1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
X Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2004
___ Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _______ to _________
Commission File Number 333-67435
CITIZENS FIRST CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)
Kentucky 61-0912615
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1805 Campbell Lane, Bowling Green, Kentucky 42101
(Address of principal executive offices)
Issuer's telephone number, including area code: (270) 393-0700
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
CLASS OUTSTANDING AT NOVEMBER 15, 2004
Common Stock, no par value 844,057
Transitional Small Disclosure Format: Yes ___ No X
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CITIZENS FIRST CORPORATION
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements 3-12
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-20
ITEM 3. Controls and Procedures 21
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities 22
ITEM 6. Exhibits 22
Signatures 23
Exhibits 24-27
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PART 1. FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 2004 December 31, 2003
ASSETS
Cash and due from banks ....................................... $ 4,578,222 $ 5,233,396
Federal funds sold ............................................ 2,976,079 --
------------- -------------
Cash and cash equivalents ................................. 7,554,301 5,233,396
Available for sale securities (amortized cost of $13,472,877 as
of September 30, 2004; $18,953,814 as of December 31, 2003) 13,110,999 18,400,189
Federal Home Loan Bank (FHLB) stock ............................ 576,700 529,800
Mortgage loans held for sale ................................... 586,008 425,100
Loans ......................................................... 140,511,268 134,715,475
Less allowance for loan losses ................................ 1,697,407 1,904,377
------------- -------------
Net loans .................................................. 138,813,861 132,811,098
Premises and equipment, net ................................... 3,684,715 3,913,361
Interest receivable ........................................... 817,986 694,637
Other real estate owned ....................................... 70,000 --
Deferred income taxes ......................................... 688,128 703,673
Goodwill ...................................................... 600,794 384,243
Other assets .................................................. 92,591 424,498
------------- -------------
Total assets ............................................... $ 166,596,083 $ 163,519,995
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits ............................................. $ 12,738,348 $ 14,147,896
Savings, NOW and money market deposits ...................... 59,057,065 49,833,676
Time deposits ............................................... 58,655,104 69,747,520
------------- -------------
Total deposits ............................................ 130,450,517 133,729,092
Federal funds purchased ....................................... -- 662,576
Securities sold under agreements to repurchase ................ 3,983,700 4,756,410
Long-term debt ................................................ 13,000,000 14,000,000
Deferred income taxes ......................................... -- 100,315
Accrued interest and other liabilities ........................ 1,192,172 661,225
------------- -------------
Total liabilities .......................................... 148,626,389 153,909,618
Stockholders' equity:
Preferred stock , no par value, authorized 500 shares; issued 7,659,340 --
and outstanding 250 and 0 shares, respectively
Common stock, no par value, authorized 2,000,000
shares; issued and outstanding 844,057 and 840,447, ....... 9,975,130 9,920,981
shares, respectively
Retained earnings ........................................... 574,063 54,789
Accumulated other comprehensive income ...................... (238,839) (365,393)
------------- -------------
Total stockholders' equity ................................ 17,969,694 9,610,377
------------- -------------
Total liabilities
and stockholders' equity ............................... $ 166,596,083 $ 163,519,995
============= =============
See accompanying notes to condensed consolidated financial statements.
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CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30: 2004 2003
----- ----
INTEREST INCOME
Loans, including fees .................... $ 2,044,843 $ 1,853,329
Federal funds sold ....................... 7,244 3,264
Securities ............................... 123,169 178,051
Other .................................... 6,176 4,225
--------- -----------
Total interest income .................... 2,181,432 2,038,869
INTEREST EXPENSE
Deposits ................................. 513,785 654,036
Other borrowings ......................... 87,558 107,594
--------- ----------
Total interest expense ................... 601,343 761,630
NET INTEREST INCOME ........................ 1,580,089 1,277,239
Provision for loan losses ................ 40,000 85,000
--------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ................ 1,540,089 1,192,239
--------- -----------
NON-INTEREST INCOME
Service charges on deposit accounts ...... 213,918 170,025
Income from the sale of loans ............ 126,907 150,811
Other .................................... 45,790 68,194
---------- ----------
Total non-interest income ................ 386,615 389,030
NON-INTEREST EXPENSES
Compensation and benefits ................ 752,534 656,640
Net occupancy expense .................... 89,370 79,949
Furniture and equipment expense .......... 106,643 105,207
Professional fees ........................ 56,682 35,961
Legal fees ............................... 107,354 38,030
Postage, printing and supplies ........... 22,175 24,619
Processing fees .......................... 96,772 77,909
Advertising .............................. 56,955 37,322
Other .................................... 190,881 195,570
--------- -----------
Total non-interest expenses .............. 1,479,366 1,251,207
---------- -----------
INCOME BEFORE INCOME TAXES ................. 447,338 330,062
Income tax expense ......................... 146,750 110,000
---------- -----------
NET INCOME ................................. 300,588 220,062
PREFERRED DIVIDENDS ........................ (109,671) --
----------- -----------
NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS $ 190,917 $ 220,062
=========== ===========
BASIC EARNINGS PER COMMON SHARE $0.23 $.30
See accompanying notes to condensed consolidated financial statements.
