Independence Bancshares,
Inc.
Part I - Financial
Information
Item 1. Financial
Statements
Consolidated Balance
Sheets
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
(unaudited)
|
|
(audited)
|
Assets
|
|
|
|
|
|
|
Cash and due from
banks
|
|
$
|
5,408,411
|
|
$
|
5,453,795
|
Federal funds
sold
|
|
|
5,809,000
|
|
|
8,446,000
|
Cash
and cash equivalents
|
|
|
11,217,411
|
|
|
13,899,795
|
Interest-bearing deposits
in other institutions
|
|
|
1,750,000
|
|
|
1,500,000
|
Investment securities
available for sale
|
|
|
10,223,300
|
|
|
10,687,851
|
Non-marketable equity
securities
|
|
|
380,050
|
|
|
392,500
|
Loans, net of allowance for
loan losses of $853,137 and $1,139,509,
|
|
|
|
|
|
|
respectively
|
|
|
62,478,299
|
|
|
66,402,246
|
Accrued interest
receivable
|
|
|
206,687
|
|
|
232,215
|
Property, equipment, and
software, net
|
|
|
2,043,803
|
|
|
2,198,796
|
Other real estate owned and
repossessed assets
|
|
|
2,615,809
|
|
|
1,910,220
|
Bank owned life
insurance
|
|
|
2,521,199
|
|
|
-
|
Other assets
|
|
|
553,212
|
|
|
243,683
|
Total
assets
|
|
$
|
93,989,770
|
|
$
|
97,467,306
|
|
Liabilities
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
Noninterest
bearing
|
|
$
|
14,147,006
|
|
$
|
13,010,209
|
Interest bearing
|
|
|
67,609,798
|
|
|
70,557,116
|
Total
deposits
|
|
|
81,756,804
|
|
|
83,567,325
|
|
Securities sold under agreements to repurchase
|
|
|
61,820
|
|
|
113,080
|
Accrued interest
payable
|
|
|
8,515
|
|
|
7,909
|
Accounts payable and
accrued expenses
|
|
|
801,457
|
|
|
1,134,833
|
Total
liabilities
|
|
|
82,628,596
|
|
|
84,823,147
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
Preferred stock, par value
$.01 per share; 10,000,000 shares
|
|
|
|
|
|
|
authorized;
8,425 Series A shares issued and outstanding
|
|
|
84
|
|
|
84
|
Common stock, par value
$.01 per share; 300,000,000 shares
|
|
|
|
|
|
|
authorized;
20,502,760 shares issued and outstanding
|
|
|
205,028
|
|
|
205,028
|
Additional paid-in
capital
|
|
|
43,053,599
|
|
|
43,043,473
|
Accumulated other
comprehensive income
|
|
|
267,356
|
|
|
113,846
|
Accumulated
deficit
|
|
|
(32,164,893)
|
|
|
(30,718,272)
|
Total
shareholders equity
|
|
|
11,361,174
|
|
|
12,644,159
|
Total
liabilities and shareholders equity
|
|
$
|
93,989,770
|
|
$
|
97,467,306
|
The accompanying notes
are an integral part of these consolidated financial statements.
2
Independence Bancshares,
Inc.
Consolidated Statements
of Operations and Comprehensive Income (Loss)
(unaudited)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
820,984
|
|
$
|
753,412
|
|
$
|
2,496,404
|
|
$
|
2,411,870
|
Investment
securities
|
|
|
61,709
|
|
|
77,243
|
|
|
195,793
|
|
|
256,789
|
Federal funds sold and
other
|
|
|
15,386
|
|
|
12,854
|
|
|
48,251
|
|
|
34,886
|
Total
interest income
|
|
|
898,079
|
|
|
843,509
|
|
|
2,740,448
|
|
|
2,703,545
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
84,896
|
|
|
81,117
|
|
|
243,799
|
|
|
236,003
|
Borrowings
|
|
|
103
|
|
|
2,161
|
|
|
181
|
|
|
15,548
|
Total
interest expense
|
|
|
84,999
|
|
|
83,278
|
|
|
243,980
|
|
|
251,551
|
|
Net
interest income
|
|
|
813,080
|
|
|
760,231
|
|
|
2,496,468
|
|
|
2,451,994
|
Provision for loan losses
|
|
|
-
|
|
|
150,000
|
|
|
(68,000)
|
|
|
150,000
|
|
Net
interest income after provision
|
|
|
|
|
|
|
|
|
|
|
|
|
for
loan losses
|
|
|
813,080
|
|
|
610,231
|
|
|
2,564,468
|
|
|
2,301,994
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees on deposit
accounts
|
|
|
24,329
|
|
|
14,729
|
|
|
71,044
|
|
|
55,625
|
Residential loan
origination fees
|
|
|
67,167
|
|
|
44,661
|
|
|
167,093
|
|
|
154,013
|
SBA loan fees
|
|
|
-
|
|
|
-
|
|
|
119,306
|
|
|
-
|
Loss on sale of
investment securities
|
|
|
-
|
|
|
(129,143)
|
|
|
-
|
|
|
(87,995)
|
Other income
|
|
|
52,042
|
|
|
8,902
|
|
|
70,904
|
|
|
70,881
|
Total
non-interest income
|
|
|
143,538
|
|
|
(60,851)
|
|
|
428,347
|
|
|
192,524
|
|
Non-interest expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and
benefits
|
|
|
637,297
|
|
|
642,002
|
|
|
1,944,260
|
|
|
2,027,309
|
Real estate owned
activity
|
|
|
(15,473)
|
|
|
148,429
|
|
|
348,839
|
|
|
407,382
|
Occupancy and
equipment
|
|
|
188,407
|
|
|
199,076
|
|
|
507,220
|
|
|
514,862
|
Insurance
|
|
|
50,272
|
|
|
66,750
|
|
|
165,449
|
|
|
173,691
|
Data processing and
related costs
|
|
|
90,876
|
|
|
90,952
|
|
|
256,650
|
|
|
255,924
|
Professional
fees
|
|
|
234,381
|
|
|
169,883
|
|
|
707,534
|
|
|
500,846
|
Product research and
development expense
|
|
|
27,364
|
|
|
1,162,722
|
|
|
204,554
|
|
|
2,091,892
|
Other
|
|
|
104,521
|
|
|
77,892
|
|
|
304,930
|
|
|
246,766
|
Total
non-interest expenses
|
|
|
1,317,645
|
|
|
2,557,706
|
|
|
4,439,436
|
|
|
6,218,672
|
Loss
before income tax expense
|
|
|
(361,027)
|
|
|
(2,008,326)
|
|
|
(1,446,621)
|
|
|
(3,724,154)
|
|
Income tax expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,080
|
Net
loss
|
|
$
|
(361,027)
|
|
$
|
(2,008,326)
|
|
$
|
(1,446,621)
|
|
$
|
(3,729,234)
|
|
Other comprehensive income (loss), net of
tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on investment
securities available for
|
|
|
|
|
|
|
|
|
|
|
|
|
sale, net of tax
|
|
|
9,712
|
|
|
343,260
|
|
|
153,510
|
|
|
160,661
|
Reclassification
adjustment included in net loss,
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax
|
|
|
-
|
|
|
(129,143)
|
|
|
-
|
|
|
(87,995)
|
Other
comprehensive income
|
|
|
9,712
|
|
|
214,117
|
|
|
153,510
|
|
|
72,666
|
|
Total
comprehensive loss
|
|
$
|
(351,315)
|
|
$
|
(1,794,209)
|
|
$
|
(1,293,111)
|
|
$
|
(3,656,568)
|
Net loss per common share basic and
diluted
|
|
$
|
(.02)
|
|
$
|
(.10)
|
|
$
|
(.07)
|
|
$
|
(.18)
|
Weighted average common shares outstanding
basic and
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted
|
|
|
20,502,760
|
|
|
20,502,760
|
|
|
20,502,760
|
|
|
20,502,760
|
The accompanying notes
are an integral part of these consolidated financial statements.
3
Independence
Bancshares,
Inc.
Consolidated
Statements
of
Changes
in
Shareholders
Equity
(unaudited)
|
|
|
|
|
|
|
|
Accumulated other
|
|
|
|
|
|
|
Preferred stock
|
|
Common stock
|
|
Additional
|
|
comprehensive
|
|
Accumulated
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
paid-in capital
|
|
income (loss)
|
|
deficit
|
|
Total
|
December 31, 2014
|
|
-
|
|
$
|
-
|
|
20,502,760
|
|
$
|
205,028
|
|
$
|
35,124,151
|
|
$
|
1,154
|
|
$
|
(25,919,753)
|
|
$
|
9,410,580
|
Compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related to
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options granted
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
236,512
|
|
|
-
|
|
|
-
|
|
|
236,512
|
Issuance of preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses
|
|
8,425
|
|
|
84
|
|
-
|
|
|
-
|
|
|
7,615,493
|
|
|
-
|
|
|
-
|
|
|
7,615,577
|
Net
loss
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,729,234)
|
|
|
(3,729,234)
|
|
Other comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
72,666
|
|
|
-
|
|
|
72,666
|
|
September 30, 2015
|
|
8,425
|
|
$
|
84
|
|
20,502,760
|
|
$
|
205,028
|
|
$
|
42,976,156
|
|
$
|
73,820
|
|
$
|
(29,648,987)
|
|
$
|
13,606,101
|
|
December 31, 2015
|
|
8,425
|
|
$
|
84
|
|
20,502,760
|
|
$
|
205,028
|
|
$
|
43,043,473
|
|
$
|
113,846
|
|
$
|
(30,718,272)
|
|
$
|
12,644,159
|
Compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related to
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options granted
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
10,126
|
|
|
-
|
|
|
-
|
|
|
10,126
|
Net loss
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,446,621)
|
|
|
(1,446,621)
|
Other comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
153,510
|
|
|
-
|
|
|
153,510
|
|
September 30, 2016
|
|
8,425
|
|
$
|
84
|
|
20,502,760
|
|
$
|
205,028
|
|
$
|
43,053,599
|
|
$
|
267,356
|
|
$
|
(32,164,893)
|
|
$
|
11,361,174
|
The
accompanying
notes are an
integral
part of these
consolidated
financial
statements.
4
Independence Bancshares,
Inc.
Consolidated Statements
of Cash Flows
(unaudited)
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
Operating activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,446,621)
|
|
$
|
(3,729,234)
|
Adjustments to reconcile
net loss to cash used in operating activities
|
|
|
|
|
|
|
(Reversal
of provision) provision for loan losses
|
|
|
(68,000)
|
|
|
150,000
|
Depreciation
|
|
|
182,567
|
|
|
161,249
|
Amortization
of investment securities discounts/premiums, net
|
|
|
120,651
|
|
|
152,209
|
Stock
option expense related to stock options granted
|
|
|
10,126
|
|
|
236,512
|
Net
changes in fair value and losses on other real estate owned and
repossessed
|
|
|
|
|
|
|
assets
|
|
|
133,207
|
|
|
334,942
|
Increase
in value of bank owned life insurance
|
|
|
(21,199)
|
|
|
-
|
Loss
on sale of investment securities
|
|
|
-
|
|
|
87,995
|
Loss
on disposal of property, equipment and software
|
|
|
566
|
|
|
-
|
(Increase)
decrease in other assets, net
|
|
|
(284,001)
|
|
|
(177,975)
|
Decrease
in other liabilities, net
|
|
|
(411,852)
|
|
|
(1,406,879)
|
Net
cash used in operating activities
|
|
|
(1,784,556)
|
|
|
(4,191,181)
|
|
Investing activities
|
|
|
|
|
|
|
Net decrease in
loans
|
|
|
2,734,658
|
|
|
3,256,118
|
Repayments of investment
securities available for sale
|
|
|
576,492
|
|
|
878,824
|
Maturities and sales of
investment securities available for sale
|
|
|
-
|
|
|
4,070,789
|
Purchases of interest
bearing deposits in other institutions
|
|
|
(250,000)
|
|
|
(1,500,000)
|
Purchases of investment
securities available for sale
|
|
|
-
|
|
|
(300,000)
|
Redemption of
non-marketable equity securities, net
|
|
|
12,450
|
|
|
217,150
|
Purchase of property,
equipment and software
|
|
|
(28,140)
|
|
|
(20,349)
|
Proceeds from sale of other
real estate owned and repossessed assets
|
|
|
418,493
|
|
|
582,295
|
Purchase of bank owned life
insurance
|
|
|
(2,500,000)
|
|
|
-
|
Net
cash provided by investing activities
|
|
|
963,953
|
|
|
7,184,827
|
|
Financing activities
|
|
|
|
|
|
|
(Decrease) increase in
deposits, net
|
|
|
(1,810,521)
|
|
|
1,743,850
|
Repayments on
borrowings
|
|
|
-
|
|
|
(5,000,000)
|
Repayments on note
payable
|
|
|
-
|
|
|
(600,000)
|
Issuance of preferred
stock, net
|
|
|
-
|
|
|
7,615,577
|
Decrease in securities sold
under agreements to repurchase
|
|
|
(51,260)
|
|
|
(129,962)
|
Net
cash (used in) provided by financing activities
|
|
|
(1,861,781)
|
|
|
3,629,465
|
|
Net (decrease) increase in cash and
cash equivalents
|
|
|
(2,682,384)
|
|
|
6,623,111
|
|
Cash and cash equivalents at beginning of the period
|
|
|
13,899,795
|
|
|
10,904,080
|
|
Cash and cash equivalents at end of the
period
|
|
$
|
11,217,411
|
|
$
|
17,527,191
|
|
Supplemental information:
|
|
|
|
|
|
|
Cash
paid for
|
|
|
|
|
|
|
Interest
|
|
$
|
243,374
|
|
$
|
250,695
|
Income
taxes
|
|
$
|
-
|
|
$
|
5,080
|
Schedule
of non-cash transactions
|
|
|
|
|
|
|
Unrealized
gain on securities available for sale, net of tax
|
|
$
|
153,510
|
|
$
|
73,820
|
Loans
transferred to other real estate owned and repossessed assets
|
|
$
|
1,257,289
|
|
$
|
300,000
|
The accompanying notes
are an integral part of these consolidated financial statements.
5
Notes to Unaudited
Consolidated Financial Statements
NOTE 1 NATURE OF
BUSINESS AND BASIS OF PRESENTATION
Independence
Bancshares, Inc.
(the
Company) is a South Carolina corporation organized to operate as a bank
holding company pursuant to the Federal Bank Holding Company Act of 1956 and the
South Carolina Banking and Branching Efficiency Act of 1996, and to own and
control all of the capital stock of Independence National Bank (the Bank), a
national association organized under the laws of the United States. Since
opening for business on May 16, 2005, the Bank has operated as a traditional
community bank in Greenville, South Carolina, fulfilling the financial needs of
individuals and small businesses in its market. The Bank provides traditional
checking and savings products insured by the Federal Deposit Insurance
Corporation (the FDIC) and commercial, consumer and mortgage loans, as well as
ATM and online banking, cash management and safe deposit boxes.
As previously reported, on
September 25, 2015, the Company suspended development of its digital banking,
payments and transaction services business and has subsequently been evaluating
strategic alternatives for the Company. A key goal of the Companys digital
banking business was to reduce costs for banking activities and operate more
efficiently through utilizing mobile and on-line delivery channels. In
furtherance of this goal and based in part upon the institutional knowledge
acquired in the pursuit of the digital banking strategy, the Company plans to
supplement its current lending strategy by expanding its consumer lending
program with on-line offerings, targeting prime and super-prime borrowers in the
Banks current market area as well as throughout South Carolina. The Companys
board of directors is focused on profitably growing the Bank and enhancing
shareholder value through this targeted expansion of its consumer lending
program.
Basis of
Presentation
The accompanying unaudited
consolidated financial statements include the accounts of the Company and the
Bank. In consolidation, all significant intercompany transactions have been
eliminated. The unaudited consolidated financial statements include, in the
opinion of management, all adjustments necessary to present a fair statement of
the financial position and the results of operations for all periods presented.
All such adjustments are of a normal recurring nature. The accounting and
reporting policies conform to accounting principles generally accepted in the
United States and to general practices in the banking industry. The foregoing
discussion is a summary only and should be read in conjunction with the
Companys Annual Report on Form 10-K for the year ended December 31, 2015 (the
2015 10-K) as filed with the Securities and Exchange Commission (the SEC)
and Managements Discussion and Analysis in this Quarterly Report on Form 10-Q.
Operating results for the three and nine month periods ended September 30, 2016
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2016.
Reclassifications
Certain amounts have been
reclassified to state all periods on a comparable basis. Reclassifications had
no effect on previously reported shareholders equity or net loss.
Use of Estimates
The preparation of
consolidated 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 as of the date
of the consolidated financial statements and the reported amount of income and
expenses during the reporting periods. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance for loan
losses, other real estate owned, fair value of financial instruments, evaluating
other-than-temporary impairment of investment securities and valuation of
deferred tax assets.
Business Segments
The Company reports its activities as four
business segments - Community Banking, Transaction Services, Asset Management
and Parent Only. In determining proper segment definition, the Company considers
the materiality of a potential segment and components of the business about
which financial information is available and regularly evaluated, relative to a
resource allocation and performance assessment. Please refer to Note 8
Business Segments for further information on the reporting for the four
business segments.
