SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
Commission File No.: 1-14274
CITIZENS FIRST FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 37-1351861
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
2101 North Veterans Parkway, Bloomington, Illinois 61704
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (309) 661-8700
Securities registered pursuant to Section 12(g) of the Act: None
Securities registered pursuant to Section 12(b) of the Act:
Common Stock par value $0.01 per share
(Title of class)
American Stock Exchange
(Name of exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of
the registrant, i.e., persons other than directors and executive officers of the
registrant is $23,759,454 and is based upon the last sales price as quoted on
The American Stock Exchange for March 14, 2000.
The Registrant had 1,958,015 shares of Common Stock outstanding as of
March 14, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December
31, 1999, are incorporated by reference into Part II of this Form 10-K.
Portions of the Proxy Statement for the 2000 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-K.
<PAGE>
INDEX
PAGE
PART I
Item 1 Business....................................................1
Item 2 Properties.................................................23
Item 3 Legal Proceedings..........................................24
Item 4 Submission of Matters to a Vote of Security Holders........24
Supplemental Information - Executive Officers of the Registrant
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters .......................................25
Item 6 Selected Financial Data....................................25
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations........................25
Item 7A Quantitative and Qualitative Disclosures about
Market Risk................................................25
Item 8 Financial Statements and Supplementary Data................25
Item 9 Changes in and Disagreements With Accountants on
Accounting and Financial Disclosures.......................25
PART III
Item 10 Directors and Executive Officers of the Registrant.........25
Item 11 Executive Compensation.....................................26
Item 12 Security Ownership of Certain Beneficial Owners
and Management.............................................26
Item 13 Certain Relationships and Related Transactions.............26
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ..................................................26
Signatures....................................................................28
<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"), and the Securities and Exchange Commission ("SEC"). Currently, the
Company does not transact any material business other than through its
subsidiary, the Bank. At December 31, 1999, the Company had total assets of
$316.6 million, total deposits of $220.2 million and total stockholders' equity
of $34.3 million.
The Bank was originally chartered in 1888 by the State of Illinois and in
1989 became a federally chartered savings bank. In April 1999, the Bank was
converted from a federally chartered savings bank to an Illinois state savings
bank. The Bank's principal business consists of the acceptance of retail
deposits from the general public in the area surrounding its branch offices and
the investment of those deposits, together with funds generated from operations
and borrowings, in one- to four-family residential mortgage loans, multi-family,
commercial real estate, consumer and other loans. The Bank originates loans for
investment and for sale. Currently, it is the Bank's policy to sell, on a
servicing retained basis, most longer-term fixed rate one- to four-family
mortgage loans it originates as a method of controlling its growth, managing its
interest rate risk and increasing its loan servicing fee income. The Bank's
revenues are derived principally from interest on its mortgage, consumer and
commercial loans, loan servicing fees and, to a lesser extent, the interest on
its securities. The Bank's primary source of funds are deposits, principal and
interest payments on loans and securities, borrowings from the Federal Home Loan
Bank of Chicago and, to a lesser extent, proceeds from the sale of loans and
securities. The Bank had two wholly-owned service corporations, CSL Service
Corporation and Fairbury Financial Services Corp. CSL Service Corporation is an
Illinois-chartered corporation that has a joint venture with an independent
insurance agency and a participant in a joint venture that has purchased and is
developing commercial real estate. Fairbury Financial Services Corp., an
Illinois-chartered corporation, that serviced previously sold tax deferred
annuities and long-term care insurance policies that it sold on an agency basis
was merged into CSL Service Corporation in January, 1999.
Market Area and Competition
The Bank is a community-oriented savings institution offering a variety of
financial products and services to meet the needs of the communities it serves.
The Bank's deposit gathering is concentrated in the communities surrounding its
six offices located in the municipalities of Bloomington, Normal, Eureka and
Fairbury, Illinois which are part of McLean, Woodford and Livingston Counties.
In January 2000, the Company entered into a purchase agreement for the sale of
certain fixed assets and assumption of deposit liabilities of a branch located
in Eureka, Illinois. McLean County comprises the greater Bloomington/Normal
metropolitan area and Woodford, Tazewell and Livingston Counties are adjacent to
the greater Bloomington/Normal metropolitan area. The economy in McLean,
Woodford, Tazewell and Livingston Counties has historically benefitted from the
presence of the national and regional headquarters of State Farm Insurance
Company, the Mitsubishi Motors Corporation, Caterpillar, GTE, the Eureka
Company, Illinois Farm Bureau, Illinois State University and Illinois Wesleyan
University as well as a variety of agricultural related businesses. These
counties are the primary market area for the Bank's lending and deposit
gathering activities.
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<PAGE>
The Bank faces significant competition both in making loans and in
attracting deposits. The greater Bloomington/Normal metropolitan area is a
highly competitive market. The Bank faces direct competition from a significant
number of financial institutions operating in its market area, many with a
state-wide or regional presence and in some cases a national presence. Many of
these financial institutions are significantly larger and have greater financial
resources than the Bank. State Farm Insurance Company, Bloomington-Normal's
largest business, has opened a savings bank, which it will operate through its
agents on a national basis. The Bank's competition for loans comes principally
from commercial banks, savings and loan associations, mortgage banking
companies, credit unions and insurance companies. Its most direct competition
for deposits has historically come from savings and loan associations and
commercial banks. In addition, the Bank faces increasing competition for
deposits from non-bank institutions such as brokerage firms and insurance
companies in such areas as short-term money market funds, corporate and
government securities funds, mutual funds and annuities. Competition may also
increase as a result of the lifting of restrictions on the interstate operations
of financial institutions.
Investment Activities
The investment policy of the Bank, as approved by the Board of Directors,
requires management to maintain adequate liquidity and generate a favorable
return on investments without incurring undue interest rate and credit risk. The
Bank has invested primarily in U.S. Agency securities, a Federal Home Loan Bank
demand investment account, eligible mutual funds, corporate securities and U.S.
government sponsored agency issued mortgage-backed securities. SFAS 115 requires
the Bank to designate its securities as held to maturity, available for sale or
held for trading. The Bank does not currently maintain a portfolio of securities
categorized as held to maturity or held for trading. The Bank's investment
securities generally consist of U.S. Agency obligations and mortgage-backed and
mortgage-related securities. The Bank's mortgage-backed securities consist of
pass through certificates representing interests in pools of fixed and
adjustable rate mortgage loans issued or guaranteed by FNMA, FHLMC or GNMA. At
December 31, 1999, the Bank's portfolio of investment and mortgage-backed
securities totaled $16.1 million, all of which was categorized as available for
sale.
In recent periods, the Bank has primarily invested in securities in order
to maintain liquid assets for its operations and as a means of utilizing its
excess funding not necessary for loan originations. The Board of Directors
reviews all of the activity in the investment portfolio on a monthly basis.
Lending Activities
Origination, Sale, Servicing and Purchase of Loans. The Bank's loan
origination activities are conducted primarily by its loan personnel, operating
at its six branch offices. All loans originated by the Bank are underwritten by
the Bank pursuant to the Bank's policies and procedures. The Bank originates
both adjustable-rate and fixed-rate mortgage loans, commercial loans and
consumer loans. The Bank's ability to originate loans is dependent upon the
relative customer demand for the type of loan and demand for fixed-rate or
adjustable-rate loans, which is affected by the current and expected future
level of interest rates.
While the Bank has in the past, from time to time, sold adjustable-rate
one- to four-family loans and retained mortgage loans with terms of 10 years or
more, it is currently the general policy of the Bank to originate for sale in
the secondary market one- to four-family fixed-rate mortgage loans with
maturities exceeding ten years and to originate for investment all
adjustable-rate one- to four-family mortgage loans and fixed-rate one- to
four-family mortgage loans with maturities of ten years or less.
One- to-Four Family Mortgage Lending. The Bank currently offers both
fixed-rate and adjustable-rate mortgage loans secured by one- to-four family
residences located in the Bank's primary market area, with
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<PAGE>
maturities of up to thirty years. While the Bank has originated such loans
secured by properties outside its market area, substantially all of such loans
at December 31, 1999 were secured by property located in the Bank's primary
market area. One- to-four family mortgage loan originations are generally
obtained from the Bank's loan representatives operating in its branch offices
and their contacts with the local real estate industry, existing or past
customers, and members of the local communities.
Multi-Family Lending. The Bank originates fixed and adjustable-rate
multi-family mortgage loans generally secured by 5 to 70 unit apartment and
student housing buildings located in the Bank's primary market area. In reaching
its decision on whether to make a multi-family loan, the Bank considers the
qualifications and financial condition of the borrower as well as the value and
condition of the underlying property. The factors considered by the Bank
include: the net operating income of the mortgaged premises before debt service
and depreciation; the debt coverage ratio (the ratio of net earnings to debt
service); and the ratio of loan amount to appraised value.
Commercial Real Estate Lending. The Bank originates adjustable-rate
commercial real estate loans that are generally secured by properties used for
business purposes such as small office buildings or a combination of residential
and retail facilities located in the Bank's primary market area.
Loans secured by commercial real estate properties, like multi-family
loans, generally involve larger principal amounts and a greater degree of risk
than one- to four-family residential mortgage loans. Because payments on loans
secured by commercial real estate properties are often dependent on successful
operation or management of the properties, repayment of such loans may be
subject to adverse conditions in the real estate market or the economy. The Bank
seeks to minimize these risks through its underwriting standards, which require
such loans to be qualified on the basis of the property's income and debt
coverage ratio.
Construction and Land Lending. The Bank originates loans for the
acquisition and development of commercial and residential property located in
its primary market area. These loans are offered to local developers and
individuals. The majority of the Bank's construction loans are originated
primarily to finance the construction of one- to four-family, owner-occupied
residential properties and multi-family properties located in the Bank's primary
market area. Such loans are offered for the construction of properties that are
pre-sold or for which permanent financing has been secured, as well as for
properties that are not pre-sold or for which permanent financing has not been
secured.
Construction and land development financing is generally considered to
involve a higher degree of credit risk than long-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction. If the estimate of value proves to be
inaccurate, the Bank may be confronted with a project, when completed, having a
value which is insufficient to assure full repayment.
Commercial Lending. The Bank offers commercial loans to businesses
operating in the Bank's primary market area on a selective basis.
Unlike mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment and other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself. Further, the collateral securing the loans may
depreciate over time, may be
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<PAGE>
difficult to appraise and may fluctuate in value based on the success of the
business. Included in this total are agricultural loans made within our lending
area. These agricultural loans are generally offered with one year terms in
amounts up to $500,000 and are generally secured by crops, equipment and other
assets and personal guarantees.
Consumer and Other Lending. The Bank's portfolio of consumer and other
loans primarily consist of fixed-rate, fixed-term home equity loans, adjustable
home equity lines of credit, loans secured by automobiles, home improvement
loans, loans secured by deposit accounts and unsecured personal loans.
Loan Servicing. The Bank generally services all loans it retains for
investment and also services a portfolio of one- to four-family mortgage loans
for others which is primarily generated from its loan sale activity. Loan
servicing includes collecting and remitting loan payments, accounting for
principal and interest, making inspections as required of mortgaged premises,
contacting delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults, making certain insurance and
tax payments on behalf of the borrowers and generally administering the loans.
Deposit Activities
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposit accounts consist of savings, NOW
accounts, checking accounts, money market accounts and certificate accounts. The
Bank also offers certificate of deposit accounts with balances in excess of
$100,000 at negotiated rates (jumbo certificates) and Individual Retirement
Accounts ("IRAs"). For the year ended December 31, 1999, the average balance of
core deposits (savings, NOW, money market and non-interest-bearing checking
accounts) totaled $50.6 million, or 25.2%, of total average deposits. The flow
of deposits is influenced significantly by general economic conditions, changes
in money market rates, prevailing interest rates and competition. The Bank's
deposits are obtained predominantly from the areas in which its branch offices
are located. The Bank relies primarily on customer service and long-standing
relationships with customers to attract and retain these deposits; however,
market interest rates and rates offered by competing financial institutions
significantly affect the Bank's ability to attract and retain deposits. The Bank
uses traditional means of advertising its deposit products, including radio and
print media and generally does not solicit deposits from outside its market
area. While certificate accounts in excess of $100,000 are accepted by the Bank,
the Bank does not actively solicit such deposits nor does the Bank currently use
brokers to obtain deposits. The Bank has attempted to increase its deposit
customer base and decrease its level of dependency on certificate accounts by
offering interest free checking accounts without minimum balance requirements.
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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
Amoritzed Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Available for sale at December 31, 1999:
Federal agencies $ 7,502 $ 288 $ 7,214
Mortgage-backed securities 8,144 258 7,886
Other asset-backed securities 15 15
Marketable equity securities 1,000 12 988
------- ------- ------- -------
Total available for sale $16,661 $ 558 $16,103
======= ======= ======= =======
Available for sale at December 31, 1998:
Federal agencies $ 6,500 $ 6 $ 2 $ 6,504
Mortgage-backed securities 10,380 10 91 10,299
Other asset-based securities 231 231
Marketable equity securities 1,000 1 999
------- ------- ------- -------
Total available for sale $18,111 $ 16 $ 94 $18,033
======= ======= ======= =======
Available for sale at December 31, 1997:
Federal agencies $ 4,209 $ 14 $ 4 $ 4,219
Mortgage-backed securities 14,210 175 14,035
Other asset-backed securities 46 46
Marketable equity securities 1,000 2 1,002
------- ------- ------- -------
Total available for sale $19,465 $ 16 $ 179 $19,302
======= ======= ======= =======
</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)
1999 1998 1997
---- ---- ----
$2,853 $1,971 $2,453
====== ====== ======
The fair value of Federal Home Loan Bank stock approximates cost.
The yield on the stock is approximately 6.75% at December 31, 1999.
The maturity distribution (dollars in thousands) and average yields for the
securities available for sale portfolio at December 31, 1999 were:
Within 1 Year 1 - 5 Years 5 - 10 Years
--------------- --------------- ---------------
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
Federal agencies $ 988 4.98% $2,444 6.37% $3,782 6.58%
------ ------ ------ ----- ------ -----
Total $ 988 4.98% $2,444 6.37% $3,782 6.58%
====== ====== ====== ===== ====== =====
<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 $7,2144 6.29%
Marketable equity securities $ 988 5.34% 988 5.34
Mortgage-backed securities 7,886 6.22 7,886 6.22
Other asset-backed securities 15 5.44 15 5.44
----- ------ ------- ----- ------- -----
Total $ -0- 0.00% $ 8,889 6.11% $16,103 6.20%
===== ====== ======= ===== ======= =====
</TABLE>
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<PAGE>
LOAN PORTFOLIO
Types of Loans
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial loans $ 12,694 $ 12,727 $ 16,863 $ 8,063 $ 6,865
Real estate loans:
Construction and land 72,636 40,946 15,862 12,489 12,353
Commercial 26,633 24,073 25,610 8,934 8,679
Residential 153,070 150,273 168,938 174,253 152,177
Consumer and other loans 16,151 12,072 12,345 11,444 11,719
-------- -------- -------- -------- --------
Total 281,184 240,091 239,618 215,183 191,793
Deferred premium on sale of loans 3 11 33 34 39
-------- -------- -------- -------- --------
Total gross loans 281,187 240,102 239,651 215,217 191,832
Less:
Undisbursed portion of loans (1) 15,623 7,189 9,049 3,397 2,859
Unearned interest
Deferred loan fees 11 29 293 266 200
Allowance for loan losses 1,679 1,256 840 512 412
-------- -------- -------- -------- --------
Loans, net $263,874 $231,628 $229,469 $211,042 $188,361
======== ======== ======== ======== ========
</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, 1999, 1998, 1997, 1996 and 1995 were
$3,007,425, $5,245,872, $2,393,567, $3,027,468 and $-0-, respectively, were not
included in the above totals.
Maturities and Sensitivities of Loans to Changes in Interest Rates
Presented in the table below are the maturities of loans (excluding commercial
real estate, residential real estate and consumer and other loans) outstanding
as of December 31, 1999. Also presented are the amounts due after one year
classified according to the sensitivity to changes in interest rates.
Maturing
--------------------------
Within 1-5 Over 5
1 Year Years Years Total
------- ------- ------- -------
(Dollars in thousands)
Commercial loans $ 7,307 $ 4,413 $ 974 $12,694
Real estate loans-Construction and
Land 37,569 33,457 1,610 72,636
------- ------- ------ -------
Total $44,876 $37,870 $2,584 $85,330
======= ======= ====== =======
-7-
<PAGE>
Maturing
-------------------
1 - 5 Over
Years 5 Years
------- -------
(Dollars in thousands)
Loans maturing after one year with:
Fixed rates $26,928 $2,584
Variable rate 10,942 0
------- ------
Total $37,870 $2,584
======= ======
Risk Elements
December
--------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Nonaccruing loans $435 $129 $737 $198 $311
Loans contractually past due 90 days or
more other than nonaccuring 134 250 211 369 637
Restructured loans 314 325 341 463 364
Nonaccruing loans are loans which are reclassified to a nonaccruing status when
in management's judgment the collateral value and financial condition of the
borrower do not justify accruing interest. Interest previously recorded but not
deemed collectible is reversed and charged against current income. Interest
income on these loans is then recognized when collected.
