Citizens Independent Bancorp, Inc. - FORM 10-Q

Attached files

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EX-31.1 - EXHIBIT 31.1 - Citizens Independent Bancorp, Inc.	v445482_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - Citizens Independent Bancorp, Inc.	v445482_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - Citizens Independent Bancorp, Inc.	v445482_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Citizens Independent Bancorp, Inc.	v445482_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: June 30, 2016

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

Commission file number: 333-191004

	Citizens Independent Bancorp, Inc.
	(Exact name of registrant as specified in its charter)

Ohio		31-1441050
(State or other jurisdiction of		(I.R.S. Employer Identification Number)
incorporation or organization)

188 West Main Street, Logan Ohio		43138
(Address of principal executive offices)		Zip Code

(740) 385-8561

(Registrant’s telephone number, including area code)

Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T

(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

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

Large accelerated filers ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule

12b-2).

Yes ¨ No x

As of August 10, 2016, the latest practicable date, 691,287 shares of the registrant’s no par value common stock were outstanding.

CITIZENS INDEPENDENT BANCORP, INC.

FORM 10-Q

For the Six Month Periods Ended June 30, 2016 and 2015

Table of Contents

	Page
PART I – FINANCIAL INFORMATION	3

ITEM 1 – Financial Statements	3

Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015	4

Consolidated Statements of Income (unaudited) for the three and six month periods ended June 30, 2016 and 2015	5

Consolidated Statements of Comprehensive Income (unaudited) for the three and six month periods ended June 30, 2016 and 2015	6

Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the six month periods ended June 30, 2016 and 2015	7

Consolidated Statements of Cash Flows (unaudited) for the six month periods ended June 30, 2016 and 2015	8

Notes to the Consolidated Financial Statements	9

ITEM 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk	37

ITEM 4 – Controls and Procedures	37

PART II – OTHER INFORMATION	38

ITEM 1 - Legal Proceedings	38

ITEM 1A – Risk Factors	38

ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds	38

ITEM 3 - Defaults upon Senior Securities	38

ITEM 4 - Mine Safety Disclosures	38

ITEM 5 - Other Information	38

ITEM 6 - Exhibits	38

SIGNATURES	39

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

CITIZENS INDEPENDENT BANCORP, INC.

Logan, Ohio

CONSOLIDATED BALANCE SHEETS

	(Dollars in thousands)
	(unaudited)
	June 30, 2016			December 31, 2015

ASSETS
Cash and cash equivalents
Cash and amounts due from depository institutions	$	4,745		$	5,307
Federal funds sold		8,994			4,064
Total cash and cash equivalents		13,739			9,371

Securities available for sale		8,215			14,013
Other investment securities		859			859
Loans held for sale		230			-

Loans		147,258			149,231
Allowance for loan losses		(1,991	)		(2,078	)
Net loans		145,267			147,153

Premises and equipment, net		3,456			2,977
Accrued interest receivable		300			285
Other real estate owned		22			238
Other assets		8,911			8,899
TOTAL ASSETS	$	180,999		$	183,795

LIABILITIES
Deposits
Noninterest bearing	$	31,378		$	26,116
Interest bearing		127,459			136,209
Total deposits		158,837			162,325

Borrowed funds		2,309			2,569
Accrued interest payable		572			759
Other liabilities		802			783
TOTAL LIABILITIES		162,520			166,436

SHAREHOLDERS' EQUITY
Cumulative preferred stock of no par value; 100,000 shares authorized, 0 shares issued and outstanding		-			-
Common stock of no par value; 2,000,000 shares authorized, 745,667 shares issued and 691,287 shares outstanding at June 30, 2016 and 721,998 shares issued and 667,618 shares outstanding at December 31, 2015		14,964			14,296
Common stock warrants; 0 warrants issued and outstanding at June 30, 2016 and 119,003 warrants issued and 67,985 outstanding at December 31, 2015		-			108
Retained earnings		10,580			10,112
Treasury stock, at cost, 54,380 shares at June 30, 2016 and December 31, 2015, respectively		(6,590	)		(6,590	)
Accumulated other comprehensive income (loss)		(475	)		(567	)
TOTAL SHAREHOLDERS' EQUITY		18,479			17,359

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	180,999		$	183,795

See notes to consolidated financial statements

CITIZENS INDEPENDENT BANCORP, INC.

Logan, Ohio

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	(Dollars in thousands, except per share data)
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
INTEREST INCOME
Interest and fees on loans	$	1,911	$	1,941	$	3,877	$	3,835
Interest and dividends on investment securities		43		109		98		234
Interest on federal funds sold		12		6		17		13
TOTAL INTEREST INCOME		1,966		2,056		3,992		4,082

INTEREST EXPENSE
Interest on deposits		173		223		349		472
Interest on borrowed funds		33		91		68		190
TOTAL INTEREST EXPENSE		206		314		417		662

NET INTEREST INCOME		1,760		1,742		3,575		3,420

Provision for loan losses		-		-		-		-

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,760		1,742		3,575		3,420

NONINTEREST INCOME
Service charges		110		103		197		188
Net gain on sale of securities		-		58		15		148
Net gain on sale of loans		4		-		11		-
Net gain (loss) on sale of other real estate owned		82		1		166		(45	)
Credit card income and fees		90		90		177		173
Other		72		58		213		123
TOTAL NONINTEREST INCOME		358		310		779		587

NONINTEREST EXPENSE
Salaries and employee benefits		810		762		1,665		1,574
Net occupancy and equipment expense		199		224		429		477
Other real estate owned expense		14		35		72		60
FDIC insurance expense		60		46		118		126
Legal and professional fees		85		100		182		198
Data processing		94		92		181		186
Advertising		54		55		109		97
Examinations and audits		80		79		164		156
Directors fees		53		51		111		112
Other operating expenses		325		408		716		681
TOTAL NONINTEREST EXPENSE		1,774		1,852		3,747		3,667

INCOME BEFORE INCOME TAXES		344		200		607		340

Income tax expense		94		51		139		88

NET INCOME	$	250	$	149	$	468	$	252

Basic earnings per common share	$	0.37	$	0.23	$	0.69	$	0.40
Diluted earnings per common share	$	0.37	$	0.23	$	0.69	$	0.40

See notes to consolidated financial statements

CITIZENS INDEPENDENT BANCORP, INC.

Logan, Ohio

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	(Dollars in thousands)
	Three Months Ended
	June 30,
	2016		2015

Net income	$	250	$	149

Other comprehensive income (loss), net of tax:

Net unrealized holding gain (loss) on securities available for sale, net of income taxes of $14 and $(57) for the three month periods ended June 30, 2016 and 2015, respectively		26		(110	)

Reclassification for gains recognized on sale of securities available for sale, net of income taxes of $0 and $19 for the three month periods ended June 30, 2016 and 2015, respectively		-		(39	)
Other comprehensive income (loss)		26		(149	)
Comprehensive income	$	276	$	-

	Six Months Ended
	June 30,
	2016			2015

Net income	$	468		$	252

Other comprehensive income (loss), net of tax:

Net unrealized holding gain (loss) on securities available for sale, net of income taxes of $53 and $20 for the six month periods ended June 30, 2016 and 2015, respectively		102			39

Reclassification for gains recognized on sale of securities available for sale, net of income taxes of $5 and $50 for the six month periods ended June 30, 2016 and 2015, respectively		(10	)		(98	)
Other comprehensive income (loss)		92			(59	)
Comprehensive income	$	560		$	193

See notes to consolidated financial statements

CITIZENS INDEPENDENT BANCORP, INC.

Logan, Ohio

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Unaudited)

	(Dollars in thousands)
	Six Months Ended
	June 30,
	2016		2015

Balance at beginning of period	$	17,359	$	14,837

Exercise of common stock warrants - 23,669 shares in 2016 and 42,656 shares in 2015		560		974

Issuance of common stock - 28,675 shares in 2015		-		656

Net income		468		252
Other comprehensive income (loss)		92		(59	)

Balance at end of period	$	18,479	$	16,660

See notes to consolidated financial statements

CITIZENS INDEPENDENT BANCORP, INC.

Logan, Ohio

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	(Dollars in thousands)
	Six Months Ended
	June 30,
	2016			2015

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	468		$	252
Adjustment to reconcile net income to net cash provided by (used in) operating activities
Provision for loan losses		-			-
Depreciation and amortization		165			143
Deferred income taxes		139			88
Investment securities amortization (accretion), net		27			76
Provision for loss on real estate owned		15			-
Change in value of bank owned life insurance		(56	)		(4	)
Net (gain) loss on sale of other real estate owned		(166	)		45
Net (gain) loss on sale of investments		(15	)		(148	)
Net (gain) loss on sale of substandard loans		(56	)		-
Net (gain) loss on disposition of premises and equipment		67			-
Net (gain) loss on sale of loans		(11	)		-
Proceeds from sale of loans		587			-
Loans originated for sale		(806	)		-
Net change in:
Accrued interest receivable		(15	)		36
Accrued interest payable		(187	)		(326	)
Other assets		(145	)		17
Other liabilities		19			68
Net cash provided by operating activities		30			247

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available for sale securities		-			(3,084	)
Proceeds from maturities of available for sale securities		1,887			2,413
Proceeds from sales of available for sale securities		4,040			5,587
Proceeds from sale of substandard loans		651			-
Net change in loans		1,269			1,417
Proceeds from sale of other real estate owned		389			769
Purchases for construction of new branch		(574	)		-
Purchases of premises and equipment		(136	)		(76	)
Net cash provided by investing activities		7,526			7,026

CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits		(3,488	)		(8,923	)
Payments on loans payable		(260	)		(138	)
Proceeds from issuance of common stock and warrants		560			974
Net cash provided by (used in) financing activities		(3,188	)		(8,087	)

Net increase (decrease) in cash and cash equivalents		4,368			(814	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		9,371			16,633

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	13,739		$	15,819


Supplemental Disclosure of Cash Flows
Cash paid during the period for:
Interest	$	604		$	988
Taxes	$	-		$	-

Supplemental Schedule of Noncash Investing and Financing Activities
Transfer of loans to other real estate owned	$	22		$	107
Short term debt converted to common stock	$	-		$	656
Receivable from sale of available for sale securities	$	-		$	5,655

See notes to consolidated financial statements

CITIZENS INDEPENDENT BANCORP, INC.

