SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 1998
Commission File No.: 1-14274
CITIZENS FIRST FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
DELAWARE 37-1351861
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
2101 NORTH VETERANS PARKWAY, BLOOMINGTON, ILLINOIS 61704
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (309) 661-8700
Securities registered pursuant to Section 12(g) of the Act: NONE
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK PAR VALUE $0.01 PER SHARE
(Title of class)
AMERICAN STOCK EXCHANGE
(Name of exchange on which registered)
Indicate by check mark whether the registrant has (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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, I.E., persons other than directors and executive officers of
the registrant is $30,680,271 and is based upon the last sales price as quoted
on The American Stock Exchange for March 12, 1999.
The Registrant had 2,204,417 shares of Common Stock outstanding as of
March 12, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED
DECEMBER 31, 1998, ARE INCORPORATED BY REFERENCE INTO PART II OF THIS FORM 10-K.
PORTIONS OF THE PROXY STATEMENT FOR THE 1999 ANNUAL MEETING OF
SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I
Item 1 Business...............................................................................1
Item 2 Properties............................................................................25
Item 3 Legal Proceedings.....................................................................26
Item 4 Submission of Matters to a Vote of Security Holders...................................26
Supplemental Information - Executive Officers of the Registrant
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.................27
Item 6 Selected Financial Data...............................................................27
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................27
Item 7A Quantitative and Qualitative Disclosures about Market Risk............................27
Item 8 Financial Statements and Supplementary Data...........................................27
Item 9 Changes in and Disagreements With Accountants on Accounting and Financial
Disclosures...........................................................................27
PART III
Item 10 Directors and Executive Officers of the Registrant....................................27
Item 11 Executive Compensation................................................................28
Item 12 Security Ownership of Certain Beneficial Owners and Management........................28
Item 13 Certain Relationships and Related Transactions........................................28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................28
Signatures..............................................................................................30
</TABLE>
<PAGE>
PART I
ITEM 1 BUSINESS
GENERAL
Citizens First Financial Corp. (the "Company") was incorporated under
Delaware law in January 1996. The Company completed its initial public offering
of 2,817,500 shares of common stock on May 1, 1996 in connection with the
conversion of Citizens Savings Bank, F.S.B (the "Bank") from the mutual to stock
form of ownership (the "Conversion"). The Company is a savings and loan holding
company and is subject to regulation by the Office of Thrift Supervision
("OTS"), 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,
1998, the Company had total assets of $287.3 million, total deposits of $208.1
million and total stockholders' equity of $36.0 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, in one- to
four-family residential mortgage loans, multi-family, commercial real estate,
consumer and other loans. The Bank originates loans for investment and for sale.
Currently, it is the Bank's policy to sell, on a servicing retained basis, most
longer-term fixed rate one- to four-family mortgage loans it originates as a
method of controlling its growth, managing its interest rate risk and increasing
its loan servicing fee income. The Bank's revenues are derived principally from
interest on its mortgage, consumer and commercial loans, loan servicing fees
and, to a lesser extent, the interest on its securities. The Bank's primary
source of funds are deposits, principal and interest payments on loans and
securities, borrowings from the Federal Home Loan Bank of Chicago and, to a
lesser extent, proceeds from the sale of loans and securities. The Bank had two
wholly-owned service corporations, CSL Service Corporation and Fairbury
Financial Services Corp. CSL Service Corporation is an Illinois-chartered
corporation that has had limited activity selling tax-deferred annuities.
Fairbury Financial Services Corp., an Illinois-chartered corporation, that
serviced previously sold tax deferred annuities and long-term care insurance
policies that it sold on an agency basis was merged into CSL Service Corporation
in January, 1999.
INVESTMENT 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. The Bank has invested primarily in U.S. Agency securities, corporate and
mortgage-backed securities, a Federal Home Loan Bank demand investment account
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 to maturity or held for trading. The
Bank's investment securities generally consist of U.S. Agency obligations and
mortgage-backed and mortgage-related securities. The Bank's mortgage-backed
securities consist of pass through certificates representing interests in pools
of fixed and adjustable rate mortgage loans issued or guaranteed by FNMA, FHLMC
or GNMA. At December 31, 1998, the Bank's portfolio of investment and
mortgage-backed securities totaled $18.0 million, all of which was categorized
as available for sale.
In recent periods, the Bank has primarily invested in securities in
order to maintain liquid assets for its operations and as a means of utilizing
its excess funding not necessary for loan originations. The Board of Directors
reviews all of the activity in the investment portfolio on a monthly basis.
LENDING ACTIVITIES
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ORIGINATION, SALE, SERVICING AND PURCHASE OF LOANS. The Bank's loan
origination activities are conducted primarily by its loan personnel, operating
at its six branch offices. All loans originated by the Bank are underwritten by
the Bank pursuant to the Bank's policies and procedures. The Bank originates
both adjustable-rate and fixed-rate mortgage loans, commercial loans and
consumer loans. The Bank's ability to originate loans is dependent upon the
relative customer demand for the type of loan and demand for fixed-rate or
adjustable-rate loans, which is affected by the current and expected future
level of interest rates.
While the Bank has in the past, from time to time, sold adjustable-rate
one- to four-family loans and retained mortgage loans with terms of 10 years or
more, it is currently the general policy of the Bank to originate for sale in
the secondary market one- to four-family fixed-rate mortgage loans with
maturities exceeding ten years and to originate for investment all
adjustable-rate one- to four-family mortgage loans and fixed-rate one- to
four-family mortgage loans with maturities of ten years or less.
ONE- TO FOUR-FAMILY MORTGAGE LENDING. The Bank currently offers both
fixed-rate and adjustable-rate mortgage loans secured by one- to four-family
residences located in the Bank's primary market area, with maturities of up to
thirty years. While the Bank has originated such loans secured by properties
outside its market area, substantially all of such loans at December 31, 1998
were secured by property located in the Bank's primary market area. One- to
four-family mortgage loan originations are generally obtained from the Bank's
loan representatives operating in its branch offices and their contacts with the
local real estate industry, existing or past customers, and members of the local
communities.
MULTI-FAMILY LENDING. The Bank originates fixed and adjustable-rate
multi-family mortgage loans generally secured by 5 to 70 unit apartment and
student housing buildings located in the Bank's primary market area. In reaching
its decision on whether to make a multi-family loan, the Bank considers the
qualifications and financial condition of the borrower as well as the value and
condition of the underlying property. The factors considered by the Bank
include: the net operating income of the mortgaged premises before debt service
and depreciation; the debt coverage ratio (the ratio of net earnings to debt
service); and the ratio of loan amount to appraised value.
COMMERCIAL REAL ESTATE LENDING. The Bank originates adjustable-rate
commercial real estate loans that are generally secured by properties used for
business purposes such as small office buildings or a combination of residential
and retail facilities located in the Bank's primary market area.
Loans secured by commercial real estate properties, like multi-family
loans, generally involve larger principal amounts and a greater degree of risk
than one- to four-family residential mortgage loans. Because payments on loans
secured by commercial real estate properties are often dependent on successful
operation or management of the properties, repayment of such loans may be
subject to adverse conditions in the real estate market or the economy. The Bank
seeks to minimize these risks through its underwriting standards, which require
such loans to be qualified on the basis of the property's income and debt
coverage ratio.
CONSTRUCTION AND LAND LENDING. The Bank originates loans for the
acquisition and development of commercial and residential property located in
its primary market area. These loans are offered to local developers and
individuals. The majority of the Bank's construction loans are originated
primarily to finance the
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<PAGE>
construction of one- to four-family, owner-occupied residential properties and
multi-family properties located in the Bank's primary market area. Such loans
are offered for the construction of properties that are pre-sold or for which
permanent financing has been secured, as well as for properties that are not
pre-sold or for which permanent financing has not been secured.
Construction and land development financing is generally considered to
involve a higher degree of credit risk than long-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction. If the estimate of value proves to be
inaccurate, the Bank may be confronted with a project, when completed, having a
value which is insufficient to assure full repayment.
COMMERCIAL LENDING. The Bank offers commercial loans to businesses
operating in the Bank's primary market area on a selective basis.
Unlike mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment and other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself. Further, the collateral securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business. Included in this total are agricultural
loans made within our lending area. These agricultural loans are generally
offered with one year terms in amounts up to $500,000 and are generally secured
by crops, equipment and other assets and personal guarantees.
CONSUMER AND OTHER LENDING. The Bank's portfolio of consumer and other
loans primarily consist of fixed-rate, fixed-term home equity loans, adjustable
home equity lines of credit, loans secured by automobiles, home improvement
loans, loans secured by deposit accounts and unsecured personal loans.
LOAN SERVICING. The Bank generally services all loans it retains for
investment and also services a portfolio of one- to four-family mortgage loans
for others which is primarily generated from its loan sale activity. Loan
servicing includes collecting and remitting loan payments, accounting for
principal and interest, making inspections as required of mortgaged premises,
contacting delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults, making certain insurance and
tax payments on behalf of the borrowers and generally administering the loans.
DEPOSIT ACTIVITIES
DEPOSITS. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposit accounts consist of savings, NOW
accounts, checking accounts, money market accounts and certificate accounts. The
Bank also offers certificate of deposit accounts with balances in excess of
$100,000 at negotiated rates (jumbo certificates) and Individual Retirement
Accounts ("IRAs"). For the year ended December 31, 1998, the average balance of
core deposits (savings, NOW, money market and non-interest-bearing checking
accounts) totaled $44.2 million, or 23.0%, 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
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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.
MARKET AREA AND COMPETITION
The Bank is a community-oriented savings institution offering a variety
of financial products and services to meet the needs of the communities it
serves. The Bank's deposit gathering is concentrated in the communities
surrounding its six offices located in the municipalities of Bloomington,
Normal, Eureka and Fairbury, Illinois which are part of McLean, Woodford and
Livingston Counties. 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 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. State Farm Insurance Company, Bloomington-Normal's
largest business, has received regulatory approval for opening a savings bank,
which it will operate through its agents on a national basis. The effect, if
any, that the venture will have on the Company when it commences operations in
1999, is unknown. 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.
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<PAGE>
STATISTICAL DATA
INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
approximate market value of the investment securities at the dates indicated
were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Available for sale at December 31, 1998:
Federal agencies $ 6,500 $ 6 $ 2 $ 6,504
Mortgage-backed securities 10,380 10 91 10,299
Other asset-backed securities 231 231
Marketable equity securities 1,000 1 999
------- ------- ------- -------
Total available for sale $18,111 $ 16 $ 94 $18,033
======= ======= ======= =======
Available for sale at December 31, 1997:
Federal agencies $ 4,209 $ 14 $ 4 $ 4,219
Mortgage-backed securities 14,210 175 14,035
Other asset-based securities 46 46
Marketable equity securities 1,000 2 1,002
------- ------- ------- -------
Total available for sale $19,465 $ 16 $ 179 $19,302
======= ======= ======= =======
Available for sale at December 31, 1996:
Federal agencies $ 4,221 $ 32 $ 4,189
Mortgage-backed securities 23,569 3 458 23,114
Other asset-backed securities 68 68
Marketable equity securities 1,000 1,000
------- ------- ------- -------
Total available for sale 28,858 3 490 28,371
======= ======= ======= =======
Held to maturity at December 31,1996:
Federal agencies 1,000 9 991
------- ------- ------- -------
Total investment securities $29,858 $ 3 $ 499 $29,362
======= ======= ======= =======
</TABLE>
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<PAGE>
The balance of Federal Home Loan Bank of Chicago stock owned at December 31 is
as follows
Cost
-----------------------------------------
(Dollars in thousands)
1998 1997 1996
------ ------ ------
$1,971 $2,453 $1,662
====== ====== ======
The fair value of Federal Home Loan Bank stock approximates cost. The yield on
the stock is approximately 6.625% at December 31, 1998.
The maturity distribution (dollars in thousands) and average yields for the
securities available for sale portfolio at December 31, 1998 were:
<TABLE>
<CAPTION>
Within 1 Year 1 - 5 Years 5 - 10 Years
---------------------- ---------------------- ----------------------
Amount Yield* Amount Yield* Amount Yield*
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Federal agencies $ % $ 1,501 5.88% $ 5,003 6.62%
-------- -------- -------- -------- -------- --------
Total $ 0 0.00% $ 1,501 5.88% $ 5,003 6.62%
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Marketable Equity,
Mortgage and Other
Due After Ten Year Asset-Backed Securities Total
---------------------- ---------------------- ----------------------
Amount Yield* Amount Yield* Amount Yield*
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Federal agencies $ 6,504 6.45%
Marketable equity securities $ 999 5.90% 999 5.90%
Mortgage-backed securities 10,299 6.13% 10,299 6.13%
Other asset-backed securities 231 5.15% 231 5.15%
-------- -------- -------- --------
Total $ 0 0.00% $ 11,529 5.96% $ 18,033 6.34%
======== ======== ======== ======== ======== ========
</TABLE>
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<PAGE>
LOAN PORTFOLIO
Types of Loans
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial loans $ 33,649 $ 16,863 $ 8,063 $ 6,865 $ 4,023
Real estate loans:
Construction and land 20,024 15,862 12,489 12,353 5,131
Commercial 24,073 25,610 8,934 8,679 7,847
Residential 150,273 168,938 174,253 152,177 149,913
Consumer and other loans 12,072 12,345 11,444 11,719 12,607
-------- -------- -------- -------- --------
Total 240,091 239,618 215,183 191,793 179,521
Deferred premium on sale of loans 11 33 34 39 62
-------- -------- -------- -------- --------
Total gross loans 240,102 239,651 215,217 191,832 179,583
Less:
Undisbursed portion of loans (1) 7,189 9,049 3,397 2,859 2,129
Unearned interest 21
Deferred loan fees 29 293 266 200 171
Allowance for loan losses 1,256 840 512 412 353
-------- -------- -------- -------- --------
Loans, net $231,628 $229,469 $211,042 $188,361 $176,909
======== ======== ======== ======== ========
</TABLE>
(1) The undisbursed portion of loans represents amounts included in gross loans
above that have been approved, but not disbursed to the borrower.
Loans held for sale at December 31, 1998, 1997, 1996, 1995 and 1994 were
$5,245,872, $2,393,567, $3,027,468, $-0- and $-0-, respectively, were not
included in the above totals.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
Presented in the table below are the maturities of loans (excluding commercial
real estate, residential real estate and consumer and other loans) outstanding
as of December 31, 1998. Also presented are the amounts due after one year
classified according to the sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
Maturing
----------------------------------------------
Within 1-5 Over 5
1 Year Years Years Total
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial loans $15,782 $14,627 $ 3,240 $33,649
Real estate loans-Construction and
Land 15,671 2,988 1,365 20,024
------- ------- ------- -------
Total $31,453 $17,615 $ 4,605 $53,673
======= ======= ======= =======
</TABLE>
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<PAGE>
Maturing
-----------------------
1 - 5 Over
Years 5 Years
------- -------
(Dollars in thousands)
Loans maturing after one year with:
Fixed rates $11,638 $ 2,852
Variable rate 5,977 1,753
------- -------
Total $17,615 $ 4,605
======= =======
Risk Elements
- -------------
December
------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
Nonaccruing loans $129 $737 $198 $311 $330
Loans contractually past due 90 days or
more other than nonaccuring 250 211 369 637 209
Restructured loans 325 341 463 364 375
Nonaccruing loans are loans which are reclassified to a nonaccruing status when
in management's judgment the collateral value and financial condition of the
borrower do not justify accruing interest. Interest previously recorded but not
deemed collectible is reversed and charged against current income. Interest
income on these loans is then recognized when collected.
Restructured loans are loans for which the contractual interest rate has been
reduced or other concessions are granted to the borrower because of a
deterioration in the financial condition of the borrower resulting in the
inability of the borrower to meet the original contractual terms of the loans.
Interest income of $32,865 for the year ended December 31, 1998, was recognized
on the nonaccruing and restructured loans listed in the table above, whereas
interest income of $41,315 would have been recognized under their original loan
terms.
POTENTIAL PROBLEM LOANS:
- ------------------------
Management has identified certain other loans totaling $296,000 as of December
31, 1998, not included in the risk elements table, which are current as to
principal and interest, about which there are doubts as to the borrowers'
ability to comply with present repayment terms.
The Bank generates commercial, mortgage and consumer loans from customers
located primarily in Central Illinois. The Bank's loans are generally secured by
specific items of collateral including real property, consumer assets, and
business assets. Although the Bank has a diversified loan portfolio, a
substantial portion of their debtors' ability to honor their contracts is
dependent upon economic conditions in Central Illinois.
