Citizens First Corporation
As filed with the Securities and Exchange Commission on
October 10, 2006
Registration
No. 333-137147
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 2
to the
Form SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
CITIZENS FIRST CORPORATION
(Name of small business issuer
in its charter)
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Kentucky
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6021
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61-0912615
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(State or jurisdiction
of
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(Primary Standard
Industrial
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(I.R.S. Employer
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incorporation or
organization)
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Classification Code
Number)
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Identification
No.)
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1065
Ashley Street, Bowling Green, Kentucky 42103
(270) 393-0700
(Address
and telephone number of principal executive
offices)
Mary D.
Cohron
President and Chief Executive Officer
1065 Ashley Street
Bowling Green, Kentucky 42103
(270) 393-0700
(Name,
address and telephone number of agent for
service)
Copies
of all communications to:
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Caryn F. Price, Esq.
Wyatt, Tarrant & Combs, LLP
500 West Jefferson Street
Suite 2800
Louisville, Kentucky 40202
Telephone:
(502) 589-5235
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Neil E. Grayson, Esq.
Jason R.Wolfersberger, Esq.
Nelson Mullins Riley & Scarborough LLP
999 Peachtree Street, N.E., Suite 1400
Atlanta, Georgia 30309
Telephone: (404)
817-6000
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Approximate date of proposed sale to the
public: As soon as practicable after this
registration statement becomes effective.
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. o
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. o
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. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following
box. o
CALCULATION OF REGISTRATION FEE
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Proposed
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Proposed Maximum
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Amount of
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Title of Each Class of
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Amount to be
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Maximum Offering
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Aggregate
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Registration
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Securities to be Registered
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Registered(1)
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Price per
Share(2)
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Offering
Price(2)
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Fee(3)
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Common stock
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1,035,000
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$19.625
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$20,311,875
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$2,173.37
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(1) |
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Includes 135,000 shares that the underwriters have the
option to purchase to cover over-allotments, if any. |
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(2) |
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Estimated solely for the purpose of computing the registration
fee pursuant to Rule 457(c) under the Securities Act, based
on the average of the bid and asked price on August 31, 2006. |
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(3) |
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Previously paid. |
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.
The
information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell these securities and it is not soliciting an offer
to buy these securities in any jurisdiction where the offer or
sale is not permitted.
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SUBJECT TO COMPLETION, DATED
OCTOBER 10, 2006
PRELIMINARY PROSPECTUS
900,000 Shares
Common Stock
Citizens First Corporation is the holding company for Citizens
First Bank, Inc., a Kentucky state chartered bank headquartered
in Bowling Green, Kentucky. We are offering 900,000 shares
of our common stock. In June 2006, we entered into an agreement
to purchase Kentucky Banking Centers, Inc., a Kentucky state
chartered bank headquartered in Glasgow, Kentucky. The proceeds
from this offering will be used to fund a portion of this
acquisition.
Our common stock is currently quoted on the OTC
Bulletin Board under the symbol CZFC.OB. The
last reported sale price of our common stock on the OTC
Bulletin Board on September 28, 2006 was $20.05. We
have applied to list our common stock on the NASDAQ Global
Market under the symbol CZFC.
Investing in our common stock involves risks. See
Risk Factors beginning on page 17 to read about
factors you should consider before you make your investment
decision.
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Per Share
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Total
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Price to public
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$
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$
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Underwriting
discount(1)
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$
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$
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Proceeds, before expenses, to
Citizens First Corporation
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$
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$
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(1) |
The underwriting discount is
$ per share, except with
respect to shares with up to an aggregate maximum purchase price
of $2.0 million, reserved for sale to our directors,
officers and employees. The underwriting discount for these
shares is $ per share.
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We have granted the underwriters a
30-day
option to purchase up to 135,000 additional shares of common
stock at the same price, and on the same terms, solely to cover
over-allotments, if any.
Neither the Securities and Exchange Commission nor any state
securities commission or regulatory authority has approved or
disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary
is a criminal offense.
These securities are not deposits, savings accounts or other
obligations of any bank and are not insured by the Federal
Deposit Insurance Corporation or any other governmental
agency.
The underwriters expect to deliver the common stock to
purchasers against payment in New York, New York on or
about ,
2006, subject to customary closing conditions.
The date of this prospectus
is ,
2006.
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different
information. We are not, and the underwriters are not, making an
offer to sell our common stock in any jurisdiction in which the
offer or sale is not permitted. You should assume that the
information contained in this prospectus will be materially
accurate so long as we permit this prospectus to be used. Unless
otherwise indicated, all information in this prospectus assumes
that the underwriters will not exercise their option to purchase
additional shares of common stock to cover over-allotments.
Unless the context indicates otherwise, all references in
this prospectus to we, us, and
our refer to Citizens First Corporation and its
subsidiary, Citizens First Bank, Inc., on a consolidated
basis.
SUMMARY
This summary highlights material information contained
elsewhere in this prospectus. Because it is a summary, it may
not contain all of the information that is important to you.
Therefore, you should read carefully the more detailed
information set forth in this prospectus and the financial
statements before making a decision to invest in our common
stock. All financial information, operating statistics and
ratios in this prospectus are based on generally accepted
accounting principles as applied in the United States, referred
to as GAAP, unless otherwise noted.
Citizens
First Corporation
We are a Kentucky corporation that serves as the holding company
for Citizens First Bank, Inc., a Kentucky state chartered bank
headquartered in Bowling Green, Warren County, Kentucky.
Citizens First Bank opened for business in February 1999. We are
locally managed and owned, and we operate as a traditional
community bank. We believe that the responsiveness, customized
products and services and personal attention we provide to our
customers is responsible for our growth to date. At
June 30, 2006, we had consolidated assets of approximately
$202.9 million, deposits of approximately
$162.0 million and shareholders equity of
approximately $20.6 million.
Our strategy is to continue to grow our community bank franchise
by emphasizing local management and providing superior customer
service, while achieving operating efficiencies and maintaining
strong credit quality and financial performance. We believe the
following strengths of our business differentiate us and provide
us with a competitive advantage.
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Strategic Expansion. We have expanded from a
single office in Bowling Green to five offices in Warren and
Simpson Counties in Kentucky. In June 2006, we entered into an
agreement to acquire Kentucky Banking Centers, a
$126.6 million asset bank as of June 30, 2006, with
offices in Glasgow, Horse Cave and Munfordville, Kentucky, which
will provide us additional access to growing communities in our
market area. We intend to continue to expand in our market area
through internal growth, the opening of new offices and
selective acquisitions.
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Our Management Team. We have assembled a team
of bankers with expertise in servicing individuals and small- to
medium-sized businesses, many of whom participated in the
successful growth of Trans Financial, Inc., a bank holding
company formerly headquartered in Bowling Green. Trans Financial
was acquired by Star Bank in 1998. We will continue to emphasize
experienced local management with a strong commitment to the
communities we serve.
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Our Market Area. Our bank is headquartered in
Bowling Green, Warren County, Kentucky, and we currently have
one office in Franklin, located in adjacent Simpson County. Our
market area consists of the ten county region located in south
central Kentucky known as the Barren River Area Development
District and extends south into the outlying suburban growth
areas of Nashville, Tennessee. In recent years, this market area
has experienced notable economic growth, driven by industry
expansion and population growth in Bowling Green. We believe
that this combination of population and economic growth will
continue to support businesses such as real estate development,
construction, manufacturing and education and favors the
expansion of community-based banking services in our market area.
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Strategic
Expansion
Through internal growth, expansion of our branch network and
strategic acquisitions, we believe we can significantly increase
our market share in our primary market area. According to FDIC
data as of June 30, 2005, our market share represented 9.8%
and 5.3% of the total deposit market of Warren County and
Simpson County, respectively. In the past six years, we have
expanded from a single office in Bowling Green, Kentucky to five
offices in Warren and Simpson Counties in Kentucky. We opened
our Simpson County branch in 2003 after hiring seasoned
community bankers in that county. To support the growing needs
of our customers, we
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opened a new main office in Bowling Green in March 2006, and we
anticipate opening new offices in Franklin in November 2006 and
in Bowling Green by the end of 2007. We plan to open new offices
only after both identifying and hiring experienced local
executives to manage our operations in those offices. We will
also consider expanding into growing markets within our primary
market area or nearby markets by engaging in selective
acquisitions of other financial institutions that have
experienced management who share a common philosophy and
approach to community banking.
In June 2006, we entered into a definitive agreement to acquire
Kentucky Banking Centers, a Kentucky state chartered bank
headquartered in Glasgow, Kentucky, for a cash purchase price of
$20.0 million. We intend to fund the purchase price through
a combination of the issuance of common stock in this offering
and a separate offering of trust preferred securities. When
completed, our acquisition of Kentucky Banking Centers will add
to Citizens First Bank approximately $126.6 million in
assets, $83.9 million in net loans and $115.2 million
in deposits, along with three additional offices in our market
area.
We believe that our acquisition of Kentucky Banking Centers will
provide us additional access to growing communities in our
market area, as well as a stable and profitable deposit base.
According to FDIC data as of June 30, 2005, the proposed
combination will give us a 40.2% market share in Hart County and
a 6.9% market share in Barren County. Our management team has
extensive experience in Kentucky Banking Centers market
and we believe the combined bank will be well positioned to
increase its growth in these areas through the offering of more
sophisticated banking products, our focused marketing efforts
and the addition of one or more branches in Barren County. We
have offered and expect to retain substantially all of the
employees of Kentucky Banking Centers. We believe this will help
expedite the integration of our businesses and provide
continuity for all of our customers.
Our acquisition of Kentucky Banking Centers is anticipated to
close in the fourth quarter of 2006 and is conditioned upon
receiving the requisite regulatory approvals.
Our
Management Team
Our management team consists of an experienced team of bankers,
combining extensive market knowledge with an energetic culture.
A significant number of members of our management team served
the Bowling Green market and surrounding area for many years as
officers, directors or employees of Trans Financial. Trans
Financial, formerly headquartered in Bowling Green, grew from a
$180.0 million asset one bank holding company in 1982 to a
$2.2 billion asset multi-bank holding company in 1998, when
it was acquired by Star Bank. Many of our officers, directors
and employees played a key role in the growth of Trans
Financial, with over 25 of our initial 28 employees having once
been employed by Trans Financial. Today, 26 of our 74 employees
were once employed with Trans Financial, many of whom were in
key positions.
We believe we have assembled a senior management team with
extensive banking experience and a shared goal to grow our bank
while remaining committed to our guiding principles of building
strong personal relationships and providing superior customer
service. For example, Mary D. Cohron has been our President and
Chief Executive Officer since our founding in 1998.
Ms. Cohron is an active community leader in our market area
and is currently Chairman-Elect of the Bowling Green Area
Chamber of Commerce, Secretary of the Bowling Green Area
Economic Development Authority, and Vice Chairman of the Western
Kentucky University Foundation. Ms. Cohron served as a
director of Trans Financial from 1979 to 1998 and held positions
on various committees during her tenure, including the executive
committee and the audit committee for which she served as
chairwoman. Our Chief Financial Officer, Steve Marcum, is a
lifelong resident of Warren County, Kentucky and, prior to
joining us, served as the chief financial officer of two area
community banks for over 25 years.
Our
Market Area
Our market area consists of a ten county region located in south
central Kentucky known as the Barren River Area Development
District and extends south into the outlying suburban growth
areas of Nashville,
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Tennessee. This region consists of Allen, Barren, Butler,
Edmonson, Hart, Logan, Metcalfe, Monroe, Simpson and Warren
Counties in Kentucky. This area is a thriving and growing region
along the Interstate 65 corridor with access to skilled labor
and a competitive business climate. In recent years, this market
area has experienced notable economic growth, driven by industry
expansion, tourism and population growth. According to FDIC data
as of June 30, 2005, deposits in our market area were
$3.4 billion, an increase of approximately
$644.1 million, or 23.6%, from $2.7 billion at
June 30, 2000.
Our bank is headquartered in Bowling Green, Warren County,
Kentucky, and we currently have one office in Franklin, located
in adjacent Simpson County. Bowling Green, the fourth largest
city in Kentucky, is located approximately 100 miles south
of Louisville, Kentucky and approximately 60 miles north of
Nashville, Tennessee. Bowling Green is the financial, retail and
health care center of the region and is the home of Western
Kentucky University, which provides the area with a strong
educational and employment base. Western Kentucky University has
over 18,000 students and 2,000 employees. According to the U.S.
Census Bureau, the population of Warren County increased 29.0%
from 1990 to 2005 to an estimated 99,000 residents in 2005.
According to the Kentucky Cabinet for Economic Development,
Warren and Simpson Counties have attracted more than
$560.0 million in new business investments and added over
3,450 new jobs in the last three years. In 2006, Forbes magazine
named Bowling Green 14th in the U.S. on its list of Best
Small Places for Business. A 2006 publication of the
Federal Reserve Bank of St. Louis also cites Bowling
Greens significant employment growth, noting that total
payroll employment increased 13% from November 2001 to April
2006.
The economic strength of our market area is generated by private
employers engaged in manufacturing, retail and service
industries. In addition to Western Kentucky University, leading
employers in our market area include General Motors Corporation,
Commonwealth Health Corporation, DESA, LLC, a manufacturer of
portable gas heaters and generators, R.R. Donnelley, a financial
printer, and Dana Corporation, an automobile parts manufacturer.
According to FDIC data as of June 30, 2005, Warren and
Simpson Counties had total deposits of approximately
$1.6 billion, an increase of approximately
$431.6 million, or 37.9%, from June 30, 2000. As of
June 30, 2005, we had a 9.8% market share in Warren County
and a 5.3% market share in Simpson County. Approximately 70.0%
of the deposits in Warren County were held by financial
institutions with headquarters located outside Warren County as
of June 30, 2005. We believe the demographic trends and
growth characteristics of our market area will continue to
provide us with significant organic growth opportunities in the
future.
Upon the completion of our acquisition of Kentucky Banking
Centers, we will have offices in Barren and Hart Counties in
Kentucky. According to FDIC data as of June 30, 2005, this
two-county area had total deposits of $723.4 million at
June 30, 2005, an increase of approximately
$127.2 million, or 21.3%, from June 30, 2000, with
most of this growth occurring in Barren County. Our presence in
this market will allow us to benefit from the growth occurring
in Barren County and will provide us with access to a solid
source of core deposits in Hart County.
Our
Background and Strategy
Following the sale of Trans Financial in early 1998, a group of
local civic and business leaders in the Bowling Green area
determined that the community needed a new locally owned bank
because of their concern that the absence of a locally owned and
managed bank would ultimately serve as a drain on the Bowling
Green economy. These community leaders became the initial
organizers of our bank, using a private investment club
organized in 1975 to serve as our holding company. The
organizers recruited Ms. Cohron and others to organize and
operate the bank and capitalized it with over $1.8 million
of the investment clubs funds. We raised the remainder of
our initial capital through a public offering in early 1999,
with most of our shareholders coming from the Bowling Green
community. We opened for business in February 1999, less than a
year following the sale of Trans Financial. Of our initial 28
employees, 25 were former Trans Financial employees.
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From the time of our initial public offering and continuing to
the present, we have been the only public company headquartered
in the Bowling Green area. We believe our status as the only
local public company has helped to position us as the leading
community bank in the Bowling Green area. From the outset we
have been focused on providing a consistent and superior level
of professional service to our customers through timely
responses to customer requests, customized financial products
and services and the personal attention of senior banking
officers.
We continue to emphasize experienced local management with a
strong commitment to the communities we serve. We have an
ongoing and vested interest in the economic development and
continued growth of Bowling Green and the surrounding region. As
a locally owned and managed community bank, our success depends
on the continued economic growth that the area has enjoyed over
the past decade. Our commitment to, and knowledge of, our market
area has proven effective for us in attracting customers,
fostering loyalty and maintaining strong asset quality.
Our
Financial Performance
We have experienced significant growth while building the
infrastructure for our future growth and maintaining a strong
credit culture. Specifically, we have:
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increased our total assets from approximately $74.1 million
at December 31, 2000 to approximately $202.9 million
at June 30, 2006, total loans from approximately
$61.0 million at December 31, 2000 to approximately
$160.5 million at June 30, 2006, and total deposits
from approximately $62.5 million at December 31, 2000
to approximately $162.0 million at June 30,
2006; and
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achieved compounded annual growth rates of 20.1% in total
assets, 19.2% in total loans and 18.9% in total deposits for the
five and one-half years ended June 30, 2006.
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While experiencing this growth, we have emphasized a strong
credit culture based on traditional credit measures and
underwriting standards as well as the experience and market
knowledge of our management team. The results of our continued
focus on credit quality are evidenced by a nonperforming asset
to total asset ratio of 0.42% at June 30, 2006 and a net
charge-offs to average total loans ratio of 0.05% for the six
months ended June 30, 2006.
Our strong financial performance has continued. As of
June 30, 2006, we had:
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improved our net interest margin to 4.71% for the six months
ended June 30, 2006, compared to 4.49% for the six months
ended June 30, 2005;
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increased our total assets and deposits by 13.0% and 15.2%,
respectively, from the same period a year ago; and
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achieved a year to date annualized return on average assets of
1.04% and a year to date annualized return on average equity of
10.11%.
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Corporate
Information
Our principal executive offices are located 1065 Ashley Street,
Bowling Green, Kentucky 42103. Our telephone number is
(270) 393-0700.
Our website is www.citizensfirstbank.com. Information on our
website is not incorporated herein and is not part of this
prospectus.
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The
Offering
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Common stock offered by us |
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900,000 shares
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Common stock outstanding after this offering
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1,843,463 shares
(2) |
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Net proceeds |
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The net proceeds of this offering will be approximately
$16.3 million without giving effect to any exercise of the
underwriters over-allotment option, assuming an offering
price of $20.05 per share (based on the closing price of
our common stock on the OTC Bulletin Board on
September 28, 2006). |
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Use of proceeds |
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We intend to use the net proceeds of the offering to fund a
portion of the purchase price of Kentucky Banking Centers. See
Use of Proceeds. |
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Dividends on common stock |
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We have not paid any cash dividends on our common stock since
our inception, electing to retain earnings to fund future
growth. We do not anticipate declaring cash dividends on shares
of our common stock for the foreseeable future. See
Dividend Policy. |
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Stock symbol |
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CZFC.OB. We have applied to list our common stock on the NASDAQ
Global Market under the symbol CZFC. |
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(1) |
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The number of shares offered assumes that the underwriters
over-allotment option is not exercised. If the over allotment
option is exercised in full, we will issue and sell
1,035,000 shares. |
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(2) |
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The number of shares outstanding after the offering is based on
the number of shares outstanding as of August 30, 2006 and
assumes that the underwriters over-allotment option is not
exercised. It excludes an aggregate of 176,400 shares
reserved for issuance under our stock option plans, of which
options to purchase 148,683 shares at a weighted average
exercise price of $15.38 had been granted and remained
outstanding as of August 30, 2006. |
Risk
Factors
Before investing, you should carefully consider the information
set forth under Risk Factors, beginning on
page 17, for a discussion of the risks related to an
investment in our common stock.
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CITIZENS
FIRST CORPORATION
SUMMARY CONSOLIDATED FINANCIAL DATA
Our summary consolidated financial data presented below as of
and for the years ended December 31, 2001 through 2005 are
derived from our audited consolidated financial statements. Our
audited consolidated financial statements as of
December 31, 2005 and 2004 and for each of the years in the
two year period ended December 31, 2005 are included
elsewhere in this prospectus. Our summary consolidated financial
data as of and for the six months ended June 30, 2006 and
2005 have not been audited but, in the opinion of our
management, contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly our financial
position and results of operations for such periods in
accordance with generally accepted accounting principles (GAAP).
Our results for the six months ended June 30, 2006 are not
necessarily indicative of our results of operations that may be
expected for the year ending December 31, 2006. The
following summary consolidated financial data should be read in
conjunction with our consolidated financial statements and
related notes and Citizens First Corporation
Managements Discussion and Analysis included
elsewhere in this prospectus.
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At or For the Six
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Months Ended
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June 30,
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At or For the Years Ended December 31,
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2006
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2005
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2005
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2004
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2003
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2002
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2001
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(Dollars in thousands, except per share amounts)
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Summary Balance Sheet
Data:
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Assets
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$
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202,855
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$
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179,596
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$
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195,502
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$
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169,512
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$
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163,420
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$
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128,443
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$
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104,820
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Available for sale securities
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12,690
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12,657
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12,058
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12,889
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18,400
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16,186
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10,201
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Loans (net of unearned
income)(1)
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160,484
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156,554
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157,569
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146,950
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134,715
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95,959
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84,720
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Allowance for loan losses
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1,881
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1,891
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1,957
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1,721
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1,904
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1,300
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1,196
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Deposits
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161,992
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|
|
140,627
|
|
|
|
156,377
|
|
|
|
130,529
|
|
|
|
133,729
|
|
|
|
105,893
|
|
|
|
87,891
|
|
Other borrowed
funds(2)
|
|
|
19,107
|
|
|
|
18,330
|
|
|
|
17,420
|
|
|
|
19,373
|
|
|
|
19,419
|
|
|
|
13,734
|
|
|
|
9,211
|
|
Shareholders equity
|
|
|
20,640
|
|
|
|
19,119
|
|
|
|
19,958
|
|
|
|
18,177
|
|
|
|
9,610
|
|
|
|
7,838
|
|
|
|
7,066
|
|
Summary Results of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
6,712
|
|
|
$
|
5,070
|
|
|
$
|
11,074
|
|
|
$
|
8,621
|
|
|
$
|
7,728
|
|
|
$
|
6,397
|
|
|
$
|
6,450
|
|
Interest expense
|
|
|
2,432
|
|
|
|
1,426
|
|
|
|
3,353
|
|
|
|
2,542
|
|
|
|
2,888
|
|
|
|
2,774
|
|
|
|
3,475
|
|
Net interest income
|
|
|
4,280
|
|
|
|
3,644
|
|
|
|
7,721
|
|
|
|
6,079
|
|
|
|
4,840
|
|
|
|
3,623
|
|
|
|
2,975
|
|
Provision for loan losses
|
|
|
|
|
|
|
120
|
|
|
|
(200
|
)
|
|
|
165
|
|
|
|
1,808
|
|
|
|
195
|
|
|
|
664
|
|
Net interest income after provision
for loan losses
|
|
|
4,280
|
|
|
|
3,524
|
|
|
|
7,921
|
|
|
|
5,914
|
|
|
|
3,032
|
|
|
|
3,428
|
|
|
|
2,311
|
|
Noninterest income
|
|
|
701
|
|
|
|
693
|
|
|
|
1,476
|
|
|
|
1,430
|
|
|
|
1,519
|
|
|
|
772
|
|
|
|
379
|
|
Noninterest expense
|
|
|
3,373
|
|
|
|
2,769
|
|
|
|
6,004
|
|
|
|
5,806
|
|
|
|
5,007
|
|
|
|
3,065
|
|
|
|
2,709
|
|
Income (loss) before taxes
|
|
|
1,608
|
|
|
|
1,448
|
|
|
|
3,393
|
|
|
|
1,538
|
|
|
|
(456
|
)
|
|
|
1,135
|
|
|
|
(19
|
)
|
Income tax expense (benefit)
|
|
|
581
|
|
|
|
493
|
|
|
|
1,156
|
|
|
|
500
|
|
|
|
(166
|
)
|
|
|
390
|
|
|
|
(361
|
)
|
Net income (loss)
|
|
|
1,027
|
|
|
|
955
|
|
|
|
2,237
|
|
|
|
1,038
|
|
|
|
(290
|
)
|
|
|
745
|
|
|
|
342
|
|
Dividends declared on preferred
stock
|
|
|
258
|
|
|
|
258
|
|
|
|
520
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders
|
|
|
769
|
|
|
|
697
|
|
|
|
1,717
|
|
|
|
797
|
|
|
|
(290
|
)
|
|
|
745
|
|
|
|
342
|
|
Per Share
Data:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), basic
|
|
$
|
0.82
|
|
|
$
|
0.74
|
|
|
$
|
1.83
|
|
|
$
|
0.86
|
|
|
$
|
(0.37
|
)
|
|
$
|
1.05
|
|
|
$
|
0.48
|
|
Net income (loss), diluted
|
|
|
0.67
|
|
|
|
0.63
|
|
|
|
1.47
|
|
|
|
0.86
|
|
|
|
(0.37
|
)
|
|
|
1.05
|
|
|
|
0.48
|
|
Net tangible book value per common
share
|
|
|
12.35
|
|
|
|
11.22
|
|
|
|
11.76
|
|
|
|
10.30
|
|
|
|
9.96
|
|
|
|
11.06
|
|
|
|
9.97
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Six
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
At or For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Weighted average number of shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
939,169
|
|
|
|
935,656
|
|
|
|
936,847
|
|
|
|
929,431
|
|
|
|
778,171
|
|
|
|
708,966
|
|
|
|
708,966
|
|
Diluted
|
|
|
1,539,430
|
|
|
|
1,507,055
|
|
|
|
1,516,586
|
|
|
|
929,710
|
|
|
|
778,171
|
|
|
|
708,966
|
|
|
|
708,966
|
|
Performance Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return (loss) on average
assets(4)
|
|
|
1.04
|
%
|
|
|
1.11
|
%
|
|
|
1.24
|
%
|
|
|
0.63
|
%
|
|
|
(0.20
|
)%
|
|
|
0.70
|
%
|
|
|
0.40
|
%
|
Return (loss) on average
equity(4)
|
|
|
10.11
|
%
|
|
|
10.28
|
%
|
|
|
11.67
|
%
|
|
|
7.24
|
%
|
|
|
(3.71
|
)%
|
|
|
9.97
|
%
|
|
|
5.08
|
%
|
Net interest margin
|
|
|
4.71
|
%
|
|
|
4.49
|
%
|
|
|
4.58
|
%
|
|
|
3.90
|
%
|
|
|
3.45
|
%
|
|
|
3.58
|
%
|
|
|
3.67
|
%
|
Efficiency
ratio(5)
|
|
|
67.72
|
%
|
|
|
63.85
|
%
|
|
|
65.28
|
%
|
|
|
77.32
|
%
|
|
|
78.74
|
%
|
|
|
69.74
|
%
|
|
|
80.77
|
%
|
Loan to deposit ratio
|
|
|
99.07
|
%
|
|
|
111.33
|
%
|
|
|
100.76
|
%
|
|
|
112.58
|
%
|
|
|
100.74
|
%
|
|
|
90.62
|
%
|
|
|
96.39
|
%
|
Asset Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets, past due and
restructured loans to total loans
|
|
|
0.53
|
%
|
|
|
0.49
|
%
|
|
|
0.16
|
%
|
|
|
0.49
|
%
|
|
|
0.48
|
%
|
|
|
0.19
|
%
|
|
|
0.78
|
%
|
Nonperforming assets, past due and
restructured loans to total assets
|
|
|
0.42
|
%
|
|
|
0.43
|
%
|
|
|
0.13
|
%
|
|
|
0.42
|
%
|
|
|
0.40
|
%
|
|
|
0.14
|
%
|
|
|
0.64
|
%
|
Net charge-offs to average total
loans
|
|
|
0.05
|
%
|
|
|
0.03
|
%
|
|
|
(0.28
|
)%
|
|
|
0.25
|
%
|
|
|
0.99
|
%
|
|
|
0.10
|
%
|
|
|
0.40
|
%
|
Allowance for loan losses to
nonperforming loans
|
|
|
273.80
|
%
|
|
|
245.87
|
%
|
|
|
761.48
|
%
|
|
|
238.95
|
%
|
|
|
291.50
|
%
|
|
|
1,130.43
|
%
|
|
|
343.40
|
%
|
Allowance for loan losses to total
loans
|
|
|
1.17
|
%
|
|
|
1.21
|
%
|
|
|
1.24
|
%
|
|
|
1.17
|
%
|
|
|
1.41
|
%
|
|
|
1.35
|
%
|
|
|
1.39
|
%
|
Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity to assets
|
|
|
10.17
|
%
|
|
|
10.65
|
%
|
|
|
10.21
|
%
|
|
|
10.72
|
%
|
|
|
5.88
|
%
|
|
|
6.10
|
%
|
|
|
6.74
|
%
|
Tangible equity to tangible assets
|
|
|
9.58
|
%
|
|
|
10.18
|
%
|
|
|
9.62
|
%
|
|
|
10.23
|
%
|
|
|
5.66
|
%
|
|
|
6.10
|
%
|
|
|
6.74
|
%
|
Average equity to average assets
|
|
|
10.33
|
%
|
|
|
10.78
|
%
|
|
|
10.62
|
%
|
|
|
8.64
|
%
|
|
|
5.56
|
%
|
|
|
7.03
|
%
|
|
|
7.88
|
%
|
Tier 1 leverage
|
|
|
8.47
|
%
|
|
|
8.29
|
%
|
|
|
8.40
|
%
|
|
|
8.05
|
%
|
|
|
5.88
|
%
|
|
|
6.76
|
%
|
|
|
7.30
|
%
|
Tier 1 risk-based capital
|
|
|
10.04
|
%
|
|
|
9.51
|
%
|
|
|
9.91
|
%
|
|
|
9.49
|
%
|
|
|
7.23
|
%
|
|
|
7.83
|
%
|
|
|
8.20
|
%
|
Total risk-based capital
|
|
|
13.01
|
%
|
|
|
13.21
|
%
|
|
|
13.27
|
%
|
|
|
13.55
|
%
|
|
|
8.48
|
%
|
|
|
9.08
|
%
|
|
|
9.40
|
%
|
Growth Ratios and Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change in assets
|
|
|
12.95
|
%
|
|
|
9.02
|
%
|
|
|
15.33
|
%
|
|
|
3.73
|
%
|
|
|
27.31
|
%
|
|
|
22.54
|
%
|
|
|
41.51
|
%
|
Percentage change in
loans(1)
|
|
|
2.51
|
%
|
|
|
12.99
|
%
|
|
|
7.23
|
%
|
|
|
9.08
|
%
|
|
|
40.39
|
%
|
|
|
13.27
|
%
|
|
|
38.91
|
%
|
Percentage change in deposits
|
|
|
15.19
|
%
|
|
|
5.36
|
%
|
|
|
19.80
|
%
|
|
|
(2.39
|
)%
|
|
|
26.29
|
%
|
|
|
20.48
|
%
|
|
|
40.59
|
%
|
Percentage change in equity
|
|
|
7.96
|
%
|
|
|
95.47
|
%
|
|
|
9.80
|
%
|
|
|
89.15
|
%
|
|
|
22.61
|
%
|
|
|
10.93
|
%
|
|
|
5.91
|
%
|
Full time equivalent employees
|
|
|
66
|
|
|
|
57
|
|
|
|
58
|
|
|
|
51
|
|
|
|
57
|
|
|
|
34
|
|
|
|
29
|
|
Number of banking offices
|
|
|
5
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
(1) |
|
Includes nonperforming loans. |
|
(2) |
|
Includes federal funds purchased, securities sold under
agreements to repurchase and FHLB borrowings. |
|
(3) |
|
Restated to reflect 5% stock dividends issued in May 2005 and
June 2006. |
|
(4) |
|
Annualized for the six month periods. |
|
(5) |
|
Computed by dividing noninterest expense by the sum of net
interest income and noninterest income. |
7
GAAP Reconciliation
and Management Explanation
of Non-GAAP Financial Measures
Certain financial information included in our summary
consolidated financial information and other data is determined
by methods other than in accordance with accounting principles
generally accepted within the United States, or GAAP. These
non-GAAP financial measures are net tangible book value
per common share and tangible equity to tangible
assets. Our management uses these non-GAAP measures in its
analysis of our performance.
These disclosures should not be viewed as a substitute for
results determined in accordance with GAAP, and are not
necessarily comparable to non-GAAP performance measures which
may be presented by other companies. The following
reconciliation table provides a more detailed analysis of these
non-GAAP performance measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Six
|
|
|
|
|
|
|
Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
At or For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
Book value per common share
|
|
$
|
13.76
|
|
|
$
|
12.21
|
|
|
$
|
13.11
|
|
|
$
|
11.30
|
|
|
$
|
10.38
|
|
|
$
|
11.06
|
|
|
$
|
9.97
|
|
Effect of intangible assets per
share
|
|
$
|
(1.41
|
)
|
|
$
|
(0.99
|
)
|
|
$
|
(1.35
|
)
|
|
$
|
(1.00
|
)
|
|
$
|
(0.42
|
)
|
|
|
n/m
|
|
|
|
n/m
|
|
Net tangible book value per common
share(1)
|
|
$
|
12.35
|
|
|
$
|
11.22
|
|
|
$
|
11.76
|
|
|
$
|
10.30
|
|
|
$
|
9.96
|
|
|
$
|
11.06
|
|
|
$
|
9.97
|
|
Equity to assets
|
|
|
10.17
|
%
|
|
|
10.65
|
%
|
|
|
10.21
|
%
|
|
|
10.72
|
%
|
|
|
5.88
|
%
|
|
|
6.10
|
%
|
|
|
6.74
|
%
|
Effect of intangible assets
|
|
|
(0.59
|
)%
|
|
|
(0.47
|
)%
|
|
|
(0.59
|
)%
|
|
|
(0.49
|
)%
|
|
|
(0.22
|
)%
|
|
|
n/m
|
|
|
|
n/m
|
|
Tangible equity to tangible
assets(2)
|
|
|
9.58
|
%
|
|
|
10.18
|
%
|
|
|
9.62
|
%
|
|
|
10.23
|
%
|
|
|
5.66
|
%
|
|
|
6.10
|
%
|
|
|
6.74
|
%
|
|
|
|
(1) |
|
Net tangible book value per common share is defined
as total equity less preferred stock reduced by recorded
goodwill and other intangible assets divided by total common
shares outstanding. This measure is important to investors
interested in changes from
period-to-period
in book value per share exclusive of changes in intangible
assets. |
|
(2) |
|
Tangible equity to tangible assets is defined as
total equity less preferred stock reduced by recorded goodwill
and other intangible assets divided by total assets reduced by
recorded goodwill and other intangible assets. This measure is
important to investors interested in the equity/asset ratio
exclusive of goodwill. |
As used in the table above, n/m means not a
meaningful measurement.
8
KENTUCKY
BANKING CENTERS, INC.
SUMMARY FINANCIAL DATA
Kentucky Banking Centers summary financial data as of and
for the years ended December 31, 2001 through 2005 are
presented below. Kentucky Banking Centers summary
financial data as of and for the years ended December 31,
2004 and 2005 are derived from its audited financial statements,
which are included elsewhere in this prospectus. Kentucky
Banking Centers summary financial data as of and for the
years ended December 31, 2001, 2002 and 2003 and as of and
for the six months ended June 30, 2006 and 2005 have not
been audited but, in the opinion of Kentucky Banking
Centers management, contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly
its financial position and results of operations for such
periods in accordance with GAAP. The following summary financial
data should be read in conjunction with Kentucky Banking
Centers financial statements and related notes and
Kentucky Banking Centers Managements Discussion and
Analysis included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Six
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
At or For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Summary Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
126,642
|
|
|
$
|
124,838
|
|
|
$
|
127,239
|
|
|
$
|
138,031
|
|
|
$
|
120,069
|
|
|
$
|
102,568
|
|
|
$
|
97,553
|
|
Investment securities
|
|
|
21,403
|
|
|
|
33,829
|
|
|
|
36,027
|
|
|
|
46,569
|
|
|
|
24,337
|
|
|
|
14,628
|
|
|
|
18,753
|
|
Loans (net of unearned
income)(1)
|
|
|
83,902
|
|
|
|
82,238
|
|
|
|
81,845
|
|
|
|
81,902
|
|
|
|
80,108
|
|
|
|
75,137
|
|
|
|
65,485
|
|
Allowance for loan losses
|
|
|
1,178
|
|
|
|
1,264
|
|
|
|
1,199
|
|
|
|
1,193
|
|
|
|
1,202
|
|
|
|
1,129
|
|
|
|
978
|
|
Deposits
|
|
|
115,155
|
|
|
|
112,545
|
|
|
|
115,277
|
|
|
|
123,629
|
|
|
|
108,032
|
|
|
|
91,654
|
|
|
|
85,072
|
|
Securities sold under agreements to
repurchase and federal funds purchased
|
|
|
200
|
|
|
|
200
|
|
|
|
777
|
|
|
|
2,480
|
|
|
|
200
|
|
|
|
581
|
|
|
|
1,298
|
|
Shareholders equity
|
|
|
9,169
|
|
|
|
9,789
|
|
|
|
9,143
|
|
|
|
9,523
|
|
|
|
8,889
|
|
|
|
8,301
|
|
|
|
8,026
|
|
Summary Results of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
3,971
|
|
|
$
|
3,483
|
|
|
$
|
7,190
|
|
|
$
|
6,348
|
|
|
$
|
6,270
|
|
|
$
|
6,641
|
|
|
$
|
7,049
|
|
Interest expense
|
|
|
1,601
|
|
|
|
1,362
|
|
|
|
2,808
|
|
|
|
2,454
|
|
|
|
2,393
|
|
|
|
3,002
|
|
|
|
3,571
|
|
Net interest income
|
|
|
2,370
|
|
|
|
2,121
|
|
|
|
4,382
|
|
|
|
3,894
|
|
|
|
3,877
|
|
|
|
3,639
|
|
|
|
3,478
|
|
Provision for loan losses
|
|
|
(84
|
)
|
|
|
76
|
|
|
|
195
|
|
|
|
570
|
|
|
|
697
|
|
|
|
654
|
|
|
|
97
|
|
Net interest income after provision
for loan losses
|
|
|
2,454
|
|
|
|
2,045
|
|
|
|
4,187
|
|
|
|
3,324
|
|
|
|
3,180
|
|
|
|
2,985
|
|
|
|
3,381
|
|
Noninterest income
|
|
|
559
|
|
|
|
540
|
|
|
|
1,070
|
|
|
|
1,208
|
|
|
|
1,123
|
|
|
|
1,223
|
|
|
|
1,285
|
|
Noninterest expense
|
|
|
2,087
|
|
|
|
1,815
|
|
|
|
3,676
|
|
|
|
3,603
|
|
|
|
3,356
|
|
|
|
3,230
|
|
|
|
3,161
|
|
Income before taxes
|
|
|
926
|
|
|
|
770
|
|
|
|
1,581
|
|
|
|
929
|
|
|
|
947
|
|
|
|
978
|
|
|
|
1,505
|
|
Income tax expense
|
|
|
254
|
|
|
|
185
|
|
|
|
435
|
|
|
|
220
|
|
|
|
251
|
|
|
|
278
|
|
|
|
484
|
|
Net income
|
|
|
672
|
|
|
|
585
|
|
|
|
1,146
|
|
|
|
709
|
|
|
|
696
|
|
|
|
700
|
|
|
|
1,021
|
|
Performance Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average
assets(2)
|
|
|
1.06
|
%
|
|
|
0.87
|
%
|
|
|
0.88
|
%
|
|
|
0.55
|
%
|
|
|
0.62
|
%
|
|
|
0.71
|
%
|
|
|
1.12
|
%
|
Return on average
equity(2)
|
|
|
14.47
|
%
|
|
|
12.05
|
%
|
|
|
11.77
|
%
|
|
|
7.66
|
%
|
|
|
8.05
|
%
|
|
|
8.35
|
%
|
|
|
12.89
|
%
|
Net interest margin
|
|
|
4.17
|
%
|
|
|
3.51
|
%
|
|
|
3.71
|
%
|
|
|
3.32
|
%
|
|
|
3.85
|
%
|
|
|
4.10
|
%
|
|
|
4.31
|
%
|
Efficiency
ratio(3)
|
|
|
71.30
|
%
|
|
|
68.20
|
%
|
|
|
67.40
|
%
|
|
|
70.60
|
%
|
|
|
67.10
|
%
|
|
|
66.40
|
%
|
|
|
66.40
|
%
|
Loan to deposit ratio
|
|
|
72.90
|
%
|
|
|
73.10
|
%
|
|
|
71.00
|
%
|
|
|
66.20
|
%
|
|
|
74.20
|
%
|
|
|
82.00
|
%
|
|
|
77.00
|
%
|
Asset Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets, past due and
restructured loans to total loans
|
|
|
0.70
|
%
|
|
|
1.10
|
%
|
|
|
1.40
|
%
|
|
|
1.40
|
%
|
|
|
1.60
|
%
|
|
|
0.60
|
%
|
|
|
0.30
|
%
|
Nonperforming assets, past due and
restructured loans to total assets
|
|
|
0.50
|
%
|
|
|
0.80
|
%
|
|
|
0.90
|
%
|
|
|
0.80
|
%
|
|
|
1.10
|
%
|
|
|
0.40
|
%
|
|
|
0.20
|
%
|
Net charge-offs to average total
loans
|
|
|
(0.10
|
)%
|
|
|
0.0
|
%
|
|
|
0.20
|
%
|
|
|
0.70
|
%
|
|
|
0.80
|
%
|
|
|
0.70
|
%
|
|
|
0.10
|
%
|
Allowance for loan losses to
nonperforming loans
|
|
|
229.20
|
%
|
|
|
148.20
|
%
|
|
|
106.10
|
%
|
|
|
109.00
|
%
|
|
|
113.80
|
%
|
|
|
413.60
|
%
|
|
|
631.00
|
%
|
Allowance for loan losses to total
loans
|
|
|
1.40
|
%
|
|
|
1.50
|
%
|
|
|
1.50
|
%
|
|
|
1.50
|
%
|
|
|
1.50
|
%
|
|
|
1.50
|
%
|
|
|
1.50
|
%
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Six
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
At or For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity to assets
|
|
|
7.24
|
%
|
|
|
7.80
|
%
|
|
|
7.20
|
%
|
|
|
6.90
|
%
|
|
|
7.40
|
%
|
|
|
8.10
|
%
|
|
|
8.20
|
%
|
Tier 1 leverage
|
|
|
7.42
|
%
|
|
|
7.49
|
%
|
|
|
7.31
|
%
|
|
|
7.07
|
%
|
|
|
7.37
|
%
|
|
|
8.11
|
%
|
|
|
8.39
|
%
|
Tier 1 risk-based capital
|
|
|
10.73
|
%
|
|
|
11.18
|
%
|
|
|
10.86
|
%
|
|
|
10.55
|
%
|
|
|
10.41
|
%
|
|
|
10.59
|
%
|
|
|
11.19
|
%
|
Total risk-based capital
|
|
|
11.98
|
%
|
|
|
12.44
|
%
|
|
|
12.12
|
%
|
|
|
11.80
|
%
|
|
|
11.67
|
%
|
|
|
11.84
|
%
|
|
|
12.44
|
%
|
Growth Ratios and Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change in assets
|
|
|
1.40
|
%
|
|
|
2.70
|
%
|
|
|
(7.80
|
)%
|
|
|
15.00
|
%
|
|
|
17.10
|
%
|
|
|
5.10
|
%
|
|
|
13.80
|
%
|
Percentage change in
loans(1)
|
|
|
2.0
|
%
|
|
|
0.10
|
%
|
|
|
(0.10
|
)%
|
|
|
2.20
|
%
|
|
|
6.60
|
%
|
|
|
14.70
|
%
|
|
|
6.80
|
%
|
Percentage change in deposits
|
|
|
2.30
|
%
|
|
|
2.60
|
%
|
|
|
(6.80
|
)%
|
|
|
14.40
|
%
|
|
|
17.90
|
%
|
|
|
7.70
|
%
|
|
|
17.80
|
%
|
Percentage change in equity
|
|
|
(6.30
|
)%
|
|
|
7.70
|
%
|
|
|
(4.00
|
)%
|
|
|
7.10
|
%
|
|
|
7.10
|
%
|
|
|
3.40
|
%
|
|
|
9.70
|
%
|
Full time equivalent employees
|
|
|
43
|
|
|
|
40
|
|
|
|
43
|
|
|
|
40
|
|
|
|
40
|
|
|
|
40
|
|
|
|
38
|
|
Number of banking offices
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
(1) |
|
Includes nonperforming loans. |
|
(2) |
|
Annualized for the six month periods. |
|
(3) |
|
Computed by dividing noninterest expense by the sum of net
interest income and noninterest income. |
UNAUDITED
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined financial information
and explanatory notes present how the combined financial
statements of Citizens First and Kentucky Banking Centers may
have appeared had the businesses actually been combined as of
the date indicated. The unaudited pro forma combined balance
sheet at June 30, 2006 assumes the acquisition of Kentucky
Banking Centers was completed on that date. The unaudited pro
forma combined income statement for the year and six months
ended December 31, 2005 and June 30, 2006 gives effect
to the acquisition of Kentucky Banking Centers as if the
acquisition had been completed on January 1, 2005. The
unaudited pro forma combined financial information shows the
impact of the acquisition on Citizens Firsts and Kentucky
Banking Centers combined financial position and results of
operations under the purchase method of accounting. Under this
method of accounting, we will be required to record the assets
and liabilities of Kentucky Banking Centers at their estimated
fair market values as of the date the acquisition is completed.
The unaudited pro forma combined financial information has been
derived from and should be read in conjunction with the
historical consolidated financial statements and the related
notes of Citizens First and the historical financial statements
and the related notes of Kentucky Banking Centers that are
included as a part of this prospectus. See Index to
Financial Statements of Citizens First Corporation
beginning on
page F-1
and Index to Financial Statements of Kentucky Banking
Centers beginning on
page F-37.
The unaudited pro forma combined financial information is
presented for illustrative purposes only and does not indicate
the financial results of the combined company had the companies
actually been combined at the beginning of the period presented.
Furthermore, the information does not include the impact of
possible revenue enhancements and expense efficiencies, among
other factors. In addition, as explained in more detail in the
accompanying notes to the unaudited pro forma combined financial
information, the allocation of the purchase price reflected in
the unaudited pro forma combined financial information is
subject to adjustment and will vary from the actual purchase
price allocation that will be recorded upon completion of the
acquisition based upon changes in the balance sheet including
fair value estimates.
10
CITIZENS
FIRST CORPORATION
PRO FORMA
CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
JUNE 30,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kentucky
|
|
|
|
|
|
|
|
|
|
Citizens
|
|
|
Banking
|
|
|
|
|
|
Pro Forma
|
|
|
|
First
|
|
|
Centers
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
16,125
|
|
|
$
|
15,195
|
|
|
$
|
1,024
|
A
|
|
$
|
32,344
|
|
Securities
|
|
|
12,690
|
|
|
|
21,403
|
|
|
|
15
|
B
|
|
|
34,108
|
|
Loans, net of unearned fees
|
|
|
160,484
|
|
|
|
83,902
|
|
|
|
(195
|
)B
|
|
|
244,191
|
|
Allowance for loan losses
|
|
|
(1,881
|
)
|
|
|
(1,178
|
)
|
|
|
|
|
|
|
(3,059
|
)
|
Premises and equipment
|
|
|
8,610
|
|
|
|
4,123
|
|
|
|
(900
|
)B
|
|
|
11,833
|
|
Goodwill
|
|
|
1,327
|
|
|
|
|
|
|
|
10,372
|
D
|
|
|
11,699
|
|
Core deposit premium
|
|
|
|
|
|
|
|
|
|
|
1,519
|
C
|
|
|
1,519
|
|
Other assets
|
|
|
5,500
|
|
|
|
3,197
|
|
|
|
|
|
|
|
8,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
202,855
|
|
|
$
|
126,642
|
|
|
$
|
11,835
|
|
|
$
|
341,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing
|
|
$
|
15,866
|
|
|
$
|
10,776
|
|
|
|
|
|
|
$
|
26,642
|
|
Interest bearing
|
|
|
146,126
|
|
|
|
104,379
|
|
|
$
|
(151
|
)B
|
|
|
250,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
161,992
|
|
|
|
115,155
|
|
|
|
(151
|
)
|
|
|
276,996
|
|
Other borrowed funds
|
|
|
19,107
|
|
|
|
1,646
|
|
|
|
5,000
|
A
|
|
|
25,753
|
|
Other liabilities
|
|
|
1,116
|
|
|
|
672
|
|
|
|
(139
|
)
|
|
|
1,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
182,215
|
|
|
|
117,473
|
|
|
|
4,710
|
|
|
|
304,398
|
|
Shareholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
7,659
|
|
|
|
|
|
|
|
|
|
|
|
7,659
|
|
Common stock
|
|
|
11,875
|
|
|
|
6,261
|
|
|
|
10,033
|
A
|
|
|
28,169
|
|
Retained earnings
|
|
|
1,775
|
|
|
|
3,108
|
|
|
|
(3,108
|
)A
|
|
|
1,775
|
|
Accumulated other comprehensive
income
|
|
|
(669
|
)
|
|
|
(200
|
)
|
|
|
200
|
A
|
|
|
(669
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
20,640
|
|
|
|
9,169
|
|
|
|
7,125
|
|
|
|
36,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
202,855
|
|
|
$
|
126,642
|
|
|
$
|
11,835
|
|
|
$
|
341,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares outstanding
|
|
|
943,463
|
|
|
|
|
|
|
|
900,000
|
|
|
|
1,843,463
|
|
Book value per common share
|
|
$
|
13.76
|
|
|
|
|
|
|
|
|
|
|
$
|
15.88
|
|
Net tangible book value per common
share
|
|
$
|
12.35
|
|
|
|
|
|
|
|
|
|
|
$
|
8.71
|
|
11
CITIZENS
FIRST CORPORATION
PRO FORMA
CONDENSED COMBINED CONSOLIDATED STATEMENT OF INCOME
SIX
MONTHS ENDED JUNE 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kentucky
|
|
|
|
|
|
|
|
|
|
Citizens
|
|
|
Banking
|
|
|
|
|
|
Pro Forma
|
|
|
|
First
|
|
|
Centers
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
6,207
|
|
|
$
|
3,266
|
|
|
$
|
33
|
E
|
|
$
|
9,506
|
|
Securities
|
|
|
249
|
|
|
|
503
|
|
|
|
|
|
|
|
752
|
|
Other
|
|
|
256
|
|
|
|
202
|
|
|
|
|
|
|
|
458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
6,712
|
|
|
|
3,971
|
|
|
|
33
|
|
|
|
10,716
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,153
|
|
|
|
1,568
|
|
|
|
42
|
G
|
|
|
3,763
|
|
Interest on borrowed funds
|
|
|
279
|
|
|
|
33
|
|
|
|
173
|
H
|
|
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
2,432
|
|
|
|
1,601
|
|
|
|
215
|
|
|
|
4,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
4,280
|
|
|
|
2,370
|
|
|
|
(182
|
)
|
|
|
6,468
|
|
Provision for loan losses
|
|
|
|
|
|
|
(84
|
)
|
|
|
|
I
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses
|
|
|
4,280
|
|
|
|
2,454
|
|
|
|
(182
|
)
|
|
|
6,552
|
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
365
|
|
|
|
367
|
|
|
|
|
|
|
|
732
|
|
Other noninterest income
|
|
|
336
|
|
|
|
192
|
|
|
|
|
|
|
|
528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
701
|
|
|
|
559
|
|
|
|
|
|
|
|
1,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
1,775
|
|
|
|
995
|
|
|
|
|
|
|
|
2,770
|
|
Occupancy and equipment expense
|
|
|
531
|
|
|
|
306
|
|
|
|
(15
|
)J
|
|
|
822
|
|
Other
|
|
|
1,067
|
|
|
|
786
|
|
|
|
124
|
K
|
|
|
1,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
3,373
|
|
|
|
2,087
|
|
|
|
109
|
|
|
|
5,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income
taxes
|
|
|
1,608
|
|
|
|
926
|
|
|
|
(291
|
)
|
|
|
2,243
|
|
Provision for income
taxes
|
|
|
581
|
|
|
|
254
|
|
|
|
(99
|
)L
|
|
|
736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1,027
|
|
|
|
672
|
|
|
|
(192
|
)M
|
|
|
1,507
|
|
Dividends declared on preferred
stock
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders
|
|
$
|
769
|
|
|
$
|
672
|
|
|
$
|
(192
|
)
|
|
$
|
1,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
|
$
|
0.68
|
|
Diluted earnings per
share
|
|
$
|
0.67
|
|
|
|
|
|
|
|
|
|
|
$
|
0.62
|
|
Weighted average
shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
939,169
|
|
|
|
|
|
|
|
900,000
|
N
|
|
|
1,839,169
|
|
Diluted
|
|
|
1,539,430
|
|
|
|
|
|
|
|
900,000
|
N
|
|
|
2,439,430
|
|
12
CITIZENS
FIRST CORPORATION
PRO FORMA
CONDENSED COMBINED CONSOLIDATED STATEMENT OF INCOME
YEAR
ENDED DECEMBER 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kentucky
|
|
|
|
|
|
|
|
|
|
Citizens
|
|
|
Banking
|
|
|
|
|
|
Pro Forma
|
|
|
|
First
|
|
|
Centers
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
10,499
|
|
|
$
|
5,956
|
|
|
$
|
65
|
E
|
|
$
|
16,520
|
|
Securities
|
|
|
472
|
|
|
|
1,062
|
|
|
|
(15
|
)F
|
|
|
1,519
|
|
Other
|
|
|
103
|
|
|
|
172
|
|
|
|
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
11,074
|
|
|
|
7,190
|
|
|
|
50
|
|
|
|
18,314
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,906
|
|
|
|
2,743
|
|
|
|
135
|
G
|
|
|
5,784
|
|
Interest on borrowed funds
|
|
|
447
|
|
|
|
65
|
|
|
|
282
|
H
|
|
|
794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
3,353
|
|
|
|
2,808
|
|
|
|
417
|
|
|
|
6,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
7,721
|
|
|
|
4,382
|
|
|
|
(367
|
)
|
|
|
11,736
|
|
Provision for loan losses
|
|
|
(200
|
)
|
|
|
195
|
|
|
|
|
I
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses
|
|
|
7,921
|
|
|
|
4,187
|
|
|
|
(367
|
)
|
|
|
11,741
|
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
808
|
|
|
|
744
|
|
|
|
|
|
|
|
1,552
|
|
Other noninterest income
|
|
|
668
|
|
|
|
326
|
|
|
|
|
|
|
|
994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
1,476
|
|
|
|
1,070
|
|
|
|
|
|
|
|
2,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
3,005
|
|
|
|
1,726
|
|
|
|
|
|
|
|
4,731
|
|
Occupancy and equipment expense
|
|
|
801
|
|
|
|
535
|
|
|
|
(30
|
)J
|
|
|
1,306
|
|
Other
|
|
|
2,198
|
|
|
|
1,415
|
|
|
|
276
|
K
|
|
|
3,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
6,004
|
|
|
|
3,676
|
|
|
|
246
|
|
|
|
9,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income
taxes
|
|
|
3,393
|
|
|
|
1,581
|
|
|
|
(613
|
)
|
|
|
4,361
|
|
Provision for income
taxes
|
|
|
1,156
|
|
|
|
435
|
|
|
|
(208
|
)L
|
|
|
1,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
2,237
|
|
|
|
1,146
|
|
|
|
(405
|
)M
|
|
|
2,978
|
|
Dividends declared on preferred
stock
|
|
|
520
|
|
|
|
|
|
|
|
|
|
|
|
520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders
|
|
$
|
1,717
|
|
|
$
|
1,146
|
|
|
$
|
(405
|
)
|
|
$
|
2,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share
|
|
$
|
1.83
|
|
|
|
|
|
|
|
|
|
|
$
|
1.34
|
|
Diluted earnings per
share
|
|
$
|
1.47
|
|
|
|
|
|
|
|
|
|
|
$
|
1.23
|
|
Weighted average
shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
936,847
|
|
|
|
|
|
|
|
900,000
|
N
|
|
|
1,836,847
|
|
Diluted
|
|
|
1,516,586
|
|
|
|
|
|
|
|
900,000
|
N
|
|
|
2,416,586
|
|
13
NOTES TO
UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 1
|
Basis of
Presentation and Kentucky Banking Centers Acquisition
|
On June 1, 2006, we entered into a Stock Purchase Agreement
with Farmers Capital Bank Corporation to acquire its wholly
owned subsidiary Kentucky Banking Centers, a Kentucky state
chartered bank headquartered in Glasgow, Kentucky, for a cash
purchase price of $20.0 million. We intend to fund the
acquisition of Kentucky Banking Centers from the net proceeds of
this offering and the issuance of trust preferred securities.
The unaudited pro forma condensed combined consolidated
financial statements give effect to the acquisition in a
business combination accounted for under the purchase method of
accounting.
The unaudited pro forma condensed combined consolidated balance
sheet reflects the proposed purchase as if it had occurred on
June 30, 2006, while the unaudited pro forma condensed
combined consolidated statements of income for the year ended
December 31, 2005 and for the six months ended
June 30, 2006 reflect the proposed purchase as if it had
occurred on January 1, 2005. Described below is the pro
forma estimate of the proceeds from the public offering of
common stock and of the total purchase price of the transaction,
as well as adjustments to allocate the purchase price based on
preliminary estimates of the fair values of the assets and
liabilities of Kentucky Banking Centers. The estimates will be
refined and updated as of the date of the transaction and the
final values indicated in the pro forma condensed combined
consolidated financial data may be more or less depending on
operating results, changes in market conditions and other
factors.
Described below is the pro forma estimate of the net proceeds of
common stock and the total purchase price of the transaction as
well as adjustments to allocate the purchase price based on
preliminary estimates of fair values of the assets and
liabilities of Kentucky Banking Centers. All amounts are in
thousands.
|
|
|
|
|
Estimated gross proceeds from sale
of common stock to be issued in public offering
|
|
$
|
18,045
|
|
Estimated offering costs
|
|
|
(1,751
|
)
|
|
|
|
|
|
Estimated net proceeds
|
|
$
|
16,294
|
|
|
|
|
|
|
Cash to purchase Kentucky Banking
Centers
|
|
$
|
20,000
|
|
Estimated legal and accounting
fees, net of tax
|
|
|
100
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
20,100
|
|
Net assets of Kentucky Banking
Centers based on historical carrying amounts as of June 30,
2006
|
|
$
|
9,169
|
|
Increase (decrease) in net assets
to reflect estimated fair value adjustments under the purchase
method of accounting:
|
|
|
|
|
Securities
|
|
|
15
|
|
Loans receivable
|
|
|
(195
|
)
|
Deposits
|
|
|
151
|
|
Premises and equipment, net
|
|
|
(900
|
)
|
Deferred taxes
|
|
|
139
|
|
Identifiable intangible assets
(Note 2C)
|
|
|
1,519
|
|
|
|
|
|
|
Net assets of Kentucky Banking
Centers adjusted for fair value and identified intangibles
|
|
$
|
9,898
|
|
|
|
|
|
|
Total purchase price in excess of
fair value of net assets acquired
|
|
$
|
10,202
|
|
Estimated acquisition charges
|
|
|
170
|
|
|
|
|
|
|
Goodwill
|
|
$
|
10,372
|
|
Except as discussed in Note 2, there are no adjustments to
other asset or liability groups, and the book values approximate
fair values.
14
NOTES TO
UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The acquisition will be accounted for under the purchase method
of accounting in accordance with Statement of Financial
Accounting Standards No. 141, Business
Combinations (SFAS No. 141), and
SFAS 142, Goodwill and Other Intangible Assets
(SFAS No. 142). In accordance with
SFAS No. 142, intangible assets other than goodwill
(such as core deposit intangibles) must be amortized over their
estimated useful lives. Goodwill will not be amortized to
expense, but instead will be reviewed for impairment at least
annually and to the extent goodwill is impaired, its carrying
value will be written down to its implied fair value and a
charge to earnings will be made.
|
|
Note 2
|
Purchase
Accounting and Pro Forma Adjustments
|
|
|
|
(A) |
|
Reflects the issuance of 900,000 shares of our no par value
common stock at an estimated price of $20.05 per share less the
underwriting discount and offering expenses, cash consideration
of $20.0 million paid in association with the purchase of
Kentucky Banking Centers plus the estimated acquisition costs of
$170,000 associated with the transaction, and the elimination of
Kentucky Banking Centers equity accounts. |
|
|
|
|
|
Estimated gross proceeds from
offering of common stock
|
|
$
|
18,045
|
|
Less estimated offering expenses:
|
|
|
|
|
Underwriting discount at 6.38% of
gross proceeds
|
|
|
1,151
|
|
Printing
|
|
|
100
|
|
Legal
|
|
|
150
|
|
Accounting
|
|
|
75
|
|
Other
|
|
|
275
|
|
|
|
|
|
|
Total offering expenses
|
|
|
1,751
|
|
|
|
|
|
|
Estimated net proceeds from
offering of common stock
|
|
$
|
16,294
|
|
Cash adjustment reconciliation:
|
|
|
|
|
Estimated net proceeds from
offering of common stock
|
|
$
|
16,294
|
|
Proceeds from issuance of trust
preferred securities
|
|
|
5,000
|
|
Cash paid to Kentucky Banking
Centers shareholder
|
|
|
(20,000
|
)
|
Estimated legal and accounting
fees, net of tax
|
|
|
(100
|
)
|
Estimated acquisition related
charges, net of tax
|
|
|
(170
|
)
|
|
|
|
|
|
Total
|
|
$
|
1,024
|
|
Represents adjustment to record
the estimated costs, as follows:
|
|
|
|
|
Data contract termination, net of
tax
|
|
$
|
65
|
|
Trust preferred securities
acquisition fees, net of tax
|
|
|
17
|
|
Other acquisition related charges,
net of tax
|
|
|
88
|
|
|
|
|
|
|
Estimated acquisition costs
|
|
$
|
170
|
|
|
|
|
(B) |
|
Represents the recording of estimated fair value adjustments
relating to Kentucky Banking Centers premises and
equipment, securities, loans, deposits and eliminated deferred
tax liabilities. Final valuations could differ significantly. |
|
(C) |
|
Represents the adjustment to record the estimated core deposit
intangible which is estimated at 3% of Kentucky Banking
Centers deposits excluding time deposits. The core deposit
intangible also includes the intangible related to customer
relationships. The final valuation of the core deposit
intangible asset could differ significantly. |
|
(D) |
|
Represents the adjustment to record the estimated goodwill
related to the transaction. |
15
NOTES TO
UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(E) |
|
Represents the adjustment to record the amortization of the fair
value adjustment on acquired loans over their expected average
life of 36 months. |
|
(F) |
|
Represents the adjustment to record the amortization of the fair
value adjustment on acquired investments over their expected
average life of 12 months. |
|
(G) |
|
Represents the adjustment to record the amortization of the fair
value adjustment on acquired time deposits over their expected
average life of 15 months. In addition, the replacement of
Kentucky Banking Centers interest bearing intercompany
deposit with its holding company (at a rate of 0.50%) with other
short-term borrowed funds will increases its cost of funds. The
additional interest expense is $14 and $12 for the year ended
December 31, 2005 and six months ended June 30, 2006,
respectively. These amounts are based on an average federal
funds rate of 2.75% for 2005 and 4.75% for 2006 based on an
average balance of $516,000 for the year ended December 31,
2005 and for the six months ended June 30, 2006. |
|
(H) |
|
Represents the adjustment to record the interest on trust
preferred securities issued for $5 million using an
estimated coupon rate of 175 basis points over six-month
LIBOR (London Inter-Bank Offering Rate). The interest expense is
calculated on an average rate of 5.64% for 2005 and 6.91% for
2006. |
|
(I) |
|
The pro forma condensed combined consolidated income statements
contain no adjustments to the provision for loan losses for the
year ended December 31, 2005 or for the six months ended
June 30, 2006. However, the determination of the level of
any banks allowance for loan losses is a subjective
process that involves both quantitative and qualitative factors.
