the guidelines provided by
OTS entitled "Guidelines for Appraisal Reports for the Valuation of Savings
Institutions Converting from the Mutual to Stock Form of Organization," in
accordance with the OTS application requirements of Regulation (S)563b and the
OTS's Revised Guidelines for Appraisal Reports, and represents a full appraisal
report. The Report provides detailed exhibits based on the Revised Guidelines
and a discussion on each of the fourteen factors that need to be considered. Our
valuation will be updated in accordance with the Revised Guidelines and will
consider any changes in market conditions for thrift institutions.
The pro forma market value is defined as the price at which the stock of the
Corporation after conversion would change hands between a typical willing buyer
and a typical willing seller when the former is not under any compulsion to buy
and the latter is not under any compulsion to sell, and with both parties having
reasonable knowledge of
1
relevant facts in an arms-length transaction. The appraisal assumes the Bank is
a going concern and that the shares issued by the Corporation in the conversion
are sold in non-control blocks.
Introduction (cont.)
In preparing this conversion appraisal, we have reviewed the financial
statements for the five fiscal years ended March 31, 1996 through 2000, as well
as the financial statements for the five months ended August 31, 1999 and 2000,
and discussed them with Citizens First's management and with Citizens First's
independent auditors, Plante & Moran, LLP, Bloomfield Hills, Michigan. We have
also discussed and reviewed with management other financial matters and have
reviewed internal projections. We have reviewed the Corporation's preliminary
Form S-1 and the Bank's preliminary Form AC and discussed them with management
and with the Bank's conversion counsel.
We have visited Citizens First's home office and have traveled the
surrounding area where its thirteen regular branches are located. The Bank also
has six off-premise ATM facilities. We have studied the economic and
demographic characteristics of the primary retail market area of Huron, Lapeer,
St. Clair and Sanilac Counties and analyzed the Bank's primary market area
relative to Michigan and the United States. We have also examined the
competitive market within which Citizens First operates, giving consideration to
the area's numerous financial institution offices, mortgage banking offices, and
credit union offices and other key characteristics, both positive and negative.
We have given consideration to the current market conditions for securities
in general and for publicly-traded thrift stocks in particular. We have
examined the performance of selected publicly-traded thrift institutions and
compared the performance of Citizens First to those selected institutions.
Our valuation is not intended to represent and must not be interpreted to be
a recommendation of any kind as to the desirability of purchasing the to-be-
outstanding shares of common stock of the Corporation. Giving consideration to
the fact that this appraisal is
2
based on numerous factors that can change over time, we can provide no assurance
that any person who purchases the stock of the Corporation in this mutual-to-
stock conversion will subsequently be able to sell such shares at prices similar
to the pro forma market value of the Corporation as determined in this
conversion appraisal.
3
I. DESCRIPTION OF CITIZENS FIRST SAVINGS BANK
GENERAL
Citizens First is a community oriented financial institution which has been
principally engaged in the business of serving the financial needs of the public
in its local communities and throughout its primary market area. Citizens First
conducts its business from its main office in Port Huron, Michigan and its
thirteen branch offices in Fort Gratiot, Port Huron, Marysville, St. Clair,
Marine City, Algonac, Lapeer, Imlay City, Croswell, Sandusky, Harbor Beach and
Bad Axe. The Bank also serves its customers from its six off-premise ATMs. The
Bank's primary market area is comprised of Huron, Lapeer, St. Clair and Sanilac
Counties where all of the Bank's facilities are located, and its lending market
extends into Macomb County.
Citizens First's deposits are insured up to applicable limits by the Federal
Deposit Insurance Corporation ("FDIC") in the Savings Association Insurance Fund
("SAIF"). The Bank is also subject to certain reserve requirements of the Board
of Governors of the Federal Reserve Bank (the "FRB"). Citizens First is a
member of the Federal Home Loan Bank (the "FHLB") of Indianapolis and is
regulated by the FDIC and the Michigan Office of Financial and Insurance
Services. As of August 31, 2000, Citizens First had assets of $794,428,000,
deposits of $637,023,000 and equity of $66,963,000.
Citizens First has been involved in the origination of residential mortgage
loans secured by one- to four-family dwellings, which represented 37.9 percent
of its loan originations during the year ended March 31, 2000, and a similar
35.3 percent of its loan originations during the five months ended August 31,
2000. Construction loan originations represented a strong 12.9 percent and 14.2
percent, respectively, and home equity loan originations represented 11.3
percent for each period. Other consumer loan originations represented 14.5
percent and 13.8 percent of total originations for the same respective time
periods. At August 31, 2000, 55.9 percent of the Bank's gross loans consisted
of residential real estate loans on one- to four-family dwellings, compared to a
larger 74.1 percent at
4
March 31, 1996, with the primary sources of funds being retail deposits from
residents in its local communities, FHLB advances and earnings. The Bank is also
an originator of multi-family loans, commercial real
General (cont.)
estate loans, interim construction loans, consumer loans and commercial loans.
Consumer loans include home equity loans, second mortgage loans, automobile
loans, loans on savings accounts and other secured and unsecured personal loans.
The Bank had $135.4 million, or a moderate 17.0 percent of its assets in
cash and investments at August 31, 2000, including FHLB stock which totaled $5.1
million or 0.6 percent of assets. The Bank had no mortgage-backed and related
securities. Deposits, FHLB advances and equity have been the primary sources of
funds for the Bank's lending and investment activities.
The Bank's gross amount of stock to be sold in the subscription and
community offering will be $58.0 million or 5,796,000 shares at $10 per share
based on the midpoint of the appraised value of $62.6 million and excluding the
planned issuance of 464,000 shares or $4,640,000 to the proposed Citizens First
Charitable Foundation ("Foundation"). The net conversion proceeds will be
$55,688,700, reflecting conversion expenses of approximately $2,266,902 and the
$4,640,000 Foundation. The actual cash proceeds to the Bank will be $27.9
million representing fifty percent of the net conversion proceeds. The ESOP
will represent 8.0 percent of the gross shares issued or 501,120 shares at $10
per share, representing $5,011,200. The Bank's net proceeds will be invested in
adjustable-rate mortgage loans, consumer loans including home equity loans and
commercial loans over time and initially invested in short term investments.
The Bank may also use the proceeds to expand services, expand operations or
acquire other financial service organizations, diversify into other businesses,
or for any other purposes authorized by law. The Corporation will use its fifty
percent of the proceeds to fund the ESOP and to invest in short-and
intermediate-term government or federal agency securities and other interest-
bearing
5
deposits.
Citizens First has seen a relatively strong deposit increase over the past
five fiscal years with deposits increasing 41.7 percent from March 31, 1996 to
March 31, 2000, or an average of 10.4 percent per year. From March 31, 2000, to
August 31, 2000, deposits increased by 6.0
General (cont.)
percent or 14.4 percent, annualized, compared to a 14.1 percent growth rate in
fiscal 2000. The Bank's stronger growth has been strengthened by its recent
success in attracting public deposits. The Bank has focused on increasing its
residential real estate loan and consumer loan portfolios during the past five
years, monitoring its net interest margin and earnings and maintaining its
equity to assets ratio. Equity to assets decreased modestly from 9.01 percent
of assets at March 31, 1996, to 8.53 percent at March 31, 2000, and then
decreased to 8.42 percent at August 31, 2000, due to the Bank's stronger growth.
Citizens First's primary lending strategy, historically, has been to focus
on the origination of adjustable-rate and fixed-rate, one-to four-family loans
and residential construction loans, the origination of commercial real estate
loans, the origination of consumer loans and commercial business loans with a
more recent emphasis on consumer and commercial loans.
Citizens First's share of one- to four-family mortgage loans has decreased
significantly, from 74.1 percent of gross loans at March 31, 1996, to 55.9
percent as of August 31, 2000. Commercial real estate loans and multi-family
loans combined increased from 1.9 percent of gross loans to 12.6 percent of
gross loans from March 31, 1996, to August 31, 2000. All types of mortgage
loans as a group decreased moderately from 80.9 percent of gross loans in 1996
to 74.1 percent at August 31, 2000. The decrease in mortgage loans was offset
by the Bank's increase in consumer loans and commercial loans. The Bank's share
of consumer loans witnessed an increase in their share of loans from 16.6
percent at March 31, 1996, to 20.3 percent at August 31, 2000, and the level of
consumer loans increased from $72.8 million to $130.8 million, due primarily to
growth in automobile
6
loans. Commercial business loans also witnessed an increase in their share of
loans from 2.5 percent in 1996 to 5.6 percent at August 31, 2000.
Management's internal strategy has also included continued emphasis on
maintaining an adequate and appropriate allowance for loan losses relative to
loans and nonperforming assets in recognition of the more stringent requirements
within the industry to establish and maintain a higher level of general
valuation allowances and also in recognition of the Bank's
General (cont.)
continued increased level of higher risk consumer and commercial loans. At
March 31, 1996, Citizens First had $6.4 million in its loan loss allowance or
1.45 percent of gross loans, which increased to $10.6 million and represented a
higher 1.65 percent of gross loans and 473.0 percent of nonperforming assets at
August 31, 2000.
Interest income from loans and investments has been the basis of earnings
with the net interest margin being the key determinant of net earnings. With a
dependence on net interest margin for earnings, current management will focus on
maintaining the Bank's net interest margin while undertaking some higher credit
risk combined with reducing the Bank's interest risk position.
7
PERFORMANCE OVERVIEW
Citizens First's financial position at year end March 31, 1996 through March
31, 2000, and at August 31, 2000, is highlighted through the use of selected
financial data in Exhibit 5. Citizens First has focused on maintaining its
equity and overall earnings, increasing its loan levels, increasing investment
securities, increasing deposits, and maintaining its net interest margin.
Citizens First has experienced a stronger increase in assets from 1996 to 2000
with a stronger increase in deposits, a moderate rise in FHLB advances and a
rise in equity over the past four fiscal years. Such a rise in assets was the
result of increases in investment securities from 1999 to 2000 and loans from
1996 to 1999.
Citizens First witnessed a total increase in assets of $253.9 million or
52.1 percent for the period of March 31, 1996, to March 31, 2000, representing
an average annual increase in assets of 13.0 percent. For the year ended March
31, 2000, assets increased $95.8 million or 14.8 percent. For the five months
ended August 31, 2000, the Bank's assets increased $52.9 million or 7.1 percent.
Over the past four fiscal periods, the Bank experienced its largest dollar rise
in assets of $95.8 million in fiscal year 2000, which represented a strong 14.8
percent increase in assets funded by a rise in deposits of $74.2 million and a
rise in FHLB advances by $16.2 million. This increase in assets was preceded by
a more normal $39.8 million or 6.6 percent increase in assets in fiscal year
1999.
The Bank's net loan portfolio, including mortgage loans and non-mortgage
loans, increased from $431.3 million at March 31, 1996, to $631.2 million at
August 31, 2000, and represented a total increase of $199.9 million, or 46.3
percent. The average annual increase during that period was 10.51 percent.
That increase was primarily the result of higher levels of commercial real
estate loans, consumer loans and commercial loans. For the year ended March 31,
2000, loans decreased $22.1 million or 3.7 percent, due to the sale of a
portfolio of mortgage loans. For the five months ended August 31, 2000, net
loans increased $62.7 million or 11.0 percent representing 26.4 percent,
annualized.
8
Performance Overview (cont.)
Citizens First has pursued obtaining funds through deposits and FHLB
advances in accordance with the demand for loans. The Bank's competitive rates
for savings in its local market in conjunction with its focus on service and a
larger network of offices have been the sources for attracting retail deposits.
Deposits increased 41.7 percent from 1996 to 2000, with an average annual rate
of increase of 10.4 percent from March 31, 1996, to March 31, 2000. For the five
months ended August 31, 2000, deposits increased by $36.0 million or 6.0
percent, annualized to 14.4 percent. The Bank's strongest fiscal year deposit
growth was in 2000, when deposits increased $74.2 million or a relatively strong
14.1 percent with this growth partially due to the Bank's recent focus on public
deposits. The Bank's FHLB advances increased from $14.0 million at March 31,
1996, to $77.3 million at August 31, 2000, representing a total increase of
$63.3 million.
Citizens First has been able to increase its equity level each fiscal year
from 1996 through 2000 and in the five months ended August 31, 2000. At March
31, 1996, the Bank had equity of $43.9 million, representing a 9.01 percent
equity to assets ratio and then increasing to $63.3 million at March 31, 2000,
but representing a lower 8.53 percent equity to assets ratio due to the Bank's
strong growth. At August 31, 2000, equity was a higher $67.0 million but a
lower 8.43 percent of assets due to the Bank's continued growth. The overall
decrease in the equity to assets ratio from 1996 to 2000 is the result of the
Bank's somewhat volatile earnings performance impacted by the Bank's strong
growth in assets. Equity increased 44.1 percent from March 31, 1996, to March
31, 2000, representing an average annual increase of 11.0 percent and increased
5.9 percent for the five months ended August 31, 2000, or 14.1 percent,
annually.
9
INCOME AND EXPENSE
Exhibit 6 presents selected operating data for Citizens First, reflecting
the Bank's income and expense trends. This table provides key income and
expense figures in dollars for the fiscal years of 1996 through 2000 and for the
five months ended August 31, 1999 and 2000.
Citizens First has witnessed an overall increase in its dollar level of
interest income from March 31, 1996, through March 31, 2000, due to the Bank's
growth in assets, primarily loans. Interest income ranged from a low of $36.5
million in 1996 to a high of $51.9 million in 2000. This overall trend was a
combination of an increase of $9.7 million or 26.5 percent from 1996 to 1998,
followed by a smaller increase of $5.7 million or 12.3 percent from 1998 to
2000. For the five months ended August 31, 2000, interest income was $23.9
million, compared to a lower $20.7 million for the five months ended August 31,
1999, a continuation of the fiscal 2000 increase. The overall increase in
interest income was due primarily to the Bank's increase in the size of its loan
portfolio from 1996 to 1999 and an increase in its investment portfolio in 2000.
The Bank's interest expense experienced a similar trend with an overall
increase from fiscal year 1996 to 2000. Interest expense increased $5.1 million
or 25.2 percent, from 1996 to 1998, compared to a larger dollar increase in
interest income of $9.7 million and a larger 26.5 percent increase, for the same
time period. Interest expense then increased $2.0 million or 7.8 percent from
1998 to 2000, compared to an increase in interest income of $5.7 million or 12.3
percent. Such increase in interest income in 2000, notwithstanding the increase
in interest expense, resulted in a moderate dollar increase in annual net
interest income of $2.4 million or 11.3 percent for the fiscal year ended March
31, 2000, and a moderate increase in net interest margin. Net interest income
increased from $16.5 million in 1996, to $24.9 million in 2000. For the five
months ended August 31, 2000, Citizens First's actual net interest income was
$10.4 or $24.9 million, annualized, which was modestly higher than the $10.0
million for the five months ended August 31, 1999, or $24.0
10
million, annualized.
