1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
X Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2003
___ Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _______ to _________
Commission File Number 333-67435
CITIZENS FIRST CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)
Kentucky 61-0912615
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1805 Campbell Lane, Bowling Green, Kentucky 42101
(Address of principal executive offices)
Issuer's telephone number, including area code: (270) 393-0700
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
CLASS OUTSTANDING AT MAY 15, 2003
----- ---------------------------
Common Stock, no par value 643,053
Transitional Small Disclosure Format: Yes ___ No X
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CITIZENS FIRST CORPORATION
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements 3-8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
ITEM 4. Controls and Procedures 15
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Certifications 18-19
Exhibits 20-33
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
MARCH 31, 2003 DECEMBER 31, 2002
ASSETS
Cash and due from banks .......................... $ 4,466,664 $ 5,204,747
Federal funds sold ............................... -- 8,718,070
------------ ------------
Cash and cash equivalents .................... 4,466,664 13,922,817
Available for sale securities (amortized cost of
$12,503,576 as of March 31,2003; $15,980,411 as
of December 31, 2002)
12,660,323 16,186,406
Federal Home Loan Bank (FHLB) Stock ............... 356,900 353,600
Mortgage loans held for sale ...................... 1,726,765 305,200
Loans ............................................ 108,728,188 95,959,056
Less allowance for loan losses ................... 1,441,960 1,300,258
------------ ------------
Net loans ..................................... 107,286,228 94,658,798
Premises and equipment, net ...................... 2,812,682 1,840,022
Interest receivable .............................. 572,831 651,412
Other real estate owned .......................... -- 70,000
Deferred income taxes ............................ 336,706 335,193
Goodwill ......................................... 384,281 --
Other assets ..................................... 219,815 119,681
------------ ------------
Total assets .................................. $130,823,195 $128,443,129
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits ................................ $ 10,550,986 $ 11,304,108
Savings, NOW and money market deposits ......... 38,460,015 34,676,471
Time deposits .................................. 57,986,846 59,912,754
------------ ------------
Total deposits ............................... 106,997,847 105,893,333
Federal funds purchased .......................... 2,425,120 --
Securities sold under agreements to repurchase ... 4,271,681 5,833,512
Federal Home Loan Bank (FHLB) borrowings ......... 7,000,000 7,000,000
Long-term debt ................................... 1,300,000 900,000
Deferred income taxes ............................ -- 15,231
Accrued interest and other liabilities ........... 905,050 962,801
------------ ------------
Total liabilities ............................. 122,899,698 120,604,877
Stockholders' equity:
Common stock, no par value authorized 2,000,000
shares; issued and outstanding 643,053 shares,
respectively ................................. 7,357,477 7,357,477
Retained earnings .............................. 462,567 344,818
Accumulated other comprehensive income ......... 103,453 135,957
------------ ------------
Total stockholders' equity ................... 7,923,497 7,838,252
------------ ------------
Total liabilities
And stockholders' equity .................. $130,823,195 $128,443,129
============ ============
See accompanying notes to condensed consolidated financial statements.
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CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31: 2003 2002
----- ----
INTEREST INCOME
Loans, including fees ............. $1,529,947 $1,434,361
Federal funds sold ................ 3,392 9,984
Securities ........................ 181,734 129,797
Other ............................. 3,388 3,456
--------- ----------
Total interest income ............. 1,718,461 1,577,598
INTEREST EXPENSE
Deposits .......................... 584,342 643,339
Other borrowings .................. 74,026 85,606
--------- ----------
Total interest expense ............ 658,368 728,945
--------- ----------
NET INTEREST INCOME ................. 1,060,093 848,653
Provision for loan losses ......... 153,000 30,000
--------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ......... 907,093 818,653
---------- ----------
NON-INTEREST INCOME
Service charges on deposit accounts 147,089 92,596
Income from the sale of loans ..... 91,938 9,238
Gain on the sale of securities .... 9,292 --
Other ............................. 39,880 10,615
--------- ----------
Total non-interest income ......... 288,199 112,449
NON-INTEREST EXPENSES
Compensation and benefits ......... 593,527 359,885
Net occupancy expense ............. 65,293 44,202
Furniture and equipment expense ... 84,967 68,120
Professional fees ................. 31,591 24,197
Postage, printing and supplies .... 29,991 15,205
Processing fees ................... 70,102 55,588
Advertising ....................... 47,204 37,043
Other ............................. 100,018 127,463
--------- ----------
Total non-interest expenses ....... 1,022,693 731,703
---------- ----------
INCOME BEFORE INCOME TAXES .......... $ 172,599 $ 199,399
INCOME TAX EXPENSE .................. 54,850 68,510
---------- ----------
NET INCOME .......................... $ 117,749 $ 130,889
========== ==========
BASIC EARNINGS PER COMMON SHARE ..... $ 0.18 $ 0.20
See accompanying notes to condensed consolidated financial statements.
