FINANCIAL STATEMENTS DECEMBER 31, 2016

Transcription

1 FINANCIAL STATEMENTS DECEMBER 31, 2016 PO Box Georgia Heritage Place Dallas, GA P: F:

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3 GEORGIA HERITAGE BANK FINANCIAL REPORT DECEMBER 31, 2016 TABLE OF CONTENTS INDEPENDENT AUDITOR S REPORT... 1 FINANCIAL STATEMENTS Balance sheets... 2 Statements of income... 3 Statements of comprehensive income... 4 Statements of shareholders' equity... 5 Statements of cash flows... 6 Notes to financial statements Page

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5 INDEPENDENT AUDITOR S REPORT To the Board of Directors Georgia Heritage Bank Dallas, Georgia Report on the Financial Statements We have audited the accompanying financial statements of Georgia Heritage Bank, which comprise the balance sheets as of December 31, 2016 and 2015, and the related statements of income, comprehensive income, shareholders' equity, and cash flows for the years then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these 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 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 financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the 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 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 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 financial statements referred to above present fairly, in all material respects, the financial position of Georgia Heritage Bank as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Atlanta, Georgia March 23, GALLERIA PARKWAY S.E., SUITE 1700 ATLANTA, GA FAX Members of The American Institute of Certified Public Accountants RSM International

6 GEORGIA HERITAGE BANK BALANCE SHEETS DECEMBER 31, 2016 AND 2015 Assets Cash and due from banks $ 934,992 $ 1,002,556 Interest-bearing deposits in banks 3,417,035 5,943,129 Securities available for sale 10,155,809 10,164,400 Restricted equity securities, at cost 67,000 63,500 Loans 56,531,078 48,410,809 Less allowance for loan losses 960, ,186 Loans, net 55,570,573 47,690,623 Premises and equipment 5,032,576 5,072,756 Accrued interest receivable 218, ,502 Foreclosed assets 3,061,037 3,372,256 Other assets 852, ,182 Total assets $ 79,309,972 $ 74,314,904 Liabilities and Shareholders' Equity Liabilities: Deposits Noninterest-bearing $ 11,963,537 $ 8,651,849 Interest-bearing NOW accounts 16,770,305 14,153,159 Savings 2,005,461 2,211,248 Money market accounts 12,347,048 12,113,391 Time deposits of $100,000 and over 14,768,258 15,446,948 Other time deposits 12,418,028 13,528,704 Total deposits 70,272,637 66,105,299 Securities sold under repurchase agreements 2,155,079 2,455,712 Accrued interest payable 65,707 76,444 Other liabilities 132, ,967 Total liabilities 72,626,026 68,738,422 Commitments and contingencies Shareholders' equity Preferred stock, Series A, voting; non-cumulative; convertible; par value $1; 1,500,000 shares authorized, 76,119 shares issued and outstanding; liquidation preference of $6.00 per share 76,119 76,119 Preferred stock, Series B, voting; non-cumulative; convertible; par value $1; 2,000,000 shares authorized, 12,000 shares issued and outstanding; liquidation preference of $2.50 per share 12,000 12,000 Common stock, par value $1; 20,000,000 shares authorized, 5,605,100 and 5,078,900 shares issued and outstanding, respectively 5,605,100 5,078,900 Discount on common stock (1,274,000) (1,010,900) Additional paid-in capital 16,063,335 16,062,432 Accumulated deficit (13,759,062) (14,631,793) Accumulated other comprehensive loss (39,546) (10,276) Total shareholders' equity 6,683,946 5,576,482 Total liabilities and shareholders' equity $ 79,309,972 $ 74,314,904 See Notes to Financial Statements. 2

7 GEORGIA HERITAGE BANK STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2016 AND Interest income Loans, including fees $ 3,431,042 $ 3,049,872 Taxable securities 126, ,745 Restricted equity securities 3,071 2,698 Deposits in banks 29,378 26,235 Total interest income 3,590,176 3,181,550 Interest expense Time deposits of $100,000 or more 138, ,795 Other deposits 97, ,000 Securities sold under repurchase agreements Total interest expense 236, ,085 Net interest income 3,353,684 2,911,465 Provision for loan losses 553, ,000 Net interest income after provision for loan losses 2,800,660 2,770,465 Other income Service charges on deposits 200, ,592 Gain on sale of loans - 24,751 Net gains on sale of foreclosed assets 345, ,470 Other income 16,811 18,917 Total other income 562, ,730 Other expense Salaries and employee benefits 1,247,460 1,079,517 Equipment and occupancy expenses 418, ,389 Other operating expenses 824, ,440 Total other expenses 2,490,257 2,323,346 Income before income tax benefit 872, ,849 Income tax benefit - - Net income $ 872,731 $ 956,849 See Notes to Financial Statements. 3

