CITIZENS FIRST CORP - FORM 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2014

x 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 7, 2014.

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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	30

ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	46

ITEM 4	CONTROLS AND PROCEDURES	47

PART II — OTHER INFORMATION

ITEM 6	EXHIBITS	48

SIGNATURES		50

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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, 2014		December 31, 2013
	Unaudited
Assets
Cash and due from financial institutions	$	11,055	$	8,572
Federal funds sold	11,775		28,490
Cash and cash equivalents	22,830		37,062
Available-for-sale securities	55,405		51,633
Loans held for sale	286		—
Loans, net of allowance for loan losses of $4,953 and $4,653 at June 30, 2014 and December 31, 2013, respectively	306,502		290,415
Premises and equipment, net	10,880		11,054
Bank owned life insurance (BOLI)	7,900		7,806
Federal Home Loan Bank (FHLB) stock, at cost	2,025		2,025
Accrued interest receivable	1,536		1,554
Deferred income taxes	1,614		2,279
Goodwill	4,097		4,097
Core deposit intangible	499		665
Other real estate owned	598		833
Other assets	639		752
Total Assets	$	414,811	$	410,175
Liabilities
Deposits
Noninterest bearing	44,972		39,967
Savings, NOW and money market	139,293		143,602
Time	161,545		159,382
Total deposits	345,810		342,951
FHLB advances and other borrowings	25,300		22,000
Subordinated debentures	5,000		5,000
Accrued interest payable	239		243
Other liabilities	1,661		1,634
Total Liabilities	$	378,010	$	371,828
Stockholders’ Equity
6.5% cumulative preferred stock; no par value, authorized 250 shares, aggregate liquidation preference of $7,998; issued and outstanding 250 shares at June 30, 2014 and December 31, 2013, respectively	$	7,659	$	7,659
5.0% Series A cumulative preferred stock; no par value, authorized 250 shares, aggregate liquidation preference of $0 and $3,266; issued and outstanding 0 shares at June 30, 2014 and 93 shares at December 31, 2013	—		3,266
Common stock, no par value, authorized 5,000,000 shares; issued and outstanding 1,968,777 shares at June 30, 2014 and December 31, 2013, respectively	27,072		27,072
Retained earnings	1,818		653
Accumulated other comprehensive income (loss)	252		(303		)
Total stockholders’ equity	$	36,801	$	38,347
Total liabilities and stockholders’ equity	$	414,811	$	410,175

See Notes to Unaudited Consolidated Financial Statements

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Citizens First Corporation
Unaudited Consolidated Statements of Income

	Three months ended
	(In Thousands, Except Per Share Data)
	June 30, 2014		June 30, 2013
Interest and dividend income
Loans	$	3,879	$	4,022
Taxable securities	151		101
Non-taxable securities	167		165
Federal funds sold and other	33		37
Total interest and dividend income	4,230		4,325
Interest expense
Deposits	551		625
FHLB advances and other	126		121
Subordinated debentures	24		24
Total interest expense	701		770
Net interest income	3,529		3,555
Provision for loan losses	150		50
Net interest income after provision for loan losses	3,379		3,505
Non-interest income
Service charges on deposit accounts	296		321
Other service charges and fees	141		158
Gain on sale of mortgage loans	51		78
Non-deposit brokerage fees	75		78
Lease income	74		75
BOLI income	47		56
Gain on sale of securities available-for-sale (includes $74 in 2014 and $29 in 2013 accumulated other comprehensive income reclassifications for unrealized net gains on available-for-sale-securities)	74		29
Total non-interest income	758		795
Non-interest expenses
Salaries and employee benefits	1,486		1,417
Net occupancy expense	479		465
Advertising and public relations	93		110
Professional fees	149		174
Data processing services	248		272
Franchise shares and deposit tax	145		141
FDIC insurance	74		26
Core deposit intangible amortization	82		85
Postage and office supplies	59		35
Other real estate owned expenses	47		20
Other	271		434
Total non-interest expenses	3,133		3,179
Income before income taxes	1,004		1,121

Income taxes	271		333
Net income	$	733	$	788
Dividends and accretion on preferred stock	127		176
Net income available for common stockholders	$	606	$	612
Basic earnings per common share	$	0.31	$	0.31
Diluted earnings per common share	$	0.29	$	0.30

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, 2014		June 30, 2013
Interest and dividend income
Loans	$	7,722	$	8,147
Taxable securities	292		196
Non-taxable securities	332		334
Federal funds sold and other	65		76
Total interest and dividend income	8,411		8,753
Interest expense
Deposits	1,094		1,252
FHLB advances and other	243		231
Subordinated debentures	47		49
Total interest expense	1,384		1,532
Net interest income	7,027		7,221
Provision for loan losses	275		1,300
Net interest income after provision for loan losses	6,752		5,921
Non-interest income
Service charges on deposit accounts	557		612
Other service charges and fees	294		296
Gain on sale of mortgage loans	75		160
Non-deposit brokerage fees	144		143
Lease income	149		149
BOLI income	94		117
Gain on sale of securities available-for-sale (includes $74 in 2014 and $37 in 2013 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)	74		37
Total non-interest income	1,387		1,514
Non-interest expenses
Salaries and employee benefits	3,013		2,858
Net occupancy expense	961		926
Advertising and public relations	176		188
Professional fees	302		338
Data processing services	481		537
Franchise shares and deposit tax	291		282
FDIC insurance	151		111
Core deposit intangible amortization	166		169
Postage and office supplies	110		78
Other real estate owned expenses	57		31
Other	487		743
Total non-interest expenses	6,195		6,261
Income before income taxes	1,944		1,174

Income taxes	520		271
Net income	$	1,424	$	903
Dividends and accretion on preferred stock	259		393
Net income available for common stockholders	$	1,165	$	510
Basic earnings per common share	$	0.59	$	0.26
Diluted earnings per common share	$	0.56	$	0.25

See Notes to Unaudited Consolidated Financial Statements

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Citizens First Corporation

Unaudited Consolidated Statements of Comprehensive Income

In thousands, except share data

	Three months ended
	(In Thousands, Except Per Share Data)
	June 30, 2014			June 30, 2013
Comprehensive income (loss), net of tax
Net income	733			788
Other comprehensive income (loss)
Reclassification adjustment for gains included in net income, net	(49		)	(19		)
Change in unrealized gain (loss) on available for sale securities, net of $113 taxes in 2014 and $327 in 2013	331			(914		)
Total other comprehensive income (loss)	282			(933		)
Comprehensive income (loss)	$	1,015		$	(145	)

See Notes to Unaudited Consolidated Financial Statements

	Six months ended
	(In Thousands, Except Per Share Data)
	June 30, 2014			June 30, 2013

