CITIZENS FIRST CORP - FORM 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2016

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-33126

CITIZENS FIRST CORPORATION

(Exact name of registrant as specified in its charter)

Kentucky		61-0912615
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1065 Ashley Street, Bowling Green, Kentucky		42103
(Address of principal executive offices)		(Zip Code)

(270) 393-0700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o		Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of the latest practicable date.

2,000,087 shares of Common Stock, no par value, were outstanding at August 11, 2016.

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CITIZENS FIRST CORPORATION

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PART I — FINANCIAL INFORMATION

ITEM 1	FINANCIAL STATEMENTS	2

ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	34

ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	49

ITEM 4	CONTROLS AND PROCEDURES	51

PART II — OTHER INFORMATION

ITEM 6	EXHIBITS	52

SIGNATURES		54

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Part 1. Financial Information

Item 1. Financial Statements

Citizens First Corporation

Consolidated Balance Sheets

	(In Thousands, Except Share Data)
	June 30, 2016		December 31, 2015
	Unaudited
Assets
Cash and due from financial institutions	$	6,259	$	8,865
Federal funds sold	1,095		6,390
Cash and cash equivalents	7,354		15,255
Interest-bearing deposits in other financial institutions	2,728		2,728
Available-for-sale securities	58,541		60,200
Loans held for sale	118		—
Loans, net of allowance for loan losses of $4,949 and $4,916 at June 30, 2016 and December 31, 2015, respectively	342,064		325,866
Premises and equipment, net	9,543		9,998
Bank owned life insurance (BOLI)	8,262		8,174
Federal Home Loan Bank (FHLB) stock, at cost	2,025		2,025
Accrued interest receivable	1,536		1,680
Deferred income taxes	1,177		1,328
Goodwill	4,097		4,097
Core deposit intangible	230		265
Other real estate owned	66		100
Other assets	514		465
Total Assets	$	438,255	$	432,181
Liabilities
Deposits
Noninterest bearing	$	49,623	$	48,522
Savings, NOW and money market	163,951		168,335
Time	139,859		153,531
Total deposits	353,433		370,388
FHLB advances and other borrowings	36,000		15,000
Subordinated debentures	5,000		5,000
Accrued interest payable	223		213
Other liabilities	2,152		2,056
Total Liabilities	396,808		392,657
Stockholders’ Equity
6.5% cumulative convertible preferred stock; no par value, authorized 250 shares, aggregate liquidation preference of $7,998; issued and outstanding 237 and 250 shares at June 30, 2016 and December 31, 2015, respectively	7,261		7,659
Common stock, no par value, authorized 5,000,000 shares; issued and outstanding 1,999,587 and 1,968,777 shares at June 30, 2016 and December 31, 2015, respectively	25,862		25,406
Retained earnings	7,876		6,304
Accumulated other comprehensive income	448		155
Total stockholders’ equity	41,447		39,524
Total liabilities and stockholders’ equity	$	438,255	$	432,181

See Notes to Unaudited Consolidated Financial Statements

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Citizens First Corporation

Unaudited Consolidated Statements of Income

	Three months ended
	(In Thousands, Except Per Share Data)
	June 30, 2016			June 30, 2015
Interest and dividend income
Loans	$	4,162		$	4,108
Taxable securities	177			154
Non-taxable securities	159			173
Federal funds sold and other	38			34
Total interest and dividend income	4,536			4,469
Interest expense
Deposits	514			580
FHLB advances and other	81			74
Subordinated debentures	29			24
Total interest expense	624			678
Net interest income	3,912			3,791
Provision (credit) for loan losses	(85		)	120
Net interest income after provision (credit) for loan losses	3,997			3,671
Non-interest income
Service charges on deposit accounts	339			358
Other service charges and fees	179			176
Gain on sale of mortgage loans	91			79
Non-deposit brokerage fees	75			87
Lease income	49			70
BOLI income	44			46
Gain on sale of available-for-sale securities	55			10
Total non-interest income	832			826
Non-interest expenses
Salaries and employee benefits	1,676			1,589
Net occupancy expense	492			493
Advertising and public relations	98			123
Professional fees	137			187
Data processing services	263			238
Franchise shares and deposit tax	132			145
FDIC insurance	59			63
Core deposit intangible amortization	18			17
Postage and office supplies	45			52
Other real estate owned expenses	23			29
Other	354			310
Total non-interest expenses	3,297			3,246
Income before income taxes	1,532			1,251

Income taxes	458			352
Net income	1,074			899
Dividends on preferred stock	123			130
Net income available for common stockholders	$	951		$	769
Basic earnings per common share	$	0.48		$	0.39
Diluted earnings per common share	$	0.42		$	0.35

See Notes to Unaudited Consolidated Financial Statements

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Citizens First Corporation

Unaudited Consolidated Statements of Income

	Six months ended
	(In Thousands, Except Per Share Data)
	June 30, 2016			June 30, 2015
Interest and dividend income
Loans	$	8,265		$	8,058
Taxable securities	354			306
Non-taxable securities	318			349
Federal funds sold and other	75			62
Total interest and dividend income	9,012			8,775
Interest expense
Deposits	1,042			1,129
FHLB advances and other	138			145
Subordinated debentures	57			48
Total interest expense	1,237			1,322
Net interest income	7,775			7,453
Provision (credit) for loan losses	(85		)	200
Net interest income after provision (credit) for loan losses	7,860			7,253
Non-interest income
Service charges on deposit accounts	664			675
Other service charges and fees	343			311
Gain on sale of mortgage loans	168			110
Non-deposit brokerage fees	147			179
Lease income	94			143
BOLI income	88			91
Gain on sale of available-for-sale securities	106			10
Total non-interest income	1,610			1,519
Non-interest expenses
Salaries and employee benefits	3,460			3,237
Net occupancy expense	975			1,021
Advertising and public relations	159			175
Professional fees	317			351
Data processing services	519			477
Franchise shares and deposit tax	264			291
FDIC insurance	118			122
Core deposit intangible amortization	35			35
Postage and office supplies	91			92
Other real estate owned expenses	24			36
Loss on branch disposal	27			—
Other	678			612
Total non-interest expenses	6,667			6,449
Income before income taxes	2,803			2,323
Income taxes	824			642
Net income	1,979			1,681
Dividends and accretion on preferred stock	247			258
Net income available for common stockholders	$	1,732		$	1,423
Basic earnings per common share	$	0.87		$	0.72
Diluted earnings per common share	$	0.78		$	0.64

See Notes to Unaudited Consolidated Financial Statements

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Citizens First Corporation

Unaudited Consolidated Statements of Comprehensive Income

In thousands, except share data

	Three months ended
	(In Thousands, Except Per Share Data)
	June 30, 2016			June 30, 2015
Comprehensive income, net of tax
Net income	$	1,074		$	899
Other comprehensive income (loss)
Reclassification adjustment for gains included in net income, net of taxes	(36		)	(7		)
Change in unrealized gain on available for sale securities, net of taxes	207			(371		)
Total other comprehensive income (loss)	171			(378		)
Comprehensive income	$	1,245		$	521

	Six months ended
	(In Thousands, Except Per Share Data)
	June 30, 2016			June 30, 2015
Comprehensive income, net of tax
Net income	$	1,979		$	1,681
Other comprehensive income (loss)
Reclassification adjustment for gains included in net income, net of taxes	(70		)	(7		)
Change in unrealized gain (loss) on available for sale securities, net of taxes	363			(122		)
Total other comprehensive income (loss)	293			(129		)
Comprehensive income	$	2,272		$	1,552

See Notes to Unaudited Consolidated Financial Statements

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Citizens First Corporation

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

In thousands, except share data

	Preferred Stock			Common Stock			Retained Earnings			Accumulated Other Comprehensive Income			Total
Balance, January 1, 2016	$	7,659		$	25,406		$	6,304		$	155		$	39,524
Net income							1,979						1,979
Conversion of cumulative preferred	(398		)	398									—
Exercise of director stock options				16									16
Stock based compensation				42									42
Change in accumulated other comprehensive income										293			293
Dividend declared and paid on common stock ($.08 per share)							(160		)				(160		)
Dividend declared and paid on preferred stock							(247		)				(247		)

Balance, June 30, 2016	$	7,261		$	25,862		$	7,876		$	448		$	41,447

	Preferred Stock			Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, January 1, 2015	$	7,659		$	27,072		$	3,373		$	344		$	38,448
Net income							1,681						1,681
Change in accumulated other comprehensive income										(129		)	(129		)
Dividend declared and paid on preferred stock							(258		)				(258		)
Repurchase of TARP Warrants				(1,706		)							(1,706		)

