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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
X Annual Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 2003
___ Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _______ to _________
Commission File Number 333-67435
CITIZENS FIRST CORPORATION
(Name of Small Business Issuer in Its Charter)
Kentucky 61-0912615
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1805 Campbell Lane, Bowling Green, Kentucky 42104
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(Address of Principal Executive Offices) (Zip Code)
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 Securities Exchange Act of 1934 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 __
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. _X_
State issuer's revenues for its most recent fiscal year: $9,247,164
State the aggregate market value of the voting stock held by non-affiliates of
the registrant on March 30, 2004: $8,074,444.
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 MARCH 30, 2004
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Common Stock, no par value 840,447
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the Annual Meeting of
Shareholders to be held May 20, 2004 are incorporated by reference into Part
III.
Transitional Small Business Disclosure Format: Yes ___ No X
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CITIZENS FIRST CORPORATION
TABLE OF CONTENTS
PART I
ITEM
PAGE
1. Description of Business.................................................3-12
2. Description of Property...................................................12
3. Legal Proceedings......................................................12-13
4. Submission of Matters to a Vote of Security Holders.......................13
PART II
5. Market for the Common Equity, Related Stockholder Matters, and Small .......
Business Issuer Purchases of Equity Securities...........................14
6. Management's Discussion and Analysis or Plan of
Operation..............................................................14-33
7. Financial Statements...................................................34-64
8. Changes in and Disagreements with Accountants on Accounting and Financial.
Disclosure................................................................65
8A. Controls and Procedures...................................................65
PART III
9. Directors, Executive Officers, Promoters and Control Persons;Compliance with
Section 16(a) of the Exchange Act.........................................66
10. Executive Compensation...................................................66
11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters......................................................66
12. Certain Relationships and Related
Transactions.............................................................66
PART IV
13. Exhibits and Reports on Form 8-K.......................................67-68
14. Principal Accountant Fees and Services...................................68
Signatures.................................................................69-70
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ITEM 1. DESCRIPTION OF BUSINESS
Citizens First Corporation ("the Company") was incorporated in 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 received regulatory approval to become a bank holding company under
the Bank Holding Company Act of 1956, as amended (the"BHCA"), through its
organization and ownership of its subsidiary, Citizens First Bank, Inc. (the
"Bank"). On February 17, 1999 the Company completed the initial public offering
of the sale of 536,667 shares of its no par value common stock. The Company,
through the Bank, is now involved in the banking business, primarily serving
customers in the Bowling Green/Warren County market and, as of 2003, in the
Franklin/Simpson County market. As of December 31, 2003, the Company and Bank
employed sixty-six employees (fifty-seven full-time equivalent employees).
In January 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
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
Bank's option, an additional 25% of such deferred purchase price, if any, may be
paid in shares of the Company common stock. The deferred contingent purchase
price will be accounted for as additional purchase price at the time the
contingency is resolved. The purchased assets of Commonwealth Mortgage and
Southern Kentucky Land Title consist primarily of furniture, fixtures and
equipment. 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 connection
with the acquisition, the Bank recorded $380,000 of goodwill.
In January 2004, the Bank paid $162,400 to the former Commonwealth shareholders
as the first installment of the deferred contingent purchase price.
Additionally, the Company will issue the former Commonwealth shareholders common
stock having a value of approximately $54,000 during the first quarter of 2004.
The Company's corporate strategy focuses on providing the Bank's customers with
high quality, personal banking services. The Bank offers products designed to
meet the needs of its customers that include individuals, small businesses,
partnerships and corporations. The Bank provides a full range of corporate and
retail banking services that include checking, savings, and time deposit
accounts; secured and unsecured loans to corporations, individuals, and others;
letters of credit; rental of safe deposit boxes; and cash management services.
The Bank also offers, through affiliations with third parties, trust services,
investment management services, and business and personal insurance products.
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 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 Bank does not emphasize real estate lending for land acquisition,
land development or open-end construction loans. 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 sold on the secondary market (each individually) to a correspondent.
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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 network but
participates in a national ATM network through the FiServ EFT network, and
through the Visa Debit Card Program.
The business of the Bank is not considered to be seasonal nor is the Bank's
business dependent on any one industry.
The Bowling Green economy is diversified, with financial and other service
industries representing the largest industry segment. The local unemployment
rate of approximately 4.2% is lower than the national unemployment rate of
approximately 5.7%. The Company's competition in the local market consists
mainly of regional and national financial institutions. In the Bank's primary
service area, there are 14 commercial banks, of which 4 are considered to have
their headquarters in the Bank's service area. In addition, there are various
credit unions, mortgage companies, and other commercial banks that have loan
production offices in the area. The Bank encounters strong competition from
these financial institutions, for deposits, loans, and other financial services,
as well as from insurance companies, brokerage firms and other financial
institutions, some of which are not subject to the same degree of regulation and
restrictions as the Bank. Many of these competitors have substantially greater
resources and lending limits than the Bank has to offer and certain services,
such as international banking services, which the Bank is not providing.
On December 31, 2003, the Company had total consolidated assets of $163,519,995,
total loans of $134,715,475, total deposits of $133,729,092 and shareholders'
equity of $9,610,377.
SUPERVISION AND REGULATION
Both the Company and the Bank are subject to extensive state and federal banking
laws and regulations that impose restrictions on and provide for general
regulatory oversight of the Company's and the Bank's operations. These laws and
regulations are generally intended to protect depositors and not shareholders.
The following discussion describes the material elements of the regulatory
framework which apply.
As a bank holding company, under the BHCA, the Company is under the supervisory
and regulatory authority of the Board of Governors of the Federal Reserve System
(the "Federal Reserve"). The Company is also subject to regulation by the
Kentucky Department of Financial Institutions. Thus, the Company is required to
file annual reports and other information with the Federal Reserve and the
Kentucky Department of Financial Institutions regarding its financial condition,
results of operations, management and intercompany relationships and
transactions between the Company and its subsidiaries.
The Bank is a state chartered financial institution, and as such, is subject to
various statutory requirements, supervision and regulation (of which regular
bank examinations are a part) promulgated and enforced primarily by the Federal
Deposit Insurance Corporation ("FDIC") and the Kentucky Department of Financial
Institutions.
In August 2003, the Bank and its primary regulators entered into a regulatory
agreement in order to improve the Bank's performance. As of December 31, 2003,
the Bank had implemented several steps included in the agreement. 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, reviewed the lending authority of each loan officer and
loan committee, and addressed staffing requirements, particularly in the area of
loan administration. Management of the Bank continues 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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CAPITAL ADEQUACY
The Company and the Bank are required to comply with the capital adequacy
standards established by the Federal Reserve and the FDIC, respectively. There
are two basic measures for capital adequacy for bank holding companies and the
depository institutions that they own: a risk-based measure and a leverage
measure. All applicable capital standards must be satisfied for a bank holding
company to be considered in compliance.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profile among depository
institutions and bank holding companies, to account for off-balance sheet
exposure and to minimize disincentives for holding liquid assets. Assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance-sheet items.
The minimum guideline for the ratio of total capital to risk-weighted assets
(including some off-balance sheet items, such as standby letters of credit) is
8.0%. At least half of total capital must be comprised of Tier 1 capital, which
is common equity, undivided profits, minority interests in the equity accounts
of consolidated subsidiaries, noncumulative perpetual preferred stock and a
limited amount of cumulative perpetual preferred stock, less goodwill and other
permissible intangible assets. The remainder may consist of Tier 2 capital which
is subordinated debt, other preferred stock, and a limited amount of loan loss
reserves. In addition, the Federal Reserve Board has established minimum
leverage ratio guidelines for bank holding companies. These guidelines provide
for a minimum leverage ratio of Tier 1 capital to average assets, less goodwill
and permissible other intangible assets, of 3.0% for bank holding companies that
meet specified criteria, including having the highest regulatory rating. All
other bank holding companies generally are required to maintain a leverage ratio
of at least 3.0%, plus an additional cushion of 100 to 200 basis points. The
guidelines also provide that bank holding companies that experience internal
growth to make acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels without significant
reliance on intangible assets. The Federal Reserve Board will consider a
"tangible Tier 1 capital average ratio" (deducting all intangibles) and other
indicia of capital strength in evaluating proposals for expansion or new
activities.
The federal bank regulators continue to indicate their desire to raise the
capital requirements that apply to banks beyond their current levels and are
considering changes to the risk-based capital adequacy framework for banks,
including emphasis on credit, market and operational risk components.
PROMPT CORRECTIVE ACTION
The Federal Deposit Insurance Corporation Improvement Act of 1991 established a
system of prompt corrective action to resolve the problems of undercapitalized
institutions. Under this system, the federal banking regulators established five
capital categories (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized). With respect
to institutions in the three undercapitalized categories, the regulators must
take prescribed supervisory actions and are authorized to take other
discretionary actions. Generally, subject to a narrow exception, the Improvement
Act requires the banking regulator to appoint a receiver or conservator for an
institution that is critically undercapitalized. The federal banking agencies
have specified by regulation the relevant capital level for each category.
An institution is deemed to be well capitalized if it
o has a total capital ratio of 10% or greater,
o has a tier 1 capital ratio of 6.0% or greater,
o has a leverage ratio of 5.0% or greater, and
o is not subject to any written agreement, order, capital directive, or
prompt corrective action directive issued by its federal banking
agency.
An institution is considered to be adequately capitalized if it has o a total
capital ratio of 8.0% or greater, o a tier 1 capital ratio of 4.0% or greater,
and o a leverage ratio of 4.0% or greater.
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An institution is considered to be undercapitalized if it has o a total capital
ratio of less than 8.0%, o a tier 1 capital ratio of less than 4.0%, or o a
leverage ratio of less than 4.0%.
An institution is considered to be significantly undercapitalized if it has o a
total capital ratio of less than 6.0%, o a tier 1 capital ratio of less than
3.0%, or o a leverage ratio of less than 3.0%.
An institution that has a tangible equity capital to assets ratio equal to or
less than 2.0% is deemed to be critically undercapitalized. For purposes of the
regulation, the term "tangible equity" includes core capital elements counted as
tier 1 capital for purposes of the risk-based capital standards, plus the amount
of outstanding cumulative perpetual preferred stock (including related surplus),
minus all intangible assets with exceptions. A depository institution may be
deemed to be in a capitalization category that is lower than is indicated by its
actual capital position if it receives an unsatisfactory examination rating.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
Under the Improvement Act, a bank holding company must guarantee that a
subsidiary depository institution meet its capital restoration plan, subject to
limitations. The obligations of a controlling bank holding company under the
Improvement Act to fund a capital restoration plan is limited to the lesser of
5.0% of an undercapitalized subsidiary's assets or the amount required to meet
regulatory capital requirements. An undercapitalized institution is also
generally prohibited from increasing its average total assets, making
acquisitions, establishing any branches or engaging in any new line of business,
except in accordance with an accepted capital restoration plan or with the
approval of the Federal Deposit Insurance Corporation. In addition, the
appropriate federal banking agency is given authority with respect to any
undercapitalized depository institution to take any of the actions it is
required to or may take with respect to a significantly undercapitalized
institution as described below if it determines "that those actions are
necessary to carry out the purpose" of the Improvement Act.
For those institutions that are significantly undercapitalized or
undercapitalized and either fail to submit an acceptable capital restoration
plan or fail to implement an approved capital restoration plan, the appropriate
federal banking agency must require the institution to take one or more
additional actions, which could include among other things, restricting asset
growth, selling additional shares and electing new directors. In addition,
without the prior approval of the appropriate federal banking agency, a
significantly undercapitalized institution may not pay any bonus to any senior
executive officer or increase the rate of compensation for such an officer.
PAYMENT OF DIVIDENDS
Federal and state statutes and regulations restrict the payment of dividends by
state-chartered banks. Under Kentucky law, dividends by Kentucky banks may be
paid only from current or retained net profits. Before any dividend may be
declared for any period (other than upon preferred stock, if any), a bank must
increase its capital surplus by at least 10% of the net profits of the bank for
such period until the bank's capital surplus equals the amount of its stated
capital attributable to its common stock. Moreover, the Commissioner of the
Kentucky Department of Financial Institutions must approve the declaration of
dividends if the total of all dividends declared by a bank for any calendar year
exceeds the bank's net profits for such year combined with its retained net
profits for the preceding two years, less any required transfers to surplus or a
fund for the retirement of preferred stock or debt, if any. The Kentucky
Business Corporation Act provides additional restrictions on distributions by a
Kentucky corporation, including the Company and the Bank. The FDIC may also
restrict the Bank's payment of dividends. If the FDIC determines that a
depository institution under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice, the FDIC may require, after notice and
hearing, that the institution cease and desist from such practice. Depending on
the financial condition of the depository institution, an unsafe or unsound
practice
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could include the payment of dividends. Moreover, regulations of the
FDIC requiring the Bank to maintain certain capital levels will also affect the
Bank's ability to pay dividends.
THE BANK
Organized under Kentucky law, the Bank is subject to the regulation and
supervision of the Kentucky Department of Financial Institutions. As an insured
bank under the Federal Deposit Insurance Act, the Bank is also subject to
regulation and examination by the FDIC. Although the Bank is not a member of the
Federal Reserve System, it is nevertheless subject to provisions of the Federal
Reserve Act and regulations promulgated under that Act.
The FDIC and the Kentucky Department of Financial Institutions regularly examine
the operations of the Bank. State banks also are subject to regulation requiring
the maintenance of prescribed minimum capital levels, and the Bank is required
to file annual reports and such additional information as the Kentucky
Department of Financial Institutions and FDIC regulations require. The Bank is
also subject to restrictions on loan limits, interest rates, "insider" loans to
officers, directors and principal shareholders, restrictions on tie-in
arrangements and transactions with affiliates, as well as many other matters.
Federal and state regulators have authority to impose substantial sanctions on
the Bank and its directors and officers if it engages in unsafe or unsound
practices, or otherwise fails to comply with regulatory standards. Supervisory
agreements, such as memoranda of understanding entered into with federal and
state bank regulators, may also impose requirements and reporting obligations.
INTERSTATE BANKING. The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 enabled nationwide interstate banking through bank subsidiaries and
interstate banking mergers. The Riegle-Neal Act allows adequately capitalized
and well-managed bank holding companies to acquire control of a bank in any
state subject to concentration limits. The Riegle-Neal Act also generally
provides that national and state-chartered banks may branch interstate through
acquisitions of banks in other states.
Restrictions on branching imposed upon Kentucky banks continue to apply under
the legislation, including prohibiting acquisitions which have the result of
concentrating control of more than 15% of the federally insured deposits in
Kentucky. The Riegle-Neal Act increased competition in the banking industry as
it allows out of state banks to branch into Kentucky through acquisitions of
banks in Kentucky.
STATE REGULATION. With respect to expansion, the Bank until recently could
establish branches only within the geographical limits of Warren County,
Kentucky. However, recent legislation permits Kentucky banks to establish a
branch office anywhere in Kentucky upon approval of the Kentucky Department of
Financial Institutions. Certain well capitalized and well managed banks may
establish a branch office upon notice to the Department.
FDIC INSURANCE ASSESSMENTS. The Bank's deposits are insured by the FDIC up to
the statutory limit of $100,000 per depositor through the Bank Insurance Fund.
Under current law, the insurance assessment paid by Bank Insurance Fund-insured
institutions is set by the FDIC and is designed to achieve a target reserve
ratio of 1.25 percent of estimated insured deposits, or such higher ratio as the
FDIC may determine in accordance with law. The FDIC is also authorized to impose
one or more special assessments in any amount deemed necessary to enable
repayment of amounts borrowed by the FDIC from the Treasury Department. Bank
Insurance Fund annual assessment rates currently range from 0 to 27 basis
points. The actual assessment rate paid by individual institutions is determined
by the risk category rating of the institution as determined by the FDIC.
The Deposit Insurance Funds Act of 1996 authorized the Financing Corporation to
levy assessments on FDIC insured institutions sufficient to pay interest on
certain Financing Corporation bonds. Financing Corporation assessments imposed
on Bank Insurance Fund insured deposits in annual amounts are presently
estimated at 1.54 basis points.
