UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC. 20549

Form 10-K

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

For the fiscal year ended December 31, ~~2017~~2018

☐	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		(I.R.S. Employer Identification No.)
incorporation or organization)

1065 Ashley Street, Bowling Green, Kentucky		42103
(Address of Principal Executive Offices)		(Zip Code)

Issuer’s Telephone Number, Including Area Code: (270) 393-0700

Securities registered under Section 12(b) of the Exchange Act:

Title of each class		Name of each exchange on which registered
Common stock, no par value		The NASDAQ Stock Market, LLC

Securities registered under Section 12(g) of the Exchange Act: None

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. . Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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 past 12 months (or for such 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~~ files) Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(Section229.405) is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐ ☒

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

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐☒ ~~(Do not check if a smaller reporting company)~~ Smaller reporting company ☒ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates (for purposes of this calculation, “affiliates” are considered to be the directors and executive officers of the issuer) computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $5161,~~415~~557,~~301~~317 as of June 30, ~~2017~~2018

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 2,~~526~~537,~~377~~605 shares of common stock as of March 137, ~~2018~~2019

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement for the Annual Meeting of Shareholders to be held May 16, 2018 are incorporated by reference into Part III.

Table of Contents

Citizens First Corporation

Table of Contents

Part I
Item 1	Business	4
Item 1A	Risk Factors	1416
Item 1B	Unresolved Staff Comments	2325
Item 2	Properties	2325
Item 3	Legal Proceedings	2325
Item 4	Mine Safety ~~and~~ Disclosures	2325
Part II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2426
Item 6	Selected Financial Data	2426
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operation	2527
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	3941
Item 8	Financial Statements and Supplementary Data	4042
Item 9	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	7274
Item 9A	Controls and Procedures	7274
Item 9B	Other Information	7274
Part III
Item 10	Directors, Executive Officers, and Corporate Governance	7375
Item 11	Executive Compensation	7375
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	7376
Item 13	Certain Relationships and Related Transactions, and Director Independence	7476
Item 14	Principal Accounting Fees and Services	7476
Part IV
Item 15	Exhibits, Financial Statement Schedules	7577
	Signatures	77
Item 16	Form 10-K Summary	78
	Signatures	79

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Part I

Forward-Looking Statements

Citizens First Corporation (the “Company”) 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 27A of the Securities Act of 1933 and 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 based on many assumptions and estimates and are not guarantees of future performance. Such statements are made pursuant to “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors that could cause actual results and performance to differ from those expressed in our forward-looking statements we make or incorporate by reference in this Annual Report on Form 10-K include, but are not limited to those described below under Item 1A – “Risk Factors” and the following:

the Company’s recently announced agreement to merge with German American (the “Merger”) and the risks and uncertainties associated with the Merger;

current and future economic and business conditions, including, without limitation, the deterioration of real estate values, the subprime mortgage, credit and liquidity markets, as well as the Federal Reserve’s actions with respect to interest rates, may lead to a deterioration in credit quality, thereby requiring increases in our provision for credit losses, a reduced demand for credit, which would reduce earning assets, and/or a decline in real estate values;

changes in trade, monetary and fiscal policies, as well as legislative and regulatory changes, including changes in accounting standards and banking, securities and tax laws, and our ability to maintain appropriate levels of capital;

changes in the interest rate environment and our ability to effectively manage interest rate risk and other market risk, credit risk and operational risk;

changes in the quality or composition of our loan or investment portfolios, including adverse developments in the real estate markets, the borrowers’ industries or in the repayment ability of individual borrowers or issuers;

increases in our nonperforming assets, or our inability to recover or absorb losses created by such nonperforming assets;

our ability to manage fluctuations in the value of assets and liabilities and off-balance sheet exposure so as to maintain sufficient capital and liquidity to support our business;

laws and regulations affecting financial institutions in general;

government intervention in the U.S. financial system;

the cost and other effects of material contingencies;

the impact, extent and timing of technological changes;

potential cyber-attacks, information security breaches and other criminal activities;

· the threat or occurrence of war or acts of terrorism and the existence or exacerbation of general geopolitical instability and uncertainty;

· management’s ability to develop and execute plans to effectively respond to unexpected changes; and

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the threat or occurrence of war or acts of terrorism and the existence or exacerbation of general geopolitical instability and uncertainty;

management’s ability to develop and execute plans to effectively respond to unexpected changes; and

other factors and information contained in this Annual Report on Form 10-K and other reports that we file with the Securities and Exchange Commission (SEC) under the Exchange Act.

The cautionary statements in this Annual Report on Form 10-K also identify important factors and possible events that involve risk and uncertainties that could cause our actual results to differ materially from those contained in the forward-looking statements. These forward-looking statements speak only as of the date on which the statements were made. We do not intend and undertake no obligation to update or revise any forward-looking statements, whether as a result of differences in actual results, changes in assumptions, future events or otherwise.

Item 1. Business

Overview

We are a Kentucky corporation organized in 1975 for the purpose of conducting business as an investment club. We are headquartered in Bowling Green, Kentucky. In late 1998 and early 1999 we received regulatory approval to serve as the bank holding company for Citizens First Bank, Inc. (the “Bank”), a Kentucky state chartered bank that commenced operations on February 19, 1999. The Bank currently conducts full-service community banking operations from eight (8) locations in the Kentucky counties of Barren, Hart, Simpson and Warren, and a loan production office in Williamson County, Tennessee.

We are primarily engaged in the business of accepting demand, savings and time deposits insured by the FDIC and providing commercial, consumer and mortgage loans to the general public. We primarily market our products and services to small and medium-sized businesses and to retail consumers. Our strategy is to provide outstanding service through our employees, who are relationship-oriented and committed to customer service. Through this strategy, we intend to grow our business, expand our customer base and improve our profitability.

As of December 31, ~~2017~~2018, we had total assets of $~~465~~476.40 million, total loans of $~~374~~371.25 million, deposits of $~~372~~388.36 million and stockholders’ equity of $4550.80 million.

~~Lending~~Merger ~~Activities~~Agreement with German American

~~General.~~On WeFebruary 21, ~~offer~~2019, athe ~~variety~~Company ofentered ~~loans,~~into ~~including~~an ~~commercial~~Agreement and ~~residential~~Plan ~~real~~of ~~estate~~Reorganization ~~mortgage~~(the ~~loans~~“Merger Agreement”) with German American Bancorp, ~~construction~~Inc.(“German ~~loans~~American”), ~~commercial~~an ~~loans~~Indiana ~~and~~corporation. ~~consumer~~The Merger ~~loans~~Agreement provides tothat, ~~individuals~~upon the terms and ~~small~~subject to ~~mid-size~~the ~~businesses~~conditions ~~that~~set ~~are~~forth ~~located~~therein, inthe orCompany ~~conduct~~will amerge ~~substantial~~with ~~portion~~and ofinto German ~~their~~American (the ~~business~~“Merger”), inwith German ~~our~~American as ~~market~~the ~~area~~surviving entity in the Merger. ~~Our~~ ~~underwriting~~Immediately ~~standards~~following ~~vary~~the ~~for~~Merger, ~~each~~the ~~type~~Company’s ofwholly ~~loan~~owned subsidiary, asCitizens ~~described~~First ~~below.~~Bank, Atwill ~~December~~merge with and into 31German American’s wholly owned subsidiary, ~~2017~~German American Bank ( Bank Merger), wewith ~~had~~German ~~total~~American ~~loans~~Bank ofas ~~$374~~the surviving entity in the Bank Merger.2 The ~~million~~Merger Agreement was unanimously approved by the Board of Directors of each of German American and the Company, ~~representing~~and ~~80.4%~~is subject to approval by federal and state banking regulatory authorities, approval by the shareholders of ~~our~~the ~~total~~Company ~~assets~~and certain other conditions set forth in the Merger Agreement.

~~Commercial~~Under ~~Loans. We~~the ~~make~~terms ~~commercial~~of ~~loans~~the ~~primarily~~Merger toAgreement, ~~small~~each ~~and~~record ~~medium-sized~~holder ~~businesses.~~of ~~These~~the ~~loans~~Company’s ~~are~~common ~~secured~~stock ~~and~~(other ~~unsecured~~than "dissenting shares" and ~~are~~shares ~~made~~of ~~available~~the ~~for~~Company’s ~~general~~common ~~operating~~stock ~~inventory~~held ~~and~~by ~~accounts~~the ~~receivables,~~Citizens asFirst ~~well~~Bank as401k ~~any~~plan), ~~other~~is ~~purposes~~to ~~considered~~receive ~~appropriate~~(a) 0.6629 Weshare ~~will~~of ~~generally~~German ~~look~~American tocommon stock in a ~~borrower’s~~tax-free ~~business~~exchange ~~operations~~(“Exchange asRatio”), ~~the~~plus ~~principal~~(b) a ~~source~~cash payment of ~~repayment,~~$5.80 ~~but~~in ~~will~~the ~~also~~Merger. ~~require,~~The ~~when~~401(k) ~~appropriate~~plan is to receive, ~~security~~for ~~interests~~each inshare ~~personal~~of ~~property~~the ~~and~~Company’s ~~personal~~common ~~guarantees.~~stock Inheld ~~addition,~~by the ~~majority~~401(k) ofplan ~~commercial~~at ~~loans~~the ~~that~~time ~~are~~of ~~not~~the ~~mortgage~~Merger, ~~loans~~a ~~are~~cash ~~secured~~payment byequal ato ~~lien~~$5.80 onplus ~~equipment,~~the ~~inventory~~product ~~and~~of ~~other~~the ~~assets~~Exchange ofRatio multiplied by the ~~commercial~~greater ~~borrower.~~of ~~These~~(i) the ~~loans~~average ~~are~~trading ~~generally~~price ~~considered~~of toGerman ~~have~~American ~~greater~~common ~~risk~~stock ~~than~~during ~~first~~the ~~and~~20 ~~second~~trading ~~mortgages~~days ending on ~~real~~the ~~estate~~trading ~~because~~day ~~these~~that ~~loans~~is ~~may~~the besecond ~~unsecured~~business ~~or,~~day ifpreceding ~~they~~the ~~are secured~~closing, and (ii) the ~~value~~closing trading price of the ~~collateral~~German ~~may~~American becommon ~~difficult~~stock toon ~~assess~~the ~~and~~trading ~~more~~day ~~likely~~that tois ~~decrease~~the ~~than~~first ~~real~~business ~~estate. At~~day ~~December 31,~~preceding ~~2017,~~the ~~commercial~~closing ~~loans~~date ~~amounted~~of tothe ~~$61.2 million~~Merger, oreach ~~16.4%~~as ofreported ~~our~~by ~~total loan portfolio~~Bloomberg, L.P. ~~excluding~~The ~~for~~cash ~~these~~payment ~~purposes~~per ~~commercial~~outstanding ~~loans~~share ~~secured~~(including byeach ~~real~~401(k) ~~estate~~share) ~~which~~described above are ~~included~~also subject to reduction in the ~~commercial~~event ~~real~~the ~~estate~~"Effective ~~category. At~~Time ~~December 31,~~Book ~~2017,~~Value" ~~our~~(as ~~commercial~~defined ~~loans~~in ~~had~~and ancalculated ~~average~~pursuant ~~size~~to the Merger Agreement) of ~~$112,000~~the ~~and~~Company falls below certain thresholds at the ~~largest~~time ~~loan~~of ~~was~~closing ~~$4.8~~of ~~million~~the Merger. Immediately prior to closing the Merger,

Commercial Real Estate Loans. We originate and maintain a significant amount of commercial real estate loans. This lending involves loans secured by multi-family residential units, income-producing properties and owner-occupied commercial properties. Loan amounts generally conform to the regulatory loan-to-value guidelines and amortizations match the economic life of the collateral, with a maximum amortization schedule of 20 years. Loans secured by commercial real estate are generally subject to a maximum term of 20 years. At December 31, 2017, total commercial real estate loans amounted to $226.8 million, or 60.6% of our loan portfolio. At December 31, 2017, our commercial real estate loans had an average size of $417,000 and the largest loan was $7.3 million.

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Residential Real Estate Mortgage Loans. We originate residential real estate mortgage loans with either fixed or variable interest rates to borrowers to purchase and refinance one-to-four family properties. We also offer home equity loans and home equity lines of credit. Real estate mortgage loans are subject to the ~~same~~Company ~~general~~is ~~risks as other loans and are particularly sensitive~~ to ~~fluctuations~~make ~~in the value of real estate, which could negatively affect a borrower’s~~ cash ~~flow,~~payments ~~creditworthiness and ability~~ to ~~repay~~ the ~~loan. Except~~holders ~~for home equity loans and lines~~ of ~~credit,~~certain ~~substantially~~outstanding ~~all~~performance ofunits ~~our~~granted ~~residential~~under ~~real estate loans are secured by a first lien on~~ the ~~real~~Citizens ~~estate. Loans~~First ~~secured~~Corporation by2015 ~~residential~~Incentive ~~real~~Compensation ~~estate~~Plan, ~~with~~in ~~variable~~lieu ~~interest rates will have a maximum term and amortization schedule~~ of ~~30 years. We~~distributing ~~sell to~~ the ~~secondary~~Company’s ~~market~~common ~~the~~shares ~~majority of our residential fixed-rate mortgage loans, thereby reducing our interest rate risk and credit risk. Loans secured by vacant land are generally subject~~ to asuch ~~maximum term of five years and a maximum amortization schedule of five years~~holders. At December 31, 2017, total residential real estate loans amounted to $82.2 million, or 22.0% of our loan portfolio. At December 31, 2017, our residential real estate mortgage loans had an average size of $75,000 and the largest loan was $3.1 million.

WeThe ~~provide~~Merger ~~customers~~Agreement ~~access~~contains to(a) ~~long-term~~representations ~~conventional~~and ~~real~~warranties ~~estate~~of ~~loans~~German ~~through~~American ~~our~~and ~~mortgage~~the ~~loan division~~Company, ~~which~~(b) covenants ~~underwrites~~of ~~loans~~the ~~that~~Company ~~are~~to ~~purchased~~conduct byits ~~unaffiliated~~business ~~third~~in ~~party~~the ~~brokers~~ordinary incourse until the ~~secondary~~Merger ~~market. We~~is ~~receive~~completed, ~~fees~~(c) covenants inof ~~connection~~the ~~with~~Company ~~the~~to ~~sale~~use ofreasonable ~~mortgage~~efforts ~~loans,~~to ~~with~~preserve ~~these~~intact ~~fees~~its ~~aggregating~~business ~~$317,000~~organization and ~~$375~~assets and maintain its rights and franchises,~~000~~ ~~for~~and (d) covenants of German American and the ~~years~~Company ~~ending~~to ~~December 31~~take, ~~2017~~or ~~and~~not ~~2016~~to take, ~~respectively~~certain actions during the term of the Merger Agreement. We doThe ~~not~~Company ~~retain~~has ~~servicing~~also ~~rights~~agreed ~~with~~not ~~respect~~to (a) solicit proposals relating to alternative business combination transactions or (b) maintain discussions concerning any proposals for alternative business combination transactions. The representations and warranties contained in the ~~secondary~~Merger ~~market~~Agreement ~~residential~~are ~~mortgage~~qualified ~~loans~~by ~~that~~disclosures weset ~~originate~~out in confidential disclosure schedules and should not be relied upon by investors.

Each party's obligation to consummate the Merger is subject to various conditions, including (a) receipt of the requisite approval of the holders of the Company’s common stock of the Merger, (b) receipt of regulatory approvals, (c) effectiveness of the registration statement to be filed by German American with respect to the German American common stock to be issued in the Merger, (d) the accuracy of the representations and warranties of the other party, (e) compliance by the other party with its covenants in all material respects, and (f) the absence of a material adverse effect as to the other party.

The Merger Agreement contains certain termination rights for German American and the Company, as the case may be, applicable upon: (i) certain adverse regulatory decisions in relation to the Merger, (ii) if the Merger has not been closed by October 1, 2019; (iii) a failure of the other party to comply with such party's covenants (subject to certain rights to cure in certain cases) or a breach of the representations and warranties by the other party that would have a material adverse effect on such party; or (iv) if the Company’s shareholders fail to approve the Merger by the required vote. Under certain circumstances, termination of the Merger Agreement may result in the payment of a termination fee of $2.5 million by the Company to German American, as more fully described in the Merger Agreement.

Lending Activities

General. We offer a variety of loans, including commercial and residential real estate mortgage loans, construction loans, commercial loans and consumer loans to individuals and small to mid-size businesses that are located in or conduct a substantial portion of their business in our market area. Our underwriting standards vary for each type of loan, as described below. At December 31, 2018, we had total loans of $371.5 million, representing 78.0% of our total assets.

Commercial Loans. We make commercial loans primarily to small and medium-sized businesses. These loans are secured and unsecured and are made available for general operating inventory and accounts receivables, as well as any other purposes considered appropriate. We will generally look to a borrower’s business operations as the principal source of repayment, but will also require, when appropriate, security interests in personal property and personal guarantees. In addition, the majority of commercial loans that are not mortgage loans are secured by a lien on equipment, inventory and other assets of the commercial borrower. These loans are generally considered to have greater risk than first and second mortgages on real estate because these loans may be unsecured or, if they are secured, the value of the collateral may be difficult to assess and more likely to decrease than real estate. At December 31, 2018, commercial loans amounted to $61.6 million, or 16.6% of our total loan portfolio, excluding for these purposes commercial loans secured by real estate which are included in the commercial real estate category. At December 31, 2018, our commercial loans had an average size of $109,000 and the largest loan was $4.8 million.

Commercial Real Estate Loans. We originate and maintain a significant amount of commercial real estate loans. This lending involves loans secured by multi-family residential units, income-producing properties and owner-occupied commercial properties. Loan amounts generally conform to the regulatory loan-to-value guidelines and amortizations match the economic life of the collateral, with a maximum amortization schedule of 20 years. Loans secured by commercial real estate are generally subject to a maximum term of 20 years. At December 31, 2018, total commercial real estate loans amounted to $217.6 million, or 58.6% of our loan portfolio. At December 31, 2018, our commercial real estate loans had an average size of $428,000 and the largest loan was $7.1 million.

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home equity lines of credit. Real estate mortgage loans are subject to the same general risks as other loans and are particularly sensitive to fluctuations in the value of real estate, which could negatively affect a borrower’s cash flow, creditworthiness and ability to repay the loan. Except for home equity loans and lines of credit, substantially all of our residential real estate loans are secured by a first lien on the real estate. Loans secured by residential real estate with variable interest rates will have a maximum term and amortization schedule of 30 years. We sell to the secondary market the majority of our residential fixed-rate mortgage loans, thereby reducing our interest rate risk and credit risk. Loans secured by vacant land are generally subject to a maximum term of five years and a maximum amortization schedule of five years. At December 31, 2018, total residential real estate loans amounted to $88.8 million, or 23.9% of our loan portfolio. At December 31, 2018, our residential real estate mortgage loans had an average size of $81,000 and the largest loan was $3.8 million.

We provide customers access to long-term conventional real estate loans through our mortgage loan division, which underwrites loans that are purchased by unaffiliated third party brokers in the secondary market. We receive fees in connection with the sale of mortgage loans, with these fees aggregating $320,000 and $317,000 for the years ending December 31, 2018 and 2017, respectively. We do not retain servicing rights with respect to the secondary market residential mortgage loans that we originate.

Consumer. We make personal loans and lines of credit available to consumers for various purposes, such as the purchase of automobiles, boats and other recreational vehicles, and the making of home improvements and personal investments. Consumer loans generally have shorter terms and higher interest rates than residential mortgage loans and usually involve more credit risk than mortgage loans because of the type and nature of the collateral. Consumer lending collections are dependent on a borrower’s continuing financial stability and are thus likely to be adversely affected by job loss, illness or personal bankruptcy. In many cases, repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance because of depreciation of the underlying collateral. We emphasize the amount of the down payment, credit quality and history, employment stability and monthly income. These loans are expected generally to be repaid on a monthly repayment schedule with the payment amount tied to the borrower’s periodic income.

We believe that the generally higher yields earned on consumer loans help compensate for the increased credit risk associated with such loans and that consumer loans are important to our efforts to serve the credit needs of our customer base. At December 31, ~~2017~~2018, total consumer loans amounted to $43.06 million, or 10.19% of our loan portfolio. At December 31, ~~2017~~2018, our consumer loans had an average size of $5,000, and the largest loan was $~~236~~234,000.

Loan Underwriting and Approval. We seek to make sound, high quality loans while recognizing that lending money involves a degree of business risk. Our loan policies are designed to assist us in managing this business risk. These policies provide a general framework for our loan operations while recognizing that not all risk activities and procedures can be anticipated. Our loan policies instruct lending personnel to use care and prudent decision making and to seek the guidance of our Chief Credit Officer, our Vice President Credit Risk Officer, our Senior Vice President Credit Administration or our President and Chief Executive Officer where appropriate.

Deposit Products

Our principal source of funds is core deposits. We offer a range of deposit products and services including checking accounts, savings accounts, NOW accounts, money market accounts, sweep accounts, fixed and variable rate IRA accounts, Christmas Club accounts and certificate of deposit accounts. We solicit accounts from a wide variety of customers, including individuals and small to medium-sized businesses. We actively pursue business checking accounts by offering competitive rates and other convenient services to our business customers. In some cases, we require business customers to maintain minimum balances. We offer a deposit pick-up service to our commercial customers that enable these customers to make daily cash deposits through one of our couriers. At December 31, ~~2017~~2018, we had total deposits of $~~372~~388.36 million.