Comprehensive income (loss), net of tax
Net income	1,424			903
Other comprehensive income (loss)
Reclassification adjustment for gains included in net income, net	(49		)	(24		)
Change in unrealized gain (loss) on available for sale securities, net of $205 taxes in 2014 and $360 in 2013	604			(1,009		)
Total other comprehensive income (loss)	555			(1,033		)
Comprehensive income (loss)	$	1,979		$	(130	)

See Notes to Unaudited Consolidated Financial Statements

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Citizens First Corporation

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

In thousands, except share data

	Preferred Stock			Common Stock		Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total
Balance, January 1, 2013	$	14,178		$	27,072	$	(430	)	$	746		$	41,566
Net income						903						903
Series A preferred stock	(3,301		)									(3,301		)
Accretion on Series A preferred stock	35					(35		)				—
Change in other comprehensive loss									(1,033		)	(1,033		)
Dividend declared and paid on preferred stock						(359		)				(359		)
Balance, June 30, 2013	$	10,912		$	27,072	$	79		$	(287	)	$	37,776

	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
Repayment of 93 shares Series A preferred stock	(3,266		)									(3,266		)
Change in other comprehensive income									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

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Citizens First Corporation

Unaudited Consolidated Statements of Cash Flows

	Six months ended
	(In Thousands)
	June 30, 2014			June 30,2013
Operating Activities
Net income	$	1,424		$	903
Items not requiring (providing) cash:
Depreciation and amortization	277			310
Provision for loan losses	275			1,300
Amortization of premiums and discounts on securities	138			181
Amortization of core deposit intangible	166			169
Deferred income taxes	796			182
BOLI income	(94		)	(117		)
Proceeds from sale of mortgage loans	2,956			6,743
Origination of mortgage loans held for sale	(3,167		)	(6,678		)
Gains on sales of available-for-sale securities	(74		)	(37		)
Gains on sales of mortgage loans	(75		)	(160		)
Write-downs and losses on sale of other real estate owned	35			8
Gain on sale premises and equipment	(11		)	(9		)
Changes in:
Accrued interest receivable	18			(6		)
Other assets	(304		)	552
Accrued interest payable and other liabilities	23			923
Net cash provided by operating activities	2,383			4,264
Investing Activities
Loan originations and payments, net	(16,462		)	(8,959		)
Purchase of premises and equipment	(115		)	(36		)
Proceeds from maturities of available-for-sale securities	3,252			5,535
Proceeds from sales of available-for-sale securities	5,888			1,089
Proceeds from sales of other real estate owned	300			25
Purchase of available-for-sale securities	(12,135		)	(10,894		)
Proceeds from sales of premises and equipment	23			9
Net cash used in investing activities	(19,249		)	(13,231		)
Financing Activities
Net change in demand deposits, money market, NOW and savings accounts	696			(418		)
Net change in time deposits	2,163			5,911
Repayment of TARP preferred stock	(3,266		)	(3,301		)
Proceeds from other borrowings	3,300			2,300
Dividends paid on preferred stock	(259		)	(359		)
Net cash provided by financing activities	2,634			4,133
Decrease in Cash and Cash Equivalents	(14,232		)	(4,834		)
Cash and Cash Equivalents, Beginning of Year	37,062			34,799
Cash and Cash Equivalents, End of Quarter	$	22,830		$	29,965

Supplemental Cash Flows Information
Interest paid	$	1,389		$	1,487
Income taxes paid	$	10		$	260
Loans transferred to other real estate owned	$	100		$	359

See Notes to Unaudited Consolidated Financial Statements

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Citizens First Corporation

Notes to Unaudited Consolidated Financial Statements

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

The accounting and reporting policies of Citizens First Corporation (the “Company”) and its 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 2013 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, 2013 has been derived from the audited consolidated balance sheet of the Company as of that date.

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.

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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, 2014 and December 31, 2013 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss:

	(Dollars in Thousands)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2014
U. S. government agencies and government sponsored entities	$	5,991	$	—	$	(67	)	$	5,924
State and municipal	20,614		819		(131		)	21,302
Agency mortgage-backed securities: residential	25,544		267		(71		)	25,740
Trust preferred security	1,874		—		(434		)	1,440
Corporate Bonds	1,000		—		(1		)	999
Total Available-for-Sale Securities	$	55,023	$	1,086	$	(704	)	$	55,405

December 31, 2013
U. S. government agencies and government sponsored entities	$	6001	$	—	$	(182	)	$	5,819
State and municipal	19,394		547		(265		)	19,676
Agency mortgage-backed securities: residential	23,825		172		(253		)	23,744
Trust preferred security	1,872		—		(472		)	1,400
Corporate bond	1,000		—		(6		)	994
Total Available-for-Sale Securities	$	52,092	$	719	$	(1,178	)	$	51,633

The amortized cost and fair value of investment securities at June 30, 2014 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

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	June 30, 2014 (Dollars in Thousands)
	Available-For-Sale
	Amortized Cost		Fair Value
Due in one year or less	534		543
Due from one to five years	8,091		8,251
Due from five to ten years	11,978		12,226
Due after ten years	8,876		8,645
Agency mortgage-backed: residential	25,544		25,740
Total	$	55,023	$	55,405

The following table summarizes the investment securities with unrealized losses at June 30, 2014 and December 31, 2013, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position:

	(Dollars in Thousands)
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2014:
U.S. government agencies and government sponsored entities	$	990	$	(2	)	$	4,934	$	(65	)	$	5,924	$	(67	)
State and municipal	1,736		(8		)	2,489		(123		)	4,225		(131		)
Agency mortgage-backed: residential	7,984		(21		)	1751		(50		)	9,735		(71		)
Trust preferred security	—		—			1,440		(434		)	1,440		(434		)
Corporate Bonds	999		(1		)	—		—			999		(1		)
Total temporarily impaired	$	11,709	$	(32	)	$	10,614	$	(672	)	$	22,323	$	(704	)

	(Dollars in Thousands)
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2013:
U.S. government agencies and government sponsored entities	$	4,882	$	(119	)	$	937	$	(63	)	$	5,819	$	(182	)
State and municipal	3,988		(128		)	844		(137		)	4,832		(265		)
Agency mortgage-backed: residential	12,977		(253		)	—		—			12,977		(253		)
Trust preferred security	—		—			1,400		(472		)	1,400		(472		)
Corporate bonds	994		(6		)	—		—			994		(6		)
Total temporarily impaired	$	22,841	$	(506	)	$	3,181	$	(672	)	$	26,022	$	(1,178	)

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Other-Than-Temporary-Impairment

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

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

As of June 30, 2014, our securities portfolio consisted of $55.4 million fair value of securities, $22.3 million, or 23 securities, of which were in an unrealized loss position.