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<PAGE>
The Company accounts for impaired loans in accordance with SFAS No. 114 and No.
118,"Accounting by Creditors for an Impairment of a Loan" and "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures". These
Statements require that impaired loans within the scope of these Statements be
measured at the present value of expected future cash flows discounted at the
loan's effective interest rate, or as a practical expedient, at the loan's
observable market price or fair value of the collateral, if the loan is
collateral dependent. A loan is impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts
due, both principal and interest, according to the contractual terms of the
note. The amount of impaired loans outstanding at December 31, 1998 and 1997 and
during 1998 and 1997 were immaterial. The Company considers 1-4 family real
estate and consumer loans to be homogeneous and are therefore excluded from the
separate identification for evaluation of impairment.
ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
The allowance for loan losses is maintained at a level management
believes to be adequate to provide for known and potential risks inherent in the
loan portfolios. On a quarterly basis, management assesses the adequacy of the
allowance for loan losses. Management's evaluation of the adequacy of the
allowance considers such factors as prior loss experience, loan delinquency
levels and trends, loan portfolio growth and reviews of impaired loans and the
value of underlying collateral securing these loans. The analysis of the
commercial and industrial loan portfolio includes assessments based on historic
loan losses and current quality grades of specific credits, current delinquent
and non-performing loans, current economic conditions, growth in the portfolio
and the results of recent audits and regulatory examinations. For the review of
the adequacy of the allowance for loan losses for real estate loans, assessments
are based on current economic conditions and real estate values, historic loan
losses and current quality grades of specific credits, recent growth and current
delinquent and non-performing loans. The adequacy of the allowance for loan
losses as it pertains to the consumer loan portfolio is based on the assessments
of current economic conditions, historic loan losses and the mix of loans,
recent growth and the current delinquent and non-performing loans.
Although the risk of non-payment for any reason exists with respect to
all loans, certain other more specific risks are associated with each type of
loan. The primary risks associated with commercial loans are quality of the
borrower's management and the impact of national and local economic factors.
Currently the business atmosphere remains stable for the local economy in the
McLean, Livingston and Tazewell County areas. Risk associated with real estate
loans include concentrations of loans in a loan type, such as residential real
estate, decline in real estate values and a sudden rise in interest rates.
Individual loans face the risk of borrower's unemployment as a result of
deteriorating economic conditions or renewed contract differences between unions
and management of several large companies in the Company's market area. The
Company's strategy with respect to addressing and managing these types of risks
is for the Company to follow its loan policies and underwriting criteria.
The Company has substantially increased its investment in commercial,
commercial real estate and construction and land loans since December 31, 1996.
Because of the higher degree of risk associated with these types of loans, the
Compnay has undertaken to increase its allowance for loan losses to reflect this
increased risk.
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A provision for loan losses is charged to income to increase the
allowance to a level deemed to be adequate based on management's evaluation.
When a loan or a part thereof is considered by management to be uncollectible, a
charge is made against the allowance. Recoveries of previously charged-off loans
are credited back to the allowance. The following table summarizes the changes
in the allowance for loan losses for the last five years (in thousands):
SUMMARY OF LOAN LOSS EXPERIENCE
- -------------------------------
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1 $ 840 $ 512 $ 412 $ 353 $ 388
Loan Charged off (net):
Commercial loans (8) -- -- -- (50)
Real Estate Loans:
Construction and land (7) -- -- -- --
Commercial -- (32) -- -- (3)
Residential (32) (106) (47) (59) (29)
Consumer and other loans -- (32) 20 (5) (34)
------ ------ ------ ------ ------
Net chargeoffs (47) (188) (67) (64) (116)
------ ------ ------ ------ ------
Provision for loan losses 463 516 (167) 123 81
------ ------ ------ ------ ------
Balance at December 31 $1,256 $ 840 $ 512 $ 412 $ 353
====== ====== ====== ====== ======
Ration of net chargeoffs during the period to 0.02% 0.08% 0.03% 0.03% 0.07%
average loans outstanding during the period
</TABLE>
For many years, the Company has minimized credit risk by adhering to
sound underwriting and credit review policies. These policies are reviewed at
least annually and changes approved by the board of directors. Senior management
is actively involved in business development efforts and maintenance and
monitoring of credit underwriting approval.
Management believes the allowance for loan losses is adequate to absorb
probable loan losses and that the policies and procedures in place to identify
and monitor loans for potential losses are satisfactory.
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<PAGE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- -------------------------------------------
The percentages of allocation of the allowance for loan losses among
the various categories of loans have remained relatively steady for 1994
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
% of % of % of
Amount Total Amount Total Amount Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial loans $ 320 25.48% $ 213 25.36% $ 68 13.28%
Real estate loans:
Construction and land 70 5.57 40 4.76 46 8.98
Commercial 120 9.55 116 13.81 36 7.03
Residential 435 34.63 393 46.78 222 43.37
Consumer and other loans 75 5.97 78 9.29 140 27.34
Unallocated 236 18.80 0 0.0% 0 0.0%
------ ----- ------ ----- ------ -----
Total $1,256 100.0% $ 840 100.0% $ 512 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
1995 1994
- ---------------------------------------------------------------------------------------
% of % of
Amount Total Amount Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial loans $ 56 13.59% 69 19.55%
Real estate loans:
Construction and land 16 3.88 24 6.8
Commercial 56 13.59 22 6.23
Residential 182 44.18 122 34.57
Consumer and other loans 130 31.55 116 32.85
Unallocated 0 0.0% 0 0.0
------ ------ ----- ------
Total $ 412 100.0% $ 353 100.0%
====== ====== ===== ======
</TABLE>
The percentage of the allocation of the allowance for loan losses among the
various categories have changed for the years 1994 through 1998 to reflect the
changes in the types of loans that the Company was originating, the degree of
risk associated with these loans and the performance of specific loans. The
increased investment in the higher risk commercial, commercial real estate and
construction and land loans is reflected in the increased allowance attributed
to these classifications. The unallocated portion of the allowance for loan
losses represents the amount that is necessary to cover any current adverse
conditions on the loan portfolio such as the deterioration in the agricultural
industry.
-11-
<PAGE>
DEPOSITS AND BORROWINGS
DEPOSITS. The following table shows the average amount of deposits and
average rate of interest paid thereon for the years indicated.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
Amount Rate Amount Rate Amount Rate
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31:
Noninterest bearing deposits $ 10,333 0.00% $ 7,531 0.00% $ 7,579 0.00%
Money Market deposit accounts 10,345 2.26 9,703 2.41 10,440 2.43
Savings deposits 17,221 2.40 16,921 2.48 18,163 2.46
NOW accounts 16,668 2.27 14,930 2.26 14,534 2.36
Certificate of deposit and
other time deposits 147,591 5.77 148,812 5.83 155,937 5.84
-------- ------- -------- ------ -------- -------
Total deposits $202,158 4.72% $197,897 4.89% $206,653 4.91%
======== ======= ======== ====== ======== =======
</TABLE>
As of December 31, 1998, certificates of deposit and other time deposits of
$100,000 or more mature as follows:
<TABLE>
<CAPTION>
Maturing
----------------------------------------------------------------
3 Months 3-6 6-12 Over 12
or less Months Months Months Total
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit and other
time deposits $3,732 $1,602 $1,881 4,652 $11,867
====== ====== ====== ====== =======
Per cent 31.45% 13.50% 15.85% 39.20% 100.0%
====== ====== ====== ====== =======
</TABLE>
-12-
<PAGE>
BORROWINGS. At December 31, 1998, the Bank had $39,410,000 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 advances were collateralized primarily by certain of the Bank's mortgage
loans and secondarily by the Bank's investment in capital stock of the FHLB.
FHLB advances are made pursuant to several different credit programs, each of
which has its own interest rate and range of maturities. The maximum amount that
the FHLB will advance to member institutions, including the Bank, fluctuates
from time to time in accordance with the policies of the OTS and the FHLB.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
AT OR FOR THE YEAR
ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
------ ------- -------
(DOLLARS IN THOUSANDS)
FHLB advances:
Average balance outstanding ........... $33,573 $33,858 $ 8,099
======= ======= =======
Maximum amount outstanding at any
month-end during the period ........... 39,415 46,067 19,550
======= ======= =======
Balance outstanding at end of period .. 39,410 33,944 16,250
======= ======= =======
Weighted average interest rate during
the period ............................ 6.37% 6.26% 6.01%
======= ======= =======
Weighted average interest rate at end
of period ............................. 5.67% 6.08% 5.80%
======= ======= =======
RETURN ON EQUITY AND ASSETS
1998 1997 1996
---- ---- ----
Return on assets (net income divided by
average total assets) 0.73% 0.69% 0.24%
Return on equity (net income divided by
average equity (1) 5.54% 4.88% 1.97%
Dividend payout ratio (dividends per
share divided by net income per share) 0.00% 0.00% 0.00%
Equity to assets ratio (average equity
divided by average total assets) 13.11% 14.15% 12.43%
(1) Prior to conversion on May 1, 1996, data relates to total equity capital.
-13-
<PAGE>
SUBSIDIARY ACTIVITIES
At December 31, 1998, the Bank had two wholly-owned service
corporations, CSL Service Corporation ("CSL") and Fairbury Financial Service
Corp. ("Fairbury Financial"). CSL sells tax-deferred annuities on an agency
basis. Fairbury Financial, which serviced previously sold tax deferred annuiites
and long-term care insurance policies that it sold on an agency basis, was
merged into CSL in January, 1999.
PERSONNEL
As of December 31, 1998, the Bank had 88 authorized full-time employee
positions and 28 authorized part-time employee positions. The employees are not
represented by a collective bargaining unit and the Bank considers its
relationship with its employees to be good.
REGULATION AND SUPERVISION
GENERAL
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
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's 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
-14-
<PAGE>
loan holding company (if the acquired institution is held as a separate
subsidiary) and would be subject to extensive limitations on the types of
business activities in which it could engage. The HOLA limits the activities of
a multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"), subject to
the prior approval of the OTS, and certain activities authorized by OTS
regulation, 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,without prior
written approval of the OTS, (i) control of any other savings association or
savings and loan holding company or substantially of all of the assets thereof
or (ii) more than 5% of the voting stock of another savings association or a
savings and loan holding company that is not a subsidiary. 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 associations
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 OTS has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the association.
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 Uniform Financial
Institution Rating System), and, together with the risk-based capital standard
itself, a 4% Tier I (core) 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.
-15-
<PAGE>
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. The Director of the OTS may
waive or defer a savings institution's interest rate risk component on a
case-by-case basis. At December 31, 1998, 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, 1998.
<TABLE>
<CAPTION>
EXCESS CAPITAL
-----------------------------
ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED
------- --------- ------------ ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Tangible............................... $28,033 $11,218 $16,815 10.00% 4.00%
Core (Leverage)........................ 28,033 11,218 16,815 10.00 4.00
Risk-based............................. 29,203 14,495 14,708 16.12 8.00
</TABLE>
-16-
<PAGE>
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution is
considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is 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 rating under the Uniform Financial Institution
Rating System). 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 rating under the
Uniform Financial Institution Rating system) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier I 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. The SAIF and the Bank Insurance Fund ("BIF") are required
by law to achieve and maintain a ratio of insurance reserves to total insured
deposits equal to 1.25%. The BIF reached this required reserve ratio during
1995, while some predictions indicated that the SAIF would not reach this target
until the year 2002. The SAIF has not grown as quickly as the BIF for many
reasons, but in large part because almost half of the SAIF premiums had to be
used to retire bonds issued by the Financing Corporation ("FICO Bonds") in the
late 1980s to recapitalize the Federal Savings and Loan Insurance Corporation.
Until 1995, the SAIF and BIF deposit insurance premium rate schedules
had been identical. But in mid-1995, the FDIC issued final rules modifying its
assessment rate schedules for SAIF and BIF member institutions. Under the
revised schedule, SAIF members continued to pay assessments ranging from $0.23
to $0.31 per $100 of deposits, while the BIF members paid assessments ranging
from zero to $0.27 per $100 of deposits, but the majority of BIF members paid
only the $2,000 minimum annual premium. Thrift industry represenatives argued
that this significant premium differential caused savings associations to
operate at a competitive disadvantage to their BIF insured bank counterparts.
In 1996, President Clinton signed the Deposit Insurance Funds Act of
1996 ("DIFA") which among other things, imposed a special assessment of 65.7
basis points on SAIF assessable deposits held as of March 31, 1995, payable
November 27, 1996. As a result of the DIFA and the special assessment, the FDIC
has lowered the SAIF assessment to the current rate of 0 to 27 basis points.
The amount each insured depository institution pays for FDIC insurance
coverage is determined in accordance with a risk-based assessment system under
which all insured depository institutions are placed into one of nine categories
and assessed insurnace premiums based upon their level of capital and
supervisory
-17-
<PAGE>
evaluation. SAIF member institutions classified as well-capitalized and
considered financially strong pay the lowest premium (currently 0.0% of
deposits) while SAIF member institutions that are undercapitalized and of
substantial supervisory concern pay the highest premium (currently .27% of
deposits).
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.
FICO BOND PAYMENTS. The DIFA also amended the Federal Home Loan Bank
Act to impose the assessment for the payment of the FICO Bonds against both SAIF
and BIF deposits beginning in 1997. As of January 1, 1998 BIF deposits are
assessed for FICO payments at a rate that is 20 percent of the rate assessed on
SAIF deposits. The FICO assessment rate on BIF and SAIF deposits will be the
same beginning on the earlier of January 1, 2000 or the date the BIF and SAIF
are merged.
FEDERAL HOME LOAN BANK SYSTEM The Bank is a memeber of the Federal Home
Loan Bank System ("FHLB") which consists of 12 regional FHLBs. The FHLB provides
a central credit facility primarily for member associations. The Bank, as a
member of the FHLB- Chicago, is required to acquire and hold shares of capital
stock in that FHLB in an amount at least equal to 1 percent of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB-Chicago, whichever is greater. The Bank iS in compliance with this
requirement, with an investment in FHLB-Chicago stock at December 31, 1998 of
$1,970,700. The FHLB advances must be secured by specified types of collateral
and may be obtained only for the purpose of purchasing or funding new
residential housing finance assets.
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, 1998, the Bank's limit on loans to one borrower was $4.2 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% of the
Bank's capital, which at December 31, 1998 increased their individual loan to
one borrower limit to $8.4 million. At December 31, 1998, the Bank's largest
aggregate outstanding balance of loans to one borrower was $7.2 million.
BROKERED DEPOSITS. Well-capitalized savings associations that are not
troubled are not subject to brokered deposit limitations. Adequately-capitalized
associations are able to accept, renew or roll over brokered deposits but only
(i) with a waiver from the FDIC and (ii) subject to the limitation that they do
not pay an effective yield on any such deposit that exceeds by more than 75
basis points (a) the effective yield on deposits of comparable size and maturity
in such association's normal market area for deposits accepted in its normal
market area or (b) the national prime rate paid on deposits of comparable size
and maturity for deposits accepted outside the institution's normal market area.
Undercapitalized associations are not permitted to accept brokered deposits and
may not solicit deposits by offering an effective yield that exceeds by more
than 75 basis points the prevailing effective yields on insured deposits of
comparable maturity in the association's normal market area or in the market
area in which such deposits are being solicited. At December 31, 1998 the Bank
had no brokered deposits and was not soliciting brokered deposits.
-18-
<PAGE>
REAL ESTATE LENDING STANDARDS. The OTS and other federal banking
agencies have uniform regulations prescribing real estate lending standards. The
OTS regulations require each savings association to establish and maintain
written internal real estate lending standards consistent with safe and sound
banking practices and appropriate to the size of the institution and the nature
and scope of its real estate lending activities. The policy must also be
consistent with accompanying OTS guidelines, which include maximum loan-to-value
ratios for the following types of real estate loans: raw land (65 percent), land
development (75 percent), nonresidential construction (85 percent), improved
property (85 percent) and one-to-four-family residential construction (85
percent). Owner-occupied one-to-four family mortgage loans and home equity loans
do not have maximum loan-to-value ratio limits, but those with a loan-to-value
ratio at origination of 90 percent or greater are to be backed by private
mortgage insurance or readily marketable collateral. Institutions are also
permitted to make a limited amount of loans that do not conform to the proposed
loan-to-value limitaitons so long as such exceptions are appropriately reviewed
and justified. The guidelines also list a number of lending situations in which
exceptions to the loan-to-value standard are justified.