Restructured loans are loans for which the contractual interest rate has been
reduced or other concessions are granted to the borrower because of a
deterioration in the financial condition of the borrower resulting in the
inability of the borrower to meet the original contractual terms of the loans.
Interest income of approximately $26,000 for the year ended December 31, 1999,
was recognized on the nonaccruing and restructured loans listed in the table
above, whereas interest income of approximately $45,000 would have been
recognized under their original loan terms.
Potential Problem Loans:
Management has identified certain other loans totaling $250,000 as of December
31, 1999, not included in the risk elements table, which are current as to
principal and interest, about which there are doubts as to the borrowers'
ability to comply with present repayment terms.
The Bank generates commercial, mortgage and consumer loans from customers
located primarily in Central Illinois. The Bank's loans are generally secured by
specific items of collateral including real property, consumer assets, and
business assets. Although the Bank has a diversified loan portfolio, a
substantial portion of their debtors' ability to honor their contracts is
dependent upon economic conditions in Central Illinois.
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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, 1999 and 1998 and
during 1999 and 1998 were immaterial. The Company considers 1-4 family real
estate and consumer loans to be homogeneous and are therefore excluded from the
separate identification for evaluation of impairment.
Allowance for Loan Losses and Impaired Loans
The allowance for loan losses is maintained at a level management believes
to be adequate to provide for known and potential risks inherent in the loan
portfolios. On a quarterly basis, management assesses the adequacy of the
allowance for loan losses. Management's evaluation of the adequacy of the
allowance considers such factors as prior loss experience, loan delinquency
levels and trends, loan portfolio growth and reviews of impaired loans and the
value of underlying collateral securing these loans. The analysis of the
commercial and industrial loan portfolio includes assessments based on historic
loan losses and current quality grades of specific credits, current delinquent
and non-performing loans, current economic conditions, growth in the portfolio
and the results of recent audits and regulatory examinations. For the review of
the adequacy of the allowance for loan losses for real estate loans, assessments
are based on current economic conditions and real estate values, historic loan
losses and current quality grades of specific credits, recent growth and current
delinquent and non-performing loans. The adequacy of the allowance for loan
losses as it pertains to the consumer loan portfolio is based on the assessments
of current economic conditions, historic loan losses and the mix of loans,
recent growth and the current delinquent and non-performing loans.
Although the risk of non-payment for any reason exists with respect to all
loans, certain other more specific risks are associated with each type of loan.
The primary risks associated with commercial loans are quality of the borrower's
management and the impact of national and local economic factors. Currently the
business atmosphere remains stable for the local economy in the McLean,
Livingston and Tazewell County areas. Risk associated with real estate loans
include concentrations of loans in a loan type, such as residential real estate,
decline in real estate values and a sudden rise in interest rates. Individual
loans face the risk of borrower's unemployment as a result of deteriorating
economic conditions or renewed contract differences between unions and
management of several large companies in the Company's market area. The
Company's strategy with respect to addressing and managing these types of risks
is for the Company to follow its loan policies and underwriting criteria.
The Company has substantially increased its investment in commercial,
commercial real estate and construction and land loans since December 31, 1996.
Because of the higher degree of risk associated with these types of loans, the
Company has undertaken to increase its allowance for loan losses to reflect this
increased risk.
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<PAGE>
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>
1999 1998 1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1 $1,256 $840 $512 $412 $353
Loan charged off (net):
Commercial loans -- (8) -- -- --
Real estate loans:
Construction and land -- (7) -- -- --
Commercial -- -- (32) -- --
Residential (57) (32) (106) (47) (59)
Consumer and other loans -- -- (32) (20) (5)
------ ------- ------- ------- -------
Net charge-offs (57) (47) (188) (67) (64)
------ ------- ------- ------- -------
Provision for loan losses 480 463 516 167 123
------ ------- ------- ------- -------
Balance at December 31 $1,679 $ 1,256 $ 840 $ 512 $ 412
====== ======= ======= ======= =======
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.02% 0.02% 0.08% 0.03% 0.03%
====== ======= ======= ======= =======
</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
Presented below is an analysis of the composition of the allowance for
loan losses (in thousands of dollars) and percent of each category to total
loans:
1999 1998 1997
- --------------------------------------------------------------------------------
% of % of % of
Amount Total Amount Total Amount Total
- --------------------------------------------------------------------------------
Commercial loans $ 405 24.12% $ 320 25.48% $ 213 25.36%
Real estate loans:
Construction and land 210 12.51 70 5.57 40 4.76
Commercial 285 16.97 120 9.55 116 13.81
Residential 480 28.59 435 34.63 393 46.78
Consumer and other loans 120 7.15 75 5.97 78 9.29
Unallocated 179 10.66 236 18.80 0 0.0
--- ----- --- ----- - ---
Total $1,679 100.0% $1,256 100.0% $ 840 100.0%
====== ===== ====== ===== ====== =====
1996 1995
- --------------------------------------------------------------------------------
% of % of
Amount Total Amount Total
- --------------------------------------------------------------------------------
Commercial loans $ 68 13.28% $ 56 13.59%
Real estate loans:
Construction and land 46 8.98 16 3.88
Commercial 36 7.03 56 13.59
Residential 222 43.37 182 44.18
Consumer and other loans 140 27.34 130 31.55
Unallocated 0 0.0 0 0.0
---- ----- ---- -----
Total $512 100.0% $412 100.0%
==== ===== ==== =====
The percentage of the allocation of the allowance for loan losses among the
various categories have changed for the years 1995 through 1999 to reflect the
changes in the types of loans that the Company was originating, the degree of
risk associated with these loans and the performance of specific loans. The
increased investment in the higher risk commercial, commercial real estate and
construction and land loans is reflected in the increased allowance attributed
to these classifications. The unallocated portion of the allowance for loan
losses represents the amount that is necessary to cover any current adverse
conditions on the loan portfolio such as the deterioration in the agricultural
industry.
-11-
<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>
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31:
Noninterest bearing deposits $14,217 0.00% $ 10,333 0.00% $ 7,531 0.00%
Money market deposit accounts 12,542 3.40% 10,345 2.26% 9,703 2.41%
Savings deposits 19,003 2.20% 17,221 2.40% 16,921 2.48%
NOW accounts 19,079 1.76% 16,668 2.27% 14,930 2.26%
Certificate of deposit and
other time deposits 150,068 5.36% 147,591 5.77% 148,812 5.83%
-------- ----- -------- ---- -------- ----
Total deposits $214,909 4.29% $202,158 4.72% $197,897 4.89%
======== ===== ======== ==== ======== ====
</TABLE>
As of December 31, 1999, 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 $4,580 $2,949 $7,456 $3,702 $18,687
====== ====== ====== ====== =======
Per cent 24.51% 15.78% 39.90% 19.81% 100.00%
====== ====== ====== ====== =======
</TABLE>
-12-
<PAGE>
Borrowings
At December 31, 1999, the Bank had $57,073,000 in outstanding advances
from the FHLB. It is the policy of the Bank to utilize advances from the FHLB as
an alternative to retail deposits to fund its operations and may do so in the
future as part of its operating strategy. The FHLB advance was collateralized
primarily by certain of the Bank's mortgage loans and mortgage-backed securities
and secondarily by the Bank's investment in capital stock of the FHLB. FHLB
advances are made pursuant to several different credit programs, each of which
has its own interest rate and range of maturities. The maximum amount that the
FHLB will advance to member institutions, including the Bank, fluctuates from
time to time in accordance with the policies of the FHLB. At December 31, 1999,
the Company had $17,000,000 in FHLB borrowings with a weighted average rate of
5.22% which were callable at various dates.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
At or For the Year
Ended December 31,
-----------------------------
1999 1998 1997
---- ---- ----
(Dollars In thousands)
FHLB advances:
Average balance outstanding ........... $45,481 $33,573 $33,858
======= ======= =======
Maximum amount outstanding at
any month-end during the period ....... $57,073 $39,415 $46,067
======= ======= =======
Balance outstanding at end of
period ................................ $57,073 $39,410 $33,944
======= ======= =======
Weighted average interest rate
during the period ..................... 5.67% 6.37% 6.26%
======= ======= =======
Weighted average interest rate
at end of period ...................... 5.79% 5.67% 6.08%
======= ======= =======
RETURN ON EQUITY AND ASSETS
1999 1998 1997
---- ---- ----
Return on assets (net income divided by
average total assets) 0.40% 0.73% 0.69%
Return on equity (net income divided by
average equity) 3.38% 5.54% 4.88%
Dividend payout ratio (dividends per
share divided by net income per share) 17.67% 0.00% 0.00%
Equity to assets ratio (average equity
divided by average total assets) 11.73% 13.11% 14.15%
-13-
<PAGE>
Subsidiary Activities
At December 31, 1999, the Bank had a wholly-owned service corporation,
CSL Service Corporation ("CSL"), an Illinois chartered company. A prior service
corporation, Fairbury Financial Service Corp. was merged into CSL in January,
1999. CSL is a participant in a joint venture with an independent insurance
agency (Hometown Insurance) and a participant in a joint venture real estate
development (Williamsburg Place LLC) which has purchased and is developing
commercial real estate.
Personnel
As of December 31, 1999, the Bank had 87 authorized full-time employee
positions and 38 authorized part-time employee positions. The employees are not
represented by a collective bargaining unit and the Bank considers its
relationship with its employees to be good.
REGULATION AND SUPERVISION
General
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of
the OTS under the Home Owners' Loan Act, as amended (the "HOLA").
<PAGE>
The Bank is an Illinois state chartered savings bank and its deposit
accounts are insured up to applicable limits by the FDIC under the Savings
Association Insurance Fund (the "SAIF"). The Bank is subject to extensive
regulation by the Illinois Office of Banks and Real Estate Commissioner ( the
"Commissioner"), as its chartering authority, and by the FDIC, as deposit
insurer. The Bank must file reports with the Commissioner and the FDIC
concerning its activities and financial condition, in addition to obtaining
regulatory approval prior to entering into certain transactions such as
establishing branches and mergers with, or acquisitions of, other depository
institutions. There are periodic examinations by the Commissioner and the FDIC
to assess the Bank's compliance with various regulatory requirements and
financial condition. This regulation and supervision establishes a framework of
activities in which a savings bank can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes. Any change in such regulation, whether by the
Commissioner, the FDIC or through legislation, could have a material adverse
impact on the Company and the Bank and their operations and stockholders. The
Holding Company will also be required to file certain reports with and otherwise
comply with the rules and regulations, of the OTS, the Commissioner and of the
Securities and Exchange Commission (the "SEC") under the federal securities
laws. Certain of the regulatory requirements applicable to the Bank and to the
Holding Company are referred to below or elsewhere herein. However, the
description of such requirements is not exhaustive and it does not purport to be
a complete description of the applicable laws and regulations.
-14-
<PAGE>
The Commissioner has established a schedule for the assessment of
"supervisory fees" upon all Illinois savings banks to fund the operations of the
Commissioner. These supervisory fees are computed on the basis of each savings
bank's total assets (including consolidated subsidiaries) and are payable at the
end of each calendar quarter. A schedule of fees has also been established for
certain filings made by Illinois savings banks with the Commissioner. The
Commissioner also assesses fees for examinations conducted by the Commissioner's
staff, based upon the number of hours spent by the Commissioner's staff
performing the examination. During the year ended December 31, 1999, the Bank
paid approximately $30,000 in supervisory fees and expenses.
Regulations
Capital Requirements. Under the Illinois law and the regulations of the
Commissioner, an Illinois savings bank must maintain a minimum level of capital
equal to the higher of 3% of total assets or the amount required to maintain
insurance of deposits by the FDIC. The Commissioner has the authority to require
an Illinois savings bank to maintain a higher level of capital if deemed
necessary based on the savings bank's financial condition, history, management
or earnings prospects.
The FDIC has also adopted risk-based capital guidelines to which the Bank
is subject. The Bank is required to maintain certain levels of regulatory
capital in relation to regulatory risk-weighted assets. Risk-based capital
ratios are determined by allocating assets and specified off-balance sheet items
to four risk-weighted categories ranging from 0% to 100%, with higher levels of
capital being required for the categories perceived as representing greater
risk. The guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitation, less
required deductions. Savings banks are required to maintain a total risk-based
capital ratio of 8%, of which at least 4% must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage ratio. These regulations provide for a minimum Tier I leverage
ratio of 3% for banks that meet certain specified citieria, including that they
have the highest examination rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier I leverage
ratio of at least 4%. The FDIC may, however, set higher leverage and risk-based
capital requirements on individual institutions when particular circumstances
warrant.
The following is a summary of the Bank's regulatory capital at December
31, 1999:
Total Capital to Risk-Weighted Assets 14.0%
Tier I Leverage Ratio 9.2%
Tier I to Risk-Weighted Assets 13.3%
The FDIC, along with other federal banking agencies, adopted a regulation
providing that the agencies will take account of the exposure of a bank's
capital and economic value to changes in interest rate risk in assessing a
bank's capital adequacy.
-15-
<PAGE>
Standard for Safety and Soundness. The federal banking agencies have
adopted final regulations and Interagency Guidelines Establishing Standard for
Safety and Soundness to implement safety and soundness standards. The Guidelines
set forth the safety and soundness standards that the banking agencies use to
identify and address problems at insured depository institutions before capital
becomes impaired. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard.
Lending Restriction. The Bank is prohibited by the Illinois law from
making secured or unsecured loans for business, commercial or agricultural
purposes representing in the aggregate an amount in excess of 15% of its total
assets, unless the Commissioner authorizes in writing a higher percentage limit
for such loans upon the request of an institution.
The Bank is also subject to a loans-to-one borrower limitation. Under the
Illinois law, the total loans and extensions of credit by the Bank to any person
outstanding at one time must not exceed the greater of $500,000 or 20% of the
Bank's total capital plus general loan loss reserves. In addition, the Bank may
make loans in an amount equal to an additional 10% of the Bank's capital plus
general loan loss reserves if secured by readily marketable collateral.
Dividend Limitations. Under the Illinois Savings Bank Act (the "ISBA"),
dividends may only be declared when the total capital of the Bank is greater
than that required by Illinois law. Dividends may be paid by the Bank out of its
net profits. The written approval of the Commissioner must be obtained, however,
before a savings bank having total capital of less than 6% of total assets may
declare dividends in any year in an amount in excess of 50% of its net profits
for that year. A savings bank may not declare dividends in excess of its net
profits in any year without the approval of the Commissioner. Finally, the Bank
will be unable to pay dividends in an amount which would reduce its capital
below the greater of (i) the amount required by the FDIC capital regulations or
otherwise specified by the FDIC, (ii) the amount required by the Commissioner or
(iii) the amount required for the liquidation account established by the Bank in
connection with the Bank's conversion to stock form. The Commissioner and the
FDIC also have the authority to prohibit the payment of any dividends by the
Bank if the Commissioner or the FDIC determines that the distribution would
constitute an unsafe or unsound practice.
Prompt Corrective Regulatory Action
Federal law requires, among other things, that the federal bank regulatory
authorities take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. For these purposes, the law establishes
various capital categories. The FDIC has adopted regulations to implement the
prompt corrective action legislation. Under the regulations, an institution is
deemed to be "undercapitalized" if it has a total risk-based capital ratio of
less than 8%, a Tier I risk-based capital ratio of less than 4%, or generally a
leverage ratio of less than 4%. An institution is deemed to be "significantly
undercapitalized" if it has a risk-based capital ratio of less than 6%, a Tier I
risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%.
An institution is deemed to be "critically undercapitalized" if it has a ratio
of tangible equity (as defined in the regulations) to total assets that is equal
to or less than 2%.
"Undercapitalized" banks are subject to growth, capital distribution
(including dividend) and other limitations and are required to submit a capital
restoration plan. A bank's compliance with such plan must be guaranteed by any
company that controls the undercapitalized institution in an amount equal to the
lesser of 5% of the Bank's total assets when deemed undercapitalized or the
amount necessary to achieve the status of adequately capitalized. If an
"undercapitalized" bank fails to submit an acceptable plan, it is treated as if
it is
-16-
<PAGE>
"significantly undercapitalized". "Significantly undercapitalized" banks are
subject to one or more of a number of additional restrictions, including but not
limited to an order by the FDIC to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets and cease receipt of
deposits from correspondent banks or dismiss directors or officers. "Critically
undercapitalized" institutions also may not make any payment of principal or
interest on certain subordinated debt or extend credit for a highly leveraged
transaction or enter into any material transaction outside the ordinary course
of business. In addition, subject to a narrow exception, the appointment of a
receiver or conservator is required for a "critically undercapitalized"
institution within 270 days after it obtains such status.
