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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2015

 

Or

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number: 001-33126

 


 

CITIZENS FIRST CORPORATION

(Exact name of registrant as specified in its charter)

 


 

Kentucky

 

61-0912615

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

1065 Ashley Street, Bowling Green, Kentucky

 

42103

(Address of principal executive offices)

 

(Zip Code)

 

(270) 393-0700

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x  No   o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   o

Accelerated filer   o

Non-accelerated filer  o

Smaller reporting company   x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  x

 

Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of the latest practicable date.

 

1,968,777 shares of Common Stock, no par value, were outstanding at November 12, 2015.

 

 

 




Table of Contents

 

Part 1. Financial Information

Item 1. Financial Statements

 

Citizens First Corporation

Consolidated Balance Sheets

 

 

 

(In Thousands, Except Share Data)

 

 

 

September 30,
2015

 

December 31,
2014

 

 

 

Unaudited

 

 

 

Assets

 

 

 

 

 

Cash and due from financial institutions

 

$

9,501

 

$

7,962

 

Federal funds sold

 

1,705

 

3,360

 

Cash and cash equivalents

 

11,206

 

11,322

 

Interest-bearing deposits in other financial institutions

 

2,480

 

 

Available-for-sale securities

 

60,068

 

58,986

 

Loans held for sale

 

155

 

 

Loans, net of allowance for loan losses of $5,021 and $4,885 at September 30, 2015 and December 31, 2014, respectively

 

322,128

 

313,592

 

Premises and equipment, net

 

9,971

 

10,758

 

Bank owned life insurance (BOLI)

 

8,129

 

7,993

 

Federal Home Loan Bank (FHLB) stock, at cost

 

2,025

 

2,025

 

Accrued interest receivable

 

1,597

 

1,527

 

Deferred income taxes

 

1,517

 

1,479

 

Goodwill

 

4,097

 

4,097

 

Core deposit intangible

 

283

 

336

 

Other real estate owned

 

207

 

198

 

Other assets

 

418

 

501

 

Total Assets

 

$

424,281

 

$

412,814

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Noninterest bearing

 

$

46,081

 

$

41,975

 

Savings, NOW and money market

 

154,761

 

148,935

 

Time

 

161,649

 

150,874

 

Total deposits

 

362,491

 

341,784

 

FHLB advances and other borrowings

 

15,500

 

25,500

 

Subordinated debentures

 

5,000

 

5,000

 

Accrued interest payable

 

233

 

231

 

Other liabilities

 

2,322

 

1,851

 

Total Liabilities

 

385,546

 

374,366

 

Stockholders’ Equity

 

 

 

 

 

6.5% cumulative convertible preferred stock; no par value, authorized 250 shares, aggregate liquidation preference of $7,998; issued and outstanding 250 shares at September 30, 2015 and December 31, 2014, respectively

 

7,659

 

7,659

 

Common stock, no par value, authorized 5,000,000 shares; issued and outstanding 1,968,777 shares at September 30, 2015 and December 31, 2014, respectively

 

25,366

 

27,072

 

Retained earnings

 

5,440

 

3,373

 

Accumulated other comprehensive income

 

270

 

344

 

Total stockholders’ equity

 

38,735

 

38,448

 

Total liabilities and stockholders’ equity

 

$

424,281

 

$

412,814

 

 

See Notes to Unaudited Consolidated Financial Statements

 

3



Table of Contents

 

Citizens First Corporation

Unaudited Consolidated Statements of Income

 

 

 

Three months ended

 

 

 

(In Thousands, Except Per Share Data)

 

 

 

September 30, 2015

 

September 30, 2014

 

Interest and dividend income

 

 

 

 

 

Loans

 

$

4,050

 

$

4,006

 

Taxable securities

 

159

 

158

 

Non-taxable securities

 

170

 

161

 

Federal funds sold and other

 

36

 

29

 

Total interest and dividend income

 

4,415

 

4,354

 

Interest expense

 

 

 

 

 

Deposits

 

563

 

526

 

FHLB advances and other

 

74

 

125

 

Subordinated debentures

 

25

 

24

 

Total interest expense

 

662

 

675

 

Net interest income

 

3,753

 

3,679

 

Provision for loan losses

 

 

 

Net interest income after provision for loan losses

 

3,753

 

3,679

 

Non-interest income

 

 

 

 

 

Service charges on deposit accounts

 

386

 

300

 

Other service charges and fees

 

187

 

198

 

Gain on sale of mortgage loans

 

60

 

76

 

Non-deposit brokerage fees

 

103

 

67

 

Lease income

 

59

 

76

 

BOLI income

 

45

 

47

 

Total non-interest income

 

840

 

764

 

Non-interest expenses

 

 

 

 

 

Salaries and employee benefits

 

1,650

 

1,519

 

Net occupancy expense

 

495

 

501

 

Advertising and public relations

 

75

 

74

 

Professional fees

 

183

 

137

 

Data processing services

 

262

 

250

 

Franchise shares and deposit tax

 

146

 

146

 

FDIC insurance

 

61

 

73

 

Core deposit intangible amortization

 

18

 

82

 

Postage and office supplies

 

55

 

54

 

Other real estate owned expenses

 

6

 

10

 

Loss on branch disposal

 

262

 

 

Other

 

317

 

295

 

Total non-interest expenses

 

3,530

 

3,141

 

Income before income taxes

 

1,063

 

1,302

 

Income taxes

 

288

 

372

 

Net income

 

775

 

930

 

Dividends on preferred stock

 

131

 

131

 

Net income available for common stockholders

 

$

644

 

$

799

 

Basic earnings per common share

 

$

0.33

 

$

0.41

 

Diluted earnings per common share

 

$

0.31

 

$

0.38

 

 

See Notes to Unaudited Consolidated Financial Statements

 

4



Table of Contents

 

Citizens First Corporation

Unaudited Consolidated Statements of Income

 

 

 

Nine months ended

 

 

 

(In Thousands, Except Per Share Data)

 

 

 

September 30, 2015

 

September 30, 2014

 

Interest and dividend income

 

 

 

 

 

Loans

 

$

12,107

 

$

11,728

 

Taxable securities

 

465

 

450

 

Non-taxable securities

 

519

 

493

 

Federal funds sold and other

 

99

 

94

 

Total interest and dividend income

 

13,190

 

12,765

 

Interest expense

 

 

 

 

 

Deposits

 

1,692

 

1,620

 

FHLB advances and other

 

219

 

368

 

Subordinated debentures

 

73

 

71

 

Total interest expense

 

1,984

 

2,059

 

Net interest income

 

11,206

 

10,706

 

Provision for loan losses

 

200

 

275

 

Net interest income after provision for loan losses

 

11,006

 

10,431

 

Non-interest income

 

 

 

 

 

Service charges on deposit accounts

 

1,061

 

857

 

Other service charges and fees

 

498

 

492

 

Gain on sale of mortgage loans

 

170

 

151

 

Non-deposit brokerage fees

 

282

 

211

 

Lease income

 

202

 

225

 

BOLI income

 

136

 

141

 

Gain on sale of securities available-for-sale (includes $10 in 2015 and $74 in 2014 accumulated other comprehensive income reclassifications for unrealized net gains on available-for-sale-securities)

 

10

 

74

 

Total non-interest income

 

2,359

 

2,151

 

Non-interest expenses

 

 

 

 

 

Salaries and employee benefits

 

4,887

 

4,532

 

Net occupancy expense

 

1,516

 

1,462

 

Advertising and public relations

 

250

 

250

 

Professional fees

 

534

 

439

 

Data processing services

 

739

 

731

 

Franchise shares and deposit tax

 

437

 

437

 

FDIC insurance

 

183

 

224

 

Core deposit intangible amortization

 

53

 

248

 

Postage and office supplies

 

147

 

164

 

Other real estate owned expenses

 

42

 

67

 

Loss on branch disposal

 

262

 

 

Other

 

929

 

782

 

Total non-interest expenses

 

9,979

 

9,336

 

Income before income taxes

 

3,386

 

3,246

 

Income taxes

 

930

 

892

 

Net income

 

2,456

 

2,354

 

Dividends and accretion on preferred stock

 

389

 

390

 

Net income available for common stockholders

 

$

2,067

 

$

1,964

 

Basic earnings per common share

 

$

1.05

 

$

1.00

 

Diluted earnings per common share

 

$

0.95

 

$

0.94

 

 

See Notes to Unaudited Consolidated Financial Statements

 

5



Table of Contents

 

Citizens First Corporation

Unaudited Consolidated Statements of Comprehensive Income

In thousands, except share data

 

 

 

Three months ended

 

 

 

(In Thousands, Except Per Share Data)

 

 

 

September 30, 2015

 

September 30,2014

 

Comprehensive income, net of tax

 

 

 

 

 

Net income

 

$

775

 

$

930

 

Other comprehensive income

 

 

 

 

 

Reclassification adjustment for gains included in net income, net of taxes

 

 

 

Change in unrealized gain on available for sale securities, net of taxes

 

55

 

34

 

Total other comprehensive income

 

55

 

34

 

Comprehensive income

 

$

830

 

$

964

 

 

 

 

Nine months ended

 

 

 

(In Thousands, Except Per Share Data)

 

 

 

September 30, 2015

 

September 30, 2014

 

 

 

 

 

 

 

Comprehensive income, net of tax

 

 

 

 

 

Net income

 

$

2,456

 

$

2,354

 

Other comprehensive income (loss)

 

 

 

 

 

Reclassification adjustment for gains included in net income, net of taxes

 

(7

)

(49

)

Change in unrealized gain (loss) on available for sale securities, net of taxes

 

(67

)

638

 

Total other comprehensive income (loss)

 

(74

)

589

 

Comprehensive income

 

$

2,382

 

$

2,943

 

 

See Notes to Unaudited Consolidated Financial Statements

 

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Table of Contents

 

Citizens First Corporation

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

In thousands, except share data

 

 

 

Preferred
Stock

 

Common
Stock

 

Retained
Earnings

 

Accumulated Other
Comprehensive
Income

 

Total

 

Balance, January 1, 2015

 

$

7,659

 

$

27,072

 

$

3,373

 

$

344

 

$

38,448

 

Net income

 

 

 

 

 

2,456

 

 

 

2,456

 

Change in accumulated other comprehensive income

 

 

 

 

 

 

 

(74

)

(74

)

Dividend declared and paid on preferred stock

 

