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CZFC > SEC Filings for CZFC > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for CITIZENS FIRST CORP

Form 10-Q for CITIZENS FIRST CORP


13-Nov-2012

Quarterly Report


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

Management's discussion and analysis of Citizens First Corporation (the "Company") is included to provide the shareholders with an expanded narrative of our results of operations, changes in financial condition, liquidity and capital adequacy. This narrative should be reviewed in conjunction with our consolidated financial statements and notes thereto included in our 2011 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 economic conditions generally and in our market areas, a continuation or worsening of the current disruption in credit and other markets, goodwill impairment, 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, 2012, we reported net income of $941,000 compared to net income of $770,000 in the third quarter of 2011, an increase of $171,000. Net income available to common shareholders was $716,000 or, $0.35 per diluted common share this quarter, compared to net income available to common shareholders of $545,000 or, $0.26 per diluted common share for the third quarter of 2011. Net income increased due to an improved net interest margin.

For the nine months ended September 30, 2012, the Company reported net income of $2.5 million, or $.88 per diluted common share. This represents an increase of $262,000, or $0.16 per share, from the net income of $2.2 million in the previous year. The increase in net income is primarily attributable to an increase in net interest income of $1.5 million, partially offset by an increase in non-interest expense of $818,000.

Our annualized return on average assets was .82% for nine months ended September 30, 2012, compared to .82% in the previous year. Our annualized return on average


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equity was 8.26% for the nine months ending September 30, 2012, compared to 7.83% for the nine months ending September 30, 2011.

Net Interest Income

Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets, such as loans and securities, and the total interest cost of the deposits and borrowings obtained to fund these assets. Factors that influence the level of net interest income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, the level of non-performing loans and non-earning assets, and the amount of non-interest bearing deposits supporting earning assets.

For the quarter ended September 30, 2012, net interest income was $3.9 million, an increase of $553,000, or 16.7%, from net interest income of $3.3 million for the comparable period in 2011. Net interest income increased as a result of lower interest expense on deposits and borrowings of $185,000, combined with an increase in interest income of $368,000. The increase in interest income was fueled by the growth in average loans for the third quarter of 2012 compared to the third quarter of 2011. For the nine months ended September 30, 2012, net interest income was $11.2 million, an increase of $1.5 million, or 15.1%, from net interest income of $9.8 million for the comparable period in 2011.

The net interest margin for the three months ended September 30, 2012 was 4.31%, compared to 4.11% in 2011. This increase of 20 basis points is attributable to both an increase in loan income for the quarter combined with a reduction in interest expense on deposits. Our yield on earning assets (tax equivalent) for the current quarter was 5.21%, a decrease of 13 basis points from 5.34% in the same period a year ago. The net interest margin for the nine months ended September 30, 2012 was 4.18%, an increase of 11 basis points from 4.07% in the previous year.

The following table sets forth for the quarter and nine months ended September 30, 2012 and 2011, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. Such yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented.


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

Quarter ended September 30,

                                          2012                              2011
                              Average     Income/    Average    Average     Income/    Average
                              Balance     Expense     Rate      Balance     Expense     Rate
Earning assets:
Federal funds sold           $  16,788   $      11      0.26 % $  13,221   $       9      0.28 %
Available-for-sale
securities (1)
Taxable                         28,944         100      1.37 %    24,284         142      2.32 %
Nontaxable (1)                  18,116         249      5.47 %    18,729         274      5.81 %
Federal Home Loan Bank
stock                            2,025          21      4.13 %     2,025          20      3.96 %
Loans receivable (2)           297,863       4,384      5.86 %   269,001       3,959      5.84 %
Total interest earning
assets                         363,736       4,765      5.21 %   327,260       4,405      5.34 %
Non-interest earning
assets                          33,921                            31,217
Total Assets                 $ 397,657                         $ 358,477

