-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HW8hK4k8smMpy5NdCVzUdDbtFJcPdoUpoGYTq9C0DoDJP5fWPaBNN2X2AJuRppIC G8Tj/8w4F0eKrZV5bJWm3A== 0000950124-04-000953.txt : 20040315 0000950124-04-000953.hdr.sgml : 20040315 20040315172931 ACCESSION NUMBER: 0000950124-04-000953 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS FIRST BANCORP INC CENTRAL INDEX KEY: 0001127442 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 383573582 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-32041 FILM NUMBER: 04670633 BUSINESS ADDRESS: STREET 1: 525 WATER ST CITY: PORT HURON STATE: MI ZIP: 48060 BUSINESS PHONE: 8109878300 MAIL ADDRESS: STREET 1: 525 WATER ST CITY: PORT HURON STATE: MI ZIP: 48060 10-K 1 k82471e10vk.htm ANNUAL REPORT FOR FISCAL YEAR ENDED 12/31/03 e10vk
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    
  For the fiscal year ended December 31, 2003
 
    
  OR
 
    
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    
  For the transition period from                    

Commission File Number: 0-32041

CITIZENS FIRST BANCORP, INC.      

(Exact name of registrant as specified in its charter)
         
Delaware
    38-3573582  
(State or other jurisdiction of incorporation or organization)
  (I.R.S. Employer Identification No.)
 
        
525 Water Street, Port Huron, Michigan
    48060  
(Address of principal executive offices)
  (Zip Code)

(810) 987-8300

(Issuer’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Registrant’s telephone number, including area code: (810) 987-8300
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share
(Title of Class)

     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 the past 90 days.
Yes þ    X o

     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 the Form 10-K or any amendment to this Form 10-K. þ

     Indicate by check mark whether the registrant is an accelerated filer Yes þ    X o

     The aggregate market value of the voting and non-voting common equity held by non-affiliates was $141.6 million, based upon the closing price of $21.10 as quoted on the Nasdaq National Market on March 8, 2004. Solely for purposes of this calculation, the shares held by the directors and executive officers of the registrant are deemed to be held by affiliates.

     As of March 15, 2004, the registrant had 8,518,902 shares of common stock outstanding.

Documents Incorporated by Reference

 

Table of Contents

TABLE OF CONTENTS

INDEX

             
        Page
 
   Part I        
  Business     3  
  Properties     31  
  Legal Proceedings     33  
  Submission of Matters to a Vote of Securities Holders     33  
 
   Part II        
  Market for Registrant's Common Equity and Related Stockholder Matters     33  
  Selected Financial Data     33  
  Management's Discussion and Analysis of Financial Condition and Results of Operations     33  
  Quantitative and Qualitative Disclosure about Market Risk     34  
  Financial Statements and Supplementary Data     34  
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     34  
  Controls and Procedures     34  
 
   Part III        
  Directors and Executive Officers of the Registrant     34  
  Executive Compensation     34  
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     35  
  Certain Relationships and Related Transactions     35  
  Principal Accountant Fees and Services     35  
 
   Part IV        
  Exhibits, Financial Statement Schedules and Reports on Form 8-K     35  
 2003 Annual Report to Stockholders
 Consent of BDO Seidman LLP
 Consent of Plante & Moran PLLC
 Rule 13a-14(a) Certifications
 Rule 13a-14(a) Certifications
 Section 1350 Certifications
 Section 1350 Certifications

 

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Part I

Item 1. Business

General

Citizens First Bancorp, Inc. (the “Company” or “Citizens First Bancorp”) was organized in October 2000 as a Delaware business corporation at the direction of Citizens First Savings Bank (the “Bank” or “Citizens First”). As used in this Report, unless otherwise stated or the context otherwise requires, all references to “we,” “our,” or “us” and similar references are to the Company and/or the Bank and the consolidated subsidiaries of the Company and the Bank, including Citizens First Mortgage, LLC, which has engaged in the Bank’s residential mortgage lending business since its formation in June, 2002. The Company became the holding company for Citizens First upon completion of the Bank’s conversion from the mutual to the stock form of ownership. The conversion was completed on March 7, 2001. In connection with the conversion, the Company sold 8,821,075 shares of its common stock, par value $0.01 per share, at a purchase price of $10 per share to depositors of the Bank in a subscription offering, which raised approximately $85.1 million in net conversion proceeds. In addition, the Company issued an additional 705,686 shares, representing 8% of the shares sold in the subscription offering, to Citizens First Foundation, a charitable foundation established by the Bank. The Company has no significant assets, other than all of the outstanding shares of the Bank and the portion of the net proceeds it retained from the subscription offering, and no significant liabilities. Management of the Company and the Bank are substantially similar. Except for a parcel of vacant land located in northern St. Clair County, Michigan, which was purchased by the Company in November, 2002 and is held by the Company, the Company neither owns nor leases any property, but instead uses the premises, equipment and furniture of the Bank. In addition, employees are generally employed by the Bank rather than by the Company. Accordingly, the information set forth in this Report, including the Consolidated Financial Statements and related financial data, relates primarily to the Bank and other consolidated subsidiaries.

     Citizens First currently operates as a community-oriented financial institution that accepts deposits from the general public in the communities surrounding its 16 full-service banking offices. The deposited funds, together with funds generated from operations and borrowings, are used by Citizens First to originate loans. Citizens First’s principal lending activity is the origination of mortgage loans for the purchase or refinancing of one- to four-family residential property. Citizens First originates one- to four-family mortgage loans primarily for sale in the secondary market, although Citizens First generally retains the servicing rights for these mortgage loans. Citizens First also originates commercial and multi-family real estate loans, construction loans, commercial loans, automobile loans, home equity loans and lines of credit and a variety of other consumer loans. Citizens First’s revenues are derived principally from the generation of interest and fees on loans originated and held and, to a lesser extent, from gains and fees related to loans originated for sale and interest and dividends earned on Citizens First’s investments. Citizens First’s primary sources of funds consist of deposits, loan repayments, payments of interest on loans, proceeds from the sale of loans originated for sale, maturities and sales of investment securities, borrowings from the Federal Home Loan Bank, cash on hand and cash on deposit.

Regulation

     Citizens First is regulated by the Michigan Office of Financial and Insurance Services and the Federal Deposit Insurance Corporation. Citizens First’s deposits are insured to the maximum allowable amount by the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation. Citizens First has been a member of the Federal Home Loan Bank System since 1938. For more information about the regulation applicable to Citizens First and the Company, see “Regulation and Supervision” below.

Market Area

     Citizens First’s main office is in Port Huron, Michigan, which is in St. Clair County. Citizens First’s deposit gathering and lending activities, as well as its other primary business operations, are principally concentrated in and around the communities surrounding its 16 full-service offices located in St. Clair, Sanilac, Huron, Lapeer and northern Macomb counties, Michigan. As of January 9, 2004 and due to the acquisition of Metrobank, Citizens market area now includes Oakland County. To a limited extent, however, Citizens First also makes some loans beyond its primary market area. Port Huron, the population center for St. Clair County, is located approximately sixty miles northeast of Detroit and sixty miles east of Flint. St. Clair County is bounded by the counties of Macomb to the south and west, Lapeer to the west and Sanilac to the north. The eastern boundary of the County is the St. Clair River and Canada. Almost half of the County’s total land area is rural, and approximately one-third of the resident labor force commutes to jobs outside of the County. As of 2001, St. Clair County had a population of approximately 166,541, while the other four counties in the Bank’s primary market area had a combined population of approximately 169,970. The largest employment sectors in St. Clair County are manufacturing, services, retail and government. Citizens First’s primary market area has a higher per capita median household income when compared to Michigan and the United States.

OPERATING STRATEGY

     Citizens First is a community-oriented financial institution, offering a wide range of deposit and loan products to its customers. In recent years, Citizens First’s strategy has been one of controlled balance sheet growth and broader diversification of its

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loan products and loan portfolio. Beginning in 1995, Citizens First determined that it would originate its fixed-rate one-to-four-family residential mortgage loans primarily for sale, while generally retaining the servicing rights as to those mortgages. Since that time, Citizens First has emphasized originating residential mortgage loans, commercial and multi-family real estate loans, construction loans, commercial loans, automobile loans, home equity loans and lines of credit and a variety of consumer loans. It has also emphasized increasing sources of noninterest income. To accomplish these objectives, Citizens First has sought to:

  •   Operate as a community bank, expanding the services and products it offers, particularly its commercial business products and deposit products offered to local municipalities and government organizations.
 
  •   Provide customer service and products by expanding delivery systems by using new technology and expanding the capability of its customer call center through which customers can receive various services via telephone.
 
  •   Increase fee income by broadening non-depository product offerings and services, including expanding its trust services. Citizens First’s five-year-old Asset Management and Trust Group oversaw $201.6 million in assets at December 31, 2003, compared to $143.3 million in assets at December 31, 2002, an increase of $58.3 million, or 40.7%.
 
  •   Upgrade technology and training to ensure high levels of service. During 2003, the Bank initiated several training programs to enhance the Bank’s focus on customer service. In addition, the Bank completed its planned computer conversion that it believes will improve its technology. See “Computer Conversion” below.
 
  •   Reinvest in its communities.
 
  •   Continue to increase its emphasis on commercial, commercial real estate and consumer loans to increase the yields earned on its overall loan portfolio, without incurring unacceptable credit risk.
 
  •   Increase originating automobile loans on a direct and indirect basis, at least in part by increasing the number of vehicle dealers through which Citizens finances automobile purchases by consumers.
 
  •   Control credit risk by continuing to employ conservative underwriting standards to minimize the level of problem assets.
 
  •   Manage interest rate risk by continuing to emphasize an appropriate mix of investments and loans. For more information about the interest rate risk to which Citizens First is exposed and about how Citizens First attempts to manage that risk, see Item 7A, “Quantitative and Qualitative Disclosure About Market Risk.”

COMPUTER CONVERSION

     In October, 2002, Citizens First entered into an agreement with Fiserv Solutions, Inc. (“Fiserv”) relating to Fiserv’s ITI software package. The Fiserv ITI software package offers a fully integrated general ledger system, customer relationship management capabilities, comprehensive on-line/real time Internet banking services, improved ATM processing and document imaging, in addition to various other features. Citizens First believes that the Fiserv ITI software package should provide it with significant processing improvements that it believes will allow enhanced customer service and efficiencies within the Bank. In connection with its conversion to the Fiserv software package, the Bank also upgraded PCs throughout the Bank, as well as data line connectivity to its branches, to attempt to improve processing speed.

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COMPETITION

     Citizens First faces intense competition for the attraction of deposits and origination of loans in its primary market area. Citizens First’s most direct competition for deposits has historically come from the several financial institutions operating in Citizens First’s primary market area and, to a lesser extent, from other financial service companies, such as brokerage firms, credit unions and insurance companies. Citizens First’s competition for loans comes primarily from financial institutions operating in its primary market area, and to a lesser extent, from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans may increase due to the increasing number of non-depository financial service companies entering the mortgage market, such as insurance companies, securities companies and specialty finance companies. Citizens First also expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of institutional consolidation in the financial services industry. Technological advances, for example, have lowered barriers to market entry, and have allowed banks, mortgage companies, mortgage brokers and other competitors to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. The Gramm-Leach-Bliley Act passed in 1999, which permits affiliation among banks, securities firms and insurance companies, also has changed the competitive environment in which Citizens First conducts business. Some of the institutions with which Citizens First competes are significantly larger than Citizens First and, therefore, have significantly greater resources. Competition for deposits and the origination of loans could limit Citizens First’s growth in the future.

Lending Activities

General. Citizens First’s loans are subject to federal and state laws and regulations. Interest rates charged by Citizens First on loans are affected principally by the following:

  •   Citizens First’s current asset/liability strategy, which is to monitor and control the financial position of Citizens First, including monitoring and controlling market risk such as interest rate risk. (For more information, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”);
 
  •   the demand for various types of loans;
 
  •   the supply of money available for lending purposes; and
 
  •   the rates offered by competitors.

These factors are, in turn, affected by general and economic conditions, consumer spending and saving habits, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters and other factors. For a list of some additional factors that may affect these items, see the section captioned “Forward-Looking Statements” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Loan Portfolio Analysis. The following table sets forth the composition of Citizens First’s loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated.

                                                 
    December 31,
March 31,
    2003
2002
2002
            Percent           Percent           Percent
    Amount
   of Total
   Amount
   of Total
   Amount
   of Total
    (Dollars in thousands)
Real estate Loans
                                                
One- to four-family
   $ 386,531       40.99 %   $ 414,939       49.88 %   $ 385,765       51.56 %
Commercial and multi-family real estate (1)
     241,097       25.56 %     179,387       21.57 %     144,817       19.36 %
Residential construction
     24,996       2.65 %     21,822       2.62 %     27,541       3.68 %
Home equity loans and lines of credit
     85,371       9.06 %     72,724       8.75 %     71,266       9.52 %
 
    
 		      
 		      
 		      
 		      
 		      
 		  
Total real estate loans
     737,995       78.26 %     688,872       82.82 %     629,389       84.12 %
Consumer loans
                                                
Vehicles (2)
     59,392       6.30 %     61,386       7.38 %     61,661       8.24 %
Other
     37,948       4.02 %     21,221       2.55 %     15,015       2.01 %
 
    
 		      
 		      
 		      
 		      
 		      
 		  
Total consumer loans
     97,340       10.32 %     82,607       9.93 %     76,676       10.25 %
Commercial loans
     107,742       11.42 %     60,336       7.25 %     42,137       5.63 %
 
    
 		      
 		      
 		      
 		      
 		      
 		  
Total loans
     943,077       100.00 %     831,815       100.00 %     748,202       100.00 %
 
            
 		              
 		              
 		  
Less:
                                                
Deferred loan origination fees and discounts
     2,212               1,597               1,618          
Allow ance for loan losses
     11,664               11,082               11,020          
 
    
 		              
 		              
 		          
Total loans, net
   $ 929,201             $ 819,136             $ 735,564          
 
    
 		              
 		              
 		          

[Additional columns below]

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[Continued from above table, first column(s) repeated]

                                 
    March 31,
    2001
2000
            Percent           Percent
    Amount
   of Total
   Amount
   of Total
    (Dollars in thousands)
Real estate Loans
                                
One- to four-family
   $ 395,484       57.75 %   $ 341,308       58.82 %
Commercial and multi-family real estate (1)
     113,715       16.60 %     83,536       14.39 %
Residential construction
     18,479       2.70 %     24,750       4.26 %
Home equity loans and lines of credit
     66,687       9.74 %     56,991       9.82 %
 
    
 		      
 		      
 		      
 		  
Total real estate loans
     594,365       86.79 %     506,585       87.29 %
Consumer loans
                                
Vehicles (2)
     55,490       8.10 %     41,066       7.08 %
Other
     12,344       1.80 %     13,882       2.39 %
 
    
 		      
 		      
 		      
 		  
Total consumer loans
     67,834       9.90 %     54,948       9.47 %
Commercial loans
     22,676       3.31 %     18,824       3.24 %
 
    
 		      
 		      
 		      
 		  
Total loans
     684,875       100.00 %     580,357       100.00 %
 
            
 		              
 		  
Less:
                                
Deferred loan origination fees and discounts
     1,595               1,393          
Allow ance for loan losses
     10,831               10,461          
 
    
 		              
 		          
Total loans, net
   $ 672,449             $ 568,503          
 
    
 		              
 		          

(1)   Includes commercial construction loans which at December 31, 2003, December 31, 2002 and March 31, 2002, March 31, 2001 and March 31, 2000 totaled $14.8 million, $12.6 million, $9.9 million, $6.5 million and $9.6 million, respectively.
 
(2)   Includes loans secured by automobiles, motorcycles, campers and other recreational vehicles.

     As shown in the above table, the trend has been to increase the percentage of the Bank’s loan portfolio comprised of commercial and multi-family real estate loans and commercial loans and to decrease the percentage of the Bank’s loan portfolio comprised of one- to four-family residential mortgage loans although, at December 31, 2003, residential mortgage loans still constituted 41% of the Bank’s loan portfolio.

Maturity of Loan Portfolio. The following table presents the dollar amount of loans maturing in Citizens First’s portfolio at December 31, 2003 based on contractual terms to maturity or scheduled amortization, but does not include potential prepayments. Demand loans, loans lacking a stated schedule of repayments or stated maturity and overdrafts are reported as becoming due in one year or less. Loan balances do not include undisbursed loan proceeds, net deferred loan origination costs or allowance for loan losses.

                                                         
    December 31, 2003
            Commercial                                
    One- to   and           Home Equity                    
    Four-   Multi-Family   Residential   Loans and                   Total
    Family
   Real Estate
   Construction
   Lines of Credit
   Consumer
   Commercial
   Loans
Amounts due in:
                                                        
One year or less
   $ 18,442     $ 42,676     $ 24,996     $ 6,745     $ 21,562     $ 63,337     $ 177,758  
More than one year to five
     18,504       134,506       —       49,013       61,274       40,699       303,996  
More than five years
     349,585       63,915       —       29,613       14,504       3,706       461,323  
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		  
Total amount due
   $ 386,531     $ 241,097     $ 24,996     $ 85,371     $ 97,340     $ 107,742     $ 943,077  
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		  

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     Scheduled contractual principal repayments of loans do not reflect the actual lives of most loans. The average life of a loan generally is substantially less than its contractual term because of prepayments. In addition, due-on-sale clauses on loans usually give Citizens First the right to declare loans immediately due and payable under certain circumstances, including, for example, if the borrower sells the real property with the mortgage and the loan is not repaid. The average life of a mortgage loan tends to increase, however, when current mortgage loan market interest rates are substantially higher than interest rates on existing mortgage loans and, conversely, tends to decrease when interest rates on existing mortgage loans are substantially higher than current mortgage loan market interest rates. Current mortgage loan market interest rates are generally lower than rates on existing mortgage loans in Citizens First’s portfolio, which suggests that the average lives of these mortgage loans may be lower than might otherwise have been expected.

     The following table sets forth, at December 31, 2003, the dollar amount of loans contractually due after December 31, 2003, and whether such loans have fixed interest rates or adjustable interest rates (000s omitted).

                         
    Due After December 31, 2003
    Fixed
   Adjustable
   Total
Real estate loans:
                        
One- to four-family
   $ 85,040     $ 301,491     $ 386,531  
Residential construction
     18,525       6,471       24,996  
Commercial and multi-family real estate
     103,672       137,425       241,097  
Home equity
     56,865       28,506       85,371  
 
    
 		      
 		      
 		  
Total real estate loans
     264,102       473,893       737,995  
Consumer loans
     92,611       4,729       97,340  
Commercial loans
     46,351       61,391       107,742  
 
    
 		      
 		      
 		  
Total loans
   $ 403,064     $ 540,013     $ 943,077  
 
    
 		      
 		      
 		  

TYPES OF LOANS. Currently, Citizens First originates one- to four-family residential mortgage loans, commercial and multi-family real estate loans, construction loans, commercial loans, automobile loans, home equity loans and lines of credit and a variety of other consumer loans. Set forth below is a general description of some of Citizens First’s current policies and practices with regard to some of these types of loans. Although Citizens First believes that the information set forth below is generally consistent with its current practices, management may make exceptions or deviations from its policies from time to time as it deems appropriate. In addition, lending policies and practices are subject to change from time to time as deemed appropriate by management.

     ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LOANS. Citizens First’s primary lending activity is the origination of loans secured by one- to four-family residences generally located in its market area. At December 31, 2003, one- to four-family residential mortgage loans totaled $386.5 million or 41.0% of Citizens First’s total loans. Citizens First currently offers various types of adjustable-rate mortgage loans and fixed-rate mortgage loans. At December 31, 2003, 22% of the dollar amount of loans in Citizens First’s residential mortgage loan portfolio had fixed interest rates and 78.0% of the dollar amount of loans in its residential mortgage loan portfolio had adjustable interest rates.

     Citizens First originates fixed-rate, fully-amortizing residential mortgage loans with maturities of 10, 15, 20 and 30 years. The Bank’s management establishes the loan interest rates based on market conditions, with consideration given to the type of the loan and the quality and liquidity of the collateral securing the loan. Citizens First offers mortgage loans that generally conform to Freddie Mac guidelines, as well as jumbo loans, which, according to these guidelines, presently means loans in amounts over $322,700. Fixed-rate conforming loans are typically originated for sale in the secondary market, although Citizens First generally retains the servicing rights. Citizens First will underwrite one- to four-family owner-occupied residential mortgage loans in amounts equal to up to 97% of the appraised value of the underlying real estate, although private mortgage insurance will generally be required on most loans that exceed 80% of the lower of the appraised value or the purchase price of the real estate. In limited instances, Citizens First will originate loans that constitute 103% of the appraised value of the underlying real estate for sale in the secondary market, although Citizens generally retains the servicing rights.

     Citizens First also offers a 7 year balloon mortgage loan. A 7 year balloon mortgage loan requires a fixed monthly payment for the first 7 years, at which point the entire remaining balance of the loan becomes due. Citizens First currently also offers adjustable-rate residential mortgage loans with terms of up to 30 years. The interest rates on adjustable-rate loans are based on the U.S. Treasury securities index. The interest rates on these loans adjust annually after a 1, 3, 5 or 7 year initial fixed period. The maximum amount by which the interest rate may be increased or decreased on such loans is generally 2% per year and 5% over the life of the loan. Additionally, Citizens First offers an adjustable-rate residential mortgage loan in which the borrower has the option to convert the loan to a fixed rate after a predetermined period of time, without incurring refinancing costs.

     Adjustable-rate mortgage loans help reduce Citizens First’s exposure to changes in interest rates because the interest rate paid by Citizens First’s borrowers changes with changes in market interest rates. Because rate changes could increase payments that borrowers are required to make, regardless of their ability to make the increased payments, adjustable rate mortgage loans involve some

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unquantifiable credit risks. Accordingly, if interest rates rise, and mortgage payments are repriced at increased amounts, the risk of default on adjustable-rate mortgage loans increases as well. In addition, although adjustable-rate mortgage loans increase the responsiveness of Citizens First’s asset base to interest rate changes, the extent of this interest rate sensitivity is limited by the contractual documentation, which often restricts how much the interest rates can increase annually and over the lifetime of the mortgage. As a result, yields on adjustable-rate mortgage loans may not be sufficient to offset increases in Citizens First’s cost of funds during periods of rising interest rates.

     Citizens First requires properties securing its mortgage loans to be appraised by an approved independent state-licensed appraiser. Citizens First also requires fire, casualty, title, hazard and, if appropriate, flood insurance to be maintained on most properties securing real estate loans originated by Citizens First. In an effort to provide financing for low- and moderate-income families, Citizens First offers Federal Housing Authority and Veterans Administration residential mortgage loans to qualified individuals with adjustable- and fixed-rates of interest and terms of up to 30 years. These loans are secured by one- to four-family residential property and are underwritten using modified underwriting guidelines.

RESIDENTIAL CONSTRUCTION LOANS. Citizens First originates construction loans to individuals for the construction of one- to four-family residences. At December 31, 2003, residential construction loans totaled $25.0 million or 2.65% of Citizens First’s total loans. Citizens First’s residential construction loans generally provide for the payment of interest only during the construction phase, which is typically between 6 and 12 months. At the end of the construction phase, the loan converts to a permanent mortgage loan. Loans can be made in amounts of up to 95% of the appraised value of the underlying real estate, provided that the borrower obtains private mortgage insurance on the loan if the loan balance exceeds 80% of the lesser of either the appraised value or the sales price of the secured property. Construction loans to individuals are generally made on the same terms as Citizens First’s one- to four-family mortgage loans. Citizens First also originates residential construction loans to certain builders with which Citizens First has an established relationship.

     Before making a commitment to fund a construction loan, Citizens First requires an appraisal of the property by an independent licensed appraiser. Citizens First also reviews and inspects each property before disbursing funds. Loan proceeds are disbursed in pre-determined portions (described in the loan documentation) upon completion of each stage of work. The final 10% of the loan proceeds is generally not disbursed until the construction of the residence is completed.

     Construction lending generally involves a higher degree of risk than single-family permanent mortgage lending because of the greater potential for disagreements between borrowers and builders and the failure of builders to pay subcontractors. For example, if a builder fails to pay subcontractors, a lien could be attached against the property by the subcontractors, which could reduce the value of the property as collateral for the Bank’s loan. Additional risk also often exists because of the inherent difficulty in estimating in advance both a property’s value post-construction and the estimated cost of construction. If the estimate of construction costs proves to be inaccurate, Citizens First may be required to advance funds beyond the amount originally committed to protect the value of the collateral for its loan. If the estimate of value upon completion proves to be inaccurate, the property’s value may be insufficient to assure full loan repayment.

COMMERCIAL AND MULTI-FAMILY REAL ESTATE LOANS. Citizens First also originates commercial real estate loans. These loans are generally secured by properties located in Citizens First’s primary market area and used for business purposes, such as small office buildings, industrial facilities or retail facilities. Citizens First also, to a lesser extent, originates multi-family real estate loans that are typically secured by 5-unit or larger apartment buildings in Citizens First’s primary market area. At December 31, 2003, commercial and multi-family real estate loans totaled $241.1 million or 25.6% of Citizens First’s total loans.

     Most of the commercial and multi-family real estate loans originated by Citizens First are fully amortizing loans with terms of up to 20 years. Generally, the maximum loan amount Citizens First permits for such a loan is 80% of the value of the underlying real estate. In reaching its decision on whether to originate a commercial or multi-family real estate loan, Citizens First considers the net operating income of the property that will secure the loan, the borrower’s expertise, credit history and profitability and the value of the underlying property. In addition, with respect to commercial real estate rental properties, Citizens First will also consider the terms of the applicable leases and the quality of the tenants. Citizens First has generally required that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of between 1.10x and 1.30x. Citizens First generally requires written appraisals prepared by a certified independent appraiser of all properties securing commercial or multi-family real estate loans of greater than $250,000 or if an appraisal is required by the Financial Institutions Reform, Recovery and Enforcement Act. Additionally, environmental surveys are usually required before Citizens First funds certain larger commercial real estate loans in excess of $1.0 million and may be required on commercial real estate loans of greater than $500,000 or where a risk of contamination exists.

     Citizens First also makes construction loans for commercial development projects, including multi-family commercial properties, single-family subdivisions and condominiums. These loans generally have an interest-only phase during construction and then convert to permanent financing. The permanent mortgage loan must be approved at the time Citizens First initially approves the construction loan. Disbursement of funds is at the sole discretion of Citizens First and is based on the progress of construction. The maximum loan-

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to-value ratio for these loans permitted by Citizens First depends upon the type of commercial development project being undertaken, but generally the amount of this type of loan will not exceed 80% of the value of the underlying real estate.

     Multi-family and commercial real estate lending affords Citizens First an opportunity to receive interest at rates higher than those generally available from one- to four-family residential lending. A loan secured by this type of property, however, usually is greater in amount and more difficult to evaluate and monitor than a one- to four-family residential mortgage loan. As a result, multi-family and commercial real estate loans typically involve a greater degree of risk than one- to four-family residential mortgage loans. Repayment of multi-family and commercial real estate loans may be affected by adverse conditions in the real estate market or the economy because these loan payments often depend on the successful operation and management of the underlying properties. Citizens First seeks to minimize these risks by generally limiting the maximum loan-to-value ratio to 80% for commercial and multi-family real estate loans and by strictly scrutinizing the financial condition of the borrower, the cash flow of the project, the quality of the collateral and the management of the property securing the loan.

     HOME EQUITY LOANS AND LINES OF CREDIT. Citizens First offers home equity loans and lines of credit secured by owner-occupied one- to four-family residences. At December 31, 2003, home equity loans and lines of credit totaled $85.4 million or 9.1% of Citizens First’s total loans. Additionally, at December 31, 2003, the unadvanced amounts of home equity lines of credit totaled $31.7 million. Unadvanced amounts of home equity loans are not shown as liabilities on the Company’s balance sheet. For more information about Citizens First’s commitments, including commitments to make advances on home equity lines of credit, see Note 13 to the Company’s Consolidated Financial Statements.

     The underwriting standards employed by Citizens First for home equity loans and lines of credit generally include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan and the value of the collateral that would secure the loan. Home equity loans generally will not be made if the borrower’s outstanding monthly debt exceeds 40% of the borrower’s gross monthly income. Loan-to-value ratios and maximum loan amounts vary depending on the amount of insurance coverage on the underlying property. Generally, home equity loans are made with fixed interest rates and terms of up to 15 years.

     Home equity lines of credit, as opposed to home equity loans, generally have adjustable rates of interest that are indexed to the prime rate as reported in The Wall Street Journal. Generally, the maximum combined (original mortgage plus home equity line of credit) loan-to-value ratio on home equity lines of credit is 85%. Home equity lines of credit are generally made in amounts of up to $500,000. A home equity line of credit generally may be drawn down by the borrower over an initial period of 5 years from the date of the loan agreement. During this period, the borrower generally has the option of paying, on a monthly basis, either principal and interest together or only the interest. If the equity line is not renewed, the borrower is generally required to repay the amount outstanding under the line of credit over a term not to exceed 15 years, beginning at the end of this initial 5-year period.