Balance, June 30, 2015	$	7,659		$	25,366		$	4,797		$	215		$	38,037

See Notes to Unaudited Consolidated Financial Statements

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Citizens First Corporation

Unaudited Consolidated Statements of Cash Flows

	Six months ended
	(In Thousands)
	June 30, 2016			June 30, 2015
Operating Activities
Net income	$	1,979		$	1,681
Items not requiring (providing) cash:
Depreciation and amortization	274			276
Provision(credit) for loan losses	(85		)	200
Amortization of premiums and discounts on securities	158			170
Amortization of core deposit intangible	35			35
Stock based compensation	42			—
BOLI income	(88		)	(91		)
Proceeds from sale of mortgage loans	7,408			5,225
Origination of mortgage loans held for sale	(7,359		)	(5,195		)
Gains on sales of available-for-sale securities	(106		)	(10		)
Gains on sales of mortgage loans	(168		)	(110		)
Write-downs and losses on sale of other real estate owned	—			35
Loss/(gain) on sale of premises and equipment	4			(8		)
Loss on branch disposal	27			—
Changes in:
Accrued interest receivable	144			28
Other assets	(48		)	(86		)
Accrued interest payable and other liabilities	106			187
Net cash provided by operating activities	2,323			2,337
Investing Activities
Loan originations and payments, net	(16,179		)	4,149
Purchase of premises and equipment	(48		)	(158		)
Proceeds from maturities of available-for-sale securities	5,373			3,468
Proceeds from sales of available-for-sale securities	3,839			1,010
Proceeds from sales of other real owned	100			62
Proceeds from branch disposal	197			—
Purchase of available-for-sale securities	(7,160		)	(4,199		)
Net cash (used in) provided by investing activities	(13,878		)	4,332
Financing Activities
Net change in demand deposits, money market, NOW and savings accounts	(3,283		)	12,003
Net change in time deposits	(13,672		)	15,008
Repayment of FHLB advances	(5,000		)	(11,000		)
Proceeds from FHLB advances	27,000
Repurchase of TARP warrants	—			(1,706		)
Proceeds (payments) from other borrowings	(1,000		)	1,500
Exercise of stock options	16			—
Dividends paid on common stock	(160		)	—
Dividends paid on preferred stock	(247		)	(258		)
Net cash provided by financing activities	3,654			15,547
Increase in Cash and Cash Equivalents	(7,901		)	22,216
Cash and Cash Equivalents, Beginning of Year	15,255			11,322
Cash and Cash Equivalents, End of Quarter	$	7,354		$	33,538
Supplemental Cash Flows Information
Interest paid	$	1,227		$	1,311
Income taxes paid	$	650		$	525
Conversion of cumulative preferred stock	$	398		$	—
Loans transferred to other real estate owned	$	66		$	111

See Notes to Unaudited Consolidated Financial Statements

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Citizens First Corporation

Notes to Unaudited Consolidated Financial Statements

Note 1 — Nature of Operations and Summary of Significant Accounting Policies

The accounting and reporting policies of Citizens First Corporation (the “Company”) and its wholly owned subsidiary, Citizens First Bank, Inc. (the “Bank”), conform to U.S. generally accepted accounting principles and general practices within the banking industry. The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany transactions and accounts have been eliminated in consolidation.

Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates used in the preparation of the financial statements are based on various factors including the current interest rate environment and the general strength of the local economy. Changes in the overall interest rate environment can significantly affect the Company’s net interest income and the value of its recorded assets and liabilities. Actual results could differ from those estimates used in the preparation of the financial statements.

In the opinion of management, all adjustments considered necessary for a fair presentation have been reflected in the accompanying unaudited financial statements. Those adjustments consist only of normal recurring adjustments. Results of interim periods are not necessarily indicative of results to be expected for the full year.

Recent Accounting Pronouncements—In May 2014 the FASB amended existing guidance related to revenue from contracts with customers. This amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, this amendment specifies the accounting for some costs to obtain or fulfill a contract with a customer. These

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amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. In March 2016, the FASB issued ASU 2016-08 that clarifies how to apply revenue recognition guidance related to whether an entity is a principal or an agent. The amendments in this update affect this guidance issued in 2014 that is not yet effective. The Company is currently evaluating the impact of this new accounting standard on the consolidated financial statements.

In January 2016 the FASB issued ASU 2016-01 which amends existing guidance on the classification and measurement of financial instruments. This new standard revises and entity’s accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The new standard is effective for reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of this new accounting standard on the consolidated financial statements.

In February 2016 the FASB issued ASU 2016-02 which establishes the principles to report information about the assets and liabilities that arise from leases. This new standard changes the way operating leases are account for and reflected on the lessee’s balance sheet. The new standard is intended to increase transparency and comparability by requiring lessees to recognize the financial obligation and right-of-use asset associated with operating leases that have a lease term of more than 12 months on the balance sheet. The new standard is effective for reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact of this new accounting standard on the consolidated financial statements.

In March 2016 the FASB issued ASU 2016-09 which provides guidance on share-based payment accounting. The new standard includes multiple provision intended to simplify various aspects of the accounting for share-based payments. The new standard is effective for reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact of this new accounting standard on the consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduces the current expected credit loss (CECL) model and replaces the incurred loss model. The most significant impact for financial institutions will be to the allowance for loan and lease losses (ALLL). The standard allows for various expected credit loss estimation methods and is scalable. This standard is effective for reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact of this new accounting standard on the consolidated financial statements.

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Note 2 - Reclassifications

Certain reclassifications have been made to the consolidated financial statements of prior periods to conform to the current period presentation. These reclassifications do not affect net income or total stockholders’ equity as previously reported.

Note 3 - Available-For-Sale Securities

The following table summarizes the amortized cost and fair value of the available-for-sale securities portfolio at June 30, 2016 and December 31, 2015 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income:

	(Dollars in Thousands)
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
June 30, 2016

U. S. government agencies and government sponsored entities	$	2,998	$	2	$	—		$	3,000
Agency mortgage-backed securities: residential	28,250		549		(16		)	28,783
State and municipal	23,732		774		(2		)	24,504
Trust preferred security	1,882		—		(622		)	1,260
Corporate bonds	1,000		—		(6		)	994

Total Available-for-Sale Securities	$	57,862	$	1,325	$	(646	)	$	58,541
December 31, 2015

U. S. government agencies and government sponsored entities	$	2,998	$	3	$	(7	)	$	2,994
Agency mortgage-backed securities: residential	29,446		259		(48		)	29,657
State and municipal	24,641		615		(34		)	25,222
Trust preferred security	1,880		—		(540		)	1,340
Corporate bonds	1,000		—		(13		)	987

Total Available-for-Sale Securities	$	59,965	$	877	$	(642	)	$	60,200

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The amortized cost and fair value of investment securities at June 30, 2016 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

	June 30, 2016
	(Dollars in Thousands)
	Available-For-Sale
	Amortized Cost		Fair Value
Due in one year or less	$	1,532	$	1,543
Due from one to five years	12,375		12,582
Due from five to ten years	11,219		11,616
Due after ten years	4,486		4,017
Agency mortgage-backed: residential	28,250		28,783

Total	$	57,862	$	58,541

The following table summarizes the investment securities with unrealized losses by portfolio segment at June 30, 2016 and December 31, 2015, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position:

	(Dollars in Thousands)
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2016:
U.S. government agencies and government sponsored entities	$	—	$	—		$	—	$	—		$	—	$	—
Agency mortgage-backed: residential	1,951		(16		)	—		—			1,951		(16		)
State and municipal	1,468		(2		)	—		—			1,468		(2		)
Trust preferred security	—		—			1,260		(622		)	1,260		(622		)
Corporate Bonds	994		(6		)	—		—			994		(6		)

Total temporarily impaired	$	4,413	$	(24	)	$	1,260	$	(622	)	$	5,673	$	(646	)

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	(Dollars in Thousands)
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2015:
U.S. government agencies and government sponsored entities	$	—	$	—		$	992	$	(7	)	$	992	$	(7	)
Agency mortgage-backed: residential	7,009		(25		)	1,475		(23		)	8,484		(48		)
State and municipal	3,797		(19		)	617		(15		)	4,414		(34		)
Trust preferred security	—		—			1,340		(540		)	1,340		(540		)
Corporate bonds	987		(13		)	—		—			987		(13		)

Total temporarily impaired	$	11,793	$	(57	)	$	4,424	$	(585	)	$	16,217	$	(642	)

Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Investment securities classified as available-for-sale are generally evaluated for OTTI under ASC Topic 320, “Investments - Debt and Equity Securities.”

In determining OTTI under the ASC Topic 320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

All rated securities are investment grade. For those that are not rated, the financial condition has been evaluated and no adverse conditions were identified related to repayment. Declines in fair value are a function of rate differences in the market and market illiquidity. The Company does not intend or is not expected to be required to sell these securities before recovery of their amortized cost basis.