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CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31: 2003 2002
---- ----
Balance January 1 .................... $ 7,838,252 $ 7,066,376
Net income ......................... 117,749
130,889
Other comprehensive loss, net of tax (32,504) (43,422)
----------- -----------
Balance at end of period ............. $ 7,923,497 $ 7,153,843
=========== ===========
See accompanying notes to condensed consolidated financial statements.
CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31: 2003 2002
---- ----
Net income ...................................................... $ 117,749 $ 130,889
Other comprehensive income,(loss) net of tax:
Unrealized (depreciation) on available for sale
securities, net of income taxes (credit) of $(16,744) and
$(22,368), arising during the period, respectively....... (32,504) (43,422)
--------- ---------
Comprehensive income ............................................ $ 82,545 $ 87,467
========= =========
See accompanying notes to condensed consolidated financial statements.
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CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31: 2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 117,749 $ 130,889
Items not requiring (providing) cash:
Depreciation and amortization ........................... 106,439 70,954
Provision for loan losses ............................... 153,000 30,000
Amortization of premiums and discounts on securities .... 37,065 4,027
Net realized gain on disposition of investment securities (9,292) --
FHLB stock dividends received ........................... 3,400 2,700
Mortgage loans held for sale originated ................. (8,697,504) (2,258,100)
Sale of mortgage loans held for sale .................... 7,275,939 3,202,259
Changes in:
Accrued interest receivable ............................. 78,581 (22,713)
Other assets ............................................ (462,720) 220,807
Interest payable and other liabilities .................. (56,238) (2,898)
------------ ------------
Net cash provided (used) in operating activities ....... (1,453,581) 1,377,925
CASH FLOWS FROM INVESTING ACTIVITIES:
Net changes in loans ...................................... (12,780,430) 1,058,596
Purchases of premises and equipment ....................... (1,039,007) (16,028)
Proceeds from maturities of securities available for sale . 6,221,812 535,174
Proceeds from sales of securities available for sale ...... 304,750 --
Purchase of securities available for sale ................. (3,077,500) --
Purchase of mortgage company and title company ............ (398,688) --
------------ ------------
Net cash provided (used) in investing activities ....... (10,769,063) 1,577,742
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase/(decrease) in deposits ....................... 1,104,514 (5,142,399)
Net decrease in other borrowings .......................... 400,000 (1,924,000)
Net increase/(decrease) in federal funds purchased and ....
repurchase agreements 863,289 129,072
------------ ------------
Net cash provided (used) in financing activities ........ 2,367,803 (6,937,327)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................. (9,456,153) (3,981,660)
Cash and cash equivalents at beginning of period .......... 13,922,817 6,526,769
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................ 4,466,664 $ 2,545,109
============ ============
See accompanying notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Citizens First
Corporation (the "Company") and its subsidiary, Citizens First Bank,
Inc.(the "Bank"),conform to accounting principles generally accepted in
the United States of America and general practices within the banking
industry. The condensed consolidated financial statements include the
accounts of the Company and the Bank. All significant intercompany
transactions and accounts have been eliminated in consolidation.
Certain information and note disclosures normally included in
the Company's annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Form 10-KSB annual report for 2002 filed with the Securities
and Exchange Commission.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Estimates used in the preparation of the financial
statements are based on various factors including the current interest
rate environment and the general strength of the local economy. Changes
in the overall interest rate environment can significantly affect the
Company's net interest income and the value of its recorded assets and
liabilities. Actual results could differ from those estimates used in
the preparation of the financial statements.
