Citizens Independent Bancorp, Inc. - FORM 10-Q

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EX-32.1 - EXHIBIT 32.1 - Citizens Independent Bancorp, Inc.	v393053_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - Citizens Independent Bancorp, Inc.	v393053_ex31-1.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: September 30, 2014

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 November 13, 2014, the latest practicable date, 637,805 shares of the registrant’s no par value common stock were issued and outstanding.

CITIZENS INDEPENDENT BANCORP, INC.

FORM 10-Q

For the Nine Month Periods Ended September 30, 2014 and 2013

Table of Contents

	Page
PART I – FINANCIAL INFORMATION	3

ITEM 1 – Financial Statements	3

Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013	3

Consolidated Statements of Income (unaudited) for the three and nine month periods ended September 30, 2014 and 2013	4

Consolidated Statements of Comprehensive Income (unaudited) for the three and nine month periods ended September 30, 2014 and 2013	5

Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the nine month periods ended September 30, 2014 and 2013	6

Consolidated Statements of Cash Flows (unaudited) for the nine month periods ended September 30, 2014 and 2013	7

Notes to the Consolidated Financial Statements	8

ITEM 2 - Management Discussion and Analysis of Financial Condition and Results of Operations	23

ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk	35

ITEM 4 – Controls and Procedures	35

PART II – OTHER INFORMATION	36

ITEM 1 - Legal Proceedings	36

ITEM 1A – Risk Factors	36

ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds	36

ITEM 3 - Defaults upon Senior Securities	36

ITEM 4 - Mine Safety Disclosures	36

ITEM 5 - Other Information	36

ITEM 6 - Exhibits	36

SIGNATURES	37

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

CITIZENS INDEPENDENT BANCORP, INC.
Logan, Ohio
CONSOLIDATED BALANCE SHEETS


	(Dollars in thousands)
	(unaudited)
	September 30, 2014			December 31, 2013

ASSETS
Cash and cash equivalents
Cash and amounts due from depository institutions	$	4,826		$	6,758
Federal funds sold		6,206			8,246
Total cash and cash equivalents		11,032			15,004

Securities available for sale		36,979			34,630
Other investment securities		859			859

Loans		147,473			147,017
Allowance for loan losses		(3,870	)		(4,384	)
Net loans		143,603			142,633

Premises and equipment, net		3,121			3,283
Accrued interest receivable		403			446
Other real estate owned		1,146			2,532
Other assets		949			1,465
TOTAL ASSETS	$	198,092		$	200,852

LIABILITIES
Deposits
Noninterest bearing	$	21,918		$	20,539
Interest bearing		157,526			165,032
Total deposits		179,444			185,571

Borrowed funds		6,202			6,363
Accrued interest payable		1,556			1,935
Other liabilities		1,220			1,357
TOTAL LIABILITIES		188,422			195,226

SHAREHOLDERS' EQUITY
Cumulative preferred stock of no par value; 100,000 shares		-			-
authorized, 0 shares issued and outstanding
Common stock of no par value; 900,000 shares		12,312			9,307
authorized, 637,805 shares issued and outstanding at September 30, 2014 and 399,748 shares issued and outstanding at December 31, 2013, respectively
Stock warrants outstanding; 119,003 warrants		188			-
issued and outstanding as of September 30, 2014 and
0 warrants outstanding at December 31, 2013, respectively
Retained earnings		4,082			3,380
Treasury stock, at cost, 54,380 shares at September 30, 2014		(6,590	)		(6,590	)
and December 31, 2013, respectively
Accumulated other comprehensive income (loss)		(322	)		(471	)
TOTAL SHAREHOLDERS' EQUITY		9,670			5,626

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	198,092		$	200,852

See notes to consolidated financial statements

CITIZENS INDEPENDENT BANCORP, INC.
Logan, Ohio
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

	(Dollars in thousands, except per share data)
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014			2013
INTEREST INCOME
Interest and fees on loans	$	1,968	$	2,154	$	5,699		$	6,657
Interest and dividends on investment securities		184		191		564			582
Interest on federal funds sold		7		7		23			12
TOTAL INTEREST INCOME		2,159		2,352		6,286			7,251

INTEREST EXPENSE
Interest on deposits		285		386		912			1,222
Interest on borrowed funds		115		118		341			352
TOTAL INTEREST EXPENSE		400		504		1,253			1,574

NET INTEREST INCOME		1,759		1,848		5,033			5,677

Provision for loan losses		-		-		(186	)		191

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,759		1,848		5,219			5,486

NONINTEREST INCOME
Service charges		121		128		347			383
Net gain on sale of securities		-		-		-			31
Net gain on sale of loans		-		63		-			112
Net gain (loss) on sale of other real estate owned		106		114		477			118
Credit card income and fees		87		80		254			242
Other		66		57		207			236
TOTAL NONINTEREST INCOME		380		442		1,285			1,122

NONINTEREST EXPENSE
Salaries and employee benefits		860		869		2,571			2,747
Net occupancy and equipment expense		228		280		827			830
Other real estate owned expense		79		70		236			48
FDIC insurance expense		120		135		360			405
Legal and professional fees		84		263		276			398
Data processing		77		91		239			264
Advertising		54		45		151			138
Examinations and audits		122		42		204			132
Telephone		21		24		67			87
Other operating expenses		291		265		871			880
TOTAL NONINTEREST EXPENSE		1,936		2,084		5,802			5,929

INCOME BEFORE INCOME TAXES		203		206		702			679

Income tax expense		-		-		-			-

NET INCOME	$	203	$	206	$	702		$	679

Basic earnings per common share	$	0.35	$	0.60	$	1.33		$	2.08
Diluted earnings per common share	$	0.34	$	0.60	$	1.29		$	2.08

See notes to consolidated financial statements

CITIZENS INDEPENDENT BANCORP, INC.
Logan, Ohio
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
	(Dollars in thousands)
	Three Months Ended
	September 30,
	2014			2013

Net income	$	203		$	206

Other comprehensive income (loss), net of tax:

Unrealized net holding gain (loss) on securities available for sale, net of income taxes of $(2) and $(13) for the three month periods ended September 30, 2014 and 2013, respectively		(3	)		(25	)

Other comprehensive income (loss)		(3	)		(25	)
Comprehensive income		200			181

	Nine Months Ended
	September 30,
	2014		2013

Net income	$	702	$	679

Other comprehensive income (loss), net of tax:

