Independence Bancshares,
Inc.
Consolidated Statements
of Operations and Comprehensive Income (Loss)
(unaudited)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
898,453
|
|
|
$
|
845,207
|
|
|
$
|
1,704,338
|
|
|
$
|
1,675,420
|
|
Investment
securities
|
|
|
6,802
|
|
|
|
65,886
|
|
|
|
13,536
|
|
|
|
134,084
|
|
Federal
funds sold and other
|
|
|
39,375
|
|
|
|
16,224
|
|
|
|
77,518
|
|
|
|
32,865
|
|
Total
interest income
|
|
|
944,630
|
|
|
|
927,317
|
|
|
|
1,795,392
|
|
|
|
1,842,369
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
85,198
|
|
|
|
80,289
|
|
|
|
164,237
|
|
|
|
158,903
|
|
Borrowings
|
|
|
8,069
|
|
|
|
60
|
|
|
|
13,406
|
|
|
|
78
|
|
Total
interest expense
|
|
|
93,267
|
|
|
|
80,349
|
|
|
|
177,643
|
|
|
|
158,981
|
|
|
Net interest
income
|
|
|
851,363
|
|
|
|
846,968
|
|
|
|
1,617,749
|
|
|
|
1,683,388
|
|
Provision
(reversal of provision) for loan losses
|
|
|
(4,447
|
)
|
|
|
-
|
|
|
|
186,702
|
|
|
|
(68,000
|
)
|
|
Net interest
income after provision for loan losses
|
|
|
855,810
|
|
|
|
846,968
|
|
|
|
1,431,047
|
|
|
|
1,751,388
|
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees
on deposit accounts
|
|
|
8,584
|
|
|
|
21,512
|
|
|
|
33,931
|
|
|
|
46,715
|
|
Residential
loan origination fees
|
|
|
54,224
|
|
|
|
55,771
|
|
|
|
104,844
|
|
|
|
99,926
|
|
SBA loan
fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
119,306
|
|
Other
income
|
|
|
30,644
|
|
|
|
9,091
|
|
|
|
62,051
|
|
|
|
18,862
|
|
Total
non-interest income
|
|
|
93,452
|
|
|
|
86,374
|
|
|
|
200,826
|
|
|
|
284,809
|
|
|
Non-interest expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
556,101
|
|
|
|
646,856
|
|
|
|
1,188,506
|
|
|
|
1,306,963
|
|
Real estate
owned activity
|
|
|
(3,410
|
)
|
|
|
355,216
|
|
|
|
42,156
|
|
|
|
364,312
|
|
Occupancy
and equipment
|
|
|
134,110
|
|
|
|
163,939
|
|
|
|
266,178
|
|
|
|
318,813
|
|
Insurance
|
|
|
58,227
|
|
|
|
57,203
|
|
|
|
118,443
|
|
|
|
115,177
|
|
Data
processing and related costs
|
|
|
110,756
|
|
|
|
77,902
|
|
|
|
224,572
|
|
|
|
165,774
|
|
Professional
fees
|
|
|
195,020
|
|
|
|
245,465
|
|
|
|
391,414
|
|
|
|
473,153
|
|
Product
research and development expense
|
|
|
-
|
|
|
|
76,708
|
|
|
|
-
|
|
|
|
177,190
|
|
Other
|
|
|
106,079
|
|
|
|
95,217
|
|
|
|
256,041
|
|
|
|
200,409
|
|
Total
non-interest expenses
|
|
|
1,156,883
|
|
|
|
1,718,506
|
|
|
|
2,487,310
|
|
|
|
3,121,791
|
|
Loss before
income tax expense
|
|
|
(207,621
|
)
|
|
|
(785,164
|
)
|
|
|
(855,437
|
)
|
|
|
(1,085,594
|
)
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
loss
|
|
$
|
(207,621
|
)
|
|
$
|
(785,164
|
)
|
|
$
|
(855,437
|
)
|
|
$
|
(1,085,594
|
)
|
|
Other
comprehensive (loss) income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(loss) gain on investment securities available for sale, net of
tax
|
|
|
(2,612
|
)
|
|
|
72,777
|
|
|
|
(155
|
)
|
|
|
143,798
|
|
Reclassification adjustment included in net
loss, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
comprehensive (loss) income
|
|
|
(2,612
|
)
|
|
|
72,777
|
|
|
|
(155
|
)
|
|
|
143,798
|
|
|
Total comprehensive loss
|
|
$
|
(210,233
|
)
|
|
$
|
(712,387
|
)
|
|
$
|
(855,592
|
)
|
|
$
|
(941,796
|
)
|
Net loss per common share basic and
diluted
|
|
$
|
(.01
|
)
|
|
$
|
(.04
|
)
|
|
$
|
(.04
|
)
|
|
$
|
(.05
|
)
|
Weighted average common shares outstanding
basic and diluted
|
|
|
20,502,760
|
|
|
|
20,502,760
|
|
|
|
20,502,760
|
|
|
|
20,502,760
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
3
Independence Bancshares,
Inc.
Consolidated Statements
of Changes in Shareholders Equity
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
Common
stock
|
|
Additional
|
|
comprehensive
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
|
Amount
|
|
paid-in capital
|
|
income (loss)
|
|
deficit
|
|
Total
|
December 31, 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
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
10,128
|
|
|
-
|
|
|
|
-
|
|
|
|
10,128
|
|
Net
loss
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
(1,085,594
|
)
|
|
|
(1,085,594
|
)
|
Other comprehensive income
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
143,798
|
|
|
|
-
|
|
|
|
143,798
|
|
|
June 30, 2016
|
|
8,425
|
|
$
|
84
|
|
20,502,760
|
|
$
|
205,028
|
|
$
|
43,053,601
|
|
$
|
257,644
|
|
|
$
|
(31,803,866
|
)
|
|
$
|
11,712,491
|
|
|
December 31,
2016
|
|
8,425
|
|
$
|
84
|
|
20,502,760
|
|
$
|
205,028
|
|
$
|
43,053,599
|
|
$
|
(8,056
|
)
|
|
$
|
(33,306,290
|
)
|
|
$
|
9,944,365
|
|
Net
loss
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
(855,437
|
)
|
|
|
(855,437
|
)
|
Other comprehensive loss
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(155
|
)
|
|
|
-
|
|
|
|
(155
|
)
|
|
June 30, 2017
|
|
8,425
|
|
$
|
84
|
|
20,502,760
|
|
$
|
205,028
|
|
$
|
43,053,599
|
|
$
|
(8,211
|
)
|
|
$
|
(34,161,727
|
)
|
|
$
|
9,088,773
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
4
Independence Bancshares,
Inc.
Consolidated Statements
of Cash Flows
(unaudited)
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
2017
|
|
2016
|
Operating activities
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(855,437
|
)
|
|
$
|
(1,085,594
|
)
|
Adjustments
to reconcile net loss to cash used in operating activities
|
|
|
|
|
|
|
|
|
Provision
(reversal of provision) for loan losses
|
|
|
186,702
|
|
|
|
(68,000
|
)
|
Depreciation
|
|
|
52,105
|
|
|
|
105,857
|
|
Amortization
of investment securities discounts/premiums, net
|
|
|
1,995
|
|
|
|
79,069
|
|
Stock option
expense related to stock options granted
|
|
|
-
|
|
|
|
10,128
|
|
Net changes in fair value and
(gains) losses on other real estate owned and repossessed assets
|
|
|
(9,318
|
)
|
|
|
178,842
|
|
Increase in
value of bank owned life insurance
|
|
|
(41,916
|
)
|
|
|
-
|
|
(Increase)
decrease in other assets, net
|
|
|
(79,886
|
)
|
|
|
5,639
|
|
Decrease in
other liabilities, net
|
|
|
(131,134
|
)
|
|
|
(484,522
|
)
|
Net cash
used in operating activities
|
|
|
(876,889
|
)
|
|
|
(1,258,581
|
)
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Net decrease
in loans
|
|
|
103,092
|
|
|
|
2,086,714
|
|
Repayments
of investment securities available for sale
|
|
|
-
|
|
|
|
354,220
|
|
Maturities
(purchases) of interest bearing deposits in other institutions
|
|
|
1,750,000
|
|
|
|
(250,000
|
)
|
(Purchases)
redemption of non-marketable equity securities, net
|
|
|
(122,500
|
)
|
|
|
12,450
|
|
Purchase of
property, equipment and software
|
|
|
(32,695
|
)
|
|
|
(18,554
|
)
|
Proceeds
from sale of other real estate owned and repossessed assets
|
|
|
243,085
|
|
|
|
36,000
|
|
Purchase of
bank owned life insurance
|
|
|
-
|
|
|
|
(2,500,000
|
)
|
Net cash
provided by (used in) investing activities
|
|
|
1,940,982
|
|
|
|
(279,170
|
)
|
|
Financing activities
|
|
|
|
|
|
|
|
|
(Decrease)
increase in deposits, net
|
|
|
(3,609,305
|
)
|
|
|
(3,552,648
|
)
|
Federal Home
Loan Bank advance
|
|
|
4,000,000
|
|
|
|
-
|
|
Decrease in
securities sold under agreements to repurchase
|
|
|
(68,619
|
)
|
|
|
(63,723
|
)
|
Net cash
provided by (used in) financing activities
|
|
|
322,076
|
|
|
|
(3,616,371
|
)
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
|
1,386,169
|
|
|
|
(5,154,122
|
)
|
|
Cash and cash equivalents at beginning of the
period
|
|
|
10,774,727
|
|
|
|
13,899,795
|
|
|
Cash and cash equivalents at end of the
period
|
|
$
|
12,160,896
|
|
|
$
|
8,745,673
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Cash paid for
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
171,121
|
|
|
$
|
157,692
|
|
Income
taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
Schedule of non-cash transactions
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on securities available for sale, net of tax
|
|
$
|
(155
|
)
|
|
$
|
143,798
|
|
Loans
transferred to other real estate owned and repossessed assets
|
|
$
|
165,000
|
|
|
$
|
1,257,289
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
5
Notes to Unaudited
Consolidated Financial Statements
NOTE 1 NATURE OF
BUSINESS AND BASIS OF PRESENTATION
Independence
Bancshares, Inc.
(the
Company) is a South Carolina corporation organized to operate as a bank
holding company pursuant to the Federal Bank Holding Company Act of 1956 and the
South Carolina Banking and Branching Efficiency Act of 1996, and to own and
control all of the capital stock of Independence National Bank (the Bank), a
national association organized under the laws of the United States. Since
opening for business on May 16, 2005, the Bank has operated as a traditional
community bank in Greenville, South Carolina, fulfilling the financial needs of
individuals and small businesses in its market. The Bank provides traditional
checking and savings products insured by the Federal Deposit Insurance
Corporation (the FDIC) and consumer, commercial and mortgage loans, as well as
ATM and online banking, cash management and safe deposit boxes.
Basis of
Presentation
The accompanying
consolidated financial statements include the accounts of the Company and the
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. All adjustments consist of normally recurring accruals
that, in the opinion of management, are necessary for fair presentation of the
consolidated financial position of the Company. The foregoing discussion is a
summary only and should be read in conjunction with the Companys Annual Report
on Form 10-K for the year ended December 31, 2016 (the 2016 10-K) as filed
with the Securities and Exchange Commission (the SEC) on March 24, 2017 and
Managements Discussion and Analysis in this Quarterly Report on Form 10-Q.
Operating results for the three and six month periods ended June 30, 2017 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2017.
Reclassifications
Certain amounts have been
reclassified to state all periods on a comparable basis. Reclassifications had
no effect on previously reported shareholders equity or net loss.
Use of Estimates
The preparation of
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the consolidated financial statements and the reported amount of income and
expenses during the reporting periods. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance for loan
losses, other real estate owned, fair value of financial instruments, evaluating
other-than-temporary impairment of investment securities and valuation of
deferred tax assets.
Business Segments
Through December 31, 2016,
the Company reported its activities as four business segmentsCommunity Banking,
Transaction Services, Asset Management and Parent Only. In determining proper
segment definition, the Company considers the materiality of a potential segment
and components of the business about which financial information is available
and regularly evaluated, relative to a resource allocation and performance
assessment. As previously reported, the Company determined that segment
reporting was no longer necessary based on the lack of activity in the
Transaction Services and Asset Management segments. Substantially all of the
Companys consolidated activity for the three and six months ended June 30, 2017
was derived from community banking. Please refer to Note 8Business Segments
for further information on the reporting for business segments.
Subsequent
Events
Subsequent events are
events or transactions that occur after the balance sheet date but before
financial statements are issued. Recognized subsequent events are events or
transactions that provide additional evidence about conditions that existed at
the date of the balance sheet, including the estimates inherent in the process
of preparing financial statements. Non-recognized subsequent events are events
that provide evidence about conditions that did not exist at the date of the
balance sheet but arose after that date. Management performed an evaluation to
determine whether or not there have been any subsequent events since the balance
sheet date, and concluded that no subsequent events had occurred requiring
accrual or disclosure through the date of this filing.
6
NOTE 2 LIQUIDITY AND
CAPITAL CONSIDERATIONS
The Company
The Companys cash
balances, independent of the Bank, were approximately $1.7 million at June 30,
2017 compared to cash balances of approximately $1.8 million at December 31,
2016. Liquid assets decreased by $162,260, a slight decrease from December 31,
2016 as a result of professional fees and data processing expenses incurred by
the Company. There were no expenses incurred related to the transaction services
or asset management segments during the six month period ended June 30, 2017.
See Note 8Business Segments for additional information related to the
transaction services segment.