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 60% 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. While market conditions have allowed some increase in the fair market value of the trust preferred security at June 30, 2014, a full recovery has not yet occurred. 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, 2014			December 31, 2013

Commercial	$	45,712		$	45,254
Commercial real estate:
Construction	15,668			15,052
Other	167,271			154,975
Residential real estate	77,267			74,040
Consumer:
Auto	2,088			2,544
Other	3,449			3,203
Total loans	311,455			295,068
Less allowance for loan losses	(4,953		)	(4,653		)
Net loans	$	306,502		$	290,415

The following table sets forth an analysis of our allowance for loan losses for the three months ending June 30, 2014 and 2013.

	(Dollars In Thousands)
	Commercial			Commercial Real Estate		Residential Real Estate			Consumer			Unallocated		Total
June 30, 2014 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

	(Dollars In Thousands)
	Commercial			Commercial Real Estate		Residential Real Estate			Consumer			Unallocated		Total
June 30, 2013 Allowance for loan losses:
Beginning balance	$	3,282		$	2,584	$	507		$	81		$	196	$	6,650
Provision for loan losses	(714		)	656		30			(3		)	81		50
Loans charged-off	(653		)	—		(19		)	(6		)	—		(678		)
Recoveries	7			31		3			1			—		42
Total ending allowance balance	$	1,922		$	3,271	$	521		$	73		$	277	$	6,064

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The following table sets forth an analysis of our allowance for loan losses for the six months ending June 30, 2014 and 2013.

	(Dollars In Thousands)
	Commercial			Commercial Real Estate		Residential Real Estate			Consumer			Unallocated			Total
June 30, 2014 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

	(Dollars In Thousands)
	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Unallocated		Total
June 30, 2013 Allowance for loan losses:
Beginning balance	$	2,156		$	2,635		$	589		$	90		$	251	$	5,721
Provision for loan losses	746			590			(60		)	(2		)	26		1,300
Loans charged-off	(987		)	(14		)	(19		)	(17		)	—		(1,037		)
Recoveries	7			60			11			2			—		80
Total ending allowance balance	$	1,922		$	3,271		$	521		$	73		$	277	$	6,064

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, 2014 and December 31, 2013. As of June 30, 2014 and December 31, 2013, accrued interest receivable of $1.3 million is not considered significant and therefore not included in the recorded investment in loans presented in the following tables. Net deferred loan fees of $355,000 and $280,000, respectively, are included in the following tables.

	(Dollars In Thousands)
	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total
June 30, 2014 Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	147	$	389	$	60	$	17	$	—	$	613
Collectively evaluated	755		2,800		586		50		149		4,340
Total ending allowance balance	$	902	$	3,189	$	646	$	67	$	149	$	4,953
Loans:
Individually evaluated for impairment	$	2,617	$	1,561	$	1,261	$	30	$	—	$	5,469
Collectively evaluated	43,095		181,378		76,006		5,507		—		305,986
Total ending loans balance	$	45,712	$	182,939	$	77,267	$	5,537	$	—	$	311,455

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	(Dollars In Thousands)
	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total
December 31, 2013 Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	676	$	369	$	307	$	35	$	—	$	1,387
Collectively evaluated	744		1,710		396		51		365		3,266
Total ending allowance balance	$	1,420	$	2,079	$	703	$	86	$	365	$	4,653
Loans:
Individually evaluated for impairment	$	3,085	$	2,021	$	1,383	$	36	$	—	$	6,525
Collectively evaluated	42,169		168,006		72,657		5,711		—		288,543
Total ending loans balance	$	45,254	$	170,027	$	74,040	$	5,747	$	—	$	295,068

The following table presents information related to impaired loans by class of loans as of June 30, 2014 and December 31, 2013. In this table presentation the unpaid principal balance of the loans has not been reduced by partial net charge-offs. In this table presentation the recorded investment of the loans was reduced by partial net charge-offs.

	(Dollars in Thousands) June 30, 2014						(Dollars in Thousands) December 31, 2013
	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	$	783	$	783	$	—	$	1,880	$	1,880	$	—
Commercial real estate:
Construction	—		—		—		—		—		—
Other	111		111		—		843		843		—
Residential real estate	1,037		1,037		—		337		337		—
Consumer:
Auto	—		—		—		1		1		—
Other	—		—		—		—		—		—
Subtotal	1,931		1,931		—		3,061		3,061		—
With an allowance recorded:
Commercial	1,834		1,834		147		1,205		1,205		676
Commercial real estate:
Construction	—		—		—		—		—		—
Other	1,450		1,450		389		1,178		1,178		369
Residential real estate	224		224		60		1,046		1,046		307
Consumer:
Auto	17		17		17		21		21		21
Other	13		13		—		14		14		14
Subtotal	3,538		3,538		613		3,464		3,464		1,387
Total	$	5,469	$	5,469	$	613	$	6,525	$	6,525	$	1,387

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Information on impaired loans for the three months ending June 30, 2014 and 2013 is as follows:

	(Dollars in Thousands) June 30, 2014						(Dollars in Thousands) June 30, 2013
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
Commercial	$	2,710	37		26		$	6,287	99		52
Commercial real estate:
Construction	—		—		—		—		—		—
Other	1,547		20		15		7,607		120		13
Residential real estate	1,305		16		11		682		13		8
Consumer:
Auto	18		—		—		27		—		—
Other	13		—		—		4		—		—
Total	$	5,593	$	73	$	52	$	14,607	$	232	$	73

Information on impaired loans for the six months ending June 30, 2014 and 2013 is as follows:

	(Dollars in Thousands) June 30, 2014						(Dollars in Thousands) June 30, 2013
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
Commercial	$	2,851	68		53		$	5,851	161		94
Commercial real estate:
Construction	—		—		—		—		—		—
Other	1,791		40		29		7,128		208		44
Residential real estate	1,322		31		20		528		16		9
Consumer:
Auto	19		1		—		28		1		—
Other	14		—		—		3		—		—
Total	$	5,997	$	140	$	102	$	13,538	$	386	$	147

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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, 2014 and December 31, 2013 are summarized below:

	(Dollars in Thousands) As of June 30, 2014				(Dollars in Thousands) As of December 31, 2013
	Loans Past Due Over 90 Days and Still Accruing		Nonaccrual		Loans Past Due Over 90 Days and Still Accruing		Nonaccrual

Commercial	$	—	$	816	$	—	$	153
Commercial real estate:
Construction	—		—		—		—
Other	—		535		—		362
Residential real estate	42		473		—		643
Consumer:
Auto	—		17		—		22
Other	—		—		—		—
Total	$	42	$	1,841	$	—	$	1,180

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, 2014 and December 31, 2013 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		Loans Not Past Due		Total
June 30, 2014
Commercial	$	181	$	—	$	688	$	869	$	44,843	$	45,712
Commercial real estate:
Construction	—		—		—		—		15,668		15,668
Other	—		45		440		485		166,786		167,271
Residential real estate	68		23		513		604		76,663		77,267
Consumer:
Auto	—		—		—		—		2,088		2,088
Other	—		—		—		—		3,449		3,449
Total	$	249	$	68	$	1,641	$	1,958	$	309,497	$	311,455

