Item 7. Management’s Discussion and Analysis or
Plan of Operation
.
Overview
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 earned on our interest-earning assets, such as loans and investments, and the expense
cost of our interest-bearing liabilities, such as deposits. 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.
The Company has reported
losses from operations during 2016 and 2015, primarily due to expenses incurred in 2016 as a result of professional fees relating
to the expansion of the Bank’s consumer lending program, credit write-downs, and losses on other real estate owned sold
and due to expenses incurred in 2015 related to the costs associated with the transaction services segment, credit write-downs,
and losses on other real estate owned sold. Due to regulatory restrictions, the Bank may not be a source of cash or capital for
affiliates, including the Company, and may not be relied on as a source of financing. The foregoing discussion is a summary only
and is qualified by reference to the report of the Company’s independent registered public accounting firm, Elliott Davis
Decosimo, LLC, on page F-2 and the disclosure in other sections of this Form 10-K, including this section, the Risk Factors and
our financial statements.
The Consolidated Company
At December 31, 2016,
we had total assets of $90.5 million, a decrease of $7.0 million, or 7.2%, from total assets of $97.5 million at December 31,
2015. This decrease in assets was primarily driven by a decrease in investment securities of $8.2 million, a decrease in net loans
of $7.3 million, and a decrease in cash and due from banks and federal funds sold of $3.1 million, partially offset by an increase
in interest-bearing deposits in other institutions of $9.0 million and an increase in bank-owned life insurance of $2.5 million.
Total assets at December 31, 2016 consisted of cash and due from banks of $4.6 million, interest bearing deposits in other institutions
of $10.5 million, federal funds sold of $6.1 million, investment securities available for sale of $2.5 million, bank-owned life
insurance of $2.5 million, non-marketable equity securities of $380,050, property, equipment and software of $2.0 million, other
real estate owned and repossessed assets of $2.2 million, loans net of allowances for loan losses of $59.1 million, and accrued
interest receivable and other assets of $358,277. Total liabilities at December 31, 2016 were $80.5 million compared to $84.8
million at December 31, 2015, a decrease of $4.3 million, or 5.1%. At December 31, 2016, liabilities consisted of deposits of
$79.7 million, securities sold under agreements to repurchase of $113,598, and accrued interest payable and accounts payable and
accrued expenses of $683,446. Shareholders’ equity at December 31, 2016 was $9.9 million, compared to $12.6 million at December
31, 2015, a decrease of $2.7 million or 21.4%. This decrease was primarily due to the recognition of a net loss of $2.6 million
and a decrease in the unrealized gain on investment securities of $121,902.
Our net loss for the
year ended December 31, 2016 was $2.6 million, or $0.13 per share, a decrease in loss of $2.2 million, or 46.7%, compared to a
net loss of $4.8 million for the year ended December 31, 2015, or $0.23 per share. The Company’s decrease in net loss for
the year was primarily driven by a decrease in noninterest expenses due to the suspension of further development of its digital
banking business in September 2015. As a result, product research and development decreased $2.0 million. In addition, compensation
and benefits expenses decreased $392,994, despite expenses incurred as a result of the filling of open positions during the year.
Each of these components is discussed in greater detail below.
The Company
The Company’s
cash balances, independent of the Bank, were $1.8 million and its real estate held for sale was zero at December 31, 2016 compared
to cash balances of approximately $2.9 million and real estate held for sale of $631,320 at December 31, 2015. The Company’s
accrued and other liabilities, independent of the Bank, were $304,346 at December 31, 2016 compared to $905,824 at December 31,
2015. The decrease in liquid assets of approximately $1.1 million and the decrease in payables of $601,478 is due primarily to
a decrease in expenses incurred related to the transaction services segment as the Company suspended further development of its
digital banking, payments and transaction services business in September 2015. The existing liabilities for the Company are related
to deferred director fees and accrued audit and professional fees. See “Note 22 — Parent Company Financial Information”
for additional information related to the transaction services segment.
The Bank
At December 31,
2016, we had total assets at the Bank of $90.4 million compared to $96.6 million at December 31, 2015. Total assets at
December 31, 2016 consisted of cash and due from banks of $4.6 million, federal funds sold of $6.1 million, investment
securities available for sale of $2.5 million, nonmarketable equity securities of $380,050, property, equipment, and software
of $2.0 million, other real estate owned and repossessed assets of $2.23 million, net loans of $59.1 million,
interest-bearing deposits in other
institutions of $10.5
million, bank-owned life insurance of $2.5 million and accrued interest receivable and other assets of $731,838. At December 31,
2016, we had total liabilities at the Bank of approximately $82.0 million compared to approximately $86.8 million at December
31, 2015. The largest components of total liabilities at the Bank are deposits which were $81.6 million, respectively. We have
included a number of tables to assist in our description of our results of operations. For example, the “Average Balances”
table shows the average balance during 2016 and 2015 of each category of our assets and liabilities, as well as the yield we earned
or the rate we paid with respect to each category. A review of this table shows that our loans typically provide higher interest
yields than do other types of interest-earning assets, which is why we have channeled a substantial percentage of our earning
assets into our loan portfolio. We also track the sensitivity of our various categories of assets and liabilities to changes in
interest rates, and we have included a table to help explain this. Finally, we have included a number of tables that provide detail
about our investment securities, our loans, and our deposits and other borrowings.
There are risks inherent
in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible.
We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following
section we have included a detailed discussion of this process.
In addition to earning
interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe
the various components of this non-interest income, as well as our non-interest expenses, in the following discussion.
Throughout our discussion
we have identified significant factors that we believe have affected our financial position and operating results during the periods
included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with our
financial statements and the other statistical information included in this report.
Critical Accounting Policies
We have adopted various
accounting policies that govern the application of accounting principles generally accepted in the United States and with general
practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are
described in Note 1 to our audited consolidated financial statements as of December 31, 2016.
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 judgments 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.
Provision and 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 management’s 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.
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 did not achieve technological feasibility in connection with the development of its
digital banking business and therefore expensed all computer software purchases and development expenses related to research and
development. As previously noted, on September 25, 2015, the Company suspended the development of its digital banking business.
Results of Operations
Net Interest Income
Net interest income
is the Company’s primary source of revenue. Net interest income is the difference between interest earned on assets and
interest paid on deposits and borrowings used to support such assets. Net interest income is determined by the rates earned on
the Company’s interest-earning assets and the rates paid on its interest-bearing liabilities and the relative amounts of
interest-earning assets and interest-bearing liabilities. Net interest income was $3.2 million for the year ended December 31,
2016, a slight decrease of $1,787, or 0.1%, over net interest income of $3.2 million in 2015. Total interest income decreased
by $2,935, or 0.1%, during the year, primarily due to a decrease in interest income on investment securities. Total interest expense
decreased by $4,722, or 1.4%, during the year due to decreases in interest expense on deposits and borrowings.
Our consolidated net
interest margin for the year ended December 31, 2016 was 3.89%, a 27 basis point increase over the net interest margin for the
year ended December 31, 2015 of 3.62%. The net interest margin is calculated as net interest income divided by year-to-date average
earning assets. Earning assets averaged $83.2 million in 2016, a decrease of $6.4 million, or 7.2%, from $89.6 million in 2015.
This decrease in earning assets is due to the $4.4 million decrease in average investment securities available for sale and a
decrease in average net loans of $2.6 million, partially offset by an increase in federal funds sold between years of $542,044.
Our yield on earning assets increased during the year, moving from 3.99% for the year ended December 31, 2015 to 4.28% for the
year ended December 31, 2016. This increase is largely attributable to an increase in yield on loans and investment securities.
These increases were accompanied by an increase in the cost of interest-bearing liabilities, which moved from 0.44% for the year
ended December 31, 2015 to 0.48% for the year ended December 31, 2016. The increase in this area was a result of several factors,
including the repricing of deposits, specifically money market accounts and retail time deposits, which increased to a rate of
0.25% and 0.86%, respectively, for the year ended December 31, 2016 from 0.24% and 0.77%, respectively, for the year ended December
31, 2015. In pricing deposits, we considered our liquidity needs, the direction and levels of interest rates and local market
conditions. At times, higher rates are paid initially to attract deposits. Borrowings averaged $135,708 for the year ended December
31, 2016 compared to $553,599 for the year ended December 31, 2015, primarily as a result of the repayment of the note payable.
Our net interest spread was 3.81% for 2016 compared to 3.54% in 2015. The net interest spread is the difference between the yield
we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities.
The following table
sets forth information related to our average balance sheet, average yields on assets, and average costs of liabilities. We derived
these yields by dividing 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 Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
|
Average
Balance
|
|
|
Income/
Expense
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Income/
Expense
|
|
|
Yield/
Rate
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other
|
|
$
|
10,013,935
|
|
|
$
|
73,030
|
|
|
|
0.76
|
%
|
|
$
|
9,471,891
|
|
|
$
|
49,953
|
|
|
|
0.56
|
%
|
Investment securities
|
|
|
9,173,821
|
|
|
|
219,507
|
|
|
|
2.31
|
%
|
|
|
13,575,466
|
|
|
|
323,979
|
|
|
|
2.31
|
%
|
Loans (1)
|
|
|
64,014,530
|
|
|
|
3,272,291
|
|
|
|
5.11
|
%
|
|
|
66,593,873
|
|
|
|
3,193,831
|
|
|
|
4.81
|
%
|
Total interest-earning assets
|
|
|
83,202,286
|
|
|
|
3,564,828
|
|
|
|
4.28
|
%
|
|
|
89,641,230
|
|
|
|
3,567,763
|
|
|
|
3.99
|
%
|
Non-interest-earning assets
|
|
|
10,500,151
|
|
|
|
|
|
|
|
|
|
|
|
9,541,314
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
93,702,437
|
|
|
|
|
|
|
|
|
|
|
$
|
99,182,544
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
9,101,906
|
|
|
$
|
10,935
|
|
|
|
0.12
|
%
|
|
$
|
8,129,603
|
|
|
$
|
9,840
|
|
|
|
0.12
|
%
|
Savings & money market
|
|
|
32,082,911
|
|
|
|
80,458
|
|
|
|
0.25
|
%
|
|
|
35,400,117
|
|
|
|
83,492
|
|
|
|
0.24
|
%
|
Time deposits (excluding brokered time deposits)
|
|
|
27,380,014
|
|
|
|
234,727
|
|
|
|
0.86
|
%
|
|
|
29,021,956
|
|
|
|
222,152
|
|
|
|
0.77
|
%
|
Total interest-bearing deposits
|
|
|
68,564,831
|
|
|
|
326,120
|
|
|
|
0.48
|
%
|
|
|
72,551,676
|
|
|
|
315,484
|
|
|
|
0.44
|
%
|
Borrowings
|
|
|
135,708
|
|
|
|
220
|
|
|
|
0.16
|
%
|
|
|
553,599
|
|
|
|
15,578
|
|
|
|
2.82
|
%
|
Total interest-bearing liabilities
|
|
|
68,700,539
|
|
|
|
326,340
|
|
|
|
0.48
|
%
|
|
|
73,105,275
|
|
|
|
331,062
|
|
|
|
0.45
|
%
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
|
|
12,419,304
|
|
|
|
|
|
|
|
|
|
|
|
11,742,521
|
|
|
|
|
|
|
|
|
|
Other non-interest-bearing liabilities
|
|
|
776,104
|
|
|
|
|
|
|
|
|
|
|
|
1,836,190
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
11,806,490
|
|
|
|
|
|
|
|
|
|
|
|
12,498,558
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
93,702,437
|
|
|
|
|
|
|
|
|
|
|
$
|
99,182,544
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.81
|
%
|
|
|
|
|
|
|
|
|
|
|
3.54
|
%
|
Net interest income/margin
|
|
|
|
|
|
$
|
3,238,488
|
|
|
|
3.89
|
%
|
|
|
|
|
|
$
|
3,236,701
|
|
|
|
3.62
|
%
|
|
(1)
|
Nonaccrual
loans
are
included
in
average
balances
for
yield
computations.
|
|
|
For the Year Ended December 31,
|
|
|
2014
|
|
|
Average
Balance
|
|
|
Income/
Expense
|
|
|
Yield/
Rate
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other
|
|
$
|
5,125,344
|
|
|
$
|
34,505
|
|
|
|
0.68
|
%
|
Investment securities
|
|
|
19,225,587
|
|
|
|
495,403
|
|
|
|
2.58
|
%
|
Loans (1)
|
|
|
66,635,561
|
|
|
|
3,388,060
|
|
|
|
5.10
|
%
|
Total interest-earning assets
|
|
|
90,986,482
|
|
|
|
3,917,968
|
|
|
|
4.32
|
%
|
Non-interest-earning assets
|
|
|
10,041,726
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
101,028,208
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
7,112,555
|
|
|
$
|
9,689
|
|
|
|
0.14
|
%
|
Savings & money market
|
|
|
38,844,285
|
|
|
|
92,213
|
|
|
|
0.24
|
%
|
Time deposits (excluding brokered time deposits)
|
|
|
28,085,586
|
|
|
|
184,351
|
|
|
|
0.66
|
%
|
Brokered time deposits
|
|
|
388,688
|
|
|
|
6,034
|
|
|
|
1.56
|
%
|
Total interest-bearing deposits
|
|
|
74,431,114
|
|
|
|
292,287
|
|
|
|
0.39
|
%
|
Borrowings
|
|
|
2,596,893
|
|
|
|
19,737
|
|
|
|
0.76
|
%
|
Total interest-bearing liabilities
|
|
|
77,028,007
|
|
|
|
312,024
|
|
|
|
0.41
|
%
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
|
|
10,646,556
|
|
|
|
|
|
|
|
|
|
Other non-interest-bearing liabilities
|
|
|
924,433
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
12,429,212
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
101,028,208
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.91
|
%
|
Net interest income/margin
|
|
|
|
|
|
$
|
3,605,944
|
|
|
|
3.97
|
%
|
|
(1)
|
Nonaccrual
loans
are
included
in
average
balances
for
yield
computations.
|
Rate/Volume Analysis
Net interest income can be analyzed in terms
of the impact of changing interest rates and changing volume. The following tables set forth the effect which the varying levels
of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income
for the periods presented.
|
|
2016 Compared to 2015
|
|
|
Total
Change
|
|
|
Change in
Volume
|
|
|
Change in
Rate
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other
|
|
$
|
22,992
|
|
|
$
|
3,185
|
|
|
$
|
19,807
|
|
Investment securities
|
|
|
(100,952
|
)
|
|
|
(101,797
|
)
|
|
|
846
|
|
Loans (1)
|
|
|
69,711
|
|
|
|
(127,018
|
)
|
|
|
196,728
|
|
Total interest income
|
|
|
(8,249
|
)
|
|
|
(225,630
|
)
|
|
|
217,381
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
9,772
|
|
|
|
(20,047
|
)
|
|
|
29,818
|
|
Borrowings
|
|
|
(15,401
|
)
|
|
|
(6,849
|
)
|
|
|
(8,552
|
)
|
Total interest expense
|
|
|
(5,629
|
)
|
|
|
(26,895
|
)
|
|
|
21,267
|
|
Net Interest Income
|
|
$
|
(2,621
|
)
|
|
$
|
(198,733
|
)
|
|
$
|
196,113
|
|
|
|
2015 Compared to 2014
|
|
|
Total
Change
|
|
|
Change in
Volume
|
|
|
Change in
Rate
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other
|
|
$
|
18,332
|
|
|
$
|
25,142
|
|
|
$
|
(6,810
|
)
|
Investment securities
|
|
|
(182,755
|
)
|
|
|
(134,712
|
)
|
|
|
(48,043
|
)
|
Loans (1)
|
|
|
(194,760
|
)
|
|
|
(2,124
|
)
|
|
|
(192,636
|
)
|
Total interest income
|
|
|
(359,183
|
)
|
|
|
(111,694
|
)
|
|
|
(247,489
|
)
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
23,261
|
|
|
|
(3,538
|
)
|
|
|
26,798
|
|
Borrowings
|
|
|
(4,170
|
)
|
|
|
(25,062
|
)
|
|
|
20,891
|
|
Total interest expense
|
|
|
22,091
|
|
|
|
(28,600
|
)
|
|
|
47,689
|
|
Net Interest Income
|
|
$
|
(359,183
|
)
|
|
$
|
(83,094
|
)
|
|
$
|
(297,178
|
)
|
|
(1)
|
Nonaccrual
loans
are
included
in
average
balances
for
yield
computations.
|
Provision for Loan Losses
We have established
an allowance for loan losses through a provision for loan losses charged to expense to our consolidated statement of operations.
We review our loan portfolio at least quarterly to evaluate our outstanding loans and to measure both the performance of the portfolio
and the adequacy of the allowance for loan losses. Please see the discussion below under “Provision and Allowance for Loan
Losses” for a description of the factors we consider in determining the amount of the provision we expense each period to
maintain this allowance.
The provision, reversal
of provision and allowance for loan losses is evaluated on a regular basis by management and is based upon management’s
periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision
as more information becomes available.
We recorded a provision
for loan losses of $407,000 for the year ended December 31, 2016, an increase of $257,000, or 171% from a provision for loan losses
of $150,000 for the year ended December 31, 2015. The increase in provision for loan losses is primarily due to the recognition
of specific reserves during 2016 on six impaired loans. The allowance as a percentage of gross loans increased to 2.21% at December
31, 2016 from 1.68% at December 31, 2015. Specific reserves were approximately $611,000 on impaired loans of $2.2 million as of
December 31, 2016 compared to specific reserves of approximately $375,000 on impaired loans of $2.4 million as of December 31,
2015. As of December 31, 2016, the general reserve allocation was 1.22% of gross loans not impaired compared to 1.17% as of December
31, 2015. The provision for loan losses is discussed further below under “Provision and Allowance for Loan Losses.”
Non-interest Income
Non-interest income
for the year ended December 31, 2016 was $840,100, an increase of 26.0% from non-interest income of $666,907 for the year ended
December 31, 2015. Our largest components of non-interest income in 2016 were from residential loan origination fees, which were
$231,495 for 2016, or approximately 27.6% of total non-interest income, and from the recognition of gains on sales of investments
of $296,723, or approximately 35.3% of total non-interest income. Residential loan origination fees increased by $6,832, or 3.0%,
during the year due to the changes in mortgage loan underwriting and compensation regulations as well as increased customer demand.
The remaining increase is primarily due to the recognition of income related to the collection of SBA loan fees of $119,306. For
the year ended December 31, 2016, service fees on deposit accounts totaled $95,431, an increase of $14,272, or 17.6%, from 2015
due primarily to an increase in NSF/return check fees. Other income includes ATM surcharges, wire fees, and commissions on insurance
referrals. Other income was $97,145 for 2016, an increase of $51,310, or 111.9%, compared to $45,835 for the year ended December
31, 2015 due primarily to an increase related to commissions received and income recognized for bank-owned life insurance.
The Company recognized
a gain on sale of investment securities available for sale of approximately $297,000 during 2016. The Company recognized a loss
on sale of investment securities available for sale of approximately $88,000 during 2015.
