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CZFC > SEC Filings for CZFC > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for CITIZENS FIRST CORP



Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's discussion and analysis of Citizens First Corporation (the "Company") is included to provide the shareholders with an expanded narrative of our results of operations, changes in financial condition, liquidity and capital adequacy. This narrative should be reviewed in conjunction with our consolidated financial statements and notes thereto included in our 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Forward-Looking Statements

We 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 actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors. Among the risks and uncertainties that could cause actual results to differ materially are current and future economic conditions generally and in our market areas, changes in the interest rate environment, overall loan demand, increased competition in the financial services industry which could negatively impact our ability to increase total earning assets, and retention of key personnel. Actions by the Department of the Treasury and federal and state bank regulators in response to changing economic conditions, changes in interest rates, loan prepayments by and the financial health of our borrowers, and other factors described in the reports filed by us with the Securities and Exchange Commission could also impact current expectations.

Results of Operations

For the quarter ended March 31, 2014, we reported net income of $691,000 compared to net income of $115,000 in the first quarter of 2013, an increase of $576,000. Net income available to common shareholders was $559,000 or, $0.27 per diluted common share this quarter, compared to net loss available to common shareholders of $102,000 or, $0.05 per diluted common share for the first quarter of 2013. The provision expense was higher in the first quarter of 2013 as a result of an increase in non-performing assets in that period.

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Our annualized return on average assets was 0.68% for the three months ended March 31, 2014, compared to 0.11% in March 31, 2013. Our annualized return on average equity was 7.74% for the three months ending March 31, 2014, compared to 1.16% for the three months ending March 31, 2013.

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.

Net interest income for the quarter ended March 31, 2014 decreased $168,000, or 4.6%, compared to March 31, 2013. The decrease in net interest income was impacted by a reduction in interest expense of $79,000 combined with a decrease in interest income of $247,000. The decrease in interest income was created by a decrease in loan income for the quarter.

The net interest margin for the three months ended March 31, 2014 was 3.81%, compared to 3.96% in 2013. This decrease of 15 basis points is attributable primarily to a decline in the yield on loans from 5.50% in the first quarter of 2013 to 5.14% in the first quarter of 2014. Loan yields have declined as maturing loans were repriced at a lower rate, as well as increased competition for new loans that has resulted in lower rates.

The following tables set forth for the three months ended March 31, 2014 and 2013, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. Such yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented.

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Average Consolidated Balance Sheets and Net Interest Analysis (Dollars in thousands)

                                        2014                                2013
                           Average     Income/     Average     Average     Income/     Average
Quarter ended March 31,    Balance     Expense       Rate      Balance     Expense       Rate
Earning assets:
Federal funds sold        $  23,748           12       0.20 % $  30,694   $       15       0.20 %
securities (1)
Taxable                      32,388          141       1.77 %    28,466           96       1.37 %
Nontaxable (1)               19,886          249       5.08 %    19,532          257       5.34 %
Federal Home Loan Bank
stock                         2,025           20       4.01 %     2,025           22       4.41 %
Loans receivable (2)        303,438        3,844       5.14 %   303,942        4,125       5.50 %
Total interest earning
assets                      381,485        4,266       4.54 %   384,659        4,515       4.76 %
Non-interest earning
assets                       32,604                              33,145
Total Assets              $ 414,089                           $ 417,804

NOW accounts              $ 105,445          110       0.42 % $  76,559   $       69       0.37 %
Money market accounts        23,910           21       0.36 %    22,820           21       0.37 %
Savings accounts             16,740           10       0.24 %    15,656            9       0.23 %
Time deposits               159,144          402       1.02 %   184,757          529       1.16 %
Total interest-bearing
deposits                    305,239          543       0.72 %   299,792          628       0.85 %
Borrowings                   24,787          117       1.91 %    27,760          110       1.61 %
Subordinated debentures       5,000           23       1.87 %     5,000           24       1.95 %
Total interest-bearing
liabilities                 335,026          683       0.83 %   332,552          762       0.93 %
Non-interest bearing
deposits                     40,849                              42,682
Other liabilities             2,001                               2,406
Total liabilities           377,876                             377,640
Stockholders' equity         36,213                              40,164
Total Liabilities and
Stockholders' Equity      $ 414,089                           $ 417,804
Net interest income                   $    3,583                          $    3,753

Net interest spread (1)                                3.71 %                              3.83 %
Net interest margin (1)
(3)                                                    3.81 %                              3.96 %
Return on average
assets ratio                                           0.68 %                              0.11 %
Return on average
equity ratio                                           7.74 %                              1.16 %
Average equity to
assets ratio                                           8.75 %                              9.61 %

(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 non-performing loans. Interest income includes interest and fees on loans, but does not include interest on loans on non-accrual.