Other Banking Services

Our retail banking strategy is to offer basic banking products and services that are attractively priced and easily understood by the customer. We focus on making our products and services convenient and readily accessible to the customer. In addition to banking during normal business hours, we offer extended drive-through hours, ATMs, and banking by telephone, mail and personal appointment. We have ten ATMs located within our markets. We also provide debit cards,

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addition to banking during normal business hours, we offer extended drive-through hours, ATMs, and banking by telephone, mail and personal appointment. We have ten ATMs located within our markets. We also provide debit cards, credit cards, safekeeping and safe deposit boxes, ACH and other direct deposit services, savings bond redemptions, cashier’s checks, travelers’ checks and letters of credit. We have also established relationships with correspondent banks and other independent financial institutions to provide other services requested by customers, including cash management services, wire transfer services, and loan participations where the requested loan amount exceeds the lending limits imposed by law or by our policies. We maintain an internet banking website at www.citizensfirstbank.com, which allows customers to obtain account balances and transfer funds among accounts. The website also provides online bill payment and electronic delivery of customer statements.

We provide title insurance services to mortgage loan customers for a fee. Through third party providers, we offer other insurance services and trust services and receive a fee for referrals. We offer non-deposit investment services and products through an agreement with a broker-dealer. We earn advisory fees and commissions from the sale of these services and products. The objective of offering these products and services is to generate fee income and strengthen relationships with our customers.

Competition and Market Area

The banking business is highly competitive, and we experience competition in our market from many other financial institutions. Our profitability depends upon our ability to compete in the market area in which our bank offices are located. We compete for deposits, loans and other banking services generally on the basis of convenient office locations, interest rates offered on deposit accounts and charged on loans, fees and the range of services offered. We compete with existing area financial institutions other than commercial banks and savings banks, including commercial bank loan production offices, mortgage companies, insurance companies, consumer finance companies, securities brokerage firms, credit unions, money market funds and other business entities which have recently entered traditional banking markets.

Along with its headquarters in Bowling Green, the Bank currently operates eight (8) full-service banking facilities in the counties of Warren, Simpson, Barren and Hart in south central Kentucky, as well as a loan production office in Williamson County, Tennessee. Our market area consists primarily of a ten county region located in south central Kentucky known as the Barren River Area Development District. This region consists of Allen, Barren, Butler, Edmonson, Hart, Logan, Metcalfe, Monroe, Simpson, and Warren Counties in Kentucky. As of June 30, ~~2017~~2018, there were 20 financial institutions operating a total of 6967 offices in the Bowling Green MSA. In addition, there are six financial institutions operating a total of seven offices in Simpson County, four institutions operating a total of six offices in Hart County and ~~eight~~nine financial institutions operating 2021 offices in Barren County.

Employees

At December 31, ~~2017~~2018, we had 9897 full-time equivalent employees. Management considers its relations with its employees to be good. Neither we nor the Bank are a party to any collective bargaining agreement.

Supervision and Regulation

We are subject to the extensive regulatory framework applicable to bank holding companies and their subsidiaries. This framework is intended primarily for the protection of depositors, the FDIC’s Deposit Insurance Fund and the banking system as a whole, and generally is not intended for the protection of stockholders or other investors. Described below are the material elements of selected laws and regulations applicable to us and the Bank. These descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described. Changes in applicable law or regulation, and in their interpretation and application by regulatory agencies and other governmental authorities, cannot be predicted, but may have a material effect on our business, financial condition or results of operations.

Applicable laws and regulations restrict our permissible activities and investments and impose conditions and requirements on the products and services we offer and the manner in which they are offered and sold. They also restrict our ability to repurchase stock or pay dividends, or to receive dividends from our banking subsidiary, and impose capital adequacy requirements on us and our banking subsidiary. The consequences of noncompliance with these laws and regulations can include substantial monetary and nonmonetary sanctions.

~~Page~~As 6 described in more detail below, comprehensive reform of the legislative and regulatory landscape occurred with the passage of the Dodd-Frank Act in 2010. The Dodd-Frank Act implements numerous and far-reaching changes that affect

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As described in more detail below, comprehensive reform of the legislative and regulatory landscape occurred with the passage of the Dodd-Frank Act in 2010. Implementation of the Dodd-Frank Act and related rulemaking activities continued in 2017. The Dodd-Frank Act implements numerous and far-reaching changes that affect financial companies, including banking organizations. Many of the provisions of the Dodd-Frank Act and other laws are subject to further rulemaking, guidance and interpretation by the applicable federal regulators. Some of the regulations related to these reforms are still in the implementation stage and, as a result, there is significant uncertainty concerning their ultimate impact on us.

In addition to banking laws, regulations and regulatory agencies, we are subject to various other laws, regulations, supervision and examination by other regulatory agencies, all of which directly or indirectly affect our operations and management.

Overview

We are a bank holding company under the Bank Holding Company Act of 1956 (BHC Act). As such, we are subject to the supervision, examination and reporting requirements of the Board of Governors of the Federal Reserve (Federal Reserve Board) under the BHC Act and the regulations promulgated thereunder. We are required to file periodic reports of our operations and any additional information the Federal Reserve may require.

The Bank is a member of the FDIC and, as such, its deposits are insured by the FDIC to the extent provided by law. The Bank is a state bank chartered under the banking laws of the Commonwealth of Kentucky. As a result, it is subject to the supervision, examination and reporting requirements of both the Kentucky Department of Financial Institutions (KDFI) and the FDIC.

We are subject to numerous state and federal statutes and regulations that affect our business activities and operations, including restrictions on loan limits, interest rates, “insider” loans to officers, directors, and principal shareholders, tie-in arrangements and transactions with affiliates, among other things. Federal and state regulators also have authority to impose substantial sanctions on the Bank and its directors and officers if we engage in unsafe or unsound practices, or otherwise fail to comply with regulatory standards. Supervisory agreements, such as memoranda of understanding entered into with federal and state bank regulators, may also impose requirements and reporting obligations.

Economic Growth, Regulatory Relief and Consumer Protection Act

On May 25, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the "Regulatory Relief Act") was signed into law. The Regulatory Relief Act was designed to provide regulatory relief for banking organizations, particularly for all but the very largest, those with assets in excess of $250 billion. Bank holding companies with assets of less than $100 billion are no longer subject to enhanced prudential standards, and those with assets between $100 billion and $250 billion will be relieved of those requirements in 18 months, unless the Federal Reserve Board takes action to maintain those standards. Certain regulatory requirements applied only to banks with assets in excess of $50 billion and so did not apply to the Company even before the enactment of the Regulatory Relief Act.

The Regulatory Relief Act also provides that the banking regulators must adopt regulations implementing the provision that banking organizations with assets of less than $10 billion are permitted to satisfy capital standards and be considered "well capitalized" under the prompt corrective action framework if their leverage ratios of tangible assets to average consolidated assets is between 8% and 10%, unless the banking organization's federal banking agency determines that the banking organization's risk profile warrants a more stringent leverage ratio. The OCC, the Federal Reserve Board and the FDIC have proposed for comment the leverage ratio framework for any banking organization with total consolidated assets of less than $10 billion, limited amounts of certain types of assets and off-balance sheet exposures, and a community bank leverage ratio greater than 9%. The community bank leverage ratio would be calculated as the ratio of tangible equity capital divided by average total consolidated assets. Tangible equity capital would be defined as total bank equity capital or total holding company equity capital, as applicable, prior to including minority interests, and excluding accumulated other comprehensive income, deferred tax assets arising from net operating loss and tax credit carry forwards, goodwill and other intangible assets (other than mortgage servicing assets). Average total assets would be calculated in a manner similar to the current tier 1 leverage ratio denominator in that amounts deducted from the community bank leverage ratio numerator would also be excluded from the community bank leverage ratio denominator.

The Office of the Comptroller of the Currency (OCC), the Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC) also adopted a rule providing banking organizations with the option to phase in over a three-year

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period the day-one adverse effects on regulatory capital that may result from the adoption of new current expected credit loss methodology accounting under U. S. generally accepted accounting principles.

The Regulatory Relief Act also relieves bank holding companies and banks with assets of less than $100 billion in assets from certain record-keeping, reporting and disclosure requirements.

Acquisitions

A bank holding company must obtain Federal Reserve Board approval before acquiring, directly or indirectly, ownership or control of more than 5% of the voting stock or all or substantially all of the assets of a bank, merging or consolidating with any other bank holding company and before engaging, or acquiring a company that is not a bank but is engaged in certain non-banking activities. Federal law also prohibits a person or group of persons from acquiring “control” of a bank holding company without notifying the Federal Reserve Board in advance and then only if the Federal Reserve Board does not object to the proposed transaction. The Federal Reserve Board has established a rebuttable presumptive standard that the acquisition of 10% or more of the voting stock of a bank holding company with a class of securities registered under the Securities Exchange Act of 1934 would constitute an acquisition of control of the bank holding company. In addition, any company is required to obtain the approval of the Federal Reserve Board before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of any class of a bank holding company’s voting securities, or otherwise obtaining control or a “controlling influence” over a bank holding company.

Permissible Activities under the BHC Act

A bank holding company is generally permitted under the BHC Act to engage in or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in banking or managing or controlling banks, furnishing services to or performing services for our subsidiaries and any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking.

As a bank holding company, we may elect to become a financial holding company, which enables the holding company to conduct activities that are “financial in nature.” Activities that are “financial in nature” include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve has determined to be closely related to banking. We have not sought financial holding company status. If we were to elect in writing for financial holding company status, each insured depository institution we controlled would have to be well capitalized, well managed and have at least a satisfactory CRA rating.

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insured depository institution we controlled would have to be well capitalized, well managed and have at least a satisfactory CRA rating.

Capital Requirements

We are required to comply with the capital adequacy standards established by the Federal Reserve at the holding company level, and the FDIC at the bank level. Failure to meet statutorily mandated capital requirements or more restrictive ratios separately established for a financial institution by its regulators could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on its deposits and other restrictions on its business.

Effective January 1, 2015, (subject to certain phase-in provisions), we became subject to the final rules implementing the Basel III regulatory capital reforms. The Basel III rules, among other things, (i) introduce a new capital measure called common equity Tier 1 (CET1), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expand the scope of the deductions/adjustments to capital as compared to existing regulations.

The ~~new~~ minimum capital level requirements applicable to bank holding companies and banks subject to the rules are: (i) a ~~new~~ common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); (iii) a total risk-based capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The preamble to the final rules states that these quantitative calculations are minimums and that the agencies may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner.

~~The~~Page rules also establish a “capital conservation buffer” of 2.5% (to be phased in over multiple years) above the new regulatory minimum risk-based capital ratios, and result in the following minimum ratios once the capital conservation buffer is fully phased in: (i) a common equity Tier 1 risk-based capital ratio of 7%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.9

~~Under~~Table ~~these new rules, Tier 1 capital generally consists~~ of common stock (plus related surplus) and retained earnings, limited amounts of minority interest in the form of additional Tier 1 capital instruments, and non-cumulative preferred stock and related surplus, subject to certain eligibility standards, less goodwill and other specified intangible assets and other regulatory deductions. Cumulative preferred stock and trust preferred securities issued after May 19, 2010, will no longer qualify as Tier 1 capital, but such securities issued prior to May 19, 2010, including, in the case of bank holding companies with less than $15.0 billion in total assets on December 31, 2009, trust preferred securities issued prior to that date, will continue to count as Tier 1 capital subject to certain limitations. The definition of Tier 2 capital is generally unchanged for most banking organizations, subject to certain new eligibility criteria.Contents

~~Common~~The rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum risk-based capital ratios, and result in the following minimum ratios once the capital conservation buffer is fully phased in: (i) a common equity Tier 1 risk-based capital ~~will~~ratio ~~generally~~of ~~consist~~7%, of(ii) a ~~common~~Tier ~~stock~~1 ~~(plus~~risk-based ~~related~~capital ~~surplus)~~ratio of 8.5%, and ~~retained~~(iii) a ~~earnings~~total ~~plus~~risk-based ~~limited~~capital ~~amounts~~ratio of ~~minority~~10.5%. ~~interest~~An ininstitution ~~the~~will ~~form~~be ofsubject ~~common~~to ~~stock~~limitations on paying dividends, ~~less~~engaging ~~goodwill~~in share repurchases and ~~other~~paying ~~specified~~discretionary ~~intangible~~bonuses ~~assets~~if ~~and~~capital ~~other~~levels ~~regulatory~~fall ~~deductions~~below minimum plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

Tier 1 capital generally consists of common stock (plus related surplus) and retained earnings, limited amounts of minority interest in the form of additional Tier 1 capital instruments, and non-cumulative preferred stock and related surplus, subject to certain eligibility standards, less goodwill and other specified intangible assets and other regulatory deductions. Cumulative preferred stock and trust preferred securities issued after May 19, 2010, will no longer qualify as Tier 1 capital, but such securities issued prior to May 19, 2010, including, in the case of bank holding companies with less than $15.0 billion in total assets on December 31, 2009, trust preferred securities issued prior to that date, will continue to count as Tier 1 capital subject to certain limitations. The definition of Tier 2 capital is generally unchanged for most banking organizations, subject to certain new eligibility criteria.

Common equity Tier 1 capital generally consists of common stock (plus related surplus) and retained earnings plus limited amounts of minority interest in the form of common stock, less goodwill and other specified intangible assets and other regulatory deductions.

Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. These requirements provide for a minimum ratio of Tier 1 capital to total consolidated quarterly average assets (as defined for regulatory purposes), net of the loan loss reserve, goodwill and certain other intangible assets (the “leverage ratio”), of 4.0% for all bank holding companies.

Safety and Soundness Standards

Guidelines adopted by the federal bank regulatory agencies pursuant to the Federal Deposit Insurance Act (FDIA) establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, these guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. Additionally, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the FDIA. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.

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among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. Additionally, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the FDIA. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.

Prompt Corrective Action

The FDIA establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the federal banking regulators established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized), into one of which each institution is placed. With respect to institutions in the three undercapitalized categories, the regulators must take prescribed supervisory actions and are authorized to take other discretionary actions. The severity of the action depends upon the capital category into which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category. As of December 31, ~~2017~~2018, the Bank was well-capitalized.

An institution that is classified as well-capitalized based on its capital levels may be treated as adequately capitalized, and an institution that is adequately capitalized or undercapitalized based upon its capital levels may be treated as though it were undercapitalized or significantly undercapitalized, respectively, if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment.

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If a bank is not well capitalized, it cannot accept brokered deposits without prior FDIC approval. Even if approved, rate restrictions apply governing the rate the bank may be permitted to pay on the brokered deposits. In addition, a bank that is undercapitalized cannot offer an effective yield in excess of 75 basis points over the “national rate” paid on deposits (including brokered deposits, if approval is granted for the bank to accept them) of comparable size and maturity. The “national rate” is defined as a simple average of rates paid by insured depository institution and branches for which data are available and is published weekly by the FDIC. Institutions subject to the restrictions that believe they are operating in an area where the rates paid on deposits are higher than the “national rate” can use the local market to determine the prevailing rate if they seek and receive a determination from the FDIC that it is operating in a high-rate area. Regardless of the determination, institutions must use the national rate to determine conformance for all deposits outside their market area.

An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to limitations. The controlling bank holding company’s obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary’s assets or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except in accordance with an accepted capital restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution and a lower capital category based on supervisory factors other than capital.

An insured depository institution may not pay a management fee to a bank holding company controlling that institution or any other person having control of the institution if, after making the payment, the institution would be undercapitalized. In addition, an institution cannot make a capital distribution, such as a dividend or other distribution that is in substance a distribution of capital to the owners of the institution if following such a distribution the institution would be undercapitalized. Thus, if payment of such a management fee or the making of such capital distribution would cause the Bank to become undercapitalized, it could not pay a management fee or dividend to us.

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Dividends

We are a legal entity separate and distinct from the Bank. The principal source of our cash flow is dividends paid to us by the Bank. Statutory and regulatory limitations apply to the Bank’s ability to pay dividends to us as well as to our ability to pay dividends to our shareholders. Under Kentucky law, the Company is not permitted to pay dividends to the extent they result in the insolvency of the corporation from a balance sheet perspective or the corporation becoming unable to pay debts as they come due.

In addition to state law limitations on the Company’s ability to pay dividends, the Federal Reserve imposes limitations on the Company’s ability to pay dividends. As noted above, effective January 1, 2016, Federal Reserve limitations limit dividends, stock repurchases and discretionary bonuses to executive officers if the Company’s regulatory capital is below the level of regulatory minimums plus the applicable capital conservation buffer~~, which will increase each year until January 1, 2019~~.

Statutory limitations also apply to the Bank’s payment of dividends to the Company. Under Kentucky law, dividends by Kentucky banks may be paid only from current or retained net profits. The Kentucky Department of Financial Institutions must approve the declaration of dividends if the total dividends to be declared by a bank for any calendar year would exceed the bank’s total net profits for such year combined with its retained net profits for the preceding two years, less any required transfers to surplus or a fund for the retirement of preferred stock or debt.

The payment of dividends by the Bank may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the FDIA, an insured institution may not pay a dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the Federal Reserve and the FDIC have issued policy statements stating that bank holding companies and insured banks should generally pay dividends only out of current operating earnings, and the new capital rules prohibit the payment of dividends when a holding company or insured depository institution is not in compliance with the capital conservation buffer described elsewhere in this report.

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The amount and timing of all future dividend payments, if any, is subject to the discretion of our Board of Directors and will depend on our earnings, capital position, financial condition and other factors, including new regulatory capital requirements, as they become known to us.

Transactions with Affiliates

Both the Company and the Bank are subject to the provisions of Section 23A and Section 23B of the Federal Reserve Act. Section 23A places limits on the amount of a bank’s loans or extensions of credit to affiliates, a bank’s investment in an affiliate, assets a bank may purchase from affiliates, except for real and personal property exempted by the obligations of affiliates, the amount of loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates, transactions involving the borrowing or lending of securities and any derivative transaction that results in credit exposure to an affiliate, and a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.

The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. The Bank must also comply with other provisions designed to avoid the taking of low-quality assets. Section 23B prohibits an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

Source of Strength

Under the Dodd-Frank Act, and previously under Federal Reserve policy, we are required to act as a source of financial strength for and to commit resources to support the Bank in circumstances in which might not otherwise do so. This support may be required at times when, absent such Federal Reserve policy, we may not be inclined to provide it. If the Bank were to become undercapitalized, we would be required to provide a guarantee of the Bank’s plan to return to capital adequacy. In addition, any loans by a bank holding company to any of its banking subsidiaries are subordinate in right of payment to deposits and to other indebtedness of such banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a banking subsidiary will be assumed by the bankruptcy trustee and entitled to a priority of payment.

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deposits and to other indebtedness of such banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a banking subsidiary will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Branching

With prior regulatory approval and/or notices, as applicable, Kentucky law permits banks based in the state to either establish new or acquire existing branch offices throughout Kentucky. As a result of the Dodd Frank Act, the Bank and any other national or state chartered bank may branch across state lines to the same extent as banks chartered in the state of the branch.

FDIC Insurance

Deposits in the Bank are insured by the FDIC subject to applicable limitations. To offset the cost of this insurance, the FDIC has adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities and the size of the institutions. Under the Dodd-Frank Act, the FDIC has adopted regulations that base deposit insurance assessments on total assets less capital rather than deposit liabilities and include off-balance sheet liabilities of institutions and their affiliates in risk-based assessments.

The Dodd-Frank Act increased the basic limit on federal deposit insurance coverage to $250,000 per depositor. The Dodd-Frank Act also repealed the prohibition on paying interest on demand transaction accounts.

The FDIC may terminate its insurance of an institution’s deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

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Community Reinvestment

The Community Reinvestment Act of 1977 (the “CRA”) requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under CRA, each depository institution is required to help meet the credit needs of its market areas by, amount other things, providing credit to low- and moderate-income individuals and communities. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. The applicable federal regulators regularly conduct CRA examinations to assess the performance of financial institutions and assign one of four ratings to the institution’s record of meeting the credit needs of its community. During its last examination, a rating of “satisfactory” was received by the Bank.

Consumer Protection Laws

The Bank is subject to consumer laws and regulations that are designed to protect consumers. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s loan operations are also subject to federal laws applicable to credit transactions such as the:

Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;

Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

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Bank Secrecy Act, governing how banks and other firms report certain currency transactions and maintain appropriate safeguards against “money laundering” activities;

Soldiers’ and Sailors’ Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying, secured obligations of persons in active military service; and

Rules and regulations of the various federal agencies charged with the responsibility of implementing the federal laws.

The Bank’s deposit operations are subject to the:

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and

Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities (including with respect to the permissibility of overdraft charges) arising from the use of automated teller machines and other electronic banking services.