The financial information presented has been prepared from the
books and records of the Company and is not audited. The accompanying
consolidated condensed financial statements have been prepared in
accordance with the instructions to Form 10-QSB and do not include all
of the information and the footnotes required by accounting principles
generally accepted in the United States of America for complete
statements.
In the opinion of management, all adjustments considered
necessary for a fair presentation have been reflected in the
accompanying unaudited financial statements. Results of interim periods
are not necessarily indicative of results to be expected for the full
year. Those adjustments consist only of normal recurring adjustments.
The condensed consolidated balance sheet of the Company as of
December 31, 2002, has been derived from the audited consolidated
balance sheet of the Company as of that date.
(2) RECLASSIFICATIONS
Certain reclassifications have been made to the 2002 financial
statements to conform to the 2003 financial statement presentation.
These reclassifications had no effect on net earnings.
(3) STOCK OPTION PLANS
On December 9, 2002, the board of directors adopted the 2002
Stock Option Plan, which became effective subject to the approval of
the Company's shareholders at the annual meeting in April 2003. The
purpose of the plan is to afford key employees an incentive to remain
in the employ of the Company and its subsidiaries and to use their best
efforts on its behalf. 120,000 shares of Company common stock have been
reserved for issuance under the plan.
On January 17, 2003, the board of directors adopted the 2003
Stock Option Plan for Non-Employee Directors, which became effective
subject to the approval of the Company's shareholders at the annual
meeting in April 2003. The purpose of the plan is to assist the Company
in promoting a greater identity of interest between the Company's
non-employee directors and shareholders, and in attracting and
retaining non-employee directors by affording them an opportunity to
share in the Company's future successes. 40,000 shares of common stock
have been reserved for issuance under the plan.
The 2002 Stock Option Plan and the 2003 Stock Option Plan for
Non-Employee Directors were approved at the Company's Annual Meeting of
Shareholders on April 17, 2003.
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(4) STOCK OFFERING
The Company is currently proposing to raise additional equity
through the sale of additional shares of common stock. The Company
filed a Registration Statement on Form SB-2 with the Securities and
Exchange Commission in February 2003 for the offering and sale of up to
$10,000,000 of shares of the Company's common stock. As of the end of
March 2003, the offering had not commenced.
(5) ACQUISITION OF COMMONWEALTH MORTGAGE AND SOUTHERN KENTUCKY
LAND TITLE
On January 2, 2003, the Bank acquired all of the outstanding
stock of Commonwealth Mortgage of Bowling Green, Inc. and Southern
Kentucky Land Title, Inc. Commonwealth Mortgage originates 1-4 family
residential mortgages for sale in the secondary mortgage market, while
Southern Kentucky Land Title provides title insurance agency services
for real estate purchase contracts. The purchase price for Commonwealth
Mortgage and Southern Kentucky Land Title consisted of $400,000 in cash
plus a deferred contingent purchase price of up to $1,350,000 payable
upon the combined entities' achievement of specified annual earnings
targets over a five year period, plus 25% of the amount, if any, by
which their earnings exceed such targets. 25% of the deferred purchase
price will be paid by the issuance of the Company's common stock,
valued at the average of the closing sales price of the stock over the
last ten trading days of the applicable calendar year. At the Company's
option, an additional 25% of such deferred purchase price, if any, may
be paid in shares of our common stock. The deferred contingent purchase
price will be accounted for as additional purchase price at the time
the contingency is resolved. The Bank also purchased the .2 acre site
on which the main office of Commonwealth Mortgage is located for a
purchase price of $272,500 in cash. Goodwill recognized in this
transaction amounted to $380,000, all of which was assigned to the
Bank.
The acquisition of Commonwealth Mortgage and Southern Kentucky
Land Title was completed to give the Bank an expanded presence in the
local mortgage origination market, to further expand the Bank's
customer service offerings, and to supplement the Bank's non-interest
fee income.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company was incorporated under the laws of the
Commonwealth of Kentucky on December 24, 1975 for the purpose of
conducting business as an investment club, and is headquartered in
Bowling Green, Kentucky. In late 1998 and early 1999, the Company filed
the appropriate regulatory applications and received regulatory
approval to become a bank holding company under the Bank Holding
Company Act of 1956, as amended, through its organization and ownership
of its only subsidiary, the Bank. On February 17, 1999, the Company
completed the initial public offering for the sale of 536,667 shares of
its no par value common stock. The proceeds of the sale of the stock
were used to pay start up expenses, liquidate short-term borrowings,
and capitalize the Bank. The Bank opened for business on February 18,
1999.
