LBC BANCSHARES,INC. AND SUBSIDIARY. Financial Statements December 31, 2014 and (with Independent Auditor s Report thereon)

Transcription

1 LBC BANCSHARES,INC. AND SUBSIDIARY Financial Statements December 31, 2014 and 2013 (with Independent Auditor s Report thereon)

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3 INDEPENDENT AUDITOR S REPORT To the Board of Directors and Stockholders LBC Bancshares, Inc. and Subsidiary LaGrange, Georgia Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of LBC Bancshares, Inc. and subsidiary, which comprise the consolidated balance sheets as of December 31, 2014 and 2013, and the related consolidated statements of earnings, comprehensive income, changes in stockholders equity and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LBC Bancshares, Inc. and subsidiary as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Atlanta, Georgia April 2, Peachtree Street NE Suite 1800 Atlanta, Georgia Phone Fax

4 Consolidated Balance Sheets December 31, 2014 and 2013 Assets Cash and due from banks $ 11,053,238 3,576,571 Interest-bearing deposits in banks 2,480,000 1,984,000 Investment securities available-for-sale 18,865,819 17,814,054 Other investments 247, ,400 Loans, net 98,815,086 91,090,002 Premises and equipment, net 6,003,507 5,510,238 Other real estate 828,000 33,200 Cash surrender value of life insurance 3,527,962 3,421,296 Accrued interest receivable and other assets 1,244,387 1,397,014 Total assets $ 143,065, ,108,775 Liabilities and Stockholders Equity Liabilities: Deposits: Non-interest bearing demand $ 18,228,203 19,531,033 Interest-bearing demand 38,598,573 31,796,482 Savings and money market 24,126,459 18,661,095 Time deposits 42,870,423 37,339,247 Total deposits 123,823, ,327,857 Federal Home Loan Bank advances 3,000,000 3,000,000 Payable to shareholders 490,000 - Accrued interest payable and other liabilities 757, ,588 Commitments Total liabilities 128,070, ,430,445 Stockholders equity: Preferred stock, no par value; 10,000,000 shares authorized; no shares issued or outstanding - - Common stock, $5.00 par value; 10,000,000 shares authorized; 1,339,865 and 1,388,865 shares issued and outstanding 6,699,325 6,944,325 Additional paid-in capital 7,833,034 8,051,541 Retained earnings 603, ,174 Accumulated other comprehensive loss (141,135) (473,710) Total stockholders equity 14,994,895 14,678,330 Total liabilities and stockholders equity $ 143,065, ,108,775 See accompanying notes to consolidated financial statements. -2-

5 Consolidated Statements of Earnings For the Years Ended December 31, 2014 and Interest and dividend income: Loans, including fees $ 5,140,643 4,804,803 Interest and dividends on investment securities: Taxable 277, ,661 Nontaxable 48,971 51,231 Other interest income 65,860 54,701 Total interest income 5,533,028 5,151,396 Interest expense: Deposits 618, ,003 Other 45,326 8,801 Total interest expense 663, ,804 Net interest income 4,869,291 4,645,592 Provision for loan losses 229, ,000 Net interest income after provision for loan losses 4,640,291 4,440,592 Noninterest income: Service charges on deposit accounts 227, ,120 Small Business Administration ( SBA ) loan fees 37, ,153 Increase in cash surrender value of bank owned life insurance 106, ,726 Loss on sales of investment securities available-for-sale (4,411) - Other service charges, commissions and fees 219, ,780 Total other income 586, ,779 Noninterest expense: Salaries and employee benefits 2,259,944 1,679,657 Occupancy 879, ,535 Other operating 1,442,909 1,299,984 Total noninterest expense 4,582,700 3,512,176 Net earnings before income taxes 644,094 1,473,195 Income tax expense 196, ,156 Net earnings $ 447,497 1,003,039 See accompanying notes to consolidated financial statements. -3-

6 Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2014 and Net earnings $ 447,497 1,003,039 Other comprehensive income (loss): Unrealized gains (losses) on securities available-for-sale arising during period, net of tax expense (benefit) of $202,160 and $(288,679), in 2014 and 2013, respectively 329,840 (471,002) Reclassification adjustment for losses included in earnings, net of tax benefit of $1,676 in ,735 - Other comprehensive income (loss) 332,575 (471,002) Comprehensive income $ 780, ,037 See accompanying notes to consolidated financial statements. -4-

