Item 1
Business
Item 2
Properties
Item 3
Legal Proceedings
Item 4
Submission of Matters to a Vote of Security Holders
Part II:
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issued Purchases of Equity Securities
Item 6
Selected Financial Data
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operation
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
Item 8
Financial Statements and Supplementary Data
Item 9
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A
Controls and Procedures
Part III:
Item 10
Directors, Executive Officers and Corporate Governance
Item 11
Executive Compensation
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13
Certain Relationships and Related Transactions and Director Independence
Item 14
Principal Accounting Fees and Services
Part IV:
Item 15
Exhibits, Financial Statement Schedules
Signatures
Forward-Looking Statements
Citizens First Corporation (the “Company”) may from time to time make written or oral statements, including statements contained in this report, which may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). The words “may”, “expect”, “anticipate”, “intend”, “consider”, “plan”, “believe”, “seek”, “should”, “estimate”, and similar expressions are intended to identify such forward-looking statements, but other statements may constitute forward-looking statements. These statements should be considered subject to various risks and uncertainties. Such forward-looking statements are made based upon management’s belief as well as assumptions made by, and information currently available to, management pursuant to “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.
Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors that could cause actual results and performance to differ from those expressed in our forward-looking statements we make or incorporate by reference in this Annual Report on Form 10-K include, but are not limited to:
· the effects of current and future economic and business conditions, including, without limitation, the recent deterioration of real estate values, the subprime mortgage, credit and liquidity markets, as well as the Federal Reserve’s actions with respect to interest rates, may lead to a deterioration in credit quality, thereby requiring increases in our provision for credit losses, or a reduced demand for credit, which would reduce earning assets;
· possible changes in trade, monetary and fiscal policies, as well as legislative and regulatory changes, including changes in accounting standards and banking, securities and tax laws and regulations, as well as changes affecting financial institutions’ ability to lend and otherwise do business with consumers;
· our ability to effectively manage interest rate risk and other market risk, credit risk and operational risk;
· changes in the quality or composition of our loan or investment portfolios, including adverse developments in the real estate markets, the borrowers’ industries or in the repayment ability of individual borrowers or issuers;
· increases in our nonperforming assets, or our inability to recover or absorb losses created by such nonperforming assets;
· our ability to manage fluctuations in the value of assets and liabilities and off-balance sheet exposure so as to maintain sufficient capital and liquidity to support our business;
· the failure of our assumptions underlying the establishment of allowances for loan losses and other estimates, or dramatic changes in those underlying assumptions or judgments in future periods, that, in either case, render the allowance for loan losses inadequate or require that further provisions for loan losses be made;
· the cost and other effects of material contingencies;
· our ability to keep pace with technological changes;
· our ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by our customers and potential customers;
· the threat or occurrence of war or acts of terrorism and the existence or exacerbation of general geopolitical instability and uncertainty;
· management’s ability to develop and execute plans to effectively respond to unexpected changes; and
· other factors and information contained in this Annual Report on Form 10-K and other reports that we file with the Securities and Exchange Commission (SEC) under the Exchange Act.
The cautionary statements in this Annual Report on Form 10-K also identify important factors and possible events that involve risk and uncertainties that could cause our actual results to differ materially from those contained in the forward-looking statements. These forward-looking statements speak only as of the date on which the statements were made. We do not intend, and undertake no obligation, to update or revise any forward-looking statements contained in this Annual Report on Form 10-K, whether as a result of differences in actual results, changes in assumptions or changes in other factors affecting such statements, except as required by law.
Part I
Item 1. Business
Overview
Citizens First Corporation was incorporated in Kentucky in 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 “Bank Holding Company Act”), through its organization and ownership of its subsidiary, Citizens First Bank, Inc. (the “Bank”), a Kentucky state chartered bank that commenced operations on February 19, 1999. The Bank currently conducts full-service community banking operations from nine locations in the Kentucky counties of Barren, Hart, Simpson and Warren.
In November 2006, we acquired Kentucky Banking Centers, Inc. (“KBC”), a Kentucky state chartered bank headquartered in Glasgow, Kentucky, for a cash purchase price of $18.7 million. We funded the purchase price through a combination of the sale of common stock and trust preferred securities. Following the closing of the acquisition, we merged KBC into the Bank and the former offices of KBC became branch offices of the Bank.
We primarily market our products and services to small and medium-sized businesses and to retail consumers. Our strategy is to provide outstanding service through our employees, who are relationship-oriented and committed to customer service. Through this strategy, we intend to grow our business, expand our customer base and improve our profitability.
Employees
At December 31, 2009, we had 88 full-time equivalent employees. Management considers its relations with its employees to be good. Neither we nor the Bank are a party to any collective bargaining agreement
Lending Activities
General. We offer a variety of loans, including real estate, construction, commercial and consumer loans to individuals and small to mid-size businesses that are located in or conduct a substantial portion of their business in our market area. Our underwriting standards vary for each type of loan, as described below. At December 31, 2009, we had total loans of $263.9 million, representing 76.7% of our total assets.
Commercial Loans. We make commercial loans primarily to small and medium-sized businesses. At December 31, 2009, our commercial loans had an average size of $85,000 and the largest loan was $2.6 million. These loans are secured and unsecured and are made available for general operating inventory and accounts receivables, as
well as any other purposes considered appropriate. We will generally look to a borrower’s business operations as the principal source of repayment, but will also require, when appropriate, security interests in personal property and personal guarantees. In addition, the majority of commercial loans that are not mortgage loans are secured by a lien on equipment, inventory and other assets of the commercial borrower. At December 31, 2009, commercial loans amounted to $74.9 million, or 28.4%, of our total loan portfolio, excluding for these purposes commercial loans secured by real estate which are included in the commercial real estate category.
Commercial Real Estate Loans. We originate and maintain a significant amount of commercial real estate loans. At December 31, 2009, our commercial real estate loans had an average size of $204,000 and the largest loan was $4.1 million. This lending involves loans secured by multi-family residential units, income-producing properties and owner-occupied commercial properties. Loan amounts generally conform to the regulatory loan-to-value guidelines and amortizations match the economic life of the collateral, with a maximum amortization schedule of 20 years. Loans secured by commercial real estate are generally subject to a maximum term of 20 years. At December 31, 2009, total commercial real estate loans amounted to $104.8 million, or 39.7% of our loan portfolio.
Residential Real Estate Loans. We originate residential mortgage loans with either fixed or variable interest rates to borrowers to purchase and refinance one-to-four family properties. At December 31, 2009, our residential real estate loans had an average size of $54,000 and the largest loan was $2.7 million. We also offer home equity loans which are secured by prior liens on the subject residence. Except for home equity loans and lines of credit, substantially all of our residential real estate loans are secured by a first lien on the real estate. Loans secured by residential real estate with variable interest rates will have a maximum term and amortization schedule of 30 years. Except for five-year fixed rate residential mortgage loans, we sell to the secondary market all of our residential fixed-rate mortgage loans, thereby reducing our interest rate risk and credit risk. Loans secured by vacant land are generally subject to a maximum term of five years and a maximum amortization schedule of five years. At December 31, 2009, total residential real estate loans amounted to $73.2 million, or 27.7% of our loan portfolio.
We provide customers access to long-term conventional real estate loans through our mortgage loan division, which underwrites loans that are purchased by unaffiliated third party brokers in the secondary market. We receive fees in connection with the sale of mortgage loans, with these fees aggregating $317,000 and $278,000 for the years ending December 31, 2009 and 2008, respectively. We do not retain servicing rights with respect to the secondary market residential mortgage loans that we originate.
Consumer. We make personal loans and lines of credit available to consumers for various purposes, such as the purchase of automobiles, boats and other recreational vehicles, and the making of home improvements and personal investments. At December 31, 2009, our consumer loans had an average size of $6,000, and the largest loan was $315,000. Consumer loans generally have shorter terms and higher interest rates than residential mortgage loans and usually involve more credit risk than mortgage loans because of the type and nature of the collateral. Consumer lending
collections are dependent on a borrower’s continuing financial stability and are thus likely to be adversely affected by job loss, illness or personal bankruptcy. In many cases, repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance because of depreciation of the underlying collateral. We emphasize the amount of the down payment, credit quality and history, employment stability and monthly income. These loans are expected generally to be repaid on a monthly repayment schedule with the payment amount tied to the borrower’s periodic income. We believe that the generally higher yields earned on consumer loans help compensate for the increased credit risk associated with such loans and that consumer loans are important to our efforts to serve the credit needs of our customer base. At December 31, 2009, total consumer loans amounted to $11.0 million, or 4.2% of our loan portfolio.
Loan Underwriting and Approval. We seek to make sound, high quality loans while recognizing that lending money involves a degree of business risk. Our loan policies are designed to assist us in managing this business risk. These policies provide a general framework for our loan operations while recognizing that not all risk activities and procedures can be anticipated. Our loan policies instruct lending personnel to use care and prudent decision making and to seek the guidance of our Vice President, Credit Administration or our President and Chief Executive Officer where appropriate.
Deposit Services
Our principal source of funds is core deposits. We offer a range of deposit products and services consistent with the goal of attracting a wide variety of customers, including small- to medium-sized businesses. We actively pursue business checking accounts by offering competitive rates and other convenient services to our business customers. In some cases, we require business customers to maintain minimum balances. We offer a deposit pick-up service to our commercial customers that enable these customers to make daily cash deposits through one of our couriers.
We offer a variety of deposit accounts, including checking accounts, savings accounts, NOW accounts, money market accounts, sweep accounts, fixed and variable rate IRA accounts, Christmas Club accounts and certificate of deposit accounts.
Other Banking Services
Our retail banking strategy is to offer basic banking products and services that are attractively priced and easily understood by the customer. We focus on making our products and services convenient and readily accessible to the customer. In addition to banking during normal business hours, we offer extended drive-through hours, ATMs, and banking by telephone, mail and personal appointment. We have fifteen ATMs, two of which are located in restricted work-place environments, located within our markets. We also provide debit cards, credit cards, safekeeping and safe deposit boxes, ACH and other direct deposit services, savings bond redemptions, cashiers checks, travelers’ checks and letters of credit. We have also established relationships with correspondent banks and other independent financial institutions to provide other services requested by customers, including cash management services, wire transfer services, and loan
participations where the requested loan amount exceeds the lending limits imposed by law or by our policies. We maintain an internet banking website at www.citizensfirstbank.com, which allows customers to obtain account balances and transfer funds among accounts. The website also provides online bill payment and electronic delivery of customer statements.
We provide title insurance services to mortgage loan customers for a fee and, through third party providers, we offer other insurance services and trust services and receive a fee for referrals. We offer non-deposit investment services and products through an agreement with a broker-dealer. We earn advisory fees and commissions from the sale of these services and products. The objective of offering these products and services is to generate fee income and strengthen relationships with our customers.
Competition
The banking business is highly competitive, and we experience competition in our market from many other financial institutions. Our profitability depends upon our ability to compete in the market area in which our bank offices are located. We compete for deposits, loans and other banking services generally on the basis of convenient office locations, interest rates, fees and the range of services offered. We compete with existing area financial institutions other than commercial banks and savings banks, including commercial bank loan production offices, mortgage companies, insurance companies, consumer finance companies, securities brokerage firms, credit unions, money market funds and other business entities which have recently entered traditional banking markets.
Our most competitive market area is in Warren County. As of February 28, 2010, there were 19 financial institutions operating a total of 57 offices in Warren County. In addition, there are six financial institutions operating a total of 10 offices in Simpson County, four institutions operating a total of six offices in Hart County and seven financial institutions operating 20 offices in Barren County.
Supervision and Regulation
We are subject to extensive state and federal banking laws and regulations that impose restrictions on and provide for general regulatory oversight of our operations. These laws and regulations are generally intended to protect customers and depositors of the Bank and not for the protection of the Company or its shareholders. The following summary briefly describes some material provisions of the regulatory framework which apply to us. It is qualified by reference to the statutory and regulatory provisions discussed, and is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on our operations.
Citizens First Corporation
We are a bank holding company under the Bank Holding Company Act of 1956. As such, we are subject to the supervision, examination and reporting requirements of the Bank Holding Company Act and the regulations of the Federal Reserve, and we are required to file periodic reports of our operations and any additional information the Federal Reserve may require.
Acquisitions. A bank holding company must obtain Federal Reserve Board approval before acquiring, directly or indirectly, ownership or control of more than 5% of the voting stock or all or substantially all of the assets of a bank, merging or consolidating with any other bank holding company and before engaging, or acquiring a company that is not a bank but is engaged in certain non-banking activities. Federal law also prohibits a person or group of persons from acquiring “control” of a bank holding company without notifying the Federal Reserve Board in advance and then only if the Federal Reserve Board does not object to the proposed transaction. The Federal Reserve Board has established a rebuttable presumptive standard that the acquisition of 10% or more of the voting stock of a bank holding company with a class of securities registered under the Securities Exchange Act of 1934 would constitute an acquisition of control of the bank holding company. In addition, any company is required to obtain the approval of the Federal Reserve Board before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of any class of a bank holding company’s voting securities, or otherwise obtaining control or a “controlling influence” over a bank holding company.
Permissible Activities. A bank holding company is generally permitted under the Bank Holding Company Act to engage in or acquire direct or indirect control of more than 5% of the voting shares of any bank, bank holding company or company engaged in any activity that the Federal Reserve Board determines to be so closely related to banking as to be a proper incident to the business of banking.
Under current federal law, a bank holding company may elect to become a financial holding company, which enables the holding company to conduct activities that are “financial in nature.” Activities that are “financial in nature” include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. We have not filed an election to become a financial holding company.
Participation in Capital Purchase Program. In response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, on October 3, 2008, the Emergency Economic
Stabilization Act of 2008 (the “EESA”) became law. Pursuant to the EESA, the U.S. Treasury was given the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.
On October 14, 2008, the Secretary of the Department of the Treasury announced that the Department of the Treasury would purchase equity stakes in a wide variety of banks and thrifts. Under the program, known as the Troubled Asset Relief Program Capital Purchase Program (the “Capital Purchase Program”), from the $700 billion authorized by the EESA, the Treasury made $250 billion of capital available to U.S. financial institutions in the form of preferred stock. In conjunction with the purchase of preferred stock, the Treasury received, from participating financial institutions, warrants to purchase common stock with an aggregate market price equal to 15% of the preferred investment. Participating financial institutions were required to adopt the Treasury’s standards for executive compensation and corporate governance for the period during which the Treasury holds equity issued under the Capital Purchase Program.