LOGAN, OHIO

Notes to the Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Citizens Independent Bancorp, Inc. (the Bancorp), a bank holding company for The Citizens Bank of Logan (the Bank), collectively referred to as the “Company” is engaged in the business of commercial and retail banking services with operations conducted through offices in Hocking and Athens Counties, Ohio. These communities and surrounding areas are the source of substantially all the Company's deposit and loan activities. Secured loans are secured by business assets, consumer assets, residential real estate, and non-residential real estate. The majority of Company income is derived from commercial, real estate, and retail lending activities and investments. Other financial instruments, which potentially represent concentrations of credit risk include deposit accounts in other financial institutions and federal funds sold.

In October 2012, the Bank entered into publicly available Consent Orders with the Federal Deposit Insurance Corporation (FDIC) and the Ohio Division of Financial Institutions (DFI) (collectively referred to as the Orders), which required the Bank to take a number of actions. In October 2015, the Orders were lifted and the Bank entered into a Memorandum of Understanding with the FDIC and DFI. Significant among the ongoing required actions was the development of a capital plan resulting in the Bank meeting and maintaining its level of Tier 1 capital as a percentage of its total assets at a minimum of 8.00% and its level of qualifying total capital as a percentage of risk-weighted assets at a minimum of 11.50%. The Bank is also required to obtain approval from the FDIC and DFI prior to the payment of any dividends.

On July 5, 2011, the Bancorp entered into a memorandum of understanding (the FRB 2011 MOU) with the Federal Reserve Bank of Cleveland (the FRB). The FRB 2011 MOU prohibits the Bancorp, without prior approval of the FRB, from: declaring or paying cash dividends, taking dividends or any other form of payment representing a reduction in the Bank’s capital, incurring, increasing, or guaranteeing any debt, or purchasing or redeeming any shares. The FRB 2011 MOU remains in effect.

Basis of Financial Statement Presentation

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual year-end financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation, have been included and are of a normal, recurring nature. Operating results for the six month period ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

The accounting and reporting policies of the Bancorp and the Bank conform to GAAP and to general practices followed within the banking industry.

The consolidated balance sheet as of December 31, 2015 has been extracted from audited financial statements included in the Company’s 2015 filing on Form 10-K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2015 Form 10-K.

Information is presented in these notes with dollars expressed in thousands, unless otherwise noted or specified.

Principles of Consolidation

The consolidated financial statements include the accounts of Citizens Independent Bancorp, Inc. and its wholly-owned subsidiary, The Citizens Bank of Logan. All significant intercompany transactions and balances have been eliminated.

Common Stock Warrants

In June 2014, the Company issued warrants to purchase 119,003 shares of common stock in connection with the issuance of common stock in the stock offering campaign. These warrants entitled the holder to purchase the Company’s common stock at 90% of the prior month’s closing book value. Valid for a period of two years, the warrants expired June 25, 2016. Allocated value of these common stock warrants was based on the Black Scholes methodology. A total of 74,687 of the 119,003 total warrants issued were exercised.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The core principle will be achieved using a five step process. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606)” which amends the effective date for the Company from January 1, 2017 to January 1, 2018. The adoptions of ASU No. 2014-09 and ASU No. 2015-14 are not expected to have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This standard requires organizations to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing requirements for leases that were historically classified as operating leases under previous generally accepted accounting principles. This ASU will become effective for the Company for interim and annual periods on January 1, 2019. Management is currently evaluating the potential impact of ASU No. 2016-02 on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326).” This standard replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The new Current Expected Credit Losses model (CECL) will apply to the allowance for loan losses, available-for-sale and held to maturity debt securities, purchased financial assets with credit deterioration, and certain off-balance sheet credit exposures. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. This ASU will become effective for the Company for interim and annual periods on January 1, 2020. Management is currently evaluating the potential impact of ASU No. 2016-13 on the Company’s consolidated financial statements.

NOTE 2 - EARNINGS PER COMMON SHARE

Earnings per common share are net income available to common shareholders divided by the weighted average common shares outstanding during the period. The factors used in the earnings per share computation for the three and six month periods ended June 30, 2016 and 2015 follow:

	(Dollars in thousands, except per share data)
	Three Months Ended
	June 30,
	2016		2015
Net income	$	250	$	149
Weighted average common shares outstanding		678,058		648,397
Basic earnings per common share	$	0.37	$	0.23
Total shares and warrants		678,058		656,668
Diluted earnings per common share	$	0.37	$	0.23

	Six Months Ended
	June 30,
	2016		2015
Net income	$	468	$	252
Weighted average common shares outstanding		673,770		626,245
Basic earnings per common share	$	0.69	$	0.40
Total shares and warrants		673,770		636,097
Diluted earnings per common share	$	0.69	$	0.40

NOTE 3 - INVESTMENT SECURITIES

The amortized cost of securities and their approximate fair values are as follows:

	(Dollars in thousands)
	June 30, 2016									December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S.government securities	$	-	$	-	$	-		$	-	$	1,005	$	-	$	-		$	1,005
U.S. government federal agencies		2,245		9		-			2,254		6,571		3		(39	)		6,535
State and local governments		1,767		39		-			1,806		1,774		9		-			1,783
Mortgage backed securities		4,145		22		(12	)		4,155		4,745		4		(59	)		4,690
Total	$	8,157	$	70	$	(12	)	$	8,215	$	14,095	$	16	$	(98	)	$	14,013

The following is a summary of contractual maturities of securities available for sale as of June 30, 2016:

	(Dollars in thousands)
	Securities available for sale
	Amortized Cost		Fair Value
Amounts maturing in:
One year or less	$	251	$	252
After one year through five years		2,537		2,552
After five years through ten years		1,241		1,276
After ten years		4,128		4,135
Total	$	8,157	$	8,215

Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

During the first quarter of 2016, the Company sold available for sale securities, U.S. Treasury and Agencies, totaling $4.0 million with a weighted average yield of 1.00% and weighted average maturity of 1.9 years. The net realized gain on these transactions was $15 thousand.

Investment securities with a carrying amount of approximately $2,160,000 and $2,848,000 were pledged to secure deposits as required or permitted by law at June 30, 2016 and December 31, 2015, respectively.

Information pertaining to securities with gross unrealized losses at June 30, 2016 and December 31, 2015, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	(Dollars in thousands)
	Less than 12 months					12 months or greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
June 30, 2016
U.S. government federal agencies	$	-	$	-		$	-	$	-		$	-	$	-
Mortgage backed securities		-		-			1,268		(12	)		1,268		(12	)
Total	$	-	$	-		$	1,268	$	(12	)	$	1,268	$	(12	)

December 31, 2015
U.S. government federal agencies	$	4,981	$	(39	)	$	-	$	-		$	4,981	$	(39	)
Mortgage backed securities		3,115		(28	)		1,388		(31	)		4,503		(59	)
Total	$	8,096	$	(67	)	$	1,388	$	(31	)	$	9,484	$	(98	)

As of June 30, 2016, the investment portfolio contains unrealized losses of mortgage-related instruments issued or backed by the full faith and credit of the United States government or are generally viewed as having the implied guarantee of the U.S. government. As management has the ability to hold debt securities until maturity, or the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary.

Management evaluates securities for other than temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (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, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any recovery in fair value.

NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table provides information on the activity in the allowance for loan losses by the respective loan portfolio segment for the periods indicated:

	(Dollars in thousands)
	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2016		2015		2016		2015

Allowance at beginning of period	$	2,031	$	3,443	$	2,078	$	3,869
Provision for credit losses		-		-		-		-
Charge-offs:
Commercial		64		1,001		74		1,422
Real Estate		-		38		-		42
Consumer		7		30		71		59
Total charge-offs	$	71	$	1,069	$	145	$	1,523

Recoveries:
Commercial		19		27		30		39
Real Estate		1		-		2		-
Consumer		11		13		26		29
Total Recoveries		31		40		58		68
Allowance at end of period	$	1,991	$	2,414	$	1,991	$	2,414

The following table presents the recorded investment with respect to loans and the related allowance by portfolio segment at the dates indicated:

	(Dollars in thousands)
	Collectively Evaluated				Individually Evaluated				Total
	Allowance for loan losses		Recorded Investment In loans		Allowance for loan losses		Recorded Investment In loans		Allowance for loan losses		Recorded investment in loans
June 30, 2016
Commercial	$	1,312	$	79,289	$	214	$	862	$	1,526	$	80,151
Real estate		188		42,040		35		399		223		42,439
Consumer		213		24,555		29		113		242		24,668
Total	$	1,713	$	145,884	$	278	$	1,374	$	1,991	$	147,258

December 31, 2015
Commercial	$	1,479	$	80,293	$	150	$	1,854	$	1,629	$	82,147
Real estate		196		42,993		44		408		240		43,401
Consumer		209		23,683		-		-		209		23,683
Total	$	1,884	$	146,969	$	194	$	2,262	$	2,078	$	149,231

As part of its monitoring process, the Bank utilizes a risk rating system which quantifies the risk the Bank estimates it has assumed when entering into a loan transaction and during the life of that loan. The system rates the strength of the borrower and the transaction and is designed to provide a program for risk management and early detection of problems. Loans are graded on a scale of 1 through 8, with a grade of 4 or below classified as “Pass” rated credits. Following is a description of the general characteristics of risk grades 5 through 8:

5 – Special Mention - The weighted overall risk associated with this credit is considered higher than normal (but still acceptable) or the loan possesses deficiencies, which corrective action by the Bank would remedy, thereby reducing risk.

6 – Substandard - The weighted overall risk associated with this credit (based on each of the Bank’s creditworthiness criteria) is considered undesirable, the credit demonstrates a well-defined weakness or the Bank is inadequately protected and there exists the distinct possibility of sustaining some loss if not corrected.

7 – Doubtful - Weakness makes collection or liquidation in full (based on currently existing facts) improbable.