Unrealized net holding gain (loss) on securities available for sale, net of income taxes of $77 and $(287) for the nine month periods ended September 30, 2014 and 2013, respectively		149		(561	)

Reclassification for gains recognized on sale of securities available for sale, net of income taxes of $11 for the nine month period ended September 30, 2013		-		(20	)
Other comprehensive income (loss)		149		(581	)
Comprehensive income	$	851	$	98

See notes to consolidated financial statements

CITIZENS INDEPENDENT BANCORP, INC.
Logan, Ohio
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)

	(Dollars in thousands)
	Nine Months Ended
	September 30,
	2014		2013

Balance at beginning of period	$	5,626	$	5,524

Issuance of common stock - 238,057 shares in 2014		3,005		-
Issuance of common stock warrants - 119,003 warrants in 2014		188		-
Purchase of treasury stock - 625 shares in 2013				(61	)
Net income		702		679
Other comprehensive income (loss)		149		(581	)


Balance at end of period	$	9,670	$	5,561

See notes to consolidated financial statements

CITIZENS INDEPENDENT BANCORP, INC.
Logan, Ohio
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	(Dollars in thousands)
	Nine Months Ended
	September 30,
	2014			2013

CASH FLOWS FROM OPERATING ACTIVITIES
Net income		702			679
Adjustment to reconcile net income to net cash
provided by (used in) operating activities
Provision for loan losses		(186	)		191
Depreciation and amortization		262			279
Deferred income taxes		-			-
Investment securities amortization (accretion), net		(5	)		193
Provision for loss on other real estate owned		86			-
Change in value of bank owned life insurance		-			(3	)
Net (gain) loss on sale of other real estate owned		(477	)		(118	)
(Gain) loss on sale of investments		-			(31	)
Net (gain) loss on disposition of premises and equipment		20			-
Net (gain) on sale of loans		-			(112	)
Proceeds from sale of loans		-			4,312
Loans originated for sale		-			(4,200	)
Net change in:
Accrued interest receivable		43			(62	)
Accrued interest payable		(379	)		(125	)
Other assets		438			(71	)
Other liabilities		(137	)		(463	)
Net cash provided by (used in) operating activities		367			469

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available for sale securities		(5,070	)		-
Proceeds from maturities of available for sale securities		2,953			6,467
Proceeds from sales of other securities		-			80
Net change in loans		(1,552	)		15,392
Proceeds from sale of other real estate owned		2,545			2,430
Purchases of premises and equipment		(120	)		(8	)
Net cash provided by (used in) investing activities		(1,244	)		24,361

CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits		(6,127	)		(15,487	)
Payments on borrowed funds		(161	)		(152	)
Purchase of treasury stock		-			(61	)
Proceeds from issuance of common stock and warrants		3,193			-
Net cash provided by (used in) financing activities		(3,095	)		(15,700	)

Net increase in cash and cash equivalents		(3,972	)		9,130

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		15,004			10,215

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	11,032		$	19,345


Supplemental Disclosure of Cash Flows
Cash paid during the period for:
Interest	$	1,632		$	1,699
Taxes	$	-		$	-

Supplemental Schedule of Noncash Investing and Financing Activities
Transfer of loans to other real estate owned	$	733		$	2,532

See notes to consolidated financial statements

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, Athens and Fairfield 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 generally accepted accounting principles 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 generally accepted accounting principles (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. The balance sheet as of December 31, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles. Operating results for the three and nine month periods ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

The accounting and reporting policies of the Bancorp and the Bank conform to accounting principles generally accepted in the United States of America and to general practices followed within the banking industry.

The consolidated balance sheet as of December 31, 2013 has been extracted from audited financial statements included in the Company’s 2013 filing on Form 10-K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States 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, 2013 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. The financial statements of the Bank include the accounts of its wholly-owned subsidiaries, Countywide Mortgage Company and Countywide Loan Company. Citizens Travel Center was closed in third quarter, 2013. The balance sheet and statement of income for the Citizens Travel Center were immaterial to the 2013 consolidated financial statements. All significant intercompany transactions and balances have been eliminated.

Recent Accounting Pronouncements

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This Update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this pronouncement did not have a material effect on the consolidated financial statements.

Stock Offering

The Company concluded the stock offering on June 25, 2014 having sold a total of 238,057 shares at a price of $14.49 per share. Those shareholders who had purchased stock at the initial price of $15.39 per share were offered the option of rescission or were refunded the difference of $0.90 per share between the original offered price and the adjusted price of $14.49 per share. A total of 63 shares were rescinded as a result of the offer. Net proceeds of the offering were reduced by $256 thousand of direct stock offering costs. The Company invested $2.1 million in The Citizens Bank of Logan. Remaining funds of $1.1 million were retained in the holding company for debt service and general purposes.

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 from issue and expire June 26, 2016. Allocated value of these common stock warrants is $188 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 nine month periods ended September 30, 2014 and 2013 follow:

	(Dollars in thousands, except per share data)
	Three Months Ended
	September 30,
	2014		2013
Net income	$	203	$	206
Weighted average common shares outstanding		583,425		345,368
Basic earnings per common share	$	0.35	$	0.60
Total Shares and Warrants		597,264		345,368
Diluted earnings per common share	$	0.34	$	0.60

	Nine Months Ended
	September 30,
	2014		2013
Net income	$	702	$	679
Weighted average common shares outstanding		528,487		325,753
Basic earnings per common share	$	1.33	$	2.08
Total Shares and Warrants		542,305		325,753
Diluted earnings per common share	$	1.29	$	2.08

NOTE 3 - INVESTMENT SECURITIES

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

	(Dollars in thousands)
	September 30, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury securities	$	5,057	$	3	$	(6	)	$	5,054
U.S. government federal agencies		13,914		12		(109	)		13,817
State and local governments		6,088		250		(1	)		6,337
Mortgage backed securities		11,847		54		(130	)		11,771
Total	$	36,906	$	319	$	(246	)	$	36,979

	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury securities	$	-	$	-	$	-		$	-
U.S. government federal agencies		13,937		8		(233	)		13,712
State and local governments		7,015		334		(10	)		7,339
Mortgage backed securities		13,831		36		(288	)		13,579
Total	$	34,783	$	378	$	(531	)	$	34,630

The following is a summary of maturities of securities available-for-sale as of September 30, 2014:

	(Dollars in thousands)
	Securities available for sale
	Amortized Cost		Fair Value
Amounts maturing in:

One year or less	$	646	$	650
After one year through five years		21,039		21,131
After five years through ten years		4,236		4,296
After ten years		10,985		10,902
Total	$	36,906	$	36,979

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

Investment securities with a carrying amount of approximately $29,572,000 and $31,835,000 were pledged to secure deposits as required or permitted by law at September 30, 2014 and December 31, 2013, respectively.

