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CZFC > SEC Filings for CZFC > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for CITIZENS FIRST CORP

Form 10-Q for CITIZENS FIRST CORP


7-Aug-2014

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 June 30, 2014, we reported net income of $733,000 compared to net income of $788,000 in the second quarter of 2014, a decrease of $55,000. Net income available to common shareholders was $606,000 or, $0.29 per diluted common share this quarter, compared to net income available to common shareholders of $612,000 or, $0.30 per diluted common share for the second quarter of 2013. The decrease in net income is substantially attributable to an increase in the provision for loan losses of $100,000 net of income taxes.


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For the six months ended June 30, 2014, the Company reported net income of $1.42 million, or $0.56 per diluted common share. This represents an increase of $521,000, or $0.31 per share, from the net income of $903,000 in the previous year. The increase in net income is primarily attributable to a decrease in provision for loan losses of $1 million partially offset by a decrease in net interest income of $194,000 and in increase in income tax expense of $249,000.

Our annualized return on average assets, defined as net income divided by average assets, was 0.69% for the six months ended June 30, 2014, compared to 0.44% in June 30, 2013. Our annualized return on average equity was 7.90% for the six months ending June 30, 2014, compared to 4.64% for the six months ending June 30, 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 June 30, 2014 decreased $26,000, or 0.7%, compared to June 30, 2013. The decrease in net interest income was impacted by a reduction in interest expense of $69,000 combined with a decrease in interest income of $95,000. The decrease in interest income was created by a decrease in loan income for the quarter.

For the six months ended June 30, 2014, net interest income was $7.0 million, a decrease of $194,000, or 2.7%, from net interest income of $7.2 million for the comparable period in 2013. Net interest income decreased as a result of a decrease in interest income of $342,000 offset by lower interest expense on deposits and borrowings of $148,000. The decrease in interest income was created by a decline in the yield on loans.

The net interest margin for the three months ended June 30, 2014 was 3.74%, compared to 3.77% in 2013. This decrease of 3 basis points is attributable primarily to a decline in the yield on loans from 5.28% in the second quarter of 2013 to 5.13% in the second 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 quarter and six months ended June 30, 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


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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.

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

Quarter ended June 30,

                                            2014                              2013
                                Average     Income/    Average    Average     Income/    Average
                                Balance     Expense     Rate      Balance     Expense     Rate
Earning assets:
Federal funds sold             $   26,794   $     13      0.19 % $   29,674   $     17      0.23 %
Available-for-sale
securities (1)
Taxable                            34,867        151      1.74 %     30,892        101      1.31 %
Nontaxable (1)                     20,281        252      4.98 %     19,540        248      5.10 %
Federal Home Loan Bank stock        2,025         20      3.96 %      2,025         21      4.20 %
Loans receivable (2)              303,489      3,879      5.13 %    305,532      4,022      5.28 %
Total interest earning
assets                            387,456      4,315      4.47 %    387,663      4,409      4.56 %
Non-interest earning assets        32,174                            31,577
Total Assets                   $  419,630                        $  419,240

Interest-bearing
liabilities:
NOW accounts                   $  105,134        108      0.41 % $   78,464   $     81      0.41 %
Money market accounts              23,212         20      0.34 %     21,441         17      0.33 %
Savings accounts                   17,931         10      0.22 %     15,785          9      0.23 %
Time deposits                     163,543        413      1.01 %    187,463        518      1.11 %
Total interest-bearing
deposits                          309,820        551      0.71 %    303,153        625      0.83 %
Borrowings                         25,300        126      2.00 %     28,542        121      1.70 %
Subordinated debentures             5,000         24      1.92 %      5,000         24      1.96 %
Total interest-bearing
liabilities                       340,120        701      0.83 %    336,695        770      0.92 %
Non-interest bearing
deposits                           41,123                            42,584
Other liabilities                   1,886                             1,608
Total liabilities                 383,129                           380,887
Stockholders' equity               36,501                            38,353
Total Liabilities and
Stockholders' Equity           $  419,630                        $  419,240
Net interest income                         $  3,614                          $  3,639

Net interest spread (1)                                   3.64 %                            3.64 %
Net interest margin (1) (3)                               3.74 %                            3.77 %
Return on average assets
ratio                                                     0.70 %                            0.75 %
Return on average equity
ratio                                                     8.05 %                            8.24 %
Average equity to assets
ratio                                                     8.70 %                            9.15 %