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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		Loans Not Past Due		Total
December 31, 2013
Commercial	$	53	$	—	$	—	$	53	$	45,201	$	45,254
Commercial real estate:
Construction	—		—		—		—		15,052		15,052
Other	321		—		303		624		154,351		154,975
Residential real estate	98		66		574		738		73,302		74,040
Consumer:
Auto	6		1		—		7		2,537		2,544
Other	—		—		—		—		3,203		3,203
Total	$	478	$	67	$	877	$	1,422	$	293,646	$	295,068

Troubled Debt Restructurings:

The Company reported total troubled debt restructurings of $4.4 million and $5.5 million as of June 30, 2014 and December 31, 2013, 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. Of the 14 troubled debt restructurings reported at quarter end, 11 loans totaling $3.6 million were accruing and 3 loans totaling $806,000 were on nonaccrual status.

During the quarter ending June 30, 2014, one previously identified troubled debt restructuring was further modified and will continue the current amortization at the current interest rate, as the subject loan had matured. No other troubled debt restructurings were added during the second quarter of 2014.

The following table presents loans by class modified as troubled debt restructurings outstanding as of June 30, 2014:

		(Dollars in thousands)
	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Commercial	6	$	3,326	$	3,326
Commercial real estate:
Other	3	1,109		1,109
Residential real estate	4	757		759
Consumer	1	16		15
Total	14	$	5,208	$	5,209

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The following table presents loans by class modified as troubled debt restructurings outstanding as of December 31, 2013:

		(Dollars in thousands)
	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Commercial	10	$	2,716	$	2,716
Commercial real estate:
Other	1	604		604
Residential real estate	3	841		854
Consumer other	1	16		15
Total	15	$	4,177	$	4,189

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

		(Dollars in thousands)
	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Commercial real estate	1	$	924	$	924
Total	1	$	924	$	924

The following table presents loans by class modified as troubled debt restructurings that occurred during the quarter ending June 30, 2013:

		(Dollars in thousands)
	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Commercial	4	$	795	$	1,195
Total	4	$	795	$	1,195

Specific allocations of $337,000 and $1.1 million were reported for troubled debt restructurings as of June 30, 2014 and December 31, 2013. No payment defaults were reported for troubled debt restructurings during the quarter ending June 30, 2014 or June 30, 2013. Specific allocations of $1.9 million were reported for the troubled debt restructurings as of June 30, 2013. No charge offs were taken on troubled debt restructurings during the quarter ending June 30, 2014 or June 30, 2013.

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The terms of certain other loans were modified during the six months ending June 30, 2014 and 2013 that did not meet the definition of a troubled debt restructuring. These 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 loans modified during the six months ending June 30, 2013 have a total recorded investment of $3.7 million as of June 30, 2013. 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 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

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categories are assigned risk ratings. Based on the most recent analyses performed, the risk category of loans by class of loans is as follows:

	Pass		Special Mention		Substandard		Doubtful		Total
June 30, 2014
Commercial	$	41,754	$	69	$	3,889	$	—	$	45,712
Commercial real estate:
Construction	15,668		—		—		—		15,668
Other	159,994		—		7,277		—		167,271
Residential real estate	76,259		161		847		—		77,267
Consumer
Auto	2,088		—		—		—		2,088
Other	3,442		—		7		—		3,449
Total	$	299,205	$	230	$	12,020	$	—	$	311,455

	Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2013
Commercial	$	41,968	$	77	$	3,209	$	—	$	45,254
Commercial real estate:
Construction	15,052		—		—		—		15,052
Other	147,429		—		7,546		—		154,975
Residential real estate	72,264		164		1,612		—		74,040
Consumer:
Auto	2,543		—		1		—		2,544
Other	3,203		—		—		—		3,203
Total	$	282,459	$	241	$	12,368	$	—	$	295,068

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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 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.

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

Appraisals for collateral-dependent impaired loans and real estate properties classified as other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by Bank management. The appraisal values for collateral-dependent impaired loans are discounted to allow for selling expenses and fees, the limited use nature of various properties, the age of the most recent appraisal, and additional discretionary discounts for location, condition, etc. The Bank annually obtains an updated current appraisal value for each OREO property to certify that the fair value has not declined. For each 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 June 30, 2014 (Dollars in Thousands)
	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		$	5,924
State and municipal		21,302
Agency mortgage-backed securities -residential		25,740
Trust preferred security				1,440
Corporate bonds		999
Total investment securities	—	$	53,965	$	1,440

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	Fair Value Measurements at December 31, 2013 (Dollars in Thousands)
	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		$	5,819
State and municipal		19,676
Agency mortgage-backed securities -residential		23,744
Trust preferred security		1,400
Corporate Bond		994
Total investment securities	—	$	51,633	—

Assets measured on a non-recurring basis:

	Fair Value Measurements (Dollars in Thousands)
	June 30, 2014 Significant Unobservable Inputs (Level 3)		December 31, 2013 Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial	$	26	$	530
Commercial RE	243		808
Residential	157		739

Other real estate owned:
Commercial RE	$	471	$	516
Residential	127		317

Impaired loans which are measured for impairment using the fair value of collateral for collateral dependent loans, had a principal balance of $761,000 at June 30, 2014 with a valuation allowance of $335,000. Impaired loans had a principal balance of $3.5 million at December 31, 2013, with a valuation allowance of $1.4 million. An increase in the provision for loan losses of $22,000 was recognized for the six months ended June 30, 2014, 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 $598,000 at June 30, 2014 and $833,000 at December 31, 2013. Total writedowns of other real estate owned year to date June 30, 2014 and 2013, were $33,000 and $11,000 respectively.

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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, 2014.

	June 30, 2014		Valuation Techniques	Unobservable Inputs (Dollars in thousands)	Range (Weighted Avg)
Impaired loans:
Commercial	$	26	Market Approach	Discounts to allow for market value of assets	(50.00%)
Commercial RE	243		Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition	20%-50% (34.08%)
Residential	157		Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition	0%-20% (11.94%)
Other real estate owned:
Commercial RE	471		Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition	8%-55% (44.24%)
Residential	127		Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition	6%-69% (17.36%)

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, 2013.

