-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KBCGqVFmnekg8Ok64kpcrY+Mz4TDcGktojV8bydlL/Pl5QotxNbZa1qHKh2nXUjf PGd80MwjwFkPoaibYkuwFQ== 0001005477-00-002714.txt : 20000331 0001005477-00-002714.hdr.sgml : 20000331 ACCESSION NUMBER: 0001005477-00-002714 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS FIRST FINANCIAL CORP CENTRAL INDEX KEY: 0001006265 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 371351861 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14274 FILM NUMBER: 588428 BUSINESS ADDRESS: STREET 1: 2101 NORTH VETERANS PARKWAY CITY: BLOOMINGTON STATE: IL ZIP: 61704 BUSINESS PHONE: 3096618700 MAIL ADDRESS: STREET 1: 2101 NORTH VETERANS PARKWAY CITY: BLOOMINGTON STATE: IL ZIP: 61704 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 Commission File No.: 1-14274 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) (Zip Code) Registrant's telephone number: (309) 661-8700 Securities registered pursuant to Section 12(g) of the Act: None Securities registered pursuant to Section 12(b) of the Act: Common Stock par value $0.01 per share (Title of class) American Stock Exchange (Name of exchange on which registered) 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. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| The aggregate market value of the voting stock held by non-affiliates of the registrant, i.e., persons other than directors and executive officers of the registrant is $23,759,454 and is based upon the last sales price as quoted on The American Stock Exchange for March 14, 2000. The Registrant had 1,958,015 shares of Common Stock outstanding as of March 14, 2000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the year ended December 31, 1999, are incorporated by reference into Part II of this Form 10-K. Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K. INDEX PAGE PART I Item 1 Business....................................................1 Item 2 Properties.................................................23 Item 3 Legal Proceedings..........................................24 Item 4 Submission of Matters to a Vote of Security Holders........24 Supplemental Information - Executive Officers of the Registrant PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters .......................................25 Item 6 Selected Financial Data....................................25 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations........................25 Item 7A Quantitative and Qualitative Disclosures about Market Risk................................................25 Item 8 Financial Statements and Supplementary Data................25 Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosures.......................25 PART III Item 10 Directors and Executive Officers of the Registrant.........25 Item 11 Executive Compensation.....................................26 Item 12 Security Ownership of Certain Beneficial Owners and Management.............................................26 Item 13 Certain Relationships and Related Transactions.............26 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..................................................26 Signatures....................................................................28 PART I Item 1 Business General Citizens First Financial Corp. (the "Company") was incorporated under Delaware law in January 1996. The Company completed its initial public offering of 2,817,500 shares of common stock on May 1, 1996 in connection with the conversion of Citizens Savings Bank, F.S.B (the "Bank") from the mutual to stock form of ownership (the "Conversion"). The Company is a savings and loan holding company and is subject to regulation by the Office of Thrift Supervision ("OTS"), and the Securities and Exchange Commission ("SEC"). Currently, the Company does not transact any material business other than through its subsidiary, the Bank. At December 31, 1999, the Company had total assets of $316.6 million, total deposits of $220.2 million and total stockholders' equity of $34.3 million. 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 branch offices and the investment of those deposits, together with funds generated from operations and borrowings, in one- to four-family residential mortgage loans, multi-family, commercial real estate, consumer and other loans. The Bank originates loans for investment and for sale. Currently, it is the Bank's policy to sell, on a servicing retained basis, most longer-term fixed rate one- to four-family mortgage loans it originates as a method of controlling its growth, managing its interest rate risk and increasing its loan servicing fee income. The Bank's revenues are derived principally from interest on its mortgage, consumer and commercial loans, loan servicing fees and, to a lesser extent, the interest on its securities. The Bank's primary source of funds are deposits, principal and interest payments on loans and securities, borrowings from the Federal Home Loan Bank of Chicago and, to a lesser extent, proceeds from the sale of loans and securities. The Bank had two wholly-owned service corporations, CSL Service Corporation and Fairbury Financial Services Corp. CSL Service Corporation is an Illinois-chartered corporation that has a joint venture with an independent insurance agency and a participant in a joint venture that has purchased and is developing commercial real estate. Fairbury Financial Services Corp., an Illinois-chartered corporation, that serviced previously sold tax deferred annuities and long-term care insurance policies that it sold on an agency basis was merged into CSL Service Corporation in January, 1999. Market Area and Competition The Bank is a community-oriented savings institution offering a variety of financial products and services to meet the needs of the communities it serves. The Bank's deposit gathering is concentrated in the communities surrounding its six offices located in the municipalities of Bloomington, Normal, Eureka and Fairbury, Illinois which are part of McLean, Woodford and Livingston Counties. In January 2000, the Company entered into a purchase agreement for the sale of certain fixed assets and assumption of deposit liabilities of a branch located in Eureka, Illinois. McLean County comprises the greater Bloomington/Normal metropolitan area and Woodford, Tazewell and Livingston Counties are adjacent to the greater Bloomington/Normal metropolitan area. The economy in McLean, Woodford, Tazewell and Livingston Counties has historically benefitted from the presence of the national and regional headquarters of State Farm Insurance Company, the Mitsubishi Motors Corporation, Caterpillar, GTE, the Eureka Company, Illinois Farm Bureau, Illinois State University and Illinois Wesleyan University as well as a variety of agricultural related businesses. These counties are the primary market area for the Bank's lending and deposit gathering activities. -1- The Bank faces significant competition both in making loans and in attracting deposits. The greater Bloomington/Normal metropolitan area is a highly competitive market. The Bank faces direct competition from a significant number of financial institutions operating in its market area, many with a state-wide or regional presence and in some cases a national presence. Many of these financial institutions are significantly larger and have greater financial resources than the Bank. State Farm Insurance Company, Bloomington-Normal's largest business, has opened a savings bank, which it will operate through its agents on a national basis. The Bank's competition for loans comes principally from commercial banks, savings and loan associations, mortgage banking companies, credit unions and insurance companies. Its most direct competition for deposits has historically come from savings and loan associations and commercial banks. In addition, the Bank faces increasing competition for deposits from non-bank institutions such as brokerage firms and insurance companies in such areas as short-term money market funds, corporate and government securities funds, mutual funds and annuities. Competition may also increase as a result of the lifting of restrictions on the interstate operations of financial institutions. Investment Activities The investment policy of the Bank, as approved by the Board of Directors, requires management to maintain adequate liquidity and generate a favorable return on investments without incurring undue interest rate and credit risk. The Bank has invested primarily in U.S. Agency securities, a Federal Home Loan Bank demand investment account, eligible mutual funds, corporate securities and U.S. government sponsored agency issued mortgage-backed securities. SFAS 115 requires the Bank to designate its securities as held to maturity, available for sale or held for trading. The Bank does not currently maintain a portfolio of securities categorized as held to maturity or held for trading. The Bank's investment securities generally consist of U.S. Agency obligations and mortgage-backed and mortgage-related securities. The Bank's mortgage-backed securities consist of pass through certificates representing interests in pools of fixed and adjustable rate mortgage loans issued or guaranteed by FNMA, FHLMC or GNMA. At December 31, 1999, the Bank's portfolio of investment and mortgage-backed securities totaled $16.1 million, all of which was categorized as available for sale. In recent periods, the Bank has primarily invested in securities in order to maintain liquid assets for its operations and as a means of utilizing its excess funding not necessary for loan originations. The Board of Directors reviews all of the activity in the investment portfolio on a monthly basis. Lending Activities Origination, Sale, Servicing and Purchase of Loans. The Bank's loan origination activities are conducted primarily by its loan personnel, operating at its six branch offices. All loans originated by the Bank are underwritten by the Bank pursuant to the Bank's policies and procedures. The Bank originates both adjustable-rate and fixed-rate mortgage loans, commercial loans and consumer loans. The Bank's ability to originate loans is dependent upon the relative customer demand for the type of loan and demand for fixed-rate or adjustable-rate loans, which is affected by the current and expected future level of interest rates. While the Bank has in the past, from time to time, sold adjustable-rate one- to four-family loans and retained mortgage loans with terms of 10 years or more, it is currently the general policy of the Bank to originate for sale in the secondary market one- to four-family fixed-rate mortgage loans with maturities exceeding ten years and to originate for investment all adjustable-rate one- to four-family mortgage loans and fixed-rate one- to four-family mortgage loans with maturities of ten years or less. One- to-Four Family Mortgage Lending. The Bank currently offers both fixed-rate and adjustable-rate mortgage loans secured by one- to-four family residences located in the Bank's primary market area, with -2- maturities of up to thirty years. While the Bank has originated such loans secured by properties outside its market area, substantially all of such loans at December 31, 1999 were secured by property located in the Bank's primary market area. One- to-four family mortgage loan originations are generally obtained from the Bank's loan representatives operating in its branch offices and their contacts with the local real estate industry, existing or past customers, and members of the local communities. Multi-Family Lending. The Bank originates fixed and adjustable-rate multi-family mortgage loans generally secured by 5 to 70 unit apartment and student housing buildings located in the Bank's primary market area. In reaching its decision on whether to make a multi-family loan, the Bank considers the qualifications and financial condition of the borrower as well as the value and condition of the underlying property. The factors considered by the Bank include: the net operating income of the mortgaged premises before debt service and depreciation; the debt coverage ratio (the ratio of net earnings to debt service); and the ratio of loan amount to appraised value. Commercial Real Estate Lending. The Bank originates adjustable-rate commercial real estate loans that are generally secured by properties used for business purposes such as small office buildings or a combination of residential and retail facilities located in the Bank's primary market area. Loans secured by commercial real estate properties, like multi-family loans, generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks through its underwriting standards, which require such loans to be qualified on the basis of the property's income and debt coverage ratio. Construction and Land Lending. The Bank originates loans for the acquisition and development of commercial and residential property located in its primary market area. These loans are offered to local developers and individuals. The majority of the Bank's construction loans are originated primarily to finance the construction of one- to four-family, owner-occupied residential properties and multi-family properties located in the Bank's primary market area. Such loans are offered for the construction of properties that are pre-sold or for which permanent financing has been secured, as well as for properties that are not pre-sold or for which permanent financing has not been secured. Construction and land development financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development compared to the estimated cost (including interest) of construction. If the estimate of value proves to be inaccurate, the Bank may be confronted with a project, when completed, having a value which is insufficient to assure full repayment. Commercial Lending. The Bank offers commercial loans to businesses operating in the Bank's primary market area on a selective basis. Unlike mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be -3- difficult to appraise and may fluctuate in value based on the success of the business. Included in this total are agricultural loans made within our lending area. These agricultural loans are generally offered with one year terms in amounts up to $500,000 and are generally secured by crops, equipment and other assets and personal guarantees. Consumer and Other Lending. The Bank's portfolio of consumer and other loans primarily consist of fixed-rate, fixed-term home equity loans, adjustable home equity lines of credit, loans secured by automobiles, home improvement loans, loans secured by deposit accounts and unsecured personal loans. Loan Servicing. The Bank generally services all loans it retains for investment and also services a portfolio of one- to four-family mortgage loans for others which is primarily generated from its loan sale activity. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, making inspections as required of mortgaged premises, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. Deposit Activities Deposits. The Bank offers a variety of deposit accounts with a range of interest rates and terms. The Bank's deposit accounts consist of savings, NOW accounts, checking accounts, money market accounts and certificate accounts. The Bank also offers certificate of deposit accounts with balances in excess of $100,000 at negotiated rates (jumbo certificates) and Individual Retirement Accounts ("IRAs"). For the year ended December 31, 1999, the average balance of core deposits (savings, NOW, money market and non-interest-bearing checking accounts) totaled $50.6 million, or 25.2%, of total average deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. The Bank's deposits are obtained predominantly from the areas in which its branch offices are located. The Bank relies primarily on customer service and long-standing relationships with customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions significantly affect the Bank's ability to attract and retain deposits. The Bank uses traditional means of advertising its deposit products, including radio and print media and generally does not solicit deposits from outside its market area. While certificate accounts in excess of $100,000 are accepted by the Bank, the Bank does not actively solicit such deposits nor does the Bank currently use brokers to obtain deposits. The Bank has attempted to increase its deposit customer base and decrease its level of dependency on certificate accounts by offering interest free checking accounts without minimum balance requirements. -4- Statistical Data INVESTMENT SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses and approximate market value of the investment securities at the dates indicated were:
Gross Gross Amoritzed Unrealized Unrealized Fair Cost Gains Losses Value ------- ------- ------- ------- (Dollars in thousands) Available for sale at December 31, 1999: Federal agencies $ 7,502 $ 288 $ 7,214 Mortgage-backed securities 8,144 258 7,886 Other asset-backed securities 15 15 Marketable equity securities 1,000 12 988 ------- ------- ------- ------- Total available for sale $16,661 $ 558 $16,103 ======= ======= ======= ======= Available for sale at December 31, 1998: Federal agencies $ 6,500 $ 6 $ 2 $ 6,504 Mortgage-backed securities 10,380 10 91 10,299 Other asset-based securities 231 231 Marketable equity securities 1,000 1 999 ------- ------- ------- ------- Total available for sale $18,111 $ 16 $ 94 $18,033 ======= ======= ======= ======= Available for sale at December 31, 1997: Federal agencies $ 4,209 $ 14 $ 4 $ 4,219 Mortgage-backed securities 14,210 175 14,035 Other asset-backed securities 46 46 Marketable equity securities 1,000 2 1,002 ------- ------- ------- ------- Total available for sale $19,465 $ 16 $ 179 $19,302 ======= ======= ======= =======
-5- The balance of Federal Home Loan Bank of Chicago stock owned at December 31 is as follows: Cost -------------------------------------- (Dollars in thousands) 1999 1998 1997 ---- ---- ---- $2,853 $1,971 $2,453 ====== ====== ====== The fair value of Federal Home Loan Bank stock approximates cost. The yield on the stock is approximately 6.75% at December 31, 1999. The maturity distribution (dollars in thousands) and average yields for the securities available for sale portfolio at December 31, 1999 were: Within 1 Year 1 - 5 Years 5 - 10 Years --------------- --------------- --------------- Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- Federal agencies $ 988 4.98% $2,444 6.37% $3,782 6.58% ------ ------ ------ ----- ------ ----- Total $ 988 4.98% $2,444 6.37% $3,782 6.58% ====== ====== ====== ===== ====== =====
Marketable Equity, Mortgage and Other Due After Ten Year Asset-Backed Securities Total ------------------ ----------------------- ----- Amount Yield Amount Yield Amount Yield ----- ----- ------- ----- ------- ----- Federal agencies $7,2144 6.29% Marketable equity securities $ 988 5.34% 988 5.34 Mortgage-backed securities 7,886 6.22 7,886 6.22 Other asset-backed securities 15 5.44 15 5.44 ----- ------ ------- ----- ------- ----- Total $ -0- 0.00% $ 8,889 6.11% $16,103 6.20% ===== ====== ======= ===== ======= =====
-6- LOAN PORTFOLIO Types of Loans
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Dollars in thousands) Commercial loans $ 12,694 $ 12,727 $ 16,863 $ 8,063 $ 6,865 Real estate loans: Construction and land 72,636 40,946 15,862 12,489 12,353 Commercial 26,633 24,073 25,610 8,934 8,679 Residential 153,070 150,273 168,938 174,253 152,177 Consumer and other loans 16,151 12,072 12,345 11,444 11,719 -------- -------- -------- -------- -------- Total 281,184 240,091 239,618 215,183 191,793 Deferred premium on sale of loans 3 11 33 34 39 -------- -------- -------- -------- -------- Total gross loans 281,187 240,102 239,651 215,217 191,832 Less: Undisbursed portion of loans (1) 15,623 7,189 9,049 3,397 2,859 Unearned interest Deferred loan fees 11 29 293 266 200 Allowance for loan losses 1,679 1,256 840 512 412 -------- -------- -------- -------- -------- Loans, net $263,874 $231,628 $229,469 $211,042 $188,361 ======== ======== ======== ======== ========
