Citizens First (CZFC) 10-Q 2015 Q2 Quarterly report

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, 2015

Or

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.

1,968,777 shares of Common Stock, no par value, were outstanding at August 10, 2015.

CITIZENS FIRST CORPORATION

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
ITEM 1	FINANCIAL STATEMENTS	3
ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	34
ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	51
ITEM 4	CONTROLS AND PROCEDURES	52
PART II — OTHER INFORMATION
ITEM 6	EXHIBITS	53
SIGNATURES		55

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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, 2015		December 31, 2014
	Unaudited
Assets
Cash and due from financial institutions	$	9,438	$	7,962
Federal funds sold	24,100		3,360
Cash and cash equivalents	33,538		11,322
Available-for-sale securities	58,352		58,986
Loans held for sale	80		—
Loans, net of allowance for loan losses of $4,983 and $4,885 at June 30, 2015 and December 31, 2014, respectively	309,132		313,592
Premises and equipment, net	10,649		10,758
Bank owned life insurance (BOLI)	8,084		7,993
Federal Home Loan Bank (FHLB) stock, at cost	2,025		2,025
Accrued interest receivable	1,499		1,527
Deferred income taxes	1,545		1,479
Goodwill	4,097		4,097
Core deposit intangible	300		336
Other real estate owned	212		198
Other assets	588		501
Total Assets	$	430,101	$	412,814
Liabilities
Deposits
Noninterest bearing	$	44,330	$	41,975
Savings, NOW and money market	158,583		148,935
Time	165,882		150,874
Total deposits	368,795		341,784
FHLB advances and other borrowings	16,000		25,500
Subordinated debentures	5,000		5,000
Accrued interest payable	242		231
Other liabilities	2,027		1,851
Total Liabilities	392,064		374,366
Stockholders’ Equity
6.5% cumulative convertible preferred stock; no par value, authorized 250 shares, aggregate liquidation preference of $7,998; issued and outstanding 250 shares at June 30, 2015 and December 31, 2014, respectively	7,659		7,659
Common stock, no par value, authorized 5,000,000 shares; issued and outstanding 1,968,777 shares at June 30, 2015 and December 31, 2014, respectively	25,366		27,072
Retained earnings	4,797		3,373
Accumulated other comprehensive income	215		344
Total stockholders’ equity	38,037		38,448
Total liabilities and stockholders’ equity	$	430,101	$	412,814

See Notes to Unaudited Consolidated Financial Statements

3

Citizens First Corporation

Unaudited Consolidated Statements of Income

	Three months ended
	(In Thousands, Except Per Share Data)
	June 30,2015		June 30, 2014
Interest and dividend income
Loans	$	4,108	$	3,879
Taxable securities	154		151
Non-taxable securities	173		167
Federal funds sold and other	34		33
Total interest and dividend income	4,469		4,230
Interest expense
Deposits	580		551
FHLB advances and other	74		126
Subordinated debentures	24		24
Total interest expense	678		701
Net interest income	3,791		3,529
Provision for loan losses	120		150
Net interest income after provision for loan losses	3,671		3,379
Non-interest income
Service charges on deposit accounts	358		296
Other service charges and fees	176		141
Gain on sale of mortgage loans	79		51
Non-deposit brokerage fees	87		75
Lease income	70		74
BOLI income	46		47
Gain on sale of securities available-for-sale (includes $10 in 2015 and $74 in 2014 in accumulated other comprehensive income reclassifications for unrealized net gains on available-for-sale-securities)	10		74
Total non-interest income	826		758
Non-interest expenses
Salaries and employee benefits	1,589		1,486
Net occupancy expense	493		479
Advertising and public relations	123		93
Professional fees	187		149
Data processing services	238		248
Franchise shares and deposit tax	145		145
FDIC insurance	63		74
Core deposit intangible amortization	17		82
Postage and office supplies	52		59
Other real estate owned expenses	29		47
Other	310		271
Total non-interest expenses	3,246		3,133
Income before income taxes	1,251		1,004
Income taxes	352		271
Net income	899		733
Dividends on preferred stock	130		127
Net income available for common stockholders	$	769	$	606
Basic earnings per common share	$	0.39	$	0.31
Diluted earnings per common share	$	0.35	$	0.29

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, 2015		June 30, 2014
Interest and dividend income
Loans	$	8,058	$	7,722
Taxable securities	306		292
Non-taxable securities	349		332
Federal funds sold and other	62		65
Total interest and dividend income	8,775		8,411
Interest expense
Deposits	1,129		1,094
FHLB advances and other	145		243
Subordinated debentures	48		47
Total interest expense	1,322		1,384
Net interest income	7,453		7,027
Provision for loan losses	200		275
Net interest income after provision for loan losses	7,253		6,752
Non-interest income
Service charges on deposit accounts	675		557
Other service charges and fees	311		294
Gain on sale of mortgage loans	110		75
Non-deposit brokerage fees	179		144
Lease income	143		149
BOLI income	91		94
Gain on sale of securities available-for-sale (includes $10 in 2015 and $74 in 2014 accumulated other comprehensive income reclassifications for unrealized net gains on available-for-sale-securities) comprehensive income reclassifications for unrealized net gains on available-for- sale securities)	10		74
Total non-interest income	1,519		1,387
Non-interest expenses
Salaries and employee benefits	3,237		3,013
Net occupancy expense	1,021		961
Advertising and public relations	175		176
Professional fees	351		302
Data processing services	477		481
Franchise shares and deposit tax	291		291
FDIC insurance	122		151
Core deposit intangible amortization	35		166
Postage and office supplies	92		110
Other real estate owned expenses	36		57
Other	612		487
Total non-interest expenses	6,449		6,195
Income before income taxes	2,323		1,944
Income taxes	642		520
Net income	1,681		1,424
Dividends and accretion on preferred stock	258		259
Net income available for common stockholders	$	1,423	$	1,165
Basic earnings per common share	$	0.72	$	0.59
Diluted earnings per common share	$	0.64	$	0.56

See Notes to Unaudited Consolidated Financial Statements

5

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, 2015			June 30,2014
Comprehensive income (loss), net of tax
Net income	$	899		$	733
Other comprehensive income (loss)
Reclassification adjustment for gains included in net income, net of taxes	(7		)	(49		)
Change in unrealized gain (loss) on available for sale securities, net of taxes	(371		)	331
Total other comprehensive income (loss)	(378		)	282
Comprehensive income	$	521		$	1,015
	Six months ended
	(In Thousands, Except Per Share Data)
	June 30, 2015			June 30, 2014
Comprehensive income (loss), net of tax
Net income	$	1,681		$	1,424
Other comprehensive income (loss)
Reclassification adjustment for gains included in net income, net of taxes	(7		)	(49		)
Change in unrealized gain (loss) on available for sale securities, net of taxes	(122		)	604
Total other comprehensive income (loss)	(129		)	555
Comprehensive income	$	1,552		$	1,979

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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 (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