Non-interest Expenses
The following table
sets forth information related to our non-interest expenses for the years ended December 31, 2016 and 2015.
|
|
2016
|
|
|
2015
|
|
Compensation and benefits
|
|
$
|
2,557,959
|
|
|
$
|
2,950,953
|
|
Real estate owned activity
|
|
|
512,407
|
|
|
|
457,173
|
|
Occupancy and equipment
|
|
|
639,167
|
|
|
|
678,404
|
|
Insurance
|
|
|
216,295
|
|
|
|
233,168
|
|
Data processing and related costs
|
|
|
471,976
|
|
|
|
343,107
|
|
Professional fees
|
|
|
1,050,062
|
|
|
|
1,320,505
|
|
Product research and development
|
|
|
249,594
|
|
|
|
2,209,978
|
|
Other
|
|
|
562,146
|
|
|
|
353,759
|
|
Total non-interest expenses
|
|
$
|
6,259,606
|
|
|
$
|
8,547,047
|
|
Non-interest expenses
decreased by approximately $2.3 million, or 26.8%, for the year ended December 31, 2016. This decrease was primarily due to decreases
in product research and development expenses, professional fees, and compensation and benefits expenses, partially offset by increases
in data processing costs and other expenses. Product research and development expenses decreased $2.0 million due to the suspension
of further development of the transaction services segment in September 2015. Product research and development expenses consisted
primarily of outside service fees to developers, software licenses, compensation expense, consulting fees and research and development
expense. Compensation and benefits decreased $392,994 due to the reduction in staffing related to the suspension of the product
development segment as well as by a decrease of $293,703 in expense incurred related to stock option expense. Professional fees
decreased $270,443 due to a decrease in consulting fees. These decreases were offset by a $128,869 increase in data processing
costs and an increase of $208,387 in other expenses related to marketing and costs related to our consumer lending program.
Income Tax Expense
No income tax benefit
or expense was recognized for the year ended December 31, 2016. In 2015, we recognized approximately $5,100 in state income taxes
due with the Bank’s state tax return.
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 or internal information.
Balance Sheet Review
Investments
The purpose of the
investment portfolio is to provide liquidity and stable returns through the purchase of high quality investment securities. At
December 31, 2016, our investment portfolio of $2.5 million represented approximately 2.8% of total assets. The portfolio decreased
from $10.7 million at December 31, 2015, or 11.0% of total assets. Decreases in investment balances during 2016 were due to normal
investment maturities and repayments as well as due to the October 2016 sale of the mortgage-backed and municipal security portfolios.
At December 31, 2016, we held one US Treasury note as an investment security available for sale. At December 31, 2015, we held
government-sponsored mortgage-backed securities, non-taxable and taxable municipal bonds as investment securities available for
sale. The amortized costs and the fair value of our investments at December 31, 2016, 2015 and 2014 are shown in the following
table.
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury Note
|
|
$
|
2,507,861
|
|
|
$
|
2,499,805
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Government-sponsored mortgage-backed
|
|
|
—
|
|
|
|
—
|
|
|
|
4,290,680
|
|
|
|
4,312,449
|
|
|
|
7,597,334
|
|
|
|
7,601,517
|
|
Collateralized mortgage-backed
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,040,478
|
|
|
|
1,982,960
|
|
Municipals, tax-exempt
|
|
|
—
|
|
|
|
—
|
|
|
|
4,916,379
|
|
|
|
5,039,447
|
|
|
|
4,658,532
|
|
|
|
4,696,996
|
|
Municipals, taxable
|
|
|
—
|
|
|
|
—
|
|
|
|
1,308,298
|
|
|
|
1,335,955
|
|
|
|
1,317,433
|
|
|
|
1,334,053
|
|
Total
|
|
$
|
2,507,861
|
|
|
$
|
2,499,805
|
|
|
$
|
10,515,357
|
|
|
$
|
10,687,851
|
|
|
$
|
15,613,777
|
|
|
$
|
15,615,526
|
|
Contractual maturities
and yields on our investment securities available for sale at December 31, 2016 are shown in the following table. Expected maturities
may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment
penalties.
|
|
One year or less
|
|
|
After one year
through five years
|
|
|
After five years
through ten years
|
|
|
After ten years
|
|
|
Total
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury Note
|
|
|
—
|
|
|
|
—
|
|
|
$
|
2,499,805
|
|
|
|
1.08
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
2,499,805
|
|
|
|
1.08
|
%
|
Total
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
2,499,805
|
|
|
|
1.08
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
2,499,805
|
|
|
|
1.08
|
%
|
At December 31, 2016
and 2015, we also held non-marketable equity securities, which consisted of Federal Reserve Bank stock of $293,050 and $303,500,
respectively, and FHLB stock of $87,000 and $89,000, respectively. These investments are carried at cost, which approximates fair
market value.
Loans
Since loans typically
provide higher interest yields than other types of interest-earning assets, a significant percentage of our earning assets are
invested in our loan portfolio. Average loans for the year ended December 31, 2016 were $64.0 million, a decrease of $2.6 million,
or 3.9%, compared to average loans of $66.6 million for the year ended December 31, 2015. Before allowance for loan losses, gross
loans outstanding at December 31, 2016 were $60.5 million, or 66.9% of total assets, compared to $67.5 million, or 69.3% of total
assets at December 31, 2015.
The principal component
of our loan portfolio is loans secured by real estate mortgages. Most of our real estate loans are secured by residential or commercial
property. We do not generally originate traditional long term residential mortgages for the Bank’s portfolio, but we do
issue traditional second mortgage residential real estate loans and home equity lines of credit. We obtain a security interest
in real estate whenever possible, in addition to any other available collateral. This collateral is taken to increase the likelihood
of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans we make to 80%. The total amount of
second lien mortgage collateral and home equity loans as of December 31, 2016, 2015, 2014, 2013 and 2012 were approximately $4.3
million, $5.8 million, $8.3 million, $7.3 million, and $8.6 million, respectively.
The largest component of our loan portfolio
at year-end was commercial real estate loans, which represented 36.4% of the portfolio. We attempt to maintain a relatively diversified
loan portfolio to help reduce the risk inherent in concentration of certain types of collateral. Refer to Item 1, “Lending
Activities”, for a detailed discussion regarding the risks inherent in each loan category noted above. Due to the short
time our portfolio has existed, the current mix may not be indicative of the ongoing portfolio mix.
As previously disclosed,
although traditionally we have maintained only a small percentage of the Bank’s loan portfolio in consumer loans, we plan
to supplement our current lending strategy by expanding our consumer lending program with on-line offerings, targeting prime and
super-prime borrowers in the Bank’s current market area as well as throughout South Carolina. We are focused on profitably
growing the Bank and enhancing shareholder value through this targeted expansion of our consumer lending program, which may include
purchases of in-market consumer loans that meet the Bank’s underwriting criteria.
The following tables
summarize the composition of our loan portfolio as of December 31, 2016, 2015, 2014, 2013 and 2012.
|
|
2016
|
|
|
2015
|
|
|
|
Amount
|
|
|
% of
Total
|
|
|
Amount
|
|
|
% of
Total
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
22,033,590
|
|
|
|
36.4
|
%
|
|
$
|
25,559,943
|
|
|
|
37.8
|
%
|
Construction and development
|
|
|
7,913,783
|
|
|
|
13.1
|
|
|
|
7,286,459
|
|
|
|
10.8
|
|
Single and multifamily residential
|
|
|
13,314,130
|
|
|
|
22.0
|
|
|
|
16,434,722
|
|
|
|
24.3
|
|
Total real estate loans
|
|
|
43,261,503
|
|
|
|
71.5
|
|
|
|
49,281,124
|
|
|
|
72.9
|
|
Commercial business
|
|
|
15,954,106
|
|
|
|
26.4
|
|
|
|
17,027,054
|
|
|
|
25.2
|
|
Consumer — other
|
|
|
1,434,449
|
|
|
|
2.4
|
|
|
|
1,369,224
|
|
|
|
2.1
|
|
Deferred origination fees, net
|
|
|
(167,062
|
)
|
|
|
(0.3
|
)
|
|
|
(135,647
|
)
|
|
|
(0.2
|
)
|
Gross loans, net of deferred fees
|
|
|
60,482,996
|
|
|
|
100.0
|
%
|
|
|
67,541,755
|
|
|
|
100.0
|
%
|
Less allowance for loan losses
|
|
|
(1,338,149
|
)
|
|
|
|
|
|
|
(1,139,509
|
)
|
|
|
|
|
Total loans, net
|
|
$
|
59,144,847
|
|
|
|
|
|
|
$
|
66,402,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
Amount
|
|
|
% of
Total
|
|
|
Amount
|
|
|
% of
Total
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
25,246,396
|
|
|
|
36.6
|
%
|
|
$
|
21,795,047
|
|
|
|
34.2
|
%
|
Construction and development
|
|
|
8,425,453
|
|
|
|
12.2
|
|
|
|
10,053,100
|
|
|
|
15.8
|
|
Single and multifamily residential
|
|
|
18,073,429
|
|
|
|
26.2
|
|
|
|
18,757,484
|
|
|
|
29.5
|
|
Total real estate loans
|
|
|
51,745,278
|
|
|
|
75.0
|
|
|
|
50,605,631
|
|
|
|
79.5
|
|
Commercial business
|
|
|
16,059,082
|
|
|
|
23.2
|
|
|
|
12,170,698
|
|
|
|
19.1
|
|
Consumer — other
|
|
|
1,372,906
|
|
|
|
2.0
|
|
|
|
999,941
|
|
|
|
1.6
|
|
Deferred origination fees, net
|
|
|
(149,823
|
)
|
|
|
(0.2
|
)
|
|
|
(106,134
|
)
|
|
|
(0.2
|
)
|
Gross loans, net of deferred fees
|
|
|
69,027,443
|
|
|
|
100.0
|
%
|
|
|
63,670,136
|
|
|
|
100.0
|
%
|
Less allowance for loan losses
|
|
|
(1,032,776
|
)
|
|
|
|
|
|
|
(1,301,886
|
)
|
|
|
|
|
Total loans, net
|
|
$
|
67,994,667
|
|
|
|
|
|
|
$
|
62,368,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
% of
Total
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
24,845,155
|
|
|
|
35.3
|
%
|
|
|
|
|
|
|
|
|
Construction and development
|
|
|
12,299,452
|
|
|
|
17.5
|
|
|
|
|
|
|
|
|
|
Single and multifamily residential
|
|
|
21,294,926
|
|
|
|
30.2
|
|
|
|
|
|
|
|
|
|
Total real estate
|
|
|
58,439,533
|
|
|
|
83.0
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
|
10,915,768
|
|
|
|
15.5
|
|
|
|
|
|
|
|
|
|
Consumer — other
|
|
|
1,128,544
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
Deferred origination fees, net
|
|
|
(102,099
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
70,381,746
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
Less allowance for loan losses
|
|
|
(1,858,416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net
|
|
$
|
68,523,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities and Sensitivity of Loans to Changes in Interest
Rates
The information in
the following table is 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.
The following table
summarizes the loan maturity distribution by type and related interest rate characteristics at December 31, 2016.
|
|
One year
or less
|
|
|
After one
but within
five years
|
|
|
After five
years
|
|
|
Total
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
3,144,814
|
|
|
$
|
16,958,206
|
|
|
$
|
1,930,570
|
|
|
$
|
22,033,590
|
|
Construction and development
|
|
|
2,987,321
|
|
|
|
4,829,172
|
|
|
|
97,290
|
|
|
|
7,913,783
|
|
Single and multifamily residential
|
|
|
1,445,328
|
|
|
|
6,710,484
|
|
|
|
5,158,318
|
|
|
|
13,314,130
|
|
Total real estate
|
|
|
7,577,463
|
|
|
|
28,497,862
|
|
|
|
7,186,178
|
|
|
|
43,261,503
|
|
Commercial business
|
|
|
6,203,428
|
|
|
|
8,736,000
|
|
|
|
1,014,678
|
|
|
|
15,954,106
|
|
Consumer — other
|
|
|
540,500
|
|
|
|
821,639
|
|
|
|
72,310
|
|
|
|
1,434,449
|
|
Gross loans
|
|
$
|
14,321,391
|
|
|
$
|
38,055,501
|
|
|
$
|
8,273,166
|
|
|
$
|
60,650,058
|
|
Deferred origination fees, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(167,062
|
)
|
Gross loans, net of deferred fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60,482,996
|
|
Loans maturing — after one year with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed interest rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,767,328
|
|
Floating interest rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,561,339
|
|
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 borrower’s 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, which generally is six months. Foregone
interest income related to nonaccrual loans equaled $60,633 and $129,066 for the years ended December 31, 2016 and 2015, respectively.
No interest income was recognized on nonaccrual loans during 2016 and 2015. At both December 31, 2016 and 2015, there were no
accruing loans which were contractually past due 90 days or more as to principal or interest payments.
The following tables
summarize delinquencies and nonaccruals, by portfolio class, as of December 31, 2016, 2015, 2014, 2013, and 2012.
|
|
Single and
multifamily
residential
real estate
|
|
|
Construction
and
development
|
|
|
Commercial
real estate —
other
|
|
|
Commercial
business
|
|
|
Consumer
|
|
|
Total
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30–59 days past due
|
|
$
|
442,295
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
617,052
|
|
|
$
|
—
|
|
|
$
|
1,059,347
|
|
60–89 days past due
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
409,675
|
|
|
|
—
|
|
|
|
409,675
|
|
Nonaccrual
|
|
|
108,951
|
|
|
|
—
|
|
|
|
195,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
304,451
|
|
Total past due and nonaccrual
|
|
|
551,246
|
|
|
|
—
|
|
|
|
195,500
|
|
|
|
1,026,727
|
|
|
|
—
|
|
|
|
1,773,473
|
|
Total debt restructurings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Current
|
|
|
12,762,884
|
|
|
|
7,913,783
|
|
|
|
21,838,090
|
|
|
|
14,927,379
|
|
|
|
1,434,449
|
|
|
|
58,876,585
|
|
Total loans
|
|
$
|
13,314,130
|
|
|
$
|
7,913,783
|
|
|
$
|
22,033,590
|
|
|
$
|
15,954,106
|
|
|
$
|
1,434,449
|
|
|
$
|
60,650,058
|
|
|
|
Single and
multifamily
residential
real estate
|
|
|
Construction
and
development
|
|
|
Commercial
real estate —
other
|
|
|
Commercial
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
|
|
|
|
—
|
|
|
|
1,665,190
|
|
Total past due and nonaccrual
|
|
|
308,471
|
|
|
|
290,878
|
|
|
|
1,390,013
|
|
|
|
65,798
|
|
|
|
—
|
|
|
|
2,055,160
|
|
Total debt restructurings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Current
|
|
|
16,126,251
|
|
|
|
6,995,581
|
|
|
|
24,169,930
|
|
|
|
16,961,256
|
|
|
|
1,369,224
|
|
|
|
65,622,242
|
|
Total loans
|
|
$
|
16,434,722
|
|
|
$
|
7,286,459
|
|
|
$
|
25,559,943
|
|
|
$
|
17,027,054
|
|
|
$
|
1,369,224
|
|
|
$
|
67,677,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and
multifamily
residential
real estate
|
|
|
Construction
and
development
|
|
|
Commercial
real estate —
other
|
|
|
Commercial
business
|
|
|
Consumer
|
|
|
Total
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30–59 days past due
|
|
$
|
188,033
|
|
|
$
|
39,561
|
|
|
$
|
—
|
|
|
$
|
23,938
|
|
|
$
|
—
|
|
|
$
|
251,532
|
|
60–89 days past due
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,129
|
|
|
|
—
|
|
|
|
9,129
|
|
Nonaccrual
|
|
|
—
|
|
|
|
—
|
|
|
|
534,057
|
|
|
|
—
|
|
|
|
—
|
|
|
|
534,057
|
|
Total past due and nonaccrual
|
|
|
188,033
|
|
|
|
39,561
|
|
|
|
534,057
|
|
|
|
33,067
|
|
|
|
—
|
|
|
|
794,718
|
|
Total debt restructurings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Current
|
|
|
17,885,396
|
|
|
|
8,385,892
|
|
|
|
24,712,339
|
|
|
|
16,026,015
|
|
|
|
1,372,906
|
|
|
|
68,382,548
|
|
Total loans
|
|
$
|
18,073,429
|
|
|
$
|
8,425,453
|
|
|
$
|
25,246,396
|
|
|
$
|
16,059,082
|
|
|
$
|
1,372,906
|
|
|
$
|
69,177,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and
multifamily
residential
real estate
|
|
|
Construction
and
development
|
|
|
Commercial
real estate —
other
|
|
|
Commercial
business
|
|
|
Consumer
|
|
|
Total
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30–59 days past due
|
|
$
|
—
|
|
|
$
|
42,542
|
|
|
$
|
524,430
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
566,972
|
|
60–89 days past due
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Nonaccrual
|
|
|
—
|
|
|
|
1,008,253
|
|
|
|
347,615
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,402,715
|
|
Total past due and nonaccrual
|
|
|
46,847
|
|
|
|
1,050,795
|
|
|
|
872,045
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,969,687
|
|
Total debt restructurings
|
|
|
46,847
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Current
|
|
|
—
|
|
|
|
9,002,305
|
|
|
|
20,923,002
|
|
|
|
12,170,698
|
|
|
|
999,941
|
|
|
|
61,806,583
|
|
Total loans
|
|
$
|
18,757,484
|
|
|
$
|
10,053,100
|
|
|
$
|
21,795,047
|
|
|
$
|
12,170,698
|
|
|
$
|
999,941
|
|
|
$
|
63,776,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and
multifamily
residential
real estate
|
|
|
Construction
and
development
|
|
|
Commercial
real estate —
other
|
|
|
Commercial
business
|
|
|
Consumer
|
|
|
Total
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30–59 days past due
|
|
$
|
46,178
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,316
|
|
|
$
|
55,494
|
|
60–89 days past due
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,541
|
|
|
|
1,541
|
|
Nonaccrual
|
|
|
719,260
|
|
|
|
3,710,587
|
|
|
|
331,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,760,847
|
|
Total past due and nonaccrual
|
|
|
765,438
|
|
|
|
3,710,587
|
|
|
|
331,000
|
|
|
|
—
|
|
|
|
10,857
|
|
|
|
4,817,882
|
|
Total debt restructurings
|
|
|
1,175,843
|
|
|
|
—
|
|
|
|
1,314,205
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,490,048
|
|
Current
|
|
|
19,353,645
|
|
|
|
8,588,865
|
|
|
|
23,199,950
|
|
|
|
10,915,768
|
|
|
|
1,117,687
|
|
|
|
63,175,915
|
|
Total loans
|
|
$
|
21,294,926
|
|
|
$
|
12,299,452
|
|
|
$
|
24,845,155
|
|
|
$
|
10,915,768
|
|
|
$
|
1,128,544
|
|
|
$
|
70,483,845
|
|
Total
delinquent and nonaccrual loans decreased from $2,055,160 at December 31, 2015 to $1,773,473 at December 31, 2016, a decrease
of $281,687 or 13.7%. This decrease was a result of the movement of three nonaccrual loans transferring to other real estate
owned, which decreased by $1.4 million from 2015 to 2016, partially offset by an increase in loans past due 30-59 days of
$983,457 and an increase in loans past due 60-89 days of $95,595 as discussed below. Nonaccrual decreases were seen in single
and multifamily residential, construction and development, commercial real estate and residential lot real estate loans due
to successful
foreclosure of the
properties collateralizing these loans and their transfer to other real estate owned. At December 31, 2016, nonaccrual loans represented
0.5% of gross loans. Loans past due 30-89 days are considered potential problem loans and amounted to $1,469,022 and $389,970
at December 31, 2016 and 2015, respectively. The increase in 30-89 delinquent loans is due to seven loans moving into the 30-59
days delinquent category and two loans moving into the 60-89 days delinquent category.
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.