(1) The undisbursed portion of loans represents amounts included in gross loans above that have been approved, but not disbursed to the borrower. Loans held for sale at December 31, 1999, 1998, 1997, 1996 and 1995 were $3,007,425, $5,245,872, $2,393,567, $3,027,468 and $-0-, respectively, were not included in the above totals. Maturities and Sensitivities of Loans to Changes in Interest Rates Presented in the table below are the maturities of loans (excluding commercial real estate, residential real estate and consumer and other loans) outstanding as of December 31, 1999. Also presented are the amounts due after one year classified according to the sensitivity to changes in interest rates. Maturing -------------------------- Within 1-5 Over 5 1 Year Years Years Total ------- ------- ------- ------- (Dollars in thousands) Commercial loans $ 7,307 $ 4,413 $ 974 $12,694 Real estate loans-Construction and Land 37,569 33,457 1,610 72,636 ------- ------- ------ ------- Total $44,876 $37,870 $2,584 $85,330 ======= ======= ====== ======= -7- Maturing ------------------- 1 - 5 Over Years 5 Years ------- ------- (Dollars in thousands) Loans maturing after one year with: Fixed rates $26,928 $2,584 Variable rate 10,942 0 ------- ------ Total $37,870 $2,584 ======= ====== Risk Elements December -------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Dollars in thousands) Nonaccruing loans $435 $129 $737 $198 $311 Loans contractually past due 90 days or more other than nonaccuring 134 250 211 369 637 Restructured loans 314 325 341 463 364 Nonaccruing loans are loans which are reclassified to a nonaccruing status when in management's judgment the collateral value and financial condition of the borrower do not justify accruing interest. Interest previously recorded but not deemed collectible is reversed and charged against current income. Interest income on these loans is then recognized when collected. Restructured loans are loans for which the contractual interest rate has been reduced or other concessions are granted to the borrower because of a deterioration in the financial condition of the borrower resulting in the inability of the borrower to meet the original contractual terms of the loans. Interest income of approximately $26,000 for the year ended December 31, 1999, was recognized on the nonaccruing and restructured loans listed in the table above, whereas interest income of approximately $45,000 would have been recognized under their original loan terms. Potential Problem Loans: Management has identified certain other loans totaling $250,000 as of December 31, 1999, not included in the risk elements table, which are current as to principal and interest, about which there are doubts as to the borrowers' ability to comply with present repayment terms. The Bank generates commercial, mortgage and consumer loans from customers located primarily in Central Illinois. The Bank's loans are generally secured by specific items of collateral including real property, consumer assets, and business assets. Although the Bank has a diversified loan portfolio, a substantial portion of their debtors' ability to honor their contracts is dependent upon economic conditions in Central Illinois. -8- The Company accounts for impaired loans in accordance with SFAS No. 114 and No. 118, "Accounting by Creditors for an Impairment of a Loan" and "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures". These Statements require that impaired loans within the scope of these Statements be measured at the present value of expected future cash flows discounted at the loan's effective interest rate, or as a practical expedient, at the loan's observable market price or fair value of the collateral, if the loan is collateral dependent. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the note. The amount of impaired loans outstanding at December 31, 1999 and 1998 and during 1999 and 1998 were immaterial. The Company considers 1-4 family real estate and consumer loans to be homogeneous and are therefore excluded from the separate identification for evaluation of impairment. Allowance for Loan Losses and Impaired Loans The allowance for loan losses is maintained at a level management believes to be adequate to provide for known and potential risks inherent in the loan portfolios. On a quarterly basis, management assesses the adequacy of the allowance for loan losses. Management's evaluation of the adequacy of the allowance considers such factors as prior loss experience, loan delinquency levels and trends, loan portfolio growth and reviews of impaired loans and the value of underlying collateral securing these loans. The analysis of the commercial and industrial loan portfolio includes assessments based on historic loan losses and current quality grades of specific credits, current delinquent and non-performing loans, current economic conditions, growth in the portfolio and the results of recent audits and regulatory examinations. For the review of the adequacy of the allowance for loan losses for real estate loans, assessments are based on current economic conditions and real estate values, historic loan losses and current quality grades of specific credits, recent growth and current delinquent and non-performing loans. The adequacy of the allowance for loan losses as it pertains to the consumer loan portfolio is based on the assessments of current economic conditions, historic loan losses and the mix of loans, recent growth and the current delinquent and non-performing loans. Although the risk of non-payment for any reason exists with respect to all loans, certain other more specific risks are associated with each type of loan. The primary risks associated with commercial loans are quality of the borrower's management and the impact of national and local economic factors. Currently the business atmosphere remains stable for the local economy in the McLean, Livingston and Tazewell County areas. Risk associated with real estate loans include concentrations of loans in a loan type, such as residential real estate, decline in real estate values and a sudden rise in interest rates. Individual loans face the risk of borrower's unemployment as a result of deteriorating economic conditions or renewed contract differences between unions and management of several large companies in the Company's market area. The Company's strategy with respect to addressing and managing these types of risks is for the Company to follow its loan policies and underwriting criteria. The Company has substantially increased its investment in commercial, commercial real estate and construction and land loans since December 31, 1996. Because of the higher degree of risk associated with these types of loans, the Company has undertaken to increase its allowance for loan losses to reflect this increased risk. -9- A provision for loan losses is charged to income to increase the allowance to a level deemed to be adequate based on management's evaluation. When a loan or a part thereof is considered by management to be uncollectible, a charge is made against the allowance. Recoveries of previously charged-off loans are credited back to the allowance. The following table summarizes the changes in the allowance for loan losses for the last five years (in thousands): Summary of Loan Loss Experience
1999 1998 1997 1996 1995 ----------------------------------------------------- Balance at January 1 $1,256 $840 $512 $412 $353 Loan charged off (net): Commercial loans -- (8) -- -- -- Real estate loans: Construction and land -- (7) -- -- -- Commercial -- -- (32) -- -- Residential (57) (32) (106) (47) (59) Consumer and other loans -- -- (32) (20) (5) ------ ------- ------- ------- ------- Net charge-offs (57) (47) (188) (67) (64) ------ ------- ------- ------- ------- Provision for loan losses 480 463 516 167 123 ------ ------- ------- ------- ------- Balance at December 31 $1,679 $ 1,256 $ 840 $ 512 $ 412 ====== ======= ======= ======= ======= Ratio of net charge-offs during the period to average loans outstanding during the period 0.02% 0.02% 0.08% 0.03% 0.03% ====== ======= ======= ======= =======
For many years, the Company has minimized credit risk by adhering to sound underwriting and credit review policies. These policies are reviewed at least annually and changes approved by the board of directors. Senior management is actively involved in business development efforts and maintenance and monitoring of credit underwriting approval. Management believes the allowance for loan losses is adequate to absorb probable loan losses and that the policies and procedures in place to identify and monitor loans for potential losses are satisfactory. -10- Allocation of the Allowance for Loan Losses Presented below is an analysis of the composition of the allowance for loan losses (in thousands of dollars) and percent of each category to total loans: 1999 1998 1997 - -------------------------------------------------------------------------------- % of % of % of Amount Total Amount Total Amount Total - -------------------------------------------------------------------------------- Commercial loans $ 405 24.12% $ 320 25.48% $ 213 25.36% Real estate loans: Construction and land 210 12.51 70 5.57 40 4.76 Commercial 285 16.97 120 9.55 116 13.81 Residential 480 28.59 435 34.63 393 46.78 Consumer and other loans 120 7.15 75 5.97 78 9.29 Unallocated 179 10.66 236 18.80 0 0.0 --- ----- --- ----- - --- Total $1,679 100.0% $1,256 100.0% $ 840 100.0% ====== ===== ====== ===== ====== ===== 1996 1995 - -------------------------------------------------------------------------------- % of % of Amount Total Amount Total - -------------------------------------------------------------------------------- Commercial loans $ 68 13.28% $ 56 13.59% Real estate loans: Construction and land 46 8.98 16 3.88 Commercial 36 7.03 56 13.59 Residential 222 43.37 182 44.18 Consumer and other loans 140 27.34 130 31.55 Unallocated 0 0.0 0 0.0 ---- ----- ---- ----- Total $512 100.0% $412 100.0% ==== ===== ==== ===== The percentage of the allocation of the allowance for loan losses among the various categories have changed for the years 1995 through 1999 to reflect the changes in the types of loans that the Company was originating, the degree of risk associated with these loans and the performance of specific loans. The increased investment in the higher risk commercial, commercial real estate and construction and land loans is reflected in the increased allowance attributed to these classifications. The unallocated portion of the allowance for loan losses represents the amount that is necessary to cover any current adverse conditions on the loan portfolio such as the deterioration in the agricultural industry. -11- DEPOSITS AND BORROWINGS Deposits The following table shows the average amount of deposits and average rate of interest paid thereon for the years indicated.
1999 1998 1997 ---- ---- ---- Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- (Dollars in thousands) Balance at December 31: Noninterest bearing deposits $14,217 0.00% $ 10,333 0.00% $ 7,531 0.00% Money market deposit accounts 12,542 3.40% 10,345 2.26% 9,703 2.41% Savings deposits 19,003 2.20% 17,221 2.40% 16,921 2.48% NOW accounts 19,079 1.76% 16,668 2.27% 14,930 2.26% Certificate of deposit and other time deposits 150,068 5.36% 147,591 5.77% 148,812 5.83% -------- ----- -------- ---- -------- ---- Total deposits $214,909 4.29% $202,158 4.72% $197,897 4.89% ======== ===== ======== ==== ======== ====
As of December 31, 1999, certificates of deposit and other time deposits of $100,000 or more mature as follows:
Maturing -------------------------------------------------- 3 Months 3-6 6-12 Over 12 or less Months Months Months Total ------- ------ ------ ------ ----- (Dollars in thousands) Certificates of deposit and other time deposits $4,580 $2,949 $7,456 $3,702 $18,687 ====== ====== ====== ====== ======= Per cent 24.51% 15.78% 39.90% 19.81% 100.00% ====== ====== ====== ====== =======
-12- Borrowings At December 31, 1999, the Bank had $57,073,000 in outstanding advances from the FHLB. It is the policy of the Bank to utilize advances from the FHLB as an alternative to retail deposits to fund its operations and may do so in the future as part of its operating strategy. The FHLB advance was collateralized primarily by certain of the Bank's mortgage loans and mortgage-backed securities and secondarily by the Bank's investment in capital stock of the FHLB. FHLB advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB will advance to member institutions, including the Bank, fluctuates from time to time in accordance with the policies of the FHLB. At December 31, 1999, the Company had $17,000,000 in FHLB borrowings with a weighted average rate of 5.22% which were callable at various dates. The following table sets forth certain information regarding the Bank's borrowed funds at or for the periods ended on the dates indicated: At or For the Year Ended December 31, ----------------------------- 1999 1998 1997 ---- ---- ---- (Dollars In thousands) FHLB advances: Average balance outstanding ........... $45,481 $33,573 $33,858 ======= ======= ======= Maximum amount outstanding at any month-end during the period ....... $57,073 $39,415 $46,067 ======= ======= ======= Balance outstanding at end of period ................................ $57,073 $39,410 $33,944 ======= ======= ======= Weighted average interest rate during the period ..................... 5.67% 6.37% 6.26% ======= ======= ======= Weighted average interest rate at end of period ...................... 5.79% 5.67% 6.08% ======= ======= ======= RETURN ON EQUITY AND ASSETS 1999 1998 1997 ---- ---- ---- Return on assets (net income divided by average total assets) 0.40% 0.73% 0.69% Return on equity (net income divided by average equity) 3.38% 5.54% 4.88% Dividend payout ratio (dividends per share divided by net income per share) 17.67% 0.00% 0.00% Equity to assets ratio (average equity divided by average total assets) 11.73% 13.11% 14.15% -13- Subsidiary Activities At December 31, 1999, the Bank had a wholly-owned service corporation, CSL Service Corporation ("CSL"), an Illinois chartered company. A prior service corporation, Fairbury Financial Service Corp. was merged into CSL in January, 1999. CSL is a participant in a joint venture with an independent insurance agency (Hometown Insurance) and a participant in a joint venture real estate development (Williamsburg Place LLC) which has purchased and is developing commercial real estate. Personnel As of December 31, 1999, the Bank had 87 authorized full-time employee positions and 38 authorized part-time employee positions. The employees are not represented by a collective bargaining unit and the Bank considers its relationship with its employees to be good. REGULATION AND SUPERVISION General The Company, as a savings and loan holding company, is required to file certain reports with, and otherwise comply with the rules and regulations of the OTS under the Home Owners' Loan Act, as amended (the "HOLA"). The Bank is an Illinois state chartered savings bank and its deposit accounts are insured up to applicable limits by the FDIC under the Savings Association Insurance Fund (the "SAIF"). The Bank is subject to extensive regulation by the Illinois Office of Banks and Real Estate Commissioner ( the "Commissioner"), as its chartering authority, and by the FDIC, as deposit insurer. The Bank must file reports with the Commissioner and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approval prior to entering into certain transactions such as establishing branches and mergers with, or acquisitions of, other depository institutions. There are periodic examinations by the Commissioner and the FDIC to assess the Bank's compliance with various regulatory requirements and financial condition. This regulation and supervision establishes a framework of activities in which a savings bank can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the Commissioner, the FDIC or through legislation, could have a material adverse impact on the Company and the Bank and their operations and stockholders. The Holding Company will also be required to file certain reports with and otherwise comply with the rules and regulations, of the OTS, the Commissioner and of the Securities and Exchange Commission (the "SEC") under the federal securities laws. Certain of the regulatory requirements applicable to the Bank and to the Holding Company are referred to below or elsewhere herein. However, the description of such requirements is not exhaustive and it does not purport to be a complete description of the applicable laws and regulations. -14- The Commissioner has established a schedule for the assessment of "supervisory fees" upon all Illinois savings banks to fund the operations of the Commissioner. These supervisory fees are computed on the basis of each savings bank's total assets (including consolidated subsidiaries) and are payable at the end of each calendar quarter. A schedule of fees has also been established for certain filings made by Illinois savings banks with the Commissioner. The Commissioner also assesses fees for examinations conducted by the Commissioner's staff, based upon the number of hours spent by the Commissioner's staff performing the examination. During the year ended December 31, 1999, the Bank paid approximately $30,000 in supervisory fees and expenses. Regulations Capital Requirements. Under the Illinois law and the regulations of the Commissioner, an Illinois savings bank must maintain a minimum level of capital equal to the higher of 3% of total assets or the amount required to maintain insurance of deposits by the FDIC. The Commissioner has the authority to require an Illinois savings bank to maintain a higher level of capital if deemed necessary based on the savings bank's financial condition, history, management or earnings prospects. The FDIC has also adopted risk-based capital guidelines to which the Bank is subject. The Bank is required to maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items to four risk-weighted categories ranging from 0% to 100%, with higher levels of capital being required for the categories perceived as representing greater risk. The guidelines divide a savings bank's capital into two tiers. The first tier ("Tier I") includes common equity, retained earnings, certain non-cumulative perpetual preferred stock (excluding auction rate issues) and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangible assets (except mortgage servicing rights and purchased credit card relationships subject to certain limitations). Supplementary ("Tier II") capital includes, among other items, cumulative perpetual and long-term limited life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan and lease losses, subject to certain limitation, less required deductions. Savings banks are required to maintain a total risk-based capital ratio of 8%, of which at least 4% must be Tier I capital. In addition, the FDIC has established regulations prescribing a minimum Tier I leverage ratio. These regulations provide for a minimum Tier I leverage ratio of 3% for banks that meet certain specified citieria, including that they have the highest examination rating and are not experiencing or anticipating significant growth. All other banks are required to maintain a Tier I leverage ratio of at least 4%. The FDIC may, however, set higher leverage and risk-based capital requirements on individual institutions when particular circumstances warrant. The following is a summary of the Bank's regulatory capital at December 31, 1999: Total Capital to Risk-Weighted Assets 14.0% Tier I Leverage Ratio 9.2% Tier I to Risk-Weighted Assets 13.3% The FDIC, along with other federal banking agencies, adopted a regulation providing that the agencies will take account of the exposure of a bank's capital and economic value to changes in interest rate risk in assessing a bank's capital adequacy. -15- Standard for Safety and Soundness. The federal banking agencies have adopted final regulations and Interagency Guidelines Establishing Standard for Safety and Soundness to implement