	Preferred Stock			Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, January 1, 2014	$	10,925		$	27,072	$	653		$	(303	)	$	38,347
Net income						1,424						1,424
Redemption of Series A preferred stock	(3,266		)									(3,266		)
Change in accumulated other comprehensive loss									555			555
Dividend declared and paid on preferred stock						(259		)				(259		)
Balance, June 30, 2014	$	7,659		$	27,072	$	1,818		$	252		$	36,801

See Notes to Unaudited Consolidated Financial Statements

7

Citizens First Corporation

Unaudited Consolidated Statements of Cash Flows

	Six months ended
	(In Thousands)
	June 30, 2015			June 30, 2014
Operating Activities
Net income	$	1,681		$	1,424
Items not requiring (providing) cash:
Depreciation and amortization	276			277
Provision for loan losses	200			275
Amortization of premiums and discounts on securities	170			138
Amortization of core deposit intangible	35			166
Deferred income taxes	—			796
BOLI income	(91		)	(94		)
Proceeds from sale of mortgage loans	5,225			2,956
Origination of mortgage loans held for sale	(5,195		)	(3,167		)
Gains on sales of available-for-sale securities	(10		)	(74		)
Gains on sales of mortgage loans	(110		)	(75		)
Write-downs and losses on sale of other real estate owned	35			35
Gain on sale premises and equipment	(8		)	(11		)
Changes in:
Accrued interest receivable	28			18
Other assets	(86		)	(304		)
Accrued interest payable and other liabilities	187			23
Net cash provided by operating activities	2,337			2,383
Investing Activities
Loan originations and payments, net	4,149			(16,462		)
Purchase of premises and equipment	(158		)	(115		)
Proceeds from maturities of available-for-sale securities	3,468			3,252
Proceeds from sales of available-for-sale securities	1,010			5,888
Proceeds from sales of other real estate owned	62			300
Purchase of available-for-sale securities	(4,199		)	(12,135		)
Proceeds from sales of premises and equipment	—			23
Net cash provided by (used in) investing activities	4,332			(19,249		)
Financing Activities
Net change in demand deposits, money market, NOW and savings accounts	12,003			696
Net change in time deposits	15,008			2,163
Repayment of FHLB advances	(11,000		)	—
Repayment of TARP preferred stock	—			(3,266		)
Repurchase of TARP warrants	(1,706		)	—
Proceeds from other borrowings	1,500			3,300
Dividends paid on preferred stock	(258		)	(259		)
Net cash provided by financing activities	15,547			2,634
Increase in Cash and Cash Equivalents	22,216			(14,232		)
Cash and Cash Equivalents, Beginning of Year	11,322			37,062
Cash and Cash Equivalents, End of Quarter	$	33,538		$	22,830
Supplemental Cash Flows Information
Interest paid	$	1,311		$	1,389
Income taxes paid	$	525		$	10
Loans transferred to other real estate owned	$	111		$	100

8

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 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 consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2014 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.  The consolidated balance sheet of the Company as of December 31, 2014 has been derived from the audited consolidated balance sheet of the Company as of that date.

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

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improves disclosures about revenue. In addition, this amendment specifies the accounting for some costs to obtain or fulfill a contract with a customer. These amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Bank is currently evaluating the impact of this new accounting standard on the consolidated financial statements.

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, 2015 and December 31, 2014 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income(loss):

10

	(Dollars in Thousands)
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
June 30, 2015
U. S. government agencies and government sponsored entities	$	2,998	$	—	$	(24	)	$	2,974
Agency mortgage-backed securities:
residential	27,408		357		(63		)	27,702
State and municipal	24,742		606		(130		)	25,218
Trust preferred security	1,878		—		(428		)	1,450
Corporate bonds	1,000		8		—			1,008
Total Available-for-Sale Securities	$	58,026	$	971	$	(645	)	$	58,352
December 31, 2014
U. S. government agencies and government sponsored entities	$	2,999	$	—	$	(51	)	$	2,948
Agency mortgage-backed securities:
residential	27,241		309		(31		)	27,519
State and municipal	25,350		793		(104		)	26,039
Trust preferred security	1,876		—		(396		)	1,480
Corporate bonds	1,000		—		—			1000
Total Available-for-Sale Securities	$	58,466	$	1,102	$	(582	)	$	58,986

The amortized cost and fair value of investment securities at June 30, 2015 by contractual maturity were as follows.  Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

	June 30, 2015
	(Dollars in Thousands)
	Available-For-Sale
	Amortized Cost		Fair Value
Due in one year or less	$	580	$	588
Due from one to five years	12,357		12,488
Due from five to ten years	10,600		10,785
Due after ten years	7,081		6,789
Agency mortgage-backed: residential	27,408		27,702
Total	$	58,026	$	58,352

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The following table summarizes the investment securities with unrealized losses by portfolio segment at June 30, 2015 and December 31, 2014, 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			Unrealized					Unrealized					Unrealized
Securities	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
June 30, 2015:
U.S. government agencies and government sponsored entities	$	995	$	(3	)	$	1,979	$	(21	)	$	2,974	$	(24	)
Agency mortgage-backed:
residential	3,153		(21		)	1,553		(42		)	4,706		(63		)
State and municipal	7,002		(76		)	578		(54		)	7,580		(130		)
Trust preferred security	—		—			1,450		(428		)	1,450		(428		)
Total temporarily impaired	$	11,150	$	(100	)	$	5,560	$	(545	)	$	16,710	$	(645	)
	(Dollars in Thousands)
	Less than 12 Months					12 Months or More					Total
Description of			Unrealized					Unrealized					Unrealized
Securities	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
December 31, 2014:
U.S. government agencies and government sponsored entities	$	992	$	(8	)	$	1,955	$	(43	)	$	2,947	$	(51	)
Agency mortgage-backed:
residential	1,134		(2		)	1,678		(29		)	2,812		(31		)
State and municipal	4,891		(24		)	2,530		(80		)	7,421		(104		)
Trust preferred security	—		—			1,480		(396		)	1,480		(396		)
Total temporarily impaired	$	7,017	$	(34	)	$	7,643	$	(548	)	$	14,660	$	(582	)

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

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(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.

Approximately 79% 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 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.

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Note 4 - Loans and Allowance for Loan Losses

Categories of loans include:

	(Dollars in Thousands)
	June 30, 2015			December 31, 2014
Commercial	$	43,796		$	43,439
Commercial real estate:
Construction	21,206			18,064
Other	169,572			174,032
Residential real estate	75,151			78,270
Consumer:
Auto	1,428			1,820
Other	2,962			2,852
Total Loans	314,115			318,477
Less Allowance for loan losses	(4,983		)	(4,885		)
Net loans	$	309,132		$	313,592

The following table sets forth an analysis of our allowance for loan losses for the three months ending June 30, 2015 and 2014.