7 Consolidated Statements of Changes in Stockholders Equity For the Years Ended December 31, 2014 and 2013 Retained Accumulated Additional Earnings Other Common Paid-in (Accumulated Comprehensive Stock Capital Deficit) Loss Total Balance December 31, 2012 $ 6,944,325 8,038,293 (846,865) (2,708) 14,133,045 Stock compensation expense - 13, ,248 Net earnings - - 1,003,039-1,003,039 Change in unrealized loss on securities available-for-sale (471,002) (471,002) Balance December 31, ,944,325 8,051, ,174 (473,710) 14,678,330 Purchase and retirement of common stock (49,000 shares) (245,000) (245,000) - - (490,000) Stock compensation expense - 26, ,493 Net earnings , ,497 Change in unrealized loss on securities available-for-sale , ,575 Balance December 31, 2014 $ 6,699,325 7,833, ,671 (141,135) 14,994,895 See accompanying notes to consolidated financial statements. -5-

8 Statements of Cash Flows For the Years Ended December 31, 2014 and Cash flows from operating activities: Net earnings $ 447,497 1,003,039 Adjustments to reconcile net earnings to net cash provided by operating activities: Increase in cash surrender value of life insurance (106,666) (108,726) Depreciation, amortization and accretion, net 625, ,514 Provision for loan losses 229, ,000 Stock compensation expense 26,493 13,248 Deferred tax (benefit) expense (77,698) 7,835 Loss on sales of investment securities available-for-sale 4,411 - Net (gain) loss on sale and writedowns of other real estate (42,175) 12,000 Change in: Accrued interest receivable and other assets 26,488 38,634 Accrued interest payable and other liabilities 654,558 (274,887) Net cash provided by operating activities 1,786,977 1,252,657 Cash flows from investing activities: Net change in interest-bearing deposits in banks (496,000) - Purchase of investment securities available-for-sale (6,059,948) (1,651,663) Proceeds from sale of investment securities available-for-sale 4,554,544 - Proceeds from maturities and calls of investment securities available-for-sale 881,425 1,798,337 Purchases of other investments - (100) Proceeds from redemption of other investments 34,700 21,600 Proceeds from sale of other real estate 984,968 - Net change in loans (9,691,677) (8,226,200) Purchases of premises and equipment (1,014,123) (316,718) Net cash used by investing activities (10,806,111) (8,374,744) Cash flows from financing activities consisting of net change in deposits 16,495,801 2,143,541 Net change in cash and cash equivalents 7,476,667 (4,978,546) Cash and cash equivalents at beginning of the year 3,576,571 8,555,117 Cash and cash equivalents at end of the year $ 11,053,238 3,576,571 Supplemental disclosure of cash flow information and non cash investing activity: Cash paid for interest $ 591, ,216 Cash paid for income taxes $ 208, ,000 Change in unrealized loss on securities available-for-sale, net of tax $ 332,575 (471,002) Transfer of loans to other real estate $ 1,737,593 - Change in payable to shareholders $ 490,000 - See accompanying notes to consolidated financial statements. -6-

