UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ Annual Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the fiscal year ended December 31, ~~2015~~2016

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number 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
incorporation or organization)	Identification No.)

188 West Main Street Logan, OH	43138
(Address of principal executive offices)	(zip code)

Registrant’s telephone number, including area code: (740) 385-8561

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Common Shares, no par value

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

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

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, and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 þ No ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (Check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-Accelerated filer ¨ Smaller reporting company þ

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

Based on the closing book price of the registrant’s common shares as of June 30, 2014, the aggregate value of the voting common shares held by non-affiliates was $5,337,000.

As of March 1820, ~~2016~~2017, ~~669~~691,~~754~~288 shares of the registrant’s no par value common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

~~Portions of the registrant’s Proxy Statement for the 2016 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K~~None.

INDEX

FORM 10-K

			Page
PART I
	Item 1.	Description of Business	3
	Item 1A.	Risk Factors	1210
	Item 1B.	Unresolved Staff Comments	1815
	Item 2.	Properties	1815
	Item 3.	Legal Proceedings	1815
	Item 4.	Mine Safety Disclosures	1816
PART II
	Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities	1816
	Item 6.	Selected Financial Data	1917
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	2018
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	3533
	Item 8.	Financial Statements and Supplementary Data	~~F-1~~34
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	3635
	Item 9A.	Controls and Procedures	3635
	Item 9B.	Other Information	3635
PART III
	Item 10.	Directors and Executive Officers and Corporate Governance	3635
	Item 11.	Executive Compensation	3739
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	3742
	Item 13.	Certain Relationships and Related Transactions and Director Independence	3743
	Item 14.	Principal Accounting Fees and Services	3744
PART IV
	Item 15.	Exhibits and Financial Statement Schedules	3745
Signatures			3947

PART I

ITEM 1 - DESCRIPTION OF BUSINESS

General

Citizens Independent Bancorp, Inc. (“Bancorp”) was organized under the laws of the State of Ohio in 1994 to be the bank holding company for The Citizens Bank of Logan (“Citizens Bank” or “Bank”). As a bank holding company, Bancorp is subject to regulation by the Federal Reserve Bank of Cleveland (“FRB”). The FRB regulates the types of banking and nonbanking activities in which the Company may engage. At this time, the Company is not directly engaged in any permissible nonbanking activities. The term “Company” is used in this Form 10-K to refer to Bancorp and Citizens Bank, collectively.

Chartered in 1961, the Bank is an independent, community bank headquartered in Logan, Ohio, offering a broad range of financial services. The Bank is regulated by the Federal Deposit Insurance Corporation (“FDIC”) and the Ohio Division of Financial Institutions (“DFI”).

The Bank operates through its home office, located at 188 West Main Street, Logan, Ohio 43138, and ~~four~~two other branch offices located in Athens and Hocking Counties in Ohio. We seek to deliver exceptional quality service while providing innovative products. Our priority has been, and continues to be, to create shareholder value by establishing an attractive commercial banking franchise and providing valuable service through relationship-oriented employees who are committed to the communities that we serve and to building lasting customer relationships.

~~During~~As ~~2014~~of December 31, 2016, the ~~Bank~~Company ~~legally dissolved~~had ~~its~~consolidated ~~two~~net ~~subsidiaries.~~assets ~~Citizens~~of ~~Independent~~$179.5 ~~Mortgage Company~~million, antotal ~~Ohio~~loans ~~corporation,~~(net ~~and~~of ~~Citizens~~allowance ~~Travel~~for ~~Center~~loan ~~LLC~~losses, areferred ~~travel~~to ~~agency~~as “net loans”) ~~organized~~of as$152.1 anmillion, ~~Ohio~~total ~~limited~~deposits ~~liability~~of ~~company~~$156.1 ~~which~~million, ~~was~~and ~~closed~~shareholders’ inequity ~~2013~~of $19.2 million.

As of December 31, 2015, the Company had consolidated net assets of $183.8 million, total loans (net of allowance for loan losses, referred to as “net loans”) of $147.2 million, total deposits of $162.3 million, and shareholders’ equity of $17.4 million.

Primary Lines of Business

The Bank is a full service bank offering a wide variety of services to satisfy the needs of the consumer and commercial customers in our market area. Fundamental to our business are skilled bankers building full banking relationships with high quality customers. We believe that there is no substitute for knowing and understanding your customer when seeking attractive risk-adjusted returns in the extension of credit. We plan to continue to evaluate and adapt our services and product offerings as our customer base grows and the needs of the marketplace evolve.

The Bank currently offers banking services of traditional, independent community banks including demand deposit accounts, savings accounts, and certificates of deposit. The Bank’s loans are for any legitimate purpose, which includes commercial and industrial loans, real estate loans, including commercial income-producing real estate loans, construction and development loans, residential real estate loans, and consumer loans. Consumer loans offered include loans for the purpose of purchasing automobiles, recreational vehicles, personal residences, household goods, home improvements, or for educational needs. The Bank’s business is not seasonal in any material respect.

The principal risk associated with each category of loans we make is the creditworthiness of the borrower. Borrower creditworthiness is affected by general economic conditions and the attributes of the borrower’s market or industry segment. Attributes of the relevant business market or industry segment include the competitive environment, customer and supplier power, threat of substitutes, and barriers to entry and exit. Our credit policy requires that key risks be identified and measured, documented and mitigated, to the extent possible, to seek to ensure the soundness of our loan portfolio.

Our credit policy also provides detailed procedures for making loans to individuals along with the regulatory requirements to ensure that all loan applications are evaluated subject to our fair lending policy. Our credit policy addresses the common credit standards for making loans to individuals, the credit analysis and financial statement requirements, the collateral requirements, including insurance coverage where appropriate, as well as the documentation required. Our ability to analyze a borrower’s current financial health and credit history, as well as the value of collateral as a secondary source of repayment, when applicable, are significant factors in determining the creditworthiness of loans to individuals.

As of December 31, ~~2015~~2016, less than 32.04% of our total loan portfolio was unsecured, representing loans made to borrowers considered to be of sufficient financial strength to merit unsecured financing. As of December 31, ~~2015~~2016, approximately 3328.06% of our total portfolio was fixed rate loans and approximately 6771.04% of our total portfolio was variable rate loans.

Commercial and Industrial Loans. Our lending activities focus primarily on providing small and medium-sized businesses, agricultural businesses, and farms in our market area with commercial business loans. These loans are both secured and unsecured and are made available for general operating purposes, acquisition of fixed assets including real estate, equipment and machinery, lines of credit collateralized by inventory, and accounts receivable, as well as any other purposes considered appropriate by our executive management. For loans secured by accounts receivable or inventory, principal is typically repaid as the assets securing the loan are converted into cash. Typically, we make equipment loans for a term of three to five years at fixed or variable interest rates with the loan amortized over the term. Equipment loans are generally secured by the financed equipment at advance ratios that we believe are appropriate for the equipment type.

In our credit underwriting process, we carefully evaluate the borrower’s industry, operating performance, liquidity, and financial condition. We underwrite credits based on multiple repayment sources, including operating cash flow, liquidation of collateral, and guarantor support, if any. As of December 31, ~~2015~~2016, approximately 7882.5% of our commercial and industrial loans were secured and a significant portion of those loans were supported by personal guarantees. We closely monitor the operating performance, liquidity and financial condition of borrowers through analysis of periodic financial statements and meetings with the borrower’s management. As part of our credit underwriting process, we also review the borrower’s total debt obligations on a global basis.

Commercial Real Estate Loans. We make commercial real estate loans, or CRE loans, on income-producing properties. The primary collateral for CRE loans is a first lien mortgage on multi-family, office, warehouse, hotel, or retail property plus assignments of all leases related to the properties. Our CRE loans generally have maturity dates and amortization schedules of 15 to 25 years, nearly all with floating rates of interest. We seek to reduce the risks associated with commercial mortgage lending by focusing our lending in our target markets and obtaining financial statements, tax returns or both from borrowers and guarantors at regular intervals. In underwriting commercial real estate loans, we consider the borrower’s financial strength, cash flow, liquidity, and credit. In the event there is more than one borrower on the loan, we analyze global cash flow of all borrowers.

We also make construction and land development loans generally to local builders, developers, or persons who will ultimately not occupy the property being developed. We have no loans to national developers. Our construction and land development loans are intended to provide interim financing on the property and the principal amounts are based on percentages of the cost or as-completed appraised value of the property securing the loans. Additionally, when underwriting the loan, we consider the operating performance, liquidity, financial condition, and the reputation of the borrower and any guarantors, the amount of the borrower’s equity in the project, independent appraisals, cost estimates, and pre-construction sale information. The ratio of the loan principal to the value of the collateral as established by independent appraisal typically does not exceed regulatory guidelines. Construction and land development loan funds are disbursed periodically at pre-specified stages of completion of construction and only after the project has been inspected by an experienced construction lender or third-party inspector. We carefully monitor these loans with on-site inspections and by closely monitoring disbursements.

CRE loans are secured by business and commercial properties. Typically our loan-to-value benchmark for these loans is below 80% at inception, with satisfactory debt service coverage ratios as well. As of December 31, ~~2015~~2016, we had $6968.36 million in CRE loans outstanding, comprising approximately 4644.45% of our total loan portfolio. In line with our strategic direction, these loans were down from last year when they totaled $7469.43 million, or 5046.84%, of the loan portfolio.

Residential Real Estate Loans. Our lending activities include the origination of first and second lien loans secured by residential real estate that is located primarily in our target markets. These customers primarily include branch and retail banking customers. Typically our loan-to-value benchmark for these loans is below 90% at inception, with satisfactory debt-to-income ratios as well. As of December 31, ~~2015~~2016, we had a total of $43.47 million in outstanding residential real estate loans, comprising 2928.14% of our total loan portfolio, up from $3843.84 million, or 2629.51% of the loan portfolio at December 31, ~~2014~~2015.

Personal Loans and Credit. We make personal loans and lines of credit available to consumers for various purposes, such as the purchase of automobiles, boats, and other recreational vehicles and the making of home improvements and personal investments. At December 31, 2016, we had $30.2 million in personal loans, which represented 19.6% of total loans. The December 31, 2015 loan portfolio had $23.7 million of personal loans, or 15.9% of the portfolio.

~~Personal~~Deposit ~~Loans~~Generation. ~~and~~We ~~Credit.~~generate Wedeposits ~~make~~primarily ~~personal~~through ~~loans~~offering ~~and~~a ~~lines~~broad array of ~~credit~~deposit ~~available~~products to ~~consumers~~individuals, ~~for~~businesses, ~~various~~associations, ~~purposes~~financial institutions, and ~~such~~government asentities ~~the~~in ~~purchase~~our ofgeographic ~~automobiles,~~market. ~~boats,~~We generally seek a full banking relationship from our lending customers. This ~~and~~often ~~other~~includes ~~recreational~~encouraging ~~vehicles~~a ~~and~~new ~~the~~customer ~~making~~to ofconsider ~~home~~both ~~improvements~~business and personal ~~investments~~checking accounts and other deposit services. Our Atdeposit ~~December~~services 31include checking, ~~2015~~savings, weand ~~had~~money ~~$23.7 million~~market inaccounts, ~~personal~~certificates ~~loans~~of deposit, ~~which~~direct ~~represented~~deposit ~~15.9%~~services, ofand telephone ~~total~~and ~~loans~~internet banking. ~~The~~As of December 31, ~~2014~~2016, ~~loan~~the ~~portfolio~~Bank had ~~$19.7~~total ~~million~~deposits of ~~personal loans, or 13~~$156.4%1 ~~of the portfolio~~million.

Deposit Generation. We generate deposits primarily through offering a broad array of deposit products to individuals, businesses, associations, financial institutions and government entities in our geographic market. We generally seek a full banking relationship from our lending customers. This often includes encouraging a new customer to consider both business and personal checking accounts and other deposit services. Our deposit services include checking, savings, and money market accounts, certificates of deposit, direct deposit services, and telephone and internet banking. As of December 31, 2015, the Bank had total deposits of $162.3 million.

Stock Offering

On October 25, 2013, we commenced an offering for the sale of up to 369,754 of our common shares, without par value, at a subscription price of $15.39 per share (up to $5,690,514), which subscription price was intended to be equal to 90% of the book value per share of the Company on September 30, 2013. This price was later amended to $14.49 per share. The offering had two components, a rights offering, which expired on January 31, 2014, followed by a public offering which expired on June 25, 2014. At the close of the public offering, the Company had sold and issued a total of 238,057 shares of common stock with 119,003 accompanying warrants.

~~Rights~~Common ~~Offering~~Stock Warrants

In the rights offering, for each of our common shares held by a shareholder on October 21, 2013, the record date of the rights offering, the shareholder received a subscription right to purchase one of our common shares at the $15.39 per share subscription price (later amended to $14.49 per share). In addition, for each two shares purchased by a shareholder ~~in the rights offering~~, the Company issued to the shareholder, for no additional consideration, a warrant entitling the shareholder to purchase, upon exercise of the warrant, one additional common share. ~~The exercise~~These ~~price~~warrants ofentitled ~~each~~the ~~warrant~~holder ~~share is equal~~ to ~~90%~~purchase a share of the ~~book~~Company’s ~~value of a~~ common ~~share~~stock asat ~~reflected~~90% onof the ~~books~~prior ofmonth’s ~~the~~closing ~~Company on~~book ~~the~~value. ~~last~~Valid ~~day~~for ofa ~~the~~period ~~month~~of ~~prior~~two toyears, the warrants ~~warrant~~expired ~~exercise~~June ~~date~~25, 2016. ~~The~~Allocated ~~warrant~~value isof ~~exercisable~~these ~~until~~common ~~two~~stock ~~years~~warrants ~~after~~was ~~the~~based ~~expiration date~~on of the ~~public~~Black ~~offering,~~Scholes ~~may~~methodology. beA ~~exercised~~total of ~~only~~74,687 ~~by payment~~ of the ~~warrant~~119,003 ~~exercise~~total ~~price~~warrants inissued ~~cash~~were ~~and is non-transferable~~exercised.

Public Offering

On February 1, 2014, following the expiration of the rights offering, the Company commenced the public offering of the common shares (and warrants) that were not subscribed for in the rights offering. The subscription price of the common shares, and the warrant terms, offered in the public offering were the same as those offered to the Company’s shareholders in the rights offering.

At the close of the public offering, the Company had sold and issued a total of 238,057 shares of common stock with 119,003 accompanying warrants. As of March 18, 2016, 53,154 shares of common stock have been issued upon the exercise of warrants.

Employees

Bancorp does not have any employees. As of December 31, ~~2015~~2016, the Bank had 5755 full-time employees and 34 part-time employees, a reduction of 53 FTE from the December 31, ~~2014~~2015 level. The future success of the Bank depends, in part, on its ability to attract, retain, and motivate highly qualified management and other personnel, for whom competition is intense. The Bank believes that its employees are critical to the success of the institution. The Bank provides group health, dental, life, and disability insurance for its employees. The Bank’s employees are not represented by a collective bargaining agreement and the Bank has never experienced a strike or similar work stoppage. The Bank considers its relationship with its employees to be satisfactory.

Market

We consider our primary market area to be Hocking and Athens Counties, Ohio. The Bank serves this market through ~~four~~three full service locations, which include the Bank’s main office located at 188 West Main Street, Logan, Hocking County, Ohio. In a move to significantly lower delivery costs and improve visibility and service to the community, during the 2016 fiscal year we constructed a new full service branch replacing an existing full service branch and ~~one~~a limited service branch. We also closed an additional full service location in an unprofitable market sector. 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.

Competition

Competition in originating non-residential mortgage and commercial loans comes mainly from commercial banks with banking center offices in the Company’s market area. Competition for the origination of mortgage loans arises mainly from savings associations, commercial banks, and mortgage companies. The distinction among market participants is based on a combination of price, the quality of customer service and name recognition. The Company competes for loans by offering competitive interest rates and product types and by seeking to provide a higher level of personal service to borrowers than is furnished by competitors. The Bank has a significant market share of the lending markets in which it conducts operations.

Management believes that the Bank’s most direct competition for deposits comes from local financial institutions. The distinction among market participants is based on price, quality of customer service, and name recognition. The Bank’s cost of funds fluctuates with general market interest rates. During certain interest rate environments, additional significant competition for deposits may be expected from corporate and governmental debt securities, as well as from money market mutual funds. The Bank competes for conventional deposits by emphasizing quality of service, extensive product lines and competitive pricing.

Supervision and Regulation

Bancorp and the Bank are subject to extensive regulation by federal and state agencies. The regulation of bank holding companies and their subsidiaries is intended primarily for the protection of consumers, depositors, borrowers, the FDIC’s Deposit Insurance Fund and the banking system as a whole and not for the protection of shareholders. Applicable laws and regulations restrict permissible activities and investments and require actions to protect loan, deposit, brokerage, fiduciary, and other customers, as well as the FDIC’s Deposit Insurance Fund. They also may restrict Bancorp’s ability to repurchase its common shares or to receive dividends from the Bank and impose capital adequacy and liquidity requirements.

Bancorp is registered with the FRB as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). As a bank holding company, Bancorp is subject to regulation under the Bank Holding Company Act and to inspection, examination, and supervision by the FRB.

The Bank, as an Ohio commercial bank, is subject to regulation, supervision, and examination by the DFI and FDIC.

The following information describes selected federal and state statutory and regulatory provisions and is qualified in its entirety by reference to the full text of the particular statutory or regulatory provisions. These statutes and regulations are continually under review by the United States Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations, or regulatory policies applicable to Bancorp and the Bank could have a material effect on their respective businesses.

Regulation of Bank Holding Companies. As a bank holding company, Bancorp’s activities are subject to extensive regulation by the FRB. Bancorp is required to file reports with the FRB and such additional information as the FRB may require, and is subject to regular examinations by the FRB.

The FRB also has extensive enforcement authority over bank holding companies, including, among other things, the ability to:

	•	assess civil money penalties;

	•	issue cease and desist or removal orders; and

•

require that a bank holding company divest subsidiaries (including a subsidiary bank).

In general, the FRB may initiate enforcement actions for violations of laws and regulations and unsafe or unsound practices.

Under FRB policy, a bank holding company is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support such subsidiary bank. Under this policy, the FRB may require a bank holding company to contribute additional capital to an undercapitalized subsidiary bank and may disapprove of the payment of dividends to the shareholders if the FRB believes the payment of such dividends would be an unsafe or unsound practice.

The Bank Holding Company Act requires the prior approval of the FRB in any case where a bank holding company proposes to:

	•	acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority-owned by it;

	•	acquire all or substantially all of the assets of another bank or another financial or bank holding company; or

•

merge or consolidate with any other financial or bank holding company.

The Gramm-Leach-Bliley Act of 1999 (“GLBA”) permits a qualifying bank holding company to become a financial holding company and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature and not otherwise permissible for a bank holding company. Bancorp is not a financial holding company.

Each subsidiary bank of a bank holding company is subject to certain restrictions imposed by the Federal Reserve Act on the maintenance of reserves against deposits, extensions of credit to the bank holding company or any of its subsidiaries, investments in the shares or other securities of the bank holding company or its subsidiaries, and the taking of such shares or securities as collateral for loans to any borrower. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property, or furnishing of any services. Various consumer laws and regulations also affect the operations of these subsidiaries.

Transactions with Affiliates, Directors, Executive Officers, and Shareholders. Sections 23A and 23B of the Federal Reserve Act and FRB Regulation W generally:

	•	limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate;

	•	limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with all affiliates; and

•

require that all such transactions be on terms substantially the same, or at least as favorable to the bank or subsidiary, as those provided to a non-affiliate.

An affiliate of a bank is any company or entity which controls, is controlled by, or is under common control with the bank. The term “covered transaction” includes the making of loans to the affiliate, the purchase of assets from the affiliate, the issuance of a guarantee on behalf of the affiliate, the purchase of securities issued by the affiliate, and other similar types of transactions.

A bank’s authority to extend credit to executive officers, directors, and greater than 10% shareholders, as well as entities such persons control, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder by the FRB. Among other things, these loans must be made on terms (including interest rates charged and collateral required) substantially the same as those offered to unaffiliated individuals or be made as part of a benefit or compensation program and on terms widely available to employees, and must not involve a greater than normal risk of repayment. In addition, the amount of loans a bank may make to these persons is based, in part, on the bank’s capital position, and specified approval procedures must be followed in making loans which exceed specified amounts.

Regulation of Ohio Banks. Regulation by the DFI affects the internal organization of Citizens Bank, as well as its depository, lending, and other investment activities. Periodic examinations by the DFI are usually conducted on a joint basis with the FDIC. Ohio law requires that Citizens Bank maintain federal deposit insurance as a condition of doing business. The ability of Ohio chartered banks to engage in certain state-authorized investments is subject to oversight and approval by the FDIC.

The ability of Citizens Bank to engage in any state-authorized activities or make any state-authorized investments, as principal, is limited if such activity is conducted or investment is made in a manner different than that permitted for, or subject to different terms and conditions than those imposed on national banks. Engaging as a principal in any such activity or investment not permissible for a national bank is subject to approval by the FDIC. Such approval will not be granted unless certain capital requirements are met and there is not a significant risk to the FDIC insurance fund. Most equity and real estate investments (excluding office space and other real estate owned) authorized by state law are not permitted for national banks. Certain exceptions are granted for activities deemed by the FRB to be closely related to banking and for FDIC-approved subsidiary activities.

Any mergers involving acquisitions of control of Ohio banks must be approved by the DFI. The DFI may initiate certain supervisory measures or formal enforcement actions against Ohio chartered banks. Ultimately, if the grounds provided by law exist, the DFI may place an Ohio chartered bank in conservatorship or receivership.

In addition to being governed by the laws of Ohio specifically governing banks, Citizens Bank is also governed by Ohio corporate law, to the extent such law does not conflict with the laws specifically governing banks.

Federal Deposit Insurance Corporation. The FDIC is an independent federal agency which insures the deposits, up to prescribed statutory limits, of federally-insured banks and savings associations and safeguards the safety and soundness of the financial institution industry.

Insurance premiums for each insured depository institution are determined based upon the institution’s capital level and supervisory rating provided to the FDIC by the institution’s primary federal regulator and other information the FDIC determines to be relevant to the risk posed to the Deposit Insurance Fund by the institution. The assessment rate determined by considering such information is then applied to the amount of the institution’s average assets minus average tangible equity to determine the institution’s insurance premium. An increase in the assessment rate could have a material adverse effect on the earnings of the affected institution(s), depending on the amount of the increase.

Insurance of deposits may be terminated by the FDIC upon a finding that the insured depository institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition enacted or imposed by the institution’s regulatory agency.

Regulatory Capital. The FRB has adopted risk-based capital guidelines for bank holding companies and state member banks. The Office of the Comptroller of the Currency (the “OCC”) and the FDIC have adopted risk-based capital guidelines for national banks and state non-member banks, respectively. The guidelines provide a systematic analytical framework which makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy, and minimizes disincentives to holding liquid, low-risk assets. Capital levels as measured by these standards are also used to categorize financial institutions for purposes of certain prompt corrective action regulatory provisions.

~~Prior~~Effective to January 1, 2015, the ~~guidelines included~~new a minimum ~~for the ratio of total~~ capital torequirements ~~risk-weighted~~became ~~assets of 8%~~effective, ~~with~~including ata ~~least~~new ~~half~~capital ofconservation ~~the~~buffer ~~ratio~~and ~~composed~~deductions offrom common ~~shareholders’~~ equity, ~~minority~~capital ~~interests~~ phase in ~~certain~~from ~~equity~~January ~~accounts of consolidated subsidiaries and a limited amount of qualifying preferred stock and qualified trust preferred securities, less goodwill and certain other intangible assets (known as “Tier~~ 1~~” risk-based capital). The guidelines also provided for a minimum ratio of Tier 1 capital to average assets~~, or ~~“leverage ratio~~2016,” ofthrough 3%January ~~for bank holding companies that meet certain criteria~~1, ~~including having the highest regulatory rating, and 4% for all other bank holding companies~~2019.

The ~~risk-based~~new ~~capital~~rules ~~guidelines~~include ~~adopted by the federal banking agencies are based on the “International Convergence of Capital Measurement and Capital Standard”~~ (~~Basel I~~a), ~~published by the Basel Committee on Banking Supervision (the “Basel Committee”) in 1988. In 2004, the Basel Committee published~~ a new ~~capital adequacy framework (Basel II) for large, internationally active banking organizations, and in~~common ~~December~~equity ~~2010~~tier ~~and~~1 ~~January~~capital ~~2011,~~ratio ~~the~~of ~~Basel~~at ~~Committee~~least ~~issued an update to Basel II (“Basel III”)~~4.5 The Basel Committee frameworks did not become applicable to banks supervised in the United States until adopted into United States law or regulations. Although the United States banking regulators imposed some of the Basel II and Basel III rules on banks with $250 billion or more in assets or $10 billion of on-balance sheet foreign exposure%, ~~it was not until July 2013 that the United States banking regulators issued final~~ (~~or,~~b) ina ~~the~~tier ~~case~~1 ~~of the FDIC, interim final) new~~ capital ~~rules~~ratio ~~applicable to smaller banking organizations which also implement certain~~ of ~~the~~at ~~provisions~~least ~~of the Dodd-Frank Act (the “Basel III Capital Rules”)~~6.0 ~~Community banking organizations~~%, ~~including~~ ~~Bancorp~~rather ~~and~~than the ~~Bank,~~former ~~began transitioning to the new rules on January 1, 2015~~4.0 ~~The new minimum capital requirements became effective on January 1~~%, ~~2015, whereas~~ (c) a ~~new~~minimum ~~capital~~total ~~conservation buffer and deductions from common equity~~ capital ~~phase~~ratio inthat ~~from January~~remains 1,at ~~2016,~~8.0 ~~through January 1~~%, ~~2019,~~ and ~~most~~(d) ~~deductions~~a ~~from~~minimum ~~common~~leverage ~~equity~~ratio ~~tier~~of ~~1 capital will phase in from January 1, 2015, through January 1, 2019~~4.0%.

The new rules include (a) a new common equity tier 1 capital ratio of at least 4.5 percent, (b) a Tier 1 capital ratio of at least 6.0 percent, rather than the former 4.0 percent, (c) a minimum total capital ratio that remains at 8.0 percent, and (d) a minimum leverage ratio of 4%.

Common equity for the common equity tier 1 capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions.

Tier 1 capital includes common equity as defined for the common equity tier 1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus and trust preferred securities that have been grandfathered (but which are not permitted going forward), and limited amounts of minority interests in the form of additional Tier 1 capital instruments, less certain deductions.

Tier 2 capital, which can be included in the total capital ratio, includes certain capital instruments (such as subordinated debt) and limited amounts of the allowance for loan and lease losses, subject to new eligibility criteria, less applicable deductions.

The deductions from common equity tier 1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels). ~~The deductions phase in from 2015 through 2019.~~

Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Some of the risk weightings were changed effective January 1, 2015.

The new rules also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the company does not hold a capital conservation buffer of greater than 2.5 ~~percent~~% composed of common equity tier 1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation ~~buffer~~ buffer ratio was less than 2.5 ~~percent~~% at the beginning of the quarter. The capital conservation buffer phases in starting on January 1, 2016, and atincreases by 0.625% each year through January 1, 2019.

In addition to the capital adequacy requirements set forth above, every financial institution is classified into one of five categories based upon the institution’s capital ratios, the results of regulatory examinations of the institution and whether the institution is subject to enforcement agreements with its regulatory authorities. The categories are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A bank with a capital level that might qualify for well-capitalized or adequately-capitalized status may nevertheless be treated as though the bank is in the next lower capital category if the bank’s primary federal banking supervisory authority determines that an unsafe or unsound condition or practice warrants that treatment. A bank’s operations can be significantly affected by its capital classification under the prompt corrective action rules. For example, a bank that is not well capitalized generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market without advance regulatory approval. At each successively lower capital category, an insured depository institution is subject to additional restrictions. Undercapitalized banks are required to take specified actions to increase their capital or otherwise decrease the risk to the federal deposit insurance fund. Bank regulatory agencies generally are required to appoint a receiver or conservator within 90 days after a bank becomes critically undercapitalized.

Effective January 1, 2015, in order to be “well-capitalized,” a bank must have a common equity tier 1 capital ratio of at least 6.5%, a total capital ratio of at least 10%, a Tier 1 capital ratio of at least 8%, and a leverage capital ratio of at least 5%, and the bank must not be subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level or any capital measure.

Dividends and Distributions. Shareholders of an Ohio corporation are entitled to dividends when, as, and if declared by the corporation’s board of directors. Bancorp’s ability to obtain funds for the payment of dividends and for other cash requirements depends on the amount of dividends that may be paid by the Bank to Bancorp. Under Ohio law, a dividend may be declared by a bank from surplus, meaning additional paid-in capital, with the approval of the DFI and the holders of two-thirds of the bank’s outstanding shares. Superintendent approval is also necessary for payment of a dividend if the total of all cash dividends in a year exceeds the sum of (i) net income for the year and (ii) retained net income for the two preceding years. The FDIC also may restrict the Bank’s ability to pay a dividend if the FDIC has reasonable cause to believe that the payment of the dividend would constitute an unsafe and unsound practice.

The FRB expects Bancorp to serve as a source of strength to the Bank, which may require Bancorp to retain capital for further investment in the Bank rather than pay dividends to the Bancorp shareholders. The FRB has issued a policy statement with regard to the payment of cash dividends by bank holding companies. The policy statement provides that, as a matter of prudent banking, a bank holding company should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends, and the prospective rate of earnings retentions appears to be consistent with the bank holding company’s capital needs, asset quality, and overall financial condition. Accordingly, a bank holding company should not pay cash dividends that exceed its net income or can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. Under certain circumstances, a bank holding company is required by such policy statement to provide advance notice to the FRB before paying a dividend.

Fiscal and Monetary Policies. The business and earnings of Bancorp and the Bank are affected significantly by the fiscal and monetary policies of the United States government and its agencies. Citizens Bank is particularly affected by the policies of the FRB, which regulates the supply of money and credit in the United States. These policies are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits.

Privacy Provisions of Gramm-Leach-Bliley Act. Under the GLBA, federal banking regulators were required to adopt rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party.

Patriot Act. In response to the terrorist events of September 11, 2001, the Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”) was signed into law in October 2001. The Patriot Act gives the United States government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. Title III of the Patriot Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions. Among other requirements, Title III and related regulations require regulated financial institutions to establish a program specifying procedures for obtaining identifying information from customers seeking to open new accounts and establish enhanced due diligence policies, procedures, and controls designed to detect and report suspicious activity. Citizens Bank has established policies and procedures that are believed to be compliant with the requirements of the Patriot Act.

Dodd-Frank Act. On July 21, 2010, President Obama signed the Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) into law. The Dodd-Frank Act has significantly changed the regulation of financial institutions and the financial services industry. The Dodd-Frank Act requires various federal agencies to adopt a broad range of regulations with significant discretion. Although many of the regulations have been adopted, some still have not, and the Bancorp is closely monitoring developments under the Dodd-Frank Act.9

~~Among~~Dodd-Frank Act. On July 21, 2010, President Obama signed the ~~provisions~~Wall ~~already~~Street ~~implemented~~Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) into ~~that~~law. ~~have~~The orDodd-Frank ~~may~~Act, ~~have~~amongst another ~~effect~~things, oncreated ~~Bancorp~~the orConsumer Financial Protection Bureau, permitted the ~~Bank~~payment ~~are~~of interest on commercial demand deposit accounts, and increased the ~~following:~~standard maximum amount of deposit insurance per customer to $250,000.

•Executive and Incentive Compensation. In June 2010, the ~~Consumer~~FRB, ~~Financial~~the ~~Protection~~OCC, ~~Bureau~~and ~~has~~the ~~been~~FDIC ~~formed~~issued joint interagency guidance on incentive compensation policies (the “Joint Guidance”) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. This principles-based guidance, which ~~has~~covers ~~broad~~all ~~powers~~employees that have the ability to ~~adopt~~materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should: (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and ~~enforce~~manage ~~consumer~~risks; ~~protection~~(ii) be compatible ~~regulations~~with effective internal controls and risk management; and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

• the federal law prohibiting the payment of interest on commercial demand deposit accounts was eliminated;

• the standard maximum amount of deposit insurance per customer was permanently increased to $250,000;

• the assessment base for determining deposit insurance premiums has been expanded from domestic deposits to average assets minus average tangible equity;

• public companies in all industries are now required to provide shareholders the opportunity to cast a non-binding advisory vote on executive compensation; and

• the FRB has imposed on financial institutions with assets of $10 billion or more a cap on the debit card interchange fees the financial institutions may charge. Although the cap is not applicable to Citizens Bank, it may have an adverse effect on the Bank as the debit cards issued by the Bank and other smaller banks, which have higher interchange fees, may become less competitive.

