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As filed with the Securities and Exchange Commission on September 10, 2003
Registration No. 333-103238
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CITIZENS FIRST CORPORATION
(Name of small business issuer in its charter)
Kentucky 6122 61-0912615
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
1805 Campbell Lane, Bowling Green, Kentucky 42104
(270) 393-0700
(Address and telephone number of principal executive offices
and principal place of business)
Mary D. Cohron, President and Chief Executive Officer
Citizens First Corporation
1805 Campbell Lane, Bowling Green, Kentucky 42104
(270) 393-0700
(Name, address and telephone number of agent for service)
Copies to:
Caryn F. Price, Esq. James A. Giesel, Esq.
Wyatt, Tarrant & Combs, LLP Frost Brown Todd LLC
500 West Jefferson Street, Suite 2800 400 West Market Street, 32nd Floor
Louisville, Kentucky 40202 Louisville, Kentucky 40202
(502) 589-5235 (502) 589-5400
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. X
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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PROSPECTUS
[CITIZENS FIRST CORPORATION LOGO]
606,060 SHARES OF COMMON STOCK
Citizens First Corporation is offering 606,060 shares of our common stock,
resulting in a 94% increase in our outstanding shares if all shares offered are
sold. The current public market for our common stock is very thinly traded. You
should not invest in this offering unless you view your investment as a
long-term one. Our common stock is quoted on the Over the Counter Bulletin Board
under the symbol "CZFC.OB". On September 3, 2003, the closing price of the
common stock as reported on the Over the Counter Bulletin Board was $14.55 per
share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 11.
PER SHARE TOTAL
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Public offering price $15.50 $9,393,930
Underwriter fees $ 0.775 $ 469,696
Proceeds, before expenses, to Citizens First Corporation $14.725 $8,924,234
Once made, subscriptions may not be revoked. The shares are being offered
on a "best efforts" basis through Winebrenner Capital Partners, LLC. The
underwriter is not required to sell any specific number or dollar amount of
shares but will use its best efforts to sell the shares offered. We intend to
close sales of shares respecting subscriptions we accept under the offering on a
continuous basis. The offering will continue until October 31, 2003, unless
earlier terminated or extended in the discretion of our board of directors to a
date not later than November 14, 2003. Until your subscription is accepted, all
funds will be placed in an escrow account at Bank One Trust Company, Louisville,
Kentucky. Subscription funds will not accrue interest prior to acceptance. We
intend to accept subscriptions promptly, but we can withhold acceptance until
the final termination date. If your subscription is rejected or the offering is
terminated prior to acceptance of your subscription, your subscription funds
will be returned promptly.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION OR REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE. THE SHARES OF OUR COMMON STOCK ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OBLIGATIONS OF ANY BANK AND ARE NOT INSURED BY THE FDIC OR
ANY OTHER GOVERNMENTAL AGENCY.
WINEBRENNER CAPITAL PARTNERS, LLC
The date of this prospectus is September __, 2003.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the Securities and Exchange Commission declares
our registration statement effective. This prospectus is not an offer to sell
these securities and is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
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[CITIZENS FIRST CORPORATION LOGO]
MARKET AREA
[MAP OF KENTUCKY WITH TEN COUNTIES BLOWN UP
AND A STAR DESIGNATING WARREN COUNTY AND SIMPSON COUNTY]
* LOCATIONS OF CURRENT BANKING OFFICES OF CITIZENS FIRST
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TABLE OF CONTENTS
Summary...................................................................... 4
Risk Factors................................................................. 11
Forward Looking Statements....................................................17
The Offering..................................................................18
Use of Proceeds...............................................................24
Price Range of our Common Stock...............................................25
Dividends.....................................................................27
Dilution......................................................................28
Capitalization................................................................29
Selected Financial Data.......................................................30
Management's Discussion and Analysis of Financial Condition and Results
of Operation...............................................................31
Business......................................................................58
Supervision and Regulation....................................................68
Management....................................................................81
Principal Shareholders........................................................84
Description of Our Capital Stock..............................................85
Selected Provisions of our Articles of Incorporation and Bylaws
and Kentucky Law...........................................................86
Experts.......................................................................90
Legal Matters.................................................................90
Where You Can Find More Information...........................................90
Index to Consolidated Financial Statements...................................F-1
You should rely only on the information contained in this prospectus. We have
not, and the underwriter has not, authorized any other person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriter is not, making an offer to sell these securities in any jurisdiction
where the offer or sale is not permitted. You should assume that the information
appearing in this prospectus is accurate only as of the date on the front cover
of this prospectus. Our business, financial condition, results of operations and
prospects may have changed since that date.
We will not provide subscription materials to any person who resides in any
foreign country or in any state of the United States if we determine that
compliance with the securities laws of such country or state would be
impracticable, and we will not accept any subscriptions from subscribers located
in those states or countries. Persons who receive a subscription document or who
wish to subscribe from states other than Kentucky, Tennessee, Indiana, Georgia
and Florida, should contact Winebrenner Capital Partners, LLC, telephone (502)
671-0015 or toll free (877) 671-0015.
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SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU
SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE RISK FACTORS AND OUR FINANCIAL STATEMENTS
AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS, TO UNDERSTAND THIS
OFFERING FULLY.
CITIZENS FIRST AND CITIZENS FIRST BANK
ORGANIZATION AND BACKGROUND. Citizens First Corporation is a one-bank
holding company headquartered in Bowling Green, Kentucky. We provide general
commercial and consumer banking services through our wholly-owned banking
subsidiary, Citizens First Bank. We operated from 1975 to 1998 as an investment
club with a small number of shareholders. In late 1998 and early 1999, we filed
the appropriate regulatory applications and received regulatory approval to
become a bank holding company through the organization and ownership of Citizens
First Bank.
Citizens First Bank opened for business in February 1999. At June 30, 2003,
we had consolidated assets of $154.4 million, deposits of $127.9 million and
stockholders' equity of $8.1 million. See "Summary Consolidated Financial Data"
below, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" on page 31 and our financial statements beginning on page F-1.
We entered the banking business because, in recent years, some Bowling
Green banks were acquired by regional multi-bank holding companies headquartered
outside Bowling Green. In many cases, these acquisitions and consolidations were
accompanied by fee changes, branch closings, the dissolution of local boards of
directors, management and personnel changes and, in the perception of our
management, a decline in the level of personalized customer service. This
situation created a favorable opportunity for a new commercial bank that could
attract those customers who prefer to conduct business with a locally managed
institution that demonstrates an active interest in their businesses and
personal financial affairs. We believe that a locally managed institution is
better able to deliver more timely responses to customer requests, provide
customized financial products and services and offer customers the personal
attention of senior banking officers.
To meet the mortgage banking and title insurance needs of our customers, in
January 2003 we acquired Commonwealth Mortgage Company of Bowling Green, Inc.,
an originator of 1-4 family residential mortgages, and Southern Kentucky Land
Title, a provider of title insurance agency services.
BUSINESS. Citizens First Bank is an independent, community-oriented full
service financial institution. It conducts a general commercial and consumer
banking business. These services include the usual deposit functions of
commercial banks, including business and personal checking accounts, "NOW"
accounts and savings accounts, business and commercial loans, residential
mortgages and consumer loans and cash management services. Citizens First Bank
is a Kentucky chartered bank which is not a member of the Federal Reserve
System, and its deposits are insured
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by the Bank Insurance Fund of the Federal Deposit Insurance Corporation. See
"Business" on page 58.
Our primary service area is Warren County, Kentucky, and the surrounding
counties. Citizens First Bank operates through its main office in Bowling Green,
Kentucky and three branch offices.
RECENT DEVELOPMENTS. On June 27, 2003, we sold 79,625 shares of our common
stock in this offering and received net proceeds of approximately $1,026,000,
all of which we contributed to the capital of our subsidiary bank.
Compared to net income of $207,997 or $0.32 per common share for the second
quarter of 2002, we reported a consolidated net loss for the second quarter of
2003 of ($748,086), or ($1.16) per common share. For the six months ended June
30, 2003, we reported a net loss of ($630,337), or ($0.98) per common share,
compared to net income of $338,886, or $0.53 per common share for the same
period in 2002. During the second quarter we recorded a provision for loan
losses of $1,490,000. For the first six months of 2003, we recorded a provision
for loan losses of $1,643,000, an increase of $1,543,000 over the total of
$100,000 for the same period of 2002. Although Citizens First's and Citizens
First Bank's Tier 1 risk-based and leverage ratios exceeded the minimum capital
ratios for "well-capitalized" institutions at June 30, 2003, Citizens First's
total risk-based capital ratio did not meet the regulatory minimum total
risk-based capital ratio at June 30, 2003 and Citizens First Bank's total
risk-based capital ratio did not meet the minimum capital ratio for
"well-capitalized" institutions. See "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operation - For the Three
Months and Six Months Ended June 30, 2003."
We recorded approximately $1,675,000 of nonperforming loans in the second
quarter of 2003, consisting of three loans to one borrower with its principal
place of business in Bowling Green, Kentucky. We placed the loans on non-accrual
status during the second quarter of 2003. The loans are secured by substantially
all the assets of the borrower and the guaranties of three individuals, a
limited partnership and a limited liability company. The borrower's assets
consist primarily of interests in two energy related properties located in Texas
and Louisiana. During the second quarter of 2003, the borrower advised us that
one of the properties, which it had expected to produce significant earnings,
had failed to produce any revenues, that it was unlikely to ever produce
revenues and that the property's value is now negligible and further that the
revenue from the second property is expected to be minimal. The borrower
terminated its operations and began winding up its business. We have demanded
payment in full of the loans by the borrower and the guarantors. To date, the
borrower and the guarantors have refused to pay. We have initiated legal action
against the guarantors and intend to vigorously enforce our remedies under the
loan documents and against each of the guarantors. There can be no assurance
however that we will be successful in our collection of the loans or under the
guaranties.
With respect to the nonperforming loans described above, for the second
quarter of 2003, we specifically allocated $1,087,000 to the provision for loan
losses of the total $1,490,000 second quarter provision. In addition to these
nonperforming loans, we also identified other potential problem loans in the
loan portfolio where known information about possible credit problems of the
borrowers causes management to have serious doubts as to the ability of such
borrowers to comply
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with the present loan repayment terms. These potential problem loans include two
loans to two affiliated borrowers, one in the amount of $49,000 and one in the
amount of $1,478,000. The borrower of the smaller loan declared bankruptcy in
February 2003. We specifically allocated $229,050 to the provision for loan
losses with respect to these two loans. The factors influencing our decision to
significantly increase the allowance for loan losses in the second quarter with
respect to these loans and the nonperforming loans described above include
management's continued review of the specific loans and assessment of the
borrowers' ability to comply with the present repayment terms of the loans,
overall national, regional and local economic conditions and the results of a
periodic regulatory examination of our bank subsidiary which concluded in July
2003.
The increase in our provision for loan losses and the corresponding
increase in our allowance for loan losses for the quarter ended June 30, 2003
had a significant adverse effect on the book value per share of our common stock
as of June 30, 2003. Including the approximately $1,026,000 in net proceeds we
received from the sale of 79,625 shares of our common stock on June 27, 2003,
the book value per share of our common stock as of June 30, 2003 was
approximately $11.27, compared to a book value per share of $12.19 at December
31, 2003. The $15.50 offering price per share for our common stock represents a
multiple of our estimated book value per share as of June 30, 2003 of 1.38. You
should consider the book value per share of our common stock, as compared to the
offering price per share of our common stock, when making a decision to purchase
shares of our common stock in the offering. If we allocate additional amounts to
the allowance for loan losses with respect to the potential problem loans
described above or other loans in subsequent quarters, or we are ultimately
unsuccessful in our collection of these loans from the borrowers and/or the
guarantors, the book value per share of our common stock will be further
significantly and adversely affected. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Application of Critical
Accounting Policies", "-Results of Operations - Provision for Loan Losses" and
"- Balance Sheet Review -Asset Quality".
The problems that we experienced in our loan portfolio in the second
quarter, particularly with respect to commercial loans, were the most
significant contributing factor to the net loss that we incurred in the second
quarter and the six months ending June 30, 2003. The increase in our loan loss
reserve of $1,600,649, from $1,300,258 at December 31, 2002 to $2,900,907 at
June 30, 2003, was primarily attributable to maintaining an adequate reserve in
light of the problems in our loan portfolio and, to a lesser degree, to the loan
growth we have experienced in the first six months of 2003. Our subsidiary bank
and its primary regulators have entered into an agreement that will implement
several steps intended to improve our performance. These steps will include
refining and refocusing our credit risk analysis, underwriting, monitoring and
evaluation functions with the goal of improving the quality of our loan
portfolio, quickly identifying, and addressing, potential problem loans and
lessening our risk position in each asset that we have internally classified as
a problem loan or identified as a potential problem loan. These comprehensive
loan review procedures will provide for a strengthened risk analysis of the loan
portfolio and will include a review of the lending authority of each of our loan
officers and loan committee, as well as our staffing requirements, particularly
in the area of loan administration. In this regard, we intend to hire and/or
train an individual whose primary responsibility will be the independent risk
analysis of our loan portfolio on an ongoing basis. We will also review,
reevaluate and implement long range strategic plans for improving our operating
performance and maintaining adequate capital levels, given our recent
performance and our anticipated future growth. Throughout the term of the
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regulatory agreement, Citizens First Bank will be required to maintain a minimum
Tier 1 capital to total assets ratio of 7%. A committee of our board of
directors, of which at least two-thirds must be independent, outside directors,
will be responsible for ensuring that our subsidiary bank complies with this
regulatory agreement. There is no assurance that the steps we have taken and
will be taking will ultimately prove adequate or effective at improving our
profitability or that future earnings, if any, will meet the level of earnings
of our competitors or that is otherwise prevalent in the banking industry. See
"Risk Factors", "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operation - For the Three Months and Six
Months Ended June 30, 2003" and "Supervision and Regulation - Capital Adequacy"
and "- Prompt Corrective Action."
BUSINESS STRATEGY. We emphasize experienced local management with a strong
commitment to the communities located within our primary market area. Our
officers and directors are active in these communities and we believe that these
communities and their business leaders have supported, and will continue to
support, a locally owned and managed financial institution committed to
providing outstanding customer service and banking products. Citizens First Bank
competes aggressively for banking business through a systematic program of
directly calling on both customers and referral sources, such as attorneys,
accountants, mortgage brokers, insurance agents and other business people, many
of whom are already known to our officers and directors.
We are committed to developing strong customer relationships by providing:
o customer access to executive management;
o continuity in officer and staff personnel;
o an active personal call program by officers;
o an understanding of customers' businesses and needs;
o prompt response to customer requests; and
o development of relationships that are durable and that grow as Citizens
First Bank and its customers continue in business.
We have hired and will continue to hire experienced staff to provide
personalized service and to generate competitively priced loans and deposits.
This experienced staff has access to technology, software and database systems
selected to deliver high-quality products and provide responsive service to
customers. Through an agreement with a third-party service provider to provide
data processing services and customer accounts statement preparation, we reduce
the in-house personnel and equipment required to deliver such services and
products.
MANAGEMENT. Mary D. Cohron is our President and Chief Executive Officer and
has been since 1998. Ms. Cohron previously served as a director of Trans
Financial, Inc., a bank holding company previously located in Bowling Green. She
headed the Tax and Revenue Anticipation Note Program for the Kentucky School
Boards Association and provided strategic planning and consultant services for
small businesses. Barry D. Bray is our Vice President and Chief Credit
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Officer. Mr. Bray served as executive vice president and chief credit officer
for Trans Financial, Inc. from 1982 to 1998. Bill D. Wright is our Vice
President and Chief Financial Officer. From 1995 to 1998, Mr. Wright was
Assistant Controller and Assistant Treasurer for Trans Financial Bank. M. Todd
Kanipe is our Vice President and Trust Relationship Manager. From 1990 to 1998,
Mr. Kanipe was a commercial lender for Trans Financial Bank.
Our board of directors is made up of individuals with broad backgrounds in
business, real estate, banking and government, including several individuals who
have served as executive officers of some of Bowling Green's most prominent
businesses.
As of June 30, 2003, we had 45 full-time and 18 part-time employees.
LOCATION OF EXECUTIVE OFFICES
The address and phone number of our executive offices are:
1805 Campbell Street
Bowling Green, Kentucky 42104
(270) 393-0700
THE OFFERING
Common stock offered 606,060 shares. All of our directors and
executive officers have indicated their
intention to purchase shares in the
offering. See "The Offering" on page 18
and "Principal Shareholders" on page 84.
Common stock outstanding after this
offering 1,249,113 shares
Net proceeds We anticipate that our net proceeds from
this offering will be approximately
$8,675,000.
Minimum/maximum subscription The minimum number of shares for which
you may subscribe is 100, for an
investment of $1,550. No maximum
subscription has been established.
However, we may reject, in whole or in
part, any subscription, whether or not
there are available shares, and we may
determine, in our sole discretion, the
allocation of shares to subscribers.
Determination of offering price The offering price has been determined
primarily based on trades of our common
stock prior to the commencement of this
offering, although somewhat limited, and,
to a lesser degree, comparisons of the
trading prices of securities of similarly
sized peer issuers in our geographic
region relative to book value
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per share. The common stock of these
issuers traded at an average multiple of
book value per share of approximately
1.52 prior to the commencement of this
offering. The offering price per share
for our stock represents a multiple of
our book value per share as of June 30,
2003 of 1.38.
Use of proceeds We intend to use the net proceeds of the
offering for general corporate purposes,
including for contribution to Citizens
First Bank's capital and to pursue future
growth opportunities through further
expansion of its existing lending and
investment activities, and possible
branch expansion. While there can be no
assurance, we expect to continue to
experience substantial growth. As our
assets increase, our need for capital
increases proportionately, and we do not
yet expect earnings to satisfy our
capital needs. In general, without
raising additional capital, we can
increase our assets only by 10 to 12
times the level of our earnings.
A portion of the proceeds will be used to
repay all or a portion of our borrowings
under our line of credit. At June 30,
2003, we owed approximately $2.3 million
under our line of credit. The proceeds
will also be available for financing
possible acquisitions of other
institutions or for investments in
activities which are permitted for bank
holding companies. Except as described in
this prospectus, we have no definitive
plans for any additional branches or for
any acquisitions or investments. See "Use
of Proceeds" at page 24.
Expiration time The offering will continue until
October 31, 2003, unless earlier
terminated, or extended in the discretion
of the board of directors to a date not
later than November 14, 2003.
Minimum offering There is no minimum aggregate number of
shares that must be sold in the offering.
We intend to complete the offering if any
valid subscriptions are received before
the expiration of the offering.
Subscriptions irrevocable Once your completed subscription
agreement is received, you may not revoke
your subscription. Your subscription
funds will not be released to us or for
our
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use or commingled with our funds unless
your subscription is accepted and shares
are to be issued to you with respect to
your funds.
Risk factors See "Risk Factors" on page 11 for a
discussion of factors you should
carefully consider before deciding to
invest in shares of our common stock.
Trading market and symbol OTCBB: CZFC.OB
The number of shares outstanding after the offering is based upon our shares
outstanding as of June 30, 2003, assumes the sale of all of the shares offered
and excludes a total of 160,000 shares issuable under our stock option plans.
Net proceeds assumes the sale of all of the shares offered after deducting
estimated offering expenses and the underwriter's fees and commissions.
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary historical consolidated financial
data from our consolidated financial statements and should be read in
conjunction with our consolidated financial statements including the related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 31. Except for the data under
"Performance Ratios", "Asset Quality Ratios" and "Capital Ratios", the summary
historical consolidated financial data as of December 31, 2002 and December 31,
2001 and for the years ended December 31, 2002 and December 31, 2001 is derived
from our audited consolidated financial statements and related notes, which are
included elsewhere in this prospectus, and the summary historical consolidated
financial data as of and for the six months ended June 30, 2003 and June 30,
2002 is derived from unaudited consolidated financial statements for those
periods, which are also included elsewhere in this prospectus. The unaudited
consolidated financial statements include all adjustments, consisting only of
normal recurring items, which our management considers necessary for a fair
presentation of our financial positions and results of operations for these
periods. The financial condition and results of operations as of and for the six
months ended June 30, 2003 do not purport to be indicative of the financial
condition or results of operations to be expected as of or for the fiscal year
ending December 31, 2003.
AT OR FOR THE SIX MONTHS ENDED AT OR FOR THE YEARS ENDED
JUNE 30, DECEMBER 31,
2003 2002 2002 2001
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INCOME STATEMENT DATA:
Interest income $3,613,144 $3,176,398 $6,396,580 $6,450,510
Interest expense 1,386,409 1,429,608 2,773,904 3,475,087
Net interest income 2,226,735 1,746,790 3,622,676 2,975,423
Provision for loan losses 1,643,000 100,000 195,000 664,000
Non-interest income 847,932 332,868 772,456 379,136
Non-interest expense 2,396,254 1,463,762 3,064,555 2,709,222
Net income (loss) (630,337) 338,886 745,218 342,402
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BALANCE SHEET DATA:
Total assets $154,435,574 $105,685,701 $128,443,129 $104,819,716
Total securities 17,688,014 11,392,497 16,186,406 10,200,866
Total loans, net 121,886,906 87,515,329 94,658,798 83,524,425
Allowance for loan losses 2,900,907 1,289,321 1,300,258 1,195,924
Total deposits 127,884,553 88,467,670 105,893,333 87,890,828
Repurchase agreements and short-term borrowings 4,431,233 5,122,727 5,833,512 3,411,736
borrowings
Total stockholders' equity 8,146,028 7,422,981 7,838,252 7,066,376
PER SHARE DATA:
Earnings (loss) per share - basic $(0.98) $0.53 $ 1.16 $0.53
Earnings (loss) per share -diluted (0.98) 0.53 1.16 0.53
Book value 11.27 11.54 12.19 10.99
PERFORMANCE RATIOS:
Return on average assets (.96%) .67% 0.70% 0.40%
Return on average equity (16.26%) 9.40% 9.97% 5.08%
Net interest margin (1) 3.53% 3.61% 3.58% 3.67%
ASSET QUALITY RATIOS:
Nonperforming assets to total loans 1.43% .56% 0.19% 0.80%
Net loan charge-offs to average loans .04% .01% 0.10% 0.40%
Allowance for loan losses to total loans 2.32% 1.45% 1.36% 1.41%
CAPITAL RATIOS:
Leverage ratio (2) 5.39% 7.04% 6.80% 7.30%
Tier 1 risk-based capital ratio 6.34% 8.27% 7.80% 8.20%
Total risk-based capital ratio 7.60% 9.52% 9.10% 9.40%
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(1) Net interest margin is the result of net interest income for the period
divided by average interest earning assets.
(2) Leverage ratio is defined as Tier 1 capital (pursuant to risk-based capital
guidelines) as a percentage of adjusted average assets.
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK IN
THIS OFFERING. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IF
ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, WE MAY NOT BE ABLE TO CONDUCT OUR
BUSINESS AS CURRENTLY PLANNED AND OUR FINANCIAL CONDITION OR OPERATING RESULTS
COULD BE MATERIALLY HARMED, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE
AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
WE MAY NOT BE SUCCESSFUL IN THE IMPLEMENTATION OF OUR BUSINESS STRATEGY.
We cannot assure you that we will be successful in the implementation of
our business strategy. See "Business - Business Strategy" on page 58. The growth
and expansion of our business has placed, and will continue to place,
significant demands on our management and our operational and financial
resources. We expect to incur additional non-interest expense in 2003, largely
as a result of our opening of a new branch in Bowling Green and a new branch in
Franklin, Kentucky. Successful implementation of our business strategy requires
continued growth and will
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depend on our ability to attract a significant number of customers, profitably
manage our assets, liabilities and capital, develop necessary business
relationships to provide products and services, implement and improve
operational, financial and management information systems and other technology,
and hire and train additional qualified personnel.
IF OUR ASSUMPTIONS ABOUT THE COLLECTIBILITY OF OUR LOAN PORTFOLIO ARE WRONG AND
OUR ALLOWANCE FOR LOAN LOSSES IS NOT SUFFICIENT TO COVER FUTURE LOAN LOSSES, WE
MAY INCUR ADDITIONAL LOSSES AND BE SUBJECT TO GREATER REGULATORY SUPERVISION AND
SANCTIONS.
We substantially increased our allowance for loan losses for the six months
ended June 30, 2003, from $1,289,321 at June 30, 2002 to $2,900,907 at June 30,
2003, because of increases in our nonperforming loans and potential problem
loans. Management makes various assumptions and judgments about the
collectibility of our loan portfolio, including the creditworthiness of our
borrowers and the value of the collateral, if any, securing the repayment of
many of our loans. If our assumptions are wrong, our allowance may not be
sufficient to cover future loan losses. In addition, federal and state
regulators who periodically review our allowance for loan losses can require us
to increase our provision for loan losses or recognize further loan charge-offs,
based on judgments different than those of our management. There is no assurance
that our allowance for loan losses will be sufficient to cover future loan
losses in our loan portfolio or that additional substantial increases in our
allowance for loan losses will not be required as a result of increased
nonperforming loans and potential problem loans.
In connection with the increase in our allowance for loan losses, our
subsidiary bank and its primary regulators entered into an agreement that will
implement several steps intended to improve our performance and credit quality,
including lessening our risk position in each asset that we have internally
classified as a problem loan or identified as a potential problem loan,
strengthening the risk analysis of the loan portfolio, reviewing loan
administration staffing requirements and lending authority and hiring and/or
training an individual whose primary responsibility will be the independent risk
analysis of our loan portfolio on an ongoing basis. There is no assurance that
the steps we will be taking will ultimately prove adequate or effective at
improving our performance and credit quality.
If the assumptions we make in determining our allowance for loan losses are
wrong, or we are unable to or do not comply with the regulatory agreement, or we
otherwise fail to comply with regulatory standards or improve our performance
and credit quality, we may be subject to greater regulatory scrutiny and
substantial sanctions by federal and state regulators. See "Supervision and
Regulation."
IF WE OR OUR SUBSIDIARY BANK DO NOT HAVE ADEQUATE CAPITAL, WE WILL BE SUBJECT TO
AN INCREASED LEVEL OF REGULATORY SUPERVISION AND OUR BUSINESS, OPERATING RESULTS
AND FINANCIAL CONDITION WILL BE ADVERSELY AFFECTED.
Our total risk-based capital ratio did not meet the regulatory minimum
total risk-based capital requirement at June 30, 2003 and our subsidiary bank's
total risk-based capital ratio did not meet the minimum capital requirement for
"well-capitalized" institutions at June 30, 2003. We anticipate that our
existing capital resources, together with the net proceeds of this offering, if
successful, will adequately satisfy our foreseeable capital requirements.
However, we cannot be
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certain that our capital, even if all the shares being offered in this offering
are sold, will allow our subsidiary bank to meet the capital requirements of the
regulatory agreement between the bank and its regulators, or will allow us or
our subsidiary bank to meet the minimum capital ratios for "well-capitalized"
institutions or be adequate to support future growth. If we are not able to
raise and maintain sufficient capital, we may consider alternative measures,
such as slowing or reducing loan growth or raising capital through other means.
Any necessary future equity or debt financing, if available at all, may be on
terms which are not favorable to us and, in the case of equity financing, could
result in dilution to your share ownership. If adequate capital is not
available, we will be subject to an increased level of regulatory supervision
and our business, operating results and financial condition could be adversely
affected. See "Supervision and Regulation - Prompt Corrective Action" on page
69.
WE MAY NOT GROW AS RAPIDLY AS WE HAVE IN THE PAST. IF WE ARE UNABLE TO GROW OUR
ASSETS, OUR ABILITY TO INCREASE OUR LONG-TERM PROFITABILITY WILL SUFFER.
Our assets increased from $22 million at June 30, 1999 to approximately
$154 million at June 30, 2003, and our quarterly net interest income after
provision for loan losses has increased from $79,683 in the second quarter of
1999 (our first full calendar quarter of banking operations) to $1,160,403 in
the second quarter of 2003. Our future profitability will depend on our
continued ability to grow our assets while maintaining asset quality. We have
incurred substantial expenses in management, sales and customer support
personnel and other infrastructure to support our future growth, and we expect
to continue to incur such expenses as we open and expand new branch offices. We
may not grow as rapidly as we have over the past four years, and we may not grow
at all. To continue to grow, we will need to provide sufficient capital to
Citizens First Bank and we do not yet expect earnings to satisfy our capital
needs. In general, without raising additional capital, we can increase asset
levels only by 10 to 12 times the level of our earnings. We may not be able to
receive the regulatory approvals, such as branch approvals, that will be
necessary for such growth. If we are unable to grow, our ability to increase our
long-term profitability will suffer.
FLUCTUATIONS IN INTEREST RATES COULD REDUCE OUR NET INTEREST INCOME. WE REALIZE
INCOME PRIMARILY FROM THE DIFFERENCE BETWEEN INTEREST EARNED ON LOANS AND
INVESTMENTS AND INTEREST PAID ON DEPOSITS AND BORROWINGS.
Approximately 82.4% or our earnings during 2002 consisted of net interest
income, the difference between interest earned on loans and investments and the
interest paid on deposits and borrowings. Most of our interest bearing
liabilities tend to be at fixed rates of interest for a fixed term and can only
be repriced at maturities while the yield on a significant portion of our
interest earning assets fluctuates with changes in an external index, primarily
the prime rate. As a result, our assets will reprice faster than our liabilities
and, in a decreasing rate market, such as we experienced in 2001 and 2002, the
yield on our assets will decline faster than the rates paid on our liabilities.
This causes a decline in our net interest margin and may lower interest income
while interest expense does not fall as rapidly. In that event, our net income
may be adversely impacted. We are unable to predict fluctuations of market
interest rates, which are affected by many factors, including inflation,
recession, a rise in unemployment, tightening money supply, and domestic and
international disorder and instability in domestic and foreign financial
markets.
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BECAUSE A RELATIVELY HIGH PERCENTAGE OF OUR LOAN PORTFOLIO CONSISTS OF
COMMERCIAL LOANS AND COMMERCIAL REAL ESTATE LOANS IN AMOUNTS IN EXCESS OF
$1,000,000, PRIMARILY TO SMALL-TO-MEDIUM SIZED BUSINESSES, WE MAY EXPERIENCE
INCREASED NONPERFORMING LOANS AND OUR OPERATING RESULTS MAY BE ADVERSELY
AFFECTED.
At June 30, 2003, 15 loans totaling $20.3 million or 16% of our loan
portfolio consisted of commercial loans and commercial real estate loans in
excess of $1,000,000. All of our nonperforming loans at June 30, 2003 originated
from this portion of our loan portfolio. The increase in our allowance for loan
losses attributable to these nonperforming loans adversely affected our net
income and shareholders' equity for the quarter and six months ended June 30,
2003. Because a substantial focus of our marketing and business strategy is to
serve small-to-medium sized businesses in our primary market area, increased
nonperforming loans from this portion of our loan portfolio may adversely affect
our future results of operation and financial condition. See "Summary - Recent
Developments."
THE RESTRICTIONS ON CITIZENS FIRST BANK'S ABILITY TO PAY US DIVIDENDS COULD HAVE
A SUBSTANTIAL IMPACT ON OUR ABILITY TO FUND OUR HOLDING COMPANY OPERATIONS,
INCLUDING DEBT SERVICE ON FUTURE BORROWINGS.
We do not currently incur material expenses at the holding company level.
If material expenses are incurred in the future, however, we will need to
receive dividends from Citizens First Bank or have some other source of funds.
Due to regulatory constraints, no funds are currently available for the payment
of dividends from Citizens First Bank to us without prior regulatory approval.
WE RELY ON CERTIFICATES OF DEPOSIT IN EXCESS OF $100,000 FOR A SIGNIFICANT
PORTION OF OUR DEPOSIT FUNDING.
At December 31, 2002, $22.5 million, or 21.2%, of total deposits, consisted
of certificates of deposit in excess of $100,000. These depositors tend to be
more active in shopping for better interest rates and therefore are either
likely to move their deposits or require active repricing to market. In either
event, our net income may be adversely impacted as a result of decreased levels
of liquidity with which to fund growth in our interest earning assets or
increased interest expense.
WE ARE DEPENDENT ON THE BOWLING GREEN AND WARREN COUNTY ECONOMY AND THE ECONOMY
OF THE SURROUNDING REGION.
We are a one bank holding company with banking offices in only two
counties. Accordingly, our operations are materially dependent upon and
sensitive to the economy of the Bowling Green-Warren County area and the
surrounding ten county region known as the Barren River Area Development
District. An economic downturn or widespread labor management difficulties could
have a significant adverse effect on our earnings and financial condition.
COMPETITION WITH OTHER FINANCIAL INSTITUTIONS COULD ADVERSELY AFFECT OUR
PROFITABILITY.
According to FDIC deposit information as of June 30, 2003, there were 13
banking institutions, excluding credit unions, with offices in the Bowling Green
MSA. A number of these banking institutions have substantially greater resources
and lending limits, more numerous
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banking offices, a wider variety of banking and other financial services, and
much higher levels of core deposits than we do. In addition, we compete with
mortgage companies, insurance companies, consumer finance companies, brokerage
firms, credit unions, money market funds and other entities. This competition
may limit or reduce our profitability, reduce our growth and adversely affect
our results of operations and financial condition. See "Business - Competition"
on page 65.
CONSUMMATION OF THE OFFERING IS NOT SUBJECT TO THE RECEIPT OF SUBSCRIPTIONS FOR
A MINIMUM NUMBER OF SHARES AND SUBSCRIBERS WILL BE REQUIRED TO PURCHASE SHARES
EVEN IF LESS THAN ALL OF THE SHARES OFFERED ARE SOLD.
There is no minimum number of shares that must be sold in the offering and
subscriptions, once received, are irrevocable. The offering may be completed
even if substantially less than the total number of shares offered is sold. If
this happens, our capital would not be increased to the extent it would be if
all of the shares being offered were sold. If we can not meet minimum capital
standards or the capital standards imposed by our regulators, we will be subject
to an increased level of regulatory supervision, and we will have less capital
to fund future operations and growth, which could result in restricted or slower
growth and lower shareholder returns. We intend to accept subscriptions even if
the offering has not been fully subscribed. If we are required to raise
additional capital in the future, it could have a dilutive effect on earnings
per share and the relative voting power of our current shareholders. See "The
Offering" on page 18.