Our preliminary analysis performed during due diligence has
revealed that there are certain differences in the methodologies
employed by us and Kentucky Banking Centers in determining the
levels of their respective allowances for loan losses. In
connection with preparations for combining Kentucky Banking
Centers with us, we will complete our analysis of their
allowances for loan losses and further analyze the attributes of
the combined loan portfolio. |
|
(J) |
|
Represents the adjustment to record the amortization of the fair
value adjustment on acquired premises and equipment over their
expected average life of 360 months. |
|
|
|
(K) |
|
Represents the amortization of core deposit intangible. We
estimate that a core deposit intangible and customer
relationship intangible of $1.5 million (assuming an
acquisition date of June 30, 2006) would be amortized
on an accelerated basis using sum-of-the-years digits over ten
years. The core deposit intangible of $1.5 million
represents 3% of Kentucky Banking Centers core deposits as
of June 30, 2006. |
|
|
|
(L) |
|
Represents estimated tax savings at a combined rate of 34%. |
|
|
|
(M) |
|
The pro forma condensed combined consolidated income statements
for the year ended December 31, 2005 and for the six months
ended June 30, 2006 do not give effect to the anticipated
cost savings or other operating synergies in connection with
this transaction. Certain costs disclosed in Note 2 to the
financial statements of Kentucky Banking Centers paid to related
parties may no longer be incurred. Although we believe there
will be some net savings, pro forma amounts have been disclosed
based on historical operating results of Kentucky Banking
Centers. |
|
|
|
(N) |
|
Represents the estimated increase in the number of shares
outstanding for the issuance of 900,000 shares in this
offering of common stock. |
16
RISK
FACTORS
An investment in shares of our common stock involves various
risks, and you should not invest in our common stock unless you
can afford to lose some or all of your investment. Before
deciding to invest in our common stock, you should carefully
consider the risks described below in conjunction with other
information contained in this prospectus, including our
consolidated financial statements and related notes and the
section entitled Citizens First Corporation
Managements Discussion and Analysis. Our business,
financial condition and results of operations could be harmed by
any of the following risks, or other risks which have not been
identified or which we believe are immaterial or unlikely.
Risks
Related to the Acquisition of Kentucky Banking Centers
We can
give no assurances as to when, or if, our acquisition of
Kentucky Banking Centers will be consummated, which may affect
both our stock and long term prospects.
We announced our proposed acquisition of Kentucky Banking
Centers located in Glasgow, Kentucky on June 1, 2006 and
entered into a Stock Purchase Agreement with Kentucky Banking
Centers and its parent company, Farmers Capital Bank
Corporation, Frankfort, Kentucky on that same date. Our
acquisition of Kentucky Banking Centers is subject to regulatory
approval of the Federal Reserve and the Kentucky Office of
Financial Institutions and other customary conditions to
closing. Accordingly, we are unable to predict when, or if, the
acquisition will be consummated. If we cannot complete the
acquisition of Kentucky Banking Centers, we may be forced to
alter our long-range business plans at significant expense. If
the capital we raise in this offering to fund the acquisition is
not put to immediate use, our earnings per share may be
significantly reduced and our stock price negatively affected.
The
acquisition may have an adverse effect on operating
results.
Our proposed acquisition of Kentucky Banking Centers involves
the combination of two companies that have previously operated
independently. A successful combination of the companies
operations will depend primarily on retaining and expanding the
customer base of Kentucky Banking Centers and on our ability to
consolidate operations, systems and procedures and to eliminate
redundancies and costs. Difficulties may be encountered in
combining the operations of Kentucky Banking Centers, including:
|
|
|
|
|
the loss of key employees and customers;
|
|
|
|
disruptions to our businesses;
|
|
|
|
possible inconsistencies in standards, control procedures and
policies;
|
|
|
|
unexpected problems with operations, personnel, technology or
credit;
|
|
|
|
the assimilation of new operations, sites and personnel possibly
diverting resources from regular banking operations;
|
|
|
|
potential disruptions of our ongoing business;
|
|
|
|
the possibility that uniform standards, controls, procedures and
policies may not be maintained;
|
|
|
|
the potential impairment of relationships with employees or
customers as a result of changes in management;
|
|
|
|
difficulties in evaluating the historical or future financial
performance of the combined business; and
|
|
|
|
brand awareness issues related to the acquired assets or
customers.
|
Further, we may be unable to realize fully any of the potential
cost savings we expect to achieve in the acquisition. Any cost
savings that are realized may be offset by losses in revenues,
increases in expenses or other charges to earnings or required
accounting treatments or valuations of our assets and
liabilities.
17
Risks
Related to our Business
An
economic downturn could reduce our customer base, our level of
deposits and demand for financial products such as
loans.
Our success significantly depends upon the growth in population,
income levels, deposits and housing starts in our market areas
of Warren and Simpson Counties in Kentucky and in the market
areas in which we expand. If these communities do not grow or if
prevailing local or national economic conditions are
unfavorable, our business may not succeed. An economic downturn
would likely harm the quality of our loan portfolio and reduce
our level of deposits, which in turn would hurt our business. If
an economic downturn occurs, borrowers may be less likely to
repay their loans as scheduled. Moreover, the value of real
estate or other collateral securing our loans could be adversely
affected. Unlike many larger institutions, we are not able to
spread the risks of unfavorable local economic conditions across
a large number of diversified economies. An economic downturn
could, therefore, result in losses that materially and adversely
affect our business.
We
face strong competition for customers, which could prevent us
from obtaining customers and may cause us to pay higher interest
rates to attract customers.
The banking business in our market area is highly competitive,
and we experience competition in our market from many other
financial institutions. We compete with commercial banks, credit
unions, savings and loan associations, mortgage banking firms,
consumer finance companies, securities brokerage firms,
insurance companies, money market funds and other mutual funds,
as well as other super-regional, national and international
financial institutions that operate offices in our primary
market areas and elsewhere.
We compete with these institutions both in attracting deposits
and in making loans. In addition, we have to attract our
customer base from other existing financial institutions and
from new residents. Our competitors include well established,
larger financial institutions, such as BB&T and US Bank, as
well as community banks such as SouthCentral Bank and American
Bank & Trust Company. These institutions offer some
services, such as extensive and established branch networks and
trust services, that we currently do not provide. There is a
risk that we will not be able to compete successfully with other
financial institutions in our market, and that we may have to
pay higher interest rates to attract deposits, resulting in
reduced profitability. In addition, competitors that are not
depository institutions are generally not subject to the
extensive regulations that apply to us.
Our
decisions regarding credit risk and allowance for loan losses
may materially and adversely affect our business.
Making loans and other extensions of credit is an essential
element of our business. Interest received on loans represented
approximately 92.5% of our interest income for the six months
ended June 30, 2006. Although we seek to mitigate risks
inherent in lending by adhering to specific underwriting
practices, our loans and other extensions of credit may not be
repaid. The risk of nonpayment is affected by a number of
factors, including:
|
|
|
|
|
the duration of the credit;
|
|
|
|
credit risks of a particular customer;
|
|
|
|
changes in economic and industry conditions; and
|
|
|
|
in the case of a collateralized loan, risks resulting from
uncertainties about the future value of the collateral.
|
We maintain an allowance for loan losses to provide for probable
incurred losses in our loan portfolio. However, there is no
precise method of predicting credit losses; therefore, we face
the risk that charge-offs in future periods will exceed our
allowance for loan losses and that additional increases in the
allowance for loan losses will be required. Additions to the
allowance for loan losses would result in a decrease of our net
income, and possibly our capital.
18
We are
dependent on key individuals, and the loss of one or more of
these key individuals could curtail our growth and adversely
affect our prospects.
Mary D. Cohron, our President and Chief Executive Officer, and
Steve Marcum, our Chief Financial Officer, have extensive and
long-standing ties within our primary market area, and they have
contributed significantly to our growth. If we lose the services
of either of Ms. Cohron or Mr. Marcum, they would be
difficult to replace and our business and development could be
materially and adversely affected. We do not maintain key-man
life insurance on Ms. Cohron or Mr. Marcum.
Our success also depends, in part, on our continued ability to
attract and retain experienced loan originators, as well as
other management personnel. The loss of the services of several
of such key personnel could adversely affect our growth strategy
and prospects to the extent we are unable to replace such
personnel.
Our
corporate culture has contributed to our success and, if we
cannot maintain this culture as we grow, we could lose the
productivity fostered by our culture, which could harm our
business.
We believe that a critical contributor to our success has been
our corporate culture, which we believe fosters teamwork and
productivity. As our organization grows, and we are required to
implement more complex organizational management structures, we
may find it increasingly difficult to maintain the beneficial
aspects of our corporate culture. For example, we may not be
able to continue our high customer satisfaction ratings or
maintain our strong asset quality. This could negatively impact
our future success.
Our
recent operating results may not be indicative of our future
operating results.
We may not be able to sustain our historical rate of growth and
may not even be able to grow our business at all. Because of our
relatively small size and short operating history, it will be
difficult for us to generate similar earnings growth as we
continue to expand, and consequently our historical results of
operations will not necessarily be indicative of our future
operations. Various factors, such as economic conditions,
regulatory and legislative considerations, and competition, may
also impede our ability to expand our market presence. If we
experience a significant decrease in our historical rate of
growth, our results of operations and financial condition may be
adversely affected because a high percentage of our operating
costs are fixed expenses.
Lack
of seasoning of our loan portfolio may increase the risk of
credit defaults in the future.
Due to the rapid growth of our bank over the past several years,
a large portion of the loans in our loan portfolio and of our
lending relationships is of relatively recent origin. In
general, loans do not begin to show signs of credit
deterioration or default until they have been outstanding for
some period of time, a process referred to as
seasoning. As a result, a portfolio of older loans
will usually behave more predictably than a newer portfolio.
Because a significant portion of our loan portfolio is
relatively new, the current level of delinquencies and defaults
may not be representative of the level that will prevail when
the portfolio becomes more seasoned, which may be higher than
current levels. If delinquencies and defaults increase, we may
be required to increase our provision for loan losses, which
would adversely affect our results of operations and financial
condition.
A
large percentage of our loans are collateralized by real estate,
and an adverse change in the real estate market may result in
losses and adversely affect our profitability.
Approximately 64.5% of our loan portfolio as of June 30,
2006 was comprised of loans collateralized by real estate. An
adverse change in the economy affecting values of real estate
generally or in our primary market specifically could
significantly impair the value of our collateral and our ability
to sell the collateral upon foreclosure. The real estate
collateral provides an alternate source of repayment in the
event of default by the borrower and may deteriorate in value
during the time the credit is extended. If real estate values
decline, it is also more likely that we would be required to
increase our allowance for loan losses. If during a period of
reduced real estate values we are required to liquidate the
collateral collateralizing a loan to satisfy
19
the debt or to increase our allowance for loan losses, it could
materially reduce our profitability and adversely affect our
financial condition.
A
small number of customers account for a large percentage of our
total deposits.
At June 30, 2006, three customers accounted for
approximately $29.7 million, or 18.3%, of total deposits.
If one or more of these customers move their deposits, 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.
We
rely on certificates of deposit in excess of $100,000 for a
significant portion of our deposit funding.
At June 30, 2006, $35.3 million, or 21.8% 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.
Changes
in interest rates may reduce our profitability.
Our results of operations depend in large part upon the level of
our net interest income, which is the difference between
interest earned from interest earning assets, such as loans and
mortgage-backed securities, and interest paid on interest
bearing liabilities, such as deposits and other borrowings.
Depending on the terms and maturities of our assets and
liabilities, a significant change in interest rates could have a
material adverse effect on our profitability. Many factors cause
changes in interest rates, including governmental monetary
policies and domestic and international economic and political
conditions. While we intend to manage the effects of changes in
interest rates by adjusting the terms, maturities, and pricing
of our assets and liabilities, our efforts may not be effective
and our financial condition and results of operations could
suffer.
We are
subject to extensive regulation that could limit or restrict our
activities.
We operate in a highly regulated industry and are subject to
examination, supervision and comprehensive regulation by various
regulatory agencies. Our compliance with these regulations is
costly and restricts certain of our activities, including
payment of dividends, mergers and acquisitions, investments,
loans and interest rates charged, interest rates paid on
deposits and locations of offices. We are also subject to
capitalization guidelines established by our regulators, which
require us to maintain adequate capital to support our growth.
The laws and regulations applicable to the banking industry
could change at any time, and we cannot predict the effects of
these changes on our business and profitability. Because
government regulation greatly affects the business and financial
results of all commercial banks and bank holding companies, our
cost of compliance could adversely affect our ability to operate
profitably.
Efforts
to comply with the Sarbanes-Oxley Act will involve significant
expenditures, and non-compliance with the Sarbanes-Oxley Act may
adversely affect us.
The Sarbanes-Oxley Act of 2002, and the related rules and
regulations promulgated by the Securities and Exchange
Commission that are now applicable to us, have increased the
scope, complexity and cost of corporate governance, reporting
and disclosure practices. We have experienced, and we expect to
continue to experience, greater compliance costs, including
costs related to internal controls, as a result of the
Sarbanes-Oxley Act. For example, for the year ending
December 31, 2007, we anticipate being required to comply
with Section 404 of the Sarbanes-Oxley Act and our
management will be required to issue a report on our internal
controls over financial reporting. We expect these new rules and
regulations to continue to increase our accounting, legal and
other costs, and to make some activities more difficult, time
consuming and costly. In the event that we are unable to
maintain or achieve compliance with the Sarbanes-Oxley Act and
related rules, we may be adversely affected.
20
We are evaluating our internal control systems in order to allow
management to report on, and our independent registered public
accounting firm to attest to, our internal control over
financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act. If we identify significant deficiencies or
material weaknesses in our internal control over financial
reporting that we cannot remediate in a timely manner, or if we
are unable to receive a positive attestation from our
independent registered public accounting firm with respect to
our internal control over financial reporting, the trading price
of our common stock could decline, our ability to obtain any
necessary equity or debt financing could suffer, and, if
accepted for listing, our common stock could ultimately be
delisted from the NASDAQ Global Market. In this event, the
liquidity of our common stock would be severely limited and the
market price of our common stock would likely decline
significantly.
In addition, the new rules adopted as a result of the
Sarbanes-Oxley Act could make it more difficult or more costly
for us to obtain certain types of insurance, including
directors and officers liability insurance, which
could make it more difficult for us to attract and retain
qualified persons to serve on our board of directors or as
executive officers.
Our
continued pace of growth may require us to raise additional
capital in the future, but that capital may not be available
when it is needed or may not be available on terms acceptable to
us.
We are required by regulatory authorities to maintain adequate
levels of capital to support our operations. We anticipate that
our capital resources following this offering will satisfy our
capital requirements for the foreseeable future. We may at some
point, however, need to raise additional capital to support our
continued growth. Our ability to raise additional capital, if
needed, will depend in part on conditions in the capital markets
at that time, which are outside our control. If we cannot raise
additional capital on terms acceptable to us, when needed, our
ability to further expand our operations through internal growth
and acquisitions could be materially impaired. In addition, if
we decide to raise additional equity capital, your interest
could be diluted.
We
will face risks with respect to future expansion and
acquisitions or mergers.
We may expand into new markets or lines of business or offer new
products or services. These activities, including our proposed
acquisition of Kentucky Banking Centers, will involve a number
of risks, including:
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taking additional time and creating expense associated with
evaluating new markets for expansion, hiring experienced local
management, and opening new offices, as there may be a
substantial time lag between these activities before we generate
sufficient assets and deposits to support the costs of the
expansion;
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taking a significant amount of time negotiating a transaction or
working on expansion plans, resulting in managements
attention being diverted from the operation of our existing
business; and
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creating an adverse short-term effect on our results of
operations.
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Risks associated with our acquisition of other financial
institutions may include the following:
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taking additional time and creating expense associated with
identifying and evaluating potential acquisitions and merger
partners;
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using inaccurate estimates and judgments to evaluate credit,
operations, management, and market risks with respect to the
target institution or assets;
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diluting our existing shareholders in the acquisition;
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taking time and creating expense integrating the operations and
personnel of the combined businesses; and
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losing key employees and customers as a result of an acquisition
that is poorly received.
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21
We have never acquired another bank before, so we lack
experience in handling any of these risks. There is also a risk
that any expansion effort will not be successful.
Risks
Related to an Investment in our Common Stock
We
cannot be sure that an active public trading market for our
common stock will develop or be maintained.
Although we have applied to list our common stock on the NASDAQ
Global Market, our stock is currently quoted on the OTC
Bulletin Board. There has been limited trading in our
shares of common stock, at widely varying prices, and trading to
date has not created an active market for our shares.
Accordingly, we cannot assure you that an established and liquid
trading market in our stock will develop, that it will continue
if it does develop, or that our common stock will trade at or
above the offering price set forth on the cover page of this
prospectus. Our underwriters, Sandler ONeill &
Partners, L.P. and J.J.B. Hilliard, W.L. Lyons, Inc., have
advised us that they intend to make a market in our common
stock. However, neither of our underwriters, nor any other
market maker, is obligated to make a market in our shares, and
they may discontinue making a market in our stock at any time in
their sole discretion. Accordingly, investors should consider
the potential lack of liquidity and the long-term nature of an
investment in our common stock prior to investing. We cannot
guarantee that investors will be able to sell their shares at or
above our offering price.
Our
ability to pay cash dividends is limited, and we may be unable
to pay future cash dividends if we decide to do
so.
Since our inception, we have not paid any cash dividends on our
common stock, and we do not intend to pay cash dividends in the
foreseeable future. Even if we decide to pay cash dividends in
the future, our ability to do so will be limited by regulatory
restrictions, by the banks ability to pay dividends to us
based on its capital position and profitability, and by our need
to maintain sufficient capital to support the banks
operations. In addition, quarterly dividends are payable on our
preferred stock, prior and in preference to the payment of
dividends on our common stock, at an annual fixed rate of 6.5%.
The ability of the bank to pay dividends to us is limited by its
obligations to maintain sufficient capital and by other
restrictions on its dividends that are applicable to Kentucky
state chartered banks and banks that are regulated by the FDIC.
If we do not satisfy these regulatory requirements, we will be
unable to pay cash dividends on our common stock.
Purchasers
of our common stock will experience immediate
dilution.
If you purchase shares of our common stock in this offering, you
will experience immediate dilution of approximately 24.4% in the
value of your investment, in that our net tangible book value
per share will be approximately $15.16, compared with an assumed
offering price per share of $20.05 (based on the closing price
of our common stock on the OTC Bulletin Board on
September 28, 2006). See Dilution.
Purchasers
of our common stock may experience additional dilution when our
outstanding convertible preferred stock becomes convertible in
2007.
In 2007, or immediately upon a change in control, our
outstanding shares of preferred stock will be convertible, at
the option of the holders, into a number of shares of our common
stock equal to $31,992, the stated value per share of a share of
preferred stock, divided by the conversion price per share. The
conversion price per share is $14.06, which is $5.99 less than
the assumed offering price per share of $20.05 (based on the
closing price of our common stock on the OTC Bulletin Board
on September 28, 2006). To the extent all of the holders of
shares of our preferred stock elect to convert their shares of
preferred stock into common stock, you will experience
additional dilution of approximately 2.7% in the value of your
investment. If holders of shares of preferred stock choose not
to convert their shares into common stock, we may redeem such
shares at a price of $31,992 per share, plus all accrued
but unpaid dividends.
22
We
have implemented anti-takeover devices that could make it more
difficult for another company to purchase us, even though such a
purchase may increase shareholder value.
In many cases, shareholders would receive a premium for their
shares if we were purchased by another company. However, our
articles of incorporation and bylaws may make it difficult for
anyone to purchase us without approval of our board of
directors. For example, our articles of incorporation divide the
board of directors into three classes of directors serving
staggered three-year terms with approximately one-third of the
board of directors elected at each annual meeting of
shareholders. The classification of directors makes it more
difficult for shareholders to change the composition of the
board of directors. As a result, at least two annual meetings of
shareholders would be required for the shareholders to change a
majority of the directors, whether or not a change in the board
of directors would be beneficial and whether or not a majority
of shareholders believe that such a change would be desirable.
Consequently, a takeover attempt may prove difficult, and
shareholders may not realize the highest possible price for
their securities. See Description of Capital Stock -
Anti-takeover Effects.
We
will have broad discretion in allocating the net proceeds from
the offering in the event that we are unable to consummate our
pending acquisition of Kentucky Banking Centers.
We intend to use the net proceeds from this offering to fund our
acquisition of Kentucky Banking Centers. If we are unable to
consummate our pending acquisition of Kentucky Banking Centers,
we will have significant flexibility in applying the net
proceeds of this offering. Accordingly, investors will not have
the opportunity to evaluate the economic, financial and other
relevant information that we may consider in the application of
the net proceeds. See Use of Proceeds.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995 relating to, without limitation, our future economic
performance, plans and objectives for future operations, and
projections of revenues and other financial items that are based
on our beliefs, as well as assumptions made by and information
currently available to us. The words may,
will, anticipate, should,
would, believe, contemplate,
could, project, predict,
expect, estimate, continue
and intend, as well as other similar words and
expressions of the future, are intended to identify
forward-looking statements. Our actual results, performance or
achievements may differ materially from the results expressed or
implied by our forward-looking statements.
The cautionary statements in the Risk Factors
section and elsewhere in this prospectus also identify important
factors and possible events which involve risks and
uncertainties that could cause actual results to differ
materially from those contained in the forward-looking
statements. If you are interested in purchasing shares of our
common stock, you should consider these risk factors carefully,
as well as factors discussed elsewhere in this prospectus,
before making a decision to invest. All forward-looking
statements in this prospectus are based on information available
to us on the date of this prospectus. We do not intend to, and
assume no responsibility for, updating any forward-looking
statements that may be made by us or on our behalf in this
prospectus or otherwise.
USE OF
PROCEEDS
We estimate that the net proceeds from the sale of our common
stock in this offering will be approximately $16.3 million,
or approximately $18.8 million if the underwriters
over-allotment option is exercised in full, after deducting
estimated offering expenses of approximately $600,000 and
underwriting discounts.
We plan to use the net proceeds of this offering to fund a
portion of the purchase price of Kentucky Banking Centers. See
Business Strategic Expansion and
Summary Unaudited Pro Forma Financial
Information.
If our pending acquisition of Kentucky Banking Centers does not
close, we intend to use the net proceeds of this offering for
general corporate purposes and to fund the continued growth and
expansion of our franchise through investments in or loans to
our bank subsidiary.
23
CAPITALIZATION
The following table sets forth our capitalization as of
June 30, 2006. Our capitalization is presented on a
historical basis and on an as-adjusted basis to give effect to
the sale of 900,000 shares of common stock at an assumed
offering price of $20.05 per share (based on the closing
price of our common stock on the OTC Bulletin Board on
September 28, 2006) and assuming:
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the net proceeds of the offering are $16.3 million, after
deducting the estimated underwriting discount and estimated
offering expenses of approximately $1.7 million; and
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the underwriters over-allotment option is not exercised.
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The following data should be read together with our consolidated
financial statements and the related notes included elsewhere in
this prospectus.
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June 30, 2006
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As Adjusted
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As
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For the
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Actual
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Adjusted
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Acquisition
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(Dollars in thousands)
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Long Term Borrowings:
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Junior subordinated
debentures(1)
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$
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$
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$
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5,000
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Shareholders
Equity(2):
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Common stock, no par value per
share; 5,000,000 shares authorized; 943,463 shares
issued and outstanding actual; 1,843,463 shares
issued and outstanding as adjusted
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11,875
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28,169
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28,169
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Preferred stock, no par value per
share; 500 shares authorized; 250 shares issued and
outstanding
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7,659
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7,659
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7,659
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Retained earnings
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1,775
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1,775
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1,775
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Accumulated other comprehensive
income, net of tax
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(669
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)
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(669
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)
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(669
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Total shareholders equity
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20,640
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36,934
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36,934
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Total
capitalization(3)
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$
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20,640
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$
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36,934
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$
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41,934
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Capital Ratios:
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Equity to assets
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10.17
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%
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16.85
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%
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10.82
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%
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Tangible equity to tangible assets
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9.58
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%
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16.35
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%
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7.23
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%
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Tier 1 leverage
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8.47
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%
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18.21
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%
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9.37
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%
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Tier 1 risk-based capital
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10.04
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%
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21.59
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%
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11.55
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%
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Total risk-based capital
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13.01
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%
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22.70
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%
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12.76
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%
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(1) |
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Junior subordinated debentures associated with proposed issuance
of trust preferred securities. |
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(2) |
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As of August 30, 2006, there were 943,463 shares of
common stock outstanding and we had 148,683 shares of
common stock subject to the issuance of outstanding options with
a weighted average exercise price of $15.38 per share. |
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(3) |
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Includes long-term borrowings and total shareholders
equity. |
24
DILUTION
If you invest in our common stock, your interest will be diluted
to the extent of the difference between the public offering
price per share of our common stock and the pro forma net
tangible book value per share of our common stock after this
offering.
The net tangible book value of our common stock as of
June 30, 2006 was approximately $11.7 million, or
$12.35 per share, based on the number of shares of common
stock outstanding as of June 30, 2006. Net tangible book
value per share is equal to the amount of our shareholders
equity less preferred stock and reduced by recorded goodwill and
other intangible assets, divided by the number of shares of
common stock outstanding as of June 30, 2006.
After (i) giving effect to the sale of the
900,000 shares of common stock in this offering, at the
assumed public offering price of $20.05 per share (based on
closing price of our common stock on the OTC Bulletin Board
on September 28, 2006) assuming that the
underwriters over-allotment option is not exercised, and
(ii) deducting the underwriting discount and estimated
offering expenses, our pro forma net tangible book value as of
June 30, 2006 would be approximately $28.0 million, or
$15.16 per share. This offering will result in an immediate
increase in net tangible book value of $2.81 per share to
existing shareholders and an immediate dilution of
$4.89 per share to new investors, or approximately 24.4% of
the assumed public offering price of $20.05 per share.
Dilution is determined by subtracting pro forma net tangible
book value per share after this offering from the assumed public
offering price of $20.05 per share. The following table
illustrates this per share dilution:
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Assumed public offering price per
share
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$
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20.05
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Net tangible book value per share
at June 30, 2006
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$
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12.35
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Increase in net tangible book
value per share attributable to new investors
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2.81
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Pro forma net tangible book value
per share at June 30, 2006
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15.16
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Dilution per share to new investors
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$
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4.89
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25
PRICE
RANGE OF OUR COMMON STOCK
We have applied to list our common stock on the NASDAQ Global
Market under the symbol CZFC. Currently, our common
stock is quoted on the OTC Bulletin Board under the symbol
CZFC.OB. There has been limited trading, at widely
varying prices, and to date trading has not created an active
market for our common stock. For example, from January 1,
2006 through September 28, 2006, the total number of shares
of our common stock that traded was 26,931. Thus, the prices at
which trades occurred may not be representative of the actual
value of our common stock. On a number of days during this
period, there were no trades at all in our common stock. The
last reported sales price of our common stock on the OTC
Bulletin Board on September 28, 2006 was $20.05. As of
June 30, 2006, there were approximately 594 beneficial
owners of our common stock.
The following table shows the reported high and low bid
information (adjusted for stock dividends) for the periods
indicated. The prices listed below are quotations, which reflect
inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
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2006
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Third Quarter (through
September 28, 2006)
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$
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20.50
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$
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18.60
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Second Quarter
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$
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21.00
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$
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18.50
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First Quarter
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$
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26.57
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$
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17.14
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2005
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Fourth Quarter
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|
$
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17.14
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$
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15.71
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Third Quarter
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$
|
15.71
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$
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14.76
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Second Quarter
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$
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15.33
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$
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13.20
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First Quarter
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$
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14.51
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$
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13.61
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2004
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Fourth Quarter
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$
|
14.69
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|
$
|
12.89
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Third Quarter
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|
$
|
13.11
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|
$
|
12.49
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|
Second Quarter
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|
$
|
14.06
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|
|
$
|
12.06
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|
First Quarter
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|
$
|
12.93
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$
|
11.02
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DIVIDEND
POLICY
We have not declared or paid any cash dividends on our common
stock since our inception. For the foreseeable future we do not
intend to declare cash dividends on our common stock. We intend
to retain earnings to grow our business and strengthen our
capital base. Quarterly dividends are payable on our preferred
stock, prior and in preference to the payment of dividends on
our common stock, at an annual fixed rate of 6.5%.
Our ability to pay dividends depends on the ability of our
subsidiary, Citizens First Bank, to pay dividends to us. Under
Kentucky law, the bank may pay dividends only from current or
retained net profits. Prior regulatory approval is required to
pay dividends which exceed the banks net profits for the
current year plus its retained net profits for the preceding two
calendar years. At June 30, 2006, the bank had
approximately $4.8 million in unrestricted dividend
capacity. 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.
26
BUSINESS
We are a Kentucky corporation that serves as the holding company
for Citizens First Bank, Inc., a Kentucky state chartered bank
headquartered in Bowling Green, Warren County, Kentucky.
Citizens First Bank opened for business in February 1999. We are
locally managed and owned, and we operate as a traditional
community bank. We believe that the responsiveness, customized
products and services and personal attention we provide to our
customers is responsible for our growth to date. At
June 30, 2006, we had consolidated assets of approximately
$202.9 million, deposits of approximately
$162.0 million and shareholders equity of
approximately $20.6 million.
Our strategy is to continue to grow our community bank franchise
by emphasizing local management and providing superior customer
service, while achieving operating efficiencies and maintaining
strong credit quality and financial performance. We believe the
following strengths of our business differentiate us and provide
us with a competitive advantage.
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Strategic Expansion. We have expanded from a
single office in Bowling Green to five offices in Warren and
Simpson Counties in Kentucky. In June 2006, we entered into an
agreement to acquire Kentucky Banking Centers, a
$126.6 million asset bank as of June 30, 2006 with
offices in Glasgow, Horse Cave and Munfordville, Kentucky, which
will provide us access to additional growing communities in our
market area. We intend to continue to expand in our market area
through internal growth, the opening of new offices and
selective acquisitions.
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Our Management Team. We have assembled a team
of bankers with expertise in servicing individuals and small- to
medium-sized businesses, many of whom participated in the
successful growth of Trans Financial, Inc., a bank holding
company formerly headquartered in Bowling Green. Trans Financial
was acquired by Star Bank in 1998. We will continue to emphasize
experienced local management with a strong commitment to the
communities we serve.
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Our Market Area. Our bank is headquartered in
Bowling Green, Warren County, Kentucky, and we currently have
one office in Franklin, located in adjacent Simpson County. Our
market area consists of the ten county region located in south
central Kentucky known as the Barren River Area Development
District and extends south into the outlying suburban growth
areas of Nashville, Tennessee. In recent years, this market area
has experienced notable economic growth, driven by industry
expansion and population growth in Bowling Green. We believe
that this combination of population and economic growth will
continue to support businesses such as real estate development,
construction, manufacturing and education and favors the
expansion of community-based banking services in our market area.
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Strategic
Expansion
Through internal growth, expansion of our branch network and
strategic acquisitions, we believe we can significantly increase
our market share in our primary market area. According to FDIC
data as of June 30, 2005, our market share represented 9.8%
and 5.3% of the total deposit market of Warren County and
Simpson County, respectively. In the past six years, we have
expanded from a single office in Bowling Green, Kentucky to five
offices in Warren and Simpson Counties in Kentucky. We opened
our Simpson County branch in 2003 after hiring seasoned
community bankers in that county. To support the growing needs
of our customers, we opened a new main office in Bowling Green
in March 2006, and we anticipate opening new offices in Franklin
in November 2006 and in Bowling Green by the end of 2007.
We plan to open new offices only after both identifying and
hiring experienced local executives to manage our operations in
those offices. We will also consider expanding into growing
markets within our primary market area or nearby markets by
engaging in selective acquisitions of other financial
institutions that have experienced management who share a common
philosophy and approach to community banking.
In June 2006, we entered into a definitive agreement to acquire
Kentucky Banking Centers, a Kentucky state chartered bank
headquartered in Glasgow, Kentucky, for a cash purchase price of
$20.0 million. We intend to fund the purchase price through
a combination of the issuance of common stock in this offering
and a separate offering of trust preferred securities. When
completed, our acquisition of Kentucky Banking Centers
27
will add to Citizens First Bank approximately
$126.6 million in assets, $83.9 million in net loans
and $115.2 million in deposits, along with three additional
offices in our market area.
We believe that our acquisition of Kentucky Banking Centers will
provide us additional access to growing communities in our
market area, as well as a stable and profitable deposit base.
According to FDIC data as of June 30, 2005, the proposed
combination will give us a 40.2% market share in Hart County and
a 6.9% market share in Barren County. Our management team has
extensive experience in Kentucky Banking Centers market
and we believe the combined bank will be well positioned to
increase its growth in these areas through the offering of more
sophisticated banking products, our focused marketing efforts
and the addition of one or more branches in Barren County. We
have offered and expect to retain substantially all of the
employees of Kentucky Banking Centers. We believe this will help
expedite the integration of our businesses and provide
continuity for all of our customers.
Our acquisition of Kentucky Banking Centers is anticipated to
close in the fourth quarter of 2006 and is conditioned upon
receiving the requisite regulatory approvals.
Our
Management Team
Our management team consists of an experienced team of bankers,
combining extensive market knowledge with an energetic culture.
A significant number of members of our management team served
the Bowling Green market and surrounding area for many years as
officers, directors or employees of Trans Financial. Trans
Financial, formerly headquartered in Bowling Green, grew from a
$180.0 million asset one bank holding company in 1982 to a
$2.2 billion asset multi-bank holding company in 1998, when
it was acquired by Star Bank. Many of our officers, directors
and employees played a key role in the growth of Trans
Financial, with over 25 of our initial 28 employees having once
been employed by Trans Financial. Today, 26 of our 74 employees
were once employed with Trans Financial, many of whom were in
key positions.
We believe we have assembled a senior management team with
extensive banking experience and a shared goal to grow our bank
while remaining committed to our guiding principles of building
strong personal relationships and providing superior customer
service. For example, Mary D. Cohron has been our President and
Chief Executive Officer since our founding in 1998.
Ms. Cohron is an active community leader in our market area
and is currently Chairman-Elect of the Bowling Green Area
Chamber of Commerce, Secretary of the Bowling Green Area
Economic Development Authority and Vice Chairman of the Western
Kentucky University Foundation. Ms. Cohron served as a
director of Trans Financial from 1979 to 1998 and held positions
on various committees during her tenure, including the executive
committee and the audit committee for which she served as
chairwoman. Our Chief Financial Officer, Steve Marcum, is a
lifelong resident of Warren County, Kentucky and, prior to
joining us, served as the chief financial officer of two area
community banks for over 25 years.
Our
Market Area
Our market area consists of a ten county region located in south
central Kentucky known as the Barren River Area Development
District and extends south into the outlying suburban growth
areas of Nashville, Tennessee. This region consists of Allen,
Barren, Butler, Edmonson, Hart, Logan, Metcalfe, Monroe, Simpson
and Warren Counties in Kentucky. This area is a thriving and
growing region along the Interstate 65 corridor with access to
skilled labor and a competitive business climate. In recent
years, this market area has experienced notable economic growth,
driven by industry expansion, tourism and population growth.
According to FDIC data as of June 30, 2005, deposits in our
market area were $3.4 billion, an increase of approximately
$644.1 million, or 23.6%, from $2.7 billion at
June 30, 2000.
Our bank is headquartered in Bowling Green, Warren County,
Kentucky, and we currently have one office in Franklin, located
in adjacent Simpson County. Bowling Green, the fourth largest
city in Kentucky, is located approximately 100 miles south
of Louisville, Kentucky and approximately 60 miles north of
Nashville, Tennessee. Bowling Green is the financial, retail and
health care center of the region and is the home of Western
Kentucky University, which provides the area with a strong
educational and employment base. Western Kentucky University has
over 18,000 students and 2,000 employees. According to the U.S.
Census
28
Bureau, the population of Warren County increased 29.0% from
1990 to 2005 to an estimated 99,000 residents in 2005. According
to the Kentucky Cabinet for Economic Development, Warren and
Simpson Counties have attracted more than $560.0 million in
new business investments and added over 3,450 new jobs in the
last three years. In 2006, Forbes magazine named Bowling Green
14th in the U.S. on its list of Best Small Places for
Business. A 2006 publication of the Federal Reserve Bank
of St. Louis also cites Bowling Greens significant
employment growth, noting that total payroll employment in
Bowling Green increased 13% from November 2001 to
April 2006.
The economic strength of our market area is generated by private
employers engaged in manufacturing, retail and service
industries. In addition to Western Kentucky University, leading
employers in our market area include General Motors Corporation,
Commonwealth Health Corporation, DESA, LLC, a manufacturer of
portable gas heaters and generators, R.R. Donnelley, a financial
printer, and Dana Corporation, an automobile parts manufacturer.
According to FDIC data as of June 30, 2005, Warren and
Simpson Counties had total deposits of approximately
$1.6 billion, an increase of approximately
$431.6 million, or 37.9%, from June 30, 2000. As of
June 30, 2005, we had a 9.8% market share in Warren County
and a 5.3% market share in Simpson County. Over 70.0% of the
deposits in Warren County were held by financial institutions
with headquarters located outside Warren County. We believe the
demographic trends and growth characteristics of our market area
will continue to provide us with significant organic growth
opportunities in the future.
Upon the completion of our acquisition of Kentucky Banking
Centers, we will have offices in Barren and Hart Counties in
Kentucky. According to FDIC data as of June 30, 2005, this
two-county area had total deposits of $723.4 million at
June 30, 2005, an increase of approximately
$127.2 million, or 21.3%, from June 30, 2000, with
most of this growth occurring in Barren County. Our presence in
this market will allow us to benefit from the growth occurring
in Barren County and will provide us with access to a solid
source of core deposits in Hart County.
Our
Background and Strategy
Following the sale of Trans Financial in early 1998, a group of
local civic and business leaders in the Bowling Green area
determined that the community needed a new locally owned bank
because of their concern that the absence of a locally owned and
managed bank would ultimately serve as a drain on the Bowling
Green economy. These community leaders became the initial
organizers of our bank, using a private investment club
organized in 1975 to serve as our holding company. The
organizers recruited Ms. Cohron and others to organize and
operate the bank and capitalized it with over $1.8 million
of the investment clubs funds. We raised the remainder of
our initial capital through a public offering in early 1999,
with most of our shareholders coming from the Bowling Green
community. We opened for business in February 1999, less than a
year following the sale of Trans Financial. Of our initial 28
employees, 25 were former Trans Financial employees.
From the time of our initial public offering and continuing to
the present, we have been the only public company headquartered
in the Bowling Green area. We believe our status as the only
local public company has helped to position us as the leading
community bank in the Bowling Green area. From the outset we
have been focused on providing a consistent and superior level
of professional service to our customers through timely
responses to customer requests, customized financial products
and services and the personal attention of senior banking
officers.
We continue to emphasize experienced local management with a
strong commitment to the communities we serve. We have an
ongoing and vested interest in the economic development and
continued growth of Bowling Green and the surrounding region. As
a locally owned and managed community bank, our success depends
on the continued economic growth that the area has enjoyed over
the past decade. Our commitment to, and knowledge of, our market
area has proven effective for us in attracting customers,
fostering loyalty and maintaining strong asset quality.
29
Lending
Activities
General. We offer a variety of loans,
including real estate, construction, commercial and consumer
loans to individuals and small- to mid-size businesses that are
located in or conduct a substantial portion of their business in
our market area. Our underwriting standards vary for each type
of loan, as described below. At June 30, 2006, we had total
loans of $160.5 million, representing 79.1% of our total
assets.
Commercial Loans. We make commercial loans
primarily to small- and medium-sized businesses. At
June 30, 2006, our commercial loans had an average size of
$108,000 and the largest loan was $2.0 million. 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 borrowers business operations as the principal source of
repayment, but will also require, when appropriate, security
interests in personal property and personal guarantees. In
addition, the majority of commercial loans that are not mortgage
loans are secured by a lien on equipment, inventory and other
assets of the commercial borrower. At June 30, 2006,
commercial loans amounted to $47.5 million, or 29.6%, of
our total loan portfolio, excluding for these purposes
commercial loans secured by real estate which are included in
the commercial real estate category.
Commercial Real Estate Loans. We originate and
maintain a significant amount of commercial real estate loans.
At June 30, 2006, our commercial real estate loans had an
average size of $227,000 and the largest loan was
$2.0 million. This lending involves loans secured by
multi-family residential units, income-producing properties and
owner-occupied commercial properties. Loan amounts generally
conform to the regulatory
loan-to-value
guidelines and amortizations match the economic life of the
collateral, with a maximum amortization schedule of
20 years. Loans secured by commercial real estate are
generally subject to a maximum term of 20 years. At
June 30, 2006, total commercial real estate loans amounted
to $59.1 million, or 36.9% of our loan portfolio.
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
borrowers operations. We attempt to minimize the risks
associated with these transactions by generally limiting our
exposure to owner-operated properties of customers with an
established profitable history. In many cases, risk can be
further 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.
Residential Real Estate Loans. We originate
residential mortgage loans with either fixed or variable
interest rates to borrowers to purchase and refinance
one-to-four
family properties. At June 30, 2006, our residential real
estate loans had an average size of $56,000 and the largest loan
was $891,000. We also offer home equity loans which are secured
by prior liens on the subject residence. Except for home equity
loans and lines of credit, substantially all of our residential
real estate loans are secured by a first lien on the real
estate. Loans secured by residential real estate with variable
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 five years and a
maximum amortization schedule of five years. At June 30,
2006, total residential real estate loans amounted to
$44.4 million, or 27.6% of our loan portfolio.
We provide customers access to long-term conventional real
estate loans through our mortgage loan division, which
underwrites loans that are funded by unaffiliated third party
brokers in the secondary market. We receive fees in connection
with the origination of mortgage loans, with these fees
aggregating $141,000 for the six months ended June 30, 2006
and $343,000 for the year ended December 31, 2005. We do
not retain servicing rights with respect to the secondary market
residential mortgage loans that we originate.
Consumer. 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. At
June 30, 2006, our consumer loans had an average size of
$9,000, and the largest loan was $219,000. Consumer loans
generally have shorter terms and higher interest rates than
30
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
borrowers 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 emphasize 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 borrowers 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.
At June 30, 2006, total consumer loans amounted to
$9.5 million, or 5.9% of our loan portfolio.
Loan Underwriting and Approval. We seek to
make sound, high quality loans while recognizing that lending
money involves a degree of business risk. Our loan policies are
designed to assist us in managing this business risk. 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.
Our policies provide that individual officers have personal
lending authority within varied ranges. Credits in excess of an
officers lending authority but not in excess of $750,000
require the approval of an executive officer and at least two
senior lenders. Credits in excess of $750,000 but less than
$1.5 million require the approval of the Chief Credit
Officer, the Chief Executive Officer and at least two senior
lenders. Credits in excess of $1.5 million but less than
$2.5 million require the approval of the loan committee of
the board of directors, and credits in excess of
$2.5 million require the approval of the board of directors.
Lending Limits. Our lending activities are
subject to a variety of lending limits imposed by state and
federal law. In general, the bank is subject to a legal limit on
loans to a single borrower equal to 30% of the banks
capital and unimpaired surplus for secured loans and 20% of the
banks capital and unimpaired surplus for unsecured loans.
This limit will increase or decrease as the banks capital
increases or decreases. Based upon the capitalization of the
bank at June 30, 2006, we have a legal lending limit of
$5.1 million for secured loans per borrower and
$3.4 million for unsecured loans per borrower. Our internal
lending limits follow these limitations and are generally more
restrictive than the limits required by law. We are able to sell
participations in our larger loans to other financial
institutions, which allow us to manage the risk involved in
these loans and to meet the lending needs of our clients
requiring extensions of credit in excess of these limits.
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:
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raw land (65.0%);
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improved residential real estate lots (80.0%);
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commercial real estate (80.0%); and
|
|
|
|
residences (90.0%).
|
When appropriate, we make use of credit risk insurance,
principally for residential real estate mortgages where the
loan-to-value
ratio exceeds 90.0%. 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 follow these limits and are often 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 borrowers
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
31
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 include maximum
amortization schedules and loan terms for each category of loans
secured by liens on real estate.
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 without board approval where the
aggregate liability of the borrower to us will exceed
$2.5 million. This internal lending limit 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, an 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.
Deposit
Services
Our principal source of funds is core deposits. We offer a range
of deposit products and services consistent with the goal of
attracting a wide variety of customers, including small- to
medium-sized businesses. 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 offer a deposit
pick-up
service to our commercial customers that enables these customers
to make daily cash deposits through one of our couriers. Our
newest service is a remote deposit program whereby commercial
customers can electronically scan checks at their place of
business. These scanned images replace the original paper
documents that can be then settled through the check clearing
network.
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.
Other
Banking 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, we offer extended
drive-through hours, ATMs, and banking by telephone, mail and
personal appointment. We have nine ATMs and have joined an ATM
network which has ATMs at convenience stores and service
stations. We also provide debit and credit card services through
third parties and also offer night depository, direct deposits,
Series E Savings Bond redemptions, cashiers and
travelers checks and letters of credit. We have also established
relationships with correspondent banks and other independent
financial institutions to provide other services requested by
customers, including cash management services, wire transfer
services, credit card services and loan participations where the
requested loan amount exceeds the lending limits imposed by law
or by our policies, as well as other services such as check
collection and purchase and sale of federal funds. Our agreement
with a third-party service provider makes available to customers
convenient telephonic access to their accounts while reducing
the personnel and equipment required to provide these services.
We maintain an internet banking website at
www.citizensfirstbank.com, which allows customers to
obtain account balances and transfer funds among accounts. The
website also provides online bill payment and electronic
delivery of customer statements.
We provide title insurance services to mortgage loan customers
for a fee and, through third party providers, we offer other
insurance services and trust 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.
32
Rather than incurring the cost of conducting the data management
function directly, we have entered into an agreement with
Fiserv, Inc. in which Fiserv provides, among other things,
on-line facilities, daily financial report preparation, loan and
deposit data processing and customer account statement
preparation. 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.
Competition
The banking business is highly competitive, and we experience
competition in our market from many other financial
institutions. We compete for deposits, loans and other banking
services with numerous well established financial institutions
that have vastly greater financial and human resources than
those available to us. 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.
Our market area has experienced substantial consolidation in
recent years within the banking industry. Many of the
areas 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. This type
of consolidation is expected to continue.
Our most competitive market is the Bowling Green market area. As
of June 30, 2005, there were 15 financial institutions
operating a total of 48 offices in Warren County and six
financial institutions operating a total of 10 offices in
Simpson County. The number of banking offices in the Bowling
Green market has nearly doubled since 1998. We compete with
these institutions both in attracting deposits and in making
loans. We have to attract our customer base from other existing
financial institutions and from new residents. Many of our
competitors are well established, larger financial institutions
with substantially greater resources and lending limits than we
have. These institutions offer some services, such as extensive
and established branch networks and trust services, that we do
not provide. In addition, many of our non-bank competitors are
not subject to the same extensive federal regulations that
govern bank holding companies and federally insured banks.
Employees
As of June 30, 2006, we had 57 full-time employees and
17 part-time employees. Upon consummation of our
acquisition of Kentucky Banking Centers, we currently anticipate
that we will have 94 full-time employees and
21 part-time employees.
33
Properties
We currently operate from a five office network in Warren and
Simpson Counties, Kentucky.
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Type of Office
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Location
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Leased or Owned
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Main Office
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1065 Ashley Street
Bowling Green, Kentucky 42103
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Owned
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Branch
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1805 Campbell Lane
Bowling Green, Kentucky 42104
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Owned
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Branch
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901 Lehman Avenue
Bowling Green, Kentucky
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Leased
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(1)
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Branch
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1200 S. Main Street
Franklin, Kentucky
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Owned
|
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Branch
|
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2451 Fitzgerald-Industrial Drive
Bowling Green, Kentucky
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Owned
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(1) |
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We have purchased property at 987 Lehman Avenue, Bowling Green,
Kentucky near our current Lehman Avenue branch and intend to
relocate that branch to the new location. We expect to begin
construction of the new location in the third quarter of 2006. |
We have purchased property located at 705 North Main Street in
Franklin, Kentucky, and we anticipate opening an office at this
location in November 2006. We have also entered into a contract
to purchase property located at 2900 Louisville Road in Bowling
Green, and we anticipate opening a branch at this location in
2007. We believe that all of our properties are adequately
covered by insurance.
Legal
Proceedings
In the ordinary course of operations, we may be a party to
various legal proceedings from time to time. We do not believe
that there is any pending or threatened proceeding against us,
which, if determined adversely, would have a material effect on
our business, results of operations or financial condition.
34
CITIZENS
FIRST CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS
The following discussion reviews our results of operations
and assesses our financial condition. You should read the
following discussion and analysis in conjunction with our
Summary Consolidated Financial Data and our
consolidated financial statements and related notes thereto
included elsewhere in this prospectus. Our discussion and
analysis for the periods ended June 30, 2006 and 2005 is
based on unaudited financial statements for such periods
included elsewhere in this prospectus.
Overview
We are a one bank holding company headquartered in Bowling
Green, Kentucky. Since we opened Citizens First Bank, Inc. in
1999, we have expanded to five offices with $202.9 million
in total assets as of June 30, 2006. In June 2006, we
entered into an agreement with Farmers Capital Bank Corporation
to purchase 100% of the outstanding stock of Kentucky Banking
Centers, a Kentucky state chartered bank headquartered in
Glasgow, Kentucky, for $20.0 million.
The following table sets forth selected measures of our
financial performance for the periods indicated.
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Six Months Ended
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|
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Years Ended
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June 30,
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December 31,
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|
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2006
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|
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2005
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2005
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|
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2004
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|
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2003
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(Dollars in thousands)
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|
|
Net income
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|
$
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1,027
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|
|
$
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955
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|
|
$
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2,237
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|
|
$
|
1,038
|
|
|
$
|
(290
|
)
|
Total assets
|
|
|
202,855
|
|
|
|
179,596
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|
|
|
195,502
|
|
|
|
169,512
|
|
|
|
163,420
|
|
Total loans, net of unearned income
|
|
|
160,484
|
|
|
|
156,554
|
|
|
|
157,569
|
|
|
|
146,950
|
|
|
|
134,715
|
|
Total deposits
|
|
|
161,992
|
|
|
|
140,627
|
|
|
|
156,377
|
|
|
|
130,529
|
|
|
|
133,729
|
|
Shareholders equity
|
|
|
20,640
|
|
|
|
19,119
|
|
|
|
19,958
|
|
|
|
18,177
|
|
|
|
9,610
|
|
Like most community banks, we derive the majority of our income
from interest received on our loans and investments. Our primary
source of funds for making these loans and investments is our
deposits and advances from the Federal Home Loan Bank of
Cincinnati (FHLB). Consequently, one of the key
measures of our success is our amount of net interest income, or
the difference between the income earned on our interest earning
assets, such as loans and securities, and the interest paid on
our interest bearing liabilities, such as deposits and advances
from FHLB. Another key measure is the spread between the yield
we earn on these interest earning assets and the rate we pay on
our interest bearing liabilities.
We have included a number of tables to assist in our description
of these measures. For example, the Average Consolidated
Balance Sheets and Analysis of Changes in Net Interest
Income tables show for the periods indicated the average
balance for each category of our assets and liabilities, as well
as the yield we earned or the rate we paid with respect to each
category. A review of these tables show that our loans typically
provide higher interest yields than do other types of interest
earning assets, which is why we intend to channel a substantial
percentage of our earning assets into our loan portfolio.
Similarly, the Rate/Volume Analysis tables help
demonstrate the impact of changing interest rates and changing
volume of assets and liabilities during the periods shown. We
also track the sensitivity of our various categories of assets
and liabilities to changes in interest rates, and we have
included an Interest Sensitivity Analysis Table to
help explain this. Finally, we have included a number of tables
that provide detail about our securities, loans, deposits and
other borrowings.
There are risks inherent in all loans, so we maintain an
allowance for loan losses to absorb probable incurred credit
losses on existing loans that may become uncollectible. We
maintain this allowance by charging a provision for loan losses
against our operating earnings. In the
Loans and Asset
Quality and Allowance for Loan Losses sections, we have
included a detailed discussion of this process, as well as
several tables describing our allowance for loan losses and the
allocation of this allowance among our various categories of
loans.
35
In addition to earning interest on our loans and investments, we
earn income through fees and other expenses we charge to our
customers. We describe the various components of this
noninterest income, as well as our noninterest expense, in the
Noninterest Income and
Noninterest Expense sections.
The following discussion and analysis also identifies
significant factors that have affected our financial position
and operating results during the periods included in the
accompanying financial statements. We encourage you to read this
discussion and analysis in conjunction with the financial
statements and other statistical information also included in
this prospectus.
Application
of Critical Accounting Policies
Our consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United
States and practices followed generally within the financial
services industry. Our most significant accounting policies 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 discussion,
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, we believe
the determination of our allowance for loan losses requires the
most subjective or complex judgments and could be most subject
to revision as new information becomes available.
The allowance for loan losses represents managements
estimate of probable incurred credit losses inherent in our loan
portfolio. The loan portfolio also represents the largest asset
type on the consolidated balance sheet. We consider the
determination of the amount of our allowance for loan losses to
be a critical accounting policy 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. Note 1
to the consolidated financial statements describes the
methodology we use to determine the allowance for loan losses,
and we have discussed the factors driving changes in the amount
of the allowance for loan losses under Asset
Quality and Allowance for Loan Losses below.
We review loans that exhibit probable or observed credit
weaknesses individually. Where appropriate, we allocate reserves
to individual loans based on our estimate of the borrowers
ability to repay the loan given the availability of collateral,
other sources of cash flow and legal options available to us. We
include in our review of individual loans those that are
impaired under 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, and we apply historical loss rates to
other loans that are not subject to reserve allocations. We may
adjust these historical loss rates for significant factors that,
in our judgment, reflect the impact of any current conditions on
loss recognition, such as 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.
We maintain a modest unallocated reserve to recognize the
imprecision in estimating and measuring losses when evaluating
reserves for individual loans or pools of loans. We review our
reserves on individual loans and historical loss rates quarterly
and adjust them as necessary based on changing borrower
and/or
collateral conditions and actual collection and charge-off
experience.
We have not made any substantive changes in our overall approach
in determining our allowance for loan losses or our assumptions
or estimation techniques that impacted the determination of the
current period allowance as compared to prior periods.
Based on the procedures discussed above, we are of the opinion
that the allowance for loan losses of $1.9 million was
adequate to absorb probable incurred credit losses associated
with the loan portfolio at June 30, 2006.
We had a net deferred tax asset of $686,000 as of June 30,
2006, which we evaluate on a quarterly basis. To the extent we
believe it is more likely than not that it will not be used, we
will establish a valuation
36
allowance to reduce the assets carrying amount to the
amount we expect to be realized. At June 30, 2006, we have
not established a valuation allowance against the outstanding
deferred tax asset. We will use the deferred tax asset 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
Overview
Years
Ended December 31, 2005 and 2004
In 2005, we recorded net income of $2.2 million, or
$1.83 per basic common share and $1.47 per diluted
common share. This compares to net income of $1.0 million,
or $0.86 per basic and diluted common share, in 2004.
Three and
Six Months Ended June 30, 2006 and 2005
We reported net income for the three months ended June 30,
2006 of $478,000, or $0.37 and $0.31 per basic and diluted
common share, respectively, compared to net income of $505,000,
or $0.40 and $0.33 per basic and diluted common share,
respectively, for the three months ended June 30, 2005.
We reported net income of $1.0 million for the six months
ended June 30, 2006, an increase of $72,000, or 7.5%,
compared to $955,000 reported for the six months ended
June 30, 2005. Basic and diluted net income per share was
$0.82 and $0.67, respectively, for the six months ended
June 30, 2006, compared to $0.74 and $0.63 for the six
months ended June 30, 2005. During the first six months of
2006, we recorded an expense of $135,000 net of taxes
related to our stock option programs. Under new accounting
standards, these expenses are now required to be recorded
whereas they were not required to be recorded in the first half
of 2005.
Our return on average assets was 1.04% for the six months ended
June 30, 2006 compared to 1.11% for the previous year.
Return on average assets for the bank was 1.25% for the six
months ended June 30, 2006 compared to 1.18% for the
previous year. Our annualized return on average equity was
10.11% for the six months ending June 30, 2006 compared to
an annualized return of 10.28% for the six months ending
June 30, 2005.
Net
Interest Income
Years
Ended December 31, 2005 and 2004
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
noninterest bearing deposits supporting earning assets.
For the year ended December 31, 2005, net interest income
was $7.7 million, an increase of $1.6 million over our
net interest income of $6.1 million in 2004. The increase
in 2005 resulted primarily from continued growth of loans and
deposits, as we continued to increase our market share in our
principal area of operations. The net interest margin in 2005
was 4.58%, compared to 3.90% in 2004. This increase of
68 basis points is primarily attributable to the continued
increase in the yield on interest earning assets, particularly
due to the prime rate increases occurring during 2005.
Net
Interest Analysis Summary
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Average yield on interest earning
assets
|
|
|
6.57%
|
|
|
|
5.54%
|
|
Average rate on interest bearing
liabilities
|
|
|
2.30%
|
|
|
|
1.85%
|
|
Net interest rate spread
|
|
|
4.27%
|
|
|
|
3.69%
|
|
Net interest margin
|
|
|
4.58%
|
|
|
|
3.90%
|
|
37
The following table sets forth for the years ended
December 31, 2005 and 2004 information regarding average
balances of assets and liabilities as well as the amounts of
interest income from average interest earning assets and
interest expense on average interest bearing liabilities and
average yields and costs. We have calculated the yields and
costs for the periods indicated by dividing income or expense by
the average balances of assets or liabilities, respectively, for
the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate (%)
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate (%)
|
|
|
ASSETS
|
Interest earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other
|
|
$
|
1,958
|
|
|
$
|
73
|
|
|
|
3.73
|
%
|
|
$
|
1,552
|
|
|
$
|
22
|
|
|
|
1.42
|
%
|
Available for sale securities
|
|
|
12,502
|
|
|
|
472
|
|
|
|
3.78
|
%
|
|
|
13,132
|
|
|
|
515
|
|
|
|
3.92
|
%
|
FHLB stock
|
|
|
595
|
|
|
|
30
|
|
|
|
5.04
|
%
|
|
|
561
|
|
|
|
23
|
|
|
|
4.10
|
%
|
Loans(1)
|
|
|
153,501
|
|
|
|
10,499
|
|
|
|
6.84
|
%
|
|
|
140,470
|
|
|
|
8,061
|
|
|
|
5.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
168,556
|
|
|
|
11,074
|
|
|
|
6.57
|
%
|
|
|
155,715
|
|
|
|
8,621
|
|
|
|
5.54
|
%
|
Non-earning assets
|
|
|
11,905
|
|
|
|
|
|
|
|
|
|
|
|
10,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
180,461
|
|
|
|
|
|
|
|
|
|
|
$
|
165,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing transaction
accounts
|
|
$
|
49,513
|
|
|
$
|
504
|
|
|
|
1.02
|
%
|
|
$
|
53,309
|
|
|
$
|
510
|
|
|
|
0.96
|
%
|
Savings accounts
|
|
|
3,026
|
|
|
|
23
|
|
|
|
0.76
|
%
|
|
|
2,895
|
|
|
|
19
|
|
|
|
0.66
|
%
|
Time deposits
|
|
|
74,135
|
|
|
|
2,379
|
|
|
|
3.21
|
%
|
|
|
61,106
|
|
|
|
1,606
|
|
|
|
2.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
126,674
|
|
|
|
2,906
|
|
|
|
2.29
|
%
|
|
|
117,310
|
|
|
|
2,135
|
|
|
|
1.82
|
%
|
Securities sold under repurchase
agreements
|
|
|
3,663
|
|
|
|
32
|
|
|
|
0.87
|
%
|
|
|
4,266
|
|
|
|
37
|
|
|
|
0.87
|
%
|
Federal funds purchased
|
|
|
1,235
|
|
|
|
44
|
|
|
|
3.56
|
%
|
|
|
906
|
|
|
|
15
|
|
|
|
1.66
|
%
|
FHLB borrowings
|
|
|
14,100
|
|
|
|
371
|
|
|
|
2.63
|
%
|
|
|
13,385
|
|
|
|
288
|
|
|
|
2.15
|
%
|
Other borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,394
|
|
|
|
67
|
|
|
|
4.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
145,672
|
|
|
|
3,353
|
|
|
|
2.30
|
%
|
|
|
137,261
|
|
|
|
2,542
|
|
|
|
1.85
|
%
|
Noninterest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits
|
|
|
14,527
|
|
|
|
|
|
|
|
|
|
|
|
13,330
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
1,092
|
|
|
|
|
|
|
|
|
|
|
|
980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
161,291
|
|
|
|
|
|
|
|
|
|
|
|
151,571
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
19,170
|
|
|
|
|
|
|
|
|
|
|
|
14,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
180,461
|
|
|
|
|
|
|
|
|
|
|
$
|
165,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
7,721
|
|
|
|
|
|
|
|
|
|
|
$
|
6,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
4.27
|
%
|
|
|
|
|
|
|
|
|
|
|
3.69
|
%
|
Net interest
margin(2)
|
|
|
|
|
|
|
|
|
|
|
4.58
|
%
|
|
|
|
|
|
|
|
|
|
|
3.90
|
%
|
Return on average assets
|
|
|
|
|
|
|
|
|
|
|
1.24
|
%
|
|
|
|
|
|
|
|
|
|
|
0.63
|
%
|
Return on average equity
|
|
|
|
|
|
|
|
|
|
|
11.67
|
%
|
|
|
|
|
|
|
|
|
|
|
7.24
|
%
|
Equity to assets ratio
|
|
|
|
|
|
|
|
|
|
|
10.62
|
%
|
|
|
|
|
|
|
|
|
|
|
8.64
|
%
|
|
|
|
(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 interest earning assets. |
38
Rate/Volume
Analysis
Net interest income can be analyzed in terms of the impact of
changing interest rates and changing volume. The following table
sets forth the effect which the varying levels of interest
earning assets and interest bearing liabilities and the
applicable rates have had on changes in net interest income for
the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005 vs. 2004
|
|
|
|
Increase/(Decrease)
|
|
|
|
|
|
|
Due to
|
|
|
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Net
|
|
|
|
(Dollars in thousands)
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
1,690
|
|
|
$
|
748
|
|
|
$
|
2,438
|
|
Available for sale securities
|
|
|
(18
|
)
|
|
|
(25
|
)
|
|
|
(43
|
)
|
FHLB stock
|
|
|
6
|
|
|
|
1
|
|
|
|
7
|
|
Federal funds sold
|
|
|
45
|
|
|
|
6
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net change in income on
interest earning assets
|
|
|
1,723
|
|
|
|
730
|
|
|
|
2,453
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing transaction
accounts
|
|
|
30
|
|
|
|
(36
|
)
|
|
|
(6
|
)
|
Savings accounts
|
|
|
3
|
|
|
|
1
|
|
|
|
4
|
|
Time deposits
|
|
|
431
|
|
|
|
342
|
|
|
|
773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
464
|
|
|
|
307
|
|
|
|
771
|
|
Federal funds purchased
|
|
|
24
|
|
|
|
5
|
|
|
|
29
|
|
Securities sold under repurchase
agreements
|
|
|
|
|
|
|
(5
|
)
|
|
|
(5
|
)
|
FHLB borrowings
|
|
|
68
|
|
|
|
15
|
|
|
|
83
|
|
Other borrowings
|
|
|
|
|
|
|
(67
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net change in expense on
interest bearing liabilities
|
|
|
556
|
|
|
|
255
|
|
|
|
811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in net interest income
|
|
$
|
1,167
|
|
|
$
|
475
|
|
|
$
|
1,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and
Six Months Ended June 30, 2006 and 2005
For the quarter ended June 30, 2006, net interest income
was $2.2 million, an increase of $296,000 over net interest
income of $1.9 million in 2005. The increase in 2006
resulted primarily from the increase in interest rates, as well
as the growth in volume of loans and deposits. For the six
months ended June 30, 2006, net interest income was
$4.3 million on a tax-equivalent basis, an increase of
$645,000 over net interest income of $3.6 million in 2005.