QTL TEST. The HOLA requires savings institutions to meet a QTL test by
maintaining 65 percent of their portfolio assets (defined as all assets minus
intangible assets, property used by the association in conducting its business
and liquid assets equal to 20% of total assets) in certain qualified thrift
investments in at least nine out of every twelve months. Residential mortgage
loans and related investments, loans for educational purposes,loans to small
businesses and loans made through credit cards are qualified thrift investments.
In addition, other loans for personal, family and household purposes, along with
other specified assets, count as qualified thrift investments up to 20 percent
of portfolio assets.
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, 1998, the Bank maintained 76.25% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
CAPITAL DISTRIBUTIONS. Effective April 1, 1999, the OTS regulations on
capital distributions have been amended so that no prior application or notice
is required to the OTS for certain capital distributions by a savings
association that is not a subsidiary of a savings and loan holding company.
Capital distributions subject to the regulations include: any distribution of
cash or other property made to shareholders on account of their ownership,
except for dividends consisting only of shares or rights to repurchase shares;
the repurchase, redemption or acquisition of shares of debt instruments included
in capital; any direct or indirect payment of cash or other property to
shareholders or affiliates in connection with a corporate restructuring; and any
distribution charged against capital accounts if the savings association would
not be well capitalized after the distribution. Any savings association that
does not qualify for expedited treatment for applications submitted to the OTS
must file an application for any capital distribution. A savings association
that is eligible for expedited treatment must file an application for a capital
distribution if the total of all capital distributions for the year exceeds net
income for the year to date plus retained net income for the preceding two
years, if the savings association would not be at least adequately capitalized
following the distribution or if the proposed distribution would violate any
applicable law, regulation or agreement with the OTS. In addition, a savings
association that is eligible for expedited treatment, must file a notice of any
capital distribution with the OTS if the savings association is a subsidiary of
a savings and loan holding company. A savings association that is eligible for
expedited treatment that is not a subsidiary of a savings and loan holding
company also must file a notice of capital distribution if the savings
association would not be well capitalized following the proposed capital
distribution or if the proposed capital distribution would reduce or retire any
common or preferred stock or debt instruments included in capital.
Since the Bank is a subsidiary of a savings and loan holding company,
it must file a notice prior to any capital distribution and may, in some
instances, be required to file an application for approval of certain capital
-19-
<PAGE>
distributions as outlined above. Notices or applications must be filed at least
30 days prior to the proposed declaration of a dividend or approval of another
capital distribution by the board of directors of the Bank. The OTS may
disapprove a notice or deny an application if a savings associaiton will be
undercapitalized following the distribution, if the proposed distribution raises
safety or soundness concerns, or if the proposed distribution violates any
applicable law, regulation or agreement with the OTS.
LIQUIDITY. The Bank is required to maintain an average daily balance of
specified liquid assets sufficient to insure its safe and sound operation, but
not less than 4% of either its liquidity base at the end of the preceding
calendar quarter or the average daily balance of its liquidity base during the
preceding quarter. The liquidity base consists of net withdrawable deposit
accounts plus short-term borrowings. In computing net withdrawable accounts, the
Bank may exclude such accounts maturing in more than one year. The OTS may
initiate enforcement actions for failure to meet these liquidity 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, 1998 totaled $74,000.
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"). Subsidiaries of a savings association are
genrally exempted from the definition of "affiliate". 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 the absence of
comparable transactions, such transactions may occur only under terms and
circumstances, including credit standards, that in good faith would be offered
to or would apply to 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
-20-
<PAGE>
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.
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.
CNS Financial Management Requirements. FDIC regulations require
depository institutions having $500 million or more in total assets to have an
annual independent audit, an audit committee comprised solely of outside
directors, and to hire outside auditors to evaluate the institution's internal
control structure and procedures and compliance with laws and regulations
relating to safety and soundness. The FDIC , in adopting the regulations,
reiterated its belief that every depository institution, regardless of size,
should have an independent audit and independent audit committee.
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 require that reserves of 3% be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$47.8 million or less (subject to adjustment by the Federal Reserve Board) and
an initial reserve of $1,434,000 plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess of $47.8 million. The first $4.7 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve Board) are
exempted from the reserve requirements. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
-21-
<PAGE>
IMPACT OF CHARTER CHANGE ON BANK REGULATIONS
GENERAL. As discussed above (See "Business-Recent Developments"), the
Bank is in the process of changing its charter from that of a federal savings
institution to an Illinois-chartered savings bank. After the charter change, the
Bank will be subject to regulation, examination and supervision by the Illinois
Office of Banks and Real Estate (the "IOBRE") as the chartering agency rather
than the OTS. Since the FDIC will become the Bank's primary federal regulatory
agency, its role in regulation, examination and supervision will be increased.
Many of the regulatory requirements discussed above will not be
changed, although in some instances, the FDIC will play a more active role. The
requirements discussed above under the headings "Insurance of Deposits", "FICO
Bond Payments", "Federal Home Loan Bank System", "Brokered Deposits", "Real
Estate Lending Standards", "Transactions with Related Parties", "Standards for
Safety and Soundness", "Financial Management Requirements", and "Federal Reserve
System" will remain unchanged, although in some instances, the applicable
federal agency for enforcement will be the FDIC rather than the OTS. In other
areas, as discussed below, the Bank will be subject to different requirements
than those that currently apply to the Bank.
CAPITAL REQUIREMENTS. Under the Illinois Savings Bank Act (the "ISBA")
and the regulations of the IOBRE, an Illinois savings bank must maintain a
minimum level of total capital equal to the higher of 3% of total assets or the
amount required to maintain insurance of deposits by the FDIC. The IOBRE has the
authority to require an Illinois savings bank to maintain a higher level of
capital if the IOBRE deems such higher level necessary based on the savings
bank's financial condition, history, management or earnings prospects.
FDIC requirements for the leverage capital ratio and risk-weighted
capital ratios are virtually identical to those required by the OTS. Therefore,
the Bank will be required to maintain: (i) Tier 1 capital in an amount not less
than 3% of average adjusted total assets (the "leverage ratio"); (ii) Tier 1
capital in an amount no less than 4% of risk-weighted assets; and (iii) total
capital in an amount not less than 8% of risk-weighted assets. In the case of
the leverage ratio, the 3% requirement applies only to those institutions in the
strongest financial and managerial condition (with a composite rating of "1"
under the Uniform Financial Institutions Rating System). All other institutions
will be required to maintain a leverage ratio of 4% or 5%.
LOANS TO ONE BORROWER. Under the ISBA, the total loans and extensions
of credit, both direct and indirect, by the Bank to any person (other than the
United States or its agencies, the State of Illinois or its agencies, and any
municipal corporation for money borrowed) outstanding at one time must not
exceed the greater of $500,000 or 20% of the Bank's total capital plus general
loan loss reserves. The Bank also may make loans in an amount equal to an
additional 10% of the Bank's capital plus general loan loss reserves if the
loans are 100% secured by readily marketable collateral.
In addition, with the prior written approval of the IOBRE, a savings
bank that has capital in excess of 6% of assets may make loans to one person for
the development of residential housing properties located in Illinois of up to
30% of the savings bank's total capital and general loan loss reserves.
LENDING RESTRICTIONS. While the ISBA places limitations on the types of
loans that the Bank may make, it does not include a QTL test. The Bank will be
authorized to make various loans secured by real estate, deposit accounts, or
cash surrender value of insurance policies or for the purpose of financing or
improving real estate or financing automobiles, mobile homes or education. Under
the ISBA, the Bank will be prohibited from making secured or unsecured loans for
business, corporate, commercial or agricultural purposes representing
-22-
<PAGE>
in the aggregate an amount in excess of 15% of its total assets, unless the
IOBRE authorizes in writing a higher percentage limit for such loans upon the
request of the Bank. However, the Bank will be authorized to make any loan that
it could make if it were an Illinois-chartered savings and loan association or a
federal savings and loan association or savings bank.
CAPITAL DISTRIBUTIONS. Under the ISBA, dividends may only be declared
when the total capital of the Bank is greater than that required by Illinois
law. Dividends may be paid by the Bank out of net profits (i.e. earnings from
current operations, plus actual recoveries on loans, investments and other
assets, after deducting all current expenses, including dividends or interest on
deposits, additions to reserves as required by the IOBRE, actual losses, accrued
dividends on preferred stock, if any, and all state and federal taxes). The
written approval of the IOBRE must be obtained, however, before a savings bank
having total capital of less than 6% of total assets may declare dividends in
any calendar year in an amount in excess of 50% of its net profits for the
calendar year. A savings bank may not declare dividends in excess of its net
profits in any year without the approval of the IOBRE. In addition, before
declaing a dividend on its capital stock, a savings bank must transfer no less
than 10% of its net profits for the preceding half year in the case of quarterly
or semi-annual dividends or not less that 10% of the net profits for the
preceding two half year periods in the case of annual dividends to its paid-in
surplus until it shall have paid-in surplus equal to its capital stock. The
IOBRE and the FDIC also have the authority to prohibit the payment of any
dividends by the Bank if the IOBRE or the FDIC determines that the distribution
would constitute an unsafe or unsound practice.
ASSESSMENTS. The IOBRE has established a schedule for the assessment of
"supervisory fees" upon all Illinois savings banks to fund the operations of the
IOBRE. These supervisory fees are computed on the basis of each savings bank's
total assets (including consolidated subsidiaries) and are payable at the end of
each calendar quarter. A schedule of fees has also been established for certain
filings made by Illinois savings banks with the IOBRE. The IOBRE also assesses
fees for examinations conducted by the IOBRE's staff, based upon the number of
hours spent by the IOBRE's staff performing the examination.
ENFORCEMENT. The IOBRE and FDIC have extensive enforcement authority
over Illinois-chartered savings banks. This enforcement authority includes,
among other things, the ability to assess civil money penalties, to issue cease
and desist orders and to remove directors and officers. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.
The IOBRE is given authority by Illinois law to appoint a conservator
or receiver for an Illinois savings bank under certain circumstances including,
but not limited to, insolvency, a substantial dissipation of assets due to
violation of law, regulation, order of the IOBRE or due to any unsafe or unsound
practice, or the occurrence of an unsafe or unsound condition likely to cause
insolvency or substantial dissipation of assets or earnings that will weaken the
condition of the savings bank and prejudice the interests of depositors. The
FDIC also has authority under federal law to appoint a conservator or receiver
for an insured savings bank under certain circumstances. The FDIC is required,
with certain exceptions, to appoint a receiver or conservator for an insured
state savings bank if that savings bank was "critically undercapitalized" on
average during the calendar quarter beginning 270 days after the date onwhich
the savings bank became "critically undercapitalized". For this purpose,
"critically undercapitalized" means having a ratio of tangible capital to total
assets of less than 2%. See "-Prompt Corrective Regulatory Action". The FDIC may
also appoint itself as conservator or receiver for a state savings bank under
certain circumstances on the basis of the institution's fiancial condition or
upon the occurrence of certain events, including: (I) insolvency (whereby the
assets of the savings bank are less than its liabilities to depositors and
others); (ii) substantial dissipation of assets or earnings through violations
of law or unsafe or unsound practices; (iii) existence of an unsafe or unsound
condition to transact business; (iv) liklihood that the savings bank will be
unable to meet the demands of its depositors or to pay its obligations in the
normal course of business; and (v) insufficient capital, or the incurring or
likely incurring of losses that will deplete
-23-
<PAGE>
substantially all of the institution's capital with no reasonable prospect of
replenishment of capital without federal assistance.
CURRENT ACCOUNTING ISSUES
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This Statement requires companies to record derivatives on the
balance sheet at their fair value. Statement No. 133 also acknowledges that the
method of recording a gain or loss depends on the use of the derivative.
The new Statement applies to all entities. If hedge accounting is
elected by the entity, the method of assessing the effectiveness of the hedging
derivative and measurement approach of determining the hedge's ineffectiveness
must be established at the inception of the hedge.
Statement No. 133 amends Statement No. 52 and supercedes No. 80, 105
and 119. Statement No. 107 is amended to include the disclosure provisions about
the concentrations of credit risk from Statement 105. Several Emerging Issues
Task Force consensuses also are changed or modified by the provisions of
Statement 133.
Statement No. 133 will be effective for all fiscal years beginning
after June 15, 1999. The Statement may not be applied retroactively to financial
statement of prior periods. The adoption of the Statement would have no material
impact on the Company's financial condition or results of operation.
ACCOUNTING FOR MORTGAGE BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF
MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE
Also in 1998, the FASB issued Statement No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". It establishes accounting
standards for certain activities of mortgage banking enterprises and for other
enterprises with similar mortgage operations. This Statement amends No. 65.
Statement No. 65, as previously amended by Statements No. 115 and 125,
required a mortgage banking enterprise to classify a mortgage-backed security as
a trading security following the securitization of the mortgage loans held for
sale. This Statement further amends Statement No. 65 to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities must classify the resulting mortgage-backed security or other
retained interests based on the entity's ability to sell or hold those
investments.
The determination of the appropriate classification for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise now conforms to Statement No. 115. The only new requirement is that
if an entity has a sales commitment in place, the security must be classified
into trading.
This Statement is effective for the first fiscal quarter beginning
after December 15, 1998. On the date the Statement is initially applied, an
entity may reclassify mortgage-backed securities and other beneficial interest
retained after the securitization of mortgage loans held for sale from the
trading category, except for those with sales commitments in place. Those
securities and other interests shall be classified based on the
-24-
<PAGE>
entity's present ability and intent to hold the investments. The adoption of
this Statement would have no material impact on the Company's financial
condition and results of operations.
REPORTING THE COSTS OF START-UP ACTIVITIES
During 1998, the Accounting Standards Executive Committee, ("AcSec")
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities". Statement of Position 98-5 will affect all non-government entities,
including not-for-profits, reporting start-up costs in their financial
statements.
1. Some existing industry practices result in the capitalization and
amortization of start-up costs. This Statement of Position requires
that start-up costs be expensed when incurred. The Statement of
Position applies to start-up activities and organizational costs
associated with both development stage and established operating
entities.
According to Statement of Position 98-5, start-up activities are "those
one-time activities related to opening a new facility, introducing a new product
or service, conducting business in a new territory, conducting business with a
new class of customer or beneficiary, initiating a new process in an existing
facility, or commencing some new operation. Start-up activities include
activities related to organizing a new entity commonly referred to as
organizational costs". The adoption of this statement would have no material
impact on the Company's financial condition and results of operation.
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 OR ORIGINAL YEAR NET BOOK VALUE AT DEPOSITS PER
LOCATION OWNED LEASED OR ACQUIRED DECEMBER 31, 1998 OFFICE
- ----------------------------------- ---------- ------------------ ----------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EXECUTIVE BRANCH OFFICE: Owned 1997 $3,726 $17,600
2101 North Veterans Parkway*
Bloomington, Illinois 61704
BRANCH OFFICES: Owned 1963 737 59,881
301 Broadway*
Normal, Illinois 61761
2402 E. Washington* Owned 1980 773 42,442
Bloomington, Illinois 61704
1722 Hamilton Road* Owned 1995 1,377 9,419
Bloomington, Illinois 61704
115 N. Third Street* Owned 1981 805 51,993
Fairbury, Illinois 61739
205 S. Main * Owned 1974 212 26,762
Eureka, Illinois 61530 ------ ---------
Total $7,630 $ 208,097
====== =========
</TABLE>
- ------------------
* An automated teller machine is located at each office.
None of the properties owned by the Company are subject to any emcumbrance.
-25-
<PAGE>
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
No matters were submitted during the fourth quarter of 1998 to a vote
of security holders, through the solicitation of proxies or otherwise.
SUPPLEMENTAL INFORMATION - EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions with the Company and subsidiary bank of all
executive officers of the Company are listed below:
<TABLE>
<CAPTION>
OFFICERS WITH THE COMPANY PRINCIPAL OCCUPATION
NAME AND AGE AND SUBSIDIARY BANK DURING PAST FIVE YEARS
------------ ------------------- ----------------------
<S> <C> <C>
C. William Landefeld , 59 President and Chief Executive President and Chief Executive
Officer, Citizens First Financial Officer, Citizens First Financial
Corp.; President and Chief Executive Corp. since 1996; President and
Officer, Citizens Savings Bank Chief Executive Officer, Citizens
F.S.B. Savings Bank F.S.B. since 1987
Richard F. Becker, 51 Senior Vice President and Secretary, Senior Vice President and Secretary,
Citizens First Financial Corp.; Citizens First Financial Corp. since
Senior Vice Presidient and 1996, Senior Vice President and
Secretary, Citizens Savings Bank Secretary, Citizens Savings Bank
F.S.B. F.S.B. since 1996, Vice President,
Citizens Savings Bank F.S.B. since
1979.