Information pertaining to securities with gross unrealized losses at September 30, 2014 and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

						(Dollars in thousands)
	Less than 12 months					12 months or greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
September 30, 2014
U.S. Treasury securities	$	1,974	$	(6	)	$	-	$	-		$	1,974	$	(6	)
U.S. government federal agencies		4,575		(19	)		4,951		(90	)		9,526		(109	)
State and local governments		578		(1	)		-		-			578		(1	)
Mortgage backed securities		2,617		(6	)		5,269		(124	)		7,886		(130	)
Total	$	9,744	$	(32	)	$	10,220	$	(214	)	$	19,964	$	(246	)

December 31, 2013
U.S. Treasury securities	$	-	$	-		$	-	$	-		$	-	$	-
U.S. government federal agencies		12,416		(233	)		-		-			12,416		(233	)
State and local governments		570		(10	)		-		-			570		(10	)
Mortgage backed securities		9,791		(288	)		-		-			9,791		(288	)
Total	$	22,777	$	(531	)	$	-	$	-		$	22,777	$	(531	)

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)
	Nine Months Ended					Three Months Ended
	September 30,			September 30,		September 30,		September 30,
	2014			2013		2014		2013

Allowance at beginning of period	$	4,384		$	5,204	$	3,900	$	4,725
Provision for credit losses		(186	)		191		-		-
Charge-offs:
Commercial		435			909		27		177
Real Estate		45			107		7		1
Consumer		167			131		31		3
Total charge-offs	$	647		$	1,147	$	65	$	181

Recoveries:
Commercial		273			387		25		111
Real Estate		7			185		2		183
Consumer		39			30		8		12
Total Recoveries		319			602		35		306
Ending allowance	$	3,870		$	4,850	$	3,870	$	4,850

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
September 30, 2014
Commercial	$	2,573	$	77,614	$	839	$	10,246	$	3,412	$	87,860
Real estate		150		37,995		90		616		240		38,611
Consumer		196		20,738		22		264		218		21,002
Total	$	2,919	$	136,347	$	951	$	11,126	$	3,870	$	147,473

December 31, 2013
Commercial	$	2,802	$	81,716	$	1,071	$	9,874	$	3,873	$	91,590
Real estate		183		33,219		84		778		267		33,997
Consumer		189		21,183		55		247		244		21,430
Total	$	3,174	$	136,118	$	1,210	$	10,899	$	4,384	$	147,017

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 similarity 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 September 30, 2014 and December 31, 2013.

Commercial Credit Exposure

Credit risk profile by credit worthiness category

			(Dollars in thousands)
	Commercial				Commercial
	Mortgage				Other
Category	09/30/14		12/31/13		09/30/14		12/31/13

Pass	$	62,070	$	58,765	$	11,144	$	11,424
5		5,255		11,468		217		2,480
6		8,374		6,657		101		722
7		699		74		-		-
Total	$	76,398	$	76,964	$	11,462	$	14,626

Consumer Credit Exposure

Credit risk by credit worthiness category

			(Dollars in thousands)
	Residential				Consumer				Consumer				Consumer
	Real Estate				Equity				Auto				Other
Category	09/30/14		12/31/13		09/30/14		12/31/13		09/30/14		12/31/13		09/30/14		12/31/13

Pass	$	37,602	$	32,201	$	7,327	$	7,351	$	11,662	$	11,908	$	1,814	$	1,738
5		444		792		77		210		45		62		-		-
6		565		1,004		15		105		61		53		-		-
7		-		-		-		-		1		3		-		-
Total	$	38,611	$	33,997	$	7,419	$	7,666	$	11,769	$	12,026	$	1,814	$	1,738

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
September 30, 2014
With no related allowance recorded:
Commercial mortgage	$	7,530	$	7,861	$	-
Commercial other		73		75		-
Residential real estate		169		220		-
Consumer equity		15		16		-
Consumer auto		96		98		-
Subtotal		7,883		8,270		-

With an allowance recorded:
Commercial mortgage	$	2,643	$	2,721	$	836
Commercial other		-		-		3
Residential real estate		447		450		90
Consumer equity		153		153		15
Consumer auto		-		-		7
Subtotal		3,243		3,324		951
Total	$	11,126	$	11,594	$	951

			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
December 31, 2013
With no related allowance recorded:
Commercial mortgage	$	6,824	$	7,048	$	-
Commercial other		113		115		-
Residential real estate		558		615		-
Consumer equity		96		97		-
Consumer auto		132		135		-
Subtotal		7,723		8,010		-

With an allowance recorded:
Commercial mortgage		2,352		3,629		624
Commercial other		656		792		447
Residential real estate		452		455		84
Consumer equity		165		166		53
Consumer auto		9		9		2
Subtotal		3,634		5,051		1,210
Total	$	11,357	$	13,061	$	1,210

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
Nine Month Period
Ended September 30, 2014
Commercial:
Mortgage	$	7,654	$	86	$	2,365	$	19	$	10,019	$	105
Other		168		2		251		-		419		2
Residential real estate		242		3		534		13		776		16
Consumer:
Equity		75		-		157		8		232		8
Auto		108		1		2		-		110		1
Other		-		-		-		-		-		-
Total	$	8,247	$	92	$	3,309	$	40	$	11,556	$	132

Nine Month Period
Ended September 30, 2013
Commercial:
Mortgage	$	6,656	$	108	$	2,293	$	5	$	8,949	$	113
Other		2,382		-		865		3		3,247		3
Residential real estate		533		-		413		16		946		16
Consumer:
Equity		66		-		141		9		207		9
Auto		180		-		65		6		245		6
Other		14		-		37		1		51		1
Total	$	9,831	$	108	$	3,814	$	40	$	13,645	$	148

					(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 September 30, 2014
Commercial:
Mortgage	$	7,673	$	29	$	2,589	$	6	$	10,262	$	35
Other		80		1		60		-		140		1
Residential real estate		145		1		532		4		677		5
Consumer:
Equity		52		-		153		3		205		3
Auto		81		-		-		-		81		-
Other		-		-		-		-		-		-
Total	$	8,031	$	31	$	3,334	$	13	$	11,365	$	44

Three Month Period
Ended September 30, 2013
Commercial:
Mortgage	$	8,328	$	36	$	1,181	$	2	$	9,509	$	38
Other		20		-		766		1		786		1
Residential real estate		106		-		723		5		829		5
Consumer:
Equity		49		-		189		3		238		3
Auto		12		-		131		2		143		2
Other		-		-		71		-		71		-
Total	$	8,515	$	36	$	3,061	$	13	$	11,576	$	49

The following table summarizes information relative to loan modifications determined to be troubled debt restructurings (TDRs) during the nine and three months ended September 30, 2014.