The following tables summarize management’s internal credit risk grades, by portfolio class, as of December 31, 2016 and
2015.
|
|
Single and
multifamily
residential
real estate
|
|
|
Construction
and
development
|
|
|
Commercial
real estate —
other
|
|
|
Commercial
business
|
|
|
Consumer
|
|
|
Total
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass Loans (Consumer)
|
|
$
|
8,246,567
|
|
|
$
|
1,462,925
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,434,449
|
|
|
$
|
11,143,941
|
|
Grade 1 — Prime
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Grade 2 — Good
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Grade 3 — Acceptable
|
|
|
1,919,685
|
|
|
|
1,108,334
|
|
|
|
11,057,550
|
|
|
|
7,676,592
|
|
|
|
—
|
|
|
|
21,762,161
|
|
Grade 4 — Acceptable w/Care
|
|
|
2,877,013
|
|
|
|
5,273,411
|
|
|
|
9,232,019
|
|
|
|
7,307,961
|
|
|
|
—
|
|
|
|
24,690,404
|
|
Grade 5 — Special Mention
|
|
|
—
|
|
|
|
69,113
|
|
|
|
766,388
|
|
|
|
—
|
|
|
|
—
|
|
|
|
835,501
|
|
Grade 6 — Substandard
|
|
|
270,865
|
|
|
|
—
|
|
|
|
977,633
|
|
|
|
969,553
|
|
|
|
—
|
|
|
|
2,218,051
|
|
Grade 7 — Doubtful
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total loans
|
|
$
|
13,314,130
|
|
|
$
|
7,913,783
|
|
|
$
|
22,033,590
|
|
|
$
|
15,954,106
|
|
|
$
|
1,434,449
|
|
|
$
|
60,650,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and
multifamily
residential
real estate
|
|
|
Construction
and
development
|
|
|
Commercial
real estate —
other
|
|
|
Commercial
business
|
|
|
Consumer
|
|
|
Total
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass Loans (Consumer)
|
|
$
|
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
|
|
$
|
16,434,722
|
|
|
$
|
7,286,459
|
|
|
$
|
25,559,943
|
|
|
$
|
17,027,054
|
|
|
$
|
1,369,224
|
|
|
$
|
67,677,402
|
|
Loans graded one through
four are considered “pass” credits. Consumer loans are assigned a “pass” credit rating unless something
within the loan warrants a specific classification grade. At December 31, 2016, approximately 95% 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.
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 management’s 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 December 31, 2016, we had loans totaling $835,501 on the watch
list compared to $1.6 million as of December 31, 2015. This decrease was primarily related to two loans from 2015 being deemed
as acceptable and one loan being repaid in full, partially offset by two loans being deemed special mention during 2016.
Loans graded six or
greater are considered classified credits. At December 31, 2016 and 2015, classified loans totaled $2.2 million and $2.9 million,
respectively, with the vast majority of these loans being collateralized by real estate. The decrease was primarily related to
three loans moving to other real estate owned and three loans being repaid in full during 2016. Classified credits are evaluated
for impairment on a quarterly basis.
A loan is considered
impaired when, based on current information and events, 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 loan’s effective interest rate, the loan’s obtainable market price, or the fair
value of the collateral if the loan is collateral dependent. The resulting 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 December 31, 2016,
impaired loans totaled $2.2 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. During 2016, the average recorded investment in impaired loans
was $2.1 million compared to $2.4 million during 2015. As of December 31, 2016 and December 31, 2015, we had loans totaling approximately
$835,501 and $498,437, respectively that were classified in accordance with our loan rating policies but were not considered impaired.
On March 7, 2017, one impaired loan was transferred to other real estate owned for $165,000, net of a specific reserve of $35,000.
The specific reserve was included in the December 31, 2016 allowance amounts. The following tables summarize information relative
to impaired loans, by portfolio class, at December 31, 2016 and 2015.
|
|
Unpaid
principal
balance
|
|
|
Recorded
investment
|
|
|
Related
allowance
|
|
|
Average
impaired
investment
|
|
|
Interest
income
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and multifamily residential real estate
|
|
$
|
99,794
|
|
|
$
|
99,794
|
|
|
$
|
—
|
|
|
$
|
179,235
|
|
|
$
|
3,261
|
|
Construction and development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
109,660
|
|
|
|
6,130
|
|
Commercial real estate — other
|
|
|
782,133
|
|
|
|
782,133
|
|
|
|
—
|
|
|
|
718,589
|
|
|
|
46,778
|
|
Commercial
|
|
|
231,448
|
|
|
|
231,448
|
|
|
|
—
|
|
|
|
96,283
|
|
|
|
4,744
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
With related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and multifamily residential real estate
|
|
|
171,071
|
|
|
|
171,071
|
|
|
|
93,471
|
|
|
|
201,000
|
|
|
|
3,251
|
|
Construction and development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
98,139
|
|
|
|
—
|
|
Commercial real estate — other
|
|
|
195,500
|
|
|
|
195,500
|
|
|
|
30,500
|
|
|
|
524,283
|
|
|
|
—
|
|
Commercial
|
|
|
738,105
|
|
|
|
738,105
|
|
|
|
487,490
|
|
|
|
191,329
|
|
|
|
46,315
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and multifamily residential real estate
|
|
|
270,865
|
|
|
|
270,865
|
|
|
|
93,471
|
|
|
|
380,235
|
|
|
|
6,512
|
|
Construction and development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
207,799
|
|
|
|
6,130
|
|
Commercial real estate — other
|
|
|
977,633
|
|
|
|
977,633
|
|
|
|
30,500
|
|
|
|
1,242,872
|
|
|
|
46,778
|
|
Commercial
|
|
|
969,553
|
|
|
|
969,553
|
|
|
|
487,490
|
|
|
|
287,612
|
|
|
|
51,059
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
2,218,051
|
|
|
$
|
2,218,051
|
|
|
$
|
611,461
|
|
|
$
|
2,118,518
|
|
|
$
|
110,479
|
|
|
|
Unpaid
principal
balance
|
|
|
Recorded
investment
|
|
|
Related
allowance
|
|
|
Average
impaired
investment
|
|
|
Interest
income
|
|
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
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
62,015
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
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
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,139
|
|
|
|
2,119
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
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
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
80,154
|
|
|
|
2,119
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
2,380,599
|
|
|
$
|
2,380,599
|
|
|
$
|
375,431
|
|
|
$
|
2,399,647
|
|
|
$
|
100,697
|
|
Troubled debt restructurings
(“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 December 31, 2016,
the principal balance of TDRs was zero as the one loan previously constituting our sole TDR during the year 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 previously constituting
our sole TDR had been transferred to other real estate owned. No TDRs went into default during the year ended December 31, 2015
and 2016. A TDR can be removed from “troubled” status once there is sufficient history of demonstrating the borrower
can service the credit under market terms. We currently consider sufficient history to be approximately six months.
There were no loans
modified as TDRs within the previous 12- month period for which there was a payment default during the years ended December 31,
2015 and 2016.
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 statements of operations.
At December 31, 2016, the allowance for loan losses was $1.3 million, or 2.20% of gross loans, compared to $1.1 million at December
31, 2015, or 1.68% of gross loans. This increase in the allowance for loan losses is due to the recognition of provision for loan
losses, partially offset by charge-offs taken against specific reserves, as well as payoffs in our commercial real estate portfolio,
which carries a higher historical loss ratio and, consequently, a higher reserve factor within our allowance model.
The provision, reversal
of provision and allowance for loan losses is evaluated on a regular basis by management and is based upon management’s
periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and
prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as
more information becomes available.
The allowance 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 borrower’s 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 directors’ 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 $2.2 million at December
31, 2016, with an associated specific reserve of approximately $611,000. See above discussion under “Loan Performance and
Asset 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. The total general reserve is based upon the individual loan categories and
their historical loss factors over an eight quarter moving average, adjusted for other risk factors as well. Therefore, the general
allocation will move among the categories depending on if some loss factors increased while others decreased. 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.
The following tables
summarize activity related to our allowance for loan losses for the years ended December 31, 2016, 2015, 2014, 2013, and 2012
by portfolio segment.
|
|
Single and
multifamily
residential
real estate
|
|
|
Construction
and
development
|
|
|
Commercial
real estate —
other
|
|
|
Commercial
business
|
|
|
Consumer
|
|
|
Total
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
265,797
|
|
|
$
|
184,130
|
|
|
$
|
439,830
|
|
|
$
|
244,679
|
|
|
$
|
5,073
|
|
|
$
|
1,139,509
|
|
Provision (reversal of provision) for loan losses
|
|
|
(30,000
|
)
|
|
|
(100,000
|
)
|
|
|
100,000
|
|
|
|
440,000
|
|
|
|
(3,000
|
)
|
|
|
407,000
|
|
Loan charge-offs
|
|
|
—
|
|
|
|
(10,500
|
)
|
|
|
(209,045
|
)
|
|
|
—
|
|
|
|
(640
|
)
|
|
|
(220,185
|
)
|
Loan recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,825
|
|
|
|
11,825
|
|
Net loans charged-off
|
|
|
—
|
|
|
|
(10,500
|
)
|
|
|
(209,045
|
)
|
|
|
—
|
|
|
|
11,185
|
|
|
|
(208,360
|
)
|
Balance, end of year
|
|
$
|
235,797
|
|
|
$
|
73,630
|
|
|
$
|
330,785
|
|
|
$
|
684,679
|
|
|
$
|
13,258
|
|
|
$
|
1,338,149
|
|
Individually reviewed for impairment
|
|
$
|
93,471
|
|
|
$
|
—
|
|
|
$
|
30,500
|
|
|
$
|
487,490
|
|
|
$
|
—
|
|
|
$
|
611,461
|
|
Collectively reviewed for impairment
|
|
|
142,326
|
|
|
|
73,630
|
|
|
|
300,285
|
|
|
|
197,189
|
|
|
|
13,258
|
|
|
|
726,688
|
|
Total allowance for loan losses
|
|
$
|
235,797
|
|
|
$
|
73,630
|
|
|
$
|
330,785
|
|
|
$
|
684,679
|
|
|
$
|
13,258
|
|
|
$
|
1,338,149
|
|
Gross loans, end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually reviewed for impairment
|
|
$
|
171,071
|
|
|
$
|
—
|
|
|
$
|
195,500
|
|
|
$
|
738,105
|
|
|
$
|
—
|
|
|
$
|
1,104,676
|
|
Collectively reviewed for impairment
|
|
|
13,143,059
|
|
|
|
7,913,783
|
|
|
|
21,838,090
|
|
|
|
15,216,001
|
|
|
|
1,434,449
|
|
|
|
59,545,382
|
|
Total gross loans
|
|
$
|
13,314,130
|
|
|
$
|
7,913,783
|
|
|
$
|
22,033,590
|
|
|
$
|
15,954,106
|
|
|
$
|
1,434,449
|
|
|
$
|
60,650,058
|
|
|
|
Single and
multifamily
residential
real estate
|
|
|
Construction
and
development
|
|
|
Commercial
real estate —
other
|
|
|
Commercial
business
|
|
|
Consumer
|
|
|
Total
|
|
December 31, 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 loan losses
|
|
|
105,000
|
|
|
|
(50,000
|
)
|
|
|
120,000
|
|
|
|
60,000
|
|
|
|
(85,000
|
)
|
|
|
150,000
|
|
Loan charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
(43,267
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(43,267
|
)
|
Loan recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loans charged-off
|
|
|
—
|
|
|
|
—
|
|
|
|
(43,267
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(43,267
|
)
|
Balance, end of year
|
|
$
|
265,797
|
|
|
$
|
184,130
|
|
|
$
|
439,830
|
|
|
$
|
244,679
|
|
|
$
|
5,073
|
|
|
$
|
1,139,509
|
|
Individually reviewed for impairment
|
|
$
|
163,138
|
|
|
$
|
10,500
|
|
|
$
|
201,793
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
375,431
|
|
Collectively reviewed for impairment
|
|
|
102,659
|
|
|
|
173,630
|
|
|
|
238,037
|
|
|
|
244,679
|
|
|
|
5,073
|
|
|
|
764,078
|
|
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
|
|
$
|
236,938
|
|
|
$
|
40,500
|
|
|
$
|
2,103,161
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,380,599
|
|
Collectively reviewed for impairment
|
|
|
16,197,784
|
|
|
|
7,245,959
|
|
|
|
23,456,782
|
|
|
|
17,027,054
|
|
|
|
1,369,224
|
|
|
|
65,296,803
|
|
Total gross loans
|
|
$
|
16,434,722
|
|
|
$
|
7,286,459
|
|
|
$
|
25,559,943
|
|
|
$
|
17,027,054
|
|
|
$
|
1,369,224
|
|
|
$
|
67,677,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and
multifamily
residential
real estate
|
|
|
Construction
and
development
|
|
|
Commercial
real estate —
other
|
|
|
Commercial
business
|
|
|
Consumer
|
|
|
Total
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
237,230
|
|
|
$
|
485,010
|
|
|
$
|
360,564
|
|
|
$
|
129,009
|
|
|
$
|
90,073
|
|
|
$
|
1,301,886
|
|
Provision for loan losses
|
|
|
(150,000
|
)
|
|
|
(295,265
|
)
|
|
|
100,106
|
|
|
|
315,159
|
|
|
|
—
|
|
|
|
(30,000
|
)
|
Loan charge-offs
|
|
|
—
|
|
|
|
(118,577
|
)
|
|
|
(101,000
|
)
|
|
|
(297,889
|
)
|
|
|
—
|
|
|
|
(517,466
|
)
|
Loan recoveries
|
|
|
73,567
|
|
|
|
162,962
|
|
|
|
3,427
|
|
|
|
38,400
|
|
|
|
—
|
|
|
|
278,356
|
|
Net loans charged-off
|
|
|
73,567
|
|
|
|
44,385
|
|
|
|
(97,573
|
)
|
|
|
(259,489
|
)
|
|
|
—
|
|
|
|
(239,110
|
)
|
Balance, end of year
|
|
$
|
160,797
|
|
|
$
|
234,130
|
|
|
$
|
363,097
|
|
|
$
|
184,679
|
|
|
$
|
90,073
|
|
|
$
|
1,032,776
|
|
Individually reviewed for impairment
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
88,712
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
88,712
|
|
Collectively reviewed for impairment
|
|
|
160,797
|
|
|
|
234,130
|
|
|
|
274,385
|
|
|
|
184,679
|
|
|
|
90,073
|
|
|
|
944,064
|
|
Total allowance for loan losses
|
|
$
|
160,797
|
|
|
$
|
234,130
|
|
|
$
|
363,097
|
|
|
$
|
184,679
|
|
|
$
|
90,073
|
|
|
$
|
1,032,776
|
|
Gross loans, end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually reviewed for impairment
|
|
$
|
725,090
|
|
|
$
|
—
|
|
|
$
|
1,290,503
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,015,593
|
|
Collectively reviewed for impairment
|
|
|
17,348,339
|
|
|
|
8,425,453
|
|
|
|
23,955,893
|
|
|
|
16,059,082
|
|
|
|
1,372,906
|
|
|
|
67,161,673
|
|
Total gross loans
|
|
$
|
18,073,429
|
|
|
$
|
8,425,453
|
|
|
$
|
25,246,396
|
|
|
$
|
16,059,082
|
|
|
$
|
1,372,906
|
|
|
$
|
69,177,266
|
|
|
|
Single and
multifamily
residential
real estate
|
|
|
Construction
and
development
|
|
|
Commercial
real estate —
other
|
|
|
Commercial
business
|
|
|
Consumer
|
|
|
Total
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
611,576
|
|
|
$
|
1,073,110
|
|
|
$
|
63,747
|
|
|
$
|
36,683
|
|
|
$
|
73,300
|
|
|
$
|
1,858,416
|
|
Provision for loan losses
|
|
|
(115,000
|
)
|
|
|
(586,040
|
)
|
|
|
703,817
|
|
|
|
85,827
|
|
|
|
16,820
|
|
|
|
105,424
|
|
Loan charge-offs
|
|
|
(259,346
|
)
|
|
|
(97,060
|
)
|
|
|
(407,000
|
)
|
|
|
—
|
|
|
|
(148
|
)
|
|
|
(763,554
|
)
|
Loan recoveries
|
|
|
—
|
|
|
|
95,000
|
|
|
|
—
|
|
|
|
6,499
|
|
|
|
101
|
|
|
|
101,600
|
|
Net loans charged-off
|
|
|
(259,346
|
)
|
|
|
(2,060
|
)
|
|
|
(407,000
|
)
|
|
|
6,499
|
|
|
|
(47
|
)
|
|
|
(661,954
|
)
|
Balance, end of year
|
|
$
|
237,230
|
|
|
$
|
485,010
|
|
|
$
|
360,564
|
|
|
$
|
129,009
|
|
|
$
|
90,073
|
|
|
$
|
1,301,886
|
|
Individually reviewed for impairment
|
|
$
|
7,425
|
|
|
$
|
101,000
|
|
|
$
|
83,614
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
192,039
|
|
Collectively reviewed for impairment
|
|
|
229,805
|
|
|
|
384,010
|
|
|
|
276,950
|
|
|
|
129,009
|
|
|
|
90,073
|
|
|
|
1,109,847
|
|
Total allowance for loan losses
|
|
$
|
237,230
|
|
|
$
|
485,010
|
|
|
$
|
360,564
|
|
|
$
|
129,009
|
|
|
$
|
90,073
|
|
|
$
|
1,301,886
|
|
Gross loans, end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually reviewed for impairment
|
|
$
|
138,691
|
|
|
$
|
1,008,253
|
|
|
$
|
347,969
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,494,913
|
|
Collectively reviewed for impairment
|
|
|
18,618,793
|
|
|
|
9,044,847
|
|
|
|
21,447,078
|
|
|
|
12,170,698
|
|
|
|
999,941
|
|
|
|
62,281,357
|
|
Total gross loans
|
|
$
|
18,757,484
|
|
|
$
|
10,053,100
|
|
|
$
|
21,795,047
|
|
|
$
|
12,170,698
|
|
|
$
|
999,941
|
|
|
$
|
63,776,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and
multifamily
residential
real estate
|
|
|
Construction
and
development
|
|
|
Commercial
real estate —
other
|
|
|
Commercial
business
|
|
|
Consumer
|
|
|
Total
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
576,669
|
|
|
$
|
688,847
|
|
|
$
|
347,061
|
|
|
$
|
412,808
|
|
|
$
|
85,138
|
|
|
$
|
2,110,523
|
|
Provision for loan losses
|
|
|
88,351
|
|
|
|
402,724
|
|
|
|
(233,315
|
)
|
|
|
(361,806
|
)
|
|
|
82,046
|
|
|
|
(22,000
|
)
|
Loan charge-offs
|
|
|
(55,330
|
)
|
|
|
(18,461
|
)
|
|
|
(49,999
|
)
|
|
|
(15,443
|
)
|
|
|
(93,884
|
)
|
|
|
(233,117
|
)
|
Loan recoveries
|
|
|
1,886
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,124
|
|
|
|
—
|
|
|
|
3,010
|
|
Net loans charged-off
|
|
|
(53,444
|
)
|
|
|
(18,461
|
)
|
|
|
(49,999
|
)
|
|
|
(14,320
|
)
|
|
|
(93,884
|
)
|
|
|
(230,108
|
)
|
Balance, end of year
|
|
$
|
611,576
|
|
|
$
|
1,073,110
|
|
|
$
|
63,747
|
|
|
$
|
36,683
|
|
|
$
|
73,300
|
|
|
$
|
1,858,416
|
|
Individually reviewed for impairment
|
|
$
|
159,979
|
|
|
$
|
248,417
|
|
|
$
|
34,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
442,396
|
|
Collectively reviewed for impairment
|
|
|
451,597
|
|
|
|
824,693
|
|
|
|
29,747
|
|
|
|
36,683
|
|
|
|
73,300
|
|
|
|
1,416,020
|
|
Total allowance for loan losses
|
|
$
|
611,576
|
|
|
$
|
1,073,110
|
|
|
$
|
63,747
|
|
|
$
|
36,683
|
|
|
$
|
73,300
|
|
|
$
|
1,858,416
|
|
Gross loans, end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually reviewed for impairment
|
|
$
|
2,034,986
|
|
|
$
|
4,814,002
|
|
|
$
|
1,645,205
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,494,193
|
|
Collectively reviewed for impairment
|
|
|
19,259,940
|
|
|
|
7,485,450
|
|
|
|
23,199,950
|
|
|
|
10,915,768
|
|
|
|
1,128,544
|
|
|
|
61,989,652
|
|
Total gross loans
|
|
$
|
21,294,926
|
|
|
$
|
12,299,452
|
|
|
$
|
24,845,155
|
|
|
$
|
10,915,768
|
|
|
$
|
1,128,544
|
|
|
$
|
70,483,845
|
|
Net loan charge-offs
increased during 2016 from $43,267 for the year ended December 31, 2015 to $208,360 for the year ended December 31, 2016, an increase
of $165,093. Charge-offs in 2016 of approximately $220,000 were partial charge-offs taken on certain collateral-dependent loans
within our commercial real estate and construction segments. Charge-offs in 2015 of approximately $43,000 were full charge-offs
taken on one loan within our commercial real estate segment. 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. In addition, when collateral is obtained in satisfaction of a loan, a charge-off is taken
through the allowance at the time of repossession to move the collateral to other real estate owned at fair value less costs to
sell.
