CITIZENS FIRST CORP - FORM 10-Q

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EX-32.2 - EX-32.2 - CITIZENS FIRST CORP	czfc-20160930ex322fd2f1a.htm
EX-32.1 - EX-32.1 - CITIZENS FIRST CORP	czfc-20160930ex321497e0b.htm
EX-31.2 - EX-31.2 - CITIZENS FIRST CORP	czfc-20160930ex31217dd54.htm
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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the Quarterly Period Ended September 30, 2016


☐	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 ☒ No ◻

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 ☒ No ◻

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 ☐	Accelerated filer ☐

Non-accelerated filer ☐	Smaller reporting company ☒

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

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

2,000,852 shares of Common Stock, no par value, were outstanding at November 10, 2016.

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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	25

ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	37

ITEM 4	CONTROLS AND PROCEDURES	38

PART II – OTHER INFORMATION

ITEM 6	EXHIBITS	39

SIGNATURES		40

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Part 1. Financial Information

Item 1. Financial Statements

Citizens First Corporation

Consolidated Balance Sheets


	(In Thousands, Except Share Data)
	September 30,		December 31,
	2016		2015
	Unaudited
Assets
Cash and due from financial institutions	$	5,353	$	8,865
Federal funds sold		—		6,390
Cash and cash equivalents		5,353		15,255
Interest-bearing deposits in other financial institutions		15,611		2,728
Available-for-sale securities		55,424		60,200
Loans, net of allowance for loan losses of $4,961 and $4,916 at September 30, 2016 and December 31, 2015, respectively		338,215		325,866
Premises and equipment, net		9,461		9,998
Bank owned life insurance (BOLI)		8,307		8,174
Federal Home Loan Bank (FHLB) stock, at cost		2,025		2,025
Accrued interest receivable		1,547		1,680
Deferred income taxes		1,017		1,328
Goodwill		4,097		4,097
Core deposit intangible		212		265
Other real estate owned		—		100
Other assets		409		465
Total Assets	$	441,678	$	432,181
Liabilities
Deposits
Noninterest bearing	$	49,439	$	48,522
Savings, NOW and money market		155,912		168,335
Time		148,478		153,531
Total deposits		353,829		370,388
FHLB advances and other borrowings		38,000		15,000
Subordinated debentures		5,000		5,000
Accrued interest payable		219		213
Other liabilities		2,240		2,056
Total Liabilities		399,288		392,657
Stockholders’ Equity
6.5% cumulative preferred stock; no par value, authorized 250 shares, aggregate liquidation preference of $7,998; issued and outstanding 237 and 250 shares at September 30, 2016 and December 31, 2015, respectively		7,261		7,659
Common stock, no par value, authorized 5,000,000 shares; issued and outstanding 2,000,852 and 1,968,777 shares at September 30, 2016 and December 31, 2015, respectively		25,899		25,406
Retained earnings		8,887		6,304
Accumulated other comprehensive income		343		155
Total stockholders’ equity		42,390		39,524
Total liabilities and stockholders’ equity	$	441,678	$	432,181

See Notes to Unaudited Consolidated Financial Statements

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Citizens First Corporation

Unaudited Consolidated Statements of Income


	Three months ended
	(In Thousands, Except Per Share Data)
	September 30, 2016		September 30, 2015
Interest and dividend income
Loans	$	4,213	$	4,050
Taxable securities		156		159
Non-taxable securities		146		170
Federal funds sold and other		42		36
Total interest and dividend income		4,557		4,415
Interest expense
Deposits		520		563
FHLB advances and other		89		74
Subordinated debentures		30		25
Total interest expense		639		662
Net interest income		3,918		3,753
Provision (credit) for loan losses		—		—
Net interest income after provision (credit) for loan losses		3,918		3,753
Non-interest income
Service charges on deposit accounts		361		386
Other service charges and fees		172		187
Gain on sale of mortgage loans		110		60
Non-deposit brokerage fees		83		103
Lease income		61		59
BOLI income		45		45
Gain on sale of available-for-sale securities		20		—
Total non-interest income		852		840
Non-interest expenses
Salaries and employee benefits		1,674		1,650
Net occupancy expense		481		495
Advertising and public relations		86		75
Professional fees		98		183
Data processing services		262		262
Franchise shares and deposit tax		132		146
FDIC insurance		58		61
Core deposit intangible amortization		18		18
Other real estate owned expenses (income)		(8)		6
Loss on branch disposal		—		262
Other		344		372
Total non-interest expenses		3,145		3,530
Income before income taxes		1,625		1,063
Income taxes		490		288
Net income		1,135		775
Dividends on preferred stock		124		131
Net income available for common stockholders	$	1,011	$	644
Basic earnings per common share	$	0.50	$	0.33
Diluted earnings per common share	$	0.45	$	0.31

See Notes to Unaudited Consolidated Financial Statements

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Citizens First Corporation

Unaudited Consolidated Statements of Income


	Nine months ended
	(In Thousands, Except Per Share Data)
	September 30, 2016		September 30, 2015
Interest and dividend income
Loans	$	12,478	$	12,107
Taxable securities		510		465
Non-taxable securities		464		519
Federal funds sold and other		117		99
Total interest and dividend income		13,569		13,190
Interest expense
Deposits		1,562		1,692
FHLB advances and other		228		219
Subordinated debentures		86		73
Total interest expense		1,876		1,984
Net interest income		11,693		11,206
Provision (credit) for loan losses		(85)		200
Net interest income after provision (credit) for loan losses		11,778		11,006
Non-interest income
Service charges on deposit accounts		1,025		1,061
Other service charges and fees		515		498
Gain on sale of mortgage loans		278		170
Non-deposit brokerage fees		230		282
Lease income		155		202
BOLI income		133		136
Gain on sale of available-for-sale securities		126		10
Total non-interest income		2,462		2,359
Non-interest expenses
Salaries and employee benefits		5,134		4,887
Net occupancy expense		1,456		1,516
Advertising and public relations		245		250
Professional fees		415		534
Data processing services		781		739
Franchise shares and deposit tax		396		437
FDIC insurance		176		183
Core deposit intangible amortization		53		53
Other real estate owned expenses		16		42
Loss on branch disposal		27		262
Other		1,113		1,076
Total non-interest expenses		9,812		9,979
Income before income taxes		4,428		3,386
Income taxes		1,314		930
Net income		3,114		2,456
Dividends and accretion on preferred stock		371		389
Net income available for common stockholders	$	2,743	$	2,067
Basic earnings per common share	$	1.37	$	1.05
Diluted earnings per common share	$	1.23	$	0.95

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)
	September 30, 2016		September 30, 2015
Comprehensive income, net of tax
Net income	$	1,135	$	775
Other comprehensive income (loss)
Reclassification adjustment for gains included in net income, net of taxes		(13)		—
Change in unrealized gain on available for sale securities, net of taxes		(92)		55
Total other comprehensive income (loss)		(105)		55
Comprehensive income	$	1,030	$	830


		Nine months ended
	(In Thousands, Except Per Share Data)
	September 30, 2016		September 30, 2015
Comprehensive income, net of tax
Net income	$	3,114	$	2,456
Other comprehensive income (loss)
Reclassification adjustment for gains included in net income, net of taxes		(83)		(7)
Change in unrealized gain (loss) on available for sale securities, net of taxes		271		(67)
Total other comprehensive income (loss)		188		(74)
Comprehensive income	$	3,302	$	2,382

