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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, 2005
___ 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 13, 2005
Common Stock, no par value 893,651
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 12-18
ITEM 3. Controls and Procedures 19
PART II. OTHER INFORMATION
ITEM 6. Exhibits 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, 2005 DECEMBER 31, 2004
ASSETS
Cash and due from banks $3,890,054 $3,910,629
Federal funds sold 865,908 169,078
-------------- --------------
Cash and cash equivalents 4,755,962 4,079,707
Available for sale securities 12,399,301 12,888,985
Federal Home Loan Bank (FHLB) stock 588,800 582,800
Mortgage loans held for sale 1,142,111 649,500
Loans 148,341,645 146,950,427
Less allowance for loan losses 1,766,714 1,720,565
-------------- --------------
Net loans 146,574,931 145,229,862
Premises and equipment, net 3,911,233 3,628,317
Interest receivable 865,977 788,871
Other real estate owned 155,000 -
Deferred income taxes 531,870 549,292
Goodwill 936,416 936,416
Other assets 236,947 178,336
-------------- --------------
Total assets $172,098,548 $169,512,086
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $12,879,154 $15,015,304
Savings, NOW and money market deposits 52,473,114 54,770,108
Time deposits 69,975,299 60,743,325
--------------- ------------
Total deposits 135,327,567 130,528,737
Federal funds purchased - 2,500,000
Securities sold under agreements to repurchase 4,299,131 3,872,532
Long-term debt 13,000,000 13,000,000
Income taxes payable - 155,814
Accrued interest and other liabilities 1,005,948 1,278,363
--------------- ------------
Total liabilities 153,632,646 151,335,446
Stockholders' equity:
Preferred stock cumulative;500 shares authorized;
250 shares issued and outstanding; no par value, 7,659,340 7,659,340
at March 31, 2005 and at December 31,2004
Common stock, no par value, authorized 2,000,000
shares; issued and outstanding 893,651 and 887,719, 10,079,986 9,975,130
shares, respectively at March 31, 2005
and December 31, 2004
Retained earnings 1,175,001 851,972
Accumulated other comprehensive income (loss) (448,425) (309,802)
--------------- -------------
Total stockholders' equity 18,465,902 18,176,640
--------------- ------------
Total liabilities and stockholders' equity $172,098,548 $169,512,086
=============== ============
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: 2005 2004
----- ----
INTEREST INCOME
Loans, including fees .......................... $ 2,279,683 $ 1,914,620
Available-for-sale securities .................. 119,863 141,624
Federal funds sold ............................. 7,225 1,287
Dividends on FHLB stock ........................ 6,000 4,800
--------- -----------
Total interest income .......................... 2,412,771 2,062,331
INTEREST EXPENSE
Deposits ....................................... 581,683 551,727
Securities sold under agreements to repurchase . 7,942 10,185
Long-term debt .................................. 65,890 115,381
Federal funds purchased ......................... 10,545 6,481
--------- -----------
Total interest expense ......................... 666,060 683,774
NET INTEREST INCOME ....................... 1,746,711 1,378,557
Provision for loan losses ...................... 35,000 75,000
--------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ...................... 1,711,711 1,303,557
--------- -----------
NON-INTEREST INCOME
Service charges on deposit accounts ............ 213,918 192,935
Other service charges and fees ................. 17,351 28,348
Mortgage banking income ........................ 97,627 78,809
Net realized (losses) on sale of
available-for-sale securities .................. -- (34,368)
Trust referral fees ............................ 3,000 3,000
--------- -----------
Total non-interest income ...................... 331,896 268,724
NON-INTEREST EXPENSES
Salaries and employee benefits ................. 670,476 762,433
Net occupancy expense .......................... 87,812 88,997
Furniture and equipment expense ................ 94,639 112,557
Advertising .................................... 38,032 35,572
Professional fees .............................. 94,855 48,219
Data processing services ....................... 90,178 90,632
FDIC and other insurance ....................... 30,731 50,074
Franchise shares and deposit tax ............... 51,150 12,747
Business manager expense ....................... 4,136 13,519
Postage, printing and supplies ................. 27,733 27,241
Telephone and other communication .............. 30,978 32,485
Other .......................................... 139,171 86,397
--------- -----------
Total non-interest expenses .................... 1,359,891 1,360,873
--------- -----------
INCOME BEFORE INCOME TAXES ....................... 683,716 211,408
Income tax expense .............................. 232,500 65,800
---------- -----------
NET INCOME ....................................... 451,216 145,608
PREFERRED DIVIDENDS .............................. (128,187) --
---------- -----------
NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS ..... $ 323,029 145,608
========== ===========
BASIC EARNINGS PER COMMON SHARE $0.36 $0.16
DILUTED EARNINGS PER COMMON SHARE $0.31 $0.16
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: 2005 2004
---- ----
Balance January 1 ............................... $ 18,176,640 $9,610,377
Net income ...................................... 451,216 145,608
Issuance of common stock ........................ 104,856 --
Payment of preferred dividends,
$512.75 per share (128,187) --
Other comprehensive income (loss), net of tax ... (138,623) 208,631
------------ ----------
Balance at end of period .......................... $ 18,465,902 $9,964,616
============ ==========
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: 2005 2004
---- ----
Net income $ 451,216 $ 145,608
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available for sale
securities, net of income taxes (benefits) of
$(71,412) and $107,477, arising during the period, (138,623) 208,631
respectively
---------- --------
Comprehensive income $ 312,593 $354,239
========= ========
See accompanying notes to condensed consolidated financial statements.