The allowance as a
percentage of gross loans increased from 1.68% at December 31, 2015 to 2.21% at December 31, 2016. The increase in the reserve
percentage is due to an increase in allowance for loan losses of $198,640. The increase in allowance is attributed to the recognition
of a provision for loan losses of $407,000, net of recoveries and charge-offs taken against specific reserves of $208,360. The
general reserve as a percentage of non-impaired loans has increased from 1.17% at December 31, 2015 to 1.22% at December 31, 2016.
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 management’s judgment, should be charge-off. 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.
Other Real Estate Owned and Repossessed Assets
As of December 31,
2016, we had $2.2 million in other real estate owned. This compares to $1.9 million in other real estate owned as of December
31, 2015. During 2016, collateral was obtained from three loan relationships that went through the foreclosure process. We also
completed the sale of three repossessed properties.
During 2016, 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 $613,000, which resulted in a loss of approximately $18,000 to the Company. Real estate owned for the Bank increased
due to three pieces of real estate being moved to other real estate owned for $1.3 million, partially offset by the sale of one
piece of real estate held by the Bank for proceeds of approximately $24,000, which resulted in a loss of approximately $6,000.
In addition, the Bank recognized writedowns on real estate owned of approximately $284,000 during 2016. On March 7, 2017, one
impaired loan was transferred to other real estate owned for $165,000, net of a specific reserve of $35,000. The specific reserve
was included in the December 31, 2016 allowance amounts. The following table summarizes changes in the consolidated balance of
other real estate owned and repossessed assets during the periods noted:
|
|
2016
|
|
|
2015
|
|
Balance at beginning of year
|
|
$
|
1,910,220
|
|
|
$
|
2,557,457
|
|
Repossessed property acquired in settlement of loans
|
|
|
1,257,289
|
|
|
|
300,000
|
|
Proceeds from sales of repossessed property
|
|
|
(637,072
|
)
|
|
|
(582,295
|
)
|
Gain (loss) on sale and write-downs of repossessed property, net
|
|
|
(307,770
|
)
|
|
|
(364,942
|
)
|
Balance at end of year
|
|
$
|
2,222,667
|
|
|
$
|
1,910,220
|
|
The following table summarizes the composition
of other real estate owned and repossessed assets as of the dates noted:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Residential land lots
|
|
$
|
—
|
|
|
$
|
31,320
|
|
Single and multifamily residential real estate
|
|
|
—
|
|
|
|
—
|
|
Commercial office space
|
|
|
1,412,667
|
|
|
|
1,008,900
|
|
Commercial land
|
|
|
810,000
|
|
|
|
870,000
|
|
Equipment
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
2,222,667
|
|
|
$
|
1,910,220
|
|
The remaining 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
and the downward, though stabilizing, trends in third party appraised values.
Deposits and Other Interest-Bearing Liabilities
Our primary source
of funds for loans and investments is our deposits and short-term repurchase agreements. Average total deposits for the years
ended December 31, 2016 and 2015 were $83.1 million and $85.0 million, respectively. The following table shows the balance outstanding
and the weighted-average rates paid on deposits held by us as of December 31, 2016, 2015, and 2014.
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
Non-interest bearing demand deposits
|
|
$
|
13,723,902
|
|
|
|
—
|
%
|
|
$
|
13,010,209
|
|
|
|
—
|
%
|
|
$
|
11,016,882
|
|
|
|
—
|
%
|
Interest bearing demand deposits
|
|
|
8,959,818
|
|
|
|
0.11
|
|
|
|
8,894,408
|
|
|
|
0.12
|
|
|
|
7,335,360
|
|
|
|
0.12
|
|
Money market accounts
|
|
|
29,620,179
|
|
|
|
0.28
|
|
|
|
33,164,973
|
|
|
|
0.25
|
|
|
|
35,077,304
|
|
|
|
0.24
|
|
Savings accounts
|
|
|
1,054,314
|
|
|
|
0.05
|
|
|
|
1,034,438
|
|
|
|
0.05
|
|
|
|
767,668
|
|
|
|
0.05
|
|
Time deposits less than $100,000
|
|
|
5,565,797
|
|
|
|
0.76
|
|
|
|
5,756,202
|
|
|
|
0.71
|
|
|
|
6,695,936
|
|
|
|
0.62
|
|
Time deposits of $100,000 or more
|
|
|
20,783,638
|
|
|
|
0.92
|
|
|
|
21,707,095
|
|
|
|
0.84
|
|
|
|
21,981,513
|
|
|
|
0.76
|
|
Brokered time deposits less than $100,000
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
79,707,648
|
|
|
|
0.45
|
%
|
|
$
|
83,567,325
|
|
|
|
0.38
|
%
|
|
$
|
82,874,663
|
|
|
|
0.36
|
%
|
Core deposits, which
exclude time deposits of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other earning
assets. Core deposits decreased $4.9 million, or 4.7%, from $61.9 million at December 31, 2015 to $58.9 million at December 31,
2016. Total retail, or customer, deposits decreased $1.1 million during 2016, or 4.1%. Our loan-to-deposit ratio was 74.2% and
78.1% at December 31, 2016 and 2015, respectively.
All of our time deposits
are certificates of deposits. The maturity distribution of our time deposits of $100,000 or more, excluding brokered deposits,
at December 31, 2016 is as follows:
Three months or less
|
|
$
|
4,694,072
|
|
Over three through six months
|
|
|
3,153,453
|
|
Over six through twelve months
|
|
|
7,249,907
|
|
Over twelve months
|
|
|
11,252,003
|
|
Total
|
|
$
|
26,349,435
|
|
Time deposits that
meet or exceed the FDIC insurance limit at $250,000 amounted to $8,913,592 and $7,578,706 as of December 31, 2016 and 2015, respectively.
Short-Term Borrowings
At December 31, 2016,
2015, and 2014, the Bank had sold $113,598, $113,080, and $153,603, respectively, of securities under agreements to repurchase
with brokers with a weighted rate of 0.12%, 0.10%, and 0.15%, respectively that mature in less than 90 days. These agreements
were secured with approximately $50,000, $107,000, and $130,000 of investment securities, respectively. The securities, under
agreements to repurchase, averaged $135,708 during 2016, with $279,628 being the maximum amount outstanding at any month-end.
The average rate paid in 2016 was 0.10%. The securities, under agreements to repurchase, averaged $98,636 during 2015, with $354,739
being the maximum amount outstanding at any month-end. The average rate paid in 2015 was 0.10%. The securities, under agreements
to repurchase, averaged $110,307 during 2014, with $221,467 being the maximum amount outstanding at any month-end. The average
rate paid in 2014 was 0.10%.
At December 31, 2016,
the Bank had an unused unsecured line of credit to purchase federal funds of $2.0 million. The line of credit is available on
a one to fourteen day basis for general corporate purposes of the Bank. The lender has reserved the right to withdraw the line
at its option. At December 31, 2016, the Bank had pledged $15.5 million in loans to the FRB’s Borrower-in-Custody of Collateral
program. Our available credit under this line was approximately $11.4 million as of December 31, 2016.
Federal Home Loan Bank Advances
From time to time,
the Bank utilizes FHLB advances as a source of funding. However, at December, 31, 2016 and 2015, the Bank had no advances from
the FHLB. In February 2017, an advance of $4,000,000 was obtained from the FHLB with a weighted average rate of 0.89% and a maturity
date of November 2017.
Capital Resources
Total shareholders’
equity was $9.9 million at December 31, 2016, a decrease of $2.7 million, or 21.4%, from $12.6 million at December 31, 2015. Shareholders’
equity decreased during 2016 primarily due to the recognition of a net loss of $2.6 million and a decrease in the unrealized gain
on investment securities of $121,902. For 2016, the $2.6 million net loss was primarily the result of $1.1 million in professional
fees, $407,000 in provisions for loan losses and $512,407 in expenses related to real estate owned. Our shareholders’ equity
is also affected by fluctuations in our other comprehensive income (loss). The highest month end reported unrealized loss in other
comprehensive income during calendar 2016 was $288,014 in August 2016 as compared to the highest month end unrealized gain in
December 2015 of $113,846.
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 more than $1 billion 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).
|
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, 2017, the Bank
is required to hold a capital conservation buffer of 1.25%, increasing by 0.625% 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%.
|
|
•
|
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 Bank’s 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 Bank’s overall financial condition or prospects for
other purposes.
See additional discussion
above under “Business — Supervision and Regulation.”
The following table
sets forth the Bank’s and the Company’s various capital ratios at December 31, 2016, 2015, and 2014.
|
|
Bank
|
|
|
Holding Company
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Total risk-based capital
|
|
|
13.4
|
%
|
|
|
14.1
|
%
|
|
|
15.3
|
%
|
|
|
15.7
|
%
|
|
|
12.8
|
%
|
|
|
14.0
|
%
|
Tier 1 risk-based capital
|
|
|
12.1
|
%
|
|
|
12.8
|
%
|
|
|
14.0
|
%
|
|
|
14.4
|
%
|
|
|
16.7
|
%
|
|
|
12.7
|
%
|
Leverage capital
|
|
|
9.0
|
%
|
|
|
10.0
|
%
|
|
|
10.6
|
%
|
|
|
10.1
|
%
|
|
|
13.0
|
%
|
|
|
9.7
|
%
|
Common equity to Tier 1 capital
|
|
|
12.1
|
%
|
|
|
12.8
|
%
|
|
|
n/a
|
|
|
|
14.4
|
%
|
|
|
16.7
|
%
|
|
|
n/a
|
|
Since December 31,
2016, no conditions or events have occurred, of which we are aware, that have resulted in a material change in the Company’s
or the Bank’s capital category. As of December 31, 2016, there were no commitments outstanding, and there were no new commitments
as of March 23, 2017. Under Regulation W, the Bank may not be a source of cash or capital for the Company. As disclosed in “Note
22 — Parent Company Financial Information,” the Company’s cash balances were $1.8 million and it had no real
estate held for sale at December 31, 2016.
Return on Equity and Assets
The following table
shows the return on average assets (net income (loss) divided by average total assets), return on average equity (net income (loss)
divided by average equity), and equity to assets ratio (average equity divided by average total assets) for the years ended December
31, 2016, 2015 and 2014. Since our inception, we have not paid cash dividends.
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Return on average assets
|
|
|
(2.79
|
)%
|
|
|
(4.94
|
)%
|
|
|
(6.25
|
)%
|
Return on average equity
|
|
|
(27.36
|
)%
|
|
|
(38.47
|
)%
|
|
|
(6.24
|
)%
|
Equity to assets ratio
|
|
|
10.18
|
%
|
|
|
12.85
|
%
|
|
|
12.29
|
%
|
Effect of Inflation and Changing Prices
The effect of relative
purchasing power over time due to inflation has not been taken into account in our consolidated financial statements. Rather,
our financial statements have been prepared on a historical cost basis in accordance with GAAP.
Unlike most industrial
companies, our assets and liabilities are primarily monetary in nature. Therefore, the effect of changes in interest rates will
have a more significant impact on our performance than will the effect of changing prices and inflation in general. In addition,
interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude.
Off-Balance Sheet Risk
Commitments to extend
credit are agreements to lend to a client as long as the client has not violated any material condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At December
31, 2016, unfunded commitments to extend credit were $8.6 million, of which approximately $7.9 million is at fixed rates and $677,000
is at variable rates. A significant portion of the unfunded commitments related to commercial lines of credit. Based on historical
experience, we anticipate that a significant portion of these lines of credit will not be funded. We evaluate each client’s
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. The type of collateral varies but may include accounts receivable, inventory,
property, plant and equipment, and commercial and residential real estate.
We are not involved
in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements, or other
transactions that could result in liquidity needs or other commitments that significantly impact earnings.
Market Risk
Market risk is the
risk of loss from adverse changes in market prices and rates, which principally arises from interest rate risk inherent in our
lending, investing, deposit gathering, and borrowing activities. Other types of market risks, such as foreign currency exchange
rate risk and commodity price risk, do not generally arise in the normal course of our business.
We actively monitor
and manage our interest rate risk exposure principally by measuring our interest sensitivity “gap,” which is the positive
or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period
of time. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available for sale, replacing
an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount
of assets and liabilities repricing in this same time interval helps to hedge the risk and minimize the impact on net interest
income of rising or falling interest rates. We generally would benefit from increasing market rates of interest when we have an
asset-sensitive gap position and generally would benefit from decreasing market rates of interest when we are liability-sensitive.
Approximately 67.7%
of our loans were variable rate loans at December 31, 2016, an increase from 64.6% at December 31, 2015. As of December 31, 2016,
our ratio of cumulative gap to total earning assets after 12 months but within five years was 18.84% because in a rate change
scenario, $17.5 million more liabilities would reprice in a 12 month period than assets. However, our gap analysis is not a precise
indicator of our interest sensitivity position. The analysis presents only a static view of the timing of maturities and repricing
opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally.
For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame,
but those rates are viewed by us as significantly less interest-sensitive than market-based rates such as those paid on noncore
deposits. Net interest income may be affected by other significant factors in a given interest rate environment, including changes
in the volume and mix of interest-earning assets and interest-bearing liabilities.
Interest rate risk
is the Company’s primary market risk exposure. As part of interest rate risk management, the Company may enter into swap
agreements to provide protection from rising rates and the impact on the current gap. There were no swap agreements at December
31, 2016. Currently, the Company’s exposure to market risk is reviewed on a regular basis by management, and at the Bank
level, the ALCO.
Liquidity and Interest Rate Sensitivity
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
At December 31, 2016,
our liquid assets, consisting of cash and due from banks and federal funds sold, amounted to $10.8 million, or 11.9% of total
assets, a decrease from our cash liquidity ratio of 14.2% as of December 31, 2015. During 2016, the decrease in liquidity is due
primarily to the decrease in cash and due from bank and fed funds sold.
The Company
The Company’s
cash balances, independent of the Bank, were $1.8 million and its real estate held for sale was zero at December 31, 2016 compared
to cash balances of approximately $2.9 million and real estate held for sale of $631,320 at December 31, 2015. The Company’s
accrued and other liabilities, independent of the Bank, were $304,346 at December 31, 2016 compared to $905,824 at December 31,
2015. The decrease in liquid assets of approximately $1.1 million was primarily due to the repayment of accrued liabilities, approximately
$250,000 in expenses incurred related to the transaction services segment, approximately $147,000 in other real estate owned expenses
incurred related to the asset management segment and approximately $913,000 in professional fees and data processing expenses
incurred at the Company. The decrease in payables of $601,478 was due primarily to the repayment of accrued liabilities related
to the transaction services segment during 2016. See “Note 22 — Parent Company Financial Information” for additional
information related to the transaction services segment.
Asset/liability management
is the process by which we monitor and control the mix and maturities of our assets and liabilities. The essential purposes of
asset/liability management are to ensure adequate liquidity and to maintain an appropriate balance between interest sensitive
assets and liabilities in order to minimize potentially adverse impacts on earnings from changes in market interest rates. Our
ALCO monitors and considers methods of managing exposure to interest rate risk. We have both an internal ALCO consisting of senior
management that meets at various times during each month and a board ALCO that meets monthly. The ALCOs are responsible for maintaining
the level of interest rate sensitivity of our interest sensitive assets and liabilities within board-approved limits.
The Bank
Our ability to maintain
and expand our deposit base and borrowing capabilities serves as our primary source of liquidity. We plan to meet our future cash
needs through the liquidation of temporary investments and the generation of 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 December 31, 2016 amounted to $2.5 million, or 2.8% of total assets. Investment securities traditionally provide a
secondary source of liquidity since they can be converted into cash in a timely manner. At December 31, 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.
We are 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 December 31, 2016,
we had collateral that would support approximately $12.3 million in additional borrowings. Like all banks, we are subject to the
FHLB’s 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.
At December 31, 2016,
the Bank had an unused line of credit to purchase federal funds of $2.0 million. The line of credit is available on a one to fourteen
day basis for general corporate purposes of the Bank. The lender has reserved the right to withdraw the line at its option. At
December 31, 2016, the Bank had pledged $15.5 million in loans to the FRB’s Borrower-in-Custody of Collateral program. Our
available credit under this line was approximately $11.4 million as of December 31, 2016.
The following table
sets forth information regarding our rate sensitivity, as of December 31, 2016, at each of the time intervals. The information
in the table may not be indicative of our rate sensitivity position at other points in time. In addition, the maturity distribution
indicated in the table may differ from the contractual maturities of the earning assets and interest-bearing liabilities
presented due to consideration
of prepayment speeds under various interest rate change scenarios in the application of the interest rate sensitivity methods
described above.
|
|
Within
three
months
|
|
|
After three but
within twelve
months
|
|
|
After one but
within five
years
|
|
|
After
five
years
|
|
|
Total
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other
|
|
$
|
6,143,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,143,000
|
|
Investment securities
|
|
|
—
|
|
|
|
—
|
|
|
|
2,499,805
|
|
|
|
—
|
|
|
|
2,499,805
|
|
Interest-bearing deposits in other institutions
|
|
|
1,750,000
|
|
|
|
4,250,000
|
|
|
|
4,500,000
|
|
|
|
—
|
|
|
|
10,500,000
|
|
Loans
|
|
|
2,116,714
|
|
|
|
12,204,679
|
|
|
|
13,531,086
|
|
|
|
32,797,579
|
|
|
|
60,650,058
|
|
Total interest-earning assets
|
|
$
|
10,009,714
|
|
|
$
|
16,454,679
|
|
|
$
|
20,530,891
|
|
|
$
|
32,797,579
|
|
|
$
|
79,792,863
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market and NOW
|
|
$
|
38,579,997
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
38,579,997
|
|
Regular savings
|
|
|
1,054,314
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,054,314
|
|
Time deposits
|
|
|
4,694,072
|
|
|
|
10,403,360
|
|
|
|
9,686,221
|
|
|
|
1,565,781
|
|
|
|
26,349,434
|
|
Repurchase agreements
|
|
|
113,598
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
113,598
|
|
Total interest-bearing liabilities
|
|
$
|
44,441,981
|
|
|
$
|
10,403,360
|
|
|
$
|
9,686,221
|
|
|
$
|
1,565,781
|
|
|
$
|
66,097,343
|
|
Period gap
|
|
$
|
(34,432,267
|
)
|
|
$
|
6,051,319
|
|
|
$
|
10,844,670
|
|
|
$
|
31,231,798
|
|
|
|
|
|
Cumulative gap
|
|
|
(34,432,267
|
)
|
|
|
(28,380,948
|
)
|
|
|
(17,536,278
|
)
|
|
|
13,695,520
|
|
|
|
|
|
Ratio of cumulative gap to total earning assets
|
|
|
(36.99
|
)%
|
|
|
(30.49
|
)%
|
|
|
(18.84
|
)%
|
|
|
14.71
|
%
|
|
|
|
|
Accounting, Reporting, and Regulatory Matters
The following is a
summary of recent authoritative pronouncements that may affect our accounting, reporting, and disclosure of financial information:
In May 2014, 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 August 2015, the FASB deferred the effective date of ASU 2014-09,
Revenue from
Contracts with Customers.