			(Dollars in thousands)
			Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding
	of		Recorded		Recorded
	TDRs		Investment (1)		Investment

Nine months ended September 30, 2014
Commercial mortgage		5	$	1,260	$	1,260
Residential mortgage		2		186		186
Consumer auto		2		2		2
Unsecured		1		1		1
Total		10	$	1,449	$	1,449

Nine months ended September 30, 2013
Commercial mortgage		1		287		283
Commercial other		1		212		202
Consumer auto		2		29		28
Unsecured		-		-		-
Total		4	$	528	$	513

			Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding
	of		Recorded		Recorded
	TDRs		Investment (1)		Investment

Three months ended September 30, 2014
Commercial mortgage		2	$	950	$	950
Residential mortgage		-		-		-
Consumer auto		1		1		1
Unsecured		-		-		-
Total		3	$	951	$	951

Three months ended September 30, 2013
Commercial mortgage		1		287		283
Commercial other		1		212		202
Consumer auto		-		-		-
Unsecured		-		-		-
Total		2	$	499	$	485

(1)

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

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

During the nine month period ended September 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 eight loans was extended.

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 has 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 have been three loans totaling $963,000 which were modified as a TDR within the previous twelve months that have subsequently defaulted as of September 30, 2014.

The following table presents the loan portfolio by class summarized by aging categories, at September 30, 2014 and December 31, 2013:

													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
September 30, 2014
Commercial:
Mortgage	$	1,773	$	308	$	4,836	$	6,917	$	69,481	$	76,398	$	-
Other		-		5		20		25		11,437		11,462		-
Residential real estate		457		156		25		638		37,973		38,611		-
Consumer:
Equity		42		-		15		57		7,362		7,419		-
Auto		38		3		25		66		11,703		11,769		-
Other		17		18		3		38		1,776		1,814		3
Total	$	2,327	$	490	$	4,924	$	7,741	$	139,732	$	147,473	$	3

December 31, 2013
Commercial:
Mortgage	$	1,923	$	203	$	3,153	$	5,279	$	71,685	$	76,964	$	-
Other		140		74		174		388		14,238		14,626		-
Residential real estate		639		156		259		1,054		32,943		33,997		-
Consumer:
Equity		81		16		-		97		7,569		7,666		-
Auto		46		11		-		57		11,969		12,026		-
Other		71		60		-		131		1,607		1,738		-
Total	$	2,900	$	520	$	3,586	$	7,006	$	140,011	$	147,017	$	-

The following summarizes by loan class, the loans on nonaccrual status at September 30, 2014 and December 31, 2013:

	(Dollars in thousands)
	September 30,		December 31,
	2014		2013
Commercial:
Mortgage	$	7,223	$	6,443
Other		30		529
Residential real estate		274		680
Consumer:
Equity		15		105
Auto		46		31
Other		-		-
Total	$	7,588	$	7,788

NOTE 5 – 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. A minimum annual contribution of $84,000 is required.

The following table presents the components of the net periodic pension cost of the Defined Benefit Plan.

	(Dollars in thousands)
	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Net periodic pension cost:
Interest cost on projected benefit obligation	$	13		$	13		$	39		$	39
Expected return on plan assets		(10	)		(2	)		(30	)		(6	)
Settlement loss		-			22			-			65
Net amortization of deferral of (gains) losses		12			22			36			67
Net periodic pension cost	$	15		$	55		$	45		$	165

NOTE 6 - FAIR VALUES OF FINANCIAL INSTRUMENTS

Fair Value Measurements and Disclosures of the FASB ASC, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Fair value accounting guidance excluded certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values.

Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Other securities consist mainly of shares of Federal Home Loan Bank stock that do not have readily determinable fair values and are carried at cost.

Loans: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans (for example, fixed rate commercial real estate and rental property mortgage loans and commercial and industrial loans) are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable.

Deposits: The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money-market accounts and certificates of deposit approximate their fair values. Fair values for fixed -rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently offered on certificates to a schedule of aggregated contractual expected monthly maturities on time deposits.

Accrued interest: The carrying amounts of accrued interest approximate the fair values.

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.

Fair Value Hierarchy

The Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity 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 or liabilities.

Level 2 – Valuation is based on inputs other than quoted prices included with Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices 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.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

	(Dollars in thousands)
	Fair Value Measurements
	Using
	Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2014
Assets:
Available for sale securities:
U.S. Treasury securities	$	-	$	5,054	$	-
U.S. government federal agencies		-		13,817		-
State & local governments		-		6,337		-
Mortgage backed securities		-		11,771		-

December 31, 2013
Assets:
Available for sale securities:
U.S. Treasury securities	$	-	$	-	$	-
U.S. government federal agencies		-		13,712		-
State & local governments		-		7,339		-
Mortgage backed securities		-		13,579		-

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

	(Dollars in thousands)
	Fair Value Measurements
	Using
	Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2014
Assets:
Impaired loans	$	-	$	-	$	10,175
Other real estate owned		-		-		1,146


December 31, 2013
Assets:
Impaired loans	$	-	$	-	$	10,147
Other real estate owned		-		-		2,532

The estimated fair values of the Company's financial instruments are as follows:

					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)
September 30, 2014
Financial assets:
Cash and cash equivalents	$	11,032	$	11,032	$	-	$	11,032	$	-
Investment securities		36,979		36,979		-		36,979		-
Other investment securities		859		859		-		-		859
Loans, net		143,603		147,596		-		-		147,596
Accrued interest receivable		403		403		-		-		403

Financial liabilities:
Noninterest-bearing deposits	$	21,918	$	21,918	$	-	$	21,918	$	-
Interest-bearing deposits		157,526		154,761		-		154,761		-
Borrowed funds		6,202		6,202		-		6,202		-
Accrued interest payable		1,556		1,556		-		-		1,556

December 31, 2013
Financial assets:
Cash and cash equivalents	$	15,004	$	15,004	$	-	$	15,004	$	-
Investment securities		34,630		34,630		-		34,630		-
Other investment securities		859		859		-		-		859
Loans, net		142,633		147,703		-		-		147,703
Accrued interest receivable		446		446		-		-		446

Financial liabilities:
Noninterest-bearing deposits	$	20,539	$	20,539	$	-	$	20,539	$	-
Interest-bearing deposits		165,032		165,502		-		165,502		-
Borrowed funds		6,363		6,363		-		6,363		-
Accrued interest payable		1,935		1,935		-		-		1,935

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.

