UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: June 30, 2015

OR

¨ 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, 2015, the latest practicable date, 663,695 shares of the registrant’s no par value common stock were issued and outstanding.

CITIZENS INDEPENDENT BANCORP

FORM 10-Q

For the Six Month Periods Ended June 30, 2015 and 2014

Table of Contents

	Page
PART I – FINANCIAL INFORMATION	3
ITEM 1 – Financial Statements	3
Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014	3
Consolidated Statements of Income (unaudited) for the three and six month periods ended June 30, 2015 and 2014	4
Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six month periods ended June 30, 2015 and 2014	5
Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the six month period ended June 30, 2015 and 2014	6
Consolidated Statements of Cash Flows (unaudited) for the six month periods ended June 30, 2015 and 2014	7
Notes to the Consolidated Financial Statements	8
ITEM 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk	34
ITEM 4 – Controls and Procedures	34
PART II – OTHER INFORMATION	35
ITEM 1 - Legal Proceedings	35
ITEM 1A – Risk Factors	35
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds	35
ITEM 3 - Defaults upon Senior Securities	35
ITEM 4 - Mine Safety Disclosures	35
ITEM 5 - Other Information	35
ITEM 6 - Exhibits	36
SIGNATURES	37

2 

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

CITIZENS INDEPENDENT BANCORP, INC.

Logan, Ohio

CONSOLIDATED BALANCE SHEETS

	(Dollars in thousands)
	(unaudited)
	June 30, 2015			December 31, 2014
ASSETS
Cash and cash equivalents
Cash and amounts due from depository institutions	$	4,589		$	13,290
Federal funds sold		11,230			3,343
Total cash and cash equivalents		15,819			16,633
Securities available for sale		20,584			31,164
Other investment securities		859			859
Loans		143,447			146,426
Allowance for loan losses		(2,414	)		(3,869	)
Net loans		141,033			142,557
Premises and equipment, net		2,983			3,050
Accrued interest receivable		312			348
Other real estate owned		361			1,068
Other assets		11,719			6,144
TOTAL ASSETS	$	193,670		$	201,823
LIABILITIES
Deposits
Noninterest bearing	$	23,627		$	23,153
Interest bearing		145,417			154,814
Total deposits		169,044			177,967
Borrowed funds		5,352			6,147
Accrued interest payable		1,166			1,492
Other liabilities		1,448			1,380
TOTAL LIABILITIES		177,010			186,986
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, 709,886 shares issued and 655,506 shares outstanding at June 30, 2015 and 638,555 shares issued and 584,175 shares outstanding at December 31, 2014, respectively		13,994			12,297
Stock warrants outstanding; 119,003 warrants issued and 75,597 warrants outstanding as of June 30, 2015 and 119,003 warrants issued and 118,253 outstanding at December 31, 2014, respectively		120			187
Retained earnings		9,710			9,458
Treasury stock, at cost, 54,380 shares at June 30, 2015 and December 31, 2014, respectively		(6,590	)		(6,590	)
Accumulated other comprehensive income (loss)		(574	)		(515	)
TOTAL SHAREHOLDERS' EQUITY		16,660			14,837
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	193,670		$	201,823

See notes to consolidated financial statements

3 

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,
	2015		2014			2015			2014
INTEREST INCOME
Interest and fees on loans	$	1,941	$	1,832		$	3,835		$	3,731
Interest and dividends on investment securities		109		175			234			380
Interest on federal funds sold		6		7			13			16
TOTAL INTEREST INCOME		2,056		2,014			4,082			4,127
INTEREST EXPENSE
Interest on deposits		223		305			472			627
Interest on borrowed funds		91		113			190			226
TOTAL INTEREST EXPENSE		314		418			662			853
NET INTEREST INCOME		1,742		1,596			3,420			3,274
Provision for loan losses		-		(186	)		-			(186	)
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,742		1,782			3,420			3,460
NONINTEREST INCOME
Service charges		103		113			188			226
Net gain on sale of securities		58		-			148			-
Net gain (loss) on sale of other real estate owned		1		(4	)		(45	)		371
Credit card income and fees		90		86			173			167
Other		58		85			123			141
TOTAL NONINTEREST INCOME		310		280			587			905
NONINTEREST EXPENSE
Salaries and employee benefits		762		853			1,574			1,711
Net occupancy and equipment expense		224		269			477			599
Other real estate owned expense		35		77			60			157
FDIC insurance expense		46		105			126			240
Legal and professional fees		100		85			198			192
Data processing		92		85			186			162
Advertising		55		51			97			97
Examinations and audits		79		43			156			82
Telephone		22		26			42			46
Other operating expenses		437		272			751			582
TOTAL NONINTEREST EXPENSE		1,852		1,866			3,667			3,868
INCOME BEFORE INCOME TAXES		200		196			340			497
Income tax expense		51		-			88			-
NET INCOME	$	149	$	196		$	252		$	497
Basic earnings per common share	$	0.23	$	0.35		$	0.40		$	0.99
Diluted earnings per common share	$	0.23	$	0.34		$	0.40		$	0.97

See notes to consolidated financial statements

4 

CITIZENS INDEPENDENT BANCORP, INC.

Logan, Ohio

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	(Dollars in thousands)
	Three Months Ended
	June 30,
	2015			2014
Net income	$	149		$	196
Other comprehensive income (loss), net of tax:
Unrealized net holding gain (loss) on securities available for sale, net of income taxes of $(57) and $47 for the three month periods ended June 30, 2015 and 2014, respectively		(110	)		92
Reclassification for gains recognized on sale of securities available for sale, net of income taxes of $19 for the three month period ended June 30, 2015		(39	)		-
Other comprehensive income (loss)		(149	)		92
Comprehensive income	$	-		$	288

	Six Months Ended
	June 30,
	2015			2014
Net income	$	252		$	497
Other comprehensive income (loss), net of tax:
Unrealized net holding gain (loss) on securities available for sale, net of income taxes of $20 and $79 for the six month periods ended June 30, 2015 and 2014, respectively		39			152
Reclassification for gains recognized on sale of securities available for sale, net of income taxes of $50 for the six month period ended June 30, 2015		(98	)		-
Other comprehensive income (loss)		(59	)		152
Comprehensive income	$	193		$	649

See notes to consolidated financial statements

5 

CITIZENS INDEPENDENT BANCORP, INC.

