UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 - Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001 Commission File No.: 0-27740
-------
CITIZENS FIRST FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 37-1351861
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
2101 North Veterans Parkway, Bloomington, Illinois 61704
(Address of principal executive offices)
Registrant's telephone number: (309) 661-8700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for past 90 days.
(1) Yes x No
(2) Yes x No
The Registrant had 1,568,512 shares of Common Stock outstanding as of July
31, 2001.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of
June 30, 2001 and December 31, 2000 1
Condensed Consolidated Income Statement for the Six
Months Ended June 30, 2001 and 2000 2
Condensed Consolidated Income Statement for the Three
Months Ended June 30, 2001 and 2000 3
Condensed Consolidated Statement of Comprehensive
Income for the Six and Three Months Ended June 30, 2001
and 2000 4
Condensed Consolidated Statement of Cash Flows for the Six
Months Ended June 30, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 19
Statements contained in this Form 10-Q which are not historical facts are
forward-looking statements, as that term is described in the Private Securities
Litigation Reform Act of 1995. The forward-looking statements are generally
identifiable by the use of such words as "believes", "expects", "anticipates",
"estimates", "projects", "intends" or similar expressions. Such forward-looking
statements are subject to risk and uncertainties which could cause actual
results to differ materially from those projected. Such risks and uncertainties
include potential change in interest rates, competitive factors in the financial
services industry, general and local economic conditions, the effect of new
legislation and other risks detailed in documents filed by the Company with the
Securities and Exchange Commission from time to time.
PART I. -- FINANCIAL INFORMATION
Citizens First Financial Corp. and Subsidiary
Condensed Consolidated Balance Sheet
As of June 30, 2001 and December 31, 2000
(in thousands)
June 30, December 31,
2001 2000
-------- --------
ASSETS (Unaudited)
Cash and due from banks $ 7,267 $ 5,779
Interest-bearing demand deposits 9,861 5,236
-------- --------
Cash and cash equivalents 17,128 11,015
Investment securities - available for sale 13,705 15,054
Mortgage loans held for sale 4,162 1,494
Loans 284,648 285,315
Allowance for loan losses (2,186) (1,826)
-------- --------
Net loans 282,462 283,489
Land in real estate joint venture 905 1,220
Premises and equipment 7,849 8,124
Federal Home Loan Bank of Chicago stock 4,323 4,166
Other assets 5,459 5,328
-------- --------
Total assets $335,993 $329,890
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $241,775 $228,886
Borrowings 59,814 67,984
Other liabilities 3,285 3,123
-------- --------
Total liabilities 304,874 299,993
-------- --------
Minority interest in real estate joint venture 480 591
Commitments and Contingent Liabilities
Stockholders' Equity
Preferred stock, $.01 par value
Authorized and unissued - 1,000,000 shares --- ---
Common stock, $.01 par value; 8,000,000 shares
Authorized; 2,817,500 shares issued and
outstanding 28 28
Paid-in-capital 27,606 27,559
Retained earnings 23,609 22,634
Accumulated other comprehensive loss (4) (29)
Less:
Treasury shares, 1,248,988 and 1,249,220 (19,972) (19,970)
Unearned incentive plan shares, 10,233 and 19,916 (145) (272)
Unearned employee stock ownership plan
shares, 48,300 and 64,400 shares (483) (644)
-------- --------
Total stockholders' equity 30,639 29,306
-------- --------
Total liabilities and stockholders' equity $335,993 $329,890
======== ========
See notes to condensed consolidated financial statements
1
Citizens First Financial Corp. and Subsidiary
Condensed Consolidated Income Statement
For the six For the six
months ended months ended
June 30, 2001 June 30, 2000
------------- -------------
(Unaudited and in thousands
except share data)
Interest income:
Interest on loans $ 11,786 $ 11,409
Interest on investments 808 684
---------- ----------
Total interest income 12,594 12,093
Interest expense:
Interest on deposits 5,825 4,843
Interest on borrowings 1,800 1,876
---------- ----------
Total interest expense 7,625 6,719
---------- ----------
Net interest income 4,969 5,374
Provision for loan losses 360 240
---------- ----------
Net interest income after provision for
loan losses 4,609 5,134
Other income:
Net gain on sale of branch facility 0 2,445
Net realized losses on sale of available for sale securities 0 (378)
Net gains on loan sales 323 106
Gain on sale of land in joint venture 233 222
Other operating income 646 770
---------- ----------
Total other income 1,202 3,165
Other expense:
Salaries and employee benefits 2,172 2,440
Net occupancy and equipment expenses 620 605
Deposit insurance expense 39 25
Data processing expense 140 155
Other operating expense 848 1,022
Minority interest in net income of real estate joint venture 116 111
---------- ----------
Total other expense 3,935 4,358
----------
Income before income tax 1,876 3,941
Income tax expense 728 1,530
---------- ----------
Net income $ 1,148 $ 2,411
========== ==========
Basic earnings per share $ 0.77 $ 1.30
Weighted average shares outstanding 1,499,236 1,847,621
Diluted earnings per share $ 0.74 $ 1.25
Weighted average shares outstanding 1,551,704 1,926,826