This topic was amended again in March 2016 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. The amendments will be effective for the Company for annual periods beginning after December 15, 2018,
and interim periods within annual reporting periods beginning after December 15, 2019. The Company does not expect these amendments
to have a material effect on its financial statements.
In January 2016, the
FASB amended the Financial Instruments topic of the Accounting Standards Codification 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, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company will apply the
guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. 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 Accounting Standards Codification to revise certain aspects of recognition, measurement,
presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after December
15, 2019, and interim periods within fiscal years beginning after December 15, 2020. 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
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 and interim periods within those annual periods. 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.
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 Company’s financial position, results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk
.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
and 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Shareholders
Independence Bancshares, Inc.
Greenville, South Carolina
We have audited the accompanying consolidated
balance sheets of Independence Bancshares, Inc. and its subsidiary (the “Company”) as of December 31, 2016 and 2015,
and the related consolidated statements of operations and comprehensive income (loss), changes in shareholders’ equity, and cash
flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31,
2016 and 2015, and the results of its operations and cash flows for the years then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ Elliott Davis Decosimo, LLC
Greenville, South Carolina
March 23, 2017
INDEPENDENCE BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
4,631,727
|
|
|
$
|
5,453,795
|
|
Federal funds sold
|
|
|
6,143,000
|
|
|
|
8,446,000
|
|
Cash and cash equivalents
|
|
|
10,774,727
|
|
|
|
13,899,795
|
|
Interest-bearing deposits in other institutions
|
|
|
10,500,000
|
|
|
|
1,500,000
|
|
Investment securities available for sale
|
|
|
2,499,805
|
|
|
|
10,687,851
|
|
Non-marketable equity securities
|
|
|
380,050
|
|
|
|
392,500
|
|
Loans, net of an allowance for loan losses of $1,338,149 and $1,139,509, respectively
|
|
|
59,144,847
|
|
|
|
66,402,246
|
|
Accrued interest receivable
|
|
|
170,342
|
|
|
|
232,215
|
|
Property, equipment, and software, net
|
|
|
2,025,774
|
|
|
|
2,198,796
|
|
Other real estate owned and repossessed assets
|
|
|
2,222,667
|
|
|
|
1,910,220
|
|
Bank-owned life insurance
|
|
|
2,542,910
|
|
|
|
—
|
|
Other assets
|
|
|
187,935
|
|
|
|
243,683
|
|
Total assets
|
|
$
|
90,449,057
|
|
|
$
|
97,467,306
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
13,723,903
|
|
|
$
|
13,010,209
|
|
Interest bearing
|
|
|
65,983,745
|
|
|
|
70,557,116
|
|
Total deposits
|
|
|
79,707,648
|
|
|
|
83,567,325
|
|
Securities sold under agreements to repurchase
|
|
|
113,598
|
|
|
|
113,080
|
|
Accrued interest payable
|
|
|
8,802
|
|
|
|
7,909
|
|
Accounts payable and accrued expenses
|
|
|
674,644
|
|
|
|
1,134,833
|
|
Total liabilities
|
|
|
80,504,692
|
|
|
|
84,823,147
|
|
Commitments and contingencies — notes 13 and 14
|
|
|
|
|
|
|
|
|
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
|
|
|
(8,056
|
)
|
|
|
113,846
|
|
Accumulated deficit
|
|
|
(33,306,290
|
)
|
|
|
(30,718,272
|
)
|
Total shareholders’ equity
|
|
|
9,944,365
|
|
|
|
12,644,159
|
|
Total liabilities and shareholders’ equity
|
|
$
|
90,449,057
|
|
|
$
|
97,467,306
|
|
See notes to consolidated financial statements
that are an integral part of these consolidated statements.
INDEPENDENCE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Interest income
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
3,272,291
|
|
|
$
|
3,193,831
|
|
Investment securities
|
|
|
219,507
|
|
|
|
323,979
|
|
Federal funds sold and other
|
|
|
73,030
|
|
|
|
49,953
|
|
Total interest income
|
|
|
3,564,828
|
|
|
|
3,567,763
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
326,120
|
|
|
|
315,484
|
|
Borrowings
|
|
|
220
|
|
|
|
15,578
|
|
Total interest expense
|
|
|
326,340
|
|
|
|
331,062
|
|
Net interest income
|
|
|
3,238,488
|
|
|
|
3,236,701
|
|
Provision for loan losses
|
|
|
407,000
|
|
|
|
150,000
|
|
Net interest income after provision for loan losses
|
|
|
2,831,488
|
|
|
|
3,086,701
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
Service fees on deposit accounts
|
|
|
95,431
|
|
|
|
81,159
|
|
Residential loan origination fees
|
|
|
231,495
|
|
|
|
224,663
|
|
Forgiveness of debt
|
|
|
—
|
|
|
|
403,245
|
|
SBA loan fees
|
|
|
119,306
|
|
|
|
—
|
|
Gain (loss) on sale of investments
|
|
|
296,723
|
|
|
|
(87,995
|
)
|
Other income
|
|
|
97,739
|
|
|
|
45,835
|
|
Total non-interest income
|
|
|
840,694
|
|
|
|
666,907
|
|
Non-interest expenses
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
2,557,959
|
|
|
|
2,950,953
|
|
Real estate owned activity
|
|
|
512,407
|
|
|
|
457,173
|
|
Occupancy and equipment
|
|
|
639,167
|
|
|
|
678,404
|
|
Insurance
|
|
|
216,295
|
|
|
|
233,168
|
|
Data processing and related costs
|
|
|
471,976
|
|
|
|
343,107
|
|
Professional fees
|
|
|
1,050,062
|
|
|
|
1,320,505
|
|
Product research and development expense
|
|
|
249,594
|
|
|
|
2,209,978
|
|
Other
|
|
|
562,740
|
|
|
|
353,759
|
|
Total non-interest expenses
|
|
|
6,260,000
|
|
|
|
8,547,047
|
|
Loss before income tax expense
|
|
|
(2,588,018
|
)
|
|
|
(4,793,439
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
5,080
|
|
Net loss
|
|
$
|
(2,588,018
|
)
|
|
$
|
(4,798,519
|
)
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on investment securities available for sale, net of tax
|
|
|
174,821
|
|
|
|
24,697
|
|
Reclassification adjustment included in net income, net of tax
|
|
|
(296,723
|
)
|
|
|
87,995
|
|
Other comprehensive (loss) income
|
|
|
(121,902
|
)
|
|
|
112,692
|
|
Total comprehensive loss
|
|
$
|
(2,709,920
|
)
|
|
$
|
(4,685,827
|
)
|
Loss per common share — basic and diluted
|
|
$
|
(0.13
|
)
|
|
$
|
(0.23
|
)
|
Weighted average common shares outstanding — basic and diluted
|
|
|
20,502,760
|
|
|
|
20,502,760
|
|
See notes to consolidated financial statements
that are an integral part of these consolidated statements.
INDEPENDENCE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
303,829
|
|
|
|
—
|
|
|
|
—
|
|
|
|
303,829
|
|
Issuance of preferred stock – net of expenses
|
|
|
8,425
|
|
|
|
84
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,615,493
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,615,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,798,519
|
)
|
|
|
(4,798,519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
112,692
|
|
|
|
—
|
|
|
|
112,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,588,018
|
)
|
|
|
(2,588,018
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(121,902
|
)
|
|
|
—
|
|
|
|
(121,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
8,425
|
|
|
$
|
84
|
|
|
|
20,502,760
|
|
|
$
|
205,028
|
|
|
$
|
43,053,599
|
|
|
$
|
(8,056
|
)
|
|
$
|
(33,306,290
|
)
|
|
$
|
9,944,365
|
|
See notes to consolidated financial statements
that are an integral part of these consolidated statements.
INDEPENDENCE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,588,018
|
)
|
|
$
|
(4,798,519
|
)
|
Adjustments to reconcile net loss to cash used in operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
407,000
|
|
|
|
150,000
|
|
Depreciation
|
|
|
206,623
|
|
|
|
215,471
|
|
Amortization of investment securities discounts/premiums, net
|
|
|
134,622
|
|
|
|
110,134
|
|
Stock option expense related to stock options granted
|
|
|
10,126
|
|
|
|
303,829
|
|
(Gain) loss on sale of investment securities
|
|
|
(296,723
|
)
|
|
|
87,995
|
|
Increase in value of bank owned life insurance
|
|
|
(42,910
|
)
|
|
|
—
|
|
Loss on disposal of property, equipment and software
|
|
|
566
|
|
|
|
—
|
|
Net changes in fair value and losses on sale of other real estate owned and repossessed assets
|
|
|
307,770
|
|
|
|
364,942
|
|
Forgiveness of debt
|
|
|
—
|
|
|
|
(403,245
|
)
|
Decrease in other assets, net
|
|
|
117,621
|
|
|
|
170,697
|
|
Decrease in other liabilities, net
|
|
|
(400,648
|
)
|
|
|
(1,185,202
|
)
|
Net cash used in operating activities
|
|
|
(2,143,971
|
)
|
|
|
(4,983,898
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
Net decrease in loans
|
|
|
5,593,110
|
|
|
|
1,142,421
|
|
Purchases of investment securities available for sale
|
|
|
(7,437,287
|
)
|
|
|
(336,864
|
)
|
Maturities and sales of investment securities available for sale
|
|
|
14,955,233
|
|
|
|
4,070,789
|
|
Repayments of investment securities available for sale
|
|
|
651,651
|
|
|
|
1,166,366
|
|
Net activity in interest bearing deposits in other institutions
|
|
|
(9,000,000
|
)
|
|
|
(1,500,000
|
)
|
Redemption of non-marketable equity securities, net
|
|
|
12,450
|
|
|
|
217,150
|
|
Purchase of bank owned life insurance
|
|
|
(2,500,000
|
)
|
|
|
—
|
|
Purchase of property, equipment, and software
|
|
|
(34,167
|
)
|
|
|
(30,260
|
)
|
Proceeds from sale of other real estate owned and repossessed assets
|
|
|
637,072
|
|
|
|
582,295
|
|
Net cash provided by investing activities
|
|
|
2,878,062
|
|
|
|
5,311,897
|
|
Financing activities
|
|
|
|
|
|
|
|
|
(Decrease) increase in deposits, net
|
|
|
(3,859,677
|
)
|
|
|
692,662
|
|
Repayments on borrowings
|
|
|
—
|
|
|
|
(5,000,000
|
)
|
Increase (decrease) in securities sold under agreements to repurchase
|
|
|
518
|
|
|
|
(40,523
|
)
|
Repayments on note payable
|
|
|
—
|
|
|
|
(600,000
|
)
|
Issuance of preferred stock, net
|
|
|
—
|
|
|
|
7,615,577
|
|
Net cash provided by (used in) financing activities
|
|
|
(3,859,159
|
)
|
|
|
2,667,716
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(3,125,068
|
)
|
|
|
2,995,715
|
|
Cash and cash equivalents at beginning of the year
|
|
|
13,899,795
|
|
|
|
10,904,080
|
|
Cash and cash equivalents at end of the year
|
|
$
|
10,774,727
|
|
|
$
|
13,899,795
|
|
Supplemental information
|
|
|
|
|
|
|
|
|
Cash paid for
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
325,447
|
|
|
$
|
331,379
|
|
Schedule of non-cash transactions
|
|
|
|
|
|
|
|
|
Unrealized gain on securities available for sale, net of tax
|
|
$
|
174,821
|
|
|
$
|
24,697
|
|
Loans transferred to other real estate owned and repossessed assets
|
|
$
|
1,257,289
|
|
|
$
|
300,000
|
|
See notes to consolidated financial statements
that are an integral part of these consolidated statements.
INDEPENDENCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AND ACTIVITIES
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 consumer, commercial 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 Company’s 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 Bank’s current market area as well as throughout South Carolina.
The Company’s board of directors is focused on profitably growing the Bank and enhancing shareholder value through this
targeted expansion of its consumer lending program, which may include purchases of in-market consumer loans that meet the Bank’s
underwriting criteria.
The following is a
description of the significant accounting and reporting policies that the Company follows in preparing and presenting consolidated
financial statements.
Basis of Presentation
The accompanying consolidated
financial statements include the accounts of the Company and its wholly owned subsidiary, Independence National Bank. In consolidation,
all significant intercompany transactions have been eliminated. The accounting and reporting policies conform to accounting principles
generally accepted in the United States and to general practices in the banking industry.
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.
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.
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 relate to the determination of the allowance for loan losses, including
valuation allowances for impaired loans, the valuation of real estate acquired in connection with foreclosures or in satisfaction
of loans, and calculation of the provision for income taxes and deferred income tax assets and related valuation allowances. In
connection with the determination of the allowance for loan losses and the valuation of foreclosed real estate,
management obtains
independent appraisals for significant properties and takes into account other current market information. Management must also
make estimates in determining the useful lives and methods for depreciating premises and equipment.
While management uses
available information to recognize losses on loans and foreclosed real estate, future additions to the allowance for loan losses
and changes to valuation of foreclosed real estate may be necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan
losses and valuation of foreclosed real estate. Such agencies may require the Company to recognize additions to the allowance
for loan losses or additional write-downs on foreclosed real estate based on their judgments about information available to them
at the time of their examination. Because of these factors, it is reasonably possible that the allowance for loan losses and valuation
of foreclosed real estate may change materially in the near term.
Risks and Uncertainties
In the normal course
of its business, the Company encounters two significant types of risks: economic and regulatory. There are three main components
of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree
that its interest bearing liabilities mature or reprice at different speeds, or on different bases, than its interest-earning
assets. Credit risk is the risk of default within the Company’s loan portfolio that results from borrowers’ inability
or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans
receivable and the valuation of real estate held by the Company.
The Company is subject
to the regulations of various governmental agencies. These regulations can change significantly from period to period. The Company
also undergoes periodic examinations by the regulatory agencies, which may subject it to changes with respect to valuation of
assets, amount of required loss allowance and operating restrictions resulting from the regulators’ judgments based on information
available to them at the time of their examinations. The Bank makes loans to individuals and businesses in and around “Upstate”
South Carolina for various personal and commercial purposes. The Bank has a diversified loan portfolio. Borrowers’ ability
to repay their loans is not dependent upon any specific economic sector.
Cash and Cash Equivalents
For purposes of reporting
cash flows, cash and cash equivalents includes 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 December 31, 2016
and 2015, the Company had restricted cash totaling $2,000 with the Federal Home Loan Bank (“FHLB”) of Atlanta. 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.
Investment Securities
Investment securities
are accounted for in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 320, “Investments — Debt and Equity Securities.” Management classifies securities
at the time of purchase into one of three categories as follows: (1) Securities Held to Maturity: securities which the Company
has the positive intent and ability to hold to maturity, which are reported at amortized cost; (2) Trading Securities: securities
that are bought and held principally for the purpose of selling them in the near future, which are reported at fair value with
unrealized gains and losses included in earnings; and (3) Securities Available for Sale: securities that may be sold under certain
conditions, which are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate
component of shareholders’ equity as accumulated other comprehensive income. The amortization of premiums and accretion
of discounts on investment securities are recorded as adjustments to interest income. Gains or losses on sales of investment securities
are based on the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method.
Losses on securities, reflecting a decline in value or impairment judged by the Company to be other-than-temporary, are charged
to earnings in the consolidated statements of operations.
Non-Marketable Equity Securities
The Bank, as a member
of the Federal Reserve Bank (“FRB”) and the FHLB, is required to own capital stock in these organizations. The amount
of FRB stock owned is based on the Bank’s capital levels and totaled $293,050 and $303,500 at December 31, 2016 and 2015,
respectively. The amount of FHLB stock owned is determined based on the Bank’s balances of residential mortgages and advances
from the FHLB and totaled $87,000 and $89,000 at December 31, 2016 and 2015, respectively. No ready
market exists for
these stocks, 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.
Loans Receivable
Loans are stated at
their unpaid principal balance net of any charge-offs. Interest income is computed using the simple interest method and is recorded
in the period earned. Fees earned and direct costs incurred on loans are amortized using the effective interest method over the
life of the loan.
When serious doubt
exists as to the collectability of a loan or when a loan becomes contractually 90 days past due as to principal or interest, interest
income is generally discontinued unless the estimated net realizable value of collateral exceeds the principal balance and accrued
interest. When interest accruals are discontinued, income earned but not collected is reversed. Cash receipts on nonaccrual loans
are not recorded as interest income, but are used to reduce principal. Generally, loans are returned to accrual status when the
loan is brought current and ultimate collectability of principal and interest is no longer in doubt.
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. In cases where management deems the amount of the reserve for loan losses to be less than previously
determined, an adjustment to lower or reverse the provision will be recorded. Loan losses are charged against the allowance when
management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, as well as any reversal of provision,
if any, are credited to the allowance.
The allowance for loan
losses or any reversal of provision is evaluated on a regular basis by management and is based upon management’s periodic
review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse
situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision
as more information becomes available.
The allowance consists
of 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 (less estimated selling costs) or observable market price of the impaired loan is lower than the carrying value
of that loan. 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.
The Company identifies
impaired loans through its 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 borrower’s 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 and in the process of the foreclosure
process, they are moved to nonaccrual status and recognition of interest income is discontinued. 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.
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.
The Company designates
loan modifications as troubled debt restructurings (TDRs) when, for economic or legal reasons related to the borrower’s
financial difficulties, a concession is granted to the borrower that would not otherwise be considered. Upon initial
restructuring, TDRs
are considered classified and impaired and are placed in nonaccrual status if not already categorized. TDRs are returned to accrual
status when there is economic substance to the restructuring, any portion of the debt not expected to be repaid has been charged
off, the remaining note is reasonably assured of repayment in accordance with its modified terms, and the borrower has demonstrated
sustained repayment performance in accordance with the modified terms for a reasonable period of time (generally six months).
Property and Equipment and Software
Land is reported at
cost. Buildings and improvements, furniture and equipment, capitalized software, and automobiles are stated at cost less accumulated
depreciation. Depreciation is computed by the straight-line method, based on the estimated useful lives of 40 years for buildings
and 3 to 15 years for software, furniture, equipment and automobiles. Leasehold improvements are amortized over the life of the
lease. The cost of assets sold or otherwise disposed of, and the related allowance for depreciation, are eliminated from the accounts
and the resulting gains or losses are reflected in the statement of operations when incurred. Maintenance and repairs are charged
to current expense. The costs of major renewals and improvements are capitalized.
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 at the time of acquisition. 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. Write-downs 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.
Securities Sold Under Agreements to Repurchase
The Bank enters into
sales of securities under agreements to repurchase. Repurchase agreements are treated as financing, with the obligation to repurchase
securities sold being reflected as a liability and the securities underlying the agreements remaining as assets.
Fair Value
The Company determines
the fair market values of its financial instruments based on the fair value hierarchy established in FASB ASC Topic 820, “Fair
Value Measurements and Disclosures” (“ASC Topic 820”), which provides a framework for measuring and disclosing
fair value under GAAP. 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.
|
Residential Loan Origination Fees
The Company offers
residential loan origination services to its customers. The loans are offered on terms and prices offered by the Company’s
correspondents and are closed in the name of the correspondents. The Company receives fees for services it provides in conjunction
with these origination services. The fees are recognized at the time the loans are closed by the Company’s correspondent.
Residential loan origination fees are included in other income on the Company’s consolidated statements of operations.
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.