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THE COMPANY
The Company is a bank holding company under the federal Bank Holding Company Act
of 1956. As a result, it is subject to the supervision, examination and
reporting requirements of the BHCA and the regulations of the Federal Reserve.
ACQUISITION OF BANKS. Bank holding companies are required to obtain the prior
approval of the Federal Reserve before they may
o acquire direct or indirect ownership or control of more than 5% of the voting
shares of any bank, o acquire all or substantially all of the assets of any
bank, or o merge or consolidate with any other bank holding company.
The Federal Reserve generally may not approve any transaction that would result
in a monopoly or that would further a combination or conspiracy to monopolize
banking in the United States. Nor can the Federal Reserve approve a transaction
that could substantially lessen competition in any section of the country, that
would tend to create a monopoly in any section of the country, or that would be
in restraint of trade. But the Federal Reserve may approve any such transaction
if it determines that the public interest in meeting the convenience and needs
of the community served clearly outweighs the anticompetitive effects of the
proposed transaction. The Federal Reserve is also required to consider the
financial and managerial resources and future prospects of the bank holding
companies and banks concerned, as well as the convenience and needs of the
community to be served. Consideration of financial resources generally focuses
on capital adequacy. Consideration of convenience and needs of the community
includes the parties' performance under the Community Reinvestment Act of 1977.
Kentucky law provides that any individual or bank holding company having its
principal place of business in Kentucky may acquire control of one or more banks
or bank holding companies wherever located within Kentucky, provided that no
individual or bank holding company acquires control of banks located in Kentucky
holding more than 15% of the total deposits of all federally-insured depository
institutions in Kentucky. A bank holding company must seek and obtain the
approval of the Commissioner of the Kentucky Department of Financial
Institutions before acquiring control of any bank chartered in Kentucky or any
bank holding company controlling a bank which is chartered in Kentucky.
PERMITTED ACTIVITIES. Under the BHCA, a bank holding company is, with limited
exceptions, prohibited from acquiring direct or indirect ownership or control of
any voting shares of any company which is not a bank, or engaging in any
activity other than managing and controlling banks. Among the activities which
are permissible for bank holding companies are
o acquiring and holding shares of any company engaged solely in the
business of the holding and operating properties used wholly or
substantially by a subsidiary bank, conducting a safe deposit business
or furnishing services to or performing services for a subsidiary bank,
o acquiring and holding up to five 5% of the outstanding voting shares of
any company,
o acquiring and holding up to 5% of the outstanding voting shares of an
investment company that is solely engaged in investing in securities
and that does not own or control more than 5% of the outstanding shares
of any class of voting securities of any company, and
o acquiring and holding shares of any company, the activities of which
the Federal Reserve Board has determined to be so closely related to
banking or managing or controlling banks as to be a proper incident
thereto.
In determining whether a particular activity is permissible, the Federal Reserve
must consider whether the performance of such an activity reasonably can be
expected to produce benefits to the public that outweigh possible adverse
effects. Possible benefits that the Federal Reserve considers include greater
convenience, increased competition or gains in efficiency. Possible adverse
effects include undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. The Federal
Reserve has determined certain activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto and such
activities may be engaged in by a bank holding company or a subsidiary of a bank
holding company in
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accordance with the rules and regulations of the Federal
Reserve. Bank holding companies are not limited under the BHCA to activities
previously approved by the Federal Reserve. If a bank holding company is of the
opinion that other activities are closely related to banking or managing or
controlling banks, the holding company may apply for Federal Reserve approval to
engage in the activity or acquire an interest in a company that is engaged in
the activity.
The Gramm-Leach-Bliley Act of 1999 expanded the permissible activities of a bank
holding company. The Gramm Act allows qualifying bank holding companies to elect
to be treated as "financial holding companies." A bank holding company qualifies
to be a financial holding company if its depository institution subsidiaries are
well-managed, well capitalized and received at least a "satisfactory" Community
Reinvestment Act rating as of the most recent examination. A financial holding
company may engage in activities and acquire companies engaged in activities
that are "financial" in nature or "incidental" or "complementary" to such
financial activities including
o acting as a principal, agent or broker in selling various forms of insurance,
o providing financial investment and economic advisory services, including
advising investment companies, o underwriting, dealing or making a market in
securities, without any revenue limitation, o investing in shares or other
ownership interests in any entity in the course of a bona fide underwriting,
merchant banking
or investment banking business, provided that such investments are not
made by a depository institution or its subsidiary, and
o investing, through an insurance subsidiary in the ordinary course of
its business in accordance with relevant state law, in any entity, but
subject to conditions analogous to those for merchant banking
investments.
The Federal Reserve and the Treasury Department have the authority to expand the
list of permissible activities for a financial holding company. Any bank holding
company which cannot or chooses not to become a financial holding company will
remain subject to the previous rules of the BHCA.
REPORTING OBLIGATIONS. A bank holding company is required to file with the
Federal Reserve annual reports and other information regarding its business
operations and the business operations of its subsidiaries. It is also subject
to examination by the Federal Reserve and is required to obtain Federal Reserve
approval prior to acquiring, directly or indirectly, ownership or control of any
voting shares of any bank if, after such acquisition, it would own or control,
directly or indirectly, more than 5% of the voting stock of such bank unless it
already owns a majority of the shares of voting stock of such bank.
SUPPORT OF SUBSIDIARY INSTITUTIONS. Under Federal Reserve policy the Company is
expected to act as a source of financial strength for, and to commit resources
to support, the Bank. This support may be required at times when, absent such
Federal Reserve policy, the Company may not be inclined to provide it. In
addition, any capital loans by a bank holding company to any of its banking
subsidiaries are subordinate in right of payment to deposits and to other
indebtedness of such banks. In the event of a bank holding company's bankruptcy,
any commitment by the bank holding company to a federal bank regulatory agency
to maintain the capital of a banking subsidiary will be assumed by the
bankruptcy trustee and entitled to a priority of payment.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act requires that, in connection with examinations of
financial institutions within their respective jurisdictions, the Federal
Reserve, the OCC or the FDIC shall evaluate the record of each financial
institution in meeting the credit needs of its local community, including low
and moderate-income neighborhoods. These facts are also considered in evaluating
mergers, acquisitions and applications to open a branch or facility. Failure to
adequately meet these criteria could impose additional requirements and
limitations on the Bank.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES
Both the Company and the Bank are subject to the provisions of Section 23A and
Section 23B of the Federal Reserve Act. Section 23A places limits on the amount
of
o a bank's loans or extensions of credit to affiliates,
o a bank's investment in affiliate,
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o assets a bank may purchase from affiliates, except for real and
personal property exempted by the obligations of affiliates
and,
o a bank's guarantee, acceptance or letter of credit issued on behalf of
an affiliate.
Section 23B prohibits an institution from engaging in the above transactions
with affiliates unless the transactions are on terms substantially the same, or
at least as favorable to the institution or its subsidiaries, as those
prevailing at the time for comparable transactions with nonaffiliated companies.
PRIVACY
Under the Gramm-Leach-Bliley Act, financial institutions are required to
disclose their policies for collecting and protecting confidential information.
Customers generally may prevent a financial institution from sharing personal
financial information with nonaffiliated third parties except for third parties
that market the institution's own products and services. Additionally, financial
institutions generally may not disclose consumer account numbers to any
nonaffiliated third party for use in telemarketing, direct mail marketing or
other marketing through electronic mail to consumers. The Company has
established a privacy policy to ensure compliance with federal requirements.
ANTI-TERRORISM LEGISLATION
In the wake of the tragic events of September 11, 2001, on October 26, 2001, the
President signed the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001.
Under the USA PATRIOT Act, financial institutions are subject to prohibitions
against specified financial transactions and account relationships as well as
enhanced due diligence and "know your customer" standards in their dealing with
foreign financial institutions and foreign customers.
EFFECTS OF GOVERNMENTAL POLICIES AND ECONOMIC CONDITIONS
The Bank's earnings are affected by the difference between the interest earned
by its loans and investments and the interest paid by its deposits or other
borrowings. The yields on its assets and the rates paid on its liabilities are
sensitive to changes in prevailing market rates of interest. Thus, the earnings
and growth of the Bank are influenced by general economic conditions, fiscal
policies of the Federal government, and the policies of regulatory agencies,
particularly the Federal Reserve, which establishes national monetary policy,
all of which are beyond the Bank's control. The nature and impact of any future
changes in fiscal or monetary policies cannot be predicted.
MONETARY POLICY
Commercial banks, including the Bank, are affected by the credit policy of
various regulatory authorities, including the Federal Reserve. An important
function of the Federal Reserve is to regulate the national supply of bank
credit. Among the instruments of monetary policy used by the Federal Reserve to
implement these objectives are open market operations in U.S. government
securities, changes in reserve requirements on bank deposits, changes in the
discount rate on bank borrowings and limitations on interest rates that banks
may pay on time and savings deposits. The Federal Reserve uses these means in
varying combinations to influence overall growth of bank loans, investments and
deposits, and also to affect interest rates charged on loans, received on
investments or paid for deposits.
The monetary and fiscal policies of regulatory authorities, including the
Federal Reserve, also affect the banking industry. Through changes in the
reserve requirements against bank deposits, open market operations in U.S.
government securities and changes in the discount rate on bank borrowings, the
Federal Reserve influences the cost and availability of funds obtained for
lending and investing. No prediction can be made with respect to possible future
changes in interest rates, deposit levels or loan demand or with respect to the
impact of such changes on the business and earnings of the Bank.
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RISK FACTORS
There are factors, many beyond our control, which may significantly change the
results or expectations of the Company. Some of these factors are described
below.
WE MAY NOT BE SUCCESSFUL IN THE IMPLEMENTATION OF OUR BUSINESS STRATEGY.
We cannot assure you that we will be successful in the implementation of our
business strategy. The growth and expansion of the Company's business has
placed, and will continue to place, significant demands on the Company's
management and operational and financial resources. Successful implementation of
the Company's business strategy requires continued growth and will depend on its
ability to attract a significant number of customers, profitably manage its
assets, liabilities and capital, develop necessary business relationships to
provide products and services, implement and improve operational, financial and
management information systems and other technology, and hire and train
additional qualified personnel.
IF THE COMPANY'S ASSUMPTIONS ABOUT THE COLLECTIBILITY OF ITS LOAN PORTFOLIO ARE
WRONG AND THE ALLOWANCE FOR LOAN LOSSES IS NOT SUFFICIENT TO COVER FUTURE LOAN
LOSSES, THE COMPANY MAY INCUR ADDITIONAL LOSSES AND BE SUBJECT TO GREATER
REGULATORY SUPERVISION AND SANCTIONS.
The Company substantially increased its allowance for loan losses for the year
ended December 31, 2003, from $1,300,258 at December 31, 2002 to $1,904,377 at
December 31, 2003, because of increases in nonperforming loans and potential
problem loans, and because of increases in loans charged off compared to prior
years, particularly the chargeoff of $1,043,050 during the third quarter of 2003
of three loans to one borrower. Management makes various assumptions and
judgments about the collectibility of the loan portfolio, including the
creditworthiness of borrowers and the value of the collateral, if any, securing
the repayment of many of the loans. If the assumptions are wrong, the allowance
may not be sufficient to cover future loan losses. In addition, federal and
state regulators who periodically review the allowance for loan losses can
require the Company to increase its provision for loan losses or recognize
further loan charge-offs, based on judgments different than those of management.
There is no assurance that the allowance for loan losses will be sufficient to
cover future loan losses in the loan portfolio or that additional substantial
increases in the allowance for loan losses will not be required as a result of
increased nonperforming loans and potential problem loans.
In connection with the increase in the allowance for loan losses, the Bank and
its primary regulators entered into an agreement that will implement several
steps intended to improve performance and credit quality, including lessening
the risk position in each asset that has been internally classified as a problem
loan or identified as a potential problem loan, strengthening the risk analysis
of the loan portfolio, reviewing loan administration staffing requirements and
lending authority and hiring and/or training an individual whose primary
responsibility will be the independent risk analysis of the loan portfolio on an
ongoing basis. There is no assurance that the steps taken will ultimately prove
adequate or effective at improving the Bank's performance and credit quality.
If the assumptions made in determining the allowance for loan losses are wrong,
or the Bank is unable to or does not comply with the regulatory agreement, or
otherwise fails to comply with regulatory standards or improve performance and
credit quality, the Bank may be subject to greater regulatory scrutiny and
substantial sanctions by federal and state regulators.
IF EITHER THE COMPANY OR THE BANK DOES NOT HAVE ADEQUATE CAPITAL, IT WILL BE
SUBJECT TO AN INCREASED LEVEL OF REGULATORY SUPERVISION AND ITS BUSINESS,
OPERATING RESULTS AND FINANCIAL CONDITION WILL BE ADVERSELY AFFECTED. The
Company cannot be certain that its capital will allow the Bank to continue to
meet the capital requirements of the agreement between the Bank and its
regulators, or will allow the Bank to continue to meet the minimum capital
ratios for well-capitalized institutions or be adequate to support future
growth. If the Company is not able to maintain sufficient capital, it may
consider various alternative measures, such as slowing or reducing loan growth
or raising additional capital. Any necessary future equity or debt financing, if
available at all, may be on terms which are not favorable to the Company, and,
in the case of equity financing, could result in dilution to the Company's
shareholders. If adequate capital is not available, the Company and the Bank
will be subject to an increased level of regulatory supervision and its
business, operating results and financial condition could be adversely affected.
THE COMPANY MAY NOT GROW AS RAPIDLY AS IT HAS IN THE PAST. IF IT IS UNABLE TO
GROW ASSETS, THE COMPANY'S ABILITY TO INCREASE LONG-TERM PROFITABILITY MAY
SUFFER.
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The Company has incurred substantial expenses in management, sales and
customer support personnel and other infrastructure to support future growth,
and expects to continue to incur such expenses as it opens and expands new
branch offices. It may not grow as rapidly as over the past five years, and may
not grow at all. To continue to grow, the Company will need to provide
sufficient capital to the Bank, and the Company does not yet expect earnings to
satisfy capital needs. In general, without raising additional capital, the
Company can increase asset levels only by 10 to 12 times the level of earnings.
If the Company is unable to grow, its ability to increase long-term
profitability may suffer.
FLUCTUATIONS IN INTEREST RATES COULD REDUCE NET INTEREST INCOME. THE COMPANY
REALIZES INCOME PRIMARILY FROM THE DIFFERENCE BETWEEN INTEREST EARNED ON LOANS
AND INVESTMENTS AND INTEREST PAID ON DEPOSITS AND BORROWINGS. Most of the
Company's interest bearing liabilities tend to be at fixed rates of interest for
a fixed term and can only be repriced at maturity while the yield on a
significant portion of interest earning assets fluctuates with changes in an
external index, primarily the prime rate. As a result, assets will reprice
faster than liabilities and, in a decreasing rate market, such as was
experienced in 2001 and in 2002, the yield on assets will decline faster than
the rates paid on our liabilities. This causes a decline in net interest margin
and may lower interest income while interest expense does not fall as rapidly.
In that event, net income may be adversely impacted. Management is unable to
predict fluctuations of market interest rates, which are affected by many
factors, including inflation, recession, a rise in unemployment, tightening
money supply, and domestic and international disorder and instability in
domestic and foreign financial markets.
THE RESTRICTIONS ON THE BANK'S ABILITY TO PAY DIVIDENDS TO THE COMPANY COULD
HAVE A SUBSTANTIAL IMPACT ON ITS ABILITY TO FUND HOLDING COMPANY OPERATIONS,
INCLUDING DEBT SERVICE ON FUTURE BORROWINGS. The Company does not currently
incur material expenses at the holding company level. If material expenses are
incurred in the future, however, it will need to receive dividends from the Bank
or have some other source of funds. Due to regulatory constraints, no funds are
currently available for the payment of dividends from the Bank to the Company
without prior regulatory approval.
COMPETITION WITH OTHER FINANCIAL INSTITUTIONS COULD ADVERSELY AFFECT OUR
PROFITABILITY.
