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CZFC > SEC Filings for CZFC > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for CITIZENS FIRST CORP


9-Aug-2013

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 current and future economic conditions generally and in our market areas, changes in the interest rate environment, overall loan demand, increased competition in the financial services industry which could negatively impact our ability to increase total earning assets, and retention of key personnel. Actions by the Department of the Treasury and federal and state bank regulators in response to changing economic conditions, changes in interest rates, loan prepayments by and the financial health of our borrowers, and other factors described in the reports filed by us with the Securities and Exchange Commission could also impact current expectations.

Results of Operations

For the quarter ended June 30, 2013, we reported net income of $788,000 compared to net income of $726,000 in the second quarter of 2012, an increase of $62,000. Net income available to common shareholders was $612,000 or, $0.30 per diluted common share this quarter, compared to net income available to common shareholders of $503,000 or, $0.24 per diluted common share for the second quarter of 2012. The provision expense was lower in the second quarter of 2013 primarily as a result of a slight reduction in non-performing assets in the current quarter. Net charge-offs were $636,000 for the second quarter of 2013. The majority of the charge-offs in the second quarter of 2013 had specific allocations in the allowance for loan losses established in prior quarters.

For the six months ended June 30, 2013, the Company reported net income of $903,000, or $.25 per diluted common share. This represents a decrease of $631,000, or $0.28 per share, from the net income of $1.5 million in the previous year. The


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decrease in net income is primarily attributable to an increase in provision for loan losses of $480,000 and an increase in non-interest expense of $289,000.

Our annualized return on average assets was .44% for the six months ended June 30, 2013, compared to .76% in the previous year. Our annualized return on average equity was 4.64% for the six months ending June 30, 2013, compared to 7.77% for the six months ending June 30, 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 June 30, 2013, net interest income was $3.6 million, a decrease of $120,000, or 3.3%, 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 $241,000 offset by lower interest expense on deposits and borrowings of $121,000. The decrease in interest income was created by a decline in the yields on loans and securities.

For the six months ended June 30, 2013, net interest income was $7.2 million, a decrease of $147,000, or 2.00%, from net interest income of $7.4 million for the comparable period in 2012. Net interest income decreased as a result of a decrease in interest income of $431,000 offset by lower interest expense on deposits and borrowings of $284,000. The decrease in interest income was created by a decline in the yields on loans and securities.

The net interest margin for the three months ended June 30, 2013 was 3.77%, compared to 4.06% in 2012. This decrease of 29 basis points is attributable primarily to a decrease in loan income for the quarter as the level of non-accrual loans has increased from the same period a year ago. Our yield on earning assets (tax equivalent) for the current quarter was 4.56%, a decrease of 47 basis points from 5.03% in the same period a year ago.

The following tables set forth for the quarter and six months ended June 30, 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)

Quarter ended June 30,

                                       2013                               2012
                           Average     Income/    Average     Average     Income/    Average
                           Balance     Expense     Rate       Balance     Expense     Rate
Earning assets:
Federal funds sold        $  29,674   $      17      0.23 %  $  18,010   $      12      0.26 %
Available-for-sale
securities (1)
Taxable                      30,892         101      1.31 %     30,512         152      2.01 %
Nontaxable (1)               19,540         248      5.10 %     17,367         244      5.65 %
Federal Home Loan Bank
stock                         2,025          21      4.20 %      2,025          21      4.25 %
Loans receivable (2)        305,532       4,022      5.28 %    304,003       4,219      5.58 %
Total interest earning
assets                      387,663       4,409      4.56 %    371,917       4,648      5.03 %
Non-interest earning
assets                       31,577                             35,381
Total Assets              $ 419,240                          $ 407,298

Interest-bearing
liabilities:
NOW accounts              $  78,464   $      81      0.41 %  $  75,488   $      44      0.23 %
Money market accounts        21,441          17      0.33 %     24,354          27      0.44 %
Savings accounts             15,785           9      0.23 %     16,075           9      0.22 %
Time deposits               187,463         518      1.11 %    175,487         678      1.55 %
Total interest-bearing
deposits                    303,153         625      0.83 %    291,404         758      1.05 %
Borrowings                   28,542         121      1.70 %     28,165         105      1.50 %
Subordinated debentures       5,000          24      1.96 %      5,000          27      2.15 %
Total interest-bearing
liabilities                 336,695         770      0.92 %    324,569         890      1.10 %
Non-interest bearing
deposits                     42,584                             40,683
Other liabilities             1,608                              2,084
Total liabilities           380,887                            367,336
Stockholders' equity         38,353                             39,962
Total Liabilities and
Stockholders' Equity      $ 419,240                          $ 407,298
Net interest income                   $   3,639                          $   3,758