Additionally, it is expected that new corporate governance requirements applicable generally to all public companies in all industries will be adopted that require other new compensation practices and disclosure requirements, including requiring companies to “claw back” incentive compensation under certain circumstances, to consider the independence of compensation advisors and to make additional disclosures in proxy statements with respect to compensation matters.

As some provisions of the Dodd-Frank Act have not yet been implemented and will require interpretation and rule making, the full effect on Bancorp and the Bank cannot yet be determined. However, the implementation of certain provisions have already increased compliance costs and the implementation of future provisions will likely increase both compliance costs and fees paid to regulators, along with possibly restricting the operations of Bancorp and Citizens Bank.

Executive and Incentive Compensation. In June 2010, the FRB, the OCC and the FDIC issued joint interagency guidance on incentive compensation policies (the “Joint Guidance”) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. This principles-based guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should: (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks; (ii) be compatible with effective internal controls and risk management; and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

Pursuant to the Joint Guidance, the FRB and FDIC will review as part of a regular, risk-focused examination process, the incentive compensation arrangements of financial institutions such as Bancorp and Citizens Bank. Such reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination and deficiencies will be incorporated into the institution’s supervisory ratings, which can affect the institution’s ability to make acquisitions and take other actions. Enforcement actions may be taken against an institution if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and prompt and effective measures are not being taken to correct the deficiencies.

Regulatory Matters. Under applicable laws, the FDIC and the DFI, as the Bank’s primary regulators, and the FRB, as Bancorp’s primary federal regulator, have the ability to impose substantial sanctions, restrictions, and requirements on us if they find, upon examination or otherwise, weaknesses with respect to our operations.

~~Based~~In onOctober 2012, the ~~FDIC’s~~Bank ~~January~~entered ~~3, 2011~~into ~~examination~~publicly ofavailable ~~Citizens~~Consent ~~Bank,~~Orders with the FDIC ~~determined~~and onthe ~~May~~DFI 3,(collectively ~~2011~~referred ~~that~~to as the ~~Bank~~Orders), ~~was~~which inrequired ~~“troubled~~the ~~condition”~~Bank ~~within the~~to ~~meaning~~take ofa ~~federal~~number ~~statutes~~of ~~and regulations~~actions. AsIn aOctober ~~result~~2015, ~~certain~~the ~~limitations~~Orders were lifted and ~~regulatory~~the ~~requirements~~Bank ~~applied~~entered tointo ~~the~~a ~~Bank, including~~memorandum ~~but~~of ~~not~~understanding ~~limited~~(the “2015 ~~to,~~MOU”) ~~prior~~with ~~approval~~the ofFDIC ~~changes~~and toDFI. ~~senior~~Significant ~~executive~~among ~~management~~the ~~and~~ongoing ~~directors~~required ~~and~~actions was the ~~payment~~development of, ora ~~the~~capital ~~agreement~~plan toresulting ~~pay,~~in ~~certain~~the ~~severance~~Bank ~~payments~~meeting toand ~~officers,~~maintaining ~~directors~~its ~~and~~level ~~employees.~~of OnTier ~~June~~1 ~~11,~~capital ~~2011,~~as ~~the~~a ~~Bank~~percentage ~~entered~~of ~~into~~its aadjusted ~~Consent~~average total assets ~~Order~~at ~~with~~a ~~the~~minimum ~~FDIC~~of ~~that~~8.00% ~~was~~and ~~replaced~~its bylevel aof ~~revised~~qualifying ~~Consent~~total ~~Order~~capital onas ~~October~~a ~~23,~~percentage ~~2012~~of ~~(the~~risk-weighted ~~“2012~~assets ~~Consent~~at ~~Order”).~~a ~~Further,~~minimum of 11.50%. ~~the~~The Bank ~~entered~~was ~~into~~also arequired ~~written~~to ~~agreement~~obtain ~~with~~approval from the ~~DFI~~FDIC onand ~~July~~DFI 6,prior ~~2011.~~to ~~This~~the ~~agreement~~payment ~~was~~of ~~subsequently~~any ~~replaced~~dividends. ~~with~~In ~~the~~August ~~DFI~~2016, ~~2012~~both ~~Agreement~~the ~~dated~~FDIC ~~October~~and ~~31, 2012 (~~the “DFI ~~2012~~released ~~Agreement”).~~the ~~The~~Bank ~~2012~~from ~~Consent~~the ~~Order~~2015 ~~and~~MOU ~~DFI~~without ~~2012~~restriction. ~~Agreement~~The ~~are~~Bank ~~nearly identical,~~is ~~and~~no longer required ~~the~~to ~~Bank~~seek ~~to,~~prior ~~among~~approval of ~~other~~any ~~things:~~dividends.

•On ~~obtain~~July ~~approval~~5, 2011, the Bancorp entered into a memorandum of understanding (the ~~FDIC~~“FRB ~~and~~2011 ~~DFI~~MOU”) with the FRB. The FRB 2011 MOU prohibited the Bancorp, without prior approval toof ~~appointment~~the FRB, from declaring or paying cash dividends; taking dividends or any other form of payment representing a reduction in the Bank’s capital; incurring, increasing, or guaranteeing any ~~senior~~debt; ~~executive~~or ~~officer~~purchasing or ~~new~~redeeming ~~director~~any shares. On August 18, 2016 the FRB released the Bancorp from the FRB 2011 MOU without restriction. Bancorp may declare and pay cash dividends; take dividends or any other form of payment representing a reduction in the Bank’s capital; incur, increase, or guarantee any debt; or purchase or redeem any shares as approved by the board of directors without prior approval of the FRB.

• within 120 days, achieve and maintain Tier 1 Leverage Capital equal to at least 8.5% of total assets, and Total Risk Based Capital equal to at least 11.5% of risk-weighted assets;

• within 60 days, adopt and implement a written plan to reduce the loan concentration of credit identified in the examination of the Bank, and include procedures to restrict the creation of new concentrations and ensure that commercial unsecured lending does not exceed 80% of Tier 1 Capital and that total unsecured lending does not exceed 125% of Tier 1 Capital;

• not declare or pay any dividends without prior FDIC and DFI approval;

• not accept, renew, or rollover any brokered deposits without a specific waiver from the FDIC;

• within 60 days, eliminate and/or correct all violations of law, rule, and regulations identified in the examination and;

• provide the regulators with written progress reports within 30 days of the end of each calendar quarter while the 2012 Consent Order is effective detailing the results of actions taken to comply with the 2012 Consent Order.

On April 5, 2013, the Bank entered into a memorandum of understanding with the FDIC (the “FDIC 2013 MOU”), which required the Bank to address certain compliance issues.

On June 5, 2015, the FDIC 2013 MOU was terminated. Then, on October 2, 2015 both the 2012 Consent Order and the DFI 2012 Agreement were terminated by the FDIC and the DFI. As a result, the Bank is no longer considered to be in “troubled condition”. This means that the Bank is no longer required to seek FDIC or DFI approval prior to adding or replacing Board members or employing senior executive officers of the Bank and is not required to seek FDIC approval prior to entering into any employment agreements with those officers. The Bank is required to maintain Tier 1 leverage capital levels of 8.00% and to seek DFI and FDIC permission prior to the declaration or payment of any cash dividends.

In connection with the termination of the 2012 Consent Order and the DFI 2012 Agreement, the Bank entered into a Memorandum of Understanding with the FDIC and the DFI (the “2015 MOU”). The 2015 MOU requires, among other things, that the Bank maintain Leverage Capital of 8.0% and Total Capital of 11.50%, adopt strategic and profit plans, and revise its procedures related to managing sensitivity to interest rate risk. The Bank is currently in compliance with these requirements.

On July 5, 2011, the Company entered into a memorandum of understanding with the FRB (the “FRB 2011 MOU”). The FRB 2011 MOU prohibited the Company from:

• declaring or paying cash dividends without the prior written approval of the FRB;

• taking dividends or any other form of payment representing a reduction in the Bank’s capital without the prior written approval of the FRB;

• incurring, increasing, or guaranteeing any debt without the prior written approval of the FRB; or

• purchasing or redeeming any shares without the prior written approval of the FRB.

The FRB 2011 MOU remains in effect.

ITEM 1A - RISK FACTORS

The Company is subject to risks inherent to the Company’s business. The material risks and uncertainties that management believes affect the Company are described below. These risks are not all inclusive. Additional risks and uncertainties that management is not aware, focused on, or currently deems immaterial may also impair the Company’s business operations. If any of the following risks occur, the Company’s financial condition could be materially and adversely affected.

1210

~~Our~~Governmental ~~capital~~regulation ~~levels~~and ~~may~~regulatory actions ~~fall~~against ~~below the~~us ~~higher~~may ~~capital~~impair ~~requirements~~our ~~required~~operations byor ~~the~~restrict ~~2015~~our ~~MOU~~growth.

Under the 2015 MOU, the Bank is required to maintain its Leverage Capital ratio at 8.0% and its Total Capital ratio at 11.5%. Although the Bank’s capital levels exceeded these requirements at December 31, 2015, these capital levels could change. Increases to our allowance for loan losses, additional deterioration of our real estate owned portfolio and operating losses could negatively impact our capital levels and make it more difficult to achieve the capital level directed by the FDIC and DFI. As a result, there is no assurance that we will not need to raise additional capital in the future to provide the capital required to meet the regulators’ requirements and provide liquidity for Bancorp.

If we raise additional capital by issuing equity securities, the percentage ownership of our existing shareholders may be reduced, and accordingly these shareholders may experience substantial dilution. We may also issue equity securities that provide for rights, preferences and privileges senior to those of our common shares.

Debt financing, if obtained, may involve agreements that include liens on our assets, covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, could increase our expenses and require that our assets be provided as a security for such debt. Debt financing would also be required to be repaid regardless of our operating results.

Governmental regulation and regulatory actions against us may further impair our operations or restrict our growth.

Bancorp is subject to significant governmental supervision and regulation. These regulations are intended primarily for the protection of depositors’ funds, federal deposit insurance funds, and the banking system as a whole, not security holders. These regulations affect our lending practices, capital structure, investment practices, dividend policy, and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations, and policies for possible changes. Statutes and regulations affecting our business may be changed at any time and the interpretation of these statutes and regulations by examining authorities may also change.

There can be no assurance that such changes to the statutes and regulations or to their interpretation will not adversely affect our business. Such changes could subject us to additional costs, limit the types of financial services and products Bancorp may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things.

On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act and regulations adopted under it constituted a major change in the financial services industry throughout the United States and have significantly impacted the way in which Bancorp and the Bank conduct business. Some provisions of the Dodd-Frank Act remain to be implemented and interpreted by the banking regulators and the SEC, and the full effect of that law is not yet known. Nonetheless, the parts of the law and regulations that have been implemented have already resulted in increased compliance costs and may result in increased fees paid to regulators, as well as restrictions on the operations of the Company, all of which may have a material adverse effect on the results of operations and financial condition of Bancorp.

If our allowance for loan losses is not sufficient to cover our actual loan losses, our ability to remain profitable will be adversely affected.

At December 31, ~~2015~~2016, our non-performing loans totaled $10.48 million, representing 0.95% of total loans and 0.74% of total assets. In addition, loans that management has classified as either substandard, doubtful or loss totaled $74.69 million, representing 53.12% of total loans and 42.17% of total assets. At December 31, ~~2015~~2016, our allowance for loan losses was $2.1.8 million, representing ~~153~~240.96% of non-performing loans. In the event our loan customers do not repay their loans according to their terms and the collateral securing the payment of these loans is insufficient to pay any remaining loan balance, Bancorp may experience significant loan losses, which could have a materially adverse effect on our operating results. Bancorp makes various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, Bancorp reviews loans and our loss and delinquency experience, and evaluates economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable losses in our loan portfolio, resulting in additions to our allowance. The additions to our allowance for loan losses would be made through increased provision for loan losses, which would reduce our income.

Bank regulators periodically review Citizens Bank’s allowance for loan losses and may require it to increase the allowance for loan losses. Any increase in the allowance for loan losses as required by these regulatory authorities could have a material adverse effect on Bancorp’s results of operations and financial condition.

A large percentage of our loans are collateralized by real estate, and deterioration in the real estate market may result in additional losses and adversely affect our financial results.

Our results of operations have been, and in future periods will continue to be significantly impacted by the economy in Ohio. Deterioration of the economic environment Bancorp is exposed to, including a continued decline or worsening declines in the real estate market and single-family home re-sales or a material external shock, may significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. In the event of a default with respect to any of these loans, amounts received upon sale of the collateral may be insufficient to recover outstanding principal and interest on the loan. In the past, material declines in the value of the real estate assets securing many of our commercial real estate loans led to significant credit losses in the portfolio.

Deterioration of the economic environment Bancorp is exposed to, including a continued decline or worsening declines in the real estate market and single-family home re-sales or a material external shock, may significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. In the event of a default with respect to any of these loans, amounts received upon sale of the collateral may be insufficient to recover outstanding principal and interest on the loan. In the past, material declines in the value of the real estate assets securing many of our commercial real estate loans led to significant credit losses in the portfolio.

The same deterioration noted above can affect our real estate owned portfolio, and if the economic environment declines, it could significantly impair the value of the portfolio and our ability to sell the properties in a timely manner.

Changes in economic and political conditions could adversely affect Bancorp’s earnings through declines in deposits, loan demand, the ability of its customers to repay loans and the value of the collateral securing its loans.

Bancorp’s success depends, in part, on economic and political conditions, local and national, as well as governmental fiscal and monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy and other factors beyond Bancorp’s control may adversely affect its deposit levels and composition, demand for loans, the ability of its borrowers to repay their loans and the value of the collateral securing the loans it makes. Economic turmoil in Europe and Asia and changes in oil production in the Middle East affect the economy and stock prices in the United States, which can affect Bancorp’s earnings and capital and the ability of its customers to repay loans. Because Bancorp has a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral and Bancorp’s ability to sell the collateral upon foreclosure.

Volatility in the economy may negatively impact the fair value of our shares.

The market price for Bancorp’s common shares has been volatile in the past, and several factors could cause the price to fluctuate substantially in the future, including:

	•	announcements of developments related to our business;

	•	fluctuations in our results of operations;

	•	sales of substantial amounts of our securities into the marketplace;

	•	general conditions in our markets or the worldwide economy;

	•	a shortfall in revenues or earnings compared to securities analysts’ expectations;

	•	our inability to pay cash dividends;

	•	changes in analysts’ recommendations or projections; and

•

our announcement of other projects.

Changes in interest rates could adversely affect our financial condition and results of operations.

Our results of operations depend substantially on our net interest income, which is the difference between (i) interest income on interest-earning assets, principally loans and investment securities, and (ii) interest expense on deposit accounts and borrowings. These rates are highly sensitive to many factors beyond our control, including general economic conditions, inflation, recession, unemployment, money supply, and the policies of various governmental and regulatory authorities. While Bancorp has taken measures intended to manage the risks of operating in a changing interest rate environment, there can be no assurance that these measures will be effective in avoiding undue interest rate risk.

Increases in interest rates can affect the value of loans and other assets, including our ability to realize gains on the sale of assets. Bancorp originates loans for sale and for our portfolio. Increasing interest rates may reduce the volume of origination of loans for sale and consequently the volume of fee income earned on such sales. Further, increasing interest rates may adversely affect the ability of borrowers to pay the principal or interest on loans and leases, resulting in an increase in non-performing assets and a reduction of income recognized.

We rely, in part, on external financing to fund our operations and the availability of such funds in the future could adversely impact its growth strategy and prospects.

The Bank relies on deposits, advances from the Federal Home Loan Bank (the “FHLB”), and other borrowings to fund its operations. Although the Company considers such sources of funds adequate for its current capital needs, the Company may seek additional debt or equity capital in the future to achieve its long-term business objectives. The sale of equity or convertible debt securities in the future may be dilutive to the Company shareholders, and debt refinancing arrangements may require the Company to pledge some of its assets and enter into covenants that would restrict its ability to incur further indebtedness. Additional financing sources, if sought, might be unavailable to Bancorp or, if available, could be on terms unfavorable to it. If additional financing sources are unavailable, not available on reasonable terms or the Company is unable to obtain any required regulatory approval for additional debt, the Company’s growth strategy and future prospects could be adversely impacted.

Credit risks could adversely affect our results of operations.

There are inherent risks associated with our lending activities, including credit risk, which is the risk that borrowers may not repay outstanding loans or that the value of the collateral securing loans may decrease. Bancorp extends credit to a variety of customers based on internally set standards and judgment. Bancorp attempts to manage credit risk through a program of underwriting standards, the review of certain credit decisions, and an on-going process of assessment of the quality of the credit already extended. However, conditions such as inflation, recession, unemployment, changes in interest rates, money supply, and other factors beyond our control may increase our credit risk. Such adverse changes in the economy may have a negative impact on the ability of borrowers to repay their loans. Because Bancorp has a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral. In addition, substantially all of our loans are to individuals and businesses in Ohio. Consequently, any decline in the economy of this market area could have a materially adverse effect on our financial condition and results of operations.

We operate in extremely competitive markets, and our business will suffer if we are unable to compete effectively.

In our market area, the Company encounters significant competition from other commercial banks, savings associations, savings banks, insurance companies, consumer finance companies, credit unions, other lenders and with the issuers of commercial paper and other securities, such as shares in money market mutual funds. The increasingly competitive environment is a result primarily of changes in regulation and the accelerating pace of consolidation among financial service providers. Many of our competitors have substantially greater resources and lending limits than the Company does and may offer services that the Company does not or cannot provide.

The preparation of financial statements requires management to make estimates about matters that are inherently uncertain.

Management’s accounting policies and methods are fundamental to how the Company records and reports our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods in order to ensure that they comply with generally accepted accounting principles and reflect management’s judgment as to the most appropriate manner in which to record and report our financial condition and results of operations. The most critical estimates are the level of the allowance offor loan losses, other real estate owned valuation, and the valuation allowance on the deferred tax asset. Due to the inherent ~~nature~~ nature of these estimates, Bancorp cannot provide absolute assurance that it will not significantly adjust the allowance for loan ~~losses~~ losses or valuations due to uncertainties.

Our organizational documents may have the effect of discouraging a third party from acquiring us.

Our articles of incorporation and code of regulations, as amended, contain provisions that make it more difficult for a third party to gain control over or acquire us. The current provisions that may have anti-takeover effects include: (a) the elimination of cumulative voting in the election of directors; (b) the requirement that shareholder nominations for election to the Board of Directors be made in writing and delivered or mailed to the president of the Company within specified time frames; (c) the requirement that directors may be removed only by the affirmative vote of holders of not less than 80% of the voting power of the Company entitled to vote at an election of directors; (d) the requirements that certain business combinations be approved by at least 80% of the voting power of the Company, depending on the nature of the recommendation of the Board of Directors with regard to the relevant acquisition; (e) the lack of a provision opting out of application of the Ohio Merger Moratorium statute and its restrictions on persons who become the beneficial owner of ten percent or more of the shares of the Company and; (f) the classification of the Board of Directors into three classes with staggered terms. These provisions of our governing documents may have the effect of delaying, deferring, or preventing a transaction or a change in control that might be in the best interest of our shareholders.

Consumers may decide not to use banks to complete their financial transactions.

Technology and other changes are allowing parties to utilize alternative methods to complete financial transactions that historically have involved banks. For example, consumers can now maintain funds in brokerage accounts or mutual funds that would have historically been held as bank deposits. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.

We may be named as a defendant from time to time in a variety of litigation and other actions.

Bancorp or its subsidiary may be named as a defendant from time to time in a variety of litigation arising in the ordinary course of their respective businesses. Such litigation is normally covered by errors and omissions or other appropriate insurance. However, significant litigation could cause the Company to devote substantial time and resources to defending its business or result in judgments or settlements that exceed insurance coverage, which could have a material adverse effect on the Company’s financial condition and results of operation. Further, any claims asserted against Bancorp or Citizens Bank, regardless of merit or eventual outcome may harm the Company’s reputation and result in loss of business. In addition, the Company may not be able to obtain new or different insurance coverage, or adequate replacement policies with acceptable terms.

Our ability to use net operating loss carry forwards to reduce future tax payments may be limited or restricted.

Bancorp has generated net operating losses (“NOLs”) as a result of our recent losses. Bancorp generally is able to carry NOLs forward to reduce taxable income in future years. However, our ability to utilize the NOLs is subject to the rules of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). Section 382 generally restricts the use of NOLs after an “ownership change.” An ownership change generally occurs if, among other things, the shareholders (or specified groups of shareholders) who own or have owned, (directly, indirectly, or constructively under Section 382 and the Treasury regulations) 5% or more of a corporation’s common shares or are otherwise treated as 5% shareholders under Section 382 and the Treasury regulations caused an increase in their aggregate percentage ownership of that corporation’s stock by more than 50 percentage points over the lowest percentage of the shares owned by these shareholders over a three-year rolling period. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of taxable income a corporation may offset with NOL carry forwards. This annual limitation is generally equal to the product of the value of the corporation’s shares on the date of the ownership, multiplied by the long-term tax-exempt rate published monthly by the Internal Revenue Service. Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOL carry forwards.

Bancorp cannot ensure that our ability to use our NOLs to offset income will not become limited in the future. As a result, Bancorp could pay taxes earlier and in larger amounts than would be the case if our NOLs were available to reduce our federal income taxes without restriction.

Potential misuse of funds or information by the Bank’s employees or by third parties could result in damage to our customers for which we could be held liable, subject the Company to regulatory sanctions and otherwise adversely affect our financial condition and results of operations.

Our employees handle a significant amount of funds, as well as financial and personal information. Although the Company has implemented systems to minimize the risk of fraudulent taking or misuse of funds or information, there can be no assurance that such systems will be adequate or that a taking or misuse of funds or information by employees, by third parties who have authorized access to funds or information, or by third parties who are able to access funds or information without authorization will never occur. We could be held liable for such an event and could also be subject to regulatory sanctions. We could also incur the expense of developing additional controls to prevent future such occurrences. Although the Company has insurance to cover such potential losses, we cannot provide assurance that such insurance will be adequate to meet any liability. In addition, any loss of trust or confidence placed in the Company by our clients could result in a loss of business, which could adversely affect our financial condition and results of operations.

The Company could suffer a material adverse impact from interruptions in the effective operation of, or security breaches affecting, our computer systems.

The Bank relies heavily on information systems to conduct our business and to process, record, and monitor transactions. Risks to the system result from a variety of factors, including the potential for bad acts on the part of hackers, criminals, employees and others. As one example, in recent years, some banks have experienced denial of service attacks in which individuals or organizations flood the bank’s website with extraordinarily high volumes of traffic, with the goal and effect of disrupting the ability of the bank to process transactions. We are also at risk for the impact of natural disasters, terrorism and international hostilities on its systems or for the effects of outages or other failures involving power or communications systems operated by others. These risks also arise from the same types of threats to businesses with which we deal.

Potential adverse consequences of attacks on the Company’s computer systems or other threats include damage to our reputation, loss of customer business, litigation and increased regulatory scrutiny, which might also result in financial loss and require additional efforts and expense to attempt to prevent such adverse consequences in the future.

~~The absence of a trading market in our common shares may adversely affect your ability to resell shares at prices that you find attractive, or at all.~~14

~~Our~~The common shares are not traded on any national securities exchange and are not quoted on any over-the-counter market, and we do not intend to apply for listing on any national securities exchange or stock market. In the absence of a ~~trading~~highly ~~market,~~liquid ~~investors may be unable to liquidate their investment~~trading ormarket ~~make~~in ~~any~~our ~~profit~~common ~~from~~shares ~~the investment. Furthermore, it~~ may beadversely ~~difficult~~affect ~~for~~your ~~holders~~ability to resell ~~their~~ shares at prices ~~they~~that you find attractive, or at all.

Our ~~ability~~common shares are quoted on the over-the-counter market “pink sheets”, but are not traded on any other national securities exchange and we do not intend to ~~pay~~apply ~~cash~~for listing ~~dividends~~on any national securities exchange or stock market. In the absence of a highly liquid trading market, investors may be isunable ~~subject~~to liquidate their investment or make any profit from the investment. Furthermore, it may be difficult for holders to ~~prior~~resell their ~~FRB~~shares ~~approval~~at prices they find attractive, or at all.

The FRB 2011 MOU prohibits the Company from paying dividends without the FRB’s prior approval. Bancorp does not know how long this restriction will remain in place. Even if Bancorp is permitted to pay a dividend, Bancorp is dependent primarily upon the earnings of Citizens Bank for funds to pay dividends on our common shares. The payment of dividends by Citizens Bank is subject to certain regulatory restrictions. In addition, federal law generally prohibits a depository institution from making any capital distributions (including payment of a dividend) to its parent holding company if the depository institution would thereafter, and or, continue to be undercapitalized. As a result, any payment of dividends in the future by Bancorp will be dependent, in large part, on Citizens Bank’s ability to satisfy these regulatory restrictions and our subsidiary’s earnings, capital requirements, financial condition, and other factors.

We may issue additional common shares or convertible securities that will dilute the percentage ownership interest of existing shareholders and may dilute the book value per common share and adversely affect the terms on which we may obtain additional capital.

Our authorized capital includes 2,000,000 common shares and 100,000 preferred shares. As of December 31, ~~2015~~2016, we had ~~667~~691,~~618~~287 common shares and no preferred shares outstanding. ~~We may issue up to 67,985 additional common shares through the exercise of warrants issued in the 2014 stock offering.~~ Although we presently do not have any intention of issuing additional common shares ~~(other than pursuant to the exercise of warrants issued in the stock offering)~~, we may do so in the future in order to meet our capital needs and regulatory requirements, and we may be able to do so without shareholder approval. Our Board of Directors generally has the authority, without action by or vote of the shareholders, to issue all or part of any authorized, but unissued, common shares for any corporate purpose, including issuance of equity-based incentives under or outside of our equity compensation plans. We plan no immediate activity. Any issuance of additional common shares or convertible securities will dilute the percentage ownership interest of our shareholders and may dilute the book value per common share.

ITEM 1B. - UNRESOLVED STAFF COMMENTS

No response required.

ITEM 2 - PROPERTIES

The Company conducts business from ~~five~~three office locations. The Bank’s main office is located at 188 West Main Street, Logan, Ohio 43138. The main office is housed in a Bank-owned 4,000+ square foot building with drive-up lanes and a detached ATM. The Bank’s offices are located in Logan, Ohio (main office and ~~2 branches), Athens, Ohio (~~1 branch), and ~~Nelsonville~~Athens, Ohio (1 branch). The Company currently operates from the following locations, which~~, unless otherwise indicated,~~ are owned by the Bank:

Locations
· Main Office 188 West Main Street Logan, Ohio 43138	· Branch ~~(leased)~~31348 24Primmer ~~Fulton~~Road ~~Street~~Logan. ~~Nelsonville,~~ Ohio ~~45764~~43138
· Branch (leased) 12910 State Route 664 South Logan, Ohio 43138	· Branch 20 East Stimson Avenue Athens, Ohio 45701
	· Branch 20 East Stimson Avenue Athens, Ohio 45701
· Branch (leased) 21 Hocking Mall Logan, Ohio 43138

In September, 2015, an in-store, limited service, bank branch in Athens, Ohio was closed., and in July, 2016 a full service branch in Nelsonville, Ohio was also closed. Analysis indicated that ~~this~~these particular ~~location~~locations ~~was~~were not profitable and bank resources could be better deployed elsewhere. ~~Incremental~~In both cases, incremental cost savings more than offset the costs of the lease buyout. In September, 2016, an in-store branch in Logan, Ohio was closed and in November, 2016 a full service branch in Logan, Ohio was also closed. These two leased branches were merged into a newly constructed, bank owned, branch in Logan. Management believes that the site of the new branch is highly advantageous in comparison to the two branches replaced, will result in significantly reduced costs, and will enhance the business model. Cost reductions resulting from lower maintenance, energy expenses, and personnel costs make the project accretive to earnings.

Management is pursuing the merger of the two leased branches in Logan into a newly constructed, bank owned, branch in Logan. Management believes that the site of the new branch is highly advantageous in comparison to the two branches to be replaced, will result in significantly reduced costs, and will enhance the business model. Cost reductions resulting from lower maintenance, energy expenses, and personnel costs make the project accretive to earnings.

ITEM 3 – LEGAL PROCEEDINGS

From time to time, we are involved in routine litigation that arises in the normal course of business. However, neither Bancorp nor the Bank is currently involved in any litigation that management believes, either singularly or in the aggregate, could be reasonably expected to have a material adverse effect on its business, financial condition or results of operation.

ITEM 4 – Mine Safety Disclosures

Not applicable.

Part II

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

~~There~~Beginning ison noOctober ~~market~~5, ~~for~~2016, our ~~securities.~~ ~~Our~~common ~~securities~~shares ~~are~~started ~~not~~being ~~sold~~quoted for trading on ~~any~~the ~~exchange~~Over-The-Counter orPink ~~listed~~Sheets on(“OTC ~~any~~Pink”) ~~securities~~Bulletin ~~listing~~Board under ~~venue.~~the symbol “CZID.” The number of record holders of the Company’s common ~~stock~~shares as of ~~December~~March 3120, 2017 ~~2015~~was is658. ~~659~~The following quotations obtained from the OTC Pink since our shares became listed reflect the high and low bid prices for our common shares based on inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

The last cash dividend was paid in December 2010. Our shareholders are entitled to receive distributions out of legally available funds as and when declared by the Board, in its sole discretion. See Item 1 – Description of Business – “Regulatory Matters” for a description of restrictions on the Company’s ability to pay dividends.

	High Bid		Low Bid
Quarter ended:
March 31		N/A		N/A
June 30		N/A		N/A
September 30		N/A		N/A
December 31	$	26.50	$	18.30

18The last cash dividend was paid in December 2010. Our shareholders are entitled to receive distributions out of legally available funds as, and when, declared by the Board, in its sole discretion.

Recent Sales of Unregistered Securities. On February 9, 2015, the Bancorp renegotiated a portion of a $5.0 million note payable due December 29, 2015. In exchange for $2.3 million of the original $5.0 million note, the Company issued an interest only note for $1,644,546.60, due August 4, 2021, with a fixed interest rate of 6.00% and 28,675 shares of the Company’s common stock. These common shares were offered and sold by Bancorp in reliance upon an exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.16

On July 10, 2015, the Bancorp entered into an agreement with an accredited investor to sell that investor 4,500 shares of Bancorp common stock at a per share price of $25.46. These common shares were offered and sold by Bancorp in reliance upon an exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

ITEM 6 – SELECTED FINANCIAL DATA

	(Dollars in thousands)
	Year Ended December 31, 2015			Year Ended December 31, 2014
	Year Ended December 31, 2016			Year Ended December 31, 2015
Summary Income Data:
Total interest income	$	8,~~172~~047		$	8,~~453~~172
Total interest expense		~~1,225~~818			1,~~634~~225
Net interest income		67,~~947~~229			6,~~819~~947
Provision for loan losses		~~(250~~-	)		(~~186~~250	)
Non-interest income		1,491			1,728
Noninterest income		1,737			1,491
Non-interest expense		7,802			7,754
Noninterest expense		7,116			7,802
Income before income taxes		~~886~~1,850			~~979~~886
Income tax expense (benefit)		~~232~~622			~~(5,099~~232	)
Net income	$	~~654~~1,228		$	~~6,078~~654
Per Share Income Data:
Earnings per common share	$	1.0180		$	111.2101
Book value per share	$	2627.0082		$	2526.4000
Outstanding shares		~~667~~691,~~618~~287			~~584~~667,~~175~~618
Selected Balance Sheet Data (period end):
Total assets	$	~~183~~179,~~795~~497		$	~~201~~183,~~823~~795
Securities available for sale		148,~~013~~237			3114,~~164~~013
Loans, net of allowance for loan losses		147,153			142,557
Loans, net of allowance for loan losses (1)		152,273			147,153
Allowance for loan losses		(21,~~078~~848	)		(32,~~869~~078	)
Deposits		~~162~~156,~~325~~138			~~177~~162,~~967~~325
Shareholders' equity		17,359			14,837
Shareholders' equty		19,230			17,359
Performance Ratios (averages):
Return on shareholders' equity		36.9366	%		643.1193	%
Return on assets		0.3468	%		30.0034	%
Net interest income to total assets		34.5901	%		3.3659	%
Shareholders' equity to assets		8.60	%		4.68	%
Shareholders' equity to total assets		10.22	%		8.60	%
Asset Quality Data:
Nonperforming assets to total assets		0.8643	%		40.3686	%
Nonperforming assets to capital		93.1599	%		599.2915	%
Nonperforming loans to total loans		0.9050	%		50.2890	%
Nonperforming loans to reserve for loan losses		64.97	%		199.77	%
Nonperforming loans to allowance for loan losses		41.56	%		64.97	%
Reserve for loan losses to total loans		1.39	%		2.64	%
Allowance for loan losses to total loans		1.20	%		1.39	%
Ratio of net charge-offs to total loans		10.0315	%		01.2203	%
(1) Includes loans held for sale

1917

ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Forward-Looking Statements

Certain statements in this Form 10-K, which are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act , Section 21E of the Exchange Act, and the Private Securities Litigation Reform Act of 1995. Words such as “anticipate”,” “estimates”,” “may”,” “feels”,” “expects”,” “believes”,” “plans”,” “will”,” “would”,” “should”,” “could”,” and similar expressions are intended to identify these forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. Factors that might cause such a difference include, but are not limited to:

the success, impact, and timing of the implementation of the Company’s business strategies, including the successful integration of the recently completed acquisitions, the expansion of consumer lending activity, and rebranding efforts;

competitive pressures among financial institutions or from non-financial institutions may increase significantly, including product and pricing pressures and the Company’s ability to attract, develop, and retain qualified professionals;

changes in the interest rate environment due to economic conditions and/or the fiscal policies of the U.S. government and FRB, which may adversely impact interest margins;

changes in prepayment speeds, loan originations, and charge-offs, which may be less favorable than expected and adversely impact the amount of interest income generated;

adverse changes in the economic conditions and/or activities, including impacts from the implementation of the Budget Control Act of 2011 and the American Taxpayer Relief Act of 2012, as well as continuing economic uncertainty in the U.S., the European Union, and other areas, which could decrease sales volumes and increase loan delinquencies and defaults;

legislative or regulatory changes or actions, including in particular the Dodd-Frank Act and the regulations promulgated and to be promulgated thereunder by the FDIC, the FRB and others, that may subject the Company to a variety of new and more stringent legal and regulatory requirements which adversely affect their respective businesses;

deterioration in the credit quality of the Company’s loan portfolio, which may adversely impact the provision for loan losses;

changes in accounting standards, policies, estimates, or procedures, which may adversely affect the Company’s reported financial condition or results of operations;

adverse changes in the conditions and trends in the financial markets, including political developments, which may adversely affect the fair value of securities within the Company’s investment portfolio and interest rate sensitivity of the Company’s consolidated balance sheet;

Bancorp’s ability to receive dividends from its subsidiary;

the Company’s ability to maintain required capital levels and adequate sources of funding and liquidity;

the impact of larger or similar sized financial institutions encountering problems, which may adversely affect the banking industry and/or the Company’s business generation and retention, funding, and liquidity;

the costs and effects of regulatory and legal developments, including the outcome of potential regulatory or other governmental inquiries and legal proceedings and results of regulatory examinations;

the Company’s ability to secure confidential information through the use of computer systems and telecommunications networks, including those of the Company’s third-party vendors and other service providers, may prove inadequate, which could adversely affect customer confidence in the Company and/or result in the Company incurring a financial loss;

2018

the overall adequacy of the Company’s risk management program; and

other risk factors relating to the banking industry or the Company as detailed from time to time in the Company’s reports filed with the SEC, including those risk factors included in the disclosure under "ITEM 1A - RISK FACTORS" of this Form 10-K.