According to FDIC deposit information as of June 30, 2003, there were 13 banking
institutions, excluding credit unions, with offices in the Bowling Green MSA. A
number of these banking institutions have substantially greater resources and
lending limits, more numerous banking offices, a wider variety of banking and
other financial services, and much higher levels of core deposits than the
Company. In addition, the Company competes with mortgage companies, insurance
companies, consumer finance companies, brokerage firms, credit unions, money
market funds and other entities. This competition may limit or reduce the
Company's profitability, reduce its growth and adversely affect results of
operations and financial condition.
ITEM 2. DESCRIPTION OF PROPERTY
The main office of the Bank and the Company is located at 1805 Campbell Lane,
Bowling Green, Kentucky, which the Bank owns. The Bank leases a branch office,
located at 901 Lehman Avenue. The current lease of this facility provides for an
initial term of 1 year beginning on March 1, 2004 with options to extend the
lease for two (2) additional two (2) year terms The base rent of the current
term of the lease is payable in equal monthly installments of $2,497 in advance.
In February 2003, the Bank opened a branch at 2451 Fitzgerald-Industrial Drive
in Bowling Green, on land it purchased in the third quarter of 2002 for
$301,364. Total costs of the branch facility, excluding the cost of the land,
were $789,310, including building, furniture, and equipment. The Bank opened a
third branch in Franklin, Kentucky in February 2003. The Bank operated out of a
temporary leased location until a permanent facility could be constructed. The
permanent facility, located at 1200 S. Main, was completed and opened in October
2003. Total costs of the branch, excluding the cost of the land, were $940,816,
including building, furniture, and equipment. In January 2003, in connection
with the Bank's acquisition of Commonwealth Mortgage, a mortgage origination
company, the Bank purchased the .2 acre site, located at 1301U.S. Highway 31-W
Bypass in Bowling Green, on which the main office of Commonwealth is located,
for a purchase price of $272,500.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, there is no proceeding pending or, to the
knowledge of management, threatened, in which an adverse decision could result
in a material adverse change in the consolidated financial condition or results
of
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operations of the Company. To the knowledge of management, no proceedings
have been or are contemplated by or against any governmental authority in
connection with the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2003.
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Part II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
The common stock of the Company is traded in the over-the-counter market under
the symbol "CZFC.OB", on an order-match agency basis, whereby buyers and sellers
of the stock execute transactions on a no spread basis. The bid prices represent
prices between dealers, do not include retail mark-up, mark-down, or
commissions, and may not represent actual transactions. Trading volume in our
common stock is considered light and the stock is thinly traded. As of
December 31, 2003 there were approximately 179 shareholders of record of
Company common stock.
The following (based upon information provided by the Nasdaq Stock Market)
reflects the over-the-counter market range of high and low bid quotations for
the Company's common stock for the quarterly periods indicated:
HIGH LOW
First quarter, 2002 14.00 13.25
Second quarter, 2002 14.00 12.75
Third quarter, 2002 14.00 14.00
Fourth quarter, 2002 17.25 15.00
First quarter, 2003 17.25 14.00
Second quarter, 2003 15.75 14.80
Third quarter, 2003 15.25 14.55
Fourth quarter, 2003 15.30 12.80
The Company has not paid or declared dividends on its common stock since we
became a holding company of the Bank. The payment of dividends in the future is
dependent on future income, financial position, capital requirements, the
discretion and judgment of the Board of Directors and other considerations. In
addition, the Bank is the primary source of funds for the payment of dividends
by the Company. The payment of dividends by the Bank is subject to regulatory
restrictions as described in Note 10 of the Notes to Consolidated Financial
Statements.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW OF OPERATIONS
Management's discussion and analysis is included to provide the shareholders
with an expanded narrative of the Company's results of operations, changes in
financial condition, liquidity and capital adequacy. This narrative should be
reviewed in conjunction with the Company's audited consolidated financial
statements and notes thereto included elsewhere in this report. Since the
primary asset of the Company is its wholly owned subsidiary, most of the
discussion and analysis relates to the Bank.
The Company is a growing one bank holding company headquartered in Bowling
Green, Kentucky. The Company provides general commercial and consumer banking
services through its wholly owned bank subsidiary, Citizens First Bank, Inc.
Following completion of an approximately $8 million stock offering, the Bank
commenced operations as a newly chartered commercial bank in February 1999 at
1805 Campbell Lane, Bowling Green, Kentucky. The Bank opened a branch office at
901 Lehman Avenue, Bowling Green, Kentucky in March 1999.
In January 2003 the Bank acquired Commonwealth Mortgage and Southern Kentucky
Land Title, Inc. located at 1301U.S. Highway 31-W Bypass in Bowling Green,
Kentucky. The Bank opened a branch office at 2451 Fitzgerald-Industrial Drive,
Bowling Green, Kentucky and one at 914 South Main Street, Franklin, Kentucky in
February 2003. The Bank was organized as a community oriented, full service
alternative to the superregional financial institutions which dominate its
primary service area. The Bank's mission is to firmly establish itself in its
primary service area as a community owned and operated full-service bank
providing traditional products and services typically offered by commercial
banks. The Bank believes that its ability to compete is enhanced by its local
management and its base of local shareholders and directors. The Bank has
emphasized and intends to continue emphasizing its Bowling Green and southern
Kentucky roots, and the Bank has a philosophy of giving its customers prompt and
responsive personal service.
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The year ended December 31, 2003 represented a year of continued growth for the
Company. Since inception, the Company's balance sheet has steadily grown to
$163,519,995 at December 31, 2003.
In February 2003, the Company filed a registration statement with the Securities
and Exchange Commission for the offering and sale of up to $10 million of the
Company's common stock. The offering was designed for multiple closings of sales
of common stock, and had a final offering date of November 14, 2003. It was
completed in November 2003 netting proceeds to the Company of $2,563,503. The
proceeds of the offering were used to strengthen the Bank's capital base and
position it to continue to exceed minimum regulatory capital ratios, which will
allow for future growth.
In 2003, the Company recorded a net loss of $(290,029), or $(0.41) per common
share. This compares to net income of $745,218, or $1.16 per common share, in
2002. The provision for loan losses in 2003 was $1,808,000 or 1.49% of average
loans, compared to $195,000 or 0.2% of average loans during 2002. The increase
in the provision expense in 2003, compared to 2002, is primarily attributable to
the allocation of $1,087,000 for three loans to one borrower, which were
subsequently charged off. In addition, 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. The problems experienced in the loan
portfolio in 2003, particularly with respect to commercial loans, were the most
significant contributing factor to the net loss that was incurred during 2003.
The Bank and its primary regulators entered into a regulatory agreement in
August 2003 in order to implement several steps intended to improve the Bank's
performance. These steps included refining and refocusing credit risk analysis,
underwriting, monitoring and evaluation functions with the goal of improving the
quality of the loan portfolio, quickly identifying, and addressing, potential
problem loans and lessening the risk position in each asset that has been
internally classified as a problem loan or identified as a potential problem
loan. These comprehensive loan review procedures will provide for a strengthened
risk analysis of the loan portfolio and included a review of the lending
authority of each loan officer and loan committee, as well as the Bank's
staffing requirements, particularly in the area of loan administration. In this
regard, the Bank has hired an individual whose primary responsibility is the
independent risk analysis of the loan portfolio on an ongoing basis. The Bank
also reviewed, reevaluated and is implementing a long range strategic plan for
improving the operating performance and maintaining adequate capital levels at
the Bank. Throughout the term of the regulatory agreement, the Bank will be
required to maintain a minimum Tier 1 capital to total assets ratio of 7%. A
committee of the Bank's board of directors, of which at least two-thirds must be
independent, outside directors, will be responsible for ensuring that the Bank
complies with this regulatory agreement.
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. 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.
ALLOWANCE FOR LOAN LOSSES
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 describes the
methodology used to determine the allowance for loan losses, and a
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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
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 the Company's internal credit examiners.
An unallocated reserve is maintained to recognize the imprecision in estimating
and measuring losses 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 to 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 $1,904,377 was adequate, but not excessive, to absorb estimated
credit losses associated with the loan portfolio at December 31, 2003.
DEFERRED TAX ASSETS
The Company has a deferred tax asset of approximately $704,000. The Company
evaluates this asset on a quarterly basis. To the extent the Company believes it
is more likely than not that it will not be utilized, the Company will establish
a valuation allowance to reduce its carrying amount to the amount it expects to
be realized. At December 31, 2003, no valuation allowance has been established
against the outstanding deferred tax asset. The deferred tax asset will be
utilized as the Company is profitable or as the Company carries back tax losses
to periods in which it paid income taxes. The estimate of the realizable amount
of this asset is a critical accounting policy.
INCOME STATEMENT REVIEW
In 2003, the Company recorded a net loss of $(290,029), or $(0.41) per common
share. The net loss for 2003 includes gains of $9,292 during the first quarter
and $134,732 during the second quarter, from the sale of investment securities.
This compares to net income of $745,218, or $1.16 per common share, in 2002.
During 2002, the Company had gains from the sale of investment securities of
$108,454.
NET INTEREST INCOME
Net interest income, the Company's principal source of earnings, is the
difference between the interest income generated by earning assets, such as
loans and securities, and the total interest cost of the deposits and borrowings
obtained to fund these assets. Factors that influence the level of net interest
income include the volume of earning assets and interest bearing liabilities,
yields earned and rates paid, the level of non-performing loans and non-earning
assets, and the amount of non-interest bearing deposits supporting earning
assets.
For the year ended December 31, 2003, net interest income was $4,839,644, an
increase of $1,216,968 over net interest income of $3,622,676 in 2002. The
increase in 2003 resulted primarily from continued growth of loans and deposits,
as the Bank continues to increase market share in its principal area of
operations. The net interest margin
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in 2003 was 3.45%, compared to 3.58% in
2002. This drop of 13 basis points is primarily attributable to the continued
repricing in yield of interest-earning assets after the 25 basis points
reduction in short-term interest rates, initiated by the Federal Open Market
Committee of the Federal Reserve, in the second quarter of 2003, which followed
a 50 basis point reduction in the fourth quarter of 2002. Because the Bank's
interest-bearing liabilities generally have a longer repricing frequency than
its interest-earning assets, the Bank was unable to reprice interest-bearing
liabilities as quickly, in equal or greater dollar volume, as interest-earning
assets that are indexed to short-term rates primarily the Prime rate.
NET INTEREST ANALYSIS SUMMARY
2003 2002
---- ----
Average yield on interest earning assets 5.51% 6.31%
Average rate on interest bearing liabilities 2.22% 3.07%
Net interest-rate spread 3.29% 3.24%
Net interest margin 3.45% 3.58%
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The following table sets forth for the years ended December 31, 2003 and 2002
information regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and average yields and
costs. Such yields and costs for the periods indicated are derived by dividing
income or expense by the average balances of assets or liabilities,
respectively, for the periods presented.
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST ANALYSIS - 2003
(In Thousands) Average Income/ Average
Balance Expense Rate (%)
ASSETS
EARNING ASSETS
Federal funds sold and other ................ $ 1,232 $ 15 1.22%
Securities available for sale (including
equity securities) ........................ 17,563 648 3.69%
Federal Home Loan Bank Stock ................ 397 16 4.03%
Loans (1) ................................... 121,075 7,049 5.82%
-------- -----
Total interest earning assets ........... 140,267 7,728 5.51%
-----
Non-earning assets .......................... 8,433
-----
TOTAL ASSETS ............................ $ 148,700
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Interest bearing liabilities
Interest bearing transaction accounts ..... $ 43,248 $ 504 1.17%
Savings accounts .......................... 1,906 15 .79%
Time deposits ............................. 66,365 1,969 2.97%
--------- ------
Total interest bearing deposits ......... 111,519 2,488 2.23%
Securities sold under agreement
to repurchase ............................. 5,552 51 .92%
Other borrowed funds
Federal funds purchased ................... 1,112 15 1.35%
FHLB borrowings ........................... 9,667 244 2.52%
Other borrowings .......................... 2,103 90 4.28%
--------- -----
Total interest bearing liabilities ...... 129,953 2,888 2.22%
Non-interest bearing liabilities
Non-interest bearing deposits ............. 9,647
Other liabilities .......................... 832
-------
TOTAL LIABILITIES ....................... 140,432
Stockholders' equity ........................ 8,268
--------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ................... $ 148,700
=======
Net interest income ......................... $ 4,840
=====
Net interest margin (2) ................ 3.45%
Return on Assets Ratio ..................... (0.20%)
Return on Equity Ratio ..................... (3.71%)
Equity to Assets Ratio ..................... 5.56%
(1) Average loans include nonperforming loans. Interest income includes
interest and fees on loans, but does not include interest on loans 90
days or more past due.
(2) Net interest income as a percentage of average interest-earning assets.
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AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST ANALYSIS - 2002
(In Thousands) AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE (%)
ASSETS
EARNING ASSETS
Federal funds sold and other ................. $ 1,952 $ 30 1.53%
Securities available for sale (including
equity securities) ......................... 11,297 565 5.00%
Federal Home Loan Bank Stock ................. 268 13 4.65%
Loans (1) .................................... 87,805 5,789 6.59%
-------- ----
Total interest earning assets ............ 101,322 6,397 6.31%
----
Non-earning assets ........................... 4,993
----
TOTAL ASSETS ............................. $106,315
=======
LIABILITIES and STOCKHOLDERS' EQUITY
LIABILITIES
Interest bearing liabilities
Interest bearing transaction accounts ...... $ 22,383 $ 342 1.53%
Savings accounts ........................... 1,135 12 1.06%
Time deposits .............................. 56,961 2,146 3.77%
-------- ----
Total interest bearing deposits .......... 80,479 2,500 3.11%
Securities sold under agreement
to repurchase .............................. 4,731 54 1.14%
Other borrowed funds
Federal funds purchased .................... 201 4 2.05%
FHLB borrowings ............................ 4,169 164 3.93%
Other borrowings ........................... 875 52 5.95%
------ ----- -----
Total interest bearing liabilities ....... 90,455 2,774 3.07%
Non-interest bearing liabilities
Non-interest bearing deposits .............. 7,508
Other liabilities ........................... 876
------
TOTAL LIABILITIES ........................ 98,839
Stockholders' equity ......................... 7,476
------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY .................... $106,315
=======
Net interest income .......................... $ 3,623
=======
Net interest margin (2) ................. 3.58%
Return on Assets Ratio ...................... 0.70%
Return on Equity Ratio ...................... 9.97%
Equity to Assets Ratio ...................... 7.03%
(1) Average loans include nonperforming loans. Interest income includes
interest and fees on loans, but does not include interest on loans 90 days
or more past due.
(2) Net interest income as a percentage of average interest-earning assets.
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RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on net
interest income of Citizens First Corporation for the years ended December 31,
2003 and 2002. Information is provided with respect to (1) effects on interest
income attributable to changes in volume (changes in volume multiplied by prior
rate) and (2) effects on interest income attributable to changes in rate
(changes in rate multiplied by prior volume). Changes attributable to the
combined input of volume and rate have been allocated proportionately to the
changes due to volume and the changes due to rate.
RATE/VOLUME ANALYSIS
In thousands
2003 vs. 2002
Increase/(Decrease)
Due to
Rate Volume Net
---- ------ ------
Interest-earning assets:
Loans, net ................................ $ (737) $ 1,997 $ 1,260
Investment securities ..................... (175) 258 83
FHLB stock................................. (2) 5 3
Federal funds sold ........................ (5) (10) (15)
------- ------- -------
Total net change in income on
Interest-earning assets ........ (919) 2,250 1,331
Interest bearing liabilities:
Demand and savings accounts ............... (101) 266 165
Certificates of deposit ................... (498) 321 (177)
------- ------- -------
Total deposits ....................... (599) 587 (12)
Federal funds purchased ................... (2) 13 11
Repurchase agreements ..................... (12) 9 (3)
Borrowings ................................ (93) 211 118
------- ------- -------
Total net change in expense on ....... (706) 820 114
Interest-bearing liabilities
Net change in net interest income ............. $ (213) $ 1,430 $ 1,217
======= ======= =======
MARKET RISK ANALYSIS
QUANTITATIVE ASPECTS OF MARKET RISK. The Company does not maintain a trading
account for any class of financial instrument nor does it engage in hedging
activities or purchase high-risk derivative instruments. Furthermore, the
Company is not subject to foreign exchange rate risk or commodity price risk.
