EXHIBIT 13
FINANCIAL HIGHLIGHTS
The selected consolidated financial and other data of Citizens First set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of Citizens First and Notes thereto presented
elsewhere in this annual report.
<Table>
<Caption>
AT AT AT
DECEMBER 31, DECEMBER 31, MARCH 31,
2003 2002 2002 2001 2000
------------ ------------ ---------- ---------- ----------
(Dollars in thousands)
SELECTED CONSOLIDATED FINANCIAL DATA:
Total assets $1,094,260 $1,000,184 $ 946,356 $ 855,866 $ 741,570
Cash and cash equivalents 33,647 40,356 57,926 53,618 45,182
Loans, net 929,201 819,136 735,564 672,449 568,503
Securities available-for-sale 79,672 100,382 118,547 96,053 99,407
Deposits 748,531 671,830 634,014 581,281 601,008
FHLB advances 172,534 173,003 151,514 114,931 70,502
Total equity 158,187 148,155 151,440 149,721 63,259
Real estate owned, net 443 353 953 282 80
Total nonperforming assets 4,209 2,767 2,746 2,029 1,326
</Table>
<Table>
<Caption>
YEAR NINE MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
2003 2002 2002 2001 2000
------------ ------------ ---------- ---------- ----------
Total interest income $ 60,415 $ 46,954 $ 66,347 $ 60,517 $ 51,928
Total interest expense 23,307 20,129 30,691 34,112 27,063
---------- ---------- ---------- ---------- ----------
Net interest income 37,108 26,825 35,656 26,405 24,865
---------- ---------- ---------- ---------- ----------
Provision for loan losses 1,440 892 996 780 (483)
Net interest income
after provision
for loan losses 35,668 25,933 34,660 25,625 25,348
Noninterest income:
Net gain on sale of securities (46) 108 -- 89 --
Other 10,353 5,655 4,079 3,179 (314)
Noninterest expense 27,399 17,670 22,773 24,742 16,248
---------- ---------- ---------- ---------- ----------
Income before income taxes 18,576 14,026 15,966 4,151 8,786
Income taxes 6,255 4,842 5,418 965 2,880
Net income $ 12,321 $ 9,184 $ 10,548 $ 3,186 $ 5,906
</Table>
<Table>
<Caption>
YEAR NINE MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31 MARCH 31,
2003 2002 2002 2001 2000
------------ ------------ ------ ------ ------
PERFORMANCE RATIOS:
Average yield on interest-
earning assets 5.96% 6.52% 7.49% 7.78% 7.97%
Average rate paid on
interest-bearing
liabilities 2.78 3.38 4.22 4.77 4.44
Average interest rate spread 3.17 3.21 3.27 3.01 3.53
Net interest margin 3.66 3.77 4.02 3.40 3.82
Ratio of interest-earning assets to
interest-bearing liabilities 121.04 119.65 121.71 108.68 106.90
Net interest income after provision
for loan losses to noninterest
expense 130.18 146.76 152.20 103.57 156.01
Noninterest expense as a percent of
average assets 2.57 2.44 2.54 3.04 2.35
Per share earnings 1.58 1.14 1.23 N/A N/A
Dividends per share 0.34 0.24 0.16 N/A N/A
Return on average assets 1.15 1.26 1.16 0.39 0.85
Return on average equity 8.06 8.25 7.00 4.15 9.35
Ratio of average equity to
average assets 14.32 14.95 16.49 9.42 9.11
</Table>
<Table>
<Caption>
AT OR FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
2003 2002 2002 2001 2000
------------ ------------ ------ ---------- ------
(Dollars in thousands)
Leverage Capital Ratio 11.80 12.10 16.40 16.70 8.50
Risk-based capital ratio 15.80 19.50 22.00 24.40 13.10
ASSET QUALITY RATIOS:
Nonperforming loans as
a percent of total loans 0.47 0.29 0.24 0.26 0.22
Nonperforming assets as
a percent of total assets 0.40 0.28 0.29 0.21 0.18
Allowance for loan losses as a
percent of total loans 1.24 1.33 1.47 1.58 1.80
Allowance for loan losses as a
percent of nonperforming loans 309.72 459.07 614.61 598.40 839.57
Net loans charged-off to average
interest-earning loans 0.10 0.10 0.11 0.06 0.04
</Table>
[ASSET GROWTH RATE BAR GRAPH]
<Table>
<Caption>
Nine
Months
Year Ended Ended Year Ended
March 31, December 31, December 31,
2000 2001 2002 2002 2003 5YR
ASSET GROWTH RATE 14.84% 15.41% 10.57% 5.80% 9.41% 11.21%
</Table>
[RETURN ON AVERAGE ASSETS BAR GRAPH]
<Table>
<Caption>
Nine
Months
Year Ended Ended Year Ended
March 31, December 31, December 31,
2000 2001 2002 2002 2003 5YR
RETURN ON AVERAGE ASSETS 0.85% 0.39% 1.16% 0.94% 1.15% 0.90%
</Table>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL. Management's discussion and analysis of financial condition and results
of operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the Company's Consolidated Financial
Statements and accompanying Notes contained in this Annual Report to
Stockholders.
FORWARD-LOOKING STATEMENTS. The Company or the Bank may from time to time make
written or oral "forward-looking statements." These forward-looking statements
may be contained in this Annual Report to Stockholders, in the Company's Form
10-K filed with the Securities and Exchange Commission (the "SEC"), in other
filings with the SEC and in other communications by the Company and the Bank,
which are made in good faith pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements include, without limitation, statements with respect to anticipated
future operating and financial performance, including revenue creation, lending
origination, operating efficiencies, loan sales, charge-offs, loan loss
allowances and provisions, growth opportunities, interest rates, acquisition and
divestiture opportunities, capital and other expenditures and synergies,
efficiencies, cost savings and funding and other advantages expected to be
realized from various activities. The words, "may, "could," "should," "would,"
"will", "believe," "anticipate," "estimate," "expect," "intend," "plan,"
"project," "predict," "continue," and similar expressions are intended to
identify forward-looking statements.
Forward-looking statements include statements with respect to the Company's
beliefs, plans, strategies, objectives, goals, expectations, anticipations,
estimates or intentions that are subject to significant risks or uncertainties
or that are based on certain assumptions. Future results and the actual effect
of plans and strategies are inherently uncertain, and actual results could
differ materially from those anticipated in the forward-looking statements,
depending upon various important factors, risks or uncertainties. The following
factors, many of which are subject to change based on various other factors,
including factors beyond the Company's control, and other factors, including
others discussed in this Annual Report to Stockholders, in the Company's Form
10-K, other factors identified in the Company's other filings with the SEC, as
well as other factors identified by management from time to time, could have a
material adverse effect on the Company, the Bank and their subsidiaries and
their operations or cause their financial performance to differ materially from
the plans, objectives, expectations, estimates or intentions expressed in the
Company's or the Bank's forward-looking statements:
- - The strength of the United States economy in general and the strength
of the local economies in which the Company and the Bank conduct
operations which may be less favorable than expected and may result in,
among other things, a deterioration in the credit quality and value of
the Company's assets.
- - The economic impact of past and any future terrorist attacks, acts of
war or threats of war and the response of the United States to any of
these threats or attacks.
- - The effects of, and changes in, federal, state and local laws,
regulations, rules and policies including laws, regulations, rules and
policies affecting taxes, banking, securities, insurance and monetary
and financial matters.
- - The effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate and other policies of the Federal Reserve
Board and policies of the United States Treasury.
- - Inflation, interest rates, market and monetary fluctuations, including
the effects of changes in the rate of prepayments of the Bank's assets.
- - The quality or composition of the Bank's loan portfolio.
- - Demand for loan products and services.
- - Deposit flows.
- - The ability of the Company and the Bank to compete with other financial
institutions due to increases in competitive pressures in the financial
services sector.
- - The ability of the Company to obtain new customers and to retain
existing customers.
- - The timely development of, and acceptance of, products and services of
the Company and the Bank and the perceived overall value of these
products and services by users, including the features, pricing and
quality compared to competitors' products and services.
- - The willingness of users to substitute competitors' products and
services for the Company's and the Bank's products and services.
- - The Company's and the Bank's success in gaining regulatory approval of
their products and services, when required.
- - The impact of technological changes implemented by the Company and the
Bank and by other parties, including third party vendors, which may be
more difficult or more expensive than anticipated or which may have
unforeseen consequences to the Company and its customers. In this
regard, in October 2002, Citizens First entered into an agreement with
Fiserv Solutions, Inc. ("Fiserv") relating to Fiserv's ITI software
package. Citizens First believes that the Fiserv ITI software package,
together with planned upgrades to the Bank's PCs and data line
connectivity, should provide it with significant processing
improvements that it believes will allow enhanced customer service and
efficiencies within the Bank. There can be no assurance, however, that
the computer conversion will not be more difficult or expensive than
anticipated or have unforeseen consequences.
- - The ability of the Company to develop and maintain secure and reliable
electronic systems.
- - The ability of the Company to retain key executives and employees and
the difficulty that the Company may experience in replacing key
executives and employees in an effective manner.
- - Consumer spending and saving habits which may change in a manner that
adversely affects the Company's business.
- - Business combinations and the integration of acquired businesses which
may be more difficult or expensive than expected.
- - Unanticipated litigation or disputes and the costs, effects and
outcomes of existing or future litigation or disputes.
- - The effects of, and changes in, accounting principles, guidelines,
policies and practices, as may be adopted by state and federal
regulatory agencies and various accounting rulemakers.
- - The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
- - This list of important factors is not exclusive. These risks and
uncertainties should be considered in evaluating forward-looking
statements, and undue reliance should not be placed on these
statements. Neither the Company nor the Bank undertakes - and each
specifically disclaims any obligation - to update any forward-looking
statement, whether written or oral, that may be made from time to time
by or on behalf of the Company or the Bank or to release publicly the
result of any revisions that may be made to any forward-looking
statements, including revisions to reflect events or circumstances
after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
OPERATING STRATEGY. Citizens First is a community-oriented financial
institution, offering a wide range of deposit and loan products to its
customers. In recent years, Citizens First's strategy has been one of controlled
balance sheet growth and broader diversification of its loan products and loan
portfolio. In recent years, Citizens First has emphasized originating
residential mortgage loans, commercial and multi-family real estate loans,
construction loans, commercial loans, automobile loans, home equity loans and
lines of credit and a variety of consumer loans. It has also emphasized
increasing sources of noninterest income.
CRITICAL ACCOUNTING POLICIES
Management has established various accounting policies that govern how
accounting principles generally accepted in the United States of America are
used to prepare the Company's financial statements. The Company's significant
accounting policies are described in the Notes to the Consolidated Financial
Statements of this Annual Report to Stockholders. Certain accounting policies
require management to make estimates and assumptions about matters that are
highly uncertain and as to which different estimates and assumptions would have
a material impact on the carrying value of certain of the Company's assets and
liabilities, on the Company's net income and on the Company's overall financial
condition and results of operations. The estimates and assumptions management
uses are based on historical experience and other factors, which management
believes to be reasonable under the circumstances. Actual results could differ
significantly as a result of these estimates and assumptions, and different
estimates and assumptions could have a material impact on the carrying value of
certain of the Company's assets and liabilities, on the Company's net income and
on the Company's overall financial condition and results of operations for
future reporting periods. Management believes that the Company's "critical
accounting policies" relate to the Bank's allowance for loan losses and its
valuation of its mortgage servicing rights. These policies are described in more
detail below.
ALLOWANCE FOR LOAN LOSSES. Citizens First recognizes that losses will be
experienced from originating loans and that the risk of loss will vary with,
among other factors, the type of loan being made, the creditworthiness of the
borrower over the term of the loan, general economic conditions and, in the case
of a secured loan, the quality of the security for the loan. To reflect the
perceived risk associated with the Bank's loan portfolio, the Bank maintains an
allowance for loan losses to absorb potential losses from loans in its loan
portfolio. As losses are estimated to have occurred, management establishes a
provision for loan losses, which is then charged directly against earnings. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance.
The allowance for loan losses represents management's estimate of probable
losses based on information as of the date of the financial statements.
Management evaluates whether the Bank's loan loss allowance is adequate at least
quarterly by assessing the expected losses inherent in its loan portfolio.
Management first reviews perceived higher risk loans, such as commercial and
multi-family real estate loans and loans with significant balances, and
establishes an allowance for those loans. Second, management reviews loans that
have deteriorated below certain levels of credit risk, including impaired, or
likely uncollectible loans, and loans that have been classified as "watch list"
loans, and attributes a specified loan loss allowance to these reviewed loans.
For additional information regarding how management determines whether a loan is
impaired, or likely uncollectible, see Note 1 to the Company's Consolidated
Financial Statements. Third, an appropriate level of loan loss is then
determined for the remaining balance of the loan portfolio by applying varying
loan loss factors. Management then analyzes whether the combined loan loss
allowance is adequate by considering other factors that may have an impact on
the performance of the loan portfolio, such as trends in real estate and
collateral values, and adjusts the overall loan loss allowance.
No assurances can be given that Citizens First's level of allowance for loan
losses will be sufficient to cover future loan losses incurred by Citizens First
or that future adjustments to the allowance for loan losses will be unnecessary
if economic and other conditions differ substantially from the economic and
other conditions used by management to determine the current level of the
allowance for loan losses or if historical trends change. Nevertheless,
management believes that, based on information currently available, Citizens
First's allowance for loan losses is sufficient to cover losses inherent in its
loan portfolio at this time. In addition, it is uncertain whether various
regulatory agencies, as an integral part of their examination process and in
reviewing Citizens First's loan portfolio, will request that Citizens First
increase its allowance for loan losses. Citizens First believes, however, that
it has established its existing loan loss allowance in conformity with generally
accepted accounting principles. These agencies could, nevertheless, require
Citizens First to provide additions to the allowance for loan losses based upon
judgments of the agencies that are different from the judgments of management.
In the last few years, although the percentage of the loan loss allowance to
total loans has decreased, the Bank has increased the total amount of its
allowance for loan losses to a level that it believes is consistent with that of
other comparable financial institutions. Because the estimates and assumptions
underlying Citizens First's allowance for loan losses are inherently uncertain,
different estimates and assumptions could require a material increase in the
allowance for loan losses. Any material increase in the allowance for loan
losses could have a material adverse effect on Citizens First's net income and
results of operations.
VALUATION OF MORTGAGE SERVICING RIGHTS. The Bank routinely sells its originated
residential mortgage loans to investors, mainly Freddie Mac. Although Citizens
First sells the mortgage loans, it frequently retains the servicing rights, or
the rights to collect payments and otherwise service these loans, for an
administrative or servicing fee. The mortgage loans that the Bank services for
others are not included as assets in the Company's consolidated balance sheet.
Loans serviced for others were approximately $478.0 million and $322.0 million
at December 31, 2003 and December 31, 2002, respectively.
Citizens First's mortgage servicing rights relating to loans serviced for others
represent an asset of the Bank. This asset is initially capitalized and included
in other assets on the Company's consolidated balance sheet. The mortgage
servicing rights are then amortized against noninterest income in proportion to,
and over the period of, the estimated future net servicing income of the
underlying mortgage servicing rights. There are a number of factors, however,
that can affect the ultimate value of the mortgage servicing rights to the Bank,
including the estimated prepayment speed of the loan and the discount rate used
to present value the mortage servicing rights. For example, if the mortgage loan
is prepaid, the Bank will receive fewer servicing fees, meaning that the present
value of the mortgage servicing rights is less than the carrying value of those
rights on the Bank's balance sheet. Therefore, in an attempt to reflect an
accurate expected value to the Bank of the mortgage servicing rights, the Bank
receives a valuation of its mortgage servicing rights from an independent third
party. The independent third party's valuation of the mortgage servicing rights
is based on relevant characteristics of the Bank's loan servicing portfolio,
such as loan terms, interest rates and recent prepayment experience, as well as
current market interest rate levels, market forecasts and other economic
conditions. Based upon the independent third party's valuation of the Bank's
mortgage servicing rights, management then establishes a valuation allowance to
quantify the likely impairment of the
value of the mortgage servicing rights to the Bank. The estimates of prepayment
speeds and discount rates are inherently uncertain, and different estimates
could have a material impact on the Company's net income and results of
operations. The valuation allowance is evaluated and adjusted quarterly by
management to reflect changes in the fair value of the underlying mortgage
servicing rights based on market conditions.
