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CZFC > SEC Filings for CZFC > Form 10-K on 28-Mar-2013All Recent SEC Filings

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Form 10-K for CITIZENS FIRST CORP


28-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with Item 8 "Financial Statements" as well as other information included in this Form 10-K.

Overview of 2012

For the year ended December 31, 2012, we reported net income of $3.2 million compared to a net income of $2.6 million for the year ended December 31, 2011. Basic and diluted income per common share were $1.16 and $1.11, respectively, for the year ended December 31, 2012, compared to basic and diluted income per common share of $0.84 and $0.81, respectively, for 2011.

Significant developments for the year ended December 31, 2012 were:

Net income increased $0.6 million, or $0.30 per diluted common share, from a net income of $2.6 million in the previous year to $3.2 million in 2012.

Total assets increased $2.8 million, or 0.68%, to $406.6 million since the 2011 year-end, led by an increase in loans of $4.4 million.

Net interest margin increased to 4.20% for 2012 compared to 4.06% for 2011 as interest income increased and the rates we paid on deposits and other borrowings declined.

Provision expense for the twelve month period ended December 31, 2012 was $1.7 million, a decrease of $300,000 from the provision expense of $2.0 million for the previous year.Net loan charge-offs were $1.8 million or 0.61% of average loans for 2012, compared with $1.2 million or 0.42% of average loans for 2011.

Application of Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles and follow general practices within the financial services industry. The most significant accounting policies followed by the Company are presented in Note 1 to the Consolidated Financial Statements. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has


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identified the determination of the allowance for loan losses, the evaluation of our goodwill and other intangible assets, and our valuation of deferred tax assets to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

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 or underlying collateral values 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 loan portfolio also represents the largest asset type on the consolidated balance sheet. Note 1 to the Consolidated Financial Statements describes the methodology used to determine the allowance for loan losses, and a discussion of the factors driving changes in the amount of the allowance for loan losses is included under "Credit Quality and the Allowance for Loan Losses" below.

Goodwill and Other Intangibles

Management is required to assess goodwill and other intangible assets annually for impairment or more often if certain factors are identified which could imply potential impairment. This assessment involves preparing analyses of market multiples for similar operations, and estimating the fair value of the reporting unit to which the goodwill is allocated. If the analysis results in an estimate of fair value materially less than the carrying value we would be required to take a charge against earnings to write down the asset to the lower fair value. Based on management's assessment completed with the help of an outside valuation firm, we believe our goodwill of $4.1 million and other identifiable intangibles of $997,000 are not impaired and are properly recorded in the consolidated financial statements as of December 31, 2012.

Valuation of Deferred Tax Asset

We evaluate deferred tax assets quarterly. We will realize this asset to the extent we are profitable or able to carry back tax losses to periods in which we paid income taxes. Our determination of the realization of the deferred tax asset will be based upon management's judgment of various future events and uncertainties, including the timing and amount of future income we will earn and the implementation of various tax planning strategies to maximize realization of the deferred tax assets. Management believes we will generate sufficient operating earnings to realize the deferred tax asset. Examinations of our income tax returns or changes in tax law may impact the tax liabilities and resulting provisions for income taxes.


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Results of Operations

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 year ended December 31, 2012, net interest income was $15.1 million, an increase of $1.8 million or 13.5%, over net interest income of $13.3 million in 2011. The net interest margin in 2012 was 4.20%, compared to 4.06% in 2011. This increase of 14 basis points in the net interest margin resulted from an increase in interest income and decrease in interest expense. The prime rate remained stable throughout 2012 and 2011 at 3.25%.

Net Interest Analysis Summary



                                               2012   2011

Average yield on interest earning assets       5.13 % 5.30 %
Average rate on interest bearing liabilities   1.08 % 1.44 %
Net interest spread                            4.05 % 3.86 %
Net interest margin                            4.20 % 4.06 %

Our average interest-earning assets were $367.4 million for 2012, compared with $336.8 million for 2011, a 9.1% increase primarily attributable to an increase in outstanding loans. Average loans were $301.3 million for 2012, compared with $274.1 million for 2011, a 9.9% increase. Our total interest income on a tax basis, increased 5.6% to $18.9 million for 2012, compared with $17.9 million for 2011. The change was due primarily to increased interest-earning assets of $30.6 million.

