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CZFC > SEC Filings for CZFC > Form 10-Q on 10-May-2013All Recent SEC Filings

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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 2012 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 March 31, 2013, we reported net income of $115,000 compared to net income of $808,000 in the first quarter of 2012, a decrease of $693,000. Net loss available to common shareholders was $102,000 or, $0.05 per diluted common share this quarter, compared to net income available to common shareholders of $584,000 or, $0.29 per diluted common share for the first quarter of 2012. The provision expense was higher in the first quarter of 2013 primarily as a result of a $4.6 million increase in non-performing assets in the current quarter. Specific allocations in the allowance for loan losses increased as a result of the increased non-performing assets.

Our annualized return on average assets was .11% for three months ended March 31, 2013, compared to .81% in the previous year. Our annualized return on average equity

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was 1.16% for the three months ending March 31, 2013, compared to 8.24% for the three months ending March 31, 2012.

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 March 31, 2013, net interest income was $3.7 million, a decrease of $26,000, or 0.7%, from net interest income of $3.7 million for the comparable period in 2012. Net interest income decreased as a result of a decrease in interest income of $190,000 offset by lower interest expense on deposits and borrowings of $164,000. The decrease in interest income was created by a decline in the yields on loans and available securities, and included the effect of non-accrual loan interest reversed against income in the current quarter.

The net interest margin for the three months ended March 31, 2013 was 3.96%, compared to 4.17% in 2012. This decrease of 21 basis points is attributable primarily to a decrease in loan income for the quarter as the level of non-accrual loans increased. Our yield on earning assets (tax equivalent) for the current quarter was 4.76%, a decrease of 44 basis points from 5.20% in the same period a year ago.

The following table sets forth for the three months ended March 31, 2013 and 2012, 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)

                                        2013                                2012
                           Average      Income/    Average     Average      Income/    Average
Quarter ended March 31,    Balance      Expense      Rate      Balance      Expense      Rate
Earning assets:
Federal funds sold        $   30,694   $      15       0.20 % $   12,683   $      10       0.31 %
securities (1)
Taxable                       28,466          96       1.37 %     32,226         161       2.02 %
Nontaxable (1)                19,532         257       5.34 %     17,959         246       5.51 %
Federal Home Loan Bank
stock                          2,025          22       4.41 %      2,025          23       4.56 %
Loans receivable (2)         303,942       4,125       5.50 %    299,062       4,261       5.73 %
Total interest earning
assets                       384,659       4,515       4.76 %    363,955       4,701       5.20 %
Non-interest earning
assets                        33,145                              38,995
Total Assets              $  417,804                          $  402,950

transaction accounts      $   99,379   $      90       0.37 % $  100,895   $      76       0.30 %
Savings accounts              15,656           9       0.23 %     16,260           9       0.22 %
Time deposits                184,757         529       1.16 %    175,925         718       1.64 %
Total interest-bearing
deposits                     299,792         628       0.85 %    293,080         803       1.10 %
Borrowings                    27,760         110       1.61 %     25,000          95       1.53 %
Subordinated debentures        5,000          24       1.95 %      5,000          28       2.25 %
Total interest-bearing
liabilities                  332,552         762       0.93 %    323,080         926       1.15 %
Non-interest bearing
deposits                      42,682                              38,319
Other liabilities              2,408                               2,120
Total liabilities            377,640                             363,519
Stockholders' equity          40,164                              39,431
Total Liabilities and
Stockholders' Equity      $  417,806                          $  402,950
Net interest income                    $   3,753                           $   3,775

Net interest spread (1)                                3.83 %                              4.05 %
Net interest margin
(1) (3)                                                3.96 %                              4.17 %
Return on average
assets ratio                                           0.11 %                              0.81 %
Return on average
equity ratio                                           1.16 %                              8.24 %
Average equity to
assets ratio                                           9.61 %                              9.79 %

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

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

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

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Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on our net interest income for the three months ended March 31, 2013 and 2012. Information is provided with respect to (1) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (2) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes attributable to the combined input of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

