<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
Annual report under Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
Commission File No.: 1-14274
CITIZENS FIRST FINANCIAL CORP.
(Name of small business issuer in its charter)
DELAWARE 37-1351861
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
301 Broadway, Normal, Illinois 61761
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (309) 452-1102
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)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 / /
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained in this form and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. /X/
Issuer's revenues for its fiscal year ended December 31, 1996 were
$19,856,986.
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 $40,596,680 and is based upon the last sales price as
quoted on The American Stock Exchange for March 10, 1997.
The Registrant had 2,792,000 shares of Common Stock outstanding as of
March 10, 1997.
Transitional Small Business Disclosure Format. Yes / / No /X/
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December
31, 1996, are incorporated by reference into Part II of this Form 10-KSB.
Portions of the Proxy Statement for the 1997 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-KSB.
<PAGE>
INDEX
PART I PAGE
Item 1. Description of Business 1
Item 2. Properties 45
Item 3. Legal Proceedings 46
Item 4. Submission of Matters to a Vote of Security
Holders 46
PART II
Item 5. Market for Common Equity and
Related Stockholder Matters 47
Item 6. Management's Discussion and Analysis
or Plan of Operation 47
Item 7. Financial Statements 47
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 47
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance With Section 16(a)
of the Exchange Act 47
Item 10. Executive Compensation 47
Item 11. Security Ownership of Certain Beneficial Owners
and Management 47
Item 12. Certain Relationships and Related Transactions 48
Item 13. Exhibits and Reports on Form 8-K 48
SIGNATURES
<PAGE>
PART I
Item 1. Description of 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"), the Federal Deposit Insurance Corporation
("FDIC") 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, 1996, the Company had total assets of
$261.6 million, total deposits of $202.1 million and total stockholders'
equity of $40.3 million.
The Bank was originally chartered in 1888 by the State of Illinois and in
1989 became a federally chartered 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,
primarily in one- to four-family residential mortgage loans. To a lesser
extent, the Bank also invests in 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, all 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, and, to a lesser extent, proceeds
from the sale of loans and securities. The Bank has two wholly-owned service
corporations, CSL Service Corporation and Fairbury Financial Services Corp.
CSL Service Corporation is an Illinois-chartered corporation that has been
inactive, but began initiating the sale of tax-deferred annuities at the end
of 1996. Fairbury Financial Services Corp. is an Illinois-chartered
corporation that currently services previously sold tax deferred annuities
and long-term care insurance policies that it sold on an agency basis.
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 Normal,
Bloomington, Eureka, Fairbury and Chenoa, Illinois which are part of McLean,
Woodford and Livingston Counties. McLean County comprises the greater
Bloomington/Normal metropolitan area and Woodford, Tazewell and Livingston
Counties are adjacent to the greater Bloomington/Normalmetropolitan area.
The economy in McLean,
1
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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.
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. 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.
Lending Activities
Loan Portfolio Composition. The types of loans that the Bank may
originate are subject to federal laws and regulations. Interest rates
charged by the Bank on loans are affected by the demand for such loans and
the supply of money available for lending purposes and the rates offered by
competitors. These factors are, in turn, affected by, among other things,
economic conditions, monetary policies of the federal government, including
the Federal Reserve Board, and legislative tax policies.
The Bank's loan portfolio consists primarily of first mortgage loans
secured by one- to four-family residences located in its primary market area.
At December 31, 1996, the Bank's gross loan portfolio totalled $215.2 million
of total loans outstanding, of which $161.7 million were one- to four-family,
residential mortgage loans, or 75.2% of total gross loans. At such date, the
remainder of the loan portfolio consisted of: $12.5 million of multi-family
loans, or 5.8% of total gross loans; $8.9 million of commercial real estate
loans, or 4.1% of total gross loans; $12.5 million of construction and land
loans, or 5.8% of total gross loans; $8.1 million of commercial loans, or 3.8
% of total gross loans, and $11.4 million of consumer and other loans, or 5.3%
of total gross loans. At that same date, $125.4 million, or 58.2%, of the
Bank's mortgage loans had adjustable interest rates, most of which are indexed
to the one year CMT Index.
2
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The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------- --------------------- --------------------- --------------------- -------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ------- ------- ---------- -------- --------- -------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage
loans:
One- to four-
family...... $161,733 75.15% $141,708 73.87% $ 140,136 78.04% $120,162 75.34% $128,465 75.90%
Multi-family.. 12,520 5.82 10,469 5.46 9,777 5.44 11,673 7.32 13,654 8.07
Commercial
real
estate...... 8,934 4.15 8,679 4.52 7,847 4.37 9,067 5.69 10,188 6.02
Construction
and land.... 12,489 5.80 12,353 6.44 5,131 2.86 4,208 2.64 2,787 1.65
Commercial.... 8,063 3.75 6,865 3.58 4,023 2.24 3,194 2.00 3,764 2.05
Consumer and
other
loans....... 11,444 5.31 11,719 6.11 12,607 7.02 11,112 6.97 10,567 6.24
-------- ----- ------ ------- -------- ------ -------- ------ ------- ------
215,183 99.98 191,793 99.98 179,521 99.97 159,416 99.96 169,125 99.93
Deferred
premium on
sale of
loans..... 34 .02 39 .02 62 .03 81 .04 136
-------- ------- ------- ------ -------- ------ ------- ------- ------- ------
Total loans... 215,217 100.00% 191,793 100.00% 179,583 100.00% 159,497 100.00% 169,261 100.00%
-------- -------- -------- ------- -------- ------- -------- -------- ------- ------
-------- ------- ------- -------- -------- ------- ------
Less:
Undisbursed
portion of
loans....... 3,397 2,859 2,129 2,027 2,093
Unearned
interest.... -- -- 21 25 36
Deferred loan
fees........ 265 200 171 270 337
Allowance for
loan
losses...... 512 412 353 388 449
-------- -------- -------- -------- --------
Total:........ $211,042 $188,361 $176,909 $156,787 $166,346
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
3
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Loan Maturity. The following table shows the remaining contractual
maturity of the Bank's loans at December 31, 1997. The table does not
include the effect of future principal prepayments. Principal repayments on
total loans were $77.4 million, $50.8 million and $56.7 million for the years
ended December 31, 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
At December 31, 1996
------------------------------------------------------------------------------
One- to Commercial Consumer
Four- Multi- Real Construction Commercial and Other Total
Family Family Estate and Land Loans Loans Loans
------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less...................... $ 1,439 $ 0 $ 370 $10,687 $3,153 $ 2,701 $ 18,350
After one year:
More than one year to three years. 1,051 0 33 50 3,486 2,774 7,394
More than three years to five
years.......................... 2,803 183 758 523 469 3,847 8,583
More than five years to 10 years.. 17,896 253 1,937 222 583 1,949 22,840
More than 10 years to 20 years.... 58,003 10,998 5,290 856 325 166 75,638
More than 20 years................ 80,542 1,086 546 150 47 7 82,378
-------- ------- ------ ------- ------ ------- --------
Total due after December 31,
1997......................... 160,295 12,520 8,564 1,801 4,910 8,743 196,833
Total amount due................ $161,734 $12,520 $8,934 $12,488 $8,063 $11,444 $215,183
-------- ------- ------ ------- ------ ------- --------
-------- ------- ------ ------- ------ ------- --------
Deferred premium on sale of loans......... 34
Less
Allowance for loan losses............. 512
Undisbursed portion of loans.......... 3,397
Deferred loan fees.................... 265
--------
Loans, net................................ $211,042
--------
--------
</TABLE>
4
<PAGE>
The following table sets forth at December 31, 1996 the dollar amount of
loans contractually due after December 31, 1997, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due After December 31, 1997
--------------------------------
Fixed Adjustable Total
------- ---------- -----
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family.............. $69,770 $90,525 $160,295
Multi-family..................... 155 12,365 12,520
Commercial real estate........... 1,602 6,962 8,564
Construction and land............ 592 1,209 1,801
Commercial loans................. 1,052 3,858 4,910
Consumer and other loans......... 7,364 1,379 8,743
------- -------- --------
Total loans.................... $80,535 $116,298 $196,833
------- -------- --------
------- -------- --------
</TABLE>
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. The Bank
has in the past also originated for investment one- to four-family loans for
investment with maturities of fifteen years if the interest rate was equal to
or greater than 250 basis points over the Bank's cost of funds and maturities
of twenty years if the interest rate was equal to or greater than 275 basis
points over the Bank's cost of funds. The Bank generally retains the
servicing rights of loans it sells and sells such loans without recourse. At
December 31, 1996, the Bank serviced $80.6 million of loans for others and
for the years ended December 31, 1996, 1995 and 1994 had $626,000, $540,000
and $551,000, respectively, of loan servicing fees. The Bank recognizes, at
the time of sale, the cash gain or loss on the sale of the loans based on the
difference between the net cash proceeds received and the carrying value of
the loans sold. See "- Lending Activities - Loan Servicing." Although it is
the current policy of the Bank to originate and purchase loans or
participations secured by properties located
5
<PAGE>
in its primary market area, at December 31, 1996, the Bank had $3.0 million
in loans, or 1.4%, of total loans, secured by properties located outside of
its primary market area, specifically various single-family, multi-family and
commercial real estate loans secured by properties in Chicago, Illinois, New
Mexico and Florida. Loans secured by properties located outside an
institution's primary market area generally involve greater risks than loans
secured by properties within the institution's market area as the institution
may not be as familiar with the real estate market or local economy of the
area where the property is located and may rely on third parties to inspect
such properties.
The Bank engages in certain hedging activities to facilitate the sale of
its one- to four-family mortgage loans in an attempt to minimize interest
rate risk from the time that loan commitments are made to the time until the
loans are packaged and sold. The Bank currently utilizes forward loan sale
commitment contracts with the FHLMC as its method of hedging its loan sales
in an attempt to protect the Bank from fluctuations in market interest rates
("forward commitment contracts") from the time of the loan commitment to the
time of sale. Generally, such forward commitment contracts obligate the Bank
to deliver loans or agency mortgage-backed securities to the FHLMC at a date
not greater than 60 days in the future at a specified price. During the time
the Bank enters into the forward commitment contract to the date of delivery,
the Bank processes and closes loans, thereby protecting the price of
currently processed loans from interest rate fluctuations that may occur from
the time the interest rate on the loan is fixed to the time of sale. For the
year ended December 31, 1996, the Bank had $236,000 in net gains attributable
to the sale of loans, including any hedging gains or losses related to its
forward commitment contract activity. It is the policy of the Bank that the
Bank generally not have more than $5 million of aggregate mortgage loan
applications at any given time that are not covered by forward commitment
contracts. Accordingly, the Bank monitors the volume of its loan
applications and trends in market interest rates to determine the amount of
forward sale commitment contracts which it will enter into at any point in
time. At December 31, 1996, the Bank had forward commitment contracts
outstanding which required the delivery of $163,000 of one- to four-family
mortgage loans 45 days in the future. The Bank's utilization of such forward
commitment contracts involves certain risks in the event the Bank is unable
to deliver loans that it has committed to sell which may result in the Bank
being required to buy whole loans at a premium for delivery under the
contract or may result in other losses associated with such activity.
6
<PAGE>
The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------
1996 1995 1994
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Net loans:
Beginning balance..................... $188,361 $176,910 $156,787
Loans originated:
One- to four-family.............. 90,084 54,683 57,233
Multi-family..................... 6,780 3,360 808
Commercial real estate........... 2,863 2,512 1,396
Construction and land............ 1,153 1,327 8,421
Commercial....................... 6,514 8,120 6,160
Consumer and other(1)............ 8,576 10,243 12,105
-------- -------- --------
Total loans originated......... 115,970 80,245 86,123
-------- -------- --------
Total................... 304,331 257,155 242,910
-------- -------- --------
Less:
Principal repayments and other,
net........................... 77,393 50,832 56,684
Loan charge-offs, net............ 67 64 117
Proceeds from sale of mortgage
loans......................... 15,132 17,898 9,160
Transfer of mortgage loans to
REO........................... 697 -- 39
-------- -------- --------
Loans, net(2)......................... $211,042 $188,361 $176,910
-------- -------- --------
-------- -------- --------
</TABLE>
______________________
(1) Consumer and other loans primarily consist of home equity loans and lines
of credit secured by mortgages, automobile and personal loans.
(2) There were no significant amounts of loans held for sale at any of the
period ends presented.
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 maturities of up
to thirty years. While the Bank has in the past purchased or originated such
loans secured by properties outside its market area, substantially all of
such loans at December 31, 1996 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.
At December 31, 1996, one- to four-family mortgage loans totalled $161.7
million, or 75.2%, of total gross loans. Of the one- to four-family mortgage
loans outstanding at that date, 41.8% were fixed-rate loans and 58.2% were
adjustable-rate mortgage loans. The Bank currently offers a number of
adjustable-rate mortgage loans with terms of up to 30 years and interest rates
7
<PAGE>
which adjust annually from the outset of the loan or which adjust
annually after a 1, 3 or 5-year initial period in which the loan has a fixed
rate. The interest rates for the majority of the Bank's adjustable-rate
mortgage loans are indexed to the one year CMT Index. Interest rate
adjustments on such loans are limited to 2% annual adjustment cap and a
maximum adjustment of 6% over the life of the loan.
The Bank also offers its adjustable-rate one- to four-family loans with
initial interest rates that are 50 to 100 basis points below its fully
indexed rate for a period of one or three years and which adjust to a rate
currently 2.75% over the CMT Index on an annual basis thereafter. The Bank
qualifies borrowers for such loans at the initial interest rates.
Accordingly, such loans generally bear a greater degree of risk than other
types of one- to four-family adjustable-rate loans or loans where the
borrower is qualified at the fully indexed rate as there is an increased risk
of default by the borrower after the initial upward rate adjustment due to
the increase in the interest rate charged on such loans and corresponding
increase in monthly payments.
The origination of adjustable-rate residential mortgage loans, as opposed
to fixed-rate residential mortgage loans, helps reduce the Bank's exposure to
increase in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing
the potential for default. Adjustable-rate loans originated with below fully
indexed market rates involve greater risks as a borrower's payment may
increase by a greater amount thereby increasing the potential for default.
Periodic and lifetime caps on interest rate increases help to reduce the
risks associated with its adjustable-rate loans but also limit the interest
rate sensitivity of its adjustable-rate mortgage loans.
The Bank currently originates one- to four-family residential mortgage
loans in amounts up to 95% of the lower of the appraised value or the selling
price of the property securing the loan up to a maximum amount of $214,600
for loans originated for sale. The Bank currently requires private mortgage
insurance to be obtained for loans in excess of an 80% loan to value ratio
for loans originated for sale, however, the Bank generally does not require
private mortgage insurance on loans originated for investment unless the loan
to value ratios are in excess of 90%. Mortgage loans originated by the Bank
generally include due-on-sale clauses which provide the Bank with the
contractual right to deem the loan immediately due and payable in the event
the borrower transfers ownership of the property without the Bank's consent.
Due-on-sale clauses are an important means of adjusting the yields on the
Bank's fixed-rate mortgage loan portfolio and the Bank has generally
exercised its rights under these clauses.
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. At
December 31, 1996, the Bank's multi-family loan portfolio was $12.5 million,
or 5.9%, of total loans. 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 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. Pursuant to the Bank's underwriting
policies, a multi-family mortgage loan may only be made in an amount up to
85% of the lower of the appraised value
8
<PAGE>
or sales price of the underlying property with terms of up to 25 years. The
Bank's adjustable-rate multi-family loans are originated with rates that
adjust annually or which are fixed for the first three years and adjust
annually thereafter based upon the CMT Index plus a margin of 3.5%. The
maximum amount of the Bank's multi-family loans are limited by the Bank's
loans to one borrower limit which, at December 31, 1996, was $4.5 million.
In addition, the Bank generally requires a debt service ratio of a maximum of
1.2% and the personal guarantee of the borrower. The Bank also requires an
appraisal on the property conducted by an independent appraiser and title
insurance.
When evaluating the qualifications of the borrower for a multi-family
loan, the Bank considers the financial resources and income level of the
borrower, the borrower's experience in owning or managing similar property
and the Bank's lending experience with the borrower. The Bank's underwriting
policies require that the borrower be able to demonstrate management skills
and the ability to maintain the property from current rental income. The
Bank's policy requires borrowers to present evidence of the ability to repay
the mortgage and a history of making mortgage payments on a timely basis. In
making its assessment of the creditworthiness of the borrower, the Bank
generally reviews the financial statements, employment and credit history of
the borrower, as well as other related documentation. The Bank's largest
multi-family loan at December 31, 1996, had an outstanding balance of $3.4
million and is secured by a 68-unit apartment complex located in Normal,
Illinois.
Loans secured by apartment buildings and other multi-family residential
properties 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 multi-family properties are often dependent on successful
operation or management of the properties, repayment of such loans may be
subject to a greater extent to adverse conditions in the real estate market
or the economy. The Bank seeks to minimize these risks through its
underwriting policies, which require such loans to be qualified at
origination on the basis of the property's income and debt coverage ratio.
As part of its operating strategy, the Bank intends to increase its
multi-family lending in its primary market area depending on market demand
for such loans.
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.
The Bank's underwriting procedures provide that commercial real estate loans
may generally be made in amounts up to 80% of the lower of the appraised
value or sales value of the property, subject to the Bank's current
loans-to-one-borrower limit, which at December 31, 1996, was $4.5 million.
These loans may be made with terms up to 25 years and are generally offered
at interest rates which adjust in accordance with the CMT Index or prime
rate, as reported in the Wall Street Journal, annually or annually after a
three year period. The Bank's underwriting standards and procedures are
similar to those applicable to its multi-family loans, whereby the Bank
considers the net operating income of the property and the borrower's
expertise, credit history and profitability. The Bank has generally required
that the properties securing commercial real estate loans have debt service
coverage ratios of at least 1.1%. At December 31, 1996, the Bank's
commercial real estate loan portfolio totalled approximately $8.9 million or
4.2% of total loans. The largest commercial real estate loan in the Bank's
portfolio
9
<PAGE>
at December 31, 1996, was a $735,000 loan secured by a theater/restaurant
located in Peoria, Illinois.