8 GEORGIA HERITAGE BANK STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2016 AND Net income $ 872,731 $ 956,849 Other comprehensive income (loss): Unrealized holding gains (losses) on securities available for sale during the period, net of tax (benefits) of $(15,079) and $16,663, respectively (29,270) 32,345 Other comprehensive income (loss) (29,270) 32,345 Comprehensive income $ 843,461 $ 989,194 See Notes to Financial Statements. 4

9 GEORGIA HERITAGE BANK STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2016 AND 2015 Preferred Stock Series A and Series B Common Stock Shares Par Value Shares Par Value Accumulated Additional Other Total Paid-in Accumulated Comprehensive Shareholders' Capital Deficit Income (Loss) Equity 5 Balance, December 31, 2014 Exercise of stock warrants Discount on common stock issuance Stock-based compensation expense Other comprehensive income Net income Balance, December 31, 2015 Exercise of stock warrants Discount on common stock issuance Stock-based compensation expense Other comprehensive loss Net income Balance, December 31, ,119 $ 88,119 4,538,900 $ 3,798, , , (270,000) ,119 88,119 5,078,900 4,068, , , (263,100) ,119 $ 88,119 5,605,100 $ 4,331,100 $ 16,061,447 $ (15,588,642) $ (42,621) $ 4,316, , (270,000) ,345 32, , ,849 16,062,432 (14,631,793) (10,276) 5,576, , (263,100) (29,270) (29,270) - 872, ,731 $ 16,063,335 $ (13,759,062) $ (39,546) $ 6,683,946 See Notes to Financial Statements.

10 GEORGIA HERITAGE BANK STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2016 AND OPERATING ACTIVITIES Net income $ 872,731 $ 956,849 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 190, ,640 Amortization and accretion of securities available for sale, net 2,097 1,074 Provision for loan losses 553, ,000 Writedown of foreclosed assets - 2,000 Net gain on sale of foreclosed assets (345,210) (286,470) Stock-based compensation expense Increase in accrued interest receivable (47,166) (18,570) Decrease in accrued interest payable (10,737) (4,828) Net change in other assets and liabilities 28,617 25,753 Net cash provided by operating activities 1,244,414 1,004,433 INVESTING ACTIVITIES (Increase) decrease in interest-bearing deposits in banks 2,526,094 (2,186,496) Purchases of securities available for sale (1,537,856) (3,496,324) Proceeds from calls and maturities of securities available for sale 1,500,000 2,000,000 Purchases of restricted equity securities (3,500) (4,800) Net increase in loans (8,301,664) (652,217) Proceeds from sales of foreclosed assets 525, ,882 Purchase of premises and equipment (149,975) (59,679) Net cash used in investing activities (5,441,782) (4,148,634) FINANCING ACTIVITIES Net increase in deposits 4,167,337 1,800,511 Net increase (decrease) in securities sold under repurchase agreements (300,633) 698,715 Net proceeds from the issuance of common stock 263, ,000 Net cash provided by financing activities 4,129,804 2,769,226 Net decrease in cash and due from banks (67,564) (374,975) Cash and due from banks at beginning of year 1,002,556 1,377,531 Cash and due from banks at end of year $ 934,992 $ 1,002,556 SUPPLEMENTAL DISCLOSURE Cash paid for: Interest $ 247,229 $ 274,913 NONCASH TRANSACTIONS Financed sales of foreclosed assets $ 131,310 $ 412,060 6