On December 19, 2008, we sold to the U.S. Treasury 250 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having a liquidation amount per share of $35,116, and a warrant to purchase 254,218 shares of our common stock, at an initial per share exercise price of $5.18, for an aggregate purchase price of $8,779,000. The Series A Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and 9% per year thereafter. Pursuant to the terms of the American Recovery and Reinvestment Act of 2009 (“ARRA”) we may, upon prior consultation with Citizen First’s and the Bank’s appropriate regulatory agency redeem the Series A preferred stock at any time. Upon full redemption of the Series A preferred stock, the Treasury Department will also liquidate the associated warrant. The Series A preferred stock is generally non-voting.
As a result of our participation in the Capital Purchase Program, we agreed to various requirements and restrictions imposed on all participants in the Capital Purchase Program. Among the terms of participation was a provision that the Treasury Department could change the terms of participation at any time.
The current terms of participation in the Capital Purchase Program include the following:
· We filed with the SEC a registration statement under the Securities Act of 1933 registering for resale the Warrant and any shares of common stock issuable from time to time upon exercise of the Warrant.
· As long as the Series A preferred stock remains outstanding, unless all accrued and unpaid dividends for all past dividend periods on the Series A preferred stock are fully paid, we will not be permitted to declare or pay dividends on any common stock, any junior preferred shares or, generally, any preferred shares ranking pari passu with the Series A preferred stock (other than in the case of pari passu preferred shares, dividends on a pro rata basis with the Series A
preferred stock), nor will we be permitted to repurchase or redeem any common stock or preferred shares other than the Series A preferred stock.
· Unless the Series A preferred stock has been transferred to unaffiliated third parties or redeemed in whole, until December 19, 2011, the Treasury Department’s approval is required for any increase in common stock dividends or any share repurchases other than repurchases of the Series A preferred stock, repurchases of junior preferred shares or common stock in connection with the administration of any employee benefit plan in the ordinary course of business and consistent with past practice and purchases under certain other limited circumstances.
As a recipient of government funding under the Capital Purchase Program, we must also comply with the executive compensation and corporate governance standards imposed by the ARRA for so long as the Treasury Department holds any securities acquired from us. The Treasury Department adopted rules for these standards in June 2009. The standards imposed by the ARRA include, without limitation, the following:
· ensuring that incentive compensation for senior executive officers does not encourage unnecessary and excessive risks that threaten the value of the financial institution;
· any bonus, retention award or incentive compensation paid (or under a legally binding obligation to be paid) to a senior executive officer based on statements of earnings, revenues, gains or other criteria that are later proven to be materially inaccurate must be subject to recovery or “clawback” by us;
· we are prohibited from paying or accruing any bonus, retention award or incentive compensation with respect to our most highly compensated officer, except for certain grants of restricted stock;
· severance payments to the senior executive officers or next five most highly-compensated employees, generally referred to as “golden parachute” payments, are prohibited, except for payments for services performed or benefits accrued;
· compensation plans that encourage manipulation of reported earnings are prohibited;
· the Treasury Department may retroactively review bonuses, retention awards and other compensation previously paid to a senior executive officer or any of our 20 next most highly-compensated employees that the Treasury Department finds to be inconsistent with the purposes of the Capital Purchase Program or otherwise contrary to the public interest;
· our Board of Directors must establish a company-wide policy regarding excessive or luxury expenditures;
· our proxy statements for annual shareholder meetings must permit a non-binding “say on pay” shareholder vote on the compensation of executives;
· compensation in excess of $500,000 for each senior executive officer must not be deducted for federal income tax purposes; and
· we must comply with the executive compensation reporting and recordkeeping requirements established by the Treasury Department.
The Treasury Department has certain supervisory and oversight duties and responsibilities under the EESA, the Capital Purchase Program and the ARRA. Also, the Special Inspector General for TARP has the duty, among other things, to conduct, supervise and coordinate audits and investigations of the purchase, management and sale of assets by the Treasury Department under the Capital Purchase Program, including the Series A preferred stock purchased from us.
Capital Adequacy. We are required to comply with the capital adequacy standards established by the Federal Reserve at the holding company level, and the FDIC at the bank level. The Federal Reserve has established a risk-based and a leverage measure of capital adequacy for bank holding companies. The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among depository institutions and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Under the guidelines, specific categories of assets are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a “risk-weighted” asset base.
The guidelines require a minimum total risk-based capital ratio of 8.0%. At least half of the total capital must be composed of common equity, retained earnings, senior perpetual preferred stock issued to the U. S. Treasury under the CPP and qualifying perpetual preferred stock and certain hybrid capital instruments, less certain intangible assets (“Tier 1 capital”). The remainder may consist of certain subordinated debt, certain hybrid capital instruments, qualifying preferred stock and a limited amount of the allowance for loan losses (“Tier 2 capital”). Total capital is the sum of Tier 1 and Tier 2 capital. To be considered well-capitalized under the risk-based capital guidelines, an institution must maintain a total capital to total risk-weighted assets ratio of at least 10% and a Tier 1 capital to total risk-weighted assets ratio of 6% or greater. As of December 31, 2009, our ratio of total capital to total risk-weighted assets was 13.79% and our ratio of Tier 1 capital to total risk-weighted assets was 12.54%.
In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. These guidelines have a dual structure for (i) bank holding companies that meet specified criteria, including having the highest regulatory rating and implementing the Federal Reserve’s risk-based capital measure for market risk, and (ii) all other bank holding companies, which are typically smaller.
We are subject to the latter, under which we are required to maintain a leverage ratio of at least 4%. As of December 31, 2009, our leverage ratio was 10.52%.
Dividends. We are a legal entity separate and distinct from Citizens First Bank. The majority of our revenue is from dividends paid to us by Citizens First Bank. Statutory and regulatory limitations apply to the Bank’s ability to pay dividends to us as well as to our ability to pay dividends to our shareholders. Citizens First Corporation did not pay any dividends to its common shareholders in 2009.
Under Kentucky law, dividends by Kentucky banks may be paid only from current or retained net profits. The Kentucky Department of Financial Institutions must approve the declaration of dividends if the total dividends to be declared by a bank for any calendar year would exceed the bank’s total net profits for such year combined with its retained net profits for the preceding two years, less any required transfers to surplus or a fund for the retirement of preferred stock or debt. We and the Bank are also subject to the Kentucky Business Corporation Act, which generally prohibits dividends to the extent they result in the insolvency of the corporation from a balance sheet perspective or in the corporation becoming unable to pay debts as they come due. Citizens First Bank did not pay any dividends in 2009 and cannot pay dividends without prior approval of the Kentucky Department of Financial Institutions.
In addition to the limitations on our ability to pay dividends under Kentucky law, our ability to pay dividends on our common stock is also limited by our participation in the Capital Purchase Program. Prior to December 18, 2011, unless we have redeemed the Series A preferred stock issued to the U.S. Treasury in the Capital Purchase Program, or the U.S. Treasury has transferred the Series A preferred stock to a third party, the consent of the U.S. Treasury must be received before we can declare or pay any dividend or make any distribution on our common stock above the amount of our last cash dividend of $0.05 per share. Furthermore, if we are not current in the payment of quarterly dividends on the Series A preferred stock, we cannot pay dividends on our common stock. Additionally, the Federal Reserve Bank of St. Louis under certain circumstances may preclude us from paying dividends on our Series A preferred stock or trust preferred securities. Recent supervisory guidance from the Federal Reserve indicates that Capital Purchase Program participants that are experiencing financial difficulties generally should eliminate, reduce or defer dividends on Tier 1 capital instruments, including trust preferred, preferred stock or common stock, if the holding company needs to conserve capital for safe and sound operation and to serve as a source of strength to its subsidiaries.
The payment of dividends by us and the Bank may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. If, in the opinion of the FDIC, the Bank was engaged in or is about to engage in an unsafe or unsound practice, the FDIC could require, after notice and hearing, that the Bank refrain from engaging in the
practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. The federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.
Restrictions on Transactions with Affiliates. Both the Company and the Bank are subject to the provisions of Section 23A and Section 23B of the Federal Reserve Act. Section 23A places limits on the amount of a bank’s loans or extensions of credit to affiliates, a bank’s investment in an affiliate, assets a bank may purchase from affiliates, except for real and personal property exempted by the obligations of affiliates, and a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.
Section 23B prohibits an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.
Support of Subsidiary Institutions. Holding companies must also act as a source of financial strength for and to commit resources to support their subsidiary banks. This support may be required at times when, absent such Federal Reserve policy, the Company may not be inclined to provide it. In addition, any capital loans by a bank holding company to any of its banking subsidiaries are subordinate in right of payment to deposits and to other indebtedness of such banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a banking subsidiary will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Citizens First Bank
The Bank is a state bank chartered under the banking laws of the Commonwealth of Kentucky. As a result, we are subject to the supervision, examination and reporting requirements of both the Kentucky Department of Financial Institutions (KDFI) and the FDIC.
We also are subject to numerous state and federal statutes and regulations that affect our business activities and operations, including restrictions on loan limits, interest rates, “insider” loans to officers, directors, and principal shareholders, tie-in arrangements and transactions with affiliates, among other things.
Federal and state regulators also have authority to impose substantial sanctions on the Bank and its directors and its directors and officers if we engage in unsafe or unsound practices, or otherwise fail to comply with regulatory standards. Supervisory agreements, such as memoranda of understanding entered into with federal and state bank regulators, may also impose requirements and reporting obligations.
Branching. With prior regulatory approval and/or notices, as applicable, Kentucky law permits banks based in the state to either establish new or acquire existing branch offices throughout Kentucky. Our Bank and any other national or state-chartered bank generally may branch across state lines by merging with banks in other states if allowed by the applicable state’s laws. Kentucky law (with limited exceptions) currently permits branching across state lines either through interstate merger or branch acquisition. Kentucky law does not currently permit an out-of-state bank to branch into Kentucky short of an interstate merger.
FDIC Insurance. The deposits of the Bank are currently insured to the maximum amount allowable per depositor through the Deposit Insurance Fund (DIF) administered by the FDIC. The FDIC implemented a new risk-based insurance premium system effective January 1, 2007, under which banks are assessed insurance premiums based on how much risk they present to the DIF. Banks with higher levels of capital and a lower degree of supervisory risk are assessed lower premium rates than banks with lower levels of capital and/or a higher degree of supervisory risk. These premium rates are applied to the average balance of deposits in the prior quarter. The FDIC may increase or decrease the assessment rate schedule in order to manage the DIF to prescribed statutory target levels. An increase in the assessment rate could have an adverse effect on the Bank’s earnings, depending on the amount of the increase.
The Bank opted-in to the FDIC Temporary Liquidity guarantee program effective October 14, 2008. The guarantee program provides a temporary unlimited guarantee of funds in noninterest bearing transaction accounts. The Bank will be assessed an additional fee for noninterest bearing account balances greater than $250,000. Normal premium assessment rates were increased by the FDIC in 2009 and were effective based on the March 31, 2009 balances. In addition, a one-time special assessment of 5 basis points was implemented in the second quarter of 2009. While not announced, additional FDIC special assessments may be necessary in future periods. The FDIC has also amended 12 CFR Part 327 to require institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. The prepaid assessments for these periods were collected on December 30, 2009. Effective September 30, 2009 the annual assessment for 2011 was increased 3 basis points. The FDIC may terminate deposit insurance if it determines the institution involved has engaged in or is engaging in unsafe or unsound banking practices, is in an unsafe or unsound condition or has violated applicable laws, regulations or orders.
Capital Adequacy. Similar to the Federal Reserve Board’s requirements for bank holding companies, the FDIC has adopted risk-based capital requirements for assessing state non-member banks’ capital adequacy. The FDIC’s risk-based capital guidelines require that all banks maintain a minimum ratio of total capital to total risk-weighted assets of 8.0% and a minimum ratio of Tier 1 capital to total risk-weighted assets of 4.0%. To be well-capitalized, a bank must have a ratio of total capital to total risk-weighted assets of at least 10.0% and a ratio of Tier 1 capital to total risk-weighted assets of 6.0%. As of December 31, 2009, Citizens First Bank’s ratio of total capital to total risk-weighted assets was 12.37% and its ratio of Tier 1 capital to total risk-weighted assets was 11.12%. The FDIC also requires a minimum leverage ratio of 3.0% of Tier 1
capital to total assets for the highest rated banks and an additional cushion of approximately 100-200 basis points for all other banks, which will effectively increase the minimum leverage ratio for other banks to 4.0% or 5.0% of Tier 1 capital or more. As of December 31, 2009, Citizens First Bank’s leverage ratio was 9.38%.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) established a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the federal banking regulators established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized), into one of which each institution is placed. With respect to institutions in the three undercapitalized categories, the regulators must take prescribed supervisory actions and are authorized to take other discretionary actions. The severity of the action depends upon the capital category into which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category.
An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to limitations. The controlling bank holding company’s obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary’s assets or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except in accordance with an accepted capital restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution and a lower capital category based on supervisory factors other than capital. We believe that the Bank would be considered “well capitalized” as of December 31, 2009.
Community Reinvestment. The Community Reinvestment Act (“CRA”) requires that the FDIC shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on the Bank. At our last regulatory examination, the Bank received a “satisfactory” CRA rating.
Consumer Protection Laws. Citizens First Bank is subject to consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement and Procedures Act, the Fair Credit Reporting Act, and the Federal Trade Commission Act, among others. These laws and regulations mandate certain
disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers.
Privacy. Federal law currently contains extensive customer privacy protections provisions. Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. These provisions also provide that, except for certain limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. Federal law makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.
USA Patriot Act. The USA PATRIOT Act of 2001 (the “Patriot Act”) contains anti-money laundering measures affecting insured depository institutions, broker-dealers and certain other financial institutions. Under the Patriot Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers. In addition, the Patriot Act authorizes the Secretary of the Treasury to adopt rules increasing the cooperation and information sharing between financial institutions, regulators, and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. The Bank currently has policies and procedures in place designed to comply with the Patriot Act.
Proposed Legislation and Regulatory Action
New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of the nation’s financial institutions. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute. With the enactments of EESA and AARA and the significant amount of legislation currently proposed in Congress that will affect financial institutions, the nature and extent of the future legislative and regulatory changes affecting financial institutions is very unpredictable at this time.
