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, 2005
___ Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _______ to _________
Commission File Number 333-67435
CITIZENS FIRST CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)
Kentucky 61-0912615
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1805 Campbell Lane, Bowling Green, Kentucky 42101
(Address of principal executive offices)
Issuer's telephone number, including area code: (270) 393-0700
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes ___ No X
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 14, 2005
----- --------------------------------
Common Stock, no par value 893,643
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 1. Legal Proceedings None
ITEM 2. Unregistered Sales of Equity Securities and
Use of Proceeds None
ITEM 3. Defaults Upon Senior Securities None
ITEM 4. Submission of Matters to a Vote of Security Holders None
ITEM 5. Other Information None
ITEM 6. Exhibits 22
Signatures 23
Exhibits 24-27
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PART 1. FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
CITIZENS FIRST CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ -----------------
ASSETS
Cash and due from banks $8,035,993 $3,910,629
Federal funds sold - 169,078
-------------- -----------
Cash and cash equivalents 8,035,993 4,079,707
Available for sale securities 12,308,326 12,888,985
Federal Home Loan Bank (FHLB) stock 606,400 582,800
Mortgage loans held for sale 1,046,811 649,500
Loans 158,689,160 146,950,427
Less allowance for loan losses 1,949,704 1,720,565
-------------- -----------
Net loans 156,739,456 145,229,862
Premises and equipment, net 7,605,132 3,628,317
Interest receivable 1,047,324 788,871
Deferred income taxes 589,873 549,292
Goodwill 936,416 936,416
Other assets 224,286 178,336
-------------- -----------
Total assets $189,140,017 $169,512,086
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $15,326,475 $15,015,304
Savings, NOW and money market deposits 49,073,269 54,770,108
Time deposits 81,933,150 60,743,325
-------------- ------------
Total deposits 146,332,894 130,528,737
Federal funds purchased 2,598,000 2,500,000
Securities sold under agreements to repurchase 2,649,642 3,872,532
Long-term debt 17,000,000 13,000,000
Income taxes payable 281,676 155,814
Accrued interest and other liabilities 893,970 1,278,363
-------------- ------------
Total liabilities 169,756,183 151,335,446
Stockholders' equity:
Preferred stock cumulative;500 shares authorized;
250 shares issued and outstanding; no par value,
at September 30, 2005 and at December 31, 2004 7,659,340 7,659,340
Common stock, no par value, authorized 5,000,000
shares; issued and outstanding 893,643 and 887,719,
shares, respectively at September 30, 2005
and December 31, 2004 10,079,986 9,975,130
Retained earnings 1,950,312 851,972
Accumulated other comprehensive income (loss) (305,804) (309,802)
-------------- ------------
Total stockholders' equity 19,383,834 18,176,640
-------------- ------------
Total liabilities
and stockholders' equity $189,140,017 $169,512,086
============== ============
See accompanying notes to consolidated financial statements.
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Citizens First Corporation
Consolidated Statements of Operations
(Unaudited)
For the three months ended September 30:
2005 2004
----- ----
Interest income
Loans, including fees $2,766,312 $2,044,843
Available-for-sale securities 117,454 123,356
Federal funds sold 4,342 7,244
Dividends on FHLB stock 7,362 5,989
------------ -----------
Total interest income 2,895,470 2,181,432
Interest expense
Deposits 766,251 513,785
Securities sold under agreements to repurchase 7,533 9,236
Long-term debt 100,979 76,365
Federal funds purchased 20,788 1,957
------------ -----------
Total interest expense 895,551 601,343
------------ -----------
Net interest income 1,999,919 1,580,089
Provision for loan losses 95,000 40,000
------------ -----------
Net interest income after
provision for loan losses 1,904,919 1,540,089
------------ -----------
Non-interest income
Service charges on deposit accounts 210,470 213,918
Other service charges and fees 24,960 26,010
Mortgage banking income 122,479 136,902
Lease income 36,862 -
Trust referral fees 5,500 3,000
Other income 8,298 6,785
------------ -----------
Total non-interest income 408,569 386,615
Non-interest expenses
Salaries and employee benefits 750,573 752,534
Net occupancy expense 109,821 89,370
Furniture and equipment expense 92,792 106,643
Advertising 65,554 56,955
Professional fees 62,040 56,681
Legal fees 121,450 107,354
Data processing services 111,914 88,885
FDIC and other insurance 17,943 26,961
Franchise shares and deposit tax 51,150 42,600
Business manager expense 1,493 9,074
Postage, printing and supplies 30,237 22,175
Telephone and other communication 33,197 26,567
Other 59,184 93,567
----------- -----------
Total non-interest expenses 1,507,348 1,479,366
----------- -----------
Income before income taxes 806,140 447,338
Income tax expense 274,200 146,750
----------- -----------
Net income 531,940 300,588
Preferred dividends (131,036) (109,671)
----------- -----------
Net income available for common shareholders $400,904 $190,917
=========== ===========
Basic earnings per common share $0.45 $0.23
Diluted earnings per common share $0.37 $0.23
See accompanying notes to consolidated financial statements.