THE BOOK VALUE OF A SHARE OF OUR COMMON STOCK AFTER THE OFFERING WILL BE LOWER
THAN THE PRICE PAID FOR SHARES IN THE OFFERING.
If all of the shares being offered are sold, the net tangible book value
per share at June 30, 2003, after giving effect to completion of this offering,
would be $12.34 per share. Based on these assumptions, the post-offering book
value would be less than the offering price of $15.50 per share, and
accordingly, investors in the offering would experience dilution of $3.16, or
20%, per share, calculated on the basis of the difference between the offering
price and pro forma book value. See "Dilution" on page 28.
THE OFFERING PRICE DOES NOT NECESSARILY REFLECT THE FAIR MARKET VALUE OF THE
COMMON STOCK.
We principally looked to the price of trades known to have occurred prior
to the commencement of this offering in determining the offering price for the
common stock. No independent third party or negotiations were involved in the
determination of the offering price, and the price does not necessarily reflect
the market value of our common stock. The price at which our common stock trades
after the offering may be higher or lower than the offering price.
AN ACTIVE PUBLIC MARKET FOR OUR COMMON STOCK DOES NOT CURRENTLY EXIST, AND WILL
PROBABLY NOT EXIST AFTER THE OFFERING. AS A RESULT, SHAREHOLDERS MAY NOT BE ABLE
TO QUICKLY AND EASILY SELL THEIR COMMON STOCK.
While the common stock will be freely transferable by most shareholders, we
do not expect that there will be an active market for trading the common stock
following the offering. There has not been active trading in our common stock
and we cannot be sure that an active or established trading market will develop
following completion of the offering, or, if one develops, that it will
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continue, or whether the price of our common stock will be higher or lower than
the offering price. The common stock will not be listed on The Nasdaq National
Market, The Nasdaq SmallCap Market or any other securities market upon
completion of the offering.
Winebrenner Capital Partners, LLC facilitates quotations of our common
stock on the Over The Counter Bulletin Board and intends to do so following the
offering. It is not obligated to do this and the development of an active public
trading market depends upon the existence of willing buyers and sellers which is
not within our control or that of the underwriter. Even if a market maker should
make quotations of our common stock, market makers are not required to maintain
a continuous two-sided market and are free to withdraw firm quotations at any
time. Even with a market maker, the limited size of this offering, our lack of
earnings history and the absence of dividends within the foreseeable future will
impede the development of an active and liquid market for our common stock. You
should carefully consider the limited liquidity of your investment in the
shares.
NO UNDERWRITER HAS AGREED TO PURCHASE ANY OF THE COMMON STOCK AND WE MAY NOT BE
ABLE TO SELL ALL OF THE SHARES IN THE OFFERING.
The common stock is being sold through the efforts of Winebrenner Capital
Partners, LLC. Neither it nor any other person has any obligation to purchase,
or find purchasers for, any shares of common stock. See "The Offering - Manner
of Distribution" on page 24. There can be no assurance that any particular
number of shares will be sold. If less than all of the shares offered are
subscribed for, we may be unable to repay our existing indebtedness as
contemplated under "Use of Proceeds", and we will have less capital to fund
operations and growth, which could result in restricted or slower growth for
Citizens First Bank, slower expansion of activities and lower shareholder
returns. We could be required to raise additional capital earlier than if all of
the shares offered are sold.
OUR DIRECTORS AND EXECUTIVE OFFICERS OWN 22% OF OUR OUTSTANDING COMMON STOCK AS
OF JUNE 30, 2003 AND IT IS EXPECTED THAT ALL OF OUR DIRECTORS AND EXECUTIVE
OFFICERS HAVE PURCHASED OR WILL PURCHASE COMMON STOCK IN THE OFFERING.
Our directors and executive officers and their affiliates own 22% of our
outstanding shares of common stock as of June 30, 2003, and all of our directors
and executive officers have purchased or currently intend to purchase shares in
the offering. By voting against a proposal submitted to shareholders, the
directors and executive officers, as a group, may be able to make approval more
difficult for proposals requiring the vote of shareholders (such as mergers,
share exchanges, certain asset sales and certain amendments to our articles of
incorporation). See "Principal Shareholders" on page 84 and "Selected Provisions
of Our Articles of Incorporation and Bylaws and Kentucky Law" on page 86.
WE MAY ISSUE ADDITIONAL SHARES WHICH MAY DILUTE YOUR SHARE OWNERSHIP.
If all of the shares offered are sold under this offering, 1,249,113 shares
of common stock will be outstanding following the conclusion of the offering.
Our board of directors may issue additional shares up to the authorized maximum
of 5,000,000 shares of common stock and 500 shares of preferred stock without
prior shareholder approval and without allowing shareholders the
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right to purchase their pro rata portion of such shares. The issuance of any new
shares of common stock for whatever purpose would cause dilution in your
percentage ownership of common stock and perhaps in the value of your shares.
WE CAN DECIDE NOT TO ACCEPT ALL OR A PART OF YOUR SUBSCRIPTION.
We will have broad discretion in determining which subscriptions to accept,
in whole or in part, including if the offering is oversubscribed. In deciding
which subscriptions to accept, we may consider, among other factors, the order
in which subscriptions are received, a subscriber's potential to do business
with or to direct business to us, and the desire to have a broad distribution of
stock ownership. As a result, a subscriber cannot be assured of receiving the
full number of shares subscribed for, and may forego use of all or a portion of
such subscriber's funds pending allocation of available shares. See "The
Offering - General" and "- Acceptance and Refunding of Subscriptions" on pages
18 and 21.
WE HAVE NOT HISTORICALLY PAID CASH DIVIDENDS AND THERE CAN BE NO ASSURANCE THAT
WE WILL HAVE SUFFICIENT EARNINGS TO BE LEGALLY ABLE TO PAY DIVIDENDS.
Citizens First Bank is currently our sole revenue producing operation. As a
result, our ability to pay dividends depends on receiving dividends from
Citizens First Bank. The amount of dividends that Citizens First Bank may pay is
limited by state and federal laws and regulations and currently it is restricted
from paying us any dividends without prior regulatory approval. Even if we have
earnings in an amount sufficient to pay dividends, our board of directors may
decide to retain earnings for the purpose of financing growth. We have never
paid cash dividends. You should not purchase shares if you are depending upon
dividend income from this investment. See "Dividends" on page 27.
IF A CHANGE IN CONTROL OR CHANGE IN MANAGEMENT IS DELAYED OR PREVENTED, THE
MARKET PRICE OF OUR COMMON STOCK COULD BE NEGATIVELY AFFECTED.
Provisions in our corporate documents, as well as certain federal and state
laws and regulations, may make it difficult and expensive to pursue a tender
offer, change in control or takeover attempt that our board of directors
opposes. As a result, our shareholders may not have an opportunity to
participate in such a transaction, and the trading price of our stock may not
rise to the level of other institutions that are more vulnerable to hostile
takeovers. Anti-takeover provisions contained in our corporate documents also
will make it more difficult for an outside shareholder to remove our current
board of directors or management.
FORWARD-LOOKING STATEMENTS
This prospectus 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 our 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, our business plans,
objectives or goals for future operations, the anticipated effects of this
offering, our forecasted revenues, earnings, assets or other measures of
performance. These forward-looking statements are subject to risks,
uncertainties and
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assumptions. Important factors that could cause actual results to differ
materially from the forward-looking statements we make or incorporate by
reference in this prospectus are described under "Risk Factors". These factors
also include, but are not limited to:
o the strength of the United States economy in general and the strength
of the Bowling Green economy in particular;
o changes in interest rates, yield curves and interest rate spread
relationships;
o deposit flows, cost of funds, and cost of deposit insurance on
premiums;
o changes in the quality or composition of our loan or investment
portfolios, including adverse developments in borrower industries or
in the repayment ability of individual borrowers or issuers;
o increased competition or market concentration;
o changes in tax or accounting principles; and
o 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
our underlying assumptions prove incorrect, our actual results, performance or
achievements may vary materially from future results, performance or
achievements expressed or implied by these forward-looking statements. All
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements in this
section. We undertake no obligation to publicly update or revise any
forward-looking statements to reflect future events or developments.
THE OFFERING
GENERAL
We are offering to sell 606,060 newly issued shares of our common stock at
a price of $15.50 per share. If the volume of subscriptions exceeds the number
of shares offered, we may allocate offered shares among excess subscriptions in
any amount we see fit.
NO MINIMUM OFFERING. There is no minimum number of shares which must be
sold in the offering. The offering will be consummated if any valid
subscriptions are received, unless our board of directors has terminated the
offering in its entirety.
EXPIRATION TIME. Subscriptions to purchase shares must be received no later
than 5:00 p.m., eastern time, on October 31, 2003, unless we terminate the
offering earlier or extend it. We reserve the right to terminate the offering at
any time prior to October 31, 2003, or to extend the termination date for up to
three periods of thirty days each, without notice to subscribers. Under no
circumstances will we extend the offering beyond November 14, 2003. See
"Procedure for Subscribing for Shares " and "Acceptance and Refunding of
Subscriptions" below.
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MINIMUM AND MAXIMUM SUBSCRIPTION. There is no minimum number of shares
which must be sold in the offering; however, investors must subscribe for the
purchase of a minimum of 100 shares (for a minimum investment of $1,550),
subject to our right to permit smaller subscriptions in our discretion. There is
no maximum number of shares which any person or group of affiliated persons will
be permitted to purchase, subject to our right to reject any subscription in
whole or in part.
NOTWITHSTANDING OUR UNFETTERED RIGHT OF REJECTION, ONCE WE RECEIVE A
SUBSCRIPTION, IT IS IRREVOCABLE BY THE SUBSCRIBER.
PROCEDURE FOR SUBSCRIBING FOR SHARES
You may participate in the offering and invest in the shares by completing
and signing the subscription agreement accompanying this prospectus and
delivering the completed subscription agreement prior to the termination of the
offering, together with payment in full of the offering price of all shares for
which you have subscribed. Payment in full must be made by:
o check or bank draft drawn upon a U.S. bank; or
o postal, telegraphic or express money order;
o in any case, payable to "CFC Escrow".
The offering price will be deemed to have been received only upon (i)
clearance of any uncertified check, or (ii) receipt of any certified check or
bank draft drawn upon a U.S. bank or of any postal, telegraphic or express money
order. A postage paid, addressed envelope is included with this prospectus for
the return of the subscription agreement. If paying by uncertified personal
check, please note that the funds paid thereby may take at least five business
days to clear. Accordingly, investors who wish to pay the offering price by
means of uncertified personal checks are urged to make payment sufficiently in
advance of the termination of the offering to ensure that such payment is
received and clears by such date. All funds received in payment of the
subscription price will be deposited in an escrow account with Bank One Trust
Company, N.A., Louisville, Kentucky, as escrow agent, until acceptance of such
subscriptions (which can occur in our discretion at any time prior to the
closing or termination of the offering), and will be invested at our direction.
The address to which subscription agreements and payment of the offering
price should be delivered is:
Winebrenner Capital Partners, LLC
2300 Greene Way, Suite 200
Louisville, Kentucky 40220
If the amount you send with your subscription is insufficient to purchase
the number of shares that you indicate are being subscribed for, or if you do
not specify the number of shares to be purchased, then you will be deemed to
have subscribed to purchase shares to the full extent of the payment tendered
(subject only to reduction to the extent necessary to comply with any
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regulatory limitation or conditions we impose in connection with the offering
and provided that no fractional shares will be issued). If the amount you send
with your subscription exceeds the amount necessary to purchase the number of
shares that you indicate are being subscribed for, then you will be deemed to
have subscribed to purchase shares to the full extent of the excess payment
tendered (subject only to reduction to the extent necessary to comply with any
regulatory limitation or conditions we impose in connection with the offering
and provided that no fractional shares will be issued). Notwithstanding the
foregoing, we reserve the right to reject, in whole or in part, any
subscription. See "- Minimum and Maximum Subscription" above.
Failure to include the full offering price with your subscription agreement
may cause us to reject your subscription. The method of delivery of subscription
agreements and payment of the offering price will be your election and risk. If
you send your subscription by mail, we recommend that you use registered mail,
return receipt requested, and that you allow a sufficient number of days to
ensure delivery and clearance of payment prior to the termination date.
Broker/dealers will transmit any such checks directly to the escrow agent by
noon of the business day following receipt.
We will decide all questions concerning the timeliness, validity, form and
eligibility of subscription agreements, and our decisions will be final and
binding. In our sole discretion, we may waive any defect or irregularity in any
subscription, may permit any defect or irregularity to be corrected within such
time as we may allow or may reject the purported subscription. Subscription
agreements will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as we determine in our
sole discretion. None of Citizens First, its officers, directors and agents
(including, without limitation, the underwriter), or any other person will be
under any duty to give a subscriber notice of any defect or irregularity in the
submission of subscription agreements, or incur any liability for failure to
give such notice.
SUBSCRIPTIONS FOR SHARES MAY NOT BE REVOKED BY SUBSCRIBERS.
ESCROW ACCOUNT; RELEASE OF FUNDS; NO INTEREST ON SUBSCRIPTION FUNDS
All funds received in payment of the offering price will be promptly
deposited into an escrow account at Bank One Trust Company, N.A., Louisville,
Kentucky, until acceptance or rejection by us of such subscriptions. Funds in
the escrow account will be invested only in investments permissible under SEC
Rule 15c2-4 (including short-term obligations of the United States government or
a sweep account collateralized by United States government or agency
securities). Subscription funds will be released from the escrow account to us
only upon receipt by the escrow agent of the certification of our president that
subscriptions relating to such funds have been accepted and that shares of
common stock will be issued to subscribers in respect of such subscriptions.
Subscription funds will not accrue interest prior to acceptance. Earnings on
funds in the escrow account will be retained by us, whether or not the offering
is consummated. We intend to accept subscriptions promptly, but we can withhold
acceptance of your subscription until the final termination date of the
offering.
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ACCEPTANCE AND REFUNDING OF SUBSCRIPTIONS
Subscription agreements are not binding on us until accepted by us. We
reserve the right to accept or reject any subscription in whole or in part or,
if the offering is oversubscribed, to allot a lesser number of shares than the
number for which a person has subscribed. In addition, the underwriter can
reject a subscription if an investor fails to meet applicable suitability
standards, as prescribed by the National Association of Securities Dealers'
sales practice rules or an investor's subscription agreement is incomplete or it
is determined that the investor resides in a jurisdiction in which compliance
with the securities laws of such jurisdiction would be impracticable.
In considering whether to accept subscriptions, in whole or in part, we may
consider, among other factors, the order in which subscriptions are received,
the number of shares purchased by a subscriber in other capacities, the
potential of the subscriber to do business with or direct business to Citizens
First Bank, our desire to have a broad distribution of stock ownership, as well
as legal or regulatory restrictions, the number of shares which have not been
subscribed for at the time a subscription is accepted and other factors relating
to a particular subscription. In determining whether to permit a larger
subscription, we may also consider the identity of the subscriber and the
subscriber's intentions with respect to our operations, management and
direction. If you subscribe for shares through a broker or nominee, and your
broker or nominee does not identify you in the subscription agreement, we may
not allocate any shares to your subscription.
In determining the number of shares to allot to each subscriber in the
event the offering is oversubscribed, we may, in our discretion, take into
account the fact that a subscriber is a current shareholder, the order in which
subscriptions are received, a subscriber's potential to do business with or to
direct customers to Citizens First Bank, and our desire to have a broad
distribution of stock ownership, as well as legal or regulatory restrictions and
the other factors described above.
We will decide which subscription agreements to accept within ten days
after the termination of the offering if we have not previously made such
determination. Once made, a subscription is irrevocable by the subscriber during
the period of the offering, including extensions, if any.
We may elect, at any time and from time to time, until October 31, 2003
(the date on which the offering will terminate, which date may be extended to a
date not later than November 14, 2003), to accept any or all of the
subscriptions which have been received to date, issue shares of common stock for
those subscriptions and continue the offering with respect to any remaining
shares not yet purchased in the offering.
In the event that we reject all or a portion of any subscription, the
escrow agent will promptly refund to the subscriber by check sent by first-class
mail all, or the appropriate portion, of the amount submitted with the
subscription agreements. After all refunds have been made, the escrow agent, the
underwriter, Citizens First, Citizens First Bank and their respective directors,
officers, and agents will have no further liabilities to subscribers.
Certificates representing shares duly subscribed and paid for will be issued as
soon as practicable after funds are released to us by the escrow agent.
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LIMITED MARKET FOR COMMON STOCK
Except for common stock held by our directors and executive officers, the
shares offered under this prospectus will be freely transferable immediately
upon issuance and will not be subject to any transfer restrictions. There does
not currently exist an active public market for our common stock. The
underwriter is currently the only broker-dealer that is actively facilitating a
market in our common stock. Our common stock has been the subject of only
sporadic trades. There can be no assurance that an active over-the-counter
market will develop for our common stock. It is not anticipated that our common
stock will be listed on any stock exchange or be designated for trading on the
Nasdaq system upon completion of the offering or in the immediate future.
DETERMINATION OF OFFERING PRICE
The offering price has been determined by our President and Chief Executive
Officer, as authorized by our board of directors, primarily based on recent
trades of our common stock prior to the commencement of the offering, although
somewhat limited, and, to a lesser degree, comparisons of the recent trading
prices of securities of similarly sized peer issuers in our geographic region
relative to book value per share. Specifically, we reviewed the trading price to
book value per share of a group of financial institutions organized within the
last ten years with assets of $350 million or less, located within an
approximate 250 mile geographic radius of Bowling Green, Kentucky. The common
stock of these institutions traded at an average multiple of book value per
share of approximately 1.52 prior to the commencement of this offering and
approximately 1.56 as of September 3, 2003.
Institution Trading Price(1) Book Value(2) Multiple
----------- ---------------- ------------- --------
Bank of Evansville (BEVN) $11.73 $8.77 1.34
Evansville, Indiana
Classic Bancshares (CLAS) $27.31 $23.00 1.35
Ashland, Kentucky
FCB Bancorp (FCBE) $26.00 $14.44 1.80
Louisville, Kentucky
First Security Bancorp (FSLK) $17.50 $13.03 1.34
Lexington, Kentucky
Pinnacle Financial (PNFP) $18.00 $9.11 1.98
Nashville, Tennessee
-------------
(1) Based on last sale price reported as of September 3, 2003. The common
stock of these institutions is not actively traded.
(2) As of June 30, 2003, with respect of Bank of Evansville, First Security
Bancorp, FCB Bancorp and Pinnacle Financial, and as of March 31, 2003 with
respect to Classic Bancshares.
On September 3, 2003, 300 shares of our common stock were traded at a price
of $14.55 per share, representing a multiple of our book value per share as of
June 30, 2003 of 1.29. The offering price per share for our common stock in this
offering represents a multiple of our book value per share as of June 30, 2003
of 1.38. There has not been active trading in our common stock and the price at
which our common stock trades after the offering may be higher or lower than the
offering price. See "Price Range of Our Common Stock" on page 25. Because of the
recent trading prices of our common stock, management has chosen an offering
price per share which reflects a lower multiple of book value per share that the
average reflected in the table above.
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Neither our board of directors nor management has expressed an opinion or has
made any recommendation as to whether anyone should purchase shares of common
stock in the offering. Any decision to invest in our common stock must be made
by you based upon your own evaluation of the offering in the context of your
best interests.
There can be no assurance that, following completion of the offering and
the issuance of the shares, you will be able to sell shares purchased in the
offering at a price equal to or greater than the offering price. Moreover, until
certificates for shares of common stock are delivered, you may not be able to
sell the shares of common stock that you have purchased in the offering.
INTENTIONS OF DIRECTORS AND EXECUTIVE OFFICERS
All of our directors and executive officers have subscribed or have
indicated that they intend to subscribe for shares of common stock in the
offering. Any shares purchased by directors and executive officers are intended
to be held as an investment. These commitments could change based upon
individual circumstances. See "Principal Shareholders" on page 84.
REGULATORY LIMITATIONS
If you would own 10% or more of our common stock after the offering (5% in
some circumstances), you may be required to provide certain information to, or
seek the prior approval of, state and federal bank regulators. We may reject
subscriptions and will not be required to issue shares of common stock in the
offering and we will promptly refund all subscription funds received to any
person who, in our opinion, would be required to obtain prior clearance or
approval from any state or federal bank regulatory authority to own or control
such shares if, at the termination date, such clearance or approval has not been
obtained or any required waiting period has not expired. We reserve the right to
reduce or reject, in whole or in part, any subscription which would require
prior regulatory application or approval if such has not been obtained prior to
the termination date. See "Acceptance and Refunding of Subscriptions" above.
RIGHT TO AMEND OR TERMINATE THE OFFERING
We expressly reserve the right to amend the terms and conditions of the
offering. In the event of a material change to the terms of the offering, we
will file an amendment to the registration statement, of which this prospectus
is a part, and resolicit subscribers to the extent required by the Securities
and Exchange Commission. In the event of such a resolicitation, all proceeds
received will be returned promptly to any subscriber who does not provide the
escrow agent with an affirmative reconfirmation of the subscription.
We expressly reserve the right, at any time prior to delivery of the shares
of common stock offered, to terminate the offering if the offering is prohibited
by law or regulation or if our board of directors concludes, in its sole
judgment, that it is not in our best interests to complete the offering under
the circumstances. The offering may be terminated by us giving oral or written
notice to the escrow agent and/or making a public announcement of the
termination of the offering. If the offering is so terminated, all funds
received will be promptly refunded, without interest.
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ISSUANCE OF COMMON STOCK
Certificates representing shares of common stock purchased in the offering
will be delivered to purchasers at the direction of the purchasers as indicated
in their subscription agreement. No fractional shares will be issued in the
offering.
REQUESTS FOR ASSISTANCE WITH RESPECT TO SUBSCRIPTION AGREEMENT
If you have questions regarding completion of the subscription agreement,
contact Winebrenner Capital Partners, LLC, 2300 Greene Way, Suite 200,
Louisville, Kentucky 40220, telephone (502) 671-0015 or toll free (877)
671-0015.
MANNER OF DISTRIBUTION
Winebrenner Capital Partners, LLC, will serve as the underwriter for the
offering. For its services in attempting to sell shares on a "best efforts"
basis, Winebrenner Capital will receive a commission fee equal to five percent
(5%) of the proceeds of the offering. If no shares are sold due to the early
termination of the offering, we are obligated to pay the reasonable accountable
out-of-pocket expenses incurred by Winebrenner Capital in connection with the
offering up to an aggregate of $25,000 in expenses. If any shares are sold in
the offering, we are obligated to pay up to $60,000 of the reasonable
out-of-pocket expenses incurred by Winebrenner Capital.
The underwriter may use selected dealers to facilitate sales of stock.
These dealers will be paid a fee in an amount competitive with underwriting
discounts paid for comparable amounts sold at a competitive price per share in a
similar market environment. Such fees will be paid by Winebrenner Capital from
its fee, and not in addition to its fee. If any of our directors and executive
officers assist in the offering they will receive no compensation for such
services. The underwriter, selected dealers and any such directors and officers
are not authorized to make statements about us or Citizens First Bank unless
such information is set forth in this prospectus, nor will they render
investment advice. None of our directors or executive officers are registered as
securities brokers or dealers under the federal or applicable state securities
laws. Because they are not in the business of either effecting securities
transactions for others or buying and selling securities for their own account,
they are not required to register as brokers or dealers under the federal
securities laws. In addition, any such activities of our directors and executive
officers would be exempted from registration pursuant to a specific safe-harbor
provision under Rule 3a4-1 under the Securities Exchange Act of 1934, as
amended. Substantially similar exemptions from registration are available under
applicable state securities laws.
NEITHER WINEBRENNER CAPITAL PARTNERS NOR ANY OTHER PERSON IS OBLIGATED TO
PURCHASE ANY OF THE SHARES OFFERED, OR TO FIND PURCHASERS FOR ANY SHARES. THERE
CAN BE NO ASSURANCE THAT ANY MINIMUM NUMBER OF SHARES WILL BE SOLD.
USE OF PROCEEDS
Before deducting expenses of the offering (not including commissions
payable to the underwriter), which are estimated at $250,000, the proceeds to
Citizens First from the sale of the
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common stock offered, net of underwriting fees, will be approximately $8.7
million if all of the shares being offered are sold, $6.4 million if 75% of the
shares being offered are sold, $4.2 million if 50% of the shares being offered
are sold, and $2.0 million if 25% of the shares being offered are sold. There is
no minimum number of shares which must be sold in the offering.
The proceeds of the offering will be available for contribution to the
capital of Citizens First Bank, for use in the bank's lending and investment
activities, for branch expansion, and for Citizens First Bank's general
corporate purposes, for acquisition of other institutions or for investments by
us in activities which are permitted for bank holding companies. The proceeds
will also be available for the reduction of the outstanding balance on our line
of credit, which was $2.3 million at June 30, 2003. Our line of credit bears
interest at the one year LIBOR rate plus 275 basis points and matures on June
23, 2012. An insignificant amount of the proceeds will be retained at Citizens
First to provide liquidity. The first $5 million of offering proceeds will be
contributed to the capital of Citizens First Bank for the purposes described
above. Thereafter, proceeds will be used to pay the outstanding balance on the
line of credit, approximately $500,000 will be retained by Citizens First and
the balance of the offering proceeds, if any, will be contributed to Citizens
First Bank.
Contribution of capital to Citizens First Bank will strengthen the bank's
capital base and enable it to exceed regulatory capital levels required for well
capitalized status, and will permit continued growth in assets and loans through
expansion of its existing lending and investment activities and possible further
branching or acquisitions. While there can be no assurance, we expect to
continue to experience substantial growth. As our assets increase, our need for
capital increases proportionately, and we do not yet expect earnings to fully
satisfy our capital needs. At December 31, 2002, Citizens First Bank's total
risk-weighted capital ratio was 10.3%, slightly above the amount required for
well capitalized status and, at June 30, 2003, its total risk-weighted capital
ratio was 9.5%, below the amount required for well capitalized status. In
general, without raising additional capital, a bank can increase asset levels
only by 10 to 12 times the level of its earnings, depending on the nature of its
asset mix. If this offering is not successful or we are not able to raise
sufficient capital to meet our loan growth as it develops, we will consider
alternative measures, such as slowing loan growth or raising additional capital,
including through the issuance of trust preferred securities. We may also borrow
additional funds under our existing line of credit.
Except as described in this prospectus, there are no definitive plans for
any additional branches or for any acquisitions, and there can be no assurance
that we will establish additional branches, acquire another institution in whole
or in part, or that any new branch or acquisition will be successful or
contribute to shareholder value. Although we plan to use the proceeds of the
offering for the development and expansion of our existing businesses, or for
investment in activities permitted for bank holding companies, we have no
definitive plans for any particular investments or the use of any particular
amount of the proceeds of the offering except as described above.
PRICE RANGE OF OUR COMMON STOCK
Our common stock is not traded on any listed stock exchange. The shares are
traded in the over-the-counter market under the symbol "CZFC.OB", on an
order-match agency basis, whereby
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buyers and sellers of the stock execute transactions on a no spread basis.
Trading volume in our common stock is considered light and the stock is thinly
traded. As of June 30, 2003, there were 722,678 shares of common stock
outstanding held by approximately 425 shareholders of record.
The following represents the reported prices (as well as the total trading
volume) for which shares of our common stock have been exchanged since January
1, 2000 on a per share basis. The last reported sale of our common stock was the
sale of 300 shares on September 3, 2003 at a price of $14.55 per share.
NO. OF SHARES
HIGH LOW TRADED DURING PERIOD
---- --- --------------------
2000: First quarter $15.50 $14.00 5,800
Second quarter 15.25 14.00 11,800
Third quarter 15.12 14.25 18,000
Fourth quarter 15.25 14.25 8,000
2001: First quarter 15.00 13.13 6,200
Second quarter 16.00 11.13 2,600
Third quarter 12.75 11.00 11,400
Fourth quarter 13.25 11.50 6,800
2002: First quarter 14.00 13.25 11,800
Second quarter 14.00 12.75 15,200
Third quarter 14.00 14.00 400
Fourth quarter 17.25 15.00 38,900
2003: First quarter 17.00 14.00 12,400
Second quarter 15.65 14.80 21,600
Third quarter through
September 8, 2003 15.25 14.55 10,300
These price quotations are derived from data furnished by the National
Association of Securities Dealers and, accordingly, we cannot guarantee the
accuracy or reliability of such price quotations. Some trades may occur which
are not reported by the NASD. Since there is no established public trading
market for our common stock, there can be no assurance that the price
information set forth above is representative of prices which could be obtained
from sales of our common stock in established open market transactions.
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DIVIDENDS
Holders of our common stock are entitled to receive dividends as and when
declared by our board of directors. We have not paid cash dividends since we
became the holding company for Citizens First Bank, electing to retain our
limited earnings to support growth. We currently intend to continue the policy
of retaining earnings to support growth for the immediate future. Future
dividends will depend primarily upon Citizens First Bank's earnings, financial
condition and need for funds, as well as applicable governmental policies and
regulations. There can be no assurance that we will have earnings at a level
sufficient to support the payment of dividends, or that we will in the future
elect to pay dividends. As Citizens First Bank is the primary source of funds
for payment of dividends by us, the inability of Citizens First Bank to pay
dividends could adversely affect our ability to pay dividends.
Federal and state statutes and regulations place limits on the amount of
dividends Citizens First Bank may pay without prior approval. Under Kentucky
law, dividends by Kentucky banks may be paid only from current or retained net
profits. Before any common stock dividend may be declared for any period, a bank
must increase its capital surplus by at least 10% of the net profits of the bank
for such period until the bank's capital surplus equals the amount of its stated
capital attributable to its common stock. Prior regulatory approval is required
to pay dividends which exceed Citizens First Bank's net profits for the current
year plus its retained net profits for the preceding two calendar years, less
required transfers to surplus. State and federal regulatory authorities also
have authority to prohibit a bank from paying dividends if they deem such
payment to be an unsafe or unsound practice. As of June 30, 2003, Citizens First
Bank must have additional retained earnings of approximately $1.3 million before
it may pay dividends to Citizens First without prior regulatory approval.
The Federal Reserve Board has established guidelines with respect to the
maintenance of appropriate levels of capital by registered bank holding
companies. Compliance with such standards, as presently in effect, or as they
may be amended from time to time, could possibly limit the amount of dividends
that we may pay in the future. In 1985, the Federal Reserve Board issued a
policy statement on the payment of cash dividends by bank holding companies. In
the statement, the Federal Reserve Board expressed its view that a holding
company experiencing earnings weaknesses should not pay cash dividends exceeding
its net income, or which could only be funded in ways that weakened the holding
company's financial health, such as by borrowing.
As a depository institution, the deposits of which are insured by the
Federal Deposit Insurance Corporation, Citizens First Bank may not pay dividends
or distribute any of its capital assets while it remains in default on any
assessment due the Federal Deposit Insurance Corporation. Citizens First Bank is
not currently in default under any of its obligations to the Federal Deposit
Insurance Corporation.
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DILUTION
The net tangible book value of our common stock as of June 30, 2003 was
$7.8 million, or $10.74 per share. Net tangible book value per share represents
the equity of our shareholders, less intangible assets, divided by the number of
shares of our common stock outstanding. The dilution of the net tangible book
value per share represents the difference between the amount per share paid by
purchasers of our common stock in this offering and the as adjusted net tangible
book value per share of our common stock immediately after completion of this
offering, assuming 25%, 50% and 100% of the shares of common stock being offered
are sold. After (1) giving effect to the sale by us of 606,060 shares of our
common stock offered at a price to the public of $15.50 per share and the
application of the estimated net proceeds therefrom, and (2) deducting the
estimated sales agents fees and offering expenses payable by us, our as adjusted
net tangible book value as of June 30, 2003 would have been $15.4 million, or
$12.34 per share. This represents an immediate increase in adjusted net tangible
book value of $1.60 per share to existing investors and an immediate dilution in
net tangible book value of $3.16 per share to new investors purchasing our
common stock in this offering, as illustrated in the following table:
SALE OF SALE OF SALE OF
25% OF 50% OF 100% OF
SHARES SHARES SHARES
OFFERED OFFERED OFFERED
------- ------- -------
Price to the public per share $15.50 $15.50 $15.50
Net tangible book value per share at June 30, 2003 (1) $10.74 $10.74 $10.74
Increase in net tangible book value per share attributable to new $ 0.23 $ 0.83 $ 1.60
investors (2)
As adjusted net tangible book value per share at June 30, 2003 $10.97 $11.57 $12.34
Dilution per share to new investors $ 4.53 $ 3.93 $ 3.16
The following table summarizes, on an as adjusted basis, as of June 30,
2003, the tangible book value of the outstanding shares and the total
consideration and average price paid per share by the new investors for the
shares purchased in this offering, assuming all of the shares offered are sold.
Shares Tangible Equity Average
Number Percent Number Percent Per Share
(dollars in thousands, except share and per share data)
Equity at December 31, 2002 723 57.9% $ 7,762 50.4% $10.74
New investors (2) 526 42.1% 7,648 49.6% $14.53
----- ----- ------ ----- -----
Total 1,249 100.0% $15,410 100.0% $12.34
===== ===== ====== ===== =====
____________
(1) Does not include 160,0900 shares of our commons tock issuable udner our
stock option plans.
(2) Net of underwriting fees of $117,424, $234,848 and $469,696, assuming 25%,
50% and 100% of the shares of common stock being offered are sold,
respectively, and estimated offering expenses of approximately $250,000.
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CAPITALIZATION
The following table sets forth our capitalization and certain capital
ratios as of June 30, 2003. Our capitalization is presented on an actual basis
and on an as adjusted basis to reflect the sale of 25%, 50% and 100% of the
shares of our common stock being offered in this offering and our receipt of net
proceeds therefrom, assuming a public offering price of $15.50 per share and
after deducting the underwriting fees and estimated expenses of this offering.