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


							Accumulated Other
	Preferred		Common		Retained		Comprehensive
	Stock		Stock		Earnings		Income (Loss)		Total
Balance, January 1, 2016	$	7,659	$	25,406	$	6,304	$	155	$	39,524
Net income		—		—		3,114		—		3,114
Conversion of cumulative preferred		(398)		398		—		—		—
Exercise of director stock options		—		32		—		—		32
Stock based compensation		—		63		—		—		63
Change in accumulated other comprehensive income		—		—		—		188		188
Dividend declared and paid on common stock ( $.08 per share)		—		—		(160)		—		(160)
Dividend declared and paid on preferred stock		—		—		(371)		—		(371)
Balance, September 30, 2016	$	7,261	$	25,899	$	8,887	$	343	$	42,390


							Accumulated Other
	Preferred		Common		Retained		Comprehensive
	Stock		Stock		Earnings		Income (Loss)		Total
Balance, January 1, 2015	$	7,659	$	27,072	$	3,373	$	344	$	38,448
Net income		—		—		2,456		—		2,456
Change in accumulated other comprehensive income		—		—		—		(74)		(74)
Dividend declared and paid on preferred stock		—		—		(389)		—		(389)
Repurchase of TARP Warrants		—		(1,706)		—		—		(1,706)
Balance, September 30, 2015	$	7,659	$	25,366	$	5,440	$	270	$	38,735

See Notes to Unaudited Consolidated Financial Statements

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Citizens First Corporation

Unaudited Consolidated Statements of Cash Flows


	Nine Months Ended
	(In Thousands)
	September 30, 2016		September 30, 2015
Operating Activities
Net income	$	3,114	$	2,456
Items not requiring (providing) cash:
Depreciation and amortization		401		414
Provision (credit) for loan losses		(85)		200
Amortization of premiums and discounts on securities		233		239
Amortization of core deposit intangible		53		53
Deferred income taxes		214		—
Stock based compensation		63		—
BOLI Income		(133)		(136)
Proceeds from sale of mortgage loans		13,252		7,556
Origination of mortgage loans held for sale		(12,974)		(7,540)
Gains on sales of available-for-sale securities		(126)		(10)
Gains on sales of mortgage loans		(278)		(170)
Write-downs and losses (gains) on other real estate owned		(11)		39
Loss (gain) on sale premises and equipment		4		(12)
Loss on branch disposal		27		262
Changes in:
Accrued interest receivable		133		(70)
Other assets		56		83
Accrued interest payable and other liabilities		190		473
Net cash provided by operating activities		4,133		3,837
Investing Activities
Loan originations and payments, net		(12,330)		(8,848)
Purchases of interest-bearing deposits in other financial institutions		(12,883)		(2,480)
Purchase of premises and equipment		(92)		(260)
Proceeds from maturities of available-for-sale securities		10,090		5,601
Proceeds from sales of available-for-sale securities		4,358		1,010
Proceeds from sales of other real estate owned		177		62
Proceeds from sales of premises and equipment		197		383
Purchase of available-for-sale securities		(9,494)		(8,033)
Net cash used in investing activities		(19,977)		(12,565)
Financing Activities
Net change in demand deposits, money market, NOW and savings accounts		(11,506)		9,932
Net change in time deposits		(5,053)		10,775
Repayment of FHLB advances		(5,000)		(11,000)
Proceeds from FHLB advances		30,000		—
Repurchase of TARP warrants		—		(1,706)
Proceeds (payments) from other borrowings		(2,000)		1,000
Exercise of stock options		32		—
Dividends paid on common stock		(160)		—
Dividends paid on preferred stock		(371)		(389)
Net cash provided by financing activities		5,942		8,612
Decrease in Cash and Cash Equivalents		(9,902)		(116)
Cash and Cash Equivalents, Beginning of Year		15,255		11,322
Cash and Cash Equivalents, End of Year	$	5,353	$	11,206
Supplemental Cash Flows Information
Interest paid	$	1,870	$	1,982
Income taxes paid	$	900	$	890
Conversion of cumulative preferred stock	$	398	$	—
Loans transferred to other real estate owned	$	66	$	111

See Notes to Unaudited Consolidated Financial Statements

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Citizens First Corporation

Notes to Unaudited Consolidated Financial Statements

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

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

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

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

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

Recent Accounting Pronouncements–In May 2014 the FASB amended existing guidance related to revenue from contracts with customers. This amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, this amendment specifies the accounting for some costs to obtain or fulfill a contract with a customer. These amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.

In March 2016, the FASB issued ASU 2016-08 that clarifies how to apply revenue recognition guidance related to whether an entity is a principal or an agent. The amendments in this update affect this guidance issued in 2014 that is not yet effective. The Company is currently evaluating the impact of this new accounting standard on the consolidated financial statements.

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

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

In March 2016 the FASB issued ASU 2016-09 which provides guidance on share-based payment accounting. The new standard includes multiple provision intended to simplify various aspects of the accounting for share-based payments. The

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new standard is effective for reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact of this new accounting standard on the consolidated financial statements.

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

Note 2 - Reclassifications

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

Note 3 - Available-For-Sale Securities

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


	(Dollars in Thousands)
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
September 30, 2016
U. S. government agencies and government sponsored entities	$	1,998	$	2	$	—	$	2,000
Agency mortgage-backed securities: residential		28,798		567		(19)		29,346
State and municipal		21,226		611		(8)		21,829
Trust preferred security		1,883		—		(643)		1,240
Corporate bonds		1,000		9		—		1,009
Total Available-for-Sale Securities	$	54,905	$	1,189	$	(670)	$	55,424

December 31, 2015
U. S. government agencies and government sponsored entities	$	2,998	$	3	$	(7)	$	2,994
Agency mortgage-backed securities: residential		29,446		259		(48)		29,657
State and municipal		24,641		615		(34)		25,222
Trust preferred security		1,880		—		(540)		1,340
Corporate bonds		1,000		—		(13)		987
Total Available-for-Sale Securities	$	59,965	$	877	$	(642)	$	60,200

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


	September 30, 2016
	(Dollars in Thousands)
	Available-For-Sale
	Amortized Cost		Fair Value
Due in one year or less	$	1,305	$	1,310
Due from one to five years		11,714		11,866
Due from five to ten years		8,825		9,170
Due after ten years		4,263		3,732
Agency mortgage-backed: residential		28,798		29,346
Total	$	54,905	$	55,424

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


	(Dollars in Thousands)
	Less than 12 Months				12 Months or More				Total
Description of			Unrealized				Unrealized				Unrealized
Securities	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
September 30, 2016:
U.S. government agencies and government sponsored entities	$	—	$	—	$	—	$	—	$	—	$	—
Agency mortgage-backed: residential		1,867		(19)		—		—		1,867		(19)
State and municipal		2,492		(8)		—		—		2,492		(8)
Trust preferred security		—		—		1,240		(643)		1,240		(643)
Corporate Bonds		—		—		—		—		—		—
Total temporarily impaired	$	4,359	$	(27)	$	1,240	$	(643)	$	5,599	$	(670)


	(Dollars in Thousands)
	Less than 12 Months				12 Months or More				Total
Description of			Unrealized				Unrealized				Unrealized
Securities	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
December 31, 2015:
U.S. government agencies and government sponsored entities	$	—	$	—	$	992	$	(7)	$	992	$	(7)
Agency mortgage-backed: residential		7,009		(25)		1,475		(23)		8,484		(48)
State and municipal		3,797		(19)		617		(15)		4,414		(34)
Trust preferred security		—		—		1,340		(540)		1,340		(540)
Corporate bonds		987		(13)		—		—		987		(13)
Total temporarily impaired	$	11,793	$	(57)	$	4,424	$	(585)	$	16,217	$	(642)

Other-Than-Temporary-Impairment

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

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

All rated securities are investment grade. For those that are not rated, the financial condition has been evaluated and no adverse conditions were identified related to repayment. Declines in fair value are a function of rate differences in the

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market and market illiquidity. The Company does not intend or is not expected to be required to sell these securities before recovery of their amortized cost basis.