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CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31:
2005 2004
---- ----
OPERATING ACTIVITIES:
Net income ............................................. $ 451,216 $ 145,608
Items not requiring (providing) cash:
Depreciation and amortization ......................... 86,842 131,569
Provision for loan losses ............................. 35,000 75,000
Amortization of premiums and discounts on securities .. 4,525 7,561
Deferred income taxes ................................. 86,947 132,602
Net realized (gains) losses on disposition of
investment securities ................................. -- 34,368
Gains on sales of loans ............................... (82,782) (63,571)
Sale of mortgage loans held for sale .................. 5,533,606 3,211,064
Origination of mortgage loans for sale ................. (5,943,435) (3,200,973)
FHLB stock dividend received .......................... (6,000) (4,800)
Changes in:
Interest receivable ................................... (77,106) (94,760)
Income taxes receivable (payable) ..................... (20,545) 40,675
Other assets .......................................... (214,288) (364,222)
Interest payable and other liabilities ................ (66,647) (60,102)
----------- ----------
Net cash from operating activities ........... (212,667) (9,981)
INVESTING ACTIVITIES:
Net changes in loans .................................... (1,380,069) (6,487,894)
Purchases of premises and equipment ..................... (369,758) (27,714)
Proceeds from maturities of securities available for sale 275,123 255,075
Proceeds from sales of available-for-sale securities .... -- 4,727,438
Payment related to purchase of Commonwealth Mortgage and
Southern KY Land Title, Inc., net of stock issued (251,717) --
KY Land Title, Inc., net of stock issued
----------- -----------
Net cash from investing activities ............ (1,726,421) (1,533,095)
FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, ............. (4,433,145) 2,435,563
money market, NOW, and savings accounts
Net increase (decrease) in certificates of deposit ....... 9,231,975 (5,859,101)
Proceeds from long-term borrowings ....................... -- 2,000,000
Net increase (decrease) in federal funds ................. (2,073,401) 1,917,273
purchased and repurchase agreements
Issuance of common stock ................................ 20,950 --
Dividends paid on preferred stock ....................... (131,036) --
----------- -----------
Net cash from financing activities ...................... 2,615,343 493,735
----------- -----------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS .... 676,255 (1,049,341)
Cash and cash equivalents at beginning of period ........ 4,079,707 5,233,396
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............. $ 4,755,962 $ 4,184,055
=========== ===========
Supplemental Cash Flow Information:
Cash paid for interest $625,025 $ 705,490
Cash paid for income taxes $250,500 $ -
Real estate acquired in settlement of loans: $155,000 $ -
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 2004 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.
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, 2004, has been derived from the audited consolidated balance
sheet of the Company as of that date.
STOCK OPTION PLANS
All references to stock options, earnings per share and the amount of common
stock issued and outstanding have been adjusted to reflect the 5% common stock
dividend.
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. 126,000 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. 42,000 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 42,000
shares under the employee stock option plan and 5,250 shares under the
non-employee stock option plan. On May 20, 2004, the Company granted options to
purchase 4,725 shares under the non-employee stock option plan. On January 12,
2005, the Company granted options to purchase 42,000 shares under the employee
stock option plan. Subsequent to quarter end, the Company on April 21, 2005,
granted options to purchase 6,300 shares under the non-employee stock option
plan.
