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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 June 30, 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 AUGUST 13, 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 3-11
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-19
ITEM 3. Controls and Procedures 20
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities 21
ITEM 4. Submission of Matters to a Vote of Security Holders 21
ITEM 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibits 23-44
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PART 1. FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, 2004 DECEMBER 31, 2003
ASSETS
Cash and due from banks .............................................. $ 5,491,519 $ 5,233,396
Federal funds sold ................................................... 2,892,696 --
------------- -------------
Cash and cash equivalents ........................................ 8,384,215 5,233,396
Available for sale securities (amortized cost of $13,734,623
as of June 30, 2004; $18,953,814 as of December 31, 2003) ............. 12,860,269 18,400,189
Federal Home Loan Bank (FHLB) Stock ................................... 570,700 425,100
Mortgage loans held for sale .......................................... 268,985 529,800
Loans ................................................................ 138,553,598 134,715,475
Less allowance for loan losses ....................................... 1,998,207 1,904,377
------------- -------------
Net loans ......................................................... 136,555,391 132,811,098
Premises and equipment, net .......................................... 3,760,249 3,913,361
Interest receivable .................................................. 705,112 694,637
Other real estate owned .............................................. -- --
Deferred income taxes ................................................ 879,351 703,673
Goodwill ............................................................. 600,794 384,243
Other assets ......................................................... 150,790 424,498
------------- -------------
Total assets ...................................................... $ 164,735,856 $ 163,519,995
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits .................................................... $ 14,649,123 $ 14,147,896
Savings, NOW and money market deposits ............................. 55,768,695 49,833,676
Time deposits ...................................................... 63,060,795 69,747,520
------------- -------------
Total deposits ................................................... 133,478,613 133,729,092
Federal funds purchased .............................................. -- 662,576
Securities sold under agreements to repurchase ....................... 4,734,490 4,756,410
Long-term debt ....................................................... 16,000,000 14,000,000
Deferred income taxes ................................................ -- 100,315
Accrued interest and other liabilities ............................... 741,550 661,225
------------- -------------
Total liabilities ................................................. 154,954,653 153,909,618
Stockholders' equity:
Common stock, no par value, authorized 2,000,000
shares; issued and outstanding 844,057 and 840,447, .............. 9,975,130 9,920,981
shares, respectively
Retained earnings .................................................. 383,146 54,789
Accumulated other comprehensive income ............................. (577,073) (365,393)
------------- -------------
Total stockholders' equity ....................................... 9,781,203 9,610,377
------------- -------------
Total liabilities
And stockholders' equity ...................................... $ 164,735,856 $ 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 JUNE 30:
2004 2003
----- ----
INTEREST INCOME
Loans, including fees ................ $1,940,982 $ 1,769,060
Federal funds sold ................... 2,653 7,421
Securities ........................... 126,158 107,913
Other ................................ 5,615 4,050
---------- -----------
Total interest income ................ 2,075,408 1,888,444
INTEREST EXPENSE
Deposits ............................. 540,994 629,223
Other borrowings ..................... 108,871 98,818
--------- -----------
Total interest expense ............... 649,865 728,041
---------- -----------
NET INTEREST INCOME .................... 1,425,543 1,160,403
Provision for loan losses ............ 45,000 1,490,000
----------- -----------
NET INTEREST INCOME (LOSS) AFTER
PROVISION FOR LOAN LOSSES ............ 1,380,543 (329,597)
----------- -----------
NON-INTEREST INCOME
Service charges on deposit accounts .. 216,465 173,033
Income from the sale of loans ........ 115,889 188,808
Gain on the sale of securities ....... -- 134,732
Other ................................ 63,787 69,399
----------- -----------
Total non-interest income ............ 396,141 565,972
NON-INTEREST EXPENSES
Compensation and benefits ............ 769,108 665,917
Net occupancy expense ................ 94,994 120,493
Furniture and equipment expense ...... 100,612 105,058
Professional fees .................... 147,309 109,424
Postage, printing and supplies ....... 23,651 30,133
Processing fees ...................... 109,880 78,959
Advertising .......................... 49,122 61,023
Other ................................ 213,459 202,554
---------- -----------
Total non-interest expenses .......... 1,508,135 1,373,561
---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ...... 268,549 (1,137,186)
Income tax expense (benefit) ........... 85,800 (389,100)
---------- -----------
NET INCOME (LOSS) ...................... $ 182,749 $ (748,086)
============ ============
BASIC EARNINGS (LOSS) PER COMMON SHARE $0.22 $(1.16)
See accompanying notes to condensed consolidated financial statements.