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Citizens First Corporation
Consolidated Statements of Operations
(Unaudited)
For the nine months ended September 30:
2005 2004
----- ----
Interest income
Loans, including fees $7,570,231 $5,900,445
Available-for-sale securities 356,313 391,009
Federal funds sold 17,926 11,184
Dividends on FHLB stock 21,017 16,533
------------ ----------
Total interest income 7,965,487 6,319,171
Interest expense
Deposits 2,005,086 1,606,506
Securities sold under agreements to repurchase 24,427 28,775
Long-term debt 249,240 287,064
Federal funds purchased 42,632 12,637
----------- ----------
Total interest expense 2,321,385 1,934,982
----------- ----------
Net interest income 5,644,102 4,384,189
Provision for loan losses 215,000 160,000
----------- ----------
Net interest income after
provision for loan losses 5,429,102 4,224,189
----------- ----------
Non-interest income
Service charges on deposit accounts 615,640 623,318
Other service charges and fees 80,681 76,897
Mortgage banking income 317,549 351,898
Net realized (losses) on sale of available-for-sale securities - (34,368)
Lease income 47,288 890
Trust referral fees 14,500 9,500
Other income 26,140 23,345
----------- ---------
Total non-interest income 1,101,798 1,051,480
Non-interest expenses
Salaries and employee benefits 2,111,432 2,284,075
Net occupancy expense 290,406 273,361
Furniture and equipment expense 281,221 319,812
Advertising 185,545 148,719
Professional fees 168,078 155,830
Legal fees 250,128 213,174
Data processing services 302,257 272,846
FDIC and other insurance 77,601 126,275
Franchise shares and deposit tax 153,450 97,947
Business manager expense 7,474 37,483
Postage, printing and supplies 84,790 73,067
Telephone and other communication 95,033 91,739
Other 269,312 254,016
----------- ---------
Total non-interest expenses 4,276,726 4,348,374
----------- ---------
Income before income taxes 2,254,174 927,295
Income tax expense 767,000 298,350
----------- ---------
Net income 1,487,174 628,945
Preferred dividends (388,835) (109,671)
------------ ---------
Net income available for common shareholders $1,098,339 $519,274
============ =========
Basic earnings per common share $1.23 $0.62
Diluted earnings per common share $1.03 $0.62
See accompanying notes to consolidated financial statements.
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CITIZENS FIRST CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30: 2005 2004
--------------------------------------- ---- ----
Balance January 1 $18,176,640 $9,610,377
Net income 1,487,174 628,945
Issuance of common stock 104,856 54,149
Issuance of preferred stock - 7,659,340
Payment of preferred dividends, $1,555.34 per share for
2005 and $438.68 per share for 2004 (388,835) (109,671)
Other comprehensive income (loss), net of tax 3,999 126,554
------------ -------------
Balance at end of period $19,383,834 $17,969,694
=========== =============
See accompanying notes to consolidated financial statements.
Citizens First Corporation
Consolidated Statements of Comprehensive Income
(Unaudited)
For the nine months ended September 30: 2005 2004
---- ----
Net income .................................................. $ 1,487,174 $ 628,945
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available for sale
securities, net of income taxes (benefits) of $2,060 and
$53,509, arising during the period, respectively............ 3,999 103,871
------------ -----------
Comprehensive income ........................................... $ 1,491,173 $ 732,816
========== ===========
See accompanying notes to consolidated financial statements ....
Citizens First Corporation
Consolidated Statements of Comprehensive Income
(Unaudited)
For the three months ended September 30: 2005 2004
---- ----
Net income ................................................... $ 531,940 $ 300,588
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available for sale
securities, net of income taxes (benefits) of $(70,144) and
$174,242, arising during the period, respectively ......
(136,162) 338,234
--------- ---------
Comprehensive income ......................................... $ 395,778 $ 638,822
========= =========
See accompanying notes to consolidated financial statements.
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CITIZENS FIRST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30:
(Unaudited) (Unaudited)
2005 2004
---- ----
OPERATING ACTIVITIES:
Net income ................................................. $ 1,487,174 $ 628,945
Items not requiring (providing) cash:
Depreciation and amortization ............................. 284,409 340,248
Provision for loan losses ................................. 215,000 160,000
Amortization of premiums and discounts on securities ...... 10,159 15,591
Loss on sale of property, plant and equipment ............. -- 2,259
Loss on sale of other real estate owned ................... 6,803 --
Deferred income taxes (benefits) .......................... (40,581) (84,770)
Net realized losses on disposition of investment securities -- 34,368
Gains on sales of loans ................................... (264,795) (306,367)
Sale of mortgage loans held for sale ...................... 19,238,834 16,063,220
Origination of mortgage loans for sale ..................... (19,371,350) (15,813,061)
FHLB stock dividend received .............................. (20,800) (16,300)
Changes in:
Interest receivable ....................................... (258,453) (123,349)
Income taxes receivable ................................... -- (187,764)
Other assets .............................................. 13,297 81,315
Interest payable and other liabilities .................... (259,915) 566,069
----------- ------------
Net cash from operating activities ............... 1,039,782 1,360,404
INVESTING ACTIVITIES:
Net changes in loans ........................................ (11,989,738) (6,162,763)
Purchases of premises and equipment ......................... (4,243,827) (62,995)
Proceeds from sale of property, plant and equipment ......... -- 625
Proceeds from maturities of securities available for sale ... 576,558 703,539
Proceeds from sales of available-for-sale securities ........ -- 4,727,438
Purchase of FHLB stock ...................................... (2,800) (135,300)
Proceeds from sale of other real estate owned ............... 264,929 --
------------ ------------
Net cash from investing activities ................ (15,394,878) (929,456)
FINANCING ACTIVITIES:
Net increase (decrease) in deposits ........................ 15,804,157 (3,278,575)
Net increase (decrease) in other borrowings ................. 4,000,000 (1,000,000)
Net increase (decrease) in federal funds .................... (1,124,890) (1,435,286)
purchased and repurchase agreements
Issuance of preferred stock ................................ -- 7,659,340
Dividends paid on preferred stock ........................... (388,835) (109,671)
Issuance of common stock ................................... 20,950 54,149
------------ ------------
Net cash from financing activities .......................... 18,311,382 1,889,957
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................... 3,956,286 2,320,905
Cash and cash equivalents at beginning of period ............ 4,079,707 5,233,396
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................. $ 8,035,993 $ 7,554,301
============ ============
Supplemental Cash Flow Information:
Cash paid for interest ...................................... $ 2,212,654 $ 1,969,904
Cash paid for income taxes .................................. $ 925,500 $ 521,558
Real estate acquired in settlement of loans: ................. $ 265,144 $ -
See accompanying notes to consolidated financial statements.