Interest-bearing
liabilities:
Interest-bearing
transaction accounts         $  69,538   $      42      0.24 % $  74,364   $      82      0.44 %
Savings accounts                38,892          35      0.36 %    11,742           7      0.24 %
Time deposits                  173,685         608      1.39 %   175,114         817      1.85 %
Total interest-bearing
deposits                       282,115         685      0.97 %   261,220         906      1.38 %
Borrowings                      28,060         114      1.62 %    15,000          80      2.03 %
Subordinated debentures          5,000          27      2.12 %     5,000          25      1.96 %
Total interest-bearing
liabilities                    315,175         826      1.04 %   281,759       1,011      1.42 %
Non-interest bearing
deposits                        39,713                            36,424
Other liabilities                1,993                             1,954
Total liabilities              356,881                           320,138
Stockholders' equity            40,776                            38,339
Total Liabilities and
Stockholders' Equity         $ 397,657                         $ 358,447
Net interest income                      $   3,939                         $   3,395

Net interest spread (1)                                 4.17 %                            3.92 %
Net interest margin
(1) (3)                                                 4.31 %                            4.11 %
Return on average assets
ratio                                                   0.94 %                            0.85 %
Return on average equity
ratio                                                   9.18 %                            7.97 %
Average equity to assets
ratio                                                  10.25 %                           10.52 %



(1) Income and yield stated at a tax equivalent basis for nontaxable securities using the marginal corporate Federal tax rate of 34.0%

(2) Average loans include nonperforming loans. Interest income includes interest and fees on loans, but does not include interest on loans on non-accrual.

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


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

Nine months ended September 30,

                                          2012                             2011
                              Average    Income/    Average    Average    Income/    Average
                              Balance    Expense     Rate      Balance    Expense     Rate
Earning assets:
Federal funds sold           $  15,831   $     32      0.27 % $  15,347   $     32      0.28 %
Available-for-sale
securities (1)
Taxable                         30,555        414      1.81 %    23,624        452      2.56 %
Nontaxable (1)                  17,815        739      5.54 %    18,603        819      5.89 %
Federal Home Loan Bank
stock                            2,025         66      4.35 %     2,025         66      4.33 %
Loans, net (2)                 300,300     12,863      5.72 %   269,254     11,857      5.89 %
Total interest earning
assets                         360,558     14,114      5.14 %   328,853     13,226      5.37 %
Non-interest earning
assets                          36,091                           30,648
Total Assets                 $ 402,617                        $ 359,501

Interest-bearing
liabilities:
Interest-bearing
transaction accounts         $  74,473   $    134      0.24 % $  51,071   $    146      0.38 %
Savings accounts                39,341        107      0.36 %    30,190        146      0.65 %
Time deposits                  175,027      2,005      1.53 %   179,307      2,596      1.94 %
Total interest-bearing
deposits                       288,841      2,246      1.04 %   260,568      2,888      1.48 %
Borrowings                      27,078        314      1.55 %    15,677        238      2.02 %
Subordinated debentures          5,000         81      2.16 %     5,000         73      1.96 %
Total interest-bearing
liabilities                    320,919      2,641      1.10 %   281,245      3,199      1.52 %
Non-interest bearing
deposits                        39,483                           38,485
Other liabilities                2,156                            1,966
Total liabilities              362,558                          321,696
Stockholders' equity            40,059                           37,805
Total Liabilities and
Stockholders' Equity         $ 402,617                        $ 359,501
Net interest income                      $ 11,473                         $ 10,028

Net interest spread (1)                                4.04 %                           3.85 %
Net interest margin
(1) (3)                                                4.18 %                           4.07 %
Return on average assets
ratio                                                  0.82 %                           0.82 %
Return on average equity
ratio                                                  8.26 %                           7.83 %
Average equity to assets
ratio                                                  9.95 %                          10.52 %



(1) Income and yield stated at a tax equivalent basis for nontaxable securities using the marginal corporate Federal tax rate of 34.0%

(2) Average loans include nonperforming loans. Interest income includes interest and fees on loans, but does not include interest on loans on non-accrual.

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

Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on our net interest income for the nine months ended September 30, 2012 and 2011. Information is provided with respect to (1) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (2) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes attributable to the combined input of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.


