<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, 1997
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)
2101 NORTH VETERANS PARKWAY, BLOOMINGTON, ILLINOIS 61704
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (309) 661-8700
Securities registered pursuant to Section 12(g) of the Act: None
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK PAR VALUE $0.01 PER SHARE
(Title of class)
AMERICAN STOCK EXCHANGE
(Name of exchange on which registered)
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, 1997 were
$22,284,000.
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 $48,310,316 and is based upon the last sales price as
quoted on The American Stock Exchange for March 10, 1998.
The Registrant had 2,535,750 shares of Common Stock outstanding as of
March 10, 1998.
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, 1997, ARE INCORPORATED BY REFERENCE INTO PART II OF THIS FORM 10-KSB.
PORTIONS OF THE PROXY STATEMENT FOR THE 1998 ANNUAL MEETING OF SHAREHOLDERS
ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-KSB.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I
Item 1 Description of Business ............................... 1
Item 2 Properties ............................................ 44
Item 3 Legal Proceedings ..................................... 44
Item 4 Submission of Matters to a Vote of Security Holders ... 44
PART II
Item 5 Market for Common Equity and
Related Stockholder Matters............................ 45
Item 6 Management's Discussion and Analysis
or Plan of Operation .................................. 45
Item 7 Financial Statements .................................. 45
Item 8 Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure ................... 45
PART III
Item 9 Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the
Exchange Act .......................................... 45
Item 10 Executive Compensation ................................ 45
Item 11 Security Ownership of Certain Beneficial Owners
and Management ........................................ 46
Item 12 Certain Relationships and Related Transactions ........ 46
Item 13 Exhibits and Reports on Form 8-K ...................... 46
SIGNATURES .............................................................. 48
</TABLE>
<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,
1997, the Company had total assets of $273.6 million, total deposits of $198.6
million and total stockholders' equity of $38.0 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, most longer-term fixed-rate one-to four-family mortgage loans it
originates as a method of controlling its growth, managing its interest rate
risk and increasing its loan servicing fee income. The Bank's revenues are
derived principally from interest on its mortgage, consumer and commercial
loans, loan servicing fees and, to a lesser extent, the interest on its
securities. The Bank's primary source of funds are deposits, principal and
interest payments on loans and securities, 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 and
Fairbury, Illinois which are part of McLean, Woodford and Livingston Counties.
On November 29, 1997, the Bank completed the sale of a branch office in Chenoa,
Illinois to another financial institution. McLean County comprises the greater
Bloomington/Normal metropolitan area and Woodford, Tazewell and Livingston
Counties are adjacent to the greater Bloomington/Normal metropolitan area. The
economy in McLean, Woodford, Tazewell and
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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, 1997, the Bank's gross loan portfolio totalled $239.6 million of
total loans outstanding, of which $157.3 million were one- to four-family,
residential mortgage loans, or 65.7% of total gross loans. At such date, the
remainder of the loan portfolio consisted of: $11.6 million of multi-family
loans, or 4.8% of total gross loans; $25.6 million of commercial real estate
loans, or 10.7% of total gross loans; $15.9 million of construction and land
loans, or 6.6% of total gross loans; $16.9 million of commercial loans, or 7.0%
of total gross loans, and $12.3 million of consumer and other loans, or 5.2% of
total gross loans. At that same date, $130.7 million, or 62.1%, 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,
----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- --------------- --------------- ----------------
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..... $157,345 65.65% $161,733 75.15% $141,708 73.87% $140,136 78.04% $120,162 75.34%
Multi-family............ 11,593 4.84 12,520 5.82 10,469 5.46 9,777 5.44 11,673 7.32
Commercial real estate.. 25,610 10.69 8,934 4.15 8,679 4.52 7,847 4.37 9,067 5.69
Construction and land... 15,862 6.62 12,489 5.80 12,353 6.44 5,131 2.86 4,208 2.64
Commercial............... 16,863 7.04 8,063 3.75 6,865 3.58 4,023 2.24 3,194 2.00
Consumer and other loans. 12,345 5.15 11,444 5.31 11,719 6.11 12,607 7.02 11,112 6.97
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
239,618 99.99 215,183 99.98 191,793 99.98 179,521 99.97 159,416 99.96
Deferred premium on sale
of loans......... 33 01 34 .02 39 .02 62 .03 81 .04
-- -- -- --- -- --- -- --- -- ---
Total gross loans...... 239,651 100.00% 215,217 100.00% 191,832 100.00% 179,583 100.00% 159,497 100.00%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
------ ------ ------ ------ ------
Less:
Undisbursed portion of
loans 9,049 3,397 2,859 2,129 2,027
Unearned interest....... -- -- -- 21 25
Deferred loan fees...... 293 265 200 171 270
Allowance for loan
losses................ 840 512 412 353 388
-------- -------- -------- -------- --------
Loans, Net: $229,469 $211,042 $188,361 $176,909 $156,787
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</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 $89.2
million, $74.6 million and $51.1 million for the years ended December 31, 1997,
1996 and 1995, respectively.
<TABLE>
<CAPTION>
At December 31, 1997
-----------------------------------------------------------------------------------------------
One- to Consumer
Four- Multi- Commercial Construction Commercial and Other Total
Family Family Real Estate and Land Loans Loans Loans
-----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less ...................... 1,614 0 344 14,325 12,590 2,307 $ 31,180
After one year:
More than one year to three years ... 2,498 0 116 158 1,798 2,582 7,152
More than three years to five years . 2,764 223 1,295 344 473 3,899 8,998
More than five years to 10 years .... 16,938 388 8,684 198 1,808 3,043 31,059
More than 10 years to 20 years ...... 52,786 5,396 10,785 770 166 507 70,410
More than 20 years .................. 80,745 5,586 4,386 67 28 7 90,819
------ ------ ------ ----- ----- ------ --------
Total due after December 31, 1998 . 15,573 11,593 25,266 1,537 4,273 10,038 208,438
Total amount due .................. $157,345 $ 11,593 $ 25,610 $ 15,862 $ 16,863 $12,345 $239,618
-------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------
Deferred premium on sale of loans......... 33
Less:
Allowance for loan losses.............. (840)
Undisbursed portion of loans........... (9,049)
Deferred loan fees..................... (293)
--------
Loans, net................................ $229,469
--------
--------
</TABLE>
4
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The following table sets forth at December 31, 1997 the dollar amount of
loans contractually due after December 31, 1998, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due After December 31, 1998
---------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family........... $67,414 $88,317 $155,731
Multi-family.................. 581 11,012 11,593
Commercial real estate........ 7,912 17,354 25,266
Construction and land......... 494 1,043 1,537
Commercial loans.................. 184 4,089 4,273
Consumer and other loans.......... 1,466 8,572 10,038
----- ----- ------
Total loans ........... $78,051 $130,387 $208,438
------- -------- --------
------- -------- --------
</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, 1997, the
Bank serviced $93.0 million of loans for others and for the years ended December
31, 1997, 1996 and 1995 had $205,000, $209,000 and $251,000, 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
5
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loans or participations secured by properties located in its primary market
area, at December 31, 1997, the Bank had $5.1 million in loans, or 2.13%, of
total gross 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 Illinois, New Mexico, Michigan,
Ohio 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, 1997, the
Bank had $418,000 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, 1997, the Bank had forward commitment contracts
outstanding which required the delivery of $3.3 million 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,
-------------------------------------------------
1997 1996 1995
------------ --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loans:
Beginning balance........................ $214,069 $188,361 $176,910
Loans originated:
One- to four-family.................. 73,342 90,084 54,683
Multi-family......................... 9,746 6,780 3,360
Commercial real estate............... 17,053 2,863 2,512
Construction and land................ 2,455 1,153 1,327
Commercial........................... 22,454 6,514 8,120
Consumer and other(1)................ 9,075 8,576 10,243
-------- -------- --------
Total loans originated............. 134,125 115,970 80,245
-------- -------- --------
Total.............................. 348,194 304,331 257,155
-------- -------- --------
Net gain on loan sales .................. 418 236 268
Less:
Principal repayments and
other, net........................... 89,172 74,602 51,100
Loan charge-offs, net.................. 188 67 64
Proceeds from sale of mortgage loans... 27,020 15,132 17,898
Transfer of mortgage loans to REO...... 369 697 --
-------- -------- --------
Loans, net(2) ............................. $231,863 $214,069 $188,361
-------- -------- --------
-------- -------- --------
</TABLE>
- ----------
(1) Consumer and other loans primarily consist of home equity loans and
lines of credit secured by mortgages, automobile and personal loans.
(2) Includes mortgage loans held for sale. There were no loans held for
sale at December 31, 1995.
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, 1997 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, 1997, one- to four-family mortgage loans totalled $157.3
million, or 65.7%, of total gross loans. The Bank currently offers a number of
adjustable-rate mortgage loans with
7
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terms of up to 30 years and interest rates 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 $227,150 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, 1997, the Bank's multi-family loan portfolio was $11.6 million, or 4.8%, 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
8
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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 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, 1997, was $4.4 million. The OTS, after
reviewing applications from the Bank, has approved an increase in the loan to
one borrower limit for four of the Bank's borrowers to 30.0% of the Bank's
capital, which at December 31, 1997 increased their individual loan to one
borrower limit to $8.8 million. In addition, the Bank generally requires a
debt service ratio of a maximum of 110.0% 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.
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, 1997, was $4.4 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 or five 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 110.0%. At December 31,
1997, the Bank's commercial real estate loan portfolio totalled approximately
$25.6 million or 10.7% of total loans.
9
<PAGE>
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, 1997, the Bank had $7.0 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, $4.3 million had been drawn on such
lines of credit or construction loans for the construction of 31 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, 1997 was $4.4 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.
Construction and land development financing is generally considered to
involve a higher degree of credit risk than long-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction. If the estimate of value proves to be
inaccurate, the Bank may be confronted with a project, when completed, having a
value which is insufficient to assure full repayment.
Commercial Lending. The Bank offers commercial loans to businesses
operating in the Bank's primary market area on a selective basis. Such loans are
generally offered with terms up to 15 years in amounts up to $700,000 and are
generally secured by receivables, inventories, equipment and other assets of the
business. The Bank generally requires personal guarantees on its commercial
10
<PAGE>
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, 1997, the Bank had $16.9 million of commercial loans, of which
$1.8 million, or 10.7%, were unsecured. As part of its operating strategy,
the Bank intends to increase its emphasis on secured commercial lending.
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, 1997, consumer loans amounted to $12.3 million, or 5.2%, of the
Bank's total loan portfolio of which $6.9 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 90% 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 five (5) 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 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.
11
<PAGE>
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, 1997 the Bank was servicing
$93.0 million of loans for others and for the year ended December 31, 1997, the
Bank's servicing fees totalled $205,000.
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, 1997, the Bank had $605,000 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,
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
13
<PAGE>
have been established, actual losses are 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, 1997, the Bank had no assets designated as Special
Mention, Doubtful or Loss and $1,538,000, and of assets classified as
Substandard. Assets classified as Substandard consisted of 15 one- to
four-family loans with an aggregate outstanding balance of $1,464,900 and 3
commercial asset-based loan with an aggregate outstanding balance of $33,700 and
4 consumer and other loans with an aggregate outstanding balance of $39,400.