All of the Company’s unrealized losses 12 months or more relate to its investment in a single trust preferred security. The security is a single-issuer trust preferred that is not rated. No impairment charge is being taken as no loss of principal or interest is anticipated. All principal and interest payments are being received as scheduled. On a quarterly basis, we evaluate the creditworthiness of the issuer, a bank holding company with operations in the state of Kentucky. Based on the issuer’s continued profitability and well-capitalized position, we do not deem that there is credit loss. The decline in

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fair value is primarily attributable to illiquidity affecting these markets and not the expected cash flows of the individual securities. We have evaluated the financial condition and near term prospects of the issuer and expect to fully recover our cost basis. This security continues to pay interest as agreed and future payments are expected to be made as agreed. This security is not considered to be other-than-temporarily impaired.

Note 4 - Loans and Allowance for Loan Losses

Categories of loans include:

	(Dollars in Thousands)
	June 30, 2016			December 31, 2015
Commercial	$	55,132		$	53,516
Commercial real estate:
Construction	28,511			24,167
Other	178,337			169,290
Residential real estate	81,306			79,680
Consumer:
Auto	1,242			1,425
Other	2,485			2,704
Total loans	347,013			330,782
Less allowance for loan losses	(4,949		)	(4,916		)
Net loans	$	342,064		$	325,866

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The following table sets forth an analysis of our allowance for loan losses for the three months ending June 30, 2016 and 2015.

	(Dollars in Thousands)
	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Unallocated			Total
June 30, 2016
Allowance for loan losses:
Beginning balance	$	745		$	3,585		$	602		$	24		$	88		$	5,044
Provision (credit) for loan losses	(301		)	257			4			(5		)	(40		)	(85		)
Loans charged-off	(5		)	(52		)	(15		)	—			—			(72		)
Recoveries	25			25			9			3			—			62

Total ending allowance balance	$	464		$	3,815		$	600		$	22		$	48		$	4,949

	(Dollars in Thousands)
	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Unallocated			Total
June 30, 2015
Allowance for loan losses:
Beginning balance	$	1,035		$	3,206		$	519		$	41		$	146		$	4,947
Provision for loan losses	(233		)	398			(43		)	8			(10		)	120
Loans charged-off	(75		)	—			(32		)	(16		)	—			(123		)
Recoveries	30			1			3			5			—			39

Total ending allowance balance	$	757		$	3,605		$	447		$	38		$	136		$	4,983

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The following table sets forth an analysis of our allowance for loan losses for the six months ending June 30, 2016 and 2015.

	(Dollars in Thousands)
	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Unallocated			Total
June 30, 2016
Allowance for loan losses:
Beginning balance	$	812		$	3,431		$	524		$	28		$	121		$	4,916
Provision (credit) for loan losses	(475		)	386			86			(10		)	(73		)	(85		)
Loans charged-off	(5		)	(52		)	(23		)	—			—			(80		)
Recoveries	132			50			13			4			—			199

Total ending allowance balance	$	464		$	3,815		$	600		$	22		$	48		$	4,949

	(Dollars in Thousands)
	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Unallocated			Total
June 30, 2015
Allowance for loan losses:
Beginning balance	$	1,029		$	3,088		$	582		$	45		$	141		$	4,885
Provision for loan losses	(248		)	533			(86		)	6			(5		)	200
Loans charged-off	(75		)	(17		)	(56		)	(19		)	—			(167		)
Recoveries	51			1			7			6			—			65

Total ending allowance balance	$	757		$	3,605		$	447		$	38		$	136		$	4,983

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 2016 and December 31, 2015, which includes net deferred loan fees. As of June 30, 2016 and December 31, 2015, accrued interest receivable of $1.2 million and $1.3 million, respectively, are not considered significant and therefore not included in the recorded investment in loans presented in the following tables.

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	(Dollars in Thousands)
	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total
June 30, 2016
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	35	$	195	$	25	$	1	$	—	$	256
Collectively evaluated	429		3,620		575		21		48		4,693
Total ending allowance balance	$	464	$	3,815	$	600	$	22	$	48	$	4,949
Loans:
Individually evaluated for impairment	$	133	$	1,580	$	744	$	28	$	—	$	2,485
Collectively evaluated	54,999		205,268		80,562		3,699		—		344,528
Total ending loans balance	$	55,132	$	206,848	$	81,306	$	3,727	$	—	$	347,013

	(Dollars in Thousands)
	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total
December 31, 2015
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	36	$	377	$	20	$	—	$	—	$	433
Collectively evaluated	776		3,054		504		28		121		4,483
Total ending allowance balance	$	812	$	3,431	$	524	$	28	$	121	$	4,916
Loans:
Individually evaluated for impairment	$	145	$	2,066	$	807	$	9	$	—	$	3,027
Collectively evaluated	53,371		191,391		78,873		4,120		—		327,755
Total ending loans balance	$	53,516	$	193,457	$	79,680	$	4,129	$	—	$	330,782

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The following table presents information related to impaired loans by class of loans as of June 30, 2016 and December 31, 2015. In this table presentation the unpaid principal balance of the loans has not been reduced by partial net charge-offs and the recorded investment of the loans was reduced by partial net charge-offs.

	(Dollars in Thousands)						(Dollars in Thousands)
	June 30, 2016						December 31, 2015
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Commercial	$	58	$	58	$	—	$	61	$	61	$	—
Commercial real estate:
Other	611		611		—		643		643		—
Residential real estate	692		692		—		700		700		—
Consumer:
Other	—		—		—		—		—		—
Subtotal	$	1,361	$	1,361	$	—	$	1,404	$	1,404	$	—
With an allowance recorded:
Commercial	$	75	$	75	$	35	$	84	$	84	$	36
Commercial real estate:
Other	969		969		195		1,423		1,423		377
Residential real estate	52		52		25		107		107		20
Consumer:
Other	28		28		1		9		9		—
Subtotal	$	1,124	$	1,124	$	256	$	1,623	$	1,623	$	433
Total	$	2,485	$	2,485	$	256	$	3,027	$	3,027	$	433

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Information on impaired loans for the three months ending June 30, 2016 and 2015 is as follows:

	(Dollars in Thousands)						(Dollars in Thousands)
	June 30, 2016						June 30, 2015
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized

Commercial	$	135	$	3	$	3	$	1,893	$	24	$	22
Commercial real estate:
Construction	—		—		—		—		—		—
Other	1,584		21		21		1,916		17		13
Residential real estate	747		8		8		1,014		12		9
Consumer:
Auto	—		—		—		—		—		—
Other	25		—		—		11		—		—

Total	$	2,491	$	32	$	32	$	4,834	$	53	$	44

Information on impaired loans for the six months ending June 30, 2016 and 2015 is as follows:

	(Dollars in Thousands)						(Dollars in Thousands)
	June 30, 2016						June 30, 2015
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized

Commercial	$	139	$	6	$	6	$	1,972	$	49	$	45
Commercial real estate:
Construction	—		—		—		—		—		—
Other	1,604		41		41		1,922		31		32
Residential real estate	749		16		15		1,019		25		18
Consumer:
Auto	—		—		—		—		—		—
Other	18		1		1		11		—		—

Total	$	2,510	$	64	$	63	$	4,924	$	105	$	95

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The recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2016 and December 31, 2015 are summarized below:

	(Dollars in Thousands)				(Dollars in Thousands)
	June 30, 2016				December 31, 2015
	Loans Past Due Over 90 Days and Still Accruing		Nonaccrual		Loans Past Due Over 90 Days and Still Accruing		Nonaccrual

Commercial	$	150	$	—	$	—	$	—
Commercial real estate:
Construction	—		—		—		—
Other	—		—		—		439
Residential real estate	—		49		—		98
Consumer:
Auto	—		—		—		—
Other	—		—		—		—

Total	$	150	$	49	$	—	$	537

Nonaccrual loans and loans past due 90 days still on accrual include individually classified impaired loans.

The following tables present the aging of the recorded investment in past due loans as of June 30, 2016 and December 31, 2015 by class of loans. Non-accrual loans are included and have been categorized based on their payment status:

	(Dollars in Thousands)
	30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Current		Total
June 30, 2016
Commercial	$	88	$	—	$	150	$	238	$	54,894	$	55,132
Commercial real estate:
Construction	—		—		—		—		28,511		28,511
Other	—		—		—		—		178,337		178,337
Residential real estate	—		14		49		63		81,243		81,306
Consumer:
Auto	—		—		—		—		1,242		1,242
Other	—		—		—		—		2,485		2,485

Subtotal	$	88	$	14	$	199	$	301	$	346,712	$	347,013

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	(Dollars in Thousands)
	30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Current		Total
December 31, 2015
Commercial	$	—	$	—	$	—	$	—	$	53,516	$	53,516
Commercial real estate:
Construction	—		—		—		—		24,167		24,167
Other	178		—		439		617		168,673		169,290
Residential real estate	329		—		98		427		79,253		79,680
Consumer:
Auto	1		—		—		1		1,424		1,425
Other	—		—		—		—		2,704		2,704

Subtotal	$	508	$	—	$	537	$	1,045	$	329,737	$	330,782

Troubled Debt Restructurings:

The Company reported total troubled debt restructurings of $2.4 million and $2.5 million as of June 30, 2016 and December 31, 2015, respectively. The Company has no commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings. Troubled debt restructurings are included in impaired loans. The modifications of the terms of these loans included reducing the interest rate, granting an interest only payment period, or extending the terms of the debt for customers experiencing financial difficulties. Of the 12 troubled debt restructurings reported at quarter end, all loans were on accrual status.