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 service 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. At December 31, 1996, the Bank had
$11.4 million of construction lines of credit and construction loans
committed to the construction of one- to four-family properties that were not
pre-sold or for which permanent financing had not been secured and, at such
date, $8.4 million had been drawn on such lines of credit or construction
loans for the construction of 75 one- to four-family properties.
Construction loans are generally offered with terms up to six months for
residential property and up to one year for multi-family and commercial
property. The Bank also offers developers construction loans in the form of a
line of credit whereby the borrower may draw upon such line of credit only as
individual properties are released for construction. Construction loans may
be made in amounts up to 80% of the estimated cost of construction, although
the Bank will lend up to 85% of the estimated cost of construction if the
property is pre-sold, subject to the Bank's current limitation on
loans-to-one-borrower which at December 31, 1996 was $4.5 million. With
respect to construction loans, the Bank's policy is to require borrowers to
secure permanent financing commitments from generally recognized lenders for
an amount equal to or greater than the amount of the loan. Loan proceeds are
disbursed in increments as construction progresses and as inspections
warrant. Land development loans are offered on a selective basis and the
terms determined on a case by case basis, but generally do not exceed 75% of
the actual cost or current appraised value of the property, whichever is
less. The largest construction loan in the Bank's portfolio at December 31,
1996 for the construction of a sixty-unit apartment complex, was a $1.8
million loan originated in April 1996.
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.
10
<PAGE>
Commercial Lending. The Bank offers commercial loans to businesses
operating in the Bank's primary market area on a selective basis. Such loans
are generally offered with terms up to 15 years in amounts up to $250,000 and
are generally secured by receivables, inventories, equipment and other assets
of the business. The Bank generally requires personal guarantees on its
commercial loans. The Bank also offers commercial loans to businesses on an
unsecured basis on a selective basis. These types of loans are made to
existing customers and are of a short duration, generally less than six
months. At December 31, 1996, the Bank had $8.1 million of commercial loans,
of which $339,000, or 4.2%, were unsecured, and the largest of which was a
$142,800 loan to a local convenience store secured by substantially all
assets of the business. As part of its operating strategy, the Bank intends
to increase its emphasis on secured commercial lending by training existing
loan personnel and hiring additional commercial loan personnel.
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 difficult to appraise and
may fluctuate in value based on the success of the business.
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. As of December 31, 1996, consumer loans amounted to $11.4 million, or
5.3%, of the Bank's total loan portfolio of which $4.3 million were home
equity loans. Consumer loans are generally originated in the Bank's primary
market area. Fixed-rate, fixed-term home equity loans and adjustable home
equity lines of credit are offered in amounts of 80% of the appraised value
if the Bank does not hold the first mortgage on the property and up to 85% of
the appraised value if the Bank holds the first mortgage with a maximum loan
amount of $100,000. Fixed-rate, fixed-term home equity loans are offered with
terms up to 15 years and home equity lines of credit are offered with terms
up to five years. Automobile loans are offered with maximum terms of up to
six years and have interest rates established by the age of the automobile.
Unsecured consumer loans are made with a maximum maturity of 24 months and
the maximum loan amount based on a borrower's financial condition.
Loan Approval Procedures and Authority. The Board of Directors
establishes the lending policies and loan approval limits of the Bank. The
Board of Directors has established a Loan Committee comprised of four (4)
directors, an Executive Officer Loan Committee comprised of the President and
Senior Vice President of Lending, a Senior Officer Loan Committee comprised
of the Senior Vice President of Lending and the Vice President of Commercial
Lending, and a Staff Loan Committee comprised of various corporate officers.
The Board of Directors has authorized the following committees to approve
loans up to the amounts indicated: secured loans in excess of $500,000 and
unsecured loans in excess of $75,000 may be approved by the Director Loan
Committee; secured loans up to $500,000 and unsecured loans up to $75,000 may
be approved by the President and Senior Vice President of Lending; all
secured loans to commercial clients up to $250,000 and unsecured loans up to
$75,000 may be approved by the Senior Vice
11
<PAGE>
President of Lending and Vice President of Commercial Loans; and all secured
loans to $350,000 and unsecured loans to $75,000 may be approved by the Staff
Loan Committee.
Additionally, the Bank recently adopted approval procedures which allow
branch managers and loan officers to approve loans up to $10,000 for any
purpose.
For all loans originated by the Bank, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered and
certain other information is verified by an independent credit agency. If
necessary, additional financial information may be required. An appraisal of
real estate intended to secure a proposed loan generally is required to be
performed by an appraiser designated and approved by the Bank. For proposed
mortgage loans, the Board annually approves independent appraisers used by
the Bank and approves the Bank's appraisal policy. The Bank's policy is to
obtain title and hazard insurance on all mortgage loans and the Bank may
require borrowers to make payments to a mortgage escrow account for the
payment of property taxes and private mortgage insurance, if required.
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. The gross servicing fee paid to the Bank for loans
it services for others is generally 25 to 50 basis points of the interest
paid on the loan. The Bank currently does not purchase servicing rights
related to mortgage loans originated by other institutions. At December 31,
1996 the Bank was servicing $80.6 million of loans for others and for the
year ended December 31, 1996, the Bank's servicing fees totalled $626,000.
Delinquencies and Classified Assets. Management and the Board of
Directors perform a monthly review of all delinquent loans. The procedures
taken by the Bank with respect to delinquencies vary depending on the nature
of the loan and period of delinquency. The Bank generally requires that
delinquent mortgage loans be reviewed and that a delinquency notice be mailed
no later than the 10th day of delinquency and a late charge is assessed after
20 days for mortgage loans and 10 days after the due date for consumer loans.
The Bank's policies provide that telephone contact will be attempted to
ascertain the reasons for delinquency and the prospects of repayment. When
contact is made with the borrower at any time prior to foreclosure, the Bank
will attempt to obtain full payment or work out a repayment schedule with the
borrower to avoid foreclosure. It is the Bank's general policy to
discontinue accruing interest on all loans which are past due 90 days where
the principal and accrued interest amount to over 90% of the net realizable
value of the collateral. Property acquired by the Bank as a result of
foreclosure on a mortgage loans is classified as "real estate owned" and is
recorded at the lower of the unpaid principal balance and accrued interest or
fair value less costs to sell at the date of acquisition and thereafter.
Upon foreclosure, it is the Bank's policy to require an appraisal of the
property and, thereafter, appraisal of the property on an as-needed basis.
At December 31, 1996, the Bank had $697,000 in foreclosed real estate.
12
<PAGE>
Federal regulations and the Bank's Classification of Assets Policy
require that the Bank utilize an internal asset classification system as a
means of reporting problem and potential problem assets. The Bank has
incorporated the OTS' internal asset classifications as a part of its credit
monitoring system. The Bank currently classifies problem and potential
problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset is
considered Substandard if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if
any. Substandard assets include those characterized by the distinct
possibility that the insured institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as Doubtful have all of
the weaknesses inherent in those classified Substandard with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as Loss are those considered
uncollectible and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted.
Assets which do not currently expose the insured institution to sufficient
risk to warrant classification in one of the aforementioned categories but
possess weaknesses are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by
management. General valuation allowances, which is a regulatory term,
represent loss allowances which have been established to recognize the
inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an
insured institution classifies one or more assets, or portions thereof, as
Loss, it is required either to establish a specific allowance for losses
equal to 100% of the amount of the assets so classified or to charge off such
amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies,
recently adopted an interagency policy statement on the allowance for loan
and lease losses. The policy statement provides guidance for financial
institutions on both the responsibilities of management for the assessment
and establishment of adequate allowances and guidance for banking agency
examiners to use in determining the adequacy of general valuation guidelines.
Generally, the policy statement recommends that institutions have effective
systems and controls to identify, monitor and address asset quality problems;
that management has analyzed all significant factors that affect the
collectibility of the portfolio in a reasonable manner; and that management
has established acceptable allowance evaluation processes that meet the
objectives set forth in the policy statement. As a result of the declines in
local and regional real estate market values and the significant losses
experienced by many financial institutions, there has been a greater level of
scrutiny by regulatory authorities of the loan portfolios of financial
institutions undertaken as part of the examination of institutions by the OTS
and the FDIC. While the Bank believes that it has established an adequate
allowance for loan losses, there can be no assurance that regulators, in
reviewing the Bank's loan portfolio, will not request the Bank to materially
increase at that time its allowance for loan losses, thereby negatively
affecting the Bank's financial condition and earnings at that time. Although
management believes that adequate specific and general loan loss allowances
have been established, actual losses are
13
<PAGE>
dependent upon future events and, as such, further additions to the level of
specific and general loan loss allowances may become necessary.
The Bank's senior management reviews and classifies the Bank's loans on a
quarterly basis and reports the results of its review to the Board of
Directors. The Bank classifies loans in accordance with the management
guidelines described above. At December 31, 1996, the Bank had no assets
designated as Special Mention or classified as Doubtful and, $1,298,000, and
$37,000 of assets classified as Substandard, and Loss, respectively. Assets
classified as Substandard consisted of 12 one- to four-family loans with an
aggregate outstanding balance of $1,075,800, one commercial real estate loan
and one commercial asset-based loan with an aggregate outstanding balance of
$131,600 and 16 consumer and other loans with an aggregate outstanding
balance of $90,600.
14
<PAGE>
The following table sets forth delinquencies in the Bank's loan portfolio
as of the dates indicated:
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1995
-------------------------------------------- ------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
--------------------- -------------------- -------------------- ------------------
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------- --------- -------- -------- -------- --------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family........ 3 279 8 500 5 304 16 610
Multi-family............... -- -- -- -- -- -- -- --
Commercial real estate..... -- -- -- -- -- -- 1 100
Construction and land...... -- -- -- -- -- -- -- --
Commercial................. 2 5 1 14 -- -- -- --
Consumer and other loans... 5 54 16 53 12 98 37 238
-------- ---------- -------- ------- -------- ----- ---- ----
Total.................. 10 338 25 567 17 402 54 948
-------- ---------- -------- ------- -------- ----- ---- ----
-------- ---------- -------- ------- -------- ----- ---- ----
Delinquent loans to total
loans, net............... 0.27% 0.50%
<CAPTION>
At December 31, 1994
---------------------------------------------------
60-89 Days 90 Days or More
----------------------- ----------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
-------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One- to four-family........ 18 $505 13 $365
Multi-family............... -- -- -- --
Commercial real estate..... -- -- -- --
Construction and land...... -- -- 1 40
Commercial................. 1 4 -- --
Consumer and other loans... 36 254 26 134
---- ---- ---- ----
Total.................... 55 $763 40 $539
---- ---- ---- ----
---- ---- ---- ----
Delinquent loans to total
loans, net,.............. 0.30%
</TABLE>
15
<PAGE>
Non-Performing Assets and Restructured Loans. The following table sets
forth information regarding non-accrual loans, restructured loans and REO.
At December 31, 1996, the Bank had two restructured loans totalling $463,000,
one of which consisted of a 50 percent participation in an office building
located in New Mexico and the other a commercial office building in
Bloomington, Illinois. It is the policy of the Bank to cease accruing
interest on loans 90 days or more past due where the principal and accrued
interest amounts to over 90% of the net realizable value of the collateral
and charge off all accrued interest at the time of foreclosure with respect
to mortgage loans, and after 120 days with respect to consumer loans. For
the years ended December 31, 1996, 1995, 1994, 1993 and 1992, the amount of
additional interest income that would have been recognized on non-accrual
loans if such loans had continued to perform in accordance with their
contractual terms was $11,000, $26,000, $30,000, $19,000 and $125,000,
respectively.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ------------ ---------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
One- to four-family............................. $ 133 $ 178 $ 209 $ 225 $ 371
Multi-family.................................... 0 0 -- -- 538
Commercial real estate.......................... 0 0 -- -- --
Construction and land............................. 0 0 40 -- --
Commercial........................................ 14 0 -- 71 7
Consumer and other loans.......................... 51 133 81 106 86
--------- ----------- ---------- ---------- -----------
Total non-accrual loans......................... 198 311 330 402 1,002
Loans contractually past due 90 days or
more, other than non-accruing..................... 369 637 209 326 313
--------- ----------- ---------- ---------- -----------
Total non-performing loans...................... 567 948 539 728 1,315
Real estate owned, net(1)........................... 697 -- 39 197 340
--------- ----------- ---------- ---------- -----------
Total non-performing assets..................... $1,264 $ 948 $ 578 $ 925 $1,655
========= =========== ========== ========== ===========
Restructured loans(2)............................... $ 463 $ 364 $ 375 $ 400 $ --
========= =========== ========== ========== ===========
Allowance for estimated loan
losses as a percent of loans receivable(3)........ 0% 0.22% 0.20% 0.25% 0.27%
Allowance for estimated loan losses as
a percent of non-performing loans(4).............. 90.30 43.46 65.49 53.30 34.14
Non-performing loans as a percent
of loans receivable(3)(4)......................... 0.27 0.50 0.30 0.46 0.79
Non-performing assets as
a percent of total assets(5)...................... 0.48 0.41 0.25 0.40 0.72
</TABLE>
- ----------------
(1) REO balances are shown net of related valuation allowances.
(2) The restructuring of these loans resulted in lengthening of the loan
terms and, for the commercial office building loan, a slight
modification to the original interest rate, which will not result in the
foregoing of any principal or interest payments. Accordingly, the Bank
has not foregone any interest income as a result of this restructuring.
(3) Loans includes loans, net, excluding allowance for loan losses.
(4) Non-performing loans consist of all 90 days or more past due and other
loans which have been identified by the Bank as presenting uncertainty
with respect to the collectibility of interest or principal.
(5) Non-performing assets consist of non-performing loans and real estate
owned (REO).
16
<PAGE>
Allowance for Loan Losses. The Bank's allowance for loan losses is
established through a provision for loan losses based on management's
evaluation of the risks inherent in its loan portfolio and the general
economy. The allowance for loan losses is maintained at an amount
management considers adequate to cover estimated losses in loans
receivable which are deemed probable and estimable based on information
currently known to management. The allowance is based upon a number of
factors, including current economic conditions, actual loss experience and
industry trends. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Bank's allowance for loan losses. Such agencies may require the Bank to
make additional provisions for estimated loan losses based upon judgments
different from those of management. As of December 31, 1996, the Bank's
allowance for loan losses was $512,000, or 0.24%, of total loans and
90.30% of non-performing loans as compared to $412,000, or 0.22%, of total
loans and 43.46% of non-performing loans as of December 31, 1995. The
Bank had total non-performing loans of $567,000 and $948,000 at December
31, 1996 and December 31, 1995, respectively and non-performing loans to
total loans of 0.27% and 0.50%, respectively. The Bank will continue to
monitor and modify its allowances for loan losses as conditions dictate.
While management believes that, based on information currently available,
the Bank's allowance for loan losses is sufficient to cover losses
inherent in its loan portfolio at this time, no assurances can be given that
the Bank's level of allowance for loan losses will be sufficient to cover
future loan losses incurred by the Bank or that future adjustments to the
allowance for loan losses will not be necessary if economic and other
conditions differ substantially from the economic and other conditions
used by management to determine the current level of the allowance for
loan losses. Management may in the future increase its level of loan
loss allowances as a percentage of total loans and non-performing loans
in the event it increases the level of multi-family, commercial real estate,
commercial, construction and land and consumer lending as a percentage of
its total loan portfolio.
The following table sets forth activity in the Bank's allowance for loan
losses for the periods set forth in the following table.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
------------ --------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period..................... $412 $353 $388 $449 $415
Provision.......................................... 167 123 81 211 66
Charge-offs:
One- to four-family (recoveries)................ 47 59 29 -- (1)
Multi-family.................................... -- -- -- 262 --
Commercial...................................... -- -- 50 -- --
Commercial real estate.......................... -- -- 3 4 23
Construction and land........................... -- -- -- -- --
Consumer........................................ 20 5 34 6 10
--------- -------- -------- --------- -------
Net charge-offs............................... (67) (64) (116) (272) (32)
--------- -------- -------- --------- -------
Balance at end of period........................... $512 $412 $353 $388 $449
========= ======== ======== ========= =======
Net charge-off as a percent of
average loans (net)................................ 0.03% 0.04% 0.07% 0.17% 0.02%
-------- -------- -------- --------- -------
-------- -------- -------- --------- -------
</TABLE>
17
<PAGE>
The following tables set forth the Bank's percent of allowance for loan
losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- --------------------------------- ---------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Percent of in Each Percent of in Each Percent of in Each
Allowance Category Allowance Category Allowance Category
to Total to Total to Total to Total to Total to Total
Amount Allowance Loans (1) Amount Allowance Loans (1) Amount Allowance Loans (1)
-------- ------------- ---------- -------- ------------- ---------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Mortgage loans:
One- to four-family $170 33.21% 75.17% $150 36.41% 73.87% $102 28.90% 78.07%
Multi-family........ 52 10.16 5.82 32 7.77 5.46 20 5.67 5.44
Commercial real
estate............ 36 7.03 4.15 28 6.80 4.52 22 6.23 4.37
Construction
and land.......... 46 8.98 5.80 16 3.88 6.44 24 6.80 2.86
Commercial........... 68 13.28 3.75 56 13.59 3.58 69 19.55 2.24
Consumer and
other loans....... 140 27.34 5.31 130 31.55 6.11 116 32.85 7.02
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total allowance
for loan losses.. $512 100.00% 100.00% $412 100.00% 100.00% $353 100.00 100.00%
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------
1993 1992
----------------------------------- ----------------------------------
Percent Percent
of Loans of Loans
Percent of in Each Percent of in Each
Allowance Category Allowance Category
to Total to Total to Total to Total
Amount Allowance Loans (1) Amount Allowance Loans (1)
--------- ------------ ------------ ---------- ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family......... $125 32.22% 75.38% $154 34.30% 75.97%
Multi-family................ 28 7.22 7.32 42 9.35 8.07
Commercial real
estate................... 24 6.19 5.69 10 2.23 6.02
Construction
and land................. 16 4.12 2.64 32 7.13 1.65
Commercial................... 57 14.69 2.00 67 14.92 2.05
Consumer and
other loans.............. 138 35.56 6.97 144 32.07 6.24
-------- -------- -------- -------- ---------- ---------
Total allowance
for loan losses......... $388 100.00% 100.00% $449 100.00% 100.00%
-------- -------- -------- -------- ---------- ---------
-------- -------- -------- -------- ---------- ---------
</TABLE>
__________________
(1) The deferred premium on sale of loans of $34,000, $39,000, $62,000,
$81,000 and $136,000 has been netted with one- to four-family mortgage
loans in computing percent of loans to total loans.