Logan, Ohio

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Unaudited)

	(Dollars in thousands)
	Six Months Ended
	June 30,
	2015			2014
Balance at beginning of period	$	14,837		$	5,626
Exercise of common stock warrants - 42,656 shares in 2015 and 0 shares in 2014		974			-
Issuance of common stock warrants - 119,003 warrants in 2014		-			188
Issuance of common stock - 28,675 shares in 2015 and 238,057 shares in 2014		656			3,030
Net income		252			497
Other comprehensive income (loss)		(59	)		152
Balance at end of period	$	16,660		$	9,493

See notes to consolidated financial statements

6 

CITIZENS INDEPENDENT BANCORP, INC.

Logan, Ohio

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	(Dollars in thousands)
	Six Months Ended
	June 30,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		252			497
Adjustment to reconcile net income to net cash provided by (used in) operating activities
Provision for loan losses		-			(186	)
Depreciation and amortization		143			182
Deferred income taxes		88			-
Investment securities amortization (accretion), net		76			(2	)
Provision for loss on real estate owned		-			74
Change in value of bank owned life insurance		(4	)		-
Net (gain) loss on sale of other real estate owned		45			(371	)
(Gain) loss on sale of investments		(148	)		-
Net (gain) loss on disposition of premises and equipment		-			20
Net change in:
Accrued interest receivable		36			94
Accrued interest payable		(326	)		(281	)
Other assets		17			197
Other liabilities		68			(107	)
Net cash provided by operating activities		247			117
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available for sale securities		(3,084	)		(5,070	)
Proceeds from maturities of available for sale securities		2,413			2,168
Proceeds from sales of available for sale securities		5,587			-
Net change in loans		1,417			2,470
Proceeds from sale of other real estate owned		769			2,289
Purchases of premises and equipment		(76	)		(104	)
Net cash provided by investing activities		7,026			1,753
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits		(8,923	)		(92	)
Payments on borrowed funds		(138	)		(108	)
Proceeds from issuance of common stock and warrants		974			3,218
Net cash provided by (used in) financing activities		(8,087	)		3,018
Net increase (decrease) in cash and cash equivalents		(814	)		4,888
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		16,633			15,004
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	15,819		$	19,892
Supplemental Disclosure of Cash Flows
Cash paid during the period for:
Interest	$	988		$	1,135
Taxes	$	-		$	-
Supplemental Schedule of Noncash Investing and Financing Activities
Transfer of loans to other real estate owned	$	107		$	462
Short term debt converted to common stock	$	656		$	-
Receivable from sale of available for sale securities	$	5,655		$	-

See notes to consolidated financial statements

7 

CITIZENS INDEPENDENT BANCORP, INC.

LOGAN, OHIO

Notes to 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. 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.

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 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, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

The accounting and reporting policies of the Bancorp and the Bank conform to GAAP and to general practices followed within the banking industry. Securities transactions have been accounted for on a trade date basis, wherein any gains or losses resulting from the transaction are recognized as of the date of the respective trade.

The consolidated balance sheet as of December 31, 2014 has been extracted from audited financial statements included in the Company’s 2014 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, 2014 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 entitle the holder to purchase the Company’s common stock at 90% of the prior month’s closing book value. These warrants are valid for a period of two years and expire June 25, 2016. Allocated value of these common stock warrants is $187 thousand based on the Black Scholes methodology.

NOTE 2 - EARNINGS PER COMMON SHARE

Earnings per common share are net income 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, 2015 and 2014 follow:

8 

	(Dollars in thousands, except per share data)
	Three Months Ended
	June 30,
	2015		2014
Net income	$	149	$	196
Weighted average common shares outstanding		648,397		560,485
Basic earnings per common share	$	0.23	$	0.35
Total shares and warrants		656,668		572,319
Diluted earnings per common share	$	0.23	$	0.34

	Six Months Ended
	June 30,
	2015		2014
Net income	$	252	$	497
Weighted average common shares outstanding		626,245		500,563
Basic earnings per common share	$	0.40	$	0.99
Total shares and warrants		636,097		512,430
Diluted earnings per common share	$	0.40	$	0.97

NOTE 3 - INVESTMENT SECURITIES

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

	(Dollars in thousands)
	June 30, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. government securities	$	2,053	$	6	$	-		$	2,059
U.S. government federal agencies		9,681		8		(32	)		9,657
State and local governments		2,809		5		(28	)		2,786
Mortgage backed securities		6,140		10		(68	)		6,082
Total	$	20,683	$	29	$	(128	)	$	20,584

	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. government securities	$	5,049	$	18	$	-		$	5,067
U.S. government federal agencies		13,905		31		(67	)		13,869
State and local governments		1,029		7		(1	)		1,035
Mortgage backed securities		11,191		67		(65	)		11,193
Total	$	31,174	$	123	$	(133	)	$	31,164

9 

The following is a summary of maturities of securities available-for-sale as of June 30, 2015:

	(Dollars in thousands)
	Securities available for sale
	Amortized Cost		Fair Value
Amounts maturing in:
One year or less	$	1,463	$	1,467
After one year through five years		10,558		10,544
After five years through ten years		3,219		3,195
After ten years		5,443		5,378
Total	$	20,683	$	20,584

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

During the first two quarters of 2015, the Company sold available-for-sale securities, principally U.S. Treasury and Agencies, totaling $5.6 million with a weighted average yield of 1.81% and weighted average maturity of 3.6 years and reinvested in $3.0 million of tax exempt municipal bonds and U.S. Agencies with a weighted average yield of 2.46% and weighted average maturity of 6.5 years. A portion of the securities portfolio was sold as of June 30, 2015; however, cash had not been received as of that date. The receivable is currently in Other Assets. The net realized gain on these transactions was $148 thousand.

Investment securities with a carrying amount of approximately $15,319,000 and $28,793,000 were pledged to secure deposits as required or permitted by law at June 30, 2015 and December 31, 2014, respectively.