safety and soundness standards. The Guidelines set forth the safety and soundness standards that the banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. Lending Restriction. The Bank is prohibited by the Illinois law from making secured or unsecured loans for business, commercial or agricultural purposes representing in the aggregate an amount in excess of 15% of its total assets, unless the Commissioner authorizes in writing a higher percentage limit for such loans upon the request of an institution. The Bank is also subject to a loans-to-one borrower limitation. Under the Illinois law, the total loans and extensions of credit by the Bank to any person outstanding at one time must not exceed the greater of $500,000 or 20% of the Bank's total capital plus general loan loss reserves. In addition, the Bank may make loans in an amount equal to an additional 10% of the Bank's capital plus general loan loss reserves if secured by readily marketable collateral. Dividend Limitations. Under the Illinois Savings Bank Act (the "ISBA"), dividends may only be declared when the total capital of the Bank is greater than that required by Illinois law. Dividends may be paid by the Bank out of its net profits. The written approval of the Commissioner must be obtained, however, before a savings bank having total capital of less than 6% of total assets may declare dividends in any year in an amount in excess of 50% of its net profits for that year. A savings bank may not declare dividends in excess of its net profits in any year without the approval of the Commissioner. Finally, the Bank will be unable to pay dividends in an amount which would reduce its capital below the greater of (i) the amount required by the FDIC capital regulations or otherwise specified by the FDIC, (ii) the amount required by the Commissioner or (iii) the amount required for the liquidation account established by the Bank in connection with the Bank's conversion to stock form. The Commissioner and the FDIC also have the authority to prohibit the payment of any dividends by the Bank if the Commissioner or the FDIC determines that the distribution would constitute an unsafe or unsound practice. Prompt Corrective Regulatory Action Federal law requires, among other things, that the federal bank regulatory authorities take "prompt corrective action" with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes various capital categories. The FDIC has adopted regulations to implement the prompt corrective action legislation. Under the regulations, an institution is deemed to be "undercapitalized" if it has a total risk-based capital ratio of less than 8%, a Tier I risk-based capital ratio of less than 4%, or generally a leverage ratio of less than 4%. An institution is deemed to be "significantly undercapitalized" if it has a risk-based capital ratio of less than 6%, a Tier I risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%. An institution is deemed to be "critically undercapitalized" if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%. "Undercapitalized" banks are subject to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank's compliance with such plan must be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5% of the Bank's total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an "undercapitalized" bank fails to submit an acceptable plan, it is treated as if it is -16- "significantly undercapitalized". "Significantly undercapitalized" banks are subject to one or more of a number of additional restrictions, including but not limited to an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cease receipt of deposits from correspondent banks or dismiss directors or officers. "Critically undercapitalized" institutions also may not make any payment of principal or interest on certain subordinated debt or extend credit for a highly leveraged transaction or enter into any material transaction outside the ordinary course of business. In addition, subject to a narrow exception, the appointment of a receiver or conservator is required for a "critically undercapitalized" institution within 270 days after it obtains such status. Transactions with Affiliates Transactions between depository institutions and their affiliates are governed by federal law. An affiliate of a savings bank is any company or entity that controls, is controlled by, or is under common control with the savings bank, other than a subsidiary. In a holding company context, at a minimum, the parent holding company of a savings bank and any companies which are controlled by such parent holding company are affiliates of the savings bank. Generally, the extent to which the savings bank or its subsidiaries may engage in "covered transactions", including loans, with any one affiliate is limited to 10% of such savings bank's capital stock and surplus, and there is an aggregate limit on all such transactions with all affiliates of 20% of such capital stock and surplus. Federal law also establishes specific collateral requirements for loans or extensions of credit to, or guarantees, acceptances on letters of credit issued on behalf of an affiliate. Covered transactions and a broad list of other specified transactions also must be on terms substantially the same, or no less favorable, to the savings bank or its subsidiary as similar transactions with non-affiliates. Federal law also restricts a savings bank with respect to loans to directors, executive officers, and principal stockholders. Loans to directors, executive officers and stockholders who control, directly or indirectly, 10% or more of voting securities of a savings bank, and certain related interests of any of the foregoing, may not exceed the savings bank's total capital and surplus. Loans to directors, executive officers and principal shareholders must be made on terms substantially the same as offered in comparable transactions to other persons, except that such insiders may receive preferential loans made pursuant to a better or compensate program that is widely available to the Bank's employees and does not give preference to the insider over the employees. Federal law also establishes a board of directors approval requirements for loans exceeding a certain amount. There are additional limitations on loans to executive officers. Enforcement The Commissioner and the FDIC have extensive enforcement authority over Illinois-chartered savings banks, including the Bank. this enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices. The Commissioner is given authority by Illinois law to appoint a conservator or receiver for an Illinois savings bank under certain circumstances including, but not limited to, insolvency, a substantial dissipation of assets due to violation of law, regulation, order of the Commissioner or an unsafe or unsound practice. The FDIC also has authority under federal law to appoint a conservator or receiver for an insured savings bank under certain circumstances. -17- Insurance of Deposit Accounts Deposits of the Bank are presently insured by the SAIF. The FDIC maintains a risk-based assessment system by which institutions are assigned to one of three categories based on their capitalization and one of the three subcategories based on examination ratings and other supervisory information. An institution's assessment rate depends upon the categories to which it is assigned. Assessment rates for SAIF member institutions are determined semiannually by the FDIC and currently range from zero basis points of assessable deposits for the healthiest institutions to 27 basis points for the riskiest. In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1999, FICO payments for SAIF members approximated 6.5 basis points, while Bank Insurance Fund ("BIF") members paid 1.3 basis points. By law, there was equal sharing of FICO payments between SAIF and BIF members beginning on January 1, 2000. The Bank's SAIF assessment rate for 1999 was zero basis points, therefore no premium was paid for the period. Payments toward the FICO bonds amounted to approximately $123,000. The FDIC has authority to increase insurance assessments. A significant increase in SAIF insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future. Insurance of deposits may be terminated by the FDIC upon finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. Federal Reserve System The Federal Reserve Board regulations require depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $44.3 million or less (subject to adjustment by the Federal Reserve Board) the reserve requirement is 3%; and for accounts greater than $44.3 million, the reserve requirement is $1.329 million plus 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%) against that portion of total transaction accounts in excess of $44.3 million. The first $5.0 million of otherwise reservable balances (subject to adjustment by the Federal Reserve Board) are exempted from the reserve requirements. The Bank is in compliance with the foregoing requirement. Federal Home Loan Bank System The Bank is a member of the FHLB system, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB, is required to acquire and hold shares of capital stock in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater. The Bank is in compliance with this requirement with an investment in FHLB stock at December 31, 1999 of $2,853,700. -18- The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the FHLBs pay to their members and could result in the FHLBs imposing a higher rate of interest on advances to their members. For the years ended December 31, 1999, 1998 and 1997, cash dividends from the FHLB to the Bank amounted to approximately, $159,000, $138,000 and $134,000, respectively. Holding Company Regulation Federal law allows a state savings bank that qualifies as a "qualified thrift lender" to elect to be treated as a savings association for purposes of the savings and loan holding company provisions of federal law. Such election results in its holding company being regulated as a savings and loan holding company by the OTS rather than as a bank holding company by the Federal Reserve Board. The Bank has made such election and has received approval from the OTS to become a savings and loan holding company. The Company has registered with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and its non-savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. Additionally, the Bank is required to notify the OTS at least 30 days before declaring any dividend to the Company. Because the Bank is chartered under Illinois law, the Company is also subject to registration with and regulation by the Commissioner. As a unitary savings and loan company, the Company is generally not restricted under existing laws as to the types of business activities in which it may engage. The Gramm-Leach-Billey Act of 1999 provides that no company may acquire control of a savings association after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law and for multiple savings and loan holding companies as described below. Further, the Gramm-Leach-Billey Act specifies that existing savings and loan holding companies may only engage in such activities. The Gramm-Leach-Billey Act, however, grandfathered the unrestricted authority for activities with respect to unitary savings and loan holding companies existing prior to May 4, 1999, such as the Company, so long as the Bank continues to comply with the qualified thrift lender test. Upon any non-supervisory acquisition by the Company of another savings association as a separate subsidiary, the Company would become a multiple savings and loan holding company and would be subject to extensive limitations on the types of business activities in which it could engage. Federal law limits the activities of a multiple savings and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to prior approval of the OTS, and to other activities authorized by OTS regulation. Multiple savings and loan holding companies are prohibited from acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary company engaged in activities other than those permitted by federal law. Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from merging with or acquiring more than 5% of the voting stock of another savings institution or holding company thereof without prior written approval of the OTS. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, except: (i) interstate supervisory acquisitions by savings and loan holding companies; and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. -19- In order to elect and continue to be regulated as a savings and loan holding company by the OTS, the Bank must continue to qualify as a qualified thrift lender. This requires the Bank to maintain compliance with the test for a "domestic building and loan association", as defined in the Internal Revenue Code, or with a Qualified Thrift Lender Test. Under the Test, a savings association is required to maintain at least 65% of its "portfolio assets" (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least 9 months out of each 12 month period. A holding company of a savings institution that fails to qualify as a qualified thrift lender must either convert to a bank holding company and thereby become subject to the regulation and supervision of the Federal Reserve Board or operate under certain restrictions. As of December 31, 1999, the Bank maintained in excess of 65% of its portfolio assets in qualified thrift investments. The Bank also met the test in each of the prior 12 months and, therefore, is a qualified thrift lender. Recent legislative amendments have broadened the scope of "qualified thrift investments" that go toward meeting the test to fully include credit card loans, student loans and small business loans. -20- FEDERAL AND STATE INCOME TAXATION Federal Taxation General The Company files a consolidated federal income tax return. To the extent a member incurs a loss which is utilized to reduce the consolidated federal tax liability, that member will be reimbursed for the tax benefit utilized from the member(s) incurring federal tax liabilities. Amounts provided for income tax expense are based upon income reported for financial statement purposes and do not necessarily represent amounts currently payable to federal and state tax authorities. Deferred income taxes, which principally arise from the temporary difference related to the recognition of certain income and expense items for financial reporting purposes and the period in which they affect federal and state taxable income, are included in the amounts provided for income taxes. Bad Debt Reserves The Small Business Job Protection Act of 1996 (the "1996 Act"), which was enacted on August 20, 1996, made significant changes to provisions of the Code relating to a savings institution's use of bad debt reserves for federal income tax purposes and requires such institutions to recapture (i.e. take into income) certain portions of their accumulated bad debt reserves. Prior to the enactment of the 1996 Act, the Bank was permitted to establish tax reserves for bad debts and to make annual additions thereto, which additions, within specified formula limits were deducted in arriving at the Bank's taxable income. The Bank's deduction with respect to "qualifying loans", which are generally loans secured by certain interests in real property, could be computed using an amount based on a six-year moving average of the Bank's actual loss experience (the "Experience Method"), or a percentage equal to 8% of the Bank's taxable income (the "PTI Method"), computed without regard to this deduction and with additional modifications and reduced by the amount of any permitted addition to the non-qualifying reserve. The Bank's deduction with respect to non-qualifying loans was required to be computed under the Experience Method. The 1996 Act Under the 1996 Act, for its current and future taxable years, as a "Small Bank", the Bank is permitted to make additions to its tax bad debt reserves under an Experience Method based on total loans. However, the Bank is required to recapture (i.e. take into income) over a six year period the excess of the balance of its tax bad debt reserves as of December 31, 1996 over the balance of such reserves as of December 31, 1987. As of December 31, 1995, the Bank's tax bad debt reserve exceeded the balance of such reserve as of December 31, 1987 by $326,713. Distributions Under the 1996 Act, if the Bank makes "non-dividend distributions" to the Company, such distributions will be considered to have been made from the Bank's unrecaptured tax bad debt reserves (including the balance of its reserves as of December 31, 1987) to the extent thereof, and an amount based on the amount distributed (but not in excess of the amount of such reserves) will be included in the Bank's income. The term "non-dividend distributions" is defined as distributions in excess of the Bank's current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of the Bank's current or accumulated earnings and profits will not cause this pre-1988 reserve to be included in the Bank's income. The amount of additional taxable income created from a non-dividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if the Bank makes a non-dividend distribution to the Company, approximately one and one-half times the amount of such distribution (but not in excess of the amount of such reserves) would be includable in income for federal income -21- tax purposes, assuming a 35% federal corporate income tax rate. The Bank does not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserves. Dividends Received Deduction and Other Matters The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company and the Bank own more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividend received may be excluded. State Taxation Illinois State Taxation The Company and its subsidiaries are required to file Illinois income tax returns and pay tax at an effective tax rate of 7.18% of Illinois taxable income. For these purposes, Illinois taxable income, generally means federal taxable income subject to certain modifications, the primary one of which is the exclusion of interest income on United States obligations. The Company and its subsidiaries file one combined corporation return for State of Illinois income tax purposes. Delaware State Taxation As a Delaware holding company not earning income in Delaware, the Company is exempted from Delaware Corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. -22- Item 2 Properties The Bank conducts its business through an executive and full service office located in Normal and five other full service branch offices. The Company believes that the Bank's current facilities are adequate to meet the present and immediately foreseeable needs of the Bank and the Company. In January 2000, the Company entered into a purchase and assumption of deposits agreement for the sale of certain fixed assets and assumption of deposit liabilities for the branch located in Eureka, Illinois. It is anticipated this transaction will be finalized in the second quarter of 2000.
Leased or Original Year Net Book Value at Deposits per Location Owned Leased or Acquired December 31, 1999 Office - ---------------------------- --------- ------------------ ----------------- ------------ (In thousands) Executive Branch Office: 2101 North Veterans Parkway* Bloomington, Illinois 61704 Owned 1997 $4,541 $25,711 Branch Offices: 301 Broadway* Normal, Illinois 61761 Owned 1963 712 59,582 2402 E. Washington* Owned 1980 867 44,430 Bloomington, Illinois 61704 1722 Hamilton Road* Owned 1995 1,366 11,985 Bloomington, Illinois 61704 115 N. Third Street* Owned 1981 818 51,790 Fairbury, Illinois 61739 205 S. Main * Owned 1974 226 26,739 Eureka, Illinois 61530 --- ------ Total $ 8,530 $ 220,237 ======= =========