The Company follows a corporate strategy that focuses on
providing the Bank's customers with high quality, personal banking
services. The Bank offers a range of products designed to meet the
needs of its customers that include individuals, small businesses,
partnerships and corporations.
The Bank offers a full range of deposit services. Checking
account services include regular non-interest bearing checking accounts
as well as interest bearing negotiable order of withdrawal ("NOW")
accounts. Savings and certificate of deposit accounts include accounts
ranging from a daily maturity (regular savings and also money market
accounts) to longer term certificates as authorized by law. In
addition, retirement accounts such as IRA's (Individual Retirement
Accounts) are available. All deposit accounts are insured by the
Federal Deposit Insurance Corporation to the full amount permitted by
law. Deposit accounts are solicited from individuals, businesses,
professional organizations and governmental authorities.
Lending services include a full range of commercial, personal,
and mortgage loans. The Bank's primary lending focus is on business
lending. The types of commercial loans that are available include both
secured and unsecured loans for working capital (including inventory
and receivables), business expansion (including acquisition of real
estate and improvements) and purchase of machinery and equipment. The
types of personal loans that are available include secured and
unsecured loans for such purposes as financing automobiles, home
improvements, education and personal investments. The Bank originates,
processes and closes residential real estate loans that are then
usually sold on the secondary market (each individually) to a
correspondent.
The Bank offers credit cards (through correspondent banking
services) including MasterCard(TM) and Visa(TM) as well as a personal
checking account related line of credit. The line of credit is
available for both protection against unexpected overdrafts and also
for the convenience of having a pre-arranged loan that can be activated
simply by a check drawn on a personal checking account. Other services
offered include, but are not limited to, safe deposit boxes, letters of
credit, travelers checks, direct deposit of payroll, social security
and dividend payments and automatic payment of insurance premiums and
mortgage loans. The Bank does not have a proprietary automated teller
machine but participates in a national ATM network through the FiServ
EFT network and then through the Visa Debit Card Program.
The Bank operates in four full-service locations, currently
has one loan production office, and one mortgage origination company
which is operating as a division of the Bank. The main office and two
full-service branches are located in Bowling Green, Kentucky. A third
full-service branch, currently operating in a temporary facility, is
located in Franklin, Kentucky. The main office is located at 1805
Campbell Lane, the first branch office, which opened on March 22, 1999,
is located at 901 Lehman Avenue and the second branch office, which
opened February 27, 2003, is located at 2451 Industrial Drive. The
Franklin branch opened for business as a loan production office
during January 2003. By the end of the first quarter of 2003,
application had been filed with the FDIC for approval to convert the
loan production office into a full-service branch. Subsequent to the
end of the first quarter that application was approved. The mortgage
origination company was purchased by the Bank on January 2, 2003 and
operates at 1301 US Highway 31W Bypass in Bowling Green, Kentucky.
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APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared
in accordance with accounting principles generally accepted in the
United States and follow general practices within the financial
services industry. The most significant accounting policies followed by
the Company are presented in Note 1 to the consolidated financial
statements in the Company's Form 10-KSB annual report for 2002 filed
with the Securities and Exchange Commission. These policies, along with
the disclosures presented in the other financial statement notes and in
this financial review, provide information on how significant assets
and liabilities are valued in the financial statements and how those
values are determined. Based on the valuation techniques used and the
sensitivity of financial statement amounts to the methods, assumptions,
and estimates underlying those amounts, management has identified the
determination of the allowance for loan losses to be the accounting
area that requires the most subjective or complex judgments, and as
such could be most subject to revision as new information becomes
available.
The allowance for loan losses represents management's estimate
of probable credit losses inherent in the loan portfolio. Determining
the amount of the allowance for loan losses is considered a critical
accounting estimate because it requires significant judgment and the
use of estimates related to the amount and timing of expected future
cash flows on impaired loans, estimated losses on loans based on
historical loss experience, and consideration of current economic
trends and conditions, all of which may be susceptible to significant
change.