If the Company decides to
pursue new business strategies or plans, the Company may not have sufficient
working capital to bring the development to operational capability and would
need to raise additional capital. The Companys ability to raise additional
capital will depend on a number of factors outside of its control, including
conditions in the capital markets. There is a risk the Company would not be able
to raise the capital it needs at all or upon favorable terms. If the Company
cannot raise capital when needed, the Company would not be able to implement any
such strategies or plans and the Company may be subject to increased regulatory
supervision and restriction. Any restrictions imposed by regulators could have a
material adverse effect on the Companys financial condition and results of
operations, whether directly or indirectly.
The Bank
Our ability to maintain and
expand our deposit base and borrowing capabilities serves as our primary source
of liquidity at the Bank. We currently have $12.2 million in cash and federal
funds sold. If our cash needs at the Bank exceed that amount, we plan to
liquidate temporary investments and generate deposits within our market. In
addition, we will receive cash upon the maturity and sale of loans and the
maturity of investment securities and investments in interest bearing deposits.
Our investments in interest bearing deposits at June 30, 2017 amounted to $8.8
million, or 9.7% of total assets. Our investment securities available for sale
at June 30, 2017 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 June 30, 2017, $2.4 million of our
investment portfolio was pledged against outstanding debt. Therefore, the
related debt would need to be repaid prior to the securities being sold and
converted to cash.
The Bank is a member of the
Federal Home Loan Bank of Atlanta (FHLB), from which applications for
borrowings can be made for leverage purposes. The FHLB requires that securities,
qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to
secure any advances from the FHLB. At June 30, 2017, we had collateral that
would support approximately $31.3 million in additional borrowings. We are
subject to the FHLBs credit risk rating policy which assigns member
institutions a rating that is reviewed quarterly. The rating system utilizes key
factors such as loan quality, capital, liquidity, profitability, etc. Our
ability to access our available borrowing capacity from the FHLB in the future
is subject to our rating and any subsequent changes based on our financial
performance as compared to factors considered by the FHLB in their assignment of
our credit risk rating each quarter.
The Bank also pledges
collateral to the Federal Reserve Banks Borrower-in-Custody of Collateral
program, and our available credit under this program was $12.0 million as of
June 30, 2017.
The Bank has $5.5 million
in federal funds purchased lines of credit through correspondent banks that are
unsecured, but have not been utilized.
We believe our liquidity
sources are adequate to meet our operating needs at the Bank. However, we
continue to carefully focus on liquidity management during 2017. Comprehensive
weekly and monthly liquidity analyses serve management as vital decision-making
tools by providing summaries of anticipated changes in loans, investments, core
deposits, and wholesale funds. These internal funding reports provide management
with the details critical to anticipate immediate and long-term cash
requirements, such as expected deposit runoff, loan pay downs and amount and
cost of available borrowing sources, including secured overnight federal funds
lines with our various correspondent banks.
7
The Consolidated
Company
The Companys level of
liquidity is measured by the cash, cash equivalents, and federal funds sold to
total assets ratio which was 13.5% at June 30, 2017 compared to 11.9% as of
December 31, 2016. The increase in liquidity is due primarily to the increase in
cash and due from banks, partially offset by a slight decrease in federal funds
sold.
NOTE 3 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
For further information
refer to the consolidated financial statements and footnotes thereto included in
our 2016 10K.
Cash and Cash
Equivalents
- For purposes of
reporting cash flows, cash and cash equivalents include cash, amounts due from
banks and federal funds sold. Generally, federal funds are sold for one-day
periods. Due to the short term nature of cash and cash equivalents, the carrying
amount of these instruments is deemed to be a reasonable estimate of fair value.
At June 30, 2017 and
December 31, 2016, the Company had restricted cash totaling $2,000 with the
FHLB. The Company places its deposits and correspondent accounts with and sells
its federal funds to high quality institutions. Management believes credit risk
associated with correspondent accounts is not significant.
Net Loss per Common
Share
- Basic loss per common
share represents net loss divided by the weighted average number of common
shares outstanding during the period. Diluted loss per share reflects additional
common shares that would have been outstanding if dilutive potential common
shares had been issued. Potential common shares that may be issued by the
Company relate to outstanding stock options and warrants and are determined
using the treasury stock method. For the three and six month periods ended June
30, 2017 and June 30, 2016, as a result of the Companys net loss, all of the
potential common shares were considered anti-dilutive.
Research and Development
All costs incurred to establish
the technological feasibility of computer software to be sold, leased or
otherwise marketed as research and development are expensed as incurred. Once
technological feasibility has been established, the subsequent costs of
producing, coding and testing the products should be capitalized. The expensing
of computer software costs is discontinued when the product is available for
general release for customers. The Company did not achieve technological
feasibility in connection with the development its digital banking, payments and
transaction services 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. During the year ended December 31, 2016 and 2015, we incurred product
research and development expenses of approximately $250,000 and $2.2 million,
respectively. The 2016 expenses related to remaining monthly contract costs
which have since been completed, and no further research and development
expenses have been incurred in 2017.
Fair Value Measurements
-
The Company determines the fair
market values of its financial instruments based on the fair value hierarchy
established in Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Topic 820, Fair Value Measurements and
Disclosures (ASC Topic 820), which provides a framework for measuring and
disclosing fair value under generally accepted accounting principles. ASC Topic
820 requires disclosures about the fair value of assets and liabilities
recognized in the balance sheet in periods subsequent to initial recognition,
whether the measurements are made on a recurring basis (for example, available
for sale investment securities) or on a nonrecurring basis (for example,
impaired loans).
ASC Topic 820 defines fair
value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. ASC Topic 820 also establishes a fair
value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair
value:
Level 1 Valuations are
based on quoted prices in active markets for identical assets or liabilities.
Level 2 Valuations are
based on observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities, quoted prices in markets that are not active, or
other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
Level 3 Valuations
include unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or liabilities.
8
Income
Taxes
- The Company accounts for
income taxes in accordance with FASB ASC Topic 740, Income Taxes". Deferred tax
assets and liabilities are recognized for the expected future tax consequences
of events that have been recognized in the consolidated financial statements or
tax returns. Deferred tax assets and liabilities are measured using the enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be realized or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation allowances are
established to reduce deferred tax assets if it is determined to be more likely
than not that all or some portion of the potential deferred tax asset will not
be realized.
We did not recognize any
income tax benefit or expense for the three and six month periods ended June 30,
2017 and 2016 due to our net operating loss carryforward position. 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
weighting all available evidence, including both positive and negative evidence.
In making such judgments, significant weight is given to evidence that can be
objectively verified. We will continue to analyze our deferred tax assets and
related valuation allowance on a quarterly basis, taking into account
performance compared to forecasted earnings as well as current economic and
internal information.
The Company believes that
its income tax filing positions taken or expected to be taken in its tax returns
will more likely than not be sustained upon audit by the taxing authorities, and
does not anticipate any adjustments that will result in a material adverse
impact on the Companys financial condition, results of operations, or cash
flows. Therefore, no reserves for uncertain income tax positions have been
recorded pursuant to ASC 740.
Recently Issued
Accounting Pronouncements
- The
following is a summary of recent authoritative pronouncements that may affect
our accounting, reporting, and disclosure of financial information:
In May 2014, 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.
The guidance will be effective for the Company for reporting periods beginning
after December 15, 2017. The Company will apply the guidance using a full
retrospective approach. The Company does not expect these amendments to have a
material effect on its financial statements.
In August 2015, the FASB
deferred the effective date of ASU 2014-09, Revenue from Contracts with
Customers. As a result of the deferral, the guidance in ASU 2014-09 will be
effective for the Company for reporting periods beginning after December 15,
2017. The Company will apply the guidance using a full retrospective approach.
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, 2017, including interim periods within those
fiscal years. 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, 2018, including interim periods within those fiscal
years
.
Early adoption is permitted. 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
amended the Revenue from Contracts with Customers topic of the Accounting
Standards Codification 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 reporting periods beginning
after December 15, 2017
.
The Company does not expect these
amendments to have a material effect on its financial statements.
9
In April 2016, the FASB
amended the Revenue from Contracts with Customers topic of the Accounting
Standards Codification to clarify guidance related to identifying performance
obligations and accounting for licenses of intellectual property. The amendments
will be effective for the Company for reporting periods beginning after December
15, 2017. The Company does not expect these amendments to have a material effect
on its financial statements.
In May 2016, the FASB
amended the Revenue from Contracts with Customers topic of the Accounting
Standards Codification to clarify guidance related to collectability, noncash
consideration, presentation of sales tax, and transition. The amendments will be
effective for the Company for reporting periods beginning after December 15,
2017. 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. Early
adoption is permitted for all organizations for periods beginning after December
15, 2018. The Company is currently evaluating the effect that implementation of
the new standard will have on its financial position, results of operations, and
cash flows.
In August 2016, the FASB
amended the Statement of Cash Flows topic of the Accounting Standards
Codification to clarify how certain cash receipts and cash payments are
presented and classified in the statement of cash flows. The amendments will be
effective for the Company for fiscal years beginning after December 15, 2017
including interim periods within those fiscal years. Early adoption is
permitted. The Company does not expect these amendments to have a material
effect on its financial statements.
In October 2016, the FASB
amended the Income Taxes topic of the Accounting Standards Codification to
modify the accounting for intra-entity transfers of assets other than inventory.
The amendments will be effective for the Company for fiscal years beginning
after December 15, 2017 including interim periods within those fiscal years.
Early adoption is permitted. The Company does not expect these amendments to
have a material effect on its financial statements.
In November 2016, the FASB
amended the Statement of Cash Flows topic of the Accounting Standards
Codification to clarify how restricted cash is presented and classified in the
statement of cash flows. The amendments will be effective for the Company for
fiscal years beginning after December 15, 2017 including interim periods within
those fiscal years. Early adoption is permitted. The Company does not expect
these amendments to have a material effect on its financial statements.
In December 2016, the FASB
issued technical corrections and improvements to the Revenue from Contracts with
Customers Topic. These corrections make a limited number of revisions to several
pieces of the revenue recognition standard issued in 2014. The effective date
and transition requirements for the technical corrections will be effective for
the Company for reporting periods beginning after December 15, 2017. The Company
will apply the guidance using a full retrospective approach. The Company does
not expect these amendments to have a material effect on its financial
statements.
In January 2017, the FASB
issued guidance to clarify the definition of a business with the objective of
adding guidance to assist entities with evaluating whether transactions should
be accounted for as acquisitions (or disposals) of assets or businesses. The
amendment to the Business Combinations Topic is intended to address concerns
that the existing definition of a business has been applied too broadly and has
resulted in many transactions being recorded as business acquisitions that in
substance are more akin to asset acquisitions. The guidance will be effective
for the Company for reporting periods beginning after December 15, 2017. Early
adoption is permitted. The Company does not expect these amendments to have a
material effect on its financial statements.
In January 2017, the FASB
updated the Accounting Changes and Error Corrections and the InvestmentsEquity
Method and Joint Ventures Topics of the Accounting Standards Codification. The
ASU incorporates into the Accounting Standards Codification recent SEC guidance
about disclosing, under SEC SAB Topic 11.M, the effect on financial statements
of adopting the revenue, leases, and credit losses standards. The ASU was
effective upon issuance. The Company is currently evaluating the impact on
additional disclosure requirements as each of the standards is adopted, however
it does not expect these amendments to have a material effect on its financial
position, results of operations or cash flows.
In February 2017, the FASB
amended the Other Income Topic of the Accounting Standards Codification to
clarify the scope of the guidance on nonfinancial asset derecognition as well as
the accounting for partial sales of nonfinancial assets.
10
The amendments conform the
derecognition guidance on nonfinancial assets with the model for transactions in
the new revenue standard. The amendments will be effective for the Company for
reporting periods beginning after December 15, 2017. The Company does not expect
these amendments to have a material effect on its financial statements.
Other accounting standards
that have been issued or proposed by the FASB or other standards-setting bodies
are not expected to have a material impact on the Companys financial position,
results of operations or cash flows.
NOTE 4 INVESTMENT
SECURITIES
Investment securities
classified as available for sale are carried at fair value with unrealized
gains and losses excluded from earnings and reported as a separate component of
shareholders equity (net of estimated tax effects). Realized gains or losses on
the sale of investments are based on the specific identification method. The
amortized costs and fair values of investment securities available for sale are
as follows:
|
|
June 30,
2017
|
|
|
Amortized
|
|
Gross
Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
US
treasury note
|
|
$
|
2,505,866
|
|
$
|
-
|
|
$
|
(8,211
|
)
|
|
$
|
2,497,655
|
Total investment securities
|
|
$
|
2,505,866
|
|
$
|
-
|
|
$
|
(8,211
|
)
|
|
$
|
2,497,655
|
|
|
|
December 31,
2016
|
|
|
Amortized
|
|
Gross
Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
US
treasury note
|
|
$
|
2,507,861
|
|
$
|
-
|
|
$
|
(8,056
|
)
|
|
$
|
2,499,805
|
Total investment securities
|
|
$
|
2,507,861
|
|
$
|
-
|
|
$
|
(8,056
|
)
|
|
$
|
2,499,805
|
The following table
presents information regarding securities with unrealized losses at June 30,
2017:
|
|
Securities in an Unrealized
|
|
Securities in an Unrealized
|
|
|
|
|
|
|
|
|
Loss Position for Less than
|
|
Loss Position for More than
|
|
|
|
|
|
|
|
|
12
Months
|
|
12
Months
|
|
Total
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
US
treasury note
|
|
$
|
2,497,655
|
|
$
|
8,211
|
|
$
|
-
|
|
$
|
-
|
|
$
|
2,497,655
|
|
$
|
8,211
|
Total temporarily impaired
securities
|
|
$
|
2,497,655
|
|
$
|
8,211
|
|
$
|
-
|
|
$
|
-
|
|
$
|
2,497,655
|
|
$
|
8,211
|
The following table
presents information regarding securities with unrealized losses at December 31,
2016:
|
|
Securities in an Unrealized
|
|
Securities in an Unrealized
|
|
|
|
|
|
|
|
|
Loss Position for Less than
|
|
Loss Position for More than
|
|
|
|
|
|
|
|
|
12
Months
|
|
12
Months
|
|
Total
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
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
|
At June 30, 2017, our one
investment security with a fair value of approximately $2.5 million and
unrealized losses of $8,211 had been in a continuous loss position for less than
twelve months. At June 30, 2017, there were no investment securities in a
continuous loss position for more than twelve months. The Company believes,
based on industry analyst reports and credit ratings that the deterioration in
the fair value of this investment security available for sale is attributed to
changes in market interest rates and not in the credit quality of the issuer and
therefore, this loss is not considered other-than-temporary. The Company has the
ability and intent to hold securities until such time as the values recover or
the securities mature. At December 31, 2016, our one investment security with a
fair value of $2.5 million and unrealized losses of $8,056 had been in a continuous
loss for less than twelve months. At December 31, 2016, there were no investment
securities that had been in a continuous loss position for more than twelve
months.