The balances of the Bank's capitalized mortgage servicing rights, net of
valuation allowance, included in the Company's other assets at December 31, 2003
and December 31, 2002 were $3,820,000 and $1,939,000, respectively. These
balances approximate the fair value of the Bank's mortgage servicing rights at
these dates. The fair values of the Bank's mortgage servicing rights were
determined using annual constant prepayment speeds of 13.46% and 33.93% and
discount rates of 7.25% and 7.02% at December 31, 2003 and December 31, 2002,
respectively. (Constant prepayment speeds are a statistical measure of the
historical or expected prepayment of principal on a mortgage.) For further
discussion of the Bank's valuation allowance and valuation of mortgage servicing
rights, including a table setting forth the valuation allowances established by
management with regard to the Bank's mortgage servicing rights for the previous
three periods, see Note 6 to the Company's Consolidated Financial Statements. As
can be seen in that table, prepayments have decreased and discount rates have
increased over the past twelve months. As a result of the combined effect of
these conditions, the expected value of the Bank's mortgage servicing rights has
increased and management has, accordingly, decreased its valuation allowance for
the Bank's mortgage servicing rights.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2003 AND 2002
TOTAL ASSETS. Total assets increased $94.1 million, or 9.4%, to $1.1 billion at
December 31, 2003 from $1.0 billion at December 31, 2002, primarily due to:
- - a $110.1 million, or 13.4%, increase in loans, which is explained in
more detail below,
- - a $8.3 million, or 55.2%, increase in net premises and equipment, due
to the purchase and remodeling of the Bank's new Wadhams office,
additional capital improvements as a result of remodeling our other
Bank branches and the acquisition of additional land in the Bank's
market area,
- - a $427,000, or 27.4%, increase in loans held for sale, due to
differences in timing of loan sales,
- - a $236,000, or 2.6%, increase in Federal Home Loan Bank stock, due to
increased borrowings from the Federal Home Loan Bank of Indianapolis,
which, in turn, required an increased investment in Federal Home Loan
Bank stock, and
- - a $2.5 million, or 17.1%, increase in accrued interest and other
assets.
The increases in assets described above were partially offset by the following
decreases in assets at December 31, 2003, as compared to assets at December 31,
2002:
- - a $20.7 million, or 20.6%, net decrease in securities available for
sale, consisting primarily of:
o a $2.8 million decrease in United States government agency
securities, and
o a $16.5 million decrease in corporate securities, partially
offset by a $3.6 million increase in municipal bonds, and
- - a $6.7 million, or 16.5%, decrease in cash and cash equivalents
primarily due to:
o a $28.8 million decrease in interest bearing deposits in
other depository institutions partially offset by,
o a $19.5 million increase in cash and due from other
depository institutions, and
o a $2.2 million increase in Federal Funds sold.
These net decrease in securities available for sale was primarily due to the
sale of securities to fund loan growth. Similarly, the decrease in interest
bearing deposits in other depository institutions was mainly to fund loan
growth. Citizens First's net loans to assets ratio at December 31, 2003 was
84.9% compared to 81.9% at December 31, 2002, as a result of the $110.1 million
increase in loans referred to above. The increase in loans was a result of
Citizens First's operating strategy of controlled balance sheet growth and
consisted primarily of:
- - a $61.7 million, or 34.4%, increase in commercial real estate loans to
$241.1 million,
- - a $47.4 million, or 78.6%, increase in commercial loans to $107.7
million,
- - a $3.2 million, or 14.5%, increase in construction loans to $25.0
million,
- - a $12.6 million, or 17.4%, increase in home equity loans and lines of
credit to $85.4 million, and
- - a $16.7 million, or a 78.8%, increase in other consumer loans to $37.9
million.
The increase in commercial and commercial real estate loans was primarily due to
the development of new business relationships and growth of existing clients.
The increase in other consumer loans was a result of ongoing efforts to
emphasize growth in shorter term commercial and consumer loan products. These
loan increases were partially offset by the following decreases in loans at
December 31, 2003, as compared to at December 31, 2002:
- - a $2.0 million, or 3.3%, decrease in vehicle loans to $59.4 million,
and
- - a $28.4 million, or 6.9%, decrease in one- to four-family mortgage
loans to $386.5 million, due to an increased number of sales of loans
to third parties.
TOTAL LIABILITIES. Total liabilities increased $84.0 million, or 9.9%, from
$852.0 million at December 31, 2002 to $936.0 million at December 31, 2003. The
increase was primarily due to the following:
- - a $76.7 million, or 11.4%, increase in deposits from $671.8 million at
December 31, 2002 to $748.5 million at December 31, 2003, and
- - a $7.8 million, or 108.6%, increase in accrued interest and other
liabilities, due to a $9.0 million increase in fed funds borrowed.
These increases in liabilities were partially offset by:
- - a $469,000, or 0.3%, decrease in Federal Home Loan Bank advances from
$173.0 million at December 31, 2002 to $172.5 million at December 31,
2003 as a result of principal payments.
The overall increase in deposits were primarily invested in loans. The increases
in deposits were a result of Citizens First's operating strategy of controlled
balance sheet growth along with a greater emphasis on building relationships
with new and existing customers. The $76.7 million net increase in deposits at
December 31, 2003 compared to at December 31, 2002 was comprised of the
following components:
- - an increase in noninterest bearing deposits of $28.8 million, or
127.1%,
- - a decrease in NOW checking accounts of $24.0 million, or 24.7%,
- - an increase in passbook and savings deposits of $7.9 million, or 10.2%,
- - an increase in money market deposit accounts of $78.0 million, or
38.6%, and
- - a decrease in certificates of deposit of $14.0 million, or 5.2%, as a
result of low market rates, as discussed below.
The increase in the money market deposit accounts was primarily due to lower
overall rates in short-term accounts and certificates of deposit and to
growth in business deposit accounts, which resulted primarily from historically
low interest rates that have encouraged customers to move away from longer term,
lower fixed rate, certificates of deposit to more liquid money market type
accounts and our ongoing effort to attract and retain deposit relationships with
businesses throughout our market area.
QUALITY OF ASSETS. Non-performing loans were 0.34% of total assets at December
31, 2003, compared to 0.24% at December 31, 2002. Non-performing loans increased
$1.4 million, or 56.0%, to $3.8 million at December 31, 2003 from $2.4 million
at December 31, 2002. This increase in non-performing loans was primarily due to
a $1.4 million increase in non-performing real estate loans and a $230,000
increase in non-performing consumer loans as a result of poorer general economic
conditions, offset by a $270,000 decrease in non-performing commercial loans.
Non-performing assets, which includes not only non-performing loans, but also
real estate owned by the Bank after foreclosure, increased $1.4 million to $4.2
million, or 0.38% of total assets, at December 31, 2003, as compared to $2.8
million, or 0.28%, of total assets at December 31, 2002. This increase in
non-performing assets was due to the increase in non-performing loans described
above along with a nominal $90,000 increase in other real estate owned. The
allowance for loan losses was $11.6 million at December 31, 2003 and $11.1
million at December 31, 2002, or 1.24% of total loans and 309.7% of
non-performing loans at December 31, 2003, as compared to 1.33% of total loans
and 459.1% of non-performing loans at December 31, 2002. The Company's allowance
for loan losses is a critical accounting policy that involves estimates and
assumptions about matters that are highly uncertain. Use of a different amount
for the allowance could have a material impact on the Company's financial
statements. For more information on how the amount of this allowance is
determined, please see the caption "Critical Accounting Policies" in this
section "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
STOCKHOLDERS' EQUITY. Stockholders' equity increased $10.0 million from $148.2
million at December 31, 2002 to $158.2 million, as a result of the addition of
net income of $12.3 million and a $1.1 million increase due to the allocation of
ESOP shares, a $291,000 increase in accumulated other comprehensive income from
the unrealized gains or losses on securities and a $464,000 increase in deferred
compensation which represents deferred fees owed to members of the Board of
Directors. These increases were offset by a $1.4 million increase in treasury
shares and dividends of $2.7 million.
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 2003 AND THE
TWELVE MONTHS ENDED DECEMBER 31, 2002
The Company changed its fiscal year so that its fiscal year now ends on December
31st, rather than on March 31st. As a result, the Company has filed with the SEC
a transition report on Form 10-K for the nine months ended December 31, 2002,
and audited financial statements as of and for the nine months ended December
31, 2002 are included with the Company's audited Consolidated Financial
Statements. To facilitate understanding the Company's results of operations for
the twelve months ended December 31, 2003, however, the following table sets
forth the Company's audited results of operations for the twelve months ended
December 31, 2003 and the Company's unaudited results of operations for the
twelve months ended December 31, 2002:
<Table>
<Caption>
For the Twelve
Year Ended Months Ended
December 31, December 31,
2003 2002
------------ --------------
INTEREST INCOME (unaudited)
Loans, including fees $ 56,016 $ 56,240
Federal funds sold and Interest-bearing deposits 325 348
Securities:
Tax-exempt 485 495
Taxable 3,589 5,565
---------- ----------
Total interest income 60,415 62,648
INTEREST EXPENSE
Deposits 13,996 17,739
Federal Home Loan Bank advances 9,311 9,130
---------- ----------
Total interest expense 23,307 26,869
---------- ----------
NET INTEREST INCOME 37,108 35,779
PROVISION FOR LOAN LOSSES 1,440 1,141
---------- ----------
NET INTEREST INCOME, after provision for loan losses 35,668 34,638
NONINTEREST INCOME (LOSS)
Service charges and other fees 3,113 3,318
Loan servicing fees 1,090 587
Mortgage banking activities 4,961 2,264
Gain (Loss) on sale of investment securities (46) 108
Other 1,189 721
---------- ----------
Total noninterest income 10,307 6,998
NONINTEREST EXPENSES
Compensation and employee benefits 13,322 11,179
Office occupancy and equipment 4,237 3,372
Advertising and business promotion 1,228 804
Stationery, printing and supplies 859 1,571
Data processing 487 392
Deposit statement preparation and collections 689 751
Professional fees 1,418 1,213
Appraisal fees 916 861
Other 4,243 3,430
---------- ----------
Total noninterest expenses 27,399 23,573
---------- ----------
INCOME - Before federal income tax expense 18,576 18,063
Federal income tax expense 6,255 6,204
---------- ----------
NET INCOME $ 12,321 $ 11,859
========== ==========
BASIC EARNINGS PER COMMON SHARE $ 1.58 $ 1.46
========== ==========
DILUTED EARNINGS PER COMMON SHARE $ 1.57 $ 1.46
========== ==========
</Table>
NET INCOME. Net income increased $462,000, or 3.9%, for the year ended December
31, 2003 to $12.3 million as compared to $11.9 million for the twelve months
ended December 31, 2002, resulting in net earnings of $1.58 per share. The
increase in net income for the year was primarily due to a $1.3 million, or
3.7%, increase in net interest income (discussed below) and to a $3.3 million,
or 47.3%, increase in noninterest income, partially offset by a $3.8 million, or
16.2%, increase in noninterest expenses, which was primarily due to a $2.1
million, or 19.2% increase in compensation and employee benefits, a $865,000, or
25.7% increase in occupancy expenses and a $205,000, or 16.9%, increase in
professional fees, a $813,000, or 23.7%, increase in other noninterest expenses
along with a $424,000, or 52.7%, increase in advertising. Contributing to the
increase in noninterest income were a $2.7 million, or 119.1%, increase in
income from mortgage banking activities, a $503,000, or 85.7%,
increase in loan servicing fees and a $468,000, or 64.9%, increase in other
noninterest income. These increases are explained in more detail below.
NET INTEREST INCOME. Net interest income, before provision for loan loss,
increased by $1.3 million to $37.1 million for the year ended December 31, 2003,
from $35.8 million for the twelve months ended December 31, 2002. The increase
in net interest income, before provision for loan loss, consisted primarily of:
- - a $2.2 million, or 3.6%, decrease in total interest income to $60.4
million for the year ended December 31, 2003, from $62.6 million for
the twelve months ended December 31, 2002, which is explained in detail
below, offset by,
- - a $3.6 million, or 13.3%, decrease in total interest expense to $23.3
million for the year ended December 31, 2003, from $26.9 million for
the twelve months ended December 31, 2002, which is explained in detail
below.
The $2.2 million decrease in total interest income for the year ended December
31, 2003, compared to the twelve months ended December 31, 2002, was comprised
primarily of a $2.0 million, or 35.5%, decrease in interest income on taxable
securities, primarily due to a 167 basis point reduction in the average yield on
securities offset by a $15.8 million increase in the average balance.
Average interest earning assets increased $53.2 million primarily due to a $61.5
million, or 7.6%, increase in the average balance of loans, which occurred as a
result of the growth in deposits and the decrease in cash and cash equivalents.
The $3.6 million decrease in total interest expense for the year ended December
31, 2003, compared to the twelve months ended December 31, 2002, was comprised
primarily of a $3.7 million, or 21.1%, aggregate decrease in interest expense on
savings, NOW, MMDA and certificates of deposit accounts.
Earning asset yields have declined by approximately 56 basis points over the
last twelve months. Net interest margin continues to compress as existing loans
refinance and new loans, mainly commercial and consumer, that are indexed to
Prime are added to the portfolio. We believe that this compression could
continue until such time as these indexes begin to rise. The possibility exists
that rates on deposits could rise sooner than rates on loans further compressing
net interest margin.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased $299,000, or
26.2%, from $1.1 million for the twelve months ended December 31, 2002 to $1.4
million for the year ended December 31, 2003. The increased provision for loan
losses is the result of a $1.4 million increase in non-performing loans. As a
result of the increase in non-performing loans and net charge-offs, management
felt an increased provision was warranted. Despite the increased provision, the
loan loss allowance as a percentage of total loans decreased from 1.33% at
December 31, 2002 to 1.24% at December 31, 2003, and the allowance for loan
losses as a percentage of non-performing loans decreased from 459.1% at December
31, 2002 to 309.7% at December 31, 2003, in each case primarily as a result of
the significant increase in the size of the Bank's loan portfolio. Management
considers its allowance for loan losses to be one of its critical accounting
policies, meaning that in order to determine the allowance and provision for
loan losses, management must make estimates and assumptions about matters that
are highly uncertain and as to which different estimates and assumptions could
have a material impact on the Company's net income and on the Company's overall
financial condition and results of operations. For more information, see the
caption "Critical Accounting Policies" in this section of "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
NONINTEREST INCOME. Noninterest income increased by $3.3 million, or 47.3%, from
$7.0 million for the twelve months ended December 31, 2002 to $10.3 million for
the year ended December 31, 2003. The increase was primarily due to the
following changes between the twelve month period ended December 31, 2002 and
the year ended December 31, 2003:
a $2.7 million, or 119.1%, increase in mortgage banking activities, due to
increased sales of fixed rate one- to four-family loans, which occurred as a
result of an increased volume of refinancings. (The rights to service these
loans and the income associated with those rights were retained by Citizens
First.) The following factors contributed to the increased sale of loans from
the twelve months ended December 31, 2002 to the year ended December 31, 2003:
During the year ended December 31, 2003, the Bank originated $443.7 million of
one- to four-family residential mortgage loans, an increase of $96.6 million, or
27.8%, from $347.1 million of one-to four-family residential mortgage loans
originated by the Bank for the twelve months ended December 31, 2002.
