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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
X Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2004
___ Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _______ to _________
Commission File Number 333-67435
CITIZENS FIRST CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)
Kentucky 61-0912615
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1805 Campbell Lane, Bowling Green, Kentucky 42101
(Address of principal executive offices)
Issuer's telephone number, including area code: (270) 393-0700
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class OUTSTANDING AT MAY 14, 2004
Common Stock, no par value 844,057
Transitional Small Disclosure Format: Yes ___ No X
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CITIZENS FIRST CORPORATION
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements 3-10
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-18
ITEM 3. Controls and Procedures 19
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibits 22-25
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PART 1. FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
MARCH 31, 2004 DECEMBER 31, 2003
ASSETS
Cash and due from banks ......................... $ 4,184,055 $ 5,233,396
Federal funds sold .............................. -- --
------------- -------------
Cash and cash equivalents ................... 4,184,055 5,233,396
Available for sale securities (amortized cost
of $13,929,371 as of March 31,
2004; $18,953,814 as of December 31, 2003)
13,691,854 18,400,189
Federal Home Loan Bank (FHLB) Stock .............. 517,600 529,800
Mortgage loans held for sale ..................... 583,280 425,100
Loans ........................................... 141,196,440 134,715,475
Less allowance for loan losses .................. 1,972,448 1,904,377
------------- -------------
Net loans .................................... 139,223,992 132,811,098
Premises and equipment, net ..................... 3,840,524 3,913,361
Interest receivable ............................. 789,397 694,637
Other real estate owned ......................... -- --
Deferred income taxes ........................... 717,990 703,673
Goodwill ........................................ 546,644 384,243
Other assets .................................... 219,693 424,498
------------- -------------
Total assets ................................. $ 164,315,029 $ 163,519,995
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits ............................... $ 11,198,917 $ 14,147,896
Savings, NOW and money market deposits ........ 55,218,218 49,833,676
Time deposits ................................. 63,888,419 69,747,520
------------- -------------
Total deposits .............................. 130,305,554 133,729,092
Federal funds purchased ......................... 2,922,730 662,576
Securities sold under agreements to repurchase .. 4,413,529 4,756,410
Long-term debt .................................. 16,000,000 14,000,000
Deferred income taxes ........................... -- 100,315
Accrued interest and other liabilities .......... 708,600 661,225
------------- -------------
Total liabilities ............................ 154,350,413 153,909,618
Stockholders' equity:
Common stock, no par value authorized 2,000,000
shares; issued and outstanding 840,447 shares 9,920,981 9,920,981
Retained earnings ............................. 200,397 54,789
Accumulated other comprehensive income ........ (156,762) (365,393)
------------- -------------
Total stockholders' equity .................. 9,964,616 9,610,377
------------- -------------
Total liabilities
And stockholders' equity ................. $ 164,315,029 $ 163,519,995
============= =============
See accompanying notes to condensed consolidated financial statements.
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CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31: 2004 2003
----- ----
INTEREST INCOME
Loans, including fees ................ $ 1,914,620 $1,529,947
Federal funds sold ................... 1,287 3,392
Securities ........................... 141,495 181,734
Other ................................ 4,929 3,388
--------- ----------
Total interest income ................ 2,062,331 1,718,461
INTEREST EXPENSE
Deposits ............................. 551,727 584,342
Other borrowings ..................... 132,047 74,026
--------- ----------
Total interest expense ............... 683,774 658,368
--------- ----------
NET INTEREST INCOME .................... 1,378,557 1,060,093
Provision for loan losses ............ 75,000 153,000
--------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ............ 1,303,557 907,093
---------- ----------
NON-INTEREST INCOME
Service charges on deposit accounts .. 192,935 147,089
Income from the sale of loans ........ 63,571 91,938
Gain (loss) on the sale of securities (34,368) 9,292
Other ................................ 46,586 39,880
--------- ----------
Total non-interest income ............ 268,724 288,199
NON-INTEREST EXPENSES
Compensation and benefits ............ 762,433 593,527
Net occupancy expense ................ 88,997 65,293
Furniture and equipment expense ...... 112,557 84,967
Professional fees .................... 57,660 31,591
Postage, printing and supplies ....... 27,241 29,991
Processing fees ...................... 106,281 70,102
Advertising .......................... 42,642 47,204
Other ................................ 163,062 100,018
---------- ----------
Total non-interest expenses .......... 1,360,873 1,022,693
---------- ----------
INCOME BEFORE INCOME TAXES ............. 211,408 172,599
Income tax expense ..................... 65,800 54,850
----------- ----------
NET INCOME ............................. $ 145,608 $ 117,749
=========== ==========
BASIC EARNINGS PER COMMON SHARE $0.17 $0.18
See accompanying notes to condensed consolidated financial statements.