11
The amortized costs and
fair values of investment securities available for sale at June 30, 2017, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because issuers have the right to prepay the
obligations.
|
|
June 30,
2017
|
|
|
Amortized
|
|
Fair
|
|
|
Cost
|
|
Value
|
Due
within one year
|
|
$
|
|
|
$
|
|
Due
after one through three years
|
|
|
2,505,866
|
|
|
2,497,655
|
Due
after three through five years
|
|
|
|
|
|
|
Due
after five through ten years
|
|
|
|
|
|
|
Due
after ten years
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
2,505,866
|
|
$
|
2,497,655
|
NOTE 5 LOANS
At June 30, 2017, our gross
loan portfolio consisted primarily of $26.8 million of commercial real estate
loans, $15.4 million of commercial business loans, and $18.0 million of consumer
and home equity loans. Our current loan portfolio composition is not materially
different than the loan portfolio composition disclosed in the footnotes to the
consolidated financial statements included in our 2016 10-K, other than the
increase in consumer loans resulting from the purchase of $4.8 million in
unsecured consumer loans during the period ended June 30, 2017.
During the quarter ended
June 30, 2017, one nonaccrual loan at the Bank was transferred to other real
estate owned for $165,000. A specific reserve was included in the December 31,
2016 allowance accounts. During the quarter ended June 30, 2016, three
nonaccrual loans were transferred to other real estate owned for $1,257,289.
Specific reserves for each of these loans were included in the December 31, 2015
allowance accounts.
Certain credit quality
statistics related to our loan portfolio have improved over the past several
quarters, including reductions of in-migration of nonaccrual loans and
reductions in the aggregate level of nonperforming assets. To the extent such
improvement continues, we may continue to reduce our allowance for loan losses
in future periods based on our assessment of the inherent risk in the loan
portfolio at those future reporting dates. A reduction in the allowance for loan
losses would result in a lower provision for loans losses being recorded in
future periods. Conversely, there can be no assurance that loan losses in future
periods will not exceed the current allowance for loan losses amount or that
future increases in the allowance for loan losses will not be required.
Additionally, no assurance can be given that our ongoing evaluation of the loan
portfolio, in light of changing economic conditions and other relevant factors,
will not require significant future additions to the allowance for loan losses,
thus adversely impacting our business, financial condition, results of
operations, and cash flows.
Loan Performance and
Asset Quality
Generally, a loan will be
placed on nonaccrual status when it becomes 90 days past due as to principal or
interest (unless the loan is well-collateralized and in the process of
collection), or when management believes, after considering economic and
business conditions and collection efforts, that the borrowers financial
condition is such that collection of the loan is doubtful. When a loan is placed
in nonaccrual status, interest accruals are discontinued and income earned but
not collected is reversed. Cash receipts on nonaccrual loans are not recorded as
interest income, but are used to reduce principal. Loans are removed from
nonaccrual status when they become current as to both principal and interest and
when concern no longer exists as to the collectability of principal or interest
based on current available information or as evidenced by sufficient payment
history, generally six months.
12
The following table
summarizes delinquencies and nonaccruals, by portfolio class, as of June 30,
2017 and December 31, 2016.
|
|
Single and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
multifamily
|
|
Construction
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
residential
|
|
and
|
|
real estate -
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
real
estate
|
|
development
|
|
other
|
|
business
|
|
Consumer
|
|
Total
|
June 30,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 days past due
|
|
$
|
-
|
|
$
|
64,383
|
|
$
|
-
|
|
$
|
135,222
|
|
$
|
-
|
|
$
|
199,605
|
|
60-89 days past due
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Nonaccrual
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
660,730
|
|
|
-
|
|
|
660,730
|
|
Total past due and nonaccrual
|
|
|
-
|
|
|
64,383
|
|
|
-
|
|
|
795,952
|
|
|
-
|
|
|
860,335
|
|
Current
|
|
|
12,124,136
|
|
|
7,183,876
|
|
|
19,531,490
|
|
|
14,627,142
|
|
|
5,903,531
|
|
|
59,370,175
|
|
Total loans (gross of deferred fees)
|
|
$
|
12,124,136
|
|
$
|
7,248,259
|
|
$
|
19,531,490
|
|
$
|
15,423,094
|
|
$
|
5,903,531
|
|
$
|
60,230,510
|
|
Deferred fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(132,939
|
)
|
Loan loss reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,407,518
|
)
|
Total Loans, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58,690,053
|
|
|
|
|
Single and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
multifamily
|
|
Construction
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
residential
|
|
and
|
|
real estate -
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
real
estate
|
|
development
|
|
other
|
|
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
|
|
Current
|
|
|
12,762,884
|
|
|
7,913,783
|
|
|
21,838,090
|
|
|
14,927,379
|
|
|
1,434,449
|
|
|
58,876,585
|
|
Total loans (gross of deferred fees)
|
|
$
|
13,314,130
|
|
$
|
7,913,783
|
|
$
|
22,033,590
|
|
$
|
15,954,106
|
|
$
|
1,434,449
|
|
$
|
60,650,058
|
|
Deferred fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(167,062
|
)
|
Loan loss reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,338,149
|
)
|
Total Loans, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
59,144,847
|
|
At June 30, 2017 and
December 31, 2016, there were nonaccrual loans of $660,730 and $304,451,
respectively. The increase in nonaccrual loans was a result of the movement of
four loans during January and February to nonaccrual status, partially offset by
one nonaccrual loan transferring to other real estate owned and one nonaccrual
loan being fully charged off during the prior quarter. In the current quarter,
the three remaining nonaccrual loans from one relationship were restructured
into one nonaccrual loan. Foregone interest income related to nonaccrual loans
equaled $34,944 and $49,567 for the six months ended June 30, 2017 and 2016,
respectively. No interest income was recognized on nonaccrual loans during the
six months ended June 30, 2017 and 2016. At June 30, 2017 and December 31, 2016,
there were no accruing loans which were contractually past due 90 days or more
as to principal or interest payments.
As part of the loan review
process, loans are given individual credit grades, representing the risk the
Company believes is associated with the loan balance. Credit grades are assigned
based on factors that impact the collectability of the loan, the strength of the
borrower, the type of collateral, and loan performance. Commercial loans are
individually graded at origination and credit grades are reviewed on a regular
basis in accordance with our loan policy. Consumer loans are assigned a pass
credit rating unless something within the loan warrants a specific
classification grade
.
13
The following table
summarizes managements internal credit risk grades, by portfolio class, as of
June 30, 2017 and December 31, 2016.
|
|
Single and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
multifamily
|
|
Construction
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
residential
|
|
and
|
|
real estate -
|
|
Commercial
|
|
|
|
|
|
|
June 30,
2017
|
|
real estate
|
|
development
|
|
other
|
|
business
|
|
Consumer
|
|
Total
|
Pass
Loans
|
|
$
|
7,584,510
|
|
$
|
1,112,242
|
|
$
|
-
|
|
$
|
-
|
|
$
|
5,903,531
|
|
$
|
14,600,283
|
Grade 1 - Prime
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Grade 2 - Good
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Grade 3 - Acceptable
|
|
|
1,767,041
|
|
|
1,485,969
|
|
|
9,349,157
|
|
|
7,332,476
|
|
|
-
|
|
|
19,934,643
|
Grade 4 Acceptable w/ Care
|
|
|
2,711,451
|
|
|
4,584,829
|
|
|
8,656,493
|
|
|
7,211,410
|
|
|
-
|
|
|
23,164,183
|
Grade 5 Special Mention
|
|
|
-
|
|
|
65,219
|
|
|
755,274
|
|
|
-
|
|
|
-
|
|
|
820,493
|
Grade 6 - Substandard
|
|
|
61,134
|
|
|
-
|
|
|
770,566
|
|
|
879,208
|
|
|
-
|
|
|
1,710,908
|
Grade 7 - Doubtful
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Total loans (gross of deferred fees)
|
|
$
|
12,124,136
|
|
$
|
7,248,259
|
|
$
|
19,531,490
|
|
$
|
15,423,094
|
|
$
|
5,903,531
|
|
$
|
60,230,510
|
|
|
|
Single and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
multifamily
|
|
Construction
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
residential
|
|
and
|
|
real estate -
|
|
Commercial
|
|
|
|
|
|
|
December 31, 2016
|
|
real
estate
|
|
development
|
|
other
|
|
business
|
|
Consumer
|
|
Total
|
Pass
Loans
|
|
$
|
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 (gross of deferred fees)
|
|
$
|
13,314,130
|
|
$
|
7,913,783
|
|
$
|
22,033,590
|
|
$
|
15,954,106
|
|
$
|
1,434,449
|
|
$
|
60,650,058
|
Loans graded one through
four are considered pass credits. At June 30, 2017, approximately 96% of the
loan portfolio had a credit grade of pass compared to 95% at December 31,
2016. 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. As of June 30, 2017 and December 31, 2016, we had loans
totaling $820,493 and $835,501, respectively, classified as special mention.
This classification is utilized when an initial concern is identified about the
financial health of a borrower. Loans are designated as such in order to be
monitored more closely than other credits in the loan portfolio. At June 30,
2017, substandard loans totaled approximately $1.7 million, with all loans being
collateralized by real estate, compared to $2.2 million at December 31, 2016.
Substandard credits are evaluated for impairment on a quarterly
basis.
The Company identifies
impaired loans through its normal internal loan review process. A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrowers prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Loans on the
Companys problem loan watch list are considered potentially impaired loans.
Generally, once loans are considered impaired, they are moved to nonaccrual
status and recognition of interest income is discontinued. However, loans may be
considered impaired strictly based on a decrease in the underlying value of the
collateral securing the loan while the loan is still considered to be
performing, thus preventing the need to move the loan to nonaccrual status.
Impairment is measured on a loan-by-loan basis based on the determination of the
most probable source of repayment which is usually liquidation of the underlying
collateral, but may also include discounted future cash flows, or in rare cases,
the market value of the loan itself.
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.
14
At June 30, 2017, impaired
loans totaled $1.7 million, all of which were valued on a nonrecurring basis at
the lower of cost or market value of the underlying collateral. Impaired loans
decreased $470,406 from December 31, 2016 due to one loan being transferred to
other real estate owned for $165,000, two loan for approximately $119,000 being
charged off which were fully reserved at December 31, 2016, one loan for
approximately $100,000 being repaid in full during the quarter and approximately
$66,000 in loan balance reductions through pay downs. Market values were
obtained using independent appraisals, updated in accordance with our
reappraisal policy, or other market data such as recent offers to the borrower.
As of June 30, 2017, we had loans totaling approximately $820,493 that were
classified in accordance with our loan rating policies but were not considered
impaired. The following table summarizes information relative to impaired loans,
by portfolio class, at June 30, 2017 and December 31, 2016.
|
|
Unpaid
|
|
|
|
|
|
|
|
Average
|
|
Year to date
|
|
|
principal
|
|
Recorded
|
|
Related
|
|
impaired
|
|
interest
|
|
|
balance
|
|
investment
|
|
allowance
|
|
investment
|
|
income
|
June 30,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With
no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and multifamily residential real estate
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
106,250
|
|
$
|
-
|
Construction and development
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
54,830
|
|
|
-
|
Commercial real estate - other
|
|
|
770,566
|
|
|
770,566
|
|
|
-
|
|
|
745,514
|
|
|
20,416
|
Commercial business
|
|
|
218,478
|
|
|
218,478
|
|
|
-
|
|
|
158,880
|
|
|
|
Consumer
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
With
related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and multifamily residential real estate
|
|
|
61,134
|
|
|
61,134
|
|
|
3,534
|
|
|
131,156
|
|
|
1,599
|
Construction and development
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
49,070
|
|
|
-
|
Commercial real estate - other
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
262,142
|
|
|
-
|
Commercial business
|
|
|
697,467
|
|
|
660,730
|
|
|
562,035
|
|
|
450,775
|
|
|
-
|
Consumer
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and multifamily residential real estate
|
|
|
61,134
|
|
|
61,134
|
|
|
3,534
|
|
|
237,406
|
|
|
1,599
|
Construction and development
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
103,900
|
|
|
-
|
Commercial real estate - other
|
|
|
770,566
|
|
|
770,566
|
|
|
-
|
|
|
1,007,656
|
|
|
20,416
|
Commercial business
|
|
|
915,945
|
|
|
879,208
|
|
|
562,035
|
|
|
609,655
|
|
|
-
|
Consumer
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
$
|
1,747,645
|
|
$
|
1,710,908
|
|
$
|
565,569
|
|
$
|
1,958,617
|
|
$
|
22,015
|
|
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
|
15
During the six months ended
June 30, 2017, we had interest income on impaired loans of $22,015, which were
related to commercial real estate and construction and development
loans.