     CONSUMER LOANS. Citizens First offers a variety of consumer loans, including automobile loans, mobile home loans, other secured loans, collateral loans, personal loans and unsecured loans. At December 31, 2003, consumer loans totaled $97.3 million or 10.3% of Citizens First’s total loans. Citizens First offers fixed-rate automobile loans with terms of up to 72 months. These loans are offered on a direct basis, meaning the Bank makes the loan directly to the consumer purchasing the automobile, and on an indirect basis, which is described in more detail below. Citizens First will generally make such loans up to 100% of the retail price for new cars and up to 90% of the retail value as stated in the NADA Used Car Guide for used cars. The interest rates Citizens First offers on these loans depend on the age of the automobile, market conditions and current market interest rates.

     In March 1999, Citizens First commenced an indirect consumer lending program. Under this program, Citizens First originates automobile loans through approximately 46 automobile dealers in its primary market area. These dealers provide Citizens First applications made by consumers to finance new (and, to a lesser extent, used) vehicles sold by their dealerships. Citizens First has the opportunity to accept or reject each loan. Generally, Citizens First pays a monthly fee, or “dealer reserve,” to the automobile dealer based on the interest rate on the loan. If a loan is paid off or charged off within a specified time period, the dealer forfeits the dealer reserve, and Citizens First is credited with 100% of the dealer reserve, which it may withhold from the dealer’s account or credit against future payments to the dealer.

     Citizens First also originates consumer loans secured by mobile homes. Historically, these loans were primarily originated indirectly through dealer relationships, similar to the arrangements currently in place with automobile dealers described above. In recent years, however, management has decided to stop originating these loans on an indirect basis. At December 31, 2003 and December 31, 2002, outstanding mobile home loans were in the amounts of $9.1 million, or 9.4% of consumer loans, and $8.3 million, or 10.8% of consumer loans, respectively. Citizens First originates loans on new or used (up to 15 years old) mobile homes, with terms ranging from 7 to 15 years and with fixed interest rates. Citizens First generally will finance up to a maximum of 90% of either the purchase price of the mobile home unit or the retail value as stated in the NADA book, whichever is less.

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     Citizens First also originates consumer loans secured by boats, motorcycles, campers and other recreational vehicles. These loans generally have fixed interest rates and terms ranging from a maximum of 5 years to 15 years depending on the type of collateral securing the loan.

     Citizens First offers collateral loans, personal loans and unsecured loans. Collateral loans are usually secured by a savings account or a certificate of deposit. Personal loans generally have a borrowing limit of $5,000 and a maximum term of four years. Citizens First also makes unsecured personal loans to individuals who have been homeowners for at least four years. These loans typically will be made in amounts of up to $10,000 and with terms of up to 7 years.

     Citizens First believes that it will benefit from the higher yields typically earned on consumer loans, in contrast to the relatively lower yields earned on residential one- to four-family loans, and that the shorter duration of consumer loans will improve Citizens First’s interest rate risk position. Consumer loans, however, entail greater risk of nonpayment than do residential mortgage loans. This is particularly true in the case of loans that are unsecured or that are secured by rapidly depreciating assets such as automobiles. As a result of the greater likelihood of damage, loss or depreciation to the underlying collateral (such as the automobile), consumer loan collateral may not provide an adequate source of repayment of the outstanding loan balance. The remaining deficiency on the loan often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment because the costs of additional collection efforts may not be justified by the potential amount to be collected. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by such events as job loss, divorce, illness or personal bankruptcy. For information on how the Company determines its provision for loan losses, see the section captioned “Allowance for Loan Losses” below, the section captioned “Critical Accounting Policies” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 1 to the Company’s Consolidated Financial Statements.

     COMMERCIAL LOANS. Citizens First makes commercial business loans primarily in its market area to a variety of professionals, sole proprietorships and small businesses. Citizens First offers a variety of commercial lending products, including term loans for fixed assets, working capital loans and lines of credit and loans with a single principal payment at maturity. Additionally, Citizens First originates Small Business Administration-guaranteed loans. At December 31, 2003, commercial loans totaled $107.7 million or 11.4% of Citizen First’s total loans.

     Citizens First offers secured commercial term loans generally with terms of up to ten years and the payment of which is dependent on future earnings. Business lines of credit generally have adjustable rates of interest and terms of up to three years. Loans that require a one-time payment of principal at termination will generally be originated on terms of up to 3 years as long as the borrower is paying interest at least semi-annually. Loans generally will be originated on terms of up to one year if the borrower will pay all of the interest due upon maturity. Business loans with variable rates of interest are generally indexed to the prime rate as reported in The Wall Street Journal. Citizens First also makes unsecured commercial loans. Unadvanced amounts of commercial loans and commercial loan commitments are not shown as liabilities on the Company’s balance sheet. For more information about Citizens First’s commitments, including unadvanced amounts of commercial loans and commercial loan commitments, see Note 13 to the Company’s Consolidated Financial Statements.

     When making commercial business loans, Citizens First considers the financial statements of the borrower, Citizens First’s lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the value of the collateral. Commercial business loans are generally secured by a variety of collateral, which primarily includes accounts receivable, inventory and equipment. Commercial business loans are also typically supported by personal guarantees. Depending on the collateral used to secure the loans, commercial loans are made in amounts of up to 100% of the value of the collateral securing the loan.

     Commercial loans generally involve higher risk than residential mortgage loans. Residential mortgage loans generally are made on the basis of the borrower’s ability to make repayment from employment or other income and are secured by real property for which the value can be easily ascertained. Commercial loans, on the other hand, are typically 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 loans may depend substantially on the success of the business itself, which may be difficult to predict and may depend on various unknown factors. Further, any collateral securing commercial business loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

     LOANS TO ONE BORROWER. The maximum amount that Citizens First may lend to one borrower is limited by regulation. At December 31, 2003, Citizens First’s regulatory limit on loans to one borrower was $12.9 million or $21.5 million for loans approved by two-thirds of the Board of Directors. At that date, Citizens First’s largest amount of outstanding loans to one borrower, including the borrower’s related interests, was approximately $20.7 million and consisted of ten commercial, industrial and retail properties. These loans were previously approved by the Bank’s Board of Directors. Additionally, at December 31, 2003, Citizens First’s largest outstanding commitment to one borrower was approximately $20.9 million, approximately $20.7 million of which was outstanding, and consisted of commercial and industrial and retail properties. All of these loans were performing in accordance with required repayment

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terms at December 31, 2003. For more information on the regulations limiting loans to one borrower, see the section captioned “Loans to One Borrower” under the heading “Regulation and Supervision” below.

     LOAN APPROVAL PROCEDURES AND AUTHORITY. Citizens First’s lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by Citizens First’s Board of Directors and management. Although subject to change and deviation or exception from time to time as determined appropriate by management, the current guidelines are generally as follows:

  •   Residential real estate loans in amounts of greater than $700,000 but less than $1.0 million require the approval of the Bank’s Mortgage Loan Committee, which consists of the President and Chief Executive Officer of the Bank, Senior Vice President — Retail Banking, a Vice President and an Assistant Vice President.
 
  •   Residential real estate loans in amounts of between $1.0 million and $2.0 million require approval of the Officers’ Credit Committee, which consists of the President and Chief Executive Officer of the Bank, the Senior Vice President — Commercial Banking, certain commercial officers and other officers as designated.
 
  •   Loans in amounts in excess of $2.0 million require approval of the Directors’ Loan Committee, which consists of three directors of the Bank, the President and Chief Executive Officer of the Bank and the Senior Vice President — Commercial Banking of the Bank.
 
  •   The President and Chief Executive Officer of the Bank has been delegated the authority to approve any real estate loan up to $700,000.
 
  •   Consumer loans in amounts in excess of $1.0 million, but less than $3.0 million require approval of two outside Directors, and loans of $3.0 million or more require approval of the entire Board of Directors of the Bank.
 
  •   The President and Chief Executive Officer may individually approve any consumer loan in an amount of up to $700,000.
 
  •   All commercial and commercial real estate loans in amounts in excess of $5.0 million require approval of the Board of Directors of the Bank.
 
  •   Commercial and commercial real estate loans in amounts between $2.0 and $5.0 million require the approval of the Directors’ Loan Committee.
 
  •   Commercial and commercial real estate loans in amounts between $500,000 and $2.0 million require the approval of the Officers’ Credit Committee.

     LOAN ORIGINATIONS, PURCHASES AND SALES. Citizens First’s lending activities are generally conducted by its salaried and commissioned loan personnel and through its relationship with vehicle dealers, which is described in more detail under the heading “Consumer Loans” above.

     Except in connection with Citizens First’s indirect automobile lending, Citizens First relies on advertising, referrals from realtors and customers and personal contact by Citizens First’s staff to originate loans. Other than the automobile dealerships previously discussed, Citizens First does not use loan correspondents or other third parties to originate loans. Citizens First’s ability to originate adjustable-rate and fixed-rate loans depends upon the relative customer demand for these loans, which is in turn affected by the current and expected future levels of interest rates. Interest rates are in turn affected by a variety of other factors, some of which are mentioned in the section captioned “Forward-Looking Statements” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

     Generally, fixed-rate loans that conform to the underwriting standards specified by Freddie Mac are originated by Citizens First for sale in the secondary market to Freddie Mac and, to a lesser extent, private investors. Additionally, Citizens First may in the future sell loans in the secondary market to Fannie Mae although, to date, no loans have been sold to Fannie Mae. Citizens First generally retains the servicing rights on the loans sold in the secondary market, meaning that Citizens First receives payments and other collections on these loans and administers these loans in exchange for a servicing or administrative fee. Citizens First currently has a best efforts contract with a third party under which Citizens First must use its best efforts to provide the third party with loans for sale. Citizens First is not required under this contract to replace loans that fail to close for any reason. Additionally, Citizens First has entered into forward contracts with Freddie Mac in the past, under which Freddie Mac commits to purchase certain loans from the Bank. At December 31, 2003, Citizens First had outstanding forward contracts, all of which were with Freddie Mac, to sell loans of approximately $5.8 million. Under these forward contracts, Freddie Mac is generally required to purchase these loans in the future from Citizens First, notwithstanding any change in the market interest rate, as long as specific underwriting requirements are met in making the loans. Sales of most fixed-rate loans are made without recourse to Citizens First if the borrower defaults. Citizens First

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generally originates adjustable-rate loans for its portfolio, but will, from time to time, sell these loans in the secondary market based on prevailing market interest rate conditions, Citizens First’s liquidity needs and Citizens First’s interest rate risk position.

     The following table sets forth Citizens First’s loan originations, sales and principal repayments for the periods indicated:

                         
            For the Nine    
    For the Year Ended
Months Ended
For the Year Ended
    December 31,   December 31,   March 31,
    2003
   2002
   2002
    (In thousands)
Loans at beginning of period
   $ 831,815     $ 748,202     $ 684,875  
Originations:
                        
Real estate:
                        
One- to four-family
     443,664       347,097       187,765  
Commercial and multi-family real estate
     114,103       59,174       41,078  
Residential construction
     31,194       37,044       50,045  
Home equity loans and lines of credit
     65,820       16,856       43,911  
 
    
 		      
 		      
 		  
Total real estate loans
     654,781       460,171       322,799  
Consumer
     41,568       30,985       35,834  
Commercial
     65,571       43,628       107,293  
 
    
 		      
 		      
 		  
Total loans originated
     761,920       534,784       465,926  
Deduct:
                        
Principal loan repayments and prepayments
     325,698       263,129       212,816  
Loan sales
     324,960       188,042       189,783  
 
    
 		      
 		      
 		  
Sub-total
     650,658       451,171       402,599  
 
    
 		      
 		      
 		  
Net loan activity
     111,262       83,613       63,327  
 
    
 		      
 		      
 		  
Loans at end of period(1)
   $ 943,077     $ 831,815     $ 748,202  
 
    
 		      
 		      
 		  

(1)   Loans at end of period include loans in process of $1.6 million, $13.7 million and $13.7 million for fiscal years 2003, 2002 and 2001, respectively.

     Loan Commitments. Citizens First frequently issues loan commitments to its prospective borrowers, which are made in writing on specified terms and conditions. Commitments are generally honored for up to 30 days from approval for residential real estate loans and for up to 180 days on commercial and multi-family real estate loans. At December 31, 2003, Citizens First had loan commitments and unadvanced loans and lines of credit totaling $217.4 million. These loan commitments and unadvanced loans and lines of credit do not appear as liabilities on the Company’s Consolidated Financial Statements. For more information regarding Citizens First’s loan commitments and unadvanced loans and lines of credit, see Note 13 of the Company’s Consolidated Financial Statements. Although the Company believes that it has sufficient liquidity to meet these commitments and obligations in the future, there can be no assurance regarding whether intervening factors, some of which are beyond the Company’s control, will interfere with the Company’s ability to do so. For more information, see the section captioned “Liquidity and Capital Resources” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Loan Fees. In addition to interest earned on loans, Citizens First receives income from fees in connection with loan originations, loan modifications and late payments and for miscellaneous services related to its loans. Income from these activities varies from period to period depending upon the volume and type of loans made and competitive conditions. For more information, see the Company’s Consolidated Financial Statements.

Citizens First charges loan origination fees, which are calculated as a percentage of the amount borrowed, subject to a minimum amount. As required by applicable accounting principles, loan origination fees, discount points and certain loan origination costs are deferred and recognized as charges against income over the contractual remaining lives of the related loans on a level yield basis. At December 31, 2003, Citizens First had $2.2 million of net deferred loan fees.

Nonperforming Assets and Delinquencies. When a borrower fails to make a required loan payment, Citizens First attempts to cure the delinquency by contacting the borrower and seeking the payment. A late notice is mailed after 16 days of delinquency for residential mortgage loans. In most cases, deficiencies are cured promptly. If a late notice does not prompt the borrower to cure the delinquency, Citizens First will attempt to contact the borrower either by telephone, letter or in person in order to determine the cause

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of the delinquency and to arrange for curing of the default. Generally, after the 90th day of delinquency, Citizens First commences foreclosure proceedings under the terms of the loan documents and applicable law.

When a borrower on a consumer or commercial loan fails to make a required loan payment, a late notice is mailed after 10 days of delinquency. Citizens First supplements the late notice with a separately-mailed letter and a telephone call to the borrower. Additional contact and correspondence continues until the 90th day of the delinquency, at which point Citizens First may take action to repossess the property securing the loan or implement other collection efforts. Management informs the Boards of Directors of the Bank and the Company monthly of the amounts of loans delinquent more than 60 days, of loans in foreclosure and of all foreclosed and repossessed property that Citizens First owns.

Citizens First ceases accruing interest on loans when principal or interest payments are delinquent 90 days or more, unless the loan is adequately collateralized and is in the process of collection. If management determines that interest is uncollectible, all interest previously accrued is reversed against current period interest income. If collection of principal or interest is considered doubtful, loans are placed on nonaccrual status or charged against income at an earlier date. The following table provides information at the dates indicated regarding various non-accruing loans in Citizens First’s loan portfolio and regarding real estate owned by the Bank:

                                         
    December 31,
March 31,
    2003
   2002
   2002
   2001
   2000
            (Dollars in thousands)        
Non-accruing loans:
                                        
Real estate
   $ 3,268     $ 1,876     $ 1,437     $ 1,156     $ 954  
Consumer
     452       182       61       220       64  
Commercial
     195       356       295       434       228  
     
     
     
     
     
 
Total (1)
     3,915       2,414       1,793       1,810       1,246  
Real estate owned (2)
     443       353       953       282       80  
     
     
     
     
     
 
Total nonperforming assets
   $ 4,358     $ 2,767     $ 2,746     $ 2,092     $ 1,326  
     
     
     
     
     
 
Total nonperforming loans as a percentage of total loans
     0.47 %     0.29 %     0.24 %     0.26 %     0.21 %
Total nonperforming loans as a percentage of total assets
     0.40 %     0.24 %     0.19 %     0.21 %     0.17 %

(1)   Total non-accruing loans equals total nonperforming loans.
 
(2)   Real estate owned balances are shown net of related loss allowances and include repossessed automobiles, which at December 31, 2003, totaled $63,000.

     Interest income that would have been recorded for the year ended December 31, 2003 had nonaccruing loans been current according to their original terms amounted to approximately $100,200. Interest related to these loans was not included in interest income for the year ended December 31, 2003.

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     The following table sets forth the delinquencies in Citizens First’s loan portfolio as of the dates indicated.

                                                                 
   
December 31, 2003
December 31, 2002
    60-89 Days   90 Days or More   60-89 Days   90 Days or More
    Number   Principal   Number   Principal   Number   Principal   Number   Principal
    of   Balance of   of   Balance of   of   Balance of   of   Balance of
    Loans
   Loans
   Loans
   Loans
   Loans
   Loans
   Loans
   Loans
Real estate loans:
                                                                
One- to four-family
     27     $ 2,632       25     $ 2,506       12     $ 1,114       14     $ 1,575  
Commercial real estate
     2       290       2       149       —       —       —       —  
Residential construction
     —       —       4       762       —       —       2       301  
Consumer loans:
                                                                
Home equity loans and lines of credit
     2       97       8       84       29       385       7       116  
Other Consumer loans
     39       303       27       328       31       270       8       66  
Commercial loans
     1       91       2       86       3       101       3       356  
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		      
 		  
Total
     71     $ 3,413       68     $ 3,915       75     $ 1,870       34     $ 2,414  
Delinquent loans to total loans
             0.36 %             0.47 %             0.25 %             0.32 %
                                 
   
At March 31, 2002
    60-89 Days   90 Days or More
    Number   Principal   Number   Principal
    of   Balance of   of   Balance of
    Loans
   Loans
   Loans
   Loans
Real estate loans:
                                
One- to four-family
     18     $ 2,263       10     $ 1,161  
Commercial real estate
     —       —       —       —  
Residential construction
     3       401       2       276  
Consumer loans:
                                
Home equity loans and lines of credit
     4       130       —       —  
Other Consumer loans
     13       109       8       61  
Commercial loans
     2       888       2       295  
 
    
 		      
 		      
 		      
 		  
Total
     40     $ 3,791       22     $ 1,793  
Delinquent loans to total loans
             0.51 %             0.24 %

     Real Estate Owned. Real estate acquired by Citizens First as a result of foreclosure and real estate acquired by deed-in-lieu of foreclosure is classified as real estate owned until sold. Under Michigan law, there is generally a six-month redemption period with respect to one- to four-family residential properties during which the borrower has the right to repurchase the property. When property is acquired, the property is recorded on the Bank’s balance sheet at the lower of its cost, which is the unpaid principal balance of the loan plus foreclosure costs, or fair market value at the date of foreclosure less estimated costs to sell. This recordation establishes a new cost basis. Holding costs and declines in fair value after acquisition of the property may result in charges against Citizens First’s income. At December 31, 2003, Citizens First had approximately $443,000 in real estate owned, which consisted of 4 one-to four-family residences, 1 vacant parcel of land and $63,000 of repossessed automobiles.

Asset Classification. Bank regulators have adopted various regulations and practices regarding “problem” assets of savings institutions. Under these regulations, examiners have authority to identify problem assets during examinations and, if appropriate, to require them to be classified as described below.

There are three classifications for “problem” assets: substandard, doubtful and loss. “Substandard” assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. “Doubtful” assets have the same weaknesses as substandard assets, except that weaknesses of doubtful assets make collection or liquidation in full questionable based on currently existing facts, conditions and values, and there is a high possibility of loss. An asset classified as “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. If an asset or portion of an asset is classified as “loss,” the insured institution establishes a specific allowance in its allowance for loan losses for the full amount of the portion of the asset that is classified as loss. All or a portion of general loan loss allowances established to cover probable losses related to assets classified substandard or doubtful can be included in determining an institution’s regulatory capital, while specific valuation allowances such as those for assets classified as “loss” generally do not qualify as regulatory capital. Citizens First’s Directors’ Loan Committee, which consists of the President and Chief Executive Officer of the Bank, two outside directors and the Senior Vice President — Commercial Banking, classifies assets on a monthly basis based upon delinquency reports, assets held by Citizens First as real estate owned, asset review summaries and assets brought to the attention of the Director’s Loan Committee by other senior officers. Assets that do not currently expose the insured institution to sufficient risk to warrant classification as substandard, doubtful or loss, but that possess weaknesses, are designated by Citizens as “special mention.” Citizens First monitors “special mention” assets.

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     The following table sets forth the Bank’s classified assets at December 31, 2003.

                                                                 
    Loss
   Doubtful
   Substandard
   Special Mention
    Number       Number       Number       Number    
    of   Principal   of   Principal   of   Principal   of   Principal
    Loans
   Balance
   Loans
   Balance
   Loans
   Balance
   Loans
   Balance
    (Dollars in thousands)
Real estate loans:
                                                                
One- to four-family
     —     $ —       —     $ —       29     $ 3,268       —     $ —  
Commercial and multi-family
     —       —       —       —       3       195       3       1,779  
Residential construction
     —       —       —       —       —       —       —       —  
Home equity loans and lines of credit
     —       —       —       —       —       —       —       —  
Consumer loans:
     —       —       —       —       —       —       —       —  
Vehicles
     —       —       —       —       18       120       —       —  
Other
     —       —       —       —       15       137       —       —  
Commercial loans
     —       —       —       —       3       195       8       2,802  
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		      
 		  
Total
     —     $ —       —     $ —       68     $ 3,915       11     $ 4,581  

Allowance for Loan Losses. Citizens First recognizes that losses will be experienced from originating loans and that the risk of loss will vary with, among other factors, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. To reflect the perceived risk associated with the Bank’s loan portfolio, the Bank maintains an allowance for loan losses to absorb potential losses from loans in its loan portfolio. As losses are estimated to have occurred, management establishes a provision for loan losses, which is then charged directly against earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses represents management’s estimate of probable losses based on information available as of the date of the financial statements.

Potential Significant Impact on Financial Statements and Condition. The level of the allowance for loan losses is important to the portrayal of the Company’s financial condition and results of operations. Although management believes that it uses the best information available to establish the allowance for loan losses, the determination of what the loan allowance should be requires management to make difficult and subjective judgments about which estimates and assumptions to use. Actual results may differ materially from these estimates and assumptions, resulting in a direct impact on Citizens First’s allowance for loan losses and requiring changes in the allowance. Because the estimates and assumptions underlying Citizens First’s allowance for loan losses are inherently uncertain, different estimates and assumptions could require a material increase in the allowance for loan losses. Any material increase in the allowance for loan losses could have a material adverse effect on Citizens First’s net income, its financial condition and results of operations. The Company, therefore, views its allowance for loan losses as a “critical accounting policy.” For additional information about the allowance for loan losses, see Note 1 to the Company’s Consolidated Financial Statements and the section captioned “Critical Accounting Policies” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Methodology for Determination of Loan Loss Allowance. Management evaluates the adequacy of the level of its loss allowance at least quarterly as a function of its internal asset review process because of the importance of the Bank’s loan loss allowance. The Bank’s Director Loan Committee meets monthly to review asset classifications and to recommend any changes to the allowance for loan losses.

In order to determine if its loan loss allowance is adequate, Citizens First assesses the expected losses inherent in its loan portfolio. Management’s internal asset review system and loss allowance methodology are intended to identify problem assets and recognize losses in a timely manner. Management considers various factors in determining whether its allowance for loan losses is adequate, including risk characteristics inherent in different types of loans. Management first performs a detailed review of multi-family real estate loans, commercial real estate loans and other loans with significant balances. Multi-family and commercial real estate loans are generally considered to involve a higher degree of risk and to be more vulnerable to adverse conditions in the real estate market and to deteriorating economic conditions, particularly changes in interest rates, than one-to-four family residential mortgage loans. In addition, multi-family and commercial real estate loans typically involve higher loan principal amounts, and the repayment of these loans generally depends on the income produced by the operation or sale of the property being sufficient to cover operating expenses and debt service. Finally, multi-family and commercial real estate loan values tend to be more cyclical, and recessionary conditions of the type that prevail from time to time in the Bank’s lending market area tend to result in higher vacancy and reduced rental rates and net operating incomes from multi-family and commercial real estate properties. As a result, multi-family and commercial real estate loans are assigned higher credit risk ratings upon their origination, as are other loans with significant balances. In addition to a review

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of multi-family and commercial real estate loans and other loans with significant balances, a detailed credit quality review is also performed for other loans that have deteriorated below certain levels of credit risk or that have been classified or identified as “watch list” loans. A specified loss allowance is attributed to these reviewed loans.

An appropriate level of loss allowance is then determined for the remaining balance of the loan portfolio. This allowance relates to assets with no well-defined deficiencies or weaknesses and takes into consideration losses that are inherent within the portfolio but that have not yet been realized. This allowance is determined by applying estimated projected loss factors to each specific type of loan category in the portfolio (e.g., one- to four-family residential mortgage loans, consumer loans). Varying loss factors are applied to specific sub-categories of loans within the broader loan categories (e.g., fixed-rate mortgage loans, automobile loans). Management determines the estimated loss factors based on historical and recent loan loss experience, industry averages and trends in loan delinquencies and nonaccruals for each type of loan. The determination of the estimated loss factors applied to each type of loan is based on information known and projections made by management based on that information. As a result, actual loss ratios experienced in the future could vary from those projected, which could have a material impact on the loan loss allowance.

After the review yields an aggregate amount of loss allowance attributable to specific loans and after management applies various loss factors to the remaining balance of loans by type, management then analyzes the adequacy of the combined amount of loan loss allowance by considering other factors that may have an impact on the performance of the loan portfolio. These factors include trends in real estate and collateral values, trends and forecasts for the national and local economies, the geographic dispersion of borrowers and other risk factors. Based on this analysis, management adjusts the overall loss allowance, which may result in an unallocated portion of the loan loss allowance. Management believes that an unallocated portion of the allowance is generally necessary because other factors affecting whether losses in the loan portfolio are probable may not be captured by applying estimated loss factors. The existence of an unallocated portion of the loan loss allowance reflects management’s view that the allowance should have a margin that recognizes that the process of estimating expected credit losses and determining the loan loss allowance is imprecise. Determination of the probable losses inherent in the portfolio, which losses are not necessarily captured by the allocated methodology discussed above, involves the exercise of judgment and uncertainty. The assessment of general local and national economic conditions and trends inherently involves a higher degree of uncertainty as it requires management to anticipate the impact that economic trends, legislative actions or other unique market and/or portfolio issues have on estimated credit losses. Recent factors which were considered in the evaluation of the adequacy of Citizens First’s unallocated loan loss reserve include increases in commercial real estate, commercial and construction loans and increases in the amount of loans that have been charged off. Management also considers industry norms and the expectations from rating agencies and banking regulators in determining the adequacy of the Bank’s loan loss allowance.

     Recent Adjustments to Loan Loss Allowance. During the year ended December 31, 2003, management reevaluated its loan loss allowance methodology in recognition of Citizens First’s strategy of increasing multi-family real estate, commercial real estate, commercial and consumer (particularly indirect automobile) loans and the overall increase in the risk inherent in a loan portfolio with an increased amount of these loans. Management determined that the loss factors applied to commercial real estate, commercial and consumer loans should be increased. As a result, management maintained the loan loss allowance at a level of $11.7 million, or 1.24% of total loans, at December 31, 2003.

     Possible Future Adjustments to Loan Loss Allowance. No assurances can be given that Citizens First’s level of allowance for loan losses will be sufficient to cover future loan losses incurred by Citizens First or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses or if historical trends change. Nevertheless, management believes that, based on information currently available, Citizens First’s allowance for loan losses is sufficient to cover losses inherent in its loan portfolio at this time. In addition, it is uncertain whether various regulatory agencies, as an integral part of their examination process and in reviewing Citizens First’s loan portfolio, will request that Citizens First increase its allowance for loan losses. Citizens First believes, however, that it has established its existing loan loss allowance in conformity with generally accepted accounting principles. These agencies could, nevertheless, require Citizens First to provide additions to the allowance for loan losses based upon judgments of the agencies that are different from the judgments of management. Additional information about Citizens First’s allowance for loan losses can be found in Note 1 to the Company’s Consolidated Financial Statements and in the section captioned “Critical Accounting Policies” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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     The following table presents an analysis of Citizens First’s allowance for loan losses (000s omitted).

                                         
            For the Nine                
    Year Ended   Months Ended   Year Ended
    December 31,   December 31,       March 31,    
    2003
   2002
   2002
   2001
   2000
Allowance for loan losses, beginning of year
   $ 11,082     $ 11,020     $ 10,831     $ 10,461     $ 11,161  
Charged-off loans:
                                        
Real estate
     (15 )     (56 )     (12 )     (5 )     (5 )
Consumer
     (755 )     (498 )     (870 )     (342 )     (230 )
Commercial
     (325 )     (548 )     (291 )     (142 )     —  
 
    
 		      
 		      
 		      
 		      
 		  
Total charged-off loans
     (1,095 )     (1,102 )     (1,173 )     (489 )     (235 )
Recoveries on loans previously charged off:
                                        
Real estate
     —       1       —       —       6  
Consumer
     154       242       263       23       12  
Commercial
     83       29       103       56       —  
 
    
 		      
 		      
 		      
 		      
 		  
Total recoveries
     237       272       366       79       18  
 
    
 		      
 		      
 		      
 		      
 		  
Net loans charged-off
     (858 )     (830 )     (807 )     (410 )     (217 )
Provision for loan losses
     1,440       892       996       780       (483 )
 
    
 		      
 		      
 		      
 		      
 		  
Allowance for loan losses, end of period
   $ 11,664     $ 11,082     $ 11,020     $ 10,831     $ 10,461  
 
    
 		      
 		      
 		      
 		      
 		  
Net loans charged-off to average interest-earning loans
     0.10 %     0.10 %     0.11 %     0.06 %     0.04 %
Allowance for loan losses to total loans
     1.24 %     1.33 %     1.47 %     1.58 %     1.80 %
Allowance for loan losses to nonperforming loans
     309.72 %     459.07 %     614.61 %     598.40 %     839.57 %
Net loans charged-off to allowance for loan losses
     7.36 %     7.49 %     7.32 %     3.79 %     2.07 %
Recoveries to charge-offs
     21.64 %     24.68 %     31.20 %     16.16 %     7.66 %

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     The following table presents the approximate allocation of the allowance for loan losses by loan category at the dates indicated. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each category is not indicative of future losses and does not restrict the use of any of the allowance to absorb losses in any category (000s omitted).