9 Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies The accounting and reporting policies of LBC Bancshares, Inc. (the Company ) and its wholly owned subsidiary, LaGrange Banking Company (the Bank ) conform to accounting principles generally accepted in the United States of America ( GAAP ) and with general practices within the banking industry. The following is a description of the more significant of those policies that the Company follows in preparing and presenting its consolidated financial statements. Reporting Entity and Nature of Operations The Bank is a community oriented commercial bank with emphasis on commercial and retail banking and offers such customary banking services as consumer and commercial checking accounts, savings accounts, certificates of deposit, commercial and consumer loans, money transfers and a variety of other banking services. The Company s primary source of revenue is providing loans to customers within its geographical area. The Company s main office is located in LaGrange, Georgia. The Bank is primarily regulated by the Georgia Department of Banking and Finance ( DBF ) and its deposits are insured by the Federal Deposit Insurance Corporation ( FDIC ). The Bank undergoes periodic examinations by these regulatory agencies. The Company is regulated by the Federal Reserve Bank and also undergoes periodic examinations. Use of Estimates in the Preparation of Consolidated Financial Statements The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, and valuation allowances associated with the realization of deferred tax assets, which are based on future taxable income. Subsequent Events Management has evaluated subsequent events for potential recognition or disclosure in the consolidated financial statements through April 2, 2015, the date on which the consolidated financial statements were available to be issued. Cash and Cash Equivalents For purposes of presentation in the statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions cash and due from banks and federal funds sold. Cash flows from interest-bearing deposits in banks, deposits and loans are reported net. The Company s required reserve with the Federal Reserve Bank at December 31, 2014 and 2013 was $1,132,000 and $1,110,000, respectively, which was satisfied with vault cash and amounts on deposit with the Federal Reserve Bank. Investment Securities The Company classifies its securities in one of three categories: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-tomaturity securities are those securities for which the Company has the ability and intent to hold the security until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. At December 31, 2014 and 2013, all securities are classified as available-for-sale. Available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses, net of the related tax effect, on securities available-for-sale are excluded from earnings and are reported as a separate component of shareholders equity until realized. Transfers of securities between categories are recorded at fair value at the date of transfer. -7-

10 (1) Summary of Significant Accounting Policies, continued Investment Securities, continued A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary is charged to earnings and establishes a new cost basis for the security for the decline in value deemed to be credit related. The decline in value attributed to non-credit related factors is recognized in other comprehensive income for available-for-sale securities. Premiums and discounts are amortized or accreted over the life of the related securities as adjustments to the yield. Realized gains and losses for securities classified as available-for-sale and held-to-maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Other Investments Other Investments include common stock in the Federal Home Loan Bank of Atlanta ( FHLB ). As a member of the FHLB System, the Company is required to maintain an investment in the capital stock of this entity. These equity securities are restricted in that they can only be sold back to the FHLB or another member institution at par. Therefore, they are less liquid than other tradable equity securities. As no ready market exists for these stocks, and they have no quoted market value, these investments are carried at cost. Loans and Allowance for Loan Losses Loans are stated at the principal amount outstanding, net of the allowance for loan losses and deferred loan fees. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. Loan origination fees, net of direct loan origination costs, are deferred and recognized as income over the life of the related loan on a level-yield basis. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower s financial condition is such that collection of interest is doubtful. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is charged to interest income on loans. Generally, payments on nonaccrual loans are applied first to principal. Interest income is recorded after principal has been satisfied and as payments are received. A loan is considered impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan will not be collected. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan s effective interest rate, or at the loan s observable market price, or the fair value of the collateral if the loan is collateral dependent. Interest income from impaired loans is recognized using a cash basis method of accounting during the time within that period in which the loans were impaired. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. The allowance represents an amount which, in management s judgment, will be adequate to absorb probable losses on existing loans that may become uncollectible. Management s judgment in determining the adequacy of the allowance is based on evaluations of the collectability of loans. These evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions that may affect the borrower s ability to pay, overall portfolio quality, and review of specific problem loans. Management uses an independent loan reviewer to challenge and corroborate its loan gradings and to provide additional analysis in determining the adequacy of the allowance for loan losses and necessary provisions to the allowance. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on judgments different than those of management. -8-

11 (1) Summary of Significant Accounting Policies, continued Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation, computed principally on the straightline method over the estimated useful lives of the assets. Maintenance and repairs that do not extend the useful life of the premises and equipment are charged to expense. The useful lives of premises and equipment are as follows: Asset Type Buildings and improvements Furniture and equipment Computer software Useful Life years 1-7 years 3-5 years. Other Real Estate Other real estate includes real estate acquired through foreclosure. Each other real estate property is carried at its fair value less estimated costs to sell. Fair value is principally based on independent appraisals performed by local credentialed appraisers. Any excess of the carrying value of the related loan over the fair value of the real estate at the date of foreclosure is charged against the allowance for loan losses. Generally, properties in other real estate are re-appraised annually. Any expense incurred in connection with holding such real estate or resulting from any writedowns in value subsequent to foreclosure is included in noninterest expense. When the other real estate property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered 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. In the event the future tax consequences of differences between the financial reporting bases and the tax bases of the assets and liabilities results in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. The Company currently evaluates income tax positions judged to be uncertain. A loss contingency reserve is accrued if it is probable that the tax position will be challenged, it is probable that the future resolution of the challenge will confirm that a loss has been incurred, and the amount of such loss can be reasonably estimated. Stock Compensation Plans The Company accounts for its stock compensation plans using a fair value based method whereby compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Accumulated Other Comprehensive Loss At December 31, 2014 and 2013, accumulated other comprehensive loss consisted of net unrealized losses on investment securities available-for-sale. -9-