The following table sets forth delinquencies in the Bank's loan portfolio
as of the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
----------------------------------- ------------------------------------------
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................. 8 $497 9 $782 3 $279 8 $500
Multi-family........................ -- -- -- -- -- -- -- --
Commercial real estate.............. -- -- -- -- -- -- -- --
Construction and land............... -- -- -- -- -- -- -- --
Commercial.......................... -- -- 3 34 2 5 1 14
Consumer and other loans............ 7 63 11 132 5 54 16 53
--- ----- ---- ------ ---- ----- ---- -----
Total.......................... 15 $560 23 948 10 $338 25 $567
--- ----- ---- ------ ---- ----- ---- -----
--- ----- ---- ------ ---- ----- ---- -----
Delinquent loans to total loans, net 0.41% 0.27%
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
------------------------------------
60-89 DAYS 90 DAYS OR MORE
----------------- -----------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
-------- ------- ------- --------
<S> <C> <C> <C> <C>
One- to four-family................. 5 304 16 610
Multi-family........................ -- -- -- --
Commercial real estate............. -- -- 1 100
Construction and land............... -- -- -- --
Commercial.......................... -- -- -- --
Consumer and other loans............ 12 98 37 238
--- --- --- ---
Total.......................... 17 402 54 948
--- --- --- ---
--- --- --- ---
Delinquent loans to total loans, net 0.50%
</TABLE>
14
<PAGE>
Non-Performing Assets and Restructured Loans. The following table sets
forth information regarding non-accrual loans, restructured loans and REO. At
December 31, 1997, the Bank had two restructured loans totalling $341,000, 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, 1997,
1996, 1995, 1994 and 1993, 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 $47,000, $11,000, $26,000,
$30,000 and $19,000, respectively.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
One- to four-family................. $ 647 $ 133 $178 $ 209 $ 225
Multi-family........................ 0 0 0 -- --
Commercial real estate.............. 0 0 0 -- --
Construction and land................. 0 0 0 40 --
Commercial ........................... 0 14 0 -- 71
Consumer and other loans.............. 56 51 133 81 106
------ ------ ---- ------- -------
Total non-accrual loans............. 737 198 311 330 402
Loans contractually past due 90 days or
more, other than non-accruing......... 211 369 637 209 326
------ ------ ---- ------- -------
Total non-performing loans.......... 948 567 948 539 728
Real estate owned, net(1)............... 605 697 -- 39 197
------ ------ ---- ------- -------
Total non-performing assets......... $1,553 $1,264 $948 $ 578 $ 925
------ ------ ---- ------- -------
------ ------ ---- ------- -------
Restructured loans(2)................... $ 341 $ 463 $364 $ 375 $ 400
------ ------ ---- ------- -------
------ ------ ---- ------- -------
Allowance for estimated loan
losses as a percent of loans receivable(3) 0.36% 0.24% 0.22% 0.20% 0.25%
Allowance for estimated loan losses as
a percent of non-performing loans(4). 88.61 90.30 43.46 65.49 53.30
Non-performing loans as a percent
of loans receivable(3)(4)............ 0.41 0.27 0.50 0.30 0.46
Non-performing assets as
a percent of total assets(5).......... 0.57 0.48 0.41 0.25 0.40
- ----------
(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 REO.
15
<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, 1997, the Bank's allowance for loan losses was
$840,000, or 0.36%, of total loans and 88.61% of non-performing loans as
compared to $512,000, or 0.24%, of total loans and 90.30% of non-performing
loans as of December 31, 1996. The Bank had total non-performing loans of
$948,000 and $567,000 at December 31, 1997 and December 31, 1996, respectively
and non- performing loans to total loans of .41% and 0.27%, 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.
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period......... $512 $412 $353 $388 $449
Provision ............................. 516 167 123 81 211
Charge-offs:
One- to four-family................ (106) (47) (59) (29) --
Multi-family....................... -- -- -- -- (262)
Commercial......................... -- -- -- (50) --
Commercial real estate............. (50) -- -- (3) (4)
Construction and land.............. -- -- -- -- --
Consumer........................... (32) (20) (5) (34) (6)
------- ------- ------- -------- --------
Net charge-offs................. (188) (67) (64) (116) (272)
------- ------- ------- -------- --------
Balance at end of period............... $840 $512 $412 $353 $388
------- ------- ------- -------- --------
------- ------- ------- -------- --------
Net charge-off as a percent of
average loans (net).................... 0.08% 0.03% 0.04% 0.07% 0.17%
------- ------- ------- -------- --------
------- ------- ------- -------- --------
</TABLE>
16
<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,
--------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------- ------------------------------- -------------------------------
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)
-------- --------- -------- ------- --------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family.. $332 39.52% 65.66% $170 33.21% 75.17% $150 36.41% 73.87%
Multi-family......... 61 7.26 4.84 52 10.16 5.82 32 7.77 5.46
Commercial real
estate.......... 116 13.81 10.69 36 7.03 4.15 28 6.80 4.52
Construction
and land........ 40 4.76 6.62 46 8.98 5.80 16 3.88 6.44
Commercial............... 213 25.36 7.04 68 13.28 3.75 56 13.59 3.58
Consumer and
other loans......... 78 9.29 5.15 140 27.34 5.31 130 31.55 6.11
Total allowance
---- ------ ------ ---- ------ ------ ---- ------ ------
for loan losses.... $840 100.00% 100.00% $512 100.00% 100.00% $412 100.00% 100.00%
---- ------ ------ ---- ------ ------ ---- ------ ------
---- ------ ------ ---- ------ ------ ---- ------ ------
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------
1994 1993
------------------------------ ------------------------------
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.. $102 28.90% 78.07% $125 32.22% 75.38%
Multi-family......... 20 5.67 5.44 28 7.22 7.32
Commercial real
estate.......... 22 6.23 4.37 24 6.19 5.69
Construction
and land........ 24 6.80 2.86 16 4.12 2.64
Commercial............... 69 19.55 2.24 57 14.69 2.00
Consumer and
other loans......... 116 32.85 7.02 138 35.56 6.97
--- ----- ---- --- -------- -------
Total allowance
for loan losses.... $353 100.00% 100.00% $388 100.00% 100.00%
--- ----- ---- --- -------- -------
--- ----- ---- --- -------- -------
</TABLE>
- ----------
(1) The deferred premium on sale of loans of $33,000, $34,000, $39,000,
$62,000 and $81,000 has been netted with one- to four-family mortgage
loans in computing percent of loans to total loans.
17
<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, 1997,
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
5.74%. 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 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
18
<PAGE>
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, 1997, 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, 1997, 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.
19
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
------------------------------------------------------------------------------------
MORE THAN
MORE THAN 6 MONTHS MORE THAN MORE THAN MORE THAN MORE THAN
3 MONTHS 3 MONTHS TO 1 YEAR TO 2 YEARS TO 3 YEARS TO 4 YEARS TO
OR LESS 6 MONTHS 1 YEAR 2 YEARS 3 YEARS 4 YEARS 5 YEARS
--------- ---------- ---------- ---------- --------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Short-term deposits......... $3,317 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Investment securities....... 1,002 0 0 1,246 0 1,966 1,007
Loans receivable............ 27,135 27,959 37,713 57,975 15,137 8,548 9,486
Mortgage-backed securities.. 342 336 395 1,076 985 903 828
FHLB stock.................. 2,453 0 0 0 0 0 0
------- --------- --------- --------- --------- ---------- --------
Total $34,249 $28,295 $38,108 $60,297 $16,122 $11,417 $11,321
------- --------- --------- --------- --------- ---------- --------
------- --------- --------- --------- --------- ---------- --------
INTEREST-BEARING LIABILITIES:
Money market savings........ 8,961 0 0 0 0 0 0
Passbook accounts........... 503 488 946 1,778 1,565 1,377 1,211
NOW accounts................ 459 445 863 1,623 1,428 1,257 1,106
Certificate accounts........ 22,424 20,445 53,702 35,624 12,357 2,631 1,145
------ ------ ------ ------ ------- -------- -------
32,347 21,378 55,511 39,025 15,350 5,265 3,462
FHLB advances.................. 4,200 0 2,000 9,000 8,000 0 7,969
------- ---------- ------- ------ ------- ------- -------
Total..................... $36,547 $21,378 $57,511 $48,025 $23,350 $5,265 $11,431
------- --------- --------- --------- --------- ---------- --------
------- --------- --------- --------- --------- ---------- --------
Assets minus liabilities....... (2,298) 6,917 (19,403) 12,272 (7,228) 6,152 (110)
Cumulative interest-rate
sensitivity gap.............. (2,298) 4,619 (14,784) (2,512) (9,740) (3,588) (3,698)
Cumulative interest-rate gap
as a percent of total assets. (0.84)% 1.69% (5.40)% (0.92)% (3.56)% (1.31)% (1.35)%
Cumulative interest-rate gap a
percent of total
interest-earning assets...... (0.89)% 1.79% (5.74)% (0.97)% (3.78)% (1.39)% (1.43)%
Cumulative interest-earning assets
as a percent of cumulative
interest-bearing liabilities. 93.71% 107.97% 87.19% 98.46% 94.79% 98.13% 98.18%
<CAPTION>
AT DECEMBER 31, 1997
----------------------
MORE THAN TOTAL
5 YEARS AMOUNT
--------- ----------
<S> <C> <C>
INTEREST-EARNING ASSETS:
Short-term deposits......... $ 0 $ 3,317
Investment securities....... 46 5,267
Loans receivable............ 48,749 232,702
Mortgage-backed securities.. 9,170 14,035
FHLB stock.................. 0 2,453
---------- --------
Total $57,964 $257,773
---------- --------
---------- --------
INTEREST-BEARING LIABILITIES:
Money market savings........ 0 8,961
Passbook accounts........... 8,887 16,755
NOW accounts................ 8,109 15,290
Certificate accounts........ 349 148,677
------- -------
17,345 189,683
FHLB advances.................. 2,775 33,944
------- -------
Total..................... $20,120 $223,627
------- ---------
------- ---------
Assets minus liabilities....... 37,844
Cumulative interest-rate
sensitivity gap.............. 34,146
Cumulative interest-rate gap
as a percent of total assets. 12.48%
Cumulative interest-rate gap a
percent of total
interest-earning assets...... 13.25%
Cumulative interest-earning assets
as a percent of cumulative
interest-bearing liabilities. 115.27%
</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.
20
<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,
1997, as calculated by the OTS.
<TABLE>
<CAPTION>
NPV AS % OF PORTFOLIO
NET PORTFOLIO VALUE VALUE OF ASSETS
------------------------------------------------ --------------------------------
CHANGE IN
INTEREST RATES
IN BASIS POINTS %
(RATE SHOCK) AMOUNT $ CHANGE CHANGE NPV RATIO CHANGE (1)
- ----------------------------- --------------- ------------- ------------- ------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400............. 24,752 (11,814) (32)% 9.58% (355)
300............. 28,396 (8,170) (22)% 10.76% (237)
200............. 31,770 (4,796) (13)% 11.80% (134)
100............. 34,615 (1,951) (5)% 12.62% (51)
0............... 36,566 13.13%
(100)........... 37,403 837 2% 13.28% 15
(200)........... 37,036 470 1% 13.06% (7)
(300)........... 36,727 161 0% 12.86% (27)
(400)........... 37,246 680 2% 12.91% (22)
- ---------------------
</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.
21
<PAGE>
REAL ESTATE OWNED
At December 31, 1997, the Bank had $605,000 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, 1997, the Bank's portfolio of
investment and mortgage-backed securities totaled $19.3 million, all of which
was 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.
22
<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. The Bank
has also decreased its level of investments in investment securities and
mortgage-backed securities from $29.4 million at December 31, 1996, to
$19.3 million at December 31, 1997. The Board of Directors reviews all of the
activity in the investment portfolio on a monthly basis.
At December 31, 1997, the Bank had $14.0 million in mortgage-backed
securities, or 5.1% of total assets, which were guaranteed by GNMA or insured by
either FNMA or FHLMC. Of the $14.0 million, $7.2 million had adjustable interest
rates, most of which were subject to maximum annual rate adjustments up to a
maximum interest rate of 10.83% 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, 1997 were
available for sale.