Income and Expense (cont.)
The Bank has made provisions for loan losses in four of the past five fiscal
years of 1996 through 2000 and also in the five months ended August 31, 2000.
The Bank had a credit to provision for loan losses in fiscal 2000 of $483,000.
The amounts of those provisions were determined in recognition of the Bank's
levels of nonperforming assets, charge-offs, real estate owned and repossessed
assets, the Bank's rise in lending activity, and industry norms. The loan loss
provisions were $816,000 in 1996, $757,000 in 1997, $714,000 in 1998, $3.8
million in 1999 and $106,000 in the five months ended August 31, 2000. The
impact of these loan loss provisions has been to provide Citizens First with a
general valuation allowance of $10.6 million at August 31, 2000, or 1.65 percent
of gross loans and 473.0 percent of nonperforming assets.
Total other income or noninterest income indicated an overall rising trend
from1996 to 1999 and then a decrease in 2000 due to a loss on loan sales. The
highest level of noninterest income was in fiscal year 1999 at $10.3 million or
1.59 percent of assets including $6.1 million in gains on the contribution of
securities. The lowest level was a net loss of $314,000 in 2000, due to a $4.5
million loss on the sale of loans. The average noninterest income level for the
past five fiscal years was $3.4 million or 0.56 percent of average assets. In
the five months ended August 31, 2000, noninterest income was $1.4 million or
0.42 percent of assets on an annualized basis. Noninterest income consists
primarily of service charges, fees, gains on loans sold, and other income.
The Bank's general and administrative expenses or noninterest expenses
increased from $12.5 million for the fiscal year of 1996 to $16.2 million for
the fiscal year ended March 31, 2000. The dollar increase in noninterest
expenses was $3.7 million from 1996 to 2000, representing an average annual
increase of $746,000 or 7.4 percent. Noninterest expenses were a higher $22.6
million in 1999 due to the Bank's establishment of a $6.2
11
million foundation. The annual increase in other expenses was due primarily to
the Bank's growth over the past five years combined with the normal rise in
overhead expenses. On a percent of average assets basis, operating expenses
decreased from 2.70 percent of average assets for the
Income and Expense (cont.)
fiscal year ended March 31, 1996, to 2.30 percent for the fiscal year ended
March 31, 2000. For the five months ended August 31, 2000, Citizens First's
ratio of operating expenses to average assets was a lower 2.25 percent.
The net earnings position of Citizens First has indicated profitable
performance in each of the past five fiscal years ended March 31, 1996 through
2000, and for the five months ended August 31, 2000. The annual net income
figures for the past five fiscal years of 1996 through 2000 have been $3.4
million, $2.9 million, $6.2 million, $6.6 million and $5.9 million, representing
returns on average assets of 0.71 percent, 0.53 percent, 1.01 percent, 1.01
percent and 0.85 percent, respectively. For the five months ended August 31,
2000, net earnings were $3.4 million, representing an annualized return on
average assets of 1.07 percent.
Exhibit 7 provides the Bank's normalized earnings or core earnings for
fiscal years 1999 and 2000 and for the twelve months ended August 31, 2000. The
Bank's normalized earnings eliminate any nonrecurring income and expense items.
There were adjustments to both income and expense during the periods. There was
a one time loss on the sale of loans of $4,500,000, which was added back to core
income, and there was a deduction to gains on the sale of loans of $1,650,000
due to higher than normal gains for the twelve months ended August 31, 2000, and
for the fiscal year ended March 31, 2000. For the fiscal year ended March 31,
1999, there was a $3.0 million expense negative adjustment to provision for loan
losses and a $6.2 million negative expense adjustment for the establishment of a
foundation. There were also two income adjustments in this period, one was a
reduction in the gain on the sale of property of $1.1 million and the second was
a $6.1 million reduction in the gain related to the foundation contribution.
12
The key performance indicators comprised of selected performance ratios,
asset quality ratios and capital ratios are shown in Exhibit 8 to reflect the
results of performance. The Bank's return on assets increased from 0.71 percent
in fiscal year 1996 to 1.01 percent in fiscal year 1999, and then down to 0.85
percent in 2000 due to losses on loans sold. It was a higher level for the five
months ended August 31, 2000, of 1.07 percent, annualized, due primarily to the
Bank's more normal noninterest income.
Income and Expense (cont.)
The Bank's average net interest rate spread decreased from 3.13 percent in
fiscal year 1996 to 3.04 percent in fiscal year 1998, then increased to 3.53
percent in 2000. For the five months ended August 31, 2000, net interest spread
was a lower 3.26 percent, annualized. The Bank's net interest margin indicated
a similar trend, decreasing from 3.56 percent in fiscal year 1996 to 3.43
percent in fiscal year 1997, then increasing to 3.82 percent in fiscal 2000, and
then down to 3.50 percent for the five months ended August 31, 2000, annualized.
Citizens First's average net interest rate spread decreased 9 basis points to
3.04 percent in 1998 from 3.13 percent in 1996 and then increased 49 basis
points from 1998 to 2000 to 3.53 percent. The Bank's net interest margin
followed a slightly less volatile trend, decreasing 13 basis points to 3.43
percent from 1996 to 1997 and then increasing 39 basis points to 3.82 percent
from 1997 to 2000. For the five months ended August 31, 2000, Citizens First's
annualized net interest spread decreased 27 basis points to 3.26 percent, and
its net interest margin decreased 32 basis points to 3.50 percent.
The Bank's return on average equity increased from 1996 to 2000. The return
on average equity increased from 8.16 percent in 1996 to 9.35 percent in fiscal
year 2000. For the five months ended August 31, 2000, return on average equity
was a higher 12.81 percent, annualized, due to the Bank's higher noninterest
income resulting in higher earnings.
Citizens First's ratio of interest-earning assets to interest-bearing
liabilities decreased modestly from 108.4 percent at March 31, 1996, to 106.9
percent at March 31, 2000, and then to a lower 105.4 percent at August 31, 2000.
The Bank's lower ratio of interest-
13
earning assets to interest-bearing liabilities is primarily the result of the
Bank's higher level of noninterest-earning deposits.
The Bank's ratio of non-interest expenses to average assets decreased from
2.70 percent in fiscal year 1996 to a lower 2.30 percent in fiscal year 2000,
due to more moderate increases in normal overhead and the impact of stronger
growth in assets. For the five months ended August 31, 2000, noninterest
expenses to assets decreased to 2.25 percent. Another key
Income and Expense (cont.)
noninterest expense ratio reflecting efficiency of operation is the ratio of
noninterest expenses to noninterest income plus net interest income referred to
as the "efficiency ratio." The industry norm is 60.0 percent with the lower
ratio indicating higher efficiency. The Bank has been characterized with a
lower level of efficiency historically reflected in its higher efficiency ratio,
which decreased from 68.8 percent in 1996 to 56.7 percent for the five months
ended August 31, 2000.
Earnings performance can be affected by an institution's asset quality
position. The ratio of nonperforming assets to total assets is a key indicator
of asset quality. Citizens First witnessed an increase in its nonperforming
asset ratio from 1996 to 2000, but the ratio still remained lower than the
industry norm. Nonperforming assets, in general, consist of loans delinquent 90
days or more, nonaccruing loans, real estate owned and repossessed assets.
Citizens First's nonperforming assets consist of all of those items except loans
delinquent 90 days or more. The ratio of nonperforming assets to total assets
was 0.10 percent at March 31, 1996, and increased to 0.18 percent at March 31,
2000. At August 31, 2000, Citizens First's ratio of nonperforming assets to
total assets increased to 0.26 percent.
The Bank's allowance for loan losses was 1.45 percent of loans at March 31,
1996, and increased to 1.80 percent at March 31, 2000, and then decreased to
1.65 percent at August 31, 2000, with the recent decrease due to the Bank's
strong growth in loans. As a percentage of nonperforming loans, Citizens
First's allowance for loan losses was 1,268.38
14
percent in 1996 and 839.57 percent in 2000. At August 31, 2000, the ratio
decreased to 506.33 percent, reflective of an increase in nonperforming assets.
Exhibit 9 provides the changes in net interest income due to rate and volume
changes for the fiscal years 1999 and 2000 and for the five months ended August
31, 2000. In fiscal year 1999, net interest income increased $2,394,000, due to
an increase in interest income of $3,542,000 reduced by a $1,148,000 increase in
interest expense. The increase in interest income was due to an increase due to
volume of $3,123,000 accented by an increase due to rate of $419,000. The
increase in interest expense was due to an increase due to volume of $1,621,000
reduced by a decrease due to a change in rate of $473,000.
Income and Expense (cont.)
In fiscal year 2000, net interest income increased $1,341,000 due to an
increase in interest income of $2,164,000 reduced by an increase in interest
expense of $823,000. The increase in interest income was due to an increase due
to volume of $78,000 accented by an increase due to rate of $1,374,000. The
increase in interest expense was due to an increase due to volume of $2,211,000
reduced by a decrease due to rate of $1,388,000.
For the five months ended August 31, 2000, compared to the five months ended
August 31, 1999, net interest income increased $381,000 due to a $3,188,000
increase in interest income reduced by a $2,807,000 increase in interest
expense. The increase in interest income was due to a $1,840,000 increase due
to volume accented by a $1,348,000 increase due to rate. The rise in interest
expense was the result of an increase due to volume of $2,061,000 accented by an
increase due to rate of $746,000.
YIELDS AND COSTS
The overview of yield and cost trends for the years ended March 31, 1998
through 2000, for the five months ended August 31, 1999 and 2000, and at August
31, 2000, can be seen in Exhibit 10, which offers a summary of key yields on
interest-earning assets and costs of interest-bearing liabilities.
15
Citizens First's weighted average yield on its loan portfolio increased 35
basis points from fiscal year 1998 to 2000, from 7.91 percent to 8.26 percent,
and then increased 20 basis points to 8.46 percent for the five months ended
August 31, 2000, compared to a lower 7.86 percent for the five months ended
August 31, 1999. The yield on securities decreased 67 basis points from 5.81
percent in 1998 to 5.14 percent in fiscal year 2000 and then increased 107 basis
points to 6.21 percent for the five months ended August 31, 2000, compared to a
higher 6.71 percent for the five months ended August 31, 1999. The yield on
interest-earning deposits decreased 11 basis points from fiscal year 1998 to
2000, from 5.16 percent to 5.05 percent and then increased 62 basis points to
5.67 percent for the five months ended August 31, 2000, compared to a lower 4.64
percent for the five months ended August 31, 1999. The
Yields and Costs (cont.)
combined weighted average yield on all interest-earning assets increased 18
basis points to 7.97 percent from 1998 to 2000, reflecting the Bank's higher
yield on loans. The yield on interest-earning assets for the five months ended
August 31, 2000, was a still higher 8.05 percent, compared to a lower 7.78
percent for the five months ended August 31, 1999.
Citizens First's weighted average cost of interest-bearing liabilities
decreased 31 basis points to 4.44 percent from fiscal year 1998 to 2000, which
was less than the Bank's 18 basis point increase in yield, resulting in an
increase in the Bank's interest rate spread of 49 basis points from 3.04 percent
to 3.53 percent from 1998 to 2000. For the five months ended August 31, 2000,
the Bank's cost of funds increased 35 basis points to 4.79 percent, compared to
an 8 basis point increase in yield on interest-earning assets, resulting in a
lower net interest rate spread by 27 basis points to 3.26 percent compared to
3.42 percent for the five months ended August 31, 1999. The Bank's net interest
margin increased from 3.56 percent in fiscal year 1998 to 3.82 percent in fiscal
year 2000. The Bank's net interest margin for the five months ended August 31,
2000, was a lower 3.50 percent compared to a higher 3.76 percent for the five
months ended August 31, 1999.
16
INTEREST RATE SENSITIVITY
Citizens First has monitored its interest rate sensitivity position and
focused on maintaining a reasonable level of rate sensitive assets. Citizens
First has recognized the thrift industry's historically higher interest rate
risk exposure, which caused a negative impact on earnings and market value of
equity as a result of significant fluctuations in interest rates, specifically
rising rates. Such exposure was due to the disparate rate of maturity and/or
repricing of assets relative liabilities commonly referred to as an
institution's "gap." The larger an institution's gap, the greater the risk
(interest rate risk) of earnings loss due to a decrease in net interest margin
and a decrease in market value of equity or portfolio loss. In response to the
potential impact of interest rate volatility and negative earnings impact, many
institutions have taken steps during the 1990's to reduce their gap position.
This frequently results in a decline in the institution's net interest margin
and overall earnings performance. Interest Rate Sensitivity (cont.)
Citizens First has responded to the interest rate sensitivity issue by
originating more adjustable-rate mortgage loans, short term consumer loans and
maintaining a higher available-for-sale investment portfolio.
The Bank measures its interest rate risk through the use of the calculation
of its change in annual net interest income under rising and falling interest
rate assumptions and by the determination of its cumulative interest-rate gap
and corresponding ratio of cumulative interest-rate gap as a percentage of
interest-earning assets. The change in net interest income and cumulative
interest-rate gap for the Bank are calculated on a quarterly basis, by an
outside firm, Risk Analytics, Inc., as well as the level of market value of
equity for the Bank under current interest rates. Such cumulative interest-rate
gap and changes in net interest income under changing rates are reflective of
the Bank's interest rate risk exposure.
There are numerous factors which have a measurable influence on interest
rate sensitivity in addition to changing interest rates. Such key factors to
consider when
17
analyzing interest rate sensitivity include the loan payoff schedule,
accelerated principal payments, deposit maturities, interest rate caps on
adjustable-rate mortgage loans and deposit withdrawals.
Exhibit 11 provides the Bank's cumulative interest-rate gap as of August 31,
2000, and the ratio of cumulative interest-earning assets as a percentage of
interest-bearing liabilities. Such calculations are provided by Risk Analytics,
Inc., and the focus of this exposure table is the cumulative one-year and three-
year interest rate gap levels for the Bank.
The Bank's one-year cumulative interest rate gap at August 31, 2000, was a
negative 16.15 percent, representing a dollar negative gap of $122,500,000. The
Bank's three-year cumulative interest rate gap at August 31, 2000, was a
negative 11.50 percent, representing a dollar negative gap of a lesser
$87,199,000.
Interest Rate Sensitivity (cont.)
The Bank is aware of its interest rate risk. Due to Citizens First's
recognition of the need to control its interest rate risk, the Bank has focused
on being more active in the origination of shorter term consumer loans and plans
to continue this lending strategy combined with continuing to sell its fixed-
rate mortgage loans in the future.
LENDING ACTIVITIES
Citizens First has historically focused its lending activity on the
origination of conventional mortgage loans secured by one- to four-family
dwellings, construction loans, home equity loans and commercial loans. Exhibit
12 provides a summary of Citizens First's loan portfolio, by loan type, at March
31, 1996 through 2000, and at August 31, 2000.