 

 

 

 

(389

)

 

 

(389

)

Repurchase of TARP Warrants

 

 

 

(1,706

)

 

 

 

 

(1,706

)

Balance, September 30, 2015

 

$

7,659

 

$

25,366

 

$

5,440

 

$

270

 

$

38,735

 

 

 

 

Preferred
Stock

 

Common
Stock

 

Retained
Earnings

 

Accumulated Other
Comprehensive
Income (Loss)

 

Total

 

Balance, January 1, 2014

 

$

10,925

 

$

27,072

 

$

653

 

$

(303

)

$

38,347

 

Net income

 

 

 

 

 

2,354

 

 

 

2,354

 

Redemption of Series A preferred stock

 

(3,266

)

 

 

 

 

 

 

(3,266

)

Change in accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

589

 

589

 

Dividend declared and paid on preferred stock

 

 

 

 

 

(390

)

 

 

(390

)

Balance, September 30, 2014

 

$

7,659

 

$

27,072

 

$

2,617

 

$

286

 

$

37,634

 

 

See Notes to Unaudited Consolidated Financial Statements

 

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Table of Contents

 

Citizens First Corporation

Unaudited Consolidated Statements of Cash Flows

 

 

 

Nine months ended

 

 

 

(In Thousands)

 

 

 

September 30, 2015

 

September 30, 2014

 

Operating Activities

 

 

 

 

 

Net income

 

$

2,456

 

$

2,354

 

Items not requiring (providing) cash:

 

 

 

 

 

Depreciation and amortization

 

414

 

410

 

Provision for loan losses

 

200

 

275

 

Amortization of premiums and discounts on securities

 

239

 

221

 

Amortization of core deposit intangible

 

53

 

248

 

BOLI income

 

(136

)

(141

)

Proceeds from sale of mortgage loans

 

7,556

 

5,273

 

Origination of mortgage loans held for sale

 

(7,540

)

(5,121

)

Gains on sales of available-for-sale securities

 

(10

)

(74

)

Gains on sales of mortgage loans

 

(170

)

(151

)

Write-downs and losses on sale of other real estate owned

 

39

 

34

 

Gain on sale of premises and equipment

 

(12

)

(15

)

Loss on branch disposal

 

262

 

 

Changes in:

 

 

 

 

 

Accrued interest receivable

 

(70

)

(84

)

Other assets

 

83

 

684

 

Accrued interest payable and other liabilities

 

473

 

321

 

Net cash provided by operating activities

 

3,837

 

4,234

 

Investing Activities

 

 

 

 

 

Loan originations and payments, net

 

(8,848

)

(16,064

)

Purchase of interest-bearing deposits in other financial institutions

 

(2,480

)

 

Purchase of premises and equipment

 

(260

)

(169

)

Proceeds from maturities of available-for-sale securities

 

5,601

 

4,706

 

Proceeds from sales of available-for-sale securities

 

1,010

 

5,888

 

Proceeds from sales of other real estate owned

 

62

 

440

 

Purchase of available-for-sale securities

 

(8,033

)

(20,463

)

Proceeds from sales of premises and equipment

 

383

 

28

 

Net cash used in investing activities

 

(12,565

)

(25,634

)

Financing Activities

 

 

 

 

 

Net change in demand deposits, money market, NOW and savings accounts

 

9,932

 

(2,776

)

Net change in time deposits

 

10,775

 

(2,990

)

Repayment of FHLB advances

 

(11,000

)

 

Repayment of TARP preferred stock

 

 

(3,266

)

Repurchase of TARP warrants

 

(1,706

)

 

Proceeds from other borrowings

 

1,000

 

7,000

 

Dividends paid on preferred stock

 

(389

)

(390

)

Net cash provided by (used in) financing activities

 

8,612

 

(2,422

)

Increase in Cash and Cash Equivalents

 

(116

)

(23,822

)

Cash and Cash Equivalents, Beginning of Year

 

11,322

 

37,062

 

Cash and Cash Equivalents, End of Quarter

 

$

11,206

 

$

13,240

 

Supplemental Cash Flows Information

 

 

 

 

 

Interest paid

 

$

1,982

 

$

2,071

 

Income taxes paid

 

$

890

 

$

225

 

Loans transferred to other real estate owned

 

$

111

 

$

230

 

 

See Notes to Unaudited Consolidated Financial Statements

 

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Table of Contents

 

Citizens First Corporation

Notes to Unaudited Consolidated Financial Statements

 

Note 1 — Nature of Operations and Summary of Significant Accounting Policies

 

The accounting and reporting policies of Citizens First Corporation (the “Company”) and its subsidiary, Citizens First Bank, Inc. (the “Bank”), conform to U.S. generally accepted accounting principles and general practices within the banking industry.  The consolidated financial statements include the accounts of the Company and the Bank.  All significant intercompany transactions and accounts have been eliminated in consolidation.

 

Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted.  These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Estimates used in the preparation of the financial statements are based on various factors including the current interest rate environment and the general strength of the local economy.  Changes in the overall interest rate environment can significantly affect the Company’s net interest income and the value of its recorded assets and liabilities.  Actual results could differ from those estimates used in the preparation of the financial statements.

 

In the opinion of management, all adjustments considered necessary for a fair presentation have been reflected in the accompanying unaudited financial statements.  Those adjustments consist only of normal recurring adjustments. Results of interim periods are not necessarily indicative of results to be expected for the full year.  The consolidated balance sheet of the Company as of December 31, 2014 has been derived from the audited consolidated balance sheet of the Company as of that date.

 

Recent Accounting PronouncementsIn May 2014 the FASB amended existing guidance related to revenue from contracts with customers. This amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and

 

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Table of Contents

 

improves disclosures about revenue. In addition, this amendment specifies the accounting for some costs to obtain or fulfill a contract with a customer. These amendments are effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. The Bank is currently evaluating the impact of this new accounting standard on the consolidated financial statements.

 

Note 2 -  Reclassifications

 

Certain reclassifications have been made to the consolidated financial statements of prior periods to conform to the current period presentation.  These reclassifications do not affect net income or total stockholders’ equity as previously reported.

 

Note 3 - Available-For-Sale Securities

 

The following table summarizes the amortized cost and fair value of the available-for sale securities portfolio at September 30, 2015 and December 31, 2014 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income:

 

10



Table of Contents

 

 

 

(Dollars in Thousands)

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. government agencies and government sponsored entities

 

$

2,998

 

$

2

 

$

(6

)

$

2,994

 

Agency mortgage-backed securities: residential

 

27,938

 

464

 

(14

)

28,388

 

State and municipal

 

25,844

 

669

 

(70

)

26,443

 

Trust preferred security

 

1,879

 

 

(639

)

1,240

 

Corporate bonds

 

1,000

 

3

 

 

1,003

 

Total Available-for-Sale Securities

 

$

59,659

 

$

1,138

 

$

(729

)

$

60,068

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. government agencies and government sponsored entities

 

$

2,999

 

$

 

$

(51

)

$

2,948

 

Agency mortgage-backed securities: residential

 

27,241

 

309

 

(31

)

27,519

 

State and municipal

 

25,350

 

793

 

(104

)

26,039

 

Trust preferred security

 

1,876

 

 

(396

)

1,480

 

Corporate bonds

 

1,000

 

 

 

1,000

 

Total Available-for-Sale Securities

 

$

58,466

 

$

1,102

 

$

(582

)

$

58,986

 

 

The amortized cost and fair value of investment securities at September 30, 2015 by contractual maturity were as follows.  Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

 

 

 

September 30, 2015

 

 

 

(Dollars in Thousands)

 

 

 

Available-For-Sale

 

 

 

Amortized Cost

 

Fair Value

 

Due in one year or less

 

$

340

 

$

346

 

Due from one to five years

 

14,386

 

14,570

 

Due from five to ten years

 

9,663

 

9,875

 

Due after ten years

 

7,332

 

6,889

 

Agency mortgage-backed: residential

 

27,938

 

28,388

 

Total

 

$

59,659

 

$

60,068

 

 

11



Table of Contents

 

The following table summarizes the investment securities with unrealized losses by portfolio segment at September 30, 2015 and December 31, 2014, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position:

 

 

 

(Dollars in Thousands)

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

Description of
Securities

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

September 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies and government sponsored entities

 

$

 

$

 

$

1,993

 

$

(6

)

$

1,993

 

$

(6

)

Agency mortgage-backed: residential

 

 

 

1,553

 

(14

)

1,553

 

(14

)

State and municipal

 

4,947

 

(33

)

595

 

(37

)

5,542

 

(70

)

Trust preferred security

 

 

 

1,240

 

(639

)

1,240

 

(639

)

Total temporarily impaired

 

$

4,947

 

$

(33

)

$

5,381

 

$

(696

)

$

10,328

 

$

(729

)

 

 

 

(Dollars in Thousands)

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

Description of

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

Securities

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies and government sponsored entities

 

$

992

 

$

(8

)

$

1,955

 

$

(43

)

$

2,947

 

$

(51

)

Agency mortgage-backed: residential

 

1,134

 

(2

)

1,678

 

(29

)

2,812

 

(31

)

State and municipal

 

4,891

 

(24

)

2,530

 

(80

)

7,421

 

(104

)

Trust preferred security

 

 

 

1,480

 

(396

)

1,480

 

(396

)

Total temporarily impaired

 

$

7,017

 

$

(34

)

$

7,643

 

$

(548

)

$

14,660

 

$

(582

)

 

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

 

12



Table of Contents

 

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.

 

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 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.

 

Approximately 92% of the Company’s unrealized losses 12 months or more relate to its investment in a single trust preferred security.  The security is a single-issuer trust preferred that is not rated. 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.  On a 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 illiquidity affecting these markets and not 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.

 

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Table of Contents

 

Note 4 - Loans and Allowance for Loan Losses

 

Categories of loans include:

 

 

 

(Dollars in Thousands)

 

 

 

September 30, 2015

 

December 31, 2014

 

Commercial

 

$

47,137

 

$

43,439

 

Commercial real estate:

 

 

 

 

 

Construction

 

24,444

 

18,064

 

Other

 

173,029

 

174,032

 

Residential real estate

 

78,326

 

78,270

 

Consumer:

 

 

 

 

 

Auto

 

1,486

 

1,820

 

Other

 

2,727

 

2,852

 

Total loans

 

327,149

 

318,477

 

Less allowance for loan losses

 

(5,021

)

(4,885

)

Net loans

 

$

322,128

 

$

313,592

 

 

The following table sets forth an analysis of our allowance for loan losses for the three months ending September 30, 2015 and 2014.