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                                                          (Dollars in Thousands)
                                                      Nine Months Ended September 30,
                                                               2012 Vs. 2011
                                                        Increase (Decrease) Due to
                                                    Rate            Volume          Net
Interest-earning assets:
Federal funds sold                              $         (1 )   $          1    $        -
Available-for-sale securities:
Taxable                                                 (171 )            133           (38 )
Nontaxable (1)                                           (45 )            (35 )         (80 )
FHLB stock                                                 -                -             -
Loans, net                                              (361 )          1,367         1,006
               Total net change in income on
                     interest-earning assets            (578 )          1,466           888

Interest-bearing liabilities:
Interest-bearing transaction accounts                    (79 )             67           (12 )
Savings accounts                                         (83 )             44           (39 )
Time deposits                                           (529 )            (62 )        (591 )
FHLB and other borrowings                                (95 )            172            77
Subordinated debentures                                    8                -             8
              Total net change in expense on
                interest-bearing liabilities            (778 )            221          (557 )
           Net change in net interest income    $        200     $      1,245    $    1,445
                           Percentage change           13.84 %          86.16 %       100.0 %



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

Provision for Loan Losses

The provision for loan losses for the third quarter of 2012 was $300,000 or 0.10% of average loans, compared to $300,000, or 0.11% of average loans for the third quarter of 2011. For the nine months ended September 30, 2012 and 2011, the provision for loan losses was $1.1 million and $825,000, respectively. We had net charge-offs totaling $231,000 during the third quarter of 2012, compared to $583,000 during the third quarter of 2011. The provision for loan losses adequately supports the loans that were previously not provided for, loans that required adjustment in the amount provided for due to current conditions, or newly identified impaired loans that required specific allocations.

Non-Interest Income

Non-interest income for the three months ended September 30, 2012 decreased $7,000, or 0.9%, compared to the three months ended September 30, 2011, primarily due to a decrease in security gains of $13,000 from the prior year.

Non-interest income for the nine months ended September 30, 2012 and 2011, respectively, was $2.2 million. Other service charges and fees increased $49,000 while security gains decreased $19,000.


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Non-Interest Expense

Non-interest expense for the three months ended September 30, 2012 increased $272,000, or 10.0%, compared to the three months ended September 30, 2011, primarily due to an increase in personnel expenses totaling $166,000 and other expenses totaling $20,000.

Non-interest expense was $9.0 million for the nine months ended September 30, 2012, an increase of $818,000, or 10.0%, from $8.1 million in the same period of 2011. Salaries and benefit expenses increased $483,000, while data processing expenses increased $144,000.

Income Taxes

Income tax expense was calculated using our expected effective rate for 2012 and 2011. 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 2012 and 2011. The effective tax rate for the quarter was 28.0%, compared to 25.5% for 2011. The effective tax rate year-to-date was 26.6%, compared to 25.1% for 2011. 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, 2012 were $394.3 million, a decrease of $9.5 million, or 2.4%, from December 31, 2011. Loans increased $11.3 million, or 3.8%, from $294.4 million at December 31, 2011 to $305.7 million at September 30, 2012. Deposits at September 30, 2012 were $315.8 million, a decrease of $16.9 million, or 5.1%, compared to $332.7 million at December 31, 2011.

Loans

Loans increased from $294.4 million at December 31, 2011 to $305.7 million at September 30, 2012. Total loans averaged $297.9 million for the quarter ending September 30, 2012, compared to $269.0 million for the quarter ended September 30, 2011, an increase of $28.9 million, or 10.7%. We experienced an increase in commercial real estate during the first nine months of the year compared to the same period in 2011. The following table presents a summary of the loan portfolio by category:


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                                          (Dollars in Thousands)
                               September 30, 2012        December 31, 2011
                                              % of
                                             Total                   % of
                                             Loans                Total Loans
Commercial and agricultural   $     52,960    17.32 % $  58,853         19.99 %
Commercial real estate             165,896    54.26 %   144,020         48.93 %
Residential real estate             79,646    26.05 %    83,486         28.36 %
Consumer                             7,262     2.37 %     7,993          2.72 %
                              $    305,764   100.00 % $ 294,352        100.00 %

Substantially all of our loans are to customers located in Warren, Simpson, Hart and Barren counties in Kentucky. As of September 30, 2012, our twenty largest credit relationships consisted of loans and loan commitments ranging from $2.9 million to $11.5 million. The aggregate amount of these credit relationships was $82.3 million.