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 September 30, 2014

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%. The completion of the Company’s capital campaign and subsequent investment in the Bank, along with earnings have increased the ratio of Tier 1 capital to total assets to 7.42% and the ratio of total capital to risk-weighted assets to 13.02%.

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 non-interest income, such as service charges on deposit accounts and fees on other services, income from lending services as well as non-interest expense such as salaries and employee benefits, occupancy expense, professional and other services and other expenses.

For the nine months ended September 30, 2014, the Company earned net income of $702 thousand or $1.33 per share, compared to net income of $679 thousand or $2.08 per share for the nine months ended September 30, 2013.

Key items affecting the Company’s results for the first nine months of 2014:

Net interest income decreased by $644 thousand year-over-year for the nine months ended September 30, 2014 from the nine months ended September 30, 2013. For 2014, a $965 thousand decline in interest income was partially offset by a $321 thousand decrease in interest expense.

Non-interest income increased by $163 thousand to $1.285 million for the nine months ended September 30, 2014 from the nine months ended September 30, 2013. The period to period increase can be attributed to gains on the sale of repossessed assets totaling $477 thousand for the nine months ended in 2014.

Non-interest expense declined slightly for the nine months ended September 30, 2014 in comparison to the nine months ended September 30, 2013 with expenses of $5.802 million and $5.929 million respectively.

Non-performing loans were $7.6 million and $7.8 million respectively as of September 30, 2014 and December 31, 2013. The period over period activity primarily consisted of the pay-off of a $1.4 million credit and the orderly liquidation of another $2.0 million, offset by the addition of a five large credits totaling $2.7 million. Numerous lesser loans made up the remainder of the activity.

Gross loans increased $0.5 million or 0.3% to $147.5 million as of September 30, 2014 compared to $147.0 million as of December 31, 2013. The increase is the result of loan originations of $18.5 million offset by $18.0 million in principal reductions received during the first nine months of 2014.

Deposits decreased $6.2 million relative to year end balances with $179.4 million as of September 30, 2014 and $185.6 million as of December 31, 2013.

Shareholders’ equity at the Company increased $4.0 million or 71.9% to $9.7 million as of September 30, 2014 from the December 31, 2013 equity position. This increase was due to net proceeds from the sale of common stock of $3.2 million and net income of $702 thousand with an increase of $149 thousand in other comprehensive income resulting from the recognition in equity of an unrealized gain on the Company’s available for sale investment portfolio during the first nine months of 2014. As of September 30, 2014, $2.1 million of proceeds from the common stock issuance have been invested in the Bank. Tier I Leverage Capital and Total Risk Based Capital at the Bank were 7.42% and 13.03%, respectively, as of September 30, 2014 and 5.71% and 10.36% as of December 31, 2013. The Tier 1 Leverage Capital ratio is still under the 8.5% required under the Orders.

Comparison of Results of Operations for the Nine Months Ended September 30, 2014 and September 30, 2013

For the nine months ended September 30, 2014, the Company earned net income of $702 thousand, a $23 thousand increase from the $679 thousand net income reported as of September 30, 2013. The increase in profitability can primarily be attributed to a $377 thousand reduction in loan loss provision, an increase in non-interest income of $163 thousand, and a decrease in non-interest expense of $127 thousand, partially offset by a reduction of $644 thousand in net interest income during the nine months ended September 30, 2014 in comparison to the nine months ended September 30, 2013. Net interest income for the nine months ended September 30, 2014 was $5.033 million, a decrease of $644 thousand or 11.3% from the nine months ended September 30, 2013.

Distributution of Assets, Liabilities, and Shareholders' Equity
For the nine months ended September 30,

	(Dollars in thousands)
	2014							2013
	Average Balance		Interest		Yield / Rate			Average Balance		Interest		Yield / Rate
Interest-Earning Assets:
Loans receivable^{(1), (2)}	$	140,836	$	5,699		5.40	%	$	161,320	$	6,657		5.50	%
Securities⁽³⁾		36,731		538		1.95	%		41,075		555		1.80	%
Fed Funds Sold		13,888		23		0.22	%		7,599		12		0.21	%
FHLB stock		859		26		4.04	%		859		27		4.19	%
Total interest-earning assets		192,314		6,286		4.36	%		210,853		7,251		4.59	%
Non-interest-earning assets		11,630							13,475
Total Assets	$	203,944						$	224,328

Interest-Bearing Liabilities
Interest-bearing deposits		163,649		912		0.74	%		186,594		1,222		0.87	%
Other borrowings		6,279		341		7.24	%		6,490		352		7.23	%
Total interest-bearing liabilities		169,928		1,253		0.98	%		193,084		1,574		1.09	%
Non-interest-bearing deposits		22,045							17,094
Total including non-interest-bearing demand deposits		191,973		1,253					210,178		1,574
Other non-interest liabilities		3,178							8,150
Total Liabilities		195,151							218,328
Shareholders' equity		8,793							6,000
Total liabilities and shareholders' equity	$	203,944						$	224,328
Net interest income; interest rate spread			$	5,033		3.38	%			$	5,677		3.50	%
Net interest margin						3.49	%						3.59	%
Average interest-earning assets to average interest-bearing liabilities						113.17	%						109.20	%

⁽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 nine months ended September 30, 2014 was $6.3 million, a $965 thousand or 13.3% decrease from the $7.3 million earned during the nine months ended September 30, 2013. The yield on earning assets declined 23 basis points to 4.36% for the nine months ended September 30, 2014 from 4.59% for the nine months ended September 30, 2013. Interest income earned from the loan portfolio decreased $958 thousand or 14.4% to $5.7 million for the nine months ended September 30, 2014 from $6.7 million for the nine months ended September 30, 2013. The decrease in interest income from the loan portfolio can be attributed to both the $20.5 million decrease in average loans year-over year and a 10 bps decrease in the yield, which was 5.40% for the nine months ended September 30, 2014 versus 5.50% for the same period in 2013.