All of the Company’s unrealized losses 12 months or more relate to its investment in a single trust preferred security. The security is a single-issuer trust preferred that is not rated. No impairment charge is being taken as no loss of principal or interest is anticipated. All principal and interest payments are being received as scheduled. On a quarterly basis, we evaluate the creditworthiness of the issuer, a bank holding company with operations in the state of Kentucky. Based on the issuer’s continued profitability and well-capitalized position, we do not deem that there is credit loss. The decline in fair value is primarily attributable to illiquidity affecting these markets and not the expected cash flows of the individual securities. We have evaluated the financial condition and near term prospects of the issuer and expect to fully recover our cost basis. This security continues to pay interest as agreed and future payments are expected to be made as agreed. This security is not considered to be other-than-temporarily impaired.

Note 4 - Loans and Allowance for Loan Losses

Categories of loans include:


	(Dollars in Thousands)
	September 30, 2016		December 31, 2015
Commercial	$	52,394	$	53,516
Commercial real estate:
Construction		31,713		24,167
Other		175,746		169,290
Residential real estate		79,202		79,680
Consumer:
Auto		1,286		1,425
Other		2,835		2,704
Total Loans		343,176		330,782
Less: Allowance for loan losses		(4,961)		(4,916)
Net loans	$	338,215	$	325,866

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


	(Dollars in Thousands)
September 30, 2016	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total

Allowance for loan losses:
Beginning balance	$	464	$	3,815	$	600	$	22	$	48	$	4,949
Provision (credit) for loan losses		80		(64)		(41)		1		24		—
Loans charged-off		(5)		—		—		—		—		(5)
Recoveries		9		1		6		1		—		17
Total ending allowance balance	$	548	$	3,752	$	565	$	24	$	72	$	4,961


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

Allowance for loan losses:
Beginning balance	$	757	$	3,605	$	447	$	38	$	136	$	4,983
Provision (credit) for loan losses		12		(23)		8		(2)		5		—
Loans charged-off		—		—		—		(3)		—		(3)
Recoveries		35		—		3		3		—		41
Total ending allowance balance	$	804	$	3,582	$	458	$	36	$	141	$	5,021

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


	(Dollars in Thousands)
September 30, 2016	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total

Allowance for loan losses:
Beginning balance	$	812	$	3,431	$	524	$	28	$	121	$	4,916
Provision (credit) for loan losses		(395)		322		45		(8)		(49)		(85)
Loans charged-off		(10)		(52)		(23)		(1)		—		(86)
Recoveries		141		51		19		5		—		216
Total ending allowance balance	$	548	$	3,752	$	565	$	24	$	72	$	4,961


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

Allowance for loan losses:
Beginning balance	$	1,029	$	3,088	$	582	$	45	$	141	$	4,885
Provision (credit) for loan losses		(236)		510		(77)		3		—		200
Loans charged-off		(75)		(17)		(57)		(21)		—		(170)
Recoveries		86		1		10		9		—		106
Total ending allowance balance	$	804	$	3,582	$	458	$	36	$	141	$	5,021

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 September 30, 2016 and December 31, 2015, which includes net deferred loan fees. As of September 30, 2016 and December 31, 2015, accrued interest receivable of $1.3 million and $1.3 million, respectively, are not considered significant and therefore not included in the recorded investment in loans presented in the following tables.


	(Dollars in Thousands)
September 30, 2016	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total

Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	125	$	193	$	16	$	1	$	—	$	335
Collectively evaluated		423		3,559		549		23		72		4,626
Total ending allowance balance	$	548	$	3,752	$	565	$	24	$	72	$	4,961

Loans:
Individually evaluated for impairment	$	226	$	1,540	$	748	$	25	$	—	$	2,539
Collectively evaluated		52,168		205,919		78,454		4,096		—		340,637
Total ending loans balance	$	52,394	$	207,459	$	79,202	$	4,121	$	—	$	343,176

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	(Dollars in Thousands)
December 31, 2015	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total

Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	36	$	377	$	20	$	—	$	—	$	433
Collectively evaluated		776		3,054		504		28		121		4,483
Total ending allowance balance	$	812	$	3,431	$	524	$	28	$	121	$	4,916

Loans:
Individually evaluated for impairment	$	145	$	2,066	$	807	$	9	$	—	$	3,027
Collectively evaluated		53,371		191,391		78,873		4,120		—		327,755
Total ending loans balance	$	53,516	$	193,457	$	79,680	$	4,129	$	—	$	330,782

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


	(Dollars in Thousands)						(Dollars in Thousands)
	September 30, 2016						December 31, 2015
	Unpaid principal Balance		Recorded Investment		Allowances for Loan Losses Allocated		Unpaid Principal Balance		Recored Investment		Allowances for Loan Losses Allocated
With no related allowance recorded:
Commercial	$	56	$	56	$	—	$	61	$	61	$	—
Commercial real estate:
Other		579		579		—		643		643		—
Residential real estate		696		696		—		700		700		—
Consumer:
Other		6		6		—		—		—		—
Subtotal	$	1,337	$	1,337	$	—	$	1,404	$	1,404	$	—

With an allowance recorded:
Commercial	$	170	$	170	$	125	$	84	$	84	$	36
Commercial real estate:
Other		961		961		193		1,423		1,423		377
Residential real estate		52		52		16		107		107		20
Consumer:
Other		19		19		1		9		9		—
Subtotal	$	1,202	$	1,202	$	335	$	1,623	$	1,623	$	433
Total	$	2,539	$	2,539	$	335	$	3,027	$	3,027	$	433

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


	(Dollars in Thousands)						(Dollars in Thousands)
	September 30, 2016						September 30, 2015
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
Commercial	$	229	$	3	$	3	$	1,003	$	16	$	15
Commercial real estate:
Other		1,560		21		21		2,077		18		13
Residential real estate		751		9		8		1,006		12		8
Consumer:
Other		26		—		—		10		—		—
Total	$	2,566	$	33	$	32	$	4,096	$	46	$	36

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


	(Dollars in Thousands)						(Dollars in Thousands)
	September 30, 2016						September 30, 2015
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
Commercial	$	235	$	8	$	8	$	1,032	$	37	$	36
Commercial real estate:
Other		1,584		62		62		1,765		46		44
Residential real estate		757		25		24		1,015		36		27
Consumer:
Other		17		1		1		11		1		1
Total	$	2,593	$	96	$	95	$	3,823	$	120	$	108

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


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

Commercial	$	—	$	99	$	—	$	—
Commercial real estate:
Other		—		—		—		439
Residential real estate		—		57		—		98
Total	$	—	$	156	$	—	$	537

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

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


	(Dollars in Thousands)
	30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Current		Total
September 30, 2016
Commercial	$	—	$	99	$	—	$	99	$	52,295	$	52,394
Commercial real estate:
Construction		—		—		—		—		31,713		31,713
Other		22		—		—		22		175,724		175,746
Residential real estate		96		—		57		153		79,049		79,202
Consumer:
Auto		—		—		—		—		1,286		1,286
Other		—		—		—		—		2,835		2,835
Subtotal	$	118	$	99	$	57	$	274	$	342,902	$	343,176


	(Dollars in Thousands)
	30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Current		Total
December 31, 2015
Commercial	$	—	$	—	$	—	$	—	$	53,516	$	53,516
Commercial real estate:
Construction		—		—		—		—		24,167		24,167
Other		178		—		439		617		168,673		169,290
Residential real estate		329		—		98		427		79,253		79,680
Consumer:
Auto		1		—		—		1		1,424		1,425
Other		—		—		—		—		2,704		2,704
Subtotal	$	508	$	—	$	537	$	1,045	$	329,737	$	330,782

Troubled Debt Restructurings:

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

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There were no troubled debt restructurings that occurred during the three months ending September 30, 2016 and 2015.