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CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30:
2004 2003
---- ----
INTEREST INCOME
Loans, including fees .............................................. $ 5,900,445 $ 5,158,575
Federal funds sold ................................................. 11,184 14,077
Securities ......................................................... 390,821 467,698
Other .............................................................. 16,721 11,663
--------- -----------
Total interest income .............................................. 6,319,171 5,652,013
INTEREST EXPENSE
Deposits ........................................................... 1,606,506 1,867,601
Other borrowings ................................................... 328,476 280,438
--------- -----------
Total interest expense ............................................. 1,934,982 2,148,039
NET INTEREST INCOME .................................................. 4,384,189 3,503,974
Provision for loan losses .......................................... 160,000 1,728,000
--------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES .......................................... 4,224,189 1,775,974
--------- -----------
NON-INTEREST INCOME
Service charges on deposit accounts ................................ 623,318 490,147
Income from the sale of loans ...................................... 306,367 431,557
Gain (loss) on the sale of securities .............................. (34,368) 144,024
Other .............................................................. 156,163 171,234
--------- ---------
Total non-interest income .......................................... 1,051,480 1,236,962
NON-INTEREST EXPENSES
Compensation and benefits .......................................... 2,284,075 1,916,084
Net occupancy expense .............................................. 273,361 265,735
Furniture and equipment expense .................................... 319,812 295,232
Professional fees .................................................. 155,831 116,041
Legal fees ......................................................... 213,174 98,465
Postage, printing and supplies ..................................... 73,067 84,743
Processing fees .................................................... 312,933 226,970
Advertising ........................................................ 148,719 145,549
Other .............................................................. 567,402 498,142
--------- -----------
Total non-interest expenses ........................................ 4,348,374 3,647,461
--------- -----------
INCOME (LOSS) BEFORE INCOME TAXES .................................... 927,295 (634,525)
Income tax expense (benefit) ......................................... 298,350 (224,250)
------- -----------
NET INCOME (LOSS) .................................................... 628,945 (410,275)
PREFERRED DIVIDENDS .................................................. (109,671) (0)
--------- -----------
NET INCOME (LOSS) AVAILABLE FOR COMMON SHAREHOLDERS .................. $ 519,274 $ (410,275)
=========== ============
BASIC EARNINGS PER COMMON SHARE ...................................... $ 0.62 $ (0.61)
See accompanying notes to condensed consolidated financial statements
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CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30: 2004 2003
---- ----
Balance January 1 .............................................. $ 9,610,377 $ 7,838,252
Net income ................................................... 628,945 (410,275)
Issuance of preferred stock, net of issuance costs of $338,660 7,659,340 --
Issuance of common stock ..................................... 54,149 1,536,732
Payment of preferred dividends, $438.68 per share ............ (109,671) --
Other comprehensive income (loss), net of tax ................ 126,554 (477,345)
------------ -----------
Balance at end of period ....................................... $ 17,969,694 $ 8,487,364
============ ===========
See accompanying notes to condensed consolidated financial statements.
Citizens First Corporation
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
For the nine months ended September 30: 2004 2003
---- ----
Net income .................................................... $628,945 $(410,275)
Other comprehensive income (loss), net of tax:
Unrealized gain (depreciation) on available for sale
securities, net of income taxes (credit) of $65,194 and
$(245,906), arising during the period, ................ 126,554 (477,435)
respectively -------- ---------
Comprehensive income (loss) ................................... $755,499 $(887,710)
======== =========
See accompanying notes to condensed consolidated financial statements.
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CITIZENS FIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30:
2004 2003
----- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................... $ 628,945 $ (410,275)
Items not requiring (providing) cash:
Depreciation and amortization .................................. 340,248 230,814
Provision for loan losses ...................................... 160,000 1,728,000
Amortization of premiums and discounts on securities ........... 15,591 88,124
Net realized loss/(gain) on disposition of investment securities 34,368 (144,024)
Loss on sale of property, plant and equipment .................. 2,259 --
FHLB stock dividends received .................................. (16,300) (11,500)
Deferred income taxes .......................................... (84,770) (601,608)
Mortgage loans held for sale originated ........................ (15,813,061) (34,830,728)
Sale of mortgage loans held for sale ........................... 15,756,853 35,033,928
Changes in:
Accrued interest receivable .................................... (123,349) (39,285)
Other assets ................................................... (106,449) 368
Interest payable and other liabilities ......................... 566,069 70,886
------------ ------------
Net cash used in operating activities ......................... 1,360,404 1,114,700
CASH FLOWS FROM INVESTING ACTIVITIES:
Net changes in loans ............................................. (6,162,763) (38,399,553)
Purchases of premises and equipment .............................. (62,995) (1,874,200)
Proceeds from sale of property, plant and equipment .............. 625 --
Purchase of FHLB stock ........................................... (135,300) (55,900)
Proceeds from maturities of securities available for sale ........ 703,539 18,004,599
Proceeds from sales of securities available for sale ............. 4,727,438 5,480,565
Purchase of securities available for sale ........................ -- (27,298,947)
Purchase of mortgage company and title company ................... -- (398,688)
------------ ------------
Net cash used in investing activities ......................... (929,456) (44,542,124)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits .............................. (3,278,575) 26,626,235
Net increase (decrease) in other borrowings ...................... (1,000,000) 6,100,000
Net decrease in federal funds purchased and repurchase .......... (1,435,286) 634,667
agreements
Issuance of preferred stock ...................................... 7,659,340 --
Dividends paid on preferred stock ................................ (109,671) --
Issuance of common stock ......................................... 54,149 1,536,732
------------ ------------
Net cash provided (used) in financing activities ................. 1,889,957 34,897,634
------------ ------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS ............. 2,320,905 (8,529,790)
Cash and cash equivalents at beginning of period ................. 5,233,396 13,922,817
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ....................... $ 7,554,301 $ 5,393,027
============ ============
Supplemental Cash Flow Information:
Real estate acquired in settlement of loans: $70,000 $ -
See accompanying notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Citizens First Corporation (the
"Company") and its subsidiary, Citizens First Bank, Inc. (the "Bank"), conform
to accounting principles generally accepted in the United States of America and
general practices within the banking industry. The condensed consolidated
financial statements include the accounts of the Company and the Bank. All
significant intercompany transactions and accounts have been eliminated in
consolidation.
Certain information and note disclosures normally included in the Company's
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-KSB annual report for 2003 filed with the
Securities and Exchange Commission.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates used in the preparation of the financial
statements are based on various factors including the current interest rate
environment and the general strength of the local economy. Changes in the
overall interest rate environment can significantly affect the Company's net
interest income and the value of its recorded assets and liabilities. Actual
results could differ from those estimates used in the preparation of the
financial statements.
The financial information presented has been prepared from the books and records
of the Company and is not audited. The accompanying condensed consolidated
financial statements have been prepared in accordance with the instructions to
Form 10-QSB and do not include all of the information and the footnotes required
by accounting principles generally accepted in the United States of America for
complete statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been reflected in the accompanying unaudited financial
statements. Results of interim periods are not necessarily indicative of results
to be expected for the full year. Those adjustments consist only of normal
recurring adjustments. The condensed consolidated balance sheet of the Company
as of December 31, 2003, has been derived from the audited consolidated balance
sheet of the Company as of that date.