6
Subsequent
Events
Subsequent events are
events or transactions that occur after the balance sheet date but before
financial statements are issued. Recognized subsequent events are events or
transactions that provide additional evidence about conditions that existed at
the date of the balance sheet, including the estimates inherent in the process
of preparing financial statements. Non-recognized subsequent events are events
that provide evidence about conditions that did not exist at the date of the
balance sheet but arose after that date. Management performed an evaluation to
determine whether or not there have been any subsequent events since the balance
sheet date, and concluded that no subsequent events had occurred requiring
accrual or disclosure through the date of this filing, other than those
mentioned in Note 11.
NOTE 2 LIQUIDITY AND
CAPITAL CONSIDERATIONS
The Company
The Companys cash
balances, independent of the Bank, were approximately $1.6 million and its real
estate held for sale was $293,142 at September 30, 2016 compared to cash
balances of approximately $2.9 million and real estate held for sale of $631,320
at December 31, 2015. The decrease in liquid assets of approximately $1.3
million during the nine month period is due primarily to the repayment of
accrued liabilities, approximately $205,000 in expenses incurred related to the
transaction services segment, approximately $73,000 in other real estate owned
expenses incurred related to the asset management segment, and approximately
$741,000 in professional fees and data processing expenses incurred at the
Company. See Note 8 Business Segments for additional information related to
the Companys business segments. The foregoing discussion is a summary only and
should be read in conjunction with the 2015 Form 10-K as filed with the SEC and
Managements Discussion and Analysis in this Quarterly Report on Form 10-Q. The
Companys board of directors has suspended its digital banking business and, as
such, we believe our liquidity sources are adequate to meet our operating needs
at the Company.
The Bank
Our ability to maintain and
expand our deposit base and borrowing capabilities serves as our primary source
of liquidity at the Bank. We currently have $11.2 million in cash and federal
funds sold. If our cash needs at the Bank exceed that, we plan to liquidate
temporary investments and generate deposits within our market. In addition, we
will receive cash upon the maturity and sale of loans and the maturity of
investment securities. Our investment securities available for sale at September
30, 2016 amounted to $10.2 million, or 10.9% of total assets. Investment
securities traditionally provide a secondary source of liquidity since they can
be converted into cash in a timely manner. At September 30, 2016, $2.4 million
of our investment portfolio was pledged against outstanding debt. Therefore, the
related debt would need to be repaid prior to the securities being sold and
converted to cash.
The Bank is a member of the
Federal Home Loan Bank of Atlanta (FHLB), from which applications for
borrowings can be made for leverage purposes. The FHLB requires that securities,
qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to
secure any advances from the FHLB. At September 30, 2016, we had collateral that
would support approximately $35.9 million in additional borrowings. We are
subject to the FHLBs credit risk rating policy which assigns member
institutions a rating which is reviewed quarterly. The rating system utilizes
key factors such as loan quality, capital, liquidity, profitability, etc. Our
ability to access our available borrowing capacity from the FHLB in the future
is subject to our rating and any subsequent changes based on our financial
performance as compared to factors considered by the FHLB in their assignment of
our credit risk rating each quarter.
The Bank also pledges
collateral to the Federal Reserve Banks Borrower-in-Custody of Collateral
program, and our available credit under this program was $16.5 million as of
September 30, 2016.
The Bank has $5.5 million
in federal funds purchased lines of credits through correspondent banks that are
unsecured, but have not been utilized.
We believe our liquidity
sources are adequate to meet our operating needs at the Bank. However, we
continue to carefully focus on liquidity management during 2016. Comprehensive
weekly and monthly liquidity analyses serve management as vital decision-making
tools by providing summaries of anticipated changes in loans, investments, core
deposits, and wholesale funds. These internal funding reports provide management
with the details critical to anticipate immediate and long-term cash
requirements, such as expected deposit runoff, loan pay downs and amount and
cost of available borrowing sources, including secured overnight federal funds
lines with our various correspondent banks.
7
The Consolidated
Company
The Companys level of
liquidity is measured by the cash, cash equivalents, and investment securities
available for sale to total assets ratio which was 24.7% at September 30, 2016
compared to 26.7% as of December 31, 2015. The decrease in liquidity is due
primarily to the decrease in cash and due from bank and federal funds sold.
NOTE 3 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
For further information
refer to the consolidated financial statements and footnotes thereto included in
our 2015 Form 10K as filed with the SEC.
Cash and Cash
Equivalents
- For purposes of
reporting cash flows, cash and cash equivalents include cash, amounts due from
banks and federal funds sold. Generally, federal funds are sold for one-day
periods. Due to the short term nature of cash and cash equivalents, the carrying
amount of these instruments is deemed to be a reasonable estimate of fair value.
At September 30, 2016 and
December 31, 2015, the Company had restricted cash totaling $2,000 with the
FHLB. The Company places its deposits and correspondent accounts with and sells
its federal funds to high quality institutions. Management believes credit risk
associated with correspondent accounts is not significant.
Net Loss per Common
Share
- Basic loss per common
share represents net loss divided by the weighted average number of common
shares outstanding during the period. Diluted loss per share reflects additional
common shares that would have been outstanding if dilutive potential common
shares had been issued. Potential common shares that may be issued by the
Company relate to outstanding stock options and warrants and are determined
using the treasury stock method. For the three and nine month periods ended
September 30, 2016 and September 30, 2015, as a result of the Companys net
loss, all of the potential common shares were considered
anti-dilutive.
Research and Development
All costs incurred to establish the
technological feasibility of computer software to be sold, leased or otherwise
marketed as research and development are expensed as incurred. Once
technological feasibility has been established, the subsequent costs of
producing, coding and testing the products should be capitalized. The expensing
of computer software costs is discontinued when the product is available for
general release for customers. The Company did not achieve technological
feasibility and therefore expensed all computer software purchases and
development expenses related to research and development of its digital banking,
payments and transaction services business. On September 25, 2015 the Company
suspended the development of its digital banking business.
Fair Value Measurements
-
The Company determines the fair
market values of its financial instruments based on the fair value hierarchy
established in Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Topic 820, Fair Value Measurements and
Disclosures (ASC Topic 820), which provides a framework for measuring and
disclosing fair value under generally accepted accounting principles. ASC Topic
820 requires disclosures about the fair value of assets and liabilities
recognized in the balance sheet in periods subsequent to initial recognition,
whether the measurements are made on a recurring basis (for example, available
for sale investment securities) or on a nonrecurring basis (for example,
impaired loans).
ASC Topic 820 defines fair
value as the exchange price that would be received for 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. ASC Topic 820 also establishes a fair
value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair
value:
Level 1 Valuations are
based on quoted prices in active markets for identical assets or liabilities.
Level 2 Valuations are
based on observable inputs other than Level 1 prices, such as 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 assets or liabilities.
Level 3 Valuations
include unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or liabilities.
8
Income
Taxes
- The Company accounts for
income taxes in accordance with FASB ASC Topic 740, Income Taxes". Deferred tax
assets and liabilities are recognized for the expected future tax consequences
of events that have been recognized in the consolidated financial statements or
tax returns. Deferred tax assets and liabilities are measured using the enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be realized or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation allowances are
established to reduce deferred tax assets if it is determined to be more likely
than not that all or some portion of the potential deferred tax asset will not
be realized.
We did not recognize any
income tax benefit or expense for the three and nine month periods ended
September 30, 2016 due to our net operating loss carryforward position. For the
nine month period ended September 30, 2015, we recognized $5,080 in state income
tax expense related to our net operating income in 2014 at the Bank. We did not
recognize any income tax benefit or expense for the three month period ended
September 30, 2015 due to our net loss in 2015 at the Bank. Accounting
literature states that a deferred tax asset should be reduced by a valuation
allowance if, based on the weight of all available evidence, it is more likely
than not (a likelihood of more than 50%) that some portion or the entire
deferred tax asset will not be realized. The determination of whether a deferred
tax asset is realizable is based on weighting all available evidence, including
both positive and negative evidence. In making such judgments, significant
weight is given to evidence that can be objectively verified. We will continue
to analyze our deferred tax assets and related valuation allowance on a
quarterly basis, taking into account performance compared to forecasted earnings
as well as current economic and internal information.
The Company believes that
its income tax filing positions taken or expected to be taken in its tax returns
will more likely than not be sustained upon audit by the taxing authorities, and
does not anticipate any adjustments that will result in a material adverse
impact on the Companys financial condition, results of operations, or cash
flows. Therefore, no reserves for uncertain income tax positions have been
recorded pursuant to ASC 740.
Recently Issued
Accounting Pronouncements
- The
following is a summary of recent authoritative pronouncements that may affect
our accounting, reporting, and disclosure of financial information:
In May 2014 and August
2015, the FASB issued guidance to change the recognition of revenue from
contracts with customers. The core principle of the new guidance is that an
entity should recognize revenue to reflect the transfer of goods and services to
customers in an amount equal to the consideration the entity receives or expects
to receive. In March 2016, the guidance was amended to clarify the
implementation guidance on principal versus agent considerations and address how
an entity should assess whether it is the principal or the agent in contracts
that include three or more parties. In May 2016, the topic was amended again to
clarify the guidance related to collectability, noncash consideration,
presentation of sales tax, and transition. The guidance and amendments will be
effective for the Company for reporting periods beginning after December 15,
2017. The Company will apply the guidance using a modified retrospective
approach. The Company does not expect these amendments to have a material effect
on its financial statements.
In January 2015, the FASB
issued guidance to eliminate from the U.S. GAAP the concept of an extraordinary
item, which is an event or transaction that is both (1) unusual in nature and
(2) infrequently occurring. Under the new guidance, an entity will no longer (1)
segregate an extraordinary item from the results of ordinary operations; (2)
separately present an extraordinary item on its income statement, net of tax,
after income from continuing operations; or (3) disclose income taxes and
earnings-per-share data applicable to an extraordinary item. The amendments will
be effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2015, with early adoption permitted provided that
the guidance is applied from the beginning of the fiscal year of adoption. The
Company will apply the guidance prospectively to all prior periods presented in
the financial statements. These amendments have not had a material effect on the
Companys financial statements.
In February 2015, the FASB
issued guidance which amends the consolidation requirements and significantly
changes the consolidation analysis required under the U.S. GAAP. Although the
amendments are expected to result in the deconsolidation of many entities, the
Company will need to reevaluate all its previous consolidation conclusions. The
amendments will be effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2015, with early adoption permitted
(included during an interim period), provided that the guidance is applied as of
the beginning of the annual
period containing the adoption date. These amendments have not had a material
effect on the Companys financial statements.
9
In August 2015, the FASB
issued amendments to the Interest topic of the Accounting Standards Codification
to clarify the SEC staffs position on presenting and measuring debt issuance
costs incurred in connection with line-of-credit arrangements. The amendments
were effective upon issuance and have not had a material effect on the Companys
financial statements.
In January 2016, the FASB
amended the Financial Instruments topic of the ASC to address certain aspects of
recognition, measurement, presentation, and disclosure of financial instruments.
The amendments will be effective for fiscal years beginning after December 15,
2017, including interim periods within those fiscal years. The amendments
related to equity securities without readily determinable fair values will be
applied prospectively to equity investments that exist as of the date of
adoption of the amendments. The Company does not expect these amendments to have
a material effect on its financial statements.
In February 2016, the FASB
amended the Leases topic of the ASC to revise certain aspects of recognition,
measurement, presentation, and disclosure of leasing transactions. The
amendments will be effective for fiscal years beginning December 15, 2018,
including interim periods within those fiscal years. The Company is currently
evaluating the effect that implementation of the new standard will have on its
financial position, results of operations, and cash flows.
In March 2016, the FASB
issued guidance to simplify several aspects of the accounting for share-based
payment award transactions including the income tax consequences, the
classification of awards as either equity or liabilities, and the classification
on the statement of cash flows. Additionally, the guidance simplifies two areas
specific to entities other than public business entities allowing them to apply
a practical expedient to estimate the expected term for all awards with
performance or service conditions that have certain characteristics and also
allowing them to make a one-time election to switch from measuring all
liability-classified awards at fair value to measuring them at intrinsic value.
The amendments will be effective for the Company for annual periods beginning
after December 15, 2016. The Company does not expect these amendments to have a
material effect on its financial statements.
In June 2016, the FASB
issued guidance to change the accounting for credit losses and modify the
impairment model for certain debt securities. The amendments will be effective
for the Company for reporting periods beginning after December 15, 2019. The
Company is currently evaluating the effect that implementation of the new
standard will have on its financial position, results of operations, and cash
flows.
In August 2016, the FASB
amended the Statement of Cash Flows topic of the Accounting Standards
Codification to clarify how certain cash receipts and cash payments are
presented and classified in the statement of cash flows. The amendments will be
effective for the Company for fiscal years beginning after December 15, 2017
including interim periods within those years. The Company does not expect these
amendments to have a material effect on its financial statements.
Other accounting standards
that have been issued or proposed by the FASB or other standards-setting bodies
are not expected to have a material impact on the Companys financial position,
results of operations or cash flows.
10
NOTE 4 INVESTMENT
SECURITIES
Investment securities
classified as Available for Sale are carried at fair value with unrealized
gains and losses excluded from earnings and reported as a separate component of
shareholders equity (net of estimated tax effects). Realized gains or losses on
the sale of investments are based on the specific identification method. The
amortized costs and fair values of investment securities available for sale are
as follows:
|
|
September 30,
2016
|
|
|
Amortized
|
|
Gross Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
Government-sponsored mortgage-backed
|
|
$
|
3,660,290
|
|
$
|
95,649
|
|
$
|
(10,121)
|
|
$
|
3,745,818
|
Municipals,
tax-exempt
|
|
|
4,856,478
|
|
|
250,422
|
|
|
(2,173)
|
|
|
5,104,727
|
Municipals,
taxable
|
|
|
1,301,446
|
|
|
71,309
|
|
|
-
|
|
|
1,372,755
|
Total
investment securities
|
|
$
|
9,818,214
|
|
$
|
417,380
|
|
$
|
(12,294)
|
|
$
|
10,223,300
|
|
|
|
December 31,
2015
|
|
|
Amortized
|
|
Gross Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
Government-sponsored mortgage-backed
|
|
$
|
4,290,680
|
|
$
|
66,350
|
|
$
|
(44,581)
|
|
$
|
4,312,449
|
Municipals,
tax-exempt
|
|
|
4,916,379
|
|
|
140,335
|
|
|
(17,267)
|
|
|
5,039,447
|
Municipals,
taxable
|
|
|
1,308,298
|
|
|
27,657
|
|
|
-
|
|
|
1,335,955
|
Total
investment securities
|
|
$
|
10,515,357
|
|
$
|
234,342
|
|
$
|
(61,848)
|
|
$
|
10,687,851
|
The following table
presents information regarding securities with unrealized losses at September
30, 2016:
|
|
Securities in an
Unrealized
|
|
Securities in an
Unrealized
|
|
|
|
|
|
|
|
|
Loss Position for Less
than
|
|
Loss Position for More
than
|
|
|
|
|
|
|
|
|
12 Months
|
|
12 Months
|
|
Total
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
Government-sponsored mortgage-backed
|
|
$
|
-
|
|
$
|
-
|
|
$
|
709,955
|
|
$
|
10,121
|
|
$
|
709,955
|
|
$
|
10,121
|
Municipals, tax-exempt
|
|
|
322,119
|
|
|
2,173
|
|
|
-
|
|
|
-
|
|
|
322,119
|
|
|
2,173
|
Total temporarily impaired
securities
|
|
$
|
322,119
|
|
$
|
2,173
|
|
$
|
709,955
|
|
$
|
10,121
|
|
$
|
1,032,074
|
|
$
|
12,294
|
The following table
presents information regarding securities with unrealized losses at December 31,
2015:
|
|
Securities in an
Unrealized
|
|
Securities in an
Unrealized
|
|
|
|
|
|
|
|
|
Loss Position for Less
than
|
|
Loss Position for More
than
|
|
|
|
|
|
|
|
|
12 Months
|
|
12 Months
|
|
Total
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
Government-sponsored mortgage-backed
|
|
$
|
627,542
|
|
$
|
5,569
|
|
$
|
764,462
|
|
$
|
39,012
|
|
$
|
1,392,004
|
|
$
|
44,581
|
Municipals, tax-exempt
|
|
|
323,796
|
|
|
6,249
|
|
|
1,074,440
|
|
|
11,018
|
|
|
1,398,236
|
|
|
17,267
|
Total temporarily impaired
securities
|
|
$
|
951,338
|
|
$
|
11,818
|
|
$
|
1,838,902
|
|
$
|
50,030
|
|
$
|
2,790,240
|
|
$
|
61,848
|
At September 30, 2016,
investment securities with a fair value of approximately $710,000 and unrealized
losses of $10,121 had been in a continuous loss position for more than twelve
months. At September 30, 2016, investment securities with a fair value of
approximately $322,000 and unrealized losses of $2,173 had been in a continuous
loss position for less than twelve months. All remaining investment securities
were in an unrealized gain position. The Company believes, based on industry
analyst reports and credit ratings that the deterioration in the fair value of
these investment securities available for sale is attributed to changes in
market interest rates and not in the credit quality of the issuer and therefore,
these losses are not considered other-than-temporary. The Company has the
ability and intent to hold these securities until such time as the values
recover or the securities mature. At December 31, 2015, investment securities
with a fair value of approximately $951,000 and unrealized losses of $11,818 had
been in a continuous loss for less than twelve months. At December 31, 2015,
investment securities with a fair value of approximately $1.8 million and
unrealized losses of $50,030 had been in a continuous loss position for more than twelve months. All remaining
investment securities were in an unrealized gain position.