The following table presents loans by class modified as troubled debt restructurings that occurred during the quarter ending June 30, 2016 and 2015.

		(Dollars in Thousands)					(Dollars in Thousands)
	Number of Loans	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	June 30, 2016					June 30, 2015
Troubled Debt Restructurings:
Commercial real estate:
Other	—	—		—		2	$	1,547	$	1,547
Consumer	1	$	7	$	7	—	—		—

Total	1	$	7	$	7	2	$	1,547	$	1,547

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The following table presents loans by class modified as troubled debt restructurings that occurred year to date June 30, 2016 and 2015.

		(Dollars in Thousands)					(Dollars in Thousands)
	Number of Loans	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	June 30, 2016					June 30, 2015
Troubled Debt Restructurings:
Commercial real estate:
Other	—	—		—		2	$	1,547	$	1,547
Consumer	2	21		21		—	—		—

Total	2	$	21	$	21	2	$	1,547	$	1,547

Specific allocations of $231,000 and $243,000 were reported for troubled debt restructurings as of June 30, 2016 and June 30, 2015. One troubled debt restructuring of $3,000 was charged-off in the three and six months ending June 30, 2016. No payment defaults or charge-offs were reported for troubled debt restructurings during the three and six months ending June 30, 2015.

The terms of certain other loans were modified during the six months ending June 30, 2016 and 2015 that did not meet the definition of a troubled debt restructuring. These loans modified during the six months ending June 30, 2016 have a total recorded investment of $13.1 million as of June 30, 2016. These loans modified during the six months ending June 30, 2015 have a total recorded investment of $9.5 million as of June 30, 2015. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes commercial and commercial

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real estate loans with an outstanding balance greater than $25 thousand and is reviewed on a monthly basis. For residential real estate and consumer loans the analysis primarily involves monitoring the past due status of these loans and at such time that these loans are past due, the Company evaluates the loans to determine if a change in risk category is warranted. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans. All loans in all loan categories are assigned risk ratings. Based on the most recent analyses performed, the risk category of loans by class of loans is as follows:

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	Pass		Special Mention		Substandard		Doubtful		Total
June 30, 2016
Commercial	$	55,053	$	—	$	79	$	—	$	55,132
Commercial real estate:
Construction	28,511		—		—		—		28,511
Other	171,830		763		5,744		—		178,337
Residential real estate	80,788		—		518		—		81,306
Consumer:
Auto	1,242		—		—		—		1,242
Other	2,474		—		11		—		2,485

Total	$	339,898	$	763	$	6,352	$	—	$	347,013

	Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2015
Commercial	$	53,316	$	—	$	200	$	—	$	53,516
Commercial real estate:
Construction	24,167		—		—		—		24,167
Other	159,829		5,753		3,708		—		169,290
Residential real estate	79,033		—		647		—		79,680
Consumer:
Auto	1,425		—		—		—		1,425
Other	2,697		—		7		—		2,704

Total	$	320,467	$	5,753	$	4,562	$	—	$	330,782

Note 5 - Fair Value Measurements

Fair value is the exchange price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3 — Significant unobservable inputs that are supported by little or no market activity, reflect a company’s own assumptions about market participant

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assumptions of fair value, and are significant to the fair value of the assets or liabilities.

In determining the appropriate levels, the Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment Securities: The fair value of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges (level 1 inputs) or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (level 2 inputs). The Company does not have any Level 1 securities. Level 2 securities include certain U.S. agency bonds, collateralized mortgage and debt obligations, and certain municipal securities. The Company also has one Level 3 security. The value of this single issue trust preferred security is obtained on a quarterly basis directly from the originating broker.

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Other Real Estate Owned: Commercial and residential real estate properties classified as other real estate owned (OREO) are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for collateral-dependent impaired loans and real estate properties classified as other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by Bank management. The appraisal values for collateral-dependent impaired loans are discounted to allow for selling expenses and fees, the limited use nature of various properties, the age of the most recent appraisal, and additional discretionary discounts for location, condition, etc. The Bank annually obtains an updated current appraisal value for each OREO property to certify that the fair value has not declined. For each

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parcel of OREO that has declined in value, the Bank records the decline in value by a direct writedown of the asset.

Assets measured at fair value on a recurring basis:

	Fair Value Measurements at:
	(Dollars in Thousands)						(Dollars in Thousands)
	June 30, 2016						December 31, 2015
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Securities available-for-sale
U.S. government agencies and government sponsored entities			$	3,000					$	2,994
Agency mortgage-backed securites-residential			28,783						29,657
State and municipal			24,504						25,222
Trust preferred security					1,260						1,340
Corporate bonds			994						987

Total investment securities	$	—	$	57,281	$	1,260	$	—	$	58,860	$	1,340

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30:

	Trust Preferred Security
	2016			2015

Balance of recurring Level 3 assets at January 1	$	1,340		$	1,480
Total losses for the period:
Included in other comprehensive income	(80		)	(30		)
Balance of recurring Level 3 assets at June 30	$	1,260		$	1,450

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Impaired loans which are measured for impairment using the fair value of collateral for collateral dependent loans, had a principal balance of $49,000 at June 30, 2016 with a valuation allowance of $25,000. Impaired loans which were measured for impairment using the fair value of collateral for collateral-dependent loans had a principal balance of $537,000 at December 31, 2015, with a valuation allowance of $198,000. Increases in the provision for loan losses of $25,000 and $233,000 were recognized for the six months ended June 30, 2016 and 2015, respectively, as a result of net changes in fair values on collateral dependent loans and other factors affecting the provision for loan losses.

Other real estate owned, which is measured at fair value less costs to sell, had a net carrying value of $66,000 at June 30, 2016 and $100,000 at December 31, 2015. Total writedowns of other real estate owned were $0 and $23,000 in the six months ending June 30, 2016 and 2015, respectively.

The following table presents quantitative and qualitative information about Level 3 fair value measurements for financial instruments measured on a non-recurring basis at June 30, 2016.

	June 30, 2016		Valuation Techniques	Unobservable Inputs (Dollars in thousands)	Range (Weighted Avg)
Impaired loans:
Residential RE	$	24	Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition	(50%)

Other real estate owned:
Residentiall RE	66		Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition	48%-54% (51.63%)

The following table presents quantitative and qualitative information about Level 3 fair value measurements for financial instruments measured on a non-recurring basis at December 31, 2015.

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	December 31, 2015		Valuation Techniques	Unobservable Inputs (Dollars in thousands)	Range (Weighted Avg)
Impaired loans:
Commercial RE	$	260	Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition	(50.00%)
Residential	79		Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition	20%-60% (30.00%)

Other real estate owned:
Commercial RE	100		Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition	8%-40% (33.65%)

The carrying amount and estimated fair values of financial instruments at June 30, 2016 and December 31, 2015 were as follows:

			Fair Value Measurements at
	Carrying		June 30, 2016
	Amount		Level 1		Level 2	Level 3	Total
Financial Assets
Cash and cash equivalents	$	7,354	$	7,354			$	7,354
Interest-bearing deposits in other financial institutions	2,728		2,761				2,761
Available-for-sale securities	57,862				57,281	1,260	58,541
Loans, net of allowance	342,064					343,856	343,856
Loans held for sale	118				121		121
Accrued interest receivable	1,536		18		300	1,218	1,536
Federal Home Loan Bank stock	2,025						N/A

Financial Liabilities
Demand and savings deposits	$	213,574	$	213,574			$	213,574
Time deposits	139,859				140,196		140,196
FHLB advances	35,000				35,023		35,023
Other borrowings	1,000				1,000		1,000
Subordinate debentures	5,000					2,434	2,434
Accrued interest payable	223		11		182	30	223

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			Fair Value Measurements at
			December 31, 2015
	Carrying Amount		Level 1		Level 2		Level 3	Total

Financial Assets
Cash and cash equivalents	$	15,255	$	15,255	$		$	$	15,255
Interest-bearing deposits in other financial institutions	2,728		$	2,728				2,728
Available-for-sale securities	59,965				$	58,860	1,340	60,200
Loans, net of allowance	325,866						326,886	326,886
Accrued interest receivable	1,680				337		1,343	1,680
Federal Home Loan Bank stock	2,025							N/A

Financial Liabilities
Demand and savings deposits	$	216,857	$	216,857				$	216,857
Time deposits	153,531				153,801			153,801
FHLB advances	13,000				12,902			12,902
Other borrowings	2,000				2,000			2,000
Subordinate debentures	5,000						2,434	2,434
Accrued interest payable	213		9		177		27	213

The methods and assumptions used to estimate fair value are described as follows:

(a) Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

(b) Interest Bearing Deposits in Other Financial Institutions: Fair values are based on quoted market prices.