On December 9, 2002, the board of directors adopted the 2002 Stock Option Plan,
which became effective subject to the approval of the Company's shareholders at
the annual meeting in April 2003. The purpose of the plan is to afford key
employees an incentive to remain in the employ of the Company and its
subsidiaries and to use their best efforts on its behalf. 120,000 shares of
Company common stock have been reserved for issuance under the plan.
On January 17, 2003, the board of directors adopted the 2003 Stock Option Plan
for Non-Employee Directors, which became effective subject to the approval of
the Company's shareholders at the annual meeting in April 2003. The purpose of
the plan is to assist the Company in promoting a greater identity of interest
between the Company's non-employee directors and shareholders, and in attracting
and retaining non-employee directors by affording them an opportunity to share
in the Company's future successes. 40,000 shares of common stock have been
reserved for issuance under the plan.
The 2002 Stock Option Plan and the 2003 Stock Option Plan for Non-Employee
Directors were approved at the Company's Annual Meeting of Shareholders on April
17, 2003. On January 14, 2004, the Company granted options to purchase 40,000
shares under the employee stock option plan and 5,000 shares under the
non-employee stock option plan. On May 20, 2004, the Company granted options to
purchase 4,500 shares under the non-employee stock option plan.
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The Company accounts for these plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under this plan had an exercise price
equal to the market value of the underlying common stock on the grant date. The
following tables illustrates the effect on net income and earnings per share if
the Company had applied the fair value provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation,
for the quarter and nine months ended September 30, 2004.
Quarter Ended September 30
2004 2003
------- -------
Net income, as reported ......................... $300,588 $ 220,062
Less: Total stock-based employee compensation
cost determined under the
fair value based method, net of income taxes .... 7,564 --
Pro forma net income ............................ $293,024 $ 220,062
Earnings per share:
Basic - as reported ............................. $ 0.23 $ 0.30
Basic - pro forma ............................... $ 0.22 $ 0.30
Nine Months Ended September 30
2004 2003
----------- -------------
Net income, as reported .................... $628,945 $ (410,275)
Less: Total stock-based employee
compensation cost determined under the
fair value based method, net of income taxes 42,839 --
Pro forma net income ....................... $586,106 $ (410,275)
Earnings per share:
Basic - as reported ........................ $ 0.62 $ (0.61)
Basic - pro forma .......................... $ 0.57 $ (0.61)
The Company's 2002 Stock Option Plan is a fixed option plan under which the
Company may grant options that vest over 3 years to selected employees for up to
120,000 shares of common stock. The Company's 2003 Stock Option Plan is a fixed
option plan under which the Company may grant options that vest immediately to
selected non-employee directors for up to 40,000 shares of common stock. The
exercise price of each option is intended to equal the fair value of the
Company's stock on the date of grant. An option's maximum term is 10 years.
A summary of the status of the plans at September 30,2004 and 2003, and changes
during the periods then ended is presented below:
2004 2003
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
-------------------------------------------------------------------------------
Outstanding, beginning of year -- $ -- -- $ --
Granted 49,500 $ 14.17 --
Exercised -- -- --
Forfeited -- -- --
Expired -- -- --
Outstanding, end of period 49,500 $ 14.17 0 $ --
Options exercisable, end of period 9,500 --
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The fair value of options granted is estimated on the date of the grant using an
option-pricing model with the following weighted-average assumptions:
2004
---------
Dividend yields 0%
Volatility factors of expected market price of common stock 19.90%
Risk-free interest rates 1.00%
Expected life of options 10 Years
Weighted-average fair value of options granted during the year $ 168,795
The following table summarizes information about stock options under the plans
outstanding at September 30, 2004:
Options Outstanding Options Exercisable
Range of Number Weighted-Average Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------------------------------------------------------------------------------------------------------------
$14.25 40,000 10 years $14.25 0 $14.25
$14.25 5,000 10 years $14.25 5,000 $14.25
$13.40 4,500 10 years $13.40 4,500 $13.40
(2) RECLASSIFICATIONS
Certain reclassifications have been made to the 2003 financial statements to
conform to the 2004 financial statement presentation. These reclassifications
had no effect on net earnings.
(3) ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the stated periods was as follows:
SEPTEMBER 30, DECEMBER 31,
-------------------------------
2004 2003
-------------------------------
Balance, beginning of year ................................. $ 1,904,377 $ 1,300,258
Provision charged to expense ............................... 160,000 1,808,000
Loans charged off, net of recoveries of $5,120 for September
30, 2004 and $13,714 for December 31, 2003 .............. (366,970) (1,203,881)
----------- -----------
Balance, September 30, 2004 and December 31, 2003,respectively $ 1,697,407 $ 1,904,377
=========== ===========
(4) STOCK OFFERING
In February 2003, the Company filed a Registration Statement on Form SB-2 with
the Securities and Exchange Commission for the offering and sale of up to
$10,000,000 of shares of the Company's common stock. The offering was completed
in November 2003 netting proceeds to the Company of $2,563,503. The proceeds of
the offering were used to strengthen the Bank's capital base and position it to
continue to exceed minimum regulatory capital ratios, which will allow for
future growth.
(5) ACQUISITION OF COMMONWEALTH MORTGAGE AND SOUTHERN KENTUCKY LAND TITLE
On January 2, 2003, the Bank acquired all of the outstanding stock of
Commonwealth Mortgage of Bowling Green, Inc. and Southern Kentucky Land Title,
Inc. Commonwealth Mortgage originates 1-4 family residential mortgages for sale
in the secondary mortgage market, while Southern Kentucky Land Title provides
title insurance agency
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services for real estate purchase contracts. The purchase
price for Commonwealth Mortgage and Southern Kentucky Land Title consisted of
$400,000 in cash plus a deferred contingent purchase price of up to $1,350,000
payable upon the combined entities' achievement of specified annual earnings
targets over a five year period, plus 25% of the amount, if any, by which their
earnings exceed such targets. 25% of the deferred purchase price will be paid by
the issuance of the Company's common stock, valued at the average of the closing
sales price of the stock over the last ten trading days of the applicable
calendar year. At the Company's option, an additional 25% of such deferred
purchase price, if any, may be paid in shares of the Company's common stock. The
deferred contingent purchase price will be accounted for as additional purchase
price at the time the contingency is resolved. The Bank also purchased the .2
acre site on which the main office of Commonwealth Mortgage is located for a
purchase price of $272,500 in cash. Goodwill recognized in the initial
transaction amounted to $380,000, all of which was assigned to the Bank. In
January 2004, the Bank paid $162,401 in cash, and in April 2004 the Company
issued 3,610 shares of the Company's common stock, to the former Commonwealth
shareholders as the first installment of the deferred contingent purchase price.