23
<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,
-------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
----------- ---------- --------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Treasuries..................... $ -- --% $ -- --% $3,994 52.62%
Federal agencies.................... 4,219 80.10 5,188 82.93 2,014 26.53
Marketable equitable securities..... 1,002 19.00 1,000 15.98 1,000 13.18
CMOs................................ 46 0.90 68 1.09 582 7.67
----------- ------- -------- ------- ------- -------
Total investment securities..... $ 5,267 100.00% $6,256 100.00% $7,590 100.00%
----------- ------- -------- ------- ------- -------
----------- ------- -------- ------- ------- -------
Investment securities available
for sale......................... $ 5,267 $5,256 $1,598
Investment securities held
to maturity...... -- 1,000 5,992
----------- -------- -------
Total investment securities..... $ 5,267 $6,256 $7,590
----------- -------- -------
----------- -------- -------
Mortgage-backed securities:
FHLMC............................... $ 5,430 38.69% $11,050 47.80% $7,254 41.96%
GNMA................................ 1,455 10.37 2,488 10.77 3,035 17.55
FNMA................................ 7,150 50.94 9,577 41.43 7,000 40.49
----------- ------- -------- ------- ------- -------
Total mortgage-backed securities.. $14,035 100.00% $23,115 100.00% $17,289 100.00%
----------- ------- -------- ------- -------
----------- ------- -------- ------- -------
Mortgage-backed securities available
for sale............................. $14,035 $23,115 $17,289
Mortgage-backed securities held to
maturity............................. -- -- --
----------- -------- -------
Total mortgage-backed securities.... $14,035 $23,115 $17,289
----------- -------- -------
----------- -------- -------
</TABLE>
24
<PAGE>
The following table sets forth the Bank's securities activities for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
1997 1996 1995
----------------- --------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance ....................................... $29,371 $24,879 $38,255
Purchases of securities available for sale............... 1,992 19,841 1,000
Purchases of securities held to maturity................. -- -- 3,474
Less:
Proceeds from maturities and principal
paydowns on securities available for sale.............. (5,342) (4,015) (7,017)
Proceeds from sales of securities
available for sale..................................... (5,996) (6,044) (5,152)
Proceeds from maturities and principal
paydowns on securities held to maturity................ (1,000) (5,000) (7,028)
Net gain (loss) on sale of securities.................... 4 (15) (18)
Amortization of premium ................................. (52) (61) (31)
Change in net unrealized gain (loss)
on securities available for sale........................ 325 (214) 1,396
-------- -------- --------
Ending balance........................................... $19,302 $29,371 $24,879
-------- -------- --------
-------- -------- --------
</TABLE>
25
<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,
---------------------------------------------------------------------------------
1997 1996 1995
------------------------- -------------------------- ------------------------
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................... $ 4,219 $ 4,219 $ 4,188 $ 4,188 $ 15 $ 15
CMOs......................................... 46 46 68 68 582 582
Marketable equity securities................. 1,002 1,002 1,000 1,000 1,000 1,000
Mortgage-backed securities:
FHLMC...................................... 5,430 5,430 11,050 11,050 7,254 7,254
GNMA....................................... 1,455 1,455 2,488 2,488 3,035 3,035
FNMA....................................... 7,150 7,150 9,577 9,577 7,000 7,000
-------- --------- ------- ------- ------- -------
Total mortgage-backed securities
available for sale.................. 14,035 14,035 23,115 23,115 17,289 17,289
-------- -------- -------- -------- ------- -------
Total investments and
mortgage-backed securities
available for sale.................. 19,302 19,302 28,371 28,371 18,886 18,886
-------- -------- -------- -------- ------- ------
Held to maturity:
U.S. Government and agency................... -- -- 1,000 991 5,992 5,999
CMOs......................................... -- -- -- -- -- --
Mortgage-backed securities:
FHLMC...................................... -- -- -- -- -- --
----------- ----------- --------- --------- --------- ---------
Total held to maturity................... -- -- 1,000 991 5,992 5,999
------------ ----------- ------- -------- ------- -------
Total investment securities.............. $19,302 $19,302 $29,371 $29,362 $24,878 $24,885
------------ ----------- ------- -------- ------- -------
------------ ----------- ------- -------- ------- -------
</TABLE>
26
<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, 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-------------------------------------------------------------------------
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........... $ -- -- % $4,219 6.22% $ -- -- %
Marketable equity securities......... 1,002 5.86 -- -- -- --
CMOs................................. 46 6.63 -- -- -- --
Mortgage-backed securities:
FHLMC............................ 133 8.11 -- -- 1,711 6.76
GNMA............................. -- -- -- 1,138 6.72
FNMA............................. 31 8.72 -- -- -- --
-------- ------- ---------
Total mortgage-backed............ 164 -- -- --
-------- ------- ---------
Total Investment Securities...... $1,212 $4,219 $2,849
-------- ------- ---------
-------- ------- ---------
</TABLE>
There were no held to maturity securities at December 31, 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-------------------------------------------------
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........... $ -- -- % $ 4,219 6.22%
Marketable equity securities......... -- -- 1,002 5.86
CMOs................................. -- -- 46 6.63
Mortgage-backed securities:
FHLMC............................ 3,586 6.41 5,430 6.56
GNMA............................. 317 7.33 1,455 6.85
FNMA............................. 7,119 6.16 7,150 6.17
--------- -------
Total mortgage-backed............ 11,022 14,035 6.39
-------- ------
Total investment securities...... $11,022 $19,302
--------- -------
--------- -------
</TABLE>
There were no held to maturity securities at December 31, 1997.
27
<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, 1997, the average balance of
core deposits (savings, NOW, money market and non-interest-bearing checking
accounts) totaled $49.5 million, or 25.0%, 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
$206.7 million for 1996 to an average balance of $198.4 million for the year
ended December 31, 1997. 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:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995
------------ ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net withdrawals.......................... $(11,024) $(16,381) $(5,956)
Interest credited on deposit accounts.... 7,532 8,642 6,562
---------- ------- --------
Total increase (decrease) in deposit
accounts................................. $ (3,492) $(7,739) $606
---------- ------- --------
---------- ------- --------
</TABLE>
28
<PAGE>
At December 31, 1997, the Bank had $15.4 million in certificate accounts in
amounts of $100,000 or more.
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,
-----------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ---------------------------- ---------------------------
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......... $9,703 4.89% 2.92% $10,440 5.05% 3.04% 10,127 4.84% 2.89%
Passbook accounts............. 16,921 8.53 2.53 18,163 8.79 2.53 18,342 8.77 2.50
NOW accounts.................. 14,930 7.53 2.02 14,534 7.03 2.02 16,318 7.81 2.02
Non-interest-bearing accounts. 7,993 4.03 -- 7,580 3.67 -- 5,906 2.83 --
------ ----- ------ ----- ------ -----
Total.................... 49,547 24.98 50,717 24.54 50,693 24.25
------ ----- ------ ----- ------ -----
Certificate accounts:
Less than six months....... 1,099 .55 4.39 1,268 0.61 4.27 3,983 1.91 4.36
Six through 12 months...... 60,864 30.68 5.44 51,923 25.13 5.47 54,136 25.90 5.63
Over 12 through 24 months.. 39,711 20.02 5.93 36,260 17.55 6.04 37,640 18.01 6.19
Over 24 months............. 47,138 23.77 6.31 66,486 32.17 6.06 62,569 29.93 6.61
------- ------ ------- ------ ------- ------
Total certificate accounts 148,812 75.02 155,937 75.46 158,328 75.75
------- ------ ------- ------ ------- ------
Total average deposits........ 198,359 100.00% $206,654 100.00% $209,021 100.00%
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
</TABLE>
29
<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, 1997.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM DECEMBER 31, 1997
----------------------------------------------------------------------------------------
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%.......... 79 84 23 -- 26 249
4.01 to 6.00%....... 76,658 21,988 2,436 971 550 --
6.01 to 8.00%....... 18,185 13,367 9,078 734 569 100
8.01 to 10.00%...... 1,649 185 820 926 -- --
----- --- --- --- ------ ------
Total........... $96,571 $35,624 $12,357 $2,631 $1,145 $349
------- ------- ------- ------ ------ ----
------- ------- ------- ------ ------ ----
<CAPTION>
AT DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Certificate accounts:
0 to 4.00%............. $ 461 $ 330 $ 2,179
4.01 to 6.00%.......... 102,603 111,729 93,144
6.01 to 8.00%.......... 42,033 36,622 60,518
8.01 to 10.00%......... 3,580 3,967 3,830
----- ----- -----
Total............... $148,677 $152,648 $159,671
-------- -------- --------
-------- -------- --------
</TABLE>
30
<PAGE>
Borrowings. At December 31, 1997, the Bank had $33,944,000 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:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995
--------------- ---------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding............. $33,858 $8,099 $1,346
------- ------ ------
------- ------ ------
Maximum amount outstanding at
any month-end during the period...... 46,067 19,550 3,500
------- ------ ------
------- ------ ------
Balance outstanding at end of period.... 33,944 16,250 --
------- ------ ------
------- ------ ------
Weighted average interest rate
during the period.................... 6,09% 6.01% 5.29%
------- ------ ------
------- ------ ------
Weighted average interest rate at end
of period........................... 6.08% 5.80% N/A
------- ------ ------
------- ------ ------
</TABLE>
SUBSIDIARY ACTIVITIES
CSL Service Corporation ("CSL") and Fairbury Financial Service Corp.
("Fairbury Financial") are wholly-owned subsidiaries of the Bank. CSL sells
tax-deferred annuities on an agency basis. Fairbury Financial is inactive.
PERSONNEL
As of December 31, 1997, the Bank had 80 authorized full-time employee
positions and 39 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.
31
<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
Office of Thrift Supervision ("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-K 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
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authorized by OTS regulation, and no multiple savings and loan holding company
may acquire more than 5% the voting stock of a company engaged in impermissible
activities.
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 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
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 as principal that are not permissible for
a national bank.
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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 at least 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 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, 1997, the
Bank met each of its capital requirements and it is anticipated that the Bank
will not be subject to the interest rate risk component.
The following table presents the Bank's capital position at December 31,
1997.
<TABLE>
<CAPTION>
EXCESS CAPITAL
---------------------------------
ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
----------------- ------------- ----------------- -------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Tangible............ $29,947 $ 4,068 $25,879 11.08 1.50%
Core (Leverage)..... 29,947 10,848 19,099 11.08 4.00
Risk-based.......... 30,770 13,316 17,454 18.49 8.00
</TABLE>
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations, the OTS is required to take certain supervisory actions against
undercapitalized institutions, the
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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
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. 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. The SAIF was undercapitalized due primarily to a
statutory requirement that SAIF members make payments on bonds issued in the
late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor
to the SAIF. As required by the Funds Act, the FDIC imposed a special assessment
of 65.7 basis points on SAIF assessable 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 was generally tax deductible. The SAIF Special Assessment
recorded by the Bank amounted to $1.37 million on a pre-tax basis and $839,000
million on an after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and Bank Insurance Fund ("BIF") members. The BIF is the fund
which primarily insures commercial bank deposits. Beginning on January 1, 1997,
BIF deposits were assessed for a FICO payment of approximately 1.3 basis points,
while SAIF deposits pay approximately 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
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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 voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members. SAIF members will also continue to make the 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 quarterly assessment rate for fiscal 1997 ranged from 1.58 to
1.63 basis points and the premium paid for this period was $101,000. A
significant increase in SAIF insurance premiums would likely have an adverse
effect on the operating expenses and results of operations of the Bank.
Under the FDI Act, 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. Various proposals to eliminate the federal thrift charter, create
a uniform financial institutions charter and abolish the OTS have been
introduced in Congress. Some bills would require federal savings institutions to
convert to a national bank or some type of state charter by a specified date
under some bills, or they would automatically become national banks. Under some
proposals, converted federal thrifts would generally be required to conform
their activities to those permitted for the charter selected and divestiture of
nonconforming assets would be required over a two year period, subject to two
possible one year extensions. State chartered thrifts would become subject to
the same federal regulation as applies to state commercial banks. A more recent
bill passed by the House Banking Committee would allow savings institutions to
continue to exercise activities being conducted when they convert to a bank
regardless of whether a national bank could engage in the activity. Holding
companies for savings institutions would become subject to the same regulation
as holding companies that control commercial banks, with some limited
grandfathering, including savings and loan holding company activities. The
grandfathering would be lost under certain circumstances such as a change in
control of the Company. The Bank is unable to predict whether such legislation
would be enacted or the extent to which the legislation would restrict or
disrupt its operations.
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,
1997, the Bank's limit on loans
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to one borrower was $4.4 million. The OTS, after reviewing application from
the Bank, has approved an increase in the loan to one borrower limit for four
of the Bank's borrowers to 30% of the Bank's capital, which at December 31,
1997 increased their individual loan to one borrower limit to $8.8 million.
At December 31, 1997, the Bank's largest aggregate outstanding balance of
loans to one borrower was $7.5 million.