                                                            (Dollars in Thousands)
                                                         Three Months Ended March 31,
                                                                2013 Vs. 2012
                                                          Increase (Decrease) Due to
                                                    Rate            Volume             Net
Interest-earning assets:
Federal funds sold                              $         (9 )   $         14      $         5
Available-for-sale securities:
Taxable                                                  (46 )            (19 )            (65 )
Nontaxable (1)                                           (11 )             22               11
FHLB stock                                                (1 )              -               (1 )
Loans, net                                              (206 )             70             (136 )
               Total net change in income on
                     interest-earning assets            (273 )             87             (186 )
Interest-bearing liabilities:
Interest-bearing transaction accounts                     15               (1 )             14
Savings accounts                                           -                -                -
Time deposits                                           (225 )             36             (189 )
FHLB and other borrowings                                  5               10               15
Subordinated debentures                                   (4 )              -               (4 )
              Total net change in expense on
                interest-bearing liabilities            (209 )             45             (164 )
           Net change in net interest income    $        (64 )   $         42      $       (22 )
                           Percentage change          290.91 %        (190.91 )%         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 first quarter of 2013 was $1,250,000 or 0.41% of average loans, compared to $370,000, or 0.12% of average loans for the first quarter of 2012. We had net charge-offs totaling $321,000 during the first quarter of 2013, compared to $307,000 during the first quarter of 2012. 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, and newly identified impaired loans that required specific allocations. During the first quarter of 2013, we increased the specific allocation for certain impaired loans due to a decline in the value of the collateral which in turn increased our provision expense.

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Non-Interest Income

Non-interest income for the three months ended March 31, 2013 increased $23,000, or 3.3%, compared to the three months ended March 31, 2012, primarily due to an improvement in non-deposit brokerage fees of $31,000 from the previous year.

Non-Interest Expense

Non-interest expense for the three months ended March 31, 2013 increased $156,000, or 5.3%, compared to the three months ended March 31, 2012, primarily due to an increase in collection expenses related to non-performing loans of $88,000.

Income Taxes

Income tax expense was calculated using our expected effective rate for 2013 and 2012. 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 2013 and 2012. Tax-exempt income exceeded income before taxes which ultimately resulted in a negative effective tax rate for the quarter. The difference between the statutory and effective rates are impacted by such factors as income from tax-exempt loans, tax-exempt income on state and municipal securities, and income on bank owned life insurance.

Balance Sheet Review


Total assets at March 31, 2013 were $422.1 million, an increase of $15.5 million, or 3.8%, from December 31, 2012. Loans increased $2.3 million, or 0.8%, from $298.8 million at December 31, 2012 to $301.1 million at March 31, 2013. Deposits at March 31, 2013 were $347.9 million, an increase of $16.2 million, or 4.9%, compared to $331.7 million at December 31, 2012.


Loans increased from $298.8 million at December 31, 2012 to $301.1 million at March 31, 2013. Total loans averaged $303.9 million for the quarter ending March 31, 2013, compared to $304.2 million for the quarter ended December 31, 2012, a decrease of $307,000, or 0.1%. We experienced an increase in commercial real estate loans during the first three months of the year compared to 2012. The following table presents a summary of the loan portfolio by category:

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                                         (Dollars in Thousands)
                                March 31, 2013        December 31, 2012
                                           % of
                                          Total                   % of
                                          Loans                Total Loans
Commercial and agricultural   $  49,087    16.30 % $  49,535         16.58 %
Commercial real estate          169,479    56.29 %   164,647         55.11 %
Residential real estate          76,156    25.29 %    77,356         25.89 %
Consumer                          6,389     2.12 %     7,216          2.42 %
                              $ 301,111   100.00 % $ 298,754        100.00 %

Substantially all of our loans are to customers located in Warren, Simpson, Hart and Barren counties in Kentucky. As of March 31, 2013, our twenty largest credit relationships consisted of loans and loan commitments ranging from $3.2 million to $11.6 million. The aggregate amount of these credit relationships was $86.2 million.

Our lending activities are subject to a variety of lending limits imposed by state and federal law. Citizens First Bank's secured legal lending limit to a single borrower was approximately $12.5 million at March 31, 2013.

As of March 31, 2013, we had $26.3 million of participations in loans purchased from, and $9.0 million of participations in loans sold to, other banks.

The following table sets forth the maturity distribution of the loan portfolio as of March 31, 2013. Maturities are based on contractual terms. Our policy is to specifically review and approve all loans renewed; loans are not automatically rolled over.