(c) FHLB Stock: It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

(d) Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price. The fair value of loans held for sale is estimated based upon binding contracts and quotes from first party investors resulting in a Level 2 classification.

(e) Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market

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accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of variable rate certificates of deposit approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(f) FHLB Advances and Other Borrowings/Subordinated Debentures: The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification. The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

(g) Accrued Interest Receivable/Payable: The carrying amounts of accrued interest approximate fair value resulting in a Level 1 or Level 2 classification consistent with the asset/liability they are associated with.

Note 6 - Earnings Per Share

Basic earnings per share have been computed by dividing net income available for common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share have been computed the same as basic earnings per share, and assumes the conversion of outstanding stock options, convertible preferred stock and warrants, if dilutive. The following table reconciles the basic and diluted earnings per share computations for the three months and six months ended June 30, 2016 and 2015.

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	Quarter ended June 30, 2016					Quarter ended June 30, 2015
			Weighted	Per					Weighted	Per
			Average	Share					Average	Share
	Income		Shares	Amount		Income			Shares	Amount
Basic earnings per share:
Net income	$	1,074				$	899
Less: Dividends on preferred stock during the quarter	(123)					(130		)
Net income available to common shareholders	$	951	1,998,979	$	0.48	$	769		1,968,777	$	0.39

Effect of dilutive securities
Convertible preferred stock	123		539,175			130			568,890
Performance share units	—		1,725			—			—
Stock options	—		69			—			—
Warrants	—		—			—			24,462

Diluted earnings per share
Net income available to common stockholders and assumed conversions	$	1,074	2,539,948	$	0.42	$	899		2,562,129	$	0.35

	Six months ended June 30, 2016						Six months ended June 30, 2015
				Weighted						Weighted
				Average	Per Share					Average	Per Share
	Income			Shares	Amount		Income			Shares	Amount
Basic earnings per share:
Net income	$	1,979					$	1,681
Less: Dividends on preferred stock during the quarter	(247		)				(258		)
Net income available to common shareholders	$	1,732		1,996,278	$	0.87	$	1,423		1,968,777	$	0.72

Effect of dilutive securities
Convertible preferred stock	247			541,563			258			568,890
Performance share units	—			2,937			—			—
Stock options	—			59			—			—
Warrants	—			—			—			85,759

Diluted earnings per share
Net income available to common stockholders and assumed conversions	$	1,979		2,540,837	$	0.78	$	1,681		2,623,426	$	0.64

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Stock options for 29,276 shares of common stock were not considered in computing diluted earnings per common share for June 30, 2015 because they are anti-dilutive. There were no anti-dilutive stock options at June 30, 2016.

Note 7 — Regulatory Capital Matters

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as of June 30, 2016 and December 31, 2015, the Company and Citizens First Bank, Inc. met all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. The most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

Under quantitative measures established by regulation to ensure capital adequacy, we are required to maintain minimum amounts and ratios of total Tier 1 capital to risk-weighted assets and to total assets. For 2016, interim Final Basel III rules require the Bank to maintain minimum amounts and ratios of common equity Tier I capital to risk-weighted assets. Under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in computing regulatory capital. The rules also established a “capital conservation buffer” of 2.5%, to be phased in through January 1, 2019, above the new regulatory minimum risk-based capital ratios. The buffer could limit the payment of dividends and discretionary bonuses to officers if a bank fails to maintain required capital levels.

The Company’s and Citizens First Bank, Inc.’s actual capital amounts and ratios are also presented in the following table.

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June 30, 2016

	(Dollars in Thousands)
	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk-Weighted Assets)
Consolidated	$	46,518	12.64	%	$	29,448	8.0	%	N/A		N/A
Citizens First Bank, Inc.	47,162		12.82	%	29,440		8.0	%	$	36,800	10.0	%

Tier I Capital (to Risk-Weighted Assets)
Consolidated	41,908		11.38	%	22,086		6.0	%	N/A		N/A
Citizens First Bank, Inc.	42,554		11.56	%	22,080		6.0	%	29,440		8.0	%

Common Equity Tier I Capital (to Risk-Weighted Assets)
Consolidated	29,647		8.05	%	16,565		4.5	%	N/A		N/A
Citizens First Bank, Inc.	42,554		11.56	%	16,560		4.5	%	23,920		6.5	%

Tier I Leverage Capital to average assets
Consolidated	41,908		9.63	%	17,400		4.0	%	N/A		N/A
Citizens First Bank, Inc.	42,554		9.79	%	17,394		4.0	%	21,742		5.0	%

December 31, 2015

	(Dollars in Thousands)
	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk-Weighted Assets)
Consolidated	$	44,762	12.58	%	$	28,463	8.0	%	N/A		N/A
Citizens First Bank, Inc.	46,353		13.03	%	28,459		8.0	%	$	35,573	10.0	%

Tier I Capital (to Risk-Weighted Assets)
Consolidated	40,310		11.33	%	21,348		6.0	%	N/A		N/A
Citizens First Bank, Inc.	41,901		11.78	%	21,344		6.0	%	28,459		8.0	%

Common Equity Tier I Capital (to Risk-Weighted Assets)
Consolidated	27,650		7.77	%	16,011		4.5	%	N/A		N/A
Citizens First Bank, Inc.	41,901		11.78	%	16,008		4.5	%	23,123		6.5	%

Tier I Leverage Capital to average assets
Consolidated	39,365		9.46	%	13,961		4.0	%	N/A		N/A
Citizens First Bank, Inc.	41,901		9.83	%	17,043		4.0	%	21,304		5.0	%

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Note 8 — Preferred Stock

In 2004, the Company issued 250 shares of Cumulative Convertible Preferred Stock, stated value $31,992 per share (Cumulative Preferred Stock), for an aggregate purchase price of $7,998,000. The Cumulative Preferred Stock was sold for $31,992 per share, is entitled to quarterly cumulative dividends at an annual fixed rate of 6.5% and is convertible into shares of common stock of the Company at an initial conversion price per share of $15.50 (currently $14.06, adjusted for stock dividends) on and after three years after the date of issuance. As of June 30, 2016, 13 preferred shares have converted to 29,575 common shares.

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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 2015 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, 2016, we reported net income of $1.07 million or $0.42 per diluted common share, compared to net income of $899,000, or $0.35 per diluted common share in the second quarter of 2015, an increase of $175,000. The increase in net income is attributable to a reduction in the provision for loan losses of $205,000, combined with an increase in net interest income of $121,000. The increase in net interest income is the result of an increase in earning assets over the prior year, primarily loans.

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For the six months ended June 30, 2016, we reported net income of $1.98 million or $0.78 per diluted common share, compared to net income of $1.68 million, or $0.64 per diluted common share in the previous year. This represents an increase of $298,000, or $0.14 per share. The increase in net income is attributable to a reduction in the provision for loan losses of $285,000, combined with an increase in net interest income of $322,000, reduced by an increase in non-interest expenses of $218,000. The increase in net interest income is the result of an increase in earning assets over the prior year, primarily loans.

Our annualized return on average assets, defined as net income divided by average assets, was 0.91% for the six months ended June 30, 2016, compared to 0.79% in June 30, 2015. Our annualized return on average equity, defined as net income divided by average equity, was 9.82% for the six months ending June 30, 2016, compared to 8.78% for the six months ending June 30, 2015.

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.

Net interest income for the quarter ended June 30, 2016 increased $121,000, or 3.2%, compared to June 30, 2015. The increase in net interest income was a result of an increase in the volume of average earning assets over the previous year.

Net interest income for the six months ended June 30, 2016 increased $322,000 or 4.3%, compared to June 30, 2015. The increase in net interest income was a result of an increase in the volume of average earning assets over the previous year.

The Company’s net interest margin was 3.92% for the three months ended June 30, 2016, and 3.85% for the three months ended June 30, 2015, an increase of 7 basis points. The net interest margin increased due to a decline in the cost of average interest-bearing liabilities. The net interest margin for the six months ended June 30, 2016 was 3.93%, compared to 3.84% in 2015. The increase of 9 basis points is attributable to both a decrease in the cost of average interest-bearing liabilities and an increase in the yield on earning assets.

The following tables set forth for the quarter and six months ended June 30, 2016 and 2015, 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

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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.