18
<PAGE>
Management of Interest Rate Risk
The principal objective of the Company's interest rate risk management
function is to evaluate the interest rate risk included in certain balance
sheet accounts, determine the level of risk appropriate given the Bank's
business strategy, operating environment, capital and liquidity requirements
and performance objectives, and manage the risk consistent with Board of
Directors' 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 Bank's
interest rate risk position on a quarterly basis. The Bank's Asset/Liability
Committee is comprised of the Bank'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 the Company's 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 Bank has utilized the following strategies to manage
interest rate risk: (1) originating for investment adjustable-rate
residential mortgages and fixed-rate one- to four-family loans with
maturities of 10 years or less; (2) generally selling one- to four-family
mortgage loans with maturities exceeding 10 years in the secondary market
without recourse and on a servicing retained basis; and (3) investing in
shorter term investment securities which may generally bear lower yields as
compared to longer term investments, but which better position the Company
for increases in market interest rates. The primary analytical tool utilized
by the Company to monitor its interest rate risk is a modeling tool utilized
by the OTS which estimates the change in its net portfolio value over a range
of interest rate scenarios ("net portfolio value model"). Based on such net
portfolio value model, the OTS prepares for the Bank on a quarterly basis an
analysis of the Company's interest rate risk based on data submitted by the
Bank.
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 a bank'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, 1996, 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 negative 9.0%. 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, an institution with a negative gap position would be in a worse
position to invest in higher yielding assets 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
19
<PAGE>
if it had a positive gap. During a period of falling interest rates, an
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, 1996, which are
anticipated by the Company, based upon certain assumptions, to reprice or
mature in each of the future time periods shown (the "GAP Table"). 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 to 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, 1996, on the basis of contractual
maturities, anticipated prepayments, and scheduled rate adjustments within a
three month period and subsequent 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 mortgage-backed securities
are assumed to be 4.5% and 7.5%, respectively. Money market deposit accounts
are assumed to be immediately rate-sensitive, while passbook accounts and
negotiable order or withdrawal ("NOW") accounts are assumed to have decay
rates of 12% annually.
20
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1996
---------------------------------------------------------------------------------------------
3 Months More than More than More More than More Total
or less 3 Months to 6 Months to than 3 Years to than Amount
6 Months 1 Year 1 Year to 5 Years 5 Years
3 Years
-------- ----------- ------------ ---------- ----------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Short-term deposits 5,159 -- -- -- -- -- 5,159
Investment securities 1,499 -- 500 2,236 1,953 68 6,256
Loans receivable 30,486 13,561 34,375 75,885 12,908 47,967 215,183
Mortgage-backed securities 12,811 806 2,152 1,347 900 5,099 23,114
FHLB stock 1,662 -- -- -- -- -- 1,662
------ ------ ------ ------ ------ ------ -------
Total 51,617 14,366 37,027 79,468 15,761 53,134 251,374
------ ------ ------ ------ ------ ------ -------
------ ------ ------ ------ ------ ------ -------
Interest-bearing liabilities:
Money market savings 9,395 -- -- -- -- -- 9,395
Passbook accounts 497 482 935 5,276 2,251 7,129 16,571
NOW accounts 359 348 675 2,537 1,928 6,105 11,950
Certificate accounts 29,765 24,169 47,679 43,894 6,969 172 152,648
------ ------ ------ ------ ------ ------ -------
FHLB advances 10,250 -- 2,000 4,000 -- -- 16,250
Total 50,266 24,999 51,289 55,707 11,148 13,405 206,814
------ ------ ------ ------ ------ ------ -------
------ ------ ------ ------ ------ ------ -------
Assets minus liabilities 1,351 (10,633) (14,262) 23,761 4,613 39,729 44,560
Cumulative interest-rate sensitivity
gap 1,351 (9,281) (23,543) 218 4,831 44,560 --
Cumulative interest-rate gap as a
percent of total assets 0.52% (3.55)% (9.00)% 0.08% 1.85% 17.03% --
Cumulative interest-rate gap as a
percent of total interest-earning
assets 2.62% (64.61)% (63.58)% 0.27% 30.65% 83.86% --
Cumulative interest-earning assets as
a percent of cumulative interest-
bearing liabilities 102.69% 87.67% 81.40% 100.12% 102.50% 121.55% --
</TABLE>
- --------------------
(1) Includes total loans net of non-performing loans and the allowance for
loan losses.
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in
different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets, such as
adjustable-rate loans, have features which restrict changes in interest rates
both on a short-term basis and over the life of the asset. Further, in the
event of change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in calculating the
table. Finally, the ability of many borrowers to service their
adjustable-rate loans may decrease in the event of an interest rate increase.
21
<PAGE>
Net Portfolio Value. The Bank's interest rate sensitivity is monitored by
management through the use of the net portfolio value model produced by the
OTS which generates estimates of the change in the Bank's net portfolio value
("NPV") over a range of interest rate scenarios. NPV is the present value of
expected cash flows from assets, liabilities, and off-balance sheet
contracts. The NPV ratio, under any interest rate scenario, is defined as
the NPV in that scenario divided by the market value of assets in the same
scenario. The OTS produces such estimates utilizing its own model, based
upon data submitted on the Bank's quarterly Thrift Financial Reports on a
quarterly basis. The OTS' model assumes estimated loan prepayment rates,
reinvestment rates and deposit decay rates. The following table sets forth
the Bank's NPV as of December 31, 1996, as calculated by the OTS.
<TABLE>
<CAPTION>
NPV as % of Portfolio
Change in Net Portfolio Value Value of Assets
Interest Rates ------------------------------------ ----------------------
In Basis Points % NPV
(Rate Shock) Amount $ Change Change Ratio Change (1)
--------------- ------ -------- ------ ----- ---------
(Dollars in thousands)
<C> <C> <C> <C> <C> <C>
400 $17,975 $(15,615) (46)% 7.36% (529)
300 22,385 (11,205) (33) 8.96 (369)
200 26,640 (6,950) (21) 10.42 (223)
100 30,492 (3,098) (9) 11.69 (96)
0 33,590 -- -- 12.65 --
(100) 35,584 1,994 6 13.22 57
(200) 36,080 2,490 7 13.30 65
(300) 35,755 2,165 6 13.11 46
(400) 36,080 2,490 7 13.13 48
</TABLE>
______________________
(1) Based on the portfolio value of the Bank's assets assuming no change in
interest rates.
As is the case with the GAP Table, certain shortcomings are inherent in
the methodology used in the above interest rate risk measurements. Modeling
changes in NPV require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in
market interest rates. In this regard, the NPV model presented assumes that
the composition of the Bank's interest sensitive assets and liabilities
existing at the beginning of a period remains constant over the period being
measured and also assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration to
maturity or repricing of specific assets and liabilities. Accordingly,
although the NPV measurements and net interest income models provide an
indication of the Bank's interest rate risk exposure at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on the Bank's net
interest income and will differ from actual results.
22
<PAGE>
Real Estate Owned
At December 31, 1996, the Bank had $697,000 of foreclosed real estate.
When the Bank acquires property through foreclosure or deed in lieu of
foreclosure, it is initially recorded at the lower of the recorded investment
in the corresponding loan or the fair value of the related assets at the date
of foreclosure, less costs to sell. Thereafter, if there is a further
deterioration in value, the Bank provides for a specific valuation allowance
and charges operations for the diminution in value. It is the policy of the
Bank to have obtained an appraisal on all real estate subject to foreclosure
proceedings prior to the time of foreclosure. It is the Bank's policy to
require appraisals on an as needed basis on foreclosed properties.
Investment Activities
Federally-chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured
banks and savings institutions, bankers' acceptances, repurchase agreements
and federal funds. Subject to various restrictions, federally-chartered
savings institutions may also invest their assets in commercial paper,
investment-grade corporate debt securities and mutual funds whose assets
conform to the investments that a federally-chartered savings institution is
otherwise authorized to make directly. Additionally, the Bank must maintain
minimum levels of investments that qualify as liquid assets under OTS
regulations. See "Regulation and Supervision- Federal Savings Institution
Regulation-Liquidity." Historically, the Bank has maintained liquid assets
above the minimum OTS requirements and at a level considered to be adequate
to meet its normal daily activities.
The investment policy of the Bank, as approved by the Board of Directors,
requires management to maintain adequate liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk.
Generally, the Bank's investment policy is more restrictive than the OTS
regulations allow and, accordingly, the Bank has invested primarily in U.S.
Government and Agency securities, corporate and mortgage-backed securities,
short-term money market instruments, FDIC insured certificates of deposit
with maturities not to exceed 90 days, mutual funds which qualify as liquid
assets under the OTS regulations, federal funds 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 for trading. The Bank's investment securities generally
consist of U.S. Treasury securities, 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, 1996, the Bank's portfolio of investment
and mortgage-backed securities totalled $29.4 million, of which $28.4 million
were categorized as available for sale. In accordance with the Special
Report of the FASB regarding SFAS 115, on December 31, 1995, the Bank
transferred all of its CMOs included in its held to maturity portfolio which,
at such date, had a carrying value and market value of $595,000 and $583,000,
respectively, to its available for sale portfolio.
23
<PAGE>
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. In order to better
position the Bank for an increase in market interest rates, the Bank has
recently increased its emphasis on investing in shorter term investment
securities by reinvesting funds from maturing investment and mortgage-backed
securities in shorter term securities. The Board of Directors is provided a
detail of the held to maturity and available for sale investment portfolio on
a monthly basis. The Bank has also increased its level of investments in
investment and mortgage-backed securities from $24.9 million at December 31,
1995, to $29.4 million at December 31, 1996. The Board of Directors reviews
all of the activity in the investment portfolio on a monthly basis.
At December 31, 1996, the Bank had $23.1 million in mortgage-backed
securities, or 8.8% of total assets, which were guaranteed by GNMA or
insured by either FNMA or FHLMC. Of the $23.1 million, $15.2 million had
adjustable interest rates, most of which were subject to maximum annual rate
adjustments up to a maximum interest rate of 9.48% to 14.75%. Investments in
mortgage-backed securities involve a risk that actual prepayments will be
greater than estimated prepayments over the life of the security, which may
require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby reducing the net yield on such
securities. There is also reinvestment risk associated with the cash flows
from such securities or in the event such securities are redeemed by the
issuer. In addition, the market value of such securities may be adversely
affected by changes in interest rates. All of the Bank's investment in
mortgage-backed securities at December 31, 1996 were available for sale.
24
<PAGE>
The following table sets forth the composition of the Bank's investment
and mortgage securities portfolios in dollar amounts and in percentages at
the dates indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------
1996 1995 1994
----------------- ---------------- -----------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Investment securities:
U.S.Treasuries...................................... $0 0% $3,994 52.62% $14,434 89.72%
Federal agencies.................................... 5,188 82.93 2,014 26.53 1,031 6.41
Marketable equitable securities..................... 1,000 15.98 1,000 13.18
CMOs................................................ 68 1.09 582 7.67 6.23 3.87
------- -------- ------ ------- ------- --------
Total investment securities........................ $6,256 100.00% $7,590 100.00% $16,088 100.00%
------- -------- ------ ------- ------- --------
------- -------- ------ ------- ------- --------
Investment securities available for sale......... $ 5,256 $1,598 $ 5,974
Investment securities held to maturity........... 1,000 5,992 10,114
------- ------ -------
Total investment securities.................... $ 6,256 $7,590 $16,088
------- ------ -------
------- ------ -------
Mortgage-backed securities:
FHLMC.............................................. $11,050 47.80% $ 7,254 41.96% $ 7,669 34.60%
GNMA............................................... 2,488 10.77 3,035 17.55 6,975 31.47
FNMA............................................... 9,577 41.43 7,000 40.49 7,522 33.93
------- -------- ------ ------- ------- --------
Total mortgage-backed securities................ $23,115 100.00% $17,289 100.00% $22,166 100.00%
-------- -------- ------ ------- ------- --------
-------- -------- ------ ------- ------- --------
Mortgage-backed securities available for sale.......... $23,115 $17,289 $22,051
Mortgage-backed securities held to maturity............ 0 0 115
-------- ------ ------
Total mortgage-backed securities.................. $23,115 $17,289 $22,166
-------- ------ ------
-------- ------ ------
</TABLE>
25
<PAGE>
The following table sets forth the Bank's securities activities for the
periods indicated:
<TABLE>
<CAPTION>
For the Year
Ended December 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Beginning balance................................ $24,879 $38,255 $53,761
Purchases of securities available for sale....... 19,841 1,000 11,508
Purchases of securities held to maturity......... -- 3,474 3,490
Less:
Proceeds from maturities and principal
paydowns on securities available for sale...... (4,015) (7,017) (16,201)
Proceeds from sales of securities
available for sale............................. (6,044) (5,152) (7,132)
Proceeds from maturities and principal
paydowns on securities held to maturity........ (5,000) (7,028) (5,080)
Net gain (loss) on sale of securities............ (15) (18) --
Amortization of premium........................... (61) (31) (200)
Amortization of hedging losses.................... -- -- --
Change in net unrealized gain (loss)
on securities available for sale................. (214) 1,396 (1,891)
------- ------- -------
Ending balance.................................... $29,371 $24,879 $38,255
------- ------- -------
------- ------- -------
</TABLE>
26
<PAGE>
The following table sets forth certain information regarding the carrying
and market values of the Bank's investment and mortgage-backed securities, at
the dates indicated:
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------
1996 1995 1994
-------------------- --------------------- --------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
---------- -------- ----------- -------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Government and agency................... $4,188 $4,188 $15 $15 $5,974 $5,974
CMOs......................................... 68 68 582 582 -- --
Marketable equity securities................. 1,000 1,000 1,000 1,000 -- --
Mortgage-backed securities:
FHLMC................................... 11,050 11,050 7,254 7,254 7,554 7,554
GNMA.................................... 2,488 2,488 3,035 3,035 6,975 6,975
FNMA.................................... 9,577 9,577 7,000 7,000 7,522 7,522
------- ------ ------- ------ ------ -------
Total mortgage-backed securities
available for sale............... 23,115 23,115 17,289 17,289 22,051 22,051
------- ------ ------- ------ ------ -------
Total investments and
mortgage-backed securities
available for sale............... 28,371 28,371 18,886 18,886 28,025 28,025
------- ------ ------- ------ ------ -------
Held to maturity:
U.S. Government and agency................... 1,000 991 5,992 5,999 9,491 9,277
CMOs......................................... -- -- -- -- 623 589
Mortgage-backed securities:
FHLMC................................... -- -- -- -- 115 118
------- ------ ------- ------ ------ -------
Total held to maturity............. 1,000 991 5,992 5,999 10,229 9,984
------- ------ ------- ------ ------ -------
Total investment securities........ $29,371 $29,362 $24,878 $24,885 $38,254 $38,009
------- ------ ------- ------ ------ -------
------- ------ ------- ------ ------ -------
</TABLE>
27
<PAGE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Bank's investment
securities and mortgage-backed securities as of December 31, 1996.
<TABLE>
<CAPTION>
At December 31, 1996
-------------------------------------------------------------
More than One More than Five
One Year or Less Year to Five Years Years to Ten Years
---------------- ------------------ ------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
------- -------- ------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. government and agency............. $ -- -- $ 4,188 6.42% $ -- --
Marketable equity securities........... 1,000 6.08% -- -- -- --
CMOs................................... -- -- 68 6.63 -- --
Mortgage-backed securities:
FHLMC.............................. -- -- 202 8.27 -- --
GNMA............................... -- -- -- -- -- --
FNMA............................... 8 8.85 44 8.82 -- --
------ ------ ------
Total mortgage-backed.............. 8 8.85 246 8.37 -- --
------ ------ ------
Total available for sale........... 1,008 4,502 0
------ ------ ------
Held to maturity:
U.S. government and agency......... 1,000 6.04 -- -- -- --
------ ------ ------ ------ -------
Total hold to maturity............. 1,000 0 0
------ ------ ------
Total investment securities $2,008 $4,502 $ 0
------ ------ ------
------ ------ ------
<CAPTION>
At December 31, 1996
---------------------------------------
More than Ten Years Total
------------------- ------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
-------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Available for sale:
U.S. government and agency..... $-- --% $4,188 6.42%
Marketable equity securities... -- -- 1,000 6.08
CMOs........................... -- -- 68 6.63
Mortgage-backed securities:
FHLMC...................... 10,848 6.52 11,050 6.55
GNMA....................... 2,488 6.91 2,488 6.91
FNMA....................... 9,525 6.42 9,577 6.43
Total mortgage-backed...... 22,861 6.52 23,115 6.53
------ ------
Total available for sale... 22,861 28,371
------ ------
Held to maturity:
U.S. government and agency.. -- -- 1,000 6.04
------ ------
Total hold to maturity.... 0 1,000 6.04
------ ------
Total investment securities $22,861 $29,371
------- -------
------- -------
</TABLE>
28
<PAGE>
Sources of Funds
General. Deposits, repayments and prepayments of loans and securities,
proceeds from sales of loans and securities, cash flows generated from
operations and FHLB advances are the primary sources of the Bank's funds for
use in lending, investing and for other general purposes.