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


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

Specific allocations of $228,000 and $267,000 were reported for troubled debt restructurings as of September 30, 2016 and September 30, 2015. No payment defaults or charge-offs were reported for troubled debt restructuring during the three months ending September 30, 2016, and one troubled debt restructuring totaling $3,000 was charged off in the nine months ending September 30, 2016. No payment defaults or charge-offs were reported for troubled debt restructurings during the three and nine months ending September 30, 2015.

The terms of certain other loans were modified during the nine months ending September 30, 2016 and 2015 that did not meet the definition of a troubled debt restructuring. These loans modified during the nine months ending September 30, 2016 have a total recorded investment of $25.6 million as of September 30, 2016. These loans modified during the nine months ending September 30, 2015 had a total recorded investment of $19.2 million as of September 30, 2015. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

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

Credit Quality Indicators:

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

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


	(Dollars in Thousands)
	Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2016
Commercial	$	51,831	$	—	$	563	$	—	$	52,394
Commercial real estate:
Construction		31,713		—		—		—		31,713
Other		171,876		756		3,114		—		175,746
Residential real estate		78,855		—		347		—		79,202
Consumer:
Auto		1,286		—		—		—		1,286
Other		2,822		—		13		—		2,835
Total	$	338,383	$	756	$	4,037	$	—	$	343,176


	(Dollars in Thousands)
	Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2015
Commercial	$	53,316	$	—	$	200	$	—	$	53,516
Commercial real estate:
Construction		24,167		—		—		—		24,167
Other		159,829		5,753		3,708		—		169,290
Residential real estate		79,033		—		647		—		79,680
Consumer:
Auto		1,425		—		—		—		1,425
Other		2,697		—		7		—		2,704
Total	$	320,467	$	5,753	$	4,562	$	—	$	330,782

Note 5 - Fair Value Measurements

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

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

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

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

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not have any Level 1 securities. Level 2 securities include certain U.S. agency bonds, collateralized mortgage and debt obligations, and certain municipal securities. The Company also has one Level 3 security. The value of this single issue trust preferred security is obtained on a quarterly basis directly from the originating broker.

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

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

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

Assets measured at fair value on a recurring basis:


	Fair Value Measurements at:
	(Dollars in Thousands)						(Dollars in Thousands)
	September 30, 2016						December 31, 2015
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Securities available-for-sale
U. S. government agencies and government sponsored entities		—	$	2,000		—		—	$	2,994		—
Agency mortgage-backed securities-residential		—		29,346		—		—		29,657		—
State and municipal		—		21,829		—		—		25,222		—
Trust preferred security		—		—		1,240		—		—		1,340
Corporate bonds		—		1,009		—		—		987		—
Total investment securities	$	—	$	54,184	$	1,240	$	—	$	58,860	$	1,340

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


	Trust Preferred Security
	2016		2015

Balance of recurring Level 3 assets at January 1	$	1,340	$	1,480
Total losses for the period:
Included in other comprehensive income		(100)		(240)
Balance of recurring Level 3 assets at September 30	$	1,240	$	1,240

Impaired loans which are measured for impairment using the fair value of collateral for collateral dependent loans, had a principal balance of $148,000 at September 30, 2016 with a valuation allowance of $107,000. Impaired loans which were measured for impairment using the fair value of collateral for collateral-dependent loans had a principal balance of $537,000 at December 31, 2015, with a valuation allowance of $198,000. Increases in the provision for loan losses of $107,000 and $260,000 were recognized for the nine months ended September 30, 2016 and 2015, respectively, as a result of net changes in fair values on collateral dependent loans and other factors affecting the provision for loan losses.

Other real estate owned, which is measured at fair value less costs to sell, had a net carrying value of $0 at September 30, 2016 and $100,000 at December 31, 2015. Total writedowns of other real estate owned were $0 and $27,000 in the nine months ending September 30, 2016 and 2015, respectively.

The following table presents quantitative and qualitative information about Level 3 fair value measurements for financial instruments measured on a non-recurring basis at September 30, 2016. There was no other real estate owned as of September 30, 2016.

September 30, 2016

Valuation
Techniques

Unobservable Inputs (Dollars in thousands)

Range (Weighted Avg)

Impaired loans:

Commercial

Market Approach

Discounts to allow for market value of assets

(20.00)

Residential RE

Sales Comparison

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

(0.00)

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


		December 31, 2015	Valuation Techniques	Unobservable Inputs (Dollars in thousands)	Range (Weighted Avg)
Impaired loans:
Commercial RE	$	260	Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition						(50.00)	%
Residential		79	Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition	20	%	-	60	%	(30.00)	%
Other real estate owned:
Commercial RE		100	Sales Comparison	Adjustments for limited use nature of certain properties, age of appraisal, location, and/or condition	8	%	-	40	%	(33.65)	%

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


			Fair Value Measurements at
			September 30, 2016
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and cash equivalents	$	5,353	$	5,353	$	—	$	—	$	5,353
Interest-bearing deposits in other financial institutions		15,611		15,645		—		—		15,645
Available-for-sale-securities		55,424		—		54,184		1,240		55,424
Loans, net of allowance		338,215		—		—		339,619		339,619
Accrued interest receivable		1,547		8		270		1,269		1,547
Federal Home Loan Bank stock		2,025		—		—		—		N/A

Financial Liabilities
Demand and savings deposits	$	205,351	$	205,351	$	—	$	—	$	205,351
Time deposits		148,478		—		148,865		—		148,865
FHLB advances		38,000		—		38,000		—		38,000
Other Borrowings		—		—		—		—		—
Subordinated debentures		5,000		—		—		2,434		2,434
Accrued interest payable		219		10		178		31		219


			Fair Value Measurements at
			December 31, 2015
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and cash equivalents	$	15,255	$	15,255	$	—	$	—	$	15,255
Interest-bearing deposits in other financial institutions		2,728		2,728		—		—		2,728
Available-for-sale-securities		60,200		—		58,860		1,340		60,200
Loans, net of allowance		325,866		—		—		326,886		326,886
Accrued interest receivable		1,680		—		337		1,343		1,680
Federal Home Loan Bank stock		2,025		—		—		—		N/A

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

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

(a)

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

(b)

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

(c)

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

(d)

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

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of loans held for sale is estimated based upon binding contracts and quotes from first party investors resulting in a Level 2 classification.

(e)

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

(f)

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

(g)

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

Note 6 - Earnings Per Share

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


	Quarter ended September 30, 2016					Quarter ended September 30, 2015
			Weighted	Per				Weighted	Per
			Average	Share				Average	Share
	Income		Shares	Amount		Income		Shares	Amount
Basic earnings per share:
Net income	$	1,135				$	775
Dividends on preferred stock during the year		(124)					(131)
Net income available to common shareholders	$	1,011	2,000,148	$	0.50	$	644	1,968,777	$	0.33

Effect of dilutive securities
Convertible preferred stock		124	539,175				131	568,890
Performance share units		—	2,313				—	—
Stock options		—	78				—	—
Warrants		—	—				—	—

Diluted earnings per share

Net income available to common stockholders and assumed conversions	$	1,135	2,541,714	$	0.45	$	775	2,537,667	$	0.31

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	Nine months ended September 30, 2016					Nine months ended September 30, 2015
			Weighted					Weighted
			Average	Per Share				Average	Per Share
	Income		Shares	Amount		Income		Shares	Amount
Basic earnings per share:
Net income	$	3,114				$	2,456
Dividends on preferred stock during the year		(371)					(389)
Net income available to common shareholders	$	2,743	1,997,577	$	1.37	$	2,067	1,968,777	$	1.05

Effect of dilutive securities
Convertible preferred stock		371	540,761				389	568,890
Performance share units		—	4,235				—	—
Stock options		—	104				—	—
Warrants		—	—				—	57,223

Diluted earnings per share

Net income available to common stockholders and assumed conversions	$	3,114	2,542,677	$	1.23	$	2,456	2,594,890	$	0.95

Stock options for 26,571 shares of common stock were not considered in computing diluted earnings per common share for September 30, 2015 because they are anti-dilutive. There were no anti-dilutive stock options at September 30, 2016.