Interest income from the investment portfolio declined $17 thousand or 3.1% to $538 thousand for the nine months ended September 30, 2014 from $555 thousand for the nine months ended September 30, 2013. Average assets for the securities portfolio declined $4.3 million and the yield increased by 16 basis points. Securities purchases during the nine month period ending September 30, 2014 totaled $5.0 million par of U.S. Treasury securities with an average yield of 1.99% and an average duration of 3.7 years. There were no sales of investment securities during the nine month periods ending September 30, 2014 and no purchases of investment securities for the period ending September 30, 2013.

Interest expense for the nine months ended September 30, 2014 was $1,253 thousand, a $321 thousand or 20.4% decrease from the $1,574 thousand in interest expense for the nine months ended September 30, 2013. Interest expense for deposits declined $310 thousand or 25.4% to $912 thousand for the nine months September 30, 2014. Average balances of interest bearing deposits decreased by $23.0 million or 12.3%, declining to $163.6 million at September30, 2014 from $186.6 million at September 30, 2013.

Interest expense for other borrowings was $341 thousand for the nine months ended September 30, 2014 and $352 thousand for the nine months ended September 30, 2013.

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 nine months of 2014, loans totaling $5.7 million have either repriced or refinanced at interest rates averaging 158 basis points below original rates. The Bank has continued to drive the composition of the loan portfolio towards variable rate loans as protection against rising interest rates. Management has decided to retain a larger percentage of 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 interest rates rise and these loans begin to reprice. The loan portfolio currently consists of 67% variable rate loans. During the third quarter the Bank aggressively reduced interest rates paid on a large group deposit accounts and continues to monitor certificate of deposit rates versus our peers. Effects of these deposit cost initiatives are now being felt in the third quarter as extremely rate sensitive depositors exit the bank. Relatively higher priced certificates of deposit are approximately $9.9 million less than at December 31, 2013.

Comparison of Results of Operations for the Three Months Ended September 30, 2014 and September 30, 2013

For the three months ended September 30, 2014, the Company earned net income of $203 thousand, a $3 thousand decrease from the $206 thousand net income reported for the three months ended September 30, 2013. The decrease can primarily be attributed to net interest income falling $89 thousand, non-interest income down $62 thousand, offset by reduced non-interest expenses of $148 thousand for the three months ended September 30, 2014 in comparison to the three months ended September 30, 2013. Net interest income for the three months ended September 30, 2014 was $1.759 million, a decrease of $89 thousand or 4.8% from the three months ended September 30, 2013.

Distributution of Assets, Liabilities, and Shareholders' Equity
For the three months ended September 30,

	(Dollars in thousands)
	2014							2013
	Average Balance		Interest		Yield / Rate			Average Balance		Interest		Yield / Rate
Interest-Earning Assets:
Loans receivable^{(1), (2)}	$	143,363	$	1,968		5.49	%	$	149,138	$	2,154		5.78	%
Securities⁽³⁾		37,288		175		1.88	%		36,900		182		1.97	%
Fed Funds Sold		10,603		7		0.26	%		13,001		7		0.22	%
FHLB stock		859		9		4.19	%		859		9		4.19	%
Total interest-earning assets		192,113		2,159		4.49	%		199,898		2,352		4.71	%
Non-interest-earning assets		10,659							14,197
Total Assets	$	202,772						$	214,095

Interest-Bearing Liabilities
Interest-bearing deposits		162,163		285		0.70	%		177,837		386		0.87	%
Other borrowings		6,220		115		7.40	%		6,431		118		7.34	%
Total interest-bearing liabilities		168,383		400		0.95	%		184,268		504		1.09	%
Non-interest-bearing liabilities		21,925							20,502
Total including non-interest-bearing demand deposits		190,308		400					204,770		504
Other non-interest liabilities		2,797							3,754
Total Liabilities		193,105							208,524
Shareholders' equity		9,667							5,571
Total liabilities and shareholders' equity	$	202,772						$	214,095
Net interest income; interest rate spread			$	1,759		3.54	%			$	1,848		3.62	%
Net interest margin						3.66	%						3.70	%
Average interest-earning assets to average interest-bearing liabilities						114.09	%						108.48	%

⁽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 September 30, 2014 was $2.2 million, a $193 thousand or 8.2% decrease from the $2.4 million earned during the three months ended September 30, 2013. The yield on earning assets declined 22 bps to 4.49% for the three months ended September 30, 2014 from 4.71% for the three months ended September 30, 2013. Interest income earned from the loan portfolio decreased $186 thousand or 8.6% to $1.968 million for the three months ended September 30, 2014 from $2.154 million for the three months ended September 30, 2013. The decrease in interest income from the loan portfolio can be attributed to both the $5.8 million decrease in average loans year-over-year and a 29 basis point decrease in the yield, which was 5.49% for the three months ended September 30, 2014.

Interest income from the investment portfolio declined $7 thousand or 3.8% to $175 thousand for the three months ended September 30, 2014 from $182 thousand for the three months ended September 30, 2013. Average assets for the securities portfolio increased $388 thousand and the yield decreased by 9 bps. There were no securities purchases during the three month period ending September 30, 2014. There were no sales of investment securities during the three month periods ending September 30, 2014 and no purchases or sales of investment portfolio securities for the three month period ending September 30, 2013.

Interest expense for the three months ended September 30, 2014 was $400 thousand, a $104 thousand or 20.8% decrease from the $504 thousand in interest expense for the three months ended September 30, 2013. Interest expense for deposits declined $102 thousand or 26.4% to $285 thousand for the three months September 30, 2014. Average balances of interest bearing deposits decreased by $15.7 million or 8.8%, declining to $162.2 million at September 30, 2014 from $177.8 million at September 30, 2013.

Interest expense for other borrowings was $115 thousand for the three months ended September 30, 2014 and $118 thousand for the three months ended September 30, 2013.