Net interest spread (1)                              3.64 %                             3.93 %
Net interest margin
(1) (3)                                              3.77 %                             4.06 %
Return on average
assets ratio                                         0.75 %                             0.72 %
Return on average
equity ratio                                         8.24 %                             7.31 %
Average equity to
assets ratio                                         9.15 %                             9.81 %



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

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

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


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

Six months ended June 30,

                                       2013                               2012
                           Average     Income/    Average     Average     Income/    Average
                           Balance     Expense     Rate       Balance     Expense     Rate
Earning assets:
Federal funds sold        $  30,181   $      33      0.22 %  $  15,347   $      22      0.28 %
Available-for-sale
securities (1)
Taxable                      29,686         196      1.33 %     31,369         314      2.01 %
Nontaxable (1)               19,536         504      5.20 %     17,663         490      5.58 %
Federal Home Loan Bank
stock                         2,025          43      4.27 %      2,025          44      4.41 %
Loans, net (2)              304,741       8,147      5.39 %    301,532       8,479      5.66 %
Total interest earning
assets                      386,169       8,923      4.66 %    367,936       9,349      5.11 %
Non-interest earning
assets                       32,357                             37,188
Total Assets              $ 418,526                          $ 405,124

Interest-bearing
liabilities:
NOW accounts              $  77,517   $     149      0.39 %  $  76,968   $      92      0.24 %
Money market accounts        22,127          38      0.35 %     23,401          54      0.47 %
Savings accounts             15,721          18      0.23 %     16,168          18      0.22 %
Time deposits               186,118       1,047      1.13 %    175,706       1,397      1.60 %
Total interest-bearing
deposits                    301,483       1,252      0.84 %    292,243       1,561      1.08 %
Borrowings                   28,153         231      1.65 %     26,581         200      1.51 %
Subordinated debentures       5,000          49      1.96 %      5,000          55      2.20 %
Total interest-bearing
liabilities                 334,636       1,532      0.92 %    323,824       1,816      1.13 %
Non-interest bearing
deposits                     42,632                             39,368
Other liabilities             2,004                              2,236
Total liabilities           379,272                            365,428
Stockholders' equity         39,254                             39,696
Total Liabilities and
Stockholders' Equity      $ 418,526                          $ 405,124
Net interest income                   $   7,391                          $   7,533

Net interest spread (1)                              3.74 %                             3.98 %
Net interest margin
(1) (3)                                              3.86 %                             4.12 %
Return on average
assets ratio                                         0.44 %                             0.76 %
Return on average
equity ratio                                         4.64 %                             7.77 %
Average equity to
assets ratio                                         9.38 %                             9.80 %



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

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

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

Rate/Volume Analysis

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


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                                                          (Dollars in Thousands)
                                                         Six Months Ended June 30,
                                                               2013 Vs. 2012
                                                        Increase (Decrease) Due to
                                                   Rate             Volume            Net
Interest-earning assets:
Federal funds sold                            $          (10 )   $          21    $        11
Available-for-sale securities:
Taxable                                                 (101 )             (17 )         (118 )
Nontaxable (1)                                           (38 )              52             14
FHLB stock                                                (1 )               -             (1 )
Loans, net                                              (422 )              90           (332 )
             Total net change in income on
                   interest-earning assets              (573 )             147           (426 )
Interest-bearing liabilities:
NOW accounts                                              56                 1             57
Money market accounts                                    (13 )              (3 )          (16 )
Savings accounts                                           -                 -              -
Time deposits                                           (433 )              83           (350 )
FHLB and other borrowings                                 19                12             31
Subordinated debentures                                   (6 )               -             (6 )
            Total net change in expense on
              interest-bearing liabilities              (376 )              92           (284 )
         Net change in net interest income    $         (197 )   $          55    $      (142 )
                         Percentage change            138.59 %          (38.59 )%       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 second quarter of 2013 was $50,000 or 0.02% of average loans, compared to $450,000, or 0.15% of average loans for the second quarter of 2012. We had net charge-offs totaling $636,000 during the second quarter of 2013, compared to $479,000 during the second quarter of 2012. The majority of the charge-offs in the second quarter of 2013 had specific allocations in the allowance for loan losses that had been established prior to the current quarter. 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.

Non-Interest Income

Non-interest income for the three months ended June 30, 2013 increased $2,000, or 0.30%, compared to the three months ended June 30, 2012, primarily due to an improvement in non-deposit brokerage fees of $21,000 from the previous year offset by a decrease in securities gains of $26,000.


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Non-interest income for both the six months ended June 30, 2013 and 2012, was $1.5 million. While service charge income declined $47,000 in the period to period comparison, non-deposit brokerage fees increased $52,000.

Non-Interest Expense

Non-interest expense for the three months ended June 30, 2013 increased $134,000, or 4.4%, compared to the three months ended June 30, 2012, primarily due to an increase in collection expenses related to non-performing loans.