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.
Our policy with respect to
accrual of interest on loans restructured in a TDR follows relevant supervisory
guidance. That is, if a borrower has demonstrated performance under the previous
loan terms and shows capacity to perform under the restructured loan terms;
continued accrual of interest at the restructured interest rate is likely. If a
borrower was materially delinquent on payments prior to the restructuring, but
shows capacity to meet the restructured loan terms, the loan will likely
continue as nonaccrual going forward. Lastly, if the borrower does not perform
under the restructured terms, the loan is placed on nonaccrual status. We will
continue to closely monitor these loans and will cease accruing interest on them
if management believes that the borrowers may not continue performing based on
the restructured note terms.
At December 31, 2016, the
principal balance of TDRs was zero. No TDRs went into default during the year
ended December 31, 2016. At June 30, 2017, the recorded investment and
outstanding principal balance was $660,730 and $697,467, respectively. The
carrying balance consisted of one performing loan within one relationship.
There were three loans
within one relationship that were modified as a troubled debt restructuring
within the previous 12-month period for which there was a payment default during
the six months ended June 30, 2017. A repayment of $75,000 was made in June
2017. The three loans were restructured into one loan with a change in loan
terms.
Provision and Allowance
for Loan Losses
An allowance for loan
losses is maintained at a level deemed appropriate by management to adequately
provide for known and inherent losses in the loan portfolio. The allowance for
loan losses is established as losses are estimated to have occurred through a
provision for loan losses charged to earnings. Loan losses are charged against
the allowance when management believes the uncollectability of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance.
The provision and allowance
for loan losses is evaluated on a regular basis by management and is based upon
managements periodic review of the collectability of the loans in light of
historical experience, the nature and volume of the loan portfolio, adverse
situations that may affect the borrowers ability to repay, estimated value of
any underlying collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
The allowance consists of
both a specific and a general component. The specific component relates to loans
that are impaired loans as defined in FASB ASC Topic 310, Receivables. For
such loans, an allowance is established when either the discounted cash flows or
collateral value or observable market price of the impaired loan is lower than
the carrying value of that loan. The general component covers non-impaired loans
and is based on historical loss experience adjusted for qualitative
factors.
16
The following table
summarizes activity related to our allowance for loan losses for the six months
ended June 30, 2017 and 2016, by portfolio segment.
|
|
Single and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
multifamily
|
|
Construction
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
residential
|
|
and
|
|
real estate -
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
real
estate
|
|
development
|
|
other
|
|
business
|
|
Consumer
|
|
Total
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan
losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
235,797
|
|
|
$
|
73,630
|
|
|
$
|
330,785
|
|
|
$
|
684,679
|
|
|
$
|
13,258
|
|
|
$
|
1,338,149
|
|
Provision (reversal of
provision) for loan losses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
186,702
|
|
|
|
186,702
|
|
Loan charge-offs
|
|
|
(88,951
|
)
|
|
|
-
|
|
|
|
(30,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(119,451
|
)
|
Loan
recoveries
|
|
|
1,000
|
|
|
|
-
|
|
|
|
1,118
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,118
|
|
Net loans
charged-off
|
|
|
(87,951
|
)
|
|
|
-
|
|
|
|
(29,382
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(117,333
|
)
|
Balance, end of period
|
|
$
|
147,846
|
|
|
$
|
73,630
|
|
|
$
|
301,403
|
|
|
$
|
684,679
|
|
|
$
|
199,960
|
|
|
$
|
1,407,518
|
|
|
Individually reviewed for
impairment
|
|
$
|
3,534
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
562,035
|
|
|
$
|
-
|
|
|
$
|
565,569
|
|
Collectively reviewed for impairment
|
|
|
144,312
|
|
|
|
73,630
|
|
|
|
301,403
|
|
|
|
122,644
|
|
|
|
199,960
|
|
|
|
841,949
|
|
Total allowance for loan
losses
|
|
$
|
147,846
|
|
|
$
|
73,630
|
|
|
$
|
301,403
|
|
|
$
|
684,679
|
|
|
$
|
199,960
|
|
|
$
|
1,407,518
|
|
|
Gross loans, end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually reviewed for
impairment
|
|
$
|
61,134
|
|
|
$
|
-
|
|
|
$
|
770,566
|
|
|
$
|
879,208
|
|
|
$
|
-
|
|
|
$
|
1,710,908
|
|
Collectively reviewed for impairment
|
|
|
12,063,002
|
|
|
|
7,248,259
|
|
|
|
18,760,924
|
|
|
|
14,543,886
|
|
|
|
5,903,531
|
|
|
|
58,519,602
|
|
Total loans (gross of
deferred fees)
|
|
$
|
12,124,136
|
|
|
$
|
7,248,259
|
|
|
$
|
19,531,490
|
|
|
$
|
15,423,094
|
|
|
$
|
5,903,531
|
|
|
$
|
60,230,510
|
|
|
June 30, 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
|
)
|
|
|
(60,000
|
)
|
|
|
45,000
|
|
|
|
(28,000
|
)
|
|
|
5,000
|
|
|
|
(68,000
|
)
|
Loan
charge-offs
|
|
|
-
|
|
|
|
(10,500
|
)
|
|
|
(209,045
|
)
|
|
|
-
|
|
|
|
(139
|
)
|
|
|
(219,684
|
)
|
Loan recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,312
|
|
|
|
1,312
|
|
Net
loans charged-off
|
|
|
-
|
|
|
|
(10,500
|
)
|
|
|
(209,045
|
)
|
|
|
-
|
|
|
|
1,173
|
|
|
|
(218,372
|
)
|
Balance, end of
period
|
|
$
|
235,797
|
|
|
$
|
113,630
|
|
|
$
|
275,785
|
|
|
$
|
216,679
|
|
|
$
|
11,246
|
|
|
$
|
853,137
|
|
|
Individually reviewed for impairment
|
|
$
|
99,445
|
|
|
$
|
-
|
|
|
$
|
28,189
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
127,634
|
|
Collectively reviewed for
impairment
|
|
|
136,352
|
|
|
|
113,630
|
|
|
|
247,596
|
|
|
|
216,679
|
|
|
|
11,246
|
|
|
|
725,503
|
|
Total allowance for loan losses
|
|
$
|
235,797
|
|
|
$
|
113,630
|
|
|
$
|
275,785
|
|
|
$
|
216,679
|
|
|
$
|
11,246
|
|
|
$
|
853,137
|
|
|
Gross loans, end of
period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually reviewed for impairment
|
|
$
|
141,045
|
|
|
$
|
138,454
|
|
|
$
|
883,942
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,163,441
|
|
Collectively reviewed for
impairment
|
|
|
13,394,244
|
|
|
|
9,065,294
|
|
|
|
20,410,832
|
|
|
|
18,314,397
|
|
|
|
1,810,698
|
|
|
|
62,995,465
|
|
Total loans (gross of deferred fees)
|
|
$
|
13,535,289
|
|
|
$
|
9,203,748
|
|
|
$
|
21,294,774
|
|
|
$
|
18,314,397
|
|
|
$
|
1,810,698
|
|
|
$
|
64,158,906
|
|
|
|
June 30, 2017
|
|
June 30, 2016
|
Nonaccrual loans
|
|
$
|
660,730
|
|
|
$
|
334,233
|
|
Average gross loans
|
|
$
|
61,228,957
|
|
|
$
|
65,181,990
|
|
Net
loans charged-off as a percentage of average gross loans
|
|
|
0.19
|
%
|
|
|
0.33
|
%
|
Allowance for loan losses as a percentage of total gross
loans
|
|
|
2.34
|
%
|
|
|
1.33
|
%
|
Allowance for loan losses as a percentage of
non-accrual loans
|
|
|
201.80
|
%
|
|
|
255.25
|
%
|
Portions of the allowance
for loan losses may be allocated for specific loans or portfolio segments.
However, the entire allowance for loan losses is available for any loan that, in
managements judgment, should be charged-off. The general reserve as a
percentage of loans collectively reviewed for impairment increased to 1.44% at
June 30, 2017 from 1.22% at December 31, 2016. 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.
17
Maturities and
Sensitivity of Loans to Changes in Interest Rates
The information in the
following tables summarizes the loan maturity distribution by type and related
interest rate characteristics based on the contractual maturities of individual
loans, including loans which may be subject to renewal at their contractual
maturity. Renewal of such loans is subject to review and credit approval, as
well as modification of terms upon maturity. Actual repayments of loans may
differ from the maturities reflected below, because borrowers have the right to
prepay obligations with or without prepayment penalties.
|
|
|
|
|
After one but
|
|
|
|
|
|
|
|
|
One year or
|
|
within five
|
|
After five
|
|
|
|
|
|
less
|
|
years
|
|
years
|
|
Total
|
June 30,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and multifamily
residential real estate
|
|
$
|
1,544,470
|
|
$
|
5,206,604
|
|
$
|
5,373,062
|
|
$
|
12,124,136
|
Construction and development
|
|
|
2,708,145
|
|
|
4,001,464
|
|
|
538,650
|
|
|
7,248,259
|
Commercial real estate -
other
|
|
|
3,422,091
|
|
|
14,209,859
|
|
|
1,899,540
|
|
|
19,531,490
|
Commercial business
|
|
|
5,375,367
|
|
|
9,410,110
|
|
|
637,617
|
|
|
15,423,094
|
Consumer
|
|
|
321,862
|
|
|
5,496,736
|
|
|
84,933
|
|
|
5,903,531
|
Total
|
|
$
|
13,371,935
|
|
$
|
38,324,773
|
|
$
|
8,533,802
|
|
$
|
60,230,510
|
|
|
|
|
|
|
After one but
|
|
|
|
|
|
|
|
|
One year or
|
|
within five
|
|
After five
|
|
|
|
|
|
less
|
|
years
|
|
years
|
|
Total
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and multifamily
residential real estate
|
|
$
|
1,445,328
|
|
$
|
6,710,484
|
|
$
|
5,158,318
|
|
$
|
13,314,130
|
Construction and development
|
|
|
2,987,321
|
|
|
4,829,172
|
|
|
97,290
|
|
|
7,913,783
|
Commercial real estate -
other
|
|
|
3,144,814
|
|
|
16,958,206
|
|
|
1,930,570
|
|
|
22,033,590
|
Commercial business
|
|
|
6,203,428
|
|
|
8,736,000
|
|
|
1,014,678
|
|
|
15,954,106
|
Consumer
|
|
|
540,500
|
|
|
821,639
|
|
|
72,310
|
|
|
1,434,449
|
Total
|
|
$
|
14,321,391
|
|
$
|
38,055,501
|
|
$
|
8,273,166
|
|
$
|
60,650,058
|
Loans maturing after one year with:
|
|
June 30, 2017
|
|
December 31, 2016
|
Fixed interest rates
|
|
$
|
21,054,109
|
|
$
|
16,767,328
|
Floating interest rates
|
|
$
|
25,804,466
|
|
$
|
29,561,339
|
NOTE 6 FAIR VALUE
Assets and Liabilities
Measured at Fair Value
Fair value is defined as
the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. The Company determines the fair values of its financial
instruments based on the fair value hierarchy, which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The three levels of inputs that may be used to
measure fair value are detailed in Note 2.
Available-for-sale
investment securities ($2,497,655 and $2,499,805 at June 30, 2017 and December
31, 2016, respectively) are carried at fair value and measured on a recurring
basis using Level 2 inputs. Fair values are estimated by using bid prices and
quoted prices of pools or tranches of securities with similar
characteristics.
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 June 30, 2017, 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 June 30, 2017 and
December 31, 2016 was $1.2 million and $1.6 million, respectively.
18
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 of cost 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 June 30, 2017 and December 31, 2016 was $2.1 million and $2.2 million,
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 June 30, 2017, the significant
observable inputs used in the fair value measurements were as
follows:
|
|
Fair Value at
|
|
|
|
|
|
|
June 30,
|
|
|
|
Significant
|
Description
|
|
2017
|
|
Valuation
Technique
|
|
Unobservable
Inputs
|
Other real estate owned and
repossessed assets
|
|
$
|
2,153,900
|
|
Appraised value
|
|
Discounts to reflect current
market conditions, abbreviated holding period, and estimated costs to
sell
|
|
Impaired loans
|
|
$
|
1,182,076
|
|
Internal assessment based on external third party 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, 2016, the significant
unobservable inputs used in the fair value measurements were as
follows:
|
|
Fair Value at
|
|
|
|
|
|
|
December 31,
|
|
|
|
Significant
|
Description
|
|
2016
|
|
Valuation
Technique
|
|
Unobservable
Inputs
|
Other real estate owned and
repossessed assets
|
|
$
|
2,222,667
|
|
Appraised value
|
|
Discounts to reflect current
market conditions and estimated costs to sell
|
|
Impaired loans
|
|
$
|
1,606,590
|
|
Internal assessment based on external third party 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
Companys common stock, property, equipment and software, and other assets and
liabilities.
Fair value approximates
carrying value for the following financial instruments due to the short-term
nature of the instrument: cash and due from banks, federal funds sold, and
securities sold under agreements to repurchase. Investment securities are valued
using quoted market prices. No ready market exists for non-marketable equity
securities, and they have no quoted market value. However, redemption of these
stocks has historically been at par value. Accordingly, the carrying amounts are
deemed to be a reasonable estimate of fair value. Fair value of loans is based
on the discounted present value of the estimated future cash flows. Discount
rates used in these computations approximate the rates currently offered for
similar loans of comparable terms and credit quality.