At September 30, 2004, goodwill from this transaction totaled $600,794.
The acquisition of Commonwealth Mortgage and Southern Kentucky Land Title was
completed to give the Bank an expanded presence in the local mortgage
origination market, to further expand the Bank's customer service offerings and
to supplement the Bank's non-interest fee income.
(6) REGULATORY PROCEEDINGS
In August 2003, the Bank and its primary regulators entered into a regulatory
agreement in order to improve the Bank's performance. As a result of the
agreement, the Bank implemented several steps included in the agreement,
including refining and refocusing the Bank's credit risk analysis, underwriting,
monitoring and evaluation functions. The Bank also implemented comprehensive
loan review procedures, reviewed the lending authority of loan officers and the
loan committee and addressed staffing requirements. Among other things, the
agreement required the Bank to maintain a leverage ratio of at least 7%
throughout the term of the agreement. Subsequent to September 30, 2004,
following a regulatory examination of the Bank, the agreement was terminated.
(7) CUMULATIVE CONVERTIBLE PREFERRED STOCK OFFERING
The Company completed during the third quarter of 2004 the private placement of
250 shares of Cumulative Convertible Preferred Stock, stated value $31,992 per
share (Preferred Stock), for an aggregate purchase price of $7,998,000. The
Preferred Stock was sold for $31,992 per share, is entitled to quarterly
cumulative dividends at an annual fixed rate of 6.5% and is convertible into
shares of common stock of the Company at an initial conversion price per share
of $15.50 on and after three years from the date of issuance. The sale of the
Preferred Stock netted proceeds to the Company of $7,659,340, of which
$3,011,970 (including $3,000,000 in principal and $11,970 in accrued interest)
was used to repay the outstanding balance under the Company's line of credit,
and $3,800,000 was contributed to the capital of the Bank. The remaining
proceeds from the issuance of the Preferred Stock are being used for general
corporate purposes, including the contribution of capital to the Bank.
(8) EARNINGS PER SHARE
Basis earnings per share is computed by dividing net income available for common
shareholders by the weighted-average number of common shares outstanding for the
period. Convertible preferred stock was excluded for purposes of calculating
diluted earnings per share as it was determined that conversion had an
anti-dilutive effect on earnings per share. The following table reconciles the
numerator and denominator of the basic and diluted per share computations for
net income.
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Three months ended Nine months ended
September 30 September 30
------------ ------------
2004 2003 2004 2003
------ ------ -------- --------
NUMERATOR:
Net income before preferred dividends ....... $ 300,588 $ 220,062 $ 628,945 $ (410,275)
Preferred dividends.......................... (109,671) 0 (109,671) 0
--------- --------- ----------- ---------
Net income available for common
shareholders - numerator for basic
earnings per share ...................... $ 190,917 $ 220,062 $ 519,274 $ (410,275)
============ =========== ========== ===========
Denominator:
Basic weighted-average shares
outstanding ............................. 844,057 723,135 842,962 671,207
Basic earnings per share:
Net income .......................... ....... $ 0.36 $ 0.30 $ 0.75 $ (0.61)
Preferred dividends.......................... (0.13) 0.00 (0.13) .00
----------- --------- ----------- ----------
Basic earnings per share .................... $ 0.23 $ 0.30 $ 0.62 $ (0.61)
=========== ========= =========== ==========
(9) SUBSEQUENT EVENTS
Effective October 1, 2004, the Company elected to self-insure certain costs
related to employee health and accident benefit programs. The Company has
purchased insurance that limits its annual exposure for individual claims and
that limits its aggregate annual exposure to $118,641 during the initial year of
the plan. Future insurance costs that limit the Company's exposure for
individual claims and aggregate exposure will be determined annually, based
primarily upon the Company's actual claim history for the previous year.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Citizens First Corporation ("the Company") was incorporated in Kentucky on
December 24, 1975 for the purpose of conducting business as an investment club,
and is headquartered in Bowling Green, Kentucky. In late 1998 and early 1999,
the Company received regulatory approval to become a bank holding company under
the Bank Holding Company Act of 1956, as amended (the"BHCA"), through its
organization and ownership of its subsidiary, Citizens First Bank, Inc. (the
"Bank"). On February 17, 1999 the Company completed the initial public offering
of the sale of 536,667 shares of its no par value common stock. The Company,
through the Bank, is now involved in the banking business, primarily serving
customers in the Bowling Green/Warren County market and in the Franklin/Simpson
County market. As of September 30, 2004, the Company and Bank employed sixty-six
employees (fifty-seven full-time equivalent employees).
The Bank commenced operations as a newly chartered commercial bank in February
1999 at 1805 Campbell Lane, Bowling Green, Kentucky. The Bank opened a branch
office at 901 Lehman Avenue, Bowling Green, Kentucky in March 1999. In January
2003 the Bank acquired Commonwealth Mortgage and Southern Kentucky Land Title,
Inc. located at 1301U.S. Highway 31-W Bypass in Bowling Green, Kentucky. The
Bank opened branch offices at 2451 Fitzgerald-Industrial Drive, Bowling Green,
Kentucky and at 1200 South Main Street, Franklin, Kentucky in February 2003.
The Bank was organized as a community oriented, full service alternative to the
super-regional financial institutions which dominate its primary service area.
The Bank's mission is to firmly establish itself in its primary service area as
a community owned and operated full-service bank providing traditional products
and services typically offered by commercial banks. The Bank believes that its
ability to compete is enhanced by its local management and its base of local
shareholders and directors. The Bank has emphasized and intends to continue
emphasizing its Bowling Green and southern Kentucky roots, and the Bank has a
philosophy of giving its customers prompt and responsive personal service.
The Company's corporate strategy focuses on providing the Bank's customers with
high quality, personal banking services. The Bank offers products designed to
meet the needs of its customers that include individuals, small businesses,
partnerships and corporations. The Bank provides a full range of corporate and
retail banking services that include checking, savings, and time deposit
accounts; secured and unsecured loans to corporations, individuals, and others;
letters of credit; rental of safe deposit boxes; and cash management services.