See notes to condensed consolidated financial statements
2
Citizens First Financial Corp. and Subsidiary
Condensed Consolidated Income Statement
For the three For the three
months ended months ended
June 30, 2001 June 30, 2000
------------- -------------
(Unaudited and in thousands
except share data)
Interest income:
Interest on loans $ 5,752 $ 5,875
Interest on investments 412 332
---------- ----------
Total interest income 6,164 6,207
Interest expense:
Interest on deposits 2,904 2,445
Interest on borrowings 852 1,072
---------- ----------
Total interest expense 3,756 3,517
---------- ----------
Net interest income 2,408 2,690
Provision for loan losses 180 120
---------- ----------
Net interest income after provision for
loan losses 2,228 2,570
Other income:
Net gain on sale of branch facility 0 2,445
Net realized losses on sale of available for sale securities 0 (378)
Net gains on loan sales 218 47
Gain on sale of land in joint venture 233 222
Other operating income 361 410
---------- ----------
Total other income 812 2,746
Other expense:
Salaries and employee benefits 998 1,167
Net occupancy and equipment expenses 312 289
Deposit insurance expense 20 3
Data processing expense 70 67
Other operating expense 573 569
Minority interest in net income of real estate joint venture 116 111
---------- ----------
Total other expense 2,089 2,206
---------- ----------
Income before income tax 951 3,110
Income tax expense 369 1,208
---------- ----------
Net income $ 582 $ 1,902
========== ==========
Basic earnings per share $ 0.39 $ 1.03
Weighted average shares outstanding 1,505,681 1,843,305
Diluted earnings per share $ 0.37 $ 0.99
Weighted average shares outstanding 1,580,421 1,920,461
See notes to condensed consolidated financial statements
3
Citizens First Financial Corp. and Subsidiary
Condensed Consolidated Statement of Comprehensive Income
For the six For the six
months ended months ended
June 30, 2001 June 30, 2000
------------- -------------
(Unaudited and in thousands)
Net income $1,148 $2,411
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) during the period 25 379
Less: Reclassification adjustment for losses included
in net income 0 (234)
------ ------
Comprehensive income $1,173 $2,556
====== ======
For the three For the three
months ended months ended
June 30, 2001 June 30, 2000
------------- -------------
(Unaudited and in thousands)
Net income $582 $1,902
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) during the period (51) 416
Less: Reclassification adjustment for losses included
in net income 0 (234)
---- ------
Comprehensive income $531 $2,084
==== ======
See notes to condensed consolidated financial statements
4
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
Condensed Consolidated Statement of Cash Flows
For the six For the six
months ended months ended
June 30, 2000 June 30, 2000
------------- -------------
audited and in thousands)
Operating activities
Net income $ 1,148 $ 2,411
Adjustments to reconcile net income to net cash
Cash provided (used) by operating activities:
Provision for loan losses 360 240
ESOP compensation expense 216 209
Incentive plan compensation expense 119 134
Losses on sale of available for sale securities 0 378
Investment securities amortization, net 45 15
Minority interest in net income of real estate joint venture 116 111
Gain on sale of land in real estate joint venture (233) (222)
Net gains on sale of mortgage loans (323) (106)
Net gain on sale of branch facility 0 (2,445)
Depreciation 377 377
Mortgage loans originated for sale (14,451) (3,214)
Proceeds from sale of mortgage loans 12,106 5,786
Federal Home Loan Bank dividends (157) (50)
Change in:
Other liabilities 227 986
Prepaid expenses and other assets 5 (259)
-------- --------
Net cash provided (used) by operating activities (445) 4,351
-------- --------
Investing Activities
Purchase of securities available for sale (4,355) 0
Proceeds from maturities and principal paydowns
on securities available for sale 5,700 879
Proceeds from sales of securities available for sale 7,870
Purchase of Federal Home Loan Bank stock 0 (1,117)
Other net changes in loans 452 (18,506)
Proceeds from sale of foreclosed property 63
Purchases of premises and equipment (102) (133)
Net cash paid from sale of branch facility (23,535)
Investment in land in real estate joint venture 0 (44)
Proceeds from sale of land real estate joint venture 548 694
Distribution to minority interest portion of real estate joint (227) (346)
venture
Proceeds from sale of premises and equipment 0 166
-------- --------
Net cash provided (used) by investing activities 2,079 (34,072)
-------- --------
5
Financing Activities
Net change in deposits 12,889 21,441
Proceeds from borrowings 26,000 38,925
Repayment of borrowings (34,170) (27,094)
Purchase of treasury stock shares (2) (1,045)
Cash dividend paid on common stock (173) (198)
Net changes in advances by borrowers for taxes and insurance (65) (28)
-------- --------
Net cash provided by financing activities 4,479 32,001
-------- --------
Net change in cash and cash equivalents 6,113 2,280
Cash and cash equivalents, beginning of period 11,015 13,176
-------- --------
Cash and cash equivalents, end of period $ 17,128 $ 15,456
======== ========
Additional cash flows information:
Interest paid $ 7,336 $ 6,873
Income tax paid $ 625 $ 715
Loans transferred to foreclosed property $ 215 $ 285
See notes to condensed consolidated financial statements
6
Citizens First Financial Corp.