The Company monitors interest rate sensitivity and interest rate risk with an
earnings simulation model, using rate risk measurement techniques to produce a
reasonable estimate of interest margin risks. The system provides several
methods for measuring interest rate risk, including rate sensitivity gap
analysis to show cash flow and repricing information, and margin simulation, or
rate shocking, to quantify the actual income risk, by modeling the Company's
sensitivity to changes in cash flows over a variety of interest rate scenarios.
The program performs a full simulation of each balance sheet category under
various rate change conditions and calculates the net interest income change for
each. Each category's interest change is calculated as rates ramp up and down.
In addition the prepayment speeds and repricing speeds are changed.
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21
The following illustrates the effects on net interest income of an immediate
shift in market interest rates from the earnings simulation model.
BASIS POINT CHANGE +200 BP +100 BP -100 BP -200 BP
INCREASE (DECREASE) IN NET INTEREST INCOME 7.1% 3.7% (2.3%) (4.7%)
As of December 31, 2003, management believes the Company's balance sheet was in
an asset-sensitive position, as the repricing characteristics of the balance
sheet were such that an increase in interest rates would have a positive effect
on earnings and a decrease in interest rates would have a negative effect on
earnings.
Certain assumptions were utilized in preparing the preceding table. These
assumptions relate to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under differing interest rate
scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features that restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table.
QUALITATIVE ASPECTS OF MARKET RISK. The Company's principal financial objective
is to achieve long-term profitability while reducing its exposure to fluctuating
market interest rates. The Company has sought to reduce the exposure of its
earnings to changes in market interest rates by attempting to manage the
mismatch between asset and liability maturities and interest rates. In order to
reduce the exposure to interest rate fluctuations, the Company has developed
strategies to manage its liquidity and shorten its effective maturities of
certain interest-earning assets.
Management has sought to decrease the average maturity of its assets by:
(1) offering a variety of adjustable-rate residential mortgage loans and
consumer loans, many of which are retained by the
Company for its portfolio;
(2) purchasing mortgage-backed and related securities with adjustable rates
or estimated lives of five to ten years or less; and
(3) purchasing short- to intermediate-term investment securities.
In addition, the Company sells a portion of its long-term, fixed-rate
single-family residential mortgage loans for cash in the secondary market. The
retention of ARM loans and adjustable-rate mortgage-backed securities, which
reprice at regular intervals, helps to ensure that the yield on the Company's
loan portfolio will help to offset increases in the Company's cost of funds.
However, periodic and lifetime interest rate adjustment limits may prevent ARM
loans from repricing to market interest rates during periods of rapidly rising
interest rates. The Company does not use any hedging techniques to manage the
exposure of its assets to fluctuating market interest rates. The Company relies
on retail deposits as its primary source of funds and maintains lower-costing
savings, NOW and money market accounts, along with higher costing certificates
of deposit. The Company has attempted to lengthen the term of deposits by
offering certificates of deposit with longer terms. Management believes retail
deposits, compared to brokered deposits, reduce the effects of interest rate
fluctuations because they generally represent a more stable source of funds.
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PROVISION FOR LOAN LOSSES
The provision for loan losses in 2003 was $1,808,000 or 1.49% of average loans,
compared to $195,000 or 0.2% of average loans during 2002. The increase in the
provision expense in 2003, compared to 2002, is primarily attributable to the
allocation of $1,087,000 for three loans to one borrower, of which $1,043,050
were subsequently charged off during the third quarter of 2003. Following a
periodic 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. Loan growth during 2003 was $38,756,419,
compared to $11,238,707 in 2002. The increased loan growth experienced by the
Bank during 2003, compared to 2002, was primarily due to the addition of two new
branches in 2003 plus the acquisition of Commonwealth Mortgage and Southern
Kentucky Land Title, Inc. Net loan charge-offs totaled $1,203,880 in 2003,
including the $1,087,000 loan discussed above, compared to $90,666 in 2002. As a
percentage of average loans, net charge-offs were .99% in 2003 compared to 0.10%
in 2002.
NON-INTEREST INCOME
Non-interest income totaled $1,519,208 in 2003, compared to $772,456 in 2002, an
increase of $746,752 or 96.67%. The following table shows the detailed
components of non-interest income:
Increase (Decrease) in
Non-interest income
2003 2002 2003 vs. 2002
---- ---- -------------
Service charges on deposit accounts .................... $ 667,103 $ 575,920 $ 91,183
Other service charges and fees ......................... 80,058 29,358 50,700
Gain on the sale of mortgage loans held for sale ....... 491,646 33,538 458,108
Title premium fees ..................................... 58,698 0 58,698
Title closing fees ..................................... 33,219 0 33,219
Trust referral fees .................................... 12,000 12,763 (763)
Gain (loss) on the sale of available for sale securities 144,024 108,454 35,570
All other non-interest income .......................... 32,460 12,423 20,037
---------- ---------- ----------
$1,519,208 $ 772,456 $ 746,752
========== ========== ==========
The major variance in non-interest income in 2003 came from the gain of $491,646
from the sale of mortgage loans held for sale during the year, compared to
$33,538 during 2002. This large variance resulted from the acquisition of
Commonwealth Mortgage and Southern Kentucky Land Title, Inc. on January 2, 2003.
The growth in 2003 compared to 2002 in service charges on deposit accounts is
attributable to the growth in the number of deposit accounts subject to service
charges as a result of two new branches that opened in the first quarter of
2003. The Company refers trust business to a trust company in return for
referral fees to the Bank. These trust referral fees totaled $12,000 in 2003 and
$12,763 during 2002. Title premium fees and title closing fees in 2003 were
generated by Commonwealth Mortage and Southern Kentucky Land Title, Inc.
NON-INTEREST EXPENSE
Non-interest expenses for 2003 of $5,007,231 increased $1,942,676, or 63.4%,
from 2002. The changes to non-interest expense over this period were primarily
due to expense associated with the growth of the Bank as two new branches were
opened and Commonwealth Mortgage and Southern Kentucky Land Title, Inc. were
acquired, causing the Bank's customer base and the costs associated with
servicing the customer base to grow. The increases (decreases) in expense by
major categories are as follows:
Increase(Decrease) in
Non-interest Expenses
2003 2002 2003 vs. 2002
---- ---- -------------
Salaries and employee benefits .......... $ 2,596,731 $ 1,530,034 $ 1,066,697
Net occupancy expense ................... 350,827 176,858 173,969
Equipment expense ....................... 406,652 238,878 167,774
Business manager expense ................ 74,994 84,447 (9,453)
Professional fees ....................... 270,808 86,559 184,249
Other real estate expenses .............. 500 4,159 (3,659)
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Loss on sale of other real estate owned . (3,861) (7,493) 3,632
Data processing ......................... 306,982 233,909 73,073
FDIC deposit insurance .................. 48,136 15,607 32,529
Franchise and other taxes ............... 107,100 156,808 (49,708)
Directors' fees ......................... 23,000 13,400 9,600
Processing fees-overdraft protection plan 48,796 27,327 21,469
Overdraft protection plan charge-offs ... 40,061 29,636 10,425
Charity and contributions ............... 22,943 26,054 (3,111)
Postage ................................. 28,957 25,774 3,183
Telephone ............................... 85,317 52,707 32,610
Supplies ................................ 87,664 47,309 40,355
Advertising and marketing ............... 174,020 112,214 61,806
Other operating expenses ......... 337,604 210,368 127,236
------- --------- -----------
Total increase in non-interest expense $ 5,007,231 $ 3,064,555 $ 1,942,676
=========== =========== ===========
Significant variances include salaries and employee benefits expense, which
increased $1,066,697 during 2003, or 69.7%, to $2,596,731 from the 2002 total of
$1,530,034. The increase included annual merit increases for existing staff,
plus an increase of twenty-three full-time equivalent employees during 2003
compared to 2002, plus increases in employee benefit costs. Increases in net
occupancy, equipment, FDIC deposit insurance, data processing, telephone and
supplies reflect additional costs tied to the growth of the Bank, as these
expenses are linked to the size and activity of components of our balance sheet.
Professional fees, which increased $184,249 during 2003, to $270,808 from the
2002 total of $86,559, are primarily an increase in legal fees associated with
the attempt to recover the $1,087,000 commercial loan charged off in 2003 as
mentioned in the Provision for Loan Losses section.
INCOME TAXES
Income tax expense has been calculated using the Company's expected annual rate
for 2003. Deferred tax liabilities and assets are recognized for the tax effects
of differences between the financial statement and tax bases of assets and
liabilities.
BALANCE SHEET REVIEW
Assets at year-end 2003 totaled $163,519,995, compared with $128,443,129 at
December 31, 2002. On an annual average basis, total assets were $148,699,865 in
2002, compared to $106,314,522 in 2002. Average interest earning assets
increased $38,945,655 from 2002 to 2003, from $101,321,546 to $140,267,201.
LOANS
Total loans averaged $121,075,285 in 2003, compared to $87,804,551 in 2002. At
year-end 2003, loans totaled $134,715,475, compared to $95,959,056 at year-end
2002. The Company experienced strong to moderate loan growth in its market area
throughout of the year, with particular strength in middle market commercial and
commercial real estate loans, and in residential real estate loans. The
following table presents a summary of the loan portfolio by category:
LOANS OUTSTANDING
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
Commercial and agricultural .......... $ 37,165,893 $ 31,798,487
Commercial real estate ............... 43,078,814 33,364,597
Residential real estate .............. 43,718,482 23,546,052
Consumer ............................. 10,752,286 7,249,920
----------- ------------
Total loans .......................... $134,715,475 $ 95,959,056
============ ============
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LOAN CONCENTRATIONS
Commercial real estate loans include financing for industrial developments,
residential developments, retail shopping centers, industrial buildings,
restaurants, and hotels. The primary source of repayment cannot be traced to any
specific industry group.
The percentage distribution of the Company's loans, by industry, is shown in the
following table:
LOANS BY INDUSTRY
December 31, 2003 and 2002
As a percentage of total loans
2003 2002
---- ----
Agriculture, forestry, and fishing .............. 6.54% 1.17%
Mining .......................................... 1.08% 1.73%
Construction .................................... 8.29% 12.48%
Manufacturing ................................... 7.22% 7.81%
Transportation, communication, electric, gas, and 2.42% 2.54%
sanitary services
Wholesale Trade ................................. 3.16% 2.54%
Retail trade ................................... 10.23% 12.86%
Finance, Insurance, and Real Estate ............. 14.85% 17.90%
Services ........................................ 13.35% 15.54%
Public Administration ............................ 2.03% 1.93%
------ ------
Total Commercial and Commercial Real Estate 69.17% 76.50%
Residential Real Estate Loans .................... 23.35% 16.53%
Other Consumer Loans ............................ 7.48% 6.97%
------ ------
Total loans ............................... 100.00% 100.00%
======= =======
Substantially all of the Company's loans are to customers located in the Bowling
Green-Warren County area and in the Franklin-Simpson County area. As of December
31, 2003 the Company's 20 largest credit relationships consisted of loans and
loan commitments ranging from $2.15 million to $816,996. The aggregate amount of
these credit relationships was $26.4 million.
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The following table sets forth the maturity distribution and interest rate
sensitivity of commercial and commercial real estate loans as of December 31,
2003. Maturities are based upon contractual terms. The Company's policy is to
specifically review and approve all loans renewed; loans are not automatically
rolled over.
LOAN MATURITIES AND RATE SENSITIVITY
December 31,2003
ONE YEAR ONE THROUGH OVER TOTAL
BY MATURITY DATE: OR LESS FIVE YEARS FIVE YEARS LOANS
Commercial $19,322,608 $13,245,690 $4,597,594 $37,165,892
Commercial real estate 11,326,192 14,670,714 17,081,908 43,078,814
---------- ---------- ---------- ----------
Total $30,648,800 $27,916,404 $21,679,502 $80,244,706
Fixed rate loans $ 3,335,404 $13,656,204 $351,489 $17,343,097
Floating rate loans 27,313,396 14,260,200 21,328,013 62,901,609
---------- ---------- ---------- ----------
Total $30,648,800 $27,916,404 $21,679,502 $80,244,706
========== ========== ========== ==========
BY NEXT REPRICING OPPORTUNITY:
Commercial $30,294,989 $6,534,521 $336,382 $37,165,892
Commercial real estate 35,942,024 7,121,683 15,107 43,078,814
------------ --------- ------ ----------
Total $66,237,013 $13,656,204 $351,489 $80,244,706
Fixed rate loans $3,335,404 $13,656,204 $351,489 $17,343,097
Floating rate loans 62,901,609 0 0 62,901,609
---------- ---------- -------- ----------
Total $66,237,013 $13,656,204 $351,489 $80,244,706
========== ========== ========== ==========
ASSET AND LIABILITY MANAGEMENT
The assets and liabilities of the Company are managed to provide a consistent
level of liquidity to accommodate normal fluctuations in loans and deposits.
The yield on approximately forty-five percent of the Company's earning assets
adjusts simultaneously with changes in an external index, primarily the highest
Prime Rate as quoted in the Wall Street Journal. Most of the Company's interest
bearing liabilities are issued with fixed terms and can only be repriced at
maturity. During periods of rising rates, the yield on the Company's interest
earning assets will increase faster than the rates paid on interest bearing
liabilities. This creates an increase in the net interest margin, as the
difference between what the Company earns on its interest earning assets and
pays on its interest bearing liabilities increases. During periods of falling
rates, as occurred during the first quarter of 2003, with one rate drop of 25
basis points, and during the fourth quarter of 2002, with one rate drop of 50
basis points, the yield on the Company's assets will decline faster than the
rates paid on supporting liabilities. This causes an initial decline in the net
interest margin, as the difference between what the Company earns on its assets
and what it pays on its liabilities becomes smaller. If interest rates stabilize
for a period of time, the difference between interest earning assets and
interest bearing liabilities will tend to stabilize, as occurred during the
first ten months of 2002. In a stable rate environment, the Bank's net interest
margin will be impacted by, among other factors, a change in the mix of earning
assets, with the deposit growth of the Bank being invested in federal funds
sold, investment securities, or loans.
ASSET QUALITY
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 $653,170 at December 31, 2003, and $115,000 at December 31, 2002. The
non-performing loan total at year-end 2003 consisted of four loans. Included in
the non-performing loan total at December 31, 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 approximately $112,000 was paid against the balance of the
loans. The borrower's assets
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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. The Bank is pursuing recovery in full of
the abovementioned loans through various legal proceedings. The loans were
charged off during the third quarter of 2003. The two remaining loans on
nonaccrual status at December 31, 2003, that were put on nonaccrual during the
fourth quarter of 2003, are to one borrower, and total $124,989. The loans are
secured by apartment buildings in Bowling Green. The remaining $8,181 of
non-performing loans consists of one loan accruing but past due over 90 days.
The non-performing assets at December 31, 2003, totaled $653,170, comprised of
the properties mentioned above, and at December 31, 2002, non-performing assets
totaled $185,000.
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.
The provision to the allowance for loan losses is based on management's and the
Loan Committee's ongoing review and evaluation of the loan portfolio and general
economic conditions on a monthly basis, and review 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
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 allowance for loan losses is established through a provision for loan losses
charged to expense. At December 31, 2003, the allowance was $1,904,377, compared
to $1,300,258 at the end of 2002. The ratio of the allowance for loan losses to
total loans (excluding mortgage loans held for sale) at December 31, 2003, was
1.41%, compared to 1.36% at December 31, 2002.
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The following table sets forth an analysis of the Company's allowance for loan
losses for the periods indicated.