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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 ended March 31, 2005 and 2004.
Quarter Ended March 31
2005 2004
--------------------------
Net income, as reported .......................... $ 451,216 $ 145,608
Less: Total stock-based employee
compensation cost determined under their
value based method, net of income taxes ..... 26,747 17,584
Pro forma net income ............................. $ 424,469 $ 128,024
Earnings per share:
Basic - as reported .............................. $ 0.36 $ 0.16
Basic - pro forma ................................ $ 0.33 $ 0.14
Diluted - as reported ............................ $ 0.31 $ 0.16
Diluted - pro forma .............................. $ 0.30 $ 0.14
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
126,000 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 42,000 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.
A summary of the status of the plans at March 31, 2005 and 2004, and changes
during the periods then ended is presented below:
2005 2004
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
---------------------------------------------------------------------------
Outstanding, beginning of year 51,030 $ 13.50 -- $ --
Granted 42,000 14.33 47,250 13.57
Exercised (1,575) 13.30 --
Forfeited (735) 13.57 --
Expired -- -- --
Outstanding, end of period 90,720 $ 14.58 47,250 $13.57
Options exercisable, end of period 21,832 5,250
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:
2005
--------------------
Dividend yields 0%
Volatility factors of expected market price of common stock 21.17%
Risk-free interest rates 3.97%
Expected life of options 6 Years
Weighted-average fair value of options granted during the year $ 4.69
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The following table summarizes information about stock options under the plans
outstanding at March 31, 2005:
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 40,320 9 years $14.25 12,792 $14.25
$14.25 4,200 9 years $14.25 4,000 $14.25
$13.40 4,200 9 years $13.40 4,000 $13.40
$15.05 42,000 10 years $15.05 -- $15.05
(2) RECLASSIFICATIONS
Certain reclassifications have been made to the 2004 financial statements to
conform to the 2005 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, March 31,
-----------------------
2005 2004
-----------------------
Balance, beginning of year .............................. $ 1,720,565 $ 1,904,378
Provision charged to expense ............................ 35,000 75,000
Loans charged off, net of recoveries of $67,699 for March
31, 2005 and $50 for March 31, 2004 ..................... 11,149 (6,930)
----------- -----------
Balance, March 31, 2005 and March 31, 2004, respectively $ 1,766,714 $ 1,972,448
=========== ===========
(4) ACQUISITION OF COMMONWEALTH MORTGAGE AND SOUTHERN KENTUCKY LAND TITLE
On January 2, 2003, the Bank acquired all of the outstanding stock of
Commonwealth Mortgage of Bowling Green, Inc. and Southern Kentucky Land Title,
Inc. Commonwealth Mortgage originates 1-4 family residential mortgages for sale
in the secondary mortgage market, while Southern Kentucky Land Title provides
title insurance agency services for real estate purchase contracts. The purchase
price for Commonwealth Mortgage and Southern Kentucky Land Title consisted of
$400,000 in cash plus a deferred contingent purchase price of up to $1,350,000
payable upon the combined entities' achievement of specified annual earnings
targets over a five year period, plus 25% of the amount, if any, by which their
earnings exceed such targets. 25% of the deferred purchase price will be paid by
the issuance of the Company's common stock, valued at the average of the closing
sales price of the stock over the last ten trading days of the applicable
calendar year. At the former Commonwealth shareholders'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 is 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. 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. In January 2005, the Bank
paid $251,717 in cash, and in March 2005 the Company issued 5,502 shares of the
Company's common stock to the former Commonwealth shareholders as the second
installment of the deferred contingent purchase price. At March 31, 2005,
goodwill from this transaction totaled $936,416.
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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.
(5) CUMULATIVE CONVERTIBLE PREFERRED STOCK OFFERING
The Company completed during the third quarter of 2004 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
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 an initial conversion price per share
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 $7,659,340, 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 $3,800,000 was contributed to the capital of the Bank. The remaining
proceeds from the issuance of the Preferred Stock are being used for general
corporate purposes, including the contribution of capital to the Bank.
(6) EARNINGS PER SHARE
On April 20, 2005, the Board of Directors declared a 5% common stock dividend to
shareholders of record on April 29, 2005, payable May 30, 2005. All references
to common shares and earnings per share have been restated to reflect the stock
dividend. There are no anti-dilutive stock options. Basic earnings per share
have been computed by dividing net income available for common shareholders by
the weighted-average number of common shares outstanding for the period. Diluted
earnings per share have been computed the same as basic earnings per share, and
assumes the conversion of outstanding vested stock options and convertible
preferred stock. The following table reconciles the basic and diluted earnings
per share computations for the quarters ending March 31, 2005 and 2004.