12 (2) Investment Securities Securities available-for-sale at December 31, 2014 and 2013 are as follows: December 31, 2014 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. government sponsored enterprises $ 8,824, ,871 8,607,376 State, county and municipals 4,463,428 13,293 39,061 4,437,660 Mortgage-backed securities 5,805,781 26,760 11,758 5,820,783 $ 19,093,456 40, ,690 18,865,819 December 31, 2013 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. government sponsored enterprises $ 10,572,426 2, ,763 10,165,577 State, county and municipals 4,998,906 5, ,610 4,787,067 Mortgage-backed securities 3,006, ,361 2,861,410 $ 18,578,103 8, ,734 17,814,054 The current fair value and associated unrealized losses on investments in debt securities with unrealized losses at December 31, 2014 and 2013 are summarized in the following table, with the length of time the individual securities have been in a continuous loss position. December 31, 2014 Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses U.S. government sponsored enterprises $ 1,740,133 9,868 6,867, ,003 8,607, ,871 State, county and municipals 537,415 4,433 1,321,329 34,628 1,858,744 39,061 Mortgage-backed securities 1,733,739 1, ,268 10,448 2,649,007 11,758 Total $ 4,011,287 15,611 9,103, ,079 13,115, ,690 December 31, 2013 Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses U.S. government sponsored enterprises $ 8,663, , ,663, ,763 State, county and municipals 3,682, , ,682, ,610 Mortgage-backed securities 957,268 53,927 1,904,142 91,434 2,861, ,361 Total $ 13,303, ,300 1,904,142 91,434 15,207, ,734 At December 31, 2014 and 2013, unrealized losses in the investment portfolio related to debt securities. The unrealized losses on the debt securities arose due to changing interest rates and market conditions and are considered to be temporary because of acceptable investment grades or the repayment sources of principal and interest are backed by U.S. government sponsored enterprises. At December 31, 2014, nine (9) U.S. government sponsored enterprises out of nine (9), six (6) out of fifteen (15) municipals and two (2) out of seven (7) mortgage-backed securities contain unrealized losses. The Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity. -10-

13 (2) Investment Securities, continued The amortized cost and estimated fair value of securities available-for-sale at December 31, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Estimated Amortized Fair Cost Value U.S. government sponsored enterprises 1 to 5 years $ 8,074,247 7,864,641 5 to 10 years 750, ,735 State, county and municipals Less than 1 year 266, ,343 1 to 5 years 1,112,040 1,115,360 5 to 10 years 1,554,266 1,560,215 After 10 years 1,530,475 1,494,742 Mortgage-backed securities 5,805,781 5,820,783 $ 19,093,456 18,865,819 Proceeds from sales of investment securities available-for-sale during 2014 totaled approximately $4,555,000. Gross gains of approximately $3,000 and gross losses of approximately $7,000 were realized on those sales in There were no sales of securities available-for-sale during Securities with a carrying value of approximately $12,793,000 and $11,616,000 at December 31, 2014 and 2013, respectively, were pledged to secure public deposits as required by law and for other purposes. (3) Loans and Allowance for Loan Losses Major classifications of loans at December 31, 2014 and 2013 are summarized as follows: Commercial, financial and agricultural $ 9,802,901 7,735,602 Real estate mortgage 78,496,600 73,324,922 Real estate construction 10,661,852 9,840,909 Consumer 1,284,233 1,569, ,245,586 92,471,267 Less: Allowance for loan losses 1,310,474 1,261,754 Unearned loan fees 120, ,511 Loans, net $ 98,815,086 91,090,002 The Company grants loans and extensions of credit to individuals and a variety of businesses operating primarily in Troup County, Georgia and surrounding counties. A substantial portion of the portfolio is collateralized by commercial real estate and is dependent upon the real estate market. The Company originates SBA loans and sells the guaranteed portion of these loans to third parties. At December 31, 2014 and 2013, the unpaid principal balance of SBA loans serviced for others totaled approximately $3,391,000 and $3,429,000, respectively. During the years ended December 31, 2014 and 2013, the Company recognized approximately $13,000 and $86,000, respectively, in gains on the sale of the guaranteed portion of SBA loans. -11-