(3) Net interest income as a percentage of average interest-earning assets.

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Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on our net interest income for the quarter ended March 31, 2014 and 2013. Information is provided with respect to (1) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (2) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes attributable to the combined input of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

                                                          (Dollars in Thousands)
                                                       Three Months Ended March 31,
                                                               2014 Vs. 2013
                                                        Increase (Decrease) Due to
                                                    Rate            Volume          Net
Interest-earning assets:
Federal funds sold                              $          -     $         (3 )  $       (3 )
Available-for-sale securities:
Taxable                                                   32               13            45
Nontaxable (1)                                           (13 )              5            (8 )
FHLB stock                                                (2 )              -            (2 )
Loans, net                                              (274 )             (7 )        (281 )
               Total net change in income on
                     interest-earning assets            (257 )              8          (249 )

Interest-bearing liabilities:
NOW accounts                                              15               26            41
Money market accounts                                     (1 )              1             -
Savings accounts                                           -                1             1
Time deposits                                            (54 )            (73 )        (127 )
FHLB and other borrowings                                 19              (12 )           7
Subordinated debentures                                   (1 )              -            (1 )
              Total net change in expense on
                interest-bearing liabilities             (22 )            (57 )         (79 )

           Net change in net interest income    $       (235 )   $         65    $     (170 )

                           Percentage change          138.24 %         (38.24 )%      100.0 %

(1) Income stated at a fully tax equivalent basis using the marginal corporate Federal tax rate of 34.0%.

Provision for Loan Losses

A $125,000 provision for loan losses was recorded for the first quarter of 2014, a decrease of $1.1 million, from $1.3 million in the first quarter of 2013. The allowance for loan losses to total loans decreased from 2.21% of total loans at March 31, 2013 to 1.60% at March 31, 2014, primarily due to charge-offs of specific allocations which were included in the allowance at March 31, 2013. Net charge-offs (recoveries) were $(49,000) for the first quarter of 2014 compared to $321,000 in the first quarter of 2013.

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Non-Interest Income

Non-interest income for the three months ended March 31, 2014 decreased $90,000, or 12.5%, compared to the three months ended March 31, 2013, primarily due to a decline in gains on sale of mortgage loans of $58,000 from the prior year.

Non-Interest Expense

Non-interest expense for the three months ended March 31, 2014 decreased $20,000, or 0.6%, compared to the three months ended March 31, 2013, due to a decrease in legal and collection expenses.

Income Taxes

Income tax expense was calculated using our expected effective rate for 2014 and 2013. 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 2014 and 2013. The effective tax rate for the first quarter of 2014 was 26.5% compared to a negative effective tax rate for 2013. Tax-exempt income exceeded income before taxes in 2013 which ultimately resulted in a negative effective tax rate for the quarter. 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


Total assets at March 31, 2014 were $420.1 million, an increase of $9.9 million from $410.2 million at December 31, 2013. Average assets during the first quarter were $414.1 million, a decrease of 0.9%, or $3.7 million, from $417.8 million in the first quarter of 2013. Average interest earning assets decreased 0.8%, or $3.1 million, from $384.6 million in the first quarter of 2013 to $381.5 million in the first quarter of 2014.


Loans increased $6.5 million, or 2.2%, from $295.1 million at December 31, 2013 to $301.6 million at March 31, 2014. Total loans averaged $303.4 million the first quarter of 2014, compared to $303.9 million the first quarter of 2013, an increase of $0.5 million, or 0.2%. We experienced increases in commercial real estate loans during the first three months of the year compared to 2013. The following table presents a summary of the loan portfolio by category:

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                                         (Dollars in Thousands)
                                March 31, 2014         December 31, 2013
                                           % of
                                          Total                    % of
                                          Loans                 Total Loans

Commercial and agricultural   $  44,926    14.90 %  $  45,254         15.34 %
Commercial real estate          178,767    59.27 %    170,027         57.62 %
Residential real estate          71,963    23.86 %     74,040         25.09 %
Consumer                          5,942     1.97 %      5,747          1.95 %

                              $ 301,598   100.00 %  $ 295,068        100.00 %

The majority of our loans are to customers located in south central Kentucky and central Tennessee. As of March 31, 2014, our twenty largest credit relationships consisted of loans and loan commitments ranging from $3.8 million to $10.1 million. The aggregate amount of these credit relationships was $97.6 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 $12.5 million at March 31, 2014.

As of March 31, 2014, we had $15.5 million of participations in loans purchased from, and $8.8 million of participations in loans sold to, other banks.