All forward-looking statements speak only as of the filing date of this Form 10-K and are expressly qualified in their entirety by the cautionary statements. Although management believes the expectations in these forward-looking statements are based on reasonable assumptions within the bounds of management’s knowledge of Bancorp’s business and operations, it is possible that actual results may differ materially from these projections. Additionally, Bancorp undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the filing date of this Form 10-K or to reflect the occurrence of unanticipated events except as may be required by applicable legal requirements. Copies of documents filed with the SEC are available free of charge at the SEC’s website at www.sec.gov and/or from Bancorp’s website – www.tcbol.com under the “About Us” section.

The following discussion and analysis of the Company’s Consolidated Financial Statements is presented to provide insight into management's assessment of the financial results and condition for the periods presented. This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto, as well as the ratios and statistics, contained elsewhere in this Form 10-K.

Overview. The Company’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 nonperforming assets and additional provision for loan losses can greatly reduce profitability. Results of operations are also impacted by noninterest income, such as service charges on deposit accounts and fees on other services, income from lending services, as well as noninterest expense such as salaries and employee benefits, occupancy expense, professional and other services, and other expenses.

For the year ended December 31, ~~2015~~2016, the Company recorded net income of $01.72 million or $1.0180 per share, compared to net income of $60.17 million, or $111.2101 per share as of December 31, ~~2014~~2015. Return on average assets and return on average common equity were 0.3468% and 36.9366%, respectively, for year-end ~~2015~~2016, compared to 30.0034% and 643.1193% for year-end ~~2014~~2015. The results for 2014 include the reversal of the previously recorded deferred tax asset allowance, resulting in an income tax benefit of $5.1 million in 2014 net income. Adjusting for the effects of the deferred tax asset allowance reversal, the normalized 2014 return on average assets and return on average common equity would be 0.48% and 10.33% respectively.

Profitability in ~~2015~~2016 was largely the result of the continuation of diligent loan monitoring and the application of enhanced credit review. Many of the lower credit quality loans made in prior years have been returned to current status, been foreclosed and the collateral liquidated, or refinanced elsewhere. ~~Aggressive~~ Aggressive stewardship of those loans in the prior year resulted in higher costs for that period, but those credit related costs ~~continued~~ continued to moderate in ~~2015~~2016. The prior year’s results were impacted by costs associated with the declining credit quality of loans originated over a six year period beginning in 2003 and emanated from large commercial loans to industries, including ~~horticulture~~ horticulture nurseries, biofuel production, and speculative commercial real estate. Several loans were made to borrowers outside the Company’s primary footprint. Of the $1.7 million of gross charge offs during 2015, 36.5% came from large commercial loans originated prior to 2009. Stricter monitoring of loan origination limited gross charge offs in 2016 to $0.3 million.

Key items affecting the Company’s results in ~~2015~~2016 compared to ~~2014~~2015 include:

• ~~The~~During the 2016 fiscal year, the Company recorded ~~income~~no ~~tax~~provision ~~expense~~for ofloan ~~$232~~losses ~~thousand~~as inthe ~~2015.~~existing Inallowance ~~2014,~~for ~~the~~loan and lease losses (ALLL) is deemed adequate. The Company ~~reversed~~recaptured $250 thousand from the ~~2012~~ALLL ~~write-off~~in offiscal ~~deferred~~year ~~tax~~2015. ~~assets~~Valuation asadjustments made to the ~~financial~~other ~~projections~~real ~~indicated~~estate ~~that~~owned we(OREO) ~~were~~portfolio ~~“more~~totaled ~~likely~~$15 ~~than~~thousand ~~not”~~in ~~able~~2016 toversus ~~utilize~~OREO ~~those~~valuation ~~deferred~~adjustments ~~tax~~of ~~assets~~$138 ~~going~~thousand ~~forward~~during 2015. ~~The~~During 2016, net ~~effect~~loan ofcharge ~~this~~offs ~~reversal~~totaled of$0.2 ~~the~~million ~~deferred~~compared ~~tax~~to ~~asset~~2015 ~~allowance~~net ~~was~~loan acharge offs of $5.1.5 million. ~~addition~~Principal transfers to ~~income~~OREO totaled $22 thousand in 2016 versus $150 thousand in 2015.

• ~~The~~Net ~~Company~~interest ~~recaptured~~income increased $~~250~~282 thousand, ~~from~~or ~~the~~4.1% ~~allowance for loan and lease losses (“ALLL”) compared~~ to ~~the recapture of~~ $~~186~~7.2 ~~thousand~~million infor ~~2014~~the ~~and~~year ~~made~~ended ~~valuation~~December ~~adjustments~~31, ~~totaling~~2016 from $~~138~~6.9 ~~thousand~~million tofor the ~~other~~year ~~real~~ended ~~estate~~December ~~owned~~31, ~~(“OREO”) portfolio during~~ 2015. ~~compared~~A to $~~127~~0.1 ~~thousand~~million ofyear-over-year ~~OREO~~decline ~~portfolio valuation adjustments~~ in ~~2014.~~interest ~~During~~income ~~2015,~~was ~~net~~offset ~~loan~~by ~~charge~~a ~~offs totaled~~ $~~1.5 million versus the $~~0.34 million ofreduction ~~2014. Principal transfers to OREO totaled $150 thousand~~ in ~~2015~~interest ~~versus $803 thousand in 2014~~expense.

2119

• ~~Net~~The ~~interest~~Company’s ~~income~~capital position increased ~~$128~~with ~~thousand~~the orcapital 1campaign as well as the profitability of 2016.~~88%~~ toShareholders’ equity at Bancorp increased $61.98 million ~~for~~(10.8%) ~~the~~to ~~year~~$19.2 ~~ended~~million on December 31, ~~2015~~2016 from $617.84 million ~~for~~on ~~the year ended~~ December 31, ~~2014~~2015. ALeverage $0capital and total capital at the Bank were 8.352% ~~million~~and ~~year-over-year~~12.40% ~~decline~~as inof ~~interest~~December ~~income~~31, ~~was~~2016 ~~offset~~compared byto a8.23% $0and 13.414% ~~million~~as ~~reduction~~of inDecember ~~interest~~31, ~~expense~~2015.

•Comparison ~~The~~of ~~Company’s~~Results ~~capital position increased with the capital campaign as well as the profitability~~ of ~~2015.~~Operations ~~Shareholders’~~for ~~equity at Bancorp increased $2.5 million (17.00%) to $17.4 million on December 31, 2015 from $14.8 million on December 31, 2014. Leverage capital and total capital at~~ the ~~Bank~~Years ~~were 8.23% and 13.14% as of~~ Ended December 31, ~~2015~~2016 ~~compared to 8.11%~~ and ~~13.39% as of~~ December 31, ~~2014. Refer to Item 1 “Supervision and Regulation” for further discussion of the 2012 Consent Order.~~2015

~~Comparison~~For the year ended December 31, 2016, the Company recorded net profit of ~~Results~~$1.2 million, or $1.80 per share, an increase of ~~Operations~~$0.6 million from the net profit of $0.7 million, or $1.01 per share, for the ~~Years~~year ~~Ended~~ended December 31, 2015. ~~and~~Improved ~~December~~profitability 31in 2016 can primarily be attributed to lower noninterest expense owing to better loan quality, ~~2014~~and more efficient operations. Legal expenses and OREO related expenses were down a combined $0.5 million in 2016 relative to 2015 as nonaccrual loans declined by $0.6 million and OREO fell from $0.2 million to zero.

For the year ended December 31, 2015, the Company recorded net profit of $0.7 million, or $1.01 per share, a decline of $5.4 million from the net profit of $6.1 million, or $11.21 per share, for the year ended December 31, 2014. The 2014 net income results were buoyed by the recapture of the $5.1 million deferred tax allowance account. Adjusting for this recapture, normalized 2014 net income after tax would be $1.0 million, essentially flat with 2015 net income. Improved profitability in 2015 can primarily be attributed to better loan quality, reducing non-accrual loans by $6.4 million, and allowing a $250 thousand recapture of the allowance for loan losses, and a reduction of $0.4 million in interest expense. These reductions in loan credit related expense more than offset the $0.2 million reduction in noninterest income.20

22Distributution of Assets, Liabilities, and Shareholders' Equity

Distribution of Assets, Liabilities, and Shareholders' Equity

For the years ended December 31,

	(Dollars in thousands)
	2015							2014
	2016							2015
	Average Balance		Interest		Yield / Rate			Average Balance		Interest		Yield / Rate
Interest-Earning Assets:
Loans receivable (1), (2)	$	143,596	$	7,764		5.41	%	$	141,501	$	7,689		5.43	%
Loans receivable (1), (2), (4)	$	148,060	$	7,817		5.28	%	$	143,596	$	7,764		5.41	%
Securities (3)		169,~~034~~077		~~346~~164		21.1681	%		3616,~~286~~034		~~702~~346		12.9316	%
Fed Funds Sold		125,~~225~~188		2630		0.2157	%		1112,~~778~~225		26		0.2221	%
FHLB stock		859		36		4.19	%		859		36		4.19	%
Total interest-earning assets		~~172~~163,~~714~~184		8,~~172~~047		4.7393	%		~~190~~172,~~424~~714		8,~~453~~172		4.4473	%
Non-interest-earning assets		2017,~~961~~215							1220,~~341~~961
Total Assets	$	~~193~~180,~~675~~399						$	~~202~~193,~~765~~675
Interest-Bearing Liabilities
Interest-bearing deposits		~~146~~121,~~127~~696		~~891~~708		0.6158	%		~~162~~146,~~324~~127		~~1,178~~891		0.7361	%
Other borrowings		4,900		334		6.82	%		6,251		456		7.29	%
Fed Funds Purchased		229		2		0.87	%		-		-		0.00	%
Total interest-bearing liabilities		151,027		1,225		0.81	%		168,575		1,634		0.97	%
Other borrowings		1,775		108		6.08	%		4,900		334		6.82	%
Non-interest-bearing liabilities		24,379							22,248
Total interest-bearing liabilities		123,700		818		0.66	%		151,027		1,225		0.81	%
Total including non-interest-bearing demand deposits		175,406		1,225					190,823		1,634
Non-interest-bearing liabilities		36,507							24,379
Other non-interest liabilities		1,619							2,462
Total including non-interest-bearing demand deposits		160,207		818					175,406		1,225
Total Liabilities		177,025							193,285
Other non-interest liabilities		1,747							1,619
Shareholders' equity		16,650							9,480
Total Liabilities		161,954							177,025
Total liabilities and shareholders' equity	$	193,675						$	202,765
Shareholders' equity		18,445							16,650
Net interest income; interest rate spread			$	6,947		3.92	%			$	6,819		3.47	%
Total liabilities and shareholders' equity	$	180,399						$	193,675
Net interest margin						4.02	%						3.58	%
Net interest income; interest rate spread			$	7,229		4.27	%			$	6,947		3.92	%
Average interest-earning assets to average interest-bearing liabilities						114.36	%						112.96	%
Net interest margin						4.43	%						4.02	%
Average interest-earning assets to average interest-bearing liabilities						131.92	%						114.36	%

(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 (4) Loans receivable includes loans held for sale

~~(2) Non-accrual loans are included in average loan balance~~21

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

Volume and Rate Analysis

~~2015~~2016 Compared to ~~2014~~2015

At December 31,	(Dollars in thousands)
	Total			Volume			Rate
Increase (Decrease) in
Interest Income
Federal Funds Sold	$	-		$	1		$	(1	)
Overnight Funds Sold	$	4		$	(15	)	$	19
Investment Securities		(~~356~~182	)		(~~402~~157	)		46(25	)
Loans		7553			~~114~~241			(39188	)
Total Interest Income		(~~281~~125	)		~~(287~~69	)		6(194	)
Interest Expense
Deposits	$	(~~287~~183	)	$	(~~118~~149	)	$	(~~169~~34	)
Borrowed Funds		(122	)		(99	)		(23	)
Overnight Funds Purchased		2			-			2
Total Interest Expense		(409	)		(216	)		(193	)
Borrowed Funds		(226	)		(213	)		(13	)
Net Interest Income	$	128		$	(71	)	$	199
Total Interest Expense		(407	)		(362	)		(45	)
Net Interest Income	$	282		$	431		$	(149	)

Interest income for the year ended December 31, ~~2015~~2016 was $8.20 million, a $0.31 million, or 31.35%, decrease from ~~the~~that ~~$8.5 million~~ earned during the year ended December 31, ~~2014~~2015. The yield on earning assets increased 2920 basis points (bps) to 4.7393% for the year ending December 31, ~~2015~~2016 from 4.4473% for the prior ~~year~~ year ended December 31, ~~2014~~2015. Interest income earned from the loan portfolio increased approximately $0.1 million when compared to ~~2014~~2015. The small increase in interest income from the loan portfolio can be attributed to ~~both~~growth ~~the $6.4 million decrease~~ in ~~non-accrual loans and an increase in~~ average ~~loans~~loan ~~year-over-year~~balances of $24.15 million partially ~~(1.5%)~~offset ~~reduced~~ by a 213 bps ~~decrease~~reduction in ~~the~~average annual yield on those loans. ~~The~~A ~~yield~~combination onof ~~earning~~loan ~~assets~~originations ~~was~~during ~~impacted~~a byhistorically low ~~the~~rate ~~sales,~~cycle ~~payoffs,~~ and ~~maturities within~~ the ~~securities~~continued ~~portfolio~~downward ~~reducing the~~repricing ~~share~~ of ~~these~~variable ~~relatively~~rate ~~low~~loans ~~yielding~~drove ~~assets~~the ~~from~~reduction ~~17.5%~~in toaverage 8yield.~~4% of earning assets.~~

Interest income from the investment portfolio was down $0.42 million for the ~~years~~year ended December 31, ~~2015~~2016 and ~~2014~~relative to the year ending December 31, 2015. A year-over-year decline of $207.30 million (5543.84%) in ~~the~~ average investment portfolio ~~was~~balances ~~offset~~and by a year-over-year ~~increase~~decrease in average yield of 2335 bps (from 12.9316% in ~~2014~~2015 to 21.1681% in ~~2015~~ 2016) drive this decrease. ADuring 2016, a total of $34.10 million of investment securities were ~~purchased in 2015~~sold, consisting of $1.80 million of ~~municipal~~US government securities, yielding 10.8843%, and $1.3.0 million of US government federal agencies, yielding 2 1.0219%. During ~~2014~~2015, ~~management~~a ~~invested~~total inof $53.01 million of USinvestment ~~Treasury~~securities ~~obligations~~were ~~with~~purchased, anconsisting ~~average~~of ~~yield~~$1.8 million of municipal securities, yielding 1.2688%, and $1.3 million of US government federal agencies, yielding 2.02%.

Interest expense for the year ended December 31, ~~2015~~2016 was $10.28 million, a $0.4 million or 2533.02% decrease from the $1.62 million paid for the year ended December 31, ~~2014~~2015. Interest expense for deposits declined $0.32 million to $0.97 million for ~~2015~~2016 from $10.29 million for ~~2014~~2015. The decrease resulted, in part, from a new pricing strategy of setting competitive deposit rates on retail CD’s (less than $100 thousand) but not necessarily being the market leader as had been the case in prior years. ~~This strategy, in part, has contributed to a $14.6 million (18.3%) decrease in the average balance of certificates of deposit year-over-year.~~

Interest expense for other borrowings was $~~334~~108 thousand in ~~2015~~2016 and $~~456~~334 thousand in ~~2014~~2015. ~~All~~This ~~of the 2015~~ interest expense is related to loans to the holding company ~~totaling~~which were paid ~~$2.6~~off ~~million~~and asretired in the fourth quarter of ~~December~~2016. ~~31,~~These ~~2015~~loans ~~and~~totaled $62.16 million as of December 31, ~~2014~~2015. Please refer to “Other Borrowings” below for details regarding these loans.

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

The absence of any loan loss provision expense in 2016 compares to the recovered provision of $250 thousand in 2015. The absence of a provision expense for loan losses was largely driven by a decrease in nonperforming loans and increases in the collateral values for impaired loans. Management considers the allowance for loan losses at December 31, 2016 adequate to cover loan losses based on its assessment of various factors affecting the loan portfolio, including the level of problem loans, overall delinquencies, business conditions, estimated collateral values, and loss experience. A further decline in local and national economic conditions, or other factors, could result in a material increase in the allowance for loan losses which could adversely affect the Company’s financial condition and results of operations. At December 31, 2015, the Company had determined that an excess existed in the allowance for loan and lease losses and $250 thousand was recaptured to income.

Noninterest Income. Noninterest income, which consists primarily of fees and commissions earned on services that are provided to the Company’s banking customers, and to a lesser extent, gains on sales of OREO and other repossessed assets, and other miscellaneous income, increased $246 thousand, or 16.5%, to $1.7 million for the year ended December 31, 2016 from $1.5 million for the year ended December 31, 2015. The increase can mostly be attributed to 2016 gains from the sales of repossessed assets of $532 thousand. Gains on the sale of investment securities were down $153 thousand in 2016 relative to 2015. The following is a discussion of significant year-over-year changes in other material noninterest income categories:

	•	Services charges for deposit accounts decreased by $2 thousand to $407 thousand for the year ended December 31, 2016 from $409 thousand for the year ended December 31, 2015. These fees were expected to decline as the Bank changed the procedure used to process account overdrafts to a more customer based methodology, limiting the number of charged overdrafts fees per customer.

	•	The Company recorded $60 thousand in secondary market sales fees as the initiative to originate loans and sell them in the secondary markets gained traction in 2016. This fee income was an increase of 114.3% over the $28 thousand earned in 2015.

	•	Income for credit and debit cards increased by $11 thousand, or 3.1%, to $361 for the year ended December 31, 2016 from $350 thousand for the year ended December 31, 2015. The Bank continues to emphasize credit and merchant card issuance and fees.

	•	Other noninterest income from the gain on sale of OREO properties increased by $287 thousand to $532 thousand for the year ended December 31, 2016 from a gain of $245 thousand for the year ended December 31, 2015. Much of the 2016 gain was attributable to a single relationship.

	•	Sales of investment securities generated gains of $15 thousand in 2016 versus $168 thousand in 2015. Sales of investment securities totaled $4.0 million in 2016 and $14.4 million in 2015.

•

Other noninterest income was up $71 thousand, or 24.4%, to $362 thousand for the year ended December 31, 2016 from $291 thousand for the year ended December 31, 2015. Noninterest income primarily increased due to a $107 thousand increase in the cash surrender value of bank owned life insurance. Purchased in September, 2015, the insurance accrued for an entire year in 2016 versus only a quarter of 2015. The sale of three distressed loans to a third party purchaser resulted in gains of $56 thousand, which were only partially offset by a $28 thousand decline in mortgage broker commissions in 2016 versus 2015.

Noninterest Expense. Noninterest expense, which consists primarily of personnel, occupancy, equipment and other operating expenses, decreased by $686 thousand, or 8.8%, to $7.1 million for the year ended December 31, 2016 from the $7.8 million in expense for the year ended December 31, 2015. The year-over-year decrease was realized in branch consolidation expenses (down $260 thousand) and loan credit quality and OREO related components (down $459 thousand) offset by higher expenses associated with consumer delivery systems such as mobile banking.

The following is a discussion of significant year-over-year changes for other material noninterest expense categories:

	•	Salary and benefit expense increased by $0.2 million, or 5.4%, to $3.4 million for the year ended December 31, 2016 from $3.2 million for the year ended December 31, 2015. Increases in salary expense of $0.2 million were offset by a reduction of $0.1 million in required pension fund contributions as the pension fund was fully funded in 2015.

	•	Costs related to repossessed assets fell by $145 thousand, or 65.0%, for the year ended December 31, 2016 relative to the year ended December 31, 2015. Costs related to the preservation and care of OREO properties dropped as a result of a decline in the number and value of OREO properties held by the Bank. At December 31, 2016. the Bank held no OREO property versus properties valued at $0.2 million at December 31, 2015. In 2016, $15 thousand was required to write down existing OREO properties to market value versus an expense of $138 thousand in 2015.

	•	Reflecting the higher credit quality of the loan portfolio, legal and other professional expenses decreased by $314 thousand, or 56.2%, to $245 thousand as of December 31, 2016 from $559 thousand as of December 31, 2015. The decrease can be attributed to the decline in average delinquent loans from the prior year. The four quarters average of delinquent loans fell from $4.2 million in 2015 to $2.0 million for 2016. On a point-to-point basis, delinquent loans increased by $0.2 million, or 12.0%, at December 31, 2016 versus December 31, 2015. Legal services to assist in the resolution of regulatory issues also declined in 2016 as the regulatory climate surrounding the bank normalized.

	•	Costs associated with examinations and audits increased $44 thousand, 15.3%, to $332 thousand at December 31, 2016 relative to the year ended December 31, 2015. The Company incurred the full costs associated with public registration and auditing in 2016.

	•	The program to consolidate and update physical locations continued in 2016, including the closure of both an in-store branch and two full service branches. The Company disposed of many obsolete assets and wrote down the carrying values of many more. During the year ended December 31, 2016, the write down and disposal of fixed and worthless assets and lease buyout costs totaled $88 thousand, a decrease of $260 thousand from the $348 thousand recorded in 2015.

	•	The dues and subscriptions expense category increased $157 thousand, or 95.2%, from $165 thousand in the 2015 fiscal year to $322 thousand in the 2016 fiscal year. Customer related services such as internet banking, automatic bill pay, and remote check capture have been added over these past two years, greatly enhancing our product offerings, but also increasing costs.

•

Other noninterest expense decreased by $49 thousand, or 9.0%, to $494 thousand for the year ended December 31, 2016 from $543 thousand for the year ended December 31, 2015. The Ohio Financial Institutions Tax increased by $42 thousand year-over-year as our equity position increased. The increased emphasis on employee education and training resulted in an additional $17 thousand in 2016 relative to 2015. Miscellaneous costs in 2016 were down $109 thousand from 2015, as calendar year 2015 included one time, nonrecurring charges of $60 thousand related to the repurchase of a mortgage loan sold in a prior year and $25 thousand in settlement of litigation.

Income Taxes. Accounting Standards Codification 740, Income Taxes, requires companies to assess whether a valuation allowance should be established against deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. If it is determined that the company is “less likely than not” to utilize existing deferred tax assets within the prescribed statutory period, the company is obligated to write the deferred tax assets down accordingly.

AtThe ~~December 31, 2015, the~~ Company ~~determined that~~expects ~~an excess existed in the allowance for loan and lease losses and $250 thousand was recaptured~~ to ~~income.~~realize Predictive indicators, such as the Watch List and its component subcategories, are the principal credit tool used by the Bank to identify future problem loans. Special Mention loans, those loans deemed to be of higher risk or with correctable deficiencies, declined by $34.86 million orof ~~69.8%~~deferred attax ~~December~~assets ~~31,~~related ~~2015 relative~~ to ~~December~~net ~~31,~~operating ~~2014.~~loss ~~Substandard~~carryforwards ~~loans,~~well ~~those loans~~ in ~~which~~advance ~~there~~of is the ~~distinct~~statutory ~~possibility of~~carryforward ~~sustaining some loss, dropped $1~~period.4 ~~million,~~At ~~or 15.7% from~~ December 31, ~~2014 to December 31~~2016, ~~2015. There were no doubtful loans, those for which full collection is doubtful, at December 31, 2015 compared to~~ $0.72 million atof ~~December~~existing ~~31,~~deferred ~~2014.~~tax ~~Watch~~assets ~~List~~were ~~loans, those~~not ~~loans~~related ~~rated~~to ~~Special~~net ~~Mention,~~operating ~~Substandard,~~losses orand ~~Doubtful~~therefore ~~declined~~have ~~$5.9~~no ~~million, or 39.0%, from $15.2 million at December 31,~~expiration ~~2014 to $9~~date.~~2 million at December 31, 2015.~~

~~This~~The ~~decision~~valuation toallowance ~~recapture~~could ~~the~~be ~~calculated~~reinstated ~~excess~~should ~~portion~~future ofevents ~~the~~dictate ~~allowance~~and ~~for~~could ~~loan~~fluctuate ~~and~~in ~~lease~~future ~~losses~~periods isbased ~~further~~on ~~bolstered~~the byassessment ~~year~~of ~~end~~the ~~delinquency~~positive ~~numbers~~and negative evidence. Management’s Atconclusion at December 31, ~~2015~~ ~~nonperforming~~2016 ~~loans~~that ~~had~~it ~~fallen~~is more likely than not that the net deferred tax assets of $6.4.5 million will be realized is based on management’s estimate of future taxable income. Management’s estimate of future taxable income is based on internal forecasts which consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment. If actual results differ significantly from the ~~December~~current 31estimates of future taxable income, ~~2014~~even ~~level~~if caused by adverse macro-economic conditions, a valuation allowance may need to be recognized for some or all of $7the deferred tax asset.7 ~~million~~Such an increase to ~~$1.4~~the deferred ~~million~~tax asset valuation allowance could have a material adverse effect on the Company’s financial condition and results of operations.

~~The~~Changes ~~$250 thousand negative provision~~ in ~~2015~~ ~~compares~~Condition tofrom the recovered provision of $186 thousand in 2014. The reduction in provision for loan losses was largely driven by a decrease in nonperforming loans and increases in the collateral values for impaired loans. Management considers the allowance for loan losses at December 31, 2015 ~~adequate~~ to ~~cover~~December ~~loan losses based on its assessment of various factors affecting the loan portfolio~~31, ~~including~~2016. ~~the~~Total ~~level~~assets ofdecreased ~~problem~~$4.3 ~~loans~~million, ~~overall~~or ~~delinquencies~~2.3%, ~~business~~to ~~conditions,~~$179.5 ~~estimated~~million ~~collateral~~on ~~values~~December 31, ~~and~~2016 ~~loss~~from ~~experience~~$183.8 Amillion ~~further~~on ~~decline~~December ~~in local and national economic conditions~~31, or2015. ~~other~~This ~~factors,~~reduction ~~could result~~ in aasset ~~material~~size ~~increase~~ is in ~~the~~line ~~allowance~~with ~~for~~our ~~loan~~strategic ~~losses which could adversely affect the Company’s financial condition and results of operations~~objective.

~~Noninterest~~Loan ~~Income~~Portfolio. ~~Noninterest~~Gross loans ~~income~~increased $4.8 million, ~~which~~or ~~consists~~3.2%, ~~primarily~~to of$154.0 ~~fees~~million ~~and~~as ~~commissions~~of ~~earned~~December on31, ~~services~~2016 ~~that~~from ~~are~~a ~~provided~~balance toof ~~the~~$149.2 ~~Company’s~~million ~~banking~~on ~~customers~~December 31, 2015. ~~and~~The toincrease acan ~~lesser~~be ~~extent~~attributed, ~~gains~~in onpart, ~~sales~~to of$34.2 ~~OREO~~million ~~and~~of ~~other~~new ~~repossessed~~loan ~~assets~~originations, ~~and~~partially ~~other~~offset ~~miscellaneous~~by ~~income,~~net ~~decreased~~loan ~~$237~~charge ~~thousand,~~offs/charge ordowns 13of $0.7%2 million, transfers to OREO of less than $10.51 million, ~~for~~troubled ~~the~~loan ~~year~~sales ~~ended~~of ~~December~~$0.6 31million, ~~2015~~and ~~from~~principal repayments of $128.76 million ~~for~~(includes ~~the~~repayments ~~year~~on ~~ended~~revolving ~~December~~lines ~~31,~~of ~~2014~~credit). The ~~decrease can~~new ~~mostly~~originations bewere ~~attributed~~primarily toconsumer ~~2014~~loans, ~~gains~~with ~~from~~mortgage and ~~the~~construction ~~sales~~originations oftotaling ~~repossessed~~$8.9 ~~assets~~million and consumer titled loan originations of $~~464~~9.1 ~~thousand~~million. asThe ~~well~~emphasis ason ~~higher~~consumer lending ~~gains~~is onpart of a strategic initiative to re-balance the ~~sale of~~loan ~~securities~~portfolio into ~~2014~~be more equally weighted between commercial and consumer loans. ~~The~~This ~~following~~trend is aexpected ~~discussion~~to ofcontinue ~~significant~~into ~~year-over-year~~2017 ~~changes~~and inis ~~other~~a ~~material~~centerpiece ~~non-interest~~of ~~income categories:~~the 2017 profit plan.

• Services charges for deposit accounts decreased by $42 thousand, or 9.3%, to $409 thousand for the year ended December 31, 2015 from $451 thousand for the year ended December 31, 2014. These fees were expected to decline as the Bank changed the procedure used to process account overdrafts to a more customer based methodology, limiting the number of overdrafts per customer.

Loan Portfolio Distribution
	(Dollars in thousands)
At December 31,	2016		2015
	Amount		Amount

Commercial	$	80,087	$	82,147
Real estate		43,675		43,401
Consumer		30,224		23,683
	$	153,986	$	149,231

• The Company recorded $28 thousand in secondary market sales fees as the initiative to originate loans and sell them in the secondary markets came on line in late 2015. There was no income from the sale of loans held for sale during the year ended December 31, 2014.

• Income for credit and debit cards increased by $11 thousand, or 3.2%, to $350 for the year ended December 31, 2015 from $339 thousand for the year ended December 31, 2014. The Bank has placed a heightened emphasis on credit and merchant card issuance and fees.

• Other noninterest income from the gain on sale of OREO properties decreased by $219 thousand to $245 thousand for the year ended December 31, 2015 from a gain of $464 thousand for the year ended December 31, 2014. Much of this difference was attributable to a single relationship in 2014 which generated a gain of $286 thousand.

• Other noninterest income was up $19 thousand, or 7.0%, to $291 thousand for the year ended December 31, 2015 from $272 thousand for the year ended December 31, 2014. Noninterest income primarily increased due to mortgage broker sales commissions and increase in cash surrender value of bank owned life insurance.