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 common 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 years ended December 31, 2016 and 2015 as a result of the Company’s net loss, all
of the potential common shares (3,089,755 and 3,097,255 stock options, respectively, and zero warrants, as the warrants were not
exercised and were deemed expired in May 2015) 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 in connection with its digital banking business
and therefore expensed all computer software purchases and development expenses related to research and development. On September
25, 2015 the Company suspended the development of its digital banking business.
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, 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 August 2015, the FASB deferred the effective date of ASU 2014-09,
Revenue from
Contracts with Customers.
This topic was amended again in March 2016 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. The amendments will be effective for the Company for annual periods beginning after December 15, 2018,
and interim periods within annual reporting periods beginning after December 15, 2019. The Company does not expect these amendments
to have a material effect on its financial statements.
In January 2016, the
FASB amended the Financial Instruments topic of the Accounting Standards Codification 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, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company will apply the
guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. 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 Accounting Standards Codification to revise certain aspects of recognition, measurement,
presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after December
15, 2019, and interim periods within fiscal years beginning after December 15, 2020. 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
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 and interim periods within those annual periods. 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.
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 Company’s financial position, results of operations or cash flows.
NOTE 2 — INVESTMENT SECURITIES
The amortized costs and fair values of investment
securities available for sale are as follows:
|
|
December 31, 2016
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair
Value
|
|
US treasury note
|
|
$
|
2,507,861
|
|
|
$
|
—
|
|
|
$
|
(8,056
|
)
|
|
$
|
2,499,805
|
|
Total investment securities available for sale
|
|
$
|
2,507,861
|
|
|
$
|
—
|
|
|
$
|
(8,056
|
)
|
|
$
|
2,499,805
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair
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 available for sale
|
|
$
|
10,515,357
|
|
|
$
|
234,342
|
|
|
$
|
(61,848
|
)
|
|
$
|
10,687,851
|
|
The following table presents information
regarding securities with unrealized losses at December 31, 2016:
|
|
Securities in an Unrealized
Loss Position for Less than
12 Months
|
|
|
Securities in an Unrealized
Loss Position for More than
12 Months
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
US treasury note
|
|
$
|
2,499,805
|
|
|
$
|
8,056
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,499,805
|
|
|
$
|
8,056
|
|
Total temporarily impaired securities
|
|
$
|
2,499,805
|
|
|
$
|
8,056
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,499,805
|
|
|
$
|
8,056
|
|
The following table presents information
regarding securities with unrealized losses at December 31, 2015:
|
|
Securities in an Unrealized
Loss Position for Less than
12 Months
|
|
|
Securities in an Unrealized
Loss Position for More than
12 Months
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
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 December 31, 2016,
there were investment securities with a fair value of approximately $ 2.5 million which had been in a continuous loss position
for less than twelve months. At December 31, 2016, there were no investment securities which had been in a continuous loss position
for more than one year. 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, there
were investment securities with a fair value of approximately $ 951,000 which had been in a continuous loss position 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 one year. All remaining investment securities were in an
unrealized gain position.
The amortized costs
and fair values of investment securities available for sale at December 31, 2016, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because issuers have the right to prepay the obligations.
|
|
December 31, 2016
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
Due within one year
|
|
$
|
—
|
|
|
$
|
—
|
|
Due after one through three years
|
|
|
—
|
|
|
|
—
|
|
Due after three through five years
|
|
|
2,507,861
|
|
|
|
2,499,805
|
|
Due after five through ten years
|
|
|
—
|
|
|
|
—
|
|
Due after ten years
|
|
|
—
|
|
|
|
—
|
|
Total investment securities
|
|
$
|
2,507,861
|
|
|
$
|
2,499,805
|
|
During 2016, the Company
received proceeds from maturities and sales of securities of $15.0 million for a total gain of $296,723. During 2015, the Company
received proceeds from sales of securities of $4.1 million for a total loss of $87,995. At December 31, 2016 and 2015, $2.4 million
and $2.7 million, respectively, in securities were pledged as collateral for repurchase agreements, a credit line and public deposits.
The Company’s
investment portfolio consists principally of obligations of the United States of America, its agencies or enterprises it sponsors.
In the opinion of management, there is no concentration of credit risk in its investment portfolio.
NOTE 3 — LOANS
The composition of net loans by major category
is as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Real estate:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
22,033,590
|
|
|
$
|
25,559,943
|
|
Construction and development
|
|
|
7,913,783
|
|
|
|
7,286,459
|
|
Single and multifamily residential
|
|
|
13,314,130
|
|
|
|
16,434,722
|
|
Total real estate loans
|
|
|
43,261,503
|
|
|
|
49,281,124
|
|
Commercial business
|
|
|
15,954,106
|
|
|
|
17,027,054
|
|
Consumer
|
|
|
1,434,449
|
|
|
|
1,369,224
|
|
Deferred origination fees, net
|
|
|
(167,062
|
)
|
|
|
(135,647
|
)
|
Gross loans, net of deferred fees
|
|
|
60,482,996
|
|
|
|
67,541,755
|
|
Less allowance for loan losses
|
|
|
(1,338,149
|
)
|
|
|
(1,139,509
|
)
|
Loans, net
|
|
$
|
59,144,847
|
|
|
$
|
66,402,246
|
|
The Company, through
the Bank, makes loans to individuals and small- to mid-sized businesses for various personal and commercial purposes primarily
in Greenville County, South Carolina. Credit concentrations can exist in relation to individual borrowers or groups of borrowers,
certain types of collateral, certain types of industries, certain loan products, or certain regions of the country. Credit risk
associated with these concentrations could arise when a significant amount of loans, related by similar characteristics, are simultaneously
impacted by changes in economic or other conditions that cause their probability of repayment to be adversely affected. The Company
regularly monitors its credit concentrations. The Company does not have a significant concentration to any individual client.
The major concentrations of credit arise by collateral type. As of December 31, 2016, management has determined that the Company
has a concentration in commercial real estate and construction and development loans, including construction and development loans.
At December 31, 2016, the Company had $29.9 million in commercial real estate loans, representing 49.4% of gross loans. Management
has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened portfolio
monitoring and reporting, and strong underwriting criteria with respect to its commercial real estate portfolio.
As noted above, 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 Bank’s current market area as well as throughout South Carolina. The Company’s
board of directors is focused on profitably growing the Bank and enhancing shareholder value through this targeted expansion of
its consumer lending program, which may include purchases of in-market consumer loans that meet the Bank’s underwriting
criteria.
In addition to monitoring
potential concentrations of loans to a particular borrower or groups of borrowers, industries and geographic regions, management
monitors exposure to credit risk that could arise from potential concentrations of lending products and practices such as loans
that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only periods,
etc.) and loans with high loan-to-value ratios. Additionally, there are industry practices that could subject the Company to increased
credit risk should economic conditions change over the course of a loan’s life. For example, the Company makes variable
rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment
loans). These loans are underwritten and monitored to manage the associated risks. Management has determined that there is no
concentration of credit risk associated with its lending policies or practices.
The composition of
gross loans, before the deduction for deferred origination fees, by rate type is as follows:
|
|
December 31, 2016
|
Variable rate loans
|
|
$
|
41,077,648
|
|
Fixed rate loans
|
|
|
19,572,410
|
|
|
|
$
|
60,650,058
|
|
Directors,
executive officers and associates of such persons are customers of and have transactions with the Bank in the ordinary course
of business. Included in such transactions are outstanding loans and commitments, all of which were made under substantially
the same credit terms, including interest rates and collateral, as those prevailing at the time for comparable transactions
with unrelated persons and do not involve more than the normal risk of collectability. The aggregate dollar amount of these
outstanding loans was $1.7 million and $2.8 million at December 31, 2016 and 2015, respectively. During 2016, there were
approximately $95,000 in new loans and advances on these lines of credit and repayments were approximately $738,000. During
2015, there were $266,000 new loans and advances on these lines of credit and repayments were approximately $557,000. At
December 31, 2015, there were commitments to extend additional credit to related parties in the amount of approximately
$140,000. There were no commitments to extend additional credit to related parties at December 31, 2016. The Bank has a line
of credit with the FHLB to borrow funds, subject to the pledge of qualified collateral. Acceptable collateral includes
certain types of commercial real estate, consumer residential and home equity loans. At December 31, 2016, approximately
$34.9 million of first and second mortgage loans, commercial loans and home equity lines of credit were specifically pledged
to the FHLB, resulting in $12.3 million in lendable collateral. At December 31, 2016, the Bank had also pledged $15.5 million
of commercial loans to the FRB’s Borrower-in-Custody of Collateral program, resulting in $11.4 million in lendable
collateral.
Credit Quality
The following table summarizes delinquencies
and nonaccruals, by portfolio class, as of December 31, 2016 and 2015.
|
|
Single and
multifamily
residential
real estate
|
|
|
Construction
and
development
|
|
|
Commercial
real estate
— other
|
|
|
Commercial
business
|
|
|
Consumer
|
|
|
Total
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30–59 days past due
|
|
$
|
442,295
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
617,052
|
|
|
$
|
—
|
|
|
$
|
1,059,347
|
|
60–89 days past due
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
409,675
|
|
|
|
—
|
|
|
|
409,675
|
|
Nonaccrual
|
|
|
108,951
|
|
|
|
—
|
|
|
|
195,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
304,451
|
|
Total past due and nonaccrual
|
|
|
551,246
|
|
|
|
—
|
|
|
|
195,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,773,473
|
|
Current
|
|
|
12,762,884
|
|
|
|
7,913,783
|
|
|
|
21,838,090
|
|
|
|
14,927,379
|
|
|
|
1,434,449
|
|
|
|
58,876,585
|
|
Total loans
|
|
$
|
13,314,130
|
|
|
$
|
7,913,783
|
|
|
$
|
22,033,590
|
|
|
$
|
15,954,106
|
|
|
$
|
1,434,449
|
|
|
$
|
60,650,058
|
|
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
|
|
|
|
—
|
|
|
|
1,665,190
|
|
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
|
|
$
|
16,434,722
|
|
|
$
|
7,286,459
|
|
|
$
|
25,559,943
|
|
|
$
|
17,027,054
|
|
|
$
|
1,369,224
|
|
|
$
|
67,677,402
|
|
At December 31, 2016
and 2015, there were nonaccrual loans of $304,451 and $1.7 million, respectively, included in the above loan balances. Foregone
interest income related to nonaccrual loans equaled $60,633 and $129,066 for the years ended December 31, 2016 and 2015, respectively.
No interest income was recognized on nonaccrual loans during 2016 and 2015. At both December 31, 2016 and 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.
The following table
summarizes management’s internal credit risk grades, by portfolio class, as of December 31, 2016 and 2015.
|
|
Single and
multifamily
residential
real estate
|
|
|
Construction
and
development
|
|
|
Commercial
real estate
— other
|
|
|
Commercial
business
|
|
|
Consumer
|
|
|
Total
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass Loans (Consumer)
|
|
$
|
8,246,567
|
|
|
$
|
1,462,925
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,434,449
|
|
|
$
|
11,143,941
|
|
Grade 1 — Prime
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Grade 2 — Good
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Grade 3 — Acceptable
|
|
|
1,919,685
|
|
|
|
1,108,334
|
|
|
|
11,057,550
|
|
|
|
7,676,592
|
|
|
|
—
|
|
|
|
21,762,161
|
|
Grade 4 — Acceptable w/Care
|
|
|
2,877,013
|
|
|
|
5,273,411
|
|
|
|
9,232,019
|
|
|
|
7,307,961
|
|
|
|
—
|
|
|
|
24,690,404
|
|
Grade 5 — Special Mention
|
|
|
—
|
|
|
|
69,113
|
|
|
|
766,388
|
|
|
|
—
|
|
|
|
—
|
|
|
|
835,501
|
|
Grade 6 — Substandard
|
|
|
270,865
|
|
|
|
—
|
|
|
|
977,633
|
|
|
|
969,553
|
|
|
|
—
|
|
|
|
2,218,051
|
|
Grade 7 — Doubtful
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total loans
|
|
$
|
13,314,130
|
|
|
$
|
7,913,783
|
|
|
$
|
22,033,590
|
|
|
$
|
15,954,106
|
|
|
$
|
1,434,449
|
|
|
$
|
60,650,058
|
|
|
|
Single and
multifamily
residential
real estate
|
|
|
Construction
and
development
|
|
|
Commercial
real estate
— other
|
|
|
Commercial
business
|
|
|
Consumer
|
|
|
Total
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass Loans (Consumer)
|
|
$
|
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
|
|
$
|
16,434,722
|
|
|
$
|
7,286,459
|
|
|
$
|
25,559,943
|
|
|
$
|
17,027,054
|
|
|
$
|
1,369,224
|
|
|
$
|
67,677,402
|
|
Loans graded one through
four are considered “pass” credits. At December 31, 2016, approximately 95% 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. Loans totaling $835,501
and $1.6 million, respectively, were classified as special mention at December 31, 2016 and 2015. 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 December 31, 2016 and 2015, substandard loans totaled $2.2 million and
$2.9 million, respectively, with the vast majority of these loans being collateralized by real estate. Substandard credits are
evaluated for impairment on a quarterly basis.
The following table
summarizes information relative to impaired loans, by portfolio class, at December 31, 2016 and 2015.
|
|
Unpaid
principal
balance
|
|
|
Recorded
investment
|
|
|
Related
allowance
|
|
|
Average
impaired
investment
|
|
|
Interest
income
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and multifamily residential real estate
|
|
$
|
99,794
|
|
|
$
|
99,794
|
|
|
$
|
—
|
|
|
$
|
179,235
|
|
|
$
|
3,261
|
|
Construction and development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
109,660
|
|
|
|
6,130
|
|
Commercial real estate — other
|
|
|
782,133
|
|
|
|
782,133
|
|
|
|
—
|
|
|
|
718,589
|
|
|
|
46,778
|
|
Commercial business
|
|
|
231,448
|
|
|
|
231,448
|
|
|
|
—
|
|
|
|
96,283
|
|
|
|
4,744
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
With related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and multifamily residential real estate
|
|
|
171,071
|
|
|
|
171,071
|
|
|
|
93,471
|
|
|
|
201,000
|
|
|
|
3,251
|
|
Construction and development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
98,139
|
|
|
|
—
|
|
Commercial real estate — other
|
|
|
195,500
|
|
|
|
195,500
|
|
|
|
30,500
|
|
|
|
524,283
|
|
|
|
—
|
|
Commercial business
|
|
|
738,105
|
|
|
|
738,105
|
|
|
|
487,490
|
|
|
|
191,329
|
|
|
|
46,315
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and multifamily residential real estate
|
|
|
270,865
|
|
|
|
270,865
|
|
|
|
93,471
|
|
|
|
380,235
|
|
|
|
6,512
|
|
Construction and development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
207,799
|
|
|
|
6,130
|
|
Commercial real estate — other
|
|
|
977,633
|
|
|
|
977,633
|
|
|
|
30,500
|
|
|
|
1,242,872
|
|
|
|
46,778
|
|
Commercial business
|
|
|
969,553
|
|
|
|
969,553
|
|
|
|
487,490
|
|
|
|
287,612
|
|
|
|
51,059
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
2,218,051
|
|
|
$
|
2,218,051
|
|
|
$
|
611,461
|
|
|
$
|
2,118,518
|
|
|
$
|
110,479
|
|
|
|
Unpaid
principal
balance
|
|
|
Recorded
investment
|
|
|
Related
allowance
|
|
|
Average
impaired
investment
|
|
|
Interest
income
|
|
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
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
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
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
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
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
2,380,599
|
|
|
$
|
2,380,599
|
|
|
$
|
375,431
|
|
|
$
|
2,399,647
|
|
|
$
|
100,697
|
|
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 December 31, 2016,
the principal balance of TDRs was zero as the one loan previously constituting our sole TDR during the year 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. No TDRs went into default during the years ended December 31, 2016 and
2015. A TDR can be removed from “troubled” status once there is sufficient history of demonstrating the borrower can
service the credit under market terms. We currently consider sufficient history to be approximately six months.
Provision and Allowance for
Loan Losses
The provision, reversal
of provision and allowance for loan losses is evaluated on a regular basis by management and is based upon management’s
periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision
as more information becomes available.
The following table
summarizes activity related to our allowance for loan losses for the years ended December 31, 2016 and 2015, by portfolio segment.
|
|
Single and
multifamily
residential
real estate
|
|
|
Construction
and
development
|
|
|
Commercial
real estate
— other
|
|
|
Commercial
business
|
|
|
Consumer
|
|
|
Total
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
265,797
|
|
|
$
|
184,130
|
|
|
$
|
439,830
|
|
|
$
|
244,679
|
|
|
$
|
5,073
|
|
|
$
|
1,139,509
|
|
Provision (reversal of provision) for loan losses
|
|
|
(30,000
|
)
|
|
|
(100,000
|
)
|
|
|
100,000
|
|
|
|
440,000
|
|
|
|
(3,000
|
)
|
|
|
407,000
|
|
Loan charge-offs
|
|
|
—
|
|
|
|
(10,500
|
)
|
|
|
(209,045
|
)
|
|
|
—
|
|
|
|
(640
|
)
|
|
|
(220,185
|
)
|
Loan recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,825
|
|
|
|
11,825
|
|
Net loans charged-off
|
|
|
—
|
|
|
|
(10,500
|
)
|
|
|
(209,045
|
)
|
|
|
—
|
|
|
|
11,185
|
|
|
|
(208,360
|
)
|
Balance, end of year
|
|
$
|
235,797
|
|
|
$
|
73,630
|
|
|
$
|
330,785
|
|
|
$
|
684,679
|
|
|
$
|
13,258
|
|
|
$
|
1,338,149
|
|
Individually reviewed for impairment
|
|
$
|
93,471
|
|
|
$
|
—
|
|
|
$
|
30,500
|
|
|
$
|
487,490
|
|
|
$
|
—
|
|
|
$
|
611,461
|
|
Collectively reviewed for impairment
|
|
|
142,326
|
|
|
|
73,630
|
|
|
|
300,285
|
|
|
|
197,189
|
|
|
|
13,258
|
|
|
|
726,688
|
|
Total allowance for loan losses
|
|
$
|
235,797
|
|
|
$
|
73,630
|
|
|
$
|
330,785
|
|
|
$
|
684,679
|
|
|
$
|
13,258
|
|
|
$
|
1,338,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans, end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually reviewed for impairment
|
|
$
|
171,071
|
|
|
$
|
—
|
|
|
$
|
195,500
|
|
|
$
|
738,105
|
|
|
$
|
—
|
|
|
$
|
1,104,676
|
|
Collectively reviewed for impairment
|
|
|
13,143,059
|
|
|
|
7,913,783
|
|
|
|
21,838,090
|
|
|
|
15,216,001
|
|
|
|
1,434,449
|
|
|
|
59,545,382
|
|
Total gross loans
|
|
$
|
13,314,130
|
|
|
$
|
7,913,783
|
|
|
$
|
22,033,590
|
|
|
$
|
15,954,106
|
|
|
$
|
1,434,449
|
|
|
$
|
60,650,058
|
|
|
|
Single and
multifamily
residential
real estate
|
|
|
Construction
and
development
|
|
|
Commercial
real estate
— other
|
|
|
Commercial
business
|
|
|
Consumer
|
|
|
Total
|
|
December 31, 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 loan losses
|
|
|
105,000
|
|
|
|
(50,000
|
)
|
|
|
120,000
|
|
|
|
60,000
|
|
|
|
(85,000
|
)
|
|
|
150,000
|
|
Loan charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
(43,267
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(43,267
|
)
|
Loan recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loans charged-off
|
|
|
—
|
|
|
|
—
|
|
|
|
(43,267
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(43,267
|
)
|
Balance, end of year
|
|
$
|
265,797
|
|
|
$
|
184,130
|
|
|
$
|
439,830
|
|
|
$
|
244,679
|
|
|
$
|
5,073
|
|
|
$
|
1,139,509
|
|
Individually reviewed for impairment
|
|
$
|
163,138
|
|
|
$
|
10,500
|
|
|
$
|
201,793
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
375,431
|
|
Collectively reviewed for impairment
|
|
|
102,659
|
|
|
|
173,630
|
|
|
|
238,037
|
|
|
|
244,679
|
|
|
|
5,073
|
|
|
|
764,078
|
|
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
|
|
$
|
236,938
|
|
|
$
|
40,500
|
|
|
$
|
2,103,161
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,380,599
|
|
Collectively reviewed for impairment
|
|
|
16,197,784
|
|
|
|
7,245,959
|
|
|
|
23,456,782
|
|
|
|
17,027,054
|
|
|
|
1,369,224
|
|
|
|
65,296,803
|
|
Total gross loans
|
|
$
|
16,434,722
|
|
|
$
|
7,286,959
|
|
|
$
|
25,559,943
|
|
|
$
|
17,027,054
|
|
|
$
|
1,369,224
|
|
|
$
|
67,677,402
|
|
NOTE 4 — PROPERTY, EQUIPMENT AND SOFTWARE
Property, equipment
and software are stated at cost less accumulated depreciation. Components of property, equipment and software included in the
consolidated balance sheets are as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Land and land improvements
|
|
$
|
1,108,064
|
|
|
$
|
1,108,064
|
|
Building
|
|
|
784,845
|
|
|
|
784,845
|
|
Leasehold improvements
|
|
|
257,159
|
|
|
|
257,159
|
|
Software
|
|
|
24,039
|
|
|
|
374,039
|
|
Furniture and equipment
|
|
|
1,464,847
|
|
|
|
1,432,378
|
|
|
|
|
3,638,954
|
|
|
|
3,956,485
|
|
Accumulated depreciation
|
|
|
(1,613,180
|
)
|
|
|
(1,757,689
|
)
|
Total property, equipment and software
|
|
$
|
2,025,774
|
|
|
$
|
2,198,796
|
|
Depreciation expense
for the years ended December 31, 2016 and 2015 was $206,623 and $215,471, respectively. There were asset purchases of $34,167
and two disposals totaling $351,698 during 2016. There were asset purchases of $30,260 and no disposals during 2015.
