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CZFC > SEC Filings for CZFC > Form 10-Q on 13-Nov-2013All Recent SEC Filings

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Form 10-Q for CITIZENS FIRST CORP


13-Nov-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 September 30, 2013, we reported net income of $233,000 compared to net income of $941,000 in the third quarter of 2012, a decrease of $708,000. Net income available to common shareholders was $55,000 or, $0.02 per diluted common share this quarter, compared to net income available to common shareholders of $716,000 or, $0.35 per diluted common share for the third quarter of 2012. The provision expense was higher in the third quarter of 2013 as a result of an increase in historical charge-offs. Net charge-offs were $2.1 million for the third quarter of 2013. The majority of the charge-offs in the third quarter of 2013 had specific allocations in the allowance for loan losses that had been established prior to the current quarter.

For the nine months ended September 30, 2013, the Company reported net income of $1.1 million, or $.27 per diluted common share. This represents a decrease of $1.4


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million, or $0.61 per diluted common share, from the net income of $2.5 million in the previous year. The decrease in net income is primarily attributable to an increase in provision for loan losses of $1.1 million due to an increase in net charge-offs. Net income also decreased due to an increase in non-interest expense of $576,000 which is a result of increased legal fees and collection expenses related to non-performing assets.

Our annualized return on average assets was 0.36% for the nine months ended September 30, 2013, compared to 0.82% in the previous year. Our annualized return on average equity was 3.91% for the nine months ending September 30, 2013, compared to 8.26% for the nine months ending September 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 September 30, 2013, net interest income was $3.6 million, a decrease of $221,000, or 5.7%, from net interest income of $3.9 million for the comparable period in 2012. Net interest income decreased as a result of a decrease in interest income of $300,000 offset by lower interest expense on deposits and borrowings of $79,000. The decrease in interest income was created by a decline in the yields on loans and securities.

For the nine months ended September 30, 2013, net interest income was $10.9 million, a decrease of $368,000, or 3.3%, from net interest income of $11.2 million for the comparable period in 2012. Net interest income decreased as a result of a decrease in interest income of $730,000 offset by lower interest expense on deposits and borrowings of $362,000. 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 September 30, 2013 was 3.88%, compared to 4.31% in 2012. This decrease of 43 basis points is attributable primarily to a decrease in loan income for the quarter. Our yield on earning assets (tax equivalent) for the current quarter was 4.66%, a decrease of 55 basis points from 5.21% in the same period a year ago. Loan income has declined as existing loans have matured and repriced at lower rates, as well as increased competition for new loans has resulted in lower rates.

The following tables set forth for the quarter and nine months ended September 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.


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Such yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented.

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

                                            2013                                2012
                               Average      Income/    Average     Average      Income/    Average
Quarter ended September 30,    Balance      Expense      Rate      Balance      Expense      Rate
Earning assets:
Federal funds sold            $   21,673   $      14       0.25 % $   16,788   $      11       0.26 %
Available-for-sale
securities (1)
Taxable                           29,325         106       1.43 %     28,944         100       1.37 %
Nontaxable (1)                    19,513         247       5.03 %     18,116         249       5.47 %
Federal Home Loan Bank
stock                              2,025          21       4.20 %      2,025          21       4.13 %
Loans receivable (2)             307,618       4,076       5.26 %    297,863       4,384       5.86 %
Total interest earning
assets                           380,154       4,464       4.66 %    363,736       4,765       5.21 %
Non-interest earning assets       33,139                              33,921
Total Assets                  $  413,293                          $  397,657

Interest-bearing
liabilities:
NOW accounts                  $   82,645   $      89       0.43 % $   69,538   $      42       0.24 %
Money market accounts             21,303          17       0.32 %     23,211          26       0.45 %
Savings accounts                  16,024           9       0.23 %     15,681           9       0.23 %
Time deposits                    179,000         491       1.09 %    173,685         608       1.39 %
Total interest-bearing
deposits                         298,972         606       0.80 %    282,115         685       0.97 %
Borrowings                        28,055         116       1.64 %     28,060         114       1.62 %
Subordinated debentures            5,000          25       1.95 %      5,000          27       2.12 %
Total interest-bearing
liabilities                      332,027         747       0.89 %    315,175         826       1.04 %
Non-interest bearing
deposits                          41,095                              39,713
Other liabilities                  2,234                               1,993
Total liabilities                375,356                             356,881
Stockholders' equity              37,937                              40,776
Total Liabilities and
Stockholders' Equity          $  413,293                          $  397,657
Net interest income                        $   3,717                           $   3,939