Our average interest-bearing liabilities increased by 10.2% to $320.5 million for 2012, compared with $290.8 million for 2011. Our total interest expense decreased 16.7% to $3.5 million for 2012, compared with $4.2 million during 2011. The change was due primarily to a decrease in the rates of time deposits. Our average volume of time deposits decreased 2.2% to $175.6 million for 2012, compared with $179.5 million for 2011. The average interest rate paid on time deposits decreased to 1.48% for 2012, compared with 1.88% for 2011. The cost of funds in total decreased from 1.44% in 2011 to 1.08% in 2012. The decrease in cost of funds was the result of the continued repricing of certificates of deposit at maturity at lower interest rates, and decreased rates on FHLB advances.


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The following table sets forth for the years ended December 31, 2012 and 2011 information regarding average balances of assets and liabilities as well as the amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. We have calculated the yields and costs for the periods indicated 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)

Year Ended December 31,

                                           2012                              2011
                              Average      Income/    Average    Average     Income/    Average
                              Balance      Expense     Rate      Balance     Expense     Rate
Interest-earning assets:
Federal funds sold and
other                        $   15,961   $      42      0.26 % $   16,980   $     46      0.27 %
Available-for-sale
securities: (1)
Taxable                          29,988         510      1.70 %     24,902        605      2.43 %
Nontaxable(1)                    18,114         994      5.49 %     18,814      1,095      5.82 %
FHLB stock                        2,025          90      4.44 %      2,025         86      4.25 %
Loans receivable (2)            301,292      17,227      5.72 %    274,108     16,020      5.84 %
Total interest-earning
assets                          367,380      18,863      5.13 %    336,829     17,852      5.30 %
Non-interest earning
assets                           35,578                             32,442
Total assets                 $  402,958                         $  369,271
Interest-bearing
liabilities:
Interest-bearing
transaction accounts         $   73,442         187      0.25 % $   57,573        202       .35 %
Savings accounts                 38,780         140      0.36 %     32,222        183       .57 %
Time deposits                   175,623       2,594      1.48 %    179,515      3,372      1.88 %
Total interest-bearing
deposits                        287,845       2,921      1.01 %    269,310      3,757      1.40 %
Borrowed funds                   27,649         422      1.53 %     16,479        322      1.95 %
Subordinated debentures           5,000         107      2.14 %      5,000         99      1.98 %
Total interest-bearing
liabilities                     320,494       3,450      1.08 %    290,789      4,178      1.44 %
Non-interest bearing
liabilities:
Non-interest bearing
deposits                         39,806                             38,435
Other liabilities                 2,204                              1,922
Total liabilities               362,504                            331,146
Shareholders' equity             40,454                             38,125
Total liabilities and
shareholders' equity         $  402,958                         $  369,271
Net interest income                       $  15,413                          $ 13,674
Net interest spread (1)                                  4.05 %                            3.86 %
Net interest margin
(1) (3)                                                  4.20 %                            4.06 %
Return on average assets
ratio                                                    0.79 %                            0.71 %
Return on average equity
ratio                                                    7.84 %                            6.84 %
Equity to assets ratio                                  10.04 %                           10.32 %


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(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 90 days or more past due.

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

Rate/Volume Analysis

Net interest income can be analyzed in terms of the impact of changing interest rates and changing volumes. The following table sets forth the effect which the varying levels of interest earning assets and interest bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented. Changes in rate-volume are proportionately allocated between rate and volume variances.