11
The amortized costs and
fair values of investment securities available for sale at September 30, 2016,
by contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because issuers have the right to prepay the obligations.
|
|
September 30,
2016
|
|
|
Amortized
|
|
Fair
|
|
|
Cost
|
|
Value
|
Due within
one year
|
|
$
|
|
|
$
|
|
Due after
one through three years
|
|
|
|
|
|
|
Due after
three through five years
|
|
|
|
|
|
|
Due after
five through ten years
|
|
|
1,301,446
|
|
|
1,372,755
|
Due after
ten years
|
|
|
8,516,768
|
|
|
8,850,545
|
Total
investment securities
|
|
$
|
9,818,214
|
|
$
|
10,223,300
|
NOTE 5 LOANS
At September 30, 2016, our
current loan portfolio consisted primarily of $32.3 million of commercial real
estate loans, $16.3 million of commercial business loans, $13.1 million of home
equity loans and $1.8 million of consumer loans. Our current loan portfolio
composition is not materially different than the loan portfolio composition
disclosed in the footnotes to the consolidated financial statements included in
our 2015 10-K. The Bank plans to supplement its current lending strategy by
expanding its consumer lending program, targeting prime and super-prime
borrowers in the Banks current market area as well as throughout South
Carolina.
During the nine month
period ended September 30, 2016, three nonaccrual loans at the Bank were
transferred to other real estate owned for $1,257,289. Specific reserves for
each of these loans were included in the December 31, 2015 allowance accounts.
During the period ended September 30, 2015, one nonaccrual loan at the Bank for
$343,266 was transferred to other real estate owned for $300,000, net of a
specific reserve, which includes $34,327 in selling costs, of $43,266.
Certain credit quality
statistics related to our loan portfolio have improved over the past several
quarters, including reductions of in-migration of nonaccrual loans and
reductions in the aggregate level of nonperforming assets. To the extent such
improvement continues, we may continue to reduce our allowance for loan losses
in future periods based on our assessment of the inherent risk in the loan
portfolio at those future reporting dates. There can be no assurance that loan
losses in future periods will not exceed the current allowance for loan losses
amount or that future increases in the allowance for loan losses will not be
required. Additionally, no assurance can be given that our ongoing evaluation of
the loan portfolio, in light of changing economic conditions and other relevant
factors, will not require significant future additions to the allowance for loan
losses, thus adversely impacting our business, financial condition, results of
operations, and cash flows.
Loan Performance and
Asset Quality
Generally, a loan will be
placed on nonaccrual status when it becomes 90 days past due as to principal or
interest (unless the loan is well-collateralized and in the process of
collection), or when management believes, after considering economic and
business conditions and collection efforts, that the borrowers financial
condition is such that collection of the loan is doubtful. When a loan is placed
in nonaccrual status, interest accruals are discontinued and income earned but
not collected is reversed. Cash receipts on nonaccrual loans are not recorded as
interest income, but are used to reduce principal. Loans are removed from
nonaccrual status when they become current as to both principal and interest and
when concern no longer exists as to the collectability of principal or interest
based on current available information or as evidenced by sufficient payment
history, generally six months.
12
The following table
summarizes delinquencies and nonaccruals, by portfolio class, as of September
30, 2016 and December 31, 2015.
|
|
Single and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
multifamily
|
|
Construction
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
residential
|
|
and
|
|
real estate -
|
|
Commercial
|
|
|
|
|
|
|
|
|
real estate
|
|
development
|
|
other
|
|
business
|
|
Consumer
|
|
Total
|
September
30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 days
past due
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
90,135
|
|
$
|
500
|
|
$
|
90,635
|
60-89 days past due
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Nonaccrual
|
|
|
138,045
|
|
|
-
|
|
|
193,188
|
|
|
-
|
|
|
-
|
|
|
331,233
|
Total past due and nonaccrual
|
|
|
138,045
|
|
|
-
|
|
|
193,188
|
|
|
90,135
|
|
|
500
|
|
|
421,868
|
Current
|
|
|
12,968,165
|
|
|
8,664,401
|
|
|
23,438,325
|
|
|
16,221,319
|
|
|
1,811,017
|
|
|
63,103,227
|
Total
loans (gross of
|
|
$
|
13,106,210
|
|
$
|
8,664,401
|
|
$
|
23,631,513
|
|
$
|
16,311,454
|
|
$
|
1,811,517
|
|
$
|
63,525,095
|
deferred fees)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(193,659)
|
Loan loss reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(853,137)
|
Total Loans,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62,478,299
|
|
|
|
Single and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
multifamily
|
|
Construction
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
residential
|
|
and
|
|
real estate -
|
|
Commercial
|
|
|
|
|
|
|
|
|
real estate
|
|
development
|
|
other
|
|
business
|
|
Consumer
|
|
Total
|
December
31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 days
past due
|
|
$
|
75,890
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
75,890
|
60-89 days past due
|
|
|
63,702
|
|
|
250,378
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
314,080
|
Nonaccrual
|
|
|
168,879
|
|
|
40,500
|
|
|
1,390,013
|
|
|
65,798
|
|
|
-
|
|
|
1,655,190
|
Total past due and nonaccrual
|
|
|
308,471
|
|
|
290,878
|
|
|
1,390,013
|
|
|
65,798
|
|
|
-
|
|
|
2,055,160
|
Current
|
|
|
16,126,251
|
|
|
6,995,581
|
|
|
24,169,930
|
|
|
16,961,256
|
|
|
1,369,224
|
|
|
65,622,242
|
Total
loans (gross of
|
|
$
|
16,434,722
|
|
$
|
7,286,459
|
|
$
|
25,559,943
|
|
$
|
17,027,054
|
|
$
|
1,369,224
|
|
$
|
67,677,402
|
deferred fees)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(135,647)
|
Loan loss reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,139,509)
|
Total Loans,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
66,402,246
|
At September 30, 2016 and
December 31, 2015, there were nonaccrual loans of approximately $331,000 and
$1.7 million, respectively. Foregone interest income related to nonaccrual loans
equaled $55,231 for the nine months ended September 30, 2016. Foregone interest
income related to nonaccrual loans equaled $10,535 for the nine months ended
September 30, 2015. No interest income was recognized on nonaccrual loans during
the nine months ended September 30, 2016. At September 30, 2016 and December 31,
2015, there were no accruing loans which were contractually past due 90 days or
more as to principal or interest payments.
As part of the loan review
process, loans are given individual credit grades, representing the risk the
Company believes is associated with the loan balance. Credit grades are assigned
based on factors that impact the collectability of the loan, the strength of the
borrower, the type of collateral, and loan performance. Commercial loans are
individually graded at origination and credit grades are reviewed on a regular
basis in accordance with our loan policy. Consumer loans are assigned a pass
credit rating unless something within the loan warrants a specific
classification grade
.
13
The following table
summarizes managements internal credit risk grades, by portfolio class, as of
September 30, 2016 and December 31, 2015.
|
|
Single and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
multifamily
|
|
Construction
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
residential
|
|
and
|
|
real estate -
|
|
Commercial
|
|
|
|
|
|
|
September 30,
2016
|
|
real estate
|
|
development
|
|
other
|
|
business
|
|
Consumer
|
|
Total
|
Pass
Loans
|
|
$
|
8,166,976
|
|
$
|
2,410,426
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,811,517
|
|
$
|
12,388,919
|
Grade 1 - Prime
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Grade 2 -
Good
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Grade 3 - Acceptable
|
|
|
1,974,683
|
|
|
2,081,541
|
|
|
11,939,247
|
|
|
8,131,777
|
|
|
-
|
|
|
24,127,248
|
Grade 4
Acceptable w/ Care
|
|
|
2,764,069
|
|
|
4,101,457
|
|
|
11,499,078
|
|
|
7,125,434
|
|
|
-
|
|
|
25,490,038
|
Grade 5 Special Mention
|
|
|
62,437
|
|
|
70,977
|
|
|
-
|
|
|
831,026
|
|
|
-
|
|
|
964,440
|
Grade 6 -
Substandard
|
|
|
138,045
|
|
|
-
|
|
|
193,188
|
|
|
223,217
|
|
|
-
|
|
|
554,450
|
Grade 7 - Doubtful
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Total
loans (gross of
|
|
$
|
13,106,210
|
|
$
|
8,664,401
|
|
$
|
23,631,513
|
|
$
|
16,311,454
|
|
$
|
1,811,517
|
|
$
|
63,525,095
|
deferred
fees)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
multifamily
|
|
Construction
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
residential
|
|
and
|
|
real estate -
|
|
Commercial
|
|
|
|
|
|
|
December 31,
2015
|
|
real estate
|
|
development
|
|
other
|
|
business
|
|
Consumer
|
|
Total
|
Pass
Loans
|
|
$
|
8,340,816
|
|
$
|
1,350,332
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,369,224
|
|
$
|
11,060,372
|
Grade 1 - Prime
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Grade 2 -
Good
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Grade 3 - Acceptable
|
|
|
4,479,116
|
|
|
809,004
|
|
|
8,121,125
|
|
|
7,667,706
|
|
|
-
|
|
|
21,076,951
|
Grade 4
Acceptable w/ Care
|
|
|
3,382,209
|
|
|
4,759,864
|
|
|
14,724,468
|
|
|
8,199,385
|
|
|
-
|
|
|
31,065,926
|
Grade 5 Special Mention
|
|
|
63,702
|
|
|
76,381
|
|
|
611,189
|
|
|
846,106
|
|
|
-
|
|
|
1,597,378
|
Grade 6 -
Substandard
|
|
|
168,879
|
|
|
290,878
|
|
|
2,103,161
|
|
|
313,857
|
|
|
-
|
|
|
2,876,775
|
Grade 7 - Doubtful
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Total
loans (gross of
|
|
$
|
16,434,722
|
|
$
|
7,286,459
|
|
$
|
25,559,943
|
|
$
|
17,027,054
|
|
$
|
1,369,224
|
|
$
|
67,677,402
|
deferred
fees)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans graded one through
four are considered pass credits. At September 30, 2016, approximately 98% of
the loan portfolio had a credit grade of pass compared to 93% at December 31,
2015. For loans to qualify for this grade, they must be performing relatively
close to expectations, with no significant departures from the intended source
and timing of repayment. Consumer loans are assigned a pass credit rating
unless something within the loan warrants a specific classification grade. As of
September 30, 2016 and December 31, 2015, we had loans totaling approximately
$964,000 and $1.6 million, respectively, classified as special mention. This
classification is utilized when an initial concern is identified about the
financial health of a borrower. Loans are designated as such in order to be
monitored more closely than other credits in the loan portfolio. At September
30, 2016, substandard loans totaled approximately $554,000, with all loans being
collateralized by real estate compared to $2.9 million at December 31, 2015.
Substandard credits are evaluated for impairment on a quarterly
basis.
The Company identifies
impaired loans through its normal internal loan review process. A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, 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 borrowers prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Loans on the
Company's problem loan watch list are considered potentially impaired loans.
Generally, once loans are considered impaired, they are moved to nonaccrual
status and recognition of interest income is discontinued. However, loans may be
considered impaired strictly based on a decrease in the underlying value of the
collateral securing the loan while the loan is still considered to be
performing, thus preventing the need to move the loan to nonaccrual status.
Impairment is measured on a loan-by-loan basis based on the determination of the
most probable source of repayment which is usually liquidation of the underlying
collateral, but may also include discounted future cash flows, or in rare cases,
the market value of the loan itself.
14
Large groups of smaller
balance homogeneous loans are collectively evaluated for impairment.
Accordingly, the Company does not separately identify individual consumer and
residential loans for impairment disclosures, unless such loans are the subject
of a restructuring agreement.
At September 30, 2016,
impaired loans totaled $1.4 million, all of which were valued on a nonrecurring
basis at the lower of cost or market value of the underlying collateral.
Impaired loans decreased $975,232 from December 31, 2015 due to three loans
being transferred to other real estate owned for $1,257,289, approximately
$374,000 in loan balance reductions through pay downs, and approximately
$829,000 in loans being moved out of impaired status during the quarter,
partially offset by three loans being deemed impaired with a recorded investment
of approximately $1.0 million during the nine months ended September 30, 2016.
Market values were obtained using independent appraisals, updated in accordance
with our reappraisal policy, or other market data such as recent offers to the
borrower. As of September 30, 2016, we had no loans that were classified in
accordance with our loan rating policies but were not considered impaired. The
following table summarizes information relative to impaired loans, by portfolio
class, at September 30, 2016 and December 31, 2015.
|
|
Unpaid
|
|
|
|
|
|
|
|
Average
|
|
Year to date
|
|
|
principal
|
|
Recorded
|
|
Related
|
|
impaired
|
|
interest
|
|
|
balance
|
|
investment
|
|
allowance
|
|
investment
|
|
income
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related
allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and multifamily
residential real estate
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
205,715
|
|
$
|
-
|
Construction and
development
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
123,137
|
|
|
5,191
|
Commercial real estate -
other
|
|
|
788,098
|
|
|
788,098
|
|
|
-
|
|
|
659,162
|
|
|
20,907
|
Commercial
business
|
|
|
242,646
|
|
|
242,646
|
|
|
-
|
|
|
91,669
|
|
|
18,123
|
With
related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and multifamily
residential real estate
|
|
|
200,483
|
|
|
200,483
|
|
|
101,283
|
|
|
220,816
|
|
|
2,457
|
Construction and
development
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
126,353
|
|
|
-
|
Commercial real estate -
other
|
|
|
193,188
|
|
|
193,188
|
|
|
28,188
|
|
|
580,095
|
|
|
-
|
Commercial
business
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,070
|
|
|
-
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and multifamily
residential real estate
|
|
|
200,483
|
|
|
200,483
|
|
|
101,283
|
|
|
426,531
|
|
|
2,457
|
Construction and
development
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
249,490
|
|
|
5,191
|
Commercial real estate -
other
|
|
|
981,286
|
|
|
981,286
|
|
|
28,188
|
|
|
1,239,257
|
|
|
20,907
|
Commercial
business
|
|
|
242,646
|
|
|
242,646
|
|
|
-
|
|
|
100,739
|
|
|
18,123
|
|
|
$
|
1,424,415
|
|
$
|
1,424,415
|
|
$
|
129,471
|
|
$
|
2,016,017
|
|
$
|
46,678
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With
no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and multifamily
residential real estate
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
411,430
|
|
$
|
21,667
|
Construction and
development
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
177,047
|
|
|
-
|
Commercial real estate -
other
|
|
|
905,968
|
|
|
905,968
|
|
|
-
|
|
|
415,488
|
|
|
29,423
|
Commercial
business
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
62,015
|
|
|
-
|
With
related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and multifamily
residential real estate
|
|
|
236,938
|
|
|
236,938
|
|
|
163,138
|
|
|
270,668
|
|
|
-
|
Construction and
development
|
|
|
40,500
|
|
|
40,500
|
|
|
10,500
|
|
|
239,206
|
|
|
727
|
Commercial real estate -
other
|
|
|
1,197,193
|
|
|
1,197,193
|
|
|
201,793
|
|
|
805,654
|
|
|
46,761
|
Commercial
business
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
18,139
|
|
|
2,119
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and multifamily
residential real estate
|
|
|
236,938
|
|
|
236,938
|
|
|
163,138
|
|
|
682,098
|
|
|
21,667
|
Construction and
development
|
|
|
40,500
|
|
|
40,500
|
|
|
10,500
|
|
|
416,253
|
|
|
727
|
Commercial real estate -
other
|
|
|
2,103,161
|
|
|
2,103,161
|
|
|
201,793
|
|
|
1,221,142
|
|
|
76,184
|
Commercial
business
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
80,154
|
|
|
2,119
|
|
|
$
|
2,380,599
|
|
$
|
2,380,599
|
|
$
|
375,431
|
|
$
|
2,399,647
|
|
$
|
100,697
|
15
TDRs are loans which have
been restructured from their original contractual terms and include concessions
that would not otherwise have been granted outside of the financial difficulty
of the borrower. Concessions can relate to the contractual interest rate,
maturity date, or payment structure of the note. As part of our workout plan for
individual loan relationships, we may restructure loan terms to assist borrowers
facing challenges in the current economic environment. The purpose of a TDR is
to facilitate ultimate repayment of the loan.
Our policy with respect to
accrual of interest on loans restructured in a TDR follows relevant supervisory
guidance. That is, if a borrower has demonstrated performance under the previous
loan terms and shows capacity to perform under the restructured loan terms
continued accrual of interest at the restructured interest rate is likely. If a
borrower was materially delinquent on payments prior to the restructuring, but
shows capacity to meet the restructured loan terms, the loan will likely
continue as nonaccrual going forward. Lastly, if the borrower does not perform
under the restructured terms, the loan is placed on nonaccrual status. We will
continue to closely monitor these loans and will cease accruing interest on them
if management believes that the borrowers may not continue performing based on
the restructured note terms.
At September 30, 2016 the
principal balance of TDRs was zero as the one loan constituting our sole TDR at
June 30, 2016 had been repaid in full at maturity in August 2016. At December
31, 2015, the principal balance of TDRs was zero as the one loan constituting
our sole TDR had been transferred to other real estate owned.
There were no TDRs within
the previous 12-month period for which there was a payment default during the
nine months ended September 30, 2016.