Effects of Governmental Policies and Economic Conditions
Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government, and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through the Federal Reserve’s statutory power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The Federal Reserve, through its monetary and fiscal
policies, affects the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature and impact of future changes in monetary or fiscal policies.
Available Information
We file reports with the SEC including our annual report on Form 10-K, quarterly reports on Form 10-Q, current event reports on Form 8-K and proxy statements, as well as any amendments to those reports. The public may read and copy any materials the Registrant files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov . Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are accessible at no cost on our web site at http://www.citizensfirstbank.com, under the Investors Relations section, once they are electronically filed with or furnished to the SEC. A shareholder may also request a copy of our Annual Report or Form 10-K free of charge upon written request to: Chief Financial Officer, Citizens First Corporation, 1065 Ashley Street, Bowling Green, Kentucky 42103.
Item 1A.
Item 1A. Risk Factors
There are factors, many beyond our control, which may significantly change the results or expectations of our Company. Some of these factors are described below.
Current market developments could continue to adversely affect our industry, business, and results of operations.
We are operating in a challenging and uncertain economic environment, including generally uncertain conditions nationally and locally in our markets. Financial institutions continue to be affected by declines in the real estate market that have negatively impacted the credit performance of mortgage, construction and commercial real estate loans and resulted in significant write-downs of assets by many financial institutions. Concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial institutions to their customers and to each other. We retain direct exposure to the residential and commercial real estate markets, and we are affected by these events. Continued declines in real estate values, home sales volumes and financial stress on borrowers as a result of the uncertain economic environment, including job losses, could have an adverse affect on our borrowers and/or their customers, which could adversely affect our business, financial condition and results of operations.
In particular, we face the following risks in connection with these events:
· Further declines in the housing market and the increased volatility of the stock market may adversely affect consumer confidence and may cause adverse changes in loan payment patterns, causing increases in delinquencies and default rates.
· The processes we use to estimate probable losses and impairment of assets, including investment securities, may no longer be reliable because they rely on complex judgments, including forecasts of economic conditions, which may no longer be capable of accurate estimation.
· Declines in consumer confidence could also result in withdrawal of deposit funds by consumers, negatively impacting our liquidity.
· We may be required to pay increasingly higher FDIC premiums because of the increased deposit coverage and the closure of other financial institutions could deplete the insurance fund of the FDIC.
As each of the above conditions continues to exist or worsen, we could experience continuing or increased adverse effects on our financial condition.
Current levels of market volatility are unprecedented.
The capital and credit markets have been experiencing volatility and disruption for more than a year. In recent months, the volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience further adverse effects, which may be material, on our ability to access capital and on our business, financial condition and results of operations.
Since our business is primarily concentrated in the southcentral Kentucky area, a downturn in the local economy may adversely affect our business.
Our lending and deposit gathering activities have been historically concentrated primarily in the southcentral Kentucky area and our success depends on the general economic condition of the area. Adverse changes in the regional and general economic conditions could reduce our growth rate, impair our ability to collect loans, increase loan delinquencies, increase problem assets and foreclosure, increase claims and lawsuits, decrease the demand for the Bank’s products and services, and decrease the value of collateral for loans, especially real estate, thereby having a material adverse effect on our financial condition and results of operations.
Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio.
Lending money is a substantial part of our business. However, every loan we make carries a certain risk of non-payment. This risk is affected by, among other things:
· cash flow of the borrower and/or the project being financed;
· in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral;
· the credit history of a particular borrower;
· changes in economic and industry conditions; and
· the duration of the loan.
We maintain an allowance for loan losses that we believe is a reasonable estimate of known and inherent losses within the loan portfolio. We make various assumptions and judgments about the collectability of our loan portfolio. Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio, the collateral supporting the loans and performance of customers relative to their financial obligations with us. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and these losses may exceed current estimates. Growing loan portfolios are, by their nature, unseasoned. As a result, estimating loan loss allowances for growing portfolios is more difficult, and may be more susceptible to changes in estimates, and to losses exceeding estimates, than more seasoned portfolios. We cannot fully predict the amount or timing of losses or whether the loss allowance will be adequate in the future. Excessive loan losses and significant additions to our allowance for loan losses could have a material adverse impact on our financial condition and results of operations.
In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations.
Our loan portfolio possesses increased risk due to our relatively high concentration of loans collateralized by real estate.
Approximately 67.4% of our loan portfolio as of December 31, 2009 was comprised of loans collateralized by real estate. Further adverse changes in the economy affecting values of real estate generally or in our primary market specifically could significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. The real estate collateral provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If real estate values decline, it is also more likely that we would be required to
increase our allowance for loan losses. If during a period of reduced real estate values we are required to liquidate the collateral securing a loan to satisfy the debt or to increase our allowance for loan losses, it could materially reduce our profitability and adversely affect our financial condition.
Our operations depend upon our continued ability to access Federal Home Loan Bank advances.
Due to the high level of competition for deposits in our market, we utilize advances from the Federal Home Loan Bank of Cincinnati to help fund our asset base. Federal Home Loan Bank advances may generally be more sensitive to changes in interest rates and volatility in the capital markets than retail deposits attracted through our branch network, and our reliance on these sources of funds increases the sensitivity of our portfolio to these external factors. At December 31, 2009, we had $11.5 million in Federal Home Loan Bank advances.
Federal Home Loan Bank advances are only available to borrowers that meet certain conditions. If the Bank were to cease meeting these conditions, our access to Federal Home Loan Bank advances could be significantly reduced or eliminated.
We rely on these sources of funds because we believe that generating funds through Federal Home Loan Bank advances in many instances decreases our cost of funds, relative to the cost of generating and retaining retail deposits through our branch network. If our access to Federal Home Loan Bank advances were reduced or eliminated for whatever reason, the resulting decrease in our net interest income or limitation on our ability to fund additional loans would adversely affect our business, financial condition and results of operations.
Certain Federal Home Loan Banks have experienced lower earnings from time to time and paid out lower dividends to its members. Future problems at the Federal Home Loan Banks may impact the collateral necessary to secure borrowings and limit the borrowings extended to its member banks, as well as require additional capital contributions by its member banks. Should this occur, our short term liquidity needs could be negatively impacted. Should we be restricted from using Federal Home Loan Bank advances due to weakness in the system or with the Federal Home Loan Bank, we may be forced to find alternative funding sources. These alternative funding sources may include seeking lines of credit with third party banks or the Federal Reserve Bank, borrowing under repurchase agreement lines, increasing deposit rates to attract additional funds, accessing brokered deposits, or selling certain investment securities categorized as available-for-sale in order to maintain adequate levels of liquidity.
Impairment of goodwill and/or intangible assets could require charges to earnings, which could result in a negative impact on our results of operations.
Goodwill arises when a business is purchased for an amount greater than the net fair value of its assets. We recognized goodwill as an asset on our balance sheet in connection with our acquisition of KBC (see Note 5 “Goodwill and Intangible Assets” of the Notes to the Consolidated Financial Statements in Item 8 hereof). When an
intangible asset is determined to have an indefinite useful life, it is not amortized, and instead is evaluated for impairment. We evaluate goodwill and intangibles for impairment at least annually by comparing fair value to carrying amount. We recorded a goodwill impairment during 2008 but determined that goodwill was not further impaired during 2009. However, a significant and sustained decline in our stock price and market capitalization, a significant decline in our expected future cash flows, a significant adverse change in the business climate, slower growth rates or other factors could result in future impairment of goodwill or other intangible assets. If we were to conclude that a future write-down of our goodwill or intangible assets is necessary, then we would record the appropriate charge to earnings, which could be materially adverse to our results of operations and financial position.
The Company’s securities portfolio performance in difficult market conditions could have adverse effects on the Company’s results of operations.
Under U.S. generally accepted accounting principles, we are required to review our investment portfolio periodically for the presence of other-than-temporary impairment of its securities, taking into consideration current market conditions, the extent and nature of change in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, our intent to sell or determination that we will not be required to sell investments until a recovery of fair value, as well as other factors. Adverse developments with respect to one or more of the foregoing factors may require us to deem particular securities to be other-than-temporarily impaired, with the credit loss recognized as a charge to earnings. Recent market volatility has made it extremely difficult to value certain of our securities. Subsequent valuations, in light of factors prevailing at that time, may result in significant changes in the values of these securities in future periods. Any of these factors could require us to recognize further impairments in the value of our securities portfolio, which may have an adverse effect on our results of operations in future periods.
Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.
We face substantial competition in all phases of our operations from a variety of different competitors. Our future growth and success will depend on our ability to compete effectively in this highly competitive environment. To date, we have grown our business by focusing on our geographic market and emphasizing the high level of service and responsiveness desired by our customers. We compete for loans, deposits and other financial services with other commercial banks, thrifts, credit unions, consumer finance companies, insurance companies and brokerage firms. Many of our competitors offer products and services which we do not offer, and many have substantially greater resources, name recognition and market presence that benefit them in attracting business. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, and smaller and newer competitors may also be more aggressive in terms of pricing loan and deposit products than us in order to obtain a larger share of the market. Some of the financial institutions and financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies, federally insured state-chartered
banks and national banks and federal savings banks. As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services.
We also experience competition from a variety of institutions outside of our market area. Some of these institutions conduct business primarily over the Internet and may thus be able to realize certain cost savings and offer products and services at more favorable rates and with greater convenience to the customer.
Our business may be adversely affected by the highly regulated environment in which we operate, including the various capital adequacy guidelines we are required to meet.
We are subject to extensive federal and state legislation, regulation, examination and supervision. Recently enacted, proposed and future legislation and regulations have had, will continue to have, or may have a material adverse effect on our business and operations. Our success depends on our continued ability to maintain compliance with these regulations. Some of these regulations may increase our costs and thus place other financial institutions in stronger, more favorable competitive positions. We cannot predict what restrictions may be imposed upon us with future legislation.
We and the Bank are required to meet certain regulatory capital adequacy guidelines and other regulatory requirements imposed by the FRB, the FDIC and the Kentucky Department of Financial Institutions. If we or the Bank fail to meet these minimum capital guidelines and other regulatory requirements, our financial condition and results of operations could be materially and adversely affected.
If we are unable to redeem the Series A preferred stock after five years, the cost of this capital to us will increase substantially.
If we do not redeem the Series A preferred stock prior to December 19, 2013, the cost of this capital to us will increase substantially on that date, from 5.0% per annum to 9.0% per annum. Depending on our financial condition at the time, this increase in the annual dividend rate on the Series A preferred stock could have a material negative effect on our liquidity.
We may be adversely affected by further increases in FDIC insurance or special assessments.
Our earnings, liquidity, and capital may be affected by FDIC assessments. In February 2009, the FDIC adopted an interim rule increasing insurance assessments and also proposed a special 20 basis point one-time emergency special assessment. The proposed 20 basis point assessment was changed to 5 basis points and was based on total assets rather than deposits. This special assessment was paid September 30, 2009. The FDIC has the ability to require additional special assessments if determined necessary. In November 2009, the FDIC issued a final rule requiring banks to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. These prepayments were collected on December 30, 2009
along with the regular assessment for the third quarter of 2009. Along with this prepayment, insurance rates were increased three basis points beginning with 2011. These steps were taken as an alternative to requiring additional special assessments during 2009. Should the condition of the banking industry continue to decline, it is possible that the FDIC could increase rates further or assess additional emergency assessments and those increases or assessments could materially affect our reported earnings, liquidity or capital.
There can be no assurance that recent legislative and regulatory initiatives to address difficult market and economic conditions will stabilize the United States banking system and the enactment of these initiatives may significantly affect our financial condition, results of operations, liquidity or stock price.
In 2008 and continuing into 2009, governments, regulators and central banks in the United States and worldwide have taken numerous steps to increase liquidity and to restore investor confidence, but asset values have continued to decline and access to liquidity continues to be very limited.
The EESA authorized the Treasury Department to, among other things, purchase up to $700 million of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions and their holding companies. The purpose of EESA is to restore confidence and stability to the United States banking system and to encourage financial institutions to increase their lending to customers and to each other. Under the Capital Purchase Program, the Treasury Department is purchasing equity securities from participating institutions. For more information regarding our participation in the Capital Purchase Program, see the discussion under the caption “Participation in Capital Purchase Program” in “Item 1 - Business” of this report. The EESA also increased federal deposit insurance on most deposit accounts from $100,000 to $250,000 until the end of 2013. The ARRA, which was signed into law on February 17, 2009, includes a wide array of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health and education needs. The failure of these significant legislative measures to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock.
The EESA and the ARRA followed, and have been followed by, numerous actions by the Federal Reserve, the United States Congress, the Treasury Department, the FDIC, the SEC and others to address the current liquidity and credit crisis that has followed the sub-prime mortgage market meltdown that began in 2007. These measures include homeowner relief that encourages loan restructuring and modification; the establishment of significant liquidity and credit facilities for financial institutions and investment banks; the lowering of the federal funds rate; emergency action against short selling practices; a temporary guaranty program for money market funds; the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; and coordinated international efforts to address illiquidity and other weaknesses in the banking sector. The purpose of these legislative and regulatory actions is to stabilize the United States banking system. The EESA, the ARRA and the
other regulatory initiatives described above may not have their desired effects. If the volatility in the markets continues and economic conditions fail to improve or worsen, our business, financial condition and results of operations could be materially and adversely affected.
We may be adversely affected by interest rate changes.
Our earnings are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, and (iii) the average duration of our loan and mortgage-backed securities portfolios. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.
We generally seek to maintain a neutral position in terms of the volume of assets and liabilities that mature or re-price during any period. As such, we have adopted asset and liability management strategies to attempt to minimize the potential adverse effects of changes in interest rates on net interest income, primarily by altering the mix and maturity of loans, investments and funding sources, so that it may reasonably maintain its net interest income and net interest margin. However, interest rate fluctuations, the level and shape of the interest rate yield curve, loan prepayments, loan production and deposit flows are constantly changing and influence the ability to maintain a neutral position. Accordingly, we may not be successful in maintaining a neutral position and, as a result, our net interest margin may be adversely impacted.