11 GEORGIA HERITAGE BANK NOTES TO FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Georgia Heritage Bank (the Bank ) is a state chartered bank located in Dallas, Paulding County, Georgia. The Bank provides a full range of banking services in its primary market area of Paulding County, Cobb County and the surrounding counties. The accompanying financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and general practices within the banking industry. The following is a description of the significant accounting policies. Basis of Presentation and Accounting Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. 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, the valuation of foreclosed assets and deferred taxes, other-than-temporary impairments of securities, and the fair value of financial instruments. The Bank has evaluated all transactions, events, and circumstances for consideration or disclosure through March 23, 2017, the date these financial statements were available to be issued, and has reflected or disclosed those items within the financial statements and related footnotes as deemed appropriate. Cash, Due From Banks and Cash Flows For purposes of reporting cash flows, cash and due from banks include cash on hand, cash items in process of collection and amounts due from banks. Cash flows from interest-bearing deposits in banks, loans, deposits, and securities sold under repurchase agreements are reported net. The Bank is required to maintain average balances in cash or on deposit with the Federal Reserve Bank. The total of those reserve balances was approximately $291,000 and $211,000 at December 31, 2016 and 2015, respectively. Securities All debt securities are classified as available for sale and recorded at fair value with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive loss, net of the related deferred tax effect. The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the life of the securities. Realized gains and losses, determined on the basis of the cost of specific securities sold, are included in earnings on the trade date. 7

12 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Securities (Continued) The Bank evaluates investment securities for other-than-temporary impairment using relevant accounting guidance specifying that (a) if the Bank does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When the Bank does not intend to sell the security, and it is more likely than not, the Bank will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. Restricted Equity Securities The Bank is required to maintain an investment in capital stock of the Federal Home Loan Bank. Based on redemption provisions of this entity, the stock has no quoted market value and is carried at cost. At its discretion, this entity may declare dividends on the stock. Management reviews for impairment based on the ultimate recoverability of the cost basis in this stock. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balances less deferred fees and costs on originated loans and the allowance for loan losses. Interest income is accrued on the outstanding principal balance. Loan origination fees, net of certain direct origination costs of consumer and installment loans, are recognized at the time the loan is placed on the books. Loan origination fees for all other loans are deferred and recognized as an adjustment of the yield over the life of the loan using a method which approximates a level yield. The accrual of interest on loans is discontinued when, in management s opinion, the borrower may be unable to meet payments as they become due or at the time the loan is 90 days past due, unless the loan is well-secured and in process of collection. Past due status is based on the contractual terms of the loans. Loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. Interest income on nonaccrual loans is recognized on the cash-basis or cost-recovery method until the loans are returned to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. A loan is considered impaired when it is probable, based on current information and events, the Bank will be unable to collect all principal and interest payments due in accordance with 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. Impaired loans are measured by either the present value of expected future cash flows discounted at the loan s effective interest rate, the loan s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The amount of the impairment, if any, and any subsequent changes are included in the allowance for loan losses or charged off to the allowance for loan losses if deemed uncollectible. Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrual status. 8

13 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to expense. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio. The allowance for loan losses is evaluated on a regular basis by management and is based upon management s periodic review of the collectability of loans in light of historical experience, the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions that may affect the borrower s ability to pay, 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. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank s allowance for loan losses, and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examinations. The allowance consists of specific, general, and unallocated components. The allowance for loan losses related to specific loans is based on management s estimate of potential losses on impaired loans as determined by (1) the present value of expected future cash flows; (2) the fair value of collateral if the loan is determined to be collateral dependent; or (3) the loan s observable market price. The Bank s homogeneous loan pools include nine categories of loans within the portfolio segment of real estate loans as well as commercial loans and consumer loans. The general allocations to these loan pools are based on the greater of the Bank s average historical loss ratios or its peer group loss ratios over the past twelve months for each category of loans, adjusted for both internal and external qualitative risk factors. The qualitative factors considered by management include, among other factors, (1) level and trends in delinquencies and impaired/classified/graded loans; (2) level and trends in charge-offs and recoveries; (3) trends in volume and terms of loans; (4) effects of changes in risk selection, underwriting standards, and other changes in lending policies, procedures and practices; (5) experience, ability and depth of lending management and staff; (6) national and local economic trends and conditions; (7) industry conditions; and (8) effects of changes in credit concentrations. The total allowance established for each homogeneous loan pool represents the sum of the historical loss ratio and the qualitative risk factors times the total dollar amount of the loans in the pool less impaired loans in each category. An unallocated component may be maintained to cover uncertainties that could affect management s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. There have been no significant changes in the Bank s allowance for loan loss methodology for the years ended December 31, 2016 and