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

Six months ended June 30,

                                            2014                              2013
                                Average     Income/    Average    Average     Income/    Average
                                Balance     Expense     Rate      Balance     Expense     Rate
Earning assets:
Federal funds sold             $   25,279   $     25      0.20 % $   30,181   $     33      0.22 %
Available-for-sale
securities (1)
Taxable                            33,634        292      1.75 %     29,686        196      1.33 %
Nontaxable (1)                     20,085        500      5.02 %     19,536        504      5.20 %
Federal Home Loan Bank stock        2,025         40      3.98 %      2,025         43      4.27 %
Loans, net (2)                    303,464      7,722      5.13 %    304,741      8,147      5.39 %
Total interest earning
assets                            384,487      8,579      4.50 %    386,169      8,923      4.66 %
Non-interest earning assets        32,386                            32,357
Total Assets                   $  416,873                        $  418,526

Interest-bearing
liabilities:
NOW accounts                   $  105,288   $    218      0.42 % $   77,517   $    149      0.39 %
Money market accounts              23,559         40      0.34 %     22,127         38      0.35 %
Savings accounts                   17,339         20      0.23 %     15,721         18      0.23 %
Time deposits                     161,356        816      1.02 %    186,118      1,047      1.13 %
Total interest-bearing
deposits                          307,542      1,094      0.72 %    301,483      1,252      0.84 %
Borrowings                         25,045        243      1.96 %     28,153        231      1.65 %
Subordinated debentures             5,000         47      1.90 %      5,000         49      1.96 %
Total interest-bearing
liabilities                       337,587      1,384      0.83 %    334,636      1,532      0.92 %
Non-interest bearing
deposits                           40,987                            42,632
Other liabilities                   1,941                             2,004
Total liabilities                 380,515                           379,272
Stockholders' equity               36,358                            39,254
Total Liabilities and
Stockholders' Equity           $  416,873                        $  418,526
Net interest income                         $  7,195                          $  7,391

Net interest spread (1)                                   3.67 %                            3.74 %
Net interest margin (1) (3)                               3.77 %                            3.86 %
Return on average assets
ratio                                                     0.69 %                            0.44 %
Return on average equity
ratio                                                     7.90 %                            4.64 %
Average equity to assets
ratio                                                     8.72 %                            9.38 %



(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 on non-accrual.

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

Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on our net interest income for the six months ended June 30, 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.


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                                                           (Dollars in Thousands)
                                                         Six Months Ended June 30,
                                                               2014 Vs. 2013
                                                         Increase (Decrease) Due to
                                                    Rate             Volume          Net
Interest-earning assets:
Federal funds sold                              $          (3 )   $         (5 )  $       (8 )
Available-for-sale securities:
Taxable                                                    70               26            96
Nontaxable (1)                                            (18 )             14            (4 )
FHLB stock                                                 (3 )              -            (3 )
Loans, net                                               (391 )            (34 )        (425 )
               Total net change in income on
                     interest-earning assets             (345 )              1          (344 )

Interest-bearing liabilities:
NOW accounts                                               16               53            69
Money market accounts                                       -                2             2
Savings accounts                                            -                2             2
Time deposits                                             (92 )           (139 )        (231 )
FHLB and other borrowings                                  38              (26 )          12
Subordinated debentures                                    (2 )              -            (2 )
              Total net change in expense on
                interest-bearing liabilities              (40 )           (108 )        (148 )

           Net change in net interest income    $        (305 )   $        109    $     (196 )

                           Percentage change           155.61 %         (55.61 )%      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 $150,000 provision for loan losses was recorded for the second quarter of 2014, an increase of $100,000, from $50,000 in the second quarter of 2013. Net charge-offs were $24,000 for the second quarter of 2014 compared to $636,000 in the second quarter of 2013.

Provision expense for the six months ended June 30, 2014 decreased $1.0 million, from $1.3 million to $275,000 due to reduced net charge-offs. Net recoveries were $25,000 for the six months ended June 30, 2014 compared to net charge-offs of $957,000 for the six months ended June 30, 2013.

Non-Interest Income

Non-interest income for the three months ended June 30, 2014 decreased $37,000, or 4.7%, compared to the three months ended June 30, 2013, primarily due to a decline in gains on sale of mortgage loans of $27,000 from the prior year.

Non-interest income for the six months ended June 30, 2014 decreased $127,000 or 8.4% compared to the six months ended June 30, 2013. Gain on sale of mortgage loans


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declined $85,000 and service charge income declined $55,000 in the period to period comparison, while securities gains increased $37,000.

Non-Interest Expense

Non-interest expense for the three months ended June 30, 2014 decreased $46,000, or 1.4%, compared to the three months ended June 30, 2013, due to a decrease in legal and collection expenses.

Non-interest expense was $6.2 million for the six months ended June 30, 2014, a decrease of $100,000, or 1.6%, from $6.3 million in the same period of 2013. Data processing expenses decreased $56,000 and other operating expenses, primarily collection expense, decreased $256,000, while salaries and employee benefits increased $155,000.

