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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 September 30, 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 November 14, 2003
Common Stock, no par value 764,746
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 3-10
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-18
ITEM 3. Controls and Procedures 19
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibits 22-26
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Part 1. Financial Statements
Item 1. Financial Statements
Citizens First Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, 2003 December 31, 2002
Assets
Cash and due from banks .............................................. $ 5,393,027 $ 5,204,747
Federal funds sold ................................................... -- 8,718,070
------------- -------------
Cash and cash equivalents ........................................ 5,393,027 13,922,817
Available for sale securities (amortized cost
of $19,850,094 as of September 30,
2003; $15,980,411 as of December 31, 2002)
19,332,838 16,186,406
Federal Home Loan Bank (FHLB) Stock ................................... 420,900 353,600
Mortgage loans held for sale .......................................... 102,000 305,200
Loans ................................................................ 133,229,215 95,959,056
Less allowance for loan losses ....................................... 1,898,864 1,300,258
------------- -------------
Net loans ......................................................... 131,330,351 94,658,798
Premises and equipment, net .......................................... 3,537,800 1,840,022
Interest receivable .................................................. 690,697 651,412
Other real estate owned .............................................. -- 70,000
Deferred income taxes ................................................ 936,801 335,193
Goodwill ............................................................. 384,243 --
Other assets ......................................................... 149,467 119,681
------------- -------------
Total assets ...................................................... $ 162,278,124 $ 128,443,129
============= =============
Liabilities and Stockholders' Equity
Deposits:
Demand deposits .................................................... $ 10,747,385 $ 11,304,108
Savings, NOW and money market deposits ............................. 50,697,150 34,676,471
Time deposits ...................................................... 71,075,033 59,912,754
------------- -------------
Total deposits ................................................... 132,519,568 105,893,333
Federal funds purchased .............................................. 44,008 --
Securities sold under agreements to repurchase ....................... 6,424,171 5,833,512
Federal Home Loan Bank (FHLB) borrowings ............................. 11,000,000 7,000,000
Long-term debt ....................................................... 3,000,000 900,000
Deferred income taxes ................................................ -- 15,231
Accrued interest and other liabilities ............................... 803,013 962,801
------------- -------------
Total liabilities ................................................. 153,790,760 120,604,877
Stockholders' equity:
Common stock, no par value authorized 2,000,000
shares; issued and outstanding 764,746 and 643,053
shares, respectively ............................................. 8,894,209 7,357,477
Retained earnings (deficit) ........................................ (65,456) 344,818
Accumulated other comprehensive income ............................. (341,389) 135,957
------------- -------------
Total stockholders' equity ....................................... 8,487,364 7,838,252
------------- -------------
Total liabilities
And stockholders' equity ...................................... $ 162,278,124 $ 128,443,129
============= =============
See accompanying notes to condensed consolidated financial statements
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Citizens First Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
For the three months ended September 30: 2003 2002
----- -----
Interest income
Loans, including fees ............. $1,853,329 $1,468,154
Federal funds sold ................ 3,264 2,551
Securities ........................ 178,051 142,058
Other ............................. 4,225 3,223
--------- ----------
Total interest income ............. 2,038,869 1,615,986
Interest expense
Deposits .......................... 654,036 620,314
Other borrowings .................. 107,594 59,872
--------- ----------
Total interest expense ............ 761,630 680,186
--------- ----------
Net interest income ................. 1,277,239 935,800
Provision for loan losses ......... 85,000 60,000
--------- ----------
Net interest income after
provision for loan losses ......... 1,192,239 875,800
--------- ----------
Non-interest income
Service charges on deposit accounts 170,025 159,086
Income from the sale of loans ..... 150,811 9,973
Gain on the sale of securities .... -- 41,084
Other ............................. 68,194 13,283
--------- ----------
Total non-interest income ......... 389,030 223,426
Non-interest expenses
Compensation and benefits ......... 656,640 371,119
Net occupancy expense ............. 79,949 46,583
Furniture and equipment expense ... 105,207 58,119
Professional fees ................. 73,991 25,629
Postage, printing and supplies .... 24,619 19,492
Processing fees ................... 77,909 56,986
Advertising ....................... 37,322 34,298
Other ............................. 195,570 156,761
--------- ----------
Total non-interest expenses ....... 1,251,207 768,987
--------- ----------
Income before income taxes .......... 330,062 330,239
Income tax expense .................. 110,000 112,500
--------- ----------
Net income .......................... $ 220,062 $ 217,739
========== ==========
Basic earnings per common share $0.30 $0.34
See accompanying notes to condensed consolidated financial statements.