Notes to Condensed Consolidated Financial Statements
1. Background Information
----------------------
Citizens First Financial Corp. (the "Company") was incorporated in January, 1996
and on May 1, 1996 acquired all of the outstanding shares of common stock of
Citizens Savings Bank (the "Bank") upon the Bank's conversion from a federally
chartered mutual savings bank to a federally chartered stock savings bank. The
Company purchased 100% of the outstanding capital stock of the Bank using 50% of
the net proceeds from the Company's initial stock offering which was completed
on May 1, 1996. In April 1999, the Bank was converted from a federally
chartered savings bank to an Illinois state savings bank.
The Company sold 2,817,500 shares of common stock in the initial offering at
$10.00 per share, including 225,400 shares purchased by the Bank's Employee
Stock Ownership Plan (the "ESOP"). The ESOP shares were acquired by the Bank
with proceeds from a Company loan totaling $2,254,000. The net proceeds of the
offering totaled $27,012,000; $28,175,000 less $1,163,000 in underwriting
commissions and other expenses. The Company's stock is traded on the NASDAQ
National Market under the symbol "CFSB".
2. Statement of Information Furnished
----------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and Rule 10-01 of Regulation
S-X, and in the opinion of management reflect all adjustments necessary to
present a fair statement of the financial position as of June 30, 2001 and
December 31, 2000, the results of operations and comprehensive income for the
six and three months ended June 30, 2001 and 2000 and the cash flows for the six
months ended June 30, 2001 and 2000. All adjustments to the financial statements
were of a normal recurring nature. These results have been determined on the
basis of generally accepted accounting principles. The results of operations for
the six months ended June 30, 2001 are not necessarily indicative of the results
to be expected for the entire fiscal year.
The condensed consolidated financial statements are those of the Company and the
Bank. These condensed consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto, dated
January 19, 2001, included in the Company's 2000 Annual Report to Shareholders.
3. Earnings Per Share
------------------
Basic earnings per share have been computed based upon the weighted average
common shares outstanding for the six and three months ended June 30, 2001 and
2000. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
GENERAL
Citizens First Financial Corp. (the "Company") is the holding company for
Citizens Savings Bank (the "Bank"). The Company completed its initial offering
of 2,817,500 shares of common stock on May 1, 1996 in connection with the
conversion of the Bank from the mutual to stock form of ownership. Prior to the
Company's acquisition of the Bank on May 1, 1996, the Company had no material
assets or operations.
The Bank was originally chartered in 1888 by the State of Illinois and in 1989
became a federally chartered savings bank. In April 1999, the Bank was
converted from a federally chartered savings bank to an Illinois state savings
bank. The Bank's principal business consists of the acceptance of retail
deposits from the general public in the area surrounding its main and branch
offices and the investment of these deposits, together with funds generated from
operations and borrowings, primarily in one-to-four family residential
mortgages. The Bank also originates commercial, multi-family, construction and
land, commercial real estate, agricultural, consumer and other loans.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2001 and DECEMBER 31, 2000
Total assets increased from $329.9 million at December 31, 2000 to $336.0
million at June 30, 2001. The $6.1 million or 1.8% increase was primarily due
to the increase in interest-bearing demand deposits, which is included in cash
and cash equivalents, and mortgage loans held for sale.
Cash and cash equivalents increased from $11.0 million at December 31, 2000 to
$17.1 million at June 30, 2001 an increase of $6.1 million or 55.5%. This
increase resulted from increased deposits.