The loan portfolio also represents the largest asset type on
the consolidated balance sheet. Note 1 to the consolidated financial
statements in the Company's Form 10-KSB annual report for 2002 filed
with the Securities and Exchange Commission describes the methodology
used to determine the allowance for loan losses, and a discussion of
the factors driving changes in the amount of the allowance for loan
losses is included under Asset Quality below.
Loans that exhibit probable or observed credit weaknesses are
subject to individual review. Where appropriate, reserves are allocated
to individual loans based on management's estimate of the borrower's
ability to repay the loan given the availability of collateral, other
sources of cash flow and legal options available to us. Included in the
review of individual loans are those that are impaired as provided in
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," We
evaluate the collectibility of both principal and interest when
assessing the need for a loss accrual. Historical loss rates are
applied to other loans not subject to reserve allocations. These
historical loss rates may be adjusted for significant factors that, in
management's judgment, reflect the impact of any current conditions on
loss recognition. Factors which management considers in the analysis
include the effects of the national and local economies, trends in the
nature and volume of loans (delinquencies, charge-offs and nonaccrual
loans), changes in mix, asset quality trends, risk management and loan
administration, changes in internal lending policies and credit
standards, and examination results from bank regulatory agencies and
our internal credit examiners.
An unallocated reserve is maintained to recognize the
imprecision in estimating and measuring loss when evaluating reserves
for individual loans or pools of loans. Reserves on individual loans
and historical loss rates are reviewed quarterly and adjusted as
necessary based on changing borrower and/or collateral conditions and
actual collection and charge-off experience.
The Company has not substantively changed any aspect of its
overall approach in the determination of the allowance for loan losses.
There have been no material changes in assumptions or estimation
techniques as compared to prior periods that impacted the determination
of the current period allowance.
Based on the procedures discussed above, management is of the
opinion that the reserve of $1,441,960 was adequate, but not excessive,
to absorb estimated credit losses associated with the loan portfolio at
March 31, 2003.
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RESULTS OF OPERATIONS
For the three months ended March 31, 2003, the Company
reported net income of $117,749, or $0.18 per common share, compared to
net income of $130,889, or $0.20 per common share, for the same
period ended March 31, 2002. Net income for the first quarter of 2003
includes a gain of $9,292 from the sale of investment securities.
NET INTEREST INCOME
Net interest income was $1,060,093 in the first quarter of
2003, compared with $848,653 in the comparable period in 2002. First
quarter 2003 interest income of $1,718,461, an increase of $140,863 or
8.9% over the same period in 2002, includes $1,529,947 income on loans,
$181,734 income on securities, and $6,780 income on federal funds sold
and other interest-bearing accounts. Interest income of $1,577,598
during the first quarter of 2002 included $1,434,361 of income on
loans, $129,797 income on investment securities, and $13,440 income on
federal funds sold and other interest-bearing accounts. Interest
expense of $658,368 for the first quarter of 2003, down $70,577 from
the same period in 2002, consists of interest on deposits of $584,342,
and on other short-term borrowings of $74,026. First quarter 2002
interest expense of $728,945 consisted of interest on deposits of
$643,339, and interest on other short-term borrowings of $85,606. The
growth of the balance sheet, particularly loans and deposits, from the
first quarter of 2002 to the same period in 2003, coupled with the drop
in the cost of interest-bearing liabilities, offset by the drop in
yields on interest earning assets, contributed to the increase in net
interest income. The drop in both the cost of interest-bearing
liabilities and the yield on interest-earning assets in the first
quarter of 2003, compared to the same period in 2002, was primarily due
to the continued repricing of loans and deposits of the Bank after the
reduction of short-term interest rates by the Federal Reserve Bank
during 2001 of 475 basis points, and the further reduction of another
50 basis points during the fourth quarter of 2002. The Bank is asset
sensitive, meaning assets reprice faster to changes in short-term rates
than do liabilities. In a falling short-term rate environment, such as
occurred during 2001 and the fourth quarter of 2002, more of the Bank's
interest earning assets, primarily loans, reprice down faster than do
the liabilities, specifically certificates of deposit, which provide
the funding for the assets.