The net interest margin for the six months ended June 30,
2006 was 4.71%, compared to 4.49% in 2005. This increase of
22 basis points is attributable to the increase in the
yield on interest earning assets, primarily loans, rising faster
than the cost of interest bearing liabilities. The prime rate
increased 2% from 6.25% at June 30, 2005 to 8.25% at
June 30, 2006, which favorably increased interest income on
earning assets.
Net
Interest Analysis Summary
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Average yield on interest earning
assets
|
|
|
7.37%
|
|
|
|
6.25%
|
|
Average rate on interest bearing
liabilities
|
|
|
3.05%
|
|
|
|
2.06%
|
|
Net interest rate spread
|
|
|
4.32%
|
|
|
|
4.19%
|
|
Net interest margin
|
|
|
4.71%
|
|
|
|
4.49%
|
|
39
The following table sets forth for the six months ended
June 30, 2006, and 2005, respectively, 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. We have
calculated the yields and costs for the periods indicated by
dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2006
|
|
|
June 30, 2005
|
|
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate (%)
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate (%)
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Interest earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
$
|
10,202
|
|
|
$
|
238
|
|
|
|
4.70
|
%
|
|
$
|
1,017
|
|
|
$
|
14
|
|
|
|
2.74
|
%
|
Available for sale
securities(1)
|
|
|
12,690
|
|
|
|
258
|
|
|
|
4.10
|
%
|
|
|
12,707
|
|
|
|
239
|
|
|
|
3.79
|
%
|
FHLB stock
|
|
|
634
|
|
|
|
18
|
|
|
|
5.73
|
%
|
|
|
587
|
|
|
|
13
|
|
|
|
4.81
|
%
|
Loans(2)
|
|
|
160,272
|
|
|
|
6,207
|
|
|
|
7.81
|
%
|
|
|
149,357
|
|
|
|
4,804
|
|
|
|
6.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
183,797
|
|
|
|
6,721
|
|
|
|
7.37
|
%
|
|
|
163,668
|
|
|
|
5,070
|
|
|
|
6.25
|
%
|
Non-earning assets
|
|
|
14,551
|
|
|
|
|
|
|
|
|
|
|
|
10,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
198,348
|
|
|
|
|
|
|
|
|
|
|
$
|
173,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS
EQUITY
|
Interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing transaction
accounts
|
|
$
|
48,688
|
|
|
$
|
294
|
|
|
|
1.22
|
%
|
|
$
|
50,332
|
|
|
$
|
251
|
|
|
|
1.01
|
%
|
Savings accounts
|
|
|
3,098
|
|
|
|
18
|
|
|
|
1.17
|
%
|
|
|
3,143
|
|
|
|
11
|
|
|
|
0.71
|
%
|
Time deposits
|
|
|
92,164
|
|
|
|
1,841
|
|
|
|
4.03
|
%
|
|
|
67,851
|
|
|
|
977
|
|
|
|
2.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
143,950
|
|
|
|
2,153
|
|
|
|
3.01
|
%
|
|
|
121,326
|
|
|
|
1,239
|
|
|
|
2.06
|
%
|
Federal funds purchased
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
1,474
|
|
|
|
22
|
|
|
|
3.01
|
%
|
Securities sold under repurchase
agreements
|
|
|
3,416
|
|
|
|
27
|
|
|
|
1.59
|
%
|
|
|
3,928
|
|
|
|
17
|
|
|
|
0.87
|
%
|
FHLB borrowings
|
|
|
13,342
|
|
|
|
252
|
|
|
|
3.81
|
%
|
|
|
13,066
|
|
|
|
148
|
|
|
|
2.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
160,710
|
|
|
|
2,432
|
|
|
|
3.05
|
%
|
|
|
139,794
|
|
|
|
1,426
|
|
|
|
2.06
|
%
|
Noninterest bearing deposits
|
|
|
15,822
|
|
|
|
|
|
|
|
|
|
|
|
14,169
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
1,321
|
|
|
|
|
|
|
|
|
|
|
|
1,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
177,854
|
|
|
|
|
|
|
|
|
|
|
|
155,016
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
20,494
|
|
|
|
|
|
|
|
|
|
|
|
18,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
198,348
|
|
|
|
|
|
|
|
|
|
|
$
|
173,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
4,289
|
|
|
|
|
|
|
|
|
|
|
$
|
3,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
4.32
|
%
|
|
|
|
|
|
|
|
|
|
|
4.19
|
%
|
Net interest
margin(3)
|
|
|
|
|
|
|
|
|
|
|
4.71
|
%
|
|
|
|
|
|
|
|
|
|
|
4.49
|
%
|
Return on average assets
|
|
|
|
|
|
|
|
|
|
|
1.04
|
%
|
|
|
|
|
|
|
|
|
|
|
1.11
|
%
|
Return on average equity
|
|
|
|
|
|
|
|
|
|
|
10.11
|
%
|
|
|
|
|
|
|
|
|
|
|
10.28
|
%
|
Equity to assets ratio
|
|
|
|
|
|
|
|
|
|
|
10.33
|
%
|
|
|
|
|
|
|
|
|
|
|
10.78
|
%
|
|
|
|
(1) |
|
Income and yield stated at a tax equivalent basis for nontaxable
securities using the marginal corporate Federal tax rate of
34.0%. |
|
|
|
(2) |
|
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. |
|
|
|
(3) |
|
Net interest income as a percentage of interest earning assets. |
40
The following table sets forth the effect which the varying
levels of interest earning assets and interest bearing
liabilities and the applicable rates have had on changes in net
interest income for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30, 2006 vs. 2005
|
|
|
|
Increase/(Decrease)
|
|
|
|
|
|
|
Due to
|
|
|
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Net
|
|
|
|
(Dollars in thousands)
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
1,052
|
|
|
$
|
351
|
|
|
$
|
1,403
|
|
Available for sale securities
|
|
|
19
|
|
|
|
|
|
|
|
19
|
|
FHLB stock
|
|
|
4
|
|
|
|
1
|
|
|
|
5
|
|
Federal funds sold
|
|
|
98
|
|
|
|
126
|
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net change in income on
interest earning assets
|
|
|
1,173
|
|
|
|
478
|
|
|
|
1,651
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing transaction
accounts
|
|
|
51
|
|
|
|
(8
|
)
|
|
|
43
|
|
Savings accounts
|
|
|
7
|
|
|
|
|
|
|
|
7
|
|
Time deposits
|
|
|
514
|
|
|
|
350
|
|
|
|
864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
572
|
|
|
|
342
|
|
|
|
914
|
|
Federal funds purchased
|
|
|
|
|
|
|
(22
|
)
|
|
|
(22
|
)
|
Securities sold under repurchase
agreements
|
|
|
12
|
|
|
|
(2
|
)
|
|
|
10
|
|
FHLB borrowings
|
|
|
101
|
|
|
|
3
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net change in expense on
interest bearing liabilities
|
|
|
685
|
|
|
|
321
|
|
|
|
1,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in net interest income
|
|
$
|
488
|
|
|
$
|
157
|
|
|
$
|
645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Loan Losses
We have established an allowance for loan losses through a
provision for loan losses charged as an expense on our statement
of operations. We review our loan portfolio periodically to
evaluate our outstanding loans and to measure both the
performance of the portfolio and the adequacy of the allowance
for loan losses. Please see the discussion below under
Asset Quality and the Allowance for Loan
Losses.
For the
Years Ended December 31, 2005 and 2004
We made a negative provision for loan losses in 2005 of
$200,000, or 0.13% of average loans, compared to a positive
provision of $165,000, or 0.12% of average loans, during 2004.
The decrease in the provision expense in 2005, compared to 2004,
was primarily a result of the judgment award of $1.1 million
received in November, 2005 from the Texas court system. From the
proceeds of this award, $518,000 was applied to a nonperforming
loan, $60,000 was collection expense and the remaining $521,000
was recorded as a recovery of a loan charged off in 2003. With
the resulting decrease in total nonperforming loans and
internally classified loans, a negative provision for 2005 was
recorded to properly maintain the allowance for loan losses.
Another factor which influences provision expense is the growth
of the loan portfolio. The net increase in loans for 2005 was
$10.6 million, compared to $12.2 million in 2004,
reflecting a slightly declining trend. However, during the last
six months of 2005, loan growth had stabilized further and
increased from $156.6 million at June 30, 2005 to
$157.6 million at December 31, 2005, an increase of
$1.0 million.
Three and
Six Months Ended June 30, 2006 and 2005
No provision for loan losses was deemed necessary in 2006
resulting in a decrease of $85,000 and $120,000, respectively,
for the quarter and year to date ended June 30, 2006. The
decision not to record a
41
provision expense in 2006 is attributed to continued improvement
in the credit quality of our loan portfolio, including a decline
in classified loans and stable loan growth. Nonperforming loans
totaled $687,000 at June 30, 2006 compared to $769,000 at
June 30, 2005. Nonperforming loans to total loans ratio was
0.43% and 0.49% at June 30, 2006 and 2005, respectively.
Management continues to evaluate the risks within the loan
portfolio and emphasize collection efforts.
Noninterest
Income
Years
Ended December 31, 2005 and 2004
Our noninterest income totaled $1.5 million in 2005,
compared to $1.4 million in 2004, an increase of $46,000,
or 3.23%. The following table shows the detailed components of
noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2005
|
|
|
2004
|
|
|
(Decrease)
|
|
|
|
(Dollars in thousands)
|
|
|
Service charges on deposit accounts
|
|
$
|
808
|
|
|
$
|
835
|
|
|
$
|
(27
|
)
|
Other service charges and fees
|
|
|
73
|
|
|
|
91
|
|
|
|
(18
|
)
|
Gain on the sale of mortgage loans
held for sale
|
|
|
343
|
|
|
|
414
|
|
|
|
(71
|
)
|
Title premium fees
|
|
|
52
|
|
|
|
53
|
|
|
|
(1
|
)
|
Title closing fees
|
|
|
16
|
|
|
|
12
|
|
|
|
4
|
|
Trust referral fees
|
|
|
16
|
|
|
|
12
|
|
|
|
4
|
|
Gain (loss) on the sale of
available for sale securities
|
|
|
0
|
|
|
|
(34
|
)
|
|
|
34
|
|
Lease income
|
|
|
100
|
|
|
|
1
|
|
|
|
99
|
|
Other income
|
|
|
68
|
|
|
|
46
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,476
|
|
|
$
|
1,430
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The major variance in noninterest income in 2005 came from the
increase in lease income in 2005 as compared to 2004. This
increase resulted from our purchase of a building at 1065 Ashley
Circle in Bowling Green, which is now our main office. The
majority of the first floor of the building is leased to three
commercial tenants.
Gain on the sale of mortgage loans held for sale decreased
$71,000 in 2005 as compared to 2004. Rising interest rates in
2005 reduced demand for refinancing in the mortgage loan market.
Gain (loss) on the sale of
available-for-sale
securities increased $34,000 in 2005, as a loss of $34,000 was
incurred during 2004, while there were no sales during 2005. We
refer trust business to a trust company in return for referral
fees. These trust referral fees totaled $16,000 in 2005 and
$13,000 during 2004.
Three and
Six Months Ended June 30, 2006 and 2005
Noninterest income for the three months ended June 30, 2006
and 2005 was $381,000 and $361,000, respectively, an increase of
$20,000, or 5.5%. Income from service charges on deposit
accounts decreased $24,000, or 11.3%, to $189,000 during the
second quarter of 2006 from $213,000 for the second quarter of
2005. The volume of fees collected on non-sufficient fund
charges decreased from the pervious year, offsetting an increase
in other service charge fees.
Noninterest income for the six months ended June 30, 2006
and 2005 was $701,000 and $693,000, respectively, an increase of
$8,000, or 1.2%. Service charges on deposit accounts represent
over half of our noninterest income for both six month time
periods, and declined due to a decrease in non-sufficient fund
charges on customer overdrafts. Income from mortgage banking
decreased due to lower volumes as interest rates increased for
mortgage loans. Lease income increased substantially compared to
2005 because the building from which the lease income is
obtained was acquired in the third quarter of 2005.
42
The following table shows the detailed components of noninterest
income for the six months ended June 30, 2006 as compared
to June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
|
(Dollars in thousands)
|
|
|
Service charges on deposit accounts
|
|
$
|
365
|
|
|
$
|
405
|
|
|
$
|
(40
|
)
|
Other service charges and fees
|
|
|
28
|
|
|
|
36
|
|
|
|
(8
|
)
|
Gain on the sale of mortgage loans
held for sale
|
|
|
141
|
|
|
|
165
|
|
|
|
(24
|
)
|
Title premium fees
|
|
|
25
|
|
|
|
22
|
|
|
|
3
|
|
Title closing fees
|
|
|
5
|
|
|
|
8
|
|
|
|
(3
|
)
|
Trust referral fees
|
|
|
8
|
|
|
|
9
|
|
|
|
(1
|
)
|
Lease income
|
|
|
105
|
|
|
|
10
|
|
|
|
95
|
|
Other income
|
|
|
24
|
|
|
|
38
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
701
|
|
|
$
|
693
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
Expense
Years
Ended December 31, 2005 and 2004
Our 2005 noninterest expense was $6.0 million, an increase
of $198,000, or 3.4%, from 2004. The primary increase in
noninterest expense in 2005 resulted from the legal expense
incurred to collect a large loan that was charged off in 2003
and recovered in late November 2005. This increase is reflected
in professional fees. The increases and decreases in expense by
major categories are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2005
|
|
|
2004
|
|
|
(Decrease)
|
|
|
|
(Dollars in thousands)
|
|
|
Salaries and employee benefits
|
|
$
|
3,005
|
|
|
$
|
3,040
|
|
|
$
|
(35
|
)
|
Net occupancy expense
|
|
|
422
|
|
|
|
366
|
|
|
|
56
|
|
Equipment expense
|
|
|
379
|
|
|
|
422
|
|
|
|
(43
|
)
|
Advertising
|
|
|
229
|
|
|
|
162
|
|
|
|
67
|
|
Professional fees
|
|
|
563
|
|
|
|
472
|
|
|
|
91
|
|
Data processing services
|
|
|
414
|
|
|
|
368
|
|
|
|
46
|
|
FDIC and other insurance
|
|
|
97
|
|
|
|
154
|
|
|
|
(57
|
)
|
Franchise shares and deposit tax
|
|
|
175
|
|
|
|
141
|
|
|
|
34
|
|
Postage and office supplies
|
|
|
117
|
|
|
|
101
|
|
|
|
16
|
|
Telephone and other communication
|
|
|
125
|
|
|
|
122
|
|
|
|
3
|
|
Other
|
|
|
478
|
|
|
|
458
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,004
|
|
|
$
|
5,806
|
|
|
$
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant variances between 2005 and 2004 included
professional fees, which increased $91,000 in 2005 as compared
to 2004, and primarily consisted of legal fees incurred to
collect the large loan charged off in 2003. FDIC insurance
premiums decreased $71,000 in 2005 compared to 2004 because the
FDIC premium rates dropped in 2005. Our advertising and
marketing expenses increased $67,000 in 2005 compared to 2004 as
a result of increased marketing agency fees, fees incurred to
develop a strategic marketing plan, the costs of surveys
developed to analyze our customer base and general advertising
increases throughout the year to help reach more customers.
Three and
Six Months Ended June 30, 2006 and 2005
Noninterest expense was $1.8 million in the second quarter
of 2006, up from $1.4 million in the same quarter of 2005,
an increase of $391,000, or 27.8%. An increase in salary and
employee benefit expense of $199,000, due primarily to an
increase in full time employees and employee stock option
expense, coupled with an increase of $43,000 in non-employee
stock option expense, accounted for significant variances
compared to the same period in 2005.
43
For the six months ended June 30, 2006 and 2005,
respectively, noninterest expense was $3.4 million and
$2.8 million, an increase of $604,000, or 21.8%. An
increase in salary and employee benefit expense of $414,000, due
primarily to an increase in full time equivalent employees and
employee stock option expense, was the largest increase
comparing the first half of 2006 to 2005. Occupancy expenses
increased $128,000, or 70.7%, due to the purchase of the
corporate headquarters in the third quarter of 2005, which was
placed into service in March of 2006.
The increases and decreases in expense by major categories are
as follows for the six months ended June 30, 2006 as
compared to June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
|
(Dollars in thousands)
|
|
|
Salaries and employee benefits
|
|
$
|
1,775
|
|
|
$
|
1,361
|
|
|
$
|
414
|
|
Net occupancy expense
|
|
|
309
|
|
|
|
181
|
|
|
|
128
|
|
Equipment expense
|
|
|
222
|
|
|
|
188
|
|
|
|
34
|
|
Advertising
|
|
|
169
|
|
|
|
111
|
|
|
|
58
|
|
Professional fees
|
|
|
151
|
|
|
|
220
|
|
|
|
(69
|
)
|
Data processing services
|
|
|
208
|
|
|
|
217
|
|
|
|
(9
|
)
|
FDIC and other insurance
|
|
|
52
|
|
|
|
60
|
|
|
|
(8
|
)
|
Franchise shares and deposit tax
|
|
|
116
|
|
|
|
102
|
|
|
|
14
|
|
Postage and office supplies
|
|
|
66
|
|
|
|
54
|
|
|
|
12
|
|
Telephone and other communication
|
|
|
71
|
|
|
|
62
|
|
|
|
9
|
|
Other
|
|
|
234
|
|
|
|
213
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,373
|
|
|
$
|
2,769
|
|
|
$
|
604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes
Years
Ended December 31, 2005 and 2004
Income tax expense was calculated using the actual tax rate for
2005 and 2004. We have recognized deferred tax liabilities and
assets to show the tax effects of differences between the
financial statement and tax bases of assets and liabilities. The
effective tax rate for 2005 was 34.1%, compared to 32.5% for
2004.
Six and
Three Months Ended June 30, 2006 and 2005
For the three and six months ended June 30, 2006, income
tax expense has been calculated based on our anticipated
effective tax rate for 2006. During the second quarter of 2006,
income tax expense totaled $297,000 compared to $260,000 for the
same period of 2005. For the first half of 2006, income tax
expense totaled $581,000, compared to $493,000 during the same
period of 2005. The effective tax rate for 2006 was 38.4%
compared to 34.0% for 2005. The increase is related to the
compensation expense for employee stock options, which is not
deductible for income tax purposes.
Balance
Sheet Review
General
Our assets at year end 2005 totaled $195.5 million,
compared with $169.5 million at year end 2004, an increase
of 15.3%. On an annual average basis, total assets were
$180.5 million in 2005, compared to $165.9 million in
2004. Average interest earning assets increased by
$12.8 million from 2004 to 2005, from $155.7 million
to $168.6 million.
Total assets at June 30, 2006 were $202.9 million, up
$7.4 million, or 3.8%, from December 31, 2005. Loans
increased $3.0 million, or 1.9%, from $157.5 million
at December 31, 2005 to $160.5 million at
June 30, 2006. Deposits at June 30, 2006 were
$162.0 million, an increase of $5.6 million, or 3.6%,
from $156.4 million at December 31, 2005.
Shareholders equity of $20.6 million equaled 10.17%
of total assets as of June 30, 2006.
44
Loans
We experienced moderate loan growth in our market area
throughout 2005, with particular strength in middle market
commercial and commercial real estate loans, which range between
$500,000 and $2.0 million, and in residential real estate
loans. Total loans averaged $154.4 million in 2005,
compared to $140.5 million in 2004. At year end 2005, loans
totaled $157.6 million, compared to $147.0 million at
year end 2004.
For the second quarter of 2006, total loans averaged
$161.9 million, compared to $152.9 million for the
second quarter of 2005, an increase of 5.9%. Total loans
averaged $160.3 million for the first six months of 2006,
compared to $149.4 million for the same period in 2005, an
increase of 7.3%. At June 30, 2006, loans totaled
$160.5 million, compared to $156.6 million at
June 30, 2005, an increase of 2.5%. We experienced moderate
loan growth in our market area throughout the first half of
2006, with particular strength in middle market commercial
loans. Commercial real estate loans, residential real estate
loans and consumer loans were stable to slightly declining
during the first six months of 2006.
The following table presents a summary of the loan portfolio by
category as of June 30, 2006 and December 31, 2005 and
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
Loans
|
|
|
|
|
|
Loans
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial and agricultural
|
|
$
|
47,503
|
|
|
|
29.60
|
%
|
|
$
|
41,671
|
|
|
|
26.45
|
%
|
|
$
|
41,421
|
|
|
|
28.19
|
%
|
Commercial real estate
|
|
|
59,143
|
|
|
|
36.85
|
%
|
|
|
60,971
|
|
|
|
38.69
|
%
|
|
|
47,853
|
|
|
|
32.56
|
%
|
Residential real estate
|
|
|
44,352
|
|
|
|
27.64
|
%
|
|
|
45,108
|
|
|
|
28.63
|
%
|
|
|
46,818
|
|
|
|
31.86
|
%
|
Consumer
|
|
|
9,486
|
|
|
|
5.91
|
%
|
|
|
9,819
|
|
|
|
6.23
|
%
|
|
|
10,859
|
|
|
|
7.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
160,484
|
|
|
|
100.00
|
%
|
|
$
|
157,569
|
|
|
|
100.00
|
%
|
|
$
|
146,950
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our commercial real estate loans include financing for
industrial developments, residential developments, retail
shopping centers, industrial buildings, restaurants and hotels.
The primary source of repayment cannot be traced to any specific
industry group. The percentage distribution of our loans by
industry as of December 31, 2005 and 2004 is shown in the
following table:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Agriculture, forestry, and fishing
|
|
|
7.39
|
%
|
|
|
7.02
|
%
|
Mining
|
|
|
0.01
|
%
|
|
|
0.37
|
%
|
Construction
|
|
|
9.13
|
%
|
|
|
7.44
|
%
|
Manufacturing
|
|
|
7.16
|
%
|
|
|
6.20
|
%
|
Transportation, communication,
electric, gas, and sanitary services
|
|
|
3.28
|
%
|
|
|
2.16
|
%
|
Wholesale trade
|
|
|
2.82
|
%
|
|
|
3.57
|
%
|
Retail trade
|
|
|
12.81
|
%
|
|
|
11.88
|
%
|
Finance, insurance and real estate
|
|
|
9.39
|
%
|
|
|
12.28
|
%
|
Services
|
|
|
12.32
|
%
|
|
|
13.97
|
%
|
Public administration
|
|
|
0.88
|
%
|
|
|
1.11
|
%
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial
real estate
|
|
|
65.19
|
%
|
|
|
66.00
|
%
|
Residential real estate loans
|
|
|
28.62
|
%
|
|
|
25.39
|
%
|
Other consumer loans
|
|
|
6.19
|
%
|
|
|
8.61
|
%
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
Substantially all of our loans are to customers located in the
Bowling Green-Warren County area and in the Franklin-Simpson
County area. As of December 31, 2005, our 20 largest credit
relationships consisted of
45
loans and loan commitments ranging from $1.5 million to
$4.4 million. The aggregate amount of these credit
relationships was $41.2 million. As of June 30, 2006,
our 20 largest credit relationships consisted of loans and loan
commitments ranging from $1.5 million to $4.5 million.
The aggregate amount of these credit relationships was
$42.4 million.
The following tables set forth the maturity distribution and
interest rate sensitivity of our loan portfolio as of
December 31, 2005 and June 30, 2006. Maturities are
based upon contractual terms. Our policy is to specifically
review and approve all renewed loans; loans are not
automatically rolled over.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
One Through
|
|
|
Over
|
|
|
Total
|
|
As of December 31, 2005
|
|
or Less
|
|
|
Five Years
|
|
|
Five Years
|
|
|
Loans
|
|
|
|
(Dollars in thousands)
|
|
|
By maturity date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
21,715
|
|
|
$
|
12,861
|
|
|
$
|
7,094
|
|
|
$
|
41,670
|
|
Commercial real estate
|
|
|
21,344
|
|
|
|
21,637
|
|
|
|
17,990
|
|
|
|
60,971
|
|
Residential real estate
|
|
|
5,607
|
|
|
|
6,240
|
|
|
|
33,262
|
|
|
|
45,109
|
|
Consumer
|
|
|
2,893
|
|
|
|
6,384
|
|
|
|
542
|
|
|
|
9,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
51,559
|
|
|
$
|
47,122
|
|
|
$
|
58,888
|
|
|
$
|
157,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By next repricing
opportunity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
34,493
|
|
|
$
|
6,709
|
|
|
$
|
468
|
|
|
$
|
41,670
|
|
Commercial real estate
|
|
|
53,219
|
|
|
|
7,621
|
|
|
|
131
|
|
|
|
60,971
|
|
Residential real estate
|
|
|
39,753
|
|
|
|
3,115
|
|
|
|
2,240
|
|
|
|
45,108
|
|
Consumer
|
|
|
4,087
|
|
|
|
5,714
|
|
|
|
19
|
|
|
|
9,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
131,552
|
|
|
$
|
23,159
|
|
|
$
|
2,858
|
|
|
$
|
157,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate loans
|
|
$
|
12,550
|
|
|
$
|
23,159
|
|
|
$
|
2,858
|
|
|
$
|
38,567
|
|
Floating rate loans
|
|
|
119,002
|
|
|
|
|
|
|
|
|
|
|
|
119,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
131,552
|
|
|
$
|
23,159
|
|
|
$
|
2,858
|
|
|
$
|
157,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
One Through
|
|
|
Over
|
|
|
Total
|
|
As of June 30, 2006
|
|
or Less
|
|
|
Five Years
|
|
|
Five Years
|
|
|
Loans
|
|
|
|
(Dollars in thousands)
|
|
|
By maturity date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
25,313
|
|
|
$
|
15,960
|
|
|
$
|
6,230
|
|
|
$
|
47,503
|
|
Commercial real estate
|
|
|
19,878
|
|
|
|
21,329
|
|
|
|
17,936
|
|
|
|
59,143
|
|
Residential real estate
|
|
|
5,509
|
|
|
|
7,540
|
|
|
|
31,303
|
|
|
|
44,352
|
|
Consumer
|
|
|
2,654
|
|
|
|
6,159
|
|
|
|
673
|
|
|
|
9,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
53,354
|
|
|
$
|
50,988
|
|
|
$
|
56,142
|
|
|
$
|
160,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By next repricing
opportunity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
38,530
|
|
|
$
|
8,910
|
|
|
$
|
63
|
|
|
$
|
47,503
|
|
Commercial real estate
|
|
|
44,482
|
|
|
|
13,910
|
|
|
|
751
|
|
|
|
59,143
|
|
Residential real estate
|
|
|
29,245
|
|
|
|
12,270
|
|
|
|
2,837
|
|
|
|
44,352
|
|
Consumer
|
|
|
3,261
|
|
|
|
5,789
|
|
|
|
436
|
|
|
|
9,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
115,518
|
|
|
$
|
40,879
|
|
|
$
|
4,087
|
|
|
$
|
160,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate loans
|
|
$
|
14,195
|
|
|
$
|
28,452
|
|
|
$
|
3,629
|
|
|
$
|
46,276
|
|
Floating rate loans
|
|
|
101,323
|
|
|
|
12,427
|
|
|
|
458
|
|
|
|
114,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
115,518
|
|
|
$
|
40,879
|
|
|
$
|
4,087
|
|
|
$
|
160,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Asset and
Liability Management
We manage our assets and liabilities to provide a consistent
level of liquidity to accommodate normal fluctuations in loans
and deposits. The yield on approximately 68.0% of our earning
assets as of June 30, 2006 adjusts simultaneously with
changes in an external index, primarily the highest prime rate
as quoted in the Wall Street Journal. A majority of our interest
bearing liabilities are issued with fixed terms and can only be
repriced at maturity. In 2005, the prime rate increased eight
times for a total of 200 basis points. During the first
half of 2006, the prime rate increased 4 times for a total of
100 basis points. During a period of rising interest rates,
the yield on our interest earning assets will increase faster
than the rates paid on interest bearing liabilities. This
creates an increase in our net interest margin as the difference
between what we earn on our interest earning assets and what we
pay on our interest bearing liabilities increases. During
periods of falling rates, 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. 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 and the Allowance for Loan Losses
We consider asset quality of primary importance and employ a
full-time internal credit review person to monitor adherence to
our lending policy. We use a year round internal credit review
to assess a minimum of 30% of our loan portfolio. Management is
required to address any criticisms raised during the loan review
and to take appropriate actions where warranted.
The allowance for loan losses represents managements
estimate of probable credit losses incurred 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 allowance for loan losses is established through a provision
for loan losses charged to expense. At June 30, 2006, the
allowance was $1.9 million, compared to $2.0 million
at December 31, 2005 and $1.7 million at the end of
2004. The ratio of the allowance for loan losses to total loans
(excluding mortgage loans held for sale) at June 30, 2006
was 1.17%, compared to 1.24% at December 31, 2005 and 1.17%
at December 31, 2004.
The provision to the allowance for loan losses is based on
managements and our loan committees ongoing review
and evaluation of the loan portfolio and general economic
conditions on a monthly basis, and is reviewed by the full board
of directors on a quarterly basis. Management bases its review
and evaluation of the allowance for loan losses 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. We charge
recognized losses against the allowance and add subsequent
recoveries to the allowance. While management uses the best
information available to make evaluations, future adjustments to
the allowance may be necessary if economic conditions differ
substantially from the assumptions used in making the
evaluation. Our 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.
47
Nonperforming loans are defined as nonaccrual loans, loans
accruing but past due 90 days or more, and restructured
loans. Nonperforming assets are defined as nonperforming loans,
other real estate owned and repossessed assets. The following
table sets forth selected asset quality ratios for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Nonperforming loans
|
|
$
|
687
|
|
|
$
|
257
|
|
|
$
|
769
|
|
Nonperforming assets
|
|
$
|
856
|
|
|
$
|
257
|
|
|
$
|
769
|
|
Allowance for loan losses
|
|
$
|
1,881
|
|
|
$
|
1,957
|
|
|
$
|
1,891
|
|
Nonperforming assets to total loans
|
|
|
0.53
|
%
|
|
|
0.16
|
%
|
|
|
0.49
|
%
|
Nonperforming assets to total
assets
|
|
|
0.42
|
%
|
|
|
0.13
|
%
|
|
|
0.43
|
%
|
Net charge-offs to average total
loans
|
|
|
0.05
|
%
|
|
|
(0.28
|
)%
|
|
|
(0.03
|
)%
|
Allowance for loan losses to
nonperforming loans
|
|
|
273.80
|
%
|
|
|
761.48
|
%
|
|
|
245.87
|
%
|
Allowance for loan losses to total
loans
|
|
|
1.17
|
%
|
|
|
1.24
|
%
|
|
|
1.21
|
%
|
Management classifies commercial and commercial real estate
loans as nonaccrual 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. We
charge off consumer loans after 120 days of delinquency
unless they are adequately secured and in the process of
collection. Nonaccrual loans are not reclassified as accruing
until principal and interest payments are brought current and
future payments appear reasonably certain. We categorize loans
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.
Loans that exhibit probable or observed credit weaknesses are
subject to individual review. Where appropriate, reserves are
allocated to individual loans based on managements
estimate of the borrowers 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 managements
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.
A modest unallocated reserve is maintained to recognize the
imprecision in estimating and measuring losses when evaluating
reserves for individual loans or pools of loans. Reserves on
individual loans and historical loss rates are reviewed
quarterly and adjusted as necessary based on changing borrower
and/or
collateral conditions and actual collection and charge-off
experience.
We had nonperforming loans totaling $257,000 at
December 31, 2005, and $720,000 at December 31, 2004.
The nonperforming loan total at year end 2005 consisted of one
nonaccrual loan of $164,000 to a commercial customer that is
guaranteed in full by the Small Business Administration, and
four loans over 90 days past due totaling approximately
$93,000. The nonperforming loan total at year end 2004 included
the remaining portion of three loans to one borrower totaling
$518,000, which were placed on nonaccrual status during the
second quarter of 2003. The three loans, originally totaling
$1.7 million, were secured by substantially all the assets
of the borrower and the guaranties of three individuals, a
limited partnership and a limited liability company. During the
second quarter of 2003 the borrower advised us that one of the
properties had failed to produce any revenue and was unlikely to
ever produce revenue and that its value was now negligible, and
that revenue from a second property was expected to be minimal.
The borrower
48
terminated its operations during the second quarter of 2003 and
$1.0 million was charged off. We are pursuing recovery in
full of these loans through various legal proceedings. The
second nonperforming loan that was put on nonaccrual during the
first quarter of 2004 is to one borrower and totals $200,000.
The loan is secured by a single family residence in Bowling
Green. The sale of the property has been stayed until the
borrowers estate is processed through probate court. The
remaining $2,000 of nonperforming loans consists of one loan
accruing but past due over 90 days.
We had nonperforming loans totaling $687,000 at June 30,
2006, compared to $769,000 at June 30, 2005. The
nonperforming loans at June 30, 2006 consisted of $464,000
of nonaccrual loans, $203,000 of a loan secured by real estate
in the process of collection, and $20,000 of consumer loans. Of
the nonaccrual loans, $220,000 is secured by real estate and
$153,000 is fully guaranteed by the Small Business
Administration. Other nonperforming assets include $140,000 in
other real estate and $29,000 in repossessed equipment and
vehicles.
Generally, we do not include loans that are current as to
principal and interest in our nonperforming assets categories.
However, we will still classify a current loan as a potential
problem loan if we develop serious doubts about the
borrowers future performance under the terms of the loan
contract. We consider the level of potential problem loans in
our determination of the adequacy of the allowance for loan
losses. At June 30, 2006, we had classified loans totaling
$1.1 million as potential problem loans and made a specific
allocation in the allowance for loan losses. At
December 31, 2005 and 2004, we classified loans totaling
$1.8 million and $2.3 million, respectively, as
potential problem loans and made a specific allocation in the
allowance for loan losses.
Interest income of approximately $21,000 for the six months
ended June 30, 2006, $13,000 in 2005 and $2,000 in 2004
would have been recorded on nonaccrual loans if such loans had
been accruing interest throughout the year in accordance with
their original terms. The amount of interest income actually
recorded on nonaccrual loans was $5,000, $8,000 and $187 for the
six months ended June 30, 2006, and the years ended
December 31, 2005 and December 31, 2004, respectively.
49
The following tables set forth an analysis of our allowance for
loan losses for the years ended December 31, 2005 and 2004
and for the six months ended June 30, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Balance, beginning of year
|
|
$
|
1,721
|
|
|
$
|
1,904
|
|
Provision for loan losses
|
|
|
(200
|
)
|
|
|
165
|
|
Amounts charged off:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
119
|
|
|
|
333
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
124
|
|
|
|
|
|
Consumer
|
|
|
53
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
Total loans charged off
|
|
|
295
|
|
|
|
381
|
|
Recoveries of amounts previously
charged off:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
721
|
|
|
|
29
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
10
|
|
|
|
|
|
Consumer
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
732
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries)
|
|
|
(437
|
)
|
|
|
349
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
1,957
|
|
|
$
|
1,721
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of unearned
income:
|
|
|
|
|
|
|
|
|
Average
|
|
$
|
153,501
|
|
|
$
|
140,471
|
|
At December 31
|
|
|
157,569
|
|
|
|
146,950
|
|
As a percentage of average loans:
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries)
|
|
|
(0.28
|
)%
|
|
|
0.25
|
%
|
Provision for loan losses
|
|
|
(0.13
|
)%
|
|
|
0.12
|
%
|
Allowance as a percentage of year
end loans (excluding mortgage loans held for sale)
|
|
|
1.24
|
%
|
|
|
1.17
|
%
|
Allowance as a percentage of
nonperforming loans
|
|
|
761.48
|
%
|
|
|
238.95
|
%
|
50
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Balance, beginning of year
|
|
$
|
1,957
|
|
|
$
|
1,721
|
|
Provision for loan losses
|
|
|
|
|
|
|
120
|
|
Amounts charged off:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(73
|
)
|
|
|
(4
|
)
|
Commercial real estate
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
(28
|
)
|
|
|
(62
|
)
|
Consumer
|
|
|
(13
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
Total loans charged off
|
|
|
(114
|
)
|
|
|
(79
|
)
|
Recoveries of amounts previously
charged off:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
37
|
|
|
|
119
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
|
|
|
|
10
|
|
Consumer
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
38
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries
|
|
|
(76
|
)
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
1,881
|
|
|
$
|
1,891
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of unearned
income:
|
|
|
|
|
|
|
|
|
Average
|
|
$
|
160,272
|
|
|
$
|
149,357
|
|
At June 30
|
|
|
160,484
|
|
|
|
156,554
|
|
As a percentage of average loans:
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries
|
|
|
(0.05
|
)%
|
|
|
0.03
|
%
|
Provision for loan losses
|
|
|
(0.00
|
)%
|
|
|
0.11
|
%
|
Allowance as a percentage of year
end loans (excluding mortgage loans held for sale)
|
|
|
1.17
|
%
|
|
|
1.21
|
%
|
Allowance as a percentage of
nonperforming loans
|
|
|
273.80
|
%
|
|
|
245.87
|
%
|
The following tables set forth the breakdown of the allowance
for loan losses by loan category at December 31, 2005 and
2004 and at June 30, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
|
|
|
% of Loans in
|
|
|
|
|
|
% of Loans in
|
|
|
|
|
|
|
Each Category to
|
|
|
|
|
|
Each Category to
|
|
|
|
Amount
|
|
|
Total Loans
|
|
|
Amount
|
|
|
Total Loans
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Residential real estate
|
|
$
|
582
|
|
|
|
28.63
|
%
|
|
$
|
141
|
|
|
|
31.86
|
%
|
Consumer and other loans
|
|
|
164
|
|
|
|
6.23
|
%
|
|
|
143
|
|
|
|
7.39
|
%
|
Commercial
|
|
|
548
|
|
|
|
26.45
|
%
|
|
|
986
|
|
|
|
28.19
|
%
|
Commercial real estate
|
|
|
624
|
|
|
|
38.69
|
%
|
|
|
398
|
|
|
|
32.56
|
%
|
Unallocated
|
|
|
39
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
1,957
|
|
|
|
100.0
|
%
|
|
$
|
1,721
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
June 30, 2005
|
|
|
|
|
|
|
% of Loans in
|
|
|
|
|
|
% of Loans in
|
|
|
|
|
|
|
Each Category to
|
|
|
|
|
|
Each Category to
|
|
|
|
Amount
|
|
|
Total Loans
|
|
|
Amount
|
|
|
Total Loans
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Residential real estate
|
|
$
|
554
|
|
|
|
28.63
|
%
|
|
$
|
171
|
|
|
|
28.53
|
%
|
Consumer and other loans
|
|
|
162
|
|
|
|
5.91
|
%
|
|
|
165
|
|
|
|
6.70
|
%
|
Commercial
|
|
|
518
|
|
|
|
29.60
|
%
|
|
|
1,025
|
|
|
|
28.53
|
%
|
Commercial real estate
|
|
|
613
|
|
|
|
36.85
|
%
|
|
|
525
|
|
|
|
36.24
|
%
|
Unallocated
|
|
|
34
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
1,881
|
|
|
|
100.0
|
%
|
|
$
|
1,891
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We believe that the allowance for loan losses at June 30,
2006 is adequate to absorb probable incurred credit losses in
our portfolio as of that date. That determination is based on
the best information available to us, 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, may reach
different conclusions about the quality of our loan portfolio
and the level of the allowance, which could require us to make
additional provisions in the future.
Securities,
Federal Funds Sold and Resale Agreements
Securities are all classified as available for sale, and
averaged $12.5 million in 2005, a decrease of $630,000 over
the average of $13.1 million in 2004, and
$12.7 million for the first six months of 2006 and 2005.
The tables below present the carrying value of securities for
each of the past two years and the six months ended
June 30, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Government agencies
|
|
$
|
8,641
|
|
|
$
|
8,661
|
|
Mortgage-backed securities
|
|
|
3,417
|
|
|
|
4,228
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities
|
|
$
|
12,058
|
|
|
$
|
12,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Government agencies
|
|
$
|
8,353
|
|
|
$
|
8,838
|
|
Mortgage-backed securities
|
|
|
3,058
|
|
|
|
3,819
|
|
Municipal securities
|
|
|
1,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities
|
|
$
|
12,690
|
|
|
$
|
12,657
|
|
|
|
|
|
|
|
|
|
|
52
The table below presents the maturities and yields
characteristics of securities as of December 31, 2005.
Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over
|
|
|
Over
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
Five Years
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
Through
|
|
|
Through
|
|
|
Over
|
|
|
Total
|
|
|
Market
|
|
|
|
or Less
|
|
|
Five Years
|
|
|
Ten Years
|
|
|
Ten Years
|
|
|
Maturities
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Government agencies
|
|
$
|
4,000
|
|
|
$
|
|
|
|
$
|
4,985
|
|
|
$
|
|
|
|
$
|
8,985
|
|
|
$
|
8,641
|
|
Mortgage-backed
securities:(1)
|
|
|
|
|
|
|
|
|
|
|
653
|
|
|
|
2,950
|
|
|
|
3,603
|
|
|
|
3,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities
|
|
$
|
4,000
|
|
|
$
|
|
|
|
$
|
5,638
|
|
|
$
|
2,950
|
|
|
$
|
12,588
|
|
|
$
|
12,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total
|
|
|
31.78
|
%
|
|
|
0.00
|
%
|
|
|
44.78
|
%
|
|
|
23.44
|
%
|
|
|
100.00
|
%
|
|
|
|
|
Weighted average
yield(2)
|
|
|
3.25
|
%
|
|
|
0.00
|
%
|
|
|
3.94
|
%
|
|
|
3.64
|
%
|
|
|
3.65
|
%
|
|
|
|
|
|
|
|
(1) |
|
Collateralized mortgage obligations and mortgage-backed
securities are grouped into average lives based on December 2005
prepayment projections. |
|
(2) |
|
The weighted average yields are based on amortized cost. |
The following table presents the maturities and yields
characteristics of securities as of June 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over
|
|
|
Over
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
Five Years
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
Through
|
|
|
Through
|
|
|
Over
|
|
|
Total
|
|
|
Market
|
|
|
|
or Less
|
|
|
Five Years
|
|
|
Ten Years
|
|
|
Ten Years
|
|
|
Maturities
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,986
|
|
|
$
|
|
|
|
$
|
8,986
|
|
|
$
|
8,353
|
|
Mortgage-backed
securities:(1)
|
|
|
|
|
|
|
3,363
|
|
|
|
|
|
|
|
|
|
|
|
3,363
|
|
|
|
3,058
|
|
Municipal securities:
|
|
|
|
|
|
|
|
|
|
|
254
|
|
|
|
1,101
|
|
|
|
1,355
|
|
|
|
1,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities
|
|
$
|
|
|
|
$
|
3,363
|
|
|
$
|
9,240
|
|
|
$
|
1,101
|
|
|
$
|
13,704
|
|
|
$
|
12,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total
|
|
|
0.00
|
%
|
|
|
24.30
|
%
|
|
|
67.68
|
%
|
|
|
8.02
|
%
|
|
|
100.00
|
%
|
|
|
|
|
Weighted average
yield(2)
|
|
|
0.00
|
%
|
|
|
3.65
|
%
|
|
|
4.29
|
%
|
|
|
5.56
|
%
|
|
|
4.23
|
%
|
|
|
|
|
|
|
|
(1) |
|
Collateralized mortgage obligations and mortgage-backed
securities are grouped into average lives based on June 2006
prepayment projections. |
|
(2) |
|
The weighted average yields are based on amortized cost. |
Deferred
Tax Asset
We have a net deferred tax asset of $686,000 at June 30,
2006. 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 will establish a valuation allowance to reduce its
carrying amount to the amount it expects to be realized. At
June 30, 2006, no valuation allowance has been established
against the outstanding deferred tax asset. The deferred tax
asset will be utilized as we are profitable or as we carry back
tax losses to periods in which it paid income taxes. The
estimate of the realizable amount of this asset is a critical
accounting policy.
Deposits
We had an average of $141.2 million in total deposits
during 2005, an increase of $10.6 million compared to
$130.6 million in 2004. Time deposits of $100,000 or more
totaled $29.6 million at December 31,
53
2005, compared to $20.0 million at December 31, 2004.
Interest expense on time deposits of $100,000 or more was
$631,000 in 2005, compared to $566,000 in 2004.
Total deposits averaged $161.9 million in the second
quarter of 2006, an increase of $23.6 million, or 17.1%,
from the comparable 2005 quarter average of $138.3 million.
As of June 30, 2006, total deposits were
$162.0 million, compared to total deposits of
$156.4 million at December 31, 2005, while total
deposits at June 30, 2005 were $140.6 million.
Total deposits averaged $159.8 million during the first six
months of 2006, an increase of $24.3 million, or 17.9%,
compared to $135.5 million in 2005. Time deposits of
$100,000 or more totaled $35.3 million at June 30,
2006 compared to $19.9 million at June 30, 2005.
Interest expense on time deposits of $100,000 or more was
$548,000 for the first six months of 2006, compared to $275,000
for the first six months of 2005.
The following table shows the maturities of time deposits of
$100,000 or more as of June 30, 2006 and December 31,
2005:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Three months or less
|
|
$
|
7,874
|
|
|
$
|
5,366
|
|
Over three through six months
|
|
|
9,525
|
|
|
|
2,770
|
|
Over six through twelve months
|
|
|
8,058
|
|
|
|
7,784
|
|
Over one year through three years
|
|
|
9,315
|
|
|
|
11,600
|
|
Over three years
|
|
|
575
|
|
|
|
2,030
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,347
|
|
|
$
|
29,550
|
|
|
|
|
|
|
|
|
|
|
Liquidity,
Other Borrowings and Capital Resources
Liquidity
To maintain a desired level of liquidity, we have several
sources of funds available. We primarily rely on net inflows of
cash from financing activities, supplemented by net inflows of
cash from operating activities, to provide cash used in our
investing activities. As is typical of most banking companies,
our significant financing activities include issuance of common
stock, deposit gathering and the use of short-term borrowing
facilities, such as federal funds purchased and repurchase
agreements. Our primary investing activities include purchases
of securities and loan originations, offset by maturities,
prepayments and sales of securities and loan payments.
Other
Borrowings
We obtain advances from the FHLB for funding and liability
management. These advances are secured borrowings with terms
ranging from overnight to 30 years. Rates vary based on the
term to repayment, and are summarized below as of
December 31, 2005 and June 30, 2006:
As of
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
Type
|
|
Maturity
|
|
Rate
|
|
|
Amount
|
|
|
Fixed
|
|
January 20, 2006
|
|
|
2.21%
|
|
|
$
|
5,000,000
|
|
Fixed
|
|
June 9, 2006
|
|
|
2.03%
|
|
|
|
4,000,000
|
|
Fixed
|
|
May 2, 2007
|
|
|
4.19%
|
|
|
|
3,000,000
|
|
Fixed
|
|
May 26, 2006
|
|
|
3.90%
|
|
|
|
2,000,000
|
|
Fixed
|
|
October 27, 2008
|
|
|
4.83%
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
14,500,000
|
|
54
As of
June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
Type
|
|
Maturity
|
|
Rate
|
|
|
Amount
|
|
|
Fixed
|
|
May 2, 2007
|
|
|
4.19%
|
|
|
$
|
3,000,000
|
|
Fixed
|
|
October 27, 2008
|
|
|
4.83%
|
|
|
|
500,000
|
|
Fixed
|
|
January 31, 2007
|
|
|
5.02%
|
|
|
|
1,000,000
|
|
Fixed
|
|
February 1, 2009
|
|
|
5.07%
|
|
|
|
896,000
|
|
Variable
|
|
January 31, 2007
|
|
|
5.45%
|
|
|
|
2,000,000
|
|
Variable
|
|
January 31, 2007
|
|
|
5.75%
|
|
|
|
1,000,000
|
|
Variable
|
|
June 27, 2007
|
|
|
5.45%
|
|
|
|
1,000,000
|
|
Variable
|
|
June 27, 2007
|
|
|
5.75%
|
|
|
|
1,000,000
|
|
Variable
|
|
September 28, 2006
|
|
|
5.46%
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
15,396,000
|
|
At June 30, 2006, we had available collateral to borrow an
additional $3.1 million from the FHLB.
In 2001, we entered into a credit agreement with a correspondent
bank for the purpose of injecting capital into the bank. The
loan, which was secured by the banks common stock, had a
total credit availability of $3.0 million. The rate on the
loan, which was repriced annually on June 22, was at
one-year LIBOR plus 275 basis points. The loan was paid off
and closed during the third quarter of 2004 using proceeds from
the private placement of 250 shares of our cumulative
convertible preferred stock.
In August 2005, we entered into a credit agreement with another
bank, to be used for operating capital and general corporate
purposes. The new loan has a total credit availability of
$3.0 million, matures August 12, 2006, and bears
interest at the prime rate as published in the Money Rates
section of The Wall Street Journal, Eastern Edition, with
interest payable monthly. Under the credit agreement, we may not
pay any cash dividends on our common stock without the
lenders prior consent. The loan is secured by the
banks common stock. As of June 30, 2006, we had not
drawn on the line of credit. In September 2006, the loan
was extended to September 26, 2008 on the same terms.
At June 30, 2006, we had established Federal Funds lines of
credit totaling $16.5 million with three correspondent
banks. No amounts were drawn as of June 30, 2006.
Repurchase agreements mature in one business day. The rate paid
on these accounts is variable at our discretion and is based on
a tiered balance calculation. Information regarding federal
funds purchased and securities sold under repurchase agreements
as of June 30, 2006 is presented below.
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at period end
|
|
$
|
3,711
|
|
Weighted average rate at period end
|
|
|
2.72
|
%
|
Average balance during the six
months ended June 30, 2006
|
|
$
|
3,416
|
|
Weighted average rate for the six
months ending June 30, 2006 during the year
|
|
|
1.63
|
%
|
Maximum month-end balance
|
|
$
|
4,090
|
|
55
Information about our short-term borrowings is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Federal funds purchased and
repurchase agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year end
|
|
$
|
3,711
|
|
|
$
|
2,920
|
|
|
$
|
6,373
|
|
Weighted average rate at year end
|
|
|
2.72
|
%
|
|
|
0.87
|
%
|
|
|
1.51
|
%
|
Average balance during the year
|
|
$
|
3,416
|
|
|
$
|
4,897
|
|
|
$
|
5,172
|
|
Weighted average rate during the
year
|
|
|
1.63
|
%
|
|
|
1.55
|
%
|
|
|
1.01
|
%
|
Maximum month-end balance
|
|
$
|
4,090
|
|
|
$
|
8,227
|
|
|
$
|
10,459
|
|
Other borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year end
|
|
$
|
15,396
|
|
|
$
|
14,500
|
|
|
$
|
13,000
|
|
Weighted average rate at year end
|
|
|
4.48
|
%
|
|
|
2.90
|
%
|
|
|
2.06
|
%
|
Average balance during the year
|
|
$
|
13,342
|
|
|
$
|
13,627
|
|
|
$
|
14,779
|
|
Weighted average rate during the
year
|
|
|
3.80
|
%
|
|
|
2.73
|
%
|
|
|
2.40
|
%
|
Maximum month-end balance
|
|
$
|
15,396
|
|
|
$
|
17,000
|
|
|
$
|
16,000
|
|
Total borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year end
|
|
$
|
19,107
|
|
|
$
|
17,420
|
|
|
$
|
19,373
|
|
Weighted average rate at year end
|
|
|
4.14
|
%
|
|
|
2.56
|
%
|
|
|
1.88
|
%
|
Average balance during the year
|
|
$
|
16,758
|
|
|
$
|
18,997
|
|
|
$
|
19,951
|
|
Weighted average rate during the
year
|
|
|
3.36
|
%
|
|
|
2.57
|
%
|
|
|
1.97
|
%
|
Maximum month-end balance
|
|
$
|
19,486
|
|
|
$
|
22,248
|
|
|
$
|
26,459
|
|
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 our 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.
On February 27, 2006, the Federal Reserve approved a new
rule expanding the definition of a small bank holding
company. The new definition will include bank holding
companies with less than $500 million in total assets. Bank
holding companies will not qualify under the new definition if
they (i) are engaged in significant nonbanking activities
either directly or indirectly through a subsidiary,
(ii) conduct significant off-balance sheet activities,
including securitizations or managing or administering assets
for third parties, or (iii) have a material amount of debt
or equity securities (including trust preferred securities)
outstanding that are registered with the SEC. Although we have
less than $500 million in assets, it is unclear at this
point whether we otherwise meet the requirements for qualifying
as a small bank holding company. According to the
Federal Reserve Board, the revision of the criterion to exclude
any bank holding company that has outstanding a material amount
of SEC-registered debt or equity securities reflects the fact
that SEC registrants typically exhibit a degree of complexity of
operations and access to multiple funding sources that warrants
excluding them from the new policy statement and subjecting them
to the capital guidelines. In the adopting release for the new
rule, the Federal Reserve Board stated that what constitutes a
material amount of SEC-registered debt or equity for
a particular bank holding company depends on the size,
activities and condition of the relevant bank holding company.
In lieu of using fixed measurable parameters of materiality
across all institutions, the rule provides the Federal Reserve
with supervisory flexibility in determining, on a
case-by-case
basis, the significance or materiality of activities or
securities outstanding such that a bank
56
holding company should be excluded from the policy statement and
subject to the capital guidelines. Until the Federal Reserve
provides further guidance on the new rules, it will be unclear
whether we will be subject to the exemption from the capital
requirements for small bank holding companies. Regardless, our
bank falls under these minimum capital requirements as set per
bank regulatory agencies.
Under quantitative measures established by regulation to ensure
capital adequacy, we are required to maintain minimum amounts
and ratios of total Tier 1 capital to risk-weighted assets
and to total assets. We believe we met all applicable capital
adequacy requirements as of December 31, 2005 and as of
June 30, 2006.
Our capital ratios as of June 30, 2006, December 31,
2005 and December 31, 2004 (calculated in accordance with
regulatory guidelines) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Tier 1 leverage
ratio
|
|
|
8.47
|
%
|
|
|
8.40
|
%
|
|
|
8.05
|
%
|
Regulatory minimum
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
Well-capitalized
minimum
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 risk-based capital
ratio
|
|
|
10.04
|
%
|
|
|
9.91
|
%
|
|
|
9.49
|
%
|
Regulatory minimum
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
Well-capitalized
minimum
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
ratio
|
|
|
13.01
|
%
|
|
|
13.27
|
%
|
|
|
13.55
|
%
|
Regulatory minimum
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
Well-capitalized
minimum
|
|
|
|
|
|
|
|
|
|
|
|
|
The banks capital ratios as of June 30, 2006,
December 31, 2005 and 2004 (calculated in accordance with
regulatory guidelines) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Tier 1 leverage
ratio
|
|
|
10.00
|
%
|
|
|
10.06
|
%
|
|
|
9.99
|
%
|
Regulatory minimum
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
Well-capitalized
minimum
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Tier 1 risk-based capital
ratio
|
|
|
11.86
|
%
|
|
|
11.87
|
%
|
|
|
11.78
|
%
|
Regulatory minimum
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
Well-capitalized
minimum
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
Total risk-based capital
ratio
|
|
|
12.98
|
%
|
|
|
13.09
|
%
|
|
|
12.99
|
%
|
Regulatory minimum
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
Well-capitalized
minimum
|
|
|
10.00
|
%
|
|
|
10.00
|
%
|
|
|
10.00
|
%
|
To be categorized as well capitalized we must
maintain Tier 1 leverage, Tier 1 risk-based and
minimum total-risk based ratios of 5%, 6% and 10% respectively.
To be categorized as adequately capitalized we must
maintain minimum Tier 1 leverage, Tier 1 risk-based,
and total risk based ratios of 4%, 4% and 8%, respectively. At
December 31, 2005 and June 30, 2006, we were
categorized as well capitalized under the regulatory
framework for prompt corrective action. The capital ratios
improved generally as the percentage increase in capital
outweighed the percentage increase of assets.
During the third quarter of 2004, we completed the private
placement of 250 shares of our cumulative convertible
preferred stock at a stated value of $31,992 per share, for
an aggregate purchase price of $8.0 million. The preferred
stock is entitled to quarterly cumulative dividends at an annual
fixed rate of 6.5% and is convertible into shares of our common
stock at a conversion price per share of $14.06 three years from
the date of issuance. Our net proceeds from the sale of the
preferred stock were $7.7 million.
57
Market
Risk Analysis
Quantitative
Aspects of Market Risk
We do not maintain a trading account for any class of financial
instrument or engage in hedging activities or purchase high-risk
derivative instruments, and 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 using 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, and calculates each categorys interest change 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
|
|
|
−200
|
bp
|
Increase (decrease) in net
interest income at December 31, 2005
|
|
|
11.5
|
%
|
|
|
(11.5
|
)%
|
Increase (decrease) in net
interest income at June 30, 2006
|
|
|
3.3
|
%
|
|
|
(5.2
|
)%
|
As of December 31, 2005 and June 30, 2006, our balance
sheet was in an asset-sensitive position because 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.
In preparing the preceding table, we used certain assumptions
relating to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under differing
interest rate scenarios, among others.
As with any method of measuring interest rate risk, there are
certain shortcomings 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 the effective maturities of certain
interest earning assets.
We have attempted to decrease the average maturity of our assets
by:
|
|
|
|
|
offering a variety of adjustable-rate residential mortgage loans
and consumer loans, many of which we retain for our portfolio;
|
|
|
|
purchasing mortgage-backed and related securities with
adjustable rates or estimated lives of five to ten years or
less; and
|
|
|
|
purchasing short- to intermediate-term investment securities.
|
58
We also sell a portion of our long-term, fixed-rate
single-family residential mortgage loans for cash in the
secondary market.
We retain ARM loans and adjustable-rate mortgage-backed
securities, which reprice at regular intervals, because the
yield on these loans helps 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-cost savings,
NOW and money market accounts, along with higher-cost
certificates of deposit. We have attempted to lengthen the term
of our deposits by offering longer-term certificates of deposit.
We believe retail deposits, compared to brokered deposits,
reduce the effects of interest rate fluctuations because they
generally represent a more stable source of funds.
Off-Balance
Sheet Risk
Commitments to extend credit are agreements to lend to a client
as long as the client has not violated any material condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
the payment of a fee. At December 31, 2005, unfunded
commitments to extend credit were $24.1 million, of which
$4.7 million was at fixed rates and $19.4 million was
at variable rates. At June 30, 2006, unfunded commitments
to extend credit were $23.4 million, of which
$4.4 million was at fixed rates and $19.0 million was
at variable rates. A significant portion of the unfunded
commitments related to consumer equity lines of credit. Based on
historical experience, we anticipate that a significant portion
of these lines of credit will not be funded. We evaluate each
clients credit worthiness on a
case-by-case
basis. The amount of collateral obtained, if deemed necessary by
us upon extension of credit, is based on our credit evaluation
of the borrower. The type of collateral varies but may include
accounts receivable, inventory, property, plant and equipment,
and commercial and residential real estate.
At June 30, 2006 and December 31, 2005, there was a
$2.0 million commitment under a letter of credit. The
credit risk and collateral involved in issuing letters of credit
is essentially the same as that involved in extending loan
facilities to clients. Since most of the letters of credit are
expected to expire without being drawn upon, they do not
necessarily represent future cash requirements.
Except as disclosed in this prospectus, we are not involved in
off-balance sheet contractual relationships, unconsolidated
related entities that have off-balance sheet arrangements, or
transactions that could result in liquidity needs or other
commitments that significantly impact earnings.
Impact of
Accounting Pronouncements and Regulatory Policies
In December, 2004, the Financial Accounting Standards Board
(FASB) issued an amendment to SFAS 123 Accounting for
Stock-Based Compensation (SFAS 123R) which eliminates the
ability to account for share-based compensation transactions
using Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and generally requires
that such transactions be accounted for using a fair value-based
method. SFAS 123R will be effective for the company
beginning January 1, 2006. SFAS 123R applies to all
awards granted after the required effective date and to awards
modified, repurchased, or cancelled after that date as well as
for the unvested portion of awards existing as of the effective
date. The cumulative effect of initially applying this
Statement, if any, is recognized as of the required effective
date. As of the required effective date, the company will apply
SFAS 123R using a modified version of prospective
application. Under that transition method, compensation cost is
recognized on or after the required effective date for the
portion of outstanding awards, for which the requisite service
has not yet been rendered, based on the grant-date fair value of
those awards calculated under SFAS 123 for either
recognition or pro forma disclosures. For periods before the
required effective date, a company may elect to apply a modified
version of retrospective application under which financial
statements for prior periods are adjusted on a basis consistent
with the pro forma disclosures required for those periods by
SFAS 123. Based on the awards outstanding at June 30,
2006, we have estimated that approximately $272,000 of
compensation expense related to those awards will be recognized
during the year ended December 31, 2006.
59
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial
Instruments, an amendment of SFAS No. 133
and SFAS No. 140. This statement permits fair value
re-measurement for any hybrid financial instrument that contains
an embedded derivative that otherwise would require bifurcation.
It establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring
bifurcation. In addition, SFAS 155 clarifies which
interest-only strips and principal-only strips are not subject
to the requirements of Statement 133. It also clarifies
that concentrations of credit risk in the form of subordination
are not embedded derivatives. SFAS 155 amends
Statement 140 to eliminate the prohibition on a qualifying
special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than
another derivative financial instrument. This Statement is
effective for all financial instruments acquired or issued after
the beginning of an entitys first fiscal year that begins
after September 15, 2006. We are evaluating the impact, if
any, of the adoption of this Statement on our financial results.
In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial
Assets. This Statement amends
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities, and requires that all separately
recognized servicing assets and servicing liabilities be
initially measured at fair value, if practicable and permits the
entities to elect either fair value measurement with changes in
fair value reflected in earnings or the amortization and
impairment requirements of SFAS No. 140 for subsequent
measurement. The subsequent measurement of separately recognized
servicing assets and servicing liabilities at fair value
eliminates the necessity for entities that manage the risks
inherent in servicing assets and servicing liabilities with
derivatives to qualify for hedge accounting treatment and
eliminates the characterization of declines in fair value as
impairments or direct write-downs. This Statement is effective
as of the beginning of an entitys first fiscal year that
begins after September 15, 2006. We are evaluating the
impact, if any, of the adoption of this Statement on our
financial results.
In June 2006, the FASB issued FASB Interpretation No.
(FIN) 48 Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109, to clarify certain aspects of accounting
for uncertain tax positions, including issues related to the
recognition and measurement of those tax positions taken or
expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition. This interpretation is effective for fiscal years
beginning after December 15, 2006. We are in the process of
evaluating the impact of the adoption of this interpretation on
our results of operations and financial condition.
Effect of
Inflation and Changing Prices
The consolidated financial statements and related financial data
presented 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.