14 (3) Loans and Allowance for Loan Losses, continued The following tables present a rollforward of the allowance for loan losses and the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2014 and 2013: December 31, 2014 Commercial, Financial and Agricultural Real estate- Mortgage Real estate- Construction Consumer Total Balance, beginning of year $ 85, , ,271 67,251 1,261,754 Provisions charged to operating expense 35, ,748 (108,341) (11,361) 229,000 Loans charged off (13,821) (210,750) - - (224,571) Recoveries 1,224-33,618 9,449 44,291 Balance, end of year $ 108,559 1,016, ,548 65,339 1,310,474 Ending balance, individually evaluated for impairment $ - 49,836 24,851 54, ,663 Ending balance, collectively evaluated for impairment $ 108, ,192 95,697 10,363 1,180,811 Loans: Individually evaluated for impairment $ - 393,981 88, , ,794 Collectively evaluated for impairment $ 9,802,901 78,102,619 10,573,041 1,135,231 99,613,792 December 31, 2013 Commercial, Financial and Agricultural Real estate- Mortgage Real estate- Construction Consumer Total Balance, beginning of year $ 53, , ,566 71,157 1,136,525 Provisions charged to operating expense 29,311 94,308 86,992 (5,611) 205,000 Loans charged off - (27,039) (57,287) - (84,326) Recoveries 2, ,705 4,555 Balance, end of year $ 85, , ,271 67,251 1,261,754 Ending balance, individually evaluated for impairment $ - 271,979 92,235 54, ,190 Ending balance, collectively evaluated for impairment $ 85, , ,036 12, ,564 Loans: Individually evaluated for impairment $ - 1,478,324 1,429, ,752 3,072,303 Collectively evaluated for impairment $ 7,735,602 71,846,598 8,411,682 1,405,082 89,398,964 The Company reviews all loan relationships for impairment that are on nonaccrual or have a risk category of substandard or worse for impairment with a total balance greater than $150,000. Additionally, all material troubled debt restructurings are reviewed. A loan is considered impaired when, based on current events and circumstances it is probable that all amounts due, according to the contractual terms of the loan, will not be collected. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan s effective interest rate, at the loan s observable market price, or the fair value of the collateral if the loan is collateral dependent. Interest payments received on impaired loans are generally applied as a reduction of the outstanding principal balance. -12-

15 (3) Loans and Allowance for Loan Losses, continued The following tables present impaired loans by class of loans as of December 31, 2014 and 2013: December 31, 2014 Impaired loans with related allowance: Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized Real estate-mortgage $ 178, ,106 49, ,115 - Real estate-construction 88,811 88,811 24,851 93,177 - Consumer 149, ,002 54, ,877 - Impaired loans without related allowance: Real estate-mortgage 343, , ,100 - Consumer 14,266 14,266-16,466 - Total: Real estate-mortgage 521, ,008 49, ,215 - Real estate-construction 88,811 88,811 24,851 93,177 - Consumer 163, ,268 54, ,343 - $ 773, , , ,735 - December 31, 2013 Impaired loans with related allowance: Real estate-mortgage $ 958,437 1,006, , ,854 - Real estate-construction 569, ,742 92, ,001 - Consumer 164, ,752 54, ,755 - Impaired loans without related allowance: Commercial, financial and agricultural 110, , ,830 - Real estate-mortgage 583, , ,655 - Real estate-construction 18,666 18,666-20,175 - Consumer Total: 110, , ,830 - Commercial, financial and agricultural 1,541,864 1,695, ,979 1,585,509 - Real estate-mortgage 569, ,742 92, ,001 - Real estate-construction 183, ,418 54, ,930 - Consumer $ 2,405,755 2,559, ,190 2,506,