	(Dollars in Thousands)
June 30, 2015	Commercial			Commercial Real Estate		Residential Real Estate			Consumer			Unallocated			Total
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

	(Dollars in Thousands)
June 30, 2014	Commercial			Commercial Real Estate		Residential Real Estate			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	937		$	3,013	$	699		$	71		$	107	$	4,827
Provision for loan losses	(77		)	165		15			5			42		150
Loans charged-off	—			—		(71		)	(10		)	—		(81		)
Recoveries	42			11		3			1			—		57
Total ending allowance balance	$	902		$	3,189	$	646		$	67		$	149	$	4,953

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The following table sets forth an analysis of our allowance for loan losses for the six months ending June 30, 2015 and 2014.

	(Dollars in Thousands)
June 30, 2015	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Unallocated			Total
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

	(Dollars in Thousands)
June 30, 2014	Commercial			Commercial Real Estate		Residential Real Estate			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	1,420		$	2,079	$	703		$	86		$	365		$	4,653
Provision for loan losses	(577		)	1,052		24			(8		)	(216		)	275
Loans charged-off	—			—		(90		)	(13		)	—			(103		)
Recoveries	59			58		9			2			—			128
Total ending allowance balance	$	902		$	3,189	$	646		$	67		$	149		$	4,953

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, 2015 and December 31, 2014, which includes net deferred loan fees.  As of June 30, 2015 and December 31, 2014, accrued interest receivable of $1.2 million and $1.2 million, respectively, are not considered significant and therefore not included in the recorded investment in loans presented in the following tables.

15

	(Dollars in Thousands)
June 30, 2015	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	119	$	382	$	—	$	—	$	—	$	501
Collectively evaluated	638		3,223		447		38		136		4,482
Total ending allowance balance	$	757	$	3,605	$	447	$	38	$	136	$	4,983
Loans:
Individually evaluated for impairment	$	1,814	$	2,235	$	1,010	$	10	$	—	$	5,069
Collectively evaluated	41,982		188,543		74,141		4,380		—		309,046
Total ending loans balance	$	43,796	$	190,778	$	75,151	$	4,390	$	—	$	314,115

	(Dollars in Thousands)
December 31, 2014	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	342	$	220	$	7	$	10	$	—	$	579
Collectively evaluated	687		2,868		575		35		141		4,306
Total ending allowance balance	$	1,029	$	3,088	$	582	$	45	$	141	$	4,885
Loans:
Individually evaluated for impairment	$	2,696	$	1,057	$	1,098	$	22	$	—	$	4,873
Collectively evaluated	40,743		191,039		77,172		4,650		—		313,604
Total ending loans balance	$	43,439	$	192,096	$	78,270	$	4,672	$	—	$	318,477

The following table presents information related to impaired loans by class of loans as of June 30, 2015 and December 31, 2014. 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.

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	(Dollars in Thousands)						(Dollars in Thousands)
	June 30, 2015						December 31, 2014
	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	$	867	$	867	$	—	$	1,129	$	1,129	$	—
Commercial real estate:
Construction	—		—		—		—		—		—
Other	154		154		—		—		—		—
Residential real estate	1,004		1,004		—		1,026		1,026		—
Consumer:							—
Auto	—		—		—		—		—		—
Other	—		—		—		—		—		—
Subtotal	$	2,025	$	2,025	$	—	$	2,155	$	2,155	$	—
With an allowance recorded:
Commercial	$	947	$	947	$	119	$	1,567	$	1,567	$	342
Commercial real estate:
Construction	—		—		—		—		—		—
Other	2,081		2,081		382		1,057		1,057		220
Residential real estate	6		6		—		72		72		7
Consumer:
Auto	—		—		—		10		10		10
Other	10		10		—		12		12		—
Subtotal	$	3,044	$	3,044	$	501	$	2,718	$	2,718	$	579
Total	$	5,069	$	5,069	$	501	$	4,873	$	4,873	$	579

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Information on impaired loans for the three months ending June 30, 2015 and 2014 is as follows:

	(Dollars in Thousands)						(Dollars in Thousands)
	June 30, 2015						June 30, 2014
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
Commercial	$	1,893	$	24	$	22	$	2,710	$	37	$	26
Commercial real estate:
Construction	—		—		—		—		—		—
Other	1,916		17		13		1,547		20		15
Residential real estate	1,014		12		9		1,305		16		11
Consumer:
Auto	—		—		—		18		—		—
Other	11		—		—		13		—		—
Total	$	4,834	$	53	$	44	$	5,593	$	73	$	52

Information on impaired loans for the six months ending June 30, 2015 and 2014 is as follows:

	(Dollars in Thousands)						(Dollars in Thousands)
	June 30, 2015						June 30, 2014
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
Commercial	$	1,972	$	49	$	45	$	2,851	$	68	$	53
Commercial real estate:
Construction	—		—		—		—		—		—
Other	1,922		31		32		1,791		40		29
Residential real estate	1,019		25		18		1,322		31		20
Consumer:
Auto	—		—		—		19		1		—
Other	11		—		—		14		—		—
Total	$	4,924	$	105	$	95	$	5,997	$	140	$	102

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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, 2015 and December 31, 2014 are summarized below:

	(Dollars in Thousands)				(Dollars in Thousands)
	June 30,2015				December 31, 2014
	Loans Past Due Over 90 Days and Still Accruing		Nonaccrual		Loans Past Due Over 90 Days and Still Accruing		Nonaccrual
Commercial	$	—	$	157	$	—	$	748
Commercial real estate:
Construction	—		—		—		—
Other	—		592		—		45
Residential real estate	—		289		—		364
Consumer:
Auto	—		—		—		10
Other	—		—		—		—
Total	$	—	$	1,038	$	—	$	1,167

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, 2015 and December 31, 2014 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, 2015
Commercial	$	13	$	79	$	—	$	92	$	43,704	$	43,796
Commercial real estate:
Construction	—		—		—		—		21,206		21,206
Other	39		399		154		592		168,980		169,572
Residential real estate	79		70		227		376		74,775		75,151
Consumer:
Auto	—		—		—		—		1,428		1,428
Other	—		—		—		—		2,962		2,962
Subtotal	$	131	$	548	$	381	$	1,060	$	313,055	$	314,115

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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, 2014
Commercial	$	—	$	—	$	645	$	645	$	42,794	$	43,439
Commercial real estate:
Construction	—		—		—		—		18,064		18,064
Other	—		—		45		45		173,987		174,032
Residential real estate	31		—		362		393		77,877		78,270
Consumer:
Auto	—		—		—		—		1,820		1,820
Other	—		—		—		—		2,852		2,852
Subtotal	$	31	$	—	$	1,052	$	1,083	$	317,394	$	318,477

Troubled Debt Restructurings:

The Company reported total troubled debt restructurings of $4.1 million and $4.4 million as of June 30, 2015 and December 31, 2014, 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 14 troubled debt restructurings reported at quarter end, 13 loans totaling $4.0 million were accruing and 1 loan totaling $67,000 was on nonaccrual status.

The following table presents loans by class modified as troubled debt restructurings that occurred during the quarter ending June 30, 2015 and 2014:

		(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, 2015					June 30, 2014
Troubled Debt Restructurings:
Commercial real estate:
Other	2	$	1,547	$	1,547	1	$	924	$	924
Total	2	$	1,547	$	1,547	1	$	924	$	924

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The following table presents loans by class modified as trouble debt restructurings that occurred year to date as of June 30, 2015 and 2014.