NON-INTEREST INCOME
Non-interest income for the three months ended March 31, 2003
respectively, was $288,199 and $112,449, an increase of $175,750 or
156.3%. Income from service charge on deposit accounts increased
$54,493, from $92,596 during the first quarter of 2002 to $147,089 for
the first quarter of 2003, and comprised the largest part of
non-interest income for both time periods. The increase is primarily
attributable to growth in accounts subject to service charges, and to
the recent introduction of a new product that allows pre-approved
customers to access additional funds, as needed, for a fee. The growth
in income from the sale of secondary market residential loans is
attributed to the acquisition of the mortgage origination company,
completed on January 2, 2003. Non-interest income for the first quarter
of 2003 includes a gain of $9,292 from the sale of investment
securities.
NON-INTEREST EXPENSE
Non-interest expense was $1,022,693 in the first quarter of
2003, up from $731,703 in the same quarter of 2002, an increase of
$290,990 or 39.8%. The initiatives designed to better service our
customers, including the opening of another full service branch office
in Bowling Green, Kentucky, the opening of a loan production office in
Franklin, Kentucky, and the acquisition of a mortgage origination
company, contributed to the increase in non-interest expense during the
first quarter of 2003. The largest increase is in compensation and
benefits expense, up $233,642, or 64.9%, from $359,885 to $593,527,
primarily attributable to the staffing increases associated with the
new branch office, the loan production office, and the mortgage
origination office.
INCOME TAXES
Income tax expense has been calculated based on the Company's
expected annual rate for 2003. During the first quarter of 2003, income
tax expense totaled $54,850, compared to $68,510 for the same period of
2002. Deferred tax liabilities and assets are recognized for the tax
effects of differences between the financial statement and tax bases of
assets and liabilities.
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BALANCE SHEET REVIEW
OVERVIEW
Total assets at March 31, 2003 were $130,823,195, up from
$128,443,129 at December 31, 2002 and up from $97,944,590 a year ago.
Average total assets for the first quarter of 2003 were $127,016,750,
up $25,748,771 from the first quarter of 2002 average of $101,267,979.
LOANS
At March 31, 2003 loans (excluding mortgage loans held for
sale) totaled $108,728,188, compared with $95,959,056 at December 31,
2002 and $83,663,150 a year ago, an increase of $12,769,132 and
$25,065,038 respectively. This increase is attributable primarily to
loans generated by the loan production office opened in Franklin,
Kentucky during the first quarter of 2003, and adjustable rate
mortgage loans from Commonwealth Mortgage customers. Loans averaged
$100,819,182 during the first quarter of 2003, an increase of
$17,246,994 or 20.64%, over the average total of $83,572,188 for the
first quarter of 2002.
ASSET QUALITY
The allowance for loan losses was $1,441,960 at March 31,
2003, an increase of $141,702, or 10.9% over the December 31, 2002
level of $1,300,258. The allowance represents 1.33% of period-end
loans, compared to 1.36% of period-end loans at December 31, 2002.
Non-performing loans are defined as non-accrual loans, loans
accruing but past due 90 days or more, and restructured loans. The Bank
had non-performing loans totaling $149,000 at March 31, 2003, compared
to $115,000 at December 31, 2002 and $304,000 at March 31, 2002.
Included in the non-performing loan total at March 31, 2003 and at
December 31, 2002 is one loan, totaling $115,000, secured by
residential real estate, which was placed on non-accrual status during
the third quarter of 2002. The remaining $34,000 of non-performing
loans consists of two loans accruing but past due over 90 days. At
March 31, 2002, the Bank had two loans on non-accrual status secured by
residential real estate.
Management classifies commercial and commercial real estate
loans as non-accrual when principal or interest is past due 90 days or
more and the loan is not adequately collateralized and is in the
process of collection, or when, in the opinion of management, principal
or interest is not likely to be paid in accordance with the terms of
the obligation. Consumer loans are charged off after 120 days of
delinquency unless adequately secured and in the process of collection.
Non-accrual loans are not reclassified as accruing until principal and
interest payments are brought current and future payments appear
reasonably certain. Loans are categorized as restructured if the
original interest rate, repayment terms, or both were restructured due
to deterioration in the financial condition of the borrower. However,
restructured loans that demonstrate performance under the restructured
terms and that yield a market rate of interest may be removed from
restructured status in the year following the restructure.