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Citizens First Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30: 2004 2003
----- ----
INTEREST INCOME
Loans, including fees ............... $ 3,855,602 $ 3,305,246
Federal funds sold .................. 3,940 10,813
Securities .......................... 267,653 289,647
Other ............................... 10,544 7,438
----------- -----------
Total interest income ............... 4,137,739 3,613,144
INTEREST EXPENSE
Deposits ............................ 1,092,721 1,213,565
Other borrowings .................... 240,918 172,844
----------- -----------
Total interest expense .............. 1,333,639 1,386,409
----------- -----------
NET INTEREST INCOME ................... 2,804,100 2,226,735
Provision for loan losses ........... 120,000 1,643,000
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ........... 2,684,100 583,735
------------ ----------
NON-INTEREST INCOME
Service charges on deposit accounts . 409,400 320,122
Income from the sale of loans ....... 179,460 280,746
Gain (loss) on the sale of securities (34,368) 144,024
Other ............................... 110,373 103,040
---------- -----------
Total non-interest income ........... 664,865 847,932
NON-INTEREST EXPENSES
Compensation and benefits ........... 1,531,541 1,259,444
Net occupancy expense ............... 183,991 185,786
Furniture and equipment expense ..... 213,169 190,025
Professional fees ................... 204,969 141,015
Postage, printing and supplies ...... 50,892 60,124
Processing fees ..................... 216,161 149,061
Advertising ......................... 91,764 108,227
Other ............................... 376,521 302,572
---------- -----------
Total non-interest expenses ......... 2,869,008 2,396,254
---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ..... 479,957 (964,587)
Income tax expense (benefit) .......... 151,600 (334,250)
----------- -----------
NET INCOME (LOSS) ..................... $ 328,357 $ (630,337)
=========== ===========
BASIC EARNINGS (LOSS) PER COMMON SHARE $0.39 $(0.98)
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 SIX MONTHS ENDED JUNE 30: 2004 2003
---- ----
Balance January 1 $9,610,377 $7,838,252
Net income .................................. 328,357 (630,337)
Issuance of common stock .................... 54,150 1,025,568
Other comprehensive income (loss), net of tax (211,681) (87,455)
----------- -----------
Balance at end of period ...................... $ 9,781,203 $ 8,146,028
=========== ===========
See accompanying notes to condensed consolidated financial statements.
CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30: 2004 2003
---- ----
Net income ..................................................... $ 328,357 $(630,337)
Other comprehensive income (loss), net of tax:
Unrealized gain (depreciation) on available for sale
securities, net of income taxes (credit) of $(109,048) and
$(45,053), arising during the period, respectively ....... (211,681) (87,455)
--------- ----------
Comprehensive income (loss) ..................................... $ 116,676 $(717,792)
========= ==========
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See accompanying notes to condensed consolidated financial statements.
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CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30:
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................... $ 328,357 $ (630,337)
Items not requiring (providing) cash:
Depreciation and amortization .................................. 243,135 176,236
Provision for loan losses ...................................... 120,000 1,643,000
Amortization of premiums and discounts on securities ........... 11,191 67,924
Net realized loss/(gain) on disposition of investment securities 34,368 (144,024)
Loss on sale of property, plant and equipment .................. 1,071 --
FHLB stock dividends received .................................. (10,300) (7,300)
Deferred income taxes .......................................... (275,993) (510,755)
Mortgage loans held for sale originated ........................ (9,823,437) (23,754,652)
Sale of mortgage loans held for sale ........................... 10,084,252 22,560,101
Changes in:
Accrued interest receivable .................................... (10,475) 120,703
Other assets ................................................... 5,667 (20,921)
Interest payable and other liabilities ......................... 189,374 (259,200)
------------ ------------
Net cash used in operating activities ......................... 897,210 (759,225)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net changes in loans ............................................. (3,864,293) (28,871,108)
Purchases of premises and equipment .............................. (40,228) (1,597,435)
Proceeds from sale of property, plant and equipment .............. 625 --
Proceeds from maturities of securities available for sale ........ 446,193 13,011,023
Proceeds from sales of securities available for sale ............. 4,727,438 5,480,565
Purchase of securities available for sale ........................ -- (20,049,603)
Purchase of FHLB stock ........................................... (135,300) (55,900)
Purchase of mortgage company and title company ................... -- (398,688)
------------ ------------
Net cash used in investing activities ......................... 1,134,435 (32,481,146)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits .............................. (250,479) 21,991,200
Net increase in other borrowings ................................. 2,000,000 5,400,000
Net decrease in federal funds purchased and repurchase .......... (684,496) (1,402,279)
agreements