Note 7 - Regulatory Capital Matters

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

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

Under quantitative measures established by regulation to ensure capital adequacy, we are required to maintain minimum amounts and ratios of total Tier 1 capital to risk-weighted assets and to total assets. For 2016, interim Final Basel III rules require the Bank to maintain minimum amounts and ratios of common equity Tier I capital to risk-weighted assets. Under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in computing regulatory capital. The rules also established a "capital conservation buffer" of 2.5%, to be phased in through January 1, 2019, above the new regulatory minimum risk-based capital ratios. The buffer is 0.625% as of September 30, 2016. The buffer could limit the payment of dividends and discretionary bonuses to officers if a bank fails to maintain required capital levels.

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


	(Dollars in Thousands)
									To Be Well Capitalized
					For Capital Adequacy				Under Prompt Corrective
	Actual				Purposes				Action Provisions
September 30, 2016	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk-Weighted Assets)
Consolidated	$	47,575	13.03	%	$	29,214	8.0	%		N/A	N/A
Citizens First Bank, Inc.		47,396	12.98	%		29,207	8.0	%	$	36,509	10.0	%

Tier I Capital (to Risk-Weighted Assets)
Consolidated		43,001	11.78	%		21,911	6.0	%		N/A	N/A
Citizens First Bank, Inc.		42,828	11.73	%		21,905	6.0	%		29,207	8.0	%

Common Equity Tier I Capital (to Risk-Weighted Assets)
Consolidated		30,734	8.42	%		16,433	4.5	%		N/A	N/A
Citizens First Bank, Inc.		42,828	11.73	%		16,429	4.5	%		23,731	6.5	%

Tier I Leverage Capital to average assets
Consolidated		43,001	9.82	%		17,516	4.0	%		N/A	N/A
Citizens First Bank, Inc.		42,828	9.78	%		17,513	4.0	%		21,891	5.0	%


	(Dollars in Thousands)
									To Be Well Capitalized
					For Capital Adequacy				Under Prompt Corrective
	Actual				Purposes				Action Provisions
December 31, 2015	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk-Weighted Assets)
Consolidated	$	44,762	12.58	%	$	28,463	8.0	%		N/A	N/A
Citizens First Bank, Inc.		46,353	13.03	%		28,459	8.0	%	$	35,573	10.0	%

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

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

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

Note 8 - Preferred Stock

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

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of Citizens First Corporation (the “Company”) is included to provide the shareholders with an expanded narrative of our results of operations, changes in financial condition, liquidity and capital adequacy. This narrative should be reviewed in conjunction with our consolidated financial statements and notes thereto included in our 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Forward-Looking Statements

We may from time to time make written or oral statements, including statements contained in this report, which may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). The words “may”, “expect”, “anticipate”, “intend”, “consider”, “plan”, “believe”, “seek”, “should”, “estimate”, and similar expressions are intended to identify such forward-looking statements, but other statements may constitute forward-looking statements. These statements should be considered subject to various risks and uncertainties. Such forward-looking statements are made based upon management’s belief as well as assumptions made by, and information currently available to, management pursuant to “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors. Among the risks and uncertainties that could cause actual results to differ materially are current and future economic conditions generally and in our market areas, changes in the interest rate environment, overall loan demand, increased competition in the financial services industry which could negatively impact our ability to increase total earning assets, and retention of key personnel. Actions by the Department of the Treasury and federal and state bank regulators in response to changing economic conditions, changes in interest rates, loan prepayments by and the financial health of our borrowers, and other factors described in the reports filed by us with the Securities and Exchange Commission could also impact current expectations.

Results of Operations

For the quarter ended September 30, 2016, we reported net income of $1.14 million or $0.45 per diluted common share, compared to net income of $775,000, or $0.31 per diluted common share in the third quarter of 2015, an increase of $360,000. The increase in net income is attributable to a reduction in non-interest expenses of $385,000, combined with an increase in net interest income of $165,000. The reduction in non-interest expense is related to a branch disposal loss of $262,000 that occurred in 2015, and a reduction in professional fees of $85,000. The increase in net interest income is the result of an increase in earning assets over the prior year, primarily loans.

For the nine months ended September 30, 2016, we reported net income of $3.11 million or $1.23 per diluted common share, compared to net income of $2.46 million, or $0.95 per diluted common share in the previous year. This represents an increase of $658,000, or $0.28 per share. The increase in net income is attributable to a reduction in the provision for loan losses of $285,000, combined with an increase in net interest income of $487,000, and a decrease in non-interest expenses of $167,000. The increase in net interest income is the result of an increase in earning assets over the prior year, primarily loans.

Our annualized return on average assets, defined as net income divided by average assets, was 1.02% for the quarter ended September 30, 2016, compared to 0.72% for the quarter ended September 30, 2015. The annualized return on average assets was 0.95% for the nine months ended September 30, 2016, compared to 0.76% in September 30, 2015. Our annualized return on average equity, defined as net income divided by average equity, was 10.75% for the quarter ended September 30, 2016, compared to 7.97% for the quarter ended September 30, 2015. Our annualized return on average equity was 10.14% for the nine months ending September 30, 2016, compared to 8.51% for the nine months ending September 30, 2015.

Net Interest Income

Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets, such as loans and securities, and the total interest cost of the deposits and borrowings obtained to fund these assets. Factors that influence the level of net interest income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, the level of non-performing loans and non-earning assets, and the amount of non-interest bearing deposits supporting earning assets.

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Net interest income for the quarter ended September 30, 2016 increased $165,000, or 4.4%, compared to September 30, 2015. The increase in net interest income was a result of an increase in the volume of average earning assets over the previous year.

Net interest income for the nine months ended September 30, 2016 increased $487,000 or 4.3%, compared to September 30, 2015. The increase in net interest income was a result of an increase in the volume of average earning assets over the previous year.

The Company’s net interest margin was 3.83% for the three months ended September 30, 2016, and 3.84% for the three months ended September 30, 2015, a decrease of 1 basis point. The net interest margin decreased due to a decline in the yield on loans. The net interest margin for the nine months ended September 30, 2016 was 3.89%, compared to 3.84% in 2015. The increase of 5 basis points is attributable to both a decrease in the cost of average interest-bearing liabilities and an increase in the yield on earning assets.

The following tables set forth for the quarter and nine months ended September 30, 2016 and 2015, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. Such yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented.