We may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. In addition, we may elect to raise additional capital to support our business or to finance acquisitions, if any, or we may otherwise elect or be required to raise additional capital. In that regard, a number of financial institutions have recently raised considerable amounts of capital in response to deterioration in their results of operations and financial condition arising from the turmoil in the mortgage loan market, deteriorating economic conditions, declines in real estate values and other factors. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control, and on our financial performance. Accordingly, we cannot assure
you of our ability to raise additional capital if needed or on terms acceptable to us. If we cannot raise additional capital when needed, it may have a material adverse effect on our financial condition, results of operations and prospects.
Our exposure to operational risks may adversely affect us.
Similar to other financial institutions, we are exposed to many types of operational risk, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, the risk that sensitive customer or company data is compromised, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors. If any of these risks occur, it could result in material adverse consequences for us.
We continually encounter technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements.
The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology will increase efficiency and will enable financial institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our clients.
As a service to our clients, we currently offer an Internet PC banking product. Use of this service involves the transmission of confidential information over public networks. We cannot be sure that advances in computer capabilities, new discoveries in the field of cryptography or other developments will not result in a compromise or breach in the commercially available encryption and authentication technology that we use to protect our clients’ transaction data. If we were to experience such a breach or compromise, we could suffer losses and our operations could be adversely affected.
Our accounting policies and methods impact how we report our financial condition and results of operations. Application of these policies and methods may require management to make estimates about matters that are uncertain.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with U.S. generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in our reporting materially different amounts than would
have been reported under a different alternative. For a description of our significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements. These accounting policies are critical to presenting our financial condition and results of operations. They may require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions.
Changes in accounting standards could materially impact our consolidated financial statements.
The accounting standard setters, including the Financial Accounting Standards Board, SEC and other regulatory bodies, from time to time may change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in changes to previously reported financial results, or a cumulative charge to retained earnings.
Our internal controls may be ineffective.
We regularly review and update our internal controls, disclosure controls and procedures and corporate governance policies and procedures. As a result, we may incur increased costs to maintain and improve our controls and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls or procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations or financial condition.
We rely on dividends from the Bank for substantially all of our revenue.
Citizens First Corporation receives substantially all of its revenue as dividends from the Bank. Federal and state regulations limit the amount of dividends that the Bank may pay to Citizens First. In the event the Bank becomes unable to pay dividends to Citizens First, Citizens First may not be able to service its debt, pay its other obligations or pay dividends on our preferred stock or our common stock. Accordingly, our inability to receive dividends from the Bank could also have a material adverse effect on our business, financial condition and results of operations. Because of losses incurred, the Bank may not pay dividends to the Company without first obtaining regulatory approval.
A small number of customers account for a large percentage of our total deposits.
At December 31, 2009, our ten largest deposit customers accounted for approximately $28.5 million, or 9.9%, of total deposits. If one or more of these customers move their deposits, our net income may be adversely impacted as a result of decreased levels of
liquidity with which to fund growth in our interest earning assets.
We rely on certificates of deposit in excess of $100,000 for a significant portion of our deposit funding.
At December 31, 2009, $78.7 million, or 27.3% of total deposits, consisted of certificates of deposit in excess of $100,000. These depositors tend to be more active in shopping for better interest rates and therefore are either likely to move their deposits or require active repricing to market. In either event, our net income may be adversely impacted as a result of decreased levels of liquidity with which to fund growth in our interest earning assets or increased interest expense.
Efforts to comply with the Sarbanes-Oxley Act will involve significant expenditures, and non-compliance with the Sarbanes-Oxley Act may adversely affect us.
The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission that are now applicable to us, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices. We have experienced, and we expect to continue to experience, greater compliance costs, including costs related to internal controls, as a result of the Sarbanes-Oxley Act. Although our external auditors are not required to attest on our internal controls over financial reporting until 2010 (extended during 2009), we expect these new rules and regulations to continue to increase our accounting, legal and other costs, and to make some activities more difficult, time consuming and costly. In the event that we are unable to maintain or achieve compliance with the Sarbanes-Oxley Act and related rules, we may be adversely affected.
If we identify significant deficiencies or material weaknesses in our internal control over financial reporting that we cannot remediate in a timely manner, or if we are unable to receive a positive attestation from our independent registered public accounting firm with respect to our internal control over financial reporting, the trading price of our common stock could decline, our ability to obtain any necessary equity or debt financing could suffer, and, our common stock could ultimately be delisted from the NASDAQ Global Market. In this event, the liquidity of our common stock would be severely limited and the market price of our common stock would likely decline significantly.
The decline in fair value of our stock could adversely affect our ability to raise capital, dilute current shareholders’ ownership or make it more expensive to raise capital.
The decline in the market prices of financial stocks in general, and our stock in particular, could make it more expensive for us to raise capital in the public or private markets. In many situations, our Board of Directors has the authority, without any vote of our shareholders, to issue shares of our authorized but unissued securities. In the future, we may issue additional securities, through public or private offerings, in order to raise additional capital. Any such issuance of common stock at current trading prices would significantly dilute the ownership of our current shareholders because we would
have to issue more shares than if we had raised the same amount of capital when our share price was higher. A decline in our performance could adversely impact our stock price and the level of interest in an equity offering making it more difficult or expensive to attract investors’ interest. In the case of a debt offering, it could also result in a higher cost of funds, which could negatively impact our future earnings.
Because of our participation in the Capital Purchase Program, we are subject to several restrictions including restrictions on our ability to declare or pay dividends and repurchase our shares as well as restrictions on compensation paid to our executive officers.
Our ability to declare or pay dividends on any of our shares is limited. Specifically, we are unable to declare or pay dividends on our common stock or pari passu preferred shares if we are in arrears on the payment of dividends on the Series A preferred stock. Further, we are not permitted to increase dividends on our common stock above the amount of our last cash dividend of $0.05 per share without the Treasury Department’s approval until December 19, 2011, unless all of the Series A preferred stock has been redeemed or transferred by the Treasury Department to unaffiliated third parties. In addition, our ability to repurchase shares of our common stock is restricted. The consent of the Treasury Department generally is required for us to make any stock repurchase (other than purchases of Series A preferred stock or purchases of junior preferred shares or common stock in connection with the administration of any employee benefit plan in the ordinary course of business and consistent with past practice) until December 19, 2011, unless all of the Series A preferred stock has been redeemed or transferred by the Treasury Department to unaffiliated third parties. Further, our common stock or pari passu preferred shares may not be repurchased if we are in arrears on the payment of Series A preferred stock dividends.
As a recipient of government funding under the Capital Purchase Program, we must comply with the executive compensation and corporate governance standards imposed by the ARRA for so long as the Treasury Department holds any securities acquired from us excluding any period during which the Treasury Department holds only the Warrant. These standards include (but are not limited to) (i) ensuring that incentive compensation plans and arrangements for senior executive officers do not encourage unnecessary and excessive risks that threaten our value; (ii) required clawback of any bonus, retention award or incentive compensation paid (or under a legally binding obligation to be paid) to a senior executive officer based on materially inaccurate financial statements or other materially inaccurate performance metric criteria; (iii) prohibitions on making golden parachute payments to senior executive officers, except for payments for services performed or benefits accrued; (iv) prohibitions on paying or accruing any bonus, retention award or incentive compensation with respect to our President, except for certain grants of restricted stock; (v) prohibitions on compensation plans that encourage manipulation of reported earnings; (vi) retroactive review of bonuses, retention awards or other compensation that the Treasury Department finds to be inconsistent with the purposes of the Capital Purchase Program or otherwise contrary to the public interest; (vii) required establishment of a company-wide policy regarding “excessive or luxury expenditures”; (viii) inclusion in our proxy statements for annual shareholder meetings of a non-binding “say on pay” shareholder vote on the
compensation of executives; and (ix) agreement not to claim a deduction, for federal income tax purposes, for compensation paid to any of the senior executive officers in excess of $500,000 per year.
The Series A preferred stock impacts net income available to holders of our common stock and earnings per share of our common stock, and the Warrant we issued to the Treasury Department may be dilutive to holders of our common stock.
While the additional capital we raised through our participation in the Capital Purchase Program provided further funding to our business, it has increased our equity as well as our preferred dividend requirements. Warrants issued could potentially dilute earnings for shares of common stock currently outstanding. The dividends declared and the accretion of discount on the Series A preferred stock reduces the net income available to holders of our common stock and our earnings per share. The Series A preferred stock also receives preferential treatment in the event of our liquidation, dissolution or winding up. Additionally, the ownership interest of the existing holders of our common stock will be diluted to the extent the Warrant we issued to the Treasury Department is exercised. The common stock underlying the Warrant represents approximately 11.4% of the shares of our common stock outstanding as of December 31, 2009. Although the Treasury Department has agreed not to vote any of the common stock it receives upon exercise of the Warrant, a transferee of any portion of the Warrant or of any common stock acquired upon exercise of the Warrant is not bound by this restriction.
Item 1B.
Item 1B. Unresolved Staff Comments. None.
Item 2.
Item 2. Properties
We currently operate from a nine office network in Warren, Simpson, Barren and Hart Counties, Kentucky.
(1) We sold this branch in the fourth quarter of 2006 to an unrelated party and leased it back.
(2) We closed this office at the end of January 2010.
We also own properties located at 2900 Louisville Road, Bowling Green and on Gator Drive in Bowling Green which may be used for future branch expansion.
Item 3.
Item 3. Legal Proceedings
In the opinion of management, there is no proceeding pending or, to the knowledge of management, threatened, in which an adverse decision could result in a material adverse change in the consolidated financial condition or results of operations of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2009.
Part II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
The common stock of the Company is traded in the NASDAQ Global Market under the symbol “CZFC.” Trading volume in the Company’s common stock is light. As of March 24, 2010, there were approximately 850 shareholders, including 152 shareholders and approximately 698 beneficial owners whose shares are held in “street” name by securities brokers-dealers or other nominees.
The following table shows the reported high and low sales price for the periods:
No cash dividends were paid on common stock during 2009. We paid a cash dividend of $0.05 per share on our common stock in June and December of 2008. Dividends on common stock will be payable in the future at the discretion of the Board of Directors, subject to certain restrictions discussed below and in our financial statements. Quarterly dividends are payable on our cumulative perpetual preferred stock, prior and in preference to the payment of dividends on our common stock, at an annual fixed rate of 6.5%. Quarterly dividends are payable on our Series A preferred stock, prior and in preference to the payment of dividends on our common stock , and pari passu with the
payment of dividends on our cumulative perpetual preferred stock, at an annual fixed rate of 5.0% through December 18, 2013 and at the rate of 9% thereafter.
Our ability to pay dividends depends on the ability of our subsidiary, Citizens First Bank, to pay dividends to us. The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. Under Kentucky law, the Bank may pay dividends only from current or retained net profits. Prior regulatory approval is required to pay dividends which exceed the Bank’s net profits for the current year plus its retained net profits for the preceding two calendar years. State and federal regulatory authorities also have authority to prohibit the Bank from paying dividends if they deem such payment to be an unsafe or unsound practice. See “Business-Supervision and Regulation.”
The Company’s 401(K) plan offers employees the opportunity to invest contributions in a fund consisting primarily of the Company’s common stock. As of December 31, 2009, the common stock fund held 17,905 shares of Company common stock.
The following table sets forth certain information as of December 31, 2009, regarding Company compensation plans under which equity securities of the Company are authorized for issuance.
Item 6.
Item 6. Selected Financial Data. Not Applicable.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with Item 8 “Financial Statements” as well as other information included in this Form 10-K.
Overview of 2009
For the year ended December 31, 2009, we reported a net loss of $(1.6) million compared to a net loss of $(5.6) million for the year ended December 31, 2008. Basic and diluted loss per common share were $(1.34) for the year ended December 31, 2009, compared to $(3.14) for 2008.
Significant developments for the year ended December 31, 2009 were:
·
Deposits grew 5.7% to $288.5 million compared to $273.0 million at December 31, 2008.
·
Total assets decreased $10.9 million, or 3.1% to $344.2 million since the 2008 year-end, led by a decline in loans of $7.8 million.
·
Net interest margin increased to 3.63% for 2009 compared to 3.52% for 2008 as our rates paid on deposits and borrowings declined faster than rates we earned on loans.
·
Provision for loan losses increased $2.8 million, or 146.3%, in comparison to 2008 as the result of increased net loan charge-offs of $4.6 million, or 1.72% of average loans for 2009, compared with $1.3 million, or 0.48% of average loans for 2008.
·
During the fourth quarter, we announced a plan designed to streamline branch delivery and significantly reduce operating expenses. We scheduled two branches to close in January 2010, reduced our workforce by 20% and reorganized our administrative services division.
·
We received notice in October 2009 of a hostile tender offer of our Company by Porter Bancorp, Inc., which was ultimately withdrawn by Porter prior to its expiration date. We incurred expenses of approximately $350,000 defending against this unsolicited tender offer.
Application of Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles and follow general practices within the financial services industry. The most significant accounting policies followed by the Company are presented in Note 1 to the Consolidated Financial Statements. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses and the evaluation of our goodwill and other intangible assets to be the accounting areas that require 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 incurred in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows or underlying collateral values on impaired loans, estimated losses on loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheet. Note 1 to the Consolidated Financial Statements describes the methodology used to determine the allowance for loan losses, and a discussion of the factors driving changes in the amount of the allowance for loan losses is included under “Asset Quality and the Allowance for Loan Losses” below.
Goodwill and Other Intangibles
Management is required to assess goodwill and other intangible assets annually for impairment or more often if certain factors are identified which could imply potential impairment. This assessment involves preparing analyses of market multiples for similar operations, and estimating the fair value of the reporting unit to which the goodwill is allocated. If the analysis results in an estimate of fair value materially less than the carrying value we would be required to take a charge against earnings to write down the asset to the lower fair value. Based on its assessment completed with the help of an outside valuation firm, we believe our goodwill of $2.6 million and other identifiable intangibles of $1.3 million are not impaired and are properly recorded in the consolidated financial statements as of December 31, 2009.
Valuation of Deferred Tax Asset
We evaluate deferred tax assets quarterly. We will realize this asset to the extent we are profitable or able to carry back tax losses to periods in which we paid income taxes. Our determination of the realization of the deferred tax asset will be based upon management’s judgment of various future events and uncertainties, including the timing and amount of future income we will earn and the implementation of various tax planning strategies to maximize realization of the deferred tax assets. Management believes we will generate sufficient operating earnings to realize the deferred tax asset. Examinations of our income tax returns or changes in tax law may impact the tax liabilities and resulting provisions for income taxes.