Investment securities decreased from $15.1 million at December 31, 2000 to $13.7
million at June 30, 2001, a decrease of $1.4 million or 9.3%. The decrease was
primarily due to the principal reduction of investment securities during the
first six months of 2001.
Loans, net of allowance for loan losses and including loans held for sale,
increased from $285.0 million at December 31, 2000 to $286.6 million at June 30,
2001, an increase of $1.6 million or 0.6%.
The Company maintains an allowance for loan losses to absorb losses inherent in
the loan portfolio. The allowance for losses increased from $1,826,000 at
December 31, 2000 to $2,186,000 at June 30, 2001, an increase of $360,000 or
19.7%. The allowance is based on ongoing assessments of the probable estimated
losses inherent in the loan portfolio. The methodology for assessing the
appropriateness of the allowance consists of several key elements, which include
a formula allowance and a specific allowance for identified problem loans.
The formula allowance is calculated by applying loss factors to outstanding
loans based on the internal risk grade of such loans. Changes in risk grades of
both performing and non-performing loans affect the amount of the formula
allowance. Loss factors are based on historical loss experience and may be
adjusted for significant factors that, in management's judgment, affect the
collectibility of the portfolio as of the evaluation date. Loss factors are
based on (1) historical loss experience over a five-year period, which
management believes approximates a business
8
cycle; (2) individual evaluations of residential, commercial real estate,
construction, agricultural, commercial and consumer loans and (3) expected
charge-offs by loan classification for one-year.
The Company also evaluates various conditions affecting the current lending
operations and adjusts the historical loss factors accordingly. The conditions
evaluated include (1) general economic and business conditions affecting the
Company's lending areas; (2) collateral values; (3) loan volumes and
concentrations; (4) seasoning of the loan portfolio; (5) specific industry
conditions and (6) recent loss experience in particular segments of the
portfolio.
A specific allowance is established in cases where management has identified
significant conditions or circumstances related to a loan that management
believes indicate the probability that a loss has been incurred.
The allowance for loan losses is based upon estimates of probable losses
inherent in the loan portfolio. The amount of actual losses can vary
significantly from the estimated amounts. The methodology includes several
features that are intended to reduce the differences between estimated and
actual losses. The Company closely monitors any difference of actual and
estimated losses and adjusts the methodology accordingly.
There were no changes in estimation methods or assumptions that affected our
methodology for assessing the appropriateness of the allowance for loan losses
from December 31, 2000 to June 30, 2001. The increased allowance in 2001 was
related to the increase in delinquent and other problem loans.
Non-performing loans are loans which are past due 90 days or more, and non-
accruing loans. The ratio of the Company's allowance for loan losses to total
non-performing loans was 34.4% and 34.7% at June 30, 2001 and December 31, 2000,
respectively. Despite an increase in the allowance for loan losses, the ratio
decreased due to an increase in non-accrual loans. Management believes that the
problems with these borrowers are isolated and not indicative of the loan
portfolio in total.
The Bank's internally classified loans, which include non-performing loans, in
addition to potential problem loans, increased from $8,277,000 at December 31,
2000 to $11,198,000 at June 30, 2001. The increase of $2,921,000 was
attributable to a $1,838,000 increase in potentially problem loans and a
$1,271,000 increase in non-accrual loans.
Loans delinquent greater than 90 days decreased from $3,767,000 at December 31,
2000 to $3,579,000 at June 30, 2001, a decrease of $188,000. As of December 31,
2000, there were two borrowers with loans of approximately $3.0 million
delinquent greater than 90 days that are not included in the loans delinquent
greater than 90 days at June 30, 2001. The first borrower, a residential
developer with approximately $1.2 million in loans, was transferred to non-
accrual status during the second quarter of 2001. The Company expects that the
properties supporting the residential construction loans will be completed and
sold in 2001. A specific reserve of $150,000 has been established for these
loans. The Company believes that this reserve adequately covers any possible
losses relating to these loans. During the first six months of 2001, the Bank
refinanced the second borrower, a residential developer with approximately $1.8
million in loans. This refinanced developer has remained current on their loan
payments. Since December 31, 2000 a $1.1 million loan secured by lots in a
retail development and $1.3 million in loans to a another borrower have become
delinquent greater than 90 days. The loan for the retail development is to the
same borrowers that are discussed regarding potential problem loans. The
collateral for the other new delinquent borrower is residential lots and homes
and agricultural land. The Company
9
believes that these loans have adequate collateral and no loss will be incurred.
The other loans delinquent greater than 90 days at June 30, 2001 are individual
residential loans for which the Company believes there will be no loss.