Fair value for demand
deposit accounts and interest bearing accounts with no fixed maturity date is
equal to the carrying value. Fair value of certificate of deposit accounts are
estimated by discounting cash flows from expected maturities using current
interest rates on similar instruments. Fair value for FHLB advances is based on
discounted cash flows using the Companys current incremental borrowing rate.
The Company has used
managements best estimate of fair value based on the above assumptions. Thus,
the fair values presented may not be the amounts that could be realized in an
immediate sale or settlement of the instrument. In addition, any income taxes or
other expenses, which would be incurred in an actual sale or settlement, are not
taken into consideration in the fair value presented.
19
The estimated fair values
of the Companys financial instruments at June 30, 2017 and December 31, 2016
are as follows:
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
6,105,896
|
|
$
|
6,105,896
|
|
$
|
6,105,896
|
|
|
-
|
|
|
-
|
Interest bearing deposits in other
institutions
|
|
|
8,750,000
|
|
|
8,750,000
|
|
|
-
|
|
|
8,750,000
|
|
|
-
|
Federal funds sold
|
|
|
6,055,000
|
|
|
6,055,000
|
|
|
6,055,000
|
|
|
-
|
|
|
-
|
Investment securities available for
sale
|
|
|
2,497,655
|
|
|
2,497,655
|
|
|
-
|
|
|
2,497,655
|
|
|
-
|
Non-marketable equity securities
|
|
|
502,550
|
|
|
502,550
|
|
|
-
|
|
|
502,550
|
|
|
-
|
Loans, net
|
|
|
58,690,053
|
|
|
58,629,955
|
|
|
-
|
|
|
-
|
|
|
58,629,955
|
Bank owned life insurance
|
|
|
2,584,826
|
|
|
2,584,826
|
|
|
-
|
|
|
2,584,826
|
|
|
-
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank advances
|
|
|
4,000,000
|
|
|
4,002,126
|
|
|
-
|
|
|
-
|
|
|
4,002,126
|
Deposits
|
|
|
76,098,343
|
|
|
75,861,220
|
|
|
-
|
|
|
75,861,220
|
|
|
-
|
Securities sold under agreements to
repurchase
|
|
|
44,979
|
|
|
44,979
|
|
|
-
|
|
|
44,979
|
|
|
-
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
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
|
|
|
-
|
NOTE 7 STOCK
COMPENSATION PLANS
On July 26, 2005, the
Company adopted the Independence Bancshares, Inc. 2005 Stock Incentive Plan (the
2005 Incentive Plan) for the benefit of the directors, officers and employees.
The 2005 Incentive Plan initially reserved up to 260,626 shares of the Companys
common stock for the issuance of stock options and contained evergreen
provision, which provided that the maximum number of shares to be issued under
the 2005 Incentive Plan would automatically increase each time the Company
issues additional shares of common stock such that the total number of shares
issuable under the 2005 Incentive Plan would at all times equal 12.5% of the
then outstanding shares of common stock.
In February 2013, our board
of directors amended the 2005 Incentive Plan to cap the number of shares
issuable thereunder at 2,466,720 and adopted the Independence Bancshares, Inc.
2013 Equity Incentive Plan (the 2013 Incentive Plan) which was subsequently
approved by the Companys shareholders at the 2013 annual shareholders meeting.
The 2013 Incentive Plan is an omnibus equity incentive plan which provides for
the granting of various types of equity compensation awards, including stock
options, restricted stock, and stock appreciation rights, to the Companys
employees and directors.
20
As of June 30, 2017 and
December 31, 2016, 3,064,380 total options were outstanding at a weighted
average price of $1.04. Of the 3,064,380 options outstanding, all options were
vested.
Compensation expense
related to stock options granted was $10,128 for the six months ended June 30,
2016. There was no compensation expense for the six months ended June 30, 2017
due the remaining stock options being fully vested in July 2016. Compensation
expense is based on the fair value of the option estimated at the date of grant
using the Black-Scholes option-pricing model. Compensation expense is recognized
on a straight line basis over the vesting period of the option.
NOTE 8 BUSINESS
SEGMENTS
Through December 31, 2016,
the Company reported its activities as four business segments - Community
Banking, Transaction Services, Asset Management and Parent Only - as defined in
Note 1. In determining proper segment definition, the Company considers the
materiality of a potential segment and components of the business about which
financial information is available and regularly evaluated, relative to a
resource allocation and performance assessment. As of June 30, 2017, the Company
determined that segment reporting was no longer necessary based on the lack of
activity in the Transaction Services and Asset Management segments.
Substantially all of the Companys consolidated activity for the three and six
months ended June 30, 2017 was derived from community banking.
As previously disclosed in
the Form 10-Q filed August 10, 2016, our segment activity for the three months
ended June 30, 2016 consisted of net loss of $331,438 from the Community Banking
segment, a loss of $76,709 at the Transaction Services segment resulting from
product research and development expense, $122,620 of loss at the Asset
Management segment resulting from the costs to hold real estate owned, and a
loss of $254,397 for the Parent Only segment. Our segment activity for the six
months ended June 30, 2016 consisted of net loss of $278,505 from the Community
Banking segment, a loss of $177,190 at the Transaction Services segment
resulting from product research and development expense, $117,110 of loss at the
Asset Management segment resulting from the costs to hold real estate owned, and
a loss of $512,789 for the Parent Only segment. Also as previously reported, at
June 30, 2016 the Holding Company had $600,000 in other real estate owned
consisting of one commercial real estate property and had accrued expenses and
other liabilities totaling $378,424.
NOTE
9
BANK OWNED LIFE
INSURANCE AND PRE-RETIREMENT BENEFIT PLAN
In June of 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.
In connection with the
purchase of the bank owned life insurance, 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.
21
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion
reviews our results of operations and assesses our financial condition. You
should read the following discussion and analysis in conjunction with the
accompanying consolidated financial statements. The commentary should be read in
conjunction with the discussion of forward-looking statements, the financial
statements, and the related notes and the other statistical information included
in this report.
CAUTIONARY NOTE
REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on
Form 10-Q, including information included or incorporated by reference in this
document, contains statements which constitute forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements may relate to our
financial condition, results of operation, plans, objectives, or future
performance. These statements are based on many assumptions and estimates and
are not guarantees of future performance. Our actual results may differ
materially from those anticipated in any forward-looking statements, as they
will depend on many factors about which we are unsure, including many factors
which are beyond our control. The words may, would, could, should,
will, expect, anticipate, predict, project, potential, believe,
continue, assume, intend, plan, and estimate, as well as similar
expressions, are meant to identify such forward-looking statements. Potential
risks and uncertainties that could cause our actual results to differ from those
anticipated in our forward-looking statements include, but are not limited to,
the following:
●
|
strategies for growth and sources of new
operating revenues;
|
●
|
operating revenues, expenses, effective tax
rates, and other results of operations;
|
●
|
current and future products and services and
plans to develop and promote them;
|
●
|
capital expenditures and our estimates
regarding our capital expenditures;
|
●
|
the lack of loan growth in recent
years;
|
●
|
credit losses as a result of declining real
estate values, increasing interest rates, increasing unemployment, changes
in payment behavior or other factors;
|
●
|
credit losses due to loan
concentration;
|
●
|
the rate of delinquencies and amount of
loans charged-off;
|
●
|
allowances for loan losses and loan loss
provisions;
|
●
|
liquidity, working capital requirements and
access to funding;
|
●
|
cybersecurity risks, business disruptions or
financial losses and changes in technology;
|
●
|
our shareholder
relations;
|
●
|
defense of litigation brought by current and/or former officers, directors and/or shareholders;
|
●
|
mergers and acquisitions
activity;
|
●
|
use of proceeds from sales of our
securities;
|
●
|
our ability to comply with
regulations;
|
●
|
relations with federal and state
regulators;
|
●
|
listing our shares, including any listing on
a national securities exchange;
|
22
●
|
changes in economic
conditions;
|
●
|
our ability to attract and retain key
personnel;
|
●
|
our ability to protect, use, develop, market
and otherwise exploit our proprietary technology and intellectual
property;
|
●
|
our ability to retain our existing
customers;
|
●
|
increases in competitive pressure in the
banking and financial services industries;
|
●
|
adverse changes in asset quality and
resulting credit risk related losses and expenses;
|
●
|
changes in the interest rate environment,
business conditions, inflation and changes in monetary and tax policies;
|
●
|
changes in political, legislative or
regulatory conditions;
|
●
|
loss of consumer confidence and economic
disruptions resulting from terrorist activities or other military
actions;
|
●
|
changes in deposit
flows;
|
●
|
changes in accounting policies and
practices; and
|
●
|
other risks and uncertainties detailed in
our other filings with the SEC.
|
All forward-looking
statements in this report are based on information available to us as of the
date of this report. Although we believe that the expectations reflected in our
forward-looking statements are reasonable, we cannot guarantee you that these
expectations will be achieved. We undertake no obligation to publicly update or
otherwise revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
Critical Accounting
Policies
We have adopted various
accounting policies that govern the application of accounting principles
generally accepted in the United States of America, and comport with general
practices within the banking industry in the preparation of our financial
statements. Our significant accounting policies are described in the footnotes
to our audited consolidated financial statements as of December 31, 2016, as
filed in our 2016 10-K.
Certain accounting policies
involve significant judgments and assumptions by us that have a material impact
on the carrying value of certain assets and liabilities. We consider these
accounting policies to be critical accounting policies. The judgments and
assumptions we use are based on historical experience and other factors, which
we believe to be reasonable under the circumstances. Because of the nature of
the judgment and assumptions we make, actual results could differ from these
judgments and estimates that could have a material impact on the carrying values
of our assets and liabilities and our results of operations.
Allowance for Loan
Losses
We believe the allowance
for loan losses is the critical accounting policy that requires the most
significant judgments and estimates used in preparation of our consolidated
financial statements. Some of the more critical judgments supporting the amount
of our allowance for loan losses include judgments about the creditworthiness of
borrowers, the estimated value of the underlying collateral, the assumptions
about cash flow, determination of loss factors for estimating credit losses, the
impact of current events and conditions, and other factors impacting the level
of probable inherent losses. Under different conditions or using different
assumptions, the actual amount of credit losses incurred by us may be different
from managements estimates provided in our consolidated financial statements.
Refer to the portion of this discussion that addresses our allowance for loan
losses for a more complete discussion of our processes and methodology for
determining our allowance for loan losses.
23
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. No
research and development costs have been incurred in the three and six months
ended June 30, 2017.
Overview
The following discussion
describes our results of operations for the three and six month periods ended
June 30, 2017 and 2016 and also analyzes our financial condition as of June 30,
2017.
The Consolidated
Company
At June 30, 2017, we had
total assets of $89.8 million, a decrease of $664,650 or 0.7%, from total assets
of $90.5 million at December 31, 2016. The largest components of our total
assets are net loans, interest bearing deposits in other institutions,
investment securities available for sale, other real estate owned, federal funds
sold and cash and due from banks, which were $58.7 million, $8.8 million, $2.5
million, $2.1 million, $6.1 million and $6.1 million, respectively, at June 30,
2017. Comparatively, our net loans, investment securities available for sale,
interest bearing deposits in other institutions, other real estate owned,
federal funds sold and cash and due from banks totaled $59.1 million, $2.5
million, $10.5 million, $2.2 million, $6.1 million and $4.6 million,
respectively, at December 31, 2016.
Our liabilities and
shareholders equity at June 30, 2017 totaled $80.7 million and $9.1 million,
respectively, compared to liabilities of $80.5 million and shareholders equity
of $9.9 million at December 31, 2016. The principal component of our liabilities
is deposits, which were $76.1 million and $79.7 million at June 30, 2017 and
December 31, 2016, respectively.
24
Our net loss was $207,621
for the three months ended June 30, 2017, or $0.01 per share, an improvement of
$577,543, or 73.6%, compared to a net loss of $785,164, or $0.04 per share, for
the three months ended June 30, 2016. This decrease in net loss was primarily
driven by decreases in activity related to real estate owned, a decrease in
product research and development expenses, and an increase in other income due
to the value of bank owned life insurance.
Our net loss was $855,437
for the six months ended June 30, 2017, or $0.04 per share, an improvement of
$230,157, or 21.2%, compared to a net loss of $1.1 million, or $0.05 per share,
for the six months ended June 30, 2016. This decrease in net loss was primarily
driven by decreases in product research and development expenses as a result of
the Companys decision to suspend development of its digital banking, payments
and transaction services business on September 25, 2015, decreases in
compensation and benefits and decreases in activity related to real estate
owned, partially offset by the recognition of a provision for loan loss during
the period.
The
Company
The Companys cash
balances, independent of the Bank, were approximately $1.7 million at June 30,
2017 compared to cash balances of approximately $1.8 million at December 31,
2016. The slight decrease in liquid assets of approximately $162,000 is due
primarily to the payment of accrued liabilities for professional services during
the quarter.
The
Bank
Like most community banks,
we derive the majority of our income from interest we receive on our loans and
investments. Our primary source of funds for making these loans and investments
is our deposits, on which we pay interest. Consequently, one of the key measures
of our success is our amount of net interest income, or the difference between
the income on our interest earning assets, such as loans and investments, and
the expense on our interest bearing liabilities, such as deposits and
borrowings. Another key measure is the spread between the yield we earn on these
interest earning assets and the rate we pay on our interest bearing
liabilities.