The Bank also offers, through affiliations with third parties, trust services,
investment management services, and business and personal insurance products.
The Bank offers a full range of deposit services. Checking account services
include regular non-interest bearing checking accounts as well as interest
bearing negotiable order of withdrawal ("NOW") accounts. Savings and certificate
of deposit accounts include accounts ranging from a daily maturity (regular
savings and also money market accounts) to longer-term certificates as
authorized by law. In addition, retirement accounts such as IRA's (Individual
Retirement Accounts) are available. All deposit accounts are insured by the
Federal Deposit Insurance Corporation to the full amount permitted by law.
Deposit accounts are solicited from individuals, businesses, professional
organizations and governmental authorities.
Lending services include a full range of commercial, personal, and mortgage
loans. The Bank's primary focus is on business lending. The types of commercial
loans that are available include both secured and unsecured loans for working
capital (including inventory and receivables), business expansion (including
acquisition of real estate and improvements) and purchase of machinery and
equipment. The Bank does not emphasize real estate lending for land acquisition,
land development or open-end construction loans. The types of personal loans
that are available include secured and unsecured loans for such purposes as
financing automobiles, home improvements, education
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and personal investments.
The Bank originates, processes and closes residential real estate loans that are
then sold on the secondary market (each individually) to a correspondent.
The Bank offers credit cards (through correspondent banking services) including
MasterCard (TM) and Visa(TM) as well as a personal checking account related line
of credit. The line of credit is available for both protection against
unexpected overdrafts and also for the convenience of having a pre-arranged loan
that can be activated simply by a check drawn on a personal checking account.
Other services offered include, but are not limited to, safe deposit boxes,
letters of credit, travelers checks, direct deposit of payroll, social security
and dividend payments and automatic payment of insurance premiums and mortgage
loans. The Bank does not have a proprietary automated teller machine network but
participates in a national ATM network through the FiServ EFT network, and
through the Visa Debit Card Program.
The Bowling Green economy is diversified, with financial and other service
industries representing the largest industry segment. The local unemployment
rate of approximately 4.2% is lower than the national unemployment rate of
approximately 5.6%. The Company's competition in the local market consists
mainly of regional and national financial institutions. In the Bank's primary
service area, there are 14 commercial banks, of which 4 are considered to have
their headquarters in the Bank's service area. In addition, there are various
credit unions, mortgage companies, and other commercial banks that have loan
production offices in the area. The Bank encounters strong competition from
these financial institutions, for deposits, loans, and other financial services,
as well as from insurance companies, brokerage firms and other financial
institutions, some of which are not subject to the same degree of regulation and
restrictions as the Bank. Many of these competitors have substantially greater
resources and lending limits than the Bank has to offer and certain services,
such as international banking services, which the Bank is not providing.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States and follow general
practices within the financial services industry. The most significant
accounting policies followed by the Company are presented in Note 1 of the Notes
to the Condensed Consolidated Financial Statements included in this report.
These policies, along with the disclosures presented in the other financial
statement notes and in this financial review, provide information on how
significant assets and liabilities are valued in the financial statements and
how those values are determined. Based on the valuation techniques used and the
sensitivity of financial statement amounts to the methods, assumptions, and
estimates underlying those amounts, management has identified the determination
of the allowance for loan losses to be the accounting area that requires the
most subjective or complex judgments, and as such could be most subject to
revision as new information becomes available.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's estimate of probable
credit losses inherent in the loan portfolio. Determining the amount of the
allowance for loan losses is considered a critical accounting estimate because
it requires significant judgment and the use of estimates related to the amount
and timing of expected future cash flows on impaired loans, estimated losses on
loans based on historical loss experience, and consideration of current economic
trends and conditions, all of which may be susceptible to significant change.
The loan portfolio also represents the largest asset type on the consolidated
balance sheet. Note 1 of the Notes to the Consolidated Financial Statements
included in the Company's 2003 Annual Report on Form 10-KSB describes the
methodology used to determine the allowance for loan losses, and a discussion of
the factors driving changes in the amount of the allowance for loan losses is
included under "Asset Quality" below.
Loans that exhibit probable or observed credit weaknesses are subject to
individual review. Where appropriate, reserves are allocated to individual loans
based on management's estimate of the borrower's ability to repay the loan given
the availability of collateral, other sources of cash flow and legal options
available to the Company. Included
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in the review of individual loans are those
that are impaired as provided in SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." The Company evaluates the collectibility of both
principal and interest when assessing the need for a loss accrual. Historical
loss rates are applied to other loans not subject to reserve allocations. These
historical loss rates may be adjusted for significant factors that, in
management's judgment, reflect the impact of any current conditions on loss
recognition. Factors which management considers in the analysis include the
effects of the national and local economies, trends in the nature and volume of
loans (delinquencies, charge-offs and nonaccrual loans), changes in mix, asset
quality trends, risk management and loan administration, changes in internal
lending policies and credit standards, and examination results from bank
regulatory agencies and the Company's internal credit examiners.
An unallocated reserve is maintained to recognize the imprecision in estimating
and measuring losses when evaluating reserves for individual loans or pools of
loans. Reserves on individual loans and historical loss rates are reviewed
quarterly and adjusted as necessary based on changing borrower and/or collateral
conditions and actual collection and charge-off experience.
The Company has not substantively changed any aspect to its overall approach in
the determination of the allowance for loan losses. There have been no material
changes in assumptions or estimation techniques as compared to prior periods
that impacted the determination of the current period allowance.
Based on the procedures discussed above, management is of the opinion that the
reserve of $1,697,407 was adequate, but not excessive, to absorb estimated
credit losses associated with the loan portfolio at September 30, 2004.
DEFERRED TAX ASSETS
The Company has a deferred tax asset of approximately $688,000. The Company
evaluates this asset on a quarterly basis. To the extent the Company believes it
is more likely than not that it will not be utilized, the Company will establish
a valuation allowance to reduce its carrying amount to the amount it expects to
be realized. At September 30, 2004 no valuation allowance has been established
against the outstanding deferred tax asset. The deferred tax asset will be
utilized as the Company is profitable or as the Company carries back tax losses
to periods in which it paid income taxes. The estimate of the realizable amount
of this asset is a critical accounting policy.