* An automated teller machine is located at each office. None of the properties owned by the Company are subject to any encumbrance. -23- Item 3 Legal Proceedings The registrant is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the registrant's financial condition or results of operations. Item 4 Submission of Matters to a Vote of Security Holders No matters were submitted during the fourth quarter of 1999 to a vote of security holders, through the solicitation of proxies or otherwise. SUPPLEMENTAL INFORMATION - EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages and positions with the Company and subsidiary bank of all executive officers of the Company are listed below: Officers with the Company Principal Occupation Name and Age And Subsidiary Bank During Past Five Years ------------ ------------------- ---------------------- C. William Landefeld , 60 President and Chief President and Chief Executive Officer, Citizens Executive Officer, First Financial Corp.; Citizens First President and Chief Financial Corp. since Executive Officer, Citizens 1996; President and Savings Bank. Chief Executive Officer, Citizens Savings Bank since 1987 Richard F. Becker, 52 Senior Vice President and Senior Vice President Secretary, Citizens First and Secretary, Financial Corp.; Senior Citizens First Vice President and Financial Corp. since Secretary, Citizens Savings 1996, Senior President Bank. and Secretary, Citizens Savings Bank since 1996, Vice President, Citizens Savings Bank since 1979. Dallas G. Smiley, 53 Senior Vice President and Senior Vice President Chief Financial Officer, and Chief Financial Citizens First Financial Officer, Citizens Corp.; Senior Vice First Financial Corp. President and Chief since 1996, Senior Financial Officer, Citizens President and Chief Savings Bank. Financial Officer, Citizens Savings Bank since 1995, Vice President and Chief Financial Officer, Citizens Savings Bank since 1987. -24- PART II Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters Information relating to the market for registrant's common equity, dividends paid and related stockholder matters appears in the registrant's 1999 Annual Report to Stockholders on page 42 and is incorporated herein by reference. Item 6 Selected Financial Data Information required under this item is incorporated by reference to page 5 of the Company's 1999 Annual Report to Stockholders under the caption "Selected Financial Data". Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations The above-captioned information appears under Management's Discussion and Analysis of Results of Operations and Financial Condition in the registrant's 1999 Annual Report to Stockholders on pages 6 through 10 and 13 through 15 and is incorporated herein by reference. Item 7A Quantitative and Qualitative Disclosures about Market Risk The information required under this item is incorporated by reference to pages 11 and 12 of the Company's 1999 Annual Report to Stockholders. Item 8 Financial Statements and Supplementary Data The Consolidated Financial Statements of Citizens First Financial Corp. and its subsidiaries, together with the report thereon by Olive LLP for the year ended December 31, 1999 appears in the registrant's 1999 Annual Report to Stockholders on pages 16 through 42 and are incorporated herein by reference. Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10 Directors and Executive Officers of the Registrant The information required under this item relating to directors in incorporated by reference to the registrant's 2000 Proxy Statement furnished to its stockholders in connection with an annual meeting to be held April 24, 2000 (the "2000 Proxy Statement"), under the caption "Election of Directors",which Proxy Statement has been filed with the Commission. The information required under this item relating to executive officers is set forth in Part I, "Supplemental Information - Executive Officers of the Registrant" of this annual report on Form 10-K. -25- Item 11 Executive Compensation The information relating to directors' and executive compensation is incorporated herein by reference to the registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on April 24, 2000 at pages 14 through 20. Item 12 Security Ownership of Certain Beneficial Owners and Management The information required under this item is incorporated by reference to pages 12 and 13 of the registant's 2000 Proxy Statement, under the captions "Security Ownership of Directors, Nominees for Directors, Most Highly Compensated Executive Officers and All Directors and Executive Officers as a Group" and "Security Ownership of Shareholder Holding 5% or More", which Proxy Statement has been filed with the Commission. Item 13 Certain Relationships and Related Transactions The information relating to certain relationships and related transactions is incorporated herein by reference to the registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on April 24, 2000 at page 16 under the caption "Transactions with Certain Related Persons". PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as a part of this report: (1) Financial Statements Consolidated Financial Statements of the Company are incorporated by reference to the following indicated pages of the 1999 Annual Report to Stockholders PAGE Independent Auditor's Report......................................16 Consolidated Balance Sheet as of December 31, 1999 and 1998........................................17 Consolidated Statement of Income for the years ended December 31, 1999, 1998 and 1997......................18 Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997..............19 Consolidated Statement of Cash Flows for the years ended December 31, 1999, 1998 and 1997...................20-21 -26- Notes to Consolidated Financial Statements.....................22-41 The remaining information appearing in the Annual Report to Stockholders is not deemed to be filed as part of this report, except as expressly provided herein. (2) Financial Statement Schedules All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. (3) Exhibits The following exhibits are filed as part of this report. 3.1 Certificate of Incorporation of Citizens First Financial Corp.* 3.2 Bylaws of Citizens First Financial Corp.* 4.0 Stock Certificate of Citizens First Financial Corp.* 10.1 Citizens Savings Bank, F.S.B. Employee Stock Ownership Plan* 10.2 Form of Employment Agreement between Citizens Savings Bank, F.S.B. and certain executive officers* 10.3 Form of Employment Agreement between Citizens First Financial Corp. and certain executive officers* 10.4 Form of Citizens Savings Bank, F.S.B. Supplemental Executive Retirement Plan* 10.5 Form of Change in Control Agreement between Citizens Savings Bank, F.S.B. and certain executive officers* 10.6 Form of Citizens Savings Bank, F.S.B. Supplemental Executive Retirement Plan* 10.7 Form of Citizens Savings Bank, F.S.B. Employee Severance Compensation Plan* 10.8 Citizens First Financial Corp. 1997 Stock-Based Incentive Plan** 13.0 Portions of 1999 Annual Report to Stockholders (filed herewith) 21.0 Subsidiary information is incorporated herein by reference to "Part I - Subsidiaries" 23.0 Consent of Olive LLP 27.0 Financial Data Schedule - ---------- * Incorporated herein by reference to the Exhibits to Form SB-2, Registration Statement, filed on January 24, 1997 and any amendments thereto, Registration No. 333-556. ** Incorporated herein by reference to the Proxy Statement for the Special Meeting of Shareholders held on November 12, 1997. (b) Reports on Form 8-K: A report on Form 8-K was filed on October 1, 1999, to announce the start of a stock repurchase program of 5% of the Company's outstanding shares of common stock. -27- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on this 30th day of March, 1999. CITIZENS FIRST FINANCIAL CORP. By: /s/ C. William Landefeld ------------------------------------ C. William Landefeld President, Chief Executive Officer and Director Date: March 30, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated. Name Title Date ---- ----- ---- /s/ C. William Landefeld President, Chief Executive - ------------------------------- Officer and Director March 30, 2000 C. William Landefeld (principal executive officer) /s/ Dallas G. Smiley Senior Vice President, - ------------------------------- Treasurer and Chief March 30, 2000 Dallas G. Smiley Financial Officer (principal accounting and financial officer) /s/ Dr. Lowell M. Thompson Director March 30, 2000 - ------------------------------- Dr. Lowell M. Thompson /s/ Paul J. Hoffman Director March 30, 2000 - ------------------------------- Paul J. Hoffman /s/ Jeffrey M. Solberg Director March 30, 2000 - ------------------------------- Jeffrey M. Solberg /s/ Ronald C. Wells Director March 30, 2000 - ------------------------------- Ronald C. Wells /s/ L. Carl Borngasser Director March 30, 2000 - ------------------------------- L. Carl Borngasser /s/ Arthur W. Mier Director March 30, 2000 - ------------------------------- Arthur W. Mier /s/ James A. Shirk Director March 30, 2000 - ------------------------------- James A. Shirk -28- EX-13 2 ANNUAL REPORT Citizens First Financial Corp. and Subsidiary Selected Financial Data (In thousands, except share data)
=================================================================== 1999 1998 1997 1996 1995 ------------------------------------------------------------------- Summary of Operations Interest income ......................................... $21,856 $21,134 $20,301 $18,320 $16,699 Interest expense ........................................ 11,807 11,675 11,734 10,465 10,077 ------- ------- ------- ------- ------- Net interest income ..................................... 10,049 9,459 8,567 7,855 6,622 Provision for loan losses ............................... 480 464 516 167 124 Other income ............................................ 1,390 1,695 1,983 1,169 1,145 Other expense ........................................... 8,827 7,426 6,946 7,926 5,972 ------- ------- ------- ------- ------- Income before income tax ................................ 2,132 3,264 3,088 931 1,671 Income tax expense ...................................... 940 1,250 1,199 321 658 ------- ------- ------- ------- ------- Net income .............................................. $1,192 $2,014 $1,889 $610 $1,013 ======= ======= ======= ======= ======= Per Share Basic earnings per share (1) ............................ $0.61 $0.90 $0.79 N/A N/A Diluted earnings per share (1) .......................... $0.58 $0.84 $0.74 N/A N/A Cash dividends paid (1) ................................. $0.10 $0.00 $0.00 $0.00 N/A Book value at December 31 (1) ........................... $16.92 $16.12 $14.97 $14.32 N/A Market value at December 31 (1) ......................... $12.00 $13.88 $20.25 $14.38 N/A Ratios Based on Net Income Return on average stockholders' equity (2) .............. 3.38% 5.54% 4.88% 1.97% 6.91% Return on average assets ................................ 0.40% 0.73% 0.69% 0.24% 0.44% Net interest yield on average earning assets ............ 3.59% 3.63% 3.32% 3.30% 3.03% Year-End Balance Sheet Data Total assets ............................................ $316,585 $287,274 $273,600 $261,637 $228,638 Net loans (3) ........................................... 266,881 236,873 231,862 214,070 188,361 Securities .............................................. 16,103 18,033 19,302 29,371 24,879 Deposits ................................................ 220,237 208,097 198,633 202,125 209,864 Other borrowings ........................................ 57,073 39,410 33,944 16,250 0 Total stockholders' equity (2) .......................... 34,251 36,020 37,970 40,349 15,519
(1) Per share information is not provided for periods prior to the Company's conversion on May 1, 1996. (2) Prior to conversion on May 1, 1996, data relates to total equity capital. (3) Includes loans held for sale. 5 Citizens First Financial Corp. 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 Bank was originally chartered in 1888 by the State of Illinois. During April, 1999, the Bank converted from a federally chartered savings bank to a state chartered 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 invests in commercial, multi-family, construction and land, commercial real estate, agricultural, consumer and other loans. The Bank has a wholly-owned service corporation, CSL Service Corporation (CSL), which is an Illinois-chartered corporation that participates in an insurance agency joint venture and also has invested in Williamsburg LLC (Williamsburg). CSL is a 50% owner of Williamsburg which has two other investors. The accounts of Williamsburg are consolidated into the Company's financial statements. The 50% of Williamsburg not owned by CSL is recorded as a minority interest. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 AND DECEMBER 31, 1998 Total assets increased from $287.3 million at December 31, 1998 to $316.6 million at December 31, 1999. The $29.3 million or 10.2% increase was due to the increase in loans, which was funded by increased deposits and borrowings from the Federal Home Loan Bank of Chicago (the FHLB). Cash and cash equivalents decreased from $18,338,000 at December 31, 1998 to $13,176,000 at December 31, 1999, a decrease of $5,162,000 or 28.1%. This decrease was primarily the result of increased loans and the investment in land in a real estate joint venture. Investment securities decreased from $18,033,000 at December 31, 1998 to $16,103,000 at December 31, 1999, a decrease of $1,930,000 or 10.7%. Loans, net of allowance for loan losses and including loans held for sale, increased from $236,873,000 at December 31, 1998 to $266,881,000 at December 31,1999, an increase of $30,008,000 or 12.7%. The increase was funded by increased deposits and borrowings from the FHLB. The growth in loans was primarily attributable to an increase in construction and land loans of $31,690,000. The new construction and land loans relate primarily to new residential and commercial developments in the Bloomington-Normal market area. The allowance for losses increased from $1,256,000 at December 31, 1998 to $1,679,000 at December 31, 1999, an increase of $423,000 or 33.7%. The increased allowance was related to the Bank's increased origination of commercial real estate and agricultural loans, which generally bear a greater degree of risk as compared to one-to-four family mortgage loans. The ratio of the Company's allowance for loan losses to total non-performing loans was 295.1% and 331.5% at December 31, 1999 and 1998. Company management performs ongoing reviews of the loan portfolio in order to identify non-performing loans and potential problem loans to evaluate the adequacy of the allowance for loan losses. In performing its review, management classifies non-performing and potential problem loans as either substandard, doubtful, loss or special mention loans. A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all of the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of current existing facts and conditions, highly questionable and improbable. Loans classified as loss are those considered uncollectible and of such little value that their continuance as loans without the establishment of a specific loss reserve is not warranted. Loans which do not currently expose the Company to sufficient risk to warrant classification in any one of the categories described above but possess weaknesses are classified as special mention. The total of internally classified loans of $819,000 and $786,000 at December 31, 1999 and 1998, respectively, equals the sum of non-performing loans, which are loans past due 90 days or more and non-accruing loans and potential problem loans. 6 The land in real estate joint venture increased due to the Bank's investment in a partnership for the development of a parcel of commercial property. The joint venture purchased approximately twenty-nine acres of commercially zoned land on the east side of Bloomington-Normal. The joint venture began selling the developed land in the fourth quarter of 1999. The partners' portion of the equity is reflected as a minority interest in real estate joint venture. Premises and equipment increased primarily due to the acquisition of data processing equipment related to the Bank's computer conversion. Other assets increased primarily because of a $500,000 increase in deferred tax assets and a $250,000 increase in accrued interest receivable on loans. Deposits increased from $208,097,000 at December 31, 1998 to $220,237,000 at December 31, 1999, an increase of $12,140,000 or 5.8%. Demand deposits increased by $6.1 million and certificates of deposit by $5.2 million. The increase in deposits was primarily due to the increased deposits at our newer facilities. Borrowings from the FHLB increased from $39,410,000 at December 31, 1998 to $57,073,000 at December 31, 1999, an increase of $17,663,000 or 44.8%. Of this total $17.0 million are callable and have a weighted rate of 5.22%. The increases were used primarily to fund the increase in loans. Other liabilities decreased from $3,146,000 at December 31, 1998 to $2,099,000 at December 30, 1999, a decrease of $1,047,000 or 33.3% primarily because of a decrease in accrued principal and interest payments payable to owners of serviced loans. Total stockholders' equity capital decreased by $1,769,000 or 4.9%, from $36,020,000 at December 31, 1998 to $34,251,000 at December 31, 1999. The decrease was caused by the repurchase of 225,696 shares of the Company's stock, cash dividends of $211,000 and unrealized losses of available for sale securities of $294,000, offset by earnings of the Company during the year ended December 31, 1999 and the allocation of shares in the Company's stock-based compensation plans. The amount relating to the stock-based compensation plans decreased from $868,000 in 1998 to $746,000 due to the Company's lower average stock price in 1999. COMPARISON OF OPERATING RESULTS FOR YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998 GENERAL Net income decreased by $822,000 or 40.8%, from $2,014,000 for the year ended December 31, 1998 to $1,192,000 for the year ended December 31, 1999. The decrease was due to lower net gains on loan sales, a loss on equity investment and increased net occupancy and equipment expenses resulting from the accelerated depreciation of data processing equipment replaced during a data processing conversion. INTEREST INCOME Interest on loans increased by $1,052,000 or 5.5%, from $19,248,000 for the year ended December 31, 1998 to $20,300,000 for the year ended December 31, 1999. The increase was due primarily to a $24.3 million increase in average loans during 1999. The average yield on loans decreased from 8.43% in 1998 to 8.04% in 1999. Interest on investments decreased from $1,218,000 for the year ended December 31, 1998 to $1,171,000 for the year ended December 31, 1999, a decrease of $47,000 or 3.9%. The decrease was due to the the decrease in the average balance of investments of $429,000 and a fourteen basis point decrease in the average yield on investments. INTEREST EXPENSE Interest on savings deposits decreased by $312,000 or 3.3%, from $9,538,000 for the year ended December 31, 1998 to $9,226,000 for the year ended December 31, 1999. The decrease was primarily caused by a thirty-seven basis point decrease in the average cost of deposits, offset by a slight increase in the average balance of deposits. The decrease in the average interest rate paid on deposits was due primarily to a decrease in the rates paid on certificates of deposit. The interest on borrowings increased by $444,000 or 20.8%, from $2,137,000 for the year ended December 31, 1998 to $2,581,000 for the year ended December 31, 1999 as a result of increased average borrowings from the FHLB of $11.9 million, offset by a decrease in the average rate paid of seventy basis points. 