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NOTES TO 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 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 consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-KSB annual report for 2004 filed with the
Securities and Exchange Commission.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates used in the preparation of the financial
statements are based on various factors including the current interest rate
environment and the general strength of the local economy. Changes in the
overall interest rate environment can significantly affect the Company's net
interest income and the value of its recorded assets and liabilities. Actual
results could differ from those estimates used in the preparation of the
financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been reflected in the accompanying unaudited financial
statements. Results of interim periods are not necessarily indicative of results
to be expected for the full year. Those adjustments consist only of normal
recurring adjustments. The consolidated balance sheet of the Company as of
December 31, 2004, has been derived from the audited consolidated balance
sheet of the Company as of that date.
STOCK OPTION PLANS
All references to stock options, earnings per share and the amount of common
stock issued and outstanding have been adjusted to reflect the 5% common stock
dividend that was paid on May 30, 2005, to record holders of common stock on
April 29, 2005.
On December 9, 2002, the board of directors adopted the 2002 Stock Option Plan,
which became effective subject to the approval of the Company's shareholders at
the annual meeting in April 2003. The purpose of the plan is to afford key
employees an incentive to remain in the employ of the Company and its
subsidiaries and to use their best efforts on its behalf. 126,000 shares of
Company common stock have been reserved for issuance under the plan.
On January 17, 2003, the board of directors adopted the 2003 Stock Option Plan
for Non-Employee Directors, which became effective subject to the approval of
the Company's shareholders at the annual meeting in April 2003. The purpose of
the plan is to assist the Company in promoting a greater identity of interest
between the Company's non-employee directors and shareholders, and in attracting
and retaining non-employee directors by affording them an opportunity to share
in the Company's future successes. 42,000 shares of common stock have been
reserved for issuance under the plan.
The 2002 Stock Option Plan and the 2003 Stock Option Plan for Non-Employee
Directors were approved at the Company's Annual Meeting of Shareholders on April
17, 2003. On January 14, 2004, the Company granted options to purchase 42,000
shares under the employee stock option plan and 5,250 shares under the
non-employee stock option plan. On May 20, 2004, the Company granted options to
purchase 4,725 shares under the non-employee stock option plan. On January 12,
2005, the Company granted options to purchase 42,000 shares under the employee
stock option plan. The Company on April 21, 2005, granted options to purchase
6,300 shares under the non-employee stock option plan.
The Company accounts for these plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation
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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, 2005
and 2004.
QUARTER ENDED SEPTEMBER 30
2005 2004
----------------------------------
Net income, as reported $ 531,940 $ 300,588
Less: Total stock-based employee
compensation cost determined under the
fair value based method, net of income taxes 26,367 7,564
Pro forma net income $ 505,573 $ 293,024
Earnings per share:
Basic - as reported $ 0.45 $ 0.22
Basic - pro forma $ 0.42 $ 0.22
Diluted - as reported $ 0.37 $ 0.22
Diluted - pro forma $ 0.35 $ 0.22
Nine Months Ended September 30
2005 2004
-----------------------------------
Net income, as reported $ 1,487,174 $ 628,945
Less: Total stock-based employee
compensation cost determined under the
fair value based method, net of income taxes 96,017 42,839
Pro Forma net income $ 1,391,157 $ 586,106
Earnings per share:
Basic - as reported $ 1.23 $ 0.59
Basic - pro forma $ 1.12 $ 0.59
Diluted - as reported $ 1.03 $ 0.59
Diluted - pro forma $ 0.97 $ 0.59
The Company's 2002 Stock Option Plan is a fixed option plan under which the
Company may grant options that vest over 3 years to selected employees for up to
126,000 shares of common stock. The Company's 2003 Stock Option Plan is a fixed
option plan under which the Company may grant options that vest immediately to
selected non-employee directors for up to 42,000 shares of common stock. The
exercise price of each option is intended to equal the fair value of the
Company's stock on the date of grant. An option's maximum term is 10 years.
A summary of the status of the plans at September 30, 2005 and 2004, and changes
during the periods then ended is presented below:
2005 2004
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
-------------------------------------------------------------------------------
Outstanding, beginning of year 51,035 $ 13.50 -- $ --
Granted 48,305 14.44 51,975 13.50
Exercised (1,575) 13.30 --
Forfeited (11,507) 13.82 --
Expired -- -- --
Outstanding, end of period 86,258 $ 13.99 51,975 $ 13.50
Options exercisable, end of period 25,819 9,975
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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:
2005
----------------
Dividend yields 0%
Volatility factors of expected market price of common stock 22.46%
Risk-free interest rates 3.77%
Expected life of options 6 Years
Weighted-average fair value of options granted during the year $ 4.50
The following table summarizes information about stock options under the plans
outstanding at September 30, 2005:
Options Outstanding Options Exercisable
Range of Number Weighted-Average Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------------------------------------------------------------------------------------------------------------
$13.57 33,390 8.2 years $13.57 11,119 $13.57
$13.57 4,200 8.2 years $13.57 4,200 $13.57
$12.76 4,200 8.7 years $12.76 4,200 $12.76
$14.33 38,168 9.2 years $14.33 -- $14.33
$15.19 6,300 9.7 years $15.19 6,300 $15.19
(2) RECLASSIFICATIONS
Certain reclassifications have been made to the 2004 financial statements to
conform to the 2005 financial statement presentation. These reclassifications
had no effect on net earnings.