16 (3) Loans and Allowance for Loan Losses, continued The following tables present the aging of the recorded investment in past due loans and non-accrual loan balances as of December 31, 2014 and 2013 by class of loans: Days Past Due Days Past Due >90 Days Past Due Total Past Due Current Total -14- Non- Accrual Recorded Investment > 90 Days and Accruing December 31, 2014 Commercial, financial and agricultural $ ,802,901 9,802, Real estate-mortgage 339,905 15, , ,066 77,554,534 78,496, , ,518 Real estateconstruction ,661,852 10,661,852 88,811 - Consumer ,284,233 1,284, ,268 - Total $ 339,905 15, , ,066 99,303, ,245, , ,518 December 31, 2013 Commercial, financial and agricultural $ - 3,156-3,156 7,732,446 7,735, ,731 - Real estate-mortgage 427, ,690 72,897,232 73,324,922 1,541,864 - Real estateconstruction ,840,909 9,840, ,742 - Consumer ,569,834 1,569, ,418 - Total $ 427,690 3, ,846 92,040,421 92,471,267 2,405,755 - There were no new troubled debt restructurings during 2014 or One real estate mortgage troubled debt restructuring, with a recorded investment of approximately $324,000, subsequently defaulted during The Company has allocated $54,976 and $208,363 of specific reserves to customers whose loan terms have been modified in troubled debt restructuring as of December 31, 2014 and 2013, respectively. The Company did not commit to lend any additional amounts to customers with outstanding loans that are classified as troubled debt restructurings. The Company categorized loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continuous basis. The Company uses the following definitions for its risk ratings: Watch. Weakness exists that could cause future impairment, including the deterioration of financial ratios, past due status and questionable management capabilities. Collateral values generally afford adequate coverage, but may not be immediately marketable. Substandard. Specific and well-defined weaknesses exist that may include poor liquidity and deterioration of financial ratios. The loan may be past due and related deposit accounts experiencing overdrafts. Immediate corrective action is necessary. Doubtful. Specific weaknesses characterized as Substandard that are severe enough to make collection in full unlikely. There is no reliable secondary source of full repayment. Loss. Loans categorized as Loss have the same characteristics as Doubtful; however, probability of loss is certain. Loans classified as such are generally charged-off.

17 (3) Loans and Allowance for Loan Losses, continued Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans. As of December 31, 2014 and 2013, and based on most recent analysis performed, the risk category of loans by class of loans is as follows: December 31, 2014 Pass Watch Substandard Doubtful Total Commercial, financial and agricultural $ 9,334, , ,802,901 Real estate-mortgage 75,411, ,858 2,260,494 16,129 78,496,600 Real estate-construction 9,397,981 1,175,060 88,811-10,661,852 Consumer 1,120, ,002 14,266 1,284,233 December 31, 2013 $ 95,264,153 2,452,731 2,498,307 30, ,245,586 Commercial, financial and agricultural $ 7,355, , ,731 7,735,602 Real estate-mortgage 67,774,399 3,487,817 2,045,767 16,939 73,324,922 Real estate-construction 7,937, ,351 1,429,226-9,840,909 Consumer 1,383,589 2, ,752 18,666 1,569,834 $ 84,450,592 4,234,594 3,639, ,336 92,471,267 (4) Premises and Equipment Major classifications of premises and equipment are summarized as follows: Land and land improvements $ 681, ,566 Building 5,251,863 4,232,435 Furniture, equipment and software 2,053,471 1,871,057 Construction-in-progress - 199,032 7,987,213 6,973,090 Less: Accumulated depreciation 1,983,706 1,462,852 Premises and equipment, net $ 6,003,507 5,510,238 Depreciation expense amounted to approximately $521,000 and $264,000 in 2014 and 2013, respectively. (5) Deposits At December 31, 2014 and 2013, the Company had time deposits in excess of $250,000 that totaled $3,299,072 and $2,933,102, respectively. At December 31, 2014, contractual maturities of time deposits are summarized as follows: 2015 $ 24,769, ,669, ,369, ,335, ,670 Thereafter 500,907 $ 42,870,423 The Company held $5,835,000 and $8,709,000 in deposits gathered from the Internet as of December 31, 2014 and 2013, respectively. The Company had a concentration in deposits from one customer as of December 31, 2013 totaling approximately $11,625,000, or 11% of total deposits. -15-