18
Residential loans secured by one- to four-family dwellings was the primary
loan type representing 55.9 percent of the Bank's gross loans as of August 31,
2000. This share has seen a moderate decrease from 74.1 percent at March 31,
1996. The second largest real estate loan type as of August 31, 2000, was multi-
family and commercial real estate loans, which comprised a moderate 12.6 percent
of gross loans compared to 1.9 percent as of March 31, 1996. The third key real
estate loan type was construction loans, which represented 5.6 percent of gross
loans as of August 31, 2000, compared to a slightly lower 4.8 percent at March
31, 1996. These three real estate loan categories represented 74.1 percent of
gross loans at August 31, 2000, compared to a larger 80.9 percent of gross loans
at March 31, 1996.
Home equity loans represent a relatively large loan category for Citizens
First. Home equity loans totaled $77.8 million and represented 12.1 percent of
gross loans at August 31,
Lending Activities (cont.)
2000, compared to a larger 15.4 at March 31, 1996. The Bank has been actively
involved in home equity lending for many years with the emphasis on home equity
lending partially reflective of the characteristics of the market area.
The consumer loan category represented 8.2 percent of gross loans at August
31, 2000, compared to only 1.1 percent at March 31, 1996. Consumer loans were
the fourth largest overall loan type, at August 31, 2000, and the sixth largest
loan type in 1996. The Bank originates automobile loans, boat loans, savings
account loans and other secured and unsecured personal loans. Commercial
business loans also represent a relatively large loan category for Citizens
First. Commercial business loans totaled $36.1 million at August 31, 2000, and
represented 5.6 percent of total loans compared to a smaller 2.5 percent at
March 31, 1996.
19
The overall mix of loans has witnessed moderate changes from fiscal year-end
1996 to August 31, 2000, with the Bank having decreased its share of one- to
four-family loans to offset its increases in multi-family and commercial real
estate loans and consumer loans, primarily automobile loans.
The emphasis of Citizens First's lending activity is still the origination
of conventional mortgage loans secured by one- to four-family residences. Such
residences are located in Citizens First's primary market area, which includes
Huron, Lapeer, St. Clair and Sanilac Counties. The Bank's lending market also
extends into Macomb County. At August 31, 2000, 55.9 percent of Citizens
First's gross loans consisted of loans secured by one- to four-family
residential properties, excluding 5.6 percent in construction loans and 12.1
percent in home equity loans.
The Bank offers an adjustable-rate mortgage loan ("ARMs") with adjustment
periods of one year, three years, five years, seven years and ten years. The
interest rates on ARMs are generally indexed to the Treasury securities index.
The adjustable-rate mortgage loans have a maximum rate adjustment of 2.0 percent
at each adjustment period and 5.0 percent for the life of the loan. Rate
adjustments are computed by adding a stated margin to the index. At
Lending Activities (cont.)
December 31, 1999, the initial discounted rate on ARMs was 200 to 300 basis
points below the fully indexed rate. The Bank normally retains all ARMs which
it originates, and ARMs are generally not convertible to fixed-rate loans.
Citizens First's ARMs normally include a prepayment penalty if the loan is paid
off within three years. The majority of ARMs have terms of 15 to 25 years with
a maximum term of 30 years.
The Bank's other primary mortgage loan product is fixed-rate mortgage loans
with approximately 43.0 percent of Citizens First's one- to four-family mortgage
loans being fixed-rate loans. The Bank has been selling the major share of its
fixed-rate mortgage loans and retaining the servicing. Fixed-rate mortgage
loans have a maximum term of 30 years,
20
however, most mortgage loans have actual terms of 20 years or less. Most of the
Bank's mortgage loans conform to Freddie Mac guidelines.
The normal loan-to-value ratio for conventional mortgage loans to purchase
or refinance one-to four-family dwellings generally does not exceed 90 percent
at Citizens First, even though the Bank is permitted to make loans up to a 97
percent loan-to-value ratio. The Bank does make loans up to 90 percent of loan-
to-value and generally requires mortgage insurance for the amount in excess of
the 80.0 percent loan-to-value ratio. Mortgage loans originated by the Bank
include due-on-sale clauses enabling the Bank to adjust rates on fixed-rate
loans in the event the borrower transfers ownership.
Citizens First has also been an originator of commercial real estate loans
and multi-family loans in the past. The Bank will continue to make multi-family
and commercial real estate loans. The Bank had a total of $81.2 million in
commercial real estate and multi-family loans at August 31, 2000, representing
12.6 percent of gross loans, compared to $8.5 million or 1.9 percent of gross
loans at March 31, 1996. The major portion of commercial real estate loans is
secured by small retail establishments, industrial facilities, office buildings,
and other commercial properties. Most of the multi-family and commercial real
estate loans are fully amortizing with a term of up to twenty years. The
maximum loan-to-value ratio is normally 80.0 percent.
Lending Activities (cont.)
The Bank also originates construction loans to individuals for residential
construction of their principal residence. The construction loans generally
provide for the payment of interest only during the construction phase which
normally extends from six to twelve months. Citizens First's construction loans
are then converted to permanent mortgage loans upon completion of construction.
Construction loans totaled $35.9 million at August 31, 2000, and represented 5.6
percent of gross loans, slightly higher than its 4.8 percent at March 31, 1996.
21
Citizens First has been very active in consumer lending, including home
equity lending. Consumer loans consist primarily of home equity loans which
represented a total of $77.8 million or 59.5 percent of consumer loans and
automobile loans which represented a total of $51.5 million or 39.4 percent of
consumer loans at August 31, 2000, up from $3.7 million or 5.1 percent of
consumer loans in 1993. Total consumer loans were $130.8 million or 20.3
percent of gross loans at August 31, 2000, and a lesser $72.8 million or 16.6
percent of gross loans in 1993. Citizens First began to make indirect
automobile loans in 1999. Citizens First also makes loans secured by boats,
motorcycles, campers, mobile homes and recreational vehicles.
Exhibit 13 provides a loan maturity schedule and breakdown and summary of
Citizens First's fixed- and adjustable-rate loans, indicating a majority of
fixed-rate loans. At August 31, 2000, 60.2 percent of the Bank's total loans
due after August 31, 2001, were fixed-rate and 39.8 percent were adjustable-
rate. The Bank has 29.5 percent of its loans at August 31, 2000, due in 5 years
or less with another 39.9 percent due in 5 to 15 years.
As indicated in Exhibit 14, Citizens First experienced a moderate decrease
in its one-to four-family loan originations but a strong rise in total loan
originations from fiscal year 1998 to 2000. Total loan originations in fiscal
year 1998 were $217.9 million compared to $292.5 million in fiscal year 2000,
reflective of higher levels of commercial real estate loans, consumer loans,
construction loans and home equity loans offset by a lower level of one-to four-
family loans. The increase in consumer loan originations from 1998 to 2000 of
$48.8
Lending Activities (cont.)
million constituted 65.4 percent of the $74.6 million aggregate increase in
total loan originations from 1998 to 2000, with consumer loans increasing $48.8
million and commercial loans increasing $8.6 million. Multi-family and
commercial real estate loans increased $24.3 million from 1998 to 2000. Loan
originations for the five months ended
22
August 31, 2000, were $137.1 million, representing a stronger $329.0 million on
an annualized basis and indicating a continuation in loan origination activity.
Loan originations on one- to four-family residences represented 60.1 percent of
total loan originations in fiscal year 1998, and 37.9 percent in fiscal year
2000. One- to four-family loan originations decreased to 35.3 percent of total
loan originations for the five months ended August 31, 2000. Consumer loans
represented 12.2 percent of total loan originations in 1998 and a larger 25.8
percent in 2000. For the five months ended August 31, 2000, these loans
represented a similar 25.1 percent of total originations. Commercial real estate
loans represented 6.1 percent of total loan originations in 1998 and a higher
12.9 percent in 2000. For the five months ended August 31, 2000, commercial real
estate loans represented a similar 11.7 percent of total loan originations.
Construction loans represented 11.4 percent of loan originations in 1998 and a
higher 12.9 percent in 2000. For the five months ended August 31, 2000,
construction loans represented a slightly higher 14.2 percent of loan
originations.
Overall, loan originations exceeded principal payments, loans sales, loan
repayments and other deductions in fiscal 1998 by $60.4 million, exceeded
reductions by a lesser $45.3 million in 1999, and then fell short of principal
payments and loan sales by $23.2 million in 2000 due to higher loan sales. For
the five months ended August 31, 2000, loan originations exceeded reductions by
a strong $62.9 million or $150.9 million, annualized.
NONPERFORMING ASSETS
Citizens First understands asset quality risk and the direct relationship of
such risk to delinquent loans and nonperforming assets including real estate
owned. The quality of assets
Nonperforming Assets (cont.)
has been a key concern to financial institutions throughout many regions of the
country. A number of financial institutions have been confronted in the past
with rapid increases in their
23
levels of nonperforming assets and have been forced to recognize significant
losses, setting aside major valuation allowances. A sharp increase in
nonperforming assets has often been related to specific regions of the country
and has frequently been associated with higher risk loans, including purchased
commercial real estate loans and multi-family loans. Citizens First has not been
faced with such problems in the past and has made a concerted effort to control
its nonperforming assets and has been successful.
Exhibit 15 provides a summary of Citizens First's delinquent loans at March
31, 1998, 1999, and 2000 and at August 31, 2000, indicating a higher level of
delinquent loans since 1998. The Bank had $2.1 million or 0.33 percent of gross
loans delinquent 90 days or more at August 31, 2000, with $1.7 million in
single-family loans and $282,000 in commercial loans. Loans delinquent 60 to 89
days totaled $2.2 million at August 31, 2000, or 0.34 percent of gross loans
with $1.5 million in one-to four-family loans, $282,000 in home equity loans,
$221,000 in auto loans and $252,000 in commercial loans. At August 31, 2000,
delinquent loans of 60 days or more totaled $4.3 million or 0.67 percent of
gross loans compared to $3.1 million or 0.54 percent of gross loans at March 31,
1998.
Citizens First's board reviews all loans delinquent 30 days or more on a
monthly basis, to assess their collectibility and to initiate any direct contact
with borrowers. When a loan is delinquent 15 days, the Bank sends the borrower
a late payment notice. The Bank then initiates both written and oral
communication with the borrower if the loan remains delinquent and sends
additional notices after 30 days and 60 days of delinquency. When the loan
becomes delinquent at least 90 days, the Bank will commence foreclosure
proceedings. The Bank does not normally accrue interest on loans past due 90
days or more unless the loan is adequately collateralized and in the process of
collection. Most loans delinquent 90 days or more are placed on a non-accrual
status, and at that point in time the Bank pursues foreclosure procedures.
Nonperforming Assets (cont.)
24
Exhibit 16 provides a summary of Citizens First's nonperforming assets at
August 31, 2000, and at March 31, 1996 through March 31, 2000. Nonperforming
assets consist of loans 90 days or more past due, non-accruing loans, real
estate owned and repossessed assets for Citizens First. The Bank historically
has carried a lower level of nonperforming assets. Citizens First's level of
nonperforming assets ranged from a high dollar amount of $2,248,000 or 0.28
percent of total assets at August 31, 2000, to a low dollar amount of $507,000
or 0.10 percent of assets at March 31, 1996. The Bank's nonperforming assets
totaled $1,326,000 at March 31, 2000, representing 0.18 percent of assets.
Citizens First's level of nonperforming assets was similar to its level of
classified assets. The Bank's level of classified assets was $1.3 million or
0.17 percent of assets at August 31, 2000. The Bank's classified assets
consisted of $1.3 million in substandard assets, with no assets classified as
doubtful or loss.
Exhibit 17 shows Citizens First's allowance for loan losses at August 31,
2000, and for fiscal years ended 1996 through 2000, indicating the activity and
the resultant balances. Citizens First has witnessed a strong increase in its
balance of allowance for loan losses from $6.4 million in 1996 to $10.5 million
in 2000. The balance in allowance for loan losses then increased further to
$10.6 million at August 31, 2000, with provisions of $816,000 in 1996, $758,000
in 1997, $714,000 in 1998, $3.8 million in 1999, a credit of $483,000 in 2000
and $106,000 in the five months ended August 31, 2000. The Bank had net charge-
offs of $54,000 in 1996, $156,000 in 1997, $169,000 in 1998, $166,000 in 1999,
$217,000 in 2000 and recoveries of $66,000 for the five months ended August 31,
2000. The Bank's ratio of allowance for loan losses to gross loans was 1.45
percent at March 31, 1996, and a higher 1.80 percent at March 31, 2000. The
allowance for loan losses to gross loans decreased to 1.65 percent of loans at
August 31, 2000, due to the Bank's strong increase in loans. Allowance for loan
losses to nonperforming loans was 1,268.4 percent at March 31, 1996, and a lower
506.3 percent at August 31, 2000, reflecting the increase in nonperforming
loans.
INVESTMENTS
25
The investment and securities portfolio, excluding interest-bearing deposits has
been comprised of federal agency securities, U.S. treasury securities, FHLB
stock, municipal securities and debt and equity securities. Exhibit 18 provides
a summary of Citizens First's investment portfolio at March 31, 1998, 1999 and
2000, and at August 31, 2000, excluding interest-bearing deposits with financial
institutions. Investment securities totaled $90.8 million at August 31, 2000,
compared to $99.4 million at March 31, 2000, and $12.5 million at March 31,
1998, with all of the securities available-for-sale except FHLB stock which
totaled $5.1 million at August 31, 2000. The primary component of investment
securities at August 31, 2000, was debt and equity securities, representing 40.6
percent of investments compared to zero at March 31, 1998. The second largest
component of investment securities was U.S. government and federal agency
securities, representing 29.5 percent of investments at August 31, 2000. The
Bank had $5.1 million in FHLB stock at August 31, 2000, and a lesser $3.7
million at March 31, 1998. The weighted average yield on investment securities
was 6.21 percent and 5.67 percent for interest-bearing deposits for the five
months ended August 31, 2000. The Bank also had interest-bearing deposits
totaling $35.8 million at August 31, 2000, and a lesser $16.0 million at March
31, 1998.
DEPOSIT ACTIVITIES
The change in the mix of certificates by rate from March 31, 1998, to August
31, 2000, is provided in Exhibit 19. There has been a strong change in total
deposits but only modest change in the deposit mix during this period. Total
average deposits have increased from $495.9 million at March 31, 1998, to $614.4
million at August 31, 2000, representing an increase of $118.5 million or 23.9
percent. Certificates of deposit have increased their share of average deposits
from 53.4 percent at March 31, 1998, to 56.0 percent at August 31, 2000,
representing an increase of $79.5 million or 30.0 percent, while passbook NOW,
MMDA and noninterest-bearing deposits have witnessed a decrease in their share
from 46.6 percent at March 31, 1998, to 44.0 percent at August 31, 2000. The
increase in certificates is similar to the industry norm of a rise in the share
of certificates.
26
Deposit Activities (cont.)