(3) ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the stated periods was as follows:
September 30, September 30,
---------------------------------
2005 2004
---------------------------------
Balance, beginning of year ............................ $ 1,720,565 $ 1,904,377
Provision charged to expense .......................... 215,000 160,000
Loans charged off, net of recoveries of $129,687 for
September 30, 2005 and $5,120 for September 30, 2004 14,139 (366,970)
----------- -----------
Balance, September 30, 2005 and September 30, 2004,
respectively............................................ $ 1,949,704 $ 1,697,407
=========== ===========
(4) ACQUISITION OF COMMONWEALTH MORTGAGE AND SOUTHERN KENTUCKY LAND TITLE
On January 2, 2003, the Bank acquired all of the outstanding stock of
Commonwealth Mortgage of Bowling Green, Inc. and Southern Kentucky Land Title,
Inc. Commonwealth Mortgage originates 1-4 family residential mortgages for sale
in the secondary mortgage market, while Southern Kentucky Land Title provides
title insurance agency services for real estate purchase contracts. The purchase
price for Commonwealth Mortgage and Southern Kentucky Land Title consisted of
$400,000 in cash plus a deferred contingent purchase price of up to $1,350,000
payable upon the combined entities' achievement of specified annual earnings
targets over a five year period, plus 25% of the amount, if any, by which their
earnings exceed such targets. 25% of the deferred purchase price will be paid by
the issuance of the Company's common stock, valued at the average of the closing
sales price of the stock over the last ten trading days of the applicable
calendar year. At the former Commonwealth shareholders' option, an additional
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25% of such deferred purchase price, if any, may be paid in shares of the
Company's common stock. The deferred contingent purchase price is accounted for
as additional purchase price at the time the contingency is resolved. The Bank
also purchased the .2 acre site on which the main office of Commonwealth
Mortgage is located for a purchase price of $272,500 in cash. Goodwill
recognized in the initial transaction amounted to $380,000. In January 2004, the
Bank paid $162,401 in cash, and in April 2004 the Company issued 3,790 shares of
the Company's common stock, to the former Commonwealth shareholders as the first
installment of the deferred contingent purchase price. In January 2005, the Bank
paid $251,717 in cash, and in March 2005 the Company issued 5,778 shares of the
Company's common stock to the former Commonwealth shareholders as the second
installment of the deferred contingent purchase price. At September 30, 2005,
goodwill from this transaction totaled $936,416.
The acquisition of Commonwealth Mortgage and Southern Kentucky Land Title was
completed to give the Bank an expanded presence in the local mortgage
origination market, to further expand the Bank's customer service offerings and
to supplement the Bank's non-interest fee income.
(5) CUMULATIVE CONVERTIBLE PREFERRED STOCK OFFERING
The Company completed during the third quarter of 2004 the private placement of
250 shares of Cumulative Convertible Preferred Stock, stated value $31,992 per
share (Preferred Stock), for an aggregate purchase price of $7,998,000. The
Preferred Stock was sold for $31,992 per share, is entitled to quarterly
cumulative dividends at an annual fixed rate of 6.5% and is convertible into
shares of common stock of the Company at an initial conversion price per share
of $15.50 on and after three years from the date of issuance. The sale of the
Preferred Stock netted proceeds to the Company of $7,659,340, of which
$3,011,970 (including $3,000,000 in principal and $11,970 in accrued interest)
was used to repay the outstanding balance under the Company's line of credit,
and $3,800,000 was contributed to the capital of the Bank. The remaining
proceeds from the issuance of the Preferred Stock are being used for general
corporate purposes, including the contribution of capital to the Bank.
(6) EARNINGS PER SHARE
On April 20, 2005, the Board of Directors declared a 5% common stock dividend to
shareholders of record on April 29, 2005, payable May 30, 2005. All references
to common shares and earnings per share have been restated to reflect the stock
dividend. There are no anti-dilutive stock options. Basic earnings per share
have been computed by dividing net income available for common shareholders by
the weighted-average number of common shares outstanding for the period. Diluted
earnings per share have been computed the same as basic earnings per share, and
assumes the conversion of outstanding vested stock options and convertible
preferred stock. For the three months and nine months ended September 30, 2004,
all stock options were anti-dilutive. For the three months and nine months
ended September 30, 2005, no stock options were anti-dilutive. The following
table reconciles the basic and diluted earnings per share computations for the
quarters and nine months ending September 30, 2005 and 2004.
QUARTER ENDED SEPTEMBER 30, 2005 QUARTER ENDED SEPTEMBER 30, 2004
------------------------------------- ----------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES PER SHARE SHARES PER SHARE
INCOME AMOUNT INCOME AMOUNT
------------------------------------- ----------------------------------------
BASIC EARNINGS PER SHARE
Net income .................... $ 531,940 $ 300,588
Less: Dividends on
preferred stock ....... (131,036) (109,671)
----------- ----------
Net income available
to common shareholders . 400,904 893,643 $ 0.45 190,917 886,260 $ 0.22
======= ======
EFFECT OF DILUTIVE
SECURITIES
Convertible preferred ...
stock ................. 131,036 541,800 -- --
Stock options ........... -- 10,280 -- --
-------- ----------- ----------- -------
DILUTED EARNINGS (LOSS)
PER SHARE
Net income available to
common shareholders and
assumed conversions
$ 531,940 1,445,723 $ 0.37 $ 190,917 886,260 $ 0.22
=========== =========== ====== =========== =========== ======
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NINE MONTHS ENDED SEPTEMBER 30, 2005 NINE MONTHS ENDED SEPTEMBER 30, 2004
--------------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES PER SHARE SHARES PER SHARE
INCOME AMOUNT INCOME AMOUNT
-----------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Net income .............. $ 1,487,174 $ 628,945
Less: Dividends on
preferred stock ....... (388,835) (109,671)
----------- ---------
Net income available
to common shareholders . 1,098,339 891,958 $ 1.23 519,274 885,110 $ 0.59
======== ========
EFFECT OF DILUTIVE
SECURITIES
Convertible preferred ...
stock ................. 388,835 541,800 -- --
Stock options ........... 0 5,097 -- --
------- --------- --------- -------
DILUTED EARNINGS (LOSS)
PER SHARE
Net income available to
common shareholders and
assumed conversions
$ 1,487,174 1,438,855 $ 1.03 $ 519,274 885,110 $ 0.59
=========== =========== ======== =========== ======== =========
(7) EMPLOYEE BENEFIT PLAN
Effective October 1, 2004, the Company elected to self-insure certain costs
related to employee health and accident benefit programs. The Company has
purchased insurance that limits its annual exposure for individual claims and
that limits its aggregate annual exposure to $118,641 during the initial year of
the plan. Future insurance costs that limit the Company's exposure for
individual claims and aggregate exposure will be determined annually, based
primarily upon the Company's actual claim history for the previous year.