14 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Troubled Debt Restructurings The Bank designates loan modifications as troubled debt restructurings ( TDRs ) when for economic or legal reasons related to the borrower s financial difficulties, it grants a concession to the borrower that it would not otherwise consider. TDRs can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accrual status, depending on the individual facts and circumstances of the borrower. In circumstances where the TDR involves charging off a portion of the loan balance, the Bank typically classifies these restructurings as nonaccrual. In connection with restructurings, the decision to maintain a loan that has been restructured on accrual status is based on a current, well documented credit evaluation of the borrower s financial condition and prospects for repayment under the modified terms. This evaluation includes consideration of the borrower s current capacity to pay, which among other things may include a review of the borrower s current financial statements, an analysis of global cash flow sufficient to pay all debt obligations, a debt to income analysis, and an evaluation of secondary sources of payment from the borrower and any guarantors. This evaluation also includes an evaluation of the borrower s current willingness to pay, which may include a review of past payment history, an evaluation of the borrower s willingness to provide information on a timely basis, and consideration of offers from the borrower to provide additional collateral or guarantor support. The credit evaluation also reflects consideration of the borrower s future capacity and willingness to pay, which may include evaluation of cash flow projections, consideration of the adequacy of collateral to cover all principal and interest, and trends indicating improving profitability and collectability of receivables. Restructured nonaccrual loans may be returned to accrual status based on a current, well-documented credit evaluation of the borrower s financial condition and prospects for repayment under the modified terms. This evaluation must include consideration of the borrower s sustained historical repayment for a reasonable period, generally a minimum of six months, prior to the date on which the loan is returned to accrual status. Premises and Equipment Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the assets. Foreclosed Assets Foreclosed assets represent real estate properties and other assets acquired through, or in lieu of, loan foreclosure and are initially recorded at fair value less estimated costs to sell. Any write-down to fair value at the time of transfer to foreclosed assets is charged to the allowance for loan losses. Subsequent to foreclosure, any write-downs are recorded directly to earnings. Costs of improvements are capitalized, whereas costs relating to holding foreclosed assets and subsequent adjustments to the value are expensed. Foreclosed assets are more fully disclosed in Note 4. Securities Sold Under Repurchase Agreements Securities sold under repurchase agreements, which are secured borrowings, generally mature within one to four days from the transaction date. Securities sold under repurchase agreements are reflected at the amount of cash received in connection with the transactions. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. The Bank monitors the fair value of the underlying securities on a daily basis. 10

15 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank - put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. Income Taxes The Bank accounts for income taxes in accordance with income tax accounting guidance. This guidance sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Bank determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management s judgment. Deferred tax assets may be reduced by deferred tax liabilities and a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. Stock Compensation Plans Stock compensation accounting guidance requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, stock warrants, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the service period, generally defined as the vesting period. A Black- Scholes model is used to estimate the fair value of stock options. 11

16 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Mortgage Origination Income The Bank may originate and process mortgage loans for independent investors. These mortgage loans are closed by the independent investors. Mortgage origination income represents commissions paid by the investors and is recognized at the date of loan closing. Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. Fair Value of Financial Instruments Fair values of financial instruments are estimates using relevant market information and other assumptions, as more fully disclosed in Note 13. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates. NOTE 2. SECURITIES The amortized cost and fair value of securities with gross unrealized gains and losses are summarized as follows: Securities Available For Sale: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value December 31, 2016: U.S. Treasuries $ 6,513,366 $ 10,286 $ (43,075) $ 6,480,577 U.S. Government sponsored enterprises (GSEs) 3,702, (27,788) 3,675,232 $ 10,215,728 $ 10,944 $ (70,863) $ 10,155,809 December 31, 2015: U.S. Treasuries $ 5,974,277 $ 12,315 $ (16,338) $ 5,970,254 U.S. Government sponsored enterprises (GSEs) 4,205, (12,101) 4,194,146 $ 10,179,970 $ 12,869 $ (28,439) $ 10,164,400 12