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, 1996, the
average balance of core deposits (savings, NOW, money market and
non-interest-bearing checking accounts) totalled $50.7 million, or 24.5%, 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 in its level of dependency on
certificate accounts by offering interest free checking accounts without
minimum balance requirements. The Bank has experienced a decline in
deposits, from an average balance of $209.0 million for 1995 to an average
balance of $206.7 million for the year ended December 31, 1996. Consistent
with management's operating strategy of controlling the asset size of the
Bank to a level sustainable by the capital level of the Bank, the decrease in
deposits has resulted from management not attempting to aggressively price
deposits to maintain or increase its level of deposits as a source of funding
The following table presents the deposit activity of the Bank for the
periods indicated:
For the Year Ended December 31,
-----------------------------------
1996 1995 1994
----------- ---------- ----------
(In thousands)
Net withdrawals........................ $(16,381) $(5,956) $(11,308)
Interest credited on deposit accounts.. 8,642 6,562 6,691
------ ----- -----
Total increase (decrease) in deposit
accounts............................... $(7,739) $606 $(4,617)
-------- ---- -------
-------- ---- -------
29
<PAGE>
At December 31, 1996, the Bank had $16.4 million in certificate accounts
in amounts of $100,000.
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average nominal
interest rates on each category of deposits presented. Averages for the
periods presented utilize average month-end balances.
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ------------------------- -------------------------
Percent Weighted Percent Weighted Percent Weighted
of Total Average of Total Average of Total Average
Average Average Nominal Average Average Nominal Average Average Nominal
Balance Deposits Yield Balance Deposits Yield Balance Deposits Yield
-------- ---------- -------- -------- --------- --------- -------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market accounts................... $10,440 5.05 3.04% 10,127 4.84 2.89% $13,607 6.44% 2.76%
Passbook accounts....................... 18,163 8.79 2.53 18,342 8.77 2.50 20,656 9.77 2.67
NOW accounts............................ 14,534 7.03 2.02 16,318 7.81 2.02 17,297 8.18 2.14
Non-interest-bearing accounts........... 7,580 3.67 -- 5,906 2.83 -- 5,644 2.67 --
------ ------- ------ ------ ------ ------
Total............................... 50,717 24.54 50,693 24.25 57,204 27.06
------ ------- ------ ------ ------ ------
Certificate accounts:
Less than six months................ 1,268 0.61 4.27 3,983 1.91 4.36 10,804 5.11 2.64
Six through 12 months............... 51,923 25.13 5.47 54,136 25.90 5.63 52,269 24.72 4.09
Over 12 through 24 months........... 36,260 17.55 6.04 37,640 18.01 6.19 26,537 12.55 4.70
Over 24 months...................... 66,486 32.17 6.06 62,569 29.93 6.61 64,588 30.55 5.47
------ ----- ------ ------ ------ -----
Total certificate accounts........ 155,937 75.46 158,328 75.75 154,198 72.94
------- ----- ------- ----- ------- -----
Total average deposits.................. $206,654 100.00% $209,021 100.00% $211,402 100.00%
-------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- -------
</TABLE>
30
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1996.
<TABLE>
<CAPTION>
Period to Maturity from December 31, 1996
---------------------------------------------------------------------
Less than One to Two to Three to Four to More than
One Year Two years Three years Four years Five Years Five Years
--------- --------- ----------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00%........... 311 0 12 7 0 0
4.01 to 6.00%........ 82,881 20,350 7,126 605 658 109
6.01 to 8.00%........ 17,922 13,952 693 3,241 751 63
8.01 to 10.00%....... 499 1,589 172 803 904 0
------- ------ ----- ----- ----- ---
Total............ 101,613 35,891 8,003 4,656 2,313 172
======= ====== ===== ===== ===== ===
<CAPTION>
At December 31,
---------------------------------
1996 1995 1994
--------- -------- --------
(In thousands)
<S> <C> <C> <C>
Certificate accounts:
0 to 4.00%........... $ 330 $ 2,179 $ 34,591
4.01 to 6.00%........ 111,729 93,144 100,938
6.01 to 8.00%........ 36,622 60,518 13,635
8.01 to 10.00%....... 3,967 3,830 7,163
-------- -------- --------
Total............ $152,648 $159,671 $156,327
======== ======== ========
</TABLE>
31
<PAGE>
Borrowings. At December 31, 1996, the Bank had $16,250,000 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 OTS and the FHLB.
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,
---------------------------
1996 1995 1994
------- ------ ------
(Dollars in Thousands)
FHLB advances:
Average balance outstanding.................. $ 8,099 $1,346 $ 788
======= ====== ======
Maximum amount outstanding at
any month-end during the period............ 19,550 3,500 3,000
======= ====== ======
Balance outstanding at end of period......... 16,250 0 3,000
======= ====== ======
Weighted average interest rate
during the period.......................... 6.01% 5.29% 9.62%
======= ====== ======
Weighted average interest rate at end
of period.................................. 5.8% N/A 6.2%
======= ====== ======
Subsidiary Activities
CSL Service Corporation ("CSL") and Fairbury Financial Service Corp.
("Fairbury Financial") are wholly-owned subsidiaries of the Bank. CSL has
been inactive, but began initiating the sale of tax-deferred annuities at the
end of 1996. Fairbury Financial is a service corporation of the Bank that
previously sold tax-deferred annuities and long-term care insurance policies
that it sold on an agency basis.
Personnel
As of December 31, 1996, the Bank had 72 authorized full-time employee
positions and 30 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.
32
<PAGE>
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"). In
addition, the activities of savings institutions, such as the Bank, are
governed by the HOLA and the Federal Deposit Insurance Act ("FDI Act").
The Bank is subject to extensive regulation, examination and supervision
by the OTS, as its primary federal regulator, and the FDIC, as the deposit
insurer. The Bank is a member of the Federal Home Loan Bank ("FHLB") System
and its deposit accounts are insured up to applicable limits by the Savings
Association Insurance Fund ("SAIF") managed by the FDIC. The Bank must file
reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering
into certain transactions such as mergers with, or acquisitions of, other
savings institutions. The OTS and/or the FDIC conduct periodic examinations
to test the Bank's safety and soundness and compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and
is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulatory requirements and
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Bank and their operations. Certain of the
regulatory requirements applicable to the Bank and to the Company are
referred to below or elsewhere herein. The description of statutory
provisions and regulations applicable to savings institutions and their
holding companies set forth in this Form 10-KSB does not purport to be a
complete description of such statutes and regulations and their effects on
the Bank and the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding
company, the Company generally is not restricted under existing laws as to
the types of business activities in which it may engage, provided that the
Bank continues to be a qualified thrift lender ("QTL"). See "Federal Savings
Institution Regulation - QTL Test." Upon any non-supervisory acquisition by
the Company of another savings institution or savings bank that meets the QTL
test and is deemed to be a savings institution by the OTS, the Company would
become a multiple savings and loan holding company (if the acquired
institution is held as a separate subsidiary) and would be subject to
extensive limitations on the types of business activities in which it could
engage. The HOLA 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 ("BHC Act"), subject to the prior approval of the OTS,
and certain activities authorized by OTS regulation.
33
<PAGE>
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5%
of the voting stock of another savings institution or holding company
thereof, without prior written approval of the OTS; acquiring or retaining,
with certain exceptions, more than 5% of a nonsubsidiary company engaged in
activities other than those permitted by the HOLA; or acquiring or retaining
control of a depository institution that is not insured by the FDIC. 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, subject to two exceptions: (i) the approval of
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 specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on
subsidiary savings institutions as described below. The Bank must notify the
OTS 30 days before declaring any dividend to the Company. In addition, the
financial impact of a holding company on its subsidiary institution is a
matter that is evaluated by the OTS and the agency has authority to order
cessation of activities or divestiture of subsidiaries deemed to pose a
threat to the safety and soundness of the institution.
Federal Savings Institution Regulation
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible
capital ratio, a 3% leverage (core) capital ratio and an 8% risk-based
capital ratio. In addition, the prompt corrective action standards discussed
below also establish, in effect, a minimum 2% tangible capital standard, a 4%
leverage (core) capital ratio (3% for institutions receiving the highest
rating on the CAMEL financial institution rating system), and, together with
the risk-based capital standard itself, a 4% Tier I risk-based capital
standard. Core capital is defined as common stockholders' equity (including
retained earnings), certain noncumulative perpetual preferred stock and
related surplus, and minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain purchased mortgage servicing
rights and credit card relationships. The OTS regulations also require that,
in meeting the tangible, leverage (core) and risk-based capital standards,
institutions must generally deduct investments in and loans to subsidiaries
engaged in activities not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core
capital and supplementary capital) to risk-weighted assets of 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, as assigned by the OTS capital regulation based on the
risks OTS believes are inherent
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in the type of asset. The components of Tier I (core) capital are equivalent
to those discussed earlier. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses limited to a
maximum of 1.25% of risk-weighted assets. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The OTS regulatory capital requirements also incorporate an interest
rate risk component. Savings institutions with "above normal" interest rate
risk exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of
its assets (i.e., the difference between incoming and outgoing discounted
cash flows from assets, liabilities and off-balance sheet contracts) that
would result from a hypothetical 200 basis point increase or decrease in
market interest rates divided by the estimated economic value of the
institution's assets. In calculating its total capital under the risk-based
capital rule, a savings institution whose measured interest rate risk
exposure exceeds 2% must deduct an amount equal to one-half of the difference
between the institution's measured interest rate risk and 2%, multiplied by
the estimated economic value of the institution's assets. The Director of
the OTS may waive or defer a savings institution's interest rate risk
component on a case-by-case basis. A savings institution with assets of less
than $300 million and risk-based capital ratios in excess of 12% is not
subject to the interest rate risk component, unless the OTS determines
otherwise. For the present time, the OTS has deferred implementation of the
interest rate risk component. At December 31, 1996, the Bank met each of its
capital requirements, in each case on a fully phased-in basis and it is
anticipated that the Bank will not be subject to the interest rate risk
component.
Capital
Excess ------------------
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
------- -------- ------------ ------- --------
(Dollars in thousands)
Tangible............ $27,627 $ 3,873 $23,754 10.70% 1.50%
Core
(Leverage).......... 27,627 7,746 19,881 10.70 3.00
Risk-based.......... 28,122 11,301 16,821 19.91 8.00
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings
institution is considered "well capitalized" if its ratio of total capital to
risk-weighted assets is at least 10%, its ratio of Tier I (core) capital to
risk-weighted assets is at least 6%, its ratio of core capital to total
assets is at least 5%, and it is not subject to any order or directive by the
OTS to meet a specific capital level. A savings institution generally is
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considered "adequately capitalized" if its ratio of total capital to
risk-weighted assets is at least 8%, its ratio of Tier I (core) capital to
risk-weighted assets is at least 4%, and its ratio of core capital to total
assets is at least 4% (3% if the institution receives the highest CAMEL
rating). A savings institution that has a ratio of total capital to risk
weighted assets of less than 8%, a ratio of Tier I (core) capital to
risk-weighted assets of less than 4% or a ratio of core capital to total
assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution
that has a tangible capital to assets ratio equal to or less than 2% is
deemed to be "critically undercapitalized." Subject to a narrow exception,
the banking regulator is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also
provides that a capital restoration plan must be filed with the OTS within 45
days of the date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to an undercapitalized institution, including, but not
limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The OTS could also take any one of a
number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently
insured by the SAIF. Both the SAIF and the Bank Insurance Fund ("BIF"), (the
deposit insurance fund that covers most commercial bank deposits), are
statutorily required to be recapitalized to a 1.25% of insured reserve
deposits ratio. Until recently, members of the SAIF and BIF were paying
average deposit insurance premiums of between 24 and 25 basis points. The
BIF met the required reserve in 1995, whereas the SAIF was not expected to
meet or exceed the required level until 2002 at the earliest. This situation
was primarily due to the statutory requirement that SAIF members make
payments on bonds issued in the late 1980's by the Financing Corporation
("FICO") to recapitalize the predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately
adopted a new assessment rate schedule of from 0 to 27 basis points under
which 92% of BIF members paid an annual premium of only $2,000. With respect
to SAIF member institutions, the FDIC adopted a final rule retaining the
existing assessment rate schedule applicable to SAIF member institutions of
23 to 31 basis points. As long as the premium differential continued, it may
have had adverse consequences for SAIF members, including reduced earnings
and an impaired ability to raise funds in the capital markets. In addition,
SAIF members, such as the Bank could have been placed at a substantial
competitive disadvantage to BIF members with respect to pricing of loans and
deposits and the ability to achieve lower operating costs.
On September 30, 1996, the President signed into law the Deposit
Insurance Funds Act of 1996 (the "Funds Act") which, among other things,
imposed a special one-time assessment on SAIF member institutions, including
the Bank, to recapitalize the SAIF. As required by the Funds Act, the FDIC
imposed a special assessment of 65.7 basis points on SAIF assessable
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deposits held as of March 31, 1995, payable November 27, 1996 (the "SAIF
Special Assessment"). The SAIF Special Assessment was recognized by the Bank
as an expense in the quarter ended September 30, 1996 and is generally tax
deductible. The SAIF Special Assessment recorded by the Bank amounted to
$1.37 million on a pre-tax basis and $839,000 on an after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and BIF members. As of January 1, 1997, BIF deposits are
assessed for FICO payment at a rate of 20% of the rate assessed on SAIF
deposits. Based on current estimates of the FDIC, BIF deposits will be
assessed on a FICO payment of 1.3 basis points, while SAIF deposits will pay
an estimated 6.4 basis points. Full pro rata sharing of the FICO payments
between BIF and SAIF members will occur on the earlier of January 1, 2000 or
the date the BIF and SAIF are merged. The Funds Act specifies that the BIF
and SAIF will be merged on January 1, 1999, provided no savings associations
remain as of that time.
As a result of the Funds Act, the FDIC recently proposed to lower SAIF
assessment to 0 to 27 basis points effective January 1, 1997, a range
comparable to that of BIF members. However, SAIF members will continue to
make the higher FICO payments described above. Management cannot predict the
level of FDIC insurance assessments on an on-going basis, whether the savings
association charter will be eliminated or whether the BIF and SAIF will
eventually be merged.
The Bank's regular assessment rate for fiscal 1996 was 23 basis points
and the premium paid for this period was $410,000 (exclusive of the
previously discussed Special Assessment). A significant increase in SAIF
insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of the Bank.
Insurance of deposits may be terminated by the FDIC upon a 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 or the OTS.
The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. The Funds Act provides that the BIF
and SAIF will merge on January 1, 1999 if there are no more savings
associations as of that date. That legislation also requires that the
Department of Treasury submit a report to Congress by March 31, 1997 that
makes recommendations regarding a common financial institutions charter,
including whether the separate charters for thrifts and banks should be
abolished. Various proposals to eliminate the federal thrift charter, create
a uniform financial institutions charter and abolish the OTS were introduced
in the 104th Congress. It is likely that legislation will be introduced in
the new Congress addressing the elimination of the savings association
charter. However, the Bank is unable to predict whether such legislation
would be enacted and, if so, the extent to which the legislation would
restrict or disrupt its operation.
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Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the limits on loans to one borrower applicable to
national banks. Generally, savings institutions may not make a loan or
extend credit to a single or related group of borrowers in excess of 15% of
its unimpaired capital and surplus. An additional amount may be lent, equal
to 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. At December 31, 1996, the Bank's limit on loans to
one borrower was $4.5 million, although the Bank has received permission to
raise this limit to $9.0 million for two separate borrowers. At December 31,
1996, the Bank's largest aggregate outstanding balance of loans to one
borrower was $6.8 million.
QTL Test. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings and loan 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 securities) in at least 9 months out of
each 12 month period.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As
of December 31, 1996, the Bank maintained 93.1% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments
to shareholders of another institution in a cash-out merger and other
distributions charged against capital. The rule establishes three tiers of
institutions, which are based primarily on an institution's capital level.
An institution that exceeds all fully phased-in capital requirements before
and after a proposed capital distribution ("Tier 1 Bank") and has not been
advised by the OTS that it is in need of more than normal supervision, could,
after prior notice but without obtaining approval of the OTS, make capital
distributions during a calendar year equal to the greater of (i) 100% of its
net earnings to date during the calendar year plus the amount that would
reduce by one-half its "surplus capital ratio" (the excess capital over its
fully phased-in capital requirements) at the beginning of the calendar year
or (ii) 75% of its net income for the previous four quarters. Any additional
capital distributions would require prior regulatory approval. In the event
the Bank's capital fell below its regulatory requirements or the OTS notified
it that it was in need of more than normal supervision, the Bank's ability to
make capital distributions could be restricted. In addition, the OTS could
prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. In December
1994, the OTS proposed amendments to its capital distribution regulation that
would generally authorize the payment of capital distributions without OTS
approval provided that the payment does not cause the institution to be
undercapitalized within the meaning of the prompt corrective action
regulation. However, institutions in a holding company structure would still
have a prior notice requirement. At December 31, 1996, the Bank was a Tier 1
Bank.
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Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 5% but may be changed
from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the savings flows of member
institutions. OTS regulations also require each member savings institution
to maintain an average daily balance of short-term liquid assets at a
specified percentage (currently 1%) of the total of its net withdrawable
deposit accounts and borrowings payable in one year or less. Monetary
penalties may be imposed for failure to meet these liquidity requirements.
The Bank's liquidity and short-term liquidity ratios for December 31, 1996
were 5.0% and 3.59% respectively, which exceeded the applicable requirements.
The Bank has never been subject to monetary penalties for failure to meet
its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to
the OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest
quarterly thrift financial report. The assessments paid by the Bank for the
fiscal year ended December 31, 1996 totalled $66,000 (exclusive of the
previously discussed Special Assessment).
Branching. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute.
This permits federal savings institutions to establish interstate networks
and to geographically diversify their loan portfolios and lines of business.