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

	2016						2015
Quarter ended June 30,	Average Balance		Income/ Expense		Average Rate		Average Balance		Income/ Expense		Average Rate
Earning assets:
Federal funds sold	$	6,200	$	7	0.45	%	$	23,670	$	12	0.20	%
Interest-bearing deposits in other financial institutions	2,727		11		1.62	%	—		—		0.00	%
Available-for-sale securities (1)
Taxable	37,491		177		1.90	%	34,530		154		1.79	%
Nontaxable	22,823		238		4.19	%	23,830		261		4.39	%
Federal Home Loan Bank stock	2,025		20		3.97	%	2,025		20		3.96	%
Loans receivable (2)	338,456		4,162		4.95	%	319,758		4,108		5.15	%
Total interest earning assets	409,722		4,615		4.53	%	403,813		4,555		4.52	%
Non-interest earning assets	29,359						30,190
Total Assets	$	439,081					$	434,003

Interest-bearing liabilities:
NOW accounts	$	127,612	$	126	0.40	%	$	113,224	$	102	0.36	%
Money market accounts	23,443		22		0.38	%	27,208		28		0.41	%
Savings accounts	21,490		10		0.19	%	20,530		10		0.20	%
Time deposits	138,540		356		1.03	%	166,048		440		1.06	%
Total interest-bearing deposits	311,085		514		0.66	%	327,010		580		0.71	%
Borrowings	30,868		81		1.06	%	18,022		74		1.65	%
Subordinated debentures	5,000		29		2.33	%	5,000		24		1.93	%
Total interest-bearing liabilities	346,953		624		0.72	%	350,032		678		0.78	%
Non-interest bearing deposits	49,125						43,810
Other liabilities	2,091						1,981
Total liabilities	398,169						395,823
Stockholders’ equity	40,912						38,180
Total Liabilities and Stockholders’ Equity	$	439,081					$	434,003
Net interest income			$	3,991					$	3,877

Net interest spread (1)					3.81	%					3.75	%
Net interest margin (1) (3)					3.92	%					3.85	%
Return on average assets ratio					0.98	%					0.83	%
Return on average equity ratio					10.56	%					9.44	%
Average equity to assets ratio					9.32	%					8.80	%

(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 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)

	2016						2015
Six months ended June 30,	Average Balance		Income/ Expense		Average Rate		Average Balance		Income/ Expense		Average Rate
Earning assets:
Federal funds sold	$	5,178	$	13	0.50	%	$	19,927	$	21	0.21	%
Interest-bearing deposits in other financial institutions	2,727		22		1.62	%	—		—		0.00	%
Available-for-sale securities (1)
Taxable	37,604		354		1.89	%	34,516		306		1.79	%
Nontaxable	22,919		478		4.19	%	24,025		526		4.42	%
Federal Home Loan Bank stock	2,025		40		3.97	%	2,025		41		4.08	%
Loans receivable (2)	335,728		8,265		4.95	%	320,390		8,058		5.07	%
Total interest earning assets	406,181		9,172		4.54	%	400,883		8,952		4.50	%
Non-interest earning assets	29,931						30,239
Total Assets	$	436,112					$	431,122

Interest-bearing liabilities:
NOW accounts	$	127,304	$	248	0.39	%	$	111,869	$	198	0.36	%
Money market accounts	24,777		47		0.38	%	25,898		50		0.39	%
Savings accounts	20,970		19		0.18	%	19,955		19		0.19	%
Time deposits	142,673		728		1.03	%	164,091		862		1.06	%
Total interest-bearing deposits	315,724		1,042		0.66	%	321,813		1,129		0.71	%
Borrowings	24,631		138		1.13	%	19,983		145		1.46	%
Subordinated debentures	5,000		57		2.29	%	5,000		48		1.94	%
Total interest-bearing liabilities	345,355		1,237		0.72	%	346,796		1,322		0.77	%
Non-interest bearing deposits	48,079						43,746
Other liabilities	2,144						1,978
Total liabilities	395,578						392,520
Stockholders’ equity	40,534						38,602
Total Liabilities and Stockholders’ Equity	$	436,112					$	431,122
Net interest income			$	7,935					$	7,630

Net interest spread (1)					3.82	%					3.73	%
Net interest margin (1) (3)					3.93	%					3.84	%
Return on average assets ratio					0.91	%					0.79	%
Return on average equity ratio					9.82	%					8.78	%
Average equity to assets ratio					9.29	%					8.95	%

(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 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 six months ended June 30, 2016 and 2015. 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)
	Six Months Ended June 30, 2016 Vs. 2015
	Increase (Decrease) Due to
	Rate		Volume		Net
Interest-earning assets:
Federal funds sold	8		(16	)	(8	)
Interest-bearing deposits in other financial institutions	22		—		22
Available-for-sale securities
Taxable	21		27		48
Nontaxable (1)	(24	)	(24	)	(48	)
Federal Home Loan Bank stock	(1	)	—		(1	)
Loans, net	(179	)	386		207
Total Net Change in income on interest-earning assets	(153	)	373		220

Interest-bearing liabilities:
NOW accounts	23		27		50
Money market accounts	(1	)	(2	)	(3	)
Savings accounts	(1	)	1		—
Time deposits	(21	)	(113	)	(134	)

FHLB and other borrowings	(41	)	34		(7	)
Subordinated debentures	9		—		9
Total Net Change in expense on interest-earning liabilities	(32	)	(53	)	(85	)
Net change in net interest income	(121	)	426		305
Percentage change	-39.67	%	139.67	%	100.0	%

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

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Provision for Loan Losses

A provision (credit) for loan losses of ($85,000) was recorded for the second quarter of 2016, compared to $120,000 in the second quarter of 2015. The allowance for loan losses to total loans was 1.43% of total loans at June 30, 2016 compared to 1.59% at June 30, 2015. Net charge-offs were $10,000 for the second quarter of 2016 compared to $84,000 in the second quarter of 2015.

(Credit) Provision expense for the six month ended June 30, 2016 decreased $285,000, from $200,000 to ($85,000). Net charge-offs (recoveries) were ($119,000) for the six months ended June 30, 2016 compared to $102,000 for the six month ended June 30, 2015.

Non-Interest Income

Non-interest income for the three months ended June 30, 2016 increased $6,000, or 0.7%, compared to the three months ended June 30, 2015, primarily due to gain on sale of securities, offset by a decline in lease income.

Non-interest income for the six months ended June 30, 2016 increased $91,000, or 6.0%, compared to the six months ended June 30, 2015, primarily due to gains on sale of securities and gains on sale of mortgage loans, offset by a decline in lease income.

Non-Interest Expense

Non-interest expense for the three months ended June 30, 2016 increased $51,000, or 1.6%, compared to the three months ended June 30, 2015, due to an increase in personnel expenses primarily as a result of normal salary adjustments.

Non-interest expense for the six months ended June 30, 2016 increased $218,000, or 3.4%, compared to the six months ended June 30, 2015, due to an increase in personnel expenses primarily as a result of normal salary adjustments.

Income Taxes

Income tax expense was calculated using our expected effective rate for 2016 and 2015. 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 2016 and 2015. The effective tax rate for the second quarter of 2016 was 29.9% compared to a 28.1% effective tax rate for the second quarter of 2015. 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.

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Balance Sheet Review

Overview

Total assets at June 30, 2016 were $438.3 million, an increase of $6.1 million, or 1.4%, from $432.2 million at December 31, 2015. Average assets during the second quarter were $439.1 million, an increase of 1.2%, or $5.1 million, from $434.0 million in the second quarter of 2015. Average interest earning assets increased 1.5%, or $5.9 million, from $403.8 million in the second quarter of 2015 to $409.7 million in the second quarter of 2016.

Loans

Loans increased $16.2 million, or 4.91%, from $330.8 million at December 31, 2015 to $347.0 million at June 30, 2016. Total loans averaged $338.5 million the second quarter of 2016, compared to $319.8 million the second quarter of 2015, an increase of $18.7 million, or 5.8%. We experienced an increase in the commercial and agricultural portfolio, the commercial real estate portfolio, and the residential real estate portfolio during the first six months of the year compared to December 31, 2015. The following table presents a summary of the loan portfolio by category:

	(Dollars in Thousands)
	June 30, 2016				December 31, 2015
			% of Total Loans				% of Total Loans
Commercial and agricultural	$	55,132	15.89	%	$	53,516	16.18	%
Commercial real estate	206,848		59.61	%	193,457		58.48	%
Residential real estate	81,306		23.43	%	79,680		24.09	%
Consumer	3,727		1.07	%	4,129		1.25	%
	$	347,013	100	%	$	330,782	100	%

The majority of our loans are to customers located in south central Kentucky and central Tennessee. As of June 30, 2016, our twenty largest credit relationships consisted of loans and loan commitments ranging from $4.0 million to $11.8 million. The aggregate amount of these credit relationships was $110.9 million. As of December 31, 2015, our twenty largest credit relationships consisted of loans and loan commitments ranging from $3.8 million to $6.6 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 June 30, 2016 and December 31, 2015.