Dallas G. Smiley, 52 Senior Vice President and Chief Senior Vice President and Chief
Financial Officer, Citizens First Financial Officer, Citizens First
Financial Corp.; Senior Vice Financial Corp. since 1996, Senior Vice
President and Chief Financial President, Citizens Savings Bank
Officer, Citizens Savings Bank F.S.B. F.S.B. since 1995, Vice President
and Chief Financial Officer,
Citizens Savings Bank F.S.B.
since 1987.
</TABLE>
-26-
<PAGE>
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information relating to the market for Registrant's common equity and
related stockholder matters appears in the Registrant's 1998 Annual Report to
Stockholders on page 42 and is incorporated herein by reference. The Company did
not pay dividends during any quarter in 1998.
ITEM 6 SELECTED FINANCIAL DATA
Information required under this item is incorporated by reference on
page 5 of the Company's 1998 Annual Report to Stockholders under the caption
"Selected Financial Data".
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The above-captioned information appears under Management's Discussion
and Analysis of Results of Operations and Financial Condition in the
Registrant's 1998 Annual Report to Stockholders on pages 6 through 10 and 13
through 15 and is incorporated herein by reference.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required under this item is incorporated by reference
to pages 11 and 12 of the Company's 1998 Annual Report to Stockholders.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Citizens First Financial Corp.
and its subsidiaries, together with the report thereon by Olive LLP for the year
ended December 31, 1998 appears in the Registrant's 1998 Annual Report to
Stockholders on pages 16 through 41 and are incorporated herein by reference.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item relating to directors is
incorporated by reference to the registrant's 1999 Proxy Statement furnished to
its stockholders in connection with an annual meeting to be held April 26, 1999
(the "1999 Proxy Statement"), under the caption "Election of Directors", which
Proxy Statement has been filed with the Commission. The information required
under this item relating to executive officers is set forth in Part I,
"Supplemental Information -- Executive Officers of the Registrant" of this
annual report on Form 10-K.
-27-
<PAGE>
ITEM 11 EXECUTIVE COMPENSATION
The information relating to directors' and executive compensation is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Shareholders to be held on April 26, 1999 at pages 20 through
27.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated by reference
to pages 18 and 19 of the registrant's 1999 Proxy Statement, under the captions
"Security Ownership of Directors, Nominees for Directors, Most Highly
Compensated Executive Officers and All Directors and Executive Officers as a
Group" and "Security Ownership of Shareholder Holding 5% or More" which Proxy
Statement has been filed with the Commission.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related
transactions is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 26, 1999 at
page 23 under the caption "Transactions with Certain Related Persons".
PART IV
ITEM 14 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 1998 Annual Report to Stockholders
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Independent Auditors' Report...................................................................16
Consolidated Balance Sheet as of
December 31, 1998 and 1997.....................................................................17
Consolidated Statement of Income for the
years ended December 31, 1998, 1997 and 1996...................................................18
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996...........................................19
Consolidated Statement of Cash Flows for the
years ended December 31, 1998, 1997 and 1996................................................20-21
-28-
<PAGE>
Notes to Consolidated Financial Statements..................................................22-41
</TABLE>
The remaining information appearing in the Annual Report to
Stockholders is not deemed to be filed as part of this report,
except as expressly provided herein.
(2) Financial Statement Schedules
All schedules are omitted because they are not
required or applicable, or the required information
is shown in the consolidated financial statements or
the notes thereto.
(3) Exhibits
The following exhibits are filed as part of this
report.
3.1 Certificate of Incorporation of Citizens First
Financial Corp.*
3.2 Bylaws of Citizens First Financial Corp.*
4.0 Stock Certificate of Citizens First Financial Corp.*
10.1 Citizens Savings Bank, F.S.B. Employee Stock
Ownership Plan*
10.2 Form of Employment Agreement between Citizens Savings
Bank, F.S.B. and certain executive officers*
10.3 Form of Employment Agreement between Citizens First
Financial Corp. and certain executive officers*
10.4 Form of Citizens Savings Bank, F.S.B. Supplemental
Executive Retirement Plan*
10.5 Form of Change in Control Agreement between Citizens
Savings Bank, F.S.B. and certain executive officers*
10.6 Form of Citizens Savings Bank, F.S.B. Supplemental
Executive Retirement Plan*
10.7 Form of Citizens Savings Bank, F.S.B. Employee
Severance Compensation Plan*
10.8 Citizens First Financial Corp. 1997 Stock-Based
Incentive Plan**
13.0 Portions of 1998 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., LLP
27.0 Financial Data Schedule
- ------------------
* Incorporated herein by reference to the Exhibits to
Form SB-2, Registration Statement, filed on January
24, 1997 and any amendments thereto, Registration No.
333-556.
** Incorporated herein by reference to the Proxy
Statement for the Special Meeting of Shareholders
held on November 12, 1997.
(b) Reports on Form 8-K:
A report on Form 8-K was filed on October 16, 1998, to
announce the registrant's completion of a stock repurchase
program of 5% of its outstanding shares of common stock. The
120,449 shares were purchased at an average price of $15.83.
A report on Form 8-K was filed on November 19, 1998, to
announce the approval from the Office of Thrift Supervision
for the repurchase of 5% or 114,426 of its outstanding shares
of common stock.
-29-
<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, 1999
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 Director March 31, 1999
- -------------------------------
C. William Landefeld (principal executive officer)
/s/ Dallas G. Smiley Senior Vice President, Treasurer and Chief Financial March 31, 1999
- -------------------------------
Dallas G. Smiley Officer (principal accounting and financial officer)
/s/ L. Carl Borngasser Director March 31, 1999
- -------------------------------
L. Carl Borngasser
/s/ Paul J. Hoffman Director March 31, 1999
- -------------------------------
Paul J. Hoffman
/s/ Dean J. Broquard Director March 31, 1999
- -------------------------------
Dean J. Broquard
/s/ Ronald C. Wells Director March 31, 1999
- -------------------------------
Ronald C. Wells
</TABLE>
-30-
EXHIBIT 13.0
PORTIONS OF 1998 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
Citizens First Financial Corp. and Subsidiary
Selected Financial Data (In thousands, except share data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income ............................ $ 21,134 $ 20,301 $ 18,320 $ 16,699 $ 15,151
Interest expense ........................... 11,675 11,734 10,465 10,077 8,711
------------ ------------ ------------ ------------ ------------
Net interest income ........................ 9,459 8,567 7,855 6,622 6,440
Provision for loan losses .................. 464 516 167 124 81
Other income ............................... 1,695 1,983 1,169 1,145 854
Other expense .............................. 7,426 6,946 7,926 5,972 5,262
------------ ------------ ------------ ------------ ------------
Income before income tax ................... 3,264 3,088 931 1,671 1,951
Income tax expense ......................... 1,250 1,199 321 658 740
------------ ------------ ------------ ------------ ------------
Net income ................................. $ 2,014 $ 1,889 $ 610 $ 1,013 $ 1,211
------------ ------------ ------------ ------------ ------------
PER SHARE
Basic earnings per share (1) ............... $ 0.90 $ 0.79 N/A N/A N/A
Diluted earnings per share (1) ............. $ 0.84 $ 0.74 N/A N/A N/A
Cash dividends paid (1) .................... $ 0.00 $ 0.00 $ 0.00 N/A N/A
Book value at December 31 (1) .............. $ 16.12 $ 14.97 $ 14.32 N/A N/A
Market value at December 31 (1) ............ $ 13.88 $ 20.25 $ 14.38 N/A N/A
RATIOS BASED ON NET INCOME
Return on average stockholders' equity (2) . 5.54% 4.88% 1.97% 6.91% 8.91%
Return on average assets ................... 0.73% 0.69% 0.24% 0.44% 0.55%
Net interest yield on average earning assets 3.63% 3.32% 3.30% 3.03% 2.93%
YEAR-END BALANCE SHEET DATA
Total assets ............................... $ 287,274 $ 273,600 $ 261,637 $ 228,638 $ 227,872
Net loans (3) .............................. 236,873 231,862 214,070 188,361 176,910
Securities ................................. 18,033 19,302 29,371 24,879 38,255
Deposits ................................... 208,097 198,633 202,125 209,864 209,258
Other borrowings ........................... 39,410 33,944 16,250 0 3,000
Total stockholders' equity (2) ............. 36,020 37,970 40,349 15,519 13,652
</TABLE>
(1) Per share information is not provided for periods prior to the Company's
conversion on May 1, 1996.
(2) Prior to conversion on May 1, 1996, data relates to total equity capital.
(3) Includes loans held for sale.
5
<PAGE>
CITIZENS FIRST FINANCIAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
Citizens First Financial Corp. (the "Company") is the holding company for
Citizens Savings Bank, 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 prior to May 1, 1996 and for the Company and the Bank
for the period subsequent to the period beginning May 1, 1996.
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 borrowings,
primarily in one-to-four family residential mortgages. The Bank also invests in
commercial, multi-family, construction and land, commercial real estate,
agricultural, consumer and other loans.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND DECEMBER 31, 1997
Total assets increased from $273.6 million at December 31, 1997 to $287.3
million at December 31, 1998. The $13.7 million or 5.0% increase was primarily
due to the increase in interest-bearing demand deposits and loans which was
funded by increased deposits and borrowings from the Federal Home Loan Bank of
Chicago (the "FHLB").
Interest bearing deposits increased from $3,317,000 at December 31, 1997 to
$12,580,000 at December 31, 1998, an increase of $9,263,000 or 279.3%. This
increase was primarily the result of sales, maturities and principal paydowns on
mortgage-backed securities, increases in deposits and borrowings from the FHLB.
The increased balances provided the Company additional liquidity.
Investment securities decreased from $19,302,000 at December 31, 1997 to
$18,033,000 at December 31, 1998, a decrease of $1,269,000 or 6.6%.
Loans, net of allowance for loan losses and including loans held for sale,
increased from $231,862,000 at December 31, 1997 to $236,874,000 at December 31,
1998, an increase of $5,012,000 or 2.2%. The increase was funded by increased
deposits and borrowings from the FHLB. The growth in loans was primarily
attributable to increases of $16.8 million in commercial loans, including
agricultural loans, and $4.2 million in construction and land loans. These
increases were offset by a $20.5 million decrease in one-to-four family mortgage
loans.
The allowance for losses increased from $840,000 at December 31, 1997 to
$1,256,000 at December 31, 1998, an increase of $416,000 or 49.5%. The ratio of
the Company's allowance for loan losses to total loans were 0.54% and 0.36% at
December 31, 1998 and 1997. The increases in allowance for loan losses
percentage was due to increases in construction and commercial loans as a
percentage of total loans. The ratios of the Company's allowance for loan losses
to total nonperforming loans were 331.5% and 88.6% at December 31, 1998 and
1997. Company management performs ongoing reviews of the loan portfolio in order
to identify nonperforming loans and potential problem loans and to evaluate the
adequacy of the allowance for loan losses. In performing its review, management
classifies nonperforming and potential problem loans as either substandard,
doubtful, loss or special mention loans. A loan is considered substandard if it
is inadequately protected by the current net worth and paying capacity of the
borrower or of the collateral pledged, if any. Substandard loans include those
characterized by the distinct possibility that the Company will sustain some
loss if the deficiencies are not corrected. Loans classified as doubtful have
all of the weaknesses inherent in those classified as substandard with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts and conditions, highly
questionable and improbable. Loans classified as loss are those considered
uncollectible and of such little value that their continuance as loans without
the establishment of a specific loss reserve is not warranted. Loans which do
not currently expose the Company to sufficient risk to warrant classification in
any one of the
6
<PAGE>
categories described above but possesses weaknesses are classified as special
mention. The total of internally classified loans of $786,000 and $1,538,000 at
December 31, 1998 and 1997, respectively, equals the sum of nonperforming loans,
which are loans past due 90 days or more and nonaccruing loans and potential
problem loans.
Other assets increased from $3,030,000 at December 31, 1997 to $3,451,000 at
December 31, 1998, an increase of $421,000 or 13.9%. The increase was due to
increased accrued interest on loans and capitalized mortgage servicing rights.
Deposits increased from $198,633,000 at December 31, 1997 to $208,097,000 at
December 31, 1998, an increase of $9,464,000 or 4.8%. During 1998 demand
deposits increased by $10.2 million. The increase in deposits was primarily due
to increased deposits at the new full service office.
Borrowings from the FHLB increased from $33,944,000 at December 31, 1997 to
$39,410,000 at December 31, 1998, an increase of $5,466,000 or 16.1%. Proceeds
from the borrowings were used to provide additional liquidity to Company
operations.
Other liabilities increased from $2,359,000 at December 31, 1997 to $3,146,000
at December 31, 1998, an increase of $787,000 or 33.4% primarily because of an
increase in accrued principal and interest payments payable to owners of
serviced loans.
Total stockholders' equity capital decreased by $1,950,000 or 5.1%, from
$37,970,000 at December 31, 1997 to $36,020,000 at December 31, 1998. The
decrease was caused by the repurchase of 301,333 shares of the Company's stock,
offset by earnings of the Company during the year ended December 31, 1998 and
the allocation of shares in the Company's stock-based compensation plans.
COMPARISON OF OPERATING RESULTS FOR YEARS ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997
GENERAL
Net income for the year ended December 31, 1998 increased by $125,000 from
$1,889,000 for the year ended December 31, 1997 to $2,014,000 for the year ended
December 31, 1998. The increase was primarily due to increased net interest
income and net gains on loan sales which was partially offset by the 1997 gain
on the sale of a branch facility of $523,000 ($320,000 after-tax) and increased
other expenses.
INTEREST INCOME
Interest on loans increased by $853,000 or 4.6%, from $18,395,000 for the year
ended December 31, 1997 to $19,248,000 for the year ended December 31, 1998. The
increase was due primarily to higher interest rates resulting from a change in
the composition of the loan portfolio. There was a $20.4 million decrease in
lower yielding one-to-four family loans and an increase of $20.9 million in
higher yielding commercial and construction and land loans. Average loans for
1998 were only $878,000 higher than the 1997 average.
Interest on investments, including mortgage-backed securities and FHLB stock
dividends, decreased from $1,812,000 for the year ended December 31, 1997 to
$1,218,000 for the year ended December 31, 1998, a decrease of $594,000 or
32.8%. The decrease was primarily due to lower average balances of
mortgage-backed securities in 1998 and a seventy basis point decrease in the
average yield on mortgage-backed securities. Mortgage-backed securities
declined $10.0 million on average due to sales, maturities and principal
paydowns. This reduction contributed to the increase in cash and cash
equivalents. Interest on interest bearing deposits increased by $574,000 or
610.6%, from $94,000 for the year ended December 31, 1997 to $668,000 for the
year ended December 31, 1998 because of higher average balances during 1998.
INTEREST EXPENSE
Interest on savings deposits decreased by $134,000 or 1.4% from $9,672,000 for
the year ended December 31, 1997 to $9,538,000 for the year ended December 31,
1998. The decrease was primarily caused by an eleven basis point decrease in the
average interest rate paid on deposits, partially offset by a slight increase in
average balance of deposits.
The interest on borrowings increased by $75,000 or 3.6%, from $2,062,000 for the
year ended December 31, 1997 to $2,137,000 for the year ended December 31, 1998
as a result of increased average borrowings from the FHLB as well as a slight
increase in rates.
7
<PAGE>
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased from $516,000 for the year ended
December 31, 1997 to $463,000 for the year ended December 31, 1998, a decrease
of $53,000 or 10.3%. The provision for both periods reflects management's
analysis of the Company's loan portfolio based on information which is currently
available to it at such time. In particular, management considers the level of
non-performing loans and potential problem loans. Total charge-offs for 1998
were $47,000 compared to $188,000 in 1997. While management believes that the
allowance for loan losses is sufficient based on information currently
available, no assurances can be made that future events or conditions or
regulatory directives will not result in increased provisions for loan losses or
additions to the Bank's allowance for losses which may adversely affect net
income.