Information pertaining to securities with gross unrealized losses at June 30, 2015 and December 31, 2014, aggregated by investment category and length of time that an individual security has 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, 2015
U.S. government federal agencies	$	4,307	$	(18	)	$	1,988	$	(14	)	$	6,295	$	(32	)
State and local governments		1,752		(28	)		-		-			1,752		(28	)
Mortgage backed securities		1,711		(9	)		2,144		(59	)		3,855		(68	)
Total	$	7,770	$	(55	)	$	4,132	$	(73	)	$	11,902	$	(128	)
December 31, 2014
U.S. government federal agencies	$	3,088	$	(9	)	$	4,979	$	(58	)	$	8,067	$	(67	)
State and local governments		578		(1	)		-		-			578		(1	)
Mortgage backed securities		1,985		(8	)		3,684		(57	)		5,669		(65	)
Total	$	5,651	$	(18	)	$	8,663	$	(115	)	$	14,314	$	(133	)

10 

The investment portfolio contains unrealized losses of direct obligations of U.S. securities, including 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, and debt obligations of a U.S. state or political subdivision. 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 (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 tables provide information on the activity in the allowance for loan losses by the respective loan portfolio segment for the periods indicated:

	(Dollars in thousands)
	Six Months Ended					Three Months Ended
	June 30,		June 30,			June 30,		June 30,
	2015		2014			2015		2014
Allowance at beginning of period	$	3,869	$	4,384		$	3,443	$	4,349
Provision for credit losses		-		(186	)		-		(186	)
Charge-offs:
Commercial		1,422		408			1,001		401
Real Estate		42		38			38		10
Consumer		59		136			30		72
Total charge-offs	$	1,523	$	582		$	1,069	$	483
Recoveries:
Commercial		39		248			27		204
Real Estate		-		5			-		-
Consumer		29		31			13		16
Total Recoveries		68		284			40		220
Ending allowance	$	2,414	$	3,900		$	2,414	$	3,900

The following tables present 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, 2015
Commercial	$	1,857	$	81,618	$	138	$	1,998	$	1,995	$	83,616
Real estate		115		38,547		136		540		251		39,087
Consumer		155		20,594		13		150		168		20,744
Total	$	2,127	$	140,759	$	287	$	2,688	$	2,414	$	143,447
December 31, 2014
Commercial	$	2,422	$	77,651	$	1,069	$	10,338	$	3,491	$	87,989
Real estate		124		38,091		71		665		195		38,756
Consumer		169		19,407		14		274		183		19,681
Total	$	2,715	$	135,149	$	1,154	$	11,277	$	3,869	$	146,426

11 

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, 2015 and December 31, 2014.

Commercial Credit Exposure

Credit risk profile by credit worthiness category

	(Dollars in thousands)
	Commercial Mortgage				Commercial Other
Category	06/30/15		12/31/14		06/30/15		12/31/14
Pass	$	62,839	$	61,047	$	12,142	$	13,014
5		1,462		4,524		1,735		344
6		5,315		8,131		123		230
7		-		699		-		-
Total	$	69,616	$	74,401	$	1 4,000	$	13,588

Consumer Credit Exposure

Credit risk by credit worthiness category

			(Dollars in thousands)
	Residential				Consumer				Consumer				Consumer
	Real Estate				Equity				Auto				Other
Category	06/30/15		12/31/14		06/30/15		12/31/14		06/30/15		12/31/14		06/30/15		12/31/14
Pass	$	38,060	$	37,729	$	7,979	$	6,945	$	10,961	$	10,649	$	1,640	$	1,888
5		369		430		75		77		55		54		-		-
6		658		597		-		15		34		53		-		-
7		-		-		-		-		-		-		-		-
Total	$	39,087	$	38,756	$	8,054	$	7,037	$	11,050	$	10,756	$	1,640	$	1,888

12 

Loans evaluated for impairment include loans classified as troubled debt restructurings and non-performing commercial, mortgage and consumer loans. The following tables set 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, 2015
With no related allowance recorded:
Commercial mortgage	$	1,084	$	1,716	$	-
Commercial other		-		-		-
Residential real estate		-		-		-
Consumer equity		-		-		-
Consumer auto		-		-		-
Subtotal		1,084		1,716		-
With an allowance recorded:
Commercial mortgage	$	914	$	1,018	$	138
Commercial other		-		-		-
Residential real estate		540		554		136
Consumer equity		150		150		13
Consumer auto		-		-		-
Subtotal		1,604		1,722		287
Total	$	2,688	$	3,438	$	287

			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
December 31, 2014
With no related allowance recorded:
Commercial mortgage	$	7,027	$	7,368	$	-
Commercial other		67		67		-
Residential real estate		223		278		-
Consumer equity		15		16		-
Consumer auto		106		109		-
Subtotal		7,438		7,838		-
With an allowance recorded:
Commercial mortgage		3,100		3,191		925
Commercial other		144		168		144
Residential real estate		442		449		71
Consumer equity		153		153		14
Consumer auto		-		-		-
Subtotal		3,839		3,961		1,154
Total	$	11,277	$	11,799	$	1,154

13 

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
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
Six Month Period
Ended June 30, 2014
Commercial:
Mortgage	$	7,696	$	70	$	2,272	$	-	$	9,968	$	70
Other		200		1		335		-		535		1
Residential real estate		266		2		563		13		829		15
Consumer:
Equity		95		-		158		5		253		5
Auto		112		1		3		-		115		1
Other		-		-		-		-		-		-
Total	$	8,369	$	74	$	3,331	$	18	$	11,700	$	92

14 

					(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, 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
Three Month Period
Ended June 30, 2014
Commercial:
Mortgage	$	8,131	$	35	$	2,232	$	-	$	10,363	$	35
Other		244		1		175		-		419		1
Residential real estate		120		1		618		7		738		8
Consumer:
Equity		95		-		155		2		250		2
Auto		102		-		-		-		102		-
Other		-		-		-		-		-		-
Total	$	8,692	$	37	$	3,180	$	9	$	11,872	$	46

15 

The following table summarizes 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
Six months ended June 30, 2015
Commercial mortgage		1	$	169	$	169
Residential real estate		2		166		166
Consumer auto		6		40		40
Consumer other		-		-		-
Total		9	$	375	$	375
Six months ended June 30, 2014
Commercial mortgage		3	$	310	$	310
Residential real estate		2		187		187
Consumer auto		1		1		1
Consumer other		1		-		-
Total		7	$	498	$	498

			Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding
	of		Recorded		Recorded
	TDRs		Investment (1)		Investment
Three months ended June 30, 2015
Commercial mortgage	$	-	$	-	$	-
Residential real estate		2		166		166
Consumer auto		2		21		21
Consumer other		-		-		-
Total		4	$	187	$	187
Three months ended June 30, 2014
Commercial mortgage		-		-		-
Residential real estate		-		-		-
Consumer auto		-		-		-
Consumer other		-		-		-
Total		-	$	-	$	-

(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, 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, 2015 loans were modified by either a reduction in 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.

During the six month period ended June 30, 2014 loans were modified by either a reduction in rates or a change in the contractual maturity date of the note. Two loans were modified with reduced interest rates and the contractual maturity date of five loans was extended.