 

 

 

(Dollars in Thousands)

 

September 30, 2015

 

Commercial

 

Commercial
Real Estate

 

Residential
Real Estate

 

Consumer

 

Unallocated

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

757

 

$

3,605

 

$

447

 

$

38

 

$

136

 

$

4,983

 

Provision for loan losses

 

12

 

(23

)

8

 

(2

)

5

 

 

Loans charged-off

 

 

 

 

(3

)

 

(3

)

Recoveries

 

35

 

 

3

 

3

 

 

41

 

Total ending allowance balance

 

$

804

 

$

3,582

 

$

458

 

$

36

 

$

141

 

$

5,021

 

 

 

 

(Dollars in Thousands)

 

September 30, 2014

 

Commercial

 

Commercial
Real Estate

 

Residential
Real Estate

 

Consumer

 

Unallocated

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

902

 

$

3,189

 

$

646

 

$

67

 

$

149

 

$

4,953

 

Provision for loan losses

 

(80

)

37

 

52

 

(10

)

1

 

 

Loans charged-off

 

 

(13

)

(83

)

(2

)

 

(98

)

Recoveries

 

34

 

11

 

3

 

 

 

48

 

Total ending allowance balance

 

$

856

 

$

3,224

 

$

618

 

$

55

 

$

150

 

$

4,903

 

 

14



Table of Contents

 

The following table sets forth an analysis of our allowance for loan losses for the nine months ending September 30, 2015 and 2014.

 

 

 

(Dollars in Thousands)

 

September 30, 2015

 

Commercial

 

Commercial
Real Estate

 

Residential
Real Estate

 

Consumer

 

Unallocated

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,029

 

$

3,088

 

$

582

 

$

45

 

$

141

 

$

4,885

 

Provision for loan losses

 

(236

)

510

 

(77

)

3

 

 

200

 

Loans charged-off

 

(75

)

(17

)

(57

)

(21

)

 

(170

)

Recoveries

 

86

 

1

 

10

 

9

 

 

106

 

Total ending allowance balance

 

$

804

 

$

3,582

 

$

458

 

$

36

 

$

141

 

$

5,021

 

 

 

 

 

(Dollars in Thousands)

 

September 30, 2014

 

Commercial

 

Commercial
Real Estate

 

Residential
Real Estate

 

Consumer

 

Unallocated

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,420

 

$

2,079

 

$

703

 

$

86

 

$

365

 

$

4,653

 

Provision for loan losses

 

(657

)

1,090

 

75

 

(18

)

(215

)

275

 

Loans charged-off

 

 

(14

)

(172

)

(15

)

 

(201

)

Recoveries

 

93

 

69

 

12

 

2

 

 

176

 

Total ending allowance balance

 

$

856

 

$

3,224

 

$

618

 

$

55

 

$

150

 

$

4,903

 

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of September 30, 2015 and December 31, 2014, which includes net deferred loan fees.  As of September 30, 2015 and December 31, 2014, accrued interest receivable of $1.3 million and $1.2 million, respectively, are not considered significant and therefore not included in the recorded investment in loans presented in the following tables.

 

15



Table of Contents

 

 

 

(Dollars in Thousands)

 

September 30, 2015

 

Commercial

 

Commercial
Real Estate

 

Residential
Real Estate

 

Consumer

 

Unallocated

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

146

 

$

378

 

$

3

 

$

 

$

 

$

527

 

Collectively evaluated

 

658

 

3,204

 

455

 

36

 

141

 

4,494

 

Total ending allowance balance

 

$

804

 

$

3,582

 

$

458

 

$

36

 

$

141

 

$

5,021

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

995

 

$

2,074

 

$

1,003

 

$

9

 

$

 

$

4,081

 

Collectively evaluated

 

46,142

 

195,399

 

77,323

 

4,204

 

 

323,068

 

Total ending loans balance

 

$

47,137

 

$

197,473

 

$

78,326

 

$

4,213

 

$

 

$

327,149

 

 

 

 

(Dollars in Thousands)

 

 

 

 

 

Commercial

 

Residential

 

 

 

 

 

 

 

December 31, 2014

 

Commercial

 

Real Estate

 

Real Estate

 

Consumer

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

342

 

$

220

 

$

7

 

$

10

 

$

 

$

579

 

Collectively evaluated

 

687

 

2,868

 

575

 

35

 

141

 

4,306

 

Total ending allowance balance

 

$

1,029

 

$

3,088

 

$

582

 

$

45

 

$

141

 

$

4,885

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

2,696

 

$

1,057

 

$

1,098

 

$

22

 

$

 

$

4,873

 

Collectively evaluated

 

40,743

 

191,039

 

77,172

 

4,650

 

 

313,604

 

Total ending loans balance

 

$

43,439

 

$

192,096

 

$

78,270

 

$

4,672

 

$

 

$

318,477

 

 

The following table presents information related to impaired loans by class of loans as of September 30, 2015 and December 31, 2014. In this table presentation the unpaid principal balance of the loans has not been reduced by partial net charge-offs and the recorded investment of the loans was reduced by partial net charge-offs.

 

16



Table of Contents

 

 

 

(Dollars in Thousands)

 

(Dollars in Thousands)

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Unpaid
Principal
Balance

 

Recorded
Investment

 

Allowance
for Loan
Losses
Allocated

 

Unpaid
Principal
Balance

 

Recorded
Investment

 

Allowance
for Loan
Losses
Allocated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

63

 

$

63

 

$

 

$

1,129

 

$

1,129

 

$

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

Other

 

644

 

644

 

 

 

 

 

Residential real estate

 

936

 

936

 

 

1,026

 

1,026

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

Auto

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Subtotal

 

$

1,643

 

$

1,643

 

$

 

$

2,155

 

$

2,155

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

932

 

$

932

 

$

146

 

$

1,567

 

$

1,567

 

$

342

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

Other

 

1,430

 

1,430

 

378

 

1,057

 

1,057

 

220

 

Residential real estate

 

67

 

67

 

3

 

72

 

72

 

7

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auto

 

 

 

 

10

 

10

 

10

 

Other

 

9

 

9

 

 

12

 

12

 

 

Subtotal

 

$

2,438

 

$

2,438

 

$

527

 

$

2,718

 

$

2,718

 

$

579

 

Total

 

$

4,081

 

$

4,081

 

$

527

 

$

4,873

 

$

4,873

 

$

579

 

 

17



Table of Contents

 

Information on impaired loans for the three months ending September 30, 2015 and 2014 is as follows:

 

 

 

(Dollars in Thousands)

 

(Dollars in Thousands)

 

 

 

September 30, 2015

 

September 30, 2014

 

 

 

Average
Recorded
Investment

 

Interest
Income
Recognized

 

Cash Basis
Interest
Recognized

 

Average
Recorded
Investment

 

Interest
Income
Recognized

 

Cash Basis
Interest
Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,003

 

$

16

 

$

15

 

$

2,743

 

$

36

 

$

24

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

14

 

 

 

Other

 

2,077

 

18

 

13

 

1,482

 

20

 

14

 

Residential real estate

 

1,006

 

12

 

8

 

1,180

 

14

 

9

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auto

 

 

 

 

15

 

 

 

Other

 

10

 

 

 

13

 

 

 

Total

 

$

4,096

 

$

46

 

$

36

 

$

5,447

 

$

70

 

$

47

 

 

Information on impaired loans for the nine months ending September 30, 2015 and 2014 is as follows:

 

 

 

(Dollars in Thousands)

 

(Dollars in Thousands)

 

 

 

September 30, 2015

 

September 30, 2014

 

 

 

Average
Recorded
Investment

 

Interest
Income
Recognized

 

Cash Basis
Interest
Recognized

 

Average
Recorded
Investment

 

Interest
Income
Recognized

 

Cash Basis
Interest
Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,032

 

$

37

 

$

36

 

$

2,977

 

$

103

 

$

77

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

14

 

1

 

1

 

Other

 

1,765

 

46

 

44

 

1,712

 

57

 

42

 

Residential real estate

 

1,015

 

36

 

27

 

1,241

 

40

 

28

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auto

 

 

 

 

17

 

1

 

 

Other

 

11

 

1

 

1

 

14

 

1

 

1

 

Total

 

$

3,823

 

$

120

 

$

108

 

$

5,975

 

$

203

 

$

149

 

 

18



Table of Contents

 

The recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2015 and December 31, 2014 are summarized below:

 

 

 

(Dollars in Thousands)

 

(Dollars in Thousands)

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Loans Past Due
Over 90 Days and
Still Accruing

 

Nonaccrual

 

Loans Past Due
Over 90 Days and
Still Accruing

 

Nonaccrual

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

$

79

 

$

 

$

748

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

Other

 

 

439

 

 

45

 

Residential real estate

 

 

288

 

 

364

 

Consumer:

 

 

 

 

 

 

 

 

 

Auto

 

 

 

 

10

 

Other

 

 

 

 

 

Total

 

$

 

$

806

 

$

 

$

1,167

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans and loans past due 90 days still on accrual include individually classified impaired loans.

 

The following tables present the aging of the recorded investment in past due loans as of September 30, 2015 and December 31, 2014 by class of loans.  Non-accrual loans are included and have been categorized based on their payment status:

 

 

 

(Dollars in Thousands)

 

 

 

30-59
Days Past
Due

 

60-89
Days Past
Due

 

Over 90
Days Past
Due

 

Total Past
Due

 

Current

 

Total

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

$

 

$

79

 

$

79

 

$

47,058

 

$

47,137

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

24,444

 

24,444

 

Other

 

 

 

439

 

439

 

172,590

 

173,029

 

Residential real estate

 

132

 

 

288

 

420

 

77,906

 

78,326

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auto

 

 

 

 

 

1,486

 

1,486

 

Other

 

 

 

 

 

2,727

 

2,727

 

Subtotal

 

$

132

 

$

 

$

806

 

$

938

 

$

326,211

 

$

327,149

 

 

19



Table of Contents

 

 

 

(Dollars in Thousands)

 

 

 

30-59
Days Past
Due

 

60-89
Days Past
Due

 

Over 90
Days Past
Due

 

Total Past
Due

 

Current

 

Total

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

$

 

$

645

 

$

645

 

$

42,794

 

$

43,439

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

18,064

 

18,064

 

Other

 

 

 

45

 

45

 

173,987

 

174,032

 

Residential real estate

 

31

 

 

362

 

393

 

77,877

 

78,270

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auto

 

 

 

 

 

1,820

 

1,820

 

Other

 

 

 

 

 

2,852

 

2,852

 

Subtotal

 

$

31

 

$

 

$

1,052

 

$

1,083

 

$

317,394

 

$

318,477

 

 

Troubled Debt Restructurings:

 

The Company reported total troubled debt restructurings of $3.3 million and $4.4 million as of September 30, 2015 and December 31, 2014, respectively.  The Company has no commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.  Troubled debt restructurings are included in impaired loans. The modifications of the terms of these loans included reducing the interest rate, granting an interest only payment period, or extending the terms of the debt for customers experiencing financial difficulties. Of the 13 troubled debt restructurings reported at quarter end, all loans were on accrual status.