QUARTER ENDED MARCH 31, 2005 QUARTER ENDED MARCH 31, 2004
------------------------------------- ----------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES PER SHARE SHARES PER SHARE
INCOME AMOUNT INCOME AMOUNT
------------------------------------- ----------------------------------------
BASIC EARNINGS PER SHARE
Net income $ 451,216 $ 145,608
Less: Dividends on
preferred stock (128,187) --
---------- ---------
Net income available
to common shareholders 323,029 888,783 $ 0.36 145,608 886,970 $ 0.16
======== ========
EFFECT OF DILUTIVE
SECURITIES
Convertible preferred 128,187 541,800
stock 0 0
Stock options 0 44,184 0 0
---------- --------- ---------- ---------
DILUTED EARNINGS (LOSS)
PER SHARE
Net income available to
common shareholders and
assumed conversions
$ 451,216 1,474,767 $ 0.31 $ 145,608 886,970 $ 0.16
========== ========= ======== ========== ======= ========
(7) EMPLOYEE BENEFIT PLAN
Effective October 1, 2004, the Company elected to self-insure certain costs
related to employee health and accident benefit programs. The Company has
purchased insurance that limits its annual exposure for individual claims and
that limits its aggregate annual exposure to $118,641 during the initial year of
the plan. Future insurance costs that limit the Company's exposure for
individual claims and aggregate exposure will be determined annually, based
primarily upon the Company's actual claim history for the previous year.
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(8) SUBSEQUENT EVENTS
On April 20, 2005, the Board of Directors of the Company declared a 5% stock
dividend on each share of common stock of the Corporation outstanding, payable
to the record holders of the common stock on April 29, 2005. The dividend will
be issued and payable May 30, 2005 in the form of 0.05 share of common stock for
each one share of common stock outstanding on the record date. Any fractional
share of common stock which a shareholder would be entitled to receive will be
rounded up to a whole share of common stock.
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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 in the Franklin/Simpson
County market. As of March 31, 2005, the Company and Bank employed sixty-two
employees (fifty-four 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 branch offices at 2451 Fitzgerald-Industrial Drive, Bowling Green,
Kentucky and at 1200 South Main Street, Franklin, Kentucky in February 2003. The
Bank was organized as a community oriented, full service alternative to the
super-regional 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 5.6%. 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 2004 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
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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 $1,766,714 was adequate, but not excessive, to absorb estimated
credit losses associated with the loan portfolio at March 31, 2005.
DEFERRED TAX ASSETS
The Company has a deferred tax asset of approximately $531,870. 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, 2005 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, 2005, the Company reported net income of
$451,216, or $0.38 and $0.33 per basic and diluted common share, respectively,
compared to net income of $145,608, or $.17 per basic and diluted common share,
for the same period ended March 31, 2004.
NET INTEREST INCOME
Net interest income was $1,746,711 in the first quarter of 2005, compared with
$1,378,557 in the comparable period in 2004. First quarter 2005 interest income
of $2,412,771, an increase of $350,440 or 17.0% over the same period in 2004,
includes $2,279,683 income on loans, $119,863 income on securities, and $13,225
income on federal funds sold and other interest-bearing accounts. Interest
income of $2,062,331 during the first quarter of 2004 included $1,914,620 of
income on loans, $141,624 income on investment securities, and $6,087 income on
federal funds sold and other interest-bearing accounts. Interest expense of
$666,060 for the first quarter of 2005, down $17,714 or 2.6% from the same
period in 2004, consists of interest on deposits of $581,683, and on other
borrowings of $84,377. First quarter 2004 interest expense of $683,774 consisted
of interest on deposits of $551,727, and interest on other borrowings of
$132,047. An increase in yields on interest earning assets, coupled with a drop
in the cost of interest-bearing liabilities, and an increase in the amount of
interest earning assets, contributed to the increase in net interest income in
the first quarter of 2005, compared to the same quarter of 2004. Income from
available-for-sale securities is down from the first quarter of 2004 primarily
because of a decrease in average securities for the period. Approximately
$5,000,000 in securities were sold during the first quarter of 2004, and the
income from those securities, while in the securities portfolio, contributed to
the variance in income for the first quarter of 2004 compared to the first
quarter of 2005. The drop in the cost of interest-bearing liabilities in the
first quarter of 2005, compared to the same period in 2004, was primarily due to
the continued repricing of deposits of the Bank after the reduction of
short-term interest rates by the Federal Reserve during 2001 of 475 basis
points, of another 50 basis points during the fourth quarter of 2002, and 25
basis points during the second quarter of 2003.The decrease in long-term debt is
due to the payoff in the third quarter of 2004 of $3,000,000 of debt at the
Company, using proceeds
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from the issuance of cumulative convertible preferred stock completed during the
third quarter of 2004. The increase in yields on interest earning assets during
the first quarter of 2005, compared to the same period of 2004, is primarily
attributable to the increase by 175 basis points ofshort-term interest rates
since late June 2004. The Bank is asset sensitive, meaning assets reprice faster
to changes in short-term rates than do liabilities. In a rising short-term rate
environment, such as occurred during the first quarter of 2005, more of the
Bank's interest earning assets, primarily loans, reprice up 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, 2005,
was $35,000, a decrease of $40,000 over the total of $75,000 for the same
quarter of 2004. As shown in the table in Footnote 3, the Company had net
recoveries of loans charged off totaling $11,149 for the first quarter of 2005,
compared to net charge-offs totaling $6,930 for the same quarter of 2004, a
positive variance of $18,079.