At June 30, 2017, we had
total assets at the Bank of $89.7 million compared to $90.4 million at December
31, 2016. The largest components of total assets at the Bank are net loans,
interest bearing deposits in other institutions, bank-owned life insurance,
investment securities available for sale, other real estate owned, federal funds
sold, and cash and due from banks, which were $58.7 million, $8.8 million, $2.6
million, $2.5 million, $2.1 million, $6.1 million, and $6.1 million,
respectively, at June 30, 2017. Comparatively, our net loans, interest bearing
deposits in other institutions, bank-owned life insurance, investment securities
available for sale, other real estate owned, federal funds sold and cash and due
from banks totaled $59.1 million, $10.5 million, $2.5 million, $2.5 million,
$2.2 million, $6.1 million and $4.6 million, respectively, at December 31, 2016.
At June 30, 2017, we had total liabilities at the Bank of approximately $82.0
million compared to approximately $82.0 million at December 31, 2016. The
largest components of total liabilities at the Bank are deposits, which were
$77.8 million and $81.6 million at June 30, 2017 and December 31, 2016,
respectively.
Transaction
Services
We began offering digital
banking, payments and transaction services in October 2013 on a limited basis
through the Banks Mobiliti application and until September 2015 we focused on
expanding and growing this line of business (the digital banking business). On
September 25, 2015, we suspended further development of our digital banking
business and payments and transaction services business as the board of
directors explores strategic alternatives for this line of business and the
Company. The Bank continues to offer its customers its existing services through
the Mobiliti application, but may not expand its digital banking business as
originally planned.
Results of
Operations
Three months ended June
30, 2017 and 2016
We recorded a net loss of
$207,621, or $0.01 per diluted share, for the quarter ended June 30, 2017,
compared to a net loss of $785,164, or $0.04 per diluted share, for the quarter
ended June 30, 2016. This decrease in net loss between comparable periods was
primarily driven by decreases in activity related to real estate owned, a
decrease in product research and development expenses, and an increase in other
income due to the value of bank owned life insurance. Each of these components
is discussed in greater detail below.
The following table sets
forth information related to our average balances, average yields on assets, and
average costs of liabilities for the three months ended June 30, 2017 and 2016.
We derived these yields by dividing annualized income or expense by the average
balance of the corresponding assets or liabilities. We derived average balances
from the daily balances throughout the periods indicated. The net amount of
capitalized loan fees are amortized into interest income on loans.
25
|
|
For
the Three Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
|
Average
|
|
Income/
|
|
Yield/
|
|
Average
|
|
Income/
|
|
Yield/
|
|
|
Balance
|
|
Expense
|
|
Rate
|
|
Balance
|
|
Expense
|
|
Rate
|
Federal funds sold and other
|
|
$
|
14,922,691
|
|
$
|
39,375
|
|
1.06
|
%
|
|
$
|
9,286,750
|
|
$
|
16,223
|
|
0.70
|
%
|
Investment securities
|
|
|
2,501,291
|
|
|
6,802
|
|
1.09
|
|
|
|
10,540,497
|
|
|
65,886
|
|
2.51
|
|
Loans (1)
|
|
|
61,367,761
|
|
|
898,453
|
|
5.87
|
|
|
|
64,465,159
|
|
|
845,208
|
|
5.26
|
|
Total interest-earning assets
|
|
$
|
78,791,743
|
|
$
|
944,630
|
|
4.81
|
%
|
|
$
|
84,292,406
|
|
$
|
927,317
|
|
4.41
|
%
|
|
NOW
accounts
|
|
$
|
9,307,895
|
|
$
|
2,711
|
|
0.12
|
%
|
|
$
|
8,634,931
|
|
$
|
2,547
|
|
0.12
|
%
|
Savings & money market
|
|
|
27,985,368
|
|
|
18,220
|
|
0.26
|
|
|
|
32,874,510
|
|
|
20,039
|
|
0.24
|
|
Time
deposits (excluding brokered time deposits)
|
|
|
26,861,915
|
|
|
64,267
|
|
0.96
|
|
|
|
27,255,453
|
|
|
57,704
|
|
0.85
|
|
Total interest-bearing deposits
|
|
|
64,155,178
|
|
|
85,198
|
|
0.53
|
|
|
|
68,764,894
|
|
|
80,290
|
|
0.47
|
|
Borrowings
|
|
|
4,117,621
|
|
|
8,069
|
|
0.79
|
|
|
|
149,346
|
|
|
59
|
|
0.16
|
|
Total interest-bearing liabilities
|
|
$
|
68,272,799
|
|
$
|
93,267
|
|
0.55
|
%
|
|
$
|
68,914,240
|
|
$
|
80,349
|
|
0.47
|
%
|
|
Net
interest spread
|
|
|
|
|
|
|
|
4.26
|
%
|
|
|
|
|
|
|
|
3.94
|
%
|
Net
interest income/ margin
|
|
|
|
|
$
|
851,363
|
|
4.33
|
%
|
|
|
|
|
$
|
846,968
|
|
4.03
|
%
|
|
(1)
|
|
Nonaccrual
loans are included in average balances for yield
computations.
|
For the three months ended
June 30, 2017, we recognized $944,630 in interest income and $93,267 in interest
expense, resulting in net interest income of $851,363, an increase of $4,395, or
0.5%, over the same period in 2016. Average earning assets decreased to $78.8
million for the three months ended June 30, 2017 from $84.3 million for the
three months ended June 30, 2016, a decrease of $5.5 million, or 6.5%. This
decrease in earning assets was primarily due to a $8.0 million decrease in
average investment securities and a $3.1 million decrease in average loans
between periods as a result of payoffs and repayments exceeding originations,
partially offset by an $5.6 million increase in average federal funds sold and
other interest-bearing balances. Average interest bearing liabilities decreased
to $68.3 million during the quarter ended June 30, 2017, from $68.9 million for
the three months ended June 30, 2016, a decrease of $641,441, or 0.9%. Net
interest margin, calculated as annualized net interest income divided by average
earning assets, increased from 4.03% for the quarter ended June 30, 2016 to
4.33% for the quarter ended June 30, 2017, primarily due to an increase in yield
on earning assets from 4.41% to 4.81% between periods and an increase in cost of
funds from 0.47% to 0.55% between periods due to the mix of liabilities and the
timing of their repricing.
We recognized a reversal of
provision for loan losses of $4,447 for the three months ended June 30, 2017,
primarily to correct an entry for provision related to the purchased unsecured
consumer loans. We did not recognize any provision for loan losses for the three
months ended June 30, 2016. We recognized a provision for loan losses of
$186,702 for the six months ended June 30, 2017, primarily as a result of the
$4.8 million in purchased unsecured consumer loans added during the period. The
allowance as a percentage of gross loans increased from 1.33% as of June 30,
2016 to 2.34% at June 30, 2017. Specific reserves were approximately $566,000 on
impaired loans of $1.7 million as of June 30, 2017 compared to specific reserves
of approximately $128,000 on impaired loans of $1.2 million as of June 30, 2016.
As of June 30, 2017 and December 31, 2016, the general reserve allocation was
1.44% and 1.15%, respectively, of gross loans not impaired.
For the three months ended
June 30, 2017, noninterest income was $93,452 compared to $86,374 for the three
months ended June 30, 2016, an increase of $7,078, or 8.2%. Other noninterest
income for the three months ended June 30, 2017 and 2016 was derived from
service charges on deposits, customer service fees, and mortgage origination
income. The primary contributor for this quarters increase was due to income on
bank owned life insurance of $20,679.
During the quarter ended
June 30, 2017, we incurred noninterest expenses of $1.2 million, compared to
noninterest expenses of $1.7 million for the quarter ended June 30, 2016, a
decrease of $561,623, or 32.7%. This decrease in noninterest expenses for the
three month period ended June 30, 2017 primarily resulted from a decrease in
product research and development expenses of $76,708 and a decrease in
compensation and benefits expense of $90,755, and a decrease of $358,626 in real
estate owned activity which includes expenses to carry other real estate, gains
and losses on sales of other real estate, and write-downs on real estate owned.
Compensation and benefits decreased $90,755 due to changes in staffing levels
year over year for the quarter ended June 30, 2017.
26
We did not recognize any
income tax benefit or expense for the three and six month periods ended June 30,
2017 and 2016 due to our net
operating loss carryforward position. 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 weighing all available evidence,
including both positive and negative evidence. In making such judgments,
significant weight is given to evidence that can be objectively verified. We
will continue to analyze our deferred tax assets and related valuation allowance
on a quarterly basis, taking into account performance compared to forecasted
earnings as well as current economic and internal information.
Six months ended June
30, 2017 and 2016
We recorded a net loss of
$855,437 or $0.04 per diluted share, for the six months ended June 30, 2017, a
decrease in loss of $230,157 compared to a net loss of $1.1 million, or $0.05
per diluted share, for the six months ended June 30, 2016. This decrease in loss
between comparable periods was primarily driven by decreases in product research
and development expense, compensation expense and real estate owned activity,
partially offset by a decrease in non-interest income and the recognition of
provision for loan losses. Each of these components is discussed in greater
detail below.
The following table sets
forth information related to our average balances, average yields on assets, and
average costs of liabilities for the six months ended June 30, 2017 and 2016. We
derived these yields by dividing annualized income or expense by the average
balance of the corresponding assets or liabilities. We derived average balances
from the daily balances throughout the periods indicated. The net amount of
capitalized loan fees is amortized into interest income on loans.
|
|
For the Six Months Ended June
30,
|
|
|
2017
|
|
2016
|
|
|
Average
|
|
Income/
|
|
Yield/
|
|
Average
|
|
Income/
|
|
Yield/
|
|
|
Balance
|
|
Expense
|
|
Rate
|
|
Balance
|
|
Expense
|
|
Rate
|
Federal funds sold and other
|
|
$
|
15,045,410
|
|
$
|
77,518
|
|
1.04
|
%
|
|
$
|
10,015,928
|
|
$
|
32,865
|
|
0.66
|
%
|
Investment securities
|
|
|
2,501,907
|
|
|
13,536
|
|
1.09
|
|
|
|
10,618,273
|
|
|
134,084
|
|
2.54
|
|
Loans (1)
|
|
|
62,157,609
|
|
|
1,704,338
|
|
5.54
|
|
|
|
65,181,990
|
|
|
1,675,420
|
|
5.17
|
|
Total interest-earning assets
|
|
$
|
79,704,926
|
|
$
|
1,795,392
|
|
4.55
|
%
|
|
$
|
85,816,191
|
|
$
|
1,842,369
|
|
4.32
|
%
|
|
NOW
accounts
|
|
$
|
9,236,875
|
|
$
|
5,093
|
|
0.11
|
%
|
|
$
|
8,660,208
|
|
$
|
5,139
|
|
0.12
|
%
|
Savings & money market
|
|
|
28,689,433
|
|
|
37,900
|
|
0.27
|
|
|
|
33,501,068
|
|
|
40,892
|
|
0.25
|
|
Time
deposits (excluding brokered time deposits)
|
|
|
26,562,034
|
|
|
121,244
|
|
0.92
|
|
|
|
27,356,012
|
|
|
112,872
|
|
0.83
|
|
Total interest-bearing deposits
|
|
|
64,488,342
|
|
|
164,237
|
|
0.51
|
|
|
|
69,517,287
|
|
|
158,903
|
|
0.46
|
|
Borrowings
|
|
|
3,293,198
|
|
|
13,406
|
|
0.82
|
|
|
|
104,917
|
|
|
78
|
|
0.15
|
|
Total interest-bearing liabilities
|
|
$
|
67,781,540
|
|
$
|
177,643
|
|
0.53
|
%
|
|
$
|
69,622,204
|
|
$
|
158,981
|
|
0.46
|
%
|
|
Net
interest spread
|
|
|
|
|
|
|
|
4.02
|
%
|
|
|
|
|
|
|
|
3.86
|
%
|
|
Net
interest income/ margin
|
|
|
|
|
$
|
1,617,749
|
|
4.10
|
%
|
|
|
|
|
$
|
1,683,388
|
|
3.94
|
%
|
|
(1)
|
|
Nonaccrual
loans are included in average balances for yield
computations.
|
For the six months ended
June 30, 2017, we recognized $1.8 million in interest income and $177,643 in
interest expense, resulting in net interest income of $1.6 million, a slight
decrease of $65,639, or 3.9%, over the same period in 2016. Average earning
assets decreased to $79.7 million for the six months ended June 30, 2017 from
$85.8 million for the six months ended June 30, 2016 a decrease of $6.1 million,
or 7.1%. This decrease in earning assets was due to a $8.1 million decrease in
average investment securities and a decrease in average loans of $3.0 million
between periods as a result of payoffs and repayments exceeding originations,
partially offset by a $5.0 million increase in average federal funds sold and
interest-bearing deposits in other institutions. Average interest bearing
liabilities decreased to $67.8 million for the six months ended June 30, 2017
from $69.6 million for the six months ended June 30, 2016 a decrease of $1.8
million, or 2.6%. Net interest margin, calculated as annualized net interest
income divided by average earning assets increased to 4.10% for the six months
ended June 30, 2017, primarily due to a slight increase in yield on earning
assets from 4.32% to 4.55% between periods.
We recognized a provision
for loan losses of $186,702 for the six months ended June 30, 2017, primarily as
a result of the $4.8 million in purchased unsecured consumer loans added during
the period. We recognized a reversal of provision for loan losses of $68,000 for
the six months ended June 30, 2016. The provision for loan losses is discussed
further below under Provision and Allowance for Loan Losses.
27
For the six months ended
June 30, 2017, noninterest income was $200,826 compared to $284,809 for the six
months ended June 30, 2016, a decrease of $83,983, or 29.5% between comparable
periods. Noninterest income for the six months ended June 30, 2017 and 2016 was
derived from service charges on deposits, customer service fees, rental income,
and mortgage origination income. In addition, noninterest income for June 2016
was positively impacted by the collection of SBA loan fees of
$119,306.
