Financial Statement Restatement Paper – Citizens First Bancorp, Inc.
In 2009 Citizens First Bancorp, Inc. was forced to restate their earnings in the first and second quarters. The first quarter was revised due to “an accounting error on a $7.5 million impairment of its deferred tax valuation allowance” (Barba, R. October 20, 2009). The second quarter revision was a regulatory action by the Federal Deposit Insurance Corporation, which involved allegations of “inappropriate behavior at the company, including removing unfavorable appraisals from the loan files, in an attempt to avoid the recognition of additional loan losses” (Barba, R. October 20, 2009). Errors in accounting principles, along with the effects the restatements have on the company’s financials and stockholders are examined. The first quarter restatement involved the accounting error on deferred tax valuation. Citizens initially overstated their tax deferred asset allowance, and now “it must essentially write down the deferred tax asset, which it does by creating a “valuation allowance” on its balance sheet. That valuation allowance cuts into income reported to investors and can hit a portion of a bank’s regulatory capital, as well” (Alloway, T. November 4, 2010). The write down presented a problem for Citizens because of the financial crisis banks are being forced to hold more tier one capital.
A good definition of Tier 1 capital is that it includes equity capital and disclosed reserves, where equity capital includes instruments that can't be redeemed at the option of the holder (meaning that the owner of the shares cannot decide on his own that he wants to withdraw the money he invested and so cannot leave the bank without the risk coverage). Reserves are held by the bank and are money that no one but the bank can have an influence on. (Wikipedia, n.d.)
The FDIC is now keeping a much closer eye on banks levels of tier one capital, and for Citizens the restatement pushed their capital levels below what is considered well capitalized. The second restatement regarding the increased loan loss provision deals with Citizen’s assets on their books were not valued accurately. Loans did not have adequate collateral backing them and future defaults on loans would be greater than anticipated. Citizens Bancorp is not alone in the increases in loan loss provisions. “Many community banks have failed to come to terms with the true value of their assets” (Barba, R. October 20, 2009). The FDIC required Citizens to increase their loan loss allowances by 52 percent to 8.1 million (Barba, R. October 20, 2009). The increase in loan loss provision also affects the tier one capital ratio.
The Tier 1 capital ratio is the ratio of a bank's core equity capital to its total risk-weighted assets. The Tier 1 risk based capital ratio is the ratio of a bank's core (equity capital) to its total risk-weighted assets which are the total of all assets held by the bank which are weighted for credit risk according to a formula determined by the Central Bank. (Wikipedia, n.d.)
If Citizens capital ratios fall below 6%, this indicates undercapitalization and the bank will have to raise more capital either through a stock issuance or an increase in their asset reserves to bring the capitalization ratio to acceptable levels. These ratios are critical for investors because undercapitalized banks with a “designation below 6% are not allowed to pay dividends” (Barba, R. October 20, 2009). On the filed SEC 10-Q for Citizens, the Consolidated Balance Sheet reflects loans less allowance for loan losses of 1.3 billion dollars. The Consolidated Income Statement reflects the increase in loan loss provision which reduces net income reported to shareholders. The impairment of the tax deferred asset is also recorded in the Consolidated Balance Sheet and Consolidated Income Statement. The Consolidated

Statement of Cash Flows operating activities reports both the increase in loan loss provision and the tax deferred asset write down (SEC.gov. August 8, 2009). Citizens First Bancorp Inc. provides a good example of the effects of accounting errors on financial statements. Since the inception of the Sarbanes-Oxley Act, regulators are watching banks, and all corporations, more closely than ever before. Citizens could not say much in their defense in regard to the loan loss provision restatement because it was induced by the FDIC, but the impairment tax valuation was attributed to accounting errors. In both cases the impact on the financials and investors was a $118M net loss for the bank and $93M in delinquent loans. The bank was acquired by First Michigan Bank on April 30th, 2010 (Gervais, L. May 5, 2010).

References
Alloway, T. (November 4, 2010). The deferred tax asset disaster. Financial Times. Retrieved December 9, 2010 from http://ftalphaville.ft.com/blog/2009
Barba, R. (October 20, 2009). Regulators’ Views Force Restatement. American Banker. Vol. 174, Iss. 191; pg. 1. Retrieved from Proquest, University of phoenix library from Accounting & Tax Periodicals. (Document ID: 1886779431).
Gervais, L. (May 5, 2010). Michigan First Takes Over Citizens First. The Voice. Retrieved from www.voicenews.com
SEC.gov. (August 8, 2009). Citizens First Bancorp Inc. 10-Q Filing. Retrieved from http://www.sec.gov/Archives/edgar/data/1127442/000095012309035475/10vq.htm
Tier 1 Capital (n.d.). Wikipedia Dictionary online. Retrieved from http://www.wikipedia.com
Tier 1 Capital Ratio (n.d.). Wikipedia Dictionary online. Retrieved from http://www.wikipedia.com