	December 31, 2013		Valuation Techniques	Unobservable Inputs (Dollars in thousands)	Range (Weighted Avg)
Impaired loans:
Commercial	$	530	Market Approach	Discounts to allow for market value of assets	0%-50% (39.42%)
Commercial RE	808		Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition	20%-50% (24.92%)
Residential	739		Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition	0%-20% (18.43%)
Other real estate owned:
Residential	317		Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition	6%-42.3% (21.47%)

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Commercial RE

516

Sales Comparison

Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition

7.9%-54.5% (42.93%)

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

			Fair Value Measurements at June 30, 2014
	Carrying Amount		Level 1		Level 2	Level 3	Total
Financial Assets
Cash and cash equivalents	$	22,830	$	22,830			$	22,830
Loans held for sale	286				291		291
Loans, net of allowance	306,076					313,542	313,542
Accrued interest receivable	1,536				284	1,252	1,536
Federal Home Loan Bank stock	2,025						N/A

Financial Liabilities
Demand and savings deposits	$	184,265	$	150,376			$	150,376
Time deposits	161,545				162,395		162,395
FHLB advances	22,000				21,868		21,868
Subordinate debentures	5,000					2,836	2,836
Accrued interest payable	239		13		226		239

			Fair Value Measurements at December 31, 2013
	Carrying Amount		Level 1		Level 2	Level 3	Total
Financial Assets
Cash and cash equivalents	$	37,062	$	37,062			$	37,062
Loans, net of allowance	288,338					295,850	295,850
Accrued interest receivable	1,554				274	1,280	1,554
Federal Home Loan Bank stock	2,025						N/A

Financial Liabilities
Demand and savings deposits	$	183,569	$	144,220			$	144,220
Time deposits	159,382				160,284		160,284
FHLB advances	22,000				21,794		21,794
Subordinate debentures	5,000					2,836	2,836
Accrued interest payable	243		15		228		243

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

(e) FHLB Advances/ 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.

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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, 2014 and 2013.

	Quarter ended June 30, 2014						Quarter ended June 30, 2013
	Income			Weighted Average Shares	Per Share Amount		Income			Weighted- Average Shares	Per Share Amount
Basic earnings per share:
Net income	$	733					$	788
Less: Dividends and accretion on preferred stock	(127		)				(176		)
Net income available to common shareholders	$	606		1,968,777	$	0.31	$	612		1,968,777	$	0.31

Effect of dilutive securities
Convertible preferred stock	—			—			—			—
Stock options	—			—			—			—
Warrants	—			130,338			—			106,091

Diluted earnings per share

Net income available to common shareholders and assumed conversions	$	606		2,099,115	$	0.29	$	612		2,074,868	$	0.30

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	Six months ended June 30, 2014						Six months ended June 30, 2013
	Income			Weighted Average Shares	Per Share Amount		Income			Weighted- Average Shares	Per Share Amount
Basic earnings per share
Net income	$	1,424					$	903
Less: Dividends and accretion on preferred stock	(259		)				(393		)
Net income available to common shareholders	$	1,165		1,968,777	$	0.59	$	510		1,968,777	$	0.26

Effect of dilutive securities
Convertible preferred stock	—			—			—			—
Stock options	—			—			—			—
Warrants	—			125,995			—			109,350
Diluted earnings per share

Net income available to common shareholders and assumed conversions	$	1,165		2,094,772	$	0.56	$	510		2,078,127	$	0.25

Stock options for 72,931 shares of common stock were not considered in computing diluted earnings per common share for June 30, 2014 and 2013 because they are anti-dilutive. Convertible preferred shares are not included because they are anti-dilutive as of June 30, 2014 and 2013. Common stock warrants totaled 254,218 as of June 30, 2014 and 2013.

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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 2013 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, 2014, we reported net income of $733,000 compared to net income of $788,000 in the second quarter of 2014, a decrease of $55,000. Net income available to common shareholders was $606,000 or, $0.29 per diluted common share this quarter, compared to net income available to common shareholders of $612,000 or, $0.30 per diluted common share for the second quarter of 2013. The decrease in net income is substantially attributable to an increase in the provision for loan losses of $100,000 net of income taxes.

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For the six months ended June 30, 2014, the Company reported net income of $1.42 million, or $0.56 per diluted common share. This represents an increase of $521,000, or $0.31 per share, from the net income of $903,000 in the previous year. The increase in net income is primarily attributable to a decrease in provision for loan losses of $1 million partially offset by a decrease in net interest income of $194,000 and in increase in income tax expense of $249,000.

Our annualized return on average assets, defined as net income divided by average assets, was 0.69% for the six months ended June 30, 2014, compared to 0.44% in June 30, 2013. Our annualized return on average equity was 7.90% for the six months ending June 30, 2014, compared to 4.64% for the six months ending June 30, 2013.

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, 2014 decreased $26,000, or 0.7%, compared to June 30, 2013. The decrease in net interest income was impacted by a reduction in interest expense of $69,000 combined with a decrease in interest income of $95,000. The decrease in interest income was created by a decrease in loan income for the quarter.

For the six months ended June 30, 2014, net interest income was $7.0 million, a decrease of $194,000, or 2.7%, from net interest income of $7.2 million for the comparable period in 2013. Net interest income decreased as a result of a decrease in interest income of $342,000 offset by lower interest expense on deposits and borrowings of $148,000. The decrease in interest income was created by a decline in the yield on loans.

The net interest margin for the three months ended June 30, 2014 was 3.74%, compared to 3.77% in 2013. This decrease of 3 basis points is attributable primarily to a decline in the yield on loans from 5.28% in the second quarter of 2013 to 5.13% in the second quarter of 2014. Loan yields have declined as maturing loans were repriced at a lower rate, as well as increased competition for new loans that has resulted in lower rates.

The following tables set forth for the quarter and six months ended June 30, 2014 and 2013, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest

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

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

Quarter ended June 30,

	2014						2013
	Average Balance		Income/ Expense		Average Rate		Average Balance		Income/ Expense		Average Rate
Earning assets:
Federal funds sold	$	26,794	$	13	0.19	%	$	29,674	$	17	0.23	%
Available-for-sale securities (1)
Taxable	34,867		151		1.74	%	30,892		101		1.31	%
Nontaxable (1)	20,281		252		4.98	%	19,540		248		5.10	%
Federal Home Loan Bank stock	2,025		20		3.96	%	2,025		21		4.20	%
Loans receivable (2)	303,489		3,879		5.13	%	305,532		4,022		5.28	%
Total interest earning assets	387,456		4,315		4.47	%	387,663		4,409		4.56	%
Non-interest earning assets	32,174						31,577
Total Assets	$	419,630					$	419,240

Interest-bearing liabilities:
NOW accounts	$	105,134	108		0.41	%	$	78,464	$	81	0.41	%
Money market accounts	23,212		20		0.34	%	21,441		17		0.33	%
Savings accounts	17,931		10		0.22	%	15,785		9		0.23	%
Time deposits	163,543		413		1.01	%	187,463		518		1.11	%
Total interest-bearing deposits	309,820		551		0.71	%	303,153		625		0.83	%
Borrowings	25,300		126		2.00	%	28,542		121		1.70	%
Subordinated debentures	5,000		24		1.92	%	5,000		24		1.96	%
Total interest-bearing liabilities	340,120		701		0.83	%	336,695		770		0.92	%
Non-interest bearing deposits	41,123						42,584
Other liabilities	1,886						1,608
Total liabilities	383,129						380,887
Stockholders’ equity	36,501						38,353
Total Liabilities and Stockholders’ Equity	$	419,630					$	419,240
Net interest income			$	3,614					$	3,639