8 – Loss- This credit is of little value and not warranted as a bankable asset. Accordingly, the Bank does not carry any loans on the books that are graded 8 – loss, instead these loans are charged off.

The Bank’s strategy for credit risk management includes ongoing credit examinations and management reviews of loans exhibiting deterioration of credit quality. A deteriorating credit indicates an elevated likelihood of delinquency. When a loan becomes delinquent, its credit grade is reviewed and changed accordingly. Each downgrade to a classified credit results in a higher percentage of reserve to reflect the increased likelihood of loss for similarly graded credits. Further deterioration could result in a certain credit being deemed impaired resulting in a collateral valuation for purposes of establishing a specific reserve which reflects the possible extent of such loss for that credit.

The following tables present the risk category of loans by class of loans based on the most recent analysis performed at June 30, 2016 and December 31, 2015.

Commercial Credit Exposure

Credit risk profile by credit worthiness category

			(Dollars in thousands)
	Commercial				Commercial
	Mortgage				Other
Category	06/30/16		12/31/15		06/30/16		12/31/15

Pass	$	62,968	$	61,612	$	11,773	$	12,123
5		250		984		171		186
6		4,390		6,686		599		557
7		-		-		-		-
Total	$	67,608	$	69,282	$	12,543	$	12,866

Consumer Credit Exposure

Credit risk by credit worthiness category

	(Dollars in thousands)
	Residential				Consumer				Consumer				Consumer
	Real Estate				Equity				Auto				Other
Category	06/30/16		12/31/15		06/30/16		12/31/15		06/30/16		12/31/15		06/30/16		12/31/15

Pass	$	42,127	$	42,690	$	11,298	$	10,049	$	11,924	$	11,999	$	1,430	$	1,512
5		-		373		-		59		-		38		-		-
6		312		338		-		7		16		18		-		-
7		-		-		-		-		-		-		-		-
Total	$	42,439	$	43,401	$	11,298	$	10,115	$	11,940	$	12,055	$	1,430	$	1,512

Loans evaluated for impairment include loans classified as troubled debt restructurings and non-performing commercial, real estate, and consumer loans. The following table sets forth certain information regarding the Bank’s impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary for the periods indicated:

	(Dollars in thousands)
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
June 30, 2016
With no related allowance recorded:
Commercial mortgage	$	626	$	666	$	-
Commercial other		123		123		-
Residential real estate		301		302		-
Consumer:
Equity		-		-		-
Auto		49		50		-
Subtotal		1,099		1,141		-

With an allowance recorded:
Commercial mortgage	$	630	$	640	$	214
Commercial other		-		-		-
Residential real estate		399		400		35
Consumer:
Equity		113		113		29
Auto		-		-		-
Subtotal		1,142		1,153		278
Total	$	2,241	$	2,294	$	278

December 31, 2015
With no related allowance recorded:
Commercial mortgage	$	1,324	$	1,886	$	-
Commercial other		38		37		-
Residential real estate		315		316		-
Consumer:
Equity		-		-		-
Auto		89		90		-
Subtotal		1,766		2,329		-

With an allowance recorded:
Commercial mortgage		997		1,100		150
Commercial other		-		-		-
Residential real estate		408		409		44
Consumer:
Equity		-		-		-
Auto		-		-		-
Subtotal		1,405		1,509		194
Total	$	3,171	$	3,838	$	194

The following tables present the average recorded investments in impaired loans and the amount of interest income recognized on impaired loans after impairment by class for the periods indicated:

					(Dollars in thousands)
	No Related				With Related
	Allowance Recorded				Allowance Recorded				Total
			Total				Total				Total
	Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized
Three Month Period
Ended June 30, 2016
Commercial:
Mortgage	$	677	$	1	$	895	$	4	$	1,572	$	5
Other		80		-		-		-		80		-
Residential real estate		305		4		401		2		706		6
Consumer:
Equity		-		-		56		-		56		-
Auto		52		1		-		-		52		1
Other		-		-		-		-		-		-
Total	$	1,114	$	6	$	1,352	$	6	$	2,466	$	12

Three Month Period
Ended June 30, 2015
Commercial:
Mortgage	$	2,946	$	1	$	2,452	$	6	$	5,398	$	7
Other		50		1		61		-		111		1
Residential real estate		237		1		478		4		715		5
Consumer:
Equity		3		-		151		3		154		3
Auto		98		1		-		-		98		1
Other		-		-		-		-		-		-
Total	$	3,334	$	4	$	3,142	$	13	$	6,476	$	17

					(Dollars in thousands)
	No Related				With Related
	Allowance Recorded				Allowance Recorded				Total
			Total				Total				Total
	Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized
Six Month Period
Ended June 30, 2016
Commercial:
Mortgage	$	892	$	3	$	929	$	8	$	1,821	$	11
Other		66		1		-		-		66		1
Residential real estate		308		7		403		3		711		10
Consumer:
Equity		-		-		38		-		38		-
Auto		65		2		-		-		65		2
Other		-		-		-		-		-		-
Total	$	1,331	$	13	$	1,370	$	11	$	2,701	$	24

Six Month Period
Ended June 30, 2015
Commercial:
Mortgage	$	4,306	$	25	$	2,669	$	12	$	6,975	$	37
Other		56		1		88		-		144		1
Residential real estate		232		4		466		9		698		13
Consumer:
Equity		7		-		151		5		158		5
Auto		101		2		-		-		101		2
Other		-		-		-		-		-		-
Total	$	4,702	$	32	$	3,374	$	26	$	8,076	$	58

The following tables summarize information relative to loan modifications determined to be troubled debt restructurings (TDRs) during the periods indicated:

			(Dollars in thousands)
			Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding
	of		Recorded		Recorded
	TDRs		Investment (1)		Investment
Three months ended June 30, 2016
Commercial mortgage		-	$	-	$	-
Residential real estate		-		-		-
Consumer:
Equity		1		113		113
Auto		-		-		-
Other		2		88		88
Total		3	$	201	$	201

Three months ended June 30, 2015
Commercial mortgage		-	$	-	$	-
Residential real estate		2		166		166
Consumer:
Equity		-		-		-
Auto		2		21		21
Other		-		-		-
Total		4	$	187	$	187

			(Dollars in thousands)
			Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding
	of		Recorded		Recorded
	TDRs		Investment (1)		Investment
Six months ended June 30, 2016
Commercial mortgage		1	$	12	$	12
Residential real estate		-		-		-
Consumer:
Equity		1		113		113
Auto		-		-		-
Other		2		88		88
Total		4	$	213	$	213

Six months ended June 30, 2015
Commercial mortgage		1	$	169	$	169
Residential real estate		2		166		166
Consumer:
Equity		-		-		-
Auto		6		40		40
Other		-		-		-
Total		9	$	375	$	375

(1)

– Pre-modification balance is calculated using the loan balance on the day prior to modification as TDR.

A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Bank offers various types of concessions when modifying a loan. Loan terms that may be modified due to a borrower’s financial situation include, but are not limited to, a reduction in the stated interest rate, a reduction in the face amount of the debt, a reduction of the accrued interest, temporary interest-only payments, or re-aging, extensions, deferrals, renewals, and rewrites. In mitigation, additional collateral, a co-borrower or a guarantor may be requested.

During the six month period ended June 30, 2016, loans were modified by either a reduction in interest rates or a change in the contractual maturity date of the note. Three loans were modified with reduced interest rates and the contractual maturity date of one loan was extended.

During the six month period ended June 30, 2015, loans were modified by either a reduction in interest rates or a change in the contractual maturity date of the note. Six loans were modified with reduced interest rates and the contractual maturity date of three loans was extended.

Loans modified as a TDR may already be on nonaccrual status and partial charge-offs may have, in some cases, been taken against the outstanding loan balance. The allowance for impaired loans that have been modified as a TDR is measured based on the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent or on the present value of expected future cash flows, discounted at the loan’s original effective interest rate. Management exercises significant judgment in developing these determinations.

There have been no loans, which were modified as a TDR within the previous twelve months that have subsequently defaulted as of June 30, 2016.

The following table presents the loan portfolio by class summarized by aging categories, at June 30, 2016 and December 31, 2015:

	(Dollars in thousands)												Recorded Investment
	30-59		60-89		>90								>90 Days
	Days		Days		Days		Total				Total		and
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing
June 30, 2016
Commercial:
Mortgage	$	850	$	319	$	97	$	1,266	$	66,342	$	67,608	$	-
Other		-		-		3		3		12,540		12,543		-
Residential real estate		956		59		-		1,015		41,424		42,439		-
Consumer:
Equity		9		-		-		9		11,289		11,298		-
Auto		116		12		-		128		11,812		11,940		-
Other		-		-		-		-		1,430		1,430		-
Total	$	1,931	$	390	$	100	$	2,421	$	144,837	$	147,258	$	-

December 31, 2015
Commercial:
Mortgage	$	628	$	433	$	196	$	1,257	$	68,025	$	69,282	$	-
Other		11		-		-		11		12,855		12,866		-
Residential real estate		449		33		-		482		42,919		43,401		-
Consumer:
Equity		23		-		-		23		10,092		10,115		-
Auto		138		17		-		155		11,900		12,055		-
Other		2		9		-		11		1,501		1,512		-
Total	$	1,251	$	492	$	196	$	1,939	$	147,292	$	149,231	$	-

The following summarizes by loan class, the loans on nonaccrual status at June 30, 2016 and December 31, 2015:

	(Dollars in thousands)
	June 30,		December 31,
	2016		2015
Commercial:
Mortgage	$	604	$	1,334
Other		3		3
Residential real estate		1		3
Consumer:
Equity		-		-
Auto		11		10
Other		-		-
Total	$	619	$	1,350

NOTE 5 – BANK OWNED LIFE INSURANCE

In 2015, the Bank invested in whole life insurance contracts on the lives of ten current officers who have provided positive consent allowing the Bank to be named beneficiary of these insurance contracts. An existing policy on a former employee is also in place. These policies are recorded at their cash surrender values which are presented in the consolidated balance sheets in “Other Assets.” Those policies covering current officers are split dollar policies, providing one year’s salary to a deceased employee’s estate. These policies feature variable crediting rates and are expected to produce an average yield of about 5.50%, on a fully tax equivalent basis.