OTHER INCOME OTHER INCOME
Total other income decreased by $288,000 or 14.5%, from $1,983,000 for the year
ended December 31, 1997 to $1,695,000 for the year ended December 31, 1998. The
decrease was primarily due to the 1997 net gain on the sale of a branch facility
of $523,000 and a decrease in loan servicing fees which was offset by an
increase in net gains on loan sales. Net gains on loan sales increased by
$492,000 or 117.7% from $418,000 for the year ended December 31, 1997 to
$910,000 for the year ended December 31, 1998, because of an increase in loan
sales in the year ended December 31, 1998. Loan servicing fees decreased from
$205,000 for the year ended December 31, 1997 to $15,000 for the year ended
December 31, 1998, a decrease of $190,000 or 92.7%. This decrease was due to the
amortization of previously capitalized mortgage servicing rights.
OTHER EXPENSES
Total other expenses increased by $480,000 or 6.9% from $6,946,000 for the year
ended December 31, 1997 to $7,426,000 for the year ended December 31, 1998.
Salaries and benefits increased by $200,000 or 4.9% from $4,063,000 for the year
ended December 31, 1997 to $4,263,000 for the year ended December 31, 1998, due
to the increase in the price of the Company's stock which is used to fund the
ESOP stock based compensation program and the additional compensation expense
from the new full-service facility that was opened in the third quarter of 1997.
Net occupancy expenses increased by $157,000 or 16.8%, from $932,000 for the
year ended December 31, 1997 to $1,089,000 for the year ended December 31, 1998,
primarily because of depreciation on the new full-service office and
administrative facility. Deposit insurance expense increased by $19,000, from
$101,000 for the year ended December 31, 1997 to $120,000 for the year ended
December 31, 1998 because of the utilization of a deposit insurance credit
utilized in 1997.
INCOME TAX EXPENSE
Total income tax expense was $1,250,000 in 1998, compared to $1,199,000 in 1997.
The increase is attributable to higher taxable income in 1998. The effective tax
rates for the years ended December 31, 1998 and 1997 were 38.3% and 38.8%,
respectively.
COMPARISON OF OPERATING RESULTS FOR YEARS ENDED 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 a decrease
in investment securities and by borrowings from the FHLB.
<PAGE>
Interest from deposits with financial institutions decreased from $227,000 for
the year ended December 31, 1996 to $94,000 for the year ended December 31,
1997. This decrease of $133,000 or 58.6% was due to lower average deposits with
financial institutions 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. This 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 for the year ended December 31, 1997, an increase of
$1,747,000 or 554.6%. The increase was caused by an increase in borrowings from
the FHLB.
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 compared to one-to-four family mortgage loans. As a result, the
Bank's level of 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.
OTHER INCOME
Total other income increased from $1,169,000 for the year ended December 31,
1996 to $1,983,000 for the year ended December 31, 1997, 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.
OTHER EXPENSES
Total other expenses 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 a 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.
INCOME TAX EXPENSE
Total income tax expense was $1,199,000 in 1997, compared to $321,000 in 1996.
The increase is attributable to higher taxable income in 1997. The effective tax
rates for the years ended December 31, 1997 and 1996 were 38.8% and 34.5%,
respectively. The effective tax rate was lower in 1996 due to lower state taxes.
9
<PAGE>
YEAR 2000 COMPLIANCE
The Year 2000 compliance issue exists because many computer systems and
applications currently use two-digit fields to designate a year. As the century
date change occurs, data-sensitive systems may either fail or not operate
properly unless the underlying programs are modified or replaced.
The Company's lending and deposit activities, like those of most financial
institutions, depend significantly upon computer systems to process and record
transactions. The Company is aware of the potential Year 2000 problems that may
affect the operating systems that control our computers as well as those of our
third-party data service providers that maintain many of our records and those
of our customers. In 1997, the Company began the process of identifying Year
2000 related problems that may affect the Company's systems. A task force of
Company officers and employees was established to address the issues related to
these problems. Outside consultants have and will be utilized when required to
complete this project.
The task force analyzed the Company's operations and both identified those
functions that would be affected by the Year 2000 issues and determined which of
these functions were "mission critical" (i.e., vital to the day-to-day
operations of the Company). A timetable was established for completion of the
various sections of the project.
The Company is working with the companies that supply or service the Company's
computer systems to identify and remedy any Year 2000 related systems. The
Company's Board of Directors is monitoring the Company's progress in addressing
Year 2000 issues.
Inventory and testing of the Company's computer equipment was conducted during
the fourth quarter of 1998. New equipment will be obtained to replace equipment
that is not found to be Year 2000 compliant.
The Company's primary lending and savings systems have been maintained by an
independent data center. These systems have been identified as being mission
critical to the Company. The data center currently used by the Company has
completed the revision of a majority of their programs. Testing of these
programs began in the third quarter of 1998 by representatives of the data
center and their client advisory group utilizing tests that were developed by
the group. The Company participated in the development of this test plan. No
material deficiencies were noted as a result of this testing. On January 28,
1999, the Company entered into a contract with a new provider for the Company's
primary lending and savings systems. The Company's decision to convert was not
based on Year 2000 concerns it had with its current provider, but rather, on the
overall benefits of the new provider's products, service and pricing.
The Company intends to begin the conversion to the new system in the third
quarter of 1999. Immediately upon conversion, the Company will begin testing the
new systems to ensure that they are Year 2000 compliant.
The Company's direct expenses to date (other than the salary of Company
employees involved in the project) have been less than $10,000 and the Company
does not currently anticipate that its Year 2000 costs will exceed $100,000.
Although the Company believes it is taking the necessary steps to address the
Year 2000 compliance issue, no assurances can be given that some problems will
not occur or that we will not incur significant additional expenses in future
periods. In the event that the Company is ultimately required to purchase
replacement computer systems, programs and equipment, or to incur substantial
expenses to make the Company's current systems, programs and equipment Year 2000
compliant, the Company's net income and financial condition could be adversely
affected.
Because the Company's loan portfolio to individual borrowers is diversified and
its market area does not depend significantly on one employer or industry, it
does not expect any Year 2000 related difficulties that may affect the Company's
depositors and borrowers to significantly affect the Company's net earnings or
cash flow.
The Company is developing a contingency plan to deal with the Year 2000 related
issues. This program will provide for dealing with situations that might occur
that are both related to the Company's operation (e.g., computer system or
equipment, liquidity) and those that are beyond the Company's control (e.g.,
power failure, phone/communication line failure). The plan will include methods
to deal with these situations and continue to service the Company's customers
despite Year 2000 problems arising. The Company has established June 30, 1999 as
a deadline for the completion of this plan.
Certain statements contained in this section "Year 2000 Compliance" constitute
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward
looking statements involve known and unknown risks, uncertainties and other
factors that may cause actual results to differ materially from those expressed
or implied by such forward looking statements. Such factors may include, but are
not limited to, the severity of problems discovered with the Company's own
systems as Year 2000 testing continues, the cost of remedying such problems, the
severity of Year 2000 problems encountered by third party service providers and
the Company's borrowers, additional initiatives by the Company's regulators, and
the costs of Year 2000 professionals generally in the event problems are
encountered.
10
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Sources of market risk include interest rate risk, foreign currency exchange
rate risk, commodity price risk and equity price risk. The Company is only
subject to interest rate risk. The Company purchased no financial instruments
for trading purposes during 1998 or 1997.
The principal objective of the Company's interest rate risk management function
is to evaluate the interest rate risk included in balance sheet accounts,
determine the level of risk appropriate given the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with Board of Director's approved
guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates. The Company
monitors its interest rate risk as such risk relates to its operating
strategies. The Company's Board of Directors reviews the Company's interest rate
risk position on a quarterly basis. The Company's Asset/Liability Committee is
comprised of the Company's senior management under the direction of the Board of
Directors, with the Committee responsible for reviewing with the Board of
Directors its activities and strategies, the effect of those strategies on the
Company's net interest margin, the market value of the portfolio and the effect
that changes in the interest rates will have on the Company's portfolio and its
exposure limits. The extent of the movement of interest rates is an uncertainty
that could have a negative impact on the earnings of the Company.
In recent years, the Company has utilized the following strategies to manage
interest rate risk: (1) originating for investment adjustable-rate residential
mortgage and fixed-rate one-to-four family loans with maturities of 10 years or
less; (2) generally selling fixed-rate one-to-four family mortgage loans with
maturities exceeding 10 years in the secondary market without recourse and on a
servicing retained basis; (3) increasing its origination of shorter term and/or
adjustable rate commercial loans; and (4) investing in shorter term investment
securities which may generally bear lower yield as compared to longer term
investments, but which may better position the Company for increases in market
interest rates. A 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 models, 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 the Company's interest rate sensitivity "gap". An asset or liability
is said to be interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. At December 31, 1998,
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
$19,670,000. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. Accordingly,
during a period of rising interest rates, a financial institution with a
negative gap position would tend to have its interest bearing liabilities
repricing upwards at a faster rate which, consequently, may result in the cost
of its interest-bearing liabilities increasing at a rate faster than its yield
on interest-earning assets than if it had a positive gap. During a period of
falling interest rates, a financial institution with a negative gap would tend
to have its interest-bearing liabilities repricing downward at a faster rate
than its interest-earning assets as compared to an institution with a positive
gap, which consequently, may tend to positively affect the growth of its net
interest income.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998, which are
anticipated by the Company, based upon assumptions, to reprice or mature in each
of the future time periods shown. Except as stated below, the amount of assets
and liabilities shown which reprice or mature during a particular period were
determined in accordance with the earlier of term repricing or the contractual
maturity of the asset or liability. The table sets forth an approximation of the
projected repricing of assets and liabilities at December 31, 1998, on the basis
of contractual maturities, anticipated prepayments, and scheduled rate
adjustments within the selected time intervals. Annual prepayment rates for
adjustable-rate and fixed-rate loans are assumed to be 4.5% and 9.5%,
respectively. Annual prepayment rates for adjustable-rate and fixed-rate
mortgage-backed securities are assumed to be 4.5% and 7.5%, respectively. Money
market deposits are assumed to be immediately interest rate sensitive, while
passbook accounts and NOW accounts are assumed to have decay rates of 12%
annually.
11
<PAGE>
GAP TABLE (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans
Fixed rate ......................... $ 25,268 $ 10,694 $ 9,678 $ 8,787
Average interest rate .............. 8.50% 8.48% 8.45% 8.14%
Variable rate ...................... 56,228 23,319 15,515 26,506
Average interest rate .............. 8.22% 7.81% 7.65% 7.70%
Securities
Fixed rate ......................... 502 1,455 412 373
Average interest rate .............. 6.47% 5.45% 6.47% 6.47%
Variable rate ...................... 3,758 4,100 350
Average interest rate .............. 6.10% 6.08% 6.12%
Interest-bearing demand deposits ..... 12,580
Average interest rate .............. 4.56%
--------- --------- --------- ---------
Total interest-earning assets .... $ 98,336 $ 39,568 $ 25,955 $ 35,666
--------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
NOW and savings accounts ............. 4,465 4,465 4,465 4,465
Average interest rate .............. 1.98% 1.98% 1.98% 1.98%
Money market accounts ................ 11,239
Average interest rate .............. 2.51%
Time deposits
Fixed rate ......................... 87,382 34,414 16,116 2,102
Average interest rate .............. 5.53% 5.77% 5.99% 6.00%
Variable rate ...................... 5,920
Average interest rate .............. 5.49%
FHLB ADVANCES:
Fixed rate ......................... 9,000 8,000 7,935
Average interest rate .............. 5.91% 5.48% 5.82%
--------- --------- --------- ---------
Total interest-earning liabilities $ 118,006 $ 46,879 $ 20,581 $ 14,502
--------- --------- --------- ---------
INTEREST-EARNING ASSETS LESS
INTEREST-BEARING LIABILITIES ("GAP") ($ 19,670) ($ 7,311) $ 5,374 $ 21,164
--------- --------- --------- ---------
Cumulative gap ....................... ($ 19,670) ($ 26,981) ($ 21,607) ($ 443)
--------- --------- --------- ---------
Cumulative gap as % of
interest-earning assets ............ (7.30)% (10.01)% (8.02)% (0.16)%
--------- --------- --------- ---------
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
AFTER FAIR
YEAR 5 YEAR 5 TOTAL VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans
Fixed rate ......................... $ 7,952 $ 47,846 $ 110,225 $ 115,129
Average interest rate .............. 7.86% 7.69% 8.28%
Variable rate ...................... 5,081 0 126,649 129,989
Average interest rate .............. 7.63% 0.00% 7.91%
Securities
Fixed rate ......................... 838 8,216 11,796 11,796
Average interest rate .............. 6.11% 6.56% 6.37%
Variable rate ...................... 8,208 8,208
Average interest rate .............. 6.10%
Interest-bearing demand deposits ..... 12,580 12,580
Average interest rate .............. 4.56%
--------- --------- --------- ---------
Total interest-earning assets .... $ 13,871 $ 56,062 $ 269,458 $ 277,702
--------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
NOW and savings accounts ............. 4,465 14,882 37,207 37,207
Average interest rate .............. 1.98% 1.98% 1.98%
Money market accounts ................ 11,239 11,239
Average interest rate .............. 2.51%
Time deposits
Fixed rate ......................... 974 69 141,057 141,719
Average interest rate .............. 5.85% 6.25% 5.66%
Variable rate ...................... 5,920 5,920
Average interest rate .............. 5.49%
FHLB ADVANCES:
Fixed rate ......................... 3,000 11,475 39,410 39,364
Average interest rate .............. 5.55% 5.43% 5.68%
--------- --------- --------- ---------
Total interest-earning liabilities $ 8,439 $ 26,426 $ 234,833 $ 235,449
--------- --------- --------- ---------
INTEREST-EARNING ASSETS LESS
INTEREST-BEARING LIABILITIES ("GAP") $ 5,432 $ 29,636 $ 34,625 $ 42,253
--------- --------- --------- ---------
Cumulative gap ....................... $ 4,989 $ 34,625 $ 34,625 $ 42,253
--------- --------- --------- ---------
Cumulative gap as % of
interest-earning assets ............ 1.85% 12.85% 12.85% 15.68%
--------- --------- --------- ---------
</TABLE>
At December 31, 1998, the table above reflects that the Company has a negative
liability gap due to the level of interest bearing demand deposits and savings
that are generally subject to immediate withdrawal and are repriceable at any
time. As such, the effect of an increase in interest rate of 100 basis points
would decrease net interest income by approximately $196,700 in one year and
$269,800 in two years assuming no management intervention. A fall in interest
rates would have the opposite effect for the same period. In analyzing interest
rate sensitivity, the Company's management considers these differences and
incorporates other assumptions and factors, such as balance sheet growth and
prepayments, to better measure interest rate risk.
While the gap analysis provides an indication of interest rate sensitivity,
experience has shown that it does not fully capture the true dynamics of
interest rate changes. Essentially, the analysis presents only a static
measurement of asset and liability volumes based on contractual maturity, cash
flow estimates or repricing opportunity. It fails to reflect the differences in
the timing and degree of repricing of assets and liabilities due to interest
rate changes. In analyzing interest rate sensitivity, management considers these
differences and incorporates other assumptions and factors, such as balance
sheet growth and prepayments to better measure interest rate risk.