Net interest spread (1)					3.64	%					3.64	%
Net interest margin (1) (3)					3.74	%					3.77	%
Return on average assets ratio					0.70	%					0.75	%
Return on average equity ratio					8.05	%					8.24	%
Average equity to assets ratio					8.70	%					9.15	%

(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,

	2014						2013
	Average Balance		Income/ Expense		Average Rate		Average Balance		Income/ Expense		Average Rate
Earning assets:
Federal funds sold	$	25,279	$	25	0.20	%	$	30,181	$	33	0.22	%
Available-for-sale securities (1)
Taxable	33,634		292		1.75	%	29,686		196		1.33	%
Nontaxable (1)	20,085		500		5.02	%	19,536		504		5.20	%
Federal Home Loan Bank stock	2,025		40		3.98	%	2,025		43		4.27	%
Loans, net (2)	303,464		7,722		5.13	%	304,741		8,147		5.39	%
Total interest earning assets	384,487		8,579		4.50	%	386,169		8,923		4.66	%
Non-interest earning assets	32,386						32,357
Total Assets	$	416,873					$	418,526

Interest-bearing liabilities:
NOW accounts	$	105,288	$	218	0.42	%	$	77,517	$	149	0.39	%
Money market accounts	23,559		40		0.34	%	22,127		38		0.35	%
Savings accounts	17,339		20		0.23	%	15,721		18		0.23	%
Time deposits	161,356		816		1.02	%	186,118		1,047		1.13	%
Total interest-bearing deposits	307,542		1,094		0.72	%	301,483		1,252		0.84	%
Borrowings	25,045		243		1.96	%	28,153		231		1.65	%
Subordinated debentures	5,000		47		1.90	%	5,000		49		1.96	%
Total interest-bearing liabilities	337,587		1,384		0.83	%	334,636		1,532		0.92	%
Non-interest bearing deposits	40,987						42,632
Other liabilities	1,941						2,004
Total liabilities	380,515						379,272
Stockholders’ equity	36,358						39,254
Total Liabilities and Stockholders’ Equity	$	416,873					$	418,526
Net interest income			$	7,195					$	7,391

Net interest spread (1)					3.67	%					3.74	%
Net interest margin (1) (3)					3.77	%					3.86	%
Return on average assets ratio					0.69	%					0.44	%
Return on average equity ratio					7.90	%					4.64	%
Average equity to assets ratio					8.72	%					9.38	%

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

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

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

Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on our net interest income for the six months ended June 30, 2014 and 2013. Information is provided with respect to (1) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (2) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes attributable to the combined input of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

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	(Dollars in Thousands)
	Six Months Ended June 30,
	2014 Vs. 2013
	Increase (Decrease) Due to
	Rate			Volume			Net
Interest-earning assets:
Federal funds sold	$	(3	)	$	(5	)	$	(8	)
Available-for-sale securities:
Taxable	70			26			96
Nontaxable (1)	(18		)	14			(4		)
FHLB stock	(3		)	—			(3		)
Loans, net	(391		)	(34		)	(425		)
Total net change in income on interest-earning assets	(345		)	1			(344		)

Interest-bearing liabilities:
NOW accounts	16			53			69
Money market accounts	—			2			2
Savings accounts	—			2			2
Time deposits	(92		)	(139		)	(231		)
FHLB and other borrowings	38			(26		)	12
Subordinated debentures	(2		)	—			(2		)
Total net change in expense on interest-bearing liabilities	(40		)	(108		)	(148		)

Net change in net interest income	$	(305	)	$	109		$	(196	)

Percentage change	155.61		%	(55.61		)%	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 $150,000 provision for loan losses was recorded for the second quarter of 2014, an increase of $100,000, from $50,000 in the second quarter of 2013. Net charge-offs were $24,000 for the second quarter of 2014 compared to $636,000 in the second quarter of 2013.

Provision expense for the six months ended June 30, 2014 decreased $1.0 million, from $1.3 million to $275,000 due to reduced net charge-offs. Net recoveries were $25,000 for the six months ended June 30, 2014 compared to net charge-offs of $957,000 for the six months ended June 30, 2013.

Non-Interest Income

Non-interest income for the three months ended June 30, 2014 decreased $37,000, or 4.7%, compared to the three months ended June 30, 2013, primarily due to a decline in gains on sale of mortgage loans of $27,000 from the prior year.

Non-interest income for the six months ended June 30, 2014 decreased $127,000 or 8.4% compared to the six months ended June 30, 2013. Gain on sale of mortgage loans

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declined $85,000 and service charge income declined $55,000 in the period to period comparison, while securities gains increased $37,000.

Non-Interest Expense

Non-interest expense for the three months ended June 30, 2014 decreased $46,000, or 1.4%, compared to the three months ended June 30, 2013, due to a decrease in legal and collection expenses.

Non-interest expense was $6.2 million for the six months ended June 30, 2014, a decrease of $100,000, or 1.6%, from $6.3 million in the same period of 2013. Data processing expenses decreased $56,000 and other operating expenses, primarily collection expense, decreased $256,000, while salaries and employee benefits increased $155,000.

Income Taxes

Income tax expense was calculated using our expected effective rate for 2014 and 2013. 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 2014 and 2013. The effective tax rate for the second quarter of 2014 was 27.0% compared to a 29.7% effective tax rate for the second quarter of 2013. The effective tax rate year-to-date was 26.7% compared to 23.1% for 2013. The difference between the statutory and effective rates are impacted by such factors as income from tax-exempt loans, tax-exempt income on state and municipal securities, and income on bank owned life insurance.

Balance Sheet Review

Overview

Total assets at June 30, 2014 were $414.8 million, an increase of $4.6 million from $410.2 million at December 31, 2013. Average assets during the second quarter were $419.6 million, an increase of 0.1%, or $400,000, from $419.2 million in the second quarter of 2013. Average interest earning assets decreased 0.1%, or $200,000, from $387.7 million in the second quarter of 2013 to $387.5 million in the second quarter of 2014.