7 OTHER INCOME Total other income decreased by $305,000 or 18.0%, from $1,695,000 for the year ended December 31, 1998 to $1,390,000 for the year ended December 31, 1999. The decrease was due to the $718,000 decrease in net gains on loan sales resulting from reduced loan sales and an approximate $130,000 change in market value adjustment for loans held for sale. The decrease in net gains on loan sales was offset by increased loan servicing fees and fees on deposit accounts. Deposit fees increased because of the continued increase in number and balance of demand deposits accounts. OTHER EXPENSE Total other expense increased by $1,401,000 or 18.9%, from $7,426,000 for the year ended December 31, 1998 to $8,827,000 for the year ended December 31, 1999. Salaries and employee benefits increased by $213,000 or 5.0%, from $4,263,000 for the year ended December 31, 1998 to $4,476,000 for the year ended December 31, 1999. The increase was primarily due to normal inflationary salary increases, a slight increase in staff size and higher medical insurance premiums. Net occupancy expenses increased by $341,000 or 31.3%, from $1,089,000 for the year ended December 31, 1998 to $1,430,000 for the year ended December 31, 1999, primarily due to the accelerated depreciation of data processing equipment replaced during a computer conversion. A loss on equity investment of $441,000 reflects the losses equal to the Company's portion of the negative equity and the outstanding loans to Websoft, Inc., in which the Company has a 20% ownership investment. As the investee has negative equity, the losses were recorded. PROVISION FOR LOAN LOSSES The provision for loan losses increased from $463,000 for the year ended December 31, 1998 to $480,000 for the year ended December 31, 1999 an increase of $17,000 or 3.7%. 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. The Company's level of allowance for loan losses to total loans and allowance for loan losses to non-performing loans were 0.54% and 331.5%,respectively, at December 31, 1998, compared to 0.63% and 295.1%, respectively, at December 31, 1999. The Company charged off $57,000 and $47,000 during 1999 and 1998, respectively. 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. INCOME TAX EXPENSE Total income tax expense was $940,000 in 1999, compared to $1,250,000 in 1998. The decrease was attributable to lower taxable income in 1999. The effective tax rates for the years ended December 31, 199 and 1998 were 44.1% and 38.3%, respectively. The tax rate increased in 1999 due to increased non-deductible expenses. COMPARISON OF OPERATING RESULTS FOR YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997 GENERAL Net income for the year ended December 31, 1998 increased by $125,000 from $1,889,000 for the year ended December 31, 1997 to $2,014,000 for the year ended December 31, 1998. The increase was primarily due to increased net interest income and net gains on loan sales which was partially offset by the 1997 gain on the sale of a branch facility of $523,000 ($320,000 after-tax) and increased other expenses. INTEREST INCOME Interest on loans increased by $853,000 or 4.6%, from $18,395,000 for the year ended December 31, 1997 to $19,248,000 for the year ended December 31, 1998. The increase was due primarily to higher interest rates resulting from a change in the composition of the loan portfolio. There was a $20.4 million decrease in lower yielding one-to-four family loans and an increase of $20.9 million in higher yielding commercial and construction and land loans. Average loans for 1998 were only $878,000 higher than the 1997 average. Interest on investments, including mortgage-backed securities and FHLB stock dividends decreased from $1,812,000 for the year ended December 31, 1997 to $1,218,000 for the year ended 8 December 31, 1998, a decrease of $594,000 or 32.8%. The decrease was primarily due to lower average balances of mortgage-backed securities in 1998 and a seventy basis point decrease in the average yield on mortgage-backed securities. Mortgage-backed securities declined $10.0 million due to sales, maturities and principal paydowns. This reduction contributed to the increase in cash and cash equivalents. Interest on interest-bearing deposits increased by $574,000 or 610.6%, from $94,000 for the year ended December 31, 1997 to $668,000 for the year ended December 31, 1998 because of higher average balances during 1998. INTEREST EXPENSE Interest on savings deposits decreased by $134,000 or 1.4%, from $9,672,000 for the year ended December 31, 1997 to $9,538,000 for the year ended December 31, 1998. The decrease was primarily caused by an eleven basis point decrease in the average interest rate paid on deposits, partially offset by a slight increase in the average balance of deposits. The interest on borrowings increased by $75,000 or 3.6%, from $2,062,000 for the year ended December 31, 1997 to $2,137,000 for the year ended December 31, 1998 as a result of increased average borrowings from the FHLB as well as a slight increase in rates. PROVISION FOR LOAN LOSSES The provision for loan losses decreased from $516,000 for the year ended December 31, 1997 to $463,000 for the year ended December 31, 1998, a decrease of $53,000 or 10.3%. Total charge-offs for 1998 were $47,000, compared to $188,000 in 1997. OTHER INCOME Total other income decreased by $288,000 or 14.5%, from $1,983,000 for the year ended December 31, 1997 to $1,695,000 for the year ended December 31, 1998. The decrease was primarily due to the 1997 net gain on the sale of a branch facility of $523,000 and a decrease in loan servicing fees, which was offset by an increase in net gains on loan sales. Net gains on loan sales increased by $492,000 or 117.7%, from $418,000 for the year ended December 31, 1997 to $910,000 for the year ended December 31, 1998, because of an increase in loan sales in the year ended December 31, 1998. Loan servicing fees decreased from $205,000 for the year ended December 31, 1997 to $15,000 for the year ended December 31, 1998, a decrease of $190,000 or 92.7%. This decrease was due to the amortization of previously capitalized mortgage servicing rights. OTHER EXPENSE Total other expense increased by $480,000 or 6.9%, from $6,946,000 for the year ended December 31, 1997 to $7,426,000 for the year ended December 31, 1998. Salaries and benefits increased by $200,000 or 6.0%, from $4,063,000 for the year ended December 31, 1997 to $4,263,000 for the year ended December 31, 1998, due to the increase in the price of the Company's stock which is used to fund the ESOP stock based compensation program and the additional compensation expense from the new full-service facility that was opened in the third quarter of 1997. Net occupancy expenses increased by $157,000 or 16.8%, from $932,000 for the year ended December 31, 1997 to $1,089,000 for the year ended December 31, 1998, primarily because of the new full-service office and administrative facility. Deposit insurance expense increased by $19,000, from $101,000 for the year ended December 31, 1997 to $120,000 for the year ended December 31, 1998 because of the utilization of a deposit insurance credit utilized in 1997. INCOME TAX EXPENSE Total income tax expense was $1,250,000 in 1998, compared to $1,199,000 in 1997. The increase was attributable to higher taxable income in 1998. The effective tax rates for the years ended December 31, 1998 and 1997 were 38.8% and 38.8%, respectively. 9 YEAR 2000 COMPLIANCE The Year 2000 compliance issue existed because many computer systems and applications used two-digit fields to designate a year. There was a concern that as the century date change occurred, date-sensitive systems might either fail or not operate properly unless the underlying programs are modified or replaced. The Bank initiated a program to assure that all computer applications would be Year 2000 compliant. This program included the monitoring and testing of the Bank's in-house data processing system and other data processing related vendors Year 2000 compliance progress. The progress of certain commercial loan customers' Year 2000 efforts were also monitored. No Year 2000 problems were encountered by the Bank or any of its commercial loan customers prior to or after the century date change. The Bank will continue to monitor for any problems that may arise in the future. To date, the Company's direct expenses (other than the salary of Company employees involved in the project) have been less than $20,000 and the Company does not anticipate any material additional Year 2000 expense. SALE OF BRANCH FACILITY During January, 2000, the Bank has entered into an agreement for the sale of its branch location and related deposit accounts in Eureka, Illinois. The sales price will be 10% of the office's approximately $26.7 million in deposits. The transaction should result in a gain of approximately $2.5 million. It is anticipated this transaction will be finalized by the second quarter of 2000. 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. The Statement may not be applied retroactively to financial statements of prior periods. The adoption of the Statement will have no material impact on the Company's financial condition or result of operations. 10 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 1999 or 1998. 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 the Board of Director's 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 mortgage 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 yield as compared to longer term investments, but which may better position the Company for increases in market interest rates. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring the Company's interest rate sensitivity "gap". An asset or liability is said to be interest rate sensitive within a specific time period, if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. At December 31, 1999, the Company's one-year gap position, the difference between the amount of interest-earning assets maturing or repricing within one year, and interest-bearing liabilities maturing or repricing within one year, was ($10,952,000). A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. Accordingly, during a period of rising interest rates, a financial institution with a negative gap position would tend to have its interest-bearing liabilities repricing upwards at a faster rate which, consequently, may result in the cost of its interest-bearing liabilities increasing at a rate faster than its yield on interest-earning assets than if it had a positive gap. During a period of falling interest rates, a financial institution with a negative gap would tend to have its interest-bearing liabilities repricing downward at a faster rate than its interest-earning assets as compared to an institution with a positive gap, which consequently, may tend to positively affect the growth of its net interest income. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1999, which are anticipated by the Company, based upon assumptions, to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at December 31, 1999, on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within the selected time intervals. Annual prepayment rates for adjustable rate and fixed rate loans are assumed to be 4.5% and 9.5%, respectively. Annual prepayment rates for adjustable rate and fixed rate mortgage-backed securities are assumed to be 4.5% and 7.5%, respectively. Money market deposits are assumed to be immediately interest rate sensitive, while passbook accounts and NOW accounts are assumed to have decay rates of 12% annually. 11 Gap Table (Amounts in thousands)
After Fair Year 1 Year 2 Year 3 Year 4 Year 5 Year 5 TOTAL Value -------------------------------------------------------------------------------------- Interest-earning assets: Loans Fixed rate ......................... $50,593 $27,706 $19,575 $12,341 $11,512 $27,488 $149,215 $148,623 Average interest rate .............. 8.52% 8.43% 8.13% 8.28% 8.30% 7.66% 8.14% Variable rate ...................... 71,363 15,524 16,772 5,483 8,524 0 117,666 117,862 Average interest rate .............. 8.37% 7.90% 7.92% 8.13% 7.82% 0.00% 8.18% Securities Fixed rate ......................... 1,280 270 249 717 2,166 6,414 11,096 11,096 Average interest rate .............. 5.30% 6.42% 6.42% 6.04% 6.51% 6.52% 6.34% Variable rate ...................... 7,861 7,861 7,861 Average interest rate .............. 6.18% 6.18% Interest-bearing demand deposits ..... 3,267 3,267 3,267 Average interest rate .............. 4.56% 4.56% -------- -------- -------- -------- -------- -------- -------- -------- Total interest-earning assets .... $134,364 $43,500 $36,596 $18,541 $22,202 $33,902 $289,105 $288,709 -------- -------- -------- -------- -------- -------- -------- -------- Interest-bearing liabilities: NOW and savings accounts ............. 4,636 4,636 4,636 4,636 4,636 15,454 38,634 38,634 Average interest rate .............. 1.99% 1.99% 1.99% 1.99% 1.99% 1.99% 1.99% Money market accounts ................ 13,379 13,379 13,379 Average interest rate .............. 3.30% 3.30% Time deposits Fixed rate ......................... 97,889 39,520 7,023 1,310 908 102 146,752 147,058 Average interest rate .............. 5.29% 5.66% 5.47% 5.70% 5.35% 6.23% 5.40% Variable rate ...................... 5,412 5,412 5,412 Average interest rate .............. 5.04% 5.04% FHLB advances: Fixed rate ......................... 20,000 0 4,898 3,000 14,000 11,175 53,073 51,707 Average interest rate .............. 6.00% 0.00% 6.07% 5.55% 5.46% 5.15% 5.66% Variable rate ...................... 4,000 4,000 4,000 Average interest rate .............. 6.26% 6.26% -------- -------- -------- -------- -------- -------- -------- -------- Total interest-earning liabilities $145,316 $44,156 $16,557 $8,946 $19,544 $26,731 $261,250 $260,190 -------- -------- -------- -------- -------- -------- -------- -------- Interest-earning assets less interest-bearing liabilities ("Gap") ($10,952) ($656) $20,039 $9,595 $2,658 $7,171 $27,855 $28,519 -------- -------- -------- -------- -------- -------- -------- -------- Cumulative gap ....................... ($10,952) ($11,608) $8,431 $18,026 $20,684 $27,855 $27,855 $28,519 -------- -------- -------- -------- -------- -------- -------- -------- Cumulative gap as % of interest-earning assets ............ -3.79% -4.02% 2.92% 6.23% 7.15% 9.63% 9.63% 9.88% -------- -------- -------- -------- -------- -------- -------- --------
At December 31, 1999, the table above reflects that the Company has a negative liability gap due to the level of interest bearing demand deposits and savings that are generally subject to immediate withdrawal and are repriceable at any time. As such, the effect of an increase in interest rates of 100 basis points would decrease net interest income by approximately $109,500 in one year and $116,000 in two years assuming no management intervention. A fall in interest rates would have the opposite effect for the same period. In analyzing interest rate sensitivity, the Company's management considers these differences and incorporates other assumptions and factors, such as balance sheet growth and prepayments, to better measure interest rate risk. While the gap analysis provides an indication of interest rate sensitivity, experience has shown that it does not fully capture the true dynamics of interest rate changes. Essentially, the analysis presents only a static measurement of asset and liability volumes based on contractual maturity, cash flow estimates or repricing opportunity. It fails to reflect the differences in the timing and degree of repricing of assets and liabilities due to interest rate changes. 12 Citizens First Financial Corp. and Subsidiary Consolidated Average Balance Sheet (Dollars in thousands)
For the Years Ended December 31, At December 31 ------------------------------------------------------------------------ 1999 1999 1998 -------------- ---------------------------------- ---------------------------------- Average Average Average Average Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost -------------- ------- -------- ---------- ------- -------- ---------- Assets Deposits & short-term investments ... 5.35% $8,552 $419 4.90% $11,873 $668 5.63% Investment securities (1) ........... 6.18 7,354 462 6.28 7,783 500 6.42 Loans receivable (2) ................ 8.16 252,551 20,300 8.04 228,224 19,248 8.43 Mortgage-backed securities (3) ...... 6.22 9,191 516 5.61 10,397 580 5.58 FHLB-Chicago stock .................. 6.75 2,369 159 6.72 2,000 138 6.90 ---- -------- ------- ---- -------- ------- ---- Total interest-earning assets .... 7.98 280,017 21,856 7.81 260,277 21,134 8.12 ------- ------- Non-interest earning assets ......... 20,479 17,064 -------- -------- Total assets ..................... $300,496 $21,856 $277,341 $21,134 ======== ======= ======== ======= Liabilities & Equity Interest-bearing liabilities Money market accounts ............ 3.30 $12,542 $427 3.40 $10,345 $234 2.26 Passbook accounts ................ 2.25 19,003 418 2.20 17,221 413 2.40 NOW accounts ..................... 1.74 19,079 336 1.76 16,668 379 2.27 Certificate accounts ............. 5.39 150,068 8,045 5.36 147,591 8,512 5.77 ---- -------- ------- ---- -------- ------- ---- Total interest-bearing deposits .. 4.61 200,692 9,226 4.60 191,825 9,538 4.97 ---- -------- ------- ---- -------- ------- ---- FHLB advances .................... 5.79 45,481 2,581 5.67 33,573 2,137 6.37 -------- ------- -------- ------- Total interest-bearing liabilities 4.87 246,173 11,807 4.80 225,398 11,675 5.18 ------- ------- Non-interest bearing liabilities .... 19,062 15,591 -------- -------- Total liabilities ................ 265,235 240,989 Stockholders' Equity ................ 35,261 36,352 -------- -------- Total liabilities & stockholders' equity ........... $300,496 $277,341 ======== ======== Net interest rate spread (4) ........ 3.11% $10,049 3.01% $9,459 2.94% ==== ======= ==== ====== ==== Net interest margin (5) ............. 3.59% 3.63% ==== ==== Ratio of interest-earning assets to interest-bearing liabilities ..... 113.75% 115.47% ==================================================================================================================================== For the Years Ended December 31, ------------------------------------- 1997 ------------------------------------- Average Average Balance Interest Yield/Cost ------- -------- ---------- Assets Deposits & short-term investments ... $2,400 $94 3.92% Investment securities (1) ........... 6,200 399 6.44 Loans receivable (2) ................ 227,346 18,395 8.09 Mortgage-backed securities (3) ...... 20,359 1,279 6.28 FHLB-Chicago stock .................. 1,971 134 6.80 -------- ------- ---- Total interest-earning assets .... 258,276 20,301 7.86 ------- Non-interest earning assets ......... 15,269 -------- Total assets ..................... $273,545 $20,301 ======== ======= Liabilities & Equity Interest-bearing liabilities Money market accounts ............ $9,703 $234 2.41 Passbook accounts ................ 16,921 419 2.48 NOW accounts ..................... 14,930 338 2.26 Certificate accounts ............. 148,812 8,681 5.83 -------- ------- ---- Total interest-bearing deposits .. 190,366 9,672 5.08 -------- ------- ---- FHLB advances .................... 32,958 2,062 6.26 -------- ------- Total interest-bearing liabilities 223,324 11,734 5.25 ------- Non-interest bearing liabilities .... 11,510 -------- Total liabilities ................ 234,834 Stockholders' Equity ................ 38,711 -------- Total liabilities & stockholders' equity ........... $273,545 ======== Net interest rate spread (4) ........ $8,567 2.61% ====== ==== Net interest margin (5) ............. 3.32% ==== Ratio of interest-earning assets to interest-bearing liabilities ..... 115.65% ===================================================================================
(1) Includes investment securities available for sale and held to maturity. (2) Amount is net of deferred loan origination costs, construction loans in process, net unearned discount on loans purchased and allowance for loan losses and includes non-performing loans. (3) Includes mortgage-backed securities available for sale and held to maturity. (4) 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. (5) Net interest margin represents net interest income as a percentage of average interest-earning assets. 13 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 the Company'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 changes attributable to the combined impact of volume and rate have been allocated proportionally to the change due to volume and the change due to rate.