Issuance of common stock ......................................... 54,149 1,025,568
------------ ------------
Net cash provided (used) in financing activities ................. 1,119,174 27,014,489
------------ ------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS ............. 3,150,819 (6,225,882)
Cash and cash equivalents at beginning of period ................. 5,233,396 13,922,817
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ....................... $ 8,384,215 $ 7,696,935
============ ============
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:
JUNE 30, DECEMBER 31,
2004 2003
----------- ---------------
Balance, beginning of year ................................ $ 1,904,377 $ 1,300,258
Provision charged to expense .............................. 120,000 1,808,000
Loans charged off, net of recoveries of $5,120 for June 30,
2004 and $13,714 for December 31, 2003 ................. (26,170) (1,203,881)
----------- -----------
Balance, June 30, 2004 and December 31, 2003, respectively $ 1,998,207 $ 1,904,377
============ ===============
(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
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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. On May 20, 2004, the Company granted options to
purchase 4,500 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 tables 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,
for the quarter and six months ended June 30, 2004.
Quarter Ended June 30
2004 2003
----------------------------------------
Net income, as reported $ 182,749 $ (748,086)
Less: Total stock-based employee compensation cost
determined under the fair value based method,
net of income taxes 17,691 --
Pro forma net income $ 165,058 $ (748,086)
Earnings per share:
Basic - as reported $ 0.22 $ (1.16)
Basic - pro forma $ 0.20 $ (1.16)
Six Months Ended June 30
2004 2003
----------------------------------------
Net income, as reported $ 328,357 $ (630,337)
Less: Total stock-based employee compensation cost
determined under the fair value based method,
net of income taxes 35,275 --
Pro forma net income $ 293,082 $ (630,337)
Earnings per share:
Basic - as reported $ 0.39 $ (0.98)
Basic - pro forma $ 0.35 $ (0.98)
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 plans at June 30, 2004 and 2003, and changes
during the periods then ended is presented below:
2004 2003
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
-------------------------------------------------------------------------------
Outstanding, beginning of year -- $ -- -- $ --
Granted 49,500 14.17 --
Exercised -- -- --
Forfeited -- -- --
Expired -- -- --
Outstanding, end of period 49,500 $ 14.17 $ 0 $ --
Options exercisable, end of period 9,500 --
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 10 Years
Weighted-average fair value of options granted during the year $ 168,795
The following table summarizes information about stock options under the plans
outstanding at June 30, 2004:
Options Outstanding Options Exercisable
Range of Number Weighted-Average Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual 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
$13.40 4,500 10 years $13.40 4,500 $13.40
(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 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 the initial 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. At June 30, 2004, goodwill from this transaction
totaled $600,794.
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 June 30, 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 at least 7% throughout the term of the agreement.
(8) SUBSEQUENT EVENTS
Subsequent to the end of the second quarter of 2004, the Company completed the
private placement of 250 shares of Cumulative Convertible Preferred Stock,
stated value $31,992 per share (Preferred Stock), for an aggregate purchase
price of $7,998,000. The proceeds from the issuance of the Preferred Stock will
be used for general corporate purposes, including the contribution of capital to
Citizens First Bank and the repayment of outstanding borrowings under the
Company's credit facility. The Preferred Stock was sold for $31,992 per share,
is entitled to quarterly cumulative dividends at an annual fixed rate of 6.5%
and is convertible into shares of common stock of the Company at a price of
$15.50 on and after three years from the date of issuance. The sale of the
Preferred Stock netted proceeds to the Company of $7,673,806, of which
$3,011,970 (including $3,000,000 in principal and $11,970 in accrued interest)
was used to repay the outstanding balance under the Company's line of credit,
and $3,000,000 was contributed to the capital of the Bank.
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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 June 30, 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.
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
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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 5.6%. 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 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
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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 $1,998,207 was adequate, but not excessive, to absorb estimated
credit losses associated with the loan portfolio at June 30, 2004.
DEFERRED TAX ASSETS
The Company has a deferred tax asset of approximately $879,000. 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 June 30, 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 June 30, 2004, the Company reported net income of
$182,749, or $0.22 per common share, compared to a net loss of $(748,086), or
$(1.16) per common share, for the same period ended June 30, 2003.