At December 31, 2003, the Bank had $2.0 million of one- to four-family
residential mortgage loans held for sale, an increase of $427,000, or 27.4%,
from $1.6 million of one-to four-family residential mortgage loans held for sale
by the Bank at December 31, 2002,
- a $503,000, or 85.7%, increase in loan servicing fees due to the
increase in loans sold with servicing retained, and
- a $468,000, or 64.9%, increase in other noninterest income, partially
offset by,
- a $205,000, or 6.2%, decrease in service charges and other fees, and
- a $154,000, or 142.6%, decrease in gain on sale of securities.
As indicated above, increases during the period, much of the increase was due to
the large number of refinancings and subsequent sales of long term, fixed-rate
one- to four-family residential mortgage loans. Generally, many of the customers
that could have refinanced their loan during the period have done so. We do not
expect the number of refinancings and gains on sale that are included in line
item "Mortgage Banking Activities" subsequent to those refinancings to repeat to
the same extent in 2004. This possible reduction in noninterest income could
have a significant impact on earnings in future quarterly periods and in the
year ended December 31, 2004.
NONINTEREST EXPENSE. Noninterest expense increased $3.8 million, or 16.2%, to
$27.4 million for the year ended December 31, 2003, from $23.6 million for the
twelve months ended December 31, 2002, primarily due to the following:
- An increase of $2.1 million, or 19.2%, in compensation, payroll taxes
and employee benefit expenses, due to an increase in commissions to
lending personnel as a result of increased loan production volumes,
increased benefit costs and a 13.0% increase in the number of
employees,
- A $865,000, or 25.7%, increase in occupancy and equipment expense due
partially to additional branches and disposal of abandoned assets.
- a $424,000, or 52.7%, increase in advertising and business promotion
expense, due to increased advertising efforts by the Bank,
- a $813,000, or 23.7%, increase in other noninterest expenses.
These increases were partially offset by a $712,000, or 45.3%, decrease in
stationery, printing and supplies.
We continue to renovate the interiors of many of the branch offices and we have
begun to renovate the main office to make them more conducive to sales and
service. This investment, along with other ongoing investments in training, is
expected to increase office occupancy and other expenses in the near term.
INCOME TAXES. Federal income taxes for the year ended December 31, 2003 were
$6.3 million, an increase of $51,000, or 0.8%, from $6.3 million for the twelve
months ended December 31, 2002. The effective tax rates for 2003 and 2002 were
33.7% and 34.3%, respectively.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED MARCH 31, 2002 AND
2001 NET INCOME.
Net income increased $7.4 million, or 231.1%, for the fiscal year ended March
31, 2002 to $10.5 million resulting in net earnings of $1.23 per share. The
increase in net income for the fiscal year was primarily due to a 35.0% increase
in net interest margin and a $7.1 million contribution expense and an
accompanying reduction to the tax provision of $2.4 million in the prior period
due to the formation of Citizens First Foundation. Excluding the prior year
contribution, net income for the fiscal year would have increased $2.7 million,
or 34.5%, from $7.8 million to $10.5 million. Contributing to the increase was
811,000 or 24.8%, increase in non-interest income, primarily due to an increase
in service charges and other fees.
NET INTEREST INCOME. Net interest income before provision for loan losses
increased by $9.3 million, or 35.0%, to $35.7 million for 2002 from $26.4
million for 2001. Total interest income increased $5.8 million, or 9.6%, to
$66.3 million for 2002 from $60.5 million for 2001. Interest income on loans
increased $5.2 million primarily due to increases in the average balance in
loans but was offset partially by $3.4 million decrease in total interest
expense due to lower average market rates. Interest earning assets increased
$108.2 million primarily due to a $82.0 million, or 12.6%, increase in the
average balance of loans, and a $34.2 million, or 38.1%, increase in the average
balance of securities from funds invested as a result of the growth in deposits
and the increase in Federal Home Loan bank advances.
Total interest expense decreased $3.4 million, or 10.0%, to $30.7 million for
the fiscal year ended March 31, 2002 from $34.1 million for the fiscal year
ended March 31, 2001 due to an 55 basis point reduction in overall market
interest rates. This decrease was primarily the result of 11 interest rate
reductions over the period. A $45.7 million, or 12.5%, decrease in the average
balance of certificates of deposit combined with 74 basis point rate decrease
contributed $4.9 million of the $5.8 million reduction to retail deposit
expense. This was partially offset by a $2.4 million, or 42.1%, increase in
interest expense on Federal Home Loan Bank advances to $8.1 million for 2002
from $5.7 million in 2001. The increase in interest expense on Federal Home Loan
Bank advances was primarily due to a $40.3 million increase in the average
balance of Federal Home Loan Bank advances, offset by lower market interest
rates.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased $216,000, or
27.7%, from $780,000 for fiscal 2001 to $996,000 for fiscal 2002. The addition
to the allowance for loan losses for fiscal 2002 reflects management's
determination to maintain the overall loan loss allowance in consideration of
its applied methodology, the assessment of the composition of and trends in
non-accruing loans, the current fiscal year increase in net charge-offs and the
growth in the loan portfolio. Even though the increase in non-accruing one- to
four-family loans was offset by the better than anticipated performance of
commercial real estate, commercial and consumer loans, management felt the
increased provision was warranted considering the increased growth of those
types of loans, which, despite better than expected performance, bear a higher
degree of risk than one- to four-family loans. Despite the increased provision,
the loan loss allowance as a percentage of total loans decreased from 1.58% at
March 31, 2001 to 1.47% at March 31, 2002. The allowance for loan losses as a
percentage of nonperforming loans increased from 598.4% at March 31, 2001 to
614.6% at March 31, 2002.
Management considers its allowance for loan losses to be one of its critical
accounting policies, meaning that in order to determine the allowance and
provision for loan losses, management must make estimates and assumptions about
matters that are highly uncertain and as to which different estimates and
assumptions would have a material impact on the Company's net income and on the
Company's overall financial condition and results of operations. For more
information, see the caption "Critical Accounting Policies" in this section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
NONINTEREST INCOME. Noninterest income increased by $811,000, or 24.8%, from
$3.3 million in the fiscal year ended March 31, 2001 to $4.1 million for the
fiscal year ended March 31, 2002. The increase was primarily due to a $649,000,
or 40.0%, increase in service charges and other fees due to additional fees
charged to retail deposit accountholders as a result of a change to the fee
structure of retail deposit products. Income from mortgage banking activities
increased $340,000, or 103.0%, from $330,000 in the fiscal year ended March 31,
2001 to $670,000 in 2002 due to increased sales of fixed rate one- to
four-family loans as a result of increased refinancings.
NONINTEREST EXPENSE. Non-interest expense decreased $2.0 million, or 8.0%, from
$24.7 million for the fiscal year ended March 31, 2001 to $22.8 million for the
fiscal year ended March 31, 2002 primarily due to the $7.1 million contribution
expense in the prior period due to the formation of Citizens First Foundation at
the time of the conversion from a mutual savings bank to a stock savings bank.
Without the prior period contribution expense, noninterest expense would have
increased $5.0 million, or 27.4% from $17.7 million for fiscal 2001 to $22.8
million for fiscal 2002. Compensation and benefit expense increased $2.1
million, or 24.2%, primarily due to an addition of staff, an increase in
commissions to lending personnel due to increased loan volumes and the increased
cost for the ESOP due to a full year's accrual versus only one month for the
previous fiscal year and due to the higher share price of the Company's stock.
Professional fees increased $498,000, or 122.1%, due to the increased costs
associated with becoming a public company, other public reporting expenses, and
additional costs related to compliance with recent regulatory changes regarding
consumer privacy and the Bank's change in retail deposit products. Advertising
and business promotion expense increased $94,000, or 18.1%. The opening of a new
office in Lexington and the remodeling of our Marysville branch were among the
more visible steps we took this past fiscal year to better serve our market
area. Printing and supplies increased $329,000, or 28.7%, deposit statement
preparation increased $155,000, or 26.1% and appraisal fee expense increased
$359,000, or 74.3% due to increased loan application volume. Other non-interest
expenses increased $1.3 million, or 63.6%, primarily as a result of the
engagement of consultants to perform compensation reviews, operational
efficiency studies, a facilities review, and overall technology review. We also
plan to renovate the interiors of all our branches during 2002 to make them more
conducive to sales and service. This investment along with other upcoming
investments in training and a system-wide data processing upgrade could increase
office occupancy and other expenses in the near term.
INCOME TAXES. Income taxes for the fiscal year ended March 31, 2002 were $5.4
million, an increase of $4.5 million, or 461.5%, from $965,000 for the fiscal
year ended March 31, 2001. The effective tax rates for the fiscal year ended
March 31, 2002 and the fiscal year ended March 31, 2001 were 33.9% and 23.2%,
respectively. The lower effective tax rate in the fiscal year ended March 31,
2001 was primarily attributable to the reduction of a deferred tax asset
valuation allowance of $500,000. The valuation allowance was originally
established related to the utilization of a contribution deduction carry-forward
resulting from a contribution to a foundation in 1998. Under the Internal
Revenue Code, Citizens First may only deduct up to 10% of its consolidated
taxable income before the charitable contribution in any one-year. The excess of
the deductible amount is deductible over each of the five succeeding taxable
years, subject to a 10% limitation each year. The valuation allowance was
reversed based on estimates that the contribution deduction carry-forward are
expected to be fully utilized based on the increase in income resulting from the
proceeds received in the mutual to stock conversion.
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COST
The following table (000s omitted) presents certain information for the years
indicated regarding average balances of assets and liabilities, as well as the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and the resulting
average yields and costs. The yields and costs for the years indicated are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the years presented. Average balances were
derived from monthly balances.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
2003 2002
----------------------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
----------- ----------- ---- ----------- ----------- ----
INTEREST EARNING ASSETS:
Loans (1) $ 874,377 $ 56,016 6.41% $ 812,831 $ 56,240 6.92%
Investment securities (2) 97,519 3,706 3.80 104,059 5,565 5.35
FHLB Stock 9,219 368 3.99 8,305 348 4.19
Federal funds sold 2,513 25 0.99 -- -- --
Interest-bearing deposits 30,888 300 .97 36,119 495 1.37
----------- ----------- ---- ----------- ----------- ----
Total interest-earning assets 1,014,516 60,415 5.96 961,314 62,648 6.52
----------- ----------- ---- ----------- ----------- ----
Noninterest-earning assets 52,594 19,333
----------- -----------
Total assets $ 1,067,110 $ 980,647
=========== ===========
INTEREST-BEARING LIABILITIES:
Deposits:
Savings $ 73,351 $ 567 .77% $ 80,219 $ 767 0.96%
NOW 85,368 904 1.06 92,104 1,206 1.31
MMDA 240,685 3,808 1.58 182,745 3,968 2.17
Certificates of deposit 264,834 8,717 3.29 284,971 11,798 4.14
----------- ----------- ---- ----------- ----------- ----
Total interest earning deposits 664,238 13,996 2.11 640,039 17,739 2.77
FHLB advances and
other borrowings 173,896 9,311 5.35 163,367 9,130 5.59
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing liabilities 838,134 23,307 2.78 803,406 26,869 3.34
Non-interest earning deposits 65,325 20,648
Other noninterest-bearing
liabilities 10,789 9,955
----------- -----------
Total liabilities 914,248 834,009
Equity 152,862 146,638
----------- -----------
Total liabilities and equity $ 1,067,110 $ 980,647
=========== ===========
Net interest-earning assets $ 176,382 $ 157,908
=========== ===========
Net interest income $ 37,108 $ 35,779
=========== ===========
Interest rate spread (3)
3.18% 3.18%
Net interest margin as a percentage
of interest-earning assets (4)
3.66% 3.72%
Ratio of interest-earning assets
to interest-bearing liabilities
121.04% 119.65%
</Table>
<Table>
<Caption>
For the Twelve Months Ended March 31,
2002 2001
---- ----
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------- ----------- ------- ----------- ----------- --------
INTEREST EARNING ASSETS:
Loans (1): $ 733,097 $ 57,678 7.87% $ 651,084 $ 52,491 8.06%
Investment securities (2): 123,894 7,249 5.85 89,742 6,080 6.77
FHLB Stock 6,828 489 7.16 5,651 345 6.11
Federal funds sold -- -- -- 1,193 64 5.36
Interest-bearing deposits 22,103 931 4.21 30,056 1,537 5.11
----------- ----------- ---- ----------- ----------- ----
Total interest-earning assets 885,922 66,347 7.49 777,726 60,517 7.78
----------- ----------- ---- ----------- ----------- ----
Noninterest-earning assets 27,312 37,420
----------- -----------
Total assets $ 913,234 $ 815,146
=========== ===========
INTEREST-BEARING LIABILITIES:
Deposits:
Savings $ 79,401 $ 1,533 1.93% $ 89,418 $ 2,136 2.39%
NOW 73,099 1,359 1.86 71,453 1,440 2.02
MMDA 124,754 4,104 3.29 98,709 4,338 4.39
Certificates of deposit 320,013 15,562 4.86 365,663 20,471 5.60
----------- ----------- ---- ----------- ----------- ----
Total interest earning deposits 597,267 22,558 3.78 625,243 28,385 4.54
FHLB advances and other borrowings 130,645 8,133 6.23 90,348 5,725 6.34
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing liabilities 727,912 30,691 4.22 715,591 34,110 4.77
Non-interest earning deposits 24,812 17,567
Other noninterest-bearing
liabilities 9,929 5,196
----------- -----------
Total liabilities 762,653 738,354
Equity 150,581 76,792
----------- -----------
Total liabilities and equity $ 913,234 $ 815,146
=========== ===========
Net interest-earning assets $ 158,010 $ 62,135
=========== ===========
Net interest income $ 35,656 $ 26,407
=========== ===========
Interest rate spread (3) 3.27% 3.01%
Net interest margin as a percentage
of interest-earning assets (4) 4.02% 3.40%
Ratio of interest-earning assets
to interest-bearing liabilities 121.71% 108.68%
</Table>
(1) Balances are net of deferred loan origination costs, undisbursed proceeds of
construction loans in process, and include nonperforming loans.
(2) Includes investment securities available-for-sale and held-to-maturity.
(3) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected Citizens First's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); and (iii) the net change (the sum of the
prior columns). The changes attributable to the combined impact of volume and
rate have been allocated on a proportional basis between changes in rate and
volume. (000'S Omitted)
<Table>
<Caption>
Year Ended December 31, 2003 Year Ended March 31, 2002
Compared to Compared to
Year Ended December 31, 2002 Year Ended March 31, 2001
Increase (Decrease) Due to Increase (Decrease) Due to
Rate Volume Net Rate Volume Net
--------- --------- --------- --------- --------- ---------
INTEREST-EARNING ASSETS:
Loans $ (4,482) $ 4,258 $ (224) $ (1,425) $ 6,612 $ 5,187
Investment securities (1,509) (350) (1,859) (1,145) 2,314 1,169
FHLB stock (18) 38 20 72 72 144
Federal funds sold 25 -- 25 -- (64) (64)
Interest-earning deposits (123) (72) (195) (199) (407) (606)
--------- --------- --------- --------- --------- ---------
Total interest-earning assets (6,107) 3,874 (2,233) (2,697) 8,527 5,830
--------- --------- --------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
Deposits:
Savings (134) (66) (200) (364) (239) (603)
NOW (214) (88) (302) (114) 33 (81)
MMDA (1,418) 1,258 (160) (1,379) 1,145 (234)
Certificates of deposit (2,247) (834) (3,081) (2,353) (2,556) (4,909)
--------- --------- --------- --------- --------- ---------
Total deposits (4,013) 270 (3,743) (4,210) (1,617) (5,827)
FHLB advances and other borrowings (407) 588 181 (145) 2,553 2,408
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities (4,420) 858 (3,562) (4,355) 936 (3,419)
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net interest income $ (1,687) $ 3,016 $ 1,329 $ 1,658 $ 7,591 $ 9,249
========= ========= ========= ========= ========= =========
</Table>
Includes securities available-for-sale and held-to-maturity on a tax equivalent
basis.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Based on the following, Citizens First considers its liquidity and
capital resources sufficient to meet its outstanding short-term and long-term
needs.