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Citizens First Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
For the nine months ended September 30: 2003 2002
----- -----
Interest income
Loans, including fees ............. $ 5,158,575 $ 4,342,899
Federal funds sold ................ 14,077 17,586
Securities ........................ 467,698 421,730
Other ............................. 11,663 10,168
----------- -----------
Total interest income ............. 5,652,013 4,792,383
Interest expense
Deposits .......................... 1,867,601 1,905,618
Other borrowings .................. 280,438 204,177
----------- -----------
Total interest expense ............ 2,148,039 2,109,795
----------- -----------
Net interest income ................. 3,503,974 2,682,588
Provision for loan losses ......... 1,728,000 160,000
----------- -----------
Net interest income after
provision for loan losses ......... 1,775,974 2,522,588
----------- -----------
Non-interest income
Service charges on deposit accounts 490,147 388,160
Income from the sale of loans ..... 431,557 20,810
Gain on the sale of securities .... 144,024 108,454
Other ............................. 171,234 38,870
----------- -----------
Total non-interest income ......... 1,236,962 556,294
Non-interest expenses
Compensation and benefits ......... 1,916,084 1,098,181
Net occupancy expense ............. 265,735 134,949
Furniture and equipment expense ... 295,232 180,570
Professional fees ................. 215,006 69,972
Postage, printing and supplies .... 84,743 50,212
Processing fees ................... 226,970 164,977
Advertising ....................... 145,549 104,137
Other ............................. 498,142 429,749
----------- -----------
Total non-interest expenses ....... 3,647,461 2,232,747
----------- -----------
Income (loss) before income taxes ... (634,525) 846,135
Income tax expense (benefit) ........ (224,250) 289,510
----------- -----------
Net income (loss) ................... $ (410,275) $ 556,625
============ ===========
Basic earnings (loss) per common share $(0.61) $0.87
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 nine months ended September 30: 2003 2002
---- ----
Balance January 1 $7,838,252 $7,066,376
Net income(loss)............................. (410,275) 556,625
Issuance of common stock ................... 1,536,732 --
Other comprehensive income (loss), net of tax (477,345) 2,856
----------- -----------
Balance at end of period ...................... $ 8,487,364 $ 7,625,857
=========== ===========
See accompanying notes to condensed consolidated financial statements.
Citizens First Corporation
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
For the nine months ended September 30:
2003 2002
---- ----
Net income(loss) .................................................. $(410,275) $ 556,625
Other comprehensive income(loss), net of tax:
Unrealized gain (depreciation) on available for sale
securities, net of income taxes (credit) of $(245,906) and
$1,471, arising during the period, respectively............... (477,435) 2,856
---------- ---------
$(887,710) $ 559,481
========== =========
See accompanying notes to condensed consolidated financial statements.
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Citizens First Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the nine months ended September 30: 2003 2002
---- ----
Cash flows from operating activities:
Net income(loss)........................................... $ (410,275) $ 556,625
Items not requiring (providing) cash:
Depreciation and amortization ........................... 230,814 185,639
Provision for loan losses ............................... 1,728,000 160,000
Amortization of premiums and discounts on securities .... 88,124 9,593
Net realized gain on disposition of investment securities (144,024) (108,454)
FHLB stock dividends received ........................... (11,500) (8,600)
Mortgage loans held for sale originated ................. (34,830,728) (4,152,825)
Sale of mortgage loans held for sale .................... 35,033,928 5,315,984
Changes in:
Accrued interest receivable ............................. (39,285) (23,025)
Other assets ............................................ (657,140) 57,332
Interest payable and other liabilities .................. 70,886 455,521
------------ ------------
Net cash provided in operating activities .............. 1,058,800 2,447,790
Cash flows from investing activities:
Net changes in loans ...................................... (38,399,553) (6,724,285)
Purchases of premises and equipment ....................... (1,874,200) (437,006)
Proceeds from maturities of securities available for sale . 18,004,599 2,654,637
Proceeds from sales of securities available for sale ...... 5,480,565 1,868,094
Purchase of securities available for sale ................. (27,298,947) (7,457,350)
Purchase of mortgage company and title company ............ (398,688) --
------------ ------------
Net cash used in investing activities .................. (44,486,224) (10,095,910)
Cash flows from financing activities:
Net increase in deposits .................................. 26,626,235 289,502
Net increase in other borrowings .......................... 6,100,000 1,076,541
Net increase in federal funds purchased and repurchase ... 634,667 3,120,061
agreements
Issuance of common stock .................................. 1,536,732 --
------------ ------------
Net cash provided in financing activities .............. 34,897,634 4,486,104
------------ ------------
Net decrease in cash and cash equivalents ................. (8,529,790) (3,162,016)
Cash and cash equivalents at beginning of period .......... 13,922,817 6,526,769
------------ ------------
Cash and cash equivalents at end of period ................ $ 5,393,027 $ 3,364,753
============ ============
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
condensed consolidated 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) Allowance for Loan Losses
Activity in the allowance for loan losses for the stated
periods was as follows:
September 30, December 31,
-------------------------------
2003 2002
-------------------------------
Balance, beginning of year ............................ $ 1,300,258 $ 1,195,924
Provision charged to expense .......................... 1,728,000 195,000
Loans charged off, net of recoveries of $12,617 for
September 30, 2003 and $15,549 for December 31, 2002 (1,129,394) (90,666)
----------- -----------
Balance, September 30, 2003 and December 31, 2002, .... $ 1,898,864 $ 1,300,258
respectively =========== ===========
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(4) 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. As of September 30, 2003, no options
have been granted under either plan.