Unlike industrial companies, virtually all of our assets and
liabilities are monetary in nature. Therefore, changes in
interest rates generally have a more significant impact on our
performance than changing prices and inflation in general.
Interest rates do not necessarily move in the same direction or
to the same extent as the prices of goods and services. As
discussed previously, we seek to manage the relationships
between interest sensitive assets and liabilities in order to
protect against wide rate fluctuations, including those
resulting from inflation.
60
KENTUCKY
BANKING CENTERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS
The following discussion reviews the results of operations
and assesses the financial condition of Kentucky Banking
Centers. You should read the following discussion and analysis
in conjunction with the Kentucky Banking Centers Summary
Financial Data and the financial statements and related
notes thereto of Kentucky Banking Centers included elsewhere in
this prospectus. The discussion and analysis for the periods
ended June 30, 2006 and 2005 is based on unaudited
financial statements for such periods included elsewhere in this
prospectus.
Overview
Kentucky Banking Centers offers a variety of financial products
and services at its three banking locations in Glasgow, Horse
Cave, and Munfordville in south central Kentucky. The most
significant products and services include consumer and
commercial lending, receiving deposits, and offering other
traditional banking products and services. The primary goals of
Kentucky Banking Centers are to continually improve
profitability and shareholder value, maintain a strong capital
position, provide excellent service to customers, and provide a
challenging and rewarding work environment for our employees.
Kentucky Banking Centers generates a significant amount of its
revenue, cash flows and net income from interest income and net
interest income. Interest income is generated by earnings on
Kentucky Banking Centers earning assets, primarily loans
and investment securities. Net interest income is the excess of
the interest income earned on earning assets over the interest
expense paid on amounts borrowed to support those earning
assets. Interest expense is paid primarily on deposits accounts
and other short and long-term borrowing arrangements. The
ability to properly manage net interest income under changing
market environments is crucial to the success of Kentucky
Banking Centers.
In assessing Kentucky Banking Centers financial
performance, the following items of note should be considered:
The general trend of the short-term interest rate environment
for 2005 and the first six months of 2006 was upward primarily
as a result of short-term interest rate increases by the Federal
Reserve Board. The Federal Reserve began to increase the
short-term federal funds rate by increments of 25 basis
points during the last half of 2004 that continued into 2005 and
2006. In all, the federal funds rate was increased
125 basis points during 2004, an additional 200 basis
points during 2005 and additional 100 basis points in the
first six months of 2006. Longer-term yields, such as for
the 3, 5, 10, and 20 year treasuries, were
generally up at year end 2005 compared to year end 2004, with
the 3, 5, and 10 year notes up 112, 72, and
15 basis points, respectively, while the 20 year bond
yield dipped 24 basis points. For Kentucky Banking Centers,
this has had a positive effect on net interest margin and
spread. Net interest margin for 2005 increased 39 basis
points to 3.71% from 3.32% led by a 35 basis point increase
in net interest spread to 3.47% from 3.12%. Net interest margin
for the six months ended June 30, 2006 increased
46 basis points from December 31, 2005 to 4.17% from
3.71%.
Application
of Critical Accounting Policies
Kentucky Banking Centers audited financial statements are
prepared in accordance with accounting principles generally
accepted in the United States of America and follow general
practices applicable to the banking industry. Application of
these principles requires management to make estimates,
assumptions, and judgments 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 reported
period. These estimates, assumptions, and judgments are based on
information available as of the date of the financial
statements; accordingly, as this information changes, the
financial statements could reflect different estimates,
assumptions, and judgments. Certain policies inherently have a
greater reliance on the use of estimates, assumptions, and
judgments and as such have a greater possibility of producing
results that could be materially different than originally
reported. Estimates, assumptions, and judgments are necessary
when assets and liabilities are required to be recorded at fair
value, when a decline in the value of an asset warrants an
impairment write-down or valuation reserve to be established, or
when an asset or liability needs to be
61
recorded contingent upon a future event. Carrying assets and
liabilities at fair value inherently results in more financial
statement volatility. The fair values and the information used
to record valuation adjustments for certain assets and
liabilities are based either on quoted market prices or are
provided by other third-party sources, when available. When
third-party information is not available, valuation adjustments
are estimated in good faith by management primarily through the
use of internal cash flow modeling techniques.
The most significant accounting policies followed by Kentucky
Banking Centers are presented in Note 1 of Kentucky Banking
Centers 2005 audited financial statements. These policies,
along with the disclosures presented in the other financial
statement notes and in this managements discussion and
analysis of financial condition and results of operations,
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 credit losses
specifically identified in the loan portfolio, as well as
managements estimate of probable credit losses in the loan
portfolio at the balance sheet date. Determining the amount of
the allowance for loan losses and the related provision 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 pools of homogeneous 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 group on the balance sheets.
Additional information related to the allowance for loan losses
that describes the methodology and risk factors can be found
under the captions Asset Quality and
Nonperforming Assets in this managements
discussion and analysis of financial condition and results of
operation, as well as Notes 1 and 4 of Kentucky Banking
Centers 2005 audited financial statements.
Results
of Operations
Overview
Years
Ended December 31, 2005 and 2004
Net income for 2005 was $1.1 million, an increase of
$437,000, or 61.6%, compared to $709,000 for 2004. Basic net
income per share was $76,000 for 2005, an increase of $29,000,
or 61.7%, over basic net income per share for 2004. The increase
in net income for the twelve months ended December 31, 2005
is attributed to an increase in net interest income and a lower
provision for loan losses, partially offset by higher net
noninterest expenses (noninterest expenses in excess of
noninterest income). Net interest income for 2005 was
$4.4 million, an increase of $488,000, or 12.5%, compared
to $3.9 million for the same twelve months in 2004. The
increase in net interest income can be attributed to higher
interest income, primarily as a result of both loan growth and
higher average interest rates earned on loans, which offset the
increase in interest expense, primarily attributed to higher
rates paid on deposits.
The return on assets was 0.88% in 2005, an increase of
33 basis points from the prior year end. The return on
equity increased 411 basis points to 11.77%, compared to
7.66% in the prior year. The increase in return on equity is a
result of the $437,000 increase in net income and the
33 basis point increase in return on assets, despite the
55 basis point decrease in financial leverage from 13.9% to
13.4% as of December 31, 2005. Financial leverage
represents the degree in which borrowed funds, as opposed to
equity, are used in the funding of assets.
Three and
Six Months Ended June 30, 2006
Kentucky Banking Centers reported net income of $349,000 for the
three months ended June 30, 2006, an increase of $61,000,
or 21.2%, compared to $288,000 for the same period in 2005.
Basic and diluted net
62
income per share were $23,000 for the three months, an increase
of $4,000, or 21.3%, compared to $19,000 in the same period a
year ago.
Net interest income was $1.2 million in the three month
period ended June 30, 2006. This represents an increase of
$138,000, or 12.6%, compared to the same period a year ago. The
increase in net interest income is primarily due to higher
interest on loans of $221,000, or 15.1%, partially offset by
$136,000, or 20.4%, higher interest expense on deposits.
The provision for loans losses decreased $76,000, or 105.6%, in
the three-month comparison. This improvement is attributed to
lower delinquent and classified loans from year end 2005, lower
annualized net charge-offs as a percentage of average loans
outstanding, and lower historical loss ratios.
Noninterest income was $286,000 in the quarter ended
June 30, 2006, up $6,000, or 2.1%, from the same period a
year ago. Non-deposit service charges, commissions, and fees
increased $4,000. Service charges on fees on deposits also
increased $4,000, as compared to the same period in 2005. Income
from company-owned life insurance was unchanged. Noninterest
expense increased $115,000, or 12.4%, for the three-month period
compared to the same period a year earlier. The increase in
noninterest expenses occurred across a broad range of line
items. Salaries and employee benefits grew $22,000, or 4.8%, as
the average number of full time equivalent employees increased
to 44 from 41. Occupancy expense increased $23,000, or 32.4%.
All other noninterest expenses increased $70,000, or 17.9%. The
effective income tax rate increased to 27.1% from 23.0%.
The return on average assets was 1.11% for the current quarter
of 2006, an increase of 24 basis points compared to 0.87%
reported for the same period of 2005. The return on average
equity was 14.98% for the second quarter of 2006, an increase of
319 basis points compared to 11.79% for the same period of
2005. The increase in return on average equity is attributed to
a combination of the higher return on average equity partially
offset by a seven basis point increase in financial leverage to
13.55% from 13.48%. Financial leverage represents the degree in
which borrowed funds, as opposed to equity, are used in the
funding of assets.
Kentucky Banking Centers reported net income of $672,000 for the
six months ended June 30, 2006, an increase of $87,000, or
14.8%, compared to $585,000 reported for the six months ended
June 30, 2005. Basic and diluted net income per share was
$45,000 for the six months, an increase of $6,000, or 14.9%,
compared to $39,000 a year earlier.
The increase in net income for the six months ended
June 30, 2006 is primarily related to an increase in net
interest income. Net interest income was $2.4 million in
the six month period ended June 30, 2006. This represents
an increase of $249,000, or 11.7%, compared to the same period a
year ago. The increase in net interest income in each period is
primarily due to higher interest on loans of $401,000, or 14.0%,
partially offset by $240,000, or 18.1%, higher interest expense
on deposits.
The provision for loans losses declined $160,000 in the six
month comparison. The negative provision for loan losses of
$84,000 is reflective of the trend of improved credit quality of
Kentucky Banking Centers loan portfolio. This improvement
is attributed to lower delinquent and classified loans from year
end 2005, lower annualized net charge-offs as a percentage of
average loans outstanding, and lower historical loss ratios.
Noninterest income was $559,000 in the current six month period,
up $19,000, or 3.5%, in the comparison. The increase in
noninterest income was due to both an increase in non-deposit
service charges, commissions and fees of $11,000, or 8.5%, and
service charges and fees on deposits of $10,000, or 2.8%. Income
from company-owned life insurance increased $5,000, or 20.8%.
These increases were partially offset by a $7,000, or 23.3%,
decline in other noninterest income. Noninterest expenses
increased $272,000, or 15.0%, for the current six month period
compared to the same period a year earlier. The increase in
noninterest expenses occurred across a broad range of line
items. The most significant increase was salaries and employee
benefits, which increased $100,000, or 11.2%, in the six month
comparison, as the average number of full time equivalent
employees increased to 43 from 41 in the comparable periods.
Occupancy and equipment expenses increased $63,000 and $20,000,
respectively, which represents an increase of 42.9% and
63
26.3%, respectively, in the comparison. All other noninterest
expenses increased $89,000, or 12.8%. The effective income tax
rate was 27.4% for the current six month period compared to
24.0% a year earlier.
Return on average assets was 1.06% for the current six month
period, an increase of 19 basis points compared to 0.87%
reported for the same period in 2005. Return on average equity
was 14.47% for the current six month period, an increase of
242 basis points compared to 12.05% for the same period of
2005. The increase in return on average equity is attributed to
a combination of the higher return on average assets partially
offset by a 21 basis point increase in financial leverage
to 13.59% from 13.80%. Financial leverage represents the degree
in which borrowed funds, as opposed to equity, are used in the
funding of assets.
Net
Interest Income
Years
Ended December 31, 2005 and 2004
Interest income results from interest earned on earning assets,
which primarily include loans and investment securities.
Interest income is affected by volume (average balance),
composition of earning assets, and the related rates earned on
those assets. Total interest income for 2005 was
$7.2 million, an increase of $842,000, or 13.3%, from the
previous year. Interest income on loans grew as a result of a
higher average rate earned as well as an increase in volume.
Interest income on securities grew as a result of a higher
average rate earned on the investments. The tax equivalent yield
on earning assets for 2005 was 6.0%, an increase of
66 basis points compared to the same period a year ago.
Interest and fees on loans for 2005 was $6.0 million, an
increase of $537,000, or 9.9%, compared to a year earlier.
Average loans increased $721,000, or 0.9%, to $82.1 million
in the comparison. New loans and variable rate loans repricing
during 2005 generally repriced higher as market interest rates
have edged upward. The tax equivalent yield on loans increased
62 basis points to 7.3% from 6.7% in the annual comparison.
Interest on taxable securities was $871,000, an increase of
$259,000, or 42.3%, due to an increase in volume and the average
rate earned. The average rate earned on taxable securities
increased 55 basis points to 3.0% from 2.4% while the
average balance increased $4 million, or 16.2%, to
$29.0 million. Taxable equivalent interest on nontaxable
securities increased $2,000. Interest on short-term investments,
including time deposits in other banks, federal funds sold, and
securities purchased under agreements to resell, increased
$44,000 due to an increase in the average rate of 177 basis
points.
Interest expense results from incurring interest on interest
bearing liabilities, which primarily include interest bearing
deposits, federal funds purchased and securities sold under
agreements to repurchase, and FHLB advances. Interest expense is
affected by volume, composition of interest bearing liabilities,
and the related rates paid on those liabilities. Total interest
expense was $2.8 million for 2005, an increase of $354,000,
or 14.4%, from the prior year as a result of higher average
rates paid. Kentucky Banking Centers cost of funds was
2.6% for 2005, an increase of 31 basis points from 2.2% for
the prior year. The higher cost of funds was led by a
74 basis point increase in the average rate paid on
interest bearing demand deposits, which are reflective of the
increase in short term market interest rates by the Federal
Reserve during 2005.
Interest expense on time deposits, the largest component of
total interest expense, increased $126,000 in 2005, or 6.3%, to
$2.1 million. The increase in interest expense on time
deposits was attributed to a 16 basis point increase in
average rates paid to 3.2%. Interest expense on savings deposits
and interest bearing demand deposits increased $6,000, or 6.2%,
and $237,000, or 83.5%, respectively. These increases were due
primarily to an increase in the average rate paid on savings and
interest bearing demand deposits of 11 basis points and
74 basis points, respectively. Average interest bearing
demand deposits increased $275,000, or 0.9%, while average
savings deposits decreased $460,000, or 4.4%.
Interest expense on federal funds purchased and securities sold
under agreements to repurchase increased $3,000 in 2005.
Interest expense on FHLB advances decreased $18,000 in 2005
compared to 2004.
Net interest income is the most significant component of
Kentucky Banking Centers earnings. Net interest income is
the excess of the interest income earned on earning assets over
the interest paid for funds to support those assets. The two
most common metrics used to analyze net interest income are net
interest spread and net interest margin. Net interest spread
represents the difference between the yields on earning assets
and
64
the rates paid on interest bearing liabilities. Net interest
margin represents the percentage of net interest income to
average earning assets. Net interest margin will exceed net
interest spread because of the existence of noninterest bearing
sources of funds, principally demand deposits and
shareholders equity, which are also available to fund
earning assets. Changes in net interest income and margin result
from the interaction between the volume and the composition of
earning assets, their related yields, and the associated cost
and composition of the interest bearing liabilities.
Accordingly, portfolio size, composition, and the related yields
earned and the average rates paid can have a significant impact
on net interest spread and margin. The table on the following
page represents the major components of interest earning assets
and interest bearing liabilities on a tax equivalent basis. To
compare the tax-exempt asset yields to taxable yields, amounts
are adjusted to pretax equivalents based on the marginal
corporate Federal tax rate of 35.0%.
Tax equivalent net interest income was $4.4 million for
2005, an increase of $488,000, or 12.5%, compared to
$3.9 million in 2004. The net interest margin was 3.71%, an
increase of 39 basis points from 3.32% in the prior year.
An increase in the net interest spread accounts for
35 basis points of the lower margin while the impact of
noninterest bearing sources of funds accounted for an additional
4 basis points. The effect of noninterest bearing sources
of funds on net interest margin is reflective of an increasing
overall interest rate environment. The effect of noninterest
bearing sources of funds on net interest margin typically
increases in a rising rate environment.
During 2005, the tax equivalent yield on total earning assets
increased 66 basis points to 6.0% and the cost of funds
increased by 31 basis points to 2.6%, resulting in the
35 basis point increase in spread noted above. The tax
equivalent spread between rates earned on earning assets and
rates paid on interest bearing liabilities totaled 3.5% for 2005
compared to 3.1% a year earlier.
Kentucky Banking Centers remains proactive in management of the
rate sensitive components of both its assets and liabilities.
This task continues to be challenging due to competitive market
factors and the effects of a dynamic interest rate environment,
that is, however, still relatively low in a historical context.
Beginning in 2004, the Federal Reserve increased the short-term
federal funds rate five times totaling 125 basis points.
This trend continued throughout 2005, with eight additional rate
increases totaling 200 basis points. Predicting the movement of
future interest rates is uncertain. During the past year, the
average rates on the two most significant components of net
interest income for Kentucky Banking Centers, loans and time
deposits, both increased. Should interest rates continue to
increase, Kentucky Banking Centers cost of funds may also
increase and could continue to increase faster than the yields
on earning assets, resulting in even smaller net interest
margins. Should interest rates on Kentucky Banking Centers
earning assets and interest paying liabilities begin to decline,
Kentucky Banking Centers yield on earning assets could
potentially decrease faster than its cost of funds.
65
Distribution
of Assets, Liabilities and Shareholders Equity: Interest
Rates and Interest Differential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate (%)
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate (%)
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
29,047
|
|
|
$
|
871
|
|
|
|
3.00
|
%
|
|
$
|
24,997
|
|
|
$
|
612
|
|
|
|
2.45
|
%
|
Nontaxable(1)
|
|
|
4,810
|
|
|
|
278
|
|
|
|
5.78
|
%
|
|
|
4,688
|
|
|
|
276
|
|
|
|
5.89
|
%
|
Time deposits with banks, federal
funds sold and securities purchased under agreements to resell
|
|
|
5,500
|
|
|
|
172
|
|
|
|
3.13
|
%
|
|
|
9,387
|
|
|
|
128
|
|
|
|
1.36
|
%
|
Loans(1)(2)(3)
|
|
|
82,135
|
|
|
|
5,992
|
|
|
|
7.30
|
%
|
|
|
81,414
|
|
|
|
5,441
|
|
|
|
6.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
121,492
|
|
|
|
7,313
|
|
|
|
6.02
|
%
|
|
|
120,486
|
|
|
|
6,457
|
|
|
|
5.36
|
%
|
Allowance for loan losses
|
|
|
(1,211
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets, net of
allowance for loan losses
|
|
|
120,281
|
|
|
|
|
|
|
|
|
|
|
|
119,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
3,108
|
|
|
|
|
|
|
|
|
|
|
|
3,013
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
4,187
|
|
|
|
|
|
|
|
|
|
|
|
4,057
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
2,772
|
|
|
|
|
|
|
|
|
|
|
|
2,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
130,348
|
|
|
|
|
|
|
|
|
|
|
$
|
129,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS
EQUITY
|
Interest Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
$
|
31,748
|
|
|
$
|
521
|
|
|
|
1.64
|
%
|
|
$
|
31,473
|
|
|
$
|
284
|
|
|
|
0.90
|
%
|
Savings
|
|
|
10,030
|
|
|
|
103
|
|
|
|
1.03
|
%
|
|
|
10,490
|
|
|
|
97
|
|
|
|
0.92
|
%
|
Time
|
|
|
66,254
|
|
|
|
2,119
|
|
|
|
3.20
|
%
|
|
|
65,493
|
|
|
|
1,993
|
|
|
|
3.04
|
%
|
Federal funds purchased and
securities sold under agreements to repurchase
|
|
|
291
|
|
|
|
8
|
|
|
|
2.75
|
%
|
|
|
233
|
|
|
|
5
|
|
|
|
2.15
|
%
|
FHLB advances
|
|
|
1,724
|
|
|
|
57
|
|
|
|
3.31
|
%
|
|
|
2,098
|
|
|
|
75
|
|
|
|
3.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
110,047
|
|
|
|
2,808
|
|
|
|
2.55
|
%
|
|
|
109,787
|
|
|
|
2,454
|
|
|
|
2.24
|
%
|
Noninterest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand deposits
|
|
|
10,052
|
|
|
|
|
|
|
|
|
|
|
|
9,499
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
512
|
|
|
|
|
|
|
|
|
|
|
|
473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
120,611
|
|
|
|
|
|
|
|
|
|
|
|
119,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
9,737
|
|
|
|
|
|
|
|
|
|
|
|
9,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
130,348
|
|
|
|
|
|
|
|
|
|
|
$
|
129,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
4,505
|
|
|
|
|
|
|
|
|
|
|
$
|
4,003
|
|
|
|
|
|
TE basis adjustment
|
|
|
|
|
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
|
4,382
|
|
|
|
|
|
|
|
|
|
|
|
3,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.47
|
%
|
|
|
|
|
|
|
|
|
|
|
3.12
|
%
|
Effect of noninterest bearing
sources of funds
|
|
|
|
|
|
|
|
|
|
|
0.24
|
%
|
|
|
|
|
|
|
|
|
|
|
0.20
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.71
|
%
|
|
|
|
|
|
|
|
|
|
|
3.32
|
%
|
|
|
|
(1) |
|
Income and yield stated at a fully tax equivalent basis using
the marginal corporate Federal tax rate of 35.0%. |
|
(2) |
|
Loan balances include principal balances on nonaccrual loans. |
|
(3) |
|
Loan fees included in interest income amounted to $287,000 and
$320,000 for 2005 and 2004, respectively. |
66
The following table is an analysis of the change in net interest
income for the year ended December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
Variance Attributed to
|
|
|
|
2005/2004(1)
|
|
|
Volume
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable investment securities
|
|
$
|
259
|
|
|
$
|
109
|
|
|
$
|
150
|
|
Nontaxable investment
securities(2)
|
|
|
2
|
|
|
|
7
|
|
|
|
(5
|
)
|
Time deposits with banks, federal
funds sold and securities purchased under agreements to resell
|
|
|
44
|
|
|
|
(70
|
)
|
|
|
114
|
|
Loans(2)
|
|
|
551
|
|
|
|
48
|
|
|
|
503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
856
|
|
|
|
94
|
|
|
|
762
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits
|
|
|
237
|
|
|
|
2
|
|
|
|
235
|
|
Savings deposits
|
|
|
6
|
|
|
|
(5
|
)
|
|
|
11
|
|
Time deposits
|
|
|
126
|
|
|
|
23
|
|
|
|
103
|
|
Federal funds purchased and
securities sold under agreements to repurchase
|
|
|
3
|
|
|
|
2
|
|
|
|
1
|
|
FHLB advances
|
|
|
(18
|
)
|
|
|
(13
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
354
|
|
|
|
9
|
|
|
|
345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
502
|
|
|
$
|
85
|
|
|
$
|
417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change
|
|
|
100.0
|
%
|
|
|
16.9
|
%
|
|
|
83.1
|
%
|
|
|
|
(1) |
|
The changes which are not solely due to rate or volume are
allocated on a percentage basis using the absolute values of
rate and volume variances as a basis for allocation. |
|
(2) |
|
Income stated at fully tax equivalent basis using the marginal
corporate Federal tax rate of 35.0%. |
Three and
Six Months Ended June 30, 2006 and 2005
Three
Months Ended June 30, 2006 and 2005
The trend of the general interest rate environment in the three
months ended June 30, 2006 compared to a year earlier has
been upward primarily as a result of short-term interest rate
increases by the Board of Governors of the Federal Reserve
Board. The Federal Reserve has increased short-term interest
rates by 225 basis points in nine equal increments of
25 basis points since June 30, 2005. The effects of
these rate increases by the Federal Reserve has generally led to
higher average rates earned and paid on interest earning assets
and interest bearing liabilities with a faster increase in the
average rates earned on earning assets, particularly loans and
temporary investments, due to their repricing characteristics
combined with new loan originations in a rising rate environment.
Kentucky Banking Centers tax equivalent yield on earning
assets for the three months ended June 30, 2006 was 7.1%,
an increase of 122 basis points from 5.9% in the same
period a year ago. The cost of funds for the three months was
3.1%, an increase of 67 basis points compared to 2.5% in
the same period a year earlier. A goal of Kentucky Banking
Centers in the current interest rate environment is to increase
earning assets and maintain the current relatively low interest
rates paid on interest bearing liabilities. Kentucky Banking
Centers strives to accomplish this goal while providing
excellent service, offering competitive rates to its customers,
and maintaining its core deposit base. Maintaining the
relatively low cost of funds is becoming increasingly difficult
due to the upward trend in general interest rates and
competitive market forces. Average earning assets were
$117 million for the quarter, a decrease of
$5.7 million, or 4.6%, compared to $123 million
67
a year ago. As a percentage of total average assets, earning
assets decreased 43 basis points to 92.9% from 93.3%.
Total interest income for the second quarter of 2006 was
$2.0 million, an increase of $275,000, or 15.5%, compared
to the comparable period in the previous year. The growth in
interest income was mainly attributed to higher interest income
on loans of $221,000, or 15.1%. Interest income on loans
increased as a result of higher a 109 basis point increase
in the average rate earned on loans. Kentucky Banking
Centers tax equivalent yield on earning assets for the
quarter was 7.1%, an increase of 122 basis points compared
to the same period a year ago.
Interest and fees on loans for the second quarter of 2006 was
$1.7 million, an increase of $221,000, or 15.1%, compared
to a year earlier. Average loans decreased $200,000, or less
than 1%, to $82.3 million in the comparison. Interest
income on loans was boosted by a 122 basis point increase
in the tax equivalent yield to 7.1% from 5.9% in the quarterly
comparison. Interest on taxable securities was $170,000, a
decrease of $63,000, or 27.0%, due to a $13.1 million, or
41.9%, lower average balance outstanding partially offset by a
76 basis point increase in the average rate earned.
Interest on nontaxable securities was relatively unchanged.
Interest on short-term investments, including time deposits in
other banks, federal funds sold, and securities purchased under
agreements to resell, increased $123,000, or greater than 100%,
due to both an increase in the average rate earned of 213 basis
points and higher average balances of $8.1 million.
Total interest expense was $819,000 for the second quarter of
2006, an increase of $137,000, or 20.1%, from the same period in
the prior year. Interest expense increased mainly as a result of
higher interest expense on deposits of $137,000, or 20.1%.
Interest expense on deposits increased as a result of higher
rates paid on interest bearing deposits throughout the entire
deposit portfolio partially offset by declining balances.
Kentucky Banking Centers cost of funds was 3.1% for the
second quarter of 2006, an increase of 67 basis points from
2.5% for the prior year. The increase in cost of funds was led
by an 84 basis point increase on rates paid for time
deposits.
Interest expense on time deposits, the largest component of
total interest expense, increased $111,000, or 21.7%, to
$623,000. The increase was due to an 84 basis point
increase in the average rate paid to 3.9% from 3.1% partially
offset by a $2.9 million, or 4.4%, lower average balance
outstanding, which totaled $64.1 million in the quarter,
compared to $67.0 million in the same quarter a year
earlier. Interest expense on savings deposits and interest
bearing demand deposits increased $8,000, or 33.3%, and $17,000,
or 13.1%, respectively. Interest on interest bearing demand
deposits increased due mainly to a higher average rate paid of
40 basis points to 2.0% partially offset by a lower average
balance outstanding of $3.1 million. The increase in
average rates paid for deposits follows the trend of increasing
general short-term market interest rates between the comparable
periods.
Interest expense on federal funds purchased and securities sold
under agreements to repurchase was relatively unchanged in the
comparison as was that of FHLB advances.
The net interest margin increased 64 basis points to 4.3%
during the second quarter of 2006 compared to 3.7% in the same
quarter of 2005. The higher net interest margin is primarily
attributed to a 55 basis point increase in the spread
between rates earned on earning assets and the rates paid on
interest bearing liabilities to 4.0% in the current quarter from
3.4% in the comparable quarter of 2005. The remaining nine basis
point increase in margin is attributed to the effect of
noninterest bearing sources of funds. The effect of noninterest
bearing sources of funds on net interest margin typically
increases in a rising rate environment.
68
The following tables present an analysis of net interest income
for the quarterly periods ended June 30, 2006 and 2005.
Distribution
of Assets, Liabilities and Shareholders Equity: Interest
Rates and Interest Differential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Three Months Ended
|
|
|
|
June 30, 2006
|
|
|
June 30, 2005
|
|
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate (%)
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate (%)
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
18,115
|
|
|
$
|
170
|
|
|
|
3.76
|
%
|
|
$
|
31,199
|
|
|
$
|
233
|
|
|
|
3.00
|
%
|
Nontaxable(1)
|
|
|
4,372
|
|
|
|
62
|
|
|
|
5.69
|
%
|
|
|
4,830
|
|
|
|
70
|
|
|
|
5.81
|
%
|
Time deposits with banks, federal
funds sold and securities purchased under agreements to resell
|
|
|
12,710
|
|
|
|
155
|
|
|
|
4.89
|
%
|
|
|
4,648
|
|
|
|
32
|
|
|
|
2.76
|
%
|
Loans(1)(2)(3)
|
|
|
82,082
|
|
|
|
1,689
|
|
|
|
8.25
|
%
|
|
|
82,282
|
|
|
|
1,469
|
|
|
|
7.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
117,279
|
|
|
|
2,076
|
|
|
|
7.10
|
%
|
|
|
122,959
|
|
|
|
1,804
|
|
|
|
5.88
|
%
|
Allowance for loan losses
|
|
|
(1,169
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets, net of
allowance for loan losses
|
|
|
116,110
|
|
|
|
|
|
|
|
|
|
|
|
121,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
3,072
|
|
|
|
|
|
|
|
|
|
|
|
3,088
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
4,154
|
|
|
|
|
|
|
|
|
|
|
|
4,163
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
2,922
|
|
|
|
|
|
|
|
|
|
|
|
2,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
126,258
|
|
|
|
|
|
|
|
|
|
|
$
|
131,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS
EQUITY
|
Interest Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
$
|
29,276
|
|
|
$
|
147
|
|
|
|
2.01
|
%
|
|
$
|
32,423
|
|
|
$
|
130
|
|
|
|
1.61
|
%
|
Savings
|
|
|
10,157
|
|
|
|
32
|
|
|
|
1.26
|
%
|
|
|
10,099
|
|
|
|
24
|
|
|
|
0.95
|
%
|
Time
|
|
|
64,096
|
|
|
|
623
|
|
|
|
3.90
|
%
|
|
|
67,020
|
|
|
|
512
|
|
|
|
3.06
|
%
|
Federal funds purchased and
securities sold under agreements to repurchase
|
|
|
263
|
|
|
|
3
|
|
|
|
4.58
|
%
|
|
|
200
|
|
|
|
1
|
|
|
|
2.01
|
%
|
FHLB advances
|
|
|
1,471
|
|
|
|
14
|
|
|
|
3.82
|
%
|
|
|
1,773
|
|
|
|
15
|
|
|
|
3.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
105,263
|
|
|
|
819
|
|
|
|
3.12
|
%
|
|
|
111,515
|
|
|
|
682
|
|
|
|
2.45
|
%
|
Noninterest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand deposits
|
|
|
11,134
|
|
|
|
|
|
|
|
|
|
|
|
9,968
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
541
|
|
|
|
|
|
|
|
|
|
|
|
499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
116,938
|
|
|
|
|
|
|
|
|
|
|
|
121,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
9,320
|
|
|
|
|
|
|
|
|
|
|
|
9,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
126,258
|
|
|
|
|
|
|
|
|
|
|
$
|
131,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
1,257
|
|
|
|
|
|
|
|
|
|
|
$
|
1,122
|
|
|
|
|
|
TE basis adjustment
|
|
|
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
1,229
|
|
|
|
|
|
|
|
|
|
|
$
|
1,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.98
|
%
|
|
|
|
|
|
|
|
|
|
|
3.43
|
%
|
Effect of noninterest bearng
sources of funds
|
|
|
|
|
|
|
|
|
|
|
0.32
|
%
|
|
|
|
|
|
|
|
|
|
|
0.23
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
4.30
|
%
|
|
|
|
|
|
|
|
|
|
|
3.66
|
%
|
|
|
|
(1) |
|
Income and yield stated at a fully tax equivalent basis using a
35.0% tax rate. |
|
(2) |
|
Loan balances include principal balances on nonaccrual loans. |
|
(3) |
|
Loan fees included in interest income amounted to $68,000 and
$76,000 in 2006 and 2005, respectively. |
69
Analysis
of Changes in Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
Variance
|
|
|
Attributed to
|
|
|
|
2006/2005(1)
|
|
|
Volume
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable investment securities
|
|
$
|
(63
|
)
|
|
$
|
(335
|
)
|
|
$
|
272
|
|
Nontaxable investment
securities(2)
|
|
|
(8
|
)
|
|
|
(7
|
)
|
|
|
(1
|
)
|
Time deposits with banks, federal
funds sold and securities purchased under agreements to resell
|
|
|
123
|
|
|
|
85
|
|
|
|
38
|
|
Loans(2)
|
|
|
220
|
|
|
|
(24
|
)
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
272
|
|
|
|
(281
|
)
|
|
|
553
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits
|
|
|
17
|
|
|
|
(68
|
)
|
|
|
85
|
|
Savings deposits
|
|
|
8
|
|
|
|
|
|
|
|
8
|
|
Time deposits
|
|
|
111
|
|
|
|
(139
|
)
|
|
|
250
|
|
Federal funds purchased and
securities sold under agreements to repurchase
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
FHLB advances
|
|
|
(1
|
)
|
|
|
(9
|
)
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
137
|
|
|
|
(216
|
)
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
135
|
|
|
$
|
(65
|
)
|
|
$
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change
|
|
|
100.0
|
%
|
|
|
(48.1
|
)%
|
|
|
148.1
|
%
|
|
|
|
(1) |
|
The changes that are not solely due to rate or volume are
allocated on a percentage basis using the absolute values of
rate and volume variances as a basis for allocation. |
|
(2) |
|
Income stated at fully tax equivalent basis using a 35.0% tax
rate. |
Six
Months Ended June 30, 2006 and 2005
Kentucky Banking Centers tax equivalent yield on earning
assets for the current six months was 6.9%, an increase of
122 basis points from 5.7% in the same period a year ago.
The cost of funds for the current six months was 3.0%, an
increase of 64 basis points compared to 2.4% in the same
period a year earlier. Average earning assets decreased
$8.0 million, or 6.4%, to $117.0 million in the six
month comparison. As a percentage of total average assets,
earning assets decreased 53 basis points to 92.9% from
93.5%.
Total interest income for the six month period ended
June 30, 2006 was $4.0 million, an increase of
$488,000, or 14.0%, compared to the comparable period in the
previous year. The growth in interest income was mainly
attributed to higher interest income on loans of $401,000, or
14.0%. Interest income on loans increased mainly as a result of
a 107 basis point increase in the average rate earned on
loans. Kentucky Banking Centers tax equivalent yield on
earning assets for the current period was 6.9%, an increase of
122 basis points compared to the same period a year ago.
Interest and fees on loans for the six months ended
June 30, 2006 was $3.3 million, an increase of
$401,000, or 14.0%, compared to a year earlier. Average loans
decreased $773,000, or 0.94%, to $81.4 million in the
comparison. Interest on taxable securities was $416,000, a
decrease of $28,000, or 6.3%, due to a $9.5 million, or
29.2%, lower average balance outstanding offset by a
90 basis point increase in the average rate earned.
Interest on nontaxable securities was relatively unchanged in
the comparison. Interest on short-term investments, including
time deposits in other banks, federal funds sold, and securities
purchased under agreements to resell, increased $124,000, or
greater than 100%, due to both an increase in the average rate
earned of 210 basis points and a $2.6 million, or 44.5%,
increase in the average balances outstanding.
70
Total interest expense was $1.6 million for six months
ended June 30, 2006, an increase of $239,000, or 17.5%,
from the same period in the prior year. Interest expense
increased mainly as a result of higher interest expense on
deposits of $240,000, or 18.1%. Interest expense on deposits
increased as a result of higher rates paid on interest bearing
deposits throughout the entire deposit portfolio even though
balances were down. Kentucky Banking Centers cost of funds
was 3.0% for the current six month period, an increase of
64 basis points from 2.4% for the same period in the prior
year. The increase in cost of funds was led by a 78 basis
point increase in time deposits.
Interest expense on time deposits, the largest component of
total interest expense, increased $197,000, or 19.3%, to
$1.2 million. The increase is due to a 78 basis point
increase in the average rate paid to 3.8% from 3.0% partially
offset by a $3.4 million, or 5.1%, lower average balance
outstanding, which totaled $64.7 million in the current
period compared to $68.1 million in the same period a year
earlier. Interest expense on savings deposits and interest
bearing demand deposits increased $12,000, or 25.5%, and
$31,000, or 11.9%, respectively. The increase in interest
expense on savings deposits was due to a 25 basis point
increase in the average rates paid to 1.2% from 0.9%. Interest
on interest bearing demand deposits increased due mainly to a
higher average rate paid of 46 basis points to 2.0% and was
partially offset by a decrease in the average balance
outstanding of $4.6 million, or 13.5%. The increase in
average rates paid for deposits follows the trend of increasing
general short-term market interest rates between the comparable
periods.
Interest expense on other borrowed funds, consisting primarily
of FHLB advances, decreased $4,000, or 12.9%, and is due mainly
to a decrease in the average balance outstanding of $305,000, or
16.9%.
The net interest margin increased 66 basis points to 4.2%
during the six months ended June 30, 2006, compared to 3.5%
in the same period of 2005. The higher net interest margin is
primarily attributed to a 58 basis point increase in the
spread between rates earned on earning assets and the rates paid
on interest bearing liabilities to 3.9% in the current six
months from 3.3% in the comparable six months of 2005. The
remaining eight basis point increase in margin is attributed to
the effect of noninterest bearing sources of funds. The effect
of noninterest bearing sources of funds on net interest margin
typically increases in a rising rate environment.
71
The following tables present an analysis of net interest income
for the six months ended June 30, 2006 and 2005.
Distribution
of Assets, Liabilities and Shareholders Equity: Interest
Rates and Interest Differential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2006
|
|
|
June 30, 2005
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
Income/
|
|
|
Rate
|
|
|
Average
|
|
|
Income/
|
|
|
Rate
|
|
|
|
Balance
|
|
|
Expense
|
|
|
(%)
|
|
|
Balance
|
|
|
Expense
|
|
|
(%)
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
22,875
|
|
|
$
|
416
|
|
|
|
3.67
|
%
|
|
$
|
32,331
|
|
|
$
|
444
|
|
|
|
2.77
|
%
|
Nontaxable(1)
|
|
|
4,461
|
|
|
|
126
|
|
|
|
5.70
|
%
|
|
|
4,833
|
|
|
|
140
|
|
|
|
5.84
|
%
|
Time deposits with banks, federal
funds sold and securities purchased under agreements to resell
|
|
|
8,575
|
|
|
|
202
|
|
|
|
4.75
|
%
|
|
|
5,936
|
|
|
|
78
|
|
|
|
2.65
|
%
|
Loans(1)(2)(3)
|
|
|
81,395
|
|
|
|
3,284
|
|
|
|
8.14
|
%
|
|
|
82,168
|
|
|
|
2,881
|
|
|
|
7.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
117,306
|
|
|
|
4,028
|
|
|
|
6.92
|
%
|
|
|
125,268
|
|
|
|
3,543
|
|
|
|
5.70
|
%
|
Allowance for loan losses
|
|
|
(1,189
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets, net of
allowance for loan losses
|
|
|
116,117
|
|
|
|
|
|
|
|
|
|
|
|
124,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
3,067
|
|
|
|
|
|
|
|
|
|
|
|
3,119
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
4,163
|
|
|
|
|
|
|
|
|
|
|
|
4,161
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
2,881
|
|
|
|
|
|
|
|
|
|
|
|
2,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
126,228
|
|
|
|
|
|
|
|
|
|
|
$
|
134,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS
EQUITY
|
Interest Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
$
|
29,261
|
|
|
$
|
291
|
|
|
|
2.01
|
%
|
|
$
|
33,839
|
|
|
$
|
260
|
|
|
|
1.55
|
%
|
Savings
|
|
|
9,957
|
|
|
|
59
|
|
|
|
1.19
|
%
|
|
|
10,131
|
|
|
|
47
|
|
|
|
0.94
|
%
|
Time
|
|
|
64,664
|
|
|
|
1,218
|
|
|
|
3.80
|
%
|
|
|
68,113
|
|
|
|
1,021
|
|
|
|
3.02
|
%
|
Federal funds purchased and
securities sold under agreements to repurchase
|
|
|
323
|
|
|
|
6
|
|
|
|
3.75
|
%
|
|
|
279
|
|
|
|
3
|
|
|
|
2.17
|
%
|
FHLB advances
|
|
|
1,501
|
|
|
|
27
|
|
|
|
3.63
|
%
|
|
|
1,806
|
|
|
|
31
|
|
|
|
3.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
105,706
|
|
|
|
1,601
|
|
|
|
3.05
|
%
|
|
|
114,168
|
|
|
|
1,362
|
|
|
|
2.41
|
%
|
Noninterest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand deposits
|
|
|
10,748
|
|
|
|
|
|
|
|
|
|
|
|
9,712
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
486
|
|
|
|
|
|
|
|
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
116,940
|
|
|
|
|
|
|
|
|
|
|
|
124,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
9,288
|
|
|
|
|
|
|
|
|
|
|
|
9,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
126,228
|
|
|
|
|
|
|
|
|
|
|
$
|
134,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
2,427
|
|
|
|
|
|
|
|
|
|
|
$
|
2,181
|
|
|
|
|
|
TE basis adjustment
|
|
|
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
2,370
|
|
|
|
|
|
|
|
|
|
|
$
|
2,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.87
|
%
|
|
|
|
|
|
|
|
|
|
|
3.29
|
%
|
Effect of noninterest bearng
sources of funds
|
|
|
|
|
|
|
|
|
|
|
0.30
|
%
|
|
|
|
|
|
|
|
|
|
|
0.22
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
4.17
|
%
|
|
|
|
|
|
|
|
|
|
|
3.51
|
%
|
|
|
|
(1) |
|
Income and yield stated at a fully tax equivalent basis using a
35.0% tax rate. |
|
(2) |
|
Loan balances include principal balances on nonaccrual loans. |
|
(3) |
|
Loan fees included in interest income amounted to $133,000 and
$136,000 for 2006 and 2005, respectively. |
72
Analysis
of Changes in Net Interest Income (tax equivalent
basis)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
Variance
|
|
|
Attributed to
|
|
|
|
2006/2005(1)
|
|
|
Volume
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable investment securities
|
|
$
|
(28
|
)
|
|
$
|
(289
|
)
|
|
$
|
261
|
|
Nontaxable investment
securities(2)
|
|
|
(14
|
)
|
|
|
(11
|
)
|
|
|
(3
|
)
|
Time deposits with banks, federal
funds sold and securities purchased under agreements to resell
|
|
|
124
|
|
|
|
45
|
|
|
|
79
|
|
Loans(2)
|
|
|
403
|
|
|
|
(80
|
)
|
|
|
483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
485
|
|
|
|
(335
|
)
|
|
|
820
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits
|
|
|
31
|
|
|
|
(88
|
)
|
|
|
119
|
|
Savings deposits
|
|
|
12
|
|
|
|
(3
|
)
|
|
|
15
|
|
Time deposits
|
|
|
197
|
|
|
|
(142
|
)
|
|
|
339
|
|
Federal funds purchased and
securities sold under agreements to repurchase
|
|
|
3
|
|
|
|
1
|
|
|
|
2
|
|
FHLB advances
|
|
|
(4
|
)
|
|
|
(8
|
)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
239
|
|
|
|
(240
|
)
|
|
|
479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
246
|
|
|
$
|
(95
|
)
|
|
$
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change
|
|
|
100.0
|
%
|
|
|
(38.6
|
)%
|
|
|
138.6
|
%
|
|
|
|
(1) |
|
The changes that are not solely due to rate or volume are
allocated on a percentage basis using the absolute values of
rate and volume variances as a basis for allocation. |
|
(2) |
|
Income stated at fully tax equivalent basis using a 35.0% tax
rate. |
Noninterest
Income
Years
Ended December 31, 2005 and 2004
Noninterest income totaled $1.1 million for 2005, a
decrease of $138,000, or 11.4%, compared to the prior year.
Noninterest income represented 13.0% of total revenue at year
end 2005, a decline of 300 basis points from 16.0% for
2004. The decrease in noninterest income is due primarily to a
decrease in gain on sale of other real estate owned. The gain
was $119,000 in 2004 and none in 2005. Income from company-owned
life insurance declined $13,000, or 19.4%, and other income
declined $21,000, or 44.7%. Service charges and fees on deposits
increased $8,000, or 1.1%, and non-deposit related service
charges, commissions, and fees increased $7,000, or 2.9%.
Three and
Six Months Ended June 30, 2006 and 2005
Noninterest income totaled $286,000 for the second quarter of
2006, an increase of $6,000, or 2.1% compared to the same period
in the prior year. Noninterest income represents 12.3% of total
revenue for the quarter, a decrease of 139 basis points
from 13.6% for the same period last year. The decrease in
noninterest income as a percentage of total revenue is due
primarily to the significant growth in interest income. Service
charges and fees on deposits increased $4,000, or 2.1%, in the
quarterly comparison. Other service charges, commissions and
fees increased $4,000, or 6.2%. Income from company-owned life
insurance was unchanged at $14,000.
Noninterest income totaled $559,000 for the six months ended
June 30, 2006, an increase of $19,000, or 3.5%, compared to
the same period in the prior year. Noninterest income represents
12.3% of total revenue for the six months, a decrease of
108 basis points from 13.4% for the same period last year.
The decrease in noninterest income as a percentage of total
revenue is due primarily to higher interest and fees on loans in
the
73
current period. Service charges and fees on deposits increased
$10,000, or 2.8%. Other service charges, commissions, and fees
was $140,000 for the six months ended June 30, 2006; an
increase of $11,000, or 8.5%, compared to the same period in
2005. Income from company-owned life insurance increased $5,000,
or 20.8%. Other noninterest income was $23,000, a decrease of
$7,000 compared to $30,000 a year earlier.
Noninterest
Expense
Years
Ended December 31, 2005 and 2004
Total noninterest expense was $3.7 million for 2005, an
increase of $73,000, or 2.0%, compared to 2004. The increase in
noninterest expense occurred across a broad range of line items
but the most significant increases were data processing and
communications expense, which increased $31,000, or 6.4%, and
net occupancy and equipment expenses of $58,000, or 12.2%.
Salaries and related payroll taxes increased $39,000, or 2.9%,
to $1.4 million due to normal salary increases. Employee
benefit expenses decreased $8,000, or 2.3%. Noncash compensation
expense related to the nonqualified stock option plan of Farmers
Capital, the holding company for Kentucky Banking Centers,
declined $21,000, or 100%, due to the structure of the vesting
schedule. All options for which Kentucky Banking Centers had
previously recorded noncash compensation expense became fully
vested during the fourth quarter of 2004. Therefore, there was
no compensation expense recorded for these stock options during
2005. The number of average full time equivalent employees was
unchanged at 43.
Occupancy expense increased $47,000, or 15.2%, and totaled
$357,000. Equipment expenses were $178,000, an increase of
$11,000, or 6.6%. Kentucky Banking Centers recently relocated
the Munfordville Branch. Data processing and communications
expense increased $31,000, or 6.4%, to $514,000. All other
noninterest expenses decreased $47,000, or 5.0%, to $901,000
from $948,000.
Three and
Six Months Ended June 30, 2006 and 2005
Total noninterest expenses were $1.0 million for the three
months ended June 30, 2006, an increase of $115,000, or
12.4%, compared to $925,000 for the same period in 2005. The
increase in noninterest expenses is reflected across a broad
range of line items. The increases in noninterest expenses
include salaries and employee benefits of $22,000, or 4.8%,
occupancy expenses of $23,000, or 32.4%, liability insurance of
$34,000, or greater than 100%, and all other net expenses of
$36,000, or 9.3%.
The increase in salaries and employee benefits resulted from
normal salary increases for existing employees and an increase
in benefits. Salaries and related payroll taxes increased
$15,000, or 4.0%, and benefit expenses were unchanged. The
number of full time equivalent employees increased from 41 to
44. Noncash compensation expense related to the Farmers Capital
nonqualified stock option plan and employee stock purchase plan
was $8,000. There was no such expense recorded in the comparable
period last year since the current period includes the initial
recognition of such costs pursuant to SFAS No. 123(R).
Occupancy expense increased $23,000, or 32.4%, and totaled
$94,000 for the three months ended June 30, 2006. Equipment
expenses were up $11,000, or 28.2%, to $50,000. Data processing
and communications expense decreased $8,000, or 5.8%, to
$130,000. Bank franchise taxes increased $3,000, or 12.5%, to
$27,000. Liability insurance and Farmers Capital management fees
increased $34,000, or more than 100%, and $5,000, or 9.8%,
respectively. Other noninterest expenses were $154,000, an
increase of $25,000, or 19.4%.
Total noninterest expenses were $2.1 million for the six
months ended June 30, 2006, an increase of $272,000, or
15.0% compared to $1.8 million for the same period in 2005.
The increase in noninterest expenses is reflected across a broad
range of line items. The largest increases in noninterest
expenses is attributed to salaries and employee benefits of
$100,000, or 11.2%, net occupancy expenses of $63,000, or 42.9%,
equipment expenses of $20,000, or 26.3%, and liability insurance
of $44,000, or greater than 100%.
The $100,000 increase in salaries and employee benefits resulted
from normal salary increases and higher benefit costs. Salaries
and related payroll taxes increased $51,000, or 7.1%. Benefit
expenses increased $34,000, or 18.7%. Average full time
equivalent employees increased to 43 from 41 in the comparison.
74
Noncash compensation expense related to the Farmers Capital
nonqualified stock option plan and employee stock purchase plan
was $16,000. There was no such expense recorded in the
comparable period last year since the current period includes
the initial recognition of such costs pursuant to
SFAS No. 123(R).
Occupancy expense increased $63,000, or 42.9%, and totaled
$210,000 at June 30, 2006. Equipment expenses were up
$20,000, or 26.3%, to $96,000. Data processing and
communications expense was relatively unchanged in the
comparison. Liability insurance increased $44,000, or greater
than 100%. The holding company management fee increased $10,000,
or 8.7%, in the comparison. Bank franchise taxes increased
$6,000, or 12.5%. Other noninterest expenses were $290,000, an
increase of $26,000, or 9.8%.
Income
Tax
Years
Ended December 31, 2005 and 2004
Income tax expense for 2005 was $435,000, an increase of
$215,000, or 97.7%, from the previous year. The effective tax
rate was 27.5% for the current year, an increase of
380 basis points from 23.7% in 2004. The increase in the
effective tax rate is due to increased revenues from taxable
sources without a corresponding increase in revenue from
nontaxable investment securities or loans.
Three and
Six Months Ended June 30, 2006 and 2005
Income tax expense for the second quarter of 2006 was $130,000,
an increase of $44,000, or 51.2%, compared to the same period a
year earlier. The effective federal income tax rate increased
415 basis points to 27.1% from 23.0% in the comparison.
Income from taxable sources of revenue has grown at a much
faster pace than revenue from nontaxable loans and investment
securities.
Income tax expense for the six months ended June 30, 2006
was $254,000, an increase of $69,000, or 37.3%, compared to the
same period a year earlier. The effective federal income tax
rate increased 340 basis points to 27.4% from 24.0% in the
comparison. The change in the effective tax rate is due to an
increase in revenue from taxable sources, which outpaced the
growth in revenue from nontaxable sources.
Financial
Condition
General
Total assets were $127.2 million on December 31, 2005,
a decrease of $10.8 million, or 7.8%, from the prior year
end amount of $138.0 million. The decrease in assets was
driven by a $10.5 million, or 22.6%, decrease in total
investment securities. The decrease in investments securities
was mainly due to a decline in the need for pledging against
public funds. Total deposits were $115.2 million at
December 31, 2005, a decrease of $8.4 million, or
6.8%, due mainly to decreased public funds. Shareholders
equity decreased $380,000, or 4.0%, due mainly to a $293,000
decrease in retained earnings. Accumulated other comprehensive
income declined $87,000 as a result of unrealized losses (net of
tax) from Kentucky Banking Centers available for sale
investment securities portfolio.
On an average basis, total assets were $130.3 million for
2005, an increase of $1.3 million, or 1.0%, from year end
2004. Average earning assets, primarily loans and securities,
were $121.5 million for 2005, an increase of
$1.0 million, or 0.8%, compared to 2004. Average earning
assets represent 93.2% of total average assets on
December 31, 2005, a decrease of 18 basis points
compared to 93.4% at year end 2004.
Total assets were $127.2 million on June 30, 2006,
unchanged from the prior year end. The composition of Kentucky
Banking Centers significant assets changed as follows: an
$11.8 million increase in cash and cash equivalents, which
exceeded 100%; a $14.6 million, or 40.6%, decrease in
securities; and an increase in net loans of $2.1 million,
or 2.6%. Cash and cash equivalents and investment securities
increased primarily due to an $11.9 million increase in
Federal Funds sold and repurchase agreements. The decrease of
$14.6 million in total investment securities is partially
due to less pledging required for public funds which declined.
Shareholders equity grew $26,000, or less than 1%, to
$9.2 million at June 30, 2006.
75
On an average basis, total assets were $126.3 million for
the first six months of 2006, a decrease of $7.7 million,
or 5.7%, from year end 2005. Average earning assets, primarily
loans and securities, were $117.3 million at June 30,
2006, a decrease of $4.1 million, or 3.4%, from year end
2005. Average earning assets represent 92.9% of total average
assets on June 30, 2006, a decrease of 28 basis points
compared to 93.2% at year end 2005.
Loans
Loans, net of unearned income, totaled $81.8 million on
December 31, 2005, substantially no change from year end
2004. Real estate lending increased $2.4 million, or 3.9%,
in the comparison. Real estate mortgage loans make up 74.4% the
total net loans outstanding at December 31, 2005 and
increased $1.9 million, or 3.2%, compared to a year
earlier. Installment loans decreased $1.9 million, or
18.7%, in the year end comparison. On average, loans represented
67.6% of earning assets during 2005 unchanged from 2004. When
loan demand declines, the available funds are redirected to
lower earning temporary investments or investment securities,
which typically involve a decrease in credit risk and lower
yields.
The composition of the loan portfolio, net of unearned income,
is summarized in the table below for the years ended
December 31, 2005, 2004, 2003, 2002 and 2001.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2005
|
|
|
%
|
|
|
2004
|
|
|
%
|
|
|
2003
|
|
|
%
|
|
|
2002
|
|
|
%
|
|
|
2001
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial, financial and
agricultural
|
|
$
|
11,008
|
|
|
|
13.5
|
%
|
|
$
|
11,455
|
|
|
|
14.0
|
%
|
|
$
|
11,366
|
|
|
|
14.2
|
%
|
|
$
|
11,664
|
|
|
|
15.5
|
%
|
|
$
|
8,405
|
|
|
|
12.8
|
%
|
Real estate construction
|
|
|
1,526
|
|
|
|
1.9
|
|
|
|
1,045
|
|
|
|
1.3
|
|
|
|
768
|
|
|
|
1.0
|
|
|
|
1,719
|
|
|
|
2.3
|
|
|
|
1,469
|
|
|
|
2.2
|
|
Real estate mortgage
residential
|
|
|
37,714
|
|
|
|
46.1
|
|
|
|
38,782
|
|
|
|
47.4
|
|
|
|
24,901
|
|
|
|
31.1
|
|
|
|
21,195
|
|
|
|
28.2
|
|
|
|
17,692
|
|
|
|
27.0
|
|
Real estate mortgage
farmland and other commercial enterprises
|
|
|
23,198
|
|
|
|
28.3
|
|
|
|
20,246
|
|
|
|
24.7
|
|
|
|
29,559
|
|
|
|
36.9
|
|
|
|
26,154
|
|
|
|
34.8
|
|
|
|
23,900
|
|
|
|
36.5
|
|
Installment
|
|
|
8,342
|
|
|
|
10.2
|
|
|
|
10,265
|
|
|
|
12.5
|
|
|
|
13,291
|
|
|
|
16.6
|
|
|
|
14,230
|
|
|
|
18.9
|
|
|
|
13,753
|
|
|
|
21.0
|
|
Lease financing
|
|
|
70
|
|
|
|
0.1
|
|
|
|
118
|
|
|
|
0.1
|
|
|
|
223
|
|
|
|
0.3
|
|
|
|
175
|
|
|
|
0.2
|
|
|
|
266
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
81,845
|
|
|
|
100.0
|
%
|
|
$
|
81,902
|
|
|
|
100.0
|
%
|
|
$
|
80,108
|
|
|
|
100.0
|
%
|
|
$
|
75,137
|
|
|
|
100.0
|
%
|
|
$
|
65,485
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents commercial, financial, and
agricultural loans and real estate construction loans
outstanding at December 31, 2005 which, based on remaining
scheduled repayments of principal, are due in the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
After One But
|
|
|
After
|
|
|
|
|
|
|
One Year
|
|
|
Within Five Years
|
|
|
Five Years
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial, financial and
agricultural
|
|
$
|
9,979
|
|
|
$
|
947
|
|
|
$
|
82
|
|
|
$
|
11,008
|
|
Real estate
construction
|
|
|
1,501
|
|
|
|
25
|
|
|
|
|
|
|
|
1,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,480
|
|
|
$
|
972
|
|
|
$
|
82
|
|
|
$
|
12,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below presents commercial, financial, and agricultural
loans and real estate construction loans outstanding at
December 31, 2005 that are due after one year, classified
according to sensitivity to changes in interest rates.
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
Variable
|
|
|
|
Rate
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
Due after one but within five years
|
|
$
|
947
|
|
|
$
|
25
|
|
Due after five years
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,029
|
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
|
76
Loans, net of unearned income, totaled $83.9 million at
June 30, 2006, an increase of $2.1 million, or 2.5%,
from year end 2005. The composition of the loan portfolio is
summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
December 31, 2005
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial, financial and
agriculture
|
|
$
|
10,242
|
|
|
|
12.2
|
%
|
|
$
|
11,008
|
|
|
|
13.5
|
%
|
Real estate
construction
|
|
|
1,382
|
|
|
|
1.6
|
|
|
|
1,526
|
|
|
|
1.9
|
|
Real estate mortgage
residential
|
|
|
24,812
|
|
|
|
29.6
|
|
|
|
37,714
|
|
|
|
46.1
|
|
Real estate mortgage
farmland and other commercial enterprises
|
|
|
39,706
|
|
|
|
47.3
|
|
|
|
23,198
|
|
|
|
28.3
|
|
Installment
|
|
|
7,714
|
|
|
|
9.2
|
|
|
|
8,342
|
|
|
|
10.2
|
|
Lease financing
|
|
|
46
|
|
|
|
0.1
|
|
|
|
70
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
83,902
|
|
|
|
100.0
|
%
|
|
$
|
81,845
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On average, loans represented 69.4% of earning assets during the
current six month period, an increase of 178 basis points,
compared to 67.6% for year end 2005. As loan demand fluctuates,
the available funds are reallocated between loans and temporary
investments or investment securities.
Asset
Quality
Kentucky Banking Centers loan portfolio is subject to
varying degrees of credit risk. Credit risk is mitigated by
diversification within the portfolio, limiting exposure to any
single customer or industry, standard lending policies and
underwriting criteria, and collateral requirements. Kentucky
Banking Centers maintains policies and procedures to ensure that
the granting of credit is done in a sound and consistent manner.
This includes policies that require certain minimum standards to
be maintained. Credit decisions are made at the bank level under
guidelines established by policy. The parent companys
internal audit department performs loan reviews at Kentucky
Banking Centers during the year. This loan review evaluates loan
administration, credit quality, documentation, compliance with
loan standards, and the adequacy of the allowance for loan
losses.
The provision for loan losses represents charges made to
earnings to maintain an allowance for loan losses at an adequate
level based on credit losses specifically identified in the loan
portfolio, as well as managements best estimate of
probable incurred losses in the remainder of the portfolio at
the balance sheet date. The allowance for loan losses is a
valuation allowance increased by the provision for loan losses
and decreased by net charge-offs. Loan losses are charged
against the allowance when management believes the
uncollectibility of a loan is confirmed. Subsequent recoveries,
if any, are credited to the allowance.
Management estimates the allowance balance required using a
risk-rated methodology. Many factors are considered when
estimating the allowance. These include, but are not limited to,
past loan loss experience, an assessment of the financial
condition of individual borrowers, a determination of the value
and adequacy of underlying collateral, the condition of the
local economy, an analysis of the levels and trends of the loan
portfolio, and a review of delinquent and classified loans. The
allowance for loan losses consists of specific and general
components. The specific component relates to loans that are
individually classified as impaired or loans otherwise
classified as substandard or doubtful. The general component
covers non-classified loans and is based on historical loss
experience adjusted for current risk factors. Allocations of the
allowance may be made for specific loans, but the entire
allowance is available for any loan that, in managements
judgment, should be charged off. Actual loan losses could differ
significantly from the amounts estimated by management.
The risk-rated methodology includes segregating watch list and
past due loans from the general portfolio and allocating
specific reserves to these loans depending on their status. For
example, watch list loans, which may be identified by the
internal loan review risk-rating system or by regulatory
examiner classification, are assigned a certain loss percentage
while loans past due 30 days or more are assigned a
different loss percentage. Each of these percentages consider
past experience as well as current factors. The remainder of
77
the general loan portfolio is segregated into three components
having similar risk characteristics as follows: commercial
loans, consumer loans, and real estate loans. Each of these
components is assigned a loss percentage based on their
respective three year historical loss percentage. Additional
allocations to the allowance may then be made for subjective
factors, such as those mentioned above, as determined by senior
managers who are knowledgeable about these matters.
While management considers the allowance for loan losses to be
adequate based on the information currently available,
additional adjustments to the allowance may be necessary due to
changes in the factors noted above. Borrowers may experience
difficulty in periods of economic deterioration, and the level
of nonperforming loans, charge-offs, and delinquencies could
rise and require additional increases in the provision. Also,
regulatory agencies, as an integral part of their examinations,
periodically review the allowance for loan losses. These reviews
could result in additional adjustments to the provision based
upon their judgments about relevant information available during
their examination.
The provision for loan losses totaled $195,000 in 2005, a
decrease of $375,000, or 65.8%, compared to $570,000 for 2004.
Total net charge-offs for Kentucky Banking Centers decreased
$390,000, or 67.4%, for year end 2005 compared to 2004 and were
as follows for 2005: real estate lending $16,000, installment
loans $148,000, and commercial, financial, and agricultural
loans $25,000. The change in net charge-offs for 2005 compared
to 2004 were as follows: commercial, financial, and agriculture
decreased $197,000, or 88.7%; real estate lending decreased
$117,000, or 88.0%; and installment loans decreased $76,000, or
33.9%. Net charge-offs equaled 0.23% of average loans for 2005,
a decline of 48 basis points compared to the prior year
end. The allowance for loan losses was $1.2 million at year
end 2005, nearly unchanged from 2004 and represented 1.46% of
loans net of unearned income at year end 2005 and 2004. The
allowance for loan losses as a percentage of nonperforming loans
totaled 106.1% and 109.0% at year end 2005 and 2004,
respectively. Management continues to emphasize collection
efforts and evaluation of risks within the portfolio. The
composition of Kentucky Banking Centers loan portfolio
continues to be diverse with no significant concentration to any
individual or industry.