QTL Test. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings and loan association is either must qualify as a
"domestic building and loan association" as defined in the Internal Revenue Code
or 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, 1997, the Bank maintained 90.41% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test. Recent
legislation has expanded the extent to which education loans, credit card loans
and small business loans may be considered "qualified thrift investments."
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, 1997, the Bank was a Tier
1 Bank.
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 was 5% for fiscal 1997, but is subject to change 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. In 1997,
OTS
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regulations also required each savings institution to maintain an average daily
balance of short-term liquid assets of at least 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 OTS has recently lowered the liquidity requirement from 5% to
4% and eliminated the 1% short term liquid asset requirement. The Bank's
liquidity ratio for December 31, 1997 was 10.4%, 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, 1997 totaled $72,000.
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 ("insiders"), 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 involve more
than the normal risk of repayment. Recent legislation created an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees. Regulation O also places individual and aggregate
limits on the amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
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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; asset quality; earnings; 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). The Federal Reserve Board
regulations generally required for most of 1997 that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$49.3 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement was 3%; and for accounts aggregating greater than $49.3
million, the reserve requirement was $1.48 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 $49.3 million. The first $4.4 million
of otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) were exempted from the reserve requirements. The Bank maintained
compliance with the foregoing requirements. For 1998, the Federal Reserve Board
has decreased from $49.3 to $47.8 million the amount of transaction accounts
subject to the 3% reserve requirement and to increase the amount of exempt
reservable balances from $4.4 million to $4.7 million. 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 1997 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 average
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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 $832,000.
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 levied a 65.7-cent fee on
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was 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 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.
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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
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 establishes standards for
computing and presenting earnings per share ("EPS") and applies to entities
with publicly held common stock or potential common stock. SFAS No. 128
simplifies previous standards for computing EPS. SFAS No. 128 is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods. Earlier application is not permitted. SFAS No. 128
requires restatement of all prior period EPS data presented. The Company
adopted SFAS 128 during the fiscal quarter ending December 31, 1997.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." SFAS No. 129 summarizes previously issued
disclosure guidance contained within Accounting Principles Board Opinions No.
10 and 15 as well as SFAS No. 47. This statement is effective for financial
statements issued for periods ending after December 15, 1997. Accordingly,
the Company adopted SFAS 129 during the fourth quarter of 1997. There
were no changes to the Company's disclosures pursuant to the adoption of SFAS
No. 129.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as "the change in
equity of a business
42
<PAGE>
enterprise during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity during
a period except those resulting from investment by owners and distributions
to owners." The comprehensive income and related cumulative equity impact of
comprehensive income items will be required to be disclosed prominently as
part of the notes to the financial statements. Only the impact of unrealized
gains or losses on securities available for sale is expected to be disclosed
as an additional component of the Company's income under the requirements of
SFAS No. 130. This statement is effective for fiscal years beginning after
December 15, 1997. The Company will adopt SFAS 130 during 1998.
Also in 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which supersedes SFAS
14, "Financial Reporting of Segments of a Business Enterprise." SFAS No.
131 establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in annual
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic area and major
customers. SFAS 131 defines operating segments as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. This standard is effective for
financial statement periods beginning after December 15, 1997 and requires
comparative information for earlier years to be restated. Due to the recent
issuance of this standard, management has been unable to fully evaluate the
impact, if any, the standard may have on the Company's future financial
statement disclosures.
In addition to historical information, this Report may include certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies
of the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or competition, changes in the
quality or composition of the Bank's loan and investment portfolios, changes
in accounting principles, policies or guidelines, and other economic,
competitive, governmental and technological factors affecting the Company's
operations, markets, products, services and prices. Further description of
the risks and uncertainties to the business are included in detail in Item 1
herein.
43
<PAGE>
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.
<TABLE>
<CAPTION>
LEASED ORIGINAL
OR YEAR LEASED NET BOOK VALUE AT DEPOSITS PER
LOCATION OWNED OR ACQUIRED DECEMBER 31, 1997 OFFICE
- ---------------------------------- --------- ------------------ ------------------- -----------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EXECUTIVE/BRANCH OFFICE:
2101 North Veterans Parkway*
Bloomington, Illinois 61704 Owned 1997 $3,257 $6,830
BRANCH OFFICES:
301 Broadway*
Normal, Illinois 61761 Owned 1963 606 60,856
2402 E. Washington*
Bloomington, Illinois 61704 Owned 1980 731 42,626
1722 Hamilton Road*
Bloomington, Illinois 61704 Owned 1995 1,347 7,421
115 N. Third Street*
Fairbury, Illinois 61739 Owned 1981 749 54,661
205 S. Main
Eureka, Illinois 61530 Owned 1974 116 26,237
------- ---------
Total $6,806 $198,633
------- ---------
------- ---------
</TABLE>
- ---------------------
* Automated teller machines are located at these offices.
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
- -----------------------------------------------------------
None.
44
<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 1997 Annual Report to
Stockholders on page 35 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
1997 Annual Report to Stockholders on pages 5 through 8 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 1997 appears in the Registrant's 1997 Annual
Report to Stockholders on pages 12 through 34 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 27, 1998 at
pages 4 through 6.
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 27, 1998 at pages 7 through
9.
45
<PAGE>
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 27, 1998 at
pages 3 through 5.
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 27, 1998 at page 11.
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 1997 Annual Report to
Stockholders
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. 12
Consolidated Balance Sheet as of December 31, 1997 and 1996.............. 13
Consolidated Statement of Income for the years ended December 31, 1997,
1996 and 1995.................... ...................................... 14
Consolidated Statement of Changes in Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995 ................................ 15
Consolidated Statement of Cash Flows for the
years ended December 31, 1997, 1996 and 1995........................... 16-17
Notes to Consolidated Financial Statements............................. 18-34
The remaining information appearing in the Annual Report to
Stockholders is not deemed to be filed as part of this report, except
as expressly provided herein.
</TABLE>
46
<PAGE>
<TABLE>
<S> <C>
(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.
(3) Exhibits
The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of Citizens First Financial Corp.*
3.2 Bylaws of Citizens First Financial Corp.*
4.0 Stock Certificate of Citizens First Financial Corp.*
10.1 Citizens Savings Bank, F.S.B. Employee Stock Ownership Plan*
10.2 Form of Employment Agreement between Citizens Savings Bank, F.S.B. and certain
executive officers*
10.3 Form of Employment Agreement between Citizens First Financial Corp. and certain
executive officers*
10.4 Form of Citizens Savings Bank, F.S.B. Supplemental Executive Retirement Plan*
10.5 Form of Change in Control Agreement between Citizens Savings Bank, F.S.B. and
certain executive officers*
10.6 Form of Citizens Savings Bank, F.S.B. Supplemental Executive Retirement Plan*
10.7 Form of Citizens Savings Bank, F.S.B. Employee Severance Compensation Plan*
10.8 Citizens First Financial Corp. 1997 Stock-Based Incentive Plan**
11.0 Computation of earnings per share
13.0 Portions of 1997 Annual Report to Stockholders (filed herewith)
21.0 Subsidiary information is incorporated herein by reference to "Part I - Subsidiaries"
23.0 Consent of Geo. S. Olive & Co., LLC
27.0 Financial Data Schedule
</TABLE>
- ----------
* Incorporated herein by reference to the Exhibits to Form SB-2,
Registration Statement, filed on January 24, 1997 and any amendments
thereto, Registration No. 333-556.
** Incorporated herein by reference to the Proxy Statement for the Special
Meeting of Shareholders held on November 12, 1997.
(b) Reports on Form 8-K:
On December 24, 1997, the Company filed a report on Form 8-K
in connection with the Company's completion of its initial
stock repurchase program and the completion date of its sale
of a branch office in Chenoa, Illinois.
On October 28, 1997, the Company filed a report on Form 8-K in
connection with the election of Ronald C. Wells as Chairman of
the Board of Directors of the Company.
47
<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 31, 1998
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.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ C. William Landefeld President, Chief Executive Officer and March 31, 1998
- ------------------------ Director (principal executive officer)
C. William Landefeld
/s/ Dallas G. Smiley Senior Vice President, Treasurer and March 31, 1998
- ------------------------ Chief Financial Officer (principal
Dallas G. Smiley accounting and financial officer)
/s/ Bryce A. Sides Director March 31, 1998
- ------------------------
Bryce A. Sides
/s/ Lyle J. Honegger Director March 31, 1998
- ------------------------
Lyle J. Honegger
/s/ Lowell M. Thompson Director March 31, 1998
- ------------------------
Lowell M. Thompson
/s/ Ronald C. Wells Director March 31, 1998
- ------------------------
Ronald C. Wells
</TABLE>
48
<PAGE>
Exhibit 11.
EARNINGS PER SHARE
Earnings per share were computed as follows
(dollar amounts in thousands except share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------
WEIGHTED
AVERAGE PER-SHARE
INCOME SHARES AMOUNT
------ ---------- ----------
<S> <C> <C> <C>
Basic Earnings Per Share
Income available to common stockholders............................ $1,889 2,397,234 $ 0.79
Effect of Dilutive Securities
Stock options...................................................... 69,402
Unearned incentive plan shares..................................... 84,746
------ ----------
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions.... $1,889 2,551,382 $ 0.74
------ ---------- -----------
------ ---------- -----------
</TABLE>
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.
<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 the Bank for the period 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
area surrounding its main and branch offices and the investment of these
deposits, together with funds generated from operations and borrowing, primarily
in one-to-four family residential mortgages. The Bank also invests in
commercial, 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 sells tax-deferred
annuities. Fairbury Financial Services Corp. is an Illinois-chartered
corporation that currently services previously sold tax deferred annuities and
long-term care insurance policies that were sold on an agency basis.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
Total assets increased from $261.6 million at December 31, 1996 to $273.6
million at December 31, 1997, an increase of $12.0 million or 4.6%. The increase
was primarily due to the growth of loans which was funded by borrowings from the
Federal Home Loan Bank of Chicago (the "FHLB") and the proceeds from sales,
principal repayment and maturities of investment securities.
Cash and cash equivalents increased from $7,007,000 at December 31, 1996 to
$7,939,000 at December 31, 1997, an increase of $932,000 or 13.3%.
Investment securities decreased from $29,371,000 at December 31, 1996 to
$19,302,000 at December 31, 1997. This represents a decline of $10.1 million or
34.4% and was the result of the Bank using the proceeds from the sale, principal
repayment and maturities of investment securities to fund the growth in loans.
Loans increased from $211.6 million at December 31, 1996 to $230.3 million at
December 31, 1997, an increase of $18.7 million or 8.8%. The increase was funded
by borrowings from the FHLB and sale, principal repayment and maturities of
investment securities. The growth in loans was primarily attributable to
increases of $16.7 million in commercial real estate loans, $3.4 million in
construction and land loans, and $8.8 million in commercial loans. These
increases were offset by a $4.4 million decline in one-to-four family mortgage
loans.
The allowance for losses increased from $512,000 at December 31, 1996 to
$840,000, an increase of $328,000 or 64.1%. The increased allowance was made
because of the Bank's increased origination of commercial loans, which generally
bear a greater degree of risk as compared to one-to-four family mortgage loans.
1
<PAGE>
Premises and equipment increased from $5,778,000 at December 31, 1996 to
$8,408,000 at December 31, 1997, an increase of $2,630,000 or 45.5%. The
increase was primarily due to the opening of a new administrative and full
service banking facility in August, 1997.
Deposits decreased from $202.1 million at December 31, 1996 to $198.6 million at
December 31, 1997. The decrease of $3.5 million or 1.8% was due to the sale of a
branch facility with $6.1 million in deposits in November, 1997.
Federal Home Loan Bank borrowings increased from $16,250,000 at December 31,
1996 to $33,944,000 at December 31, 1997, an increase of $17,694,000 or 108.9%.
The increased borrowings were primarily used to fund the increase in loans.
Total stockholders' equity decreased from $40,349,000 at December 31, 1996 to
$37,970,000 at December 31, 1997, a decrease of $2,379,000 or 5.9%. The decrease
was due to the repurchase of 10% of the Company's common stock in 1997 which
resulted in a reduction of $4,520,000 of stockholders' equity.