AT JUNE 30, 2003
----------------
ACTUAL(1) PRO FORMA(2) PRO FORMA(3) PRO FORMA(4)
--------- ------------ ------------ ------------
Stockholders' equity:
Preferred stock, no par value; 500 shares $ $ - $ - $ -
authorized; no shares issued and -
outstanding
Common stock, no par value per share; 2,000,000 8,383,045 16,031,279 11,569,162 9,338,103
shares authorized; 722,678 shares, issued and
outstanding actual
Retained earnings (deficit) (285,519) (285,519) (285,519) (285,519)
Accumulated other comprehensive income, net 48,502 48,502 48,502 48,502
Less: Goodwill (384,243) (384,243) (384,243) (384,243)
---------- ------------ ------------ ----------
Total tangible equity $7,761,785 $15,410,019 $10,947,902 $8,716,843
========== =========== =========== ==========
Capital ratios:
Leverage (4) 5.39% 10.74% 7.62% 6.06%
Tier 1 risk-based (5) 6.34% 12.45% 8.90% 7.10%
Total risk-based (5) 7.60% 13.70% 10.14% 8.35%
-------------
(1) Includes the sale of 79,625 shares of our common stock in this offering
on June 27, 2003 and the receipt of $1,026,000 in net proceeds
therefrom.
(2) Reflects the sale of 606,060 shares of our common stock in this
offering, resulting in 1,249,113 shares issued and outstanding pro
forma, and our receipt of $8,674,234 in estimated net proceeds
(including net proceeds of approximately $1,026,000 from the sale of
79,625 shares on June 27, 2003).
(3) Reflects the sale of 303,030 shares of our common stock in this
offering, resulting in 946,083 shares issued and outstanding pro forma,
and our receipt of $4,212,117 in estimated net proceeds (including net
proceeds of approximately $1,026,000 from the sale of 79,625 shares on
June 27, 2003).
(4) Reflects the sale of 151,515 shares of our common stock in this
offering, resulting in 794,568 shares issued and outstanding pro forma,
and our receipt of $1,981,058 in estimated net proceeds (including net
proceeds of approximately $1,026,000 from the sale of 79,625 shares on
June 27, 2003).
(5) Leverage ratio is defined as Tier 1 capital (pursuant to risk-based
capital guidelines) as a percentage of adjusted average assets for the
quarter ended June 30, 2003. As adjusted calculation assumes that
proceeds from offering would have been received as the last transaction
for the quarter ended June 30, 2003.
(6) The as adjusted calculations for the risk-based capital ratios assume
that the proceeds from the offering are invested in assets which carry
a 100% risk-weighting as of June 30, 2003.
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SELECTED FINANCIAL DATA
The following table sets forth summary historical consolidated financial
data from our consolidated financial statements and should be read in
conjunction with our consolidated financial statements including the related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 31. Except for the data under
"Performance Ratios", "Asset Quality Ratios" and "Capital Ratios", the summary
historical consolidated financial data as of December 31, 2002 and December 31,
2001 and for the years ended December 31, 2002 and December 31, 2001 is derived
from our audited consolidated financial statements and related notes, which are
included elsewhere in this prospectus, and the summary historical consolidated
financial data as of and for the six months ended June 30, 2003 and June 30,
2002 is derived from unaudited consolidated financial statements for those
periods, which are also included elsewhere in this prospectus. The unaudited
consolidated financial statements include all adjustments, consisting only of
normal recurring items, which our management considers necessary for a fair
presentation of our financial positions and results of operations for these
periods. The financial condition and results of operations as of and for the six
months ended June 30, 2003 do not purport to be indicative of the financial
condition or results of operations to be expected as of or for the fiscal year
ending December 31, 2003.
AT OR FOR THE SIX MONTHS ENDED AT OR FOR THE YEARS ENDED
JUNE 30, DECEMBER 31,
2003 2002 2002 2001
---- ---- ---- ----
INCOME STATEMENT DATA:
Interest income $3,613,144 $3,176,398 $6,396,580 $6,450,510
Interest expense 1,386,409 1,429,608 2,773,904 3,475,087
Net interest income 2,226,735 1,746,790 3,622,676 2,975,423
Provision for loan losses 1,643,000 100,000 195,000 664,000
Non-interest income 847,932 332,868 772,456 379,136
Non-interest expense 2,396,254 1,463,762 3,064,555 2,709,222
Net income (loss) (630,337) 338,886 745,218 342,402
BALANCE SHEET DATA:
Total assets $154,435,574 $105,685,701 $128,443,129 $104,819,716
Total securities 17,688,014 11,392,497 16,186,406 10,200,866
Total loans, net 121,886,906 87,515,329 94,658,798 83,524,425
Allowance for loan losses 2,900,907 1,289,321 1,300,258 1,195,924
Total deposits 127,884,553 88,467,670 105,893,333 87,890,828
Repurchase agreements and short-term borrowings 4,431,233 5,122,727 5,833,512 3,411,736
borrowings
Total stockholders' equity 8,146,028 7,422,981 7,838,252 7,066,376
PER SHARE DATA:
Earnings (loss) per share - basic $(0.98) $0.53 $ 1.16 $0.53
Earnings (loss) per share -diluted (0.98) 0.53 1.16 0.53
Book value 11.27 11.54 12.19 10.99
PERFORMANCE RATIOS:
Return on average assets (.96%) .67% 0.70% 0.40%
Return on average equity (16.26%) 9.40% 9.97% 5.08%
Net interest margin (1) 3.53% 3.61% 3.58% 3.67%
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ASSET QUALITY RATIOS:
Nonperforming assets to total loans 1.43% .56% 0.19% 0.80%
Net loan charge-offs to average loans 0.04% 0.01% 0.10% 0.40%
Allowance for loan losses to total loans 2.32% 1.45% 1.36% 1.41%
CAPITAL RATIOS:
Leverage ratio (2) 5.39% 7.04% 6.80% 7.30%
Tier 1 risk-based capital ratio 6.34% 8.27% 7.80% 8.20%
Total risk-based capital ratio 7.60% 9.52% 9.10% 9.40%
---------------
(1) Net interest margin is the result of net interest income for the period divided by average interest earning assets.
(2) Leverage ratio is defined as Tier 1 capital (pursuant to risk-based capital guidelines) as a percentage of adjusted average
assets.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following is a discussion of our financial condition at December 31,
2002 and 2001 and at June 30, 2003 and our results of operations for the years
ended December 31, 2002 and 2001 and the three months and six months ended June
30, 2003 and 2002. The purpose of this discussion is to focus on information
about our financial condition and results of operations which is not otherwise
apparent from the annual audited consolidated financial statements. You should
read the following discussion and analysis along with our consolidated financial
statements and the related notes included elsewhere in this prospectus.
We reported a consolidated net loss for the second quarter of 2003 of
($748,086), or ($1.16) per common share. For the six months ended June 30, 2003,
we reported a net loss of ($630,337), or ($0.98) per common share.
The problems that we experienced in our loan portfolio in the second
quarter, particularly with respect to commercial loans, were the most
significant contributing factor to the net loss that we incurred in the second
quarter and the six months ending June 30, 2003. The increase in our loan loss
reserve of $1,600,649, from $1,300,258 at December 31, 2002 to $2,900,907 at
June 30, 2003, was primarily attributable to maintaining an adequate reserve in
light of the problems in our loan portfolio and, to a lesser degree, to the loan
growth we have experienced in the first six months of 2003. Our subsidiary bank
and its primary regulators have entered into an agreement that will implement
several steps intended to improve our performance. These steps will include
refining and refocusing our credit risk analysis, underwriting, monitoring and
evaluation functions with the goal of improving the quality of our loan
portfolio, quickly identifying, and addressing, potential problem loans and
lessening our risk position in each asset that we have internally classified as
a problem loan or identified as a potential problem loan. These comprehensive
loan review procedures will provide for a strengthened risk analysis of the loan
portfolio and will include a review of the lending authority of each of our loan
officers and loan committees, as well as our staffing requirements, particularly
in the area of loan administration. In this regard, we intend to hire and/or
train an individual whose primary responsibility will be the independent risk
analysis of our loan portfolio on an ongoing basis. We will also review,
reevaluate and implement long range strategic plans for improving our operating
performance and maintaining adequate
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capital levels, given our recent performance and our anticipated future growth.
We grew our loan portfolio considerably in the first six months of 2003 in order
to increase our earning asset base. In light of this and the other factors
discussed, throughout the term of the regulatory agreement our subsidiary bank
will be required to maintain a minimum Tier 1 capital to total assets ratio of
7%. A committee of our board of directors, of which at least two-thirds must be
independent, outside directors, will be responsible for ensuring that our
subsidiary bank complies with this regulatory agreement.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our 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 us are presented in Note 1 to the consolidated
financial statements. These policies, along with the disclosures presented in
the other financial statement notes and in this financial review, provide
information on how significant assets and liabilities are valued in the
financial statements and how those values are determined. Based on the valuation
techniques used and the sensitivity of financial statement amounts to the
methods, assumptions, and estimates underlying those amounts, management has
identified the determination of the allowance for loan losses to be the
accounting area that requires the most subjective or complex judgments, and as
such could be most subject to revision as new information becomes available.
The allowance for loan losses represents management's estimate of probable
credit losses inherent in the loan portfolio. Determining the amount of the
allowance for loan losses is considered a critical accounting estimate because
it requires significant judgment and the use of estimates related to the amount
and timing of expected future cash flows on impaired loans, estimated losses on
loans based on historical loss experience, and consideration of current economic
trends and conditions, all of which may be susceptible to significant change.
The loan portfolio also represents the largest asset type on the
consolidated balance sheet. Note 1 to the consolidated financial statements
describes the methodology used to determine the allowance for loan losses, and a
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 us. 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." We evaluate the collectibility of both principal and interest when
assessing the need for a loss accrual. Historical loss rates are applied to
other loans not subject to reserve allocations. These historical loss rates may
be adjusted for significant factors that, in management's judgment, reflect the
impact of any current conditions on loss recognition. Factors which management
considers in the analysis include the effects of the national and local
economies, trends in the nature and volume of loans (delinquencies, charge-offs
and nonaccrual loans), changes in mix, asset quality trends, risk management and
loan administration, changes in internal lending policies and credit standards,
and examination results from bank regulatory agencies and our internal credit
examiners.
32
34
An unallocated reserve is maintained to recognize the imprecision in
estimating and measuring loss when evaluating reserves for individual loans or
pools of loans. Reserves on individual loans and historical loss rates are
reviewed quarterly and adjusted as necessary based on changing borrower and/or
collateral conditions and actual collection and charge-off experience.
We have not substantively changed any aspect of our 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 $2,900,907 at June 30, 2003 was adequate, but not excessive, to
absorb estimated credit losses associated with the loan portfolio at June 30,
2003.
We have a deferred tax asset of approximately $846,000. We evaluate this
asset on a quarterly basis. To the extent we believe it is more likely than not
that it will not be utilized, we establish a valuation allowance to reduce its
carrying amount to the amount we expect to be realized. At June 30, 2003, there
is no valuation allowance established. The deferred tax asset will be utilized
as we are profitable or as we carry back tax losses to periods in which we paid
income taxes. The estimate of the realizable amount of this asset is a critical
accounting policy.
RESULTS OF OPERATIONS
In 2002, we recorded net income of $745,218, or $1.16 per common share.
This compares to net income of $342,402, or $0.53 per common share, in 2001. Net
income for 2002 includes gains of $67,370 during the second quarter and $41,084
during the third quarter from the sale of investment securities.
NET INTEREST INCOME. Net interest income, our principal source of earnings,
is the difference between the interest income generated by earning assets, such
as loans and securities, and the total interest cost of the deposits and
borrowings obtained to fund these assets. Factors that influence the level of
net interest income include the volume of earning assets and interest bearing
liabilities, yields earned and rates paid, the level of nonperforming loans and
non-earning assets, and the amount of non-interest bearing deposits supporting
earning assets.
For the year ended December 31, 2002, net interest income was $3,622,676,
an increase of $647,253 over net interest income of $2,975,423 in 2001. The
increase in 2002 resulted primarily from continued growth of loans and deposits,
as we continued to increase market share in our principal area of operations.
The net interest margin in 2002 was 3.58%, compared to 3.67% in 2001. This drop
of 9 basis points is primarily attributable to the continued repricing down in
yield of interest earning assets after the 475 basis points reduction in
short-term interest rates, initiated by the Federal Open Market Committee of the
Federal Reserve, throughout 2001. Because our interest bearing liabilities
generally have a longer repricing frequency than our interest earning assets, we
were unable to reprice interest bearing liabilities as quickly, in equal or
greater dollar volume, as interest earning assets that are indexed to short-term
rates, primarily the prime rate.
33
35
NET INTEREST ANALYSIS SUMMARY 2002 2001
---- ----
Average yield on interest earning assets 6.31% 7.95%
Average rate on interest bearing liabilities 3.07% 4.80%
Net interest rate spread 3.24% 3.15%
Net interest margin 3.58% 3.67%
The following table sets forth for the years ended December 31, 2002 and
2001 information regarding average balances of assets and liabilities, as well
as the total dollar amounts of interest income from average interest earning
assets and interest expense on average interest bearing liabilities and average
yields and costs. Such yields and costs for the periods indicated are derived by
dividing income or expense by the average balances of assets or liabilities,
respectively, for the periods presented. See "Balance Sheet Review - Asset and
Liability Management" and "Market Risk Analysis" for a discussion of the
repricing characteristics of our assets and liabilities and their effect on our
earnings.
34
36
AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS FOR YEAR ENDED DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE
------- ------- ----
ASSETS
EARNING ASSETS
Federal funds sold and other $ 1,952 $ 30 1.53%
Securities available for sale (including equity 11,297 565 5.00%
securities)
Federal Home Loan Bank stock 268 13 4.85%
Loans (1) 87,805 5,789 6.59%
--------- ----- -----
Total interest earning assets 101,322 6,397 6.31%
-----
Non-interest earning assets 4,993
---------
TOTAL ASSETS $ 106,315
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Interest bearing liabilities
Interest bearing transaction accounts $ 22,383 $ 342 1.53%
Savings accounts 1,135 12 1.06%
Time deposits 56,961 2,146 3.77%
------- -----
Total interest bearing deposits 80,479 2,500 3.11%
Securities sold under agreement
to repurchase 4,731 54 1.14%
Other borrowed funds
Federal funds purchased 201 4 1.99%
FHLB borrowings 4,169 164 3.93%
Other borrowings 875 52 5.95%
------- -----
Total interest bearing liabilities 90,455 2,774 3.07%
Non-interest bearing liabilities
Non-interest bearing deposits 7,508
Other liabilities 876
-------
TOTAL LIABILITIES 98,839
Stockholders' equity 7,476
-------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $106,315
=======
Net interest income $3,623
=====
Net interest margin(2) 3.58%
=====
Return on assets ratio 0.70%
Return on equity ratio 9.97%
Equity to assets ratio 7.03%
-------------
(1) Average loans include nonperforming loans. Interest income includes
interest and fees on loans, but does not include interest on loans 90
days or more past due.
(2) Net interest income as a percentage of average interest earning assets.
35
37
AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS FOR YEAR ENDED
DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE
------- ------- -------
ASSETS
EARNING ASSETS
Federal funds sold and other $ 976 $ 36 3.69%
Securities available for sale (including equity 8,084 467 5.78%
securities)
Federal Home Loan Bank stock 141 9 6.38%
Loans (1) 71,963 5,938 8.25%
-------- ------
Total interest earning assets 81,164 6,450 7.95%
------
Non-interest earning assets 4,412
--------
TOTAL ASSETS $ 85,576
=========
LIABILITIES and STOCKHOLDERS' EQUITY
LIABILITIES
Interest bearing liabilities
Interest bearing transaction accounts $ 15,461 $ 431 2.79%
Savings accounts 805 14 1.76%
Time deposits 51,002 2,787 5.46%
------- -----
Total interest bearing deposits 67,268 3,232 4.80%
Securities sold under agreement
to repurchase 2,429 77 3.17%
Other borrowed funds
Federal funds purchased 451 17 3.77%
FHLB borrowings 2,030 135 6.66%
Other borrowings 210 14 6.67%
------- ----- -----
Total interest bearing liabilities 72,388 3,475 4.80%
Non-interest bearing liabilities
Non-interest bearing deposits 5,759
Other liabilities 680
-------
TOTAL LIABILITIES 78,827
Stockholders' equity 6,749
-------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 85,576
=======
Net interest income $ 2,975
======
Net interest margin(2) 3.67%
=====
Return on assets ratio 0.40%
Return on equity ratio 5.08%
Equity to assets ratio 7.88%
-----------
(1) Average loans include nonperforming loans. Interest income includes
interest and fees on loans, but does not include interest on loans 90
days or more past due.
(2) Net interest income as a percentage of average interest earning assets.
36
38
The following table sets forth the effects of changing rates and volumes on
our net interest income for the years ended December 31, 2002 and 2001.
Information is provided with respect to (1) effects on interest income
attributable to changes in volume (changes in volume multiplied by prior rate)
and (2) effects on interest income attributable to changes in rate (changes in
rate multiplied by prior volume). Changes attributable to the combined input of
volume and rate have been allocated proportionately to the changes due to volume
and the changes due to rate.
2002 VS. 2001
-----------------
INCREASE/(DECREASE)
DUE TO
-----------------
RATE VOLUME NET
---- ------ ---
(IN THOUSANDS)
INTEREST EARNING ASSETS:
Loans, net $ (1,456) $1,307 $ (149)
Investment securities (84) 182 98
FHLB stock (6) 10 4
Federal funds sold (43) 37 (6)
-------- ------ -------
TOTAL NET CHANGE IN INCOME ON INTEREST EARNING (1,589) 1,536 (53)
ASSETS
INTEREST BEARING LIABILITIES:
Demand and savings accounts (289) 198 (91)
Certificates of deposit (964) 324 (640)
-----
Total deposits (1,253) 522 (731)
Federal funds purchased (3) (10) (13)
Repurchase agreements (96) 73 (23)
Borrowings (121) 187 66
------ ---- -----
TOTAL NET CHANGE IN EXPENSE ON INTEREST (1,473) 772 (701)
BEARING LIABILITIES
NET CHANGE IN NET INTEREST INCOME $ (116) $764 $ 648
======= ==== =====
PROVISION FOR LOAN LOSSES. The provision for loan losses in 2002 was
$195,000 or 0.22% of average loans, compared to $664,000 or 0.92% of average
loans during 2001. The decrease in the provision expense in 2002, compared to
2001, is primarily attributable to smaller loan growth in 2002 compared to 2001,
coupled with management's evaluation of the risks associated with the loan
portfolio during 2002. Loan growth during 2002 was $11,238,707, compared to
$23,730,926 in 2001. The lower loan growth we experienced during 2002, compared
to 2001, was due to a general slowdown in the local economy that coincided with
a slowdown in the national economy. Net loan charge-offs totaled $90,666 in
2002, compared to $290,420 in 2001. As a percentage of average loans, net
charge-offs were 0.10% in 2002 compared to 0.40% in 2001. Commercial and
commercial real estate loan charge-offs decreased in 2002 in comparison to
levels experienced in 2001, when one commercial relationship accounted for a
charge of $173,000 to the allowance for loan losses.
NON-INTEREST INCOME. Non-interest income totaled $772,456 in 2002, compared
to $379,136 in 2001, an increase of $393,320 or 103.74%. The following table
shows the detailed components of non-interest income:
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39
2002 2001
---- ----
Service charges on deposit accounts $ 575,920 $ 283,305
Gain on the sale of mortgage loans held for sale 33,538 53,667
Other 12,763 9,132
Gain on the sale of available for sale securities 108,454 0
Other service charges and fees 41,781 33,032
The growth in 2002 compared to 2001 in service charges on deposit accounts
is attributable to the growth in the number of deposit accounts subject to
service charges, and to the introduction during the first quarter of an
overdraft protection product that, subject to certain terms and conditions,
allows pre-approved customers to access up to $500 of additional funds in
transaction accounts for a fee. The other major variance in non-interest income
in 2002 came from the gain of $108,454 from the sale of investment securities
during the year, compared to no gain or loss during 2001. Gains on the sale of
mortgage loans decreased slightly in 2002 as management elected to retain a
higher percentage of its residential real estate loans in the portfolio. In
2002, we sold 56 mortgage loans, totaling $7,487,760, in the secondary market
compared to 75 mortgage loans, totaling $8,555,434, in 2001. Gain on sale of
loans increased during 2001 as declining market interest rates prompted an
increase in consumer refinancing activity in 1-4 family, fixed rate residential
loans. Revenue from gains on sales of loans increased as a result of higher
secondary market sales volumes. We refer trust business to a trust company in
return for referral fees. These trust referral fees totaled $12,763 in 2002 and
$8,800 during 2001.
NON-INTEREST EXPENSE. Non-interest expenses for 2002 of $3,064,555
increased $355,333, or 13.1%, from 2001. The changes to non-interest expense
over this period were primarily due to expense associated with the growth of
Citizens First Bank as its customer base grew. The increases (decreases) in
expense by major categories are as follows:
INCREASE (DECREASE)IN
NON-INTEREST EXPENSES
2002 VS. 2001
----------------------
Salaries and employee benefits $ 163,339
Net occupancy expense 1,072
Equipment expense (25,051)
Business manager expense (1,001)
Professional fees (16,702)
Other real estate expenses (30,890)
Loss on sale of other real estate owned (17,495)
Data processing 42,177
FDIC deposit insurance 3,400
Franchise and other taxes 57,220
Directors' fees 13,400
Processing fees-overdraft protection plan 27,327
Overdraft protection plan charge-offs 29,636
Charity and contributions 17,141
Postage 3,738
Telephone 3,970
38
40
Supplies 13,372
Advertising and marketing 18,915
Other operating expenses 51,765
----------
Total increase in non-interest expense $ 355,333
==========
Significant variances include salaries and employee benefits expense, which
increased $163,339 during 2002, or 11.95%, to $1,530,034 from the 2001 total of
$1,366,695. The increase included annual merit increases for existing staff,
plus an increase of five full-time equivalent employees during 2002 compared to
2001, plus increases in employee benefit costs. Increases in data processing and
franchise and other taxes reflect additional costs tied to our growth, as those
expenses are linked to the size and activity of components of our balance sheet.
Expenses associated with the overdraft protection plan relate to a product
introduced during the first quarter of 2002.
INCOME TAXES. Income tax expense for the year ended December 31, 2002 has
been calculated using our expected annual rate for 2002. Deferred tax
liabilities and assets are recognized for the tax effects of differences between
the financial statement and tax bases of assets and liabilities. During the
fourth quarter of 2001, we exhausted our tax operating loss carryforwards and
anticipated future taxable income. Therefore, in accordance with SFAS 109, we
reduced our valuation allowance by $349,251, because we had sufficient taxable
income to realize the tax benefits of the existing net deferred tax assets. As a
result, our net income for the year ended December 31, 2001 increased $349,251.
BALANCE SHEET REVIEW
Assets at year-end 2002 totaled $128,443,129, compared with $104,819,716 at
December 31, 2001. On an annual average basis, total assets were $106,314,522 in
2002, compared to $85,576,395 in 2001. Average interest earning assets increased
$20,157,727 from 2001 to 2002, from $81,163,819 to $101,321,546.
LOANS. Total loans, net of unearned income, averaged $87,804,551 in 2002,
compared to $71,963,289 in 2001. At year-end 2002, loans totaled $95,959,056,
compared to $84,720,349 at year-end 2001. We experienced moderate loan growth in
our market area during the majority of the year, and experienced strong loan
growth during the latter part of the fourth quarter, with particular strength in
middle market commercial and commercial real estate loans. The following table
presents a summary of the loan portfolio by category:
LOANS OUTSTANDING
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
Commercial and agricultural $ 31,798,487 $ 27,014,848
Commercial real estate 33,364,597 35,285,871
Residential real estate 20,637,427 13,373,143
Consumer:
Home equity lines 2,908,625 1,888,877
Other consumer 7,249,920 7,173,572
------------ ------------
Total loans $ 95,959,056 $ 84,736,311
Less: Deferred loan fees 0 (15,962)
------------ ------------
Loans, net of unearned income $ 95,959,056 $ 84,720,349
============ ============
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41
LOAN CONCENTRATIONS. The percentage distribution of our loans, by industry,
is shown in the following table. Commercial real estate loans include financing
for industrial developments, residential developments, retail shopping centers,
industrial buildings, restaurants, and hotels. The primary source of repayment
cannot be traced to any specific industry group.
LOANS BY INDUSTRY (AS A PERCENTAGE OF TOTAL LOANS)
FOR THE YEAR ENDED DECEMBER 31,
2002 2001
---- ----
Agriculture 0.54% 0.96%
Apartment buildings 1.24% 4.73%
Construction and land development 7.87% 5.80%
Finance and insurance 0.28% 0.80%
Manufacturing durable goods 5.37% 4.80%
Services:
Health 1.55% 1.27%
Other 4.24% 6.37%
Wholesale trade 2.38% 1.88%
Retail trade:
Restaurants 3.26% 4.44%
Automotive 0.26% 0.86%
Other 2.98% 3.77%
Other commercial real estate 24.11% 25.61%
All other commercial loans 12.45% 12.21%
------ ------
Total commercial and commercial real estate loans 66.53% 73.50%
Residential real estate loans 25.77% 18.04%
Consumer loans 7.70% 8.46%
------ ------
Total loans 100.00% 100.00%
Substantially all of our loans are to customers located in the Bowling
Green-Warren County area. As of December 31, 2002, our 20 largest credit
relationships consisted of loans and loan commitments ranging from $1.85 million
to $988,864. The aggregate amount of these credit relationships was $25.9
million.
The following table sets forth the maturity distribution and interest rate
sensitivity of commercial and commercial real estate loans as of December 31,
2002. Maturities are based upon contractual terms. Our policy is to specifically
review and approve all loans renewed; loans are not automatically rolled over.
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42
LOAN MATURITIES AND RATE SENSITIVITY
DECEMBER 31, 2002
ONE YEAR ONE THROUGH OVER TOTAL
OR LESS FIVE YEARS FIVE YEARS LOANS
------- ---------- ---------- -----
BY MATURITY DATE:
Commercial $18,437,743 $10,752,858 $ 2,607,886 $31,798,487
Commercial real estate 9,733,605 11,508,622 12,122,370 33,364,597
----------- ----------- ---------- ----------
Total $28,171,348 $22,261,480 $14,730,256 $65,163,084
Fixed rate loans $ 7,504,395 $ 9,775,949 $ 12,499,149 $29,779,493
Floating rate loans 20,666,953 12,485,531 2,231,107 35,383,591
----------- ----------- ------------ -----------
Total $28,171,348 $22,261,480 $14,730,256 $65,163,084
BY NEXT REPRICING OPPORTUNITY:
Commercial $25,834,029 $ 5,587,678 $376,780 $31,798,487
Commercial real estate 17,053,957 4,188,271 12,122,369 33,364,597
---------- --------- ---------- ----------
Total $42,887,986 $ 9,775,949 $12,499,149 $65,163,084
Fixed rate loans $ 7,504,395 $ 9,775,949 $12,499,149 $29,779,493
Floating rate loans 35,383,591 0 0 35,383,591
----------- ----------- ----------- -----------
Total $42,887,986 $ 9,775,949 $12,499,149 $65,163,084
ASSET AND LIABILITY MANAGEMENT. Our assets and liabilities are managed to
provide a consistent level of liquidity to accommodate normal fluctuations in
loans and deposits. The yield on approximately 35 percent of our earning assets
adjusts simultaneously with changes in an external index, primarily the highest
prime rate as quoted in the Wall Street Journal. Most of our interest bearing
liabilities are issued with fixed terms and can only be repriced at maturity.
During periods of rising rates, the yield on our interest earning assets will
increase faster than the rates paid on interest bearing liabilities. This
creates an increase in the net interest margin, as the difference between what
we earn on our interest earning assets and pay on our interest bearing
liabilities increases. During periods of falling rates, as occurred during the
fourth quarter of 2002, with one rate drop of 50 basis points, and throughout
2001, when eleven short-term rate decreases totaling 475 basis points occurred,
the yield on our assets will decline faster than the rates paid on supporting
liabilities. This causes an initial decline in the net interest margin, as the
difference between what we earn on our assets and what we pay on our liabilities
becomes smaller. If interest rates stabilize for a period of time, the
difference between interest earning assets and interest bearing liabilities will
tend to stabilize as occurred during the first ten months of 2002. In a stable
rate environment, our net interest margin will be impacted by, among other
factors, a change in the mix of earning assets, with our deposit growth being
invested in federal funds sold, investment securities or loans.
ASSET QUALITY. Nonperforming loans are defined as non-accrual loans, loans
accruing but past due 90 days or more, and restructured loans. We had
nonperforming loans totaling $115,000 at December 31, 2002, compared to $348,000
at December 31, 2001. The nonperforming loan total at year-end 2002 consisted of
one loan, secured by residential real estate, which was placed on non-accrual
status during the third quarter of 2002. This property has subsequently been
sold at a foreclosure sale, at a price less than $115,000, and a small loss on
the settlement of the loan is anticipated by us when the transaction is settled.
There were no loans accruing but past due 90 days or more and no restructured
loans at December 31, 2002.
41
43
We had nonperforming loans totaling $348,000 at December 31, 2001. Included
in the nonperforming loan total at year-end 2001 were two loans to one customer,
totaling $253,000, that were placed on non-accrual status in the fourth quarter
of 2001. One of these loans was secured by residential real estate, and a
residential building lot secured the other. The remaining $95,000 of
non-performing loans were comprised of two loans, one of which was an $80,000
loan secured by residential real estate, which was placed on non-accrual during
the third quarter of 2000. The remaining $15,000 was a commercial loan past due
90 days or more at the end of 2001. There were no restructured loans at year-end
2001. We had non-performing assets of $670,000 at the end of 2001, comprised of
the four non-performing loans totaling $348,000 mentioned above, plus other real
estate owned totaling $322,000. The other real estate owned was comprised of two
properties, one valued at $230,000 and the other valued at $92,000.
Management classifies commercial and commercial real estate loans as
non-accrual when principal or interest is past due 90 days or more and the loan
is not adequately collateralized and is in the process of collection, or when,
in the opinion of management, principal or interest is not likely to be paid in
accordance with the terms of the obligation. 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.
Nonperforming assets are defined as nonperforming loans, foreclosed real
estate, and other foreclosed property. We had nonperforming assets of $185,000
at the end of 2002, compared to $670,000 at the end of 2001. The nonperforming
assets at December 31, 2002 were comprised of the one nonperforming loan
mentioned above, totaling $115,000, plus other real estate owned totaling
$70,000. The other real estate owned is comprised of one partially developed
real estate property valued at $70,000. This property was written down by
$21,000 during the fourth quarter of 2002, from a previous total of $91,000.
Subsequent to year end 2002, this other real estate owned property was sold,
resulting in a net gain on the sale of $3,900.
The allowance for loan losses is established through a provision for loan
losses charged to expense. The provision to the allowance for loan losses is
based on management's and the Loan Committee's ongoing review and evaluation of
the loan portfolio and general economic conditions on a monthly basis, and
review by the full Board of Directors on a quarterly basis. Our 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. Consumer loans
are charged off after 120 days of delinquency unless adequately secured and in
the process of collection. Recognized losses are charged against the allowance
and subsequent recoveries are added to the allowance. While we use the best
information available to make evaluations, future adjustments to the allowance
may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. The allowance for loan losses is
subject to periodic evaluation by various regulatory authorities and may be
subject to adjustment based upon information that is available to them at the
time of their examination.
42
44
At December 31, 2002, the allowance was $1,300,258, compared to $1,195,924
at the end of 2001. The ratio of the allowance for loan losses to total loans
(excluding mortgage loans held for sale) at December 31, 2002, was 1.36%,
compared to 1.41% at December 31, 2001. The increase in the allowance for loan
losses in 2002 compared to 2001 is primarily due to the overall increase in the
total loan portfolio, as nonperforming loans at December 31, 2002 decreased as a
percentage of the allowance for loan losses. The total allowance for loan losses
as a percent of nonperforming loans increased to 1,130.66% at December 31, 2002,
compared to 358.06% at December 31, 2001. The allowance established for
commercial and commercial real estate loans increased $123,000 to $910,000. The
increase is largely reflective of the growth in the commercial and commercial
real estate loan portfolio. Historical loss rates are used to provide for loans
that have no specific allocation in the determination of the adequacy of the
allowance for loan losses. At December 31, 2002, $641,000 of the allowance was
allocated applying these historical loss rates, compared to $609,000 at the end
of 2001. An unallocated reserve is maintained to recognize the imprecision in
estimating and measuring loss when evaluating allowances for individual loans or
pools of loans. The unallocated allowance for losses was $197,000 at December
31, 2002. The reduction of $19,000 in the unallocated allowance for losses in
2002 compared to 2001 reflects the decrease in loan losses experienced during
2002, coupled with the decrease in nonperforming loans at December 31, 2002
compared to December 31, 2001. The following table sets forth an analysis of our
allowance for loan losses for the periods indicated.
SUMMARY OF LOAN LOSS EXPERIENCE
FOR THE YEAR ENDED DECEMBER 31, 2002 2001
---- ----
Balance at beginning of year $ 1,195,924 $ 822,344
Provision for loan losses 195,000 664,000
Amounts charged off:
Commercial and commercial real estate 94,596 230,811
Residential real estate 0 56,919
Consumer 11,519 8,192
----------- ----------
Total loans charged off 106,115 295,922
Recoveries of amounts previously charged off:
Commercial and commercial real estate 2,800 5,402
Residential real estate 10,279 0
Consumer 2,370 100
----------- ----------
Total recoveries 15,449 5,502
----------- ----------
Net charge-offs 90,666 290,420
----------- ----------
Balance at end of year $ 1,300,258 $ 1,195,924
=========== ===========
Total loans, net of unearned income:
Average $87,805,000 $71,963,000
At December 31 95,959,056 84,720,349
As a percentage of average loans:
Net charge-offs 0.10% 0.40%
Provision for loan losses 0.22% 0.92%
Allowance as a percentage of year-end loans
(excluding mortgage loans held for sale 1.36% 1.41%
Allowance as a percentage of nonperforming loans 1,130.66% 358.06%
43
45
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated.