Consumer Financial Protection Bureau

Dodd-Frank created a new, independent federal agency called the Consumer Financial Protection Bureau (CFPB) which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB but are examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. Dodd-Frank permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

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prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. Dodd-Frank permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

Volcker Rule. On December 10, 2013, the final Volcker Rule under the Dodd-Frank Act was approved and implemented by the Federal Reserve Board, the FDIC, the Securities and Exchange Commission (“SEC”), and the Commodity Futures Trading Commission. The Volcker Rule attempts to reduce risk and banking system instability by restricting U.S. banks from investing in or engaging in proprietary trading and speculation and imposing a strict framework to justify exemptions for underwriting, market-making and hedging activities. U.S. banks are restricted from investing in funds with collateral comprised of less than 100% loans that are not registered with the SEC and from engaging in hedging activities that do not hedge a specific identified risk. The Economic Growth, Regulatory Relief and Consumer Protection Act exempted banks, like the Bank, which have less than $10 billion in assets and no material trading assets and liabilities from the Volcker Rule.

Financial Privacy and Cybersecurity

The federal banking regulators have adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. In addition, consumers may also prevent disclosure of certain information among affiliated companies that is assembled or used to determine eligibility for a product or service, such as that shown on consumer credit reports and asset and income information from applications. Consumers also have the option to direct banks and other financial institutions not to share information about transactions and experiences with affiliated companies for the purpose of marketing products or services.

In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing Internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber attack. If we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties.

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Anti-Money Laundering; USA Patriot Act

Financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. We are prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence in dealings with foreign financial institutions and foreign customers. We also must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions. Recent laws provide law enforcement authorities with increased access to financial information maintained by banks. Anti-money laundering obligations have been substantially strengthened as a result of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act), enacted in 2001, renewed in 2006 and extended, in part, in 2011. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications.

The USA Patriot Act amended, in part, the Bank Secrecy Act and provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering. The statute also creates enhanced information collection tools and enforcement mechanics for the U.S. government, including: (1) requiring standards for verifying customer identification at account opening; (2) promulgating rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (3) requiring reports by nonfinancial trades and businesses filed with the Treasury’s Financial Crimes Enforcement Network for transactions exceeding $10,000; and (4) mandating the filing of suspicious activities reports if a bank believes a customer may be violating U.S. laws and regulations. The statute also requires enhanced due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons.

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Treasury’s Financial Crimes Enforcement Network for transactions exceeding $10,000; and (4) mandating the filing of suspicious activities reports if a bank believes a customer may be violating U.S. laws and regulations. The statute also requires enhanced due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons.

On May 11, 2016, the Financial Crimes Enforcement Network (the “FinCen”) issued new anti-money laundering (“AML”) rules governing corporate entities doing business with banks and other financial institutions that are subject to the requirements of the USA Patriot Act. The AML rules impose significant due diligence obligations on financial institutions with respect to opening of new accounts and the monitoring of existing accounts. Under the AML rules, a financial institution must identify persons owning or controlling 25% or more of a “legal entity”, whenever the legal entity opens a new account at the bank. The financial institution must also identify an individual who has substantial management authority as the legal entity, such as a CEO, CFO, or managing partner.

The Federal Bureau of Investigation may send bank regulatory agencies lists of the names of persons suspected of involvement in terrorist activities. The Bank may be subject to a request for a search of its records for any relationships or transactions with persons on those lists and may be required to report any identified relationships or transactions. Furthermore, the Office of Foreign Assets Control (OFAC) is responsible for helping to ensure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send, bank regulatory agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. If we find a name on any transaction, account or wire transfer that is on an OFAC list, we must freeze such account, file a suspicious activity report and notify the appropriate authorities.

Proposed Legislation and Regulatory Action

Congress may enact further legislation that affects the regulation of the financial services industry, and state legislatures may enact further legislation affecting the regulation of financial institutions chartered by or operation in these states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. We cannot predict the substance or impact of pending or future legislation or regulations, or the application thereof, although enactment of the proposed legislation could impact the regulatory structure under which the Company operates and may significantly increase costs, impede the efficiency of internal business processes, require an increase in regulatory capital, may require modifications of the Company’s business strategy, and limit the Company’s ability to pursue business opportunities in an efficient manner. A change in statutes, regulations or regulatory policies applicate to the Company or the Bank could have a material effect on our business.

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Effects of Governmental Policies and Economic Conditions

Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government, and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through the Federal Reserve’s statutory power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The Federal Reserve, through its monetary and fiscal policies, affects the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature and impact of future changes in monetary or fiscal policies.

Available Information

We file reports with the SEC including our annual report on Form 10-K, quarterly reports on Form 10-Q, current event reports on Form 8-K and proxy statements, as well as any amendments to those reports. The public may read and copy any materials the Registrant files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are accessible at no cost on our web site at http://www.citizensfirstbank.com, under the Investors Relations section, once they are electronically filed with or furnished to the SEC. A shareholder may also request a copy of our Annual Report or Form 10-K free of charge upon written request to: Chief Financial Officer, Citizens First Corporation, 1065 Ashley Street, Suite 150, Bowling Green, Kentucky 42103.

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furnished to the SEC. A shareholder may also request a copy of our Annual Report or Form 10-K free of charge upon written request to: Chief Financial Officer, Citizens First Corporation, 1065 Ashley Street, Suite 150, Bowling Green, Kentucky 42103. The internet address of the Company is http://www.snl.com/IRW/CorporateProfile/4043705.

Item 1A. Risk Factors

Our business, financial condition, and results of operation could be harmed by any of the following risks, or other risks that have not been identified or which we believe are immaterial or unlikely. Shareholders should carefully consider the risks described below in conjunction with other information in this Form 10-K and the information incorporated by reference in this Form 10-K, including our consolidated financial statements and related notes.

~~The~~Failure ~~full~~to ~~impact~~complete of the ~~Tax~~merger ~~Cuts~~with ~~and~~German ~~Jobs~~American could ~~Act~~negatively ~~(the~~impact ~~“Tax Act”) on us and~~ our ~~customers~~stock isprice ~~unknown at present, creating uncertainty~~ and ~~risk related to~~ our ~~customers’~~ future ~~demand~~business ~~for credit~~ and ~~our~~financial ~~future~~ results.

~~Increased~~If ~~economic activity expected to result from~~ the ~~decrease~~Merger inis ~~tax~~not ~~rates~~completed onfor ~~businesses~~any ~~generally could spur additional economic activity that would encourage additional borrowing. At the same time~~reason, some customers may elect to use their additional cash flow from lower taxes to fund their existing levels of activity, decreasing borrowing needs. The elimination of the federal income tax deductibility of business interest expense for a significant number of our ~~customers~~ongoing ~~effectively increases the cost of borrowing and makes equity hybrid funding relatively more attractive. This could have a long-term negative impact on~~ business ~~customer~~may borrowing. We are anticipating a significant increase in our after-tax net income available to stockholders in 2018 and future years as a result of the decrease in our effective tax rate. Some of all of this benefit could be ~~lost~~adversely toaffected ~~the extent that the banks~~ and ~~financial services companies~~ we ~~compete~~would ~~with~~be ~~elect~~subject to ~~lower~~a ~~interest~~number ~~rates and fees and we are forced to respond in order to remain competitive. There is no assurance that presently anticipated benefits~~ of ~~the~~risks, ~~Tax~~including ~~Act for~~ the ~~Company will be realized.~~following:

~~Legislative~~· ~~and~~we ~~regulatory~~may ~~initiatives~~experience tonegative ~~support~~reactions from the financial ~~services~~markets, ~~industry~~including ~~have~~negative ~~been~~impacts ~~coupled~~on ~~with numerous restrictions and requirements that could detrimentally affect~~ our ~~business.~~ stock price

~~The~~· Dodd-Frank Act and the rules and regulations promulgated thereunder significantly impacted the United States bank regulatory structure and affected the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The scope and impact of many of the Dodd-Frank Act provisions, including the authority provided to the CFPB, will continue to be determined over time as rules and regulations are issued and become effective. As a result, we ~~cannot~~may ~~predict~~experience ~~the~~negative ~~ultimate~~reactions ~~impact~~from ~~of the Dodd-Frank Act on us at this time, including the extent to which it could increase costs or limit~~ our ~~ability to pursue business opportunities in an efficient manner~~customers, orvendors ~~otherwise adversely affect our business, financial condition, results of operations~~ and ~~our ability to pay dividends. At a minimum it has~~ employees

~~Page~~· 14 we will have incurred substantial expenses and will be required to pay certain costs relating to the Merger, including legal, accounting, investment banking and advisory fees, whether or not the Merger is completed

we will have been bound by certain restrictions on the conduct of our business prior to completion of the Merger; such restrictions may prevent us from taking certain other specified actions during the pendency of the Merger

our management team will have devoted substantial time and resources to matters relating to the Merger (including integration planning), and would otherwise have devoted their time and resources to other opportunities that may have been beneficial to us as an independent financial institution

In addition to the above risks, termination of the Merger Agreement could have a negative impact on the strategic opportunities available to the Company if our Board then seeks another merger or business combination. If the Merger Agreement is terminated under certain circumstances, we may be required to pay a termination fee of $2.5 million to German American, which may adversely affect the price of our common stock.

We will be subject to uncertainties while the Merger is pending, which could adversely affect our business.

Uncertainty about the effect of the Merger on our employees and customers may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the Merger is consummated and for a period of time thereafter, and could cause customers and others that deal with us to seek to change their existing business relationships with us. Employee retention may be particularly challenging during the pendency of the Merger, as employees may experience uncertainty about their roles with the surviving corporation following the Merger. In addition, the Merger Agreement restricts us from taking certain specified actions without the consent of German American, and generally requires us to continue our operations in the ordinary course, until the Merger closes. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the Merger or may otherwise adversely affect our ongoing business and operations.

Our ability to complete the Merger is subject to the receipt of approval from various federal and state regulatory agencies, which may impose conditions that could adversely affect us or cause the Merger to be abandoned.

Before the Merger may be completed, we must obtain the approval of various federal and state regulatory agencies, including the FRB, the FDIC, the Indiana Department of Financial Institutions, and the Kentucky Department of Financial Institutions. These regulators may impose conditions on the completion of the Merger, and any such conditions could have the effect of delaying completion of the Merger or causing a termination of the Merger Agreement. There can be no assurance as to whether regulatory approval will be received, the timing of that approval, or whether any conditions will be imposed.

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~~increased~~ Shareholder ~~our~~litigation ~~operating~~could ~~and~~prevent ~~compliance~~or ~~costs.~~delay ~~Compliance~~the ~~with~~closing ~~these~~of ~~requirements~~the ~~has~~proposed ~~necessitated~~Merger ~~that~~or weotherwise ~~design~~negatively ~~and~~impact ~~implement~~our ~~additional~~business ~~internal controls,~~ and ~~incur other significant expenses~~operations.

~~Changes~~We tomay ~~capital~~incur ~~requirements~~additional ~~for~~costs ~~bank~~in ~~holding~~connection ~~companies~~with ~~and~~the ~~depository~~defense ~~institutions~~or ~~may~~settlement ~~negatively~~of ~~impact~~any shareholder lawsuits filed in connection with the proposed Merger. Such litigation could have an adverse effect on our financial condition and results of operations and could prevent or delay the consummation of the Merger.

In July 2013, the Federal Reserve Board and the FDIC approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Company and the Bank. The final rules implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.

Under these rules, the leverage and risk-based capital ratios of bank holding companies may not be lower than the leverage and risk-based capital ratios for insured depository institutions. The final rules implementing the Basel III regulatory capital reforms were effective as to the Company and the Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. Moreover, these rules refine the definition of what constitutes “capital” for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital. The new minimum capital level requirements applicable to bank holding companies and banks subject to the rules are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 riskbased capital ratio of 6% (increased from 4%); (iii) a total risk-based capital ratio of 8% (unchanged from current rules); (iv) a Tier 1 leverage ratio of 4% for all institutions. The rules also establish a “capital conservation buffer” of 2.5% (to be phased in over multiple years) above the new regulatory minimum risk-based capital ratios, and result in the following minimum ratios once the capital conservation buffer is fully phased in: (i) a common equity Tier 1 risk-based capital ratio of 7%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. The capital conservation buffer requirement is to be phased in over a multi-year period beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

Under these new rules, Tier 1 capital will generally consist of common stock (plus related surplus) and retained earnings, limited amounts of minority interest in the form of additional Tier 1 capital instruments, and non-cumulative preferred stock and related surplus, subject to certain eligibility standards, less goodwill and other specified intangible assets and other regulatory deductions. Cumulative preferred stock and trust preferred securities issued after May 19, 2010, will no longer qualify as Tier 1 capital, but such securities issued prior to May 19, 2010, including in the case of bank holding companies with less than $15.0 billion in total assets, trust preferred securities issued prior to that date, will continue to count as Tier 1 capital subject to certain limitations. The definition of Tier 2 capital is generally unchanged for most banking organizations, subject to certain new eligibility criteria. Common equity Tier 1 capital will generally consist of common stock (plus related surplus) and retained earnings plus limited amounts of minority interest in the form of common stock, less goodwill and other specified intangible assets and other regulatory deductions.

The application of more stringent capital requirements for the Company and the Bank, like those adopted to implement the Basel III reforms, could, among other things, result in lower returns on invested capital, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Implementation of changes to asset risk weightings for risk based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy and could limit our ability to make distributions, including paying dividends or buying back shares.

We may be adversely affected by interest rate changes.

Our earnings are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, and (iii) the average duration of our loan and mortgage-backed securities portfolios. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.

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income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.

We generally seek to maintain a neutral position in terms of the volume of assets and liabilities that mature or re-price during any period. As such, we have adopted asset and liability management strategies to attempt to minimize the potential adverse effects of changes in interest rates on net interest income, primarily by altering the mix and maturity of loans, investments and funding sources, so that it may reasonably maintain its net interest income and net interest margin. However, interest rate fluctuations, the level and shape of the interest rate yield curve, loan prepayments, loan production and deposit flows are constantly changing and influence the ability to maintain a neutral position. Accordingly, we may not be successful in maintaining a neutral position and, as a result, our net interest margin may be adversely impacted.

Our loan portfolio exposes us to credit risk.

There are inherent risks associated with our lending activities and we seek to mitigate these risks by adhering to conservative underwriting practices. Although we believe that our underwriting practices are appropriate for the various kinds of loans we make, we may nevertheless incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves in our allowance for loan losses. Increased credit risk may result from several factors, including adverse changes in local, U.S. and global economic and industry conditions, declines in the value of collateral, concentrations of credit associated with specific loan categories, industries or collateral types and risks related to individual borrowers. We rely heavily on information provided by third parties when originating and monitoring loans. If this information is intentionally or negligently misrepresented and we do not detect such misrepresentations, the credit risk associated with the transaction may be increased. Although we attempt to manage our credit risk by carefully monitoring the concentration of our loans within specific loan categories and industries and through prudent loan approval and monitoring practices in all categories of our lending, we cannot assure you that our approval and monitoring procedures will reduce these lending risks. If our credit administration personnel, policies and procedures are not able to adequately adapt to changes in economic or other conditions that affect customers and the quality of the loan portfolio, we may incur increased losses that could adversely affect our financial results.

We are exposed to higher credit risk by commercial real estate, commercial and agricultural loans.

Commercial real estate and commercial and agricultural lending usually involve higher credit risks than that of single-family residential lending. As of December 31, ~~2017~~2018, commercial real estate loans accounted for 6058.6% of our loan portfolio and commercial and agricultural loans accounted for 16.46% of our loan portfolio. These types of loans involve larger loan balances to a single borrower or groups of related borrowers. Commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties, in addition to the factors affecting residential real estate borrowers. These loans also involve greater risk because they generally are not fully amortizing over the loan period, but have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or sell the underlying property in a timely manner.

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Commercial loans are typically based on the borrowers’ ability to repay the loans from the cash flow of their businesses. These loans may involve greater risk because the availability of funds to repay each loan depends substantially on the success of the business itself. In addition, the collateral securing the loans have the following characteristics: (a) they depreciate over time, (b) they are difficult to appraise and liquidate, and (c) they fluctuate in value based on the success of the business.

Risk of loss on a construction loan depends largely upon whether our initial estimate of the property’s value at completion of construction equals or exceeds the cost of the property construction (including interest), the availability of permanent take-out financing, and the builder’s ability to ultimately sell the property. During the construction phase, a number of factors can result in delays and cost overruns. If estimates of value are inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan or by seizure of collateral.

Commercial real estate and commercial and agricultural loans are more susceptible to a risk of loss during a downturn in the business cycle. Our underwriting, review and monitoring cannot eliminate all of the risks related to these loans.

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The banking regulators are giving commercial real estate lending greater scrutiny, and may require banks with higher levels of commercial real estate loans to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate lending growth and exposures.

Our loan portfolio possesses increased risk due to our relatively high concentration of loans collateralized by real estate.

Approximately 85% of our loan portfolio as of December 31, ~~2017~~2018 was comprised of loans collateralized by real estate. Further adverse changes in the economy affecting values of real estate generally or in our primary market specifically could significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. The real estate collateral provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If real estate values decline, it is also more likely that we would be required to increase our allowance for loan losses. If during a period of reduced real estate values we are required to liquidate the collateral securing a loan to satisfy the debt or to increase our allowance for loan losses, it could materially reduce our profitability and adversely affect our financial condition.

Weakness in the residential real estate markets could adversely affect our performance.

As of December 31, ~~2017~~2018, ~~consumer~~ residential real estate loans represented approximately 2223.09% of our total loan portfolio. Declines in home values would adversely affect the value of collateral securing the residential real estate that we hold, as well as the volume of loan originations and the amount we realize on the sale of real estate loans. These factors could result in higher delinquencies and greater charge-offs in future periods, which could materially adversely affect our business, financial condition or results of operations.

If our allowance for loan losses proves to be insufficient to absorb probable incurred losses in our loan portfolio, our earnings will decrease.

If loan customers with significant loan balances fail to repay their loans, our earnings and capital levels will suffer. We maintain an allowance for loan losses that we believe is a reasonable estimate of probable incurred losses within the loan portfolio. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of any collateral securing the loans. Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio, the collateral supporting the loans and performance of customers relative to their financial obligations with us. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and these losses may exceed current estimates. We cannot fully predict the amount or timing of losses or whether the loss allowance will be adequate in the future and our current and future allowances for loan losses may not be adequate to cover future loan losses given current and future market conditions. Excessive loan losses and significant additions to our allowance for loan losses could have a material adverse impact on our financial condition and results of operations.

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In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our financial condition and results of operations.

General economic conditions in the U.S. and in our local economy could adversely affect us.

Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services that the Bank offers, is highly dependent upon the business environment in markets where the Bank operates and in the United States as a whole. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment, natural disasters, terrorist acts, or a combination of these or other factors. The U.S. economy experienced growth during ~~2017~~2018, with increasing exports, jobs, and manufacturing production. Real GDP has increased, and unemployment is in line with a full-employment economy. However, if tighter financial conditions emerge, along with additional rate hikes by the Federal Reserve, there can be no assurance that the economy will not enter into another recession, whether in the near term or long term. An economic downturn or sustained, high unemployment levels and stock market volatility may negatively impact our operating results and have a negative effect on the ability of our borrowers to make timely repayments of their loans, increasing the risk of loan defaults and losses.

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However, if tighter financial conditions emerge, along with additional rate hikes by the Federal Reserve, there can be no assurance that the economy will not enter into another recession, whether in the near term or long term. An economic downturn or sustained, high unemployment levels and stock market volatility may negatively impact our operating results and have a negative effect on the ability of our borrowers to make timely repayments of their loans, increasing the risk of loan defaults and losses.

Our ability to maintain required capital levels and adequate sources of funding and liquidity could be impacted by changes in the capital markets and deteriorating economic and market conditions.

We, and the Bank, are required to maintain certain capital levels established by banking regulations or specified by bank regulators, including those capital maintenance standards imposed on us as a result of the Dodd-Frank Act, and we are required to serve as a source of strength to the Bank. We must also maintain adequate funding sources in the normal course of business to support our operations and fund outstanding liabilities. Our ability to maintain capital levels, sources of funding and liquidity could be impacted by changes in the capital markets in which we operate and deteriorating economic and market conditions. The Bank will be required to obtain regulatory approval in order to pay dividends to us unless the amount of such dividends does not exceed its retained net profits for that year plus the preceding two years. Failure by the Bank to meet applicable capital guidelines or to satisfy certain other regulatory requirements could subject our bank subsidiary to a variety of enforcement remedies available to the federal regulatory authorities.

Certain of our deposits and other funding sources may be volatile and impact our liquidity.

In addition to traditional core deposits, such as demand deposit accounts, interest checking, money market savings and certificates of deposits, we utilize or in the past have utilized several noncore funding sources, such as brokered certificates of deposit, Federal Home Loan Bank (FHLB) of Cincinnati advances, federal funds purchased and other sources. We utilize these noncore funding sources to fund the ongoing operations and growth of the Bank. The availability of these noncore funding sources is subject to broad economic conditions and to investor assessment of our financial strength and, as such, the cost of funds may fluctuate significantly and/or be restricted, thus impacting our net interest income, our immediate liquidity and/or our access to additional liquidity.

Our risk management framework may not be effective in mitigating risk and loss to us.