		(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, 2015					June 30, 2014
Troubled Debt Restructurings:
Commercial real estate:
Other	2	$	1,547	$	1,547	1	$	924	$	924
Residential real estate	—	—		—		1	15		15
Total	2	$	1,547	$	1,547	2	$	939	$	939

Specific allocations of $243,000 and $547,000 were reported for troubled debt restructurings as of June 30, 2015 and December 31, 2014. Specific allocations of $337,000 were reported for the troubled debt restructurings as of June 30, 2014. No payment defaults were reported for troubled debt restructurings during the six months ending June 30, 2015 or June 30, 2014. No charge offs were taken on troubled debt restructurings during the three months ending June 30, 2015 or June 30, 2014.

The terms of certain other loans were modified during the six months ending June 30, 2015 and 2014 that did not meet the definition of a troubled debt restructuring. These loans modified during the three months ending June 30, 2015 have a total recorded investment of $12.3 million as of June 30, 2015. The loans modified during the six months ending June 30, 2014 have a total recorded investment of $13.9 million as of June 30, 2014. 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, 2015
Commercial	$	41,436	$	478	$	1,882	$	—	$	43,796
Commercial real estate:
Construction	21,206		—		—		—		21,206
Other	160,104		4,015		5,453		—		169,572
Residential real estate	73,902		575		674		—		75,151
Consumer:
Auto	1,428		—		—		—		1,428
Other	2,953		—		9		—		2,962
Total	$	301,029	$	5,068	$	8,018	$	—	$	314,115

	Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2014
Commercial	$	39,926	$	547	$	2,966	$	—	$	43,439
Commercial real estate:
Construction	18,064		—		—		—		18,064
Other	166,969		2,875		4,188		—		174,032
Residential real estate	76,756		772		742		—		78,270
Consumer:
Auto	1,820		—		—		—		1,820
Other	2,842		—		10		—		2,852
Total	$	306,377	$	4,194	$	7,906	$	—	$	318,477

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 fair value of this security is obtained directly from the broker which originally handled the security issue. The value is determined based on trades of similar securities with similar coupons.

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

24

value for each OREO property to certify that the fair value has not declined.  For each parcel of OREO that has declined in value, the Bank records the decline in value by a direct writedown of the asset.

Assets measured on a recurring basis:

	Fair Value Measurements at:
	(Dollars in Thousands)						(Dollars in Thousands)
	June 30, 2015						December 31, 2014
	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			$	2,974					$	2,948
Agency mortgage-backed securites-residential			27,702						27,519
State and municipal			25,218						26,039
Trust preferred security					1,450						1,480
Corporate bonds			1,008						1,000
Total investment securities	$	—	$	56,902	$	1,450	$	—	$	57,506	$	1,480

Assets measured on a non-recurring basis:

	Fair Value Measurement
	(Dollars in Thousands)
	June 30, 2015		December 31, 2014
	Significant Unobservable Inputs (Level 3)		Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial	$	65	$	423
Commercial RE	260		29
Residential	—		59
Other real estate owned:
Commercial RE	$	140	$	198
Residential	72		—

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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 $585,000 at June 30, 2015 with a valuation allowance of $260,000.  Impaired loans which were measured for impairment using the fair value of collateral for collateral-dependent loans had a principal balance of $841,000 at December 31, 2014, with a valuation allowance of $330,000.  An increase in the provision for loan losses of $233,000 and $22,000 was recognized for the six months ended June 30, 2015 and 2014, 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 $212,000 at June 30, 2015 and $198,000 at December 31, 2014.  Total writedowns of other real estate owned were $13,000 and $16,000 in the quarters ending June 30, 2015 and 2014, respectively. Total writedowns of other real estate owned were $23,000 and $33,000 in the six months ending June 30, 2015 and 2014, 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, 2015.

	June 30, 2015		Valuation Techniques	Unobservable Inputs (Dollars in thousands)	Range (Weighted Avg)
Impaired loans:
Commercial	$	65	Market Approach	Discounts to allow for market value of assets	(50.00)%
Commercial RE	260		Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition	(50.00)%
Other real estate owned:
Commercial RE	140		Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition	8%-40% (33.13)%
Residential RE	72		Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition	(61.54)%

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, 2014.

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	December 31, 2014		Valuation Techniques	Unobservable Inputs (Dollars in thousands)	Range (Weighted Avg)
Impaired loans:
Commercial	$	423	Market Approach	Discounts to allow for market value of assets	50%-70% (67.35)%
Commercial RE	29		Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition	(20.00)%
Residential	59		Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition	(10.00)%
Other real estate owned:
Commercial RE	198		Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition	8%-55% (38.29)%

Carrying amount and estimated fair values of financial instruments, not previously presented, were as follows:

			Fair Value Measurements at
			June 30, 2015
	Carrying Amount		Level 1		Level 2		Level 3	Total
Financial Assets
Cash and cash equivalents	$	33,538	$	33,290	$	248		$	33,538
Loans, net of allowance	308,807						310,874	310,874
Loans held for sale	80				82			82
Accrued interest receivable	1,499				320		1,179	1,499
Federal Home Loan Bank stock	2,025							N/A
Financial Liabilities
Demand and savings deposits	$	202,913	$	157,817				$	157,817
Time deposits	165,882				166,225			166,225
FHLB advances	13,000				12,872			12,872
Other borrowings	3,000				3,000			3,000
Subordinate debentures	5,000						2,836	2,836
Accrued interest payable	242		10		232			242

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			Fair Value Measurements at
			December 31, 2014
	Carrying Amount		Level 1		Level 2	Level 3	Total
Financial Assets
Cash and cash equivalents	$	11,322	$	11,322			$	11,322
Loans, net of allowance	313,081					316,075	316,075
Accrued interest recievable	1,527				323	1,204	1,527
Federal Home Loan Bank stock	2,025						N/A
Financial Liabilities
Demand and savings deposits	$	190,910	$	156,790			$	156,790
Time deposits	150,874				151,504		151,504
FHLB advances	24,000				23,835		23,835
Other borrowings	1,500				1,500		1,500
Subordinate debentures	5,000					2,395	2,395
Accrued interest payable	231		9		222		231

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

(c)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.

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

28

offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(e)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.

(f)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 quarters ending June 30, 2015 and 2014.