 

The following table presents loans by class modified as troubled debt restructurings that occurred during the quarter ending September 30, 2015 and 2014:

 

 

 

 

 

(Dollars in Thousands)

 

 

 

(Dollars in Thousands)

 

 

 

Number
of Loans

 

Pre-Modification
Outstanding
Recorded
Investment

 

Post-Modification
Outstanding
Recorded
Investment

 

Number
of Loans

 

Pre-Modification
Outstanding
Recorded
Investment

 

Post-Modification
Outstanding
Recorded
Investment

 

 

 

September 30, 2015

 

September 30, 2014

 

Troubled Debt Restructurings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

$

 

$

 

1

 

$

666

 

$

666

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Total

 

 

$

 

$

 

1

 

$

666

 

$

666

 

 

20



Table of Contents

 

The following table presents loans by class modified as trouble debt restructurings that occurred year to date as of September 30, 2015 and 2014.

 

 

 

 

 

(Dollars in Thousands)

 

 

 

(Dollars in Thousands)

 

 

 

Number
of Loans

 

Pre-Modification
Outstanding
Recorded
Investment

 

Post-Modification
Outstanding
Recorded
Investment

 

Number
of Loans

 

Pre-Modification
Outstanding
Recorded
Investment

 

Post-Modification
Outstanding
Recorded
Investment

 

 

 

September 30, 2015

 

September 30, 2014

 

Troubled Debt Restructurings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

$

 

$

 

1

 

$

666

 

$

666

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

2

 

1,547

 

1,547

 

1

 

$

924

 

$

924

 

Residential real estate

 

 

 

 

1

 

15

 

15

 

Total

 

2

 

$

1,547

 

$

1,547

 

3

 

$

1,605

 

$

1,605

 

 

Specific allocations of $267,000 and $547,000 were reported for troubled debt restructurings as of September 30, 2015 and December 31, 2014. Specific allocations of $424,000 were reported for the troubled debt restructurings as of September 30, 2014. No payment defaults were reported for troubled debt restructurings during the three and nine months ending September 30, 2015 or September 30, 2014. No charge offs were taken on troubled debt restructurings during the three and nine months ending September 30, 2015 or September 30, 2014.

 

The terms of certain other loans were modified during the nine months ending September 30, 2015 and 2014 that did not meet the definition of a troubled debt restructuring. These loans modified during the nine months ending September 30, 2015 have a total recorded investment of $19.2 million as of September 30, 2015. The loans modified during the nine months ending September 30, 2014 had a total recorded investment of $13.3 million as of September 30, 2014. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

 

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

 

Credit Quality Indicators:

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current

 

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economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes commercial and commercial real estate loans with an outstanding balance greater than $25 thousand and is reviewed on a monthly basis. For residential real estate and consumer loans the analysis primarily involves monitoring the past due status of these loans and at such time that these loans are past due, the Company evaluates the loans to determine if a change in risk category is warranted. The Company uses the following definitions for risk ratings:

 

Special Mention.  Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

Substandard.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful.  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans.  All loans in all loan categories are assigned risk ratings.  Based on the most recent analyses performed, the risk category of loans by class of loans is as follows:

 

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Pass

 

Special
Mention

 

Substandard

 

Doubtful

 

Total

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

45,096

 

$

 

$

2,041

 

$

 

$

47,137

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Construction

 

24,444

 

 

 

 

24,444

 

Other

 

163,564

 

5,714

 

3,751

 

 

173,029

 

Residential real estate

 

77,656

 

 

670

 

 

78,326

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Auto

 

1,486

 

 

 

 

1,486

 

Other

 

2,717

 

 

10

 

 

2,727

 

Total

 

$

314,963

 

$

5,714

 

$

6,472

 

$

 

$

327,149

 

 

 

 

Pass

 

Special
Mention

 

Substandard

 

Doubtful

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

39,926

 

$

547

 

$

2,966

 

$

 

$

43,439

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Construction

 

18,064

 

 

 

 

18,064

 

Other

 

166,969

 

2,875

 

4,188

 

 

174,032

 

Residential real estate

 

76,756

 

772

 

742

 

 

78,270

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Auto

 

1,820

 

 

 

 

1,820

 

Other

 

2,842

 

 

10

 

 

2,852

 

Total

 

$

306,377

 

$

4,194

 

$

7,906

 

$

 

$

318,477

 

 

Note 5 - Fair Value Measurements

 

Fair value is the exchange price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy 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 values:

 

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

 

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assumptions of fair value, and are significant to the fair value of the assets or liabilities.

 

In determining the appropriate levels, the Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

 

Investment Securities: 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 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. The Company also has one Level 3 security. The fair value of this security is obtained directly from the broker which originally handled the security issue. The value is determined based on trades of similar securities with similar coupons.

 

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

 

Other Real Estate Owned: Commercial and residential real estate properties classified as other real estate owned (OREO) are measured at fair value, less costs to sell.  Fair values are based on recent real estate appraisals.  These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

 

Appraisals for collateral-dependent impaired loans and real estate properties classified as other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by Bank management.  The appraisal values for collateral-dependent impaired loans are discounted to allow for selling expenses and fees, the limited use nature of various properties, the age of the most recent appraisal, and additional discretionary discounts for location, condition, etc. The Bank annually obtains an updated current appraisal

 

24



Table of Contents

 

value for each OREO property to certify that the fair value has not declined.  For each parcel of OREO that has declined in value, the Bank records the decline in value by a direct writedown of the asset.

 

Assets measured on a recurring basis:

 

 

 

Fair Value Measurements at:

 

 

 

(Dollars in Thousands)

 

(Dollars in Thousands)

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies and government sponsored entities

 

 

 

$

2,994

 

 

 

 

 

$

2,948

 

 

 

Agency mortgage-backed securites-residential

 

 

 

28,388

 

 

 

 

 

27,519

 

 

 

State and municipal

 

 

 

26,443

 

 

 

 

 

26,039

 

 

 

Trust preferred security

 

 

 

 

 

1,240

 

 

 

 

 

1,480

 

Corporate bonds

 

 

 

1,003

 

 

 

 

 

1,000

 

 

 

Total investment securities

 

$

 

$

58,828

 

$

1,240

 

$

 

$

57,506

 

$

1,480

 

 

Assets measured on a non-recurring basis:

 

 

 

Fair Value Measurement

 

 

 

(Dollars in Thousands)

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Significant
Unobservable Inputs
(Level 3)

 

Significant
Unobservable Inputs
(Level 3)

 

Impaired loans:

 

 

 

 

 

Commercial

 

$

 

$

423

 

Commercial RE

 

260

 

29

 

Residential

 

60

 

59

 

 

 

 

 

 

 

Other real estate owned:

 

 

 

 

 

Commercial RE

 

$

135

 

$

198

 

Residential

 

72

 

 

 

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Table of Contents

 

Impaired loans which are measured for impairment using the fair value of collateral for collateral dependent loans, had a principal balance of $580,000 at September 30, 2015 with a valuation allowance of $260,000.  Impaired loans which were measured for impairment using the fair value of collateral for collateral-dependent loans had a principal balance of $841,000 at December 31, 2014, with a valuation allowance of $330,000.  An increase in the provision for loan losses of $260,000 and a decrease of $256,000 was recognized for the nine months ended September 30, 2015 and 2014, respectively, as a result of net changes in fair values on collateral dependent loans and other factors affecting the provision for loan losses.

 

Other real estate owned, which is measured at fair value less costs to sell, had a net carrying value of $207,000 at September 30, 2015 and $198,000 at December 31, 2014.  Total writedowns of other real estate owned were $4,000 and $14,000 in the quarters ending September 30, 2015 and 2014, respectively. Total writedowns of other real estate owned were $27,000 and $47,000 in the nine months ending September 30, 2015 and 2014, respectively.

 

The following table presents quantitative and qualitative information about Level 3 fair value measurements for financial instruments measured on a non-recurring basis at September 30, 2015.

 

 

 

September 30,
2015

 

Valuation Techniques

 

Unobservable Inputs (Dollars in
thousands)

 

Range
(Weighted Avg)

 

Impaired loans:

 

 

 

 

 

 

 

 

 

Commercial RE

 

260

 

Sales Comparison

 

Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition

 

(50.00%)

 

Residential RE

 

60

 

Sales Comparison

 

Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition

 

(20.00%)

 

Other real estate owned:

 

 

 

 

 

 

 

 

 

Commercial RE

 

135

 

Sales Comparison

 

Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition

 

8%-40% (33.13%)

 

Residential RE

 

72

 

Sales Comparison

 

Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition

 

(38.46%)

 

 

The following table presents quantitative and qualitative information about Level 3 fair value measurements for financial instruments measured on a non-recurring basis at December 31, 2014.