The OTS authority preempts any state law purporting to regulate branching by
federal savings institutions.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (e.g., any company that
controls or is under common control with an institution, including the
Company and its non-savings institution subsidiaries) is limited by Sections
23A and 23B of the Federal Reserve Act ("FRA"). Section 23A limits the
aggregate amount of covered transactions with any individual affiliate to 10%
of the capital and surplus of the savings institution. The aggregate amount
of covered transactions with all affiliates is limited to 20% of the savings
institution's capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is
generally prohibited. Section 23B generally provides that certain
transactions with affiliates, including loans and asset purchases, must be on
terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to
any affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of
any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders, as well as entities such persons control, is governed
by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder. Among
other things, such loans are required to be made on terms substantially the
same as those offered to unaffiliated individuals and to not
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involve more than the normal risk of repayment. Regulation O also places
individual and aggregate limits on the amount of loans the Bank may make to
such persons based, in part, on the Bank's capital position and requires
certain board approval procedures to be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
actions against the institution and all institution-affiliated parties,
including stockholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an
adverse effect on an insured institution. Formal enforcement action may
range from the issuance of a capital directive or cease and desist order to
removal of officers and/or directors to institution of receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or even $1
million per day in especially egregious cases. Under the FDI Act, the FDIC
has the authority to recommend to the Director of the OTS enforcement action
to be taken with respect to a particular savings institution. If action is
not taken by the Director, the FDIC has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The standards set forth in the Guidelines address internal
controls and information systems; internal audit system; credit underwriting;
loan documentation; interest rate risk exposure; asset growth; and
compensation, fees and benefits. 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, as required by the
FDI Act. The final rule establishes deadlines for the submission and review
of such safety and soundness compliance plans when such plans are required.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). During fiscal 1996, the
Federal Reserve Board regulations generally required that reserves be
maintained against aggregate transaction accounts as follows: for accounts
aggregating $52.0 million or less (subject to adjustment by the Federal
Reserve Board) the reserve requirement is 3%; and for accounts aggregating
greater than $52.0 million, the reserve requirement is $1.6 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 $52.0
million. The first $4.3 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Bank is in compliance with the foregoing requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the
OTS.
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FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a consolidated
basis and the accrual method of accounting, and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to
the Bank or the Company. The Bank has not been audited by the Internal
Revenue Service or State of Illinois in the last 5 years. For its 1996
taxable year, the Bank is subject to a maximum federal income tax rate of 35%.
Bad Debt Reserves. For fiscal years beginning prior to 1996, thrift
institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted
to use certain favorable provisions to calculate their deductions from
taxable income for annual additions to their bad debt reserve. A reserve
could be established for bad debts on qualifying real property loans
(generally secured by interests in real property improved or to be improved)
under (i) the Percentage of Taxable Income Method (the "PTI Method") or (ii)
the Experience Method. The reserve for nonqualifying loans was computed
using the Experience Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which
was enacted on August 20, 1996, requires savings institutions to recapture
(i.e., take into income) certain portions of their accumulated bad debt
reserves. The 1996 Act repeals the reserve method of accounting for bad
debts effective for tax years beginning after 1995. Thrift institutions that
would be treated as small banks are allowed to utilize the Experience Method
applicable to such institutions, while thrift institutions that are treated
as large banks (those generally exceeding $500 million in assets) are
required to use only the specific charge-off method. Thus, the PTI Method of
accounting for bad debts is no longer available for any financial
institution.
Use of the PTI Method had the effect of reducing the marginal rate of
federal tax on the Bank's income to 32%, exclusive of any minimum or
environmental tax, as compared to the maximum corporate federal income tax
rate of 35%.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the IRS.
Any Section 481(a) adjustment required to be taken into income with respect
to such change generally will be taken into income ratably over a six-taxable
year period, beginning with the first taxable year beginning after 1995,
subject to the residential loan requirement.
Under the residential loan requirement provision, the recapture required
by the 1996 Act may be suspended for each of two successive taxable years,
beginning with the Bank's current taxable year, in which the Bank originates
a minimum of certain residential loans based upon the
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average of the principal amounts of such loans made by the Bank during its
six taxable years preceding its current taxable year.
Under the 1996 Act, for its current and future taxable years, the Bank
is permitted to use the experience method for making additions to its tax bad
debt reserves. In addition, 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, 1995 over the balance of such reserves as of
December 31, 1987 (or a lesser amount since the Bank's loan portfolio
decreased since December 31, 1987). As a result of such recapture, the Bank
will incur an additional tax liability of approximately $111,000.
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
then from the Bank's supplemental reserve for losses on loans, 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.
Non-dividend distributions include 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 be so included in the Bank's
income.
The amount of additional taxable income triggered by a non-dividend 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 tax purposes, assuming a 35%
federal corporate income tax rate. The Banks does not intend to pay
dividends that would result in a recapture of any portion of its bad debt
reserves.
SAIF Recapitalization Assessment. The Funds Act levies a 65.7-cent fee
on every $100 of thrift deposits held on March 31, 1995. For financial
statement purposes, this assessment must be reported as an expense for the
quarter ended September 30, 1996. The Funds Act includes a provision which
states that the amount of any special assessment paid to capitalize SAIF
under this legislation is deductible under Section 162 of the Code in the
year of payment.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986,
as amended (the "Code") imposes a tax on alternative minimum taxable income
("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net operating
loss carryovers of which the Bank currently has none. AMTI is increased by
an amount equal to 75% of the amount by which the Bank's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses). In addition, for taxable years
beginning after December 31, 1986 and before January 1, 1996, an
environmental tax of .12% of the excess of AMTI (with certain modifications)
over $2.0 million is imposed on corporations, including the
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Bank, whether or not an Alternative Minimum Tax ("AMT") is paid. The Bank
does not expect to be subject to the AMT, but may be subject to the
environmental tax liability.
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 or the Bank own more than
20% of the stock of a corporation distributing a dividend then 80% of any
dividends received may be deducted.
State and Local Taxation
State of Illinois. The Company and the Bank will file a combined
Illinois income tax return. For Illinois income tax purposes, they are taxed
at an effective rate equal to 7.2% of Illinois Taxable Income. For these
purposes, "Illinois Taxable Income" generally means federal taxable income,
subject to certain adjustments (including the addition of interest income on
state and municipal obligations and the exclusion of interest income on
United States Treasury obligations). The exclusion of income on United
States Treasury obligations has the effect of reducing Illinois taxable
income. The Company is also required to file an annual report with and pay
an annual franchise tax to the State of Illinois.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt 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.
Impact of New Accounting Standards
Accounting for Mortgage Servicing Rights. In 1995, the FASB also issued
SFAS No. 122, "Accounting for Mortgage Servicing Rights." This Statement
amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," to
require that a mortgage banking enterprise recognize as separate assets
rights to service mortgage loans for others, however those services are
acquired. This statement was adopted by the Company on January 1, 1995. The
effect of adopting this statement has been to increase earnings by
approximately $94,000 and $123,000 during the years ended December 31, 1996
and 1995, respectively.
Accounting for Stock-Based Compensation. The FASB has issued No. SFAS
123, Accounting for Stock-based Compensation. SFAS No. 123 establishes a
fair value based method of accounting for stock-based compensation plans.
The FASB encourages all entities to adopt this method for accounting for all
arrangements under which employees receive shares of stock or other equity
instruments of the employer, or the employer incurs liabilities to employees
in amounts based on the price of its stock.
Due the extremely controversial nature of this project, SFAS No. 123
permits a company to continue the accounting for stock-based compensation
prescribed in accounting Principals
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Board Opinion No. 25, Accounting for Stock Issued to Employees. If a company
elects that option, pro forma disclosures of net income (and EPS, if
presented) are required in the notes to the financial statements as if the
provisions of SFAS No. 123 had been used to measure stock-based compensation.
The disclosure requirements of Opinion No. 25 have been superseded by the
disclosure requirements of this Statement. Once an entity adopts the fair
value based method for accounting for these transactions, that election
cannot be reversed.
Equity instruments granted or otherwise transferred directly to an
employee by a principal stockholder are stock-based employee compensation to
be accounted for in accordance with either Opinion 25 or SFAS No. 123 unless
the transfer clearly is for a purpose other than compensation. The
accounting requirements of SFAS No. 123 became effective for transactions
entered into in fiscal years beginning after December 15, 1995, and the
disclosure requirements became effective for financial statements for fiscal
years beginning after December 15, 1995, and the disclosure requirements
became effective for financial statements for fiscal years beginning after
December 15, 1995. Pro forma disclosures required for entities that elect to
continue to measure compensation cost using Opinion 25 must include the
effects of all awards granted in fiscal years beginning after December 15,
1994. During the initial phase-in period, the effects of applying this
Statement are not likely to be representative of the effects on reported net
income for future years because options vest over several years and
additional awards generally are made each year.
The Company adopted SFAS No. 123 for 1996, and elected to report the pro
forma disclosures of net income and earnings per share in the notes to
financial statements.
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, breaks new ground in
resolving long-standing questions about whether transactions should be
accounted for as secured borrowing or as sales. The Statement provides
consistent standards for distinguishing transfers of financial assets that
are sales from transfers that are considered secured borrowings.
A transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. The transferor has surrendered control over
transferred assets only if all of the following conditions are met:
- The transferred assets have been isolated from the transferor - put
presumptively beyond the reach of the transferor and its creditors,
even in bankruptcy or other receivership.
- Each transferee obtains the right - free of conditions that constrain
it from taking advantage of that right - to pledge or exchange those
interests.
- The transferor does not maintain effective control over the transferred
assets through an agreement that both entitles and obligates the
transferor to repurchase or redeem them before their maturity or an
agreement that entitles the transferor to repurchase or redeem
transferred assets are not readily obtainable.
44
<PAGE>
This Statement provides detailed measurement standards for assets and
liabilities included in these transactions. It also includes implementation
guidance for assessing isolation transferred assets and for accounting for
transfers of partial interest, servicing of financial assets, securitization,
transfers or sales type and direct financing lease receivables, securities
lending transactions, repurchase agreements, "wash sales," loan syndication
and participation, risk participation in banker's acceptances, factoring
arrangements, transfers of receivables with recourse and extinguishment of
liabilities.
The Statements supersede FASB Statements No. 76 Extinguishment of Debt,
and No. 77, Reporting by Transferors for Transfers of Receivables with
Recourse, and No. 122, Accounting for Mortgage Servicing Rights, and amends
FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, in addition to clarifying or amending a number of other
statements and technical bulletins.
Except as amended by Statement No. 127, this Statement is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31,1996 and is to be applied
prospectively. Earlier or retroactive application is not permitted.
The FASB was made aware that the volume of certain transactions and the
related changes to information systems and accounting processes that are
necessary to comply with the requirements of Statement No. 125 would make it
extremely difficult, if not impossible, for some affected enterprises to
apply the transfer and collateral provisions of Statement No. 125 to those
transactions as soon as January 1, 1997. As a result, SFAS No. 127 defers
for one year the effective date (a) of paragraph 15 of Statement No. 125 and
(b) for repurchase agreement, dollar-roll, securities lending and similar
transactions, of paragraphs 9-12 and 237(b) of Statement No. 125.
Statement No. 127 provides additional guidance on the types of
transactions for which the effective date of Statement No. 125 had been
deferred. It also requires that if it is not possible to determine whether a
transfer occurring during calendar year 1997 is part of a repurchase
agreement, dollar-roll securities lending, or similar transaction, then
paragraphs 9-12 of Statement No. 125 should be applied to that transfer.
All provisions of Statement No. 125 should continue to be applied
prospectively and earlier or retroactive application is not permitted.
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.
45
<PAGE>
<TABLE>
<CAPTION>
Leased Original
or Year Leased Net Book Value at Deposits per
Location Owned or Acquired December 31, 1996 Office**
- --------------------- --------- -------------- -------------------- ---------------
(In thousands)
<S> <C> <C> <C> <C>
Executive/Branch Office:
301 Broadway* Owned 1963 $508 $59,687
Normal,
Illinois 61761
Branch Offices:
2402 E.Washington* Owned 1980 755 39,389
Bloomington, Illinois 61704
1722 Hamilton Road* Owned 1995 1,491 4,168
Bloomington, Illinois 61704
(opened October 1995)
115 N. Third Street* Owned 1981 775 58,241
Fairbury, Illinois 61739
205 S. Main Owned 1974 180 26,453
Eureka, Illinois 61530
314 Crittenden Owned 1984 100 6,674
Chenoa, Illinois 61726 ----- -------
Total $3,809 $194,612
-------- ----------
-------- ----------
</TABLE>
- --------------------
* Automated teller machines are located at these offices.
** Deposits from closed branches located in Bloomington and El Paso,
Illinois totalling $7.8 million are held by the Bank but are not
reflected in the table.
Item 3. Legal Proceedings
The Company 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 Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of Shareholders of Citizens First Financial Corp. was
held on November 12, 1996, at 10:00 a.m., at the Holiday Inn, 8 Traders
Circle, Normal, Illinois for the purpose of voting upon the Citizens First
Financial Corp. 1996 Stock-Based Incentive Plan.
The results of the voting for the approval of Citizens First Financial Corp.
1996 Stock-Based Incentive Plan were as follows:
FOR AGAINST ABSTAIN
----------- --------- ----------
1,565,442 402,233 28,055
------- ------
------- ------
46
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Information relating to the market for Registrant's common equity and
related stockholder matters appears in the Registrant's 1996 Annual Report to
Stockholders on pages 37 and 38, and is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
The above-captioned information appears under Management's Discussion and
Analysis of Results of Operations and Financial Condition in the Registrant's
1996 Annual Report to Stockholders on pages 6 through 12 and is incorporated
herein by reference.
Item 7. Financial Statements
The Consolidated Financial Statements of Citizens First Financial Corp.
and its subsidiaries, together with the report thereon by Geo. S. Olive & Co.
LLC for the year ended December 31 1996 appears in the Registrant's 1996
Annual Report to Stockholders on pages 13 through 36 and are incorporated
herein by reference.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
The information relating to directors and executive officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 21, 1997
at pages 5 through 7.
Item 10. 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 21, 1997 at pages 7
through 13.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Registrant's
Proxy Statement for the Annual Meeting of Shareholders to be held on April
21, 1997 at pages 5 through 6.
47
<PAGE>
Item 12. 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 21, 1997
at page 13.
Item 13. Exhibits 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 1996 Annual Report to Stockholders
PAGE
------
Independent Auditors' Report. . . . . . . . . . . . . . . . . . 13-14
Consolidated Balance Sheet as of
December 31, 1996 and 1995. . . . . . . . . . . . . . . . . . . . .15
Consolidated Statement of Income for the
years ended December 31, 1996, 1995 and 1994. . . . . . . . . . . .16
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994. . . . . . . .17
Consolidated Statement of Cash Flows for the
years ended December 31, 1996, 1995 and 1994. . . . . . . . . . 18-19
Notes to Consolidated Financial Statements. . . . . . . . . . . 20-36
The remaining information appearing in the Annual Report to
tockholders is not deemed to be filed as part of this report,
except as expressly provided herein.
(2) 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.
48
<PAGE>
(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. 1996 Stock-Based Incentive
Plan**
11.0 Computation of earnings per share***
13.0 Portions of 1996 Annual Report to Stockholders (filed herewith)
21.0 Subsidiary information is incorporated herein by reference to
"Part I - Subsidiaries"
27.0 Financial Data Schedule
- ---------------------------------------
* Incorporated herein by reference to the Exhibits to Form
SB-2, Registration Statement, filed on January 24, 1996
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,
1996.
*** Due to the Company's initial public offering effective May
1, 1996, earnings per share for the year ended December
31, 1996 are not meaningful.
(b) Reports on Form 8-K:
On November 26, 1996, the Company filed a report on Form 8-K in
connection with the Company's Board of Directors authorizing
management to apply to the Office of Thrift Supervision for permission
to repurchase up to 10 percent of the outstanding stock of the
Company.
49
<PAGE> 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, hereunto duly authorized.
50
<PAGE>
CONFORMED 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, hereunto duly authorized.
CITIZENS FIRST FINANCIAL CORP.
By: /s/ C. William Landefeld
----------------------------------
C. William Landefeld
President, Chief Executive Officer
and Director
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates stated.
Name Title Date
------ ------- ------
/s/ C. William Landefeld President, Chief Executive Officer March 28, 1997
- ------------------------- and Director (principal executive
C. William Landefeld officer)
/s/ Dallas G. Smiley Senior Vice President, Treasurer March 28, 1997
- ------------------------- and Chief Financial Officer
Dallas G. Smiley (principal accounting and financial
officer)
/s/ Bryce A. Sides Director March 28, 1997
- -------------------------
Bryce A. Sides
/s/ Jeffrey M. Solberg Director March 28, 1997
- -------------------------
Jeffrey M. Solberg
/s/ Lowell M. Thompson Director March 28, 1997
- -------------------------
Lowell M. Thompson
/s/ Donald L. Wainscott Director March 28, 1997
- -------------------------
Donald L. Wainscott
51
<PAGE>
EXHIBIT 13
[LOGO]
PORTIONS OF CITIZENS FIRST FINANCIAL CORP. 1996 ANNUAL REPORT
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDARY
CONTENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 6
INDEPENDENT AUDITOR'S REPORT 13
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET 15
CONSOLIDATED STATEMENT OF INCOME 16
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY 17
CONSOLIDATED STATEMENT OF CASH FLOWS 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20
5
<PAGE>
CITIZENS FIRST FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Citizens First Financial Corp. (the "Company") is the holding company for
Citizens Savings Bank, F.S.B., (the "Bank"). The Company completed its initial
offering of 2,817,500 shares of common stock on May 1, 1996 in connection with
the conversion of the Bank from the mutual to stock form of ownership. Prior to
the Company's acquisition of the Bank on May 1, 1996, the Company had no
material assets or operations. Accordingly, the following information reflects
management's discussion and analysis of the financial condition and results of
operations for the Bank for the period prior to May 1, 1996 and for the Company
and Bank subsequent to the period beginning May 1, 1996. Currently, the Company
does not transact any material business other than through its subsidiary, the
Bank.