The major component of certificates had rates between 6.01 percent and 7.00
percent and represented 56.7 percent of certificates at August 31, 2000
(reference Exhibit 20). At March 31, 1998, the major component of certificates
was the 5.01 percent to 6.00 percent category with a stronger 58.6 percent of
certificates. The category witnessing the strongest growth from March 31, 1998,
to August 31, 2000, was certificates with rates between 6.01 percent and 7.0
percent, which increased $120.2 million during this time period. This increase
was partially the result of a decrease in the certificates with rates between
5.01 percent and 6.0 percent, which declined $46.9 million.
Exhibit 21 shows the Bank's deposit activity for the three years ended March
31, 1998 through 2000, and for the five months ended August 31, 1999 and 2000.
Excluding interest credited, Citizens First experienced net increases in
deposits in each fiscal year and for the five months ended August 31, 1999 and
2000. In fiscal year 1998, a net increase in deposits of $45.9 million resulted
in a 10.0 percent increase in deposits including interest credited, and in 2000,
there was a net increase of $74.2 million or 14.1 percent. For the five months
ended August 31, 2000, a net increase in deposits of $36.0 million produced a
net rise of 6.0 percent, or 14.4 percent, annualized.
BORROWINGS
Citizens First has made regular use of FHLB advances from March 31, 1998 to
August 31, 2000. The Bank had $77.3 million in FHLB advances at August 31,
2000, with an average rate of 6.27 percent compared to a smaller $41.6 million
at March 31, 1998, with an average rate of 6.35 percent (reference Exhibit 22).
FHLB advances represented 9.7 percent of assets at August 31, 2000, compared to
8.5 percent at March 31, 1998.
27
SUBSIDIARIES
Citizens First had one wholly-owned service corporation at August 31, 2000,
which serves as the parent company of three other subsidiaries. Citizens
First's service corporation was established in 1974 with the name Riverside
Corporation, which was later changed to Citizens Financial Services, Inc. The
service corporation previously participated in real estate development but
currently serves as the parent corporation for three subsidiaries, CFS Appraisal
Company, CFS Survey L.L.C. and CFS Title Agency. CFS Appraisal Company was
established in 1995 to provide appraisal services to Citizens First. CFS Survey
was organized in 1999 to complete mortgage survey reports for Citizens First,
and CFS Title Agency was established in 1998 to provide title insurance for
customers of Citizens First and was a joint venture with Lawyers Title Insurance
Agency.
Citizens First also established an Asset Management and Trust Department
Group in 1999 as a department of Citizens First to provide trust and investment
services to individuals, partnerships, corporations and institutions.
OFFICE PROPERTIES
Citizens First had fourteen full service offices at August 31, 2000, located
in Port Huron, Fort Gratiot, Marysville, St. Clair, Marine City, Algonac,
Lapeer, Imlay City, Croswell, Sandusky, Harbor Beach and Bad Axe. Citizens
First owns all of its offices. The Bank also has six off-premise ATM
facilities. The Bank's investment in its office premises totaled $6.0 million
or 0.76 percent of assets at August 31, 2000, and the Bank's investment in fixed
assets was $9.8 million or 1.2 percent at August 31, 2000.
28
MANAGEMENT
The president, chief executive officer, and managing officer of Citizens
First is Larry J. Moeller, Sr., who is also a director. Mr. Moeller joined the
Bank in 1998 as President and Chief Executive Officer and was appointed a
director in 1992. Prior to working at Citizens First, Mr. Moeller worked in the
Port Huron Area School District for 31 years, including serving as
Superintendent of Schools from 1980 until 1997. Mr. J. Stephen Armstrong is
Senior Vice President of the Bank in charge of the Commercial Banking Division
since 1999. Mr. Armstrong has worked at Citizens First since 1995, serving in
several different lending positions. Mr. Randy J. Cutler is Senior Vice
President in charge of Retail Banking and Branch Operations since 1985. Mr.
Cutler joined the Bank in 1977. Mr. Timothy D. Regan is also a Senior Vice
President and is the Bank's controller and chief financial officer. Mr. Regan
has served as Senior Vice President since 1991 and has been employed with the
Bank since 1988. The final member of the Bank's senior management group is Mr.
B. Scott Nill who is Vice President in charge of Operations. Mr. Nill has
served in the position since 1998. For seven years prior to joining Citizens
First, Mr. Nill was the chief executive officer of I.M.P.A.C.T. corporation,
which is a center for human resources.
29
II. DESCRIPTION OF PRIMARY MARKET AREA
Citizens First's primary market area for retail deposits and lending
activity encompasses all of Huron, Lapeer, St. Clair and Sanilac Counties ("the
market area") with the Bank's lending area extending into Macomb County. The
Bank has fourteen office facilities, all located in the market area. The Bank's
main office is located in Port Huron with branches in Bad Axe and Harbor Beach
in Huron County, Imlay City and Lapeer in Lapeer County, Croswell and Sandusky
in Sanilac County and in Algonac, Fort Gratiot, Marine City, Marysville, Port
Huron and Saint Clair in St. Clair County.
The primary market area is characterized by a higher than average level of
median household income and a lower housing value when compared to the United
States with a similar median household income but a lower housing value when
compared to Michigan. The unemployment rate in the market area has been higher
than Michigan and national unemployment rates but has declined slightly over the
past few years. The market area's strongest employment categories are the
manufacturing industry, services industry and the construction industry, with a
similar level of residents employed in the transportation/utilities industry
category as in the United States.
Exhibit 25 provides a summary of key demographic data and trends for the
market area, Huron, Lapeer, St. Clair and Sanilac Counties, Michigan and the
United States. Overall, from 1990 to 2000, population increased in all areas.
The population increased by 13.0 percent in the market area from 1990 to 2000,
due primarily to the stronger growth in Lapeer County. In the same time period,
population increased by 1.0 percent in Huron County, a much larger 21.2 percent
in Lapeer County, a moderate 12.5 percent in St. Clair County, and 9.7 percent
in Sanilac County, compared to increases of 6.6 percent in Michigan and 10.7
percent in the United States. Future population projections indicate that
population will continue to increase in the market area through the year 2005.
From 2000 to 2005, population is expected to increase by 5.6 percent in the
market area, while increasing by 2.2 percent in Michigan and by 4.5 percent in
the United States.
30
Description of Primary Market Area (cont.)
In conformance with its increasing trend in population, the market area
witnessed an increase in households (families) of 16.2 percent from 1990 to
2000. During that same time period, the number of households increased in
Michigan by 9.7 percent and increased by 12.5 percent in the United States. The
market area counties had varying degrees of increasing rates of households, from
a low of 4.3 percent in Huron County to a high 26.2 percent in Lapeer County.
By the year 2005, the market area's households are projected to continue to
increase by 7.2 percent, while the number of households is expected to increase
by 3.7 percent in Michigan and increase in the United States by 5.3 percent.
In 1990, per capita income in the market area was lower than the per capita
income in Michigan but slightly higher than the United States. The market area
had a 1990 per capita income of $12,500 compared to Michigan at a higher $14,154
and the United States at a lower $12,313. From 1990 to 2000, per capita income
increased in the market area, Michigan and the United States, with the United
States having the greatest percent increase. The market area's per capita
income increased from 1990 to 2000, by 62.3 percent to $20,293 while Michigan's
per capita income increased by a smaller 57.4 percent to a higher $22,281. Per
capita income in the United States also increased by a much larger 80.0 percent
to $22,162. The market area's per capita income in 2000 is below the per capita
income in Michigan and the United States.
The 1990 median household income in the Bank's primary market area was lower
than the median household income in Michigan but higher than in the United
States. The market area had a 1990 median household income of $29,926, which
was lower than Michigan's median household income of $31,020 but higher than the
United States' median household income of $28,525. From 1990 to 2000, median
household income in the primary market area, all market area counties, Michigan
and the United States increased, with Michigan indicating the lowest rate of
increase and Huron County the highest. Median household income increased by
47.0 percent to $43,978 in the market area compared to a lower 39.9 percent
increase to $43,403 in Michigan and 46.9 percent increase to $41,914 in the
United States. Lapeer
31
Description of Primary Market Area (cont.)
County maintained the highest median household income in 1990 and in 2000,
increasing from $35,874 in 1990 to $51,862 in 2000, while Huron County
maintained the lowest median household income in both years, increasing from
$21,852 in 1990 to $33,322 in 2000. From 2000 to 2005, median household income
is projected to increase by 17.2 percent in the market area, while increasing by
13.0 percent in Michigan and increasing by 17.2 percent in the United States.
Based on those rates of change, by 2005, median household income is expected to
be a higher $51,523 in the market area, $49,028 in Michigan, and $49,127 in the
United States.
Exhibit 26 provides a summary of key housing data for the market area,
Huron, Lapeer, St. Clair and Sanilac Counties, Michigan and the United States in
1990. The market area had a higher than the national average percent of owner-
occupancy at 77.9 percent and greater than the 71.0 percent owner-occupancy rate
for Michigan. The United States had an owner-occupancy rate of 64.2 percent.
As a result, the market area supports a lower than average rate of renter-
occupied housing at 22.1 percent compared to a higher 29.0 percent for Michigan
and 35.8 percent for the United States.
The market area's median housing value of $55,941 is lower than Michigan's
and significantly lower than the United States' median housing value. The
market area's median housing value of $55,941 is 7.4 percent lower than
Michigan's median housing value of $60,100, and it is 41.4 percent lower than
the United States' $79,098 median housing value. The average median rent of the
market area is less than the median rent of both Michigan and that of the United
States. The market area had a median rent of $324, which was lower than
Michigan's median rent of $423 and the United States' median rent of $374.
In 1990, the major business source of employment by industry group, based
on number of employees, for the market area was the manufacturing industry,
responsible for 29.5 percent of jobs, which was higher than both Michigan and
the United States with 24.6 and 19.2 percent, respectively (reference, Exhibit
27). The services industry was the second major
32
Description of Primary Market Area (cont.)
employer in the market area but it was the first major employer in both Michigan
and the United States, responsible for 29.2 percent, 35.6 percent and 34.0
percent of employment, respectively. The wholesale/retail trade industry was
the third major employer in the market area, responsible for 20.3 percent of
jobs, compared to 22.0 percent in Michigan and 27.5 percent in the United
States. The construction, transportation/utilities group, the
agriculture/mining group and the finance, insurance and real estate group
combined to provide 21.0 percent of employment in the market area, 35.8 percent
of employment in Michigan and 19.3 percent in the United States.
The following list provides some of the leading employers in the market area:
Employer Employees
- -------- ---------
Port Huron Area School District 1,582
Port Huron Hospital 1,057
Detroit Edison 1,044
St. Clair County 882
Kmart Corporation 850
Mercy Hospital 693
T I Group Automotive Systems 620
East China Public Schools 594
Britax Rainfords 591
Mueller Brass Company 547
Ameritech 459
St. Clair County Community College 440
River District Hospital 393
City of Port Huron 381
Blue Water Plastics 372
Chrysler Corporation 330
Pine River Plastics 329
33
Description of Primary Market Area (cont.)
Walmart Stores, Inc. 320
E.B. Eddy Paper 306
Mascotech Coating, Inc. 305
The unemployment rate is another key economic indicator. Exhibit 28 shows
the unemployment rates in the market area, the market area counties, Michigan
and the United States in 1997, 1998 1999 and through July 2000. The market area
has been characterized by a higher unemployment rate than both Michigan and the
United States. In 1997, the market area had an unemployment rate of 5.2
percent, compared to a lower unemployment rate of 4.2 percent in Michigan and
4.9 percent in the United States. The market area's unemployment rate decreased
to 4.7 percent in 1998, compared to a lower 3.9 percent in Michigan and a
decrease to 4.5 percent in the United States. In 1999, the market area had an
unemployment rate of a slightly higher 4.9 percent with Michigan decreasing to
3.8 percent and the United States at 4.2 percent. In July of 2000, the
unemployment rate increased to 5.2 percent in the market area, compared to a
decrease to 3.5 percent in Michigan and a stable 4.2 percent in the United
States.
Exhibit 29 provides deposit data for banks and thrifts in the market area.
Citizens First's deposit base in the market area was $505.2 million or 87.2
percent of the $579.1 billion total thrift deposits and a smaller but moderate
17.1 percent share of total deposits which were $3.0 billion as of August 31,
2000. The market area is dominated by the bank industry. Total bank deposits
in the market area were $2.4 billion representing 80.4 percent of total
deposits, compared to a lower $ 579.1 million or 19.6 percent of deposits for
thrifts. It is evident from the size of both thrift deposits and bank deposits
that the market area has a strong deposit base with the Bank having a dominant
level of market penetration for thrift deposits and a smaller yet moderate share
of market penetration of total deposits.
Exhibit 30 provides interest rate data for each quarter for the years 1996
through 1999 and for the first two quarters of 2000. The interest rates tracked
are the Prime Rate, as well
34
Description of Primary Market Area (cont.)
as 90-Day, One-Year and Thirty-Year Treasury Bills. Short term interest rates
experienced a declining trend in 1996. This declining trend continued in 1997
and 1998. Interest rates then increased in 1999 and continued to rise in 2000
with prime increasing from 8.00 in the first quarter of 1999 to 9.50 percent in
the second quarter of 2000.
SUMMARY
To summarize, the market area represents an area with an increasing
population base and household level during the 1990s. The market area displayed
a lower per capita income but similar median household income to Michigan.
Finally, the market area has had an historically higher unemployment rate when
compared to Michigan and the United States. The market is a highly competitive
financial institution market strongly dominated by banks, with a moderate
presence of thrifts, and a total market deposit base for banks and thrifts of
nearly $3.0 billion in deposits.
35
III. COMPARABLE GROUP SELECTION
Introduction
Integral to the valuation of the Corporation is the selection of an
appropriate group of publicly-traded thrift institutions, hereinafter referred
to as the "comparable group." This section identifies the comparable group and
describes each parameter used in the selection of each institution in the group,
resulting in a comparable group based on such specific and detailed parameters,
current financials and recent trading prices. The various characteristics of
the selected comparable group provide the primary basis for making the necessary
adjustments to the Corporation's pro forma value relative to the comparable
group. There is also a recognition and consideration of financial comparisons
with all publicly-traded, FDIC-insured thrifts in the United States and all
publicly-traded, FDIC-insured thrifts in the Midwest region and in Michigan.
Exhibits 31 and 32 present Thrift Stock Prices and Pricing Ratios and Key
Financial Data and Ratios, respectively, both individually and in aggregate, for
the universe of 284 publicly-traded, FDIC-insured thrifts in the United States
("all thrifts"), excluding mutual holding companies, used in the selection of
the comparable group and other financial comparisons. Exhibits 31 and 32 also
subclassify all thrifts by region, including the 109 publicly-traded Midwest
thrifts ("Midwest thrifts") and the 4 publicly-traded thrifts in Michigan
("Michigan thrifts"), and by trading exchange. Exhibit 33 presents prices,
pricing ratios and price trends for all FDIC-insured thrifts completing their
conversions between January 1, 2000, and October 5, 2000.