Year-to-Date 1999 Year-to-Date 1998 Compared to Compared to Year-to-Date 1998 Year-to-Date 1997 ===================================== ==================================== Increase (Decrease) Increase (Decrease) Due to Due to ------------------------------------- ------------------------------------ Volume Rate Total Change Volume Rate Total Change ------------------------------------- ------------------------------------ (in thousands) Interest Income: Interest-earning deposits ($170) ($79) ($249) $517 $57 $574 Investment securities (27) (11) (38) 102 (1) 101 Loans receivable 1,985 (933) 1,052 71 782 853 Mortgage-backed securities (68) 4 (64) (569) (130) (699) FHLB stock 25 (4) 21 2 2 4 ----- ----- ----- ----- ----- ----- Total interest income 1,562 (840) 722 158 675 833 ----- ----- ----- ----- ----- ----- Interest Expense: Money-market deposit accounts 57 136 193 15 (15) 0 Savings accounts 41 (36) 5 7 (13) (6) NOW accounts 50 (93) (43) 40 1 41 Certificate accounts 141 (608) (467) (71) (98) (169) FHLB advances 695 (251) 444 39 36 75 ----- ----- ----- ----- ----- ----- Total interest expense 1,032 (900) 132 108 (167) (59) ----- ----- ----- ----- ----- ----- Net interest income $530 $60 $590 $50 $842 $892 ===== ===== ===== ===== ===== =====
14 Liquidity and Capital Resources The Bank'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. At December 31, 1999, the Bank exceeded all of its regulatory capital requirements with Tier 1 core capital of $27.9 million, or 13.3% of risk-weighted assets, which is above the required level of $8.4 million or 4.0%; and risk-based capital of $29.3 million or 14.0% of risk-weighted assets, which is above the required level of $16.8 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 December 31, 1999 and 1998, cash and interest-bearing deposits totaled $13.2 million and $18.3 million, respectively. The Company has other sources of liquidity if a need for additional funds arises, including FHLB advances. At December 31, 1999, the Bank had outstanding advances with the FHLB of $57.1 million. The FHLB maintains two limitations on the availability based on FHLB stock ownership and 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 $52.2 million. Depending upon market conditions and the pricing of deposit products and FHLB borrowings, the Bank may utilize FHLB advances to fund loan originations. At December 31, 1999 the Bank had commitments to originate loans and unused lines of credit totaling $45.1 million. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Certificate accounts which are scheduled to mature in one year or less from December 31, 1999 totaled $103.3 million. The Bank anticipates that it will have sufficient funds to meet its current loan commitments and maturing deposits. 15 Independent Auditor's Report To the Stockholders and Board of Directors Citizens First Financial Corp. and Subsidiary Bloomington, Illinois We have audited the accompanying consolidated balance sheet of Citizens First Financial Corp. and subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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 generally accepted auditing standards. 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 described above present fairly, in all material respects, the consolidated financial position of Citizens First Financial Corp. and subsidiary as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ Olive LLP Olive Decatur, Illinois January 26, 2000 16 Citizens First Financial Corp. and Subsidiary Consolidated Balance Sheet
December 31 1999 1998 ===================================================================================================== Assets Cash and due from banks ............................................ $9,909,293 $5,758,487 Interest-bearing demand deposits ................................... 3,266,649 12,579,716 ----------------------------- Cash and cash equivalents .................................... 13,175,942 18,338,203 Investment securities available for sale ........................... 16,103,412 18,033,239 Loans held for sale ................................................ 3,007,425 5,245,872 Loans, net of allowance for loan losses of $1,679,247 and $1,256,475 263,873,765 231,627,677 Land in real estate joint venture .................................. 4,107,729 Premises and equipment ............................................. 9,028,410 8,124,445 Federal Home Loan Bank stock ....................................... 2,853,700 1,970,700 Foreclosed assets .................................................. 86,224 482,833 Other assets ....................................................... 4,348,041 3,451,161 - ----------------------------------------------------------------------------------------------------- Total assets ................................................. $316,584,648 $287,274,130 ===================================================================================================== Liabilities Deposits Noninterest bearing .......................................... $16,059,672 $13,046,683 Interest bearing ............................................. 204,177,299 195,049,888 ----------------------------- Total deposits ......................................... 220,236,971 208,096,571 Federal Home Loan Bank borrowings .................................. 57,073,196 39,409,618 Advances by borrowers for taxes and insurance ...................... 890,483 601,266 Other liabilities .................................................. 2,098,804 3,146,317 - ----------------------------------------------------------------------------------------------------- Total liabilities ............................................ 280,299,454 251,253,772 - ----------------------------------------------------------------------------------------------------- Minority Interest in Real Estate Joint Venture ..................... 2,034,054 COMMITMENTS AND CONTINGENT LIABILITIES Stockholders' Equity Preferred stock, $.01 par value Authorized and unissued -- 1,000,000 shares Common stock, $.01 par value Authorized -- 8,000,000 shares Issued and Outstanding -- 2,817,500 shares ................... 28,175 28,175 Additional Paid-in-capital ................................... 27,489,456 27,426,725 Retained earnings .................................................. 21,179,540 20,198,209 Accumulated other comprehensive income ............................. (341,567) (47,729) - ----------------------------------------------------------------------------------------------------- 48,355,604 47,605,380 Less: Unallocated employee stock ownership plan shares -- 96,600 and 128,800 shares .......................... (966,000) (1,288,000) Unearned incentive plan shares -- 40,577 and 64,709 shares ......... (558,965) (893,433) Treasury stock, at cost -- 793,145 and 583,083 shares .............. (12,579,499) (9,403,589) - ----------------------------------------------------------------------------------------------------- Total stockholders' equity ......................................... 34,251,140 36,020,358 - ----------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity ................... $316,584,648 $287,274,130 =====================================================================================================
See notes to consolidated financial statements. 17 Citizens First Financial Corp. and Subsidiary Consolidated Statement of Income
Year Ended December 31 1999 1998 1997 ============================================================================================= Interest Income Loans receivable ............................ $20,299,904 $19,248,250 $18,394,586 Investment securities ....................... 1,171,225 1,218,318 1,812,044 Deposits with financial institutions ........ 384,643 667,589 94,271 --------------------------------------- Total interest income ................. 21,855,772 21,134,157 20,300,901 --------------------------------------- Interest Expense Deposits .................................... 9,226,193 9,537,962 9,672,326 Federal Home Loan Bank borrowings ........... 2,581,041 2,137,116 2,061,677 --------------------------------------- Total interest expense ................ 11,807,234 11,675,078 11,734,003 --------------------------------------- Net Interest Income ............................... 10,048,538 9,459,079 8,566,898 Provision for loan losses ................... 480,000 463,381 516,053 --------------------------------------- Net Interest Income After Provision for Loan Losses 9,568,538 8,995,698 8,050,845 --------------------------------------- Other Income Service charges on deposit accounts ......... 782,672 509,197 495,980 Loan servicing fees ......................... 86,506 15,410 205,027 Net realized gains on sales of available-for-sale securities ........... 11,428 17,060 4,019 Net gain on sale of branch facility ......... 522,883 Net gains on loan sales ..................... 192,244 910,352 418,260 Other income ................................ 316,904 243,353 336,869 --------------------------------------- Total other income .................... 1,389,754 1,695,372 1,983,038 --------------------------------------- Other Expenses Salaries and employee benefits .............. 4,476,988 4,263,484 4,063,420 Net occupancy and equipment expenses ........ 1,430,349 1,089,380 932,335 Deposit insurance expense ................... 122,989 120,149 101,473 Data processing fees ........................ 444,948 403,771 385,098 Loss on equity investment ................... 441,087 Other expenses .............................. 1,873,776 1,549,513 1,463,469 Minority interest in net income of real estate joint venture ................ 36,378 --------------------------------------- Total other expenses .................. 8,826,515 7,426,297 6,945,795 --------------------------------------- Income Before Income Tax .......................... 2,131,777 3,264,773 3,088,088 Income tax expense .......................... 939,891 1,250,304 1,199,332 --------------------------------------- Net Income ........................................ $1,191,886 $2,014,469 $1,888,756 ============================================================================================= Basic Earnings Per Share .......................... $0.61 $0.90 $0.79 Diluted Earnings Per Share ........................ $0.58 $0.84 $0.74
See notes to consolidated financial statements. 18 Citizens First Financial Corp. and Subsidiary Consolidated Statement of Stockholders' Equity
Common Stock Accumulated -------------------- Additional Other Shares Paid-in Comprehensive Retained Comprehensive Outstanding Amount Capital Income Earnings Income - ---------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1997 ................... 2,568,611 $28,175 $27,023,869 $16,294,984 ($297,685) Comprehensive income Net income ............................. $1,888,756 1,888,756 Other comprehensive income, net of tax Unrealized gains on securities, net of reclassification adjustment .. 197,952 197,952 --------------- Comprehensive income ..................... $2,086,708 =============== Employee stock ownership plan shares allocated .................. 32,200 203,437 Incentive plan shares acquired ........... (54,100) Incentive plan shares earned ............. 22,540 (33,984) Purchase of treasury stock ............... (281,750) - -------------------------------------------------------------------------------- ----------------------------- Balance, December 31, 1997 ................. 2,287,501 28,175 27,193,322 18,183,740 (99,733) Comprehensive income Net income ............................. $2,014,469 2,014,469 Other comprehensive income, net of tax Unrealized gains on securities, net of reclassification adjustment .. 52,004 52,004 --------------- Comprehensive income ..................... $2,066,473 =============== Employee stock ownership plan shares allocated .................. 32,200 268,559 Incentive plan shares earned ............. 22,540 (35,156) Purchase of treasury stock ............... (301,333) - -------------------------------------------------------------------------------- ----------------------------- Balance, December 31, 1998 ................. 2,040,908 28,175 27,426,725 20,198,209 (47,729) Comprehensive income Net income ............................. $1,191,886 1,191,886 Other comprehensive income, net of tax Unrealized losses on securities, net of reclassification adjustment .. (293,838) (293,838) --------------- Comprehensive income ..................... $898,048 =============== Cash dividends ($.10 per share) .......... (210,555) Employee stock ownership plan shares allocated .................. 32,200 127,484 Incentive plan shares earned ............. 24,132 (37,644) Exercise of stock options ................ 15,634 (27,109) Purchase of treasury stock ............... (225,696) - -------------------------------------------------------------------------------- ----------------------------- Balance, December 31, 1999 ................. 1,887,178 $28,175 $27,489,456 $21,179,540 ($341,567) ================================================================================ ============================= Unallocated Employee Stock Unearned Ownership Incentive Treasury Plan Shares Plan Shares Stock Total - ------------------------------------------------------------------------------------------------------- Balance, January 1, 1997 ................... ($1,932,000) ($768,833) $40,348,510 Comprehensive income Net income ............................. 1,888,756 Other comprehensive income, net of tax Unrealized gains on securities, net of reclassification adjustment .. 197,952 Comprehensive income ..................... Employee stock ownership plan shares allocated .................. 322,000 525,437 Incentive plan shares acquired ........... (752,932) (752,932) Incentive plan shares earned ............. 315,984 282,000 Purchase of treasury stock ............... ($4,520,173) (4,520,173) - ------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 ................. (1,610,000) (1,205,781) (4,520,173) 37,969,550 Comprehensive income Net income ............................. 2,014,469 Other comprehensive income, net of tax Unrealized gains on securities, net of reclassification adjustment .. 52,004 Comprehensive income ..................... Employee stock ownership plan shares allocated .................. 322,000 590,559 Incentive plan shares earned ............. 312,348 277,192 Purchase of treasury stock ............... (4,883,416) (4,883,416) - ------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 ................. (1,288,000) (893,433) (9,403,589) 36,020,358 Comprehensive income Net income ............................. 1,191,886 Other comprehensive income, net of tax Unrealized losses on securities, net of reclassification adjustment .. (293,838) Comprehensive income ..................... Cash dividends ($.10 per share) .......... (210,555) Employee stock ownership plan shares allocated .................. 322,000 449,484 Incentive plan shares earned ............. 334,468 296,824 Exercise of stock options ................ 219,407 192,298 Purchase of treasury stock ............... (3,395,317) (3,395,317) - ------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 ................. ($966,000) ($558,965) ($12,579,499) $34,251,140 =======================================================================================================
See notes to consolidated financial statements. 19 Citizens First Financial Corp. and Subsidiary Consolidated Statement of Cash Flows
Year Ended December 31 1999 1998 1997 ========================================================================================================== Operating Activities Net income ......................................... $1,191,886 $2,014,469 $1,888,756 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses .................... 480,000 463,381 516,053 Loss on equity investment .................... 441,087 Depreciation ................................. 986,169 591,230 471,610 Deferred income tax benefit .................. (303,617) (51,643) (72,833) Investment securities gains .................. (11,428) (17,060) (4,019) Investment securities amortization, net ...... 55,212 51,049 51,711 Minority interest in net income of real estate joint venture ............. 36,378 Net loss on sales of foreclosed real estate .. 56,551 73,656 19,381 Net gain on loan sales ....................... (192,244) (910,352) (418,260) Net gain on sale of branch facility .......... (522,883) Net gain on sales of premises and equipment .. (6,478) (44,366) Loans originated for sale .................... (20,932,960) (61,122,594) (25,967,927) Proceeds from sales of loans originated for resale ............................... 23,363,651 59,180,641 27,020,088 Compensation expense related to employee stock ownership and incentive plans ...................... 746,308 867,751 807,437 Change in: Other assets ............................. (406,817) (402,916) (30,587) Other liabilities ........................ (1,301,100) 787,193 196,924 - ---------------------------------------------------------------------------------------------------------- Net cash provided by operating activities .... 4,209,076 1,518,327 3,911,085 - ---------------------------------------------------------------------------------------------------------- Investing Activities Purchases of securities available for sale ......... (3,005,375) (10,503,689) (1,992,419) Proceeds from maturities and principal paydowns on securities available for sale ............. 4,197,893 6,565,809 5,341,739 Proceeds from sales of securities available for sale 25,741 5,257,424 5,995,727 Proceeds from maturities and principal paydowns on securities held to maturity ............... 1,000,000 Redemption (purchase) of Federal Home Loan Bank stock .............................. (883,000) 482,500 (791,200) Net change in loans ................................ (32,878,138) (3,752,577) (19,311,565) Proceeds from sales of foreclosed real estate ...... 492,108 1,179,300 441,043 Purchases of premises and equipment ................ (1,890,134) (335,500) (3,317,385) Investment in land in real estate joint venture .... (4,180,485) Proceeds from minority interest portion of real estate joint venture ................. 2,070,432 Sale of branch, net of cash paid ................... 522,883 Proceeds from sales of premises and equipment ...... 34,274 260,423 - ---------------------------------------------------------------------------------------------------------- Net cash used by investing activities ........ (36,050,958) (1,072,459) (11,850,754) - ----------------------------------------------------------------------------------------------------------
20 Citizens First Financial Corp. and Subsidiary Consolidated Statement of Cash Flows (continued)
Year Ended December 31 1999 1998 1997 =================================================================================================== Financing Activities Net change in Interest-bearing demand and savings deposits $6,953,643 $11,163,613 $479,448 Certificates of deposit ..................... 5,186,757 (1,700,259) (3,970,971) Net change in Federal Home Loan Bank line of credit (4,200,000) (10,250,000) Net proceeds from Federal Home Loan Bank advances ............................... 17,663,578 9,665,942 27,943,676 Net change in advances by borrowers for taxes and insurance ......................... 289,217 (92,798) (57,366) Cash dividends .................................... (210,555) Purchase of stock for incentive plan .............. (752,932) Exercise of stock options ......................... 192,298 Purchase of treasury stock ........................ (3,395,317) (4,883,416) (4,520,173) -------------------------------------------- Net cash provided by financing activities .................. 26,679,621 9,953,082 8,871,682 -------------------------------------------- Net Change in Cash and Cash Equivalents ........... (5,162,261) 10,398,950 932,013 Cash and Cash Equivalents, Beginning of Year ...... 18,338,203 7,939,253 7,007,240 -------------------------------------------- Cash and Cash Equivalents, End of Year ............ $13,175,942 $18,338,203 $7,939,253 =================================================================================================== Additional Cash Flows Information Interest paid ..................................... $11,721,872 $11,697,057 $11,598,098 Income tax paid ................................... 1,337,379 1,138,727 834,003 Loan balances transferred to foreclosed real estate and repossessions ............... 152,050 1,130,411 368,822
See notes to consolidated financial statements. 21 Citizens First Financial Corp. and Subsidiary Notes to Consolidated Financial Statements Note 1 - Nature of Operations and Summary of Significant Accounting Policies The accounting and reporting policies of Citizens First Financial Corp. ("Company") and its wholly owned subsidiary, Citizens Savings Bank, ("Bank"), conform to generally accepted accounting principles and reporting practices followed by the thrift industry. The Bank has one wholly owned subsidiary, CSL Service Corporation. The more significant of the policies are described below. During 1999, CSL Service Corporation entered into a joint venture real estate development partnership with two other investors and is a 50% owner of Williamsburg Place LLC. The primary business of Williamsburg Place LLC is to purchase and develop commercial real estate. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company is a thrift holding company whose principal activity is the ownership and management of the Bank. The Bank converted from a federal thrift charter to a state bank charter during 1999, and provides full banking services in a single significant business segment. As a state-chartered savings bank, the Bank is subject to regulation by the State of Illinois Office of Banks and Real Estate, and the Federal Deposit Insurance Corporation. The Bank generates commercial, mortgage and consumer loans and receives deposits from customers located primarily in Central Illinois. The Bank's loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon economic conditions in Central Illinois. CONSOLIDATION - The consolidated financial statements include the accounts of the Company and Bank after elimination of all material intercompany transactions and accounts. The accounts of Williamsburg Place LLC have been consolidated into the Company's financial statements. The cost basis investment in the real estate and the minority interest owned portion are reflected on the consolidated balance sheet. INVESTMENT SECURITIES - Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Securities held to maturity are carried at amortized cost. Debt securities not classified as held to maturity and marketable equity securities are classified as available for sale. Securities available for sale are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income, net of tax. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method. LOANS HELD FOR SALE are carried at the lower of aggregate cost or market. Market is determined using the aggregate method. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income based on the difference between estimated sales proceeds and aggregate cost. 22 Citizens First Financial Corp. and Subsidiary Notes to Consolidated Financial Statements LOANS are carried at the principal amount outstanding. Interest income is accrued on the principal balances of loans. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed when considered uncollectible. Interest income is subsequently recognized only to the extent cash payments are received. Certain loan fees and direct costs are being deferred and amortized as an adjustment of yield on the loans. In applying the provisions of Statement of Financial Accounting Standards (SFAS) No. 114, the Company considers its investments in one-to-four family residential loans and installment loans to be homogeneous and therefore excluded from separate identification for valuation of impairment. ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES are maintained to absorb loan and real estate losses based on management's continuing review and evaluation of the loan and real estate portfolios and its judgment as to the impact of economic conditions on the portfolios. The evaluation by management includes consideration of past loss experience, changes in the composition of the portfolios, the current condition and amount of loans and foreclosed real estate outstanding, and the probability of collecting all amounts due. Impaired loans are measured by the present value of expected future cash flows, or the fair value of the collateral of the loan, if collateral dependent. The determination of the adequacy of the allowance for loan losses and the valuation of real estate is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Management believes that as of December 31, 1999, the allowance for loan losses and carrying value of foreclosed real estate are adequate based on information currently available. A worsening or protracted economic decline in the area within which the Bank operates would increase the likelihood of additional losses due to credit and market risks and could create the need for additional loss reserves. LAND IN REAL ESTATE JOINT VENTURE is carried at cost, with land and development costs allocated to lots when incurred. PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations. FEDERAL HOME LOAN BANK (FHLB) STOCK is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula. FORECLOSED ASSETS are carried at the lower of cost or fair value less estimated selling costs. When foreclosed assets are acquired, any required adjustment is charged to the allowance for loan losses. All subsequent activity is included in current operations. MORTGAGE SERVICING RIGHTS on originated loans are capitalized by allocating the total cost of the mortgage loans between the mortgage servicing rights and the loans based on their relative fair values. Capitalized servicing rights are amortized in proportion to and over the period of estimated servicing revenues. TREASURY STOCK is stated at cost. Cost is determined by the first-in, first-out method. 23 Citizens First Financial Corp. and Subsidiary Notes to Consolidated Financial Statements INCOME TAX in the consolidated statement of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. The Company files consolidated income tax returns with its subsidiary. INCENTIVE PLAN -- The Company accounts for its stock award program or incentive plan in accordance with Accounting Principals Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees. The aggregate purchase price of all shares owned by the incentive plan is reflected as a reduction of stockholders' equity. Compensation expense is based on the market price of the Company's stock on the date the shares are granted and is recorded over the vesting period. The difference between the aggregate purchase price and the fair value on the date granted of the shares earned is recorded as an adjustment to paid-in capital. EMPLOYEE STOCK OWNERSHIP PLAN -- The Company accounts for its employee stock ownership plan (ESOP) in accordance with American Institute of Certified Public Accountants (AICPA) Statement of Position 93-6. The cost of shares issued to the ESOP but not yet allocated to participants are presented in the consolidated balance sheet as a reduction of stockholders' equity. Compensation expense is recorded based on the market price of the shares as they are committed to be released for allocation to participant accounts. The difference between the market price and the cost of shares committed to be released is recorded as an adjustment to paid-in capital. Dividends on allocated ESOP shares will be recorded as a reduction of retained earnings; dividends on unallocated ESOP shares will be reflected as a reduction of debt. Shares are considered outstanding for earnings per share calculations when they are committed to be released; unallocated shares are not considered outstanding. EARNINGS PER SHARE -- Basic earnings per share have been computed based upon the weighted average common shares outstanding during each year. 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. RECLASSIFICATIONS of certain amounts in the 1998 and 1997 financial statements have been made to conform to the 1999 presentation. Note 2 - Subsequent Event In January 2000, the Company entered into a purchase and assumption agreement for the sale of certain fixed assets and assumption of deposit liabilities of a branch located in Eureka, Illinois. As of December 31, 1999, total deposits for the Eureka Branch are approximately $26,740,000 and fixed assets are approximately $172,000. The gain on sale should approximate $2,500,000. It is anticipated this transaction will be finalized by the second quarter of 2000. 24 Citizens First Financial Corp. and Subsidiary Notes to Consolidated Financial Statements Note 3 - Investment Securities