Liquidity is the Company's ability to meet its current and future needs for
cash. Citizens First further defines liquidity as the ability to have funds
available, without incurring excessive cost, to respond to the needs of
depositors and borrowers and to satisfy its financial commitments, as well as
maintaining the flexibility to take advantage of investment opportunities. Many
factors affect a bank's ability to meet its liquidity needs, including variation
in the markets served, the bank's asset-liability mix, its reputation and credit
standing in the market and general economic conditions.
Citizens First's primary sources of funds consist of deposits, loan repayments,
payments of interest on loans, proceeds from the sale of loans originated for
sale, maturities and sales of investment securities and borrowings from the
Federal Home Loan Bank, cash on hand and cash on deposit. While maturities and
scheduled amortization of loans and securities are predictable sources of funds,
deposit flows, loan prepayments, and mortgage loan originations and sales are
greatly influenced by general interest rates, economic conditions and
competition. Additionally, dividends from the Bank may be a source of funding
for the Company. The Bank is subject to regulatory requirements regarding these
dividends. These regulatory requirements are further discussed in Note 12 to the
Company's Consolidated Financial Statements. Citizens First and the Company
primarily use their funds for the following:
- - To originate mortgages and other new loans,
- - To fund withdrawals of deposits and to pay interest on deposits,
- - To fund takedowns on loan commitments and letters of credit,
- - To invest in securities, including Federal Home Loan Bank stock,
- - To pay principal and interest on its borrowings, including interest on
Federal Home Loan Bank advances,
- - To fund any capital expenditures, which, for the upcoming fiscal year,
are expected to include renovation of the interiors of the remaining
branch offices that began in 2002,
- - To pay dividends to its shareholders, and
- - To fund repurchases of the Company's stock pursuant to common stock
repurchase plans approved by the Company's Board of Directors from time
to time, which repurchase plans are described in detail below.
Liquidity management is both a daily and long-term responsibility of management.
Citizens First adjusts its investments in liquid assets based upon management's
assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields
available on interest-earning assets and costs of interest-bearing liabilities,
and (4) the objectives of its asset/liability management program, which are to
balance and control the risks and financial position of Citizens First. Excess
liquid assets are invested generally in interest-earning overnight deposits and
short-and intermediate-term U. S. Government and agency obligations.
Citizens First's most liquid assets are cash and due from depository
institutions as well as securities maturing in one year or less. The levels of
these assets are dependent on Citizens First's operating, financing, lending and
investing activities during any given period. At December 31, 2003, cash and
deposits in other depository institutions totaled $33.6 million and
available-for-sale securities totaled $79.7 million. In addition, at December
31, 2003, Citizens First had the ability to borrow a total of approximately
$238.0 million from the Federal Home Loan Bank of Indianapolis. On that date,
Citizens First had advances outstanding from the Federal Home Loan Bank of
Indianapolis of $172.5 million.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
As disclosed in the Notes to the Consolidated Financial Statements, the Company
has certain obligations and commitments to make future payments under contracts.
At December 31, 2003, the aggregate contractual obligations and commitments are:
(000's Omitted)
<Table>
<Caption>
Payments Due by Period
----------------------------------------------------------------------
Less than 1 to 3 4 to 5 After 5
Contractual Obligations 1 Year Years Years Years Total
- ------------------------- ---------- ---------- ---------- ---------- ----------
Total Deposits $ 110,769 55,683 27,328 2,683 196,463
Long-Term Borrowings 32,325 62,459 63,851 13,899 172,534
Short-Term Borrowings 19,000 -- -- -- 19,000
Annual Rental/Purchase --
Commitments Under
Noncancelable
Leases/Contracts 1,826 119 123 -- 2,068
---------- ---------- ---------- ---------- ----------
Total 163,920 118,261 91,302 16,582 390,065
========== ========== ========== ========== ==========
</Table>
<Table>
<Caption>
Expiration by Period
----------------------------------------------------------------------
Less than 1 to 3 4 to 5 After 5
Other Commitments 1 Year Years Years Years Total
- ------------------------- ---------- ---------- ---------- ---------- ----------
Letters of Credit 5,397 -- -- -- 5,397
Commitments to
Extend Credit 212,024 -- -- -- 212,024
---------- ---------- ---------- ---------- ----------
Total 217,421 -- -- -- 217,421
========== ========== ========== ========== ==========
</Table>
OPERATING ACTIVITIES. Citizens First originates fixed-rate mortgage loans
conforming to Freddie Mac guidelines generally for sale in the secondary market.
The proceeds of these sales provide the Bank with funds for both additional
lending and liquidity to meet
its current obligations. Citizens First sold $325.0 million of fixed-rate
mortgage loans during the period ended December 31, 2003 and $188.0 million of
these loans during the nine months ended December 31, 2002.
INVESTING ACTIVITIES. The primary investing activities of Citizens First are the
origination of loans to be held for investment, the purchase and sale of
securities and capital expenditures. The following table shows those activities
engaged in by Citizens First during the period ended December 31, 2003 the nine
months ended December 31, 2002 and the fiscal year ended March 31 2002:
<Table>
<Caption>
For the Year For the Nine For the Year
Ended Months Ended Ended
December 31, 2003 December 31, 2002 March 31, 2002
------------------ ------------------ ------------------
Loan originations, exclusive of repayments $ 761,920 $ 534,784 $ 465,926
Maturities of securities 48,867 22,744 70,290
Sale of securities 25,990 6,963 35,040
Purchase of securities 53,964 12,070 128,623
</Table>
For the fiscal year ending December 31, 2004, upcoming capital expenditures are
expected to include renovation of the interiors of the remaining branch offices
that began in 2002 and purchases of land for future branch expansion.
FINANCING ACTIVITIES. Financing activities consist primarily of activity in
deposit accounts, Federal Home Loan Bank advances, payment of dividends to the
Company's shareholders and repurchase of the Company's stock pursuant to various
common stock repurchase programs approved by the Company's Board of Directors
from time to time. Citizens First experienced a net increase in total deposits
of $76.7 million for the year ended December 31, 2003 and a net increase in
total deposits of $37.8 million for the nine months ended December 31, 2002.
Deposit flows are affected by market interest rates, the interest rates and
products offered by Citizens First and its competitors and other factors.
Citizens First generally manages the pricing of its deposits to be competitive
with other local banks and to increase core deposit relationships. Occasionally,
Citizens First offers promotional rates on certain deposit products in order to
attract deposits.
During the year ended December 31, 2003 and the nine months ended December 31,
2002, Federal Home Loan Bank advances decreased $469,000 and increased $21.6
million, respectively. Federal Home Loan Bank advances are collateralized by
mortgage loans and investment securities under a blanket collateral agreement.
For additional information about Federal Home Loan Bank advances, see Note 8 to
the Company's Consolidated Financial Statements. The 2002 increase in Federal
Home Loan Bank advances were used to fund Citizens First's increase in its loan
portfolio.
At December 31, 2003, Citizens First had outstanding unfunded commitments to
originate loans or to refinance existing loans of $118.2 million, $48.1 million
of which had fixed interest rates. These loans are generally to be secured by
properties located in its market area. Citizens First anticipates that it will
have sufficient funds available to meet its current loan commitments. Loan
commitments have, in recent periods, been funded through cash and cash
equivalents, increased deposits, sales of loans and sales and maturities of
securities or through Federal Home Loan Bank borrowings. In addition,
certificates of deposit that are scheduled to mature in one year or less from
December 31, 2003 total $110.8 million. To the extent that Citizens First needs
to fund maturing certificates of deposit, they will also be funded through cash
and cash equivalents, increased deposits, sales of loans and sales and
maturities of securities or through Federal Home Loan Bank borrowings. Based on
past experience, however, management believes that a significant portion of
these certificates of deposit will remain with Citizens First.
During the year ended December 31, 2003 and the nine months ended December 31,
2002, dividends were paid to shareholders in the amounts of $2.7 million and
$1.9 million, respectively. The Company intends to continue to pay regular
quarterly dividends. The declaration and payment of dividends, however, are
subject to the discretion of the Board of Directors and to compliance
requirements under applicable law. For additional information, see Note 12 to
the Company's Consolidated Financial Statements. Determination of the timing and
amount of future dividends, if any, will depend upon our results of operations,
financial condition, cash requirements, future business prospects, general
business conditions and other factors that the Board of Directors may deem
relevant. At this time, the Company does not believe that there are any
restrictions that would currently materially limit the Company's ability to pay
dividends or that the Company believes are likely to limit materially the future
payment of dividends on its common stock.
On September 26, 2002, the Company's Board of Directors approved a plan to
repurchase up to 428,701, or 5%, of its outstanding shares of its common stock.
Under the common stock repurchase plan, the Company may purchase shares of its
common stock in the open market at prevailing prices or in privately negotiated
transactions from time to time depending upon market conditions and other
factors. As of December 31, 2003, the Company had repurchased 124,900 shares of
its common stock pursuant to this repurchase plan
at a weighted average price of $20.35 per share. In addition, by the end of July
2002, the Company announced that it had completed the repurchase of 476,338
shares of its outstanding common stock, at an average price of $20.72 per share
pursuant to another repurchase program. This repurchase program was in addition
to a prior repurchase program completed in December 2001, pursuant to which the
Company repurchased 476,388 shares of its outstanding common stock, at an
average price of $15.66 per share. Repurchased shares are held in treasury and
may be used in connection with employee benefits and other general corporate
purposes. Management does not believe that these past purchases have had, nor
are future purchases expected to have, a significant impact on the Company's
liquidity. For more information on the Company's stock repurchase programs, see
Note 15 to the Company's Consolidated Financial Statements.
REGULATORY CAPITAL REQUIREMENTS. Citizens First is subject to various regulatory
capital requirements administered by the Federal Deposit Insurance Corporation,
including a risk-based capital measure. The risk-based capital guidelines
include both a definition of capital and a framework for calculating
risk-weighted assets by assigning balance sheet assets and off-balance sheet
items to broad risk categories. At December 31, 2003, Citizens First exceeded
all of its regulatory capital requirements. Citizens First is considered "well
capitalized" under regulatory guidelines. See Note 11 to the Company's
Consolidated Financial Statements.
IMPACT OF NEW ACCOUNTING STANDARDS. In April 2003, the FASB issued SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
This Statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain embedded derivatives, and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This Statement amends SFAS No. 133 to reflect the decisions
made as part of the Derivatives Implementation Group (DIG) and in other FASB
projects or deliberations. SFAS No. 149 is effective for contracts entered into
or modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. Adoption of the Standard did not have a material effect on the
Company's Condensed Consolidated Financial Statements.
AICPA Statement of Position 03-3, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer (SOP 03-3), addresses the accounting for
differences between contractual cash flows and cash flows expected to be
collected from the initial investment in loans acquired in a transfer if those
differences are attributable, at least in part, to credit quality. It includes
loans acquired in purchase business combinations and does not apply to loans
originated by the entity. The SOP prohibits carrying over or creation of
valuation allowances in the initial accounting for loans acquired in a
transfer. It is effective for loans acquired in fiscal years beginning after
December 15, 2004. The effect of this new guidance on the consolidated
financial statements will depend on future acquisition activity, thus, its
impact is not readily determinable.
EFFECT OF INFLATION AND CHANGING PRICES. The Company's Consolidated Financial
Statements and related financial data presented have been prepared in accordance
with generally accepted accounting principles in the United States of America,
which require the measurement of financial position and operating results in
terms of historical dollars, without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Bank's operations and in increased loan
amounts and in increased interest rates (which must include a real rate of
return and an additional amount to reflect expected inflation over the term of
the loan). Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates do
not necessarily move in the same direction or to the same extent as the prices
of goods and services.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS QUALITATIVE ASPECTS OF
MARKET RISK. Citizens First's primary market risk exposure is interest rate
risk. Sudden fluctuations in market interest rates are inherently uncertain and
could have a negative impact on the earnings of Citizens First to the extent
that the interest rates on assets and liabilities do not change at the same
speed, to the same extent or on the same basis. For example, Citizens First's
assets include a large number of fixed-rate mortgage loans. As a result, during
periods of rising interest rates, there is a risk that Citizens First's interest
expense will increase faster than its interest income.
Citizens First's principal objectives regarding interest rate risk management
are to evaluate regularly the interest rate risk inherent in certain balance
sheet accounts, to determine the level of risk appropriate given Citizens
First's financial condition and outlook, operating environment, capital and
liquidity requirements and performance objectives and to manage interest rate
risk consistent with the Bank's Board of Directors' approved guidelines.
Citizens First has an Asset/Liability Management Committee that is responsible
for accomplishing the principal objectives of interest rate risk management. The
Committee regularly reviews the Bank's guidelines and strategies affecting the
Bank's asset/liability management related activities to determine if they are
adequate based on estimated market risk sensitivity, policy limits set by the
Bank's Board and overall market interest rate levels and trends. The Committee
is composed of members of management and the Bank's Board of Directors and
regularly meets to review the Bank's asset/liability mix. It also reports
trends, interest rate risk position and results of current interest rate risk
management strategies and recommends any changes to strategies to the Board of
Directors quarterly. In recent years, Citizens First has used the following
strategies to manage interest rate risk: (1) emphasizing the origination of
adjustable-rate loans and the sale of longer-term, fixed-rate loans; (2)
emphasizing shorter term consumer loans; (3) maintaining a
high quality portfolio of short to intermediate term securities; (4) maintaining
high levels of liquidity; and (5) using Federal Home Loan Bank advances to
better structure the maturities of its interest rate sensitive liabilities.
Adverse market interest rate changes between the time that a customer receives a
rate-lock commitment on a mortgage and when the fully funded mortgage loan is
sold to an investor can erode the value of that mortgage. Citizens First enters
into forward sales contracts in order to mitigate this particular interest rate
risk. Citizens First accepts credit risk in forward sales contracts should the
other party default, in which case Citizens First would be compelled to sell the
mortgages to another party at the current market price. Therefore, if market
interest rates increased from the date of the forward sales contract and the
other party defaulted, Citizens First would most likely have to sell the
mortgage to another party at a lower price, which would reduce earnings or
create losses on this mortgage. More recently, Citizens First has used some of
its excess liquidity to increase its loan and securities portfolios. As
liquidity is reduced, Citizens First's sensitivity to interest rate movements is
expected to increase.
QUANTITATIVE ASPECTS OF MARKET RISK. Citizens First uses a simulation model
based on discounted cash flows to measure the potential impact on its net
interest income of hypothetical changes in market interest rates. The model
forecasts the Bank's net interest income for the next twelve months assuming
that there are no changes in interest rates or the mix of assets and liabilities
on the balance sheet from the end of the prior period. After this initial
forecast, the model subjects the balance sheet to instantaneous and sustained
rate changes of 100 and 200 basis points to the treasury yield curve. In order
to determine the possible effect of the rate changes, the model uses various
assumptions. Among others, these assumptions include assumptions regarding the
following:
- - the shape of the yield curve;
- - the pricing characteristics of and pricing decisions regarding loans
based on previous rates charged by the Bank;
- - changes in deposits and borrowings based on previous rates charged by
the Bank and other competitive conditions;
- - reinvestments of cash flows from assets and liabilities based on
current market interest rates;
- - the lack of any changes in the mix of assets and liabilities on the
balance sheet;
- - the degree to which certain assets and liabilities with similar
maturities or periods to repricing react to changes in market interest
rates based on particular characteristics of those assets and
liabilities;
- - expected prepayment rates on loans and investments based on industry
standards and the current interest rate environment;
- - certificates of deposit and other deposit flows based on expected
maturity dates; and
- - expected growth based on the Bank's projections.