Provision and Allowance
for Loan Losses
An allowance for loan
losses is maintained at a level deemed appropriate by management to adequately
provide for known and inherent losses in the loan portfolio. 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 uncollectability of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance.
The provision and allowance
for loan losses is evaluated on a regular basis by management and is based upon
managements 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 borrowers 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
both a specific and a general component. The specific component relates to loans
that are impaired loans as defined in FASB ASC Topic 310, Receivables. For
such loans, an allowance is established when either the discounted cash flows or
collateral value or observable market price of the impaired loan is lower than
the carrying value of that loan. The general component covers non-impaired loans
and is based on historical loss experience adjusted for qualitative
factors.
16
The following table
summarizes activity related to our allowance for loan losses for the nine months
ended September 30, 2016 and 2015, by portfolio segment.
|
|
Single and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
multifamily
|
|
Construction
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
residential
|
|
and
|
|
real estate -
|
|
Commercial
|
|
|
|
|
|
|
|
|
real estate
|
|
development
|
|
other
|
|
business
|
|
Consumer
|
|
Total
|
September 30,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
$
|
265,797
|
|
$
|
184,130
|
|
$
|
439,830
|
|
$
|
244,679
|
|
$
|
5,073
|
|
$
|
1,139,509
|
Provision
(reversal of provision) for
|
|
|
(30,000)
|
|
|
(60,000)
|
|
|
45,000
|
|
|
(28,000)
|
|
|
5,000
|
|
|
(68,000)
|
loan
losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
charge-offs
|
|
|
-
|
|
|
(10,500)
|
|
|
(209,045)
|
|
|
-
|
|
|
(139)
|
|
|
(219,684)
|
Loan
recoveries
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,312
|
|
|
1,312
|
Net loans
charged-off
|
|
|
-
|
|
|
(10,500)
|
|
|
(209,045)
|
|
|
-
|
|
|
1,173
|
|
|
(218,372)
|
Balance, end
of period
|
|
$
|
235,797
|
|
$
|
113,630
|
|
$
|
275,785
|
|
$
|
216,679
|
|
$
|
11,246
|
|
$
|
853,137
|
|
Individually
reviewed for impairment
|
|
$
|
101,283
|
|
$
|
-
|
|
$
|
28,188
|
|
$
|
-
|
|
$
|
-
|
|
$
|
129,471
|
Collectively
reviewed for impairment
|
|
|
134,514
|
|
|
113,630
|
|
|
247,597
|
|
|
216,679
|
|
|
11,246
|
|
|
723,666
|
Total
allowance for loan losses
|
|
$
|
235,797
|
|
$
|
113,630
|
|
$
|
275,785
|
|
$
|
216,679
|
|
$
|
11,246
|
|
$
|
853,137
|
|
Gross loans,
end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
reviewed for impairment
|
|
$
|
200,483
|
|
$
|
-
|
|
$
|
981,286
|
|
$
|
242,646
|
|
$
|
-
|
|
$
|
1,424,415
|
Collectively
reviewed for impairment
|
|
|
12,905,727
|
|
|
8,664,401
|
|
|
22,650,227
|
|
|
16,068,808
|
|
|
1,811,517
|
|
|
62,100,680
|
Total loans
(gross of deferred fees)
|
|
$
|
13,106,210
|
|
$
|
8,664,401
|
|
$
|
23,631,513
|
|
$
|
16,311,454
|
|
$
|
1,811,517
|
|
$
|
63,525,095
|
|
September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$
|
160,797
|
|
$
|
234,130
|
|
$
|
363,097
|
|
$
|
184,679
|
|
$
|
90,073
|
|
$
|
1,032,776
|
Provision
(reversal of provision) for
|
|
|
105,000
|
|
|
(50,000)
|
|
|
120,000
|
|
|
60,000
|
|
|
(85,000)
|
|
|
150,000
|
loan
losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
charge-offs
|
|
|
-
|
|
|
-
|
|
|
(43,267)
|
|
|
-
|
|
|
-
|
|
|
(43,267)
|
Loan
recoveries
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Net loans
charged-off
|
|
|
-
|
|
|
-
|
|
|
(43,267)
|
|
|
-
|
|
|
-
|
|
|
(43,267)
|
Balance, end
of period
|
|
$
|
265,797
|
|
$
|
184,130
|
|
$
|
439,830
|
|
$
|
244,679
|
|
$
|
5,073
|
|
$
|
1,139,509
|
|
Individually
reviewed for impairment
|
|
$
|
158,529
|
|
$
|
9,867
|
|
$
|
212,836
|
|
$
|
20,958
|
|
$
|
-
|
|
$
|
402,190
|
Collectively
reviewed for impairment
|
|
|
107,268
|
|
|
174,263
|
|
|
226,994
|
|
|
223,721
|
|
|
5,073
|
|
|
737,319
|
Total
allowance for loan losses
|
|
$
|
265,797
|
|
$
|
184,130
|
|
$
|
439,830
|
|
$
|
244,679
|
|
$
|
5,073
|
|
$
|
1,139,509
|
|
Gross loans,
end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
reviewed for impairment
|
|
$
|
951,429
|
|
$
|
39,867
|
|
$
|
2,111,886
|
|
$
|
82,352
|
|
$
|
-
|
|
$
|
3,185,534
|
Collectively
reviewed for impairment
|
|
|
16,141,243
|
|
|
7,656,202
|
|
|
21,584,909
|
|
|
16,469,948
|
|
|
1,348,721
|
|
|
62,378,123
|
Total loans
(gross of deferred fees)
|
|
$
|
16,299,772
|
|
$
|
7,666,069
|
|
$
|
23,696,795
|
|
$
|
16,552,300
|
|
$
|
1,348,721
|
|
$
|
65,563,657
|
|
|
September
|
|
September
|
|
|
30, 2016
|
|
30, 2015
|
Nonaccrual
loans
|
|
$
|
331,233
|
|
$
|
2,461,342
|
Average
gross loans
|
|
$
|
64,628,769
|
|
$
|
66,974,277
|
Net loans
charged-off as a percentage of average gross loans
|
|
|
0.34%
|
|
|
0.01%
|
Allowance
for loan losses as a percentage of total gross
|
|
|
1.34%
|
|
|
1.74%
|
loans
|
|
|
|
|
|
|
Allowance
for loan losses as a percentage of non-accrual
|
|
|
257.56%
|
|
|
0.46%
|
loans
|
|
|
|
|
|
|
17
Portions of the allowance
for loan losses may be allocated for specific loans or portfolio segments.
However, the entire allowance for loan losses is available for any loan that, in
managements judgment, should be charged-off. The general reserve as a
percentage of loans collectively reviewed for impairment was 1.17% at September
30, 2016 and December 31, 2015. While management utilizes the best judgment and
information available to it, the ultimate adequacy of the allowance for
loan losses depends on a variety of factors beyond our control, including the
performance of our loan portfolio, the economy, changes in interest rates, and
the view of the regulatory authorities toward loan classifications. If
delinquencies and defaults increase, we may be required to increase our
provision for loan losses, which would adversely affect our results of
operations and financial condition. There can be no assurance that charge-offs
of loans in future periods will not exceed the allowance for loan losses as
estimated at any point in time or that provisions for loan losses will not be
significant to a particular accounting period.
Maturities and
Sensitivity of Loans to Changes in Interest Rates
The information in the
following tables summarizes the loan maturity distribution by type and related
interest rate characteristics based on the contractual maturities of individual
loans, including loans which may be subject to renewal at their contractual
maturity. Renewal of such loans is subject to review and credit approval, as
well as modification of terms upon maturity. Actual repayments of loans may
differ from the maturities reflected below, because borrowers have the right to
prepay obligations with or without prepayment penalties.
|
|
|
|
|
After one but
|
|
|
|
|
|
|
|
|
One year or
|
|
within five
|
|
After five
|
|
|
|
|
|
less
|
|
years
|
|
years
|
|
Total
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and multifamily
residential real estate
|
|
$
|
1,576,246
|
|
$
|
6,640,725
|
|
$
|
4,889,239
|
|
$
|
13,106,210
|
Construction and
development
|
|
|
2,560,990
|
|
|
5,564,125
|
|
|
539,286
|
|
|
8,664,401
|
Commercial real estate -
other
|
|
|
3,396,392
|
|
|
18,289,695
|
|
|
1,945,426
|
|
|
23,631,513
|
Commercial
business
|
|
|
4,568,492
|
|
|
11,159,120
|
|
|
583,842
|
|
|
16,311,454
|
Consumer
|
|
|
911,206
|
|
|
818,435
|
|
|
81,876
|
|
|
1,811,517
|
Total
|
|
$
|
13,016,326
|
|
$
|
42,472,100
|
|
$
|
8,039,669
|
|
$
|
63,525,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After one but
|
|
|
|
|
|
|
|
|
One year or
|
|
within five
|
|
After five
|
|
|
|
|
|
less
|
|
years
|
|
years
|
|
Total
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and multifamily
residential real estate
|
|
$
|
4,107,456
|
|
$
|
7,977,523
|
|
$
|
4,349,743
|
|
$
|
16,434,722
|
Construction and
development
|
|
|
2,850,334
|
|
|
3,915,218
|
|
|
520,907
|
|
|
7,286,459
|
Commercial real estate -
other
|
|
|
5,740,738
|
|
|
17,556,599
|
|
|
2,262,606
|
|
|
25,559,943
|
Commercial
business
|
|
|
5,170,004
|
|
|
11,334,906
|
|
|
522,144
|
|
|
17,027,054
|
Consumer
|
|
|
551,733
|
|
|
749,455
|
|
|
68,036
|
|
|
1,369,224
|
Total
|
|
$
|
18,420,265
|
|
$
|
41,533,701
|
|
$
|
7,723,436
|
|
$
|
67,677,402
|
Loans maturing after one year with:
|
|
September 30, 2016
|
|
December 31, 2015
|
Fixed
interest rates
|
|
$
|
17,935,580
|
|
$
|
16,892,651
|
Floating
interest rates
|
|
$
|
32,576,189
|
|
$
|
32,364,486
|
NOTE 6 FAIR VALUE
Assets and Liabilities
Measured at Fair Value
Fair value is defined as
the exchange price that would be received for 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. The Company determines the fair values of its financial
instruments based on the fair value hierarchy, which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The three levels of inputs that may be used to
measure fair value are detailed in Note 2.
Available-for-sale
investment securities ($10,223,300 and $10,687,851 at September 30, 2016 and
December 31, 2015, respectively) are carried at fair value and measured on a
recurring basis using Level 2 inputs. Fair values are estimated by using bid
prices and quoted prices of pools or tranches of securities with similar
characteristics.
18
We do not record loans at
fair value on a recurring basis. However, from time to time, a loan is
considered impaired and a specific reserve within the allowance for loan losses
is established or the loan is charged down to the fair value less costs
to sell. At September 30, 2016, all impaired loans were evaluated on a
nonrecurring basis based on the market value of the underlying collateral.
Market values are generally obtained using independent appraisals or other
market data, which the Company considers to be Level 3 inputs. The aggregate
carrying amount, net of specific reserves, of impaired loans carried at fair
value at September 30, 2016 and December 31, 2015 was $1.3 million and $2.0
million, respectively.
Other real estate owned and
repossessed assets, generally consisting of properties or other collateral
obtained through foreclosure or in satisfaction of loans, are carried at the
lower or market value and measured on a non-recurring basis. Market values are
generally obtained using independent appraisals which are generally prepared
using the income or market valuation approach, adjusted for estimated selling
costs which the Company considers to be Level 3 inputs. The carrying amount of
other real estate owned and repossessed assets carried at fair value at
September 30, 2016 and December 31, 2015 was $2,615,809 and $1,910,220,
respectively. The Company utilizes two methods to determine carrying values,
either appraised value, or if lower, current net listing price.
The Company has no assets
whose fair values are measured using Level 1 inputs. The Company also has no
liabilities carried at fair value or measured at fair value.
For Level 3 assets measured
at fair value on a non-recurring basis as of September 30, 2016, the significant
observable inputs used in the fair value measurements were as
follows:
|
|
Fair Value at
|
|
|
|
|
|
|
September
|
|
|
|
Significant
|
Description
|
|
30, 2016
|
|
Valuation
Technique
|
|
Unobservable
Inputs
|
Other real estate
owned and repossessed assets
|
|
$ 2,615,809
|
|
Appraised value
|
|
Discounts to reflect
current
market conditions, abbreviated
holding period, and
estimated
costs to sell
|
Impaired loans
|
|
$ 1,294,944
|
|
Internal assessment
based on
external third party appraised
value
|
|
Adjustments to
estimated
value based on recent sales
of comparable collateral,
and
estimated costs to sell
|
For Level 3 assets measured
at fair value on a non-recurring basis as of December 31, 2015, the significant
unobservable inputs used in the fair value measurements were as
follows:
|
|
Fair Value at
|
|
|
|
|
|
|
December 31,
|
|
|
|
Significant
|
Description
|
|
2015
|
|
Valuation Technique
|
|
Unobservable Inputs
|
Other real estate
owned and repossessed assets
|
|
$ 1,910,220
|
|
Appraised value
|
|
Discounts to reflect
current
market conditions and
estimated costs to sell
|
Impaired loans
|
|
$ 2,005,168
|
|
Internal
assessment
based on external third
party appraised value
|
|
Adjustments to
estimated
value based on recent sales
of comparable collateral,
and
estimated costs to sell
|
Disclosures about Fair
Value of Financial Instruments
FASB ASC Topic 825,
Financial Instruments requires disclosure of fair value information, whether
or not recognized in the consolidated balance sheets, when it is practical to
estimate the fair value. FASB ASC Topic 825 defines a financial instrument as
cash, evidence of an ownership interest in an entity or contractual obligations
which require the exchange of cash or other financial instruments. Certain items
are specifically excluded from the disclosure requirements, including the
Companys common stock, property, equipment and software, and other assets and
liabilities.
Fair value approximates
carrying value for the following financial instruments due to the short-term
nature of the instrument: cash and due from banks, federal funds sold, and
securities sold under agreements to repurchase. Investment securities are valued using
quoted market prices. No ready market exists for non-marketable equity
securities, and they have no quoted market value. However, redemption of these
stocks has historically been at par value. Accordingly, the carrying amounts are
deemed to be a reasonable estimate of fair value. Fair value of loans is based
on the discounted present value of the estimated future cash flows. Discount
rates used in these computations approximate the rates currently offered for
similar loans of comparable terms and credit quality. Fair value of bank owned
life insurance is based on the cash surrender value of the policies, as
determined by the issuer.
19
Fair value for demand
deposit accounts and interest bearing accounts with no fixed maturity date is
equal to the carrying value. Fair value of certificate of deposit accounts are
estimated by discounting cash flows from expected maturities using current
interest rates on similar instruments. Fair value for FHLB advances is based on
discounted cash flows using the Companys current incremental borrowing rate.
The Company has used
managements best estimate of fair value based on the above assumptions. Thus,
the fair values presented may not be the amounts that could be realized in an
immediate sale or settlement of the instrument. In addition, any income taxes or
other expenses, which would be incurred in an actual sale or settlement, are not
taken into consideration in the fair value presented.
The estimated fair values
of the Companys financial instruments at September 30, 2016 and December 31,
2015 are as follows:
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
5,408,411
|
|
$
|
5,408,411
|
|
$
|
5,408,411
|
|
|
-
|
|
|
-
|
Interest bearing deposits in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other institutions
|
|
|
1,750,000
|
|
|
1,750,000
|
|
|
-
|
|
|
1,750,000
|
|
|
-
|
Federal funds sold
|
|
|
5,809,000
|
|
|
5,809,000
|
|
|
5,809,000
|
|
|
-
|
|
|
-
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available for sale
|
|
|
10,223,300
|
|
|
10,223,300
|
|
|
-
|
|
|
10,223,300
|
|
|
-
|
Non-marketable equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
380,050
|
|
|
380,050
|
|
|
-
|
|
|
380,050
|
|
|
-
|
Loans, net
|
|
|
62,478,299
|
|
|
62,668,293
|
|
|
-
|
|
|
-
|
|
|
62,668,293
|
Bank owned life
insurance
|
|
|
2,521,199
|
|
|
2,521,199
|
|
|
-
|
|
|
2,521,199
|
|
|
-
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
81,756,804
|
|
|
81,728,119
|
|
|
-
|
|
|
81,728,119
|
|
|
-
|
Securities sold under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements to repurchase
|
|
|
61,820
|
|
|
61,820
|
|
|
-
|
|
|
61,820
|
|
|
-
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
5,453,795
|
|
$
|
5,453,795
|
|
$
|
5,453,795
|
|
$
|
-
|
|
$
|
-
|
Interest-bearing deposits in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other institutions
|
|
|
1,500,000
|
|
|
1,500,000
|
|
|
-
|
|
|
1,500,000
|
|
|
-
|
Federal funds sold
|
|
|
8,446,000
|
|
|
8,446,000
|
|
|
8,446,000
|
|
|
-
|
|
|
-
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available for sale
|
|
|
10,687,851
|
|
|
10,687,851
|
|
|
-
|
|
|
10,687,851
|
|
|
-
|
Non-marketable equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
392,500
|
|
|
392,500
|
|
|
-
|
|
|
392,500
|
|
|
-
|
Loans, net
|
|
|
66,402,246
|
|
|
66,873,213
|
|
|
-
|
|
|
-
|
|
|
66,873,213
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
83,567,325
|
|
|
83,538,827
|
|
|
-
|
|
|
83,538,827
|
|
|
-
|
Securities sold under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements to repurchase
|
|
|
113,080
|
|
|
113,080
|
|
|
-
|
|
|
113,080
|
|
|
-
|
20
NOTE 7 STOCK
COMPENSATION PLANS
On July 26, 2005, the
Company adopted the Independence Bancshares, Inc. 2005 Stock Incentive Plan (the
2005 Incentive Plan) for the benefit of the directors, officers and employees.
The 2005 Incentive Plan initially reserved up to 260,626 shares of the Companys
common stock for the issuance of stock options and contained evergreen
provision, which provided that the maximum number of shares to be issued under
the 2005 Incentive Plan would automatically increase each time the Company
issues additional shares of common stock such that the total number of shares
issuable under the 2005 Incentive Plan would at all times equal 12.5% of the
then outstanding shares of common stock.