The selection of the comparable group was based on the establishment of
both general and specific parameters using financial, operating and asset
quality characteristics of Citizens First as determinants for defining those
parameters. The determination of parameters was also based on the uniqueness of
each parameter as a normal indicator of a thrift institution's operating
philosophy and perspective. The parameters established and
36
defined are considered to be both reasonable and reflective of Citizens First's
basic operation.
Introduction (cont.)
Inasmuch as the comparable group must consist of at least ten institutions,
the parameters relating to asset size and geographic location have been expanded
as necessary in order to fulfill this requirement.
GENERAL PARAMETERS
Merger/Acquisition
The comparable group will not include any institution that is in the
process of a merger or acquisition due to the price impact of such a pending
transaction. The following thrift institutions were potential comparable group
candidates but had to be eliminated due to their involvement in a
merger/acquisition.
Institution State
----------- -----
Home Bancorp Indiana
Ottawa Financial Corp. Michigan
Equality Bancorp, Inc. Missouri
Jefferson Savings Bancorp, Inc. Missouri
FFY Financial Corp. Ohio
York Financial Corp. Pennsylvania
First Northern Capital Corp. Wisconsin
There is are no pending merger/acquisition transaction involving thrift
institutions in Citizens First's city, county or market area, as indicated in
Exhibit 34.
37
Mutual Holding Companies
The comparable group will not include any mutual holding companies. The
percentage of public ownership of individual mutual holding companies indicates
a wide range from minimal to 49.0 percent, the largest permissible percentage,
causing them to demonstrate certain varying individual characteristics different
among themselves and from conventional, publicly-traded companies. A further
reason for the elimination of mutual holding companies as potential comparable
group candidates relates to the presence of a mid-tier, publicly-traded holding
company in some, but not all, mutual holding company structures. The presence
of mid-tier holding companies can also result in inconsistent and unreliable
comparisons among the relatively small universe of 31 publicly-traded mutual
holding companies as well between those 31 entities and the larger universe of
conventional, publicly-traded thrift institutions. As a result of the foregoing
and other factors, mutual holding companies typically demonstrate higher pricing
ratios that relate to their minority ownership structure and are inconsistent in
their derivation with those calculated for conventionally structured, publicly-
traded institutions. In our opinion it is appropriate to limit individual
comparisons to institutions that are 100 percent publicly owned. Exhibit 35
presents pricing ratios and Exhibit 36 presents key financial data and ratios
for the 31 publicly-traded, FDIC-insured mutual holding companies in the United
States. The following thrift institutions were potential comparable group
candidates, but were not considered due to their mutual holding company form:
Institution State
----------- -----
Wayne Savings Bancshares Ohio
Greater Delaware Valley, MHC Pennsylvania
Harris Financial, Inc., MHC Pennsylvania
38
PHS Bancorp, Inc., MHC Pennsylvania
Willow Grove Bancorp, Inc. Pennsylvania
Trading Exchange
It is necessary that each institution in the comparable group be listed on
one of the three major stock exchanges, the New York Stock Exchange, the
American Stock Exchange, or the National Association of Securities Dealers
Automated Quotation System (NASDAQ). Such a listing indicates that an
institution's stock has demonstrated trading activity and is responsive to
normal market conditions, which are requirements for listing. Of the 315
publicly-traded, FDIC-insured institutions, including 31 mutual holding
companies, 12 are traded on the New York Stock Exchange, 30 are traded on the
American Stock Exchange and 273 are listed on NASDAQ.
IPO Date
Another general parameter for the selection of the comparable group is the
initial public offering ("IPO") date, which must be at least four quarterly
periods prior to the trading date of October 5, 2000, used in this report, in
order to insure at least four consecutive quarters of reported data as a
publicly-traded institution. The resulting parameter is a required IPO date
prior to June 30, 1999.
Geographic Location
39
The geographic location of an institution is a key parameter due to the
impact of various economic and thrift industry conditions on the performance and
trading prices of thrift institution stocks. Although geographic location and
asset size are the two parameters that have been developed incrementally to
fulfill the comparable group requirements, the geographic location parameter has
nevertheless eliminated regions of the United States distant to Citizens First,
including the New England, western, southwestern and southeastern states.
Geographic Location (cont.)
The geographic location parameter consists of Michigan and its surrounding
states of Ohio, Indiana and Wisconsin, as well as the states of Pennsylvania,
Kentucky, Illinois, Missouri, Minnesota and Iowa, for a total of ten states. To
extend the geographic parameter beyond those states could result in the
selection of similar thrift institutions with regard to financial conditions and
operating characteristics, but with different pricing ratios due to their
geographic regions. The result could then be an unrepresentative comparable
group with regard to price relative to the parameters and, therefore, an
inaccurate value.
Asset Size
Asset size was another key parameter used in the selection of the
comparable group. The range of total assets for any potential comparable group
institution was from $200 million to $2 billion, due to the general similarity
of asset mix and operating strategies of institutions in this asset range,
compared to Citizens First, with assets of approximately $794.4 million. Such an
asset size parameter was necessary to obtain an appropriate comparable group of
at least ten institutions.
40
In connection with asset size, we did not consider the number of offices or
branches in selecting or eliminating candidates, since that characteristic is
directly related to operating expenses, which are recognized as an operating
performance parameter.
SUMMARY
Exhibits 37 and 38 show the 57 institutions considered as comparable group
candidates after applying the general parameters, with the shaded lines denoting
the institutions ultimately selected for the comparable group using the balance
sheet, performance and asset quality parameters established in this section. It
should be noted that the comparable group candidates
Summary (cont.)
may be members of either the Bank Insurance Fund (BIF) or the Savings
Association Insurance Fund (SAIF), since many members of each fund hold
significant balances of deposits insured by the other fund and, following the
recapitalization of the SAIF in 1996, deposit insurance premiums assessed by the
two funds are now similar.
BALANCE SHEET PARAMETERS
Introduction
The balance sheet parameters focused on seven balance sheet ratios as
determinants for selecting a comparable group, as presented in Exhibit 37. The
balance sheet ratios consist of the following:
41
1. Cash and Investments/Assets
2. Mortgage-Backed Securities/Assets
3. One- to Four-Family Loans/Assets
4. Total Net Loans/Assets
5. Total Net Loans and Mortgage-Backed Securities/Assets
6. Borrowed Funds/Assets
7. Equity/Assets
The parameters enable the identification and elimination of thrift
institutions that are distinctly and functionally different from Citizens First
with regard to asset mix. The balance sheet parameters also distinguish
institutions with a significantly different capital position from Citizens
First. The ratio of deposits to assets was not used as a parameter as it is
directly related to and affected by an institution's equity and borrowed funds
ratios, which are separate parameters.
Cash and Investments to Assets
Citizens First's ratio of cash and investments to assets was 16.40 percent
at August 31, 2000, and reflects a share of investments generally in line with
national and regional averages. The Bank's investments consist primarily of
federal agency and government securities, interest-bearing deposits, municipal
securities, debt securities and FHLB stock. For its most recent five fiscal
years, Citizens First's average ratio of cash and investments to assets was a
lower 8.0 percent, from a high of 7.4 percent at March 31, 1996, to a low of 2.8
percent in fiscal 1999, indicating a four year decline followed by a significant
increase in the fifth year. It should be noted that, for the purposes of
comparable group selection, Citizens First's $5.1 million balance of Federal
Home Loan Bank stock at August 31, 2000, is included in the other assets
category, rather than in cash and investments, in order to be consistent with
reporting requirements and sources of statistical and comparative analysis
42
related to the universe of comparable group candidates and the final comparable
group.
The parameter range for cash and investments relates to the Bank's
historically volatile ratio as well as overall industry volatility of this
parameter as institutions exercise varying liquidity options and approaches,
including the purchase of mortgage-backed and mortgage derivative securities.
The range has been defined as 25.0 or less of assets, with a midpoint of 12.5
percent.
Mortgage-Backed Securities to Assets
Citizens First had no mortgage-backed securities at August 31, 2000, and at
the close of its most recent five fiscal years, compared to the regional average
of 8.1 percent of assets and the national average of 10.0 percent of assets for
publicly-traded thrifts. Inasmuch as many institutions purchase mortgage-backed
securities as an alternative to both lending, relative to cyclical loan demand
and prevailing interest rates, and other investment vehicles, this parameter is
relatively broad at 20.0 percent or less of assets and a midpoint of 10.0
percent.
One- to Four-Family Loans to Assets
Citizens First's lending activity is focused on the origination of
permanent residential mortgage loans secured by one- to four-family dwellings.
Such one- to four-family loans, including construction loans, represented 50.4
percent of the Bank's assets at August 31, 2000, which is similar to both the
national average of 47.1 percent and lower than the 53.0 percent average for
savings institutions in the Midwest. The parameter for this characteristic
requires any comparable group institution to have from 30.0 percent to 80.0
percent of its assets in one-to four-family loans with a midpoint of 55.0
percent.
Total Net Loans to Assets
43
At August 31, 2000, Citizens First had a ratio of total net loans to assets
of 79.7 percent and a higher five calendar year average of 88.5 percent, both of
which are higher than the national average of 70.5 percent and the regional
average of 74.9 percent for publicly-traded thrifts. The parameter for the
selection of the comparable group is from 60.0 percent to 90.0 percent with a
midpoint of 75.0 percent. The broadness of the range recognized the Bank's
historical ratios and the fact that, as the referenced national and regional
averages indicate, many larger institutions purchase a greater volume of
investment securities and/or mortgage-backed securities as cyclical alternatives
to lending, but may otherwise be similar to Citizens First.
Total Net Loans and Mortgage-Backed Securities to Assets
As discussed previously, Citizens First had a 79.7 percent ratio of total
net loans to assets and had no mortgage-backed securities at August 31, 2000.
Recognizing the industry and regional ratios of 10.0 percent and 8.1 percent,
respectively, of mortgage-backed securities to assets, the parameter range for
the comparable group in this category is 65.0 percent to 95.0 percent, with a
midpoint of 80.0 percent.
Borrowed Funds to Assets
Citizens First had a $77.3 million balance of borrowed funds at August 31,
2000, consisting of FHLB advances, representing 9.7 percent of assets. At March
31, 2000, the Bank's borrowed funds were $70.5 million or a very similar 9.5
percent of assets, and its five calendar year average was a lower 7.1 percent
with an increasing share since March 31, 1996, as the Bank made greater use of
borrowings to fund its asset growth. The use of borrowed funds by some thrift
institutions indicates an alternative to retail deposits and may provide a
source of term funds for lending. The federal insurance premium on deposits has
also increased the attractiveness of borrowed funds.
44
The institutional demand for borrowed funds increased in 1996 and 1997 due
to the difficulty in competing for deposits, resulting in an increase in
borrowed funds by many institutions as an alternative to higher cost and/or
longer term certificates. The ratio of borrowed funds to assets, therefore,
does not typically indicate higher risk or more aggressive lending, but
primarily an alternative to retail deposits.
The parameter range of borrowed funds to assets is 35.0 percent or less
with a midpoint of 17.5 percent, lower than the national averages of 22.5
percent for publicly-traded thrifts and 29.8 percent for all FDIC-insured
savings institutions.
Equity to Assets
Citizens First's equity to assets ratio as of August 31, 2000, was 8.4
percent. After conversion, based on the midpoint value of $62.6 million and a
public offering of $58.0 million, with 50.0 percent of the net proceeds of the
public offering going to the Bank, Citizens First's equity is projected to
stabilize in the area of 11.5 percent. The consolidated pro forma equity to
assets ratio for the Corporation is projected to be 13.9 percent following
conversion. Based on those equity ratios, we have defined the equity ratio
parameter to be 7.0 percent to 15.0 percent with a midpoint ratio of 11.0
percent.
PERFORMANCE PARAMETERS
Introduction
Exhibit 38 presents five parameters identified as key indicators of
Citizens First's earnings performance and the basis for such performance both
historically and during the four quarters ended August 31, 2000. The primary
performance indicator is the Bank's return on average assets (ROAA). The second
performance indicator is the Bank's return
45
on average equity (ROAE). To measure the Bank's ability to generate net interest
income, we have used net interest margin. The supplemental source of income for
the Bank is noninterest income, and the parameter used to measure this factor is
the ratio of noninterest income to assets. The final performance indicator is
the Bank's ratio of operating expenses or noninterest expenses to assets, a key
factor in distinguishing different types of operations, particularly
institutions that are aggressive in secondary market activities, which often
results in much higher operating costs and overhead ratios.
Return on Average Assets
The key performance parameter is the ROAA. For the twelve months ended
August 31, 2000, Citizens First's ROAA was 0.80 percent based on net earnings
after taxes and 1.02 percent based on core or normalized earnings after taxes,
as detailed in Item I of this report and presented in Exhibit 7. The Bank's
ROAA over its prior five fiscal years, based on net earnings, has ranged from a
low of 0.53 percent in 1997 to a high of 1.01 percent in both 1998 and 1999,
with an average ROAA of 0.82 percent. The consolidated ROAA for the Bank and
the Corporation on a pro forma basis at the time of conversion is projected to
be 1.07 percent based on core income at the midpoint valuation.
For consistency and in recognition of the differences between net and core
income for many institutions, we have elected to base our ROAA analysis and
comparison on core or normalized income for both Citizens First and the
comparable group. Considering the
Return on Average Assets (cont.)
historical, current and projected earnings performance of Citizens First, the
range for the ROAA parameter based on core income has been defined as 0.70
percent to a high of 1.45 percent with a midpoint of 1.08 percent.
46
Return on Average Equity
The ROAE has been used as a secondary parameter to eliminate any
institutions with an unusually high or low ROAE that is inconsistent with the
Bank's position. This parameter does not provide as much meaning for a newly
converted thrift institution as it does for established stock institutions, due
to the unseasoned nature of the capital structure of the newly converted thrift
and the inability to accurately reflect a mature ROAE for the newly converted
thrift relative to other stock institutions.
The consolidated ROAE for the Bank and the Corporation on a pro forma basis
at the time of conversion will be 7.75 percent based on core income at the
midpoint valuation. Prior to conversion, the Bank's ROAE for the twelve months
ended August 31, 2000, was 9.25 percent based on net income and 11.83 percent
based on core income, with a five fiscal year average net ROAE of 9.65 percent.
The parameter range for the comparable group, based on core income, is from 3.5
percent to 15.0 percent with a midpoint of 9.3 percent.
Net Interest Margin
Citizens First had a net interest margin of 3.58 percent for the twelve
months ended August 31, 2000, representing net interest income as a percentage
of average interest-earning assets. The Bank's range of net interest margin for
the five previous fiscal years has been from a low of 3.43 percent in 1997 to a
high of 3.82 percent in 1999 with a five year average of 3.62 percent and a
generally stable trend since 1996 with relatively mild fluctuation.