DECEMBER 31,
(DOLLARS IN THOUSANDS) 2002 2001
---------------------------- ---------------------------
% OF LOANS IN EACH % OF LOANS IN EACH
CATEGORY TO TOTAL CATEGORY TO TOTAL
AMOUNT LOANS AMOUNT LOANS
------ ----- ------ -----
Mortgage loans $ 82 7.4% $ 81 8.3%
Consumer and other loans 111 10.1% 112 11.4%
Commercial loans 483 43.8% 461 47.0%
Commercial real estate loans 427 38.7% 326 33.3%
Unallocated 197 N/A 216 N/A
------- --- --- ---
Total allowance for loan losses $ 1,300 100.0% $1,196 100.0%
======= ====== ====== ======
Each category of the above table consists of allocations based upon
specifically identified problem loans, past due loans, and a portion of the
remaining portfolio based upon historical loss rates. Residential real estate
loans increased from $13,373,143 to $20,637,427 from year-end 2001 to year-end
2002, while the allocation of the loan loss for these loans increased from
$81,000 to $82,000. This small increase in the allocation compared to the
increase in the loan balances was due to a decrease in specifically allocated
problem loans in the portfolio at year-end 2002 compared to 2001, resulting in a
decrease in the specific allocation portion of the allocation calculation of
$12,000. This decrease was offset by the allocation for the remaining part of
the portfolio determined by historical loss rates, which increased by $12,000 at
the end of 2002 compared to 2001. The same scenario applied to the calculation
for consumer and other loans, where a decrease in the allocation for past due
loans at year-end 2002, compared to 2001, offset a slight increase of the
allocation in 2002 calculated for the remaining part of the consumer loan
portfolio.
During the fourth quarter of 2001, due to the uncertainty of the strength
of the national and regional economies following the tragic events of September
11, 2001, management elected to increase the provision for loan losses by an
additional $175,000. This additional provision is reflected in the above table
on the breakdown of the allowance for loans losses, for the year ending 2001, in
the unallocated portion of the distribution of the allowance. This additional
provision amount did not affect the amount of provision expense for potential
loan losses taken by us during 2002.
Management believes that the allowance for loan losses at December 31, 2002
is adequate to absorb losses inherent in the loan portfolio as of that date.
That determination is based on the best information available to management, but
necessarily involves uncertainties and matters of judgment and, therefore,
cannot be determined with precision and could be susceptible to significant
change in the future. In addition, bank regulatory authorities, as a part of
their periodic examinations of Citizens First Bank, may reach different
conclusions regarding the quality of the loan portfolio and the level of the
allowance, which could result in additional provisions being made in future
periods.
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SECURITIES, FEDERAL FUNDS SOLD AND RESALE AGREEMENTS. The tables below
present the carrying value of securities for each of the past two years and the
maturities and yield characteristics of securities as of December 31, 2002.
Securities are all classified as available for sale, and averaged $11,297,161 in
2002, an increase of $3,213,968 over the average of $8,083,193 in 2001.
CARRYING VALUE OF SECURITIES AVAILABLE FOR SALE
DECEMBER 31,
(IN THOUSANDS) 2002 2001
---- ----
U.S. Government agencies $10,183 $ 8,404
Collateralized mortgage obligations securities 6,003 1,725
Other securities, including equity investment securities 0 72
------- -------
Total securities available for sale $16,186 $10,201
======= =======
MATURITY DISTRIBUTION OF SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
OVER OVER
ONE ONE YEAR FIVE YEARS OVER
YEAR THROUGH THROUGH TEN TOTAL EQUITY MARKET
OR LESS FIVE YEARS TEN YEARS YEARS MATURITIES SECURITIES VALUE
------- ---------- --------- ----- ---------- ---------- -----
U.S. Government agencies 196 $6,000 $3,892 $0 $10,088 $ 0 $10,183
Collateralized mortgage obligations
and mortgage-backed securities 1 945 3,554 1,392 5,892 0 6,003
---- ------ ------ ------ ------- - -------
Total securities available for sale $197 $6,945 $7,446 $1,392 $15,980 $0 $16,186
==== ====== ====== ====== ======= == =======
Percent of total 1.2% 43.5% 46.6% 8.7% 100.0% 0%
Weighted average yield(2) 4.60% 4.11% 3.93% 5.30% 4.13% N/A
--------------
(1) Collateralized mortgage obligations and mortgage-backed securities are
grouped into average lives based on December 2002 prepayment
projections.
(2) The weighted average yields are based on amortized cost.
DEPOSITS. Total deposits averaged $87,986,819 during 2002, an increase of
$14,960,175 compared to $73,026,644 in 2001. Strong transaction deposit growth
fueled average deposit growth during 2002. Average demand deposits increased
$1,749,095 during 2002 compared to 2001, to $7,507,931 from $5,758,836. Demand
balances at December 31, 2002 were $11,304,108, an increase of $2,753,859
compared to the end of 2001. Savings, NOW and money market average deposit
balances increased $7,243,495 during 2002 compared to 2001, to $23,517,934 from
$16,274,439. Savings, NOW and money market balances at December 31, 2002 were
$34,676,471, an increase of $13,683,426 compared to December 31, 2001. Time
deposits of $100,000 or more totaled $22,457,617 at December 31, 2002, compared
to $22,040,834 at December 31, 2001. Interest expense on time deposits of
$100,000 or more was $750,336 in 2002, compared to $955,713 in 2001. The
following table shows the maturities of time deposits of $100,000 or more as of
December 31, 2002:
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MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
DECEMBER 31, 2002
Three months or less $ 8,093,726
Over three through six months 4,200,226
Over six through twelve months 4,373,070
Over one year through two years 3,603,851
Over two years through five years 2,186,744
-----------
Total $22,457,617
===========
LIQUIDITY, OTHER BORROWINGS AND CAPITAL RESOURCES
LIQUIDITY. To maintain a desired level of liquidity, we have several
sources of funds available. We primarily rely upon net inflows of cash from
financing activities, supplemented by net inflows of cash from operating
activities, to provide cash used in our investing activities. The majority of
our net inflows in 2002 came from financing activities, which is typical of the
banking industry. Significant financing activities include deposit gathering,
and the use of short-term borrowing facilities, such as federal funds purchased
and repurchase agreements. Total net cash provided by financing activities
during 2002 were $22,525,281, a decrease of $7,778,011 from the total of
$30,303,292 from 2001.
Net increases in demand deposit, NOW, money market and savings accounts
during 2002 totaled $16,437,285, compared to net increases of $9,334,215 during
2001, reflecting our focus on increasing market share and expanding our customer
base. The net increase from certificates of deposit was $1,565,220 in 2002,
compared to $16,040,501 during 2001, reflecting our intent to reduce our
dependency on certificates of deposit accounts for funding needs. We had
$16,667,022 in time deposits of $100,000 or more maturing within one year as of
December 31, 2002. These deposits are typically more volatile than time deposits
under $100,000, meaning there is a greater risk associated with maintaining the
deposits as they mature. We have decreased our dependency on time deposits in
general and time deposits of $100,000 or more as a percentage of our total
deposits in 2002 compared to 2001. Time deposits were $59,912,754 or 56.58% of
total deposits at December 31, 2002, compared to $58,347,534 or 66.39% of total
deposits at December 31, 2001. Time deposits of $100,000 or more totaled
$22,457,617 or 21.21% of total deposits at the end of 2002, compared to
$22,040,834 or 25.08% of total deposits at the end of 2001. To decrease reliance
on time deposits of $100,000 or more, we will continue to offer competitive
transaction deposit products and to focus on expanding our customer base and
increasing our market share, primarily through opening more retail banking
offices in our local market.
We rely on existing Federal Funds lines of credit through correspondent
banks for short-term funding needs. At December 31, 2002, we had established
Federal Funds lines of credit totaling $8,950,000 with four correspondent banks.
Information regarding short-term borrowings is presented below:
OTHER BORROWINGS
(DOLLARS IN THOUSANDS)
2002 2001
---- ----
FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS:
Balance at year end $5,834 $3,412
Weighted average rate at year end .99% 1.47%
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48
Average balance during the year 4,932 2,880
Weighted average rate during the year 1.17% 3.28%
Maximum month-end balance 5,834 5,348
OTHER BORROWINGS:
Balance at year end 7,900 5,799
Weighted average rate at year end 2.81% 5.36%
Average balance during the year 5,045 2,241
Weighted average rate during the year 3.93% 6.67%
Maximum month-end balance 7,900 5,799
TOTAL BORROWINGS:
Balance at year end 13,734 9,211
Weighted average rate at year end 2.04% 3.92%
Average balance during the year 9,977 5,121
Weighted average rate during the year 2.57% 4.76%
Maximum month-end balance 13,734 9,211
Repurchase agreements mature in one business day. The rate paid on these
accounts is tied to the targeted federal funds rate and is based on a tiered
balance calculation.
We 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 December 31, 2002, we had two outstanding FHLB advances
totaling $7,000,000. The first FHLB advance, which was issued December 19, 2001,
matures March 19, 2004 and has a fixed interest rate of 4.04%. The second FHLB
advance, which was issued December 11, 2002, matured June 9, 2003 and had a
fixed interest rate of 1.50%. We have 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 December 31, 2002, we had available
collateral to borrow an additional $5.5 million from FHLB. Net increases from
proceeds from long-term borrowings, primarily from advances from the FHLB, were
$2,101,000 in 2002.
Significant net cash inflows from operating activities came from net income
of $745,218 generated during 2002, and the net increase in available cash offset
by the decrease of $1,272,959 in mortgage loans held for sale to the secondary
market at December 31,2002, compared to the balance at the end of 2001.
Our primary investing activities include purchases of securities and loan
originations, offset by maturities, prepayments and sales of securities, and
loan payments. Net cash used in investing activities were primarily from two
categories: net changes in loans and purchases of available-for-sale securities.
Net changes in loans using cash during 2002 totaled $11,329,373, compared to net
changes in loans using cash of $24,342,809 during 2001. This decrease in the
growth rate of net loans during 2002 compared to 2001 reflects the moderate loan
growth we experienced during the majority of 2002, attributable to a general
slow-down in the local economy after the terrorist attacks in the United States
during September 2001. Net purchases of available-for-sale securities used cash
totaling $13,147,281 during 2002, compared to net cash used of $17,594,039
during 2001. However, proceeds from maturities of available-for-sale securities
were down $8,344,720 during 2002 from 2001, to a total of $6,168,141. The
declining interest rate environment during 2001, when short-term rates fell 475
basis points during the year, contributed to several securities being called for
early maturity, resulting in higher proceeds from the sale of available-for-sale
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49
securities, and also increased purchases of available-for-sale securities during
2001 compared to 2002.
CAPITAL RESOURCES. We are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, we must meet specific
capital guidelines that involve quantitative measures of our assets, liabilities
and certain off-balance sheet items as calculated under the regulatory
accounting practices. Our capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require us to maintain minimum amounts and ratios of total Tier 1 capital to
risk-weighted assets and to total assets. Citizens First's capital ratios at
December 31, 2002 and December 31, 2001 (calculated in accordance with
regulatory guidelines) were as follows:
2002 2001
---- ----
TIER 1 RISK-BASED CAPITAL RATIO 7.83% 8.20%
Regulatory minimum 4.00 4.00
"Well-capitalized" minimum 6.00 6.00
TOTAL RISK-BASED CAPITAL RATIO 9.08% 9.40%
Regulatory minimum 8.00 8.00
"Well-capitalized" minimum 10.00 10.00
TIER 1 LEVERAGE RATIO 6.76% 7.30%
Regulatory minimum 4.00 4.00
"Well-capitalized" minimum 5.00 5.00
At December 31, 2002, Citizens First Bank was categorized as "well
capitalized" under the regulatory framework for prompt corrective action, while
Citizens First was categorized as "well capitalized" under the Tier 1 risk-based
and the Tier 1 leverage ratios, respectively, and as "adequately capitalized"
under the Total risk-based capital ratio. To be categorized as "well
capitalized", we must maintain minimum total risk-based, Tier 1 risk-based and
Tier 1 leverage ratios of 10%, 6%, and 5%, respectively. To be categorized as
"adequately capitalized", we must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios of 8%, 4% and 4 %, respectively. The
decrease in these capital ratios in 2002 is primarily due to our asset growth
relative to our increase in net income, associated with our efforts to gain
market share in our market through competitive pricing of our products and
services.
At the time we became a bank holding company, we owned an investment
portfolio of marketable equity securities valued at approximately $1.5 million.
These securities were our primary asset prior to the formation of Citizens First
Bank. The majority of these securities were sold in 1999, and the proceeds from
the sale of the securities provided a source of cash to us. Since the opening of
Citizens First Bank, our cash requirements have been met primarily by the growth
of customers' deposits, and by the cash generated from the sale of the
investment portfolio
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50
mentioned above. In November 2000, $850,000 of the cash generated from the sale
of the investment portfolio was injected as capital into Citizens First Bank.
In 2001, we executed a credit agreement with a correspondent bank for the
purpose of injecting capital into Citizens First Bank. We made three draws in
2001 totaling $875,000 from a total availability of $3,000,000. We made one draw
in 2002 totaling $25,000. Subsequent to year-end 2002, we made one draw in
February 2003 for $400,000. The current rate on the loan, which is repriced
annually at one-year LIBOR plus 275 basis points, is 5.11%. The stock of
Citizens First Bank is pledged as collateral for the loan.
Our ability to continue to grow is dependent on our earnings and the
ability to obtain additional funds for contribution to Citizens First Bank's
capital, through additional borrowing, the sale of additional common stock or
preferred stock, or through the issuance of additional qualifying equity
equivalents, such as trust preferred securities. We are currently proposing to
raise additional equity through the sale of additional shares of common stock.
To the extent that we are unsuccessful in raising additional equity, we will be
required to seek alternative sources, such as increased reliance on, or
expansion of, our line of credit or the issuance of trust preferred securities.
Increased borrowings or trust preferred securities will have immediate interest
costs, which will have an adverse impact on earnings, although they may require
a lower internal rate of return on equity than common stock. To the extent that
they are floating or variable rate, the future cost of additional borrowings or
trust preferred securities may increase over time, while the cost of equity will
remain fixed.
In the event that we are unable to obtain additional capital for Citizens
First Bank on a timely basis, the growth of Citizens First and Citizens First
Bank may be curtailed, and we may be required to reduce our level of assets in
order to maintain compliance with regulatory capital requirements. Under those
circumstances, net income and the rate of growth of net income may be adversely
affected.
Due to regulatory constraints on the payment of dividends, no funds are
available for the payment of dividends from Citizens First Bank to the Citizens
First holding company without prior regulatory approval.
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003
RESULTS OF OPERATIONS
For the three months ended June 30, 2003, we reported a net loss of
$(748,086), or $(1.16) per common share, compared to net income of $207,997, or
$0.32 per common share, for the same period ended June 30, 2002. For the six
months ended June 30, 2003, we reported a net loss of $(630,337), or $(0.98) per
common share, compared to a net gain of $338,886, or $0.53 per common share, for
the same period ended June 30, 2002.
NET INTEREST INCOME. Net interest income was $1,160,403 in the second
quarter of 2003, compared with $898,137 in the comparable period in 2002. Second
quarter 2003 interest income of $1,888,444, an increase of $289,644 or 18.1%
over the same period in 2002, includes $1,769,060 income on loans, $107,913
income on securities, and $11,471 income on federal funds sold and other
interest-bearing accounts. Interest income of $1,598,800 during the second
quarter
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of 2002 included $1,440,385 of income on loans, $149,875 income on investment
securities, and $8,540 income on federal funds sold and other interest-bearing
accounts. Interest expense of $728,041 for the second quarter of 2003, up
$27,378 from the same period in 2002, consists of interest on deposits of
$629,223, and on other borrowings of $98,818. Second quarter 2002 interest
expense of $700,663 consisted of interest on deposits of $641,964, and interest
on other borrowings of $58,699. The growth of the balance sheet, particularly
loans and deposits, from the second quarter of 2002 to the same period in 2003,
coupled with the drop in the cost of interest-bearing liabilities, offset by the
drop in yields on interest earning assets, contributed to the increase in net
interest income. The drop in both the cost of interest-bearing liabilities and
the yield on interest-earning assets in the second quarter of 2003, compared to
the same period in 2002, was primarily due to the continued repricing of loans
and deposits of the Bank after the reduction of short-term interest rates by the
Federal Reserve Bank during 2001 of 475 basis points, and the reduction of
another 50 basis points during the fourth quarter of 2002, and 25 basis points
during the second quarter of 2003. We are 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 our interest earning assets,
primarily loans, reprice down faster than do the liabilities, specifically
certificates of deposit, which provide the funding for the assets.
Net interest income was $2,226,735 for the six months ended June 30, 2003,
an increase of $479,945 or 27.5% over the total of $1,746,790 for the same
period of 2002. Interest income of $3,613,144 for the first six months of 2003
included $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.
Total interest income of $3,176,398 for the first six months of 2002 consisted
of $2,874,746 income on loans, $279,672 income on investment securities, and
$21,980 income on federal funds sold and other interest-bearing accounts.
Interest expense for the first half of 2003 totaled $1,386,409, and included
$1,213,565 interest on deposits, and $172,844 expense on other borrowings. The
comparable period of 2002 had interest expense of $1,429,608, of which
$1,285,303 was interest on deposits, and $144,305 was expense on other
borrowings.
PROVISION FOR LOAN LOSSES. The provision for loan losses expense for the
three months ended June 30, 2003, was $1,490,000, an increase of $1,420,000 over
the total of $70,000 for the same quarter of 2002. 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
and included in nonperforming loans at June 30, 2003. As the result of a
periodic regulatory examination of our subsidiary 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 $1,643,000 for the first six
months of the year, compared to $100,000 for the same period of 2002, an
increase of $1,543,000. Of this increase, $1,087,000 and $229,050 were
specifically expensed for non-performing loans and potential problem loans,
respectively, during the second quarter of 2003.
NON-INTEREST INCOME. Non-interest income for the three months ended June
30, 2003 and 2002, respectively, was $565,972 and $220,419, an increase of
$345,553 or 156.8%. Income from service charge on deposit accounts increased
$36,555, or 26.8%, from $136,478 during the second
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quarter of 2002 to $173,033 for the second quarter of 2003. The increase is
primarily attributable to growth in accounts subject to service charges. Income
from the sale of secondary market loans increased $187,209, from $1,599 during
the second quarter of 2002 to $188,808 for the same period of 2003. The growth
in income from the sale of secondary market loans is associated with the
acquisition of Commonwealth Mortgage during the first quarter of 2003.
Non-interest income for the second quarter of 2003 includes a gain of $134,732
from the sale of investment securities, compared to a gain of $67,370 during the
same quarter of 2002.
Non-interest income for the six months ended June 30, 2003 and 2002,
respectively, was $847,932 and $332,868, an increase of $515,064 or 154.7%.
Service charges on deposit accounts comprised the largest part of non-interest
income for both six-month time periods, totaling $320,122 and $229,074 for 2003
and 2002, respectively. Income from the sale of secondary market loans increased
to $280,746 for the first half of 2003, from $10,837 for the same period of
2002. Gains from the sale of investment securities during the first half of 2003
totaled $144,024, compared to $67,370 for the first half of 2002.
NON-INTEREST EXPENSE. Non-interest expense was $1,373,561 in the second
quarter of 2003, up from $732,059 in the same quarter of 2002, an increase of
$641,502 or 87.6%. 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
$368,940 of the increase in non-interest expense during the second quarter of
2003, compared to the same period of 2002.
For the six months ended June 30, 2003 and 2002, respectively, non-interest
expense was $2,396,254 and $1,463,763, an increase of $932,492, or 63.7%. The
non-interest expense associated with the two new branches and the mortgage
origination company accounted for $582,584 of the increase during the first half
of 2003.
INCOME TAXES. Income tax expense or credit has been calculated based on our
expected annual rate for 2003. During the second quarter of 2003, an income tax
credit totaled $(389,100), compared to expense of $108,500 for the same period
of 2002. For the six months ended June 30, 2003, the income tax credit totaled
$(334,250), compared to expense of $177,010 for the same period of 2002.
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities.
BALANCE SHEET REVIEW
OVERVIEW. Total assets at June 30, 2003 were $154,435,574, up from
$128,443,129 at December 31, 2002 and up from $105,685,701 a year ago. Average
total assets for the second quarter of 2003 were $143,404,081, up $39,757,409
from the second quarter of 2002 average of $103,646,672.
LOANS. At June 30, 2003 loans (excluding mortgage loans held for sale)
totaled $124,787,813, compared with $95,959,056 at December 31, 2002 and
$88,804,650 a year ago, an increase of $28,828,757 and $35,983,163 respectively.
This increase is attributable primarily to loans generated by the branch opened
during the first quarter of 2003 in Franklin, Kentucky, and adjustable rate
mortgage loans generated by Commonwealth Mortgage, which are retained in our
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portfolio. Loans averaged $118,380,179 during the second quarter of 2003, an
increase of $32,087,741 or 37.2%, over the average total of $86,292,438 for the
second quarter of 2002.
ASSET QUALITY. The allowance for loan losses was $2,900,907 at June 30,
2003, an increase of $1,600,649, or 123.1% over the December 31, 2002 level of
$1,300,258. The allowance represents 2.32% of period-end loans, compared to
1.36% of period-end loans at December 31, 2002. As noted above, we recorded a
provision for loan losses of $1,490,000 during the second quarter of 2003 to the
allowance for loan losses.
We had non-performing loans totaling $1,783,707 at June 30, 2003, compared
to $115,000 at December 31, 2002 and $409,795 at June 30, 2002. Included in the
non-performing loan total at June 30, 2003 are three loans to one borrower,
totaling $1,675,000, that were placed on non-accrual status during the second
quarter of 2003. The loans are secured by substantially all the assets of the
borrower and the guaranties of three individuals, a limited partnership and a
limited liability company. The borrower's assets consist primarily of interests
in two energy related properties located in Texas and Louisiana. During the
second quarter of 2003 the borrower advised the Company that one of the
properties had failed to produce any revenue, was unlikely to ever produce
revenue and that the property's value was now negligible, and further that the
revenue from the second property is expected to be minimal. The borrower
terminated its operations during the second quarter. Also placed on non-accrual
status during the second quarter of 2003 were two loans totaling $55,244, to one
borrower, secured by a second mortgage on residential real estate, and a
vehicle. The borrower filed for bankruptcy protection during the quarter. The
remaining $53,463 of non-performing loans consists of two loans, secured by
residential real estate, accruing but past due over 90 days.
We had non-performing assets of $1,783,707 at the end of the second quarter
of 2003, comprised of the above mentioned non-performing loans. We had
non-performing assets of $185,000 at December 31, 2002, comprised of $115,000 of
non-performing loans, and other real estate owned of $70,000.
SECURITIES. Securities (all classified as available for sale) increased
from $16,186,406 at December 31, 2002 to $17,688,014 at June 30, 2003. At June
30, 2002 securities totaled $11,392,497.
DEPOSITS AND BORROWED FUNDS. Total deposits averaged $117,270,977 in the
second quarter of 2003, an increase of $30,357,040 from the comparable 2002
quarterly average of $86,913,937. As of June 30, 2003, total deposits were
$127,884,533, and included $117,285,550 of interest bearing deposits. This
compares to total deposits of $105,893,333 at December 31, 2002, which included
$94,589,225 of interest bearing deposits. Total deposits at June 30,2002 were
$88,467,670, and included interest bearing deposits of $81,462,656.
We had $4,431,233 of deposits secured by securities sold under agreements
to repurchase on June 30, 2003. These obligations, which mature in one business
day, are swept daily from customers' demand deposit accounts. These balances
averaged $4,868,460 during the second quarter of 2003.
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At June 30, 2003, we had established Federal Funds lines of credit totaling
$8,950,000 with four correspondent banks. At June 30, 2003, we had three
outstanding FHLB advances totaling $11,000,000. The first FHLB advance, which
was issued December 19, 2001, matures March 19, 2004 and has a fixed interest
rate of 4.04%. The second FHLB advance, which was issued May 2, 2003, matures
May 2, 2005 and has a fixed interest rate of 1.90%. The third FHLB advance,
which was issued June 9, 2003, matures June 6, 2006, and has a fixed interest
rate of 2.03%. At June 30, 2003, we had available collateral to borrow an
additional $8.3 million from the FHLB.
During the second quarter of 2003, we made a draw of $1,000,000 under the
credit agreement with a correspondent bank, bringing total outstanding debt
under the agreement to $2,300,000 at June 30, 2003 from a total availability of
$3,000,000. The current rate on the loan, which is repriced annually during June
at one-year LIBOR plus 275 basis points, is 3.78%.
CAPITAL RESOURCES AND LIQUIDITY. The table below sets forth Citizens First
Bank's capital ratios as of June 30, 2003 and June 30, 2002:
2003 2002
---- ----
TIER 1 RISK-BASED 8.23% 9.33%
Regulatory minimum 4.00 4.00
"Well-capitalized" minimum 6.00 6.00
TOTAL RISK-BASED 9.49% 10.58%
Regulatory minimum 8.00 8.00
"Well-capitalized" minimum 10.00 10.00
TIER 1 LEVERAGE 7.00% 7.93%
Regulatory minimum 4.00 4.00
"Well-capitalized" minimum 5.00 5.00
The table below sets forth Citizens First's capital ratios as of June 30,
2003 and June 30, 2002:
2003 2002
---- ----
TIER 1 RISK-BASED 6.34% 8.27%
Regulatory minimum 4.00 4.00
"Well-capitalized" minimum 6.00 6.00
TOTAL RISK-BASED 7.60% 9.52%
Regulatory minimum 8.00 8.00
"Well-capitalized" minimum 10.00 10.00
TIER 1 LEVERAGE 5.39% 7.04%
Regulatory minimum 4.00 4.00
"Well-capitalized" minimum 5.00 5.00
All of the capital ratios for Citizens First and Citizens First Bank
decreased from December 31, 2002 to June 30, 2003, as the rate of growth of
risk-weighted and average quarterly assets has been higher than the growth of
total equity. All capital ratios for our subsidiary bank fall within the minimum
capital ratios for well-capitalized banks as of June 30, 2003, with the
exception of the total risk-based ratio. For that ratio, the increase in loans,
coupled with the large provision expense taken during the second quarter, offset
the net proceeds we contributed to the bank from the sale of our common stock,
resulting in larger growth in total risk-based assets compared to allowable
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equity. Included in equity at quarter end 2003 are the net proceeds, totaling
approximately $1,026,000, from the sale of 79,625 shares of our common stock in
this offering on June 27, 2003, all of which were contributed to the capital of
our subsidiary bank.
At June 30, 2003, Citizens First's tier 1 risk-based and leverage ratio
exceeded "well-capitalized" minimum levels. Our total risk-based ratio at June
30, 2003 fell below the regulatory minimum due to the increase in period end
loan balances, coupled with the large provision expense taken during the second
quarter, which offset the net proceeds of approximately $1,026,000 from the sale
of our common stock during the second quarter of 2003. Management anticipates
that the sale of additional shares of common stock during the third quarter will
result in an improved total risk-based capital ratio at the end of the third
quarter of 2003. If this offering is not successful or we cannot raise
sufficient capital, alternative measures to improve our capital ratios, such as
slowing or reducing loan growth, or raising capital through the issuance of
preferred stock or trust preferred securities, would be considered.
MARKET RISK ANALYSIS
QUANTITATIVE ASPECTS OF MARKET RISK. We do not maintain a trading account
for any class of financial instrument, nor do we engage in hedging activities or
purchase high-risk derivative instruments. Furthermore, we are not subject to
foreign exchange rate risk or commodity price risk.
We monitor interest rate sensitivity and interest rate risk with an
earnings simulation model, using rate risk measurement techniques to produce a
reasonable estimate of interest margin risks. The system provides several
methods for measuring interest rate risk, including rate sensitivity gap
analysis to show cash flow and repricing information, and margin simulation, or
rate shocking, to quantify the actual income risk, by modeling our sensitivity
to changes in cash flows over a variety of interest rate scenarios. The program
performs a full simulation of each balance sheet category under various rate
change conditions and calculates the net interest income change for each. Each
category's interest change is calculated as rates ramp up and down. In addition,
the prepayment speeds and repricing speeds are changed.
The following illustrates the effects on net interest income of an
immediate shift in market interest rates from the earnings simulation model.
Basis point change +200 bp +100 bp -100 bp -200 bp
Increase (decrease) in net interest income 9.3% 4.8% (4.8%) (9.8%)
As of December 31, 2002, management believes our balance sheet was in an
asset-sensitive position, as the repricing characteristics of the balance sheet
were such that an increase in interest rates would have a positive effect on
earnings and a decrease in interest rates would have a negative effect on
earnings. Certain assumptions were utilized in preparing the preceding table.
These assumptions relate to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under differing interest rate
scenarios, among others.
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As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features that restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table.
QUALITATIVE ASPECTS OF MARKET RISK. Our principal financial objective is to
achieve long-term profitability while reducing our exposure to fluctuating
market interest rates. We have sought to reduce the exposure of our earnings to
changes in market interest rates by attempting to manage the mismatch between
asset and liability maturities and interest rates. In order to reduce the
exposure to interest rate fluctuations, we have developed strategies to manage
our liquidity and shorten our effective maturities of certain interest earning
assets.
Management has sought to decrease the average maturity of our assets by:
o offering a variety of adjustable-rate residential mortgage loans
and consumer loans, many of which are retained by us for our
portfolio;
o purchasing mortgage-backed and related securities with adjustable
rates or estimated lives of five to ten years or less; and
o purchasing short- to intermediate-term investment securities.
In addition, we sell a portion of our long-term, fixed-rate single-family
residential mortgage loans for cash in the secondary market. The retention of
ARM loans and adjustable-rate mortgage-backed securities, which reprice at
regular intervals, helps to ensure that the yield on our loan portfolio will
help to offset increases in our cost of funds. However, periodic and lifetime
interest rate adjustment limits may prevent ARM loans from repricing to market
interest rates during periods of rapidly rising interest rates. We do not use
any hedging techniques to manage the exposure of our assets to fluctuating
market interest rates.
We rely on retail deposits as our primary source of funds and maintain
lower-costing savings, NOW and money market accounts, along with higher costing
certificates of deposit. We have attempted to lengthen the term of deposits by
offering certificates of deposit with longer terms. Management believes retail
deposits, compared to brokered deposits, reduce the effects of interest rate
fluctuations because they generally represent a more stable source of funds.
IMPACT OF ACCOUNTING PRONOUNCEMENTS AND REGULATORY POLICIES
The Financial Accounting Standards Board (FASB) recently adopted
Statement of Financial Accounting Standard (SFAS) 143, "Accounting for Asset
Retirement Obligations." This statement requires an entity to record a liability
for an obligation associated with the retirement of an asset at
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the time the liability is incurred by capitalizing the cost as part of the
carrying value of the related asset and depreciating it over the remaining
useful life of that asset. SFAS 143 is effective for fiscal years beginning
after June 15, 2002. We expect to first apply SFAS 143 in the first quarter of
our fiscal year ending December 31, 2003. We anticipate that there will be no
material impact on our financial condition or results of operation as a result
of adopting SFAS 143.
The FASB recently adopted SFAS No. 145, "Rescission of SFAS Statements No.
4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections." This
statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment
of Debt," and amends SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." This statement also rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers." This statement amends SFAS
No. 13, "Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. SFAS No. 145
was effective for transactions occurring after May 15, 2002. We anticipate there
will be no material impact on our financial condition or results of operation as
a result of adopting SFAS No. 145.
The FASB recently adopted SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This statement
requires recognition of a liability for a cost associated with an exit or
disposal activity when the liability is incurred, as opposed to being recognized
at the date an entity commits to an exit plan under EITF Issue No. 94-3. This
statement also established that fair value is the objective for initial
measurement of the liability. This statement is effective for exit or disposal
activities that re initiated after December 31, 2002. We anticipate there will
be no material impact on our financial condition or results of operation as a
result of adopting SFAS No. 146.
The FASB recently adopted SFAS No. 147, "Acquisition of Certain Financial
Institutions." This statement addresses the financial accounting and reporting
for the acquisition of all or part of a financial institution, except for a
transaction between two or more mutual enterprises. This statement removes
acquisitions of financial institutions from the scope of SFAS No. 72,
"Accounting for Certain Acquisitions of Banking or Thrift Institutions" and FASB
Interpretation No. 9, "Applying APB Opinions No. 16 and 17 when a Savings and
Loan Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method," and requires that those transactions be
accounted for in accordance with SFAS No. 141 and SFAS No. 142. In addition,
this statement amends SFAS No. 144 to include in its scope long-term customer
relationship intangible assets of financial institutions such as depositor and
borrower-relationship intangible assets and credit cardholder intangible assets.
Consequently, those intangible assets are subject to the same undiscounted cash
flow recoverability test and impairment loss recognition and measurement
provisions that SFAS No. 144 requires for other long-lived assets that are held
and used. This statement was effective October 1, 2002. There was no material
impact on our financial condition or results of operation as a result of
adopting SFAS No. 147.
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The FASB recently adopted SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure--an Amendment of FASB Statement No.
123." This statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 123 to require more prominent disclosures about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results in both annual and interim financial statements. This
statement is effective for financial statements for fiscal years ending after
December 15, 2002. There was no material impact on our financial condition or
results of operation as a result of adopting SFAS No. 148.
In November 2002, the FASB issued Interpretation No. 45, (FIN 45),
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, which elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this Interpretation apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements in this Interpretation are effective for periods ending after
December 15, 2002. Adoption of the requirements of FIN 45 is not expected to
have a material effect on our financial statements.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. This statement
establishes standards for how an issuer classifies and measures in its balance
sheet certain financial instruments with characteristics of both liabilities and
equity. The objective of this Statement is to require issuers to classify as
liabilities (or assets in some circumstances) three classes of freestanding
financial instruments that embody obligations for the issuer. This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
except for mandatorily redeemable financial instruments of a nonpublic company.