                                                 
   
December 31,
December 31,
   
2003
2002
            % of   Percent           % of   Percent
            Allowance   of Loans           Allowance   of Loans
            in each   in Each           in each   in Each
            Category   Category           Category   Category
            to Total   to Total           to Total   to Total
    Amount
   Allowance
   Loans
   Amount
   Allowance
   Loans
Real estate
   $ 5,493       47.09 %     78.27 %   $ 5,286       47.71 %     82.82 %
Consumer
     3,527       30.24 %     10.31 %     4,205       37.94 %     9.93 %
Commercial
     1,922       16.48 %     11.42 %     1,020       9.20 %     7.25 %
Unallocated
     722       6.19 %     —       571       5.15 %     —  
 
    
 		      
 		      
 		      
 		      
 		      
 		  
Total allowance for loan losses
   $ 11,664       100.00 %     100.00 %   $ 11,082       100.00 %     100.00 %
 
    
 		      
 		      
 		      
 		      
 		      
 		  
                                                 
   
March 31,
March 31,
   
2002
2001
            % of   Percent           % of   Percent
            Allowance   of Loans           Allowance   of Loans
            in each   in Each           in each   in Each
            Category   Category           Category   Category
            to Total   to Total           to Total   to Total
    Amount
   Allowance
   Loans
   Amount
   Allowance
   Loans
Real estate
   $ 4,980       45.19 %     84.12 %   $ 5,425       50.09 %     86.78 %
Consumer
     4,130       37.48 %     10.25 %     4,082       37.69 %     9.90 %
Commercial
     1,096       9.95 %     5.63 %     845       7.80 %     3.32 %
Unallocated
     814       7.38 %     —       479       4.42 %     —  
 
    
 		      
 		      
 		      
 		      
 		      
 		  
Total allowance for loan losses
   $ 11,020       100.00 %     100.00 %   $ 10,831       100.00 %     100.00 %
 
    
 		      
 		      
 		      
 		      
 		      
 		  
                         
            March 31,    
   
2000
            % of   Percent
      Allowance   of Loans
            in each   in Each
            Category   Category
            to Total   to Total
    Amount
   Allowance
   Loans
Real estate
   $ 5,717       54.65 %     87.29 %
Consumer
     3,120       29.83 %     9.47 %
Commercial
     784       7.49 %     3.24 %
Unallocated
     840       8.03 %     —  
 
    
 		      
 		      
 		  
Total allowance for loan losses
   $ 10,461       100.00 %     100.00 %
 
    
 		      
 		      
 		  

Investment Securities Activities

Under Michigan law and regulation, Citizens First has authority to purchase a wide range of investment securities. Under federal banking law, however, financial institutions such as Citizens First generally may not invest in investment securities that are not permissible for investment by a national bank.

Citizens First’s Board of Directors has the overall responsibility for Citizens First’s investment portfolio. The Board of Directors has authorized the Investment Committee of the Board of Directors to execute the investment policy, which is described below, as prescribed by the Board of Directors. The Board of Directors also receives a monthly portfolio report. The Investment Committee is authorized to delegate investment and compliance duties to an investment consultant and/or Investment Manager. The Investment Manager is authorized to make investment decisions consistent with Citizens First’s investment policy and the recommendations of Citizens First’s Investment Committee and is primarily responsible for daily investment activities.

The primary objectives of Citizens First’s investment portfolio are to provide the liquidity necessary to meet Citizens First’s day-to-day, cyclical and long-term requirements for funds, to invest funds not currently needed to fulfill loan demands and to provide a flow

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of dependable earnings with minimum risk associated with potential changes in interest rates or from the concentration of investments in a particular issuer or sector. Investment decisions are based upon Citizens First’s cash and borrowed funds position; the quality, maturity, stability and earnings of loans; the nature and stability of deposits; and Citizens First’s excess capital.

Under Citizens First’s current investment policy, its investment portfolio should be composed of investments in marketable obligations in the form of bonds, notes or debentures, which are generally salable under ordinary circumstances with reasonable promptness at fair value. Debt securities authorized for investment by the investment policy include U.S. Treasury securities, government agency securities, corporate debt securities, municipal securities, certificates of deposit, bankers acceptances, demand obligations, repurchase agreements and commercial paper.

Citizens First’s investment policy generally provides that all bonds, when purchased, must be of investment grade, as determined by at least one nationally recognized securities rating organization, and must generally carry a rating of “A/Mig2” or better or the equivalent or “A1/P1” for commercial paper when purchased. Citizens First’s investment policy limits investments in non-U.S. Treasury securities to no more than five percent of the value of Citizens First’s investment portfolio in any one issue or class and ten percent of the value of the investment portfolio in any one issuer. Also, the total amount of investment securities of any one issuer may not exceed twenty percent of the total of Citizens First’s capital, surplus, and subordinated notes and debentures. Citizens First’s investment policy is subject to change as determined appropriate by its Board of Directors.

Generally accepted accounting principles require that securities be categorized as either “held to maturity,” “trading securities” or “available for sale,” based on management’s intention regarding ultimate disposition of each security. Debt securities may be classified as “held to maturity” and reported in financial statements at amortized cost only if management has the intention and ability to hold those securities to maturity. Securities that might be sold in response to changes in market interest rates, changes in the security’s prepayment risk, increases in loan demand or other similar factors cannot be classified as “held to maturity.” Debt and equity securities held for current resale are classified as “trading securities.” These securities are reported at fair value, and unrealized gains and losses on these securities would be included in current earnings. Citizens First does not currently use or maintain a trading securities account. Debt and equity securities not classified as either “held to maturity” or “trading securities” are classified as “available for sale.” These securities are reported at fair value, and unrealized gains and losses on the securities are excluded from earnings and reported, net of deferred taxes, as a separate component of stockholders’ equity. Citizens First currently classifies all of its securities as available for sale.

At December 31, 2003, Citizens First did not own any securities that had an aggregate book value in excess of 10% of Citizens First’s stockholders’ equity at that date, other than U.S. Government and Agency securities.

     The following table sets forth certain information regarding the amortized cost and fair value of Citizens First’s securities at the dates indicated (000s omitted).

                                                 
    December 31,   December 31,   March 31,
    2003
   2002
   2002
    Amortized   Fair   Amortized   Fair   Amortized   Fair
    Cost
   Value
   Cost
   Value
   Cost
   Value
Debt securities available-for-sale:
                                                
Obligations of U.S. Treasury and U.S. government agencies
   $ 7,998     $ 8,013     $ 10,389     $ 10,775     $ 19,586     $ 20,388  
Obligations of state and political subdivisions
     17,863       18,611       14,149       15,049       14,056       14,568  
Corporate Securities
     47,880       48,263       65,223       64,720       74,126       73,874  
Mortgaged-backed Securities
     —       —       5,131       5,163       4,878       4,932  
 
    
 		      
 		      
 		      
 		      
 		      
 		  
Total
     73,741       74,887       94,892       95,707       112,646       113,762  
 
    
 		      
 		      
 		      
 		      
 		      
 		  
Equity securities available-for-sale:
     5,002       4,785       5,002       4,675       5,002       4,785  
 
    
 		      
 		      
 		      
 		      
 		      
 		  
Total debt and equity securities
   $ 78,743     $ 79,672     $ 99,894     $ 100,382     $ 117,648     $ 118,547  
 
    
 		      
 		      
 		      
 		      
 		      
 		  

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     The following table sets forth Citizens First’s securities activities for the periods indicated (000s omitted).

                         
            For The Nine    
    For the Year Ended
Months Ended
For the Year Ended
    December 31,   December 31,   March 31,
    2003
   2002
   2002
Securities:
                        
Securities, beginning of period
   $ 100,382     $ 118,547     $ 96,053  
Purchases
     53,964       12,070       128,623  
Sales
     (25,990 )     (6,853 )     (35,040 )
Maturities
     (48,867 )     (22,744 )     (70,290 )
(Amortization) accretion
     (259 )     (228 )     407  
Increase (decrease) in unrealized gain
     442       (410 )     (1,206 )
 
    
 		      
 		      
 		  
Net increase (decrease) in investment securities
     (20,710 )     (18,165 )     22,494  
 
    
 		      
 		      
 		  
Securities, end of period
   $ 79,672     $ 100,382     $ 118,547  
 
    
 		      
 		      
 		  
                                                 
   
At December 31, 2003
                    More than One Year   More than Five Years
    One Year or Less
to Five Years
to Ten Years
            Weighted           Weighted           Weighted
    Carrying   Average   Carrying   Average   Carrying   Average
    Value
   Yield
   Value
   Yield
   Value
   Yield
Available-for-sale securities:
                                                
Municipal securities (1)
   $ 1,833       4.78 %   $ 5,364       4.75 %   $ 8,952       4.47 %
Obligations of the U.S. Treasury and government agencies and corporation
     8,013       7.21 %     —                       —  
Corporates
     13,455       5.71 %     25,149       4.30 %     5,025       4.16  
Equity securities
     —       —       —       —       —       —  
 
    
 		              
 		              
 		        
Total securities at fair value
   $ 23,301       5.9. %   $ 30,513       4.42 %   $ 13,977       3.64 %
 
    
 		              
 		              
 		        
                                         
    At December 31, 2003
    More than Ten Years
Equity
Total
            Weighted                   Weighted
    Carrying   Average   Carrying   Carrying   Average
    Value
   Yield
   Value
   Value
   Yield
Available-for-sale securities:
                                        
Municipal securities (1)
   $ 2,462       4.17 %   $ —     $ 18,611       3.13 %
Obligations of the U.S. Treasury and government agencies and corporation
     —       —       —       8,013       5.30 %
Corporates
     4,634       6.72 %     —       48,263       4.51 %
Equity securities
     —       —       4,785       4,785       —  
 
    
 		              
 		      
 		        
Total securities at fair value
   $ 7,096       5.83 %   $ 4,785     $ 79,672       3.98 %
 
    
 		              
 		      
 		        

(1)   Weighted average yield data for municipal securities is presented on a tax equivalent basis based on an assumed tax rate of 35%.

Deposit Activities and Other Sources of Funds.

GENERAL. Deposits are the major external source of funds for Citizens First’s lending and other investment activities. In addition, Citizens First generates funds internally from loan repayments, payments of interest on loans, proceeds from the sale of loans originated for sale, maturities and sales of investment securities, cash on hand and cash on deposit. Scheduled loan repayments are a relatively stable source of funds. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, loan prepayments, and mortgage loan originations and sales are greatly influenced by general interest rates, economic conditions and competition. Citizens First may use borrowings from the Federal Home Loan Bank of Indianapolis to compensate for

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any reductions in the availability of funds from other sources. Currently, Citizens First has no other borrowing arrangements aside from the Federal Home Loan Bank.

DEPOSIT ACCOUNTS. Nearly all of Citizens First’s depositors reside in Michigan. Citizens First offers a wide variety of deposit accounts with a range of interest rates and terms, including savings accounts, checking and NOW accounts, certificates of deposit, individual retirement accounts and money market accounts. The maturities of Citizens First’s certificate of deposit accounts range from seven days to six years. Deposit account terms vary primarily based on minimum deposit balance, early withdrawal penalties, limits on the number of transactions and the interest rate. Citizens First reviews its deposit mix monthly and its pricing terms weekly. In October 1999, Citizens First began offering a wide range of commercial deposit products and checking accounts to cities, towns and municipal school districts located within Citizens First’s primary market area. At December 31, 2003, Citizens First had depository arrangements with approximately 46 municipalities. At December 31, 2003, these entities accounted for approximately $9.1 million, or 4.6%, of Citizens First’s certificates of deposit and $85.9 million, or 30.7%, of Citizens First’s money market accounts. Municipal and governmental depository arrangements generally are more sensitive to interest rate changes than other consumer deposit accounts and are typically subject to competitive bidding processes. Additionally, the balance of these deposit accounts tends to fluctuate more than consumer deposit accounts because of the budgeting and tax collection timing of each particular municipal entity. Accordingly, municipal deposits tend to be more volatile than consumer deposits, and there is no assurance that Citizens First will be able to maintain its current levels of municipal accounts in future periods.

     Citizens First believes it is competitive in the interest rates it offers on its commercial deposit account products. Citizens First determines the rates paid based on a number of factors, including rates paid by competitors, Citizens First’s need for funds and cost of funds, borrowing costs and movements of market interest rates. Citizens First does not utilize brokers to obtain deposits and at December 31, 2003 had no brokered deposits.

     The following table presents the deposit activity of Citizens First for the periods indicated (000s omitted):

                         
    For the Year   For the Nine   For the Year
    Ended   Months Ended   Ended
    December 31,   December 31,   March 31,
    2003
   2002
   2001
Beginning balance
   $ 671,830     $ 634,014     $ 581,281  
Increase before interest credited
     62,705       24,644       30,175  
Interest credited
     13,996       13,172       22,558  
     
     
     
       
Net increase
     76,701       37,816       52,733  
     
     
     
       
Ending balance
   $ 748,531     $ 671,830     $ 634,014  
     
     
     
       

     At December 31, 2003, Citizens First had $71.7 million in certificate of deposit accounts in amounts of $100,000 or more maturing as follows (000s omitted):

                 
            Weighted
            Average
Maturity Period
   Amount
   Rate
Three months or less
   $ 14,712       1.51 %
Over 3 through 6 months
     7,635       3.94 %
Over 6 through 12 months
     6,807       3.17 %
Over 12 months
     42,506       3.91 %
     
         
Total
   $ 71,660          
     
         

     The following table presents by various rate categories, the amount of certificates of deposit outstanding at the dates indicated and the periods to maturity of the certificates of deposit outstanding at December 31, 2003 (000s omitted).

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    Less   One   Two   Over           Total at    
    than One   to Two   to Three   Three   December 31,   December 31,   March 31,
    Year
   Years
   Years
   Years
   2003
   2002
   2002
Certificates of deposit:
                                                        
0 to 1.00%
   $ 37,203     $ 105     $ 67     $ —     $ 37,375     $ —     $ —  
1.01 to 2.00%
     40,925       6,901       884       4       48,714       74,050       71,058  
2.01 to 4.00%
     14,355       2,756       13,941       10,840       41,892       63,833       62,810  
4.01 to 5.00%
     9,860       5,741       9,584       19,296       44,481       51,841       43,524  
5.01 to 6.00%
     7,322       12,279       3,864       13,926       37,391       43,163       39,451  
6.01 to 7.00%
     14,351       7,380       5,780       10,405       37,916       36,291       64,491  
7.01 to 8.00%
     4,187       2,396       931       192       7,704       2,674       7,976  
Over 8.00%
     1,921       294       127       —       2,344       —       —  
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		  
Total certificate of deposit
   $ 130,124     $ 37,852     $ 35,178     $ 54,663     $ 257,817     $ 271,852     $ 289,310  
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		  

     Borrowings. Citizens First can use advances from the Federal Home Loan Bank of Indianapolis to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The Federal Home Loan Bank of Indianapolis functions as a central reserve bank by providing credit for savings banks and certain other member financial institutions. As a member of the Federal Home Loan Bank of Indianapolis, Citizens First is required to acquire and hold shares of capital stock in the Federal Home Loan Bank of Indianapolis and is authorized to apply for advances as long as certain creditworthiness standards have been met. For more information, see the section captioned “Federal Home Loan Bank System” under the heading “Regulation and Supervision” below. Advances are generally secured by eligible assets of a member, which include principally mortgage loans and obligations of, or guaranteed by, the U.S. government or its agencies. Advances can be made to Citizens First under several different credit programs of the Federal Home Loan Bank of Indianapolis. Each credit program has its own interest rate, range of maturities and limitations on the amount of advances permitted based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit. At December 31, 2003, Citizens First had the ability to borrow a total of approximately $238.0 million from the Federal Home Loan Bank of Indianapolis, of which $172.5 million was borrowed at such date.

     The following table presents certain information regarding Citizens First’s borrowed funds at or for the periods ended on the dates indicated (000s omitted):

                                 
            Nine    
    Year Ended   Months Ended   Year Ended
    December 31,   December 31,   March 31,
    2003
   2002
   2002
   2001
Federal Home Loan Bank advances and other borrowings:
                                
Average balance outstanding
   $ 173,896     $ 164,199     $ 130,645     $ 90,348  
Maximum amount outstanding at any month-end during the period
     181,534       148,568       155,093       115,004  
Balance outstanding at end of period
     172,534       173,003       151,415       114,931  
Weighted average interest rate during the period
     5.35 %     5.65 %     6.23 %     6.34 %
Weighted average interest rate end of period
     5.24 %     5.36 %     5.79 %     6.35 %

Trust Services

     Citizens First maintains its Asset Management and Trust Department, established in 1999, which provides trust and investment services to individuals, partnerships, corporations and institutions. The Asset Management and Trust Department also acts as a fiduciary of estates and conservatorships and as a trustee under various wills, trusts and other plans. The Trust Department allows the Bank to provide investment opportunities and fiduciary services to both current and prospective customers. Consistent with Citizens First’s operating strategy, Citizens First will continue to emphasize the growth of its trust service operations in order to grow its assets and to increase fee-based income. Citizens First has implemented several policies governing the practices and procedures of the Trust Department, including policies relating to maintaining confidentiality of trust records, investment of trust property, handling conflicts of interest and maintaining impartiality. At December 31, 2003, the Trust Department managed 367 accounts with aggregate assets of $201.6 million, of which the largest relationship totaled $79.9 million, or 39.6% of the Trust Department’s total assets.

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Personnel

     As of December 31, 2003, Citizens First had 244 full-time employees and 31 part-time employees, none of whom is represented by a collective bargaining unit. We believe that our relationship with our employees is good.

Subsidiaries

     Citizens First owns 99%, and the Company owns 1%, of the membership interests of Citizens First Mortgage, LLC, which was established in 2002. Citizens First currently conducts its residential mortgage lending activity through Citizens First Mortgage, LLC. Citizens Financial Services, Inc., formerly 525 Riverside Corporation, was established in 1974 as a Michigan-chartered service corporation, and is wholly-owned by Citizens First. Citizens Financial Services owns 50% of the membership interests of CFS Title Insurance Agency, LLC. CFS Title Insurance Agency, a Michigan limited liability company, was established in 1998 as a joint venture between Citizens First and Lawyers Title Insurance Agency, a Virginia corporation, to provide title insurance for customers of Citizens First. Citizens Financial Services may also in the future offer other personal insurance products through an affiliation arrangement with a third party insurance agency. In addition, the Bank owns 100% of CFS Insurance Agency, Inc., d/b/a CFS Financial Services, Inc., which offers mutual funds and insurance products such as annuities.

ADDITIONAL FINANCIAL INFORMATION

     Although this description of the business of Citizens First and the Bancorp includes some specific financial information, more detailed financial information can be found elsewhere in this Report. For the Company’s Consolidated Financial Statements, see Item 8. For “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” see Item 7. Among other things, Item 7 also includes a table showing “average” balance sheets for the Company for the periods ended December 31, 2003 and December 31, 2002. This table shows, for those periods, the average balances of interest-earning assets and interest-bearing liabilities, as well as the total dollar amounts of interest income from average interest-earning assets and the total dollar amount of interest expense from average interest-earning liabilities and the resulting average yields and costs. In addition, Item 7 contains a table captioned “Rate/Volume Analysis.” This table shows the effect on the Company’s interest income and interest expense of changes in interest rates and changes in the volumes of interest-earning assets and the volumes of interest-bearing liabilities during the period ended December 31, 2003 compared to the period ended December 31, 2002, during the nine months ended December 31, 2002 compared to the nine months ended December 31, 2001 and during the year ended March 31, 2002 compared to the year ended March 31, 2001. In addition, see Item 6 for “Selected Financial Data” of the Company.

REGULATION AND SUPERVISION

General

     As a savings and loan holding company, Citizens First Bancorp is required by federal law to file reports with, and otherwise comply with, the rules and regulations of the Office of Thrift Supervision. Citizens First is a Michigan-chartered state savings bank and a member of the Federal Home Loan Bank System and, with respect to deposit insurance, of the Savings Association Insurance Fund managed by the Federal Deposit Insurance Corporation. The Commissioner of the Michigan Office of Financial and Insurance Services and/or the Federal Deposit Insurance Corporation conduct periodic examinations to test Citizens First’s safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, which include policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in these regulatory requirements and policies, whether by the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, the Michigan Office of Financial and Insurance Services or the U.S. Congress, could have a material adverse impact on Citizens First Bancorp, Citizens First, Metrobank and their operations. Certain regulatory requirements applicable to Metrobank, Citizens First and to Citizens First Bancorp are referred to below or elsewhere in this Form 10-K. The description of statutory provisions and regulations applicable to savings institutions and their holding companies included in this Form 10-K does not purport to be a complete description of these statutes and regulations and their effects on Citizens First and Citizens First Bancorp.

Michigan Bank Regulation

     Michigan savings banks are regulated and supervised by the Commissioner of the Michigan Office of Financial and Insurance Services. Michigan-chartered savings banks are subject to an examination, not less than once every 18 months, by the Michigan Commissioner either with or without notice. The approval of the Michigan Commissioner is required for certain activities such as for a savings bank to merge with another institution, to reorganize or to undertake other specified activities.

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     Certain powers that Michigan-chartered savings banks can exercise under the law are summarized below.

     Business Activities. The activities of state savings banks are governed by state as well as federal law and regulations. These laws and regulations delineate the nature and extent of the investments and activities in which state institutions may engage. To qualify as a Michigan savings bank, both Citizens First and Metrobank must meet an asset test, which requires that during 9 of the 12 preceding months, at least 50% of its total assets must have consisted of specified assets, primarily housing loans, mortgage-backed securities, loans for religious, health and nursing home facilities, consumer loans, liquid assets and government obligations. An institution that fails the asset test must notify the Commissioner and may requalify by meeting the test, but it if fails to requalify within the time prescribed by the Commissioner, it must convert to a different charter or liquidate within the time prescribed by the Commissioner. If it does not do so, the Commissioner may appoint a conservator or seek the appointment of a receiver. As of December 31, 2003, Citizens First met the asset test for a Michigan savings bank. Under federal law, Citizens First must also meet the qualified thrift lender test discussed below.

     Loans to One Borrower. Michigan law provides that a stock savings bank may not provide loans or extensions of credit to a person in excess of 15% of the capital and surplus of the bank. The limit, however, may be increased to 25% of capital and surplus if approval of two-thirds of the bank’s board of directors is granted. If the Michigan Commissioner determines that the interests of a group of more than one person, co-partnership, association or corporation are so interrelated that they should be considered as a unit for the purpose of extending credit, the total loans and extensions of credit to that group are combined. At December 31, 2003, Citizens First did not have any loans with one borrower that exceeded its regulatory limit. A number of loans are exempted from these limitations. They include, among others, certain loans on commercial paper, loans to financial institutions and loans secured by bonds, notes and certificates of indebtedness of the United States. For more information, see the section captioned “Loans to One Borrower” under the heading “Lending Activities” above.

     Dividends. Dividends may be paid out of a Michigan savings bank’s net income after deducting all bad debts. A Michigan savings bank may only pay dividends on its common stock if the savings bank has a surplus amounting to not less than 20% of its capital after the payment of the dividend. If a bank has a surplus less than the amount of its capital, it may not declare or pay any dividend until an amount equal to at least 10% of net income for the preceding one-half year (in the case of quarterly or semi-annual dividends) or at least 10% of net income of the preceding two consecutive half-year periods (in the case of annual dividends) has been transferred to surplus. With the approval of the Michigan Commissioner and by a vote of shareholders owning two-thirds of the stock entitled to vote, a savings bank may increase its capital stock by declaring a stock dividend on the capital stock. A savings bank may pay dividends on its preferred stock without limitation on the rates. Federal law may also affect the ability of a Michigan savings bank to pay dividends.

     Branching Activities. Michigan savings banks, have the authority under Michigan law to establish branches anywhere in the State of Michigan, as well as in any other U.S. state or foreign country, subject to receipt of all required regulatory approvals (including the approval of the Michigan Commissioner and the Federal Deposit Insurance Corporation).

     Commissioner Assessments. Michigan savings banks are required to pay supervisory fees to the Michigan Commissioner to fund the operations of the Michigan Commissioner. The amount of supervisory fees paid by a bank is based upon a formula involving the bank’s total assets, as reported to the Michigan Commissioner. The assessments paid by Citizens First for the twelve months ended December 31, 2003 totaled $67,206.

     Enforcement. Under Michigan law, the Michigan Commissioner has broad enforcement authority over state chartered banks and, under certain circumstances, affiliated parties insiders, and agents. If a Michigan savings bank does not operate in accordance with the regulations, policies and directives of the Michigan Commissioner or is engaging, has engaged or is about to engage in an unsafe or unsound practice in conducting the business of the bank, the Michigan Commissioner may issue and serve upon the bank a notice of charges with respect to the practice or violation. The Michigan Commissioner’s enforcement authority includes: cease and desist orders, receivership, conservatorship, removal and suspension of officers and directors, assessment of monetary penalties, emergency closures, liquidation and the power to issue orders and declaratory rulings to enforce the Savings Bank Act provisions.

Federal Regulation

Capital Requirements. Under Federal Deposit Insurance Corporation regulations, federally-insured state-chartered banks that are not members of the Federal Reserve System (“state non-member banks”), such as Citizens First, are required to comply with minimum leverage capital requirements. For an institution determined by the Federal Deposit Insurance Corporation not to be anticipating or experiencing significant growth and to be in general a strong banking organization, rated composite 1 under the Uniform Financial Institutions Ranking System established by the Federal Financial Institutions Examination Council, the minimum capital leverage requirement is a ratio of Tier 1 capital to total assets of 3%. For all other institutions, the minimum leverage capital ratio is not less than 4%. Tier 1 capital is principally composed of the sum of common stockholders’ equity, noncumulative perpetual preferred stock (including any related surplus) and minority investments in certain subsidiaries, less intangible assets (except for certain servicing rights and credit card relationships).

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     Citizens First and Metrobank must also comply with the Federal Deposit Insurance Corporation risk-based capital guidelines. 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. For example, under the Federal Deposit Insurance Corporation’s risk-weighting system, cash and securities backed by the full faith and credit of the U.S. Government are given a 0% risk weight, loans fully secured by one-to four-family residential properties generally have a 50% risk weight and commercial loans have a risk weight of 100%.

     State non-member banks must maintain a minimum ratio of total capital to risk-weighted assets of at least 8%, of which at least one-half must be Tier 1 capital. Total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items, the principal elements of which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock, a portion of the net unrealized gain on equity securities and other capital instruments such as subordinated debt.

     The Federal Deposit Insurance Corporation has adopted a regulation providing that it will take into account the exposure of a bank’s capital and economic value to changes in interest rate risk in assessing a bank’s capital adequacy. For more information about interest rate risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”

Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal banking authorities take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. Generally, an institution that has a total risk-based capital ratio of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating that is not experiencing significant growth) is considered to be “undercapitalized.” An institution that has a total risk- based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and an institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.” Subject to a narrow exception, the Federal Deposit Insurance Corporation is required to appoint itself sole receiver or conservator for an institution that is “critically undercapitalized.” A capital restoration plan must be filed with the Federal Deposit Insurance Corporation within 45 days of the date an institution is on notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The Federal Deposit Insurance Corporation could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

     As of December 31, 2003 and December 31, 2002, the most recent notification from the Company’s and the Bank’s regulators categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action.

     Federal law generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. The Federal Deposit Insurance Corporation may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the Federal Deposit Insurance Corporation. In addition, the Federal Deposit Insurance Corporation may prohibit the payment of dividends by a bank if such payment is determined, by reason of the financial condition of the bank, to be an unsafe and unsound banking practice.

Insurance of Deposit Accounts. Citizens First and Metrobank are both a member of the Savings Association Insurance Fund. The Federal Deposit Insurance Corporation maintains a risk-based assessment system by which institutions are assigned to one of three categories based on their capitalization and one of 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 insured institutions are determined semiannually by the Federal Deposit Insurance Corporation and currently range from zero basis points for the healthiest institutions to 27 basis points of assessable deposits 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 to recapitalize the predecessor to the Savings Association Insurance Fund. Beginning January 1, 2000, these assessments were shared by the Savings Association Insurance Fund and the Bank Insurance Fund members.

     The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in Savings Association Insurance Fund insurance premiums would likely have an adverse effect on the operating expenses and results of operations of Citizens First and Citizens First Bancorp. Management cannot predict what insurance assessment rates will be in the future.

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     Transactions with Related Parties. Citizens First’s authority to engage in transactions with an “affiliate” (generally, any company that controls or is under common control with an institution, including Citizens First Bancorp and its non-savings institution subsidiaries) is limited by federal law. Federal law places quantitative restrictions on these transactions and imposes specified collateral requirements for certain transactions. The purchase of low quality assets from affiliates is generally prohibited. Transactions with affiliates must be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies.