(8) 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 Corporation 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 common stock dividend.
(9)NOTE 9 - RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
FAS 123, Revised, requires all public companies to record compensation cost for
stock options provided to employees in return for employee service. As discussed
in the Stock Compensation Expense disclosure in Note 1 above, the cost of stock
options is measured at the fair value of the options when granted. This cost
will be required to be expensed over the employee service period, which is
normally the vesting period of the options. This Standard was originally to
apply to stock option awards granted or modified after the first quarter or year
following June 15, 2005. However, this requirement has been postponed until the
first quarter or year following December 15, 2005. Compensation cost will also
be recorded for options already granted that have a vesting period beyond 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. The effect
of existing options that will continue to vest after the adoption date is
anticipated to be immaterial. There will also be no significant effect on the
financial position of the Company as total equity will not change as a result of
the required recording of compensation cost.
(10) SUBSEQUENT EVENTS
In 2003, Citizens First Bank, Inc., a wholly owned subsidiary of Citizens First
Corporation, initiated an action to recover the outstanding principal balance of
and interest on three loans to one borrower totaling approximately $1,675,000.
After obtaining a default judgment against the borrower and guarantors, the Bank
filed a garnishment action in Travis County, Texas to recover certain of the
borrower's assets in the possession of third parties, consisting primarily of
the proceeds generated from a producing oil and gas well in Texas. On November
3, 2005, the court indicated that it would enter an order granting the Bank's
request for declaratory relief against certain intervening parties claiming a
superior interest in the well and its proceeds. As a result of an agreement
entered into between the Bank and the intervening parties, the court's grant of
relief will be non-appealable. In the fourth quarter of 2005, the Bank is
expected to receive approximately $1,000,000 of the proceeds from the well
currently being held in the registry of the court. The Bank previously had
charged off $1,043,050 of the loans.
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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, 2005, the Company and Bank employed
sixty-five employees (fifty-eight 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.
During the third quarter of 2005, the Bank purchased a 30,000 square foot office
building, located at 1065 Ashley Street in Bowling Green, Kentucky for
$3,750,000. The Bank has received permission from the appropriate regulatory
authorities to move its headquarters to this facility, and also to open a retail
branch in the building. Approximately 15,000 square feet of the first floor of
this building is leased. The bank offices will primarily be occupied by senior
management, commercial lenders, deposit operations, loan accounting, finance,
and information systems personnel. The purchase price was funded through the
acquisition of deposits generated by the bank.
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
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working capital (including inventory and receivables), business expansion
(including acquisition of real estate and improvements) and purchase of
machinery and equipment. The Bank does not emphasize real estate lending for
land acquisition, land development or open-end construction loans. The types of
personal loans that are available include secured and unsecured loans for such
purposes as financing automobiles, home improvements, education and personal
investments. The Bank originates, processes and closes residential real estate
loans that are then primarily 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 5.2% is in line with the national unemployment rate of
approximately the same. The Company's competition in the local market
consists mainly of regional and national financial institutions. In the Bank's
primary service area, there are 14 commercial banks, of which 4 are considered
to have their headquarters in the Bank's service area. In addition, there are
various credit unions, mortgage companies, and other commercial banks that have
loan production offices in the area. The Bank encounters strong competition from
these financial institutions, for deposits, loans, and other financial services,
as well as from insurance companies, brokerage firms and other financial
institutions, some of which are not subject to the same degree of regulation and
restrictions as the Bank. Many of these competitors have substantially greater
resources and lending limits than the Bank has to offer and certain services,
such as international banking services, which the Bank is not providing.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States and follow general
practices within the financial services industry. The most significant
accounting policies followed by the Company are presented in Note 1 of the Notes
to the Condensed Consolidated Financial Statements included in this report.
These policies, along with the disclosures presented in the other financial
statement notes and in this financial review, provide information on how
significant assets and liabilities are valued in the financial statements and
how those values are determined. Based on the valuation techniques used and the
sensitivity of financial statement amounts to the methods, assumptions, and
estimates underlying those amounts, management has identified the determination
of the allowance for loan losses to be the accounting area that requires the
most subjective or complex judgments, and as such could be most subject to
revision as new information becomes available.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's estimate of probable
credit losses inherent in the loan portfolio. Determining the amount of the
allowance for loan losses is considered a critical accounting estimate because
it requires significant judgment and the use of estimates related to the amount
and timing of expected future cash flows on impaired loans, estimated losses on
loans based on historical loss experience, and consideration of current economic
trends and conditions, all of which may be susceptible to significant change.
The loan portfolio also represents the largest asset type on the consolidated
balance sheet. Note 1 of the Notes to the Consolidated Financial Statements
included in the Company's 2004 Annual Report on Form 10-KSB describes the
methodology used to determine the allowance for loan losses, and a discussion of
the factors driving changes in the amount of the allowance for loan losses is
included under "Asset Quality" below.
Loans that exhibit probable or observed credit weaknesses are subject to
individual review. Where appropriate, reserves are allocated to individual loans
based on management's estimate of the borrower's ability to repay the loan given
the availability of collateral, other sources of cash flow and legal options
available to the Company. Included
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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 $1,890,776 was adequate, but not excessive, to absorb estimated
credit losses associated with the loan portfolio at September 30, 2005.
RESULTS OF OPERATIONS
For the three months ended September 30, 2005, the Company reported net income
of $531,940, or $0.45 and $0.37 per basic and diluted common share,
respectively, compared to net income of $300,588, or $0.23 per basic and diluted
common share, for the same period ended September 30, 2004.
For the nine months ended September 30, 2005, the Company reported net income of
$1,487,174, or $1.23 and $1.03 per basic and diluted common share, respectively,
compared to net income of $628,945, or $0.62 per basic and diluted common share,
for the same period ended September 30, 2004.