Transactions with Affiliates
Transactions between depository institutions and their affiliates are
governed by federal law. An affiliate of a savings bank is any company or entity
that controls, is controlled by, or is under common control with the savings
bank, other than a subsidiary. In a holding company context, at a minimum, the
parent holding company of a savings bank and any companies which are controlled
by such parent holding company are affiliates of the savings bank. Generally,
the extent to which the savings bank or its subsidiaries may engage in "covered
transactions", including loans, with any one affiliate is limited to 10% of such
savings bank's capital stock and surplus, and there is an aggregate limit on all
such transactions with all affiliates of 20% of such capital stock and surplus.
Federal law also establishes specific collateral requirements for loans or
extensions of credit to, or guarantees, acceptances on letters of credit issued
on behalf of an affiliate. Covered transactions and a broad list of other
specified transactions also must be on terms substantially the same, or no less
favorable, to the savings bank or its subsidiary as similar transactions with
non-affiliates.
Federal law also restricts a savings bank with respect to loans to
directors, executive officers, and principal stockholders. Loans to directors,
executive officers and stockholders who control, directly or indirectly, 10% or
more of voting securities of a savings bank, and certain related interests of
any of the foregoing, may not exceed the savings bank's total capital and
surplus. Loans to directors, executive officers and principal shareholders must
be made on terms substantially the same as offered in comparable transactions to
other persons, except that such insiders may receive preferential loans made
pursuant to a better or compensate program that is widely available to the
Bank's employees and does not give preference to the insider over the employees.
Federal law also establishes a board of directors approval requirements for
loans exceeding a certain amount. There are additional limitations on loans to
executive officers.
Enforcement
The Commissioner and the FDIC have extensive enforcement authority over
Illinois-chartered savings banks, including the Bank. this enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist orders and to remove directors and officers. In general,
these enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.
The Commissioner is given authority by Illinois law to appoint a
conservator or receiver for an Illinois savings bank under certain circumstances
including, but not limited to, insolvency, a substantial dissipation of assets
due to violation of law, regulation, order of the Commissioner or an unsafe or
unsound practice. The FDIC also has authority under federal law to appoint a
conservator or receiver for an insured savings bank under certain circumstances.
-17-
<PAGE>
Insurance of Deposit Accounts
Deposits of the Bank are presently insured by the SAIF. The FDIC maintains
a risk-based assessment system by which institutions are assigned to one of
three categories based on their capitalization and one of the three
subcategories based on examination ratings and other supervisory information. An
institution's assessment rate depends upon the categories to which it is
assigned. Assessment rates for SAIF member institutions are determined
semiannually by the FDIC and currently range from zero basis points of
assessable deposits for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1999,
FICO payments for SAIF members approximated 6.5 basis points, while Bank
Insurance Fund ("BIF") members paid 1.3 basis points. By law, there was equal
sharing of FICO payments between SAIF and BIF members beginning on January 1,
2000.
The Bank's SAIF assessment rate for 1999 was zero basis points, therefore
no premium was paid for the period. Payments toward the FICO bonds amounted to
approximately $123,000. The FDIC has authority to increase insurance
assessments. A significant increase in SAIF insurance premiums would likely have
an adverse effect on the operating expenses and results of operations of the
Bank. Management cannot predict what insurance assessment rates will be in the
future.
Insurance of deposits may be terminated by the FDIC upon finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC. The Bank does not know
of any practice, condition or violation that might lead to termination of
deposit insurance.
Federal Reserve System
The Federal Reserve Board regulations require depository institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for that portion of transaction accounts
aggregating $44.3 million or less (subject to adjustment by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts greater than $44.3
million, the reserve requirement is $1.329 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that portion
of total transaction accounts in excess of $44.3 million. The first $5.0 million
of otherwise reservable balances (subject to adjustment by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirement.
Federal Home Loan Bank System
The Bank is a member of the FHLB system, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in an amount at least equal to 1% of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank is in compliance with this
requirement with an investment in FHLB stock at December 31, 1999 of $2,853,700.
-18-
<PAGE>
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended December 31, 1999, 1998 and 1997,
cash dividends from the FHLB to the Bank amounted to approximately, $159,000,
$138,000 and $134,000, respectively.
Holding Company Regulation
Federal law allows a state savings bank that qualifies as a "qualified
thrift lender" to elect to be treated as a savings association for purposes of
the savings and loan holding company provisions of federal law. Such election
results in its holding company being regulated as a savings and loan holding
company by the OTS rather than as a bank holding company by the Federal Reserve
Board. The Bank has made such election and has received approval from the OTS to
become a savings and loan holding company. The Company has registered with the
OTS and is subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Company
and its non-savings institution subsidiaries. Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings institution. Additionally, the Bank is
required to notify the OTS at least 30 days before declaring any dividend to the
Company. Because the Bank is chartered under Illinois law, the Company is also
subject to registration with and regulation by the Commissioner.
As a unitary savings and loan company, the Company is generally not
restricted under existing laws as to the types of business activities in which
it may engage. The Gramm-Leach-Billey Act of 1999 provides that no company may
acquire control of a savings association after May 4, 1999 unless it engages
only in the financial activities permitted for financial holding companies under
the law and for multiple savings and loan holding companies as described below.
Further, the Gramm-Leach-Billey Act specifies that existing savings and loan
holding companies may only engage in such activities. The Gramm-Leach-Billey
Act, however, grandfathered the unrestricted authority for activities with
respect to unitary savings and loan holding companies existing prior to May 4,
1999, such as the Company, so long as the Bank continues to comply with the
qualified thrift lender test. Upon any non-supervisory acquisition by the
Company of another savings association as a separate subsidiary, the Company
would become a multiple savings and loan holding company and would be subject to
extensive limitations on the types of business activities in which it could
engage. Federal law limits the activities of a multiple savings and loan holding
company and its non-insured institution subsidiaries primarily to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act, subject to prior approval of the OTS, and to other activities
authorized by OTS regulation. Multiple savings and loan holding companies are
prohibited from acquiring or retaining, with certain exceptions, more than 5% of
a non-subsidiary company engaged in activities other than those permitted by
federal law.
Federal law prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from merging with or acquiring
more than 5% of the voting stock of another savings institution or holding
company thereof without prior written approval of the OTS. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result in
a multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) interstate supervisory acquisitions by savings
and loan holding companies; and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution permit
such acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
-19-
<PAGE>
In order to elect and continue to be regulated as a savings and loan
holding company by the OTS, the Bank must continue to qualify as a qualified
thrift lender. This requires the Bank to maintain compliance with the test for a
"domestic building and loan association", as defined in the Internal Revenue
Code, or with a Qualified Thrift Lender Test. Under the Test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less: (i) specified liquid assets up to 20% of total assets; (ii)
intangibles, including goodwill; and (iii) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities) in at least 9 months out of each 12 month period. A holding company
of a savings institution that fails to qualify as a qualified thrift lender must
either convert to a bank holding company and thereby become subject to the
regulation and supervision of the Federal Reserve Board or operate under certain
restrictions. As of December 31, 1999, the Bank maintained in excess of 65% of
its portfolio assets in qualified thrift investments. The Bank also met the test
in each of the prior 12 months and, therefore, is a qualified thrift lender.
Recent legislative amendments have broadened the scope of "qualified thrift
investments" that go toward meeting the test to fully include credit card loans,
student loans and small business loans.
-20-
<PAGE>
FEDERAL AND STATE INCOME TAXATION
Federal Taxation
General The Company files a consolidated federal income tax return. To
the extent a member incurs a loss which is utilized to reduce the consolidated
federal tax liability, that member will be reimbursed for the tax benefit
utilized from the member(s) incurring federal tax liabilities.
Amounts provided for income tax expense are based upon income reported for
financial statement purposes and do not necessarily represent amounts currently
payable to federal and state tax authorities. Deferred income taxes, which
principally arise from the temporary difference related to the recognition of
certain income and expense items for financial reporting purposes and the period
in which they affect federal and state taxable income, are included in the
amounts provided for income taxes.
Bad Debt Reserves The Small Business Job Protection Act of 1996 (the
"1996 Act"), which was enacted on August 20, 1996, made significant changes to
provisions of the Code relating to a savings institution's use of bad debt
reserves for federal income tax purposes and requires such institutions to
recapture (i.e. take into income) certain portions of their accumulated bad debt
reserves. Prior to the enactment of the 1996 Act, the Bank was permitted to
establish tax reserves for bad debts and to make annual additions thereto, which
additions, within specified formula limits were deducted in arriving at the
Bank's taxable income. The Bank's deduction with respect to "qualifying loans",
which are generally loans secured by certain interests in real property, could
be computed using an amount based on a six-year moving average of the Bank's
actual loss experience (the "Experience Method"), or a percentage equal to 8% of
the Bank's taxable income (the "PTI Method"), computed without regard to this
deduction and with additional modifications and reduced by the amount of any
permitted addition to the non-qualifying reserve. The Bank's deduction with
respect to non-qualifying loans was required to be computed under the Experience
Method.
The 1996 Act Under the 1996 Act, for its current and future taxable
years, as a "Small Bank", the Bank is permitted to make additions to its tax bad
debt reserves under an Experience Method based on total loans. However, the Bank
is required to recapture (i.e. take into income) over a six year period the
excess of the balance of its tax bad debt reserves as of December 31, 1996 over
the balance of such reserves as of December 31, 1987. As of December 31, 1995,
the Bank's tax bad debt reserve exceeded the balance of such reserve as of
December 31, 1987 by $326,713.
Distributions Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and an
amount based on the amount distributed (but not in excess of the amount of such
reserves) will be included in the Bank's income. The term "non-dividend
distributions" is defined as distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not cause this pre-1988 reserve to be included in the Bank's
income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if the Bank makes a
non-dividend distribution to the Company, approximately one and one-half times
the amount of such distribution (but not in excess of the amount of such
reserves) would be includable in income for federal income
-21-
<PAGE>
tax purposes, assuming a 35% federal corporate income tax rate. The Bank does
not intend to pay dividends that would result in a recapture of any portion of
its tax bad debt reserves.
Dividends Received Deduction and Other Matters The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company and the Bank own more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividend received may be
excluded.
State Taxation
Illinois State Taxation The Company and its subsidiaries are required to
file Illinois income tax returns and pay tax at an effective tax rate of 7.18%
of Illinois taxable income. For these purposes, Illinois taxable income,
generally means federal taxable income subject to certain modifications, the
primary one of which is the exclusion of interest income on United States
obligations.
The Company and its subsidiaries file one combined corporation return for
State of Illinois income tax purposes.
Delaware State Taxation As a Delaware holding company not earning income
in Delaware, the Company is exempted from Delaware Corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
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<PAGE>
Item 2 Properties
The Bank conducts its business through an executive and full service
office located in Normal and five other full service branch offices. The Company
believes that the Bank's current facilities are adequate to meet the present and
immediately foreseeable needs of the Bank and the Company. In January 2000, the
Company entered into a purchase and assumption of deposits agreement for the
sale of certain fixed assets and assumption of deposit liabilities for the
branch located in Eureka, Illinois. It is anticipated this transaction will be
finalized in the second quarter of 2000.
<TABLE>
<CAPTION>
Leased or Original Year Net Book Value at Deposits per
Location Owned Leased or Acquired December 31, 1999 Office
- ---------------------------- --------- ------------------ ----------------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Executive Branch Office:
2101 North Veterans Parkway*
Bloomington, Illinois 61704 Owned 1997 $4,541 $25,711
Branch Offices:
301 Broadway*
Normal, Illinois 61761 Owned 1963 712 59,582
2402 E. Washington* Owned 1980 867 44,430
Bloomington, Illinois 61704
1722 Hamilton Road* Owned 1995 1,366 11,985
Bloomington, Illinois 61704
115 N. Third Street* Owned 1981 818 51,790
Fairbury, Illinois 61739
205 S. Main * Owned 1974 226 26,739
Eureka, Illinois 61530 --- ------
Total $ 8,530 $ 220,237
======= =========
</TABLE>
* An automated teller machine is located at each office.
None of the properties owned by the Company are subject to any encumbrance.
-23-
<PAGE>
Item 3 Legal Proceedings
The registrant is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the registrant's financial condition or results of operations.
Item 4 Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of 1999 to a vote of
security holders, through the solicitation of proxies or otherwise.
SUPPLEMENTAL INFORMATION - EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions with the Company and subsidiary bank of all
executive officers of the Company are listed below:
Officers with the Company Principal Occupation
Name and Age And Subsidiary Bank During Past Five Years
------------ ------------------- ----------------------
C. William Landefeld , 60 President and Chief President and Chief
Executive Officer, Citizens Executive Officer,
First Financial Corp.; Citizens First
President and Chief Financial Corp. since
Executive Officer, Citizens 1996; President and
Savings Bank. Chief Executive
Officer, Citizens
Savings Bank since
1987
Richard F. Becker, 52 Senior Vice President and Senior Vice President
Secretary, Citizens First and Secretary,
Financial Corp.; Senior Citizens First
Vice President and Financial Corp. since
Secretary, Citizens Savings 1996, Senior President
Bank. and Secretary,
Citizens Savings Bank
since 1996, Vice
President, Citizens
Savings Bank since
1979.
Dallas G. Smiley, 53 Senior Vice President and Senior Vice President
Chief Financial Officer, and Chief Financial
Citizens First Financial Officer, Citizens
Corp.; Senior Vice First Financial Corp.
President and Chief since 1996, Senior
Financial Officer, Citizens President and Chief
Savings Bank. Financial Officer,
Citizens Savings Bank
since 1995, Vice
President and Chief
Financial Officer,
Citizens Savings Bank
since 1987.
-24-
<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,
dividends paid and related stockholder matters appears in the registrant's 1999
Annual Report to Stockholders on page 42 and is incorporated herein by
reference.
Item 6 Selected Financial Data
Information required under this item is incorporated by reference to page
5 of the Company's 1999 Annual Report to Stockholders under the caption
"Selected Financial Data".
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
The above-captioned information appears under Management's Discussion and
Analysis of Results of Operations and Financial Condition in the registrant's
1999 Annual Report to Stockholders on pages 6 through 10 and 13 through 15 and
is incorporated herein by reference.
Item 7A Quantitative and Qualitative Disclosures about Market Risk
The information required under this item is incorporated by reference to
pages 11 and 12 of the Company's 1999 Annual Report to Stockholders.
Item 8 Financial Statements and Supplementary Data
The Consolidated Financial Statements of Citizens First Financial Corp.
and its subsidiaries, together with the report thereon by Olive LLP for the year
ended December 31, 1999 appears in the registrant's 1999 Annual Report to
Stockholders on pages 16 through 42 and are incorporated herein by reference.
Item 9 Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
PART III
Item 10 Directors and Executive Officers of the Registrant
The information required under this item relating to directors in
incorporated by reference to the registrant's 2000 Proxy Statement furnished to
its stockholders in connection with an annual meeting to be held April 24, 2000
(the "2000 Proxy Statement"), under the caption "Election of Directors",which
Proxy Statement has been filed with the Commission. The information required
under this item relating to executive officers is set forth in Part I,
"Supplemental Information - Executive Officers of the Registrant" of this annual
report on Form 10-K.
-25-
<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 24, 2000 at pages 14 through
20.
Item 12 Security Ownership of Certain Beneficial Owners and Management
The information required under this item is incorporated by reference to
pages 12 and 13 of the registant's 2000 Proxy Statement, under the captions
"Security Ownership of Directors, Nominees for Directors, Most Highly
Compensated Executive Officers and All Directors and Executive Officers as a
Group" and "Security Ownership of Shareholder Holding 5% or More", which Proxy
Statement has been filed with the Commission.
Item 13 Certain Relationships and Related Transactions
The information relating to certain relationships and related transactions
is incorporated herein by reference to the registrant's Proxy Statement for the
Annual Meeting of Shareholders to be held on April 24, 2000 at page 16 under the
caption "Transactions with Certain Related Persons".
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements
Consolidated Financial Statements of the Company
are incorporated by reference to the following indicated
pages of the 1999 Annual Report to Stockholders
PAGE
Independent Auditor's Report......................................16
Consolidated Balance Sheet as of
December 31, 1999 and 1998........................................17
Consolidated Statement of Income for the
years ended December 31, 1999, 1998 and 1997......................18
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997..............19
Consolidated Statement of Cash Flows for the
years ended December 31, 1999, 1998 and 1997...................20-21
-26-
<PAGE>
Notes to Consolidated Financial Statements.....................22-41
The remaining information appearing in the Annual Report to
Stockholders is not deemed to be filed as part of this report,
except as expressly provided herein.