The following table sets forth the maturity distribution of the loan portfolio as of March 31, 2014. Maturities are based on contractual terms. Our policy is to specifically review and approve all loans renewed; loans are not automatically rolled over.

                                              (Dollars in Thousands)
                                              After One
Loan Maturities                Within One     but Within     After Five
as of March 31, 2014              Year        Five Years       Years         Total

Commercial and agricultural   $     15,661   $     25,526   $      3,739   $  44,926
Commercial real estate              28,440         95,887         54,440     178,767
Residential real estate              5,915         29,020         37,028      71,963
Consumer                             1,817          4,053             72       5,942

                      Total   $     51,833   $    154,486   $     95,279   $ 301,598

Credit Quality and the 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

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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 loans losses at March 31, 2014 was $4.8 million, or 1.60% of total loans, compared to $4.7 million, or 1.58% of total loans as of December 31, 2013. The allowance increased slightly due to a growth in loans during the first quarter of 2014.

The following table sets forth an analysis of our allowance for loan losses for the quarter ended March 31, 2014 and 2013.

                                                  (Dollars in Thousands)
                                                        March 31,
                                                    2014           2013
Balance at beginning of period                  $      4,653     $   5,721
Provision for loan losses                                125         1,250
Amounts charged off:
Commercial                                                 -           333
Commercial real estate                                     -            14
Residential real estate                                   19             -
Consumer                                                   3            11
                      Total loans charged off             22           358
Recoveries of amounts previously charged off:
Commercial                                                17             -
Commercial real estate                                    47            28
Residential real estate                                    6             7
Consumer                                                   1             2
                             Total recoveries             71            37
Net charge-offs (recoveries)                             (49 )         321
                     Balance at end of period   $      4,827     $   6,650
Total loans, net of unearned income:
YTD Average                                     $    303,438     $ 303,942
At March 31                                     $    301,598     $ 301,111
As a percentage of YTD average loans:
Net charge-offs (recoveries), annualized               (0.06 )%       0.42 %
Provision for loan losses, annualized                   0.16 %        1.65 %

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The following table sets forth selected asset quality measurements and ratios for the periods indicated:

                                                                  (Dollars in Thousands)
                                                               March 31,        December 31,
                                                                 2014               2013
Non-accrual loans                                             $     1,104      $        1,026
Loans 90+ days past due/accruing                                       56                   -
Restructured loans                                                    815                 154
Total non-performing loans                                          1,975               1,180
Other real estate owned                                               631                 833
Total non-performing assets                                   $     2,606               2,013

Allowance for loan losses                                     $     4,827      $        4,653
Non-performing assets to total assets                                0.62 %              0.49 %
Net charge-offs YTD to average YTD total loans, annualized          (0.06 )%             1.22 %
Allowance for loan losses to non-performing loans                  244.41 %             394.3 %
Allowance for loan losses to total loans                             1.60 %              1.58 %

Non-performing assets totaled $2.6 million at March 31, 2014 compared to $2.0 million at December 31, 2013, an increase of $600,000. Payoffs and paydowns of $339,000 included two other real estate owned properties sold for $185,000 and the payoff of one residential real estate loan of $83,000, but were offset by the addition of $143,000 in commercial real estate loans, $717,000 in commercial loans, and $73,000 in residential real estate loans.

Non-performing loans are defined as non-accrual loans and loans accruing but past due 90 days or more. Non-performing assets are defined as non-performing loans, other real estate owned, and repossessed assets. 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, or earlier 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.

Troubled debt restructurings (TDRs) are modified loans in which a concession is provided to a borrower experiencing financial difficulties. Loan modifications are considered TDRs when the concession provided is not available to the borrower through either normal channels or other sources. However, not all loan modifications are TDRs. Our standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. However, each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower's specific circumstances at a point in time.TDRs can be classified as either accrual or nonaccrual loans. Non-accrual TDRs are included in non-accrual loans whereas accruing TDRs are excluded because the borrower remains contractually current.

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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 us. 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 non-accrual loans), changes in mix, asset quality trends, risk management and loan administration, changes in internal lending policies and credit standards, and examination results from bank regulatory agencies and our internal credit examiners.

A 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 and the probability of collecting scheduled principal and interest payments when due. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. 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 all loan classes 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.

The following table presents impaired loans and the related allowance for loan losses attributable to loans evaluated for impairment by portfolio segment for the periods indicated.

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                                                        (Dollars in Thousands)
                                            March 31, 2014                December 31, 2013
                                                      Allowance                       Allowance
                                                       for Loan                        for Loan
                                        Loans           Losses          Loans           Losses

Commercial and agriculture           $      2,804    $        198    $      3,086    $        676
Commercial real estate                      1,533             382           2,021             369
. . .
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