COMPARISON OF OPERATING RESULTS AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
GENERAL
Net income for the year ended December 31, 1997 increased by $1,279,000 or
209.7%, from $610,000 for the year ended December 31, 1996 to $1,889,000 for the
year ended December 31, 1997. The increase was primarily attributable to the
1997 sale of a branch facility which resulted in a gain of $523,000 ($320,000
after-tax) and the imposition in 1996 of a one-time special assessment by the
Federal Deposit Insurance Corporation (the "FDIC") due to legislation that was
enacted to address the disparity between the federal deposit insurance
assessments paid by the Savings Association Insurance Fund institutions and Bank
Insurance Fund institutions. The special assessment resulted in the Bank
experiencing a charge to expense of $1.37 million ($839,000 after-tax) in 1996.
INTEREST INCOME
Interest on loans increased from $16,230,000 for the year ended December 31,
1996 to $18,395,000, an increase of $2,165,000 or 13.3%. The increase was due to
a higher average balance of loans in 1997. The increase was funded by the
decrease in investment securities and by borrowings from the FHLB.
Interest from investment securities and deposits with financial institutions
decreased from $2,090,000 for the year ended December 31, 1996 to $1,906,000 for
the year ended December 31, 1997. This decrease of $184,000 or 8.8% was due to
lower average balances of these assets in 1997.
INTEREST EXPENSE
Interest on deposits decreased from $10,151,000 for the year ended December 31,
1996 to $9,672,000 for the year ended December 31, 1997. The decrease of
$479,000 or 4.7% was caused by a decrease in the average balance of deposits.
Interest on borrowings increased from $315,000 for the year ended December 31,
1996 to $2,062,000, an increase of $1,747,000 or 554.6%. The increase was caused
by an increase in borrowings from the FHLB.
NONINTEREST INCOME
Total noninterest income increased from $1,169,000 for the year ended December
31, 1996 to $1,983,000, an increase of $814,000 or 69.6%. The increase was
primarily attributable to the $523,000 net gain on the sale of a branch facility
in 1997 and increased net gains on loan sales, which increased from $236,000 for
the year ended December 31, 1996 to $418,000 for the year ended December 31,
1997.
2
<PAGE>
NONINTEREST EXPENSE
Total noninterest expense decreased from $7,926,000 for the year ended December
31, 1996 to $6,946,000 for the year ended December 31, 1997. The decrease was
attributable to deposit insurance expense decreasing from $1,848,000 for the
year ended December 31, 1996 to $101,000 for the year ended December 31, 1997.
The decrease was due to the previously discussed 1996 one-time special
assessment by the FDIC of $1.37 million. Salary and employee benefits increased
from $3,516,000 for the year ended December 31, 1996 to $4,063,000 for the year
ended December 31, 1997. The increase of $547,000 or 15.6% was primarily
attributable to the increased expenses of the employee stock ownership and
incentive plans and the cost of staffing the new branch facility. Net occupancy
expense increased from $746,000 for the year ended December 31, 1996 to $932,000
for the year ended December 31, 1997, an increase of $186,000 or 24.9%. The
addition of the new administrative and branch facility was primarily responsible
for this increase.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased from $167,000 for the year ended
December 31, 1996 to $516,000 for the year ended December 31, 1997, an increase
of $349,000 or 209.0%. Management increased the provision as a result of an
increase in commercial real estate and commercial loans, which increased from
4.2% and 3.8% of total loans respectively, at December 31, 1996 to 10.7% and
7.0% respectively at December 31, 1997. Such loans generally bear a greater
degree of risk as compared to one-to-four family mortgage 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 90.3%, respectively, at
December 31, 1996, compared to 0.36% and 88.6%, respectively, at December 31,
1997.
COMPARISON 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 FDIC
special assessment of $839,000, net of tax, incurred by the Bank. 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, 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.
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 in 1996.
3
<PAGE>
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.
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.
NONINTEREST INCOME
Total noninterest income increased by $24,000, or 2.1%, from $1,145,000 for the
year ended December 31, 1995 to $1,169,000 for the year ended December 31, 1996.
A decrease in loan servicing fees was offset by increased other noninterest
income which was attributable to increases in checking account fees which
increased by $66,000.
NONINTEREST EXPENSE
Total noninterest expense increased from $5,972,000 for the year ended December
31, 1995 to $7,926,000 for the year ended December 31, 1996, an increase of
$1,954,000 or 32.7%. Deposit insurance expense 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 FDIC one-time
special assessment of $1.37 million in 1996. Salaries and employee benefit
expenses increased from $3,204,000 for the year ended December 31, 1995 to
$3,516,000 for the year ended December 31, 1996, an increase of $312,000 or
9.7%. The increase was due primarily to the implementation of the employee stock
ownership and incentive plans. 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 admininstrative 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.
YEAR 2000 ISSUES
Many computer programs use only two digits to identify a year in the date field,
and therefore do not consider the impact of the upcoming change in the century.
These programs if not corrected, could fail or cause erroneous results by or at
the year 2000. The Company primarily utilizes a third party data processing
service provider and the provider's proprietary software to process its
electronic transactions. This provider is in the process of modifying its
computer software applications to permit correct processing of transactions for
and after the year 2000. In the event that this provider would not be able to in
a timely manner achieve year 2000 compliance, the Company's business or
operations could be adversely affected. In addition, the Board of Directors of
the Company has formed a management committee to identify, evaluate and monitor
all areas that will be affected by the year 2000 issue and ensure that all such
areas will be in compliance within the time frames established by the Company.
The Company does not expect that the cost of its year 2000 compliance program
will be material to its financial condition or results of operations and
believes that it will be able to satisfy such compliance program by the end of
1998 without any material disruption to its operations. The Company does not
currently have a complete evaluation of the year 2000 compliance efforts of all
its suppliers and customers.
4
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED AVERAGE BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31 FOR THE YEARS ENDED DECEMBER 31,
-------------- --------------------------------------------------------------------------------------
1997 1997 1996 1995
----- -------------------------- --------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE
YIELD AVERAGE YIELD AVERAGE YIELD AVERAGE YIELD
/COST BALANCE INTEREST /COST BALANCE INTEREST /COST BALANCE INTEREST /COST
------- ------- -------- ------- -------- -------- ------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning
deposits............... 5.33% $ 2,400 $ 94 3.92% $ 5,159 $ 227 4.40% $ 3,257 $ 249 7.65%
Investment
securities (1)........ 6.22 6,200 399 6.44 10,635 543 5.11 11,496 670 5.83
Loans receivable (2).... 8.18 227,346 18,395 8.09 203,037 16,230 7.99 181,638 14,464 7.96
Mortgage-backed
securities (3)........ 6.47 20,359 1,279 6.28 17,502 1,207 6.90 20,329 1,207 5.94
FHLB stock 7.00 1,971 134 6.80 1,665 113 6.76 1,636 109 6.66
------- ------ ------- ------ ------- ------
Total interest-earning
assets.............. 8.00 258,276 20,301 7.86 237,998 18,320 7.70 218,356 16,699 7.65
------ ------ ------
Non-interest earning
assets.............. 15,269 11,687 9,437
------- -------- --------
Total assets.......... 273,545 $249,685 $227,793
------- -------- --------
------- -------- --------
LIABILITIES & EQUITY
Interest-bearing
liabilities
Money market savings
accounts............. 2.89 9,703 234 2.41 $ 10,440 254 2.43 $ 10,127 173 1.71
Passbook accounts..... 2.50 16,921 419 2.48 18,163 447 2.46 18,342 382 2.08
NOW accounts.......... 2.00 14,930 338 2.26 14,534 343 2.36 16,318 444 2.72
Certificates
accounts............ 5.96 148,812 8,681 5.83 155,937 9,107 5.84 158,328 8,980 5.67
------- ------ ------- ------ ------- ------
Total interest-bearing
deposits............ 5.19 190,366 9,672 5.08 199,074 10,151 5.10 203,115 9,979 4.91
------- ------ ------- ------ ------- -----
FHLB advances........... 5.98 32,958 2,062 6.26 8,099 315 3.89 1,346 98 7.28
------- ------ ------- ------ ------- -----
Total interest-bearing
liabilities......... 5.31 223,324 11,734 5.25 207,173 10,466 5.05 204,461 10,077 4.93
------ ------ ------
Non-interest bearing
liabilities........... 11,510 11,471 8,679
------- -------- --------
Total liabilities..... 234,834 218,644 213,140
Equity.................. 38,711 31,041 14,652
------- -------- --------
Total liabilities
& equity............ 273,545 $249,685 $227,792
------- -------- --------
------- -------- --------
Net interest rate
spread (4)............ 2.69% $8,567 2.61% $7,854 2.65% $6,622 2.72%
------- ------ ------- ------ ------- ------ -----
------- ------ ------- ------ ------- ------ -----
Net interest
margin (5)............ 3.32% 3.30% 3.03%
------- ------- -------
------- ------- -------
Ratio of interest
earning assets to
interest-earing
liabilities........... 114.83% 115.65% 114.88% 106.80%
</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.
5
<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 proportionally to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
DECEMBER 31,1997 December 31, 1996
COMPARED TO YEAR ENDED Compared to Year Ended
DECEMBER 31, 1996 December 31, 1995
------------------------ ------------------------
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 ($99) ($34) ($133) $110 ($132) ($22)
Investment securities (263) 119 (144) (48) (79) (127)
Loans receivable 1,960 205 2,165 1,712 54 1,766
Mortgage-backed securities 187 (115) 72 (180) 180 -
FHLB stock 20 1 21 2 2 4
----- ---- ----- ------- ------ -------
Total change in interest
income 1,805 176 1,981 1,596 25 1,621
----- ---- ----- ------- ------ -------
INTEREST-BEARING LIABILITIES:
Money-market deposit accounts (18) (2) (20) 5 76 81
Savings accounts (32) 4 (28) (4) 69 65
NOWaccounts 9 (14) (5) (46) (55) (101)
Certificate accounts (414) 31 (383) (138) 265 127
FHLB advances 1,481 266 1,747 282 (65) 217
----- ---- ----- ------- ------ -------
Total change in interest
expense 1,026 285 1,311 99 290 389
----- ---- ----- ------- ------ -------
Total change in net interest
income $779 ($109) $670 $1,497 ($265) $1,232
----- ------ ----- ------- ------ -------
----- ------ ----- ------- ------ -------
</TABLE>
6
<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 (the "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 4.0%. At December 31, 1997 the Bank's
liquidity's ratio was 10.4%. Management of the Bank maintains its liquid assets
in accordance with regulatory requirements.
At December 31, 1997, the Bank exceeded all of its regulatory capital
requirements with tangible and core capital both at $29.9 million or 11.08% of
total adjusted assets, and risk-based capital of $30.8 million or 18.5% 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, 1997.
The Company's most liquid assets are cash and interest-bearing demand accounts.
The level of these assets are dependent on the Company's operating, financing,
lending and investing activities during any given period. At December 31, 1997
and 1996, cash and interest-bearing demand accounts totaled $7.9 million and
$7.0 million, respectively.
The Bank has other sources of liquidity if a need for additional funds arises,
including FHLB advances. At December 31, 1997, the Bank had $33.9 million in
outstanding advances with the FHLB and had a borrowing capacity of $15.1 million
without the purchase of additional FHLB stock. By the purchase of sufficient
additional FHLB stock, the Bank's borrowing limit could be increased to 35% of
total assets or $94.9 million at December 31, 1997. At December 31, 1996, the
Bank had $16.3 million in outstanding FHLB advances. Depending upon market
conditions and the pricing of deposit products and FHLB borrowings, the Bank may
utilize FHLB advances to fund loan originations.
At December 31, 1997, the Bank had commitments to originate loans and unused
lines of credit totaling $16.3 million. Certificate of deposit accounts, which
are scheduled to mature in one year or less from December 31, 1997, totaled
$96.6 million. The Bank anticipates that it will have sufficient funds available
to meet its current loan commitments and maturing deposits.