 

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Table of Contents

 

 

 

December 31,
2014

 

Valuation Techniques

 

Unobservable Inputs (Dollars in
thousands)

 

Range
(Weighted Avg)

 

Impaired loans:

 

 

 

 

 

 

 

 

 

Commercial

 

$

423

 

Market Approach

 

Discounts to allow for market value of assets

 

50%-70% (67.35%)

 

Commercial RE

 

29

 

Sales Comparison

 

Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition

 

(20.00%)

 

Residential

 

59

 

Sales Comparison

 

Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition

 

(10.00%)

 

Other real estate owned:

 

 

 

 

 

 

 

 

 

Commercial RE

 

198

 

Sales Comparison

 

Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition

 

8%-55% (38.29%)

 

 

Carrying amount and estimated fair values of financial instruments, not previously presented, were as follows:

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

September 30, 2015

 

 

 

Carrying
Amount

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,206

 

$

11,206

 

 

 

 

 

$

11,206

 

Interest-bearing deposits in other financial institutions

 

2,480

 

2,480

 

 

 

 

 

2,480

 

Loans, net of allowance

 

321,808

 

 

 

 

 

323,917

 

323,917

 

Loans held for sale

 

155

 

 

 

158

 

 

 

158

 

Accrued interest receivable

 

1,597

 

 

 

320

 

1,277

 

1,597

 

Federal Home Loan Bank stock

 

2,025

 

 

 

 

 

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

Demand and savings deposits

 

$

200,842

 

$

200,842

 

 

 

 

 

$

200,842

 

Time deposits

 

161,649

 

 

 

161,938

 

 

 

161,938

 

FHLB advances

 

13,000

 

 

 

12,925

 

 

 

12,925

 

Other borrowings

 

2,500

 

 

 

2,500

 

 

 

2,500

 

Subordinate debentures

 

5,000

 

 

 

 

 

2,836

 

2,836

 

Accrued interest payable

 

233

 

9

 

199

 

25

 

233

 

 

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Table of Contents

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

December 31, 2014

 

 

 

Carrying
Amount

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,322

 

$

11,322

 

 

 

 

 

$

11,322

 

Loans, net of allowance

 

313,081

 

 

 

 

 

316,075

 

316,075

 

Accrued interest receivable

 

1,527

 

 

 

323

 

1,204

 

1,527

 

Federal Home Loan Bank stock

 

2,025

 

 

 

 

 

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

Demand and savings deposits

 

$

190,910

 

$

156,790

 

 

 

 

 

$

156,790

 

Time deposits

 

150,874

 

 

 

151,504

 

 

 

151,504

 

FHLB advances

 

24,000

 

 

 

23,835

 

 

 

23,835

 

Other borrowings

 

1,500

 

 

 

1,500

 

 

 

1,500

 

Subordinate debentures

 

5,000

 

 

 

 

 

2,395

 

2,395

 

Accrued interest payable

 

231

 

9

 

222

 

 

 

231

 

 

The methods and assumptions used to estimate fair value are described as follows:

 

(a)         Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

 

(b)         Interest Bearing Deposits in Other Financial Institutions: Fair values are based on quoted market prices.

 

(c)          FHLB Stock: It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

 

(d)         Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price. The fair value of loans held for sale is estimated based upon binding contracts and quotes from first party investors resulting in a Level 2 classification.

 

(e)          Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification.

 

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Table of Contents

 

The carrying amounts of variable rate certificates of deposit approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

 

(f)           FHLB Advances and Other Borrowings/Subordinated Debentures: The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification. The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

 

(g)          Accrued Interest Receivable/Payable: The carrying amounts of accrued interest approximate fair value resulting in a Level 1 or Level 2 classification consistent with the asset/liability they are associated with.

 

Note 6 - Earnings Per Share

 

Basic earnings per share have been computed by dividing net income available for common shareholders by the weighted-average number of common shares outstanding for the period.  Diluted earnings per share have been computed the same as basic earnings per share, and assumes the conversion of outstanding stock options, convertible preferred stock and warrants, if dilutive.  The following table reconciles the basic and diluted earnings per share computations for the quarters ending September 30, 2015 and 2014.

 

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Table of Contents

 

 

 

Quarter ended September 30, 2015

 

Quarter ended September 30, 2014

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

Per Share

 

 

 

Average

 

Per Share

 

 

 

Income

 

Shares

 

Amount

 

Income

 

Shares

 

Amount

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

775

 

 

 

 

 

$

930

 

 

 

 

 

Less: Dividends on preferred stock during the quarter

 

(131

)

 

 

 

 

(131

)

 

 

 

 

Net income available to common shareholders

 

$

644

 

1,968,777

 

$

0.33

 

$

799

 

1,968,777

 

$

0.41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible preferred stock

 

131

 

568,890

 

 

 

 

 

 

 

 

 

Warrants

 

 

 

 

 

 

 

 

137,181

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders and assumed conversions

 

$

775

 

2,537,667

 

$

0.31

 

$

799

 

2,105,958

 

$

0.38

 

 

 

 

Nine months ended September 30,
2015

 

Nine months ended September 30,
2014

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

Per Share

 

 

 

Average

 

Per Share

 

 

 

Income

 

Shares

 

Amount

 

Income

 

Shares

 

Amount

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,456

 

 

 

 

 

$

2,354

 

 

 

 

 

Less: Dividends on preferred stock during the quarter

 

(389

)

 

 

 

 

(390

)

 

 

 

 

Net income available to common shareholders

 

$

2,067

 

1,968,777

 

$

1.05

 

$

1,964

 

1,968,777

 

$

1.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible preferred stock

 

389

 

568,890

 

 

 

 

 

 

 

 

 

Warrants

 

 

 

57,223

 

 

 

 

 

129,975

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders and assumed conversions

 

$

2,456

 

2,594,890

 

$

0.95

 

$

1,964

 

2,098,752

 

$

0.94

 

 

Stock options for 26,571 and 72,931 shares of common stock were not considered in computing diluted earnings per common share for September 30, 2015 and 2014, respectively, because they are anti-dilutive.  Convertible preferred shares assuming full conversion totaled 568,890 shares as of September 30, 2015. On April 15, 2015, the Company repurchased the 254,218 warrants issued in 2008 to the US Treasury as part of its participation in the US Treasury’s Capital Purchase Program.  The repurchase

 

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Table of Contents

 

 price of the warrants was $1.7 million. Common stock warrants totaled 0 and 254,218 as of September 30, 2015 and 2014, respectively.

 

Note 7 — Regulatory Capital 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 September 30, 2015 and December 31, 2014, the Company and Citizens First Bank, Inc. met all capital adequacy requirements to which they are 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.  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.

 

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. For 2015, interim Final Basel III rules require the Bank to maintain minimum amounts and ratios of common equity Tier I capital to risk-weighted assets. Under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in computing regulatory capital. For December 31, 2014, regulatory capital ratios were calculated under Basel I rules.

 

The Company’s and Citizens First Bank, Inc.’s actual capital amounts and ratios are also presented in the following table.

 

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(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

To Be Well Capitalized

 

 

 

 

 

 

 

For Capital Adequacy

 

Under Prompt Corrective

 

 

 

Actual

 

Purposes

 

Action Provisions

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

43,737

 

12.53

%

$

27,922

 

8.0

%

N/A

 

N/A

 

Citizens First Bank, Inc.

 

45,723

 

13.10

%

27,922

 

8.0

%

$

34,903

 

10.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital (to Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

39,365

 

11.28

%

20,942

 

6.0

%

N/A

 

N/A

 

Citizens First Bank, Inc.

 

41,351

 

11.85

%

20,942

 

6.0

%

27,922

 

8.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier I Capital (to Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

26,706

 

7.65

%

15,706

 

4.5

%

N/A

 

N/A

 

Citizens First Bank, Inc.

 

41,351

 

11.85

%

15,706

 

4.5

%

22,687

 

6.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I Leverage Capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

39,365

 

9.28

%

13,961

 

4.0

%

N/A

 

N/A

 

Citizens First Bank, Inc.

 

41,351

 

9.77

%

16,924

 

4.0

%

21,155

 

5.0

%

 

 

 

(Dollars in Thousands)

 

 

 

Actual

 

For Capital Adequacy
Purposes

 

To Be Well Capitalized
Under Prompt Corrective
Action Provisions

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

42,879

 

12.74

%

$

26,929

 

8.0

%

N/A

 

N/A

 

Citizens First Bank, Inc.

 

44,056

 

13.09

%

26,929

 

8.0

%

$

33,661

 

10.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital (to Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

38,671

 

11.49

%

13,465

 

4.0

%

N/A

 

N/A

 

Citizens First Bank, Inc.

 

39,837

 

11.83

%

13,465

 

4.0

%

20,197

 

6.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I Leverage Capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

38,671

 

9.42

%

16,415

 

4.0

%

N/A

 

N/A

 

Citizens First Bank, Inc.

 

39,837

 

9.78

%

16,294

 

4.0

%

20,368

 

5.0

%

 

Note 8 — Preferred Stock

 

In 2004, the Company issued 250 shares of Cumulative Convertible Preferred Stock, stated value $31,992 per share (Cumulative Preferred Stock), for an aggregate purchase price of $7,998,000. The Cumulative Preferred Stock was sold for $31,992 per

 

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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 (currently $14.06, adjusted for stock dividends) on and after three years after the date of issuance.

 

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Table of Contents

 

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 2014 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 September 30, 2015, we reported net income of $775,000, or $0.31 per diluted common share, compared to net income of $930,000, or $0.38 per diluted common share in the third quarter of 2014, a decrease of $155,000.  The decrease in net income is primarily attributable to inclusion of a $262,000 pre-tax loss on the disposal of a former branch facility.

 

For the nine months ended September 30, 2015, the Company reported net income of $2.46 million, or $0.95 per diluted common share. This represents an increase of

 

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Table of Contents

 

$102,000, or $0.01 per diluted common share, from the net income of $2.35 million in the previous year. The increase in net income is primarily attributable to an increase in net interest income of $500,000 and an increase in non-interest income of $208,000 partially offset by an increase in non-interest expense of $643,000.

 

Our annualized return on average assets, defined as net income divided by average assets, was 0.76% for the nine months ended September 30, 2015, compared to 0.76% in September 30, 2014.  Our annualized return on average equity, defined as net income divided by average equity, was 8.51% for the nine months ending September 30, 2015, compared to 8.58% for the nine months ending September 30, 2014.

 

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 September 30, 2015 increased $74,000, or 2.0%, compared to September 30, 2014. The increase in net interest income was a result of an increase in the volume of average earning assets over the previous year.

 

For the nine months ended September 30, 2015, net interest income was $11.2 million, an increase of $500,000, or 9.3%, from net interest income of $10.7 million for the comparable period in 2014.  Net interest income increased as a result of an increase in interest income of $425,000 plus lower interest expense on deposits and borrowings of $75,000.

 

The net interest margin for the nine months ended September 30, 2015 was 3.84%, compared to 3.82% in 2014.  The increase of 2 basis points is attributable primarily to the decrease in the cost of average interest-bearing liabilities.