We are subject to numerous risks, including credit risk, interest rate risk, liquidity risk, transaction/operational risk, compliance and legal risk, strategic risk and reputation risk, among other risks encountered in the ordinary course of our operations. We have put in place processes and procedures designed to identify, measure, monitor, report and analyze these risks. However, all risk management frameworks are inherently limited when current procedures cannot anticipate the existence or future development of currently unanticipated or unknown risks, and we may have underestimated the impact of known risks. Accordingly, we could suffer losses as a result of our failure to properly anticipate and manage these risks.

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A failure or breach of our operational or security systems, including as a result of cyber-attacks, could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation and create significant financial and legal exposure for us.

Our computer systems and network infrastructure are subject to security risks and could be susceptible to cyber-attacks, such as denial of service attacks, hacking, terrorist activities or identity theft. Financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks and other means. Denial of service attacks have been launched against a number of financial services institutions. These denial of service attacks have not breached our data security systems, but require substantial resources to defend, and may affect customer satisfaction and behavior.

Despite efforts to ensure the integrity of our systems, we may not be able to anticipate all security breaches of these types, nor may we be able to implement guaranteed preventive measures against such security breaches. Persistent attackers may succeed in penetrating defenses given enough resources, time, and motive. The techniques used by cyber criminals change frequently, may not be recognized until launched and can originate from a wide variety of sources, including outside groups such as external service providers, organized crime affiliates, terrorist organizations or hostile foreign governments. These risks may increase in the future as we continue to increase our mobile-payment and other internet-based product offerings and expand our internal usage of web-based products and application.

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A successful penetration or circumvention of system security could cause us serious negative consequences, including significant disruption of operations, misappropriation of confidential information, or damage to our computers or systems or those of our customers and counterparties. A successful security breach could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, significant litigation exposure, and harm to our reputation, all of which could have a material adverse effect on the Company.

We rely on third parties to provide key components of our business infrastructure.

We rely on third-party service providers to leverage subject matter expertise and industry best practice, provide enhanced products and services, and reduce costs. Although there are benefits in entering into third-party relationships with vendors and others, there are risks associated with such activities. When entering a third-party relationship, the risks associated with that activity are not passed to the third-party but remain our responsibility. Increased risk could occur based on poor planning, oversight, control, and inferior performance or service on the part of the third party, and may result in legal costs or loss of business. Any problems caused by third-party service providers could adversely affect our ability to deliver products and services to our customers and to conduct our business. Replacing a third-party service provider could also take a long period of time and result in increased expenses.

We continually encounter technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements.

The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology will increase efficiency and will enable financial institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our clients.

Impairment of goodwill and/or intangible assets could require charges to earnings, which could result in a negative impact on our results of operations.

A significant and sustained decline in our stock price and market capitalization, a significant decline in our expected future cash flows, a significant adverse change in the business climate, slower growth rates or other factors could result in future impairment of goodwill or other intangible assets. At December 31, ~~2017~~2018, our goodwill and other identifiable intangible assets totaled approximately $4.2 million. If we were to conclude that a future write-down of our goodwill or intangible assets is necessary, then we would record the appropriate charge to earnings, which could be materially adverse to our results of operations and financial position.

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Our securities portfolio performance in difficult market conditions could have adverse effects on our results of operations.

Under U.S. generally accepted accounting principles, we are required to review our investment portfolio periodically for the presence of other-than-temporary impairment of its securities, taking into consideration current market conditions, the extent and nature of change in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, our intent to sell or determination that we will not be required to sell investments until a recovery of fair value, as well as other factors. Adverse developments with respect to one or more of the foregoing factors may require us to deem particular securities to be other-than-temporarily impaired, with the credit loss recognized as a charge to earnings. Subsequent valuations, in light of factors prevailing at that time, may result in significant changes in the values of these securities in future periods. Any of these factors could require us to recognize further impairments in the value of our securities portfolio, which may have an adverse effect on our results of operations.

We are subject to environmental liability risk associated with our lending activities.

A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our business, results of operations and financial condition.

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may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our business, results of operations and financial condition.

Our businesses may be adversely affected if we are unable to hire and retain qualified employees

Our success depends, in part, on our executive officers and other key personnel. The market for qualified individuals is highly competitive, and we may not be able to attract and retain qualified personnel or candidates to replace or succeed members of our senior management team or other key personnel. Our compensation practices are subject to review and oversight by the Federal Reserve, the FDIC and other regulators. As a banking institution, we may be subject to limitations on compensation practices, which may or may not affect our competitors, by the Federal Reserve, the FDIC or other regulators. These limitations could further affect our ability to attract and retain our executive officers and other key personnel.

Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.

We face substantial competition in all phases of our operations from a variety of different competitors. Our future growth and success will depend on our ability to compete effectively in this highly competitive environment. To date, we have grown our business by focusing on our geographic market and emphasizing the high level of service and responsiveness desired by our customers. Many of our competitors offer products and services which we do not offer, and many have substantially greater resources, name recognition and market presence that benefit them in attracting business. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, and smaller and newer competitors may also be more aggressive in terms of pricing loan and deposit products than us in order to obtain a larger share of the market. Some of the financial institutions and financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies, federally insured state-chartered banks and national banks and federal savings banks. As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services.

We also experience competition from a variety of institutions outside of our market area. Some of these institutions conduct business primarily over the Internet and may thus be able to realize certain cost savings and offer products and services at more favorable rates and with greater convenience to the customer.

Our accounting policies and methods impact how we report our financial condition and results of operations. Application of these policies and methods may require management to make estimates about matters that are uncertain.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with U.S. generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in our reporting materially different amounts than would have been reported under a different alternative. For a description of our significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements. These accounting policies are critical to presenting our financial condition and results of operations. They may require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions.

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methods so they comply with U.S. generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in our reporting materially different amounts than would have been reported under a different alternative. For a description of our significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements. These accounting policies are critical to presenting our financial condition and results of operations. They may require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions.

Changes in accounting standards could materially impact our consolidated financial statements.

Regulatory bodies, including the SEC and others, and the Financial Accounting Standards Board, from time to time may change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in changes to previously reported financial results, or a cumulative charge to retained earnings.

~~Page~~Changes 20in the federal, state or local tax laws may negatively impact our consolidated financial statements and the financial performance of our customers.

~~Table~~The full impact of ~~Contents~~the Tax Cuts and Jobs Act, which was enacted on December 22, 2017, on us and our customers remains uncertain, creating uncertainty and risk related to our customers' future demand for credit and our future results. Increased economic activity expected to result from the decrease in tax rates on businesses generally could spur additional economic activity that would encourage additional borrowing. At the same time, some customers may elect to use their additional cash flow from lower taxes to fund their existing levels of activity, decreasing borrowing needs. This could have a long-term negative impact on business customer borrowing.

Our internal controls may be ineffective.

We regularly review and update our internal controls, disclosure controls and procedures and corporate governance policies and procedures. As a result, we may incur increased costs to maintain and improve our controls and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls or procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations or financial condition.

National or state legislation or regulation may increase our expenses and reduce earnings.

Federal bank regulators are increasing regulatory scrutiny, and additional restrictions (including those originating from the Dodd-Frank Act) on financial institutions have been proposed or adopted by regulators and by Congress. Changes in tax law, federal legislation, regulation or policies, such as bankruptcy laws, deposit insurance, consumer protection laws, and capital requirements, among others, can result in significant increases in our expenses and/or chargeoffs, which may adversely affect our earnings. Changes in state or federal tax laws or regulations can have a similar impact. Many state and municipal governments, including the Commonwealth of Kentucky, are under financial stress due to the economy. As a result, these governments could seek to increase their tax revenues through increased tax levies which could have a meaningful impact on our results of operations. Furthermore, financial institution regulatory agencies are expected to continue to be very aggressive in responding to concerns and trends identified in examinations, including the continued issuance of additional formal or informal enforcement or supervisory actions. These actions, whether formal or informal, could result in our agreeing to limitations or to take actions that limit our operational flexibility, restrict our growth or increase our capital or liquidity levels. Failure to comply with any formal or informal regulatory restrictions, including informal supervisory actions, could lead to further regulatory enforcement actions. Negative developments in the financial services industry and the impact of recently enacted or new legislation in response to those developments could negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and adversely impact our financial performance. In addition, industry, legislative or regulatory developments may cause us to materially change our existing strategic direction, capital strategies, compensation or operating plans.

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We may be adversely affected by further increases in FDIC insurance or special assessments.

The FDIC insures deposits at FDIC-insured depository institutions, such as the Bank, up to applicable limits. The amount of a particular institution’s deposit insurance assessment is based on that institution’s risk classification under an FDIC risk-based assessment system. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to its regulators. Market developments have significantly depleted the Deposit Insurance Fund (DIF) of the FDIC and reduced the ratio of reserves to insured deposits. As a result of recent economic conditions and the enactment of the Dodd-Frank Act, the FDIC has increased the deposit insurance assessment rates and thus raised deposit insurance premiums for insured depository institutions. If these increases are insufficient for the DIF to meet its funding requirements, there may need to be further special assessments or increases in deposit insurance premiums. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay even higher premiums than the recently increased levels. Any future additional assessments, increases or required prepayments in FDIC insurance premiums may materially and adversely affect us, including by reducing our profitability or limiting our ability to pursue certain business opportunities.

Even though our common stock is currently traded on the NASDAQ Stock Market, it has less liquidity than many other stocks quoted on a national securities exchange.

The trading volume in our common stock has been relatively low when compared with larger companies listed on NASDAQ or other stock exchanges. We cannot say with any certainty that an active and liquid trading market for our common stock will develop. Because of this, it may be more difficult for stockholders to sell a substantial number of shares for the same price at which stockholders could sell a smaller number of shares. We cannot predict the effect, if any, that future sales of our common stock in the market, or the availability of shares of common stock for sale in the market, will have on the market price of our common stock. We can give no assurance that sales of substantial amounts of common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our future ability to raise capital through sales of our common stock.

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The market price of our common stock has fluctuated significantly, and may fluctuate in the future. These fluctuations may be unrelated to our performance. General market or industry price declines or overall market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.

Our capital stock is subordinate to our existing and future indebtedness.

Our capital stock ranks junior to all of our existing and future indebtedness and other non-equity claims with respect to assets available to satisfy claims against us, including claims in the event of our liquidation. As of December 31, ~~2017~~2018, our total liabilities were approximately $~~420~~426 million, and we may incur additional indebtedness in the future to increase our capital resources. Additionally, if our capital ratios or the capital ratios of the Bank fall below the required minimums, we or the Bank could be forced to raise additional capital by making additional offerings of debt securities.

We are a holding company and depend on our subsidiary bank for dividends, distributions and other payments.

We are a legal entity separate and distinct from our bank subsidiary. Our principal source of cash flow, including cash flow to pay dividends to our stockholders and principal and interest on our outstanding debt, is dividends from the Bank. There are statutory and regulatory limitations on the payment of dividends by the Bank to us, as well as by us to our stockholders. Regulations of both the Federal Reserve and the State of Kentucky affect the ability of the Bank to pay dividends and other distributions to us and to make loans to us. If the Bank is unable to make dividend payments to us and sufficient cash or liquidity is not otherwise available, we may not be able to make dividend payments to our common and preferred stockholders or principal and interest payments on our outstanding debt. In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of creditors of that subsidiary, except to the extent that any of our claims as a creditor of such subsidiary may be recognized. As a result, shares of our capital stock are effectively subordinated to all existing and future liabilities and obligations of our subsidiaries.

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We may not pay dividends on shares of our capital stock.

Holders of shares of our capital stock are only entitled to receive such dividends as our board of directors may declare out of funds legally available for such payments. We have declared cash dividends on our common stock sporadically; we are not required to do so.

We are subject to statutory and regulatory limitations on our ability to pay dividends on our capital stock. For example, it is the policy of the Federal Reserve that BHCs should generally pay dividends on common stock only out of earnings, and only if prospective earnings retention is consistent with the organization’s expected future needs, asset quality and financial condition. Further, if we are unable to satisfy the capital requirements applicable to us for any reason, we may be limited in our ability to declare and pay dividends on our capital stock.

We may need to raise additional debt or equity capital in the future, but may be unable to do so.

We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and other business purposes. Our ability to raise additional capital, if needed, will depend on, among other things, prevailing conditions in the capital markets, which are outside of our control, and our financial performance. We cannot assure you that capital will be available to us on acceptable terms or at all. An inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on our business, financial condition or results of operations.

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Item 1B. Unresolved Staff Comments None.

Item 2. Properties

We currently operate in Warren, Simpson, Barren and Hart Counties in Kentucky, as well as Williamson County, Tennessee.


Type of Office	Location	Leased or Owned

Corporate Office	1065 Ashley Street Bowling Green, Kentucky	Owned

Main Office	1805 Campbell Lane Bowling Green, Kentucky	Leased(1)

Branch	987 Lehman Avenue Bowling Green, Kentucky	Owned

Branch	1200 S. Main Street Franklin, Kentucky	Owned

Branch	204 East Main Street Horse Cave, Kentucky	Owned

Branch	760 West Cherry Glasgow, Kentucky	Owned

Branch	607 S L Rogers Well Blvd Glasgow, Kentucky	Leased

Branch	656 North Main Street Munfordville, Kentucky	Leased

Branch	1700 Scottsville Road Bowling Green, Kentucky	Owned

Loan Production Office	3301 Aspen Grove Drive, Ste.200 Franklin, Tennessee	Leased

(1)

We sold this branch in the fourth quarter of 2006 to an unrelated party and leased it back.

We also own properties located at 2900 Louisville Road and on Gator Drive in Bowling Green which may be used for future branch expansion.

Item 3. Legal Proceedings

In the opinion of management, there is no proceeding pending or, to the knowledge of management, threatened, in which an adverse decision could result in a material adverse change in the consolidated financial condition or results of operations of the Company.

Item 4. Mine Safety Disclosures.

Not Applicable.

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Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

The common stock of the Company is traded in the NASDAQ Global Market under the symbol “CZFC.” Trading volume in the Company’s common stock is light. As of March 137, ~~2018~~2019, there were approximately ~~724~~772 beneficial owners of the Company’s common stock, including ~~111~~104 shareholders of record and, to the best knowledge of the Company, approximately ~~613~~668 beneficial owners whose shares are held by securities brokers-dealers or other nominees.

The following table shows the reported high and low closing sales price information for our common stock for the periods indicated:

2017	High		Low
Fourth Quarter	$	24.07	$	22.97
Third Quarter		24.08		20.77
Second Quarter		22.58		18.50
First Quarter		20.57		17.50

2016	High		Low
Fourth Quarter	$	18.25	$	16.00
Third Quarter		17.00		14.23
Second Quarter		15.00		13.76
First Quarter		14.25		13.34

We paid a cash dividend of $0.18 per share on our common stock in 2017, compared to $0.16 per share in 2016. Dividends on common stock will be payable in the future at the discretion of the Board of Directors, subject to certain restrictions discussed below and in our financial statements. See Item 1, “Business — Supervision and Regulation” for additional information on dividend restrictions applicable to the Company and Citizens First Bank.

The following table sets forth certain information as of December 31, 2017, regarding Company compensation plans under which equity securities of the Company are authorized for issuance.

Equity Compensation Plan Information
				Number of Securities
	Number of			Remaining Available
	Securities			for
	To be Issued Upon	Weighted-average		Future Issuance under
	Exercise of	Exercise Price of		equity compensation
	Outstanding	Outstanding		plans
	Options,	Options, Warrants		(excluding securities
	Warrants and Rights	and Rights		reflected in Column (a))
Plan Category	(a)	(b)		(c)
Equity compensation plans approved by security holders	23,925	$	15.23	76,075
Equity compensation plans not approved by security holders	—		—	—
Total	23,925	$	15.23	76,075

Item 6. Selected Financial Data.

Not Applicable.

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

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

Overview of ~~2017~~2018

Significant developments for the year ended December 31, ~~2017~~2018 were:

· Net income ~~decreased~~increased 317.09% or $~~128~~731,000, from a net income of $4.2209 million in ~~2016~~2017 to $4.0982 million in ~~2017~~2018. ~~Net~~Earnings ~~income~~per ~~decreased~~diluted ~~primarily~~common ~~due~~share towas ~~an increase in income tax expense~~$1. ~~On December 22~~89, ~~2017, President Trump signed “H.R.1”, which among other items reduces the federal corporate tax rate to 21% effective January 1, 2018. As~~ a ~~result,~~company ~~income tax expense increased $401,000 during the fourth quarter due to the Company’s deferred tax assets being revalued~~record.

· The Company recorded a provision for income tax expense of $21.3512 million in ~~2017~~2018 compared to $12.8035 million in ~~2016. The~~ 2017 ~~income tax provision was impacted by the revaluation of the Company’s net deferred tax assets and liabilities related to federal tax reform legislation enacted during the fourth quarter of 2017~~. ~~The~~On ~~revaluation~~December ~~resulted~~22, ~~in a net tax expense of $401~~2017,~~000~~ ~~during~~President ~~the~~Trump ~~fourth~~signed ~~quarter of 2017~~“H.R.1”, ~~The~~which ~~revaluation~~among ofother ~~the~~items ~~Company’s~~reduced ~~deferred tax assets and liabilities at year-end 2017 was based on reasonable estimates by~~ the ~~Company~~federal ofcorporate ~~certain income~~ tax ~~effects~~rate ~~of the new federal tax reform legislation. These effects may be subject~~ to ~~adjustment~~21% aseffective ~~the~~January ~~Company~~1, ~~completes its evaluation during~~ 2018.

· ~~The~~Net ~~Company~~interest ~~completed~~margin ~~the~~declined ~~redemption~~18 ofbasis ~~the~~points ~~6.5%~~during ~~Cumulative~~2018 ~~Preferred~~to ~~Stock,~~3.52% ~~which~~for ~~provided~~2018 ancompared ~~additional~~to $73.170% ~~million~~for in2017. ~~common~~The ~~equity.~~Company’s ~~Outstanding~~net ~~common~~interest ~~shares~~margin ofdecreased ~~the~~primarily ~~Company~~due ~~increased~~to ~~25%~~an asincrease ain ~~result~~the cost of ~~the~~interest-bearing ~~preferred~~liabilities ~~shareholders’~~which ~~option~~exceeded tothe ~~convert~~increase ~~preferred~~in ~~shares~~the ~~into~~yield ~~common~~on ~~shares~~earning assets.

· ~~Net~~Credit ~~interest~~quality ~~margin~~remained ~~declined~~strong ~~during 2017~~ as ~~the~~nonperforming ~~cost~~assets oftotaled ~~funds~~$1.3 ~~increased~~million, ~~while~~or ~~the~~0.27% ~~yield~~of ontotal ~~earning~~ assets ~~declined.~~at ~~The~~December ~~margin~~31, ~~decreased~~2018, 17compared ~~basis points~~ to 3$1.~~70%~~3 ~~for~~million, ~~2017~~or ~~compared to 3~~0.8729% ~~for~~of ~~2016.~~total ~~The Company’s net interest margin was impacted by a decrease in the yield on average earning~~ assets ofat ~~eight~~December ~~basis~~31, ~~points coupled with an increase in the cost of average interest-bearing liabilities of 12 basis points~~2017.

· Credit quality remained strong as nonperforming assets totaled $1.3 million, or 0.29% of total assets at December 31, 2017, compared to $23,000, or 0.01% of total assets at December 31, 2016.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles and follow general practices within the financial services industry. The most significant accounting policies followed by the Company are presented in Note 1 to the Consolidated Financial Statements. The selection and application of these policies involve estimates, judgments, and uncertainties that are subject to change. The critical accounting policies and estimates that the Company has determined to be the most susceptible to change in the near term relate to the determination of the allowance for loan losses, the valuation of securities available for sale, and our valuation of deferred tax assets.

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of probable credit losses incurred in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows or underlying collateral values on impaired loans, estimated losses on loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheet. Note 1 to the Consolidated Financial Statements describes the methodology used to determine the allowance for loan losses, and a discussion of the factors driving changes in the amount of the allowance for loan losses is included under “Credit Quality and the Allowance for Loan Losses” below.

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Securities Valuation

Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported separately in accumulated other comprehensive income (loss), net of tax. The Company obtains market values from a third party on a monthly basis in order to adjust the securities to fair value. Equity securities that do not have readily determinable fair values are carried at cost. Additionally, when securities are deemed to be other than temporarily impaired, a charge will be recorded through earnings; therefore, future changes in the fair value of securities could have a significant impact on the Company’s operating results. In determining whether a market value decline is other than temporary, management considers the reason for the decline, the extent of the decline, the duration of the decline and whether the Company

intends to sell or believes it will be required to sell the securities prior to recovery.

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Valuation of Deferred Tax Asset

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

Results of Operations

Net Interest Income

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

For the year ended December 31, ~~2017~~2018, net interest income was $15.67 million, aan ~~decrease~~increase of $56188,000, or 01.42%, from net interest income of $15.6 million in ~~2016~~2017. ~~Net~~ However the net interest ~~income~~margin decreased ~~primarily~~due ~~from~~to an increase in the cost of average interest bearing liabilities exceeding the increase in yield on interest earning assets.

Interest rates increased 75100 basis points during ~~2017~~2018, as the Federal Reserve increased the target federal funds rate 25 basis points at their meetings in March, June, September and December. The prime rate increased from 34.7550% to 45.50% in ~~2017~~2018.