Noninterest Expense. Noninterest expense, which consists primarily of personnel, occupancy, equipment and other operating expenses, increased by $48 thousand, or 0.6%, to $7.8 million for the year ended December 31, 2015 matching the $7.8 million in expense for the year ended December 31, 2014. The year-over-year increase was realized in compensation expense (down $218 thousand) and other occupancy expenses (down $119 thousand) offset by higher expenses associated with fixed asset write-downs ($348 thousand) and other miscellaneous expenses.

The following is a discussion of significant year-over-year changes for other material non-interest expense categories:

• Salary and benefit expense declined by $0.2 million, or 6.4%, to $3.2 million for the year ended December 31, 2015 from $3.4 million for the year ended December 31, 2014. Employee health insurance premiums were $156 thousand less for calendar year 2015 relative to calendar year 2014 due to changes made in both the coverages offered and carrier. Reductions in salary expense were a result of the full year effect of staff reductions made in 2014.

• FDIC insurance premium expense fell by $159 thousand, or 39.7%, to $242 thousand as of December 31, 2015 from $401 thousand of December 31, 2014. The 2015 FDIC insurance expense was less as a result of a reduction in the risk premium paid by the Bank and the strategic contraction of the Bank.

• Expenses associated with OREO properties decreased by $85 thousand, or 27.6%, for the year ended December 31, 2015 relative to the year ended December 31, 2014. Costs related to the preservation and care of OREO properties dropped as a result of a decline in the number and value of OREO properties held by the Bank. At December 31, 2015 the Bank held OREO property valued at $0.2 million versus properties valued at $1.1 million at December 31, 2014. In 2015, $138 thousand was required to write-down existing OREO properties to market value versus a expense of $127 thousand in 2014.

• Legal and other professional expense increased by $125 thousand, or 28.8%, to $559 thousand as of December 31, 2015 from $434 thousand as of December 31, 2014. The increase can be attributed to the increased use of third-party providers of legal and professional services to assist in the resolution of regulatory issues and in the resolution of a small number of high value troubled debt relationships as the Company works aggressively to resolve these issues.

• Costs associated with examinations and audits decreased $53 thousand, 15.5%, to $288 thousand at December 31, 2015 relative to the year ended December 31, 2014 as the Company incurred fewer costs associated with public registration and auditing in 2015 relative to 2014.

• As part of the program to consolidate and update physical locations, including the closure of an in-store branch, the Company disposed of many obsolete assets and wrote down the carrying values of many more. During the year ended December 31, 2015, the write-down and disposal of fixed and worthless assets and lease buyout costs totaled $348 thousand versus no write-downs during the previous year.

• Director fees were $41 thousand, or 23.6%, higher in the year ended December 31, 2015 totaling $215 thousand versus $174 thousand in 2014. The Company increased the annual retainer as well as increasing the number and frequency of meetings.

• Other noninterest expense increased by $134 thousand, or 32.8%, to $543 thousand for the year ended December 31, 2015 from $409 thousand for the year ended December 31, 2014. Calendar year 2015 included one time, nonrecurring charges of $60 thousand related to the repurchase of a sold mortgage loan and $25 thousand in settlement of litigation, while calendar year 2014 included nonrecurring gains of $40 thousand on the sale of other assets.

Income Taxes. Management assesses the valuation allowance recorded against deferred tax assets at each reporting period. The determination of whether a valuation allowance for deferred tax assets is appropriate is subject to considerable judgment and requires an evaluation of all the positive and negative evidence. Accounting Standards Codification 740, Income Taxes, requires companies to assess whether a valuation allowance should be established against deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.

In the fourth quarter of 2014, the Company reversed the entire valuation allowance on deferred tax assets of $5.1 million. The Company had established a full valuation allowance on the deferred tax asset in 2012 due to the realization of significant losses and uncertainty about the Company’s future earnings forecasts. Recapture of this valuation allowance made the Company subject to accruing and recording of the appropriate income tax expense going forward. Although no taxes are due as a result of the operating loss carryforward, expense is recognized.

The Company expects to realize $4.7 million of deferred tax assets related to net operating loss carryforwards well in advance of the statutory carryforward period. At December 31, 2015, $0.8 million of existing deferred tax assets were not related to net operating losses and therefore have no expiration date.

The valuation allowance could be reinstated should future events dictate and could fluctuate in future periods based on the assessment of the positive and negative evidence. Management’s conclusion at December 31, 2014 that it was more likely than not that the net deferred tax assets of $5.1 million will be realized is based on management’s estimate of future taxable income. Management’s estimate of future taxable income is based on internal forecasts which consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment. If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, a valuation allowance may need to be recognized for some or all of the deferred tax asset. Such an increase to the deferred tax asset valuation allowance could have a material adverse effect on the Company’s financial condition and results of operations.

Changes in Condition from December 31, 2014 to December 31, 2015. Total assets decreased $18.0 million, or 8.9%, to $183.8 million on December 31, 2015 from $201.8 million on December 31, 2014. This reduction in asset size is part of a strategic objective.

Loan Portfolio. Gross loans increased $2.8 million or 1.9% to $149.2 million as of December 31, 2015 from a balance of $146.4 million on December 31, 2014. The increase can be attributed, in part, to $36.0 million of new loan originations, partially offset by loan charge offs/charge downs of $1.7 million, transfers to OREO of $0.2 million and principal repayments of $31.3 million (includes repayments on revolving lines of credit). The new originations were primarily consumer loans, with mortgage originations totaling $9.0 million and consumer loan originations of $11.0 million. 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 into 2016 and is a centerpiece of the 2016 profit plan.

Loan Portfolio Distribution
	(Dollars in thousands)
At December 31,	2015		2014
	Amount		Amount
Commercial	$	82,147	$	87,989
Real estate		43,401		38,756
Consumer		23,683		19,681
	$	149,231	$	146,426

The Company’s loan portfolio represents the 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.

2725

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 the following measures to proactively manage credit risk in the loan portfolios:

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

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

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

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

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

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

The following is a schedule of loan maturities (including those held for sale) and repricing based on contract terms as of December 31, ~~2015~~2016.

Scheduled Loan Maturities/Repricings

(Dollars in thousands)

Due

<1 Year

1 - 5 Years

> 5 Years

Total

Total Gross Loans

3637,~~929~~692

7275,~~830~~877

3940,~~472~~552

~~149~~154,~~231~~121

Of the loans included in the preceding schedule, 6771.4% are adjustable rate and 3228.6% are fixed rate to maturity.

Allowance for Loan Loss. The ALLL represents management’s estimate of losses inherent in the loan portfolio. The allowance is actively managed 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 managed to create a reserve that is adequate and conservative, but not excessive. 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 Troubled Debt Restructurings 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 loan concentrations;

•

Exposure to “watch list” loans;

•

Consumer sentiment;

•

Local economic conditions;

•

Regulatory risk;

•

Unemployment, with particular attention paid to local unemployment; and

•

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

Percentage of Each Loan Segment to Total Loans. Summary of the allowance for loan losses allocated by loan segment at December 31,

% of loan segments to total loans	(Dollars in thousands)
	2015					2014
	2016					2015
	Allowance Amount		Total Loans			Allowance Amount		Total Loans
Loan Type
Commercial	$	1,~~629~~477		5552.0	%	$	31,~~491~~629		6055.10	%
Real Estate		~~240~~143		2928.14	%		~~195~~240		2629.51	%
Consumer		~~209~~228		1519.96	%		~~183~~209		1315.49	%
Total Loans	$	21,~~078~~848		100	%	$	32,~~869~~078		100	%

The Bank’s ALLL level was 1.3920% of total loans as of December 31, ~~2015~~2016 and 21.6439% of total loans as of December 31, ~~2014~~2015.

The general reserve, ~~comprised~~less 47the environmental components, comprised 39% of the total allowance at December 31, ~~2015~~2016, compared to 5747% at December 31, ~~2014~~ 2015, while the specific allowance accounted for 9 27% of the total allowance at December 31, ~~2015~~2016, compared to 309% at December 31, ~~2014~~2015. The severity of estimated losses on impaired loans can differ substantially from actual losses. The general reserve is calculated in two parts based on an internal risk classification of loans within each portfolio segment. General reserves on loans considered to be “classified” under regulatory guidance are calculated separately from loans considered to be “pass” rated under the same guidance. This segregation allows the Company to monitor the reserves related to higher risk loans separate from the remainder of the portfolio in order to better manage risk and ensure the sufficiency of reserves. The ALLL decreased $10.82 million, 46or 11.31%, year-over-year to $2.1.9 million as of December 31, ~~2015~~ 2016 from $32.91 million on December 31, ~~2014~~2015. The decrease resulted from the net effect of charge-offs totaling $~~1,672 thousand~~350 ~~and a provision recovery of $250~~ thousand, offset by $~~131~~120 thousand in recoveries.

2927

Summary of Allowance for Loan Losses. The following schedule summarizes the charge-offs and recoveries by loan segment, charged to the allowance for loan losses for the year ended December 31:

	(Dollars in thousands)
	Commercial			Real Estate			Consumer			Total
December 31, 2016
Beginning balance - January 1, 2016	$	1,629		$	240		$	209		$	2,078
Charge-offs		(233	)		(1	)		(116	)		(350	)
Recoveries		76			3			41			120
Net (charge-offs) recoveries		(157	)		2			(75	)		(230	)
Provision		5			(99	)		94			-
Ending balance - December 31, 2016	$	1,477		$	143		$	228		$	1,848
December 31, 2015
Beginning balance - January 1, 2015	$	3,491		$	195		$	183		$	3,869
Charge-offs		(1,443	)		(42	)		(187	)		(1,672	)
Recoveries		86			2			43			131
Net (charge-offs) recoveries		(1,357	)		(40	)		(144	)		(1,541	)
Provision		(505	)		85			170			(250	)
Ending balance - December 31, 2015	$	1,629		$	240		$	209		$	2,078
December 31, 2014
Beginning balance - January 1, 2014	$	3,873		$	267		$	244		$	4,384
Charge-offs		(458	)		(45	)		(185	)		(688	)
Recoveries		295			21			43			359
Net (charge-offs) recoveries		(163	)		(24	)		(142	)		(329	)
Provision		(219	)		(48	)		81			(186	)
Ending balance - December 31, 2014	$	3,491		$	195		$	183		$	3,869

Management has ~~taken~~established ~~steps~~procedures to address ~~current~~ problem loans and has ~~attempted~~implemented toa ~~implement~~credit an infrastructure to prevent nonperforming loans and charge-offs from reaching ~~the~~ the levels of the past few years in the future.

To understand and address existing weaknesses in the loan portfolio, the loan monitoring process has been centralized and additional qualified staff has been hired to review the loan portfolio and ensure that credits are appropriately graded and adequate levels of loan loss reserve are established. All large loan relationships have been analyzed to identify cash flow, collateral, and structural weaknesses. Such monitoring is being done on an ongoing basis according to the following timeframe: $250 thousand to $1 million exposure, annually; $1 million exposure, semiannually; watch list loans with aggregate exposure >$100 thousand are analyzed each quarter.

Underwriting has also been largely centralized and is an independent function of lending. All commercial loan requests > $25 thousand, all consumer loan requests > $50 thousand, and all unsecured loan requests > $10 thousand are centrally underwritten. Additionally, any loan request toof a customer with aggregate exposure > $100 thousand requires centralized underwriting. Underwriting provides an approve/deny recommendation and loans with a deny recommendation cannot be approved outside the Officers’ Loan Committee.

In addition to centralizing the account monitoring and underwriting processes, the Bank has significantly strengthened its lending policy. Loan approval levels have been adjusted downward and customers with loan exposure in excess of $1.5 million require approval from the Board of Directors.

Nonaccrual & Impaired Loans. Before loans are charged off, they typically go through a phase of nonperforming status. Various stages exist when dealing with such nonperformance. The first stage is simple delinquency, where customers consistently start paying late, 30, 60, 90 days at a time. These accounts may then be put on a list of loans to “watch” as they continue to under-perform according to original terms. Loans are placed on nonaccrual status when management believes the collection of the principal and interest is doubtful. A delinquent loan is generally placed on nonaccrual status when principal and/or interest is past due 90 days or more or if the financial strength of the borrower has declined, collateral value has declined, or other facts would make the repayment of the loan suspect, unless the loan is well-secured or in the process of collection. When a loan is placed on nonaccrual, all current interest which has been accrued is charged back against current earnings as a reduction in interest income, which adversely ~~affects~~ affects the yield on loans in the period of reversal. Interest accrued in prior years, which remains uncollected, is charged off against the allowance for loan losses, No additional interest is accrued on the loan balance until collection of both principal and interest becomes reasonably certain. Loans placed on nonaccrual status may be returned to accrual status after payments are received for a minimum of six consecutive months in accordance with the loan documents, and any doubt as to the loan’s full collectability has been removed or the troubled loan is restructured and evidenced by a credit evaluation of the borrower’s financial condition and the prospects for full payment.

3028

Management considers a loan to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the observable market price of the loan, except when the sole (remaining) source of repayment for the loan is the liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs when foreclosure is probable, instead of discounted cash flows. If management determines the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs and deferred loan fees or costs), impairment is recognized through an allowance estimate or a charge-off to the allowance. When management determines an impaired loan is a confirmed loss, the estimated impairment is directly charged-off to the loan rather than creating a specific reserve for inclusion in the allowance for loan losses. However, not all impaired loans are in nonaccrual status because they may be current with regards to the payment terms. Their determination as an impaired loan is based on some inherent weakness in the credit that may, if certain circumstances occur or arise, result in an inability to comply with the loan agreement’s contractual terms. Impaired loans exclude large groups of smaller-homogeneous loans that are collectively evaluated for impairment such as consumer real estate and installment loans.

Summary of Impaired Loans. The following schedule summarizes impaired and non-performing loans at December 31,

	(Dollars in thousands)
	As of December 31,
	2015			2014
	2016			2015
Impaired loans	$	34,~~171~~917		$	113,~~277~~171
Loans accounted for on a nonaccrual basis	$	~~1,350~~768		$	71,~~729~~350
Accruing loans, which are contractually past due 90 days or more as to interest or principal payments		-			-
Total non performing loans	$	~~1,350~~768		$	71,~~729~~350
Non-performing loans to allowance for loan losses		65.0	%		199.8	%
Nonperforming loans to allowance for loan losses		41.6	%		65.0	%

Nonperforming loans, comprised of loans on nonaccrual status along with loans that are contractually past due 90 days or more but have not been classified as nonaccrual, totaled $10.48 million at December 31, ~~2015~~2016, a decrease of $60.36 million, or 8243.51%, compared to nonperforming loans of $71.74 million at December 31, ~~2014~~2015. The decrease in nonperforming loans was primarily due to management’s proactive approach to identify and resolve nonperforming loans and to the reclassification of less than $0.21 million of principal to OREO, the sale of $0.6 million of nonaccrual loans, the payoffs and paydowns of $30.9 3 million, $10.13 million which was subsequently upgraded, and the charge-off/charge-down of $10.51 million, offset by the addition of $0.27 million. Nonperforming loans to total net loans was 0.9250% at December 31, ~~2015~~ 2016 and 50.2892% at December 31, ~~2014~~2015. Nonperforming loans represented 0.8643% of total assets at December 31, ~~2015~~2016 compared to 40.3686% at December 31, ~~2014~~2015.

The allowance for loan losses, specifically related to impaired loans was $0.25 million at December 31, ~~2015~~2016 and $10.2 million at December 31, ~~2014~~2015, and related to loans with principal balances of $34.19 million and $~~11.~~3.2 million respectively. The Company’s financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on the loan portfolio, unless a loan is placed on nonaccrual status. Amounts received on nonaccrual loans generally are applied first to principal and then to interest only after all principal has been collected.

Troubled Debt Restructurings. In certain circumstances, the Company may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near term. In most cases, the modification is either a concessionary reduction in interest rate, extension of the maturity date, or reduction in the principal balance that would otherwise not be considered. Concessionary modifications are classified as troubled debt restructurings unless the modification results in only an insignificant delay in the payments to be received. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be collateral dependent, the loan is reported at the fair value of the collateral. All such restructured loans are considered impaired loans and may either be in accruing or nonaccruing status. If the borrower has demonstrated performance under the previous terms and the Company’s underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. The Company continues to work with customers to modify loans for borrowers who are experiencing financial difficulties.

3129

Troubled debt restructured loans totaled $13.8 million at December 31, ~~2015~~2016 and $51.28 million as of December 31, ~~2014~~2015. Of those balances, $13.26 million was on accrual basis as of December 31, ~~2015~~2016 and $31.32 million as of December 31, ~~2014~~2015. During ~~2015~~2016, 1316 loan relationships totaling $03.90 million in principal were restructured.

There are no commitments to lend additional amounts to borrowers with loans that are classified as troubled debt restructurings as of December 31, ~~2015~~2016.

Other Real Estate Owned. As of December 31, 2016, the Bank has no OREO properties. At December 31, 2015, the Bank’s OREO portfolio consisted of 7 properties with a cost basis of $418 thousand and a nominal valuation allowance bringing the carrying value to $238 thousand. Management believes the carrying value for the OREO portfolio approximated liquidation value as of December 31, 2015. It is the intention of the Board of Directors and management to liquidate all existing OREO properties as of December 31, 2015 prior to December 31, 2016.

Investment Portfolio. The Company’s available for sale investment portfolio decreased $175.28 million, 5541.02%, to $148.02 million as of December 31, ~~2015~~2016 from $3114.20 million as of December 31, ~~2014~~2015. The decrease resulted from maturity and principal payments totaling $52.87 million, ~~sales~~and sales of $~~14.~~4.0 million offset by purchases of $3.1.0 million, and reduced market value ofand ~~$0.1~~amortization ~~million,~~of less ~~amortization~~than of $0.1 million., each. As of December 31, ~~2015~~2016, the investment portfolio reported an unrealized loss of $82104 thousand versus an unrealized loss of $10 82 thousand at December 31, ~~2014~~2015.

Carrying Values of Investment Securities
	(Dollars in thousands)
	As of December 31,
	2015		2014
	2016		2015
Securities available for sale
U.S. government securities	$	~~1,005~~-	$	51,~~067~~005
U.S. government federal agencies		61,~~535~~982		136,~~869~~535
State and local governments		12,~~783~~734		1,~~035~~783
Mortgage backed securities		43,~~690~~521		114,~~193~~690
Total	$	148,~~013~~237	$	3114,~~164~~013

At December 31, ~~2015~~2016, there were no concentrations of securities of any one issuer whose carrying value exceeded 10% of shareholders’ equity.

Maturity Schedule of Investment Securities. Maturity schedule (by contractual maturity or, if applicable, earliest call date) of the Company’s investment securities, by carrying value, and the related weighted average yield at December 31, ~~2015~~2016:

	(Dollars in thousands)
	Maturing in One Year or Less					Maturing After One Year Through Five Years					Maturing After Five Years Through Ten Years					Maturing After Ten Years
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
U.S. government securities	$	~~1,005~~-		0.4300	%	$	-		0.00	%	$	-		0.00	%	$	-		0.00	%
U.S. government federal agencies		~~253~~-		10.2500	%		61,~~282~~982		1.3516	%		-		0.00	%		-		0.00	%
State and local governments		-		0.00	%		~~550~~1,107		1.6676	%		~~1,233~~626		12.9809	%		-1,001		04.0025	%
Mortgage backed securities		1-		10.9100	%		-		0.00	%		2317		6.43	%		43,~~666~~504		12.9837	%
Total	$	~~1,259~~-		0.6000	%	$	63,~~832~~089		1.3738	%	$	~~1,256~~643		2.0620	%	$	4,~~666~~505		12.9878	%

The weighted average interest rates are based on interest rates for investments purchased at par value and on effective interest rates considering amortization or accretion if the investment and mortgage backed securities were purchased at a premium or discount. The weighted average yield on tax-exempt obligations has been determined on a tax equivalent basis. Other investment securities consisting of Federal Home Loan Bank stock that bears no stated maturity or yield is not included in this analysis. Maturities are reported based on stated maturities and do not reflect principal prepayment assumptions. Yields are based on amortized cost balances.

3230

Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. The mortgage backed securities may mature earlier than their contractual maturities because of principal prepayments.

Cash and Cash Equivalents. Cash and cash equivalents totaled $9.4.9 million as of December 31, ~~2015~~2016, a $74.35 million, or 4347.7%, decrease from the December 31, ~~2014~~2015 balance of $169.64 million.

Premises and Equipment. Premises and equipment ~~decreased~~increased $731.4 ~~thousand~~million, or, 245.4%, to $34.03 million at December 31, ~~2015~~2016 from $3.10 million at December 31, ~~2014~~2015. The ~~decrease~~increase ~~can~~was beattributable ~~attributed~~ to the addition of a new full service branch building and associated furnishings and equipment totaling $1.5 million reduced by depreciation expense of $~~291~~301 thousand and write-downs and disposals of $~~132~~88 thousand, partially offset by by building improvements and purchases of $~~350~~230 thousand during ~~2015~~2016.

Other Assets. Other assets ~~increased~~decreased $20.83 million during the period December 31, ~~2014~~2015 to December 31, ~~2015~~2016. InPrepaid ~~September~~expenses ~~2015,~~increased ~~the~~by ~~Bank purchased~~ $3.0.1 million and ofthe ~~Bank~~cash ~~Owned~~surrender ~~Life~~value ~~Insurance~~of (existing BOLI), ~~written~~policies onincreased $0.1 million over the ~~principal~~period. ~~officers~~Conversely, ~~with~~the net change in the ~~Bank~~Company’s deferred astax ~~primary~~asset ~~beneficiary~~was a decrease of $0.6 million from December 31, 2015 to December 31, 2016.

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

The deposit portfolio decreased $~~15.~~6.2 million, or 83.8%, to $~~162~~156.3 1 million as of December 31, ~~2015~~2016 from $~~178~~162.03 million as of December 31, ~~2014~~2015. ~~Although~~The ~~noninterest~~loss ~~bearing~~of ~~accounts~~six ~~were~~customers upaccounted for $36.0 million, orof ~~12.8%,~~the ~~and~~decline ~~NOW~~in ~~accounts~~deposit ~~increased $3~~totals.4 ~~million~~A ~~(15.1%),~~single ~~respectively~~customer, ~~year-over-year~~representing nearly half of the total, ~~significant~~redirected ~~decreases~~their ~~occurred~~deposits into ~~certificates~~an investment brokerage account of ~~deposit~~a ~~($17.3~~type ~~million~~not oroffered ~~23.5%).~~by ~~The~~the ~~decrease~~bank. inAbsent ~~time~~these ~~deposits~~deposit ~~can~~losses, beand ~~attributed~~the transfer to anoninterest bearing, ~~pricing~~interest ~~strategy~~bearing ofbalances ~~setting competitive~~were ~~offering~~flat. ~~rates,~~Noninterest ~~but~~bearing ~~not~~accounts ~~the~~were ~~highest~~up ~~deposit~~$6.2 ~~rates~~million inrelative ~~our~~to ~~market~~December 31, ~~resulting~~2015, as ina anresult 18of ~~bps~~the ~~year-over-year~~reclassification ~~decrease~~of in interest bearing accounts, which no longer met the ~~cost~~criteria ofto ~~deposits~~earn interest, to noninterest bearing accounts. Management ~~expects~~does not expect these disintermediation trends to ~~moderate~~repeat in ~~2016~~2017.

Large Time Deposits. The following table sets forth the maturities of the Bank’s certificates of deposit having principal amounts ~~greater~~of ~~than~~at least $250,000 at December 31:

	(Dollars in thousands)
Certificates of deposit maturing in quarter ending:	2015		2014
Three months or less	$	250	$	5,550
Over three months through six months		1,566		2,022
Over six months through twelve months		1,552		6,567
Over twelve months		3,890		5,387
Total	$	7,258	$	19,526

Large Time Deposits

	(Dollars in thousands)
Certificates of deposit maturing in quarter ending:		2016		2015
Three months or less	$	-	$	250
Over three months through six months		1,639		1,566
Over six months through twelve months		1,500		1,552
Over twelve months		7,532		3,890
Total	$	10,671	$	7,258

Average Deposits. Average deposit balances and average rates paid are summarized as follows for the years ended December 31:

Average Deposits
	(Dollars in thousands)
	2015					2014
	2016					2015
	Amount		Rate			Amount		Rate
Non-interest-bearing demand deposits	$	24,379		0.00	%	$	22,248		0.00	%
Noninterest bearing demand deposits	$	36,507		0.00	%	$	24,379		0.00	%
Interest-bearing demand deposits		25,711		0.11			21,795		0.11
Interest bearing demand deposits		10,422		0.16			25,711		0.11
Savings deposits		5554,~~263~~159		0.1620			6055,~~735~~263		0.1816
Time deposits		6557,~~153~~115		1.1802			7965,~~794~~153		1.3118
Total	$	~~170~~158,~~506~~203		0.5245	%	$	~~184~~170,~~572~~506		0.6452	%

AsThe ~~of December 31, 2015 the~~ Bank had no brokered deposits, ~~whereas~~as at of December 31, ~~2014~~2016 ~~the~~or ~~Bank had one brokered deposit agreement totaling $3~~2015.~~0 million.~~

33Overnight Funds Purchased. At December 31, 2016, overnight borrowings totaled $2.7 million versus no overnight borrowings at December 31, 2015.

Other Borrowings. Borrowed funds totaled $2.6 million at December 31, 2015, consisting of three separate loans to Bancorp which originally totaled $6.1 million. During the first quarter of 2015, Bancorp was able to renegotiate a ~~decrease~~substantial portion of $3the debt due December 29, 2015, achieving terms more favorable to Bancorp. A portion of the $5.0 million ~~from~~note ~~the~~totaling $62.13 million aswas ofexchanged ~~December~~for 3128,675 ~~2014~~shares of Bancorp common stock and a new $1.6 million note with a more favorable interest rate and a maturity date of August 2021.

In ~~February~~October, ~~2015~~2016, ~~the Company renegotiated~~ a $21.36 million ~~portion~~dividend was ofpaid afrom ~~$5.0 million note payable. Under~~ the ~~new~~Bank ~~terms,~~to the $2Holding Company.3 ~~million~~This ~~note~~dividend, along with ancash ~~8.00%~~on ~~interest~~hand ~~rate and~~at athe ~~maturity~~Holding ~~date of December 2015~~Company, was ~~retired,~~sufficient ~~and the Company issued $656 thousand of common stock and a new note totaling~~to ~~$1.644~~retire ~~million~~all ~~with a 6.00% interest rate and a maturity date~~ of ~~August~~the ~~2021~~long ~~was~~term ~~issued.~~debt ~~The~~outstanding ~~original~~as ~~note in the amount~~ of ~~$2.7 million~~that ~~remained intact (Note A)~~date.

InNo ~~September~~FHLB borrowings were outstanding as of December 31, 2016 or December 31, 2015. ~~the~~The ~~Company~~Bank ~~made~~had aan approved FHLB line-of-credit of $153.0 million ~~principal~~as ~~payment~~of toDecember ~~Note~~31, A2016, of ~~from~~which ~~available~~$14.8 million was pledging public funds. atIn addition, the ~~Holding~~ Company ~~level.~~has Ina ~~November~~collateralized ~~2015~~federal ~~the~~funds ~~Bank~~line ~~requested~~of ~~permission~~$10.2 million ~~from~~with the ~~FDIC~~FRB and ~~DFI~~$5.0 tomillion ~~pay~~unsecured aline ~~one-time~~with ~~dividend~~United toBankers ~~the~~Bank. ~~Holding~~The ~~Company~~United ~~for~~Bankers ~~the~~Bank ~~purpose~~line ofwas ~~retiring~~utilized ~~Note~~for A$2.7 Inmillion in overnight borrowings. The FRB line was not drawn upon as of December ~~2015~~31, ~~permission~~ 2016. The FHLB line was ~~granted,~~secured via the ~~dividend~~pledge of mortgage loans totaling $182.36 million ~~was~~and ~~paid,~~the ~~and~~Federal ~~Note~~Reserve Afederal ~~was~~fund ~~retired~~line is secured via the pledge of $13.8 million of automobile loans.

AtAccrued ~~December~~Interest ~~31,~~Payable. ~~2015, borrowings consist~~Accrued ofinterest ~~three~~payable ~~loans~~on todeposits ~~the~~decreased ~~Bancorp~~by ~~from~~$178 ~~outside~~thousand, ~~creditors~~or 23.5%, ~~The loans must be repaid~~ from ~~Bancorp cash~~$0.8 ~~Per~~million ~~the~~at ~~Consent~~December ~~Order with the FDIC~~31, ~~the~~2015 ~~Bank is not permitted~~ to ~~make any forms of payments to Bancorp~~$0.6 Asmillion ofat December 31, ~~2015, Bancorp’s cash position was $346 thousand~~2016. ~~Management~~This decrease is ~~engaged in~~ the ~~sale~~result of, ~~the~~and ~~remainder~~in ofline ~~the~~with, ~~OREO property held at~~ the ~~Bancorp,~~lower ~~which~~year-over-year ~~will~~rates ~~generate additional~~paid ~~cash~~on atcertificates ~~the~~of ~~Bancorp level~~deposit.

Description	Balance of Loan as of 12/31/15		Interest Rate			Frequency of Payments	Status	Maturity Date
Loan 1	$	539,844		4.75	%	Monthly	Amortizing	11/21/2019
Loan 2	$	384,695		4.25	%	Monthly	Amortizing	6/25/2019
Loan 3	$	1,644,547		6.00	%	Monthly	Interest Only	8/4/2021

Other Liabilities. Other liabilities increased $0.1 million from December 31, 2015 to December 31, 2016. Payments due on the new branch construction, and awaiting architect approval, increased $0.1 million compared to December 31, 2015.

No FHLB borrowings were outstanding as of December 31, 2015 or December 31, 2014. The Bank had an approved FHLB line-of-credit of $46.0 million as of December 31, 2015. In addition, the Company has a collateralized federal fund line of $8.5 million with the FRB and $1.0 million unsecured line with Great Lakes Bankers Bank. Neither line was drawn upon as of December 31, 2015. The FHLB line was secured via the pledge of mortgage loans totaling $77.5 million and the Federal Reserve federal fund line is secured via the pledge of $11.1 million of automobile loans.

Accrued Interest Payable. Accrued interest payable on deposits decreased by $733 thousand, or 49.1%, from $1.5 million at December 31, 2014 to $0.8 million at December 31, 2015. This decrease is the result of, and in line with, the year over year decrease in certificates of deposit.

Other Liabilities. Other liabilities decreased $0.6 million from December 31, 2014 to December 31, 2015. Funding of the underfunded pension plan reduced unfunded pension liabilities by $0.7 million at December 31, 2015 to $46 thousand.

Concentrations of Credit Risk. Financial institutions such as the 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. Citizens 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 these properties totaled $2830.98 million at December 31, ~~2015~~2016 versus $28.69 million at December 31, ~~2014~~2015. At December 31, ~~2015~~2016, non-owner occupied residential real estate represented 1920.40% of the loan portfolio, ~~down~~up from 19.54% of the Bank’s loan portfolio at December 31, ~~2014~~2015. Management believes it has the skill and experience to manage any risks associated with this type of lending. Loans in this category are generally paying as agreed without any unusual or unexpected levels of delinquency. The delinquency rate in this category, which is any loan 30 days or more past due, was 2.1% at both December 31, ~~2015~~2016 ~~versus~~and ~~4.8% at~~ December 31, ~~2014~~2015.

3432

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 ~~used~~provided by operating activities was $01.3 2 million in the year ended in December 31, ~~2015~~2016 ~~and~~versus $0.73 million ~~generated~~used by those activities in the year ended December 31, ~~2014~~2015. The major adjustment made to reconcile net income to cash provided by or used in operations during the periods presented was the $0.76 million decrease in ~~accrued~~deferred ~~interest~~income ~~payable~~taxes ~~and~~offset aby ~~decrease of $0.6 million in other liabilities in 2015 and~~ the adjustment ~~for~~ ~~the~~related ~~removal~~to ofgain ~~the~~on ~~deferred~~sale ~~tax asset allowance~~ of ~~$5.1~~OREO ~~million~~properties induring ~~2014~~2016. ~~Net income, net of the deferred tax asset allowance in 2014, was $0.3 million greater than that of 2015.~~

The primary investing activity of the Bank is lending, which is funded with cash provided from operating and financing activities, as well as proceeds from payment on existing loans and proceeds from maturities of investment securities. In considering the more typical investing activities, during ~~2015~~2016, $206.27 million was generated from the combination of maturity, pay-downs, calls, or sale of available for sale investment securities, ~~$3.1 million was used to purchase available for sale securities,~~ and ~~$3.0 million~~ was principally used to ~~purchase~~fund ~~bank~~new ~~owned~~loan ~~life insurance policies on key executives~~originations. During ~~2014~~2015, $820.72 million was generated ~~from~~by ~~maturities,~~the combination of maturity, pay-downs, ~~and~~calls, ~~sales~~or sale of available for sale investment securities and $53.1 million ~~was~~ used to purchase ~~securities.~~available ~~Proceeds~~for ~~from the~~ sale ~~of other real estate owned generated $1.1 million in cash during the year ended December 31~~securities, ~~2015~~ and $23.90 million ~~during 2014. During 2015, $4.5 million in cash~~ was used to ~~fund~~purchase ~~net~~bank ~~loan growth~~owned ~~while~~life ininsurance ~~2014~~policies ~~that~~on ~~number~~key ~~was $0~~executives.~~9 million.~~

For ~~2015~~2016, total deposits decreased by $~~15.~~6.2 million versus a decline of $715.6 million during ~~2014~~2015. The Company had no activity in FHLB advances during either ~~2015~~2016 or ~~2014~~2015. The ~~2014~~Company ~~capital~~borrowed ~~campaign raised~~ $3.2.7 million ~~after~~in ~~all~~overnight ~~related~~funds ~~expenses~~at ~~were~~December ~~deducted~~31, ~~and~~2016 inversus ~~2015~~no ~~$1.3~~overnight ~~million~~borrowings inat ~~capital~~December ~~was raised~~31, ~~through the exercise of outstanding warrants~~2015. 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.