NET INTEREST INCOME
Net interest income was $1,999,919 in the third quarter of 2005, compared with
$1,580,089 in the comparable period in 2004. Third quarter 2005 interest income
of $2,895,470, an increase of $714,038 or 32.7% over the same period total of
$2,181,432 in 2004, includes $2,766,312 income on loans, $117,454 income on
securities, and $11,704 income on federal funds sold and other interest-bearing
accounts. Interest income of $2,181,432 during the second quarter of 2004
included $2,044,843 of income on loans, $123,356 income on investment
securities, and $13,233 income on federal funds sold and other interest-bearing
accounts. Interest expense of $895,551 for the third quarter of 2005, up
$294,208 or 48.9% from the same period in 2004, consists of interest on deposits
of $766,251, and on other borrowings of $129,300. Third quarter 2004 interest
expense of $601,343 consisted of interest on deposits of $513,785, and interest
on other borrowings of $87,558. An increase in yields on interest earning
assets, coupled with an increase in the amount of interest earning assets,
contributed to the increase in net interest income in the third quarter of 2005,
compared to the same quarter of 2004. Income from available-for-sale securities
is down from the third quarter of 2004 primarily because of a decrease in
average securities for the period. The increase in yields on interest earning
assets during the third quarter of 2005, compared to the same period of 2004, is
primarily attributable to the increase by 200 basis points of short-term
interest rates since late September 2004. The Bank is asset sensitive, meaning
assets reprice faster to changes in short-term rates than do liabilities. In a
rising short-term rate environment, such as occurred during the third quarter of
2005, more of the Bank's interest earning assets, primarily loans, reprice up
faster than do the liabilities, specifically certificates of deposit, which
provide the funding for the assets. The increase in interest expense in the
third quarter of 2005, compared to the same period of 2004, was due to both the
increased average cost of deposits during 2005, after short term rates have
increased by 200 basis points since September 2004, and the increased average
amount of interest bearing deposits compared to the third quarter of 2004 and
the increase in long-term debt in 2005.
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Net interest income was $5,644,102 for the nine months ended September 30, 2005,
an increase of $1,259,913 or 28.7% over the total of $4,384,189 for the same
period of 2004. Interest income of $7,965,487 for the first nine months of 2005
included $7,570,231 income on loans, $356,313 income on investment securities,
and $38,943 income on federal funds sold and other interest-bearing accounts.
Total interest income of $6,319,171 for the first nine months of 2004 consisted
of $5,900,445 income on loans, $391,009 income on investment securities, and
$27,717 income on federal funds sold and other interest-bearing accounts.
Interest expense for the first nine months of 2005 totaled $2,321,385, and
included $2,005,086 interest on deposits, and $316,299 expense on other
borrowings. The comparable period of 2004 had interest expense of $1,934,982, of
which $1,606,506 was interest on deposits, and $328,476 was expense on other
borrowings.
PROVISION FOR LOAN LOSSES
The provision for loan losses expense for the quarter ended September 30, 2005,
was $95,000, an increase of $45,000 over the total of $40,000 for the same
quarter of 2004. As shown in the table in Footnote 3, the Company had net
recoveries of loans charged off totaling $14,139 for the first three quarters of
2005, compared to net charge-offs totaling $366,970 for the same period in
2004, a positive variance of $381,109. The increase in the provision expense for
the third quarter of 2005, compared to the same quarter of 2004, was due to the
overall increase in loans, requiring an allocation for loan losses for the
unallocated reserve. See a discussion of asset quality included in the Asset
Quality section of the Balance Sheet Review.
The provision for loan losses expense was $215,000 for the first nine months of
2005, as compared to $160,000 for the same period of 2004.
NON-INTEREST INCOME
Non-interest income for the three months ended September 30, 2005 and 2004,
respectively, was $408,569 and $386,615, an increase of $21,954 or 5.7%. Income
from service charges on deposit accounts decreased $3,448, or 1.6%, to $210,470
during the third quarter of 2005 from $213,918 for the third quarter of 2004.
Despite an overall increase in deposit accounts for the periods, fee income from
insufficient fund charges decreased, offsetting other account fees. Income from
mortgage banking decreased $14,423, to $122,479 during the third quarter of 2005
from $136,902 in the same period of 2004. The decrease in mortgage banking
income in 2005 is primarily due to increased competition in the local market, as
the Company reduced fees charged to customers, to maintain market share. Lease
income increased $36,862 in the third quarter of 2005 after the purchase of the
new building was completed August 1, 2005. The lease income results from the
tenants who lease out office space on the first floor of the building.
Non-interest income for the nine months ended September 30, 2005 and 2004,
respectively, was $1,101,798 and $1,051,480, an increase of $50,318 or 4.8%.
Mortgage banking income declined $34,349 in the third quarter of 2005 as
compared to the third quarter of 2004 with mortgage rates increasing in 2005 and
causing demand therefore to decline in the mortgage large market. Lease income
increased $46,398 in the first nine months of 2005 as compared to the first nine
months of 2004. The lease income results from the tenants who lease out office
space on the first floor of the new building purchased. Additional lease income
was earned earlier in 2005 on another building the Company leased out. Losses
from the sale of investment securities during the first six months of 2004
totaled $34,368, compared to no activity for the same period of 2005.
NON-INTEREST EXPENSE
Non-interest expense was $1,507,348 in the third quarter of 2005, up from
$1,479,366 in the same quarter of 2004, an increase of $27,982 or 1.9%. An
increase in legal fees of $14,096 due to a lawsuit on a debt recovery case in
Texas caused most of this increase in the third quarter of 2005 as compared to
the third quarter of 2004. Data processing services increased $23,029 from
increased levels of business and the increased number of accounts now being
processed as compared to one year ago.
For the nine months ended September 30, 2005 and 2004, respectively,
non-interest expense was $4,276,726 and $4,348,344, a decrease of $71,618, or
1.6%. A decrease in salary and employee benefit expense of $172,643, due
primarily to a reduction in FTE's, was the largest positive variance comparing
the first nine months of 2005 to 2004.