The table below sets forth, as of December 31, 2003, estimated net interest
income and the estimated changes in Citizens First's net interest income for the
next twelve month period that could occur as a result of instantaneous changes
in market interest rates of 100 and 200 basis points:
<Table>
<Caption>
Estimated Change in Annual Net Interest Income
At December 31, 2003 (Dollars in thousands)
Increase/(Decrease) in Market Interest -----------------------------------------------
Rates in Basis Points (Rate Shock) Amount $ Change % Change
- ---------------------------------------- ------------ ------------ ------------
200 $ 42,122 $ 3,051 7.81%
100 40,518 1,447 3.70
Static 39,071 -- --
-100 37,867 (1,204) (3.08)
-200 36,962 (2,109) (5.40)
</Table>
The above table indicates that in the event of a sudden and sustained decline in
prevailing market interest rates, Citizens First's net interest income would be
expected to decrease.
As noted above, computation of the prospective effect of hypothetical interest
rate changes is based on a number of assumptions. The calculation of the
interest rate sensitivity of the Company could vary significantly if different
assumptions were used, or if the Company's response to changes in interest rates
included changes in the mix of assets and liabilities in its balance sheet.
Other shortcomings also exist in the table. These shortcomings include the
following, among others:
- - Although certain assets may have similar maturities or repricing
characteristics, they may react in different degrees to changes in
interest rates.
- - The interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while
interest rates on other types of assets and liabilities may lag behind
changes in market interest rates.
- - Certain assets, such as adjustable-rate, residential mortgage loans,
have features that restrict changes in interest rates on a short-term
basis and over the life of the asset.
- - In the event of a change in interest rates, expected rates of
repayments on loans and early withdrawals from time deposits could
deviate significantly from those assumed in calculating the table.
- - If interest rates increased, it is also possible that the increased
mortgage payments required of certain borrowers could result in an
increase in delinquencies and defaults.
- - Changes in interest rates could also affect the volume and
profitability of the Bank's lending operations.
As a result of these and other shortcomings in the model determining the
prospective effects of interest rate changes, the computations in the table
should not be relied upon as indicative of actual results in the event of
changes in market interest rates. Further, the computations do not reflect any
actions that management may undertake to respond to changes in interest rates.
The notional and estimated fair value of the Bank's forward sales contracts used
to manage risk positions associated with residential mortgage loans were as
follows:
<Table>
<Caption>
Notional Estimated
Amount Fair Value
------------ ------------
(Dollars in thousands)
December 31, 2003 $ 5,753 $ 5
December 31, 2002 $ 25,700 $ 32
</Table>
Forward sales contracts as of December 31, 2003 have settlement dates of less
than 90 days. The weighted average settlement interest rate for these contracts
was 5.95%.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market under the
symbol "CTZN". As of March 1, 2004, the Company had approximately 1,076 holders
of record. The following table sets forth, for the quarters indicated, the high
and low bid information the common stock and the dividends paid. The Company's
common stock began trading on March 7, 2001. The Company is subject to the
requirements of Delaware law, which generally limits dividends to an amount
equal to the excess of the net assets of the Company (the amount by which total
assets exceed total liabilities) over its statutory capital or, if there is no
excess, to its net profits for the current and/or immediately preceding fiscal
year.
<Table>
<Caption>
For the Twelve Months Ended December 31, 2003
---------------------------------------------------------------
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
------------ ------------ ------------ ------------
High $ 24.47 $ 22.14 $ 22.80 $ 22.00
Low $ 20.73 $ 19.69 $ 19.40 $ 18.34
Dividend Paid $ 0.09 $ 0.09 $ 0.08 $ 0.08
</Table>
<Table>
<Caption>
For the Nine Months Ended December 31, 2002
---------------------------------------------------------------
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
------------ ------------ ----------- ------------
High N/A $ 21.96 $ 22.92 $ 23.33
Low N/A $ 21.76 $ 22.18 $ 22.23
Dividend Paid N/A $ 0.08 $ 0.08 $ 0.08
</Table>
FINANCIALS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS page 66
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets page 68
Statements of Income page 69
Statements of Changes in Stockholders' Equity page 70
Statements of Cash Flows page 71
Notes to Consolidated Financial Statements page 72-93
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Citizens First Bancorp, Inc. and Subsidiary
Port Huron, Michigan
We have audited the accompanying consolidated balance sheet of Citizens First
Bancorp, Inc. and subsidiary as of December 31, 2003, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Citizens First
Bancorp, Inc. and subsidiary as of December 31, 2003, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/BDO Seidman, LLP
Grand Rapids, Michigan
March 12, 2004
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Citizens First Bancorp, Inc. and Subsidiary
Port Huron, Michigan
We have audited the accompanying consolidated balance sheet of Citizens First
Bancorp, Inc. and subsidiary as of December 31, 2002 and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the nine months ended December 31, 2002 and the year ended March 31,
2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Citizens First Bancorp, Inc. and subsidiary as of December 31, 2002 and the
results of their operations and their cash flows for the nine months ended
December 31, 2002 and the year ended March 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
/s/Plante & Moran PLLC
Auburn Hills, Michigan
February 13, 2003
CONSOLIDATED BALANCE SHEETS (000S OMITTED)
<Table>
<Caption>
December 31, December 31,
2003 2002
--------------- ---------------
ASSETS
CASH AND CASH EQUIVALENTS
Cash and due from depository institutions $ 30,426 $ 10,893
Federal funds sold 2,165 --
Interest-bearing deposits in other depository institutions 1,056 29,463
--------------- ---------------
Total cash and cash equivalents 33,647 40,356
Securities available for sale, at fair value (Note 2) 79,672 100,382
Federal Home Loan Bank stock, at cost 9,416 9,180
Loans held for sale (Note 3) 1,984 1,557
Loans, less allowance for loan losses of $11,664 and $11,082 (Note 4) 929,201 819,136
Premises and equipment (Note 5) 23,268 14,989
Accrued interest income and other assets (Notes 6 and 9) 17,072 14,584
--------------- ---------------
Total assets $ 1,094,260 $ 1,000,184
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 51,498 $ 22,675
Interest-bearing (Note 7) 697,033 649,155
--------------- ---------------
Total deposits 748,531 671,830
Federal Home Loan Bank advances (Note 8) 172,534 173,003
Accrued interest expense and other liabilities (Note 10) 15,008 7,196
--------------- ---------------
Total liabilities 936,073 852,029
COMMITMENTS AND CONTINGENCIES (Notes 10 and 13) -- --
STOCKHOLDERS' EQUITY (Notes 11, 12, 15 and 16)
Preferred stock - $.01 par value; Authorized - 1,000,000 shares;
No shares issued and outstanding -- --
Common stock - $.01 par value; Authorized - 20,000,000 shares;
Issued - 9,526,761 shares 95 95
Additional paid-in capital 92,911 92,528
Retained earnings 92,684 83,044
Accumulated other comprehensive income 613 322
Treasury stock, at cost (1,206,517 and 1,136,820 shares) (21,787) (20,342)
Deferred compensation obligation (Note 10) 2,054 1,590
Unearned compensation - ESOP (Note 10) (8,383) (9,082)
--------------- ---------------
Total stockholders' equity 158,187 148,155
--------------- ---------------
Total liabilities and stockholders' equity $ 1,094,260 $ 1,000,184
=============== ===============
</Table>
CONSOLIDATED STATEMENTS OF INCOME (000'S OMITTED EXCEPT PER SHARE DATA)
<Table>
<Caption>
Nine
Year Ended Months Ended Year Ended
December 31, December 31, March 31,
2003 2002 2002
--------------- --------------- ---------------
INTEREST INCOME
Loans, including fees $ 56,016 $ 42,597 $ 57,678
Federal funds sold and Interest-bearing deposits 325 242 931
Securities:
Tax-exempt 485 373 489
Taxable 3,589 3,742 7,249
--------------- --------------- ---------------
Total interest income 60,415 46,954 66,347
INTEREST EXPENSE
Deposits 13,996 13,172 22,558
Federal Home Loan Bank advances 9,311 6,957 8,133
--------------- --------------- ---------------
Total interest expense 23,307 20,129 30,691
--------------- --------------- ---------------
NET INTEREST INCOME 37,108 26,825 35,656
PROVISION FOR LOAN LOSSES (Note 4) 1,440 892 996
--------------- --------------- ---------------
NET INTEREST INCOME, after provision for loan losses 35,668 25,933 34,660
NONINTEREST INCOME (LOSS)
Service charges and other fees 3,113 2,551 2,271
Loan servicing fees 1,090 440 626
Mortgage banking activities 4,961 2,045 670
Gain (loss) on sale of investment securities (46) 108 --
Other 1,189 619 512
--------------- --------------- ---------------
Total noninterest income 10,307 5,763 4,079
NONINTEREST EXPENSES
Compensation and employee benefits (Note 10) 13,322 8,284 10,847
Office occupancy and equipment 4,237 2,510 3,529
Advertising and business promotion 1,228 641 613
Stationary, printing and supplies 859 1,220 1,476
Data processing 487 272 444
Deposit statement preparation and collections 689 555 750
Professional fees 1,418 930 906
Appraisal fees 916 722 842
Other 4,243 2,536 3,366
--------------- --------------- ---------------
Total noninterest expenses 27,399 17,670 22,773
--------------- --------------- ---------------
INCOME - Before federal income tax expense 18,576 14,026 15,966
Federal income tax expense (Note 9) 6,255 4,842 5,418
--------------- --------------- ---------------
NET INCOME $ 12,321 $ 9,184 $ 10,548
=============== =============== ===============
BASIC EARNINGS PER COMMON SHARE $ 1.58 $ 1.14 $ 1.23
=============== =============== ===============
DILUTED EARNINGS PER COMMON SHARE $ 1.57 $ 1.14 $ 1.23
=============== =============== ===============
</Table>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (000'S OMITTED EXCEPT
PER SHARE DATA)
<Table>
<Caption>
Accumulated
Additional Other Deferred Unearned
Common Paid-in Retained Comprehensive Treasury Compensation Compensation-
Stock Capital Earnings Income(Loss) Stock Obligation ESOP Total
------- ------------ -------- ------------- --------- ------------ ------------ ---------
BALANCE - April 1, 2001 $ 95 $ 92,111 $ 66,605 $ 1,389 $ (567) $ 567 $ (10,479) $ 149,721
Allocation of ESOP shares -- 99 -- -- -- -- 699 798
Purchase of treasury stock
(515,159 shares) -- -- -- -- (8,049) -- -- (8,049)
Deferred compensation -- -- -- -- -- 587 -- 587
Dividends paid ($0.16 per share) -- -- (1,369) -- -- -- -- (1,369)
Comprehensive income: --
Net income -- -- 10,548 -- -- -- -- 10,548
Change in net unrealized gain
on securities available for
sale - Net of tax effect of
$(410) -- -- -- (796) -- -- -- (796)
---------
Total comprehensive income -- -- -- -- -- -- -- 9,752
------- ------------ -------- ------------- --------- ------------ ------------ ---------
BALANCE - March 31, 2002 95 92,210 75,784 593 (8,616) 1,154 (9,780) 151,440
------- ------------ -------- ------------- --------- ------------ ------------ ---------
Allocation of ESOP shares -- 318 -- -- -- -- 698 1,016
Purchase of treasury stock
(546,976 shares) -- -- -- -- (11,726) -- -- (11,726)
Deferred compensation -- -- -- -- -- 436 -- 436
Dividends paid ($0.24 per share) -- -- (1,924) -- -- -- -- (1,924)
Comprehensive income: --
Net income -- -- 9,184 -- -- -- -- 9,184
Change in net unrealized gain
on securities available for
sale - Net of tax effect of
$(140) -- -- -- (271) -- -- -- (271)
---------
Total comprehensive income -- -- -- -- -- -- -- 8,913
------- ------------ -------- ------------- --------- ------------ ------------ ---------
BALANCE - December 31, 2002 95 92,528 83,044 322 (20,342) 1,590 (9,082) 148,155
------- ------------ -------- ------------- --------- ------------ ------------ ---------
Allocation of ESOP shares -- 383 -- -- -- -- 699 1,082
Purchase of treasury stock
(69,697 shares) -- -- -- -- (1,445) -- -- (1,445)
Deferred compensation -- -- -- -- -- 464 -- 464
Dividends paid ($0.34 per share) -- -- (2,681) -- -- -- -- (2,681)
Comprehensive income: --
Net income -- -- 12,321 -- -- -- -- 12,321
Change in net unrealized gain
on securities available for
sale - Net of tax effect of
$150 -- -- -- 291 -- -- -- 291
---------
Total comprehensive income -- -- -- -- -- -- -- 12,612
------- ------------ -------- ------------- --------- ------------ ------------ ---------
BALANCE - December 31, 2003 $ 95 $ 92,911 $ 92,684 $ 613 $ (21,787) $ 2,054 $ (8,383) $ 158,187
======= ============ ======== ============= ========= ============ ============ =========
</Table>
CONSOLIDATED STATEMENTS OF CASH FLOWS (000S OMITTED)
<Table>
<Caption>
NINE
YEAR ENDED MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
2003 2002 2002
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12,321 $ 9,184 $ 10,548
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for deferred income taxes 617 (216) 420
Provision for loan losses 1,440 892 996
Deferred compensation 464 436 587
Depreciation 1,320 819 1,237
(Accretion) amortization 213 225 (407)
Proceeds from sale of mortgage loans held for sale 324,960 188,042 191,429
Origination of mortgage loans held for sale (322,407) (187,268) (187,945)
Gain on sale of mortgage loans (2,980) (2,205) (1,646)
(Gain) loss on sale of investment securities 46 (108) --
ESOP Expense 1,082 1,016 798
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable and other assets (3,255) 2,460 1,069
Increase (decrease) in accrued interest payable and other liabilities 7,812 (2,291) (1,973)
--------------- --------------- ---------------
Net cash provided by operating activities 21,633 10,986 15,113
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 48,867 22,744 70,290
Proceeds from sale of securities available for sale 25,990 6,963 35,040
Purchase of securities available for sale (53,964) (12,070) (128,623)
Purchase of FHLB stock (236) (1,675) (1,355)
Net increase in loans (111,505) (84,464) (64,111)
Purchases of premises and equipment (9,600) (5,808) (1,845)
--------------- --------------- ---------------
Net cash used in investing activities (100,448) (74,310) (90,604)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 76,701 37,816 52,733
Repayment of FHLB advances (8,469) (23,412) (34,801)
Proceeds from FHLB advances 8,000 45,000 71,285
Purchase of treasury stock (1,445) (11,726) (8,049)
Payment of dividends (2,681) (1,924) (1,369)
--------------- --------------- ---------------
Net cash provided by financing activities 72,106 45,754 79,799
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,709) (17,570) 4,308
CASH AND CASH EQUIVALENTS - Beginning of period 40,356 57,926 53,618
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS - End of period $ 33,647 $ 40,356 $ 57,926
=============== =============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION - Cash paid for
Interest $ 23,508 $ 20,355 $ 31,692
Federal income taxes 4,995 4,450 4,420
</Table>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION - Citizens First Bancorp,
Inc. (the "Company") is a Delaware Corporation and the holding company for
Citizens First Savings Bank (the "Bank"), a state-chartered savings bank
headquartered in Port Huron, Michigan. The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary, the Bank.
The Bank also includes the accounts of its wholly owned subsidiaries, Citizens
Financial Services, Inc. and Citizens First Mortgage, LLC. Citizens Financial
Services, Inc. includes the accounts of its wholly owned subsidiary, CFS
Insurance Agency. Citizens Financial Services, Inc. receives revenue from its
subsidiary, which provides insurance services to individuals and small
businesses in the Port Huron area. Citizens First Mortgage, LLC receives revenue
from interest income on loans and the sale of loans. All significant
intercompany transactions and balances have been eliminated in consolidation.
On March 7, 2001, the Company acquired the Bank. Prior to that time, the Bank
existed as a mutual savings bank. In connection with the conversion, the Company
issued an aggregate of 9,526,761 shares of its common stock, of which 8,821,075
shares were sold at a purchase price of $10 per share. At that time, 705,686
shares of stock were donated to Citizens First Foundation, a charitable
foundation established by the Company. The contribution expense was recognized
in the March 31, 2001 consolidated financial statements. The net offering
proceeds, after expenses of $3.1 million, totaled $85.1 million.