NOTE 5 — OTHER REAL ESTATE OWNED AND REPOSSESSED
ASSETS
The following table summarizes the composition
of other real estate owned and repossessed assets as of the dates noted.
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Residential land lots
|
|
$
|
—
|
|
|
$
|
31,320
|
|
Single and multifamily residential real estate
|
|
|
—
|
|
|
|
—
|
|
Commercial office space
|
|
|
1,412,667
|
|
|
|
1,008,900
|
|
Commercial land
|
|
|
810,000
|
|
|
|
870,000
|
|
|
|
$
|
2,222,667
|
|
|
$
|
1,910,220
|
|
Changes in other real estate owned and repossessed
assets are presented below:
|
|
2016
|
|
|
2015
|
|
Balance at beginning of year
|
|
$
|
1,910,220
|
|
|
$
|
2,557,457
|
|
Repossessed property acquired in settlement of loans
|
|
|
1,257,289
|
|
|
|
300,000
|
|
Proceeds from sales of repossessed property
|
|
|
(637,072
|
)
|
|
|
(582,295
|
)
|
Loss on sale and write-downs of repossessed property, net
|
|
|
(307,770
|
)
|
|
|
(364,942
|
)
|
Balance at end of year
|
|
$
|
2,222,667
|
|
|
$
|
1,910,220
|
|
During 2015, other
real estate owned for the Company increased due to three pieces of real estate being moved to other real estate owned for $1.3
million, partially offset by the sale of one piece of real estate held by the Bank for proceeds of approximately $24,000, which
resulted in a loss of approximately $6,000 and another sale of real estate owned that was purchased from the Bank for proceeds
of approximately $613,000, which resulted in a loss of approximately $18,000 to the Company. In addition, the Bank recognized
writedowns on real estate owned of approximately $284,000 during 2016. On March 7, 2017, one impaired loan was transferred to
other real estate owned for $165,000, net of a specific reserve of $35,000.
NOTE 6 — DEPOSITS
Deposits at December 31, 2016 and 2015 are
summarized as follows:
|
|
2016
|
|
|
2015
|
|
Non-interest bearing
|
|
$
|
13,723,902
|
|
|
$
|
13,010,209
|
|
Interest bearing:
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
|
8,959,818
|
|
|
|
8,894,408
|
|
Money market accounts
|
|
|
29,620,179
|
|
|
|
33,164,973
|
|
Savings
|
|
|
1,054,314
|
|
|
|
1,034,438
|
|
Time, less than $100,000
|
|
|
5,565,797
|
|
|
|
5,756,202
|
|
Time, $100,000 and over
|
|
|
20,783,638
|
|
|
|
21,707,095
|
|
Total deposits
|
|
$
|
79,707,648
|
|
|
$
|
83,567,325
|
|
Interest expense on
time deposits greater than $100,000 was $192,160 and $182,041 for the years ended December 31, 2016 and 2015 respectively.
Time deposits that
meet or exceed the FDIC insurance limit at $250,000 amounted to $9,163,592 and $7,578,706 as of December 31, 2016 and 2015, respectively.
At December 31, 2016
the scheduled maturities of certificates of deposit (including brokered time deposits) are as follows:
2017
|
|
$
|
15,097,432
|
|
2018
|
|
|
5,217,537
|
|
2019
|
|
|
4,468,684
|
|
2020
|
|
|
784,291
|
|
2021
|
|
|
781,490
|
|
|
|
$
|
26,349,434
|
|
At December 31, 2016,
$2.3 million in securities were pledged as collateral for public deposits and approximately $50,000 in securities were pledged
as collateral for business deposits.
NOTE 7 — SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE
At December 31, 2016
and 2015, the Bank had sold $113,598 and $113,080, respectively, of securities under agreements to repurchase with brokers with
a weighted rate of 0.10% for the comparable periods that mature in less than 90 days. These agreements were secured with approximately
$50,000 and $107,000 of investment securities, respectively. The securities, under agreements to repurchase, averaged $135,708
during 2016, with $279,628 being the maximum amount outstanding at any month-end. The average rate paid in 2016 was 0.10%. The
securities, under agreements to repurchase, averaged $98,636 during 2015, with $354,739 being the maximum amount outstanding at
any month-end. The average rate paid in 2015 was 0.10%.
NOTE 8 — FEDERAL HOME LOAN BANK ADVANCES
At December 31, 2014,
the Bank had $5.0 million of advances from the FHLB, with a weighted average rate of 0.25%. The advance was obtained in July 2014
with a maturity date of January 2015. The FHLB advance from 2014 was repaid in full in January 2015 upon maturity. There were
no advances from the FHLB for the years ended December 31, 2016 and 2015. In February 2017, an advance of $4,000,000 was obtained
from the FHLB with a weighted average rate of 0.89% and a maturity date of November 2017.
NOTE 9 — NOTE PAYABLE - RELATED PARTY
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 6 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 June 30, 2015. The outstanding balance of $149,774 plus accrued interest was repaid in its entirety
on September 3, 2015.
NOTE 10 — UNUSED LINES OF CREDIT
At December 31, 2016
and 2015, the Bank had an unused unsecured line of credit to purchase federal funds of $2.0 million that has not been utilized.
The line of credit is available on a one to fourteen day basis for general corporate purposes of the Bank. The lender has reserved
the right to withdraw the line at its option.
The Bank has a line
of credit with the FHLB to borrow funds, subject to the pledge of qualified collateral. At December 31, 2016, approximately $34.9
million of first and second mortgage loans, commercial loans and home equity lines of credit were specifically pledged to the
FHLB, resulting in $12.3 million in lendable collateral. At December 31, 2015, approximately $39.9 million of first and second
mortgage loans, commercial loans and home equity lines of credit were specifically pledged to the FHLB, resulting in $13.0 million
in lendable collateral.
The Bank is subject
to the FHLB’s 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. During the fourth quarter of 2010, the
Bank’s credit risk rating was downgraded by the FHLB, which resulted in decreased borrowing availability (total line
reduced to 15% of total assets from 20% of total assets) and increased collateral requirements (moved to 125% of borrowings
from 115%). During the third quarter of 2013, the FHLB upgraded our credit risk rating, which resulted in increased borrowing
availability
(total line increased from 15% of total assets to 20% of total assets) and decreased collateral requirements (moved to 115% of
borrowings from 125%). The Bank’s ability to access available borrowing capacity from the FHLB in the future is subject
to its rating and any subsequent changes based on financial performance as compared to factors considered by the FHLB in their
assignment of our credit risk rating each quarter.
At December 31, 2016,
the Bank had pledged $15.5 million in loans to the FRB’s Borrower-in-Custody of Collateral program resulting in $12.3 million
in lendable collateral. Our available credit under this line was approximately $11.4 million and $10.5 million as of December
31, 2016 and 2015, respectively. The Bank had no outstanding borrowings from the FRB as of December 31, 2016 and 2015.
NOTE 11 — INCOME TAXES
The components of income tax expense were
as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current income tax expense (benefit)
|
|
$
|
—
|
|
|
$
|
5,080
|
|
Deferred income tax expense (benefit)
|
|
|
(944,814
|
)
|
|
|
(2,404,737
|
)
|
|
|
|
(944,814
|
)
|
|
|
(2,409,817
|
)
|
Change in valuation allowance
|
|
|
944,814
|
|
|
|
2,404,737
|
|
Income tax expense
|
|
$
|
—
|
|
|
$
|
5,080
|
|
The following is a
summary of the items that caused recorded income taxes to differ from taxes computed using the Company’s statutory federal
income tax rate of 34%:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Income tax benefit at federal statutory rate
|
|
$
|
(879,926
|
)
|
|
$
|
(1,629,769
|
)
|
Change in valuation allowance
|
|
|
944,814
|
|
|
|
(2,404,737
|
)
|
IRC Section 382 limitation to net operating loss carry-forward
|
|
|
—
|
|
|
|
4,020,027
|
|
Other
|
|
|
(64,888
|
)
|
|
|
19,559
|
|
Income tax expense
|
|
$
|
—
|
|
|
$
|
5,080
|
|
The components of the net deferred tax asset
are as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
278,511
|
|
|
$
|
140,131
|
|
Lost interest on nonaccrual loans
|
|
|
19,047
|
|
|
|
44,348
|
|
Real estate acquired in settlement of loans
|
|
|
187,707
|
|
|
|
250,453
|
|
Net operating loss carry-forward
|
|
|
2,757,843
|
|
|
|
1,987,292
|
|
Deferred operational and start-up costs
|
|
|
43,471
|
|
|
|
56,513
|
|
Other-than-temporary impairment on non-marketable equity securities.
|
|
|
—
|
|
|
|
—
|
|
Unrealized loss (gain) on investment securities available for sale
|
|
|
(2,978
|
)
|
|
|
(58,648
|
)
|
Internally developed software
|
|
|
3,864,656
|
|
|
|
3,771,558
|
|
Other
|
|
|
229,187
|
|
|
|
185,313
|
|
|
|
|
7,377,444
|
|
|
|
6,376,960
|
|
Valuation allowance
|
|
|
(7,377,444
|
)
|
|
|
(6,376,960
|
)
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
The valuation allowance
for deferred tax assets as of December 31, 2016 and 2015 was $7.4 million and $6.4 million, respectively. 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 that the Company will not recognize the entire deferred tax asset. The determination of whether a deferred
tax asset is realizable is based on the 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. As of December 31, 2016 and 2015, the
Company determined that it is not more likely than not that deferred tax assets will be recognized in future years.
The Company will continue
to analyze deferred tax assets and the related valuation allowance on a quarterly basis, taking into account performance compared
to forecasted earnings as well as current economic and internal information.
At December 31, 2016,
the Company has federal operating loss carry-forwards of approximately $8.0 million that may be used to offset future taxable
income and expire beginning in 2026. At December 31, 2016, the Company has state operating loss carry-forwards of approximately
$1.2 million that may be used to offset future taxable income and expire beginning in 2035.
The Company has analyzed
the tax positions taken or expected to be taken on its tax returns and concluded it has no liability related to uncertain tax
positions in accordance with FIN 48. With limited exceptions, income tax returns for 2013 and subsequent years are subject to
examination by the taxing authorities.
We have generated
significant net operating losses, or NOLs, as a result of our operating results. We are generally able to carry NOLs forward
to reduce taxable income in future years. However, the ability to utilize the NOLs is subject to the rules of Section 382 of
the Internal Revenue Code. Section 382 generally restricts the use of NOLs after an “ownership change.” An
ownership change occurs if, among other things, the shareholders (or specified groups of shareholders) who own or have owned,
directly or indirectly, 5% or more of a corporation’s common stock or are otherwise treated as 5% shareholders under
Section 382 and U.S. Treasury regulations promulgated thereunder because of an increase of their aggregate percentage
ownership of that corporation’s stock by more than 50 percentage points over the lowest percentage of the stock owned
by these shareholders over a rolling three-year period. In the event of an ownership change, Section 382 imposes an annual
limitation on the amount of taxable income a corporation may offset with NOL carryforwards. This annual limitation is
generally equal to the product of the value of the corporation’s stock on the date of the ownership change, multiplied
by the long-term tax-exempt rate published monthly by the Internal Revenue Service. Any unused annual limitation may be
carried over to later years until the applicable expiration date for the respective NOL carryforwards.
NOTE 12 — RELATED PARTY TRANSACTIONS
On December 31, 2016
and 2015, the Bank had various loans outstanding to directors and officers. All of these loans were made under normal credit terms
and did not involve more than normal risk of collection. See Note 3 for further details.
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 6 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 June 30, 2015. The outstanding balance of $149,774 plus accrued interest was repaid in its entirety on September
3, 2015.
On May 14, 2015, the
Company entered into a license agreement with MPIB pursuant to which it received a non-exclusive, non-transferable, non-licensable,
worldwide license to use certain intellectual property of MPIB related to mobile payments and digital transactions. On January
4, 2016, the parties amended and restated the license agreement (the “Amended and Restated License Agreement”) pursuant
to which MPIB agreed to make the license perpetual, subject to termination rights of the parties set forth in the Amended and Restated
License Agreement, in exchange for the Company’s payment of an additional license fee of $275,000. In addition, as previously
disclosed, on April 27, 2015, the Company submitted a proposed asset purchase agreement between the Company and MPIB to the Federal
Reserve Bank of Richmond. The Company subsequently withdrew this application to the agency and no longer intends to enter into
the asset purchase agreement or consummate the transaction contemplated therein.
NOTE 13 —
FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
In the ordinary course
of business, and to meet the financing needs of its customers, the Company is a party to various financial instruments with off
balance sheet risk. These financial instruments, which include commitments to extend credit and standby letters of credit, involve,
to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheets. The contract
amount of those instruments reflects the extent of involvement the Company has in particular classes of financial instruments.
The Company’s
exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it does for on balance sheet instruments.
Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of any material condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At December
31, 2016, unfunded commitments to extend credit were $8.6 million, of which approximately $7.9 million is at fixed rates and $677,000
is at variable rates. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the
borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential
real estate. The fair value of these off-balance sheet financial instruments is considered immaterial.
The Company does not
have any commitments to lend additional funds to borrowers whose loans have been modified as a TDR.
NOTE 14 — COMMITMENTS AND CONTINGENCIES
The Bank has a two-year
operating lease on its main office facility which began in October 2008. The Bank exercised its remaining two-year renewal options
in September 2012. The Bank renegotiated on terms similar to the current lease and amended the current lease in October 2014 for
a term of five years. The monthly rent under the lease amendment is $10,370 from October 1, 2012 through September 30, 2014, $10,789
from October 1, 2014 through September 30, 2015, $11,005 from October 1, 2015 through September 30, 2016 and $11,225 from October
1, 2016 through September 30, 2017. The Bank has a ten-year operating lease on a branch facility which began in August 2007. The
monthly rent under the lease is $9,229 from August 1, 2012 through July 31, 2017. The Company is currently in negotiations regarding
the terms of renewing the lease. The Company had a 21- month operating lease on its New York office which began in May 2013. The
monthly rent under the lease agreement allowed for one month free rent from May 23, 2013 through June 22, 2013, an installment
of $2,680 for June 23, 2013 through June 30, 2013, and fixed monthly installments of $9,450 from July 1, 2013 through February
27, 2015. The New York office lease was not renewed in February 2015. At that time, the Company moved to a month to month lease
for the New York office at a rate of $2,189 per month. The New York office month to month lease was terminated during 2015. Rent
expense of $268,988 and $314,117 was recorded for the years ended December 31, 2016 and 2015, respectively.
Future minimum lease
payments under these operating leases are summarized as follows:
For the year ended December 31,
|
|
|
|
|
2017
|
|
$
|
199,975
|
|
2018
|
|
|
138,080
|
|
2019
|
|
|
105,105
|
|
2020
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
|
|
$
|
443,160
|
|
As of December 31, 2016,
there were no other commitments outstanding, and there were no new commitments as of March 23, 2017.
The board of directors
has approved employment agreements with the president and chief executive officer of the Bank, the chief financial officer of the
Company and Bank and the Bank’s chief operating officer. The agreements include provisions regarding term, compensation,
benefits, annual bonus, incentive program, stock option plan and severance and non-compete upon early termination.
The Bank may become
party to litigation and claims in the normal course of business. As of December 31, 2016, management believes there is no material
litigation pending.
NOTE 15— 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 Company’s
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 Company’s 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 Company’s employees and directors.
As of December 31, 2016
and 2015, 3,089,755 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.
A summary of the status
of the plans and changes for the years ended December 31, 2016 and 2015 are presented below:
|
|
2016
|
|
|
2015
|
|
|
|
Shares
|
|
|
Weighted
average
exercise
price
|
|
|
Average
Intrinsic
Value
|
|
|
Shares
|
|
|
Weighted
average
exercise
price
|
|
Outstanding at beginning of year
|
|
|
3,089,755
|
|
|
$
|
1.11
|
|
|
|
|
|
|
|
3,102,255
|
|
|
$
|
1.08
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
115,000
|
|
|
|
1.59
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
(127,500
|
)
|
|
|
0.80
|
|
Outstanding at end of year
|
|
|
3,089,755
|
|
|
|
1.11
|
|
|
$
|
0.00
|
|
|
|
3,089,755
|
|
|
|
1.11
|
|
Options exercisable at year-end
|
|
|
3,022,255
|
|
|
|
|
|
|
$
|
0.00
|
|
|
|
3,022,255
|
|
|
|
|
|
Shares available for grant
|
|
|
2,030,935
|
|
|
|
|
|
|
|
|
|
|
|
2,030,935
|
|
|
|
|
|
The aggregate intrinsic
value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock
price on the last trading day of 2016 and the exercise price, multiplied by the number of in-the-money options) that would have
been received by the option holders had all option holders exercised their options on December 31, 2016. This amount changes based
on the fair market value of the Company’s stock. Fair market value is based on the most recent trade of common stock reported
through the OTC Bulletin Board. As of December 31, 2016, the Company’s closing stock price was $0.15 resulting in no intrinsic
value.
Compensation expense
related to stock options granted was $10,126 and $303,829 for the years ended December 31, 2016 and 2015, respectively. 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.
In 2005, the Company
issued warrants to each of its organizers to purchase up to an additional 312,500 shares of common stock at $10.00 per share. These
warrants vested six-months from the date the Bank opened for business, or May 16, 2005, and they were exercisable in whole or in
part until May 16, 2015. No warrants were exercised by May 16, 2015, at which time the warrants were deemed expired.