     Citizens First’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is also governed by federal law. Among other restrictions, these loans are generally required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of failure to make required repayment. The Sarbanes-Oxley Act of 2002, however, prohibits Citizens First Bancorp from extending or maintaining credit, arranging for the extension of credit, or renewing an extension of credit, in the form of a personal loan to or for any director or executive officer (or equivalent thereof), except for extensions of credit made, maintained, arranged or renewed by the Bank that are subject to the federal law restrictions discussed above.

     Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions. The guidelines address internal controls and information systems, the internal audit system, credit underwriting, loan documentation, interest rate risk exposure, asset growth, asset quality, earnings and compensation, and fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit an acceptable plan to achieve compliance with the standard.

     Investment Activities. Since the enactment of the Federal Deposit Insurance Corporation Improvement Act, all state-chartered Federal Deposit Insurance Corporation insured banks, including savings banks, have generally been limited to activities as principal and equity investments of the type and in the amount authorized for national banks, notwithstanding state law. The Federal Deposit Insurance Corporation Improvement Act and the Federal Deposit Insurance Corporation permit exceptions to these limitations. For example, the Federal Deposit Insurance Corporation is authorized to permit such institutions to engage in state authorized activities or investments that do not meet this standard (other than direct equity investments) for institutions that meet all applicable capital requirements if it is determined that such activities or investments do not pose a significant risk to the Savings Association Insurance Fund.

     Mergers. Citizens First may engage in mergers or consolidations with other depository institutions, subject to filing certain notices with officials of the State of Michigan and receiving approval from the appropriate federal banking agency. When reviewing a proposed merger, the federal banking regulators consider numerous factors, including the effect on competition, the financial and managerial resources and future prospects of existing and proposed institutions, the effectiveness of FDIC-insured institutions involved in the merger in addressing money laundering activities and the convenience and needs of the community to be served, including performance under the Community Reinvestment Act.

     Federal Statutory and Regulatory Provisions. All financial institutions are subject to federal statutory and regulatory provisions intended to address money laundering, including international money laundering. Under the Community Reinvestment Act and regulations implementing the Act, every FDIC-insured institution is obligated to help meet the credit needs of its local community, including low- and moderate-income neighborhoods, consistent with safe and sound operation of the institution, and is examined and rated on its performance. An unsatisfactory rating can be the basis for denial of an application for a merger or branch. Citizens First received a “satisfactory” rating in its most recent Community Reinvestment Act evaluation by the FDIC. Since the enactment of the Federal Deposit Insurance Corporation Improvement Act, all state-chartered Federal Deposit Insurance Corporation insured banks, including savings banks, have generally been limited to activities as principal and equity investments of the type and in the amount authorized for national banks, notwithstanding state law. The Federal Deposit Insurance Corporation Improvement Act and the Federal Deposit Insurance Corporation permit exceptions to these limitations. For example, the Federal Deposit Insurance Corporation is authorized to permit such institutions to engage in state authorized activities or investments that do not meet this standard (other than direct equity investments) for institutions that meet all applicable capital requirements if it is determined that such activities or investments do not pose a significant risk to the Savings Association Insurance Fund.

     Interstate Branching. Beginning June 1, 1997, federal law permitted the responsible federal banking agencies to approve merger transactions between banks located in different states, regardless of whether the merger would be prohibited under the law of the two states. The law also permitted a state to “opt in” to the provisions of the Interstate Banking Act before June 1, 1997, and permitted a state to “opt out” of the provisions of the Interstate Banking Act by adopting appropriate legislation before that date. Michigan did not “opt out” of the provisions of the Interstate Banking Act. Accordingly, beginning June 1, 1997, a Michigan savings bank, could acquire an institution by merger in a state other than Michigan unless the other state had opted out. The Interstate Banking Act also authorizes de novo branching into another state if the host state enacts a law expressly permitting out of state banks to establish such branches within its borders.

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     Federal Enforcement. The Federal Deposit Insurance Corporation has primary federal enforcement responsibility over state non-member banks and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants, who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. Federal law also establishes criminal penalties for certain violations.

Federal Home Loan Bank System

Citizens First and Metrobank are members of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Citizens First, as a member of the Federal Home Loan Bank of Indianapolis, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank in an amount equal to at least 1.0% 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 Federal Home Loan Bank, whichever is greater. Citizens First was in compliance with this requirement as its investment in Federal Home Loan Bank stock at December 31, 2003 was $9.4 million.

Federal Reserve System

The Federal Reserve Board regulations require savings institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The regulations generally provide that reserves be maintained against net transaction accounts as follows: for accounts aggregating $42.1 million or less (subject to adjustment by the Federal Reserve Board), the reserve requirement is 3%, and for accounts aggregating greater than $42.1 million, the reserve requirement is $1.083 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 $42.1 million. The first $6.0 million of transaction accounts (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. Citizens First complies with the foregoing requirements.

Holding Company Regulation

Federal law allows a state savings bank that qualifies as a “Qualified Thrift Lender,” discussed below, to elect to be treated as a savings association for purposes of the savings and loan holding company provisions of the Home Owners’ Loan Act. Such election allows its holding company to be regulated as a savings and loan holding company by the Office of Thrift Supervision rather than as a bank holding company by the Federal Reserve Board. Citizens First has made such an election, and Citizens First Bancorp is regulated as a savings and loan holding company within the meaning of the Home Owners’ Loan Act. As a result, Citizens First Bancorp is registered with the Office of Thrift Supervision and has adhered to the Office of Thrift Supervision’s regulations, reporting requirements and examination and enforcement authority. Among other things, this authority permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.

     As of January 9, 2004, Citizens First Bancorp is a multiple savings and loan holding company within the meaning of federal law. A multiple savings and loan holding company is generally limited to activities permissible for financial holding companies and certain additional activities authorized by Office of Thrift Supervision regulations. A company such as Citizens First Bancorp is not permitted to invest in more than 5% of the voting shares of any company that is engaged in any activity other than specified activities permissible for savings and loan holding companies.

     A savings and loan holding company is also prohibited from, directly or indirectly, acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company without prior written approval of the Office of Thrift Supervision and from acquiring or retaining control of a depository institution that is not insured by the Federal Deposit Insurance Corporation. In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision considers the financial and managerial resources and future prospects of the holding company and institution involved, the effect of the acquisition on the risk to the deposit insurance funds, competitive factors and the convenience and needs of the community, including performance under the Community Reinvestment Act. An unsatisfactory rating of a savings institution can be the basis for denial of a holding company application.

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     The Office of Thrift Supervision may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:

(1)   the approval of interstate supervisory acquisitions by savings and loan holding companies and
 
(2)   the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

     Although savings and loan holding companies are not subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary institutions as previously described. Citizens First and Metrobank must notify the Office of Thrift Supervision 30 days before declaring any dividend to Citizens First Bancorp. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the Office of Thrift Supervision, and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.

     QTL Test. In order for Citizens First Bancorp to be regulated as a savings and loan holding company by the Office of Thrift Supervision (rather than as a bank holding company by the Federal Reserve Board), Citizens First and Metrobank must each qualify as a qualified thrift lender. To be a qualified thrift lender, each must either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (1) specified liquid assets up to 20% of total assets; (2) intangibles, including goodwill; and (3) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12 month period.

     A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. As of December 31, 2003, Citizens First met the qualified thrift lender test.

     Change in Bank Control Act. The acquisition of 10% or more of the outstanding common stock of Citizens First Bancorp may trigger the provisions of the Change in Bank Control Act. The Change in Bank Control Act generally requires persons (including companies) who at any time intend to acquire control of a savings and loan holding company to provide 60 days prior written notice and certain financial and other information to the Office of Thrift Supervision. The statute and underlying regulations authorize the Office of Thrift Supervision to disapprove a proposed acquisition on certain specified grounds.

     Under certain circumstances, a similar filing may be necessary with the Federal Deposit Insurance Corporation prior to the acquisition of control of Citizens First or Metrobank. If the acquirer of an interest in Citizens First Bancorp or Citizens First is a bank holding company, the acquisition may be subject to the jurisdiction of the Federal Reserve Board under the Bank Holding Company Act.

     Regulatory and Legislative Change. Citizens First, Metrobank and Citizens First Bancorp are extensively regulated and supervised. Regulations, which affect Citizens First on a daily basis, may be changed at any time, and the interpretation of the relevant law and regulations may also change because of new interpretations by the authorities who interpret those laws and regulations. Any change in the regulatory structure or the applicable statutes or regulations, whether by the State of Michigan, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation or the U.S. Congress, could have a material impact on Citizens First Bancorp, Citizens First, Metrobank or their operations.

Federal Securities Laws

The Company’s common stock is registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Securities Act and the Exchange Act. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act provides for changes to the reporting, accounting, corporate governance and business practices of companies, as well as financial and other professionals who have involvement with the U.S. public markets. Although the Company anticipates that it will incur additional expenses in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on the Company’s results of operations or financial condition.

FEDERAL AND STATE TAXATION

Federal Income Taxation

     General. Citizens First Bancorp and Citizens First report their income on a fiscal year basis using the accrual method of accounting. The federal income tax laws apply to Citizens First Bancorp and Citizens First in the same manner as to other corporations with some exceptions, including, in particular, Citizens First’s reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax laws, regulations and rules applicable to Citizens First or Citizens First Bancorp. Citizens First’s federal income tax returns have been either audited or closed under the statute of limitations through tax year 1996. For its 2003 tax year, Citizens First’s maximum federal income tax rate was 35%.

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     Bad Debt Reserves. For fiscal years beginning before December 31, 1996, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, which were generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. Citizens First’s reserve for nonqualifying loans was computed using the experience method.

     Federal legislation enacted in 1996 prohibited the use of reserve method of accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995. Under this legislation, savings institutions also were required to recapture or take into income certain portions of their accumulated bad debt reserves. Approximately $6.6 million of Citizens First’s accumulated bad debt reserves would not be recaptured as taxable income unless Citizens First makes a “non-dividend distribution” to Citizens First Bancorp as described below.

     Distributions. If Citizens First makes “non-dividend distributions” to Citizens First Bancorp, they will be considered to have been made from Citizens First’s unrecaptured tax bad debt reserves, including the balance of its reserves as of December 31, 1988, to the extent of the “non-dividend distributions,” and then from Citizens First’s supplemental reserve for losses on loans, to the extent of those reserves. An amount based on the amount distributed, but not more than the amount of those reserves, will be included in Citizens First’s taxable income. Non-dividend distributions include distributions in excess of Citizens First’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 Citizens First’s current or accumulated earnings and profits will not be so included in Citizens First’s taxable income.

     The amount of additional taxable income triggered by 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. Therefore, if Citizens First makes a non-dividend distribution to Citizens First Bancorp, approximately one and one-half times the amount of the distribution not in excess of the amount of the reserves would be includable in income for federal income tax purposes, assuming a 35% federal corporate income tax rate. Citizens First does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves.

State Taxation

The State of Michigan imposes a Single Business Tax (the “SBT”), which is an annual value-added tax imposed on the privilege of doing business in the State. Banks with business activity in Michigan are subject to the tax. Most organizations exempt from federal income tax, however, are also exempt from the SBT. The major components of the SBT are compensation, depreciation and federal taxable income, increased by net operating losses, if any, utilized in arriving at federal taxable income. For tax years beginning before 2000, the SBT base is decreased by the cost of depreciable tangible assets acquired during the year. For tax years beginning after 1999, an investment tax credit may be claimed for the acquisition of depreciable tangible assets. Effective January 1, 1999, the SBT rate was 2.2% and will be phased out during a 22-year period by dropping .1% per year.

     Delaware State Taxation. As a Delaware holding company not earning income in Delaware, the Company is exempt from Delaware Corporate income tax, but it is required to file an annual report with and pay an annual franchise tax to the State of Delaware.

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ITEM 2. PROPERTIES

     Citizens First currently conducts its business through its main office located in Port Huron, Michigan, and fifteen other full-service banking offices located in St. Clair, Sanilac, Huron and Lapeer Counties, Michigan, all of which it owns. All full-service offices, except for the Sandusky Branch, have ATM facilities. All full-service offices have drive-through facilities. Citizens First also owns a drive-up banking center and a separate office for its trust and financial services operations, which are both located at its main offices in Port Huron. Citizens First currently leases property in Lapeer, Michigan for use as its loan production office. The lease on the property expires in November 2004, at which point Citizens First has the option to renew for two additional one-year periods. Citizens First also owns and operates ATM machines at seven other locations located in St. Clair, Sanilac, Macomb, and Lapeer Counties, Michigan. The spaces for the ATM machines are leased from independent unaffiliated third parties on a year to year basis. The Company owns a parcel of vacant land located in northern St. Clair County, Michigan, which was purchased in November, 2002. Management believes that the facilities and properties it owns and leases are adequate to meet the present and immediately foreseeable needs of the Bank and the Company. Certain information concerning the properties of the Bank is set forth below (000s omitted).

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            Net Book Value
    Original   of Property
    Year Leased   or Leasehold
    or   Improvements at
Location
   Acquired
   December 31, 2003
Main/Executive Office:
                
525 Water Street
                
Port Huron, Michigan 48060
     1978     $ 1,600  
Branch Offices:
                
1527 Hancock
                
Port Huron, Michigan 48060
     1971       1,052  
48 S. Elk Street
                
Sandusky, Michigan 48471
     1972       76  
123 N. Port Crescent
                
Bad Axe, Michigan 48413
     1973       118  
270 Clint on Avenue
                
St. Clair, Michigan 48079
     1974       100  
301 Summer Street
                
Algonac, Michigan 48001
     1975       115  
380 N. Cedar Street
                
Imlay City, Michigan 48444
     1975       186  
2015 Gratiot Boulevard
                
Marysville, Michigan 48040
     1976       1,261  
3136 Lapeer Road
                
Port Huron, Michigan 48060
     1976       293  
37 N. Howard
                
Croswell, Michigan 48422
     1980       142  
204 S. Huron
                
Harbor Beach, Michigan 48441
     1980       46  
210 S. Parker
                
Marine City, Michigan 48039
     1987       71  
807 S. Main Street
                
Lapeer, Michigan 48446
     1993       76  
4778 24th Avenue
                
Fort Gratiot, Michigan 48059
     1998       97  
5536 Main Street
                
Lexington, Michigan 48450
     2002       382  
2855 Wadhams Road
                
Kimball, MI 48054
     2003       1,651  
Other Properties:
                
550 Water Street
                
Port Huron, Michigan 48060 (1)
     1986       45  
555 Water Street
                
Port Huron, Michigan 48060 (2)
     1998       778  
500 Water Street
                
Port Huron, Michigan 48060 (3)
     2000       281  
624 W. Nepessing Street
                
Lapeer, Michigan 48446 (4)
     2001       20  
New Baltimore Land
                
New Baltimore, MI (5)
     2003       1,218  
Commercial Loan Center
                
New Baltimore, MI (6)
     2003       17  
Operations Building Lease
                
Port Huron, MI 48060 (7)
     2003       61  
Imlay City land
                
Imlay City, Michigan 48444 (8)
     2003       1,102  
 
            
 		  
Total
           $ 10,788  
 
            
 		  

(1)   The property, which Citizens First owns, consists of a drive-up ATM facility.
 
(2)   The property, which Citizens First owns, houses Citizens First’s trust and financial services operations.
 
(3)   The property, which Citizens First owns, consists of a drive-up banking and customer call center.
 
(4)   The property, which Citizens First leases, serves as a loan production office. The lease on the property expires in 2004, at which point Citizens First has the option to renew for two additional one-year periods.
 
(5)   The property, which Citizens First owns, consists of vacant land for a future branch site.
 
(6)   The property, which Citizens First leases, serves a commercial and mortgage loan production office.
 
(7)   The property, which Citizens First leases, serves as an operations building for checking and savings operations, Human Resources, Marketing and Accounting.
 
(8)   The property, which Citizens First owns, consists of vacant land for a future branch site.

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ITEM 3. LEGAL PROCEEDINGS

Neither Citizens First nor any of its subsidiaries is a party to, nor is any of their property subject to or the subject of, any material pending legal proceedings other than routine litigation incidental to their respective businesses, nor are any such proceedings known to be contemplated by governmental authorities.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The information required by this item relating to the market price of and dividends on the Registrant’s Common Equity and Related Stockholder Matters appears under “Market For Registrant’s Common Equity and Related Stockholder Matters” in the Registrant’s 2003 Report to Stockholders and is incorporated herein by reference.

On March 28, 2002, Marshall J. Campbell, our Chief Executive Officer, and the Company entered into our Executive Stock Ownership Plan Agreement, pursuant to which Mr. Campbell is entitled to receive deferred compensation units convertible into the Registrant’s common stock. Under this Agreement, as subsequently amended and restated, each vested deferred compensation unit is convertible into one share of common stock of the Company upon Mr. Campbell’s death, retirement, termination of employment with the Company or the Bank, or if the Agreement is terminated by our Board of Directors on or after the date on which Mr. Campbell’s deferred compensation units become vested, which is January 31, 2007 (or earlier upon Mr. Campbell’s death, disability or certain changes of control). Pursuant to that Agreement, we awarded 4,509 deferred compensation units to Mr. Campbell with regard to the twelve months ended December 31, 2001. These transactions were not registered, but were made in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act of 1933. The terms of the Agreement are complex and the above is only a summary. The full text of the Agreement has been filed as an Exhibit to this Form 10-K and should be consulted for full information.

The Company entered into deferred fee agreements with certain directors of the Company and/or the Bank at various times in 2001, under which these directors elected to defer fees paid to them by the Company and/or the Bank. On November 15, 2001 with regard to the directors of the Bank and November 29, 2001 with regard to the directors of the Company, it was agreed that fees previously deferred by these directors under the agreements and earnings on fees previously deferred would be settled in common stock of the Company, as would future fees deferred under these agreements. (Although a director has the right to change or revoke his or her deferral election, the revocation would be effective only for fees deferred for the period beginning with the calendar year after any such revocation. No director has revoked his or her deferral to date.) Dr. Demashkieh entered into a similar agreement with the Company on April 22, 2002 when he joined the Board. Upon a director’s termination of service with the Board of Directors of the Company and/or the Bank, each restricted stock unit is to be settled on a one-for-one basis in shares of the Company’s common stock. These transactions were not registered, but were made in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act of 1933. The terms of the agreements are complex and the above is only a summary. The full text of a representative director’s deferred fee agreement previously was filed as an Exhibit with the Securities and Exchange Commission and is listed as an Exhibit to this Form 10-K and should be consulted for full information.

ITEM 6. SELECTED FINANCIAL DATA

     The information required by this item appears under “Selected Financial Data” in the Registrant’s 2003 Report to Stockholders and is incorporated herein by reference.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The information required by this item appears under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Registrant’s 2003 Report to Stockholders and is incorporated herein by reference.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this item appears under the heading “Quantitative and Qualitative Disclosures about Market Risk” in the Registrant’s 2003 Report to Stockholders and is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Consolidated Financial Statements of Citizens First Bancorp, Inc. and Subsidiary, together with the reports thereon by BDO Seidman, LLP and Plante & Moran, PLLC, are incorporated by reference to Citizens First’s Annual Report filed herewith as Exhibit 13. The supplementary financial information specified by Item 302 of Regulation S-K, Selected Unaudited Quarterly Financial Data, is also incorporated by reference to Citizens First’s Annual Report filed as Exhibit 13 herewith.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL

DISCLOSURE

On October 15, 2003, Plante & Moran, PLLC resigned as the independent public accountant for the Company. On October 15, 2003, the Audit Committee of the Company’s Board of Directors, upon authority delegated to it by the Board of Directors, engaged the firm of BDO Seidman, LLP as the Corporation’s new independent public accountant. Further discussion regarding this matter can be found in the Company’s current report on Form 8-K filed with the Commission on October 16, 2003.

ITEM 9a. CONTROLS AND PROCEDURES

The Company, under the supervision, and with the participation, of its management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2003, pursuant to the requirements of Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2003, in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item relating to Directors and Executive Officers of the Registrant is incorporated herein by reference to the Section captioned “Proposal 1 — Election of Directors” in the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 2004. Reference is made to the cover page of this Form 10-K and to the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” for information regarding compliance with Section 16(a) of the Exchange Act.

The Board of Directors has determined that Christopher A. Kellerman is an “audit committee financial expert” and is “independent,” as each such term is defined under applicable SEC and NASDAQ rules. Citizens First Bancorp has adopted a code of ethics that applies to its principal executive, financial and accounting officers. A copy of the code of ethics is posted on the Company’s website at http://www.cfsbank.com. In the event we make any amendment to, or grant any waiver of, a provision of the code of ethics that applies to the principal executive, financial or accounting officer, or any person performing similar functions, that requires disclosure under applicable SEC rules, we intend to disclose such amendment or waiver, the nature of and reasons for it, along with the name of the person to whom it was granted and the date, on our internet website.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item relating to executive compensation is incorporated herein by reference to the sections captioned “Executive Compensation” in the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 2004.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED

STOCKHOLDER MATTERS

The information required by this item relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the section captioned “Stock Ownership” in the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 2004. The information required by this item relating to securities authorized for issuance under equity compensation plans is incorporated herein by reference to the section captioned “Executive Compensation — Equity Compensation Plan Information” in the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 2004.

Equity Compensation Plan Information

                         
Plan Category                   Number of securities
                    remaining available
                    for future issuance
    Number of securities           under equity
    to be issued upon   Weighted-average   compensation plans
    exercise of   exercise price of   (excluding
    outstanding   outstanding   securities
    options, warrants   options, warrants   related in column
    and rights   and rights   (a)
    (a)
   (b)
   (c)
Equity compensation plans approved by security holders
     170,800     $ 18.95       1,258,195  
 
    
 		      
 		      
 		  
Total
     170,800     $ 18.95       1,258,195  
 
    
 		              
 		  

     The Company does not maintain any equity compensation plans that have not been approved by security holders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item relating to certain relationships and related transactions is incorporated herein by reference to the section captioned “Transactions with Related Parties” in the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 2004.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item relating to accountant fees and services is incorporated by reference to the section captioned “Proposal II — Ratification of Independent Auditors” in the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 27, 2004.

PART IV

ITEM 15, EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)(1) Financial Statements

  •   Independent Auditors’ Reports
 
  •   Consolidated Balance Sheets as of December 31, 2003 and 2002
 
  •   Consolidated Statements of Income for the Periods Ended December 31, 2003, 2002 and 2001
 
  •   Consolidated Statements of Changes in Equity for the Periods Ended December 31, 2003, 2002 and 2001
 
  •   Consolidated Statements of Cash Flows for the Periods Ended December 31, 2003, 2002, and 2001
 
  •   Notes to Consolidated Financial Statements

     (2) Financial Statement Schedules

     All financial statement 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.

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     (3) Exhibits

     
3.1
  Certificate of Incorporation of Citizens First Bancorp, Inc. (1)
 
    
3.2
  Bylaws of Citizens First Bancorp, Inc. (1)
 
    
4.0
  Draft Stock Certificate of Citizens First Bancorp, Inc. (1)
 
    
10.1
  Form of Citizens First Savings Bank Employee Severance Compensation Plan (1)
 
    
10.2
  Form of Citizens First Savings Bank Supplemental Executive Retirement Plan (1)
 
    
10.3
  Form of Citizens First Savings Bank Director’s Deferred Fee Agreement (1)
 
    
10.4
  Employment Agreement between Citizens First Bancorp, Inc. and Marshall J. Campbell
 
    
10.5
  Change in Control Agreement between Citizens First Savings Bank and Randy J. Cutler (2)
 
    
10.6
  Change in Control Agreement between Citizens First Savings Bank and Timothy D. Regan (2)
 
    
10.7
  Change in Control Agreement between Citizens First Savings Bank and Stephen J. Armstrong (2)
 
    
10.8
  Citizens First Bancorp, Inc. 2001 Stock-Based Incentive Plan (3)
 
    
13.0
  2003 Annual Report to Stockholders
 
    
21.0
  Subsidiary Information is incorporated herein by reference to Part I, Item 1, “Business — Subsidiary Activities”
 
    
23.1
  Consent of BDO Seidman LLP
 
    
23.2
  Consent of Plante & Moran PLLC
 
    
31.1
  Rule 13a-14(a) Certifications
 
    
31.2
  Rule 13a-14(a) Certifications
 
    
32.1
  Section 1350 Certifications
 
    
32.2
  Section 1350 Certifications

(1)   Incorporated by reference into this document from the Exhibits to the Form S-1, Registration Statement and amendments thereto, initially filed with the Securities and Exchange Commission on November 3, 2000, Registration No. 333-49234.
 
(2)   Incorporated by reference into this document from the Exhibits to the Form 10-Q as filed with the Securities and Exchange Commission on August 14, 2001 (Registration No. 0-32041).
 
(3)   Incorporated by reference into this document from the Appendix to the Proxy Statement as filed with the Securities and Exchange Commission on September 30, 2001.

(b) Reports on Form 8-K

1. Citizens First Bancorp, Inc. filed a current report on Form 8-K on October 16, 2003 announcing both the resignation of Plante & Moran, PLLC as its independent public accountant, and the engagement of BDO Seidman, L.L.P. as the Corporation’s new independent public accountant for the 2003 fiscal year.

2. Citizens First Bancorp, Inc. filed a current report pursuant to Item 12 of Form 8-K on November 13, 2003, regarding its press release announcing earnings (unaudited) for the three and nine month periods ended September 30, 2003, and a cash dividend of $0.09 per share.

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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.
         
  Citizens First Bancorp, Inc.
 		  
Date: March 15, 2004  By:   /s/ Marshall J. Campbell    
    Marshall J. Campbell   
    Chairman of the Board, President and Chief Executive Officer   
 

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.