Non-performing assets are defined as non-performing loans,
foreclosed real estate, and other foreclosed property. The Bank had
non-performing assets of $149,000 at the end of the first quarter of
2003, comprised of the above mentioned non-performing loans. The Bank
had non-performing assets of $185,000 at December 31, 2002, comprised
of $115,000 of non-performing loans, and $70,000 of non-performing
assets.
The allowance for loan losses is established through a
provision for loan losses charged to expense. The level of the
allowance is based on management's and the Bank Board of Directors Loan
Committee's ongoing review and evaluation of the loan portfolio and
general economic conditions on a monthly basis and by the full Board of
Directors on a quarterly basis. Management's review and evaluation of
the allowance for loan losses is based on an analysis of historical
trends, significant problem loans, current market value of real estate
or collateral and certain economic and other factors affecting loans
and real estate or collateral securing these loans. Loans are charged
off when, in the opinion of management, they are deemed to be
uncollectible. Recognized losses are charged against the allowance and
subsequent recoveries are added to the allowance. While management uses
the best information available to make evaluations, future adjustments
to the allowance may be necessary if economic conditions differ
substantially from the assumptions used in making the evaluation. The
allowance for loan losses is
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reviewed internally by personnel independent of the loan department.
In addition, the allowance is subject to periodic evaluation by various
regulatory authorities and may be subject to adjustment based upon
information that is available to them at the time of their examination.
The provision expense for loan losses totaled $153,000 for the
three months ended March 31, 2003, and $30,000 for the three months
ended March 31, 2002.
SECURITIES
Securities (all classified as available for sale) decreased
from $16,186,406 at December 31, 2002 to $12,660,323 at March 31, 2003.
At March 31, 2002 securities totaled $9,595,875. The decrease in
securities from year-end 2002 to the end of the first quarter of 2003
is attributable to the need to use proceeds from matured securities for
the strong loan growth experienced during the first quarter of 2003.
DEPOSITS AND BORROWED FUNDS
Total deposits averaged $104,182,031 in the first quarter of
2003, an increase of $20,010,059 from the comparable 2002 quarterly
average of $84,171,972. As of March 31, 2003, total deposits were
$106,997,847, and included $96,446,861 of interest bearing deposits.
This compares to total deposits of $105,893,333 at December 31, 2002,
which included $94,589,225 of interest bearing deposits. Total deposits
at March 31,2002 were $82,748,429, and included interest bearing
deposits of $76,909,985.
The Bank had $4,271,681 of deposits secured by securities sold
under agreements to repurchase on March 31, 2003. These obligations,
which mature in one business day, are swept daily from customers'
demand deposit accounts. These balances averaged $4,760,427 during the
first quarter of 2003.
At March 31, 2003, the Company had established Federal Funds
lines of credit totaling $8,950,000 with four correspondent banks. The
Company successfully applied for membership in the Cincinnati Federal
Home Loan Bank during 2000, in order to be able to obtain advances and
lines of credit from the FHLB. At March 31, 2003, the Company had two
outstanding FHLB advances totaling $7,000,000. The first FHLB advance,
which was issued December 19, 2001, matures March 19, 2004 and has a
fixed interest rate of 4.04%. The second FHLB advance, which was issued
December 11, 2002, matures June 9, 2003 and has a fixed interest rate
of 1.50%. The Company has a pre-arranged borrowing limit with the FHLB
that is collateralized by 135% of unpaid principal balances of eligible
1-4 family residential mortgage loans. At March 31, 2003, the Company
had available collateral to borrow an additional $7.5 million from the
FHLB.
In 2001, the Company executed a credit agreement with a
correspondent bank for the purpose of injecting capital into Citizens
First Bank. The Company made three draws in 2001 totaling $875,000 from
a total availability of $3,000,000. The Company made one draw in 2002
totaling $25,000. During the first quarter of 2003, the Company made
one draw $400,000, bringing total outstanding debt under this credit
agreement to $1,300,000 at March 31, 2003. Subsequent to the end of the
first quarter of 2003, the Company made a draw for $1,000,000, bringing
total outstanding debt under the credit agreement to $2,300,000. The
current rate on the loan, which is repriced annually at one-year LIBOR
plus 275 basis points, is 5.11%. The stock of Citizens First Bank is
pledged as collateral for the loan.