	Quarter ended June 30, 2015						Quarter ended June 30, 2014
				Weighted						Weighted
				Average	Per Share					Average	Per Share
	Income			Shares	Amount		Income			Shares	Amount
Basic earnings per share:
Net income	$	899					$	733
Less: Dividends on preferred stock during the quarter	(130		)				(127		)
Net income available to common shareholders	$	769		1,968,777	$	0.39	$	606		1,968,777	$	0.31
Effect of dilutive securities
Convertible preferred stock	130			568,890
Warrants				24,462						130,338
Diluted earnings per share
Net income available to common stockholders and assumed conversions	$	899		2,562,129	$	0.35	$	606		2,099,115	$	0.29

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	Six months ended June 30, 2015						Six months ended June 30, 2014
				Weighted						Weighted
				Average	Per Share					Average	Per Share
	Income			Shares	Amount		Income			Shares	Amount
Basic earnings per share:
Net income	$	1,681					$	1,424
Less: Dividends on preferred stock during the quarter	(258		)				(259		)
Net income available to common shareholders	$	1,423		1,968,777	$	0.72	$	1,165		1,968,777	$	0.59
Effect of dilutive securities
Convertible preferred stock	258			568,890
Warrants				85,759						125,995
Diluted earnings per share
Net income available to common stockholders and assumed conversions	$	1,681		2,623,426	$	0.64	$	1,165		2,094,772	$	0.56

Stock options for 29,276 and 72,931 shares of common stock were not considered in computing diluted earnings per common share for June 30, 2015 and 2014, respectively, because they are anti-dilutive.  Convertible preferred shares assuming full conversion totaled 568,890 shares as of June 30, 2015. On April 15, 2015, the Company repurchased the 254,218 warrants issued in 2008 to the US Treasury as part of its participation in the US Treasury’s Capital Purchase Program.  The repurchase price of the warrants was $1.7 million. Common stock warrants totaled 0 and 254,218 as of June 30, 2015 and 2014, respectively.

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, 2015 and December 31, 2014, the Company and Citizens First Bank, Inc. met all capital adequacy requirements to which it is 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

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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 2015, 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. For December 31, 2014, regulatory capital ratios were calculated under Basel I rules.

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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	(Dollars in Thousands)
									To Be Well Capitalized
					For Capital Adequacy				Under Prompt Corrective
	Actual				Purposes				Action Provisions
June 30, 2015	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk-Weighted Assets)
Consolidated	$	42,949	12.71	%	$	27,039	8.0	%	N/A		N/A
Citizens First Bank, Inc.	45,733		13.54	%	27,027		8.0	%	$	33,784	10.0	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated	38,715		11.45	%	20,279		6.0	%	N/A		N/A
Citizens First Bank, Inc.	41,501		12.28	%	20,270		6.0	%	27,027		8.0	%
Common Equity Tier I Capital (to Risk-Weighted Assets)
Consolidated	26,056		7.71	%	15,209		4.5	%	N/A		N/A
Citizens First Bank, Inc.	41,501		12.28	%	15,203		4.5	%	21,959		6.5	%
Tier I Leverage Capital to average assets
Consolidated	38,715		9.01	%	17,196		4.0	%	N/A		N/A
Citizens First Bank, Inc.	41,501		9.73	%	17,060		4.0	%	21,325		5.0	%

	(Dollars in Thousands)
									To Be Well Capitalized
					For Capital Adequacy				Under Prompt Corrective
	Actual				Purposes				Action Provisions
December 31, 2014	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk-Weighted Assets)
Consolidated	$	42,879	12.74	%	$	26,929	8.0	%	N/A		N/A
Citizens First Bank, Inc.	44,056		13.09	%	26,929		8.0	%	$	33,661	10.0	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated	38,671		11.49	%	13,465		4.0	%	N/A		N/A
Citizens First Bank, Inc.	39,837		11.83	%	13,465		4.0	%	20,197		6.0	%
Tier I Leverage Capital to average assets
Consolidated	38,671		9.42	%	16,415		4.0	%	N/A		N/A
Citizens First Bank, Inc.	39,837		9.78	%	16,294		4.0	%	20,368		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.

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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 2014 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, 2015, we reported net income of $899,000, or $0.35 per diluted common share, compared to net income of $733,000, or $0.29 per diluted common share in the second quarter of 2014, an increase of $166,000.  The increase in net income is primarily attributable to an improvement in net interest income of $262,000 as the volume of earning assets increased from the prior year.

For the six months ended June 30, 2015, the Company reported net income of $1.68 million, or $0.64 per diluted common share. This represents an increase of $257,000, or

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$0.08 per share, from the net income of $1.42 million in the previous year. The increase in net income is primarily attributable to an increase in net interest income of $426,000 partially offset by an increase in non-interest expense of $254,000.

Our annualized return on average assets, defined as net income divided by average assets, was 0.79% for the six months ended June 30, 2015, compared to 0.69% in June 30, 2014.  Our annualized return on average equity, defined as net income divided by average equity, was 8.78% for the six months ending June 30, 2015, compared to 7.90% for the six months ending June 30, 2014.

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, 2015 increased $262,000, or 7.4%, compared to June 30, 2014. The increase in net interest income was a result of an increase in the volume of average earning assets over the previous year.

For the six months ended June 30, 2015, net interest income was $7.5 million, an increase of $426,000, or 6.1%, from net interest income of $7.0 million for the comparable period in 2014.  Net interest income increased as a result of an increase in interest income of $364,000 plus lower interest expense on deposits and borrowings of $62,000.

The net interest margin for the six months ended June 30, 2015 was 3.84%, compared to 3.77% in 2014.  The increase of 7 basis points is attributable primarily to the decrease in the cost of average interest-bearing liabilities.

The following tables set forth for the quarter and six months ended June 30, 2015 and 2014, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs.  Such yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented.

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

Quarter ended June 30,

	2015						2014
	Average Balance		Income/ Expense		Average Rate		Average Balance		Income/ Expense		Average Rate
Earning assets:
Federal funds sold	$	23,670	$	12	0.20	%	$	26,794	$	13	0.19	%
Available-for-sale securities (1)
Taxable	34,530		154		1.79	%	34,867		151		1.74	%
Nontaxable	23,830		261		4.39	%	20,281		252		4.98	%
Federal Home Loan Bank stock	2,025		20		3.96	%	2,025		20		3.96	%
Loans receivable (2)	319,758		4,108		5.15	%	303,489		3,879		5.13	%
Total interest earning assets	403,813		4,555		4.52	%	387,456		4,315		4.47	%
Non-interest earning assets	30,190						32,174
Total Assets	$	434,003					$	419,630
Interest-bearing liabilities:
NOW accounts	$	113,224	$	102	0.36	%	$	105,134	$	108	0.41	%
Money market accounts	27,208		28		0.41	%	23,212		20		0.35	%
Savings accounts	20,530		10		0.20	%	17,931		10		0.22	%
Time deposits	166,048		440		1.06	%	163,543		413		1.01	%
Total interest-bearing deposits	327,010		580		0.71	%	309,820		551		0.71	%
Borrowings	18,022		74		1.65	%	25,300		126		2.00	%
Subordinated debentures	5,000		24		1.93	%	5,000		24		1.93	%
Total interest-bearing liabilities	350,032		678		0.78	%	340,120		701		0.83	%
Non-interest bearing deposits	43,810						41,123
Other liabilities	1,981						1,886
Total liabilities	395,823						383,129
Stockholders’ equity	38,180						36,501
Total Liabilities and Stockholders’ Equity	$	434,003					$	419,630
Net interest income			$	3,877					$	3,614
Net interest spread (1)					3.75	%					3.64	%
Net interest margin (1) (3)					3.85	%					3.74	%
Return on average assets ratio					0.83	%					0.70	%
Return on average equity ratio					9.44	%					8.05	%
Average equity to assets ratio					8.80	%					8.70	%