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CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31: 2004 2003
---- ----
Balance January 1 ........................... $9,610,377 $ 7,838,252
Net income .................................. 145,608 117,749
Other comprehensive income (loss), net of tax 208,631 (32,504)
---------- -----------
Balance at end of period ...................... $9,964,616 $ 7,923,497
========== ===========
See accompanying notes to condensed consolidated financial statements.
CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31:
2004 2003
---- ----
Net income $145,608 $117,749
Other comprehensive income(loss), net of tax:
Unrealized gain (depreciation) on available for sale
securities, net of income taxes (credit) of $107,477 and
$(16,744), arising during the period, 208,631 (32,504)
respectively
-------- --------
Comprehensive income (loss) $ 354,239 $ 85,245
========= ==========
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CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31:
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................. $ 145,608 $ 117,749
Items not requiring (providing) cash:
Depreciation and amortization ......................... 131,569 106,439
Provision for loan losses ............................. 75,000 153,000
Amortization of premiums and discounts on securities .. 7,561 37,065
Net realized loss/(gain) on disposition of investment . 34,368 (9,292)
securities
FHLB stock dividends received ......................... (4,800) 3,400
Mortgage loans held for sale originated ............... (3,200,973) (8,697,504)
Sale of mortgage loans held for sale .................. 3,147,493 7,275,939
Changes in:
Accrued interest receivable ........................... (94,760) 78,581
Other assets .......................................... (200,545) (84,093)
Interest payable and other liabilities ................ (60,102) (56,238)
----------- ------------
Net cash used in operating activities ................ (9,981) (1,074,954)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net changes in loans .................................... (6,487,894) (12,780,430)
Purchases of premises and equipment ..................... (27,714) (1,018,946)
Proceeds from maturities of securities available for sale 255,075 6,221,812
Proceeds from sales of securities available for sale .... 4,727,438 304,750
Purchase of securities available for sale ............... -- (3,077,500)
Purchase of mortgage company and title company .......... -- (398,688)
----------- ------------
Net cash used in investing activities ................ (1,533,095) (10,749,002)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits ..................... (3,423,538) 1,104,514
Net increase in other borrowings ........................ 2,000,000 400,000
Net increase in federal funds purchased and repurchase . 1,917,273 863,289
agreements
----------- ------------
Net cash provided by financing activities ............. 493,735 2,367,803
----------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............... (1,049,341) (9,456,153)
Cash and cash equivalents at beginning of period ........ 5,233,396 13,922,817
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............. $ 4,184,055 $ 4,466,664
=========== ============
See accompanying notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Citizens First Corporation (the
"Company") and its subsidiary, Citizens First Bank, Inc. (the "Bank"), conform
to accounting principles generally accepted in the United States of America and
general practices within the banking industry. The condensed consolidated
financial statements include the accounts of the Company and the Bank. All
significant intercompany transactions and accounts have been eliminated in
consolidation.
Certain information and note disclosures normally included in the Company's
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-KSB annual report for 2003 filed with the
Securities and Exchange Commission.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates used in the preparation of the financial
statements are based on various factors including the current interest rate
environment and the general strength of the local economy. Changes in the
overall interest rate environment can significantly affect the Company's net
interest income and the value of its recorded assets and liabilities. Actual
results could differ from those estimates used in the preparation of the
financial statements.