16 

Loans modified in 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 in 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 are no loans which were modified as a TDR within the previous twelve months that have subsequently defaulted as of June 30, 2015.

The following table presents the loan portfolio by class summarized by aging categories, at June 30, 2015 and December 31, 2014:

													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, 2015
Commercial:
Mortgage	$	30	$	253	$	169	$	452	$	69,164	$	69,616	$	-
Other		-		-		-		-		14,000		14,000		-
Residential real estate		136		-		35		171		38,916		39,087		-
Consumer:										-
Equity		60		-		-		60		7,994		8,054		-
Auto		69		11		-		80		10,970		11,050		-
Other		4		7		9		20		1,611		1,640		9
Total	$	299	$	271	$	213	$	783	$	142,655	$	143,447	$	9
December 31, 2014
Commercial:
Mortgage	$	1,345	$	238	$	4,924	$	6,507	$	67,894	$	74,401	$	-
Other		17		144		20		181		13,407		13,588		-
Residential real estate		470		186		27		683		38,073		38,756		-
Consumer:
Equity		-		-		-		-		7,037		7,037		-
Auto		20		6		19		45		10,711		10,756		-
Other		8		6		10		24		1,864		1,888		-
Total	$	1,860	$	580	$	5,000	$	7,440	$	138,986	$	146,426	$	-

17 

The following summarizes by loan class, the loans on nonaccrual status at June 30, 2015 and December 31, 2014:

	(Dollars in thousands)
	June 30,		December 31,
	2015		2014
Commercial:
Mortgage	$	1,373	$	7,200
Other		-		169
Residential real estate		372		307
Consumer:
Equity		-		15
Auto		21		38
Other		-		-
Total	$	1,766	$	7,729

NOTE 5 – BORROWINGS

Bancorp renegotiated a substantial portion of the existing $5.0 million debt due December 29, 2015, achieving terms more favorable to Bancorp. The $5.0 million note was effectively split into a $2.7 million note and a $2.3 million note. The $2.3 million was exchanged for 28,675 shares of Citizens Independent Bancorp common stock (valued at $22.86 per share) and a new $1.6 million note with a more favorable interest rate and a maturity date of August 2021. The $2.7 million note maintains the original terms and continues to be secured by property held by the Bancorp.

Management is actively 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 pursuing other borrowing avenues to ensure there is adequate cash to meet debt servicing needs.

Description	Balance of Loan as of 06/30/15		Interest Rate			Frequency of Payments	Status	Maturity Date
Loan 1	$	2,670,683		8.00	%	Monthly	Interest Only	12/29/2015
Loan 2	$	601,788		4.75	%	Monthly	Amortizing	11/21/2019
Loan 3	$	435,416		4.25	%	Monthly	Amortizing	6/26/2019
Loan 4	$	1,644,547		6.00	%	*	Deferred I/O	8/4/2021

* Monthly interest payments are deferred until August 2015

NOTE 6 – EMPLOYEE BENEFIT PLANS

The bank has a qualified noncontributory 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,
	2015			2014			2015			2014
Net periodic pension cost:
Interest cost on projected benefit obligation	$	14		$	13		$	27		$	26
Expected return on plan assets		(11	)		(10	)		(22	)		(20	)
Settlement loss		-			-			-			-
Net amortization of deferral of (gains) losses		17			12			34			24
Net periodic pension cost	$	20		$	15		$	39		$	30

18 

NOTE 7 - 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 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 write-downs 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.

19 

The following are assets and liabilities that were accounted for or disclosed at fair value on a recurring 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, 2015
Assets:
Available for sale securities:
U.S. government securities	$	2,059	$	2,059	$	-	$	-
U.S. government federal agencies		9,657		-		9,657		-
State and local governments		2,786		-		2,786		-
Mortgage backed securities		6,082		-		6,082		-
Total securities available for sale	$	20,584	$	2,059	$	18,525	$	-
December 31, 2014
Assets:
Securities available for sale
U.S. government securities	$	5,067	$	5,067	$	-	$	-
U.S. government federal agencies		13,869		-		13,869		-
State and local governments		1,035		-		1,035		-
Mortgage backed securities		11,193		-		11,193		-
Total securities available for sale	$	31,164	$	5,067	$	26,097	$	-

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, 2015, 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:

20 

			(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, 2015
Assets:
Impaired loans
Commercial mortgage	$	1,860	$	-	$	-	$	1,860
Commercial other		-		-		-		-
Residential real estate		404		-		-		404
Consumer equity		137		-		-		137
Consumer auto		-		-		-		-
Total impaired loans		2,401		-		-		2,401
Other real estate owned
Residential		63		-		-		63
Commercial		298		-		-		298
Total other real estate owned	$	361	$	-	$	-	$	361
December 31, 2014
Assets:
Impaired loans
Commercial mortgage	$	9,202	$	-	$	-	$	9,202
Commercial other		67		-		-		67
Residential real estate		594		-		-		594
Consumer equity		154		-		-		154
Consumer auto		106		-		-		106
Total impaired loans		10,123		-		-		10,123
Other real estate owned
Residential		200		-		-		200
Commercial		868		-		-		868
Total other real estate owned	$	1,068	$	-	$	-	$	1,068

21 

The following methods and assumptions were used to estimate the fair value disclosures for other financial instruments as of June 30, 2015 and December 31, 2014:

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. Impaired loans are estimated to average 10% less than recorded investment.

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

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:

22 

					Fair Value Measurements Using
					Quoted
	(Dollars in thousands)				Prices in
					Active
					Markets		Other		Significant
					for Identical		Observable		Unobservable
	Carrying		Fair		Assets/Liabilities		Inputs		Inputs
	Amount		Value		(Level 1)		(Level 2)		(Level 3)
June 30, 2015
Financial assets:
Cash and cash equivalents	$	15,819	$	15,819	$	-	$	15,819	$	-
Securities available for sale		20,584		20,584		2,059		18,525		-
Other investment securities		859		859		-		-		859
Loans, net		141,033		144,671		-		-		144,671
Accrued interest receivable		312		312		-		-		312
Financial liabilities:
Noninterest-bearing deposits	$	23,627	$	23,627	$	-	$	23,627	$	-
Interest-bearing deposits		145,417		146,209		-		146,209		-
Borrowed funds		5,352		5,352		-		5,352		-
Accrued interest payable		1,166		1,166		-		-		1,166
December 31, 2014
Financial assets:
Cash and cash equivalents	$	16,633	$	16,633	$	-	$	16,633	$	-
Securities available for sale		31,164		31,164		5,067		26,097		-
Other investment securities		859		859		-		-		859
Loans, net		142,557		145,895		-		-		145,895
Accrued interest receivable		348		348		-		-		348
Financial liabilities:
Noninterest-bearing deposits	$	23,153	$	23,153	$	-	$	23,153	$	-
Interest-bearing deposits		154,814		155,735		-		155,735		-
Borrowed funds		6,147		6,147		-		6,147		-
Accrued interest payable		1,492		1,492		-		-		1,492

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

23 

Item 2 – Management 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 Discussion and Analysis as of June 30, 2015

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 and the Ohio Division of Financial Institutions. Holding Company is regulated by the Federal Reserve Bank of Cleveland.