In February 2013, our board
of directors amended the 2005 Incentive Plan to cap the number of shares
issuable thereunder at 2,466,720 and adopted the Independence Bancshares, Inc.
2013 Equity Incentive Plan (the 2013 Incentive Plan) which was subsequently
approved by the Companys shareholders at the 2013 annual shareholders meeting.
The 2013 Incentive Plan is an omnibus equity incentive plan which provides for
the granting of various types of equity compensation awards, including stock
options, restricted stock, and stock appreciation rights, to the Companys
employees and directors.
As of September 30, 2016
and December 31, 2015, 3,097,255 total options were outstanding at a weighted
average price of $1.11. Of the 3,097,255 options outstanding, 3,067,255 options
were vested.
Compensation expense
related to stock options granted was $10,126 and $236,512 for the nine months
ended September 30, 2016 and September 30, 2015, respectively. The decrease in
compensation expense related to stock options was due to several options
becoming fully vested in 2015. The remaining stock options were fully vested in
July 2016. Compensation expense is based on the fair value of the option
estimated at the date of grant using the Black-Scholes option-pricing model.
Compensation expense is recognized on a straight line basis over the vesting
period of the option.
NOTE 8 BUSINESS
SEGMENTS
The Company reports its activities as four
business segments - Community Banking, Transaction Services, Asset Management
and Parent Only as defined in Note 1. In determining proper segment definition,
the Company considers the materiality of a potential segment and components of
the business about which financial information is available and regularly
evaluated, relative to a resource allocation and performance assessment.
The following table
presents selected financial information for the Companys reportable business
segments for the three and nine months ended September 30, 2016 and
2015.
|
|
|
|
|
Holding
Company
|
|
|
|
|
|
Community
|
|
Transaction
|
|
Asset
|
|
Parent
|
|
|
|
|
|
Banking
|
|
Services
|
|
Management
|
|
Only
(1)
|
|
Total
|
For the three months
ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
898,079
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
898,079
|
Interest expense
|
|
|
84,999
|
|
|
|
|
|
|
|
|
|
|
|
84,999
|
Net
interest income
|
|
|
813,080
|
|
|
|
|
|
|
|
|
|
|
|
813,080
|
Reversal of provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income
|
|
|
143,678
|
|
|
|
|
|
|
|
|
(140)
|
|
|
143,538
|
Noninterest expense
|
|
|
1,106,287
|
|
|
27,364
|
|
|
(43,664)
|
|
|
227,658
|
|
|
1,317,645
|
Loss
before income taxes
|
|
|
(149,529)
|
|
|
(27,364)
|
|
|
43,664
|
|
|
(227,798)
|
|
|
(361,027)
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(149,529)
|
|
$
|
(27,364)
|
|
$
|
43,664
|
|
$
|
(227,798)
|
|
$
|
(361,027)
|
(1)
Excludes
equity in earnings of wholly-owned Bank subsidiary.
21
|
|
|
|
|
|
|
|
|
|
|
|
Holding
Company
|
|
|
|
|
Community
|
|
Transaction
|
|
Asset
|
|
Parent
|
|
|
|
|
Banking
|
|
Services
|
|
Management
|
|
Only (1)
|
|
Total
|
For the nine months
ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
$
|
2,740,448
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
2,740,448
|
Interest expense
|
|
243,980
|
|
|
|
|
|
|
|
|
|
|
|
243,980
|
Net
interest income
|
|
2,496,468
|
|
|
|
|
|
|
|
|
|
|
|
2,496,468
|
Reversal of provision for loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
losses
|
|
(68,000)
|
|
|
|
|
|
|
|
|
|
|
|
(68,000)
|
Noninterest income
|
|
428,727
|
|
|
|
|
|
|
|
|
(380)
|
|
|
428,347
|
Noninterest expense
|
|
3,421,229
|
|
|
204,554
|
|
|
73,446
|
|
|
740,207
|
|
|
4,439,436
|
Loss
before income taxes
|
|
(428,034)
|
|
|
(204,554)
|
|
|
(73,446)
|
|
|
(740,587)
|
|
|
(1,446,621)
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(428,034)
|
|
$
|
(204,554)
|
|
$
|
(73,446)
|
|
$
|
(740,587)
|
|
$
|
(1,446,621)
|
(1) Excludes
equity in earnings of wholly-owned Bank subsidiary
|
|
Community
|
|
|
|
|
|
|
|
|
|
|
|
Banking
|
|
Holding Company (2)
|
|
Eliminations
|
|
Total
|
As of September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
5,413,988
|
|
$
|
1,644,724
|
|
$
|
( 1,650,301)
|
|
$
|
5,408,411
|
Federal funds sold
|
|
|
5,809,000
|
|
|
|
|
|
|
|
|
5,809,000
|
Interest-bearing
deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
in other institutions
|
|
|
1,750,000
|
|
|
|
|
|
|
|
|
1,750,000
|
Investment securities
|
|
|
10,223,300
|
|
|
|
|
|
|
|
|
10,223,300
|
Loans receivable, net
|
|
|
62,478,299
|
|
|
|
|
|
|
|
|
62,478,299
|
Other real estate owned
|
|
|
2,322,667
|
|
|
293,142
|
|
|
|
|
|
2,615,809
|
Property and equipment,
net
|
|
|
2,020,242
|
|
|
23,561
|
|
|
|
|
|
2,043,803
|
Bank
owned life
|
|
|
|
|
|
|
|
|
|
|
|
|
insurance
|
|
|
2,521,199
|
|
|
|
|
|
|
|
|
2,521,199
|
Other assets
|
|
|
782,021
|
|
|
357,928
|
|
|
|
|
|
1,139,949
|
Total assets
|
|
$
|
93,320,716
|
|
$
|
2,319,355
|
|
$
|
(1,650,301)
|
|
$
|
93,989,770
|
|
Deposits
|
|
$
|
83,407,105
|
|
$
|
|
|
$
|
(1,650,301)
|
|
$
|
81,756,804
|
Securities sold under
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements to repurchase
|
|
|
61,820
|
|
|
|
|
|
|
|
|
61,820
|
Accrued and other
liabilities
|
|
|
351,664
|
|
|
458,308
|
|
|
|
|
|
809,972
|
Shareholders equity
|
|
|
9,500,127
|
|
|
1,861,047
|
|
|
|
|
|
11,361,174
|
Total liabilities
and
shareholders
equity
|
|
$
|
93,320,716
|
|
$
|
2,319,355
|
|
$
|
(1,650,301)
|
|
$
|
93,989,770
|
(2) Excludes
investment in wholly-owned Bank subsidiary
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holding
Company
|
|
|
|
|
|
Community
|
|
Transaction
|
|
Asset
|
|
Parent
|
|
|
|
|
|
Banking
|
|
Services
|
|
Management
|
|
Only (1)
|
|
Total
|
For the three months
ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
843,509
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
843,509
|
Interest expense
|
|
|
81,144
|
|
|
|
|
|
|
|
|
2,134
|
|
|
83,278
|
Net
interest income
|
|
|
762,365
|
|
|
|
|
|
|
|
|
(2,134)
|
|
|
760,231
|
Reversal of provision for loan losses
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
Noninterest income
|
|
|
(60,783)
|
|
|
64
|
|
|
|
|
|
(132)
|
|
|
(60,851)
|
Noninterest expense
|
|
|
976,577
|
|
|
1,106,707
|
|
|
132,705
|
|
|
341,717
|
|
|
2,557,706
|
Income (loss) before income taxes
|
|
|
(424,995)
|
|
|
(1,106,643)
|
|
|
(132,705)
|
|
|
(343,983)
|
|
|
(2,008,326)
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(424,995)
|
|
$
|
(1,106,643)
|
|
$
|
(132,705)
|
|
$
|
(343,983)
|
|
$
|
(2,008,326)
|
(1)
Excludes equity in earnings
of wholly-owned Bank subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holding
Company
|
|
|
|
|
|
Community
|
|
Transaction
|
|
Asset
|
|
Parent
|
|
|
|
|
|
Banking
|
|
Services
|
|
Management
|
|
Only (1)
|
|
Total
|
For the nine months
ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
2,703,545
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
2,703,545
|
Interest expense
|
|
|
236,847
|
|
|
|
|
|
|
|
|
14,704
|
|
|
251,551
|
Net
interest income
|
|
|
2,466,698
|
|
|
|
|
|
|
|
|
(14,704)
|
|
|
2,451,994
|
|
Provision for loan losses
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
Noninterest income
|
|
|
157,928
|
|
|
33,391
|
|
|
|
|
|
1,205
|
|
|
192,524
|
Noninterest expense
|
|
|
3,197,481
|
|
|
2,096,729
|
|
|
129,027
|
|
|
795,435
|
|
|
6,218,672
|
Income (loss) before income taxes
|
|
|
(722,855)
|
|
|
(2,063,338)
|
|
|
(129,027)
|
|
|
(808,934)
|
|
|
(3,724,154)
|
Income taxes
|
|
|
5,080
|
|
|
|
|
|
|
|
|
|
|
|
5,080
|
Net income (loss)
|
|
$
|
(727,935)
|
|
$
|
(2,063,338)
|
|
$
|
(129,027)
|
|
$
|
(808,934)
|
|
$
|
(3,729,234)
|
(1)
Excludes equity in earnings of wholly-owned Bank subsidiary
23
|
|
Community
|
|
|
|
|
|
|
|
|
|
|
|
Banking
|
|
Holding Company
(2)
|
|
Eliminations
|
|
Total
|
As of September 30,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
5,996,959
|
|
$
|
3,646,291
|
|
$
|
(3,662,059)
|
|
$
|
5,981,191
|
Federal funds sold
|
|
|
11,546,000
|
|
|
|
|
|
|
|
|
11,546,000
|
Investment securities
|
|
|
12,372,672
|
|
|
|
|
|
|
|
|
12,372,672
|
Loans receivable, net
|
|
|
64,288,549
|
|
|
|
|
|
|
|
|
64,288,549
|
Other real estate owned
|
|
|
1,308,900
|
|
|
631,320
|
|
|
|
|
|
1,940,220
|
Property and equipment,
net
|
|
|
2,065,617
|
|
|
177,490
|
|
|
|
|
|
2,243,107
|
Other assets
|
|
|
785,832
|
|
|
431,238
|
|
|
|
|
|
1,217,070
|
Total assets
|
|
$
|
98,364,529
|
|
$
|
4,886,339
|
|
$
|
(3,662,059)
|
|
$
|
99,588,809
|
|
Deposits
|
|
$
|
88,280,572
|
|
$
|
|
|
$
|
(3,662,059)
|
|
$
|
84,618,513
|
Securities sold under
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements to repurchase
|
|
|
23,641
|
|
|
|
|
|
|
|
|
23,641
|
Accrued and other
liabilities
|
|
|
151,806
|
|
|
1,188,748
|
|
|
|
|
|
1,340,554
|
Shareholders equity
|
|
|
9,908,510
|
|
|
3,697,591
|
|
|
|
|
|
13,606,101
|
Total liabilities and
shareholders equity
|
|
$
|
98,364,529
|
|
$
|
4,886,339
|
|
$
|
(3,662,059)
|
|
$
|
99,588,809
|
(2) Excludes
investment in wholly-owned Bank subsidiary
NOTE 9 NOTE
PAYABLE
In September 2014, the
Company closed a $600,000 one-year borrowing. The loan was provided by a board
member of the Bank and as a result needed to comply with Regulation O. Proceeds
of the loan were used primarily to fund the research and development effort in
the Transaction Services business segment. The loan was collateralized by a
first perfected security interest in certain real estate assets of the Company.
The loan was fully drawn at closing, and carried an annual interest rate of 7%
per annum for the first six months on any outstanding borrowings and then
stepped up to 8% per annum for the remaining six months of the term. On March
18, 2015, one of the parcels of real estate was sold and a payment was made on
the loan so that the outstanding balance of the loan was $149,774, which was
equal to the balance on September 3, 2015. The outstanding balance of $149,774
plus accrued interest was repaid in its entirety on September 3,
2015.
NOTE 10 BANK
OWNED LIFE INSURANCE AND PRE-RETIREMENT BENEFIT
PLAN
In June 2016, the Bank
purchased two bank owned life insurance policies with aggregate death benefits
of $2,500,000 for investment purposes. The Bank is responsible for paying all
premiums and is the owner and beneficiary of the policies. At September 30,
2016, the cash surrender value of these policies was $2,521,199, and as a result
$21,199 in income recognized during the period.
In connection with the
purchase of the bank owned life insurance policies, the Bank offered
pre-retirement death benefits to selected employees of the Bank. The policies
are not transferrable to the employees and are not impacted by a change in
control. The pre-retirement death benefits are indirectly funded by the bank
owned life insurance.
NOTE 11SUBSEQUENT
EVENTS
In October 2016, the
Company sold two pieces of real estate for proceeds of $218,577, net of closing
costs and accrued expenses. A loss of $74,564 was recognized as a result of this
transaction.
In October 2016, the Company sold investment securities with a
fair value of $10,223,300. A gain of approximately $302,000 was recognized as a
result of this transaction.
24
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion
reviews our results of operations and assesses our financial condition. You
should read the following discussion and analysis in conjunction with the
accompanying consolidated financial statements. The commentary should be read in
conjunction with the discussion of forward-looking statements, the financial
statements, and the related notes and the other statistical information included
in this report.
CAUTIONARY NOTE
REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on
Form 10-Q, including information included or incorporated by reference in this
document, contains statements which constitute forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements may relate to our
financial condition, results of operation, plans, objectives, or future
performance. These statements are based on many assumptions and estimates and
are not guarantees of future performance. Our actual results may differ
materially from those anticipated in any forward-looking statements, as they
will depend on many factors about which we are unsure, including many factors
which are beyond our control. The words may, would, could, should,
will, expect, anticipate, predict, project, potential, believe,
continue, assume, intend, plan, and estimate, as well as similar
expressions, are meant to identify such forward-looking statements. Potential
risks and uncertainties that could cause our actual results to differ from those
anticipated in our forward-looking statements include, but are not limited, to
the following:
●
|
strategies for growth
and sources of new operating revenues, including the Banks expansion of
its consumer lending program to target prime and super-prime borrowers in
its current market areas as well as throughout South
Carolina;
|
●
|
suspension of
business divisions or segments, including digital banking or consumer
lending;
|
●
|
operating revenues,
expenses, effective tax rates, and other results of
operations;
|
●
|
current and future
products and services and plans to develop and promote
them;
|
●
|
capital expenditures
and our estimates regarding our capital
expenditures;
|
●
|
liquidity, working
capital requirements and access to funding;
|
●
|
cybersecurity risks,
business disruptions or financial losses and changes in
technology;
|
●
|
our shareholder
relations;
|
●
|
defense of litigation
brought by current and/or former officers, directors and/or
shareholders;
|
●
|
mergers and
acquisition activity;
|
●
|
use of proceeds from
sales of our securities;
|
●
|
our ability to comply
with regulations;
|
●
|
relations with
federal and state regulators;
|
●
|
listing our shares,
including any listing on a national securities
exchange;
|
25
●
|
changes in
economic conditions;
|
●
|
credit
losses;
|
●
|
the rate of
delinquencies and amount of loans charged-off;
|
●
|
allowances
for loan losses and loan loss provisions;
|
●
|
the lack of
loan growth in recent years;
|
●
|
our ability
to attract and retain key personnel;
|
●
|
our ability
to protect, use, develop, market and otherwise exploit our proprietary
technology and intellectual property;
|
●
|
our ability
to retain our existing customers;
|
●
|
increases
in competitive pressure in the banking and financial services
industries;
|
●
|
adverse
changes in asset quality and resulting credit risk related losses and
expenses;
|
All forward-looking
statements in this report are based on information available to us as of the
date of this report. Although we believe that the expectations reflected in our
forward-looking statements are reasonable, we cannot guarantee you that these
expectations will be achieved. We undertake no obligation to publicly update or
otherwise revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
Critical Accounting
Policies
We have adopted various
accounting policies that govern the application of accounting principles
generally accepted in the United States of America and with general practices
within the banking industry in the preparation of our financial statements. Our
significant accounting policies are described in the footnotes to our audited
consolidated financial statements as of December 31, 2015, as filed in our 2015
Form 10-K.
Certain accounting policies
involve significant judgments and assumptions by us that have a material impact
on the carrying value of certain assets and liabilities. We consider these
accounting policies to be critical accounting policies. The judgment and
assumptions we use are based on historical experience and other factors, which
we believe to be reasonable under the circumstances. Because of the nature of
the judgment and assumptions we make, actual results could differ from these
judgments and estimates that could have a material impact on the carrying values
of our assets and liabilities and our results of operations.