7
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Citizens First Financial Corp. and Subsidiary
Bloomington, Illinois
We have audited the consolidated balance sheet of Citizens First Financial Corp.
and subsidiary as of December 31, 1997 and 1996, 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, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of
Citizens First Financial Corp. and subsidiary as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/GEO. S. OLIVE & CO. LLC
- --------------------------
[LOGO]
Decatur, Illinois
January 28, 1998
8
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks ................................. $4,621,768 $4,352,571
Interest-bearing demand deposits ........................ 3,317,485 2,654,669
-----------------------------
Cash and cash equivalents .......................... 7,939,253 7,007,240
Investment securities
Available for sale ................................. 19,301,769 28,370,953
Held to maturity ................................... 1,000,000
-----------------------------
Total investment securities ................... 19,301,769 29,370,953
Mortgage loans held for sale ............................ 2,393,567 3,027,468
Loans ................................................... 230,308,737 211,554,298
Allowance for loan losses .......................... (839,845) (512,096)
-----------------------------
Net loans .......................................... 229,468,892 211,042,202
Premises and equipment .................................. 8,407,971 5,778,253
Federal Home Loan Bank stock ............................ 2,453,200 1,662,000
Foreclosed real estate .................................. 605,378 696,980
Other assets ............................................ 3,029,601 3,051,784
- -----------------------------------------------------------------------------------------
TOTAL ASSETS ....................................... $273,599,631 $261,636,880
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
LIABILITIES
Deposits
Noninterest bearing ................................ $8,850,529 $7,480,409
Interest bearing ................................... 189,782,688 194,644,331
------------------------------
Total deposits ................................ 198,633,217 202,124,740
Federal Home Loan Bank borrowings ....................... 33,943,676 16,250,000
Advances by borrowers for taxes and insurance ........... 694,064 751,430
Other liabilities ....................................... 2,359,124 2,162,20
- -----------------------------------------------------------------------------------------
TOTAL LIABILITIES .................................. $235,630,081 $221,288,370
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value
Authorized and unissued - 1,000,000 shares
Common stock, $.01 par value
Authorized - 8,000,000 shares
Issued and Outstanding- 2,817,500 shares ........... 28,175 28,175
Paid-in-capital .................................... 27,193,322 27,023,869
Retained earnings - substantially restricted ............ 18,183,740 16,294,984
Net unrealized loss on securities available for sale .... (99,733) (297,685)
- -----------------------------------------------------------------------------------------
45,305,504 43,049,343
Less:
Unallocated employee stock ownership plan
shares - 161,000 and 193,200 shares .................. (1,610,000) (1,932,000)
Unearned incentive plan shares - 87,249
and 55,689 shares ....................................... (1,205,781) (768,833)
Treasury stock, at cost, - 281,750 shares for 1997 ...... (4,520,173)
- -----------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY ......................... 37,969,550 40,348,510
- -----------------------------------------------------------------------------------------
TOAL LIABILITIES AND STOCKHOLDERS' EQUITY .......... $273,599,631 $261,636,880
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
9
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans ............................................ $18,394,586 $16,230,490 $14,464,093
Investment securities ............................ 1,812,044 1,862,465 1,986,355
Deposits with financial institutions ............. 94,271 227,316 248,859
-----------------------------------------------
Total interest income ....................... 20,300,901 18,320,271 16,699,307
-----------------------------------------------
INTEREST EXPENSE
Deposits ......................................... 9,672,326 10,150,721 9,979,041
Federal Home Loan Bank borrowings ................ 2,061,677 314,910 98,487
-----------------------------------------------
Total interest expense ...................... 11,734,003 10,465,631 10,077,528
-----------------------------------------------
NET INTEREST INCOME ................................... 8,566,898 7,854,640 6,621,779
Provision for loan losses ........................ 516,053 166,570 123,545
-----------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ... 8,050,845 7,688,070 6,498,234
-----------------------------------------------
NONINTEREST INCOME
Loan servicing fees .............................. 205,027 209,402 251,018
Net realized gains (losses) on sales of ..........
available-for-sale securities ............... 4,019 (14,790) (18,223)
Net gain on sale of branch facility .............. 522,883
Net gains on loan sales .......................... 418,260 235,777 267,812
Other income ..................................... 832,849 738,174 644,026
-----------------------------------------------
Total noninterest income .................... 1,983,038 1,168,563 1,144,633
-----------------------------------------------
NONINTEREST EXPENSES
Salaries and employee benefits ................... 4,063,420 3,516,426 3,204,079
Net occupancy and equipment expenses ............. 932,335 746,245 697,508
Deposit insurance expense ........................ 101,473 1,848,469 476,917
Data processing fees ............................. 385,098 344,798 422,653
Other expenses ................................... 1,463,469 1,469,628 1,170,593
-----------------------------------------------
Total noninterest expenses .................. 6,945,795 7,925,566 5,971,750
-----------------------------------------------
INCOME BEFORE INCOME TAX 3,088,088 931,067 1,671,117
Income tax expense ............................... 1,199,332 321,487 658,572
-----------------------------------------------
NET INCOME ............................................ $1,888,756 $ 609,580 $1,012,545
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
Basic
Net income .................................. $0.79 N/A N/A
Average number of shares .................... 2,397,234
Diluted
Net income .................................. $0.74 N/A N/A
Average number of shares .................... 2,551,382
</TABLE>
See notes to consolidated financial statements.
10
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
COMMON STOCK LOSS ON
------------ SECURITIES
SHARES PAID-IN RETAINED AVAILABLE
OUTSTANDING AMOUNT CAPITAL EARNINGS FOR SALE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 ......... $14,672,859 ($1,021,052)
Net Income for 1995 ............ 1,012,545
Net change in unrealized loss
on securities available
for sale ...................... 854,422
- -------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 ....... 15,685,404 (166,630)
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 loss
on securities available
for sale ...................... (131,055)
- -------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 ....... 2,568,611 28,175 27,023,869 16,294,984 (297,685)
Employee Stock Ownership
Plan shares allocated ......... 32,200 203,437
Incentive plan shares
acquired ...................... (54,100)
Incentive plan
shares earned ................. 22,540 (33,984)
Purchase of treasury stock ..... (281,750)
Net income for 1997 ............ 1,888,756
Net change in unrealized
loss on securities
available for sale ............ 197,952
- -------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 ....... 2,287,501 $28,175 $27,193,322 $18,183,740 ($99,733)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
UNEARNED
EMPLOYEE
STOCK UNEARNED
OWNERSHIP INCENTIVE TREASURY
PLAN SHARES PLAN SHARES STOCK TOTAL
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 ......... $13,651,807
Net Income for 1995 ............ 1,012,545
Net change in unrealized loss
on securities available
for sale ...................... 854,422
- ----------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 ....... 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 loss
on securities available
for sale ...................... (131,055)
- ----------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 ....... (1,932,000) (768,833) 40,348,510
Employee Stock Ownership
Plan shares allocated ......... 322,000 525,437
Incentive plan shares
acquired ...................... (752,932) (752,932)
Incentive plan
shares earned ................. 315,984 282,000
Purchase of treasury stock ..... ($4,520,173) (4,520,173)
Net income for 1997 ............ 1,888,756
Net change in unrealized
loss on securities
available for sale ............ 197,952
- ----------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 ....... ($1,610,000) ($1,205,781) ($4,520,173) $37,969,550
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
11
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $1,888,756 $609,580 $1,012,545
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses............................ 516,053 166,570 123,545
Depreciation......................................... 471,610 395,698 365,460
Deferred income tax benefit.......................... (72,833) (83,408) (83,957)
Investment securities (gains) losses................. (4,019) 14,790 18,223
Investment securities amortization, net.............. 51,711 61,204 31,015
Net (gain) on sales of foreclosed real estate.. 19,381 (20,577)
Net gain on loan sales............................... (418,260) (235,777) (267,812)
Net gain on sale of branch facility.................. (522,883)
Net gain on sales of premises and equipment.......... (44,366) (25,224) (3,455)
Federal Home Loan Bank stock dividends (24,100)
Loans originated for sale............................ (25,967,927) (17,924,017) (18,165,737)
Proceeds from sales of loans originated
for resale....................................... 27,020,088 15,132,326 17,897,925
Compensation expense related to
Employee Stock Ownership and
incentive plans.............................. 807,437 398,650
Change in:
Other assets..................................... (30,587) (690,161) (63,399)
Other liabilities................................ 196,924 (370,091) 1,372,113
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used)
by operating activities..................... 3,911,085 (2,549,860) 2,191,789
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of securities available for sale................ (1,992,419) (19,841,260) (1,000,000)
Proceeds from maturities and principal paydowns
on securities available for sale..................... 5,341,739 4,015,489 7,017,143
Proceeds from sales of securities available for sale...... 5,995,727 6,043,587 5,151,966
Purchases of securities held to maturity (3,473,672)
Proceeds from maturities and principal paydowns
on securities held to maturity....................... 1,000,000 5,000,000 7,027,579
Redemption (purchase) of Federal Home
Loan Bank stock...................................... (791,200) 12,400 (76,000)
Net change in loans....................................... (19,311,565) (23,544,274) (11,039,786)
Proceeds from sales of foreclosed real estate............. 441,043 59,558
Purchases of premises and equipment....................... (3,317,385) (1,260,085) (1,738,156)
Sale of branch, net of cash paid.......................... 522,883
Proceeds from sales of premises and equipment............. 260,423 25,224 3,455
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by
investing activities............................ (11,850,754) (29,548,919) 1,932,087
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net change in
Interest-bearing demand and savings deposits......... $479,448 ($757,191) ($2,738,508)
Certificates of deposit.............................. (3,970,971) (6,982,302) 3,344,312
Net change in Federal Home Loan Bank line of credit....... (10,250,000) 10,250,000
Proceeds (payments) from Federal Home Loan
Bank advances........................................ 27,943,676 6,000,000 (3,000,000)
Net change in advances by borrowers for
taxes and insurance.................................. (57,366) 41,139 (91,651)
Issuance of common stock, net of offering costs 24,757,794
Purchase of stock for incentive plan...................... (752,932) (805,233)
Purchase of treasury stock................................ (4,520,173)
------------------------------------------------------------
Net cash provided (used) by
financing activities................................. 8,871,682 32,504,207 (2,485,847)
------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................ 932,013 405,428 1,638,029
------------------------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................... 7,007,240 6,601,812 4,963,783
------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR......................... $7,939,253 $7,007,240 $6,601,812
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL CASH FLOWS INFORMATION
Interest paid............................................. $11,598,098 $10,413,456 $10,039,086
Income tax paid........................................... 834,003 758,383 427,736
Loan balances transferred to foreclosed
real estate and repossessions........................ 368,822 696,980
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURE OF OPERATIONS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Citizens First Financial Corp.
("Company") and its wholly owned subsidiary, Citizens Savings Bank, 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 thrift 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 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 based on the difference between estimated sales proceeds and
aggregate cost.
14
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOANS are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. The accrual of interest on impaired
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed when considered uncollectible. Interest
income is subsequently recognized only to the extent cash payments are received.
Certain loan fees and direct costs are being deferred and amortized as an
adjustment of yield on the loans.
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, 1997, 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 are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based on the estimated
useful lives of the assets. Maintenance and repairs are expensed as incurred
while major additions and improvements are capitalized. Gains and losses on
dispositions are included in current operations.
FEDERAL HOME LOAN BANK ("FHLB") STOCK is a required investment for institutions
that are members of the Federal Home Loan Bank system. The required investment
in the common stock is based on a predetermined formula.
FORECLOSED 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.
MORTGAGED SERVICING RIGHTS on originated loans are capitalized by allocating the
total cost of the mortgage loans between the mortgage servicing rights and the
loans based on their relative fair values. Capitalized servicing rights are
amortized in proportion to and over the period of estimated servicing revenues.
TREASURY STOCK is stated at cost. Cost is determined by the first-in, first-out
method.
15
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAX in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Company
files consolidated income tax returns with its subsidiary.
INCENTIVE PLAN - The Company accounts for its stock award program or incentive
plan in accordance with Accounting Principals Board Opinion ("APB") No. 25,
accounting for stock issued to employees. The aggregate purchase price of all
shares owned by the incentive plan is reflected as a reduction of stockholders'
equity. Compensation expense is based on the market price of the Company's stock
on the date the shares are granted and is recorded over the vesting period. The
difference between the aggregate purchase price and the fair value on the date
granted of the shares earned is recorded as an adjustment to paid-in capital.