NOTE 16 — EMPLOYEE BENEFIT PLAN
The Bank maintains an
employee benefit plan for all eligible employees of the Bank under the provisions of Internal Revenue Code Section 401(k). The
Independence National Bank 401(k) Profit Sharing Plan (the “Plan”), adopted in 2005, allows for employee contributions.
Upon annual approval of the board of directors, the Company also matches 50% of employee contributions up to a maximum of 6% of
annual compensation. For the year ended December 31, 2016 and 2015, $14,043 and $15,859, respectively, was charged to operations
for the Company’s matching contribution. Employees are immediately vested in their contributions to the Plan and become fully
vested in the employer matching contribution after six years of service.
NOTE 17 — REGULATORY MATTERS
The Bank is subject
to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital
amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures
established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of Total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Total capital includes
Tier 1 and Tier 2 capital. Tier 2 capital consists of the allowance for loan losses subject to certain limitations.
In July 2013, the FDIC
approved a final rule to implement the Basel III regulatory capital reforms among other changes required by the Dodd-Frank Act.
The framework requires banking organizations to hold more and higher quality capital, which acts as a financial cushion to absorb
losses, taking into account the impact of risk. The approved rule includes a new minimum ratio of common equity Tier 1 capital
to risk-weighted assets of 4.5% as well as a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets.
The rule also raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage
ratio of 4% for all banking institutions. For the largest, most internationally active banking organizations, the rule includes
a new minimum supplementary leverage ratio that takes into account off-balance sheet exposures. In terms of quality of capital,
the final rule emphasized common equity Tier 1 capital and implemented strict eligibility criteria for regulatory capital instruments.
It also changed the methodology for calculating risk-weighted assets to enhance risk sensitivity. The changes began to take effect
for the Bank on January 1, 2015.
The following table
summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements at December 31, 2016 and 2015.
|
|
|
|
|
|
|
|
For capital
adequacy purposes
|
|
|
To be well capitalized
under prompt corrective
action provisions
|
|
|
|
Actual
|
|
|
Minimum
|
|
|
Minimum
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk weighted assets)
|
|
$
|
9,251,000
|
|
|
|
13.4
|
%
|
|
$
|
5,525,000
|
|
|
|
8.0
|
%
|
|
$
|
6,906,000
|
|
|
|
10.0
|
%
|
Tier 1 Capital (to risk weighted assets)
|
|
|
8,382,000
|
|
|
|
12.1
|
|
|
|
2,762,000
|
|
|
|
4.0
|
|
|
|
4,144,000
|
|
|
|
6.0
|
|
Tier 1 Capital (to average assets)
|
|
|
8,382,000
|
|
|
|
9.0
|
|
|
|
3,724,000
|
|
|
|
4.0
|
|
|
|
4,655,000
|
|
|
|
5.0
|
|
Common Equity Tier 1 Capital (to risk weighted assets)
|
|
|
8,382,000
|
|
|
|
12.1
|
|
|
|
3,108,000
|
|
|
|
4.5
|
|
|
|
3,108,000
|
|
|
|
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
|
|
The Federal Reserve
has similar requirements for bank holding companies. The Company is currently not subject to these requirements because the Federal
Reserve guidelines contain an exemption for bank holding companies of less than $1 billion in consolidated assets, subject to certain
limitations.
Since December 31, 2016,
no conditions or events have occurred, of which we are aware, that have resulted in a material change in the Company’s or
the Bank’s category, other than as reported in this Annual Report on Form 10-K.
NOTE 18 — RESTRICTIONS ON SUBSIDIARY DIVIDENDS,
LOANS, OR ADVANCES
The ability of the Company
to pay cash dividends is dependent upon receiving cash in the form of dividends from the Bank. However, certain restrictions exist
regarding the ability of the subsidiary to transfer funds to Independence Bancshares, Inc. in the form of cash dividends, loans,
or advances. The approval of the OCC is required to pay dividends in excess of the Bank’s net profits (as defined) for the
current year plus retained net profits (as defined) for the preceding two years, less any required transfers to surplus. The Company
also has to obtain the prior written approval of the Federal Reserve Bank of Richmond before declaring or paying any dividends.
NOTE 19— BUSINESS SEGMENTS
The Company reports
its activities as four business segments — community banking, transaction services, asset management and parent only —
as defined in “Item 1. Business”. 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 Company’s reportable business segments for the year ended December 31, 2016
and 2015. See Note 22 for parent company condensed financial information.
|
|
|
|
|
Parent Company
|
|
|
|
|
|
Community Banking
|
|
|
Transaction
Services
|
|
|
Asset
Management
|
|
|
Parent Only
|
|
|
Total
|
|
For the year ended
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
3,564,828
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,564,828
|
|
Interest expense
|
|
|
326,340
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
326,340
|
|
Net interest income
|
|
|
3,238,488
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,238,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
407,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
407,000
|
|
Noninterest income
|
|
|
840,694
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
840,694
|
|
Noninterest expense
|
|
|
4,951,094
|
|
|
|
249,594
|
|
|
|
146,512
|
|
|
|
913,000
|
|
|
|
6,260,200
|
|
Loss before income taxes
|
|
|
(1,278,912
|
)
|
|
|
(249,594
|
)
|
|
|
(146,512
|
)
|
|
|
(913,000
|
)
|
|
|
(2,588,018
|
)
|
Income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
$
|
(1,278,912
|
)
|
|
$
|
(249,594
|
)
|
|
$
|
(146,512
|
)
|
|
$
|
(913,000
|
)
|
|
$
|
(2,588,018
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
Community Banking
|
|
|
Holding Company (1)
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
4,632,515
|
|
|
$
|
1,847,837
|
|
|
$
|
(1,848,625
|
)
|
|
$
|
4,631,727
|
|
|
|
|
|
Interest bearing deposits in other institutions
|
|
|
10,500,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,500,000
|
|
|
|
|
|
Federal funds sold
|
|
|
6,143,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,143,000
|
|
|
|
|
|
Investment securities
|
|
|
2,499,805
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,499,805
|
|
|
|
|
|
Loans receivable, net
|
|
|
59,144,847
|
|
|
|
—
|
|
|
|
—
|
|
|
|
59,144,847
|
|
|
|
|
|
Other real estate owned
|
|
|
2,222,667
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,222,667
|
|
|
|
|
|
Property, equipment, and software, net
|
|
|
2,005,226
|
|
|
|
20,548
|
|
|
|
—
|
|
|
|
2,025,774
|
|
|
|
|
|
Bank owned life insurance
|
|
|
2,542,910
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,542,910
|
|
|
|
|
|
Other assets
|
|
|
731,838
|
|
|
|
6,489
|
|
|
|
—
|
|
|
|
738,328
|
|
|
|
|
|
Total Assets
|
|
$
|
90,422,808
|
|
|
$
|
1,874,874
|
|
|
$
|
(1,848,625
|
)
|
|
$
|
90,449,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
81,556,273
|
|
|
$
|
—
|
|
|
$
|
(1,848,625
|
)
|
|
$
|
79,707,648
|
|
|
|
|
|
Securities sold under agreement to repurchase
|
|
|
113,598
|
|
|
|
—
|
|
|
|
—
|
|
|
|
113,598
|
|
|
|
|
|
Accrued and other liabilities
|
|
|
379,100
|
|
|
|
304,346
|
|
|
|
—
|
|
|
|
683,446
|
|
|
|
|
|
Shareholders’ equity
|
|
|
8,373,837
|
|
|
|
1,570,528
|
|
|
|
—
|
|
|
|
9,944,365
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
90,422,808
|
|
|
$
|
1,874,874
|
|
|
$
|
(1,848,625
|
)
|
|
$
|
90,449,057
|
|
|
|
|
|
(1)
|
Excludes investment in wholly-owned Bank subsidiary
|
|
|
|
|
|
Parent
Company
|
|
|
|
|
|
|
Community Banking
|
|
|
Transaction
Services
|
|
|
Asset
Management
|
|
|
Parent Only
|
|
|
Total
|
|
For the year ended
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
3,567,763
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,567,763
|
|
Interest expense
|
|
|
316,358
|
|
|
|
|
|
|
|
—
|
|
|
|
14,704
|
|
|
|
331,062
|
|
Net interest income
|
|
|
3,251,405
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(14,704
|
)
|
|
|
3,236,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of provision for loan losses
|
|
|
150,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
150,000
|
|
Noninterest income
|
|
|
262,521
|
|
|
|
383,312
|
|
|
|
—
|
|
|
|
21,074
|
|
|
|
666,907
|
|
Noninterest expense
|
|
|
4,271,806
|
|
|
|
2,214,478
|
|
|
|
140,782
|
|
|
|
1,919,981
|
|
|
|
8,547,047
|
|
Income (loss) before income taxes
|
|
|
(907,580
|
)
|
|
|
(1,831,166
|
)
|
|
|
(140,782
|
)
|
|
|
(1,913,611
|
)
|
|
|
(4,793,439
|
)
|
Income taxes
|
|
|
5,080
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,080
|
|
Net income (loss)
|
|
$
|
(912,960
|
)
|
|
$
|
(1,831,166
|
)
|
|
$
|
(140,782
|
)
|
|
$
|
(1,913,611
|
)
|
|
$
|
(4,798,519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
Community Banking
|
|
|
Holding
Company (1)
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
5,458,252
|
|
|
$
|
2,909,255
|
|
|
$
|
(2,913,712
|
)
|
|
$
|
5,453,795
|
|
|
|
|
|
Interest bearing deposits in other institutions
|
|
|
1,500,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,500,000
|
|
|
|
|
|
Federal funds sold
|
|
|
8,446,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,446,000
|
|
|
|
|
|
Investment securities
|
|
|
10,687,851
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,687,851
|
|
|
|
|
|
Loans receivable, net
|
|
|
66,402.246
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,402,246
|
|
|
|
|
|
Other real estate owned
|
|
|
1,278,900
|
|
|
|
631,320
|
|
|
|
—
|
|
|
|
1,910,220
|
|
|
|
|
|
Property, equipment, and software, net
|
|
|
2,053,575
|
|
|
|
145,221
|
|
|
|
—
|
|
|
|
2,198,796
|
|
|
|
|
|
Other assets
|
|
|
771,437
|
|
|
|
96,961
|
|
|
|
—
|
|
|
|
868,398
|
|
|
|
|
|
Total Assets
|
|
$
|
96,598,261
|
|
|
$
|
3,782,757
|
|
|
$
|
(2,913,712
|
)
|
|
$
|
97,467,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
86,481,037
|
|
|
$
|
—
|
|
|
$
|
(2,913,712
|
)
|
|
$
|
83,567,325
|
|
|
|
|
|
Securities sold under agreement to repurchase
|
|
|
113,080
|
|
|
|
—
|
|
|
|
—
|
|
|
|
113,080
|
|
|
|
|
|
Accrued and other liabilities
|
|
|
236,918
|
|
|
|
905,824
|
|
|
|
—
|
|
|
|
1,142,742
|
|
|
|
|
|
Shareholders’ equity (deficit)
|
|
|
9,767,226
|
|
|
|
2,876,933
|
|
|
|
—
|
|
|
|
12,644,159
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
96,598,261
|
|
|
$
|
3,782,757
|
|
|
$
|
(2,913,712
|
)
|
|
$
|
97,467,306
|
|
|
|
|
|
(1)
|
Excludes investment in wholly-owned Bank subsidiary
|
The sole activity conducted
within our asset management business segment is the resolution of assets purchased by the Company in the second quarter of 2013
from the Bank. All assets have been sold and resolved as of December 31, 2016.
The activities conducted
within our transaction services business segment relate to the Company’s research and development efforts to enhance existing
and develop new digital banking, payments and transaction services. The Company incurred approximately $250,000 and $2.2 million
in research and development expenses during 2016 and 2015, respectively. The expenses paid since the suspension of the development
of the transaction services segment in September 2015 relate to remaining monthly contract costs which have since been completed.
The Company recognized approximately $383,000 in noninterest income during 2015 within the transaction services business segment
and approximately $21,000 representing forgiveness of debt as a result of settling certain outstanding liabilities for the Company.
As previously noted, on September 25, 2015, the Company suspended development of its digital banking business.
NOTE 20 — FAIR VALUE OF FINANCIAL INSTRUMENTS
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 1.
Available-for-sale investment
securities ($2,499,805 and $10,687,851 at December 31, 2016 and 2015, respectively) are carried at fair value and measured on a
recurring basis using Level 2 inputs (other observable inputs). Fair values are estimated by using bid prices and quoted prices
of pools or tranches of securities with similar characteristics.
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 December 31, 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 December 31, 2016 and 2015 was
$1.6 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 December 31, 2016 and 2015 was $2,222,667 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 December 31, 2016, the significant observable inputs used in the fair value measurements
were as follows:
Description
|
Fair Value at
December 31, 2016
|
Valuation Technique
|
Significant
Unobservable Inputs
|
Other real estate owned and repossessed assets
|
$2,222,667
|
Appraised value
|
Discounts to reflect current
market conditions, abbreviated
holding period, and estimated
costs to sell
|
Impaired loans
|
$1,606,590
|
Internal assessment of
appraised value
|
Adjustments to estimated
value based on recent sales
of comparable collateral
|
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:
Description
|
Fair Value at
December 31, 2015
|
Valuation Technique
|
Significant
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 of
appraised value
|
Adjustments to estimated
value based on recent sales
of comparable collateral
|
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 Company’s 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.
The carrying value of
loans held for sale as of December 31, 2016 approximates fair value as these loans were discounted to their liquidation value which
is equal to the minimum acceptable bid price established by the Company in connection with the Company’s intent to sell these
loans to unaffiliated third party investors.
Fair value for demand
deposit accounts and interest bearing accounts with no fixed maturity date is equal to the carrying value. The 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 Company’s current incremental borrowing rate.
The Company has used
management’s 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 Company’s financial instruments at December 31, 2016 and 2015 are as follows:
December 31, 2016
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
4,631,727
|
|
|
$
|
4,631,727
|
|
|
$
|
4,631,727
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest bearing deposits in other institutions
|
|
|
10,500,000
|
|
|
|
10,500,000
|
|
|
|
—
|
|
|
|
10,500,000
|
|
|
|
—
|
|
Federal funds sold
|
|
|
6,143,000
|
|
|
|
6,143,000
|
|
|
|
6,143,000
|
|
|
|
—
|
|
|
|
—
|
|
Investment securities available for sale
|
|
|
2,499,805
|
|
|
|
2,499,805
|
|
|
|
—
|
|
|
|
2,499,805
|
|
|
|
—
|
|
Non-marketable equity securities
|
|
|
380,050
|
|
|
|
380,050
|
|
|
|
—
|
|
|
|
380,050
|
|
|
|
—
|
|
Loans, net
|
|
|
59,144,847
|
|
|
|
59,084,364
|
|
|
|
—
|
|
|
|
—
|
|
|
|
59,084,364
|
|
Bank owned life insurance
|
|
|
2,542,910
|
|
|
|
2,542,910
|
|
|
|
—
|
|
|
|
2,542,910
|
|
|
|
—
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
79,707,648
|
|
|
|
79,598,034
|
|
|
|
—
|
|
|
|
79,598,034
|
|
|
|
—
|
|
Securities sold under agreements to repurchase
|
|
|
113,598
|
|
|
|
113,598
|
|
|
|
—
|
|
|
|
113,598
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Carrying
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
|
|
|
66,602,246
|
|
|
|
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
|
|
|
|
—
|
|
NOTE 21 — 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 December 31, 2016, the cash surrender
value of these policies was $2,542,910, and as a result $42, 910 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 22 — PARENT COMPANY FINANCIAL INFORMATION
Following is condensed
financial information of Independence Bancshares, Inc. (includes transaction service, asset management and holding company segments
— for further detail, see “Note 19 — Business segments”):
Condensed Balance Sheets
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash and cash equivalents
|
|
$
|
1,847,837
|
|
|
$
|
2,909,255
|
|
Investment in subsidiary
|
|
|
8,373,837
|
|
|
|
9,767,226
|
|
Premises and equipment, net
|
|
|
20,548
|
|
|
|
145,221
|
|
Other real estate owned
|
|
|
—
|
|
|
|
631,320
|
|
Other assets
|
|
|
6,489
|
|
|
|
96,961
|
|
|
|
$
|
10,248,711
|
|
|
$
|
13,549,983
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Accrued and other liabilities
|
|
$
|
304,346
|
|
|
$
|
905,824
|
|
Shareholders’ equity
|
|
|
9,944,365
|
|
|
|
12,644,159
|
|
Total liabilities and shareholders’ equity
|
|
$
|
10,248,711
|
|
|
$
|
13,549,983
|
|
Condensed Statements of Operations
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Equity in undistributed net loss of subsidiary
|
|
$
|
(1,278,912
|
)
|
|
$
|
(912,960
|
)
|
Product research and development — Transaction Services
|
|
|
(249,594
|
)
|
|
|
(2,209,978
|
)
|
Forgiveness of debt
|
|
|
—
|
|
|
|
403,245
|
|
Loan interest and other income
|
|
|
—
|
|
|
|
1,141
|
|
Interest expense on note payable
|
|
|
—
|
|
|
|
(14,704
|
)
|
Property tax expense
|
|
|
(1,139
|
)
|
|
|
(23,504
|
)
|
Consulting and miscellaneous fees
|
|
|
(222,056
|
)
|
|
|
(378,825
|
)
|
Real estate owned activity
|
|
|
(145,373
|
)
|
|
|
(117,278
|
)
|
General and administrative expenses
|
|
|
(529,432
|
)
|
|
|
(852,012
|
)
|
Legal expense
|
|
|
(158,811
|
)
|
|
|
(404,672
|
)
|
Stock compensation expense
|
|
|
(2,701
|
)
|
|
|
(288,972
|
)
|
Net loss
|
|
$
|
(2,588,018
|
)
|
|
$
|
(4,798,519
|
)
|
Condensed Statements of Cash Flows
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,588,018
|
)
|
|
$
|
(4,798,519
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
2,701
|
|
|
|
288,973
|
|
Equity in undistributed net loss of subsidiary
|
|
|
1,278,912
|
|
|
|
912,960
|
|
Net changes in fair value and losses on other real estate owned
|
|
|
18,222
|
|
|
|
105,603
|
|
Depreciation expense
|
|
|
124,107
|
|
|
|
128,549
|
|
Loss on disposal of property, equipment and software
|
|
|
566
|
|
|
|
—
|
|
Change in other assets
|
|
|
90,472
|
|
|
|
153,329
|
|
Change in accrued items
|
|
|
(601,478
|
)
|
|
|
(1,633,526
|
)
|
Net cash used in operating activities
|
|
|
(1,674,516
|
)
|
|
|
(4,842,631
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Purchase of premises and equipment
|
|
|
—
|
|
|
|
(7,408
|
)
|
Proceeds from sale of other real estate owned
|
|
|
613,098
|
|
|
|
455,277
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
613,098
|
|
|
|
447,869
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Issuance of preferred stock, net of closing costs
|
|
|
—
|
|
|
|
7,615,577
|
|
(Repayments of) proceeds from note payable from affiliate
|
|
|
—
|
|
|
|
(600,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
—
|
|
|
|
7,015,577
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(1,061,418
|
)
|
|
|
2,620,815
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
2,909,255
|
|
|
|
288,440
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
1,847,837
|
|
|
$
|
2,909,255
|
|
|
|
|
|
|
|
|
|
|
Schedule of non-cash transactions
|
|
|
|
|
|
|
|
|
Loans transferred to other real estate owned
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTE 23 — SUBSEQUENT EVENTS
As part of our strategy
to identify growth and sources of new operating revenues, including increasing net interest income, the Company purchased approximately
$4.8 million in consumer loans during the first quarter of 2017. These loans are all personal unsecured loans with terms within
36 to 60 months and have a weighted interest rate of 10.42%. While the Company holds the loans, the servicing is retained by the
seller for a 1% monthly fee.
PART II