NON-INTEREST INCOME
Non-interest income for the three months ended March 31, 2005 and 2004,
respectively, was $331,896 and $268,724, an increase of $63,172 or 23.5%. Income
from service charges on deposit accounts increased $20,983, or 10.9%, from
$192,935 during the first quarter of 2004 to $213,918 for the first quarter of
2005. The increase is primarily attributable to growth in accounts subject to
service charges. Income from the sale of secondary market loans increased
$19,211, from $63,571 during the first quarter of 2004 to $82,782 for the same
period of 2005.
NON-INTEREST EXPENSE
Non-interest expense was $1,359,891 in the first quarter of 2005, down from
$1,360,873 in the same quarter of 2004, a decrease of $982 or 0.1%. A decrease
in salary and employee benefit expense of $91,957, due primarily to a reduction
in FTE's, was partially offset by an increase of $46,636 in professional fees,
primarily legal fees, associated with the attempt to recover the $1,087,000
commercial loan charged off in 2003.
INCOME TAXES
Income tax expense has been calculated based on the Company's expected annual
rate for 2005. During the first quarter of 2005, income tax expense totaled
$232,500 compared to $65,800 for the same period of 2004. 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, 2005 were $172,098,548, up from $169,512,086 at
December 31, 2004 and up from $164,315,029 a year ago. Average total assets for
the first quarter of 2005 were $170,769,954, up $7,360,568 from the first
quarter of 2004 average of $163,409,386.
LOANS
At March 31, 2005 loans (excluding mortgage loans held for sale) totaled
$148,341,645, compared with $146,950,427 at December 31, 2004 and $141,196,440 a
year ago, an increase of $1,391,218 and $7,145,205 respectively. Loans averaged
$145,788,428 during the first quarter of 2005, an increase of $7,662,066 or
5.5%, over the average total of $138,126,362 for the first quarter of 2004.
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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. Management classifies commercial
and commercial real estate loans as non-accrual when principal or interest is
past due 90 days or more and the loan is not adequately collateralized and is in
the process of collection, or when, in the opinion of management, principal or
interest is not likely to be paid in accordance with the terms of the
obligation. Consumer loans are charged off after 120 days of delinquency unless
adequately secured and in the process of collection. Non-accrual loans are not
reclassified as accruing until principal and interest payments are brought
current and future payments appear reasonably certain. Loans are categorized as
restructured if the original interest rate, repayment terms, or both were
restructured due to deterioration in the financial condition of the borrower.
However, restructured loans that demonstrate performance under the restructured
terms and that yield a market rate of interest may be removed from restructured
status in the year following the restructure.
The Bank had non-performing loans totaling $612,365 at March 31, 2005, compared
to $720,041 at December 31, 2004 and $903,125 at March 31, 2004. Included in the
non-performing loan total at March 31, 2005 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 the March 31, 2005 non-performing loan total are
six loans totaling $94,313 that were greater than 90 days past due.
Non-performing assets are defined as non-performing loans, foreclosed real
estate, and other foreclosed property. The Bank had non-performing assets of
$767,365 at the end of the first quarter of 2005, comprised of the above
mentioned non-performing loans, and foreclosed real estate totaling $155,000.