Net Interest Analysis Summary

	2017		2016
	2018		2017
Average yield on interest earning assets	4.4152	%	4.4941	%
Average rate on interest bearing liabilities	01.8520	%	0.7385	%
Net interest spread	3.5632	%	3.7656	%
Net interest margin	3.7052	%	3.8770	%

Our average interest-earning assets were $~~427~~450.52 million for ~~2017~~2018, compared with $~~411~~427.05 million for ~~2016~~2017, a $1622.57 million, or 45.03% increase primarily attributable to an increase in average loans and fed funds sold. Average loans were $~~365~~379.07 million for ~~2017~~2018, compared with $~~340~~365.80 million for ~~2016~~2017, an increase of $2414.27 million, or 74.10%. Our total interest income on a tax-equivalent basis increased 28.20% to $1820.83 million for ~~2017~~2018, compared with $18.48 million for ~~2016~~2017. The change was due primarily to the increased volume of interest-earning assets.

Our average interest-bearing liabilities increased $1116.4 million, or 34.36%, to $~~357~~374.60 million for ~~2017~~2018, compared with $~~346~~357.26 million for ~~2016~~2017. Our total interest expense increased $~~509~~1.4 million,~~000,~~ or 2047.16%, to $34.05 million for ~~2017~~2018, compared with $23.50 million during 2017. The change was due primarily to an increase in the rates and volume of FHLB borrowings and an increase in the rate on interest-bearing deposits.

~~Page~~The 26following table sets forth for the years ended December 31, 2018 and 2017 information regarding average balances of assets and liabilities as well as the amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. We have calculated the yields and costs for the periods indicated by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented.

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million during 2016. The change was due primarily to an increase in the rates on FHLB borrowings and an increase in the rate on interest-bearing deposits.

The following table sets forth for the years ended December 31, 2017 and 2016 information regarding average balances of assets and liabilities as well as the amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. We have calculated the yields and costs for the periods indicated by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented.

Average Consolidated Balance Sheets and Net Interest Analysis (Dollars in thousands) Year Ended December 31,

	2017						2016
	2018						2017
	Average		Income/		Average		Average		Income/		Average
Year ended December 31,	Balance		Expense		Rate		Balance		Expense		Rate
Earning assets:
Federal funds sold	$	—5,955	$	—119	—2.00	%	$	~~2,787~~—	$	14—	~~0.50~~—	%
Interest-bearing deposits in other financial institutions		1316,~~132~~438		~~169~~325	1.2998	%		713,~~427~~132		68169	01.9229	%
Available-for-sale securities (1)
Taxable		2829,~~656~~852		~~576~~714	2.0139	%		3628,~~194~~656		~~672~~576	12.8601	%
Nontaxable		1816,~~589~~267		~~743~~486	42.0099	%		2118,~~780~~589		~~892~~743	4.1000	%
Federal Home Loan Bank stock		2,~~046~~062		~~102~~121	45.9987	%		2,~~025~~046		81102	4.0099	%
Loans receivable (2)		~~365~~379,~~028~~663		1718,~~246~~565	4.7289	%		~~340~~365,~~837~~028		1617,~~713~~246	4.9072	%
Total interest earning assets		~~427~~450,~~451~~237		1820,~~836~~330	4.4152	%		~~411~~427,~~050~~451		18,~~440~~836	4.4941	%
Non-interest earning assets		27,~~446~~387						2827,~~578~~446
Total Assets	$	~~454~~477,~~897~~624					$	~~439~~454,~~628~~897
Interest-bearing liabilities:
NOW Accounts	$	119,991	$	580	0.48	%	$	121,600	$	486	0.40	%
NOW accounts	$	125,611	$	869	0.69	%	$	119,991	$	580	0.48	%
Money market Accounts		31,008	$	201	0.65	%	$	23,749	$	88	0.37	%
Money market accounts		35,878	$	309	0.86	%	$	31,008	$	201	0.65	%
Savings accounts		21,~~833~~907		3938	0.1817	%		21,~~225~~833		39	0.18	%
Time deposits		~~143~~145,~~336~~058		12,~~620~~296	1.1358	%		~~144~~143,~~565~~336		1,~~490~~620	1.0313	%
Total interest-bearing deposits		~~316~~328,~~168~~454		23,~~440~~512	01.7707	%		~~311~~316,~~139~~168		2,~~103~~440	0.6877	%
Borrowings		3640,~~381~~559		~~454~~776	1.2591	%		3036,~~075~~381		~~307~~454	1.0225	%
Subordinated debentures		5,000		~~144~~195	23.8890	%		5,000		~~118~~144	2.3688	%
Total interest-bearing liabilities		~~357~~374,~~549~~013		34,~~038~~483	01.8520	%		~~346~~357,~~214~~549		23,~~528~~038	0.7385	%
Non-interest bearing deposits		5053,~~694~~721						4950,~~689~~694
Other liabilities		2,~~220~~290						2,~~290~~220
Total liabilities		~~410~~430,~~463~~024						~~398~~410,~~193~~463
Stockholders’ equity		4447,~~434~~600						4144,~~435~~434
Total Liabilities and Stockholders’ Equity	$	~~454~~477,~~897~~624					$	~~439~~454,~~628~~897
Net interest income			$	15,~~798~~847					$	15,~~912~~798
Net interest spread (1)					3.5632	%					3.7656	%
Net interest margin (1) (3)					3.7052	%					3.8770	%
Return on average assets ratio					01.9001	%					0.9690	%
Return on average equity ratio					910.2013	%					109.20	%
Average equity to assets ratio					9.7797	%					9.4377	%

(1) Income and yield stated at a tax equivalent basis for nontaxable securities using the marginal corporate Federal tax rate of 34.0% for 2017 and 21.0% for 2018.

(2)

Average loans include nonperforming loans. Interest income includes interest and fees on loans, but does not include interest on loans 90 days or more past due.

(3)

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

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Rate/Volume Analysis

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

	(Dollars in Thousands)
	Twelve Months Ended December 31, 2017
	Twelve Months Ended December 31, 2018
	Vs. 2016
	Vs. 2017
	Increase (Decrease) Due to
	Rate	Volume	Net
Interest-earning assets:
Federal funds sold	—	~~(14)~~119	~~(14)~~119
Interest-bearing deposits in other financial institutions	49113	5243	~~101~~156
Available-for-sale securities:
Taxable	44114	~~(140)~~24	~~(96)~~138
Nontaxable (1)	(18164)	(~~131~~93)	(~~149~~257)
Federal Home Loan Bank stock	2018	1	2119
Loans, net	~~(653)~~628	~~1,186~~691	~~533~~1,319
Total Net Change in income on interest-earning assets	~~(558)~~709	~~954~~785	~~396~~1,494
Interest-bearing liabilities:
NOW Accounts	~~100~~262	~~(6)~~27	94289
Money market accounts	8676	2732	~~113~~108
Savings accounts	(1)	10	—(1)
Time deposits	~~143~~657	~~(13)~~19	~~130~~676
FHLB and other borrowings	83270	6452	~~147~~322
Subordinated debentures	2651	—	2651
Total Net Change in expense on interest-earning liabilities	~~437~~1,315	73130	~~510~~1,445
Net change in net interest income	(~~994~~606)	~~880~~655	~~(114)~~49
Percentage Change	~~872~~-1235.28%	~~-772~~1335.28%	100.0%

(1) Income stated at a fully tax equivalent basis using the marginal corporate Federal tax rate of 34.0% for 2017 and 21% for 2018.

Provision for Loan Losses

The provision ~~(credit)~~ for loan losses for ~~2017~~2018 was ($~~150~~160,000), or (0.04%) of average loans, compared to a credit of ($85150,000), or (0.0204%) of average loans during ~~2016~~2017. We had net ~~recoveries~~charge-offs totaling $20511,000 during ~~2017~~2018, compared to net recoveries of ($2320,000) during ~~2016~~2017. We consider the size, volume and credit quality of the loan portfolio as well as recent economic and other external influences to record the allowance for loan losses and provision for loan losses that is directionally consistent with our loan portfolio.

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Non-interest Income

Non-interest income ~~decreased~~increased 21.06%, or $7257,000, ~~from~~in $32018.6 ~~million~~This inis ~~2016~~primarily due to ~~$3.6~~an ~~million~~increase in ~~2017.~~other ~~Service~~service charges onand ~~deposit~~fees ~~accounts decreased~~ of $~~159~~56,000 ~~due~~and tonon-deposit abrokerage ~~reduction~~fees inof ~~services~~$54,000, ~~charges~~offset onby ~~business~~gains ~~accounts. Gains~~ on the sale of ~~mortgage~~securities ~~loans~~of ~~decreased~~ $5848,000 ~~due~~in tothe ~~decreased~~prior ~~volume~~year ofcompared ~~loans~~to ~~sold~~$0 in the ~~secondary~~current ~~market~~year. The following table shows the detailed components of non-interest income:

	(Dollars in Thousands)
					Increase
	2017		2016		(Decrease)
	2018		2017		(Decrease)
Service charges on deposit accounts	$	1,~~237~~230	$	1,~~396~~237	$	(~~159~~7)
Other non-interest income		1,~~170~~226		1,~~027~~170		~~143~~56
Gain on sale of mortgage loans held for sale		~~317~~320		~~375~~317		~~(58)~~3
Non-deposit brokerage fees		~~365~~419		~~315~~365		5054
Lease income		~~237~~236		~~207~~237		30(1)
Bank-owned life insurance		177		177		—
Gain on the sale of available-for-sale securities		48—		~~126~~48		(7848)
	$	3,~~551~~608	$	3,~~623~~551	$	~~(72)~~57

Non-interest Expense

Non-interest expense ~~decreased~~increased 3.73%, or $~~487~~427,000, from $1312.38 million in ~~2016~~2017 to $1213.82 million in ~~2017~~2018. ~~Several~~ ~~categories~~This ofis ~~expenses~~primarily ~~declined~~due ~~including~~to an increase of $~~176~~359,000 in ~~other~~personnel expenses, $~~127~~99,000 in ~~data~~professional ~~processing~~fees ~~services,~~and $~~123~~103,000 in ~~occupancy~~other expenses, ~~and~~offset by a decrease of $73101,000 in ~~personnel~~data ~~expenses~~processing services.

The increases and decreases in expense in ~~2017~~2018 by major categories are as follows:

	(Dollars in Thousands)
					Increase
	2017		2016		(Decrease)
	2018		2017		(Decrease)
Personnel expense	$	67,~~802~~161	$	6,~~875~~802	$	~~(73)~~359
Net occupancy expense		1,~~804~~778		1,~~927~~804		(~~123~~26)
Advertising and public relations		~~337~~359		~~320~~337		1722
Professional fees		~~547~~646		~~465~~547		8299
Data processing services		~~910~~809		~~1,037~~910		(~~127~~101)
Franchise shares and deposit tax		~~484~~480		~~528~~484		(444)
FDIC insurance		~~197~~172		~~223~~197		(2625)
Other real estate owned expenses		—		17		(17)
Other		1,844		1,741		103
Other		1,741		1,917		(176)
	$	13,249	$	12,822	$	427
	$	12,822	$	13,309	$	(487)

Income Taxes

The Company recorded a provision for income tax expense of $21.3513 million in ~~2017~~2018 compared to $12.8035 million in ~~2016~~2017. The 2017 income tax provision was impacted by the revaluation of the Company’s net deferred tax assets and liabilities related to federal tax reform legislation enacted during the fourth quarter of 2017. The revaluation resulted in a net tax expense of $401,000 during the fourth quarter of 2017. The revaluation of the Company’s deferred tax assets and liabilities at year-end 2017 was based on reasonable estimates by the Company of certain income tax effects of the new federal tax reform legislation. ~~These effects may be subject to adjustment as the Company completes its evaluation during 2018.~~

Income tax expense was calculated using the Company’s expected effective rate for ~~2017~~2018 and ~~2016~~2017. Deferred taxes arise from temporary differences, which are items recorded for financial statement purposes in a different period than for income tax returns. Our statutory federal tax rate was 3421.0% in ~~both~~2018 ~~2017~~ and ~~2016~~34.0% in 2017. The effective tax rate for ~~2017~~2018 was 3618.59%, compared to 2936.95% for ~~2016~~2017. 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 ~~and the remeasurement of the net deferred tax asset due to the 2017 Tax Cuts and Jobs Act~~. See Note 11 to the Company’s consolidated financial statements for additional details relative to the Company’s income tax provision.

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Balance Sheet Review

Our assets at December 31, ~~2017~~2018 totaled $~~465~~476.40 million, compared with $~~455~~465.4 million at December 31, ~~2016~~2017, an increase of $10.06 million, or 2.23%. Loans ~~increased~~decreased $142.87 million, or 40.17%, from December 31, ~~2016 to December 31,~~ 2017, ~~while available-for-sale securities decreased $4.9 million, or 9.2% from December 31, 2016~~ to December 31, ~~2017~~2018. Deposits increased $116.93 million, or 04.54%, from December 31, ~~2016~~2017 to December 31, ~~2017~~2018. Borrowings from the Federal Home Loan Bank ~~increased~~decreased $510.0 million, or 1425.30%, from December 31, ~~2016~~2017 to December 31, ~~2017~~2018. Average assets increased 3.5.0% or $1522.37 million, from $~~439~~454.69 million in ~~2016~~2017 to $~~454~~477.96 million in ~~2017~~2018.

Loans

Total loans averaged $~~365~~379.07 million in ~~2017~~2018, compared to $~~340~~365.80 million in ~~2016~~2017. At year-end ~~2017~~2018, loans totaled $~~374~~371.25 million, compared to $~~359~~374.42 million at year-end ~~2016~~2017, an ~~increase~~decrease of $142.87 million, or 40.17%. We experienced increases in the commercial and agricultural, ~~commercial real estate,~~ and residential real estate portfolios in ~~2017~~2018. The following table presents a summary of the loan portfolio by category:

	(Dollars in Thousands)
	December 31, 2017				December 31, 2016
	December 31, 2018				December 31, 2017
			% of Total				% of Total
			Loans				Loans
Commercial and agricultural	$	61,~~221~~551	16.3657	%	$	6061,~~388~~221	16.8036	%
Commercial real estate		~~226~~217,~~834~~629	6058.6157	%		~~216~~226,~~511~~834	60.2561	%
Residential real estate		8288,~~230~~797	2123.9790	%		7882,~~422~~230	21.8297	%
Consumer		3,~~954~~567	10.0696	%		43,~~070~~954	1.1306	%
	$	~~374~~371,~~239~~544	100.00	%	$	~~359~~374,~~391~~239	100.00	%

Our commercial real estate loans include financing for industrial developments, residential developments, retail shopping centers, industrial buildings, restaurants, and hotels. The percentage distribution of our loans by industry as of December 31, ~~2017~~2018 and ~~2016~~2017 is shown in the following table:

	2017		2016
	2018		2017
Agriculture, forestry, and fishing	8.6214	%	8.6662	%
Construction	7.8085	%	67.6380	%
Manufacturing	2.7990	%	32.7179	%
Transportation, communication, electric, gas, and sanitary services	34.7109	%	3.9671	%
Wholesale trade	32.2139	%	3.6021	%
Retail trade	3.0655	%	43.1506	%
Finance, insurance, and real estate	3229.8273	%	~~28.~~32.82	%
Services	1416.7518	%	1714.75	%
Public administration	0.2131	%	0.2721	%
Total commercial and commercial real estate	7675.9714	%	7776.0597	%
Residential real estate loans	2123.9790	%	21.8297	%
Other consumer loans	10.0696	%	1.1306	%
Total loans	100	%	100	%

The majority of our loans are to customers located in south central Kentucky and central Tennessee. As of December 31, ~~2017~~2018, the Company’s 20 largest credit relationships (which could involve more than a single borrower) consisted of loans and loan commitments ranging from $4.37 million to $1114.97 million. The aggregate amount of these credit relationships was $~~108~~107.63 million, with total commitments of $~~124~~123.76 million.

Our lending activities are subject to a variety of lending limits imposed by state and federal law. Citizens First Bank’s secured legal lending limit to a single borrower was approximately $12.5 million at December 31, ~~2017~~2018.

~~Page~~As 30of December 31, 2018, we had $17.2 million of participations in loans purchased from, and $12.3 million of participations in loans sold to, other banks. As of December 31, 2017, we had $18.6 million of participations in loans purchased from, and $17.0 million of participations in loans sold to, other banks.

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AsThe offollowing ~~December 31,~~table ~~2017,~~sets weforth ~~had~~the ~~$18.6~~maturity ~~million~~distribution of ~~participations~~our inloan ~~loans~~portfolio ~~purchased~~as ~~from, and $17.0 million~~ of ~~participations in loans sold to, other banks. As of~~ December 31, ~~2016,~~2018. Maturities weare ~~had~~based ~~$17.7~~upon ~~million~~contractual ofterms. Our ~~participations~~policy inis ~~loans~~to ~~purchased~~specifically ~~from,~~review and ~~$24.7~~approve ~~million~~all ofloans ~~participations~~renewed; in loans ~~sold~~are ~~to,~~not ~~other~~automatically ~~banks~~rolled over.

The following table sets forth the maturity distribution of our loan portfolio as of December 31, 2017. Maturities are based upon 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 December 31, 2018	Year		Years		Years		Total
Commercial and agricultural	$	22,145	$	34,511	$	4,895	$	61,551
Commercial real estate		37,792		120,411		59,426		217,629
Residential real estate		9,180		40,091		39,526		88,797
Consumer		791		2,727		49		3,567
Total	$	69,908	$	197,740	$	103,896	$	371,544

	(Dollars in Thousands)
			After One but
Loan Maturities	Within One		Within Five		After Five
as of December 31, 2017	Year		Years		Years		Total
Commercial and agricultural	$	19,197	$	32,687	$	9,337	$	61,221
Commercial real estate		63,250		102,477		61,107		226,834
Residential real estate		9,971		37,223		35,036		82,230
Consumer		1,296		2,609		49		3,954
Total	$	93,714	$	174,996	$	105,529	$	374,239

The table below presents loans outstanding as of December 31, 2018 with maturities greater than one year categorized by fixed and variable interest rates:

The table below presents loans outstanding as of December 31, 2017 with maturities greater than one year categorized by fixed and variable interest rates:


	(Dollars in
As of December 31, 2018	Thousands)
Fixed Rate	$	213,094
Variable Rate		88,542
Total maturities greater than one year	$	301,636

	(Dollars in
As of December 31, 2017	Thousands)
Fixed Rate	$	209,115
Variable Rate		71,410
Total maturities greater than one year	$	280,525

Asset and Liability Management

We manage our assets and liabilities to provide a consistent level of liquidity to accommodate normal fluctuations in loans and deposits. The yield on approximately 2632.7% of our earning assets as of December 31, ~~2017~~2018, adjusts simultaneously with changes in an external index, primarily the highest prime rate as quoted in the Wall Street Journal. A majority of our interest bearing liabilities have been issued with fixed terms and can only be repriced at maturity. The prime rate increased ~~three~~four times during ~~2017~~2018 after ~~remaining~~increasing ~~stable~~three attimes ~~3.50%~~in ~~during most of 2016~~2017. The prime rate increased to 34.7550% in December, ~~2016~~2017 and increased to 4.0075% in March ~~2017~~2018, to 45.2500% in June ~~2017~~2018, to 5.25% in September 2018 and to 45.50% in December ~~2017~~2018. The yield on our earning assets ~~declined~~increased during ~~2017~~2018 asbut ~~we were not able to reinvest at~~ the ~~yields previously earned on loans and called and matured investments. The~~ cost of our interest bearing liabilities for the year ended ~~2017~~2018 increased, ~~which~~more. This caused the net interest margin to decrease 1718 basis points from the prior year end. If interest rates stabilize for a period of time, the difference between interest earning assets and interest bearing liabilities will tend to stabilize. In a stable rate environment, our net interest margin will be impacted by, among other factors, a change in the mix of earning assets, with our deposit growth being invested in an interest bearing sweep account, investment securities or loans.

Credit Quality and the Allowance for Loan Losses

We consider credit quality to be of primary importance. We contract with a third party CPA firm for loan review services. The scope of the engagement calls for annual review of a sample of large loan relationships (in excess of $1 million), problem credits, unsecured loans, insider relationships, and a sample of smaller commercial credits with annual coverage of at least 50% of the outstanding loan portfolio. The focus of the reviews is centered in the commercial and commercial real estate portfolios, as they comprise the majority of the Bank’s loan portfolio. Management addresses any findings raised during the review process and takes appropriate actions as warranted.

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The allowance for loan losses is established through a provision for loan losses charged to expense. At December 31, ~~2017~~2018, the allowance was $4.74 million, compared to $4.97 million at December 31, ~~2016~~2017. The ratio of the allowance for loan losses to total loans at December 31, ~~2017~~2018 was 1.2618%, compared to 1.3526% at December 31, ~~2016~~2017. The following table sets forth an analysis of our allowance for loan losses for the years ended December 31, ~~2017~~2018 and ~~2016~~2017.