The Bank was originally chartered in 1888 by the State of Illinois and in 1989
became a federally chartered savings bank. The Bank's principal business
consists of the acceptance of retail deposits from the general public in the
areas surrounding its branch offices and the investment of these deposits,
together with funds generated from operations and borrowings, primarily in one-
to-four family residential mortgage loans. To a lesser extent, the Bank also
invests in multi-family, construction and land, commercial real estate, consumer
and other loans. The Bank has two wholly-owned service corporations, CSL
Service Corporation and Fairbury Financial Services Corp. CSL Service
Corporation is an Illinois-chartered corporation that has been inactive, but
initiated the sale of tax-deferred annuities at the end of 1996. Fairbury
Financial Services Corp. is an Illinois-chartered corporation that currently
services previously sold tax deferred annuities and long-term care insurance
policies that it sold on an agency basis.
RECENT LEGISLATION
On September 30, 1996, the President signed into law the Deposit Insurance Funds
Act of 1996 (the "Funds Act") which, among other things, imposed a special one-
time assessment on Savings Association Insurance Fund ("SAIF") member
institutions, including the Bank, to recapitalize the SAIF. As required by the
Funds Act, the FDIC imposed a special assessment of 65.7 basis points on SAIF
assessable deposits as of March 31, 1995, payable on November 27, 1996. The
special assessment was recognized in the third quarter of 1996 and is tax
deductible. The Bank took a charge of $1.37 million ($839,000 after-tax) as a
result of the special assessment.
The Funds Act also spreads the obligations for payment of the Financing
Corporation ("FICO") bonds across all SAIF and Bank Insurance Fund ("BIF")
members. As of January 1, 1997, BIF deposits are assessed for FICO payments at
a rate of 20% of the rate assessed on SAIF deposits. Based on current estimates
by the FDIC, BIF deposits will be assessed a FICO payment of 1.3 basis points,
while SAIF deposits will pay an estimated 6.4 basis points on the FICO bonds.
Full pro rata sharing of the FICO payments between BIF and SAIF members will
occur on the earlier of January 1, 2000 or the date BIF and SAIF are merged.
The Funds Act specifies that BIF and SAIF will be merged on January 1, 1999
provided no savings associations remain at that time.
As a result of the Funds Act, the FDIC lowered SAIF assessments to 0 to 27 basis
points effective January 1, 1997, a range comparable to that of BIF members.
SAIF members will continue to make the higher FICO payments described above.
Management cannot predict the level of FDIC insurance assessments on an on-going
basis, whether the savings charter will be eliminated or whether the BIF and
SAIF will eventually be merged.
6
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND DECEMBER 31, 1995
Total assets increased from $228.6 million at December 31, 1995 to $261.6
million at December 31, 1996. The $33.0 million, or 14.4%, increase was
primarily due to borrowings from the Federal Home Loan Bank of Chicago ("FHLB")
and proceeds from the Company's stock offering which were partially offset by a
reduction in total deposits. There were no borrowings from the FHLB at December
31, 1995 and $16.3 million of such borrowings at December 31, 1996. The
proceeds from the Company's stock offering consisted of: $28,175,000 total stock
offering less $1,163,000 in underwriting commissions and other expenses of the
offering, less $2,254,000 related to shares purchased by the Employee Stock
Ownership Plan (the "ESOP"). Approximately $4,141,000 in proceeds from stock
sales came from existing customer deposits.
Cash and cash equivalents increased from $6,602,000 at December 31, 1995 to
$7,007,000 at December 31, 1996, an increase of $405,000 or 6.1%.
Investment securities increased from $24,879,000 at December 31, 1995 to
$29,371,000 at December 31, 1996 due to an increase in the Company's investment
in mortgage-backed securities of $5,826,000. This increase was partially offset
by a decline in the Company's investment in U.S. Treasury securities.
Mortgage loans held for sale increased from $0 at December 31, 1995 to
$3,027,000 at December 31, 1996, due to the increase in origination of loans to
be sold in the secondary market at December 31, 1996.
Loans increased from $188,774,000 at December 31, 1995 to $211,554,000 at
December 31, 1996, an increase of $22,780,000 or 12.1%. The growth in loans was
funded primarily from the investment of the proceeds from the stock offering.
The growth was primarily in one-to-four family residential mortgage loans which
increased by approximately $20.0 million.
Foreclosed real estate, which is primarily the result of loans to a local real
estate developer, was $697,000 at December 31, 1996. The Company does not
anticipate any material losses related to its foreclosed real estate at
December 31, 1996.
Deposits decreased from $209,864,000 at December 31, 1995 to $202,125,000 at
December 31, 1996, a decrease of $7,739,000 or 3.7%. This decrease was
attributable to the $4,141,000 of stock purchases derived from customer deposit
accounts and the increased use of borrowings from the FHLB as a source of funds.
Overall certificates of deposit declined by $7,023,000. Other liabilities
decreased by $341,000, or 10.5%, because of lower accrued payables.
The total equity capital increased by $24,830,000, or 160.0%, from $15,519,000
at December 31, 1995 to $40,349,000 at December 31, 1996. The increase is
summarized as follows:
Equity capital, December 31, 1995 $15,519,000
Gross proceeds of stock offering 28,175,000
Underwriting commissions and other
expenses of conversion (1,163,000)
Net income 610,000
Increase in unrealized loss on
securities available for sale (131,000)
Total shares purchased by ESOP (2,254,000)
ESOP shares earned 362,000
MRP shares purchased (805,000)
MRP shares earned 36,000
-----------
Equity capital, December 31, 1996 $40,349,000
-----------
-----------
COMPARISION OF OPERATING RESULTS AT DECEMBER 31, 1996 AND DECEMBER 31, 1995
GENERAL
Net income for the year ended December 31, 1996 decreased by $403,000, or 39.8%,
from $1,013,000 for the year ended December 31, 1995 to $610,000 for the year
ended December 31, 1996. The decrease was due to the previously discussed
special assessment of $839,000, net of tax, incurred by the Bank pursuant to the
Funds Act. This expense offset the recognition of a liability for the Bank's
directors emeritus retirement plan in 1995 and higher interest income from the
investment of the proceeds from the stock offering in 1996. If the Bank had not
been required to pay this special assessment, net income for the year ended
December 31, 1996 would have been $1,449,000.
INTEREST INCOME
Interest on loans increased by $1,766,000, or 12.2%, from $14,464,000 for the
year ended December 31,
7
<PAGE>
1995 to $16,230,000 for the year ended December 31, 1996. The increase was due
to a higher average balance of loans resulting from the investment in loans of
the proceeds from the stock offering and the reinvestment of proceeds from the
sale and maturities of investment securities. This reinvestment was made
because of the higher yields that were available by investing in loans. The new
loans were primarily one-to-four family mortgage loans. Interest on investments
decreased from $1,986,000 for the year ended December 31, 1995 to $1,862,000 for
the year ended December 31, 1996, a decrease of $124,000 or 6.2%.
The decrease reflected the lower average balance of investment securities from
$11.5 million for the year ended December 31, 1995 to $10.6 million for the year
ended December 31, 1996.
INTEREST EXPENSE
Interest on deposits increased by $172,000, or 1.7%, from $9,979,000 for the
year ended December 31, 1995 to $10,151,000 for the year ended December 31,
1996. The increase was attributable to a slightly higher cost of deposits
during the year ended December 31, 1996. The interest on borrowings from the
FHLB increased $217,000, or 221.4%, because the average balance in borrowings
increased from $1.3 million for the year ended December 31, 1995 to $8.1 million
for the year ended December 31, 1996. The borrowings were primarily used to
fund the increase in the loan portfolio.
NONINTEREST INCOME
Total noninterest income increased by $151,000, or 10.9%, from $1,386,000 for
the year ended December 31, 1995 to $1,537,000 for the year ended December 31,
1996. The increase was primarily due to increases in loan servicing fees and
checking account fees. Loan servicing fees increased $86,000, or 15.9%, from
$540,000 for the year ended December 31, 1995 to $626,000 for the year ended
December 31, 1996. This increase reflected the increase of loan originations
from $80.2 million for the year ended December 31, 1995 to $116.0 million for
the year ended December 31, 1996. Checking account fees increased by $66,000,
or 16.6%, because of the higher fees being charged on certain checking accounts.
NONINTEREST EXPENSE
Total noninterest expense increased by $2,081,000, or 33.5%, from $6,213,000
for the year ended December 31, 1995 to $8,294,000 for the year ended December
31, 1996. Deposit insurance/OTS assessment increased from $477,000 for the year
ended December 31, 1995 to $1,848,000 for the year ended December 31, 1996, an
increase of $1,371,000 or 287.4%. This increase was due to the implementation
of the Funds Act. Another factor in the increase in other expense was
additional compensation and benefit expense of $440,000, due mostly to the
implementation of the employee stock ownership and incentive plans which
resulted in an expense of $399,000. Occupancy expenses increased by $48,000, or
6.9%, for the year ended December 31, 1996 primarily due to the opening of a new
branch facility in October 1995. Data processing fees decreased by $78,000 for
the year ended December 31, 1996 due to the efficiencies achieved by the
integration of the Bank's and Fairbury Federal's computer systems in the second
half of fiscal 1995 following the merger of the Bank and Fairbury Federal in
June 1995. Other expenses increased by $299,000, or 25.5%, from $1,171,000 for
the year ended December 31, 1995 to $1,470,000, because of franchise taxes
and increased administrative expenses associated with the Company.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased from $124,000 for the year ended
December 31, 1995 to $167,000 for the year ended December 31, 1996, an increase
of $43,000 or 34.7%. The increase was the result of the continued growth in the
loan portfolio and management's continuing evaluation of the loan portfolio. In
particular, the Bank experienced an increase in multi-family and commercial
loans, which increased from 5.5% and 3.6% of total loans, respectively, at
December 31, 1995, to 5.8% and 3.8%, respectively, at December 31, 1996. Such
loans generally bear a greater degree of risk as compared to one-to-four family
loans. As a result, the Bank's level of allowance for loan losses to total
loans and allowance for loan losses to non-performing loans were 0.24% and
113.53%, respectively, at December 31, 1996, compared to 0.22% and 53.43%,
respectively, at December 31, 1995.
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1995 AND
DECEMBER 31, 1994
Net income for the year ended December 31, 1995 decreased by $198,000, or 16.4%,
from $1,211,000 for the year ended December 31, 1994 to $1,013,000 for the
8
<PAGE>
year ended December 31, 1995. The decrease was primarily attributable to the
recognition of a liability for directors' emeritus retirement benefits and the
incurring of additional expenses related to the merger of the Bank and Fairbury
Federal. These costs were offset, in part, by an increase in net interest
income due to an improved yield on loans and other interest-earning assets due
to the Bank's restructuring of its interest-earning assets, with a transfer from
the lower yielding investment securities to the higher yielding loans.
INTEREST INCOME
Interest on loans increased by $2,101,000, or 17.0%, from $12,363,000 for the
year ended December 31, 1994 to $14,464,000 for the year ended December 31,
1995. The increase was primarily due to a reallocation of interest-earning
assets from lower yielding investment securities to higher yielding loans.
During 1995, the Bank determined to reinvest proceeds from investment securities
into mortgage loans. As a result, the average balance of the Bank's investment
securities portfolio decreased from $15.5 million for the year ended December
31, 1994 to $11.5 for the year ended December 31, 1995, while the average
balance of loans increased from $169.3 million for the year ended December 31,
1994 to $181.6 million for the year ended December 31, 1995. Interest on
investment securities decreased from $2,382,000 for the year ended December 31,
1994 to $1,986,000 for the year ended December 31, 1995, a decrease of $396,000
or 16.6%. The decrease reflected the previously discussed lower average balance
of securities during the year ended December 31, 1995.
INTEREST EXPENSE
Interest on deposits increased by $1,344,000, or 15.6%, from $8,635,000 for the
year ended December 31, 1994 to $9,979,000 for the year ended December 31, 1995.
The increase was attributable to higher average rates paid on deposit accounts,
which increased from an average rate of 4.20% for the year ended December 31,
1994, to 4.91% for the year ended December 31, 1995. The interest on borrowings
increased by $22,000, or 29.9%, because of a higher average balance in
borrowings in 1995.
NONINTEREST INCOME
Total noninterest income increased by $299,000, or 27.5%, from $1,087,000 for
the year ended December 31, 1994 to $1,386,000 for the year ended December 31,
1995. The increase was attributable to the net gains (losses) on loan sales
which increased $334,000, or 503.8% from ($66,000) for the year ended December
31, 1994 to $268,000 for the year ended December 31, 1995.
NONINTEREST EXPENSE
Total noninterest expenses increased by $905,000, or 17.0%, from $5,308,000 for
the year ended December 31, 1994 to $6,213,000 for the year ended December 31,
1995 primarily due to increased costs related to the May 1995 merger with
Fairbury Federal. Legal, accounting and other expenses of $124,000 were
incurred in connection with the merger. In addition, the merger resulted in
$355,000 of expenses related to retirement benefits under the Bank's Directors
Emeritus retirement plan. Such funding expense caused, in part, the expense for
salaries and employee benefits to increase from $2,799,000 for the year ended
December 31, 1994 to $3,445,000 for the year ended December 31, 1995. The
opening of a new branch facility, the introduction of a new checking product and
the customer relations expense related to the merger with Fairbury Federal also
contributed to the increase in other noninterest expense.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased from $81,000 for the year ended
December 31, 1994 to $124,000 for the year ended December 31, 1995, an increase
of $43,000 or 53.1%. The increase was due to changes in and the continued
growth of the loan portfolio and management's evaluation of this loan portfolio.
There was an increase in both commercial and construction and land loans, which
increased from 2.24% and 2.86% of total loans, respectively, at December 31,
1994 to 3.58% and 6.44% of total loans respectively at December 31, 1995. Such
loans generally bear a greater degree of risk as compared to one-to-four family
loans.
9
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEET
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------
At
December 31,
1996 1996
------------ --------------------------------------
Average Average
Yield/Cost Balance Interest Yield/Cost
------------ -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
ASSETS
Interest-earning deposits 6.50% $5,159 $227 4.40%
Investment securities (1) 5.26 10,635 543 5.11
Loans receivable (2) 8.23 203,037 16,230 7.99
Mortgage-backed securities (3) 6.49 17,502 1,207 6.90
FHLB stock 7.00 1,665 113 6.76
-------- -------
Total interest-earning assets 7.99 237,998 18,320 7.70
-------
Non-interest earning assets 11,687
--------
Total assets $249,685
--------
--------
LIABILITIES & EQUITY
Interest-bearing liabilities:
Money market savings accounts 3.00 $10,440 254 2.43
Passbook accounts 2.25 18,163 447 2.46
NOW accounts 2.00 14,534 343 2.36
Certificates accounts 5.85 155,937 9,107 5.84
-------- -------
Total interest-bearing deposits 5.08 199,074 10,151 5.10
-------- -------
FHLB advances 5.99 8,099 315 3.89
-------- -------
Total interest-bearing liabilities 5.15 207,173 10,466 5.05
-------
Non-interest bearing liabilities 11,472
--------
Total liabilities 218,644
Equity 31,041
--------
Total liabilities & equity $249,685
--------
--------
Net interest rate spread (4) 2.84 $7,854 2.65%
------- ------
------- ------
Net interest margin (5) 3.30%
------
------
Ratio of interest earning assets to
interest-bearing liabilities 115.37% 114.88%
------ ------
------ ------
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------------------------------
1995 1994
-------------------------------------- --------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
-------- -------- ---------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning deposits $3,257 $249 7.65% $5,274 $258 4.89%
Investment securities (1) 11,496 670 5.83 15,460 690 4.46
Loans receivable (2) 181,638 14,464 7.96 169,270 12,363 7.30
Mortgage-backed securities (3) 20,329 1,207 5.94 22,099 1,557 7.05
FHLB stock 1,636 109 6.66 1,609 95 5.90
-------- ------- -------- -------
Total interest-earning assets 218,356 16,699 7.65 213,712 14,963 7.00
------- -------
Non-interest earning assets 9,437 13,931
-------- --------
Total assets $227,793 $227,643
-------- --------
-------- --------
LIABILITIES & EQUITY
Interest-bearing liabilities:
Money market savings accounts $10,127 173 1.71 $13,607 363 2.67
Passbook accounts 18,342 382 2.08 20,656 550 2.66
NOW accounts 16,318 444 2.72 17,295 350 2.02
Certificates accounts 158,328 8,980 5.67 154,198 7,372 4.78
-------- ------- -------- -------
Total interest-bearing deposits 203,115 9,979 4.91 205,756 8,635 4.20
-------- ------- -------- -------
FHLB advances 1,346 98 7.28 788 76 9.64
-------- ------- -------- -------
Total interest-bearing liabilities 204,461 10,077 4.93 206,544 8,711 4.22
------- -------
Non-interest bearing liabilities 8,679 7,522
-------- --------
Total liabilities 213,140 214,066
Equity 14,652 13,577
-------- --------
Total liabilities & equity $227,792 $227,643
-------- --------
-------- --------
Net interest rate spread (4) $6,622 2.72% $6,252 2.78%
------- ------ ------- ------
------- ------ ------- ------
Net interest margin (5) 3.03% 2.93%
------ ------
------ ------
Ratio of interest earning assets to
interest-bearing liabilities 106.80% 103.47%
------ ------
------ ------
</TABLE>
(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.