 

The following tables set forth for the quarter and nine months ended September 30, 2015 and 2014, 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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Table of Contents

 

Average Consolidated Balance Sheets and Net Interest Analysis (Dollars in thousands) Quarter ended September 30,

 

 

 

2015

 

2014

 

 

 

Average
Balance

 

Income/
Expense

 

Average
Rate

 

Average
Balance

 

Income/
Expense

 

Average
Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold

 

$

15,122

 

$

9

 

0.24

%

$

14,430

 

$

9

 

0.25

%

Interest-bearing deposits in other financial institutions

 

1,609

 

6

 

1.48

%

 

 

0.00

%

Available-for-sale securities (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

35,146

 

159

 

1.79

%

35,763

 

158

 

1.75

%

Nontaxable

 

23,951

 

258

 

4.27

%

21,166

 

244

 

4.57

%

Federal Home Loan Bank stock

 

2,025

 

20

 

3.92

%

2,025

 

20

 

3.92

%

Loans receivable (2)

 

319,053

 

4,050

 

5.04

%

308,087

 

4,006

 

5.16

%

Total interest earning assets

 

396,906

 

4,502

 

4.50

%

381,471

 

4,437

 

4.61

%

Non-interest earning assets

 

31,425

 

 

 

 

 

31,290

 

 

 

 

 

Total Assets

 

$

428,331

 

 

 

 

 

$

412,761

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

111,703

 

$

104

 

0.37

%

$

103,622

 

$

96

 

0.37

%

Money market accounts

 

25,887

 

24

 

0.37

%

21,125

 

19

 

0.36

%

Savings accounts

 

20,703

 

10

 

0.19

%

18,237

 

11

 

0.24

%

Time deposits

 

163,350

 

425

 

1.03

%

158,394

 

400

 

1.00

%

Total interest-bearing deposits

 

321,643

 

563

 

0.69

%

301,378

 

526

 

0.69

%

Borrowings

 

15,696

 

74

 

1.87

%

25,096

 

125

 

1.98

%

Subordinated debentures

 

5,000

 

25

 

1.98

%

5,000

 

24

 

1.90

%

Total interest-bearing liabilities

 

342,339

 

662

 

0.77

%

331,474

 

675

 

0.81

%

Non-interest bearing deposits

 

44,984

 

 

 

 

 

41,909

 

 

 

 

 

Other liabilities

 

2,492

 

 

 

 

 

2,050

 

 

 

 

 

Total liabilities

 

389,815

 

 

 

 

 

375,433

 

 

 

 

 

Stockholders’ equity

 

38,516

 

 

 

 

 

37,328

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

$

428,331

 

 

 

 

 

$

412,761

 

 

 

 

 

Net interest income

 

 

 

$

3,840

 

 

 

 

 

$

3,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread (1)

 

 

 

 

 

3.73

%

 

 

 

 

3.81

%

Net interest margin (1) (3)

 

 

 

 

 

3.84

%

 

 

 

 

3.91

%

Return on average assets ratio

 

 

 

 

 

0.72

%

 

 

 

 

0.89

%

Return on average equity ratio

 

 

 

 

 

7.98

%

 

 

 

 

9.88

%

Average equity to assets ratio

 

 

 

 

 

8.99

%

 

 

 

 

9.04

%

 


(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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Table of Contents

 

Average Consolidated Balance Sheets and Net Interest Analysis (Dollars in thousands) Nine months ended September 30,

 

 

 

2015

 

2014

 

 

 

Average
Balance

 

Income/
Expense

 

Average
Rate

 

Average
Balance

 

Income/
Expense

 

Average
Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold

 

$

18,308

 

$

30

 

0.22

%

$

21,623

 

$

34

 

0.21

%

Interest-bearing deposits in other financial institutions

 

596

 

7

 

1.57

%

 

 

0.00

%

Available-for-sale securities (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

34,675

 

465

 

1.79

%

34,352

 

450

 

1.75

%

Nontaxable

 

24,000

 

784

 

4.37

%

20,449

 

744

 

4.86

%

Federal Home Loan Bank stock

 

2,025

 

61

 

4.03

%

2,025

 

60

 

3.96

%

Loans receivable (2)

 

319,939

 

12,107

 

5.06

%

305,021

 

11,728

 

5.14

%

Total interest earning assets

 

399,543

 

13,454

 

4.50

%

383,470

 

13,016

 

4.54

%

Non-interest earning assets

 

30,639

 

 

 

 

 

32,017

 

 

 

 

 

Total Assets

 

$

430,182

 

 

 

 

 

$

415,487

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

111,813

 

$

302

 

0.36

%

$

104,727

 

$

314

 

0.40

%

Money market accounts

 

25,894

 

74

 

0.38

%

22,739

 

59

 

0.35

%

Savings accounts

 

20,207

 

29

 

0.19

%

17,642

 

31

 

0.23

%

Time deposits

 

163,841

 

1,287

 

1.05

%

160,357

 

1,216

 

1.01

%

Total interest-bearing deposits

 

321,755

 

1,692

 

0.70

%

305,465

 

1,620

 

0.71

%

Borrowings

 

18,538

 

219

 

1.58

%

25,062

 

368

 

1.96

%

Subordinated debentures

 

5,000

 

73

 

1.95

%

5,000

 

71

 

1.90

%

Total interest-bearing liabilities

 

345,293

 

1,984

 

0.77

%

335,527

 

2,059

 

0.82

%

Non-interest bearing deposits

 

44,163

 

 

 

 

 

41,298

 

 

 

 

 

Other liabilities

 

2,153

 

 

 

 

 

1,977

 

 

 

 

 

Total liabilities

 

391,609

 

 

 

 

 

378,802

 

 

 

 

 

Stockholders’ equity

 

38,573

 

 

 

 

 

36,685

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

$

430,182

 

 

 

 

 

$

415,487

 

 

 

 

 

Net interest income

 

 

 

$

11,470

 

 

 

 

 

$

10,957

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread (1)

 

 

 

 

 

3.73

%

 

 

 

 

3.72

%

Net interest margin (1) (3)

 

 

 

 

 

3.84

%

 

 

 

 

3.82

%

Return on average assets ratio

 

 

 

 

 

0.76

%

 

 

 

 

0.76

%

Return on average equity ratio

 

 

 

 

 

8.51

%

 

 

 

 

8.58

%

Average equity to assets ratio

 

 

 

 

 

8.97

%

 

 

 

 

8.83

%

 


(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.

 

37



Table of Contents

 

Rate/Volume Analysis

 

The following table sets forth the effects of changing rates and volumes on our net interest income for the nine months ended September 30, 2015 and 2014.  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)

 

 

 

Nine Months Ended September 30,
2015 Vs. 2014

 

 

 

Increase (Decrease) Due to

 

 

 

Rate

 

Volume

 

Net

 

Interest-earning assets:

 

 

 

 

 

 

 

Federal funds sold

 

1

 

(5

)

(4

)

Interest-bearing deposits in other financial institutions

 

7

 

 

7

 

Available-for-sale securities

 

 

 

 

 

 

 

Taxable

 

11

 

4

 

15

 

Nontaxable (1)

 

(89

)

129

 

40

 

Federal Home Loan Bank stock

 

1

 

 

1

 

Loans, net

 

(195

)

574

 

379

 

Total Net Change in income on interest-earning assets

 

(264

)

702

 

438

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

NOW accounts

 

(33

)

21

 

(12

)

Money market accounts

 

7

 

8

 

15

 

Savings accounts

 

(7

)

5

 

(2

)

Time deposits

 

45

 

26

 

71

 

 

 

 

 

 

 

 

 

FHLB and other borrowings

 

(53

)

(96

)

(149

)

Subordinated debentures

 

2

 

 

2

 

Total Net Change in expense on interest-earning liabilities

 

(39

)

(36

)

(75

)

Net change in net interest income

 

(225

)

738

 

513

 

Percentage change

 

-43.86

%

143.86

%

100.0

%

 


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

 

38



Table of Contents

 

Provision for Loan Losses

 

No provision for loan losses was recorded for the third quarter of 2015 or the third quarter of 2014. The allowance for loan losses to total loans was 1.53% of total loans at September 30, 2015 compared to 1.58% at September 30, 2014. Net charge-offs (recoveries) were ($38,000) for the third quarter of 2015 compared to $50,000 in the third quarter of 2014.

 

Provision expense for the nine months ended September 30, 2015 decreased $75,000, from $275,000 to $200,000. Net charge-offs were $64,000 for the nine months ended September 30, 2015 compared to $25,000 for the nine months ended September 30, 2014.

 

Non-Interest Income

 

Non-interest income for the three months ended September 30, 2015 increased $76,000, or 9.9%, compared to the three months ended September 30, 2014, primarily due to an increase in service charges on deposit accounts due to the introduction of a new consumer deposit transaction account.

 

Non-interest income for the nine months ended September 30, 2015 increased $208,000, or 9.7%, compared to the nine months ended September 30, 2014, primarily due to an increase in service charges on deposit accounts, gain on sale of mortgage loans and non-deposit brokerage fees.

 

Non-Interest Expense

 

Non-interest expense for the three months ended September 30, 2015 increased $389,000, or 12.4%, compared to the three months ended September 30, 2014, due to the $262,000 loss on disposal of a former branch facility, and an increase in personnel expenses of $131,000, primarily as a result of normal salary adjustments.

 

Non-interest expense for the nine months ended September 30, 2015 increased $643,000, or 6.9%, compared to the nine months ended September 30, 2014, primarily due to an increase in personnel expenses, occupancy expense and other operating expenses, and the loss on disposal of a former branch facility.

 

Income Taxes

 

Income tax expense was calculated using our expected effective rate for 2015 and 2014.  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 2015 and 2014. The effective tax rate for the third

 

39



Table of Contents

 

quarter of 2015 was 27.1% compared to a 28.6% effective tax rate for the third quarter of 2014. The effective tax rate year-to-date was 27.5% for both 2015 and 2014. 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 September 30, 2015 were $424.3 million, an increase of $11.5 million, or 2.8%, from $412.8 million at December 31, 2014.  Average assets during the third quarter were $428.3 million, an increase of 3.8%, or $15.5 million, from $412.8 million in the third quarter of 2014.  Average interest earning assets increased 4.0%, or $15.4 million, from $381.5 million in the third quarter of 2014 to $396.9 million in the third quarter of 2015.