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

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

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

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

Six months ended June 30,

	2015						2014
	Average Balance		Income/ Expense		Average Rate		Average Balance		Income/ Expense		Average Rate
Earning assets:
Federal funds sold	$	19,927	$	21	0.21	%	$	25,279	$	25	0.20	%
Available-for-sale securities (1)
Taxable	34,516		306		1.79	%	33,634		292		1.75	%
Nontaxable	24,025		526		4.42	%	20,085		500		5.02	%
Federal Home Loan Bank stock	2,025		41		4.08	%	2,025		40		3.98	%
Loans receivable (2)	320,390		8,058		5.07	%	303,464		7,722		5.13	%
Total interest earning assets	400,883		8,952		4.50	%	384,487		8,579		4.50	%
Non-interest earning assets	30,239						32,386
Total Assets	$	431,122					$	416,873
Interest-bearing liabilities:
NOW accounts	$	111,869	$	198	0.36	%	$	105,288	$	218	0.42	%
Money market accounts	25,898		50		0.39	%	23,559		40		0.34	%
Savings accounts	19,955		19		0.19	%	17,339		20		0.23	%
Time deposits	164,091		862		1.06	%	161,356		816		1.02	%
Total interest-bearing deposits	321,813		1,129		0.71	%	307,542		1,094		0.72	%
Borrowings	19,983		145		1.46	%	25,045		243		1.96	%
Subordinated debentures	5,000		48		1.94	%	5,000		47		1.90	%
Total interest-bearing liabilities	346,796		1,322		0.77	%	337,587		1,384		0.83	%
Non-interest bearing deposits	43,746						40,987
Other liabilities	1,978						1,941
Total liabilities	392,520						380,515
Stockholders’ equity	38,602						36,358
Total Liabilities and Stockholders’ Equity	$	431,122					$	416,873
Net interest income			$	7,630					$	7,195
Net interest spread (1)					3.73	%					3.67	%
Net interest margin (1) (3)					3.84	%					3.77	%
Return on average assets ratio					0.79	%					0.69	%
Return on average equity ratio					8.78	%					7.90	%
Average equity to assets ratio					8.95	%					8.72	%

(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, 2015 and 2014.  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, 2015 Vs. 2014
	Increase (Decrease) Due to
	Rate		Volume		Net
Interest-earning assets:
Federal funds sold	1		(5	)	(4	)
Available-for-sale securities
Taxable	6		8		14
Nontaxable (1)	(72	)	98		26
Federal Home Loan Bank stock	1		—		1
Loans, net	(95	)	431		336
Total Net Change in income on interest-earning assets	(159	)	532		373
Interest-bearing liabilities:
NOW accounts	(34	)	14		(20	)
Money market accounts	6		4		10
Savings accounts	(4	)	3		(1	)
Time deposits	32		14		46
FHLB and other borrowings	(49	)	(49	)	(98	)
Subordinated debentures	1		—		1
Total Net Change in expense on interest-earning liabilities	(48	)	(14	)	(62	)
Net change in net interest income	(111	)	546		435
Percentage change	-25.52	%	125.52	%	100.0	%

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

Provision for Loan Losses

A provision for loan losses of $120,000 was recorded for the second quarter of 2015, compared to $150,000 in the second quarter of 2014. The allowance for loan losses to total loans was 1.59% of total loans at June 30, 2015 and June 30, 2014, respectively.

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Net charge-offs were $85,000 for the second quarter of 2015 compared to $24,000 in the second quarter of 2014.

Provision expense for the six months ended June 30, 2015 decreased $75,000, from $275,000 to $200,000. Net charge-offs (recoveries) were $102,000 for the six months ended June 30, 2015 compared to ($25,000) for the six months ended June 30, 2014.

Non-Interest Income

Non-interest income for the three months ended June 30, 2015 increased $68,000, or 9.0%, compared to the three months ended June 30, 2014, primarily due to an increase in service charges on deposit accounts due to the introduction of a new consumer deposit transaction account.

Non-interest income for the six months ended June 30, 2015 increased $132,000, or 9.5%, compared to the six months ended June 30, 2014, primarily due to an increase in service charges on deposit accounts, gain on sale of mortgage loans and non-deposit brokerage fees.

Non-Interest Expense

Non-interest expense for the three months ended June 30, 2015 increased $113,000, or 3.6%, compared to the three months ended June 30, 2014, 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, 2015 increased $254,000, or 4.1%, compared to the six months ended June 30, 2014, primarily due to an increase in personnel expenses, occupancy expense and other operating expenses.

Income Taxes

Income tax expense was calculated using our expected effective rate for 2015 and 2014.  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 2015 and 2014. The effective tax rate for the second quarter of 2015 was 28.1% compared to a 27.0% effective tax rate for the second quarter of 2014. The effective tax rate year-to-date was 27.6% compared to 26.7% for 2014. 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, 2015 were $430.1 million, an increase of $17.3 million, or 4.2%, from $412.8 million at December 31, 2014.  Average assets during the second quarter were $434.0 million, an increase of 3.4%, or $14.4 million, from $419.6 million in the second quarter of 2014.  Average interest earning assets increased 6.7%, or $25.3 million, from $387.5 million in the second quarter of 2014 to $403.8 million in the second quarter of 2015.

Loans

Loans decreased $4.4 million, or 1.4%, from $318.5 million at December 31, 2014 to $314.1 million at June 30, 2015.  Total loans averaged $319.8 million the second quarter of 2015, compared to $303.5 million the second quarter of 2014, an increase of $16.3 million, or 5.4%.  We experienced a slight increase in commercial loans that was offset by decreases in the other loan portfolios during the first six months of the year compared to December 31, 2014. The following table presents a summary of the loan portfolio by category:

	(Dollars in Thousands)
	June 30, 2015				December 31, 2014
			% of Total Loans				% of Total Loans
Commercial and agricultural	$	43,796	13.94	%	$	43,439	13.64	%
Commercial real estate	190,778		60.74	%	192,096		60.32	%
Residential real estate	75,151		23.92	%	78,270		24.57	%
Consumer	4,390		1.40	%	4,672		1.47	%
	$	314,115	100	%	$	318,477	100	%

The majority of our loans are to customers located in south central Kentucky and central Tennessee.  As of June 30, 2015, our twenty largest credit relationships consisted of loans and loan commitments ranging from $3.7 million to $7.7 million.  The aggregate amount of these credit relationships was $92.5 million. As of December 31, 2014, our twenty largest credit relationships consisted of loans and loan commitments ranging from $3.9 million to $7.8 million.  The aggregate amount of these credit relationships was $95.4 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, 2015 and December 31, 2014.