(2) Financial Statement Schedules
All schedules are omitted because they are not required or
applicable, or the required information is shown in the
consolidated financial statements or the notes thereto.
(3) Exhibits
The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of Citizens First Financial
Corp.*
3.2 Bylaws of Citizens First Financial Corp.*
4.0 Stock Certificate of Citizens First Financial Corp.*
10.1 Citizens Savings Bank, F.S.B. Employee Stock Ownership Plan*
10.2 Form of Employment Agreement between Citizens Savings Bank,
F.S.B. and certain executive officers*
10.3 Form of Employment Agreement between Citizens First Financial
Corp. and certain executive officers*
10.4 Form of Citizens Savings Bank, F.S.B. Supplemental Executive
Retirement Plan*
10.5 Form of Change in Control Agreement between Citizens Savings
Bank, F.S.B. and certain executive officers*
10.6 Form of Citizens Savings Bank, F.S.B. Supplemental Executive
Retirement Plan*
10.7 Form of Citizens Savings Bank, F.S.B. Employee Severance
Compensation Plan*
10.8 Citizens First Financial Corp. 1997 Stock-Based Incentive
Plan**
13.0 Portions of 1999 Annual Report to Stockholders (filed
herewith)
21.0 Subsidiary information is incorporated herein by reference to
"Part I - Subsidiaries"
23.0 Consent of Olive LLP
27.0 Financial Data Schedule
- ----------
* Incorporated herein by reference to the Exhibits to Form SB-2,
Registration Statement, filed on January 24, 1997 and any
amendments thereto, Registration No. 333-556.
** Incorporated herein by reference to the Proxy Statement for
the Special Meeting of Shareholders held on November 12, 1997.
(b) Reports on Form 8-K:
A report on Form 8-K was filed on October 1, 1999, to announce the
start of a stock repurchase program of 5% of the Company's
outstanding shares of common stock.
-27-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 30th day of
March, 1999.
CITIZENS FIRST FINANCIAL CORP.
By: /s/ C. William Landefeld
------------------------------------
C. William Landefeld
President, Chief Executive Officer
and Director
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ C. William Landefeld President, Chief Executive
- ------------------------------- Officer and Director March 30, 2000
C. William Landefeld (principal executive
officer)
/s/ Dallas G. Smiley Senior Vice President,
- ------------------------------- Treasurer and Chief March 30, 2000
Dallas G. Smiley Financial Officer
(principal accounting and
financial officer)
/s/ Dr. Lowell M. Thompson Director March 30, 2000
- -------------------------------
Dr. Lowell M. Thompson
/s/ Paul J. Hoffman Director March 30, 2000
- -------------------------------
Paul J. Hoffman
/s/ Jeffrey M. Solberg Director March 30, 2000
- -------------------------------
Jeffrey M. Solberg
/s/ Ronald C. Wells Director March 30, 2000
- -------------------------------
Ronald C. Wells
/s/ L. Carl Borngasser Director March 30, 2000
- -------------------------------
L. Carl Borngasser
/s/ Arthur W. Mier Director March 30, 2000
- -------------------------------
Arthur W. Mier
/s/ James A. Shirk Director March 30, 2000
- -------------------------------
James A. Shirk
-28-
Citizens First Financial Corp. and Subsidiary
Selected Financial Data (In thousands, except share data)
<TABLE>
<CAPTION>
===================================================================
1999 1998 1997 1996 1995
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income ......................................... $21,856 $21,134 $20,301 $18,320 $16,699
Interest expense ........................................ 11,807 11,675 11,734 10,465 10,077
------- ------- ------- ------- -------
Net interest income ..................................... 10,049 9,459 8,567 7,855 6,622
Provision for loan losses ............................... 480 464 516 167 124
Other income ............................................ 1,390 1,695 1,983 1,169 1,145
Other expense ........................................... 8,827 7,426 6,946 7,926 5,972
------- ------- ------- ------- -------
Income before income tax ................................ 2,132 3,264 3,088 931 1,671
Income tax expense ...................................... 940 1,250 1,199 321 658
------- ------- ------- ------- -------
Net income .............................................. $1,192 $2,014 $1,889 $610 $1,013
======= ======= ======= ======= =======
Per Share
Basic earnings per share (1) ............................ $0.61 $0.90 $0.79 N/A N/A
Diluted earnings per share (1) .......................... $0.58 $0.84 $0.74 N/A N/A
Cash dividends paid (1) ................................. $0.10 $0.00 $0.00 $0.00 N/A
Book value at December 31 (1) ........................... $16.92 $16.12 $14.97 $14.32 N/A
Market value at December 31 (1) ......................... $12.00 $13.88 $20.25 $14.38 N/A
Ratios Based on Net Income
Return on average stockholders' equity (2) .............. 3.38% 5.54% 4.88% 1.97% 6.91%
Return on average assets ................................ 0.40% 0.73% 0.69% 0.24% 0.44%
Net interest yield on average earning assets ............ 3.59% 3.63% 3.32% 3.30% 3.03%
Year-End Balance Sheet Data
Total assets ............................................ $316,585 $287,274 $273,600 $261,637 $228,638
Net loans (3) ........................................... 266,881 236,873 231,862 214,070 188,361
Securities .............................................. 16,103 18,033 19,302 29,371 24,879
Deposits ................................................ 220,237 208,097 198,633 202,125 209,864
Other borrowings ........................................ 57,073 39,410 33,944 16,250 0
Total stockholders' equity (2) .......................... 34,251 36,020 37,970 40,349 15,519
</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 (the "Bank"). The Bank was originally chartered in 1888 by
the State of Illinois. During April, 1999, the Bank converted from a federally
chartered savings bank to a state chartered savings bank. The Bank's principal
business consists of the acceptance of retail deposits from the general public
in the area surrounding its main and branch offices and the investment of these
deposits, together with funds generated from operations and borrowings,
primarily in one-to-four family residential mortgages. The Bank also invests in
commercial, multi-family, construction and land, commercial real estate,
agricultural, consumer and other loans. The Bank has a wholly-owned service
corporation, CSL Service Corporation (CSL), which is an Illinois-chartered
corporation that participates in an insurance agency joint venture and also has
invested in Williamsburg LLC (Williamsburg). CSL is a 50% owner of Williamsburg
which has two other investors. The accounts of Williamsburg are consolidated
into the Company's financial statements. The 50% of Williamsburg not owned by
CSL is recorded as a minority interest.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999
AND DECEMBER 31, 1998
Total assets increased from $287.3 million at December 31, 1998 to $316.6
million at December 31, 1999. The $29.3 million or 10.2% increase was due to the
increase in loans, which was funded by increased deposits and borrowings from
the Federal Home Loan Bank of Chicago (the FHLB).
Cash and cash equivalents decreased from $18,338,000 at December 31, 1998 to
$13,176,000 at December 31, 1999, a decrease of $5,162,000 or 28.1%. This
decrease was primarily the result of increased loans and the investment in land
in a real estate joint venture.
Investment securities decreased from $18,033,000 at December 31, 1998 to
$16,103,000 at December 31, 1999, a decrease of $1,930,000 or 10.7%.
Loans, net of allowance for loan losses and including loans held for sale,
increased from $236,873,000 at December 31, 1998 to $266,881,000 at December
31,1999, an increase of $30,008,000 or 12.7%. The increase was funded by
increased deposits and borrowings from the FHLB. The growth in loans was
primarily attributable to an increase in construction and land loans of
$31,690,000. The new construction and land loans relate primarily to new
residential and commercial developments in the Bloomington-Normal market area.
The allowance for losses increased from $1,256,000 at December 31, 1998 to
$1,679,000 at December 31, 1999, an increase of $423,000 or 33.7%. The increased
allowance was related to the Bank's increased origination of commercial real
estate and agricultural loans, which generally bear a greater degree of risk as
compared to one-to-four family mortgage loans. The ratio of the Company's
allowance for loan losses to total non-performing loans was 295.1% and 331.5% at
December 31, 1999 and 1998. Company management performs ongoing reviews of the
loan portfolio in order to identify non-performing loans and potential problem
loans to evaluate the adequacy of the allowance for loan losses. In performing
its review, management classifies non-performing and potential problem loans as
either substandard, doubtful, loss or special mention loans. A loan is
considered substandard if it is inadequately protected by the current net worth
and paying capacity of the borrower or of the collateral pledged, if any.
Substandard loans include those characterized by the distinct possibility that
the Company will sustain some loss if the deficiencies are not corrected. Loans
classified as doubtful have all of the weaknesses inherent in those classified
as substandard with the added characteristic that the weaknesses present make
collection or liquidation in full, on the basis of current existing facts and
conditions, highly questionable and improbable. Loans classified as loss are
those considered uncollectible and of such little value that their continuance
as loans without the establishment of a specific loss reserve is not warranted.
Loans which do not currently expose the Company to sufficient risk to warrant
classification in any one of the categories described above but possess
weaknesses are classified as special mention. The total of internally classified
loans of $819,000 and $786,000 at December 31, 1999 and 1998, respectively,
equals the sum of non-performing loans, which are loans past due 90 days or more
and non-accruing loans and potential problem loans.
6
<PAGE>
The land in real estate joint venture increased due to the Bank's investment in
a partnership for the development of a parcel of commercial property. The joint
venture purchased approximately twenty-nine acres of commercially zoned land on
the east side of Bloomington-Normal. The joint venture began selling the
developed land in the fourth quarter of 1999. The partners' portion of the
equity is reflected as a minority interest in real estate joint venture.
Premises and equipment increased primarily due to the acquisition of data
processing equipment related to the Bank's computer conversion.
Other assets increased primarily because of a $500,000 increase in deferred tax
assets and a $250,000 increase in accrued interest receivable on loans.
Deposits increased from $208,097,000 at December 31, 1998 to $220,237,000 at
December 31, 1999, an increase of $12,140,000 or 5.8%. Demand deposits increased
by $6.1 million and certificates of deposit by $5.2 million. The increase in
deposits was primarily due to the increased deposits at our newer facilities.
Borrowings from the FHLB increased from $39,410,000 at December 31, 1998 to
$57,073,000 at December 31, 1999, an increase of $17,663,000 or 44.8%. Of this
total $17.0 million are callable and have a weighted rate of 5.22%. The
increases were used primarily to fund the increase in loans.
Other liabilities decreased from $3,146,000 at December 31, 1998 to $2,099,000
at December 30, 1999, a decrease of $1,047,000 or 33.3% primarily because of a
decrease in accrued principal and interest payments payable to owners of
serviced loans.
Total stockholders' equity capital decreased by $1,769,000 or 4.9%, from
$36,020,000 at December 31, 1998 to $34,251,000 at December 31, 1999. The
decrease was caused by the repurchase of 225,696 shares of the Company's stock,
cash dividends of $211,000 and unrealized losses of available for sale
securities of $294,000, offset by earnings of the Company during the year ended
December 31, 1999 and the allocation of shares in the Company's stock-based
compensation plans. The amount relating to the stock-based compensation plans
decreased from $868,000 in 1998 to $746,000 due to the Company's lower average
stock price in 1999.
COMPARISON OF OPERATING RESULTS FOR YEARS ENDED
DECEMBER 31, 1999 AND DECEMBER 31, 1998
GENERAL
Net income decreased by $822,000 or 40.8%, from $2,014,000 for the year ended
December 31, 1998 to $1,192,000 for the year ended December 31, 1999. The
decrease was due to lower net gains on loan sales, a loss on equity investment
and increased net occupancy and equipment expenses resulting from the
accelerated depreciation of data processing equipment replaced during a data
processing conversion.
INTEREST INCOME
Interest on loans increased by $1,052,000 or 5.5%, from $19,248,000 for the year
ended December 31, 1998 to $20,300,000 for the year ended December 31, 1999. The
increase was due primarily to a $24.3 million increase in average loans during
1999. The average yield on loans decreased from 8.43% in 1998 to 8.04% in 1999.
Interest on investments decreased from $1,218,000 for the year ended December
31, 1998 to $1,171,000 for the year ended December 31, 1999, a decrease of
$47,000 or 3.9%. The decrease was due to the the decrease in the average balance
of investments of $429,000 and a fourteen basis point decrease in the average
yield on investments.
INTEREST EXPENSE
Interest on savings deposits decreased by $312,000 or 3.3%, from $9,538,000 for
the year ended December 31, 1998 to $9,226,000 for the year ended December 31,
1999. The decrease was primarily caused by a thirty-seven basis point decrease
in the average cost of deposits, offset by a slight increase in the average
balance of deposits. The decrease in the average interest rate paid on deposits
was due primarily to a decrease in the rates paid on certificates of deposit.
The interest on borrowings increased by $444,000 or 20.8%, from $2,137,000 for
the year ended December 31, 1998 to $2,581,000 for the year ended December 31,
1999 as a result of increased average borrowings from the FHLB of $11.9 million,
offset by a decrease in the average rate paid of seventy basis points.
7
<PAGE>
OTHER INCOME
Total other income decreased by $305,000 or 18.0%, from $1,695,000 for the year
ended December 31, 1998 to $1,390,000 for the year ended December 31, 1999. The
decrease was due to the $718,000 decrease in net gains on loan sales resulting
from reduced loan sales and an approximate $130,000 change in market value
adjustment for loans held for sale. The decrease in net gains on loan sales was
offset by increased loan servicing fees and fees on deposit accounts. Deposit
fees increased because of the continued increase in number and balance of demand
deposits accounts.
OTHER EXPENSE
Total other expense increased by $1,401,000 or 18.9%, from $7,426,000 for the
year ended December 31, 1998 to $8,827,000 for the year ended December 31, 1999.
Salaries and employee benefits increased by $213,000 or 5.0%, from $4,263,000
for the year ended December 31, 1998 to $4,476,000 for the year ended December
31, 1999. The increase was primarily due to normal inflationary salary
increases, a slight increase in staff size and higher medical insurance
premiums. Net occupancy expenses increased by $341,000 or 31.3%, from $1,089,000
for the year ended December 31, 1998 to $1,430,000 for the year ended December
31, 1999, primarily due to the accelerated depreciation of data processing
equipment replaced during a computer conversion. A loss on equity investment of
$441,000 reflects the losses equal to the Company's portion of the negative
equity and the outstanding loans to Websoft, Inc., in which the Company has a
20% ownership investment. As the investee has negative equity, the losses were
recorded.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased from $463,000 for the year ended
December 31, 1998 to $480,000 for the year ended December 31, 1999 an increase
of $17,000 or 3.7%. The provision for both periods reflects management's
analysis of the Company's loan portfolio based on information which is currently
available to it at such time. The Company's level of allowance for loan losses
to total loans and allowance for loan losses to non-performing loans were 0.54%
and 331.5%,respectively, at December 31, 1998, compared to 0.63% and 295.1%,
respectively, at December 31, 1999. The Company charged off $57,000 and $47,000
during 1999 and 1998, respectively. While management believes that the allowance
for loan losses is sufficient based on information currently available, no
assurances can be made that future events or conditions or regulatory directives
will not result in increased provisions for loan losses or additions to the
Bank's allowance for losses which may adversely affect net income.
INCOME TAX EXPENSE
Total income tax expense was $940,000 in 1999, compared to $1,250,000 in 1998.
The decrease was attributable to lower taxable income in 1999. The effective tax
rates for the years ended December 31, 199 and 1998 were 44.1% and 38.3%,
respectively. The tax rate increased in 1999 due to increased non-deductible
expenses.
COMPARISON OF OPERATING RESULTS FOR YEARS ENDED
DECEMBER 31, 1998 AND DECEMBER 31, 1997
GENERAL
Net income for the year ended December 31, 1998 increased by $125,000 from
$1,889,000 for the year ended December 31, 1997 to $2,014,000 for the year ended
December 31, 1998. The increase was primarily due to increased net interest
income and net gains on loan sales which was partially offset by the 1997 gain
on the sale of a branch facility of $523,000 ($320,000 after-tax) and increased
other expenses.
INTEREST INCOME
Interest on loans increased by $853,000 or 4.6%, from $18,395,000 for the year
ended December 31, 1997 to $19,248,000 for the year ended December 31, 1998. The
increase was due primarily to higher interest rates resulting from a change in
the composition of the loan portfolio. There was a $20.4 million decrease in
lower yielding one-to-four family loans and an increase of $20.9 million in
higher yielding commercial and construction and land loans. Average loans for
1998 were only $878,000 higher than the 1997 average.
Interest on investments, including mortgage-backed securities and FHLB stock
dividends decreased from $1,812,000 for the year ended December 31, 1997 to
$1,218,000 for the year ended
8
<PAGE>
December 31, 1998, a decrease of $594,000 or 32.8%. The decrease was primarily
due to lower average balances of mortgage-backed securities in 1998 and a
seventy basis point decrease in the average yield on mortgage-backed securities.