 

Loans

 

Loans increased $8.6 million, or 2.7%, from $318.5 million at December 31, 2014 to $327.1 million at September 30, 2015.  Total loans averaged $319.1 million the third quarter of 2015, compared to $308.1 million the third quarter of 2014, an increase of $11.0 million, or 3.6%.  We experienced increases in all portfolios except consumer loans during the first nine months of the year compared to December 31, 2014. The following table presents a summary of the loan portfolio by category:

 

 

 

(Dollars in Thousands)

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

 

 

% of Total
Loans

 

 

 

% of Total
Loans

 

 

 

 

 

 

 

 

 

 

 

Commercial and agricultural

 

$

47,137

 

14.41

%

$

43,439

 

13.64

%

Commercial real estate

 

197,473

 

60.36

%

192,096

 

60.32

%

Residential real estate

 

78,326

 

23.94

%

78,270

 

24.57

%

Consumer

 

4,213

 

1.29

%

4,672

 

1.47

%

 

 

$

327,149

 

100

%

$

318,477

 

100

%

 

The majority of our loans are to customers located in south central Kentucky and central Tennessee.  As of September 30, 2015, our twenty largest credit relationships consisted of loans and loan commitments ranging from $3.8 million to $7.7 million.  The aggregate amount of these credit relationships was $97.3 million. As of December 31, 2014, our twenty largest credit relationships consisted of loans and loan commitments ranging from $3.9 million to $7.8 million.  The aggregate amount of these credit relationships was $95.4 million.

 

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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 September 30, 2015 and December 31, 2014.

 

As of September 30, 2015, we had $23.9 million of participations in loans purchased from, and $23.8 million of participations in loans sold to, other banks. As of December 31, 2014, we had $18.1 million of participations in loans purchased from, and $19.9 million of participations in loans sold to, other banks.

 

The following table sets forth the maturity distribution of the loan portfolio as of September 30, 2015.  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)

 

Loan Maturities
as of September 30, 2015

 

Within One
Year

 

After One but
Within Five
Years

 

After Five
Years

 

Total

 

Commercial and agricultural

 

$

17,282

 

$

18,879

 

$

10,976

 

$

47,137

 

Commercial real estate

 

33,251

 

118,363

 

45,859

 

197,473

 

Residential real estate

 

7,366

 

39,254

 

31,706

 

78,326

 

Consumer

 

834

 

3,339

 

40

 

4,213

 

Total

 

$

58,733

 

$

179,835

 

$

88,581

 

$

327,149

 

 

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

 

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.  This allocation is not intended to suggest how actual losses may occur.

 

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(Dollars in Thousands)

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Amount

 

% of Loans
in Each
Category to
Toal Loans

 

Amount

 

% of Loans
in Each
Category to
Toal Loans

 

Residential real estate loans

 

$

458

 

23.94

%

$

582

 

24.57

%

Consumer and other loans

 

36

 

1.29

%

45

 

1.47

%

Commercial and agricultural

 

804

 

14.41

%

1,029

 

13.64

%

Commercial real estate

 

3,582

 

60.36

%

3,088

 

60.32

%

Unallocated

 

141

 

0.00

%

141

 

0.00

%

Total allowance for loan losses

 

$

5,021

 

100.00

%

$

4,885

 

100.00

%

 

We maintain a modest unallocated amount in the allowance to assist in mitigating inherent risk that cannot be quantitatively or qualitatively determined, including, but not limited to, new loan products and new markets for which insufficient history exists for a robust analysis.  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. The unallocated portion of the allowance was at $141,000 at December 31, 2014 and September 30, 2015.

 

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

 

 

 

(Dollars in Thousands)

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

Non-accrual loans

 

$

806

 

$

446

 

Loans 90+ days past due/accruing

 

 

 

Restructured loans on non-accrual

 

 

721

 

Total non-performing loans

 

806

 

1,167

 

Other real estate owned

 

207

 

198

 

Total non-performing assets

 

$

1,013

 

$

1,365

 

 

 

 

 

 

 

Non-performing loans to total loans

 

0.25

%

0.37

%

Non-performing assets to total assets

 

0.24

%

0.33

%

Net-charge-offs YTD

 

$

64

 

$

43

 

Net charge-offs YTD to average YTD total loans, annualized

 

0.03

%

0.01

%

Allowance for loan losses to non-performing loans

 

622.95

%

418.60

%

Allowance for loan losses to total loans

 

1.53

%

1.53

%

 

Non-performing assets totaled $1.0 million at September 30 2015, compared to $1.4 million at December 31, 2014, a decrease of $352,000. Payoffs and paydowns of $967,000 included the charge off of $70,000 in principal, with decreases offset by the addition of $79,000 in commercial loans, $439,000 in commercial real estate loans, and $98,000 in residential real estate loans.

 

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Non-performing loans consist of non-accrual loans and loans 90 days or more past due and still accruing interest. 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.

 

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

 

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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:

 

 

 

(Dollars in Thousands)

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Loans

 

Allowance
for Loan
Losses

 

Loans

 

Allowance
for Loan
Losses

 

Residential real estate loans

 

$

1,003

 

$

3

 

$

1,098

 

$

7

 

Consumer and other loans

 

9

 

 

22

 

10

 

Commercial and agricultural

 

995

 

146

 

2,696

 

342

 

Commercial real estate

 

2,074

 

378

 

1,057

 

220

 

Impaired loans

 

4,081

 

527

 

4,873

 

579

 

Loans collectively evaluated for impairment

 

323,068

 

4,494

 

313,604

 

4,306

 

Total

 

$

327,149

 

$

5,021

 

$

318,477

 

$

4,885

 

 

The $792,000 decrease in impaired loans during the nine months ending September 30, 2015 is primarily attributed to two commercial loans totaling $1.06 million that were refinanced or are no longer evaluated for impairment, the transfer of $80,000 from a residential real estate loan  to OREO and the subsequent charge off of a $15,000 deficiency balance on the loan, that were offset by two commercial real estate loans totaling $439,000, two residential real estate loans totaling $98,000, and a $79,000 commercial loan that were evaluated for impairment as of September 30, 2015, as well as paydowns, payoffs, and charge-offs through the regular collection and resolution of loans previously evaluated for impairment. The allowance for loan losses was impacted by the changes in the composition of the loans individually evaluated for impairment, the changes in the underlying collateral values and current values of future cash flows used in the evaluation of these loans. Changes in the composition and balances of the various segments of the loan portfolio, as well as the assessment of the qualitative factors inherent in the loan portfolio resulted in a $188,000 increase in the allowance

 

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attributable to loans collectively evaluated for impairment from December 31, 2014 to September 30, 2015.

 

Securities

 

The investment securities portfolio is comprised of U.S. Government agency and government sponsored entity securities, agency mortgage-backed securities, tax-exempt securities of states and political subdivisions, a taxable municipal security, a corporate bond, and a trust preferred security. The purchase of nontaxable obligations of states and political subdivisions is a part of managing our effective tax rate.  Securities are all classified as available-for-sale, and averaged $58.7 million for the first nine months of 2015, compared to $54.8 million for 2014.

 

The tables below present the maturities and yield characteristics of securities as of September 30, 2015 and December 31, 2014.  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.

 

 

 

(Dollars in Thousands)

 

September 30, 2015

 

One Year or
Less

 

Over
One Year
Through
Five Years

 

Over
Five Years
Through
Ten Years

 

Over Ten
Years

 

Total
Maturities

 

Fair Value

 

U.S. Government agencies

 

$

 

$

2,998

 

 

$

 

$

2,998

 

$

2,994

 

Agency mortgage-backed securities: (1)

 

248

 

22,937

 

4,753

 

 

27,938

 

28,388

 

Municipal securities

 

340

 

11,388

 

8,663

 

5,453

 

25,844

 

26,443

 

Trust preferred security

 

 

 

 

1,879

 

1,879

 

1,240

 

Corporate bond

 

 

 

1,000

 

 

1,000

 

1,003

 

Total available-for-sale securities

 

$

588

 

$

37,323

 

$

14,416

 

$

7,332

 

$

59,659

 

$

60,068

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent of total

 

0.99

%

62.56

%

24.16

%

12.29

%

100.00

%

 

 

Weighted average yield(2)

 

4.82

%

2.47

%

3.34

%

4.24

%

2.92

%

 

 

 


(1)    Agency mortgage-backed securities (residential) are grouped into average lives based on September 2015 prepayment projections.

 

(2)    The weighted average yields are based on amortized cost and municipal securities are calculated on a full tax- equivalent basis.

 

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Table of Contents

 

 

 

(Dollars in Thousands)

 

December 31, 2014

 

One Year or
Less

 

Over
One Year
Through
Five Years

 

Over
Five Years
Through
Ten Years

 

Over Ten
Years

 

Total
Maturities

 

Fair Value

 

U.S. Government agencies

 

$

 

$

1,999

 

$

1,000

 

$

 

$

2,999

 

$

2,948

 

Agency mortgage-backed securities: (1)

 

4

 

24,231

 

3,006

 

 

27,241

 

27,519

 

Municipal securities

 

535

 

7,802

 

11,466

 

5,547

 

25,350

 

26,039

 

Trust preferred security

 

 

 

 

1,876

 

1,876

 

1,480

 

Corporate bond

 

 

 

1,000

 

 

1,000

 

1,000

 

Total available-for-sale securities

 

$

539

 

$

34,032

 

$

16,472

 

$

7,423

 

$

58,466

 

$

58,986

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent of total

 

0.92

%

58.21

%

28.17

%

12.70

%

100.00

%

 

 

Weighted average yield(2)

 

5.27

%

2.40

%

3.44

%

4.31

%

2.96

%

 

 

 

The trust preferred security category consists 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. The Company does not intend to sell this security and does not believe it will be required to sell this security before recovery. 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.

 

Deposits

 

Our primary funding source for lending and investment activities results from customer deposits and a deposit listing service.  Deposits at September 30, 2015 were $362.5 million, an increase of $20.7 million, or 6.1%, compared to $341.8 million at December 31, 2014.  Total deposits averaged $366.6 million the third quarter of 2015, an increase of $23.3 million, or 6.8%, compared to $343.3 million during the third quarter of 2014.  Average deposits increased during the year, but the cost of funds declined as higher cost deposits matured and were renewed at lower rates.