Non-interest expense was $6.3 million for the six months ended June 30, 2013, an increase of 289,000, or 4.8%, from $6.0 million in the same period of 2012. Data processing expenses increased $87,000 and other operating expenses, primarily collection expense, increased $288,000.

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. The effective tax rate for the quarter was 29.7% compared to 26.2% for 2012. The effective tax rate year-to-date was 23.1% compared to 25.7% for 2012. The difference between the statutory and effective rates are impacted by such factors as income from tax-exempt loans, tax-exempt income on state and municipal securities, and income on bank owned life insurance.

Balance Sheet Review

Overview

Total assets at June 30, 2013 were $411.5 million, an increase of $4.9 million, or 1.2%, from December 31, 2012. Loans increased $7.6 million, or 2.5%, from $298.8 million at December 31, 2012 to $306.4 million at June 30, 2013. Deposits at June 30, 2013 were $337.2 million, an increase of $5.5 million, or 1.7%, compared to $331.7 million at December 31, 2012.

Loans

Loans increased from $298.8 million at December 31, 2012 to $306.4 million at June 30, 2013. Total loans averaged $305.5 million for the quarter ending June 30, 2013, compared to $304.2 million for the quarter ended December 31, 2012, an increase of $1.3 million, or 0.43%. We experienced increases in commercial and commercial real estate loans during the first six 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)
                                June 30, 2013         December 31, 2012
                                           % of
                                          Total                   % of
                                          Loans                Total Loans
Commercial and agricultural   $  50,428    16.46 % $  49,535         16.58 %
Commercial real estate          173,785    56.72 %   164,647         55.11 %
Residential real estate          75,810    24.74 %    77,356         25.89 %
Consumer                          6,374     2.08 %     7,216          2.42 %
                              $ 306,397   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 June 30, 2013, our twenty largest credit relationships consisted of loans and loan commitments ranging from $3.4 million to $11.5 million. The aggregate amount of these credit relationships was $90.5 million.

Our lending activities are subject to a variety of lending limits imposed by state and federal law. Citizens First Bank's secured legal lending limit to a single borrower was approximately $12.5 million at June 30, 2013.

As of June 30, 2013, we had $24.0 million of participations in loans purchased from, and $6.4 million of participations in loans sold to, other banks.

The following table sets forth the maturity distribution of the loan portfolio as of June 30, 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 June 30, 2013               Year        Five Years       Years         Total
Commercial and agricultural   $     23,187   $     26,035   $      1,206   $  50,428
Commercial real estate              33,369         77,381         63,035     173,785
Residential real estate              8,510         29,774         37,526      75,810
Consumer                             1,398          4,886             90       6,374
                      Total   $     66,464   $    138,076   $    101,857   $ 306,397

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 following table sets forth an analysis of our allowance for loan losses for the six months ended June 30, 2013 and 2012.

                                                  (Dollars in Thousands)
                                                         June 30,
                                                    2013           2012
Balance at beginning of period                  $       5,721    $   5,865
Provision for loan losses                               1,300          820
Amounts charged off:
Commercial                                                987          300
Commercial real estate                                     14           85
Residential real estate                                    19          408
Consumer                                                   17           13
                      Total loans charged off           1,037          806
Recoveries of amounts previously charged off:
Commercial                                                  7            -
Commercial real estate                                     60            -
Residential real estate                                    11           15
Consumer                                                    2            5
                             Total recoveries              80           20
Net charge-offs                                           957          786
                     Balance at end of period   $       6,064    $   5,899
Total loans, net of unearned income:
YTD Average                                     $     304,741    $ 301,531
At June 30                                      $     306,397    $ 300,028
As a percentage of YTD average loans:
Net charge-offs, annualized                              0.63 %       0.52 %
Provision for loan losses, annualized                    0.85 %       0.54 %

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

                                                                 (Dollars in Thousands)
                                                                June 30,      December 31,
                                                                  2013            2012
Non-accrual loans                                             $      6,141    $       5,384
Loans 90+ days past due/accruing                                         -                -
Restructured loans                                                   3,340              758
Total non-performing loans                                           9,481            6,142
Other real estate owned                                                517              191
Total non-performing assets                                   $      9,998    $       6,333

Allowance for loan losses                                     $      6,064    $       5,721
Non-performing assets to total assets                                 2.43 %           1.56 %
Net charge-offs YTD to average YTD total loans, annualized            0.63 %           0.61 %
Allowance for loan losses to non-performing loans                    63.96 %          93.14 %
Allowance for loan losses to total loans                              1.98 %           1.91 %


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Total non-performing assets added during the quarter totaled $335,000, which consisted primarily of three residential real estate loans totaling $332,000 and a $3,000 consumer loan. The non-performing loan total at June 30, 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 . . .

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