10
<PAGE>
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 proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
DECEMBER 31, 1996 December 31, 1995
COMPARED TO YEAR ENDED Compared to Year Ended
DECEMBER 31, 1995 December 31, 1994
------------------------------------ ------------------------------------
INCREASE (DECREASE) Increase (Decrease)
DUE TO Due to
--------------------- ---------------------
VOLUME RATE NET Volume Rate Net
------ ------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits $ 110 $(132) $ (22) $(122) $ 113 $ (9)
Investment securities (48) (79) (127) (202) 182 (20)
Loans receivable 1,712 54 1,766 939 1,162 2,101
Mortgage-backed securities (180) 180 -- (118) (232) (350)
FHLB stock 2 2 4 2 12 14
------ ----- ------ ----- ------ ------
Total change in interest
income 1,596 25 1,621 499 1,237 1,736
------ ----- ------ ----- ------ ------
Interest-bearing liabilities:
Money market deposit accounts 5 76 81 (79) (111) (190)
Savings accounts (4) 69 65 (57) (111) (168)
NOW accounts (46) (55) (101) (19) 113 94
Certificate accounts (138) 265 127 202 1,406 1,608
FHLB advances 282 (65) 217 45 (23) 22
------ ----- ------ ----- ------ ------
Total change in interest
expense 99 290 389 92 1,274 1,366
------ ----- ------ ----- ------ ------
Net change in net interest
income $1,497 $(265) $1,232 $ 407 $ (37) $ 370
------ ----- ------ ----- ------ ------
------ ----- ------ ----- ------ ------
</TABLE>
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, principal and interest
payments on loans and securities, sales of loans and securities and FHLB
advances. While maturities and scheduled amortization of loans are predictable
sources of funds, deposit outflows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Bank is subject to required minimum liquidity ratios as established by the
Office of Thrift Supervision ("OTS"), the Bank's primary regulator. This ratio
is based upon a percentage of the Bank's deposits and short-term borrowings.
The Bank is currently required by the OTS to maintain a ratio of liquid assets
to total assets of 5.0%. At December 31, 1996 and 1995, the Bank's liquidity
ratios were 5.0% and 5.5% . Management of the Bank maintains its liquid assets
in accordance with regulatory requirements.
At December 31, 1996, the Bank exceeded all of its regulatory capital
requirements with tangible capital and core capital both at $27.6 million or
10.7% of total adjusted assets, and risk-based capital of $28.1 million or 19.9%
of total risk-weighted assets. The required ratios are 1.5% for tangible
capital, 4.0% for core capital, and 8.0% for risk-weighted capital. See the
accompanying Notes to Consolidated Financial Statements for the Bank's capital
calculations as of December 31, 1996.
The Company's most liquid assets are cash and interest-bearing demand accounts.
The levels of these assets are dependent on the Company's operating, financing,
lending and investing activities during any given period. At December 31, 1996
and 1995, cash and interest-bearing demand accounts totalled $7.0 million and
$6.6 million, respectively. Cash and interest-bearing demand accounts
represented 2.7% and 2.9% of assets at December 31, 1996 and 1995, respectively.
The Bank has other sources of liquidity if a need for additional funds arises,
including FHLB advances. At December 31, 1996, the Bank had $16.3 million in
outstanding advances with the FHLB and had a borrowing capacity of $33.2
million. At December 31, 1995, the Bank had no such advances. Depending upon
market conditions and the pricing of deposit products and FHLB borrowings, the
Bank may utilized FHLB advances to fund loan originations.
At December 31, 1996, the Bank had commitments to originate loans and unused
lines of credit totalling $13.5 million. Certificate accounts, which are
scheduled to mature in one year or less from December 31, 1996, totalled $101.6
million. The Bank anticipates that it will have sufficient funds available to
meet its current loan commitments and maturing deposits.
12
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Citizens First Financial Corp.
and Subsidiary
Normal, Illinois
We have audited the consolidated balance sheet of Citizens First Financial Corp.
and subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. 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. The consolidated statements of income and cash
flows for the year ended December 31, 1994 have been restated to reflect the
pooling of interests with Fairbury Federal Savings and Loan Association and
subsidiary as described in the notes to the consolidated financial statements.
We did not audit the consolidated statements of income and cash flows for the
year ended December 31, 1994 of Fairbury Federal Savings and Loan Association
and subsidiary, which statements reflect total revenue of $5,441,969. Those
statements were audited by other auditors, whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for Fairbury
Federal Savings and Loan Association and subsidiary, is based soley on the
report of the other auditors.
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 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, based on our audits and the report of other auditors, 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Geo. S. Olive & Co. LLC
Decatur, Illinois
January 24, 1997
13
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Fairbury Federal Savings and Loan Association
Fairbury, Illinois
We have audited the accompanying consolidated balance sheet of Fairbury Federal
Savings and Loan Association and subsidiary as of December 31, 1994, and the
related consolidated statements of income, retained earnings and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Association's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The consolidated financial statements of Fairbury Federal Savings and
Loan Association and subsidiary as of December 31, 1993, were audited by other
auditors whose report dated January 28, 1994, expressed an unqualified opinion
on those statements.
We conducted our audit 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 principals used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Fairbury Federal
Savings and Loan Association and subsidiary as of December 31, 1994, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
As discussed in the summary of significant accounting policies, the Association
adopted the provisions of Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES, on January 1, 1994. As discussed in the summary of
significant accounting policies and note 8 to the consolidated financial
statements, the Association changed its method of accounting for income taxes in
1993 to adopt the provisions of the Statement of Financial Accounting Standards
No. 109, ACCOUNTING FOR INCOME TAXES.
/s/ Clifton, Gunderson & Co.
Peoria, Illinois
January 27, 1995, except as to note 13 which is as of February 28, 1995
14
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,352,571 $ 3,196,835
Interest-bearing demand deposits 2,654,669 3,404,977
------------------------------------------
Cash and cash equivalents 7,007,240 6,601,812
Investment securities
Available for sale 28,370,953 18,886,488
Held to maturity 1,000,000 5,992,487
------------------------------------------
Total investment securities 29,370,953 24,878,975
Mortgage loans held for sale 3,027,468
Loans 211,554,298 188,773,727
Allowance for loan losses (512,096) (412,249)
------------------------------------------
Net loans 211,042,202 188,361,478
Premises and equipment 5,778,253 4,913,866
Federal Home Loan Bank stock 1,662,000 1,674,400
Foreclosed real estate 696,980
Other assets 3,051,784 2,207,123
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $261,636,880 $228,637,654
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits
Noninterest bearing $ 7,480,409 $ 7,062,111
Interest bearing 194,644,331 202,802,122
------------------------------------------
Total deposits 202,124,740 209,864,233
Federal Home Loan Bank borrowings 16,250,000
Advances by borrowers for taxes and insurance 751,430 710,291
Other liabilities 2,162,200 2,544,356
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 221,288,370 213,118,880
- ----------------------------------------------------------------------------------------------------------------------------------
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 - 2,817,500 shares
Outstanding - 2,568,611 shares 28,175
Paid-in-capital 27,023,869
Retained earnings - substantially restricted 16,294,984 15,685,404
Net unrealized loss on securities for sale (297,685) (166,630)
- ----------------------------------------------------------------------------------------------------------------------------------
43,049,343 15,518,774
Less:
Unearned employee stock ownership plan
shares - 193,200 shares (1,932,000)
Unearned incentive plan shares - 55,689 shares (768,833)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 40,348,510 15,518,774
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $261,636,880 $228,637,654
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans $16,230,490 $14,464,093 $12,362,913
Investment securities 1,862,465 1,986,355 2,382,445
Deposits with financial institutions 227,316 248,859 218,118
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest income 18,320,271 16,699,307 14,963,476
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Deposits 10,150,721 9,979,041 8,635,146
Federal Home Loan Bank borrowings 314,910 98,487 75,857
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 10,465,631 10,077,528 8,711,003
- ----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 7,854,640 6,621,779 6,252,473
Provision for loan losses 166,570 123,545 81,266
- ----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,688,070 6,498,234 6,171,207
- ----------------------------------------------------------------------------------------------------------------------------------
Noninterest Income
Loan servicing fees 626,067 539,534 551,484
Net realized gains (losses) on sales of available-for-sale securities (14,790) (18,223) 411
Net gains (losses) on loan sales 235,777 267,812 (66,316)
Other income 689,661 596,481 601,868
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,536,715 1,385,604 1,087,447
- ----------------------------------------------------------------------------------------------------------------------------------
Noninterest Expenses
Salaries and employee benefits 3,884,578 3,445,050 2,798,731
Net occupancy and equipment expenses 746,245 697,508 655,837
Deposit insurance expense 1,848,469 476,917 494,871
Data processing fees 344,798 422,653 400,946
Other expenses 1,469,628 1,170,593 957,493
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 8,293,718 6,212,721 5,307,878
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX 931,067 1,671,117 1,950,776
Income tax expense 321,487 658,572 740,254
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 609,580 $ 1,012,545 $ 1,210,522
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------------
SHARES PAID-IN RETAINED
OUTSTANDING AMOUNT CAPITAL EARNINGS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1994 $13,462,337
Net Income for 1994 1,210,522
Net change in unrealized
gain (loss) on securities
available for sale
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 14,672,859
Net income for 1995 1,012,545
Net change in unrealized
gain (loss) on securities
available for sale
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 15,685,404
Issuance of common stock 2,817,500 $28,175 $26,983,619
Employee Stock Ownership Plan shares acquired (225,400)
Employee Stock Ownership Plan shares allocated 32,200 40,250
Incentive plan shares acquired (58,600)
Incentive plan shares earned 2,911
Net income for 1996 609,580
Net change in unrealized
gain (loss) on securities
available for sale
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 2,568,611 $28,175 $27,023,869 $16,294,984
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NET UNREALIZED UNEARNED
GAIN (LOSS) ON EMPLOYEE
SECURITIES STOCK UNEARNED
AVAILABLE FOR OWNERSHIP INCENTIVE
SALE PLAN SHARES PLAN SHARES TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1994 $ 137,106 $13,599,443
Net Income for 1994 1,210,522
Net change in unrealized
gain (loss) on securities
available for sale (1,158,158) (1,158,158)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 (1,021,052) 13,651,807
Net income for 1995 1,012,545
Net change in unrealized
gain (loss) on securities
available for sale 854,422 854,422
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 (166,630) 15,518,774
Issuance of common stock 27,011,794
Employee Stock Ownership Plan shares acquired $(2,254,000) (2,254,000)
Employee Stock Ownership Plan shares allocated 322,000 362,250
Incentive plan shares acquired $(805,233) (805,233)
Incentive plan shares earned 36,400 36,400
Net income for 1996 609,580
Net change in unrealized
gain (loss) on securities
available for sale (131,055) (131,055)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $(297,685) $(1,932,000) $(768,833) $40,348,510
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $609,580 $1,012,545 $1,210,522
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 166,570 123,545 81,266
Provision for losses on foreclosed real estate 10,000
Depreciation 395,698 365,460 340,864
Deferred income tax expense (benefit) (83,408) (83,957) 25,051
Investment securities (gains) losses 14,790 18,223 (411)
Investment securities amortization, net 61,204 31,015 199,456
Net gain on sales of foreclosed real estate (20,577) (9,901)
Net (gain) loss on loan sales (235,777) (267,812) 66,316
Net gain on sales of premises and equipment (25,224) (3,455)
Federal Home Loan Bank stock dividends (24,100)
Loans originated for sale (17,924,017) (18,165,737) (9,226,278)
Proceeds from sales of loans originated for resale 15,132,326 17,897,925 9,159,962
Compensation expense related to Employee Stock
Ownership and incentive plans 398,650
Change in
Other assets (690,161) (63,399) (331,697)
Other liabilities (370,091) 1,372,113 (546,824)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (2,549,860) 2,191,789 978,326
- -----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of securities available for sale (19,841,260) (1,000,000) (11,508,460)
Proceeds from maturities and principal paydowns on
securities available for sale 4,015,489 7,017,143 16,200,765
Proceeds from sales of securities available for sale 6,043,587 5,151,966 7,131,781
Purchases of securities held to maturity (3,473,672) (3,489,532)
Proceeds from maturities and principal paydowns on
securities held to maturity 5,000,000 7,027,579 5,079,839
Redemption (purchase) of Federal Home Loan Bank stock 12,400 (76,000) 150,200
Net change in loans (23,544,274) (11,039,786) (20,216,989)
Proceeds from sales of foreclosed real estate 59,558 186,200
Purchases of premises and equipment (1,260,085) (1,738,156) (843,241)
Proceeds from sales of premises and equipment 25,224 3,455
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (29,548,919) 1,932,087 (7,309,437)
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
(continued)
</TABLE>
18
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net change in
Interest-bearing demand and savings deposits $ (757,191) $(2,738,508) $(3,531,858)
Certificates of deposit (6,982,302) 3,344,312 (1,085,154)
Net change in Federal Home Loan Bank line of credit 10,250,000
Proceeds (payments) from Federal Home Loan Bank
advances 6,000,000 (3,000,000) 3,000,000
Net change in advances by borrowers for taxes and
insurance 41,139 (91,651) 87,817
Issuance of common stock, net of offering costs 24,757,794
Purchase of stock for incentive plan (805,233)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 32,504,207 (2,485,847) (1,529,195)
- -----------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 405,428 1,638,029 (7,860,306)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,601,812 4,963,783 12,824,089
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $7,007,240 $ 6,601,812 $4,963,783
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $10,413,456 $10,039,086 $8,704,241
Income tax paid 758,383 427,736 1,150,961
Loan balances transferred to foreclosed real estate and
repossessions 696,980 38,981
</TABLE>
See notes to consolidated financial statements
19
<PAGE>
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
The accounting and reporting policies of Citizens First Financial Corp.
("Company") and its wholly owned subsidiary, Citizens Savings Bank, F.S.B.
("Bank"), conform to generally accepted accounting principles and reporting
practices followed by the banking industry. The Bank has two wholly owned
subsidiaries, CSL Service Corporation and Fairbury Financial Service
Corporation. The more significant of the policies are described below.
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 savings and loan holding company whose principal activity is
the ownership and management of the Bank. The Bank operates under a federal
thrift charter. As a federally-chartered savings bank, the Bank is subject to
regulation by the Office of Thrift Supervision 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.
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 separately
in stockholders' equity, 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.
MORTGAGE SERVICING RIGHTS
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.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of aggregate cost or
market. Net unrealized losses are recognized through a valuation allowance by
charges to income.
20
<PAGE>
LOANS
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. 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.
ALLOWANCE FOR LOAN AND REAL ESTATE LOSSES
Allowance 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, 1996, the allowance for loan losses
and the valuation of 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.
PREMISES AND EQUIPMENT
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 STOCK
Federal Home Loan Bank 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 REAL ESTATE
Foreclosed real estate is carried at the lower of cost or fair value less
estimated selling costs. When foreclosed real estate is acquired, any required
adjustment is charged to the allowance for loan losses. All subsequent activity
is included in current operations.
INCOME TAX
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 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.
21
<PAGE>
Shares are considered outstanding for earnings per share calculations when they
are committed to be released; uncommitted shares are not considered outstanding.
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
Earnings per share will be computed based upon the weighted average common and
common equivalent shares outstanding for periods subsequent to the Bank's
conversion to a stock saving bank on May 1, 1996. Earnings per share for 1996
are not meaningful.
RECLASSIFICATIONS
Reclassifications of certain amounts in the 1995 and 1994 financial statements
have been made to conform to the 1996 presentation.
22
<PAGE>
BUSINESS COMBINATION
On May 31, 1995, the Company consummated a business combination with Fairbury
Federal Savings and Loan Association ("Fairbury"). The pooling-of-interests
method of accounting for business combinations was used to account for the
transaction. Accordingly, the consolidated statements of income, equity
capital, and cash flows for the year ended December 31, 1994, of the Company and
Fairbury have been combined as if the combination had been in effect for each of
the periods presented.
Presented below is the combined condensed financial information for Citizens and
Fairbury:
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FAIRBURY
CITIZENS FEDERAL
SAVINGS SAVINGS
BANK, AND LOAN PRO FORMA
YEAR ENDED DECEMBER 31, 1994 F.S.B. ASSOCIATION COMBINED
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total interest income $ 9,758,473 $ 5,205,003 $14,963,476
Total interest expense 5,593,145 3,117,858 8,711,003
---------------------------------------------------
Net interest income 4,165,328 2,087,145 6,252,473
Provision for loan losses 45,266 36,000 81,266
---------------------------------------------------
Net interest income after provision for loan losses 4,120,062 2,051,145 6,171,207
Total other income 850,481 236,966 1,087,447
Total other expenses (3,697,914) (1,609,964) (5,307,878)
---------------------------------------------------
Income before income tax 1,272,629 678,147 1,950,776
Income tax expense 500,463 239,791 740,254
---------------------------------------------------
NET INCOME $ 772,166 $ 438,356 $ 1,210,522
---------------------------------------------------
---------------------------------------------------
</TABLE>
CONVERSION TO STOCK OWNERSHIP
On May 1, 1996, the Bank consummated its conversion from a federally chartered
mutual savings bank to a federally chartered stock savings bank pursuant to the
Bank's Plan of Conversion. Concurrent with the formation of the Company, the
Company acquired 100% of the stock of the Bank and issued 2,817,500 shares of
Company common stock, with $.01 par value, at $10.00 per share. Net proceeds of
the Company's stock issuance, after costs and Employee Stock Ownership Plan
shares, were approximately $24.8 million.
23
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
1996
-----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Federal agencies $ 4,220,546 $ 32,269 $ 4,188,277
Mortgage-backed securities 23,568,989 $ 3,048 457,351 23,114,686
Other asset-backed securities 67,990 67,990
Marketable equity securities 1,000,000 1,000,000
-----------------------------------------------------------------------
Total available for sale 28,857,525 3,048 489,620 28,370,953
-----------------------------------------------------------------------
Held to maturity
Federal agencies 1,000,000 8,750 991,250
-----------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES $29,857,525 $ 3,048 $498,370 $29,362,203
-----------------------------------------------------------------------
-----------------------------------------------------------------------
<CAPTION>
1995
-----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Federal agencies $ 15,102 $ 15,102
Mortgage-backed securities 17,548,588 $ 1,643 $261,418 17,288,813
Other asset-backed securities 595,158 12,585 582,573
Marketable equity securities 1,000,000 1,000,000
-----------------------------------------------------------------------
Total available for sale 19,158,848 1,643 274,003 18,886,488
-----------------------------------------------------------------------
Held to maturity
U.S. Treasury 3,993,970 11,866 1,148 4,004,688
Federal agencies 1,998,517 13,468 17,310 1,994,675
-----------------------------------------------------------------------
Total held to maturity 5,992,487 25,334 18,458 5,999,363
-----------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES $25,151,335 $26,977 $292,461 $24,885,851
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of securities held to maturity and available
for sale at December 31, 1996, by contractual maturity, are shown below.