Results of Operations
Net Interest Income
Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets, such as loans and securities, and the total interest cost of the deposits and borrowings obtained to fund these assets. Factors that influence the level of net interest income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, the level of non-performing loans and non-earning assets, and the amount of non-interest bearing deposits supporting earning assets.
For the year ended December 31, 2009, net interest income was $11.0 million, an increase of $80,000, or 0.7%, over net interest income of $10.9 million in 2008. The net interest margin in 2009 was 3.63%, compared to 3.52% in 2008. This increase of 11 basis points resulted primarily from a reduction in interest expense which exceeded the reduction in interest income. The prime rate remained stable throughout 2009 at 3.25%, and both loans and deposits renewed at lower rates throughout the year. Interest rates were more volatile in 2008, with reductions in the federal funds target rate and seven prime rate cuts that totaled 400 basis points.
Net Interest Analysis Summary
Our average interest-earning assets were $313.9 million for 2009, compared with $321.5 million for 2008, a 2.4% decrease primarily attributable to a decrease in outstanding loans. Average loans were $265.4 million for 2009, compared with $274.0
million for 2008, a 3.1% decrease. Our total interest income decreased 14.8% to $17.8 million for 2009, compared with $20.9 million for 2008. The change was due primarily to lower loan yields, although reduced volume also contributed to decline.
Our average interest-bearing liabilities decreased by 7.8% to $270.7 million for 2009, compared with $293.7 million for 2008. Our total interest expense decreased 33.1% to $6.4 million for 2009, compared with $9.6 million during 2008. The change was due primarily to a decrease in the rates of time deposits. Our average volume of time deposits decreased 11.2% to $169.0 million for 2009, compared with $190.3 million for 2008. The average interest rate paid on time deposits decreased to 3.07% for 2009, compared with 4.09% for 2008. The cost of funds in total decreased from 3.27% in 2008 to 2.37% in 2009. The decrease in cost of funds was the result of the continued repricing of certificates of deposit at maturity at lower interest rates, and decreased rates on FHLB advances.
The following table sets forth for the years ended December 31, 2009 and 2008 information regarding average balances of assets and liabilities as well as the amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. We have calculated the yields and costs for the periods indicated by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented.
(1)
Income and yield stated at a tax equivalent basis for nontaxable securities using the marginal corporate Federal tax rate of 34.0%.
(2)
Average loans include nonperforming loans. Interest income includes interest and fees on loans, but does not include interest on loans 90 days or more past due.
(3)
Net interest income as a percentage of average interest-earning assets.
Rate/Volume Analysis
Net interest income can be analyzed in terms of the impact of changing interest rates and changing volumes. The following table sets forth the effect which the varying levels of interest earning assets and interest bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented. Changes in rate-volume are proportionately allocated between rate and volume variances.
(1) Income stated at a fully tax equivalent basis using the marginal corporate Federal tax rate of 34.0%.
Provision for Loan Losses The provision for loan losses for 2009 was $4.7 million or 1.79% of average loans, compared to a provision of $1.9 million or 0.70% of average loans during 2008. We had net charge-offs totaling $4.6 million during 2009, compared to $1.3 million during 2008. The increase in the provision for loan losses during 2009 was due to the increase in charge offs and adverse economic factors.
Non-interest Income
Non-interest income totaled $3.0 million in 2009, compared to $2.8 million in 2008, an increase of $163,000 or 5.7%. The primary increases in non-interest income was a $361,000 gain recognized on securities sold during the second quarter of 2009, partially offset by a $243,000 decline in deposit service charges as a result of the decrease in deposits. Other service charges and fees increased $135,000, $118,000 of which is related to ATM network and surcharge income. Other non-interest income decreased $66,000 in 2009 from 2008. Other non-interest income in 2008 included a $54,000 gain on the sale of a Glasgow facility. The following table shows the detailed components of non-interest income:
Non-interest Expense
Non-interest expense decreased 38.4%, or $7.7 million, from $20.1 million in 2008 to $12.4 million in 2009. The largest expense incurred in 2008 was a goodwill impairment charge of $8.7 million. No goodwill impairment charge was necessary in 2009. Salaries and employee benefits increased $134,000 in 2009 as compared to 2008, due primarily to severance payments which included a former executive officer. Net occupancy expense increased $236,000 due to the addition of a branch in Barren County during 2009, as well as expenses related to the closing of other branches in the fourth quarter of 2009. Professional and legal expenses increased $477,000 in 2009 primarily due to expenses incurred in defending the tender offer by Porter Bancorp, Inc. in the fourth quarter of 2009. FDIC insurance expense increased $295,000 in 2009 due to the special additional assessment paid in the third quarter as well as increased FDIC insurance premiums in 2009.
The increases and decreases in expense in 2009 by major categories are as follows:
Income Taxes
Income tax expense was calculated using the Company’s expected effective rate for 2009 and 2008. We have recognized deferred tax liabilities and assets to show the tax effects of differences between the financial statement and tax bases of assets and liabilities. Our statutory federal tax rate was 34.0% in both 2009 and 2008. The effective tax rate for 2009 was (47.4%), compared to (31.3%) for 2008. The difference between the statutory and effective rates are impacted by such factors as income from tax-exempt loans, tax-exempt income on state and municipal securities, and income on bank owned life insurance.
Balance Sheet Review
Our assets at year end 2009 totaled $344.2 million, compared with $355.1 million at December 31, 2008, a decrease of $10.9 million or 3.1%. Average interest earning assets decreased $7.6 million from 2008 to 2009, from $321.5 million to $313.9 million.
Loans
Total loans averaged $265.4 million in 2009, compared to $274.0 million in 2008. At year-end 2009, loans totaled $263.9 million, compared to $271.7 million at year-end 2008, a decrease of $7.8 million or 2.9%. We experienced a small decline in all segments of our loan portfolio except commercial real estate loans. The following table presents a summary of the loan portfolio by category:
Our commercial real estate loans include financing for industrial developments, residential developments, retail shopping centers, industrial buildings, restaurants, and hotels. The primary source of repayment cannot be traced to any specific industry group. The percentage distribution of our loans by industry as of December 31, 2009 and 2008 is shown in the following table:
The majority of our loans are to customers located in the Kentucky counties of Barren, Hart, Simpson and Warren. As of December 31, 2009, the Company’s 20 largest credit relationships consisted of loans and loan commitments ranging from $2.6 million to $5.2 million. The aggregate amount of these credit relationships was $68.1 million with total commitments of $74.9 million.
Our lending activities are subject to a variety of lending limits imposed by state and federal law. Citizens First Bank’s secured legal lending limit to a single borrower was approximately $10.6 million at December 31, 2009.
As of December 31, 2009, we had $10.2 million of participations in loans purchased from, and $30.8 million of participations in loans sold to, other banks. As of December 31, 2008, we had $10.5 million of participations in loans purchased from, and $24.0 million of participations in loans sold to, other banks.
The following table sets forth the maturity distribution of our loan portfolio as of December 31, 2009. Maturities are based upon contractual terms. Our policy is to specifically review and approve all loans renewed; loans are not automatically rolled over.
The table below presents loans outstanding as of December 31, 2009 with maturities greater than one year categorized by fixed and variable interest rates:
Asset and Liability Management
We manage our assets and liabilities to provide a consistent level of liquidity to accommodate normal fluctuations in loans and deposits. The yield on approximately 50.1% of our earning assets as of December 31, 2009, adjusts simultaneously with changes in an external index, primarily the highest prime rate as quoted in the Wall Street Journal. A majority of our interest bearing liabilities have been issued with fixed terms and can only be repriced at maturity. The prime rate remained stable at 3.25% during 2009. In 2008 the prime rate decreased seven times for a total of 400 basis points. Although the yield on our earning assets declined during 2009, the cost of our interest bearing liabilities declined at a faster rate. This caused a slight increase in the net interest margin. If interest rates stabilize for a period of time, the difference between interest earning assets and interest bearing liabilities will tend to stabilize. In a stable
rate environment, our net interest margin will be impacted by, among other factors, a change in the mix of earning assets, with our deposit growth being invested in federal funds sold, investment securities or loans.
Asset Quality and the Allowance for Loan Losses
We consider asset quality to be of primary importance, and employed two full-time internal credit review people to monitor adherence to the lending policy in 2009. We use a year round internal credit review to assess a minimum of 30% of our loan portfolio. The focus of the reviews is centered in the commercial and commercial real estate portfolios, as they comprise the majority of the Bank’s loan portfolio. Commercial loan relationships in excess of $500,000 are reviewed on a 12-18 month cycle, with a statistical sample of consumer and residential real estate portfolios performed annually. Management is required to address any criticisms raised during the loan review and to take appropriate actions as warranted.
The allowance for loan losses represents management’s estimate of probable credit losses incurred in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change.
The allowance for loan losses is established through a provision for loan losses charged to expense. At December 31, 2009, the allowance was $4.0 million, compared to $3.8 million at the end of 2008. The ratio of the allowance for loan losses to total loans (excluding mortgage loans held for sale) at December 31, 2009 was 1.51%, compared to 1.40% at December 31, 2008.
The provision to the allowance for loan losses is based on management’s and the loan committee’s ongoing review and evaluation of the loan portfolio and general economic conditions on a monthly basis, and reviewed by the full board of directors on a quarterly basis. Management bases its review and evaluation of the allowance for loan losses on an analysis of historical trends, significant problem loans, current market value of real estate or collateral and certain economic and other factors affecting loans and real estate or collateral securing these loans. Loans are charged off when, in the opinion of management, they are deemed to be uncollectible. We charge recognized losses against the allowance and add subsequent recoveries to the allowance. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. The allowance for loan losses is subject to periodic evaluation by various regulatory authorities and may be subject to adjustment based upon information that is available to them at the time of their examination.
The following table sets forth selected asset quality ratios for the periods indicated:
Non-performing loans are defined as non-accrual loans, loans accruing but past due 90 days or more, and restructured loans. Non-performing assets are defined as non-performing loans, other real estate owned, and repossessed assets. The non-performing loan total at year-end 2009 consisted of 22 non-accrual loans totaling $1.2 million, and 7 loans over 90 days past due totaling $48,000. Loans over 90 days past due which are still accruing either have adequate collateral or a definite repayment plan in place. Non-performing assets also includes other real estate owned of three commercial properties totaling $1.1 million and one small residential property totaling $45,000.
Management classifies commercial and commercial real estate loans as non-accrual when principal or interest is past due 90 days or more and the loan is not adequately collateralized and is in the process of collection, or when, in the opinion of management, principal or interest is not likely to be paid in accordance with the terms of the obligation. We charge off consumer loans after 120 days of delinquency unless they are 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. We categorize loans as restructured if the original interest rate, repayment terms, or both were restructured due to deterioration in the financial condition of the borrower. However, restructured loans that demonstrate performance under the restructured terms and that yield a market rate of interest may be removed from restructured status in the year following the restructure.
Loans that exhibit probable or observed credit weaknesses are subject to individual review. Where appropriate, allocations for individual loans are included in the allowance calculation based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal
options available to the Company. Included in the review of individual loans are those that are impaired as provided in ASC Topic 310 “Receivables”. We evaluate the collectability of both principal and interest when assessing the need for a loss accrual. Historical loss rates are applied to other loans not subject to individual allocations. These historical loss rates may be adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition. Factors which management considers in the analysis include the effects of the national and local economies, trends in the nature and volume of loans (delinquencies, charge-offs and nonaccrual loans), changes in mix, asset quality trends, risk management and loan administration, changes in internal lending policies and credit standards, and examination results from bank regulatory agencies and our internal credit examiners.
We maintain a modest unallocated amount in the allowance to recognize the imprecision in estimating and measuring losses when evaluating allocations for individual loans or pools of loans. Allocations 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.
Generally, we do not include loans that are current as to principal and interest in our non-performing assets categories. However, we will still classify a current loan as a potential problem loan if we develop doubts about the borrower’s future performance under the terms of the loan contract. We consider the level of potential problem loans in our determination of the allowance for loan losses. At December 31, 2009 and 2008, we reported classified loans totaling $5.5 million and $6.3 million, respectively, as potential problem loans and made allocations in the allowance for loan losses. Total potential problem loans as a percentage of total loans at December 31, 2009 and 2008 were 2.1% and 2.3%, respectively.
The following table sets forth an analysis of our allowance for loan losses for the years ended December 31, 2009 and 2008.
In 2009, net charge-offs increased significantly to $4.6 million from $1.3 million in 2008. One large commercial customer related to the automotive industry ceased business operations during the year which contributed to the higher level of net charge-offs in 2009. We charged-off $2.4 million during the second quarter and $830,000 during the fourth quarter to this one customer relationship as business assets were being liquidated. We have no loans remaining with this borrower. There was also an increase in the volume of consumer charge-offs. In addition, specific credits in the commercial and commercial real estate portfolios were assigned increased allocation rates as of December 31, 2009. These factors, coupled with increases in bankruptcies and foreclosures and the overall state of the national economy, resulted in the increase in the provision for loan losses during 2009.
The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.
We believe that the allowance for loan losses at December 31, 2009, provides for probable incurred credit losses in the loan portfolio as of that date. That determination is based on the best information available to management, but necessarily involves uncertainties and matters of judgment and, therefore, cannot be determined with precision and could be susceptible to significant change in the future. In addition, bank regulatory authorities, as a part of their periodic examinations, may reach different conclusions regarding the quality of the loan portfolio and the level of the allowance, which could require us to make additional provisions in the future. During 2009, the allowance for loan losses allocated to the commercial portfolio increased from $1.6 million to $2.1 million. During this same period, specific allocations for commercial loans increased from $1.0 million to $1.4 million. Also during this period, trends in the bank’s portfolio indicate historically low past due levels, with the Bank’s past due loans as a percentage of total loans decreasing from 2.08% at December 31, 2008 to 0.44% at December 31, 2009.
Securities
Our securities portfolio serves as a source of liquidity and earnings and contributes to the management of interest rate risk. Our portfolio also provides us with securities to pledge as required collateral for certain governmental deposits and borrowed funds.
The investment securities portfolio is comprised primarily of U.S. Government agency securities, mortgage-backed securities, and tax-exempt securities of state and political subdivisions. Securities are all classified as available-for-sale. The investment portfolio increased by $1.1 million, or 2.8%, to $41.1 million at December 31, 2009 compared with $40.0 million at December 31, 2008. We focused new investments in 2009 primarily in short-term callable agency securities.