RESULTS OF OPERATIONS
For the three months ended September 30, 2004, the Company reported net income
of $300,588, or $0.23 per basic common share, compared to net income of
$220,062, or $.30 per basic for the same period ended September 30, 2003.
For the nine months ended September 30, 2004, the Company reported net income of
$628,945, or $0.62 per basic common share, compared to a net loss of $(410,275),
or $(0.61) per basic and diluted common share, for the same period ended
September 30, 2003.
NET INTEREST INCOME
Net interest income was $1,580,089 in the third quarter of 2004, compared with
$1,277,239 in the comparable period in 2003. Third quarter 2004 interest income
of $2,181,432, an increase of $142,563 or 7.0% over the same period in 2003,
includes $2,044,843 income on loans, $123,169 income on securities, and $13,420
income on federal funds sold and other interest-bearing accounts. Interest
income of $2,038,869 during the third quarter of 2003 included $1,853,329 of
income on loans, $178,051 income on investment securities, and $7,489 income on
federal funds sold and other interest-bearing accounts. Interest expense of
$601,343 for the third quarter of 2004, down $160,287 or 21.0% from the same
period in 2003, consists of interest on deposits of $513,785, and on other
borrowings of $87,558. Third quarter 2003 interest expense of $761,630 consisted
of interest on deposits of $620,314, and interest on other borrowings of
$107,594. An increase in yields on interest earning assets, coupled
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with a drop in the cost of interest-bearing liabilities, and a slight increase
in the amount of interest earning assets, contributed to the increase in net
interest income in the third quarter of 2004, compared to the same quarter of
2003. The drop in the cost of interest-bearing liabilities in the third quarter
of 2004, compared to the same period in 2003,
was primarily due to the continued repricing of loans of the Bank after the
reduction of short-term interest rates by the Federal Reserve during 2001 of
475 basis points, of another 50 basis points during the fourth quarter of 2002,
and 25 basis points during the second quarter of 2003. The increase in yields
on interest earning assets during the third quarter of 2004, compared to the
same period of 2003, is primarily attributable to the increase by 75 basis
points of short-term interest rates since late June2004. The Bank is asset
sensitive, meaning assets reprice faster to changes in short-term rates than do
liabilities. In a rising short-term rate environment, such as occurred during
the third quarter of 2004, more of the Bank's interest earning assets, primarily
loans, reprice up faster than do the liabilities, specifically certificates of
deposit, which provide the funding for the assets.
Net interest income was $4,384,189 for the nine months ended September 30, 2004,
an increase of $880,215 or 25.1% over the total of $3,503,974 for the same
period of 2003. Interest income of $6,319,171 for the first nine months of 2004
included $5,900,445 income on loans, $390,821 income on investment securities,
and $27,905 income on federal funds sold and other interest-bearing accounts.
Total interest income of $5,652,013 for the first nine months of 2003 consisted
of $5,158,575 income on loans, $467,698 income on investment securities, and
$25,740 income on federal funds sold and other interest-bearing accounts.
Interest expense for the first nine months of 2004 totaled $1,934,982, and
included $1,606,506 interest on deposits, and $328,476 expense on other
borrowings. The comparable period of 2003 had interest expense of $2,148,039, of
which $1,867,601 was interest on deposits, and $280,438 was expense on other
borrowings.
PROVISION FOR LOAN LOSSES
The provision for loan losses expense for the three months ended September 30,
2004, was $40,000, a decrease of $45,000 over the total of $85,000 for the same
quarter of 2003.
The provision for loan losses expense was $160,000 for the first nine months of
the year, compared to $1,728,000 for the same period of 2003, a decrease of
$1,568,000. Of this decrease, $1,087,000 was specifically allocated during the
second quarter of 2003 for three loans to one borrower, totaling $1,675,000. As
the result of a periodic regulatory examination of the Bank which concluded in
July 2003, the provision was also specifically increased $229,050, during the
third quarter of 2003, for two potential problem loans, totaling $49,000 and
$1,478,000, respectively.
NON-INTEREST INCOME
Non-interest income for the three months ended September 30, 2004 and 2003,
respectively, was $386,615 and $389,030, a decrease of $2,415 or 0.6%. Income
from service charges on deposit accounts increased $43,893, or 25.8%, from
$170,025 during the third quarter of 2003 to $213,918 for the third quarter of
2004. The increase is primarily attributable to growth in accounts subject to
service charges. Income from the sale of secondary market loans decreased
$23,904, from $150,811 during the third quarter of 2003 to $126,907 for the same
period of 2004, primarily due to the high volume of refinancing activity during
the third quarter of 2003, when long-term mortgage rates were at historically
low levels.
Non-interest income for the nine months ended September 30, 2004 and 2003,
respectively, was $1,051,480 and $1,236,962, a decrease of $185,482 or 15.0%.
Service charges on deposit accounts comprised the largest part of non-interest
income for both nine-month time periods, totaling $623,318 and $490,147 for 2004
and 2003, respectively. Income from the sale of secondary market loans decreased
to $306,367 for the first nine months of 2004 from $431,557 for the same period
of 2003. Losses from the sale of investment securities during the first nine
months of 2004 totaled $(34,368), compared to gains of $144,024 for the same
period of 2003.
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NON-INTEREST EXPENSE
Non-interest expense was $1,479,366 in the third quarter of 2004, up from
$1,251,207 in the same quarter of 2003, an increase of $228,159 or 18.2%. The
opening of full service branches in Bowling Green and Franklin, Kentucky, and
the acquisition of a mortgage origination company, accounted for approximately
$81,000 of the increase in non-interest expense during the third quarter of
2004, compared to the same period of 2003. Legal fees increased by $69,324, or
182.3%, in the third quarter of 2004, compared to the same period of 2003,
primarily as a result of fees and expenses incurred in pursuing collection of
previously charged off loans. Other cost increases are primarily associated
with servicing the growing customer base.
For the nine months ended September 30, 2004 and 2003, respectively,
non-interest expense was $4,348,374 and $3647,461, an increase of $700,913, or
19.2%. The non-interest expense associated with the two new branches and the
mortgage origination company accounted for approximately $269,000 of the
increase during the first nine months of 2003. Legal fees increased by $114,709,
or 116.5%, during the first nine months of 2004, compared to the same period of
2003, to $213,174 from $98,465.