Loans

Loans increased $16.4 million, or 5.6%, from $295.1 million at December 31, 2013 to $311.5 million at June 30, 2014. Total loans averaged $303.5 million the second quarter of 2014, compared to $305.5 million the second quarter of 2013, a decrease of $2.0 million, or 0.7%. We experienced increases in commercial real estate and residential real estate loans during the first six months of the year compared to 2013. The following table presents a summary of the loan portfolio by category:

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	(Dollars in Thousands)
	June 30, 2014				December 31, 2013
			% of Total Loans				% of Total Loans
Commercial and agricultural	$	45,712	14.68	%	$	45,254	15.34	%
Commercial real estate	182,939		58.74	%	170,027		57.62	%
Residential real estate	77,267		24.81	%	74,040		25.09	%
Consumer	5,537		1.77	%	5,747		1.95	%
	$	311,455	100.00	%	$	295,068	100.00	%

The majority of our loans are to customers located in south central Kentucky and central Tennessee. As of June 30, 2014, our twenty largest credit relationships consisted of loans and loan commitments ranging from $3.7 million to $8.9 million. The aggregate amount of these credit relationships was $97.7 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, 2014.

As of June 30, 2014, we had $15.6 million of participations in loans purchased from, and $13.3 million of participations in loans sold to, other banks.

The following table sets forth the maturity distribution of the loan portfolio as of June 30, 2014. Maturities are based on contractual terms. Our policy is to specifically review and approve all loans renewed; loans are not automatically rolled over.

	(Dollars in Thousands)
Loan Maturities as of June 30, 2014	Within One Year		After One but Within Five Years		After Five Years		Total
Commercial and agricultural	$	16,989	$	24,761	$	3,962	$	45,712
Commercial real estate	28,337		99,507		55,095		182,939
Residential real estate	6,400		33,348		37,519		77,267
Consumer	1,972		3,497		68		5,537
Total	$	53,698	$	161,113	$	96,644	$	311,455

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

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experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change.

The allowance for loans losses at June 30, 2014 was $5.0 million, or 1.59% of total loans, compared to $4.7 million, or 1.58% of total loans as of December 31, 2013. The allowance increased slightly due to a growth in loans during the second quarter of 2014.

The following table sets forth an analysis of our allowance for loan losses for the six months ended June 30, 2014 and 2013.

	(Dollars in Thousands)
	June 30,
	2014			2013
Balance at beginning of period	$	4,653		$	5,721
Provision for loan losses	275			1,300
Amounts charged off:
Commercial	—			987
Commercial real estate	—			14
Residential real estate	90			19
Consumer	13			17
Total loans charged off	103			1,037
Recoveries of amounts previously charged off:
Commercial	59			7
Commercial real estate	58			60
Residential real estate	9			11
Consumer	2			2
Total recoveries	128			80
Net charge-offs (recoveries)	(25		)	957
Balance at end of period	$	4,953		$	6,064
Total loans, net of unearned income:
YTD Average	$	303,464		$	304,741
At June 30	$	311,455		$	306,397
As a percentage of YTD average loans:
Net charge-offs (recoveries), annualized	(0.02		)%	0.63		%
Provision for loan losses, annualized	0.18		%	0.85		%

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

	(Dollars in Thousands)
	June 30, 2014			December 31, 2013
Non-accrual loans	$	1,035		$	1,026
Loans 90+ days past due/accruing	42			—
Restructured loans on non-accrual	806			154
Total non-performing loans	1,883			1,180
Other real estate owned	598			833
Total non-performing assets	$	2,481		2,013

Allowance for loan losses	$	4,953		$	4,653
Non-performing assets to total assets	0.60		%	0.49		%
Net charge-offs YTD to average YTD total loans, annualized	(0.02		)%	1.22		%
Allowance for loan losses to non-performing loans	263.04		%	394.3		%
Allowance for loan losses to total loans	1.59		%	1.58		%

Non-performing assets totaled $2.5 million at June 30, 2014, compared to $2.0 million at December 31, 2013, an increase of $468,000. Payoffs and paydowns of $538,000 included the disposition of four other real estate owned properties sold for $217,000, and four loans totaling $71,000 were charged off, but these decreases were offset by the addition of $188,000 in commercial real estate loans, $688,000 in commercial loans, and $201,000 in residential real estate loans.

Non-performing loans are defined as non-accrual loans and loans accruing but past due 90 days or more. Non-performing assets are defined as non-performing loans, other real estate owned, and repossessed assets. Management classifies commercial and commercial real estate loans as non-accrual when principal or interest is past due 90 days or more and the loan is not adequately 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, 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.

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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, 2014				December 31, 2013
	Loans		Allowance for Loan Losses		Loans		Allowance for Loan Losses
Commercial and agriculture	$	2,617	$	147	$	3,085	$	676
Commercial real estate	1,561		389		2,021		369
Residential real estate	1,261		60		1,383		307
Consumer and other	30		17		36		35
Impaired Loans	5,469		613		6,525		1,387

Loans collectively evaluated for impairment	305,986		4,340		288,543		3,266
Total	311,455		$	4,953	295,068		$	4,653

The decrease in impaired loans during the six months ending June 30, 2014 is primarily attributed to a $598,000 commercial real estate loan and a $238,000 commercial loan that are no longer being evaluated for impairment, along with the payoff of a $148,000 in residential real estate loans, that are offset by the addition of $188,000 in commercial real estate loans and $201,000 in residential real estate loans that are now evaluated for impairment as of June 30, 2014. These 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, and the overall growth in the loan portfolio during the period resulted in a $1.1 million increase in the loans collectively evaluated for impairment from December 31, 2013 to June 30, 2014.

Summary of Allowance for Loan Losses

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, 2014				December 31, 2013
	Amount		% of Loans in Each Category to Total Loans		Amount		% of Loans in Each Category to Total Loans

Commercial and agricultural	$	902	14.68	%	$	1,420	15.34	%
Commercial real estate	3,189		58.74	%	2,079		57.62	%
Residential real estate	646		24.81	%	703		25.09	%
Consumer and other	67		1.77	%	86		1.95	%
Unallocated	149		0.00	%	365		0.00	%
Total allowance for loan losses	$	4,953	100.00	%	$	4,653	100.00	%

We maintain a modest unallocated amount in the allowance to recognize the imprecision in estimating and measuring losses when evaluating allocations for individual loans or pools of loans. Allocations on individual loans and historical loss

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rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience. The unallocated portion of the allowance decreased from $365,000 at December 31, 2013 to $149,000 at June 30, 2014 due to changes in qualitative factors assigned to specific pools of loans based on the unique risk factors of these pools.

We believe that the allowance for loan losses of $5.0 million at June 30, 2014 is adequate to absorb probable incurred credit losses in the loan portfolio as of that date. That determination is based on the best information available to management, but necessarily involves uncertainties and matters of judgment and, therefore, cannot be determined with precision and could be susceptible to significant change in the future. In addition, bank regulatory authorities, as a part of their periodic examinations, may reach different conclusions about the quality of our loan portfolio and the level of the allowance, which could require us to make additional provisions in the future.