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 two limited service locations. The Bank maintains drive-up facilities as well as ATM equipment at all branches. 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 a publicly available Consent Order with the FDIC and a Written Agreement with the DFI (collectively referred to as the Orders) which contain a number of listed deliverables and filing deadlines. Significant among the required actions not yet met is the completion of a capital plan which will result in the Bank meeting and maintaining its level of Tier 1 capital as a percentage of its total assets at a minimum of 8.50% and its level of qualifying total capital as a percentage of risk-weighted assets at a minimum of 11.50%. With the completion of the Company’s capital campaign and subsequent investment in the Bank, the estimated ratio of Tier 1 capital to total assets is 8.47% and the ratio of total capital to risk-weighted assets is 13.93%.

This Management 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 loss 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, 2015, the Company earned net income of $252 thousand or $0.40 per share, compared to net income of $497 thousand or $0.99 per share for the six months ended June 30, 2014.

Key items affecting the Company’s results for the first six months of 2015:

· Net interest income increased by $146 thousand year-over-year for the six months ended June 30, 2015 from the six months ended June 30, 2014. A $45 thousand decline in interest income was offset by a $191 thousand decrease in interest expense.

24 

· Noninterest income decreased by $318 thousand to $587 thousand for the six months ended June 30, 2015 from the six months ended June 30, 2014. The period to period decrease can be attributed to lower gains on the sale of repossessed assets. Sales of such assets resulted in a loss of $45 thousand for the six month period in 2015 versus gains of $371 thousand for the six months period in 2014.

· Noninterest expense dropped $201 thousand for the six months ended June 30, 2015 in comparison to the six months ended June 30, 2014, totaling $3.7 million and $3.9 million respectively.

· Non-performing loans were lower by $5.9 million at June 30, 2015 relative to December 31, 2014, totaling $1.8 million and $7.7 million respectively. The period over period activity primarily consisted of the pay-off of a $2.9 million credit, and a $0.9 million credit returning to accrual status, plus $1.4 million in net charge-offs.

· Gross loans declined $3.0 million or 2.0% to $143.4 million as of June 30, 2015 from $146.4 million as of December 31, 2014. The decline results from loan originations of $14.9 million offset by $17.9 million in principal reductions received during the first six months of 2015. Non-performing loans made up $5.9 million of these principal reductions.

· Deposits were down $9.0 million from year end balances at $169.0 million as of June 30, 2015 from $178.0 million as of December 31, 2014.

· Shareholders’ equity at the Company increased $1.8 million or 12.3% to $16.7 million as of June 30, 2015 from the December 31, 2014 equity position. This increase was due to net proceeds from exercise of outstanding common stock warrants totaling $974 thousand, the issuance of $656 thousand of common stock to satisfy an existing debt, and net income of $252 thousand with a decrease of $59 thousand in other comprehensive income resulting from the recognition in equity of an unrealized loss on the Company’s available for sale investment portfolio during the first six months of 2015. Tier I Leverage Capital and Total Risk Based Capital at the Bank were 8.47% and 13.93%, respectively, as of June 30, 2015 and 8.11% and 13.39% as of December 31, 2014. The Tier 1 Leverage Capital ratio is still under the 8.5% required under the Orders.

Comparison of Results of Operations for the Six Months Ended June 30, 2015 and June 30, 2014

For the six months ended June 30, 2015, the Company earned net income of $252 thousand, a $245 thousand decrease from the $497 thousand net income reported as of June 30, 2014. The decrease in profitability can primarily be attributed to a $186 thousand negative loan loss provision (recovery) taken in 2014, versus no provision activity in 2015, decreases in noninterest income of $318 thousand, partially offset by an increase in net interest income of $146 thousand and a decrease in noninterest expense of $201 thousand income during the six months ended June 30, 2015 in comparison to the six months ended June 30, 2014. Federal income tax provisions were $88 thousand for the first six months of 2015 versus no income tax expense provision during the comparable period in 2014. Net interest income for the six months ended June 30, 2015 was $3.4 million, an increase of $146 thousand or 4.5% from the six months ended June 30, 2014.

25 

Distribution of Assets, Liabilities, and Shareholders' Equity

For the six months ended June 30,

	(Dollars in thousands)
	2015							2014
	Average Balance		Interest		Yield / Rate			Average Balance		Interest		Yield / Rate
Interest-Earning Assets:
Loans receivable (1), (2)	$	141,728	$	3,835		5.41	%	$	143,895	$	3,731		5.19	%
Securities (3)		26,067		217		1.66	%		36,453		362		1.99	%
Fed funds sold		11,426		13		0.23	%		15,531		16		0.21	%
FHLB stock		859		17		3.96	%		859		18		4.19	%
Total interest-earning assets		180,080		4,082		4.53	%		196,738		4,127		4.20	%
Non-interest-earning assets		17,151							7,793
Total Assets	$	197,231						$	204,531
Interest-Bearing Liabilities
Interest-bearing deposits		150,268		472		0.63	%		164,392		627		0.76	%
Other borrowings		5,534		190		6.87	%		6,310		226		7.16	%
Total interest-bearing liabilities		155,802		662		0.85	%		170,702		853		1.00	%
Non-interest-bearing liabilities		22,525							22,105
Total including non-interest-bearing demand deposits		178,327		662					192,807		853
Other non-interest liabilities		2,788							3,369
Total Liabilities		181,115							196,176
Shareholders' equity		16,116							8,355
Total liabilities and shareholders' equity	$	197,231						$	204,531
Net interest income; interest rate spread			$	3,420		3.68	%			$	3,274		3.20	%
Net interest margin						3.80	%						3.33	%
Average interest-earning assets to average interest-bearing liabilities						115.58	%						115.25	%

⁽¹⁾ Loan fees are immaterial amounts.