CHANGE IN FISCAL YEAR - The Company changed its fiscal year end from March 31 to
December 31, effective December 31, 2002. See Note 19 for transition period
comparative data.
USE OF ESTIMATES - In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance for loan
losses, and the valuation of mortgage servicing rights and foreclosed real
estate.
NATURE OF OPERATIONS - The Company operates predominately in the mideastern
portion of Michigan's lower peninsula. The Bank's primary services include
accepting deposits, making commercial, consumer, and mortgage loans, and
engaging in mortgage banking activities.
The Bank's loan portfolio is concentrated in residential first-mortgage loans,
commercial and commercial real-estate loans, and property improvement loans. The
Bank is not dependent upon any single industry or customer.
CASH AND CASH EQUIVALENTS - For the purpose of the consolidated statements of
cash flows, cash and cash equivalents include cash and balances due from
depository institutions, federal funds sold, and interest bearing deposits in
other depository institutions, all of which mature within ninety days.
SECURITIES - Debt securities that management has the positive intent and ability
to hold to maturity are classified as "held to maturity" and recorded at
amortized cost. Securities not classified as held to maturity, including equity
securities with readily determinable fair values, are classified as "available
for sale" and recorded at fair value, with unrealized gains and losses excluded
from earnings and reported in other comprehensive income net of applicable
income taxes.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.
FEDERAL HOME LOAN BANK STOCK - Federal Home Loan Bank (FHLB) stock is considered
a restricted investment security and is carried at cost. Purchases and sales of
FHLB stock are made directly with the FHLB at par value.
LOANS HELD FOR SALE - Loans originated and intended for sale in the secondary
market are carried at the lower of cost or estimated fair value in the
aggregate. Net unrealized losses, if any, are recognized through a valuation
allowance by charges to income.
Mortgage loans held for sale are generally sold with the mortgage servicing
rights retained by the Company. The carrying value of mortgage loans sold is
reduced by the cost allocated to the associated mortgage servicing rights. Gains
or losses on sales of mortgage loans are recognized based on the difference
between the selling price and the adjusted carrying value of the related
mortgage loans sold.
LOANS - The Company grants mortgage, commercial, and consumer loans to
customers. Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off, are reported at their
outstanding unpaid principal balances adjusted for charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans. Interest
income is accrued on the unpaid principal balance. Loan origination fees, net of
certain direct origination costs, are deferred and recognized as an adjustment
of the related loan yield using the interest method.
The accrual of interest on loans is discontinued at the time the loan is 90 days
delinquent unless the credit is well-secured and in process of collection. In
all cases, loans are placed on nonaccrual or charged off at an earlier date if
collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual
or charged off is reversed against interest income. The interest on these loans
is accounted for on the cash-basis or cost-recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is established as
losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral, and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as doubtful, substandard
or special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value or
observable general market price) of the impaired loan is lower than the carrying
value of that loan. The general component covers non-classified loans and is
based on historical loss experience adjusted for qualitative factors. An
unallocated component is maintained to cover uncertainties that could affect
management's estimate of probable losses. The unallocated component of the
allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses
in the portfolio.
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan-by-loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.
Large groups of homogeneous loans are collectively evaluated for impairment.
Accordingly, the Company does not separately identify individual consumer and
residential loans for impairment disclosures.
SERVICING - Servicing assets are recognized as separate assets when rights are
acquired through the sale of originated residential mortgage loans. Capitalized
servicing rights are reported in other assets and are amortized against
noninterest income in proportion to, and over the period of, the estimated
future net servicing income of the underlying loans. Servicing assets are
evaluated for impairment based upon the estimated fair value of the rights as
compared to amortized cost. Impairment is determined by stratifying rights by
predominant characteristics, such as interest rates and terms. Fair value is
determined using prices for similar assets with similar
characteristics, when available, or based upon discounted cash flows using
market-based assumptions. Temporary impairment is recognized through a valuation
allowance for an individual stratum to the extent that fair value is less than
the amortized cost for the stratum. If it is later determined that all or a
portion of the temporary impairment no longer exists, the valuation allowance is
reduced through a recovery of income. An other than temporary impairment results
in a permanent reduction to the carrying value of the servicing asset.
OFF BALANCE SHEET INSTRUMENTS - In the ordinary course of business, the Company
enters into commitments to extend credit, including commitments under home
equity agreements, commercial letters of credit and standby letters of credit.
In November 2002, the Financial Accounting Standards Board issued Interpretation
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, which elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. Adoption of the Standard did not
have a material effect on the Company's financial statements.
The Bank uses forward contracts as part of its mortgage banking activities.
Forward contracts provide for the delivery of financial instruments at a
specified future date and at a specified price or yield. Forward contracts are
accounted for on a fair value basis. The fair value of forward contracts at
December 31, 2003 and 2002 was insignificant.
RATE LOCK COMMITMENTS - The Company enters into commitments to originate loans
whereby the interest rate on the loan is determined prior to funding, also know
as rate lock commitments. Rate lock commitments on residential mortgage loans
that are intended to be sold are considered to be derivatives. Fair value is
based on fees currently charged to enter into similar agreements. At December
31, 2003 and 2002, the fair value of rate lock commitments was insignificant.
PREMISES AND EQUIPMENT - Premises and equipment are carried at cost, less
accumulated depreciation. Depreciation is computed using a straight-line method
over the estimated useful lives of the related assets. Office buildings are
depreciated over 40 years and equipment and furniture over 3 to 7 years.
Leasehold improvements are amortized over the terms of their respective leases
or the estimated useful lives of the improvements, whichever is shorter.
FORECLOSED ASSETS - Assets acquired through, or in lieu of, loan foreclosure are
held for sale and are initially recorded at the lower of cost or fair value less
the cost to sell at the date of the foreclosure, establishing a new cost basis.
Subsequent to foreclosure, valuations are periodically performed by management
and the assets are carried at the lower of carrying amount or fair value less
cost to sell. Revenue and expenses from operations and changes in the valuation
allowance are included in net expenses from foreclosed assets. Foreclosed assets
amounted to $443,000 and $353,000 at December 31, 2003 and 2002, respectively.
INCOME TAXES - Deferred income tax assets and liabilities are recognized for
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred income
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
DEFERRED COMPENSATION ARRANGEMENTS - The Company maintains a rabbi trust to fund
various deferred compensation and other arrangements. The arrangements are
accounted for in accordance with EITF Issue No. 97-14, Accounting for Deferred
Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and
Invested, whereby assets of rabbi trusts are to be consolidated with those of
the employer, and the value of the employer's stock held in rabbi trusts should
be classified in stockholders' equity and generally accounted for in a manner
similar to treasury stock. The Company recognizes the original amount of
deferred compensation (fair value of the restricted stock award at the date of
grant) as the basis for recognition in the rabbi trust. Changes in the fair
value of amounts owed to employees are not recognized as the Company's deferred
compensation plans do not permit diversification and must be settled by the
delivery of a fixed number of shares of the Company's common stock.
EMPLOYEE STOCK OWNERSHIP PLAN - Compensation expense is recognized for the
Employee Stock Ownership Plan ("ESOP") equal to the average fair value of shares
committed to be released for allocation to participant accounts. Any difference
between the average fair value of shares committed to be released for allocation
and the ESOP's original acquisition cost is charged or credited to stockholders'
equity (additional paid-in capital). The cost of unallocated ESOP shares (shares
not yet released for allocation) is reflected as a reduction of stockholders'
equity.
RESTRICTED STOCK AWARDS - Under the Company's stock-based incentive plan, which
is described more fully in Note 16, the Company may grant restricted stock
awards to its directors, officers, and employees for up to 476,338 shares of
common stock. The Company recognizes compensation expense related to restricted
stock awards over the period the services are performed.
STOCK BASED COMPENSATION - The Company has a stock-based incentive plan, which
is described more fully in Note 16. The Company accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No stock-based employee
compensation cost related to options is reflected in net income, as all options
granted under the plan had an exercise price equal to the market value of the
underlying common stock on the date of grant. The Company has provided below pro
forma disclosures of net income and earnings per share and other disclosures, as
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-based Compensation, to stock-based
employee compensation.
The Company's as reported and the pro forma information for the year ended
December 31, 2003 and nine months ended December 31, 2002 are indicated below
(000s omitted, except per share data):
<Table>
<Caption>
Nine months
Year Ended Ended
December 31, December 31,
2003 2002
--------------- ---------------
Net income, as reported $ 12,321 $ 9,184
Deduct: Total stock-based employee compensation
expense determined under fair value-based method
for all awards - Net of related tax effects (85) (82)
--------------- ---------------
Pro forma net income $ 12,236 $ 9,102
=============== ===============
Earnings per share
Basic - As reported $ 1.58 $ 1.14
Basic - Pro forma 1.57 1.13
Diluted - As reported 1.57 1.14
Diluted - Pro Forma 1.56 1.13
</Table>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<Table>
<Caption>
Nine months
Year Ended Ended
December 31, December 31,
2003 2002
--------------- ---------------
Dividend yield 1.60% 1.60%
Expected life 8 years 8 years
Expected volatility 22.00% 21.20%
Risk-free interest rate 4.00% 4.00%
</Table>
OTHER COMPREHENSIVE INCOME - Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net income.
Certain changes in assets and liabilities, however, such as unrealized gains and
losses on securities available for sale, are reported as a separate component in
the equity section of the balance sheet. Such items, along with net income, are
components of comprehensive income. Accumulated other comprehensive income is
comprised solely of unrealized gains and losses on securities available for
sale, net of applicable income taxes, for all periods presented.
EARNINGS PER SHARE - Basic earnings per share is calculated by dividing net
income by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued.
Potential common shares that may be issued by the Company relate to outstanding
stock options and restricted stock awards and are determined using the treasury
stock method. Treasury and unallocated ESOP shares are not considered
outstanding for purposes of calculating basic or diluted earnings per share.
Earnings per common share have been computed based on the following (000s
Omitted, except for per share data):
<Table>
<Caption>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
2003 2002 2002
--------------- --------------- ---------------
Net income $ 12,321 $ 9,184 $ 10,548
=============== =============== ===============
Average number of common shares outstanding
used to calculate basic earnings per
common share 7,810,422 8,036,885 8,587,293
Effect of dilutive options and restricted
stock awards 32,743 173 --
--------------- --------------- ---------------
Average number of common shares outstanding
used to calculate diluted earnings per
common share 7,843,165 8,037,058 8,587,293
=============== =============== ===============
</Table>
TRUST ASSETS - Trust assets held in a fiduciary or agency capacity are not
included in the accompanying consolidated balance sheets because they are not
assets of the Company.
ADVERTISING COSTS - Advertising costs are expensed as incurred.
RECENT ACCOUNTING PRONOUNCEMENTS - In April 2003, the FASB issued SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
This Statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain embedded derivatives, and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This Statement amends SFAS No. 133 to reflect the decisions
made as part of the Derivatives Implementation Group (DIG) and in other FASB
projects or deliberations. SFAS No. 149 is effective for contracts entered into
or modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. Adoption of the Standard did not have a material effect on the
Company's financial statements.
AICPA Statement of Position 03-3, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer (SOP 03-3), addresses the accounting for
differences between contractual cash flows and cash flows expected to be
collected from the initial investment in loans acquired in a transfer if those
differences are attributable, at least in part, to credit quality. It includes
loans acquired in purchase business combinations and does not apply to loans
originated by the entity. The SOP prohibits carrying over or creation of
valuation allowances in the initial accounting for loans acquired in a transfer.
It is effective for loans acquired in fiscal years beginning after December 15,
2004. The effect of this new guidance on the consolidated financial statements
will depend on future acquisition activity, thus, its impact is not readily
determinable.
RECLASSIFICATIONS - Certain amounts in the prior year's consolidated financial
statements have been reclassified to conform to the current year's presentation.
NOTE 2 - SECURITIES
The amortized cost and estimated market value of available-for-sale securities
with gross unrealized gains and losses are as follows (000s omitted):
<Table>
<Caption>
December 31, 2003
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 7,998 $ 15 $ -- $ 8,013
Obligations of state and political
subdivisions 17,863 748 -- 18,611
Corporate debt securities 47,880 426 43 48,263
Equity securities 5,002 -- 217 4,785
------------ ------------ ------------ ------------
Total available-for-sale securities $ 78,743 $ 1,189 $ 260 $ 79,672
============ ============ ============ ============
</Table>
<Table>
<Caption>
December 31, 2002
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 10,389 $ 386 $ -- $ 10,775
Obligations of state and political
subdivisions 14,149 900 -- 15,049
Corporate debt securities 65,223 722 1,225 64,720
Mortgage-backed securities 5,131 32 -- 5,163
Equity securities 5,002 -- 327 4,675
------------ ------------ ------------ ------------
Total available-for-sale securities $ 99,894 $ 2,040 $ 1,552 $ 100,382
============ ============ ============ ============
</Table>
One security with an estimated market value of $4,785,000 and a gross unrealized
loss of $217,000 has been in a continuous unrealized loss position in excess of
one year as of December 31, 2003. Remaining securities, with an estimated market
value of $8,556,000 and an unrealized loss of $43,000, have been in a continuous
unrealized loss position for less than one year. However, management does not
believe any individual unrealized loss at December 31, 2003 represents an other
than temporary loss.
Gross proceeds from sales of securities were $25,990,000, $6,963,000, and
$35,040,000 for the year ended December 31, 2003, the nine months ended December
31, 2002 and the year ended March 31, 2002, respectively, resulting in gross
gains of $80,000, $108,000, and $19,000 and gross losses of $126,000, $0 and
$19,000, respectively.
At December 31, 2003 and 2002, U.S. government obligations with a carrying value
of $0 and $500,000 were pledged to secure public deposits and for other purposes
as required or permitted by law.
The amortized cost and estimated market value of available-for-sale securities
by contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties (000s omitted):
<Table>
<Caption>
December 31, 2003
-----------------------------
Amortized Estimated
Cost Market Value
------------ ------------
Due in one year or less $ 23,000 $ 23,301
Due in one year through five years 30,137 30,513
Due after five years through ten years 12,817 13,977
Due after ten years 7,787 7,096
------------ ------------
Total debt securities 73,741 74,887
Equity securities 5,002 4,785
------------ ------------
Total $ 78,743 $ 79,672
============ ============
</Table>
NOTE 3 - LOANS HELD FOR SALE
The Bank routinely sells to investors its originated residential mortgage loans.
All long-term fixed rate residential mortgages recently originated or financed
are identified as held for sale. They are accounted for at the lower of cost or
market on an aggregate basis. Loans held for sale are as follows (000s omitted):
<Table>
<Caption>
December 31,
2003 2002
------------ ------------
Loans held for sale $ 1,988 $ 1,557
Allowance for lower of cost or market adjustment (4) --
------------ ------------
Total $ 1,984 $ 1,557
============ ============
</Table>
The Bank had outstanding forward contracts to sell residential mortgage loans of
approximately $5,753,000 and $25,700,000 at December 31, 2003 and 2002,
respectively.
NOTE 4 - LOANS
Balances of loans are as follows (000s omitted):
<Table>
<Caption>
December 31,
2003 2002
------------ ------------
Real estate:
One- to four-family mortgage $ 386,531 $ 414,939
Commercial and multi-family real estate 241,097 179,387
Residential construction 24,996 21,822
Home equity loans and lines of credit 85,371 72,724
------------ ------------
737,995 688,872
Commercial loans 107,742 60,336
Consumer loans:
Automobile 59,392 61,386
Other consumer 37,948 21,221
------------ ------------
97,340 82,607
------------ ------------
Total loans 943,077 831,815
Less:
Allowance for loan losses 11,664 11,082
Deferred loan origination and other fees 2,212 1,597
------------ ------------
Net loans $ 929,201 $ 819,136
============ ============
</Table>
Loans made in the ordinary course of business to related parties, including
senior officers and directors of the Bank, totaled approximately $15,859,000 and
$14,820,000 at December 31, 2003 and 2002, respectively. For the year ended
December 31, 2003, $4,448,000 of new loans were made and repayments totaled
$3,409,000, respectively.