Mortgage-backed securities declined $10.0 million due to sales, maturities and
principal paydowns. This reduction contributed to the increase in cash and cash
equivalents. Interest on interest-bearing deposits increased by $574,000 or
610.6%, from $94,000 for the year ended December 31, 1997 to $668,000 for the
year ended December 31, 1998 because of higher average balances during 1998.
INTEREST EXPENSE
Interest on savings deposits decreased by $134,000 or 1.4%, from $9,672,000 for
the year ended December 31, 1997 to $9,538,000 for the year ended December 31,
1998. The decrease was primarily caused by an eleven basis point decrease in the
average interest rate paid on deposits, partially offset by a slight increase in
the average balance of deposits.
The interest on borrowings increased by $75,000 or 3.6%, from $2,062,000 for the
year ended December 31, 1997 to $2,137,000 for the year ended December 31, 1998
as a result of increased average borrowings from the FHLB as well as a slight
increase in rates.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased from $516,000 for the year ended
December 31, 1997 to $463,000 for the year ended December 31, 1998, a decrease
of $53,000 or 10.3%. Total charge-offs for 1998 were $47,000, compared to
$188,000 in 1997.
OTHER INCOME
Total other income decreased by $288,000 or 14.5%, from $1,983,000 for the year
ended December 31, 1997 to $1,695,000 for the year ended December 31, 1998. The
decrease was primarily due to the 1997 net gain on the sale of a branch facility
of $523,000 and a decrease in loan servicing fees, which was offset by an
increase in net gains on loan sales. Net gains on loan sales increased by
$492,000 or 117.7%, from $418,000 for the year ended December 31, 1997 to
$910,000 for the year ended December 31, 1998, because of an increase in loan
sales in the year ended December 31, 1998. Loan servicing fees decreased from
$205,000 for the year ended December 31, 1997 to $15,000 for the year ended
December 31, 1998, a decrease of $190,000 or 92.7%. This decrease was due to the
amortization of previously capitalized mortgage servicing rights.
OTHER EXPENSE
Total other expense increased by $480,000 or 6.9%, from $6,946,000 for the year
ended December 31, 1997 to $7,426,000 for the year ended December 31, 1998.
Salaries and benefits increased by $200,000 or 6.0%, from $4,063,000 for the
year ended December 31, 1997 to $4,263,000 for the year ended December 31, 1998,
due to the increase in the price of the Company's stock which is used to fund
the ESOP stock based compensation program and the additional compensation
expense from the new full-service facility that was opened in the third quarter
of 1997. Net occupancy expenses increased by $157,000 or 16.8%, from $932,000
for the year ended December 31, 1997 to $1,089,000 for the year ended December
31, 1998, primarily because of the new full-service office and administrative
facility. Deposit insurance expense increased by $19,000, from $101,000 for the
year ended December 31, 1997 to $120,000 for the year ended December 31, 1998
because of the utilization of a deposit insurance credit utilized in 1997.
INCOME TAX EXPENSE
Total income tax expense was $1,250,000 in 1998, compared to $1,199,000 in 1997.
The increase was attributable to higher taxable income in 1998. The effective
tax rates for the years ended December 31, 1998 and 1997 were 38.8% and 38.8%,
respectively.
9
<PAGE>
YEAR 2000 COMPLIANCE
The Year 2000 compliance issue existed because many computer systems and
applications used two-digit fields to designate a year. There was a concern that
as the century date change occurred, date-sensitive systems might either fail or
not operate properly unless the underlying programs are modified or replaced.
The Bank initiated a program to assure that all computer applications would be
Year 2000 compliant. This program included the monitoring and testing of the
Bank's in-house data processing system and other data processing related vendors
Year 2000 compliance progress. The progress of certain commercial loan
customers' Year 2000 efforts were also monitored.
No Year 2000 problems were encountered by the Bank or any of its commercial loan
customers prior to or after the century date change. The Bank will continue to
monitor for any problems that may arise in the future.
To date, the Company's direct expenses (other than the salary of Company
employees involved in the project) have been less than $20,000 and the Company
does not anticipate any material additional Year 2000 expense.
SALE OF BRANCH FACILITY
During January, 2000, the Bank has entered into an agreement for the sale of its
branch location and related deposit accounts in Eureka, Illinois. The sales
price will be 10% of the office's approximately $26.7 million in deposits. The
transaction should result in a gain of approximately $2.5 million. It is
anticipated this transaction will be finalized by the second quarter of 2000.
CURRENT ACCOUNTING ISSUES
During 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement requires companies to record derivatives on the balance sheet at their
fair value. This new Statement applies to all entities. Statement No. 137
amended the effective date of Statement No. 133 to fiscal years beginning after
June 15, 2000. The Statement may not be applied retroactively to financial
statements of prior periods. The adoption of the Statement will have no material
impact on the Company's financial condition or result of operations.
10
<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 1999 or 1998.
The principal objective of the Company's interest rate risk management function
is to evaluate the interest rate risk included in balance sheet accounts,
determine the level of risk appropriate given the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Director's approved
guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates. The Company
monitors its interest rate risk as such risk relates to its operating
strategies. The Company's Board of Directors reviews the Company's interest rate
risk position on a quarterly basis. The Company's Asset/Liability Committee is
comprised of the Company's senior management under the direction of the Board of
Directors, with the Committee responsible for reviewing with the Board of
Directors its activities and strategies, the effect of those strategies on the
Company's net interest margin, the market value of the portfolio and the effect
that changes in the interest rates will have on the Company's portfolio and its
exposure limits. The extent of the movement of interest rates is an uncertainty
that could have a negative impact on the earnings of the Company.
In recent years, the Company has utilized the following strategies to manage
interest rate risk: (1) originating for investment adjustable rate residential
mortgage and fixed rate one-to-four family loans with maturities of 10 years or
less; (2) generally selling fixed rate one-to-four family mortgage loans with
maturities exceeding 10 years in the secondary market without recourse and on a
servicing retained basis; (3) increasing its origination of shorter term and/or
adjustable rate commercial loans; and (4) investing in shorter term investment
securities which may generally bear lower yield as compared to longer term
investments, but which may better position the Company for increases in market
interest rates.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring the Company's interest rate sensitivity "gap". An asset or liability
is said to be interest rate sensitive within a specific time period, if it will
mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. At December 31, 1999,
the Company's one-year gap position, the difference between the amount of
interest-earning assets maturing or repricing within one year, and
interest-bearing liabilities maturing or repricing within one year, was
($10,952,000). A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. Accordingly,
during a period of rising interest rates, a financial institution with a
negative gap position would tend to have its interest-bearing liabilities
repricing upwards at a faster rate which, consequently, may result in the cost
of its interest-bearing liabilities increasing at a rate faster than its yield
on interest-earning assets than if it had a positive gap. During a period of
falling interest rates, a financial institution with a negative gap would tend
to have its interest-bearing liabilities repricing downward at a faster rate
than its interest-earning assets as compared to an institution with a positive
gap, which consequently, may tend to positively affect the growth of its net
interest income.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999, which are
anticipated by the Company, based upon assumptions, to reprice or mature in each
of the future time periods shown. Except as stated below, the amount of assets
and liabilities shown which reprice or mature during a particular period were
determined in accordance with the earlier of term repricing or the contractual
maturity of the asset or liability. The table sets forth an approximation of the
projected repricing of assets and liabilities at December 31, 1999, on the basis
of contractual maturities, anticipated prepayments, and scheduled rate
adjustments within the selected time intervals. Annual prepayment rates for
adjustable rate and fixed rate loans are assumed to be 4.5% and 9.5%,
respectively. Annual prepayment rates for adjustable rate and fixed rate
mortgage-backed securities are assumed to be 4.5% and 7.5%, respectively. Money
market deposits are assumed to be immediately interest rate sensitive, while
passbook accounts and NOW accounts are assumed to have decay rates of 12%
annually.
11
<PAGE>
Gap Table (Amounts in thousands)
<TABLE>
<CAPTION>
After Fair
Year 1 Year 2 Year 3 Year 4 Year 5 Year 5 TOTAL Value
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans
Fixed rate ......................... $50,593 $27,706 $19,575 $12,341 $11,512 $27,488 $149,215 $148,623
Average interest rate .............. 8.52% 8.43% 8.13% 8.28% 8.30% 7.66% 8.14%
Variable rate ...................... 71,363 15,524 16,772 5,483 8,524 0 117,666 117,862
Average interest rate .............. 8.37% 7.90% 7.92% 8.13% 7.82% 0.00% 8.18%
Securities
Fixed rate ......................... 1,280 270 249 717 2,166 6,414 11,096 11,096
Average interest rate .............. 5.30% 6.42% 6.42% 6.04% 6.51% 6.52% 6.34%
Variable rate ...................... 7,861 7,861 7,861
Average interest rate .............. 6.18% 6.18%
Interest-bearing demand deposits ..... 3,267 3,267 3,267
Average interest rate .............. 4.56% 4.56%
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning assets .... $134,364 $43,500 $36,596 $18,541 $22,202 $33,902 $289,105 $288,709
-------- -------- -------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
NOW and savings accounts ............. 4,636 4,636 4,636 4,636 4,636 15,454 38,634 38,634
Average interest rate .............. 1.99% 1.99% 1.99% 1.99% 1.99% 1.99% 1.99%
Money market accounts ................ 13,379 13,379 13,379
Average interest rate .............. 3.30% 3.30%
Time deposits
Fixed rate ......................... 97,889 39,520 7,023 1,310 908 102 146,752 147,058
Average interest rate .............. 5.29% 5.66% 5.47% 5.70% 5.35% 6.23% 5.40%
Variable rate ...................... 5,412 5,412 5,412
Average interest rate .............. 5.04% 5.04%
FHLB advances:
Fixed rate ......................... 20,000 0 4,898 3,000 14,000 11,175 53,073 51,707
Average interest rate .............. 6.00% 0.00% 6.07% 5.55% 5.46% 5.15% 5.66%
Variable rate ...................... 4,000 4,000 4,000
Average interest rate .............. 6.26% 6.26%
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning liabilities $145,316 $44,156 $16,557 $8,946 $19,544 $26,731 $261,250 $260,190
-------- -------- -------- -------- -------- -------- -------- --------
Interest-earning assets less
interest-bearing liabilities ("Gap") ($10,952) ($656) $20,039 $9,595 $2,658 $7,171 $27,855 $28,519
-------- -------- -------- -------- -------- -------- -------- --------
Cumulative gap ....................... ($10,952) ($11,608) $8,431 $18,026 $20,684 $27,855 $27,855 $28,519
-------- -------- -------- -------- -------- -------- -------- --------
Cumulative gap as % of
interest-earning assets ............ -3.79% -4.02% 2.92% 6.23% 7.15% 9.63% 9.63% 9.88%
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
At December 31, 1999, the table above reflects that the Company has a negative
liability gap due to the level of interest bearing demand deposits and savings
that are generally subject to immediate withdrawal and are repriceable at any
time. As such, the effect of an increase in interest rates of 100 basis points
would decrease net interest income by approximately $109,500 in one year and
$116,000 in two years assuming no management intervention. A fall in interest
rates would have the opposite effect for the same period. In analyzing interest
rate sensitivity, the Company's management considers these differences and
incorporates other assumptions and factors, such as balance sheet growth and
prepayments, to better measure interest rate risk.
While the gap analysis provides an indication of interest rate sensitivity,
experience has shown that it does not fully capture the true dynamics of
interest rate changes. Essentially, the analysis presents only a static
measurement of asset and liability volumes based on contractual maturity, cash
flow estimates or repricing opportunity. It fails to reflect the differences in
the timing and degree of repricing of assets and liabilities due to interest
rate changes.
12
<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 ------------------------------------------------------------------------
1999 1999 1998
-------------- ---------------------------------- ----------------------------------
Average Average Average Average
Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
-------------- ------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Deposits & short-term investments ... 5.35% $8,552 $419 4.90% $11,873 $668 5.63%
Investment securities (1) ........... 6.18 7,354 462 6.28 7,783 500 6.42
Loans receivable (2) ................ 8.16 252,551 20,300 8.04 228,224 19,248 8.43
Mortgage-backed securities (3) ...... 6.22 9,191 516 5.61 10,397 580 5.58
FHLB-Chicago stock .................. 6.75 2,369 159 6.72 2,000 138 6.90
---- -------- ------- ---- -------- ------- ----
Total interest-earning assets .... 7.98 280,017 21,856 7.81 260,277 21,134 8.12
------- -------
Non-interest earning assets ......... 20,479 17,064
-------- --------
Total assets ..................... $300,496 $21,856 $277,341 $21,134
======== ======= ======== =======
Liabilities & Equity
Interest-bearing liabilities
Money market accounts ............ 3.30 $12,542 $427 3.40 $10,345 $234 2.26
Passbook accounts ................ 2.25 19,003 418 2.20 17,221 413 2.40
NOW accounts ..................... 1.74 19,079 336 1.76 16,668 379 2.27
Certificate accounts ............. 5.39 150,068 8,045 5.36 147,591 8,512 5.77
---- -------- ------- ---- -------- ------- ----
Total interest-bearing deposits .. 4.61 200,692 9,226 4.60 191,825 9,538 4.97
---- -------- ------- ---- -------- ------- ----
FHLB advances .................... 5.79 45,481 2,581 5.67 33,573 2,137 6.37
-------- ------- -------- -------
Total interest-bearing liabilities 4.87 246,173 11,807 4.80 225,398 11,675 5.18
------- -------
Non-interest bearing liabilities .... 19,062 15,591
-------- --------
Total liabilities ................ 265,235 240,989
Stockholders' Equity ................ 35,261 36,352
-------- --------
Total liabilities &
stockholders' equity ........... $300,496 $277,341
======== ========
Net interest rate spread (4) ........ 3.11% $10,049 3.01% $9,459 2.94%
==== ======= ==== ====== ====
Net interest margin (5) ............. 3.59% 3.63%
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities ..... 113.75% 115.47%
====================================================================================================================================
<CAPTION>
For the Years Ended December 31,
-------------------------------------
1997
-------------------------------------
Average Average
Balance Interest Yield/Cost
------- -------- ----------
<S> <C> <C> <C>
Assets
Deposits & short-term investments ... $2,400 $94 3.92%
Investment securities (1) ........... 6,200 399 6.44
Loans receivable (2) ................ 227,346 18,395 8.09
Mortgage-backed securities (3) ...... 20,359 1,279 6.28
FHLB-Chicago stock .................. 1,971 134 6.80
-------- ------- ----
Total interest-earning assets .... 258,276 20,301 7.86
-------
Non-interest earning assets ......... 15,269
--------
Total assets ..................... $273,545 $20,301
======== =======
Liabilities & Equity
Interest-bearing liabilities
Money market accounts ............ $9,703 $234 2.41
Passbook accounts ................ 16,921 419 2.48
NOW accounts ..................... 14,930 338 2.26
Certificate accounts ............. 148,812 8,681 5.83
-------- ------- ----
Total interest-bearing deposits .. 190,366 9,672 5.08
-------- ------- ----
FHLB advances .................... 32,958 2,062 6.26
-------- -------
Total interest-bearing liabilities 223,324 11,734 5.25
-------
Non-interest bearing liabilities .... 11,510
--------
Total liabilities ................ 234,834
Stockholders' Equity ................ 38,711
--------
Total liabilities &
stockholders' equity ........... $273,545
========
Net interest rate spread (4) ........ $8,567 2.61%
====== ====
Net interest margin (5) ............. 3.32%
====
Ratio of interest-earning assets to
interest-bearing liabilities ..... 115.65%
===================================================================================
</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>
Year-to-Date 1999 Year-to-Date 1998
Compared to Compared to
Year-to-Date 1998 Year-to-Date 1997
===================================== ====================================
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------- ------------------------------------
Volume Rate Total Change Volume Rate Total Change
------------------------------------- ------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Interest-earning deposits ($170) ($79) ($249) $517 $57 $574
Investment securities (27) (11) (38) 102 (1) 101
Loans receivable 1,985 (933) 1,052 71 782 853
Mortgage-backed securities (68) 4 (64) (569) (130) (699)
FHLB stock 25 (4) 21 2 2 4
----- ----- ----- ----- ----- -----
Total interest income 1,562 (840) 722 158 675 833
----- ----- ----- ----- ----- -----
Interest Expense:
Money-market deposit accounts 57 136 193 15 (15) 0
Savings accounts 41 (36) 5 7 (13) (6)
NOW accounts 50 (93) (43) 40 1 41
Certificate accounts 141 (608) (467) (71) (98) (169)
FHLB advances 695 (251) 444 39 36 75
----- ----- ----- ----- ----- -----
Total interest expense 1,032 (900) 132 108 (167) (59)
----- ----- ----- ----- ----- -----
Net interest income $530 $60 $590 $50 $842 $892
===== ===== ===== ===== ===== =====
</TABLE>
14
<PAGE>
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, principal and interest
payments on loans and securities, sales of loans and securities and FHLB
advances. While maturing and scheduled amortization of loans are predictable
sources of funds, deposit outflows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
At December 31, 1999, the Bank exceeded all of its regulatory capital
requirements with Tier 1 core capital of $27.9 million, or 13.3% of
risk-weighted assets, which is above the required level of $8.4 million or 4.0%;
and risk-based capital of $29.3 million or 14.0% of risk-weighted assets, which
is above the required level of $16.8 million or 8.0%.