As disclosed in Note J of the notes to consolidated financial statements, the Company has also entered into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit. As a result of the Company’s off-balance sheet arrangements for ~~2015~~2016 and ~~2014~~2015, no material revenue, expenses, or cash flows were recognized. In addition, the Company had no other indebtedness or retained interests nor entered into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit.

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

3533

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

	Page
Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of December 31, 2015 and 2014	F-3
Consolidated Balance Sheets as of December 31, 2016 and 2015	F-3
Consolidated Statements of Income for the years ended December 31, 2015 and 2014	F-4
Consolidated Statements of Income for the years ended December 31, 2016 and 2015	F-4
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015 and 2014	F-5
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016 and 2015	F-5
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2015 and 2014	F-6
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2016 and 2015	F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014	F-7
Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015	F-7
Notes to Consolidated Financial Statements	F-8

~~F-1~~34

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the Board of Directors and Shareholders of

Citizens Independent Bancorp, Inc.

We have audited the accompanying consolidated balance sheets of Citizens Independent Bancorp, Inc. and subsidiary (the Company) as of December 31, ~~2015~~2016 and ~~2014~~2015, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, ~~2015~~2016. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Citizens Independent Bancorp, Inc. and subsidiary as of December 31, ~~2015~~2016 and ~~2014~~2015, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, ~~2015~~2016, in conformity with accounting principles generally accepted in the United States of America.

/s/ Suttle & Stalnaker, PLLC

Parkersburg, West Virginia

March 2431, ~~2016~~2017

F-2

CITIZENS INDEPENDENT BANCORP, INC.

Logan, Ohio

CONSOLIDATED BALANCE SHEETS

December 31, ~~2015~~2016 and ~~2014~~2015

	(Dollars in thousands)
	2015			2014
	2016			2015
ASSETS
Cash and cash equivalents
Cash and amounts due from depository institutions	$	54,~~307~~899		$	135,~~290~~307
Federal funds sold		~~4,064~~-			34,~~343~~064
Total cash and cash equivalents		94,~~371~~899			169,~~633~~371
Securities available for sale		148,~~013~~237			3114,~~164~~013
Other investment securities		859			859
Loans		149,231			146,426
Loans held for sale		135			-
Allowance for loan losses		(2,078	)		(3,869	)
Loans		153,986			149,231
Net loans		147,153			142,557
Allowance for loan losses		(1,848	)		(2,078	)
Premises and equipment, net		2,977			3,050
Net loans		152,138			147,153
Accrued interest receivable		285			348
Premises and equipment, net		4,330			2,977
Other real estate owned		238			1,068
Accrued interest receivable		258			285
Other assets		8,899			6,144
Other real estate owned		-			238
TOTAL ASSETS	$	183,795		$	201,823
Other assets		8,641			8,899
TOTAL ASSETS	$	179,497		$	183,795
LIABILITIES
Deposits
Noninterest bearing	$	2632,~~116~~282		$	2326,~~153~~116
Interest bearing		~~136~~123,~~209~~856			~~154~~136,~~814~~209
Total deposits		~~162~~156,~~325~~138			~~177~~162,~~967~~325
Borrowed funds		2,569			6,147
Overnight funds purchased		2,699			-
Accrued interest payable		759			1,492
Borrowed funds		-			2,569
Other liabilities		783			1,380
Accrued interest payable		581			759
TOTAL LIABILITIES		166,436			186,986
Other liabilities		849			783
TOTAL LIABILITIES		160,267			166,436
SHAREHOLDERS' EQUITY
Cumulative preferred stock of no par value; 100,000 shares authorized, 0 shares issued and outstanding		-			-
Common stock of no par value; 2,000,000 shares authorized and 721,998 shares issued and 667,618 shares outstanding at December 31, 2015 and 638,555 shares issued and 584,175 shares outstanding at December 31, 2014		14,296			12,297
Common stock of no par value; 2,000,000 shares authorized and 745,667 shares issued and 691,287 shares outstanding at December 31, 2016 and 721,998 shares issued and 667,618 shares outstanding at December 31, 2015		14,964			14,296
Common stock warrants, 119,003 warrants issued and 67,985 outstanding at December 31, 2015 and 118,253 warrants outstanding at December 31, 2014		108			187
Common stock warrants, 0 warrants issued and outstanding at December 31, 2016 and 119,003 warrants issued and 67,985 warrants outstanding at December 31, 2015		-			108
Retained earnings		1011,~~112~~340			910,~~458~~112
Treasury stock, at cost, 54,380 shares at December 31, 2015 and at December 31, 2014		(6,590	)		(6,590	)
Treasury stock, at cost, 54,380 shares at December 31, 2016 and at December 31, 2015		(6,590	)		(6,590	)
Accumulated other comprehensive income (loss)		(~~567~~484	)		(~~515~~567	)
TOTAL SHAREHOLDERS' EQUITY		1719,~~359~~230			1417,~~837~~359
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	~~183~~179,~~795~~497		$	~~201~~183,~~823~~795

See notes to consolidated financial statements

F- 3

CITIZENS INDEPENDENT BANCORP, INC.

Logan, Ohio

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, ~~2015~~2016 and ~~2014~~2015

	(Dollars in thousands, except per share data)
	2015			2014
	2016			2015
INTEREST INCOME
Interest and fees on loans	$	7,~~764~~817		$	7,~~689~~764
Interest and dividends on investment securities		~~382~~200			~~738~~382
Interest on federal funds sold		2630			26
TOTAL INTEREST INCOME		8,~~172~~047			8,~~453~~172
INTEREST EXPENSE
Interest on deposits		~~891~~708			~~1,178~~891
Interest on borrowed funds		334			456
Interest on overnight funds purchased		2			-
TOTAL INTEREST EXPENSE		1,225			1,634
Interest on borrowed funds		108			334
NET INTEREST INCOME		6,947			6,819
TOTAL INTEREST EXPENSE		818			1,225
Provision for loan losses		(250	)		(186	)
NET INTEREST INCOME		7,229			6,947
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,197			7,005
Provision for loan losses		-			(250	)
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,229			7,197
NONINTEREST INCOME
Service charges		~~409~~407			~~451~~409
Net gain on sale of securities		~~168~~15			~~202~~168
Net gain on sale of loans		2860			-28
Net gain on sale of repossessed assets		~~245~~532			~~464~~245
Credit card income and fees		~~350~~361			~~339~~350
Other		~~291~~362			~~272~~291
TOTAL NONINTEREST INCOME		1,~~491~~737			1,~~728~~491
NONINTEREST EXPENSES
Salaries and employee benefits		3,~~174~~344			3,~~392~~174
Net occupancy and equipment expenses		~~929~~823			~~1,048~~929
Other real estate owned expense		~~223~~78			~~308~~223
FDIC insurance expense		~~242~~189			~~401~~242
Legal and professional fees		~~559~~245			~~434~~559
Data processing		~~366~~363			~~314~~366
Advertising		~~198~~170			~~205~~198
Examinations and audits		~~288~~332			~~341~~288
Telephone, postage, and supplies		~~263~~254			~~264~~263
Lease buyout and worthless asset write downs		348			-
Lease buyout and worthless asset writedowns		88			348
Other professional fees		~~175~~96			~~150~~175
Director fees		~~215~~220			~~174~~215
Dues and subscriptions		~~165~~322			~~172~~165
Other insurance		~~114~~98			~~142~~114
Other operating expenses		~~543~~494			~~409~~543
TOTAL NONINTEREST EXPENSES		7,~~802~~116			7,~~754~~802
INCOME BEFORE INCOME TAXES		~~886~~1,850			~~979~~886
Income tax expense (benefit)		232			(5,099	)
Income tax expense		622			232
NET INCOME	$	~~654~~1,228		$	~~6,078~~654
Basic earnings per common share	$	1.0180		$	111.2101
Diluted earnings per common share	$	1.0080		$	111.0800

See notes to consolidated financial statements

F- 4

CITIZENS INDEPENDENT BANCORP, INC.

Logan, Ohio

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years ended December 31, ~~2015~~2016 and ~~2014~~2015

	(Dollars in thousands)
	2015			2014
	2016			2015
Net income	$	~~654~~1,228		$	~~6,078~~654
Other comprehensive income (loss), net of tax:
Change in unrecognized actuarial loss on pension plan, net of income taxes of ($3) and ($70) for the years ended December 31, 2015 and 2014, respectively		(5	)		(138	)
Change in unrecognized actuarial loss on pension plan, net of income taxes of $51 and ($3) for the years ended December 31, 2016 and 2015, respectively		97			(5	)
Net unrealized holding gain (loss) on securities available for sale, net of income taxes of $33 and $118 for the years ended December 31, 2015 and 2014, respectively		64			227
Net unrealized holding gain (loss) on securities available for sale, net of income taxes of ($2) and $33 for the years ended December 31, 2016 and 2015, respectively		(4	)		64
Reclassification for gains recognized on sale of securities available for sale, net of income taxes of $57 and $69 for the years ended December 31, 2015 and 2014, respectively		(111	)		(133	)
Reclassification for gains recognized on sale of securities available for sale, net of income taxes of $5 and $57 for the years ended December 31, 2016 and 2015, respectively		(10	)		(111	)
Other comprehensive income (loss)		~~(52~~83	)		(4452	)
Comprehensive income	$	~~602~~1,311		$	~~6,034~~602

See notes to consolidated financial statements

F- 5

CITIZENS INDEPENDENT BANCORP, INC.

Logan, Ohio

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Years ended December 31, ~~2015~~2016 and ~~2014~~2015

	(Dollars in thousands)
	Common stock		Common stock warrants			Retained earnings		Treasury stock			Accumulated other comprehensive income			Total
Balances at January 1, 2014	$	9,307	$	-		$	3,380	$	(6,590	)	$	(471	)	$	5,626
Balances at January 1, 2015	$	12,297	$	187		$	9,458	$	(6,590	)	$	(515	)	$	14,837
Comprehensive Income:
Net income							6,078								6,078
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on securities available for sale												94			94
Change in unrecognized gain (loss) on pension												(138	)		(138	)
Common stock warrants issued - 119,003 warrants				188											188
Common stock warrants exercised -750 warrants		12		(1	)										11
Common stock issued - 238,057 shares		2,978													2,978
Balances at December 31, 2014	$	12,297	$	187		$	9,458	$	(6,590	)	$	(515	)	$	14,837
Comprehensive Income:
Net income							654								654
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on securities available for sale												(47	)		(47	)
Change in unrecognized gain (loss) on pension												(5	)		(5	)
Common stock warrants exercised -50,268 warrants		1,229		(79	)										1,150
Common stock issued - 33,175 shares		770													770
Balances at December 31, 2015	$	14,296	$	108		$	10,112	$	(6,590	)	$	(567	)	$	17,359
Comprehensive Income:
Net income							1,228								1,228
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on securities available for sale												(14	)		(14	)
Change in unrecognized gain (loss) on pension												97			97
Common stock warrants exercised -23,669 warrants		597		(37	)										560
Common stock warrantts expired -44,316 warrants		71		(71	)										-
Common stock issued - 0 shares															-
Balances at December 31, 2016	$	14,964	$	-		$	11,340	$	(6,590	)	$	(484	)	$	19,230

See notes to consolidated financial statements

F- 6

CITIZENS INDEPENDENT BANCORP, INC.

Logan, Ohio

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, ~~2015~~2016 and ~~2014~~2015

	(Dollars in thousands)
	2015			2014
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		~~654~~1,228			~~6,078~~654
Adjustment to reconcile net income to net cash provided by operating activities
Provision for loan losses		~~(250~~-	)		(~~186~~250	)
Depreciation and amortization		~~291~~301			~~333~~291
Deferred income taxes		~~232~~622			~~(5,099~~232	)
Investment securities amortization (accretion), net		~~121~~50			~~173~~121
Provision for loss on real estate owned		~~138~~15			~~127~~138
Change in cash surrender value of bank owned life insurance		(39107	)		(839	)
Net (gain) loss on sale of other real estate owned		(~~245~~532	)		(~~464~~245	)
Net (gain) loss on sale of investments		(~~168~~15	)		(~~202~~168	)
Net (gain) loss on disposition of premises and equipment		132			20
Net (gain) loss on sale of substandard loans		(56	)		-
Net (gain) on sale of loans		(28	)		-
Net (gain) loss on disposition of premises and equipment		88			132
Proceeds from sale of loans		1,121			-
Net (gain) on sale of loans		(60	)		(28	)
Loans originated for sale		(1,093	)		-
Proceeds from sale of loans		2,625			1,121
Loans originated for sale		(2,700	)		(1,093	)
Net change in:
Accrued interest receivable		6327			9863
Accrued interest payable		(~~733~~178	)		(~~443~~733	)
Other assets		78(299	)		~~451~~78
Other liabilities		~~(604~~213	)		(~~186~~604	)
Net cash provided by (used in) operating activities		~~(330~~1,222	)		~~692~~(330	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities		(31,~~083~~000	)		(53,~~070~~083	)
Proceeds from maturities of available for sale securities		52,~~792~~679			35,~~998~~792
Proceeds from the sale of available for sale securities		144,~~418~~040			414,~~710~~418
Purchase of bank owned life insurance		(3,000	)		-
Proceeds from the sale of substandard loans		651			-
Net changes in loans		(4,496	)		(858	)
Purchase of bank owned life insurance		-			(3,000	)
Proceeds from the sale of other real estate owned		1,087			2,920
Net changes in loans		(5,602	)		(4,496	)
Purchases of premises and equipment		(350	)		(120	)
Proceeds from the sale of other real estate owned		777			1,087
Net cash provided by investing activities		10,368			5,580
Purchases of premises and equipment		(1,742	)		(350	)
Net cash provided by (used in) investing activities		(197	)		10,368
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits		(156,~~642~~187	)		(715,~~604~~642	)
Payments on loans payable		(2,~~921~~569	)		(~~216~~2,921	)
Proceeds from issuance of common stock and warrants		1,263			3,177
Proceeds of funds borrowed overnight		2,699			-
Net cash provided by (used in) financing activities		(17,300	)		(4,643	)
Proceeds from issuance of common stock and warrants		560			1,263
Net increase (decrease) in cash and cash equivalents		(7,262	)		1,629
Net cash provided by (used in) financing activities		(5,497	)		(17,300	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		16,633			15,004
Net increase (decrease) in cash and cash equivalents		(4,472	)		(7,262	)
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	9,371		$	16,633
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		9,371			16,633
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	4,899		$	9,371

See notes to consolidated financial statements

F- 7

Notes to Consolidated Financial Statements

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

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

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

Basis of Financial Statement Presentation

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

To conform to the ~~2015~~2016 presentation, certain reclassifications have been made to prior amounts, which had no impact on net income, comprehensive income, or shareholders’ equity.

Principles of Consolidation

The consolidated financial statements include the accounts of the Bancorp and the Bank. All significant intercompany transactions and balances have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Investment Securities

Debt securities are classified as held-to-maturity when management has the positive intent and ability to hold the securities to maturity. Securities held-to-maturity are carried at amortized cost. The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the period to maturity.

Debt securities not classified as held-to-maturity are classified as available for sale. Securities available–for-sale are carried at fair value with unrealized gains and losses, net of the deferred income tax effect, reported in accumulated other comprehensive income. Realized gains (losses) on securities available for sale are included in noninterest income (expense) and, when applicable, are reported as a reclassification adjustment, net of income tax, in other comprehensive income. Gains and losses on sales of securities are determined on the specific-identification method.

~~F-8~~Declines in the fair value of individual held to maturity and available for sale securities below their cost that are other than temporary result in writedowns of the individual securities to their fair value. The related writedowns are included in earnings as realized losses of which none have been reported in the periods presented.

~~Declines in the fair value of individual held to maturity and available for sale securities below their cost that are other than temporary result in write~~F-~~downs~~ ~~of the individual securities to their fair value. The related write-downs are included in earnings as realized losses of which none have been reported in the periods presented.~~8

Loans

Loans are stated at unpaid principal balances, less the allowance for loan losses and unearned discounts. Interest on loans is accrued based on principal amounts outstanding.

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Personal loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

Interest accrued in the current year but not collected for loans that are placed on nonaccrual or charged off is reversed against current interest income and unpaid interest accrued in prior years is charged to the allowance for loan losses. The interest on nonaccrual loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Consistent with the Bank’s existing method of income recognition for loans, interest on impaired loans, except those classified as nonaccrual, is recognized as income using the accrual method.

Loans Held for Sale

Mortgage loans originated and held for sale in the secondary market are carried at the lower of cost or market value determined on an aggregate basis. Net unrealized losses are recognized in a valuation allowance through charges to income. Gains and losses on the sale of loans held for sale are determined using the specific identification method.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general, and environmental components. The specific component relates to loans that are classified as doubtful, substandard, or troubled debt restructurings (TDRs). For such loans that are also classified as impaired, an allowance is established when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.

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

F-9

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

F- 9

Troubled Debt Restructurings (TDRs)

Management classifies loans as TDRs when a borrower is experiencing financial difficulties and the Bank has granted a concession. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Bank’s internal underwriting policy.

Management’s policy is to modify loans by extending the term or by granting a temporary or permanent contractual interest rate below the market rate. TDRs are separately identified for impairment disclosures and are measured by the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported at the fair value of the collateral.

Premises and Equipment

Land is carried at cost. Other premises and equipment are recorded at cost net of accumulated depreciation. Depreciation is computed using the straight-line method based principally on the estimated useful lives of the assets. Useful lives are revised when a change in life expectancy becomes apparent. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains or losses on dispositions are included in current operations as realized.

Other Real Estate Owned (OREO)

OREO is recorded at fair value less anticipated selling costs (net realizable value) and consists of property acquired through loan foreclosure. If the net realizable value is below the carrying value of the loan at the date of transfer, the difference is charged to the allowance for loan losses. Subsequent declines in the fair value of real estate are classified as OREO devaluations, which are reported as adjustments to the carrying value of OREO and are recorded as a charge to operations included in noninterest expense. In certain circumstances where management believes the devaluation may not be permanent in nature, the Company utilizes a valuation allowance to record OREO devaluations, which is also expensed through noninterest expense. Costs relating to development and improvement of such properties are capitalized (not in excess of fair value less estimated costs to sell) and costs relating to holding the properties are charged to expense.

Bank Owned Life Insurance

The Bank had previously purchased a life insurance policy on one retired executive. In September 2015, the Bank purchased additional life insurance policies on ten members of senior management. Bank owned life insurance is recorded at its cash surrender value, or the amount that can be realized. Increases in the asset value are recorded as earnings in other income.

F- 10

Accumulated Other Comprehensive Income

The accumulated other comprehensive income component of equity results from the unrealized gains and losses on available for sale securities and from the unrecognized actuarial loss of the pension plan.

	(Dollars in thousands)
	2015			2014
	2016			2015
Securities available for sale	$	(5468	)	$	(754	)
Unrecognized actuarial loss of the pension plan		(~~513~~416	)		(~~508~~513	)
Accumulated other comprehensive income	$	(~~567~~484	)	$	(~~515~~567	)

Employee Benefit Plans

Pension expense is the net of service and interest cost, return on plan assets, and amortization of gains and losses not immediately recognized. 401(k) plan expense is based on the Company’s annual contribution.

Earnings Per Common Share

Earnings per common share are net income available to common shareholders divided by the weighted average common shares outstanding during the period. The factors used in the earnings per share computation follow:

	(Dollars in thousands, except per share data)
	2015		2014
	2016		2015
Net income (loss)	$	~~654~~1,228	$	~~6,078~~654
Weighted average common shares outstanding		~~645~~682,~~849~~600		~~542~~645,~~398~~849
Basic earnings per common share	$	1.0180	$	111.2101
Total shares and warrants		~~652~~682,~~478~~600		~~548~~652,~~348~~478
Diluted earnings per common share	$	1.0080	$	111.0800

AtWarrants ~~December~~offered ~~31,~~in ~~2015,~~conjunction ~~there~~with ~~were~~the ~~67,985~~2014 ~~warrants~~common stock offering ~~outstanding.~~totaled ~~Each~~119,003 ~~warrant~~warrants, ~~allows~~each entitling the holder to purchase a1 share of ~~Bancorp~~ common stock at a ~~price~~discount ~~equal~~ to ~~90%~~book ofvalue. ~~the~~At ~~book price~~December ~~per~~31, ~~share~~2015, there were 67,985 warrants outstanding and at ~~the~~December ~~close~~31, of2016 the ~~preceding~~offering ~~month~~had expired and no warrants were outstanding. At ~~These~~December 31, 2015, 51,018 warrants ~~expire~~had atbeen ~~June~~exercised 25and an additional 23,669 warrants were exercised in 2016.

In 2014, the Company offered a total of 369,754 common shares plus 184,877 warrants, for a total of 554,631 shares, selling a total of 238,057 shares and issuing a total of 119,003 warrants with those shares. Net proceeds after expenses were $3.2 million. Other than an investment in the Bank, the Company currently has no arrangements or understandings regarding any specific use of proceeds.

Income Taxes

Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of securities available for sale, allowance for loan losses, subsequent loss ~~write-downs~~writedowns on other real estate owned, accumulated depreciation, nonaccrual interest on loans, and accrued employee benefits. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets or liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Bancorp files consolidated income tax returns with the Bank.

F-11

Advertising

Advertising costs are charged to operations when incurred.

Statements of Cash Flows

The Company considers cash and amounts ~~due~~ due from depository institutions, ~~interest-bearing deposits in other banks,~~ and federal funds sold, all of which have an original maturity of 90 days or less, to be cash and cash equivalents for purposes of the statements of cash flows. The following are supplemental disclosures for the years ended December 31, ~~2015~~2016 and ~~2014~~2015, respectively.

	(Dollars in thousands)
	2015		2014
Cash paid during the year for interest	$	1,958	$	2,077
Non cash investing and financing activities
Transfer of loans to real estate owned		150		803
Short term debt converted to common stock		656		-

F- 11

	(Dollars in thousands)
	2016		2015

Cash paid during the year for interest	$	996	$	1,958
Non cash investing and financing activities
Transfer of loans to real estate owned		22		150
Short term debt converted to common stock		-		656

Industry Segments

While the Bancorp’s chief decision makers monitor the revenue streams of various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable segment.

Recent Accounting Pronouncements

In ~~January~~May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-0409, “~~Receivables~~Revenue -from ~~Troubled~~Contracts ~~Debt~~with ~~Restructurings~~Customers ~~by Creditors~~ (~~Subtopic~~Topic ~~310-40~~606)~~: Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure~~.” ~~This~~The ~~ASU~~core ~~clarifies~~principle ~~that~~of anthe ~~in-substance~~guidance ~~repossession~~is orthat ~~foreclosure~~an ~~occurs,~~entity ~~and~~should arecognize ~~creditor~~revenue ~~is considered~~ to ~~have~~depict ~~received~~the ~~physical possession~~transfer of ~~residential~~promised ~~real~~goods ~~estate~~or ~~property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining~~services ~~legal title~~ to ~~the~~customers ~~residential~~in ~~real~~an ~~estate~~amount ~~property~~that ~~upon~~reflects ~~completion of a foreclosure or (2)~~ the ~~borrower~~consideration ~~conveying~~to ~~all~~which ~~interest in~~ the ~~residential~~entity ~~real~~expects ~~estate property~~ to ~~the~~be ~~creditor~~entitled ~~to satisfy that loan through completion of a deed~~ in ~~lieu~~exchange offor ~~foreclosure~~those goods or ~~through similar legal agreement~~services. ~~Additionally,~~The ~~the~~core ~~amendments~~principle ~~require~~will ~~interim~~be ~~and~~achieved ~~annual~~using ~~disclosures~~a offive ~~both~~step ~~(1)~~process. ~~the~~In ~~amount of~~August ~~foreclosed~~2015, ~~residential real estate property held by~~ the ~~creditor~~FASB ~~and~~issued ~~(2)~~ASU ~~the~~No. ~~recorded~~2015-14, ~~investment in consumer mortgage loans~~“Revenue ~~collateralized~~from byContracts ~~residential~~with ~~real~~Customers ~~estate~~(Topic ~~property~~606)” ~~that~~which ~~are~~amends in the ~~process of foreclosure according to local requirements of the applicable jurisdiction. This ASU became~~ effective date for the Company onfrom January 1, 2017 to January 1, ~~2015~~2018. The ~~adoption~~adoptions of ASU No. 2014-0409 ~~did~~and ASU No. 2015-14 are not expected to have a material impact on the Company’s consolidated financial statements.

In ~~May~~January ~~2014~~2016, the FASB issued ASU No. ~~2014~~ 2016-0901, ~~“Revenue~~ ~~from~~"Financial ~~Contracts~~Instruments ~~with~~- ~~Customers~~Overall (~~Topic~~Subtopic ~~606~~825-10).” ~~The~~Recognition ~~core~~and ~~principle~~Measurement of ~~the~~Financial ~~guidance~~Assets isand ~~that~~Financial Liabilities". The new standard significantly revises an entity's ~~should~~accounting ~~recognize revenue~~related to ~~depict~~1) the ~~transfer~~classification and measurement of ~~promised~~investments ~~goods~~in orequity ~~services~~securities toand ~~customers~~2) inthe anpresentation ~~amount~~of ~~that~~certain ~~reflects~~fair ~~the~~value ~~consideration~~changes tofor ~~which~~financial liabilities measured at ~~the~~fair ~~entity~~value. ~~expects~~It toalso beamends ~~entitled~~certain indisclosure ~~exchange~~requirements ~~for~~associated ~~those~~with ~~goods~~the orfair ~~services~~value of financial instruments. The ~~core~~amendment requires ~~principle~~equity ~~will~~investments be(excluding ~~achieved~~investments ~~using~~accounted afor ~~five~~under ~~step process.~~the Inequity ~~August~~method ~~2015,~~or ~~the~~that ~~FASB~~result ~~issued~~in ~~ASU~~consolidation) ~~No.~~to ~~2015-14,~~be measured ~~“Revenue~~at ~~from~~fair ~~Contracts~~value, with ~~Customers~~changes ~~(Topic~~in ~~606)~~fair value recognized in net income.” ~~which amends~~This ~~the~~ASU ~~effective~~will ~~date~~become effective for the Company ~~from~~ on January 1, ~~2017~~2018. The adoption will require a cumulative effect to ~~January~~the 1,statement ~~2018.~~of ~~The~~financial ~~adoptions~~position as of ~~ASU~~the ~~No.~~beginning ~~2014-09~~of ~~and~~the first ~~ASU~~reporting Noperiod. ~~2015-14~~ ~~are~~The ~~not~~Company ~~expected~~has tonot ~~have~~determined athe ~~material~~expected ~~impact~~effect onof the ~~Company’s~~adoption ~~financial~~of ~~statements~~ASU No. 2016-01.

In ~~August~~February ~~2014~~2016, the FASB issued ASU No. ~~2014~~ 2016-1402, “~~Receivables~~Leases -(Topic ~~Troubled~~842).” ~~Debt~~This ~~Restructurings~~standard byrequires ~~Creditors~~organizations ~~(Subtopic~~to ~~310-40):~~recognize ~~Classification~~lease ofassets ~~Certain~~and ~~Government-Guaranteed~~lease ~~Mortgage~~liabilities ~~Loans~~on ~~upon~~the ~~Foreclosure.”~~balance ~~The~~sheet ~~amendments~~and indisclose ~~this~~key ~~update~~information ~~require~~about ~~that~~leasing arequirements ~~mortgage~~for ~~loan~~leases ~~be derecognized and~~ that awere ~~separate~~historically classified ~~other~~as ~~receivable~~operating beleases ~~recognized~~under ~~upon~~previous ~~foreclosure~~generally ifaccepted ~~certain~~accounting ~~conditions are met~~principles. This ASU ~~became~~will become effective for the Company for interim and annual periods on January 1, ~~2015~~2019. ~~The~~Management ~~adoption~~is ofcurrently ~~ASU~~evaluating ~~No.~~the ~~2014-14~~potential ~~did~~impact ~~not~~of ~~have~~ASU aNo. ~~material impact~~ 2016-02 on the Company’s consolidated financial statements.

In ~~February~~June ~~2015~~2016, the FASB issued ASU No. ~~2015~~2016-0213, “~~Consolidation~~Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic ~~810~~326).” -This ~~Amendments~~standard replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to ~~the~~inform ~~Consolidation~~credit ~~Analysis”~~loss estimates. ~~ASU~~The Noamendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. ~~2015-02~~The ~~eliminates~~new Current Expected Credit Losses model (CECL) will apply to the ~~deferral~~allowance offor loan losses, available-for-sale ~~FAS~~and ~~167~~held to maturity debt securities, purchased financial assets with credit deterioration, and ~~makes~~certain ~~changes~~off-balance sheet credit exposures. Entities will apply the standard’s provisions as a cumulative-effect adjustment to ~~both~~retained earnings as of the beginning ~~variable~~of ~~interest~~the ~~model~~first ~~and~~reporting period in which the ~~voting~~guidance ~~model~~is effective. This ASU will become effective for the Company for interim and annual periods on January 1, ~~2016~~2020. ~~The~~Management ~~adoption of ASU No. 2015-02~~ is ~~not~~currently ~~expected~~evaluating tothe ~~have~~potential aimpact ~~material~~of ~~impact~~ASU No. 2016-13 on the Company’s consolidated financial statements.

F- 12

In May 2015, the FASB issued ASU No. 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” ASU No. 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The ASU also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. This ASU will become effective for the Company on January 1, 2016. The adoption of ASU No. 2015-07 is not expected to have a material impact on the Company’s financial statements.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities”. The new standard significantly revises an entity’s accounting related to 1) the classification and measurement of investments in equity securities and 2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. The amendment requires equity investments (excluding investments accounted for under the equity method or that result in consolidation) to be measured at fair value, with changes in fair value recognized in net income. This ASU will become effective for the Company on January 1, 2018. The adoption will require a cumulative effect to the statement of financial position as of the beginning of the first reporting period. The Company has not determined the expected effect of the adoption of ASU No. 2016-01.

NOTE B - RESTRICTION ON CASH AND DUE FROM BANKS

The Bank is required to maintain certain ~~daily~~ daily cash and due from bank reserve balances in accordance with regulatory requirements. The balance maintained under such requirements was $1775,~~064,~~000 and $~~889~~1,064,000 as of December 31, ~~2015~~2016 and ~~2014~~2015, respectively.

As of December 31, ~~2015~~2016, the Bank was required to maintain a minimum balance of $~~861~~825,000 with ~~Great~~United ~~Lakes~~ Bankers Bank.

NOTE C - INVESTMENT SECURITIES

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

	(Dollars in thousands)
	December 31, 2015									December 31, 2014
	December 31, 2016									December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. government securities	$	~~1,005~~-	$	-	$	-		$	~~1,005~~-	$	51,~~049~~005	$	18-	$	-		$	51,~~067~~005
U.S. government federal agencies		61,~~571~~990		3-		(398	)		61,~~535~~982		136,~~905~~571		313		(6739	)		136,~~869~~535
State and local governments		12,~~774~~759		9-		-(25	)		12,~~783~~734		1,~~029~~774		79		(1-	)		1,~~035~~783
Mortgage backed securities		43,~~745~~592		42		(5973	)		43,~~690~~521		114,~~191~~745		674		(6559	)		114,~~193~~690
Total	$	148,~~095~~341	$	162	$	(98106	)	$	148,~~013~~237	$	3114,~~174~~095	$	~~123~~16	$	(~~133~~98	)	$	3114,~~164~~013

F- 13

The following is a summary of maturities of securities available for sale as of December 31, ~~2015~~2016:

	(Dollars in thousands)
	Amortized Cost		Fair Value
Amounts maturing in:
One year or less	$	~~1,258~~-	$	~~1,259~~-
After one year through five years		63,~~868~~111		63,~~832~~089
After five years through ten years		~~1,245~~653		~~1,256~~644
After ten years		4,~~724~~577		4,~~666~~504
Total	$	148,~~095~~341	$	148,~~013~~237

Mortgage backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by issuers of the securities. The amortized cost and fair value of mortgage backed securities are presented in the available for sale category by contractual maturity in the preceding table.