⁽²⁾ Non-accrual loans are included in average loan balance.

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

Interest income for the six months ended June 30, 2015 was $4.1 million, a $45 thousand or 1.1% decrease from that earned during the six months ended June 30, 2014. The yield on earning assets increased 33 basis points to 4.53% for the six months ended June 30, 2015 from 4.20% for the six months ended June 30, 2014. Interest income earned from the loan portfolio increased $104 thousand or 2.8% to $3.8 million for the six months ended June 30, 2015 from $3.7 million for the six months ended June30, 2014. The increase in interest income from the loan portfolio can be attributed to a 22 basis point increase in the yield, from 5.19% for the six months ended June 30, 2014 to 5.41% for the six months ended June 30, 2015.

Interest income from the investment portfolio declined $145 thousand or 40.1% to $217 thousand for the six months ended June 30, 2015 from $362 thousand for the six months ended June 30, 2014. Average assets for the securities portfolio declined $10.4 million and the yield decreased by 33 basis points. 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 versus no securities sales or gains during the same period in 2014.

26 

Interest expense for the six months ended June 30, 2015 was $662 thousand, a $191 thousand or 22.4% decrease from the $853 thousand in interest expense for the six months ended June 30, 2014. Interest expense for deposits declined $155 thousand or 24.7% to $472 thousand for the six months June 30, 2015. Average balances of interest bearing deposits decreased by $14.1 million or 8.6%, declining to $150.3 million at June 30, 2015 from $164.4 million at June 30, 2014.

Interest expense for other borrowings was $190 thousand for the six months ended June 30, 2015 and $226 thousand for the six months ended June 30, 2014. 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. Savings in borrowing expense due to the transaction were $33 thousand during the first six months of 2015 compared to the same period in 2014.

Net interest margins continue to be under heavy pressure as higher yielding loans reprice downward, are refinanced at lower rates, or pay off early. During the first six months of 2015, loans totaling $2.7 million have either repriced or refinanced at interest rates averaging 208 basis points below original rates. Although the principal amount of repricing loans is lower than last year, the repricing gap is larger by 50 basis points. 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 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 66.3% 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, 2015 and June 30, 2014

For the three months ended June 30, 2015, the Company earned net income of $149 thousand, a $47 thousand decrease from the $196 thousand net income reported for the three months ended June 30, 2014. Net interest income increased $146 thousand (9.2%) during the second quarter of 2015 versus the second quarter of 2014, noninterest income increased $30 thousand, and noninterest expense decreased $14 thousand. Negative factors during the same time period were the $186 thousand negative loan loss provision (recovery) recorded in the second quarter of 2014 relative to no loan provision activity during the second quarter of 2015, and federal income tax expense of $51 thousand in 2015 versus no federal income tax expense during 2014.

27 

Distribution of Assets, Liabilities, and Shareholders' Equity

For the three months ended June 30,

	(Dollars in thousands)
	2015							2014
	Average Balance		Interest		Yield / Rate			Average Balance		Interest		Yield / Rate
Interest-Earning Assets:
Loans receivable (1), (2)	$	140,943	$	1,941		5.51	%	$	142,831	$	1,832		5.13	%
Securities (3)		24,158		100		1.66	%		38,282		166		1.73	%
Fed funds sold		11,733		6		0.20	%		13,456		7		0.21	%
FHLB stock		859		9		4.19	%		859		9		4.19	%
Total interest-earning assets		177,693		2,056		4.63	%		195,428		2,014		4.12	%
Non-interest-earning assets		17,138							6,756
Total Assets	$	194,831						$	202,184
Interest-Bearing Liabilities
Interest-bearing deposits		147,031		223		0.61	%		161,799		305		0.75	%
Other borrowings		5,389		91		6.75	%		6,275		113		7.20	%
Total interest-bearing liabilities		152,420		314		0.82	%		168,074		418		0.99	%
Non-interest-bearing liabilities		23,067							21,566
Total including non-interest-bearing demand deposits		175,487		314					189,640		418
Other non-interest liabilities		2,681							3,247
Total Liabilities		178,168							192,887
Shareholders' equity		16,663							9,297
Total liabilities and shareholders' equity	$	194,831						$	202,184
Net interest income; interest rate spread			$	1,742		3.81	%			$	1,596		3.13	%
Net interest margin						3.92	%						3.27	%
Average interest-earning assets to average interest-bearing liabilities						116.58	%						116.27	%

⁽¹⁾ Loan fees are immaterial amounts.

⁽²⁾ Non-accrual loans are included in average loan balance.

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

Interest income for the three months ended June 30, 2015 was $2.1 million, a $42 thousand or 2.1% increase from that earned during the three months ended June 30, 2014. The yield on earning assets improved 51 basis points to 4.63% for the three months ended June 30, 2015 from 4.12% for the three months ended June 30, 2014. Interest income earned from the loan portfolio increased $109 thousand or 5.9% to $1.9 million for the three months ended June 30, 2015 from $1.8 million for the three months ended June 30, 2014. The increase in interest income from the loan portfolio can be attributed to the decrease in nonaccrual loans, falling from $7.9 million at June 30, 2014 to $1.8 million at June 30, 2015.

Interest income from the investment portfolio declined $66 thousand or 39.8% to $100 thousand for the three months ended June 30, 2015 from $166 thousand for the three months ended June 30, 2014. Average assets for the securities portfolio declined $14.1 million and the yield decreased by 7 basis points. Net securities sales of $12.3 million have been executed since June 30, 2014.

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Interest expense for the three months ended June 30, 2015 was $314 thousand, a $104 thousand or 24.9% decrease from the $418 thousand in interest expense for the three months ended June 30, 2014. Interest expense for deposits declined $82 thousand or 26.9% to $223 thousand for the three months June 30, 2015. Average balances of interest bearing deposits decreased by $14.8 million or 9.1%, declining to $147.0 million at June 30, 2015 from $161.8 million at June 30, 2014. The Company continues to trim the public deposits by offering competitive, but not exorbitant, deposit rates.

Interest expense for other borrowings was $91 thousand for the three months ended June 30, 2015 and $113 thousand for the three months ended June 30, 2014. 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. Savings in borrowing expense due to the transaction were $21 thousand during the second quarter of 2015 compared to the same period in 2014.