The financial information presented has been prepared from the books and records
of the Company and is not audited. The accompanying condensed consolidated
financial statements have been prepared in accordance with the instructions to
Form 10-QSB and do not include all of the information and the footnotes required
by accounting principles generally accepted in the United States of America for
complete statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been reflected in the accompanying unaudited financial
statements. Results of interim periods are not necessarily indicative of results
to be expected for the full year. Those adjustments consist only of normal
recurring adjustments. The condensed consolidated balance sheet of the Company
as of December 31, 2003, has been derived from the audited consolidated balance
sheet of the Company as of that date.
(2) RECLASSIFICATIONS
Certain reclassifications have been made to the 2003 financial statements to
conform to the 2004 financial statement presentation. These reclassifications
had no effect on net earnings.
(3) ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the stated periods was as follows:
March 31, December 31,
2004 2003
Balance, beginning of year ................................ $ 1,904,377 $ 1,300,258
Provision charged to expense .............................. 75,000 1,808,000
Loans charged off, net of recoveries of $50 for March 31,
2004 and $13,714 for December 31, 2003 ................. (6,929) (1,203,881)
----------- -----------
Balance, March 31, 2004 and December 31, 2003, respectively $ 1,972,448 $ 1,904,377
=========== ===========
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(4) STOCK OPTION PLANS
On December 9, 2002, the board of directors adopted the 2002 Stock Option Plan,
which became effective subject to the approval of the Company's shareholders at
the annual meeting in April 2003. The purpose of the plan is to afford key
employees an incentive to remain in the employ of the Company and its
subsidiaries and to use their best efforts on its behalf. 120,000 shares of
Company common stock have been reserved for issuance under the plan.
On January 17, 2003, the board of directors adopted the 2003 Stock Option Plan
for Non-Employee Directors, which became effective subject to the approval of
the Company's shareholders at the annual meeting in April 2003. The purpose of
the plan is to assist the Company in promoting a greater identity of interest
between the Company's non-employee directors and shareholders, and in attracting
and retaining non-employee directors by affording them an opportunity to share
in the Company's future successes. 40,000 shares of common stock have been
reserved for issuance under the plan.
The 2002 Stock Option Plan and the 2003 Stock Option Plan for Non-Employee
Directors were approved at the Company's Annual Meeting of Shareholders on April
17, 2003. On January 14, 2004, the Company granted options to purchase 40,000
shares under the employee stock option plan and 5,000 shares under the
non-employee stock option plan.
The Company accounts for these plans under the recognition and measurement
principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is
reflected in net income, as all options granted under this plan had an exercise
price equal to the market value of the underlying common stock on the grant
date. The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation. Period Ended March 31
2004 2003
--------- ------
Net income, as reported $ 145,608 $ 117,749
Less: Total stock-based employee compensation cost
determined under the fair value based method,
net of income taxes 17,584 --
------------ ---------
Pro forma net income $ 128,024 $ 117,749
============= =========
Earnings per share:
Basic - as reported $ 0.17 $ 0.18
============= ========
Basic - pro forma $ 0.15 $ 0.18
============= ========
The Company's 2002 Stock Option Plan is a fixed option plan under which
the Company may grant options that vest over 3 years to selected
employees for up to 120,000 shares of common stock. The Company's 2003
Stock Option Plan is a fixed option plan under which the Company may
grant options that vest immediately to selected non-employee directors
for up to 40,000 shares of common stock. The exercise price of each
option is intended to equal the fair value of the Company's stock on the
date of grant. An option's maximum term is 10 years.
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A summary of the status of the plan at March 31, 2004 and 2003, and
changes during the years then ended is presented below:
2004 2003
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
-------- -------------- ------------ --------------------
Outstanding,
beginning of year .... -- $ -- -- $ --
Granted ............. 45,000 14.25 --
Exercised ........... -- -- --
Forfeited ........... -- -- --
Expired ............. -- -- --
----- ------- ------ --------------------
Outstanding, end of .....