                                              (Dollars in Thousands)
                                              After One
Loan Maturities                Within One     but Within     After Five
as of March 31, 2013              Year        Five Years       Years         Total
Commercial and agricultural   $     22,122   $     25,943   $      1,022   $  49,087
Commercial real estate              28,235         82,100         59,144     169,479
Residential real estate              8,591         28,129         39,436      76,156
Consumer                             1,405          4,890             94       6,389
                      Total   $     60,353   $    141,062   $     98,696   $ 301,111

Credit Quality and the Allowance for Loan Losses

The allowance for loan losses represents management's estimate of probable credit losses incurred in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on loans based on historical loss

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

The allowance for loan losses is established through a provision for loan losses charged to expense. The allowance totaled $6.6 million at March 31, 2013 and $5.7 million at December 31, 2012, an increase from $5.9 million at March 31, 2012.

The following table sets forth an analysis of our allowance for loan losses for the three months ended March 31, 2013 and 2012.

                                                   (Dollars in Thousands)
                                                         March 31,
                                                     2013           2012
Balance at beginning of period                   $       5,721    $   5,865
Provision for loan losses                                1,250          370
Amounts charged off:
Commercial                                                 333          100
Commercial real estate                                      14            -
Residential real estate                                      -          199
Consumer                                                    11           12
                       Total loans charged off             358          311
 Recoveries of amounts previously charged off:
Commercial                                                   -            -
Commercial real estate                                      28            -
Residential real estate                                      7            1
Consumer                                                     2            3
                              Total recoveries              37            4
 Net charge-offs                                           321          307
                      Balance at end of period   $       6,650    $   5,928
 Total loans, net of unearned income:
YTD Average                                      $     303,942    $ 299,061
At March 31                                      $     301,111    $ 303,779
As a percentage of YTD average loans:
Net charge-offs, annualized                               0.42 %       0.41 %
Provision for loan losses, annualized                     1.65 %       0.50 %

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

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                                                                  (Dollars in Thousands)
                                                                March 31,       December 31,
                                                                  2013              2012
Non-accrual loans                                             $       7,097    $        5,384
Loans 90+ days past due/accruing                                         23                 -
Restructured loans                                                    3,527               758
Total non-performing loans                                           10,647             6,142
Other real estate owned                                                 232               191
Total non-performing assets                                   $      10,879    $        6,333

Allowance for loan losses                                     $       6,650    $        5,721
Non-performing assets to total assets                                  2.58 %            1.56 %
Net charge-offs YTD to average YTD total loans, annualized             0.42 %            0.61 %
Allowance for loan losses to non-performing loans                     62.46 %           93.14 %
Allowance for loan losses to total loans                               2.21 %            1.91 %

Total non-performing assets added during the quarter totaled $4.7 million, which consisted primarily of a commercial loan totaling $1.5 million and a commercial real estate loan totaling $1.8 million. The non-performing loan total at March 31, 2013 and December 31, 2012 also included a $3.8 million commercial real estate loan which was placed on nonaccrual status during the second quarter of 2012.

Non-performing loans are defined as non-accrual loans and loans accruing but past due 90 days or more. Non-performing assets are defined as non-performing loans, other real estate owned, and repossessed assets. Management classifies commercial and commercial real estate loans as non-accrual when principal or interest is past due 90 days or more and the loan is not adequately collateralized, or earlier when, in the opinion of management, principal or interest is not likely to be paid in accordance with the terms of the obligation. We charge off consumer loans after 120 days of delinquency unless they are adequately secured and in the process of collection. Non-accrual loans are not reclassified as accruing until principal and interest payments are brought current and future payments appear reasonably certain.

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

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

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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.

We maintain a modest unallocated amount in the allowance to recognize the imprecision in estimating and measuring losses when evaluating allocations for individual loans or pools of loans. Allocations on individual loans and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for all loan classes by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price or the fair value of the collateral if the loan is collateral dependent.

The following table presents impaired loans by portfolio segment for the periods indicated.

                             (Dollars in Thousands)
                           March 31,        December
                              2013          31, 2012

Commercial                $      6,597    $      5,726
Commercial real estate           7,858           6,900
. . .
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