SUMMARY OF LOAN LOSS EXPERIENCE
For the year ended December 31, 2003 2002
Balance at beginning of year ................ $ 1,300,258 $ 1,195,924
Provision for loan losses ................... 1,808,000 195,000
Amounts charged off:
Commercial and commercial real estate ..... 1,083,635 94,596
Residential real estate ................... 24,808 0
Consumer .................................. 109,154 11,519
------------ ------------
Total loans charged off ................... 1,217,596 106,115
Recoveries of amounts previously charged off:
Commercial and commercial real estate ..... -- 2,800
Residential real estate ................... 4,500 10,279
Consumer .................................. 9,214 2,370
------------ ------------
Total recoveries .......................... 13,714 15,449
------------ ------------
Net charge-offs ............................. 1,203,880 90,666
------------ ------------
Balance at end of year ...................... $ 1,904,378 $ 1,300,258
============ ============
Total loans, net of unearned income:
Average ................................... $121,075,2856 $ 87,805,000
At December 31 ............................ 134,715,475 95,959,056
As a percentage of average loans:
Net charge-offs ........................... 0.99% 0.10%
Provision for loan losses ................. 1.49% 0.22%
Allowance as a percentage of year-end loans
(excluding mortgage loans held for sale) 1.41% 1.36%
Allowance as a percentage of non-performing loans 2,917.12% 1,130.66%
The following table sets forth the breakdown of the allowance for loan losses by
loan category at the dates indicated.
ALLOCATION OF ALLOWANCE FOR LOAN LOSS
December 31
In thousands
2003 2002
% of % of
Loans in Loans in
Each Each
Category Category
to Total to Total
Amount Loans Amount Loans
Mortgage loans $ 124 6.6% $ 82 7.4%
Consumer and other loans 171 9.1% 111 10.1%
Commercial 880 46.8% 483 43.8%
Commercial real estate 706 37.5% 427 38.7%
Unallocated 23 N/A 197 N/A
-- --- --- ---
Total allowance for loan losses $ 1,904 100.0% $ 1,300 100.0%
====== ====== ===== ======
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Management believes that the allowance for loan losses at December 31, 2003 is
adequate to absorb losses inherent in the loan portfolio as of that date. That
determination is based on the best information available to management, but
necessarily involves uncertainties and matters of judgment and, therefore,
cannot be determined with precision and could be susceptible to significant
change in the future. In addition, bank regulatory authorities, as a part of
their periodic examinations of the Bank, may reach different conclusions
regarding the quality of the loan portfolio and the level of the allowance,
which could result in additional provisions being made in future periods.
SECURITIES, FEDERAL FUNDS SOLD AND RESALE AGREEMENTS
Securities are all classified as available for sale, and averaged $17,562,844 in
2003, an increase of $6,265,683 over the average of $11,297,161 in 2002. The
tables below present the carrying value of securities for each of the past two
years and the maturities and yield characteristics of securities as of December
31, 2003.
CARRYING VALUE OF SECURITIES AVAILABLE FOR SALE
DECEMBER 31
In thousands
2003 2002
U.S. Government agencies $8,845 $ 10,183
Collateralized mortgage obligations securities 9,555 6,003
----- -----
Total securities available for sale $ 18,400 $16,186
====== ======
MATURITY DISTRIBUTION OF SECURITIES AVAILABLE FOR SALE
December 31, 2003
Dollars in thousands OVER OVER
ONE YEAR FIVE YEARS OVER
ONE YEAR THROUGH THROUGH TEN TOTAL EQUITY MARKET
OR LESS FIVE YEARS TEN YEARS YEARS MATURITIES SECURITIES VALUE
U.S. Government agencies ............. $ 0 $ 0 $ 8,235 $ 1,000 $9,235 $ 0 $ 8,845
and mortgage-backed securities:(1)...... 0 338 4,825 4,556 9,719 0 9,555
------- ------- ------- ------- ------- --------- -----
Total securities available for sale...$ 0 $ 338 $ 13,060 $5,556 $ 18,954 $ 0 18,400
====== ===== ======= ===== ======== ======== =======
Percent of total ..................... 0.0% 1.8% 68.9% 29.3% 100.0% 0%
Weighted average yield(2) ............ 0.00% 2.82% 3.65% 3.93% 3.72% N/A
(1) Collateralized mortgage obligations and mortgage-backed securities are
grouped into average lives based on December 2003 prepayment projections.
(2) The weighted average yields are based on amortized cost.
DEPOSITS
Total deposits averaged $121,166,082 during 2003, an increase of $33,179,263
compared to $87,986,819 in 2002. Time deposits of $100,000 or more totaled
$26,964,687 at December 31, 2003, compared to $22,457,617 at December 31, 2002.
Interest expense on time deposits of $100,000 or more was $521,701 in 2003,
compared to $750,336 in 2002. The following table shows the maturities of time
deposits of $100,000 or more as of December 31, 2003:
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
December 31, 2003
Three months or less $8,777,948
Over three through six months 1,964,019
Over six through twelve months 10,597,445
Over one year through two years 3,999,023
Over two years through five years 1,626,252
---------
Total $26,964,687
===========
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LIQUIDITY, OTHER BORROWINGS AND CAPITAL RESOURCES
LIQUIDITY. To maintain a desired level of liquidity, the Company has several
sources of funds available. The Company primarily relies upon net inflows of
cash from financing activities, supplemented by net inflows of cash from
operating activities, to provide cash used in its investing activities. As is
typical of most banking companies, significant financing activities include
issuance of common stock, deposit gathering, and the use of short-term borrowing
facilities, such as federal funds purchased and repurchase agreements. The
Company's primary investing activities include purchases of securities and loan
originations, offset by maturities, prepayments and sales of securities, and
loan payments.
OTHER BORROWINGS. The Company successfully applied for membership in the
Cincinnati Federal Home Loan Bank during 2000, to be able to obtain advances and
lines of credit from the FHLB. At December 31, 2003, the Company had three
outstanding FHLB advances totaling $11,000,000. The first FHLB advance, which
was issued December 19, 2001, matured 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 9, 2006, and has a fixed interest
rate of 2.03%. In January 2004, the Company obtained a fourth FHLB advance in
the amount of $5,000,000, which has a fixed interest rate of 2.21% and matures
in January 2006. This advance was obtained to replace the advance which is
maturing in March 2004, that will not be renewed.
In 2001, the Company executed a credit agreement from a correspondent bank for
the purpose of injecting capital into the 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. The Company made three draws in 2003 totaling
$2,100,000. The current rate on the loan, which is repriced annually at one-year
LIBOR plus 275 basis points, is 3.78%. The stock of the Bank is pledged as
collateral for the loan.
Information regarding short-term borrowings is presented below:
OTHER BORROWINGS
Dollars in thousands
2003 2002
FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS:
Balance at year end ............................ $ 5,419 $ 5,834
Weighted average rate at year end .............. .90% .99%
Average balance during the year ................ 6,664 4,932
Weighted average rate during the year .......... 1.00% 1.17%
Maximum month-end balance ...................... 9,337 5,834
OTHER BORROWINGS:
Balance at year end ............................ 14,000 7,900
Weighted average rate at year end .............. 2.80% 2.81%
Average balance during the year ................ 10,035 5,045
Weighted average rate during the year .......... 2.18% 3.93%
Maximum month-end balance ...................... 14,000 7,900
TOTAL BORROWINGS:
Balance at year end ............................ 19,419 13,734
Weighted average rate at year end .............. 2.27% 2.04%
Average balance during the year ................ 16,699 9,977
Weighted average rate during the year .......... 1.71% 2.57%
Maximum month-end balance ...................... 23,337 13,734
Repurchase agreements mature in one business day. The rate paid on these
accounts is tied to the targeted federal funds rate and is based on a tiered
balance calculation.
CAPITAL RESOURCES. The Company and the Bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and
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possibly additional discretionary - actions by regulators that, if undertaken,
could have a material effect on the financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities and
certain off-balance sheet items as calculated under the regulatory accounting
practices. The Company's and the Bank's capital amounts and classification are
also subject to qualitative judgements by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
Tier I capital to risk-weighted assets and to total assets. Management believes,
as of December 31, 2003, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
The Company's capital ratios at December 31, 2003 (calculated in accordance with
regulatory guidelines) were as follows:
COMPANY
DECEMBER 31, 2003 DECEMBER 31, 2002
TIER I RISK-BASED CAPITAL RATIO 7.23% 7.83%
Regulatory minimum 4.00 4.00
"Well-capitalized" minimum 6.00 6.00
TOTAL RISK-BASED CAPITAL RATIO 8.48% 9.08%
Regulatory minimum 8.00 8.00
"Well-capitalized" minimum 10.00 10.00
TIER I LEVERAGE RATIO 5.88% 6.76%
Regulatory minimum 4.00 4.00
"Well-capitalized" minimum 5.00 5.00
The Bank's capital ratios at December 31, 2003 (calculated in accordance with
regulatory guidelines) were as follows:
BANK
DECEMBER 31, 2003 DECEMBER 31, 2002
TIER I RISK-BASED CAPITAL RATIO 9.07% 9.01%
Regulatory minimum 4.00 4.00
"Well-capitalized" minimum 6.00 6.00
TOTAL RISK-BASED CAPITAL RATIO 10.32% 10.26%
Regulatory minimum 8.00 8.00
"Well-capitalized" minimum 10.00 10.00
TIER I LEVERAGE RATIO 7.38% 7.75%
Regulatory minimum 4.00 4.00
"Well-capitalized" minimum 5.00 5.00
At December 31, 2003, the Bank was categorized as "well capitalized" under the
regulatory framework for prompt corrective action, while the Company was
categorized as "well capitalized" under the Tier I risk-based and the Tier I
leverage ratios, respectively. The Company was categorized as "adequately
capitalized" under the Total risk-based capital ratio. To be categorized as
"well capitalized" the Company and the Bank must maintain minimum total-risk
based, Tier I risk-based and Tier I leverage ratios of 10%, 6%, and 5%,
respectively, and to be categorized as "adequately capitalized" the Company and
the Bank must maintain minimum total risk based, Tier I risk based and Tier I
leverage ratios of 8%, 4% and 4%, respectively.
At the time the Company became a bank holding company, it owned an investment
portfolio of marketable equity securities valued at approximately $1.5 million.
These securities were the primary asset of the Company prior to the formation of
the Bank. The majority of these securities were sold in 1999, and the proceeds
from the sale of the
30
31
securities provided a source of cash to the Company. Since
the opening of the Bank, the Company's cash requirements have been met primarily
by the growth of customers' deposits, and by the cash generated from the sale of
the investment portfolio mentioned above. In November 2000, $850,000 of the cash
generated from the sale of the investment portfolio, was injected as capital
into the Bank.
In 2001, the Company executed a credit agreement from a correspondent bank for
the purpose of injecting capital into the 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. The Company made three draws in 2003 totaling
$2,100,000. The current rate on the loan, which is repriced annually at one-year
LIBOR plus 275 basis points, is 3.78%. The stock of the Bank is pledged as
collateral for the loan.In November 2003, the Company completed the sale of
197,394 shares of common stock, netting proceeds to the Company of $2,563,504.
Of that amount, approximately $2,000,000 was contributed to the capital of the
Bank.
At the Company level, the decrease in capital ratios in 2003 is primarily due to
the Company's asset growth, coupled with the net loss for the year during 2003.
The risk-based ratios increased at the Bank level at year end 2003, primarily
because of the capital injection from the Company, which came from the net
proceeds from the sale of Company common stock and the increased borrowing from
the Company's line of credit. To maintain adequate capital ratios and allow for
continued growth, the Company may be required to consider additional or
alternative measures to improve the Company's and the Bank's capital ratios,
such as slowing or reducing loan growth, or raising additional capital through
the issuance of preferred stock or trust preferred securities. Increased
borrowings or preferred securities will generally 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 preferred
securities may increase over time, while the cost of common equity will remain
fixed.
Due to regulatory constraints on the payment of dividends, no funds are
available for the payment of dividends from the Bank to the Company.
IMPACT OF ACCOUNTING PRONOUNCEMENTS AND REGULATORY POLICIES
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS
Statements No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical
Corrections." This Statement rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," and amends SFAS No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds SFAS
No. 44, "Accounting for Intangible Assets of Motor Carriers." This Statement
amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. SFAS
No. 145 was effective for transactions occurring after May 15, 2002. Adoption of
this Standard did not have a material effect on the Company's Consolidated
Financial Statements.
The FASB recently adopted SFAS No. 147, "Acquisition of Certain Financial
Institutions." This statement addresses the financial accounting and reporting
for the acquisition of all or part of a financial institution, except for a
transaction between two or more mutual enterprises. This statement removes
acquisitions of financial institutions from the scope of SFAS No. 72,
"Accounting for Certain Acquisitions of Banking or Thrift Institutions" and FASB
Interpretation No. 9, "Applying APB Opinions No. 16 and 17 when a Savings and
Loan Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method," and requires that those transactions be
accounted for in accordance with SFAS No. 141 and SFAS No. 142. In addition,
this statement amends SFAS No. 144 to include in its scope long-term customer
relationship intangible assets of financial institutions such as depositor and
borrower-relationship intangible assets and credit cardholder intangible assets.
Consequently, those intangible assets are subject to the same undiscounted cash
flow recoverability test and impairment loss recognition and measurement
provisions that SFAS No. 144 requires for other long-lived assets that are held
and used. This statement was effective October 1, 2002. Adoption of this
Standard did not have a material effect on the Company's Consolidated Financial
Statements.
The FASB recently adopted SFAS No. 148, "Accounting for Stock-Based Compensation
- Transition and Disclosure--an Amendment of FASB Statement No. 123." This
statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value
31
32
method of accounting for stock-based employee compensation. In addition,
this statement amends the disclosure requirements of SFAS No. 123 to require
more prominent disclosures about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results in
both annual and interim financial statements. Adoption of this Standard did not
have a material effect on the Company's Consolidated Financial Statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain embedded derivatives, and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement amends SFAS No. 133 to reflect the decisions made as part of the
Derivatives Implementation Group (DIG) and in other FASB projects or
deliberations. SFAS No. 149 was effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. Adoption of this Standard did not have a material effect on the Company's
Consolidated Financial Statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This Statement
establishes standards for how an entity classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
Statement requires that an issuer classify a financial instrument that is within
its scope as a liability. Many of those instruments were previously classified
as equity or in some cases presented between the liabilities section and the
equity section of the statement of financial position. This Statement was
effective, generally, for financial instruments entered into or modified after
May 31, 2003, and otherwise was effective at the beginning of the first interim
period beginning after June 15, 2003. The effective date of SFAS No. 150 is
deferred by one year to fiscal periods beginning after December 15, 2004 for
financial instruments that are, by their terms, mandatorily redeemable as well
as stock (and other instruments) that are required to be redeemed under related
agreements. Furthermore, the application of SFAS No. 150 has been deferred
indefinitely for mandatorily redeemable instruments from non-controlling
interests. Adoption of this Standard did not have a material effect on the
Company's Consolidated Financial Statements.
In November 2002, the FASB issued Interpretation No. 45, (FIN 45) "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which elaborates on the disclosures to be
made by a guarantor about its obligations under certain guarantees issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The Interpretation expands on the accounting guidance of
SFAS No. 5, "Accounting for Contingencies," SFAS No. 57, "Related Party
Disclosures," and SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments." It also incorporates without change the provisions of FASB
Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of
Others," which is superseded. The initial recognition and measurement provisions
of this Interpretation apply on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements in this
Interpretation were effective for periods ending after December 15, 2002.
Significant guarantees that have been entered into by the Bancorp are disclosed
in Note 15. Adoption of this Interpretation did not have a material effect on
the Company's Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities." This Interpretation clarifies the application of
ARB No. 51, "Consolidated Financial Statements," for certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated support from other parties. This
Interpretation requires variable interest entities (VIE's) to be consolidated by
the primary beneficiary which represents the enterprise that will absorb the
majority of the VIE's expected losses if they occur, receive a majority of the
VIE's residual returns if they occur, or both. Qualifying Special Purpose
Entities (QSPE) are exempt from the consolidation requirements of FIN 46. This
Interpretation was effective for VIE's created after January 31, 2003 and for
VIE's in which an enterprise obtains an interest after that date. In December
2003, the FASB issued Staff Interpretation No. 46R (FIN 46R), "Consolidation of
Variable Interest Entities -- an interpretation of ARB 51 (revised December
2003)," which replaces FIN 46. FIN 46R was primarily issued to clarify the
required accounting for interests in VIE's. Additionally, this Interpretation
exempts certain entities from its requirements and provides for special
effective dates for enterprises that have fully or partially applied FIN 46 as
of December 24, 2003. Application of FIN 46R is required in financial statements
of public enterprises that have interests in structures that are commonly
referred to as special-purpose entities, or SPE's, for periods ending after
December 15, 2003.