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

In ~~2015~~2016, the Bank sold $144.20 million of ~~the~~ investment securities ~~portfolio~~ for total proceeds of $~~14.~~4.0 million, ~~with~~and a realized gain of less than $0.21 million. ~~There~~In ~~were no losses on sales of investments in~~ 2015~~. During 2014~~, the Bank sold $14.2 ~~the~~million ~~tax~~of ~~exempt~~the ~~municipal~~investment securities portfolio. ~~Total~~for total proceeds ~~were~~ of $414.74 million, ~~and~~with ~~the~~a realized gain ~~was~~of $0.2 million. There were no losses on sales of investments in 2016 or 2015.

There were no securities transferred between classifications during either ~~2015~~2016 or ~~2014~~2015.

Investment securities with a carrying amount of approximately $21,~~848~~740,000 and $282,~~793~~848,000 were pledged to secure deposits as required or permitted by law at December 31, ~~2015~~2016, and ~~2014~~2015, respectively.

The caption “Other investment securities” in the consolidated balance sheets consists of Federal Home Loan Bank stock. This equity security is carried at cost since it may only be sold back to the Federal Home Loan Bank or another member at par value.

Information pertaining to securities with ~~gross~~ gross unrealized losses at December 31, ~~2015~~2016 and ~~2014~~2015 aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

	(Dollars in thousands)
	Less than 12 months					12 months or greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
December 31, 2015
U.S. government federal agencies	$	4,981	$	(39	)	$	-	$	-		$	4,981	$	(39	)
Mortgage backed securities		3,115		(28	)		1,388		(31	)		4,503		(59	)
Total	$	8,096	$	(67	)	$	1,388	$	(31	)	$	9,484	$	(98	)
December 31, 2014
U.S. government federal agencies	$	3,088	$	(9	)	$	4,979	$	(58	)	$	8,067	$	(67	)
State and local governments		578		(1	)		-		-			578		(1	)
Mortgage backed securities		1,985		(8	)		3,684		(57	)		5,669		(65	)
Total	$	5,651	$	(18	)	$	8,663	$	(115	)	$	14,314	$	(133	)

F- 14

F-14

	(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
December 31, 2016
U.S. government federal agencies	$	1,982	$	(8	)	$	-	$	-		$	1,982	$	(8	)
State and local governments		1,734		(25	)		-		-			1,734		(25	)
Mortgage backed securities		2,675		(44	)		828		(29	)		3,503		(73	)
Total	$	6,391	$	(77	)	$	828	$	(29	)	$	7,219	$	(106	)

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

The investment portfolio contains unrealized losses of direct obligations of U.S. government agencies 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 for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary.

Management evaluates securities for other than temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any recovery in fair value.

F- 15

NOTE D - 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)
	Commercial			Real Estate			Consumer			Total
December 31, 2016
Beginning balance - January 1, 2016	$	1,629		$	240		$	209		$	2,078
Charge-offs		(233	)		(1	)		(116	)		(350	)
Recoveries		76			3			41			120
Net (charge-offs) recoveries		(157	)		2			(75	)		(230	)
Provision		5			(99	)		94			-
Ending balance - December 31, 2016	$	1,477		$	143		$	228		$	1,848
December 31, 2015
Beginning balance - January 1, 2015	$	3,491		$	195		$	183		$	3,869
Charge-offs		(1,443	)		(42	)		(187	)		(1,672	)
Recoveries		86			2			43			131
Net (charge-offs) recoveries		(1,357	)		(40	)		(144	)		(1,541	)
Provision		(505	)		85			170			(250	)
Ending balance - December 31, 2015	$	1,629		$	240		$	209		$	2,078
December 31, 2014
Beginning balance - January 1, 2014	$	3,873		$	267		$	244		$	4,384
Charge-offs		(458	)		(45	)		(185	)		(688	)
Recoveries		295			21			43			359
Net (charge-offs) recoveries		(163	)		(24	)		(142	)		(329	)
Provision		(219	)		(48	)		81			(186	)
Ending balance - December 31, 2014	$	3,491		$	195		$	183		$	3,869

F-15

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
December 31, 2016
Commercial	$	1,011	$	76,251	$	466	$	3,836	$	1,477	$	80,087
Real estate		132		43,558		11		117		143		43,675
Consumer		212		30,111		16		113		228		30,224
Total	$	1,355	$	149,920	$	493	$	4,066	$	1,848	$	153,986
December 31, 2015
Commercial	$	1,479	$	80,293	$	150	$	1,854	$	1,629	$	82,147
Real estate		196		42,993		44		408		240		43,401
Consumer		209		23,683		-		-		209		23,683
Total	$	1,884	$	146,969	$	194	$	2,262	$	2,078	$	149,231
December 31, 2014
Commercial	$	2,422	$	77,651	$	1,069	$	10,338	$	3,491	$	87,989
Real estate		124		38,091		71		665		195		38,756
Consumer		169		19,407		14		274		183		19,681
Total	$	2,715	$	135,149	$	1,154	$	11,277	$	3,869	$	146,426

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.

F- 16

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. Such monitoring is being done on an ongoing basis according to the following timeframe: $250,000 to $1,000,000 exposure, annually; $1,000,000 exposure, semiannually; watch list loans with aggregate exposure >$100,000 are analyzed each quarter. 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 December 31, ~~2015~~2016 and December 31, ~~2014~~2015.

F-16

Commercial Credit Exposure

Credit risk profile by credit worthiness category

Commercial Credit Exposure

(Dollars in thousands)

Commercial Mortgage

Commercial Other

12/31/15

12/31/14

12/31/15

12/31/14

12/31/16

12/31/15

12/31/16

12/31/15

Category

Pass

6163,~~612~~760

61,~~047~~612

1210,~~123~~884

1312,~~014~~123

~~984~~879

~~4,524~~984

~~186~~38

~~344~~186

63,~~686~~932

86,~~131~~686

~~557~~594

~~230~~557

~~699~~-

Total

6968,~~282~~571

7469,~~401~~282

1211,~~866~~516

1312,~~588~~866

F- 17

Consumer Credit Exposure

Credit risk profile by credit worthiness category

	(Dollars in thousands)
	Residential Real Estate				Consumer Equity				Consumer Auto				Consumer Other
	12/31/15		12/31/14		12/31/15		12/31/14		12/31/15		12/31/14		12/31/15		12/31/14
	12/31/16		12/31/15		12/31/16		12/31/15		12/31/16		12/31/15		12/31/16		12/31/15
Category
Pass	$	4243,~~690~~372	$	3742,~~729~~690	$	1013,~~049~~585	$	610,~~945~~049	$	1115,~~999~~078	$	1011,~~649~~999	$	1,~~512~~525	$	1,~~888~~512
5		~~373~~-		~~430~~373		59-		7759		38-		5438		-		-
6		~~338~~303		~~597~~338		7-		157		1836		5318		-		-
7		-		-		-		-		-		-		-		-
Total	$	43,~~401~~675	$	3843,~~756~~401	$	1013,~~115~~585	$	710,~~037~~115	$	1215,~~055~~114	$	1012,~~756~~055	$	1,~~512~~525	$	1,~~888~~512

Loans evaluated for impairment include loans classified as troubled debt restructurings and non-performing commercial, mortgage, and consumer loans. Impairment is evaluated in total for smaller balance loans of a similar nature, and on an individual loan basis for other loans. The following tables set forth certain information regarding the Bank’s impaired loans, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of the periods indicated:

F-17 18

	(Dollars in thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance
December 31, 2016
With no related allowance recorded:
Commercial mortgage	$	559	$	588	$	-
Commercial other		115		115		-
Residential real estate		289		289		-
Consumer equity		-		-		-
Consumer auto		55		55		-
Subtotal		1,018		1,047		-
With an allowance recorded:
Commercial mortgage		3,077		3,107		444
Commercial other		592		592		22
Residential real estate		117		119		11
Consumer equity		113		113		16
Consumer auto		-		-		-
Subtotal		3,899		3,931		493
Total	$	4,917	$	4,978	$	493
December 31, 2015
With no related allowance recorded:
Commercial mortgage	$	1,324	$	1,886	$	-
Commercial other		38		37		-
Residential real estate		315		316		-
Consumer equity		-		-		-
Consumer auto		89		90		-
Subtotal		1,766		2,329		-
With an allowance recorded:
Commercial mortgage		997		1,100		150
Commercial other		-		-		-
Residential real estate		408		409		44
Consumer equity		-		-		-
Consumer auto		-		-		-
Subtotal		1,405		1,509		194
Total	$	3,171	$	3,838	$	194
December 31, 2014
With no related allowance recorded:
Commercial mortgage	$	7,027	$	7,368	$	-
Commercial other		67		67		-
Residential real estate		223		278		-
Consumer equity		15		16		-
Consumer auto		106		109		-
Subtotal		7,438		7,838		-
With an allowance recorded:
Commercial mortgage		3,100		3,191		925
Commercial other		144		168		144
Residential real estate		442		449		71
Consumer equity		153		153		14
Consumer auto		-		-		-
Subtotal		3,839		3,961		1,154
Total	$	11,277	$	11,799	$	1,154

F-18 19

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

	(Dollars in thousands)
	No Related				With Related
	Allowance Recorded				Allowance Recorded				Total
	Average Recorded Investment		Total Interest Income Recognized		Average Recorded Investment		Total Interest Income Recognized		Average Recorded Investment		Total Interest Income Recognized
December 31, 2016
Commercial
Mortgage	$	881	$	10	$	1,769	$	74	$	2,650	$	84
Other		87		2		238		-		325		2
Residential real estate		302		14		344		6		646		20
Consumer
Equity		-		-		68		1		68		1
Auto		57		2		-		-		57		2
Other		-		-		-		-		-		-
TOTAL	$	1,327	$	28	$	2,419	$	81	$	3,746	$	109
December 31, 2015
Commercial
Mortgage	$	3,036	$	6	$	2,040	$	37	$	5,076	$	43
Other		48		2		53		-		101		2
Residential real estate		247		16		443		8		690		24
Consumer
Equity		31		-		91		-		122		-
Auto		104		6		-		-		104		6
Other		-		-		-		-		-		-
TOTAL	$	3,466	$	30	$	2,627	$	45	$	6,093	$	75
December 31, 2014
Commercial
Mortgage	$	7,529	$	115	$	2,512	$	25	$	10,041	$	140
Other		148		3		230		-		378		3
Residential real estate		238		5		515		18		753		23
Consumer
Equity		63		-		156		10		219		10
Auto		107		2		2		-		109		2
Other		-		-		-		-		-		-
TOTAL	$	8,085	$	125	$	3,415	$	53	$	11,500	$	178

F-19 20

The following table summarizes information relative to troubled debt restructured (TDR) loans which were modified during the years ended December 31, ~~2015~~2016 and ~~2014~~2015.

	(Dollars in thousands)
	Number		Pre- Modification Outstanding		Post- Modification Outstanding
	of		Recorded		Recorded
	TDRs		Investment		Investment
December 31, 2016
Commercial mortgage		13	$	2,824	$	2,824
Residential real estate		-		-		-
Consumer		3		201		201
Total		16	$	3,025	$	3,025
December 31, 2015
Commercial mortgage		2	$	478	$	478
Residential real estate		3		239		239
Consumer		8		177		177
Total		13	$	894	$	894
December 31, 2014
Commercial mortgage		5	$	1,260	$	1,260
Residential real estate		4		251		251
Consumer		6		30		30
Total		15	$	1,541	$	1,541

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 2016, loans were modified by either a reduction in interest rates, a change in the contractual maturity date of the note, or a final payment modification. The interest rate on ten loans was reduced, often in concert with an extended amortization period. Three loans maintained the original interest rate, but the amortization period was extended. Three loans were changed to interest only payments with a balloon payment due at the maturity.

During 2015, loans were modified by either a reduction in interest rates, a change in the contractual maturity date of the note, or a final payment modification. The interest rate on nine loans was reduced, often in concert with an extended amortization period. Three loans maintained the original interest rate, but the amortization period was extended. A single loan was changed to interest only payments with a balloon payment due at the maturity.

During 2014, loans were modified by a either a reduction in interest rates, a change in the contractual maturity date of the note, or a final payment modification. Five loans were modified with reduced interest rates, the contractual maturity date of eight loans was extended, and two loans had a final balloon payment added at maturity.

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 were no loans which were modified as as a TDR within the previous twelve months that have subsequently re-defaulted as of December 31, ~~2015~~2016.

As of December 31, ~~2015~~2016, there are no commitments to lend additional funds to any borrower whose loan terms have been modified as a TDR.

F-20 21

The following table presents the loan portfolio summarized by ~~aging~~ aging categories, at December 31, ~~2015~~2016 and ~~2014~~2015:

	(Dollars in thousands)
													Recorded
													Investment
	30-59		60-89		>90								>90 Days
	Days		Days		Days		Total				Total		and
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing
December 31, 2016
Commercial:
Mortgage	$	272	$	331	$	381	$	984	$	67,587	$	68,571	$	-
Other		1		4		-		5		11,511		11,516		-
Residential Real Estate		972		-		-		972		42,703		43,675		-
Consumer:
Equity		10		-		-		10		13,575		13,585		-
Auto		154		13		21		188		14,926		15,114		-
Other		11		1		-		12		1,513		1,525		-
Total	$	1,420	$	349	$	402	$	2,171	$	151,815	$	153,986	$	-
December 31, 2015
Commercial:
Mortgage	$	628	$	433	$	196	$	1,257	$	68,025	$	69,282	$	-
Other		11		-		-		11		12,855		12,866		-
Residential Real Estate		449		33		-		482		42,919		43,401		-
Consumer:
Equity		23		-		-		23		10,092		10,115		-
Auto		138		17		-		155		11,900		12,055		-
Other		2		9		-		11		1,501		1,512		-
Total	$	1,251	$	492	$	196	$	1,939	$	147,292	$	149,231	$	-
December 31, 2014
Commercial:
Mortgage	$	1,345	$	238	$	4,924	$	6,507	$	67,894	$	74,401	$	-
Other		17		144		20		181		13,407		13,588		-
Residential Real Estate		470		186		27		683		38,073		38,756		-
Consumer:
Equity		-		-		-		-		7,037		7,037		-
Auto		20		6		19		45		10,711		10,756		-
Other		8		6		10		24		1,864		1,888		-
Total	$	1,860	$	580	$	5,000	$	7,440	$	138,986	$	146,426	$	-

The following summarizes loans on nonaccrual status at ~~December~~ December 31, ~~2015~~2016 and ~~2014~~2015.

	(Dollars in thousands)
	December 31,		December 31,
	2015		2014
	2016		2015
Commercial:
Mortgage	$	~~1,334~~739	$	71,~~200~~334
Other		3-		~~169~~3
Residential Real Estate		3-		~~307~~3
Consumer:
Equity		-		15-
Auto		1029		3810
Other		-		-
Total	$	~~1,350~~768	$	71,~~729~~350

Management has identified lending for non-owner occupied residential real estate as a lending concentration. Total loans for these properties totaled $2830.98 million at December 31, ~~2015~~2016 versus $28.69 million at December 31, ~~2014~~2015. At December 31, ~~2015~~2016, non-owner occupied residential real estate represented 1920.40% of the loan portfolio, ~~down~~up from 19.54% of the Bank’s loan portfolio at December 31, ~~2014~~2015. Management believes it has the skill and experience to manage any risks associated with this type of lending. Loans in this category are generally paying as agreed without any unusual or unexpected levels of delinquency. The delinquency rate in this category, which is any loan 30 days or more past due, was 2.1% at both December 31, ~~2015~~2016 ~~versus~~and ~~4.8% at~~ December 31, ~~2014~~2015.

F-21 22

In the ordinary course of business, the Bancorp and the Bank have and expect to continue to have transactions, including borrowings, with their officers, directors, and their affiliates. In the opinion of management, such transactions were on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the time of comparable transactions with other customers and did not involve more than a normal credit risk of collectability or present any other unfavorable features to the Bancorp and the Bank. Loans to such borrowers are summarized as follows:

Related Party Loans
	(Dollars in thousands)
	2015			2014
	2016			2015
Balance, January 1,	$	11158		$	1611
New loans granted		~~148~~41			~~131~~148
Principal payments		(14	)		(~~136~~1	)
Change in director status		-			-
Principal draws		84			-
Balance, December 31,	$	~~158~~279		$	11158

NOTE E - PREMISES AND EQUIPMENT

A summary of premises and equipment at December 31, ~~2015~~2016 and ~~2014~~ 2015 follows:

	(Dollars in thousands)
	2015			2014
	2016			2015
Land	$	12,~~334~~038		$	1,~~273~~334
Buildings and improvements		3,~~291~~714			3,~~450~~291
Furniture, fixtures, and equipment		2,~~594~~949			2,~~339~~594
	$	78,~~219~~701		$	7,~~062~~219
Accumulated depreciation and amortization		(4,~~242~~371	)		(4,~~012~~242	)
Total	$	24,~~977~~330		$	32,~~050~~977

The Company has ~~entered~~no ~~into various operating~~ lease arrangements. ~~The leases expire~~ at December ~~various~~31, ~~dates throughout~~ 2016 ~~and provide options for renewal~~. The total rental expense charged to operations was $91,000 for the ~~years~~year ended December 31, ~~2015~~2016 and ~~2014 amounted to~~ $126~~,000~~ ~~and~~thousand for ~~$160,000,~~the ~~respectively.~~year Atended December 31, 2015~~, the total future minimum lease commitments under the leases were:~~.

	(Dollars in thousands)
2016	$	48
2017		-
2018		-
2019		-
2020		-
Total	$	48

F-22

NOTE F – BANK OWNED LIFE INSURANCE

In 2015, the Bank invested in whole life ~~insurance~~ insurance contracts on the lives of ten current officers who have provided positive consent allowing the Bank to be named ~~beneficiary~~ beneficiary of these insurance contracts. An existing policy on a former employee is also in place. These policies are recorded at their cash surrender values which are presented in the consolidated balance sheets in “Other assets.” These contracts are insurance products of Massachusetts Mutual Life Insurance Company, New York Life Insurance Company, and the First Penn-Pacific and consist of (21) policies. These policies have a stated aggregate death benefit as of ~~December 31, 2015 and 2014 of~~ $9.7 million and ~~$0.4 million, respectively, and~~ aggregate cash surrender values of $3,~~320~~427,000 and $~~281~~3,320,000 as of December 31, ~~2015~~2016 and ~~2014~~2015, respectively.

The initial policy was funded by a premium payment of $121 thousand. The Bank purchased additional policies in September, 2015 for $3.0 million. Cash surrender value increases to the carrying amounts of the policies are recognized as income of $39107,000 and $839,000 for the years ended December 31, ~~2015~~ 2016 and ~~2014~~2015, respectively.

F- 23

NOTE G - DEPOSITS

Deposit account balances at December 31, ~~2015~~ 2016 and ~~2014~~2015, are summarized as follows:

	(Dollars in thousands)
	2015		2014
	2016		2015
Non-interest bearing checking accounts	$	2632,~~116~~282	$	2326,~~153~~116
Interest-bearing checking accounts		2511,~~721~~055		2225,~~351~~721
Savings accounts		5455,~~277~~104		5854,~~951~~277
Certificates of deposit		5657,~~211~~697		7356,~~512~~211
Total	$	~~162~~156,~~325~~138	$	~~177~~162,~~967~~325

The aggregate amount of jumbo certificates of deposit with a minimum denomination of $250,000 was $710,~~258~~671,000 and $197,~~526~~258,000 at December 31, ~~2015~~2016 and ~~2014~~2015, respectively.

At December 31, ~~2015~~2016, scheduled maturities of certificates of deposit are as follows:

	(Dollars in thousands)
2016	$	25,279
2017	$	23,769
2017		14,506
2018		8,793
2018		3,966
2019		9,299
2019		5,775
2020		7,237
2020		6,665
2021		8,579
2021 and after		20
2022 and after		20
	$	5657,~~211~~697

~~F-23~~The Bank held deposits of approximately $794,000 and $544,000 for executive officers and directors at December 31, 2016 and 2015, respectively.

~~The~~F- ~~Bank held deposits of approximately $544,000 and $528,000 for executive officers and directors at December 31, 2015 and 2014, respectively.~~24

NOTE H – BORROWED FUNDS

Borrowed funds are comprised of the following at December 31:

	(Dollars in thousands)
	2015		2014
	2016		2015
4.25% note payable to bank in monthly installments of $9,925 through 06/25/2019, unsecured	$	~~385~~-	$	~~485~~385
4.75% note payable to bank in monthly installments of $12,615 through 11/21/2019, unsecured		~~540~~-		~~662~~540
8.00% note payable to company, of which a significant owner is a shareholder of Bancorp, in monthly installments of interest only through 12/29/2015, secured by real estate		-		5,000
8.00% note payable to company, of which a signidicant owner is a shareholder of Bancorp, in monthly installments of interest only through 12/29/2015, secured by real estate		-		-
6.00% note payable to individual who is a significant shareholder of Bancorp, in monthly installments of interest only through 08/04/2021, secured by real estate		~~1,644~~-		-1,644
Total borrowed funds	$	~~2,569~~-	$	62,~~147~~569

AsBorrowed offunds ~~February~~totaled 9$2.6 million at December 31, 2015, ~~the~~consisting ~~Company had renegotiated a portion~~ of ~~the~~three ~~$5.0~~separate ~~million~~loans ~~note~~to ~~payable~~Bancorp ~~due~~which ~~December~~originally ~~29,~~totaled ~~2015~~$6.1 Anmillion. ~~interest~~During ~~only~~the ~~note~~first ~~(Note~~quarter of ~~B) for $1~~2015,~~644,546.60,~~ ~~due~~Bancorp ~~August 4,~~was ~~2021,~~able ~~with~~to renegotiate a ~~fixed~~substantial ~~interest~~portion ~~rate~~ of ~~6.00%,~~the ~~and~~debt ~~28,675~~due ~~shares~~December of29, ~~the~~2015, ~~Company’s~~achieving ~~common~~terms ~~stock~~more ~~were~~favorable to ~~exchanged~~Bancorp. ~~for~~A ~~$2.3~~portion ~~million~~ of the ~~original~~ $5.0 million note. ~~The~~totaling ~~remaining~~ $2.73 million ~~(Note~~was A)exchanged for 28,675 shares of ~~the~~Bancorp ~~original~~common stock and a new $51.06 million note ~~continued~~with ~~unaltered, earning~~ a ~~fixed~~more favorable interest rate ofand ~~8.00%,~~a ~~due~~maturity ~~December~~date ~~29,~~of ~~2015~~August 2021.

In ~~September~~October, ~~2015~~2016, ~~the Company made~~ a $1.0 6 million ~~principal~~dividend was ~~payment~~paid ~~to Note A~~ from ~~available~~the ~~funds~~Bank atto the Holding Company ~~level~~. InThis ~~November 2015~~dividend, ~~the~~along ~~Bank~~with ~~requested~~cash ~~permission from~~on ~~the~~hand ~~FDIC~~at ~~and DFI to pay a one-time dividend to~~ the Holding Company, ~~for~~was ~~the~~sufficient ~~purpose of retiring Note A. In December 2015, permission~~to ~~was~~retire ~~granted,~~all of the ~~dividend~~long ~~was~~term ~~paid,~~debt ~~and~~outstanding ~~Note~~as Aof ~~was~~that ~~retired~~date.

Federal Home Loan Bank (FHLB) advances ~~are~~ are collateralized by all shares of FHLB stock owned by the Bank (totaling $859,000) and by 100% of the Bank’s qualifying 1 – 4 family mortgage loans in the amount of $7782.56 million. Based on the collateral capacity as of December 31, ~~2015~~ 2016, total FHLB advances are limited to approximately $4653.0 million. There were no FHLB borrowings outstanding at December 31, 2016 ~~2015~~ or ~~2014~~2015. In addition, the FHLB has issued $14,~~750~~800,000 of standby letters of credit for the Bank.

In addition, the Company has a collateralized federal funds line of $810.52 million with the Federal Reserve Bank and an unsecured $15.0 million line with ~~Great~~United ~~Lakes~~ Bankers ’ Bank. ~~Neither~~ ~~line was drawn upon as of December 31, 2015.~~ The Federal Reserve federal funds line is secured via the pledge of $1113.1 8 million of automobile loans and the ~~Great~~United ~~Lakes~~ Bankers ’ Bank line is unsecured.

AtOvernight borrowings of $2.7 million were drawn on the United Bankers' Bank line at December 31, ~~2015~~2016, ~~scheduled~~and ~~maturities~~the FHLB line was not utilized. Information concerning overnight offunds ~~notes~~purchased ~~payable~~is ~~were~~summarized as follows:

	(Dollars in thousands)
~~2016~~	2016	~~233~~		2015
2017		243
Amount outstanding	$	2,699		$	-
2018		255
Year-end rate		1.125	%		0	%
2019		194
Average outstanding		229			-
2020		-
Average rate		0.875	%		0	%
2021		1,644
Maximum amount outstanding		4,465			-
	$	2,569

F-24 25

NOTE I - FEDERAL INCOME TAXES

The consolidated provision for income taxes consists of the following for the years ended December 31:

	(Dollars in thousands)
	2015		2014
	2016		2015
Income tax expense
Current tax expense	$	-	$	-
Deferred tax expense		~~232~~622		49232
Change in valuation allowance		-		(5,148	)
Total	$	622	$	232
Total	$	232	$	(5,099	)

The consolidated provision for federal income taxes differs from that computed by applying federal statutory rates to income before federal income tax expense as indicated in the following analysis:

	(Dollars in thousands)
	2015			2014
	2016			2015
Federal statutory income tax at 34%	$	~~301~~629		$	~~333~~301
Tax exempt income		(6682	)		(~~100~~66	)
Other		(375	)		(~~184~~3	)
Change in valuation allowance		-			(5,148	)
Total	$	622		$	232
Total	$	232		$	(5,099	)

The deferred tax assets and deferred tax liabilities are comprised of the following at December 31:

	(Dollars in thousands)
	2015			2014
	2016			2015
Deferred Tax Assets
Pension accounting	$	19(13	)	$	~~261~~19
Allowance for loan losses		163			~~682~~16
Deferred compensation		1310			1613
OREO accounting		~~687~~133			~~1,106~~687
Nonaccrual loan interest		388			~~157~~38
NOL carryforward		4,~~680~~586			34,~~429~~680
Available for sale securities		2835			428
Other		743			47
Deferred tax assets		54,~~488~~805			5,~~659~~488
Deferred Tax Liabilities
Depreciation		~~164~~144			~~130~~164
FHLB stock		166			166
Deferred tax liabilities		~~330~~310			~~296~~330
Net deferred tax asset	$	54,~~158~~495		$	5,~~363~~158

At year-end ~~2015~~2016, the Company had federal net operating loss carryforwards of approximately $13,~~762~~488,000 which will begin to expire in the year ~~2031~~2032.

The Company is subject to U.S. federal income tax. The Company is no longer subject to examination by taxing authorities for years before ~~2012~~2013.

Realization of deferred tax assets is dependent on generating sufficient taxable income prior to their expiration.

~~F-25~~The net deferred tax asset of $4.5 million is recorded in other assets.

InThe ~~the~~Company ~~fourth~~expects ~~quarter~~to ofrealize ~~2014,~~$4.6 ~~the Company~~million ~~again~~of ~~evaluated~~deferred ~~the~~tax ~~need~~assets ~~for~~related ato net ~~deferred~~operating ~~tax~~loss ~~asset~~carryforwards ~~valuation~~well ~~allowance,~~in ~~concluded~~advance ~~that~~of itthe isstatutory ~~more~~carryforward ~~likely~~period. ~~than~~At ~~not that the net~~December ~~deferred~~31, ~~tax~~2016, ~~asset~~$0.2 ~~will~~million beof ~~realized~~existing ~~based~~deferred ~~upon~~tax ~~future~~assets ~~taxable~~were ~~income,~~not ~~and~~related ~~reversed~~to ~~the~~net ~~entire~~operating ~~valuation~~losses ~~allowance~~and ontherefore ~~net~~have ~~deferred tax~~no ~~assets of $5~~expiration date.~~1 million.~~

~~The~~F- ~~net deferred tax asset of $5.2 million is recorded in other assets.~~26

~~The~~Accounting ~~Company~~principles ~~expects~~generally toaccepted in ~~realize~~the ~~$4.7~~United ~~million~~ States of ~~deferred~~America require management to evaluate tax ~~assets~~positions ~~related~~taken toby ~~net~~the ~~operating~~Bancorp ~~loss~~and ~~carryforwards~~its ~~well~~Subsidiary inand ~~advance~~recognize a oftax liability (or asset) if the ~~statutory~~Bancorp ~~carryforward~~and ~~period~~its Subsidiary have taken an uncertain position that more-likely-than-not would not be sustained upon examination by the Internal Revenue Service. AtManagement ~~December~~has analyzed tax positions taken by the Bancorp and its 31Subsidiary, ~~2015,~~and ~~$0.8~~has ~~million~~concluded that as of ~~existing~~December ~~deferred~~31, ~~tax~~2016, ~~assets~~there ~~were~~are ~~not~~no ~~related~~uncertain positions taken or expected to ~~net~~be ~~operating~~taken ~~losses~~that would ~~and~~require ~~therefore~~recognition ~~have~~of noa ~~expiration date~~liability (or asset) or disclosure in the consolidated financial statements.

NOTE J- FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK

In the normal course of business, the Bank has outstanding commitments, contingent liabilities, and other financial instruments, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated balance sheets.

Financial instruments whose contract amount represents credit risk at December 31, ~~2015~~2016 and ~~2014~~2015 were as follows:

(Dollars in thousands)

2015

2014

2016

2015

Fixed

Variable

Total

Fixed

Variable

Total

Home equity lines

~~1,553~~986

56,~~359~~799

67,~~912~~785

1,~~676~~553

5,~~164~~359

6,~~840~~912

Credit card lines

3,~~405~~104

63,~~065~~405

Secured by real estate

~~848~~1,913

~~723~~3,168

15,~~571~~081

~~1,090~~848

~~564~~723

1,~~654~~571

Other unused commitments

5,~~585~~926

~~914~~945

6,~~499~~871

5,~~616~~585

88914

56,~~704~~499

Standby letters of credit

-5

1116

4111

Total

11,~~402~~940

610,~~996~~917

1822,~~398~~857

1411,~~488~~402

56,~~816~~996

2018,~~304~~398

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount and type of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, real estate, or income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.

The Bank has not incurred any losses on its commitments in either ~~2015~~2016 or ~~2014~~2015.

NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES

The Bancorp and Bank periodically are subject to claims and lawsuits which arise in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial statements of the Company.

F-26 27

NOTE L – RISKS AND UNCERTAINTIES

Total balances of due from bank balances which were in excess of $250,000 were with the following banks as of December 31, ~~2015~~2016:

	(Dollars in thousands)
Great Lakes Bankers Bank	$	2,620
United Bankers' Bank	$	3,078
Federal Reserve Bank		~~3,500~~373
Federal Home Loan Bank		~~793~~-
Total	$	63,~~913~~451

NOTE M - RESTRICTION ON DIVIDENDS

The ~~Bank~~payment isof ~~subject~~dividends to ~~certain restrictions~~shareholders by the Bancorp is not encumbered by any restrictive provisions. There are, however, limitations set by law on the amount of ~~dividends~~funds available ~~that~~to itthe Bancorp from its Subsidiary Bank. Dividends may ~~pay~~be ~~without~~paid ~~prior~~out ~~regulatory~~of funds legally available, which provides that prior approval. ~~The~~is ~~Bank~~required ~~normally~~if ~~restricts~~the total of all dividends todeclared by a ~~lesser~~state bank in any calendar year will exceed the bank's net profits ~~amount.~~for Atthat ~~December~~year ~~31,~~combined ~~2015,~~with noits retained ~~earnings~~net ~~were~~profits ~~available~~ for the ~~payment~~preceding two years. The amount of funds legally available for distribution of dividends by the Bank to the Bancorp without prior approval from regulatory ~~approval~~authorities for 2016 was $5,907,000 less $1,600,000, which was distributed by December 31, 2016.