18 (6) Borrowings At December 31, 2014 and 2013, the Company had advances outstanding from the FHLB that are summarized as follows: Interest Basis Current Rate Maturity $ 2,000,000 Floating to fixed 2.50% May 6, ,000,000 Floating to fixed 1.81% December 31, 2019 The Company has pledged under blanket floating liens approximately $29,355,000 and $26,602,000 in mortgage and commercial loans as security for FHLB advances and possible future advances as of December 31, 2014 and 2013, respectively. As of December 31, 2014 and 2013, the Company had approximately $13,488,000 and $9,934,000, respectively, in additional borrowing capacity with the FHLB. At December 31, 2014 and 2013, the Company had Federal funds lines available with correspondent banks of approximately $7,000,000. These unsecured lines have various terms, rates, and maturities. No amounts were outstanding as of December 31, 2014 and (7) Income Taxes The components of income tax expense (benefit) for the years ended December 31, 2014 and 2013 are as follows: Current $ 274, ,321 Deferred (77,698) 7,835 Total income tax expense $ 196, ,156 The difference between income tax expense and the amount computed by applying the statutory federal income tax rate to earnings before taxes for the years ended December 31, 2014 and 2013 is as follows: Pretax income at statutory rate $ 218, ,886 State income tax expense, net (9,019) 24,110 Increase in cash surrender value of bank owned life insurance (36,267) (36,967) Other 22,891 (17,873) $ 196, ,156 The following summarizes the components of deferred taxes, which is included as a component of other assets at December 31, 2014 and Deferred income tax assets: Pre-opening expenses $ 94, ,890 Allowance for loan losses 326, ,231 Stock compensation expense 283, ,880 Unrealized loss on investment securities available-for-sale 86, ,338 Other real estate 35,171 6,872 Other 17,276 22,437 Total deferred income tax assets 843,814 1,027,648 Deferred income tax liability - consisting of premises and equipment 81, ,820 Net deferred income tax asset $ 762, ,

19 (8) Related Party Transactions The Company conducts transactions with directors and executive officers, including companies in which they have beneficial interest, in the normal course of business. It is the policy of the Company that loan transactions with directors and executive officers are made on substantially the same terms as those prevailing at the time for comparable loans to other persons. Loan transactions will be approved by a majority of the directors, including a majority of the directors who do not have an interest in the transaction. Changes in related party loans for the year ended December 31, 2014 are as follows: Balance at December 31, 2013 $ 5,248,686 Advances 1,711,381 Repayments (1,877,057) Balance at December 31, 2014 $ 5,083,010 The aggregate amount of deposits of directors and executive officers and their affiliates amounted to approximately $3,403,000 and $1,996,000 at December 31, 2014 and 2013, respectively. (9) Commitments The Company has entered into an operating lease agreement with one of its directors for one of its branch offices. Total rental expense during the years ended December 31, 2014 and 2013 was approximately $56,000 and $54,000, respectively. As of December 31, 2014, future minimum rental commitments under this noncancelable operating lease are approximately $33,000 for The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. All standby letters of credit are secured at December 31, 2014 and Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $ 8,627,000 10,101,000 Standby letters of credit $ 63,000 62,000 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management s credit evaluation of the counterparty. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers. -17-

20 (10) Stock Options and Warrants In consideration of their efforts in organizing the Company, the organizers of the Company received warrants entitling each of them to purchase additional shares of common stock at the offering price of $ A total of 271,673 warrants were granted for this purpose during the period ended December 31, 2008 and vested over a three-year period. All of these warrants were exercisable as of December 31, The Board of Directors adopted a stock option plan that reserves 163,603 shares for issuance to key employees, officers and directors. Option prices and terms of grants are determined by a committee of the Board of Directors. The options vest ratably over various terms beginning with the first anniversary of the grant. A summary status of the Company s stock option plan as of December 31, 2014 and 2013, and changes during the years, are presented below: Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price Outstanding, beginning of year 96,400 $ ,517 $ Granted , Forfeitures - - 1, Outstanding, end of year 96,400 $ ,400 $ 9.00 Options exercisable at year end 76,478 $ ,517 $ The fair value of stock options granted was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions during 2013: Dividend yield 0% Expected volatility Risk-free interest rate 1.71% Expected term 6.5 years Weighted average fair value $ 2.66 Because the Company does not have a volatility factor for its common stock, it has used a calculated banking sector index based on the volatilities of publicly traded community bank stocks. Unrecognized compensation expense related to stock options was approximately $40,000 as of December 31, 2014 and is expected to be recognized over the remaining vesting period of approximately two years. The weighted average contractual term of stock options outstanding and exercisable at December 31, 2014 is approximately five years. (11) Stockholders Equity Shares of preferred stock may be issued from time to time in one or more series as established by resolution of the Board of Directors of the Company, up to a maximum of 10,000,000 shares. Each resolution shall include the number of shares issued, preferences, special rights and limitations as determined by the Board. (12) Regulatory Matters The Bank is subject to various capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary regulatory actions by regulators that, if undertaken, could have a direct material effect on the Company s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank s capital classification is also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. -18-