12
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED AVERAGE BALANCE SHEET (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
AT DECEMBER 31 -----------------------------------
1998 1998
---------- -----------------------------------
AVERAGE AVERAGE
YIELD/COST BALANCE INTEREST YIELD/COST
---------- ------- -------- ----------
<S> <C> <C> <C> <C>
ASSETS
Deposits & short-term investments ......... 4.56% $ 11,873 668 5.63%
Investment securities (1) ................. 6.34 7,783 500 6.42
Loans receivable (2) ...................... 8.09 228,224 19,248 8.43
Mortgage-backed securities (3) ............ 6.13 10,397 580 5.58
FHLB-Chicago stock ........................... 6.63 2,000 138 6.90
---- ------- ------- ----
Total interest-earning assets .......... 7.79 260,277 21,134 8.12
-------
Non-interest earning assets ............... 17,064
-------
Total assets ........................... 277,341 21,134
======= =======
LIABILITIES & EQUITY
Interest-bearing liabilities
Money market savings accounts .......... 2.51 $ 10,345 234 2.26
Passbook accounts ...................... 2.25 17,221 413 2.40
NOW accounts ........................... 1.74 16,668 379 2.27
Certificates accounts .................. 5.65 147,591 8,512 5.77
---- ------- ------ ----
Total savings deposits ................. 4.48 191,825 9,538 4.97
---- -------- ------ ----
FHLB advances .......................... 5.66 33,573 2,137 6.37
-------- ------
Total interest-bearing liabilities ..... 4.66 225,398 11,675 5.18
------
Non-interest bearing liabilities ......... 15,591
--------
Total liabilities ...................... 240,989
Stockholders'Equity ....................... 36,352
--------
Total liabilities & stockholders' equity $277,341
========
Net interest rate spread (4) .............. 3.12% $ 9,459 2.94%
==== ======== ====
Net interest margin (5) ................... 3.63%
====
Ratio of interest earning assets to
interest-bearing liabilities ........... 115.47%
===================================================================================================
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1997 1996
----------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Deposits & short-term investments ......... $ 2,400 $ 94 3.92% $ 5,159 $ 227 4.40%
Investment securities (1) ................. 6,200 399 6.44 10,635 543 5.11
Loans receivable (2) ...................... 227,346 18,395 8.09 203,037 16,230 7.99
Mortgage-backed securities (3) ............ 20,359 1,279 6.28 17,502 1,207 6.90
FHLB-Chicago stock ........................ 1,971 134 6.80 1,665 113 6.76
------- -------- ---- ------- ------ ----
Total interest-earning assets ........... 258,276 20,301 7.86 237,998 18,320 7.70
-------- ------
Non-interest earning assets ............... 15,269 11,687
------- --------
Total assets ........................... 273,545 249,685
======= ========
LIABILITIES & EQUITY
Interest-bearing liabilities
Money market savings accounts .......... $ 9,703 234 2.41 $ 10,440 254 2.43
Passbook accounts ...................... 16,921 419 2.48 18,163 447 2.46
NOW accounts ........................... 14,930 338 2.26 14,534 343 2.36
Certificates accounts .................. 148,812 8,681 5.83 155,937 9,107 5.84
------- ------ ---- ------- ------ ----
Total savings deposits ........... 190,366 9,672 5.08 199,074 10,151 5.10
------- ------ ---- ------- ------ ----
FHLB advances .......................... 32,958 2,062 6.26 8,099 315 3.89
------- ------- ----- ------
Total interest-bearing liabilities ..... 223,324 11,734 5.25 207,173 10,466 5.05
------- ------
Non-interest bearing liabilities ......... 11,510 11,471
-------- ------
Total liabilities ...................... 234,834 218,644
Stockholders'Equity ....................... 38,711 31,041
-------- -------
Total liabilities & stockholders' equity $273,545 $249,685
======== ========
Net interest rate spread (4) .............. $ 8,567 2.61% $ 7,854 2.65%
======== ==== ======== ====
Net interest margin (5) ................... 3.32% 3.30%
==== ====
Ratio of interest earning assets to
interest-bearing liabilities ........... 115.65% 114.88%
==========================================================================================================================
</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.
13
<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, 1998 December 31, 1997
COMPARED TO YEAR ENDED Compared to Year Ended
DECEMBER 31, 1997 December 31, 1996
============================ ==============================
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 $517 $57 $574 $(110) $(23) $(133)
Investment securities 102 (1) 101 (263) 119 (144)
Loans receivable 71 782 853 1,965 200 2,165
Mortgage-backed securities (569) (130) (699) 186 (114) 72
FHLB stock 2 2 4 21 0 21
--- ---- --- --- --- -----
Total change in interest income 123 675 833 1,587 394 1,981
--- ---- --- --- --- -----
INTEREST-BEARING LIABILITIES:
Money-market deposit accounts 15 (15) 0 (18) (2) (20)
Savings accounts 7 (13) (6) (31) 3 (28)
NOW accounts 40 1 41 9 (14) (5)
Certificate accounts (71) (98) (169) (416) (10) (426)
FHLB advances 39 36 75 1,458 289 1,747
--- ---- --- --- --- -----
Total change in interest expense 108 (167) (59) 838 430 1,268
--- ---- --- --- --- -----
Total change in net interest income $11 $881 $892 $663 $50 $713
=== ==== ==== ==== === ====
</TABLE>
14
<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 maturing and scheduled amortization of loans are predictable
sources of funds, deposit outflows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Bank's liquidity requirement, which may be varied at the direction of the OTS
depending on economic conditions and deposit flows, 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 of 4.0%. At December 31, 1998
and 1997, the Bank's liquidity ratio was 17.6% and 10.4%, respectively.
Management maintains its liquid assets in accordance with regulatory
requirements.
At December 31, 1998, the Bank exceeded all of its regulatory capital
requirements with Tier 1 core capital of $28.0 million, or 10.0% of adjusted
assets, which is above the required level of $11.2 million or 4.0%; and
risk-based capital of $29.2 million or 16.1% of risk-weighted assets, which is
above the required level of $14.5 million or 8.0%.
The Company's most liquid assets are cash and interest-bearing demand accounts.
The level of these accounts is dependent on the operating, financing, lending
and investing activities during any given period. At December 31, 1998 and 1997,
cash and interest-bearing deposits totaled $18.3 million and $7.9 million,
respectively. The Company has other sources of liquidity if a need for
additional funds arises, including FHLB advances. At December 31, 1998, the Bank
had outstanding advances with the FHLB of $39.4 million. The FHLB maintains two
limitations on the availability based on FHLB stock ownership and total assets.
The Bank currently meets the stock limitation; however, this limit may be raised
by the purchase of additional FHLB stock. Based on the total assets limitations,
the Bank may increase its borrowings with the FHLB by $58.8 million. Depending
upon market conditions and the pricing of deposit products and FHLB borrowings,
the Bank may utilize FHLB advances to fund loan originations.
At December 31, 1998, the Bank had commitments to originate loans and unused
lines of credit totaling $26.6 million. Certificate accounts which are scheduled
to mature in one year or less from December 31, 1998, totaled $93.3 million. The
Bank anticipates that it will have sufficient funds to meet its current loan
commitments and maturing deposits.
15
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and 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, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. 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, 1998 and 1997,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ OLIVE LLP
[LOGO] OLIVE
Decatur, Illinois
January 22, 1999
16
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
=============================================================================================================
<S> <C> <C>
ASSETS
Cash and due from banks ................................................... $5,758,487 $4,621,768
Interest-bearing demand deposits .......................................... 12,579,716 3,317,485
-------------------------------
Cash and cash equivalents ........................................... 18,338,203 7,939,253
Investment securities -- Available for sale ............................... 18,033,239 19,301,769
Loans held for sale ....................................................... 5,245,872 2,393,567
Loans, net of allowance for loan losses of $1,256,475 and $839,845 ........ 231,627,677 229,468,892
Premises and equipment .................................................... 8,124,445 8,407,971
Federal Home Loan Bank stock .............................................. 1,970,700 2,453,200
Foreclosed assets ......................................................... 482,833 605,378
Other assets .............................................................. 3,451,161 3,029,601
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ........................................................ $287,274,130 $273,599,631
=============================================================================================================
LIABILITIES
Deposits
Noninterest bearing ................................................. $12,820,361 $8,850,529
Interest bearing .................................................... 195,276,210 189,782,688
-------------------------------
Total deposits ................................................ 208,096,571 198,633,217
Federal Home Loan Bank borrowings ......................................... 39,409,618 33,943,676
Advances by borrowers for taxes and insurance ............................. 601,266 694,064
Other liabilities ......................................................... 3,146,317 2,359,124
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES ................................................... 251,253,772 235,630,081
- -------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value
Authorized and unissued -- 1,000,000 shares
Common stock, $.01 par value
Authorized -- 8,000,000 shares
Issued and Outstanding -- 2,817,500 shares .......................... 28,175 28,175
Additional Paid-in-capital .......................................... 27,426,725 27,193,322
Retained earnings ......................................................... 20,198,209 18,183,740
Accumulated other comprehensive income .................................... (47,729) (99,733)
- -------------------------------------------------------------------------------------------------------------
47,605,380 45,305,504
Less:
Unallocated employee stock ownership plan
shares -- 128,800 and 161,000 shares ............................... (1,288,000) (1,610,000)
Unearned incentive plan shares -- 64,709 and 87,249 shares ............... (893,433) (1,205,781)
Treasury stock, at cost -- 583,083 and 281,750 shares ..................... (9,403,589) (4,520,173)
- -------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY ................................................ 36,020,358 37,969,550
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................... $287,274,130 $273,599,631
=============================================================================================================
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
=============================================================================================================
<S> <C> <C> <C>
INTEREST INCOME
Loans receivable ............................. $19,248,250 $18,394,586 $16,230,490
Investment securities ........................ 1,218,318 1,812,044 1,862,465
Interest bearing deposits .................... 667,589 94,271 227,316
------------------------------------------------------
Total interest income .................. 21,134,157 20,300,901 18,320,271
------------------------------------------------------
INTEREST EXPENSE
Deposits ..................................... 9,537,962 9,672,326 10,150,721
Federal Home Loan Bank borrowings ............ 2,137,116 2,061,677 314,910
------------------------------------------------------
Total interest expense ................. 11,675,078 11,734,003 10,465,631
------------------------------------------------------
NET INTEREST INCOME ................................ 9,459,079 8,566,898 7,854,640
Provision for loan losses .................... 463,381 516,053 166,570
------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,995,698 8,050,845 7,688,070
------------------------------------------------------
OTHER INCOME
Loan servicing fees .......................... 15,410 205,027 209,402
Net realized gains (losses) on sales of
available-for-sale securities .......... 17,060 4,019 (14,790)
Net gain on sale of branch facility 522,883
Net gains on loan sales ...................... 910,352 418,260 235,777
Other income ................................. 752,550 832,849 738,174
------------------------------------------------------
Total other income ..................... 1,695,372 1,983,038 1,168,563
------------------------------------------------------
OTHER EXPENSES
Salaries and employee benefits ............... 4,263,484 4,063,420 3,516,426
Net occupancy and equipment expenses ......... 1,089,380 932,335 746,245
Deposit insurance expense .................... 120,149 101,473 1,848,469
Data processing fees ......................... 403,771 385,098 344,798
Other expenses ............................... 1,549,513 1,463,469 1,469,628
------------------------------------------------------
Total other expenses ................... 7,426,297 6,945,795 7,925,566
------------------------------------------------------
INCOME BEFORE INCOME TAX ........................... 3,264,773 3,088,088 931,067
Income tax expense ........................... 1,250,304 1,199,332 321,487
------------------------------------------------------
NET INCOME ......................................... $2,014,469 $1,888,756 $609,580
=============================================================================================================
BASIC EARNINGS PER SHARE ........................... $0.90 $0.79 N/A
DILUTED EARNINGS PER SHARE ......................... $0.84 $0.74 N/A
See notes to consolidated financial statements.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
------------------- ADDITIONAL OTHER
SHARES PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE
OUTSTANDING AMOUNT CAPITAL INCOME EARNINGS INCOME
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 ...................... $15,685,404 ($166,630)
Issuance of common stock .................... $2,817,500 $28,175 $26,983,619
Comprehensive income
Net income ................................ $609,580 609,580
Other comprehensive income,
net of tax
Unrealized losses on securities,
net of reclassification adjustment ..... (131,055) (131,055)
--------
Comprehensive income ........................ $478,525
========
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
- -------------------------------------------------------------------------------------- -------------------------
BALANCE, DECEMBER 31, 1996 .................... 2,568,611 28,175 27,023,869 16,294,984 (297,685)
Comprehensive income
Net income ................................ $1,888,756 1,888,756
Other comprehensive income,
net of tax
Unrealized gains on securities,
net of reclassification adjustment ..... 197,952 197,952
----------
Comprehensive income ........................ $2,086,708
==========
Employee Stock Ownership
Plan shares allocated ..................... 32,200 203,437
Incentive plan shares acquired .............. (54,100)
Incentive plan shares earned ................ 22,540 (33,984)
Purchase of Treasury Stock .................. (281,750)
- -------------------------------------------------------------------------------------- -------------------------
BALANCE, DECEMBER 31, 1997 .................... 2,287,501 28,175 27,193,322 18,183,740 (99,733)
Comprehensive income
Net income ................................ $2,014,469 2,014,469
Other comprehensive income,
net of tax
Unrealized gains on securities,
net of reclassification adjustment ..... 52,004 52,004
----------
Comprehensive income ........................ $2,066,473
==========
Employee Stock Ownership
Plan shares allocated ..................... 32,200 268,559
Incentive plan shares earned ................ 22,540 (35,156)
Purchase of Treasury Stock .................. (301,333)
- -------------------------------------------------------------------------------------- -------------------------
BALANCE, DECEMBER 31, 1998 .................... $2,040,908 $28,175 $27,426,725 $20,198,209 $(47,729)
====================================================================================== =========================
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
UNALLOCATED
EMPLOYEE
STOCK UNEARNED
OWNERSHIP INCENTIVE TREASURY
PLAN SHARES PLAN SHARES STOCK TOTAL
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 ...................... $15,518,774
Issuance of common stock .................... 27,011,794
Comprehensive income
Net income ................................ 609,580
Other comprehensive income,
net of tax
Unrealized losses on securities,
net of reclassification adjustment ..... (131,055)
Comprehensive income ........................
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
- ------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 .................... (1,932,000) (768,833) 40,348,510
Comprehensive income
Net income ................................ 1,888,756
Other comprehensive income,
net of tax
Unrealized gains on securities,
net of reclassification adjustment ..... 197,952
Comprehensive income ........................
Employee Stock Ownership
Plan shares allocated ..................... 322,000 525,437
Incentive plan shares acquired .............. (752,932) (752,932)
Incentive plan shares earned ................ 315,984 282,000
Purchase of Treasury Stock .................. $(4,520,173) (4,520,173)
- ------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 .................... (1,610,000) (1,205,781) (4,520,173) 37,969,550
Comprehensive income
Net income ................................ 2,014,469
Other comprehensive income,
net of tax
Unrealized gains on securities,
net of reclassification adjustment ..... 52,004
Comprehensive income ........................
Employee Stock Ownership
Plan shares allocated ..................... 322,000 590,559
Incentive plan shares earned ................ 312,348 277,192
Purchase of Treasury Stock .................. (4,883,416) (4,883,416)
- ------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 .................... $(1,288,000) $(893,433) $(9,403,589) $36,020,358
============================================================================================================
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
=========================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ......................................... $ 2,014,469 $ 1,888,756 $ 609,580
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses .................... 463,381 516,053 166,570
Depreciation ................................. 591,230 471,610 395,698
Deferred income tax benefit .................. (51,643) (72,833) (83,408)
Investment securities (gains) losses ......... (17,060) (4,019) 14,790
Investment securities amortization, net ...... 51,049 51,711 61,204
Net loss on sales of foreclosed real estate .. 73,656 19,381
Net gain on loan sales ....................... (910,352) (418,260) (235,777)
Net gain on sale of branch facility .......... (522,883)
Net gain on sales of premises and equipment .. (6,478) (44,366) (25,224)
Loans originated for sale .................... (61,122,594) (25,967,927) (17,924,017)
Proceeds from sales of loans originated
for resale ............................... 59,180,641 27,020,088 15,132,326
Compensation expense related to
employee stock ownership and
incentive plans ...................... 867,751 807,437 398,650
Change in:
Other assets ............................. (402,916) (30,587) (690,161)
Other liabilities ........................ 787,193 196,924 (370,091)
- ---------------------------------------------------------------------------------------------------------
Net cash provided (used)
by operating activities .............. 1,518,327 3,911,085 (2,549,860)
- ---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of securities available for sale ......... (10,503,689) (1,992,419) (19,841,260)
Proceeds from maturities and principal paydowns
on securities available for sale ............. 6,565,809 5,341,739 4,015,489
Proceeds from sales of securities available for sale 5,257,424 5,995,727 6,043,587
Proceeds from maturities and principal paydowns
on securities held to maturity ............... 1,000,000 5,000,000
Redemption (purchase) of Federal Home
Loan Bank stock .............................. 482,500 (791,200) 12,400
Net change in loans ................................ (3,752,577) (19,311,565) (23,544,274)
Proceeds from sales of foreclosed real estate ...... 1,179,300 441,043
Purchases of premises and equipment ................ (335,500) (3,317,385) (1,260,085)
Sale of branch, net of cash paid ................... 522,883
Proceeds from sales of premises and equipment ...... 34,274 260,423 25,224
- ---------------------------------------------------------------------------------------------------------
Net cash used by investing activities ........ (1,072,459) (11,850,754) (29,548,919)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
==================================================================================================
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net change in
Interest-bearing demand and savings deposits $ 11,163,613 $ 479,448 ($ 757,191)
Certificates of deposit ..................... (1,700,259) (3,970,971) (6,982,302)
Net change in Federal Home Loan Bank line of credit (4,200,000) (10,250,000) 10,250,000
Proceeds (payments) from Federal Home Loan
Bank advances ............................... 9,665,942 27,943,676 6,000,000
Net change in advances by borrowers for
taxes and insurance ......................... (92,798) (57,366) 41,139
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 ........................ (4,883,416) (4,520,173)
---------------------------------------------
Net cash provided by
financing activities .................. 9,953,082 8,871,682 32,504,207
---------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS ........... 10,398,950 932,013 405,428
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ...... 7,939,253 7,007,240 6,601,812
---------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR ............ $ 18,338,203 $ 7,939,253 $ 7,007,240
==================================================================================================
ADDITIONAL CASH FLOWS INFORMATION
Interest paid ..................................... $ 11,697,057 $ 11,598,098 $ 10,413,456
Income tax paid ................................... 1,138,727 834,003 758,383
Loan balances transferred to foreclosed
real estate and repossessions ............... 1,130,411 368,822 696,980
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Citizens First Financial Corp.