         
/s/ Marshall J. Campbell
Marshall J. Campbell		   Chairman of the Board, President
and Chief Executive Officer
(principal executive officer) 		  March 15, 2004
/s/ Timothy D. Regan
Timothy D. Regan		   Secretary, Treasurer
and Director (principal
accounting and financial officer) 		  March 15, 2004
       
/s/ Ronald W. Cooley
Ronald W. Cooley		   Director   March 15, 2004
       
/s/ Walid Demashkieh
Walid Demashkieh		   Director   March 15, 2004
       
/s/ Christopher A. Kellerman
Christopher A. Kellerman		   Director   March 15, 2004

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Exhibit Index

     
3.1
  Certificate of Incorporation of Citizens First Bancorp, Inc. (1)
 
    
3.2
  Bylaws of Citizens First Bancorp, Inc. (1)
 
    
4.0
  Draft Stock Certificate of Citizens First Bancorp, Inc. (1)
 
    
10.1
  Form of Citizens First Savings Bank Employee Severance Compensation Plan (1)
 
    
10.2
  Form of Citizens First Savings Bank Supplemental Executive Retirement Plan (1)
 
    
10.3
  Form of Citizens First Savings Bank Director’s Deferred Fee Agreement (1)
 
    
10.4
  Employment Agreement between Citizens First Bancorp, Inc. and Marshall J. Campbell
 
    
10.5
  Change in Control Agreement between Citizens First Savings Bank and Randy J. Cutler (2)
 
    
10.6
  Change in Control Agreement between Citizens First Savings Bank and Timothy D. Regan (2)
 
    
10.7
  Change in Control Agreement between Citizens First Savings Bank and Stephen J. Armstrong (2)
 
    
10.8
  Citizens First Bancorp, Inc. 2001 Stock-Based Incentive Plan (3)
 
    
13.0
  2003 Annual Report to Stockholders
 
    
21.0
  Subsidiary Information is incorporated herein by reference to Part I, Item 1, “Business — Subsidiary Activities”
 
    
23.1
  Consent of BDO Seidman LLP
 
    
23.2
  Consent of Plante & Moran PLLC
 
    
31.1
  Rule 13a-14(a) Certifications
 
    
31.2
  Rule 13a-14(a) Certifications
 
    
32.1
  Section 1350 Certifications
 
    
32.2
  Section 1350 Certifications

42

EX-13 3 k82471exv13.txt 2003 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13 FINANCIAL HIGHLIGHTS The selected consolidated financial and other data of Citizens First set forth below is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements of Citizens First and Notes thereto presented elsewhere in this annual report.
AT AT AT DECEMBER 31, DECEMBER 31, MARCH 31, 2003 2002 2002 2001 2000 ------------ ------------ ---------- ---------- ---------- (Dollars in thousands) SELECTED CONSOLIDATED FINANCIAL DATA: Total assets $1,094,260 $1,000,184 $ 946,356 $ 855,866 $ 741,570 Cash and cash equivalents 33,647 40,356 57,926 53,618 45,182 Loans, net 929,201 819,136 735,564 672,449 568,503 Securities available-for-sale 79,672 100,382 118,547 96,053 99,407 Deposits 748,531 671,830 634,014 581,281 601,008 FHLB advances 172,534 173,003 151,514 114,931 70,502 Total equity 158,187 148,155 151,440 149,721 63,259 Real estate owned, net 443 353 953 282 80 Total nonperforming assets 4,209 2,767 2,746 2,029 1,326
YEAR NINE MONTHS ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 2003 2002 2002 2001 2000 ------------ ------------ ---------- ---------- ---------- Total interest income $ 60,415 $ 46,954 $ 66,347 $ 60,517 $ 51,928 Total interest expense 23,307 20,129 30,691 34,112 27,063 ---------- ---------- ---------- ---------- ---------- Net interest income 37,108 26,825 35,656 26,405 24,865 ---------- ---------- ---------- ---------- ---------- Provision for loan losses 1,440 892 996 780 (483) Net interest income after provision for loan losses 35,668 25,933 34,660 25,625 25,348 Noninterest income: Net gain on sale of securities (46) 108 -- 89 -- Other 10,353 5,655 4,079 3,179 (314) Noninterest expense 27,399 17,670 22,773 24,742 16,248 ---------- ---------- ---------- ---------- ---------- Income before income taxes 18,576 14,026 15,966 4,151 8,786 Income taxes 6,255 4,842 5,418 965 2,880 Net income $ 12,321 $ 9,184 $ 10,548 $ 3,186 $ 5,906
YEAR NINE MONTHS ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31 MARCH 31, 2003 2002 2002 2001 2000 ------------ ------------ ------ ------ ------ PERFORMANCE RATIOS: Average yield on interest- earning assets 5.96% 6.52% 7.49% 7.78% 7.97% Average rate paid on interest-bearing liabilities 2.78 3.38 4.22 4.77 4.44 Average interest rate spread 3.17 3.21 3.27 3.01 3.53 Net interest margin 3.66 3.77 4.02 3.40 3.82 Ratio of interest-earning assets to interest-bearing liabilities 121.04 119.65 121.71 108.68 106.90 Net interest income after provision for loan losses to noninterest expense 130.18 146.76 152.20 103.57 156.01 Noninterest expense as a percent of average assets 2.57 2.44 2.54 3.04 2.35 Per share earnings 1.58 1.14 1.23 N/A N/A Dividends per share 0.34 0.24 0.16 N/A N/A Return on average assets 1.15 1.26 1.16 0.39 0.85 Return on average equity 8.06 8.25 7.00 4.15 9.35 Ratio of average equity to average assets 14.32 14.95 16.49 9.42 9.11
AT OR FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 2003 2002 2002 2001 2000 ------------ ------------ ------ ---------- ------ (Dollars in thousands) Leverage Capital Ratio 11.80 12.10 16.40 16.70 8.50 Risk-based capital ratio 15.80 19.50 22.00 24.40 13.10 ASSET QUALITY RATIOS: Nonperforming loans as a percent of total loans 0.47 0.29 0.24 0.26 0.22 Nonperforming assets as a percent of total assets 0.40 0.28 0.29 0.21 0.18 Allowance for loan losses as a percent of total loans 1.24 1.33 1.47 1.58 1.80 Allowance for loan losses as a percent of nonperforming loans 309.72 459.07 614.61 598.40 839.57 Net loans charged-off to average interest-earning loans 0.10 0.10 0.11 0.06 0.04
[ASSET GROWTH RATE BAR GRAPH]
Nine Months Year Ended Ended Year Ended March 31, December 31, December 31, 2000 2001 2002 2002 2003 5YR ASSET GROWTH RATE 14.84% 15.41% 10.57% 5.80% 9.41% 11.21%
[RETURN ON AVERAGE ASSETS BAR GRAPH]
Nine Months Year Ended Ended Year Ended March 31, December 31, December 31, 2000 2001 2002 2002 2003 5YR RETURN ON AVERAGE ASSETS 0.85% 0.39% 1.16% 0.94% 1.15% 0.90%
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL. Management's discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Company's Consolidated Financial Statements and accompanying Notes contained in this Annual Report to Stockholders. FORWARD-LOOKING STATEMENTS. The Company or the Bank may from time to time make written or oral "forward-looking statements." These forward-looking statements may be contained in this Annual Report to Stockholders, in the Company's Form 10-K filed with the Securities and Exchange Commission (the "SEC"), in other filings with the SEC and in other communications by the Company and the Bank, which are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements with respect to anticipated future operating and financial performance, including revenue creation, lending origination, operating efficiencies, loan sales, charge-offs, loan loss allowances and provisions, growth opportunities, interest rates, acquisition and divestiture opportunities, capital and other expenditures and synergies, efficiencies, cost savings and funding and other advantages expected to be realized from various activities. The words, "may, "could," "should," "would," "will", "believe," "anticipate," "estimate," "expect," "intend," "plan," "project," "predict," "continue," and similar expressions are intended to identify forward-looking statements. Forward-looking statements include statements with respect to the Company's beliefs, plans, strategies, objectives, goals, expectations, anticipations, estimates or intentions that are subject to significant risks or uncertainties or that are based on certain assumptions. Future results and the actual effect of plans and strategies are inherently uncertain, and actual results could differ materially from those anticipated in the forward-looking statements, depending upon various important factors, risks or uncertainties. The following factors, many of which are subject to change based on various other factors, including factors beyond the Company's control, and other factors, including others discussed in this Annual Report to Stockholders, in the Company's Form 10-K, other factors identified in the Company's other filings with the SEC, as well as other factors identified by management from time to time, could have a material adverse effect on the Company, the Bank and their subsidiaries and their operations or cause their financial performance to differ materially from the plans, objectives, expectations, estimates or intentions expressed in the Company's or the Bank's forward-looking statements: - - The strength of the United States economy in general and the strength of the local economies in which the Company and the Bank conduct operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company's assets. - - The economic impact of past and any future terrorist attacks, acts of war or threats of war and the response of the United States to any of these threats or attacks. - - The effects of, and changes in, federal, state and local laws, regulations, rules and policies including laws, regulations, rules and policies affecting taxes, banking, securities, insurance and monetary and financial matters. - - The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate and other policies of the Federal Reserve Board and policies of the United States Treasury. - - Inflation, interest rates, market and monetary fluctuations, including the effects of changes in the rate of prepayments of the Bank's assets. - - The quality or composition of the Bank's loan portfolio. - - Demand for loan products and services. - - Deposit flows. - - The ability of the Company and the Bank to compete with other financial institutions due to increases in competitive pressures in the financial services sector. - - The ability of the Company to obtain new customers and to retain existing customers. - - The timely development of, and acceptance of, products and services of the Company and the Bank and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services. - - The willingness of users to substitute competitors' products and services for the Company's and the Bank's products and services. - - The Company's and the Bank's success in gaining regulatory approval of their products and services, when required. - - The impact of technological changes implemented by the Company and the Bank and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers. In this regard, in October 2002, Citizens First entered into an agreement with Fiserv Solutions, Inc. ("Fiserv") relating to Fiserv's ITI software package. Citizens First believes that the Fiserv ITI software package, together with planned upgrades to the Bank's PCs and data line connectivity, should provide it with significant processing improvements that it believes will allow enhanced customer service and efficiencies within the Bank. There can be no assurance, however, that the computer conversion will not be more difficult or expensive than anticipated or have unforeseen consequences. - - The ability of the Company to develop and maintain secure and reliable electronic systems. - - The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner. - - Consumer spending and saving habits which may change in a manner that adversely affects the Company's business. - - Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected. - - Unanticipated litigation or disputes and the costs, effects and outcomes of existing or future litigation or disputes. - - The effects of, and changes in, accounting principles, guidelines, policies and practices, as may be adopted by state and federal regulatory agencies and various accounting rulemakers. - - The ability of the Company to manage the risks associated with the foregoing as well as anticipated. - - This list of important factors is not exclusive. These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be placed on these statements. Neither the Company nor the Bank undertakes - and each specifically disclaims any obligation - to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank or to release publicly the result of any revisions that may be made to any forward-looking statements, including revisions to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. OPERATING STRATEGY. Citizens First is a community-oriented financial institution, offering a wide range of deposit and loan products to its customers. In recent years, Citizens First's strategy has been one of controlled balance sheet growth and broader diversification of its loan products and loan portfolio. In recent years, Citizens First has emphasized originating residential mortgage loans, commercial and multi-family real estate loans, construction loans, commercial loans, automobile loans, home equity loans and lines of credit and a variety of consumer loans. It has also emphasized increasing sources of noninterest income. CRITICAL ACCOUNTING POLICIES Management has established various accounting policies that govern how accounting principles generally accepted in the United States of America are used to prepare the Company's financial statements. The Company's significant accounting policies are described in the Notes to the Consolidated Financial Statements of this Annual Report to Stockholders. Certain accounting policies require management to make estimates and assumptions about matters that are highly uncertain and as to which different estimates and assumptions would have a material impact on the carrying value of certain of the Company's assets and liabilities, on the Company's net income and on the Company's overall financial condition and results of operations. The estimates and assumptions management uses are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Actual results could differ significantly as a result of these estimates and assumptions, and different estimates and assumptions could have a material impact on the carrying value of certain of the Company's assets and liabilities, on the Company's net income and on the Company's overall financial condition and results of operations for future reporting periods. Management believes that the Company's "critical accounting policies" relate to the Bank's allowance for loan losses and its valuation of its mortgage servicing rights. These policies are described in more detail below. ALLOWANCE FOR LOAN LOSSES. Citizens First recognizes that losses will be experienced from originating loans and that the risk of loss will vary with, among other factors, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. To reflect the perceived risk associated with the Bank's loan portfolio, the Bank maintains an allowance for loan losses to absorb potential losses from loans in its loan portfolio. As losses are estimated to have occurred, management establishes a provision for loan losses, which is then charged directly against earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses represents management's estimate of probable losses based on information as of the date of the financial statements. Management evaluates whether the Bank's loan loss allowance is adequate at least quarterly by assessing the expected losses inherent in its loan portfolio. Management first reviews perceived higher risk loans, such as commercial and multi-family real estate loans and loans with significant balances, and establishes an allowance for those loans. Second, management reviews loans that have deteriorated below certain levels of credit risk, including impaired, or likely uncollectible loans, and loans that have been classified as "watch list" loans, and attributes a specified loan loss allowance to these reviewed loans. For additional information regarding how management determines whether a loan is impaired, or likely uncollectible, see Note 1 to the Company's Consolidated Financial Statements. Third, an appropriate level of loan loss is then determined for the remaining balance of the loan portfolio by applying varying loan loss factors. Management then analyzes whether the combined loan loss allowance is adequate by considering other factors that may have an impact on the performance of the loan portfolio, such as trends in real estate and collateral values, and adjusts the overall loan loss allowance. No assurances can be given that Citizens First's level of allowance for loan losses will be sufficient to cover future loan losses incurred by Citizens First or that future adjustments to the allowance for loan losses will be unnecessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses or if historical trends change. Nevertheless, management believes that, based on information currently available, Citizens First's allowance for loan losses is sufficient to cover losses inherent in its loan portfolio at this time. In addition, it is uncertain whether various regulatory agencies, as an integral part of their examination process and in reviewing Citizens First's loan portfolio, will request that Citizens First increase its allowance for loan losses. Citizens First believes, however, that it has established its existing loan loss allowance in conformity with generally accepted accounting principles. These agencies could, nevertheless, require Citizens First to provide additions to the allowance for loan losses based upon judgments of the agencies that are different from the judgments of management. In the last few years, although the percentage of the loan loss allowance to total loans has decreased, the Bank has increased the total amount of its allowance for loan losses to a level that it believes is consistent with that of other comparable financial institutions. Because the estimates and assumptions underlying Citizens First's allowance for loan losses are inherently uncertain, different estimates and assumptions could require a material increase in the allowance for loan losses. Any material increase in the allowance for loan losses could have a material adverse effect on Citizens First's net income and results of operations. VALUATION OF MORTGAGE SERVICING RIGHTS. The Bank routinely sells its originated residential mortgage loans to investors, mainly Freddie Mac. Although Citizens First sells the mortgage loans, it frequently retains the servicing rights, or the rights to collect payments and otherwise service these loans, for an administrative or servicing fee. The mortgage loans that the Bank services for others are not included as assets in the Company's consolidated balance sheet. Loans serviced for others were approximately $478.0 million and $322.0 million at December 31, 2003 and December 31, 2002, respectively. Citizens First's mortgage servicing rights relating to loans serviced for others represent an asset of the Bank. This asset is initially capitalized and included in other assets on the Company's consolidated balance sheet. The mortgage servicing rights are then amortized against noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying mortgage servicing rights. There are a number of factors, however, that can affect the ultimate value of the mortgage servicing rights to the Bank, including the estimated prepayment speed of the loan and the discount rate used to present value the mortage servicing rights. For example, if the mortgage loan is prepaid, the Bank will receive fewer servicing fees, meaning that the present value of the mortgage servicing rights is less than the carrying value of those rights on the Bank's balance sheet. Therefore, in an attempt to reflect an accurate expected value to the Bank of the mortgage servicing rights, the Bank receives a valuation of its mortgage servicing rights from an independent third party. The independent third party's valuation of the mortgage servicing rights is based on relevant characteristics of the Bank's loan servicing portfolio, such as loan terms, interest rates and recent prepayment experience, as well as current market interest rate levels, market forecasts and other economic conditions. Based upon the independent third party's valuation of the Bank's mortgage servicing rights, management then establishes a valuation allowance to quantify the likely impairment of the value of the mortgage servicing rights to the Bank. The estimates of prepayment speeds and discount rates are inherently uncertain, and different estimates could have a material impact on the Company's net income and results of operations. The valuation allowance is evaluated and adjusted quarterly by management to reflect changes in the fair value of the underlying mortgage servicing rights based on market conditions. The balances of the Bank's capitalized mortgage servicing rights, net of valuation allowance, included in the Company's other assets at December 31, 2003 and December 31, 2002 were $3,820,000 and $1,939,000, respectively. These balances approximate the fair value of the Bank's mortgage servicing rights at these dates. The fair values of the Bank's mortgage servicing rights were determined using annual constant prepayment speeds of 13.46% and 33.93% and discount rates of 7.25% and 7.02% at December 31, 2003 and December 31, 2002, respectively. (Constant prepayment speeds are a statistical measure of the historical or expected prepayment of principal on a mortgage.) For further discussion of the Bank's valuation allowance and valuation of mortgage servicing rights, including a table setting forth the valuation allowances established by management with regard to the Bank's mortgage servicing rights for the previous three periods, see Note 6 to the Company's Consolidated Financial Statements. As can be seen in that table, prepayments have decreased and discount rates have increased over the past twelve months. As a result of the combined effect of these conditions, the expected value of the Bank's mortgage servicing rights has increased and management has, accordingly, decreased its valuation allowance for the Bank's mortgage servicing rights. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2003 AND 2002 TOTAL ASSETS. Total assets increased $94.1 million, or 9.4%, to $1.1 billion at December 31, 2003 from $1.0 billion at December 31, 2002, primarily due to: - - a $110.1 million, or 13.4%, increase in loans, which is explained in more detail below, - - a $8.3 million, or 55.2%, increase in net premises and equipment, due to the purchase and remodeling of the Bank's new Wadhams office, additional capital improvements as a result of remodeling our other Bank branches and the acquisition of additional land in the Bank's market area, - - a $427,000, or 27.4%, increase in loans held for sale, due to differences in timing of loan sales, - - a $236,000, or 2.6%, increase in Federal Home Loan Bank stock, due to increased borrowings from the Federal Home Loan Bank of Indianapolis, which, in turn, required an increased investment in Federal Home Loan Bank stock, and - - a $2.5 million, or 17.1%, increase in accrued interest and other assets. The increases in assets described above were partially offset by the following decreases in assets at December 31, 2003, as compared to assets at December 31, 2002: - - a $20.7 million, or 20.6%, net decrease in securities available for sale, consisting primarily of: o a $2.8 million decrease in United States government agency securities, and o a $16.5 million decrease in corporate securities, partially offset by a $3.6 million increase in municipal bonds, and - - a $6.7 million, or 16.5%, decrease in cash and cash equivalents primarily due to: o a $28.8 million decrease in interest bearing deposits in other depository institutions partially offset by, o a $19.5 million increase in cash and due from other depository institutions, and o a $2.2 million increase in Federal Funds sold. These net decrease in securities available for sale was primarily due to the sale of securities to fund loan growth. Similarly, the decrease in interest bearing deposits in other depository institutions was mainly to fund loan growth. Citizens First's net loans to assets ratio at December 31, 2003 was 84.9% compared to 81.9% at December 31, 2002, as a result of the $110.1 million increase in loans referred to above. The increase in loans was a result of Citizens First's operating strategy of controlled balance sheet growth and consisted primarily of: - - a $61.7 million, or 34.4%, increase in commercial real estate loans to $241.1 million, - - a $47.4 million, or 78.6%, increase in commercial loans to $107.7 million, - - a $3.2 million, or 14.5%, increase in construction loans to $25.0 million, - - a $12.6 million, or 17.4%, increase in home equity loans and lines of credit to $85.4 million, and - - a $16.7 million, or a 78.8%, increase in other consumer loans to $37.9 million. The increase in commercial and commercial real estate loans was primarily due to the development of new business relationships and growth of existing clients. The increase in other consumer loans was a result of ongoing efforts to emphasize growth in shorter term commercial and consumer loan products. These loan increases were partially offset by the following decreases in loans at December 31, 2003, as compared to at December 31, 2002: - - a $2.0 million, or 3.3%, decrease in vehicle loans to $59.4 million, and - - a $28.4 million, or 6.9%, decrease in one- to four-family mortgage loans to $386.5 million, due to an increased number of sales of loans to third parties. TOTAL LIABILITIES. Total liabilities increased $84.0 million, or 9.9%, from $852.0 million at December 31, 2002 to $936.0 million at December 31, 2003. The increase was primarily due to the following: - - a $76.7 million, or 11.4%, increase in deposits from $671.8 million at December 31, 2002 to $748.5 million at December 31, 2003, and - - a $7.8 million, or 108.6%, increase in accrued interest and other liabilities, due to a $9.0 million increase in fed funds borrowed. These increases in liabilities were partially offset by: - - a $469,000, or 0.3%, decrease in Federal Home Loan Bank advances from $173.0 million at December 31, 2002 to $172.5 million at December 31, 2003 as a result of principal payments. The overall increase in deposits were primarily invested in loans. The increases in deposits were a result of Citizens First's operating strategy of controlled balance sheet growth along with a greater emphasis on building relationships with new and existing customers. The $76.7 million net increase in deposits at December 31, 2003 compared to at December 31, 2002 was comprised of the following components: - - an increase in noninterest bearing deposits of $28.8 million, or 127.1%, - - a decrease in NOW checking accounts of $24.0 million, or 24.7%, - - an increase in passbook and savings deposits of $7.9 million, or 10.2%, - - an increase in money market deposit accounts of $78.0 million, or 38.6%, and - - a decrease in certificates of deposit of $14.0 million, or 5.2%, as a result of low market rates, as discussed below. The increase in the money market deposit accounts was primarily due to lower overall rates in short-term accounts and certificates of deposit and to growth in business deposit accounts, which resulted primarily from historically low interest rates that have encouraged customers to move away from longer term, lower fixed rate, certificates of deposit to more liquid money market type accounts and our ongoing effort to attract and retain deposit relationships with businesses throughout our market area. QUALITY OF ASSETS. Non-performing loans were 0.34% of total assets at December 31, 2003, compared to 0.24% at December 31, 2002. Non-performing loans increased $1.4 million, or 56.0%, to $3.8 million at December 31, 2003 from $2.4 million at December 31, 2002. This increase in non-performing loans was primarily due to a $1.4 million increase in non-performing real estate loans and a $230,000 increase in non-performing consumer loans as a result of poorer general economic conditions, offset by a $270,000 decrease in non-performing commercial loans. Non-performing assets, which includes not only non-performing loans, but also real estate owned by the Bank after foreclosure, increased $1.4 million to $4.2 million, or 0.38% of total assets, at December 31, 2003, as compared to $2.8 million, or 0.28%, of total assets at December 31, 2002. This increase in non-performing assets was due to the increase in non-performing loans described above along with a nominal $90,000 increase in other real estate owned. The allowance for loan losses was $11.6 million at December 31, 2003 and $11.1 million at December 31, 2002, or 1.24% of total loans and 309.7% of non-performing loans at December 31, 2003, as compared to 1.33% of total loans and 459.1% of non-performing loans at December 31, 2002. The Company's allowance for loan losses is a critical accounting policy that involves estimates and assumptions about matters that are highly uncertain. Use of a different amount for the allowance could have a material impact on the Company's financial statements. For more information on how the amount of this allowance is determined, please see the caption "Critical Accounting Policies" in this section "Management's Discussion and Analysis of Financial Condition and Results of Operations." STOCKHOLDERS' EQUITY. Stockholders' equity increased $10.0 million from $148.2 million at December 31, 2002 to $158.2 million, as a result of the addition of net income of $12.3 million and a $1.1 million increase due to the allocation of ESOP shares, a $291,000 increase in accumulated other comprehensive income from the unrealized gains or losses on securities and a $464,000 increase in deferred compensation which represents deferred fees owed to members of the Board of Directors. These increases were offset by a $1.4 million increase in treasury shares and dividends of $2.7 million. COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 2003 AND THE TWELVE MONTHS ENDED DECEMBER 31, 2002 The Company changed its fiscal year so that its fiscal year now ends on December 31st, rather than on March 31st. As a result, the Company has filed with the SEC a transition report on Form 10-K for the nine months ended December 31, 2002, and audited financial statements as of and for the nine months ended December 31, 2002 are included with the Company's audited Consolidated Financial Statements. To facilitate understanding the Company's results of operations for the twelve months ended December 31, 2003, however, the following table sets forth the Company's audited results of operations for the twelve months ended December 31, 2003 and the Company's unaudited results of operations for the twelve months ended December 31, 2002:
For the Twelve Year Ended Months Ended December 31, December 31, 2003 2002 ------------ -------------- INTEREST INCOME (unaudited) Loans, including fees $ 56,016 $ 56,240 Federal funds sold and Interest-bearing deposits 325 348 Securities: Tax-exempt 485 495 Taxable 3,589 5,565 ---------- ---------- Total interest income 60,415 62,648 INTEREST EXPENSE Deposits 13,996 17,739 Federal Home Loan Bank advances 9,311 9,130 ---------- ---------- Total interest expense 23,307 26,869 ---------- ---------- NET INTEREST INCOME 37,108 35,779 PROVISION FOR LOAN LOSSES 1,440 1,141 ---------- ---------- NET INTEREST INCOME, after provision for loan losses 35,668 34,638 NONINTEREST INCOME (LOSS) Service charges and other fees 3,113 3,318 Loan servicing fees 1,090 587 Mortgage banking activities 4,961 2,264 Gain (Loss) on sale of investment securities (46) 108 Other 1,189 721 ---------- ---------- Total noninterest income 10,307 6,998 NONINTEREST EXPENSES Compensation and employee benefits 13,322 11,179 Office occupancy and equipment 4,237 3,372 Advertising and business promotion 1,228 804 Stationery, printing and supplies 859 1,571 Data processing 487 392 Deposit statement preparation and collections 689 751 Professional fees 1,418 1,213 Appraisal fees 916 861 Other 4,243 3,430 ---------- ---------- Total noninterest expenses 27,399 23,573 ---------- ---------- INCOME - Before federal income tax expense 18,576 18,063 Federal income tax expense 6,255 6,204 ---------- ---------- NET INCOME $ 12,321 $ 11,859 ========== ========== BASIC EARNINGS PER COMMON SHARE $ 1.58 $ 1.46 ========== ========== DILUTED EARNINGS PER COMMON SHARE $ 1.57 $ 1.46 ========== ==========