NOTE 6 – BORROWINGS

As of February 9, 2015, the Company renegotiated a portion of the $5.0 million note payable due December 29, 2015. An interest only note (Note B) for $1.6 million, due August 4, 2021, with a fixed interest rate of 6.00%, and 28,675 shares of the Company’s common stock were exchanged for $2.3 million of the original $5.0 million note. The remaining $2.7 million (Note A) of the original $5.0 million note continued unaltered, earning a fixed rate of 8.00%, due December 29, 2015.

In September 2015, the Company made a $1.0 million principal payment to Note A from available funds at the Bancorp level. In November 2015, the Bank requested permission from the FDIC and DFI to pay a one-time dividend to the Holding Company for the purpose of retiring Note A. In December 2015, permission was granted, the dividend was paid, and Note A was retired.

In April and June, 2016, proceeds from the sales of OREO properties held at the Bancorp level were applied to the remaining Note B, reducing the balance by $146 thousand.

Other Borrowings

(Dollars in thousands)

Description

Balance of
Loan as of
06/30/16

Interest
Rate

Frequency
of
Payments

Status

Maturity
Date

Loan 1

477

4.75

Monthly

Amortizing

11/21/2019

Loan 2

333

4.25

Monthly

Amortizing

6/25/2019

Loan 3 (Note B)

1,499

6.00

Monthly

Interest Only

8/4/2021

NOTE 7 – EMPLOYEE BENEFIT PLANS

The bank has a qualified noncontributory defined benefit pension plan, which covers certain employees. The benefits are primarily based on years of service and earnings.

The following table presents the components of the net periodic pension cost of the defined benefit plan.

	(Dollars in thousands)
	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
Net periodic pension cost:
Interest cost on projected benefit obligation	$	14		$	14		$	28		$	27
Expected return on plan assets		(20	)		(11	)		(40	)		(22	)
Settlement loss		-			-			-			-
Net amortization of deferral of (gains) losses		18			17			37			34
Net periodic pension cost	$	12		$	20		$	25		$	39

NOTE 8 – FAIR VALUES OF FINANCIAL INSTRUMENTS

Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accounting guidance also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under this guidance are described below.

Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets and liabilities.

Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Accordingly, investment securities available for sale and loans held for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record other assets at fair value on a nonrecurring basis, such as impaired loans and other real estate owned. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or writedowns of individual assets.

The following describes the valuation techniques used to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements.

Investment securities available for sale - Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange or traded by dealers or brokers in active over-the-counter markets. Level 2 securities include securities issued by government sponsored entities, mortgage backed securities, and municipal bonds. Level 3 securities include those with unobservable inputs. Transfers between levels can occur due to changes in the observability of significant inputs.

Loans held for sale - Loans held for sale are carried at fair value. These loans currently consist of one-to-four-family residential loans originated for sale in the secondary market. Fair value is based on the committed market rates or the price secondary markets are currently offering for similar loans using observable market data.

The following are assets and liabilities that were accounted for or disclosed at fair value on a recurring basis:

			Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
			Assets/Liabilities		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
June 30, 2016
Assets:
Available for sale securities:
U.S. government securities	$	-	$	-	$	-	$	-
U.S. government federal agencies		2,254		-		2,254		-
State and local governments		1,806		-		1,806		-
Mortgage backed securities		4,155		-		4,155		-
Total securities available for sale	$	8,215	$	-	$	8,215	$	-
Loans held for sale	$	230	$	-	$	230	$	-

December 31, 2015
Assets:
Securities available for sale
U.S. government securities	$	1,005	$	1,005	$	-	$	-
U.S. government federal agencies		6,535		-		6,535		-
State and local governments		1,783		-		1,783		-
Mortgage backed securities		4,690		-		4,690		-
Total securities available for sale	$	14,013	$	1,005	$	13,008	$	-

The following describes the valuation techniques used to measure certain financial assets and liabilities recorded at fair value on a nonrecurring basis in the financial statements.

Impaired loans - The Bank does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses may need to be established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment. As of June 30, 2016, the fair value of substantially all of the impaired loans was estimated based on the fair value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Bank records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Bank records the impaired loan as nonrecurring Level 3. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

Other real estate owned (OREO) - OREO consists of real estate acquired in foreclosure or other settlement of loans. Such assets are carried on the consolidated balance sheet at the lower of the investment in the real estate or its fair value less estimated selling costs. The fair value of OREO is determined on a nonrecurring basis generally utilizing current appraisals performed by an independent, licensed appraiser applying an income or market value approach using observable market data (Level 2). However, if a current appraisal is not available, the original appraised value is discounted, as appropriate, to compensate for the estimated depreciation in the value of the real estate since the date of its original appraisal. Such discounts are generally estimated based upon management’s knowledge of sales of similar property within the applicable market area and its knowledge of other real estate market-related data, as well as general economic trends (Level 3). Upon foreclosure, any fair value adjustment is charged against the allowance for loan losses. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense in the consolidated statements of income.

The following are assets and liabilities that were accounted for or disclosed at fair value on a nonrecurring basis:

			(Dollars in thousands)
			Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
			Assets/Liabilities		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
June 30, 2016
Assets:
Impaired loans
Commercial mortgage	$	1,042	$	-	$	-	$	1,042
Commercial other		123		-		-		123
Residential real estate		665		-		-		665
Consumer equity		84		-		-		84
Consumer auto		49		-		-		49
Total impaired loans		1,963		-		-		1,963

Other real estate owned
Residential		22		-		-		22
Commercial		-		-		-		-
Total other real estate owned	$	22	$	-	$	-	$	22

December 31, 2015
Assets:
Impaired loans
Commercial mortgage	$	2,171	$	-	$	-	$	2,171
Commercial other		38		-		-		38
Residential real estate		679		-		-		679
Consumer equity		-		-		-		-
Consumer auto		89		-		-		89
Total impaired loans	$	2,977	$	-	$	-	$	2,977

Other real estate owned
Residential		15		-		-		15
Commercial		223		-		-		223
Total other real estate owned	$	238	$	-	$	-	$	238

The quantitative information about Level 3 fair value measurements for financial assets and liabilities measured at fair value on a nonrecurring basis is as follows:

	(Dollars in thousands)
	Fair Value		Valuation Technique	Significant Unobservable Input	Range
June 30, 2016
Impaired loans
Commercial mortgage	$	1,042	Appraisal of Collateral	Appraisal Adjustment	Up to 17%
Commercial other		123	Appraisal of Collateral	Appraisal Adjustment	*
Residential real estate		665	Appraisal of Collateral	Appraisal Adjustment	Up to 5%
Consumer:
Equity		84	Appraisal of Collateral	Appraisal Adjustment	Up to 26%
Auto		49	Appraisal of Collateral	Appraisal Adjustment	*

Other real estate owned
Residential		22	Appraisal of Property	Appraisal Adjustment	*
Commercial		-	Appraisal of Property	Appraisal Adjustment	*

December 31, 2015
Impaired loans
Commercial mortgage	$	2,171	Appraisal of Collateral	Appraisal Adjustment	Up to 6%
Commercial other		38	Appraisal of Collateral	Appraisal Adjustment	*
Residential real estate		679	Appraisal of Collateral	Appraisal Adjustment	Up to 6%
Consumer:
Equity		-	Appraisal of Collateral	Appraisal Adjustment	*
Auto		89	Appraisal of Collateral	Appraisal Adjustment	*

Other real estate owned
Residential		15	Appraisal of Property	Appraisal Adjustment	*
Commercial		223	Appraisal of Property	Appraisal Adjustment	Up to 45%
			* There are no related allowances for these classifications

The following methods and assumptions were used to estimate the fair value disclosures for other financial instruments as of June 30, 2016 and December 31, 2015:

Cash and cash equivalents - The fair value of cash and cash equivalents is estimated to approximate the carrying amounts.

Other investment securities - Other investment securities consist of restricted equity securities in the Federal Home Loan Bank (FHLB) and are carried at cost. Because there is no market, the carrying values of restricted equity securities approximate fair values based on the redemption provisions of the FHLB.

Loans - The fair value of loans is calculated by discounting estimated cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The estimated cash flows do not anticipate prepayments.

Management has made estimates of fair value discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, management has no basis to determine whether the fair value presented for loans would be indicative of the value negotiated in an actual sale.

Accrued interest receivable and payable - The carrying amounts of accrued interest approximate fair value.

Bank owned life insurance – The fair value of bank owned life insurance approximates the cash surrender value of the policies.

Deposits - The fair value of deposits with no stated maturity, such as noninterest bearing and interest bearing demand deposits, regular savings, and certain types of money market accounts, is equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Borrowed funds – The carrying amounts of borrowed funds which mature within 90 days approximate their fair values. The fair values of other borrowed funds are estimated using discounted cash flow analysis that applies interest rates currently offered on similar instruments.

Off-balance sheet instruments - The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of agreements and the present credit standing of the counterparties. The amounts of fees currently charged on commitments to extend credit and standby letters of credit are deemed insignificant, and therefore, the estimated fair values and carrying values are not shown.

The estimated fair value of the financial instruments is as follows:

					Fair Value Measurements Using
					Quoted
	(Dollars in thousands)				Prices in
					Active		Significant
					Markets		Other		Significant
					for Identical		Observable		Unobservable
	Carrying		Fair		Assets/Liabilities		Inputs		Inputs
	Amount		Value		(Level 1)		(Level 2)		(Level 3)
June 30, 2016
Financial assets:
Cash and cash equivalents	$	13,739	$	13,739	$	-	$	13,739	$	-
Securities available for sale		8,215		8,215		-		8,215		-
Other investment securities		859		859		-		-		859
Loans held for sale		230		230		-		230		-
Loans, net		145,267		150,832		-		-		150,832
Accrued interest receivable		300		300		-		-		300
Bank owned life insurance		3,376		3,376		-		3,376		-

Financial liabilities:
Noninterest bearing deposits	$	31,378	$	31,378	$	-	$	31,378	$	-
Interest bearing deposits		127,459		128,720		-		128,720		-
Borrowed funds		2,309		2,309		-		2,309		-
Accrued interest payable		572		572		-		-		572

December 31, 2015
Financial assets:
Cash and cash equivalents	$	9,371	$	9,371	$	-	$	9,371	$	-
Securities available for sale		14,013		14,013		1,005		13,008		-
Other investment securities		859		859		-		-		859
Net loans		147,153		149,355		-		-		149,355
Accrued interest receivable		285		285		-		-		285
Bank owned life insurance		3,320		3,320		-		3,320		-

Financial liabilities:
Noninterest bearing deposits	$	26,116	$	26,116	$	-	$	26,116	$	-
Interest bearing deposits		136,209		137,174		-		137,174		-
Borrowed funds		2,569		2,569		-		2,569		-
Accrued interest payable		759		759		-		-		759

The carrying amounts in the preceding table are included in the consolidated balance sheets under the applicable captions. No derivatives were held by the Company for trading purposes.