("Company") and its wholly owned subsidiary, Citizens Savings Bank, F.S.B.
("Bank"), conform to generally accepted accounting principles and reporting
practices followed by the thrift industry. The Bank has two wholly owned
subsidiaries (which are inactive), 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 and provides full banking services in a single significant business
segment. 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 in accumulated other
comprehensive income 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.
LOANS HELD FOR SALE are carried at the lower of aggregate cost or market. Market
is determined using the aggregate method. Net unrealized losses, if any, are
recognized through a valuation allowance by charges to income based on the
difference between estimated sales proceeds and aggregate cost.
22
<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.
ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES are maintained to absorb loan and
real estate losses based on management's continuing review and evaluation of the
loan and real estate portfolios and its judgment as to the impact of economic
conditions on the portfolios. The evaluation by management includes
consideration of past loss experience, changes in the composition of the
portfolios, the current condition and amount of loans and foreclosed real estate
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses and the
valuation of real estate is based on estimates that are particularly susceptible
to significant changes in the economic environment and market conditions.
Management believes that as of December 31, 1998, the allowance for loan losses
and the carrying value of foreclosed real estate are adequate based on
information currently available. A worsening or protracted economic decline in
the area within which the Bank operates would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based on the estimated
useful lives of the assets. Maintenance and repairs are expensed as incurred
while major additions and improvements are capitalized. Gains and losses on
dispositions are included in current operations.
FEDERAL HOME LOAN BANK ("FHLB") STOCK is a required investment for institutions
that are members of the Federal Home Loan Bank system. The required investment
in the common stock is based on a predetermined formula.
FORECLOSED ASSETS are carried at the lower of cost or fair value less estimated
selling costs. When foreclosed assets are acquired, any required adjustment is
charged to the allowance for loan losses. All subsequent activity is included in
current operations.
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.
23
<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 1997 and 1996 financial statements
have been made to conform to the 1998 presentation.
NOTE 2 - 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.
24
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES
<TABLE>
<CAPTION>
1998
------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Federal agencies .................... $6,499,933 $6,625 $2,125 $6,504,433
Mortgage-backed securities .......... 10,379,723 9,676 91,186 10,298,213
Other asset-backed securities ....... 231,597 231,597
Marketable equity securities ........ 1,000,000 1,004 998,996
------------------------------------------------------------------------
Total available for sale .... $18,111,253 $16,301 $94,315 $18,033,239
========================================================================
1997
------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------
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>
25
<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, 1998, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
AVAILABLE FOR SALE
--------------------------------
AMORTIZED FAIR
COST VALUE
- --------------------------------------------------------------------------------
One to five years ........................... $1,502,908 $1,500,783
Five to ten years ........................... 4,997,025 5,003,650
--------------------------------
6,499,933 6,504,433
Mortgage-backed securities .................. 10,379,723 10,298,213
Other asset-backed securities ............... 231,597 231,597
Marketable equity securities ................ 1,000,000 998,996
--------------------------------
Totals ................................ $18,111,253 $18,033,239
================================================================================
Securities with a carrying value of $2,395,217 and $6,897,876 were pledged at
December 31, 1998 and 1997 to secure certain deposits and for other purposes as
permitted or required by law.
Proceeds from sales of securities available for sale during 1998, 1997 and 1996
were $5,257,424, $5,995,727, and $6,043,587. Gross gains of $23,055, $12,160,
and $18,460 and gross losses of $5,995, $8,141, and $33,250 were realized on
those sales. There were no sales of securities held to maturity during 1998,
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
issurer, 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, 1998.
26
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LOANS AND ALLOWANCE
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
=============================================================================================================
<S> <C> <C>
Mortgage Loans
One-to-four family .............................................. $136,866,519 $157,344,815
Multi-family .................................................... 13,405,579 11,593,431
Commercial real estate .......................................... 24,073,218 25,610,126
Construction and land ........................................... 20,024,179 15,861,881
Commercial ............................................................ 33,648,914 16,863,141
Consumer and other loans .............................................. 12,072,436 12,344,388
---------------------------------
240,090,845 239,617,782
Undisbursed portion of loans .......................................... (7,189,311) (9,048,802)
Deferred premium on sale of loans ..................................... 11,666 32,804
Deferred loan fees .................................................... (29,048) (293,047)
Allowance for loan losses ............................................. (1,256,475) (839,845)
---------------------------------
Total loans ..................................................... $231,627,677 $229,468,892
=============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
=============================================================================================================
<S> <C> <C> <C>
Allowance for Loan Losses
Balances, January 1 ............................. $ 839,845 $512,096 $412,249
Provision for loan losses ....................... 463,381 516,053 166,570
Loans charged off ............................... (46,751) (188,304) (66,723)
---------------------------------------------------
Balances, December 31 ........................... $1,256,475 $839,845 $512,096
=============================================================================================================
</TABLE>
The amount of impaired loans at December 31, 1998 and 1997 and during 1998, 1997
and 1996 was immaterial.
NOTE 5 - PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
=============================================================================================================
<S> <C> <C>
Land .................................................................. $ 2,038,437 $ 2,038,437
Buildings and land improvements ....................................... 7,357,531 7,203,247
Furniture and equipment ............................................... 3,138,795 3,012,399
-------------------------------
Total cost ...................................................... 12,534,763 12,254,083
Accumulated depreciation .............................................. (4,410,318) (3,846,112)
-------------------------------
Net ............................................................. $ 8,124,445 $ 8,407,971
=============================================================================================================
</TABLE>
27
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - OTHER ASSETS AND OTHER LIABILITIES
<TABLE>
<CAPTION>
=============================================================================================================
DECEMBER 31 1998 1997
<S> <C> <C>
Other assets
Interest receivable
Investment securities ........................................... $ 135,215 $ 138,744
Mortgage-backed securities ...................................... 59,534 103,976
Loans ........................................................... 2,299,388 1,893,234
Mortgage servicing rights .......................................... 648,765 399,879
Deferred income tax benefit ........................................ 120,374 101,730
Prepaid expenses and other assets .................................. 187,885 392,038
-------------------------------
Total ..................................................... $3,451,161 $3,029,601
=============================================================================================================
Other liabilities
Interest payable
Deposits ........................................................ $76,365 $75,543
FHLB borrowings ................................................. 190,458 213,259
Current income tax liability ....................................... 239,882 76,662
Accrued expenses and other liabilities ............................. 2,639,612 1,993,660
-------------------------------
Total ..................................................... $3,146,317 $2,359,124
=============================================================================================================
</TABLE>
NOTE 7 - DEPOSITS
<TABLE>
<CAPTION>
=============================================================================================================
DECEMBER 31 1998 1997
<S> <C> <C>
Demand deposits ....................................................... $ 43,410,766 $ 33,201,341
Savings deposits ...................................................... 17,708,938 16,754,750
Certificates of deposit of $100,000 or more ........................... 11,866,776 15,389,603
Other certificates of deposit ......................................... 135,110,091 133,287,523
---------------------------------
Total deposits .................................................. $208,096,571 $198,633,217
=============================================================================================================
</TABLE>
Certificates of deposit maturing in years ending December 31:
============================================================================
Total
1999 ....................................................... $ 93,302,108
2000 ....................................................... 34,414,009
2001 ....................................................... 16,115,681
2002 ....................................................... 2,101,832
2003 ....................................................... 973,741
Thereafter ................................................. 69,496
------------
Total ............................................ $146,976,867
============================================================================
28
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FHLB BORROWINGS
<TABLE>
<CAPTION>
=============================================================================================================
DECEMBER 31 1998 1997
<S> <C> <C>
FHLB line of credit, variable rate (6.17% at December 31,1997) ........ $ 4,200,000
FHLB advances, fixed rates ranging from 4.30% to 6.74%,
due at various dates through October, 2008 ...................... $39,409,618 29,743,676
--------------------------------
Total FHLB borrowings ..................................... $39,409,618 $33,943,676
=============================================================================================================
</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,
================================================================================
1999 ............................................................ $ 9,000,000
2000 ............................................................ 8,000,000
2002 ............................................................ 7,934,618
2003 ............................................................ 3,000,000
Thereafter ...................................................... 11,475,000
Total ................................................ $39,409,618
================================================================================
NOTE 9 - LOAN SERVICING
Loans serviced for others are not included in the accompanying consolidated
balance sheet. The loans are serviced primarily for the Federal Home Loan
Mortgage Corporation and the unpaid principal balances totaled approximately
$106,759,000, $93,021,000, and $80,575,000 at December 31, 1998, 1997, and
1996.
The aggregate fair value of capitalized mortgage servicing rights at December
31, 1998, 1997 and 1996 totaled $648,765, $399,879, and $217,246. Comparable
market values and a valuation model that calculates the present value of future
cash flows 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>
==============================================================================================================
1998 1997 1996
<S> <C> <C> <C>
Mortgage Servicing Rights
Balances, January 1 ................................. $399,879 $217,246 $123,000
Servicing rights capitalized ........................ 476,401 220,861 134,377
Amortization of servicing rights .................... (227,515) (38,228) (40,131)
-----------------------------------------------
Balances, December 31 ............................... $648,765 $399,879 $217,246
==============================================================================================================
</TABLE>
29
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - INCOME TAX
<TABLE>
<CAPTION>
=============================================================================================================
YEAR ENDED DECEMBER 31 1998 1997 1996
<S> <C> <C> <C>
Income tax expense
Currently payable
Federal .................................. $1,052,947 $1,047,165 $352,895
State .................................... 249,000 225,000 52,000
Deferred
Federal .................................. (45,231) (63,790) (73,052)
State .................................... (6,412) (9,043) (10,356)
Total income tax expense ............. $1,250,304 $1,199,332 $321,487
=============================================================================================================
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% ............ $1,110,023 $1,049,950 $316,563
Effect of state income taxes ................... 160,108 142,532 27,485
Other .......................................... (19,827) 6,850 (22,561)
---------------------------------------------------
Actual tax expense ............................. $1,250,304 $1,199,332 $321,487
=============================================================================================================
Effective Tax Rate ............................. 38.3% 38.8% 34.5%
=============================================================================================================
</TABLE>
A cumulative net deferred tax asset is included in assets. The components are as
follows:
<TABLE>
<CAPTION>
=============================================================================================================
DECEMBER 31 1998 1997
<S> <C> <C>
ASSETS
Deferred compensation ............................................. $429,650 $395,525
Deferred loan fees 34,197
Differences in accounting for loan losses ......................... 358,964 174,051
Net unrealized losses on securities available for sale ............ 30,285 63,284
Other ............................................................. 45,961 37,890
-----------------------------
Total assets ......................................... 864,860 704,947
-----------------------------
LIABILITIES
Differences in depreciation methods ............................... 388,070 372,852
FHLB stock dividends .............................................. 53,358 75,132
Capitalized mortgage servicing rights ............................. 251,880 155,233
Deferred loan fees ................................................ 51,178
-----------------------------
Total liabilities ........................................... 744,486 603,217
-----------------------------
$120,374 $101,730
=============================================================================================================
</TABLE>
30
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax expense (benefit) attributed to net gains or losses on sales of
securities available for sale during 1998, 1997 and 1996 was approximately
$6,700, $1,600, and ($5,700).
Retained earnings at December 31, 1998 and 1997, include approximately
$2,144,000 for which no deferred income tax liability has been recognized. This
amount represents an allocation of income to bad debt deductions as of December
31, 1987, for tax purposes only. Reduction of amounts so allocated for purposes
other than tax bad debt losses or adjustments arising from carryback of net
operating losses would create income for tax purposes only, which income would
be subject to the then-current corporate income tax rate. The unrecorded
deferred income tax liability on the above amount was approximately $832,000.
NOTE 11 - OTHER COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
================================================================================================================
1998
------------------------------------------------------
BEFORE-TAX TAX NET-OF-TAX
YEAR ENDED DECEMBER 31 AMOUNT EXPENSE AMOUNT
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during the year ... $102,063 $(39,652) $62,411
Less: reclassification adjustment for gains
realized in net income ...................... 17,060 (6,653) 10,407
------------------------------------------------------
$ 85,003 $(32,999) $52,004
================================================================================================================
================================================================================================================
1997
------------------------------------------------------
BEFORE-TAX TAX NET-OF-TAX
YEAR ENDED DECEMBER 31 AMOUNT EXPENSE AMOUNT
- ----------------------------------------------------------------------------------------------------------------
Unrealized gains on securities:
Unrealized holding gains arising during the year ... $336,324 $(135,978) $200,346
Less: reclassification adjustment for gains
realized in net income ...................... (4,019) (1,625) 2,394
------------------------------------------------------
$332,305 $(134,353) $197,952
================================================================================================================
================================================================================================================
1996
------------------------------------------------------
BEFORE-TAX TAX NET-OF-TAX
YEAR ENDED DECEMBER 31 AMOUNT BENEFIT AMOUNT
- ----------------------------------------------------------------------------------------------------------------
Unrealized losses on securities:
Unrealized holding losses arising during the year .. $(229,002) $88,898 $(140,104)
Less: reclassification adjustment for losses
realized in net income ...................... (14,790) 5,741 (9,049)
------------------------------------------------------
$(214,212) $83,157 $(131,055)
================================================================================================================
</TABLE>
31
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - 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>
=======================================================================================================
1998 1997
<S> <C> <C>
Loan commitments
At variable rates ................................................. $ 4,327,000 $ 4,280,600
At fixed rates (ranging from 6.375% to 10.00% at
December 31, 1998) ............................................ 5,825,000 1,783,600
Unused lines of credit .................................................. 16,432,000 10,185,000
Standby letters of credit ............................................... 979,000 60,000
</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.
NOTE 13 - YEAR 2000
Like all entities, the Company and subsidiary are exposed to risks associated
with the Year 2000 Issue, which affects computer software and hardware;
transactions with customers, vendors, and other entities; and equipment
dependent upon microchips. The Company has begun, but not yet completed, the
process of identifying and remediating potential Year 2000 problems. It is not
possible for any entity to guarantee the results of its own remediation efforts
or to accurately predict the impact of the Year 2000 Issue on third parties with
which the Company and subsidiary does business. If remediation efforts of the
Company or third parties with which the Company and subsidiary does business are
not successful, the Year 2000 Issue could have negative effects on the Company's
financial condition and results of operations in the near term.
NOTE 14 - 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.
32
<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.
NOTE 15 - REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and is assigned to a capital category. The assigned
capital category is largely determined by three ratios that are calculated
according to the regulations: total risk based capital, Tier 1 capital, and Tier
1 leverage ratios. The ratios are intended to measure capital relative to assets
and credit risk associated with those assets and off-balance sheet exposures of
the entity. The capital category assigned to an entity can also be affected by
qualitative judgments made by regulatory agencies about the risk inherent in the
entity's activities that are not part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At December 31, 1998 and 1997,
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>
===========================================================================================================
1998
---------------------------------------------------------------------
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) ..... $29,203 16.1% $14,495 8.0% $18,119 10.0%
Core capital(1) (to adjusted
tangible assets) .............. 28,033 10.0 11,218 4.0 16,828 6.0
Core capital(1) (to adjusted
total assets) ................. 28,033 10.0 11,218 4.0 14,023 5.0
===========================================================================================================
1997
---------------------------------------------------------------------
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) ..... $30,770 18.5% $13,316 8.0% $16,645 10.0%
Core capital(1) (to adjusted
tangible assets) .............. 29,947 11.04 10,848 4.0 16,272 6.0
Core capital(1) (to adjusted
total assets) ................ 29,947 11.04 10,848 4.0 13,560 5.0
</TABLE>
(1) As defined by regulators
The Bank's tangible capital at December 31, 1998 and 1997 was $28,033,000 and
$29,947,000, which amount was 10.0% and 11.0% of tangible assets, respectively,
and exceeded the required ratio of 1.5 percent.