Activity in the allowance for loan losses was as follows (000s omitted):
<Table>
<Caption>
Nine
Year Ended Months Ended Year Ended
December 31, December 31, March 31,
2003 2002 2002
--------------- --------------- ---------------
Balance - Beginning of period $ 11,082 $ 11,020 $ 10,831
Provision for loan losses 1,440 892 996
Charge-offs (1,095) (1,102) (1,173)
Recoveries 237 272 366
--------------- --------------- ---------------
Balance - End of period $ 11,664 $ 11,082 $ 11,020
=============== =============== ===============
</Table>
The following is a summary of information pertaining to impaired and non-accrual
loans (000s omitted):
<Table>
<Caption>
December 31,
2003 2002
--------------- ---------------
Impaired loans without a valuation allowance $ -- $ --
Impaired loans with a valuation allowance 195 528
--------------- ---------------
Total impaired loans $ 195 $ 528
=============== ===============
Valuation allowance related to impaired loans $ 46 $ 79
=============== ===============
Total non-accrual loans $ 3,915 $ 2,414
=============== ===============
</Table>
<Table>
<Caption>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
2003 2002 2002
--------------- --------------- ---------------
Average investment in impaired loans $ 257 $ 481 $ 533
=============== =============== ===============
Interest income recognized on impaired loans $ -- $ -- $ --
=============== =============== ===============
Interest income recognized on a cash basis
on impaired loans $ -- $ -- $ --
=============== =============== ===============
</Table>
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment were as follows (000s omitted):
<Table>
<Caption>
December 31,
2003 2002
--------------- ---------------
Land $ 6,766 $ 4,904
Office buildings 13,639 12,362
Furniture, fixtures, and equipment 8,911 8,239
Construction in process 5,272 --
--------------- ---------------
Total premises and equipment 34,588 25,505
Less accumulated depreciation (11,320) (10,516)
--------------- ---------------
Net carrying amount $ 23,268 $ 14,989
=============== ===============
</Table>
Depreciation expense for the year ended December 31, 2003, the nine months ended
December 31, 2002 and the year ended March 31, 2002 amounted to $1,320,000,
$819,000, and $1,237,000, respectively. Estimated costs to complete construction
contracts in process at December 31, 2003 totaled $1.7 million.
NOTE 6 - SERVICING
The Bank routinely sells to investors its originated residential mortgage loans.
The unpaid principal balance of loans serviced for others was approximately
$477,982,000 and $322,000,000 at December 31, 2003 and 2002, respectively, and
are not included in the accompanying consolidated balance sheets.
The balance of mortgage servicing rights, net of valuation allowance, included
in other assets at December 31, 2003 and 2002 was $3,820,000 and $1,939,000,
respectively, which approximates the fair value of these rights.
The key economic assumptions used in determining the fair value of the mortgage
servicing rights are as follows:
<Table>
<Caption>
December 31, March 31,
2003 2002 2002
--------- --------- ---------
Annual Constant Prepayment Speed 13.46% 33.93% 15.38%
Weighted average life (in months) 269 264 257
Discount rate 7.25% 7.02% 8.00%
</Table>
The following summarizes mortgage servicing rights capitalized and amortized,
along with the aggregate activity in the related valuation allowance
(000s omitted):
<Table>
<Caption>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
2003 2002 2002
--------------- --------------- ---------------
Mortgage servicing rights capitalized $ 3,063 $ 1,612 $ 486
=============== =============== ===============
Mortgage servicing rights amortized $ 2,459 $ 755 $ 881
=============== =============== ===============
Valuation allowance:
Balance at beginning of period 1,277 400 200
Additions -- 877 200
Reductions (1,277) -- --
--------------- --------------- ---------------
Balance at end of period $ -- $ 1,277 $ 400
=============== =============== ===============
</Table>
NOTE 7 - DEPOSITS
Interest-bearing deposit balances are summarized as follows (000s omitted):
<Table>
<Caption>
December 31,
2003 2002
--------- ---------
Passbook and savings deposits $ 86,202 $ 78,212
NOW accounts 73,351 97,385
Money market variable rate accounts 279,663 201,706
Certificates of deposit 257,817 271,852
--------- ---------
Total $ 697,033 $ 649,155
========= =========
</Table>
Certificates of deposit individually exceeding $100,000 were approximately
$71,660,000 and $67,148,000 at December 31, 2003 and 2002, respectively.
Scheduled maturities of certificates of deposit were as follows (000s omitted):
<Table>
<Caption>
Year Ending
December 31, Amount
- --------------- ------------
2004 $ 130,124
2005 37,852
2006 35,178
2007 44,718
2008 and thereafter 9,945
------------
Total $ 257,817
============
</Table>
Deposits from related parties held by the Bank at December 31, 2003 and 2002,
amounted to $2,847,000 and $5,668,000 respectively.
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
Advances from the Federal Home Loan Bank consist of fixed rate advances that
bear interest at rates ranging from 1.56 percent to 7.31 percent payable
monthly. The advances are collateralized by approximately $349,000,000 and
$409,000,000 of mortgage loans as of December 31, 2003 and 2002, respectively,
under a blanket collateral agreement. At December 31, 2003, the weighted average
interest rate on fixed rate advances was 5.24%.
The advances are subject to prepayment penalties and the provisions and
conditions of the credit policy of the Federal Home Loan Bank. Future
obligations of the advances are as follows at December 31, 2003 (000s omitted):
<Table>
<Caption>
Year Ending
December 31, Amount
- --------------- ------------
2004 $ 32,325
2005 20,031
2006 42,428
2007 43,686
2008 20,165
Thereafter 13,899
------------
Total $ 172,534
============
</Table>
NOTE 9 - FEDERAL INCOME TAXES
The consolidated provision for federal income taxes consisted of the following
(000s omitted):
<Table>
<Caption>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
2003 2002 2002
--------------- --------------- ---------------
Current tax expense $ 5,638 $ 5,058 $ 4,998
Deferred tax expense (benefit) 617 (216) 420
--------------- --------------- ---------------
Total income tax expense $ 6,255 $ 4,842 $ 5,418
=============== =============== ===============
</Table>
Federal income tax expense approximated the amounts computed by applying the
statutory income tax rate to income before federal income tax expense as a
result of the following (000s omitted):
<Table>
<Caption>
Nine months
Year Ended Ended Year Ended
December 31, December 31, March 31,
2003 2002 2002
--------------- --------------- ---------------
Statutory rates $ 6,402 $ 4,909 $ 5,558
Increase (decrease) resulting from:
Other (147) (67) (140)
--------------- --------------- ---------------
Total income tax expense $ 6,255 $ 4,842 $ 5,418
=============== =============== ===============
</Table>
The net deferred income tax asset was comprised of the tax effects of the
following temporary differences (000s omitted):
<Table>
<Caption>
December 31,
2003 2002
------------ ------------
Deferred income tax assets:
Allowance for loan losses $ 3,151 $ 2,909
Contribution carryover 1,911 2,504
Accumulated depreciation -- 316
Deferred loan fees 61 489
Employee benefit obligations 1,657 1,787
Investment in subsidiary -- 145
Other 451 112
------------ ------------
Total deferred income tax assets 7,231 8,262
Deferred income tax liabilities:
Original issue discount 144 866
Investment in subsidiary 380 --
Accumulated depreciation 352 --
Installment sale -- 159
Net unrealized gain on available-for-sale securities 316 166
Accumulated accretion 149 249
Other -- 165
------------ ------------
Total deferred income tax liabilities 1,341 1,605
------------ ------------
Net deferred income tax asset $ 5,890 $ 6,657
============ ============
</Table>
At December 31, 2003, the Company has a contribution carryforward for tax
purposes of approximately $5,500,000 which expires in fiscal 2006. Realization
of the deferred income tax asset related to the contribution carryforward is
dependent on generating sufficient taxable income before the carryforward
expires. Although realization is not assured, management believes it is more
likely than not that all of the deferred income tax asset will be realized. The
amount of the deferred income tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income are reduced. In
addition, the Bank has not recognized a deferred tax liability for tax bad debt
reserves of approximately $6,600,000 that existed at December 31, 1987, because
it is not expected that this temporary difference will reverse in the
foreseeable future.
NOTE 10 - EMPLOYEE BENEFITS
DEFINED BENEFIT PENSION PLAN - The Bank is a participant in the
multiple-employer Financial Institutions Retirement Fund ("FIRF" or the "Plan"),
which covers substantially all of its officers and employees. The Plan, for all
full-time employees with one year of service, provides benefits based on basic
compensation and years of service. The Bank's contributions are determined by
FIRF and generally represent the normal cost of the Plan. Specific plan assets
and accumulated benefit information for the Bank's portion of the Plan are not
available. Under the Employee Retirement Income Security Act of 1974 (ERISA), a
contributor to a multiemployer pension plan may be liable in the event of
complete or partial withdrawal for the benefit payments guaranteed under ERISA.
The expense of the Plan allocated to the Bank for the year ended December 31,
2003, the nine months ended December 31, 2002, and the year ended March 31, 2002
amounted to $250,000, $0 and $0.
As of February 1, 2004, the Company has frozen all the assets of the FIRF plan
and ceased accruing future benefits for employees participating in the Plan,
although vesting service will continue. In addition, the Company is also
considering withdrawing from the Plan, but any withdrawal liability has not yet
been quantified.
DEFINED CONTRIBUTION PLAN - The Company has a qualified savings plan under
Section 401(k) of the Internal Revenue Code. The Plan covers all employees who
have completed at least one year of service. Eligible employees may contribute
up to 15 percent of their annual compensation, subject to certain maximums
established by the Internal Revenue Service. The Company will match up to 50
percent of the first 4 percent of the employees' compensation deferred each
year. The Company made matching contributions for the year ended December 31,
2003, the nine months ended December 31, 2002, and the year ended March 31, 2002
of approximately $86,000, $83,000 and $88,000, respectively.
SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN - In 2000, the Bank entered into an
agreement to provide salary continuation supplemental payments at retirement to
its former president. The Bank purchased an annuity at the end of fiscal year
March 31, 2002 that fully funded the obligation. The expense associated with the
agreement was $101,000 for the year ended March 31, 2002.
DEFERRED COMPENSATION ARRANGEMENTS - The Company has entered into deferred
compensation and fee arrangements with certain of its directors and senior
officers. The amounts deferred under the arrangements are invested in Company
common stock and are maintained in a rabbi trust. The Company has 198,658
treasury shares reserved for the various plans with a related obligation of
$2,054,000 established within stockholders' equity.
EMPLOYEE STOCK OWNERSHIP PLAN - Effective January 1, 2001, the Bank implemented
a leveraged employee stock ownership plan (ESOP). The ESOP covers all employees
with more than one year of service who have completed at least 1,000 hours of
service and who have attained the age of 21. As part of the conversion from a
mutual to a stock entity, the Company provided a loan to the ESOP, which was
used to purchase 762,140 shares of the Company's outstanding stock in the open
market. The loan bears interest equal to the prime rate at the time of
conversion and provides for the repayment of principal over the 15-year term of
the loan. The scheduled maturities of the loan are as follows (000s omitted):
<Table>
<Caption>
Year Ending
December 31, Amount
- ------------------------- ------------
2004 $ 466
2005 507
2006 551
2007 597
2008 646
Thereafter 6,368
------------
Total $ 9,135
============
</Table>
The Company has committed to make contributions to the ESOP sufficient to
support debt service of the loan. The loan is secured by the shares purchased,
which are held in a suspense account for the allocation among the participants
as the loan is paid. Dividends paid on unallocated shares are not considered
dividends for financial reporting purposes and are used to pay principal and
interest on the ESOP loan. Dividends on allocated shares are charged to retained
earnings. Total compensation expense for the ESOP amounted to $1,167,000,
$883,000 and $1,023,000 for the year ended December 31, 2003, the nine months
ended December 31, 2002 and the year ended March 31, 2002, respectively.
Shares held by the ESOP include the following:
<Table>
<Caption>
December 31,
2003 2002
------------ ------------
Allocated 152,428 101,618
Unallocated 609,712 660,522
------------ ------------
Total 762,140 762,140
============ ============
</Table>
The fair value of the unearned shares was approximately $13,901,000 and
$13,904,000 at December 31, 2003 and 2002, respectively.
NOTE 11 - REGULATORY MATTERS
The Bank are subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the consolidated financial statements.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios, which are shown in the
table below.
As of December 31, 2003, the most recent notification from the Bank's regulators
categorized the Bank as well-capitalized under the regulatory framework for
prompt corrective action. To be categorized as well-capitalized, minimum capital
amounts and ratios must be maintained as shown in the following table. There are
no conditions or events since that notification that management believes have
changed the Company's and the Bank's capital category.
At December 31, 2003 and 2002, the Bank's actual capital levels and minimum
required levels were as follows (000s omitted):
<Table>
<Caption>
For Capital
Actual Adequacy Purposes To Be Well Capitalized
------------------------- -------------------------- -------------------------
Ratio Ratio Ratio
Amount (Percent) Amount (Percent) Amount (Percent)
---------- ---------- ---------- ---------- ---------- ----------
DECEMBER 31, 2003
Total Capital to Risk
Weighted Assets:
Citizens First Savings Bank 135,722 15.8% 68,600 > 8.0% 85,800 > 10.0%
- -
Tier 1 Capital to Risk
Weighted Assets:
Citizens First Savings Bank 124,988 14.6% 34,300 > 4.0% 51,500 > 6.0%
- -
Tier 1 Capital to
Average Assets:
Citizens First Savings Bank 124,988 11.8% 31,800 > 3.0% 53,000 > 5.0%
- -
DECEMBER 31, 2002:
Total Capital to Risk
Weighted Assets:
Citizens First Savings Bank 127,600 19.5% 56,700 > 8.0% 70,900 > 10.0%
- -
Tier 1 Capital to Risk
Weighted Assets:
Citizens First Savings Bank 118,500 18.3% 28,300 > 4.0% 42,500 > 6.0%
- -
Tier 1 Capital to
Average Assets:
Citizens First Savings Bank 118,500 12.1% 29,400 > 3.0% 49,000 > 5.0%
- -
</Table>
The Bank is required to maintain average balances on hand or with the Federal
Reserve Bank. At December 31, 2003, the reserve balance amounted to $12,259,000.
NOTE 12 - RESTRICTIONS ON DIVIDENDS
Federal and state banking regulations place certain restrictions on dividends
paid by the Bank to the Company. The total amount of dividends that may be paid
at any date is generally limited to the retained earnings of the Bank.
Accordingly, $115,506,000 of the Company's equity in the net assets of the Bank
was restricted at December 31, 2003.
At December 31, 2003, the Bank's retained earnings available for the payment of
dividends was $10,734,000.
In addition, dividends paid by the Bank to the Company would be prohibited if
the effect thereof would cause the Bank's capital to be reduced below applicable
minimum capital requirements.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
CREDIT-RELATED FINANCIAL INSTRUMENTS - The Company is a party to credit-related
financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit, standby letters of credit, and
commercial letters of credit. Such commitments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheet.
The Company's exposure to credit loss is represented by the contractual amount
of these commitments. The Company follows the same credit policies in making
commitments as it does for on-balance-sheet instruments.
A summary of the notional or contractual amounts of financial instruments with
off-balance-sheet risk at December 31, 2003 and 2002 is as follows (000s
omitted):
<Table>
<Caption>
December 31,
2003 2002
------------ ------------
Commercial and stand-by letters of credit $ 5,397 $ 12,250
Unused lines of credit 93,787 55,364
Commitments to originate loans or to refinance
existing loans:
Mortgage 53,236 77,000
Consumer 5,945 4,300
Commercial 59,056 28,200
------------ ------------
Total commitments to extend credit $ 217,421 $ 177,114
============ ============
</Table>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The commitments for equity lines of credit may expire
without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if it is deemed necessary by the Company, is based on management's
credit evaluation of the customer.