The table below summarizes the loan loss experience for the past
five years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in thousands)
|
|
|
Balance of allowance for loan
losses at beginning of year
|
|
$
|
1,193
|
|
|
$
|
1,202
|
|
|
$
|
1,130
|
|
|
$
|
979
|
|
|
$
|
920
|
|
Loans charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and
agricultural
|
|
|
30
|
|
|
|
314
|
|
|
|
205
|
|
|
|
145
|
|
|
|
111
|
|
Real estate
|
|
|
65
|
|
|
|
140
|
|
|
|
286
|
|
|
|
165
|
|
|
|
97
|
|
Installment loans to individuals
|
|
|
170
|
|
|
|
245
|
|
|
|
193
|
|
|
|
197
|
|
|
|
196
|
|
Lease financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans charged off
|
|
|
265
|
|
|
|
699
|
|
|
|
684
|
|
|
|
510
|
|
|
|
404
|
|
Recoveries of loans previously
charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and
agricultural
|
|
|
5
|
|
|
|
92
|
|
|
|
22
|
|
|
|
1
|
|
|
|
20
|
|
Real estate
|
|
|
49
|
|
|
|
7
|
|
|
|
16
|
|
|
|
|
|
|
|
336
|
|
Installment loans to individuals
|
|
|
22
|
|
|
|
21
|
|
|
|
21
|
|
|
|
6
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
76
|
|
|
|
120
|
|
|
|
59
|
|
|
|
7
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged off
|
|
|
189
|
|
|
|
579
|
|
|
|
625
|
|
|
|
503
|
|
|
|
38
|
|
Additions to allowance charged to
expense
|
|
|
195
|
|
|
|
570
|
|
|
|
697
|
|
|
|
654
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
1,199
|
|
|
$
|
1,193
|
|
|
$
|
1,202
|
|
|
$
|
1,130
|
|
|
$
|
979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans net of unearned
income
|
|
$
|
82,135
|
|
|
$
|
81,414
|
|
|
$
|
78,877
|
|
|
$
|
70,105
|
|
|
$
|
62,906
|
|
Ratio of net charge-offs during
year to average loans, net of unearned income
|
|
|
0.23
|
%
|
|
|
0.71
|
%
|
|
|
0.79
|
%
|
|
|
0.72
|
%
|
|
|
0.06
|
%
|
78
The following table presents an estimate of the allocation of
the allowance for loan losses by type for the date indicated.
Although specific allocations exist, the entire allowance is
available to absorb losses in any particular category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial, financial, and
agricultural
|
|
$
|
382
|
|
|
$
|
387
|
|
|
$
|
281
|
|
|
$
|
477
|
|
|
$
|
378
|
|
Real estate
|
|
|
639
|
|
|
|
568
|
|
|
|
604
|
|
|
|
321
|
|
|
|
234
|
|
Installment loans to individuals
|
|
|
178
|
|
|
|
238
|
|
|
|
317
|
|
|
|
329
|
|
|
|
367
|
|
Lease financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,199
|
|
|
$
|
1,193
|
|
|
$
|
1,202
|
|
|
$
|
1,130
|
|
|
$
|
979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allowance for loan losses was $1.2 million at
June 30, 2006, a decrease of $21,000, or 1.8%, from the
prior year end. The allowance for loan losses was 1.4% of loans
net of unearned income at June 30, 2006, a decrease of six
basis points, or 1.5%, at December 31, 2005. The provision
for loan losses declined $160,000, or 210.5%, in the six month
comparison. The negative provision for loans losses of $4,000
and $84,000 in the current three and six month periods is
attributed to continued improvement in the credit quality of
Kentucky Banking Centers loan portfolio. There was a
$616,000, or 54.5%, decline in nonperforming loans since year
end 2005. Nonaccrual loans are down $281,000, or 66.1%, compared
to year end 2005. Loans past due 90 days or more and still
accruing had a $335,000, or 47.5%, decrease compared to year end
2005.
The allowance for loan losses as a percentage of nonperforming
loans totaled 229.2% and 106.1% at June 30, 2006 and
December 31, 2005, respectively. The increase in the
current period compared to the prior year end is primarily
attributed to the net decline in nonperforming loans of
$616,000. Management continues to emphasize collection efforts
and evaluation of risks within the loan portfolio.
Nonperforming
Assets
Nonperforming assets for Kentucky Banking Centers include
nonperforming loans, other real estate owned, and other
foreclosed assets. Nonperforming loans consist of nonaccrual
loans, loans past due 90 days on which interest is still
accruing, and restructured loans. Generally, the accrual of
interest on loans is discontinued when it is determined that the
collection of interest or principal is doubtful, or when a
default of interest or principal has existed 90 days or
more, unless such loan is well secured and in the process of
collection.
Nonperforming assets totaled $1.2 million at year end 2005,
an increase of $10,000, or 0.9%, compared to 2004. The increase
is primarily due to a $169,000, or 31.5%, increase in
90 days past due loans and was partially offset by a
$133,000, or 23.8%, decline in nonaccrual loans. Nonperforming
loans represent 1.4% of loans net of unearned income at year end
2005; nearly unchanged compared to year end 2004. Information
pertaining to nonperforming loans and assets is presented in the
table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in thousands)
|
|
|
Loans accounted for on nonaccrual
basis
|
|
$
|
425
|
|
|
$
|
558
|
|
|
$
|
435
|
|
|
$
|
207
|
|
|
$
|
70
|
|
Loans past due 90 days or
more and still accruing
|
|
|
705
|
|
|
|
536
|
|
|
|
621
|
|
|
|
66
|
|
|
|
85
|
|
Total nonperforming loans
|
|
|
1,130
|
|
|
|
1,094
|
|
|
|
1,056
|
|
|
|
273
|
|
|
|
155
|
|
Other real estate owned
|
|
|
10
|
|
|
|
20
|
|
|
|
141
|
|
|
|
103
|
|
|
|
20
|
|
Other foreclosed assets
|
|
|
12
|
|
|
|
28
|
|
|
|
74
|
|
|
|
66
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
1,152
|
|
|
$
|
1,142
|
|
|
$
|
1,271
|
|
|
$
|
442
|
|
|
$
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets totaled $577.0 million at
June 30, 2006, a decrease of $575,000, or 49.9%, from the
prior year end. Nonperforming loans were $514,000 at
June 30, 2006, a $616,000, or 54.5%, decline compared to
year end 2005. Nonperforming loans represent 0.6% of loans net
of unearned income at June 30, 2006, a decrease of
77 basis points from 1.4% compared to year end 2005. Other
real estate owned was
79
$50,000 at June 30, 2006. This represents an increase of
$40,000, or greater than 100%, compared to $10,000 at year end
2005.
Temporary
Investments
Temporary investments consist of interest bearing deposits in
other banks and federal funds sold and securities purchased
under agreements to resell. Kentucky Banking Centers uses these
funds in the management of liquidity and interest rate
sensitivity. At December 31, 2005, temporary investments
were $208,000, a decrease of $339,000, or 62.0%, compared to
$547,000 at year end 2004. In 2005, temporary investments
averaged $5.5 million, a decrease of $3.9 million, or
41.4%, from year end 2004. Temporary investments are reallocated
as loan demand and other investment alternatives present the
opportunity.
At June 30, 2006, temporary investments were
$12.1 million, an increase of $11.9 million, or
greater than 100%, compared to $208,000 at year end 2005.
Temporary investments averaged $8.6 million during the
first six months of 2006, an increase of $3.1 million, or
55.9%, from year end 2005.
Investment
Securities
The investment securities portfolio is comprised primarily of
U.S. Government agency securities, mortgage-backed
securities, and tax-exempt securities of states and political
subdivisions. Total investment securities were
$36.0 million on December 31, 2005, a decrease of
$10.5 million, or 22.6%, from year end 2004.
The funds made available from maturing or called bonds have been
redirected as necessary to fund higher yielding loan growth,
reinvested to purchase additional investment securities, or
otherwise employed to improve the composition of the balance
sheet. The purchase of nontaxable obligations of states and
political subdivisions is one of the primary means of managing
Kentucky Banking Centers tax position. The impact of the
alternative minimum tax related to Kentucky Banking
Centers ability to acquire tax-free obligations at an
attractive yield is routinely monitored.
Investment securities averaged $33.9 million in total for
the current year, a decrease of $4.2 million, or 14.1%. The
decrease in average investment securities occurred almost
entirely in the taxable portfolio. The decrease in the net
unrealized gain in the current period is due primarily to the
impact of changing economic conditions, including an increase in
market interest rates, particularly short-term rates, which have
generally lowered the value of the investment portfolio at the
end of the current period. As overall market interest rates have
moved upward during the current period, the portfolio has
declined in value. Market values of fixed rate investments are
inversely related to changes in market interest rates.
On December 31, 2005, available for sale securities made up
95.8% of the total investment securities and 95.9% a year
earlier. U.S. Government agencies were $27.5 million
and $36.6 million at year end 2005 and 2004, respectively.
This represents 79.8% of the total available for sale securities
and 76.4% of the total portfolio at year end 2005. At year end
2004, U.S. Government agencies made up 82.0% of the total
available for sale securities and 78.7% of the total portfolio.
Mortgage-backed securities in the available for sale portfolio
were $2.7 million at year end 2005, a decrease of
$1.1 million, or 27.8%, from year end 2004. Mortgage-backed
securities accounted for 8.0% and 8.5% of the available for sale
securities portfolio at December 31, 2005 and 2004,
respectively. Obligations of states and political subdivisions
in the available for sale and held to maturity portfolio were
$3.0 million and $1.6 million, respectively, at
December 31, 2005. This represents 8.8% and 100.0% of the
available for sale and held to maturity portfolio, respectively.
There were no gains or losses on the sale of available for sale
investment securities in 2005 or 2004.
80
The following table summarizes the carrying values of investment
securities on December 31, 2005 and 2004. The investment
securities are divided into available for sale and held to
maturity securities. Available for sale securities are carried
at the estimated fair value and held to maturity securities are
carried at amortized cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
Available
|
|
|
Held to
|
|
|
Available
|
|
|
Held to
|
|
December 31,
|
|
for Sale
|
|
|
Maturity
|
|
|
for Sale
|
|
|
Maturity
|
|
|
|
(Dollars in thousands)
|
|
|
Obligations of
U.S. government agencies
|
|
$
|
27,520
|
|
|
$
|
|
|
|
$
|
36,627
|
|
|
$
|
|
|
Obligations of states and
political subdivisions
|
|
|
3,042
|
|
|
|
1,529
|
|
|
|
3,091
|
|
|
|
1,917
|
|
Mortgage-backed securities
|
|
|
2,743
|
|
|
|
|
|
|
|
3,799
|
|
|
|
|
|
Equity securities
|
|
|
1,193
|
|
|
|
|
|
|
|
1,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,498
|
|
|
$
|
1,529
|
|
|
$
|
44,652
|
|
|
$
|
1,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents an analysis of the contractual
maturity and tax equivalent weighted average interest rates of
investment securities at December 31, 2005. For purposes of
this analysis, available for sale securities are stated at fair
value and held to maturity securities are stated at amortized
cost. Equity securities in the available for sale portfolio
consist of restricted FHLB and Federal Reserve Board stocks,
which have no stated maturity and are not included in the
maturity schedule that follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One But
|
|
|
After Five But
|
|
|
|
|
|
|
Within One Year
|
|
|
Within Five Years
|
|
|
Within Ten Years
|
|
|
After Ten Years
|
|
Available for Sale
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
Obligations of
U.S. government agencies
|
|
$
|
23,618
|
|
|
|
4.7
|
%
|
|
$
|
3,902
|
|
|
|
5.2
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
Obligations of states and
political subdivisions
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
4.9
|
|
|
|
2,144
|
|
|
|
5.3
|
|
|
|
398
|
|
|
|
6.1
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
1,655
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
1,088
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,618
|
|
|
|
4.7
|
%
|
|
$
|
6,057
|
|
|
|
5.6
|
%
|
|
$
|
2,144
|
|
|
|
5.3
|
%
|
|
$
|
1,486
|
|
|
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One But
|
|
|
After Five But
|
|
|
|
Within One Year
|
|
|
Within Five Years
|
|
|
Within Ten Years
|
|
Held to Maturity
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
Obligations of states and
political subdivisions
|
|
$
|
684
|
|
|
|
6.6
|
%
|
|
$
|
715
|
|
|
|
6.6
|
%
|
|
$
|
130
|
|
|
|
7.0
|
%
|
The calculation of the weighted average interest rates for each
category is based on the weighted average costs of the
securities. The weighted average tax rates on exempt states and
political subdivisions are computed based on the marginal
corporate Federal tax rate of 35%.
Total investment securities were $21.4 million on
June 30, 2006, a decrease of $14.6 million, or 40.6%,
from year end 2005. The decline in investment securities was
partially related to a decrease in public deposits. Kentucky
Banking Centers is required to pledge investment securities
against public deposits. Public deposits were down
$4.5 million on average in the comparison.
Investment securities averaged $27.3 million in total for
the six months ended June 30, 2006, a decrease of
$6.5 million, or 19.3%, compared to the year end 2005
average balance. Funds from investment securities were shifted
to temporary investments due to the flat yield curve. The
difference in yield was not enough to encourage longer term
investments in the current rate environment.
Deposits
Kentucky Banking Centers primary source of funding for its
lending and investment activities results from its customer
deposits, which consist of noninterest and interest bearing
demand, savings, and time
81
deposits. On December 31, 2005, deposits totaled
$115.3 million, a decrease of $8.4 million, or 6.8%,
from year end 2004. The decrease in deposits was due to a
$9.1 million, or 7.9%, decrease in interest bearing
deposits partially offset by a $753,000, or 8.3%, increase in
noninterest bearing deposits. The decrease in interest bearing
deposits was almost totally related to public funds. Average
total deposits were $118.1 million for 2005, an increase of
$1.1 million, or 1.0%, compared to 2004. Increases in
average deposits consisted of: noninterest bearing demand of
$553,000, or 5.8%; interest bearing demand of $275,000, or 0.9%;
and time deposits of $761,000, or 1.2%. The only decrease was
$460,000, or 4.4%, in average savings deposits. During 2005,
total average interest bearing deposits were
$108.0 million, an increase of $576,000, or 0.5%,from
$107.5 million for 2004.
On June 30, 2006, total deposits were $115.2 million,
relatively unchanged from year end 2005. Interest bearing
deposits decreased $1.1 million, or 1.0%, but was offset by
a $942,000, or 9.6%, increase in noninterest bearing deposits.
Average total deposits were $103.9 million for the six
months of 2006, a decrease of $4.2 million, or 3.8%,
compared to year end 2005. Net increases in average deposits
were noninterest bearing demand of $696,000, or 6.9%. Net
decreases in average deposits were as follows: interest bearing
demand of $2.5 million, or 7.8%; savings accounts of
$73,000, or 0.7%; and time deposits of $1.6 million, or
2.4%.
A summary of average balances and rates paid on deposits for the
years ended December 31, 2005 and 2004 follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
Noninterest bearing demand
|
|
$
|
10,052
|
|
|
|
|
|
|
$
|
9,499
|
|
|
|
|
|
Interest bearing demand
|
|
|
31,748
|
|
|
|
1.64
|
%
|
|
|
31,473
|
|
|
|
0.90
|
%
|
Savings
|
|
|
10,030
|
|
|
|
1.03
|
%
|
|
|
10,490
|
|
|
|
0.92
|
%
|
Time
|
|
|
66,254
|
|
|
|
3.20
|
%
|
|
|
65,493
|
|
|
|
3.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
118,084
|
|
|
|
2.32
|
%
|
|
$
|
116,955
|
|
|
|
2.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of time deposits of $100,000 or more outstanding at
December 31, 2005 are summarized as follows.
|
|
|
|
|
|
|
Amount
|
|
|
|
(Dollars in thousands)
|
|
|
3 months or less
|
|
$
|
2,205
|
|
Over 3 through 6 months
|
|
|
1,052
|
|
Over 6 through 12 months
|
|
|
1,400
|
|
Over 12 months
|
|
|
8,303
|
|
|
|
|
|
|
Total
|
|
$
|
12,960
|
|
|
|
|
|
|
Short-term
Borrowings
Short-term borrowings consist of federal funds purchased and
securities sold under agreements to repurchase with year end
balances of $777,000 and $2.5 million in 2005 and 2004,
respectively. Such borrowings are generally on an overnight
basis. A summary of short-term borrowings for the years ended
December 31, 2005, 2004 and 2003 is as follows.
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Amount outstanding at year end
|
|
$
|
777
|
|
|
$
|
2,480
|
|
|
$
|
200
|
|
Maximum outstanding at any
month-end
|
|
|
777
|
|
|
|
2,480
|
|
|
|
534
|
|
Average outstanding
|
|
|
291
|
|
|
|
233
|
|
|
|
351
|
|
Weighted average rate during the
year
|
|
|
2.75
|
%
|
|
|
2.15
|
%
|
|
|
1.1
|
%
|
Short term borrowings as of June 30, 2006 decreased
$577,000, or 74.3%, as compared to December 31, 2005. Short
term borrowings averaged $323,000 at June 30, 2006, a
$32,000 increase from year end 2005.
FHLB
Advances
Kentucky Banking Centers long-term borrowings consist of
FHLB advances. These advances are secured by restricted holdings
of FHLB stock that Kentucky Banking Centers is required to own
as well as certain mortgage loans as required by the FHLB. Such
advances are made pursuant to several different credit programs,
which have their own interest rates and range of maturities.
Interest rates on FHLB advances are fixed and range between
2.91% and 8.15%, with a weighted average rate of 3.36%, and
maturities of up to 18 years. Long-term advances from the
FHLB totaled $1.6 million at December 31, 2005, a
decrease of $302,000, or 16.0%, from year end 2004.
FHLB advances were $1.4 million for the six months ended
June 30, 2006. This represents a $145,000, or 9.1%,
decrease from the prior year end and represents repayments made
during the period.
Contractual
Obligations
Kentucky Banking Centers is contractually obligated to make
payments as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
One to
|
|
|
Three to
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
Three Years
|
|
|
Five Years
|
|
|
Five Years
|
|
|
|
(Dollars in thousands)
|
|
|
Long-term debt
|
|
$
|
1,591
|
|
|
$
|
|
|
|
$
|
51
|
|
|
$
|
22
|
|
|
$
|
1,518
|
|
Operating leases
|
|
|
2,263
|
|
|
|
116
|
|
|
|
333
|
|
|
|
338
|
|
|
|
1,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,854
|
|
|
$
|
116
|
|
|
$
|
384
|
|
|
$
|
360
|
|
|
$
|
2,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term FHLB debt represents FHLB advances pursuant to several
different credit programs and is more fully described under the
caption FHLB Advances above and in Note 7 of
Kentucky Banking Centers 2005 audited financial
statements. Operating leases include standard business equipment
used in Kentucky Banking Centers
day-to-day
business as well as the lease of its branch site in
Munfordville. Operating lease terms for business equipment
generally range from one to five years. The lease for the
Munfordville branch site expires in 2025 and includes the
ability to extend the lease through five
5-year
extensions.
Effects
of Inflation
The majority of Kentucky Banking Centers assets and
liabilities are monetary in nature. Therefore, Kentucky Banking
Centers differs greatly from most commercial and industrial
companies that have significant investments in nonmonetary
assets, such as fixed assets and inventories. However, inflation
does have an important impact on the growth of assets in the
banking industry and on the resulting need to increase equity
capital at higher than normal rates in order to maintain an
appropriate equity to assets ratio. Inflation also affects other
noninterest expense, which tends to rise during periods of
general inflation.
Management believes the most significant impact on financial and
operating results is Kentucky Banking Centers ability to
react to changes in interest rates. Management seeks to maintain
an essentially balanced position between interest sensitive
assets and liabilities in order to protect against the effects
of wide interest rate fluctuations.
83
Market
Risk Management
Market risk is the risk of loss arising from adverse changes in
market prices and rates. Kentucky Banking Centers market
risk is comprised primarily of interest rate risk created by its
core banking activities of extending loans and receiving
deposits. Kentucky Banking Centers success is largely
dependent upon its ability to manage this risk. Interest rate
risk is defined as the exposure of Kentucky Banking
Centers net interest income to adverse movements in
interest rates. Although Kentucky Banking Centers manages other
risks, such as credit and liquidity risk, management considers
interest rate risk to be its most significant risk, which could
potentially have the largest and a material effect on Kentucky
Banking Centers financial condition and results of
operations. A sudden and substantial change in interest rates
may adversely impact Kentucky Banking Centers earnings to
the extent that the interest rates earned on assets and paid on
liabilities do not change at the same speed, to the same extent,
or on the same basis. Other events that could have an adverse
impact on Kentucky Banking Centers performance include
changes in general economic and financial conditions, general
movements in market interest rates, and changes in consumer
preferences. Kentucky Banking Centers primary purpose in
managing interest rate risk is to effectively invest Kentucky
Banking Centers capital and to manage and preserve the
value created by its core banking business.
Kentucky Banking Centers has an Asset and Liability Management
Committee. This committee monitors the composition of the
balance sheet to ensure comprehensive management of interest
rate risk and liquidity. The committee also receives guidance,
support, and oversight from the asset and liability management
committee of its parent company.
Kentucky Banking Centers uses a simulation model as a tool to
monitor and evaluate interest rate risk exposure. The model is
designed to measure the sensitivity of net interest income and
net income to changing interest rates during the next twelve
months. Forecasting net interest income and its sensitivity to
changes in interest rates requires Kentucky Banking Centers to
make assumptions about the volume and characteristics of many
attributes, including assumptions relating to the replacement of
maturing earning assets and liabilities. Other assumptions
include, but are not limited to, projected prepayments,
projected new volume, and the predicted relationship between
changes in market interest rates and changes in customer account
balances. These effects are combined with Kentucky Banking
Centers estimate of the most likely rate environment to
produce a forecast for the next twelve months. The forecasted
results are then compared to the effect of a gradual
200 basis point increase and decrease in market interest
rates on Kentucky Banking Centers net interest income and
net income. Because assumptions are inherently uncertain, the
model cannot precisely estimate net interest income or net
income or the effect of interest rate changes on net interest
income and net income. Actual results could differ significantly
from simulated results.
At December 31, 2005, the model indicated that if rates
were to gradually increase by 200 basis points over the
next twelve months, then net interest income (TE) and net income
would increase 9.0% and 33.5%, respectively, compared to
forecasted results. The model indicated that if rates were to
gradually decrease by 200 basis points over the next twelve
months, then net interest income (TE) and net income would
decrease 8.9% and 33.1%, respectively, compared to forecasted
results.
In the current low interest rate environment, it is not
practical or possible to reduce certain deposit rates by the
same magnitude as rates on earning assets. The average rate paid
on some of Kentucky Banking Centers deposits remains below
2.0%. This situation magnifies the models predicted
results when modeling a decrease in interest rates, as earning
assets with higher yields have more of an opportunity to reprice
at lower rates than lower-rate deposits.
Liquidity
Kentucky Banking Centers uses a liquidity ratio to help measure
its ability to meet its cash flow needs. This ratio is monitored
by the asset and liability management committee at both the bank
level and the parent company level. The liquidity ratio is based
on current and projected levels of sources and uses of funds.
This measure is useful in analyzing cash needs and formulating
strategies to achieve desired results. For example, a low
liquidity ratio could indicate that Kentucky Banking
Centers ability to fund loans might become more difficult.
A high liquidity ratio could indicate that Kentucky Banking
Centers may have a disproportionate
84
amount of funds in low yielding assets, which is more likely to
occur during periods of sluggish loan demand. Kentucky Banking
Centers liquidity position at year end 2005 is relatively
unchanged from year end 2004, is within guidelines, and
considered by management to be at an appropriate level.
The primary source of funds for Kentucky Banking Centers is
customer deposits. As of December 31, 2005 and
June 30, 2006, total deposits were $115.3 million and
$115.2 million, respectively. Kentucky Banking Centers had
cash balances of $3.3 million at year end 2005, a decrease
of $474,000, or 12.4%, from the prior year end. The decrease in
cash at year end was due primarily to dividends paid of
$1.4 million. Cash balances remained virtually unchanged at
June 30, 2006.
Kentucky Banking Centers objective as it relates to
liquidity is to ensure that it has funds available to meet
deposit withdrawals and credit demands without unduly penalizing
profitability. In order to maintain a proper level of liquidity,
the bank has several sources of funds available on a daily basis
that can be used for liquidity purposes. Those sources of funds
include the banks core deposits, consisting of both
business and nonbusiness deposits; cash flow generated by
repayment of principal and interest on loans and investment
securities; FHLB borrowings; and federal funds purchased and
securities sold under agreements to repurchase. While maturities
and scheduled amortization of loans and investment securities
are generally a predictable source of funds, deposit outflows
and mortgage prepayments are influenced significantly by general
interest rates, economic conditions, and competition in our
local markets. As of December 31, 2005, Kentucky Banking
Centers had $15.3 million in additional borrowing capacity
under various FHLB, federal funds and other borrowing
agreements. As of June 30, 2006, Kentucky Banking Centers
had approximately $14.3 million in additional borrowing
capacity under FHLB borrowing agreements. However, there is no
guarantee that these sources of funds will continue to be
available to the bank, or that current borrowings can be
refinanced upon maturity, although Kentucky Banking Centers is
not aware of any events or uncertainties that are likely to
cause a decrease in liquidity from these sources.
For the longer term, the liquidity position is managed by
balancing the maturity structure of the balance sheet. This
process allows for an orderly flow of funds over an extended
period of time. Kentucky Banking Centers asset and
liability management committee meets regularly and monitors the
composition of the balance sheet to ensure comprehensive
management of interest rate risk and liquidity.
Liquid assets consist of cash, cash equivalents and available
for sale investment securities. At December 31, 2005,
liquid assets totaled $37.8 million, a $10.6 million,
or 21.9%, decrease compared to the prior year end. Cash and
equivalents decreased $474,000, or 12.4%, coupled with a
decrease in available for sale investment securities of
$10.2 million, or 22.7%, in the comparison. The decrease in
available for sale investments is due mainly to a decrease in
pledging required for public funds. At June 30, 2006, such
assets totaled $35.5 million, an increase of
$11.8 million, or greater than 100%, from year end 2005.
The increase in liquid assets is attributed to the
$11.9 million increase in Federal Funds sold and repurchase
agreements. The overall funding position of Kentucky Banking
Centers changes as loan demand, deposit levels and other sources
and uses of funds fluctuate.
Net cash provided by operating activities was $1.4 million
in 2005, a decrease of $280,000, or 16.4%, from
$1.7 million in the prior year. Net cash provided by
investing activities was $9.9 million during 2005 compared
to $25.1 million net cash used in investing activities in
2004. The $35.0 million difference in the comparison is
attributed mainly to a decrease in cash flow from purchases of
available for sale investment securities of $19.5 million.
Net cash used in financing activities totaled $11.8 million
for the year 2005. This compares to net cash provided by
financing activities during 2004 of $17.3 million. This
represents a decrease in cash flows of $29.1 million in the
comparison and is due primarily to a decrease in cash flow from
deposits of $23.9 million between 2005 and 2004.
Net cash provided by operating activities was $811,000 in the
first six months of 2006, an increase of $58,000 compared to the
same period a year earlier. Net cash provided by investing
activities was $12.5 million in the current period compared
to $12.2 million in the same period last year. The most
significant item included in the $352,000 higher net cash
inflows from investing activities is $14.6 million of net
cash provided by investment securities transactions. Net cash
used in financing activities was $1.5 million
85
for the six months ended June 30, 2006, an increase of
$12.4 million compared to the same period a year earlier.
This decrease is related mainly to lower net outflows from
deposit activity in the current period.
Information relating to off-balance sheet arrangements, which
for Kentucky Banking Centers comprises of commitments to extend
credit and standby letters of credit, is disclosed in
Note 13 of Kentucky Banking Centers 2005 audited
financial statements. These transactions are entered into in the
ordinary course of providing traditional banking services and
are considered in managing Kentucky Banking Centers
liquidity position. Kentucky Banking Centers does not expect
these commitments to significantly affect the liquidity position
in future periods. Kentucky Banking Centers has not entered into
any contracts for financial derivative instruments such as
futures, swaps, options or similar instruments.
Capital
Resources
Shareholders equity was $9.1 million on
December 31, 2005. This represents a decrease of $380,000,
or 4.0%, from year end 2004, due mainly to a decrease in
retained earnings. Retained earnings decreased $293,000, or
8.7%, due to $1.4 million in dividends declared, which was
$293,000 greater than net income for the year.
Shareholders equity was $9.2 million on June 30,
2006, relatively unchanged from $9.1 million at
December 31, 2005. The net change in shareholders
equity from year end was $26,000, or 0.3%. Retained earnings
grew $43,000, or 1.4%, partially offset by $33,000, or 19.8%, in
additional net after tax market value unrealized loss on
available for sale securities included in other accumulated
other comprehensive loss. A dividend of $629,000 was paid during
2006. Shareholders equity also increased as a result of
$16,000 of noncash compensation expense attributed to
nonqualified stock option and employee stock purchase plans.
Accumulated other comprehensive loss, consisting of net
unrealized holding losses on available for sale securities (net
of tax), was $167,000 at December 31, 2005, a decrease of
$87,000 from an unrealized loss of $80,000 at year end 2004. The
decrease is due primarily to the impact of changing economic
conditions, including an increase in market interest rates,
particularly short-term rates, which have generally lowered the
value of the investment portfolio at the end of 2005. As overall
market interest rates have moved upward during the current
period, the portfolio has declined in value. Market values of
fixed rate investments are inversely related to changes in
market interest rates.
Consistent with the objective of operating a sound financial
organization, Kentucky Banking Centers goal is to maintain
capital ratios well above the regulatory minimum requirements.
Kentucky Banking Centers capital ratios as of
June 30, 2006 and December 31, 2005, the regulatory
minimums are as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
December 31, 2005
|
|
|
Regulatory Minimum
|
|
|
Tier 1 leverage
|
|
|
7.42
|
%
|
|
|
7.31
|
%
|
|
|
4.00
|
%
|
Tier 1 risk-based
|
|
|
10.73
|
%
|
|
|
10.86
|
%
|
|
|
4.00
|
%
|
Total risk-based
|
|
|
11.98
|
%
|
|
|
12.12
|
%
|
|
|
8.00
|
%
|
The capital ratios of the bank were in excess of the applicable
minimum regulatory capital ratio requirements at June 30,
2006 and December 31, 2005.
The table below is an analysis of dividend payout ratios and
equity to asset ratios for December 31, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
Percentage of dividends declared
to net income
|
|
|
125.54
|
%
|
|
|
|
|
|
|
|
|
|
|
81.00
|
%
|
|
|
44.16
|
%
|
Percentage of average
shareholders equity to average total assets
|
|
|
7.47
|
%
|
|
|
7.18
|
%
|
|
|
7.75
|
%
|
|
|
8.45
|
%
|
|
|
8.69
|
%
|
Recently
Issued Accounting Standards
Please refer to the caption Recently Issued Accounting
Standards in Note 2 of Kentucky Banking Centers
unaudited financial statements as of June 30, 2006.
86
MANAGEMENT
Directors
and Executive Officers
The following table provides information about our directors and
executive officers. Our bylaws provide for a classified board of
directors so that, as nearly as possible, one third of our
directors are elected each year to serve three year terms. Our
executive officers are subject to re-election annually and serve
at the pleasure of the board of directors. Each director is also
a director of the bank.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
|
Director
|
|
Term
|
|
Principal Occupation or Employment
|
Name and Age
|
|
Position
|
|
Since
|
|
Expires
|
|
During Past Five or More Years
|
|
Jerry E. Baker (75)
|
|
Director
|
|
|
1998
|
|
|
|
2009
|
|
|
Chairman, Airgas Mid-America, Inc.
|
Billy J. Bell (72)
|
|
Director
|
|
|
1998
|
|
|
|
2007
|
|
|
Co-owner and Secretary/Treasurer,
Mid-South Feeds, Inc.
|
Barry D. Bray (60)
|
|
Director
|
|
|
1999
|
|
|
|
2008
|
|
|
Retired; formerly, Vice President
and Chief Credit Officer, Citizens First Corporation and
Citizens First Bank, from January 1999 and February 1999,
respectively, through June 2004; previously, Executive Vice
President and Chief Credit Officer of Trans Financial Bank,
1982 1998
|
Mary D. Cohron (59)
|
|
President,
Chief
Executive
Officer and
Director
|
|
|
1998
|
|
|
|
2009
|
|
|
President and Chief Executive
Officer, Citizens First Corporation and Citizens First Bank
since August 1998 and February 1999, respectively; formerly,
Board Team Development Services Provider, Kentucky School Boards
Association; strategic planning and business consultant
|
John Desmarais (64)
|
|
Director
|
|
|
2006
|
|
|
|
2007
|
|
|
President and Chief Executive
Officer, Commonwealth Health Corporation
|
Floyd H. Ellis (79)
|
|
Chairman
of the Board
|
|
|
1998
|
|
|
|
2009
|
|
|
Chairman, Citizens First
Corporation and Citizens First Bank; Retired President and Chief
Executive Officer, Warren Rural Electric Cooperative Corporation
|
Sarah Glenn Grise (49)
|
|
Director
|
|
|
2002
|
|
|
|
2008
|
|
|
Civic volunteer; formerly, General
Manager, TKR Cable of Southern Kentucky
|
Christopher B. Guthrie (39)
|
|
Director
|
|
|
2004
|
|
|
|
2008
|
|
|
President, Trace Die Cast, Inc.
|
Carolyn Harp (60)
|
|
Executive
Vice
President
and Chief
Operating
Officer
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Executive Vice President and Chief
Operating Officer, Citizens First Corporation since 2005; Chief
Operating Officer, Citizens First Bank from 1999 to 2005
|
M. Todd Kanipe (38)
|
|
Executive
Vice
President
and Chief
Credit
Officer
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Executive Vice President and Chief
Credit Officer, Citizens First Corporation and Citizens First
Bank since July 2004; Vice President and Trust Relationship
Manager, Citizens First Bank from 1999 to 2004
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
|
Director
|
|
Term
|
|
Principal Occupation or Employment
|
Name and Age
|
|
Position
|
|
Since
|
|
Expires
|
|
During Past Five or More Years
|
|
John J. Kelly, III (72)
|
|
Director
|
|
|
2003
|
|
|
|
2009
|
|
|
Dentist
|
Steve Marcum (49)
|
|
Executive
Vice
President,
Chief
Financial
Officer and
Treasurer
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Executive Vice President, Chief
Financial Officer and Treasurer, Citizens First Corporation and
Citizens First Bank since 2005; formerly, Chief Financial
Officer, Franklin Bancorp, Inc. and Franklin Bank &
Trust
|
Joe B. Natcher, Jr. (48)
|
|
Director
|
|
|
1998
|
|
|
|
2007
|
|
|
Owner, President and Chief
Executive Officer, Southern Foods, Inc.
|
John T. Perkins (63)
|
|
Director
|
|
|
1998
|
|
|
|
2008
|
|
|
Retired; Vice President and Chief
Operating Officer, Citizens First Corporation and Citizens First
Bank from August 1998 and February 1999, respectively, through
2001; bank consultant, April 1995 to July 1998; Chief Operating
Officer, Trans Financial Bank, July 1973 to April 1995
|
Jack Sheidler (50)
|
|
Director
|
|
|
2002
|
|
|
|
2007
|
|
|
Real estate developer
|
Wilson Stone (53)
|
|
Director
|
|
|
2002
|
|
|
|
2008
|
|
|
Farmer and Board Trainer, Kentucky
School Boards Association
|
Kim M. Thomas (35)
|
|
Executive
Vice
President
and Chief
Marketing
Officer
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Executive Vice President and Chief
Marketing Officer, Citizens First Corporation and Citizens First
Bank since 2004; Vice President of Marketing and Commercial
Banking Officer, Citizens First Bank from 1999.
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Michael S. Thurmond (55)
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Community
President
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N/A
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N/A
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Community President, Citizens
First Bank since 2005; Branch Manager from 2003 to 2005.
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Committees
of the Board of Directors
Our board of directors has three standing committees: the Audit
Committee, the Compensation Committee and the Governance
Committee.
Audit Committee. The members of the Audit
Committee are Jack Sheidler, Billy Bell, Floyd Ellis, Sarah
Glenn Grise, John Kelly and Joe Natcher. The members of the
Audit Committee are independent and
financially literate as such terms are defined by
NASDAQ listing standards.
The Audit Committee, among other things, is directly responsible
for the selection, oversight and compensation of our independent
public accountants. It is also responsible for meeting with the
independent auditors and the appropriate corporate officers to
review matters relating to corporate financial reporting and
accounting procedures and policies, the adequacy of financial,
accounting and operating controls, and the scope of the audits
of our independent auditors and any internal auditor. In
addition, the Audit Committee is responsible for reviewing and
reporting the results of each audit and making recommendations
it may have to the board of directors with respect to financial
reporting and accounting practices, policies, controls and
safeguards.
88
The Audit Committee has adopted a formal written charter that is
reviewed for adequacy on an annual basis.
Compensation Committee. The members of the
Compensation Committee are Jerry Baker, John Desmarais, Floyd
Ellis, Jack Sheidler and Wilson Stone. The members of the
Compensation Committee are independent as such term
is defined by NASDAQ listing standards. The Compensation
Committee establishes the compensation arrangements for our
executive officers and administers the Companys stock
option plans.
The Compensation Committee has adopted a formal written charter
that is reviewed for adequacy on an annual basis.
Governance Committee. The members of the
Governance Committee are Jerry Baker, John Desmarais, Floyd
Ellis, Jack Sheidler and Wilson Stone. Each member of the
Governance Committee is independent as defined by
NASDAQ listing standards. The duties of the Governance Committee
are to identify and recommend nominees for election to the
board, and oversee matters of corporate governance processes,
including board performance. The Governance Committees
duties specifically include:
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screening and recommending candidates as nominees for election
to the board of directors;
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overseeing the process whereby board and committee performance
is evaluated;
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overseeing the training and orientation of directors;
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recommending committee assignments;
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recommending the appropriate skills and characteristics required
of new board members; and
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overseeing compliance with our Code of Conduct.
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The Governance Committee has adopted a formal written charter
that is reviewed for adequacy on an annual basis.
COMPENSATION
OF DIRECTORS AND EXECUTIVE OFFICERS
Director
Compensation
Our non-employee directors receive $500 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.
In addition, the board of directors adopted, and the
shareholders approved, the 2003 Stock Option Plan for
Non-Employee Directors. This plan provides for the issuance to
our non-employee directors of options to purchase up to an
aggregate of 44,100 shares of our common stock. A total of
21,185 options have been granted under the 2003 Stock Option
Plan.
Directors do not receive separate compensation for serving on
the board of directors of the bank.
89
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
$100,000 in 2005.
Summary
Compensation Table
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Long Term
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Compensation Awards
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Securities Underlying
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All Other
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Name and Principal Position
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Year
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Salary
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Bonus
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Options (#)
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Compensation(1)
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Mary D. Cohron
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2005
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$
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154,500
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$
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32,831
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5,733
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$
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13,679
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President and Chief
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2004
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150,000
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20,000
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8,820
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9,430
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Executive Officer
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2003
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150,000
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9,452
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Bill D.
Wright(2)
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2005
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$
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123,600
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$
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$
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12,113
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Former Vice President and
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2004
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120,000
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12,000
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6,615
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8,062
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Chief Financial Officer
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2003
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120,000
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8,120
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M. Todd Kanipe
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2005
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$
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123,600
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$
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26,625
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3,749
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$
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7,962
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Executive Vice President
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2004
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118,922
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12,000
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6,615
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7,977
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and Chief Credit Officer
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2003
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90,300
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7,142
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(1) |
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Other compensation for 2005 includes: (a) a match of up to
3% of the officers salary under the Savings Incentive
Match Plan for Employees ($4,635 for Ms. Cohron, $2,710 for
Mr. Wright and $3,708 for Mr. Kanipe); (b) the
cost of life insurance premiums paid by us on behalf of the
officer for coverage equal to annual salary ($400 for
Ms. Cohron, $240 for Mr. Wright and $320 for
Mr. Kanipe); (c) the portion of the cost of health
insurance coverage for such officer that is paid by us ($3,934
for each of Ms. Cohron, Mr. Wright and
Mr. Kanipe); (d) an automobile allowance of $4,800 for
Ms. Cohron; and (e) $5,229 representing unused
vacation paid to Mr. Wright upon his termination of
employment. |
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(2) |
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Mr. Wrights employment with us terminated in
September 2005. |
The following table provides information concerning individual
grants of options to purchase our common stock made to the named
executive officers in 2005:
Option
Grants in Last Fiscal Year
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Number of
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Percent of
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Securities
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Total Options
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Underlying
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Granted
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Options
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to Employees
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Exercise Price
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Expiration
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Name
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Granted (#)
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in Fiscal Year
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($/share)(1)
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Date
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Mary D. Cohron
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5,733
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10.5
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%
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$
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13.65
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1/12/2015
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Bill D. Wright
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M. Todd Kanipe
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3,749
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6.9
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%
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13.65
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1/12/2015
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(1) |
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All options were granted at the closing sales price for the
common stock as reported on the NASDAQ OTC Bulletin Board
on the date of grant. The options are exercisable in three equal
annual installments commencing on the anniversary date of the
date of grant. |
90
The following table provides information concerning the value of
unexercised options held by the named executive officers at
December 31, 2005:
Aggregated
Option Exercises in Fiscal Year 2005 and Fiscal Year end Option
Values
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Number of Shares
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Value of Unexercised
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Shares
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Underlying Unexercised
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In-the-Money
Options
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Acquired on
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Value
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Options at FY End (#)
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at FY End
($)(1)
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Name
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Exercise (#)
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Realized ($)
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Exercisable/Unexercisable
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Exercisable/Unexercisable
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Mary D. Cohron
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2,940/11,613
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$
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11,000/$39,290
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Bill D. Wright
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M. Todd Kanipe
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2,205/8,159
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$
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8,250/$27,805
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(1) |
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Value is calculated as the difference between the last sale
price as furnished by the National Association of Securities
Dealers (NASD) on December 31, 2005 and the option price. |
Employment
Agreements
We and Mary D. Cohron are parties to an employment agreement
effective January 1, 2005, which provides for the
employment of Ms. Cohron as our President and Chief
Executive Officer. The agreement is for a term of four years and
will be automatically renewed on January 1, 2008 for a new
three year term unless either party gives notice to the other of
the intent not to renew. The agreement provides for payment to
Ms. Cohron of an annual salary to be established by the
compensation committee at the commencement of each year. We may
terminate the agreement 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
12 months salary. Ms. Cohron may voluntarily
terminate her employment upon 60 days notice. In the event
of Ms. Cohrons termination of employment prior to the
natural expiration of the agreement, Ms. Cohron will be
prohibited for one year from rendering any services to any
banking institution in Warren County and any contiguous county.
We are parties to employment agreements with each of
Mr. Marcum and Mr. Kanipe which provide for
Mr. Marcums employment by us as Executive Vice
President, Chief Financial Officer and Treasurer and for
Mr. Kanipes employment by us as Executive Vice
President and Chief Credit Officer. The agreements provide for
the payment to Mr. Marcum and Mr. Kanipe of an annual
salary to be established by the compensation committee at the
commencement of each year. We may terminate the employment
agreements 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 the employee the value of accrued
fringe benefits through the date of termination and compensation
equal to 90 days salary.
Related
Party Transactions
We make loans and enter into other transactions in the ordinary
course of business with our directors and officers and their
affiliates. It is our policy that these loans and other
transactions be on substantially the same terms (including
price, interest rates and collateral) as those prevailing at the
time for comparable transactions with unrelated parties. We do
not expect these transactions to involve more than the normal
risk of collectibility nor present other unfavorable features to
us. Loans to individual directors and officers must also comply
with our lending policies and statutory lending limits, and
directors with a personal interest in any loan application are
excluded from the consideration of the loan application. Our
policy is that all of our transactions with our affiliates will
be on terms no less favorable to us than could be obtained from
an unaffiliated third party and will be approved by a majority
of disinterested directors.
91
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows as of August 30, 2006 the number
and percentage of shares of our common stock and preferred stock
beneficially owned by our directors, each executive officer
listed in the Summary Compensation Table, and by all of our
directors and executive officers as a group.
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Preferred
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Common Shares
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Shares
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Beneficially
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Beneficially
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Name
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Owned(1)(2)
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% of
Class(2)
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Owned
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% of Class
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Directors:
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Jerry E. Baker
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45,728
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4.8
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%
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Billy J. Bell
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57,473
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6.1
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%
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15
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6.0
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%
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Barry D.
Bray(3)
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20,260
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2.1
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%
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8
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3.2
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%
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Mary D. Cohron
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47,375
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5.0
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%
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5
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2.0
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%
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John
Desmarais(4)
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4,257
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*
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Floyd H. Ellis
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25,452
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2.7
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%
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5
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2.0
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%
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Sarah Glenn
Grise(5)
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5,830
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*
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Christopher B. Guthrie
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1,076
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*
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John J. Kelly, III
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2,153
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*
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Joe B.
Natcher, Jr.(6)
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12,322
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1.3
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%
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John T.
Perkins(7)
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12,652
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1.3
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%
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Jack Sheidler
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22,011
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2.3
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%
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8
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3.2
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%
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Wilson
Stone(8)
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11,551
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1.2
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%
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4
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1.6
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%
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Named Executive
Officers:
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(Non-Directors)
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M. Todd Kanipe
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7,314
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*
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All Directors, Named Executive
Officers and other executive officers as a Group (17
persons)
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286,862
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29.2
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%
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45
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18.0
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%
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* |
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Represents less than 1.0%. |
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(1) |
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Except as otherwise noted, each person is the record owner of
and has sole voting and investment power with respect to his or
her shares. The address for each person listed is 1065 Ashley
Street, Suite 200, Bowling Green, Kentucky 42103. |
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(2) |
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For each person, these amounts include common shares owned plus
all common shares which could be acquired from the exercise of
any vested options within 60 days of August 30, 2006.
The percent of common shares owned is computed by dividing the
number of shares beneficially owned noted above by the our total
common shares outstanding plus the number of shares which could
be acquired from the exercise of any vested options within
60 days of August 30, 2006. The number of shares which
could be acquired from the exercise of any vested options within
60 days of August 30, 2006 for each particular person
is as follows: Mr. Baker (2,730 shares); Mr. Bell
(2,730 shares); Mr. Bray (1,076 shares);
Ms. Cohron (7,791 shares); Mr. Desmarais
(525 shares); Mr. Ellis (2,730 shares);
Ms. Grise (1,628 shares); Mr. Guthrie
(1,076 shares); Mr. Kelly (1,628 shares);
Mr. Natcher, Jr. (2,730 shares); Mr. Perkins
(1,076 shares); Mr. Sheidler (1,628 shares);
Mr. Stone (1,628 shares); Mr. Kanipe
(5,660 shares); and all directors and executive officers as
a group (40,479 shares). |
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(3) |
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Includes 6,300 common shares held by Mr. Brays wife. |
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(4) |
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Includes 1,866 common shares held by Mr. Desmarais
wife. |
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(5) |
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Includes 1,357 common shares jointly owned with
Ms. Grises husband. |
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(6) |
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Includes 9,067 shares jointly owned with
Mr. Natchers wife and 276 shares each owned by
Mr. Natchers two children. |
92
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(7) |
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Includes 3,500 common shares held in an individual retirement
account for the benefit of Mr. Perkins wife. |
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(8) |
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Includes 1,050 common shares held in an individual retirement
account for the benefit of Mr. Stones wife. |
The following table shows as of August 30, 2006 the name
and address of and the number and percentage of shares of our
common stock beneficially owned by the only other persons known
to us to have beneficial ownership of 5% or more of our
outstanding common stock.
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% of
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Common Shares
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Common Shares
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Name
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Beneficially Owned
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Beneficially Owned
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Charles Hardcastle
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96,295
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10.2
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%
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1065 Ashley, Suite 150
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Bowling Green, KY 42103
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Thomas K. Hightower
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46,636
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5.0
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%
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646 Old Scottsville Road
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Bowling Green, KY 42103
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DESCRIPTION
OF OUR CAPITAL STOCK
General
Our authorized capital stock consists of 5,000,000 shares
of common stock, no par value per share, and 500 shares of
preferred stock, no par value per share. In this section, we
describe the material features and rights of our capital stock.
This summary does not purport to be exhaustive and is qualified
in its entirety by reference to our articles of incorporation,
our bylaws and applicable Kentucky law.
Common
Stock
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. In July 2004,
we issued 250 shares of non-voting cumulative convertible
preferred stock at a stated value of $31,992 per share, for an
aggregate purchase price of $7,998,000. The cumulative
convertible preferred stock is entitled to quarterly cumulative
dividends at an annual fixed rate of 6.5%, prior to the payment
of any dividends on our common stock, and is convertible at the
option of the holders, or immediately upon a change in control,
into a number of shares of our common stock equal to the stated
value per share divided by the conversion price per share of
$14.06, on or after three years from the date of issuance. To
the extent the preferred stock is not converted, beginning on or
after three years from the date of issuance, we may redeem any
or all of the shares of preferred stock at their stated value
per share. In the event of our liquidation, dissolution or
winding up, holders of preferred stock are entitled to receive,
prior and
93
in preference to any distribution of assets to the holders of
common stock, an amount equal to the stated value per share of
preferred stock, plus all accrued but unpaid dividends on such
shares.
Anti-Takeover
Effects
General. Our articles of incorporation and
bylaws contain 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.
Authorized Capital Stock. We are authorized to
issue 5,000,000 shares of common stock, 943,463 of which
were issued and outstanding as of June 30, 2006, and
500 shares of preferred stock, 250 of which were issued and
outstanding as of June 30, 2006. Our board of directors may
authorize the issuance of additional shares of common stock and
preferred 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.
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 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 us. 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 us.
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.
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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 persons
competence.
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 us or our
shareholders for monetary damages for a breach of his or her
duties as a director, except for liability for any transaction
in which the directors 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.
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.
Shares Eligible
for Future Sale
Upon completion of this offering, we will have
1,843,463 shares of common stock outstanding, or
2,018,463 shares if the underwriters exercise their
over-allotment option in full. The shares sold in this offering
will be freely tradable, without restriction or registration
under the Securities Act of 1933, except for shares purchased by
our affiliates, which will be subject to resale
restrictions under the Securities Act of 1933. An affiliate of
the issuer is defined in Rule 144 under the Securities Act
of 1933 as a person that directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under
common control with the issuer. Rule 405 under the
Securities Act of 1933 defines the term control to
mean the possession, direct or indirect, of the power to direct
or cause the direction of the management and policies of the
person whether through the ownership of voting securities, by
contract, or otherwise. Directors and executive officers will
generally be deemed to be affiliates. Shares held by affiliates
may be sold without registration in accordance with the
provisions of Rule 144 or another exemption from
registration.
In general, under Rule 144, an affiliate or a person
holding restricted shares may sell, within any three-month
period, a number of shares no greater than 1% of the then
outstanding shares of the common stock or the average weekly
trading volume of the common stock during the four calendar
weeks preceding the sale, whichever is greater. Rule 144
also requires that the securities must be sold in
brokers transactions, as defined in the
Securities Act of 1933, and the person selling the securities
may not solicit orders or make any payment in connection with
the offer or sale of securities to any person other than the
broker who executes the order to sell the securities. This
requirement may make the sale of our common stock by affiliates
pursuant to Rule 144 difficult if no trading market
develops in the common stock. Rule 144 also requires
persons holding restricted securities to hold the shares for at
least one year prior to sale.
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We also have 250 shares of preferred stock outstanding that
are convertible at the option of the holders into shares of our
common stock at a conversion price of $14.06 per share on
or after July 2007 or immediately upon a change in control. To
the extent that the preferred stock is not converted, beginning
on or after July 2007, we may redeem any or all of the shares of
preferred stock at their stated value per share of $31,992.
Stock
Transfer Agent
The stock transfer agent for our common stock is the Registrar
and Transfer Company, Cranford, New Jersey.
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SUPERVISION
AND REGULATION
We are subject to extensive state and federal banking laws and
regulations that impose restrictions on and provide for general
regulatory oversight of our operations. These laws and
regulations are generally intended to protect depositors and not
shareholders.
The following summary briefly describes some material provisions
of the regulatory framework which apply to us. It is qualified
by reference to the statutory and regulatory provisions
discussed, and is not intended to be a complete list of all the
activities regulated by the banking laws or of the impact of
such laws and regulations on our operations.
Citizens
First Corporation
We are a bank holding company under the Bank Holding Company Act
of 1956. As such, we are subject to the supervision, examination
and reporting requirements of the Bank Holding Company Act and
the regulations of the Federal Reserve, and we are required to
file periodic reports of our operations and any additional
information the Federal Reserve may require.
Acquisition of Banks. The Bank Holding Company
Act requires every bank holding company to obtain the prior
approval of the Federal Reserve before
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acquiring direct or indirect ownership or control of any voting
shares of any bank if, after the acquisition, the bank holding
company will directly or indirectly own or control more than 5%
of the banks voting shares (unless it already owns or
controls the majority of such shares);
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acquiring all or substantially all of the assets of any
bank; or
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merging or consolidating with another bank holding company.
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The Bank Holding Company Act also provides that the Federal
Reserve may not approve any of these transactions if it would
substantially lessen competition or otherwise function as a
restraint of trade, or result in or tend to create a monopoly,
unless the anticompetitive effects of the proposed transaction
are clearly outweighed by the public interest in meeting the
convenience and needs of the communities to be served. The
Federal Reserve is also required to consider the financial and
managerial resources and future prospects of the bank holding
companies and banks concerned, the convenience and needs of the
communities to be served and the applicants record of
compliance with anti-money laundering regulations. The Federal
Reserves consideration of financial resources generally
focuses on capital adequacy.
With the required regulatory approvals, we, or any other bank
holding company located in Kentucky, may purchase a bank located
outside of Kentucky. Conversely, an adequately capitalized and
adequately managed bank holding company located outside of
Kentucky may purchase a bank located inside Kentucky.
Acquisition of banks located in other states may be restricted
based on certain deposit-percentage, age or other restrictions.
Change in Bank Control. Subject to various
exceptions, the Bank Holding Company Act and the federal Change
in Bank Control Act, together with related regulations, require
Federal Reserve approval prior to any person or company
acquiring control of a bank holding company. Control
is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of the
bank holding company. Control is rebuttably presumed to exist if
a person or company acquires 10% or more of any class of voting
securities and either:
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the bank holding company has registered securities under
Section 12 of the Securities Exchange Act of 1934; or
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no other person owns a greater percentage of that class of
voting securities immediately after the transaction.
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Our common stock is registered under the Securities Exchange Act
of 1934. The regulations provide a procedure for challenge of
the rebuttable control presumption.
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Permitted Activities. The Gramm-Leach-Bliley
Act of 1999 amended the Bank Holding Company Act and expanded
the activities in which bank holding companies and affiliates of
banks are permitted to engage. The Gramm-Leach-Bliley Act
eliminated many federal and state law barriers to affiliations
among banks and securities firms, insurance companies, and other
financial service providers. Generally, if we qualify and elect
to become a financial holding company, we may engage in
activities that are:
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financial in nature;
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incidental to a financial activity; or
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complementary to a financial activity and do not pose a
substantial risk to the safety or soundness of depository
institutions or the financial system generally.
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To qualify to become a financial holding company, our depository
institution subsidiaries must be well capitalized and well
managed and must have a Community Reinvestment Act rating of at
least satisfactory. Additionally, we must file an
election with the Federal Reserve to become a financial holding
company and provide the Federal Reserve with 30 days
written notice prior to engaging in a permitted financial
activity. Although we do not have any immediate plans to file an
election with the Federal Reserve to become a financial holding
company, one of the primary reasons we selected the holding
company structure was to have the increased flexibility.
Accordingly, if deemed appropriate, we may seek to become a
financial holding company in the future.
Under the Bank Holding Company Act, a bank holding company that
has not qualified or elected to become a financial holding
company is generally prohibited from engaging in or acquiring
direct or indirect control of more than 5% of the voting shares
of any company engaged in nonbanking activities unless the
Federal Reserve has found those activities to be so closely
related to banking as to be a proper incident to the business of
banking. Some of the activities that the Federal Reserve has
determined by regulation to be proper incidents to the business
of banking include:
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factoring accounts receivable;
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acquiring or servicing loans;
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leasing personal property;
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conducting discount securities brokerage activities;
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performing selected data processing services;
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acting as agent or broker in selling credit life insurance and
other types of insurance in connection with credit transactions;
and
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performing selected insurance underwriting activities.
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Despite prior approval, the Federal Reserve may order a bank
holding company or its subsidiaries to terminate any of these
activities or to terminate its ownership or control of any
subsidiary when it has reasonable cause to believe that the bank
holding companys continued ownership, activity or control
constitutes a serious risk to the financial safety, soundness,
or stability of any of its bank subsidiaries.
Support of Subsidiary Institutions. Under
Federal Reserve policy, we are expected to act as a source of
financial strength for and to commit resources to support the
bank. This support may be required at times when, absent such
Federal Reserve policy, 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
unlikely event of our bankruptcy, any commitment by us to a
federal bank regulatory agency to maintain the capital of the
bank will be assumed by the bankruptcy trustee and entitled to a
priority of payment.
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Citizens
First Bank
The bank is a state bank chartered under the banking laws of the
Commonwealth of Kentucky. As a result, we are subject to the
supervision, examination and reporting requirements of both the
Kentucky Office of Financial Institutions (KOFI) and the FDIC.
We also are subject numerous state and federal statutes and
regulations that affect our business activities and operations,
including restrictions on loan limits, interest rates,
insider loans to officers, directors and principal
shareholders, tie-in arrangements and transactions with
affiliates, among other things.
Federal and state regulators also have authority to impose
substantial sanctions on the bank and its directors and officers
if we engage in unsafe or unsound practices, or otherwise fail
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.
Branching. With prior regulatory approval
and/or
notices, as applicable, Kentucky law permits banks based in the
state to either establish new or acquire existing branch offices
throughout Kentucky. Our bank and any other national or
state-chartered bank, generally may branch across state lines by
merging with banks in other states if allowed by the applicable
states laws. Kentucky law (with limited exceptions)
currently permits branching across state lines either through
interstate merger or branch acquisition. Kentucky law does not
currently permit an
out-of-state
bank to branch into Kentucky short of an interstate merger.
FDIC Insurance. The banks deposits are
insured by the FDIC to the maximum extent provided by law. The
FDIC has adopted a risk-based assessment system for insured
depository institutions that takes into account the risks
attributable to different categories and concentrations of
assets and liabilities. The system assigns an institution to one
of three capital categories: (1) well capitalized;
(2) adequately capitalized; and (3) undercapitalized.
These three categories are substantially similar to the prompt
corrective action categories described below, with the
undercapitalized category including institutions
that are undercapitalized, significantly undercapitalized, and
critically undercapitalized for prompt corrective action
purposes. The FDIC also assigns an institution to one of three
supervisory subgroups based on a supervisory evaluation that the
institutions primary federal regulator provides to the
FDIC and information that the FDIC determines to be relevant to
the institutions financial condition and the risk posed to
the deposit insurance funds.
FDIC Assessments. On February 8, 2006,
President Bush signed the Federal Deposit Insurance Reform Act
of 2005 (FDIRA). The FDIC must adopt rules implementing the
various provisions of the FDIRA by November 5, 2006. Among
other things, the FDIRA changes the deposit system by:
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raising the coverage level for retirement accounts to $250,000;
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indexing deposit insurance coverage levels for inflation
beginning in 2012;
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prohibiting undercapitalized financial institutions from
accepting employee benefit plan deposits;
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merging the Bank Insurance Fund and Savings Association
Insurance Fund into a new Deposit Insurance Fund (the
DIF); and
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providing credits to financial institutions that capitalized the
FDIC prior to 1996 to offset future assessment premiums.
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The FDIRA also authorizes the FDIC to revise the current
risk-based assessment system, subject to notice and comment, and
caps the amount of the DIF at 1.50% of domestic deposits. The
FDIC must issue cash dividends, awarded on a historical basis,
for the amount of the DIF over the 1.50% ratio. Additionally, if
the DIF exceeds 1.35% of domestic deposits at year end, the FDIC
must issue cash dividends, awarded on a historical basis, for
half of the amount of the excess.
Until the FDIC adopts final assessment regulations, the
FDICs existing assessment regulations will remain,
imposing assessments ranging from 0 to 27 basis points per $100
of assessable deposits, depending on an institutions
capital position and other supervisory factors. The FDIC has
adopted a risk-based assessment system for insured depository
institutions that takes into account the risks attributable to
different categories
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and concentrations of assets and liabilities. The system assigns
an institution to one of three capital categories: (1) well
capitalized; (2) adequately capitalized; and
(3) undercapitalized. These three categories are
substantially similar to the prompt corrective action categories
described above, with the undercapitalized category
including institutions that are undercapitalized, significantly
undercapitalized and critically undercapitalized for prompt
corrective action purposes. The FDIC also assigns an institution
to one of three supervisory subgroups based on a supervisory
evaluation that the institutions primary federal regulator
provides to the FDIC and information that the FDIC determines to
be relevant to the institutions financial condition and
the risk posed to the deposit insurance funds. Assessments range
from 0 to 27 cents per $100 of deposits, depending on the
institutions capital group and supervisory subgroup. In
addition, the FDIC imposes assessments to help pay off the
$780 million in annual interest payments on the
$8 billion Financing Corporation bonds issued in the late
1980s as part of the government rescue of the thrift industry.
This assessment rate is adjusted quarterly and is set at 0.32
cents per $100 of deposits for the third quarter of 2006.
The FDIC may terminate a banks deposit insurance if it
finds that the bank has engaged in unsafe and unsound practices,
is in an unsafe or unsound condition to continue operations, or
has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC.
Capital
Adequacy
We are required to comply with capital adequacy standards
established by the Federal Reserve at the holding company level,
and the FDIC at the bank level. The Federal Reserve has
established a risk-based and a leverage measure of capital
adequacy for bank holding companies. The bank is also subject to
risk-based and leverage capital requirements adopted by the
FDIC, which are substantially similar to those adopted by the
Federal Reserve for bank holding companies.
The risk-based capital standards are designed to make regulatory
capital requirements more sensitive to differences in risk
profiles 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, such as letters of credit and unfunded
loan commitments, 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 is 8.0%. Total capital consists of two
components, Tier 1 capital and Tier 2 capital.
Tier 1 capital generally consists of common stock, 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
specified intangible assets. Tier 1 capital must equal at
least 4% of risk-weighted assets. Tier 2 capital generally
consists of subordinated debt, other preferred stock, and a
limited amount of loan loss reserves. The total amount of
Tier 2 capital is limited to 100% of Tier 1 capital.
At June 30, 2006, our ratio of total capital to
risk-weighted assets was 13.01% and our ratio of Tier 1
capital to risk-weighted assets was 10.04%.
In addition, the Federal Reserve has established minimum
leverage ratio guidelines for bank holding companies. These
guidelines have a dual structure for (i) bank holding
companies that meet specified criteria, including having the
highest regulatory rating and implementing the Federal
Reserves risk-based capital measure for market risk, and
(ii) all other bank holding companies, which are typically
smaller. We are subject to the latter, under which we are
required to maintain a leverage ratio of at least 4%. At
June 30, 2006, our leverage ratio was 8.47%. The guidelines
also provide that bank holding companies experiencing high
internal growth or making acquisitions will be expected to
maintain strong capital positions substantially above the
minimum supervisory levels. Furthermore, the Federal Reserve has
indicated that it will consider a bank holding companys
Tier 1 capital leverage ratio, after deducting all
intangibles, and other indicators of capital strength in
evaluating proposals for expansion or new activities.