As of June 30, 2015, we had $21.1 million of participations in loans purchased from, and $18.2 million of participations in loans sold to, other banks. As of December 31, 2014, we had $18.1 million of participations in loans purchased from, and $19.9 million of participations in loans sold to, other banks.

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The following table sets forth the maturity distribution of the loan portfolio as of June 30, 2015.  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	Within One Year		After One but Within Five Years		After Five Years		Total
as of June 30, 2015
Commercial and agricultural	$	19,949	$	15,834	$	8,013	$	43,796
Commercial real estate	34,513		111,042		45,223		190,778
Residential real estate	8,093		31,075		35,983		75,151
Consumer	1,121		3,229		40		4,390
Total	$	63,676	$	161,180	$	89,259	$	314,115

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, 2015				December 31, 2014
	Amount		% of Loans in Each Category to Toal Loans		Amount		% of Loans in Each Category to Toal Loans
Residential real estate loans	$	447	23.92	%	$	582	24.57	%
Consumer and other loans	38		1.40	%	45		1.47	%
Commercial and agricultural	757		13.94	%	1,029		13.64	%
Commercial real estate	3,605		60.74	%	3,088		60.32	%
Unallocated	136		0.00	%	141		0.00	%
Total allowance for loan losses	$	4,983	100.00	%	$	4,885	100.00	%

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

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conditions and actual collection and charge-off experience. The unallocated portion of the allowance decreased from $141,000 at December 31, 2014 to $136,000 at June 30, 2015.

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

	(Dollars in Thousands)
	June 30,			December 31,
	2015			2014
Non-accrual loans	$	971		$	446
Loans 90+ days past due/accruing	—			—
Restructured loans on non-accrual	67			721
Total non-performing loans	1,038			1,167
Other real estate owned	212			198
Total non-performing assets	$	1,250		$	1,365
Non-performing loans to total loans	0.33		%	0.37		%
Non-performing assets to total assets	0.29		%	0.33		%
Net-charge-offs YTD	102			43
Net charge-offs YTD to average YTD total loans, annualized	0.06		%	0.01		%
Allowance for loan losses to non-performing loans	480.06		%	418.60		%
Allowance for loan losses to total loans	1.59		%	1.53		%

Non-performing assets totaled $1.3 million at June 30 2015, compared to $1.4 million at December 31, 2014, a decrease of $115,000. Payoffs and paydowns of $885,000 included the charge off of $70,000 in principal, with decreases offset by the addition of $518,000 in commercial loans, $154,000 in commercial real estate loans, and $99,000 in residential real estate 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.

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,

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

The following table presents impaired loans and the related allowance for loan losses attributable to loans evaluated for impairment by portfolio segment for the periods indicated:

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	(Dollars in Thousands)
	June 30, 2015				December 31, 2014
	Loans		Allowance for Loan Losses		Loans		Allowance for Loan Losses
Residential real estate loans	$	1,010	$	—	$	1,098	$	7
Consumer and other loans	10		—		22		10
Commercial and agricultural	1,814		119		2,696		342
Commercial real estate	2,235		382		1,057		220
Impaired loans	5,069		501		4,873		579
Loans collectively evaluated for impairment	309,046		4,482		313,604		4,306
Total	$	314,115	$	4,983	$	318,477	$	4,885

The $196,000 increase in impaired loans during the six months ending June 30, 2015 is primarily attributed to three commercial real estate loans totaling $592,000, two residential real estate loans totaling $99,000, and a $79,000 commercial loan that were evaluated for impairment as of June 30, 2015, that were offset by the transfer of $80,000 from a residential real estate loan to OREO and subsequent charge off of a $15,000 deficiency balance on the loan, as well as paydowns, payoffs, and charge-offs through the regular collection and resolution of loans previously evaluated for impairment. The allowance for loan losses was impacted by the changes in the composition of the loans individually evaluated for impairment, the changes in the underlying collateral values and current values of future cash flows used in the evaluation of these loans. Changes in the composition and balances of the various segments of the loan portfolio, as well as the assessment of the qualitative factors inherent in the loan portfolio resulted in a $176,000 increase in the allowance attributable to loans collectively evaluated for impairment from December 31, 2014 to June 30, 2015.

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, a trust preferred security and a certificate of deposit.  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 $58.5 million for the first six months of 2015, compared to $53.7 million for 2014.

The tables below presents the maturities and yield characteristics of securities as of June 30, 2015 and December 31, 2014.  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.

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	(Dollars in Thousands)
June 30, 2015	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		$	2,974
Agency mortgage-backed securities: (1)	291			23,199			3,918			—			27,408			27,702
Municipal securities	580			9,359			9,600			5,203			24,742			25,218
Trust preferred security	—			—			—			1,878			1,878			1,450
Corporate bond	—			—			1,000			—			1,000			1,008
Total available-for-sale securities	$	871		$	35,556		$	14,518		$	7,081		$	58,026		$	58,352
Percent of total	1.50		%	61.28		%	25.02		%	12.20		%	100.00		%
Weighted average yield(2)	4.92		%	2.43		%	3.47		%	4.26		%	2.95		%

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

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

	(Dollars in Thousands)
December 31, 2014	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	$	—		$	1,999		$	1,000		$	—		$	2,999		$	2,948
Agency mortgage-backed securities: (1)	4			24,231			3,006			—			27,241			27,519
Municipal securities	535			7,802			11,466			5,547			25,350			26,039
Trust preferred security	—			—			—			1,876			1,876			1,480
Corporate bond	—			—			1,000			—			1,000			1,000
Total available-for-sale securities	$	539		$	34,032		$	16,472		$	7,423		$	58,466		$	58,986
Percent of total	0.92		%	58.21		%	28.17		%	12.70		%	100.00		%
Weighted average yield(2)	5.27		%	2.40		%	3.44		%	4.31		%	2.96		%

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.

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Deposits

Our primary funding source for lending and investment activities results from customer deposits and a deposit listing service.  Deposits at June 30, 2015 were $368.8 million, an increase of $27.0 million, or 7.9%, compared to $341.8 million at December 31, 2014.  Total deposits averaged $370.8 million the second quarter of 2015, an increase of $19.9 million, or 5.7%, compared to $350.9 million during the second quarter of 2014.  Average deposits increased during the year, but the cost of funds declined as higher cost deposits matured and were renewed at lower rates.

Time deposits that meet or exceed the FDIC insurance limit of $250,000 were $11.0 million and $8.1 million at June 30, 2015 and December 31, 2014, respectively. Time deposits of $100,000 or more totaled $79.4 million at June 30, 2015, compared to $63.4 million at December 31, 2014.  Interest expense on time deposits of $100,000 or more was $410,000 for the six months ended June 30, 2015, compared to $330,000 for the six months ended June 30, 2014.  Our cost has decreased as these certificates of deposit matured and were renewed at lower current market rates.  The following table shows the maturities of time deposits as of June 30, 2015.