year ................. 45,000 $14.25 0 $ --
====== ====================
Options exercisable,
end of year .......... 5,000 --
====== --------------------
The fair value of options granted is estimated on the date of the grant
using an option-pricing model with the following weighted-average
assumptions:
2004
------
Dividend yields 0%
Volatility factors of expected market price of common stock 19.90%
Risk-free interest rates 1.00%
Expected life of options 10Years
Weighted-average fair value of options granted during the year $153,450
The following table summarizes information about stock options under the
plan outstanding at March 31, 2004:
Options Outstanding Options Exercisable
Weighted-Average
Range of Exercise Number Remaining Contractual Weighted-Average Number Weighted-Average
Prices Outstanding Life Exercise Price Exercisable Exercise Price
--------------------------------------------------------------------------------------------------------------------
$14.25 40,000 10 years $14.25 0 $14.25
$14.25 5,000 10 years $14.25 5,000 $14.25
(5) STOCK OFFERING
In February 2003, the Company filed a Registration Statement on Form SB-2 with
the Securities and Exchange Commission for the offering and sale of up to
$10,000,000 of shares of the Company's common stock. The offering was completed
in November 2003 netting proceeds to the Company of $2,563,503. The proceeds of
the offering were used to to strengthen the Bank's capital base and position it
to continue to exceed minimum regulatory capital ratios, which will allow for
future growth.
(6) ACQUISITION OF COMMONWEALTH MORTGAGE AND SOUTHERN KENTUCKY LAND TITLe
On January 2, 2003, the Bank acquired all of the outstanding stock of
Commonwealth Mortgage of Bowling Green, Inc. and Southern Kentucky Land Title,
Inc. Commonwealth Mortgage originates 1-4 family residential mortgages for sale
in the secondary mortgage market, while Southern Kentucky Land Title provides
title insurance agency services for real estate purchase contracts. The purchase
price for Commonwealth Mortgage and Southern Kentucky Land Title consisted of
$400,000 in cash plus a deferred contingent purchase price of up to $1,350,000
payable upon the combined entities' achievement of specified annual earnings
targets over a five year period, plus 25% of the amount, if any, by which their
earnings exceed such targets. 25% of the deferred purchase price will be paid by
the issuance of the Company's common stock, valued at the average of the closing
sales price of the stock over the last
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ten trading days of the applicable calendar year. At the Company's option,
an additional 25% of such deferred purchase price, if any, may be paid in shares
of the Company's common stock. The deferred contingent purchase price will be
accounted for as additional purchase price at the time the contingency is
resolved. The Bank also purchased the .2 acre site on which the main office of
Commonwealth Mortgage is located for a purchase price of $272,500 in cash.
Goodwill recognized in this transaction amounted to $380,000, all of which was
assigned to the Bank. In January 2004, the Bank paid $162,401 in cash, and in
April 2004 the Company issued 3,610 shares of the Company's common stock to the
former Commonwealth shareholders as the first installment of the deferred
contingent purchase price.
The acquisition of Commonwealth Mortgage and Southern Kentucky Land Title was
completed to give the Bank an expanded presence in the local mortgage
origination market, to further expand the Bank's customer service offerings, and
to supplement the Bank's non-interest fee income.
(7) REGULATORY PROCEEDINGS
In August 2003, the Bank and its primary regulators entered into a regulatory
agreement in order to improve the Bank's performance. As of March 31, 2004, 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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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
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 March 31, 2004, the Company and Bank
employed sixty-six employees (fifty-seven full-time equivalent employees).
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 1200 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.
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 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.
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 of the Notes
to the Condensed Consolidated Financial Statements included in this report.
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 of the Notes to the Consolidated Financial Statements
included in the Company's 2003 Annual Report on Form 10-KSB describes the
methodology used to determine the allowance for loan losses, and a discussion of
the factors driving changes in the amount of the allowance for loan losses is
included under "Asset Quality" below.
Loans that exhibit probable or observed credit weaknesses are subject to
individual review. Where appropriate, reserves are allocated to individual loans
based on management's estimate of the borrower's ability to repay the loan given
the availability of collateral, other sources of cash flow and legal options
available to the Company. Included in the review of individual loans are those
that are impaired as provided in SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." The Company evaluates the collectibility of both
principal and interest when assessing
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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 $1,972,447 was adequate, but not excessive, to absorb estimated
credit losses associated with the loan portfolio at March 31, 2004.