 

Time deposits that meet or exceed the FDIC insurance limit of $250,000 were $11.5 million and $8.1 million at September 30, 2015 and December 31, 2014, respectively. Time deposits of $100,000 or more totaled $77.9 million at September 30, 2015, compared to $63.4 million at December 31, 2014.  Interest expense on time deposits of $100,000 or more was $615,000 for the nine months ended September 30, 2015, compared to $498,000 for the nine months ended September 30, 2014.  Our cost has decreased as these certificates of deposit matured and were renewed at lower current market rates.  The following table shows the maturities of time deposits as of September 30, 2015.

 

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Table of Contents

 

 

 

(Dollars in Thousands)

 

 

 

September 30, 2015

 

Three months or less

 

$

29,148

 

Over three through six months

 

38,178

 

Over six through twelve months

 

29,966

 

Over one year through three years

 

55,429

 

Over three years through five years

 

8,924

 

Over five years

 

4

 

Total

 

$

161,649

 

 

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. Total advances as of September 30, 2015 were $13.0 million compared to $24.0 million at December 31, 2014. Rates vary based on the term to repayment, and are summarized below as of September 30, 2015:

 

 

 

 

 

 

 

(Dollars in Thousands)

 

Type

 

Maturity

 

Rate

 

Amount

 

Fixed

 

December 2, 2015

 

1.14

%

5,000

 

Fixed

 

May 25, 2016

 

0.99

%

3,000

 

Fixed

 

June 3, 2016

 

0.68

%

2,000

 

Fixed

 

May 24, 2019

 

1.72

%

3,000

 

 

 

 

 

 

 

$

13,000

 

 

At September 30, 2015, we had available collateral to borrow an additional $63.5 million from the FHLB compared to $40.6 million at December 31, 2014.

 

Other Borrowings.  In 2014, we renewed a credit agreement with a community bank to be used for operating capital and general corporate purposes.  The line has a total availability of $3.0 million, matures November 1, 2015, and bears interest at the prime rate as published in the Money Rates section of The Wall Street Journal, plus 0.25%, with interest payable monthly. The line has a floor rate of 4.5%. The line is secured by the Bank’s common stock.  As of September 30, 2015 the line had a balance of $2.5 million compared to a balance of $1.5 million at December 31, 2014.

 

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At September 30, 2015, we had established Federal Funds lines of credit totaling $18.8 million with three correspondent banks.  No amounts were drawn as of September 30, 2015 or December 31, 2014.

 

We issued $5.0 million in subordinated debentures in October, 2006.  These trust preferred securities bear an interest rate, which reprices each calendar quarter, of 165 basis points over 3-month LIBOR (London Inter Bank Offering Rate).  Our rate as of September 30, 2015 was 1.93%.  The subordinated debentures may be included with tier 1 capital (with certain limitations) under current regulatory guidelines.

 

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. 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.

 

Capital

 

Stockholders’ equity increased $287,000, or 0.7%, from December 31, 2014 to September 30, 2015.  On April 15, 2015, the Company repurchased the 254,218 warrants issued in 2008 to the US Treasury as part of its participation in the US Treasury’s Capital Purchase Program.  The repurchase price of the warrants was $1.7 million, which offset the increase in stockholders’ equity due to net income less preferred dividends of $1.4 million.  The book value per common share has increased to $15.78 as of September 30, 2015 compared to $15.64 at December 31, 2014.  No common dividends have been paid during 2015.

 

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

 

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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.

 

In July 2013, the Federal Reserve Board and the FDIC approved final rules that substantially amend the regulatory capital rules applicable to the Company and the Bank. The final rules implement the regulatory capital reforms of the Basel Committee on Banking Supervision, commonly called Basel III, and changes required by the Dodd-Frank Act.

 

Under these rules, the leverage and risk-based capital ratios of bank holding companies may not be lower than the leverage and risk-based capital ratios for insured depository institutions. The final rules implementing the Basel III regulatory capital reforms became effective as to the Company and the Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. Moreover, these rules refine the definition of what constitutes “capital” for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital. The new minimum capital level requirements applicable to bank holding companies and banks subject to the rules are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); (iii) a total risk-based capital ratio of 8% (unchanged from current rules); (iv) a Tier 1 leverage ratio of 4% for all institutions. The rules also establish a “capital conservation buffer” of 2.5% (to be phased in over three years) above the new regulatory minimum risk-based capital ratios, and result in the following minimum ratios once the capital conservation buffer is fully phased in: (i) a common equity Tier 1 risk-based capital ratio of 7%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. The capital conservation buffer requirement is to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum plus the buffer amounts.

 

As a component of new BASEL III capital regulations, Citizens First Bank chose to “opt-out” of including accumulated other comprehensive income (AOCI) in regulatory capital with the filing of the March 31, 2015 Call Report.

 

Our capital ratios, calculated in accordance with regulatory guidelines, were as follows:

 

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September 30, 2015

 

 

 

(Dollars in Thousands)

 

 

 

Actual

 

For Capital Adequacy
Purposes

 

To Be Well Capitalized
Under Prompt Corrective
Action Provisions

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Total Capital (to Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

43,737

 

12.53

%

$

27,922

 

8.0

%

N/A

 

N/A

 

Citizens First Bank, Inc.

 

45,723

 

13.10

%

27,922

 

8.0

%

$

34,903

 

10.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital (to Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

39,365

 

11.28

%

20,942

 

6.0

%

N/A

 

N/A

 

Citizens First Bank, Inc.

 

41,351

 

11.85

%

20,942

 

6.0

%

27,922

 

8.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier I Capital (to Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

26,706

 

7.65

%

15,706

 

4.5

%

N/A

 

N/A

 

Citizens First Bank, Inc.

 

41,351

 

11.85

%

15,706

 

4.5

%

22,687

 

6.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I Leverage Capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

39,365

 

9.28

%

13,961

 

4.0

%

N/A

 

N/A

 

Citizens First Bank, Inc.

 

41,351

 

9.77

%

16,924

 

4.0

%

21,155

 

5.0

%

 

December 31, 2014

 

 

 

(Dollars in Thousands)

 

 

 

Actual

 

For Capital Adequacy
Purposes

 

To Be Well Capitalized
Under Prompt Corrective
Action Provisions

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Total Capital (to Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

42,879

 

12.74

%

$

26,929

 

8.0

%

N/A

 

N/A

 

Citizens First Bank, Inc.

 

44,056

 

13.09

%

26,929

 

8.0

%

$

33,661

 

10.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital (to Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

38,671

 

11.49

%

13,465

 

4.0

%

N/A

 

N/A

 

Citizens First Bank, Inc.

 

39,837

 

11.83

%

13,465

 

4.0

%

20,197

 

6.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I Leverage Capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

38,671

 

9.42

%

16,415

 

4.0

%

N/A

 

N/A

 

Citizens First Bank, Inc.

 

39,837

 

9.78

%

16,294

 

4.0

%

20,368

 

5.0

%

 

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Table of Contents

 

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

 

We use a simulation model as a tool to monitor and evaluate interest rate risk exposure.  The model is designed to measure the sensitivity of net interest income and net income to changing interest rates over future time periods.  Forecasting net interest income and its sensitivity to changes in interest rates requires us to make assumptions about the volume and characteristics of many attributes, including assumptions relating to the replacement of maturing earning assets and liabilities.  Other assumptions include, but are not limited to, projected prepayments, projected new volume, and the predicted relationship between changes in market interest rates and changes in customer account balances.  These effects are combined with our estimate of the most likely rate environment to produce a forecast of net interest income and net income.  The forecasted results are then adjusted for the effect of a gradual increase and decrease in market interest rates on our net interest income and net income.  Because assumptions are inherently uncertain, the model cannot precisely estimate net interest income or net income or the effect of interest rate changes on net interest income and net income.  Actual results could differ significantly from simulated results.

 

At September 30, 2015, the model indicated that if rates were to increase by 200 basis points during the remainder of the calendar year, then net interest income would increase 5.41% over the next twelve months.  The model indicated that if rates were to decrease by 200 basis points over the same period, then net interest income would decrease 1.49%.  The table below notes the projected changes in net interest income as indicated by the model for increases in rates up to 400 basis points and decreases in rates to 200 basis points.

 

Projections for: Oct 2015 - Sept 2016

 

Projected
Interest
Rate
Change

 

Estimated
Value

 

Net Interest
Income $
Change
From Base

 

% Change
From Base

 

+400

 

17,535,249

 

2,108,284

 

13.67

%

+300

 

16,896,889

 

1,469,923

 

9.53

%

+200

 

16,261,474

 

834,508

 

5,41

%

Base

 

15,426,965

 

0

 

0.00

%

-200

 

15,197,275

 

-229,690

 

-1.49

%

 

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Table of Contents

 

Item 4.  Controls and Procedures

 

Our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, and have concluded that our disclosure controls and procedures were adequate and effective in all material respects to ensure that all material information required to be disclosed in this report has been made known to them in a timely fashion.

 

There was no change in our internal controls over financial reporting that occurred during the relevant period that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, subsequent to the date of the Chief Executive Officer’s and Chief Financial Officer’s evaluation, nor were there any material weaknesses in the controls which required corrective action.

 

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Table of Contents

 

PART II-OTHER INFORMATION

 

Item 6. Exhibits

 

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 3.1 of the Registrant’s Form 8-K dated June 5, 2007).

 

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 Form 8-K filed December 23, 2008).

 

3.4                               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 April 17, 2014).

 

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 and 3.3).

 

4.3                               Amended and Restated Bylaws of Citizens First Corporation (see Exhibit 3.4).

 

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).

 

31.1                        Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.

 

31.2                        Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.

 

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Table of Contents

 

32.1                        Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.

 

32.2                        Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

 

101                           Interactive data files: (i) Consolidated Balance Sheets at September 30, 2015 and December 31, 2014, (ii) the Consolidated Statements of Income for the nine months ended September 30, 2015 and September 30, 2014, (iii) the Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2015 and September 30, 2014, (iv) Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2015 and 2014, and (v) Notes to Consolidated Financial Statements.**

 


**Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

 

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Table of Contents

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

CITIZENS FIRST CORPORATION

 

 

 

 

Date: November 12, 2015

/s/M. Todd Kanipe

 

M. Todd Kanipe

 

President and Chief Executive Officer

 

 

 

 

Date: November 12, 2015

/s/ J. Steven Marcum

 

J. Steven Marcum

 

Executive Vice President and Chief Financial Officer

 

55