The table below presents the carrying value of securities by major category:
The table below presents the maturities and yield characteristics of securities as of December 31, 2009. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(1) Agency mortgage-backed securities (residential) are grouped into average lives based on December 2009 prepayment projections.
(2) The weighted average yields are based on amortized cost and municipal securities are calculated on a full tax-equivalent basis.
Other securities consist of one single issue trust preferred security which has experienced a decline in fair value due to inactivity in the market. No impairment charge is being taken as no loss of principal is anticipated and all principal and interest payments are being received as scheduled. All rated securities are investment grade. For those that are not rated, the financial condition has been evaluated and no adverse conditions were identified related to repayment. Declines in fair value are a function of rate changes in the market and market illiquidity. The Company does not intend to sell these securities and does not believe it will be required to sell these securities.
Deferred Tax Assets
We have a net deferred tax asset of $3.8 million at December 31, 2009. We evaluate this asset on a quarterly basis. To the extent we believe it is more likely than not that it will not be utilized, we will establish a valuation allowance to reduce its carrying amount to the amount it expects to be realized. At December 31, 2009, no valuation allowance has been established against the outstanding deferred tax asset. The deferred tax asset will be utilized as taxable income is generated in future years.
Deposits
We offer traditional deposit products, including non-interest-bearing and interest-bearing checking (or NOW accounts), commercial checking, money market accounts, savings accounts and certificates of deposit. We compete for deposits through our branch network with competitive pricing and advertising.
Total deposits averaged $274.7 million during 2009, a decrease of $15.4 million, or 5.3%, compared to $290.1 million in 2008. Average deposits declined during the year as higher cost deposits matured and did not renew at the interest rates we offered at that time. Deposits at December 31, 2009 totaled $288.5 million, an increase of $15.5 million or 5.7% from $273.0 million at December 31, 2008.
We utilize brokered certificates of deposit and will continue to utilize these sources for deposits when they can be cost-effective. At December 31, 2009 and 2008, these brokered deposits totaled $28.1 million and $37.8 million, respectively. At December 31, 2009 and 2008, these brokered deposits constituted approximately 9.7% and 13.1% of our total deposits, respectively.
Time deposits of $100,000 or more totaled $ 78.7 million at December 31, 2009, compared to $76.3 million at December 31, 2008. Interest expense on time deposits of $100,000 or more was $2.5 million in 2009, compared to $3.4 million in 2008. A summary of average balances and rates paid on deposits for the years ended December 31, 2009 and 2008 follows.
The following table shows the maturities of time deposits of $100,000 or more as of December 31, 2009:
Liquidity, Other Borrowings, and Capital Resources
Borrowings
FHLB Advances - We obtain advances from the Federal Home Bank of Cincinnati (FHLB) for funding and liability management. These advances are collateralized by a blanket agreement of eligible 1-4 family residential mortgage loans and eligible commercial real estate. Rates vary based on the term to repayment, and are summarized below as of December 31, 2009:
At December 31, 2009, we had available collateral to borrow an additional $24.4 million from the FHLB. FHLB borrowings decreased in 2009 as rates paid on federal funds sold declined and borrowing were paid off instead of selling funds.
In 2005, we entered into a credit agreement with a correspondent bank to be used for operating capital and general corporate purposes. The line had a total availability of $3.0 million and matured September 26, 2008. The line was not renewed.
At December 31, 2009, we had established Federal Funds lines of credit totaling $22.3 million with four correspondent banks. No amounts were drawn as of December 31, 2009 or 2008.
Repurchase agreements mature in one business day. The rate paid on these accounts is variable at our discretion and is based on a tiered balance calculation.
We issued $5.0 million in subordinated debentures in October, 2006 in conjunction with the acquisition of KBC. These subordinated debentures bear an interest rate, which reprices each calendar quarter, of 165 basis points over 3-month LIBOR (London Inter Bank Offering Rate). The rates as of December 31, 2009 and 2008 were 1.94% and 5.53%, respectively.
Information regarding our borrowings as of December 31, 2009 and 2008 is presented below:
Capital
Stockholders’ equity was $36.9 million on December 31, 2009, a decrease of $2.4 million or 6.2%, from $39.3 million on December 31, 2008. Retained earnings decreased due to our net loss and the payment of preferred dividends. No common dividends were paid during 2009. During 2008, we issued 250 shares of Series A preferred stock in connection with the TARP Capital Purchase Program for a purchase price of $8,779,000. These shares pay a cumulative annual dividend of 5% for the first five years and 9% thereafter.
We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken could have a material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under the regulatory
accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Under quantitative measures established by regulation to ensure capital adequacy, we are required to maintain minimum amounts and ratios of total Tier 1 capital to risk-weighted assets and to total assets. We believe we met all capital adequacy requirements as of December 31, 2009 and 2008.
Our capital ratios as of December 31, 2009, and 2008 (calculated in accordance with regulatory guidelines) were as follows:
The Bank’s capital ratios as of December 31, 2009, and 2008 (calculated in accordance with regulatory guidelines) were as follows:
At December 31, 2009 and 2008, we were categorized as “well capitalized” under the regulatory framework for prompt corrective action.
Contractual Obligations
The following table summarizes our contractual obligations and other commitments to make future payments as of December 31, 2009:
FHLB advances include arrangements under various FHLB credit programs. Long-term FHLB debt is more fully described under the caption “Federal Home Loan Bank Advances and Letter of Credit” in Note 7 of our 2009 audited consolidated financial statements. Lease commitments include the leases in place for certain branch sites.
Liquidity
Our objective for liquidity management is to ensure that we have funds available to meet deposit withdrawals and credit demands without unduly penalizing profitability. In order to maintain a proper level of liquidity, the Bank has several sources of funds available on a daily basis that can be used for liquidity purposes. Those sources of funds include the Bank’s core deposits, cash flow generated by repayment of principal and interest on loans and investment securities; FHLB borrowings; and federal funds purchased and securities sold under agreements to repurchase. While maturities and scheduled amortization of loans and investment securities are generally a predictable source of funds, deposit outflows and mortgage prepayments are influenced significantly by general interest rates, economic conditions, and competition in our local markets.
Our asset and liability management committee meets monthly and monitors the composition of the balance sheet to ensure comprehensive management of interest rate risk and liquidity. We prepare a monthly cash flow report which forecasts funding needs and availability for the coming months, based on forecasts of loan closings and payoffs, potentially callable securities, and other factors
Off-Balance Sheet Risk
We are a party to financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a client as long as the client has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee.
At December 31, 2009, unfunded commitments to extend credit totaled $31.9 million, of which $4.9 million were at fixed rates and $27.0 million were at variable rates. At December 31, 2008, unfunded commitments to extend credit totaled $36.9 million, of which $4.9 million were at fixed rates and $32.0 million were at variable rates. We evaluate each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.
We had letters of credit outstanding totaling $1.7 million and $2.1 million at December 31, 2009 and 2008, respectively. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.
Except as otherwise disclosed, we are not involved in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements, or transactions that could result in liquidity needs or other commitments that significantly impact earnings.
Impact of Inflation and Changing Prices
The consolidated financial statements and related financial data presented in this filing have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Our principal financial objective is to achieve long-term profitability while reducing exposure to fluctuating market interest rates. The Company has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. In order to reduce the exposure to interest rate fluctuations, the Company has developed strategies to manage its liquidity and shorten its effective maturities of certain interest-earning assets. We do not maintain a trading account for any class of financial instrument nor do we engage in hedging activities or purchase high-risk derivative instruments, and we are not subject to foreign exchange rate risk or commodity price risk.
We monitor interest rate sensitivity and interest rate risk with an earnings simulation model generated by First National Bankers Bank of Louisiana who employs the BancWare ALM System. The BancWare ALM system uses rate risk measurement techniques to produce a reasonable estimate of interest margin risks. The system provides several methods for measuring interest rate risk, including rate sensitivity gap analysis to show cash flow and repricing information, and margin simulation, or rate shocking, to quantify the actual income risk, by modeling the Company’s sensitivity to changes in cash flows over a variety of interest rate scenarios. The program performs a full simulation of each balance sheet category under various rate change conditions and calculates the net interest income change for each. Each category’s interest change is calculated as rates ramp up and down. In addition, the prepayment speeds and repricing speeds are changed.
The following illustrates the effects on net interest income of an immediate shift in market interest rates from the earnings simulation model as of December 31, 2009:
As of December 31, 2009, our balance sheet was in an asset-sensitive position for nine months and then moves to a liability-sensitive position in the one year timeframe. During the asset-sensitive timeframe, an increase in interest rates would have a positive effect on earnings and a decrease in interest rates would have a negative effect on earnings. The Company’s interest rate risk position is also impacted by the activation of floors on variable rate loans subject to repricing during the timeframe.
In preparing the preceding table, we used certain assumptions relating to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.
Item 8.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the Company and report of independent accountants are included herein:
· Report of Independent Registered Public Accounting Firm, Crowe Horwath LLP
· Consolidated Balance Sheets-December 31, 2009 and 2008
· Consolidated Statements of Operations -Years ended December 31, 2009 and 2008
· Consolidated Statements of Changes in Stockholders’ Equity-Years ended December 31, 2009 and 2008
· Consolidated Statements of Cash Flows-Years ended December 31, 2009 and 2008
· Notes to Consolidated Financial Statements
Crowe Horwath LLP
Independent Member Crowe Horwath International
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Citizens First Corporation
Bowling Green, Kentucky
We have audited the accompanying consolidated balance sheets of Citizens First Corporation as of December 31, 2009 and 2008 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Citizens First Corporation as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2009 in conformity with U.S. generally accepted accounting principles.
/s/ Crowe Horwath LLP
Louisville, Kentucky
March 30, 2010
Citizens First Corporation
Consolidated Balance Sheets
December 31
See Notes to Consolidated Financial Statements
Citizens First Corporation
Consolidated Statements of Operations
Years ended December 31
See Notes to Consolidated Financial Statements
Citizens First Corporation
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31
See Notes to Consolidated Financial Statements
Citizens First Corporation
Consolidated Statements of Cash Flows
Years Ended December 31
See Notes to Consolidated Financial Statements
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations and Principles of Consolidation - The consolidated financial statements include Citizens First Corporation and its wholly-owned subsidiary Citizens First Bank, Inc., together referred to as “the Company”. Intercompany transactions and balances are eliminated in consolidation.
The Company provides financial services to individual and corporate customers in Warren, Simpson, Barren and Hart counties in Kentucky. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial and consumer loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. There are no significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is dependent on the real estate and general economic conditions in the area.
Use of Estimates - To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, goodwill, intangible assets, realization of deferred tax assets, and fair values of financial instruments are particularly subject to change.
Cash Flows - Cash and cash equivalents includes cash, deposits with other financial institutions under 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, and federal funds purchased and repurchase agreements.
Securities - Debt securities are classified as available for sale when they might be sold before maturity. Equity securities with readily determinable fair values are classified as available for sale. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income (loss), net of tax.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 1: Nature of Operations and Summary of Significant Accounting Policies (Continued)
Loans Held for Sale - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Gains on sales of mortgage loans are recorded at the time of disbursement by an investor at the difference between the sales proceeds and the loan’s carrying value. Loans are sold servicing released.
Loans - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term on the level-yield method. Generally, loans are placed on non-accrual status at 90 days past due and interest is considered a loss, unless the loan is well secured and in the process of collection.
All interest accrued but not received for loans placed on nonaccrual are reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses - The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 1: Nature of Operations and Summary of Significant Accounting Policies (Continued)
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.
Federal Home Loan Bank (FHLB) Stock- The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Premises and Equipment - Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from twenty-five to forty years. Leasehold improvements are amortized over the shorter of the life of the lease or the life of the asset. Furniture, fixtures and equipment are depreciated using the straight-line with useful lives ranging from three to seven years.
Foreclosed Assets - Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value, less costs to sell, at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management to validate the carrying value of the foreclosed properties.
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 1: Nature of Operations and Summary of Significant Accounting Policies (Continued)
Revenue and expenses from operations are recorded through the income statement. Foreclosed assets were $1.2 million at December 31, 2009 and 2008, respectively and are included in Other Assets on the Consolidated Balance Sheets.
Bank Owned Life Insurance - The Bank has purchased life insurance policies on certain key employees. In accordance with ASC 325, Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Goodwill and Other Intangible Assets - Prior to January 1, 2009, goodwill resulted from business acquisitions and represented the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is tested annually for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value in the period identified. The Company has selected October 31 as the date to perform the annual impairment test. The Company’s assessment did not identify impairment of goodwill as of December 31, 2009. As of December 31, 2008, goodwill was determined to be impaired and the carrying value was reduced by $8.7 million. The balance of goodwill as of December 31, 2009 and December 31, 2008, respectively, was $2.6 million.
Other intangible assets consist largely of core deposit intangible assets arising from a bank acquisition. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives of 8 years.
Long-Term Assets - Premises and equipment, core deposit and other intangible assets, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Loan Commitments and Related Financial Instruments - Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 1: Nature of Operations and Summary of Significant Accounting Policies (Continued)
Income Taxes - Deferred tax assets and liabilities are recognized for the tax effects of differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized. The Company files consolidated income tax returns with its subsidiary.
The Company adopted guidance issued by the FASB with respect to accounting for uncertainty in income taxes as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
The Company recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other expense.
Stock Based Compensation Plans - Compensation cost is recognized for stock options issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation cost is recognized over the required service period, generally defined as the vesting period.
Retirement Plans - Employee 401(k) expense is the amount of matching contributions.
Operating Segments - While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.
Earnings (Loss) per Common Share - Basic earnings (loss) per common share is net income (loss) available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share include the dilutive effect of additional potential common shares issuable under stock options and preferred stock. Earnings (loss) and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 1:
Nature of Operations and Summary of Significant Accounting Policies (Continued)
Comprehensive Income/(Loss) - Comprehensive income/(loss) consists of net income/(loss) and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale which are also recognized as a separate component of equity.
Loss Contingencies - Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.
Dividend Restriction - Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to shareholders.
Fair Value of Financial Instruments - Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Adoption of New Accounting Standards - In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (ASC 820-10). This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard was effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157, which is currently FASB ASC 820-10. This FSP delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The impact of adoption was not material.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations (ASC 805). ASC 805 establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 1:
Nature of Operations and Summary of Significant Accounting Policies (Continued)
noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. ASC 805 was effective for fiscal years beginning on or after December 15, 2008. The adoption of this standard did not have a material effect on the Company’s results of operations or financial position but will depend on future acquisitions, if any.