As of June 30, 2016, we had $15.9 million of participations in loans purchased from, and $21.0 million of participations in loans sold to, other banks. As of December 31,

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2015, we had $21.1 million of participations in loans purchased from, and $21.8 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, 2016. 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)
Loan Maturities as of June 30, 2016	Within One Year		After One but Within Five Years		After Five Years		Total
Commercial and agricultural	$	22,653	$	26,258	$	6,221	$	55,132
Commercial real estate	36,901		111,903		58,044		206,848
Residential real estate	7,071		41,205		33,030		81,306
Consumer	910		2,768		49		3,727
Total	$	67,535	$	182,134	$	97,344	$	347,013

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 following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated. This allocation is not intended to suggest how actual losses may occur.

	(Dollars in Thousands)
	June 30, 2016				December 31, 2015
	Amount		% of Loans in Each Category to Toal Loans		Amount		% of Loans in Each Category to Toal Loans
Residential real estate loans	$	600	23.43	%	$	524	24.09	%
Consumer and other loans	22		1.07	%	28		1.25	%
Commercial and agricultural	464		15.89	%	812		16.18	%
Commercial real estate	3,815		59.61	%	3,431		58.48	%
Unallocated	48		0.00	%	121		0.00	%
Total allowance for loan losses	$	4,949	100.00	%	$	4,916	100.00	%

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We maintain a modest unallocated amount in the allowance to assist in mitigating inherent risk that cannot be quantitatively or qualitatively determined, including, but not limited to, new loan products and new markets for which insufficient history exists for a robust analysis. 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. The unallocated portion of the allowance was $48,000 at June 30, 2016 and $121,000 at December 31, 2015.

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

	(Dollars in Thousands)
	June 30,			December 31,
	2016			2015
Non-accrual loans	$	49		$	537
Loans 90+ days past due/accruing	150			—
Restructured loans on non-accrual	—			—
Total non-performing loans	199			537
Other real estate owned	66			100
Total non-performing assets	$	265		$	637

Non-performing loans to total loans	0.06		%	0.16		%
Non-performing assets to total assets	0.06		%	0.15		%
Net-charge-offs (recoveries) YTD	$	(119	)	$	104
Net charge-offs (recoveries) YTD to average YTD total loans, annualized	(0.07		)%	0.03		%
Allowance for loan losses to non-performing loans	2486.93		%	915.46		%
Allowance for loan losses to total loans	1.43		%	1.49		%

Non-performing assets totaled $265,000 at June 30 2016, compared to $637,000 at December 31, 2015, a decrease of $372,000. Payoffs and paydowns of $637,000 included the charge off of $73,000 in principal deficiency balances after the disposition of collateral and the sale of $100,000 in other real estate owned, with decreases offset by the addition of $49,000 in residential real estate loans and $150,000 in commercial and agricultural loans.

Non-performing loans consist of non-accrual loans and loans 90 days or more past due and still accruing interest. 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.

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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 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.

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

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interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Securities

The investment securities portfolio is comprised of U.S. Government agency and government sponsored entity securities, agency mortgage-backed securities, tax-exempt securities of states and political subdivisions, a taxable municipal security, a corporate bond, and a trust preferred security. The purchase of nontaxable obligations of states and political subdivisions is a part of managing our effective tax rate. Securities are all classified as available-for-sale, and averaged $60.5 million for the first six months of 2016, compared to $58.5 million for 2015.

The tables below present the maturities and yield characteristics of securities as of June 30, 2016 and December 31, 2015. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

June 30, 2016

	(Dollars in Thousands)
	One Year or Less			Over One Year Through Five Years			Over Five Years Through Ten Years			Over Ten Years			Total Maturities			Fair Value
U.S. Government agencies	$	—		$	2,000		$	998		$	—		$	2,998		$	3,000
Agency mortgage-backed securities: (1)	239			22,301			5,710			—			28,250			28,783
Municipal securities	1,532			10,375			9,221			2,604			23,732			24,504
Trust preferred security	—			—			—			1,882			1,882			1,260
Corporate bond	—			—			1,000			—			1,000			994
Total available-for-sale securities	$	1,771		$	34,676		$	16,929		$	4,486		$	57,862		$	58,541

Percent of total	3.06		%	59.93		%	29.26		%	7.75		%	100.00		%
Weighted average yield(2)	4.16		%	2.50		%	3.34		%	4.08		%	2.92		%

(1) Agency mortgage-backed securities (residential) are grouped into average lives based on June 2016 prepayment projections.

(2) The weighted average yields are based on amortized cost and municipal securities are calculated on a full tax- equivalent basis.

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December 31, 2015

	(Dollars in Thousands)
	One Year or Less			Over One Year Through Five Years			Over Five Years Through Ten Years			Over Ten Years			Total Maturities			Fair Value
U.S. Government agencies	$	—		$	2,998		$	—		$	—		$	2,998		$	2,994
Agency mortgage-backed securities: (1)	315			24,389			4,742			—			$	29,446		29,657
Municipal securities	1,126			10,838			8,086			4,591			$	24,641		25,222
Trust preferred security	—			—			—			1,880			$	1,880		1,340
Corporate bond	—			—			1,000			—			$	1,000		987
Total available-for-sale securities	$	1,441		$	38,225		$	13,828		$	6,471		$	59,965		$	60,200

Percent of total	2.40		%	63.75		%	23.06		%	10.79		%	100.00		%
Weighted average yield(2)	4.31		%	2.45		%	3.43		%	4.07		%	2.88		%

(1) Agency mortgage-backed securities (residential) are grouped into average lives based on December 2015 prepayment projections.

(2) The weighted average yields are based on amortized cost and municipal securities are calculated on a full tax- equivalent basis.

The trust preferred security category consists of one single issue trust preferred security which has experienced a decline in fair value due to inactivity in the market. No impairment charge is being taken as no loss of principal is anticipated and all principal and interest payments are being received as scheduled. The Company does not intend to sell this security and does not believe it will be required to sell this security before recovery. All rated securities are investment grade. For those that are not rated, the financial condition has been evaluated and no adverse conditions were identified related to repayment. Declines in fair value are a function of rate changes in the market and market illiquidity.

Deposits

Our primary funding source for lending and investment activities results from customer deposits and a deposit listing service. Deposits at June 30, 2016 were $353.4 million, a decrease of $17.0 million, or 4.6%, compared to $370.4 million at December 31, 2015. Total deposits averaged $360.2 million the second quarter of 2016, a decrease of $10.6 million, or 2.9%, compared to $370.8 million during the second quarter of 2015. Average deposits decreased during the year due to maturing time deposits that were not renewed in favor of lower cost borrowings.

Time deposits that meets or exceed the FDIC insurance limit of $250,000 were $10.9 million and $11.5 million at June 30, 2016 and December 31, 2015, respectively. Time deposits of $100,000 or more totaled $53.9 million at June 30, 2016, compared to $73.4 million at December 31, 2015. Interest expense on time deposits of $100,000 or more was $344,000 for the six months ended June 30, 2016, compared to $410,000 for the six months ended June 30, 2015. Our cost has decreased as these certificates of

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deposit matured and were renewed at lower current market rates. The following table shows the maturities of time deposits as of June 30, 2016.

	(Dollars in Thousands)
	June 30, 2016
Three months or less	$	10,073
Over three through six months	25,081
Over six through twelve months	37,332
Over one year through three years	57,548
Over three years through five years	9,821
Over five years	4
Total	$	139,859

Borrowings

FHLB Advances. We obtain advances from the Federal Home Bank of Cincinnati (FHLB) for funding and liability management. These advances are collateralized by a blanket agreement of eligible 1-4 family residential mortgage loans and eligible commercial real estate. Total advances as of June 30, 2016 were $35.0 million compared to $13.0 million at December 31, 2015. Rates vary based on the term to repayment, and are summarized below as of June 30, 2016:

				(Dollars in Thousands)
Type	Maturity	Rate		Amount
Fixed	July 22, 2016	0.70	%	5,000
Fixed	October 21, 2016	0.70	%	5,000
Fixed	December 2, 2016	0.92	%	5,000
Fixed	January 30, 2017	0.65	%	2,000
Fixed	April 25, 2017	0.89	%	5,000
Fixed	May 12, 2017	0.77	%	5,000
Fixed	April 20, 2018	1.05	%	5,000
Fixed	May 24, 2019	1.72	%	3,000
				$	35,000

At June 30, 2016, we had available collateral to borrow an additional $40.3 million from the FHLB compared to $63.5 million at December 31, 2015.