                                                             (Dollars in Thousands)
                                                        Twelve Months Ended December 31,
                                                                 2012 Vs. 2011
                                                    Increase (Decrease) Due to
                                                      Rate              Volume          Net
Interest-earning assets:
Federal funds sold                                $          (1 )    $         (3 )  $      (4 )
Available-for-sale-securities:
Taxable                                                    (219 )             124          (95 )
Nontaxable (1)                                              (60 )             (41 )       (101 )
FHLB stock                                                    4                 0            4
Loans, net                                                 (382 )           1,589        1,207
Total net change in income on interest-earning
assets                                                     (658 )           1,669        1,011

Interest-bearing liabilities:
Interest-bearing transaction accounts                       (71 )              56          (15 )
Savings accounts                                            (80 )              37          (43 )
Time deposits                                              (705 )             (73 )       (778 )
Federal funds purchased                                       -                 -            -
FHLB borrowings                                            (118 )             218          100
Notes payable                                                 -                 -            -
Subordinated debentures                                       8                 -            8
Total net change in expense on
interest-bearing liabilities                               (966 )             238         (728 )
             Net change in net interest income    $         308      $      1,431    $   1,739
                             Percentage change            17.73 %           82.27 %      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 2012 was $1.7 million, or 0.56% of average loans, compared to a provision of $2.0 million, or 0.74% of average loans during 2011. We had net charge-offs totaling $1.8 million during 2012, compared to $1.2 million during 2011. The allowance for loan losses has declined although net charge-offs has increased in comparison as the majority of loans charged off had a specific allocated reserve.


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Non-interest Income

Non-interest income totaled $3.0 million in 2012, compared to $3.1 million in 2011, a decrease of $99,000, or 3.2%. The Company had $55,000 in gains on the sale of available-for-sale securities for 2012 compared to $215,000 for 2011. Service charges on deposit accounts decreased $25,000 during 2012, while private banking fees increased by $35,000 during 2012. The following table shows the detailed components of non-interest income:

                                                       (Dollars in Thousands)
                                                                             Increase
                                                 2012           2011        (Decrease)

Service charges on deposit accounts           $     1,365    $    1,390    $        (25 )
Other non-interest income                             529           472              57
Gain on the sale of mortgage loans held
for sale                                              301           315             (14 )
Bank owned life insurance                             263           273             (10 )
Non-deposit brokerage fees                            206           171              35
Gain on the sale of available-for-sale
securities                                             55           215            (160 )
Lease income                                          279           261              18
                                              $     2,998    $    3,097    $        (99 )

Non-interest Expense

Non-interest expense increased 10.0%, or $1.1 million, from $11.0 million in 2011 to $12.1 million in 2012. Salaries and employee benefits increased $616,000 in 2012 as compared to 2011. Data processing services increased $172,000.

The increases and decreases in expense in 2012 by major categories are as follows:

                                            (Dollars in Thousands)
                                                              Increase
                                         2012       2011     (Decrease)

Salaries and employee benefits         $  5,718   $  5,102   $       616
Net occupancy expense                     1,918      1,857            61
Advertising and public relations            352        362           (10 )
Professional and legal                      627        629            (2 )
Data processing services                    916        744           172
FDIC insurance                              314        271            43
Franchise shares and deposit tax            548        464            84
Postage and office supplies                 189        164            25
Telephone and other communication           171        161            10
Other real estate owned expenses            170        215           (45 )
Core deposit intangible amortization        349        285            64
Other                                       783        707            76
                               Total   $ 12,055   $ 10,961   $     1,094


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Income Taxes

Income tax expense was calculated using the Company's 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 2012 was 26.6%, compared to 23.6% 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

Our assets at year end 2012 totaled $406.6 million, compared with $403.8 million at December 31, 2011, an increase of $2.8 million, or 0.69%. Average interest earning assets increased 9.1% or $30.6 million in 2012, from $336.8 million in 2011 to $367.4 million in 2012.