In June 2009, the FASB issued FASB ASC Topic 105 “Generally Accepted Accounting Principles.” With the issuance of ASC Topic 105 the FASB Accounting Standards Codification TM (Codification) became the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this ASC, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification became nonauthoritative. This ASC was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this ASC did not have a material effect on the results of operations or financial position.
In April 2009, the FASB issued FASB ASC Topic 320 “Investments - Debt and Equity Securities,” which amends existing guidance for determining whether impairment is other-than-temporary for debt securities. The ASC requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. Additionally, the ASC expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. This ASC is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this ASC did not have an impact at the date of adoption.
Effect of newly issued but not yet effective accounting standards:
In June 2009, the FASB issued Statements No. 166, Accounting for Transfers of Financial Assets,(ASC 860-10) and No. 167, Amendments to FASB Interpretation No. 46(R), (ASC 810-10). ASC 860-10 will require more information about transfers of financial assets, including securitization transactions, and where entities have
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 1:
Nature of Operations and Summary of Significant Accounting Policies (Continued)
continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures.
ASC 810-10 replaces the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with a qualitative approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity (VIE) that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. ASC860-10 and ASC 810-10 will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. The Company plans to adopt these statements in the first quarter of 2010; however, does not expect the adoption to have a material effect on the results of operations or financial position.
Reclassifications - Certain reclassifications have been made to the 2008 financial statements to conform to the 2009 financial statement presentation.
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 2: Available-For-Sale Securities
The following table summarizes the amortized cost and fair value of the available for sale investment securities portfolio at December 31, 2009 and December 31, 2008 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss):
The proceeds from sales and calls of securities and the associated gains are listed below:
The tax provision related to these realized gains were $123,000 and $0, respectively.
The amortized cost and fair value of investment securities at December 31, 2009 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 2: Available-For-Sale Securities (Continued)
Securities pledged at year end 2009 and 2008 had a carrying amount of $36.0 million and $37.9 million and were pledged to secure public deposits and repurchase agreements.
At year end 2009 and 2008, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.
The following table summarizes the investment securities with unrealized losses at December 31, 2009 and 2008, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position:
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 2: Available-For-Sale Securities (Continued)
Other-Than-Temporary-Impairment
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Investment securities classified as available for sale are generally evaluated for OTTI under ASC Topic 320, “Investments - Debt and Equity Securities.”
In determining OTTI under the ASC Topic 320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
As of December 31, 2009, the Company’s security portfolio consisted of $41.1 million fair value of securities, $12.2 million, or 16 securities, of which were in an unrealized loss position.
Current market conditions have allowed some increase in the fair market value of the investment portfolio at December 31, 2009; however, a full recovery has not yet occurred. No impairment charge is being taken as no loss of principal or interest is anticipated. All principal and interest payments are being received as scheduled. All rated securities are investment grade. For those that are not rated, the financial condition has been evaluated and no adverse conditions were identified related to repayment. Declines in fair value are a function of rates differences in the market and market illiquidity. The Company does not intend or is not expected to be required to sell these securities before recovery of their amortized cost basis.
The Company’s unrealized losses relate primarily to its investment in a single trust preferred security. The security is a single-issuer trust preferred that is not rated. On a
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
quarterly basis, we evaluate the creditworthiness of the issuer, a bank holding company with operations in the state of Kentucky. Based on the issuer’s continued profitability and well-capitalized position, we do not deem that there is credit loss. The decline in fair value is primarily attributable to temporary illiquidity and the financial crisis affecting these markets and not to the expected cash flows of the individual securities. We have evaluated the financial condition and near term prospects of the issuer and expect to fully recover our cost basis. This security continues to pay interest as agreed and future payments are expected to be made as agreed. This security is not considered to be other-than-temporarily impaired.
Note 3: Loans and Allowance for Loan Losses
Categories of loans at December 31 include:
Activity in the allowance for loan losses was as follows:
One large commercial customer related to the automotive industry ceased business operations during the year which contributed to the higher level of net charge-offs in 2009. We charged-off $2.4 million during the second quarter and $830,000 during the fourth quarter to this customer as business assets were being liquidated.
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 3: Loans and Allowance for Loan Losses (Continued)
Impaired loans totaled $1.2 million and $2.5 million at December 31, 2009 and 2008, respectively. An allowance for loan losses of $256,000 and $575,000 relates to impaired loans of $1.1 million and $2.5 million at December 31, 2009 and 2008, respectively.
Interest of $78,000 and $146,000 was recognized on average impaired loans of $1.9 million and $3.0 million for 2009 and 2008, respectively. Interest of $56,000 and $141,000 was recognized on impaired loans on a cash basis during 2009 and 2008, respectively.
At December 31, 2009 and 2008, accruing loans delinquent 90 days or more totaled $48,000, and $1.5 million, respectively. Non-accruing loans at December 31, 2009 and 2008 were $1.2 million and $1.1 million, respectively.
Note 4: Premises and Equipment
Major classifications of premises and equipment, stated at cost, are as follows:
Depreciation and amortization expense totaled $1.0 million and $826,000 for 2009 and 2008, respectively.
Operating Leases: The Company leases certain branch properties and equipment under operating leases. Rent expense was $329,000 and $313,000 for 2009 and 2008. Rent commitments, before considering renewal options that generally are present, were as follows (in thousands):
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 4: Premises and Equipment (Continued)
During December 2006, the Company sold a property to an unrelated third party, and subsequently entered into a lease agreement for the property. A gain of $246,000 was deferred and will be recognized over the fifteen year term of the lease. $16,000 of the deferred gain was recognized in 2009 and 2008.
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 5: Goodwill and Intangible Assets
Goodwill
Management performs a goodwill impairment analysis on an annual basis, or more frequently if circumstances warrant. The annual analysis of goodwill for 2008 indicated goodwill impairment. After determining the fair value of assets and liabilities at the measurement date, it was deemed necessary to adjust goodwill by $8.7 million. Goodwill recorded for the purchase of Kentucky Banking Centers, Inc. was reduced by $7.1 million, resulting in a remaining balance of $2.1 million, and goodwill recorded for Commonwealth Mortgage was reduced by $1.6 million, resulting in a remaining balance of $476,000. We engaged a third party valuation firm to evaluate goodwill. We performed our annual goodwill impairment analysis in 2009, which indicated that the fair value of the Company was less than its book value. However, our step 2 analysis indicated that the fair value of net assets relative to the fair value of the Company indicated no impairment. No additional impairment was identified for 2009.
The change in balance for goodwill during the year is as follows:
Acquired Intangible Assets
Acquired intangible assets were as follows at year end:
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 5: Goodwill and Intangible Assets (Continued)
Amortization expense was $276,000 in 2009 and $290,000 in 2008.
Estimated amortization expense for each of the next five years:
Note 6: Deposits
Interest-bearing time deposits in denominations of $100,000 or more were $78.7 million and $76.3 million at December 31, 2009 and 2008. This included brokered deposits of $28.1 million and $37.8 million at year end 2009 and 2008.
At December 31, 2009, the scheduled maturities of time deposits were as follows:
At December 31, 2009, ten customers accounted for approximately $28.5 million, or 9.9%, of total deposits whereas, at December 31, 2008, eight customers accounted for approximately $27.5 million or 10.1% of total deposits.
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 7: Federal Home Loan Bank Advances and Letter of Credit
At year-end, advances from the Federal Home Loan Bank (“FHLB”) were as follows:
Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances were collateralized by $42.2 million and $44.6 million of first mortgage loans under a blanket lien arrangement for both year 2009 and 2008. Based on this collateral and the Company’s holdings of FHLB stock, the Company is eligible to borrow up to an additional $24.4 million at year-end 2009.
Payment Information
Required payments over the next five years are:
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 7:
Federal Home Loan Bank Advances and Letter of Credit (Continued)
Letter of Credit
At year-end 2009, the Bank also had an outstanding Standby Letter of Credit with the Federal Home Loan Bank in the amount of $2.0 million to be used for public unit deposit collateralization. At December 31, 2009, $2.0 million of the letter of credit was pledged to secure public funds.
Note 8: Subordinated Debentures
In October 2006, Citizens First Statutory Trust I, a trust formed by the Company, closed a pooled private offering of $5.0 million trust preferred securities with a liquidation amount of $1,000 per trust security. The Company issued $5.2 million of subordinated debentures to the trust in exchange for ownership of all of the common security of the trust and the proceeds of the preferred securities sold by the trust. In accordance with accounting standards, the trust is not consolidated with the Company’s financial statements, but rather the subordinated debentures are shown as a liability. The Company’s investment in the common stock of the trust was $155,000 and is included in other assets.
The Company may redeem the subordinated debentures, in whole or in part, in a principal amount with integral multiples of $1,000 per trust security, on or after January 1, 2012 at 100% of the principal amount, plus accrued and unpaid interest. The subordinated debentures mature on January 1, 2037. The subordinated debentures are also redeemable in whole or in part from time to time, upon the occurrence of specific events defined within the trust indenture. The Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years.
The subordinated debentures may be included in Tier I capital (with certain limitations applicable) under current regulatory guidelines and interpretations. The securities have a stated maturity of thirty years and bear an interest rate of 165 basis points over the 3-month LIBOR rate. The interest rates at December 31, 2009 and 2008 were 1.94% and 5.53%, respectively.
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 9: Income Taxes
The provision for income taxes includes these components:
A reconciliation of the income tax expense at the statutory rate to the Company’s actual income tax expense is shown below:
The tax effects of temporary differences related to deferred taxes shown on the balance sheets were:
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 9: Income Taxes (Continued)
Given the past history of taxable income and projections of taxable income in the future, the deferred tax asset is considered to be realizable.
Our estimate of the realizability of the deferred tax asset is dependent upon our estimate of projected levels of future taxable income. In performing this analysis, we consider all evidence currently available, both positive and negative, in determining whether based on the weight of that evidence, the deferred tax asset will be realized. Earnings forecasts were prepared for 2010 through 2014. These forecasts include projections of net interest income that are obtained from our asset/liability management model. The credit related information includes estimates of specific and general reserves for the provision for loan losses and net charge-offs. We then combined the income before tax amount with anticipated permanent and timing differences to determine projected taxable income. Based on these projections the net operating loss carryforward is expected to be realized within approximately a three-year time period and has a twenty year carryfoward period before expiration.
Our net deferred tax asset of $3,888 consists of assets of $4,197 and liabilities of $309. The primary components of our gross deferred tax asset includes timing differences representing the excess of the cumulative provision for loan losses over cumulative net charge-offs of $930, goodwill impairment and core deposit intangible amortization of $1,601, and the benefit associated with net operating loss carryforwards of $1,117. The deferred tax asset associated with net operating loss carryforwards arose in 2009 and therefore expires in 2029.
The Company does not have any beginning and ending unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. There were no interest and penalties recorded in the income statement or accrued for the year ending December 31, 2009 related to unrecognized tax benefits.
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 9: Income Taxes (Continued)
The Company files a consolidated U.S. federal income tax return and Kentucky and Tennessee income tax returns. These returns are subject to examination by taxing authorities for all years after 2005.
As of December 31, 2009 and 2008, income taxes receivable were $652,000 and $504,000, respectively, and are included in other assets on the Consolidated Balance Sheet. At December 31, 2009, the Company had a net operating loss carry-forward of approximately $3.0 million for U.S. federal income tax purposes that will expire in 2029 and an alternative minimum tax credit carry-forward of approximately $83,000 that will not expire.
Note 10: Other Comprehensive Income (Loss)
Other comprehensive income (loss) components and related taxes were as follows:
The following is a summary of the accumulated other comprehensive income balances, net of tax:
Unrealized gains (losses) on AFS securities
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 11: Regulatory Matters
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as of December 31, 2009, the Company and Bank meet all capital adequacy requirements to which it is subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year-end 2009 and 2008, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.
The Company’s and the Bank’s actual capital amounts and ratios are also presented in the following table.
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 11: Regulatory Matters(Continued)
The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. During a profitable year, the Bank could, without prior approval, declare dividends equal to any current and prior year net profits retained to the date of the dividend declaration. Due to the loss incurred in 2008 and 2009, the Bank cannot declare common dividends without prior approval.
Note 12: Related Party Transactions
At December 31, 2009 and 2008, the Bank had loans outstanding to executive officers, directors, significant stockholders and their affiliates (related parties) in the amount of $7.9 million and $9.0 million, respectively. The following table shows the activity in the loans outstanding to executive officers, directors, significant stockholders and their affiliates (related parties) during the year:
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 12: Related Party Transactions (Continued)
Deposits from related parties held by the Bank at December 31, 2009 and 2008, respectively, totaled $1.2 million and $1.0 million, respectively.
The following amounts were paid to a related party for advertising services: $9,000 in 2009 and $7,000 in 2008.
Note 13: Employee Benefit Plans
Effective January 1, 2006 the Company has adopted a 401(k) plan covering substantially all employees. Employees may contribute a portion of their compensation (based on regulatory limitations) with the Company matching 100% of the employee’s contribution up to 4% of the employee’s compensation. Employer contributions charged to expense for 2009 and 2008 were $151,000 and $154,000, respectively.
Note 14: Stock Option Plans
In 2002, the Board of Directors adopted the employee stock option plan, which became effective upon the approval of the Company’s stockholders at the annual meeting in April 2003. The purpose of the plan is to afford key employees an incentive to remain in the employ of the Company and its subsidiaries and to use their best efforts on its behalf. 132,300 shares of Company common stock have been reserved for issuance under the plan. 53,651 shares remain available for future issuance. Options granted expire after ten years, and vest ratably over a three year period.
In 2003, the Board of Directors adopted the non-employee director stock option plan for non-employee directors, which became effective upon the approval of the Company’s stockholders 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 stockholders and in attracting and retaining non-employee directors by affording them an opportunity to share in the Company’s future successes. 44,100 shares of common stock have been reserved for issuance under the plan. 29,835 shares remain available for future issuance. Options granted expire after ten years, and are immediately vested.
The fair value of options granted is estimated on the date of the grant using a Black-Scholes option-pricing model. No options were granted during 2009.