The Bank had non-performing assets of $720,041 at December 31, 2004, 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 $1,766,714 at March 31,
2005, an increase of $46,149, or 2.7% over the December 31, 2004 level of
$1,720,565. The allowance represents 1.19% of period-end loans, compared to
1.17% of period-end loans at December 31, 2004. 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 $12,888,985 at
December 31, 2004 to $12,399,301 at March 31, 2005. At March 31, 2004,
securities totaled $13,691,854.
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DEPOSITS AND BORROWED FUNDS
Total deposits averaged $132,675,203 in the first quarter of 2005, an increase
of $3,859,897 from the comparable 2004 quarter average of $128,815,306. As of
March 31, 2005, total deposits were $135,327,567, and included $122,448,413 of
interest bearing deposits. This compares to total deposits of $130,528,737 at
December 31, 2004, which included $115,513,433 of interest bearing deposits.
Total deposits at March 31, 2004, were $130,305,554, and included interest
bearing deposits of $96,446,861.
The Bank had $4,299,131 of deposits secured by securities sold under agreements
to repurchase on March 31, 2005. These obligations, which mature in one business
day, are swept daily from customers' demand deposit accounts. These balances
averaged $3,730,461 during the first quarter of 2005.
At March 31, 2005, 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, 2005, the Bank had three outstanding FHLB advances totaling $13,000,000. The
first FHLB advance, which was issued May 2, 2003, matured May 2, 2005 and had a
fixed interest rate of 1.90%. This advance was replaced by a $3,000,000 advance,
issued May 2, 2005, which has a fixed interest rate of 4.19%, and matures May 2,
2007. 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, 2005, the Bank had available collateral
to borrow an additional $9.1 million from the FHLB.
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, 2005,
December 31, 2004, and March 31, 2004, the regulatory minimum capital ratios,
and the regulatory minimum capital ratios for well-capitalized companies:
March 31, December 31, March 31,
2005 2004 2004
----- ----------- ----
Tier 1 risk based ...... 11.95% 11.80% 8.78%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 6.00 6.00 6.00
Total risk based ....... 13.18% 13.00% 10.03%
Regulatory minimum ..... 8.00 8.00 8.00
Well-capitalized minimum 10.00 10.00 10.00
Leverage ............... 10.14% 10.00% 7.40%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 5.00 5.00 5.00
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The table below sets forth the Company's ratios as of March 31, 2005, December
31, 2004, and March 31, 2004, the regulatory minimum capital ratios, and the
regulatory minimum capital ratios for well-capitalized companies:
March 31, December 31, March 31,
2005 2004 2004
----- ---- ----
Tier 1 risk based ........... 9.59% 9.43% 6.97%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 6.00 6.00 6.00
Total risk based ............. 13.70% 13.55% 8.23%
Regulatory minimum ..... 8.00 8.00 8.00
Well-capitalized minimum 10.00 10.00 10.00
Leverage .................... 8.14% 7.99% 5.88%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 5.00 5.00 5.00
All capital ratios at the Bank and Company increased from March 31, 2004 to
March 31, 2005, as a result of the sale of Preferred Stock by the Company during
the third quarter of 2004, and the subsequent injection of capital into the
Bank. The sale of the Preferred Stock netted $7,659,340 to the Company. See note
7 of the Notes to the Condensed Consolidated Financial Statements. All ratios
for the Bank and the Company are greater than the minimum capital ratios for
well-capitalized companies as of March 31, 2005.
Liquidity is the measure of the Bank's ability to fund customer's needs for
borrowings and deposit withdrawals. In the first quarter of 2005, the Company's
principal source of funds has been the acquisition of customers' deposits,
repayment of loans, and other funds from bank operations.
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, 2004.
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ITEM 3. CONTROLS AND PROCEDURES
As of March 31, 2005, 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 31,2005 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 March 31,2005, 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 6. Exhibits
The exhibits listed on the Exhibit Index of this Form 10-QSB are
filed as a part of this report.
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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 16, 2005 /s/ Mary D. Cohron
------------------
Mary D. Cohron
President and Chief Executive Officer
(Principal Executive Officer)
May 16, 2005 /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)).
3.3 Articles of Amendment to Amended and Restated Articles of Incorporation
of Citizens First Corporation (incorporated by reference to Exhibit 3.3
of the Company's Form 10-QSB dated June 30, 2004.)
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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