DEFERRED TAX ASSETS
The Company has a deferred tax asset of approximately $718,000. 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 March 31, 2004 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.
RESULTS OF OPERATIONS
For the three months ended March 31, 2004, the Company reported net income of
$145,608, or $0.17 per common share, compared to net income of $117,749, or
$0.18 per common share, for the same period ended March 31, 2003.
NET INTEREST INCOME
Net interest income was $1,378,557 in the first quarter of 2004, compared with
$1,060,093 in the comparable period in 2003. First quarter 2004 interest income
of $2,062,331, an increase of $343,870 or 20.0% over the same period in 2003,
includes $1,914,620 income on loans, $141,495 income on securities, and $6,216
income on federal funds sold and other interest-bearing accounts. Interest
income of $1,718,461 during the first quarter of 2003 included $1,529,947 of
income on loans, $181,734 income on investment securities, and $6,780 income on
federal funds sold and other interest-bearing accounts. Interest expense of
$683,774 for the first quarter of 2004, up $25,406 or 3.9% from the same period
in 2003, consists of interest on deposits of $551,727, and on other borrowings
of $132,047. First quarter 2003 interest expense of $658,368 consisted of
interest on deposits of $584,342, and interest on other borrowings of $74,026.
The growth of the balance sheet, particularly loans and deposits, from the first
quarter of 2003 to the same period in 2004, coupled with the drop in the cost of
interest-bearing liabilities, offset by the drop in yields on interest earning
assets, contributed to the increase in net interest income. The drop in both the
cost of interest-bearing liabilities and the yield on interest-earning assets in
the first quarter of 2004, compared to the same period in 2003, was primarily
due to the continued repricing of loans and deposits of the Bank after the
reduction of short-term interest rates by the Federal Reserve Bank during 2001
of 475 basis points, and the reduction of another 50 basis points during the
fourth quarter of 2002, and 25 basis points during the second quarter of 2003.
The Bank is asset sensitive, meaning assets reprice faster to changes in
short-term rates than do liabilities. In a falling short-term rate environment,
such as occurred during 2001, the fourth quarter of 2002 and the second quarter
of 2003, more of
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the Bank's interest earning assets, primarily loans, reprice
down faster than do the liabilities, specifically certificates of deposit, which
provide the funding for the assets.
PROVISION FOR LOAN LOSSES
The provision for loan losses expense for the three months ended March 31, 2004,
was $75,000, a decrease of $78,000 over the total of $153,000 for the same
quarter of 2003.
NON-INTEREST INCOME
Non-interest income for the three months ended March 31, 2004 and 2003,
respectively, was $268,724 and $288,199, a decrease of $19,475 or 6.8%. Income
from service charges on deposit accounts increased $45,846, or 31.2%, from
$147,089 during the first quarter of 2003 to $192,935 for the first quarter of
2004. The increase is primarily attributable to growth in accounts subject to
service charges. Income from the sale of secondary market loans decreased
$28,367, from $91,938 during the first quarter of 2003 to $63,571 for the same
period of 2004. The income from the sale of secondary market loans is associated
with the acquisition of Commonwealth Mortgage of Bowling Green, Inc., during the
first quarter of 2003. The decrease in income from the sale of secondary market
loans is primarily due to the high volume of refinancing activity during the
first quarter of 2003, when long-term mortgage rates were at historically low
levels. The first quarter of 2004 includes a loss on the sale of investment
securities of $34,368. Non-interest income for the first quarter of 2003
includes a gain of $9,292 from the sale of investment securities.
NON-INTEREST EXPENSE
Non-interest expense was $1,360,873 in the first quarter of 2004, up from
$1,022,693 in the same quarter of 2003, an increase of $338,180 or 33.1%. The
initiatives designed to better service our customers, including the opening of
full service branches in Bowling Green and Franklin, Kentucky, and the
acquisition of a mortgage origination company, accounted for $118,088 of the
increase in non-interest expense during the first quarter of 2004, compared to
the same period of 2003. Other cost increases are primarily associated with
servicing the growing customer base.