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 14: Stock Option Plans (Continued)
ASC718 requires the recognition of stock-based compensation for the number of awards that are ultimately expected to vest. For the years ended December 31, 2009 and 2008, employee and non-employee compensation expense recorded was $14,000 and $116,000, respectively. As of December 31, 2009, there is no unrecognized compensation expense associated with stock options. A summary of the status of the plans at December 31, 2009, and changes during the period then ended is presented below:
The weighted average remaining term for outstanding and exercisable stock options was 5.27 years at December 31, 2009. The aggregate intrinsic value at December 31, 2009 was $0 for stock options outstanding and $0 for stock options exercisable. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of the Company’s common stock as of the reporting date.
Note 15: Preferred Stock and Stock Warrants
The Company has issued two forms of preferred stock: Series A and Cumulative preferred stock. 250 shares of our preferred stock designated as Series A preferred stock, were issued to the U.S. Treasury on December 19, 2008 in connection with the TARP Capital Purchase Program for a purchase price of $8,779,000.
Holders of shares of Series A preferred stock are entitled to receive if, as and when declared by our board of directors or a duly authorized committee of the board, out of assets legally available for payment, cumulative cash dividends at a rate per annum of 5% per share on a liquidation preference of $35,116 per share of Series A preferred stock with respect to each dividend period from December 19, 2008 to, but excluding,
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 15: Preferred Stock and Stock Warrants (Continued)
December 19, 2013. From and after December 19, 2013, holders of shares of Series A preferred stock are entitled to receive cumulative cash dividends at a rate per annum of 9% per share on a liquidation preference of $35,116 per share of Series A preferred stock with respect to each dividend period thereafter. Dividends are payable quarterly in arrears on each February 15, May 15, August 15 and November 15, starting with February 15, 2009. We may defer dividends under the Securities Purchase Agreement (“Purchase Agreement”).
Pursuant to the terms of the American Recovery and Reinvestment Act of 2009, we may, upon prior consultation with the Company’s and the Bank’s appropriate regulatory authority, redeem the Series A preferred stock at any time.
The Series A preferred stock will not be subject to any mandatory redemption, sinking fund or similar provisions. Holders of shares of Series A preferred stock have no right to require the redemption or repurchase of the Series A preferred stock. The holders of the Series A preferred stock generally will not have any voting rights.
Pursuant to the terms of the Purchase Agreement we entered into with the U. S. Treasury in connection with the Capital Purchase Program, our ability to declare or pay dividends on any of our shares is limited. Specifically, we are unable to declare or pay dividends on our common stock or pari passu preferred shares if we are in arrears on the payment of dividends on the Series A preferred stock. Further, we are not permitted to increase dividends on our common stock above the amount of our last cash dividend of $0.05 per share without the Treasury Department’s approval until December 19, 2011, unless all of the Series A preferred stock has been redeemed or transferred by the Treasury Department to unaffiliated third parties.
The Purchase Agreement also subjects the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (the “EESA”). In this connection, as a condition to the closing of the transaction, the Company’s Senior Executive Officers (as defined in the Purchase Agreement) (the “Senior Executive Officers”), (i) voluntarily waived any claim against the U.S. Treasury or the Company for any changes to such officer’s compensation or benefits that are required to comply with the regulation issued by the U.S. Treasury under the TARP Capital Purchase Program and acknowledged that the regulation may require modification of the compensation, bonus, incentive and other benefit plans, arrangements and policies and agreements as they relate to the period the U.S. Treasury owns the preferred stock of the Company.
In connection with the issuance of Series A preferred stock, we issued 254,218 common stock warrants. The initial exercise price applicable to the warrant is $5.18 per
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 15: Preferred Stock and Stock Warrants (Continued)
share of common stock for which the warrant may be exercised. The warrant may be exercised at any time on or before December 19, 2018 by surrender of the warrant and the payment of the exercise price.
The recorded value of the warrants was determined by applying a fair value discount and allocating the proceeds from the Capital Purchase program between the preferred stock and warrants. The discount on the preferred stock will be accreted over the contractual life of five years using an effective yield.
The Company issued a 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 after the date of issuance.
Note 16: Commitments and Credit Risk
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.
The following table outlines the contractual amounts of financial instruments (does not include standby letters of credit) with balance-sheet risk at year end, as follows:
Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan commitments have interest rates ranging from 3.25% to 21.0% and maturities ranging from 6 months to 31.3 years.
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 16: Commitments and Credit Risk(Continued)
Standby Letters of Credit
Standby letters of credit are irrevocable conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. Fees for letters of credit are initially recorded by the Bank as deferred revenue and are included in earnings at the termination of the respective agreements.
Should the Bank be obligated to perform under the standby letters of credit, the Bank may seek recourse from the customer for reimbursement of amounts paid.
The Bank had total outstanding standby letters of credit amounting to $1.7 million and $2.1 million at December 31, 2009 and 2008, respectively, with terms ranging from 55 days to one year.
Note 17: Disclosures About Fair Value
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that are supported by little or no market activity, reflect a company’s own assumptions about market participant assumptions of fair value, and are significant to the fair value of the assets or liabilities.
The fair value of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (level 1 inputs) or matrix pricing, which is
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 17: Disclosures About Fair Value (Continued)
a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (level 2 inputs). The Company does not have any Level 1 securities. Level 2 securities include certain U.S. agency bonds, collateralized mortgage and debt obligations, and certain municipal securities.
Assets and liabilities measured at fair value on a recurring basis are summarized below.
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 17: Disclosures About Fair Value (Continued)
Financial assets measured at fair value on a non-recurring basis are summarized below:
Impaired loans which are measured for impairment using the fair value of collateral for collateral dependent loans, had a carrying value of $1.1 million at December 31, 2009.
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 17: Disclosures About Fair Value (Continued)
with a valuation allowance of $252,000, resulting in an additional provision for loan losses of $151,000 for the year ended December 31, 2009. At December 31, 2008, impaired loans had a carrying amount of $2.3 million, with a valuation allowance of $570,000, resulting in an additional provision for loan losses of $511,000 for the year ended December 31, 2008.
Other real estate owned, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying value of $1.2 million at December 31, 2009. Total writedowns of other real estate owned during the twelve months ended December 31, 2009 were $84,000.
Carrying amount and estimated fair values of financial instruments, not previously presented, at year end were as follows:
The methods and assumptions used to estimate fair value are described as follows:
Carrying amount is the estimated fair value for cash and cash equivalents, interest bearing deposits, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 17: Disclosures About Fair Value (Continued)
repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life. Loans are reported net of the allowance for loan losses. Fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. The fair value of off-balance-sheet items is not considered material. It is not practicable to determine fair value of FHLB stock due to restrictions placed on its transferability.
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 18: Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company:
Condensed Balance Sheets
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 18: Condensed Financial Information (Parent Company Only) (Continued)
Condensed Statements of Cash Flows
Note 19: Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) available for common shareholders by the weighted-average common shares outstanding. Diluted earnings (loss) per share is computed the same as basic earnings (loss) per share, and assumes the conversion of outstanding vested stock options and convertible preferred stock, if dilutive. The following table reconciles basic and diluted earnings (loss) per share for the years ending December 31, 2009 and 2008.
Citizens First Corporation
Notes to Consolidated Financial Statements (Continued)
Note 19: Earnings (Loss) Per Share (Continued)
Stock options for 91,260 and 139,133 shares of common stock were not considered in computing diluted earnings per common share for 2009 and 2008, respectively, because they were antidilutive due to the net loss incurred by the Company. The common stock warrant for 254,218 shares was also anti-dilutive. Convertible preferred shares are not included because they are anti-dilutive for 2009 and 2008.
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9a.
Item 9a. Controls and Procedures
Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information we are required to disclose in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of these disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2009, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are effective in ensuring that all material information required to be filed in this report has been made known to them in a timely fashion.
There was no change in our internal control over financial reporting identified in connection with that evaluation that occurred during the quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this annual report. We, as management of Citizens First Corporation are responsible for establishing and maintaining adequate internal control over financial reporting and for establishing and maintaining adequate internal control over financial reporting that is designed to produce reliable financial statements in conformity with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the system of internal control over financial reporting as of December 31, 2009, in relation to criteria for effective internal control over financial reporting as described in the report Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management concluded that, as of December 31, 2009, its system of internal control over financial reporting is effective based on those criteria.
This annual report does not include an audit report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to audit by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Part III
Item 10.
Item 10. Directors, Executive Officers, and Corporate Governance.
Certain information required by this Item appears under the headings “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance”, and “Election of Directors” and “Executive Officers” in the Proxy Statement of the Company for the 2010 Annual Meeting of Shareholders to be held May 20, 2010, and is incorporated herein by reference. The Company has adopted a code of ethics that applies to the Company’s principal executive officer, principal financial officer and persons performing similar functions. The Company will provide to any person without charge, upon request, a copy of the Company’s code of ethics. Requests should be directed to the Secretary of Citizens First Corporation, 1065 Ashley Street, Bowling Green, Kentucky 42103. The Company’s current directors and executive officers are as follows:
Directors of the Company
Officers of the Company
Item 11.
Item 11. Executive Compensation
The information required by this Item appears under the heading “Executive Compensation” and “Election of Directors-Director Compensation” of the Proxy Statement and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this Item appears under the heading “Share Ownership of Management and Certain Beneficial Owners” of the Proxy Statement and in Item 5 of this Annual Report, each of which is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships, Related Transactions and Director Independence
Information required by this Item appears under the headings “Election of Directors,” “Corporate Governance” and “Certain Transactions” of the Proxy Statement and is incorporated herein by reference.
Item 14.
Item 14. Principal Accountant Fees and Services
Information required by this Item appears under the headings “Audit Committee Report” and “Independent Public Accounting Firm,” of the Proxy Statement and is incorporated herein by reference.
Part IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
Exhibit Index
3.1 Restated Articles of Incorporation of Citizens First Corporation, as amended (incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form SB-2 (No. 333-103238).
3.2 Articles of Amendment to Amended and Restated Articles of Incorporation of Citizens First Corporation (incorporated by reference to Exhibit 3.3 of the Registrant’s Form 10Q-SB dated June 30, 2004.).
3.3 Articles of Amendment to Amended and Restated Articles of Incorporation of Citizens First Corporation (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed June 5, 2007).
3.4 Articles of Amendment to Amended and Restated Articles of Incorporation of Citizens First Corporation (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed December 23,2008).
3.5 Amended and Restated Bylaws of Citizens First Corporation (incorporated by reference to Exhibit 3 of the Registrant’s Current Report on Form 8-K filed March 24, 2009).
4.1 Restated Articles of Incorporation of Citizens First Corporation, as amended (see Exhibit 3.1).
4.2 Articles of Amendment to Amended and Restated Articles of Incorporation of Citizens First Corporation (see Exhibits 3.2, 3.3 and 3.4).
4.3 Amended and Restated Bylaws of Citizens First Corporation (see Exhibit 3.5).
4.4 Copy of Registrants’ Agreement Pursuant to Item 601(b) (4) (iii) (A) of Regulation S-K dated March 30, 2007 with respect to certain debt instruments (incorporated by reference to Exhibit 4.4 of the Registrant’s Form 10K-SB dated March 31, 2007).
4.5 Warrant to Purchase Common Stock (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed December 23, 2008).
10.1 Employment Agreement between Citizens First Corporation and Mary D. Cohron as amended by First Amendment to Employment Agreement (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed March 17, 2005).*
10.2 Employment Agreement between Citizens First Corporation and Matthew Todd Kanipe (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed September 17, 2009).*
10.3 Employment Agreement between Citizens First Corporation and Kim M. Thomas (incorporated by reference to Exhibit 10.4 of the Registrant’s Form 8-K filed March 17, 2005).*
10.4 2002 Stock Option Plan of Citizens First Corporation (incorporated by reference to Exhibit 10.13 of the Company’s Registration Statement on Form SB-2 (No. 333-103238)).*
10.5 2003 Non-Employee Directors Stock Option Plan (incorporated by reference to Exhibit 10.14 of the Company’s Registration Statement on Form SB-2 (No. 333-103238)).*
10.6 Second Amendment to Employment Agreement between Citizens First Corporation and Mary D. Cohron dated August 17, 2006 (incorporated by reference to Exhibit 10 of the Registrant’s Form 8-K filed August 23, 2006.)*
10.7 Letter Agreement (including Securities Purchase Agreement-Standard Terms) dated as of December 19, 2008 between the Company and the United States Department of the Treasury (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on December 23, 2008).
10.8 Form of Waiver (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed on December 23, 2008).*
10.9 Amendment No. 1 to 2003 Non-Employee Stock Option Plan of Citizens First Corporation (incorporated by reference to Exhibit 10.11 of the Registrant’s Form 10-K dated December 31, 2008).*
10.10 Separation Agreement and General Release dated April 22, 2009 between the Registrant and Mary D. Cohron (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-Q dated June 30, 2009).
21 Subsidiaries (incorporated by reference to Exhibit 21 of the Registrant’s Registration Statement on Form SB-2 (No. 333-103238)).
23.1 Consent of Crowe Horwath LLP.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section1350.
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section1350.
*Denotes a management contract or compensatory plan or agreement.
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ M Todd Kanipe
March 30, 2010
M. Todd Kanipe
President, Chief Executive Officer and Director
/s/ J. Steven Marcum
March 30, 2010
J. Steven Marcum
Executive Vice President and Chief Financial Officer
/s/ Barry D. Bray
March 29, 2010
Barry D. Bray, Director
/s/ John J. Kelly
March 29, 2010
John J. Kelly, Director
/s/ Sarah G. Grise
March 29, 2010
Sarah G. Grise, Director
/s/ Christopher B. Guthrie
March 29, 2010
Christopher B. Guthrie, Director
/s/ J. Robert Hilliard
March 29, 2010
J. Robert Hilliard, Director
/s/ M. Todd Kanipe
March 29, 2010
M. Todd Kanipe, Director
/s/ Amy Milliken
March 29, 2010
Amy Milliken, Director
/s/ Steven W. Newberry
March 29, 2010
Steven W. Newberry, Director
/s/ John T. Perkins
March 29, 2010
John T. Perkins, Director
/s/ Jack W. Sheidler
March 29, 2010
Jack W. Sheidler, Director
/s/ John Taylor
March 29, 2010
John Taylor, Director
/s/ Freddie L. Travis
March 29, 2010
Freddie L. Travis, Director
/s/ R. Kevin Vance
March 29, 2010
R. Kevin Vance, Director