During the six months ended
June 30, 2017, we incurred noninterest expenses of $2.5 million, compared to
noninterest expenses of $3.1 million for the six months ended June 30, 2016, a
decrease of $634,481, or 20.3%. This decrease in noninterest expenses resulted
primarily from a decrease in product research and development expenses of
$177,190 a decrease in compensation and benefits of $118,457, and a decrease in
real estate owned activity of $322,156. Compensation and benefits decreased by
$118,457 due to changes in staffing levels year over year for the six months
ended June 30, 2017.
We did not recognize any
income tax benefit or expense for the three and six month periods ended June 30,
2017 and 2016 due to our net operating loss carryforward position. 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 weighing
all available evidence, including both positive and negative evidence. In making
such judgments, significant weight is given to evidence that can be objectively
verified. We will continue to analyze our deferred tax assets and related
valuation allowance on a quarterly basis, taking into account performance
compared to forecasted earnings as well as current economic and internal
information.
Assets and
Liabilities
General
Total assets as of June 30,
2017 and December 31, 2016 were $89.8 million and $90.4 million, respectively, a
decrease of $664,650. Loans, net of allowance decreased $454,794 due to $12.1
million in loan originations during the quarter, which includes $4.8 million in
purchased unsecured consumer loans, partially offset by loan repayments of $12.2
million and transfers to other real estate owned during the quarter. Other real
estate owned decreased $68,767 due to the sale of one piece of real estate for
proceeds of $243,085 and a gain recognized as a result of the sale of $9,318,
partially offset by one loan transfer for $165,000 during the quarter.
Investment securities available for sale decreased $2,150 as a result of a $155
change in unrealized losses and $1,995 in amortization. Interest-bearing
deposits in other institutions decreased $1.8 million due to the maturities of
time deposits during the quarter. Cash and due from banks increased $1.5 million
and federal funds sold decreased $88,000. At June 30, 2017, our total assets
consisted principally of $6.1 million in cash and due from banks, $6.1 million
in fed funds sold, $8.8 million in interest bearing deposits in other
institutions, $2.5 million in investment securities, $58.7 million in net loans,
$2.0 million in property and equipment, $2.6 million in bank-owned life
insurance and $2.1 million in other real estate owned and repossessed assets.
Our management closely monitors and seeks to maintain appropriate levels of
interest-earning assets and interest-bearing liabilities so that maturities of
assets are such that adequate funds are provided to meet customer withdrawals
and demand.
Liabilities at June 30,
2017 totaled $80.7 million, representing an increase of approximately $190,942
compared to $80.5 million at December 31, 2016, and consisted principally of
$76.1 million in deposits, $4.0 million in Federal Home Loan Bank advances and
$552,312 in accounts payable and accrued expenses. At June 30, 2017,
shareholders equity was $9.1 million compared to $9.9 million at December 31,
2016. Shareholders equity decreased in the 2017 period due to the recognition
of a net loss of $855,437.
Loans
Since loans typically
provide higher interest yields than other types of interest-earning assets, we
invest a substantial percentage of our interest-earning assets in our loan
portfolio. At June 30, 2017, our gross loan portfolio consisted primarily of
$26.8 million of commercial real estate loans, $15.4 million of commercial
business loans, $12.1 million of residential real estate and home equity loans
and $5.9 million of consumer loans. Our current loan portfolio composition is
not materially different than the loan portfolio composition disclosed, other
than the increase in consumer loans resulting from the purchase of $4.8 million
in unsecured consumer loans during the six month period ended June 30, 2017, in
the footnotes to the consolidated financial statements included in our 2016
10-K. We experienced net repayments of $103,091 during the six months ended June
30, 2017 as a result of payoffs and repayments of $12.2 million exceeding
advances of $7.3 million and purchased unsecured consumer loans of $4.8 million.
In addition, we have decided not to pursue the exploratory initiative to expand
our online consumer lending. We continue to examine other strategies to
supplement our current lending strategy to profitably grow the Bank and enhance
shareholder value while also carefully considering liquidity needs and credit
risk management.
28
The composition of net
loans by major category as of June 30, 2017 was as follows:
|
|
June 30,
2017
|
|
% of
Total
|
Real
estate:
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
19,531,490
|
|
|
32.5
|
%
|
Construction and development
|
|
|
7,248,259
|
|
|
12.1
|
|
Single and multifamily residential
|
|
|
12,124,136
|
|
|
20.1
|
|
Total real estate loans
|
|
|
38,903,885
|
|
|
64.7
|
|
Commercial business
|
|
|
15,423,094
|
|
|
25.7
|
|
Consumer
|
|
|
5,903,531
|
|
|
9.8
|
|
Deferred origination fees, net
|
|
|
(132,939
|
)
|
|
(0.2
|
)
|
Gross loans, net of deferred fees
|
|
|
60,097,571
|
|
|
100.0
|
%
|
Less
allowance for loan losses
|
|
|
(1,407,518
|
)
|
|
|
|
Loans, net
|
|
$
|
58,690,053
|
|
|
|
|
|
|
|
December 31,
2016
|
|
% of
Total
|
Real
estate:
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
22,033,590
|
|
|
36.4
|
%
|
Construction and development
|
|
|
7,913,783
|
|
|
13.1
|
|
Single and multifamily residential
|
|
|
13,314,130
|
|
|
22.0
|
|
Total real estate loans
|
|
|
43,261,503
|
|
|
71.5
|
|
Commercial business
|
|
|
15,954,106
|
|
|
26.4
|
|
Consumer
|
|
|
1,434,449
|
|
|
2.4
|
|
Deferred origination fees, net
|
|
|
(167,062
|
)
|
|
(0.3
|
)
|
Gross loans, net of deferred fees
|
|
|
60,482,996
|
|
|
100.0
|
%
|
Less
allowance for loan losses
|
|
|
(1,338,149
|
)
|
|
|
|
Loans, net
|
|
$
|
59,144,847
|
|
|
|
|
The largest component of
our loan portfolio at June 30, 2017 was $19.5 million of commercial real estate
loans, which represented 32.5% of the portfolio. The remainder of our loan
portfolio consisted primarily of $12.1 million of single and multifamily
residential loans, $7.2 million of construction and development loans, $5.9
million in consumer loans, which include $4.4 million in purchased unsecured
loans and $15.4 million of commercial business loans.
Loan Performance and
Asset Quality
The downturn in general
economic conditions during the late 2000s resulted in increased loan
delinquencies, defaults and foreclosures within our loan portfolio, although the
last 24 months have seen a stabilization in delinquencies, defaults and
foreclosures and an increase in recoveries. The declining real estate market had
a significant impact on the performance of our loans secured by real estate. In
some cases, the downturn resulted in significant impairment to the value of our
collateral and our ability to sell the collateral upon foreclosure. Although the
real estate collateral provides an alternate source of repayment in the event of
default by the borrower, collateral values deteriorated during the downturn,
resulting in credit losses. There is a risk that this trend will continue, which
could result in additional loss of earnings, increases in our provision for loan
losses and loan charge-offs.
29
Past due payments are often
one of the first indicators of a problem loan. We perform a continuous review of
our past due report in order to identify trends that can be resolved quickly
before a loan becomes significantly past due. We determine past due and
delinquency status based on the contractual terms of the note. When a borrower
fails to make a scheduled loan payment, we attempt to cure the default through
several methods including, but not limited to, collection contact and assessment
of late fees. Generally, a loan will be placed on nonaccrual status when it
becomes 90 days past due as to principal or interest (unless the loan is
well-collateralized and in the process of collection), or when management
believes, after considering economic and business conditions and collection
efforts, that the borrowers financial condition is such that collection of the
loan is doubtful. When a loan is placed in nonaccrual status, interest accruals
are discontinued and income earned but not collected is reversed. Cash receipts
on nonaccrual loans are not recorded as interest income, but are used to reduce
principal.
Refer to Note 5, Loans, for
a table summarizing delinquencies and nonaccruals, by portfolio class, as of
June 30, 2017 and December 31, 2016. Total delinquent and nonaccrual loans
decreased from $1.8 million at December 31, 2016 to $860,335 at June 30, 2017, a
decrease of $913,138, or 51.5%. Nonaccrual loans increased during the six
months due to the transfer of four loans during January and February to
nonaccrual status, partially offset by one nonaccrual loan transferring to other
real estate owned and one nonaccrual loan being fully charged off during the
period ended June 30, 2017. In the current quarter, the three remaining
nonaccrual loans from one relationship were restructured into one nonaccrual
loan. At June 30, 2017, nonaccrual loans represented 1.10% of gross loans
compared to 0.05% of gross loans as of December 31, 2016. Loans past due 30-89
days are considered potential problem loans and amounted to $199,605 at June 30,
2017 compared to $1.5 million at December 31, 2016.
Another method used to
monitor the loan portfolio is credit grading. As part of the loan review
process, loans are given individual credit grades, representing the risk we
believe is associated with the loan balance. Credit grades are assigned based on
factors that impact the collectability of the loan, the strength of the
borrower, the type of collateral, and loan performance. Commercial loans are
individually graded at origination and credit grades are reviewed on a regular
basis in accordance with our loan policy. Consumer loans are assigned a pass
credit rating unless something within the loan warrants a specific
classification grade. Refer to Note 5, Loans, for a table summarizing
managements internal credit risk grades, by portfolio class, as of June 30,
2017 and December 31, 2016.
Loans graded one through
four are considered pass credits. At June 30, 2017, approximately 96% of the
loan portfolio had a credit grade of pass compared to 95% at December 31,
2016. For loans to qualify for this grade, they must be performing relatively
close to expectations, with no significant departures from the intended source
and timing of repayment. Consumer loans are assigned a pass credit rating
unless something within the loan warrants a specific classification grade.
Loans with a credit grade
of five are not considered classified; however they are categorized as a special
mention or watch list credit, and are considered potential problem loans. This
classification is utilized by us when we have an initial concern about the
financial health of a borrower. These loans are designated as such in order to
be monitored more closely than other credits in our portfolio. We then gather
current financial information about the borrower and evaluate our current risk
in the credit. We will then either reclassify the loan as substandard or back
to its original risk rating after a review of the information. There are times
when we may leave the loan on the watch list, if, in managements opinion, there
are risks that cannot be fully evaluated without the passage of time, and we
determine to review the loan on a more regular basis. Loans on the watch list
are not considered problem loans until they are determined by management to be
classified as substandard. As of June 30, 2017 and December 31, 2016, we had
loans totaling $820,493 and $835,501, respectively, on the watch list. Watch
list loans remained relatively constant as no new loans were downgraded during
the quarter.
Loans graded six or greater
are considered classified credits. At June 30, 2017 and December 31, 2016,
classified loans totaled $1.7 million and $2.2 million, respectively. The
decrease in this category of $507,143, or 22.9%, during the six months ended
June 30, 2017 is primarily due to one loan moving to other real estate owned for
$165,000 and two loans for approximately $119,000 being charged off which were
both fully reserved at December 31, 2016, and approximately $66,000 in loan
paydowns. Classified credits are evaluated for impairment on a quarterly
basis.
A loan is considered
impaired when, based on current information and events, we conclude it is
probable that we will be unable to collect the scheduled payments of principal
or interest when due, according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled principal
and interest payments when due. Impairment is measured on a loan-by-loan basis
by calculating either the present value of expected future cash flows discounted
at the loans effective interest rate, the loans obtainable market price, or
the fair value of the collateral if the loan is collateral dependent. The
resultant shortfall is charged to provision for loan losses and is classified as
a specific reserve. When an impaired loan is ultimately charged-off, the
charge-off is taken against the specific reserve.
30
At June 30, 2017, impaired
loans totaled $1.7 million, all of which were valued on a nonrecurring basis at
the lower of cost or market value of the underlying collateral. Market values
were obtained using independent appraisals, updated in accordance with our
reappraisal policy, or other market data such as recent offers to the borrower.
As of June 30, 2017, we had loans totaling approximately $820,000 that were
classified in accordance with our loan rating policies but were not considered
impaired. Refer to Note 5, Loans, for a table summarizing information relative
to impaired loans, by portfolio class, at June 30, 2017 and December 31, 2016.
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. No TDRs went into default during the year
ended December 31, 2016. At June 30, 2017, the recorded investment and principal
balance of TDRs was $660,730 and $697,467, respectively. The carrying balance
consisted of one performing loan within one relationship.
There were three loans
within one relationship that were modified as a troubled debt restructuring
within the previous 12-month period for which there was a payment default during
the six months ended June 30, 2017. A repayment of $75,000 was made in June
2017. The three loans were restructured into one loan with a change in loan
terms.
Provision and Allowance
for Loan Losses
We have established an
allowance for loan losses through a provision for loan losses charged to expense
on our consolidated statement of operations. At June 30, 2017, the allowance for
loan losses was $1.4 million, or 2.34% of gross loans, compared to $1.3 million
at December 31, 2016, or 2.21% of gross loans. The allowance for loan loss
increased due to the recognition of a provision for loan losses of $186,702
during the period, as well as due to a small recovery on loan loss of $2,118,
partially offset by loan charge offs of $119,451.
The allowance for loan
losses represents an amount which we believe will be adequate to absorb probable
losses on existing loans that may become uncollectible. We strive to follow a
comprehensive, well-documented, and consistently applied analysis of our loan
portfolio in determining an appropriate level for the allowance for loan losses.