	(Dollars in Thousands)
	June 30, 2015
Three months or less	$	21,633
Over three through six months	28,477
Over six through twelve months	59,234
Over one year through three years	48,258
Over three years through five years	8,276
Over five years	4
Total	$	165,882

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, 2015 were $13.0 million compared to $24.0 million at December 31, 2014. Rates vary based on the term to repayment, and are summarized below as of June 30, 2015:

				(Dollars in Thousands)
Type	Maturity	Rate		Amount
Fixed	December 2, 2015	1.14	%	5,000
Fixed	May 25, 2016	0.99	%	3,000
Fixed	June 3, 2016	0.68	%	2,000
Fixed	May 24, 2019	1.72	%	3,000
				$	13,000

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At June 30, 2015, we had available collateral to borrow an additional $63.5 million from the FHLB compared to $40.6 million at December 31, 2014.

Other Borrowings.  In 2014, 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 1, 2015, 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 Bank’s common stock.  As of June 30, 2015 the line was fully drawn at $3.0 million compared to a balance of $1.5 million at December 31, 2014.

At June 30, 2015, we had established Federal Funds lines of credit totaling $18.8 million with three correspondent banks.  No amounts were drawn as of June 30, 2015 or December 31, 2014.

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, 2015 was 1.92%.  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.

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Capital

Stockholders’ equity decreased $411,000, or 1.1%, from December 31, 2014 to June 30, 2015.  On April 15, 2015, the Company repurchased the 254,218 warrants issued in 2008 to the US Treasury as part of its participation in the US Treasury’s Capital Purchase Program.  The repurchase price of the warrants was $1.7 million, which offset the increase in stockholders’ equity due to net income less preferred dividends of $1.4 million.  The book value per common share declined to $15.43 as of June 30, 2015 compared to $15.64 at December 31, 2014 due to the warrants redemption.  No common dividends have been paid during 2015.

We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under the regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

In July 2013, the Federal Reserve Board and the FDIC approved final rules that substantially amend the regulatory capital rules applicable to the Company and the Bank. The final rules implement the regulatory capital reforms of the Basel Committee on Banking Supervision, commonly called Basel III, and changes required by the Dodd-Frank Act.

Under these rules, the leverage and risk-based capital ratios of bank holding companies may not be lower than the leverage and risk-based capital ratios for insured depository institutions. The final rules implementing the Basel III regulatory capital reforms became effective as to the Company and the Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. Moreover, these rules refine the definition of what constitutes “capital” for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital. The new minimum capital level requirements applicable to bank holding companies and banks subject to the rules are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); (iii) a total risk-based capital ratio of 8% (unchanged from current rules); (iv) a Tier 1 leverage ratio of 4% for all institutions. The rules also establish a “capital conservation buffer” of 2.5% (to be phased in over three years) above the new regulatory minimum risk-based capital ratios, and result in the following minimum ratios once the capital conservation buffer is fully phased in: (i) a common equity Tier 1 risk-based capital ratio of 7%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. The capital conservation buffer

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requirement is to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum plus the buffer amounts.

As a component of new BASEL III capital regulations, Citizens First Bank chose to “opt-out” of including accumulated other comprehensive income (AOCI) in regulatory capital with the filing of the March 31, 2015 Call Report.

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

	(Dollars in Thousands)
					For Capital Adequacy				To Be Well Capitalized Under Prompt Corrective
	Actual				Purposes				Action Provisions
June 30, 2015	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk-Weighted Assets)
Consolidated	$	42,949	12.71	%	$	27,039	8.0	%	N/A		N/A
Citizens First Bank, Inc.	45,733		13.54	%	27,027		8.0	%	$	33,784	10.0	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated	38,715		11.45	%	20,279		6.0	%	N/A		N/A
Citizens First Bank, Inc.	41,501		12.28	%	20,270		6.0	%	27,027		8.0	%
Common Equity Tier I Capital (to Risk-Weighted Assets)
Consolidated	26,056		7.71	%	15,209		4.5	%	N/A		N/A
Citizens First Bank, Inc.	41,501		12.28	%	15,203		4.5	%	21,959		6.5	%
Tier I Leverage Capital to average assets
Consolidated	38,715		9.01	%	17,196		4.0	%	N/A		N/A
Citizens First Bank, Inc.	41,501		9.73	%	17,060		4.0	%	21,325		5.0	%

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	(Dollars in Thousands)
									To Be Well Capitalized
					For Capital Adequacy				Under Prompt Corrective
	Actual				Purposes				Action Provisions
December 31, 2014	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk-Weighted Assets)
Consolidated	$	42,879	12.74	%	$	26,929	8.0	%	N/A		N/A
Citizens First Bank, Inc.	44,056		13.09	%	26,929		8.0	%	$	33,661	10.0	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated	38,671		11.49	%	13,465		4.0	%	N/A		N/A
Citizens First Bank, Inc.	39,837		11.83	%	13,465		4.0	%	20,197		6.0	%
Tier I Leverage Capital to average assets
Consolidated	38,671		9.42	%	16,415		4.0	%	N/A		N/A
Citizens First Bank, Inc.	39,837		9.78	%	16,294		4.0	%	20,368		5.0	%

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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.

At June 30, 2015, 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 9.58% 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 2.34%.  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 2015 - June 2016

Projected Interest Rate Change	Estimated Value	Net Interest Income $ Change From Base	% Change From Base
+400	18,066,701	3,283,550	22.21	%
+300	17,134,444	2,351,292	15.91	%
+200	16,199,800	1,416,649	9.58	%
Base	14,783,152	0	0.00	%
-200	14,437,089	-346,063	-2.34	%

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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	Restated Articles of Incorporation of Citizens First Corporation, as amended (incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form SB-2 (No. 333-103238)).
3.2	Articles of Amendment to Amended and Restated Articles of Incorporation of Citizens First Corporation (incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K dated June 5, 2007).
3.3	Articles of Amendment to Amended and Restated Articles of Incorporation of Citizens First Corporation (incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed December 23, 2008).
3.4	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 April 17, 2014).
4.1	Restated Articles of Incorporation of Citizens First Corporation, as amended (see Exhibit 3.1).
4.2	Articles of Amendment to Amended and Restated Articles of Incorporation of Citizens First Corporation (see Exhibits 3.2 and 3.3).
4.3	Amended and Restated Bylaws of Citizens First Corporation (see Exhibit 3.4).
4.4	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 March 31, 2007).
4.5	Warrant to Purchase Common Stock (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed December 23, 2008).
10	Citizens First Corporation 2015 Incentive Compensation Plan dated May 20, 2015.
10.1	Form of Citizens First Corporation 2015 Incentive Compensation Plan Performance Units Award Agreement.

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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, 2015 and December 31, 2014, (ii) the Consolidated Statements of Income for the six months ended June 30, 2015 and June 30, 2014, (iii) the Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2015 and June 30, 2014, (iv) Consolidated Statements of Cash Flows for the six month periods ended June 30, 2015 and 2014, 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 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 10, 2015	/s/M. Todd Kanipe
	M. Todd Kanipe
	President and Chief Executive Officer
Date: August 10, 2015	/s/ J. Steven Marcum
	J. Steven Marcum
	Executive Vice President and Chief Financial Officer

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