Allowance for Loan
Losses
We believe the allowance
for loan losses is the critical accounting policy that requires the most
significant judgments and estimates used in preparation of our consolidated
financial statements. Some of the more critical judgments supporting the amount
of our allowance for loan losses include judgments about the credit worthiness
of borrowers, the estimated value of the underlying collateral, the assumptions
about cash flow, determination of loss factors for estimating credit losses, the
impact of current events and conditions, and other factors impacting the level
of probable inherent losses. Under different conditions or using different
assumptions, the actual amount of credit losses incurred by us may be different
from managements estimates provided in our consolidated financial statements.
Refer to the portion of this discussion that addresses our allowance for loan
losses for a more complete discussion of our processes and methodology for
determining our allowance for loan losses.
26
Other Real Estate Owned
and Repossessed Assets
Real estate and other
property acquired in settlement of loans is recorded at the lower of cost or
fair value less estimated selling costs, establishing a new cost basis when
acquired. Fair value of such property is reviewed regularly and write-downs are
recorded when it is determined that the carrying value of the property exceeds
the fair value less estimated costs to sell. Recoveries of value are recorded
only to the extent of previous write-downs on the property in accordance with
FASB ASC Topic 360 Property, Plant, and Equipment. Write-downs or recoveries
of value resulting from the periodic reevaluation of such properties, costs
related to holding such properties, and gains and losses on the sale of
foreclosed properties are charged against income. Costs relating to the
development and improvement of such properties are capitalized.
Income Taxes
We use assumptions and
estimates in determining income taxes payable or refundable for the current
year, deferred income tax liabilities and assets for events recognized
differently in our consolidated financial statements and income tax returns, and
income tax benefit or expense. Determining these amounts requires analysis of
certain transactions and interpretation of tax laws and regulations. Management
exercises judgment in evaluating the amount and timing of recognition of
resulting tax liabilities and assets. These judgments and estimates are
reevaluated on a continual basis as regulatory and business factors change.
Valuation allowances are established to reduce deferred tax assets if it is
determined to be more likely than not that all or some portion of the
potential deferred tax asset will not be realized. No assurance can be given
that either the tax returns submitted by us or the income tax reported on the
financial statements will not be adjusted by either adverse rulings by the
United States Tax Court, changes in the tax code, or assessments made by the
Internal Revenue Service. We are subject to potential adverse adjustments,
including, but not limited to, an increase in the statutory federal or state
income tax rates, the permanent non-deductibility of amounts currently
considered deductible either now or in future periods, and the dependency on the
generation of future taxable income, including capital gains, in order to
ultimately realize deferred income tax assets.
Research and
Development
All costs incurred to
establish the technological feasibility of computer software to be sold, leased
or otherwise marketed as research and development are expensed as incurred. Once
technological feasibility has been established, the subsequent costs of
producing, coding and testing the products should be capitalized. The expensing
of computer software costs is discontinued when the product is available for
general release for customers. The Company has not achieved technological
feasibility and has expensed all computer software purchases and development
expenses related to research and development of its digital banking, payments
and transaction services business. On September 25, 2015 the Company suspended
further development of its digital banking and payments and transaction services
business and has subsequently been evaluating strategic alternatives for this
business. A key goal of the Companys digital banking business was to reduce
costs for banking activities and operate more efficiently through utilizing
mobile and on-line delivery channels. In furtherance of this goal and based in
part upon the institutional knowledge acquired in the pursuit of the digital
banking strategy, the Company plans to supplement its current lending strategy
by expanding its consumer lending program with on-line offerings, targeting prime
and super-prime borrowers in the Banks current market area as well as
throughout South Carolina.
Overview
The following discussion
describes our results of operations for the three and nine month periods ended
September 30, 2016 and 2015 and also analyzes our financial condition as of
September 30, 2016.
The Consolidated
Company
At September 30, 2016, we
had total assets of $94.0 million, a decrease of $3.5 million, or 3.6%, from
total assets of $97.5 million at December 31, 2015. The largest components of
our total assets are net loans, investment securities available for sale, other
real estate owned, federal funds sold and cash and due from banks, which were
$62.5 million, $10.2 million, $2.6 million, $5.8 million and $5.4 million,
respectively, at September 30, 2016. Comparatively, our net loans, investment
securities available for sale, other real estate owned, federal funds sold and
cash and due from banks totaled $66.4 million, $10.7 million, $1.9 million, $8.4
million and $5.5 million, respectively, at December 31, 2015.
Our liabilities and
shareholders equity at September 30, 2016, totaled $82.6 million and $11.4
million, respectively, compared to liabilities of $84.8 million and
shareholders equity of $12.6 million at December 31, 2015. The principal component of our liabilities is deposits, which
were $81.8 million and $83.6 million at September 30, 2016 and December 31,
2015, respectively.
27
Our net loss was $361,027
for the three months ended September 30, 2016, or $0.02 per share, an
improvement of $1.6 million, or 82%, compared to a net loss of $2.0 million, or
$0.10 per share, for the three months ended September 30, 2015. This decrease in
net loss was primarily driven by decreases in product research and development
expenses as a result of the Companys decision to suspend development of its
digital banking, payments and transaction services business on September 25,
2015.
Our net loss was $1.4
million for the nine months ended September 30, 2016, or $0.07 per share, an
improvement of $2.3 million, or 61.2%, compared to a net loss of $3.7 million,
or $0.18 per share, for the nine months ended September 30, 2015. This decrease
in net loss was primarily driven by decreases in product research and
development expenses as a result of the Companys decision to suspend
development of its digital banking, payments and transaction services business
on September 25, 2015, as well as due to the recovery of provision for loan
losses of $68,000.
The
Bank
Like most community banks,
we derive the majority of our income from interest we receive on our loans and
investments. Our primary source of funds for making these loans and investments
is our deposits, on which we pay interest. Consequently, one of the key measures
of our success is our amount of net interest income, or the difference between
the income on our interest-earning assets, such as loans and investments, and
the expense on our interest-bearing liabilities, such as deposits and
borrowings. Another key measure is the spread between the yield we earn on these
interest-earning assets and the rate we pay on our interest-bearing
liabilities.
At September 30, 2016, we
had total assets at the Bank of $93.3 million compared to $96.7 million at
December 31, 2015. The largest components of total assets at the Bank are net
loans, investment securities available for sale, other real estate owned,
federal funds sold, and cash and due from banks, which were $62.5 million, $10.2
million, $2.3 million, $5.8 million and $5.4 million, respectively, at September
30, 2016. Comparatively, our net loans, investment securities available for
sale, other real estate owned, federal funds sold and cash and due from banks
totaled $66.4 million, $10.7 million, $1.3 million, $8.4 million and $5.5
million, respectively, at December 31, 2015. At September 30, 2016, we had total
liabilities at the Bank of approximately $83.8 million compared to approximately
$86.8 million at December 31, 2015. The largest components of total liabilities
at the Bank are deposits, which were $83.4 million and $86.5 million at
September 30, 2016 and December 31, 2015, respectively. In addition, the Company
plans to supplement its current lending strategy by expanding its consumer
lending program with on-line offerings, targeting prime and super-prime
borrowers in the Banks current market area as well as throughout South
Carolina.
The
Company
The Companys cash
balances, independent of the Bank, were approximately $1.6 million and its real
estate held for sale was $293,142 at September 30, 2016 compared to cash
balances of approximately $2.9 million and real estate held for sale of $631,320
at December 31, 2015. The decrease in liquid assets of approximately $1.3
million is due primarily to the repayment of accrued liabilities during the
quarter as well as approximately $204,000 in expenses incurred related to the
transaction services segment, approximately $73,000 in expenses related to other
real estate owned incurred related to the asset management segment, and
approximately $301,000 in professional fees, $126,000 in consulting fees and
$7,000 in data processing expenses incurred at the Company. See Note 8
Business Segments for additional information related to the transaction
services segment.
Results of
Operations
Three months ended
September 30, 2016 and 2015
We recorded a net loss of
$361,027, or $0.02 per diluted share, for the quarter ended September 30, 2016,
compared to a net loss of $2.0 million, or $0.10 per share (basic and diluted),
for the quarter ended September 30, 2015. This decrease in net loss between
comparable periods was primarily driven by decreases in research and development
and expenses related to real estate owned. Net loss for the quarter ended
September 30, 2015 also included the recognition of losses on the sales of
investment securities as well as the recognition of provisions for loan losses.
We did not recognize losses on sales of investment securities or provisions for
loan losses during the quarter ended September 30, 2106. Each of these
components is discussed in greater detail below.
28
The following table sets
forth information related to our average balances, average yields on assets, and
average costs of liabilities for the three months ended September 30, 2016 and
2015. We derived these yields by dividing annualized income or expense by the
average balance of the corresponding assets or liabilities. We derived average
balances from the daily balances throughout the periods indicated. The net
amount of capitalized loan fees are amortized into interest income on loans.
|
For the Three Months Ended September
30,
|
|
|
2016
|
|
2015
|
|
|
Average
|
|
Income/
|
|
Yield/
|
|
Average
|
|
Income/
|
|
Yield/
|
|
Balance
|
|
Expense
|
|
Rate
|
|
Balance
|
|
Expense
|
|
Rate
|
Federal
funds sold and other
|
$
|
7,440,380
|
|
$
|
15,386
|
|
0.82%
|
|
$
|
17,643,203
|
|
$
|
12,854
|
|
0.29%
|
Investment
securities
|
|
10,402,196
|
|
|
61,709
|
|
2.35
|
|
|
13,492,665
|
|
|
77,243
|
|
2.30
|
Loans
(1)
|
|
63,534,353
|
|
|
820,984
|
|
5.13
|
|
|
65,792,657
|
|
|
753,412
|
|
4.59
|
Total interest-earning assets
|
$
|
81,376,929
|
|
$
|
898,079
|
|
4.38%
|
|
$
|
96,928,525
|
|
$
|
843,509
|
|
3.49%
|
|
NOW
accounts
|
$
|
9,899,720
|
|
$
|
3,084
|
|
0.12%
|
|
$
|
7,995,257
|
|
$
|
2,446
|
|
0.12%
|
Savings
& money market
|
|
31,043,744
|
|
|
19,880
|
|
0.25
|
|
|
35,951,424
|
|
|
21,581
|
|
0.24
|
Time
deposits (excluding brokered
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
time
deposits)
|
|
27,825,087
|
|
|
61,932
|
|
0.88
|
|
|
29,191,488
|
|
|
57,089
|
|
0.78
|
Total interest-bearing deposits
|
$
|
68,768,551
|
|
$
|
84,896
|
|
0.49
|
|
$
|
73,138,169
|
|
$
|
81,116
|
|
0.44
|
Borrowings
|
|
221,009
|
|
|
103
|
|
0.18
|
|
|
83,346
|
|
|
2,162
|
|
10.40
|
Total interest-bearing liabilities
|
$
|
68,989,560
|
|
$
|
84,999
|
|
0.49%
|
|
$
|
73,221,515
|
|
$
|
83,278
|
|
0.46%
|
|
Net
interest spread
|
|
|
|
|
|
|
3.89%
|
|
|
|
|
|
|
|
3.03%
|
Net
interest income/ margin
|
|
|
|
$
|
813,080
|
|
3.96%
|
|
|
|
|
$
|
760,231
|
|
3.15%
|
|
(1)
|
|
Nonaccrual loans are
included in average balances for yield
computations.
|
For the three months ended
September 30, 2016, we recognized $898,079 in interest income and $84,999 in
interest expense, resulting in net interest income of $813,080, an increase of
$52,849, or 7%, over the same period in 2015. Average earning assets decreased
to $81.4 million for the three months ended September 30, 2016 from $96.9
million for the three months ended September 30, 2015, a decrease of $15.6
million, or 16.1%. This decrease in earning assets was primarily due to a $3.1
million decrease in average investment securities and a $2.3 million decrease in
average loans between periods as a result of payoffs and repayments exceeding
originations, as well as a $10.2 million decrease in average federal funds sold
and other interest-bearing balances. Average interest bearing liabilities
decreased to $69.0 million during the quarter ended September 30, 2016, from
$73.2 million for the three months ended September 30, 2015, a decrease of $4.2
million, or 5.8%. Net interest margin, calculated as annualized net interest
income divided by average earning assets, increased from 3.15% for the quarter
ended September 30, 2015 to 3.96% for the quarter ended September 30, 2016,
primarily due to an increase in yield on earning assets from 3.49% to 4.38%
between periods from the effect of prepayment penalties being taken to income
and an increase in cost of funds from 0.46% to 0.49% between periods due to the
mix of liabilities and the timing of their repricing.
We did not recognize any
provision for loan losses for the quarter ended September 30, 2016. We
recognized a provision for loan losses of $150,000 for the quarter ended
September 30, 2015. The allowance as a percentage of gross loans decreased to
1.34% as of September 30, 2016 compared to 1.74% at September 30, 2015. Specific
reserves were approximately $129,000 on impaired loans of $1.4 million as of
September 30, 2016 compared to specific reserves of approximately $402,000 on
impaired loans of $3.2 million as of September 30, 2015. As of September 30,
2016 and December 31, 2015, the general reserve allocation was 1.17% for
comparable periods, of gross loans not impaired.
For the three months ended
September 30, 2016, noninterest income was $143,538 compared to $(60,851) for
the three months ended September 30, 2015, an increase of $204,389, or 335.9%.
Other noninterest income for the three months ended September 30, 2016 and 2015
was derived from service charges on deposits, customer service fees, and
mortgage origination income. The primary contributors for this quarters
increase were due to the recognition of income on bank owned life insurance as
well as no losses recognized on investment security sales for the quarter. We
recognized $129,143 in losses on sales of investment securities for the three
months ended September, 30, 2015.
29
During the quarter ended
September 30, 2016, we incurred noninterest expenses of $1.3 million, compared
to noninterest expenses of $2.6 million for the quarter ended September 30,
2015, a decrease of $1.2 million, or 48.5%. This decrease in noninterest
expenses for the three month period ended September 30, 2016 primarily resulted
from a decrease in product research and development expenses of $1.1 million and
a decrease of $163,902 in real estate owned activity which includes expenses to
carry other real estate, gains and losses on sales of other real estate, and
write-downs on real estate owned. Compensation and benefits remained relatively
constant for the comparable periods.
We did not recognize any
income tax benefit or expense for the three month period ended September 30,
2016 due to our net operating loss carryforward position. We did not recognize
any income tax benefit or expense for the three months ended September 30, 2015
due to our net operating loss in 2015 at the Bank. Accounting literature states
that a deferred tax asset should be reduced by a valuation allowance if, based
on the weight of all available evidence, it is more likely than not (a
likelihood of more than 50%) that some portion or the entire deferred tax asset
will not be realized. The determination of whether a deferred tax asset is
realizable is based on weighing all available evidence, including both positive
and negative evidence. In making such judgments, significant weight is given to
evidence that can be objectively verified. We will continue to analyze our
deferred tax assets and related valuation allowance on a quarterly basis, taking
into account performance compared to forecasted earnings as well as current
economic and internal information.
Nine months ended
September 30, 2016 and 2015
We recorded a net loss of
$1.4 million or $0.07 per share (basic and diluted), for the nine months ended
September 30, 2016, a decrease in loss of $2.3 million compared to a net loss of
$3.7 million, or $0.18 per diluted share, for the nine months ended September
30, 2015. This decrease in loss between comparable periods was primarily driven
by decreases in product research and development expense, compensation expense
and real estate owned activity as well as due to an increase in non-interest
income and the reversal of provision for loan losses. Each of these components
is discussed in greater detail below.