For these instruments, this Statement is effective for existing or new contracts
for fiscal periods beginning after December 15, 2003. Adoption of this Standard
is not expected to have a material effect on our financial statements.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
CONSOLIDATION OF VARIABLE INTEREST ENTITIES. This Interpretation clarifies the
application of APB No. 51, CONSOLIDATED FINANCIAL STATEMENTS, for certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated support from
other parties. This Interpretation requires variable interest entities to be
consolidated by the primary beneficiary which represents the enterprise that
will absorb the majority of the variable interest entities' expected losses if
they occur, receive a majority of the variable interest entities' residual
returns if they occur, or both. Qualifying Special Purpose Entities (QSPE) are
exempt from the consolidation requirements of FIN 46. This Interpretation is
effective immediately for variable interest entities created after January 31,
2003 and for variable interest entities in which an enterprise obtains an
interest after that date. This Interpretation is effective in the first fiscal
year or interim period beginning after June 15, 2003 for variable interest
entities in which an enterprise holds a variable
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interest that was acquired before February 1, 2003, with earlier adoption
permitted. Adoption of this interpretation is not expected to have a material
effect on our financial statements.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data included
in this prospectus have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars, without considering the change
in the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the increased cost of our operations. Unlike most
industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
BUSINESS
BACKGROUND
We operated from 1975 to 1998 as a private investment club with a small
number of shareholders. In September 1998 our directors filed as organizers an
application with the Kentucky Department of Financial Institutions for
permission to operate a state chartered bank and an application to the FDIC for
deposit insurance. In November 1998 we filed an application with the Federal
Reserve Board for approval to become a bank holding company through ownership of
Citizens First Bank. Following our receipt of necessary regulatory approvals,
Citizens First Bank opened for business in February 1999.
We decided to enter the banking business because, in recent years, some
Bowling Green banks were acquired by regional multi-bank holding companies
headquartered outside Bowling Green. In many cases, these acquisitions and
consolidations were accompanied by fee changes, branch closings, the dissolution
of local boards of directors, management and personnel changes and, in the
perception of our management, a decline in the level of personalized customer
service. This situation created a favorable opportunity for a new commercial
bank that could attract those customers who prefer to conduct business with a
locally managed institution that demonstrates an active interest in their
businesses and personal financial affairs. We believe that a locally managed
institution is better able to deliver more timely responses to customer
requests, provide customized financial products and services and offer the
personal attention of senior banking officers.
BUSINESS STRATEGY
Our mission is to firmly establish ourselves in our primary service area as
a community owned and operated full-service bank providing traditional products
and services typically offered by commercial banks. Our primary service area is
Bowling Green, Warren County Kentucky and the surrounding ten county region
known as the Barren River Area Development District. The Bowling Green banking
market is highly competitive with 13 commercial banking institutions currently
serving the market. We believe that our ability to compete is enhanced by our
posture as
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a locally managed institution with a base of local shareholders and board of
directors. Most of the banks in Bowling Green and the surrounding region are
part of larger bank holding companies headquartered outside of the Bowling
Green/Warren County market and Kentucky. Promoting local management and
ownership has proven effective for us in attracting customers, fostering loyalty
and establishing and maintaining strong asset quality. We have and intend to
continue emphasizing our local roots, and we have a philosophy of giving our
customers prompt and responsive personal service.
Since inception, our balance sheet has steadily grown to $154 million in
total assets at June 30, 2003. To further enhance our growth and customer
service, we opened a second branch in Bowling Green in March 2003 and a third
branch in Franklin, Kentucky in May, 2003.
Citizens First Bank emphasizes experienced local management with a strong
commitment to the communities located within its primary market area. Citizens
First Bank's officers and directors are active in these communities and we
believe that these communities and their business leaders have supported, and
will continue to support, a locally owned and managed financial institution
committed to providing outstanding customer service and banking products.
Citizens First Bank competes aggressively for banking business through a
systematic program of directly calling on both customers and referral sources
such as attorneys, accountants, mortgage brokers, insurance agents and other
business people, many of whom are already known to our officers and directors.
Citizens First Bank is committed to developing strong customer
relationships by providing:
o customer access to executive management;
o continuity in officer and staff personnel;
o an active personal call program by officers;
o an understanding of customers' businesses and needs;
o prompt response to customer requests; and
o development of relationships that are durable and that grow as
Citizens First Bank and its customers continue in business.
We have hired and will continue to hire experienced staff to provide
personalized service and to generate competitively priced loans and deposits.
This experienced staff has access to technology, software and database systems
selected to deliver high-quality products and provide responsive service to
customers. Through an agreement with a third-party service provider to provide
data processing services and customer accounts statement preparation, Citizens
First Bank reduces the in-house personnel and equipment required to deliver such
services and products.
ACQUISITION OF COMMONWEALTH MORTGAGE AND SOUTHERN KENTUCKY LAND TITLE
In January 2003, we acquired all of the outstanding stock of Commonwealth
Mortgage of Bowling Green, Inc. and Southern Kentucky Land Title, Inc.
Commonwealth Mortgage originates
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1-4 family residential mortgages for sale in the secondary mortgage market,
while Southern Kentucky Land Title provides title insurance agency services for
real estate purchase contracts. The purchase price for Commonwealth Mortgage and
Southern Kentucky Land Title consisted of $400,000 plus a deferred contingent
purchase price of up to $1,350,000 payable upon the combined entities'
achievement of specified annual earnings targets over a five year period, plus
25% of the amount, if any, by which their earnings exceed such targets. 25% of
the deferred purchase price will be paid by the issuance of our 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 our option, an additional 25%
of such deferred purchase price, if any, may be paid in shares of our common
stock. The deferred contingent purchase price will be accounted for as
additional purchase price at the time the contingency is resolved. The purchased
assets of Commonwealth Mortgage and Southern Kentucky Land Title consist
primarily of furniture, fixtures and equipment. We also purchased the .2 acre
site on which the main office of Commonwealth Mortgage is located for a purchase
price of $272,500. In connection with the acquisition, we recorded $380,000 of
goodwill.
1-4 family residential mortgages originated by Commonwealth Mortgage will
typically be sold in the secondary market and will increase our gains on the
sale of loans held for sale while adjustable rate mortgage and home equity loans
originated by Commonwealth Mortgage will be retained by us in our loan
portfolio. The sale of title insurance by Southern Kentucky Land Title will
supplement our non-interest fee income and further expand our customer service
offerings.
BUSINESS OVERVIEW
We conduct a general banking business and serve as a full-service community
financial institution offering a variety of products and services. These
services include the receipt of deposits, making of loans, issuance of checks,
acceptance of drafts, consumer and commercial credit operations and mortgage
lending. Our deposit products include basic, specialty and low-cost checking
accounts and competitive savings and certificate of deposit accounts. Our loan
products include a variety of retail, commercial, mortgage and consumer
products.
BUSINESS FINANCIAL SERVICES. We offer products and services consistent with
the goal of attracting a wide variety of customers, including small- to
medium-sized business customers. We actively pursue business checking accounts
by offering competitive rates, telephone banking and other convenient services
to our business customers. In some cases, we require business customers to
maintain minimum balances. We have also established relationships with one or
more correspondent banks and other independent financial institutions to provide
other services requested by customers, including cash management services and
loan participations where the requested loan amount exceeds the lending limits
imposed by law or by our policies.
At December 31, 2002, we had total business loans of $65,163,084
outstanding. Of these, $31,798,487 were commercial and agricultural loans, and
$33,364,597 were commercial real estate loans. The commercial and agricultural
loans generated income of $2,110,692 during 2002, while the commercial real
estate loans generated income of $1,927,630. We had total business deposits of
$14,954,049 at year-end 2002. These deposits consisted of DDA deposits of
$10,412,323, NOW account deposits of $2,837,191, and money market account
deposits of $1,704,535. The business NOW accounts produced interest expense of
$43,456 during 2002, while the business money market accounts totaled $27,579.
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CONSUMER FINANCIAL SERVICES. Our retail banking strategy is to offer basic
banking products and services that are attractively priced and easily understood
by the customer. We focus on making our products and services convenient and
readily accessible to the customer. In addition to banking during normal
business hours, our products and services are delivered via multiple channels,
including extended drive-through hours, ATMs, telephone, mail, and by personal
appointment. We have nine ATMs and have joined an ATM network which has ATMs at
convenience stores and/or service stations. We also provide debit and credit
card services by contracting for such services and also offer night depository,
direct deposits, Series E Savings Bond redemptions, cashier's and travelers
checks and letters of credit.
We offer a variety of deposit accounts, including checking accounts,
regular savings accounts, NOW accounts, money market accounts, sweep accounts,
fixed and variable rate IRA accounts, certificate of deposit accounts and safety
deposit boxes. Although we offer a range of consumer and commercial deposit
accounts, we do not actively solicit (though we do accept) certificates of
deposit in principal amounts greater than $100,000. We have hired and will
continue to hire experienced staff to provide personalized service. This
experienced staff has access to current software and database systems selected
to deliver high-quality products and provide responsive service to clients. Our
agreement with a third-party service provider makes available to customers
convenient telephonic access to their accounts and is intended to allow us to
remain at the forefront of technology while reducing the personnel and equipment
required to deliver such products.
At December 31, 2002, we had total consumer loans of $30,795,972. Of these,
$20,637,427 were residential real estate, and $10,158,545 were other consumer
loans. The residential real estate loans generated income of $1,176,403 during
2002, while the other consumer loans generated income of $574,582. We had total
consumer deposits of $90,939,284 at year-end 2002. These deposits consisted of
DDA deposits of $891,785, NOW account deposits of $12,186,330, money market
account deposits of $16,547,248, savings account balances of $1,401,167, and
certificates of deposit balances of $59,912,754. The consumer NOW account
deposits produced interest expense of $151,954 during 2002, the consumer money
market accounts totaled $118,914, the consumer savings accounts were $11,972,
and the consumer certificates of deposit totaled $2,146,365.
LENDING PRACTICES. We make loans to individuals and businesses located
within our market area. Our loan portfolio consists of commercial loans (51%),
residential and commercial mortgage loans (40%) and personal loans (9%). At
December 31, 2002, our legal lending limits under applicable regulations (based
on the legal lending limits of 30% and 20%, respectively, of capital and surplus
for secured and unsecured loans, respectively) were approximately $3.1 million
and $2.1 million, respectively, for secured and unsecured loans and following
completion of this offering will be approximately $4.6 million and $3.0 million
if all shares being offered are sold and all proceeds immediately contributed by
us to Citizens First Bank.
Commercial loans are made primarily to small- and medium-sized businesses.
These loans are secured and unsecured and are made available for general
operating inventory and accounts receivables, as well as any other purposes
considered appropriate. We will generally look to a borrower's business
operations as the principal source of repayment, but will also receive, when
appropriate, security interests in personal property and/or personal guarantees.
In addition, the
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majority of commercial loans that are not mortgage loans are secured by a lien
on equipment, inventory and/or other assets of the commercial borrower.
Commercial lending (including commercial real estate lending) involves more
risk than residential real estate lending because loan balances are greater and
repayment is dependent upon the borrower's operations. In many cases, risk can
be reduced by limiting the amount of credit to any one borrower to an amount
less than our legal lending limit and avoiding types of commercial real estate
financings considered risky.
We originate residential mortgage loans with either fixed or variable
interest rates. Our general policy is to sell most fixed rate loans in the
secondary market. This policy is subject to review by management and may be
revised as a result of changing market and economic conditions and other
factors. We do not retain servicing rights with respect to the secondary market
residential mortgage loans that we originate. We also offer home equity loans
which are secured by prior liens on the subject residence. All of our
residential real estate loans are secured by a first lien on the real estate.
We make personal loans and lines of credit available to consumers for
various purposes, such as the purchase of automobiles, boats and other
recreational vehicles, and the making of home improvements and personal
investments. All of such loans are retained by us.
Consumer loans generally have shorter terms and higher interest rates than
residential mortgage loans and usually involve more credit risk than mortgage
loans because of the type and nature of the collateral. Consumer lending
collections are dependent on a borrower's continuing financial stability and are
thus likely to be adversely affected by job loss, illness or personal
bankruptcy. In many cases, repossessed collateral for a defaulted consumer loan
will not provide an adequate source of repayment of the outstanding loan balance
because of depreciation of the underlying collateral. We underwrite our loans
carefully, with a strong emphasis on the amount of the down payment, credit
quality and history, employment stability and monthly income. These loans are
expected generally to be repaid on a monthly repayment schedule with the payment
amount tied to the borrower's periodic income. We believe that the generally
higher yields earned on consumer loans help compensate for the increased credit
risk associated with such loans and that consumer loans are important to our
efforts to serve the credit needs of our customer base.
Although we take a progressive and competitive approach to lending, we
stress high quality in our loans. We are subject to written loan policies that
contain general lending guidelines and are subject to periodic review and
revision by our board of directors' Loan Committee. These policies concern loan
administration, documentation, approval and reporting requirements for various
types of loans.
We seek to make sound loans while recognizing that lending money involves a
degree of business risk. Our loan policies are designed to assist us in managing
the business risk involved in making loans. These policies provide a general
framework for our loan operations while recognizing that not all risk activities
and procedures can be anticipated. Our loan policies instruct lending personnel
to use care and prudent decision making and to seek the guidance of our Chief
Credit Officer or our President where appropriate.
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The loan policies address loan portfolio diversification and prudent
underwriting standards, loan administration procedures, and documentation,
approval and reporting requirements in light of our basic objectives of:
o granting loans on a sound and collectible basis;
o investing funds profitably for the benefit of our shareholders and
securely for the benefit of our depositors; and
o serving the credit needs of our primary service area.
Such policies provide that individual officers have personal lending
authority within varied ranges. Credits in excess of an officer's lending
authority but not in excess of $500,000 require the approval of an executive
officer and credits in excess of $500,000 require the approval of the board of
directors.
Our loan policies provide general guidelines for loan-to-value ratios that
restrict the size of loans to a maximum percentage of the value of the
collateral securing the loans, which percentage varies by the type of
collateral, including the following loan-to-value ratios:
o raw land (65%);
o improved residential real estate lots (80%);
o commercial real estate (80%); and
o residences (90%).
We make use of credit risk insurance, principally for residential real
estate mortgages where the loan-to-value ratio exceeds 80%. Regulatory and
supervisory loan-to-value limits are established by the Federal Deposit
Insurance Corporation Improvement Act of 1991. Our internal loan-to-value
limitations will follow these limits and will often be more restrictive than
those required by the regulators.
Our loan policies generally include other underwriting guidelines for loans
secured by liens on real estate. These underwriting standards are designed to
determine the maximum loan amount that a borrower has the capacity to repay
based upon the type of collateral securing the loan and the borrower's income.
Typically the borrower would be expected to have annual cash flow of 1.25 times
required debt service. In addition, our loan policies require that we obtain a
written appraisal by a state certified appraiser for loans secured by real
estate in excess of $250,000, subject to limited exceptions. The appraiser must
be selected by us and must be independent and licensed or state certified. We
must obtain a written appraisal by a state licensed appraiser for loans secured
by real estate in excess of $50,000 but not exceeding $250,000. We may elect to
conduct an in-house real estate evaluation for loans not exceeding $50,000. Our
loan policies also include maximum amortization schedules and loan terms for
each category of loans secured by liens on real estate. Loans secured by
commercial real estate are generally subject to a maximum term of 5 years and a
maximum amortization schedule of 25 years. Loans secured by residential real
estate with variable
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interest rates will have a maximum term and amortization schedule of 30 years.
Except for five-year fixed rate residential mortgage loans, we sell to the
secondary market all of our residential fixed-rate mortgage loans, thereby
reducing our interest rate risk and credit risk. Loans secured by vacant land
are generally subject to a maximum term of 3 years and a maximum amortization
schedule of 10 years.
Our loan policies also establish guidelines on the aggregate amount of
loans to any one borrower, providing as a guideline that no loan shall be
granted where the aggregate liability of the borrower to us will exceed $2
million. This internal lending guideline is subject to review and revision by
our board of directors from time to time. In addition, our loan policies provide
guidelines for personal guarantees; environmental policy review, loans to
employees, executive officers and directors, problem loan identification,
maintenance of a loan loss reserve, and other matters relating to lending
practices.
INVESTMENTS. We invest our funds in a variety of debt instruments and
participate in the federal funds market with other depository institutions.
Subject to limited exceptions, Citizens First Bank is prohibited from investing
in equity securities. Real estate acquired by Citizens First Bank in
satisfaction of or in foreclosure upon loans may be held, subject to a
determination by a majority of its board of directors as to the advisability of
retaining the property, for a period not to exceed sixty months after the date
of acquisition or such longer period as the appropriate regulators may approve.
Citizens First Bank is also permitted to invest an aggregate amount not in
excess of 40% of its capital in such real estate, including furniture and
fixtures, as is necessary for the convenient transaction of its business. Our
board of directors may alter the investment policy without shareholder approval.
INSURANCE. Southern Kentucky Land Title provides title insurance services
to mortgage loan customers for a fee. Through Charles M. Moore Insurance Agency,
a third party provider, we offer other insurance services and receive a fee for
referrals. The objective of offering these products and services is to generate
fee income and strengthen relationships with our customers.
TRUST SERVICES. We have established a relationship with Kentucky Trust
Company, a third-party provider, for administrative trust services and receive a
fee for referrals. During 2002, we earned $12,763 in referral fees.
PREMISES AND BUSINESS HOURS
Our main office is located at 1805 Campbell Lane in Bowling Green,
Kentucky. We have three branches which are located at 901 Lehman Avenue in
Bowling Green and 2435 Fitzgerald Industrial Drive in Bowling Green and a
temporary facility at 1200 South Main Street in Franklin, Kentucky. Both our
main office and our branches have automated teller facilities. We also have
automated teller facilities at six other locations in Bowling Green.
We own the main office property. Our Lehman Avenue branch office is leased
for an initial term of one year beginning March 1, 1999, with options to extend
the lease for two additional terms of two years each. During 2002, we made
annual rental payments of $28,322.
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We purchased the land on which the recently opened Bowling Green branch
office is located for a purchase price of $301,000 and incurred approximately
$700,000 to construct, equip and furnish the new facility. We also purchased
land at 1200 South Main Street, Franklin, Kentucky on which we intend to
construct a permanent facility for the Franklin branch.
We offer convenient banking hours with the main office lobby and current
branch office lobby open from 8:30 a.m. to 4:30 p.m., Monday through Thursday,
and from 8:30 a.m. to 5:30 p.m. on Friday. The main office drive-in window is
open from 7:30 a.m. to 5:30 p.m., Monday through Friday and 9:00 a.m. to 1:00
p.m. on Saturday.
DATA MANAGEMENT AND OTHER SERVICES
Rather than expending the large sums required to conduct the data
management function directly, we have entered into an agreement with Fiserv,
Inc. Fiserv, Inc. provides, among other things, on-line facilities, daily
financial report preparation, loan and deposit data processing and customer
account statement preparation pursuant to an agreement which terminates in 2007.
The fees under the Fiserv contract are approximately $24,000 per month. We
believe using Fiserv for these services is a more cost efficient alternative
than hiring the personnel and purchasing the equipment required to perform such
services in-house. In addition, we have attempted to develop strong
correspondent banking relationships that enable us to purchase other services
such as check collection, purchase and sale of federal funds, wire transfer
services and customer credit services, including selling participations in loans
which would otherwise exceed our legal lending limits.
PERSONNEL AND BENEFITS
As of June 30, 2003, our operations are staffed with 63 employees,
including 18 part-time employees. Management considers employee relations to be
good. None of our employees are covered by a collective bargaining agreement.
We have established salaries and benefits packages at levels which are
competitive in the local marketplace. Our employee benefits includes life
insurance, health insurance, a 401(k) plan, paid vacations and other traditional
benefits.
COMPETITION
The banking business in the Bowling Green-Warren County market area and the
surrounding region is highly competitive. Competition exists between state and
national banks for deposits, loans and other banking services. We compete with
numerous well established financial institutions with vastly greater financial
and human resources than those available to us.
Our market area has experienced substantial consolidation in recent years
within the banking industry. Many of the area's locally owned or locally managed
financial institutions have either been acquired by large regional bank holding
companies or have been consolidated into branches. This consolidation has been
accompanied by fee changes, branch closings, the dissolution of local boards of
directors, management and branch personnel changes and, in our judgment, a
decline in the level of personalized customer service. With recent changes in
interstate banking regulations, this type of consolidation is expected to
continue.
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As of June 30,2003, there were 13 commercial banks operating a total of 42
offices in Warren County as well as two credit unions and several small loan
companies. With the exception of American Bank & Trust, which opened in 2000, we
are the only commercial bank in Bowling Green that is not a branch of an out of
county or out of state bank. The following table (adapted from information
provided in the Federal Deposit Insurance Corporation Summary of Deposits) sets
forth information respecting the financial institutions with offices in Warren
County, and the deposits attributable to such offices as of June 30, 2002:
JUNE 30, 2002 NUMBER OF
INSTITUTION DEPOSITS (000) OFFICES
------------ -------------- -----------
American Bank & Trust Company, Inc. $ 43,774 1
Bank One, Kentucky, National Association * 1
Branch Banking & Trust Company 180,725 10
Citizens First Bank, Inc. 88,533 3
Franklin Bank & Trust Company 11,878 1
Integra Bank National Association 107,794 3
Kentucky Trust Bank 7,187 2
National City Bank of Kentucky 154,045 5
Republic Bank & Trust Company 60,216 1
South Central Bank of Bowling Green 119,611 6
The Farmers National Bank of Scottsville 26,419 2
The Monticello Banking Company 6,967 1
US Bank National Association 171,622 6
* Established in 2002; deposit data not available.
Competition for Citizens First Bank will not only increase due to the
deregulation of depository institutions but also because of the enhanced ability
of non-banking financial institutions to provide services previously reserved
for commercial banks. We compete with existing area financial institutions other
than commercial banks and savings banks, including commercial bank loan
production offices, mortgage companies, insurance companies, consumer finance
companies, securities brokerage firms, credit unions, money market funds and
other business entities which have recently entered traditional banking markets.
Competition from these sources can pose a significant challenge to us since
non-banking financial institutions may operate with greater flexibility because
they are not subject to the same regulatory restrictions as banks. See
"Supervision and Regulation" on page 67.
MARKETING STRATEGY
Our ability to compete is enhanced by our local management and a broad base
of stock ownership. We believe that promoting our local ownership is a highly
effective means of attracting customers and fostering loyalty. Through superior
service, our employees develop relationships with our customers. We believe
there has been a great deal of customer dissatisfaction as a result of the fact
that many banking offices in Bowling Green area are now branches of larger
financial institutions which, in our view, are managed with a philosophy of
strong centralization. We are committed to developing strong customer
relationships by providing
o customer access to executive management,
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o continuity in officer and staff personnel,
o an active personal call program by officers,
o an understanding of customers' businesses and needs,
o prompt response to customer requests, and
o development of relationships that are durable and that grow as
Citizens First Bank and its customers continue in business.
With an experienced staff to provide a superior level of personalized
service, we are able to generate competitively priced loans and deposits. With
access to current state-of-the-art software and database systems selected to
deliver high-quality products and provide responsive service to clients, our
staff is able to devote more time and attention to personal service, respond
more quickly to clients' requests and deliver services in the most timely manner
possible.
We believe, in the spirit of outstanding customer service, that convenience
is essential. Our main office is in the Scottsville Road/Greenwood Mall area
which is the center of the retail trading area in Warren County and is
convenient to targeted residential areas. Our Lehman Avenue branch office is
located closer to downtown Bowling Green and serves primarily downtown
businesses and professional offices and neighborhoods adjacent to that area. Our
Fitzgerald Industrial Avenue branch is located in a quickly developing area for
small business and commercial entities. The site in Franklin, Kentucky on which
we are building a new branch is located on the main thoroughfare in Franklin.
Banking by appointment during non-banking hours and lending at the customer's
location are two other ways we provide service to customers in the most
convenient fashion.
Our management is active in business development. Our directors are
knowledgeable about our mission, products and services and are active in
promoting Citizens First Bank. Our officers and directors include individuals
active in the Bowling Green-Warren County area. Their continued community
involvement provides opportunities for the promotion of Citizens First Bank and
its products and services, thereby enhancing our marketing efforts. Our
marketing and advertising plan emphasizes the message of superior service from a
locally managed bank with a broad base of local ownership.
We have an ongoing interest in the economic development and continued
growth of the Bowling Green-Warren County area and the surrounding region. As a
locally owned and managed community bank, our success depends on the continued
positive economic environment and growth that the Bowling Green-Warren County
area has enjoyed over the past decade. Made up of people who have a personal
stake in the Bowling Green community and who understand the community's needs
and how to meet those needs, we emphasize excellent corporate citizenship.
MARKET AREA
The majority of our marketing efforts are concentrated in the Bowling
Green-Warren County area. Warren County is located in central Kentucky,
approximately 110 miles south of Louisville and approximately 70 miles north of
Nashville, Tennessee. The Bowling Green area is
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the financial, retail and health care center of Warren County and the
surrounding area and is the home of Western Kentucky University which provides a
strong educational and employment base, drawing students from throughout the
area and beyond. We also intend to focus our marketing efforts in the
south-central Kentucky region known as the Barren River Area Development
District. This region consists of Allen, Barren, Butler, Edmonson, Hart, Logan,
Metcalfe, Monroe, Simpson and Warren Counties in Kentucky.
As of 2001, Warren County had a population of 93,232. Bowling Green is the
county seat and largest city in Warren County. Since 1980, Warren County's total
population has grown by 28.8%, and Warren County was one of the fastest growing
counties in Kentucky from 1990 through 2000.
Income levels for Warren County have also grown sharply of late. In 2000,
Warren County had a per capita personal income of $24,459 as compared to $11,838
in 1986.
As of June 2001, the unemployment rate for Warren County was 4.6%, compared
with the statewide average of approximately 4.8%. The Warren County area has a
diversified employment base which is not dependent on any particular firm or
firms. There are 17 manufacturing companies in the county with 150 or more
employees. The largest employers in Warren County include the following:
COMPANY EMPLOYEES
------- ---------
Commonwealth Health Corporation 2,250
Western Kentucky University 1,578
Warren County Board of Education 1,896
General Motors Corvette Plant 1,035
Holley Performance Products 950
DESA International 800
Greenview Regional Hospital 610
Eagle Industries 600
Fruit of the Loom 600
Houchens Industries 534
SUPERVISION AND REGULATION
Both Citizens First and Citizens First Bank are subject to extensive state
and federal banking laws and regulations that impose restrictions on and provide
for general regulatory oversight of Citizens First's and Citizens First Bank's
operations. These laws and regulations are generally intended to protect
depositors and not shareholders. The following discussion describes the material
elements of the regulatory framework which apply.
CAPITAL ADEQUACY
Citizens First and Citizens First Bank are required to comply with the
capital adequacy standards established by the Federal Reserve Board and the
Federal Deposit Insurance Corporation, respectively. There are two basic
measures for capital adequacy for bank holding companies and the depository
institutions that they own: a risk-based measure and a leverage measure. All
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applicable capital standards must be satisfied for a bank holding company to be
considered in compliance.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profile among depository
institutions and bank holding companies, to account for off-balance sheet
exposure and to minimize disincentives for holding liquid assets. Assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance-sheet items.
The minimum guideline for the ratio of total capital to risk-weighted
assets (including some off-balance sheet items, such as standby letters of
credit) is 8.0%. At least half of total capital must be comprised of Tier 1
capital, which is common equity, undivided profits, minority interests in the
equity accounts of consolidated subsidiaries, noncumulative perpetual preferred
stock and a limited amount of cumulative perpetual preferred stock, less
goodwill and other permissible intangible assets. The remainder may consist of
Tier 2 capital which is subordinated debt, other preferred stock, and a limited
amount of loan loss reserves.
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies. These guidelines provide for a
minimum leverage ratio of Tier 1 capital to average assets, less goodwill and
permissible other intangible assets, of 3.0% for bank holding companies that
meet specified criteria, including having the highest regulatory rating. All
other bank holding companies generally are required to maintain a leverage ratio
of at least 3.0%, plus an additional cushion of 100 to 200 basis points. The
guidelines also provide that bank holding companies that experience internal
growth to make acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels without significant
reliance on intangible assets. The Federal Reserve Board will consider a
"tangible Tier 1 capital average ratio" (deducting all intangibles) and other
indicia of capital strength in evaluating proposals for expansion or new
activities.
The federal bank regulators continue to indicate their desire to raise the
capital requirements that apply to banks beyond their current levels. The
Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office
of the Comptroller of the Currency have proposed an amendment to the risk-based
capital standards that would calculate the change in a bank's net economic value
attributable to increases and decreases in market interest rates and would
require banks with excessive interest rate risk exposure to hold additional
amounts of capital against such exposures.
PROMPT CORRECTIVE ACTION
The Federal Deposit Insurance Corporation Improvement Act of 1991
established a system of prompt corrective action to resolve the problems of
undercapitalized institutions. Under this system, the federal banking regulators
established five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized). With respect to institutions in the three undercapitalized
categories, the regulators must take prescribed supervisory actions and are
authorized to take other discretionary actions. Generally, subject to a narrow
exception, the Improvement Act requires the banking
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regulator to appoint a receiver or conservator for an institution that is
critically undercapitalized. The federal banking agencies have specified by
regulation the relevant capital level for each category.
An institution is deemed to be well capitalized if it
o has a total capital ratio of 10% or greater,
o has a tier 1 capital ratio of 6.0% or greater,
o has a leverage ratio of 5.0% or greater, and
o is not subject to any written agreement, order, capital directive,
or prompt corrective action directive issued by its federal banking
agency.
An institution is considered to be adequately capitalized if it has
o a total capital ratio of 8.0% or greater,
o a tier 1 capital ratio of 4.0% or greater, and
o a leverage ratio of 4.0% or greater.
An institution is considered to be undercapitalized if it has
o a total capital ratio of less than 8.0%,
o a tier 1 capital ratio of less than 4.0%, or
o a leverage ratio of less than 4.0%.
An institution is considered to be significantly undercapitalized if it has
o a total capital ratio of less than 6.0%,
o a tier 1 capital ratio of less than 3.0%, or
o a leverage ratio of less than 3.0%.
An institution that has a tangible equity capital to assets ratio equal to
or less than 2.0% is deemed to be critically undercapitalized. For purposes of
the regulation, the term "tangible equity" includes core capital elements
counted as tier 1 capital for purposes of the risk-based capital standards, plus
the amount of outstanding cumulative perpetual preferred stock (including
related surplus), minus all intangible assets with exceptions. A depository
institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if it receives an unsatisfactory
examination rating.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
Under the Improvement Act, a bank holding company must guarantee that a
subsidiary depository institution meet its capital restoration plan, subject to
limitations. The obligations of a controlling bank holding company under the
Improvement Act to fund a capital restoration plan is limited to the lesser of
5.0% of an undercapitalized subsidiary's assets or the amount required to meet
regulatory capital requirements. An undercapitalized
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institution is also generally prohibited from increasing its average total
assets, making acquisitions, establishing any branches or engaging in any new
line of business, except in accordance with an accepted capital restoration plan
or with the approval of the Federal Deposit Insurance Corporation. In addition,
the appropriate federal banking agency is given authority with respect to any
undercapitalized depository institution to take any of the actions it is
required to or may take with respect to a significantly undercapitalized
institution as described below if it determines "that those actions are
necessary to carry out the purpose" of the Improvement Act.
For those institutions that are significantly undercapitalized or
undercapitalized and either fail to submit an acceptable capital restoration
plan or fail to implement an approved capital restoration plan, the appropriate
federal banking agency must require the institution to take one or more of the
following actions:
o sell enough shares, including voting shares, to become adequately
capitalized;
o merge with, or be sold to, another institution or holding company,
but only if grounds exist for appointing a conservator or receiver;
o restrict transactions with banking affiliates as if the "sister bank"
exception to the requirements of Section 23A of the Federal Reserve
Act did not exist;
o otherwise restrict transactions with bank or non-bank affiliates;
o restrict interest rates that the institution pays on deposits or
"prevailing rates" in the institution's "region";
o restrict asset growth or reduce total assets;
o alter, reduce, or terminate activities;
o hold a new election of directors;
o dismiss any director or senior executive officer who held office
for more than 180 days immediately before the institution became
undercapitalized, provided that in requiring dismissal of a director
or senior officer, the agency must comply with prescribed procedural
requirements, including the opportunity for an appeal in which the
director or officer will have the burden of proving his or her value
to the institution;
o employ "qualified" senior executive officers;
o cease accepting deposits from correspondent depository institution;
o divest nondepository affiliates which pose a danger to the
institution; or
o be divested by a parent holding company.
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In addition, without the prior approval of the appropriate federal banking
agency, a significantly undercapitalized institution may not pay any bonus to
any senior executive officer or increase the rate of compensation for such an
officer.
PAYMENT OF DIVIDENDS
Federal and state statutes and regulations restrict the payment of
dividends by state-chartered banks. Under Kentucky law, dividends by Kentucky
banks may be paid only from current or retained net profits. Before any dividend
may be declared for any period (other than upon preferred stock, if any), a bank
must increase its capital surplus by at least 10% of the net profits of the bank
for such period until the bank's capital surplus equals the amount of its stated
capital attributable to its common stock. Moreover, the Commissioner of the
Kentucky Department of Financial Institutions must approve the declaration of
dividends if the total of all dividends declared by a bank for any calendar year
exceeds the bank's net profits for such year combined with its retained net
profits for the preceding two years, less any required transfers to surplus or a
fund for the retirement of preferred stock or debt, if any. The Kentucky
Business Corporation Act provides additional restrictions on distributions by a
Kentucky corporation, including Citizens First and Citizens First Bank.
The Federal Deposit Insurance Corporation may also restrict Citizens First
Bank's payment of dividends. If the Federal Deposit Insurance Corporation
determines that a depository institution under its jurisdiction is engaged in or
is about to engage in an unsafe or unsound practice, the Federal Deposit
Insurance Corporation may require, after notice and hearing, that the
institution cease and desist from such practice. Depending on the financial
condition of the depository institution, an unsafe or unsound practice could
include the payment of dividends. Moreover, regulations of the Federal Deposit
Insurance Corporation requiring Citizens First Bank to maintain certain capital
levels will also affect Citizens First Bank's ability to pay dividends.