32
33
Application by public enterprises, other than small business
issuers, for all other types of VIE's (i.e., non-SPE's) is required in financial
statements for periods ending after March 15, 2004, with earlier adoption
permitted. Adoption of this Interpretation did not have a material effect on the
Company's Consolidated Financial Statements.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented in
this filing have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering the change in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution's
performance than do general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Forward-looking statements, which are based on assumptions and
estimates and describe the Company's future plans, strategies and expectations,
are generally identifiable by the use of the words "anticipate," "will,"
"believe," "estimate," "expect," "intend," "seek," or similar expressions. These
forward-looking statements may address, among other things, the Company's
business plans, objectives or goals for future operations, our forecasted
revenues, earnings, assets or other measures of performance. These
forward-looking statements are subject to risks, uncertainties and assumptions.
Important factors that could cause actual results to differ materially from the
forward-looking statements made or incorporated by reference in this report
include, but are not limited to:
- the strength of the United States economy in general and the strength of the
Bowling Green economy in particular; - changes in interest rates, yield curves
and interest rate spread relationships; - deposit flows, cost of funds, and cost
of deposit insurance on premiums; - changes in the quality or composition of the
Company's loan or investment portfolios, including adverse developments in
borrower industries or in the repayment ability of individual
borrowers or issuers; - increased competition or market concentration; - changes
in tax or accounting principles; and - new state or federal legislation,
regulations or the initiation or outcome of litigation.
If one or more of these risks or uncertainties materialize, or if any of the
Company's underlying assumptions prove incorrect, the Company's actual results,
performance or achievements may vary materially from future results, performance
or achievements, expressed or implied by these forward-looking statements.
33
34
ITEM 7. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and report of
independent accountants are included herein:
Independent Accountants' Report, BKD, LLP
Consolidated Balance Sheets--December 31, 2003 and 2002
Consolidated Statements of Operations--Years ended December 31, 2003
and 2002
Consolidated Statements of Stockholder's Equity--Years ended December 31,
2003 and 2002
Consolidated Statements of Cash
Flows--Years ended December 31, 2003 and 2002
Notes to Consolidated Financial Statements
CITIZENS FIRST CORPORATION
ACCOUNTANTS' REPORT AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
35
36
CITIZENS FIRST CORPORATION
DECEMBER 31, 2003 AND 2002
CONTENTS
INDEPENDENT ACCOUNTANTS' REPORT...........................................37
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets.....................................................38-39
Statements of Operations...........................................40-41
Statements of Stockholders' Equity...................................42
Statements of Cash Flows..........................................43-44
Notes to Financial Statements.....................................45-64
36
37
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
Citizens First Corporation
Bowling Green, Kentucky
We have audited the accompanying balance sheets of Citizens First Corporation
(Company) as of December 31, 2003 and 2002, and the related statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2003 and 2002, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ BKD, LLP
Louisville, Kentucky
February 19, 2004
37
38
CITIZENS FIRST CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASSETS
2003 2002
------------ -------------
Cash and due from banks ................................. $ 5,233,396 $ 5,204,747
Federal funds sold ...................................... -- 8,718,070
------------- -------------
Cash and cash equivalents ........................ 5,233,396 13,922,817
Available-for-sale securities ........................... 18,400,189 16,186,406
Loans held for sale ..................................... 529,800 305,200
Loans, net of allowance for loan losses of $1,904,377 and
$1,300,258 at December 31, 2003, and 2002 ............. 132,811,098 94,658,798
Premises and equipment .................................. 3,913,361 1,840,022
Federal Home Loan Bank (FHLB) stock ..................... 425,100 353,600
Foreclosed assets held for sale, net .................... -- 70,000
Interest receivable ..................................... 694,637 651,412
Income taxes receivable ................................. 287,908 --
Deferred income taxes ................................... 703,673 335,193
Goodwill ................................................ 384,243 --
Other ................................................... 136,590 119,681
------------- -------------
Total assets ..................................... $ 163,519,995 $ 128,443,129
============= =============
38
39
LIABILITIES AND STOCKHOLDERS' EQUITY
2003 2002
------------ -------------
LIABILITIES
Deposits
Demand ............................................... $ 14,147,896 $ 11,304,108
Savings, NOW and money market ........................ 49,833,676 34,676,471
Time ................................................. 69,747,520 59,912,754
------------- -------------
Total deposits ................................... 133,729,092 105,893,333
Federal funds purchased ................................. 662,576 --
Securities sold under repurchase agreements ............. 4,756,410 5,833,512
Long-term debt .......................................... 14,000,000 7,900,000
Deferred income taxes ................................... 100,315 15,231
Income taxes payable .................................... -- 395,078
Accrued interest and other liabilities .................. 661,225 567,723
------------- -------------
Total liabilities ................................ 153,909,618 120,604,877
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock; no par value, authorized 500 shares .... -- --
Common stock, no par value, authorized 2,000,000 shares;
issued and outstanding 840,447 and 643,053 shares at
December 31, 2003, and 2002, respectively ............. 9,920,981 7,357,477
Retained earnings ....................................... 54,789 344,818
Accumulated other comprehensive income (loss) ........... (365,393) 135,957
------------- -------------
Total stockholders' equity ....................... 9,610,377 7,838,252
------------- -------------
Total liabilities and stockholders' equity ....... $ 163,519,995 $ 128,443,129
============= =============
39
40
CITIZENS FIRST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003 AND 2002
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2003 2002
----------------------------------------
INTEREST AND DIVIDEND INCOME
Loans $ 7,049,478 $ 5,789,307
Available-for-sale securities 647,832 565,125
Federal funds sold 14,831 29,700
Dividends on FHLB stock 15,815 12,448
--------------- ---------------
Total interest and dividend income 7,727,956 6,396,580
--------------- ---------------
INTEREST EXPENSE
Deposits 2,487,915 2,500,240
Securities sold under agreements to repurchase 50,737 53,521
Long-term debt 334,141 216,021
Federal funds purchased 15,519 4,122
--------------- ---------------
Total interest expense 2,888,312 2,773,904
--------------- ---------------
NET INTEREST INCOME 4,839,644 3,622,676
PROVISION FOR LOAN LOSSES 1,808,000 195,000
--------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,031,644 3,427,676
--------------- ---------------
NONINTEREST INCOME
Service charges on deposit accounts 667,103 575,920
Other service charges and fees 112,518 41,781
Title insurance premiums and closing costs 91,917 --
Sale of mortgage loans 491,646 33,538
Net realized gains on sale of available-for-sale securities 144,024 108,454
Trust referral fees 12,000 12,763
--------------- ---------------
Total noninterest income 1,519,208 772,456
--------------- ---------------
NONINTEREST EXPENSE
Salaries and employee benefits 2,596,731 1,530,034
Net occupancy expense 350,827 176,858
Equipment expense 406,652 238,878
Advertising 171,438 112,214
Professional fees 270,808 86,559
Data processing services 306,982 233,909
Franchise shares and deposit tax 107,100 156,808
Business manager expense 74,994 84,447
Postage and office supplies 116,621 73,083
Telephone and other communication 124,640 52,847
Other 480,438 318,918
--------------- ---------------
Total noninterest expense 5,007,231 3,064,555
--------------- ---------------
40
41
2003 2002
----------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES $ (456,379) $ 1,135,577
PROVISION (CREDIT) FOR INCOME TAXES (166,350) 390,359
--------------- ---------------
NET INCOME (LOSS) $ (290,029) $ 745,218
=============== ===============
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $ (0.41) $ 1.16
=============== ===============
41
42
CITIZENS FIRST CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003 AND 2002
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCUMULATED
RETAINED OTHER TOTAL
COMMON STOCK EARNINGS COMPREHENSIVE COMPREHENSIVE
SHARES AMOUNT (DEFICIT) INCOME (LOSS) TOTAL INCOME (LOSS)
----------- ---------- ---------- ------------- -------------- ------------
BALANCE, JANUARY 1, 2002 643,053 $ 7,357,477 $(400,400) $ 109,299 $ 7,066,376
Net income .............................. -- -- 745,218 -- 745,218 $ 745,218
Change in unrealized gain on securities
available for sale, net of
reclassification adjustment and tax
effect $13,733 ........................ -- -- -- 26,658 26,658 26,658
--------- ---------- --------- --------- ---------- ---------
Total comprehensive income ........ $ 771,876
=========
BALANCE, DECEMBER 31, 2002 ............. 643,053 7,357,477 344,818 135,957 7,838,252
Net income (loss) ...................... -- -- (290,029) -- (290,029) $(290,029)
Common stock issued, 197,394 shares
issued at $15.50 per share, net of
offering costs of $343,124 ............ 197,394 2,563,504 -- -- 2,563,504
Change in unrealized gain on securities
available for sale, net of
reclassification adjustment and tax
effect of $258,271 ..................... -- -- -- (501,350) (501,350) (501,350)
--------- ---------- -------- --------- ---------- ---------
Total comprehensive income
(loss) .............................. $(791,379)
=========
BALANCE, DECEMBER 31, 2003 ................. 840,447 $9,920,981 $ 54,789 $(365,393) $9,610,377
========== ========= ========= ========== =========
42
43
CITIZENS FIRST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002
See Notes to Consolidated Financial Statements
2003 2002
----------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ (290,029) $ 745,218
Items not requiring (providing) cash
Depreciation and amortization 377,616 246,664
Provision for loan losses 1,808,000 195,000
Amortization of premiums and discounts on securities 99,684 24,647
Deferred income taxes (25,125) 48,160
Net realized gains on disposition of investment securities (144,024) (108,454)
Gain on sale of other real estate owned (3,861) (7,493)
FHLB stock dividends received (15,700) (12,200)
Changes in
Interest receivable (43,225) (128,997)
Sale of mortgage loans held for sale 38,713,800 7,487,760
Origination of mortgage loans held for sale (38,938,400) (6,214,801)
Other assets (579,090) (56,432)
Interest payable and other liabilities (73,767) 319,169
-------------- --------------
Net cash provided by operating activities 885,879 2,538,241
-------------- --------------
INVESTING ACTIVITIES
Net change in loans (39,960,300) (11,329,373)
Purchase of premises and equipment (2,389,947) (642,652)
Proceeds from maturities of available-for-sale securities 18,898,051 6,168,141
Proceeds from sales of other real estate owned 73,861 258,956
Proceeds from sales of available-for-sale securities 5,471,833 1,117,635
Purchases of available-for-sale securities (27,298,947) (13,147,281)
Purchase of Commonwealth Mortgage and Southern KY Land Title,
Inc., net of cash received (398,688) --
Purchase of FHLB stock (55,900) (92,900)
-------------- --------------
Net cash used in investing activities (45,660,037) (17,667,474)
-------------- --------------
FINANCING ACTIVITIES
Net increase in demand deposits, money market, NOW and savings
accounts 18,000,993 16,437,285
Net increase in certificates of deposit 9,834,766 1,565,220
Proceeds from long-term borrowings 6,100,000 2,101,000
Net increase/(decrease) in fed funds purchased and repurchase
agreements (414,526) 2,421,776
Issuance of common stock, net of costs 2,563,504 --
-------------- --------------
Net cash provided by financing activities 36,084,737 22,525,281
-------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,689,421) 7,396,048
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 13,922,817 6,526,769
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,233,396 $ 13,922,817
============== ==============
43
44
2003 2002
-----------------------------------
SUPPLEMENTAL CASH FLOWS INFORMATION
Interest paid $ 2,904,359 $ 2,804,016
Income taxes paid $ 541,761 $ 8,865
44
45
CITIZENS FIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Citizens First Corporation (Company) was incorporated in 1975, for the
purpose of conducting business as an investment club. The Company is
incorporated under the laws of the Commonwealth of Kentucky and is
headquartered in Bowling Green, Kentucky. In September 1998, the Company
filed an application with the Kentucky Department of Financial
Institutions (KDFI) and the Federal Deposit Insurance Corporation (FDIC)
to organize and charter Citizens First Bank, Inc. (Bank) as a new
Kentucky bank and a wholly-owned subsidiary of the Company. In December
1998, the Company filed an application with the Board of Governors of
the Federal Reserve System (FRB) for approval to become a bank holding
company under the Holding Company Act of 1956, as amended. On December
28, 1998, the FRB approved the Company's application to become a bank
holding company. On January 21, 1999, the FDIC approved the Bank's
application for federal deposit insurance subject to certain conditions,
including minimum capital requirements, which have been subsequently met
by the Bank. The Bank commenced operations on February 18, 1999.
The Company's operations include one reportable segment providing a full
range of banking and mortgage services to individual and corporate
customers in Bowling Green and Warren County, Kentucky. The Company is
subject to competition from other financial institutions. The Company is
also subject to the regulation of certain federal and state agencies and
undergoes periodic examinations by those regulatory authorities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and the Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
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 at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or
in satisfaction of loans. In connection with the determination of the
allowance for loan losses and the valuation of foreclosed assets held
for sale, management obtains independent appraisals for significant
properties.
45
46
CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents.
SECURITIES
Available-for-sale securities, which include any security for which the
Company has no immediate plan to sell but which may be sold in the
future, are carried at fair value. Unrealized gains and losses are
recorded, net of related income tax effects, in other comprehensive
income.
Amortization of premium and accretion of discounts are recorded as
interest income from securities. Realized gains and losses are recorded
as net security gains (losses). Gains and losses on sales of securities
are determined on the specific-identification method.
MORTGAGE LOANS HELD-FOR-SALE
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or fair value in the aggregate. Net
unrealized losses, if any, are recognized through a valuation allowance
by charges to income. Gains on sales of mortgage loans are recorded at
the time of disbursement by an investor at the difference between the
sales proceeds and the loan's carrying value.
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoffs are reported at their
outstanding principal balance adjusted for any charge-offs, allowance
for loan losses, any deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans. Interest income is
reported on the interest method and includes amortization of net
deferred loan fees and costs over the loan term. Generally, loans are
placed on non-accrual status at 90 days past due and interest is
considered a loss, unless the loan is well secured and in the process of
collection.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to income.
Loan losses are charged against the allowance when management believes
the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
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A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value and the probability of collecting scheduled principal and interest
payments when due. Loans that experience insignificant payment delays
and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan-by-loan
basis for commercial and construction loans by either the present value
of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price or the fair value of
the collateral if the loan is collateral dependent.
Large groups of smaller balance homogenous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer and residential loans for impairment
disclosures.
PREMISES AND EQUIPMENT
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to expense using the straight-line method over
the estimated useful lives of the assets. Leasehold improvements are
capitalized and depreciated using the straight-line method over the
terms of the respective leases or the estimated useful lives of the
improvements, whichever is shorter.
FEDERAL HOME LOAN BANK STOCK
Federal Home Loan Bank (FHLB) stock is a required investment for
institutions that are members of the FHLB system. The required
investment in the common stock is based on a predetermined formula.
FORECLOSED ASSETS HELD-FOR-SALE
Assets acquired through, or in lieu of, loan foreclosure are
held-for-sale and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the assets are
carried at the lower of carrying amount or fair value less cost to sell.
Revenue and expenses from operations and changes in the valuation
allowance are included in net income or expense from foreclosed assets.
GOODWILL
Goodwill is tested annually for impairment. If the implied fair value of
goodwill is lower than its carrying amount, a goodwill impairment is
indicated and goodwill is written down to its implied fair value.
Subsequent increases in goodwill value are not recognized in the
financial statements.