The Company's most liquid assets are cash and interest-bearing demand accounts.
The level of these accounts is dependent on the operating, financing, lending
and investing activities during any given period. At December 31, 1999 and 1998,
cash and interest-bearing deposits totaled $13.2 million and $18.3 million,
respectively.
The Company has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At December 31, 1999, the Bank had outstanding
advances with the FHLB of $57.1 million. The FHLB maintains two limitations on
the availability based on FHLB stock ownership and total assets. The Bank
currently meets the stock limitation; however, this limit may be raised by the
purchase of additional FHLB stock. Based on the total assets limitations, the
Bank may increase its borrowings with the FHLB by approximately $52.2 million.
Depending upon market conditions and the pricing of deposit products and FHLB
borrowings, the Bank may utilize FHLB advances to fund loan originations.
At December 31, 1999 the Bank had commitments to originate loans and unused
lines of credit totaling $45.1 million. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Certificate accounts which are
scheduled to mature in one year or less from December 31, 1999 totaled $103.3
million. The Bank anticipates that it will have sufficient funds to meet its
current loan commitments and maturing deposits.
15
<PAGE>
Independent Auditor's Report
To the Stockholders and Board of Directors
Citizens First Financial Corp. and Subsidiary
Bloomington, Illinois
We have audited the accompanying consolidated balance sheet of Citizens First
Financial Corp. and subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of
Citizens First Financial Corp. and subsidiary as of December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ Olive LLP
Olive
Decatur, Illinois
January 26, 2000
16
<PAGE>
Citizens First Financial Corp. and Subsidiary
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31 1999 1998
=====================================================================================================
<S> <C> <C>
Assets
Cash and due from banks ............................................ $9,909,293 $5,758,487
Interest-bearing demand deposits ................................... 3,266,649 12,579,716
-----------------------------
Cash and cash equivalents .................................... 13,175,942 18,338,203
Investment securities available for sale ........................... 16,103,412 18,033,239
Loans held for sale ................................................ 3,007,425 5,245,872
Loans, net of allowance for loan losses of $1,679,247 and $1,256,475 263,873,765 231,627,677
Land in real estate joint venture .................................. 4,107,729
Premises and equipment ............................................. 9,028,410 8,124,445
Federal Home Loan Bank stock ....................................... 2,853,700 1,970,700
Foreclosed assets .................................................. 86,224 482,833
Other assets ....................................................... 4,348,041 3,451,161
- -----------------------------------------------------------------------------------------------------
Total assets ................................................. $316,584,648 $287,274,130
=====================================================================================================
Liabilities
Deposits
Noninterest bearing .......................................... $16,059,672 $13,046,683
Interest bearing ............................................. 204,177,299 195,049,888
-----------------------------
Total deposits ......................................... 220,236,971 208,096,571
Federal Home Loan Bank borrowings .................................. 57,073,196 39,409,618
Advances by borrowers for taxes and insurance ...................... 890,483 601,266
Other liabilities .................................................. 2,098,804 3,146,317
- -----------------------------------------------------------------------------------------------------
Total liabilities ............................................ 280,299,454 251,253,772
- -----------------------------------------------------------------------------------------------------
Minority Interest in Real Estate Joint Venture ..................... 2,034,054
COMMITMENTS AND CONTINGENT LIABILITIES
Stockholders' Equity
Preferred stock, $.01 par value
Authorized and unissued -- 1,000,000 shares
Common stock, $.01 par value
Authorized -- 8,000,000 shares
Issued and Outstanding -- 2,817,500 shares ................... 28,175 28,175
Additional Paid-in-capital ................................... 27,489,456 27,426,725
Retained earnings .................................................. 21,179,540 20,198,209
Accumulated other comprehensive income ............................. (341,567) (47,729)
- -----------------------------------------------------------------------------------------------------
48,355,604 47,605,380
Less:
Unallocated employee stock ownership plan
shares -- 96,600 and 128,800 shares .......................... (966,000) (1,288,000)
Unearned incentive plan shares -- 40,577 and 64,709 shares ......... (558,965) (893,433)
Treasury stock, at cost -- 793,145 and 583,083 shares .............. (12,579,499) (9,403,589)
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity ......................................... 34,251,140 36,020,358
- -----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity ................... $316,584,648 $287,274,130
=====================================================================================================
</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 1999 1998 1997
=============================================================================================
<S> <C> <C> <C>
Interest Income
Loans receivable ............................ $20,299,904 $19,248,250 $18,394,586
Investment securities ....................... 1,171,225 1,218,318 1,812,044
Deposits with financial institutions ........ 384,643 667,589 94,271
---------------------------------------
Total interest income ................. 21,855,772 21,134,157 20,300,901
---------------------------------------
Interest Expense
Deposits .................................... 9,226,193 9,537,962 9,672,326
Federal Home Loan Bank borrowings ........... 2,581,041 2,137,116 2,061,677
---------------------------------------
Total interest expense ................ 11,807,234 11,675,078 11,734,003
---------------------------------------
Net Interest Income ............................... 10,048,538 9,459,079 8,566,898
Provision for loan losses ................... 480,000 463,381 516,053
---------------------------------------
Net Interest Income After Provision for Loan Losses 9,568,538 8,995,698 8,050,845
---------------------------------------
Other Income
Service charges on deposit accounts ......... 782,672 509,197 495,980
Loan servicing fees ......................... 86,506 15,410 205,027
Net realized gains on sales of
available-for-sale securities ........... 11,428 17,060 4,019
Net gain on sale of branch facility ......... 522,883
Net gains on loan sales ..................... 192,244 910,352 418,260
Other income ................................ 316,904 243,353 336,869
---------------------------------------
Total other income .................... 1,389,754 1,695,372 1,983,038
---------------------------------------
Other Expenses
Salaries and employee benefits .............. 4,476,988 4,263,484 4,063,420
Net occupancy and equipment expenses ........ 1,430,349 1,089,380 932,335
Deposit insurance expense ................... 122,989 120,149 101,473
Data processing fees ........................ 444,948 403,771 385,098
Loss on equity investment ................... 441,087
Other expenses .............................. 1,873,776 1,549,513 1,463,469
Minority interest in net income of
real estate joint venture ................ 36,378
---------------------------------------
Total other expenses .................. 8,826,515 7,426,297 6,945,795
---------------------------------------
Income Before Income Tax .......................... 2,131,777 3,264,773 3,088,088
Income tax expense .......................... 939,891 1,250,304 1,199,332
---------------------------------------
Net Income ........................................ $1,191,886 $2,014,469 $1,888,756
=============================================================================================
Basic Earnings Per Share .......................... $0.61 $0.90 $0.79
Diluted Earnings Per Share ........................ $0.58 $0.84 $0.74
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
Citizens First Financial Corp. and Subsidiary
Consolidated Statement of Stockholders' Equity
<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, 1997 ................... 2,568,611 $28,175 $27,023,869 $16,294,984 ($297,685)
Comprehensive income
Net income ............................. $1,888,756 1,888,756
Other comprehensive income,
net of tax
Unrealized gains on securities,
net of reclassification adjustment .. 197,952 197,952
---------------
Comprehensive income ..................... $2,086,708
===============
Employee stock ownership
plan shares allocated .................. 32,200 203,437
Incentive plan shares acquired ........... (54,100)
Incentive plan shares earned ............. 22,540 (33,984)
Purchase of treasury stock ............... (281,750)
- -------------------------------------------------------------------------------- -----------------------------
Balance, December 31, 1997 ................. 2,287,501 28,175 27,193,322 18,183,740 (99,733)
Comprehensive income
Net income ............................. $2,014,469 2,014,469
Other comprehensive income,
net of tax
Unrealized gains on securities,
net of reclassification adjustment .. 52,004 52,004
---------------
Comprehensive income ..................... $2,066,473
===============
Employee stock ownership
plan shares allocated .................. 32,200 268,559
Incentive plan shares earned ............. 22,540 (35,156)
Purchase of treasury stock ............... (301,333)
- -------------------------------------------------------------------------------- -----------------------------
Balance, December 31, 1998 ................. 2,040,908 28,175 27,426,725 20,198,209 (47,729)
Comprehensive income
Net income ............................. $1,191,886 1,191,886
Other comprehensive income,
net of tax
Unrealized losses on securities,
net of reclassification adjustment .. (293,838) (293,838)
---------------
Comprehensive income ..................... $898,048
===============
Cash dividends ($.10 per share) .......... (210,555)
Employee stock ownership
plan shares allocated .................. 32,200 127,484
Incentive plan shares earned ............. 24,132 (37,644)
Exercise of stock options ................ 15,634 (27,109)
Purchase of treasury stock ............... (225,696)
- -------------------------------------------------------------------------------- -----------------------------
Balance, December 31, 1999 ................. 1,887,178 $28,175 $27,489,456 $21,179,540 ($341,567)
================================================================================ =============================
<CAPTION>
Unallocated
Employee
Stock Unearned
Ownership Incentive Treasury
Plan Shares Plan Shares Stock Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 ................... ($1,932,000) ($768,833) $40,348,510
Comprehensive income
Net income ............................. 1,888,756
Other comprehensive income,
net of tax
Unrealized gains on securities,
net of reclassification adjustment .. 197,952
Comprehensive income .....................
Employee stock ownership
plan shares allocated .................. 322,000 525,437
Incentive plan shares acquired ........... (752,932) (752,932)
Incentive plan shares earned ............. 315,984 282,000
Purchase of treasury stock ............... ($4,520,173) (4,520,173)
- -------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 ................. (1,610,000) (1,205,781) (4,520,173) 37,969,550
Comprehensive income
Net income ............................. 2,014,469
Other comprehensive income,
net of tax
Unrealized gains on securities,
net of reclassification adjustment .. 52,004
Comprehensive income .....................
Employee stock ownership
plan shares allocated .................. 322,000 590,559
Incentive plan shares earned ............. 312,348 277,192
Purchase of treasury stock ............... (4,883,416) (4,883,416)
- -------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 ................. (1,288,000) (893,433) (9,403,589) 36,020,358
Comprehensive income
Net income ............................. 1,191,886
Other comprehensive income,
net of tax
Unrealized losses on securities,
net of reclassification adjustment .. (293,838)
Comprehensive income .....................
Cash dividends ($.10 per share) .......... (210,555)
Employee stock ownership
plan shares allocated .................. 322,000 449,484
Incentive plan shares earned ............. 334,468 296,824
Exercise of stock options ................ 219,407 192,298
Purchase of treasury stock ............... (3,395,317) (3,395,317)
- -------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 ................. ($966,000) ($558,965) ($12,579,499) $34,251,140
=======================================================================================================
</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 1999 1998 1997
==========================================================================================================
<S> <C> <C> <C>
Operating Activities
Net income ......................................... $1,191,886 $2,014,469 $1,888,756
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses .................... 480,000 463,381 516,053
Loss on equity investment .................... 441,087
Depreciation ................................. 986,169 591,230 471,610
Deferred income tax benefit .................. (303,617) (51,643) (72,833)
Investment securities gains .................. (11,428) (17,060) (4,019)
Investment securities amortization, net ...... 55,212 51,049 51,711
Minority interest in net income
of real estate joint venture ............. 36,378
Net loss on sales of foreclosed real estate .. 56,551 73,656 19,381
Net gain on loan sales ....................... (192,244) (910,352) (418,260)
Net gain on sale of branch facility .......... (522,883)
Net gain on sales of premises and equipment .. (6,478) (44,366)
Loans originated for sale .................... (20,932,960) (61,122,594) (25,967,927)
Proceeds from sales of loans originated
for resale ............................... 23,363,651 59,180,641 27,020,088
Compensation expense related to
employee stock ownership and
incentive plans ...................... 746,308 867,751 807,437
Change in:
Other assets ............................. (406,817) (402,916) (30,587)
Other liabilities ........................ (1,301,100) 787,193 196,924
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities .... 4,209,076 1,518,327 3,911,085
- ----------------------------------------------------------------------------------------------------------
Investing Activities
Purchases of securities available for sale ......... (3,005,375) (10,503,689) (1,992,419)
Proceeds from maturities and principal paydowns
on securities available for sale ............. 4,197,893 6,565,809 5,341,739
Proceeds from sales of securities available for sale 25,741 5,257,424 5,995,727
Proceeds from maturities and principal paydowns
on securities held to maturity ............... 1,000,000
Redemption (purchase) of Federal Home
Loan Bank stock .............................. (883,000) 482,500 (791,200)
Net change in loans ................................ (32,878,138) (3,752,577) (19,311,565)
Proceeds from sales of foreclosed real estate ...... 492,108 1,179,300 441,043
Purchases of premises and equipment ................ (1,890,134) (335,500) (3,317,385)
Investment in land in real estate joint venture .... (4,180,485)
Proceeds from minority interest portion
of real estate joint venture ................. 2,070,432
Sale of branch, net of cash paid ................... 522,883
Proceeds from sales of premises and equipment ...... 34,274 260,423
- ----------------------------------------------------------------------------------------------------------
Net cash used by investing activities ........ (36,050,958) (1,072,459) (11,850,754)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
Citizens First Financial Corp. and Subsidiary
Consolidated Statement of Cash Flows (continued)
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
===================================================================================================
<S> <C> <C> <C>
Financing Activities
Net change in
Interest-bearing demand and savings deposits $6,953,643 $11,163,613 $479,448
Certificates of deposit ..................... 5,186,757 (1,700,259) (3,970,971)
Net change in Federal Home Loan Bank line of credit (4,200,000) (10,250,000)
Net proceeds from Federal Home Loan
Bank advances ............................... 17,663,578 9,665,942 27,943,676
Net change in advances by borrowers for
taxes and insurance ......................... 289,217 (92,798) (57,366)
Cash dividends .................................... (210,555)
Purchase of stock for incentive plan .............. (752,932)
Exercise of stock options ......................... 192,298
Purchase of treasury stock ........................ (3,395,317) (4,883,416) (4,520,173)
--------------------------------------------
Net cash provided by
financing activities .................. 26,679,621 9,953,082 8,871,682
--------------------------------------------
Net Change in Cash and Cash Equivalents ........... (5,162,261) 10,398,950 932,013
Cash and Cash Equivalents, Beginning of Year ...... 18,338,203 7,939,253 7,007,240
--------------------------------------------
Cash and Cash Equivalents, End of Year ............ $13,175,942 $18,338,203 $7,939,253
===================================================================================================
Additional Cash Flows Information
Interest paid ..................................... $11,721,872 $11,697,057 $11,598,098
Income tax paid ................................... 1,337,379 1,138,727 834,003
Loan balances transferred to foreclosed
real estate and repossessions ............... 152,050 1,130,411 368,822
</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, ("Bank"),
conform to generally accepted accounting principles and reporting practices
followed by the thrift industry. The Bank has one wholly owned subsidiary, CSL
Service Corporation. The more significant of the policies are described below.
During 1999, CSL Service Corporation entered into a joint venture real estate
development partnership with two other investors and is a 50% owner of
Williamsburg Place LLC. The primary business of Williamsburg Place LLC is to
purchase and develop commercial real estate.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
The Company is a thrift holding company whose principal activity is the
ownership and management of the Bank. The Bank converted from a federal thrift
charter to a state bank charter during 1999, and provides full banking services
in a single significant business segment. As a state-chartered savings bank, the
Bank is subject to regulation by the State of Illinois Office of Banks and Real
Estate, and the Federal Deposit Insurance Corporation.
The Bank generates commercial, mortgage and consumer loans and receives deposits
from customers located primarily in Central Illinois. The Bank's loans are
generally secured by specific items of collateral including real property,
consumer assets and business assets. Although the Bank has a diversified loan
portfolio, a substantial portion of its debtors' ability to honor their
contracts is dependent upon economic conditions in Central Illinois.
CONSOLIDATION - The consolidated financial statements include the accounts of
the Company and Bank after elimination of all material intercompany transactions
and accounts. The accounts of Williamsburg Place LLC have been consolidated into
the Company's financial statements. The cost basis investment in the real estate
and the minority interest owned portion are reflected on the consolidated
balance sheet.