INCOME TAXES
Income tax expense has been calculated based on the Company's expected annual
rate for 2004. During the first quarter of 2004, income tax expense totaled
$65,800, compared to expense of $54,850 for the same period of 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
OVERVIEW
Total assets at March 31, 2004 were $164,315,029, up from $163,519,995 at
December 31, 2003 and up from $130,823,195 a year ago. Average total assets for
the first quarter of 2004 were $163,409,386, up $36,392,636 from the first
quarter of 2003 average of $127,016,750.
LOANS
At March 31, 2004 loans (excluding mortgage loans held for sale) totaled
$141,196,440, compared with $134,715,475 at December 31, 2003 and $108,728,188 a
year ago, an increase of $6,480,965 and $32,468,252 respectively. This increase
is attributable primarily to loans generated by the branch opened during the
first quarter of 2003 in Franklin, Kentucky, and adjustable rate mortgage loans
generated by Commonwealth Mortgage, that are retained in the Bank's portfolio.
Loans averaged $138,126,362 during the first quarter of 2004, an increase of
$37,307,180 or 37.0%, over the average total of $100,819,182 for the first
quarter of 2003.
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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 $903,125 at March 31, 2004, compared to $653,170 at December 31, 2003
and $149,000 at March 31, 2003. Included in the non-performing loan total at
March 31, 2004 is the remaining portion, totaling $518,000, 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 of 2003, $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 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
of 2003. The Bank is pursuing recovery in full of the aforementioned loans
through various legal proceedings. Also included in non-performing loans is one
loan for $37,000, which was placed on non-accrual status during the second
quarter of 2003. The loan is secured by a second mortgage on residential real
estate. The borrower filed for bankruptcy protection during the second quarter
of 2003. Added at March 31, 2004 to nonaccrual status are two loans totaling
$254,572 where the borrower has filed for Chapter 7 Bankruptcy and does not wish
to reaffirm debt with the Bank. The first loan totals $54,521 and is
collateralized by a truck and trailer. The Bank anticipates any losses
associated with this loan to be minimal. The second loan totals $200,051 and is
secured by residential real estate. The Bank is awaiting the Order of
Abandonment from the bankruptcy trustee. It is likely that the property will
then be sold. The remaining $6,579 of non-performing loans consists of one loan
accruing but past due over 90 days.
Management classifies commercial and commercial real estate loans as non-accrual
when principal or interest is past due 90 days or more and the loan is not
adequately collateralized and is in the process of collection, or when, in the
opinion of management, principal or interest is not likely to be paid in
accordance with the terms of the obligation. Consumer loans are charged off
after 120 days of delinquency unless adequately secured and in the process of
collection. Non-accrual loans are not reclassified as accruing until principal
and interest payments are brought current and future payments appear reasonably
certain. Loans are categorized as restructured if the original interest rate,
repayment terms, or both were restructured due to deterioration in the financial
condition of the borrower. However, restructured loans that demonstrate
performance under the restructured terms and that yield a market rate of
interest may be removed from restructured status in the year following the
restructure.
Non-performing assets are defined as non-performing loans, foreclosed real
estate, and other foreclosed property. The Bank had non-performing assets of
$903,125 at the end of the first quarter of 2004, comprised of the above
mentioned non-performing loans. The Bank had non-performing assets of $653,170
at December 31, 2003, comprised entirely of non-performing loans.
The allowance for loan losses is established through a provision for loan losses
charged to expense. The allowance for loan losses was $1,972,448 at March 31,
2004, an increase of $68,071, or 3.6% over the December 31, 2003 level of
$1,904,377. The allowance represents 1.40% of period-end loans, compared to
1.41% of period-end loans at December 31, 2003. The level of the allowance is
based on management's and the Bank Board of Directors Loan Committee's ongoing
review and evaluation of the loan portfolio and general economic conditions on a
monthly basis and by the full Board of Directors on a quarterly basis.