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 second quarter of 2014 was 27.0% compared to a 29.7% effective tax rate for the second quarter of 2013. The effective tax rate year-to-date was 26.7% compared to 23.1% for 2013. 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

Overview

Total assets at June 30, 2014 were $414.8 million, an increase of $4.6 million from $410.2 million at December 31, 2013. Average assets during the second quarter were $419.6 million, an increase of 0.1%, or $400,000, from $419.2 million in the second quarter of 2013. Average interest earning assets decreased 0.1%, or $200,000, from $387.7 million in the second quarter of 2013 to $387.5 million in the second quarter of 2014.

Loans

Loans increased $16.4 million, or 5.6%, from $295.1 million at December 31, 2013 to $311.5 million at June 30, 2014. Total loans averaged $303.5 million the second quarter of 2014, compared to $305.5 million the second quarter of 2013, a decrease of $2.0 million, or 0.7%. We experienced increases in commercial real estate and residential real estate loans during the first six 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)
                                June 30, 2014         December 31, 2013
                                           % of
                                          Total                   % of
                                          Loans                Total Loans
Commercial and agricultural   $  45,712    14.68 % $  45,254         15.34 %
Commercial real estate          182,939    58.74 %   170,027         57.62 %
Residential real estate          77,267    24.81 %    74,040         25.09 %
Consumer                          5,537     1.77 %     5,747          1.95 %
                              $ 311,455   100.00 % $ 295,068        100.00 %

The majority of our loans are to customers located in south central Kentucky and central Tennessee. As of June 30, 2014, our twenty largest credit relationships consisted of loans and loan commitments ranging from $3.7 million to $8.9 million. The aggregate amount of these credit relationships was $97.7 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 June 30, 2014.

As of June 30, 2014, we had $15.6 million of participations in loans purchased from, and $13.3 million of participations in loans sold to, other banks.

The following table sets forth the maturity distribution of the loan portfolio as of June 30, 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 June 30, 2014               Year        Five Years       Years         Total
Commercial and agricultural   $     16,989   $     24,761   $      3,962   $  45,712
Commercial real estate              28,337         99,507         55,095     182,939
Residential real estate              6,400         33,348         37,519      77,267
Consumer                             1,972          3,497             68       5,537
Total                         $     53,698   $    161,113   $     96,644   $ 311,455

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 cash flows on impaired loans, estimated losses on loans based on historical loss


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experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change.

The allowance for loans losses at June 30, 2014 was $5.0 million, or 1.59% 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 second quarter of 2014.

The following table sets forth an analysis of our allowance for loan losses for the six months ended June 30, 2014 and 2013.

                                                  (Dollars in Thousands)
                                                         June 30,
                                                    2014           2013
Balance at beginning of period                  $      4,653     $   5,721
Provision for loan losses                                275         1,300
Amounts charged off:
Commercial                                                 -           987
Commercial real estate                                     -            14
Residential real estate                                   90            19
Consumer                                                  13            17
Total loans charged off                                  103         1,037
Recoveries of amounts previously charged off:
Commercial                                                59             7
Commercial real estate                                    58            60
Residential real estate                                    9            11
Consumer                                                   2             2
Total recoveries                                         128            80
Net charge-offs (recoveries)                             (25 )         957
Balance at end of period                        $      4,953     $   6,064
Total loans, net of unearned income:
YTD Average                                     $    303,464     $ 304,741
At June 30                                      $    311,455     $ 306,397
As a percentage of YTD average loans:
Net charge-offs (recoveries), annualized               (0.02 )%       0.63 %
Provision for loan losses, annualized                   0.18 %        0.85 %


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

                                                                  (Dollars in Thousands)
                                                               June 30,         December 31,
                                                                 2014               2013
Non-accrual loans                                             $     1,035      $        1,026
Loans 90+ days past due/accruing                                       42                   -
Restructured loans on non-accrual                                     806                 154
Total non-performing loans                                          1,883               1,180
Other real estate owned                                               598                 833
Total non-performing assets                                   $     2,481               2,013

Allowance for loan losses                                     $     4,953      $        4,653
Non-performing assets to total assets                                0.60 %              0.49 %
Net charge-offs YTD to average YTD total loans, annualized          (0.02 )%             1.22 %
Allowance for loan losses to non-performing loans                  263.04 %             394.3 %
Allowance for loan losses to total loans                             1.59 %              1.58 %

Non-performing assets totaled $2.5 million at June 30, 2014, compared to $2.0 million at December 31, 2013, an increase of $468,000. Payoffs and paydowns of $538,000 included the disposition of four other real estate owned properties sold for $217,000, and four loans totaling $71,000 were charged off, but these decreases were offset by the addition of $188,000 in commercial real estate loans, $688,000 in commercial loans, and $201,000 in residential real estate loans.

Non-performing loans are defined as non-accrual loans and loans accruing but . . .

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