The Federal Reserve has increased the size of holding companies
that can rely on the capital guidelines that apply to small bank
holding companies. However, it is unclear whether we will be
able to take advantage of these more lenient capital guidelines.
See the discussion above under Citizens First Corporation
Managements Discussion and Analysis Capital
Resources.
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Information concerning our regulatory ratios at
December 31, 2005 is included in the notes to our
consolidated financial statements.
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). Each financial institution is placed in one
of these categories. Federal banking regulators are required to
take various mandatory supervisory actions and are authorized to
take other discretionary actions with respect to institutions in
the three undercapitalized categories. The severity of the
action depends upon the capital category into which the
institution is placed. Generally, subject to a narrow exception,
the banking regulator must 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 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. A bank holding company
must guarantee that a subsidiary depository institution meets
its capital restoration plan, subject to limitations. The
controlling bank holding companys obligation to fund a
capital restoration plan is limited to the lesser of 5% of an
undercapitalized subsidiarys assets or the amount required
to meet regulatory capital requirements. An undercapitalized
institution is also generally prohibited from increasing its
average total assets, making acquisitions, establishing any
branches or engaging in any new line of business, except in
accordance with an accepted capital restoration plan or with
FDIC approval. The regulations also establish procedures for
downgrading an institution and a lower capital category based on
supervisory factors other than capital. We believe that we and
the bank would be considered well capitalized as of
June 30, 2006.
Payment
of Dividends
We are a legal entity separate and distinct from the bank. The
principal sources of our cash flow, including cash flow to pay
dividends to our shareholders, are dividends that the bank pays
to us as its sole shareholder. Statutory and regulatory
limitations apply to the banks ability to pay dividends to
us as well as to our ability to pay dividends to our
shareholders.
Kentucky banks may pay dividends only from current or retained
net profits. The Commissioner of the Kentucky Office 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 banks net profits for such year
combined with its retained net profits for the preceding two
years, less a fund for the retirement of preferred stock or
debt, if any.
The payment of dividends by us and the bank may also be affected
by other factors, such as the requirement to maintain adequate
capital above regulatory guidelines. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991, a depository
institution may not pay any dividend if payment would cause it
to become undercapitalized or if it already is undercapitalized.
If, in the opinion of the FDIC, the bank was engaged in or about
to engage in an unsafe or unsound practice, the FDIC could
require, after notice and a hearing, that the bank refrain from
engaging in the practice. The federal banking agencies have
indicated that paying dividends that deplete a depository
institutions capital base to an inadequate level would be
an unsafe and unsound banking practice. The federal agencies
have issued policy statements that provide that bank holding
companies and insured banks should generally only pay dividends
out of current operating earnings. See Prompt Corrective
Action above.
Community
Reinvestment
The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their respective
jurisdictions, the federal banking regulators, including the
Federal Reserve and the
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FDIC, must evaluate the record of each financial institution in
meeting the credit needs of its local community, including low
and moderate-income neighborhoods. These facts are also
considered in evaluating mergers, acquisitions and applications
to open a branch or facility. Failure to adequately meet these
criteria could impose additional requirements and limitations on
the bank. During 2005, the bank received a
satisfactory CRA rating.
Restrictions
on Transactions with Affiliates
Transactions between us and the bank are subject to
Section 23A of the Federal Reserve Act. Section 23A
places limits on the amount of:
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a banks loans or extensions of credit to affiliates;
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a banks investment in affiliates;
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assets a bank may purchase from affiliates, except for real and
personal property exempted by the Federal Reserve;
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the amount of loans or extensions of credit to third parties
collateralized by the securities or obligations of
affiliates; and
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a banks guarantee, acceptance or letter of credit issued
on behalf of an affiliate.
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The total amount of the above transactions is limited in amount,
as to any one affiliate, to 10% of a banks capital and
surplus and, as to all affiliates, to 20% of a banks
capital and surplus. In addition to the limitation on the amount
of these transactions, each of the above extensions of credit
transactions must also meet specified collateral requirements.
The bank must also comply with other provisions designed to
avoid the taking of low-quality assets.
Transactions between the bank and its affiliates are also
subject to Section 23B of the Federal Reserve Act which,
among other things, prohibits an institution from engaging in
the above transactions with affiliates unless the transactions
are on terms substantially the same, or at least as favorable to
the institution or its subsidiaries, as those prevailing at the
time for comparable transactions with nonaffiliated companies
and must not involve more than the normal risk of repayment or
present other unfavorable features.
The Sarbanes-Oxley Act of 2002 further restricts our company
from extending or making arrangements for the extension of
credit to any of our directors or executive officers.
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 institutions own products and
services. Additionally, financial institutions generally may not
disclose consumer account numbers to any nonaffiliated third
party for use in telemarketing, direct mail marketing or other
marketing through electronic mail to consumers. The bank has
established a privacy policy to ensure compliance with federal
requirements.
Other
Consumer Laws and Regulations
Interest and other charges collected or contracted for by the
bank are subject to state usury laws and federal laws concerning
interest rates. For example, under the Servicemembers Civil
Relief Act of 2003 (formerly the Soldiers and
Sailors Civil Relief Act of 1940) a lender is
generally prohibited from charging an annual interest rate in
excess of 6% on any obligations for which the borrower is a
person on active duty with the United States military. The
banks loan operations are also subject to federal laws
applicable to credit transactions, such as the:
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Federal
Truth-In-Lending
Act, governing disclosures of credit terms to consumer borrowers;
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Home Mortgage Disclosure Act of 1975, requiring financial
institutions to provide information to enable the public and
public officials to determine whether a financial institution is
fulfilling its obligation to help meet the housing needs of the
community it serves;
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Equal Credit Opportunity Act, prohibiting discrimination on the
basis of race, creed or other prohibited factors in extending
credit;
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Fair Credit Reporting Act of 1978, governing the use and
provision of information to credit reporting agencies;
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Fair and Accurate Credit Transactions Act of 2004, governing the
use by and provision of customer information to credit reporting
agencies, responding to complaints of inaccurate information
contained in a customers credit bureau database, providing
for procedures to deal with fraud and identity theft and using
medical information as a basis in a decision to grant credit;
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Fair Debt Collection Act, governing the manner in which consumer
debts may be collected by collection agencies; and
|
|
|
|
Rules and regulations of the various federal agencies charged
with the responsibility of implementing the federal laws.
|
The banks deposit operations are subject to the:
|
|
|
|
|
Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes
procedures for complying with administrative subpoenas of
financial records;
|
|
|
|
Electronic Funds Transfer Act and Regulation E issued by
the Federal Reserve to implement that act, which govern
automatic deposits to and withdrawals from deposit accounts and
customers rights and liabilities arising from the use of
automated teller machines and other electronic banking
services; and
|
|
|
|
Truth in Savings Act, which requires disclosure of the interest
rate and other terms of consumer deposit accounts.
|
Anti-Terrorism
Legislation
On October 26, 2001, the President of the United States
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 dealings with foreign financial institutions
and foreign customers.
In addition, the USA PATRIOT Act authorizes the Secretary of the
Treasury to adopt rules increasing the cooperation and
information sharing between financial institutions, regulators,
and law enforcement authorities regarding individuals, entities
and organizations engaged in, or reasonably suspected based on
credible evidence of engaging in, terrorist acts or money
laundering activities. Any financial institution complying with
these rules will not be deemed to have violated the privacy
provisions of the Gramm-Leach-Bliley Act, as discussed above.
The bank currently has policies and procedures in place designed
to comply with the USA PATRIOT Act.
Proposed
Legislation and Regulatory Action
New regulations and statutes are regularly proposed that contain
wide-ranging proposals for altering the structures, regulations
and competitive relationships of the nations financial
institutions. We cannot predict whether or in what form any
proposed regulation or statute will be adopted or the extent to
which our business may be affected by any new regulation or
statute.
103
Effects
of Governmental Policies and Economic Conditions
Our earnings are affected by domestic economic conditions and
the monetary and fiscal policies of the United States government
and its agencies. The Federal Reserves monetary policies
have had, and are likely to continue to have, an important
impact on the operating results of commercial banks through the
Federal Reserves statutory power to implement national
monetary policy in order, among other things, to curb inflation
or combat a recession. The Federal Reserve, through its monetary
and fiscal policies, affects the levels of bank loans,
investments and deposits through its control over the issuance
of United States government securities, its regulation of the
discount rate applicable to member banks and its influence over
reserve requirements to which member banks are subject. We
cannot predict the nature or impact of future changes in
monetary and fiscal policies.
104
UNDERWRITING
We and Sandler ONeill & Partners, L.P., as
representative of the underwriters for the offering, have
entered into an underwriting agreement with respect to the
shares being offered. Subject to the terms and conditions of the
underwriting agreement, each underwriter has severally agreed to
purchase from us the respective number of shares of common stock
shown opposite its name below:
|
|
|
Name of Underwriter
|
|
Number of Shares
|
|
Sandler ONeill &
Partners, L.P.
|
|
|
J.J.B. Hilliard, W.L. Lyons,
Inc.
|
|
|
Total
|
|
|
The underwriters obligations are several but not joint,
which means that each underwriter is required to purchase a
specific number of shares of common stock, but is not
responsible for the commitment of any other underwriter. The
underwriting agreement provides that the obligations of the
underwriters are conditional and may be terminated at their
discretion based on their assessment of the financial markets.
The obligations of the underwriters may also be terminated upon
the occurrence of the events specified in the underwriting
agreement. The underwriting agreement provides that the
underwriters are obligated to purchase all of the shares of
common stock in this offering if any are purchased, other than
those covered by the over-allotment option described below.
Over-Allotment
Option
We have granted the underwriters an option to purchase up to
135,000 additional shares of our common stock at the public
offering price, less the underwriting discounts of
$ per share applicable to the
over-allotment shares This option is exercisable for a period of
30 days. We will be obligated to sell additional shares to
the underwriters to the extent the option is exercised. The
underwriters may exercise this option only to cover
over-allotments made in connection with the sale of common stock
offered by this prospectus, if any.
Commissions
and Expenses
The following table shows the per share and total underwriting
discount that we will pay to the underwriters and the proceeds
we will receive before expenses. These amounts are shown
assuming both no exercise and full exercise of the
underwriters over-allotment option to purchase additional
shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total without
|
|
|
Total with
|
|
|
|
Per Share
|
|
|
Over-Allotment
|
|
|
Over-Allotment
|
|
|
Price to public
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Underwriting discount
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Proceeds to us, before expenses
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
(1) |
|
The underwriting discount is
$ per share, except with
respect to shares with up to an aggregate maximum purchase price
of $2.0 million reserved for sale to our directors,
officers and employees. The underwriting discount for these
shares is $ per share. |
We estimate that the total expenses of the offering payable by
us, excluding underwriting discounts and commissions, will be
approximately $600,000. We have agreed to reimburse the
underwriters for their reasonable
out-of-pocket
expenses incurred in connection with the offering, including
certain fees and disbursements of underwriters counsel, up
to a maximum of $200,000.
The underwriters propose to offer the shares of common stock
directly to the public at the public offering price set forth on
the cover page of this prospectus. The underwriters may offer
the shares of common stock to securities dealers at the public
offering price less a concession not in excess of
$ per share. The underwriters
may allow, and the dealers may reallow, a discount not in excess
of $ per share on sales to
other brokers or dealers. If all of the shares are not sold at
the public offering price, the underwriters may change the
offering price and other selling terms.
105
The shares of common stock are being offering by the
underwriters, subject to prior sale, when, as and if issued to
and accepted by them, subject to approval of certain legal
matters by counsel for the underwriters and other conditions
specified in the underwriting agreement. The underwriters
reserve the right to withdraw, cancel or modify this offer and
reject orders in whole or in part.
Sales to
Our Directors and Employees
At our request, the underwriters have reserved up to 11.1% of
the shares of our common stock offered by this prospectus for
sale to our directors and employees at the public offering price
set forth on the cover page of this prospectus. These persons
must commit to purchase from an underwriter or selected dealer
at the same time as the general public. The number of shares
available for sale to the general public will be reduced to the
extent these persons purchase the reserved shares. Any reserved
shares purchased by our directors or executive officers will be
subject to a
lock-up
agreement as described below. We are not making loans to these
employees or directors to purchase such shares.
Lock-up
Agreements
We and each of our executive officers and directors have agreed,
for a period of 180 days after the date of this prospectus,
not to sell, offer, agree to sell, contract to sell,
hypothecate, pledge, grant any option to sell, or otherwise
dispose of or hedge, directly or indirectly, any of our shares
of common stock or securities convertible into, exchangeable or
exercisable for any shares of our common stock or warrants or
other rights to purchase shares of our common stock or similar
securities, without, in each case, the prior written consent of
the underwriters. These restrictions are expressly agreed to
preclude us and our executive officers and directors from
engaging in any hedging or other transaction or arrangement that
is designed to, or which reasonably could be expected to, lead
to or result in a sale, disposition or transfer, in whole or in
part, of any of the economic consequences of ownership of our
common stock, whether such transaction would be settled by
delivery of common stock or other securities, in cash or
otherwise. The
180-day
period will be automatically extended if (1) during the
last 17 days of the
180-day
restricted period we issue an earnings release or material news
or a material event relating to us occurs or (2) prior to
expiration of the
180-day
restricted period, we announce that we will release earnings
results or become aware that material news or a material event
will occur during the
16-day
period beginning on the last day of the
180-day
restricted period, in which case the restrictions described
above will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event.
Listing
on NASDAQ Global Market
Our common stock is quoted on the OTC Bulletin Board under
the trading symbol CZFC.OB. We applied to list our
common stock on the NASDAQ Global Market under the trading
symbol CZFC.
Stabilization
In connection with this underwriting, the underwriters may
engage in stabilizing transactions, over-allotment transactions
and syndicate covering transactions.
|
|
|
|
|
Stabilizing transactions permit bids to purchase shares of
common stock so long as the stabilizing bids do not exceed a
specified maximum, and are engaged in for the purpose of
preventing or retarding a decline in the market price of the
common stock while the offering is in progress.
|
|
|
|
Over-allotment transactions involve sales by the underwriters of
shares of common stock in excess of the number of shares the
underwriters are obligated to purchase. This creates a syndicate
short position that may be either a covered short position or a
naked short position. In a covered short position, the number of
shares over-allotted by the underwriters is not greater than the
number of shares that they may purchase in the over-allotment
option. In a naked short position, the number of shares involved
is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by
exercising their over-allotment option
and/or
purchasing shares in the open market.
|
106
|
|
|
|
|
Syndicate covering transactions involve purchases of common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In
determining the source of shares to close out the short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared with the price at which they may purchase shares
through exercise of the over-allotment option. If the
underwriters sell more shares than could be covered by exercise
of the over-allotment option and, therefore, have a naked short
position, the position can be closed out only by buying shares
in the open market. A naked short position is more likely to be
created if the underwriters are concerned that after pricing
there could be downward pressure on the price of the shares in
the open market that could adversely affect investors who
purchase in the offering.
|
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of our common stock. As a result,
the price of our common stock in the open market may be higher
than it would otherwise be in the absence of these transactions.
Neither we nor the underwriters make any representation or
prediction as to the effect that the transactions described
above may have on the price of our common stock. These
transactions may be effected on the NASDAQ Global Market, in the
over-the-counter
market or otherwise and, if commenced, may be discontinued at
any time.
Right of
First Refusal
We have granted Sandler ONeill & Partners, L.P. a
right of first refusal regarding any private or public capital
raising transactions entered into by us through June 1,
2007. If during this period we pursue a capital raising
transaction with the assistance of another financial advisor
(except any selling group members in connection with this public
offering), we must pay Sandler ONeill & Partners,
L.P. a negotiated amount for the waiver or termination of such
right of first refusal. No payment is required if Sandler
ONeill & Partners, L.P. elects not to act as an
underwriter or a financial advisor in connection with such
capital raising transaction.
Indemnity
We have agreed to indemnify the underwriters against specified
liabilities, including liabilities under the Securities Act of
1933, and to contribute to payments that the underwriters may be
required to make in respect thereof.
From time to time, the underwriters have provided and may
continue to provide financial advisory and investment banking
services to us. Sandler ONeill & Partners, L.P.
has acted as a financial advisor and delivered a fairness
opinion to us in connection with our proposed acquisition of
Kentucky Banking Centers. Sandler ONeill &
Partners, L.P. received a fee for such services.
LEGAL
MATTERS
The validity of the shares of common stock offered hereby will
be passed upon for us by Wyatt Tarrant & Combs, LLP,
Louisville, Kentucky. Certain legal matters relating to this
offering will be passed upon for the underwriters by Nelson
Mullins Riley & Scarborough LLP, Atlanta, Georgia.
EXPERTS
Our consolidated financial statements as of December 31,
2005, and for the year ended December 31, 2005, have been
audited by Crowe Chizek and Company LLC, independent registered
public accounting firm, as set forth in its report appearing
herein and included in this registration statement in reliance
upon such report.
107
Our consolidated financial statements as of December 31,
2004 and the year ended December 31, 2004, have been
audited by BKD, LLP, independent registered public accounting
firm, as set forth in its report appearing herein and included
in this registration statement in reliance upon such report.
The financial statements of Kentucky Banking Centers as of
December 31, 2005 and 2004, and for each of the two years
in the period ended December 31, 2005, have been audited by
Crowe Chizek and Company LLC, independent public accountants as
set forth in its report appearing herein and included in this
registration statement in reliance upon such report.
WHERE YOU
CAN FIND MORE INFORMATION ABOUT US
We are subject to the informational requirements of the
Securities Exchange Act of 1934. Accordingly, we file periodic
reports, proxy statements, and other information with the
Securities and Exchange Commission. You may inspect or copy
these materials at the Public Reference Room at the SEC at
Room 1580, 100 F Street, N.E., Washington, D.C. 20549.
For a fee, you may also obtain copies of these materials by
writing to the Public Reference Section of the Commission at 100
F Street, N.E. Washington, D.C. 20549. Please call the SEC
at
1-800-SEC-0330
for further information on the operation of the SEC public
reference room. Our filings are also available to the public on
the SECs website on the Internet at http://www.sec.gov.
We filed a registration statement with the Securities and
Exchange Commission under the Securities Act of 1933 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 100 F
Street, N.E., 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.
108
Report of
Independent Registered Public Accounting Firm
Audit Committee, Board of Directors
and Stockholders
Citizens First Corporation
Bowling Green, Kentucky
We have audited the accompanying consolidated balance sheet of
Citizens First Corporation as of December 31, 2005, and the
related consolidated statements of operations,
shareholders equity and cash flows for the year then
ended. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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 audit provides 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,
2005, and the results of its operations and its cash flows for
the year then ended in conformity with U.S. generally
accepted accounting principles.
/s/ Crowe
Chizek and Company LLC
Brentwood, Tennessee
March 9, 2006 (except for Notes 20 and Note 23 as to
which the date is September 5, 2006)
F-2
Report of
Independent Registered Public Accounting Firm
Audit Committee, Board of Directors
and Stockholders
Citizens First Corporation
Bowling Green, Kentucky
We have audited the accompanying consolidated balance sheet of
Citizens First Corporation (Company) as of December 31,
2004, and the related consolidated statements of operations,
shareholders equity and cash flows for the year then
ended. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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 audit provides 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,
2004, and the results of its operations and its cash flows for
the year then ended in conformity with accounting principles
generally accepted in the United States of America.
Evansville, Indiana
January 21, 2005, except for Notes 21 and 23, as to which
the dates are September 5, 2006
F-3
Citizens
First Corporation
as of December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
As Restated
|
|
|
|
|
|
|
See Note 20
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
ASSETS
|
Cash and due from banks
|
|
$
|
4,062,402
|
|
|
$
|
3,910,629
|
|
Federal funds sold
|
|
|
11,681,000
|
|
|
|
169,078
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
15,743,402
|
|
|
|
4,079,707
|
|
Available for sale securities
|
|
|
12,057,724
|
|
|
|
12,888,985
|
|
Loans held for sale
|
|
|
621,085
|
|
|
|
649,500
|
|
Loans, net of allowance for loan
losses of $1,957,220 and $1,720,565 at December 31, 2005
and 2004, respectively
|
|
|
155,611,776
|
|
|
|
145,229,862
|
|
Premises and equipment
|
|
|
7,608,072
|
|
|
|
3,628,317
|
|
Federal Home Loan Bank (FHLB)
stock
|
|
|
615,100
|
|
|
|
582,800
|
|
Accrued interest receivable
|
|
|
1,085,723
|
|
|
|
788,871
|
|
Deferred income taxes
|
|
|
612,573
|
|
|
|
549,292
|
|
Goodwill
|
|
|
1,264,516
|
|
|
|
936,416
|
|
Other
|
|
|
281,573
|
|
|
|
178,336
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
195,501,544
|
|
|
$
|
169,512,086
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Noninterest bearing
|
|
$
|
15,060,574
|
|
|
$
|
15,015,304
|
|
Savings, NOW and money market
|
|
|
55,612,009
|
|
|
|
54,770,108
|
|
Time
|
|
|
85,704,604
|
|
|
|
60,743,325
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
156,377,187
|
|
|
|
130,528,737
|
|
Federal funds purchased
|
|
|
|
|
|
|
2,500,000
|
|
Securities sold under repurchase
agreements
|
|
|
2,919,629
|
|
|
|
3,872,532
|
|
FHLB advances
|
|
|
14,500,000
|
|
|
|
13,000,000
|
|
Income taxes payable
|
|
|
113,607
|
|
|
|
155,814
|
|
Accrued interest and other
liabilities
|
|
|
1,632,758
|
|
|
|
1,278,363
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
175,543,181
|
|
|
|
151,335,446
|
|
|
|
|
|
|
|
|
|
|
Shareholders
Equity
|
|
|
|
|
|
|
|
|
6.5% cumulative preferred stock,
no par value, authorized 500 shares; issued and outstanding
250 shares at December 31, 2005 and 2004, respectively
|
|
|
7,659,340
|
|
|
|
7,659,340
|
|
Common stock, no par value,
authorized 2,000,000 shares; issued and outstanding 893,643
and 844,057 shares at December 31, 2005, and 2004,
respectively
|
|
|
10,728,966
|
|
|
|
9,975,130
|
|
Retained earnings
|
|
|
1,919,925
|
|
|
|
851,972
|
|
Accumulated other comprehensive
income (loss)
|
|
|
(349,868
|
)
|
|
|
(309,802
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
19,958,363
|
|
|
|
18,176,640
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
195,501,544
|
|
|
$
|
169,512,086
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
Citizens
First Corporation
Years Ended December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Restated
|
|
|
|
|
|
|
See Note 21
|
|
|
|
2005
|
|
|
2004
|
|
|
Interest and Dividend
Income
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
10,498,720
|
|
|
$
|
8,061,256
|
|
Available for sale securities
|
|
|
472,162
|
|
|
|
514,567
|
|
Federal funds sold
|
|
|
73,170
|
|
|
|
22,243
|
|
Dividends on FHLB stock
|
|
|
29,805
|
|
|
|
22,694
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
|
11,073,857
|
|
|
|
8,620,760
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,905,843
|
|
|
|
2,135,180
|
|
Securities sold under repurchase
agreements
|
|
|
31,686
|
|
|
|
37,318
|
|
FHLB advances
|
|
|
371,403
|
|
|
|
354,354
|
|
Federal funds purchased
|
|
|
44,003
|
|
|
|
14,776
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
3,352,935
|
|
|
|
2,541,628
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
7,720,922
|
|
|
|
6,079,132
|
|
Provision for Loan
Losses
|
|
|
(200,000
|
)
|
|
|
165,000
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income After
Provision for Loan Losses
|
|
|
7,920,922
|
|
|
|
5,914,132
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
808,173
|
|
|
|
834,900
|
|
Other service charges and fees
|
|
|
141,333
|
|
|
|
136,954
|
|
Title insurance premiums and
closing costs
|
|
|
68,151
|
|
|
|
65,213
|
|
Sale of mortgage loans
|
|
|
342,533
|
|
|
|
413,715
|
|
Lease income
|
|
|
99,756
|
|
|
|
890
|
|
Net realized gains (losses) on sale
of available for sale securities
|
|
|
|
|
|
|
(34,368
|
)
|
Trust referral fees
|
|
|
16,000
|
|
|
|
12,500
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
1,475,946
|
|
|
|
1,429,804
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
3,005,399
|
|
|
|
3,039,857
|
|
Net occupancy expense
|
|
|
421,798
|
|
|
|
365,519
|
|
Equipment expense
|
|
|
379,111
|
|
|
|
421,688
|
|
Advertising
|
|
|
229,187
|
|
|
|
162,217
|
|
Professional fees
|
|
|
563,378
|
|
|
|
472,315
|
|
Data processing services
|
|
|
414,165
|
|
|
|
368,119
|
|
FDIC and other insurance
|
|
|
96,666
|
|
|
|
154,088
|
|
Franchise shares and deposit tax
|
|
|
174,550
|
|
|
|
140,547
|
|
Postage and office supplies
|
|
|
117,027
|
|
|
|
101,354
|
|
Telephone and other communication
|
|
|
125,187
|
|
|
|
122,031
|
|
Other
|
|
|
477,943
|
|
|
|
458,162
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
6,004,411
|
|
|
|
5,805,897
|
|
|
|
|
|
|
|
|
|
|
Income Before Income
Taxes
|
|
|
3,392,457
|
|
|
|
1,538,039
|
|
Provision for Income
Taxes
|
|
|
1,155,653
|
|
|
|
500,150
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
2,236,804
|
|
|
$
|
1,037,889
|
|
Dividends declared, preferred stock
|
|
|
519,871
|
|
|
|
240,706
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders
|
|
|
1,716,933
|
|
|
|
797,183
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per
Share
|
|
$
|
1.83
|
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per
Share
|
|
$
|
1.47
|
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
Citizens
First Corporation
Years Ended December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Restated
|
|
|
As Restated
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 20
|
|
|
See Note 20
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Income
|
|
|
Balance, January 1,
2004
|
|
|
|
|
|
$
|
|
|
|
|
840,447
|
|
|
$
|
9,920,981
|
|
|
$
|
54,789
|
|
|
$
|
(365,393
|
)
|
|
$
|
9,610,377
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,037,889
|
|
|
|
|
|
|
|
1,037,889
|
|
|
$
|
1,037,889
|
|
Preferred stock issued,
250 shares issued at $31,992 per share, net of
offering costs of $338,660
|
|
|
250
|
|
|
|
7,659,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,659,340
|
|
|
|
|
|
Common stock issued,
3,610 shares issued at $15.00 per share
|
|
|
|
|
|
|
|
|
|
|
3,610
|
|
|
|
54,149
|
|
|
|
|
|
|
|
|
|
|
|
54,149
|
|
|
|
|
|
Dividend declared, preferred stock
(including dividends paid of $109,671)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(240,706
|
)
|
|
|
|
|
|
|
(240,706
|
)
|
|
|
|
|
Change in unrealized gain (loss) on
available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,591
|
|
|
|
55,591
|
|
|
|
55,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,093,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2004
|
|
|
250
|
|
|
|
7,659,340
|
|
|
|
844,057
|
|
|
|
9,975,130
|
|
|
|
851,972
|
|
|
|
(309,802
|
)
|
|
|
18,176,640
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,236,804
|
|
|
|
|
|
|
|
2,236,804
|
|
|
$
|
2,236,804
|
|
Common stock issued,
7,002 shares
|
|
|
|
|
|
|
|
|
|
|
7,002
|
|
|
|
104,856
|
|
|
|
|
|
|
|
|
|
|
|
104,856
|
|
|
|
|
|
5% stock dividend declared
|
|
|
|
|
|
|
|
|
|
|
42,584
|
|
|
|
648,980
|
|
|
|
(648,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on
available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,066
|
)
|
|
|
(40,066
|
)
|
|
|
(40,066
|
)
|
Dividends declared, preferred stock
(including dividends paid of $519,871)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(519,871
|
)
|
|
|
|
|
|
|
(519,871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,196,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2005
|
|
|
250
|
|
|
$
|
7,659,340
|
|
|
|
893,643
|
|
|
$
|
10,728,966
|
|
|
$
|
1,919,925
|
|
|
$
|
(349,868
|
)
|
|
$
|
19,958,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
Citizens
First Corporation
Years Ended December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,236,804
|
|
|
$
|
1,037,889
|
|
Items not requiring (providing) cash
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
396,381
|
|
|
|
376,979
|
|
Provision for loan losses
|
|
|
(200,000
|
)
|
|
|
165,000
|
|
Amortization of premiums and
discounts on securities
|
|
|
13,108
|
|
|
|
18,085
|
|
Deferred income taxes
|
|
|
(63,281
|
)
|
|
|
25,428
|
|
Net realized (gains) losses on sale
of securities
|
|
|
|
|
|
|
34,368
|
|
Sale of mortgage loans held for sale
|
|
|
25,735,945
|
|
|
|
22,122,513
|
|
Origination of mortgage loans held
for sale
|
|
|
(25,364,997
|
)
|
|
|
(21,828,498
|
)
|
Gains on sales of loans
|
|
|
(342,533
|
)
|
|
|
(413,715
|
)
|
Losses (gains) on sale of other
real estate owned
|
|
|
6,803
|
|
|
|
(3,298
|
)
|
Loss on sale premises and equipment
|
|
|
|
|
|
|
2,259
|
|
FHLB stock dividends received
|
|
|
(29,500
|
)
|
|
|
(22,400
|
)
|
Changes in
|
|
|
|
|
|
|
|
|
Interest receivable
|
|
|
(296,852
|
)
|
|
|
(94,234
|
)
|
Income taxes receivable (payable)
|
|
|
(42,207
|
)
|
|
|
443,722
|
|
Other assets
|
|
|
(295,773
|
)
|
|
|
(111,746
|
)
|
Interest payable and other
liabilities
|
|
|
547,254
|
|
|
|
150,480
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
2,301,152
|
|
|
|
1,902,832
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
Net increase in loans
|
|
|
(10,447,058
|
)
|
|
|
(12,583,764
|
)
|
Purchase of premises and equipment
|
|
|
(4,351,883
|
)
|
|
|
(94,819
|
)
|
Proceeds from maturities of
available for sale securities
|
|
|
757,446
|
|
|
|
815,541
|
|
Proceeds from sales of other real
estate owned
|
|
|
261,929
|
|
|
|
73,298
|
|
Proceeds from sales of available
for sale securities
|
|
|
|
|
|
|
4,727,439
|
|
Proceeds from sales of premises and
equipment
|
|
|
|
|
|
|
625
|
|
Contingent payment related to
purchase of Commonwealth Mortgage and Southern KY Land Title,
Inc., net of stock issued
|
|
|
(251,717
|
)
|
|
|
(162,401
|
)
|
Purchase of FHLB stock
|
|
|
(2,800
|
)
|
|
|
(135,300
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(14,034,083
|
)
|
|
|
(7,359,381
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Net increase in demand deposits,
money market, NOW and savings accounts
|
|
|
887,171
|
|
|
|
5,803,840
|
|
Net increase (decrease) in time
deposits
|
|
|
24,961,279
|
|
|
|
(9,004,195
|
)
|
Proceeds from FHLB advances
|
|
|
8,000,000
|
|
|
|
5,000,000
|
|
Repayment of FHLB advances
|
|
|
(6,500,000
|
)
|
|
|
(6,000,000
|
)
|
Net increase (decrease) in Federal
Reserve funds purchased and repurchase agreements
|
|
|
(3,452,903
|
)
|
|
|
953,546
|
|
Issuance of preferred stock
|
|
|
|
|
|
|
7,659,340
|
|
Issuance of common stock
|
|
|
20,950
|
|
|
|
0
|
|
Dividends paid on preferred stock
|
|
|
(519,871
|
)
|
|
|
(109,671
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
23,396,626
|
|
|
|
4,302,860
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and
Cash Equivalents
|
|
|
11,663,695
|
|
|
|
(1,153,689
|
)
|
Cash and Cash Equivalents,
Beginning of Year
|
|
|
4,079,707
|
|
|
|
5,233,396
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End
of Year
|
|
$
|
15,743,402
|
|
|
$
|
4,079,707
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flows
Information
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
3,166,079
|
|
|
$
|
2,573,723
|
|
Income taxes paid
|
|
$
|
1,240,500
|
|
|
$
|
31,000
|
|
Loans transferred to other real
estate owned
|
|
$
|
268,732
|
|
|
$
|
|
|
Stock issued:
|
|
|
|
|
|
|
|
|
For contingent payment related to
purchase of Commonwealth Mortgage and Southern Ky. Land Title,
Inc.
|
|
|
83,906
|
|
|
|
54,149
|
|
See accompanying notes to consolidated financial statements.
F-7
Citizens
First Corporation
Citizens
First Corporation
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 1:
|
Nature of
Operations and Summary of Significant Accounting
Policies
|
Nature
of Operations
Citizens First Corporation (Company) was incorporated in 1975,
for the purpose of conducting business as an investment club.
The Company is incorporated under the laws of the Commonwealth
of Kentucky and is headquartered in Bowling Green, Kentucky. In
September 1998, the Company filed an application with the
Kentucky Department of Financial Institutions (KDFI) and the
Federal Deposit Insurance Corporation (FDIC) to organize and
charter Citizens First Bank, Inc. (Bank) as a new Kentucky bank
and a wholly-owned subsidiary of the Company. In December 1998,
the Company filed an application with the Board of Governors of
the Federal Reserve System (FRB) for approval to become a bank
holding company under the Holding Company Act of 1956, as
amended. On December 28, 1998, the FRB approved the
Companys application to become a bank holding company. On
January 21, 1999, the FDIC approved the Banks
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 Companys 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 and Franklin and Simpson 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
To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America,
management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures
provided, and actual results could differ. The allowance for
loan losses and fair values of financial instruments are
particularly subject to change.
Cash
Flows
Cash and cash equivalents includes cash, deposits with other
financial institutions under 90 days, and federal funds
sold. Net cash flows are reported for customer loan and deposit
transactions, interest bearing deposits in other financial
institutions, and federal funds purchased and repurchase
agreements.
Securities
Debt securities are classified as held to maturity and carried
at amortized cost when management has the positive intent and
ability to hold them to maturity. Debt securities are classified
as available for sale when they might be sold before maturity.
Equity securities with readily determinable fair values are
classified as available for sale. Securities available for sale
are carried at fair value, with unrealized holding gains and
losses reported in other comprehensive income (loss).
Federal
Home Loan Bank (FHLB) Stock
The Bank is a member of the FHLB system. Members are required to
own a certain amount of stock based on the level of borrowings
and other factors, and may invest in additional amounts. FHLB
stock is
F-8
Citizens
First Corporation
Notes to
Consolidated Financial
Statements (Continued)
carried at cost, classified as a restricted security, and
periodically evaluated for impairment based on ultimate recovery
of par value. Both cash and stock dividends are reported as
income.
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. Pursuant to accounting guidance, all mortgage loans
sold in the secondary market are considered transferred assets
once sold. The Bank does not maintain effective control over
these mortgage loans once they have been sold. 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 are sold servicing released.
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
nonaccrual 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 managements 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 borrowers ability to repay,
estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective as
it requires estimates that are susceptible to significant
revision as more information becomes available.
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 borrowers 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
loans effective interest rate, the loans 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.
F-9
Citizens
First Corporation
Notes to
Consolidated Financial
Statements (Continued)
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.
Land is carried at cost. Premises and equipment are stated at
cost less accumulated depreciation. Buildings and related
components are depreciated using the straight-line method with
useful lives ranging from twenty-five to forty years. Furniture,
fixtures and equipment are depreciated using the straight-line
(or accelerated) method with useful lives ranging from three to
seven years.
Foreclosed
Assets
Assets acquired through, or in lieu of, loan foreclosure are
held for sale and are initially recorded at fair value at the
date of foreclosure, establishing a new cost basis. Subsequent
to foreclosure, valuations are periodically performed by
management and the assets are carried at the lower of carrying
amount or fair value less cost to sell. Revenue and expenses
from operations and changes in the valuation allowance are
included in net income or expense from foreclosed assets.
Goodwill
Goodwill is tested annually for impairment. If the implied fair
value of goodwill is lower than its carrying amount, goodwill
impairment is indicated and goodwill is written down to its
implied fair value. Subsequent increases in goodwill value are
not recognized in the financial statements.
Long
Term Assets
Premises and equipment, core deposit and other intangible
assets, and other long-term assets are reviewed for impairment
when events indicate their carrying amount may not be
recoverable from future undiscounted cash flows. If impaired,
the assets are recorded at fair value.
Income
Taxes
Deferred tax assets and liabilities are recognized for the tax
effects of differences between the financial statement and tax
bases of assets and liabilities. A valuation allowance is
established to reduce deferred tax assets if it is more likely
than not that a deferred tax asset will not be realized. The
Company files consolidated income tax returns with its
subsidiary.
Stock
Option Plans
The Company accounts for the employee and the non-employee
director stock option plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net
income, as all options granted under this plan had an exercise
price equal to the market value of the underlying common stock
on the grant date. The following tables illustrate the effect on
net income and basic earnings per share if
F-10
Citizens
First Corporation
Notes to
Consolidated Financial
Statements (Continued)
the Company had applied the fair value provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation, for the years ending
December 31, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income, as reported
|
|
$
|
2,236,804
|
|
|
$
|
1,037,889
|
|
Less: Total stock-based employee
compensation cost determined under the fair value based method,
net of income taxes
|
|
|
(122,716
|
)
|
|
|
(66,877
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
2,114,088
|
|
|
$
|
971,012
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
Basic as reported
|
|
$
|
1.83
|
|
|
$
|
0.86
|
|
Basic pro forma
|
|
$
|
1.70
|
|
|
$
|
0.79
|
|
Diluted as reported
|
|
$
|
1.47
|
|
|
$
|
0.86
|
|
Diluted pro forma
|
|
$
|
1.39
|
|
|
$
|
0.79
|
|
Adoption
of New Accounting Standards
In December 2004, the Financial Accounting Standards Board
(FASB) issued an amendment to SFAS 123, Accounting for
Stock-Based Compensation (SFAS 123R) which eliminates the
ability to account for share-based compensation transactions
using Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and generally requires
that such transactions be accounted for using a fair value-based
method. SFAS 123R will be effective for the Company
beginning January 1, 2006. SFAS 123R applies to all
awards granted after the required effective date and to awards
modified, repurchased or cancelled after that date as well as
for the unvested portion of awards existing as of the effective
date.
As of the required effective date, the Company will apply
SFAS 123R using a modified version of prospective
application. Under that transition method, compensation cost is
recognized on or after the required effective date for the
portion of outstanding awards, for which the requisite service
has not yet been rendered, based on the grant-date fair value of
those awards calculated under SFAS 123 for pro forma
disclosures. For periods before the required effective date, a
company may elect to apply a modified version of retrospective
application under which financial statements for prior periods
are adjusted on a basis consistent with the pro forma
disclosures required for those periods by SFAS 123.
Based on the awards outstanding at December 31, 2005,
management has estimated that approximately $148,852 of
compensation expense related to those awards will be recognized
during the year ended December 31, 2006.
Loss
Contingencies
Loss contingencies, including claims and legal actions arising
in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount or range
of loss can be reasonably estimated. Management does not believe
there now are such matters that will have a material effect on
the financial statements.
Dividend
Restriction
Banking regulations require maintaining certain capital levels
and may limit the dividends paid by the bank to the holding
company or by the holding company to shareholders. These
restrictions pose no practical limit on the ability of the bank
or holding company to pay dividends.
F-11
Citizens
First Corporation
Notes to
Consolidated Financial
Statements (Continued)
Fair
Value of Financial Instruments
Fair values of financial instruments are estimated using
relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve
uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments, and other factors,
especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could
significantly affect the estimates.
Reclassifications
Certain reclassifications have been made to the 2004 financial
statements to conform to the 2005 financial statement
presentation. These reclassifications had no effect on net
earnings.
|
|
Note 2:
|
Available
for Sale Securities
|
The fair value of available for sale securities and the related
gross unrealized gains and losses recognized in accumulated
other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Gains
|
|
|
Losses
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
8,640,500
|
|
|
$
|
|
|
|
$
|
(344,763
|
)
|
Mortgage-backed securities
|
|
|
3,417,224
|
|
|
|
|
|
|
|
(185,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,057,724
|
|
|
$
|
0
|
|
|
$
|
(530,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
8,660,900
|
|
|
$
|
|
|
|
$
|
(322,709
|
)
|
Mortgage-backed securities
|
|
|
4,228,085
|
|
|
|
|
|
|
|
(146,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,888,985
|
|
|
$
|
0
|
|
|
$
|
(469,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair value of securities available for
sale at December 31, 2005, 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
|
|
$
|
4,000,000
|
|
|
$
|
3,897,000
|
|
One to five years
|
|
|
|
|
|
|
|
|
Five to ten years
|
|
|
4,985,263
|
|
|
|
4,743,500
|
|
After ten years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,985,263
|
|
|
|
8,640,500
|
|
Mortgage-backed securities not due
on a single maturity date
|
|
|
3,602,564
|
|
|
|
3,417,224
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
12,587,827
|
|
|
$
|
12,057,724
|
|
|
|
|
|
|
|
|
|
|
The carrying value of securities pledged as collateral, to
secure public deposits and for other purposes, was $8,330,993 at
December 31, 2005, and $10,858,512 at December 31,
2004.
F-12
Citizens
First Corporation
Notes to
Consolidated Financial
Statements (Continued)
Gross gains of $18,918 and gross losses of $53,286 for 2004 were
realized from sales of available for sale securities. There were
no sales of securities in 2005. An income tax benefit of
approximately $12,000 for 2004 was recorded in connection with
those sales.
Certain investments in debt securities are reported in the
financial statements at an amount less than their historical
cost. Total fair value of these investments at December 31,
2005 and December 31, 2004, was $12,057,724 and
$12,888,985, respectively, which is 100% of the Banks
available for sale investment portfolio. These declines
primarily resulted from recent increases in market interest
rates.
Based on evaluation of available evidence, including recent
changes in market interest rates and information obtained from
regulatory filings, management believes the declines in fair
value for these securities are temporary.
Should the impairment of any of these securities become other
than temporary, the cost basis of the investment will be reduced
and the resulting loss recognized in net income in the period
the
other-than-temporary
impairment is identified.
The following table shows the Banks investments
gross unrealized losses and fair value, aggregated by investment
category and length of time that individual securities have been
in a continuous unrealized loss position at December 31,
2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Description of Securities
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,640,500
|
|
|
$
|
(344,763
|
)
|
|
$
|
8,640,500
|
|
|
$
|
(344,763
|
)
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
3,417,224
|
|
|
|
(185,340
|
)
|
|
|
3,417,224
|
|
|
|
(185,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,057,724
|
|
|
$
|
(530,103
|
)
|
|
$
|
12,057,724
|
|
|
$
|
(530,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
2,941,200
|
|
|
$
|
(58,800
|
)
|
|
$
|
5,719,700
|
|
|
$
|
(263,909
|
)
|
|
$
|
8,660,900
|
|
|
$
|
(322,709
|
)
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
4,228,085
|
|
|
|
(146,687
|
)
|
|
|
4,228,085
|
|
|
|
(146,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities
|
|
$
|
2,941,200
|
|
|
$
|
(58,800
|
)
|
|
$
|
9,947,785
|
|
|
$
|
(410,596
|
)
|
|
$
|
12,888,985
|
|
|
$
|
(469,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3:
|
Securities
Purchased Under Agreements to Resell
|
The Company enters into purchases of securities under agreements
to resell. The amounts advanced under these agreements represent
short-term loans and are reflected as a receivable in the
balance sheet. The securities underlying the agreements are
book-entry securities. During the period, the securities were
delivered by appropriate entry into the Companys account
maintained at the Federal Reserve Bank of St. Louis or into
a third-party custodians account designated by the Company
under a written custodial agreement that explicitly recognizes
the Companys interest in the securities. At
December 31, 2005, these agreements matured within
90 days. The agreements relating to mortgage-backed
securities were agreements to resell substantially identical
securities. At December 31, 2005, no material amount of
agreements to resell securities purchased was outstanding with
any individual dealer. The Companys policy requires that
all securities purchased under agreements to resell be fully
collateralized.
F-13
Citizens
First Corporation
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 4:
|
Loans and
Allowance for Loan Losses
|
Categories of loans at December 31 include:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Commercial and agricultural
|
|
$
|
41,670,561
|
|
|
$
|
41,420,552
|
|
Commercial real estate
|
|
|
60,971,395
|
|
|
|
47,853,245
|
|
Residential real estate
|
|
|
45,108,425
|
|
|
|
46,817,849
|
|
Consumer
|
|
|
9,818,615
|
|
|
|
10,858,781
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
157,568,996
|
|
|
|
146,950,427
|
|
Less allowance for loan losses
|
|
|
(1,957,220
|
)
|
|
|
(1,720,565
|
)
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
155,611,776
|
|
|
$
|
145,229,862
|
|
|
|
|
|
|
|
|
|
|
Activity in the allowance for loan losses was as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Balance, beginning of year
|
|
$
|
1,720,565
|
|
|
$
|
1,904,378
|
|
Provision charged (credited) to
expense
|
|
|
(200,000
|
)
|
|
|
165,000
|
|
Loans charged off
|
|
|
(295,272
|
)
|
|
|
(380,891
|
)
|
Recoveries
|
|
|
731,927
|
|
|
|
32,078
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
1,957,220
|
|
|
$
|
1,720,565
|
|
|
|
|
|
|
|
|
|
|
The change in the allowance in 2005 is primarily a result of a
favorable judgment on a problem loan that had been partially
charged off. Upon receipt of the judgment award of $1,099,150 in
November 2005 from the Texas court system, $518,052 was applied
to a nonaccrual loan, $60,000 was reserved for collection
expense related to the recovery and the remainder was applied as
a partial recovery of the previously charged off loan.
Impaired loans totaled $256,993 and $720,041 at
December 31, 2005 and 2004, respectively. An allowance for
loan losses of $17,000 and $419,000 relates to impaired loans of
$69,000 and $718,103 at December 31, 2005 and 2004,
respectively.
Interest of $13,426 and $1,857 was recognized on average
impaired loans of $256,993 and $720,041 for 2005 and 2004,
respectively. Interest of $7,592 and $187 was recognized on
impaired loans on a cash basis during 2005 and 2004,
respectively.
At December 31, 2005 and 2004, accruing loans delinquent
90 days or more totaled $92,957 and $1,938, respectively.
Non-accruing loans at December 31, 2005 and 2004 were
$164,036 and $718,103, respectively.
F-14
Citizens
First Corporation
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 5:
|
Premises
and Equipment
|
Major classifications of premises and equipment, stated at cost,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Land and land improvements
|
|
$
|
2,472,996
|
|
|
$
|
1,298,963
|
|
Buildings and improvements
|
|
|
4,957,031
|
|
|
|
2,046,324
|
|
Leasehold improvements
|
|
|
108,124
|
|
|
|
108,124
|
|
Furniture and fixtures
|
|
|
200,145
|
|
|
|
188,741
|
|
Equipment
|
|
|
1,474,512
|
|
|
|
1,323,924
|
|
Automobiles
|
|
|
41,038
|
|
|
|
41,038
|
|
Construction in progress
|
|
|
129,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,383,110
|
|
|
|
5,007,114
|
|
Less accumulated depreciation
|
|
|
(1,775,038
|
)
|
|
|
(1,378,797
|
)
|
|
|
|
|
|
|
|
|
|
Net premises and equipment
|
|
$
|
7,608,072
|
|
|
$
|
3,628,317
|
|
|
|
|
|
|
|
|
|
|
In 2005 the Bank purchased a land and building at 1065 Ashley
Street in Bowling Green which will serve as the Banks
corporate headquarters. This facility was purchased for
$3,750,000 and remodeling costs are estimated at $650,000. The
construction in progress account represents costs incurred as of
December 31, 2005 for the remodeling. The majority of the
first floor is leased to other tenants, which is recognized as
lease income.
The changes in the carrying amount of goodwill for the years
ended December 31, 2005 and 2004 were:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Balance as of January 1
|
|
$
|
936,416
|
|
|
$
|
384,243
|
|
Settlement of contingent
consideration from purchase of Commonwealth Mortgage
|
|
|
328,100
|
|
|
|
552,173
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,264,516
|
|
|
$
|
936,416
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in denominations of $100,000 or more
were $29,550,419 on December 31, 2005, and $19,982,720 on
December 31, 2004. At December 31, 2005, three
customers accounted for approximately $25,740,000, or 16.5%, of
total deposits.
At December 31, 2005, the scheduled maturities of time
deposits were as follows:
|
|
|
|
|
2006
|
|
$
|
56,087,596
|
|
2007
|
|
|
19,468,516
|
|
2008
|
|
|
8,517,282
|
|
2009
|
|
|
374,705
|
|
2010
|
|
|
1,256,505
|
|
|
|
|
|
|
|
|
$
|
85,704,604
|
|
|
|
|
|
|
F-15
Citizens
First Corporation
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 8:
|
Federal
Home Loan Bank Advances
|
Federal Home Loan Bank (FHLB) advances
outstanding at December 31, 2005, mature from
January 20, 2006 to October 27, 2008. The advances
bear fixed interest rates ranging from 2.03% to 4.83%. The
average rate on these advances is 2.90%. The advances are
collateralized by a blanket agreement assigning mortgages on
single family residences to the FHLB, and are subject to
restrictions or penalties in the event of prepayment.
Aggregate annual maturities of FHLB advances at
December 31, 2005, were:
|
|
|
|
|
2006
|
|
$
|
11,000,000
|
|
2007
|
|
|
3,000,000
|
|
2008
|
|
|
500,000
|
|
|
|
|
|
|
|
|
$
|
14,500,000
|
|
|
|
|
|
|
The Bank had additional borrowing capacity of $3.1 million
at the Federal Home Loan Bank at December 31, 2005.
|
|
Note 9:
|
Cumulative
Convertible Preferred Stock
|
During the third quarter of 2004, the Company completed the
private placement of 250 shares of Cumulative Convertible
Preferred Stock, stated value $31,992 per share (Preferred
Stock), for an aggregate purchase price of $7,998,000. The
Preferred Stock was sold for $31,992 per share, is entitled
to quarterly cumulative dividends at an annual fixed rate of
6.5% and is convertible into shares of common stock of the
Company at an initial conversion price per share of $15.50 on
and after three years from the date of issuance. The sale of the
Preferred Stock netted proceeds to the Company of
$7,659,340 net of offering costs of $338,660, of which
$3,011,970 (including $3,000,000 in principal and $11,970 in
accrued interest) was used to repay the outstanding balance
under the Companys line of credit, and $3,800,000 was
contributed to the capital of the Bank. The remaining proceeds
from the issuance of the Preferred Stock are being used for
general corporate purposes, including the contribution of
capital to the Bank.
The provision (credit) for income taxes includes these
components:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Taxes currently payable
|
|
$
|
1,198,294
|
|
|
$
|
474,722
|
|
Deferred income taxes
|
|
|
(42,641
|
)
|
|
|
25,428
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
1,155,653
|
|
|
$
|
500,150
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the income tax expense at the statutory rate
to the Companys actual income tax expense is shown below:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Computed at the statutory rate
(34%)
|
|
$
|
1,153,436
|
|
|
$
|
522,933
|
|
Other
|
|
|
2,217
|
|
|
|
(22,783
|
)
|
|
|
|
|
|
|
|
|
|
Actual tax expense
|
|
$
|
1,155,653
|
|
|
$
|
500,150
|
|
|
|
|
|
|
|
|
|
|
F-16
Citizens
First Corporation
Notes to
Consolidated Financial
Statements (Continued)
The tax effects of temporary differences related to deferred
taxes shown on the balance sheets were:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
340,334
|
|
|
$
|
408,256
|
|
Depreciation
|
|
|
33,878
|
|
|
|
|
|
Unrealized losses on available for
sale securities
|
|
|
180,235
|
|
|
|
159,595
|
|
Accrued compensated absences
|
|
|
59,140
|
|
|
|
59,140
|
|
Deferred loan fees/costs
|
|
|
5,187
|
|
|
|
|
|
Other
|
|
|
56,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
674,970
|
|
|
|
626,991
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Deferred loan fees/costs
|
|
|
|
|
|
|
(3,653
|
)
|
FHLB stock dividends
|
|
|
(31,348
|
)
|
|
|
(21,318
|
)
|
Depreciation
|
|
|
|
|
|
|
(31,525
|
)
|
Accretion on investment securities
|
|
|
(2,427
|
)
|
|
|
(2,681
|
)
|
Prepaid expenses
|
|
|
(28,622
|
)
|
|
|
(18,522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(62,397
|
)
|
|
|
(77,699
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
612,573
|
|
|
$
|
549,292
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11:
|
Other
Comprehensive Income (Loss)
|
Other comprehensive income (loss) components and related taxes
were as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Unrealized gains (losses) on
available for sale securities
|
|
$
|
(60,707
|
)
|
|
$
|
49,861
|
|
Reclassification for realized
amount included in income
|
|
|
0
|
|
|
|
34,368
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss),
before tax effect
|
|
|
(60,707
|
)
|
|
|
84,229
|
|
Tax expense (benefit)
|
|
|
(20,641
|
)
|
|
|
28,638
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
$
|
(40,066
|
)
|
|
$
|
55,591
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12:
|
Regulatory
Matters
|
The Company and the Bank are subject to various regulatory
capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct
material effect on the Companys financial statements.
Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures
of 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 the 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
F-17
Citizens
First Corporation
Notes to
Consolidated Financial
Statements (Continued)
assets (as defined). Management believes, as of
December 31, 2005, that the Company and the Bank meet all
capital adequacy requirements to which they are subject.
As of December 31, 2005, the most recent notification from
regulatory agencies categorized the Company and the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Company and
the Bank must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the
following table. There are no conditions or events since that
notification that management believes have changed the
Companys or the Banks categories.
The Companys and the Banks actual capital amounts
and ratios are also presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be Well Capitalized
|
|
|
|
|
|
|
For Capital
|
|
|
Under Prompt Corrective
|
|
|
|
Actual
|
|
|
Adequacy Purposes
|
|
|
Action Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
As of December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
21,329,000
|
|
|
|
13.27
|
%
|
|
$
|
12,857,000
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Citizens First Bank, Inc.
|
|
|
21,040,000
|
|
|
|
13.09
|
|
|
|
12,857,000
|
|
|
|
8.0
|
|
|
$
|
16,078,000
|
|
|
|
10.0
|
%
|
Tier I Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
15,929,000
|
|
|
|
9.91
|
|
|
|
6,428,000
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Citizens First Bank, Inc.
|
|
|
19,083,000
|
|
|
|
11.87
|
|
|
|
6,428,000
|
|
|
|
4.0
|
|
|
|
9,642,000
|
|
|
|
6.0
|
|
Tier I Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
15,929,000
|
|
|
|
8.40
|
|
|
|
7,585,000
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Citizens First Bank, Inc.
|
|
|
19,083,000
|
|
|
|
10.06
|
|
|
|
7,590,000
|
|
|
|
4.0
|
|
|
|
9,487,000
|
|
|
|
5.0
|
|
As of December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
19,272,000
|
|
|
|
13.6
|
%
|
|
$
|
11,379,000
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Citizens First Bank, Inc.
|
|
|
18,471,000
|
|
|
|
13.0
|
|
|
|
11,379,000
|
|
|
|
8.0
|
|
|
$
|
14,224,000
|
|
|
|
10.0
|
%
|
Tier I Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
13,501,000
|
|
|
|
9.5
|
|
|
|
5,690,000
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Citizens First Bank, Inc.
|
|
|
16,750,000
|
|
|
|
11.8
|
|
|
|
5,690,000
|
|
|
|
4.0
|
|
|
|
8,535,000
|
|
|
|
6.0
|
|
Tier I Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
13,501,000
|
|
|
|
8.0
|
|
|
|
6,710,000
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Citizens First Bank, Inc.
|
|
|
16,750,000
|
|
|
|
10.0
|
|
|
|
6,709,000
|
|
|
|
4.0
|
|
|
|
8,386,000
|
|
|
|
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, 2005, the Bank could, without prior
approval, declare dividends of approximately $3,394 million.
F-18
Citizens
First Corporation
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 13:
|
Related
Party Transactions
|
At December 31, 2005 and 2004, the Bank had loans
outstanding to executive officers, directors, significant
stockholders and their affiliates (related parties) in the
amount of $8,394,043 and $8,879,034, respectively.
Deposits from related parties held by the Bank at
December 31, 2005 and 2004, totaled $2,097,034 and
$10,661,192, respectively.
|
|
Note 14:
|
Employee
Benefit Plans
|
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
employees contribution on 3% of the employees
compensation. Employer contributions charged to expense for 2005
and 2004 were $69,935 and $72,692, respectively.
Effective January 1, 2006 the Company has adopted a 401(k)
plan covering substantially all employees. Employees may
contribute a portion of their compensation (based on regulatory
limitations) with the Company matching 100% of the
employees contribution on 4% of the employees
compensation.
|
|
Note 15:
|
Stock
Option Plans
|
In 2002, the board of directors adopted the employee stock
option plan, which became effective upon the approval of the
Companys shareholders at the annual meeting in April 2003.
The purpose of the plan is to afford key employees an incentive
to remain in the employ of the Company and its subsidiaries and
to use their best efforts on its behalf. 126,000 shares of
Company common stock have been reserved for issuance under the
plan. Options granted expire after ten years, and vest ratably
over a three year period.
In 2003, the board of directors adopted the non-employee
director stock option plan for non-employee directors, which
became effective upon the approval of the Companys
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 Companys non-employee
directors and shareholders and in attracting and retaining
non-employee directors by affording them an opportunity to share
in the Companys future successes. 42,000 shares of
common stock have been reserved for issuance under the plan.
Options granted expire after ten years, and are immediately
vested.
A summary of the status of the plans at December 31, 2005
and 2004, and changes during the periods then ended is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding, beginning of year
|
|
|
51,030
|
|
|
$
|
13.50
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
58,170
|
|
|
|
14.94
|
|
|
|
51,975
|
|
|
$
|
13.50
|
|
Exercised
|
|
|
(1,575
|
)
|
|
|
13.30
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(12,022
|
)
|
|
|
13.89
|
|
|
|
(945
|
)
|
|
|
13.57
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
95,603
|
|
|
$
|
14.33
|
|
|
|
51,030
|
|
|
$
|
13.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, end of year
|
|
|
25,305
|
|
|
$
|
13.81
|
|
|
|
9,975
|
|
|
$
|
13.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
Citizens
First Corporation
Notes to
Consolidated Financial
Statements (Continued)
The fair value of options granted is estimated on the date of
the grant using an option-pricing model with the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Dividend yields
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility factors of expected
market price of common stock
|
|
|
24.54
|
%
|
|
|
19.90
|
%
|
Risk-free interest rates
|
|
|
4.00
|
%
|
|
|
1.00
|
%
|
Expected life of options
|
|
|
7 years
|
|
|
|
10 years
|
|
The following table summarizes information about stock options
under the plans outstanding at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
Number of
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
Average
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
Remaining
|
|
Average
|
|
|
|
|
|
Weighted-
|
|
|
Available for
|
|
|
|
Number
|
|
|
Contractual
|
|
Exercise
|
|
|
Number
|
|
|
Average
|
|
|
Future
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Life
|
|
Price
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
Issuance(a)
|
|
|
Employee stock option plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$13.57
|
|
|
33,390
|
|
|
8.08 years
|
|
$
|
13.57
|
|
|
|
11,130
|
|
|
$
|
13.57
|
|
|
|
(b
|
)
|
$14.33
|
|
|
38,168
|
|
|
9.08 years
|
|
$
|
14.33
|
|
|
|
0
|
|
|
|
|
|
|
|
(b
|
)
|
$17.34
|
|
|
9,870
|
|
|
9.9 years
|
|
$
|
17.34
|
|
|
|
0
|
|
|
|
|
|
|
|
(b
|
)
|
Non-employee stock option plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$12.76
|
|
|
4,200
|
|
|
8.42 years
|
|
$
|
12.76
|
|
|
|
4,200
|
|
|
$
|
12.76
|
|
|
|
(c
|
)
|
$13.57
|
|
|
4,200
|
|
|
8.08 years
|
|
$
|
13.57
|
|
|
|
4,200
|
|
|
$
|
13.57
|
|
|
|
(c
|
)
|
$15.19
|
|
|
5,775
|
|
|
9.33 years
|
|
$
|
15.19
|
|
|
|
5,775
|
|
|
$
|
15.19
|
|
|
|
(c
|
)
|
|
|
|
(a) |
|
Excludes shares to be issued upon exercise of outstanding
options. |
|
(b) |
|
44,572 shares of Company stock remain available for
issuance under the employee stock option plan. |
|
(c) |
|
26,250 shares of Company stock remain available for
issuance under the non-employee stock option plan. |
As of December 31, 2005, there were no options that were
antidilutive. The number of options have been adjusted to
reflect the 2005 5% stock dividend, in accordance with plan
provisions. There have been no adjustments to the tables in this
note related to the 2006 5% stock dividend.
|
|
Note 16:
|
Acquisition
of Commonwealth Mortgage and Southern Kentucky Land
Title
|
On January 2, 2003, the Bank acquired all of the
outstanding stock of Commonwealth Mortgage of Bowling Green,
Inc. and Southern Kentucky Land Title, Inc. Commonwealth
Mortgage originates one to four family residential mortgages for
sale in the secondary mortgage market, while Southern Kentucky
Land Title provides title insurance agency services for real
estate purchase contracts. The purchase price for Commonwealth
Mortgage and Southern Kentucky Land Title consisted of $400,000
in cash plus a deferred contingent purchase price of up to
$1,350,000 payable upon the combined entities achievement
of specified annual earnings targets over a five year period,
plus 25% of the amount, if any, by which their earnings exceed
such targets. 25% of the deferred purchase price will be paid by
the issuance of the Companys common stock, valued at the
average of the closing sales price of the stock over the last 10
trading days of the applicable calendar year. At the
Sellers option, an additional 25% of such deferred
purchase price, if any, may be paid in shares of the
Companys common stock. The deferred contingent purchase
price will be accounted for as additional purchase price at the
time the contingency is resolved. The Bank also purchased the
.2 acre site on which the main office of Commonwealth
Mortgage is located for a purchase price of $272,000 in cash.
Goodwill recognized in this transaction amounted to $380,000,
all of which was assigned to the Bank.
F-20
Citizens
First Corporation
Notes to
Consolidated Financial
Statements (Continued)
The Bank paid $251,700 and $162,400 in cash, and issued common
stock for approximately $84,000 and $54,000, associated with the
contingent purchase price during 2005 for the 2004 year and
during 2004, for the 2003 year, respectively. Goodwill
recognized in these transactions amounted to approximately
$335,700 and $216,400, all of which was assigned to the Bank.
Subsequent to December 31, 2005, the Bank paid $246,060 in
cash associated with the contingent purchase price.
Additionally, the Company will issue common stock for
approximately $82,000 during the first quarter of 2006
associated with the contingent purchase price. The total of
approximately $328,100 was accrued as of December 31, 2005,
and recorded as goodwill.
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
Banks customer service offerings and to supplement the
Banks noninterest fee income.
|
|
Note 17:
|
Commitments
and Credit Risk
|
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
customers creditworthiness is evaluated on a
case-by-case
basis. The amount of collateral obtained, if deemed necessary,
is based on managements credit evaluation of the
counterparty. Collateral held varies, but may include accounts
receivable, inventory, property, plant and equipment, commercial
real estate and residential real estate.