Non-accruing loans increased from $1,493,000 at December 31, 2000 to $2,764,000
at June 30, 2001, an increase of $1,271,000. The increase pertains to $1.2
million in loans made to a residential contractor. The remaining non-accruing
loans pertain to loans made to a residential real estate developer. The
developer, PAK Builders, an Illinois general partnership, had $4.2 million in
loans with the Bank for the development of 27 residential properties. On August
3, 2000 they filed for bankruptcy protection. A bankruptcy trustee is handling
the disposition of PAK Builders' assets. During 2000, the Company charged off
$2.8 million of the loans outstanding to PAK Builders. Based on the cash and
real estate currently held by the trustee and the Bank's expected portion of
these assets, management believes that there will be no additional losses
relative to PAK Builders. It is expected that the trustee will complete the
distribution of the proceeds to creditors by the third quarter of 2001.
The balance of potential problem loans increased from $3,017,000 at December 31,
2000 to $4,855,000 at June 30, 2001, an increase of $1,838,000. The balance
primarily relates to three borrowers. The first is a commercial mortgage for
$3.3 million for a retail development. Subsequent to year-end, the borrowers
requested and were granted a loan modification of the interest rate and maturity
for their loan on a building in this development. The loan was delinquent less
than 30 days at December 31, 2000. As of June 2001 this loan is contractually
current. The modifications were requested because of the borrowers' difficulties
meeting their combined obligations to other lenders. The collateral for the
Company's loan for this development is a commercial building and property in a
large shopping center. The building that serves as the Bank's collateral is
leased and, in addition, the borrowers have personally guaranteed the loan.
Management believes there will be no loss related to this loan. The second
borrower is an aviation firm with potential problem loans totaling $1.1 million.
The collateral for the loans are mortgages on a hanger and office maintenance
building. The loans are listed as potential problem loans because the borrower
has filed for protection under bankruptcy laws. Based on appraisals of the
property, no loss is expected on these loans. The third borrower is an
individual with loans totaling $394,000. The loans are contractually delinquent
one month. The collateral for the loans is residential properties. Based on the
value of the collateral management does not anticipate a loss on these loans.
Land in real estate joint venture decreased from $1,220,000 at December 31, 2000
to $905,000 at June 30, 2001, a decrease of $315,000 or 25.8%. The decrease was
due to the sale of lots in the development.
Other assets increased from $5.3 million at December 31, 2000 to $5.5 million at
June 30, 2001, an increase of $200,000 or 3.8%.
Deposits increased from $228.9 million at December 31, 2000 to $241.8 million at
June 30, 2001, an increase of $12.9 million or 5.6%. The increase was due
primarily to an increase in bank internal demand deposits of $6.5 million and a
$4.8 million increase in time deposits. In prior periods, the Bank utilized
demand deposit accounts at an unaffiliated commercial bank rather than internal
demand accounts for certain bank activities.
Borrowings decreased from $68.0 million at December 31, 2000 to $59.8 million at
June 30, 2001, a decrease of $8.2 million or 12.1%. Debt repaid during the first
six months of 2001 was due to normal maturities and repayments. Proceeds from
the increase in deposits were used to reduce borrowings during the first half of
2001.
10
Other liabilities increased from $3,123,000 at December 31, 2000 to $3,285,000
at June 30, 2001 an increase of $162,000 or 5.2%.
Total stockholders' equity capital increased by $1.3 million or 4.5%, from $29.3
million at December 31, 2000 to $30.6 million at June 30, 2001. The increase
resulted from the earnings of the Company of $1,148,000 for the six months ended
June 30, 2001, offset by the payment of $172,000 in dividends to shareholders, a
$25,000 increase in accumulated other comprehensive income and recognition of
earned incentive plan and ESOP shares of $342,000.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2001 and JUNE
30, 2000
GENERAL
Net income for the six months ended June 30, 2001 decreased by $1,263,000 from
$2,411,000 for the six months ended June 30, 2000 to $1,148,000 for the six
months ended June 30, 2001. The decrease was primarily due to a $2.4 million
gain on the sale of a branch facility offset by a $378,000 loss on the sale of
investment securities in the first six months of 2000.
INTEREST INCOME
Interest on loans increased by $377,000 or 3.3%, from $11,409,000 for the six
months ended June 30, 2000 to $11,786,000 for the six months ended June 30,
2001. Interest on loans increased due to an increase in the average balance of
loans outstanding of $7.6 million. The effect of this increase on interest on
loans was offset by a decrease in the average yield on loans outstanding of 9
basis points and an increase in non-accrual loans.