Net Interest Margin (cont.)
The parameter range for the selection of the comparable group is from a low
of 2.75 percent to a high of 4.25 percent with a midpoint of 3.50 percent.
47
Operating Expenses to Assets
For the twelve months ended August 31, 2000, Citizens First had a modestly
lower than average 2.24 percent ratio of operating expense to average assets.
The Bank's operating expenses, net of non-recurring items, indicated a decrease
from 2.70 percent March 31, 1996, with its ratio to average assets fluctuating
from a low of 2.30 percent in 2000 to a high of 3.58 percent in 1999, for a five
fiscal year average of 2.80 percent.
The operating expense to assets parameter for the selection of the
comparable group is from a low of 1.50 percent to a high of 3.00 percent with a
midpoint of 2.25 percent.
Noninterest Income to Assets
With the elimination of non-recurring gain and loss items in fiscal years
1999 and 2000, Citizens First has consistently experienced a generally average
dependence on noninterest income as a source of additional income compared to
publicly-traded savings institutions. The Bank's noninterest income to average
assets was a negative 0.03 percent for the twelve months ended August 31, 2000,
including its $4.5 million loss on the sale of loans. Net of that non-recurring
loss, the Bank's noninterest income was $3.9 million or 0.53 percent of average
assets during the twelve months ended August 31, 2000, which is similar to the
current average of 0.56 percent for publicly-traded thrift institutions. Net of
its non-recurring loss in fiscal year 2000 and its non-recurring gain of $6.1
million in fiscal year 1999, Citizens First's average annual ratio of
noninterest income for the past five calendar years has been 0.50 percent of
average assets since fiscal year 1996, with annual ratios ranging from 0.63
percent in 1999 to 0.35 percent in 1996.
Noninterest Income to Assets (cont.)
48
The range for this parameter for the selection of the comparable group is
1.00 percent or less of average assets, with a midpoint of 0.50 percent.
ASSET QUALITY PARAMETERS
Introduction
The final set of financial parameters used in the selection of the
comparable group are asset quality parameters, also shown in Exhibit 38. The
purpose of these parameters is to insure that any thrift institution in the
comparable group has an asset quality position similar to that of Citizens
First. The three defined asset quality parameters are the ratios of
nonperforming assets to total assets, repossessed assets to total assets and
loan loss reserves to total assets at the end of the most recent period.
Nonperforming Assets to Assets
Citizens First's ratio of nonperforming assets to assets was 0.29 percent
at August 31, 2000, which is lower than both the national average of 0.51
percent for publicly-traded thrifts and the Midwest regional average of 0.53
percent, and only modestly higher than its 0.18 percent ratio at March 31, 2000.
For the five fiscal years ended March 31, 1996 to 2000, the Bank's ratio
fluctuated from a low of 0.12 percent at March 31, 1996, to a high of 0.24
percent at March 31, 1998, with a five year average of 0.16 percent and a stable
trend.
The parameter range for nonperforming assets to assets has been defined as
0.75 percent of assets or less with a midpoint of 0.38 percent.
49
Repossessed Assets to Assets
Citizens First had a low 0.03 percent ratio of repossessed assets to total
assets at August 31, 2000, compared to a lower ratio of 0.01 percent at March
31, 2000, and a five fiscal year average of 0.01 percent or less. National and
regional averages were 0.11 percent and 0.09 percent, respectively, for
publicly-traded savings institutions and 0.10 for all FDIC-insured savings
institutions at the end of their most recent quarters.
The range for the repossessed assets to total assets parameter is 0.20
percent of assets or less with a midpoint of 0.10 percent.
Loans Loss Reserves to Assets
Citizens First had an allowance for loan losses of $10,633,000,
representing a loan loss allowance to total assets ratio of 1.34 percent at
August 31, 2000, which is slightly lower than its 1.41 percent ratio at March
31, 2000, and moderately lower than its ratio of 1.73 percent at March 31, 1999.
For its previous five fiscal years, the Bank's loan loss reserve averaged 1.39
percent of assets from a low of 1.24 percent in 1998 to a high of 1.73 percent
in 1999, indicating ratios consistently and significantly higher than the
industry average.
The loan loss allowance to assets parameter range used for the selection of
the comparable group required a minimum ratio of 0.25 percent of assets.
50
THE COMPARABLE GROUP
With the application of the parameters previously identified and applied,
the final comparable group represents ten institutions identified in Exhibits
39, 40 and 41. The comparable group institutions range in size from $213.5
million to $1.9 billion with an average asset size of $667.2 million and have an
average of 12.0 offices per institution. Two of the comparable group
institutions were converted in 1987, one in 1988, one in 1992, one in 1993, two
in 1995, one in 1996, one in 1997 and one in 1998. Nine of the comparable
group institutions are traded on NASDAQ and one is traded on the American Stock
Exchange. Of the ten institutions, all are SAIF members. The comparable group
institutions as a unit have a ratio of equity to assets of 10.5 percent, which
is only 0.5 percent lower than all publicly-traded thrift institutions in the
United States but 19.1 percent lower than publicly-traded thrift institutions in
Michigan; and for the most recent four quarters indicated a core return on
average assets of 1.03 percent, higher than all publicly-traded thrifts at 0.81
percent and publicly-traded Michigan thrifts at 0.85 percent.
51
IV. ANALYSIS OF FINANCIAL PERFORMANCE
This section reviews and compares the financial performance of Citizens
First to all publicly-traded thrifts, to publicly-traded thrifts in the Midwest
region and to Michigan thrifts, as well as to the ten institutions constituting
Citizens First's comparable group, as selected and described in the previous
section. The comparative analysis focuses on financial condition, earning
performance and pertinent ratios as presented in Exhibits 42 through 47.
As presented in Exhibits 42 and 43, at August 31, 2000, Citizens First's
total equity of 8.43 percent of assets was lower than the 10.54 percent for the
comparable group, the 10.49 for all thrifts, the 11.62 percent for Midwest
thrifts and the 8.53 percent ratio for Michigan thrifts. The Bank had a 79.74
percent share of net loans in its asset mix, higher than the comparable group
at 78.27 percent, all thrifts at 70.53 percent and Midwest thrifts at 74.85
percent, but lower than Michigan thrifts at 85.77 percent. Citizens First's
share of net loans, higher than industry averages, is primarily the result of
its absence of mortgage-backed securities only partially offset by its slightly
higher 16.40 percent share of cash and investments. The comparable group had a
lower 12.85 percent share of cash and investments and a 5.09 percent share of
mortgage-backed securities. All thrifts had 10.04 percent of assets in
mortgage-backed securities and 15.26 percent in cash and investments. Citizens
First's 80.19 percent share of deposits was considerably higher than the
comparable group and the three geographic categories, reflecting the Bank's
lower 9.73 percent ratio of borrowed funds to assets. The comparable group had
deposits of 67.49 percent and borrowings of 21.04 percent. All thrifts averaged
a 65.39 percent share of deposits and 22.47 percent of borrowed funds, while
Midwest thrifts had a 65.36 percent share of deposits and a 21.58 percent share
of borrowed funds. The four Michigan thrifts averaged a 59.68 percent share of
deposits and a 28.78 percent share of borrowed funds. Citizens First had
intangible assets in the form or mortgage servicing rights equal to 0.35 percent
of total assets at August 31, 2000, compared to 0.61 percent for the comparable
group, 0.35
52
percent for all thrifts, 0.25 percent for Midwest thrifts and 0.26
percent for Michigan thrifts.
Analysis of Financial Performance (cont.)
Operating performance indicators are summarized in Exhibits 44 and 45 and
provide a synopsis of key sources of income and key expense items for Citizens
First in comparison to the comparable group, all thrifts, and regional thrifts
for the trailing four quarters.
As shown in Exhibit 46, for the twelve months ended August 31, 2000,
Citizens First had a yield on average interest-earning assets higher than the
comparable group, all thrifts and Midwest thrifts, but slightly lower than the
average of the four Michigan thrifts. The Bank's yield on interest-earning
assets was 7.82 percent compared to the comparable group at 7.57 percent, all
thrifts at 7.58 percent, Midwest thrifts at 7.54 percent and Michigan thrifts at
7.86 percent.
The Bank's cost of funds for the twelve months ended August 31, 2000, was
lower than the comparable group and the three geographical categories. Citizens
First had an average cost of interest-bearing liabilities of 4.47 percent
compared to 4.75 percent for the comparable group, 4.73 percent for all thrifts,
4.82 percent for Midwest thrifts and 5.12 percent for Michigan thrifts. The
Bank's higher yield on interest-earning assets complimented by its lower
interest cost, resulting in net interest income of 3.41 percent of average total
assets, which was higher than the comparable group at 3.21 percent, all thrifts
at 3.17 percent, Midwest thrifts at 3.10 percent and Michigan thrifts at 2.89
percent. Citizens First demonstrated a net interest margin of 3.58 percent for
the twelve months ended August 31, 2000, based its ratio of net interest income
to average interest-earning assets, which was higher than the comparable group
ratio of 3.35 percent. All thrifts averaged a lower 3.45 percent net interest
margin for the trailing four quarters, as did
53
Midwest thrifts and Michigan thrifts at 3.24 percent and 3.08 percent,
respectively.
Citizens First's major source of income is interest earnings, as is
evidenced by the operations ratios presented in Exhibit 45. The Bank took back
into income $377,000 of its allowance for loan losses during the twelve months
ended August 31, 2000, representing 0.05 percent of average assets and
reflecting the Bank's objective to modestly reduce its ratio of
Analysis of Financial Performance (cont.)
allowance for loan losses to total loans, nonperforming assets and total assets
in recognition of its previous ratio significantly higher than the industry
averages. The comparable group indicated a provision representing 0.13 percent
of assets, with all thrifts at 0.13 percent, Midwest thrifts at 0.12 percent and
Michigan thrifts at 0.15 percent.
The Bank's non-interest income was $3,909,000 or 0.53 percent of average
assets for the twelve months ended August 31, 2000, excluding its $4,500,000
gain on the sale of loans. Such net non-interest income ratio was similar to the
comparable group at 0.58 percent, all thrifts at 0.56 percent and Midwest
thrifts at 0.51 percent, but lower than Michigan thrifts at 0.72 percent. For
the twelve months ended August 31, 2000, Citizens First's operating expense
ratio was 2.24 percent of average assets, which was higher than the comparable
group at 2.11 percent and Michigan thrifts at 2.15 percent, but lower than all
thrifts at 2.37 percent and Midwest thrifts at 2.27 percent.
The overall impact of Citizens First's income and expense ratios is
reflected in the Bank's net income and return on assets. For the twelve months
ended August 31, 2000, the Bank had an ROAA of 0.80 percent based on net income
and a higher ROAA of 1.02 percent based on core income, as indicated in Exhibit
7. For its most recent four quarters, the comparable group had a higher net
ROAA of 1.04 percent and a higher core ROAA of 1.03 percent. All publicly-
traded thrifts averaged a lower 0.81 percent core ROAA, as did
54
Midwest thrifts at 0.80 percent and Michigan thrifts at 0.85 percent.
55
V. MARKET VALUE ADJUSTMENTS
This is a conclusive section where adjustments are made to determine the
pro forma market value or appraised value of the Corporation based on a
comparison of Citizens First with the comparable group. These adjustments will
take into consideration such key items as earnings performance and growth
potential, primary market area, financial condition, asset and deposit growth,
dividend payments, subscription interest, liquidity of the stock to be issued,
management, and market conditions or marketing of the issue. It must be noted
that all of the institutions in the comparable group have their differences
among themselves and from the Bank, and, as a result, such adjustments become
necessary.
EARNINGS PERFORMANCE AND GROWTH POTENTIAL
In analyzing earnings performance, consideration was given to net interest
income, the amount and volatility of interest income and interest expense
relative to changes in primary market area conditions and to changes in overall
interest rates, the quality of assets as it relates to the presence of problem
assets which may result in adjustments to earnings, the level of current and
historical classified assets and real estate owned, the balance of valuation
allowances to support any problem assets or nonperforming assets, the amount and
volatility of non-interest income, and the level of non-interest expenses.
As discussed earlier, the Bank's historical business philosophy has focused
on increasing its net interest income and net income, maintaining a low ratio of
nonperforming assets, strengthening its level of interest sensitive assets
relative to interest sensitive liabilities and thereby improving its sensitivity
measure and its overall interest rate risk, maintaining an adequate level of
general valuation allowances to reduce the impact of any unforeseen losses, and
monitoring its overhead expenses. Following conversion, the Bank's objectives
will continue to focus on increasing its net interest spread and net interest
margin, increasing its net income, return on assets and return on equity,
maintaining a moderate ratio
56
of non-
Earnings Performance and Growth Potential (cont.)
performing and classified assets, increasing its level of interest sensitive
assets relative to interest sensitive liabilities and reducing its share of
fixed-rate residential mortgage loans through selling them in the secondary
market.
Earnings are often related to an institution's ability to generate loans.
The Bank was an active originator of both mortgage and non-mortgage loans in
years 1999 to 2000 and during the five months ended August 31, 2000, with a
strong increase in consumer loans in 2000. For the five months ended August 31,
2000, annualized, total loan originations were greater than in fiscal 2000, with
most of the increase occurring in the categories of construction loan
originations and commercial business loans. During the year ended March 31,
2000, the origination of one- to four-family loans, fell short of that category
of originations in 1998 and in 1999. Compared to fiscal 1998, consumer loans
indicated an increase of $48.8 million for the year ended March 31, 2000, and
increased an additional $7.3 million, annualized, for the five months ended
August 31, 2000. The Bank's origination of commercial loans increased by $9.9
million or 47.3 percent for the year ended March 31, 2000, compared to 1998, and
increased $12.3 million or 40.1 percent, annualized, for the five months ended
August 31, 2000. Total loan originations for the year ended March 31, 2000,
exceeded fiscal year 1998 originations by $74.6 million or 34.2 percent, while
total originations during the five months ended August 31, 2000, annualized,
exceeded 2000 originations by a strong $36.6 million or 12.5 percent.
For the five months ended August 31, 2000, one- to four-family loans,
commercial real estate loans, consumer loans and commercial business loans
represented 35.3 percent, 12.2 percent, 25.1 percent, and 13.1 percent,
respectively, of total loan originations. In comparison, during 1998, one- to
four-family loans, commercial real estate loans, consumer loans and commercial
loans represented 60.l percent, 6.7 percent, 12.2 percent and 9.6 percent,
respectively, of total loan originations.
57
Total mortgage and non-mortgage loan originations were $137.1 million in
the five months ended August 31, 2000, reduced by repayments, loan sales and
other adjustments of $74.2 million, resulted in an increase of $62.9 million in
gross loans receivable at August 31, Earnings Performance and Growth Potential
(cont.)
2000, compared to March 31, 2000. In 2000, total loan originations of $292.5
million, reduced by repayments, loan sales and other adjustments of $315.7
million, resulted in a decrease of $23.2 million in gross loans receivable to
$580.4 million at March 31, 2000, compared to $603.6 million at March 31, 1999.