At December 31, 2005 and 2004, the Company had outstanding
commitments to originate loans aggregating approximately
$24,137,495 and $26,519,849, respectively. The commitments
extended over varying periods of time with the majority being
disbursed within a one-year period.
Standby
Letters of Credit
Standby letters of credit are irrevocable conditional
commitments issued by the Bank to guarantee the performance of a
customer to a third party. Financial standby letters of credit
are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and
similar transactions. Performance standby letters of credit are
issued to guarantee performance of certain customers under
non-financial contractual obligations. The credit risk involved
in issuing standby letters of credit is essentially the same as
that involved in extending loans to customers. Fees for letters
of credit are initially recorded by the Bank as deferred revenue
and are included in earnings at the termination of the
respective agreements.
Should the Bank be obligated to perform under the standby
letters of credit, the Bank may seek recourse from the customer
for reimbursement of amounts paid.
The Bank had total outstanding standby letters of credit
amounting to $1,955,245 and $2,063,335 at December 31, 2005
and 2004, respectively, with terms ranging from days to one year.
|
|
Note 18:
|
Disclosures
about Fair Value of Financial Instruments
|
Many of the Companys assets and liabilities are short-term
financial instruments whose carrying amounts reported in the
statement of condition approximate fair value. These items
include cash and due from banks, federal funds sold, accrued
interest receivable, federal funds purchased, securities sold
under repurchase
F-21
Citizens
First Corporation
Notes to
Consolidated Financial
Statements (Continued)
agreements and accrued interest payable balances. The estimated
fair values of the Companys remaining on-balance sheet
financial instruments as of December 31, 2005 and 2004, are
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities
|
|
|
12,057,724
|
|
|
|
12,057,724
|
|
|
|
12,888,985
|
|
|
|
12,888,985
|
|
Loans, including loans held for
sale, net
|
|
|
156,232,861
|
|
|
|
154,847,801
|
|
|
|
145,879,362
|
|
|
|
143,636,961
|
|
FHLB stock
|
|
|
615,100
|
|
|
|
615,100
|
|
|
|
582,800
|
|
|
|
582,800
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
156,377,187
|
|
|
|
156,701,479
|
|
|
|
130,528,737
|
|
|
|
130,985,086
|
|
FHLB advances
|
|
|
14,500,000
|
|
|
|
14,385,185
|
|
|
|
13,000,000
|
|
|
|
13,000,000
|
|
The fair value of off-balance-sheet items is not considered
material (or is based on the current fees or cost that would be
charged to enter into or terminate such arrangements).
|
|
Note 19:
|
Condensed
Financial Information (Parent Company Only)
|
Presented below is condensed financial information as to
financial position, results of operations and cash flows of the
Company:
Condensed
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
537,255
|
|
|
$
|
1,030,005
|
|
Investment in Citizens First Bank,
Inc.
|
|
|
19,668,605
|
|
|
|
17,375,661
|
|
Other assets
|
|
|
76,096
|
|
|
|
77,916
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,281,956
|
|
|
$
|
18,483,582
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
|
|
|
$
|
|
|
Other liabilities
|
|
|
323,593
|
|
|
|
306,942
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
323,593
|
|
|
|
306,942
|
|
Shareholders
Equity
|
|
|
19,958,363
|
|
|
|
18,176,640
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
20,281,956
|
|
|
$
|
18,483,582
|
|
|
|
|
|
|
|
|
|
|
F-22
Citizens
First Corporation
Notes to
Consolidated Financial
Statements (Continued)
Condensed
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Income
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
66,780
|
|
Professional fees
|
|
|
121,984
|
|
|
|
185,245
|
|
Other expenses
|
|
|
23,785
|
|
|
|
53,380
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
145,769
|
|
|
|
305,405
|
|
|
|
|
|
|
|
|
|
|
Loss before Income Taxes and
Equity in Undistributed Income of Subsidiary
|
|
|
(145,769
|
)
|
|
|
(305,405
|
)
|
Income Tax Credit
|
|
|
(49,562
|
)
|
|
|
(127,150
|
)
|
|
|
|
|
|
|
|
|
|
Loss before Equity in
Undistributed Income of Subsidiary
|
|
|
(96,207
|
)
|
|
|
(178,255
|
)
|
Equity in Undistributed Income
of Subsidiary
|
|
|
2,333,011
|
|
|
|
1,216,144
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
2,236,804
|
|
|
$
|
1,037,889
|
|
|
|
|
|
|
|
|
|
|
Condensed
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,236,804
|
|
|
$
|
1,037,889
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Equity in undistributed income of
subsidiary
|
|
|
(2,333,011
|
)
|
|
|
(1,216,144
|
)
|
Changes in
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
1,820
|
|
|
|
52,854
|
|
Other liabilities
|
|
|
16,651
|
|
|
|
20,815
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(77,736
|
)
|
|
|
(104,586
|
)
|
|
|
|
|
|
|
|
|
|
Investing
Activity
Investment in subsidiary
|
|
|
|
|
|
|
(4,050,000
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Payment of long-term debt
|
|
|
|
|
|
|
(3,000,000
|
)
|
Issuance of preferred stock, net
|
|
|
|
|
|
|
7,659,340
|
|
Payment of dividends on preferred
stock
|
|
|
(519,870
|
)
|
|
|
(109,671
|
)
|
Issuance of common stock, net
|
|
|
104,856
|
|
|
|
54,149
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
(415,014
|
)
|
|
|
4,603,818
|
|
|
|
|
|
|
|
|
|
|
Increase in Cash and Cash
Equivalents
|
|
|
(492,750
|
)
|
|
|
449,232
|
|
Cash and Cash Equivalents,
Beginning of Year
|
|
|
1,030,005
|
|
|
|
580,773
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End
of Year
|
|
$
|
537,255
|
|
|
$
|
1,030,005
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 20:
|
Restatement
of Shareholders Equity
|
A reclassification in shareholders equity on the
Consolidated Balance Sheet from retained earnings to common
stock has been made to reflect the value of the 2005 stock
dividend issued. These accounts have
F-23
Citizens
First Corporation
Notes to
Consolidated Financial
Statements (Continued)
been properly reclassified on the Consolidated Balance Sheet and
the Consolidated Statement of Shareholders Equity as of
December 31, 2005. Total shareholders equity was not
affected by the reclassification.
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Balance Sheet
|
|
As Previously Reported
|
|
|
As Restated
|
|
|
Effect of Change
|
|
|
Common Stock
|
|
$
|
10,079,986
|
|
|
$
|
10,728,966
|
|
|
$
|
648,980
|
|
Retained Earnings
|
|
|
2,568,905
|
|
|
|
1,919,925
|
|
|
|
(648,980
|
)
|
|
|
Note 21:
|
Restatement
of Earnings Per Share
|
Basic and diluted earnings per share for the year ended 2004 did
not properly reflect the 5% stock dividend declared in May, 2005
when the Companys original 2005 Annual Report on Form
10-KSB was filed. Basic and diluted earnings per share for the
year ended December 31, 2004 were reported as $0.95 and
$0.95, respectively, and should have been $0.90 and $0.90,
respectively. As mentioned below, earnings per share amounts in
these financial statements have also been retroactively adjusted
for stock dividends that were issued in June, 2006.
|
|
Note 22:
|
Earnings
Per Share
|
All references to common shares and earnings per share below
have been restated to reflect the stock dividends issued in 2005
and 2006. Basic earnings per share have been computed by
dividing net income available for common shareholders by the
weighted-average common shares outstanding during each year.
Diluted earnings per share have been computed the same as basic
earnings per share, and assumes the conversion of outstanding
vested stock options and convertible preferred stock.
Convertible preferred stock was excluded for purposes of
calculating diluted earnings per share in 2004 as it was
determined that conversion had an anti-dilutive effect on
earnings per share. The following table reconciles basic and
diluted earnings per share for the years ending
December 31, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Per Share
|
|
|
|
|
|
Average
|
|
|
Per Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Basic earnings per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,236,804
|
|
|
|
|
|
|
|
|
|
|
$
|
1,037,889
|
|
|
|
|
|
|
|
|
|
Less: Dividends on preferred stock
|
|
|
(519,871
|
)
|
|
|
|
|
|
|
|
|
|
|
(240,706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders
|
|
|
1,716,933
|
|
|
|
936,847
|
|
|
$
|
1.83
|
|
|
|
797,183
|
|
|
|
929,431
|
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
519,871
|
|
|
|
568,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
10,849
|
|
|
|
|
|
|
|
|
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders and assumed conversions
|
|
$
|
2,236,804
|
|
|
|
1,516,586
|
|
|
$
|
1.47
|
|
|
$
|
797,183
|
|
|
|
929,710
|
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
23:
|
Subsequent
Event
|
On May 17, 2006, the Board of Directors of the Company
declared a second 5% stock dividend on each share of common
stock of the Company outstanding, payable to the record holders
of the common stock on May 31, 2006. The dividend was
issued and payable June 30, 2006. A total of
45,132 shares of common stock were issued as a result of
this common stock dividend. All references to earnings per share
have been restated to reflect the stock dividend issued in 2006.
F-24
Citizens
First Corporation
June 30, 2006 and December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Restated
|
|
|
|
|
|
|
December 31,
|
|
|
|
June 30, 2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Cash and due from banks
|
|
$
|
4,315
|
|
|
$
|
4,062
|
|
Federal funds sold
|
|
|
11,810
|
|
|
|
11,681
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
16,125
|
|
|
|
15,743
|
|
Available for sale securities
|
|
|
12,690
|
|
|
|
12,058
|
|
Loans held for sale
|
|
|
2,436
|
|
|
|
621
|
|
Loans, net of allowance of $1,881
and $1,957 at June 30, 2006 and December 31, 2005,
respectively
|
|
|
158,603
|
|
|
|
155,612
|
|
Premises and equipment
|
|
|
8,610
|
|
|
|
7,608
|
|
Federal Home Loan Bank (FHLB)
stock
|
|
|
663
|
|
|
|
615
|
|
Accrued interest receivable
|
|
|
1,225
|
|
|
|
1,086
|
|
Deferred income taxes
|
|
|
686
|
|
|
|
613
|
|
Goodwill
|
|
|
1,327
|
|
|
|
1,264
|
|
Other assets
|
|
|
490
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
202,855
|
|
|
$
|
195,502
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
15,866
|
|
|
$
|
15,060
|
|
Savings, NOW and money market
deposits
|
|
|
49,257
|
|
|
|
55,612
|
|
Time deposits
|
|
|
96,869
|
|
|
|
85,705
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
161,992
|
|
|
|
156,377
|
|
Securities sold under repurchase
agreements
|
|
|
3,711
|
|
|
|
2,920
|
|
FHLB advances
|
|
|
15,396
|
|
|
|
14,500
|
|
Income taxes payable
|
|
|
|
|
|
|
114
|
|
Accrued interest and other
liabilities
|
|
|
1,116
|
|
|
|
1,633
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
182,215
|
|
|
|
175,544
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
6.5% cumulative preferred stock, no
par value; authorized 500 shares; issued and outstanding
250 shares at June 30, 2006 and at December 31,
2005, respectively
|
|
|
7,659
|
|
|
|
7,659
|
|
Common stock, no par value;
authorized 5,000,000 shares; issued and outstanding
943,463 shares at June 30, 2006 and
893,643 shares at December 31, 2005, respectively
|
|
|
11,875
|
|
|
|
10,729
|
|
Retained earnings
|
|
|
1,775
|
|
|
|
1,920
|
|
Accumulated other comprehensive
income (loss)
|
|
|
(669
|
)
|
|
|
(350
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
20,640
|
|
|
|
19,958
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
202,855
|
|
|
$
|
195,502
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-25
Citizens
First Corporation
Three Months Ended June 30, 2006 and 2005
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30:
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
3,219
|
|
|
$
|
2,524
|
|
Available for sale securities
|
|
|
128
|
|
|
|
119
|
|
Federal funds sold
|
|
|
123
|
|
|
|
6
|
|
Dividends on FHLB stock
|
|
|
9
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
|
3,479
|
|
|
|
2,657
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,135
|
|
|
|
657
|
|
Securities sold under agreements to
repurchase
|
|
|
20
|
|
|
|
9
|
|
FHLB advances
|
|
|
130
|
|
|
|
82
|
|
Federal funds purchased
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
1,285
|
|
|
|
759
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
2,194
|
|
|
|
1,898
|
|
Provision for loan losses
|
|
|
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses
|
|
|
2,194
|
|
|
|
1,812
|
|
Non-interest
income
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
189
|
|
|
|
213
|
|
Other service charges and fees
|
|
|
32
|
|
|
|
40
|
|
Title insurance premiums and
closing costs
|
|
|
14
|
|
|
|
15
|
|
Sale of mortgage loans
|
|
|
86
|
|
|
|
82
|
|
Lease income
|
|
|
53
|
|
|
|
5
|
|
Trust referral fees
|
|
|
7
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
|
381
|
|
|
|
361
|
|
Non-interest
expenses
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
889
|
|
|
|
690
|
|
Net occupancy expense
|
|
|
171
|
|
|
|
93
|
|
Equipment expense
|
|
|
123
|
|
|
|
94
|
|
Advertising
|
|
|
115
|
|
|
|
52
|
|
Professional fees
|
|
|
92
|
|
|
|
123
|
|
Data processing services
|
|
|
102
|
|
|
|
100
|
|
FDIC and other insurance
|
|
|
36
|
|
|
|
29
|
|
Franchise shares and deposit tax
|
|
|
60
|
|
|
|
51
|
|
Postage and office supplies
|
|
|
36
|
|
|
|
27
|
|
Telephone and other communication
|
|
|
42
|
|
|
|
31
|
|
Other
|
|
|
134
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
1,800
|
|
|
|
1,409
|
|
|
|
|
|
|
|
|
|
|
Income before income
taxes
|
|
|
775
|
|
|
|
765
|
|
Provision for income tax
|
|
|
297
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
478
|
|
|
|
505
|
|
Dividends declared and paid on
preferred stock
|
|
|
130
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders
|
|
$
|
348
|
|
|
$
|
375
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share
|
|
$
|
0.37
|
|
|
$
|
0.40
|
|
Diluted earnings per
share
|
|
$
|
0.31
|
|
|
$
|
0.33
|
|
See accompanying notes to consolidated financial statements.
F-26
Citizens
First Corporation
Six Months Ended June 30, 2006 and 2005
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30:
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
6,207
|
|
|
$
|
4,804
|
|
Available for sale securities
|
|
|
249
|
|
|
|
239
|
|
Federal funds sold
|
|
|
238
|
|
|
|
13
|
|
Dividends on FHLB stock
|
|
|
18
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
|
6,712
|
|
|
|
5,070
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,153
|
|
|
|
1,239
|
|
Securities sold under agreements to
repurchase
|
|
|
27
|
|
|
|
17
|
|
FHLB advances
|
|
|
252
|
|
|
|
148
|
|
Federal funds purchased
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
2,432
|
|
|
|
1,426
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
4,280
|
|
|
|
3,644
|
|
Provision for loan losses
|
|
|
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses
|
|
|
4,280
|
|
|
|
3,524
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
365
|
|
|
|
405
|
|
Other service charges and fees
|
|
|
52
|
|
|
|
74
|
|
Title insurance premiums and
closings costs
|
|
|
30
|
|
|
|
30
|
|
Sale of mortgage loans
|
|
|
141
|
|
|
|
165
|
|
Lease income
|
|
|
105
|
|
|
|
10
|
|
Trust referral fees
|
|
|
8
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
|
701
|
|
|
|
693
|
|
Non-interest expenses
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
1,775
|
|
|
|
1,361
|
|
Net occupancy expense
|
|
|
309
|
|
|
|
181
|
|
Equipment expense
|
|
|
222
|
|
|
|
188
|
|
Advertising
|
|
|
169
|
|
|
|
111
|
|
Professional fees
|
|
|
151
|
|
|
|
220
|
|
Data processing services
|
|
|
208
|
|
|
|
217
|
|
FDIC and other insurance
|
|
|
52
|
|
|
|
60
|
|
Franchise shares and deposit tax
|
|
|
116
|
|
|
|
102
|
|
Postage and office supplies
|
|
|
66
|
|
|
|
54
|
|
Telephone and other communication
|
|
|
71
|
|
|
|
62
|
|
Other
|
|
|
234
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
3,373
|
|
|
|
2,769
|
|
|
|
|
|
|
|
|
|
|
Income before income
taxes
|
|
|
1,608
|
|
|
|
1,448
|
|
Provision for income tax
|
|
|
581
|
|
|
|
493
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,027
|
|
|
$
|
955
|
|
|
|
|
|
|
|
|
|
|
Dividends declared on preferred
stock
|
|
|
258
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders
|
|
$
|
769
|
|
|
$
|
697
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share
|
|
$
|
0.82
|
|
|
$
|
0.74
|
|
Diluted earnings per
share
|
|
$
|
0.67
|
|
|
$
|
0.63
|
|
See accompanying notes to consolidated financial statements.
F-27
Citizens
First Corporation
Six Months Ended June 30, 2006 and 2005
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30:
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands)
|
|
|
Balance January 1
|
|
$
|
19,958
|
|
|
$
|
18,177
|
|
Net income
|
|
|
1,027
|
|
|
|
955
|
|
Issuance of common stock
|
|
|
82
|
|
|
|
105
|
|
Stock-based compensation
|
|
|
150
|
|
|
|
|
|
Payment of preferred dividends,
$1031.19 per share for 2006 and 2005
|
|
|
(258
|
)
|
|
|
(258
|
)
|
Other comprehensive income (loss),
net of tax
|
|
|
(319
|
)
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
20,640
|
|
|
$
|
19,119
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-28
Citizens
First Corporation
Condensed Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30:
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands)
|
|
|
Net income
|
|
$
|
1,027
|
|
|
$
|
955
|
|
Other comprehensive income (loss),
net of tax:
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on
available for sale securities, net of income taxes (benefits) of
($164) and $72, arising during the period, respectively
|
|
|
(319
|
)
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
708
|
|
|
$
|
1,095
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements.
F-29
Citizens
First Corporation
Condensed Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30:
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands)
|
|
|
Net income
|
|
$
|
478
|
|
|
$
|
505
|
|
Other comprehensive income (loss),
net of tax:
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on
available for sale securities, net of income taxes (benefits) of
($101) and $144, arising during the period, respectively
|
|
|
(196
|
)
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
282
|
|
|
$
|
784
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements.
F-30
Citizens
First Corporation
Six Months Ended June 30, 2006 and 2005
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30:
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,027
|
|
|
$
|
955
|
|
Items not requiring (providing)
cash:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
245
|
|
|
|
165
|
|
Stock-based compensation expense
|
|
|
150
|
|
|
|
|
|
Provision for loan losses
|
|
|
|
|
|
|
120
|
|
Amortization of premiums and
discounts on securities
|
|
|
5
|
|
|
|
7
|
|
Deferred income taxes
|
|
|
|
|
|
|
105
|
|
Sale of mortgage loans held for sale
|
|
|
9,829
|
|
|
|
10,954
|
|
Origination of mortgage loans for
sale
|
|
|
(11,502
|
)
|
|
|
(10,632
|
)
|
Gains on sales of loans
|
|
|
(141
|
)
|
|
|
(165
|
)
|
Losses (gains) on sale of other
real estate owned
|
|
|
|
|
|
|
7
|
|
FHLB stock dividends received
|
|
|
(18
|
)
|
|
|
(13
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
Interest receivable
|
|
|
(139
|
)
|
|
|
(86
|
)
|
Income taxes receivable(payable)
|
|
|
(73
|
)
|
|
|
45
|
|
Other assets
|
|
|
(349
|
)
|
|
|
53
|
|
Interest payable and other
liabilities
|
|
|
(220
|
)
|
|
|
(278
|
)
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
(1,186
|
)
|
|
|
1,237
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Net increase in loans
|
|
|
(2,851
|
)
|
|
|
(9,818
|
)
|
Purchases of premises and equipment
|
|
|
(1,246
|
)
|
|
|
(409
|
)
|
Purchase of available for sale
securities
|
|
|
(1,356
|
)
|
|
|
|
|
Proceeds from maturities of
available for sale securities
|
|
|
234
|
|
|
|
437
|
|
Proceeds from sale of other real
estate
|
|
|
|
|
|
|
265
|
|
Payment related to purchase of
Commonwealth Mortgage
|
|
|
(309
|
)
|
|
|
(252
|
)
|
Purchase of FHLB stock
|
|
|
(30
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Net cash from investing activities
|
|
|
(5,558
|
)
|
|
|
(9,780
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
Net increase (decrease) in demand
deposits, money market, NOW, and savings accounts
|
|
|
(5,549
|
)
|
|
|
807
|
|
Net increase in time deposits
|
|
|
11,164
|
|
|
|
9,291
|
|
Proceeds from FHLB advances
|
|
|
12,000
|
|
|
|
1,000
|
|
Repayment of FHLB advances
|
|
|
(11,104
|
)
|
|
|
|
|
Net increase (decrease) in
repurchase agreements
|
|
|
791
|
|
|
|
(1,542
|
)
|
Issuance of common stock
|
|
|
82
|
|
|
|
21
|
|
Dividends paid on preferred stock
|
|
|
(258
|
)
|
|
|
(259
|
)
|
|
|
|
|
|
|
|
|
|
Net cash from financing activities
|
|
|
7,126
|
|
|
|
9,318
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in cash and
cash equivalents
|
|
|
382
|
|
|
|
775
|
|
Cash and cash equivalents,
Beginning of year
|
|
|
15,743
|
|
|
|
4,080
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, End
of year
|
|
$
|
16,125
|
|
|
$
|
4,855
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flows Information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
2,393
|
|
|
$
|
1,496
|
|
Income taxes paid
|
|
$
|
585
|
|
|
$
|
616
|
|
Loans transferred to other real
estate
|
|
$
|
140
|
|
|
$
|
265
|
|
See accompanying notes to consolidated financial statements.
F-31
Citizens
First Corporation
|
|
(1)
|
Basis of
Presentation and Nature of Operations
|
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
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 Companys annual financial statements prepared in
accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. These
consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto
included in this prospectus.
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
Companys net interest income and the value of its recorded
assets and liabilities. Actual results could differ from those
estimates used in the preparation of the financial statements.
In the opinion of management, all adjustments considered
necessary for a fair presentation have been reflected in the
accompanying unaudited financial statements. Results of interim
periods are not necessarily indicative of results to be expected
for the full year. Those adjustments consist only of normal
recurring adjustments. The consolidated balance sheet of the
Company as of December 31, 2005, has been derived from the
audited consolidated balance sheet of the Company as of that
date.
In 2002, the board of directors adopted the employee stock
option plan, which became effective upon the approval of the
Companys 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. 132,300 shares of
Company common stock have been reserved for issuance under the
plan. Options expire after ten years, and vest ratably over a
three year period.
In 2003, the board of directors adopted the non-employee
director stock option plan for non-employee directors, which
became effective subject to the approval of the Companys
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 Companys non-employee
directors and shareholders, and in attracting and retaining
non-employee directors by affording them an opportunity to share
in the Companys future successes. 44,100 shares of
common stock have been reserved for issuance under the plan.
Options granted expire after ten years, and are immediately
vested.
The Company accounts for these plans under the recognition and
measurement principles of FASB Statement No. 123 Revised
(SFAS 123R), Accounting for Stock-Based Compensation,
effective January 1, 2006. In 2005 and previous years,
these plans were measured under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations. Prior to 2006,
no stock-based employee compensation cost was reflected in net
income, as all options granted under this plan had an exercise
price equal to the market value of the underlying common stock
on the grant date. The following table illustrates the effect on
net income and earnings per share if the Company had
F-32
Citizens
First Corporation
Notes to Unaudited Condensed Consolidated Financial
Statements (Continued)
applied the fair value provisions of SFAS 123R for the
quarter ended June 30, 2005 and for the six months ended
June 30, 2005.
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
|
Dollars in thousands, except per share data
|
|
|
Net income, as reported
|
|
$
|
505
|
|
|
$
|
955
|
|
Less: Total stock-based employee
compensation cost determined under the fair value based method,
net of income taxes, not expensed during the quarter
|
|
|
51
|
|
|
|
97
|
|
Pro forma net income
|
|
$
|
454
|
|
|
$
|
858
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
0.40
|
|
|
$
|
0.74
|
|
Basic pro forma
|
|
$
|
0.35
|
|
|
$
|
0.64
|
|
Diluted as reported
|
|
$
|
0.33
|
|
|
$
|
0.63
|
|
Diluted pro forma
|
|
$
|
0.30
|
|
|
$
|
0.57
|
|
The fair value of options granted is estimated on the date of
the grant using a Black-Scholes option-pricing model with the
following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Dividend yields
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility factors of expected
market price of common stock
|
|
|
21.39
|
%
|
|
|
21.17
|
%
|
Risk-free interest rates
|
|
|
4.58
|
%
|
|
|
3.97
|
%
|
Expected life of options
|
|
|
7 Years
|
|
|
|
6 Years
|
|
Weighted-average fair value of
options granted during the year
|
|
$
|
7.08
|
|
|
$
|
4.69
|
|
|
|
|
|
|
The dividend yield was estimated using historical dividends paid
and market value information for the Companys stock. An
increase in dividend yield will decrease compensation expense.
|
|
|
|
The volatility was estimated using historical volatility for
periods approximating the expected option life.
|
|
|
|
The risk-free interest rate was developed using the
U.S. Treasury yield curve for periods equal to the expected
life of the options on the grant date. An increase in the
risk-free interest rate will increase stock compensation expense.
|
SFAS 123R requires the recognition of stock-based
compensation for the number of awards that are ultimately
expected to vest. For the quarter end June 30, 2006,
compensation expense recorded was $104,000, and for the six
months ended June 30, 2006 was $150,000. As of
June 30, 2006, unrecognized compensation
F-33
Citizens
First Corporation
Notes to Unaudited Condensed Consolidated Financial
Statements (Continued)
expense associated with stock options was $443,000 which is
expected to be recognized over a weighted average period of
3 years. The following table reflects the effects of
applying the provisions of this statement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
|
Effect of SFAS 123R
|
|
|
Pro Forma
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
Dollars in thousands, except per share data
|
|
|
Net income before income taxes
|
|
$
|
775
|
|
|
$
|
104
|
|
|
$
|
879
|
|
Provision for income tax
|
|
|
297
|
|
|
|
15
|
|
|
|
312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
478
|
|
|
$
|
89
|
|
|
$
|
567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
|
$
|
0.09
|
|
|
$
|
0.46
|
|
Diluted
|
|
$
|
0.31
|
|
|
$
|
0.06
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
|
Effect of SFAS 123R
|
|
|
Pro Forma
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
Dollars in thousands, except per share data
|
|
|
Net income before income taxes
|
|
$
|
1,608
|
|
|
$
|
150
|
|
|
$
|
1,758
|
|
Provision for income tax
|
|
|
581
|
|
|
|
(15
|
)
|
|
|
596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,027
|
|
|
$
|
135
|
|
|
$
|
1,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.82
|
|
|
$
|
0.14
|
|
|
$
|
0.96
|
|
Diluted
|
|
$
|
0.67
|
|
|
$
|
0.08
|
|
|
$
|
0.75
|
|
A summary of the status of the plans at June 30, 2006 and
2005, and changes during the periods then ended is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding, beginning of year
|
|
|
100,383
|
|
|
$
|
13.64
|
|
|
|
53,582
|
|
|
$
|
12.86
|
|
Granted
|
|
|
48,300
|
|
|
|
18.97
|
|
|
|
50,715
|
|
|
|
13.75
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
(1,654
|
)
|
|
|
12.67
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
(1,433
|
)
|
|
|
12.92
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
148,683
|
|
|
$
|
15.38
|
|
|
|
101,210
|
|
|
$
|
13.30
|
|
Options exercisable, end of period
|
|
|
57,915
|
|
|
$
|
13.96
|
|
|
|
29,327
|
|
|
$
|
13.15
|
|
The weighted average remaining term for outstanding stock
options was 8.73 years at June 30, 2006. The aggregate
intrinsic value at June 30, 2006 was $725,000 for stock
options outstanding and $364,000 for stock options exercisable.
The intrinsic value for stock options is calculated based on the
exercise price of the underlying awards and the market price of
the Companys common stock as of the reporting date.
F-34
Citizens
First Corporation
Notes to Unaudited Condensed Consolidated Financial
Statements (Continued)
Options outstanding at June 30, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Weighted-Average
|
|
|
Number
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
Exercise Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$12.15
|
|
|
4,410
|
|
|
|
7.92 years
|
|
|
$
|
12.15
|
|
|
|
4,410
|
|
|
$
|
12.15
|
|
$12.16 $12.93
|
|
|
39,469
|
|
|
|
7.58 years
|
|
|
$
|
12.93
|
|
|
|
27,783
|
|
|
$
|
12.93
|
|
$12.94 $13.65
|
|
|
40,076
|
|
|
|
8.58 years
|
|
|
$
|
13.65
|
|
|
|
13,358
|
|
|
$
|
13.65
|
|
$13.66 $14.47
|
|
|
6,064
|
|
|
|
8.83 years
|
|
|
$
|
14.47
|
|
|
|
6,064
|
|
|
$
|
14.47
|
|
$14.48 $16.51
|
|
|
10,364
|
|
|
|
9.42 years
|
|
|
$
|
16.51
|
|
|
|
|
|
|
|
|
|
$16.52 $18.82
|
|
|
42,000
|
|
|
|
9.67 years
|
|
|
$
|
18.82
|
|
|
|
|
|
|
|
|
|
$18.83
|
|
|
6,300
|
|
|
|
9.92 years
|
|
|
$
|
20.00
|
|
|
|
6,300
|
|
|
$
|
20.00
|
|
All references to common shares and earnings per share have been
restated to reflect the stock dividends of 5% payable on
May 30, 2005 and June 30, 2006, respectively. There
are no anti-dilutive stock options. Basic earnings per share
have been computed by dividing net income available for common
shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share have been
computed the same as basic earnings per share, and assumes the
conversion of outstanding vested stock options and convertible
preferred stock. The following table reconciles the basic and
diluted earnings per share computations for the quarters ended
June 30, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Quarter Ended
|
|
|
|
June 30, 2006
|
|
|
June 30, 2005
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Per Share
|
|
|
|
|
|
Average
|
|
|
Per Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Dollars in thousands, except per share data
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
478
|
|
|
|
|
|
|
|
|
|
|
$
|
505
|
|
|
|
|
|
|
|
|
|
Less: Dividends on preferred stock
|
|
|
(130
|
)
|
|
|
|
|
|
|
|
|
|
|
(130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders
|
|
|
348
|
|
|
|
940,004
|
|
|
$
|
0.37
|
|
|
|
375
|
|
|
|
938,325
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
130
|
|
|
|
568,890
|
|
|
|
|
|
|
|
130
|
|
|
|
568,890
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
31,974
|
|
|
|
|
|
|
|
|
|
|
|
2,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders and assumed conversions
|
|
$
|
478
|
|
|
|
1,540,868
|
|
|
$
|
0.31
|
|
|
$
|
505
|
|
|
|
1,510,205
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
Citizens
First Corporation
Notes to Unaudited Condensed Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Six Months Ended June 30, 2006
|
|
|
|
|
|
June 30, 2005
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Per Share
|
|
|
|
|
|
Average
|
|
|
Per Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Dollars in thousands, except per share data
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,027
|
|
|
|
|
|
|
|
|
|
|
$
|
955
|
|
|
|
|
|
|
|
|
|
Less: Dividends on preferred stock
|
|
|
(258
|
)
|
|
|
|
|
|
|
|
|
|
|
(258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders
|
|
|
769
|
|
|
|
939,169
|
|
|
$
|
0.82
|
|
|
|
697
|
|
|
|
935,656
|
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
258
|
|
|
|
568,890
|
|
|
|
|
|
|
|
258
|
|
|
|
568,890
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
31,371
|
|
|
|
|
|
|
|
|
|
|
|
2,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders and assumed conversions
|
|
$
|
1,027
|
|
|
|
1,539,430
|
|
|
$
|
0.67
|
|
|
$
|
955
|
|
|
|
1,507,055
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
Common
Stock Dividend
|
On April 20, 2005, the Board of Directors of the Company
declared a 5% stock dividend on each share of common stock of
the Company outstanding, payable to the record holders of the
common stock on April 29, 2005. The dividend was issued and
payable May 30, 2005 in the form of 0.05 share of
common stock for each one share of common stock outstanding on
the record date. Any fractional share of common stock which a
shareholder would be entitled to receive was rounded up to a
whole share of common stock. A total of 42,584 shares of
common stock were issued as a result of the common stock
dividend. On May 17, 2006, the Board of Directors of the
Company declared a second 5% stock dividend on each share of
common stock of the Company outstanding, payable to the record
holders of the common stock on May 31, 2006. The dividend
was issued and payable June 30, 2006. A total of
45,132 shares of common stock were issued as a result of
this common stock dividend.
|
|
(5)
|
Pending
Business Acquisition- Kentucky Banking Centers, Inc.
|
On June 1, 2006, the Company entered into a definitive
stock purchase agreement with Farmers Capital Bank Corporation
and Kentucky Banking Centers, Inc. to purchase 100% of the
outstanding stock of Kentucky Banking Centers. Kentucky Banking
Centers is a wholly-owned subsidiary of Farmers Capital Bank
Corporation of Frankfort, Kentucky.
According to the terms of the purchase agreement, Citizens First
will pay Farmers Capital $20.0 million dollars in cash for
the shares of Kentucky Banking Centers. The parties will also
pursue the merger of Kentucky Banking Centers into Citizens
First Bank. The transaction is subject to approval by regulators
and other customary closing conditions. The purchase is expected
to be completed in the second half of 2006.
Kentucky Banking Centers, Inc. has three offices, located in
Glasgow, Horse Cave, and Munfordville, Kentucky. As of
June 30, 2006, Kentucky Banking Centers had total assets of
$126.7 million, total loans (net of unearned income) of
$83.9 million, total deposits of $115.2 million, and
shareholders equity of $9.2 million. The operating
results of Kentucky Banking Centers are not included herein.
F-36
REPORT OF
INDEPENDENT AUDITORS
Board of Directors
Kentucky Banking Centers, Inc.
Glasgow, Kentucky
We have audited the accompanying balance sheets of Kentucky
Banking Centers, Inc. (a wholly-owned subsidiary of Farmers
Capital Bank Corporation) as of December 31, 2005 and 2004,
and the related statements of income, comprehensive income,
changes in shareholders equity, and cash flows for the
years then ended. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Kentucky Banking Centers, Inc. as of December 31, 2005
and 2004, 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.
Crowe Chizek and Company LLC
|
|
|
|
By:
|
/s/ Crowe
Chizek and Company LLC
|
Louisville, Kentucky
August 18, 2006
F-38
Farmers Capital Bank Corporation)
Balance Sheets
as of December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
3,140
|
|
|
$
|
3,275
|
|
Interest bearing deposits in other
banks
|
|
|
208
|
|
|
|
547
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
3,348
|
|
|
|
3,822
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Available for sale, amortized cost
of $34,755 (2005) and $44,775 (2004)
|
|
|
34,498
|
|
|
|
44,652
|
|
Held to maturity, fair value of
$1,558 (2005) and $2,000 (2004)
|
|
|
1,529
|
|
|
|
1,917
|
|
Total investment securities
|
|
|
36,027
|
|
|
|
46,569
|
|
Loans, net of unearned income
|
|
|
81,845
|
|
|
|
81,902
|
|
Allowance for loan losses
|
|
|
(1,199
|
)
|
|
|
(1,193
|
)
|
Loans, net
|
|
|
80,646
|
|
|
|
80,709
|
|
Premises and equipment, net
|
|
|
4,186
|
|
|
|
4,100
|
|
Company-owned life insurance
|
|
|
1,525
|
|
|
|
1,471
|
|
Other assets
|
|
|
1,507
|
|
|
|
1,360
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
127,239
|
|
|
$
|
138,031
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest bearing
|
|
$
|
9,834
|
|
|
$
|
9,081
|
|
Interest bearing
|
|
|
105,443
|
|
|
|
114,548
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
115,277
|
|
|
|
123,629
|
|
Federal funds purchased and
securities sold under agreements to repurchase
|
|
|
777
|
|
|
|
2,480
|
|
Federal Home Loan Bank advances
|
|
|
1,591
|
|
|
|
1,893
|
|
Other liabilities
|
|
|
451
|
|
|
|
506
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
118,096
|
|
|
|
128,508
|
|
|
|
|
|
|
|
|
|
|
Commitments and
Contingencies
|
|
|
|
|
|
|
|
|
Shareholders
Equity
|
|
|
|
|
|
|
|
|
Common stock, par value
$20,000 per share; 15 shares authorized;
15 shares issued and outstanding at December 31, 2005
and 2004, respectively
|
|
|
300
|
|
|
|
300
|
|
Capital surplus
|
|
|
5,945
|
|
|
|
5,945
|
|
Retained earnings
|
|
|
3,065
|
|
|
|
3,358
|
|
Accumulated other comprehensive
loss
|
|
|
(167
|
)
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
9,143
|
|
|
|
9,523
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
127,239
|
|
|
$
|
138,031
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-39
Farmers Capital Bank Corporation)
Statements of Income
for the Years ended December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except weighted average shares)
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
5,956
|
|
|
$
|
5,419
|
|
Interest on investment securities:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
871
|
|
|
|
612
|
|
Nontaxable
|
|
|
191
|
|
|
|
189
|
|
Interest on deposits in other banks
|
|
|
8
|
|
|
|
22
|
|
Interest on federal funds sold and
securities purchased under agreements to resell
|
|
|
164
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
7,190
|
|
|
|
6,348
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
|
2,743
|
|
|
|
2,374
|
|
Interest on federal funds purchased
and securities sold under agreements to repurchase
|
|
|
8
|
|
|
|
5
|
|
Interest on Federal Home
Loan Bank advances
|
|
|
57
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
2,808
|
|
|
|
2,454
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
4,382
|
|
|
|
3,894
|
|
Provision for loan losses
|
|
|
195
|
|
|
|
570
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for loan losses
|
|
|
4,187
|
|
|
|
3,324
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income
|
|
|
|
|
|
|
|
|
Service charges and fees on deposits
|
|
|
744
|
|
|
|
736
|
|
Other service charges, commissions,
and fees
|
|
|
246
|
|
|
|
239
|
|
Income from company-owned life
insurance
|
|
|
54
|
|
|
|
67
|
|
Gain on sale of other real estate
|
|
|
|
|
|
|
119
|
|
Other
|
|
|
26
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
1,070
|
|
|
|
1,208
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
1,726
|
|
|
|
1,695
|
|
Occupancy expenses, net
|
|
|
357
|
|
|
|
310
|
|
Equipment expenses
|
|
|
178
|
|
|
|
167
|
|
Data processing and communications
expenses
|
|
|
514
|
|
|
|
483
|
|
Holding company management fee
|
|
|
222
|
|
|
|
248
|
|
Bank franchise tax
|
|
|
96
|
|
|
|
95
|
|
Advertising
|
|
|
73
|
|
|
|
80
|
|
Other
|
|
|
510
|
|
|
|
525
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
3,676
|
|
|
|
3,603
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,581
|
|
|
|
929
|
|
Income tax expense
|
|
|
435
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,146
|
|
|
$
|
709
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Common Share (in
thousands)
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
76.42
|
|
|
$
|
47.26
|
|
Weighted Average
Shares Outstanding
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
15
|
|
|
|
15
|
|
See accompanying notes to financial statements.
F-40
Kentucky
Banking Centers, Inc.
(A wholly-owned Subsidiary of
Farmers Capital Bank Corporation)
Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
1,146
|
|
|
$
|
709
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Unrealized holding loss on
available for sale securities arising during the period on
securities held at end of period, net of tax of $47 and $52,
respectively
|
|
|
(87
|
)
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
1,059
|
|
|
$
|
613
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-41
Kentucky
Banking Centers, Inc.
(A wholly-owned subsidiary of
Farmers Capital Bank Corporation)
Statement of Changes in Shareholders Equity
for the Years ended December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Capital
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Surplus
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
|
(In thousands, except shares outstanding)
|
|
|
Balance at January 1, 2004
|
|
|
15
|
|
|
$
|
300
|
|
|
$
|
5,924
|
|
|
$
|
2,649
|
|
|
$
|
16
|
|
|
$
|
8,889
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
709
|
|
|
|
|
|
|
|
709
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(96
|
)
|
|
|
(96
|
)
|
Non cash compensation expense
attributed to stock option grants
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
15
|
|
|
|
300
|
|
|
|
5,945
|
|
|
|
3,358
|
|
|
|
(80
|
)
|
|
|
9,523
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,146
|
|
|
|
|
|
|
|
1,146
|
|
Cash dividends declared,
$95.93 per share (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,439
|
)
|
|
|
|
|
|
|
(1,439
|
)
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87
|
)
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
15
|
|
|
$
|
300
|
|
|
$
|
5,945
|
|
|
$
|
3,065
|
|
|
$
|
(167
|
)
|
|
$
|
9,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-42
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Operating
Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,146
|
|
|
$
|
709
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
265
|
|
|
|
242
|
|
Net amortization (accretion) of
investment security premiums and discounts:
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
5
|
|
|
|
74
|
|
Held to maturity
|
|
|
(2
|
)
|
|
|
(1
|
)
|
Provision for loan losses
|
|
|
195
|
|
|
|
570
|
|
Noncash compensation expense
|
|
|
|
|
|
|
21
|
|
Deferred income tax benefit
|
|
|
(59
|
)
|
|
|
(24
|
)
|
Loss (gain) on sale of premises and
equipment
|
|
|
31
|
|
|
|
(5
|
)
|
Gain on sale of other real estate
|
|
|
|
|
|
|
(119
|
)
|
Increase in accrued interest
receivable
|
|
|
(112
|
)
|
|
|
(92
|
)
|
Income from company-owned life
insurance
|
|
|
(54
|
)
|
|
|
(67
|
)
|
(Increase) decrease in other assets
|
|
|
(36
|
)
|
|
|
285
|
|
Increase (decrease) in accrued
interest payable
|
|
|
20
|
|
|
|
(13
|
)
|
Increase in other liabilities
|
|
|
31
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
1,430
|
|
|
|
1,710
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities
|
|
|
|
|
|
|
|
|
Proceeds from maturities and calls
of investment securities:
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
28,560
|
|
|
|
15,295
|
|
Held to maturity
|
|
|
390
|
|
|
|
280
|
|
Purchases of available for sale
investment securities
|
|
|
(18,544
|
)
|
|
|
(38,030
|
)
|
Loans originated for investment,
net of principal collected
|
|
|
(132
|
)
|
|
|
(2,373
|
)
|
Purchases of premises and equipment
|
|
|
(384
|
)
|
|
|
(284
|
)
|
Proceeds from sale of equipment
|
|
|
2
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
9,892
|
|
|
|
(25,107
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities
|
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits
|
|
|
(8,352
|
)
|
|
|
15,597
|
|
Net (decrease) increase in federal
funds purchased and securities sold under agreements to
repurchase
|
|
|
(1,703
|
)
|
|
|
2,280
|
|
Repayments of Federal Home Loan
Bank advances
|
|
|
(302
|
)
|
|
|
(589
|
)
|
Dividends paid
|
|
|
(1,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
financing activities
|
|
|
(11,796
|
)
|
|
|
17,288
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash
equivalents
|
|
|
(474
|
)
|
|
|
(6,109
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
3,822
|
|
|
|
9,931
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
3,348
|
|
|
$
|
3,822
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
2,788
|
|
|
$
|
2,467
|
|
Income taxes (to Holding Company)
|
|
|
323
|
|
|
|
235
|
|
Transfers from loans to repossessed
assets
|
|
|
91
|
|
|
|
268
|
|
See accompanying notes to financial statements.
F-43
Kentucky
Banking Centers, Inc.
(A wholly-owned subsidiary of
Farmers Capital Bank Corporation)
Notes to Financial Statements
Years ended December 31, 2005 and 2004
|
|
1.
|
Summary
of Significant Accounting Policies
|
The accounting and reporting policies of Kentucky Banking
Centers, Inc. (the Bank) conform to accounting
principles generally accepted in the United States of America
and general practices applicable to the banking industry.
Significant accounting policies are summarized below.
Nature
of Operations
The Bank, formerly named Horse Cave State Bank, was originally
organized in 1926 and operates as a State of Kentucky chartered
bank. In 1987, the Bank was acquired by Farmers Capital Bank
Corporation (Farmers Capital), a publicly held
financial holding company located in Frankfort, Kentucky. The
Bank operates three locations: one each in Glasgow, Horse Cave,
and Munfordville. It is engaged in a general banking business
providing full service banking to individuals, businesses, and
government customers. The Banks operations include one
reportable segment: commercial and retail banking.
The Banks primary regulators are the Federal Deposit
Insurance Corporation and the Kentucky Office of Financial
Institutions. These agencies examine the Bank on a periodic
basis.
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. 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
Banks 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 allowance for loan losses and the fair values of financial
instruments are estimates that are particularly subject to
change.
Cash
Flows
For purposes of reporting cash flows, cash and cash equivalents
include the following: cash on hand, amounts due from banks,
interest bearing demand deposits in other banks, federal funds
sold, and securities purchased under agreements to resell.
Generally, federal funds sold and securities purchased under
agreements to resell are purchased and sold for one-day periods.
Net cash flows are reported for loan and deposit transactions.
Investment
Securities
Investments in debt and equity securities are classified into
three categories. Securities that management has the positive
intent and ability to hold until maturity are classified as held
to maturity. Securities that are bought and held specifically
for the purpose of selling them in the near term are classified
as trading securities. The Bank had no securities classified as
trading during 2005 or 2004. All other securities are classified
as available for sale. Securities are designated as available
for sale if they might be sold before maturity. Securities
classified as available for sale are carried at market value.
Unrealized holding gains and losses for available for sale
securities are reported net of deferred income taxes in other
comprehensive income. Investments classified as held to maturity
are carried at amortized cost. Interest income includes
F-44
Kentucky
Banking Centers, Inc.
Notes to
Financial Statements (Continued)
amortization and accretion of purchase premiums or discounts.
Premiums and discounts on securities are amortized using the
interest method over the expected life of the securities.
Realized gains and losses on the sales of securities are
recorded on the trade date and computed on the basis of specific
identification of the adjusted cost of each security and are
included in noninterest income. A decline in the market value of
any available for sale or held to maturity security below cost
that is deemed other than temporary results in a charge to
earnings and the establishment of a new cost basis for the
security.
Federal
Home Loan Bank (FHLB) Stock
The Bank is a member of the FHLB system. Members are required to
own a certain amount of stock based on the level of borrowings
and other factors, and may invest in additional amounts. FHLB
stock is carried at cost, classified as a restricted security,
and periodically evaluated for impairment based n ultimate
recovery of par value. Both cast and stock dividends are
reported as income.
Loans
and Interest Income
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at
their unpaid principal amount outstanding adjusted for any
charge-offs and any deferred fees or costs on originated loans.
Interest income on loans is recognized using the interest method
based on loan principal amounts outstanding during the period.
Interest income also includes amortization and accretion of any
premiums or discounts over the expected life of acquired loans
at the time of purchase or business acquisition. Net fees and
incremental direct costs associated with loan origination are
deferred and amortized as yield adjustments over the contractual
term of the loans. Generally, the accrual of interest on loans
is discontinued when it is determined that the collection of
interest or principal is doubtful, or when a default of interest
or principal has existed for 90 days or more, unless such
loan is well secured and in the process of collection. Past due
status is based on the contractual terms of the loan. Cash
payments received on nonaccrual loans generally are applied to
principal, and interest income is only recorded once principal
recovery is reasonably assured. Loans are returned to accrual
status when all the principal and interest amounts contractually
due are brought current and future payments are reasonably
assured.
Provision
and Allowance for Loan Losses
The provision for loan losses represents charges made to
earnings to maintain an allowance for loan losses at an adequate
level based on credit losses specifically identified in the loan
portfolio, as well as managements best estimate of
probable loan losses in the remainder of the portfolio at the
balance sheet date. The allowance for loan losses is a valuation
allowance increased by the provision for loan losses and
decreased by net charge-offs. Loan losses are charged against
the allowance when management believes the uncollectibility of a
loan is confirmed. Subsequent recoveries, if any, are credited
to the allowance.
Management estimates the allowance balance required using a
risk-rated methodology. Many factors are considered when
estimating the allowance. These include, but are not limited to,
past loan loss experience, an assessment of the financial
condition of individual borrowers, a determination of the value
and adequacy of underlying collateral, the condition of the
local economy, an analysis of the levels and trends of the loan
portfolio, and a review of delinquent and classified loans. The
allowance for loan losses consists of specific and general
components. The specific component relates to loans that are
individually classified as impaired or loans otherwise
classified as substandard or doubtful. The general component
covers non-classified loans and is based on historical loss
experience adjusted for current risk factors. Allocations of the
allowance may be made for specific loans, but the entire
allowance is available for any loan that, in managements
judgment, should be charged off. Actual loan losses could differ
significantly from the amounts estimated by management.
F-45
Kentucky
Banking Centers, Inc.
Notes to
Financial Statements (Continued)
The risk-rated methodology includes segregating watch list and
past due loans from the general portfolio and allocating
specific amounts to these loans depending on their status. For
example, watch list loans, which may be identified by the
internal loan review risk-rating system or by regulatory
examiner classification, are assigned a certain loss percentage
while loans past due 30 days or more are assigned a
different loss percentage. Each of these percentages considers
past experience as well as current factors. The remainder of the
general loan portfolio is segregated into three components
having similar risk characteristics as follows: commercial
loans, consumer loans, and real estate loans. Each of these
components is assigned a loss percentage based on their
respective three year historical loss percentage. Additional
allocations to the allowance may then be made for subjective
factors, such as those mentioned above, as determined by senior
managers who are knowledgeable about these matters.
The Bank accounts for impaired loans in accordance with the
Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS)
No. 114, Accounting by Creditors for Impairment of a
Loan, as amended by SFAS No. 118, Accounting by
Creditors for Impairment of a Loan Income
Recognition. SFAS No. 114, as amended, requires
that impaired loans be measured at the present value of expected
future cash flows, discounted at the loans effective
interest rate, at the loans observable market price, or at
the fair value of the collateral if the loan is collateral
dependent. A loan is impaired when full payment under the
contractual terms is not expected. Generally, impaired loans are
also in nonaccrual status. In certain circumstances, however,
the Bank may continue to accrue interest on an impaired loan.
Cash receipts on impaired loans are typically applied to the
recorded investment in the loan, including any accrued interest
receivable. Loans that are part of a large group of
smaller-balance homogeneous loans, such as residential mortgage
and consumer loans, are collectively evaluated for impairment
and, accordingly, they are not separately identified for
impairment disclosures.
Other
Real Estate
Other real estate owned and held for sale, included with other
assets in the accompanying consolidated balance sheets, includes
properties acquired by the Bank through actual loan
foreclosures. Other real estate owned is carried at the lower of
cost or fair value less estimated costs to sell. Fair value is
the amount that the Bank could reasonably expect to receive in a
current sale between a willing buyer and a willing seller, other
than in a forced or liquidation sale. Fair value of assets is
measured by the market value based on comparable sales. If fair
value declines subsequent to foreclosure, a valuation allowance
is recorded through expense. Costs after acquisition are
expensed. Other real estate owned included in the balance sheets
was $9,669 and $20,000 at December 31, 2005 and 2004,
respectively.
Income
Taxes
Income tax expense is the total of current year income tax due
or refundable and the change in deferred tax assets and
liabilities, except for the deferred taxes related to fair
market value adjustments on available for sale investment
securities. Deferred income tax assets and liabilities result
from temporary differences between the tax basis of assets and
liabilities and their reported amounts in the consolidated
financial statements that will result in taxable or deductible
amounts in future years. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in years in which those temporary differences are
expected to be recovered or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are
adjusted through income tax expense.
Premises
and Equipment
Premises, equipment, and leasehold improvements are stated at
cost less accumulated depreciation and amortization.
Depreciation is computed primarily on the straight-line method
over the estimated useful lives generally ranging from two to
seven years for furniture and equipment and generally ten to
50 years for
F-46
Kentucky
Banking Centers, Inc.
Notes to
Financial Statements (Continued)
buildings and related components. Leasehold improvements are
amortized over the shorter of the estimated useful lives or
terms of the related leases on the straight-line method.
Maintenance, repairs, and minor improvements are charged to
operating expenses as incurred and major improvements are
capitalized. The cost of assets sold or retired and the related
accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in noninterest income.
Company-owned
Life Insurance
The Bank has purchased life insurance policies on certain key
employees with their knowledge and consent. Company-owned life
insurance is recorded at its cash surrender value, i.e. the
amount that can be realized, on the consolidated balance sheet.
The related change in cash surrender value and proceeds received
under the policies are reported on the statement of income under
the caption Income from company-owned life insurance.
Net
Income Per Common Share
Basic net income per common share is determined by dividing net
income by the weighted average total number of shares of common
stock outstanding. Diluted net income per common share is
determined by dividing net income by the total weighted average
number of shares of common stock outstanding. The Bank currently
has no potentially dilutive instruments outstanding.
Comprehensive
Income
SFAS No. 130, Reporting Comprehensive Income,
establishes standards for reporting and display of comprehensive
income and its components. Comprehensive income is defined as
the change in equity (net assets) of a business enterprise
during a period from transactions and other events and
circumstances from nonowner sources. For the Bank, this includes
net income and net unrealized gains and losses on available for
sale investment securities, net of taxes.
Long-term
Assets
Premises and equipment, intangible assets, and other long-term
assets are reviewed for impairment when events indicate their
carrying amount may not be recoverable from future undiscounted
cash flows. If impaired, the assets are recorded at fair value.
Loan Commitments
and Related Financial Instruments
Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and commercial
letters of credit, issued to meet customer financing needs. The
face amount of these items represents the exposure to loss,
before considering customer collateral or ability to repay. Such
financial instruments are recorded when they are funded.
Fair
Value of Financial Instruments
Fair values of financial instruments are estimated using
relevant market information and the assumptions, as more fully
disclosed in Note 17. Fair value estimates involve
uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments and other factors,
especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could
significantly affect the estimates.
F-47
Kentucky
Banking Centers, Inc.
Notes to
Financial Statements (Continued)
Stock-Based
Compensation
In 1997, Farmers Capitals Board of Directors approved a
nonqualified stock option plan (the Plan) that
provides for granting of stock options to key employees and
officers of the Bank. The Plan was subsequently ratified by
Farmers Capitals shareholders at its annual
shareholders meeting held on May 12, 1998, the
measurement date of the Plan. All stock options are awarded at a
price equal to the fair market value of the Farmers
Capitals common stock at the date the options are granted.
The Bank applies Accounting Principles Board (APB)
Opinion No. 25 and related interpretations in accounting
for its Plan. Accordingly, since options were granted during
1997 at the fair market value of Farmers Capitals stock on
the grant date, and the measurement date occurred during 1998,
the Bank recognized noncash compensation expense for the 1997
grant based on the intrinsic value of the stock options measured
on the date of shareholder ratification of the Plan. All of the
options related to the 1997 grant were fully vested as of
December 31, 2004; therefore there was no option-related
compensation expense recorded during 2005.
Farmers Capital granted 2,000 and 12,000 additional options
under the Plan to certain employees and officer of the Bank
during 2004 and 2000 in which there is no compensation expense
being recognized pursuant to APB No. 25. In addition,
certain eligible employees of the Bank participate in Farmers
Capitals Employee Stock Purchase Plan (ESPP).
During 2005 and 2004 there was no related compensation expense
recorded related to the ESPP. Had compensation expense been
determined under the fair value method described in
SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and
Disclosure, the Banks net income and income per common
share would have been as shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
1,146
|
|
|
$
|
709
|
|
Add: Stock-based employee
compensation expense included in reported net income, net of
related tax effects
|
|
|
|
|
|
|
14
|
|
Less: Stock-based compensation
expense determined under fair value based method for all awards,
net of related tax effects
|
|
|
(13
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
Proforma
|
|
$
|
1,133
|
|
|
$
|
698
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Common Share (in
thousands)
|
|
|
|
|
|
|
|
|
Basic and diluted, as reported
|
|
$
|
76.42
|
|
|
$
|
47.26
|
|
Basic and diluted, proforma
|
|
|
75.49
|
|
|
|
45.57
|
|
On March 16, 2005, the Compensation Committee of Farmers
Capitals Board of Directors acted to approve an immediate
and full acceleration of the vesting on options granted during
2004. The purpose of the accelerated vesting is to allow Farmers
Capital and the Bank to reduce anticipated future compensation
expense attributed to its stock option grants pursuant to
SFAS No. 123 (revised), Share-Based
Payment. Since the options granted during 2004 have an
exercise price in excess of the market price on the date of
modification and there is no future vesting requirement, there
will be no compensation expense recorded for these options in
current or future periods. The Bank anticipates that it will
record compensation expense pursuant to SFAS No. 123
(revised) for unvested options from its 2000 grant and shares
issued under its ESPP in the amount of $20,000 and $3,000, net
of tax, for 2006 and 2007, respectively.
F-48
Kentucky
Banking Centers, Inc.
Notes to
Financial Statements (Continued)
Recently
Issued But Not Yet Effective Accounting Standards
In December 2004, the FASB issued SFAS No. 123
(revised). This Statement requires all public companies to
record compensation cost for stock options provided to employees
in return for employee service. The Farmers Capitals ESPP
is considered an option plan under the Statement and will be
subject to cost recognition. Compensation cost is measured at
the fair value of the options when granted, and this cost is
expensed over the employee service period, which is normally the
vesting period of the options. This Statement will apply to
awards granted or modified beginning in 2006. Compensation cost
will also be recorded for prior option grants that vest after
the date of adoption. The effect on results of operations will
depend on the level of future option grants and the calculation
of the fair value of the options granted at such future date, as
well as the vesting periods provided, which cannot currently be
predicted. Existing options, including the ESPP, that vest after
the adoption date are expected to result in additional
compensation expense (net of tax) of $20,000 and $3,000 in 2006
and 2007.
|
|
2.
|
Transactions
with Affiliates
|
The Bank is a wholly-owned subsidiary of Farmers Capital.
Farmers Capital is the parent company of seven separately
chartered Kentucky banks that operate 34 banking locations in 23
communities throughout Central and Northern Kentucky. Farmers
Capital also operates a mortgage company, a leasing company, a
data processing company, and an insurance company. These related
companies provide certain operational and other services for
each other in the normal course of business. Although each
related company maintains its own officers and boards of
directors, Farmers Capital may exercise significant influence
over these companies since it is their single shareholder.
Transactions with related parties primarily include the purchase
and sale of federal funds, the sale of loan participations,
deposit transactions, certain insurance transactions, data
processing, federal income tax payments, and the payment of
certain other corporate-wide administrative expenses.
Balances due to and from related parties consist of the
following at year end 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
35
|
|
|
$
|
150
|
|
Loans sold to affiliates and
related accrued interest
|
|
|
(8,590
|
)
|
|
|
(8,072
|
)
|
Loan purchased from affiliate and
related accrued interest
|
|
|
1,011
|
|
|
|
|
|
Federal income tax receivable from
parent company
|
|
|
|
|
|
|
79
|
|
Prepaid insurance
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
$
|
839
|
|
|
$
|
322
|
|
Federal funds purchased
|
|
|
410
|
|
|
|
2,280
|
|
Federal income taxes payable to
parent company
|
|
|
23
|
|
|
|
|
|
Transactions with related parties for the year ended
December 31, 2005 and 2004 were as follows.
F-49
Kentucky
Banking Centers, Inc.
Notes to
Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Income from Farmers Capital or
its Subsidiaries
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
64
|
|
|
$
|
106
|
|
Expenses incurred to Farmers
Capital or its Subsidiaries
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
4
|
|
|
$
|
3
|
|
Data processing
|
|
|
361
|
|
|
|
295
|
|
Administrative and other
|
|
|
237
|
|
|
|
254
|
|
Administrative and other expenses included in the table above
represent payment for a variety of services, which primarily
include payroll processing, accounting, audit and managerial
services of executive officers.
Farmers Capital maintains an interest bearing savings account at
KBC to facilitate the collection of dividends to Farmers Capital
by KBC. Farmers Capital periodically withdraws amounts from this
savings account depending on its need for cash. Information
related to Farmers Capitals savings account with KBC is as
follows.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at end of period
|
|
$
|
839
|
|
|
$
|
322
|
|
Average balance during the year
|
|
|
516
|
|
|
|
455
|
|
Average interest rate during the
year
|
|
|
0.50
|
%
|
|
|
0.50
|
%
|
Maximum month-end balance during
the year
|
|
$
|
1,438
|
|
|
$
|
595
|
|
The following summarizes the amortized cost and estimated fair
values of the securities portfolio at December 31, 2005.
The summary is divided into available for sale and held to
maturity securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of
U.S. Government agencies
|
|
$
|
27,712
|
|
|
|
|
|
|
$
|
192
|
|
|
$
|
27,520
|
|
Obligations of states and
political subdivisions
|
|
|
3,055
|
|
|
$
|
21
|
|
|
|
34
|
|
|
|
3,042
|
|
Mortgage-backed securities
|
|
|
2,795
|
|
|
|
2
|
|
|
|
54
|
|
|
|
2,743
|
|
Equity securities
|
|
|
1,193
|
|
|
|
|
|
|
|
|
|
|
|
1,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
available for sale
|
|
$
|
34,755
|
|
|
$
|
23
|
|
|
$
|
280
|
|
|
$
|
34,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held To Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and
political subdivisions
|
|
$
|
1,529
|
|
|
$
|
29
|
|
|
$
|
0
|
|
|
$
|
1,558
|
|
The following summarizes the amortized cost and estimated fair
values of the securities portfolio at December 31, 2004.
F-50
Kentucky
Banking Centers, Inc.
Notes to
Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of
U.S. Government agencies
|
|
$
|
36,778
|
|
|
|
|
|
|
$
|
151
|
|
|
$
|
36,627
|
|
Obligations of states and
political subdivisions
|
|
|
3,066
|
|
|
$
|
42
|
|
|
|
17
|
|
|
|
3,091
|
|
Mortgage-backed securities
|
|
|
3,796
|
|
|
|
16
|
|
|
|
13
|
|
|
|
3,799
|
|
Equity securities
|
|
|
1,135
|
|
|
|
|
|
|
|
|
|
|
|
1,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
available for sale
|
|
$
|
44,775
|
|
|
$
|
58
|
|
|
$
|
181
|
|
|
$
|
44,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held To Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and
political subdivisions
|
|
$
|
1,917
|
|
|
$
|
83
|
|
|
$
|
0
|
|
|
$
|
2,000
|
|
The amortized cost and estimated fair value of the securities
portfolio at December 31, 2005, by contractual maturity,
are detailed below. The summary is divided into available for
sale and held to maturity securities. Expected maturities may
differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or
prepayment penalties. Equity securities in the available for
sale portfolio consist of restricted FHLB stock, which has no
stated maturity and are not included in the maturity schedule
that follows. Mortgage-backed securities are stated separately
due to the nature of payment and prepayment characteristics of
these securities, as principal is not due at a single date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
Available for sale
|
|
|
Held To Maturity
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
Amortized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Due in one year or less
|
|
$
|
23,737
|
|
|
$
|
23,618
|
|
|
$
|
684
|
|
|
$
|
689
|
|
Due after one year through five
years
|
|
|
4,475
|
|
|
|
4,402
|
|
|
|
715
|
|
|
|
732
|
|
Due after five years through ten
years
|
|
|
2,165
|
|
|
|
2,144
|
|
|
|
130
|
|
|
|
137
|
|
Due after ten years
|
|
|
390
|
|
|
|
398
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
2,795
|
|
|
|
2,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,562
|
|
|
$
|
33,305
|
|
|
$
|
1,529
|
|
|
$
|
1,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no sales of investment securities during 2005 or 2004.