NOTE N – EMPLOYEE BENEFIT PLANS

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

The following is a summary of the plans funded status as of December 31, ~~2015~~2016 and ~~2014~~2015:

	(Dollars in thousands)
	2015			2014
	2016			2015
Change in benefit obligation:
Projected benefit obligation at beginning of year	$	1,~~459~~409		$	1,~~158~~459
Interest Cost		5357			5153
Actuarial gain (loss)		(7667	)		~~274~~(76	)
Benefits paid		(2751	)		(2427	)
Projected benefit obligation at end of year	$	1,~~409~~348		$	1,~~459~~409
Change in plan assets:
Fair value of plan assets at beginning of year	$	~~726~~1,363		$	~~630~~726
Actual return on plan assets		~~(108~~87	)		56(108	)
Employer contributions		~~772~~-			64772
Benefits paid		(2751	)		(2427	)
Fair value of plan assets at end of year	$	1,~~363~~399		$	~~726~~1,363
Funded status (included in accrued liabilities)	$	~~(46~~51	)	$	(~~733~~46	)
Unrecognized actuarial loss in accumulated other comprehensive income (before taxes)	$	(~~778~~630	)	$	(~~770~~778	)

F-27 28

Amounts recognized in the consolidated statements of income consist of:

	(Dollars in thousands)
	Year ended December 31,
	2015			2014
	2016			2015
Net periodic pension cost:
Interest cost on projected benefit obligation	$	5357		$	5153
Expected return on plan assets		(4380	)		(3943	)
Net amortization of deferral of (gains) losses		6874			4768
Net periodic pension cost	$	7851		$	5978

Other changes recognized in other comprehensive income include:

	(Dollars in thousands)
	Year ended December 31,
	2015			2014
	2016			2015
Change in unrecognized net actuarial loss	$	(8148	)	$	(~~208~~8	)
Tax effect		3(51	)		703
Total recognized in other comprehensive income	$	(597	)	$	(~~138~~5	)

Weighted-average assumptions used to determine benefit obligation at December 31, ~~2015~~2016 and ~~2014~~2015:

	2015			2014
	2016			2015
Discount rate		34.7500	%		43.5075	%

Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31, ~~2015~~2016 and ~~2014~~2015:

	2015			2014
	2016			2015
Discount rate		34.7500	%		43.5075	%
Expected return on plan assets		6.00	%		6.00	%

The actuarial assumptions used in the pension plan valuations are reviewed annually. The Bank’s expected return on plan assets is determined by the plan assets’ historical long-term investment performance, current asset allocation, and estimates of future long-term returns by asset class.

As of January 1, 2016, the Bank retained Robert W. Baird & Co. as third party trustee to manage the assets of The Citizens Bank of Logan pension plan. The Bank’s investment policy for Plan assets is to manage the portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio through the full investment of available funds.

The portfolio is to be diversified by investing in multiple types of investment-grade securities. Target allocation percentages for each major class of Plan assets are as follows:

Equity Securities – 85%

Fixed Income Securities – 15%

F-28 29

The Bank’s pension plan weighted-average asset allocations at December 31, ~~2015~~2016 and ~~2014~~2015 by asset category are as follows:

	2015			2014
	2016			2015
Asset category:
Equity securities		941	%		749	%
Debt securities		045	%		0	%
Cash and cash equivalents		9114	%		591	%
Other		0	%		21	%
Total		100	%		100	%
Citizens Independent Bancorp, Inc. common stock to total plan assets		4	%		54	%

The fair values of the Bank’s pension plan assets presented by asset class within the fair value hierarchy, as defined in Note P – Fair Value of Financial Instruments, at December 31, ~~2015~~2016 and ~~2014~~2015 are as follows:

	(Dollars in thousands)		~~(Dollars in thousands)~~
	Fair Value Measurements		~~Fair Value Measurements~~
Asset Class	Total		Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
			Quoted Prices in Active Markets for Identical		Significant Other Observable		Significant Unobservable
Asset Class	Total		Assets/Liabilities (Level 1)		Inputs (Level 2)		Inputs (Level 3)
December 31, 2016
Cash Equivalents	$	193	$	-	$	193	$	-
Fixed Income		637		637		-		-
Equity Securities		516		516		-		-
	$	1,346	$	1,153	$	193	$	-
CIB Common Stock		53		53		-		-
Total Plan Assets	$	1,399	$	1,206	$	193	$	-
December 31, 2015
Cash Equivalents	$	1,240	$	-	$	1,240	$	-
Fixed Income		6769		6769		-		-
	$	1,307	$	67	$	1,240	$	-
Equity Securities		-		-		-		-
	$	1,309	$	69	$	1,240	$	-
CIB Common Stock		54		-		54		-
Total Plan Assets	$	1,~~361~~363	$	6769	$	1,294	$	-
December 31, 2014
Cash Equivalents	$	32	$	-	$	32	$	-
Fixed Income		169		169		-		-
Equity Securities		446		446		-		-
Other		47		47		-		-
	$	694	$	662	$	32	$	-
CIB Common Stock		32		-		32		-
Total Plan Assets	$	726	$	662	$	64	$	-

The Company ~~anticipates~~does not anticipate making any contributions to the pension plan ~~totaling $50,000~~ during the fiscal year ending December 31, ~~2016~~2017. These contributions ~~will~~would be required to ~~meet~~ meet ERISA’s minimum funding standards and the estimated quarterly contribution requirements during ~~this~~the period. The amount of of the unrecognized net actuarial loss included in accumulated other comprehensive income expected to be recognized in net periodic pension cost during the fiscal year ended December 31, ~~2016~~2017 is $51,~~199~~226. Participants are 100% vested.

F-29 30

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

	(Dollars in thousands)
2016		75
2017	$	66
2017		128
2018		128
2018		138
2019		25
2019		52
2020		97
2020		100
2021		52
2021-2025		312
2022-2026		246
Total	$	~~805~~614

The Company offers a 401(k) profit sharing plan covering substantially all employees. Beginning in January 2016, the existing plan was replaced by a “Safe Harbor” plan as defined by the IRS. The Company ~~partially~~ matches voluntary employee contributions ofat a 100% rate up to 43% of individual compensation., then ~~The~~at ~~matching~~a ~~percentage was~~ 50% inrate ~~2015~~on ~~and~~the ~~2014.~~next ~~Employee~~2% ~~contributions~~of ~~are~~individual ~~vested~~compensation, atfor ~~all~~a ~~times.~~maximum ~~The~~contribution ~~Company’s matching~~of ~~contributions~~4%. ~~become~~Both ~~fully~~employee ~~vested~~and ~~after~~Company ancontributions are ~~individual~~100% ~~has~~vested ~~completed~~at ~~seven~~all ~~years of service~~times. Expense associated with the plan included in salaries and employee benefits was approximately $2759,000 in ~~both~~2016 ~~2015~~ and ~~2014~~$27,000 in 2015.

~~Beginning~~During ~~in January 2016~~2015, the ~~existing plan~~Company ~~will~~entered beinto ~~replaced~~an agreement bywith athe ~~“Safe~~current ~~Harbor”~~President ~~plan~~and asCEO ~~defined~~to byprovide ~~the~~future ~~IRS.~~retirement ~~The~~compensation ~~Company~~to ~~matches~~that ~~voluntary~~executive ~~employee~~through ~~contributions~~a Supplemental atExecutive aRetirement ~~100%~~Plan ~~rate~~(SERP) upagreement. toFollowing 3%retirement, ofat ~~individual~~the ~~compensation~~normal retirement age of 65, ~~then~~the atSERP awill ~~50%~~provide ~~rate~~equal annual onpayments over the next 2%ten year period of ~~individual~~$27,500 ~~compensation~~per year. The Bank recognized expense of $12,916 ~~for~~in aconnection ~~maximum~~with this ~~contribution~~SERP ofagreement ~~4%.~~during ~~Both~~the ~~employee~~year ended December 31, 2016 and ~~Company~~$3,467 ~~contributions~~in ~~are~~the ~~100%~~year ~~vested~~ended atDecember ~~all~~31, ~~times~~2015.

During 2015, the Company entered into an agreement with the current President and CEO to provide future retirement compensation to that executive through a Supplemental Executive Retirement Plan (SERP) agreement. Following retirement, at the normal retirement age of 65, the SERP will provide equal annual payments over the next ten year period of $27,500 per year. The Bank recognized expense of $3,467 in connection with this SERP agreement during the year ended December 31, 2015.

NOTE O - REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the Federal Deposit Insurance Corporation (FDIC). Failure to meet minimum regulatory capital requirements can initiate certain mandatory, and possible additional discretionary, actions by ~~regulators~~ regulators that, if undertaken, could have a direct material effect on the Bank and the Company’s consolidated financial statements. Under regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios, as of ~~January 1, 2015, of~~ total capital, Tier I capital and common equity tier 1 capital to risk-weighted assets (as defined in the regulations), and leverage capital, which is ~~tier 1 capital to adjusted average total assets (as defined). Prior to January 1, 2015, minimum amounts and ratios of total capital, tier 1 capital, and leverage capital, which~~ is tier 1 capital to adjusted average total assets (as defined)~~, were required~~.

AsManagement ~~of October 2~~believes, ~~2015,~~as ~~the~~of ~~FDIC~~December ~~and the~~31, ~~DFI~~2016 ~~removed~~and ~~the~~2015, ~~consent~~that ~~order specifying~~ the Bank ~~maintain~~meets anall ~~8.50%~~the ~~Tier 1 leverage ratio and a 13.50% total~~ capital ~~ratio~~adequacy ~~and replaced~~requirements ~~them with a requirement~~ to ~~maintain~~which anit ~~8.00%~~is ~~Tier 1 leverage ratio and 11~~subject.50% total capital ratio. The Bank was well above both of these measures at December 31, 2015. There are no conditions or events since the most recent notification that management believes have changed the Bank’s prompt corrective action category.

As of December 31, ~~2014~~2016, the ~~FDIC~~most ~~found~~recent ~~that~~notification from the ~~Bank~~FDIC ~~was~~ categorized ~~as undercapitalized per~~ the ~~consent~~Bank ~~orders~~as ~~then~~well incapitalized ~~place.~~under ~~Under~~ the regulatory framework for prompt corrective action. To remain categorized as well capitalized, the Bank’s will have to maintain minimum total capital, ~~status~~common ~~may~~equity ~~have~~tier ~~precluded~~1 ~~the~~capital, tier ~~Bank~~1 ~~from~~capital, ~~access~~and toleverage ~~borrowings~~capital ~~from~~ratios as disclosed in the ~~Federal~~following ~~Reserve~~table. There are no conditions or events since the most ~~System~~recent ~~through~~notification that management believes have changed the ~~discount~~Bank's ~~window~~prompt corrective action category.

F-30 31

The following table outlines the regulatory components of the Company and the Bank’s capital and capital ratios ~~under the rules applicable~~ as of December 31, ~~2015~~2016 and ~~2014~~ 2015, respectively.

	(Dollars in thousands)
											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2016:
Total capital
(to risk-weighted assets)
Consolidated	$	16,916		12.46	%	$	10,861		> 8.00	%	$	N/A	$	N/A
Subsidiary Bank		16,586		12.40	%		10,698		> 8.00	%		13,372		> 10.00	%
Tier 1 capital
(to risk-weighted assets)
Consolidated		15,219		11.21	%		8,146		> 6.00	%		N/A		N/A
Subsidiary Bank		14,900		11.14	%		8,023		> 6.00	%		10,698		> 8.00	%
Common equity tier 1 capital
(to risk-weighted assets)
Consolidated		15,219		11.21	%		6,109		> 4.50	%		N/A		N/A
Subsidiary Bank		14,900		11.14	%		6,017		> 4.50	%		8,692		> 6.50	%
Leverage capital
(to adjusted average total assets)
Consolidated		15,219		8.65	%		7,035		> 4.00	%		N/A		N/A
Subsidiary Bank		14,900		8.52	%		6,998		> 4.00	%		8,747		> 5.00	%
As of December 31, 2015:
Total capital
(to risk-weighted assets)
Consolidated	$	14,365		11.24	%	$	10,222		≥> 8.00	%	$	$ N/A	$	$ N/A
Subsidiary Bank		16,504		13.14	%		10,049		≥> 8.00	%		12,561		≥> 10.00	%
Tier 1 capital
(to risk-weighted assets)
Consolidated		12,768		109.099	%		7,667		≥> 6.00	%		N/A		N/A
Subsidiary Bank		14,905		11.987	%		7,537		≥> 6.00	%		10,049		≥> 8.00	%
Common equity tier 1 capital
(to risk-weighted assets)
Consolidated		12,768		109.099	%		5,750		≥> 4.50	%		N/A		N/A
Subsidiary Bank		14,905		11.987	%		5,652		≥> 4.50	%		8,165		≥> 6.50	%
Leverage capital
(to adjusted average total assets)
Consolidated		12,768		6.877	%		7,541		≥> 4.00	%		N/A		N/A
Subsidiary Bank		14,905		8.223	%		7,243		≥> 4.00	%		9,054		≥> 5.00	%
As of December 31, 2014:
Total capital to risk weighted assets
Consolidated	$	11,779		8.8	%	$	10,663		8.0	%	$	N/A	$	N/A
Bank		17,560		13.4	%		10,491		8.0	%		13,114		10.0	%
Tier 1 capital to risk weighted assets
Consolidated		10,113		7.6	%		5,332		4.0	%		N/A		N/A
Bank		15,893		12.1	%		5,245		4.0	%		7,868		6.0	%
Tier 1 capital to average assets
Consolidated		10,113		5.0	%		8,111		4.0	%		N/A		N/A
Bank		15,893		8.1	%		7,839		4.0	%		9,798		5.0	%

F- 32

NOTE P - FAIR VALUES OF FINANCIAL INSTRUMENTS

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

F-31

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

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

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

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

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

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

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

FLoans held for sale -32 Loans held for sale are carried at fair value. These loans currently consist of one-to-four-family residential loans originated for sale in the secondary market. Fair value is based on the committed market rates or the price secondary markets are currently offering for similar loans using observable market data.

F- 33

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

	(Dollars in thousands)		~~(Dollars in thousands)~~
			Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair		Assets/Liabilities		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2016
Assets:
Securities available for sale
U.S. government securities	$	-	$	-	$	-	$	-
U.S. government federal agencies		1,982		-		1,982		-
State & local governments		2,734		-		2,734		-
Mortgage backed securities		3,521		-		3,521		-
Total securities available for sale	$	8,237	$	-	$	8,237	$	-
Loans held for sale	$	135	$	-	$	135	$	-
December 31, 2015
Assets:
Securities available for sale
U.S. government securities	$	1,005	$	1,005	$	-	$	-
U.S. government federal agencies		6,535		-		6,535		-
State & local governments		1,783		-		1,783		-
Mortgage backed securities		4,690		-		4,690		-
Total securities available for sale	$	14,013	$	1,005	$	13,008	$	-
December 31, 2014
Assets:
Securities available for sale
U.S. government securities	$	5,067	$	5,067	$	-	$	-
U.S. government federal agencies		13,869		-		13,869		-
State & local governments		1,035		-		1,035		-
Mortgage backed securities		11,193		-		11,193		-
Total securities available for sale	$	31,164	$	5,067	$	26,097	$	-

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

Impaired loans - The Bank does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses may need to be established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment. As of December 31, ~~2014~~2016, the fair value of substantially all of the impaired loans ~~was~~ was estimated based on the fair value of the collateral. When the fair value of the collateral is based on an observable market ~~price~~ price or a current appraised value, the Bank records the impaired loan as nonrecurring Level 2. When an appraised value is not ~~available~~ available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Bank records the impaired loan as nonrecurring Level 3. Those impaired loans not requiring an allowance ~~represent~~ represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

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

F-33 34

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

	(Dollars in thousands)		~~(Dollars in thousands)~~
			Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair		Assets/Liabilities		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2016
Assets:
Impaired loans
Commercial mortgage	$	3,192	$	-	$	-	$	3,192
Commercial other		685		-		-		685
Residential real estate		395		-		-		395
Consumer equity		97		-		-		97
Consumer auto		55		-		-		55
Total impaired loans	$	4,424	$	-	$	-	$	4,424
December 31, 2015
Assets:
Impaired loans
Commercial mortgage	$	2,171	$	-	$	-	$	2,171
Commercial other		38		-		-		38
Residential real estate		679		-		-		679
Consumer equity		-		-		-		-
Consumer auto		89		-		-		89
Total impaired loans	$	2,977	$	-	$	-	$	2,977
Other real estate owned
Residential		15		-		-		15
Commercial		223		-		-		223
Total other real estate owned	$	238	$	-	$	-	$	238
December 31, 2014
Assets:
Impaired loans
Commercial mortgage	$	9,202	$	-	$	-	$	9,202
Commercial other		67		-		-		67
Residential real estate		594		-		-		594
Consumer equity		154		-		-		154
Consumer auto		106		-		-		106
Total impaired loans	$	10,123	$	-	$	-	$	10,123
Other real estate owned
Residential		200		-		-		200
Commercial		868		-		-		868
Total other real estate owned	$	1,068	$	-	$	-	$	1,068

F- 35

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

F-34

(Dollars in thousands)

Fair Value

Valuation Technique

Significant Unobservable
Input

Range

December 31, 2016

Impaired loans

Commercial mortgage

3,192

Appraisal of Collateral

Appraisal Adjustment

Up to 12%

Commercial other

685

Appraisal of Collateral

Appraisal Adjustment

Up to 3%

Residential real estate

395

Appraisal of Collateral

Appraisal Adjustment

Up to 3%

Consumer equity

Appraisal of Collateral

Appraisal Adjustment

Up to 14%

Consumer auto

Appraisal of Collateral

Appraisal Adjustment

December 31, 2015

Impaired loans

Commercial mortgage

2,171

Appraisal of Collateral

Appraisal Adjustment

Up to 6%

Commercial other

Appraisal of Collateral

Appraisal Adjustment

Residential real estate

679

Appraisal of Collateral

Appraisal Adjustment

Up to 6%

Consumer auto

Appraisal of Collateral

Appraisal Adjustment

Other real estate owned

Residential

Appraisal of Property

Appraisal Adjustment

Commercial

223

Appraisal of Property

Appraisal Adjustment

Up to 45%

* There are no related allowances for these classifications

(Dollars in thousands)

Fair Value

Valuation Technique

Significant Unobservable Input

Range

December 31, 2015

Impaired loans

Commercial mortgage

2,171

Appraisal of Collateral

Appraisal Adjustment

Up to 6%

6.9

Commercial other

Appraisal of Collateral

Appraisal Adjustment

0.0

Residential real estate

679

Appraisal of Collateral

Appraisal Adjustment

Up to 6%

6.5

Consumer auto

Appraisal of Collateral

Appraisal Adjustment

0.0

Other real estate owned

Residential

Appraisal of Collateral

Appraisal Adjustment

0.0

Commercial

223

Appraisal of Collateral

Appraisal Adjustment

Up to 45%

0.0

December 31, 2014

Impaired loans

Commercial mortgage

9,202

Appraisal of Collateral

Appraisal Adjustment

Up to 9%

10.1

Commercial other

Appraisal of Collateral

Appraisal Adjustment

Up to 68%

214.9

Residential real estate

594

Appraisal of Collateral

Appraisal Adjustment

Up to 11%

12.0

Consumer equity

154

Appraisal of Collateral

Appraisal Adjustment

9.1

Consumer auto

106

Appraisal of Collateral

Appraisal Adjustment

Up to 8%

0.0

Other real estate owned

Residential

200

Appraisal of Collateral

Appraisal Adjustment

Commercial

868

Appraisal of Collateral

Appraisal Adjustment

Up to 5%

* There are no related allowances for these classifications

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

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

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

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

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

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

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

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

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

Borrowed funds —- the ~~carrying~~ 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.

F-35

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

F- 36

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

	(Dollars in thousands)				~~(Dollars in thousands)~~
					Fair Value Measurements at Reporting Date Using:
					Quoted Prices in
					Active Markets		Other		Significant
					for Identical		Observable		Unobservable
	Carrying		Fair		Assets/Liabilities		Inputs		Inputs
	Amount		Value		(Level 1)		(Level 2		(Level 3)
December 31, 2016
Financial assets:
Cash and cash equivalents	$	4,899	$	4,899	$	-	$	4,899	$	-
Securities available for sale		8,237		8,237		-		8,237		-
Other investment securities		859		859		-		-		859
Loans held for sale		135		135		-		135		-
Net loans		152,138		156,202		-		-		156,202
Accrued interest receivable		258		258		-		-		258
Bank owned life insurance		3,427		3,427		-		3,427		-
Financial liabilities
Noninterest bearing deposits	$	32,282	$	32,282	$	-	$	32,282	$	-
Interestbearing deposits		123,856		122,869		-		122,869		-
Overnight funds purchased		2,699		2,699		-		2,699		-
Borrowed funds		-		-		-		-		-
Accrued interest payable		581		581		-		-		581
December 31, 2015
Financial assets:
Cash and cash equivalents	$	9,371	$	9,371	$	-	$	9,371	$	-
Securities available for sale		14,013		14,013		1,005		13,008		-
Other investment securities		859		859		-		-		859
Net loans		147,153		149,355		-		-		149,355
Accrued interest receivable		285		285		-		-		285
Bank owned life insurance		3,320		3,320		-		3,320		-
Financial liabilities
Noninterest bearing deposits	$	26,116	$	26,116	$	-	$	26,116	$	-
Interest-bearing deposits		136,209		137,174		-		137,174		-
Interest bearing deposits		136,209		137,174		-		137,174		-
Borrowed funds		2,569		2,569		-		2,569		-
Accrued interest payable		759		759		-		-		759
December 31, 2014
Financial assets:
Cash and cash equivalents	$	16,633	$	16,633	$	-	$	16,633	$	-
Securities available for sale		31,164		31,164		5,067		26,097		-
Other investment securities		859		859		-		-		859
Net loans		142,557		145,895		-		-		145,895
Accrued interest receivable		348		348		-		-		348
Bank owned life insurance		281		281		-		281		-
Financial liabilities
Noninterest bearing deposits	$	23,153	$	23,153	$	-	$	23,153	$	-
Interest-bearing deposits		154,814		155,735		-		155,735		-
Borrowed funds		6,147		6,147		-		6,147		-
Accrued interest payable		1,492		1,492		-				1,492

F-36 37

NOTE Q – PARENT COMPANY FINANCIAL STATEMENTS

The following are condensed parent company only financial statements for Citizens Independent Bancorp, Inc.

CONDENSED BALANCE SHEETS

December 31, ~~2015~~2016 and ~~2014~~2015

	(Dollars in thousands)
	2015		2014
	2016		2015
Assets
Cash	$	~~346~~176	$	~~921~~346
Investment in subsidiary		17,~~411~~008		17,~~967~~411
Other assets		2,~~179~~057		2,~~098~~179
Total assets	$	19,~~936~~241	$	2019,~~986~~936
Total Liabilities	$	~~2,577~~11	$	62,~~149~~577
Total shareholders' equity		1719,~~359~~230		1417,~~837~~359
Total liabilities and equity	$	19,~~936~~241	$	2019,~~986~~936

F- 38

CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

Years ended December 31, ~~2015~~2016 and ~~2014~~2015

	(Dollars in thousands)
	2015			2014
	2016			2015
Income
Dividends from subsidiaries	$	1,~~300~~600		$	-1,300
Other		~~308~~512			~~(333~~308	)
		1,608			(333	)
		2,112			1,608
Expenses
Other		~~(523~~273	)		~~(683~~523	)
Income (loss) before income taxes and equity in undistributed earnings of subsidiary		1,~~085~~839			(1,~~016~~085	)
Income tax expense (benefit)		~~(73~~125	)		(~~2,098~~73	)
Equity in undistributed earnings (loss) of subsidiary		(~~504~~486	)		~~4,996~~(504	)
Net income (loss)		654			6,078
Net income		1,228			654
Other comprehensive income (loss)		~~(52~~83	)		(4452	)
Comprehensive income (loss)	$	602		$	6,034
Comprehensive income	$	1,311		$	602

F-37

CONDENSED STATEMENT OF CASH FLOWS

Years ended December 31, ~~2015~~2016 and ~~2014~~2015

	(Dollars in thousands)
	2015			2014
	2016			2015
Cash flows from Operating Activities
Net income (loss)	$	654		$	6,078
Net income	$	1,228		$	654
Adjustments to reconcile net income to cash from operations
Equity in undistributed (earnings) loss of subsidiaries		~~504~~486			~~(4,996~~504	)
Deferred income tax		~~(73~~125	)		(~~2,098~~73	)
Change in other assets and other liabilities		(21	)		29(2	)
Net cash provided by (used in) operating activities		1,~~083~~840			~~(987~~1,083	)
Cash flows from investing activities
Proceeds from the sale of other real estate owned		-			362
Capital contribution from (to) subsidiary		-			(1,467	)
Net change from investing activities		-			(1,105	)
Cash flows from financing activities
Payments on loan payable		(2,~~921~~569	)		(~~215~~2,921	)
Issuance of common stock		~~1,263~~560			31,~~177~~263
Net change from financing activities		(12,~~658~~009	)		2(1,~~962~~658	)
Net increase (decrease) in cash and cash equivalents		(~~575~~169	)		~~870~~(575	)
Cash and cash equivalents at beginning of year		~~921~~346			51921
Cash and cash equivalents at end of year	$	~~346~~176		$	~~921~~346

F- 39

NOTE R – STOCK SUBSCRIPTION

As of June 25, 2014, the Company had sold and issued a total of 238,057 shares of common stock with 119,003 accompanying warrants. As of ~~March~~June 1825, 2016, 53all warrants remaining unexercised,~~154~~ expired. A total of 74,687 warrants ~~have~~had been exercised and an additional 5374,~~154~~687 shares of common stock ~~have~~had been issued.

F-38

ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A – CONTROLS AND PROCEDURES

The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, ~~2015~~2016, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, ~~2015~~2016, in timely alerting them to material information required to be in the Company’s (including its consolidated subsidiary) periodic SEC filings.

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Under the supervision and with the participation of management, including principal executive and principal financial officers, an evaluation of the effectiveness of internal control over financial reporting was conducted based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, as required by paragraph (c) of §240.13a-15 of the Exchange Act. Based on the evaluation under Internal Control – Integrated Framework (2013), management concluded that the Company’s internal control over financial reporting was effective as of December 31, ~~2015~~2016. This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this filing. There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ending December 31, ~~2015~~2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B – OTHER INFORMATION

Not applicable.

PART III

ITEM 10 – DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers. The information required by Item 401 of SEC Regulation S-K concerning the directors of the Company and the nominees for election as directors of the Company at the Annual Meeting of Shareholders to be held on May 5, 2016 (the “2016 Annual Meeting”), is incorporated herein by reference from the disclosure included under the caption “Proposal One - Election of Directors” in the 2016 Proxy Statement related to such annual meeting. The information required by Item 401 of SEC Regulation S-K concerning the executive officers of the Company is incorporated herein by reference from the disclosure included under the caption “Executive Officers” in the 2016 Proxy Statement.

~~Nominating~~The ~~Procedures~~following ~~for Directors.~~sets ~~The~~forth certain information ~~required~~about byeach ~~Item 407(c)(3)~~ of ~~SEC Regulation S-K is incorporated herein by reference from~~ the ~~disclosure included~~Company’s ~~under~~directors ~~the~~who ~~caption~~is ~~“Corporate~~up ~~Governance~~for –election ~~Compensation, Personnel/ Corporate Governance and Nominating Committee”~~ in ~~the 2016 Proxy Statement.~~2017:

Audit Committee. The information required by Items 407(d)(4) and 407(d)(5) of SEC Regulation S-K is incorporated herein by reference from the disclosure included under the caption “Committees of the Board of Directors– Audit Committee” in the 2016 Proxy Statement.

Name and Age	Company Director Since
Robert Lilley (72)	2013
Robert C. Wolfinger, Jr. (66)	2013
Donald P. Wood (72)	2012

Code of Ethics. The Company has adopted a Code of Ethics (the “Code of Ethics”) that applies to all directors, officers, and employees’ of the Company and its subsidiary. The Code of Ethics is included in Exhibit 14 to this Annual Report on Form 10-K.35

Robert L. Lilley, an inactive attorney, had a private law practice in Logan since 1973. He retired from that practice in December, 2016. He has served as an assistant attorney general for the Ohio Attorney General’s Office, acting municipal court judge, the City of Logan law director and is an Army veteran. Mr. Lilley is a member of the Logan-Hocking Board of Health, Logan Rotary Club and member of the Brighten Your Future Foundation board. He is a graduate of The Ohio State University Moritz College of Law and has a B.F.A. from Ohio University. Mr. Lilley’s professional expertise and long term active involvement in the community are valuable assets to the Board.

Robert C. Wolfinger, Jr. is the treasurer of the City of Lancaster and served as senior vice president of National City Bank, where he was employed for 36 years. He received his bachelor’s degree from Ohio University and is a banking school graduate of Rutgers University. He has served on several boards in the Fairfield County area, including Lancaster Area Community Improvement Corporation, Ohio University Alumni Association, Lancaster Festival, Inc., Fairfield County Economic Development Committee, Lancaster Port Authority, Fairfield Medical Center, and Lancaster-Fairfield Chamber of Commerce. Mr. Wolfinger’s banking and finance experience provide the Board with additional banking regulatory and financial insights.

Donald P. Wood has owned and operated his own business for 29 years. He is the chair and CEO of Don Wood, Inc., automobile businesses in the Logan and Athens areas. His 16 years of banking experience includes serving as the district president of Bank Ohio’s Cambridge/Zanesville area in 1983, before becoming lead assistant director for branch administration of Florida National Bank in 1985. He has served on a publicly-traded bank board for the past 11 years. Mr. Wood is a University of Rio Grande board member, past board chair and past president. He also served as the president of the Hocking College Foundation Board. He joined Citizens as Board of Directors Chairman, President and CEO in 2012. He has an advanced degree in banking from the American Institute of Banking. Mr. Wood received an honorary master’s degree and honorary doctorate from the University of Rio Grande. Mr. Wood’s experience as a senior level banking officer, a successful entrepreneur and a leader in various roles in regional institutions provides valuable banking and leadership knowledge for the Board.

The following table sets forth certain information concerning directors continuing in office:

Name and Age		Company Director Since
Billy Jo King (70)		2013
Jerry Don Johnson (50)		2013
Daniel Stohs (66)		2013
William J. Mauck (69)		2013
Daniel C. Fischer (56)		2015

Billy Jo King retired in 2013 after 41 years as manager of The King Lumber Co. in Logan and has been the owner of Georgian Manner Bed & Breakfast since October 2002. He is a Navy veteran and received a B.S. degree from The Ohio State University in marketing and industrial production. Mr. King served on the Kachelmacher Memorial Trust fund for 23 years and is an original board member of The Village Mountain Mission, which builds houses and conducts medical clinics in the Dominican Republic. He also serves on the board of the Hocking County Historical Society. Mr. King’s lifelong association with the area as a small business owner provides a unique perspective on the needs and challenges of local businesses to the Board.

William J. Mauck is a General Electric retiree after 26 years of service, most recently as Logan Glass Plant manager and Circleville Lamp Plant manager. During his time with GE, he contributed in all areas of manufacturing including non-union and union relations, staffing, quality improvement programs, budgeting and compliance. He also is a Vietnam Army veteran and member of Kline Memorial United Methodist Church. He has a B.S. of Science from the University of Iowa. Mr. Mauck’s strong ties with the community and career in management provide enhanced understanding of general management concerns and valuable community

relations for the Board.

Jerry Don Johnson is a retired local business owner of Fancy Plants landscaping from 1985 to 2010. He is currently a landscape designer and consultant for Southern Pines Nursery, an employee at The Dress Code and manages his family farm. He has served on several local boards and clubs including Hocking County Children Services, Logan-Hocking School District Advisory, Hocking Valley Community Hospital Foundation, Hocking County Community Improvement Corporation and Logan-Hocking Chamber of Commerce. Mr. Johnson’s experience as a small business owner and his involvement in the community provides the Board with valuable insight into Citizens’ customers and community.

Daniel J. Stohs is an inactive attorney and former accountant in the Logan area. He also is a managing member of Rempel Partner, LLC (operator of Midwest Glassware Outlet) since 2005 and shareholder and former board member of Olde Dutch Restaurant. He currently serves as a member of the City of Logan Board of Zoning Appeals. He has a B.A. of Social Sciences from The Ohio State University and is a graduate of The Ohio State University Moritz College of Law. Mr. Stohs’ long experience living and working in the area along with his professional expertise as a lawyer provide the Board with oversight skills, knowledge of the region and business experience.

Daniel C. Fischer was appointed Chief Executive Officer and President of the Company and Bank in January 2015 and director of the Company in May 2015. Mr. Fischer is a veteran bank executive. Most recently, Mr. Fischer was Sales Manager for Wells Fargo Home Mortgage in Cincinnati, Ohio from February 2012 to December 1, 2014. Prior to that, he was a Vice President with Union Savings Bank of Cincinnati, Ohio from April 1, 2011 to February 17, 2012. His other experience includes holding positions as Chairman, President and CEO of Urban Trust Bank in Lake Mary, Florida; Executive Vice President of Regional Banking at Associated Bancorp in Green Bay, Wisconsin; Dayton District President for Key Bank; and Senior Vice President of Retail Banking for Fifth Third Bank in Cincinnati, Ohio. Mr. Fischer has a B.S. degree in business and communications from Syracuse University, Syracuse, New York. Mr. Fischer’s 30 years of experience in the banking industry, over 15 years serving as a senior executive and familiarity with the Company and the Bank contribute valuable banking and leadership insight to the Board.