INCOME TAXES
Income tax expense has been calculated based on the Company's expected annual
rate for 2004. During the third quarter of 2004, income tax expense totaled
$146,750 compared to $110,000 for the same period of 2003. For the nine months
ended September 30, 2004, the income tax expense totaled $298,350, compared to a
tax benefit of $(224,250) for the same period of 2003. Deferred tax liabilities
and assets are recognized for the tax effects of differences between the
financial statement and tax bases of assets and liabilities.
BALANCE SHEET REVIEW
OVERVIEw
Total assets at September 30, 2004 were $166,596,083, up from $163,519,995 at
December 31, 2003 and up from $162,278,124 a year ago. Average total assets for
the third quarter of 2004 were $166,374,945, up $5,767,201 from the third
quarter of 2003 average of $160,607,744.
LOANS
At September 30, 2004 loans (excluding mortgage loans held for sale) totaled
$140,511,268, compared with $134,715,475 at December 31, 2003 and $133,229,215 a
year ago, an increase of $5,795,793 and $7,282,053 respectively. Loans averaged
$140,547,234 during the third quarter of 2004, an increase of $5,795,793 or
4.3%, over the average total of $134,715,475 for the third quarter of 2003.
ASSET QUALITY
Non-performing loans are defined as non-accrual loans, loans accruing but past
due 90 days or more, and restructured loans. Management classifies commercial
and commercial real estate loans as non-accrual when principal or interest is
past due 90 days or more and the loan is not adequately collateralized and is in
the process of collection, or when, in the opinion of management, principal or
interest is not likely to be paid in accordance with the terms of the
obligation. Consumer loans are charged off after 120 days of delinquency unless
adequately secured and in the process of collection. Non-accrual loans are not
reclassified as accruing until principal and interest payments are brought
current and future payments appear reasonably certain. Loans are categorized as
restructured if the original interest rate, repayment terms, or both were
restructured due to deterioration in the financial condition of the borrower.
However, restructured loans that demonstrate performance under the restructured
terms and that yield a market rate of interest may be removed from restructured
status in the year following the restructure.
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The Bank had non-performing loans totaling $727,007 at September 30, 2004,
compared to $653,170 at December 31, 2003 and $566,000 at September 30, 2003.
Included in the non-performing loan total at September 30, 2004 is the remaining
portion, totaling $518,052, of three loans to one borrower, that were placed on
non-accrual status during the second quarter of 2003. The three loans,
originally totaling $1,675,000, are secured by substantially all the assets of
the borrower and the guaranties of three individuals, a limited partnership and
a limited liability company. During the third quarter of 2003, $1,043,050 of
these loans was charged off, and approximately $112,000 was paid against the
balance of the loans. The borrower's assets consist primarily of interests in
energy related properties located in Texas and Louisiana. During the second
quarter of 2003 the borrower advised the Company that one of the properties,
which it had expected to produce significant revenues, had failed to produce any
revenue, was unlikely to ever produce revenues and that the property's value is
now negligible, and further that the revenue from the other properties was
expected to be minimal. The borrower terminated its operations during the second
quarter of 2003. The Bank is pursuing recovery in full of the aforementioned
loans through various legal proceedings. Added during the first quarter of 2004
to nonaccrual status was a loan totaling $200,051, after the borrower filed for
Chapter 7 Bankruptcy and elected not to reaffirm the debt with the Bank. The
loan is secured by residential real estate. Also included in the September 30,
2004 total are three loans totaling $8,904 that were greater than 90 days past
due.
Non-performing assets are defined as non-performing loans, foreclosed real
estate, and other foreclosed property. The Bank had non-performing assets of
$797,007 at the end of the third quarter of 2004, comprised of the above
mentioned non-performing loans, and foreclosed real estate totaling $70,000. The
Bank had non-performing assets of $653,170 at December 31, 2003, comprised
entirely of non-performing loans.
The allowance for loan losses is established through a provision for loan losses
charged to expense. The allowance for loan losses was $1,697,407 at September
30, 2004, a decrease of $206,970, or 10.9% over the December 31, 2003 level of
$1,904,377. The allowance represents 1.21% of period-end loans, compared to
1.41% of period-end loans at December 31, 2003. The level of the allowance is
based on management's and the Bank Board of Directors Loan Committee's ongoing
review and evaluation of the loan portfolio and general economic conditions on a
monthly basis and by the full Board of Directors on a quarterly basis.
Management's review and evaluation of the allowance for loan losses is based on
an analysis of historical trends, significant problem loans, current market
value of real estate or collateral and certain economic and other factors
affecting loans and real estate or collateral securing these loans. Loans are
charged off when, in the opinion of management, they are deemed to be
uncollectible. Recognized losses are charged against the allowance and
subsequent recoveries are added to the allowance. While management uses the best
information available to make evaluations, future adjustments to the allowance
may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. The allowance for loan losses is
reviewed internally by personnel independent of the loan department. In
addition, the allowance is subject to periodic evaluation by various regulatory
authorities and may be subject to adjustment based upon information that is
available to them at the time of their examination.
SECURITIES
Securities (all classified as available for sale) decreased from $18,400,189 at
December 31, 2003 to $13,110,999 at September 30, 2004. At September 30, 2003,
securities totaled $19,332,838.
DEPOSITS AND BORROWED FUNDS
Total deposits averaged $130,805,992 in the third quarter of 2004, a decrease of
$985,560 from the comparable 2003 third quarter average of $131,791,552. As of
September 30, 2004, total deposits were $130,450,517, and included $117,712,169
of interest bearing deposits. This compares to total deposits of $133,729,092 at
December 31, 2003, which included $119,581,196 of interest bearing deposits.
Total deposits at September 30, 2003 were $132,519,568, and included interest
bearing deposits of $121,772,183.
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The Bank had $3,983,700 of deposits secured by securities sold under agreements
to repurchase on September 30, 2004. These obligations, which mature in one
business day, are swept daily from customers' demand deposit accounts. These
balances averaged $4,222,069 during the third quarter of 2004.