INVESTMENT SECURITIES - Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity and marketable equity securities
are classified as available for sale. Securities available for sale are carried
at fair value with unrealized gains and losses reported in accumulated other
comprehensive income, net of tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
LOANS HELD FOR SALE are carried at the lower of aggregate cost or market. Market
is determined using the aggregate method. Net unrealized losses, if any, are
recognized through a valuation allowance by charges to income based on the
difference between estimated sales proceeds and aggregate cost.
22
<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. In applying the provisions of Statement of
Financial Accounting Standards (SFAS) No. 114, the Company considers its
investments in one-to-four family residential loans and installment loans to be
homogeneous and therefore excluded from separate identification for valuation of
impairment.
ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES are maintained to absorb loan and
real estate losses based on management's continuing review and evaluation of the
loan and real estate portfolios and its judgment as to the impact of economic
conditions on the portfolios. The evaluation by management includes
consideration of past loss experience, changes in the composition of the
portfolios, the current condition and amount of loans and foreclosed real estate
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses and the
valuation of real estate is based on estimates that are particularly susceptible
to significant changes in the economic environment and market conditions.
Management believes that as of December 31, 1999, the allowance for loan losses
and carrying value of foreclosed real estate are adequate based on information
currently available. A worsening or protracted economic decline in the area
within which the Bank operates would increase the likelihood of additional
losses due to credit and market risks and could create the need for additional
loss reserves.
LAND IN REAL ESTATE JOINT VENTURE is carried at cost, with land and development
costs allocated to lots when incurred.
PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based on the estimated
useful lives of the assets. Maintenance and repairs are expensed as incurred
while major additions and improvements are capitalized. Gains and losses on
dispositions are included in current operations.
FEDERAL HOME LOAN BANK (FHLB) STOCK is a required investment for institutions
that are members of the Federal Home Loan Bank system. The required investment
in the common stock is based on a predetermined formula.
FORECLOSED ASSETS are carried at the lower of cost or fair value less estimated
selling costs. When foreclosed assets are acquired, any required adjustment is
charged to the allowance for loan losses. All subsequent activity is included in
current operations.
MORTGAGE SERVICING RIGHTS on originated loans are capitalized by allocating the
total cost of the mortgage loans between the mortgage servicing rights and the
loans based on their relative fair values. Capitalized servicing rights are
amortized in proportion to and over the period of estimated servicing revenues.
TREASURY STOCK is stated at cost. Cost is determined by the first-in, first-out
method.
23
<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 the
ESOP but not yet allocated to participants are presented in the consolidated
balance sheet as a reduction of stockholders' equity. Compensation expense is
recorded based on the market price of the shares as they are committed to be
released for allocation to participant accounts. The difference between the
market price and the cost of shares committed to be released is recorded as an
adjustment to paid-in capital. Dividends on allocated ESOP shares will be
recorded as a reduction of retained earnings; dividends on unallocated ESOP
shares will be reflected as a reduction of debt.
Shares are considered outstanding for earnings per share calculations when they
are committed to be released; unallocated shares are not considered outstanding.
EARNINGS PER SHARE -- Basic earnings per share have been computed based upon the
weighted average common shares outstanding during each year. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the Company.
RECLASSIFICATIONS of certain amounts in the 1998 and 1997 financial statements
have been made to conform to the 1999 presentation.
Note 2 - Subsequent Event
In January 2000, the Company entered into a purchase and assumption agreement
for the sale of certain fixed assets and assumption of deposit liabilities of a
branch located in Eureka, Illinois. As of December 31, 1999, total deposits for
the Eureka Branch are approximately $26,740,000 and fixed assets are
approximately $172,000. The gain on sale should approximate $2,500,000. It is
anticipated this transaction will be finalized by the second quarter of 2000.
24
<PAGE>
Citizens First Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
Note 3 - Investment Securities
<TABLE>
<CAPTION>
1999
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Available for sale
Federal agencies ......................... $7,502,302 $288,327 $7,213,975
Mortgage-backed securities ........... 8,144,576 257,923 7,886,653
Other asset-backed securities ........ 14,832 14,832
Marketable equity securities ......... 1,000,000 12,048 987,952
------------------------------------------------------------------------
Total available for sale ..... $16,661,710 $558,298 $16,103,412
========================================================================
<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
========================================================================
</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, 1999, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Available for Sale
------------------------------
Amortized Fair
Cost Value
- -------------------------------------------------------------------------
Within one year ......................... $1,000,565 $988,170
One to five years ....................... 2,505,783 2,443,805
Five to ten years ....................... 3,995,954 3,782,000
------------------------------
7,502,302 7,213,975
Mortgage-backed securities .............. 8,144,576 7,886,653
Other asset-backed securities ........... 14,832 14,832
Marketable equity securities ............ 1,000,000 987,952
------------------------------
Totals ............................ $16,661,710 $16,103,412
=========================================================================
Securities with a carrying value of $2,188,415 and $2,395,217 were pledged at
December 31, 1999 and 1998 to secure certain deposits and for other purposes as
permitted or required by law.
Proceeds from sales of securities available for sale during 1999, 1998 and 1997
were $25,741, $5,257,424, and $5,995,727. Gross gains of $11,428, $23,055, and
$12,160 and gross losses of $0, $5,995, and $8,141 were realized on those sales.
The tax effect of the gains were approximately $4,436, $6,653 and $1,625.
With the exception of securities of the U.S. Treasury and other U.S. Government
agencies and corporations, the Company did not hold any securities of a single
issuer, payable from and secured by the same source of revenue or taxing
authority, the book value of which exceeded 10% of stockholders' equity at
December 31, 1999.
Note 4 - Equity Investment
The Company has a 20% ownership investment in Websoft, Inc. (investee), a
company which builds and markets internet portals. The Company also had
outstanding loans with the investee. The Company follows the equity method in
recording the investment. As of December 31, 1999, the investee had total assets
of $159,137, total liabilities of $902,216, and total equity of $(743,079). As
the investee has negative equity, losses equal to the Company's portion of the
negative equity and the outstanding loans totaling $441,087 have been recorded
as other expenses in the Company's consolidated statement of income.
Note 5 - Restriction on Cash and Due From Banks
The Bank is required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank. The reserve required at December 31, 1999, was
$911,000.
26
<PAGE>
Citizens First Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
Note 6 - Loans and Allowance
December 31 1999 1998
================================================================================
Mortgage Loans
One-to-four family ................. $136,621,052 $136,866,519
Multi-family ....................... 16,448,971 13,405,579
Commercial real estate ............. 26,632,521 24,073,218
Construction and land .............. 72,636,375 40,946,179
Commercial ............................... 12,693,446 12,726,914
Consumer and other loans ................. 16,151,216 12,072,436
--------------------------------
281,183,581 240,090,845
Undisbursed portion of loans ............. (15,623,349) (7,189,311)
Deferred premium on sale of loans ........ 3,366 11,666
Deferred loan fees ....................... (10,586) (29,048)
Allowance for loan losses ................ (1,679,247) (1,256,475)
--------------------------------
Total loans ........................ $263,873,765 $231,627,677
================================================================================
Year Ended December 31 1999 1998 1997
================================================================================
Allowance for Loan Losses
Balances, January 1 ......... $1,256,475 $839,845 $512,096
Provision for loan losses ... 480,000 463,381 516,053
Loans charged off ........... (57,228) (46,751) (188,304)
-----------------------------------------
Balances, December 31 ....... $1,679,247 $1,256,475 $839,845
================================================================================
The amount of impaired loans at December 31, 1999 and 1998 and during 1999, 1998
and 1997 was immaterial.
Note 7 - Premises and Equipment
December 31 1999 1998
================================================================================
Land ..................................... $2,038,437 $2,038,437
Buildings and land improvements .......... 7,473,413 7,357,531
Furniture and equipment .................. 3,912,530 3,138,795
------------------------------
Total cost ......................... 13,424,380 12,534,763
Accumulated depreciation ................. (4,395,970) (4,410,318)
------------------------------
Net ................................ $9,028,410 $8,124,445
================================================================================
27
<PAGE>
Citizens First Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
Note 8 - Other Assets and Other Liabilities
December 31 1999 1998
================================================================================
Other assets
Interest receivable
Investment securities ...................... $149,145 $135,215
Mortgage-backed securities ................. 45,744 59,534
Loans ...................................... 2,540,013 2,299,388
Mortgage servicing rights ..................... 636,873 648,765
Income taxes receivable ....................... 93,866
Deferred income tax benefit ................... 610,437 120,374
Prepaid expenses and other assets ............. 271,963 187,885
-------------------------
Total ................................ $4,348,041 $3,451,161
================================================================================
Other liabilities
Interest payable
Deposits ................................... $79,586 $76,365
FHLB borrowings ............................ 272,599 190,458
Current income tax liability .................. 239,882
Accrued expenses and other liabilities ........ 1,746,619 2,639,612
-------------------------
Total ................................ $2,098,804 $3,146,317
================================================================================
Note 9 - Deposits
December 31 1999 1998
================================================================================
Demand deposits ................................ $49,550,124 $43,410,766
Savings deposits ............................... 18,523,223 17,708,938
Certificates of deposit of $100,000 or more .... 18,687,047 11,866,776
Other certificates of deposit .................. 133,476,577 135,110,091
----------------------------
Total deposits ........................... $220,236,971 $208,096,571
================================================================================
Certificates of deposit maturing in years ending December 31:
================================================================================
Total
2000 ........................................................... $103,300,961
2001 ........................................................... 39,519,652
2002 ........................................................... 7,023,436
2003 ........................................................... 1,310,073
2004 ........................................................... 907,832
Thereafter ..................................................... 101,670
------------
Total ................................................ $152,163,624
================================================================================
28
<PAGE>
Citizens First Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
Note 10 - FHLB Borrowings
<TABLE>
<CAPTION>
===================================================================================
December 31 1999 1998
<S> <C> <C>
FHLB advances, fixed rates ranging from 4.30% to 6.64%,
due at various dates through October, 2008 ...... $57,073,196 $39,409,618
===================================================================================
</TABLE>
The FHLB advances are secured by first-mortgage loans and all stock in the FHLB.
Advances are subject to restrictions or penalties in the event of prepayment.
The Company has $17,000,000 in FHLB borrowings having a weighted average rate of
5.22% which are callable at various dates.
Maturities in years ending December 31,
================================================================================
2000 ............................................................ $24,000,000
2002 ............................................................ 4,898,196
2003 ............................................................ 3,000,000
2004 ............................................................ 14,000,000
Thereafter ...................................................... 11,175,000
-----------
Total ................................................ $57,073,196
================================================================================
Note 11 - Loan Servicing
Loans serviced for others are not included in the accompanying consolidated
balance sheet. The loans are serviced primarily for the Federal Home Loan
Mortgage Corporation and the unpaid principal balances totaled approximately
$105,809,980, $106,759,000, and $93,021,000 at December 31, 1999, 1998, and
1997.
The aggregate fair value of capitalized mortgage servicing rights at December
31, 1999, 1998, and 1997 totaled $636,873, $648,765, and $399,879. Comparable
market values were used to estimate fair value. For purposes of measuring
impairment, risk characteristics including product type, investor type, and
interest rates, were used to stratify the originated mortgage servicing rights.
================================================================================
1999 1998 1997
Mortgage Servicing Rights
Balances, January 1 ............... $648,765 $399,879 $217,246
Servicing rights capitalized ...... 152,086 476,401 220,861
Amortization of servicing rights .. (163,978) (227,515) (38,228)
-----------------------------------
Balances, December 31 ............. $636,873 $648,765 $399,879
================================================================================
29
<PAGE>
Citizens First Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
Note 12 - Income Tax
<TABLE>
<CAPTION>
========================================================================================================
Year Ended December 31 1999 1998 1997
<S> <C> <C> <C>
Income tax expense
Currently payable
Federal ..................................... $1,076,640 $1,052,947 $1,047,165
State ....................................... 166,868 249,000 225,000
Deferred
Federal ..................................... (265,920) (45,231) (63,790)
State ....................................... (37,697) (6,412) (9,043)
-------------------------------------------
Total income tax expense ................ $939,891 $1,250,304 $1,199,332
========================================================================================================
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% ............... $724,804 $1,110,023 $1,049,950
Effect of state income taxes ...................... 85,253 160,108 142,532
Other ............................................. 129,834 (19,827) 6,850
-------------------------------------------
Actual tax expense ................................ $939,891 $1,250,304 $1,199,332
========================================================================================================
Effective Tax Rate 44.1% 38.3% 38.8%
========================================================================================================
</TABLE>
A cumulative net deferred tax asset is included in assets. The components are as
follows:
<TABLE>
<CAPTION>
==========================================================================================
December 31 1999 1998
<S> <C> <C>
Assets
Deferred compensation ................................ $435,893 $429,650
Differences in accounting for loan losses ............ 538,125 358,964
Differences in accounting for equity investment ...... 171,230
Net unrealized losses on securities available for sale 216,731 30,285
Other ................................................ 28,728 45,961
-------------------------
Total assets ............................ 1,390,707 864,860
-------------------------
Liabilities
Differences in depreciation methods .................. (425,852) (388,070)
FHLB stock dividends ................................. (47,745) (53,358)
Capitalized mortgage servicing rights ................ (247,234) (251,880)
Deferred loan fees ................................... (44,011) (51,178)
Other ................................................ (15,428)
-------------------------
Total liabilities ....................... (780,270) (744,486)
-------------------------
$610,437 $120,374
==========================================================================================
</TABLE>
30
<PAGE>
Citizens First Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
Retained earnings at December 31, 1999 and 1998, include approximately
$2,144,000 for which no deferred income tax liability has been recognized. This
amount represents an allocation of income to bad debt deductions as of December
31, 1987, for tax purposes only. Reduction of amounts so allocated for purposes
other than tax bad debt losses or adjustments arising from carryback of net
operating losses would create income for tax purposes only, which income would
be subject to the then-current corporate income tax rate. The unrecorded
deferred income tax liability on the above amount was approximately $832,000.
Note 13 - Other Comprehensive Income
<TABLE>
<CAPTION>
===================================================================================================
1999
----------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended December 31 Amount Expense Amount
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized losses on securities:
Unrealized holding losses arising during the year ($468,856) $182,010 ($286,846)
Less: reclassification adjustment for gains
realized in net income ................... 11,428 (4,436) 6,992
----------------------------------------
($480,284) $186,446 ($293,838)
===================================================================================================
<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
===================================================================================================
<CAPTION>
===================================================================================================
1997
----------------------------------------
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 $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
===================================================================================================
</TABLE>
31
<PAGE>
Citizens First Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
Note 14 - Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Bank's exposure to credit loss in the event of nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making such commitments as it does for
instruments that are included in the balance sheet.
Financial instruments whose contract amount represents credit risk as of
December 31 were as follows:
<TABLE>
<CAPTION>
=======================================================================================================
1999 1998
<S> <C> <C>
Loan commitments
At variable rates .................................................... $6,797,000 $4,327,000
At fixed rates (ranging from 7.75% to 9.50% at December 31, 1999) .... 883,000 5,825,000
Unused lines of credit ..................................................... 35,944,000 16,432,000
Standby letters of credit .................................................. 1,513,000 979,000
</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 15 - Dividends and Capital Restrictions
At the time of conversion, a liquidation account was established in an amount
equal to the Bank's net worth as reflected in the latest statement of condition
used in its final conversion offering circular. The liquidation account is
maintained for the benefit of eligible deposit account holders who maintain
their deposit account in the Bank after conversion. In the event of a complete
liquidation, and only in such event, each eligible deposit account holder will
be entitled to receive a liquidation distribution from the liquidation account
in the amount of the then current adjusted subaccount balance for deposit
accounts then held, before any liquidation distribution may be made to
stockholders. Except for the repurchase of stock and payment of dividends, the
existence of the liquidation account will not restrict the use or application of
net worth. The initial balance of the liquidation account was $15,685,404.
32
<PAGE>
Citizens First Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
Note 16 - Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and is assigned to a capital category. The assigned
capital category is largely determined by three ratios that are calculated
according to the regulations: total risk based capital, Tier 1 capital, and Tier
1 leverage ratios. The ratios are intended to measure capital relative to assets
and credit risk associated with those assets and off-balance sheet exposures of
the entity. The capital category assigned to an entity can also be affected by
qualitative judgments made by regulatory agencies about the risk inherent in the
entity's activities that are not part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At December 31, 1999 and 1998,
the Bank is categorized as well capitalized and meets all subject capital
adequacy requirements. There are no conditions or events since December 31, 1999
that management believes have changed the Bank's classification.