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INCOME TAXES
Deferred tax assets and liabilities are recognized for the tax effects
of differences between the financial statement and tax bases of assets
and liabilities. A valuation allowance is established to reduce deferred
tax assets if it is more likely than not that a deferred tax asset will
not be realized. The Company files consolidated income tax returns with
its subsidiary.
EARNINGS PER SHARE
Earnings per share have been computed based on the weighted-average
common shares outstanding during each year. Weighted-average common
shares were 705,824 for 2003 and 643,053 for 2002 and there were no
dilutive securities.
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.
NOTE 2: INVESTMENTS
AVAILABLE-FOR-SALE SECURITIES
The amortized cost and approximate fair value of securities are as
follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
------------------------------------------------------------------------
December 31, 2003
U. S. Government agencies $ 9,234,469 $ 4,817 $ (393,895) $ 8,845,391
Mortgage-backed securities 9,719,345 23,242 (187,789) 9,554,798
------------- -------------- ------------- -------------
$ 18,953,814 $ 28,059 $ (581,684) $ 18,400,189
============= ============== ============= =============
December 31, 2002
U. S. Government agencies $ 10,088,698 $ 94,395 $ -- $ 10,183,093
Mortgage-backed securities 5,891,713 111,600 -- 6,003,313
------------- -------------- ------------- -------------
$ 15,980,411 $ 205,995 $ 0 $ 16,186,406
============= ============== ============= =============
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The amortized cost and fair value of securities available for sale at
December 31, 2003, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
AVAILABLE-FOR-SALE
----------------------------------------
AMORTIZED FAIR
COST VALUE
----------------------------------------
Within one year $ -- $ --
One to five years -- --
Five to 10 years 8,234,469 7,882,266
Over 10 years 1,000,000 963,125
--------------- ---------------
9,234,469 8,845,391
Mortgage-backed securities not due on a single
maturity date 9,719,345 9,554,798
--------------- ---------------
$ 18,953,814 $ 18,400,189
=============== ===============
The carrying value of securities pledged as collateral, to secure public
deposits and for other purposes, was $16,584,962 at December 31, 2003,
and $10,427,574 at December 31, 2002.
The book value of securities sold under agreements to repurchase
amounted to $4,756,410 and $5,833,512 at December 31, 2002 and 2001,
respectively.
Gross gains of $144,024 and $108,454 resulting from sales of
available-for-sale securities were realized for 2003 and 2002,
respectively.
Certain investments in debt securities are reported in the financial
statements at an amount less than their historical cost. Total fair
value of these investments at December 31, 2003, was $17,089,365, which
is approximately 93% of the Bank's available-for-sale and
held-to-maturity investment portfolio. These declines primarily resulted
from recent increases in market interest rates and failure of certain
investments to maintain consistent credit quality ratings.
Based on evaluation of available evidence, including recent changes in
market interest rates, credit rating information and information
obtained from regulatory filings, management believes the declines in
fair value for these securities are temporary.
Should the impairment of any of these securities become other than
temporary, the cost basis of the investment will be reduced and the
resulting loss recognized in net income in the period the
other-than-temporary impairment is identified.
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The following table shows the Bank's investments' gross unrealized
losses and fair value, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized
loss position at December 31, 2003:
LESS THAN 12 MONTHS
----------------------------------------
UNREALIZED
DESCRIPTION OF SECURITIES FAIR VALUE LOSSES
----------------------------------------
U. S. Government agencies $ 8,588,125 $ (393,895)
Mortgage-backed securities 8,501,240 (187,789)
--------------- ---------------
Total temporarily impaired securities $ 17,089,365 $ (581,684)
=============== ===============
NOTE 3: SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Company enters into purchases of securities under agreements to
resell. The amounts advanced under these agreements represent short-term
loans and are reflected as a receivable in the balance sheet. The
securities underlying the agreements are book-entry securities. During
the period, the securities were delivered by appropriate entry into the
Company's account maintained at the Federal Reserve Bank of St. Louis or
into a third-party custodian's account designated by the Company under a
written custodial agreement that explicitly recognizes the Company's
interest in the securities. At December 31, 2003, these agreements
matured within 90 days. The agreements relating to mortgage-backed
securities were agreements to resell substantially identical securities.
At December 31, 2003, no material amount of agreements to resell
securities purchased was outstanding with any individual dealer. The
Company's policy requires that all securities purchased under agreements
to resell be fully collateralized.
NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at December 31 include:
2003 2002
---------- ----------
Commercial and agricultural .............. $ 37,165,893 $ 31,798,487
Commercial real estate ................... 43,078,814 33,364,597
Residential real estate .................. 43,718,482 23,546,052
Consumer ................................. 10,752,286 7,249,920
------------ ------------
134,715,475 95,959,056
Less allowance for loan losses ........... 1,904,377 1,300,258
------------ ------------
Net loans ......................... $132,811,098 $ 94,658,798
============ ============
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Activity in the allowance for loan losses was as follows:
2003 2002
------- --------
Balance, beginning of year ...................... $ 1,300,258 $ 1,195,924
Provision charged to expense .................. 1,808,000 195,000
Loans charged off, net of recoveries of $13,714
for 2003 and $15,449 for 2002 ............... (1,203,880) (90,666)
----------- -----------
Balance, end of year ............................ $ 1,904,378 $ 1,300,258
=========== ===========
Impaired loans totaled $653,170 and $115,000 at December 31, 2003 and
2002, respectively. An allowance for loan losses of $98,000 and $12,000
relates to impaired loans of $520,000 and $115,000, at December 31, 2003
and 2002, respectively.
Interest of $35,037 and $7,816 was recognized on average impaired loans
of $672,989 and $115,000 for 2003 and 2002, respectively. Interest of
$33,066 and $1,509 was recognized on impaired loans on a cash basis
during 2003 and 2002, respectively.
At December 31, 2003 and 2002, accruing loans delinquent 90 days or more
totaled $8,181 and $0, respectively. Non-accruing loans at December 31,
2003 and 2002, were $644,989 and $115,000, respectively.
NOTE 5: PREMISES AND EQUIPMENT
Major classifications of premises and equipment, stated at cost, are as
follows:
2003 2002
--------- ----------
Land and land improvements .. $1,298,963 $ 953,209
Buildings and improvements .. 2,038,521 480,770
Leasehold improvements ...... 108,124 98,765
Furniture and fixtures ...... 175,191 100,161
Equipment ................... 1,348,428 802,413
Automobiles ................. 41,038 21,518
Construction in progress .... 13,723 156,964
---------- ----------
5,023,988 2,613,800
Less accumulated depreciation 1,110,627 773,778
---------- ----------
Net premises and equipment .. $3,913,361 $1,840,022
========== ==========
52 51
NOTE 6:
INTEREST-BEARING DEPOSITS
Interest-bearing deposits in denominations of $100,000 or more were
$26,964,687 on December 31, 2003, and $22,457,617 on December 31, 2002.
At December 31, 2003, the scheduled maturities of time deposits were as
follows:
2004 $ 54,183,248
2005 11,157,767
2006 1,690,374
2007 1,991,582
2008 724,549
-------------
$ 69,747,520
NOTE 7: LONG-TERM DEBT
Long-term debt consisted of the following components:
2003 2002
FHLB advances ............. $11,000,000 $ 7,000,000
Other debt ................ 3,000,000 900,000
----------- -----------
Total long-term debt $14,000,000 $ 7,900,000
=========== ===========
Three outstanding advances from the FHLB at December 31, 2003, totaled
$11,000,000. The advances of $3,000,000, $4,000,000 and $4,000,000 carry
interest rates of 4.04%, 1.90% and 2.03%, respectively, and mature on
March 19, 2004, May 2, 2005, and June 9, 2006, respectively. The
advances are collateralized by a blanket agreement assigning mortgages
on single family residences to the FHLB totaling $16,500,000 at December
31, 2003, and are subject to restrictions or penalties in the event of
prepayment.
Other debt consists of a fully funded line of credit borrowed from
Franklin Bank & Trust which expires June 22, 2012, with interest payable
quarterly at the rate of 275 basis points over one year LIBOR and
adjusted annually on June 22 (currently 3.78%). The line of credit is
secured by 2,000 shares of the Bank's common stock.
Aggregate annual maturities of long-term debt at December 31, 2003,
were:
2004 $ 3,000,000
2005 4,375,000
Thereafter five years 6,625,000
-------------
$ 14,000,000
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NOTE 8: INCOME TAXES
The provision (credit) for income taxes includes these components:
2003 2002
------- ---------
Taxes currently payable ....................... $(141,225) $ 342,199
Deferred income taxes ......................... (25,125) 48,160
--------- --------
Income tax expense (credit) ............ $(166,350) $ 390,359
========= =========
A reconciliation of the income tax expense (credit) at the statutory
rate to the Company's actual income tax expense (credit) is shown below:
2003 2002
--------- --------
Computed at the statutory rate (34%) ............. $(155,169) $ 386,096
Increase (decrease) resulting from
Other ........................................ (11,181) 4,263
--------- ---------
Actual tax expense (credit) ................ $(166,350) $ 390,359
========= =========
The tax effects of temporary differences related to deferred taxes shown
on the balance sheets were:
2003 2002
------- --------
Deferred tax assets
Allowance for loan losses ............................... $ 464,864 $ 374,102
Start-up costs .......................................... 4,526 45,675
Unrealized losses on available-for-sale securities ...... 188,233 --
Accumulated depreciation ................................ -- 5,587
Accrued compensated absences ............................ 46,050 31,770
Other ................................................... -- 7,297
--------- ---------
703,673 464,431
--------- ---------
Deferred tax liabilities
Unrealized gains on available-for-sale securities ....... -- (70,038)
Deferred loan fees/costs ................................ (25,045) (15,769)
FHLB stock dividends .................................... (13,702) (8,398)
Depreciation ............................................ (55,895) --
Accretion on investment of securities ................... (5,673) --
Other ................................................... -- (50,264)
--------- ---------
(100,315) (144,469)
--------- ---------
Net deferred tax asset ...................................... $ 603,358 $ 319,962
========= =========
The deferred taxes are presented on the balance sheet s follows:
2003 2002
--------- ---------
Deferred tax asset .......................................... $ 703,673 $ 335,193
Deferred tax liability ...................................... (100,315) (15,231)
--------- ---------
$ 603,358 $ 319,962
========= =========
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NOTE 9: OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
2003 2002
------------------ -------------------
Unrealized gains (losses) on available-for-sale securities $ (615,597) $ 148,845
Reclassification for realized amount included in income (144,024) (108,454)
-------------- --------------
Other comprehensive income (loss), before tax effect (759,621) 40,391
Tax expense (benefit) (258,271) 13,733
-------------- --------------
Other comprehensive income (loss) $ (501,350) $ 26,658
============== ==============
NOTE 10: REGULATORY MATTERS
The Company and subsidiary bank are subject to various regulatory
capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Company and
subsidiary bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and subsidiary bank to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as
defined) and of Tier I capital (as defined) to average assets (as
defined). Management believes, as of December 31, 2003, that the Company
and subsidiary bank meet all capital adequacy requirements to which they
are subject.
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On August 21, 2003, the subsidiary bank entered into a regulatory
agreement with the FDIC. The regulatory agreement requires that the
subsidiary bank maintain adequate Tier I capital levels, provide an
adequate reserve for loan and lease losses, develop adequate policies
and procedures relative to monitoring and underwriting in lending and
generally improve in other areas of the Bank. Management believes the
Bank is in substantial compliance with the regulatory agreement.
As of December 31, 2003, the most recent notification from regulatory
agencies categorized the Company as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Company must maintain minimum total risk-based,
Tier I risk-based and Tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that
management believes have changed the Company's category.
The Company and significant subsidiary bank's actual capital amounts and
ratios are also presented in the following table.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------------------------------------------------------------------------------
AS OF DECEMBER 31, 2003
Total Capital (to
Risk-Weighted Assets)
Consolidated $ 11,253,000 8.5% $ 10,619,000 8.0% N/A N/A
Citizens First Bank, Inc. $ 13,697,000 10.3% $ 10,617,000 8.0% $ 13,271,000 10.0%
Tier I Capital (to
Risk-Weighted Assets)
Consolidated $ 9,591,000 7.2% $ 5,309,000 4.0% N/A N/A
Citizens First Bank, Inc. $ 12,035,000 9.1% $ 5,308,000 4.0% $ 7,963,000 6.0%
Tier I Capital (to Average
Assets)
Consolidated $ 9,591,000 5.9% $ 6,524,000 4.0% N/A N/A
Citizens First Bank, Inc. $ 12,035,000 7.4% $ 6,520,000 4.0% $ 8,150,000 5.0%
AS OF DECEMBER 31, 2002
Total Capital (to
Risk-Weighted Assets)
Consolidated $ 8,930,000 9.1% $ 7,887,000 8.0% N/A N/A
Citizens First Bank, Inc. $ 10,081,000 10.3% $ 7,868,000 8.0% $ 9,835,000 10.0%
Tier I Capital (to
Risk-Weighted Assets)
Consolidated $ 7,699,000 7.8% $ 3,938,000 4.0% N/A N/A
Citizens First Bank, Inc. $ 8,852,000 9.0% $ 3,934,000 4.0% $ 5,901,000 6.0%
Tier I Capital (to Average
Assets)
Consolidated $ 7,699,000 6.8% $ 3,779,000 4.0% N/A N/A
Citizens First Bank, Inc. $ 8,852,000 7.8% $ 4,566,000 4.0% $ 5,708,000 5.0%
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The Bank is subject to certain restrictions on the amount of dividends
that it may declare without prior regulatory approval. At December 31,
2002, no retained earnings were available for dividend declaration
without prior regulatory approval.
NOTE 11: RELATED-PARTY TRANSACTIONS
At December 31, 2003 and 2002, the Bank had loans outstanding to
executive officers, directors, significant stockholders and their
affiliates (related parties) in the amount of $6,483,289 and $8,499,667,
respectively.
In management's opinion, such loans and other extensions of credit and
deposits were made in the ordinary course of business and were made on
substantially the same terms (including interest rates and collateral)
as those prevailing at the time for comparable transactions with other
persons. Further, in management's opinion, these loans did not involve
more than normal risk of collectibility or present other unfavorable
features.
Deposits from related parties held by the Bank at December 31, 2003 and
2002, totaled $1,631,670 and $1,138,248, respectively.
NOTE 12: EMPLOYEE BENEFIT PLAN
The Company has a defined contribution pension plan (SIMPLE plan)
covering substantially all employees. Employees may contribute a portion
of their compensation (based on regulatory limitations) with the Company
matching 100% of the employee's contribution on 3% of the employee's
compensation. Employer contributions charged to expense for 2003 and
2002 were $63,970 and $38,037, respectively.
NOTE 13: STOCK OPTION PLAN
On December 9, 2002, the board of directors adopted the employee 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.
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On January 17, 2003, the board of directors adopted the non-employee
director 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 an din 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 employee stock option plan and the non-employee director stock
option plan for non-employee directors were approved at the Company's
annual meeting of shareholders on April 17, 2003. As of December 31,
2003, no shares have been granted under either plan.
Subsequent to December 31, 2003, on January 14, 2004, the Company
granted 40,000 shares under the employee stock option plan and 5,000
shares under the non-employee stock option plan.
NOTE 14: 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 one to four 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 10
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 $272,000 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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Subsequent to December 31, 2003, the Bank paid $162,400 in cash
associated with the contingent purchase price. Additionally, the Company
will issue common stock for approximately $54,000 during the first
quarter of 2004 associated with the contingent purchase price.
NOTE 15: COMMITMENTS AND CREDIT RISK
The Company grants commercial, consumer and residential loans to
customers primarily in Bowling Green and Warren County, Kentucky.
Although the Company has a diversified loan portfolio, loans secured by
commercial real estate comprise approximately 28% and 42% of the loan
portfolio as of December 31, 2003 and 2002, residential mortgage loans
comprise 32% and 25%, respectively, and loans for construction and land
development comprise an additional 4% and 8% of the loan portfolio as of
December 31, 2003 and 2002, respectively.