Management's review and evaluation of the allowance for loan losses is based on
an analysis of historical trends, significant problem loans, current market
value of real estate or collateral and certain economic and other factors
affecting loans and real estate or collateral securing these loans. Loans are
charged off when, in the opinion of management, they are deemed to be
uncollectible. Recognized losses are charged against the allowance and
subsequent recoveries are added to the allowance. While management uses the best
information available to make evaluations, future adjustments to the allowance
may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. The allowance for loan losses is
reviewed internally by personnel independent of the loan department. In
addition, the allowance is
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subject to periodic evaluation by various regulatory authorities and may be
subject to adjustment based upon information that is available to them at the
time of their examination.
SECURITIES
Securities (all classified as available for sale) decreased from $18,400,189 at
December 31, 2003 to $13,691,854 at March 31, 2004. Securities in the amount of
$4.6 million were sold that had been used to pledge deposits that matured during
the first quarter of 2004. At March 31, 2003, securities totaled $12,660,323.
DEPOSITS AND BORROWED FUNDS
Total deposits averaged $128,815,306 in the first quarter of 2004, an increase
of $24,633,275 from the comparable 2003 first quarter average of $104,182,031.
As of March 31, 2004, total deposits were $130,305,554, and included
$119,106,637 of interest bearing deposits. This compares to total deposits of
$133,729,092 at December 31, 2003, which included $119,581,196 of interest
bearing deposits. Total deposits at March 31, 2003 were $106,997,847, and
included interest bearing deposits of $96,446,861.
The Bank had $4,413,529 of deposits secured by securities sold under agreements
to repurchase on March 31,2004. These obligations, which mature in one business
day, are swept daily from customers' demand deposit accounts. These balances
averaged $4,724,122 during the first quarter of 2004.
At March 31, 2004, the Company had established Federal Funds lines of credit
totaling $8,950,000 with four correspondent banks. The Company successfully
applied for membership in the Cincinnati Federal Home Loan Bank during 2000, in
order to be able to obtain advances and lines of credit from the FHLB. At March
31, 2004, the Bank had three outstanding FHLB advances totaling $13,000,000. The
first FHLB advance, which was issued May 2, 2003, matures May 2, 2005 and has a
fixed interest rate of 1.90%. The second FHLB advance, which was issued June 9,
2003, matures June 6, 2006, and has a fixed interest rate of 2.03%. The third
FHLB advance, which was issued January 21, 2004, matures January 20, 2006, and
has a fixed interest rate of 2.21%. The Bank has a pre-arranged borrowing limit
with the FHLB that is collateralized by 135% of unpaid principal balances of
eligible 1-4 family residential mortgage loans. At March 31, 2004, the Bank had
available collateral to borrow an additional $10.6 million from the FHLB.
In 2001, the Company executed a credit agreement with a correspondent bank for
the purpose of injecting capital into the Bank. Total outstanding debt under the
credit agreement at March 31, 2004 is $3,000,000. The current rate on the loan,
which is repriced annually during June at one-year LIBOR plus 275 basis points,
is 3.78%. The stock of the Bank is pledged as collateral for the loan.
CAPITAL RESOURCES AND LIQUIDITY
The Board of Governors of the Federal Reserve System has adopted risk based
capital and leverage ratio requirements for banks and bank holding companies.
The table below sets forth the Bank's capital ratios as of March 31, 2004,
December 31, 2003, and March 31, 2003, the regulatory minimum capital ratios,
and the regulatory minimum capital ratios for well-capitalized companies:
March 31, December 31, March 31,
2004 2003 2003
----- ---- ----
Tier 1 risk based ........... 8.78% 9.07% 7.99%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 6.00 6.00 6.00
Total risk based ............ 10.03% 10.32% 9.24%
Regulatory minimum ..... 8.00 8.00 8.00
Well-capitalized minimum 10.00 10.00 10.00
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Leverage .................... 7.40% 7.38% 6.79%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 5.00 5.00 5.00
The table below sets forth the Company's ratios as of March 31, 2004, December
31, 2003, and March 31, 2003, the regulatory minimum capital ratios, and the
regulatory minimum capital ratios for well-capitalized companies:
March 31, December 31, March 31,
2004 2003 2003
----- ---- ----
Tier 1 risk based ........... 6.97% 7.23% 7.99%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 6.00 6.00 6.00
Total risk based ............ 8.23% 8.48% 9.24%
Regulatory minimum ..... 8.00 8.00 8.00
Well-capitalized minimum 10.00 10.00 10.00
Leverage .................... 5.88% 5.88% 6.79%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 5.00 5.00 5.00
The tier 1 risk based and the total risk based capital ratios at the Bank
decreased from December 31, 2003 to March 31, 2004, as the rate of growth of
risk-weighted assets has been higher than the growth of total equity. The
leverage ratio at the Bank increased slightly, from 7.38% to 7.40%, at March 31,
2004, as the level of average quarterly assets remained fairly flat for the
first quarter of 2004, while equity increased due to earnings. All ratios for
the Bank fall within the minimum capital ratios for well-capitalized companies
as of March 31, 2004.