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, decreased $318 thousand, or 35.1%, to $587 thousand for the six months ended June 30, 2015 from $905 thousand for the six months ended June 30, 2014. The period-over-period decrease in noninterest income can primarily be attributed to losses of $45 thousand recognized from the sale of other repossessed assets during the first six months of 2015 versus gains of $371 thousand recognized during the first six months of 2014. The following is a discussion of other significant period over period changes in other material noninterest income categories:

· Income from service fees decreased $38 thousand or 16.8% to $188 thousand for the six months ended June 30, 2015 from $226 thousand for the six months ended June 30, 2014. The decrease can primarily be attributed to a $40 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 losses of $45 thousand for the six months ended June 30, 2015, an unfavorable variance of $416 thousand from the gains on sale of OREO properties recognized during the six months ended June 30, 2014. During the first six months of 2015, the Company sold 7 properties with a carrying value of $787 thousand versus 19 properties with a carrying value of $1,953 thousand last year.

· Other income declined $18 thousand or 12.8% during the first six months of 2015 to $123 thousand. The decline can primarily be attributed to a $17 thousand decline in income associated with OREO properties sold in the interim.

For the three months ended June 30, 2015 noninterest income increased by $30 thousand, or 10.7%. The period over period increase in noninterest income can primarily be attributed to $58 thousand in gains recognized from the sale of securities. The following is a discussion of other significant period over period changes in other material noninterest income categories:

· Income from service fees decreased $10 thousand or 8.9% to $103 thousand for the three months ended June 30, 2015 from $113 thousand for the three months ended June 30, 2014. The decrease can primarily be attributed to a $13 thousand period over period decrease in revenue from the Bank’s overdraft protection product, resulting from a change in the way we process overdrafts.

· Gains on sale of investment securities totaled $58 thousand for the three months ended June 30, 2015 versus no activity for the comparable period in 2014.

· Other income decreased $27 thousand or 31.8% during the three month period ending June 30, 2015 to $58 thousand. The change can primarily be attributed to a $12 thousand decline in income associated with OREO properties sold in the interim, and a $15 thousand decline in mortgage broker commissions earned.

Noninterest Expense. Noninterest expense, which consists primarily of personnel, occupancy, equipment and other operating expenses, declined $201 thousand, or 5.2%, between the six month periods ended June 30, 2015 and June 30, 2014. The decrease 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:

· Salary and employee benefit expense declined by $137 thousand, or 8.0%, to $1.6 million for the six months ended June 30, 2015 relative to the six months ended June 30, 2014 reflecting the savings realized from reductions, and reallocations, of personnel and a change in the Bank’s policy towards employee paid time off.

· Net occupancy and equipment expenses decreased by $122 thousand, or 20.4%, during the six months ended June 30, 2015. Costs associated with an OREO property since sold amounted to $72 thousand of the change, while renegotiated lease payments on two branches contributed an additional $25 thousand in savings.

29 

· Expenses on other real estate owned were $97 thousand lower for the six months ended June 30, 2015 relative to the period ended June 30, 2014. While no additional write-downs of existing OREO properties have been required in 2015 to adjust the carrying value of OREO properties to their net realizable value, write-downs of $74 thousand were recorded during the first six months of 2014.

· FDIC insurance premiums for the period ending June 30, 2015 are $114 thousand less than the period ending June 30, 2014. The calculation base used to determine the June 30, 2015 premium was $17.7 million less than the base used in calculating the June 30, 2014 premium. In addition to lower insured balances, the insurance premium factor charged by the FDIC has been lowered from the levels charged in 2014.

· Other operating expense for the period ending June 30, 2015 is $169 thousand greater than for the period ending June 30, 2014. The major component, in addition to $45 thousand in non-recurring expenses related to nonaccrual loans, was the complete write-off of 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.

Noninterest expense, which consists primarily of personnel, occupancy, equipment and other operating expenses, was down slightly for the three month periods ended June 30, 2015 and June 30, 2014. The decrease of $14 thousand, or 0.8%, is primarily attributable to decreases in several categories, offset by other expenses. The following is a discussion of significant period over period changes for other material noninterest expense categories:

· Salary and employee benefit expense declined by $91 thousand, or 10.7%, to $762 thousand for the three months ended June 30, 2015 relative to the three months ended June 30, 2014 reflecting reductions in personnel instituted by the Bank and a change in the policy towards employee paid time off.

· Net occupancy and equipment expenses decreased by $45 thousand, or 16.7%, during the three months ended June 30, 2015 as maintenance and repair expenses decreased period over period by $16 thousand, mostly due to timing, and branch lease payments declined by $11 thousand as a result of renegotiation of terms.

· Expenses on other real estate owned were $42 thousand, or 54.6%, less for the three months ended June 30, 2015 relative to the period ended June 30, 2014. During the quarter ended June 30, 2014, expenses of $27 thousand were required to adjust the carrying value of other real estate owned properties to net realizable value. During the second quarter of 2015, no adjustments to the carrying value of OREO properties were required.

· FDIC insurance premiums for the three month period ending June 30, 2015 are $59 thousand less than the three month period ending June 30, 2014. The calculation base used to determine the June 30, 2015 premium was $17.7 million less than the base used in calculating the June 30, 2014 premium. In addition to lower insured balances, the insurance premium factor charged by the FDIC has been lowered from the levels charged in 2014.

· Other operating expense for the quarter ending June 30, 2015 is $165 thousand greater than for the quarter ending June 30, 2014. The major component, in addition to $52 thousand in non-recurring expenses related to nonaccrual loans, was the complete write-off of 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.

Provision for Loan Losses. The Company establishes an allowance for loan losses through charges to earnings, which are shown in the consolidated statement 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.

The major component of the allowance for loan losses is the general reserve based on the guidance of ASC 450 wherein the homogeneous groups of loans are evaluated based upon the Bank’s loss history for that particular group over the prior 36 months. Based upon this guidance and the actual level of charge-offs during the 36 month lookback period, the general reserve requirement has dropped to $1.7 million at June 30, 2015 from a level of $2.5 million at June 30, 2014. The historical loss factor on the general loan portfolio has fallen from 1.85% at June 30, 2014, to 1.61% at December 31, 2014, to 1.24% at June 30, 2015.

Environmental factors are also considered in the calculation of allowance for loan and lease losses. For this measure eleven separate environmental factors are examined which are discussed in further detail in the allowance for loan loss section following. For the period ending June 30, 2015, the environmental factor has fallen to 13 basis points compared to 16 basis points at December 31, 2014, and 23 basis points at June 30, 2014. As of June 30, 2015, the Company estimates that $183 thousand in reserves should be held for environmental factors.