COMMITMENT TO ORIGINATE LOANS
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since a portion of
the commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Each customer's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary, is based on management's credit evaluation of the
counterparty. Collateral held varies, but may include accounts
receivable, inventory, property, plant and equipment, commercial real
estate and residential real estate.
At December 31, 2003 and 2002, the Company had outstanding commitments
to originate loans aggregating approximately $24,960,308 and
$23,466,972, respectively. The commitments extended over varying periods
of time with the majority being disbursed within a one-year period.
STANDBY LETTERS OF CREDIT
Standby letters of credit are irrevocable conditional commitments issued
by the Bank to guarantee the performance of a customer to a third party.
Financial standby letters of credit are primarily issued to support
public and private borrowing arrangements, including commercial paper,
bond financing and similar transactions. Performance standby letters of
credit are issued to guarantee performance of certain customers under
non-financial contractual obligations. The credit risk involved in
issuing standby letters of credit is essentially the same as that
involved in extending loans to customers. Fees for letters of credit
issued after December 31, 2002, are initially recorded by the Bank as
deferred revenue and are included in earnings at the termination of the
respective agreements.
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Should the Bank be obligated to perform under the standby letters of
credit, the Bank may seek recourse from the customer for reimbursement
of amounts paid.
The Bank had total outstanding standby letters of credit amounting to
$1,880,820 and $1,684,577 at December 31, 2003 and 2002, respectively,
with terms ranging from days to one year.
OTHER CREDIT RISKS
At December 31, 2003 and 2002, approximately 31% and 26%, respectively,
of the Company's total time deposits consisted of short-term
certificates of deposit having minimum denominations in excess of
$100,000.
NOTE 16: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Accounting principles generally accepted in the United States of America
require disclosure of certain significant estimates and current
vulnerabilities due to certain concentrations. Estimates related to the
allowance for loan losses are reflected in the footnote regarding loans.
Current vulnerabilities due to certain concentrations of credit risk are
discussed in the footnote on commitments and credit risk. Other
significant estimates and concentrations not discussed in those notes
include:
DEPOSITS AND INVESTMENTS
The Company maintains cash in bank deposit accounts and investments in
federal funds sold which, at times, may exceed federally insured limits.
The Company has not experienced any losses in such accounts. The Company
believes it is not exposed to any significant credit risk on cash and
cash equivalents.
NOTE 17: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents estimated fair values of the Company's
financial instruments. The fair values of certain of these instruments
were calculated by discounting expected cash flows, which involves
significant judgments by management and uncertainties. Fair value is the
estimated amount at which financial assets or liabilities could be
exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. Because no market exists for certain of
these financial instruments and because management does not intend to
sell these financial instruments, the Company does not know whether the
fair values shown below represent values at which the respective
financial instruments could be sold individually or in the aggregate.
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60
DECEMBER 31, 2003 DECEMBER 31, 2002
FAIR CARRYING FAIR
CARRYING AMOUNT VALUE AMOUNT VALUE
----------------- ------------------ --------------- ----------------
FINANCIAL ASSETS
Cash and cash equivalents $ 5,233,396 $ 5,233,596 $ 13,922,817 $ 13,922,817
Available-for-sale securities $ 18,400,188 $ 18,400,188 $ 16,186,406 $ 16,186,406
Loans including loans held for
sale, net $ 133,673,244 $ 133,064,063 $ 98,112,814 $ 94,963,998
FHLB stock $ 425,100 $ 425,100 $ 353,600 $ 353,600
Interest receivable $ 694,637 $ 694,637 $ 651,412 $ 651,412
FINANCIAL LIABILITIES
Deposits $ 133,729,092 $ 135,348,668 $ 105,893,333 $ 107,298,082
Securities sold under
repurchase agreement $ 4,756,410 $ 4,756,410 $ 5,833,512 $ 5,833,512
Federal funds purchased $ 662,576 $ 662,576 $ 0 $ 0
FHLB advances $ 11,000,000 $ 11,000,000 $ 7,000,000 $ 7,000,000
Long-term debt $ 3,000,000 $ 3,000,000 $ 900,000 $ 900,000
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments.
CASH AND CASH EQUIVALENTS/FHLB STOCK
The carrying amount approximates fair value.
SECURITIES
Fair values equal quoted market prices, if available. If quoted market
prices are not available, fair value is estimated based on quoted market
prices of similar securities.
LOANS HELD FOR SALE
For homogeneous categories of loans, such as mortgage loans held for
sale, fair value is estimated using the quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics.
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LOANS
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. Loans with similar characteristics were aggregated for
purposes of the calculations. The carrying amount of accrued interest
approximates its fair value.
DEPOSITS
Deposits include demand deposits, savings accounts, NOW accounts and
certain money market deposits. The carrying amount approximates fair
value. The fair value of fixed-maturity time deposits is estimated using
a discounted cash flow calculation that applies the rates currently
offered for deposits of similar remaining maturities.
FEDERAL FUNDS PURCHASED AND INTEREST PAYABLE
The carrying amount approximates fair value.
LONG-TERM DEBT AND FHLB ADVANCES
Rates currently available to the Company and the Bank for debt with
similar terms and remaining maturities are used to estimate fair value
of existing debt.
COMMITMENTS TO ORIGINATE LOANS, FORWARD SALE COMMITMENTS, LETTERS OF CREDIT
AND LINES OF CREDIT
The fair value of commitments to originate loans is estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan commitments,
fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of forward sale
commitments is estimated based on current market prices for loans of
similar terms and credit quality. The fair values of letters of credit
and lines of credit are based on fees currently charged for similar
agreements or on the estimated cost to terminate or otherwise settle the
obligations with the counterparties at the reporting date.
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NOTE 18:
CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial information as to financial
position, results of operations and cash flows of the Company:
CONDENSED BALANCE SHEETS
2003 2002
---------- ----------
ASSETS
Cash ............................................ $ 580,773 $ 17,392
Available-for-sale securities ................... -- --
Investment in Citizens First Bank, Inc. ......... 12,053,925 8,990,868
Other assets .................................... 130,771 109,162
----------- -----------
Total assets ............................. $12,765,469 $ 9,117,422
=========== ===========
LIABILITIES
Long-term debt .................................. $ 3,000,000 $ 900,000
Other liabilities ............................... 155,092 379,170
----------- -----------
Total liabilities ........................ 3,155,092 1,279,170
STOCKHOLDERS' EQUITY .............................. 9,610,377 7,838,252
----------- -----------
Total liabilities and stockholders' equity $12,765,469 $ 9,117,422
=========== ===========
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CONDENSED STATEMENTS OF OPERATIONS
2003 2002
-------- -------
INCOME
Investment income from available-for-sale securities ....... $ -- $ 1,333
Realized gain on sale of available-for-sale securities ..... -- 67,370
--------- ---------
Total income ........................................ 0 68,703
--------- ---------
EXPENSES
Interest expense ........................................... 89,858 52,222
Professional fees .......................................... 105,855 37,245
Other expenses ............................................. 24,821 20,120
--------- ---------
Total expenses ...................................... 220,534 109,587
--------- ---------
LOSS BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARY ................................................ (220,534) (40,884)
INCOME TAX EXPENSE (CREDIT) .................................. (85,550) (13,481)
--------- ---------
LOSS BEFORE EQUITY IN UNDISTRIBUTED INCOME (LOSS) OF
SUBSIDIARIES .............................................. (134,984) (27,403)
EQUITY IN UNDISTRIBUTED INCOME (LOSS) OF SUBSIDIARIES ........ (155,045) 772,621
--------- ---------
NET INCOME (LOSS) ............................................ $(290,029) $ 745,218
========= =========
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CONDENSED STATEMENTS OF CASH FLOWS
2003 2002
---------- ----------
OPERATING ACTIVITIES
Net income ............................................... $ (290,029) $ 745,218
Items not requiring (providing) cash
Equity in income (loss) of subsidiary ................ 155,045 (772,621)
Amortization of premiums and discounts on securities . -- --
Realized gain on sale of available-for-sale securities -- (67,370)
Changes in
Other assets ......................................... (21,608) (14,163)
Other liabilities .................................... (224,079) (30,032)
----------- -----------
Net cash used in operating activities ............. (380,671) (138,968)
----------- -----------
INVESTING ACTIVITIES
Investment in subsidiary ................................. (3,719,451) --
Proceeds from sales of available-for-sale securities ..... -- 77,010
----------- -----------
Net cash provided by (used in) investing activities (3,719,451) 77,010
----------- -----------
FINANCING ACTIVITIES
Proceeds from long-term debt ............................. 2,100,000 25,000
Issuance of common stock, net ............................ 2,563,503
-----------
Net cash provided by financing activities ......... 4,663,503 25,000
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........... 563,381 $ (36,958)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............... 17,392 54,350
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR ..................... $ 580,773 $ 17,392
=========== ==========
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information the Company is required to disclose in the reports it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms.
The Company' management has evaluated, with the participation of the Company'
Chief Executive Officer and Chief Financial Officer, the effectiveness of these
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and the Chief
Financial Officer have concluded that, as of December 31, 2003, the Company'
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this report has been made known to them in a
timely fashion.
There was no change in the Company' internal control over financial reporting
identified in connection with that evaluation that occurred during the quarter
ended December 31, 2003 that has materially affected, or is reasonably likely to
materially affect, the Company' internal controls over financial reporting.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
Certain information required by this Item appears under the heading "Election of
Directors" of the Proxy Statement of the Company for the 2004 Annual Meeting of
Shareholders to be held May 20, 2004 ("Proxy Statement"), and is incorporated
herein by reference. The Company has adopted a code of ethics that applies to
the Company's principal executive officer, principal financial officer and
persons performing similar functions. The Company will provide to any person
without charge, upon request, a copy of the Company's code of ethics. Requests
should be directed to the Secretary of Citizens First Corporation, 1805 Campbell
Lane, Bowling Green, Kentucky 42104.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item appears under the heading "Executive
Compensation" of the Proxy Statement and is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by this Item appears under the heading "Share Ownership" of
the Proxy Statement and in Note 13 of the Notes to the Consolidated Financial
Statements of the Company (included under Item 7 of the Report on Form 10-KSB),
each of which is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item appears under the heading "Certain
Transactions" of the Proxy Statement and is incorporated herein by reference.
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PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT INDEX
2 Stock Purchase Agreement by and among Citizens First Corporation,
Citizens First Bank, Inc., Scott T. Higdon, Mark A.
Vaughn, Commonwealth Mortgage of Bowling Green, Inc. and Southern
Kentucky Land Title, Inc. (incorporated by reference to Exhibit
2.1 of the Registrant's Form 8-K filed January 17, 2003).
3.1 Restated Articles of Incorporation of Citizens First Corporation, as
amended (incorporated by reference to Exhibit 3.1 of
the Company's Registration Sttement on Form SB-2 (No. 333-103238)).
3.2 Bylaws of Citizens First Corporation, as amended, (incorporated by
reference to Exhibit 3.2 of the Company's Registration
Staetment on Form SB-2 (No. 333-1-3238).)
4.1 Restated Articles of Incorporation of Citizens First Corporation, as
amended (see Exhibit 3.1).
4.2 Bylaws of Citizens First Corporation, as amended (see Exhibit 3.2).
10.1 Employment Agreement between Citizens First Corporation and Mary
D.Cohron (incorporated by reference to Exhibit 10.1 of
the Registrant's Registration Statement on Form SB-2 (No. 333-67435)).*
10.2 First Amendment to Employment Agreement between Citizens
First Corporation and Mary D. Cohron (incorporated by
reference to Exhibit 10.2 of the Registrant's Registration Statement
on Form SB-2 (No. 333-67435)).*
10.3 Bank Contract for Electronic Data Processing Services and Customerfile
System between Fiserv Bowling Green and Citizens First Bank
(incorporated by reference to Exhibit 10.5 of the Registrant's Registration
Statement on Form SB-2 (No. 333-67435)).
10.4 Employment Agreement between Citizens First Corporation and Barry D.
Bray (incorporated by reference to Exhibit 10.12 of the Registrant's
Registration Statement on Form SB-2 (No. 333-67435)).*
10.5 Consulting Agreement between Citizens First Corporation and The
Carpenter Group (incorporated by reference to Exhibit 10.13 of the
Registrant's Registration Statement on Form SB-2 (No. 333-67435)).
10.6 Lease Agreement between Citizens First Corporation and Midtown
Plaza, Inc. (incorporated by reference to Exhibit
10.14 of the Registrant's Registration Statement on Form SB-2 (No.
333-67435)).
10.7 Employment Agreement between Citizens First Corporation and Todd
Kanipe (incorporated by reference to Exhibit 10.15 of
the Registrant's Registration Statement on Form SB-2 (No. 333-67435)).*
10.8 Employment Agreement between Citizens First Corporation and Bill D. Wright
(incorporated by reference to Exhibit 10 of the Registrant's Form 8-K dated
April 27, 2000).*
10.9 First Amendment to Employment Agreement between Citizens First
Corporation and Matthew Todd Kanipe (incorporated by reference to Exhibit
10.17 of the Registrant's Form 10-QSB dated September 30, 2000).*
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10.10 Commercial Line of Credit Agreement, Promissory Note, and Security
(Pledge) Agreement between Citizens First Corporation and Franklin Bank &
Trust Company dated June 22, 2001 (incorporated by reference to Exhibit
10.18 of the Registrant's Form 10-QSB dated June 30, 2001).
10.11 Offer to Purchase dated January 22, 2003 between Jack Sheidler and
Lester Key and Assignment of Offer to Purchase between Jack Sheidler
and Citizens First Bank dated January 27, 2003 (incorporated by
reference to Exhibit 10.11 of the Company's Registration Statement on
Form SB-2 (No.333-103238)).
10.12 Real Estate Sales Contract dated January 27, 2003 between H&V
Properties,LLC and Citizens First Bank (incorporated by reference to
Exhibit 10.12 of the Company's Registration Statement on Form SB-2
(No. 333-103238)).
10.13 2002 Stock Option Plan of Citizens First Corporation (incorporated by
reference to Exhibit 10.13 of the Company's Registration Statement on
Form SB-2 (No. 333-103238)).*
10.14 2003 Non-Employee Directors Stock Option Plan (incorporated by reference
to Exhibit 10.14 of the Company's Registration Statement on Form SB-2
(No. 333-103238)).*
21 Subsidiaries of Citizens First Corporation (incorporated by reference to
Exhibit 21 of the Company's Registration Statement on Form SB-2 (No.
333-103238)).
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.
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C.
Section 1350.
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C.
Section 1350.
*Denotes management contract or compensatory plan or agreement.
(b) The Company filed a Form 8-K dated October 9, 2003 reporting an Item 12
event ( a press release reporting quarterly earnings).
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this Item is contained under the heading "Ratification
of Appointment of Independent Public Accountants" of the Proxy Statement and is
incorporated herein by reference.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Citizens First Corporation
Date: March 30, 2004 By: /s/Mary D. Cohron
------------------
Mary D. Cohron
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/Mary D. Cohron March 30, 2004
-----------------
Mary D. Cohron
President, Chief Executive Officer
and Director
/s/ Bill D. Wright March 30, 2004
------------------
Bill D. Wright
Vice-President and Chief Financial Officer
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/s/ Floyd H. Ellis, Chairman March 30, 2004
----------------------------
Floyd H. Ellis
/s/ Jerry E.Baker March 30, 2004
-----------------
Jerry E. Baker
/s/ Billy J. Bell March 30, 2004
-----------------
Billy J. Bell
/s/ Barry D. Bray March 30, 2004
-----------------
Barry D. Bray
/s/ John J. Kelly March 30, 2004
-----------------
John J. Kelly
/s/ Sarah G. Grise March 30, 2004
------------------
Sarah G. Grise
/s/ James H. Lucas March 30, 2004
------------------
James H. Lucas
/s/ Joe B.Natcher, Jr. March 30, 2004
-----------------------
Joe B. Natcher
/s/ John T. Perkins March 30, 2004
-------------------
John T. Perkins
/s/ Jack W. Sheidler March 30, 2004
---------------------
Jack W. Sheidler
/s/ Wilson L. Stone March 30, 2004
-------------------
Wilson L. Stone
70