Executive Officers

The executive officers of the Company are elected by the Board of Directors of the Company at the annual meeting of the Board of Directors and hold office until the next annual meeting of the Board of Directors or until their successors are chosen and qualify. The following information is supplied for certain of the Company’s and the Bank's current executive officers.

Name and Age	Position with Bank	Position with Company	Executive Officer Since
Daniel C. Fischer (56)	CEO and President	CEO and President	2015
James V. Livesay (64)	Chief Financial and Accounting Officer	Chief Financial Officer	2013

Mr. Fischer’s background is set forth above.

James V. Livesay was appointed Chief Financial and Accounting Officer of the Bank in September 2013 and Chief Financial Officer of the Company in November 2013. Prior to joining the Bank, Mr. Livesay previously was Controller at United Midwest Savings Bank near Columbus, Ohio for a period of nearly nine years. Previous assignments included Manager of Investment Operations at Fifth Third Bank in Cincinnati, Ohio from January 2002 to April 2003 and Vice President and Manager of Finance and Accounting of the Treasury Division at Huntington Banks in Columbus, Ohio from 1987 to January 2002. A CPA, Mr. Livesay earned a Bachelor of Mechanical Engineering at The Ohio State University and a Masters degree in Finance and Accounting at the University of Chicago.

Certain Committees of the Board of Directors

The following table identifies the Company’s standing committees and their respective members as of December 31, 2016. All members of each committee, except Mr. Wood and Mr. Fischer, are independent in accordance with NASDAQ listing standards. Current charters for each of the Board of Directors’ committees are available for review at http://www.tcbol.com/policies_and_charters.

Director

Executive
/Loan
Committee

Audit
Committee

Compensation,
Personnel/
Corporate
Governance
and
Nominating
Committee

ALCO
Committee

Donald P. Wood

Jerry Don Johnson

Billy Jo King

Daniel Stohs

Robert Lilley

William J. Mauck

Daniel C. Fischer

Corby Leach

Robert C. Wolfinger, Jr.

Number of Meetings in fiscal 2016

* Denotes Chairman

Audit Committee

The Company has a separately designated Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The purpose of the Audit Committee is to assist the Board in its oversight of the Company’s financial statements and oversee compliance with legal and regulatory requirements. During the fiscal year ended December 31, 2016, the Audit Committee met periodically to examine and approve the audit report prepared by the Company’s independent registered public accounting firm, to review and appoint the independent registered public accounting firm to be engaged by the Company and to review the Company’s internal audit function. The Audit Committee also provides guidance on the Company’s risk management policies, including reporting, key credit risks, market risks, and steps taken by management to monitor and mitigate such risks. In addition, the Audit Committee oversees procedures for the receipt, retention and treatment of complaints on accounting and auditing. All committee members are deemed “independent,” as such term is defined for audit committee members under applicable NASDAQ listing standards. The Board has determined that Daniel Stohs has the attributes listed in the definition of “audit committee financial expert” set forth in Item 407(d)(5)(ii) of Regulation S-K and in the NASDAQ listing requirements. The Board of Directors has adopted a written charter for the Audit Committee, the Audit Committee and the Board of Directors review the charter periodically to ensure the scope of the charter is consistent with the Audit Committee’s expected role.

Compensation, Personnel/ Corporate Governance and Nominating Committee

The Compensation, Personnel/Corporate Governance and Nominating Committee (the “Compensation and Nominating Committee”) is responsible for establishing and administering policies governing (a) the Board’s organization, membership and function, (b) procedures and criteria for evaluating the suitability of director nominees, (c) committee structure, membership and operations, (d) succession planning for executive officers of the Company, (e) the Company’s Corporate Governance Policy, (f) compensation of the Company’s executive officers, including the Named Executive Officers, (g) oversight of personnel matters and (h) other matters relating to compensation, personnel, corporate governance and the rights and interests of the Company’s shareholders. The Compensation and Nominating Committee operates under a written charter that establishes the Committee’s responsibilities. The Compensation and Nominating Committee and the Board review the charter periodically to ensure the scope of the charter is consistent with the Compensation and Nominating Committee’s expected role.

The Compensation and Nominating Committee nominates directors to be voted on at the annual meeting and recommends nominees to fill any vacancies on the Board of Directors. Individuals who are nominated for election to the Board must possess certain minimum qualities, including personal integrity, demonstrated achievement, and a general appreciation and understanding of the major issues facing financial companies of a size and operational scope similar to the Company.

The Compensation and Nominating Committee believes that each nominee and current member of the Board possesses a strong and unique set of skills, qualities, and experiences, which gives the Board as a whole, competence and experience in a wide range of areas, including banking industry experience, executive management, accounting and finance, government and community experience and leadership, corporate governance, and board service.

It is the policy of the Compensation and Nominating Committee to consider director candidates recommended by shareholders who appear to be qualified to serve on the Board of Directors. The Board may choose not to consider an unsolicited recommendation if no vacancy exists on the Board and the Board does not perceive a need to increase in size. In order to avoid the unnecessary use of the Board of Directors’ resources, the Board will consider only those director candidates recommended in accordance with the procedures set forth in Section 2.03 of the Regulations. Pursuant to this section, nominations for the election of directors at an annual meeting, other than those made by or on behalf of the existing Board of Directors of the Company, must be made in writing and must be received by the President of the Company not less than 14 days nor more than 50 days prior to any meeting of shareholders called for the election of directors; provided, however, that if less than 21 days’ notice of the meeting is given to shareholders, such nomination shall be delivered to the President of the Company not later than the close of business on the seventh day following the day on which the notice of meeting was mailed. Such notification must contain the following information:

the name and address of each nominee;

the principal occupation of each nominee;

the total number of shares of capital stock of the Company that will be voted for each proposed nominee;

the name and residence address of the notifying shareholder; and

the number of shares of capital stock of the Company beneficially owned by the notifying shareholder.

All director nominees for the Company are subject to approval by the Federal Reserve Bank of Cleveland. All directors for the Bank are subject to the approval of the Federal Deposit Insurance Corporation and the Ohio Division of Financial Institutions

Code of Ethics. The Company has adopted a Code of Ethics (the “Code of Ethics”) that applies to all directors, officers, and employees’ of the Company and its subsidiary. The Code of Ethics is included in Exhibit 14 to this Annual Report on Form 10-K.

ITEM 11 – EXECUTIVE COMPENSATION

~~The information required by this Item 11 is incorporated herein by reference from the disclosure included under the captions “Proposal One – Election of~~ Directors~~”, “Corporate~~’ ~~Governance”, and “Executive Officers” in the 2016 Proxy Statement.~~Compensation

Meetings of the Board of the Company and the Board of the Bank are held regularly each month. Effective January 1, 2016, the directors of the Bank began receiving fees of $24,000 per year in cash and are not paid any additional fee for Board or committee participation, or special assignments. Directors do not receive compensation for their service on the Company’s Board.

The following table sets forth for the fiscal year ended December 31, 2016 certain information as to the total compensation we paid to the Company’s directors.

Name	Fees Earned or Paid in Cash($)		All Other Compensation ($)		Total($)
Jerry Don Johnson		24,000		0		24,000
Billy Jo King		24,000		0		24,000
Daniel Stohs		24,000		0		24,000
Robert Lilley		24,000		0		24,000
William J. Mauck		24,000		0		24,000
Robert C. Wolfinger, Jr.		24,000		0		24,000
Donald P. Wood		30,000		0		30,000
Michael J. Shawd (1)		16,000		0		16,000
Corby Leach (2)		24,000		0		24,000

(1)

Mr. Shawd resigned his position as director effective August 18, 2016.

(2)

Mr. Leach resigned his position as a director effective January 31, 2017.

Executive Compensation

Compensation of Employees. The Named Executive Officers, as identified in the Summary Compensation Table, were compensated by the Bank for their positions as officers of the Bank. Officers and employees of the Bank are compensated based on a number of merit-based factors. Our executive officers also received other benefits, such as reimbursement of certain fees and expenses. We do not maintain any equity based compensation plans.

Base Salary. Base salary represents the primary component of annual compensation paid to the Bank’s executive officers. When recommending an executive officer’s salary within the pay range established by peer group comparison data, the Compensation and Nominating Committee primarily considers the executive officer’s job performance and contribution to the objectives of the Company. These factors are determined in the subjective judgment of the Compensation and Nominating Committee for the Chief Executive Officer and with the benefit of performance reviews and salary recommendations by the Chief Executive Officer for other executive officers of the Company and the Bank. In addition, the Compensation and Nominating Committee also considers local and national economic conditions and future business prospects of the Bank in setting base salary levels.

Discretionary and Performance Bonuses. The Bank occasionally awards discretionary cash bonuses to its executive officers to attract new executive officers, to reward exceptional job performance, or to address special circumstances. Discretionary bonuses are awarded on a limited basis and are not contemplated or anticipated when setting annual compensation for the Bank’s executive officers. Mr. Fischer’s employment agreement provides that in addition to his annual salary, Mr. Fischer may receive a yearly performance bonus not to exceed 25% of his base salary. Such bonus awards are subject to the discretion of the Board based upon certain yearly performance bonus goals and objectives mutually agreed upon by the Board and Mr. Fischer.

Compensation Pursuant to Employee Benefit Plans. We maintain a 401(k) plan that matches 100% of the first 3% contributed by employees and 50% of the next 2% contributed. The plan is a Safe Harbor plan in that both employee and employer contributed funds are immediately vested and available to the employee. We also maintain health, life and accidental death & dismemberment insurance as well as both short and long term disability insurance. Further, the Company has purchased life insurance policies on certain key executives. The Company owned life insurance is recorded at its cash surrender value, or the amount that can be realized.

Supplemental Executive Retirement Plan. On October 27, 2015, the Bank adopted the Citizens Bank of Logan Supplemental Executive Retirement Plan (the “SERP”) for Mr. Fischer. The SERP entitles Mr. Fischer to 120 equal monthly payments of the Accrued Liability Balance upon his termination. The SERP is an unfunded, unsecured promise to pay benefits. The Employment Agreement provided that Mr. Fischer would receive an annual deferred compensation amount of not less than $25,000 each year in the SERP. Mr. Fischer’s interest in the SERP vests at the rate of 20% per year, with full vesting occurring on December 31, 2019; provided, however, that Mr. Fischer becomes fully vested in the SERP upon a change of control (as defined in his Employment Agreement described below) and that there is a separate, lesser lump sum payment provided in lieu of termination benefits until Mr. Fischer is fully vested in the SERP.

Pension Plan. The Company offered a defined benefit retirement plan to eligible personnel employed prior to December 2009, when the plan was frozen for both new participants and the accrual of additional benefits. As of December 31, 2016, 29 current and former employees are due benefits from the plan with a projected liability of $1.3 million. The plan currently requires no additional funding. Management believes that a plan has been put in place to ensure the pension plan remains fully funded over the next ten years.

Employment and Change of Control Agreement On October 27, 2015, Citizens and the Bank entered into an Employment Agreement with Mr. Fischer that provides for a base salary of not less than $189,650 and Mr. Fischer’s ability to receive during the term of the Employment Agreement a performance bonus as described above. The Employment Agreement entitles Mr. Fischer to a relocation bonus of $33,750 if certain terms are met, the SERP, and a car allowance. Mr. Fischer has agreed to purchase $25,000 worth of Citizens stock. Upon the completion of the purchase, Citizens will grant Mr. Fischer one share of restricted stock for every two shares of stock he purchased, which stock will vest in 3 equal installments, beginning on the grant date.

Under the Employment Agreement, Mr. Fischer’s employment may be terminated by the Company for Cause, Disability (both as defined in the agreement), or death. The Employment Agreement also may be terminated at any time by either party without cause upon 30 days’ prior written notice. Mr. Fischer is not entitled to any further payments under the Employment Agreement other than any accrued salary and benefits less any amounts owed to the Company (the “net accrued benefits”) if he terminates his employment or if the Company terminates it for Cause, death or Disability. If his employment had been terminated by the Company without Cause on or before December 31, 2016, Mr. Fischer would be entitled to three months’ salary, and if such a termination occured after December 31, 2016, he was entitled to six months’ salary.

The Employment Agreement includes covenants regarding non-competition, non-solicitation and non-disclosure, which covenants extend for a period of one year after the termination of Mr. Fischer’s employment.

On October 27, 2015, the Bank also entered into a Change of Control Agreement with Mr. Fischer. Mr. Fischer’s change of control agreement provides that if he is terminated without cause within six months after a change of control over the Bank or Company, he would receive severance payments to be calculated as follows:

For termination on or prior to December 31, 2016, Mr. Fischer’s then current salary would continue for 24 months after termination;

For termination after December 31, 2016 and before December 31, 2017, Mr. Fischer’s then current salary would continue for 24 months after termination, and he would receive his target bonus for the year in which he is terminated; and

For termination after December 31, 2017, Mr. Fischer’s then current salary would continue for a period of 24 months after termination, and he would receive his target bonus for the year in which he is terminated and the following year.

Change of control is defined as any of the following events: acquisition of or power to vote more than fifty percent of the voting stock of the Bank or Company; merger or consolidation of the Bank or Company with or into another corporation; or merger of another corporation into the Bank or Company, provided that less than 50 percent of the total voting power of the Bank or Company remains with its former shareholders. Severance payments provided under the above agreements are mutually exclusive. In the event that Mr. Fischer is entitled to receive severance under the change of control agreement, the Company has no obligation to pay him any further amounts.

Tax Considerations

Under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), a limitation is placed on the tax deductibility of executive compensation paid by publicly-held corporations for individual compensation to certain executive officers in excess of $1,000,000 in any taxable year. No executive officer of the Company received compensation during the Company’s 2016 fiscal year that would be non-deductible under Section 162(m).

SUMMARY COMPENSATION TABLE

The following table summarizes compensation for the Company’s chief executive officer and the two most highly compensated executive officers, referred to collectively as the “Named Executive Officers,” for the fiscal years ended December 31, 2016 and 2015:

Name & Principal Position	Year	Salary ($)		All Other Compensation ($)		Total ($)

Daniel C. Fischer	2016		248,532		13,244		261,776
President and Chief Executive Officer	2015		242,208		17,931		260,139

James V. Livesay	2016		125,000		4,423		129,423
Chief Financial and Accounting Officer	2015		115,192		0		115,192

All Other Compensation Table

Name & Principal Position	Year	401(k) Match ($)		Auto Allowance/Use of Company Owned Vehicle		Consulting Fees		Board Fees		Total

Daniel C. Fischer	2016		7,244		6,000		0		0		13,244
President and Chief Executive Officer	2015		0		6,177		11,754		0		17,931

James V. Livesay	2016		4,423		0		0		0		4,423
Chief Financial and Accounting Officer	2015		0		0		0		0		0

ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

~~Beneficial~~The ~~Ownership~~following ~~Information.~~table ~~The~~sets ~~information~~forth ~~required~~the beneficial ownership of our common shares by: ~~Item~~(1) ~~403~~each of ~~SEC~~our ~~Regulation~~directors, ~~S-K~~(2) iseach ~~incorporated~~executive ~~herein~~officer bynamed ~~reference~~in ~~from~~the Summary Compensation Table above (the ~~disclosure~~“Named ~~included under~~Executive Officers”), (3) all the ~~caption~~directors ~~“Security~~and ~~Ownership~~executive officers of the ~~Certain~~Company ~~Beneficial~~as ~~Owners~~a group as of March 20, 2017, and ~~Management”~~(4) ineach ~~the~~person, ~~2016~~group ~~Proxy~~or ~~Statement~~entity known to us to own beneficially more than 5% of our outstanding common shares.

Beneficial ownership is determined according to the rules of the SEC and generally includes any shares over which a person possesses sole or shared voting or investment power and options that are currently exercisable or exercisable within 60 days. The ownership information of each director and officer, as the case may be, is based upon our records with respect to beneficial ownership. Except as otherwise indicated in the footnotes to this table, we believe that the beneficial owners of common shares listed below have sole investment and voting power with respect to their shares.

The table lists applicable percentage ownership based on 691,288 common shares outstanding as of March 20, 2017. Unless otherwise noted, (i) the address for each shareholder listed below is the same as our address, and (ii) all shares are owned solely by the individual.

	Number of Shares			Percent of Class
Donald P. Wood		15,938			2.31	%
Daniel Fischer		470			*
Jerry Don Johnson		11,910	⁽¹⁾		1.72	%
Billy Jo King		4,776	⁽²⁾		*
Robert Lilley		7,399	⁽³⁾		1.07	%
James V. Livesay		375			*
William J. Mauck		3,226	⁽⁴⁾		*
Daniel Stohs		11,153			1.61	%
Robert Carl Wolfinger, Jr.		2,000			*
All current directors and executive officers as a group (9 persons)		57,247			8.28	%
Alan Stockmeister		57,643			8.34	%
213 Redondo Drive
Jackson, Ohio 45640
Evergreen National Indemnity, fbo Edward Kilbarger		48,600			7.03	%
MLPF&S
8425 Pulsar Place, St 2000
Columbus, Ohio 43240

* Less than 1% of the outstanding shares.

⁽¹⁾

All share are jointly held by Mr. Johnson and his spouse.

⁽²⁾

Includes 1,194 shares held by his daughter and 2,388 shares held by his grandchildren and for which Mr. King has voting power.

⁽³⁾

Includes 1,562 shares held by his spouse’s trust for which Mr. Lilley is the trustee, and 100 shares held in Mr. Lilley’s revocable trust

⁽⁴⁾

Includes 3,225 shares held jointly by Mr. Mauck and his spouse.

ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Related Party Transactions. The information required by Item 404 of SEC Regulation S-K is incorporated herein by reference from the disclosure included under the caption “Corporate Governance – Related Party Transactions” in the 2016 Proxy Statement.

~~Director~~The ~~Independence.~~Board ~~The~~is responsible ~~information~~for ~~required~~reviewing byand ~~Item~~overseeing ~~407(a)~~the ofprocedures ~~SEC~~designed ~~Regulation~~to ~~S-K~~identify is“related ~~incorporated~~party” ~~herein~~transactions bythat ~~reference~~are ~~from~~material to the ~~disclosure~~Company’s ~~included~~consolidated financial statements or otherwise require disclosure under applicable laws and rules adopted by the ~~caption~~SEC, and the Board has the authority to approve such “~~Corporate~~related ~~Governance~~party” –transactions. ~~The~~In ~~Board~~addition, as of ~~Directors~~December 31, –2016, ~~Independence”~~each director and executive officer of the Company must complete a Director and Officer Questionnaire that requires disclosure of any transaction, arrangement or relationship with the Company or the Bank during the last fiscal year in which the ~~2016~~director or ~~Proxy~~executive ~~Statement~~officer, or any member of his or her immediate family, had a direct or indirect material interest. Any transaction, arrangement or relationship disclosed by a director or executive officer in the questionnaire is reviewed and considered by the Board in making independence determinations with respect to directors and resolving any conflicts of interest that may be implicated.

During the Company’s 2016 fiscal year, the Bank entered into banking-related transactions in the ordinary course of business with certain executive officers and directors of the Company (including certain executive officers of the Bank), members of their immediate families and corporations or organizations with which they are affiliated. It is expected that similar transactions will be entered into in the future. All loans made to directors and executive officers (i) were made in the ordinary course of business; (ii) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to Citizens; and (iii) did not involve more than the normal risk of collectability or present other unfavorable features. The outstanding principal balance of loans to directors, executive officers, and principal shareholders of the Company (including certain executive officers of the Bank) and their associates as a group at December 31, 2016, was $279,000. As of the date of this Proxy Statement, all of these loans were performing loans.

During 2015, the Company renegotiated an existing promissory note in which it had previously borrowed $5.0 million from WLPM LLC, an Ohio limited liability company. Alan Stockmeister, a holder of over 5% of the Company’s outstanding stock and the brother-in-law of one of the Company’s former directors, Michael Shawd, is a managing member of WLPM LLC. The promissory note had an annual interest rate of 8.0%, a portion of which was paid by the Company each month, and a maturity date of December 31, 2015. In February 2015, the note was split into two pieces, a $2.3 million portion, held by Mr. Stockmeister, and a $2.7 million piece held by other members of WLPM LLC (“Note A”). The $2.3 million Stockmeister piece was subsequently replaced by a $1,644,546.60 note paying 6.00% interest and due August 4, 2021 (“Note B”) and 28,675 shares of the Company’s common stock. Terms of Note A were unchanged. The Company made payments of $400,000 in interest for the year ended December 31, 2014 and $185,000 in interest for the year ended December 31, 2015 on the WLPM note. In addition to monthly principal payments from available cash, in September 2015, the Company made a principal payment of $1.0 million on Note A and in December 2015, the Company retired Note A with a final principal payment of $1.4 million. Interest payments through the end of 2015 on Note B held by Mr. Stockmeister were approximately $100,000 with no principal due.

During 2016, the Company made periodic principal payments on Note B and, in October 2016, Note B was repaid in full and retired. Interest payments through the end of 2016 on Note B held by Mr. Stockmeister were approximately $70,000.

The Board reviewed this arrangement and concluded that it was not inconsistent with the Company’s best interests and did not constitute a conflict of interest.

In the normal course of business, the Company makes rebate payments to various automobile dealers for the placement of indirect automobile loans with the Bank. During 2016, the Company made such rebate payments to Don Wood Automotive, principally owned by Donald P. Wood, in the amount of $162,000. The Board reviewed this arrangement and concluded that it was not inconsistent with the Company’s best interests and did not constitute a conflict of interest.

Director Independence. The information required by Item 407(a) of SEC Regulation S-K is incorporated herein by reference from Item 10 above under the caption “Certain Committees of the Board of Directors”.

ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES

~~The~~Fees ~~information~~Paid ~~required~~to ~~by this Item 14 is incorporated herein by reference from the disclosure included under the captions “Proposal Two – Ratification of Appointment of~~ Independent Registered Public Accounting ~~Firm” and “Corporate Governance – Audit Committee” in the 2016 Proxy Statement.~~Firms

Fees billed for services rendered by Suttle & Stalnaker, PLLC (“Suttle”) for each of the years ended December 31, 2016 and 2015 were as follows:

	2016		2015
Audit Fees	$	150,000	$	150,700
Audit-Related Fees	$	0		0
Tax Fees	$	6,500	$	8,250
All Other Fees	$	1,000		1,000
Total	$	157,500	$	159,950

Audit Fees represent fees for professional services rendered by Suttle in connection with the integrated audit of the Company’s annual consolidated financial statements, statutory audits, reviews of the unaudited interim consolidated financial statements included in the Company’s Quarterly Reports on Form 10-Q and other services provided in connection with statutory and regulatory filings or engagements.

Tax Fees represent fees relating to customs and tax compliance matters.

All of the services rendered by Suttle to the Company and its subsidiaries during 2016 and 2015 were pre-approved by the Audit Committee.

PART IV

ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) The following financial statements appear in Part II of this Annual Report:

(a) Report of Independent Registered Public Accounting Firm;

(b) Consolidated Balance Sheets as of December 31, ~~2015~~2016 and ~~2014~~2015;

(d) Consolidated Statements of Comprehensive Income for the years ended December 31, ~~2015~~2016 and ~~2014~~2015;

(e) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, ~~2015~~2016 and ~~2014~~2015;

(f) Consolidated Statements of Cash Flows for the years ended December 31, ~~2015~~2016 and ~~2014~~2015;

and

(g) Notes to Consolidated Financial Statements;

(a)(2) Financial Statement Schedules

Financial statement schedules have been omitted either because they are not applicable or because the required information is provided in the consolidated financial statements or in the notes thereto.

(a)(3) Exhibits

The following exhibits are filed with or incorporated by reference in this Annual Report on Form 10-K:

~~Exhibit No.~~	~~Description~~Exhibit No.	Description
~~3.1~~	~~Articles of Incorporation of Citizens Independent Bancorp, Inc., as amended (Incorporated by reference to Exhibit No.~~ 3.1 ~~to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004))~~	Articles of Incorporation of Citizens Independent Bancorp, Inc., as amended (Incorporated by reference to Exhibit No. 3.1 to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004))
~~3.2~~	~~Code of Regulations of Citizens Independent Bancorp, Inc. (Incorporated by reference to Exhibit No.~~ 3.2 ~~to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004))~~	Code of Regulations of Citizens Independent Bancorp, Inc. (Incorporated by reference to Exhibit No. 3.2 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004))
~~4.1~~	~~Specimen Common Share Certificate of Citizens Independent Bancorp, Inc. (Incorporated by reference to Exhibit No.~~ 4.1 ~~to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004))~~	Specimen Common Share Certificate of Citizens Independent Bancorp, Inc. (Incorporated by reference to Exhibit No. 4.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004))
~~4.2~~	~~Form of Warrant Certificate (Incorporated by reference to Exhibit No.~~ 4.2 ~~to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004))~~	Form of Warrant Certificate (Incorporated by reference to Exhibit No. 4.2 to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004))
~~4.3~~	~~Form of Rights Certificate (Incorporated by reference to Exhibit No.~~ 4.3 ~~to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004))~~	Form of Rights Certificate (Incorporated by reference to Exhibit No. 4.3 to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004))
10.1	2012 Consent Order (Incorporated by reference to Exhibit No. 10.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004))
10.2	Employment Agreement with Daniel C. Fischer (Incorporated by reference to Exhibit No. 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016)
10.3	Change of Control Agreement with Daniel C. Fischer (Incorporated by reference to Exhibit No. 10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016)
10.4	Supplemental Executive Retirement Plan with Daniel C. Fischer (Incorporated by reference to Exhibit No. 10.3 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016)
14	Citizen’s Independent Bancorp, Inc. Code of Ethics (Incorporated by reference to Exhibit No. 14 of the Corporation’s Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission on March 17, 2015.)
16	Letter from Dixon, Davis, Bagent & Co. to the Securities and Exchange Commission dated November 27, 2013 regarding change in Company’s Certifying Accountant. (Incorporated by reference to Exhibit No. 16.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 2, 2013 (File No.333-191004))
21	Subsidiary of Citizens Independent Bancorp, Inc. (filed herewith)
23	Consent of Suttle & Stalnaker (filed herewith)
31.1	Rule 13a-14(a)/15d-14(a) Certification – Principal Executive Officer (filed herewith)
31.2	Rule 13a-14(A)/15d-14(a) Certification – Principal Financial Officer (filed herewith)
32	Section 1350 Certification – Principal Executive Officer and Principal Financial Officer (filed herewith)
101	The following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Shareholders’ Equity (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Comprehensive Income, and (vi) the Notes to Consolidated Financial Statements.

3845

	10.1		2012 Consent Order (Incorporated by reference to Exhibit No. 10.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004))
	10.2		Employment Agreement with Daniel C. Fischer (Incorporated by reference to Exhibit No. 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016)
	10.3		Change of Control Agreement with Daniel C. Fischer (Incorporated by reference to Exhibit No. 10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016)
	10.4		Supplemental Executive Retirement Plan with Daniel C. Fischer (Incorporated by reference to Exhibit No. 10.3 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016)
	14		Citizen’s Independent Bancorp, Inc. Code of Ethics (Incorporated by reference to Exhibit No. 14 of the Corporation’s Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission on March 17, 2015.)
	16		Letter from Dixon, Davis, Bagent & Co. to the Securities and Exchange Commission dated November 27, 2013 regarding change in Company’s Certifying Accountant. (Incorporated by reference to Exhibit No. 16.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 2, 2013 (File No.333-191004))
	21		Subsidiary of Citizens Independent Bancorp, Inc. (filed herewith)
	23		Consent of Suttle & Stalnaker (filed herewith)
	31.1		Rule 13a-14(a)/15d-14(a) Certification – Principal Executive Officer (filed herewith)
	31.2		Rule 13a-14(A)/15d-14(a) Certification – Principal Financial Officer (filed herewith)
	32		Section 1350 Certification – Principal Executive Officer and Principal Financial Officer (filed herewith)
	101		The following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Shareholders’ Equity (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Comprehensive Income, and (vi) the Notes to Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Logan, State of Ohio, on March 2231, ~~2016~~2017.

	Citizens Independent Bancorp, Inc.

	By:	/s/ Daniel C. Fischer
		Daniel C. Fischer, President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

By:	/s/ Donald P. Wood	By:	/s/ William J. Mauck
	Donald P. Wood, Chairman of the Board		William J. Mauck, Director
Date:	March 22, 2016	Date:	March 22, 2016
By:	/s/ Robert Lilley	By:	/s/ Daniel Stohs
	Robert Lilley, Director		Daniel Stohs, Director
Date:	March 22, 2016	Date:	March 22, 2016
By:	/s/ Michael Shawd	By:	/s/ Corby Leach
	Michael Shawd, Director		Corby Leach, Director
Date:	March 22, 2016	Date:	March 22, 2016
By:	/s/ BJ King	By:	/s/ Jerry Johnson
	BJ King, Director		Jerry Johnson, Director
Date:	March 22, 2016	Date:	March 22, 2016
By:	/s/ Robert Wolfinger	By:	/s/ James V. Livesay
	Robert Wolfinger, Director		James V. Livesay, EVP and Chief Financial Officer
Date:	March 22, 2016	Date:	March 22, 2016

By:	/s/ Donald P. Wood		By:	/s/ William J. Mauck
	Donald P. Wood, Chairman of the Board			William J. Mauck, Director

39Date: March 31, 2017 Date: March 31, 2017

By:	/s/ Robert Lilley		By:	/s/ Daniel Stohs
	Robert Lilley, Director			Daniel Stohs, Director

Date:

March 31, 2017

Date:

March 31, 2017

By:	/s/ BJ King		By:	/s/ Jerry Johnson
	BJ King, Director			Jerry Johnson, Director

Date:

March 31, 2017

Date:

March 31, 2017

By:	/s/ Robert Wolfinger		By:	/s/ James V. Livesay
	Robert Wolfinger, Director			James V. Livesay, EVP and Chief Financial Officer

Date:

March 31, 2017

Date:

March 31, 2017

EXHIBIT INDEX

Exhibit No.	Description	Location
3.1	Articles of Incorporation of Citizens Independent Bancorp, Inc., as amended	Incorporated by reference to Exhibit No. 3.1 to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004)
3.2	Code of Regulations of Citizens Independent Bancorp, Inc.	Incorporated by reference to Exhibit No. 3.2 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004)
4.1	Specimen Common Share Certificate of Citizens Independent Bancorp, Inc.	Incorporated by reference to Exhibit No. 4.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004)
4.2	Form of Warrant Certificate	Incorporated by reference to Exhibit No. 4.2 to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004)
4.3	Form of Rights Certificate	Incorporated by reference to Exhibit No. 4.3 to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004)
10.1	2012 Consent Order	Incorporated by reference to Exhibit No. 10.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004)
10.2	Employment Agreement with Daniel C. Fischer	Incorporated by reference to Exhibit No. 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016)
10.3	Change of Control Agreement with Daniel C. Fischer	Incorporated by reference to Exhibit No. 10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016)
10.4	Supplemental Executive Retirement Plan with Daniel C. Fischer	Incorporated by reference to Exhibit No. 10.3 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016)
14	Citizen’s Independent Bancorp, Inc. Code of Ethics	Incorporated by reference to Exhibit No. 14 of the Corporation’s Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission on March 17, 2015.
16	Letter from Dixon, Davis, Bagent & Company to the Securities and Exchange Commission dated November 27, 2013 regarding change in Company’s Certifying Accountant.	Incorporated by reference to Exhibit No. 16.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 2, 2013 (File No.333-191004)
21	Subsidiary of Citizens Independent Bancorp, Inc.	Filed herewith

4048

21	Subsidiary of Citizens Independent Bancorp, Inc.	File herewith
23	Consent of Suttle & Stalnaker	Filed herewith
23	Consent of Suttle & Stalnaker	File herewith
31.1	Rule 13a-14(a)/15d-14(a) Certification – Principal Executive Officer	Filed herewith
31.1	Rule 13a-14(a)/15d-14(a) Certification – Principal Executive Officer	File herewith
31.2	Rule 13a-14(A)/15d-14(a) Certification – Principal Financial Officer	Filed herewith
31.2	Rule 13a-14(A)/15d-14(a) Certification – Principal Financial Officer	File herewith
32	Section 1350 Certification – Principal Executive Officer and Principal Financial Officer	Filed herewith
32	Section 1350 Certification – Principal Executive Officer and Principal Financial Officer	File herewith
101	The following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Shareholders’ Equity (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Comprehensive Income, and (vi) the Notes to Consolidated Financial Statements.	Filed herewith
101	The following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Shareholders’ Equity (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Comprehensive Income, and (vi) the Notes to Consolidated Financial Statements.	File herewith

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Filing Compare · Citizens Independent Bancorp, Inc.