EMPLOYEE STOCK OWNERSHIP PLAN - The Company accounts for its employee stock
ownership plan ("ESOP") in accordance with American Institute of Certified
Public Accountants ("AICPA") Statement of Position 93-6. The cost of shares
issued to 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 the shares committed to be released is
recorded as an adjustment to paid-in capital. Dividends on allocated ESOP shares
will be recorded as a reduction of retained earnings; dividends on unallocated
ESOP shares will be reflected as a reduction of debt.
Shares are considered outstanding for earnings per share calculations when they
are committed to be released; unallocated shares are not considered outstanding.
EARNINGS PER SHARE -Basic earnings per share have been computed based upon the
weighted average common shares outstanding during each year. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the Company.
RECLASSIFICATIONS of certain amounts in the 1996 and 1995 financial statements
have been made to conform to the 1997 presentation.
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.
16
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
1997
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Federal agencies ...................... $ 4,208,525 $ 14,217 $ 3,834 $ 4,218,908
Mortgage-backed securities ....... 14,209,945 175,067 14,034,878
Other asset-backed securities .... 46,316 341 45,975
Marketable equity securities ..... 1,000,000 2,008 1,002,008
----------- ----------- ----------- -----------
Total available for sale .... $19,464,786 $ 16,225 $ 179,242 $19,301,769
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
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
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of securities held to maturity and available
for sale at December 31, 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
------------------------
AMORTIZED FAIR
COST VALUE
- -------------------------------------- ----------- -----------
<S> <C> <C>
One to five years .................... $4,208,525 $4,218,908
Mortgage-backed securities ........... 14,209,945 14,034,878
Other asset-backed securities ........ 46,316 45,975
Marketable equity securities ......... 1,000,000 1,002,008
----------- -----------
Totals .......................... $19,464,786 $19,301,769
----------- -----------
----------- -----------
</TABLE>
Securities with a carrying value of $6,897,876 and $7,045,920 were pledged at
December 31, 1997 and 1996 to secure certain deposits and for other purposes as
permitted or required by law.
Proceeds from sales of securities available for sale during 1997, 1996 and 1995
were $5,995,727, $6,043,587, and $5,151,966. Gross gains of $12,160, $18,460,
and $3,995 and gross losses of $8,141, $33,250, and $22,218 were realized on
those sales. There were no sales of securities held to maturity.
There were no securities transferred between classifications during 1997 or
1996.
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, 1997.
18
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
LOANS AND ALLOWANCE
- ------------------------------------------------------------------------------
DECEMBER 31 1997 1996
Mortgage Loans
<S> <C> <C>
One-to-four family .................. $157,344,815 $161,733,148
Multi-family ........................ 11,593,431 12,520,321
Commercial real estate .............. 25,610,126 8,933,859
Construction and land ............... 15,861,881 12,488,375
Commercial ............................... 16,863,141 8,062,797
Consumer and other loans ................. 12,344,388 11,444,080
------------ ------------
239,617,782 215,182,580
Undisbursed portion of loans ............. (9,048,802) (3,396,908)
Deferred premium on sale of loans ........ 32,804 33,895
Deferred loan fees ....................... (293,047) (265,269)
------------ ------------
Total loans ......................... $230,308,737 $211,554,298
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995
<S> <C> <C> <C> <C>
Allowance for Loan Losses
Balances, January 1 ................. $512,096 $412,249 $352,752
Provision for loan losses ........... 516,053 166,570 123,545
Loans charged off ................... (188,304) (66,723) (64,048)
-------- -------- --------
Balances, December 31 .......... $839,845 $512,096 $412,249
-------- -------- --------
-------- -------- --------
</TABLE>
The amount of impaired loans at December 31,1997 and 1996 and during 1997, 1996
and 1995 was immaterial.
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 were as follows:
<TABLE>
<CAPTION>
1997
<S> <C> <C>
Balances, January 1, 1997 $1,748,232
Changes in composition of related parties (477,568)
New loans, including renewals 1,274,374
Payments, including renewals (372,741)
-------------
Balances, December 31, 1997 $2,172,297
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
19
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PREMISES AND EQUIPMENT
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
<S> <C> <C>
Land .......................................... $2,038,437 $1,668,030
Buildings and land improvements ............... 7,203,247 4,483,104
Furniture and equipment ....................... 3,012,399 2,739,893
Deposit on purchase of new building ........... 768,750
---------- ----------
Total cost ............................... 12,254,083 9,659,777
Accumulated depreciation ...................... (3,846,112) (3,881,524)
---------- ----------
Net ...................................... $8,407,971 $5,778,253
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
OTHER ASSETS AND OTHER LIABILITIES
- -------------------------------------------------------------------------------
DECEMBER 31 1997 1996
<S> <C> <C>
Other assets
Interest receivable
Investment securities ................. $138,744 $104,598
Mortgage-backed securities ............ 103,976 157,497
Loans ................................. 1,893,234 1,635,919
Current income taxes receivable ................. 361,500
Deferred income tax benefit ..................... 101,730 154,500
Prepaid expenses and other assets ............... 791,917 637,770
---------- ----------
Total ................................. $3,029,601 $3,051,784
---------- ----------
---------- ----------
Other liabilities
Interest payable
Deposits .............................. $75,543 $67,489
FHLB borrowings ....................... 213,259 85,408
Current income tax liability ............... 76,662
Accrued expenses and other liabilities ..... 1,993,660 2,009,303
---------- ----------
Total ................................. $2,359,124 $2,162,200
---------- ----------
---------- ----------
</TABLE>
20
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEPOSITS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996
<S> <C> <C>
Demand deposits ....................................... $33,201,341 $ 32,905,642
Savings deposits ...................................... 16,754,750 16,571,001
Certificates of deposit of $100,000 or more ........... 15,389,603 16,406,832
Other certificates of deposit ......................... 133,287,523 136,241,265
------------ ------------
Total deposits ................................... $198,633,217 $202,124,740
------------ ------------
------------ ------------
</TABLE>
Certificates of deposit maturing in years ending December 31.
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL
<S> <C>
1998 ....................................... $96,571,325
1999 ....................................... 35,624,077
2000 ....................................... 12,357,153
2001 ....................................... 2,631,342
2002 ....................................... 1,144,658
Thereafter ................................. 348,571
------------
Total ............................ $148,677,126
------------
------------
</TABLE>
FHLB BORROWINGS
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996
<S> <C> <C>
FHLB advances, variable rate
(6.17% at December 31,1997, due September, 2001).... $4,200,000
FHLB, fixed rates ranging
from 5.40% to 6.74%,
due at various dates through January, 2007.......... 29,743,676 $ 6,000,000
FHLB line of credit,
variable rate (5.66% at December 31, 1996).......... 10,250,000
----------- -----------
Total FHLB borrowings.......................... $33,943,676 $16,250,000
----------- -----------
----------- -----------
</TABLE>
The FHLB advances and line of credit are secured by first-mortgage loans and all
stock in the FHLB. Advances are subject to restrictions or penalties in the
event of prepayment.
MATURITIES IN YEARS ENDING DECEMBER 31,
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
1998 .............................................. $2,000,000
1999 .............................................. 9,000,000
2000 .............................................. 8,000,000
2001 .............................................. 4,200,000
2002 .............................................. 7,968,676
Thereafter ........................................ 2,775,000
-----------
Total .................................. $33,943,676
-----------
-----------
</TABLE>
21
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $93,021,000 and $80,575,000 at December 31, 1997 and 1996.
In 1995, the Company adopted Statement of Financial Accounting Standards
("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, 1997 and 1996 totaled $399,879 and $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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1997 1996
<S> <C> <C> <C>
Mortgage Servicing Rights
Balances, January 1 ................... $217,246 $123,000
Servicing rights capitalized .......... 220,861 134,377
Amortization of servicing rights ...... (38,228) (40,131)
-------- --------
Balances, December 31 ............ $399,879 $217,246
-------- --------
-------- --------
</TABLE>
INCOME TAX
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995
<S> <C> <C> <C>
Income tax expense
Currently payable
Federal ......................... $1,047,165 $352,895 $637,529
State ........................... 225,000 52,000 105,000
Deferred
Federal ......................... (72,833) (83,408) (83,957)
---------- -------- --------
Total income tax expense .... $1,199,332 $321,487 $658,572
---------- -------- --------
---------- -------- --------
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% .. $1,049,950 $316,563 $568,180
Effect of state income taxes ......... 148,500 34,320 69,300
Other ................................ 882 (29,396) 21,092
---------- -------- --------
Actual tax expense ................... $1,199,332 $321,487 $658,572
---------- -------- --------
---------- -------- --------
Effective Tax Rate ................... 38.8% 34.5% 39.4%
---------- -------- --------
---------- -------- --------
</TABLE>
22
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A cumulative net deferred tax asset is included in assets. The components are as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996
<S> <C> <C>
ASSETS
Deferred loan fees ...................................... $ 34,197 $29,572
Directors' deferred compensation ........................ 395,525 372,824
Differences in accounting for loan losses ............... 174,051 15,982
Net unrealized losses on securities available for sale .. 63,284 188,887
Other ................................................... 37,890 24,278
------- -------
Total assets ................................ 704,947 631,543
------- -------
LIABILITIES
Differences in depreciation methods ..................... 372,852 317,576
FHLB stock dividends .................................... 75,132 75,132
Capitalized mortgage servicing rights ................... 155,233 84,335
------- -------
Total liabilities ........................... 603,217 477,043
------- -------
$101,730 $154,500
------- -------
------- -------
</TABLE>
The income tax expense (benefit) attributed to net gains or losses on sales of
securities available for sale during 1997, 1996 and 1995 was approximately
$1,600, ($5,000), and ($6,200).
Retained earnings at December 31, 1997 and 1996, include approximately
$2,144,000 for which no deferred income tax liability has been recognized. This
amount represents an allocation of income to bad debt deductions as of December
31, 1987, for tax purposes only. Reduction of amounts so allocated for purposes
other than tax bad debt losses or adjustments arising from carryback of net
operating losses would create income for tax purposes only, which income would
be subject to the then-current corporate income tax rate. The unrecorded
deferred income tax liability on the above amount was approximately $832,000.
23
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Bank's exposure to credit loss in the event of nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making such commitments as it does for
instruments that are included in the balance sheet.
Financial instruments whose contract amount represents credit risk as of
December 31 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
Loan commitments
At variable rates ................................... $4,280,600 $4,068,700
At fixed rates (ranging from 6.625% to 9.00%
at December 31, 1997) ............................. 1,783,600 2,601,300
Unused lines of credit ................................... 10,185,000 6,575,000
Standby letters of credit ................................ 60,000 214,000
</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.
DIVIDENDS AND CAPITAL RESTRICTIONS
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 50 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.
24
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and is assigned to a capital category. The
assigned capital category is largely determined by three ratios that are
calculated according to the regulations: total risk based capital, core (Tier
1) capital, and tangible capital ratios. The ratios are intended to measure
capital relative to assets and credit risk associated with those assets and
off-balance sheet exposures of the entity. The capital category assigned to
an entity can also be affected by qualitative judgments made by regulatory
agencies about the risk inherent in the entity's activities that are not part
of the calculated ratios.
There are five capital categories defined in the regulations, ranging from
well capitalized to critically undercapitalized. Classification of a bank in
any of the undercapitalized categories can result in actions by regulators
that could have a material effect on a bank's operations. At December 31,
1997 and 1996, the Bank is categorized as well capitalized and meets all
subject capital adequacy requirements. There are no conditions or events
since December 31, 1997 that management believes have changed the Bank's
classification.