During 1999, the Bank converted from a federal thrift charter to a state
chartered Bank. The Bank's actual and required capital amounts (in thousands)
and ratios as required for each year are as follows:
<TABLE>
<CAPTION>
=====================================================================================================================
1999
------------------------------------------------------------------
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) .............. $29,324 14.0% $16,752 8.0% $20,940 10.0%
Tier 1 capital(1) (to risk-weighted assets) .. 27,940 13.3 8,376 4.0 12,564 6.0
Tier 1 capital(1) (to average assets) ........ 27,940 9.2 12,083 4.0 15,103 5.0
<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%
Tier 1 capital(1) (to risk-weighted assets) .. 28,033 15.5 7,248 4.0 10,871 6.0
Core capital(1) (to adjusted total assets) ... 28,033 10.0 11,218 4.0 14,023 5.0
Core capital(1) (to adjusted tangible assets) 28,033 10.0 5,609 2.0 N/A
Tangible capital(1) (to adjusted total assets) 28,033 10.0 4,207 1.5 N/A
</TABLE>
(1) As defined by regulators
33
<PAGE>
Citizens First Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
Note 17 - Employee Benefit Plans
The Company maintains a savings plan (combined profit-sharing and 401(k) plan)
for the benefit of substantially all of its full-time employees. The amount of
the annual profit-sharing contribution is at the discretion of the Board of
Directors. The plan also provides for matched employee contributions up to a
maximum of four percent of the participants' gross salary. The employer expense
for the plan was $120,040, $157,650, and $182,688, for the years ended December
31, 1999, 1998 and 1997, respectively.
In connection with the conversion, the Bank established an employee stock
ownership plan for the benefit of substantially all employees. The ESOP borrowed
$2,254,000 from the Company and used those funds to acquire 225,400 shares of
the Company's stock at $10 per share.
Shares issued to the ESOP are allocated to ESOP participants based on principal
repayments made by the ESOP on the loan from the Company. The loan is secured by
shares purchased with the loan proceeds and will be repaid by the ESOP with
funds from the Bank's discretionary contributions to the ESOP and earnings on
ESOP assets. Dividends on unallocated ESOP shares will be applied to reduce the
loan. Principal payments are scheduled to occur in even annual amounts over a
seven year period. However, in the event contributions exceed the minimum debt
service requirements, additional principal payments will be made.
Stock totaling 32,200 shares for 1999, 1998, and 1997 with an average fair value
of $13.96, $18.34, and $16.32, per share, respectively, were committed to be
released, resulting in ESOP compensation expense of $449,484, $590,599, and
$525,437. Shares held by the ESOP at December 31 are as follows:
================================================================================
1999 1998
Shares earned by participants ....................... 128,800 96,600
Shares distributed to participants .................. (5,438) (1,463)
Unallocated shares .................................. 96,600 128,800
------------------------
Total ESOP shares ............................. 219,962 223,937
================================================================================
Fair value of unallocated shares at December 31 $1,159,200 $1,787,100
================================================================================
The Company has a non-qualified supplemental retirement plan (SERP) covering
certain officers and key employees. The benefits provided under the SERP will
make up the benefits lost to the SERP participants due to limitations on
compensation and maximum benefits under the Bank's tax qualified savings plan
and ESOP. Benefits will be provided under the SERP at the same time and in the
same form as the related benefits will be provided under the savings plan and
ESOP. The Bank's expense for the SERP was $29,508, $58,701, and $12,315 for
1999, 1998, and 1997.
34
<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, 1999 and 1998, 72,123 and 47,991
shares were distributed, respectively. None of these shares were forfeited
during 1999, 1998, or 1997. For the years ended December 31, 1999, 1998, and
1997, $296,824, $277,192, and $282,000 was recorded as compensation expense
under the plan.
Note 18 - Stock Option Plan
Under the Company's stock option plan, which is accounted for in accordance with
APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations, the Company grants selected executives and other key employees
stock option awards which vest pro rata over a five year period and become fully
exercisable at the end of five years of continued employment. During 1996, the
Company authorized the grant of options for up to 281,750 shares of the
Company's common stock or 10% of the shares issued in the Company's initial
public offering, that expire ten years from the date of grant. During 1996, the
Company granted all 281,750 options at an exercise price of $12.30 per share.
During 1999, the Company authorized an additional 125,000 shares and granted
100,000 shares of the Company's stock to the Company's officers and directors at
an average exercise price of $12.25. The exercise price of each option was equal
to the market price of the Company's stock on the date of grant; therefore, no
compensation expense was recognized.
Although the Company has elected to follow APB No. 25, SFAS No. 123 requires pro
forma disclosures of net income and earnings per share as if the Company had
accounted for its employee stock options under that Statement. The fair value of
each option grant was estimated on the grant date using an option-pricing model
with the following assumptions:
================================================================================
1999
Risk-free interest rates ........................................... 6.30%
Dividend yields .................................................... 1.67%
Volatility factors of expected market price of common stock ........ 34.22%
Weighted-average expected life of the options ...................... 10 years
35
<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>
======================================================================================================
1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income ....................... As reported $1,191,886 $2,014,469 $1,888,756
Pro forma 740,446 1,619,574 1,493,861
Basic earnings per share ......... As reported 0.61 0.90 0.79
Pro forma 0.38 0.73 0.62
Diluted earnings per share ....... As reported 0.58 0.84 0.74
Pro forma 0.36 0.68 0.59
</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, 1999, 1998, and
1997.
<TABLE>
<CAPTION>
============================================================================================================================
Year Ended December 31 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
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 $12.30 281,750 $12.30
Granted 100,000 $12.25
Exercised 15,634 $12.30
------- ------- -------
Outstanding, end of year 366,116 $12.29 281,750 $12.30 281,750 $12.30
======= ======= =======
Options exercisable at year end 163,416 112,700 56,350
Weighted-average fair value of options
granted during the year $5.68
</TABLE>
The shares exercised in the current year included 10,000 shares which had
accelerated vesting as a result of disability of a participant. As of December
31, 1999, 366,116 options outstanding have exercise prices ranging from $12.30
to $13.94 and a weighted-average remaining contractual life of 7.6 years.
Note 19 - Related Party Transactions
The Bank has entered into transactions with certain directors, executive
officers, significant stockholders and their affiliates or associates (related
parties). Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and did not, in the opinion of management, involve more
than normal credit risk or present other unfavorable features.
The aggregate amounts of loans, as defined, to such related parties were as
follows:
================================================================================
Balances, January 1, 1999 ........................................ $1,427,487
New loans, including renewals .................................... 761,278
Payments, etc., including renewals ............................... (859,096)
----------
Balances, December 31, 1999 ...................................... $1,326,669
================================================================================
36
<PAGE>
Citizens First Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
Note 20 - Earnings per Share
Earnings per share (EPS) were computed as follows:
<TABLE>
<CAPTION>
=============================================================================================================
Year Ended December 31, 1999
- -------------------------------------------------------------------------------------------------------------
Weighted
Average Per-Share
Income Shares Amount
-----------------------------------------------
<S> <C> <C> <C>
Basic Earnings Per Share
Income available to common stockholders ............. $1,191,886 1,962,416 $0.61
Effect of Dilutive Securities
Stock options ....................................... 36,090
Unearned incentive plan shares ...................... 47,699
------------------------
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversions ....................... $1,191,866 2,046,205 $0.58
=============================================================================================================
<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
=============================================================================================================
<CAPTION>
Year Ended December 31, 1997
- -------------------------------------------------------------------------------------------------------------
Weighted
Average Per-Share
Income Shares Amount
-----------------------------------------------
<S> <C> <C> <C>
Basic Earnings Per Share
Income available to common stockholders ............. $1,888,756 2,397,234 $0.79
Effect of Dilutive Securities
Stock options ....................................... 69,402
Unearned incentive plan shares ...................... 84,746
------------------------
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversions ....................... $1,888,756 2,551,382 $0.74
=============================================================================================================
</TABLE>
37
<PAGE>
Citizens First Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
Note 21 - Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents - The fair value of cash and cash equivalents
approximates carrying value.
Securities and Mortgage-Backed Securities - Fair values are based on quoted
market prices.
Loans Held for Sale - Fair values are based on quoted market prices.
Loans - For both short-term loans and variable-rate loans that reprice
frequently and with no significant change in credit risk, fair values are based
on carrying values. The fair values for certain mortgage loans, including
one-to-four family residential, are based on quoted market prices of similar
loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics. The fair value for other loans, including
commercial real estate and rental property mortgage loans, fixed-rate commercial
and industrial loans, and fixed-rate loans to individuals for household and
other personal expenditures, is estimated using discounted cash flow analyses
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality.
Interest Receivable/Payable - The fair values of interest receivable/payable
approximate carrying values.
FHLB Stock - Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
Deposits - The fair values of noninterest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the balance sheet
date. The carrying amounts for variable rate, fixed-term certificates of deposit
approximate their fair values at the balance sheet date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on such time deposits.
FHLB Borrowings - The fair value of fixed rate borrowings are estimated using a
discounted cash flow calculation, based on current rates for similar debt. For
those borrowings with interest rates tied to a variable market interest rate,
fair value approximates carrying value.
Advance Payments by Borrowers for Taxes and Insurance - The fair value
approximates carrying value.
Off-Balance Sheet Commitments - Commitments include commitments to extend credit
and standby letters of credit and are generally of a short-term nature. The fair
value of such commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the counterparties' credit standing.
38
<PAGE>
Citizens First Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
==================================================================================================================
1999 1998
- ------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents .............. $13,175,942 $13,175,942 $18,338,203 $18,338,203
Investment securities available for sale 16,103,412 16,103,412 18,033,239 18,033,239
Loans held for sale .................... 3,007,425 3,007,425 5,245,872 5,245,872
Loans, net ............................. 263,873,765 263,477,163 231,627,677 239,871,996
Interest receivable .................... 2,734,902 2,734,902 2,494,137 2,494,137
Federal Home Loan Bank stock ........... 2,853,700 2,853,700 1,970,700 1,970,700
Liabilities
Deposits ............................... 220,236,971 220,543,075 208,096,571 208,758,099
FHLB borrowings ........................ 57,073,196 55,707,156 39,409,618 39,364,004
Interest payable ....................... 352,185 352,185 266,823 266,823
Advance payments by borrowers for
taxes and insurance .............. 890,483 890,483 601,266 601,266
Off-balance sheet items
Commitments ............................ 0 0 0 0
</TABLE>
Notes 22 - Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
Condensed Balance Sheet
<TABLE>
<CAPTION>
December 31 1999 1998
===============================================================================================
<S> <C> <C>
Assets
Cash .......................................................... $51,052 $103,649
Interest-bearing demand deposits .............................. 910,004 692,450
---------------------------
Total cash and cash equivalents ......................... 961,056 796,099
Investment in common stock of subsidiary ...................... 28,112,219 28,107,899
Equity investment ............................................. 187,500
Investment securities available for sale ...................... 14,313
Loans, net of allowance for loan losses of $255,000 and $75,000 3,315,000 5,875,000
ESOP loan to subsidiary ....................................... 953,200 1,288,000
Other assets .................................................. 909,665 89,488
---------------------------
Total assets ............................................ $34,251,140 $36,358,299
===============================================================================================
Liabilities - Other liabilities ............................... $337,941
Stockholders' Equity .......................................... $34,251,140 36,020,358
---------------------------
Total liabilities and stockholders' equity .............. $34,251,140 $36,358,299
===============================================================================================
</TABLE>
39
<PAGE>
Citizens First Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
Condensed Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
================================================================================================
<S> <C> <C> <C>
Income
Dividends from subsidiaries ............ $1,415,300 $4,500,000
Other income ........................... 582,010 571,406 $625,407
--------------------------------------------
Total income ..................... 1,997,310 5,071,406 625,407
--------------------------------------------
Expenses
Provision for loan losses .............. 180,000 75,000
Other expenses ......................... 742,691 513,049 470,629
--------------------------------------------
Total expenses ................... 922,691 588,049 470,629
--------------------------------------------
Income before income tax and equity
in undistributed income of subsidiaries 1,074,619 4,483,357 154,778
Income tax expense (benefit) ................. (281,393) (6,461) 36,691
--------------------------------------------
Income before equity in undistributed
income of subsidiaries ................. 1,356,490 4,489,818 118,087
Equity in undistributed income of subsidiaries (164,126) (2,475,349) 1,770,669
--------------------------------------------
Net Income ................................... $1,191,886 $2,014,469 $1,888,756
================================================================================================
</TABLE>
40
<PAGE>
Citizens First Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
===========================================================================================================
<S> <C> <C> <C>
Operating Activities
Net income ........................................ $1,191,886 $2,014,469 $1,888,756
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses ......................... 180,000 75,000
Write down of equity investment ................... 187,500
Investment securities (gains) losses .............. (11,428)
Compensation expense related to incentive plan .... 296,824 277,192 282,000
Equity in undistributed income of subsidiary ...... 164,126 2,475,349 (1,770,669)
Net change in
Other assets ................................ (820,177) (89,454) 589
Other liabilities ........................... (337,941) 171,426 (142,855)
---------------------------------------------
Net cash provided by operating activities 850,790 4,923,982 257,821
---------------------------------------------
Investing Activities
Purchases of securities available for sale ........ (14,313)
Purchase of equity investment ..................... (187,500)
Sales of securities available for sale ............ 25,741 1,006,520
Net change in ESOP loan ........................... 322,000 322,000 322,000
Net change in loans ............................... 2,380,000 (1,950,000) 3,278,000
---------------------------------------------
Net cash provided (used)
by investing activities .................. 2,727,741 (1,829,813) 4,606,520
---------------------------------------------
Financing Activities
Cash dividends .................................... (210,555)
Purchase of stock for incentive plan .............. (752,932)
Exercise of stock options ......................... 192,298
Purchase of treasury stock ........................ (3,395,317) (4,883,416) (4,520,173)
Net cash used by financing activities ....... (3,413,574) (4,883,416) (5,273,105)
---------------------------------------------
---------------------------------------------
Net Change in Cash and Cash Equivalents ................. 164,957 (1,789,247) (408,764)
---------------------------------------------
Cash and Cash equivalents at Beginning of Year .......... 796,099 2,585,346 2,994,110
---------------------------------------------
Cash and Cash Equivalents at End of Year ................ $961,056 $796,099 $2,585,346
===========================================================================================================
</TABLE>
41
<PAGE>
Citizens First Financial Corp.
Shareholder Information
STOCK LISTING, STOCK PRICE, AND DIVIDEND INFORMATION
Citizens First Financial Corp.'s common stock trades on the American Stock
Exchange under the symbol "CBK". At December 31, 1999, 2,024,355 shares of the
Company's common stock were held of record by 419 persons or entities, not
including the number of persons or entities holding stock in nominee or street
name through various brokers or banks.
================================================================
Per Share
================================================================
1999
-------------------------------------------
High Low Dividends Declared
-------------------------------------------
First Quarter 16 13 1/8 $0.00
Second Quarter 15 1/2 13 5/8 $0.00
Third Quarter 15 1/2 12 $0.05
Fourth Quarter 13 3/8 11 9/16 $0.05
================================================================
1998
-------------------------------------------
High Low Dividends Declared
-------------------------------------------
First Quarter 22 3/8 18 $0.00
Second Quarter 21 1/2 17 3/4 $0.00
Third Quarter 18 3/4 13 $0.00
Fourth Quarter 17 13 3/4 $0.00
================================================================
QUARTERLY FINANCIAL DATA
The following is a summary of selected quarterly results of operations for the
years ended December 31, 1999 and 1998:
- --------------------------------------------------------------------------------
(In thousands, Quarter Ended
except share data) 12/31 09/30 06/30 03/31
1999
Net interest income ......... $2,897 $2,280 $2,496 $2,376
Provision for loan losses ... 120 120 120 120
Other income ................ 293 346 319 432
Other expense ............... 2,522 1,990 2,185 2,130
Income before income tax .... 548 516 510 558
Net income .................. 222 317 312 341
Basic earnings per share .... $0.12 $0.16 $0.16 $0.17
Diluted earnings per share .. $0.11 $0.16 $0.15 $0.16
1998
Net interest income ......... $2,444 $2,382 $2,340 $2,293
Provision for loan losses ... 118 120 120 105
Other income ................ 425 370 467 433
Other expense ............... 1,828 1,834 1,976 1,788
Income before income tax .... 923 798 711 833
Net income .................. 581 488 435 510
Basic earnings per share .... $0.27 $0.22 $0.19 $0.22
Diluted earnings per share .. $0.27 $0.20 $0.17 $0.20
42
Exhibit 23.0 Consent of Olive LLP
[OLIVE LLP LETTERHEAD]
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
Citizens First Financial Corp.
We have issued our report dated January 26, 2000 accompanying the consolidated
financial statements of Citizens First Financial Corp. and Subsidiary appearing
in the Company's 1999 Annual Report to Stockholders. We consent to the
incorporation by reference in this Form 10-K of the aforementioned report.
/s/ Olive LLP
Decatur, Illinois
March 28, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 9,909
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0
0
<COMMON> 28
<OTHER-SE> 34,223
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</TABLE>