For the six months ended June 30, 2004, the Company reported net income of
$328,357, or $0.39 per common share, compared to a net loss of $(630,337), or
$(0.98) per common share, for the same period ended June 30, 2003.
NET INTEREST INCOME
Net interest income was $1,425,543 in the second quarter of 2004, compared with
$1,160,403 in the comparable period in 2003. Second quarter 2004 interest income
of $2,075,408, an increase of $186,964 or 9.9% over the same period in 2003,
includes $1,940,982 income on loans, $126,158 income on securities, and $8,268
income on federal funds sold and other interest-bearing accounts. Interest
income of $1,888,444 during the second quarter of 2003 included $1,769,060 of
income on loans, $107,913 income on investment securities, and $11,471 income on
federal funds sold and other interest-bearing accounts. Interest expense of
$649,865 for the second quarter of 2004, down $78,176 or 10.7% from the same
period in 2003, consists of interest on deposits of $540,994, and on other
borrowings of $108,871. Second quarter 2003 interest expense of $728,041
consisted of interest on deposits of $629,223, and interest on other borrowings
of $98,818. The growth of the balance sheet, particularly loans and deposits,
from the second quarter of 2003 to the same period in 2004, coupled with the
drop in the cost of interest-bearing liabilities, offset by a slight 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 second 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 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. An increase
of 25 basis points in short-term interest rates by the Federal Reserve Bank
during the last week of June 2004 did not have time to positively impact net
interest margin during the second quarter.
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Net interest income was $2,804,100 for the six months ended June 30, 2004, an
increase of $577,365 or 25.9% over the total of $2,226,735 for the same period
of 2003. Interest income of $4,137,739 for the first six months of 2004 included
$3,855,602 income on loans, $267,653 income on investment securities, and
$14,484 income on federal funds sold and other interest-bearing accounts. Total
interest income of $3,613,144 for the first six months of 2003 consisted of
$3,305,246 income on loans, $289,647 income on investment securities, and
$18,251 income on federal funds sold and other interest-bearing accounts.
Interest expense for the first half of 2004 totaled $1,333,639, and included
$1,092,721 interest on deposits, and $240,918 expense on other borrowings. The
comparable period of 2003 had interest expense of $1,386,409, of which
$1,213,565 was interest on deposits, and $172,844 was expense on other
borrowings.
PROVISION FOR LOAN LOSSES
The provision for loan losses expense for the three months ended June 30, 2004,
was $45,000, a decrease of $1,445,000 over the total of $1,490,000 for the same
quarter of 2003. Of the $1,490,000 of provision expense during the second
quarter of 2003, approximately $1,087,000 was specifically allocated for three
loans to one borrower, totaling $1,675,000. As the result of a periodic
regulatory examination of the Bank which concluded in July 2003, the provision
was also specifically increased $229,050 for two potential problem loans,
totaling $49,000 and $1,478,000, respectively, which are not included in the
non-performing loan total at June 30, 2003.
The provision for loan losses expense was $120,000 for the first six months of
the year, compared to $1,643,000 for the same period of 2003, a decrease of
$1,523,000. Of this decrease $1,087,000 and $229,050 were specifically expensed
for non-performing loans and potential problem loans, respectively, during the
second quarter of 2003, as discussed in the preceding paragraph.
NON-INTEREST INCOME
Non-interest income for the three months ended June 30, 2004 and 2003,
respectively, was $396,141 and $565,972, a decrease of $169,831 or 30.0%. Income
from service charges on deposit accounts increased $73,167, or 42.3%, from
$173,033 during the second quarter of 2003 to $246,200 for the second 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
$72,919, from $188,808 during the second quarter of 2003 to $115,889 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 second quarter of 2003, when long-term mortgage rates were
at historically low levels. The second quarter of 2003 includes a gain on the
sale of investment securities of $134,732.
Non-interest income for the six months ended June 30, 2004 and 2003,
respectively, was $664,865 and $847,932, a decrease of $183,067 or 21.6%.
Service charges on deposit accounts comprised the largest part of non-interest
income for both six-month time periods, totaling $409,400 and $320,122 for 2004
and 2003, respectively. Income from the sale of secondary market loans decreased
to $179,460 for the first half of 2004 from $280,746 for the same period of
2003. Losses from the sale of investment securities during the first half of
2004 totaled $(34,368), compared to gains of $144,024 for the first half of
2003.