Interest on investments increased from $684,000 for the six months ended June
30, 2000 to $808,000 for the six months ended June 30, 2001, an increase of
$124,000 or 18.1%. The increase was due to a $4.7 million increase in the
average balances of interest-bearing demand deposits, FHLB stock and investment
securities in 2001 and a 24 basis point increase in the average yield on
investments and interest-bearing deposits.
INTEREST EXPENSE
Interest on savings deposits increased by $982,000 or 20.3%, from $4,843,000 for
the six months ended June 30, 2000 to $5,825,000 for the six months ended June
30, 2001. The increase was due to a $14.6 million increase in the average
balance of deposits and a 55 basis point increase in the average cost of
deposits.
The interest on borrowings decreased by $76,000 or 4.1%, from $1,876,000 for the
six months ended June 30, 2000 to $1,800,000 for the six months ended June 30,
2001 primarily as a result of a 21 basis point decrease in the average cost of
borrowings.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $360,000 for the six months ended June 30,
2001 and $240,000 for the three months ended June 30, 2000. The increase was due
to the increase in internally classified loans. The provision for both periods
reflects management's analysis of the Company's loan portfolio based on
information which is currently available to it at such time. In particular,
management considers the level of non-performing loans and potential problem
loans. While management believes that the allowance for loan losses is
sufficient based on information currently available, no assurances can be made
that future events or conditions or regulatory
11
directives will not result in increased provisions for loan losses or additions
to the Bank's allowance for losses which may adversely affect net income.
OTHER INCOME
Total other income decreased by $1,963,000 or 62.0%, from $3,165,000 for the six
months ended June 30, 2000 to $1,202,000 for the six months ended June 30, 2001.
The amount for the six months ended June 30, 2000 includes a $2,445,000 net gain
on the sale of a branch facility. This gain was offset by a $378,000 loss on the
sale of securities incurred in a restructuring of the investment portfolio. Net
gains on loan sales increased from $106,000 for the six months ended June 30,
2000 to $323,000 for the six months ended June 30, 2001, an increase of $217,000
or 204.7%. The lower interest rate environment in the first six months of 2001
resulted in increased loan originations, sales and gains on sale of loans.
Other operating income decreased from $770,000 for the six months ended June 30,
2000 to $646,000 for the six months ended June 30, 2001, a decrease of $124,000
or 16.1%. The decrease resulted primarily from decreased ATM fees of $14,000,
loan fees of $51,000 and lower office rental income of $16,000.
OTHER EXPENSES
Total other expenses decreased by $423,000 or 9.7%, from $4,358,000 for the six
months ended June 30, 2000 to $3,935,000 for the six months ended June 30, 2001.
Salaries and benefits decreased by $268,000 or 11.0%, from $2,440,000 for the
six months ended June 30, 2000 to $2,172,000 for the six months ended June 30,
2001. The decrease was primarily due to lower employee benefit expenses and
other staffing changes. Other operating expense decreased from $1,022,000 for
the six months ended June 30, 2000 to $848,000 for the three months ended June
30, 2001, a decrease of $174,000 or 17.0%, primarily because of lower legal and
professional fees associated with the 2000 Annual Meeting of Shareholders, and
operational efficiencies.
INCOME TAX EXPENSE
Total income tax expense was $728,000 for the six months ended June 30, 2001,
compared to $1,530,000 for the six months ended June 30, 2000. The decrease is
attributable to lower taxable income for the six months ended June 30, 2001. The
effective tax rate was 38.8% for the six months ended June 30, 2001 and 2000.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2001 and
JUNE 30, 2000
GENERAL
Net income for the three months ended June 30, 2001 decreased by $1,320,000 from
$1,902,000 for the three months ended June 30, 2000 to $582,000 for the three
months ended June 30, 2001. The decrease was due to a $2.4 million gain on the
sale of a branch facility in the second quarter of 2000.
INTEREST INCOME
Interest on loans decreased by $123,000 or 2.1%, from $5,875,000 for the three
months ended June 30, 2000 to $5,752,000 for the three months ended June 30,
2000. Interest on loans decreased due to an increase in the non-accrual loans
and a decrease in the average yield on loans outstanding of 27 basis points.
Interest on investments increased from $332,000 for the three months ended June
30, 2000 to $412,000 for the three months ended June 30, 2001, an increase of
$80,000 or 24.1%. The increase was due to a $8.0 million increase in the average
balances of interest-bearing demand deposits,
12
FHLB stock and investment securities in 2001. There was a 27 basis point
decrease in the average yield on investments and interest-bearing deposits.