(5) Stock Offering
The Company is currently in the process of raising 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 September 2003, the Company had completed two closings of the
offering, resulting in the addition of $1,536,732 in net proceeds from
the sale of Citizens First Corporation common stock.
(6) 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 the Company's 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.
(7) Regulatory Proceedings
As of September 30, 2003, the Bank had implemented several
steps included in the informal agreement between the Bank and its
primary regulators intended to improve the Bank's performance. These
steps included refining and refocusing the Bank's credit risk analysis,
underwriting, monitoring and evaluation functions. The Bank also
implemented comprehensive loan review procedures that provide for
strengthened independent risk analysis of the loan portfolio and
include a review of the lending authority of
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each loan officer and loan committee, as well as address staffing
requirements, particularly in the area of loan administration.
Management of the Bank continued to review, reevaluate and implement
its long range strategic plans for improving the operating performance,
maintaining adequate capital levels and improving the liquidity
position of the Bank. The agreement requires the Bank to maintain a
leverage ratio of 7% throughout the term of the agreement.
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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, 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 and, following
receipt of regulatory approval, was converted to a full service branch
in May 2003. Commonwealth Mortgage of Bowling Green, a mortgage
origination company, and Southern Kentucky Land Title were purchased by
the Bank on January 2, 2003 and operate 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 the Company.
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." The Company evaluates the collectibility of both principal and
interest when assessing the need for a loss accrual. Historical or
industry loss rates are applied to other loans not subject to reserve
allocations. These historical or industry 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 or industry 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 $1,898,864 was adequate, but not excessive,
to absorb estimated credit losses associated with the loan portfolio at
September 30, 2003.
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We have a deferred tax asset of approximately $937,000. We
evaluate this asset on a quarterly basis. To the extent we believe it
is more likely than not that it will not be utilized, we establish a
valuation allowance to reduce its carrying amount to the amount we
expect to be realized. At September 30, 2003, there is no valuation
allowance established. The deferred tax asset will be utilized as we
are profitable or as we carry back tax losses to periods in which we
paid income taxes. The estimate of the realizable amount of this asset
is a critical accounting policy.
Results of Operations
For the three months ended September 30, 2003, the Company
reported net income of $220,062, or $0.30 per common share, compared to
net income of $217,739, or $0.34 per common share, for the same period
ended September 30, 2002.
For the nine months ended September 30, 2003, the Company
reported a net loss of $(410,275), or $(0.61) per common share,
compared to net income of $556,625, or $0.87 per common share, for the
same period ended September 30, 2002.
Net Interest Income
Net interest income was $1,277,239 in the third quarter of
2003, compared with $935,800 in the comparable period in 2002. Third
quarter 2003 interest income of $2,038,869, an increase of $422,883 or
26.2% over the same period in 2002, includes $1,853,329 income on
loans, $178,051 income on securities, and $7,489 income on federal
funds sold and other interest-bearing accounts. Interest income of
$1,615,986 during the third quarter of 2002 included $1,468,154 of
income on loans, $142,058 income on investment securities, and $5,774
income on federal funds sold and other interest-bearing accounts.