CITIZENS FIRST BANK
As a bank organized under Kentucky law, Citizens First Bank is subject to
the regulation and supervision of the Kentucky Department of Financial
Institutions. As an insured bank under the Federal Deposit Insurance Act,
Citizens First Bank is also subject to regulation and examination by the Federal
Deposit Insurance Corporation. Although Citizens First Bank is not a member of
the Federal Reserve System, it is nevertheless subject to provisions of the
Federal Reserve Act and regulations promulgated under that Act.
The Federal Deposit Insurance Corporation and the Kentucky Department of
Financial Institutions regularly examine the operations of Citizens First Bank.
State banks also are subject to regulation requiring the maintenance of
prescribed minimum capital levels, and Citizens First Bank is required to file
annual reports and such additional information as the Kentucky Department of
Financial Institutions and Federal Deposit Insurance Corporation regulations
require. Citizens First Bank is also subject to restrictions on loan limits,
interest rates, "insider" loans to officers, directors and principal
shareholders, restrictions on tie-in arrangements and transactions with
affiliates, as well as many other matters. Strict compliance at all times with
state and federal banking laws is required. Supervision, regulation and
examination of Citizens First Bank by bank regulatory agencies is intended for
the protection of Citizens First Bank's depositors, not its shareholders.
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Federal and state regulators have authority to impose substantial sanctions
on Citizens First Bank and its directors and officers if Citizens First Bank
engages in unsafe or unsound practices, or otherwise fails to comply with
regulatory standards. Supervisory agreements, such as memoranda of understanding
entered into with federal and state bank regulators, may also impose
requirements and reporting obligations.
INTERSTATE BANKING. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 enabled nationwide interstate banking through bank
subsidiaries and interstate banking mergers. The Riegle-Neal Act allows
adequately capitalized and well-managed bank holding companies to acquire
control of a bank in any state subject to concentration limits. The Riegle-Neal
Act also generally provides that national and state-chartered banks may branch
interstate through acquisitions of banks in other states.
Restrictions on branching imposed upon Kentucky banks continue to apply
under the legislation, including prohibiting acquisitions which have the result
of concentrating control of more than 15% of the federally insured deposits in
Kentucky. The Riegle-Neal Act increased competition in the banking industry as
it allows out of state banks to branch into Kentucky through acquisitions of
banks in Kentucky.
STATE REGULATION. Kentucky law places restrictions and requirements on the
banking operations of state-chartered banks. State-chartered banks must report
to the Kentucky Department of Financial Institutions periodically upon request,
and at least annually, regarding the financial condition and operations of the
bank.
Under Kentucky law a bank may only hold title to real estate necessary or
appropriate for the transaction of legitimate business and the cost of such real
estate, including furniture and fixtures, generally may not exceed 40% of the
total paid-in capital, unimpaired surplus and undivided profits of the bank
without approval of the Kentucky Department of Financial Institutions. A
state-chartered bank may invest in real estate other than that related to its
legitimate business within its generally accepted banking market provided such
investment does not exceed 10% of the bank's actual paid-in capital and surplus
at the time the investment is made. Exceptions to the foregoing rules apply in
the case of real estate conveyed to a bank in satisfaction of a debt previously
contracted.
With respect to expansion, Citizens First Bank until recently could
establish branches only within the geographical limits of Warren County,
Kentucky. However, recent legislation permits Kentucky banks to establish a
branch office anywhere in Kentucky upon approval of the Kentucky Department of
Financial Institutions Certain well capitalized and well managed banks may
establish a branch office upon notice to the Department. Citizens First Bank is
also subject to the banking and usury laws of Kentucky restricting the amount of
interest it may charge in making loans or other extensions of credit.
FDIC INSURANCE ASSESSMENTS. Citizens First Bank's deposits are insured by
the Federal Deposit Insurance Corporation up to the statutory limit of $100,000
per depositor through the Bank Insurance Fund. Under current law, the insurance
assessment paid by Bank Insurance Fund-insured institutions is set by the
Federal Deposit Insurance Corporation and is designed to achieve a target
reserve ratio of 1.25 percent of estimated insured deposits, or such higher
ratio as the Federal
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Deposit Insurance Corporation may determine in accordance with law. The Federal
Deposit Insurance Corporation is also authorized to impose one or more special
assessments in any amount deemed necessary to enable repayment of amounts
borrowed by the Federal Deposit Insurance Corporation from the Treasury
Department. Bank Insurance Fund annual assessment rates currently range from 0
to 27 basis points. The actual assessment rate paid by individual institutions
is determined by the risk category rating of the institution as determined by
the Federal Deposit Insurance Corporation.
The Deposit Insurance Funds Act of 1996 authorized the Financing
Corporation to levy assessments on Bank Insurance Fund assessable deposits and
stipulates that the rate must equal one-fifth of the Financing Corporation
assessment rate that is applied to deposits assessable by the Savings
Association Insurance Fund. Financing Corporation assessments imposed on Bank
Insurance Fund insured deposits in annual amounts are presently estimated at
1.68 basis points.
CITIZENS FIRST CORPORATION
We are a bank holding company under the federal Bank Holding Company Act of
1956. As a result, we are subject to the supervision, examination and reporting
requirements of the Bank Holding Company Act and the regulations of the Federal
Reserve.
ACQUISITION OF BANKS. Bank holding companies are required to obtain the
prior approval of the Federal Reserve Board before they may
o acquire direct or indirect ownership or control of more than 5% of
the voting shares of any bank,
o acquire all or substantially all of the assets of any bank, or
o merge or consolidate with any other bank holding company.
The Federal Reserve Board generally may not approve any transaction that
would result in a monopoly or that would further a combination or conspiracy to
monopolize banking in the United States. Nor can the Federal Reserve Board
approve a transaction that could substantially lessen competition in any section
of the country, that would tend to create a monopoly in any section of the
country, or that would be in restraint of trade. But the Federal Reserve Board
may approve any such transaction if it determines that the public interest in
meeting the convenience and needs of the community served clearly outweighs the
anticompetitive effects of the proposed transaction. The Federal Reserve Board
is also required to consider the financial and managerial resources and future
prospects of the bank holding companies and banks concerned, as well as the
convenience and needs of the community to be served. Consideration of financial
resources generally focuses on capital adequacy, which is discussed below.
Consideration of convenience and needs of the community includes the parties'
performance under the Community Reinvestment Act of 1977.
Kentucky law provides that any individual or bank holding company having
its principal place of business in Kentucky may acquire control of one or more
banks or bank holding companies wherever located within the Commonwealth of
Kentucky, provided that no individual
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or bank holding company acquires control of banks located in Kentucky holding
more than 15% of the total deposits of all federally-insured depository
institutions in Kentucky.
Under Kentucky law, a bank holding company must seek and obtain the
approval of the Commissioner of the Kentucky Department of Financial
Institutions before acquiring control of any bank chartered in Kentucky or any
bank holding company controlling a bank which is chartered in Kentucky. Control
is defined the same as in the Bank Holding Company Act, which generally means
the power to vote 25% or more of any class of voting securities, the power to
elect a majority of the board of directors or the power to directly or
indirectly exercise a controlling influence over the management or policies of a
bank or bank holding company.
The Commissioner of the Kentucky Department of Financial Institutions must
approve an application by a bank holding company to acquire a bank or bank
holding company unless he finds
o the terms of the acquisition are not in accordance with the laws of
Kentucky,
o the financial condition or the competence, experience and integrity
of the acquiring company or its principals are such as will
jeopardize the financial stability of the acquired entity,
o the public convenience and advantage will not be served by the
acquisition, or
o a federal regulatory authority whose approval is required has
disapproved the transaction because it would result in a monopoly or
substantially lessen competition.
PERMITTED ACTIVITIES. Under the Bank Holding Company Act, a bank holding
company is, with limited exceptions, prohibited from acquiring direct or
indirect ownership or control of any voting shares of any company which is not a
bank, or engaging in any activity other than managing and controlling banks.
Among the activities which are permissible for bank holding companies are
o acquiring and holding shares of any company engaged solely in the
business of the holding and operating properties used wholly or
substantially by a subsidiary bank, conducting a safe deposit
business or furnishing services to or performing services for a
subsidiary bank,
o acquiring and holding up to five 5% of the outstanding voting shares
of any company,
o acquiring and holding up to 5% of the outstanding voting shares of
an investment company that is solely engaged in investing in
securities and that does not own or control more than 5% of the
outstanding shares of any class of voting securities of any company,
and
o acquiring and holding shares of any company, the activities of which
the Federal Reserve Board has determined to be so closely related to
banking or managing or controlling banks as to be a proper incident
thereto.
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In determining whether a particular activity is permissible, the Federal
Reserve Board must consider whether the performance of such an activity
reasonably can be expected to produce benefits to the public that outweigh
possible adverse effects. Possible benefits that the Federal Reserve Board
considers include greater convenience, increased competition or gains in
efficiency. Possible adverse effects include undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices. Among the activities which the Federal Reserve Board has determined
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto and which may be engaged in by a bank holding company or
a subsidiary of a bank holding company in accordance with the rules and
regulations of the Federal Reserve Board are
o making, acquiring and servicing loans and other extensions of credit,
o operating an industrial bank, Morris Plan bank or industrial loan
company,
o performing functions or activities that may be performed by a trust
company,
o acting as an investment or financial advisor,
o leasing personal or real property if the lease is to serve as the
functional equivalent of an extension of credit to the lessee and
meets other criteria,
o making investments in corporations or projects designed primarily to
promote community welfare,
o providing data processing and data transmission services if the data
to be processed or furnished are financial, banking or economic in
nature,
o acting as a principal, agent or broker for insurance that is directly
related to an extension of credit by the holding company or a bank
subsidiary of the holding company, or engaging in any insurance
agency activity in a place where the holding company (or a
subsidiary) has a lending office and that has a population not
exceeding 5,000,
o owning, controlling or operating a savings association,
o providing courier services for financial instruments exchanged among
banks and financial institutions,
o providing management consulting advice to banks and other depository
institutions not affiliated with the holding company,
o issuing and selling money orders and similar consumer-type payment
instruments having a face value of not more than $1,000,
o performing appraisals of real estate and personal property,
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o acting as intermediary for the financing of commercial or industrial
income-producing real estate,
o providing securities brokerage services, if the services are
restricted to buying and selling securities solely as agent for the
account of customers and do not include securities underwriting or
dealing or investment advice or research services,
o underwriting and dealing in government obligations and money market
instruments,
o providing general information and statistical forecasting with
respect to foreign exchange markets and transnational services with
respect thereto,
o acting as futures commissions merchant for nonaffiliated persons,
o providing investment advice on financial futures and options on
futures,
o providing consumer financial counseling,
o providing tax planning and preparation services,
o providing check guaranty services,
o operating a collection agency, and
o operating a credit bureau.
The Federal Reserve Board has determined that the following non-banking
activities among others are not so closely related to banking or managing or
controlling banks as to be a proper incident thereto
o insurance premium funding or the combined sale of mutual funds and
insurance,
o underwriting life insurance, except in low-population areas, that is
not sold in connection with a credit transaction by a bank holding
company system,
o real estate brokerage,
o land development,
o real estate syndication,
o management consulting,
o property management, and
o operation of a travel agency.
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The Gramm-Leach-Bliley Act of 1999 expanded the permissible activities of a
bank holding company. The Gramm Act allows qualifying bank holding companies to
elect to be treated as "financial holding companies." A bank holding company
qualifies to be a financial holding company if its depository institution
subsidiaries are well-managed, well capitalized and received at least a
"satisfactory" Community Reinvestment Act rating as of the most recent
examination. A financial holding company may engage in activities and acquire
companies engaged in activities that are "financial" in nature or "incidental"
or "complementary" to such financial activities including
o acting as a principal, agent or broker in selling various forms of
insurance,
o providing financial investment and economic advisory services,
including advising investment companies,
o underwriting, dealing or making a market in securities, without any
revenue limitation,
o investing in shares or other ownership interests in any entity in
the course of a bona fide underwriting, merchant banking or
investment banking business, provided that such investments are not
made by a depository institution or its subsidiary, and
o investing, through an insurance subsidiary in the ordinary course
of its business in accordance with relevant state law, in any
entity, but subject to conditions analogous to those for merchant
banking investments.
The Federal Reserve Board and the Treasury Department have the authority to
expand the list of permissible activities for a financial holding company. Any
bank holding company which cannot or chooses not to become a financial holding
company will remain subject to the previous rules of the Bank Holding Company
Act.
Bank holding companies are not limited under the Bank Holding Company Act
to activities previously approved by the Federal Reserve Board. If a bank
holding company is of the opinion that other activities are closely related to
banking or managing or controlling banks, the holding company may apply for
Federal Reserve Board approval to engage in the activity or acquire an interest
in a company that is engaged in the activity.
There are no territorial limitations on the permissible non-banking
activities of bank holding companies. Despite prior approval, the Federal
Reserve Board has the power to order a holding company or its subsidiaries to
terminate any activity or to terminate its ownership or control of any
subsidiary when it has reasonable cause to believe that a serious risk to the
financial safety, soundness, or stability of any bank subsidiary of that bank
holding company may result from such activity.
We may seek to engage, or to acquire an interest in a company that engages,
in non-banking activities so closely related to banking or managing or
controlling banks as to be a proper incident thereto. No negotiations for the
acquisition of any entities have been carried on by us, nor are any such
negotiations specifically contemplated, nor are any plans currently under
consideration under
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which we would engage in any non-banking activities. There can be no assurance
that any such entity will be acquired by us or that we will engage in any
non-banking activities in the future, or that we will be successful if we do
engage in non-banking activities.
REPORTING OBLIGATIONS. A bank holding company is required to file with the
Federal Reserve Board annual reports and other information regarding its
business operations and the business operations of its subsidiaries. It is also
subject to examination by the Federal Reserve Board and is required to obtain
Federal Reserve Board approval prior to acquiring, directly or indirectly,
ownership or control of any voting shares of any bank if, after such
acquisition, it would own or control, directly or indirectly, more than 5% of
the voting stock of such bank unless it already owns a majority of the shares of
voting stock of such bank.
SUPPORT OF SUBSIDIARY INSTITUTIONS. Under Federal Reserve Board policy we
are expected to act as a source of financial strength for, and to commit
resources to support, Citizens First Bank. This support may be required at times
when, absent such Federal Reserve Board policy, we may not be inclined to
provide it. In addition, any capital loans by a bank holding company to any of
its banking subsidiaries are subordinate in right of payment to deposits and to
other indebtedness of such banks. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a banking subsidiary will be
assumed by the bankruptcy trustee and entitled to a priority of payment.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their respective jurisdictions,
the Federal Reserve Board, the OCC or the FDIC shall evaluate the record of each
financial institution in meeting the credit needs of its local community,
including low and moderate-income neighborhoods. These facts are also considered
in evaluating mergers, acquisitions and applications to open a branch or
facility. Failure to adequately meet these criteria could impose additional
requirements and limitations on Citizens First Bank.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES
Both Citizens First and Citizens First Bank are subject to the provisions
of Section 23A and Section 23B of the Federal Reserve Act. Section 23A places
limits on the amount of
o a bank's loans or extensions of credit to affiliates,
o a bank's investment in affiliate,
o assets a bank may purchase from affiliates, except for real and
personal property exempted by the obligations of affiliates and,
o a bank's guarantee, acceptance or letter of credit issued on behalf
of an affiliate.
Section 23B prohibits an institution from engaging in the above
transactions with affiliates unless the transactions are on terms substantially
the same, or at least as favorable to the institution
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or its subsidiaries, as those prevailing at the time for comparable transactions
with nonaffiliated companies.
PRIVACY
Under the Gramm-Leach-Bliley Act, financial institutions are required to
disclose their policies for collecting and protecting confidential information.
Customers generally may prevent a financial institution from sharing personal
financial information with nonaffiliated third parties except for third parties
that market the institution's own products and services. Additionally, financial
institutions generally may not disclose consumer account numbers to any
nonaffiliated third party for use in telemarketing, direct mail marketing or
other marketing through electronic mail to consumers. We have established a
privacy policy to ensure compliance with federal requirements.
ANTI-TERRORISM LEGISLATION
In the wake of the tragic events of September 11, 2001, on October 26,
2001, the President signed the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act
of 2001. Under the USA PATRIOT Act, financial institutions are subject to
prohibitions against specified financial transactions and account relationships
as well as enhanced due diligence and "know your customer" standards in their
dealing with foreign financial institutions and foreign customers.
EFFECTS OF GOVERNMENTAL POLICIES AND ECONOMIC CONDITIONS
Citizens First Bank's earnings are affected by the difference between the
interest earned by Citizens First Bank on its loans and investments and the
interest paid by Citizens First Bank on its deposits or other borrowings. The
yields on its assets and the rates paid on its liabilities are sensitive to
changes in prevailing market rates of interest. Thus, the earnings and growth of
Citizens First Bank are influenced by general economic conditions, fiscal
policies of the Federal government, and the policies of regulatory agencies,
particularly the Federal Reserve Board, which establishes national monetary
policy, all of which are beyond Citizens First Bank's control. The nature and
impact of any future changes in fiscal or monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. For example, the Depository Institutions Deregulation
and Monetary Control Act of 1980 provided for the phasing out of restrictions on
deposit interest rate ceilings, the authorization of new accounts and related
services and the expansion of the lending authority of savings and loan
associations. The Depository Institutions Deregulation Act has altered the
competitive relationship that previously existed among financial institutions,
and resulted in a substantial reduction in the historical distinction between
the services offered by banks, savings and loan associations and other financial
institutions.
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MONETARY POLICY
Commercial banks, including Citizens First Bank, are affected by the credit
policy of various regulatory authorities, including the Federal Reserve Board.
An important function of the Federal Reserve Board is to regulate the national
supply of bank credit. Among the instruments of monetary policy used by the
Federal Reserve Board to implement these objectives are open market operations
in U.S. government securities, changes in reserve requirements on bank deposits,
changes in the discount rate on bank borrowings and limitations on interest
rates that banks may pay on time and savings deposits. The Federal Reserve Board
uses these means in varying combinations to influence overall growth of bank
loans, investments and deposits, and also to affect interest rates charged on
loans, received on investments or paid for deposits.
The monetary and fiscal policies of regulatory authorities, including the
Federal Reserve Board, also affect the banking industry. Through changes in the
reserve requirements against bank deposits, open market operations in U.S.
government securities and changes in the discount rate on bank borrowings, the
Federal Reserve Board influences the cost and availability of funds obtained for
lending and investing. No prediction can be made with respect to possible future
changes in interest rates, deposit levels or loan demand or with respect to the
impact of such changes on the business and earnings of Citizens First Bank.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
NAME, AGE, AND PRESENT PRINCIPAL OCCUPATION(S) OR EMPLOYMENT(S)
POSITION(S) WITH CITIZENS FIRST(1) DURING PAST FIVE OR MORE YEARS
---------------------------------- --------------------------------------------------
Jerry E. Baker (71) Chairman of Airgas Mid-America, Inc.
Director
Billy J. Bell (68) Co-owner and Secretary/Treasurer, Mid-South Feeds, Inc.
Director
Barry D. Bray (56) Vice President and Chief Credit Officer of Citizens First and
Director; Vice President and Chief Credit Citizens First Bank since January 1999 and February 1999,
Officer respectively; from 1982 to 1998, Executive Vice President and
Chief Credit Officer of Trans Financial, Inc.
Mary D. Cohron (55) President and Chief Executive Officer of Citizens First and
Director; President and Chief Executive Citizens First Bank since August 1998 and February 1999,
Officer respectively; formerly, Board Team Development Services Provider
for Kentucky School Boards Association and Strategic Planning and
Business Consultant
Floyd H. Ellis (76) Retired President and Chief Executive Officer, Warren Rural
Chairman of the Board of Directors Electric Cooperative Corporation
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Sarah Glenn Grise (45) Civic Volunteer; formerly, General Manager of TKR Cable of
Director Southern Kentucky
James H. Lucas (70) Of Counsel, English, Lucas, Priest & Owsley
Director; Secretary to the Board of
Directors
John J. Kelly (68) Dentist
Director
Joe B. Natcher, Jr. (45) President and Chief Executive Officer, Southern Foods, Inc.
Director
John T. Perkins (59) Consultant to Citizens First Bank since January 2002; Vice President
Director President and Chief Operating Officer of Citizens First and
Citizens First Bank since August 1998 and February 1999,
respectively, through 2001; previously, bank consultant from April
1995 to July 1998 and Chief Operating Officer, Trans Financial Bank,
Inc. from July 1973 to April 1995
Jack Sheidler (46) Real estate developer in Kentucky, Oklahoma and Tennessee
Director
Wilson Stone (50) Allen County, Kentucky farmer and Board Trainer for the Kentucky
Director School Boards Association
M. Todd Kanipe (34) Prior to 1998, commercial lender for Trans Financial Bank, Inc.
Vice President and Trust Relationship
Manager
Bill D. Wright (43) Prior to 1998, Assistant Controller and Assistant Treasurer for
Vice President and Chief Financial Officer Trans Financial Bank, Inc.
-----------
(1) With the exception of Ms. Grise, Mr. Kelly, Mr. Sheidler and Mr. Stone,
each of our directors has been a director since our the organization of
our subsidiary bank in 1998. Ms. Grise, Mr. Sheidler and Mr. Stone were
appointed to our board of directors in 2002. Mr. Kelly was appointed to
our board of directors in 2003.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid or accrued by us to or on behalf of our President and Chief
Executive Officer and each other executive officer who had annual salary and
bonus that exceeded $100,000 in 2002. Disclosure for the other executive
officers is not required because none had annual salary and bonus that exceeded
$100,000.
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SUMMARY COMPENSATION TABLE
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION(1)
--------------------------- ---- ------ ---------------
Mary D. Cohron, President and 2002 $135,000 $7,756
Chief Executive Officer 2001 $108,000 $6,519
2000 $ 96,437 $5,593
Bill D. Wright, Vice President and Chief 2002 $107,960 $6,938
Financial Officer 2001 $ 86,071 $5,809
2000 $ 52,308 $3,245
-------------------------
(1) Other compensation for 2002 includes: (a) a match of up to 3% of the
officer's salary under the Savings Incentive Match Plan for Employees
($3,750 for Ms. Cohron and $2,939 for Mr. Wright); (b) the cost of life
insurance premiums paid by Citizens First on behalf of the officer for
coverage equal to annual salary ($348 for Ms. Cohron and $341 for Mr.
Wright); and (c) the portion of the cost of health insurance coverage
for such officer that is paid by Citizens First ($3,658 for each of Ms.
Cohron and Mr. Wright). All full-time employees of Citizens First
receive similar benefits.
EMPLOYMENT AGREEMENTS
Citizens First and Mary D. Cohron are parties to an employment agreement
dated September 14, 1998, as amended, which provides for the payment to Ms.
Cohron of an initial annual salary of $95,000, subject to adjustment by the
board of directors. Such salary is exclusive of any bonus which may be paid in
the determination of the board of directors based on our performance. The
employment agreement was automatically renewed for a new three year term on
August 1, 2001. The employment agreement may be terminated by us upon 60 days
notice for cause (as defined in the agreement) and without cause. In the event
the agreement is terminated without cause, we will be obligated to pay Ms.
Cohron the value of accrued fringe benefits through the date of termination and
compensation equal to a full year's salary. Ms. Cohron may voluntarily terminate
her employment upon 60 days notice. In the event of termination of employment
prior to the natural expiration of the agreement, Ms. Cohron will be prohibited
for one year from performing in Warren County and any contiguous county duties
for a banking organization
Citizens First and Bill D. Wright are parties to an employment agreement
effective May 15, 2000 which provides for Mr. Wright's employment by us as Chief
Financial Officer. The agreement provides for the payment to Mr. Wright of an
initial annual salary of $85,000, subject to adjustment by the board of
directors. The agreement continues through May 14, 2006, and will be
automatically renewed for a new three year term unless either party gives 60
days prior notice that it does not intend to renew the agreement. The employment
agreement may be terminated by us upon 60 days notice for cause (as defined in
the agreement) and without cause. In the event the agreement is terminated
without cause, we will be obligated to pay Mr. Wright the value of accrued
fringe benefits through the date of termination and compensation equal to a full
year's salary. Mr. Wright may voluntarily terminate his employment upon 60 days
notice. In the event of termination of employment prior to the natural
expiration of the agreement, Mr. Wright will be prohibited for one year from
performing in Warren County or any contiguous county duties for a banking
organization comparable to the duties performed for us or Citizens First Bank.
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DIRECTOR COMPENSATION
Our directors receive $200 per month for each month in which they attend a
board or board committee meeting. We also reimburse directors for the expenses
they incur to attend the meetings. We recently established the 2003 Non-Employee
Directors Stock Option Plan which provides for the issuance to our non-employee
directors of options to purchase up to an aggregate of 40,000 shares of our
common stock. As of the date of this prospectus, no options have been granted
under the plan.
RELATED PARTY TRANSACTIONS
We have had and expect in the future to have banking transactions in the
ordinary course of business with our directors and executive officers and their
associates. All loans to such persons or their associates have been on the same
terms, including interest rates and collateral on loans, as those prevailing at
the same time for comparable transactions with others, and have not involved
more than normal risk of collectibility or other unfavorable features.
The law firm of English, Lucas, Priest & Owsley performs ongoing legal
services for us. Our director James H. Lucas is Of Counsel to the law firm.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of June 30, 2003
concerning the number and percentage of shares of the common stock beneficially
owned by our directors and executive officers, and by all of our directors and
executive officers as a group. At June 30, 2003, we had 722,678 shares of common
stock outstanding. Except as noted, all shares are owned directly, and the named
person possesses sole voting and sole investment power with respect to all such
shares. We are not aware of any person or persons who beneficially own in excess
of 5% of our common stock. Further, we are not aware of any arrangement which at
a subsequent date may result in a change of control of Citizens First
Corporation.
NUMBER OF SHARES PERCENT OF ALL
NAME BENEFICIALLY OWNED SHARES OWNED
----- ------------------ ------------
DIRECTORS:
Jerry E. Baker 21,000 2.91%
Billy J. Bell 27,750 3.84%
Barry D. Bray 17,700 2.45%
Mary D. Cohron 23,000 3.18%
Floyd H. Ellis 20,645 2.86%
Sarah Glenn Grise 1,050 0.15%
John J. Kelly 500 0.07%
James H. Lucas 10,600(2) 1.47%
Joe B. Natcher, Jr. 6,700(3) 0.93%
John T. Perkins 10,000(4) 1.38%
Jack Sheidler 14,310 1.98%
Wilson Stone 5,000 0.69%
EXECUTIVE OFFICERS:
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M. Todd Kanipe 750 0.10%
Bill D. Wright 500 0.07%
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP (14 159,505 22.07%
persons)
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(1) Includes 6,000 shares held by Mr. Bray's wife and 300 shares held by Mr.
Bray's child.
(2) Includes 10,000 shares held by Mr. Lucas' wife.
(3) Shares are jointly owned with Mr. Natcher's wife.
(4) Includes 3,333 shares held in an individual retirement account for the
benefit of Mr. Perkins' wife.
DESCRIPTION OF OUR CAPITAL STOCK
COMMON STOCK
Our articles of incorporation authorizes our board of directors, without
shareholder approval, to issue up to 5,000,000 shares of common stock, no par
value. As of the date of this prospectus, 120,000 shares of our common stock
were reserved for issuance under our 2002 Stock Option Plan and 40,000 shares of
our common stock were reserved for issuance under our 2003 Non-Employee Director
Stock Option Plan.
All shares of our common stock will be entitled to share equally in
dividends from legally available funds, when, as and if declared by our board of
directors. We do not anticipate that we will pay any cash dividends on our
common stock in the near future. If we were to voluntarily or involuntarily
liquidate or dissolve, all shares of our common stock would be entitled to share
equally in all of our remaining assets available for distribution to our
shareholders. Each holder of common stock will be entitled to one vote for each
share on all matters submitted to the shareholders. Whenever we issue new shares
of capital stock, holders of our common stock will not have any right to acquire
authorized but unissued capital stock. No redemption, sinking fund or conversion
rights or provisions apply to our common stock. All shares of our common stock
issued in the offering as described in this prospectus will be fully paid and
nonassessable.
PREFERRED STOCK
Our articles of incorporation also authorize our board of directors,
without shareholder approval, to issue up to 500 shares of preferred stock, no
par value. Our board of directors may determine the terms of the preferred
stock. Preferred stock may have voting rights, subject to applicable law and as
determined by our board of directors. Although we have neither issued, nor have
any present plans to issue, any preferred stock, the ownership and control of us
by the holders of our common stock would be diluted if we were to issued
preferred stock that had voting rights.
STOCK TRANSFER AGENT
The stock transfer agent for our common stock is the Registrar and Transfer
Company, Cranford, New Jersey.
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SELECTED PROVISIONS OF OUR ARTICLES OF INCORPORATION
AND BYLAWS AND KENTUCKY LAW
PROTECTIVE PROVISIONS
GENERAL. Our articles of incorporation and bylaws contain certain
provisions designed to assist our board of directors in playing a role if any
group or person attempts to acquire control of us so that our board of directors
can further protect our interests and our shareholders under the circumstances.
These provisions may help our board of directors determine that a sale of
control is in the best interests of our shareholders, or enhance our board of
directors' ability to maximize the value to be received by our shareholders upon
a sale of control.
Although management believes that these provisions are beneficial to our
shareholders, they also may tend to discourage some takeover bids. As a result,
our shareholders may be deprived of opportunities to sell some or all of their
shares at prices that represent a premium over prevailing market prices. On the
other hand, defeating undesirable acquisition offers can be a very expensive and
time-consuming process. To the extent that these provisions discourage
undesirable proposals, we may be able to avoid those expenditures of time and
money.
These provisions also may discourage open market purchases by a company
that may desire to acquire us. Those purchases may increase the market price of
common stock temporarily, and enable shareholders to sell their shares at a
price higher than that price they might otherwise obtain. In addition, these
provisions may decrease the market price of common stock by making the stock
less attractive to persons who invest in securities in anticipation of price
increases from potential acquisition attempts. The provisions also may make it
more difficult and time consuming for a potential acquirer to obtain control
through replacing our board of directors and management. Furthermore, the
provisions may make it more difficult for shareholders to replace our board of
directors or management, even if a majority of the shareholders believe that
replacing our board of directors or management is in our best interests. Because
of these factors, these provisions may tend to perpetuate the incumbent board of
directors and management. For more information about these provisions, see the
subsections "Classified Board of Directors," "Limitations on Director
Liability," and "Indemnification," below.
AUTHORIZED CAPITAL STOCK. We are authorized to issue 5,000,000 shares of
common stock, 722,678 of which were issued and outstanding at June 30, 2003, and
500 shares of preferred stock, none of which are issued and outstanding. Our
board of directors may authorize the issuance of additional shares of common
stock without further action by our shareholders, unless applicable laws or
regulations or a stock exchange on which our capital stock is listed requires
shareholder action. Our board of directors may determine the terms of the
preferred stock. Preferred stock may have voting rights, subject to applicable
law and as determined by our board of directors. Although we have neither
issued, nor have any present plans to issue, any preferred stock, the ownership
and control of us by the holders of our common stock would be diluted if we were
to issued preferred stock that had voting rights.
The authority to issue additional shares of common stock and preferred
stock provides us with the flexibility necessary to meet future needs without
the delay resulting from seeking shareholder approval. The authorized but
unissued shares of common stock and preferred stock
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may be issued from time to time for any corporate purpose, including, stock
splits, stock dividends, employee benefit and compensation plans (including
awards under our stock option plans), acquisitions and public or private sales
for cash as a means of raising capital. The shares could be used to dilute the
stock ownership of persons seeking to obtain control of Citizens First
Corporation. The sale of a substantial number of shares of voting stock to
persons who have an understanding with us concerning the voting of such shares,
or the distribution or declaration of a dividend of shares of voting stock (or
the right to receive voting stock) to our shareholders, may have the effect of
discouraging or increasing the cost of unsolicited attempts to acquire control
of Citizens First Corporation.
PREEMPTIVE RIGHTS. Our articles of incorporation do not provide our
shareholders preemptive rights.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS. We may amend our
articles of incorporation in any manner permitted by Kentucky law. The Kentucky
Business Corporation Act provides that a corporation's articles of incorporation
may be amended by a majority of votes entitled to be cast on an amendment,
subject to any condition the board of directors may place on its submission of
the amendment to the shareholders.
Our board of directors may adopt, amend or repeal our bylaws by a majority
vote of the entire board of directors. The bylaws may also be amended or
repealed by action of our shareholders.
CLASSIFIED BOARD OF DIRECTORS. Our articles of incorporation provide that
our board of directors is to be divided into three classes, with each class to
be as nearly equal in number as possible. The directors in each class serve
three-year terms of office. The effect of having a classified board of directors
is that only approximately one-third of the members of our board of directors
are elected each year. As a result, two annual meetings are required for
shareholders to change a majority of the members of our board of directors.
The purpose of dividing the board of directors into classes is to
facilitate continuity and stability of leadership by insuring that experienced
personnel familiar with us will be represented on the board of directors at all
times, and to permit management to plan for the future for a reasonable amount
of time. However, by potentially delaying the time within which an acquirer
could obtain working control of our board of directors, such provisions may
discourage some potential mergers, tender offers or takeover attempts.
LIMITATIONS ON DIRECTOR LIABILITY. Section 271B.8-330 of the Kentucky
Business Corporation Act provides that a director shall not be liable for any
action, or failure to take action if he discharges his duties in good faith,
with the care of an ordinarily prudent person in a like position under similar
circumstances; and in a manner the director reasonably believes to be in the
best interests of the corporation. In discharging his duties, a director may
rely on the information, opinions, reports or statements, including financial
statements, prepared or presented by officers or employees of the corporation
whom the director reasonably believes to be reliable. The director may also rely
on such information prepared or presented by legal counsel, public accountants
or other persons as to matters that the director reasonably believes are in the
person's competence.