Unfunded commitments under commercial lines of credit, revolving credit lines,
and overdraft protection agreements are commitments for possible future
extensions of credit to existing customers. These lines of credit are
collateralized and usually do not contain a specified maturity date and may not
be drawn upon to the total extent to which the Company is committed.
Commercial and standby letters of credit are conditional commitments issued by
the Company to guarantee the performance of a customer to a third party. Those
letters of credit are primarily used to support public and private borrowing
arrangements. Essentially all letters of credit issued have expiration dates
within one year.
To reduce credit risk related to the use of credit-related financial
instruments, the Company generally holds collateral supporting those commitments
if deemed necessary. The amount and nature of the collateral obtained is based
on the Company's credit evaluation of the customer. Collateral held varies, but
may include cash, securities, accounts receivable, inventory, property, plant,
equipment, and real estate.
If the counterparty does not have the right and ability to redeem the collateral
or the Company is permitted to sell or repledge the collateral on short notice,
the Company records the collateral in its balance sheet at fair value with a
corresponding obligation to return it.
LEASE COMMITMENTS - Future minimum lease payments under the Company's current
non-cancelable operating leases are immaterial.
LEGAL CONTINGENCIES - Various legal claims arise from time to time in the normal
course of business which, in the opinion of management, will have no material
effect on the Company's consolidated financial statements.
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of the Company's financial
instruments are presented below. Certain items, the most significant being
premises, equipment, pension and deferred compensation arrangements, and the
deposit base and other customer relationship intangibles do not meet the
definition of a financial instrument and are excluded from this disclosure.
Accordingly, this fair value information is not intended to, and does not,
represent Citizens First Bancorp, Inc. and subsidiary's underlying value. Many
of the assets and liabilities subject to the disclosure requirements are not
actively traded, requiring fair values to be estimated by management. These
estimates inherently involve the use of judgment about a wide variety of
factors, including, but not limited to, relevancy of market prices of comparable
instruments, expected future cash flows, and appropriate discount rates.
The carrying values and estimated fair values of financial instruments were as
follows (000s omitted):
<Table>
<Caption>
December 31, 2003 December 31, 2002
----------------------------- -----------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents $ 33,647 $ 33,647 $ 40,356 $ 40,356
Securities available for sale 79,672 79,672 100,382 100,382
Federal Home Loan Bank stock 9,416 9,416 9,180 9,180
Loans held for sale 1,984 1,984 1,557 1,557
Loans 929,201 931,061 819,136 835,260
Accrued interest receivable 4,103 4,103 4,766 4,766
Financial liabilities:
Deposits 748,531 758,174 671,830 675,216
FHLB advances 172,534 178,120 173,003 177,992
Accrued interest payable 467 467 668 668
</Table>
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS - Due to their short-term nature, the carrying value
of cash and short-term instruments approximate fair values.
SECURITIES AND FEDERAL HOME LOAN BANK STOCK - Fair values for securities
available for sale are based on quoted market prices. The carrying value of
Federal Home Loan Bank stock approximates fair value based on the redemption
provisions of the Federal Home Loan Bank.
LOANS HELD FOR SALE - Fair values of mortgage loans held for sale are based on
commitments on hand from investors or prevailing market prices.
LOANS - For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values, as adjusted by
estimated credit losses. Fair values for other mortgage, commercial, and
consumer loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for nonperforming loans are estimated using
discounted cash flow analyses or underlying collateral values, where applicable.
DEPOSITS - Fair values for demand deposits (e.g., interest and non-interest
checking, passbook savings, and certain types of money market accounts) are
equal to the amount payable on demand at the reporting date (i.e., their
carrying values). The carrying values of variable-rate, fixed-term money market
accounts and certificates of deposit approximate their fair values. Fair values
for fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time
deposits.
FHLB ADVANCES - Fair values of FHLB advances are estimated using discounted cash
flow analyses based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
ACCRUED INTEREST - The carrying values of accrued interest approximate fair
values.
OFF-BALANCE-SHEET INSTRUMENTS - Fair values for off-balance-sheet,
credit-related financial instruments are based on fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing. The fair value of loan
commitments and standby letters of credit, valued on the basis of fees currently
charged for commitments for similar loan terms to new borrowers with similar
credit profiles, is not considered material.
The fair value of off-balance-sheet financial instruments used for risk
management purposes, which consists solely of forward contracts extending from
45-90 days to sell mortgage loans, is not material.
NOTE 15 - STOCK REPURCHASE PROGRAM
On September 24, 2001, the Board of Directors of Citizens First Bancorp, Inc.
adopted the Company's Stock Repurchase Program. The program allowed management
to repurchase 476,388 shares of the Company's common stock, of which all of the
shares were repurchased as of March 31, 2002. On March 28, 2002, the Board of
Directors adopted an additional repurchase program. The program allowed
management to repurchase an additional 476,338 shares of the Company's common
stock, of which all of the shares have been repurchased as December 31, 2002. On
September 26, 2002, the Board of Directors adopted a new repurchase program. The
program allows management to repurchase up to an additional 428,701 shares of
the Company's common stock, of which 54,500 and 633 shares were repurchased
during the year ended December 31, 2003 and the nine months ended December 31,
2002, respectively. In addition to the Company's Stock Repurchase Program, the
Company purchased additional shares in connection with rabbi trusts established
to fund certain employee benefit plans. Shares repurchased for the rabbi trusts
totaled 198,658, 183,461 and 95,456 as of December 31, 2003, and 2002 and March
31, 2002, respectively. The total shares repurchased have a weighted average
price of $18.06 per share.
The repurchased shares are reserved for reissuance in connection with future
employee benefit plans and other general corporate purposes.
NOTE 16 - STOCK BASED COMPENSATION
RESTRICTED STOCK AWARDS - On December 16, 2002, the Company granted 69,367
restricted stock awards to employees under the Company's stock-based incentive
plan. During 2003, 2,200 shares were forfeited and 400 shares were granted. All
awards cliff vest after five years from the date of the award. Compensation
expense for the awards was approximately $251,000 and $22,000 for the year ended
December 31, 2003 and the nine months ended December 31, 2002, respectively. The
fair value of restricted stock at the date of the grant was $1,370,207.
Restricted stock awarded is subject to restrictions on sale, transfer, or
assignment for the duration of the employee's life. Holders of restricted stock
generally may forfeit ownership of all or a portion of their award if employment
is terminated before the end of the vesting period.
STOCK OPTIONS - Under the Company's stock-based incentive plan, the Company may
grant options to its directors, officers, and employees for up to 1,429,014
shares of common stock. Both incentive stock options and non-qualified stock
options may be granted under the Plan. The exercise price of each option equals
the market price of the Company's stock on the date of grant, and an option's
maximum term is 10 years. On May 9, 2002, the Company granted 23,100 stock
options with an exercise price of $19.85 per share. The options are fully vested
at the grant date and are exercisable over a 10-year period. On March 11, 2003,
the Company granted 147,700 stock options with an exercise price of $18.81 per
share. The options vest twenty percent per year for five years and are
exercisable over a 10-year period. At December 31, 2003, 1,258,195 shares were
available for future granting of options.
A summary of the status and activity in the Company's stock option plan is
presented below:
<Table>
<Caption>
Year Ended Nine Months Ended
December 31, 2003 December 31, 2002
----------------------------- -----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------ ------------ ------------ ------------
Outstanding at beginning of period 23,100 $ 19.85 -- $ --
Granted 147,700 18.81 23,100 19.85
------------ ------------ ------------ ------------
Outstanding at end of period 170,800 $ 18.95 23,100 $ 19.85
============ ============ ============ ============
Options exercisable at period end 23,100 23,100
Weighted-average fair value of options granted
during the period $ 5.29 $ 5.46
</Table>
Information pertaining to options outstanding at December 31, 2003 is as
follows:
<Table>
<Caption>
Options Outstanding Options Exercisable
----------------------------------- -------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
- -------------------------- --------------- --------------- --------------- --------------- ---------------
$19.00 - $20.00 23,100 8.4 years $ 19.85 23,100 $ 19.85
$18.00 - $19.00 147,700 9.3 years 18.81 -- --
--------------- ---------------
Outstanding at end of year 170,800 $ 18.95 23,100 $ 19.85
=============== ===============
</Table>
NOTE 17 - PARENT-ONLY FINANCIAL STATEMENTS
The following represents the condensed financial statements of Citizens First
Bancorp, Inc. ("Parent") only, which should be read in conjunction with the
Company's consolidated financial statements.
The condensed balance sheet is as follows (000s omitted):
<Table>
<Caption>
December 31,
2003 2002
------------ ------------
ASSETS
Cash at subsidiary bank $ 8,852 $ 3,432
Securities available for sale 9,419 13,517
Commercial real estate loans 6,963 4,675
Land 3,223 3,100
Investment in subsidiary 126,240 119,561
Deferred taxes and other assets 3,625 3,870
------------ ------------
Total assets $ 158,322 $ 148,155
============ ============
LIABILITIES -- --
------------ ------------
STOCKHOLDERS' EQUITY $ 158,322 $ 148,155
============ ============
</Table>
The condensed statement of operations is as follows (000s omitted):
<Table>
<Caption>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
2003 2002 2002
--------------- --------------- ---------------
Income:
Dividends from subsidiary $ 5,450 $ 8,270 $ --
Operating income 798 358 1,186
--------------- --------------- ---------------
Total income 6,248 8,628 1,186
Operating expenses (861) (446) (645)
--------------- --------------- ---------------
Income - Before income taxes and equity in
undistributed net income of subsidiary 5,387 8,182 541
Income tax (expense) benefit 139 30 (187)
--------------- --------------- ---------------
Income - Before equity in undistributed net income
of subsidiary 5,526 8,212 354
Equity in undistributed net income of subsidiary 6,795 972 10,194
--------------- --------------- ---------------
Net income $ 12,321 $ 9,184 $ 10,548
=============== =============== ===============
</Table>
The condensed statement of cash flows is as follows (000s omitted):
<Table>
<Caption>
Nine
Months
Year Ended Ended
December 31, December 31,
2003 2002
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12,321 $ 9,184
Adjustments to reconcile net income to net cash
from operating activities:
(Gain) loss on sale of investment 80 (108)
Amortization 3 2
Equity in undistributed earnings of subsidiary (6,795) (972)
Change in Deferred Compensation obligation 464 436
Net change in other assets 1,289 4,268
--------------- ---------------
Net cash provided by operating activities 7,362 12,810
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale or maturity of investments 4,631 6,964
Investment in mortgage company subsidiary -- (4,272)
Net increase in loans (2,288) (4,675)
Purchase of land (123) (3,100)
--------------- ---------------
Net cash provided by (used in)
investing activities 2,220 (5,083)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (1,445) (11,726)
Payment of dividends (2,681) (1,924)
--------------- ---------------
Net cash used in financing activities (4,162) (13,650)
--------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,420 (5,923)
CASH AND CASH EQUIVALENTS - Beginning of period 3,432 9,355
--------------- ---------------
CASH AND CASH EQUIVALENTS - End of period $ 8,852 $ 3,432
=============== ===============
</Table>
NOTE 18 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Company's quarterly results for the years
ended December 31, 2003 and 2002 (000s omitted):
<Table>
<Caption>
For the Three-month Periods Ended
---------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
2003 2003 2003 2003
--------------- --------------- --------------- ---------------
Interest income $ 15,497 $ 14,918 $ 15,032 $ 14,968
Interest expense 6,201 5,795 5,762 5,549
--------------- --------------- --------------- ---------------
Net interest income 9,296 9,123 9,270 9,419
Provision for loan losses 360 360 360 360
Other income 2,953 2,937 2,875 1,542
Other expenses 6,797 6,907 7,081 6,614
--------------- --------------- --------------- ---------------
Income before income taxes 5,092 4,793 4,704 3,987
Federal income taxes 1,891 1,517 1,718 1,129
--------------- --------------- --------------- ---------------
Net income $ 3,201 $ 3,276 $ 2,986 $ 2,858
=============== =============== =============== ===============
Basic earnings per share $ 0.40 $ 0.42 $ 0.38 $ 0.38
=============== =============== =============== ===============
Diluted earnings per share $ 0.40 $ 0.42 $ 0.38 $ 0.37
=============== =============== =============== ===============
</Table>
<Table>
<Caption>
For the Three-month Periods Ended
---------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
2002 2002 2002 2002
--------------- --------------- --------------- ---------------
Interest income $ 15,694 $ 15,484 $ 16,281 $ 15,189
Interest expense 6,740 6,714 6,707 6,708
--------------- --------------- --------------- ---------------
Net interest income 8,729 8,770 9,574 8,481
Provision for loan losses 249 274 289 329
Other income 1,235 1,544 1,305 2,914
Other expenses 5,903 5,680 5,955 6,035
--------------- --------------- --------------- ---------------
Income before income taxes 4,037 4,360 4,635 5,031
Federal income taxes 1,362 1,544 1,610 1,688
--------------- --------------- --------------- ---------------
Net income $ 2,675 $ 2,816 $ 3,025 $ 3,343
=============== =============== =============== ===============
Basic and diluted
earnings per share $ 0.32 $ 0.34 $ 0.38 $ 0.42
=============== =============== =============== ===============
</Table>
NOTE 19 - TRANSITION PERIOD COMPARATIVE DATA
The following table presents certain financial information for the nine months
ended December 31, 2002 and 2001, respectively (000s omitted):
<Table>
<Caption>
Unaudited
Nine months Nine months
Ended Ended
December 31, December 31,
2002 2001
--------------- ---------------
Total interest income $ 46,954 $ 49,998
=============== ===============
Net interest income after provision for loan losses $ 25,933 $ 25,300
Net noninterest expense 11,907 13,371
=============== ===============
Federal income tax expense 4,842 4,056
Net income $ 9,184 $ 7,873
=============== ===============
Basic earnings per common share $ 1.14 $ 0.91
=============== ===============
Diluted earnings per common share $ 1.14 $ 0.91
=============== ===============
</Table>
<Table>
<Caption>
Unaudited
Nine months Nine months
Ended Ended
December 31, December 31,
2002 2001
--------------- ---------------
Cash flow s from operating activities:
Net income $ 9,184 $ 7,873
Adjustments provided by operating activities 1,802 2,087
--------------- ---------------
Net cash flows provided by operating activities 10,986 9,960
Net cash flows used in investing activities (74,310) (88,473)
Net cash flows provided by financing activities 45,754 57,320
--------------- ---------------
Net decrease in cash and cash equivalents (17,570) (21,193)
Cash and cash equivalents - Beginning of period 57,926 53,618
--------------- ---------------
Cash and cash equivalents - End of period $ 40,356 $ 32,425
=============== ===============
Supplemental disclosure of cash flow information - Cash paid for
Interest $ 20,355 $ 24,909
Federal income taxes 4,450 3,620
</Table>
NOTE 20 - SUBSEQUENT EVENTS
On January 9, 2004, Citizens First Bancorp, Inc. acquired all of the capital
stock of Metro Bancorp, Inc. (Metro)and its wholly-owned subsidiary, Metrobank,
a Michigan savings bank located in Farmington Hills, Michigan. Under the terms
of the agreement, former shareholders of Metro received $711.73 for each
outstanding share of Metro common stock on the effective date of the
acquisition. Total consideration paid in the acquisition consisted of
$30,000,000, and total assets acquired approximated $147,000,000. The Company is
currently in process of determining the allocation of the total cost of the
acquisition to the assets acquired and the liabilities assumed.
To support future growth, the Company obtained a line-of-credit from an
unrelated bank in the amount of $50,000,000 on January 9, 2004, of which
$10,000,000 was drawn upon. The effective rate on the line-of-credit is based on
the three month LIBOR rate plus 1.40 percent. The line is collateralized by the
common stock of the Bank, expires on January 9, 2005, and is due on demand.