Non-Interest Income. Non-interest income, which consists primarily of fees and commissions earned on services such as deposits, credit cards, and ATMs that are provided to the Bank’s customers, and to a lesser extent, gains on sales of OREO and other repossessed assets and other miscellaneous income, increased $163 thousand or 14.5% to $1.285 million for the nine months ended September 30, 2014 from $1.122 million for the nine months ended September 30, 2013. The period-over-period increase in non-interest income can primarily be attributed to gains of $477 thousand recognized from the sale of other repossessed assets during the first nine months of 2014. The following is a discussion of other significant year-over-year changes in other material non-interest income categories:

Income from service fees decreased $36 thousand or 9.4% to $347 thousand for the nine months ended September 30, 2014 from $383 thousand for the nine months ended September 30, 2013. The decrease can primarily be attributed to a $35 thousand period over period decrease in revenue from the Bank’s overdraft protection product.

Secondary market income on loans held for sale in the secondary market declined by $112 thousand for the nine months ended September 30, 2014. There were no bank funded loans sold in the first three quarters of 2014, versus gains of $112 thousand for the nine months ended September 30, 2013. The decline is due, in part, to a management decision to retain a larger percentage of mortgage loans in-house rather than selling to the secondary market.

Gains on sale of OREO properties totaled $477 thousand for the nine months ended September 30, 2014, an increase of $359 thousand from the nine months ended September 30, 2013. During the first nine months of 2014, the Company sold 25 properties with a carrying value of $2,068 thousand.

Other income declined $29 thousand or 12.3% during the first nine months of 2014 to $207 thousand. The decline can primarily be attributed to an $11 thousand decline in the net brokerage fees earned on loan sales and a $17 thousand decline in rental income received on OREO properties which have been sold in 2014.

For the three months ended September 30, 2014 non-interest income decreased by $62 thousand, or 14.0%. The period-over-period decrease in non-interest income can primarily be attributed to a $63 thousand decline in gains recognized on the sale of loans held for sale. The following is a discussion of other significant year-over-year changes in other material non-interest income categories:

Income from service fees decreased $7 thousand or 5.5% to $121 thousand for the three months ended September 30, 2014 from $128 thousand for the three months ended September 30, 2013. The decrease can primarily be attributed to an $8 thousand period over period decrease in revenue from the Bank’s overdraft protection product.

Secondary market income on loans held for sale in the secondary market declined by $63 thousand for the three months ended September 30, 2014. There were no bank funded loans sold in the third quarter of 2014, versus gains of $63 thousand for the three months ended September 30, 2013. The decline is due, in part, to a management decision to retain a larger percentage of mortgage loans in-house rather than selling to the secondary market.

Gains on sale of OREO properties totaled $106 thousand during the three months ended September 30, 2014 versus a gain of $114 thousand during three months ended September 30, 2013. During the three month period ended September 30, 2014 the Company sold 6 properties with carrying values of $115 thousand.

Other income increased $9 thousand or 15.8% during the three month period ending September 30, 2014 to $66 thousand. Mortgage broker commissions, earned on the sale of loans funded by the purchasing entity, and income earned on the rental of REO properties accounted for the increase.

Non-Interest Expense. Non-interest expense, which consists primarily of personnel, occupancy, equipment and other operating expenses, decreased by $127 thousand, or 2.1%, for the nine month periods ended September 30, 2014 and September 30, 2013. The decrease is primarily attributable to changes in only a few categories. The following is a discussion of significant year-over-year changes for other material non-interest expense categories:

Salary and benefit expense declined by $176 thousand or 6.4% to $2.6 million for the nine months ended September 30, 2014 relative to the nine months ended September 30, 2013 reflecting the savings realized from reductions in personnel and a change in the Bank’s policy towards employee paid time off.

Net occupancy and equipment expense was flat with that of the comparable prior period decreasing by $3 thousand during the nine months ended September 30, 2014 as higher maintenance costs were offset by lower equipment depreciation expense.

Expenses on other real estate owned were $188 thousand greater for the nine months ended September 30, 2014 relative to the period ended September 30, 2013 as expenses of $86 thousand have been realized in 2014 to adjust the carrying value of OREO properties to their net realizable value

Legal and professional fees were down $122 thousand or 30.7% for the nine month period in 2014 versus that of 2013 as the Bank aggressively resolves problem assets.

Non-interest expense, which consists primarily of personnel, occupancy, equipment and other operating expenses, was down slightly for the three month periods ended September 30, 2014 relative to September 30, 2013. The decrease of $148 thousand or 7.1% is primarily attributable to changes in several expense categories, but most especially in legal fees. The following is a discussion of significant year-over-year changes for other material non-interest expense categories:

Salary and benefit expense declined by $9 thousand or 1.0% to $860 thousand for the three months ended September 30, 2014 relative to the three months ended September 30, 2013 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 $52 thousand or 18.6% during the three months ended September 30, 2014 as depreciation expenses decreased year over year by $21 thousand and reduced lease payments on in-store branches negotiated during the second quarter of 2014 contributed to a $14 thousand reduction in those expenses.

Expenses on other real estate owned were $9 thousand greater for the three months ended September 30, 2014 relative to the period ended September 30, 2013. During the quarter ended September 30, 2014, expenses of $12 thousand were required to adjust the carrying value of other real estate owned properties to net realizable value.

Legal and professional fees were $179 thousand less in the three month period ended September 30, 2014 relative to the three month period ended September 30, 2013 as expected legal fees through the end of the year allowed for a reduced legal expense accrual.

Expenses associated with examinations and audits increased by $80 thousand, or 190.5%, for the three month period ending September 30, 2014 versus the comparable period in 2013. These expenses included additional fees and expenses related to SEC registration.

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 loan 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 fallen substantially during the nine month period from 1.96% at December 31, 2013 to 1.85% at June 30, 2014 to 1.69% at September 30, 2014.

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. At the end of the second quarter, the environmental factor had fallen from 27 basis points at December 31, 2013 to 21 basis points where they remain at the conclusion of the third quarter, 2014.

The recovery of excess allowance for loan and lease losses during the second quarter resulted in a credit balance of $186 thousand in loan loss provision expense through the three quarters ended September 30, 2014 versus provisions for loan losses totaling $191 thousand in expense for the three quarters ended September 30, 2013.

There was no provision expense recorded in the three month periods ending September 30, 2014 or that ending September 30, 2013.

Management considers the allowance for loan losses at September 30, 2014 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. 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. Prior to the fiscal year end at December 31, management will work with the Board of Directors to determine whether any additional portion of the allowance for loan and lease losses should be recaptured.

Changes in Condition from December 31, 2013 to September 30, 2014.

Overview. Total assets decreased $2.8 million to $198.1 million on September 30, 2014 from $200.9 million on December 31, 2013.