1999 ------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair December 31 Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------- Available for sale Federal agencies ......................... $7,502,302 $288,327 $7,213,975 Mortgage-backed securities ........... 8,144,576 257,923 7,886,653 Other asset-backed securities ........ 14,832 14,832 Marketable equity securities ......... 1,000,000 12,048 987,952 ------------------------------------------------------------------------ Total available for sale ..... $16,661,710 $558,298 $16,103,412 ======================================================================== 1998 ------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair December 31 Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------- Available for sale Federal agencies ......................... $6,499,933 $6,625 $2,125 $6,504,433 Mortgage-backed securities ........... 10,379,723 9,676 91,186 10,298,213 Other asset-backed securities ........ 231,597 231,597 Marketable equity securities ......... 1,000,000 1,004 998,996 ------------------------------------------------------------------------ Total available for sale ..... $18,111,253 $16,301 $94,315 $18,033,239 ========================================================================
25 Citizens First Financial Corp. and Subsidiary Notes to Consolidated Financial Statements The amortized cost and fair value of securities held to maturity and available for sale at December 31, 1999, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Available for Sale ------------------------------ Amortized Fair Cost Value - ------------------------------------------------------------------------- Within one year ......................... $1,000,565 $988,170 One to five years ....................... 2,505,783 2,443,805 Five to ten years ....................... 3,995,954 3,782,000 ------------------------------ 7,502,302 7,213,975 Mortgage-backed securities .............. 8,144,576 7,886,653 Other asset-backed securities ........... 14,832 14,832 Marketable equity securities ............ 1,000,000 987,952 ------------------------------ Totals ............................ $16,661,710 $16,103,412 ========================================================================= Securities with a carrying value of $2,188,415 and $2,395,217 were pledged at December 31, 1999 and 1998 to secure certain deposits and for other purposes as permitted or required by law. Proceeds from sales of securities available for sale during 1999, 1998 and 1997 were $25,741, $5,257,424, and $5,995,727. Gross gains of $11,428, $23,055, and $12,160 and gross losses of $0, $5,995, and $8,141 were realized on those sales. The tax effect of the gains were approximately $4,436, $6,653 and $1,625. With the exception of securities of the U.S. Treasury and other U.S. Government agencies and corporations, the Company did not hold any securities of a single issuer, payable from and secured by the same source of revenue or taxing authority, the book value of which exceeded 10% of stockholders' equity at December 31, 1999. Note 4 - Equity Investment The Company has a 20% ownership investment in Websoft, Inc. (investee), a company which builds and markets internet portals. The Company also had outstanding loans with the investee. The Company follows the equity method in recording the investment. As of December 31, 1999, the investee had total assets of $159,137, total liabilities of $902,216, and total equity of $(743,079). As the investee has negative equity, losses equal to the Company's portion of the negative equity and the outstanding loans totaling $441,087 have been recorded as other expenses in the Company's consolidated statement of income. Note 5 - Restriction on Cash and Due From Banks The Bank is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 1999, was $911,000. 26 Citizens First Financial Corp. and Subsidiary Notes to Consolidated Financial Statements Note 6 - Loans and Allowance December 31 1999 1998 ================================================================================ Mortgage Loans One-to-four family ................. $136,621,052 $136,866,519 Multi-family ....................... 16,448,971 13,405,579 Commercial real estate ............. 26,632,521 24,073,218 Construction and land .............. 72,636,375 40,946,179 Commercial ............................... 12,693,446 12,726,914 Consumer and other loans ................. 16,151,216 12,072,436 -------------------------------- 281,183,581 240,090,845 Undisbursed portion of loans ............. (15,623,349) (7,189,311) Deferred premium on sale of loans ........ 3,366 11,666 Deferred loan fees ....................... (10,586) (29,048) Allowance for loan losses ................ (1,679,247) (1,256,475) -------------------------------- Total loans ........................ $263,873,765 $231,627,677 ================================================================================ Year Ended December 31 1999 1998 1997 ================================================================================ Allowance for Loan Losses Balances, January 1 ......... $1,256,475 $839,845 $512,096 Provision for loan losses ... 480,000 463,381 516,053 Loans charged off ........... (57,228) (46,751) (188,304) ----------------------------------------- Balances, December 31 ....... $1,679,247 $1,256,475 $839,845 ================================================================================ The amount of impaired loans at December 31, 1999 and 1998 and during 1999, 1998 and 1997 was immaterial. Note 7 - Premises and Equipment December 31 1999 1998 ================================================================================ Land ..................................... $2,038,437 $2,038,437 Buildings and land improvements .......... 7,473,413 7,357,531 Furniture and equipment .................. 3,912,530 3,138,795 ------------------------------ Total cost ......................... 13,424,380 12,534,763 Accumulated depreciation ................. (4,395,970) (4,410,318) ------------------------------ Net ................................ $9,028,410 $8,124,445 ================================================================================ 27 Citizens First Financial Corp. and Subsidiary Notes to Consolidated Financial Statements Note 8 - Other Assets and Other Liabilities December 31 1999 1998 ================================================================================ Other assets Interest receivable Investment securities ...................... $149,145 $135,215 Mortgage-backed securities ................. 45,744 59,534 Loans ...................................... 2,540,013 2,299,388 Mortgage servicing rights ..................... 636,873 648,765 Income taxes receivable ....................... 93,866 Deferred income tax benefit ................... 610,437 120,374 Prepaid expenses and other assets ............. 271,963 187,885 ------------------------- Total ................................ $4,348,041 $3,451,161 ================================================================================ Other liabilities Interest payable Deposits ................................... $79,586 $76,365 FHLB borrowings ............................ 272,599 190,458 Current income tax liability .................. 239,882 Accrued expenses and other liabilities ........ 1,746,619 2,639,612 ------------------------- Total ................................ $2,098,804 $3,146,317 ================================================================================ Note 9 - Deposits December 31 1999 1998 ================================================================================ Demand deposits ................................ $49,550,124 $43,410,766 Savings deposits ............................... 18,523,223 17,708,938 Certificates of deposit of $100,000 or more .... 18,687,047 11,866,776 Other certificates of deposit .................. 133,476,577 135,110,091 ---------------------------- Total deposits ........................... $220,236,971 $208,096,571 ================================================================================ Certificates of deposit maturing in years ending December 31: ================================================================================ Total 2000 ........................................................... $103,300,961 2001 ........................................................... 39,519,652 2002 ........................................................... 7,023,436 2003 ........................................................... 1,310,073 2004 ........................................................... 907,832 Thereafter ..................................................... 101,670 ------------ Total ................................................ $152,163,624 ================================================================================ 28 Citizens First Financial Corp. and Subsidiary Notes to Consolidated Financial Statements Note 10 - FHLB Borrowings
=================================================================================== December 31 1999 1998 FHLB advances, fixed rates ranging from 4.30% to 6.64%, due at various dates through October, 2008 ...... $57,073,196 $39,409,618 ===================================================================================
The FHLB advances are secured by first-mortgage loans and all stock in the FHLB. Advances are subject to restrictions or penalties in the event of prepayment. The Company has $17,000,000 in FHLB borrowings having a weighted average rate of 5.22% which are callable at various dates. Maturities in years ending December 31, ================================================================================ 2000 ............................................................ $24,000,000 2002 ............................................................ 4,898,196 2003 ............................................................ 3,000,000 2004 ............................................................ 14,000,000 Thereafter ...................................................... 11,175,000 ----------- Total ................................................ $57,073,196 ================================================================================ Note 11 - Loan Servicing Loans serviced for others are not included in the accompanying consolidated balance sheet. The loans are serviced primarily for the Federal Home Loan Mortgage Corporation and the unpaid principal balances totaled approximately $105,809,980, $106,759,000, and $93,021,000 at December 31, 1999, 1998, and 1997. The aggregate fair value of capitalized mortgage servicing rights at December 31, 1999, 1998, and 1997 totaled $636,873, $648,765, and $399,879. Comparable market values were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type, and interest rates, were used to stratify the originated mortgage servicing rights. ================================================================================ 1999 1998 1997 Mortgage Servicing Rights Balances, January 1 ............... $648,765 $399,879 $217,246 Servicing rights capitalized ...... 152,086 476,401 220,861 Amortization of servicing rights .. (163,978) (227,515) (38,228) ----------------------------------- Balances, December 31 ............. $636,873 $648,765 $399,879 ================================================================================ 29 Citizens First Financial Corp. and Subsidiary Notes to Consolidated Financial Statements Note 12 - Income Tax
======================================================================================================== Year Ended December 31 1999 1998 1997 Income tax expense Currently payable Federal ..................................... $1,076,640 $1,052,947 $1,047,165 State ....................................... 166,868 249,000 225,000 Deferred Federal ..................................... (265,920) (45,231) (63,790) State ....................................... (37,697) (6,412) (9,043) ------------------------------------------- Total income tax expense ................ $939,891 $1,250,304 $1,199,332 ======================================================================================================== Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 34% ............... $724,804 $1,110,023 $1,049,950 Effect of state income taxes ...................... 85,253 160,108 142,532 Other ............................................. 129,834 (19,827) 6,850 ------------------------------------------- Actual tax expense ................................ $939,891 $1,250,304 $1,199,332 ======================================================================================================== Effective Tax Rate 44.1% 38.3% 38.8% ========================================================================================================
A cumulative net deferred tax asset is included in assets. The components are as follows:
========================================================================================== December 31 1999 1998 Assets Deferred compensation ................................ $435,893 $429,650 Differences in accounting for loan losses ............ 538,125 358,964 Differences in accounting for equity investment ...... 171,230 Net unrealized losses on securities available for sale 216,731 30,285 Other ................................................ 28,728 45,961 ------------------------- Total assets ............................ 1,390,707 864,860 ------------------------- Liabilities Differences in depreciation methods .................. (425,852) (388,070) FHLB stock dividends ................................. (47,745) (53,358) Capitalized mortgage servicing rights ................ (247,234) (251,880) Deferred loan fees ................................... (44,011) (51,178) Other ................................................ (15,428) ------------------------- Total liabilities ....................... (780,270) (744,486) ------------------------- $610,437 $120,374 ==========================================================================================
30 Citizens First Financial Corp. and Subsidiary Notes to Consolidated Financial Statements Retained earnings at December 31, 1999 and 1998, include approximately $2,144,000 for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions as of December 31, 1987, for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which income would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amount was approximately $832,000. Note 13 - Other Comprehensive Income
=================================================================================================== 1999 ---------------------------------------- Before-Tax Tax Net-of-Tax Year Ended December 31 Amount Expense Amount - --------------------------------------------------------------------------------------------------- Unrealized losses on securities: Unrealized holding losses arising during the year ($468,856) $182,010 ($286,846) Less: reclassification adjustment for gains realized in net income ................... 11,428 (4,436) 6,992 ---------------------------------------- ($480,284) $186,446 ($293,838) =================================================================================================== =================================================================================================== 1998 ---------------------------------------- Before-Tax Tax Net-of-Tax Year Ended December 31 Amount Expense Amount - --------------------------------------------------------------------------------------------------- Unrealized gains on securities: Unrealized holding gains arising during the year $102,063 ($39,652) $62,411 Less: reclassification adjustment for gains realized in net income ................... 17,060 (6,653) 10,407 ---------------------------------------- $85,003 ($32,999) $52,004 =================================================================================================== =================================================================================================== 1997 ---------------------------------------- Before-Tax Tax Net-of-Tax Year Ended December 31 Amount Expense Amount - --------------------------------------------------------------------------------------------------- Unrealized gains on securities: Unrealized holding gains arising during the year $336,324 ($135,978) $200,346 Less: reclassification adjustment for gains realized in net income ................... 4,019 (1,625) 2,394 ---------------------------------------- $332,305 ($134,353) $197,952 ===================================================================================================
31 Citizens First Financial Corp. and Subsidiary Notes to Consolidated Financial Statements Note 14 - Commitments and Contingent Liabilities In the normal course of business there are outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the balance sheet. Financial instruments whose contract amount represents credit risk as of December 31 were as follows:
======================================================================================================= 1999 1998 Loan commitments At variable rates .................................................... $6,797,000 $4,327,000 At fixed rates (ranging from 7.75% to 9.50% at December 31, 1999) .... 883,000 5,825,000 Unused lines of credit ..................................................... 35,944,000 16,432,000 Standby letters of credit .................................................. 1,513,000 979,000
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 that may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies, but may include residential real estate, income-producing commercial properties, or other assets of the borrower. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The Company and subsidiary are also subject to claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Company. Note 15 - Dividends and Capital Restrictions At the time of conversion, a liquidation account was established in an amount equal to the Bank's net worth as reflected in the latest statement of condition used in its final conversion offering circular. The liquidation account is maintained for the benefit of eligible deposit account holders who maintain their deposit account in the Bank after conversion. In the event of a complete liquidation, and only in such event, each eligible deposit account holder will be entitled to receive a liquidation distribution from the liquidation account in the amount of the then current adjusted subaccount balance for deposit accounts then held, before any liquidation distribution may be made to stockholders. Except for the repurchase of stock and payment of dividends, the existence of the liquidation account will not restrict the use or application of net worth. The initial balance of the liquidation account was $15,685,404. 32 Citizens First Financial Corp. and Subsidiary Notes to Consolidated Financial Statements Note 16 - Regulatory Capital The Bank is subject to various regulatory capital requirements administered by the federal banking agencies and is assigned to a capital category. The assigned capital category is largely determined by three ratios that are calculated according to the regulations: total risk based capital, Tier 1 capital, and Tier 1 leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios. There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. At December 31, 1999 and 1998, the Bank is categorized as well capitalized and meets all subject capital adequacy requirements. There are no conditions or events since December 31, 1999 that management believes have changed the Bank's classification. During 1999, the Bank converted from a federal thrift charter to a state chartered Bank. The Bank's actual and required capital amounts (in thousands) and ratios as required for each year are as follows:
===================================================================================================================== 1999 ------------------------------------------------------------------ Required for To Be Well Actual Adequate Capital(1) Capitalized(1) ------------------------------------------------------------------ December 31 Amount Ratio Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------------------------- Total risk-based capital(1) (to risk-weighted assets) .............. $29,324 14.0% $16,752 8.0% $20,940 10.0% Tier 1 capital(1) (to risk-weighted assets) .. 27,940 13.3 8,376 4.0 12,564 6.0 Tier 1 capital(1) (to average assets) ........ 27,940 9.2 12,083 4.0 15,103 5.0 1998 Required for To Be Well Actual Adequate Capital(1) Capitalized(1) December 31 Amount Ratio Amount Ratio Amount Ratio Total risk-based capital(1) (to risk-weighted assets) .............. $29,203 16.1% $14,495 8.0% $18,119 10.0% Tier 1 capital(1) (to risk-weighted assets) .. 28,033 15.5 7,248 4.0 10,871 6.0 Core capital(1) (to adjusted total assets) ... 28,033 10.0 11,218 4.0 14,023 5.0 Core capital(1) (to adjusted tangible assets) 28,033 10.0 5,609 2.0 N/A Tangible capital(1) (to adjusted total assets) 28,033 10.0 4,207 1.5 N/A
(1) As defined by regulators 33 Citizens First Financial Corp. and Subsidiary Notes to Consolidated Financial Statements Note 17 - Employee Benefit Plans The Company maintains a savings plan (combined profit-sharing and 401(k) plan) for the benefit of substantially all of its full-time employees. The amount of the annual profit-sharing contribution is at the discretion of the Board of Directors. The plan also provides for matched employee contributions up to a maximum of four percent of the participants' gross salary. The employer expense for the plan was $120,040, $157,650, and $182,688, for the years ended December 31, 1999, 1998 and 1997, respectively. In connection with the conversion, the Bank established an employee stock ownership plan for the benefit of substantially all employees. The ESOP borrowed $2,254,000 from the Company and used those funds to acquire 225,400 shares of the Company's stock at $10 per share. Shares issued to the ESOP are allocated to ESOP participants based on principal repayments made by the ESOP on the loan from the Company. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank's discretionary contributions to the ESOP and earnings on ESOP assets. Dividends on unallocated ESOP shares will be applied to reduce the loan. Principal payments are scheduled to occur in even annual amounts over a seven year period. However, in the event contributions exceed the minimum debt service requirements, additional principal payments will be made. Stock totaling 32,200 shares for 1999, 1998, and 1997 with an average fair value of $13.96, $18.34, and $16.32, per share, respectively, were committed to be released, resulting in ESOP compensation expense of $449,484, $590,599, and $525,437. Shares held by the ESOP at December 31 are as follows: ================================================================================ 1999 1998 Shares earned by participants ....................... 128,800 96,600 Shares distributed to participants .................. (5,438) (1,463) Unallocated shares .................................. 96,600 128,800 ------------------------ Total ESOP shares ............................. 219,962 223,937 ================================================================================ Fair value of unallocated shares at December 31 $1,159,200 $1,787,100 ================================================================================ The Company has a non-qualified supplemental retirement plan (SERP) covering certain officers and key employees. The benefits provided under the SERP will make up the benefits lost to the SERP participants due to limitations on compensation and maximum benefits under the Bank's tax qualified savings plan and ESOP. Benefits will be provided under the SERP at the same time and in the same form as the related benefits will be provided under the savings plan and ESOP. The Bank's expense for the SERP was $29,508, $58,701, and $12,315 for 1999, 1998, and 1997. 34 Citizens First Financial Corp. and Subsidiary Notes to Consolidated Financial Statements During November, 1996, the Company adopted a stock-based compensation program which included both a stock award program or incentive plan and a stock option plan. The incentive plan covers key employees and directors and is authorized to acquire and grant 112,700 shares of the Company's common stock or 4% of the shares issued in the Company's initial public offering. The funds used to acquire these shares will be contributed by the Bank. Participants in the incentive plan vest over five years, commencing one year after the date such shares are granted. As of December 31, 1996, all 112,700 shares authorized under the plan had been granted. As of December 31, 1999 and 1998, 72,123 and 47,991 shares were distributed, respectively. None of these shares were forfeited during 1999, 1998, or 1997. For the years ended December 31, 1999, 1998, and 1997, $296,824, $277,192, and $282,000 was recorded as compensation expense under the plan. Note 18 - Stock Option Plan Under the Company's stock option plan, which is accounted for in accordance with APB No. 25, Accounting for Stock Issued to Employees, and related interpretations, the Company grants selected executives and other key employees stock option awards which vest pro rata over a five year period and become fully exercisable at the end of five years of continued employment. During 1996, the Company authorized the grant of options for up to 281,750 shares of the Company's common stock or 10% of the shares issued in the Company's initial public offering, that expire ten years from the date of grant. During 1996, the Company granted all 281,750 options at an exercise price of $12.30 per share. During 1999, the Company authorized an additional 125,000 shares and granted 100,000 shares of the Company's stock to the Company's officers and directors at an average exercise price of $12.25. The exercise price of each option was equal to the market price of the Company's stock on the date of grant; therefore, no compensation expense was recognized. Although the Company has elected to follow APB No. 25, SFAS No. 123 requires pro forma disclosures of net income and earnings per share as if the Company had accounted for its employee stock options under that Statement. The fair value of each option grant was estimated on the grant date using an option-pricing model with the following assumptions: ================================================================================ 1999 Risk-free interest rates ........................................... 6.30% Dividend yields .................................................... 1.67% Volatility factors of expected market price of common stock ........ 34.22% Weighted-average expected life of the options ...................... 10 years 35 Citizens First Financial Corp. and Subsidiary Notes to Consolidated Financial Statements Under SFAS No. 123, compensation cost is recognized in the amount of the estimated fair value of the options and amortized to expense over the options' vesting period. The pro forma effect on net income and earnings per share of this statement is as follows:
====================================================================================================== 1999 1998 1997 - ------------------------------------------------------------------------------------------------------ Net income ....................... As reported $1,191,886 $2,014,469 $1,888,756 Pro forma 740,446 1,619,574 1,493,861 Basic earnings per share ......... As reported 0.61 0.90 0.79 Pro forma 0.38 0.73 0.62 Diluted earnings per share ....... As reported 0.58 0.84 0.74 Pro forma 0.36 0.68 0.59
The following is a summary of the status of the Company's stock option plan and changes in that plan as of and for the years ended December 31, 1999, 1998, and 1997.