At September 30, 2004, the Company had established Federal Funds lines of credit
totaling $8,950,000 with four correspondent banks. The Company successfully
applied for membership in the Cincinnati Federal Home Loan Bank during 2000, in
order to be able to obtain advances and lines of credit from the FHLB. At
September 30, 2004, the Bank had three outstanding FHLB advances totaling
$13,000,000. The first FHLB advance, which was issued May 2, 2003, matures May
2, 2005 and has a fixed interest rate of 1.90%. The second FHLB advance, which
was issued June 9, 2003, matures June 6, 2006, and has a fixed interest rate of
2.03%. The third FHLB advance, which was issued January 21, 2004, matures
January 20, 2006, and has a fixed interest rate of 2.21%. The Bank has a
pre-arranged borrowing limit with the FHLB that is collateralized by 135% of
unpaid principal balances of eligible 1-4 family residential mortgage loans. At
September 30, 2004, the Bank had available collateral to borrow an additional
$10.1 million from the FHLB.
CAPITAL RESOURCES AND LIQUIDITY
The Board of Governors of the Federal Reserve System has adopted risk based
capital and leverage ratio requirements for banks and bank holding companies.
The table below sets forth the Bank's capital ratios as of September 30, 2004,
December 31, 2003, and September 30, 2003, the regulatory minimum capital
ratios, and the regulatory minimum capital ratios for well-capitalized
companies:
September 30, December 31, September 30,
2004 2003 2003
----- ---- ----
Tier 1 risk based ........... 12.17% 9.07% 8.71%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 6.00 6.00 6.00
Total risk based ............ 13.41% 10.32% 9.97%
Regulatory minimum ..... 8.00 8.00 8.00
Well-capitalized minimum 10.00 10.00 10.00
Leverage .................... 10.10% 7.38% 7.11%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 5.00 5.00 5.00
The table below sets forth the Company's ratios as of September 30, 2004,
December 31, 2003, and September 30, 2003, the regulatory minimum capital
ratios, and the regulatory minimum capital ratios for well-capitalized
companies:
September 30, December 31, September 30,
2004 2003 2003
----- ---- ----
Tier 1 risk based ........... 12.88% 7.23% 6.45%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 6.00 6.00 6.00
Total risk based ............ 14.12% 8.48% 7.70%
Regulatory minimum ..... 8.00 8.00 8.00
Well-capitalized minimum 10.00 10.00 10.00
Leverage .................... 10.62% 5.88% 5.26%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 5.00 5.00 5.00
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All capital ratios at the Bank and Company increased from December 31, 2003 to
September 30, 2004 as a result of the sale of Preferred Stock by the Company
during the third quarter of 2004, and the subsequent injection of capital into
the Bank. The sale of the Preferred Stock netted $7,659,340 to the Company. See
note 8 of the Notes to the Condensed Consolidated Financial Statements. All
ratios for the Bank and the Company are greater than the minimum capital ratios
for well-capitalized companies as of September 30, 2004.
Liquidity is the measure of the Bank's ability to fund customer's needs for
borrowings and deposit withdrawals. In the third quarter of 2004, the Company's
principal source of funds has been the acquisition of customers' deposits,
repayment of loans, and other funds from bank operations, including the sale of
Preferred Stock. In the third quarter of 2004, net proceeds from the sale of the
Preferred Stock of the Company totaled $7,659,340.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Forward-looking statements, which are based on assumptions and
estimates and describe the Company's future plans, strategies and expectations,
are generally identifiable by the use of the words "anticipate," "will,"
"believe," "estimate," "expect," "intend," "seek," or similar expressions. These
forward-looking statements may address, among other things, the Company's
business plans, objectives or goals for future operations, our forecasted
revenues, earnings, assets or other measures of performance. These
forward-looking statements are subject to risks, uncertainties and assumptions.
Important factors that could cause actual results to differ materially from the
forward-looking statements made or incorporated by reference in this report
include, but are not limited to:
- the strength of the United States economy in general and the strength of the
Bowling Green economy in particular;
- changes in interest rates, yield curves and interest rate spread
relationships;
- deposit flows, cost of funds, and cost of deposit insurance on premiums;
- changes in the quality or composition of the Company's loan or investment
portfolios, including adverse developments in borrower industries or in the
repayment ability of individualborrowers or issuers;
- increased competition or market concentration;
- changes in tax or accounting principles; and
- new state or federal legislation, regulations or the initiation or outcome of
litigation.
If one or more of these risks or uncertainties materialize, or if any of the
Company's underlying assumptions prove incorrect, the Company's actual results,
performance or achievements may vary materially from future results, performance
or achievements expressed or implied by these forward-looking statements. Other
risks are identified in the Company's Form 10-KSB for the period ended December
31, 2003.
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ITEM 3. CONTROLS AND PROCEDURES
As of September 30, 2004, an evaluation was performed under the supervision and
with the participation of the Company's management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on and as of the time of such evaluation, the Company's management, including
the Chief Executive Officer and Chief Financial Officer, concluded that the
Company's disclosure controls and procedures were effective as of September 30,
2004 in timely alerting them to material information relating to the Company
required to be included in the Company's periodic filings with the Securities
and Exchange Commission. There was no change in the Company's internal controls
over financial reporting identified during the quarter ended September 30, 2004
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 2. Changes in Securities
(a) In July 2004, the Company issued 250 shares of Cumulative
Convertible Preferred Stock, stated value $31,992 per share ("Preferred
Stock"). The Preferred Stock is entitled to a preference over the
Company's common stock as to dividends and in the event of a
liquidation or dissolution of the Company.
(b) 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 Company's 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 Company's
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 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.
Item 6. Exhibits
The exhibits listed on the Exhibit Index of this Form 10-QSB are
filed as a part of this report.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CITIZENS FIRST CORPORATION
Date: November 15, 2004 /s/ Mary D. Cohron
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Mary D. Cohron
President and Chief Executive Officer
(Principal Executive Officer)
November 15, 2004 /s/ Bill D. Wright
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Bill D. Wright
Vice-President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBITS
3.1 Restated Articles of Incorporation of Citizens First Corporation
(incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement on Form SB-2 (No. 333-103238)).
3.2 Amended and Restated Bylaws of Citizens First Corporation
(incorporated by reference to Exhibit 3.2 of
the Company's Registration Statement on Form SB-2 (No. 333-103238)).
3.3 Articles of Amendment to Amended and Restated Articles of Incorporation
of Citizens First Corporation (incorporated by reference to Exhibit 3.3
of the Company's Form 10-QSB dated June 30, 2004.)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act.
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350.
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