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FDIC insurance decreased $60,931 from the third quarter of 2004 to the third
quarter of 2005 due to lower rates charged on the Bank's deposits by the FDIC
Insurance Fund. Franchise shares and deposit tax was up $55,503 compared to
2004, primarily due to an adjustment made to the 2004 total from prior periods
which was corrected in 2004. Legal fees increased $36,954 as a result of the
legal fees incurred on the debt recovery case mentioned above. Advertising
increased $36,826 as the Bank increased its print and media advertising due to
increased competition. Data processing services increased $29,411 from increased
levels of business and the increased number of accounts now being processed as
compared to one year ago.
INCOME TAXES
Income tax expense has been calculated based on the Company's expected annual
rate for 2005. During the third quarter of 2005, income tax expense totaled
$274,200 compared to $146,750 for the same period of 2004. For the first nine
months of 2005, income tax expense totaled $767,000, compared to $298,380 during
the same period of 2004. Deferred tax liabilities and assets are recognized for
the tax effects of differences between the financial statement and tax bases of
assets and liabilities.
BALANCE SHEET REVIEW
OVERVIEW
Total assets at September 30, 2005 were $189,140,017, up from $169,512,086 at
December 31, 2004 and up from $166,596,083 a year ago. Average total assets for
the third quarter of 2005 were $183,554,135, up $17,179,190 from the third
quarter of 2004 average of $166,374,945.
LOANS
At September 30, 2005 loans (excluding mortgage loans held for sale) totaled
$158,689,160, compared with $146,950,427 at December 31, 2004 and $141,097,274 a
year ago, an increase of $11,738,733 and $17,591,886 respectively. Loans
averaged $156,981,504 during the third quarter of 2005, an increase of
$16,434,270 or 11.7%, over the average total of $140,547,234 for the third
quarter of 2004.
ASSET QUALITY
Non-performing loans are defined as non-accrual loans, loans accruing but past
due 90 days or more, and restructured loans. Management classifies commercial
and commercial real estate loans as non-accrual when principal or interest is
past due 90 days or more and the loan is not adequately collateralized and is in
the process of collection, or when, in the opinion of management, principal or
interest is not likely to be paid in accordance with the terms of the
obligation. Consumer loans are charged off after 120 days of delinquency unless
adequately secured and in the process of collection. Non-accrual loans are not
reclassified as accruing until principal and interest payments are brought
current and future payments appear reasonably certain. Loans are categorized as
restructured if the original interest rate, repayment terms, or both were
restructured due to deterioration in the financial condition of the borrower.
However, restructured loans that demonstrate performance under the restructured
terms and that yield a market rate of interest may be removed from restructured
status in the year following the restructure.
The Bank had non-performing loans totaling $799,336 at September 30, 2005,
compared to $720,041 at December 31, 2004 and $727,007 at September 30, 2004.
Included in the non-performing loan total at September 30, 2005 is the remaining
portion, totaling $518,052, of three loans to one borrower, that were placed on
non-accrual status during the second quarter of 2003. The three loans,
originally totaling $1,675,000, are secured by substantially all the assets of
the borrower and the guaranties of three individuals, a limited partnership and
a limited liability company. During the third quarter of 2003, $1,043,050 of
these loans was charged off, and approximately $112,000 was paid against the
balance of the loans. The borrower's assets consist primarily of interests in
energy related properties located in Texas and Louisiana. During the second
quarter of 2003 the borrower advised the Company that one of the properties,
which it had expected to produce significant revenues, had failed to produce any
revenue,
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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, which are expected to culminate by the
end of 2005. On November 3, 2005, the court indicated that it would enter an
order granting the Bank's request for declaratory relief against certain
intervening parties claiming a superior interest in the well and its proceeds.
As a result of an agreement entered into between the Bank and the intervening
parties, the court's grant of relief will be non-appealable. In the fourth
quarter of 2005, the Bank is expected to receive approximately $1,000,000 of the
proceeds from the well currently being held in the registry of the court. The
Bank previously had charged off $1,043,050 of the loans.
Added to non-performing loans in the third quarter of 2005 is a loan to an
electrical contractor who has filed Chapter 7 Bankruptcy. The contractor had
diversified into several non-related businesses and several accounts receivable
became uncollectible. The total of this loan included in non-performing at
September 30, 2005 is $218,715. This loan is 75% guaranteed by the Small
Business Administration. Also included in the September 30, 2005 non-performing
loan total are two loans totaling $50,214 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
$799,336 at the end of the third quarter of 2005, comprised of the above
mentioned non-performing loans. The Bank had non-performing assets of $720,041
at December 31, 2004, comprised entirely of non-performing loans.
The allowance for loan losses is established through a provision for loan losses
charged to expense. The allowance for loan losses was $1,949,704 at September
30, 2005, an increase of $229,139, or 13.3% over the December 31, 2004 level of
$1,720,565. The allowance represents 1.23% of period-end loans, compared to
1.17% of period-end loans at December 31, 2004. The allowance as a percentage of
period-end loans increased at September 30, 2005, compared to December 31, 2004,
because of the increase in the unallocated portion of the loan portfolio, which
is maintained to recognize the imprecision in estimating and measuring losses.
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. 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. Historical loss rates are applied to other
loans not subject to reserve allocations. An unallocated reserve is maintained
to recognize the imprecision in estimating and measuring losses when evaluating
reserves for individual loans or pools of loans. These historical loss rates may
be adjusted for significant factors that, in managements judgment, reflect the
impact of any current conditions on loss recognition, including 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. Loans are charged off
when, in the opinion of management, they are deemed to be uncollectible.
Recognized losses are charged against the allowance and subsequent recoveries
are added to the allowance. While management uses the best information available
to make evaluations, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in making the
evaluation. The allowance for loan losses is reviewed internally by personnel
independent of the loan department. In addition, the allowance is subject to
periodic evaluation by various regulatory authorities and may be subject to
adjustment based upon information that is available to them at the time of their
examination.
SECURITIES
Securities (all classified as available for sale) decreased from $12,888,985 at
December 31, 2004 to $12,308,326 at September 30, 2005. At September 30, 2004,
securities totaled $13,110,999.