Our lending activities are subject to a variety of lending limits imposed by state and federal law. Citizens First Bank's secured legal lending limit to a single borrower was approximately $12.5 million at September 30, 2012.

As of September 30, 2012, we had $27 million of participations in loans purchased from, and $12.7 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, 2012. Maturities are based on contractual terms. Our policy is to specifically review and approve all loans renewed; loans are not automatically rolled over.

                                              (Dollars in Thousands)
                                              After One
Loan Maturities                Within One     but Within     After Five
as of September 30, 2012          Year        Five Years       Years         Total
Commercial and agricultural   $     25,412   $     24,789   $      2,759   $  52,960
Commercial real estate              34,134         83,345         48,417     165,896
Residential real estate              7,328         26,733         45,585      79,646
Consumer                             1,709          5,417            136       7,262
                      Total   $     68,583   $    140,284   $     96,897   $ 305,764

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.


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The allowance for loan losses is established through a provision for loan losses charged to expense. The allowance totaled $6.0 million at September 30, 2012 and $5.9 million at December 31, 2011, an increase from $4.9 million at September 30, 2011.

The following table sets forth an analysis of our allowance for loan losses for the nine months ended September 30, 2012 and 2011.

                                                  (Dollars in Thousands)
                                                      September 30,
                                                    2012           2011
Balance at beginning of period                  $       5,865    $   5,001
Provision for loan losses                               1,120          825
Amounts charged off:
Commercial                                                490          512
Commercial real estate                                    100          194
Residential real estate                                   445          207
Consumer                                                   14           44
                      Total loans charged off           1,049          957
Recoveries of amounts previously charged off:
Commercial                                                  5           14
Commercial real estate                                      1            -
Residential real estate                                    19           37
Consumer                                                    7           12
                             Total recoveries              32           63
Net charge-offs                                         1,017          894
                     Balance at end of period   $       5,968    $   4,932
Total loans, net of unearned income:
YTD Average                                     $     300,300    $ 269,254
At September 30                                 $     305,764    $ 280,385
As a percentage of YTD average loans:
Net charge-offs, annualized                              0.45 %       0.44 %
Provision for loan losses, annualized                    0.50 %       0.41 %

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

                                                                   (Dollars in Thousands)
                                                               September 30,     December 31,
                                                                   2012              2011
Non-performing loans                                          $         7,359    $       4,264
Non-performing assets                                                   7,617            4,901
Allowance for loan losses                                               5,968            5,865
Non-performing assets to total assets                                    1.93 %           1.21 %
Net charge-offs YTD to average YTD total loans, annualized               0.45 %           0.42 %
Allowance for loan losses to non-performing loans                       81.10 %         137.54 %
Allowance for loan losses to total loans                                 1.95 %           1.99 %

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


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performing loans at September 30, 2012 consisted of $7.3 million of non-accrual loans and less than $60,000 of loans past due 90 days or more. Of the non-accrual loans, $1.6 million are loans secured by real estate in the process of collection, $4.3 million are loans secured by real estate not in foreclosure, $48,000 are commercial loans in the process of collection, $1.3 million are commercial loans not in foreclosure, and $21,000 are consumer loans in the process of collection. Non-performing assets also includes other real estate owned of two residential properties and a one tract of farm acreage totaling $258,000 as of September 30, 2012.

The non-performing loan total at December 31, 2011 consisted of 32 non-accrual loans totaling $4.3 million and five loans over 90 days past due balances less than $1,000. Loans over 90 days past due which are still accruing either have adequate collateral or a definite repayment plan in place. Non-performing assets also includes other real estate owned of two commercial properties . . .

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