INTEREST EXPENSE
Interest on savings deposits increased by $459,000 or 18.8%, from $2,445,000 for
the three months ended June 30, 2000 to $2,904,000 for the three months ended
June 30, 2001. The increase was due to a $20.4 million increase in the average
balance of deposits and a 36 basis point increase in the average cost of
deposits.
The interest on borrowings decreased by $220,000 or 20.5%, from $1,072,000 for
the three months ended June 30, 2000 to $852,000 for the three months ended June
30, 2001 as a result of a $8.6 million decrease in average borrowings and a 52
basis point decrease in the average cost of borrowings.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $180,000 for the three months ended June 30,
2001 and $120,000 for the three months ended June 30, 2000. The increase was due
to the increase in internally classified loans. The provision for both periods
reflects management's analysis of the Company's loan portfolio based on
information which is currently available to it at such time. In particular,
management considers the level of non-performing loans and potential problem
loans. While management believes that the allowance for loan losses is
sufficient based on information currently available, no assurances can be made
that future events or conditions or regulatory directives will not result in
increased provisions for loan losses or additions to the Bank's allowance for
losses which may adversely affect net income.
OTHER INCOME
Total other income decreased by $1,934,000 or 70.4%, from $2,746,000 for the
three months ended June 30, 2000 to $812,000 for the three months ended June 30,
2000. The amount for the three months ended June 30, 2000 includes a $2,445,000
net gain on the sale of a branch facility. This gain was offset by a $378,000
loss on the sale of securities incurred in a restructuring of the investment
portfolio. Net gains on loan sales increased from $47,000 for the three months
ended June 30, 2000 to $218,000 for the three months ended June 30, 2001, an
increase of $171,000 or 363.8%. The lower interest rate environment in 2001
resulted in increased loan originations, sales and gains on sale of loans. Other
operating income decreased from $410,000 for the three months ended June 30,
2000 to $361,000 for the three months ended June 30, 2001, a decrease of $49,000
or 12.0%. The decrease resulted primarily from decreased loan fees of $38,000
and lower office rental income of $5,000.
OTHER EXPENSES
Total other expenses decreased by $117,000 or 5.3%, from $2,206,000 for the
three months ended June 30, 2000 to $2,089,000 for the three months ended June
30, 2001. Salaries and benefits decreased by $169,000 or 14.5%, from $1,167,000
for the three months ended June 30, 2000 to $998,000 for the three months ended
June 30, 2001. The decrease was primarily due to the efficiencies achieved from
the sale of a branch facility in 2000 and other staffing changes.
INCOME TAX EXPENSE
Total income tax expense was $369,000 for the three months ended June 30, 2001,
compared to $1,208,000 for the three months ended June 30, 2000. The increase
is attributable to higher taxable income for the three months ended June 30,
2001. The effective tax rate was 38.8% for the three months ended June 30, 2001
and 2000.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, principal and interest
payments on loans and securities, sales of loans and securities and FHLB
advances. While maturing and scheduled amortization of loans are predictable
sources of funds, deposit outflows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Bank's liquidity requirement, which may be varied at the direction of the Bank's
regulators depending on economic conditions and deposit flows, is based upon a
percentage of the Bank's deposits and short-term borrowings.
At June 30, 2001, the Bank exceeded all of its regulatory capital requirements
with Tier 1 capital of $29.1 million, or 8.9% of average total assets, which is
above the required level of $13.1 million or 4.0%; and risk-based capital of
$31.2 million or 13.3% of risk-weighted assets, which is above the required
level of $18.8 million or 8.0%.
The Company's most liquid assets are cash and interest-bearing demand accounts.
The level of these accounts is dependent on the operating, financing, lending
and investing activities during any given period. At June 30, 2001 cash and
interest-bearing deposits totaled $17.1 million.
The Company has other sources of liquidity if a need for additional funds
arises, including FHLB advances, loan sales, brokered deposits and Fed funds.
At June 30, 2001, the Bank had outstanding advances with the FHLB of $55.6
million. The FHLB maintains two limitations on borrowing availability based on
(1) FHLB stock ownership and (2) total assets. The Bank currently meets the
stock limitation; however, this limit may be raised by the purchase of
additional FHLB stock. Based on the total assets limitations, the Bank may
increase its borrowings with the FHLB by approximately $60.5 million. The
ability to borrow this amount would require meeting regulatory mandated loan and
collateral limits. Depending upon market conditions and the pricing of deposit
products and FHLB borrowings, the Bank may utilize FHLB advances to fund loan
originations.