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DEPOSITS AND BORROWED FUNDS
Total deposits averaged $143,706,162 in the third quarter of 2005, an increase
of $12,900,170 from the comparable 2004 quarter average of $130,805,992. As of
September 30, 2005, total deposits were $146,332,894, and included $131,006,419
of interest bearing deposits. This compares to total deposits of $130,528,737 at
December 31, 2004, which included $115,513,433 of interest bearing deposits.
Total deposits at September 30, 2004, were $130,450,517, and included interest
bearing deposits of $117,712,169.
The Bank had $2,649,642 of deposits secured by securities sold under agreements
to repurchase on September 30, 2005. These obligations, which mature in one
business day, are swept daily from customers' demand deposit accounts. These
balances averaged $3,446,692 during the third quarter of 2005.
At September 30, 2005, the Company had established Federal Funds lines of credit
totaling $10,050,000 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, 2005, the Bank had five outstanding FHLB advances totaling
$17,000,000. The first FHLB advance which was issued May 26, 2005, matures May
26, 2006 and has a fixed interest rate of 3.90%. The second FHLB advance, which
was issued June 9, 2003, matures June 9, 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 fourth FHLB
advance, which was issued May 2, 2005, matures May 2, 2007, and has a fixed rate
of interest of 4.19%. The final FHLB advance, which was issued September 26,
2005, matured October 27, 2005, and had a fixed rate of interest of 3.95%. This
advance was replaced with a $2,500,000 advance, which was issued October 27,
2005, and has a fixed interest rate of 4.19%, and a maturity date of November
28, 2005. The October 27, 2005 advance that matured was also replaced with a
$500,000 advance, issued that day with a fixed rate of 4.83% with a maturiy of
October 27, 2008. 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, 2005, the Bank had available
collateral to borrow an additional $3.9 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, 2005,
December 31, 2004, and September 30, 2004, the regulatory minimum capital
ratios, and the regulatory minimum capital ratios for well-capitalized
companies:
September 30, December 31, September 30,
2005 2004 2004
----- ---- ----
Tier 1 risk based ........... 11.43% 11.80% 12.17%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 6.00 6.00 6.00
Total risk based ............ 12.64% 13.00% 13.41%
Regulatory minimum ..... 8.00 8.00 8.00
Well-capitalized minimum 10.00 10.00 10.00
Leverage .................... 10.03% 10.00% 10.10%
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, 2005,
December 31, 2004, and September 30, 2004, the regulatory minimum capital
ratios, and the regulatory minimum capital ratios for well-capitalized
companies:
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September 30, December 31, September 30,
2005 2004 2004
----- ---- ----
Tier 1 risk based ........... 9.43% 9.43% 12.88%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 6.00 6.00 6.00
Total risk based ............ 12.92% 13.55% 14.12%
Regulatory minimum ..... 8.00 8.00 8.00
Well-capitalized minimum 10.00 10.00 10.00
Leverage .................... 8.27% 7.99% 10.62%
Regulatory minimum ..... 4.00 4.00 4.00
Well-capitalized minimum 5.00 5.00 5.00
All capital ratios at the Bank and Company decreased since September 30, 2004,
as the assets of the Bank and the Company grew at a more rapid pace than the
capital of the Bank and the Company. All ratios for the Bank
and the Company are greater than the minimum capital ratios for well-capitalized
companies as of September 30, 2005.
Liquidity is the measure of the Bank's ability to fund customer's needs for
borrowings and deposit withdrawals. In the third quarter of 2005, the Company's
principal sources of funds have been the acquisition of customers' deposits,
repayments of loans, use of Federal Home Loan advances and other funds from bank
operations.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Forward-looking statements, which are based on assumptions and
estimates and describe the Company's future plans, strategies and expectations,
are generally identifiable by the use of the words "anticipate," "will,"
"believe," "estimate," "expect," "intend," "seek," or similar expressions. These
forward-looking statements may address, among other things, the Company's
business plans, objectives or goals for future operations, our forecasted
revenues, earnings, assets or other measures of performance. These
forward-looking statements are subject to risks, uncertainties and assumptions.
Important factors that could cause actual results to differ materially from the
forward-looking statements made or incorporated by reference in this report
include, but are not limited to:
- the strength of the United States economy in general and the strength of the
Bowling Green economy in particular;
- changes in interest rates, yield curves and interest rate spread
relationships;
- deposit flows, cost of funds, and cost of deposit insurance on premiums;
- changes in the quality or composition of the Company's loan or investment
portfolios, including adverse developments in borrower industries or in the
repayment ability of individual borrowers or issuers;
- increased competition or market concentration;
- changes in tax or accounting principles; and
- new state or federal legislation, regulations or the initiation or outcome of
litigation.
If one or more of these risks or uncertainties materialize, or if any of the
Company's underlying assumptions prove incorrect, the Company's actual results,
performance or achievements may vary materially from future results, performance
or achievements expressed or implied by these forward-looking statements. Other
risks are identified in the Company's Form 10-KSB for the period ended December
31, 2004.
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ITEM 3. CONTROLS AND PROCEDURES
As of September 30, 2005, an evaluation was performed under the supervision and
with the participation of the Company's management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on and as of the time of such evaluation, the Company's management, including
the Chief Executive Officer and Chief Financial Officer, concluded that the
Company's disclosure controls and procedures were effective as of September 30,
2005 in timely alerting them to material information relating to the Company
required to be included in the Company's periodic filings with the Securities
and Exchange Commission. There was no change in the Company's internal controls
over financial reporting identified during the quarter ended September 30, 2005,
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 6. Exhibits
The exhibits listed on the Exhibit Index of this Form 10-QSB are
filed as a part of this report.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CITIZENS FIRST CORPORATION
Date: November 14, 2005 /s/ Mary D. Cohron
------------------
Mary D. Cohron
President and Chief Executive Officer
(Principal Executive Officer)
November 14, 2005 /s/ Steve Marcum
----------------
Steve Marcum
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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