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


	2016						2015
	Average		Income/		Average		Average		Income/		Average
Quarter ended September 30,	Balance		Expense		Rate		Balance		Expense		Rate
Earning assets:
Federal funds sold	$	843	$	1	0.47	%	$	15,122	$	9	0.24	%
Interest-bearing deposits in other financial institutions		11,015		21	0.76	%		1,609		6	1.48	%
Available-for-sale securities (1)
Taxable		34,671		156	1.79	%		35,146		159	1.79	%
Nontaxable		21,282		218	4.08	%		23,951		258	4.27	%
Federal Home Loan Bank stock		2,025		20	3.93	%		2,025		20	3.92	%
Loans receivable (2)		344,733		4,213	4.86	%		319,053		4,050	5.04	%
Total interest earning assets		414,569		4,629	4.44	%		396,906		4,502	4.50	%
Non-interest earning assets		27,473						31,425
Total Assets	$	442,042					$	428,331

Interest-bearing liabilities:
NOW Accounts	$	115,788	$	117	0.40	%	$	111,703	$	104	0.37	%
Money market Accounts		21,103		16	0.30	%		25,887		24	0.37	%
Savings accounts		21,613		10	0.18	%		20,703		10	0.19	%
Time deposits		145,968		377	1.03	%		163,350		425	1.03	%
Total interest-bearing deposits		304,472		520	0.68	%		321,643		563	0.69	%
Borrowings		37,490		89	0.94	%		15,696		74	1.87	%
Subordinated debentures		5,000		30	2.39	%		5,000		25	1.98	%
Total interest-bearing liabilities		346,962		639	0.73	%		342,339		662	0.77	%
Non-interest bearing deposits		50,480						44,984
Other liabilities		2,598						2,492
Total liabilities		400,040						389,815
Stockholders’ equity		42,002						38,516
Total Liabilities and Stockholders’ Equity	$	442,042					$	428,331
Net interest income			$	3,990					$	3,840

Net interest spread (1)					3.71	%					3.73	%
Net interest margin (1) (3)					3.83	%					3.84	%
Return on average assets ratio					1.02	%					0.72	%
Return on average equity ratio					10.75	%					7.98	%
Average equity to assets ratio					9.50	%					8.99	%

(1)

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

(2)

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

(3)

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

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


	2016						2015
	Average		Income/		Average		Average		Income/		Average
Nine months ended September 30,	Balance		Expense		Rate		Balance		Expense		Rate
Earning assets:
Federal funds sold	$	3,723	$	14	0.50	%	$	18,308	$	30	0.22	%
Interest-bearing deposits in other financial institutions		5,510		43	1.04	%		596		7	1.57	%
Available-for-sale securities (1)
Taxable		36,619		510	1.86	%		34,675		465	1.79	%
Nontaxable		22,369		696	4.16	%		24,000		784	4.37	%
Federal Home Loan Bank stock		2,025		61	4.02	%		2,025		61	4.03	%
Loans receivable (2)		338,751		12,478	4.92	%		319,939		12,107	5.06	%
Total interest earning assets		408,997		13,802	4.51	%		399,543		13,454	4.50	%
Non-interest earning assets		29,106						30,639
Total Assets	$	438,103					$	430,182

Interest-bearing liabilities:
NOW Accounts	$	123,437	$	365	0.39	%	$	111,813	$	302	0.36	%
Money market Accounts		23,543	$	63	0.36	%	$	25,894	$	74	0.38	%
Savings accounts		21,186		29	0.18	%		20,207		29	0.19	%
Time deposits		143,779		1,105	1.03	%		163,841		1,287	1.05	%
Total interest-bearing deposits		311,945		1,562	0.67	%		321,755		1,692	0.70	%
Borrowings		28,949		228	1.05	%		18,538		219	1.58	%
Subordinated debentures		5,000		86	2.30	%		5,000		73	1.95	%
Total interest-bearing liabilities		345,894		1,876	0.72	%		345,293		1,984	0.77	%
Non-interest bearing deposits		48,886						44,163
Other liabilities		2,296						2,153
Total liabilities		397,076						391,609
Stockholders’ equity		41,027						38,573
Total Liabilities and Stockholders’ Equity	$	438,103					$	430,182
Net interest income			$	11,926					$	11,470

Net interest spread (1)					3.78	%					3.73	%
Net interest margin (1) (3)					3.89	%					3.84	%
Return on average assets ratio					0.95	%					0.76	%
Return on average equity ratio					10.14	%					8.51	%
Average equity to assets ratio					9.36	%					8.97	%

(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.

Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on our net interest income for the nine months ended September 30, 2016 and 2015. Information is provided with respect to (1) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (2) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes attributable to the combined input of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

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	(Dollars in Thousands)
	Nine Months Ended September 30,
	2016 Vs. 2015
	Increase (Decrease) Due to
	Rate	Volume	Net
Interest-earning assets:
Federal funds sold	27	(43)	(16)
Interest-bearing deposits in other financial institutions	(67)	103	36
Available-for-sale securities	—	—	—
Taxable	(2)	47	45
Nontaxable (1)	7	(95)	(88)
Federal Home Loan Bank stock	—	—	—
Loans, net	(901)	1,272	371
Total Net Change in income on interest-earning assets	(936)	1,284	348

Interest-bearing liabilities:
NOW Accounts	7	56	63
Money market accounts	1	(12)	(11)
Savings accounts	(3)	3	—
Time deposits	100	(282)	(182)
FHLB and other borrowings	(38)	(92)	(130)
Subordinated debentures	(211)	220	9
Total Net Change in expense on interest-earning liabilities	(144)	(107)	(251)
Net change in net interest income	(792)	1,391	599
Percentage Change	-132.3%	232.3%	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

There was no provision for loan losses recorded for the third quarter of 2016 or for the third quarter of 2015. The allowance for loan losses to total loans was 1.45% of total loans at September 30, 2016 compared to 1.53% at September 30, 2015. Net charge-offs (recoveries) were ($12,000) for the third quarter of 2016 compared to ($38,000) in the third quarter of 2015.

(Credit) provision expense for the nine month ended September 30, 2016 decreased $285,000, from $200,000 to ($85,000). Net charge-offs (recoveries) were ($130,000) for the nine months ended September 30, 2016 compared to $64,000 for the nine months ended September 30, 2015.

Non-Interest Income

Non-interest income for the three months ended September 30, 2016 increased $12,000, or 1.4%, compared to the three months ended September 30, 2015, primarily due to gain on the sale of mortgage loans.

Non-interest income for the nine months ended September 30, 2016 increased $103,000, or 4.4%, compared to the nine months ended September 30, 2015, primarily due to gains on sale of securities and gains on sale of mortgage loans, offset by a decline in lease income and non-deposit brokerage fees.

Non-Interest Expense

Non-interest expense for the three months ended September 30, 2016 decreased $385,000, or 10.9%, compared to the three months ended September 30, 2015, primarily due to a branch disposal loss of $262,000 that occurred in 2015, and a reduction in professional fees of $85,000.

Non-interest expense for the nine months ended September 30, 2016 decreased $167,000, or 1.7%, compared to the nine months ended September 30, 2015, primarily due to branch disposal losses of $235,000 and professional fees of $119,000, partially offset by an increase in personnel expenses, which were a result of normal salary adjustments.

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Income Taxes

Income tax expense was calculated using our expected effective rate for 2016 and 2015. We have recognized deferred tax liabilities and assets to show the tax effects of differences between the financial statement and tax bases of assets and liabilities. Our statutory federal tax rate was 34.0% in both 2016 and 2015. The effective tax rate for the third quarter of 2016 was 30.2% compared to a 27.1% effective tax rate for the third quarter of 2015. The difference between the statutory and effective rates are impacted by such factors as income from tax-exempt loans, tax-exempt income on state and municipal securities, and income on bank owned life insurance.

Balance Sheet Review

Overview

Total assets at September 30, 2016 were $441.7 million, an increase of $9.5 million, or 2.2%, from $432.2 million at December 31, 2015. Average assets during the third quarter were $442.0 million, an increase of 3.2%, or $13.7 million, from $428.3 million in the third quarter of 2015. Average interest earning assets increased 4.4%, or $17.6 million, from $397.0 million in the third quarter of 2015 to $414.6 million in the third quarter of 2016.