Loans

Total loans averaged $301.3 million in 2012, compared to $274.1 million in 2011. At year-end 2012, loans totaled $298.8 million, compared to $294.4 million at year-end 2011, an increase of $4.4 million, or 1.5%. We experienced declines in the commercial, residential real estate, and consumer segments of our loan portfolio, while increasing the commercial real estate segment. The following table presents a summary of the loan portfolio by category:

                                        (Dollars in Thousands)
                               December 31, 2012      December 31, 2011
                                             % of                   % of
                                            Total                  Total
                                            Loans                  Loans
Commercial and agricultural   $    49,535    16.58 % $    58,853    19.99 %
Commercial real estate            164,647    55.11 %     144,020    48.93 %
Residential real estate            77,356    25.89 %      83,486    28.36 %
Consumer                            7,216     2.42 %       7,993     2.72 %
                              $   298,754   100.00 % $   294,352   100.00 %

Our commercial real estate loans include financing for industrial developments, residential developments, retail shopping centers, industrial buildings, restaurants, and hotels. The percentage distribution of our loans by industry as of December 31, 2012 and 2011 is shown in the following table:


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                                                             2012         2011
Agriculture, forestry, and fishing                             11.11 %      13.63 %
Mining                                                          0.00 %       0.02 %
Construction                                                    6.44 %       6.89 %
Manufacturing                                                   3.96 %       4.20 %
Transportation, communication, electric, gas, and
sanitary services                                               4.62 %       2.64 %
Wholesale trade                                                 1.67 %       0.81 %
Retail trade                                                    7.69 %       7.75 %
Finance, insurance, and real estate                            17.22 %      16.38 %
Services                                                       19.09 %      15.66 %
Public administration                                           0.07 %       0.99 %
            Total commercial and commercial real estate        71.87 %      68.97 %
Residential real estate loans                                  25.92 %      28.36 %
Other consumer loans                                            2.21 %       2.67 %
                                            Total loans       100.00 %     100.00 %

The majority of our loans are to customers located in the Kentucky counties of Barren, Hart, Simpson and Warren. As of December 31, 2012, the Company's 20 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 $75.4 million, with total commitments of $82.0 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 December 31, 2012.

As of December 31, 2012, we had $26.6 million of participations in loans purchased from, and $7.4 million of participations in loans sold to, other banks. As of December 31, 2011, we had $16.3 million of participations in loans purchased from, and $13.9 million of participations in loans sold to, other banks.

The following table sets forth the maturity distribution of our loan portfolio as of December 31, 2012. Maturities are based upon contractual terms. Our policy is to specifically review and approve all loans renewed; loans are not automatically rolled over.


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                                              (Dollars in Thousands)
                                              After One
Loan Maturities                Within One     but Within     After Five
as of December 31, 2012           Year        Five Years       Years         Total

Commercial and agricultural   $     23,837   $     23,043   $      2,655   $  49,535
Commercial real estate              32,052         76,249         56,346     164,647
Residential real estate              8,112         28,719         40,525      77,356
Consumer                             1,849          5,286             81       7,216
                      Total   $     65,850   $    133,297   $     99,607   $ 298,754

The table below presents loans outstanding as of December 31, 2012 with maturities greater than one year categorized by fixed and variable interest rates:

                                          (Dollars in
As of December 31, 2012                   Thousands)

Fixed Rate                               $     133,733
Variable Rate                                   99,171
Total maturities greater than one year   $     232,904

Asset and Liability Management

We manage our assets and liabilities to provide a consistent level of liquidity to accommodate normal fluctuations in loans and deposits. The yield on approximately 37.1% of our earning assets as of December 31, 2012, adjusts simultaneously with changes in an external index, primarily the highest prime rate as quoted in the Wall Street Journal. A majority of our interest bearing liabilities have been issued with fixed terms and can only be repriced at maturity. The prime rate remained stable at 3.25% during 2012 and 2011. The yield on our earning assets declined during 2012 as we were not able to reinvest at the yields previously earned on called and matured investments. The cost of our interest bearing liabilities continued to decline in 2012, which allowed the net interest margin to only decline slightly from the prior year end. If interest rates stabilize for a period of time, the difference between interest earning assets and interest bearing liabilities will tend to stabilize. In a stable rate environment, our net interest margin will be impacted by, among other factors, a change in the mix of earning assets, with our deposit growth being invested in federal funds sold, investment securities or loans.

Credit Quality and the Allowance for Loan Losses

We consider credit quality to be of primary importance. We contract with a third party CPA firm for loan review services. The scope of the engagement calls for annual review of large loan relationships (in excess of $1 million), problem credits, unsecured loans, insider relationships, a random sample of smaller . . .

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