NET INCOME. Net income increased $462,000, or 3.9%, for the year ended December 31, 2003 to $12.3 million as compared to $11.9 million for the twelve months ended December 31, 2002, resulting in net earnings of $1.58 per share. The increase in net income for the year was primarily due to a $1.3 million, or 3.7%, increase in net interest income (discussed below) and to a $3.3 million, or 47.3%, increase in noninterest income, partially offset by a $3.8 million, or 16.2%, increase in noninterest expenses, which was primarily due to a $2.1 million, or 19.2% increase in compensation and employee benefits, a $865,000, or 25.7% increase in occupancy expenses and a $205,000, or 16.9%, increase in professional fees, a $813,000, or 23.7%, increase in other noninterest expenses along with a $424,000, or 52.7%, increase in advertising. Contributing to the increase in noninterest income were a $2.7 million, or 119.1%, increase in income from mortgage banking activities, a $503,000, or 85.7%, increase in loan servicing fees and a $468,000, or 64.9%, increase in other noninterest income. These increases are explained in more detail below. NET INTEREST INCOME. Net interest income, before provision for loan loss, increased by $1.3 million to $37.1 million for the year ended December 31, 2003, from $35.8 million for the twelve months ended December 31, 2002. The increase in net interest income, before provision for loan loss, consisted primarily of: - - a $2.2 million, or 3.6%, decrease in total interest income to $60.4 million for the year ended December 31, 2003, from $62.6 million for the twelve months ended December 31, 2002, which is explained in detail below, offset by, - - a $3.6 million, or 13.3%, decrease in total interest expense to $23.3 million for the year ended December 31, 2003, from $26.9 million for the twelve months ended December 31, 2002, which is explained in detail below. The $2.2 million decrease in total interest income for the year ended December 31, 2003, compared to the twelve months ended December 31, 2002, was comprised primarily of a $2.0 million, or 35.5%, decrease in interest income on taxable securities, primarily due to a 167 basis point reduction in the average yield on securities offset by a $15.8 million increase in the average balance. Average interest earning assets increased $53.2 million primarily due to a $61.5 million, or 7.6%, increase in the average balance of loans, which occurred as a result of the growth in deposits and the decrease in cash and cash equivalents. The $3.6 million decrease in total interest expense for the year ended December 31, 2003, compared to the twelve months ended December 31, 2002, was comprised primarily of a $3.7 million, or 21.1%, aggregate decrease in interest expense on savings, NOW, MMDA and certificates of deposit accounts. Earning asset yields have declined by approximately 56 basis points over the last twelve months. Net interest margin continues to compress as existing loans refinance and new loans, mainly commercial and consumer, that are indexed to Prime are added to the portfolio. We believe that this compression could continue until such time as these indexes begin to rise. The possibility exists that rates on deposits could rise sooner than rates on loans further compressing net interest margin. PROVISION FOR LOAN LOSSES. The provision for loan losses increased $299,000, or 26.2%, from $1.1 million for the twelve months ended December 31, 2002 to $1.4 million for the year ended December 31, 2003. The increased provision for loan losses is the result of a $1.4 million increase in non-performing loans. As a result of the increase in non-performing loans and net charge-offs, management felt an increased provision was warranted. Despite the increased provision, the loan loss allowance as a percentage of total loans decreased from 1.33% at December 31, 2002 to 1.24% at December 31, 2003, and the allowance for loan losses as a percentage of non-performing loans decreased from 459.1% at December 31, 2002 to 309.7% at December 31, 2003, in each case primarily as a result of the significant increase in the size of the Bank's loan portfolio. Management considers its allowance for loan losses to be one of its critical accounting policies, meaning that in order to determine the allowance and provision for loan losses, management must make estimates and assumptions about matters that are highly uncertain and as to which different estimates and assumptions could have a material impact on the Company's net income and on the Company's overall financial condition and results of operations. For more information, see the caption "Critical Accounting Policies" in this section of "Management's Discussion and Analysis of Financial Condition and Results of Operations." NONINTEREST INCOME. Noninterest income increased by $3.3 million, or 47.3%, from $7.0 million for the twelve months ended December 31, 2002 to $10.3 million for the year ended December 31, 2003. The increase was primarily due to the following changes between the twelve month period ended December 31, 2002 and the year ended December 31, 2003: a $2.7 million, or 119.1%, increase in mortgage banking activities, due to increased sales of fixed rate one- to four-family loans, which occurred as a result of an increased volume of refinancings. (The rights to service these loans and the income associated with those rights were retained by Citizens First.) The following factors contributed to the increased sale of loans from the twelve months ended December 31, 2002 to the year ended December 31, 2003: During the year ended December 31, 2003, the Bank originated $443.7 million of one- to four-family residential mortgage loans, an increase of $96.6 million, or 27.8%, from $347.1 million of one-to four-family residential mortgage loans originated by the Bank for the twelve months ended December 31, 2002. At December 31, 2003, the Bank had $2.0 million of one- to four-family residential mortgage loans held for sale, an increase of $427,000, or 27.4%, from $1.6 million of one-to four-family residential mortgage loans held for sale by the Bank at December 31, 2002, - a $503,000, or 85.7%, increase in loan servicing fees due to the increase in loans sold with servicing retained, and - a $468,000, or 64.9%, increase in other noninterest income, partially offset by, - a $205,000, or 6.2%, decrease in service charges and other fees, and - a $154,000, or 142.6%, decrease in gain on sale of securities. As indicated above, increases during the period, much of the increase was due to the large number of refinancings and subsequent sales of long term, fixed-rate one- to four-family residential mortgage loans. Generally, many of the customers that could have refinanced their loan during the period have done so. We do not expect the number of refinancings and gains on sale that are included in line item "Mortgage Banking Activities" subsequent to those refinancings to repeat to the same extent in 2004. This possible reduction in noninterest income could have a significant impact on earnings in future quarterly periods and in the year ended December 31, 2004. NONINTEREST EXPENSE. Noninterest expense increased $3.8 million, or 16.2%, to $27.4 million for the year ended December 31, 2003, from $23.6 million for the twelve months ended December 31, 2002, primarily due to the following: - An increase of $2.1 million, or 19.2%, in compensation, payroll taxes and employee benefit expenses, due to an increase in commissions to lending personnel as a result of increased loan production volumes, increased benefit costs and a 13.0% increase in the number of employees, - A $865,000, or 25.7%, increase in occupancy and equipment expense due partially to additional branches and disposal of abandoned assets. - a $424,000, or 52.7%, increase in advertising and business promotion expense, due to increased advertising efforts by the Bank, - a $813,000, or 23.7%, increase in other noninterest expenses. These increases were partially offset by a $712,000, or 45.3%, decrease in stationery, printing and supplies. We continue to renovate the interiors of many of the branch offices and we have begun to renovate the main office to make them more conducive to sales and service. This investment, along with other ongoing investments in training, is expected to increase office occupancy and other expenses in the near term. INCOME TAXES. Federal income taxes for the year ended December 31, 2003 were $6.3 million, an increase of $51,000, or 0.8%, from $6.3 million for the twelve months ended December 31, 2002. The effective tax rates for 2003 and 2002 were 33.7% and 34.3%, respectively. COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED MARCH 31, 2002 AND 2001 NET INCOME. Net income increased $7.4 million, or 231.1%, for the fiscal year ended March 31, 2002 to $10.5 million resulting in net earnings of $1.23 per share. The increase in net income for the fiscal year was primarily due to a 35.0% increase in net interest margin and a $7.1 million contribution expense and an accompanying reduction to the tax provision of $2.4 million in the prior period due to the formation of Citizens First Foundation. Excluding the prior year contribution, net income for the fiscal year would have increased $2.7 million, or 34.5%, from $7.8 million to $10.5 million. Contributing to the increase was 811,000 or 24.8%, increase in non-interest income, primarily due to an increase in service charges and other fees. NET INTEREST INCOME. Net interest income before provision for loan losses increased by $9.3 million, or 35.0%, to $35.7 million for 2002 from $26.4 million for 2001. Total interest income increased $5.8 million, or 9.6%, to $66.3 million for 2002 from $60.5 million for 2001. Interest income on loans increased $5.2 million primarily due to increases in the average balance in loans but was offset partially by $3.4 million decrease in total interest expense due to lower average market rates. Interest earning assets increased $108.2 million primarily due to a $82.0 million, or 12.6%, increase in the average balance of loans, and a $34.2 million, or 38.1%, increase in the average balance of securities from funds invested as a result of the growth in deposits and the increase in Federal Home Loan bank advances. Total interest expense decreased $3.4 million, or 10.0%, to $30.7 million for the fiscal year ended March 31, 2002 from $34.1 million for the fiscal year ended March 31, 2001 due to an 55 basis point reduction in overall market interest rates. This decrease was primarily the result of 11 interest rate reductions over the period. A $45.7 million, or 12.5%, decrease in the average balance of certificates of deposit combined with 74 basis point rate decrease contributed $4.9 million of the $5.8 million reduction to retail deposit expense. This was partially offset by a $2.4 million, or 42.1%, increase in interest expense on Federal Home Loan Bank advances to $8.1 million for 2002 from $5.7 million in 2001. The increase in interest expense on Federal Home Loan Bank advances was primarily due to a $40.3 million increase in the average balance of Federal Home Loan Bank advances, offset by lower market interest rates. PROVISION FOR LOAN LOSSES. The provision for loan losses increased $216,000, or 27.7%, from $780,000 for fiscal 2001 to $996,000 for fiscal 2002. The addition to the allowance for loan losses for fiscal 2002 reflects management's determination to maintain the overall loan loss allowance in consideration of its applied methodology, the assessment of the composition of and trends in non-accruing loans, the current fiscal year increase in net charge-offs and the growth in the loan portfolio. Even though the increase in non-accruing one- to four-family loans was offset by the better than anticipated performance of commercial real estate, commercial and consumer loans, management felt the increased provision was warranted considering the increased growth of those types of loans, which, despite better than expected performance, bear a higher degree of risk than one- to four-family loans. Despite the increased provision, the loan loss allowance as a percentage of total loans decreased from 1.58% at March 31, 2001 to 1.47% at March 31, 2002. The allowance for loan losses as a percentage of nonperforming loans increased from 598.4% at March 31, 2001 to 614.6% at March 31, 2002. Management considers its allowance for loan losses to be one of its critical accounting policies, meaning that in order to determine the allowance and provision for loan losses, management must make estimates and assumptions about matters that are highly uncertain and as to which different estimates and assumptions would have a material impact on the Company's net income and on the Company's overall financial condition and results of operations. For more information, see the caption "Critical Accounting Policies" in this section of "Management's Discussion and Analysis of Financial Condition and Results of Operations." NONINTEREST INCOME. Noninterest income increased by $811,000, or 24.8%, from $3.3 million in the fiscal year ended March 31, 2001 to $4.1 million for the fiscal year ended March 31, 2002. The increase was primarily due to a $649,000, or 40.0%, increase in service charges and other fees due to additional fees charged to retail deposit accountholders as a result of a change to the fee structure of retail deposit products. Income from mortgage banking activities increased $340,000, or 103.0%, from $330,000 in the fiscal year ended March 31, 2001 to $670,000 in 2002 due to increased sales of fixed rate one- to four-family loans as a result of increased refinancings. NONINTEREST EXPENSE. Non-interest expense decreased $2.0 million, or 8.0%, from $24.7 million for the fiscal year ended March 31, 2001 to $22.8 million for the fiscal year ended March 31, 2002 primarily due to the $7.1 million contribution expense in the prior period due to the formation of Citizens First Foundation at the time of the conversion from a mutual savings bank to a stock savings bank. Without the prior period contribution expense, noninterest expense would have increased $5.0 million, or 27.4% from $17.7 million for fiscal 2001 to $22.8 million for fiscal 2002. Compensation and benefit expense increased $2.1 million, or 24.2%, primarily due to an addition of staff, an increase in commissions to lending personnel due to increased loan volumes and the increased cost for the ESOP due to a full year's accrual versus only one month for the previous fiscal year and due to the higher share price of the Company's stock. Professional fees increased $498,000, or 122.1%, due to the increased costs associated with becoming a public company, other public reporting expenses, and additional costs related to compliance with recent regulatory changes regarding consumer privacy and the Bank's change in retail deposit products. Advertising and business promotion expense increased $94,000, or 18.1%. The opening of a new office in Lexington and the remodeling of our Marysville branch were among the more visible steps we took this past fiscal year to better serve our market area. Printing and supplies increased $329,000, or 28.7%, deposit statement preparation increased $155,000, or 26.1% and appraisal fee expense increased $359,000, or 74.3% due to increased loan application volume. Other non-interest expenses increased $1.3 million, or 63.6%, primarily as a result of the engagement of consultants to perform compensation reviews, operational efficiency studies, a facilities review, and overall technology review. We also plan to renovate the interiors of all our branches during 2002 to make them more conducive to sales and service. This investment along with other upcoming investments in training and a system-wide data processing upgrade could increase office occupancy and other expenses in the near term. INCOME TAXES. Income taxes for the fiscal year ended March 31, 2002 were $5.4 million, an increase of $4.5 million, or 461.5%, from $965,000 for the fiscal year ended March 31, 2001. The effective tax rates for the fiscal year ended March 31, 2002 and the fiscal year ended March 31, 2001 were 33.9% and 23.2%, respectively. The lower effective tax rate in the fiscal year ended March 31, 2001 was primarily attributable to the reduction of a deferred tax asset valuation allowance of $500,000. The valuation allowance was originally established related to the utilization of a contribution deduction carry-forward resulting from a contribution to a foundation in 1998. Under the Internal Revenue Code, Citizens First may only deduct up to 10% of its consolidated taxable income before the charitable contribution in any one-year. The excess of the deductible amount is deductible over each of the five succeeding taxable years, subject to a 10% limitation each year. The valuation allowance was reversed based on estimates that the contribution deduction carry-forward are expected to be fully utilized based on the increase in income resulting from the proceeds received in the mutual to stock conversion. AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COST The following table (000s omitted) presents certain information for the years indicated regarding average balances of assets and liabilities, as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and the resulting average yields and costs. The yields and costs for the years indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the years presented. Average balances were derived from monthly balances.
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------------- 2003 2002 ---------------------------------------------------------------------------------------- AVERAGE AVERAGE AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE ----------- ----------- ---- ----------- ----------- ---- INTEREST EARNING ASSETS: Loans (1) $ 874,377 $ 56,016 6.41% $ 812,831 $ 56,240 6.92% Investment securities (2) 97,519 3,706 3.80 104,059 5,565 5.35 FHLB Stock 9,219 368 3.99 8,305 348 4.19 Federal funds sold 2,513 25 0.99 -- -- -- Interest-bearing deposits 30,888 300 .97 36,119 495 1.37 ----------- ----------- ---- ----------- ----------- ---- Total interest-earning assets 1,014,516 60,415 5.96 961,314 62,648 6.52 ----------- ----------- ---- ----------- ----------- ---- Noninterest-earning assets 52,594 19,333 ----------- ----------- Total assets $ 1,067,110 $ 980,647 =========== =========== INTEREST-BEARING LIABILITIES: Deposits: Savings $ 73,351 $ 567 .77% $ 80,219 $ 767 0.96% NOW 85,368 904 1.06 92,104 1,206 1.31 MMDA 240,685 3,808 1.58 182,745 3,968 2.17 Certificates of deposit 264,834 8,717 3.29 284,971 11,798 4.14 ----------- ----------- ---- ----------- ----------- ---- Total interest earning deposits 664,238 13,996 2.11 640,039 17,739 2.77 FHLB advances and other borrowings 173,896 9,311 5.35 163,367 9,130 5.59 ----------- ----------- ---- ----------- ----------- ---- Total interest-bearing liabilities 838,134 23,307 2.78 803,406 26,869 3.34 Non-interest earning deposits 65,325 20,648 Other noninterest-bearing liabilities 10,789 9,955 ----------- ----------- Total liabilities 914,248 834,009 Equity 152,862 146,638 ----------- ----------- Total liabilities and equity $ 1,067,110 $ 980,647 =========== =========== Net interest-earning assets $ 176,382 $ 157,908 =========== =========== Net interest income $ 37,108 $ 35,779 =========== =========== Interest rate spread (3) 3.18% 3.18% Net interest margin as a percentage of interest-earning assets (4) 3.66% 3.72% Ratio of interest-earning assets to interest-bearing liabilities 121.04% 119.65%
For the Twelve Months Ended March 31, 2002 2001 ---- ---- Average Average Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate ----------- ----------- ------- ----------- ----------- -------- INTEREST EARNING ASSETS: Loans (1): $ 733,097 $ 57,678 7.87% $ 651,084 $ 52,491 8.06% Investment securities (2): 123,894 7,249 5.85 89,742 6,080 6.77 FHLB Stock 6,828 489 7.16 5,651 345 6.11 Federal funds sold -- -- -- 1,193 64 5.36 Interest-bearing deposits 22,103 931 4.21 30,056 1,537 5.11 ----------- ----------- ---- ----------- ----------- ---- Total interest-earning assets 885,922 66,347 7.49 777,726 60,517 7.78 ----------- ----------- ---- ----------- ----------- ---- Noninterest-earning assets 27,312 37,420 ----------- ----------- Total assets $ 913,234 $ 815,146 =========== =========== INTEREST-BEARING LIABILITIES: Deposits: Savings $ 79,401 $ 1,533 1.93% $ 89,418 $ 2,136 2.39% NOW 73,099 1,359 1.86 71,453 1,440 2.02 MMDA 124,754 4,104 3.29 98,709 4,338 4.39 Certificates of deposit 320,013 15,562 4.86 365,663 20,471 5.60 ----------- ----------- ---- ----------- ----------- ---- Total interest earning deposits 597,267 22,558 3.78 625,243 28,385 4.54 FHLB advances and other borrowings 130,645 8,133 6.23 90,348 5,725 6.34 ----------- ----------- ---- ----------- ----------- ---- Total interest-bearing liabilities 727,912 30,691 4.22 715,591 34,110 4.77 Non-interest earning deposits 24,812 17,567 Other noninterest-bearing liabilities 9,929 5,196 ----------- ----------- Total liabilities 762,653 738,354 Equity 150,581 76,792 ----------- ----------- Total liabilities and equity $ 913,234 $ 815,146 =========== =========== Net interest-earning assets $ 158,010 $ 62,135 =========== =========== Net interest income $ 35,656 $ 26,407 =========== =========== Interest rate spread (3) 3.27% 3.01% Net interest margin as a percentage of interest-earning assets (4) 4.02% 3.40% Ratio of interest-earning assets to interest-bearing liabilities 121.71% 108.68%
(1) Balances are net of deferred loan origination costs, undisbursed proceeds of construction loans in process, and include nonperforming loans. (2) Includes investment securities available-for-sale and held-to-maturity. (3) 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. (4) Net interest margin represents net interest income as a percentage of average interest-earning assets. 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 Citizens First'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 sum of the prior columns). The changes attributable to the combined impact of volume and rate have been allocated on a proportional basis between changes in rate and volume. (000'S Omitted)
Year Ended December 31, 2003 Year Ended March 31, 2002 Compared to Compared to Year Ended December 31, 2002 Year Ended March 31, 2001 Increase (Decrease) Due to Increase (Decrease) Due to Rate Volume Net Rate Volume Net --------- --------- --------- --------- --------- --------- INTEREST-EARNING ASSETS: Loans $ (4,482) $ 4,258 $ (224) $ (1,425) $ 6,612 $ 5,187 Investment securities (1,509) (350) (1,859) (1,145) 2,314 1,169 FHLB stock (18) 38 20 72 72 144 Federal funds sold 25 -- 25 -- (64) (64) Interest-earning deposits (123) (72) (195) (199) (407) (606) --------- --------- --------- --------- --------- --------- Total interest-earning assets (6,107) 3,874 (2,233) (2,697) 8,527 5,830 --------- --------- --------- --------- --------- --------- INTEREST-BEARING LIABILITIES: Deposits: Savings (134) (66) (200) (364) (239) (603) NOW (214) (88) (302) (114) 33 (81) MMDA (1,418) 1,258 (160) (1,379) 1,145 (234) Certificates of deposit (2,247) (834) (3,081) (2,353) (2,556) (4,909) --------- --------- --------- --------- --------- --------- Total deposits (4,013) 270 (3,743) (4,210) (1,617) (5,827) FHLB advances and other borrowings (407) 588 181 (145) 2,553 2,408 --------- --------- --------- --------- --------- --------- Total interest-bearing liabilities (4,420) 858 (3,562) (4,355) 936 (3,419) --------- --------- --------- --------- --------- --------- Increase (decrease) in net interest income $ (1,687) $ 3,016 $ 1,329 $ 1,658 $ 7,591 $ 9,249 ========= ========= ========= ========= ========= =========
Includes securities available-for-sale and held-to-maturity on a tax equivalent basis. LIQUIDITY AND CAPITAL RESOURCES GENERAL. Based on the following, Citizens First considers its liquidity and capital resources sufficient to meet its outstanding short-term and long-term needs. Liquidity is the Company's ability to meet its current and future needs for cash. Citizens First further defines liquidity as the ability to have funds available, without incurring excessive cost, to respond to the needs of depositors and borrowers and to satisfy its financial commitments, as well as maintaining the flexibility to take advantage of investment opportunities. Many factors affect a bank's ability to meet its liquidity needs, including variation in the markets served, the bank's asset-liability mix, its reputation and credit standing in the market and general economic conditions. Citizens First's primary sources of funds consist of deposits, loan repayments, payments of interest on loans, proceeds from the sale of loans originated for sale, maturities and sales of investment securities and borrowings from the Federal Home Loan Bank, cash on hand and cash on deposit. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, loan prepayments, and mortgage loan originations and sales are greatly influenced by general interest rates, economic conditions and competition. Additionally, dividends from the Bank may be a source of funding for the Company. The Bank is subject to regulatory requirements regarding these dividends. These regulatory requirements are further discussed in Note 12 to the Company's Consolidated Financial Statements. Citizens First and the Company primarily use their funds for the following: - - To originate mortgages and other new loans, - - To fund withdrawals of deposits and to pay interest on deposits, - - To fund takedowns on loan commitments and letters of credit, - - To invest in securities, including Federal Home Loan Bank stock, - - To pay principal and interest on its borrowings, including interest on Federal Home Loan Bank advances, - - To fund any capital expenditures, which, for the upcoming fiscal year, are expected to include renovation of the interiors of the remaining branch offices that began in 2002, - - To pay dividends to its shareholders, and - - To fund repurchases of the Company's stock pursuant to common stock repurchase plans approved by the Company's Board of Directors from time to time, which repurchase plans are described in detail below. Liquidity management is both a daily and long-term responsibility of management. Citizens First adjusts its investments in liquid assets based upon management's assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning assets and costs of interest-bearing liabilities, and (4) the objectives of its asset/liability management program, which are to balance and control the risks and financial position of Citizens First. Excess liquid assets are invested generally in interest-earning overnight deposits and short-and intermediate-term U. S. Government and agency obligations. Citizens First's most liquid assets are cash and due from depository institutions as well as securities maturing in one year or less. The levels of these assets are dependent on Citizens First's operating, financing, lending and investing activities during any given period. At December 31, 2003, cash and deposits in other depository institutions totaled $33.6 million and available-for-sale securities totaled $79.7 million. In addition, at December 31, 2003, Citizens First had the ability to borrow a total of approximately $238.0 million from the Federal Home Loan Bank of Indianapolis. On that date, Citizens First had advances outstanding from the Federal Home Loan Bank of Indianapolis of $172.5 million. CONTRACTUAL OBLIGATIONS AND COMMITMENTS As disclosed in the Notes to the Consolidated Financial Statements, the Company has certain obligations and commitments to make future payments under contracts. At December 31, 2003, the aggregate contractual obligations and commitments are: (000's Omitted)
Payments Due by Period ---------------------------------------------------------------------- Less than 1 to 3 4 to 5 After 5 Contractual Obligations 1 Year Years Years Years Total - ------------------------- ---------- ---------- ---------- ---------- ---------- Total Deposits $ 110,769 55,683 27,328 2,683 196,463 Long-Term Borrowings 32,325 62,459 63,851 13,899 172,534 Short-Term Borrowings 19,000 -- -- -- 19,000 Annual Rental/Purchase -- Commitments Under Noncancelable Leases/Contracts 1,826 119 123 -- 2,068 ---------- ---------- ---------- ---------- ---------- Total 163,920 118,261 91,302 16,582 390,065 ========== ========== ========== ========== ==========
Expiration by Period ---------------------------------------------------------------------- Less than 1 to 3 4 to 5 After 5 Other Commitments 1 Year Years Years Years Total - ------------------------- ---------- ---------- ---------- ---------- ---------- Letters of Credit 5,397 -- -- -- 5,397 Commitments to Extend Credit 212,024 -- -- -- 212,024 ---------- ---------- ---------- ---------- ---------- Total 217,421 -- -- -- 217,421 ========== ========== ========== ========== ==========
OPERATING ACTIVITIES. Citizens First originates fixed-rate mortgage loans conforming to Freddie Mac guidelines generally for sale in the secondary market. The proceeds of these sales provide the Bank with funds for both additional lending and liquidity to meet its current obligations. Citizens First sold $325.0 million of fixed-rate mortgage loans during the period ended December 31, 2003 and $188.0 million of these loans during the nine months ended December 31, 2002. INVESTING ACTIVITIES. The primary investing activities of Citizens First are the origination of loans to be held for investment, the purchase and sale of securities and capital expenditures. The following table shows those activities engaged in by Citizens First during the period ended December 31, 2003 the nine months ended December 31, 2002 and the fiscal year ended March 31 2002:
For the Year For the Nine For the Year Ended Months Ended Ended December 31, 2003 December 31, 2002 March 31, 2002 ------------------ ------------------ ------------------ Loan originations, exclusive of repayments $ 761,920 $ 534,784 $ 465,926 Maturities of securities 48,867 22,744 70,290 Sale of securities 25,990 6,963 35,040 Purchase of securities 53,964 12,070 128,623
For the fiscal year ending December 31, 2004, upcoming capital expenditures are expected to include renovation of the interiors of the remaining branch offices that began in 2002 and purchases of land for future branch expansion. FINANCING ACTIVITIES. Financing activities consist primarily of activity in deposit accounts, Federal Home Loan Bank advances, payment of dividends to the Company's shareholders and repurchase of the Company's stock pursuant to various common stock repurchase programs approved by the Company's Board of Directors from time to time. Citizens First experienced a net increase in total deposits of $76.7 million for the year ended December 31, 2003 and a net increase in total deposits of $37.8 million for the nine months ended December 31, 2002. Deposit flows are affected by market interest rates, the interest rates and products offered by Citizens First and its competitors and other factors. Citizens First generally manages the pricing of its deposits to be competitive with other local banks and to increase core deposit relationships. Occasionally, Citizens First offers promotional rates on certain deposit products in order to attract deposits. During the year ended December 31, 2003 and the nine months ended December 31, 2002, Federal Home Loan Bank advances decreased $469,000 and increased $21.6 million, respectively. Federal Home Loan Bank advances are collateralized by mortgage loans and investment securities under a blanket collateral agreement. For additional information about Federal Home Loan Bank advances, see Note 8 to the Company's Consolidated Financial Statements. The 2002 increase in Federal Home Loan Bank advances were used to fund Citizens First's increase in its loan portfolio. At December 31, 2003, Citizens First had outstanding unfunded commitments to originate loans or to refinance existing loans of $118.2 million, $48.1 million of which had fixed interest rates. These loans are generally to be secured by properties located in its market area. Citizens First anticipates that it will have sufficient funds available to meet its current loan commitments. Loan commitments have, in recent periods, been funded through cash and cash equivalents, increased deposits, sales of loans and sales and maturities of securities or through Federal Home Loan Bank borrowings. In addition, certificates of deposit that are scheduled to mature in one year or less from December 31, 2003 total $110.8 million. To the extent that Citizens First needs to fund maturing certificates of deposit, they will also be funded through cash and cash equivalents, increased deposits, sales of loans and sales and maturities of securities or through Federal Home Loan Bank borrowings. Based on past experience, however, management believes that a significant portion of these certificates of deposit will remain with Citizens First. During the year ended December 31, 2003 and the nine months ended December 31, 2002, dividends were paid to shareholders in the amounts of $2.7 million and $1.9 million, respectively. The Company intends to continue to pay regular quarterly dividends. The declaration and payment of dividends, however, are subject to the discretion of the Board of Directors and to compliance requirements under applicable law. For additional information, see Note 12 to the Company's Consolidated Financial Statements. Determination of the timing and amount of future dividends, if any, will depend upon our results of operations, financial condition, cash requirements, future business prospects, general business conditions and other factors that the Board of Directors may deem relevant. At this time, the Company does not believe that there are any restrictions that would currently materially limit the Company's ability to pay dividends or that the Company believes are likely to limit materially the future payment of dividends on its common stock. On September 26, 2002, the Company's Board of Directors approved a plan to repurchase up to 428,701, or 5%, of its outstanding shares of its common stock. Under the common stock repurchase plan, the Company may purchase shares of its common stock in the open market at prevailing prices or in privately negotiated transactions from time to time depending upon market conditions and other factors. As of December 31, 2003, the Company had repurchased 124,900 shares of its common stock pursuant to this repurchase plan at a weighted average price of $20.35 per share. In addition, by the end of July 2002, the Company announced that it had completed the repurchase of 476,338 shares of its outstanding common stock, at an average price of $20.72 per share pursuant to another repurchase program. This repurchase program was in addition to a prior repurchase program completed in December 2001, pursuant to which the Company repurchased 476,388 shares of its outstanding common stock, at an average price of $15.66 per share. Repurchased shares are held in treasury and may be used in connection with employee benefits and other general corporate purposes. Management does not believe that these past purchases have had, nor are future purchases expected to have, a significant impact on the Company's liquidity. For more information on the Company's stock repurchase programs, see Note 15 to the Company's Consolidated Financial Statements. REGULATORY CAPITAL REQUIREMENTS. Citizens First is subject to various regulatory capital requirements administered by the Federal Deposit Insurance Corporation, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2003, Citizens First exceeded all of its regulatory capital requirements. Citizens First is considered "well capitalized" under regulatory guidelines. See Note 11 to the Company's Consolidated Financial Statements. IMPACT OF NEW ACCOUNTING STANDARDS. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain embedded derivatives, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement amends SFAS No. 133 to reflect the decisions made as part of the Derivatives Implementation Group (DIG) and in other FASB projects or deliberations. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. Adoption of the Standard did not have a material effect on the Company's Condensed Consolidated Financial Statements. AICPA Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3), addresses the accounting for differences between contractual cash flows and cash flows expected to be collected from the initial investment in loans acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes loans acquired in purchase business combinations and does not apply to loans originated by the entity. The SOP prohibits carrying over or creation of valuation allowances in the initial accounting for loans acquired in a transfer. It is effective for loans acquired in fiscal years beginning after December 15, 2004. The effect of this new guidance on the consolidated financial statements will depend on future acquisition activity, thus, its impact is not readily determinable. EFFECT OF INFLATION AND CHANGING PRICES. The Company's Consolidated Financial Statements and related financial data presented have been prepared in accordance with generally accepted accounting principles in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Bank's operations and in increased loan amounts and in increased interest rates (which must include a real rate of return and an additional amount to reflect expected inflation over the term of the loan). Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS QUALITATIVE ASPECTS OF MARKET RISK. Citizens First's primary market risk exposure is interest rate risk. Sudden fluctuations in market interest rates are inherently uncertain and could have a negative impact on the earnings of Citizens First to the extent that the interest rates on assets and liabilities do not change at the same speed, to the same extent or on the same basis. For example, Citizens First's assets include a large number of fixed-rate mortgage loans. As a result, during periods of rising interest rates, there is a risk that Citizens First's interest expense will increase faster than its interest income. Citizens First's principal objectives regarding interest rate risk management are to evaluate regularly the interest rate risk inherent in certain balance sheet accounts, to determine the level of risk appropriate given Citizens First's financial condition and outlook, operating environment, capital and liquidity requirements and performance objectives and to manage interest rate risk consistent with the Bank's Board of Directors' approved guidelines. Citizens First has an Asset/Liability Management Committee that is responsible for accomplishing the principal objectives of interest rate risk management. The Committee regularly reviews the Bank's guidelines and strategies affecting the Bank's asset/liability management related activities to determine if they are adequate based on estimated market risk sensitivity, policy limits set by the Bank's Board and overall market interest rate levels and trends. The Committee is composed of members of management and the Bank's Board of Directors and regularly meets to review the Bank's asset/liability mix. It also reports trends, interest rate risk position and results of current interest rate risk management strategies and recommends any changes to strategies to the Board of Directors quarterly. In recent years, Citizens First has used the following strategies to manage interest rate risk: (1) emphasizing the origination of adjustable-rate loans and the sale of longer-term, fixed-rate loans; (2) emphasizing shorter term consumer loans; (3) maintaining a high quality portfolio of short to intermediate term securities; (4) maintaining high levels of liquidity; and (5) using Federal Home Loan Bank advances to better structure the maturities of its interest rate sensitive liabilities. Adverse market interest rate changes between the time that a customer receives a rate-lock commitment on a mortgage and when the fully funded mortgage loan is sold to an investor can erode the value of that mortgage. Citizens First enters into forward sales contracts in order to mitigate this particular interest rate risk. Citizens First accepts credit risk in forward sales contracts should the other party default, in which case Citizens First would be compelled to sell the mortgages to another party at the current market price. Therefore, if market interest rates increased from the date of the forward sales contract and the other party defaulted, Citizens First would most likely have to sell the mortgage to another party at a lower price, which would reduce earnings or create losses on this mortgage. More recently, Citizens First has used some of its excess liquidity to increase its loan and securities portfolios. As liquidity is reduced, Citizens First's sensitivity to interest rate movements is expected to increase. QUANTITATIVE ASPECTS OF MARKET RISK. Citizens First uses a simulation model based on discounted cash flows to measure the potential impact on its net interest income of hypothetical changes in market interest rates. The model forecasts the Bank's net interest income for the next twelve months assuming that there are no changes in interest rates or the mix of assets and liabilities on the balance sheet from the end of the prior period. After this initial forecast, the model subjects the balance sheet to instantaneous and sustained rate changes of 100 and 200 basis points to the treasury yield curve. In order to determine the possible effect of the rate changes, the model uses various assumptions. Among others, these assumptions include assumptions regarding the following: - - the shape of the yield curve; - - the pricing characteristics of and pricing decisions regarding loans based on previous rates charged by the Bank; - - changes in deposits and borrowings based on previous rates charged by the Bank and other competitive conditions; - - reinvestments of cash flows from assets and liabilities based on current market interest rates; - - the lack of any changes in the mix of assets and liabilities on the balance sheet; - - the degree to which certain assets and liabilities with similar maturities or periods to repricing react to changes in market interest rates based on particular characteristics of those assets and liabilities; - - expected prepayment rates on loans and investments based on industry standards and the current interest rate environment; - - certificates of deposit and other deposit flows based on expected maturity dates; and - - expected growth based on the Bank's projections. The table below sets forth, as of December 31, 2003, estimated net interest income and the estimated changes in Citizens First's net interest income for the next twelve month period that could occur as a result of instantaneous changes in market interest rates of 100 and 200 basis points:
Estimated Change in Annual Net Interest Income At December 31, 2003 (Dollars in thousands) Increase/(Decrease) in Market Interest ----------------------------------------------- Rates in Basis Points (Rate Shock) Amount $ Change % Change - ---------------------------------------- ------------ ------------ ------------ 200 $ 42,122 $ 3,051 7.81% 100 40,518 1,447 3.70 Static 39,071 -- -- -100 37,867 (1,204) (3.08) -200 36,962 (2,109) (5.40)
The above table indicates that in the event of a sudden and sustained decline in prevailing market interest rates, Citizens First's net interest income would be expected to decrease. As noted above, computation of the prospective effect of hypothetical interest rate changes is based on a number of assumptions. The calculation of the interest rate sensitivity of the Company could vary significantly if different assumptions were used, or if the Company's response to changes in interest rates included changes in the mix of assets and liabilities in its balance sheet. Other shortcomings also exist in the table. These shortcomings include the following, among others: - - Although certain assets may have similar maturities or repricing characteristics, they may react in different degrees to changes in interest rates. - - The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. - - Certain assets, such as adjustable-rate, residential mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. - - In the event of a change in interest rates, expected rates of repayments on loans and early withdrawals from time deposits could deviate significantly from those assumed in calculating the table. - - If interest rates increased, it is also possible that the increased mortgage payments required of certain borrowers could result in an increase in delinquencies and defaults. - - Changes in interest rates could also affect the volume and profitability of the Bank's lending operations. As a result of these and other shortcomings in the model determining the prospective effects of interest rate changes, the computations in the table should not be relied upon as indicative of actual results in the event of changes in market interest rates. Further, the computations do not reflect any actions that management may undertake to respond to changes in interest rates. The notional and estimated fair value of the Bank's forward sales contracts used to manage risk positions associated with residential mortgage loans were as follows:
Notional Estimated Amount Fair Value ------------ ------------ (Dollars in thousands) December 31, 2003 $ 5,753 $ 5 December 31, 2002 $ 25,700 $ 32
Forward sales contracts as of December 31, 2003 have settlement dates of less than 90 days. The weighted average settlement interest rate for these contracts was 5.95%. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the Nasdaq National Market under the symbol "CTZN". As of March 1, 2004, the Company had approximately 1,076 holders of record. The following table sets forth, for the quarters indicated, the high and low bid information the common stock and the dividends paid. The Company's common stock began trading on March 7, 2001. The Company is subject to the requirements of Delaware law, which generally limits dividends to an amount equal to the excess of the net assets of the Company (the amount by which total assets exceed total liabilities) over its statutory capital or, if there is no excess, to its net profits for the current and/or immediately preceding fiscal year.
For the Twelve Months Ended December 31, 2003 --------------------------------------------------------------- 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter ------------ ------------ ------------ ------------ High $ 24.47 $ 22.14 $ 22.80 $ 22.00 Low $ 20.73 $ 19.69 $ 19.40 $ 18.34 Dividend Paid $ 0.09 $ 0.09 $ 0.08 $ 0.08
For the Nine Months Ended December 31, 2002 --------------------------------------------------------------- 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter ------------ ------------ ----------- ------------ High N/A $ 21.96 $ 22.92 $ 23.33 Low N/A $ 21.76 $ 22.18 $ 22.23 Dividend Paid N/A $ 0.08 $ 0.08 $ 0.08
FINANCIALS REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS page 66 CONSOLIDATED FINANCIAL STATEMENTS Balance Sheets page 68 Statements of Income page 69 Statements of Changes in Stockholders' Equity page 70 Statements of Cash Flows page 71 Notes to Consolidated Financial Statements page 72-93 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors Citizens First Bancorp, Inc. and Subsidiary Port Huron, Michigan We have audited the accompanying consolidated balance sheet of Citizens First Bancorp, Inc. and subsidiary as of December 31, 2003, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Citizens First Bancorp, Inc. and subsidiary as of December 31, 2003, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. /s/BDO Seidman, LLP Grand Rapids, Michigan March 12, 2004 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors Citizens First Bancorp, Inc. and Subsidiary Port Huron, Michigan We have audited the accompanying consolidated balance sheet of Citizens First Bancorp, Inc. and subsidiary as of December 31, 2002 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the nine months ended December 31, 2002 and the year ended March 31, 2002. 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 auditing standards generally accepted in the United States of America. 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 referred to above present fairly, in all material respects, the consolidated financial position of Citizens First Bancorp, Inc. and subsidiary as of December 31, 2002 and the results of their operations and their cash flows for the nine months ended December 31, 2002 and the year ended March 31, 2002, in conformity with accounting principles generally accepted in the United States of America. /s/Plante & Moran PLLC Auburn Hills, Michigan February 13, 2003 CONSOLIDATED BALANCE SHEETS (000S OMITTED)
December 31, December 31, 2003 2002 --------------- --------------- ASSETS CASH AND CASH EQUIVALENTS Cash and due from depository institutions $ 30,426 $ 10,893 Federal funds sold 2,165 -- Interest-bearing deposits in other depository institutions 1,056 29,463 --------------- --------------- Total cash and cash equivalents 33,647 40,356 Securities available for sale, at fair value (Note 2) 79,672 100,382 Federal Home Loan Bank stock, at cost 9,416 9,180 Loans held for sale (Note 3) 1,984 1,557 Loans, less allowance for loan losses of $11,664 and $11,082 (Note 4) 929,201 819,136 Premises and equipment (Note 5) 23,268 14,989 Accrued interest income and other assets (Notes 6 and 9) 17,072 14,584 --------------- --------------- Total assets $ 1,094,260 $ 1,000,184 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Noninterest-bearing $ 51,498 $ 22,675 Interest-bearing (Note 7) 697,033 649,155 --------------- --------------- Total deposits 748,531 671,830 Federal Home Loan Bank advances (Note 8) 172,534 173,003 Accrued interest expense and other liabilities (Note 10) 15,008 7,196 --------------- --------------- Total liabilities 936,073 852,029 COMMITMENTS AND CONTINGENCIES (Notes 10 and 13) -- -- STOCKHOLDERS' EQUITY (Notes 11, 12, 15 and 16) Preferred stock - $.01 par value; Authorized - 1,000,000 shares; No shares issued and outstanding -- -- Common stock - $.01 par value; Authorized - 20,000,000 shares; Issued - 9,526,761 shares 95 95 Additional paid-in capital 92,911 92,528 Retained earnings 92,684 83,044 Accumulated other comprehensive income 613 322 Treasury stock, at cost (1,206,517 and 1,136,820 shares) (21,787) (20,342) Deferred compensation obligation (Note 10) 2,054 1,590 Unearned compensation - ESOP (Note 10) (8,383) (9,082) --------------- --------------- Total stockholders' equity 158,187 148,155 --------------- --------------- Total liabilities and stockholders' equity $ 1,094,260 $ 1,000,184 =============== ===============
CONSOLIDATED STATEMENTS OF INCOME (000'S OMITTED EXCEPT PER SHARE DATA)
Nine Year Ended Months Ended Year Ended December 31, December 31, March 31, 2003 2002 2002 --------------- --------------- --------------- INTEREST INCOME Loans, including fees $ 56,016 $ 42,597 $ 57,678 Federal funds sold and Interest-bearing deposits 325 242 931 Securities: Tax-exempt 485 373 489 Taxable 3,589 3,742 7,249 --------------- --------------- --------------- Total interest income 60,415 46,954 66,347 INTEREST EXPENSE Deposits 13,996 13,172 22,558 Federal Home Loan Bank advances 9,311 6,957 8,133 --------------- --------------- --------------- Total interest expense 23,307 20,129 30,691 --------------- --------------- --------------- NET INTEREST INCOME 37,108 26,825 35,656 PROVISION FOR LOAN LOSSES (Note 4) 1,440 892 996 --------------- --------------- --------------- NET INTEREST INCOME, after provision for loan losses 35,668 25,933 34,660 NONINTEREST INCOME (LOSS) Service charges and other fees 3,113 2,551 2,271 Loan servicing fees 1,090 440 626 Mortgage banking activities 4,961 2,045 670 Gain (loss) on sale of investment securities (46) 108 -- Other 1,189 619 512 --------------- --------------- --------------- Total noninterest income 10,307 5,763 4,079 NONINTEREST EXPENSES Compensation and employee benefits (Note 10) 13,322 8,284 10,847 Office occupancy and equipment 4,237 2,510 3,529 Advertising and business promotion 1,228 641 613 Stationary, printing and supplies 859 1,220 1,476 Data processing 487 272 444 Deposit statement preparation and collections 689 555 750 Professional fees 1,418 930 906 Appraisal fees 916 722 842 Other 4,243 2,536 3,366 --------------- --------------- --------------- Total noninterest expenses 27,399 17,670 22,773 --------------- --------------- --------------- INCOME - Before federal income tax expense 18,576 14,026 15,966 Federal income tax expense (Note 9) 6,255 4,842 5,418 --------------- --------------- --------------- NET INCOME $ 12,321 $ 9,184 $ 10,548 =============== =============== =============== BASIC EARNINGS PER COMMON SHARE $ 1.58 $ 1.14 $ 1.23 =============== =============== =============== DILUTED EARNINGS PER COMMON SHARE $ 1.57 $ 1.14 $ 1.23 =============== =============== ===============
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (000'S OMITTED EXCEPT PER SHARE DATA)
Accumulated Additional Other Deferred Unearned Common Paid-in Retained Comprehensive Treasury Compensation Compensation- Stock Capital Earnings Income(Loss) Stock Obligation ESOP Total ------- ------------ -------- ------------- --------- ------------ ------------ --------- BALANCE - April 1, 2001 $ 95 $ 92,111 $ 66,605 $ 1,389 $ (567) $ 567 $ (10,479) $ 149,721 Allocation of ESOP shares -- 99 -- -- -- -- 699 798 Purchase of treasury stock (515,159 shares) -- -- -- -- (8,049) -- -- (8,049) Deferred compensation -- -- -- -- -- 587 -- 587 Dividends paid ($0.16 per share) -- -- (1,369) -- -- -- -- (1,369) Comprehensive income: -- Net income -- -- 10,548 -- -- -- -- 10,548 Change in net unrealized gain on securities available for sale - Net of tax effect of $(410) -- -- -- (796) -- -- -- (796) --------- Total comprehensive income -- -- -- -- -- -- -- 9,752 ------- ------------ -------- ------------- --------- ------------ ------------ --------- BALANCE - March 31, 2002 95 92,210 75,784 593 (8,616) 1,154 (9,780) 151,440 ------- ------------ -------- ------------- --------- ------------ ------------ --------- Allocation of ESOP shares -- 318 -- -- -- -- 698 1,016 Purchase of treasury stock (546,976 shares) -- -- -- -- (11,726) -- -- (11,726) Deferred compensation -- -- -- -- -- 436 -- 436 Dividends paid ($0.24 per share) -- -- (1,924) -- -- -- -- (1,924) Comprehensive income: -- Net income -- -- 9,184 -- -- -- -- 9,184 Change in net unrealized gain on securities available for sale - Net of tax effect of $(140) -- -- -- (271) -- -- -- (271) --------- Total comprehensive income -- -- -- -- -- -- -- 8,913 ------- ------------ -------- ------------- --------- ------------ ------------ --------- BALANCE - December 31, 2002 95 92,528 83,044 322 (20,342) 1,590 (9,082) 148,155 ------- ------------ -------- ------------- --------- ------------ ------------ --------- Allocation of ESOP shares -- 383 -- -- -- -- 699 1,082 Purchase of treasury stock (69,697 shares) -- -- -- -- (1,445) -- -- (1,445) Deferred compensation -- -- -- -- -- 464 -- 464 Dividends paid ($0.34 per share) -- -- (2,681) -- -- -- -- (2,681) Comprehensive income: -- Net income -- -- 12,321 -- -- -- -- 12,321 Change in net unrealized gain on securities available for sale - Net of tax effect of $150 -- -- -- 291 -- -- -- 291 --------- Total comprehensive income -- -- -- -- -- -- -- 12,612 ------- ------------ -------- ------------- --------- ------------ ------------ --------- BALANCE - December 31, 2003 $ 95 $ 92,911 $ 92,684 $ 613 $ (21,787) $ 2,054 $ (8,383) $ 158,187 ======= ============ ======== ============= ========= ============ ============ =========
CONSOLIDATED STATEMENTS OF CASH FLOWS (000S OMITTED)
NINE YEAR ENDED MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 2003 2002 2002 --------------- --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 12,321 $ 9,184 $ 10,548 Adjustments to reconcile net income to net cash provided by operating activities: Provision for deferred income taxes 617 (216) 420 Provision for loan losses 1,440 892 996 Deferred compensation 464 436 587 Depreciation 1,320 819 1,237 (Accretion) amortization 213 225 (407) Proceeds from sale of mortgage loans held for sale 324,960 188,042 191,429 Origination of mortgage loans held for sale (322,407) (187,268) (187,945) Gain on sale of mortgage loans (2,980) (2,205) (1,646) (Gain) loss on sale of investment securities 46 (108) -- ESOP Expense 1,082 1,016 798 Changes in assets and liabilities: (Increase) decrease in accrued interest receivable and other assets (3,255) 2,460 1,069 Increase (decrease) in accrued interest payable and other liabilities 7,812 (2,291) (1,973) --------------- --------------- --------------- Net cash provided by operating activities 21,633 10,986 15,113 --------------- --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of securities available for sale 48,867 22,744 70,290 Proceeds from sale of securities available for sale 25,990 6,963 35,040 Purchase of securities available for sale (53,964) (12,070) (128,623) Purchase of FHLB stock (236) (1,675) (1,355) Net increase in loans (111,505) (84,464) (64,111) Purchases of premises and equipment (9,600) (5,808) (1,845) --------------- --------------- --------------- Net cash used in investing activities (100,448) (74,310) (90,604) --------------- --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 76,701 37,816 52,733 Repayment of FHLB advances (8,469) (23,412) (34,801) Proceeds from FHLB advances 8,000 45,000 71,285 Purchase of treasury stock (1,445) (11,726) (8,049) Payment of dividends (2,681) (1,924) (1,369) --------------- --------------- --------------- Net cash provided by financing activities 72,106 45,754 79,799 --------------- --------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,709) (17,570) 4,308 CASH AND CASH EQUIVALENTS - Beginning of period 40,356 57,926 53,618 --------------- --------------- --------------- CASH AND CASH EQUIVALENTS - End of period $ 33,647 $ 40,356 $ 57,926 =============== =============== =============== SUPPLEMENTAL CASH FLOW INFORMATION - Cash paid for Interest $ 23,508 $ 20,355 $ 31,692 Federal income taxes 4,995 4,450 4,420
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION - Citizens First Bancorp, Inc. (the "Company") is a Delaware Corporation and the holding company for Citizens First Savings Bank (the "Bank"), a state-chartered savings bank headquartered in Port Huron, Michigan. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank. The Bank also includes the accounts of its wholly owned subsidiaries, Citizens Financial Services, Inc. and Citizens First Mortgage, LLC. Citizens Financial Services, Inc. includes the accounts of its wholly owned subsidiary, CFS Insurance Agency. Citizens Financial Services, Inc. receives revenue from its subsidiary, which provides insurance services to individuals and small businesses in the Port Huron area. Citizens First Mortgage, LLC receives revenue from interest income on loans and the sale of loans. All significant intercompany transactions and balances have been eliminated in consolidation. On March 7, 2001, the Company acquired the Bank. Prior to that time, the Bank existed as a mutual savings bank. In connection with the conversion, the Company issued an aggregate of 9,526,761 shares of its common stock, of which 8,821,075 shares were sold at a purchase price of $10 per share. At that time, 705,686 shares of stock were donated to Citizens First Foundation, a charitable foundation established by the Company. The contribution expense was recognized in the March 31, 2001 consolidated financial statements. The net offering proceeds, after expenses of $3.1 million, totaled $85.1 million. CHANGE IN FISCAL YEAR - The Company changed its fiscal year end from March 31 to December 31, effective December 31, 2002. See Note 19 for transition period comparative data. USE OF ESTIMATES - In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, and the valuation of mortgage servicing rights and foreclosed real estate. NATURE OF OPERATIONS - The Company operates predominately in the mideastern portion of Michigan's lower peninsula. The Bank's primary services include accepting deposits, making commercial, consumer, and mortgage loans, and engaging in mortgage banking activities. The Bank's loan portfolio is concentrated in residential first-mortgage loans, commercial and commercial real-estate loans, and property improvement loans. The Bank is not dependent upon any single industry or customer. CASH AND CASH EQUIVALENTS - For the purpose of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from depository institutions, federal funds sold, and interest bearing deposits in other depository institutions, all of which mature within ninety days. SECURITIES - Debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as "available for sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income net of applicable income taxes. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. FEDERAL HOME LOAN BANK STOCK - Federal Home Loan Bank (FHLB) stock is considered a restricted investment security and is carried at cost. Purchases and sales of FHLB stock are made directly with the FHLB at par value. LOANS HELD FOR SALE - Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the adjusted carrying value of the related mortgage loans sold. LOANS - The Company grants mortgage, commercial, and consumer loans to customers. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off, are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable general market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures. SERVICING - Servicing assets are recognized as separate assets when rights are acquired through the sale of originated residential mortgage loans. Capitalized servicing rights are reported in other assets and are amortized against noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing assets are evaluated for impairment based upon the estimated fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Temporary impairment is recognized through a valuation allowance for an individual stratum to the extent that fair value is less than the amortized cost for the stratum. If it is later determined that all or a portion of the temporary impairment no longer exists, the valuation allowance is reduced through a recovery of income. An other than temporary impairment results in a permanent reduction to the carrying value of the servicing asset. OFF BALANCE SHEET INSTRUMENTS - In the ordinary course of business, the Company enters into commitments to extend credit, including commitments under home equity agreements, commercial letters of credit and standby letters of credit. In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Adoption of the Standard did not have a material effect on the Company's financial statements. The Bank uses forward contracts as part of its mortgage banking activities. Forward contracts provide for the delivery of financial instruments at a specified future date and at a specified price or yield. Forward contracts are accounted for on a fair value basis. The fair value of forward contracts at December 31, 2003 and 2002 was insignificant. RATE LOCK COMMITMENTS - The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding, also know as rate lock commitments. Rate lock commitments on residential mortgage loans that are intended to be sold are considered to be derivatives. Fair value is based on fees currently charged to enter into similar agreements. At December 31, 2003 and 2002, the fair value of rate lock commitments was insignificant. PREMISES AND EQUIPMENT - Premises and equipment are carried at cost, less accumulated depreciation. Depreciation is computed using a straight-line method over the estimated useful lives of the related assets. Office buildings are depreciated over 40 years and equipment and furniture over 3 to 7 years. Leasehold improvements are amortized over the terms of their respective leases or the estimated useful lives of the improvements, whichever is shorter. FORECLOSED ASSETS - Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of cost or fair value less the cost to sell at the date of the foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. Foreclosed assets amounted to $443,000 and $353,000 at December 31, 2003 and 2002, respectively. INCOME TAXES - Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. DEFERRED COMPENSATION ARRANGEMENTS - The Company maintains a rabbi trust to fund various deferred compensation and other arrangements. The arrangements are accounted for in accordance with EITF Issue No. 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested, whereby assets of rabbi trusts are to be consolidated with those of the employer, and the value of the employer's stock held in rabbi trusts should be classified in stockholders' equity and generally accounted for in a manner similar to treasury stock. The Company recognizes the original amount of deferred compensation (fair value of the restricted stock award at the date of grant) as the basis for recognition in the rabbi trust. Changes in the fair value of amounts owed to employees are not recognized as the Company's deferred compensation plans do not permit diversification and must be settled by the delivery of a fixed number of shares of the Company's common stock. EMPLOYEE STOCK OWNERSHIP PLAN - Compensation expense is recognized for the Employee Stock Ownership Plan ("ESOP") equal to the average fair value of shares committed to be released for allocation to participant accounts. Any difference between the average fair value of shares committed to be released for allocation and the ESOP's original acquisition cost is charged or credited to stockholders' equity (additional paid-in capital). The cost of unallocated ESOP shares (shares not yet released for allocation) is reflected as a reduction of stockholders' equity. RESTRICTED STOCK AWARDS - Under the Company's stock-based incentive plan, which is described more fully in Note 16, the Company may grant restricted stock awards to its directors, officers, and employees for up to 476,338 shares of common stock. The Company recognizes compensation expense related to restricted stock awards over the period the services are performed. STOCK BASED COMPENSATION - The Company has a stock-based incentive plan, which is described more fully in Note 16. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost related to options is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company has provided below pro forma disclosures of net income and earnings per share and other disclosures, as if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-based Compensation, to stock-based employee compensation. The Company's as reported and the pro forma information for the year ended December 31, 2003 and nine months ended December 31, 2002 are indicated below (000s omitted, except per share data):
Nine months Year Ended Ended December 31, December 31, 2003 2002 --------------- --------------- Net income, as reported $ 12,321 $ 9,184 Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards - Net of related tax effects (85) (82) --------------- --------------- Pro forma net income $ 12,236 $ 9,102 =============== =============== Earnings per share Basic - As reported $ 1.58 $ 1.14 Basic - Pro forma 1.57 1.13 Diluted - As reported 1.57 1.14 Diluted - Pro Forma 1.56 1.13
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Nine months Year Ended Ended December 31, December 31, 2003 2002 --------------- --------------- Dividend yield 1.60% 1.60% Expected life 8 years 8 years Expected volatility 22.00% 21.20% Risk-free interest rate 4.00% 4.00%
OTHER COMPREHENSIVE INCOME - Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, however, such as unrealized gains and losses on securities available for sale, are reported as a separate component in the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. Accumulated other comprehensive income is comprised solely of unrealized gains and losses on securities available for sale, net of applicable income taxes, for all periods presented. EARNINGS PER SHARE - Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options and restricted stock awards and are determined using the treasury stock method. Treasury and unallocated ESOP shares are not considered outstanding for purposes of calculating basic or diluted earnings per share. Earnings per common share have been computed based on the following (000s Omitted, except for per share data):
Nine Months Year Ended Ended Year Ended December 31, December 31, March 31, 2003 2002 2002 --------------- --------------- --------------- Net income $ 12,321 $ 9,184 $ 10,548 =============== =============== =============== Average number of common shares outstanding used to calculate basic earnings per common share 7,810,422 8,036,885 8,587,293 Effect of dilutive options and restricted stock awards 32,743 173 -- --------------- --------------- --------------- Average number of common shares outstanding used to calculate diluted earnings per common share 7,843,165 8,037,058 8,587,293 =============== =============== ===============
TRUST ASSETS - Trust assets held in a fiduciary or agency capacity are not included in the accompanying consolidated balance sheets because they are not assets of the Company. ADVERTISING COSTS - Advertising costs are expensed as incurred. RECENT ACCOUNTING PRONOUNCEMENTS - In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain embedded derivatives, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement amends SFAS No. 133 to reflect the decisions made as part of the Derivatives Implementation Group (DIG) and in other FASB projects or deliberations. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. Adoption of the Standard did not have a material effect on the Company's financial statements. AICPA Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3), addresses the accounting for differences between contractual cash flows and cash flows expected to be collected from the initial investment in loans acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes loans acquired in purchase business combinations and does not apply to loans originated by the entity. The SOP prohibits carrying over or creation of valuation allowances in the initial accounting for loans acquired in a transfer. It is effective for loans acquired in fiscal years beginning after December 15, 2004. The effect of this new guidance on the consolidated financial statements will depend on future acquisition activity, thus, its impact is not readily determinable. RECLASSIFICATIONS - Certain amounts in the prior year's consolidated financial statements have been reclassified to conform to the current year's presentation. NOTE 2 - SECURITIES The amortized cost and estimated market value of available-for-sale securities with gross unrealized gains and losses are as follows (000s omitted):
December 31, 2003 --------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------ ------------ ------------ ------------ U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 7,998 $ 15 $ -- $ 8,013 Obligations of state and political subdivisions 17,863 748 -- 18,611 Corporate debt securities 47,880 426 43 48,263 Equity securities 5,002 -- 217 4,785 ------------ ------------ ------------ ------------ Total available-for-sale securities $ 78,743 $ 1,189 $ 260 $ 79,672 ============ ============ ============ ============
December 31, 2002 --------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------ ------------ ------------ ------------ U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 10,389 $ 386 $ -- $ 10,775 Obligations of state and political subdivisions 14,149 900 -- 15,049 Corporate debt securities 65,223 722 1,225 64,720 Mortgage-backed securities 5,131 32 -- 5,163 Equity securities 5,002 -- 327 4,675 ------------ ------------ ------------ ------------ Total available-for-sale securities $ 99,894 $ 2,040 $ 1,552 $ 100,382 ============ ============ ============ ============
One security with an estimated market value of $4,785,000 and a gross unrealized loss of $217,000 has been in a continuous unrealized loss position in excess of one year as of December 31, 2003. Remaining securities, with an estimated market value of $8,556,000 and an unrealized loss of $43,000, have been in a continuous unrealized loss position for less than one year. However, management does not believe any individual unrealized loss at December 31, 2003 represents an other than temporary loss. Gross proceeds from sales of securities were $25,990,000, $6,963,000, and $35,040,000 for the year ended December 31, 2003, the nine months ended December 31, 2002 and the year ended March 31, 2002, respectively, resulting in gross gains of $80,000, $108,000, and $19,000 and gross losses of $126,000, $0 and $19,000, respectively. At December 31, 2003 and 2002, U.S. government obligations with a carrying value of $0 and $500,000 were pledged to secure public deposits and for other purposes as required or permitted by law. The amortized cost and estimated market value of available-for-sale securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (000s omitted):
December 31, 2003 ----------------------------- Amortized Estimated Cost Market Value ------------ ------------ Due in one year or less $ 23,000 $ 23,301 Due in one year through five years 30,137 30,513 Due after five years through ten years 12,817 13,977 Due after ten years 7,787 7,096 ------------ ------------ Total debt securities 73,741 74,887 Equity securities 5,002 4,785 ------------ ------------ Total $ 78,743 $ 79,672 ============ ============
NOTE 3 - LOANS HELD FOR SALE The Bank routinely sells to investors its originated residential mortgage loans. All long-term fixed rate residential mortgages recently originated or financed are identified as held for sale. They are accounted for at the lower of cost or market on an aggregate basis. Loans held for sale are as follows (000s omitted):
December 31, 2003 2002 ------------ ------------ Loans held for sale $ 1,988 $ 1,557 Allowance for lower of cost or market adjustment (4) -- ------------ ------------ Total $ 1,984 $ 1,557 ============ ============
The Bank had outstanding forward contracts to sell residential mortgage loans of approximately $5,753,000 and $25,700,000 at December 31, 2003 and 2002, respectively. NOTE 4 - LOANS Balances of loans are as follows (000s omitted):
December 31, 2003 2002 ------------ ------------ Real estate: One- to four-family mortgage $ 386,531 $ 414,939 Commercial and multi-family real estate 241,097 179,387 Residential construction 24,996 21,822 Home equity loans and lines of credit 85,371 72,724 ------------ ------------ 737,995 688,872 Commercial loans 107,742 60,336 Consumer loans: Automobile 59,392 61,386 Other consumer 37,948 21,221 ------------ ------------ 97,340 82,607 ------------ ------------ Total loans 943,077 831,815 Less: Allowance for loan losses 11,664 11,082 Deferred loan origination and other fees 2,212 1,597 ------------ ------------ Net loans $ 929,201 $ 819,136 ============ ============
Loans made in the ordinary course of business to related parties, including senior officers and directors of the Bank, totaled approximately $15,859,000 and $14,820,000 at December 31, 2003 and 2002, respectively. For the year ended December 31, 2003, $4,448,000 of new loans were made and repayments totaled $3,409,000, respectively. Activity in the allowance for loan losses was as follows (000s omitted):
Nine Year Ended Months Ended Year Ended December 31, December 31, March 31, 2003 2002 2002 --------------- --------------- --------------- Balance - Beginning of period $ 11,082 $ 11,020 $ 10,831 Provision for loan losses 1,440 892 996 Charge-offs (1,095) (1,102) (1,173) Recoveries 237 272 366 --------------- --------------- --------------- Balance - End of period $ 11,664 $ 11,082 $ 11,020 =============== =============== ===============