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Our articles of incorporation limit the liability of our directors to the
greatest extent permitted by law and provide that no director shall be
personally liable to Citizens First or its shareholders for monetary damages for
a breach of his or her duties as a director, except for liability for any
transaction in which the director's personal financial interest is in conflict
with the financial interest of the entity in question or its shareholders, for
acts or omissions not in good faith or which involve intentional misconduct or
are known to the director to be a violation of law, for voting for or assenting
to any distributions made in violation of Section 271B.8-330 of the Kentucky
Revised Statutes or for any transaction from which the director derives an
improper personal benefit.
INDEMNIFICATION. Under the Kentucky Business Corporation Act, a corporation
may indemnify any director against liability if the director
o conducted himself or herself in good faith,
o reasonably believed, in the case of conduct in his or her official
capacity with the corporation, that his or her conduct was in the
best interests of the corporation,
o reasonably believed, in all other civil cases, that his or her
conduct was at least not opposed to the corporation's best
interests, and
o in the case of any criminal proceeding, had no reasonable cause to
believe his or her conduct was unlawful.
Unless limited by its articles of incorporation, a Kentucky corporation
must indemnify, against reasonable expenses incurred by him or her, a director
who was wholly successful, on the merits or otherwise, in defending any
proceeding to which he or she was a party because he or she is or was a director
of the corporation. Expenses incurred by a director in defending a proceeding
may be paid by the corporation in advance of the final disposition of the
proceeding if three conditions are met
o the director must furnish the corporation a written affirmation of
the director's good faith belief that he or she has met the
standard of conduct as set forth above,
o the director must furnish the corporation a written undertaking by
or on behalf of a director to repay such amount if it is ultimately
determined that he or she is not entitled to be indemnified by the
corporation against such expenses, and
o a determination must be made that the facts then known to those
making the determination would not preclude indemnification.
A director may apply for court-ordered indemnification under certain
circumstances. Unless a corporation's articles of incorporation provide
otherwise, an officer of a corporation is entitled to mandatory indemnification
and is entitled to apply for court-ordered indemnification to the same extent as
a director. The corporation may indemnify and advance expenses to an officer,
employee or agent of the corporation to the same extent as to a director. A
corporation may also indemnify and advance expenses to an officer, employee or
agent who is not a director to the
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extent, consistent with public policy, that may be provided by its articles of
incorporation, bylaws, general or specific action of its board of directors or
contract.
Our bylaws provide for the indemnification of our directors and officers to
the fullest extent permitted by Kentucky law.
SPECIAL MEETINGS OF SHAREHOLDERS. Special meetings of our shareholders may
be called for any purpose or purposes whatever at any time by shareholders
owning, in the aggregate, not less than 33% of the shares entitled to vote at
such meeting.
SHAREHOLDER NOMINATIONS AND PROPOSALS. Our bylaws provide that a
shareholder may nominate members of the board of directors or submit proposals
to be presented at an annual meeting of shareholders only upon at least 60 days
prior written notice to us.
DISSENTERS' RIGHTS OF APPRAISAL. Under the Kentucky Business Corporation
Act, a shareholder is generally entitled to dissent from a corporate action and
obtain payment of the fair value of his shares in certain events. These events
generally include: mergers, share exchanges and sales of substantially all of
the corporation's assets other than in the usual and regular course of business,
if the shareholder is entitled to vote on the transaction; certain types of
amendments of the corporation's articles of incorporation that materially and
adversely affect a shareholder's rights; or other corporate actions taken
pursuant to a shareholder vote, to the extent the articles of incorporation,
bylaws, or a resolution of the board of directors provide for dissenters'
rights.
SHAREHOLDERS' RIGHTS TO EXAMINE BOOKS AND RECORDS. A shareholder of a
Kentucky corporation may inspect and copy books and records of the corporation
during regular business hours, if he or she gives the corporation written notice
of his or her demand at least five business days before the date of the
inspection. In order to inspect certain records, written demand must also be
made in good faith and for a proper purpose and must describe with reasonable
particularity the purpose of the request and the records the shareholder desires
to inspect.
DIVIDENDS. Our ability to pay dividends on common stock is dependent upon
dividends from Citizens First Bank and is governed by Kentucky corporate law.
Under Kentucky corporate law, dividends may be paid so long as the corporation
would be able to pay its debts as they become due in the ordinary course of
business and the corporation's total assets would not be less than the sum of
its total liabilities plus the amount that would be needed, if the corporation
were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution to shareholders whose preferential rights
are superior to those receiving the distribution. Citizens First Bank's board of
directors may declare dividends on shares of Citizens First Bank common stock
out of funds legally available therefor. The payment of dividends on Citizens
First Bank common stock is subject to certain limitations imposed by law. See
"Dividends" on page 26.
SHARES ELIGIBLE FOR FUTURE SALE
All shares sold in this offering will be freely tradable without
restriction or registration under the Securities Act of 1933, except for any
shares purchased by an "affiliate" of Citizens First, which will be subject to
the resale limitations set forth in Securities and Exchange Commission Rule 144.
89
91
All of our directors are considered "affiliates" within the meaning of Rule
144 and will, therefore, be subject to the applicable resale limitations with
respect to the shares purchased in this offering and are subject to applicable
resale limitations with respect to the shares they currently own. In general,
the number of shares that can be sold by each director in brokers' transactions,
(as that term is used in Rule 144) within any three month period may not exceed
the greater of one percent (1%) of the outstanding shares as shown by the most
recent report or statement published by the company, or the average weekly
reported volume of trading in the shares on all national securities exchanges
and/or reported through the automated quotation system of a registered
securities association during the four calendar weeks preceding the sale.
EXPERTS
The financial statements of Citizens First as of December 31, 2002 and 2001
and for the years then ended included in this prospectus, have been audited by
BKD, LLP, independent auditors, as set forth in their report appearing elsewhere
herein, and are included in reliance upon such report given upon authority of
such firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of common stock offered under this prospectus
are being passed upon by Wyatt, Tarrant & Combs, LLP, Louisville, Kentucky.
Frost Brown Todd LLC will pass upon certain matters for the sales agent.
WHERE YOU CAN FIND MORE INFORMATION
We filed a registration statement with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, relating to the shares
of common stock offered under this prospectus. The registration statement
contains additional information about us and our common stock. The Securities
and Exchange Commission allows us to omit certain information included in the
registration statement from this prospectus. The registration statement may be
inspected and copied at the Public Reference Section at the Securities and
Exchange Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the Securities and Exchange Commission at 1-800-SEC-0330. The
Securities and Exchange Commission maintains an Internet site that contains
reports, proxy and information statements, and other information about issuers
that file electronically with the Securities and Exchange Commission. The
address of that site is http://www.sec.gov. In addition, you can read and copy
this information at the regional offices of the Securities and Exchange
Commission at 233 Broadway, New York, New York 10279 and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661.
We furnish our shareholders with annual reports containing audited
financial statements.
90
92
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002
(unaudited)........................................................................F-2
Condensed Consolidated Statements of Operations for the three months ended June
30, 2003 and 2002 (unaudited)......................................................F-3
Condensed Consolidated Statements of Operations for the six months ended June
30, 2003 and 2002 (unaudited)......................................................F-4
Condensed Consolidated Statements of Changes in Stockholders' Equity for the six
months ended June 30, 2003 and 2002 (unaudited)....................................F-5
Condensed Consolidated Statements of Comprehensive Income for the six months
ended June 30, 2003 and 2002 (unaudited)...........................................F-5
Condensed Consolidated Statements of Cash Flows for the six months ended June
30, 2003 and 2002 (unaudited)......................................................F-6
Notes to Condensed Consolidated Financial Statements (unaudited).....................F-7
Independent Accountants' Report......................................................F-10
Consolidated Balance Sheets as of December 31, 2002 and 2001.........................F-11
Consolidated Statements of Income for the years ended December 31, 2002
and 2001...........................................................................F-12
Consolidated Statements of Stockholders' Equity for the years ended December 31,
2002 and 2001........................................................ .............F-14
Consolidated Statements of Cash Flows for the years ended December 31, 2002
and 2001...........................................................................F-15
Notes to Consolidated Financial Statements...........................................F-17
F-1
93
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, 2003 DECEMBER 31, 2002
ASSETS
Cash and due from banks $5,008,000 $5,204,747
Federal funds sold 2,688,935 8,718,070
--------------------------- -----------------------
--------------------------- -----------------------
Cash and cash equivalents 7,696,935 13,922,817
Available for sale securities (amortized cost of $17,614,526 as
of June 30, 2003; $15,980,411 as of December 31, 2002) 17,688,014 16,186,406
Federal Home Loan Bank (FHLB) Stock 416,700 353,600
Mortgage loans held for sale 1,499,751 305,200
Loans 124,787,813 95,959,056
Less allowance for loan losses 2,900,907 1,300,258
--------------------------- -----------------------
Net loans 121,886,906 94,658,798
Premises and equipment, net 3,305,392 1,840,022
Interest receivable 530,709 651,412
Other real estate owned - 70,000
Deferred income taxes 845,948 335,193
Goodwill 384,243 -
Other assets 180,976 119,681
--------------------------- -----------------------
Total assets $154,435,574 $128,443,129
=========================== =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $10,598,983 $11,304,108
Savings, NOW and money market deposits 49,109,000 34,676,471
Time deposits 68,176,550 59,912,754
--------------------------- -----------------------
Total deposits 127,884,533 105,893,333
Securities sold under agreements to repurchase 4,431,233 5,833,512
Federal Home Loan Bank (FHLB) borrowings 11,000,000 7,000,000
Long-term debt 2,300,000 900,000
Deferred income taxes - 15,231
Accrued interest and other liabilities 673,780 962,801
--------------------------- -----------------------
Total liabilities 146,289,546 120,604,877
Stockholders' equity:
Common stock, no par value authorized 2,000,000
shares; issued and outstanding 722,678 and 643,053
shares, respectively 8,383,045 7,357,477
Retained earnings (deficit) (285,519) 344,818
Accumulated other comprehensive income 48,502 135,957
--------------------------- -----------------------
Total stockholders' equity 8,146,028 7,838,252
--------------------------- -----------------------
Total liabilities
And stockholders' equity $154,435,574 $128,443,129
=========================== =======================
See accompanying notes to condensed consolidated financial statements.
F-2
94
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS ENDED JUNE 30: 2003 2002
---- ----
INTEREST INCOME
Loans, including fees $1,769,060 $1,440,385
Federal funds sold 7,421 5,051
Securities 107,913 149,875
Other 4,050 3,489
--------- ---------
Total interest income 1,888,444 1,598,800
INTEREST EXPENSE
Deposits 629,223 641,964
Other borrowings 98,818 58,699
--------- --------
Total interest expense 728,041 700,663
--------- --------
NET INTEREST INCOME 1,160,403 898,137
Provision for loan losses 1,490,000 70,000
--------- -------
NET INTEREST INCOME (LOSS) AFTER
PROVISION FOR LOAN LOSSES (329,597) 828,137
--------- --------
NON-INTEREST INCOME
Service charges on deposit accounts 173,033 136,478
Income from the sale of loans 188,808 1,599
Gain on the sale of securities 134,732 67,370
Other 69,399 14,972
-------- -------
Total non-interest income 565,972 220,419
NON-INTEREST EXPENSES
Compensation and benefits 665,917 367,177
Net occupancy expense 120,493 44,164
Furniture and equipment expense 105,058 54,331
Professional fees 109,424 20,146
Postage, printing and supplies 30,133 15,514
Processing fees 78,959 52,403
Advertising 61,023 32,796
Other 202,554 145,528
----------- -------
Total non-interest expenses 1,373,561 732,059
----------- -------
INCOME (LOSS) BEFORE INCOME TAXES (1,137,186) 316,497
Income tax expense (benefit) (389,100) 108,500
----------- -------
NET INCOME (LOSS) $(748,086) $207,997
=========== ========
BASIC EARNINGS (LOSS) PER COMMON SHARE $(1.16) $0.32
See accompanying notes to condensed consolidated financial statements.
F-3
95
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30: 2003 2002
---- ----
INTEREST INCOME
Loans, including fees $3,305,246 $2,874,746
Federal funds sold 10,813 15,035
Securities 289,647 279,672
Other 7,438 6,945
---------- ----------
Total interest income 3,613,144 3,176,398
INTEREST EXPENSE
Deposits 1,213,565 1,285,303
Other borrowings 172,844 144,305
---------- ---------
Total interest expense 1,386,409 1,429,608
---------- ---------
NET INTEREST INCOME 2,226,735 1,746,790
Provision for loan losses 1,643,000 100,000
--------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 583,735 1,646,790
--------- ---------
NON-INTEREST INCOME
Service charges on deposit accounts 320,122 229,074
Income from the sale of loans 280,746 10,837
Gain on the sale of securities 144,024 67,370
Other 103,040 25,587
--------- -------
Total non-interest income 847,932 332,868
NON-INTEREST EXPENSES
Compensation and benefits 1,259,444 727,062
Net occupancy expense 185,786 88,366
Furniture and equipment expense 190,025 122,451
Professional fees 141,015 44,343
Postage, printing and supplies 60,124 30,719
Processing fees 149,061 107,991
Advertising 108,227 69,839
Other 302,572 272,991
--------- ---------
Total non-interest expenses 2,396,254 1,463,762
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (964,587) 515,896
Income tax expense (benefit) (334,250) 177,010
---------- --------
NET INCOME (LOSS) $(630,337) $338,886
========== ========
BASIC EARNINGS (LOSS) PER COMMON SHARE $(0.98) $0.53
See accompanying notes to condensed consolidated financial statements.
F-4
96
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30: 2003 2002
---- ----
Balance January 1 $7,838,252 $7,066,376
Net income (630,337) 338,886
Issuance of common stock 1,025,568 -
Other comprehensive income (loss), net of tax (87,455) 17,719
--------- ---------
Balance at end of period $8,146,028 $7,422,981
========== ==========
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30: 2003 2002
---- ----
Net income $(630,337) $338,886
Other comprehensive income (loss), net of tax:
Unrealized (depreciation) on available for sale
securities, net of income taxes (credit) of $(16,744)
and $(22,368), arising during the period, respectively (87,455) 17,719
---------- --------
Comprehensive income (loss) $(717,792) $356,605
========== ========
See accompanying notes to condensed consolidated financial statements.
F-5
97
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30: 2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(630,337) $338,886
Items not requiring (providing) cash:
Depreciation and amortization 176,236 130,381
Provision for loan losses 1,643,000 100,000
Amortization of premiums and discounts on securities 67,924 6,175
Net realized gain on disposition of investment securities (144,024) (67,370)
FHLB stock dividends received (7,300) (5,600)
Mortgage loans held for sale originated (23,754,652) (3,133,600)
Sale of mortgage loans held for sale 22,560,101 4,330,259
Changes in:
Accrued interest receivable 120,703 (47,811)
Other assets (587,576) 239,481
Interest payable and other liabilities (259,200) 136,419
--------- ----------
Net cash provided (used) in operating activities (815,125) 2,027,220
CASH FLOWS FROM INVESTING ACTIVITIES:
Net changes in loans (28,871,108) (4,090,903)
Purchases of premises and equipment (1,597,435) (62,583)
Proceeds from maturities of securities available for sale 13,011,023 2,248,626
Proceeds from sales of securities available for sale 5,480,565 77,010
Purchase of securities available for sale (20,049,603) (3,429,225)
Purchase of mortgage company and title company (398,688) -
------------ -----------
Net cash provided (used) in investing activities (32,425,246) (5,257,075)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 21,991,200 576,842
Net increase in other borrowings 5,400,000 -
Net decrease in federal funds purchased and repurchase (1,402,279) (213,009)
agreements
Issuance of common stock 1,025,568 -
----------- -----------
Net cash provided (used) in financing activities 27,014,489 363,833
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,225,882) (2,866,022)
Cash and cash equivalents at beginning of period 13,922,817 6,526,769
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,696,935 $3,660,747
=========== ===========
See accompanying notes to condensed consolidated financial statements.
F-6
98
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Citizens First Corporation (the
"Company") and its subsidiary, Citizens First Bank, Inc. (the "Bank"), conform
to accounting principles generally accepted in the United States of America and
general practices within the banking industry. The condensed consolidated
financial statements include the accounts of the Company and the Bank. All
significant intercompany transactions and accounts have been eliminated in
consolidation.
Certain information and note disclosures normally included in the Company's
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-KSB annual report for 2002 filed with the
Securities and Exchange Commission.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Estimates used in the preparation of the
financial statements are based on various factors including the current interest
rate environment and the general strength of the local economy. Changes in the
overall interest rate environment can significantly affect the Company's net
interest income and the value of its recorded assets and liabilities. Actual
results could differ from those estimates used in the preparation of the
financial statements.
The financial information presented has been prepared from the books and
records of the Company and is not audited. The accompanying condensed
consolidated financial statements have been prepared in accordance with the
instructions to Form 10-QSB and do not include all of the information and the
footnotes required by accounting principles generally accepted in the United
States of America for complete statements.
In the opinion of management, all adjustments considered necessary for a
fair presentation have been reflected in the accompanying unaudited financial
statements. Results of interim periods are not necessarily indicative of results
to be expected for the full year. Those adjustments consist only of normal
recurring adjustments. The condensed consolidated balance sheet of the Company
as of December 31, 2002, has been derived from the audited consolidated balance
sheet of the Company as of that date.
(2) RECLASSIFICATIONS
Certain reclassifications have been made to the 2002 financial statements
to conform to the 2003 financial statement presentation. These reclassifications
had no effect on net earnings.
(3) ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the stated periods was as
follows:
JUNE 30, DECEMBER 31,
2003 2002
Balance, beginning of year $ 1,300,258 $ 1,195,924
Provision charged to expense 1,643,000 195,000
F-7
99
Loans charged off, net of recoveries of $6,974 for June
30, 2003 and $15,549 for December 31, 2002 (42,351) (90,666)
-------------- -------------
Balance, June 30, 2003 and December 31, 2002,
respectively $ 2,900,907 $ 1,300,258
============= =============
(4) STOCK OPTION PLANS
On December 9, 2002, the board of directors adopted the 2002 Stock Option
Plan, which became effective subject to the approval of the Company's
shareholders at the annual meeting in April 2003. The purpose of the plan is to
afford key employees an incentive to remain in the employ of the Company and its
subsidiaries and to use their best efforts on its behalf. 120,000 shares of
Company common stock have been reserved for issuance under the plan.
On January 17, 2003, the board of directors adopted the 2003 Stock Option
Plan for Non-Employee Directors, which became effective subject to the approval
of the Company's shareholders at the annual meeting in April 2003. The purpose
of the plan is to assist the Company in promoting a greater identity of interest
between the Company's non-employee directors and shareholders, and in attracting
and retaining non-employee directors by affording them an opportunity to share
in the Company's future successes. 40,000 shares of common stock have been
reserved for issuance under the plan.
The 2002 Stock Option Plan and the 2003 Stock Option Plan for Non-Employee
Directors were approved at the Company's Annual Meeting of Shareholders on April
17, 2003.
(5) STOCK OFFERING
The Company is currently in the process of raising additional equity
through the sale of additional shares of common stock. The Company filed a
Registration Statement on Form SB-2 with the Securities and Exchange Commission
in February 2003 for the offering and sale of up to $10,000,000 of shares of the
Company's common stock. As of the end of June 2003, the Company had completed
one closing of the offering, resulting in the addition of approximately
$1,026,000 in net proceeds from the sale of Citizens First Corporation common
stock.
(6) ACQUISITION OF COMMONWEALTH MORTGAGE AND SOUTHERN KENTUCKY LAND TITLE
On January 2, 2003, the Bank acquired all of the outstanding stock of
Commonwealth Mortgage of Bowling Green, Inc. and Southern Kentucky Land Title,
Inc. Commonwealth Mortgage originates 1-4 family residential mortgages for sale
in the secondary mortgage market, while Southern Kentucky Land Title provides
title insurance agency services for real estate purchase contracts. The purchase
price for Commonwealth Mortgage and Southern Kentucky Land Title consisted of
$400,000 in cash plus a deferred contingent purchase price of up to $1,350,000
payable upon the combined entities' achievement of specified annual earnings
targets over a five year period, plus 25% of the amount, if any, by which their
earnings exceed such targets. 25% of the deferred purchase price will be paid by
the issuance of the Company's common stock, valued at the average of the closing
sales price of the stock over the last ten trading days of the applicable
calendar year. At the Company's option, an additional 25% of such deferred
purchase price, if any, may be paid in shares of our common stock. The deferred
contingent purchase price will be accounted for as additional purchase price at
the time the contingency is resolved. The Bank also purchased the .2 acre site
on which the main office of Commonwealth Mortgage is located for a purchase
price of $272,500 in cash. Goodwill recognized in this transaction amounted to
$380,000, all of which was assigned to the Bank.
F-8
100
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) SUBSEQUENT EVENTS
Subsequent to the end of the second quarter of 2003, the Bank will
implement several steps that will become part of an informal agreement between
the Bank and its primary regulators intended to improve the Bank's performance.
These steps will include refining and refocusing the Bank's credit risk
analysis, underwriting, monitoring and evaluation functions. These comprehensive
loan review procedures will provide for strengthened independent risk analysis
of the loan portfolio and will include a review of the lending authority of each
loan officer and loan committee, as well as address staffing requirements,
particularly in the area of loan administration. Management of the Bank will
continue 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. Management anticipates that the
Bank's primary regulators will require it to maintain capital ratios at levels
higher than those typically required for an adequately capitalized or well
capitalized institution.
F-9
101
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
Citizens First Corporation
Bowling Green, Kentucky
We have audited the accompanying consolidated balance sheets of Citizens First
Corporation as of December 31, 2002 and 2001, and the related consolidated
statements of income, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Citizens First
Corporation as of December 31, 2002 and 2001, and the results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ BKD, LLP
Louisville, Kentucky
January 17, 2003
F-10
102
CITIZENS FIRST CORPORATION
CONSOLIDATED BALANCE SHEETS
YEARS ENDED DECEMBER 31, 2002 AND 2001
ASSETS
2002 2001
----------------------------------------
Cash and due from banks $ 5,204,747 $ 3,926,769
Federal funds sold 8,718,070 2,600,000
-------------- ---------------
Cash and cash equivalents 13,922,817 6,526,769
Available-for-sale securities 16,186,406 10,200,866
Loans held for sale 305,200 1,578,159
Loans, net of allowance for loan losses of $1,300,258 and
$1,195,924 at December 31, 2002, and 2001, respectively 94,658,798 83,524,425
Premises and equipment 1,840,022 1,393,603
Federal Home Loan Bank (FHLB) stock 353,600 248,500
Foreclosed assets held for sale, net 70,000 321,463
Interest receivable 651,412 522,415
Deferred income taxes 335,193 390,000
Other 119,681 113,516
-------------- ---------------
Total assets $ 128,443,129 $ 104,819,716
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand $ 11,304,108 $ 8,550,249
Savings, NOW and money market 34,676,471 20,993,045
Time 59,912,754 58,347,534
--------------- ---------------
Total deposits 105,893,333 87,890,828
Securities sold under repurchase agreements 5,833,512 3,411,736
Long-term debt 7,900,000 5,799,000
Deferred income taxes 15,231 56,305
Income taxes payable 395,078 --
Accrued interest and other liabilities 567,723 595,471
--------------- ---------------
Total liabilities 120,604,877 97,753,340
--------------- ---------------
STOCKHOLDERS' EQUITY
Common stock, no par value, authorized 2,000,000 shares; issued
and outstanding 643,053 shares 7,357,477 7,357,477
Retained earnings (deficit) 344,818 (400,400)
Accumulated other comprehensive income 135,957 109,299
--------------- ---------------
Total stockholders' equity 7,838,252 7,066,376
--------------- ---------------
Total liabilities and stockholders' equity $ 128,443,129 $ 104,819,716
=============== ===============
See Notes to Consolidated Financial Statements.
F-11
103
CITIZENS FIRST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
---- ----
INTEREST AND DIVIDEND INCOME
Loans $ 5,789,307 $ 5,938,299
Securities taxable 565,125 467,444
Federal funds sold 29,700 35,446
Dividends on FHLB stock 12,448 9,321
--------------- ---------------
Total interest and dividend income 6,396,580 6,450,510
--------------- ---------------
INTEREST EXPENSE
Deposits 2,500,240 3,231,414
Securities sold under agreements to repurchase 53,521 76,880
Long-term debt 216,021 149,446
Federal funds purchased 4,122 17,347
--------------- ---------------
Total interest expense 2,773,904 3,475,087
--------------- ---------------
NET INTEREST INCOME 3,622,676 2,975,423
PROVISION FOR LOAN LOSSES 195,000 664,000
--------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,427,676 2,311,423
--------------- ---------------
NONINTEREST INCOME
Service charges on deposit accounts 575,920 283,305
Other service charges and fees 41,781 33,032
Income on sale of mortgage loans 33,538 53,667
Net realized gains on sale of available-for-sale securities 108,454 --
Trust referral fees 12,763 9,132
--------------- ---------------
Total noninterest income 772,456 379,136
--------------- ---------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,530,034 1,366,695
Net occupancy expense 176,858 175,786
Equipment expense 238,878 263,929
Advertising 112,214 93,299
Professional fees 86,559 103,261
Data processing services 233,909 191,732
Franchise shares and deposit tax 156,808 99,588
Business manager expense 84,447 85,448
Other 444,848 329,484
--------------- ---------------
Total noninterest expense 3,064,555 2,709,222
--------------- ---------------
See Notes to Consolidated Financial Statements.
F-12
104
2002 2001
---- ----
INCOME (LOSS) BEFORE INCOME TAXES $ 1,135,577 $ (18,663)
PROVISION (CREDIT) FOR INCOME TAXES 390,359 (361,065)
--------------- ---------------
NET INCOME $ 745,218 $ 342,402
=============== ===============
BASIC AND DILUTED EARNINGS PER SHARE $ 1.16 $ 0.53
=============== ===============
F-13
105
CITIZENS FIRST CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002 AND 2001
Accumulated
Common Stock Other Total
----------- ------------- Retained Comprehensive Comprehensive
Shares Amount Earnings Income Total Income
--------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2001 643,053 $ 7,357,477 $(742,802) $ 57,551 $ 6,672,226
Comprehensive income
Net income -- -- 342,402 -- 342,402 $ 342,402
Change in unrealized gain on securities
available for sale, net of reclassification
adjustment and tax effect $26,659 -- -- -- 51,748 51,748 51,748
-------- ------------- ----------- ------------ ----------- -----------
Total comprehensive income $ 394,150
===========
BALANCE, DECEMBER 31, 2001 643,053 7,357,477 (400,400) 109,299 7,066,376
Comprehensive income
Net income -- -- 745,218 -- 745,218 745,218
Change in unrealized gain on securities
available for sale, net of reclassification
adjustment and tax effect of $13,733 -- -- -- 26,658 26,658 26,658
------- ----------- --------- ----------- ----------- -----------
Total comprehensive income $ 771,876
===========
Balance, December 31, 2002 643,053 $ 7,357,477 $ 344,818 $ 135,957 $ 7,838,252
======== =========== ========= ============ ===========
See Notes to Consolidated Financial Statements.
F-14
106
CITIZENS FIRST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
---- ----
OPERATING ACTIVITIES
Net income $ 745,218 $ 342,402
Items not requiring (providing) cash
Depreciation and amortization 246,664 218,605
Provision for loan losses 195,000 664,000
Amortization of premiums and discounts on securities 24,647 (15,364)
Deferred income taxes 48,160 (390,000)
Net realized gains on disposition of investment securities (108,454) --
Gain on sale of other real estate owned (7,493) --
FHLB stock dividends received (12,200) (11,000)
Changes in
Interest receivable (128,997) 68,144
Mortgage loans held for sale 1,272,959 (1,254,159)
Other assets (56,432) 29,140
Interest payable and other liabilities 319,169 23,146
-------------- --------------
Net cash provided by (used in) operating activities 2,538,241 (325,086)
-------------- --------------
INVESTING ACTIVITIES
Net change in loans (11,329,373) (24,342,809)
Purchase of premises and equipment (642,652) (127,227)
Proceeds from maturities of available-for-sale securities 6,168,141 14,512,861
Proceeds from sales of other real estate owned 258,956 --
Proceeds from sales of available-for-sale securities 1,117,635 --
Purchases of available-for-sale securities (13,147,281) (17,594,039)
Purchase of FHLB stock (92,900) (139,800)
-------------- --------------
Net cash used in investing activities (17,667,474) (27,691,014)
-------------- --------------
FINANCING ACTIVITIES
Net increase in demand deposits, money market, NOW and savings
accounts 16,437,285 9,334,215
Net increase in certificates of deposit 1,565,220 16,040,501
Proceeds from long-term borrowings 2,101,000 3,875,000
Net increase in repurchase agreements 2,421,776 1,053,576
-------------- --------------
Net cash provided by financing activities 22,525,281 30,303,292
-------------- --------------
INCREASE IN CASH AND CASH EQUIVALENTS 7,396,048 2,287,192
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,526,769 4,239,577
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 13,922,817 $ 6,526,769
============== ==============
See Notes to Consolidated Financial Statements.
F-15
107
2002 2001
---- ----
SUPPLEMENTAL CASH FLOWS INFORMATION
Sale and financing of foreclosed assets $ 0 $ 161,998
Real estate acquired in settlement of loans $ 0 $ 527,000
Interest paid $ 2,804,016 $ 3,469,502
Income taxes paid $ 8,865 $ 21,000
F-16
108
CITIZENS FIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Citizens First Corporation (Company) was incorporated in 1975, for the
purpose of conducting business as an investment club. The Company is
incorporated under the laws of the Commonwealth of Kentucky and is
headquartered in Bowling Green, Kentucky. In September 1998, the Company
filed an application with the Kentucky Department of Financial
Institutions (KDFI) and the Federal Deposit Insurance Corporation (FDIC)
to organize and charter Citizens First Bank, Inc. (Bank) as a new
Kentucky bank and a wholly owned subsidiary of the Company. In December
1998, the Company filed an application with the Board of Governors of
the Federal Reserve System (FRB) for approval to become a bank holding
company under the Holding Company Act of 1956, as amended. On December
28, 1998, the FRB approved the Company's application to become a bank
holding company. On January 21, 1999, the FDIC approved the Bank's
application for federal deposit insurance subject to certain conditions,
including minimum capital requirements, which have been subsequently met
by the Bank. The Bank commenced operations on February 18, 1999.
The Company's operations include one reportable segment: providing a
full range of banking and mortgage services to individual and corporate
customers in Bowling Green and Warren County, Kentucky. The Company is
subject to competition from other financial institutions. The Company is
also subject to the regulation of certain federal and state agencies and
undergoes periodic examinations by those regulatory authorities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and the Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or
in satisfaction of loans. In connection with the determination of the
allowance for loan losses and the valuation of foreclosed assets held
for sale, management obtains independent appraisals for significant
properties.
F-17
109
CITIZENS FIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents.
SECURITIES
Available-for-sale securities, which include any security for which the
Company has no immediate plan to sell but which may be sold in the
future, are carried at fair value. Unrealized gains and losses are
recorded, net of related income tax effects, in other comprehensive
income.
Amortization of premium and accretion of discounts are recorded as
interest income from securities. Realized gains and losses are recorded
as net security gains (losses). Gains and losses on sales of securities
are determined on the specific-identification method.
LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or fair value in the aggregate. Net
unrealized losses, if any, are recognized through a valuation allowance
by charges to income. Gains on sales of mortgage loans are recorded at
the time of disbursement by an investor at the difference between the
sales proceeds and the loans carrying value.
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoffs are reported at their
outstanding principal balance adjusted for any charge-offs, allowance
for loan losses, any deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans. Interest income is
reported on the interest method and includes amortization of net
deferred loan fees and costs over the loan term. Generally, loans are
placed on non-accrual status at 90 days past due and interest is
considered a loss, unless the loan is well secured and in the process of
collection.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to income.
Loan losses are charged against the allowance when management believes
the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, the estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
F-18
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CITIZENS FIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value and the probability of collecting scheduled principal and interest
payments when due. Loans that experience insignificant payment delays
and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan-by-loan
basis for commercial and construction loans by either the present value
of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price or the fair value of
the collateral if the loan is collateral dependent.
Large groups of smaller balance homogenous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer and residential loans for impairment
disclosures.
PREMISES AND EQUIPMENT
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to expense using the straight-line method over
the estimated useful lives of the assets. Leasehold improvements are
capitalized and depreciated using the straight-line method over the
terms of the respective leases or the estimated useful lives of the
improvements, whichever is shorter.
FEDERAL HOME LOAN BANK STOCK
Federal Home Loan Bank stock is a required investment for institutions
that are members of the Federal Home Loan Bank system. The required
investment in the common stock is based on a predetermined formula.
FORECLOSED ASSETS HELD FOR SALE
Assets acquired through, or in lieu of, loan foreclosure are held for
sale and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the assets are
carried at the lower of carrying amount or fair value less cost to sell.
Revenue and expenses from operations and changes in the valuation
allowance are included in net income or expense from foreclosed assets.
F-19
111
CITIZENS FIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects
of differences between the financial statement and tax bases of assets
and liabilities. A valuation allowance is established to reduce deferred
tax assets if it is more likely than not that a deferred tax asset will
not be realized. The Company files consolidated income tax returns with
its subsidiary.
EARNINGS PER SHARE
Earnings per share have been computed based on the weighted-average
common shares outstanding during each year. Weighted-average common
shares were 643,053 in both years and there were no dilutive securities.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2001 financial
statements to conform to the 2002 financial statement presentation.
These reclassifications had no effect on net earnings.