Loans

Loans increased $12.4 million, or 3.75%, from $330.8 million at December 31, 2015 to $ 343.2 million at September 30, 2016. Total loans averaged $344.7 million the third quarter of 2016, compared to $319.1 million the third quarter of 2015, an increase of $25.6 million, or 8.02%. We experienced an increase in the commercial real estate portfolio during the first nine months of the year compared to December 31, 2015. The following table presents a summary of the loan portfolio by category:


	(Dollars in Thousands)
	September 30, 2016				December 31, 2015
			% of Total				% of Total
			Loans				Loans
Commercial and agricultural	$	52,394	15.27	%	$	53,516	16.18	%
Commercial real estate		207,459	60.45	%		193,457	58.48	%
Residential real estate		79,202	23.08	%		79,680	24.09	%
Consumer		4,121	1.20	%		4,129	1.25	%
	$	343,176	100.00	%	$	330,782	100.00	%

The majority of our loans are to customers located in south central Kentucky and central Tennessee. As of September 30, 2016, our twenty largest credit relationships consisted of loans and loan commitments ranging from $3.9 million to $11.3 million. The aggregate amount of these credit relationships was $113.5 million. As of December 31, 2015, our twenty largest credit relationships consisted of loans and loan commitments ranging from $3.8 million to $6.6 million. The aggregate amount of these credit relationships was $95.9 million.

Our lending activities are subject to a variety of lending limits imposed by state and federal law. Citizens First Bank’s secured legal lending limit to a single borrower was approximately $12.5 million at September 30, 2016 and December 31, 2015.

As of September 30, 2016, we had $17.0 million of participations in loans purchased from, and $20.7 million of participations in loans sold to, other banks. As of December 31, 2015, we had $21.1 million of participations in loans purchased from, and $21.8 million of participations in loans sold to, other banks.

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The following table sets forth the maturity distribution of the loan portfolio as of September 30, 2016. Maturities are based on contractual terms. Our policy is to specifically review and approve all loans renewed; loans are not automatically rolled over.


	(Dollars in Thousands)
			After One but
Loan Maturities	Within One		Within Five		After Five
as of September 30, 2016	Year		Years		Years		Total
Commercial and agricultural	$	19,788	$	27,007	$	5,599	$	52,394
Commercial real estate		37,537		114,164		55,758		207,459
Residential real estate		7,463		37,918		33,821		79,202
Consumer		1,237		2,845		39		4,121
Total	$	66,025	$	181,934	$	95,217	$	343,176

Credit Quality and the Allowance for Loan Losses

The allowance for loan losses represents management's estimate of probable credit losses incurred in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change.

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


	(Dollars in Thousands)
	September 30, 2016				December 31, 2015
	Amount		% of Loans in Each Category to Total Loans		Amount		% of Loans in Each Category to Total Loans
Residential real estate loans	$	565	23.08	%	$	524	24.09	%
Consumer and other loans		24	1.20	%		28	1.25	%
Commercial and agricultural		548	15.27	%		812	16.18	%
Commercial real estate		3,752	60.45	%		3,431	58.48	%
Unallocated		72	0.00	%		121	0.00	%
Total allowance for loan losses	$	4,961	100.00	%	$	4,916	100.00	%

We maintain a modest unallocated amount in the allowance to assist in mitigating inherent risk that cannot be quantitatively or qualitatively determined, including, but not limited to, new loan products and new markets for which insufficient history exists for a robust analysis. Allocations on individual loans and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience. The unallocated portion of the allowance was $72,000 at September 30, 2016 and $121,000 at December 31, 2015.

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


	(Dollars in Thousands)
	September 30,			December 31,
	2016			2015
Non-accrual loans	$	156		$	537
Loans 90+ days past due/accruing		—			—
Restructured loans on non-accrual		—			—
Total non-performing loans		156			537
Other real estate owned		—			100
Total non-performing assets	$	156		$	637

Non-performing loans to total loans		0.05	%		0.16	%
Non-performing assets to total assets		0.04	%		0.15	%
Net charge-offs (recoveries) YTD	$	(130)		$	104
Net charge-offs (recoveries) YTD to average YTD total loans		(0.05)	%		0.03	%
Allowance for loan losses to non-performing loans		3,180.13	%		915.46	%
Allowance for loan losses to total loans		1.45	%		1.49	%

Non-performing assets totaled $156,000 at September 30 2016, compared to $637,000 at December 31, 2015, a decrease of $481,000. Payoffs and paydowns of $637,000 included the charge off of $73,000 in principal deficiency balances after the disposition of collateral and the sale of $100,000 in other real estate owned, with decreases offset by the addition of $57,000 in residential real estate loans and $100,000 in commercial and agricultural loans.

Non-performing loans consist of non-accrual loans and loans 90 days or more past due and still accruing interest. Non-performing assets are defined as non-performing loans, other real estate owned, and repossessed assets. Management classifies commercial and commercial real estate loans as non-accrual when principal or interest is past due 90 days or more and the loan is not adequately collateralized, or earlier when, in the opinion of management, principal or interest is not likely to be paid in accordance with the terms of the obligation. We charge off consumer loans after 120 days of delinquency unless they are adequately secured and in the process of collection. Non-accrual loans are not reclassified as accruing until principal and interest payments are brought current and future payments appear reasonably certain.

Troubled debt restructurings (TDRs) are modified loans in which a concession is provided to a borrower experiencing financial difficulties. Loan modifications are considered TDRs when the concession provided is not available to the borrower through either normal channels or other sources. However, not all loan modifications are TDRs. Our standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. However, each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific circumstances at a point in time. TDRs can be classified as either accrual or nonaccrual loans. Non-accrual TDRs are included in non-accrual loans whereas accruing TDRs are excluded because the borrower remains contractually current.

Loans that exhibit probable or observed credit weaknesses are subject to individual review. Where appropriate, allocations for individual loans are included in the allowance calculation based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to us. Included in the review of individual loans are those that are impaired as provided in ASC Topic 310 “Receivables”. We evaluate the collectability of both principal and interest when assessing the need for a loss accrual. Historical loss rates are applied to other loans not subject to individual allocations. These historical loss rates may be adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition. Factors which management considers in the analysis include the effects of the national and local economies, trends in the nature and volume of loans (delinquencies, charge-offs and non-accrual loans), changes in mix, asset quality trends, risk management and loan administration, changes in internal lending policies and credit standards, and examination results from bank regulatory agencies and our internal credit examiners.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt

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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.

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 $59.0 million for the first nine months of 2016, compared to $58.7 million for 2015.

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


	(Dollars in Thousands)
				Over			Over
				One Year			Five Years
	One Year or			Through			Through			Over Ten			Total
September 30, 2016	Less			Five Years			Ten Years			Years			Maturities			Fair Value
U.S. Government agencies	$	—		$	1,998		$	—		$	—		$	1,998		$	2,000
Agency mortgage-backed securities: (1)		171			23,156			5,471			—			28,798			29,346
Municipal securities		1,305			9,716			7,825			2,380			21,226			21,829
Trust preferred security		—			—			—			1,883			1,883			1,240
Corporate bond		—			—			1,000			—			1,000			1,009
Total available-for-sale securities	$	1,476		$	34,870		$	14,296		$	4,263		$	54,905		$	55,424

Percent of total		2.69	%		63.51	%		26.04	%		7.76	%		100.00	%

Weighted average yield(2)		2.90	%		2.40	%		3.43	%		4.05	%		2.79	%

(1)

Agency mortgage‑backed securities (residential) are grouped into average lives based on September 2016 prepayment projections.