At March 31, 1998, compared to March 31, 1997, loans receivable increased $60.4
million due to originations of $217.9 million, reduced by repayments, loan sales
and other adjustments of $157.5 million.
The impact of Citizens First's primary lending efforts has been to generate
a yield on average interest-earning assets of 7.82 percent for the twelve months
ended August 31, 2000, compared to a lesser 7.57 percent for the comparable
group, 7.58 percent for all thrifts and 7.54 percent for Midwest thrifts. The
Bank's ratio of interest income to average assets was 7.44 percent for the
twelve months ended August 31, 2000, which was also higher than the comparable
group at 7.25 percent, all thrifts at 7.23 percent and Midwest thrifts at 7.22
percent.
Citizens First's 4.47 percent cost of interest-bearing liabilities for
the twelve months ended August 31, 2000, was lower than the comparable group at
4.75 percent, all thrifts at 4.73 percent and Midwest thrifts at 4.82 percent.
The Bank's resulting net interest spread of 3.35 percent for the twelve months
ended August 31, 2000, was higher than the comparable group at 2.82 percent, all
thrifts at 2.85 percent and Midwest thrifts at 2.72. The Bank's net interest
margin of 3.58 percent, based on average interest-earning assets for the twelve
months ended August 31, 2000, was modestly higher than the comparable group at
3.35 percent, all thrifts at 3.32 percent and Midwest thrifts at 3.24 percent.
Excluding the recent loss on the sale of loans, the Bank's ratio of
noninterest income to assets was 0.53 percent for the twelve months ended August
31, 2000, lower than the comparable group at 0.58 percent, lower than all
thrifts at 0.56 percent and similar to
58
Midwest thrifts at 0.51 percent. The Bank's operating expenses were modestly
higher than the comparable group but lower than all thrifts and Midwest thrifts.
For the twelve months ended
Earnings Performance and Growth Potential (cont.)
August 31, 2000, Citizens First had an operating expenses to assets ratio of
2.24 percent compared to 2.11 percent for the comparable group, 2.37 percent for
all thrifts and 2.27 percent for Midwest thrifts.
For the twelve months ended August 31, 2000, Citizens First generated lower
noninterest income, lower noninterest expenses and a higher net interest margin
relative to its comparable group. As a result, the Bank's net income was lower
than the comparable group and the Bank's core income was only slightly lower
than the comparable group for the twelve months ended August 31, 2000. Based on
net earnings, the Bank had a return on average assets of 0.71 percent in 1996,
0.53 percent in 1997, 1.01 percent in 1998 and 1999, 0.85 percent in 2000, 1.07
percent for the five months ended August 31, 2000, annualized, and 0.80 percent
for the twelve months ended August 31, 2000. For the trailing twelve months,
the comparable group had a higher net ROAA of 1.04 percent, while all thrifts
indicated a lower ROAA of 0.78 percent. The Bank's core or normalized earnings,
as shown in Exhibit 7, were higher than its net earnings and resulted in a 1.02
percent core return on assets for the twelve months ended August 31, 2000. That
core ROAA was also lower than the comparable group at 1.03 percent, but higher
than all thrifts at 0.81 percent and Midwest thrifts at 0.80 percent.
Citizens First's earnings stream will continue to be dependent on both the
overall trends in interest rates and also on the consistency, reliability and
variation of its noninterest income and overhead expenses. Noninterest income
has increased from 1996 through August 31, 2000, and overhead expenses have
indicated a recently decreasing trend in their ratio to average assets
influenced by the Bank's strong growth. The Bank's net interest margin, higher
than the comparable group, has been the result of its higher yield on assets
59
accented by its lower cost of funds. Citizens First's composite yield on
interest-earning assets is likely to benefit from its increase in higher
yielding consumer loans due to the Bank's increasing share of higher rate
automobile loans. It is also likely, moreover, that strong competition from
both financial institutions and mortgage companies will limit the Bank's ability
to significantly increase rates on individual mortgage loan products. Citizens
First's success in achieving its objective to increase its overall net interest
spread and net interest margin will relate to its
Earnings Performance and Growth Potential (cont.)
ability to increase its shares of higher yielding non-mortgage loans, rather
than by increasing rates on its loan products in the current rate environment.
The Bank's cost of funds has witnessed an increase during the past year and this
rising cost of funds will likely continue and basically offset the Bank's rise
in its yield on interest-earning assets. During the next few years, a possible
modest increase in the Bank's net interest spread and net interest margin will
be dependent on Citizens First's marketing and cross-selling capability, as well
as the demographic and economic characteristics and trends in its primary market
area.
It has also been recognized that Citizens First's current core ROAA, in
addition to being slightly lower than that of its comparable group, has been
volatile, while its net interest margin and net interest spread have indicated
recent decreases. Citizens First's noninterest expenses, noninterest income,
net interest spread and net interest margin for the twelve months ended August
31, 2000, were actually similar to performance in 1996, while ROAA was higher.
The Bank's ROAE has indicated a rise from 8.16 percent in 1996 to 9.25 percent
for the most recent twelve month period.
Finally, as stated above, the competitive environment for both loans and
deposits in the Bank's historically manufacturing dominated market will limit
Citizens First's ability to significantly increase its market share other than
by increasing savings rates or reducing loan rates, which are not consistent
with the Bank's current strategies.
In recognition of the foregoing earnings related factors, with
consideration to
60
Citizens First's current performance measures no adjustment has
been made to Citizens First's pro forma market value for earnings performance
and growth potential.
MARKET AREA
Citizens First's primary market area for retail deposits consists of Huron,
Lapeer, St. Clair and Sanilac Counties, Michigan, and the Bank's lending market
extends into Macomb County. As discussed in Section II, since 1990, this
overall primary market area has experienced increases in population and
households, but has also been characterized with higher unemployment rates than
the comparable group markets, Michigan and the United States. The average
unemployment rate in the Bank's primary market area was 4.9 percent in 1999,
compared to 3.8 percent in Michigan and 4.2 percent in the United States. By
July 2000, the primary market area's unemployment rate had increased to 5.2
percent, although Michigan decreased to 3.5 percent and the United States
remained at 4.2 percent. Per capita income and median household income in
Citizens First's primary market area have historically been and remain similar
to the state and national averages but lower than the comparable group average.
The median housing value and median rent in the Bank's primary market area is
significantly lower than Michigan and the comparable group as well as the United
States.
Citizens First's primary market area is characterized by smaller
communities with two of the four market area counties being more focused on
agriculture and two being more industrial and more dependent on the nearby auto
industry in Detroit. In the Bank's primary market area, the manufacturing
sector represents the primary source of employment, followed by the services
sector and then the wholesale/retail sector. The market continues to be focused
on auto-related manufacturing with almost 30.0 percent of employment tied
61
to manufacturing compared to 24.6 percent in Michigan and 19.2 percent in the
United States.
The level of financial competition in Citizens First's primary market area
is relatively strong with commercial banks holding a strong majority of
deposits, representing 80.4 percent of deposits, and financial institutions of
varying sizes and characteristics operating in and around Citizens First's
offices. The Bank experienced net increases in deposits in each of its most
recent two fiscal years, as deposits and interest credited exceeded withdrawals,
with its average annual growth rate being slightly higher than the comparable
group. The Bank's recent growth in deposits has been primarily due to growth in
public funds.
Market area (cont.)
In recognition of the foregoing factors, we believe that a moderate
downward adjustment is warranted for the Bank's primary market area.
FINANCIAL CONDITION
The financial condition of Citizens First is discussed in Section I and
shown in Exhibits 1, 2, 5, 15, 16 and 17, and is compared to the comparable
group in Exhibits 42 and 43. The Bank's ratio of total equity to total assets
was 8.43 percent at August 31, 2000, which was lower than the comparable group
at 10.54 percent, all thrifts at 10.49, and Midwest thrifts at 11.62 percent.
With a conversion at the midpoint, the Corporation's pro forma equity to assets
ratio will increase to approximately 13.86 percent, and the Bank's pro forma
equity to assets ratio will increase to approximately 11.64 percent.
The Bank's mix of assets and liabilities indicates some areas of variation
from its
62
comparable group but many similarities. Citizens First had a 79.7 percent ratio
of net loans to total assets at August 31, 2000, compared to the comparable
group at 78.3 percent and all thrifts at 70.5 percent. The Bank's 16.4 percent
share of cash and investments was higher than the comparable group at 12.9
percent, all thrifts at 15.3 percent and Midwest thrifts at 13.1 percent.
Citizens First's ratio of mortgage-backed securities to total assets of zero was
lower than the comparable group at 5.1 percent and all thrifts at 10.0 percent.
The Bank's 80.2 percent ratio of deposits to total assets was higher than the
comparable group at 67.5 percent, all thrifts at 65.4 percent and Midwest
thrifts at 65.4 percent. Citizens First's 9.7 percent ratio of borrowed funds to
assets was much lower than the comparable group at 21.0 percent, all thrifts at
22.5 percent and Midwest thrifts at 21.6 percent.
Citizens First had intangible assets of 0.35 percent of assets and
repossessed assets of 0.03 percent of assets, compared to ratios of 0.61 percent
and 0.05 percent of intangible assets and real estate owned, respectively, for
the comparable group. All thrifts had intangible assets
Financial Condition (cont.)
of 0.35 percent and real estate owned of 0.11 percent. The financial condition
of Citizens First is influenced by its level of nonperforming assets of $2.2
million or 0.29 percent of assets at August 31, 2000, compared to a similar 0.33
percent for the comparable group, 0.51 percent for all thrifts and 0.53 percent
for Midwest thrifts. Historically, the Bank's dollar balance of nonperforming
assets and its ratio of nonperforming assets to total assets have been lower
than industry averages and have fluctuated moderately since March 31, 1998. The
Bank's ratio of nonperforming assets to total assets was 0.24 percent and 0.18
percent at March 31, 1998, and 2000, respectively.
The Bank had a normal share of high risk real estate loans at 11.00 percent
of total assets, compared to 11.69 percent for the comparable group and 16.01
percent for all thrifts. The regulatory definition of high risk real estate
loans is all mortgage loans other than those secured by one- to four-family
residential properties. The Bank had a much higher share
63
of higher risk consumer loans and commercial business loans at August 31, 2000,
representing 24.1 percent of gross loans. This well exceeds the industry norm
and the average for the comparable group, both of which are dominated by
mortgage loans.
At August 31, 2000, Citizens First had $10.6 million of allowances for loan
losses, which represented 1.34 percent of assets and 1.65 percent of total
loans. The comparable group indicated allowances equal to 0.53 percent of
assets and a larger 0.70 percent of total loans. More significant, however, is
an institution's ratio of allowances for loan losses to nonperforming loans,
since a portion of nonperforming assets might eventually be charged off.
Citizens First's $10.6 million of allowances for loan losses, represented 457.53
percent of nonperforming loans at August 31, 2000, compared to the comparable
group's 211.43 percent, with all thrifts at 197.95 percent and Midwest thrifts
at 166.33 percent. Citizens First's ratio of net charge-offs to average total
loans, moreover, was 0.03 percent for the twelve months ended August 31, 2000,
lower than the 0.09 percent for the comparable group, 0.16 percent for all
thrifts and 0.14 percent for Midwest thrifts. This ratio is reflective of the
Bank's maintenance of a higher average ratio of reserves to loans, and a higher
ratio of reserves to
Financial Condition (cont.)
nonperforming loans due to the Bank's higher share of consumer and commercial
business loans.
Citizens First has a moderate level of interest rate risk, as reflected by
the negative exposure of its net interest income under conditions of rising
interest rates. The Bank's net interest income is projected to decrease 13.0
percent if interest rates rise 200 basis points. This exposure is similar to the
Bank's current interest rate risk limit.
Overall, with particular consideration to the Bank's equity level, share of
higher risk loans and interest rate risk position, we believe that a moderate
downward adjustment is warranted for Citizens First's current financial
condition.
64
ASSET, LOAN AND DEPOSIT GROWTH
During the past two fiscal years, Citizens First has been characterized by
higher than average growth in assets and deposits, combined with growth in loans
similar to the comparable group. The Bank's five year asset growth and loan
growth have both also been higher than all thrifts. The Bank's average annual
asset growth rate from 1996 to 2000, was 13.0 percent, compared to a lower 8.8
percent for the comparable group, 8.1 percent for all thrifts and 8.4 percent
for Midwest thrifts. Citizens First's asset growth rate is reflective primarily
of its growth in consumer loans. The Bank's loans indicate an average annual
increase of 8.0 percent from 1996 to 2000, compared to average growth rates of
8.1 percent for the comparable group, 11.7 percent for all thrifts and 11.9
percent for Midwest thrifts. Citizens First's deposits indicate an average
annual increase of 10.4 percent from March 31, 1996 to March 31, 2000, followed
by a deposit increase of 6.0 percent or 14.3 percent annualized during the five
months ended August 31, 2000. Annual deposit changes have been from a low of
4.6 percent in 1999 to a high of 14.1 percent in 2000, compared to average
growth rates of 5.1 percent for the comparable group, 5.8 percent for all
thrifts and 5.1 percent Asset, Loan and Deposit Growth (cont.)
for Midwest thrifts. The Bank's recent growth in deposits has been primarily
due to the Bank's focus on public deposits.
The Bank's ability to maintain its asset base and deposits in the future
is, to a great extent, dependent on its being able to competitively price its
loan and savings products and to maintain a high quality of service to its
customers. The Bank does not anticipate its loan and deposit growth to continue
at its recently strong pace. Citizens First's fourteen offices serve the primary
market area of Huron, Lapeer, St. Clair and Sanilac Counties. The Bank's primary
market area has experienced a moderate rise in population and households between
1990 and 1999 but is projected to grow at a much slower pace over the following
65
five years. The Bank's primary market area also indicates per capita income and
median household income levels similar to Michigan and the United States and in
May 2000 had an unemployment rate higher than Michigan and the United States.
The Bank's dependence on its current primary market area, with no immediate
plans to expand beyond that primary market area, could result in limited asset
growth as a result of its highly competitive operating environment. Citizens
First's projections indicate a reduction in deposits the first year due to
outflow of public deposits and reduction in retail deposits to purchase
conversion stock. Total loans are projected to experience moderate growth, with
excess growth offsetting reductions in investments and increases in borrowed
funds. Citizens First's highly competitive operating environment, together with
its anticipated stable deposits and moderate asset growth, should result in
similar growth in assets and deposits for the Bank relative to the comparable
group. Loan growth, if the Bank's objectives are realized, should also be
similar to that of the comparable group.
Based on these conditions, we have concluded that no adjustment to the
Bank's pro forma value is warranted.