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

Forward-Looking Information

Certain statements contained in this quarterly report are not historical facts, including but not limited to statements that can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” or “continue” or the negative thereof or other variations thereon or comparable terminology, and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those indicated in such statements due to risks, uncertainties, and changes with respect to a variety of market and other factors. The Company assumes no obligation to update any forward-looking statements.

Management’s Discussion and Analysis as of June 30, 2016

Overview. Citizens Independent Bancorp. Inc. (Holding Company, Bancorp, we or our) was organized under the laws of the State of Ohio in 1994 as the bank holding company for The Citizens Bank of Logan (Citizens Bank or Bank) under the Bank Holding Company Act of 1956, as amended. Bancorp and the Bank are sometimes collectively referred to herein as the Company. Holding Company is headquartered in Logan, Ohio, and offers a broad range of financial services through Citizens Bank, an Ohio chartered commercial bank. The Bank is currently regulated by the Federal Deposit Insurance Company (FDIC) and the Ohio Division of Financial Institutions (DFI). Holding Company is regulated by the Federal Reserve Bank of Cleveland (FRB).

Citizens Bank is engaged in the business of commercial and retail banking. The Bank’s primary market area is Hocking, Fairfield, and Athens Counties, Ohio. The Bank serves this market through four full service locations, which include the Bank’s main office located at 188 West Main Street, Logan, Hocking County, Ohio, and one limited service location. The Bank maintains drive-up facilities, as well as ATM equipment at all branches. In a cost saving project, the Bank is presently constructing a new full service branch. This branch will consolidate an existing full service facility and a limited service location, both of which will be closed. The principal economic activities in the Bank’s market area include manufacturing, the service sector for local universities, tourism, construction, healthcare, retailing, and food services. The Bank grants residential real estate, commercial real estate, commercial and industrial, and consumer loans to customers primarily located in the Bank’s footprint of Hocking, Athens, and Fairfield counties.

In October 2012, the Bank entered into publicly available Consent Orders with the FDIC and DFI, which required the Bank to take a number of actions. In October 2015, the Consent Orders were lifted and the Bank entered into a Memorandum of Understanding with the FDIC and DFI. Significant among the ongoing required actions was the development of a capital plan resulting in the Bank meeting and maintaining its level of Tier 1 capital as a percentage of its total assets at a minimum of 8.00% and its level of qualifying total capital as a percentage of risk-weighted assets at a minimum of 11.50%. The Bank is also required to obtain approval from the FDIC and DFI prior to the payment of any dividends.

On July 5, 2011, the Holding Company entered into a memorandum of understanding (the FRB 2011 MOU) with the FRB. The FRB 2011 MOU prohibits the Holding Company, without prior approval of the FRB, from: declaring or paying cash dividends, taking dividends or any other form of payment representing a reduction in the Bank’s capital, incurring, increasing, or guaranteeing any debt, or purchasing or redeeming any shares. The FRB 2011 MOU remains in effect.

Management’s Discussion and Analysis is intended to provide shareholders with a more comprehensive analysis of the issues facing management than can be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the consolidated financial statements and related footnotes and selected financial data elsewhere in this filing.

The Bank’s profitability, as with most financial institutions, is significantly dependent upon net interest income, which is the difference between interest received on interest earning assets, such as loans and securities and the interest paid on interest bearing liabilities, principally deposits and borrowings. During a period of economic slowdown, the lack of interest income from non-performing assets and additional provision for loan losses can greatly reduce profitability. Results of operations are also impacted by noninterest income, such as service charges on deposit accounts and fees on other services, income from lending services, as well as noninterest expense, such as salaries and employee benefits, occupancy expense, professional and other services, and other expenses.

For the six months ended June 30, 2016, the Company earned net income of $468 thousand or $0.69 per share, compared to net income of $252 thousand or $0.40 per share for the six months ended June 30, 2015.

Key items affecting the Company’s results for the first six months of 2016:

Net interest income increased by $155 thousand period-over-period for the six months ended June 30, 2016 from the six months ended June 30, 2015. A $90 thousand decline in interest income was offset by a $245 thousand decrease in interest expense.

Noninterest income increased by $192 thousand to $779 thousand for the six months ended June 30, 2016 from the six months ended June 30, 2015. The period to period increase can be attributed to higher gains on the sale of repossessed assets, partially offset by lower gains on the sale of available for sale securities. Sales of repossessed assets resulted in a gain of $166 thousand for the six month period in 2016 versus losses of $45 thousand for the six month period in 2015.

Noninterest expense increased $80 thousand for the six months ended June 30, 2016 in comparison to the six months ended June 30, 2015, totaling just over $3.7 million in 2016 and just under $3.7 million in 2015.

Non-performing loans were lower by $0.7 million at June 30, 2016 relative to December 31, 2015, totaling $0.6 million and $1.3 million, respectively. The period-over-period activity primarily consisted of the pay-off of three credits totaling $773 thousand and the upgrade of one credit totaling $191 thousand, offset by the downgrade of one credit totaling $324 thousand.

Gross loans declined $2.0 million, or 1.3%, to $147.2 million as of June 30, 2016 from $149.2 million as of December 31, 2015. The decline results from loan originations of $11.1 million offset by $13.1 million in principal reductions received during the first six months of 2016. Non-performing loans made up $0.8 million of these principal reductions.

Deposits were down $3.5 million from year end balances to $158.8 million as of June 30, 2016 from $162.3 million as of December 31, 2015.

Shareholders’ equity of the Company increased $1.1 million, or 6.5%, to $18.5 million as of June 30, 2016 from the December 31, 2015 equity position. This increase was due to net proceeds from the exercise of outstanding common stock warrants totaling $560 thousand, net income of $468 thousand, plus an increase of $92 thousand in accumulated other comprehensive income resulting from the recognition in equity of an unrealized gain on the Company’s available for sale investment portfolio during the first six months of 2016. Leverage Capital and Total Capital at the Bank were 8.73% and 13.59%, respectively, as of June 30, 2016 and 8.23% and 13.14%, respectively, as of December 31, 2015.

Comparison of Results of Operations for the Six Months Ended June 30, 2016 and June 30, 2015

For the six months ended June 30, 2016, the Company earned net income of $468 thousand, a $216 thousand increase from the $252 thousand net income reported for the six months ended June 30, 2015. The increase in profitability can primarily be attributed to a $155 thousand increase in net interest income relative to the first six months of 2015 and an increase in noninterest income of $192 thousand only partially offset by an increase in noninterest expense of $80 thousand. Federal income tax provisions were $139 thousand for the first six months of 2016 versus only $88 thousand during the comparable period in 2015.

Distribution of Assets, Liabilities, and Shareholders' Equity

For the six months ended June 30,

	(Dollars in thousands)
	2016							2015
	Average Balance		Interest		Yield / Rate			Average Balance		Interest		Yield / Rate
Interest-Earning Assets:
Loans receivable^{(1), (2), (4)}	$	146,504	$	3,877		5.29	%	$	141,728	$	3,835		5.41	%
Securities⁽³⁾		9,352		81		1.73	%		26,067		217		1.66	%
Fed funds sold		6,741		17		0.50	%		11,426		13		0.23	%
FHLB stock		859		17		3.96	%		859		17		3.96	%
Total interest-earning assets		163,456		3,992		4.88	%		180,080		4,082		4.53	%
Non-interest-earning assets		17,123							17,151
Total Assets	$	180,579						$	197,231

Interest-Bearing Liabilities:
Interest-bearing deposits		126,022		349		0.55	%		150,268		472		0.63	%
Other borrowings		2,445		68		5.56	%		5,534		190		6.87	%
Total interest-bearing liabilities		128,467		417		0.65	%		155,802		662		0.85	%
Non-interest-bearing liabilities		32,816							22,525
Total including non-interest-bearing demand deposits		161,283		417					178,327		662
Other non-interest liabilities		1,398							2,788
Total Liabilities		162,681							181,115
Shareholders' equity		17,898							16,116
Total liabilities and shareholders' equity	$	180,579						$	197,231
Net interest income; interest rate spread			$	3,575		4.23	%			$	3,420		3.68	%
Net interest margin						4.37	%						3.80	%
Average interest-earning assets to average interest-bearing liabilities						127.24	%						115.58	%

⁽¹⁾Loan fees are immaterial amounts.

⁽²⁾Nonaccrual loans are included in average loan balance.

⁽³⁾ Interest income for tax-exempt securities is not calculated on a tax-exempt basis.

⁽⁴⁾ Loans receivable includes loans held for sale.

Interest income for the six months ended June 30, 2016 was $4.0 million, a $90 thousand, or 2.2%, decrease from that earned during the six months ended June 30, 2015. The yield on earning assets increased 35 basis points to 4.88% for the six months ended June 30, 2016 from 4.53% for the six months ended June 30, 2015. Interest income earned from the loan portfolio increased $42 thousand, or 1.1%, to $3.9 million for the six months ended June 30, 2016 from $3.8 million for the six months ended June 30, 2015. The increase in interest income from the loan portfolio can be attributed to an increase in average loan balances of $4.8 million, or 3.4%. The yield on loans decreased 12 basis points to 5.29% for the six months ended June 30, 2016 relative to the 5.41% earned for the six months ended June 30, 2015.