	(Dollars in Thousands)
	2017			2016
	2018			2017
Balance at beginning of year	$	4,~~854~~724		$	4,~~916~~854
Provision (credit) for loan losses		~~(150)~~160			(85150)
Amounts charged off:
Commercial		1737			~~109~~17
Commercial real estate		—468			52—
Residential real estate		—43			39—
Consumer		2611			226
Total loans charged off		43559			~~202~~43
Recoveries of amounts previously charged off:
Commercial		315			~~144~~31
Commercial real estate		1			521
Residential real estate		1441			2414
Consumer		171			517
Total recoveries		6348			~~225~~63
Net charge-offs (recoveries)		~~(20)~~511			(2320)
Balance at end of year	$	4,~~724~~373		$	4,~~854~~724
Total loans, net of unearned income:
Average	$	~~365~~379,~~028~~663		$	~~340~~365,~~837~~028
At December 31	$	~~374~~371,~~239~~544		$	~~359~~374,~~391~~239
As a percentage of average loans:
Net charge-offs (recoveries)		(0.~~01)~~13	%		(0.01)	%
Provision (credit) for loan losses		(0.04)	%		(0.0204)	%

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)
	December 31, 2017				December 31, 2016
	December 31, 2018				December 31, 2017
	Amount		% of Loans in Each Category to Total Loans		Amount		% of Loansin EachCategory toTotal Loans
Residential real estate loans	$	554	21.97	%	$	527	21.82	%
Commercial and agricultural	$	592	16.57	%		633	16.36	%
Consumer and other loans		10	1.06	%		14	1.13	%
Commercial real estate		3,122	58.57	%		3,515	60.61	%
Commercial and agricultural		633	16.36	%		615	16.80	%
Residential real estate loans		611	23.90	%		554	21.97	%
Commercial real estate		3,515	60.61	%		3,628	60.25	%
Consumer and other loans		9	0.96	%		10	1.06	%
Unallocated		1239	0.00	%		7012	~~0.00~~—	%
Total allowance for loan losses	$	4,~~724~~373	100.00	%	$	4,~~854~~724	100.00	%

We maintain a modest unallocated amount in the allowance to recognize the imprecision in estimating and measuring losses when evaluating allocations for individual loans or pools of loans. Allocations on individual loans and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience. The unallocated portion of the allowance ~~decreased~~increased from $7012,000 at December 31, ~~2016~~2017 to $1239,000 at December 31, ~~2017~~2018.

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

	(Dollars in Thousands)
	December 31, 2017			December 31, 2016
	December 31, 2018			December 31, 2017
Non-accrual loans	$	2796		$	2327
Loans 90+ days past due/accruing		—			—
Restructured loans on non-accrual		1,~~317~~202			—1,317
Total non-performing loans		1,~~344~~298			231,344
Other real estate owned		—			—
Total non-performing assets	$	1,~~344~~298		$	231,344
Non-performing loans to total loans		0.3635	%		0.0136	%
Non-performing assets to total assets		0.2927	%		0.0129	%
Net charge-offs (recoveries) YTD	$	~~(20)~~511		$	(2320)
Net charge-offs (recoveries) YTD to average YTD total loans		(0.01)	%		(0.01)	%
Net charge-offs (recoveries) YTD to average YTD total loans, annualized		0.13	%		(0.01)	%
Allowance for loan losses to non-performing loans		~~351~~336.4990	%		~~21,104~~351.3549	%
Allowance for loan losses to total loans		1.2618	%		1.3526	%

Non-performing assets totaled $1.3 million at December 31, ~~2017,~~2018 ~~compared~~and ~~to $23,000 at~~ December 31, ~~2016,~~2017. anChanges ~~increase~~to ofthe ~~$1.3~~non-performing ~~million.~~assets ~~Payoffs~~included the charge off of a $2327,000 ~~were~~loan ~~made~~and onpaydowns ~~two~~of ~~residential~~$115,000, ~~real estate loans. The decreases were~~ offset by the addition of $~~1.3 million in commercial real estate loans and a $27~~97,000 in residential real estate ~~loan~~loans.

Non-performing loans are defined as non-accrual loans, loans accruing but past due 90 days or more, and non-current restructured loans. Non-performing assets are defined as non-performing loans, other real estate owned, and repossessed assets. The non-performing loan total at year-end ~~2017~~2018 consisted of ~~three~~four non-accrual loans totaling $1.3 million and no loans over 90 days past due that are still accruing. No other real estate was owned at December 31, ~~2017~~2018.

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 and is in the process of collection, or 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. Generally, we do not include loans that are current as to principal and interest in our non-performing assets categories. However, we will still classify a current loan as a potential problem loan if we develop doubts about the borrower’s future performance under the terms of the loan contract.

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 the Company. 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 nonaccrual 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 loan review.

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A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for all loan classes by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

We believe that the allowance for loan losses at December 31, ~~2017~~2018, provides for probable incurred credit losses in the loan portfolio as of that date. That determination is based on the best information available to management, but necessarily involves uncertainties and matters of judgment and, therefore, cannot be determined with precision and could be susceptible to significant change in the future. In addition, bank regulatory authorities, as a part of their periodic examinations, may reach different conclusions regarding the quality of the loan portfolio and the level of the allowance, which could require us to make additional provisions in the future.

Securities

Our securities portfolio serves as a source of liquidity and earnings and contributes to the management of interest rate risk. Our portfolio also provides us with securities to pledge as required collateral for certain governmental deposits and borrowed funds.

The investment securities portfolio is comprised primarily of U.S. Government agency securities, mortgage-backed securities, and securities of state and political subdivisions (municipal securities) that are both taxable and tax-exempt. Securities are all classified as available-for-sale. The investment portfolio decreased by $41.95 million, or 93.21%, to $4847.61 million at December 31, ~~2017~~2018, compared with $5348.56 million at December 31, ~~2016~~2017.

The tables below present the maturities and yield characteristics of securities as of December 31, ~~2017~~2018 and ~~2016~~2017. 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
December 31, 2017	Less			Five Years			Ten Years			Years			Maturities			Fair Value
December 31, 2018	Less			Five Years			Ten Years			Years			Maturities			Fair Value
U.S. Government agencies	$	~~1,000~~56		$	~~998~~2,495		$	—5,978		$	—		$	18,~~998~~529		$	18,~~977~~440
Agency mortgage-backed securities: (1)		12—			1819,~~981~~287			71,~~031~~353			—			2620,~~024~~640			2520,~~811~~300
Municipal securities		12,~~963~~573			86,~~375~~680			64,~~224~~882			2,~~819~~731			1916,~~381~~866			1916,~~388~~728
Trust preferred security		—			—			—			1,~~889~~893			1,~~889~~893			1,~~440~~630
Total available-for-sale securities	$	2,~~975~~629		$	28,~~354~~462		$	1312,~~255~~213		$	4,~~708~~624		$	4947,~~292~~928		$	4847,~~616~~098
Percent of total		65.0449	%		5759.5238	%		2625.8948	%		9.5565	%		100.00	%
Weighted average yield(2)		32.0317	%		2.4556	%		3.1511	%		3.5986	%		2.7981	%

(1) Agency mortgage backed securities (residential) are grouped into average lives based on December ~~2017~~2018 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, 2016	Less			Five Years			Ten Years			Years			Maturities			Fair Value
December 31, 2017	Less			Five Years			Ten Years			Years			Maturities			Fair Value
U.S. Government agencies	$	—1,000		$	1,998		$	—		$	—		$	1,998		$	1,~~957~~977
Agency mortgage-backed securities: (1)		8512			2118,~~700~~981			67,~~363~~031			—			2826,~~148~~024			2725,~~957~~811
Municipal securities		1,~~264~~963			98,~~924~~375			76,~~606~~224			2,~~516~~819			2119,~~310~~381			2119,~~380~~388
Trust preferred security		—			—			—			1,~~884~~889			1,~~884~~889			1,~~240~~440
Corporate bond		—			—			1,000			—			1,000			1,013
Total available-for-sale securities	$	2,975		$	28,354		$	13,255		$	4,708		$	49,292		$	48,616
Total available-for-sale securities	$	1,349		$	33,622		$	14,969		$	4,400		$	54,340		$	53,547
Percent of total		6.04	%		57.52	%		26.89	%		9.55	%		100.00	%
Percent of total		2.48	%		61.87	%		27.55	%		8.10	%		100.00	%
Weighted average yield(2)		3.03	%		2.45	%		3.15	%		3.59	%		2.79	%
Weighted average yield(2)		3.06	%		2.47	%		3.31	%		4.14	%		2.85	%

(1) Agency mortgage backed securities (residential) are grouped into average lives based on December ~~2016~~2017 prepayment projections.

(2)

The weighted average yields are based on amortized cost and municipal securitiesare 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 payments are being received as scheduled. All rated securities are investment grade. For those that are not rated, the financial condition has been evaluated and no adverse conditions were identified related to repayment. Declines in fair value are a function of rate changes in the market and market illiquidity. The Company does not intend to sell these securities and does not believe it will be required to sell these securities.

Deferred Tax Assets

We have a net deferred tax asset of $~~670~~545,000 at December 31, ~~2017~~2018 compared to $~~1.46~~670,000 ~~million~~ at December 31, ~~2016~~2017. On December 22, 2017, President Trump signed “H.R.1”, which among other items reduces the federal corporate tax rate to 21% effective January 1, 2018. As a result, the Company’s net deferred tax assets were revalued based on the income tax rates at which they are expected to reverse in the future, which is generally 21%. We evaluate this asset on a quarterly basis. To the extent we believe it is more likely than not that it will not be utilized, we will establish a valuation allowance to reduce its carrying amount to the amount it expects to be realized. At December 31, ~~2017~~2018, no valuation allowance has been established against the outstanding deferred tax asset. The deferred tax asset will be utilized as taxable income is generated in future years.

Deposits

We offer traditional deposit products, including non-interest-bearing and interest-bearing checking (or NOW accounts), commercial checking, money market accounts, savings accounts and certificates of deposit. We compete for deposits through our branch network with competitive pricing and advertising.

Total deposits averaged $~~366~~382.92 million during ~~2017~~2018, an increase of $615.13 million, or 14.72%, compared to $~~360~~366.89 million during ~~2016~~2017. Average deposits increased during the year and the cost of funds increased as deposits matured and were renewed at higher rates. Deposits at December 31, ~~2017~~2018 totaled $~~372~~388.36 million, an increase of $116.93 million from the prior year end.

We utilize brokered certificates of deposit and will continue to utilize these sources for deposits when they can be cost-effective. We also utilize a deposit listing service. There were $1814.18 million in brokered deposits at December 31, ~~2017~~2018 compared to $118.91 million at December 31, ~~2016~~2017.

At December 31, ~~2017~~2018, our ten largest customers accounted for approximately $4962.48 million, or 1316.38%, of total deposits whereas, at December 31, ~~2016~~2017, ten customers accounted for approximately $49.84 million, or 13.53% of total deposits in ~~2016.~~

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2017. The weighted average cost of deposits, including the average of noninterest bearing demand deposits, for the years ended December 31, ~~2017~~2018 and ~~2016~~2017 is listed below:

	(Dollars in Thousands)
	2017				2016
	2018				2017
	Average		Average		Average		Average
	Balance		Rate		Balance		Rate
Noninterest bearing demand	$	5053,~~694~~721	—	%	$	4950,~~689~~694	—	%
Interest bearing demand		~~119~~125,~~991~~611	0.4869	%		~~121~~119,~~600~~991	0.4048	%
Savings		52,841	0.45	%		44,974	0.28	%
Savings and money market		57,785	0.60	%		52,841	0.45	%
Time		~~143~~145,~~336~~058	1.1358	%		~~144~~143,~~565~~336	1.0313	%
	$	~~366~~382,~~862~~175	0.6792	%	$	~~360~~366,~~828~~862	0.5867	%

Liquidity, Other Borrowings, and Capital Resources

Borrowings

FHLB Advances. We obtain advances from the Federal Home Bank of Cincinnati (FHLB) for funding and liability management. These advances are collateralized by a blanket agreement of eligible 1-4 family residential mortgage loans and eligible commercial real estate. Rates vary based on the term to repayment. Total advances as of December 31, ~~2017~~2018 were $4030.0 million.

At December 31, ~~2017~~2018, we had established Federal Funds lines of credit totaling $18.8 million with three correspondent banks. No amounts were drawn as of December 31, ~~2017~~2018 or ~~2016~~2017.

We ~~maintained~~issued a$5.0 ~~credit~~million ~~agreement~~in ~~with~~subordinated adebentures ~~community~~in ~~bank~~October to2006. These besubordinated ~~used~~debentures ~~for~~bear ~~operating~~an ~~capital~~interest ~~and~~rate, ~~general~~which ~~corporate~~reprices ~~purposes. The~~each ~~line~~calendar ~~had~~quarter, aof ~~total~~165 ~~availability~~basis ofpoints $over 3.0-month ~~million,~~LIBOR ~~matured~~(London ~~November~~Inter ~~21,~~Bank ~~2017,~~Offering ~~and~~Rate). Our ~~bore~~ interest ~~at the prime~~ rate as ~~published in the Money Rates section~~ of ~~The Wall Street Journal~~December 31, ~~plus~~2018 ~~0.25%,~~was ~~with interest payable monthly. The line had a floor rate of~~ 4.505%., ~~The~~and ~~line was secured by the Bank’s common stock. The line was not renewed~~ at ~~maturity. The line did not have a balance as of~~ December 31, ~~2016.~~2017 was 2.99%.

WeInformation ~~issued~~regarding ~~$5.0~~our ~~million~~borrowings in subordinated debentures in October 2006. These subordinated debentures bear an interest rate, which reprices each calendar quarter, of 165 basis points over 3-month LIBOR (London Inter Bank Offering Rate). Our interest rate as of December 31, ~~2017~~2018 ~~was 2.99%,~~ and at2017 ~~December 31,~~is ~~2016~~presented ~~was 2.5%.~~below:

Information regarding our borrowings as of December 31, 2017 and 2016 is presented below:


	(Dollars in Thousands)
	2018			2017
Borrowed funds:
Balance at year end	$	30,000		$	40,000
Weighted average rate at year end		2.37	%		1.46	%
Average balance during the year	$	40,559		$	32,696
Weighted average rate during the year		1.91	%		1.36	%
Maximum month-end balance	$	50,000		$	41,000
Subordinated debentures:
Balance at year end	$	5,000		$	5,000
Weighted average rate at year end		4.05	%		2.99	%
Average balance during the year	$	5,000		$	5,000
Weighted average rate during the year		3.88	%		2.94	%
Maximum month-end balance	$	5,000		$	5,000
Total borrowings:
Balance at year end	$	35,000		$	45,000
Weighted average rate at year end		2.61	%		1.63	%
Average balance during the year	$	45,559		$	37,696
Weighted average rate during the year		2.13	%		1.57	%
Maximum month-end balance	$	55,000		$	46,000

	(Dollars in Thousands)
	2017			2016
Borrowed funds:
Balance at year end	$	40,000		$	35,000
Weighted average rate at year end		1.46	%		0.91	%
Average balance during the year	$	32,696		$	30,075
Weighted average rate during the year		1.36	%		1.02	%
Maximum month-end balance	$	41,000		$	38,000
Subordinated debentures:
Balance at year end	$	5,000		$	5,000
Weighted average rate at year end		2.99	%		2.50	%
Average balance during the year	$	5,000		$	5,000
Weighted average rate during the year		2.94	%		2.36	%
Maximum month-end balance	$	5,000		$	5,000
Total borrowings:
Balance at year end	$	45,000		$	40,000
Weighted average rate at year end		1.63	%		1.11	%
Average balance during the year	$	37,696		$	35,075
Weighted average rate during the year		1.57	%		1.23	%
Maximum month-end balance	$	46,000		$	43,000

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Capital

Stockholders’ equity was $4550.80 million on December 31, ~~2017~~2018, an increase of $34.52 million, or 89.2%, from $4245.48 million on December 31, ~~2016~~2017. A common dividend of $0.1827 per share was paid in ~~2017~~2018 compared to $0.1618 per share in ~~2016~~2017. The book value per common share and tangible book value per common share ratios were $1819.1471 and $1618.4707, respectively, at December 31, ~~2017~~2018 compared to $1718.5414 and $1516.4047, respectively, at December 31, ~~2016~~2017.

~~The~~Page tangible common equity ratio increased to 9.02% as of December 31, 2017 compared to 6.83% at December 31, 2016 as a result of the increase in common equity of $10.8 million, primarily related to the redemption of preferred stock in 2017. 38

	(In Thousands, Except Share Data and Ratios)
		December 31,			December 31,
		2017			2016
Total shareholders’ equity (a)		$	45,834		$	42,364
Less:
Preferred stock			—			(7,261)
Common equity (b)			45,834			35,103
Goodwill			(4,097)			(4,097)
Intangible assets			(124)			(194)
Tangible common equity (c)			41,613			30,812
Add:
Preferred stock			—			7,261
Tangible equity (d)			41,613			38,073
Total assets (e)			465,382			455,422
Less:
Goodwill			(4,097)			(4,097)
Intangible assets			(124)			(194)
Tangible assets (f)		$	461,161		$	451,131
Shares outstanding (in thousands) (g)			2,526			2,001
Book value per common share (b/g)		$	18.14		$	17.54
Tangible book value per common share (c/g)		$	16.47		$	15.40
Equity to assets ratio (a/e)			9.85	%		9.30	%
Tangible equity ratio (d/f)			9.02	%		8.44	%
Common equity ratio (b/e)			9.85	%		7.71	%
Tangible common equity ratio (c/f)			9.02	%		6.83	%

In 2004, the Company previously issued 250 shares of Cumulative Convertible Preferred Stock, (“Preferred Shares”), for an aggregate purchase price of $8.0 million. The Preferred Shares were sold for $31,992 per share, entitled to quarterly cumulative dividends at an annual fixed rate of 6.5% and were convertible into shares of common stock of the Company at an initial conversion price per share of $15.50.

On May 15, 2017, the Board of Directors of the Company authorized the redemption of all 229 outstanding shares of the Preferred Shares as of June 30, 2017 (the “Redemption Date”) at the redemption price of $31,992 per share (the Stated Value of the Preferred Shares), plus accrued and unpaid dividends. The Preferred Shares were convertible at the option of the holder, until the day prior to the Redemption Date, into a number of shares of common stock determined by dividing the Stated Value of the Preferred Shares ($31,992) by $14.06, the conversion price (adjusted for stock dividends).

From May 15, 2017 to the Redemption Date, the Company issued an aggregate of 507,325 shares of common stock upon conversion of 223 Preferred Shares. Six preferred shares with an aggregate redemption price of $191,952 were redeemed. As a result of the conversion of Preferred Shares, the outstanding shares of the Company’s common stock increased from 2,019,052 to 2,526,377 on June 30, 2017.

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~~certain~~ The ~~off-balance-sheet~~tangible ~~items~~common ~~calculated~~equity ~~under~~ratio ~~regulatory~~increased ~~accounting practices. Capital amounts and classifications are also subject~~ to ~~qualitative judgments by regulators~~9. ~~Failure~~72% toas 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~~December ~~requirements being phased in over a multi-year schedule~~31, ~~and~~2018 ~~fully~~compared ~~phased~~to ~~in by January 1, 2019~~9. ~~The rules also establish a “capital conservation buffer” of 2.5~~02% toat ~~be phased in over a multi-year period, above the new regulatory minimum risk-based capital ratio. The buffer as of~~ December 31, 2017 isas ~~1.25%. The buffer could limit the payment of dividends and discretionary bonuses to officers if~~ a ~~bank~~result ~~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 ~~December 31, 2017,~~ the ~~Company~~increase ~~and~~in ~~the~~retained ~~Bank met all capital adequacy requirements to which it is subject~~earnings.

Capital ratios as of December 31, 2017, and 2016 (calculated in accordance with regulatory guidelines) were as follows:


	(In Thousands, Except Per Share Data and ratios)
		December 31,			December 31,
Regulation G Non-GAAP Reconciliation:		2018			2017

Total shareholders’ equity (a)		$	50,019		$	45,834
Less:
Goodwill			(4,097)			(4,097)
Intangible assets			(53)			(124)
Tangible common equity (b)			45,869			41,613

Total assets (c)			475,982			465,382
Less:
Goodwill			(4,097)			(4,097)
Intangible assets			(53)			(124)
Tangible assets (d)		$	471,832		$	461,161
Shares outstanding (in thousands) (e)			2,538			2,526

Book value per common share (a/e)		$	19.71		$	18.14
Tangible book value per common share (b/e)		$	18.07		$	16.47
Equity to assets ratio (a/c)			10.51	%		9.85	%
Tangible equity ratio (b/d)			9.72	%		9.02	%
Common equity ratio (a/c)			10.51	%		9.85	%
Tangible common equity ratio (b/d)			9.72	%		9.02	%

	December 31, 2017								December 31, 2016
	Tier I Risk- based Capital		Total Risk- based Capital		Common Equity Tier I Capital		Tier I Leverage		Tier I Risk- based Capital		Total Risk- based Capital		Common Equity Tier I Capital		Tier I Leverage
Consolidated	11.88	%	13.07	%	10.68	%	10.31	%	11.37	%	12.62	%	8.19	%	9.97	%
Citizens First Bank, Inc.	11.67	%	12.86	%	11.67	%	10.14	%	11.28	%	12.53	%	11.28	%	9.89	%
Regulatory minimum	4.00	%	8.00	%	4.50	%	4.00	%	4.00	%	8.00	%	4.50	%	4.00	%
Well-capitalized minimum	6.00	%	10.00	%	6.50	%	5.00	%	6.00	%	10.00	%	6.50	%	5.00	%

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 establish a “capital conservation buffer” of 2.5% to be phased in over a multi-year period, above the new regulatory minimum risk-based capital ratio. The buffer as of December 31, 2018 is 1.875%. 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 December 31, 2018, the Company and the Bank met all capital adequacy requirements to which it is subject.