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During the second quarter of 2015, net charge-offs of $1.0 million recorded. These charge-offs were largely (96.4%) related to specifically reserved loans, and were reflective of the resolution of previously identified problem credits. At June 30, 2015, the allowance for loan losses stood at $2.4 million versus an allowance of $3.9 million at December 31, 2014.

Management considers the current allowance for loan losses at June 30, 2015 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, and no provision for loan losses was recorded in either the first or second quarter of 2015. A negative loan loss provision (recovery) of $186 thousand was recorded in the second quarter of 2014.

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 financial condition and results of operations.

Changes in Condition from December 31, 2014 to June 30, 2015.

Overview, Total assets decreased $8.2 million to $193.7 million on June 30, 2015 from $201.8 million on December 31, 2014.

Loan Portfolio. Gross loans decreased $3.0 million, or 2.0%, to $143.4 million as of June 30, 2015 from a balance of $146.4 million on December 31, 2014. The decrease is the net effect of new origination activity totaling $14.9 million, and $17.9 million of principal reduction for the first six months of 2015. Principal reductions also included net loan charge-offs of $1.4 million and transfers to OREO totaling $0.1 million. Included in the $17.9 million of principal reduction is the resolution of $5.9 million of non-accrual loans. The new originations were primarily commercial mortgage loans ($5.3 million or 35.6%) and consumer mortgage ($4.8 million or 32.4%). Total consumer lending, including consumer mortgage, was 52.2% of originations during the six month period ending June 30, 2015. 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 2015 and is incorporated into the 2015 budget. As of June 30, 2015, consumer mortgage loans totaled $39.1 million or 27.2% of gross loans versus $38.8 million or 26.5% of gross loans at December 31, 2014.

	(Dollars in thousands)
	June 30,		December 31,
	2015		2014
Commercial	$	83,616	$	87,989
Real estate		39,087		38,756
Consumer		20,744		19,681
	$	143,447	$	146,426

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:

31 

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

2) 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;

3) 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;

4) 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;

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

6) 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;

· General economic conditions;

· Regulatory risk;

· Unemployment, with particular attention paid to local unemployment; and

32 

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

Other Borrowings Borrowed funds totaled $5.4 million as of June 30, 2015, a $795 thousand, or 12.9%, decrease from the December 31, 2014 balance. In February 2015, the Company renegotiated a $2.3 million portion of a $5.0 million note payable. Under the new terms, the $2.3 million note, with an 8.00% coupon and a maturity date of December 2015, was retired, and the Company issued $656 thousand of common stock and a new note totaling $1.644 million, with a 6.00% coupon and a maturity date of August 2021 was issued. Savings in borrowing expense due to the transaction were $33 thousand during the first six months of 2015 compared to the same period in 2014.

The borrowings consist of four loans to the Bancorp from outside creditors. The loans must be repaid from Bancorp cash. Per the Consent Order with the FDIC, the Bank is not permitted to make any forms of payments to Bancorp. As of June 30, 2015, Bancorp’s cash position was $1.6 million. Management is engaged in the sale of the remainder of the OREO property held at the Bancorp, which will generate additional cash at the Bancorp level.

Description	Balance of Loan as of 06/30/15		Interest Rate			Frequency of Payments	Status	Maturity Date
Loan 1	$	2,670,683		8.00	%	Monthly	Interest Only	12/29/2015
Loan 2	$	601,788		4.75	%	Monthly	Amortizing	11/21/2019
Loan 3	$	435,416		4.25	%	Monthly	Amortizing	6/26/2019
Loan 4	$	1,644,547		6.00	%	*	Deferred I/O	8/4/2021
	*  Monthly interest payments are deferred until August 2015

No FHLB borrowings were outstanding as of June 30, 2015 or December 31, 2014. The Bank had an approved FHLB line-of-credit of $14.6 million as of June 30, 2015. In addition, the Company has collateralized federal fund lines of $6.3 million with the FRB and $1.0 million with Great Lakes Bankers Bank. Neither line was drawn upon as of June 30, 2015. The FHLB line is secured via the pledge of mortgage loans totaling $26.8 million, the Federal Reserve federal fund line is secured via the pledge of $10.3 million of automobile loans and the Great Lakes Bankers Bank line is unsecured.

Federal Income Taxes

In December 2014, the Company 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 2015. For the period ended June 30, 2015, the Company recorded income tax expense of $88 thousand versus no income tax expense for the period ended June 30, 2014. At June 30, 2015, the Company has a deferred tax asset related to a net operating loss carryforward of $4.0 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 $30.0 million at June 30, 2015, which represents 20.9% 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 0.6% at June 30, 2015. Management has also identified sub-prime loans (less than a 660 credit score) and unsecured loans as concentrations. As of June 30, 2015, loans to sub-prime borrowers totaled $11.2 million (7.8% of total portfolio), with 3.5% of these credits 30 days or more past due. In addition, unsecured loans totaled $4.9 million as of June 30, 2015, or 3.4% of the loan portfolio, with a delinquency rate, which is any loan 30 days or more past due, of 0.4% at June 30, 2015.

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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 generated by operating activities was $247 thousand and $117 thousand for the first six months of 2015 and 2014. The adjustments to reconcile net income to cash provided by or used in operations during the periods presented consist primarily of accrued interest payable, gains on available for sale securities, and depreciation.

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 maturities of investment securities.

In considering the more typical investing activities, during the first six months of 2015, $5.6 million of cash was generated from sale of investment securities and $2.4 million was provided by the combination of maturity, pay-downs, or calls of investment securities, with $3.1 million used to purchase of investment portfolio securities.

Financing activities consumed a net total of $8.1 million of cash balances during the six month period ended June 30, 2015, due to the drop in deposit account balances during the same period. Proceeds from the issuance of the Bancorp’s common stock totaled $1.0 million.

For the first six months of 2015, total deposits were down $8.9 million, or 5.0%, versus December 31, 2014 as the Company continues to de-emphasize large, collateralized, public fund deposits. For the same period in 2014, total deposits were essentially flat. 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 carried out an evaluation, under the supervision and with the participation of its management, including 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, 2015, 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 was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 2015, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.”

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FORM 10-Q

Quarter ended June 30, 2015

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 Registration Statement No. 333-191004 on Form 10-K filed on March 17, 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.

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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, 2015 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.

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Citizens Independent Bancorp

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
	(Registrant)
Date: August 12, 2015	/s/ Daniel C. Fischer
	Daniel C. Fischer
	President and Chief Executive Officer
Date: August 12, 2015	/s/  James Livesay
	James Livesay SVP and Chief Financial Officer

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