(2)

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

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	(Dollars in Thousands)
				Over			Over
				One Year			Five Years
	One Year or			Through			Through			Over Ten			Total
December 31, 2015	Less			Five Years			Ten Years			Years			Maturities			Fair Value
U.S. Government agencies	$	—		$	2,998		$	—		$	—		$	2,998		$	2,994
Agency mortgage-backed securities: (1)		315			24,389			4,742			—			29,446			29,657
Municipal securities		1,126			10,838			8,086			4,591			24,641			25,222
Trust preferred security		—			—			—			1,880			1,880			1,340
Corporate bond		—			—			1,000			—			1,000			987
Total available-for-sale securities	$	1,441		$	38,225		$	13,828		$	6,471		$	59,965		$	60,200

Percent of total		2.4	%		63.75	%		23.06	%		10.79	%		100	%

Weighted average yield(2)		4.31	%		2.45	%		3.43	%		4.07	%		2.88	%

(1)

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

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

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

Deposits

Our primary funding source for lending and investment activities results from customer deposits and a deposit listing service. Deposits at September 30, 2016 were $353.8 million, a decrease of $16.6 million, or 4.5%, compared to $370.4 million at December 31, 2015. Total deposits averaged $355.0 million the third quarter of 2016, a decrease of $11.6 million, or 3.2%, compared to $366.6 million during the third quarter of 2015.

Time deposits that meets or exceed the FDIC insurance limit of $250,000 were $11.2 million and $11.5 million at September 30, 2016 and December 31, 2015, respectively. Time deposits of $100,000 or more totaled $62.8 million at September 30, 2016, compared to $73.4 million at December 31, 2015. Interest expense on time deposits of $100,000 or more was $569,000 for the nine months ended September 30, 2016, compared to $615,000 for the nine months ended September 30, 2015. 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 September 30, 2016.


	(Dollars in Thousands)
	September 30, 2016
Three months or less	$	24,691
Over three through six months		26,125
Over six through twelve months		40,995
Over one year through three years		46,299
Over three years through five years		10,367
Over five years		1
Total	$	148,478

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

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and eligible commercial real estate. Total advances as of September 30, 2016 were $38.0 million compared to $13.0 million at December 31, 2015. Rates vary based on the term to repayment, and are summarized below as of September 30, 2016:


				(Dollars in Thousands)
Type	Maturity	Rate		Amount
Fixed	October 21, 2016	0.7	%		5,000
Fixed	December 2, 2016	0.9	%		5,000
Fixed	January 18, 2017	0.65	%		5,000
Fixed	January 30, 2017	0.65	%		2,000
Fixed	April 25, 2017	0.89	%		5,000
Fixed	May 12, 2017	0.77	%		5,000
Fixed	July 28, 2017	0.84	%		3,000
Fixed	April 20, 2018	1.05	%		5,000
Fixed	May 24, 2019	1.72	%		3,000
				$	38,000

At September 30, 2016, we had available collateral to borrow an additional $37.3 million from the FHLB compared to $63.5 million at December 31, 2015.

Other Borrowings. In 2015, we renewed a credit agreement with a community bank to be used for operating capital and general corporate purposes. The line has a total availability of $3.0 million, matures November 21, 2016, and bears interest at the prime rate as published in the Money Rates section of The Wall Street Journal, plus 0.25%, with interest payable monthly. The line has a floor rate of 4.5%. The line is secured by the Bank’s common stock. As of September 30, 2016 there was no balance on the line compared to a balance of $2.0 million at December 31, 2015.

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

We issued $5.0 million in subordinated debentures in October, 2006. These trust preferred securities bear an interest rate, which reprices each calendar quarter, of 165 basis points over 3-month LIBOR (London Inter Bank Offering Rate). Our rate as of September 30, 2016 was 2.30%. The subordinated debentures may be included with tier 1 capital (with certain limitations) under current regulatory guidelines.

Liquidity

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

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

Capital

Stockholders’ equity increased to $42.4 million at September 30, 2016 from $39.5 million at December 31, 2015. The book value per common share improved to $17.56 at September 30, 2016 compared to $16.18 at December 31, 2015. The Company has paid $0.08 per share in common dividends year-to-date in 2016, and declared a dividend of $0.08 per share in October, 2016 to be paid in November, 2016.

The Company previously issued 250 shares of Cumulative Convertible Preferred Stock, (Preferred Stock), for an aggregate purchase price of $8.0 million. The Preferred Stock was sold for $31,992 per share, is entitled to quarterly cumulative

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dividends at an annual fixed rate of 6.5% and is currently convertible into shares of common stock of the Company at an initial conversion price per share of $15.50 (currently $14.06, adjusted for stock dividends). Approximately 5% of preferred shareholders (holding 13 shares of Preferred Stock) have converted their shares into 29,575 shares of common stock as of September 30, 2016.

We are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off‑balance‑sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks, (Basel III rules) became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. The rules also established a "capital conservation buffer" of 2.5%, to be phased in over three years, above the new regulatory minimum risk-based capital ratios. The buffer as of September 30, 2016 is 0.625%. The buffer could limit the payment of dividends and discretionary bonuses to officers if a bank fails to maintain required capital levels. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. We believe as of September 30, 2016 and December 31, 2015, the Company and the Bank met all capital adequacy requirements to which it is subject.

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


	(Dollars in Thousands)
									To Be Well Capitalized
					For Capital Adequacy				Under Prompt Corrective
	Actual				Purposes				Action Provisions
September 30, 2016	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk-Weighted Assets)
Consolidated	$	47,575	13.03	%	$	29,214	8.0	%		N/A	N/A
Citizens First Bank, Inc.		47,396	12.98	%		29,207	8.0	%	$	36,509	10.0	%

Tier I Capital (to Risk-Weighted Assets)
Consolidated		43,001	11.78	%		21,911	6.0	%		N/A	N/A
Citizens First Bank, Inc.		42,828	11.73	%		21,905	6.0	%		29,207	8.0	%

Common Equity Tier I Capital (to Risk-Weighted Assets)
Consolidated		30,734	8.42	%		16,433	4.5	%		N/A	N/A
Citizens First Bank, Inc.		42,828	11.73	%		16,429	4.5	%		23,731	6.5	%

Tier I Leverage Capital to average assets
Consolidated		43,001	9.82	%		17,516	4.0	%		N/A	N/A
Citizens First Bank, Inc.		42,828	9.78	%		17,513	4.0	%		21,891	5.0	%

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	(Dollars in Thousands)
									To Be Well Capitalized
					For Capital Adequacy				Under Prompt Corrective
	Actual				Purposes				Action Provisions
December 31, 2015	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk-Weighted Assets)
Consolidated	$	44,762	12.58	%	$	28,463	8.0	%		N/A	N/A
Citizens First Bank, Inc.		46,353	13.03	%		28,459	8.0	%	$	35,573	10.0	%

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

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

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

At September 30, 2016, the model indicated that if rates were to increase by 200 basis points during the remainder of the calendar year, then net interest income would increase 8.20% 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 .69%. 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: Oct 2016 - Sept 2017


Projected			Net Interest Income
Interest Rate			$ Change From		% Change From
Change	Estimated Value		Base		Base
+400	$	18,123,055	$	2,674,492	17.31	%
+300		17,425,360		1,976,797	12.80	%
+200		16,715,586		1,267,023	8.20	%
Base		15,448,563		—	—	%
-200		15,342,354		(106,209)	(0.69)	%

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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 quarter ending September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, nor were there any material weaknesses in the controls which required corrective action.

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PART II-OTHER INFORMATION

Item 6. Exhibits

EXHIBIT INDEX


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

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

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

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

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

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

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

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

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

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

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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: November 10, 2016	/s/M. Todd Kanipe
	M. Todd Kanipe
	President and Chief Executive Officer


Date: November 10, 2016	/s/ J. Steven Marcum
	J. Steven Marcum
	Executive Vice President and Chief Financial Officer

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