Interest expense of $761,630 for the third quarter of 2003, up $81,444
or 12.0% from the same period in 2002, consists of interest on deposits
of $654,036, and on other borrowings of $107,594. Third quarter 2002
interest expense of $680,186 consisted of interest on deposits of
$620,314, and interest on other borrowings of $59,872. The growth of
the balance sheet, particularly loans and deposits, from the third
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 third 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 reduction of another 50 basis points during
the fourth quarter of 2002, and 25 basis points during the second
quarter of 2003. 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, the fourth
quarter of 2002 and the second quarter of 2003, 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.
Net interest income was $3,503,974 for the nine months ended
September 30, 2003, an increase of $821,386 or 30.6% over the total of
$2,682,588 for the same period of 2002. Interest income of $5,652,013
for the first nine months of 2003 included $5,158,575 income on loans,
$467,698 income on investment securities, and $25,740 income on federal
funds sold and other interest-bearing accounts. Total interest income
of $4,792,383 for the first nine months of 2002 consisted of $4,342,899
income on loans, $421,730 income on investment securities, and $27,754
income on federal funds sold and other interest-bearing accounts.
Interest expense for the first nine months of 2003 totaled $2,148,039,
and included $1,867,601 interest on deposits, and $280,438 expense on
other borrowings. The comparable period of 2002 had interest expense of
$2,109,795, of which $1,905,618 was interest on deposits, and $204,177
was expense on other borrowings.
Provision for Loan Losses
The provision for loan losses expense for the three months
ended September 30, 2003, was $85,000, an increase of $15,000 over the
total of $60,000 for the same quarter of 2002.
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The provision for loan losses expense was $1,728,000 for the
first nine months of the year, compared to $160,000 for the same period
of 2002, an increase of $1,568,000. Of this increase, $1,087,000 was
specifically allocated during the second quarter of 2003 for three
loans to one borrower, totaling $1,675,000, that are further discussed
in the Asset Quality section of this report.. As the result of a
periodic regulatory examination of the Bank which concluded in July
2003, the provision was also specifically increased $229,050 for two
potential problem loans, totaling $49,000 and $1,478,000, respectively,
which are not included in the non-performing loan total at September
30, 2003.
Non-Interest Income
Non-interest income for the three months ended September 30,
2003 and 2002, respectively, was $389,030 and $223,426, an increase of
$165,604 or 74.1%. Income from service charges on deposit accounts
increased $10,939, or 6.9%, from $159,086 during the third quarter of
2002 to $170,025 for the third quarter of 2003. The increase is
primarily attributable to growth in accounts subject to service
charges. Income from the sale of secondary market loans increased
$140,838, from $9,973 during the third quarter of 2002 to $150,811 for
the same period of 2003. The growth in income from the sale of
secondary market loans is associated with the acquisition of
Commonwealth Mortgage of Bowling Green, Inc., during the first quarter
of 2003. Non-interest income for the third quarter of 2002 includes a
gain of $41,084 from the sale of investment securities.
Non-interest income for the nine months ended September 30,
2003 and 2002, respectively, was $1,236,962 and $556,294, an increase
of $680,668 or 122.4%. Service charges on deposit accounts comprised
the largest part of non-interest income for both nine-month time
periods, totaling $490,147 and $388,160 for 2003 and 2002,
respectively. Income from the sale of secondary market loans increased
to $431,557 for the first nine months of 2003, from $20,810 for the
same period of 2002. Gains from the sale of investment securities
during the first nine months of 2003 totaled $144,024, compared to
$108,454 for the first nine months of 2002.
Non-Interest Expense
Non-interest expense was $1,251,207 in the third quarter of
2003, up from $768,987 in the same quarter of 2002, an increase of
$482,220 or 62.7%. The initiatives designed to better service our
customers, including the opening of full service branches in Bowling
Green and Franklin, Kentucky, and the acquisition of a mortgage
origination company, accounted for $307,651 of the increase in
non-interest expense during the third quarter of 2003, compared to the
same period of 2002.
For the nine months ended September 30, 2003 and 2002,
respectively, non-interest expense was $3,647,461 and $2,232,747, an
increase of $1,414,714, or 63.4%. The non-interest expense associated
with the two new branches and the mortgage origination company
accounted for $884,232 of the increase during the first nine months of
2003.
Income Taxes
Income tax expense or credit has been calculated based on the
Company's expected annual rate for 2003. During the third quarter of
2003, income tax expense totaled $110,000, compared to expense of
$112,500 for the same period of 2002. For the nine months ended
September 30, 2003, the income tax credit totaled $(224,250), compared
to expense of $289,510 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 September 30, 2003 were $162,278,124, up from
$128,443,129 at December 31, 2002 and up from $110,321,755 a year ago.