Interest income from the investment portfolio declined $136 thousand, or 62.7%, to $81 thousand for the six months ended June 30, 2016 from $217 thousand for the six months ended June 30, 2015. Average assets for the securities portfolio declined $16.7 million and the yield increased by 7 basis points. Securities sales during the six month period ending June 30, 2016 totaled $4.0 million at a weighted average yield of 1.00% and a weighted average maturity of 1.9 years. Securities sales during the six month period ending June 30, 2015 totaled $11.1 million and purchases were $3.1 million. Securities gains recognized during the first two quarters of 2015 were $148 thousand.

Interest expense for the six months ended June 30, 2016 was $417 thousand, a $245 thousand, or 37.0%, decrease from the $662 thousand in interest expense for the six months ended June 30, 2015. Interest expense for deposits declined $123 thousand, or 26.1%, to $349 thousand for the six months ended June 30, 2016. Average balances of interest bearing deposits decreased by $24.2 million, or 16.1%, to $126.0 million at June 30, 2016 from $150.2 million at June 30, 2015.

Interest expense for other borrowings was $68 thousand for the six months ended June 30, 2016 and $190 thousand for the six months ended June 30, 2015. In February 2015, the Company issued $656 thousand of common stock, retiring a like amount of debt, and reducing the interest rate on a portion of the remaining debt. Principal payments reduced the average outstanding debt to $2.4 million as of June 30, 2016 from $5.5 million as of June 30, 2015.

Net interest margins continue to be under heavy pressure as higher yielding loans reprice downward, are refinanced at lower rates, or paid off early. During the first six months of 2016, loans totaling $9.9 million have repriced at a net increase of 2 basis points, mostly due to the repricing of home equity loans from their initial teaser rates. The Bank has continued to drive the composition of the loan portfolio towards variable rate loans as protection against rising interest rates. Although striving to originate conforming residential mortgage loans, management is retaining a larger percentage of these mortgage loans in-house rather than selling to the secondary market. The loan mix resulting from holding these typically variable rate loans in the portfolio will depress the net interest margin in the short term, but should be additive as they begin to reprice. The loan portfolio currently consists of 69.3% variable rate loans. The Bank has reduced interest rates paid on a large group of deposit accounts and continues to monitor certificate of deposit rates versus our peers. Effects of these deposit cost initiatives are now being felt.

Comparison of Results of Operations for the Three Months Ended June 30, 2016 and June 30, 2015

For the three months ended June 30, 2016, the Company earned net income of $250 thousand, a $101 thousand increase from the $149 thousand net income reported for the three months ended June 30, 2015. Net interest income increased $18 thousand (1.0%) during the second quarter of 2016 versus the second quarter of 2015, noninterest income increased $48 thousand, and noninterest expense decreased $78 thousand. Federal income tax expense of $94 thousand in the second quarter of 2016 was $43 thousand (84.3%) greater than that recorded in the second quarter of 2015.

Distribution of Assets, Liabilities, and Shareholders' Equity

For the three months ended June 30,

	(Dollars in thousands)
	2016							2015
	Average Balance		Interest		Yield / Rate			Average Balance		Interest		Yield / Rate
Interest-Earning Assets:
Loans receivable^{(1), (2), (4)}	$	145,719	$	1,911		5.25	%	$	140,943	$	1,941		5.51	%
Securities⁽³⁾		8,295		34		1.64	%		24,158		100		1.66	%
Fed funds sold		9,373		12		0.51	%		11,733		6		0.20	%
FHLB stock		859		9		4.19	%		859		9		4.19	%
Total interest-earning assets		164,246		1,966		4.79	%		177,693		2,056		4.63	%
Non-interest-earning assets		17,253							17,138
Total Assets	$	181,499						$	194,831

Interest-Bearing Liabilities:
Interest-bearing deposits		118,969		173		0.58	%		147,031		223		0.61	%
Other borrowings		2,358		33		5.60	%		5,389		91		6.75	%
Total interest-bearing liabilities		121,327		206		0.68	%		152,420		314		0.82	%
Non-interest-bearing liabilities		40,612							23,067
Total including non-interest-bearing demand deposits		161,939		206					175,487		314
Other non-interest liabilities		1,369							2,681
Total Liabilities		163,308							178,168
Shareholders' equity		18,191							16,663
Total liabilities and shareholders' equity	$	181,499						$	194,831
Net interest income; interest rate spread			$	1,760		4.11	%			$	1,742		3.81	%
Net interest margin						4.29	%						3.92	%
Average interest-earning assets to average interest-bearing liabilities						135.37	%						116.58	%

⁽¹⁾Loan fees are immaterial amounts.

⁽²⁾Nonaccrual loans are included in average loan balance.

⁽³⁾ Interest income for tax-exempt securities is not calculated on a tax-exempt basis.

⁽⁴⁾ Loans receivable includes loans held for sale.

Interest income for the three months ended June 30, 2016 was $2.0 million, a $90 thousand, or 4.4%, decrease from that earned during the three months ended June 30, 2015. The yield on earning assets improved 16 basis points to 4.79% for the three months ended June 30, 2016 from 4.63% for the three months ended June 30, 2015. Interest income earned from the loan portfolio decreased $30 thousand, or 1.5%, for the three months ended June 30, 2016 relative to the three months ended June 30, 2015. The decrease in interest income from the loan portfolio can be attributed to the decrease in average yield of 26 basis points for the three month period ending June 30, 2016 compared to the three month period ending June 30, 2015.

Interest income from the investment portfolio declined $66 thousand, or 66.0%, to $34 thousand for the three months ended June 30, 2016 from $100 thousand for the three months ended June 30, 2015. Average assets for the securities portfolio declined $15.9 million and the yield decreased by 2 basis points. There were no securities purchases or sales during the second quarter of 2016.

Interest expense for the three months ended June 30, 2016 was $206 thousand, a $108 thousand, or 34.4%, decrease from the $314 thousand in interest expense for the three months ended June 30, 2015. Interest expense for deposits declined $50 thousand, or 22.4%, to $173 thousand for the three months June 30, 2016. Average balances of interest bearing deposits decreased by $28.1 million, or 19.1%, declining to $119.0 million at June 30, 2016 from $147.0 million at June 30, 2015. The Company continues to trim the public deposits by offering competitive, but not exorbitant, deposit rates.

Interest expense for other borrowings was $33 thousand for the three months ended June 30, 2016 and $91 thousand for the three months ended June 30, 2015. In February 2015, the Company issued $656 thousand of common stock, retiring a like amount of debt, and reducing the interest rate on a portion of the remaining debt. Principal payments reduced the average outstanding balance from $5.4 million as of June 30, 2015 to $2.4 million as of June 30, 2016.

Noninterest Income. Noninterest income, which consists primarily of fees and commissions earned on services, such as deposits, credit cards, and ATMs that are provided to the Bank’s customers, and to a lesser extent, gains on sales of OREO and other repossessed assets and other miscellaneous income, increased $192 thousand, or 32.7%, to $779 thousand for the six months ended June 30, 2016 from $587 thousand for the six months ended June 30, 2015. The period-over-period increase in noninterest income can primarily be attributed to $166 thousand in gains recognized from the sale of OREO and other repossessed assets during the first six months of 2016 versus losses of $45 thousand recognized during the first six months of 2015. The following is a discussion of other significant period-over-period changes in other material noninterest income categories:

Income from service fees increased $9 thousand, or 4.8%, to $197 thousand for the six months ended June 30, 2016 from $188 thousand for the six months ended June 30, 2015. The increase came despite a $33 thousand period-over-period decrease in revenue from the Bank’s overdraft protection product, resulting from a change in the way we process overdrafts.

Sales of OREO properties generated gains of $166 thousand for the six months ended June 30, 2016 compared to losses of $45 thousand recognized on the sale of OREO properties during the six months ended June 30, 2015. During the first six months of 2016, the Company sold 12 properties with a carrying value of $223 thousand versus 7 properties with a carrying value of $787 thousand last year.

Other income increased $90 thousand, or 73.2%, during the first six months of 2016 to $213 thousand. The increase is primarily attributable to a gain of $56 thousand realized on the sale of three substandard, nonaccrual loans with a carrying value of $595 thousand, as well as increased earnings of $51 thousand from Bank Owned Life Insurance policies purchased in September 2015 on key management figures for the purpose of offsetting employee benefit costs. Offsetting this increase was a decline of $16 thousand in mortgage broker commissions and a $1 thousand net decrease in various other fee categories

For the three months ended June 30, 2016, noninterest income increased by $48 thousand, or 15.5%. The period-over-period increase in noninterest income can primarily be attributed to an increase of $81 thousand in gains recognized from the sale of OREO and other repossessed properties, offset by a reduction of $58 thousand in gains on the sale of available for sale securities. The following is a discussion of other significant period-over-period changes in other material noninterest income categories:

Income from service fees increased $7 thousand, or 6.8%, to $110 thousand for the three months ended June 30, 2016 from $103 thousand for the three months ended June 30, 2015. The increase can primarily be attributed to a $16 thousand period-over-period increase in revenue from various service charges offset by a $9 thousand decrease in the Bank’s overdraft protection product, due to a change in the way we process overdrafts.

Sales of OREO properties generated gains of $82 thousand for the three months ended June 30, 2016 compared to gains of $1 thousand recognized on the sale of OREO properties during the three months ended June 30, 2015.

There were no transactions or gains from the sale of investment securities during the second quarter of 2016 versus $58 thousand in gains for the three months ended June 30, 2015.

Other income increased $14 thousand, or 24.1%, during the three month period ending June 30, 2016 to $72 thousand. The change can primarily be attributed to an increase of $26 thousand in earnings from Bank Owned Life Insurance policies purchased in September 2015 on key management figures for the purpose of offsetting employee benefit costs. Offsetting this increase were declines of $10 thousand in mortgage broker commissions and $2 thousand in various other fee categories.