NOTE 1: SECURITIES
The amortized cost and approximate fair value of securities are as
follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
------------------------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES
December 31, 2002
U. S. government agencies $ 10,088,698 $ 94,395 $ 0 $ 10,183,093
Mortgage-backed securities 5,891,713 111,600 -- 6,003,313
------------- ------------- ------------- -------------
$ 15,980,411 $ 205,995 $ 0 $ 16,186,406
============= ============= ============= =============
December 31, 2001
U. S. government agencies $ 8,318,834 $ 89,210 $ (4,641) $ 8,403,403
Mortgage-backed securities 1,706,788 18,404 -- 1,725,192
Equity securities 9,640 62,631 -- 72,271
------------- ------------- ------------- -------------
$ 10,035,262 $ 170,245 $ (4,641) $ 10,200,866
============= ============= ============= =============
F-20
112
CITIZENS FIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
The amortized cost and fair value of securities available for sale at
December 31, 2002, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
AVAILABLE FOR SALE
AMORTIZED FAIR
COST VALUE
--------------------------------
Within one year $ 196,114 $ 201,084
One to five years 6,000,406 6,059,106
Five to 10 years 3,892,178 3,922,903
------------- -----------
10,088,698 10,183,093
Mortgage-backed securities 5,891,713 6,003,313
------------- -----------
$ 15,980,411 $16,186,406
============= ===========
The carrying value of securities pledged as collateral, to secure public
deposits and for other purposes, was $10,427,574 at December 31, 2002,
and $8,840,955 at December 31, 2001.
The book value of securities sold under agreements to repurchase
amounted to $5,833,512 and $3,411,736 at December 31, 2002 and 2001,
respectively.
Gross gains of $108,454 resulting from sales of available-for-sale
securities were realized for 2002. There were no sales of
available-for-sale securities during 2001.
NOTE 2: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at December 31 include:
2002 2001
---------------------------------
Commercial and agricultural $ 31,798,487 $ 27,014,848
Commercial real estate 33,364,597 35,285,871
Residential real estate 23,546,052 13,357,181
Consumer 7,249,920 9,062,449
------------ ------------
95,959,056 84,720,349
Less allowance for loan losses 1,300,258 1,195,924
------------ ------------
Net loans $ 94,658,798 $ 83,524,425
============ ============
F-21
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CITIZENS FIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
Activity in the allowance for loan losses was as follows:
2002 2001
------------------------------
Balance, beginning of year $ 1,195,924 $ 822,344
Provision charged to expense 195,000 664,000
Loans charged off, net of recoveries of $15,449
for 2002 and $5,502 for 2001 (90,666) (290,420)
------------ -----------
Balance, end of year $ 1,300,258 $ 1,195,924
=========== ===========
At December 31, 2002 and 2001, accruing loans delinquent 90 days or more totaled
$0 and $15,000, respectively. Non-accruing loans at December 31, 2002 and 2001
were $115,000 and $334,000, respectively.
NOTE 3: PREMISES AND EQUIPMENT
Major classifications of premises and equipment, stated at cost, are as follows:
2002 2001
---------------------------------
Land and land improvements $ 953,209 $ 651,845
Buildings and improvements 480,770 480,770
Leasehold improvements 98,765 87,573
Furniture and fixtures 100,161 96,438
Equipment 802,413 654,521
Automobiles 21,518 --
Construction in progress 156,964 --
----------- -----------
2,613,800 1,971,147
Less accumulated depreciation 773,778 577,544
----------- -----------
Net premises and equipment $ 1,840,022 $ 1,393,603
=========== ===========
F-22
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CITIZENS FIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 4: INTEREST BEARING DEPOSITS
Interest bearing deposits in denominations of $100,000 or more were
$22,457,617 on December 31, 2002, and $22,040,834 on December 31, 2001.
At December 31, 2002, the scheduled maturities of time deposits were as
follows:
2003 $ 41,749,190
2004 11,477,754
2005 4,730,112
2006 977,856
2007 977,842
---------------
$ 59,912,754
================
NOTE 5: SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Company enters into purchases of securities under agreements to
resell. The amounts advanced under these agreements represent short-term
loans and are reflected as a receivable in the balance sheet. The
securities underlying the agreements are book-entry securities. During
the period, the securities were delivered by appropriate entry into the
Company's account maintained at the Federal Reserve Bank of St. Louis or
into a third-party custodian's account designated by the Company under a
written custodial agreement that explicitly recognizes the Company's
interest in the securities. At December 31, 2002, these agreements
matured within 90 days. The agreements relating to mortgage-backed
securities were agreements to resell substantially identical securities.
At December 31, 2002, no material amount of agreements to resell
securities purchased was outstanding with any individual dealer. The
Company's policy requires that all securities purchased under agreements
to resell be fully collateralized.
NOTE 6: INCOME TAXES
The provision (credit) for income taxes includes these components:
2002 2001
-----------------------------------
Taxes currently payable $ 342,199 $ 28,935
Deferred income taxes 48,160 (390,000)
----------- -----------
Income tax expense (credit) $ 390,359 $ (361,065)
============ ===========
F-23
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CITIZENS FIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
A reconciliation of the income tax expense (credit) at the statutory
rate to the Company's actual income tax expense (credit) is shown below:
2002 2001
----------------------------------------
Computed at the statutory rate (34%) $ 386,096 $ (6,345)
Increase (decrease) resulting from
State income taxes -- (7,920)
Tax exempt municipal income -- (1,460)
Changes in the deferred tax asset valuation allowance -- (349,251)
Other 4,263 3,911
--------------- ---------------
Actual tax expense (credit) $ 390,359 $ (361,065)
=============== ===============
The tax effects of temporary differences related to deferred taxes shown
on the balance sheets were:
2002 2001
----------------------------------------
Deferred tax assets
Allowance for loan losses $ 374,102 $ 332,058
Start-up costs 45,675 53,679
Net operating loss carryforwards -- 3,892
Accumulated depreciation 5,587 --
Accrued compensated absences 31,770 22,157
Other 7,297 --
--------------- ---------------
464,431 411,786
--------------- ---------------
Deferred tax liabilities
Unrealized gains on available-for-sale securities (70,038) (56,305)
Deferred loan fees/costs (15,769) (5,557)
FHLB stock dividends (8,398) (4,250)
Depreciation -- (11,979)
Other (50,264) --
--------------- ---------------
(144,469) (78,091)
--------------- ---------------
Net deferred tax asset before valuation allowance 319,962 333,695
--------------- ---------------
Valuation allowance
Beginning balance -- (349,251)
Decrease during the period -- 349,251
--------------- ---------------
Ending balance 0 0
--------------- ---------------
Net deferred tax asset $ 319,962 $ 333,695
=============== ===============
F-24
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CITIZENS FIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
The deferred taxes are presented on the balance sheet as follows:
2002 2001
-------------------------------
Deferred tax asset $ 335,193 $ 390,000
Deferred tax liability (15,231) (56,309)
------------ -----------
$ 319,962 $ 333,695
=========== ===========
NOTE 7: LONG-TERM DEBT
Long-term debt consisted of the following components:
2002 2001
-------------------------------
FHLB advances $ 7,000,000 $ 4,924,000
Other debt 900,000 875,000
----------- -----------
Total long-term debt $ 7,900,000 $ 5,799,000
=========== ===========
Two outstanding advances from the Federal Home Loan Bank (FHLB) at
December 31, 2002, totaled $7,000,000. The advances of $4,000,000 and
$3,000,000 carry interest rates of 1.50% and 4.04%, respectively, and
mature on June 9, 2003, and March 19, 2004, respectively. The advances
are collateralized by a blanket agreement assigning mortgages on single
family residences to the FHLB totaling $9,450,000 at December 31, 2002,
and are subject to restrictions or penalties in the event of prepayment.
Other debt consists of an amount borrowed from Franklin Bank & Trust
under a $3,000,000 line of credit which expires June 22, 2012, with
interest payable quarterly at the rate of 275 basis points over one year
LIBOR and adjusted annually on June 22 (currently 5.11%). The line of
credit is secured by 2,000 shares of the Bank's common stock.
Aggregate annual maturities of long-term debt at December 31, 2002,
were:
2003 $ 4,000,000
2004 3,000,000
Thereafter five years 900,000
------------
$ 7,900,000
============
F-25
117
CITIZENS FIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 9: OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
2002 2001
-------------------------------------------
Unrealized gains on securities available for sale $ 148,845 $ 78,407
Reclassification for realized amount included in
income (108,454) --
------------- ------------
Other comprehensive income, before tax effect 40,391 78,407
Tax expense 13,733 26,659
------------- ------------
Other comprehensive income $ 26,658 $ 51,748
============= ============
NOTE 10: REGULATORY MATTERS
The Company and subsidiary bank are subject to various regulatory
capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Company and
subsidiary bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and subsidiary bank to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as
defined) and of Tier I capital (as defined) to average assets (as
defined). Management believes, as of December 31, 2002, that the Company
and subsidiary bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 2002, the most recent notification from regulatory
agencies categorized the Company as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Company must maintain minimum total risk-based,
Tier I risk-based and Tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that
management believes have changed the Company's category.
F-26
118
CITIZENS FIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
The Company and significant subsidiary bank's actual capital amounts and
ratios are also presented in the following table.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 2002:
Total Capital (to risk-weighted
assets)
Consolidated $ 8,930,000 9.1% $ 7,887,000 8.0% N/A N/A
Citizens First Bank, Inc. $ 10,081,000 10.3% $ 7,868,000 8.0% $ 9,835,000 10.0%
Tier I Capital (to risk-
weighted assets)
Consolidated $ 7,699,000 7.8% $ 3,938,000 4.0% N/A N/A
Citizens First Bank, Inc. $ 8,852,000 9.0% $ 3,934,000 4.0% $ 5,901,000 6.0%
Tier I Capital (to average
assets)
Consolidated $ 7,699,000 6.8% $ 3,779,000 4.0% N/A N/A
Citizens First Bank, Inc. $ 8,852,000 7.8% $ 4,566,000 4.0% $ 5,708,000 5.0%
AS OF DECEMBER 31, 2001:
Total Capital (to risk-weighted
assets)
Consolidated $ 7,923,000 9.4% $ 6,719,000 8.0% N/A N/A
Citizens First Bank, Inc. $ 8,796,000 10.4% $ 6,741,000 8.0% $ 8,426,000 10.0%
Tier I Capital (to risk-
weighted assets)
Consolidated $ 6,873,000 8.2% $ 3,359,000 4.0% N/A N/A
Citizens First Bank, Inc. $ 7,728,000 9.2% $ 3,370,000 4.0% $ 5,055,000 6.0%
Tier I Capital (to average
assets)
Consolidated $ 6,873,000 7.3% $ 3,765,000 4.0% N/A/ N/A
Citizens First Bank, Inc. $ 7,728,000 8.2% $ 3,765,000 4.0% $ 4,707,000 5.0%
The Bank is subject to certain restrictions on the amount of dividends
that it may declare without prior regulatory approval. At December 31,
2002, no retained earnings were available for dividend declaration
without prior regulatory approval.
F-27
119
CITIZENS FIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 11: RELATED-PARTY TRANSACTIONS
At December 31, 2002 and 2001, the Bank had loans outstanding to
executive officers, directors, significant stockholders and their
affiliates (related parties) in the amount of $8,499,667 and $7,812,551,
respectively.
In management's opinion, such loans and other extensions of credit and
deposits were made in the ordinary course of business and were made on
substantially the same terms (including interest rates and collateral)
as those prevailing at the time for comparable transactions with other
persons. Further, in management's opinion, these loans did not involve
more than normal risk of collectibility or present other unfavorable
features.
Deposits from related parties held by the Bank at December 31, 2002 and
2001, totaled $1,138,248 and $1,546,070, respectively.
NOTE 12: EMPLOYEE BENEFIT PLAN
The Company has a defined contribution pension plan (SIMPLE plan)
covering substantially all employees. Employees may contribute a portion
of their compensation (based on regulatory limitations) with the Company
matching 100% of the employee's contribution on 3% of the employee's
compensation. Employer contributions charged to expense for 2002 and
2001 were $38,037 and $37,751, respectively.
NOTE 13: COMMITMENTS AND CREDIT RISK
The Company grants commercial, consumer and residential loans to
customers primarily in Bowling Green and Warren County, Kentucky.
Although the Company has a diversified loan portfolio, loans secured by
commercial real estate comprise approximately 42% and 42% of the loan
portfolio as of December 31, 2002 and 2001, respectively, and loans for
construction and land development comprise an additional 8% and 6% of
the loan portfolio as of December 31, 2002 and 2001, respectively.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since a portion of
the commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Each customer's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary, is based on management's credit evaluation of the
counterparty. Collateral held varies, but may include accounts
receivable, inventory, property, plant and equipment, commercial real
estate and residential real estate.
F-28
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CITIZENS FIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
At December 31, 2002 and 2001, the Company had outstanding commitments
to originate loans aggregating approximately $23,466,972 and
$12,882,675, respectively. The commitments extended over varying periods
of time with the majority being disbursed within a one-year period.
Letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to customers.
The Company had total outstanding letters of credit amounting to
$1,684,577 and $1,167,665 at December 31, 2002 and 2001, respectively,
with terms generally maturing within one year.
At December 31, 2002 and 2001, approximately 26% and 29%, respectively,
of the Company's total time deposits consisted of short-term
certificates of deposit having minimum denominations in excess of
$100,000.
NOTE 14: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Accounting principles generally accepted in the United States of America
require disclosure of certain significant estimates and current
vulnerabilities due to certain concentrations. Estimates related to the
allowance for loan losses are reflected in the footnote regarding loans.
Current vulnerabilities due to certain concentrations of credit risk are
discussed in the footnote on commitments and credit risk. Other
significant estimates and concentrations not discussed in those notes
include:
DEPOSITS AND INVESTMENTS
The Company maintains cash in bank deposit accounts and investments in
federal funds sold which, at times, may exceed federally insured limits.
The Company has not experienced any losses in such accounts. The Company
believes it is not exposed to any significant credit risk on cash and
cash equivalents.
NOTE 15: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents estimated fair values of the Company's
financial instruments. The fair values of certain of these instruments
were calculated by discounting expected cash flows, which involves
significant judgments by management and uncertainties. Fair value is the
estimated amount at which financial assets or liabilities could be
exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. Because no market exists for certain of
these financial instruments and because management does not intend to
sell these financial instruments, the Company does not know whether the
fair values shown below represent values at which the respective
financial instruments could be sold individually or in the aggregate.
F-29
121
CITIZENS FIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
DECEMBER 31, 2002 DECEMBER 31, 2001
CARRYING AMOUNT FAIR CARRYING AMOUNT FAIR
VALUE VALUE
-------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and cash equivalents $ 13,922,817 $ 13,922,817 $ 6,526,769 $ 6,526,769
Available-for-sale securities 16,186,406 16,186,406 10,200,866 10,200,866
Loans including loans held for sale, net 98,112,814 94,963,998 85,102,584 90,220,755
FHLB stock 353,600 353,600 248,500 248,500
Interest receivable 651,412 651,412 522,415 522,415
FINANCIAL LIABILITIES
Deposits 105,893,333 107,298,082 87,890,828 88,642,596
Securities sold under repurchase agreements 5,833,512 5,833,512 3,411,736 3,411,736
FHLB advances 7,000,000 7,000,000 4,924,000 4,956,204
Long-term debt 900,000 900,000 875,000 875,000
UNRECOGNIZED FINANCIAL INSTRUMENTS (NET OF
CONTRACT AMOUNT)
Commitments to extend credit - - - -
Letters of credit - - - -
Lines of credit - - - -
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 2002 and 2001. The
estimated fair value for cash and cash equivalents, FHLB stock, accrued
interest receivable, demand deposits, savings accounts, NOW accounts,
certain money market deposits, securities sold under repurchase
agreements and interest payable is considered to approximate cost. The
estimated fair value for securities is based on quoted market values for
the individual securities or for equivalent securities. The estimated
fair value for loans receivable, including loans held for sale, net, is
based on estimates of the rate the Bank would charge for similar loans
at December 31, 2002 and 2001 applied for the time period until the
loans are assumed to reprice or be paid. The estimated fair value for
fixed-maturity time deposits as well as borrowings is based on estimates
of the rate the Bank would pay on such liabilities at December 31, 2002
and 2001, applied for the time period until maturity. The fair value of
commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. The
fair value of letters of credit and lines of credit is based on fees
currently charged for similar agreements or on the estimated cost to
terminate or otherwise settle the obligations with the counterparties at
the reporting date.
NOTE 16: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial information as to financial
position, results of operations and cash flows of the Company:
F-30
122
CITIZENS FIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
CONDENSED BALANCE SHEETS
2002 2001
----------------------------------------
ASSETS
Cash $ 17,392 $ 54,350
Available-for-sale securities -- 72,271
Investment in Citizens First Bank, Inc. 8,990,868 8,150,252
Other assets 109,162 --
--------------- ---------------
Total assets $ 9,117,422 $ 8,276,873
=============== ===============
LIABILITIES
Long-term debt $ 900,000 $ 875,000
Other liabilities 379,170 335,497
--------------- ---------------
Total liabilities 1,279,170 1,210,497
STOCKHOLDERS' EQUITY 7,838,252 7,066,376
--------------- ---------------
Total liabilities and stockholders' equity $ 9,117,422 $ 8,276,873
=============== ===============
F-31
123
CITIZENS FIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
CONDENSED STATEMENTS OF INCOME
2002 2001
-----------------------------------------
INCOME
Investment income from available-for-sale securities $ 1,333 $ 3,012
Realized gain on sale of available-for-sale securities 67,370 --
--------------- ---------------
Total income 68,703 3,012
--------------- ---------------
EXPENSES
Interest expense 52,222 14,104
Professional fees 37,245 39,891
Other expenses 20,120 19,364
--------------- ---------------
Total expenses 109,587 73,359
--------------- ---------------
LOSS BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY (40,884) (70,347)
INCOME TAX EXPENSE (CREDIT) (13,481) 293,000
--------------- ---------------
LOSS BEFORE EQUITY IN UNDISTRIBUTED INCOME OF (27,403) (363,347)
SUBSIDIARIES
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 772,621 705,749
--------------- ---------------
NET INCOME $ 745,218 $ 342,402
=============== ===============
CONDENSED STATEMENTS OF CASH FLOWS
2002 2001
-----------------------------------------
OPERATING ACTIVITIES
Net income $ 745,218 $ 342,402
Items not requiring (providing) cash
Equity in loss of subsidiary (772,621) (705,749)
Amortization of premiums and discounts on securities -- 14
Realized gain on sale of available-for-sale securities (67,370) --
Changes in
Other assets (14,163) (14,604)
Other liabilities (30,032) 315,407
--------------- ---------------
Net cash used in operating activities (138,968) (62,530)
--------------- ---------------
F-32
124
CITIZENS FIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
2002 2001
-----------------------------------------
INVESTING ACTIVITIES
Investment in subsidiary $ -- $ (925,000)
Proceeds from sales of available-for-sale securities 77,010 --
Purchases of available-for-sale securities -- --
Proceeds from maturities of available-for-sale securities -- 100,000
--------------- ---------------
Net cash provided by (used in) investing activities 77,010 (825,000)
--------------- ---------------
FINANCING ACTIVITIES
Proceeds from long-term debt 25,000 875,000
--------------- ---------------
Net cash provided by financing activities 25,000 875,000
--------------- ---------------
DECREASE IN CASH AND CASH EQUIVALENTS (36,958) (12,530)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 54,350 66,880
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 17,392 $ 54,350
=============== ===============
NOTE 17: SUBSEQUENT EVENT
In January 2003, the Bank acquired all of the outstanding stock of
Commonwealth Mortgage of Bowling Green, Inc. (Commonwealth) and Southern
Kentucky Land Title, Inc. (Southern) for $400,000 plus a future
contingent amount based on Commonwealth's and Southern's future earnings
over the next five years. The future contingent purchase price is
payable in cash and shares of the Company's common stock. The Bank
agreed to purchase certain land on which the main office of Commonwealth
is located. The purchase price of the land is $272,500. Commonwealth
originates one to four family residential mortgages for sale to the
secondary mortgage market, while Southern provides title insurance
agency services for real estate purchase contracts. The transaction will
be accounted for as a purchase.
F-33
125
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Indemnification of corporate directors and officers is governed by Sections
271B.8-500 through 271B.8-580 of the Kentucky Revised Statutes (the "Act").
Under the Act, a person may be indemnified by a corporation against judgments,
fines, amounts paid in settlement and reasonable expenses (included attorneys'
fees) actually and necessarily incurred by him in connection with any threatened
or pending suit or proceeding or any appeal thereof (other than an action by or
in the right of the corporation), whether civil or criminal, by reason of the
fact that he is or was a director or officer of the corporation or is or was
serving at the request of the corporation as a director or officer, employee or
agent of another corporation of any type or kind, domestic or foreign, if such
director or officer acted in good faith for a purpose which he reasonably
believed to be in the best interest of the corporation and, in criminal actions
or proceedings only, in addition, had no reasonable cause to believe that his
conduct was unlawful. A Kentucky corporation may indemnify a director or officer
thereof in a suit by or in the right of the corporation against amounts paid in
settlement and reasonable expenses, including attorneys' fees, actually and
necessarily incurred as a result of such suit if such director or officer acted
in good faith for a purpose which he reasonably believed to be in the best
interests of the corporation.
Article XIII, entitled INDEMNIFICATION OF DIRECTORS & OFFICERS, of the
registrant's Bylaws provides as follows:
SECTION 1. DEFINITIONS. As used in this article, the term "person" means any
past, present or future Director or officer of the Corporation.
SECTION 2. INDEMNIFICATION GRANTED. The Corporation shall indemnify, to the full
extent and under the circumstances permitted by the Kentucky Business
Corporation Act in effect, from time to time, any person as defined above, made
or threatened to, be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director, officer of
the Corporation, or designated officer of an operating division of the
Corporation, or is or was an employee or agent of the Corporation, or is or was
serving at the specific request of the Corporation as a director, officer,
employee or agent of another company or other enterprise in which the
Corporation should own, directly or indirectly, an equity interest or of which
it may be a creditor.
This right of indemnification shall not be deemed exclusive of any other
rights to which a person indemnified herein may be entitled by bylaw, agreement,
vote of shareholders or disinterested directors, the Kentucky Business
Corporation Act, or otherwise, and shall continue as to a person who has ceased
to be a director, officer, designated officer, employee or agent, and shall
inure to the benefit of the heirs, executors, administrators and other legal
representatives of such person. It is not intended that the provisions of this
article be applicable to, and they are not to be construed as granting indemnity
with respect to, matters as to which indemnification would be in
126
contravention of the laws of Kentucky or the United States of America, whether
as a matter of public policy or pursuant to statutory provision.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses in connection with the issuance
and distribution of the securities being registered. Except for the registration
fee, all of the amounts shown are estimates.
Registration Fee $ 920.00
Blue Sky Fees and Expenses 7,500.00
NASD Filing Fee 1,500.00
Accounting Fees 60,000.00
Legal Fees 150,000.00
Printing 25,000.00
Miscellaneous Expenses 5,000.00
TOTAL $249,920.00
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
No securities have been sold by the registrant within the past three years
without registering the securities under the Securities Act of 1933.
ITEM 27. EXHIBITS
The following exhibits are filed herein:
1 Sales Agency Agreement between Citizens First Corporation and
Winebrenner Capital Partners, LLC, as amended.**
2 Stock Purchase Agreement by and among Citizens First Corporation,
Citizens First Bank, Inc., Scott T. Higdon, Mark A. Vaughn,
Commonwealth Mortgage of Bowling Green, Inc. and Southern Kentucky
Land Title, Inc. (incorporated by reference to Exhibit 2.1 of the
Registrant's Form 8-K filed January 17, 2003).
3.1 Restated Articles of Incorporation of Citizens First Corporation, as
amended (restated for SEC electronic filing purposes only).*
3.2 Bylaws of Citizens First Corporation, as amended (restated for SEC
electronic filing purposes only).*
4.1 Restated Articles of Incorporation of Citizens First Corporation, as
amended (see Exhibit 3.1).
4.2 Bylaws of Citizens First Corporation, as amended (see Exhibit 3.2).
5 Opinion of Wyatt, Tarrant & Combs, LLP as to the validity of the
shares of Citizens First Corporation.*
10.1 Employment Agreement between Citizens First Corporation and Mary D.
Cohron (incorporated by reference to Exhibit 10.1 of the Registrant's
Registration Statement on Form SB-2 (No. 333-67435)).
127
10.2 First Amendment to Employment Agreement between Citizens First
Corporation and Mary D. Cohron (incorporated by reference to Exhibit
10.2 of the Registrant's Registration Statement on Form SB-2 (No.
333-67435)).
10.3 Bank Contract for Electronic Data Processing Services and Customerfile
System between Fiserv Bowling Green and Citizens First Bank
(incorporated by reference to Exhibit 10.5 of the Registrant's
Registration Statement on Form SB-2 (No. 333-67435)).
10.4 Employment Agreement between Citizens First Corporation and Barry D.
Bray (incorporated by reference to Exhibit 10.12 of the Registrant's
Registration Statement on Form SB-2 (No. 333-67435)).
10.5 Consulting Agreement between Citizens First Corporation and The
Carpenter Group (incorporated by reference to Exhibit 10.13 of the
Registrant's Registration Statement on Form SB-2 (No. 333-67435)).
10.6 Lease Agreement between Citizens First Corporation and Midtown Plaza,
Inc. (incorporated by reference to Exhibit 10.14 of the Registrant's
Registration Statement on Form SB-2 (No. 333-67435)).
10.7 Employment Agreement between Citizens First Corporation and Todd
Kanipe (incorporated by reference to Exhibit 10.15 of the Registrant's
Registration Statement on Form SB-2 (No. 333-67435)).
10.8 Employment Agreement between Citizens First Corporation and Bill D.
Wright (incorporated by reference to Exhibit 10 of the Registrant's
Form 8-K dated April 27, 2000).
10.9 First Amendment to Employment Agreement between Citizens First
Corporation and Matthew Todd Kanipe (incorporated by reference to
Exhibit 10.17 of the Registrant's Form 10-QSB dated September 30,
2000).
10.10 Commercial Line of Credit Agreement, Promissory Note, and Security
(Pledge) Agreement between Citizens First Corporation and Franklin
Bank & Trust Company dated June 22, 2001 (incorporated by reference to
Exhibit 10.18 of the Registrant's Form 10-QSB dated June 30, 2001).
10.11 Offer to Purchase dated January 22, 2003 between Jack Sheidler and
Lester Key and Assignment of Offer to Purchase between Jack Sheidler
and Citizens First Bank dated January 27, 2003.*
10.12 Real Estate Sales Contract dated January 27, 2003 between H&V
Properties, LLC and Citizens First Bank.*
10.13 2002 Stock Option Plan of Citizens First Corporation.*
10.14 2003 Non-Employee Directors Stock Option Plan.*
21 Subsidiaries of Citizens First Corporation.*
23.1 Consent of BKD LLP.**
23.2 Consent of Wyatt, Tarrant & Combs, LLP (included in Exhibit 5).*
24 Power of attorney (contained on the signature page at page II-7
hereof).*
99.1 Form of Subscription Agreement.*
99.2 Form of Escrow Agreement by and between Citizens First Corporation,
Bank One Trust Company, N.A., and Winebrenner Capital Partners, LLC.*
*Previously filed.
**Filed herewith.
128
ITEM 28. UNDERTAKINGS
The undersigned small business issuer hereby undertakes as follows:
(1) The small business issuer will:
(a) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in information in the
registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) Include any additional or changed material information on the
plan of distribution.
(b) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(c) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(2) The small business issuer will supplement the prospectus, after the end
of the subscription period, to include the results of the subscription offer,
the transactions by the underwriters during the subscription period, and the
amount of unsubscribed securities that the underwriters will purchase and the
terms of any later reoffering. If the underwriters make any public offering of
the securities on terms different from those on the cover page of the
prospectus, the small business issuer will file a post-effective amendment to
state the terms of such offering.
(3) That for the purposes of determining any liability under the Securities
Act of 1933 (the "Act"), it will treat the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the small business issuer
pursuant to Rule 424 (b) (1) or (4) or 497 (h) under the Act as part of this
registration statement as of the time the Commission declared it effective.
(4) That for the purposes of determining any liability under the Act, it
will treat each post-effective amendment that contains a form of prospectus as a
new registration statement for the
129
securities offered in the registration statement, and that offering of the
securities at that time as the initial bona fide offering of those securities.
(5) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provision, or otherwise, the small business issuer has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
130
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this Post-Effective Amendment on Form SB-2 and
authorized this registration statement to be signed on its behalf by the
undersigned, in the city of Bowling Green, Commonwealth of Kentucky, on
September 9, 2003.
CITIZENS FIRST CORPORATION.
By: /s/ Mary D. Cohron
-----------------------------------------
Mary D. Cohron, President
We, the undersigned directors and officers of Citizens First Corporation,
do hereby constitute and appoint Mary D. Cohron and Bill D. Wright, and each of
them, our true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for us and in our name, place and stead, in any
and all capacities, to sign any and all amendments to this registration
statement and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, and we do
hereby ratify and confirm all that said attorneys-in-fact and agents, or their
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on the 9th day
of September, 2003 in the capacities indicated:
SIGNATURE TITLE
/s/ Mary D. Cohron President, Chief Executive Officer
--------------------------------------
Mary D. Cohron (Principal Executive Officer) and
Director
/s/ Bill D. Wright Chief Financial Officer
--------------------------------------
Bill D. Wright (Principal Financial and Accounting
Officer)
* Chairman of the Board and Director
--------------------------------------
Floyd H. Ellis
* Director
--------------------------------------
Jerry E. Baker
131
* Director
--------------------------------------
Billy J. Bell
* Director
--------------------------------------
Barry D. Bray
* Director
--------------------------------------
Sarah Glenn Grise
* Director
--------------------------------------
James H. Lucas
* Director
--------------------------------------
Joe B. Natcher, Jr.
* Director
--------------------------------------
John T. Perkins
* Director
--------------------------------------
Jack W. Sheidler
* Director
--------------------------------------
Wilson L. Stone
* /s/ Mary D. Cohron
------------------------------------------------
By: Mary D. Cohron, as Attorney-in-Fact
Date: September 9, 2003
132
EXHIBIT INDEX
1 Sales Agency Agreement between Citizens First Corporation and
Winebrenner Capital Partners, LLC, as amended.**
2 Stock Purchase Agreement by and among Citizens First Corporation,
Citizens First Bank, Inc., Scott T. Higdon, Mark A. Vaughn,
Commonwealth Mortgage of Bowling Green, Inc. and Southern Kentucky
Land Title, Inc. (incorporated by reference to Exhibit 2.1 of the
Registrant's Form 8-K filed January 17, 2003).
3.1 Restated Articles of Incorporation of Citizens First Corporation, as
amended (restated for SEC electronic filing purposes only).*
3.2 Bylaws of Citizens First Corporation, as amended (restated for SEC
electronic filing purposes only).*
4.1 Restated Articles of Incorporation of Citizens First Corporation, as
amended (see Exhibit 3.1).
4.2 Bylaws of Citizens First Corporation, as amended (see Exhibit 3.2).
5 Opinion of Wyatt, Tarrant & Combs, LLP as to the validity of the
shares of Citizens First Corporation.*
10.1 Employment Agreement between Citizens First Corporation and Mary D.
Cohron (incorporated by reference to Exhibit 10.1 of the Registrant's
Registration Statement on Form SB-2 (No. 333-67435)).
10.2 First Amendment to Employment Agreement between Citizens First
Corporation and Mary D. Cohron (incorporated by reference to Exhibit
10.2 of the Registrant's Registration Statement on Form SB-2 (No.
333-67435)).
10.3 Bank Contract for Electronic Data Processing Services and Customerfile
System between Fiserv Bowling Green and Citizens First Bank
(incorporated by reference to Exhibit 10.5 of the Registrant's
Registration Statement on Form SB-2 (No. 333-67435)).
10.4 Employment Agreement between Citizens First Corporation and Barry D.
Bray (incorporated by reference to Exhibit 10.12 of the Registrant's
Registration Statement on Form SB-2 (No. 333-67435)).
10.5 Consulting Agreement between Citizens First Corporation and The
Carpenter Group (incorporated by reference to Exhibit 10.13 of the
Registrant's Registration Statement on Form SB-2 (No. 333-67435)).
10.6 Lease Agreement between Citizens First Corporation and Midtown Plaza,
Inc. (incorporated by reference to Exhibit 10.14 of the Registrant's
Registration Statement on Form SB-2 (No. 333-67435)).
10.7 Employment Agreement between Citizens First Corporation and Todd
Kanipe (incorporated by reference to Exhibit 10.15 of the Registrant's
Registration Statement on Form SB-2 (No. 333-67435)).
10.8 Employment Agreement between Citizens First Corporation and Bill D.
Wright (incorporated by reference to Exhibit 10 of the Registrant's
Form 8-K dated April 27, 2000).
10.9 First Amendment to Employment Agreement between Citizens First
Corporation and Matthew Todd Kanipe (incorporated by reference to
Exhibit 10.17 of the Registrant's Form 10-QSB dated September 30,
2000).
10.10 Commercial Line of Credit Agreement, Promissory Note, and Security
(Pledge) Agreement between Citizens First Corporation and Franklin
Bank & Trust Company dated June 22, 2001 (incorporated by reference to
Exhibit 10.18 of the Registrant's Form 10-QSB dated June 30, 2001).
133
10.11 Offer to Purchase dated January 22, 2003 between Jack Sheidler and
Lester Key and Assignment of Offer to Purchase between Jack Sheidler
and Citizens First Bank dated January 27, 2003.*
10.12 Real Estate Sales Contract dated January 27, 2003 between H&V
Properties, LLC and Citizens First Bank.*
10.13 2002 Stock Option Plan of Citizens First Corporation.*
10.14 2003 Non-Employee Directors Stock Option Plan.*
21 Subsidiaries of Citizens First Corporation.*
23.1 Consent of BKD LLP.**
23.2 Consent of Wyatt, Tarrant & Combs, LLP (included in Exhibit 5).*
24 Power of attorney (contained on the signature page at page II-7
hereof).*
99.1 Form of Subscription Agreement.*
99.2 Form of Escrow Agreement by and between Citizens First Corporation,
Bank One Trust Company, N.A., and Winebrenner Capital Partners, LLC.*
*Previously filed.
**Filed herewith.