Net interest spread (1)                                    3.77 %                              4.17 %
Net interest margin (1) (3)                                3.88 %                              4.31 %
Return on average assets
ratio                                                      0.22 %                              0.94 %
Return on average equity
ratio                                                      2.44 %                              9.18 %
Average equity to assets
ratio                                                      9.18 %                             10.25 %



(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)

                                                2013                               2012
                                   Average     Income/    Average     Average     Income/    Average
Nine months ended September 30,    Balance     Expense      Rate      Balance     Expense      Rate
Earning assets:
Federal funds sold                $  27,314   $      46       0.23 % $  15,831   $      32       0.27 %
Available-for-sale securities
(1)
Taxable                              29,564         302       1.37 %    30,555         414       1.81 %
Nontaxable (1)                       19,528         752       5.15 %    17,815         739       5.54 %
Federal Home Loan Bank stock          2,025          64       4.25 %     2,025          66       4.35 %
Loans, net (2)                      305,710      12,223       5.35 %   300,300      12,863       5.72 %
Total interest earning assets       384,141      13,387       4.66 %   366,526      14,114       5.14 %
Non-interest earning assets          32,622                             36,091
Total Assets                      $ 416,763                          $ 402,617

Interest-bearing liabilities:
NOW accounts                      $  79,245   $     238       0.40 % $  74,473   $     134       0.24 %
Money market accounts                21,850          56       0.34 %    23,337          80       0.46 %
Savings accounts                     15,823          27       0.23 %    16,004          27       0.29 %
Time deposits                       183,719       1,538       1.12 %   175,027       2,005       1.53 %
Total interest-bearing deposits     300,637       1,859       0.83 %   288,841       2,246       1.04 %
Borrowings                           28,120         347       1.65 %    27,078         314       1.55 %
Subordinated debentures               5,000          73       1.96 %     5,000          81       2.16 %
Total interest-bearing
liabilities                         333,757       2,279       0.91 %   320,919       2,641       1.10 %
Non-interest bearing deposits        42,114                             39,483
Other liabilities                     2,082                              2,156
Total liabilities                   377,953                            362,558
Stockholders' equity                 38,810                             40,059
Total Liabilities and
Stockholders' Equity              $ 416,763                          $ 402,617
Net interest income                           $  11,108                          $  11,473

Net interest spread (1)                                       3.75 %                             4.04 %
Net interest margin (1) (3)                                   3.87 %                             4.18 %
Return on average assets ratio                                0.36 %                             0.82 %
Return on average equity ratio                                3.91 %                             8.26 %
Average equity to assets ratio                                9.31 %                             9.95 %



(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, 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)
                                                       Nine Months Ended September 30,
                                                                2013 Vs. 2012
                                                         Increase (Decrease) Due to
                                                    Rate             Volume           Net
Interest-earning assets:
Federal funds sold                              $          (9 )   $         23     $       14
Available-for-sale securities:
Taxable                                                   (99 )            (13 )         (112 )
Nontaxable (1)                                            (58 )             71             13
FHLB stock                                                 (2 )              -             (2 )
Loans, net                                               (872 )            232           (640 )
               Total net change in income on
                     interest-earning assets           (1,040 )            313           (727 )
Interest-bearing liabilities:
NOW accounts                                               95                9            104
Money market accounts                                     (19 )             (5 )          (24 )
Savings accounts                                            -                -              -
Time deposits                                            (566 )             99           (467 )
FHLB and other borrowings                                  21               12             33
Subordinated debentures                                    (8 )              -             (8 )
              Total net change in expense on
                interest-bearing liabilities             (477 )            115           (362 )
           Net change in net interest income    $        (563 )   $        198     $     (365 )
                           Percentage change           154.17 %         (54.17 )%       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 2013 was $900,000 or 0.29% of average loans, compared to $300,000, or 0.10% of average loans for the third quarter of 2012. We had net charge-offs totaling $2.1 million during the third quarter of 2013, compared to $231,000 during the third quarter of 2012. The majority of the charge-offs in the third quarter of 2013 had specific allocations in the allowance for loan losses that had been established prior to the current quarter.

Provision expense for the nine months ended September 30, 2013 totaled $2.2 million compared to $1.1 million for the nine months ended September 30, 2012. Net charge-offs for 2013 total $3.1 million compared to $1.0 million in 2012. The provision expense is higher in 2013 due to the increased level of charged-off loans. 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 September 30, 2013 increased $51,000, or 6.8%, compared to the three months ended September 30, 2012, primarily due to an improvement in non-deposit brokerage fees of $37,000 from the previous year.