21 (12) Regulatory Matters, continued Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2014 and 2013, that the Bank meets all capital adequacy requirements to which it is subject. In July 2013, the Federal bank regulatory agencies issued a final rule that will revise their risk-based capital requirements and the method for calculating components of capital and of computing risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more and top-tier savings and loan holding companies. The rule establishes a new common equity Tier 1 minimum capital requirement, increases the minimum capital ratios and assigns a higher risk weight to certain assets based on the risk associated with these assets. The final rule includes transition periods that generally implement the new regulations over a five year period. These changes will be phased in beginning in January 2015, and while management continues to evaluate this final rule and its potential impact, preliminary assessments indicate that the Bank and the Company will continue to exceed all regulatory capital requirements under the new rule. As of December 31, 2014 and 2013, the most recent notification from the regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank s category. The Bank s actual capital amounts (in thousands) and ratios are also presented in the following table. To Be Well Capitalized For Capital Under Prompt Adequacy Corrective Actual Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio As of December 31, 2014 Total Capital (to Risk Weighted Assets) $16, % $8, % $10, % Tier I Capital (to Risk Weighted Assets) $15, % $4, % $ 6, % Tier I Capital (to Average Assets) $15, % $5, % $ 7, % As of December 31, 2013 Total Capital (to Risk Weighted Assets) $16, % $7, % $ 9, % Tier I Capital (to Risk Weighted Assets) $15, % $3, % $ 5, % Tier I Capital (to Average Assets) $15, % $5, % $ 6, % (13) Limitations on Dividends The sources of funds available to pay shareholder dividends are from the Bank s earnings and Company equity. Bank regulatory authorities may impose restrictions on the amount of dividends that may be declared by the Bank without prior approval of the regulatory authorities. Further restrictions could result from a review by regulatory authorities of the Bank s capital adequacy. (14) Fair Value Measurements and Disclosures The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to make fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans and foreclosed property. These non-recurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. -19-

22 (14) Fair Value Measurements and Disclosures, continued Fair Value Hierarchy The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are: Level 1 Valuation is based upon quoted prices for identical instruments traded in active markets. Level 2 Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques. Following is a description of valuation methodologies used for assets and liabilities recorded or disclosed at fair value. Cash and Cash Equivalents For cash, due from banks and federal funds sold, the carrying amount is a reasonable estimate of fair value. Securities Available-for-Sale Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on active exchanges such as U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. Level 2 securities include mortgagebacked securities issued by government sponsored enterprises, corporate debt securities and municipal bonds. Securities classified as Level 3 include asset-backed securities in less liquid markets. Other Investments The carrying amount of other investments approximates their fair value. Loans The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using one of three methods, including collateral value, market value of similar debt and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Impaired loans where an allowance is established require classification in the fair value hierarchy. When the fair value is based on an observable market price, the Company records the impaired loan as nonrecurring Level 2. When the fair value is based on an appraised value, the Company records the impaired loan as nonrecurring Level 3. For disclosure purposes, the fair value of fixed rate loans which are not considered impaired is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For unimpaired variable rate loans, the carrying amount is a reasonable estimate of fair value for disclosure purposes. Other Real Estate Other real estate properties are adjusted to fair value upon transfer of the loans to other real estate. Subsequently, other real estate assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management s estimation of the value of the collateral. The Company records other real estate as nonrecurring Level