Loan Portfolio. Gross loans have increased $0.5 million or 0.3% to $147.5 million as of September 30, 2014 from a balance of $147.0 million on December 31, 2013. The increase is the net effect of new origination activity totaling $18.5 million, and $18.0 million of principal reduction for the first nine months of 2014. Principal reductions also included loan charge-offs of $0.6 million and transfers to OREO totaling $0.7 million. The new originations were primarily consumer mortgage loans ($8.1 million or 43.6%) and commercial real estate ($6.7 million or 35.9% of originations) and secured, titled consumer loans ($3.2 million or 17.5% of the total periods originations). 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 2014 and is incorporated into the 2014 budget. As of September 30, 2014, consumer mortgage loans totaled $38.6 million or 26.2% of gross loans versus $34.0 million or 23.1% of gross loans at December 31, 2013.

Loan Portfolio Distribution


	(Dollars in thousands)
	September 30,		December 31,
	2014		2013

Commercial	$	87,860	$	91,590
Real estate		38,611		33,997
Consumer		21,002		21,430
	$	147,473	$	147,017

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

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

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

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

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

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

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

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

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

Other Borrowings Borrowed funds totaled $6.2 million as of September 30, 2014, a $161 thousand or 2.5% decrease from the December 31, 2013 balance. The borrowings consist of three 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 September 30, 2014, Bancorp’s cash position was $1.2 million.

	Balance of Loan as of 09/30/14	Interest Rate	Frequency of Payments	Status	Maturity Date

Description
Loan 1	$ 5,000,000	8.00%	Monthly	Interest Only	12/29/2015
Loan 2	$ 692,137	4.75%	Monthly	Amortizing	11/21/2019
Loan 3	$ 509,605	4.25%	Monthly	Amortizing	6/26/2019

No FHLB borrowings were outstanding as of September 30, 2014 or December 31, 2013. The Bank had an approved FHLB line-of-credit of $16.6 million as of September 30, 2014. In addition, the Company has collateralized federal fund lines of $5.0 million with the FRB and $1.0 million with Great Lakes Bankers Bank. Neither line was drawn upon as of September 30, 2014. The FHLB line is secured via the pledge of mortgage loans totaling $27.9 million, the Federal Reserve federal fund line is secured via the pledge of $8.0 million of automobile loans and the Great Lakes Bankers Bank line is secured via the pledge of cash.

Federal Income Taxes

At September 30, 2014, the Company has federal net operating loss carryforwards of approximately $9.8 million. These carryforwards, comprising the majority of the deferred tax asset, will begin to expire in 2031.

Realization of deferred tax assets is dependent on generating sufficient taxable income prior to their expiration. Given substantial losses in prior periods, a determination was previously made to record a full valuation allowance against the deferred tax asset. With the current trends of profitability, management is analyzing the deferred tax asset and anticipates the valuation allowance may be adjusted in the near future.

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 $27.1 million at September 30, 2014, which represents 18.4% 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 6.6% at September 30, 2014 with 54.0% of the total made up of a single credit. Management has also identified sub-prime loans (less than a 660 credit score) and unsecured loans as concentrations. As of September 30, 2014, loans to sub-prime borrowers totaled $11.4 million (7.7% of total portfolio), with 4.4% of these credits 30 days or more past due. In addition, unsecured loans totaled $4.8 million as of September 30, 2014, or 3.2% of the loan portfolio, with a delinquency rate, which is any loan 30 days or more past due, of 1.2% at September 30, 2014.

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

Cash provided by (used in) operating activities was $367 thousand and $469 thousand for the first nine months of 2014 and 2013. The adjustments to reconcile net income to cash provided by or used in operations during the periods presented consist primarily of gain on the sale of other real estate owned, provision for loan losses, depreciation expense and increases and decreases in other assets and liabilities.

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 and sale of OREO.

In considering the more typical investing activities, during the first nine months of 2014, $2.5 million of cash was generated from sale of other real estate owned and $1.6 million was used to fund the increase in the loan portfolio. During the first nine months of 2013, $6.5 million was generated from the combination of maturity, pay-downs, or calls of available-for-sale investment securities and $15.4 million was generated from the maturity, pay-downs, or prepayments of loans within the Company’s loan portfolio. During the nine month period ended September 30, 2014 securities purchases consisted of $5.1 million of U.S. Treasury securities with an average yield of 1.99% and average duration of 3.7 years. No securities were purchased during the first nine months of 2013.

Financing activities decreased cash balances by a net total of $3.1 million during the nine month period ended September 30, 2014. Reductions in deposit balances removed $6.1 million from the Bank while proceeds from the issuance of the Bancorp’s common stock totaled $3.2 million after costs.

For the first nine months of 2014, total deposits declined $6.1 million, or 3.3%, from the balance at December 31, 2013. For the same period in 2013, total deposits decreased by $15.5 million or 7.4%. 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.

The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures as of September 30, 2014 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 (as defined in Exchange Act Rule 13a-15(e)) were effective as of September 30, 2014.

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended September 30, 2014, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

This quarterly report does not include a report of management’s assessment regarding internal control over financial reporting due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.

FORM 10-Q

Quarter ended September 30, 2014

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 Form 10-K filed on March 31, 2014.

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.
	There are no matters required to be reported under this item.

Item 3.	Defaults upon Senior Securities.
	There are no matters required to be reported under this item.

Item 4.	Mine Safety Disclosures.
	There are no matters required to be reported under this item.

Item 5.	Other Information.
	There are no matters required to be reported under this item.

Item 6.	Exhibits.

Exhibit No.		Exhibit

3.1		Amended and Restated Articles of Citizens Independent Bancorp, Inc. incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, filed September 5, 2013 (Registration No. 333-191004).
3.2		Amended and Restated Regulations of Citizens Independent Bancorp, Inc. incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, filed September 5, 2013 (Registration No. 333-191004).
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		The following financial information from Citizens Independent Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014 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 (Loss), (iv) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.

Citizens Independent Bancorp, Inc.

SIGNATURES

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

	CITIZENS INDEPENDENT BANCORP, INC.
	(Registrant)

Date: November 13, 2014	/s/ Donald P. Wood

	Donald P. Wood
	President and Chief Executive Officer

Date: November 13, 2014	/s/ James Livesay
	James Livesay SVP and Chief Financial Officer

Citizens Independent Bancorp, Inc. - FORM 10-Q - November 13, 2014

Attached files

Citizens Independent Bancorp, Inc. Reports