At June 30, 2001 the Bank had commitments to originate loans and unused lines of
credit totaling $18.5 million. Certificate accounts which are scheduled to
mature in one year or less from June 30, 2001 totaled $133.4 million. The Bank
anticipates that it will have sufficient funds to meet its current commitments
and maturing deposits.
Current Accounting Issues
During 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities". This
Statement requires companies to record derivatives on the balance sheet at their
fair value. This new Statement applies to all entities. Statement No. 137
amended the effective date of Statement No. 133 to fiscal years beginning after
June 15, 2000. This Statement may not be applied retroactively to financial
statements of prior periods. The adoption of this Statement had no material
impact on the Company's financial position or results of operation.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets".
SFAS No. 141 requires that all business combinations be accounted for using the
purchase method of accounting and requires separate recognition of intangible
assets that meet certain criteria. This statement applies to all business
combinations after June 30, 2001. SFAS No. 142 requires that an intangible
asset that is acquired shall be initially recognized and measured based on its
fair value. This statement also provides that
14
goodwill should not be amortized, but shall be tested for impairment annually,
or more frequently if circumstances indicate potential impairment, through a
comparison of fair value to its carrying amount. SFAS No. 142 is effective for
fiscal periods beginning after December 15, 2001. The adoption of these
statements will have no impact on the Company's financial condition or results
of operation.
15
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Sources of market risk include interest rate risk, foreign currency exchange
rate risk, commodity price risk and equity price risk. The Company is only
subject to interest rate risk. The Company purchased no financial instruments
for trading purposes during the three and six months ended June 30, 2001 and
2000.
The principal objective of the Company's interest rate risk management function
is to evaluate the interest rate risk included in balance sheet accounts,
determine the level of risk appropriate given the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with Board of Director approved
guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates. The Company
monitors its interest rate risk as such risk relates to its operating
strategies. The Company's Board of Directors reviews the Company's interest
rate risk position on a quarterly basis. The Company's Asset/Liability
Committee is comprised of the Company's senior management under the direction of
the Board of Directors, with the Committee responsible for reviewing with the
Board of Directors its activities and strategies, the effect of those strategies
on the Company's net interest margin, the market value of the portfolio and the
effect that changes in the interest rates will have on the Company's portfolio
and its exposure limits. The extent of the movement of interest rates is an
uncertainty that could have a negative impact on the earnings of the Company.
In recent years, the Company has utilized the following strategies to manage
interest rate risk: (1) originating for investment adjustable-rate residential
mortgage and fixed-rate one-to-four family loans with maturities of 10 years or
less; (2) generally selling fixed-rate one-to-four family loans with maturities
exceeding 10 years in the secondary market without recourse and on a servicing
retained basis; (3) increasing its origination of shorter term and/or adjustable
rate commercial loans; and (4) investing in shorter term investment securities
which may generally bear lower yields as compared to longer term investments,
but which may better position the Company for increases in market interest
rates.
The Company's interest rate and market risk profile has not materially changed
from the year ended December 31, 2000. Please refer to the Company's 2000 Form
10-K for further discussion of the Company's market and interest rate risk.
16
PART II. -- OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any legal proceedings of a material nature
at this time other than those occurring in the ordinary course of business,
which in the aggregate involves amounts which are believed by management to
be immaterial to the financial condition of the Company.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
a. The Company's Annual Meeting of Shareholders was held on April
23, 2001.
b. See Item 4-c below.
c. At such meeting the shareholders approved the following
matters:
1. The election of the following individuals as Directors:
Votes For Votes Withheld Term
--------- -------------- -------
Dr. Lowell M. Thompson 1,269,494 57,205 3 years
Ronald C. Wells 1,270,519 56,180 3 years
Additionally, the following individuals are the other Directors whose term
of office as a Director continued after the meeting:
L. Carl Borngasser
Harold L. Hoeferle
C. William Landefeld
Arthur W. Mier
2. The ratification of Olive LLP as independent auditor of
the Company for the fiscal year ending December 31,
2001, as reflected by 1,294,137 votes for, 28,462 votes
against and 4,100 abstentions.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
11.0 Statement re: Computation of Per Share Earnings (filed
herewith)
b. Reports on Form 8-K
Citizens First Financial Corp. filed the following Form 8-K
during the quarter ended June 30, 2001: None
17
Exhibit Index
-------------
11.0 Statement re: Computation of Per Share Earnings 20
18
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Citizens First Financial Corp.
Date: August 14, 2001 /s/ C. William Landefeld
--------------- ------------------------------
C. William Landefeld
President
Date: August 14, 2001 /s/ Dallas G. Smiley
--------------- ------------------------------
Dallas G. Smiley
Chief Financial Officer
19