Other Borrowings. In 2015, we renewed a credit agreement with a community bank to be used for operating capital and general corporate purposes. The line has a total availability of $3.0 million, matures November 21, 2016, and bears interest at the prime rate as published in the Money Rates section of The Wall Street Journal, plus 0.25%, with interest payable monthly. The line has a floor rate of 4.5%. The line is secured by the

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Bank’s common stock. As of June 30, 2016 the line had a balance of $1.0 million compared to a balance of $2.0 million at December 31, 2015.

At June 30, 2016, we had established Federal Funds lines of credit totaling $18.8 million with three correspondent banks. No amounts were drawn as of June 30, 2016 or December 31, 2015.

We issued $5.0 million in subordinated debentures in October, 2006. These trust preferred securities bear an interest rate, which reprices each calendar quarter, of 165 basis points over 3-month LIBOR (London Inter Bank Offering Rate). Our rate as of June 30, 2016 was 2.28%. The subordinated debentures may be included with tier 1 capital (with certain limitations) under current regulatory guidelines.

Liquidity

Our objective for liquidity management is to ensure that we have funds available to meet deposit withdrawals and credit demands without unduly penalizing profitability. In order to maintain a proper level of liquidity, the Bank has several sources of funds available on a daily basis that can be used for liquidity purposes. Those sources of funds include the Bank’s core deposits, cash flow generated by repayment of principal and interest on loans and investment securities; FHLB borrowings; and federal funds purchased. While maturities and scheduled amortization of loans and investment securities are generally a predictable source of funds, deposit outflows and mortgage prepayments are influenced significantly by general interest rates, economic conditions, and competition in our local markets.

Our asset and liability management committee meets monthly and monitors the composition of the balance sheet to ensure comprehensive management of interest rate risk and liquidity. We prepare a monthly cash flow report which forecasts funding needs and availability for the coming months, based on forecasts of loan closings and payoffs, potentially callable securities, and other factors.

Capital

Stockholders’ equity increased $1.9 million, or 4.9%, from December 31, 2015 to June 30, 2016. A common dividend of $0.08 per share was paid during the second quarter of 2016, which marks the second common dividend paid since 2008.

The Company previously issued 250 shares of Cumulative Convertible Preferred Stock, (Preferred Stock), for an aggregate purchase price of $8.0 million. The Preferred Stock was sold for $31,992 per share, is entitled to quarterly cumulative dividends at an annual fixed rate of 6.5% and is currently convertible into shares of common stock of the Company at an initial conversion price per share of $15.50 (currently $14.06, adjusted for stock dividends). Approximately 5% of preferred shareholders (holding 13

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shares of Preferred Stock) have converted their shares into 29,575 shares of common stock as of June 30, 2016.

We are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks, (Basel III rules) became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. The rules also established a “capital conservation buffer” of 2.5%, to be phased in over three years, above the new regulatory minimum risk-based capital ratios. The buffer could limit the payment of dividends and discretionary bonuses to officers if a bank fails to maintain required capital levels. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. We believe as of June 30, 2016 and December 31, 2015, the Company and the Bank met all capital adequacy requirements to which it is subject.

Our capital ratios, calculated in accordance with regulatory guidelines, were as follows:

June 30, 2016

	(Dollars in Thousands)
	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk-Weighted Assets)
Consolidated	$	46,518	12.64	%	$	29,448	8.0	%	N/A		N/A
Citizens First Bank, Inc.	47,162		12.82	%	29,440		8.0	%	$	36,800	10.0	%

Tier I Capital (to Risk-Weighted Assets)
Consolidated	41,908		11.38	%	22,086		6.0	%	N/A		N/A
Citizens First Bank, Inc.	42,554		11.56	%	22,080		6.0	%	29,440		8.0	%

Common Equity Tier I Capital (to Risk-Weighted Assets)
Consolidated	29,647		8.05	%	16,565		4.5	%	N/A		N/A
Citizens First Bank, Inc.	42,554		11.56	%	16,560		4.5	%	23,920		6.5	%

Tier I Leverage Capital to average assets
Consolidated	41,908		9.63	%	17,400		4.0	%	N/A		N/A
Citizens First Bank, Inc.	42,554		9.79	%	17,394		4.0	%	21,742		5.0	%

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December 31, 2015

	(Dollars in Thousands)
	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk-Weighted Assets)
Consolidated	$	44,762	12.58	%	$	28,463	8.0	%	N/A		N/A
Citizens First Bank, Inc.	46,353		13.03	%	28,459		8.0	%	$	35,573	10.0	%

Tier I Capital (to Risk-Weighted Assets)
Consolidated	40,310		11.33	%	21,348		6.0	%	N/A		N/A
Citizens First Bank, Inc.	41,901		11.78	%	21,344		6.0	%	28,459		8.0	%

Common Equity Tier I Capital (to Risk-Weighted Assets)
Consolidated	27,650		7.77	%	16,011		4.5	%	N/A		N/A
Citizens First Bank, Inc.	41,901		11.78	%	16,008		4.5	%	23,123		6.5	%

Tier I Leverage Capital to average assets
Consolidated	39,365		9.46	%	13,961		4.0	%	N/A		N/A
Citizens First Bank, Inc.	41,901		9.83	%	17,043		4.0	%	21,304		5.0	%

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

We use a simulation model as a tool to monitor and evaluate interest rate risk exposure. The model is designed to measure the sensitivity of net interest income and net income to changing interest rates over future time periods. Forecasting net interest income and its sensitivity to changes in interest rates requires us to make assumptions about the volume and characteristics of many attributes, including assumptions relating to the replacement of maturing earning assets and liabilities. Other assumptions include, but are not limited to, projected prepayments, projected new volume, and the predicted relationship between changes in market interest rates and changes in customer account balances. These effects are combined with our estimate of the most likely rate environment to produce a forecast of net interest income and net income. The forecasted results are then adjusted for the effect of a gradual increase and decrease in market interest rates on our net interest income and net income. Because assumptions are inherently uncertain, the model cannot precisely estimate net interest income or net income or the effect of interest rate changes on net interest income and net income. Actual results could differ significantly from simulated results.

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At June 30, 2016, the model indicated that if rates were to increase by 200 basis points during the remainder of the calendar year, then net interest income would increase 8.85% over the next twelve months. The model indicated that if rates were to decrease by 200 basis points over the same period, then net interest income would decrease 0.59%. The table below notes the projected changes in net interest income as indicated by the model for increases in rates up to 400 basis points and decreases in rates to 200 basis points.

Projections for: July 2016 - June 2017

Projected Interest Rate Change	Estimated Value	Net Interest Income $ Change From Base	% Change From Base
+400	18,665,881	2,952,968	18.79	%
+300	17,885,337	2,172,425	13.83	%
+200	17,103,932	1,391,019	8.85	%
Base	15,712,913	0	0.00	%
-200	15,620,792	-92,120	-0.59	%

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Item 4. Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, and have concluded that our disclosure controls and procedures were adequate and effective in all material respects to ensure that all material information required to be disclosed in this report has been made known to them in a timely fashion.

There was no change in our internal controls over financial reporting that occurred during the relevant period that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, subsequent to the date of the Chief Executive Officer’s and Chief Financial Officer’s evaluation, nor were there any material weaknesses in the controls which required corrective action.

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PART II-OTHER INFORMATION

Item 6. Exhibits

EXHIBIT INDEX

3.1	Second Amended and Restated Articles of Incorporation of Citizens First Corporation, (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed November 24, 2015).

3.2	Amended and Restated Bylaws of Citizens First Corporation (incorporated by reference to Exhibit 3 of the Registrant’s Current Report on Form 8-K filed November 24, 2015).

4.1	Second Amended and Restated Articles of Incorporation of Citizens First Corporation, (see Exhibit 3.1).

4.2	Amended and Restated Bylaws of Citizens First Corporation (see Exhibit 3.2).

4.3	Copy of Registrants’ Agreement Pursuant to Item 601(b) (4) (iii) (A) of Regulation S-K dated March 30, 2007 with respect to certain debt instruments (incorporated by reference to Exhibit 4.4 of the Registrant’s Form 10K-SB dated June 30, 2007; file number 001-33126).

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.

32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.

32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

101	Interactive data files: (i) Consolidated Balance Sheets at June 30, 2016 and December 31, 2015, (ii) the Consolidated Statements of Income for the six months ended June 30, 2016 and June 30, 2015, (iii) the Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2016 and June 30, 2015, (iv) Consolidated Statements of Cash Flows for the six month periods ended June 30, 2016 and 2015, and (v) Notes to Consolidated Financial Statements.**

**Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for

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purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CITIZENS FIRST CORPORATION


Date: August 11, 2016	/s/ M. Todd Kanipe
	M. Todd Kanipe
	President and Chief Executive Officer


Date: August 11, 2016	/s/ J. Steven Marcum
	J. Steven Marcum
	Executive Vice President and Chief Financial Officer

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