Investment securities with a carrying value of $31,811,000 and
$33,029,000 at December 31, 2005 and 2004 were pledged to
secure public and trust deposits, repurchase agreements, and for
other purposes.
Investment securities with unrealized losses at year end 2005
and 2004 not recognized in income are presented in the table
below. The table segregates investment securities that have been
in a continuous unrealized loss position for less than twelve
months from those that have been in a continuous unrealized loss
position for twelve months or more. The table also includes the
fair value of the related securities.
F-51
Kentucky
Banking Centers, Inc.
Notes to
Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
|
Obligations of
U.S. Government agencies
|
|
$
|
17,402
|
|
|
$
|
61
|
|
|
$
|
10,117
|
|
|
$
|
131
|
|
|
$
|
27,519
|
|
|
$
|
192
|
|
Obligations of states and
political subdivisions
|
|
|
974
|
|
|
|
18
|
|
|
|
519
|
|
|
|
16
|
|
|
|
1,493
|
|
|
|
34
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
2,424
|
|
|
|
54
|
|
|
|
2,424
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,376
|
|
|
$
|
79
|
|
|
$
|
13,060
|
|
|
$
|
201
|
|
|
$
|
31,436
|
|
|
$
|
280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
|
Obligations of
U.S. Government agencies
|
|
$
|
35,649
|
|
|
$
|
130
|
|
|
$
|
978
|
|
|
$
|
21
|
|
|
$
|
36,627
|
|
|
$
|
151
|
|
Obligations of states and
political subdivisions
|
|
|
1,043
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
1,043
|
|
|
|
17
|
|
Mortgage-backed securities
|
|
|
3,323
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
3,323
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,015
|
|
|
$
|
160
|
|
|
$
|
978
|
|
|
$
|
21
|
|
|
$
|
40,993
|
|
|
$
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses included in the tables above have not been
recognized in income since they have been identified as
temporary. The Bank periodically evaluates securities for
other-than-temporary
impairment. Consideration is given to the length of time and the
extent to which the fair value has been less than cost, the
financial condition and near-term prospects of the issuer, and
the intent and ability of the Bank to retain its investment in
the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. The Bank attributes the
unrealized losses mainly to changes in market interest rates and
does not expect to incur a loss unless the securities are sold.
Management has the intent and ability to hold these securities
until the foreseeable future. As the securities approach their
maturity date, their fair value is expected to recover. A
decline in certain market interest rates could also favorably
impact fair values.
F-52
Kentucky
Banking Centers, Inc.
Notes to
Financial Statements (Continued)
Major classifications of loans are summarized as follows.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Commercial, financial, and
agricultural
|
|
$
|
11,008
|
|
|
$
|
11,455
|
|
Real estate
construction
|
|
|
1,526
|
|
|
|
1,045
|
|
Real estate mortgage
residential
|
|
|
37,714
|
|
|
|
38,782
|
|
Real estate mortgage
farmland and other commercial enterprises
|
|
|
23,189
|
|
|
|
20,246
|
|
Installment loans
|
|
|
8,342
|
|
|
|
10,265
|
|
Lease financing
|
|
|
70
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
81,849
|
|
|
|
81,911
|
|
Less unearned income
|
|
|
(4
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Total loans, net of unearned income
|
|
$
|
81,845
|
|
|
$
|
81,902
|
|
|
|
|
|
|
|
|
|
|
Loans to directors, executive officers, and principal
shareholders (including loans to affiliated companies of which
they are principal owners) and loans to members of the immediate
family of such persons were $562,000 and $487,000 at
December 31, 2005 and 2004, respectively. An analysis of
the activity with respect to these loans is presented in the
table below.
|
|
|
|
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Balance, December 31, 2004
|
|
$
|
487
|
|
New loans
|
|
|
1,068
|
|
Repayments
|
|
|
(396
|
)
|
Loans no longer meeting disclosure
requirements and other adjustments
|
|
|
(597
|
)
|
|
|
|
|
|
Balance, December 31, 2005
|
|
$
|
562
|
|
|
|
|
|
|
|
|
5.
|
Allowance
for Loan Losses
|
An analysis of the allowance for loan losses follows.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of year
|
|
$
|
1,193
|
|
|
$
|
1,202
|
|
Provision for loan losses
|
|
|
195
|
|
|
|
570
|
|
Recoveries
|
|
|
76
|
|
|
|
121
|
|
Loans charged off
|
|
|
(265
|
)
|
|
|
(700
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
1,199
|
|
|
$
|
1,193
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans were as follows.
F-53
Kentucky
Banking Centers, Inc.
Notes to
Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Nonaccrual loans
|
|
$
|
425
|
|
|
$
|
558
|
|
Loans past due 90 days or
more and still accruing
|
|
|
705
|
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
1,130
|
|
|
$
|
1,094
|
|
|
|
|
|
|
|
|
|
|
Individually impaired loans, which consist of nonaccrual loans,
were as follows.
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Year-end impaired loans with
allocated allowance
|
|
$
|
425
|
|
|
$
|
558
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
425
|
|
|
$
|
558
|
|
|
|
|
|
|
|
|
|
|
Amount of allowance for loan
losses allocated
|
|
$
|
26
|
|
|
$
|
77
|
|
Average impaired loans for the year
|
|
|
467
|
|
|
|
752
|
|
Interest income recognized on
impaired loans
|
|
|
3
|
|
|
|
10
|
|
Cash-basis interest income
recognized
|
|
|
3
|
|
|
|
10
|
|
|
|
6.
|
Premises
and Equipment
|
Premises and equipment consist of the following.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Land, buildings, and leasehold
improvements
|
|
$
|
5,272
|
|
|
$
|
5,296
|
|
Furniture and equipment
|
|
|
1,299
|
|
|
|
1,178
|
|
|
|
|
|
|
|
|
|
|
Total premises and equipment
|
|
|
6,571
|
|
|
|
6,474
|
|
Less accumulated depreciation and
amortization
|
|
|
(2,385
|
)
|
|
|
(2,374
|
)
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
$
|
4,186
|
|
|
$
|
4,100
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of premises and equipment was
$264,000 and $242,000 in 2005 and 2004, respectively.
Time deposits of $100,000 or more at December 31, 2005 and
2004 were $12,960,000 and $16,823,000, respectively. Interest
expense on time deposits of $100,000 or more was $365,000 and
$325,000 for 2005 and 2004, respectively.
At December 31, 2005 the scheduled maturities of time
deposits were as follows.
F-54
Kentucky
Banking Centers, Inc.
Notes to
Financial Statements (Continued)
|
|
|
|
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
2006
|
|
$
|
26,256
|
|
2007
|
|
|
12,261
|
|
2008
|
|
|
21,410
|
|
2009
|
|
|
4,000
|
|
2010
|
|
|
1,108
|
|
Thereafter
|
|
|
173
|
|
|
|
|
|
|
Total
|
|
$
|
65,208
|
|
|
|
|
|
|
Deposits from directors, executive officers, and principal
shareholders (including deposits from affiliated companies of
which they are principal owners) and deposits from members of
the immediate family of such persons were $2,099,000 and
$814,000 at December 31, 2005 and 2004, respectively.
|
|
8.
|
Federal
Funds Purchased, Securities Sold Under Agreements to Repurchase,
and Other Borrowed Funds
|
Federal funds purchased and securities sold under agreements to
repurchase represent borrowings by the Bank that generally
mature one business day following the date of the transaction.
Information pertaining to such borrowings is as follows.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Average balance during the year
|
|
$
|
291
|
|
|
$
|
233
|
|
Average interest rate during the
year
|
|
|
2.75
|
%
|
|
|
2.15
|
%
|
Maximum month-end balance during
the year
|
|
$
|
777
|
|
|
$
|
2,480
|
|
The table below displays a summary of the ending balance and
average rate for borrowed funds on the dates indicated. For FHLB
advances, the subsidiary banks pledge FHLB stock and fully
disbursed, otherwise unencumbered, 1-4 family first mortgage
loans as collateral for these advances as required by the FHLB.
Based on this collateral and the Banks holdings of FHLB
stock, the Bank is eligible to borrow up to an additional
$15,320,000 at year end 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
2005
|
|
|
Rate
|
|
|
2004
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
Short-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and
securities sold under agreements to repurchase
|
|
$
|
777
|
|
|
|
3.54
|
%
|
|
$
|
2,480
|
|
|
|
2.17
|
%
|
Long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
1,591
|
|
|
|
3.36
|
%
|
|
$
|
1,893
|
|
|
|
3.47
|
%
|
FHLB advances are made pursuant to several different credit
programs, which have their own interest rates and range of
maturities. Interest rates on FHLB advances are generally fixed
and range between 2.91% and 8.15%, averaging 3.36%, over a
remaining maturity period of up to 18 years as of
December 31, 2005.
Maturities of long-term borrowings at December 31, 2005 are
as follows.
F-55
Kentucky
Banking Centers, Inc.
Notes to
Financial Statements (Continued)
|
|
|
|
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
2006
|
|
$
|
273
|
|
2007
|
|
|
258
|
|
2008
|
|
|
244
|
|
2009
|
|
|
231
|
|
2010
|
|
|
220
|
|
Thereafter
|
|
|
365
|
|
|
|
|
|
|
Total
|
|
$
|
1,591
|
|
|
|
|
|
|
The components of income tax expense are as follows.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Currently payable
|
|
$
|
494
|
|
|
$
|
244
|
|
Deferred
|
|
|
(59
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
Total applicable to operations
|
|
$
|
435
|
|
|
$
|
220
|
|
|
|
|
|
|
|
|
|
|
An analysis of the difference between the effective income tax
rates and the statutory federal income tax rate follows.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Changes from statutory rates
resulting from:
|
|
|
|
|
|
|
|
|
Tax-exempt interest
|
|
|
(5.9
|
)
|
|
|
(8.8
|
)
|
Nondeductible interest to carry
tax-exempt obligations
|
|
|
.6
|
|
|
|
.8
|
|
Company-owned life insurance
|
|
|
(1.2
|
)
|
|
|
(2.5
|
)
|
Other, net
|
|
|
(1.0
|
)
|
|
|
(.8
|
)
|
|
|
|
|
|
|
|
|
|
Effective tax rate on pretax income
|
|
|
27.5
|
%
|
|
|
23.7
|
%
|
|
|
|
|
|
|
|
|
|
The tax effects of the significant temporary differences that
comprise deferred tax assets and liabilities at
December 31, 2005 and 2004 follows.
F-56
Kentucky
Banking Centers, Inc.
Notes to
Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
420
|
|
|
$
|
417
|
|
Unrealized losses on available for
sale investment securities, net
|
|
|
90
|
|
|
|
43
|
|
Postretirement benefit obligations
|
|
|
40
|
|
|
|
26
|
|
Stock options
|
|
|
66
|
|
|
|
70
|
|
Other
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
616
|
|
|
|
558
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
287
|
|
|
|
312
|
|
Prepaid expenses
|
|
|
41
|
|
|
|
|
|
Discount on investment securities
|
|
|
178
|
|
|
|
159
|
|
Deferred loan fees
|
|
|
241
|
|
|
|
206
|
|
Total deferred tax liabilities
|
|
|
747
|
|
|
|
677
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(131
|
)
|
|
$
|
(119
|
)
|
|
|
|
|
|
|
|
|
|
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for
future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely
than not the Bank will realize the benefits of these deductible
differences at December 31, 2005.
The Bank files a consolidated Federal tax return with Farmers
Capital in accordance with a written agreement. The agreement
outlines the procedures for the Bank to pay its tax liability to
Farmers Capital. The Bank calculates its liability as if it were
a separate entity using the consolidated return average tax
rate. Farmers Capital is responsible for paying the consolidated
liability to the federal government.
Farmers Capital maintains an Employee Stock Ownership Plan
(ESOP) and a salary savings plan for its employees.
Farmers Capital may at its discretion contribute an amount (up
to the maximum imposed by federal law) to the ESOP which will be
allocated to all participants in the ratio that each
participants compensation bears to all participants
compensation. Such discretionary contributions will be utilized
to purchase shares of Farmers Capitals common stock to be
held in the participants accounts. There were no
contributions to the ESOP in any of the years in the two-year
period ended December 31, 2005. The fair market value of
parent company shares held by the ESOP was $2,218,000 and
$2,953,000 at year end December 31, 2005 and 2004,
respectively.
The salary savings plan covers substantially all employees. The
Bank matches all eligible voluntary tax deferred employee
contributions up to 4% of the participants compensation.
Farmers Capital may, at
the discretion of its board of directors, contribute an
additional amount based upon a percentage of covered
employees salaries. A 4% discretionary contribution was
made to the plan during each of the years in the two-year period
ended December 31, 2005. Discretionary contributions are
allocated among participants in the
F-57
Kentucky
Banking Centers, Inc.
Notes to
Financial Statements (Continued)
ratio that each participants compensation bears to all
participants compensation. Eligible employees are
presented with various investment alternatives related to the
salary savings plan. Those alternatives include various stock
and bond mutual funds that vary from traditional growth funds to
more stable income funds. Farmers Capital shares are not an
available investment alternative in the salary savings plan.
The total retirement plan expense for 2005 and 2004 was $82,000
and 91,000, respectively.
|
|
11.
|
Postretirement
Benefits
|
During 2003, the Bank implemented a postretirement health
insurance program whereby any employee meeting the service
requirements of 20 years of full time service to the Bank
and is at least age 55 upon retirement will be eligible to
continue their health insurance coverage. The coverage offered
to eligible retirees will be identical to the coverage that is
offered to active employees. The retiree will pay 50% of the
cost and the Bank will pay 50% under the first plan. The plan is
unfunded.
The following schedules set forth a reconciliation of the
changes in the plans benefit obligation and funded status for
the years ended December 31, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Change in Benefit
Obligation
|
|
|
|
|
|
|
|
|
Obligation at beginning of year
|
|
$
|
276
|
|
|
$
|
252
|
|
Service cost
|
|
|
14
|
|
|
|
13
|
|
Interest cost
|
|
|
16
|
|
|
|
16
|
|
Actuarial loss
|
|
|
49
|
|
|
|
|
|
Benefit payments
|
|
|
(4
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
Obligation at end of year
|
|
$
|
351
|
|
|
$
|
276
|
|
|
|
|
|
|
|
|
|
|
Funded Status (plan assets less
benefit obligations)
|
|
|
|
|
|
|
|
|
Accumulated postretirement benefit
obligation
|
|
$
|
(351
|
)
|
|
$
|
(276
|
)
|
Unamortized prior service cost
|
|
|
139
|
|
|
|
155
|
|
Unrecognized net actuarial loss
|
|
|
101
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
Accrued postretirement benefit
costs
|
|
$
|
(111
|
)
|
|
$
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
The following table provides disclosure of the net periodic
benefit cost as of December 31.
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Service cost
|
|
$
|
14
|
|
|
$
|
13
|
|
Interest cost
|
|
|
16
|
|
|
|
16
|
|
Recognized prior service cost
|
|
|
16
|
|
|
|
16
|
|
Recognized net loss
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
47
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
Major assumptions:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.75
|
%
|
|
|
6.00
|
%
|
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plans. For
measurement purposes, the rate of increase in pre-Medicare
medical care claims costs was 10% in 2006 grading down by 1% to
5% for 2011 and thereafter. For Medicare Supplement claims
costs, it was 8% in
F-58
Kentucky
Banking Centers, Inc.
Notes to
Financial Statements (Continued)
2006 grading down by 1% to 5% for 2009 and thereafter. For
dental claims cost, it was 5% for 2006 and thereafter. A 1%
change in the assumed health care cost trend rates would have
the following incremental effects:
|
|
|
|
|
|
|
|
|
|
|
1% Increase
|
|
|
1% Decrease
|
|
|
|
(In thousands)
|
|
|
Effect on total of service and
interest cost components of net periodic postretirement health
care benefit cost
|
|
$
|
9
|
|
|
$
|
(7
|
)
|
Effect on postretirement benefit
obligation
|
|
|
64
|
|
|
|
(51
|
)
|
The following table presents estimated future benefit payments
in the period indicated.
|
|
|
|
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
2006
|
|
$
|
11
|
|
2007
|
|
|
13
|
|
2008
|
|
|
7
|
|
2009
|
|
|
8
|
|
2010
|
|
|
10
|
|
2011 2015
|
|
|
83
|
|
|
|
|
|
|
Total
|
|
$
|
132
|
|
|
|
|
|
|
The Bank leases certain branch sites and certain banking
equipment under various operating leases. All of the branch site
leases have renewal options of varying lengths and terms. The
following table presents estimated future minimum rental
commitments under these leases for the period indicated.
|
|
|
|
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
2006
|
|
$
|
116
|
|
2007
|
|
|
168
|
|
2008
|
|
|
165
|
|
2009
|
|
|
171
|
|
2010
|
|
|
167
|
|
Thereafter
|
|
|
1,476
|
|
|
|
|
|
|
Total
|
|
$
|
2,263
|
|
|
|
|
|
|
Rent expense was $63,000 and $18,000 for 2005 and 2004,
respectively.
|
|
13.
|
Financial
Instruments With Off-Balance Sheet Risk
|
The Bank is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the
financing needs of its customers. The financial instruments
include commitments to extend credit and standby letters of
credit.
These financial instruments involve to varying degrees, elements
of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The contract
amounts of these instruments reflect the extent of involvement
the Bank has in particular classes of financial instruments.
F-59
Kentucky
Banking Centers, Inc.
Notes to
Financial Statements (Continued)
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
the payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amount
does not necessarily represent future cash requirements. Total
commitments to extend credit were $9,965,000 and $9,207,000 at
December 31, 2005 and 2004, respectively. The Bank
evaluates each customers creditworthiness on a
case-by-case
basis. The amount of collateral obtained upon extension of
credit, if deemed necessary by the Bank, is based on
managements credit evaluation of the counter party.
Collateral held varies, but may include accounts receivable,
marketable securities, inventory, premises and equipment,
residential real estate, and income producing commercial
properties.
Standby letters of credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a third
party. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. The credit risk
involved in issuing letters of credit is essentially the same as
that received when extending credit to customers. The fair value
of these instruments is not considered material for disclosure
under FASB Interpretation No. 45. The Bank had $163,000 and
$239,000 in irrevocable letters of credit outstanding at
December 31, 2005 and 2004, respectively.
The contractual amount of financial instruments with off-balance
sheet risk was as follows at year end.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
Fixed Rate
|
|
|
Variable Rate
|
|
|
Fixed Rate
|
|
|
Variable Rate
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Commitments to extend credit
|
|
$
|
3,926
|
|
|
$
|
6,039
|
|
|
$
|
3,151
|
|
|
$
|
6,056
|
|
Standby letters of credit
|
|
|
152
|
|
|
|
11
|
|
|
|
54
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,078
|
|
|
$
|
6,050
|
|
|
$
|
3,205
|
|
|
$
|
6,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
Concentration
of Credit Risk
|
The Bank actively engages in lending, primarily in Hart and
Barren Counties and adjacent areas. Collateral is received to
support these loans when deemed necessary. The more significant
categories of collateral include cash on deposit with the Banks,
marketable securities, income producing property, home
mortgages, and consumer durables. Loans outstanding, commitments
to make loans, and letters of credit range across a large number
of industries and individuals. The obligations are significantly
diverse and reflect no material concentration in one or more
areas.
Loss contingencies, including claims and legal actions arising
in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount or range
of loss can be reasonably estimated. As of December 31,
2005, there were various pending legal actions and proceedings
against the Bank arising from the normal course of business and
in which claims for damages are asserted. Management, after
discussion with legal counsel, believes that these actions are
without merit and that the ultimate liability resulting from
these legal actions and proceedings, if any, will not have a
material effect upon the financial statements of the Bank.
The Banks payment of dividends to its parent company is
subject to certain regulatory restrictions as set forth in state
banking laws and regulations. Generally, capital distributions
are limited to undistributed net income for the current and
prior two years, subject to the capital requirements described
below. At
F-60
Kentucky
Banking Centers, Inc.
Notes to
Financial Statements (Continued)
December 31, 2005, retained earnings of the Bank were
$3,065,000 of which $1,112,000 was available for the payment of
dividends in 2006 without obtaining prior approval from bank
regulatory agencies.
Included in cash and due from banks is certain noninterest
bearing deposits that are held at the Federal Reserve Bank and
correspondent banks in accordance with regulatory reserve
requirements specified by the Federal Reserve Board of
Governors. The reserve requirement was $400,000 at
December 31, 2005 and 2004.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements will initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the
Banks financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Banks assets,
liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Banks 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 Bank to maintain minimum amounts
and ratios (set forth in the tables below) of total and
Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined). The Bank meets all capital adequacy
requirements to which it is subject as of December 31, 2005.
As of December 31, 2005, the most recent notification from
the FDIC categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the tables. There are no
conditions or events since that notification that management
believes have changed the institutions category.
The capital amounts and ratios of the Bank are presented in the
following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be Well
|
|
|
|
|
|
|
|
|
|
Capitalized
|
|
|
|
|
|
|
For Capital
|
|
|
Under Prompt
|
|
|
|
|
|
|
Adequacy
|
|
|
Corrective
|
|
|
|
Actual
|
|
|
Purposes
|
|
|
Action Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(Dollars in thousands)
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital (to
Risk-Weighted Assets)
|
|
$
|
9,310
|
|
|
|
10.86
|
%
|
|
$
|
3,428
|
|
|
|
4.00
|
%
|
|
$
|
5,142
|
|
|
|
6.00
|
%
|
Total Capital (to Risk-Weighted
Assets)
|
|
|
10,383
|
|
|
|
12.12
|
|
|
|
6,855
|
|
|
|
8.00
|
|
|
|
8,569
|
|
|
|
10.00
|
|
Tier 1 Capital (to Average
Assets)
|
|
|
9,310
|
|
|
|
7.31
|
|
|
|
5,092
|
|
|
|
4.00
|
|
|
|
6,365
|
|
|
|
5.00
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital (to
Risk-Weighted Assets)
|
|
|
9,603
|
|
|
|
10.55
|
|
|
|
3,641
|
|
|
|
4.00
|
|
|
|
5,461
|
|
|
|
6.00
|
|
Total Capital (to Risk-Weighted
Assets)
|
|
|
10,741
|
|
|
|
11.80
|
|
|
|
7,281
|
|
|
|
8.00
|
|
|
|
9,101
|
|
|
|
10.00
|
|
Tier 1 Capital (to Average
Assets)
|
|
|
9,603
|
|
|
|
7.07
|
|
|
|
5,433
|
|
|
|
4.00
|
|
|
|
6,791
|
|
|
|
5.00
|
|
|
|
17.
|
Fair
Value of Financial Instruments
|
The following table presents the estimated fair values of the
Banks financial instruments made in accordance with the
requirements of SFAS No. 107, Disclosures About
Fair Value of Financial Instruments. This Statement requires
disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet for
which it is practicable to estimate that value. The estimated
fair value amounts have been determined by the Bank using
available market information and present value or other
valuation techniques. These derived fair values are subjective
in nature, involve uncertainties and matters of
F-61
Kentucky
Banking Centers, Inc.
Notes to
Financial Statements (Continued)
significant judgment and, therefore, cannot be determined with
precision. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from the disclosure
requirements. Accordingly, the aggregate fair value amounts
presented are not intended to represent the underlying value of
the Bank.
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it
is practicable to estimate that value.
Cash and Cash Equivalents, Accrued Interest Receivable, and
Accrued Interest Payable
The carrying amount is a reasonable estimate of fair value.
Investment Securities
Fair value equals quoted market price, if available. If a quoted
market price is not available, fair value is estimated using
quoted market prices for similar securities.
Loans
The fair value of loans is estimated by discounting the future
cash flows using current discount rates at which similar loans
would be made to borrowers with similar credit ratings and for
the same remaining maturities.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed maturity certificates of
deposit is estimated by discounting the future cash flows using
the rates currently offered for certificates of deposit with
similar remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit
Pricing of these financial instruments is based on the credit
quality and relationship, fees, interest rates, probability of
funding, compensating balance, and other covenants or
requirements. Loan commitments generally have fixed expiration
dates, variable interest rates and contain termination and other
clauses that provide for relief from funding in the event there
is a significant deterioration in the credit quality of the
customer. Many loan commitments are expected to, and typically
do, expire without being drawn upon. The rates and terms of the
Banks commitments to lend and standby letters of credit
are competitive with others in the various markets in which the
Bank operates. There are no unamortized fees relating to these
financial instruments, as such the carrying value and fair value
are both zero.
Federal Funds Purchased, Securities Sold Under Agreements to
Repurchase, and Other Borrowed Funds
The fair value of federal funds purchased, securities sold under
agreements to repurchase, and other borrowed funds is estimated
using rates currently available for debt with similar terms and
remaining maturities.
F-62
Kentucky
Banking Centers, Inc.
Notes to
Financial Statements (Continued)
The estimated fair values of the Banks financial
instruments are as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
3,348
|
|
|
$
|
3,348
|
|
|
$
|
3,822
|
|
|
$
|
3,822
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
34,498
|
|
|
|
34,498
|
|
|
|
44,652
|
|
|
|
44,652
|
|
Held to maturity
|
|
|
1,529
|
|
|
|
1,558
|
|
|
|
1,917
|
|
|
|
2,000
|
|
Loans, net
|
|
|
80,646
|
|
|
|
78,630
|
|
|
|
80,709
|
|
|
|
79,000
|
|
Accrued interest receivable
|
|
|
1,225
|
|
|
|
1,225
|
|
|
|
1,113
|
|
|
|
1,113
|
|
|
LIABILITIES
|
Deposits
|
|
|
115,277
|
|
|
|
114,757
|
|
|
|
123,629
|
|
|
|
123,338
|
|
Federal funds purchased and
securities sold under agreements to repurchase
|
|
|
777
|
|
|
|
777
|
|
|
|
2,480
|
|
|
|
2,480
|
|
FHLB and other borrowings
|
|
|
1,591
|
|
|
|
1,780
|
|
|
|
1,893
|
|
|
|
2,140
|
|
Accrued interest payable
|
|
|
152
|
|
|
|
152
|
|
|
|
132
|
|
|
|
132
|
|
|
|
18.
|
Quarterly
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended 2005
|
|
|
|
March 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
|
(In thousands, except weighted average shares)
|
|
|
Interest income
|
|
$
|
1,710
|
|
|
$
|
1,772
|
|
|
$
|
1,842
|
|
|
$
|
1,866
|
|
Interest expense
|
|
|
680
|
|
|
|
682
|
|
|
|
695
|
|
|
|
751
|
|
Net interest income
|
|
|
1,030
|
|
|
|
1,090
|
|
|
|
1,147
|
|
|
|
1,115
|
|
Provision for loan losses
|
|
|
4
|
|
|
|
72
|
|
|
|
(11
|
)
|
|
|
130
|
|
Net interest income after
provision for loan losses
|
|
|
1,026
|
|
|
|
1,018
|
|
|
|
1,158
|
|
|
|
985
|
|
Noninterest income
|
|
|
260
|
|
|
|
281
|
|
|
|
263
|
|
|
|
266
|
|
Noninterest expense
|
|
|
890
|
|
|
|
925
|
|
|
|
928
|
|
|
|
933
|
|
Income before income taxes
|
|
|
396
|
|
|
|
374
|
|
|
|
493
|
|
|
|
318
|
|
Income tax expense
|
|
|
99
|
|
|
|
86
|
|
|
|
159
|
|
|
|
91
|
|
Net income
|
|
$
|
297
|
|
|
$
|
288
|
|
|
$
|
334
|
|
|
$
|
227
|
|
Net income per common share, basic
and diluted (in thousands)
|
|
$
|
19.82
|
|
|
$
|
19.19
|
|
|
$
|
22.25
|
|
|
$
|
15.16
|
|
Weighted average shares
outstanding, basic and diluted
|
|
|
15
|
|
|
|
15
|
|
|
|
15
|
|
|
|
15
|
|
F-63
Kentucky
Banking Centers, Inc.
Notes to
Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended 2004
|
|
|
|
March 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
|
(In thousands, except weighted average shares)
|
|
|
Interest income
|
|
$
|
1,545
|
|
|
$
|
1,568
|
|
|
$
|
1,600
|
|
|
$
|
1,635
|
|
Interest expense
|
|
|
581
|
|
|
|
592
|
|
|
|
630
|
|
|
|
651
|
|
Net interest income
|
|
|
964
|
|
|
|
976
|
|
|
|
970
|
|
|
|
984
|
|
Provision for loan losses
|
|
|
91
|
|
|
|
115
|
|
|
|
205
|
|
|
|
159
|
|
Net interest income after
provision for loan losses
|
|
|
873
|
|
|
|
861
|
|
|
|
765
|
|
|
|
825
|
|
Noninterest income
|
|
|
269
|
|
|
|
282
|
|
|
|
290
|
|
|
|
248
|
|
Noninterest expense
|
|
|
815
|
|
|
|
895
|
|
|
|
877
|
|
|
|
897
|
|
Income before income taxes
|
|
|
327
|
|
|
|
248
|
|
|
|
178
|
|
|
|
176
|
|
Income tax expense
|
|
|
83
|
|
|
|
71
|
|
|
|
25
|
|
|
|
41
|
|
Net income
|
|
$
|
244
|
|
|
$
|
177
|
|
|
$
|
153
|
|
|
$
|
135
|
|
Net income per common share, basic
and diluted (in thousands)
|
|
$
|
16.23
|
|
|
$
|
11.84
|
|
|
$
|
10.18
|
|
|
$
|
9.00
|
|
Weighted average shares
outstanding, basic and diluted
|
|
|
15
|
|
|
|
15
|
|
|
|
15
|
|
|
|
15
|
|
|
|
19.
|
Subsequent
Event (Unaudited)
|
On June 1, 2006 the Bank, Farmers Capital, and Citizens
First Corporation (Bowling Green, KY) (Citizens
First) jointly announced the signing of a definitive
agreement for the purchase of the Bank by Citizens First in a
$20 million cash transaction. Pending the required
approvals from the appropriate regulatory authorities and
subject to the satisfaction of the conditions set forth in the
definitive agreement, the transaction is expected to close
during the second half of 2006.
F-64
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands,
|
|
|
|
except share data)
|
|
|
ASSETS
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
3,076
|
|
|
$
|
3,140
|
|
Interest bearing deposits in other
banks
|
|
|
193
|
|
|
|
208
|
|
Federal funds sold and securities
purchased under agreements to resell
|
|
|
11,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
15,195
|
|
|
|
3,348
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Available for sale, amortized cost
of $20,608 (2006) and $34,755 (2005)
|
|
|
20,299
|
|
|
|
34,498
|
|
Held to maturity, fair value of
$1,119 (2006) and $1,558 (2005)
|
|
|
1,104
|
|
|
|
1,529
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
21,403
|
|
|
|
36,027
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income
|
|
|
83,902
|
|
|
|
81,845
|
|
Allowance for loan losses
|
|
|
(1,178
|
)
|
|
|
(1,199
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
82,724
|
|
|
|
80,646
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
4,123
|
|
|
|
4,186
|
|
Company-owned life insurance
|
|
|
1,555
|
|
|
|
1,525
|
|
Other assets
|
|
|
1,642
|
|
|
|
1,507
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
126,642
|
|
|
$
|
127,239
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest bearing
|
|
$
|
10,776
|
|
|
$
|
9,834
|
|
Interest bearing
|
|
|
104,379
|
|
|
|
105,443
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
115,155
|
|
|
|
115,277
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and
securities sold under agreements to repurchase
|
|
|
200
|
|
|
|
777
|
|
Federal Home Loan Bank
advances
|
|
|
1,446
|
|
|
|
1,591
|
|
Other liabilities
|
|
|
672
|
|
|
|
451
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
117,473
|
|
|
|
118,096
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Common stock, par value
$20,000 per share; 15 shares authorized;
15 shares issued and outstanding at June 30, 2006 and
December 31, 2005
|
|
|
300
|
|
|
|
300
|
|
Capital surplus
|
|
|
5,961
|
|
|
|
5,945
|
|
Retained earnings
|
|
|
3,108
|
|
|
|
3,065
|
|
Accumulated other comprehensive
loss
|
|
|
(200
|
)
|
|
|
(167
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
9,169
|
|
|
|
9,143
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
126,642
|
|
|
$
|
127,239
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited financial statements.
F-65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except weighted average shares)
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
1,681
|
|
|
$
|
1,460
|
|
|
$
|
3,266
|
|
|
$
|
2,865
|
|
Interest on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
170
|
|
|
|
233
|
|
|
|
416
|
|
|
|
444
|
|
Nontaxable
|
|
|
42
|
|
|
|
48
|
|
|
|
87
|
|
|
|
96
|
|
Interest on deposits in other banks
|
|
|
1
|
|
|
|
|
|
|
|
2
|
|
|
|
6
|
|
Interest of federal funds sold and
securities purchased under agreements to resell
|
|
|
154
|
|
|
|
32
|
|
|
|
200
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
2,048
|
|
|
|
1,773
|
|
|
|
3,971
|
|
|
|
3,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
|
802
|
|
|
|
666
|
|
|
|
1,568
|
|
|
|
1,328
|
|
Interest on federal funds
purchased and securities sold under agreements to repurchase
|
|
|
3
|
|
|
|
1
|
|
|
|
6
|
|
|
|
3
|
|
Interest on Federal Home
Loan Bank advances
|
|
|
14
|
|
|
|
15
|
|
|
|
27
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
819
|
|
|
|
682
|
|
|
|
1,601
|
|
|
|
1,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
1,229
|
|
|
|
1,091
|
|
|
|
2,370
|
|
|
|
2,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
(4
|
)
|
|
|
72
|
|
|
|
(84
|
)
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses
|
|
|
1,233
|
|
|
|
1,019
|
|
|
|
2,454
|
|
|
|
2,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and fees on
deposits
|
|
|
192
|
|
|
|
188
|
|
|
|
367
|
|
|
|
357
|
|
Other service charges,
commissions, and fees
|
|
|
69
|
|
|
|
65
|
|
|
|
140
|
|
|
|
129
|
|
Income from company-owned life
insurance
|
|
|
14
|
|
|
|
14
|
|
|
|
29
|
|
|
|
24
|
|
Other
|
|
|
11
|
|
|
|
13
|
|
|
|
23
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
286
|
|
|
|
280
|
|
|
|
559
|
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
484
|
|
|
|
462
|
|
|
|
995
|
|
|
|
895
|
|
Occupancy expenses
|
|
|
94
|
|
|
|
71
|
|
|
|
210
|
|
|
|
147
|
|
Equipment expenses
|
|
|
50
|
|
|
|
39
|
|
|
|
96
|
|
|
|
76
|
|
Data processing and communications
expense
|
|
|
130
|
|
|
|
138
|
|
|
|
265
|
|
|
|
262
|
|
Holding Company management fee
|
|
|
61
|
|
|
|
56
|
|
|
|
120
|
|
|
|
110
|
|
Liability insurance
|
|
|
40
|
|
|
|
6
|
|
|
|
57
|
|
|
|
13
|
|
Bank franchise tax
|
|
|
27
|
|
|
|
24
|
|
|
|
54
|
|
|
|
48
|
|
Other
|
|
|
154
|
|
|
|
129
|
|
|
|
290
|
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
1,040
|
|
|
|
925
|
|
|
|
2,087
|
|
|
|
1,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
479
|
|
|
|
374
|
|
|
|
926
|
|
|
|
770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
130
|
|
|
|
86
|
|
|
|
254
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
349
|
|
|
$
|
288
|
|
|
$
|
672
|
|
|
$
|
585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Common Share (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
23.28
|
|
|
$
|
19.19
|
|
|
$
|
44.78
|
|
|
$
|
39.01
|
|
Weighted Average
Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
15
|
|
|
|
15
|
|
|
|
15
|
|
|
|
15
|
|
See accompanying notes to unaudited financial statements.
F-66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Net Income
|
|
$
|
349
|
|
|
$
|
288
|
|
|
$
|
672
|
|
|
$
|
585
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding (loss) gain on
available for sale securities arising during the period, net of
tax of $17, $72, $18, and $3, respectively
|
|
|
(32
|
)
|
|
|
134
|
|
|
|
(33
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$
|
317
|
|
|
$
|
422
|
|
|
$
|
639
|
|
|
$
|
591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited financial statements.
F-67
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Operating
Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
672
|
|
|
$
|
585
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
140
|
|
|
|
122
|
|
Net amortization of investment
security premiums and (discounts):
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
(7
|
)
|
|
|
14
|
|
Held to maturity
|
|
|
|
|
|
|
(1
|
)
|
Provision for loan losses
|
|
|
(84
|
)
|
|
|
76
|
|
Noncash compensation expense
|
|
|
16
|
|
|
|
|
|
Deferred income tax expense
(benefit)
|
|
|
115
|
|
|
|
(43
|
)
|
Gains on sale of premises and
equipment, net
|
|
|
|
|
|
|
(1
|
)
|
Increase in accrued interest
receivable
|
|
|
(177
|
)
|
|
|
(87
|
)
|
Income from company-owned life
insurance
|
|
|
(29
|
)
|
|
|
(24
|
)
|
Decrease in other assets
|
|
|
6
|
|
|
|
22
|
|
Increase in accrued interest payable
|
|
|
3
|
|
|
|
7
|
|
Increase in other liabilities
|
|
|
156
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
811
|
|
|
|
753
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities
|
|
|
|
|
|
|
|
|
Proceeds from maturities and calls
of investment securities:
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
18,224
|
|
|
|
23,091
|
|
Held to maturity
|
|
|
425
|
|
|
|
150
|
|
Purchase of available for sale
investment securities
|
|
|
(4,069
|
)
|
|
|
(10,505
|
)
|
Loans originated for investment,
net of principal collected
|
|
|
(1,994
|
)
|
|
|
(341
|
)
|
Purchase of premises and equipment
|
|
|
(77
|
)
|
|
|
(240
|
)
|
Proceeds from sale of equipment
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing
activities
|
|
|
12,509
|
|
|
|
12,157
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities
|
|
|
|
|
|
|
|
|
Net decrease in deposits
|
|
|
(122
|
)
|
|
|
(11,084
|
)
|
Net decrease in securities sold
under agreements to repurchase
|
|
|
(577
|
)
|
|
|
(2,280
|
)
|
Repayments of Federal Home
Loan Bank advances
|
|
|
(145
|
)
|
|
|
(145
|
)
|
Dividends paid
|
|
|
(629
|
)
|
|
|
(325
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(1,473
|
)
|
|
|
(13,834
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
11,847
|
|
|
|
(924
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at
beginning of year
|
|
|
3,348
|
|
|
|
3,822
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
15,195
|
|
|
$
|
2,898
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,598
|
|
|
$
|
1,355
|
|
Income taxes (to Holding Company)
|
|
|
195
|
|
|
|
65
|
|
Transfers from loans to repossessed
assets
|
|
|
48
|
|
|
|
70
|
|
See accompanying notes to unaudited financial statements.
F-68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
Six Months Ended
|
|
Common Stock
|
|
|
Capital
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
June 30, 2006 and 2005
|
|
Shares
|
|
|
Amount
|
|
|
Surplus
|
|
|
Earnings
|
|
|
Income
|
|
|
Equity
|
|
|
|
(In thousands, except per share data)
|
|
|
Balance at January 1, 2006
|
|
|
15
|
|
|
$
|
300
|
|
|
$
|
5,945
|
|
|
$
|
3,065
|
|
|
$
|
(167
|
)
|
|
$
|
9,143
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
672
|
|
|
|
|
|
|
|
672
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33
|
)
|
|
|
(33
|
)
|
Cash dividends declared,
$41.93 per share (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(629
|
)
|
|
|
|
|
|
|
(629
|
)
|
Noncash compensation expense
attributed to stock option & Employee Stock Purchase
Plan grants
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006
|
|
|
15
|
|
|
$
|
300
|
|
|
$
|
5,961
|
|
|
$
|
3,108
|
|
|
$
|
(200
|
)
|
|
$
|
9,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2005
|
|
|
15
|
|
|
$
|
300
|
|
|
$
|
5,945
|
|
|
$
|
3,358
|
|
|
$
|
(80
|
)
|
|
$
|
9,523
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
585
|
|
|
|
|
|
|
|
585
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
6
|
|
Cash dividends declared,
$21.67 per share (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(325
|
)
|
|
|
|
|
|
|
(325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2005
|
|
|
15
|
|
|
$
|
300
|
|
|
$
|
5,945
|
|
|
$
|
3,618
|
|
|
$
|
(74
|
)
|
|
$
|
9,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited financial statements.
F-69
Kentucky
Banking Centers, Inc.
(A wholly-owned subsidiary of
Farmers Capital Bank Corporation)
|
|
1.
|
Basis of
Presentation and Nature of Operations
|
The accounting and reporting policies of Kentucky Banking
Centers, Inc. (the Bank) conform to accounting
principles generally accepted in the United States of America
and general practices applicable to the banking industry.
The Bank, formerly named Horse Cave State Bank, was originally
organized in 1926 and operates as a State of Kentucky chartered
bank. In 1987 the Bank was acquired by Farmers Capital Bank
Corporation (Farmers Capital), a publicly held
financial holding company located in Frankfort, Kentucky, and
has operated as a wholly-owned subsidiary of Farmers Capital
since that time. The Bank operates three locations; one each in
Glasgow, Horse Cave, and Munfordville. It is engaged in a
general banking business providing full service banking to
individuals, businesses, and government customers. The
Banks operations include one reportable segment:
commercial and retail banking.
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
Banks 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 as of any date other than
December 31 has been prepared from the books and records
without audit. The accompanying consolidated financial
statements have been prepared in accordance with the rules on
quarterly financial information and
Rule 10-01
of
Regulation S-X
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, consisting of normal recurring
adjustments, necessary for a fair presentation of such financial
statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the
results to be expected for the full year.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Companys
Annual Financial Statements for the year ended December 31,
2005.
|
|
2.
|
Recently
Issued Accounting Standards
|
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment, that requires the cost
resulting from stock options be measured at fair value and
recognized in earnings. This Statement replaces
SFAS No. 123, Accounting for Stock-Based
Compensation and supersedes Accounting Principles
Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, which permitted the
recognition of compensation expense using the intrinsic value
method. The adoption of SFAS No. 123(R) did not have a
material impact on the Banks results of operations or financial
condition.
In November 2005, the FASB issued FASB Staff Position
(FSP) No. FAS 123(R)-3,
Transition Election to Accounting for the Tax Effects
of Share-Based Payment Awards. This FSP provides a
simplified method to calculate the Banks hypothetical
additional paid-in capital (APIC) pool for the
beginning balance of excess tax benefits and the method of
determining the subsequent impact on the pool of option awards
that are outstanding and fully or partially vested upon adoption
of SFAS 123(R). This FSP allows companies up to one year
from the later of the adoption date of SFAS 123(R) or
November 10, 2005 to evaluate the available
F-70
Kentucky
Banking Centers, Inc.
Notes to Unaudited Financial Statements
(Continued)
transition alternatives and make a one-time election. The Bank
is currently evaluating the impact of the new method provided by
this guidance.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial
Instruments, an amendment of SFAS No. 133
and SFAS No. 140. This statement permits fair value
re-measurement for any hybrid financial instrument that contains
an embedded derivative that otherwise would require bifurcation.
It establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring
bifurcation. In addition, SFAS 155 clarifies which
interest-only strips and principal-only strips are not subject
to the requirements of Statement 133. It also clarifies
that concentrations of credit risk in the form of subordination
are not embedded derivatives. SFAS 155 amends
Statement 140 to eliminate the prohibition on a qualifying
special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than
another derivative financial instrument. This Statement is
effective for all financial instruments acquired or issued after
the beginning of an entitys first fiscal year that begins
after September 15, 2006. The Bank is evaluating the
impact, if any, of the adoption of this Statement on its
financial results.
In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets.
This Statement amends SFAS No. 140,
Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, and
requires that all separately recognized servicing assets and
servicing liabilities be initially measured at fair value, if
practicable and permits the entities to elect either fair value
measurement with changes in fair value reflected in earnings or
the amortization and impairment requirements of
SFAS No. 140 for subsequent measurement. The
subsequent measurement of separately recognized servicing assets
and servicing liabilities at fair value eliminates the necessity
for entities that manage the risks inherent in servicing assets
and servicing liabilities with derivatives to qualify for hedge
accounting treatment and eliminates the characterization of
declines in fair value as impairments or direct write-downs.
This Statement is effective as of the beginning of an
entitys first fiscal year that begins after
September 15, 2006. The Bank is evaluating the impact, if
any, of the adoption of this Statement on its financial results.
In June 2006, the FASB issued FASB Interpretation No.
(FIN) 48 Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109, to clarify certain aspects of accounting
for uncertain tax positions, including issues related to the
recognition and measurement of those tax positions taken or
expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition. This interpretation is effective for fiscal years
beginning after December 15, 2006. The Bank is in the
process of evaluating the impact of the adoption of this
interpretation on the Banks results of operations and
financial condition.
|
|
3.
|
Stock-Based
Compensation
|
In 1997, Farmers Capitals Board of Directors approved a
nonqualified stock option plan (the Plan) that
provides for granting of options to acquire Farmers Capital
stock to key employees and officers of the Bank. All stock
options are awarded at a price equal to the fair market value of
Farmers Capitals common stock at the date the options are
granted and expire ten years from the date of the grant.
F-71
Kentucky
Banking Centers, Inc.
Notes to Unaudited Financial Statements
(Continued)
Prior to January 1, 2006, the Bank and Farmers Capital
accounted for its Plan under the recognition and measurement
provisions of APB Opinion No. 25 and related
interpretations as allowed by SFAS No. 123. Effective
January 1, 2006, the Bank and Farmers Capital adopted the
fair value recognition provisions of SFAS No. 123(R)
applying the modified-prospective application. Under the
modified-prospective application, prior year amounts are not
restated. The following table presents the effect on net income
and earnings per share prior to adoption as if expense was
measured using the fair value recognition provisions of
SFAS No. 123(R).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
288
|
|
|
$
|
585
|
|
Less: Stock-based compensation
expense determined under fair value based method for all awards,
net of related tax effects
|
|
$
|
(3
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
Proforma
|
|
$
|
285
|
|
|
$
|
577
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Common Share (in
thousands)
|
|
|
|
|
|
|
|
|
Basic and diluted, as reported
|
|
$
|
19.19
|
|
|
$
|
39.01
|
|
Basic and diluted, proforma
|
|
$
|
19.00
|
|
|
|
38.47
|
|
The amount of stock-based compensation attributed to Farmers
Capitals stock option grants included in net income was
$8,000 and $15,000 for the three and six month periods ended
June 30, 2006. In addition, there was $16,000 in
compensation cost related to unvested options not recognized at
June 30, 2006, with a weighted-average period of
7 months over which the cost is expected to be recognized.
There were no modifications or cash paid to settle stock option
awards during the six months ended June 30, 2006.
Certain eligible employees of the Bank also participate in
Farmers Capitals Employee Stock Purchase Plan
(ESPP). During 2005 there was no stock-based
compensation expense recorded related to the ESPP. The amount of
stock-based compensation attributed to Farmers Capitals
ESPP included in net income was zero and $1,000 for the three
and six month periods ended June 30, 2006.
|
|
4.
|
Pending
Sale of the Bank
|
On June 1, 2006 the Bank, Farmers Capital, and Citizens
First Corporation (Citizens First) jointly announced
the signing of a definitive agreement for the purchase of the
Bank by Citizens First in a $20 million cash transaction.
Pending the required approvals of Citizens First shareholders,
the appropriate regulatory authorities, and subject to the
satisfaction of the conditions set forth in the definitive
agreement, the transaction is expected to close during the
fourth quarter of 2006.
F-72
900,000 Shares
Common Stock
PROSPECTUS
,
2006
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 24.
|
Indemnification
of Directors and Officers
|
Section 271B-.8-500
et seq. of the Kentucky Business Corporation Act provides us
with broad powers and authority to indemnify our directors and
officers and to purchase and maintain insurance for such
purposes and mandates the indemnification of our directors under
certain circumstances. Our articles of incorporation and bylaws
also provide us with the power and authority to the fullest
extent legally permissible under the Act to indemnify our
directors and officers, persons serving at our request or for
our benefit as directors or officers of another corporation, and
persons serving as our representatives or agents in certain
circumstances. Pursuant to such authority and the provisions of
our articles of incorporation, we have purchased insurance
against certain liabilities that may be incurred by the company
and our officers and directors.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers,
and controlling persons of the company pursuant to the articles
of incorporation or bylaws, or otherwise, we have been advised
that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
|
|
Item 25.
|
Other
Expenses of Issuance and Distribution
|
The following table sets forth the costs and expenses, other
than underwriting discounts and commissions, to be paid in
connection with the sale of common stock being registered, all
of which will be paid by Citizens First Corporation. All amounts
are estimates except the SEC filing fee and NASDAQ listing fee.
|
|
|
|
|
SEC filing fee
|
|
$
|
2,173
|
|
NASDAQ filing fee
|
|
|
100,000
|
|
NASD filing fee
|
|
|
2,531
|
|
Printing expenses
|
|
|
60,000
|
|
Legal fees and expenses
|
|
|
100,000
|
|
Accounting fees and expenses
|
|
|
100,000
|
|
Miscellaneous
disbursements(1)
|
|
|
235,296
|
|
|
|
|
|
|
Total
|
|
$
|
600,000
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes reimbursement to the underwriters for expenses of up to
$200,000. |
|
|
Item 26.
|
Recent
Sales of Unregistered Securities
|
On July 16, 2004, the Company sold 250 shares of
Preferred Stock, stated value $31,992 per share, for an
aggregate purchase price of $7,998,000, payable in cash. The
Preferred Stock was offered and sold in a private placement to a
limited number of accredited investors pursuant to the exemption
from registration provided by Section 4(2) of the
Securities Act of 1933 and Rule 506 promulgated thereunder.
Howe Barnes Investments, Inc., Chicago, Illinois, served as the
placement agent in the transaction. The aggregate commission
paid to Howe Barnes Investments was $293,703. The proceeds from
the issuance of the Preferred Stock are being used for general
corporate purposes, including the contribution of capital to
Citizens First Bank. In addition, the Company repaid $3,000,000
of outstanding borrowings under its credit facility. The
Preferred Stock was sold for $31,992 per share and is
entitled to quarterly cumulative dividends at an annual fixed
rate of 6.5%. Each share of Preferred Stock is convertible, at
the option of the holder, into shares of the Companys
Common Stock (i) at any time on and after 3 years from
the date of issuance, and, with respect to shares of Preferred
Stock designated for redemption, on or prior to the close of
business on the day prior to the redemption date or, if earlier,
(ii) at any time on and after a change of control of the
Company (as defined in the Articles of Amendment to the
Companys Articles of Incorporation establishing the terms
of the Preferred Stock). Such shares of Preferred Stock are
convertible into such number of fully paid and nonassessable
shares
II-1
of Common Stock as is determined by dividing the Stated Value
(as adjusted for any stock dividends, combinations, splits or
the like with respect to such shares), by the conversion price
applicable to such share in effect on the date the certificate
is surrendered for conversion. The initial conversion price per
share is $15.50 and is subject to adjustment in certain events.
When shares of Preferred Stock are converted, all accrued
dividends on the Preferred Stock so converted to (and not
including) the date of conversion are immediately due and
payable in cash.
|
|
|
|
|
|
1
|
.1
|
|
Form of underwriting agreement
among Citizens First Corporation, Sandler ONeill +
Partners, L.P. and J.J.B. Hilliard, W.L. Lyons, Inc.
|
|
2
|
|
|
Stock Purchase Agreement among
Citizens First Corporation, Farmers Capital Bank Corporation and
Kentucky Banking Centers, Inc. dated June 1, 2006
(incorporated by reference to Exhibit 2 of the
Registrants
Form 8-K
filed June 7, 2006).
|
|
3
|
.1
|
|
Restated Articles of Incorporation
of Citizens First Corporation, as amended (incorporated by
reference to Exhibit 3.1 of the Companys Registration
Statement on
Form SB-2
(No. 333-103238)).
|
|
3
|
.2
|
|
Articles of Amendment to Amended
and Restated Articles of Incorporation of Citizens First
Corporation (incorporated by reference to Exhibit 3. 3 of
the Registrants
Form 10-QSB
dated June 30, 2004).
|
|
3
|
.3
|
|
Amended and Restated Bylaws of
Citizens First Corporation (incorporated by reference to
Exhibit 3 of the Registrants
Form 8-K
filed April 24, 2006).
|
|
4
|
.1
|
|
Restated Articles of Incorporation
of Citizens First Corporation, as amended (see Exhibit 3.1).
|
|
4
|
.2
|
|
Articles of Amendment to Amended
and Restated Articles of Incorporation of Citizens First
Corporation (see Exhibit 3.2).
|
|
4
|
.3
|
|
Amended and Restated Bylaws of
Citizens First Corporation (see Exhibit 3.3).
|
|
5
|
|
|
Opinion of Wyatt,
Tarrant & Combs, LLP.
|
|
10
|
.1
|
|
Employment Agreement between
Citizens First Corporation and Mary D. Cohron as amended by
First Amendment to Employment Agreement (incorporated by
reference to Exhibit 10.1 of the Registrants
Form 8-K
filed March 17, 2005).*
|
|
10
|
.2
|
|
Employment Agreement between
Citizens First Corporation and Matthew Todd Kanipe (incorporated
by reference to Exhibit 10.3 of the Registrants
Form 8-K
filed March 17, 2005).*
|
|
10
|
.3
|
|
Employment Agreement between
Citizens First Corporation and J. Steven Marcum (incorporated by
reference to Exhibit 10.1 of the Registrants
Form 8-K
filed October 13, 2005).*
|
|
10
|
.4
|
|
Employment Agreement between
Citizens First Corporation and Kim M. Thomas (incorporated by
reference to Exhibit 10.4 of the Registrants
Form 8-K
filed March 17, 2005).*
|
|
10
|
.5
|
|
2002 Stock Option Plan of Citizens
First Corporation (incorporated by reference to
Exhibit 10.13 of the Companys Registration Statement
on
Form SB-2
(No. 333-103238)).*
|
|
10
|
.6
|
|
2003 Non-Employee Directors Stock
Option Plan (incorporated by reference to Exhibit 10.14 of
the Companys Registration Statement on
Form SB-2
(No.
333-103238)).*
|
|
10
|
.7
|
|
Management Bonus Compensation Plan
(incorporated by reference to Exhibit 10 of the
Registrants
Form 8-K
filed January 25, 2006)*
|
|
10
|
.8
|
|
Business Loan Agreement and
related Promissory Note between The Bankers Bank and Citizens
First Corporation dated September 26, 2006 (incorporated by
reference to Exhibit 10.4 of the Registrants
Form 8-K
filed September 27, 2006).
|
|
10
|
.9
|
|
Second Amendment to Employment
Agreement between Citizens First Corporation and Mary D. Cohron
dated August 17, 2006 (incorporated by reference to
Exhibit 10 of the Registrants Form 8-K filed
August 23, 2006).*
|
|
10
|
.10
|
|
First Amendment to Employment
Agreement between Citizens First Corporation and Matthew Todd
Kanipe (incorporated by reference to Exhibit 10.2 of the
Registrants
Form 8-K
filed September 27, 2006).*
|
|
10
|
.11
|
|
First Amendment to Employment
Agreement between Citizens First Corporation and Steve Marcum
(incorporated by reference to Exhibit 10.1 of the
Registrants
Form 8-K
filed September 27, 2006).*
|
II-2
|
|
|
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10
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.12
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First Amendment to Employment
Agreement between Citizens First Corporation and Kim M. Thomas
(incorporated by reference to Exhibit 10.3 of the
Registrants
Form 8-K
filed September 27, 2006).*
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21
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Subsidiaries (incorporated by
reference to Exhibit 21 of the Registrants
Registration Statement on Form
SB-2 (No. 333-103238)).
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23
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.1
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Consent of Crowe Chizek and
Company LLC.
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23
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.2
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Consent of BKD, LLP.
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23
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.3
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Consent of Crowe Chizek and
Company LLC.
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23
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.4
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Consent of Wyatt,
Tarrant, & Combs LLP (appears in its opinion filed as
Exhibit 5).
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24
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Power of Attorney.
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* |
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Denotes a management contract, compensatory plan or arrangement. |
(e) Insofar as indemnification for liabilities under the
Securities Act of 1933 (the Act) may be permitted to
directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, 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 small business issuer 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 small
business issuer 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 is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of
such issue.
(f) The small business issuer hereby undertakes:
(1) For determining any liability under the Securities Act,
to 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 Securities Act as part of this
registration statement as of the time the Commission declared it
effective.
(2) For determining any liability under the Securities Act,
to treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities
offered in the registration statement, and that offering of the
securities at that time as the initial bona fide offering of
those securities.
II-3
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 of filing on
Form SB-2
and authorized this registration statement to be signed on its
behalf by the undersigned, in the City of Bowling Green,
Kentucky, on October 10, 2006.
Citizens First Corporation
Mary D. Cohron
President and Chief Executive Officer
Date: October 10, 2006
In accordance with the Securities Act of 1933, this registration
statement was signed below by the following persons in the
capacities and on the dates indicated.
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/s/ Mary
D. Cohron
Mary
D. Cohron
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President, Chief Executive Officer
And Director (principal executive officer)
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October 10, 2006
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*
Steve
Marcum
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Executive Vice-President and Chief
Financial Officer (principal financial and accounting officer)
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October 10, 2006
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*
Floyd
H. Ellis
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Chairman
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October 10, 2006
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*
Jerry
E. Baker
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Director
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October 10, 2006
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*
Billy
J. Bell
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Director
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October 10, 2006
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*
Barry
D. Bray
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Director
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October 10, 2006
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*
John
C. Desmarais
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Director
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October 10, 2006
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*
John
J. Kelly
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Director
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October 10, 2006
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*
Sarah
G. Grise
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Director
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October 10, 2006
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*
Christopher
B. Guthrie
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Director
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October 10, 2006
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II-4
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*
Joe
B. Natcher
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Director
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October 10, 2006
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*
John
T. Perkins
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Director
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October 10, 2006
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*
Jack
W. Sheidler
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Director
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October 10, 2006
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*
Wilson
L. Stone
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Director
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October 10, 2006
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*By:
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/s/ Mary
D. Cohron
Mary
D. Cohron
Attorney-in-Fact
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October 10, 2006
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II-5
EXHIBIT
INDEX
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1
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.1
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Form of underwriting agreement
among Citizens First Corporation, Sandler ONeill +
Partners, L.P. and J.J.B. Hilliard, W.L. Lyons, Inc.
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2
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Stock Purchase Agreement among
Citizens First Corporation, Farmers Capital Bank Corporation and
Kentucky Banking Centers, Inc. dated June 1, 2006
(incorporated by reference to Exhibit 2 of the
Registrants
Form 8-K
filed June 7, 2006).
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3
|
.1
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Restated Articles of Incorporation
of Citizens First Corporation, as amended (incorporated by
reference to Exhibit 3.1 of the Companys Registration
Statement on
Form SB-2
(No. 333-103238)).
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3
|
.2
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Articles of Amendment to Amended
and Restated Articles of Incorporation of Citizens First
Corporation (incorporated by reference to Exhibit 3. 3 of
the Registrants
Form 10-QSB
dated June 30, 2004).
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3
|
.3
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Amended and Restated Bylaws of
Citizens First Corporation (incorporated by reference to
Exhibit 3 of the Registrants
Form 8-K
filed April 24, 2006).
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4
|
.1
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Restated Articles of Incorporation
of Citizens First Corporation, as amended (see Exhibit 3.1).
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4
|
.2
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Articles of Amendment to Amended
and Restated Articles of Incorporation of Citizens First
Corporation (see Exhibit 3.2).
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4
|
.3
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Amended and Restated Bylaws of
Citizens First Corporation (see Exhibit 3.3).
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5
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Opinion of Wyatt,
Tarrant & Combs, LLP.
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10
|
.1
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Employment Agreement between
Citizens First Corporation and Mary D. Cohron as amended by
First Amendment to Employment Agreement (incorporated by
reference to Exhibit 10.1 of the Registrants
Form 8-K
filed March 17, 2005).*
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10
|
.2
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Employment Agreement between
Citizens First Corporation and Matthew Todd Kanipe (incorporated
by reference to Exhibit 10.3 of the Registrants
Form 8-K
filed March 17, 2005).*
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10
|
.3
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Employment Agreement between
Citizens First Corporation and J. Steven Marcum (incorporated by
reference to Exhibit 10.1 of the Registrants
Form 8-K
filed October 13, 2005).*
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10
|
.4
|
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Employment Agreement between
Citizens First Corporation and Kim M. Thomas (incorporated by
reference to Exhibit 10.4 of the Registrants
Form 8-K
filed March 17, 2005).*
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10
|
.5
|
|
2002 Stock Option Plan of Citizens
First Corporation (incorporated by reference to
Exhibit 10.13 of the Companys Registration Statement
on
Form SB-2
(No. 333-103238)).*
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10
|
.6
|
|
2003 Non-Employee Directors Stock
Option Plan (incorporated by reference to Exhibit 10.14 of
the Companys Registration Statement on
Form SB-2
(No.
333-103238)).*
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10
|
.7
|
|
Management Bonus Compensation Plan
(incorporated by reference to Exhibit 10 of the
Registrants
Form 8-K
filed January 25, 2006)*
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10
|
.8
|
|
Business Loan Agreement and
related Promissory Note between The Bankers Bank and Citizens
First Corporation dated September 26, 2006 (incorporated by
reference to Exhibit 10.4 of the Registrants
Form 8-K
filed September 27, 2006.
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10
|
.9
|
|
Second Amendment to Employment
Agreement between Citizens First Corporation and Mary D. Cohron
dated August 17, 2006 (incorporated by reference to
Exhibit 10 of the Registrants Form 8-K filed
August 23, 2006).
|
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10
|
.10
|
|
First Amendment to Employment
Agreement between Citizens First Corporation and Matthew Todd
Kanipe (incorporated by reference to Exhibit 10.2 of the
Registrants
Form 8-K
filed September 27, 2006).
|
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10
|
.11
|
|
First Amendment to Employment
Agreement between Citizens First Corporation and Steve Marcum
incorporated by reference to Exhibit 10.1 of the
Registrants
Form 8-K
filed September 27, 2006).
|
|
10
|
.12
|
|
First Amendment to Employment
Agreement between Citizens First Corporation and Kim M. Thomas
(incorporated by reference to Exhibit 10.3 of the
Registrants
Form 8-K
filed September 27, 2006).
|
|
21
|
|
|
Subsidiaries (incorporated by
reference to Exhibit 21 of the Registrants
Registration Statement on Form
SB-2 (No. 333-103238)).
|
|
23
|
.1
|
|
Consent of Crowe Chizek and
Company LLC.
|
|
23
|
.2
|
|
Consent of BKD, LLP.
|
|
23
|
.3
|
|
Consent of Crowe Chizek and
Company LLC.
|
|
|
|
|
|
|
23
|
.4
|
|
Consent of Wyatt,
Tarrant, & Combs LLP (appears in its opinion filed as
Exhibit 5).
|
|
24
|
|
|
Power of Attorney.
|
|
|
|
* |
|
Denotes a management contract compensatory plan or arrangement. |