Average total assets for the third quarter of 2003 were $160,607,744,
up $54,461,903 from the third quarter of 2002 average of $106,145,841.
Loans
At September 30, 2003 loans (excluding mortgage loans held for
sale) totaled $133,229,215, compared with $95,959,056 at December 31,
2002 and $91,367,416 a year ago, an increase of $37,270,159 and
$41,861,799 respectively. This increase is attributable primarily to
loans generated by the branch opened during the first quarter of 2003
in Franklin, Kentucky, and adjustable rate mortgage loans generated by
Commonwealth Mortgage, which are retained in the Bank's portfolio.
Loans averaged $130,241,409 during the third quarter of 2003, an
increase of $40,291,584 or 44.8%, over the average total of $89,949,825
for the third quarter of 2002.
Asset Quality
The allowance for loan losses was $1,898,864 at September 30,
2003, an increase of $598,606, or 46.0% over the December 31, 2002
level of $1,300,258. The allowance represents 1.43% 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 $566,000 at September 30, 2003,
compared to $115,000 at December 31, 2002 and $123,000 at September 30,
2002. Included in the non-performing loan total at September 30, 2003
is the remaining portion, totaling $520,000, of three loans to one
borrower, that were placed on non-accrual status during the second
quarter of 2003. The three loans, originally totaling $1,675,000, are
secured by substantially all the assets of the borrower and the
guaranties of three individuals, a limited partnership and a limited
liability company. During the third quarter, $1,043,050 of these loans
was charged off, and, prior to the charge-off, approximately $112,000
was paid against the balance of the loans. The borrower's assets
consist primarily of interests in two energy related properties located
in Texas and Louisiana. During the second quarter of 2003 the borrower
advised the Company that one of the properties had failed to produce
any revenue, was unlikely to ever produce revenue and that the
property's value was now negligible, and further that the revenue from
the second property was expected to be minimal. The borrower terminated
its operations during the second quarter. Also included in non-
performing loans is one loan for $35,000, which was placed on non-
accrual status during the second quarter of 2003, secured by a second
mortgage on residential real estate. The borrower filed for bankruptcy
protection during the second quarter of 2003. The remaining $11,000 of
non-performing loans consists of one loan accruing but past due over
90 days.
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 $566,000 at the end of the third 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 other real estate owned of
$70,000.
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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 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.
Securities
Securities (all classified as available for sale) increased
from $16,186,406 at December 31, 2002 to $19,332,838 at September 30,
2003. At September 30, 2002 securities totaled $13,238,425.
Deposits and Borrowed Funds
Total deposits averaged $131,791,552 in the third quarter of
2003, an increase of $43,875,210 from the comparable 2002 third quarter
average of $87,916,342. As of September 30, 2003, total deposits were
$132,519,568, and included $121,772,183 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 September 30, 2002 were $88,180,330, and included interest bearing
deposits of $78,598,292.
The Bank had $6,424,171 of deposits secured by securities sold
under agreements to repurchase on September 30, 2003. These
obligations, which mature in one business day, are swept daily from
customers' demand deposit accounts. These balances averaged $6,393,812
during the third quarter of 2003.
At September 30, 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 September 30,
2003, the Bank had three outstanding FHLB advances totaling
$11,000,000. 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 May 2, 2003, matures May 2,
2005 and has a fixed interest rate of 1.90%. The third FHLB advance,
which was issued June 9, 2003, matures June 6, 2006, and has a fixed
interest rate of 2.03%. The Bank has a pre-arranged borrowing limit
with the FHLB that is collateralized by 150% of unpaid principal
balances of eligible 1-4 family residential mortgage loans. At
September 30, 2003, the Bank had available collateral to borrow an
additional $9.8 million from the FHLB.
In 2001, the Company executed a credit agreement with a
correspondent bank for the purpose of injecting capital into the Bank.