33
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - EMPLOYEE BENEFIT PLANS
The Company maintains a savings plan (combined profit-sharing and 401(k) plan)
for the benefit of substantially all of its full-time employees. The amount of
the annual profit-sharing contribution is at the discretion of the Board of
Directors. The plan also provides for matched employee contributions up to a
maximum of four percent of the participants' gross salary. The employer expense
for the plan was $157,650, $182,688, and $124,297 for the years ended December
31, 1998, 1997 and 1996, respectively.
In connection with the conversion, the Bank established an employee stock
ownership plan for the benefit of substantially all employees. The ESOP borrowed
$2,254,000 from the Company and used those funds to acquire 225,400 shares of
the Company's stock at $10 per share.
Shares issued to the ESOP are allocated to ESOP participants based on principal
repayments made by the ESOP on the loan from the Company. The loan is secured by
shares purchased with the loan proceeds and will be repaid by the ESOP with
funds from the Bank's discretionary contributions to the ESOP and earnings on
ESOP assets. Dividends on unallocated ESOP shares will be applied to reduce the
loan. Principal payments are scheduled to occur in even annual amounts over a
seven year period. However, in the event contributions exceed the minimum debt
service requirements, additional principal payments will be made.
Stock totaling 32,200 shares for 1998, 1997, and 1996 with an average fair value
of $18.34, $16.32, and $11.25 per share, respectively, were committed to be
released, resulting in ESOP compensation expense of $590,599, $525,437, and
$362,250.
Shares held by the ESOP at December 31 are as follows:
<TABLE>
<CAPTION>
=============================================================================================================
1998 1997
<S> <C> <C>
Allocated shares ......................................................... 96,600 64,400
Shares distributed to participants ....................................... (2,003)
Unallocated shares ....................................................... 128,800 161,000
------------------------------
Total ESOP shares .................................................. 223,937 225,400
=============================================================================================================
Fair value of unallocated shares at December 31 .................... $1,787,100 $3,260,250
=============================================================================================================
</TABLE>
The Company has a non-qualified supplemental retirement plan ("SERP") covering
certain officers and key employees. The benefits provided under the SERP will
make up the benefits lost to the SERP participants due to limitations on
compensation and maximum benefits under the Bank's tax qualified Savings plan
and ESOP. Benefits will be provided under the SERP at the same time and in the
same form as the related benefits will be provided under the Savings plan and
ESOP. The Bank's expense for the SERP was $58,701, $12,315, and $3,274 for 1998,
1997, and 1996.
34
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During November, 1996, the Company adopted a stock-based compensation program
which included both a stock award program or incentive plan and a stock option
plan.
The incentive plan covers key employees and directors and is authorized to
acquire and grant 112,700 shares of the Company's common stock or 4% of the
shares issued in the Company's initial public offering. The funds used to
acquire these shares will be contributed by the Bank. Participants in the
incentive plan vest over five years, commencing one year after the date such
shares are granted. As of December 31, 1996, all 112,700 shares authorized under
the plan had been granted. As of December 31, 1998 and 1997, 45,080 and 22,540
shares were distributed, respectively. No shares were distributed as of December
31, 1996. None of these shares were forfeited during 1998, 1997 or 1996. For the
years ended December 31, 1998, 1997, and 1996, $277,192, $282,000, and $36,400
was recorded as compensation expense under the plan.
NOTE 17 - 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:
================================================================================
1996
Risk-free interest rates ........................................... 7.00%
Dividend yields .................................................... 2.50%
Volatility factors of expected market price of common stock ........ 12.00%
Weighted-average expected life of the options ...................... 9.8 years
35
<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>
==========================================================================================================
1998 1997 1996
<S> <C> <C> <C>
Net income ....................... As reported $2,014,469 $1,888,756 $609,580
Pro forma 1,790,097 1,664,384 492,464
Basic earnings per share ......... As reported 0.90 0.79 N/A
Pro forma 0.80 0.69 N/A
Diluted earnings per share ....... As reported 0.84 0.74 N/A
Pro forma 0.75 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, 1998, 1997, and
1996.
<TABLE>
<CAPTION>
===============================================================================================================
YEAR ENDED DECEMBER 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
OPTIONS SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 281,750 $12.30 281,750 $12.30
Granted 281,750 $12.30
------- ------- =======
Outstanding, end of year 281,750 $12.30 281,750 $12.30 281,750 $12.30
======= ======= =======
Options exercisable at year end 112,700 56,350 0
Weighted-average fair value of
options granted during the year $ 4.91
</TABLE>
As of December 31, 1998, all 281,750 options outstanding have an exercise price
of $12.30 and a weighted-average remaining contractual life of 7.8 years. No
options were exercised, forfeited or expired during 1998, 1997 and 1996.
NOTE 18 - RELATED PARTY TRANSACTIONS
The Bank has entered into transactions with certain directors, executive
officers, significant stockholders and their affiliates or associates (related
parties). Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and did not, in the opinion of management, involve more
than normal credit risk or present other unfavorable features.
The aggregate amounts of loans, as defined, to such parties were as follows:
================================================================================
Balances, January 1, 1998 ........................................ $ 924,863
New loans, including renewals .................................... 1,246,400
Payments, etc., including renewals ............................... (746,776)
---------
Balances, December 31, 1998 ...................................... $1,424,487
================================================================================
36
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - EARNINGS PER SHARE
Earnings per share (EPS) were computed as follows:
<TABLE>
<CAPTION>
=============================================================================================================
YEAR ENDED DECEMBER 31, 1998
- -------------------------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE PER-SHARE
INCOME SHARES AMOUNT
-----------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income available to common stockholders ............. $2,014,469 2,232,037 $0.90
EFFECT OF DILUTIVE SECURITIES
Stock options ....................................... 92,790
Unearned incentive plan shares ...................... 64,915
------------------------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
and assumed conversions ....................... $2,014,469 2,389,742 $0.84
=============================================================================================================
YEAR ENDED DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE PER-SHARE
INCOME SHARES AMOUNT
-----------------------------------------------
BASIC EARNINGS PER SHARE
Income available to common stockholders ............. $1,888,756 2,397,234 $0.79
EFFECT OF DILUTIVE SECURITIES
Stock options ....................................... 69,402
Unearned incentive plan shares ...................... 84,746
------------------------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
and assumed conversions ....................... $1,888,756 2,551,382 $0.74
=============================================================================================================
</TABLE>
NOTE 20 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS -- The fair value of cash and cash equivalents
approximates carrying value.
SECURITIES AND MORTGAGE-BACKED SECURITIES -- Fair values are based on quoted
market prices.
LOANS HELD FOR SALE -- Fair values are based on quoted market prices.
LOANS -- For both short-term loans and variable-rate loans that reprice
frequently and with no significant change in credit risk, fair values are based
on carrying values. The fair values for certain mortgage loans, including
one-to-four family residential, are based on quoted market prices of similar
loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics. The fair value for other loans, including
commercial real estate and rental property mortgage loans, fixed-rate commercial
and industrial loans, and fixed-rate loans to individuals for household and
other personal expenditures, is estimated using discounted cash flow analyses
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality.
37
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTEREST RECEIVABLE/PAYABLE -- The fair values of interest receivable/payable
approximate carrying values.
FHLB STOCK -- Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
DEPOSITS -- The fair values of noninterest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the balance sheet
date. The carrying amounts for variable rate, fixed-term certificates of deposit
approximate their fair values at the balance sheet date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on such time deposits.
FHLB BORROWINGS -- The fair value of fixed rate borrowings are estimated using a
discounted cash flow calculation, based on current rates for similar debt. For
those borrowings with interest rates tied to a variable market interest rate,
fair value approximates carrying value.
ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE -- The fair value
approximates carrying value.
OFF-BALANCE SHEET COMMITMENTS -- Commitments include commitments to extend
credit and standby letters of credit and are generally of a short-term nature.
The fair value of such commitments are based on fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
==========================================================================================================
1998 1997
- ----------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
--------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents .......... $ 18,338,203 $ 18,338,203 $ 7,939,253 $ 7,939,253
Investment securities available
for sale ....................... 18,033,239 18,033,239 19,301,769 19,301,769
Loans held for sale ................ 5,245,872 5,245,872 2,393,567 2,393,567
Loans, net ......................... 231,627,677 239,871,996 229,468,892 233,469,000
Interest receivable ................ 2,494,137 2,494,137 2,135,954 2,135,954
Federal Home Loan Bank stock ....... 1,970,700 1,970,700 2,453,200 2,453,200
LIABILITIES
Deposits ........................... 208,096,571 208,758,099 198,633,217 199,013,069
FHLB borrowings .................... 39,409,618 39,364,004 33,943,676 34,147,358
Interest payable ................... 266,823 266,823 288,802 288,802
Advances payments by borrowers for
taxes and insurance ............ 601,266 601,266 694,064 694,064
OFF-BALANCE SHEET ITEMS
Commitments ........................ 0 0 0 0
</TABLE>
38
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES 21 - CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
DECEMBER 31 1998 1997
=============================================================================================================
<S> <C> <C>
ASSETS
Cash ..................................................................... $ 103,649 $ 88,509
Interest-bearing demand deposits ......................................... 692,450 2,496,837
--------------------------------
Total cash and cash equivalents .................................... 796,099 2,585,346
Investment in common stock of subsidiary ................................. 28,107,899 29,940,719
Investment securities available for sale ................................. 201,813
Loans, net of allowance for loan losses of $75,000 and $0 ................ 5,875,000 4,000,000
ESOP loan to subsidiary .................................................. 1,288,000 1,610,000
Other assets ............................................................. 89,488 34
--------------------------------
Total assets ....................................................... $36,358,299 $38,136,065
=============================================================================================================
LIABILITIES - Other liabilities .......................................... $337,941 $166,515
STOCKHOLDERS' EQUITY ..................................................... 36,020,358 37,969,550
--------------------------------
Total liabilities and stockholders' equity ......................... $36,358,299 $38,136,065
=============================================================================================================
</TABLE>
39
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 1998 1997 1996
=============================================================================================================
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries .................... $4,500,000
Other income ................................... 571,406 $ 625,407 $567,324
-----------------------------------------------------
Total income ............................. 5,071,406 625,407 567,324
-----------------------------------------------------
EXPENSES
Provision for loan losses ...................... 75,000
Other expenses ................................. 513,049 470,629 236,570
-----------------------------------------------------
Total expenses ........................... 588,049 470,629 236,570
-----------------------------------------------------
INCOME BEFORE INCOME TAX AND EQUITY
IN UNDISTRIBUTED INCOME OF SUBSIDIARIES ........ 4,483,357 154,778 330,754
INCOME TAX EXPENSE (BENEFIT) ......................... (6,461) 36,691 165,161
-----------------------------------------------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES ......................... 4,489,818 118,087 165,593
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES ....... (2,475,349) 1,770,669 443,987
-----------------------------------------------------
NET INCOME ........................................... $2,014,469 $1,888,756 $609,580
=============================================================================================================
</TABLE>
40
<PAGE>
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 1998 1997 1996
=============================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ...................................... $2,014,469 $1,888,756 $ 609,580
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses ....................... 75,000
Compensation expense related to incentive plan . 277,192 282,000 36,400
Equity in undistributed income of subsidiary .... 2,475,349 (1,770,669) (443,987)
Net change in
Other assets .............................. (89,454) 589 (623)
Other liabilities ......................... 171,426 (142,855) 309,370
----------------------------------------------------
Net cash provided by
operating activities ............... 4,923,982 257,821 510,740
----------------------------------------------------
INVESTING ACTIVITIES
Purchases of securities available for sale ...... (201,813) (1,007,294)
Sales of securities available for sale 1,006,520
Net change in ESOP loan ......................... 322,000 322,000 322,000
Net change in loans ............................. (1,950,000) 3,278,000 (7,278,000)
...................................................... ----------------------------------------------------
Net cash provided (used)
by investing activities ................ (1,829,813) 4,606,520 (7,963,294)
----------------------------------------------------
FINANCING ACTIVITIES
Issuance of common stock, net of offering costs 11,251,897
Purchase of stock for incentive plan (752,932) (805,233)
Purchase of treasury stock ...................... (4,883,416) (4,520,173)
----------------------------------------------------
Net cash provided (used)
by financing activities ................ (4,883,416) (5,273,105) 10,446,664
----------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS ............... (1,789,247) (408,764) 2,994,110
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ........ 2,585,346 2,994,110
----------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR .............. $ 796,099 $2,585,346 $2,994,110
=============================================================================================================
</TABLE>
41
<PAGE>
CITIZENS FIRST FINANCIAL CORP.
SHAREHOLDER INFORMATION
STOCK LISTING AND PRICE INFORMATION
Citizens First Financial Corp.'s common stock trades on the American Stock
Exchange under the symbol "CBK". At December 31, 1998, 2,234,417 shares of the
Company's common stock were held of record by 529 persons or entities, not
including the number of persons or entities holding stock in nominee or street
name through various brokers or banks.
========================================
1998
-------------------
HIGH LOW
-------------------
First Quarter 22 3/8 18
Second Quarter 21 1/2 17 3/4
Third Quarter 18 3/4 13
Fourth Quarter 17 13 3/4
========================================
1997
-------------------
HIGH LOW
-------------------
First Quarter 15 7/8 13 1/2
Second Quarter 17 1/4 14 5/8
Third Quarter 18 3/4 15 1/4
Fourth Quarter 20 5/8 17 3/4
========================================
QUARTERLY FINANCIAL DATA
The following is a summary of selected quarterly results of operations for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
QUARTER ENDED
(In thousands, except share data) 12/31 09/30 06/30 03/31
1998
<S> <C> <C> <C> <C>
Net interest income ....................... $2,444 $2,382 $2,340 $2,293
Provision for loan losses ................. 118 120 120 105
Other income .............................. 425 370 467 433
Other expense ............................. 1,828 1,834 1,976 1,788
Income before income tax .................. 923 798 711 833
Net income ................................ 581 488 435 510
Basic earnings per share .................. $0.27 $0.22 $0.19 $0.22
Diluted earnings per share ................ $0.27 $0.20 $0.17 $0.20
1997
Net interest income ....................... $2,209 $2,135 $2,168 $2,055
Provision for loan losses ................. 291 75 75 75
Other income .............................. 1,003 315 343 322
Other expense ............................. 1,849 1,773 1,710 1,614
Income before income tax .................. 1,072 602 726 688
Net income ................................ 666 359 444 420
Basic earnings per share .................. $0.29 $0.15 $0.18 $0.17
Diluted earnings per share ................ $0.28 $0.13 $0.17 $0.16
</TABLE>
42
EXHIBIT 23.0 CONSENT OF GEO. S. OLIVE & CO., LLC
[OLIVE LLP LETTERHEAD]
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
Citizens First Financial Corp.
We hereby consent to the incorporation of our report dated January 22, 1999 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-K of Citizens First Financial Corp. and Subsidiary.
Olive LLP
Decatur, Illinois
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,758
<INT-BEARING-DEPOSITS> 12,580
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,033
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 238,130
<ALLOWANCE> 1,256
<TOTAL-ASSETS> 287,274
<DEPOSITS> 208,097
<SHORT-TERM> 9,000
<LIABILITIES-OTHER> 3,748
<LONG-TERM> 30,410
0
0
<COMMON> 28
<OTHER-SE> 35,992
<TOTAL-LIABILITIES-AND-EQUITY> 287,274
<INTEREST-LOAN> 19,248
<INTEREST-INVEST> 1,218
<INTEREST-OTHER> 668
<INTEREST-TOTAL> 21,134
<INTEREST-DEPOSIT> 9,538
<INTEREST-EXPENSE> 11,675
<INTEREST-INCOME-NET> 9,459
<LOAN-LOSSES> 463
<SECURITIES-GAINS> 17
<EXPENSE-OTHER> 7,426
<INCOME-PRETAX> 3,265
<INCOME-PRE-EXTRAORDINARY> 3,265
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,014
<EPS-PRIMARY> .90
<EPS-DILUTED> .84
<YIELD-ACTUAL> .035
<LOANS-NON> 129
<LOANS-PAST> 250
<LOANS-TROUBLED> 325
<LOANS-PROBLEM> 296
<ALLOWANCE-OPEN> 840
<CHARGE-OFFS> 47
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,256
<ALLOWANCE-DOMESTIC> 1,256
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 236
</TABLE>