Securities

The investment securities portfolio is comprised of U.S. Government agency and government sponsored entity securities, agency mortgage-backed securities, tax-exempt securities of states and political subdivisions, a taxable municipal security, a corporate bond and a trust preferred security. The purchase of nontaxable obligations of states and political subdivisions is a part of managing our effective tax rate. Securities are all classified as available-for-sale, and averaged $53.7 million for the first six months of 2014, compared to $49.2 million for 2013. The table below presents the carrying value of securities by major category.

	(Dollars in Thousands)
	June 30, 2014		December 31, 2013
U.S. Government agencies and government sponsored entities	$	5,924	$	5,819
Municipal securities	21,302		19,676
Agency mortgage-backed securities-residential	25,740		23,744
Trust preferred security	1,440		1,400
Corporate bond	999		994
Total available-for-sale securities	$	55,405	$	51,633

The table below presents the maturities and yield characteristics of securities as of June 30, 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, 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 and government sponsored entities	$	—		$	3,991		$	2,000		$	—		$	5,991		$	5,924
Municipal securities	534			4,100			8,978			7,002			20,614			21,302
Agency mortgage-backed securities: (1)	124			20,555			3,773			1,092			25,544			25,740
Trust preferred security	—			—			—			1,874			1,874			1,440
Corporate bond	—			—			1,000			—			1,000			999
Total available-for-sale securities	$	658		$	28,646		$	15,751		$	9,968		$	55,023		$	55,405

Percent of total	1.2		%	52.1		%	28.6		%	18.1		%	100.0		%
Weighted average yield(2)	4.86		%	2.34		%	3.45		%	3.94		%	2.98		%

(1) Agency mortgage-backed securities (residential) are grouped into average lives based on June 2014 prepayment projections.

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

The Trust Preferred security category consist 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. 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. The Company does not intend to sell these securities and does not believe it will be required to sell these securities.

Deposits

Our primary funding source for lending and investment activities results from customer deposits and a deposit listing service. Deposits at June 30, 2014 were $345.8 million, an increase of $2.8 million, or 0.8%, compared to $343.0 million at December 31, 2013. Total deposits averaged $350.9 million the second quarter of 2014, an increase of $5.2 million, or 1.5%, compared to $345.7 million during the second quarter of 2013. 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 of $100,000 or more totaled $63.6 million at June 30, 2014, compared to $56.8 million at December 31, 2013. Interest expense on time deposits of $100,000 or more was $330,000 for the six month ended June 30, 2014, compared to $399,000 for the six months ended June 30, 2013. 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, 2014.

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	(Dollars in Thousands)
	June 30, 2014
Three months or less	$	17,826
Over three through six months	33,878
Over six through twelve months	33,036
Over one year through three years	60,402
Over three years through five years	106
Over five years	16,297
Total	$	161,545

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. Rates vary based on the term to repayment, and are summarized below as of June 30, 2014:

				(Dollars in Thousands)
Type	Maturity	Rate		Amount
Fixed	December 10, 2014	1.73	%	2,000
Fixed	December 24, 2014	3.46	%	2,000
Fixed	February 25, 2015	2.85	%	2,000
Fixed	May 22, 2015	0.73	%	3,000
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
				$	22,000

At June 30, 2014, we had available collateral to borrow an additional $39.3 million from the FHLB.

Other Borrowings.

In 2013, 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 $5.0 million, matures November 26, 2014, and bears interest at the prime rate as published in the Money Rates section of The Wall Street Journal, plus 0.5%, with interest payable monthly. The loan is secured by the Bank’s common stock. As of June 30, 2014, the line had a balance of $3.3 million.

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At June 30, 2014, we had established Federal Funds lines of credit totaling $18.8 million with three correspondent banks. No amounts were drawn as of June 30, 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). The rate as of June 30, 2014 was 1.88%. The subordinated debentures may be included with tier 1 capital (with certain limitations) under current regulatory guidelines.

Liquidity

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

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

Capital

At June 30, 2014, total shareholders’ equity was $36.8 million compared to $38.3 million at December 31, 2013, a decrease of $1.5 million. During the first quarter of 2014, the Company paid $3.3 million to repurchase the remaining 93 shares of the Series A preferred stock that the Company had issued to the Treasury in 2008 under the TARP Capital Purchase Program. No common dividends have been paid during 2014.

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

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factors.

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. We believe we met all capital adequacy requirements as of June 30, 2014 and December 31, 2013.

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

	June 30, 2014		December 31, 2013
Tier 1 leverage ratio	8.90	%	9.57	%
Regulatory minimum	4.00	%	4.00	%
“Well-capitalized” minimum	N/A		N/A
Tier 1 risk-based capital ratio	11.44	%	12.56	%
Regulatory minimum	4.00	%	4.00	%
“Well-capitalized” minimum	N/A		N/A
Total risk-based capital ratio	12.69	%	13.81	%
Regulatory minimum	8.00	%	8.00	%
“Well-capitalized” minimum	N/A		N/A

The Bank’s capital ratios (calculated in accordance with regulatory guidelines) were as follows:

	June 30, 2014		December 31, 2013
Tier 1 leverage ratio	9.66	%	9.62	%
Regulatory minimum	4.00	%	4.00	%
“Well-capitalized” minimum	5.00	%	5.00	%
Tier 1 risk-based capital ratio	12.42	%	12.58	%
Regulatory minimum	4.00	%	4.00	%
“Well-capitalized” minimum	6.00	%	6.00	%
Total risk-based capital ratio	13.67	%	13.83	%
Regulatory minimum	8.00	%	8.00	%
“Well-capitalized” minimum	10.00	%	10.00	%

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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, 2014, the model indicated that if rates were to increase by 200 basis points during the remainder of the calendar year, then net interest income would increase 8.71% over the next twelve months. The model indicated that if rates were to decrease by 200 basis points over the same period, then net interest income would decrease 0.78%. 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 2014 - June 2015

Projected Interest Rate Change	Estimated Value	Net Interest Income $ Change From Base	% Change From Base
+400	18,278,157	3,198,833	21.21	%
+300	17,331,104	2,251,779	14.93	%
+200	16,392,210	1,312,886	8.71	%
Base	15,079,324	0	0.00	%
-200	14,962,159	-117,166	-0.78	%

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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 significant deficiencies or 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).

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.

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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, 2014 and December 31, 2013, (ii) the Consolidated Statements of Income for the six months ended June 30, 2014 and June 30, 2013, (iii) the Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2014 and June 30, 2013, (iv) Consolidated Statements of Cash Flows for the six month periods ended June 30, 2014 and 2013, 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 7, 2014	/s/M. Todd Kanipe
		M. Todd Kanipe
		President and Chief Executive Officer


	August 7, 2014	/s/ J. Steven Marcum
		J. Steven Marcum
		Executive Vice President and Chief Financial Officer

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