Our judgment as to the adequacy of the allowance for loan losses is based on a
number of assumptions about future events, which we believe to be reasonable,
but which may or may not prove to be accurate. Our determination of the
allowance for loan losses is based on what we believe are all significant
factors that impact the collectability of loans, including consideration of
factors such as the balance of impaired loans, the quality, mix, and size of our
overall loan portfolio, economic conditions that may affect the borrowers
ability to repay, the amount and quality of collateral securing the loans, our
historical loan loss experience, and a review of specific problem loans. We also
consider subjective issues such as changes in lending policies and procedures,
changes in the local/national economy, changes in volume or type of credits,
changes in volume/severity of problem loans, quality of loan review and Board of
Director oversight, concentrations of credit, and peer group
comparisons.
Our allowance for loan
losses consists of both specific and general reserve components. The specific
reserve component relates to loans that are impaired loans as defined in FASB
ASC Topic 310, Receivables. Loans determined to be impaired are excluded from
the general reserve calculation described below and evaluated individually for
impairment. Impaired loans totaled $1.7 million at June 30, 2017, with an
associated specific reserve of $565,569. See Note 5, Loans, as well as the above
discussion under Loan Performance and Credit Quality for additional
information related to impaired loans.
The general reserve
component covers non-impaired loans and is calculated by applying historical
loss factors to each sector of the loan portfolio and adjusting for qualitative
environmental factors. Qualitative adjustments are used to adjust the historical
average for changes to loss indicators within the economy, our market, and
specifically our portfolio. The general reserve component is then combined with
the specific reserve to determine the total allowance for loan losses.
We recognized a reversal of
provision for loan losses of $68,000 for the six months ended June 30, 2016. We
recognized a provision for loan losses for the six months ended June 30, 2017 of
$186,702. Net charge-offs for the six months ended June 30, 2017 were $117,333.
A net recovery of $1,312 was recognized for the six months ended June 30, 2016.
The charge-offs during the six months ended June 30, 2017 related to the
write-down of collateral to fair value, against specific reserves, at the time
of repossession, as well as due to one unsecured loan being fully charged off
during the quarter. The unsecured loan
was fully reserved at December 31, 2016. 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.
31
Other Real Estate Owned
and Repossessed Assets
At June 30, 2017 and
December 31, 2016, we had approximately $2.1 and $2.2 million in other real
estate owned, respectively. We completed the sale of one parcel of real estate
during the six months ended June 30, 2017. The sale of that parcel of real
estate resulted in a gain of $9,318 and is included in the gain below. During
the six months ended June 30, 2016, we completed the sale of one parcel of real
estate. The sale of that parcel of real estate resulted in a gain of
approximately $4,680 and is included in the loss below. The following table
summarizes changes in other real estate owned and repossessed assets for the six
months ended June 30, 2017 and 2016:
|
|
2017
|
|
2016
|
Balance at beginning of period
|
|
$
|
2,222,667
|
|
|
$
|
1,910,220
|
|
Repossessed property acquired in settlement of
loans
|
|
|
165,000
|
|
|
|
1,257,289
|
|
Proceeds from sales of repossessed property
|
|
|
(243,085
|
)
|
|
|
(36,000
|
)
|
Gain
(loss) on sale and write-downs of repossessed property, net
|
|
|
9,318
|
|
|
|
(178,842
|
)
|
Balance at end of period
|
|
$
|
2,153,900
|
|
|
$
|
2,952,667
|
|
As of June 30, 2017, other
real estate owned consisted of commercial land valued at $909,000 and commercial
office space valued at $1.2 million. In June 2017, proceeds of $243,085 were
received from the sale of one piece of real estate. A gain of $9,318 was
recognized as a result of this transaction. In March 2017, one piece of real
estate was moved to other real estate owned for $165,000. On January 28, 2016,
proceeds of $36,000 were received from the sale of one piece of real estate held
by the Company. A loss of $4,680 was recognized as a result of this transaction.
In March 2016, one piece of real estate was moved to other real estate owned for
$233,767. In May 2016, two pieces of real estate were moved to other real estate
owned for $1.0 million. In addition, the Company recognized writedowns on real
estate owned of approximately $184,000 during 2016. These assets are being
actively marketed with the primary objective of liquidating the collateral at a
level which most accurately approximates fair value and allows recovery of as
much of the unpaid principal loan balance as possible upon the sale of the asset
within a reasonable period of time. Based on currently available valuation
information, the carrying value of these assets is believed to be representative
of their fair value less estimated costs to sell, although there can be no
assurance that the ultimate proceeds from the sale of these assets will be equal
to or greater than their carrying values, particularly in the current real
estate environment.
Deposits
Our primary source of funds
for loans and investments is our deposits. At June 30, 2017 we had $76.1 million
in deposits, representing a decrease of $3.6 million compared to December 31,
2016. Deposits at June 30, 2017 consisted primarily of $12.1 million in demand
deposit accounts, $34.3 million in money market accounts and $29.6 million in
time deposits. As brokered deposits and advances have matured, we have not
replaced these funds with wholesale funding as we have sought to reduce our
reliance on brokered time deposits and other noncore funding sources. Our
loan-to-deposit ratio was 77.1% and 74.2% at June 30, 2017 and December 31,
2016, respectively.
Borrowings
We use borrowings to fund
growth of earning assets in excess of deposit growth. Borrowings totaled $4.0
million at June 30, 2017 compared to $113,598 at December 31, 2016. FHLB
advances accounted for $4.0 million of total borrowings as of June 30, 2017.
These advances are secured with approximately $31.3 million of first and second
mortgage loans and $251,300 of stock in the FHLB. The remaining balances at June
30, 2017 and December 31, 2016 were $44,979 and $113,598, respectively, in
borrowings representing customer repurchase agreements.
Liquidity
Liquidity represents the
ability of a company to convert assets into cash or cash equivalents without
significant loss, and the ability to raise additional funds by increasing
liabilities. Liquidity management involves monitoring our sources and uses of
funds in order to meet our day-to-day cash flow requirements while maximizing
profits. Liquidity management is made more complicated because different balance
sheet components are subject to varying degrees of management control. For
example, the timing of maturities of our investment portfolio is fairly
predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit
inflows and outflows are far less predictable and are not subject to the same
degree of control.
32
The Company
The Companys cash
balances, independent of the Bank, were approximately $1.7 million at June 30,
2017 compared to cash balances of approximately $1.8 million at December 31,
2016. Liquid assets decreased by $162,260, a slight decrease from December 31,
2016 as a result of professional fees and data processing expenses incurred by
the Company. There were no expenses incurred related to the transaction services
or asset management segments during the period ended June 30, 2017. See Note
8Business Segments for additional information related to the transaction
services segment.
The Bank
Our ability to maintain and
expand our deposit base and borrowing capabilities serves as our primary source
of liquidity at the Bank. We currently have $12.2 million in cash and federal
funds sold. If our cash needs at the Bank exceed that amount, we plan to
liquidate temporary investments and generate deposits within our market. In
addition, we will receive cash upon the maturity and sale of loans and the
maturity of investment securities and investments in interest-bearing deposits.
Our investments in interest bearing deposits at June 30, 2017 amounted to $8.8
million, or 9.7% of total assets. Our investment securities available for sale
at June 30, 2017 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 June 30, 2017, $2.4 million of our
investment portfolio was pledged against outstanding debt. Therefore, the
related debt would need to be repaid prior to the securities being sold and
converted to cash.
The Bank is a member of the
Federal Home Loan Bank of Atlanta (FHLB), from which applications for
borrowings can be made for leverage purposes. The FHLB requires that securities,
qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to
secure any advances from the FHLB. At June 30, 2017, we had collateral that
would support approximately $31.3 million in additional borrowings. We are
subject to the FHLBs credit risk rating policy which assigns member
institutions a rating which is reviewed quarterly. The rating system utilizes
key factors such as loan quality, capital, liquidity, profitability, etc. Our
ability to access our available borrowing capacity from the FHLB in the future
is subject to our rating and any subsequent changes based on our financial
performance as compared to factors considered by the FHLB in their assignment of
our credit risk rating each quarter.
The Bank also pledges
collateral to the Federal Reserve Banks Borrower-in-Custody of Collateral
program, and our available credit under this program was $12.0 million as of
June 30, 2017.
The Bank has $5.5 million
in federal funds purchased lines of credit through correspondent banks that are
unsecured, but have not been utilized.
We believe our liquidity
sources are adequate to meet our operating needs at the Bank. However, we
continue to carefully focus on liquidity management during 2017. Comprehensive
weekly and monthly liquidity analyses serve management as vital decision-making
tools by providing summaries of anticipated changes in loans, investments, core
deposits, and wholesale funds. These internal funding reports provide management
with the details critical to anticipate immediate and long-term cash
requirements, such as expected deposit runoff, loan pay downs and amount and
cost of available borrowing sources, including secured overnight federal funds
lines with our various correspondent banks.
The Consolidated
Company
The Companys level of
liquidity is measured by the cash, cash equivalents, and federal funds sold to
total assets ratio which was 13.5% at June 30, 2017 compared to 11.9% as of
December 31, 2016. The decrease in liquidity is due primarily to the decrease in
cash and due from bank and federal funds sold. The foregoing discussion is a
summary only and should be read in conjunction with the 2016 10-K and
Managements Discussion and Analysis in this Form 10-Q.
Impact of Off-Balance
Sheet Instruments
Through the operations of
our Bank, we have made contractual commitments to extend credit in the ordinary
course of our business activities. These commitments are legally binding
agreements to lend money to our customers at predetermined interest rates for a
specified period of time. At June 30, 2017, we had issued commitments to extend
credit of $738,900 through various types of lending arrangements. We evaluate
each customers creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by us upon extension of credit, is
based on our credit evaluation of the borrower. Collateral varies but may
include accounts receivable, inventory, property, plant and equipment, and
commercial and residential real
estate. We manage the credit risk on these commitments by subjecting them to
normal underwriting and risk management processes.
33
Capital
Resources
Total shareholders' equity
decreased from $9.9 million for December 31, 2016 to $9.1 million for June 30,
2017 due to a net loss of $855,437. The foregoing discussion is a summary only
and should be read in conjunction with the 2016 10-K as filed with the SEC and
Managements Discussion and Analysis in this Form 10-Q.
Our Bank and Company are
subject to various regulatory capital requirements administered by the federal
banking agencies. Under the capital adequacy guidelines and the regulatory
framework for prompt corrective action, we must meet specific capital guidelines
that involve quantitative measures of assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. Our
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
The Basel III capital
rules, which were released in July 2013, implement new capital standards and
apply to all national and state banks and savings associations regardless of
size and bank holding companies and savings and loan holding companies with 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).
|
Because the Companys total
assets were less than $1 billion at December 31, 2016, the Company is not
subject to the new capital requirements established by the Basel III capital
rules. However, bank holding companies with assets of less than $1 billion are
subject to various restrictions on debt including requirements that debt be
retired within 25 years of being incurred, that the debt to equity ratio is .30
to 1 within 12 years of the incurrence of debt and that dividends generally
cannot be paid if the debt to equity ratio exceeds 1 to 1.
Under the rule, Tier 1
capital is redefined to include two components: Common Equity Tier 1 capital and
additional Tier 1 capital. The new and highest form of capital, Common Equity
Tier 1 capital, consists solely of common stock (plus related surplus), retained
earnings, accumulated other comprehensive income, and limited amounts of
minority interests that are in the form of common stock. Additional Tier 1
capital includes other perpetual instruments historically included in Tier 1
capital, such as noncumulative perpetual preferred stock Tier 1 capital
generally consists of instruments that previously qualified as 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; except that the rule permits bank holding
companies with less than $15 billion in total consolidated assets to continue to
include trust preferred securities and cumulative perpetual preferred stock
issued before May 19, 2010 in Tier 1 capital (but not in Common Equity Tier 1
capital), subject to certain restrictions. 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 ultimately consist of an additional
amount of common equity equal to 2.5% of risk-weighted assets. As of January 1,
2016, we are required to maintain a capital conservation buffer of 1.25%,
increasing by 0.625% each successive year until 2019.
In general, the rules have
had the effect of increasing capital requirements by increasing the risk weights
on certain assets, including high volatility commercial real estate, certain
loans past due 90 days or more or in nonaccrual status, mortgage servicing
rights not includable in Common Equity Tier 1 capital, equity exposures, and
claims on securities firms, that are used in the denominator of the three
risk-based capital ratios.
34
The following table
summarizes the capital amounts and ratios of the Bank and the regulatory minimum
requirements at June 30, 2017 and December 31, 2016. It is managements belief
that, as of June 30, 2017, the Bank met all capital adequacy requirements under
Basel III on a fully phased-in basis if such requirements were currently in
effect.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be well capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
under prompt
|
|
|
|
|
|
|
|
|
For capital adequacy
|
|
corrective action
|
|
|
|
|
|
|
|
purposes
|
|
provisions
|
|
|
Actual
|
|
Minimum
|
|
Minimum
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
As of June 30,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk weighted
assets)
|
|
$
|
8,617,000
|
|
12.4
|
%
|
|
$
|
5,542,000
|
|
8.0
|
%
|
|
$
|
6,927,000
|
|
10.0
|
%
|
Tier 1 Capital (to risk
weighted assets)
|
|
|
7,745,000
|
|
11.2
|
|
|
|
2,771,000
|
|
4.0
|
|
|
|
4,156,000
|
|
6.0
|
|
Tier 1 Capital (to average assets)
|
|
|
7,745,000
|
|
8.6
|
|
|
|
3,600,000
|
|
4.0
|
|
|
|
4,500,000
|
|
5.0
|
|
Common Equity Tier 1 Capital
(to risk weighted assets)
|
|
|
7,745,000
|
|
11.2
|
|
|
|
3,117,000
|
|
4.5
|
|
|
|
3,117,000
|
|
4.5
|
|
|
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
|
|
35