The following is a summary of information pertaining to impaired and non-accrual loans (000s omitted):
December 31, 2003 2002 --------------- --------------- Impaired loans without a valuation allowance $ -- $ -- Impaired loans with a valuation allowance 195 528 --------------- --------------- Total impaired loans $ 195 $ 528 =============== =============== Valuation allowance related to impaired loans $ 46 $ 79 =============== =============== Total non-accrual loans $ 3,915 $ 2,414 =============== ===============
Nine Months Year Ended Ended Year Ended December 31, December 31, March 31, 2003 2002 2002 --------------- --------------- --------------- Average investment in impaired loans $ 257 $ 481 $ 533 =============== =============== =============== Interest income recognized on impaired loans $ -- $ -- $ -- =============== =============== =============== Interest income recognized on a cash basis on impaired loans $ -- $ -- $ -- =============== =============== ===============
NOTE 5 - PREMISES AND EQUIPMENT Premises and equipment were as follows (000s omitted):
December 31, 2003 2002 --------------- --------------- Land $ 6,766 $ 4,904 Office buildings 13,639 12,362 Furniture, fixtures, and equipment 8,911 8,239 Construction in process 5,272 -- --------------- --------------- Total premises and equipment 34,588 25,505 Less accumulated depreciation (11,320) (10,516) --------------- --------------- Net carrying amount $ 23,268 $ 14,989 =============== ===============
Depreciation expense for the year ended December 31, 2003, the nine months ended December 31, 2002 and the year ended March 31, 2002 amounted to $1,320,000, $819,000, and $1,237,000, respectively. Estimated costs to complete construction contracts in process at December 31, 2003 totaled $1.7 million. NOTE 6 - SERVICING The Bank routinely sells to investors its originated residential mortgage loans. The unpaid principal balance of loans serviced for others was approximately $477,982,000 and $322,000,000 at December 31, 2003 and 2002, respectively, and are not included in the accompanying consolidated balance sheets. The balance of mortgage servicing rights, net of valuation allowance, included in other assets at December 31, 2003 and 2002 was $3,820,000 and $1,939,000, respectively, which approximates the fair value of these rights. The key economic assumptions used in determining the fair value of the mortgage servicing rights are as follows:
December 31, March 31, 2003 2002 2002 --------- --------- --------- Annual Constant Prepayment Speed 13.46% 33.93% 15.38% Weighted average life (in months) 269 264 257 Discount rate 7.25% 7.02% 8.00%
The following summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity in the related valuation allowance (000s omitted):
Nine Months Year Ended Ended Year Ended December 31, December 31, March 31, 2003 2002 2002 --------------- --------------- --------------- Mortgage servicing rights capitalized $ 3,063 $ 1,612 $ 486 =============== =============== =============== Mortgage servicing rights amortized $ 2,459 $ 755 $ 881 =============== =============== =============== Valuation allowance: Balance at beginning of period 1,277 400 200 Additions -- 877 200 Reductions (1,277) -- -- --------------- --------------- --------------- Balance at end of period $ -- $ 1,277 $ 400 =============== =============== ===============
NOTE 7 - DEPOSITS Interest-bearing deposit balances are summarized as follows (000s omitted):
December 31, 2003 2002 --------- --------- Passbook and savings deposits $ 86,202 $ 78,212 NOW accounts 73,351 97,385 Money market variable rate accounts 279,663 201,706 Certificates of deposit 257,817 271,852 --------- --------- Total $ 697,033 $ 649,155 ========= =========
Certificates of deposit individually exceeding $100,000 were approximately $71,660,000 and $67,148,000 at December 31, 2003 and 2002, respectively. Scheduled maturities of certificates of deposit were as follows (000s omitted):
Year Ending December 31, Amount - --------------- ------------ 2004 $ 130,124 2005 37,852 2006 35,178 2007 44,718 2008 and thereafter 9,945 ------------ Total $ 257,817 ============
Deposits from related parties held by the Bank at December 31, 2003 and 2002, amounted to $2,847,000 and $5,668,000 respectively. NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES Advances from the Federal Home Loan Bank consist of fixed rate advances that bear interest at rates ranging from 1.56 percent to 7.31 percent payable monthly. The advances are collateralized by approximately $349,000,000 and $409,000,000 of mortgage loans as of December 31, 2003 and 2002, respectively, under a blanket collateral agreement. At December 31, 2003, the weighted average interest rate on fixed rate advances was 5.24%. The advances are subject to prepayment penalties and the provisions and conditions of the credit policy of the Federal Home Loan Bank. Future obligations of the advances are as follows at December 31, 2003 (000s omitted):
Year Ending December 31, Amount - --------------- ------------ 2004 $ 32,325 2005 20,031 2006 42,428 2007 43,686 2008 20,165 Thereafter 13,899 ------------ Total $ 172,534 ============
NOTE 9 - FEDERAL INCOME TAXES The consolidated provision for federal income taxes consisted of the following (000s omitted):
Nine Months Year Ended Ended Year Ended December 31, December 31, March 31, 2003 2002 2002 --------------- --------------- --------------- Current tax expense $ 5,638 $ 5,058 $ 4,998 Deferred tax expense (benefit) 617 (216) 420 --------------- --------------- --------------- Total income tax expense $ 6,255 $ 4,842 $ 5,418 =============== =============== ===============
Federal income tax expense approximated the amounts computed by applying the statutory income tax rate to income before federal income tax expense as a result of the following (000s omitted):
Nine months Year Ended Ended Year Ended December 31, December 31, March 31, 2003 2002 2002 --------------- --------------- --------------- Statutory rates $ 6,402 $ 4,909 $ 5,558 Increase (decrease) resulting from: Other (147) (67) (140) --------------- --------------- --------------- Total income tax expense $ 6,255 $ 4,842 $ 5,418 =============== =============== ===============
The net deferred income tax asset was comprised of the tax effects of the following temporary differences (000s omitted):
December 31, 2003 2002 ------------ ------------ Deferred income tax assets: Allowance for loan losses $ 3,151 $ 2,909 Contribution carryover 1,911 2,504 Accumulated depreciation -- 316 Deferred loan fees 61 489 Employee benefit obligations 1,657 1,787 Investment in subsidiary -- 145 Other 451 112 ------------ ------------ Total deferred income tax assets 7,231 8,262 Deferred income tax liabilities: Original issue discount 144 866 Investment in subsidiary 380 -- Accumulated depreciation 352 -- Installment sale -- 159 Net unrealized gain on available-for-sale securities 316 166 Accumulated accretion 149 249 Other -- 165 ------------ ------------ Total deferred income tax liabilities 1,341 1,605 ------------ ------------ Net deferred income tax asset $ 5,890 $ 6,657 ============ ============
At December 31, 2003, the Company has a contribution carryforward for tax purposes of approximately $5,500,000 which expires in fiscal 2006. Realization of the deferred income tax asset related to the contribution carryforward is dependent on generating sufficient taxable income before the carryforward expires. Although realization is not assured, management believes it is more likely than not that all of the deferred income tax asset will be realized. The amount of the deferred income tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. In addition, the Bank has not recognized a deferred tax liability for tax bad debt reserves of approximately $6,600,000 that existed at December 31, 1987, because it is not expected that this temporary difference will reverse in the foreseeable future. NOTE 10 - EMPLOYEE BENEFITS DEFINED BENEFIT PENSION PLAN - The Bank is a participant in the multiple-employer Financial Institutions Retirement Fund ("FIRF" or the "Plan"), which covers substantially all of its officers and employees. The Plan, for all full-time employees with one year of service, provides benefits based on basic compensation and years of service. The Bank's contributions are determined by FIRF and generally represent the normal cost of the Plan. Specific plan assets and accumulated benefit information for the Bank's portion of the Plan are not available. Under the Employee Retirement Income Security Act of 1974 (ERISA), a contributor to a multiemployer pension plan may be liable in the event of complete or partial withdrawal for the benefit payments guaranteed under ERISA. The expense of the Plan allocated to the Bank for the year ended December 31, 2003, the nine months ended December 31, 2002, and the year ended March 31, 2002 amounted to $250,000, $0 and $0. As of February 1, 2004, the Company has frozen all the assets of the FIRF plan and ceased accruing future benefits for employees participating in the Plan, although vesting service will continue. In addition, the Company is also considering withdrawing from the Plan, but any withdrawal liability has not yet been quantified. DEFINED CONTRIBUTION PLAN - The Company has a qualified savings plan under Section 401(k) of the Internal Revenue Code. The Plan covers all employees who have completed at least one year of service. Eligible employees may contribute up to 15 percent of their annual compensation, subject to certain maximums established by the Internal Revenue Service. The Company will match up to 50 percent of the first 4 percent of the employees' compensation deferred each year. The Company made matching contributions for the year ended December 31, 2003, the nine months ended December 31, 2002, and the year ended March 31, 2002 of approximately $86,000, $83,000 and $88,000, respectively. SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN - In 2000, the Bank entered into an agreement to provide salary continuation supplemental payments at retirement to its former president. The Bank purchased an annuity at the end of fiscal year March 31, 2002 that fully funded the obligation. The expense associated with the agreement was $101,000 for the year ended March 31, 2002. DEFERRED COMPENSATION ARRANGEMENTS - The Company has entered into deferred compensation and fee arrangements with certain of its directors and senior officers. The amounts deferred under the arrangements are invested in Company common stock and are maintained in a rabbi trust. The Company has 198,658 treasury shares reserved for the various plans with a related obligation of $2,054,000 established within stockholders' equity. EMPLOYEE STOCK OWNERSHIP PLAN - Effective January 1, 2001, the Bank implemented a leveraged employee stock ownership plan (ESOP). The ESOP covers all employees with more than one year of service who have completed at least 1,000 hours of service and who have attained the age of 21. As part of the conversion from a mutual to a stock entity, the Company provided a loan to the ESOP, which was used to purchase 762,140 shares of the Company's outstanding stock in the open market. The loan bears interest equal to the prime rate at the time of conversion and provides for the repayment of principal over the 15-year term of the loan. The scheduled maturities of the loan are as follows (000s omitted):
Year Ending December 31, Amount - ------------------------- ------------ 2004 $ 466 2005 507 2006 551 2007 597 2008 646 Thereafter 6,368 ------------ Total $ 9,135 ============
The Company has committed to make contributions to the ESOP sufficient to support debt service of the loan. The loan is secured by the shares purchased, which are held in a suspense account for the allocation among the participants as the loan is paid. Dividends paid on unallocated shares are not considered dividends for financial reporting purposes and are used to pay principal and interest on the ESOP loan. Dividends on allocated shares are charged to retained earnings. Total compensation expense for the ESOP amounted to $1,167,000, $883,000 and $1,023,000 for the year ended December 31, 2003, the nine months ended December 31, 2002 and the year ended March 31, 2002, respectively. Shares held by the ESOP include the following:
December 31, 2003 2002 ------------ ------------ Allocated 152,428 101,618 Unallocated 609,712 660,522 ------------ ------------ Total 762,140 762,140 ============ ============
The fair value of the unearned shares was approximately $13,901,000 and $13,904,000 at December 31, 2003 and 2002, respectively. NOTE 11 - REGULATORY MATTERS The Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the consolidated financial statements. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios, which are shown in the table below. As of December 31, 2003, the most recent notification from the Bank's regulators categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, minimum capital amounts and ratios must be maintained as shown in the following table. There are no conditions or events since that notification that management believes have changed the Company's and the Bank's capital category. At December 31, 2003 and 2002, the Bank's actual capital levels and minimum required levels were as follows (000s omitted):
For Capital Actual Adequacy Purposes To Be Well Capitalized ------------------------- -------------------------- ------------------------- Ratio Ratio Ratio Amount (Percent) Amount (Percent) Amount (Percent) ---------- ---------- ---------- ---------- ---------- ---------- DECEMBER 31, 2003 Total Capital to Risk Weighted Assets: Citizens First Savings Bank 135,722 15.8% 68,600 > 8.0% 85,800 > 10.0% - - Tier 1 Capital to Risk Weighted Assets: Citizens First Savings Bank 124,988 14.6% 34,300 > 4.0% 51,500 > 6.0% - - Tier 1 Capital to Average Assets: Citizens First Savings Bank 124,988 11.8% 31,800 > 3.0% 53,000 > 5.0% - - DECEMBER 31, 2002: Total Capital to Risk Weighted Assets: Citizens First Savings Bank 127,600 19.5% 56,700 > 8.0% 70,900 > 10.0% - - Tier 1 Capital to Risk Weighted Assets: Citizens First Savings Bank 118,500 18.3% 28,300 > 4.0% 42,500 > 6.0% - - Tier 1 Capital to Average Assets: Citizens First Savings Bank 118,500 12.1% 29,400 > 3.0% 49,000 > 5.0% - -
The Bank is required to maintain average balances on hand or with the Federal Reserve Bank. At December 31, 2003, the reserve balance amounted to $12,259,000. NOTE 12 - RESTRICTIONS ON DIVIDENDS Federal and state banking regulations place certain restrictions on dividends paid by the Bank to the Company. The total amount of dividends that may be paid at any date is generally limited to the retained earnings of the Bank. Accordingly, $115,506,000 of the Company's equity in the net assets of the Bank was restricted at December 31, 2003. At December 31, 2003, the Bank's retained earnings available for the payment of dividends was $10,734,000. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank's capital to be reduced below applicable minimum capital requirements. NOTE 13 - COMMITMENTS AND CONTINGENCIES CREDIT-RELATED FINANCIAL INSTRUMENTS - The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The Company's exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments. A summary of the notional or contractual amounts of financial instruments with off-balance-sheet risk at December 31, 2003 and 2002 is as follows (000s omitted):
December 31, 2003 2002 ------------ ------------ Commercial and stand-by letters of credit $ 5,397 $ 12,250 Unused lines of credit 93,787 55,364 Commitments to originate loans or to refinance existing loans: Mortgage 53,236 77,000 Consumer 5,945 4,300 Commercial 59,056 28,200 ------------ ------------ Total commitments to extend credit $ 217,421 $ 177,114 ============ ============
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 and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management's credit evaluation of the customer. Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are collateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed. Commercial and standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily used to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. To reduce credit risk related to the use of credit-related financial instruments, the Company generally holds collateral supporting those commitments if deemed necessary. The amount and nature of the collateral obtained is based on the Company's credit evaluation of the customer. Collateral held varies, but may include cash, securities, accounts receivable, inventory, property, plant, equipment, and real estate. If the counterparty does not have the right and ability to redeem the collateral or the Company is permitted to sell or repledge the collateral on short notice, the Company records the collateral in its balance sheet at fair value with a corresponding obligation to return it. LEASE COMMITMENTS - Future minimum lease payments under the Company's current non-cancelable operating leases are immaterial. LEGAL CONTINGENCIES - Various legal claims arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company's consolidated financial statements. NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying values and estimated fair values of the Company's financial instruments are presented below. Certain items, the most significant being premises, equipment, pension and deferred compensation arrangements, and the deposit base and other customer relationship intangibles do not meet the definition of a financial instrument and are excluded from this disclosure. Accordingly, this fair value information is not intended to, and does not, represent Citizens First Bancorp, Inc. and subsidiary's underlying value. Many of the assets and liabilities subject to the disclosure requirements are not actively traded, requiring fair values to be estimated by management. These estimates inherently involve the use of judgment about a wide variety of factors, including, but not limited to, relevancy of market prices of comparable instruments, expected future cash flows, and appropriate discount rates. The carrying values and estimated fair values of financial instruments were as follows (000s omitted):
December 31, 2003 December 31, 2002 ----------------------------- ----------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ------------ ------------ ------------ ------------ Financial assets: Cash and cash equivalents $ 33,647 $ 33,647 $ 40,356 $ 40,356 Securities available for sale 79,672 79,672 100,382 100,382 Federal Home Loan Bank stock 9,416 9,416 9,180 9,180 Loans held for sale 1,984 1,984 1,557 1,557 Loans 929,201 931,061 819,136 835,260 Accrued interest receivable 4,103 4,103 4,766 4,766 Financial liabilities: Deposits 748,531 758,174 671,830 675,216 FHLB advances 172,534 178,120 173,003 177,992 Accrued interest payable 467 467 668 668
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments: CASH AND CASH EQUIVALENTS - Due to their short-term nature, the carrying value of cash and short-term instruments approximate fair values. SECURITIES AND FEDERAL HOME LOAN BANK STOCK - Fair values for securities available for sale are based on quoted market prices. The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank. LOANS HELD FOR SALE - Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices. LOANS - For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values, as adjusted by estimated credit losses. Fair values for other mortgage, commercial, and consumer loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. DEPOSITS - Fair values for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are equal to the amount payable on demand at the reporting date (i.e., their carrying values). The carrying values of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values. 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 time deposits. FHLB ADVANCES - Fair values of FHLB advances are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. ACCRUED INTEREST - The carrying values of accrued interest approximate fair values. OFF-BALANCE-SHEET INSTRUMENTS - Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of loan commitments and standby letters of credit, valued on the basis of fees currently charged for commitments for similar loan terms to new borrowers with similar credit profiles, is not considered material. The fair value of off-balance-sheet financial instruments used for risk management purposes, which consists solely of forward contracts extending from 45-90 days to sell mortgage loans, is not material. NOTE 15 - STOCK REPURCHASE PROGRAM On September 24, 2001, the Board of Directors of Citizens First Bancorp, Inc. adopted the Company's Stock Repurchase Program. The program allowed management to repurchase 476,388 shares of the Company's common stock, of which all of the shares were repurchased as of March 31, 2002. On March 28, 2002, the Board of Directors adopted an additional repurchase program. The program allowed management to repurchase an additional 476,338 shares of the Company's common stock, of which all of the shares have been repurchased as December 31, 2002. On September 26, 2002, the Board of Directors adopted a new repurchase program. The program allows management to repurchase up to an additional 428,701 shares of the Company's common stock, of which 54,500 and 633 shares were repurchased during the year ended December 31, 2003 and the nine months ended December 31, 2002, respectively. In addition to the Company's Stock Repurchase Program, the Company purchased additional shares in connection with rabbi trusts established to fund certain employee benefit plans. Shares repurchased for the rabbi trusts totaled 198,658, 183,461 and 95,456 as of December 31, 2003, and 2002 and March 31, 2002, respectively. The total shares repurchased have a weighted average price of $18.06 per share. The repurchased shares are reserved for reissuance in connection with future employee benefit plans and other general corporate purposes. NOTE 16 - STOCK BASED COMPENSATION RESTRICTED STOCK AWARDS - On December 16, 2002, the Company granted 69,367 restricted stock awards to employees under the Company's stock-based incentive plan. During 2003, 2,200 shares were forfeited and 400 shares were granted. All awards cliff vest after five years from the date of the award. Compensation expense for the awards was approximately $251,000 and $22,000 for the year ended December 31, 2003 and the nine months ended December 31, 2002, respectively. The fair value of restricted stock at the date of the grant was $1,370,207. Restricted stock awarded is subject to restrictions on sale, transfer, or assignment for the duration of the employee's life. Holders of restricted stock generally may forfeit ownership of all or a portion of their award if employment is terminated before the end of the vesting period. STOCK OPTIONS - Under the Company's stock-based incentive plan, the Company may grant options to its directors, officers, and employees for up to 1,429,014 shares of common stock. Both incentive stock options and non-qualified stock options may be granted under the Plan. The exercise price of each option equals the market price of the Company's stock on the date of grant, and an option's maximum term is 10 years. On May 9, 2002, the Company granted 23,100 stock options with an exercise price of $19.85 per share. The options are fully vested at the grant date and are exercisable over a 10-year period. On March 11, 2003, the Company granted 147,700 stock options with an exercise price of $18.81 per share. The options vest twenty percent per year for five years and are exercisable over a 10-year period. At December 31, 2003, 1,258,195 shares were available for future granting of options. A summary of the status and activity in the Company's stock option plan is presented below:
Year Ended Nine Months Ended December 31, 2003 December 31, 2002 ----------------------------- ----------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ------------ ------------ ------------ ------------ Outstanding at beginning of period 23,100 $ 19.85 -- $ -- Granted 147,700 18.81 23,100 19.85 ------------ ------------ ------------ ------------ Outstanding at end of period 170,800 $ 18.95 23,100 $ 19.85 ============ ============ ============ ============ Options exercisable at period end 23,100 23,100 Weighted-average fair value of options granted during the period $ 5.29 $ 5.46
Information pertaining to options outstanding at December 31, 2003 is as follows:
Options Outstanding Options Exercisable ----------------------------------- ------------------------------------------------------- Weighted Average Weighted Weighted Remaining Average Average Number Contractual Exercise Number Exercise Range of Exercise Prices Outstanding Life Price Exercisable Price - -------------------------- --------------- --------------- --------------- --------------- --------------- $19.00 - $20.00 23,100 8.4 years $ 19.85 23,100 $ 19.85 $18.00 - $19.00 147,700 9.3 years 18.81 -- -- --------------- --------------- Outstanding at end of year 170,800 $ 18.95 23,100 $ 19.85 =============== ===============
NOTE 17 - PARENT-ONLY FINANCIAL STATEMENTS The following represents the condensed financial statements of Citizens First Bancorp, Inc. ("Parent") only, which should be read in conjunction with the Company's consolidated financial statements. The condensed balance sheet is as follows (000s omitted):
December 31, 2003 2002 ------------ ------------ ASSETS Cash at subsidiary bank $ 8,852 $ 3,432 Securities available for sale 9,419 13,517 Commercial real estate loans 6,963 4,675 Land 3,223 3,100 Investment in subsidiary 126,240 119,561 Deferred taxes and other assets 3,625 3,870 ------------ ------------ Total assets $ 158,322 $ 148,155 ============ ============ LIABILITIES -- -- ------------ ------------ STOCKHOLDERS' EQUITY $ 158,322 $ 148,155 ============ ============
The condensed statement of operations is as follows (000s omitted):
Nine Months Year Ended Ended Year Ended December 31, December 31, March 31, 2003 2002 2002 --------------- --------------- --------------- Income: Dividends from subsidiary $ 5,450 $ 8,270 $ -- Operating income 798 358 1,186 --------------- --------------- --------------- Total income 6,248 8,628 1,186 Operating expenses (861) (446) (645) --------------- --------------- --------------- Income - Before income taxes and equity in undistributed net income of subsidiary 5,387 8,182 541 Income tax (expense) benefit 139 30 (187) --------------- --------------- --------------- Income - Before equity in undistributed net income of subsidiary 5,526 8,212 354 Equity in undistributed net income of subsidiary 6,795 972 10,194 --------------- --------------- --------------- Net income $ 12,321 $ 9,184 $ 10,548 =============== =============== ===============
The condensed statement of cash flows is as follows (000s omitted):
Nine Months Year Ended Ended December 31, December 31, 2003 2002 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 12,321 $ 9,184 Adjustments to reconcile net income to net cash from operating activities: (Gain) loss on sale of investment 80 (108) Amortization 3 2 Equity in undistributed earnings of subsidiary (6,795) (972) Change in Deferred Compensation obligation 464 436 Net change in other assets 1,289 4,268 --------------- --------------- Net cash provided by operating activities 7,362 12,810 --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale or maturity of investments 4,631 6,964 Investment in mortgage company subsidiary -- (4,272) Net increase in loans (2,288) (4,675) Purchase of land (123) (3,100) --------------- --------------- Net cash provided by (used in) investing activities 2,220 (5,083) --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES Purchase of treasury stock (1,445) (11,726) Payment of dividends (2,681) (1,924) --------------- --------------- Net cash used in financing activities (4,162) (13,650) --------------- --------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 5,420 (5,923) CASH AND CASH EQUIVALENTS - Beginning of period 3,432 9,355 --------------- --------------- CASH AND CASH EQUIVALENTS - End of period $ 8,852 $ 3,432 =============== ===============
NOTE 18 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table summarizes the Company's quarterly results for the years ended December 31, 2003 and 2002 (000s omitted):
For the Three-month Periods Ended --------------------------------------------------------------------------- March 31, June 30, September 30, December 31, 2003 2003 2003 2003 --------------- --------------- --------------- --------------- Interest income $ 15,497 $ 14,918 $ 15,032 $ 14,968 Interest expense 6,201 5,795 5,762 5,549 --------------- --------------- --------------- --------------- Net interest income 9,296 9,123 9,270 9,419 Provision for loan losses 360 360 360 360 Other income 2,953 2,937 2,875 1,542 Other expenses 6,797 6,907 7,081 6,614 --------------- --------------- --------------- --------------- Income before income taxes 5,092 4,793 4,704 3,987 Federal income taxes 1,891 1,517 1,718 1,129 --------------- --------------- --------------- --------------- Net income $ 3,201 $ 3,276 $ 2,986 $ 2,858 =============== =============== =============== =============== Basic earnings per share $ 0.40 $ 0.42 $ 0.38 $ 0.38 =============== =============== =============== =============== Diluted earnings per share $ 0.40 $ 0.42 $ 0.38 $ 0.37 =============== =============== =============== ===============
For the Three-month Periods Ended --------------------------------------------------------------------------- March 31, June 30, September 30, December 31, 2002 2002 2002 2002 --------------- --------------- --------------- --------------- Interest income $ 15,694 $ 15,484 $ 16,281 $ 15,189 Interest expense 6,740 6,714 6,707 6,708 --------------- --------------- --------------- --------------- Net interest income 8,729 8,770 9,574 8,481 Provision for loan losses 249 274 289 329 Other income 1,235 1,544 1,305 2,914 Other expenses 5,903 5,680 5,955 6,035 --------------- --------------- --------------- --------------- Income before income taxes 4,037 4,360 4,635 5,031 Federal income taxes 1,362 1,544 1,610 1,688 --------------- --------------- --------------- --------------- Net income $ 2,675 $ 2,816 $ 3,025 $ 3,343 =============== =============== =============== =============== Basic and diluted earnings per share $ 0.32 $ 0.34 $ 0.38 $ 0.42 =============== =============== =============== ===============
NOTE 19 - TRANSITION PERIOD COMPARATIVE DATA The following table presents certain financial information for the nine months ended December 31, 2002 and 2001, respectively (000s omitted):
Unaudited Nine months Nine months Ended Ended December 31, December 31, 2002 2001 --------------- --------------- Total interest income $ 46,954 $ 49,998 =============== =============== Net interest income after provision for loan losses $ 25,933 $ 25,300 Net noninterest expense 11,907 13,371 =============== =============== Federal income tax expense 4,842 4,056 Net income $ 9,184 $ 7,873 =============== =============== Basic earnings per common share $ 1.14 $ 0.91 =============== =============== Diluted earnings per common share $ 1.14 $ 0.91 =============== ===============
Unaudited Nine months Nine months Ended Ended December 31, December 31, 2002 2001 --------------- --------------- Cash flow s from operating activities: Net income $ 9,184 $ 7,873 Adjustments provided by operating activities 1,802 2,087 --------------- --------------- Net cash flows provided by operating activities 10,986 9,960 Net cash flows used in investing activities (74,310) (88,473) Net cash flows provided by financing activities 45,754 57,320 --------------- --------------- Net decrease in cash and cash equivalents (17,570) (21,193) Cash and cash equivalents - Beginning of period 57,926 53,618 --------------- --------------- Cash and cash equivalents - End of period $ 40,356 $ 32,425 =============== =============== Supplemental disclosure of cash flow information - Cash paid for Interest $ 20,355 $ 24,909 Federal income taxes 4,450 3,620
NOTE 20 - SUBSEQUENT EVENTS On January 9, 2004, Citizens First Bancorp, Inc. acquired all of the capital stock of Metro Bancorp, Inc. (Metro)and its wholly-owned subsidiary, Metrobank, a Michigan savings bank located in Farmington Hills, Michigan. Under the terms of the agreement, former shareholders of Metro received $711.73 for each outstanding share of Metro common stock on the effective date of the acquisition. Total consideration paid in the acquisition consisted of $30,000,000, and total assets acquired approximated $147,000,000. The Company is currently in process of determining the allocation of the total cost of the acquisition to the assets acquired and the liabilities assumed. To support future growth, the Company obtained a line-of-credit from an unrelated bank in the amount of $50,000,000 on January 9, 2004, of which $10,000,000 was drawn upon. The effective rate on the line-of-credit is based on the three month LIBOR rate plus 1.40 percent. The line is collateralized by the common stock of the Bank, expires on January 9, 2005, and is due on demand. EX-23.1 4 k82471exv23w1.txt CONSENT OF BDO SEIDMAN LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Form S-8 for the Company's Citizens First Savings Bank 401 (K) Plan (Registration No. 333-74218), Citizens First Bancorp, Inc. 2001 Stock-Based Incentive Plan (Registration No. 333-98199) and Citizens First Bancorp, Inc. Management Restricted Stock Purchase Plan (Registration No. 333-100516) of our report dated March 12, 2004 relating to the consolidated financial statements of Citizens First Bancorp, Inc. which appears in this Form 10-K. BDO SEIDMAN, LLP Grand Rapids, Michigan March 12, 2004 EX-23.2 5 k82471exv23w2.txt CONSENT OF PLANTE & MORAN PLLC EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Form S-8 our report dated February 14, 2003 on the financial statements of Citizens First Bancorp, Inc. for the nine months ended December 31, 2002 and year ended March 31, 2002, appearing in the Annual Report on Form 10-K (File No. 0-32041) for the year ended December 31, 2003. /s/ Plante & Moran, LLP Auburn Hills, MI EX-31.1 6 k82471exv31w1.txt RULE 13A-14(A) CERTIFICATIONS EXHIBIT 31.1 CERTIFICATIONS I, Marshall J. Campbell, President and Chief Executive Officer of Citizens First Bancorp, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Citizens First Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [This paragraph intentionally left blank.] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Marshall J. Campbell - -------------------------- Dated: March 15, 2004 EX-31.2 7 k82471exv31w2.txt RULE 13A-14(A) CERTIFICATIONS EXHIBIT 31.2 CERTIFICATIONS I, Timothy D. Regan, Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Citizens First Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [This paragraph intentionally left blank.] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Timothy D. Regan - ------------------------- Dated: March 15, 2004 EX-32.1 8 k82471exv32w1.txt SECTION 1350 CERTIFICATIONS EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ENACTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Citizens First Bancorp, Inc., (the "Company") on Form 10-K for the year ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Marshall J. Campbell, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. /s/ Marshall J. Campbell - --------------------------------- Marshall J. Campbell Chief Executive Officer March 15, 2004 EX-32.2 9 k82471exv32w2.txt SECTION 1350 CERTIFICATIONS EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ENACTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Citizens First Bancorp, Inc., (the "Company") on Form 10-K for the year ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Timothy D. Regan, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. /s/ Timothy D. Regan - -------------------------------- Timothy D. Regan Chief Financial Officer March 15, 2004 -----END PRIVACY-ENHANCED MESSAGE-----