NON-INTEREST EXPENSE
Non-interest expense was $1,508,135 in the second quarter of 2004, up from
$1,373,561 in the same quarter of 2003, an increase of $134,574 or 9.8%. 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 approximately
$80,000 of the increase in non-interest expense during the first quarter of
2004, compared to the same period of 2003. Professional fees increased primarily
as result of fees and expenses incurred in administering problem loans. Other
cost increases are primarily associated with servicing the growing customer
base.
For the six months ended June 30, 2004 and 2003, respectively, non-interest
expense was $2,869,008 and $2,396,254, an increase of $472,754, or 19.7%. The
non-interest expense associated with the two new branches and
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the mortgage origination company accounted for approximately $250,000 of the
increase during the first half of 2003.
INCOME TAXES
Income tax expense has been calculated based on the Company's expected annual
rate for 2004. During the second quarter of 2004, income tax expense totaled
$85,800, compared to a tax benefit of $(389,100) 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 June 30, 2004 were $164,735,856, up from $163,519,995 at
December 31, 2003 and up from $154,435,574 a year ago. Average total assets for
the second quarter of 2004 were $162,884,137, up $19,480,056 from the second
quarter of 2003 average of $143,404,081.
LOANS
At June 30, 2004 loans (excluding mortgage loans held for sale) totaled
$138,553,598, compared with $134,715,475 at December 31, 2003 and $124,787,813 a
year ago, an increase of $3,838,123 and $13,765,785 respectively. Loans averaged
$138,540,727 during the second quarter of 2004, an increase of $20,160,548 or
17.0%, over the average total of $118,380,179 for the second quarter of 2003.
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 $1,644,610 at June 30, 2004, compared to $653,170 at December 31, 2003
and $1,783,707 at June 30, 2003. Included in the non-performing loan total at
June 30, 2004 is the remaining portion, totaling $518,052, 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 energy related properties located in
Texas and Louisiana. During the second quarter of 2003 the borrower advised the
Company that one of the properties, which it had expected to produce significant
revenues, had failed to produce any revenue, was unlikely to ever produce
revenues and that the property's value is now negligible, and further that the
revenue from the other properties 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 are two loans to one
borrower, totaling $123,472, which were placed on nonaccrual during the fourth
quarter of 2003. The loans are secured by a mortgage on residential real estate.
Added at March 31, 2004 to nonaccrual status is a loan totaling $200,501, after
the borrower filed for Chapter 7 Bankruptcy and elected not to reaffirm the debt
with the Bank. The loan is secured by residential real estate. Also included in
the June 30, 2004 total is a loan for $767,701 that was greater than 90 days
past due, which was subsequently paid in full in July 2004, and a loan totaling
$29,789 on which the Bank is pursuing legal action against the borrower and the
guarantor. The remaining $5,095 of non-performing loans consists of one loan
accruing but past due over 90 days totaling $1,678, and one loan on non-accrual
of $3,417.
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.
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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
$1,644,610 at the end of the second 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 $1,998,207 at June 30,
2004, an increase of $93,830, or 4.9% over the December 31, 2003 level of
$1,904,377. The allowance represents 1.44% 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 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 $12,860,270 at June 30, 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 June 30, 2003, securities totaled $17,688,014.
DEPOSITS AND BORROWED FUNDS
Total deposits averaged $130,687,675 in the second quarter of 2004, an increase
of $13,416,698 from the comparable 2003 second quarter average of $117,270,977.
As of June 30, 2004, total deposits were $133,478,613, and included $119,106,637
of interest bearing deposits. This compares to total deposits of $133,729,092 at
December 31, 2003, which included $118,829,490 of interest bearing deposits.
Total deposits at June 30, 2003 were $127,884,533, and included interest bearing
deposits of $117,285,550.
The Bank had $4,734,490 of deposits secured by securities sold under agreements
to repurchase on June 30, 2004. These obligations, which mature in one business
day, are swept daily from customers' demand deposit accounts. These balances
averaged $4,337,929 during the second quarter of 2004.
At June 30, 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 June
30, 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 June 30, 2004, the Bank had
available collateral to borrow an additional $10.1 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 June 30, 2004 is $3,000,000. The debt was
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retired subsequent to the end of the second quarter with funds obtained from the
sale of Preferred Stock in July 2004.