During the third quarter of 2003, the Company borrowed $700,000,
bringing total outstanding debt under the credit agreement to the total
availability of $3,000,000. The current rate on the loan, which is
repriced annually during June at one-year LIBOR plus 275 basis points,
is 3.78%. The stock of the 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
and bank holding companies. The table below sets forth the Bank's
capital ratios as of September 30, 2003, December 31, 2002 and
September 30, 2002; the regulatory minimum capital ratios; and the
regulatory minimum capital ratios for well-capitalized companies:
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September 30, December 31, September 30,
2003 2002 2002
----- ---- ----
Tier 1 risk based ........... 8.71% 9.01% 9.27%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 6.00 6.00 6.00
Total risk based ............ 9.97% 10.26% 10.52%
Regulatory minimum ..... 8.00 8.00 8.00
Well-capitalized minimum 10.00 10.00 10.00
Leverage .................... 7.11% 7.75% 8.01%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 5.00 5.00 5.00
The table below sets forth the Company's ratios as of September 30,
2003, December 31, 2002 and June 30, 2002; the regulatory minimum
capital ratios; and the regulatory minimum capital ratios for
well-capitalized companies:
September 30, December 31, September 30,
2003 2002 2002
----- ---- ----
Tier 1 risk based ........... 6.45% 7.83% 8.27%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 6.00 6.00 6.00
Total risk based ............ 7.70% 9.08% 9.52%
Regulatory minimum ..... 8.00 8.00 8.00
Well-capitalized minimum 10.00 10.00 10.00
Leverage .................... 5.26% 6.76% 7.04%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 5.00 5.00 5.00
All the capital ratios have decreased from December 31, 2002
to September 30, 2003, as the rate of growth of risk-weighted and
average quarterly assets has been higher than the growth of total
equity. All ratios for the Bank fall within the minimum capital ratios
for well-capitalized companies as of September 30, 2003, with the
exception of the total risk based ratio, which measures 9.97% compared
to a well-capitalized minimum ratio of 10.00%. Included in equity at
third quarter end 2003 are the net proceeds, totaling $511,164, from
the sale of 42,068 shares of common stock of the Company on September
30, 2003.
The Company's capital ratios have decreased from December 31,
2002. At September 30, 2003, the tier 1 risk based and the leverage
ratio exceeded well-capitalized minimum levels. The total risk based
ratio at September 30, 2003 falls below the regulatory minimum, due to
the increase in period end loan balances that offset the net proceeds
of $511,164 from the sale of Company common stock during the third
quarter of 2003. Management anticipates that the sale of more Company
common stock during the fourth quarter, will result in an improved
total risk based capital ratio at the end of the third quarter of 2003.
See Note 5 of the Notes to the Condensed Consolidated Financial
Statements.
If the the Company does not raise sufficient capital in the
offering, which is scheduled to be completed in November 2003, the
Company will be required to consider alternative measures to improve
the Company's and the Bank's capital ratios, such as slowing or
reducing loan growth, or raising capital through the issuance of
preferred stock or trust preferred securities. Increased borrowings or
trust preferred securities will have immediate interest costs, which
will have an adverse impact on earnings, although they may require a
lower internal rate of return on equity than common stock. To the
extent they are floating or variable rate, the future cost of
additional borrowings or trust preferred securities may increase over
time, while the cost of equity will remain fixed.
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Throughout the term of the regulatory agreement between the
Bank and its primary regulators, the Bank is required to maintain a
minimum Tier 1 capital to total assets ratio of 7%. In the event that
we are unable to obtain additional capital for the Bank on a timely
basis, the growth of the Company and the Bank may be curtailed, and we
may be required to reduce our level of assets in order to maintain
compliance with regulatory capital requirements. Under those
circumstances, net income and the rate of growth of net income may be
adversely affected. If adequate capital is not available, the Company
and the Bank will be subject to an increased level of regulatory
supervision.
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.
Liquidity is the measure of the Bank's ability to fund
customer's needs for borrowings and deposit withdrawals. In the third
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 third 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 3. CONTROLS AND PROCEDURES
As of September 30, 2003, 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 as of September 30,
2003, 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 September 30,
2003.
Form 8-K filed on August 1, 2003 reporting an Item 7 and
furnishing an Item 12 event (the press release for second
quarter earnings).
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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: November 14, 2003 /s/ Mary D. Cohron
------------------
Mary D. Cohron
President and Chief Executive Officer
(Principal Executive Officer)
November 14, 2003 /s/ Bill D. Wright
------------------
Bill D. Wright
Vice-President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBITS
3.1 Restated Articles of Incorporation of Citizens First Corporation
(incorporated by reference to Exhibit 3.1 of the Company's Registration
Statement on Form SB-2 (No. 333-103238)).
3.2 Amended and Restated Bylaws of Citizens First Corporation (incorporated
by reference to Exhibit 3.2 of the Company's Registration Statement on
Form SB-2 (No. 333-103238)).
11 Statement re: Computation of per share earnings
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act.
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350.
22