Noninterest Expense. Noninterest expense, which consists primarily of personnel, occupancy, equipment, and other operating expenses, increased $80 thousand, or 2.2%, between the six month periods ended June 30, 2016 and June 30, 2015. The increase is primarily attributable to changes in only a few categories. The following is a discussion of significant period-over-period changes for other material noninterest expense categories:

Salaries and employee benefits expense increased by $91 thousand, or 5.8%, to $1.7 million for the six months ended June 30, 2016 relative to the six months ended June 30, 2015. Nearly all of the increase is attributable to the addition of two senior level employees to enhance our lending and loan processing capabilities. An additional new employee has brought a service formerly outsourced to a third party back into the Bank.

Net occupancy and equipment expense decreased by $48 thousand, or 10.1%, during the six months ended June 30, 2016 relative to the same period of 2015. Most of the savings are due to the closing of an unprofitable in-store branch in September 2015.

Expenses on other real estate owned were $12 thousand higher for the six months ended June 30, 2016 relative to the period ended June 30, 2015. Additional write-downs of existing OREO properties required to adjust the carrying value of those OREO properties to their net realizable value totaled $15 thousand during the first six months of 2016 versus no write-downs of OREO properties recorded during the first six months of 2015.

Legal and professional fees have fallen $16 thousand for the six month period ending June 30, 2016 to a total of $182 thousand versus $198 thousand for the comparable period in 2015. Litigation and foreclosure activity has declined for the 2016 period as reflected in the lower levels of OREO properties and non-performing assets.

Other operating expense for the six month period ending June 30, 2016 is $35 thousand greater than for the comparable period ending June 30, 2015. This increase was driven by the write-down of $74 thousand in worthless, discarded assets in addition to $91 thousand in additional expenses related to new Bank products. During the same period in 2015, we wrote-off stock received as collateral in a loan foreclosure in 2012. Previously valued at $100 thousand, the carrying value of the stock was written down to zero. Increases of $38 thousand in employee training related costs for the 2016 year to date period were partially offset by savings of $27 thousand in temporary and seasonal employee costs.

Noninterest expense, which consists primarily of personnel, occupancy, equipment, and other operating expenses, was down slightly for the three month period ended June 30, 2016 compared to the same period for June 30, 2015. The decrease of $78 thousand, or 4.2%, is primarily attributable to compensation increases offset by decreases in several other expense categories. The following is a discussion of significant period-over-period changes for other material noninterest expense categories:

Salaries and employee benefits expense increased by $48 thousand, or 6.3%, to $810 thousand for the three months ended June 30, 2016 relative to the three months ended June 30, 2015. Most of the increase is attributable to the addition of two senior level employees to enhance our lending and loan processing capabilities. An additional new employee has brought a service formerly outsourced to a third party back into the Bank.

Net occupancy and equipment expenses decreased by $25 thousand, or 11.2%, during the three months ended June 30, 2016 as software maintenance expenses decreased period-over-period by $12 thousand, mostly due to timing, and branch lease payments declined by $9 thousand as a result of a branch closing.

Expenses on other real estate owned were $21 thousand, or 60.0%, less for the three months ended June 30, 2016 relative to the same period ended June 30, 2015. Balances of OREO properties fell from $361 thousand at June 30, 2015 to $22 thousand at June 30, 2016. There were no adjustments to the carrying value of other real estate owned properties during either the second quarter of 2016 or the second quarter of 2015.

Other operating expense for the quarter ending June 30, 2016 were $83 thousand less than for the quarter ending June 30, 2015. The major component was the 2015 complete write-off of stock received as collateral in a 2012 loan foreclosure. Previously valued at $100 thousand, the carrying value of the stock was written down to zero. Other non-recurring costs incurred during the second quarter of 2015 included $35 thousand in legal and loan settlements. During the second quarter of 2016, costs associated with new Bank products increased $53 thousand, while expenses related to temporary and seasonal employees were $18 thousand less than for the comparable three month period ending June 30, 2015. Appraisal and other expenses were up a net of $17 thousand.

Provision for Loan Losses. The Company establishes an allowance for loan losses through charges to earnings, which are shown in the consolidated statements of income as the provision for loan losses. Through the provision for loan losses, an allowance is maintained that reflects management’s best estimate of probable incurred loan losses related to specifically identified loans, as well as the inherent risk of loss related to the remaining portfolio. In evaluating the allowance for loan losses, management considers various factors that include loan growth, the amount and composition of the loan portfolio, (including non-performing and potential problem loans), diversification, or conversely, concentrations by industry, geography, or collateral within the portfolio, historical loan loss experience, current delinquency levels, the estimated value of the underlying collateral, prevailing economic conditions, and other relevant factors. Loan charge-offs are recorded to this allowance when loans are deemed uncollectible, in whole or in part. Impacting the provision for loan losses in any accounting period are several factors, including the amount of loan growth during the period broken down by loan type, the level of charge-offs during the period, the changes in the amount of impaired loans, changes in risk ratings assigned to loans, specific loan impairments, credit quality, and ultimately, the results of management’s assessment of the inherent risks of the loan portfolio.

Management considers the current allowance for loan losses at June 30, 2016 adequate to cover loan losses based on its assessment of various factors affecting the loan portfolio, including the level of problem loans, overall delinquencies, business conditions, estimated collateral values, and loss experience. No provision for loan losses was recorded in either the first or second quarter of 2016 or 2015.

A further decline in local and national economic conditions, or other factors, could result in a material increase in the allowance for loan losses, which could adversely affect the Company’s financial condition and results of operations.

Changes in Financial Condition from December 31, 2015 to June 30, 2016.

Overview, Total assets decreased $2.8 million to $181.0 million on June 30, 2016 from $183.8 million on December 31, 2015.

Loan Portfolio. Gross loans decreased $2.0 million, or 1.3%, to $147.2 million as of June 30, 2016 from a balance of $149.2 million on December 31, 2015. The decrease is the net effect of new origination activity totaling $11.1 million, and $13.1 million of principal reduction for the first six months of 2016. Principal reductions also included net loan charge-offs of $87 thousand and transfers to OREO totaling $22 thousand. The new originations were primarily commercial mortgage loans ($3.9 million or 34.7%) and consumer mortgage ($2.2 million or 19.5%). Total consumer lending, including consumer mortgage, was 61.4% of originations during the six month period ending June 30, 2016. The emphasis on consumer lending is part of a strategic initiative to re-balance the loan portfolio to be more equally weighted between commercial and consumer loans. This trend is expected to continue for the remainder of 2016 and is incorporated into the 2016 budget. As of June 30, 2016, total consumer loans, including consumer mortgage loans, totaled 45.6% of gross loans versus 45.0% of gross loans at December 31, 2015.

Loan Portfolio Distribution
	(Dollars in thousands)
	June 30,		December 31,
	2016		2015

Commercial	$	80,151	$	82,147
Real estate		42,439		43,401
Consumer		24,668	$	23,683
	$	147,258	$	149,231

The Company’s loan portfolio represents its largest and highest yielding assets. The fundamental lending business of the Company is based on understanding, measuring, and controlling the credit risk inherent in the loan portfolio. The Company’s loan portfolio is subject to varying degrees of credit risk. Credit risk entails both general risks, which are inherent in the process of lending, and risk specific to individual borrowers. The Company’s credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry, or collateral type. Typically, each consumer and residential lending product has a generally predictable level of credit losses based on historical loss experience. Home mortgage and home equity loans and lines generally have the lowest credit loss experience, while loans secured by personal property, such as auto loans, are generally expected to experience more elevated credit losses. Credit risk in commercial lending can vary significantly, as losses as a percentage of outstanding loans can shift widely during economic cycles and are particularly sensitive to changing economic conditions. Generally, improving economic conditions result in improved operating results on the part of commercial customers, enhancing their ability to meet their particular debt service requirements. Improvements, if any, in operating cash flows can be offset by the impact of rising interest rates that may occur during improved economic times. Declining economic conditions have an adverse effect on the operating results of commercial customers, reducing their ability to meet debt service obligations.

To control and manage credit risk, management has a credit process in place to ensure credit standards are maintained along with strong oversight and review procedures. The primary purpose of loan underwriting is the evaluation of specific lending risks and involves the analysis of the borrower’s ability to service the debt as well as the assessment of the value of the underlying collateral. Oversight and review procedures include the monitoring of portfolio credit quality, early identification of potential problem credits, and the aggressive management of problem credits. Executive management has implemented and continues to focus on the following measures to manage credit risk in the loan portfolios:

Reviewed all underwriting guidelines for various loan portfolios and have strengthened underwriting guidelines where needed;

Evaluated outside loan review parameters, engaging the services of a well-established firm to continue with such loan review, addressing not only specific loans but underwriting analysis, documentation, credit evaluation, and risk identification;

Increased the frequency of internal reviews of past due and delinquent loans to assess probable credit risks early in the delinquency process to minimize losses;

Aggressively seeks ownership and control, when appropriate, of real estate properties, which would otherwise go through time-consuming and costly foreclosure proceedings to effectively control the disposition of such collateral;

Aggressively obtaining updated financial information on commercial credits and performing analytical reviews to determine debt source capacities in business performance trends; and

Engaged a well established auditing firm to analyze the Company’s loan loss reserve methodology and documentation.

Allowance for Loan Loss (ALLL). The ALLL represents management’s estimate of losses inherent in the loan portfolio. The allowance is actively maintained to ensure future earnings are not impacted by credit losses. Reserves are based on historical loss analysis, assessment of current portfolio and market conditions, and any identified loss potential in specific credits. Reserve levels are recommended by senior management on a quarterly basis and approved by the Board of Directors.

The ALLL is composed of a reserve to absorb probable and quantifiable losses based on current knowledge of the loan portfolio and a reserve to absorb losses, which are not specifically identified, but can be reasonably expected.

Following the guidelines set forth in GAAP, Interagency Policy Statements on the Allowance for Loan and Lease Losses, and all other relevant supervisory guidance, the adequacy of the ALLL is ensured by applying consistent methods of identification, analysis, computation, documentation, and reporting.

The Bank’s ALLL has two components, the general reserve and the specific reserve. Included in the general reserve is the environmental reserve.

The general reserve is calculated by applying annualized net loan losses taken during a 36 month rolling look back period to the current loan portfolio, less any loans considered in the specific reserve analysis. To reflect the variations in risk of different loan products, the portfolio is segmented by collateral type, borrower type, and underwriting process.