Expected maturities will differ from the contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
24
<PAGE>
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
---------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year $1,000,000 $991,250 $1,000,350 $1,000,350
One to five years 4,220,196 4,187,927
---------------------------------------------------------------------------
1,000,000 991,250 5,220,546 5,188,277
Mortgage-backed securities 23,568,989 23,114,686
Other asset-backed securities 67,990 67,990
---------------------------------------------------------------------------
Totals $1,000,000 $991,250 $28,857,525 $28,370,953
---------------------------------------------------------------------------
---------------------------------------------------------------------------
</TABLE>
Securities with a carrying value of $7,045,920 and $8,464,410 were pledged at
December 31, 1996 and 1995 to secure certain deposits and for other purposes as
permitted or required by law.
Proceeds from sales of securities available for sale during 1996, 1995 and 1994
were $6,043,587, $5,151,966, and $7,131,781. Gross gains of $18,460, $3,995
and $65,553 and gross losses of $33,250, $22,218 and $65,142 were realized on
those sales.
There were no sales of securities held to maturity.
On December 31, 1995, the Bank transferred certain securities from held to
maturity to available for sale in accordance with a transition reclassification
allowed by the Financial Accounting Standards Board. Such securities had a
carrying value of $595,158 and a fair value of $582,573. There were no
securities transferred between classifications during 1996 or 1994.
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, 1996.
LOANS AND ALLOWANCE
DECEMBER 31 1996 1995
- --------------------------------------------------------------------------------
Mortgage loans
One-to-four family $161,733,148 $141,707,473
Multi-family 12,520,321 10,469,462
Commercial real estate 8,933,859 8,679,318
Construction and land 12,488,375 12,353,378
Commercial 8,062,797 6,864,703
Consumer and other loans 11,444,080 11,718,712
------------ ------------
215,182,580 191,793,046
Undisbursed portion of loans (3,396,908) (2,858,939)
Deferred premium on sale of loans 33,895 39,395
Deferred loan fees (265,269) (199,775)
------------ ------------
Total loans $211,554,298 $188,773,727
------------ ------------
------------ ------------
25
<PAGE>
YEAR ENDED DECEMBER 31 1996 1995 1994
- --------------------------------------------------------------------------------
Allowance for Loan Losses
Balances, January 1 $412,249 $352,752 $388,488
Provision for loan losses 166,570 123,545 81,266
Loans charged off (66,723) (64,048) (117,002)
-------------------------------------
Balances, December 31 $512,096 $412,249 $352,752
-------------------------------------
-------------------------------------
The Company adopted SFAS No. 114 and No. 118 ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN AND ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN -
INCOME RECOGNITION AND DISCLOSURES on January 1, 1995. The Company's loan
portfolio consists primarily of smaller balance, homogeneous loans which are
principally one-to-four family residential loans. The Company did not have any
loans it considered impaired at December 31, 1996 and 1995 or during the years
then ended.
The Bank has entered into transactions with certain directors, executive
officers, 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 amount of loans, as
defined, to such related parties was as follows:
1996
----------
Balance, January 1, 1996 $1,874,488
Changes in composition of related parties (133,668)
New loans, including renewals 300,600
Payments, including renewals (293,188)
----------
Balance, December 31, 1996 $1,748,232
----------
----------
LOAN SERVICING
Mortgage 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 $80,575,000, $82,857,000 and $80,474,000 at December 31, 1996,
1995 and 1994.
26
<PAGE>
In 1995, the Company adopted SFAS No. 122, ACCOUNTING FOR MORTGAGE SERVICING
RIGHTS. This Statement requires the capitalization of retained mortgage
servicing rights on originated or purchased loans by allocating the total cost
of the mortgage loans between the mortgage servicing rights and the loans
(without the servicing rights) based on their relative fair values. SFAS No.
122 was superseded during 1996 by SFAS No. 125, ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES. SFAS No. 125
(as did SFAS No. 122) requires the assessment of impairment of capitalized
mortgage servicing rights and requires that impairment be recognized through a
valuation allowance based on the fair value of those rights. The aggregate fair
value of capitalized mortgage servicing rights at December 31, 1996 totaled
$217,246. 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.
1996 1995
-------- --------
Mortgage Servicing Rights
Balances, January 1 $123,000 $ 0
Servicing rights capitalized 134,377 131,754
Amortization of servicing rights (40,131) (8,754)
-------- --------
Balances, December 31 $217,246 $123,000
-------- --------
-------- --------
PREMISES AND EQUIPMENT
DECEMBER 31 1996 1995
- --------------------------------------------------------------------------------
Land $1,668,030 $1,636,461
Buildings and land improvements 4,483,104 4,363,907
Furniture and equipment 2,739,893 2,453,477
Deposit on purchase of new building 768,750
---------- ----------
Total cost 9,659,777 8,453,845
Accumulated depreciation (3,881,524) (3,539,979)
---------- ----------
Net $5,778,253 $4,913,866
---------- ----------
---------- ----------
The Bank purchased an existing building located in Bloomington, Illinois in
January 1997, for a total purchase price of $3,000,000. The deposit of $768,750
paid during 1996, is shown as a component of premises and equipment as of
December 31, 1996.
27
<PAGE>
OTHER ASSETS AND OTHER LIABILITIES
DECEMBER 31 1996 1995
- --------------------------------------------------------------------------------
Other assets
Interest receivable
Investment securities $ 104,598 $ 94,136
Mortgage-backed securities 157,497 105,377
Loans 1,635,919 1,578,066
Current income taxes receivable 361,500 8,012
Deferred income tax benefit 154,500
Prepaid expenses and other assets 637,770 421,532
---------- ----------
Total $3,051,784 $2,207,123
---------- ----------
---------- ----------
Other liabilities
Interest payable
Deposits $ 67,489 $ 100,722
FHLB borrowings 85,408
Deferred income tax liability 12,065
Accrued expenses and other liabilities 2,009,303 2,431,569
---------- ----------
Total $2,162,200 $2,544,356
---------- ----------
---------- ----------
DEPOSITS
DECEMBER 31 1996 1995
- --------------------------------------------------------------------------------
Demand deposits $ 32,905,642 $ 31,849,169
Savings deposits 16,571,001 18,344,141
Certificates of deposit of $100,000 or more 16,406,832 17,694,000
Other certificates of deposit 136,241,265 141,976,923
------------ -----------
Total deposits $202,124,740 $209,864,233
------------ -----------
------------ -----------
28
<PAGE>
Certificates of deposit maturing in years ending December 31:
1997 $101,613,018
1998 35,890,689
1999 8,003,362
2000 4,655,516
2001 2,313,380
Thereafter 172,132
------------
Total $152,648,097
------------
------------
FEDERAL HOME LOAN BANK BORROWINGS
DECEMBER 31 1996
- --------------------------------------------------------------------------------
Federal Home Loan Bank ("FHLB") advances:
5.81%, due November 1997 $ 2,000,000
6.21%, due October 1998 2,000,000
6.43%, due October 1999 2,000,000
FHLB line of credit, variable rate,
(5.66% at December 31, 1996) 10,250,000
-----------
Total FHLB borrowings $16,250,000
-----------
-----------
The terms of a security agreement with the FHLB require the Bank to pledge as
collateral for the borrowings and for its line of credit qualifying first
mortgage loans in an amount equal to at least 170% of borrowings and all stock
in the FHLB.
INCOME TAX
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense
Currently payable
Federal $352,895 $637,529 $636,503
State 52,000 105,000 78,700
Deferred
Federal (83,408) (83,957) 25,051
-------- -------- --------
Total income tax expense $321,487 $658,572 $740,254
-------- -------- --------
-------- -------- --------
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $316,563 $568,180 $663,264
Effect of state income taxes 34,320 69,300 51,942
Other (29,396) 21,092 25,048
-------- -------- --------
Actual tax expense $321,487 $658,872 $740,254
-------- -------- --------
-------- -------- --------
Effective Tax Rate 34.5% 39.4% 37.9%
-------- -------- --------
-------- -------- --------
</TABLE>
29
<PAGE>
A cumulative net deferred tax asset (liability) is included in assets
(liabilities). The components are as follows:
DECEMBER 31 1996 1995
- --------------------------------------------------------------------------------
Differences in depreciation methods $(317,576) $(235,505)
Deferred loan fees 29,572 42,746
FHLB stock dividends (75,132) (75,693)
Directors' deferred compensation 372,824 288,895
Differences in accounting for loan losses 15,982 (88,132)
Capitalized mortgage servicing rights (84,335) (47,749)
Net unrealized losses on securities available
for sale 188,887 105,730
Other 24,278 (2,357)
--------- ---------
$154,500 $(12,065)
--------- ---------
--------- ---------
Assets $631,543 $437,371
Liabilities (477,043) (449,436)
--------- ---------
$154,500 $(12,065)
--------- ---------
--------- ---------
The income tax expense (benefit) attributed to net gains or losses on sales of
securities available for sale during 1996, 1995 and 1994 was approximately
$(5,000), $(6,200), and $140.
Retained earnings at December 31, 1996 and 1995, include approximately
$2,144,000 and $2,021,000 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 amounts was
approximately $832,000 and $763,000 at December 31, 1996 and 1995.
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.
30
<PAGE>
Financial instruments whose contract amount represents credit risk as of
December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Mortgage loan commitments
At variable rates $4,068,700 $1,814,800
At fixed rates (ranging from 7.50% to 8.50% at December 31, 1996) 2,601,300 2,381,600
Unused lines of credit 6,575,000 4,032,625
Standby letters of credit 214,000 59,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses 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.
RESTRICTION ON DIVIDENDS
The Office of Thrift Supervision ("OTS") regulations provide that a savings
association which meets fully phased-in capital requirements and is subject only
to "normal supervision" may pay out, as a dividend, 100 percent of net income to
date over the calendar year and fifty percent of surplus capital existing at the
beginning of the calendar year without supervisory approval, but with 30 days
prior notice to the OTS. Any additional amount of capital distributions would
require prior regulatory approval. A savings association meeting current
minimum capital requirements but not fully phased-in standards may, with 30 days
prior notice but without prior approval, distribute up to 75 percent of net
income if it meets the risk-based requirement on January 1, 1993. A savings
association failing to meet current capital standards may only pay dividends
with supervisory approval.
31
<PAGE>
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.
REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate actions by the regulatory agencies that, if undertaken, could have a
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
At December 31, 1996, the management believes that it meets all capital adequacy
requirements to which it is subject. The most recent notification from the
regulatory agency categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. There have been no conditions or events
since that notification that management believes have changed this
categorization.
The Bank's actual and required capital amounts (in thousands) and ratios are as
follows:
<TABLE>
<CAPTION>
1996
----------------------------------------------------------
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL CAPITALIZED
----------------------------------------------------------
DECEMBER 31 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital(1) (to risk-weighted assets) $28,122 19.91% $11,301 8.0% $14,258 10.0%
Core capital(1) (to adjusted tangible assets) 27,627 10.70 10,333 4.0 15,499 6.0
Core capital(1) (to adjusted total assets) 27,627 10.70 7,746 3.0 12,918 5.0
</TABLE>
(1) As defined by regulatory agencies
The Bank's tangible capital at December 31, 1996 was $27,627,000, which amount
was 10.70% of tangible assets and exceeded the required ratio of 1.5 percent.
32
<PAGE>
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 $124,297, $142,568, and $184,354 for the years ended
December 31, 1996, 1995, and 1994, respectively.
In connection with the conversion, the Bank established an employee stock
ownership plan ("ESOP") 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 Bank contributions exceed the minimum
debt service requirements, additional principal payments will be made.
During 1996, 32,300 shares of stock with an average fair value of $11.25 per
share were committed to be released, resulting in ESOP compensation expense of
$362,250. Shares held by the ESOP at December 31 are as follows:
1996
----------
Allocated shares 32,200
Unallocated shares 193,200
----------
Total ESOP shares 225,400
----------
----------
Fair value of unallocated shares at December 31 $2,777,250
----------
----------
During 1996, the Company implemented 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 $3,274 for
1996.
33
<PAGE>
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. None of these shares have been distributed nor
were any forfeited during 1996. For the year ended December 31, 1996, $36,400
was recorded as compensation expense under the plan.
Under the Company's stock option plan, which is accounted for in accordance with
Accounting Principles Board Opinion (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 and become fully
exercisable at the end of five years of continued employment. During 1996, the
Company authorized the grant of options of 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
which vest over five years. 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. No options were exercisable, forfeited or
had expired at December 31, 1996 or for the year then ended. The options
outstanding at December 31, 1996, have a weighted average exercise price of
$12.30 and a weighted average contractual maturity of 9.8 years.
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 granted was estimated on the grant date using an option-pricing
model with the following assumptions:
1996
-------
Risk-free interest rates 7.00%
Dividend yields 2.50%
Volatility factors of expected market price of common stock 12.00%
Weighted-average expected life of the options 9 years
Under SFAS No. 123, compensation cost would be recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The weighted average fair value of the options granted during
1996 was $4.91 per option. Accordingly, the pro forma effect of SFAS No. 123
for 1996 would have been to reduce net income from $609,580 to $492,464.
34
<PAGE>
The Bank also maintains a Director Emeritus Retirement Plan, which provides
retirement benefits to members of the Bank's Board of Directors who retire
(generally defined as retirement upon or after attaining the age of sixty-five),
and are appointed as a Director Emeritus. The plan provides that, in
consideration for services and consultation rendered as a Director Emeritus, the
Director Emeritus will receive annual cash benefits equal to the annual
director's fees received at the time of retirement. Payments under the plan are
through the Bank's purchase of a single premium insurance annuity for each
covered Director Emeritus. Currently, there are seven Directors Emeritus. The
expense recorded related to this plan was $240,000, $504,000 and $66,994 for the
years ended December 31, 1996, 1995 and 1994. A payment of $121,070 was made
during the year ended December 31, 1995 under the plan to purchase an annuity
contract for a retired director. There were no annuity contract purchases under
the plan during the years ended December 31, 1996 and 1994.
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.
INVESTMENT SECURITIES - Fair values are based on quoted market prices.
MORTGAGE LOAN 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 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 NOW, money market deposit 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.
35
<PAGE>
FEDERAL HOME LOAN BANK 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 ITEMS - COMMITMENTS - Commitments include commitments to
purchase and originate mortgage loans, commitments to sell mortgage loans and
standby letters of credit and are generally of a short-term nature. The fair
value of such commitments is based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the counterparties' credit standing.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $7,007,240 $7,007,240 $6,601,812 $6,601,812
Investment securities available for sale 28,370,953 28,370,953 18,886,488 18,886,488
Investment securities held to maturity 1,000,000 991,250 5,992,487 5,999,363
Mortgage loans held for sale 3,027,468 3,027,468
Loans, net 211,042,202 215,504,000 188,361,478 191,639,624
Interest receivable 1,898,014 1,898,014 1,777,579 1,777,579
Federal Home Loan Bank stock 1,662,000 1,662,000 1,674,400 1,674,400
Residential mortgage loan servicing 217,246 217,246 123,000 123,000
LIABILITIES
Deposits 202,124,740 203,128,000 209,864,233 211,708,235
FHLB borrowings 16,250,000 16,250,000
Interest payable 152,897 152,897 100,722 100,722
Advanced payments by borrowers for
taxes and insurance 751,430 751,430 710,291 710,291
OFF-BALANCE SHEET ITEMS
Commitments 0 0 0 0
</TABLE>
36
<PAGE>
STOCK LISTING AND PRICE INFORMATION
Citizens First Financial Corp. completed its public offering on May 1, 1996.
The Company's common stock trades on the American Stock Exchange under the
symbol "CBK." Shares of common stock were made available to qualified
subscribers at $10.00 per share during the initial public offering.
At December 31, 1996, 2,817,500 shares of the Company's common stock were held
of record by 623 persons or entities, not including the number of person or
entities holding stock in nominee or street name through various brokers or
banks.
On May 1, 1996, the first day of trading in the Company's common stock, the high
and low sales prices were $10.625 and $10.25, respectively. During the quarter
ended December 31, 1996, the high and low sales prices were $14.625 and $11.875,
respectively. At December 31, 1996 the closing price of a common share was
$14.875. Such prices do not necessarily reflect retail markups, markdowns or
commissions.
The Company had paid no dividends since the initial public offering.
37
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,352
<INT-BEARING-DEPOSITS> 2,655
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,371
<INVESTMENTS-CARRYING> 1,000
<INVESTMENTS-MARKET> 991
<LOANS> 214,582
<ALLOWANCE> 512
<TOTAL-ASSETS> 261,637
<DEPOSITS> 202,125
<SHORT-TERM> 12,250
<LIABILITIES-OTHER> 2,914
<LONG-TERM> 4,000
0
0
<COMMON> 28
<OTHER-SE> 40,321
<TOTAL-LIABILITIES-AND-EQUITY> 261,637
<INTEREST-LOAN> 16,927
<INTEREST-INVEST> 1,862
<INTEREST-OTHER> 227
<INTEREST-TOTAL> 19,016
<INTEREST-DEPOSIT> 10,151
<INTEREST-EXPENSE> 10,466
<INTEREST-INCOME-NET> 8,550
<LOAN-LOSSES> 167
<SECURITIES-GAINS> (15)
<EXPENSE-OTHER> 8,294
<INCOME-PRETAX> 931
<INCOME-PRE-EXTRAORDINARY> 610
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 610
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.18
<LOANS-NON> 198
<LOANS-PAST> 369
<LOANS-TROUBLED> 463
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 412
<CHARGE-OFFS> 74
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 512
<ALLOWANCE-DOMESTIC> 17
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 495
</TABLE>