============================================================================================================================ Year Ended December 31 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Weighted- Weighted- Weighted- Average Average Average Options Shares Exercise Price Shares Exercise Price Shares Exercise Price - ---------------------------------------------------------------------------------------------------------------------------- Outstanding, beginning of year 281,750 $12.30 281,750 $12.30 281,750 $12.30 Granted 100,000 $12.25 Exercised 15,634 $12.30 ------- ------- ------- Outstanding, end of year 366,116 $12.29 281,750 $12.30 281,750 $12.30 ======= ======= ======= Options exercisable at year end 163,416 112,700 56,350 Weighted-average fair value of options granted during the year $5.68
The shares exercised in the current year included 10,000 shares which had accelerated vesting as a result of disability of a participant. As of December 31, 1999, 366,116 options outstanding have exercise prices ranging from $12.30 to $13.94 and a weighted-average remaining contractual life of 7.6 years. Note 19 - Related Party Transactions The Bank has entered into transactions with certain directors, executive officers, significant stockholders and their affiliates or associates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amounts of loans, as defined, to such related parties were as follows: ================================================================================ Balances, January 1, 1999 ........................................ $1,427,487 New loans, including renewals .................................... 761,278 Payments, etc., including renewals ............................... (859,096) ---------- Balances, December 31, 1999 ...................................... $1,326,669 ================================================================================ 36 Citizens First Financial Corp. and Subsidiary Notes to Consolidated Financial Statements Note 20 - Earnings per Share Earnings per share (EPS) were computed as follows:
============================================================================================================= Year Ended December 31, 1999 - ------------------------------------------------------------------------------------------------------------- Weighted Average Per-Share Income Shares Amount ----------------------------------------------- Basic Earnings Per Share Income available to common stockholders ............. $1,191,886 1,962,416 $0.61 Effect of Dilutive Securities Stock options ....................................... 36,090 Unearned incentive plan shares ...................... 47,699 ------------------------ Diluted Earnings Per Share Income available to common stockholders and assumed conversions ....................... $1,191,866 2,046,205 $0.58 ============================================================================================================= Year Ended December 31, 1998 - ------------------------------------------------------------------------------------------------------------- Weighted Average Per-Share Income Shares Amount ----------------------------------------------- Basic Earnings Per Share Income available to common stockholders ............. $2,014,469 2,232,037 $0.90 Effect of Dilutive Securities Stock options ....................................... 92,790 Unearned incentive plan shares ...................... 64,915 ------------------------ Diluted Earnings Per Share Income available to common stockholders and assumed conversions ....................... $2,014,469 2,389,742 $0.84 ============================================================================================================= Year Ended December 31, 1997 - ------------------------------------------------------------------------------------------------------------- Weighted Average Per-Share Income Shares Amount ----------------------------------------------- Basic Earnings Per Share Income available to common stockholders ............. $1,888,756 2,397,234 $0.79 Effect of Dilutive Securities Stock options ....................................... 69,402 Unearned incentive plan shares ...................... 84,746 ------------------------ Diluted Earnings Per Share Income available to common stockholders and assumed conversions ....................... $1,888,756 2,551,382 $0.74 =============================================================================================================
37 Citizens First Financial Corp. and Subsidiary Notes to Consolidated Financial Statements Note 21 - Fair Values of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Cash Equivalents - The fair value of cash and cash equivalents approximates carrying value. Securities and Mortgage-Backed Securities - Fair values are based on quoted market prices. Loans Held for Sale - Fair values are based on quoted market prices. Loans - For both short-term loans and variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for certain mortgage loans, including one-to-four family residential, are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair value for other loans, including commercial real estate and rental property mortgage loans, fixed-rate commercial and industrial loans, and fixed-rate loans to individuals for household and other personal expenditures, is estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Interest Receivable/Payable - The fair values of interest receivable/payable approximate carrying values. FHLB Stock - Fair value of FHLB stock is based on the price at which it may be resold to the FHLB. Deposits - The fair values of noninterest-bearing, interest-bearing demand and savings accounts are equal to the amount payable on demand at the balance sheet date. The carrying amounts for variable rate, fixed-term certificates of deposit approximate their fair values at the balance sheet date. 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 such time deposits. FHLB Borrowings - The fair value of fixed rate borrowings are estimated using a discounted cash flow calculation, based on current rates for similar debt. For those borrowings with interest rates tied to a variable market interest rate, fair value approximates carrying value. Advance Payments by Borrowers for Taxes and Insurance - The fair value approximates carrying value. Off-Balance Sheet Commitments - Commitments include commitments to extend credit and standby letters of credit and are generally of a short-term nature. The fair value of such commitments 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. 38 Citizens First Financial Corp. and Subsidiary Notes to Consolidated Financial Statements The estimated fair values of the Company's financial instruments are as follows:
================================================================================================================== 1999 1998 - ------------------------------------------------------------------------------------------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value --------------------------------------------------------------- Assets Cash and cash equivalents .............. $13,175,942 $13,175,942 $18,338,203 $18,338,203 Investment securities available for sale 16,103,412 16,103,412 18,033,239 18,033,239 Loans held for sale .................... 3,007,425 3,007,425 5,245,872 5,245,872 Loans, net ............................. 263,873,765 263,477,163 231,627,677 239,871,996 Interest receivable .................... 2,734,902 2,734,902 2,494,137 2,494,137 Federal Home Loan Bank stock ........... 2,853,700 2,853,700 1,970,700 1,970,700 Liabilities Deposits ............................... 220,236,971 220,543,075 208,096,571 208,758,099 FHLB borrowings ........................ 57,073,196 55,707,156 39,409,618 39,364,004 Interest payable ....................... 352,185 352,185 266,823 266,823 Advance payments by borrowers for taxes and insurance .............. 890,483 890,483 601,266 601,266 Off-balance sheet items Commitments ............................ 0 0 0 0
Notes 22 - Condensed Financial Information (Parent Company Only) Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company: Condensed Balance Sheet
December 31 1999 1998 =============================================================================================== Assets Cash .......................................................... $51,052 $103,649 Interest-bearing demand deposits .............................. 910,004 692,450 --------------------------- Total cash and cash equivalents ......................... 961,056 796,099 Investment in common stock of subsidiary ...................... 28,112,219 28,107,899 Equity investment ............................................. 187,500 Investment securities available for sale ...................... 14,313 Loans, net of allowance for loan losses of $255,000 and $75,000 3,315,000 5,875,000 ESOP loan to subsidiary ....................................... 953,200 1,288,000 Other assets .................................................. 909,665 89,488 --------------------------- Total assets ............................................ $34,251,140 $36,358,299 =============================================================================================== Liabilities - Other liabilities ............................... $337,941 Stockholders' Equity .......................................... $34,251,140 36,020,358 --------------------------- Total liabilities and stockholders' equity .............. $34,251,140 $36,358,299 ===============================================================================================
39 Citizens First Financial Corp. and Subsidiary Notes to Consolidated Financial Statements Condensed Statement of Income
Year Ended December 31 1999 1998 1997 ================================================================================================ Income Dividends from subsidiaries ............ $1,415,300 $4,500,000 Other income ........................... 582,010 571,406 $625,407 -------------------------------------------- Total income ..................... 1,997,310 5,071,406 625,407 -------------------------------------------- Expenses Provision for loan losses .............. 180,000 75,000 Other expenses ......................... 742,691 513,049 470,629 -------------------------------------------- Total expenses ................... 922,691 588,049 470,629 -------------------------------------------- Income before income tax and equity in undistributed income of subsidiaries 1,074,619 4,483,357 154,778 Income tax expense (benefit) ................. (281,393) (6,461) 36,691 -------------------------------------------- Income before equity in undistributed income of subsidiaries ................. 1,356,490 4,489,818 118,087 Equity in undistributed income of subsidiaries (164,126) (2,475,349) 1,770,669 -------------------------------------------- Net Income ................................... $1,191,886 $2,014,469 $1,888,756 ================================================================================================
40 Citizens First Financial Corp. and Subsidiary Notes to Consolidated Financial Statements Condensed Statement of Cash Flows
Year Ended December 31 1999 1998 1997 =========================================================================================================== Operating Activities Net income ........................................ $1,191,886 $2,014,469 $1,888,756 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses ......................... 180,000 75,000 Write down of equity investment ................... 187,500 Investment securities (gains) losses .............. (11,428) Compensation expense related to incentive plan .... 296,824 277,192 282,000 Equity in undistributed income of subsidiary ...... 164,126 2,475,349 (1,770,669) Net change in Other assets ................................ (820,177) (89,454) 589 Other liabilities ........................... (337,941) 171,426 (142,855) --------------------------------------------- Net cash provided by operating activities 850,790 4,923,982 257,821 --------------------------------------------- Investing Activities Purchases of securities available for sale ........ (14,313) Purchase of equity investment ..................... (187,500) Sales of securities available for sale ............ 25,741 1,006,520 Net change in ESOP loan ........................... 322,000 322,000 322,000 Net change in loans ............................... 2,380,000 (1,950,000) 3,278,000 --------------------------------------------- Net cash provided (used) by investing activities .................. 2,727,741 (1,829,813) 4,606,520 --------------------------------------------- Financing Activities Cash dividends .................................... (210,555) Purchase of stock for incentive plan .............. (752,932) Exercise of stock options ......................... 192,298 Purchase of treasury stock ........................ (3,395,317) (4,883,416) (4,520,173) Net cash used by financing activities ....... (3,413,574) (4,883,416) (5,273,105) --------------------------------------------- --------------------------------------------- Net Change in Cash and Cash Equivalents ................. 164,957 (1,789,247) (408,764) --------------------------------------------- Cash and Cash equivalents at Beginning of Year .......... 796,099 2,585,346 2,994,110 --------------------------------------------- Cash and Cash Equivalents at End of Year ................ $961,056 $796,099 $2,585,346 ===========================================================================================================
41 Citizens First Financial Corp. Shareholder Information STOCK LISTING, STOCK PRICE, AND DIVIDEND INFORMATION Citizens First Financial Corp.'s common stock trades on the American Stock Exchange under the symbol "CBK". At December 31, 1999, 2,024,355 shares of the Company's common stock were held of record by 419 persons or entities, not including the number of persons or entities holding stock in nominee or street name through various brokers or banks. ================================================================ Per Share ================================================================ 1999 ------------------------------------------- High Low Dividends Declared ------------------------------------------- First Quarter 16 13 1/8 $0.00 Second Quarter 15 1/2 13 5/8 $0.00 Third Quarter 15 1/2 12 $0.05 Fourth Quarter 13 3/8 11 9/16 $0.05 ================================================================ 1998 ------------------------------------------- High Low Dividends Declared ------------------------------------------- First Quarter 22 3/8 18 $0.00 Second Quarter 21 1/2 17 3/4 $0.00 Third Quarter 18 3/4 13 $0.00 Fourth Quarter 17 13 3/4 $0.00 ================================================================ QUARTERLY FINANCIAL DATA The following is a summary of selected quarterly results of operations for the years ended December 31, 1999 and 1998: - -------------------------------------------------------------------------------- (In thousands, Quarter Ended except share data) 12/31 09/30 06/30 03/31 1999 Net interest income ......... $2,897 $2,280 $2,496 $2,376 Provision for loan losses ... 120 120 120 120 Other income ................ 293 346 319 432 Other expense ............... 2,522 1,990 2,185 2,130 Income before income tax .... 548 516 510 558 Net income .................. 222 317 312 341 Basic earnings per share .... $0.12 $0.16 $0.16 $0.17 Diluted earnings per share .. $0.11 $0.16 $0.15 $0.16 1998 Net interest income ......... $2,444 $2,382 $2,340 $2,293 Provision for loan losses ... 118 120 120 105 Other income ................ 425 370 467 433 Other expense ............... 1,828 1,834 1,976 1,788 Income before income tax .... 923 798 711 833 Net income .................. 581 488 435 510 Basic earnings per share .... $0.27 $0.22 $0.19 $0.22 Diluted earnings per share .. $0.27 $0.20 $0.17 $0.20 42 EX-23 3 INDEPENDENT ACCOUNTANTS' CONSENT Exhibit 23.0 Consent of Olive LLP [OLIVE LLP LETTERHEAD] INDEPENDENT ACCOUNTANTS' CONSENT The Board of Directors Citizens First Financial Corp. We have issued our report dated January 26, 2000 accompanying the consolidated financial statements of Citizens First Financial Corp. and Subsidiary appearing in the Company's 1999 Annual Report to Stockholders. We consent to the incorporation by reference in this Form 10-K of the aforementioned report. /s/ Olive LLP Decatur, Illinois March 28, 1999 EX-27 4 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1999 DEC-31-1999 9,909 3,267 0 0 16,103 0 0 268,560 1,679 316,585 220,237 24,000 2,989 33,073 0 0 28 34,223 316,585 20,300 1,171 385 21,856 9,226 11,807 10,049 480 11 8,827 2,132 2,132 0 0 1,192 0.61 0.58 0.036 435 134 314 250 1,256 57 0 1,679 1,679 0 179
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