The following table sets
forth information related to our average balances, average yields on assets, and
average costs of liabilities for the nine months ended September 30, 2016 and
2015. We derived these yields by dividing annualized income or expense by the
average balance of the corresponding assets or liabilities. We derived average
balances from the daily balances throughout the periods indicated. The net
amount of capitalized loan fees is amortized into interest income on
loans.
|
For the Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
Average
|
|
Income/
|
|
Yield/
|
|
Average
|
|
Income/
|
|
Yield/
|
|
Balance
|
|
Expense
|
|
Rate
|
|
Balance
|
|
Expense
|
|
Rate
|
Federal funds sold
and other
|
$
|
9,151,146
|
|
$
|
48,251
|
|
0.70%
|
|
$
|
8,106,555
|
|
$
|
34,886
|
|
0.58%
|
Investment
securities
|
|
10,545,721
|
|
|
195,793
|
|
2.48
|
|
|
14,621,763
|
|
|
256,789
|
|
2.36
|
Loans (1)
|
|
64,628,769
|
|
|
2,496,404
|
|
5.16
|
|
|
66,974,277
|
|
|
2,411,870
|
|
4.85
|
Total interest-earning assets
|
$
|
84,325,636
|
|
$
|
2,740,448
|
|
4.34%
|
|
$
|
89,702,595
|
|
$
|
2,703,545
|
|
4.06%
|
|
NOW
accounts
|
$
|
9,076,395
|
|
$
|
8,224
|
|
0.12%
|
|
$
|
8,029,542
|
|
$
|
7,260
|
|
0.12%
|
Savings & money
market
|
|
32,675,984
|
|
|
60,772
|
|
0.25
|
|
|
35,922,920
|
|
|
63,365
|
|
0.24
|
Time deposits
(excluding brokered
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
time
deposits)
|
|
27,513,511
|
|
|
174,803
|
|
0.85
|
|
|
29,328,314
|
|
|
165,378
|
|
0.76
|
Total interest-bearing deposits
|
$
|
69,265,890
|
|
$
|
243,799
|
|
0.47
|
|
$
|
73,280,776
|
|
$
|
236,003
|
|
0.43
|
Borrowings
|
|
143,897
|
|
|
181
|
|
0.17
|
|
|
710,383
|
|
|
15,548
|
|
2.95
|
Total interest-bearing liabilities
|
$
|
69,409,787
|
|
$
|
243,980
|
|
0.47%
|
|
$
|
73,991,159
|
|
$
|
251,551
|
|
0.46%
|
|
Net
interest spread
|
|
|
|
|
|
|
3.87%
|
|
|
|
|
|
|
|
3.60%
|
|
Net
interest income/ margin
|
|
|
|
$
|
2,496,468
|
|
3.95%
|
|
|
|
|
$
|
2,451,994
|
|
3.68%
|
(1)
|
Nonaccrual loans are
included in average balances for yield
computations.
|
For the nine months ended
September 30, 2016, we recognized $2.7 million in interest income and $243,980
in interest expense, resulting in net interest income of $2.5 million, an
increase of $44,474, or 1.8%, over the same period in 2015. Average earning
assets decreased to $84.3 million for the nine months ended September 30, 2016
from $89.7 million for the nine months ended September 30, 2015 a decrease of
$5.4 million, or 6%. This decrease in earning assets was due to a $4.1 million
decrease in average investment securities and a decrease in average loans of
$2.3 million between periods as a result of payoffs and repayments exceeding
originations, partially offset by a $1.0 million increase in average federal
funds sold. Average interest bearing liabilities decreased to $69.4 million for
the nine months ended September 30, 2016 from $74.0 million for the nine months
ended September 30, 2015 a decrease of $4.6 million, or 6.2%. Net interest
margin, calculated as annualized net interest income divided by average earning
assets increased to 3.95% for the nine months ended September 30, 2016, from
3.68% for the nine months ended September 30, 2015, primarily due to an increase
in yield on earning assets from 4.06% to 4.34% between periods from the effect
of prepayment penalties being taken to income.
30
We recognized a reversal of
provision for loan losses of $68,000 for the nine months ended September 30,
2016. We recognized provisions for loan losses of $150,000 for the nine months
ended September 30, 2015. The provision for loan losses is discussed further
below under Provision and Allowance for Loan Losses.
For the nine months ended
September 30, 2016, noninterest income was $428,347 compared to $192,524 for the
nine months ended September 30, 2015, an increase of $235,823, or 122.5% between
comparable periods. Noninterest income for the nine months ended September 30,
2016 and 2015 was derived from service charges on deposits, customer service
fees, rental income, and mortgage origination income. In addition, noninterest
income for September 2016 was positively impacted by the collection of SBA loan
fees of $119,306. Noninterest income for September 2015 was also impacted by the
recognition of losses on sales of investment securities recognized in the nine
month period.
During the nine months
ended September 30, 2016, we incurred noninterest expenses of $4.4 million,
compared to noninterest expenses of $6.2 million for the nine months ended
September 30, 2015, a decrease of $1.8 million, or 28.6%. This decrease in
noninterest expenses resulted primarily from a decrease in product research and
development expenses of $1.9 million, a decrease in compensation and benefits of
$83,049 and a decrease in real estate owned activity of $58,543, partially
offset by an increase in professional fees of $206,688 due to an increase in
consulting fees at the Company. Compensation and benefits decreased by $83,049
due to shortages in personnel at the Bank.
We recognized $5,080 in
income tax expense for the nine months ended September 30, 2015 due to our net
operating income in 2014 at the Bank. We did not recognize any income tax
benefit or expense for the nine months ended September 30, 2016 due to our net
operating loss carryforward position.
Assets and Liabilities
General
Total assets as of
September 30, 2016 and December 31, 2015 were $94.0 million and $97.5 million,
respectively, a decrease of $3.5 million. Loans, net of allowance decreased $3.9
million due to loan repayments and transfers to other real estate owned during
the quarter. Other real estate owned increased $705,589 due to three loan
transfers for $1.3 million, partially offset by the sale of three pieces of real
estate during the period for proceeds of $418,000 as well as the writedown of
one piece of property of $183,522. Investment securities available for sale
decreased $464,551 as a result of $576,492 in paydowns and $120,651 in
amortization, partially offset by a $232,592 change in unrealized gains. Cash
and cash equivalents decreased $45,384 and federal funds sold decreased $2.6
million. At September 30, 2016, our total assets consisted principally of $5.4
million in cash and due from banks, $5.8 million in fed funds sold, $1.8 million
in interest-bearing deposits in other institutions, $10.2 million in investment
securities, $62.5 million in net loans, $2.0 million in property and equipment
and $2.6 million in other real estate owned and repossessed assets. Our
management closely monitors and seeks to maintain appropriate levels of
interest-earning assets and interest-bearing liabilities so that maturities of
assets are such that adequate funds are provided to meet customer withdrawals
and demand.
Liabilities at September
30, 2016 totaled $82.6 million, representing a decrease of approximately $2.2
million compared to December 31, 2015, and consisted principally of $81.8
million in deposits and $801,457 in accounts payable and accrued expenses. At
September 30, 2016, shareholders equity was $11.4 million compared to $12.6
million at December 31, 2015. Shareholders equity decreased due to the
recognition of net loss of $1.4 million, and stock option expense of $10,126, as
well as an increase of $153,510 in unrealized gains on investment securities
available for sale.
Loans
Since loans typically
provide higher interest yields than other types of interest-earning assets, we
invest a substantial percentage of our earning assets in our loan portfolio. At
September 30, 2016, our gross loan portfolio consisted primarily of $32.3
million of commercial real estate loans, $16.3 million of commercial business
loans, and $14.9 million of consumer and home equity loans. Our current loan
portfolio composition is not materially different than the loan portfolio
composition disclosed in the footnotes to the consolidated financial statements
included in our 2015 Form 10-K. We experienced net repayments of $2.7 million
during the nine months ended September 30, 2016 as a result of payoffs and
repayments exceeding originations.
31
The composition of net
loans by major category is as follows:
|
September 30, 2016
|
|
% of
Total
|
Real
estate:
|
|
|
|
|
Commercial
|
$
|
23,631,513
|
|
37.3%
|
Construction and
development
|
|
8,664,401
|
|
13.7
|
Single and
multifamily residential
|
|
13,106,210
|
|
20.7
|
Total
real estate loans
|
|
45,402,124
|
|
71.7
|
Commercial business
|
|
16,311,454
|
|
25.8
|
Consumer
|
|
1,811,517
|
|
2.8
|
Deferred origination fees, net
|
|
(193,659)
|
|
(0.3)
|
Gross
loans, net of deferred fees
|
|
63,331,436
|
|
100.0%
|
Less
allowance for loan losses
|
|
(853,137)
|
|
|
Loans,
net
|
$
|
62,478,299
|
|
|
|
|
December
31, 2015
|
|
% of
Total
|
Real
estate:
|
|
|
|
|
Commercial
|
$
|
25,559,943
|
|
37.8%
|
Construction and
development
|
|
7,286,459
|
|
10.8
|
Single and
multifamily residential
|
|
16,434,722
|
|
24.3
|
Total
real estate loans
|
|
49,281,124
|
|
72.9
|
Commercial business
|
|
17,027,054
|
|
25.2
|
Consumer
|
|
1,369,224
|
|
2.1
|
Deferred origination fees, net
|
|
(135,647)
|
|
(0.2)
|
Gross
loans, net of deferred fees
|
|
67,541,755
|
|
100.0%
|
Less
allowance for loan losses
|
|
(1,139,509)
|
|
|
Loans,
net
|
$
|
66,402,246
|
|
|
The largest component of
our loan portfolio at September 30, 2016 was $23.6 million of commercial
real-estate loans, which represented 37.3% of the portfolio. The remainder of
our loan portfolio consisted primarily of $13.1 million of single and
multifamily residential loans, $8.7 million of construction and development
loans, $16.3 million of commercial business loans, and $1.8 million of consumer
loans. The Bank plans to supplement its current lending strategy by expanding
its consumer lending program, targeting prime and super-prime borrowers in the
Banks current market area as well as throughout South Carolina.
32
Loan Performance and
Asset Quality
The downturn in general
economic conditions during the late 2000s resulted in increased loan
delinquencies, defaults and foreclosures within our loan portfolio, although the
last 24 months have seen a stabilization in delinquencies,
defaults and foreclosures and an increase in
recoveries. The declining real estate market had a significant impact on the
performance of our loans secured by real estate. In some cases, the downturn
resulted in significant impairment to the value of our collateral and our
ability to sell the collateral upon foreclosure. Although the real estate
collateral provides an alternate source of repayment in the event of default by
the borrower, collateral values deteriorated during the downturn, resulting in
credit losses. There is a risk that this trend will continue, which could result
in additional loss of earnings, increases in our provision for loan losses and
loan charge-offs.
Past due payments are often
one of the first indicators of a problem loan. We perform a continuous review of
our past due report in order to identify trends that can be resolved quickly
before a loan becomes significantly past due. We determine past due and
delinquency status based on the contractual terms of the note. When a borrower
fails to make a scheduled loan payment, we attempt to cure the default through
several methods including, but not limited to, collection contact and assessment
of late fees. Generally, a loan will be placed on nonaccrual status when it
becomes 90 days past due as to principal or interest (unless the loan is
well-collateralized and in the process of collection), or when management
believes, after considering economic and business conditions and collection
efforts, that the borrowers financial condition is such that collection of the
loan is doubtful. When a loan is placed in nonaccrual status, interest accruals
are discontinued and income earned but not collected is reversed. Cash receipts
on nonaccrual loans are not recorded as interest income, but are used to reduce
principal.
Refer to Note 5, Loans, for
a table summarizing delinquencies and nonaccruals, by portfolio class, as of
September 30, 2016 and December 31, 2015. Total delinquent and nonaccrual loans
decreased from $2.1 million at December 31, 2015 to $421,868 at September 30,
2016, a decrease of $1.6 million, or 79.5%. Nonaccrual loans decreased during
the nine months due to the transfer of three loans during the period. At
September 30, 2016, nonaccrual loans represented 0.5% of gross loans compared to
2.46% of gross loans as of December 31, 2015. Loans past due 30-89 days are
considered potential problem loans and amounted to $90,635 and $389,970 at
September 30, 2016 and December 31, 2015, respectively.
Another method used to
monitor the loan portfolio is credit grading. As part of the loan review
process, loans are given individual credit grades, representing the risk we
believe is associated with the loan balance. Credit grades are assigned based on
factors that impact the collectability of the loan, the strength of the
borrower, the type of collateral, and loan performance. Commercial loans are
individually graded at origination and credit grades are reviewed on a regular
basis in accordance with our loan policy. Consumer loans are assigned a pass
credit rating unless something within the loan warrants a specific
classification grade. Refer to Note 5, Loans, for a table summarizing
managements internal credit risk grades, by portfolio class, as of September
30, 2016 and December 31, 2015.
Loans graded one through
four are considered pass credits. At September 30, 2016, approximately 98% of
the loan portfolio had a credit grade of pass compared to 93% at December 31,
2015. For loans to qualify for this grade, they must be performing relatively
close to expectations, with no significant departures from the intended source
and timing of repayment. Consumer loans are assigned a pass credit rating
unless something within the loan warrants a specific classification grade.
Loans with a credit grade
of five are not considered classified; however they are categorized as a special
mention or watch list credit, and are considered potential problem loans. This
classification is utilized by us when we have an initial concern about the
financial health of a borrower. These loans are designated as such in order to
be monitored more closely than other credits in our portfolio. We then gather
current financial information about the borrower and evaluate our current risk
in the credit. We will then either reclassify the loan as substandard or back
to its original risk rating after a review of the information. There are times
when we may leave the loan on the watch list, if, in managements opinion, there
are risks that cannot be fully evaluated without the passage of time, and we
determine to review the loan on a more regular basis. Loans on the watch list
are not considered problem loans until they are determined by management to be
classified as substandard. As of September 30, 2016 and December 31, 2015, we
had loans totaling $964,440 and $1.6 million, respectively, on the watch list.
Watch list loans remained relatively constant as no new loans were downgraded
during the quarter.
Loans graded six or greater
are considered classified credits. At September 30, 2016 and December 31, 2015,
classified loans totaled $554,450 and $2.9 million, respectively. The decrease
in this category of $2.3 million, or 80.7%, during the nine months ended
September 30, 2016 is primarily due to three loans moving to other real estate
owned for $1.3 million as well as approximately $374,000 in loan paydowns.
Classified credits are evaluated for impairment on a quarterly basis.
33
A loan is considered
impaired when, based on current information and events, we conclude it is
probable that we will be unable to collect the scheduled payments of principal
or interest when due, according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled principal
and interest payments when due. Impairment is measured on a loan-by-loan basis
by calculating either the present value of expected future cash flows discounted
at the loans effective interest rate, the loans obtainable market price, or
the fair value of the collateral if the loan is collateral dependent. The
resultant shortfall is charged to provision for loan losses and is classified as
a specific reserve. When an impaired loan is ultimately charged-off, the
charge-off is taken against the specific reserve.
At September 30, 2016,
impaired loans totaled $1.4 million, all of which were valued on a nonrecurring
basis at the lower of cost or market value of the underlying collateral. Market
values were obtained using independent appraisals, updated in accordance with
our reappraisal policy, or other market data such as recent offers to the
borrower. As of September 30, 2016, we had no loans that were classified in
accordance with our loan rating policies but not considered impaired. Refer to
Note 5, Loans, for a table summarizing information relative to impaired loans,
by portfolio class, at September 30, 2016 and December 31, 2015.
TDRs are loans which have
been restructured from their original contractual terms and include concessions
that would not otherwise have been granted outside of the financial difficulty
of the borrower. Concessions can relate to the contractual interest rate,
maturity date, or payment structure of the note. As part of our workout plan for
individual loan relationships, we may restructure loan terms to assist borrowers
facing challenges in the current economic environment. The purpose of a TDR is
to facilitate ultimate repayment of the loan.
At September 30, 2016 the
principal balance of TDRs was zero as the one loan constituting our sole TDR at
June 30, 2016 had been repaid in full at maturity in August 2016. At December
31, 2015, the principal balance of TDRs was zero as the one loan constituting
our sole TDR had been transferred to other real estate owned.
Provision and Allowance
for Loan Losses
We have established an
allowance for loan losses through a provision for loan losses charged to expense
on our consolidated statement of operations. At September 30, 2016, the
allowance for loan losses was $853,137, or 1.34% of gross loans, compared to
$1.1 million at December 31, 2015, or 1.68% of gross loans. The allowance for
loan loss decreased primarily due to the reversal of provision of $68,000 that
was recognized during the first quarter of 2016 and due to the charge off of one
loan for $209,045.
The allowance for loan
losses represents an amount which we believe will be adequate to absorb probable
losses on existing loans that may become uncollectible. We strive to follow a
comprehensive, well-documented, and consistently applied analysis of our loan
portfolio in determining an appropriate level for the allowance for loan losses.
Our judgment as to the adequacy of the allowance for loan losses is based on a
number of assumptions about future events, which we believe to be reasonable,
but which may or may not prove to be accurate. Our determination of the
allowance for loan losses is based on what we believe are all significant
factors that impact the collectability of loans, including consideration of
factors such as the balance of impaired loans, the quality, mix, and size of our
overall loan portfolio, economic conditions that may affect the borrowers
ability to repay, the amount and quality of collateral securing the loans, our
historical loan loss experience, and a review of specific problem loans. We also
consider subjective issues such as changes in lending policies and procedures,
changes in the local/national economy, changes in volume or type of credits,
changes in volume/severity of problem loans, quality of loan review and Board of
Director oversight, concentrations of credit, and peer group
comparisons.
Our allowance for loan
losses consists of both specific and general reserve components. The specific
reserve component relates to loans that are impaired loans as defined in FASB
ASC Topic 310, Receivables. Loans determined to be impaired are excluded from
the general reserve calculation described below and evaluated individually for
impairment. Impaired loans totaled $1.4 million at September 30, 2016, with an
associated specific reserve of $129,471. See Note 5, Loans, as well as the above
discussion under Loan Performance and Credit Quality for additional
information related to impaired loans.
The general reserve
component covers non-impaired loans and is calculated by applying historical
loss factors to each sector of the loan portfolio and adjusting for qualitative
environmental factors. Qualitative adjustments are used to adjust the historical
average for changes to loss indicators within the economy, our market, and
specifically our portfolio. The general reserve component is then combined with
the specific reserve to determine the total allowance for loan losses.
34
Refer to Note 5, Loans, for
a table summarizing activity related to our allowance for loan losses for the
quarter ended September 30, 2016 and 2015, by portfolio segment. As of September
30, 2016, the allowance for loan losses was $853,137, or 1.34% of gross loans,
compared to $1.1 million, or 1.68% of gross loans, as of December 31, 2015 and
$1.1 million, or 1.74% of gross loans, as of September 30, 2015. We recognized a
reversal of provision for loan losses of $68,000 for the nine months ended
September 30, 2016. We recognized a provision for loan losses of $150,000 for
the nine months ended September 30, 2015. Charge-offs for the nine months ended
September 30, 2016 were $219,684. A recovery of $1,312 was recognized for the
nine months ended September 30, 2016. The charge-offs during the nine months
ended September 30, 2016 related to the write-down of collateral to fair value,
against specific reserves, at the time of repossession. Partial charge-offs were
based on recent appraisals and evaluations on commercial real estate loans in
the process of foreclosure. Loans with partial charge-offs are typically
considered impaired loans and remain on nonaccrual status.