Capital ratios as of December 31, 2018, and 2017 (calculated in accordance with regulatory guidelines) were as follows:


	December 31, 2018								December 31, 2017
	Tier I Risk- based Capital		Total Risk- based Capital		Common Equity Tier I Capital		Tier I Leverage		Tier I Risk- based Capital		Total Risk- based Capital		Common Equity Tier I Capital		Tier I Leverage

Consolidated	13.19	%	14.30	%	11.92	%	11.05	%	11.88	%	13.07	%	10.68	%	10.31	%

Citizens First Bank, Inc.	12.92	%	14.03	%	12.92	%	10.82	%	11.67	%	12.86	%	11.67	%	10.14	%

Regulatory minimum	4.00	%	8.00	%	4.50	%	4.00	%	4.00	%	8.00	%	4.50	%	4.00	%

Well-capitalized minimum	6.00	%	10.00	%	6.50	%	5.00	%	6.00	%	10.00	%	6.50	%	5.00	%

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(1)

Calculated in accordance with regulatory guidelines. The well-capitalized minimum is for the Bank only. When fully phased-in on January 1, 2019, Basel III Capital Rules will require banking organizations to maintain: a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer”; a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer; a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer; and a minimum ratio of Tier 1 capital to adjusted average consolidated assets of at least 4.0%.

Contractual Obligations

The following table summarizes our contractual obligations and other commitments to make future payments as of December 31, ~~2017~~2018:

	(Dollars in Thousands)
December 31, 2017	One year or less		More than one year but less than three years		More than three years but less than five years		Five years or more		Total
December 31, 2018	One year or less		More than one year but less than three years		More than three years but less than five years		Five years or more		Total
Time deposits	$	9378,~~382~~957	$	3849,~~260~~766	$	12,~~326~~118	$	—	$	~~143~~140,~~968~~841
FHLB advances		3012,000		715,000		3,000		—		4030,000
Subordinated debentures		—		—		—		5,000		5,000
Lease commitments		~~420~~425		~~788~~696		~~550~~378		~~344~~183		21,~~102~~682
	$	~~123~~91,~~802~~382	$	4665,~~048~~462	$	15,~~876~~496	$	5,~~344~~183	$	~~191~~177,~~070~~523

FHLB advances include arrangements under various FHLB credit programs. Long-term FHLB debt is more fully described in Note 9 of our Consolidated Financial Statements. Lease commitments include the leases in place for certain branch sites.

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.

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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.

Off-Balance Sheet Risk

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a client as long as the client has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee.

At December 31, ~~2017~~2018, unfunded commitments to extend credit and unused lines of credit totaled $5360.72 million, of which $1915.40 million were at fixed rates and $3444.37 million were at variable rates. At December 31, ~~2016~~2017, unfunded commitments to extend credit and unused lines of credit totaled $5553.07 million, of which $2019.04 million were at fixed rates and $3534.03 million were at variable rates. We evaluate each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.

WePage had letters of credit totaling $1.3 million and $1.1 million at December 31, 2017 and 2016, respectively. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.40

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We had letters of credit totaling $1.3 million at December 31, 2018 and 2017. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.

Except as otherwise disclosed, we are not involved in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements, or transactions that could result in liquidity needs or other commitments that significantly impact earnings.

Impact of Inflation and Changing Prices

The consolidated financial statements and related financial data presented in this filing have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Our principal financial objective is to achieve long-term profitability while reducing exposure to fluctuating market interest rates. The Company has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. In order to reduce the exposure to interest rate fluctuations, the Company has developed strategies to manage its liquidity and shorten its effective maturities of certain interest-earning assets. We do not maintain a trading account for any class of financial instrument nor do we engage in hedging activities or purchase high-risk derivative instruments, and we are not subject to foreign exchange rate risk or commodity price risk.

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We monitor interest rate sensitivity and interest rate risk with an earnings simulation model generated by First National Bankers Bank of Louisiana who employs the Sungard Ambit ALM4 model. This model uses rate risk measurement techniques to produce a reasonable estimate of interest margin risks. The system provides several methods for measuring interest rate risk, including rate sensitivity gap analysis to show cash flow and repricing information, and margin simulation, or rate shocking, to quantify the actual income risk, by modeling the Company’s sensitivity to changes in cash flows over a variety of interest rate scenarios. The program performs a full simulation of each balance sheet category under various rate change conditions and calculates the net interest income change for each. Each category’s interest change is calculated as rates ramp up and down. In addition, the prepayment speeds and repricing speeds are changed.

The following illustrates the effects on net interest income of an immediate shift in market interest rates from the earnings simulation model as of December 31, ~~2017~~2018:

Projected			Net Interest Income
Interest Rate			$ Change From		% Change From
Change	Estimated Value		Base		Base
+400	$	1820,~~568,776~~466	$	23,~~379,628~~587	1421.7025	%
+300		1819,~~193,706~~807		2,~~004,557~~928	1217.3835	%
+200		1718,~~669,940~~984		12,~~480,791~~105	912.1547	%
Base		16,~~189,149~~879		—	—	%
(200)		1514,~~345,119~~583		(~~844~~2,~~030~~296)	(513.2160)	%

As of December 31, ~~2017~~2018, our balance sheet was in an asset-sensitive position and remains in an asset sensitive position for the next four years. During the asset-sensitive time frame, an increase in interest rates would have a positive effect on earnings and a decrease in interest rates would have a negative effect on earnings. The Company’s interest rate risk position is also impacted by the activation of floors on variable rate loans subject to repricing during the time frame.

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In preparing the preceding table, we used certain assumptions relating to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.

Item 8. Financial Statements and Supplementary Data

The following consolidated financial statements of the Company and report of independent accountants are included herein:

· Report of Independent Registered Public Accounting Firm, Crowe ~~Horwath~~ LLP

· Consolidated Balance Sheets - December 31, ~~2017~~2018 and ~~2016~~2017

· Consolidated Statements of Income and Comprehensive Income - Years Ended December 31, ~~2017~~2018 and ~~2016~~2017

· Consolidated Statements of Changes in Stockholders’ Equity - Years Ended December 31, ~~2017~~2018 and ~~2016~~2017

· Consolidated Statements of Cash Flows - Years Ended December 31, ~~2017~~2018 and ~~2016~~2017

Notes to Consolidated Financial Statements

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Report of Independent Registered Public Accounting Firm

Shareholders and the Board of Directors of Citizens First Corporation

Bowling Green, Kentucky

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Citizens First Corporation (the "Company") as of December 31, ~~2017~~2018 and ~~2016~~2017, the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, ~~2017~~2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, ~~2017~~2018 and ~~2016~~2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, ~~2017~~2018, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting ~~in accordance with the standards of the PCAOB~~. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion ~~in accordance with the standards of the PCAOB~~.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Crowe ~~Horwath~~ LLP

We have served as the Company's auditor since 2005.

Louisville, Kentucky

March 137, ~~2018~~2019

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Citizens First Corporation

Consolidated Balance Sheets

December 31

	(In Thousands, Except Share Data)
	December 31,		December 31,
	2017		2016
	2018		2017
Assets
Cash and due from financial institutions	$	68,~~444~~875	$	86,~~542~~444
Interest-bearing deposits in other financial institutions		13,532		11,018
Federal funds sold		10,000		—
Available-for-sale securities		48,616		53,547
Cash and cash equivalents		18,875		6,444
Loans held for sale		427		264
Interest-bearing deposits in other financial institutions		16,010		13,532
Loans, net of allowance for loan losses of $4,724 and $4,854 at December 31, 2017 and December 31, 2016, respectively		369,515		354,537
Available-for-sale securities		47,098		48,616
Premises and equipment, net		9,140		9,390
Loans held for sale		269		427
Bank owned life insurance (BOLI)		8,528		8,351
Loans, net of allowance for loan losses of $4,373 and $4,724 at December 31, 2018 and December 31, 2017, respectively		367,171		369,515
Federal Home Loan Bank (FHLB) stock, at cost		2,053		2,025
Premises and equipment, net		8,861		9,140
Accrued interest receivable		1,681		1,622
Bank owned life insurance (BOLI)		8,705		8,528
Deferred income taxes		670		1,464
Federal Home Loan Bank (FHLB) stock, at cost		2,065		2,053
Goodwill and other intangible assets		4,221		4,291
Accrued interest receivable		1,683		1,681
Other assets		555		371
Deferred income taxes		545		670
Total assets	$	465,382	$	455,422
Goodwill and other intangible assets		4,150		4,221
Other assets		550		555
Total assets	$	475,982	$	465,382
Liabilities
Deposits
Noninterest bearing	$	5355,~~259~~006	$	5253,~~322~~259
Savings, NOW and money market		~~175~~192,~~087~~762		~~173~~175,~~620~~087
Time		~~143~~140,~~968~~841		~~144~~143,~~497~~968
Total deposits		~~372~~388,~~314~~609		~~370~~372,~~439~~314
FHLB advances and other borrowings		4030,000		3540,000
Subordinated debentures		5,000		5,000
Accrued interest payable		~~285~~410		~~220~~285
Other liabilities		1,~~949~~944		21,~~399~~949
Total liabilities		~~419~~425,~~548~~963		~~413~~419,~~058~~548
Stockholders’ equity
6.5% cumulative preferred stock, no par value, authorized 250 shares, aggregate liquidation preference of $7,998; issued and outstanding 0 and 237 shares at December 31, 2017 and December 31, 2016, respectively		—		7,261
Common stock, no par value, authorized 5,000,000 shares; issued and outstanding 2,537,605 shares at December 31, 2018 and 2,526,377 shares at December 31, 2017, respectively		33,309		33,138
Common stock, no par value, authorized 5,000,000 shares; issued and outstanding 2,526,377 and 2,000,852 shares at December 31, 2017 and December 31, 2016, respectively		33,138		25,920
Retained earnings		17,365		13,142
Retained earnings		13,142		9,706
Accumulated other comprehensive (loss)		(655)		(446)
Accumulated other comprehensive (loss)		(446)		(523)
Total stockholders’ equity		50,019		45,834
Total stockholders’ equity		45,834		42,364
Total liabilities and stockholders’ equity	$	475,982	$	465,382
Total liabilities and stockholders’ equity	$	465,382	$	455,422

See Notes to Consolidated Financial Statements

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Citizens First Corporation

Consolidated Statements of Income and Comprehensive Income

Years Ended December 31

	(In Thousands, Except Per Share Data)
	2017		2016
	2018		2017
Interest and dividend income
Loans	$	1718,~~246~~565	$	1617,~~713~~246
Taxable securities		~~576~~714		~~672~~576
Non-taxable securities		~~502~~384		~~593~~502
Other		~~271~~565		~~163~~271
Total interest and dividend income		1820,~~595~~228		18,~~141~~595
Interest expense
Deposits		23,~~440~~512		2,~~103~~440
FHLB advances		~~454~~776		~~278~~454
Subordinated debentures		~~144~~195		~~118~~144
Short-term borrowings		—		29
Total interest expense		4,483		3,038
Total interest expense		3,038		2,528
Net interest income		15,745		15,557
Net interest income		15,557		15,613
Provision for loan losses (credit)		160		(150)
Provision for loan losses (credit)		(150)		(85)
Net interest income after provision for loan losses (credit)		15,585		15,707
Net interest income after provision for loan losses (credit)		15,707		15,698
Non-interest income
Service charges on deposit accounts		1,~~237~~230		1,~~396~~237
Other service charges and fees		1,~~170~~226		1,~~027~~170
Gain on sale of mortgage loans		~~317~~320		~~375~~317
Non-deposit brokerage fees		~~365~~419		~~315~~365
Lease income		~~237~~236		~~207~~237
BOLI income		177		177
Gain on sale of securities available-for-sale		48—		~~126~~48
Total non-interest income		3,~~551~~608		3,~~623~~551
Non-interest expenses
Salaries and employee benefits		67,~~802~~161		6,~~875~~802
Net occupancy expense		1,~~804~~778		1,~~927~~804
Advertising and public relations		~~337~~359		~~320~~337
Professional fees		~~547~~646		~~465~~547
Data processing services		~~910~~809		~~1,037~~910
Franchise shares and deposit tax		~~484~~480		~~528~~484
FDIC insurance		~~197~~172		~~223~~197
Other real estate owned expenses		—		17
Other		1,844		1,741
Other		1,741		1,917
Total non-interest expenses		13,249		12,822
Total non-interest expenses		12,822		13,309
Income before income taxes		5,944		6,436
Income before income taxes		6,436		6,012
Provision for income taxes		1,125		2,347
Provision for income taxes		2,347		1,795
Net income		4,819		4,089
Net income		4,089		4,217
Dividends and accretion on preferred stock		—		238
Dividends and accretion on preferred stock		238		495
Net income available for common stockholders	$	4,819	$	3,851
Net income available for common stockholders	$	3,851	$	3,722
Basic earnings per common share	$	1.90	$	1.68
Basic earnings per common share	$	1.68	$	1.86
Diluted earnings per common share	$	1.89	$	1.60
Diluted earnings per common share	$	1.60	$	1.66
Comprehensive income (loss), net of tax
Net income		4,~~089~~819		4,~~217~~089
Other comprehensive income (loss)
Reclassification adjustment for gains included in net income, net of taxes at 34%		~~(32)~~—		(8332)
Change in unrealized gain (loss) on available for sale securities, net of taxes at 34%		109		(595)
Change in unrealized gain (loss) on available for sale securities, net of taxes at 21% for 2018 and 34% for 2017		(121)		109
Total other comprehensive income (loss)		77(121)		~~(678)~~77
Comprehensive income	$	4,~~166~~698	$	34,~~539~~166

See Notes to Consolidated Financial Statements.

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Citizens First Corporation

Consolidated Statements of Changes in Stockholders' Equity

Years Ended December 31, ~~2017~~2018 and ~~2016~~2017

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
Balance, January 1, 2017	$	7,261	$	25,920	$	9,706	$	(523)	$	42,364
Net income		—		—		4,~~217~~089		—		4,~~217~~089
Conversion of cumulative preferred		(~~398~~7,077)		~~398~~7,077		—		—		—
Stock based compensation		—		84		—		—		84
Redemption of cumulative preferred		(184)		(8)		—		—		(192)
Change in accumulated other comprehensive income		—		—		—		(678)		(678)
Stock based compensation		—		148		—		—		148
Exercise of director stock options		—		32		—		—		32
Change in accumulated other comprehensive income		—		—		—		77		77
Dividend declared and paid on common stock ($.16 per share)		—		—		(320)		—		(320)
Dividend declared and paid on common stock ($.18 per share)		—		—		(414)		—		(414)
Dividend declared and paid on preferred stock		—		—		(~~495~~238)		—		(~~495~~238)
Balance, December 31, 2016	$	7,261	$	25,920	$	9,706	$	(523)	$	42,364
Balance, December 31, 2017	$	—	$	33,138	$	13,142	$	(446)	$	45,834

							Accumulated Other
	Preferred		Common		Retained		Comprehensive
	Stock		Stock		Earnings		(Loss)		Total
Balance, January 1, 2017	$	7,261	$	25,920	$	9,706	$	(523)	$	42,364
Balance, January 1, 2018	$	—	$	33,138	$	13,142	$	(446)	$	45,834
Net income		—		—		4,~~089~~819		—		4,~~089~~819
Conversion of cumulative preferred		(7,077)		7,077		—		—		—
Stock based compensation		—		171		—		—		171
Redemption of cumulative preferred		(184)		(8)						(192)
Change in accumulated other comprehensive income		—		—		—		(121)		(121)
Stock based compensation		—		148		—		—		148
Dividend declared and paid on common stock ($.27 per share)		—		—		(684)		—		(684)
Change in accumulated other comprehensive income		—		—		—		77		77
Reclassification of disproportionate tax effect		—		—		88		(88)		—
Dividend declared and paid on common stock ($.18 per share)		—		—		(414)		—		(414)
Balance, December 31, 2018	$	—	$	33,309	$	17,365	$	(655)	$	50,019
Dividend declared and paid on preferred stock		—		—		(238)		—		(238)
Balance, December 31, 2017	$	—	$	33,138	$	13,142	$	(446)	$	45,834

See Notes to Consolidated Financial Statements

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Citizens First Corporation

Consolidated Statements of Cash Flows

Years Ended December 31

	(In Thousands)
	December 31, 2017		December 31, 2016
	December 31, 2018		December 31, 2017
Operating Activities
Net income	$	4,~~089~~819	$	4,~~217~~089
Items not requiring (providing) cash:
Depreciation		~~438~~387		~~522~~438
Provision (credit) for loan losses		(150)		(85)
Provision for loan losses		160		(150)
Amortization of premiums and discounts on securities		~~215~~204		~~310~~215
Amortization of core deposit intangible		5371		7153
Deferred income taxes		~~754~~157		~~215~~754
Stock based compensation		~~148~~171		84148
BOLI Income		(177)		(177)
Proceeds from sale of mortgage loans held for sale		15,~~581~~909		1815,~~277~~581
Origination of mortgage loans held for sale		(15,~~427~~431)		(1815,~~166~~427)
Gains on sales of available-for-sale securities		~~(48)~~—		(~~126~~48)
Gains on sales of mortgage loans held for sale		(~~317~~320)		(~~375~~317)
Write-downs and losses (gains) on other real estate owned		—		(11)
Loss (gain) on sale of premises and equipment		(16)		(14)
Loss (gain) on sale of premises and equipment		(14)		4
Loss on branch disposal		—		27
Changes in:
Accrued interest receivable		(592)		58(59)
Other assets		(~~167~~27)		93(167)
Accrued interest payable and other liabilities		~~(385)~~152		~~350~~(385)
Net cash provided by operating activities		46,~~534~~057		54,~~288~~534
Investing Activities
Loan originations and payments, net		~~(14~~2,~~828)~~184		(2814,~~652~~828)
Increase in interest-bearing deposits in other financial institutions		(2,~~514~~478)		(82,~~290~~514)
Purchase of premises and equipment		(~~187~~115)		(~~142~~187)
Proceeds from maturities of available-for-sale securities		8,~~976~~324		118,~~924~~976
Purchase of available-for-sale securities		(107,~~594~~163)		(10,~~841~~594)
Proceeds from sales of available-for-sale securities		~~6,498~~—		46,~~358~~498
Proceeds from sales of other real estate owned		—		177
Proceeds from sales of premises and equipment		23		14
Proceeds from sales of premises and equipment		14		197
Purchase of FHLB stock		(12)		(28)
Purchase of FHLB stock		(28)		—
Net cash provided by (used in) investing activities		763		(12,663)
Net cash used in investing activities		(12,663)		(31,269)
Financing Activities
Net change in demand deposits, money market, NOW and savings accounts		219,~~404~~422		92,~~085~~404
Net change in time deposits		(~~529~~3,127)		(~~9,034~~529)
Proceeds from FHLB advances		3925,000		3739,000
Repayment of FHLB advances		(3435,000)		(1534,000)
Repayment of other borrowings		—		(2,000)
Redemption of preferred stock		—		(192)
Redemption of preferred stock		(192)		—
Dividends paid on common stock		(684)		(414)
Exercise of stock options		—		32
Dividends paid on preferred stock		—		(238)
Dividends paid on common stock		(414)		(320)
Net cash provided by financing activities		5,611		6,031
Dividends paid on preferred stock		(238)		(495)
Increase (Decrease) in Cash and Cash Equivalents		12,431		(2,098)
Net cash provided by financing activities		6,031		19,268
Cash and Cash Equivalents, Beginning of Year		6,444		8,542
Decrease in Cash and Cash Equivalents		(2,098)		(6,713)
Cash and Cash Equivalents, End of Year	$	18,875	$	6,444
Cash and Cash Equivalents, Beginning of Year		8,542		15,255
Cash and Cash Equivalents, End of Year	$	6,444	$	8,542
Supplemental Cash Flows Information
Interest paid	$	24,~~973~~358	$	2,~~521~~973
Income taxes paid	$	1,~~745~~025	$	1,~~365~~745
Conversion of cumulative preferred stock	$	~~7,077~~—	$	~~398~~7,077
Loans transferred to other real estate owned	$	—	$	66

See Notes to Consolidated Financial Statements.

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Citizens First Corporation

Notes to Consolidated Financial Statements

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

Nature of Operations and Principles of Consolidation– The consolidated financial statements include Citizens First Corporation and its wholly-owned subsidiary Citizens First Bank, Inc., together referred to as “the Company” or “the Bank”. Intercompany transactions and balances are eliminated in consolidation.

The Company provides financial services to individual and corporate customers in Warren, Simpson, Barren and Hart counties in Kentucky and in central Tennessee. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial and consumer loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. There are no significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is dependent on the real estate and general economic conditions in the area.

Use of Estimates–To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

Cash Flows–Cash and cash equivalents includes cash, deposits with other financial institutions under 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions.