The specific reserve is the calculated impairment of all loans classified as impaired, with a minimum outstanding principal balance of $100,000. A loan is classified as impaired when it is probable that the Bank will not be able to collect all amounts due according to the loan agreement’s contractual terms. All loans classified as TDRs are also evaluated in the specific reserve. Impairment is measured based on one of the three following methods:

Present value of expected future cash flows discounted at the loan’s effective interest rate;

Loan’s observable market price; or

Fair value of the collateral if the loan is collateral dependent.

The environmental reserve allows management to consider qualitative or environmental factors that are likely to cause estimated credit losses to differ from historical loss experience. The Bank’s environmental reserve considers 11 risk factors which are evaluated as minimal, low, moderate, or high risk. As the overall risk level of the environmental factors increases, the proportion of the loan portfolio held in reserve also increases. Risk factors considered in the analysis are:

Lending experience, with particular attention paid to new lenders;

Exceptions to loan policy;

Rate of total portfolio delinquency;

Growth rate of loan portfolio;

Exposure to commercial loan concentrations;

Exposure to “watch list” loans;

Consumer sentiment;

Local economic conditions;

Regulatory risk;

Unemployment, with particular attention paid to local unemployment; and

Vintage risk, with particular attention paid to underwriting procedures at time loans were made.

Deposits. The Company’s primary source of funds is customer deposits. The Bank offers a variety of deposit products in an attempt to remain competitive and respond to changes in consumer demand. The Company relies primarily on its high quality customer service, sales programs, customer referrals, and advertising to attract and retain these deposits. Deposits provide the primary source of funding for the Company’s lending and investment activities and the interest paid for deposits must be carefully managed to control the level of interest expense.

The deposit portfolio decreased $3.5 million, or 2.2%, to $158.8 million as of June 30, 2016 from $162.3 million as of December 31, 2015. Noninterest bearing deposits increased $5.3 million, relative to December 31, 2015, as a result of the reclassification of interest bearing accounts which no longer met the criteria to earn interest. Both certificates of deposit and DDA/NOW accounts declined during the period relative to December 31, 2015. Certificates declined by $0.2 million and DDA/NOW accounts fell by $6.2 million, in addition to the reclassification decrease. Much of the decline in transaction deposits was a shift to MMDA which increased by $2.9 million (5.0%) over the same period. The decrease in certificates of deposit is expected with the Bank’s pricing strategy of setting competitive interest rates, but not necessarily the highest deposit rates in our market. This strategy contributed to an 8 basis points decrease in the average cost of deposits during the first two quarters of 2016 versus the first two quarters of 2015. Management expects these disintermediation driven reductions in cost to continue in 2016 as premium deposit rates are no longer offered by the Bank.

Other Borrowings. Borrowed funds totaled $2.3 million as of June 30, 2016, a $260 thousand, or 10.1%, decrease from the December 31, 2015 balance. The borrowings consist of three loans to the Bancorp from outside creditors. The loans must be repaid from Bancorp cash. As of June 30, 2016, Bancorp’s cash position was $628 thousand.

During the first quarter of 2015, Bancorp was able to renegotiate a substantial portion of the debt due December 29, 2015, achieving terms more favorable to Bancorp. A portion of the $5.0 million note totaling $2.3 million was exchanged for 28,675 shares of Bancorp common stock and a new $1.6 million note with a more favorable interest rate and a maturity date of August 2021.

Management is engaged in the sale of the remainder of the OREO property held at the Bancorp, which will provide additional liquidity to meet required debt servicing payments. The Bancorp is also reviewing other borrowing avenues to ensure there is adequate cash to meet debt servicing needs.

Other Borrowings

(Dollars in thousands)

Description

Balance of
Loan as of
06/30/16

Interest Rate

Frequency
of
Payments

Status

Maturity
Date

Loan 1

477

4.75

Monthly

Amortizing

11/21/2019

Loan 2

333

4.25

Monthly

Amortizing

6/25/2019

Loan 3 (Note B)

1,499

6.00

Monthly

Interest Only

8/4/2021

No FHLB borrowings were outstanding as of June 30, 2016 or December 31, 2015. The Bank had an approved FHLB line-of-credit of $48.7 million as of June 30, 2016. In addition, the Company has collateralized federal fund lines of $8.5 million with the FRB and $1.0 million with Great Lakes Bankers Bank. Neither line was drawn upon as of June 30, 2016. The FHLB line is secured via the pledge of mortgage loans totaling $76.2 million, the Federal Reserve federal fund line is secured via the pledge of $11.1 million of automobile loans, and the Great Lakes Bankers Bank line is unsecured.

Federal Income Taxes. The Company, in December 2014, recaptured the $5.1 million deferred tax asset allowance account, which had been established in 2012 as a write-off of the Company’s deferred tax asset position. As a result of recapturing this allowance account, the Company is now subject to reporting federal income tax expense. For the six month period ended June 30, 2016, the Company recorded income tax expense of $139 thousand versus $88 thousand for the six month period ended June 30, 2015. At June 30, 2016, the Company has a deferred tax asset related to a net operating loss carryforward of approximately $4.8 million.

Concentrations of Credit Risk. Financial institutions such as Citizens Bank generate income primarily through lending and investing activities. The risk of loss from lending and investing activities includes the possibility that losses may occur from the failure of another party to perform according to the terms of the loan or investment agreement. This possibility is known as credit risk.

Lending or investing activities that concentrate assets in a way that exposes the Company to a material loss from any single occurrence or group of occurrences increases credit risk. Diversifying loans and investments to prevent concentrations of risks is one way a financial institution can reduce potential losses due to credit risk. Examples of asset concentrations would include multiple loans made to a single borrower and loans of inappropriate size relative to the total capitalization of the institution. Management believes adherence to its loan and investment policies allows it to control its exposure to concentrations of credit risk at acceptable levels. The Bank’s loan portfolio is concentrated geographically in central Ohio. Management has identified lending for non-owner occupied residential real estate as a lending concentration. Total loans for income generating property totaled $28.4 million at June 30, 2016, which represents 19.3% of the Company’s loan portfolio. Management believes it has the skill and experience to manage any risks associated with this type of lending. Loans in this category are generally paying as agreed without any unusual or unexpected levels of delinquency. The delinquency rate in this category, which is any loan 30 days or more past due, was 2.1% at June 30, 2016. Management has also identified sub-prime loans (less than a 660 credit score) and unsecured loans as concentrations. As of June 30, 2016, loans to sub-prime borrowers totaled $10.1 million (6.9% of total portfolio), with 7.8% of these credits 30 days or more past due. In addition, unsecured loans totaled $4.5 million as of June 30, 2016, or 3.1%, of the loan portfolio, with a delinquency rate, which is any loan 30 days or more past due, of 0.1% at June 30, 2016.

Liquidity and Capital Resources. The Company’s primary source of liquidity is its core deposit base, raised through the Bank’s branch network, along with wholesale sources of funding and its capital base. These funds, along with investment securities, provide the ability to meet the needs of depositors while funding new loan demand and existing commitments.

Cash provided by operating activities was $30 thousand for the first six months of 2016 and $247 thousand for the first six months of 2015. The adjustments to reconcile net income to cash provided by or used in operations during the periods presented consist primarily of accrued interest payable, net gain on sale of other real estate owned, other assets, and adjustments related to loans originated for sale.

The primary investing activity of the Bank is lending, which is funded with cash provided from operating and financing activities, as well as proceeds from payment on existing loans and proceeds from sales and maturities of investment securities.

In considering the more typical investing activities, during the first six months of 2016, $4.0 million of cash was generated from sale of investment securities and $1.9 million was provided by the combination of maturity, pay-downs, or calls of investment securities.

Financing activities consumed a net total of $3.2 million of cash balances during the six month period ended June 30, 2016, due to the drop in deposit account balances during the same period. Proceeds from the issuance of the Bancorp’s common stock totaled $0.6 million.

For the first six months of 2016, total deposits were down $3.5 million, or 2.2%, versus December 31, 2015 as the Company continues to de-emphasize large, collateralized, public fund deposits. For the same period in 2015, total deposits were down $8.9 million. For additional information about cash flows from the Bank’s operating, investing, and financing activities see the consolidated statements of cash flows included in the consolidated financial statements.

Item 3 - Quantitative and Qualitative Disclosures About Market Risk.

There are no matters required to be reported under this item.

Item 4 - Controls and Procedures.

Bancorp’s management carried out an evaluation, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2016, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of that date, in timely alerting them to material information required to be in the Company’s (including its consolidated subsidiary) periodic SEC filings.

There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

FORM 10-Q

Quarter ended June 30, 2016

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings.

There are no matters required to be reported under this item.

Item 1A.

Risk Factors.

There has been no material change in the nature of the risk factors as set forth in the Company’s Annual Report on Form 10-K filed for the year ended December 31, 2015.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

There are no matters required to be reported under this item.

Item 3.

Defaults upon Senior Securities.

There are no matters required to be reported under this item.

Item 4.

Mine Safety Disclosures.

There are no matters required to be reported under this item.

Item 5.

Other Information.

There are no matters required to be reported under this item.

Item 6.

Exhibits.

Exhibit No.		Exhibit

3.1		Amended and Restated Articles of Citizens Independent Bancorp, Inc. incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, filed September 5, 2013 (Registration No. 333-191004).

3.2		Amended and Restated Regulations of Citizens Independent Bancorp, Inc. incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, filed September 5, 2013 (Registration No. 333-191004).

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following financial information from Citizens Independent Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.

Citizens Independent Bancorp, Inc.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CITIZENS INDEPENDENT BANCORP, INC.
	(Registrant)

Date: August 15, 2016	/s/ Daniel C. Fischer
	Daniel C. Fischer
	President and Chief Executive Officer

	/s/ James V. Livesay
Date: August 15, 2016	James V. Livesay EVP and Chief Financial Officer

Citizens Independent Bancorp, Inc. - FORM 10-Q - August 15, 2016

Attached files

Citizens Independent Bancorp, Inc. Reports