The Bank's actual and required capital amounts (in thousands) and ratios are
as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
1997
------------------------------------------------------------
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL(1) CAPITALIZED(1)
DECEMBER 31 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital(1)
(to risk-weighted assets)................... $30,770 18.49% $13,316 8.0% $16,645 10.0%
Core capital(1) (to risk-weighted assets)....... 29,947 17.99 6,658 4.0 9,987 6.0
Core capital(1) (to adjusted tangible assets)... 29,947 11.08 10,848 4.0 13,560 5.0
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
1996
------------------------------------------------------------
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL(1) CAPITALIZED(1)
DECEMBER 31 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------------------------------------------------------------------------------------------
Total risk-based capital(1)
(to risk-weighted assets)................... $28,122 19.91% $11,301 8.0% $14,258 10.0%
Core capital(1) (to risk-weighted assets)....... 27,627 19.56 5,650 4.0 8,475 6.0
Core capital(1) (to adjusted tangible assets)... 27,627 10.70 10,333 4.0 12,918 5.0
</TABLE>
(1) As defined by regulatory agencies
The Bank's tangible capital at December 31, 1997 and 1996 was $29,947,000 and
$27,627,000, which amount was 11.08% and 10.70% of tangible assets,
respectively, and exceeded the required ratio of 1.5 percent.
25
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYEE BENEFIT PLANS
The Company maintains a savings plan (combined profit-sharing and 401(k) plan)
for the benefit of substantially all of its full-time employees. The amount of
the annual profit-sharing contribution is at the discretion of the Board of
Directors. The plan also provides for matched employee contributions up to a
maximum of four percent of the participant's gross salary. The employer expense
for the plan was $182,688, $124,297, and $142,568, for the years ended December
31, 1997, 1996 and 1995, respectively.
In connection with the conversion, the Bank established an employee stock
ownership plan for the benefit of substantially all employees. The ESOP borrowed
$2,254,000 from the Company and used those funds to acquire 225,400 shares of
the Company's stock at $10 per share.
Shares issued to the ESOP are allocated to ESOP participants based on principal
repayments made by the ESOP on the loan from the Company. The loan is secured by
shares purchased with the loan proceeds and will be repaid by the ESOP with
funds from the Bank's discretionary contributions to the ESOP and earnings on
ESOP assets. Dividends on unallocated ESOP shares will be applied to reduce the
loan. Principal payments are scheduled to occur in even annual amounts over a
seven year period. However, in the event Bank contributions exceed the minimum
debt service requirements, additional principal payments will be made.
Stock totaling 32,200 shares for both 1997 and 1996 with an average fair value
of $16.32 and $11.25 per share, respectively, were committed to be released,
resulting in ESOP compensation expense of $525,437 and $362,250. Shares held by
the ESOP at December 31 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
Allocated shares........................................ 64,400 32,200
Unallocated shares...................................... 161,000 193,200
---------- ----------
Total ESOP shares.................................. 225,400 225,400
---------- ----------
Fair value of unallocated shares at December 31.... $3,260,250 $2,777,250
---------- ----------
---------- ----------
</TABLE>
During 1996, the Company implemented a non-qualified Supplemental Executive
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
$12,315 and $3,274 for 1997 and 1996, respectively.
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.
26
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The incentive plan covers key employees and directors and is authorized to
acquire and grant 112,700 shares of the Company's common stock or 4% of the
shares issued in the Company's initial public offering. The funds used to
acquire these shares will be contributed by the Bank. Participants in the
incentive plan vest over five years, commencing one year after the date such
shares are granted. As of December 31, 1996, all 112,700 shares authorized under
the plan had been granted. As of December 31, 1997, 22,540 shares were
distributed. No shares were distributed as of December 31, 1996. None of these
shares were forfeited during 1997 or 1996. For the years ended December 31, 1997
and 1996, $282,000 and $36,400 was recorded as compensation expense under the
plan.
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 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 approximately $103,000, $240,000, and
$504,000 for the years ended December 31, 1997, 1996 and 1995. Payments of
$138,599 and $121,070 were made during the years ended December 31, 1997 and
1995 under the plan to purchase annuity contracts for retired directors. There
were no annuity contract purchases under the plan during the year ended December
31, 1996.
STOCK OPTION PLAN
Under the Company's stock option plan, which is accounted for in accordance with
APB No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations, the Company grants selected executives and other key employees
stock option awards which vest and become fully exercisable at the end of five
years of continued employment. During 1996, the Company authorized the grant of
options for up to 281,750 shares of the Company's common stock or 10% of the
shares issued in the Company's initial public offering, that expire ten years
from the date of grant. During 1996, the Company granted all 281,750 options at
an exercise price of $12.30 per share 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.
Although the Company has elected to follow APB No. 25, SFAS No. 123 requires pro
forma disclosures of net income and earnings per share as if the Company had
accounted for its employee stock options under that Statement. The fair value of
each option grant was estimated on the grant date using an option-pricing model
with the following assumptions:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
Risk-free interest rates ....................................... 7.00% 7.00%
Dividend yields ................................................ 2.50% 2.50%
Volatility factors of expected market price of common stock .... 13.00% 12.00%
Weighted-average expected life of the options .................. 8.8 YEARS 9.8 years
</TABLE>
27
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under SFAS No 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this statement is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C> <C>
Net income ...................... As reported $1,888,756 $609,580
Pro forma 1,664,384 492,464
Basic earnings per share ........ As reported 0.79 N/A
Pro forma 0.69 N/A
Diluted earnings per share ...... As reported 0.74 N/A
Pro forma 0.65 N/A
</TABLE>
The following is a summary of the status of the Company's stock option plan and
changes in that plan as of and for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996
- -------------------------------------------------------------------------------------------------------
WEIGHTED- Weighted-
AVERAGE Average
OPTIONS SHARES EXERCISE PRICE Shares Exercise Price
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year ....... $ 12.30
Granted .............................. 281,750 281,750 $ 12.30
------- -------
Outstanding, end of year ............. 281,750 $ 12.30 281,750 $ 12.30
------- -------
------- -------
Options exercisable at year end ...... 56,350 0
Weighted-average fair value of options
granted during the year ......... $ 0 $ 4.91
</TABLE>
As of December 31, 1997, all 281,750 options outstanding have an exercise price
of $12.30 and a weighted-average remaining contractual life of 8.8 years. No
options were exercised, forfeited or expired during 1997 and 1996.
28
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EARNINGS PER SHARE
Earnings per share (EPS) were computed as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE PER-SHARE
INCOME SHARES AMOUNT
- ---------------------------------------------------------------- ---------- ----------- ----------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income available to common stockholders..................... $1,888,756 2,397,234 $ 0.79
EFFECT OF DILUTIVE SECURITIES
Stock options............................................... 69,402
Unearned incentive plan shares.............................. 84,746
---------- ---------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
and assumed conversions................................ $1,888,756 2,551,382 $ 0.74
---------- --------- ---------
---------- --------- ---------
</TABLE>
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 LOANS HELD FOR SALE -- Fair values are based on quoted market prices.
LOANS -- For both short-term loans and variable-rate loans that reprice
frequently and with no significant change in credit risk, fair values are based
on carrying values. The fair values for certain mortgage loans, including
one-to-four family residential, are based on quoted market prices of similar
loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics. The fair value for other loans, including
commercial real estate and rental property mortgage loans, fixed-rate commercial
and industrial loans, and fixed-rate loans to individuals for household and
other personal expenditures, is estimated using discounted cash flow analyses
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality.
INTEREST RECEIVABLE/PAYABLE -- The fair values of interest receivable/payable
approximate carrying values.
29
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
FHLB BORROWINGS -- The fair value of fixed rate borrowings are estimated using a
discounted cash flow calculation, based on current rates for similar debt. For
those borrowings with interest rates tied to a variable market interest rate,
fair value approximates carrying value.
ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE -- The fair value
approximates carrying value.
OFF-BALANCE SHEET 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 are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the counterparties' credit standing.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents .................................. $ 7,939,253 $ 7,939,253 $7,007,240 $7,007,240
Investment securities available for sale ................... 19,301,769 19,301,769 28,370,953 28,370,953
Investment securities held to maturity ..................... 1,000,000 991,250
Mortgage loans held for sale ............................... 2,393,567 2,393,567 3,027,468 3,027,468
Loans, net ................................................. 229,468,892 233,469,000 211,042,202 215,504,000
Interest receivable ........................................ 2,135,954 2,135,954 1,898,014 1,898,014
Federal Home Loan Bank stock ............................... 2,453,200 2,453,200 1,662,000 1,662,000
LIABILITIES
Deposits ................................................... 198,633,217 199,013,069 202,124,740 203,128,000
FHLB borrowing ............................................. 33,943,676 34,147,358 16,250,000 16,250,000
Interest payable ........................................... 288,802 288,802 152,897 152,897
Advance payments by borrowers for
taxes and insurance ................................... 694,064 694,064 751,430 751,430
OFF-BALANCE SHEET ITEMS
Commitments ................................................ 0 0 0 0
</TABLE>
30
<PAGE>
Exhibit 23.0
[LETTERHEAD]
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
Citizens First Financial Corp.
We hereby consent to the incorporation by reference to Registration
Statements on Form S-8, File numbers 333-37925 and 333-41615, of our report
dated January 28, 1998 on the consolidated financial statements of Citizens
First Financial Corp. and Subsidiary, which report is incorporated by
reference in the Annual Report on Form 10-KSB of Citizens First Financial
Corp. and Subsidiary.
/s/ Geo.S. Olive & Co. LLC
- --------------------------
Geo.S. Olive & Co. LLC
Decatur, Illinois
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,622
<INT-BEARING-DEPOSITS> 3,317
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,302
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 232,703
<ALLOWANCE> 840
<TOTAL-ASSETS> 273,600
<DEPOSITS> 198,633
<SHORT-TERM> 6,200
<LIABILITIES-OTHER> 3,053
<LONG-TERM> 27,744
0
0
<COMMON> 28
<OTHER-SE> 37,942
<TOTAL-LIABILITIES-AND-EQUITY> 273,600
<INTEREST-LOAN> 18,395
<INTEREST-INVEST> 1,812
<INTEREST-OTHER> 94
<INTEREST-TOTAL> 20,301
<INTEREST-DEPOSIT> 9,672
<INTEREST-EXPENSE> 2,062
<INTEREST-INCOME-NET> 8,567
<LOAN-LOSSES> 516
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 6,946
<INCOME-PRETAX> 3,088
<INCOME-PRE-EXTRAORDINARY> 1,889
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,889
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.74
<YIELD-ACTUAL> 0.033
<LOANS-NON> 737
<LOANS-PAST> 211
<LOANS-TROUBLED> 341
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 512
<CHARGE-OFFS> 188
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 840
<ALLOWANCE-DOMESTIC> 17
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 823
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 0
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 0
<ALLOWANCE> 0
<TOTAL-ASSETS> 0
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 0
<INTEREST-LOAN> 0
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 0
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 0
<INCOME-PRETAX> 0
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 0 0 0
<INT-BEARING-DEPOSITS> 0 0 0
<FED-FUNDS-SOLD> 0 0 0
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 0 0
<INVESTMENTS-CARRYING> 0 0 0
<INVESTMENTS-MARKET> 0 0 0
<LOANS> 0 0 0
<ALLOWANCE> 0 0 0
<TOTAL-ASSETS> 0 0 0
<DEPOSITS> 0 0 0
<SHORT-TERM> 0 0 0
<LIABILITIES-OTHER> 0 0 0
<LONG-TERM> 0 0 0
0 0 0
0 0 0
<COMMON> 0 0 0
<OTHER-SE> 0 0 0
<TOTAL-LIABILITIES-AND-EQUITY> 0 0 0
<INTEREST-LOAN> 0 0 0
<INTEREST-INVEST> 0 0 0
<INTEREST-OTHER> 0 0 0
<INTEREST-TOTAL> 0 0 0
<INTEREST-DEPOSIT> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INTEREST-INCOME-NET> 0 0 0
<LOAN-LOSSES> 0 0 0
<SECURITIES-GAINS> 0 0 0
<EXPENSE-OTHER> 0 0 0
<INCOME-PRETAX> 0 0 0
<INCOME-PRE-EXTRAORDINARY> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 0 0 0
<EPS-PRIMARY> 0.50 0.35 0.17
<EPS-DILUTED> 0.47 0.33 0.16
<YIELD-ACTUAL> 0 0 0
<LOANS-NON> 0 0 0
<LOANS-PAST> 0 0 0
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 0 0 0
<CHARGE-OFFS> 0 0 0
<RECOVERIES> 0 0 0
<ALLOWANCE-CLOSE> 0 0 0
<ALLOWANCE-DOMESTIC> 0 0 0
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