Non-interest income for the nine months ended September 30, 2013 increased $76,000, or 3.4% compared to the nine months ending September 30, 2012, primarily due to an improvement in non-deposit brokerage fees of $89,000 from the previous year.


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Non-Interest Expense

Non-interest expense for the three months ended September 30, 2013 increased $286,000, or 9.6%, compared to the three months ended September 30, 2012, primarily due to an increase in collection expenses related to non-performing loans.

Non-interest expense was $9.5 million for the nine months ended September 30, 2013, an increase of $576,000, or 6.4%, from $9.0 million in the same period of 2012. Data processing expenses increased $142,000 and other operating expenses, primarily collection expense, increased $451,000.

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. With the increased loan loss provision in the quarter and the related increased collection costs, income before taxes and the related tax expense were lower this quarter than in previous quarters. As sources of tax-exempt income remained constant, all these factors combined to cause the effective tax rate for the quarter to be lower. The effective tax rate for the quarter was 7.2% compared to 28.0% for 2012. The effective tax rate year-to-date was 20.3% compared to 26.6% 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 September 30, 2013 were $410.8 million, an increase of $4.2 million, or 1.0%, from December 31, 2012. Loans increased $2.6 million, or 0.9%, from $298.8 million at December 31, 2012 to $301.4 million at September 30, 2013. Deposits at September 30, 2013 were $337.6 million, an increase of $5.9 million, or 1.8%, compared to $331.7 million at December 31, 2012.

Loans

Loans increased from $298.8 million at December 31, 2012 to $301.4 million at September 30, 2013. Total loans averaged $307.6 million for the quarter ending September 30, 2013, compared to $304.2 million for the quarter ended December 31, 2012, an increase of $3.4 million, or 1.1%. We experienced increases in commercial real estate loans during the first nine months of the year compared to 2012. The following table presents a summary of the loan portfolio by category:

                                          (Dollars in Thousands)
                               September 30, 2013        December 31, 2012
                                              % of
                                             Total                   % of
                                             Loans                Total Loans
Commercial and agricultural   $     46,781    15.52 % $  49,535         16.58 %
Commercial real estate             173,070    57.43 %   164,647         55.11 %
Residential real estate             75,055    24.90 %    77,356         25.89 %
Consumer                             6,470     2.15 %     7,216          2.42 %
                              $    301,376   100.00 % $ 298,754        100.00 %


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Substantially all of our loans are to customers located in Warren, Simpson, Hart and Barren counties in Kentucky. As of September 30, 2013, our twenty largest credit relationships consisted of loans and loan commitments ranging from $3.5 million to $11.4 million. The aggregate amount of these credit relationships was $95.9 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, 2013.

As of September 30, 2013, we had $23.7 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 September 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 September 30, 2013          Year        Five Years        Years         Total
Commercial and agricultural   $     19,314   $      26,285   $      1,182   $  46,781
Commercial real estate              26,060          85,291         61,719     173,070
Residential real estate              7,609          28,363         39,083      75,055
Consumer                             1,798           4,583             89       6,470
                      Total   $     54,781   $     144,522   $    102,073   $ 301,376

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 allowance for loans losses at September 30, 2013 was $4.8 million, or 1.60% of total loans, compared to $5.7 million, or 1.91% of total loans as of December 31, 2012. The allowance decreased as a result of charging off specific allocations of the allowance that had been established in previous quarters.

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


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                                                  (Dollars in Thousands)
                                                      September 30,
                                                    2013           2012
Balance at beginning of period                  $       5,721    $   5,865
Provision for loan losses                               2,200        1,120
Amounts charged off:
Commercial                                                987          490
Commercial real estate                                  2,183          100
Residential real estate                                    40          445
Consumer                                                   24           14
                      Total loans charged off           3,234        1,049
Recoveries of amounts previously charged off:
Commercial                                                 22            5
Commercial real estate                                     91            1
Residential real estate                                    16           19
Consumer                                                    4            7
                             Total recoveries             133           32
Net charge-offs                                         3,101        1,017
                     Balance at end of period   $       4,820    $   5,968
Total loans, net of unearned income:
YTD Average                                     $     305,710    $ 300,300
At September 30                                 $     301,376    $ 305,764
As a percentage of YTD average loans:
Net charge-offs, annualized                              1.35 %       0.45 %
Provision for loan losses, annualized                    0.96 %       0.50 %

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

                                                                    (Dollars in Thousands)
                                                               September 30,       December 31,
                                                                    2013               2012
Non-accrual loans                                             $          3,784    $         5,384
Loans 90+ days past due/accruing                                            19                  -
Restructured loans                                                       2,041                758
Total non-performing loans                                               5,844              6,142
. . .
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