CAPITAL RESOURCES AND LIQUIDITY
The Board of Governors of the Federal Reserve System has
adopted risk based capital and leverage ratio requirements for banks.
The table below sets forth the Bank's capital ratios as of March
31,2003, December 31, 2002 and March 31, 2002; the regulatory minimum
capital ratios; and the regulatory minimum capital ratios for
well-capitalized companies:
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March 31, December 31, March 31,
2003 2002 2002
----- ---- ----
Tier 1 risk based ........... 7.99% 9.01% 9.72%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 6.00 6.00 6.00
Total risk based ............ 9.24% 10.26% 10.98%
Regulatory minimum ..... 8.00 8.00 8.00
Well-capitalized minimum 10.00 10.00 10.00
Leverage .................... 6.79% 7.75% 7.86%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 5.00 5.00 5.00
Both risk based capital ratios have decreased from December
31, 2002 to March 31, 2003, as the rate of growth of risk-weighted
assets has been higher than the rate of growth of total equity. The
leverage ratio decreased from the end of December 2002 to the end of
March 2003 due to the faster rate of growth in the quarterly average of
total assets, compared to the rate of growth of total equity, during
the first quarter of 2003.
The Company's primary cash requirements are expected to be met
by the anticipated growth of customers' deposits. The Bank has also
established federal funds guidelines with correspondent banks, giving
it short-term borrowing availability, and has established a program
allowing it to sell investment
securities under an agreement to repurchase at a later date. In
addition, the Bank has borrowing capabilities through the Federal Home
Loan Bank of Cincinnati. The Company has the need to raise additional
funds to inject as capital into the Bank, due primarily to the growth
of the Bank's assets. The Company is currently proposing to raise
additional equity through the sale of additional shares of common
stock. See Note 4 of the Notes to the Condensed Consolidated Financial
Statements.
Liquidity is the measure of the Bank's ability to fund
customer's needs for borrowings and deposit withdrawals. In the first
quarter of 2003, the Company's principal source of funds has been the
acquisition of customers' deposits, repayment of loans, and other funds
from bank operations, as was the case for the first quarter of 2002.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements,
either expressed or implied, which are provided to assist the reader in
making judgments about the Company's possible future financial
performance. Such statements are subject to certain risks and
uncertainties, including without limitation changes in economic
conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans
in the Company's market area, competition, and those risks and
uncertainties discussed under the heading "Risk Factors" in the
Company's Registration Statement on Form SB-2 as filed with the
Securities and Exchange Commission. The factors listed above could
affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from
any opinions or statements expressed or implied with respect to future
periods in any current statements.
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ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing this quarterly report on Form 10-QSB,
an evaluation was performed under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on and as of the time of
such evaluation, the Company's management, including the Chief Executive Officer
and Chief Financial Officer, concluded that the Company's disclosure controls
and procedures were effective in timely alerting them to material information
relating to the Company required to be included in the Company's periodic filing
with the Securities and Exchange Commission. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to the time of such
evaluation.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index of this
Form 10-QSB are filed as a part of this report.
(b) Reports on Form 8-K during the quarter ended March 31, 2003:
Form 8-K filed on January 17, 2003 reporting an
Item 2 event (the acquisition of Commonwealth
Mortgage of Bowling Green, Inc. and Southern Kentucky
Land Title).
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CITIZENS FIRST CORPORATION
Date: May 15, 2003 /s/ Mary D. Cohron
------------------
Mary D. Cohron
President and Chief Executive Officer
(Principal Executive Officer)
May 15, 2003 /s/ Bill D. Wright
------------------
Bill D. Wright
Vice-President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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CERTIFICATION
I, Mary D. Cohron, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Citizens First
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures 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 quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003
By: /s/ Mary D. Cohron
--------------------------------------
Mary D. Cohron
President and Chief Executive Officer
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CERTIFICATION
I, Bill D.Wright, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Citizens First
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures 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 quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003
By: /s/ Bill D. Wright
--------------------------------------
Bill D.Wright
Vice President and Chief Financial Officer
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EXHIBITS
10.1 2002 Stock Option Plan of Citizens First Corporation
10.2 2003 Non-Employee Directors Stock Option Plan of Citizens First
Corporation
99.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350.
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