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 June 30, 2004,
December 31, 2003, and June 30, 2003, the regulatory minimum capital ratios, and
the regulatory minimum capital ratios for well-capitalized companies:
June 30, December 31, June 30,
2004 2003 2003
----- ---- ----
Tier 1 risk based ........... 9.23% 9.07% 8.23%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 6.00 6.00 6.00
Total risk based ............ 10.48% 10.32% 9.49%
Regulatory minimum ..... 8.00 8.00 8.00
Well-capitalized minimum 10.00 10.00 10.00
Leverage .................... 7.69% 7.38% 7.00%
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 June 30, 2004, December
31, 2003, and June 30, 2003, the regulatory minimum capital ratios, and the
regulatory minimum capital ratios for well-capitalized companies:
June 30, December 31, June 30,
2004 2003 2003
----- ---- ----
Tier 1 risk based ........... 7.21% 7.23% 6.34%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 6.00 6.00 6.00
Total risk based ............ 8.46% 8.48% 7.60%
Regulatory minimum ..... 8.00 8.00 8.00
Well-capitalized minimum 10.00 10.00 10.00
Leverage .................... 6.01% 5.88% 5.39%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 5.00 5.00 5.00
All capital ratios at the Bank increased from December 31, 2003 to June 30,
2004, as the rate of growth of risk-weighted assets was lower than the growth of
total equity. All ratios for the Bank fall within the minimum capital ratios for
well-capitalized companies as of June 30, 2004.
The Company's tier 1 risk based and total risk based capital ratios decreased 2
basis points respectively from December 31, 2003. At June 30, 2004, the tier 1
risk based and the leverage ratios exceeded well-capitalized minimum levels. The
total risk based ratio at June 30, 2004 falls below the regulatory minimum for
well-capitalized companies. Included in equity at December 31, 2003 and June 30,
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.
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To improve the Company's and the Bank's capital ratios and allow it to continue
growth in its market area subsequent to June 30, 2004, the Company completed
raising additional capital through the issuance of Cumulative Convertible
Preferred Stock, as mentioned previously in Note 8 of the Notes to the Condensed
Consolidated Financial Statements.
Liquidity is the measure of the Bank's ability to fund customer's needs for
borrowings and deposit withdrawals. In the second 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 primarily the
case for the second quarter of 2003. In the second quarter of 2003, net proceeds
from the sale of the common stock of the Company totaled $1,025,568.
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 June 30, 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 June 30, 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 was no change in the Company's internal controls over
financial reporting identified during the quarter ended June 30, 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On April 15, 2004, the Company issued 3,610 shares of the
Company's common stock to the two former shareholders of Commonwealth
Mortgage of Bowling Green, Inc., representing a portion of the deferred
purchase price payable to the shareholders in connection with the
Company's acquisition of Commonwealth Mortgage. See Note 6 of the Notes
to Condensed Consolidated Financial Statements included as part of this
Report. The shares of common stock were issued by the Company in a
private placement in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on
May 20, 2004. The following directors were elected to three year terms,
ending in 2007, with the vote totals as shown:
Votes for Votes withheld
Billy J. Bell 812,202 5,750
James H. Lucas 812,202 5,750
Joe B. Natcher, Jr. 812,202 5,750
Jack Sheidler 812,202 5,750
The terms of office of the following directors of Citizens First
Corporation continued after the Annual Meeting:
NAME TERM EXPIRES IN
---- ---------------
Barry D. Bray 2005
Sarah Glen Grise 2005
John T. Perkins 2005
Wilson Stone 2005
Jerry E. Baker 2006
Mary D. Cohron 2006
Floyd H. Ellis 2006
John J. Kelley 2006
The shareholders cast 792,275 votes to ratify the appointment of BKD,
LLP as the Company's independent accountants for 2004. 17,877 votes
were cast against this proposal and 0 votes were abstained.
There were no broker nonvotes on any of the items voted on at the
Annual Meeting.
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 June 30, 2004.
Form 8-K filed on April 20, 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: August 13, 2004 /s/ Mary D. Cohron
------------------
Mary D. Cohron
President and Chief Executive Officer
(Principal Executive Officer)
August 13, 2004 /s/ Bill D. Wright
------------------
Bill D. Wright
-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)).
3.3 Articles of Amendment to Amended and Restated Articles of Incorporation
of Citizens First Corporation.
10 Placement Agent Agreement dated as of June 22, 2004 between Citizens
First Corporation and Howe Barnes, Investments, Inc.
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.
23