DIVIDEND PAYMENTS
Citizens First has not committed to pay an initial cash dividend. The
future payment of cash dividends will be dependent upon such factors as earnings
performance, capital position, growth, and regulatory limitations. All of the
ten institutions in the comparable group pay cash dividends for an average
dividend yield of 4.01 percent. The average dividend yield for Michigan thrifts
is 3.31 percent and 2.92 percent for all thrifts.
The current dividend yields for thrift stocks have increased due partially
to the decrease in the average market price for thrift stocks combined with
modest increases in cash dividends. The Bank has no plans to pay a cash dividend
for at least a year, and the initial
66
dividend will be well below current dividend yields. In our opinion, a downward
adjustment to the pro forma market value is warranted at this time related to
dividend payments.
SUBSCRIPTION INTEREST
In the first half of 2000, investors' interest in new issues was minimal
and subscription levels were consistently low, although a few issues received a
stronger reaction from the marketplace. The number of conversions in the first
half of 2000 decreased from historical levels. Overall, the reaction of IPO
investors appears to be related to a number of factors, including the financial
performance and condition of the converting thrift institution, the strength of
the local economy, general market conditions, aftermarket price trends and the
future of merger/acquisition activity in the thrift industry. Additionally, the
overall stock market decline may restrain investor interest in new offerings.
Citizens First will direct its offering primarily to depositors and
residents in its primary market area. The board of directors and officers
anticipate purchasing approximately $1.5 million or 2.6 percent of the stock
offered to the public based on the appraised midpoint valuation. The Bank will
form an ESOP, which plans to purchase 8.0 percent of the total
Subscription Interest (cont.)
shares issued in the conversion. Additionally, the Prospectus restricts to
25,000 shares, based on the $10.00 per share purchase price, the total number of
shares in the conversion that may be purchased by a single person or by persons
and associates acting in concert as part of either the subscription offering or
a direct community offering.
The Bank has secured the services of Trident Securities, a Division of
McDonald Investments, Inc. ("Trident") to assist in the marketing and sale of
the conversion stock.
67
Based on the size of the offering, current market conditions, local market
interest and the terms of the offering, we believe that a downward adjustment is
warranted for the Bank's anticipated subscription interest.
LIQUIDITY OF THE STOCK
Citizens First will offer its shares through a subscription offering and,
if required, a subsequent community offering with the assistance of Trident.
Citizens First will pursue at least two market makers for the stock. The Bank's
offering is very similar in size to the comparable group. The comparable group
has an average market value of $64,440,000 for the stock outstanding compared to
a midpoint value of $62,640,000 for Citizens First. We have concluded,
therefore, that no adjustment to the pro forma market value is warranted at this
time relative to the liquidity of the stock.
MANAGEMENT
The president, chief executive officer, and managing officer of Citizens
First is Larry J. Moeller, Sr., who is also a director. Mr. Moeller joined the
Bank in 1998 as President and Chief Executive Officer and was appointed a
director in 1999. Prior to working at Citizens
Management (cont.)
First, Mr. Moeller worked in the Port Huron Area School District for 31 years,
including serving as Superintendent of School from 1980 until 1997. Mr. J.
Stephen Armstrong is Senior Vice President of the Bank in charge of the
Commercial Banking Division since 1999. Mr. Armstrong has worked at Citizens
First since 1995, serving in several different lending positions. Mr. Randy J.
Cutler is Senior Vice President in charge of Retail Banking
68
and Branch Operations since 1985. Mr. Cutler joined the Bank in 1977. Mr.
Timothy D. Regan is also a Senior Vice President and is the Bank's controller
and chief financial officer. Mr. Regan has served as Senior Vice President since
1991 and has been employed with the Bank since 1988. The final member of the
Bank's senior management group is Mr. B. Scott Nill who is Vice President in
charge of Operations. Mr. Nill has served in the position since 1998. For seven
years prior to joining Citizens First, Mr. Nill was the chief executive officer
of I.M.P.A.C.T. corporation, which is a center for human resources.
The management of Citizens First have been successful in increasing the
Bank's deposit base and strengthening its market share, and in strengthen
lending activity, despite a highly competitive operating environment including
the presence of much larger financial institutions. During the past few years,
Citizens First has been able to increase its dollar level of retained earnings,
its net interest margin, reduce its overhead expenses, maintain a higher than
average allowance for loan losses to loans and strengthen its level of
noninterest income. Management has also been successful in controlling
nonperforming assets and classified loans, keeping them similar to the
comparable group and industry averages. Although net margin has decreased
recently, it is still above the industry average.
Overall, we believe the Bank to be professionally, knowledgeably and
efficiently managed, as are the comparable group institutions, based on their
performance ratios. It is our opinion that no adjustment to the pro forma
market value of the Corporation is warranted for management.
MARKETING OF THE ISSUE
The necessity to build a new issue discount into the stock price of a
converting thrift institution continues to prevail in recognition of uncertainty
among investors as a result of the thrift industry's dependence on interest rate
trends, recent volatility in the stock market, the downward trend in market
prices for financial institutions over the past year, the decrease in merger and
acquisition activity in the financial institution industry and the
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resultant decrease in pricing ratios and the presence of new competitors in the
financial institution industry such as investment firms, insurance companies,
mortgage companies, etc., resulting in increased pressure to attract retail
deposits at normal rates rather than premium rates. Recently converted
institutions seem to have borne much of the impact of that uncertainty,
reflected in much weaker subscription activity and in some instances the need to
extend subscription offerings and do community offerings.
We believe that a new issue discount applied to the price to book valuation
approach continues and is considered to be reasonable and necessary in the
pricing of the Corporation. We have made a downward adjustment to the
Corporation's pro forma market value in recognition of the new issue discount.
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VI. VALUATION METHODS
Historically, the most frequently used method for determining the pro forma
market value of common stock for thrift institutions by this firm has been the
price to book value ratio method, due to the volatility of earnings in the
thrift industry in the early to mid-1990s. As earnings in the thrift industry
improved in the last few years, however, more emphasis was been placed on the
price to earnings method in most conversions, but with the recent increase in
interest rates and the decline in the prices of financial institution stocks,
this valuation will focus on the correlation of both methods.
In recognition of the volatility and variance in earnings due to
fluctuations in interest rates, the continued differences in asset and liability
repricing and the frequent disparity in value between the price to book approach
and the price to earnings approach, a third valuation method, the price to net
assets method, has also been used. The price to assets method is used less
often for valuing ongoing institutions, but becomes more useful in valuing
converting institutions when the equity position and earnings performance of the
institutions under consideration are different.
In addition to the pro forma market value, we have defined a valuation
range with the minimum of the range being 85.0 percent of the pro forma market
value, the maximum of the range being 115.0 percent of the pro forma market
value, and a super maximum being 115.0 percent of the maximum. The pro forma
market value or appraised value will also be referred to as the "midpoint
value."
In applying each of the valuation methods, consideration was given to the
adjustments to the Bank's pro forma market value discussed in Section V. A
maximum downward adjustment was made for the marketing of the issue. Moderate
downward adjustments were made for the Bank's market area and financial
condition. Minimum downward adjustments were made for subscription interest and
dividend payments. No adjustments were made for
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Valuation Methods (cont.)
earnings performance, potential asset, loan and deposit growth, liquidity of the
Corporation's stock and the Bank's management.
PRICE TO BOOK VALUE METHOD
In the valuation of thrift institutions, the price to book value method
focuses on an institution's financial condition, and does not give as much
consideration to the institution's long term performance and value as measured
by earnings. Due to the earnings volatility of many thrift stocks, the price to
book value method is frequently used by investors who rely on an institution's
financial condition rather than earnings performance. This method, therefore,
is sometimes considered less meaningful for institutions that provide a
consistent earnings trend, but remains significant and reliable as a
confirmational and correlative analysis to the price to earnings and price to
assets approaches. It should be noted that the prescribed formulary computation
of value using the pro forma price to book value method returns a price to book
value ratio below market value.
Exhibit 49 shows the average and median price to book value ratios for the
comparable group which were 92.99 percent and 89.28 percent, respectively. The
total comparable group indicated a moderately wide range, from a low of 77.92
percent (Northeast PA Financial Corp.) to a high of 114.34 percent (Alliance
Bancorp). The comparable group had slightly higher average and median price to
tangible book value ratios of 99.72 percent and 95.20 percent, respectively,
with a high of 136.51 percent and a low of 77.92 percent. Excluding the low and
the high in the group, the price to book value range narrowed modestly from a
low of 78.58 percent to a high of 109.92 percent, while the range of price to
tangible book value ratio narrowed from a low of 78.89 percent to a high of
115.28 percent.
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Price to Book Value Method (cont.)
Taking into consideration all of the previously mentioned items in
conjunction with the adjustments made in Section V, we have determined a pro
forma price to book value ratio of 53.56 percent and a price to tangible book
value ratio of 53.65 percent at the midpoint. The price to book value ratio
increases from 48.82 percent at the minimum to 62.15 percent at the maximum as
adjusted, while the price to tangible book value ratio increases from 53.73
percent at the minimum to 62.23 percent at the maximum, as adjusted.
The Corporation's pro forma price to book value and price to tangible book
value ratios of 53.56 percent and 53.73 percent, respectively, are strongly
influenced by the Bank's financial condition and local market, as well as recent
prices of thrift stocks. Further, the Corporation's ratio of equity to assets
after conversion at the midpoint of the valuation range will be approximately
13.86 percent compared to 10.54 percent for the comparable group. Based on the
price to book value ratio and the Bank's total equity of $66,963,000 at August
31, 2000, the indicated pro forma market value of the Bank using this approach
is $62,470,301 at the midpoint (reference Exhibit 48).
PRICE TO EARNINGS METHOD
The focal point of this method is the determination of the earnings base to
be used and secondly, the determination of an appropriate price to earnings
multiple. The recent earnings position of Citizens First is displayed in
Exhibit 3, indicating after tax net earnings for the twelve months ended August
31, 2000, of $5,912,000, and in Exhibit 7 indicating the derivation of the
Bank's lower core or normalized earnings of $7,562,000 for that period. To
arrive at the pro forma market value of the Corporation by means of the price to
earnings method, we used the core earnings base of $7,562,000.
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Price to Earnings Method (cont.)
In determining the price to earnings multiple, we reviewed the range of
price to core earnings and price to net earnings multiples for the comparable
group and all publicly-traded thrifts. The average price to core earnings
multiple for the comparable group was 10.43, while the median was 10.42. The
average price to net earnings multiple was 10.39 and the median multiple was
9.97. The comparable group's price to core earnings multiple was lower than the
average of 12.75 times earnings for all publicly-traded, FDIC-insured thrifts,
and also lower than their median of 11.19. The range in the price to core
earnings multiple for the comparable group was from a low of 7.63 (FFW Corp.) to
a high of 13.43 (First Place Financial Corp.). The primary range in the price to
core earnings multiple for the comparable group, excluding the high and low
ranges, was from a low price to earnings multiple of 8.49 to a high of 13.30
times earnings for eight of the ten institutions in the group.
Consideration was given to the adjustments to the Corporation's pro forma
market value discussed in Section V. In recognition of these adjustments, we
have determined a price to core earnings multiple of 7.03 at the midpoint, based
on Citizens First's core earnings of $7,562,000 for twelve months ended August
31, 2000.
Based on the Bank's core earnings base of $7,562,000 (reference Exhibits 7
and 48), the pro forma market value of the Corporation using the price to
earnings method is $62,972,188 at the midpoint.
PRICE TO ASSETS METHOD
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The final valuation method is the price to assets method. This method is
not frequently used due to the fact that it does not incorporate an
institution's equity position or earnings performance. Additionally, the
prescribed formulary computation of value using the pro forma price to net
assets method does not recognize the runoff of deposits concurrently
Price to Assets Method (cont.)
allocated to the purchase of conversion stock, returning a pro forma price to
net assets ratio below its true level following conversion. Exhibit 49
indicates that the average price to assets ratio for the comparable group was
9.69 percent and the median was 9.18 percent. The range in the price to assets
ratios for the comparable group varied from a low of 7.88 percent (FFW Corp.) to
a high of 12.19 percent (Industrial Bancorp, Inc.). It narrows slightly with
the elimination of the two extremes in the group to a low of 7.93 percent and a
high of 11.54 percent.
Based on the adjustments made previously for Citizens First, it is our
opinion that an appropriate price to assets ratio for the Corporation is 7.45
percent at the midpoint, which ranges from a low of 6.38 percent at the minimum
to 9.65 percent at the maximum, as adjusted.
Based on the Bank's August 31, 2000, asset base of $794,428,000, the
indicated pro forma market value of the Corporation using the price to assets
method is $62,810,316 at the midpoint (reference Exhibit 48).
VALUATION CONCLUSION
Exhibit 54 provides a summary of the valuation premium or discount for each
of the valuation ranges when compared to the comparable group based on each of
the valuation
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approaches. At the midpoint value, the price to book value ratio of 53.56
percent for the Corporation represents a discount of 42.40 percent relative to
the comparable group and decreases to 33.16 percent at the maximum, as adjusted.
The price to core earnings multiple of 7.03 for the Corporation at the midpoint
value indicates a discount of 32.64 percent, decreasing to a discount of 15.71
percent at the super maximum. The price to assets ratio at the midpoint
represents a discount of 23.11 percent, decreasing to a discount of 0.47 percent
at the super maximum.
Valuation Conclusion (cont.)
It is our opinion that as of October 5, 2000, the pro forma market value of
the Corporation, inclusive of the shares to be issued to the foundation, is
$62,640,000 at the midpoint, representing 6,264,000 shares at $10.00 per share.
The foundation constitutes 8.0 percent of the midpoint of the subscription and
community offering of $58,000,000 or $4,640,000. The total of the stock to be
offered to the public, excluding the shares to be issued to the foundation, will
be 4,930,000 shares, 5,800,000 shares, 6,670,000 shares and 7,670,500 shares at
the minimum, midpoint, maximum and maximum, as adjusted, respectively. The
resulting gross proceeds of the subscription and community offering will,
therefore, be $49,300,000, $58,000,000, $66,700,000 and $79,705,000 at the
minimum, midpoint, maximum and maximum, as adjusted, respectively.
Based on the established regulatory valuation formula, a standard
conversion, exclusive of the contribution of stock to the foundation, would have
resulted in a midpoint value of $65,300,000, a price to book value ratio of
53.50 percent, a price to core earnings multiple of 7.09 times earnings and a
price to assets ratio of 7.69 percent.
Inclusive of the contribution of stock to the foundation, the pro forma
valuation range of the Corporation is from a minimum of $53,244,000 or 5,324,600
shares at $10.00 per share to a maximum of $72,036,000 or 7,203,600 shares at
$10.00 per share, with such range being defined as 15 percent below the
appraised value to 15 percent above the
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appraised value. The maximum, as adjusted, is $82,841,400 or 8,284,140 shares at
$10.00 per share (reference Exhibits 51 to 54).
Inclusive of the contribution of stock to the foundation, the appraised
value of Citizens First Bancorp, Inc. as of October 5, 2000, is $62,640,000 at
the midpoint.