Securities–Debt securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income (loss), net of tax. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

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. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

Loans Held for Sale–Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Gains on sales of mortgage loans are recorded at the time of disbursement by an investor at the difference between the sales proceeds and the loan’s carrying value. Loans are sold servicing released.

Loans–Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term on the level-yield method. Past due status is based on contractual terms of the loan. Generally, loans are placed on non-accrual status at 90 days past due and interest is considered a loss, unless the loan is well secured and in the process of collection.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are

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returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses–The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

Management estimates the allowance balance required using past loan loss experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, information about specific borrower situations and estimated collateral values, prevailing economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for all loan classes by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative current factors. The historical loss experienced is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 12 quarters. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These factors can include the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

The Company defines its portfolio segments by regulatory classification, which include the following: Commercial loans, consisting of loans to depository institutions, loans to finance agricultural production, and other non-real estate commercial and industrial loans; Commercial Real Estate, consisting of loans for construction and land development, farmland, multi-family residential properties, and other non-farm, non-residential real estate loans; Residential Real Estate, consisting of first liens on residential 1-4 family properties and junior liens (revolving and non-revolving) on residential 1-4 family properties; and Consumer, including revolving and non-revolving consumer purpose loans.

Commercial loans are typically based on the borrowers' ability to repay the loans from the cash flow of their business operations, and secured by assets being financed and other assets such as accounts receivable and inventory. Commercial Real Estate loans may be affected by adverse conditions in real estate markets or the economy because the borrowers ability to repay their loans depends on successful development of their properties. These loans also involve greater risk because they generally are not fully amortizing over the loan period, but have a balloon payment due at maturity. All types of Commercial and Commercial Real Estate loans may also have personal guarantees of the borrowers and business owners. Residential real estate mortgage loans are either fixed or variable interest rates to borrowers to purchase and

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refinance one-to-four family properties. Real estate mortgage loans are subject to the same general risks as other loans and are particularly sensitive to fluctuations in the value of real estate, which could negatively affect a borrower’s cash flow, credit worthiness and ability to repay the loan. Consumer loans are generally dependent on the personal income of the customer, and repayment is dependent on the borrower’s personal cash flow and employment status which can be affected by general economic conditions.

Federal Home Loan Bank (FHLB) Stock–The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Premises and Equipment–Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from twenty-five to forty years. Leasehold improvements are amortized over the shorter of the life of the lease or the life of the asset. Furniture, fixtures and equipment are depreciated using the straight-line with useful lives ranging from three to seven years.

Foreclosed Assets–Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value, less costs to sell, at the date of foreclosure, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. These assets are subsequently accounted for at a lower of cost of fair value less estimated costs to sell. Subsequent to foreclosure, valuations are periodically performed by management to validate the carrying value of the foreclosed properties.

Bank Owned Life Insurance–The Bank has purchased life insurance policies on certain key employees. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Goodwill and Other Intangible Assets–Prior to January 1, 2009, goodwill resulted from business acquisitions and represented the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is tested annually for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value in the period identified. The Company has selected December 31 as the date to perform the annual impairment test. The Company’s assessment did not identify impairment of goodwill as of December 31, ~~2017~~2018 and ~~2016~~2017.

Other intangible assets consist largely of core deposit intangible assets arising from a bank acquisition. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives of 8 years.

Loan Commitments and Related Financial Instruments–Financial instruments include off balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Income Taxes–Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. Future decreases in the corporate tax rate could result in a loss of value of the Company’s deferred tax assets, but would reduce future income tax expense. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Company files consolidated income tax returns with its subsidiary.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

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The Company recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other expense.

Stock Based Compensation Plans–Compensation cost is recognized for performance share units issued to employees, based on the fair value of these awards at the date of grant. Compensation cost is recognized over the required service period, generally defined as the vesting period.

Retirement Plans–Employee 401(k) expense is the amount of matching contributions.

Operating Segments–While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

Earnings per Common Share–Basic earnings per common share is net income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options, performance share units and preferred stock. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.

Comprehensive Income (Loss)–Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale which are also recognized as a separate component of equity.

Loss Contingencies–Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

Dividend Restriction–Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to shareholders.

Fair Value of Financial Instruments–Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Recent Accounting Pronouncements–InOn ~~May~~January ~~2014~~1, 2018, the ~~FASB~~Company ~~amended~~adopted ~~existing~~ASU ~~guidance~~2014-09 ~~related~~Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”), which (i) creates a single framework for recognizing revenue from contracts with customers. ~~This~~that ~~amendment~~fall ~~supersedes~~within its scope and ~~replaces~~(ii) ~~nearly~~revises ~~all~~when ~~existing~~it ~~revenue~~is ~~recognition~~appropriate ~~guidance,~~to ~~including~~recognize ~~industry-specific~~a ~~guidance,~~gain ~~establishes~~(loss) afrom ~~new~~the ~~control-based~~transfer ~~revenue~~of ~~recognition~~nonfinancial ~~model~~assets, ~~changes~~such as OREO. The majority of the ~~basis~~Company’s ~~for~~revenues ~~deciding~~come ~~when~~from ~~revenue~~interest isincome ~~recognized~~related ~~over~~to ~~time~~loans, orsecurities atand aother ~~point~~sources inthat ~~time,~~are ~~provides~~outside ~~new~~the ~~and~~scope ~~more~~of ~~detailed~~ASC ~~guidance~~606. onThe ~~specific~~Company’s ~~topics~~services ~~and~~that ~~expands~~fall within the scope of ASC 606 are presented within non-interest income and ~~improves~~are ~~disclosures~~recognized ~~about~~as revenue. ~~The~~as ~~FASB~~the ~~subsequently~~Company ~~issued~~satisfies ~~additional~~its ~~ASUs~~obligation to ~~defer~~the customer. Services within the ~~effective~~scope ~~date~~of ASC 606 for the year ended December 31, 2018 include service charges on deposit accounts of $1,230, debit card interchange income of $851, and ~~provide~~non-deposit ~~additional~~brokerage ~~clarifications~~fees of $419. ~~The~~We ~~amendments~~elected ~~are~~to ~~effective~~implement ~~for~~using ~~annual~~the ~~periods~~modified ~~and~~retrospective ~~interim~~application, ~~periods~~with ~~within~~the ~~those~~cumulative ~~annual~~effect ~~periods~~recorded ~~beginning~~as ~~after~~an ~~December~~adjustment 15to opening retained earnings at January 1, ~~2017~~2018. Due to immateriality, we had no cumulative effect to record.

~~Most~~In ofJanuary 2016 the ~~Company’s~~FASB ~~revenues~~issued ~~come~~ASU ~~from~~2016-01 ~~financial~~which ~~instruments,~~amends ~~such~~existing asguidance ~~loans,~~on ~~investment~~the ~~securities~~classification and ~~other~~measurement of financial instruments. This ~~which~~new ~~are~~standard ~~not~~revises ~~included~~an ~~in the scope of this ASU. The Company~~entity’s ~~revenue~~accounting ~~recognition~~related ~~pattern~~to ~~for~~the ~~revenue~~classification ~~streams~~and ~~within~~measurement ~~the scope~~ of ~~the~~investments ~~ASU,~~in ~~include~~equity ~~but~~securities ~~are not limited to service charges on deposit accounts~~ and ~~gains/losses on~~ the ~~sale~~presentation of ~~OREO.~~certain ~~Revenue~~fair ~~recognition~~value ischanges ~~not~~for ~~expected~~financial toliabilities ~~change~~measured ~~significantly~~at ~~from~~fair ~~current practice~~value. The new standard ~~permits~~is ~~the~~effective ~~use~~for ofreporting ~~either~~periods ~~the~~beginning ~~full~~after ~~retrospective~~December ~~or modified retrospective transition method. The Company adopted the new guidance effective January 1~~15, ~~2018 and intends to utilize the modified retrospective method~~2017. Adopting ~~Based on~~ the ~~evaluation~~provisions of ~~the~~ASU ~~Company’s non~~2016-~~interest~~01 ~~income~~did ~~revenue streams, adoption of this new guidance does~~ not have a material impact on ~~the~~our consolidated financial statements.; ~~The~~however, ~~Company~~it will ~~have~~impact ~~additional~~the ~~disclosures~~fair invalue ~~its~~disclosures ~~Form~~included ~~10-Q~~in ~~for~~Note ~~the~~4: Fair ~~first~~Value. ~~quarter~~The ofCompany ~~2018~~currently asdoes ~~required~~not byhave ~~this~~any ~~guidance~~equity investments.

InPage January 2016 the FASB issued ASU 2016-01 which amends existing guidance on the classification and measurement of financial instruments. This new standard revises an entity’s accounting related to the classification and measurement 51

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of In ~~investments~~February in2016 ~~equity~~the ~~securities~~FASB ~~and~~issued ASU 2016-02 which establishes the ~~presentation~~principles ofto ~~certain~~report ~~fair~~information ~~value~~about the assets and liabilities that arise from leases. This new standard changes the way operating leases are accounted for ~~financial~~and ~~liabilities~~reflected ~~measured~~on atthe ~~fair~~lessee’s ~~value~~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 Company has four real property operating leases with renewal options that are impacted by this standard. The new standard is effective for reporting periods beginning after December 15, ~~2017~~2018. ~~Adopting~~The ~~the~~Company ~~provisions~~will ofadopt ~~ASU~~this ~~2016-01~~new ~~did~~accounting ~~not~~standard ~~have~~in athe ~~material~~first ~~impact~~quarter of 2019. Based on ~~our~~the ~~consolidated~~leases ~~financial~~outstanding ~~statements;~~at ~~however~~December 31, it2018, ~~will impact~~ the ~~fair~~effect ~~value~~of ~~disclosures~~adopting ~~included~~this instandard ~~Note~~was ~~4: Fair~~an ~~Value~~approximate $1.9 ~~The~~million ~~Company~~increase ~~currently~~in ~~does~~assets ~~not~~and ~~have~~liabilities ~~any~~on ~~equity~~our ~~investments.~~Consolidated Balance Sheets.

In ~~February~~June 2016, the FASB issued ASU No. 2016-0213, ~~which~~“Financial ~~establishes~~Instruments ~~the~~– ~~principles~~Credit toLosses ~~report~~(Topic ~~information~~326): ~~about~~Measurement ~~the~~of ~~assets~~Credit ~~and~~Losses ~~liabilities~~on ~~that~~Financial ~~arise~~Instruments”, ~~from~~which ~~leases. This~~introduces ~~new standard changes~~ the ~~way~~current ~~operating~~expected ~~leases~~credit ~~are~~loss ~~accounted~~(CECL) ~~for~~model and ~~reflected~~replaces on the ~~lessee’s~~incurred ~~balance~~loss ~~sheet~~model. The ~~new~~most ~~standard~~significant isimpact ~~intended~~for tofinancial ~~increase~~institutions ~~transparency~~will ~~and~~be ~~comparability by requiring lessees~~ to ~~recognize~~ the ~~financial~~allowance ~~obligation~~for loan and ~~right-of-use~~lease ~~asset~~losses ~~associated~~(ALLL). The ~~with~~standard ~~operating~~allows ~~leases~~for ~~that~~various ~~have~~expected acredit ~~lease~~loss ~~term~~estimation ofmethods ~~more~~and ~~than~~is ~~12 months on the balance sheet~~scalable. ~~The~~This ~~new~~ standard is effective for public companies for reporting periods beginning after December 15, ~~2018~~2019. ~~The~~We ~~Company~~continue isto ~~currently~~attend ~~evaluating~~training ~~the~~sessions, ~~impact~~assess ofour ~~this~~data ~~new~~and ~~accounting~~system ~~standard~~needs, and onhave ~~the~~selected ~~consolidated~~a ~~financial~~vendor ~~statements~~to assist to management with adoption. ~~Based~~The onCompany expects to recognize a one-time increase to the ~~leases~~allowance ~~outstanding~~for atloan ~~December 31,~~losses ~~2017,~~as weof dothe ~~not~~beginning ~~expect~~of the first reporting period in which the new standard tois ~~have~~effective, abut ~~material~~cannot yet determine the magnitude of any such one-time adjustment or the overall impact of this standard on ~~our~~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 provisions intended to simplify various aspects of the accounting for share-based payments. The new standard became effective January 1, 2017 and did not have a material impact 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 public companies for reporting periods beginning after December 15, 2019. We have attended training sessions and are assessing our data and system needs and evaluating the impact of adopting this new accounting standard. The Company expects to recognize a one-time increase to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of this standard on the consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization of Purchased Callable Debt Securities. The final standard will shorten the amortization period for premiums on callable debt securities by requiring that premiums be amortized to the first (or earliest) call date instead of as an adjustment to the yield over the contractual life. The standard is effective for public companies for fiscal years beginning after December 15, 2018. Early adoption is permitted. This new accounting standard is not expected to have a material impact on the consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU required a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate as a result of the Tax Cuts and Jobs Act. The amount of the reclassification is the difference between the historical corporate income tax rate and the newly enacted twenty-one percent corporate income tax rate. The Company adopted during the first quarter of 2018 and recorded an entry of approximately $88,000.

Reclassifications–Certain reclassifications have been made to the ~~2016~~2017 financial statements to conform to the ~~2017~~2018 financial statement presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.

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Note 2: Available-For-Sale Securities

The following table summarizes the amortized cost and fair value of the available-for-sale securities portfolio at December 31, ~~2017~~2018 and December 31, ~~2016~~2017 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss:

	(Dollars in Thousands)
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
December 31, 2018
U. S. government agencies and government sponsored entities	$	8,529		29	$	(118)	$	8,440
Agency mortgage-backed securities: residential		20,640		15		(355)		20,300
State and municipal		16,866		57		(195)		16,728
Trust preferred security		1,893		—		(263)		1,630
Total Available-for-Sale Securities	$	47,928	$	101	$	(931)	$	47,098
December 31, 2017
U. S. government agencies and government sponsored entities	$	1,998	$	—	$	(21)	$	1,977
Agency mortgage-backed securities: residential		26,024		14		(227)		25,811
State and municipal		19,381		143		(136)		19,388
Trust preferred security		1,889		—		(449)		1,440
Total Available-for-Sale Securities	$	49,292	$	157	$	(833)	$	48,616
December 31, 2016
U. S. government agencies and government sponsored entities	$	1,998	$	—	$	(41)	$	1,957
Agency mortgage-backed securities: residential		28,148		99		(290)		27,957
State and municipal		21,310		216		(146)		21,380
Trust preferred security		1,884		—		(644)		1,240
Corporate bonds		1,000		13		—		1,013
Total Available-for-Sale Securities	$	54,340	$	328	$	(1,121)	$	53,547

The proceeds from sales of securities and the associated gains are listed below:

	2017		2016
	2018		2017
	(Dollars in Thousands)
Sales of available for sale securities
Proceeds	$	~~6,498~~—	$	46,~~358~~498
Gross gains		48—		~~126~~48
Gross losses		—		—

The tax provision related to ~~these~~the 2017 realized gains ~~were~~was $16,000 ~~and $43,000, respectively~~.

The amortized cost and fair value of investment securities at December 31, ~~2017~~2018 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

	December 31, 2017
	December 31, 2018
	(Dollars in Thousands)
	Available-For-Sale
	Amortized Cost		Fair Value
Due in one year or less	$	2,~~963~~629	$	2,~~965~~630
Due from one to five years		9,~~373~~175		9,~~356~~093
Due from five to ten years		610,~~224~~860		610,~~249~~780
Due after ten years		4,~~708~~624		4,~~235~~295
Agency mortgage-backed: residential		2620,~~024~~640		2520,~~811~~300
Total	$	4947,~~292~~928	$	4847,~~616~~098

Securities pledged at year end ~~2017~~2018 and ~~2016~~2017 had a carrying amount of $4645.93 million and $46.9 million, respectively, and were pledged to secure public deposits.

At year end ~~2017~~2018 and ~~2016~~2017, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

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The following table summarizes the investment securities with unrealized losses at December 31, ~~2017~~2018 and ~~2016~~2017, 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
December 31, 2018:
U.S. government agencies and government sponsored entities	$	—	$	—	$	6,243	$	(118)	$	6,243	$	(118)
Agency mortgage-backed: residential		1,029		(2)		15,431		(353)		16,460		(355)
State and municipal		689		(2)		9,445		(193)		10,134		(195)
Trust preferred security		—		—		1,630		(263)		1,630		(263)
Total temporarily impaired	$	1,718	$	(4)	$	32,749	$	(927)	$	34,467	$	(931)


	(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, 2017:
U.S. government agencies and government sponsored entities	$	—	$	—	$	1,977	$	(21)	$	1,977	$	(21)
Agency mortgage-backed: residential		17,798		(113)		4,754		(114)		22,552		(227)
State and municipal		8,270		(116)		294		(20)		8,564		(136)
Trust preferred security		—		—		1,440		(449)		1,440		(449)
Total temporarily impaired	$	26,068	$	(229)	$	8,465	$	(604)	$	34,533	$	(833)

	(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, 2016:
U.S. government agencies and government sponsored entities	$	1,957	$	(41)	$	—	$	—	$	1,957	$	(41)
Agency mortgage-backed: residential		16,722		(290)		—		—		16,722		(290)
State and municipal		9,399		(142)		293		(4)		9,692		(146)
Trust preferred security		—		—		1,240		(644)		1,240		(644)
Total temporarily impaired	$	28,078	$	(473)	$	1,533	$	(648)	$	29,611	$	(1,121)

Other-Than-Temporary-Impairment

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

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

As of December 31, ~~2017~~2018, the Company’s security portfolio consisted of $4847.61 million fair value of securities, $34.5 million, or 5460 securities, of which were in an unrealized loss position.

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

~~The~~At December 31, 2018, 28.4% of the Company’s unrealized losses 12 months or more relate ~~primarily~~ to its investment in an unrated single-issuer trust preferred security. No impairment charge is being taken as no loss of principal or interest is anticipated. All principal and interest payments are being received as scheduled. On a quarterly basis, we evaluate the creditworthiness of the issuer, a bank holding company with operations in the state of Kentucky. Based on the issuer’s continued profitability and well-capitalized position, we do not deem that there is credit loss. The decline in fair value is primarily attributable to illiquidity affecting these markets and not the expected cash flows of the individual securities. We have evaluated the financial condition and near term prospects of the issuer and expect to fully recover our cost basis. This security continues to pay interest as agreed and future payments are expected to be made as agreed. This security is not considered to be other-than-temporarily impaired.

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Note 3: Loans and Allowance for Loan Losses

Categories of loans at December 31 include:

	(Dollars in Thousands)
	December 31, 2017		December 31, 2016
	December 31, 2018		December 31, 2017
Commercial	$	61,~~221~~551	$	6061,~~388~~221
Commercial real estate:
Construction		4436,~~391~~829		3844,~~168~~391
Other		~~182~~180,~~443~~800		~~178~~182,~~343~~443
Residential real estate		8288,~~230~~797		7882,~~422~~230
Consumer:
Auto		~~1,184~~841		1,~~195~~184
Other		2,~~770~~726		2,~~875~~770
Total Loans		~~374~~371,~~239~~544		~~359~~374,~~391~~239
Less: Allowance for loan losses		(4,~~724~~373)		(4,~~854~~724)
Net loans	$	~~369~~367,~~515~~171	$	~~354~~369,~~537~~515

Activity in the allowance for loan losses was as follows.


	(Dollars in Thousands)
December 31, 2018	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total

Allowance for loan losses:
Beginning balance	$	633	$	3,515	$	554	$	10	$	12	$	4,724
Provision (credit) for loan losses		(9)		74		59		9		27		160
Loans charged-off		(37)		(468)		(43)		(11)		—		(559)
Recoveries		5		1		41		1		—		48
Total ending allowance balance	$	592	$	3,122	$	611	$	9	$	39	$	4,373


	(Dollars in Thousands)
December 31, 2017	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total

Allowance for loan losses:
Beginning balance	$	615	$	3,628	$	527	$	14	$	70	$	4,854
Provision (credit) for loan losses		4		(114)		13		5		(58)		(150)
Loans charged-off		(17)		—		—		(26)		—		(43)
Recoveries		31		1		14		17		—		63
Total ending allowance balance	$	633	$	3,515	$	554	$	10	$	12	$	4,724

	(Dollars in Thousands)
December 31, 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		(232)		197		18		(17)		(51)		(85)
Loans charged-off		(109)		(52)		(39)		(2)		—		(202)
Recoveries		144		52		24		5		—		225
Total ending allowance balance	$	615	$	3,628	$	527	$	14	$	70	$	4,854

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The following table presents 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 December 31, ~~2017~~2018 and December 31, ~~2016~~2017. As of December 31, ~~2017~~2018 and December 31, ~~2016~~2017, accrued interest receivables of $1.4 million and $1.34 million, respectively, are not considered significant for purposes of the disclosure and therefore not included in the recorded investment in loans presented in the following tables. Net deferred loan fees of $~~363~~303,000 and $~~322~~363,000, respectively, are included in the following tables.


	(Dollars in Thousands)
December 31, 2018	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total

Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	48	$	—	$	—	$	—	$	48
Collectively evaluated		592		3,074		611		9		39		4,325
Total ending allowance balance	$	592	$	3,122	$	611	$	9	$	39	$	4,373

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