Other Real Estate Owned
and Repossessed Assets
At September 30, 2016 and
December 31, 2015, we had approximately $2.6 million and $1.9 million in other
real estate owned, respectively. During the nine months ended September 30,
2016, we completed two sales of five separate parcels of real estate. The sales
of real estate resulted in a gain of approximately $56,342 and a loss of $6,027
and are included in the loss below. The following table summarizes changes in
other real estate owned and repossessed assets for the nine months ended
September 30, 2016 and 2015:
|
2016
|
|
2015
|
Balance at beginning of period
|
$
|
1,910,220
|
|
$
|
2,557,457
|
Repossessed property acquired in settlement of
loans
|
|
1,257,289
|
|
|
300,000
|
Proceeds from sales of repossessed property
|
|
(418,493)
|
|
|
(582,295)
|
Loss
on sale and write-downs of repossessed property, net
|
|
(133,207)
|
|
|
(334,942)
|
Balance at end of period
|
$
|
2,615,809
|
|
$
|
1,940,220
|
As of September 30, 2016,
other real estate owned consisted of commercial land valued at $1.1 million and
commercial office space valued at $1.5 million. During 2015, other real estate
owned for the Company decreased due to the sale of real estate owned that were
purchased from the Bank for proceeds of approximately $455,000, which resulted
in a gain of approximately $17,000 to the Company. Real estate owned also
decreased due to the sale of two pieces of real estate held by the Bank for
proceeds of approximately $143,000, which resulted in a loss of approximately
$5,200. In addition, the Company recognized writedowns on real estate owned of
approximately $377,000 during 2015. The remaining pieces of real estate owned
that were purchased from the Bank are being actively marketed for sale. One
piece of real estate was moved to other real estate owned in March for $300,000,
and subsequently written down by $30,000. On January 28, 2016, proceeds of
$36,000 were received from the sale of one piece of real estate held by the
Company. A loss of $4,680 was recognized as a result of this transaction. In
March 2016, one piece of real estate was moved to other real estate owned for
$233,767. In May 2016, two pieces of real estate were moved to other real estate
owned for $1.0 million. In addition, the Company recognized writedowns on real
estate owned of approximately $184,000 during 2016. In August 2016, proceeds of
$23,972 were received from the sale of one piece of real estate held by the
Bank. A loss of $6,027 was recognized as a result of this transaction. In
September 2016, proceeds of $358,520 were received from the sale of four pieces
of real estate held by the Company. A gain of $51,662 was recognized as a result
of this transaction. In October 2016, proceeds of $218,577 were received from
the sale of two pieces of real estate held by the Company. A loss of $74,564 was
recognized as a result of this transaction. These assets are being actively
marketed with the primary objective of liquidating the collateral at a level
which most accurately approximates fair value and allows recovery of as much of
the unpaid principal loan balance as possible upon the sale of the asset within
a reasonable period of time. Based on currently available valuation information,
the carrying value of these assets is believed to be representative of their
fair value less estimated costs to sell, although there can be no assurance that
the ultimate proceeds from the sale of these assets will be equal to or greater
than their carrying values, particularly in the current real estate
environment.
Deposits
Our primary source of funds
for loans and investments is our deposits. At September 30, 2016, we had $81.8
million in deposits, representing a decrease of $1.8 million compared to
December 31, 2015. Deposits at September 30, 2016 consisted primarily of $23.3
million in demand deposit accounts, $29.8 million in money market accounts and
$28.7 million in time deposits. Deposits at September 30, 2016 consisted in
$21.8 million in time deposits greater than $100,000. As brokered deposits and
advances have matured, we have not replaced these funds with wholesale funding
as we have sought to reduce our reliance on brokered time deposits and other
noncore funding sources. Our loan-to-deposit ratio was 76.4% and 79.4% at
September 30, 2016 and December 31, 2015, respectively.
35
Borrowings
We use borrowings to fund
growth of earning assets in excess of deposit growth. At September 30, 2016 and
December 31, 2015, there were $61,820 and $113,080, respectively, in borrowings
representing customer repurchase agreements.
Liquidity
Liquidity represents the
ability of a company to convert assets into cash or cash equivalents without
significant loss, and the ability to raise additional funds by increasing
liabilities. Liquidity management involves monitoring our sources and uses of
funds in order to meet our day-to-day cash flow requirements while maximizing
profits. Liquidity management is made more complicated because different balance
sheet components are subject to varying degrees of management control. For
example, the timing of maturities of our investment portfolio is fairly
predictable and subject to a high degree of control at the time investment
decisions are made. However, net deposit inflows and outflows are far less
predictable and are not subject to the same degree of control.
The Consolidated
Company
The Companys level of
liquidity is measured by the cash, cash equivalents, and investment securities
available for sale to total assets ratio and was 24.7% at September 30, 2016
compared to 26.7% as of December 31, 2015. The decrease in liquidity is due
primarily to the decrease in cash and due from bank and federal funds
sold.
The Bank
Our ability to maintain and
expand our deposit base and borrowing capabilities serves as our primary source
of liquidity at the Bank. We currently have $11.2 million in cash and fed funds
sold. If our cash needs at the Bank exceed that, we plan to liquidate temporary
investments and generate deposits within our market. In addition, we will
receive cash upon the maturity and sale of loans and the maturity of investment
securities. Our investment securities available for sale at September 30, 2016
amounted to $10.2 million, or 10.9% of total assets. Investment securities
traditionally provide a secondary source of liquidity since they can be
converted into cash in a timely manner. At September 30, 2016, $2.4 million of
our investment portfolio was pledged against outstanding debt. Therefore, the
related debt would need to be repaid prior to the securities being sold and
converted to cash.
The Bank is a member of the
FHLB, from which applications for borrowings can be made for leverage purposes.
The FHLB requires that securities, qualifying mortgage loans, and stock of the
FHLB owned by the Bank be pledged to secure any advances from the FHLB. At
September 30, 2016, we had collateral that would support approximately $35.9
million in additional borrowings. We are subject to the FHLBs credit risk
rating policy which assigns member institutions a rating which is reviewed
quarterly. The rating system utilizes key factors such as loan quality, capital,
liquidity, profitability, etc. Our ability to access our available borrowing
capacity from the FHLB in the future is subject to our rating and any subsequent
changes based on our financial performance as compared to factors considered by
the FHLB in their assignment of our credit risk rating each quarter.
The Bank also pledges
collateral to the Federal Reserve Banks Borrower-in-Custody of Collateral
program, and our available credit under this program was $16.5 million as of
September 30, 2016.
The Bank has $5.5 million
in federal funds purchased lines of credits through correspondent banks that are
unsecured, but have not been utilized.
We believe our liquidity
sources are adequate to meet our operating needs at the Bank. However, we
continue to carefully focus on liquidity management during 2016. Comprehensive
weekly and monthly liquidity analyses serve management as vital decision-making
tools by providing summaries of anticipated changes in loans, investments, core
deposits, and wholesale funds. These internal funding reports provide management
with the details critical to anticipate immediate and long-term cash
requirements, such as expected deposit runoff, loan pay downs and amount and
cost of available borrowing sources, including secured overnight federal funds
lines with our various correspondent banks.
36
The
Company
The Companys cash
balances, independent of the Bank, were approximately $1.6 million and its real
estate held for sale was $293,142 at September 30, 2016 compared to cash
balances of approximately $2.9 million and real estate held for sale of $631,320
at December 31, 2015. The decrease in liquid assets during this nine month
period of approximately $1.3
million
is due primarily to the repayment of accrued liabilities, approximately $205,000
in expenses incurred related to the transaction services segment, approximately
$73,000 in other real estate owned expenses incurred related to the asset
management segment, and approximately $741,000 in professional fees and data
processing expenses incurred at the Company. See Note 8 Business Segments
for additional information related to the transaction services segment. The
foregoing discussion is a summary only and should be read in conjunction with
the 2015 Form 10-K as filed with the SEC and Managements Discussion and
Analysis in this Form 10-Q.
Impact of
Off-
Balance Sheet
Instruments
Through the operations of
our Bank, we have made contractual commitments to extend credit in the ordinary
course of our business activities. These commitments are legally binding
agreements to lend money to our customers at predetermined interest rates for a
specified period of time. At September 30, 2016, we had issued commitments to
extend credit of $2.7 million through various types of lending arrangements. We
evaluate each customers credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by us upon extension of credit, is
based on our credit evaluation of the borrower. Collateral varies but may
include accounts receivable, inventory, property, plant and equipment, and
commercial and residential real estate. We manage the credit risk on these
commitments by subjecting them to normal underwriting and risk management
processes.
Capital
Resources
Total shareholders' equity
decreased from $12.6 million for December 31, 2015 to $11.4 million for
September 30, 2016 due to a net loss of $1.4 million and stock option expense of
$10,126, as well as an increase of $153,510 in unrealized gains on investment
securities available for sale. The foregoing discussion is a summary only and
should be read in conjunction with the 2015 Form 10-K as filed with the SEC and
Managements Discussion and Analysis in this Form 10-Q.
Our Bank and Company are
subject to various regulatory capital requirements administered by the federal
banking agencies. Under the capital adequacy guidelines and the regulatory
framework for prompt corrective action, we must meet specific capital guidelines
that involve quantitative measures of assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. Our
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
The Basel III capital
rules, which were released in July 2013, implement new capital standards and
apply to all national and state banks and savings associations regardless of
size and bank holding companies and savings and loan holding companies with $500
million or more in total consolidated assets. The requirements of the rules
began to phase in on January 1, 2015 for the Bank, and the requirements of the
rules will be fully phased in by January 1, 2019. Under the rules, the following
minimum capital requirements apply to the Bank:
●
|
a new common equity Tier 1 risk-based capital
ratio of 4.5%,
|
●
|
a Tier 1 risk-based capital ratio of 6%
(increased from the former 4% requirement),
|
●
|
a total risk-based capital ratio of 8%
(unchanged from the former requirement), and
|
●
|
a leverage ratio of 4% (also unchanged from the
former requirement).
|
37
Because the Companys total
assets were less than $500 million at December 31, 2015, the Company is not
subject to the new capital requirements established by the Basel III capital
rules. In addition, pursuant to the Federal Reserves Small Bank Holding Company
Policy, which was amended in 2014, the Federal Reserve exempts certain bank
holding and savings and loan holding companies from the capital requirements
discussed above. The exemption applies only to bank holding companies with less
than $1 billion (formerly $500 million) in consolidated assets that: (i) are not
engaged in significant nonbanking activities either directly or through a
nonbank subsidiary; (ii) do not conduct significant off-balance sheet activities
(including securitization and asset management or administration) either
directly or through a nonbank subsidiary; and (iii) do not have a material
amount of debt or equity securities outstanding (other than trust preferred
securities) that are registered with the SEC. The Company qualifies for this
exemption and, thus, is required to meet applicable capital standards on a
bank-only basis. However, bank holding companies with assets of less than $1
billion are subject to various restrictions on debt including requirements that
debt be retired within 25 years of being incurred, that the debt to equity ratio
is 0.30 to 1 within 12 years of the incurrence of debt and that dividends
generally cannot be paid if the debt to equity ratio exceeds 1 to 1.
Under the rule, Tier 1
capital is redefined to include two components: Common Equity Tier 1 capital and
additional Tier 1 capital. The new and highest form of capital, Common Equity
Tier 1 capital, consists solely of common stock (plus related surplus), retained
earnings, accumulated other comprehensive income, and limited amounts of
minority interests that are in the form of common stock. Additional Tier 1
capital includes other perpetual instruments historically included in Tier 1
capital, such as noncumulative perpetual preferred stock. Tier 2 capital
consists of instruments that currently qualify in Tier 2 capital plus
instruments that the rule has disqualified from Tier 1 capital treatment.
Cumulative perpetual preferred stock, formerly includable in Tier 1 capital, is
now included only in Tier 2 capital. Accumulated other comprehensive income
(AOCI) is presumptively included in Common Equity Tier 1 capital and often would
operate to reduce this category of capital. The rule provided a one-time
opportunity at the end of the first quarter of 2015 for covered banking
organizations to opt out of much of this treatment of AOCI. We made this opt-out
election and, as a result, will retain the pre-existing treatment for AOCI.
In addition, in order to
avoid restrictions on capital distributions or discretionary bonus payments to
executives, a covered banking organization must maintain a capital conservation
buffer on top of its minimum risk-based capital requirements. This buffer must
consist solely of Tier 1 Common Equity, but the buffer applies to all three
measurements (Common Equity Tier 1, Tier 1 capital and total capital). The
capital conservation buffer will be phased in incrementally over time, becoming
fully effective on January 1, 2019, and will consist of an additional amount of
common equity equal to 2.5% of risk-weighted assets. As of January 1, 2016, the
Bank is required to hold a capital conservation buffer of 0.625%, increasing by
that amount each successive year until 2019.
Under the regulations
adopted by the federal regulatory authorities, the Bank will be categorized as:
●
|
Well capitalized if the institution (i) has
total risk-based capital ratio of 10% or greater, (ii) has a Tier 1
risk-based capital ratio of 8% or greater, (iii) has a common equity Tier
1 risk-based capital ratio of 6.5% or greater, (iv) has a leverage capital
ratio of 5% or greater, and (v) is not subject to any order or written
directive to meet and maintain a specific capital level for any capital
measure.
|
●
|
Adequately capitalized if the institution
(i) has a total risk-based capital ratio of 8% or greater, (ii) has a Tier
1 risk-based capital ratio of 6% or greater, (iii) has a common equity
Tier 1 risk-based capital ratio of 4.5% or greater, and (iv) has a
leverage capital ratio of 4% or greater.
|
●
|
Undercapitalized if the institution (i) has
a total risk-based capital ratio of less than 8%, (ii) has a Tier 1
risk-based capital ratio of less than 6%, (iii) has a common equity Tier 1
risk-based capital ratio of less than 4.5% or greater, or (iv) has a
leverage capital ratio of less than 4%.
|
●
|
Significantly undercapitalized if the
institution (i) has a total risk-based capital ratio of less than 6%, (ii)
has a Tier 1 risk-based capital ratio of less than 4%, (iii) has a common
equity Tier 1 risk-based capital ratio of less than 3% or greater, or (iv)
has a leverage capital ratio of less than 3%.
|
38
●
|
Critically undercapitalized if the
institution has a ratio of tangible equity to total assets that is equal
to or less than 2%.
|
In addition, the Bank may be
downgraded to, or deemed to be in, a capital category that is lower than
indicated by its capital ratios if it is determined to be in an unsafe or
unsound condition or if it receives an unsatisfactory examination rating with
respect to certain matters. The Banks capital category is determined solely for
the purpose of applying prompt corrective action regulations, and the capital
category may not constitute an accurate representation of the Banks overall
financial condition or prospects for other purposes.
The following table summarizes
the capital amounts and ratios of the Bank and the regulatory minimum
requirements at September 30, 2016 and December 31, 2015. It is managements
belief that, as of September 30, 2016, the Bank met all capital adequacy
requirements under Basel III on a fully phased-in basis if such requirements
were currently in effect.
|
|
|
|
|
|
|
|
|
|
|
|
To be well capitalized
|
|
|
|
|
|
|
|
|
|
under prompt
|
|
|
|
|
|
|
|
For
capital adequacy
|
|
corrective action
|
|
|
|
|
|
|
|
purposes
|
|
provisions
|
|
|
Actual
|
|
|
|
Minimum
|
|
Minimum
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
As of September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to
risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted assets)
|
|
$
|
10,086,000
|
|
13.4%
|
|
$
|
6,025,000
|
|
8.0%
|
|
$
|
7,532,000
|
|
10.0%
|
Tier 1 Capital (to
risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted assets)
|
|
|
9,233,000
|
|
12.2
|
|
|
3,012,000
|
|
4.0
|
|
|
4,519,000
|
|
6.0
|
Tier 1 Capital
(to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average assets)
|
|
|
9,233,000
|
|
10.0
|
|
|
3,698,000
|
|
4.0
|
|
|
4,623,000
|
|
5.0
|
Common Equity
Tier
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Capital (to
risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted assets)
|
|
|
9,233,000
|
|
12.2
|
|
|
3,389,000
|
|
4.5
|
|
|
3,389,000
|
|
4.5
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to
risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted assets)
|
|
$
|
10,598,000
|
|
14.1%
|
|
$
|
6,029,000
|
|
8.0%
|
|
$
|
7,536,000
|
|
10.0%
|
Tier 1 Capital (to
risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted assets)
|
|
|
9,653,000
|
|
12.8
|
|
|
3,014,000
|
|
4.0
|
|
|
4,521,000
|
|
6.0
|
Tier 1 Capital
(to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average assets)
|
|
|
9,653,000
|
|
10.0
|
|
|
3,875,000
|
|
4.0
|
|
|
4,844,000
|
|
5.0
|
Common Equity
Tier
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Capital (to
risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted assets)
|
|
|
9,653,000
|
|
12.8
|
|
|
3,391,000
|
|
4.5
|
|
|
3,391,000
|
|
4.5
|
39