The Company's tier 1 risk based and total risk based capital ratios decreased
from December 31, 2003, due to the increase of higher risk weighted assets,
loans, offset by the reduction of lesser risk weighted assets, security
investments, that grew at a faster pace than total equity. At March 31, 2004,
the tier 1 risk based and the leverage ratios exceeded well-capitalized minimum
levels. The total risk based ratio at March 31, 2004 falls below the regulatory
minimum for well-capitalized companies. Included in equity at December 31, 2003
and March 31, 2004 are the net proceeds, totaling $2,563,503, from the sale of
197,394 shares of common stock of the Company during the second, third, and
fourth quarters of 2003. See Note 5 of the Notes to the Condensed Consolidated
Financial Statements.
To improve the Company's and the Bank's capital ratios and allow it to continue
growth in its market area, the Company is considering alternative measures such
as slowing or reducing loan growth, or raising additional capital through the
issuance of convertible preferred stock.
Throughout the term of the regulatory agreement between the Bank and its primary
regulators, the Bank is required to maintain a minimum leverage ratio of 7%. In
the event that the Bank's leverage ratio falls below 7% and the Company is
unable to obtain additional capital for the Bank on a timely basis, the growth
of the Bank may be curtailed, and the Company may be required to reduce its
level of assets in order to maintain compliance with regulatory capital
requirements. Under those circumstances, net income and the rate of growth of
net income may be adversely affected. If adequate capital is not available, the
Company and the Bank will be subject to an increased level of regulatory
supervision.
Liquidity is the measure of the Bank's ability to fund customer's needs for
borrowings and deposit withdrawals. In the first quarter of 2004, the Company's
principal source of funds has been the acquisition of customers' deposits,
repayment of loans, and other funds from bank operations, as was the case for
the first quarter of 2003.
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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. Other
risks are identified in the Company's Form 10-KSB for the period ended December
31, 2003.
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ITEM 3. CONTROLS AND PROCEDURES
As of March 31, 2004, an evaluation was performed under the supervision and with
the participation of the Company's management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on and as
of the time of such evaluation, the Company's management, including the Chief
Executive Officer and Chief Financial Officer, concluded that the Company's
disclosure controls and procedures were effective as of March 31, 2004 in timely
alerting them to material information relating to the Company required to be
included in the Company's periodic filings with the Securities and Exchange
Commission. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the time of such evaluation.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index of this Form 10-QSB are
filed as a part of this report.
(b) Reports on Form 8-K during the quarter ended March 31, 2004.
Form 8-K filed on January 16, 2004 reporting an Item 7 and furnishing an
Item 12 event (the press release for first quarter 2004 earnings).
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CITIZENS FIRST CORPORATION
Date: May 14, 2004 /s/ Mary D. Cohron
------------------
Mary D. Cohron
President and Chief Executive Officer
(Principal Executive Officer)
May 14, 2004 /s/ Bill D. Wright
------------------
Bill D. Wright
Vice-President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBITS
3.1 Restated Articles of Incorporation of Citizens First Corporation
(incorporated by reference to Exhibit 3.1 of the Company's Registration
Statement on Form SB-2 (No. 333-103238)).
3.2 Amended and Restated Bylaws of Citizens First Corporation (incorporated
by reference to Exhibit 3.2 of the Company's Registration Statement on
Form SB-2 (No. 333-103238)).
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act.
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350.
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