17 NOTE 2. SECURITIES (Continued) The amortized cost and fair value of securities as of December 31, 2016 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Cost Fair Value Due in one year or less $ 2,199,039 $ 2,199,443 Due from one to five years 8,016,689 7,956,366 $ 10,215,728 $ 10,155,809 There were no sales of securities available for sale for the years ended December 31, 2016 and Restricted equity securities consist of the following: December 31, Federal Home Loan Bank stock $ 67,000 $ 63,500 Securities with a carrying value of $6,469,813 and $6,676,507 were pledged at December 31, 2016 and 2015, respectively, to secure public deposits and for other purposes required or permitted by law. Temporarily Impaired Securities The following table shows the gross unrealized losses and fair value of the securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2016 and Less Than Twelve Months Gross Unrealized Fair Losses Value Over Twelve Months Gross Unrealized Losses Fair Value Total Unrealized Losses December 31, 2016: U.S. Treasuries $ (42,780) $ 3,485,879 $ (295) $ 500,235 $ (43,075) U.S. Government sponsored enterprises (GSEs) (27,788) 2,975, (27,788) $ (70,568) $ 6,461,190 $ (295) $ 500,235 $ (70,863) December 31, 2015: U.S. Treasuries $ (16,338) $ 3,471,309 $ - $ - $ (16,338) U.S. Government sponsored enterprises (GSEs) (12,101) 3,190, (12,101) $ (28,439) $ 6,661,842 $ - $ - $ (28,439) 13

18 NOTE 2. SECURITIES (Continued) Temporarily Impaired Securities (Continued) Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. At December 31, 2016, fourteen of the twenty debt securities had an unrealized loss with depreciation of 1.01% from the Bank s amortized cost basis. In analyzing an issuer s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond agencies have occurred, and industry analysts reports. Although the issuers may have shown declines in earnings and a weakened financial condition, no credit issues have been identified that cause management to believe the declines in market value are other than temporary. As management has the ability to hold the securities until maturity, or for the foreseeable future, no decline is deemed to be other than temporary. U.S. Treasury and GSE obligations. The unrealized losses on the fourteen investments in U.S. Treasury and GSE obligations were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Bank does not consider those investments to be other-than-temporarily impaired at December 31, NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES The composition of loans is summarized as follows: December 31, Real estate: Construction and land development $ 14,035,189 $ 9,814, family closed-end 8,963,812 9,083,608 Commercial 23,681,824 20,793,318 Other 4,721,527 3,802,782 Commercial 4,575,978 4,299,925 Consumer 600, ,557 56,579,143 48,461,167 Net deferred loan fees (48,065) (50,358) Allowance for loan losses (960,505) (720,186) Loans, net $ 55,570,573 $ 47,690,623 Included in loans above are $21,804,226 and $15,093,003 of interest only loans at December 31, 2016 and 2015, respectively. For the majority of these loans, interest is due monthly and principal is due at maturity. These loans can present greater risk to the Bank, depending on the real estate market. 14

19 NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) The loan portfolio was disaggregated into portfolio segments and then further disaggregated into classes for certain disclosures. A portfolio segment is defined as the level at which the Bank develops and documents a systematic method for determining its allowance for credit losses. The three loan portfolio segments are real estate, commercial, and consumer. A class is generally determined based on the initial measurement attribute and the Bank s method for monitoring and assessing credit risk. Classes within the real estate portfolio segment include construction and land development, 1-4 family closed-end, commercial, and other. The commercial and consumer segments have not been further disaggregated into classes. The following describe risk characteristics relevant to each of the portfolio segments: Real Estate - As discussed below, the Bank offers various types of real estate loan products. All loans within this portfolio segment are particularly sensitive to the valuation of real estate: Construction and land development are repaid through cash flow related to the operations, sale or refinance of the underlying property. This class includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of the real estate or income generated from the real estate collateral. 1-4 family closed-end loans are repaid by various means such as a borrower s income, sale of the property, or rental income derived from the property. This class includes 1-4 family mortgages secured by first and junior liens. Open-end lines such as home equity lines of credit (HELOCs) are included in the other real estate segment. Commercial real estate loans include owner-occupied and nonowner-occupied commercial real estate loans, multifamily residential loans, and other loans secured by income producing properties. Owner-occupied commercial real estate loans to operating businesses are long-term financing of land and buildings. Real estate loans for income-producing properties such as office and industrial buildings and retail shopping centers are repaid from rental income derived from the properties. Other real estate loans include loans secured by farmland, HELOCs, and other loans secured by miscellaneous real estate properties. These loans are repaid by various means such as the borrower s income, sale of the property, or rental income derived from the property. Commercial - The commercial loan portfolio segment includes commercial and industrial loans. These loans include those loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or expansion projects. Loans are repaid by business cash flows. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrower, particularly cash flows from the customers business operations. Consumer - The consumer portfolio segment includes consumer loans, overdrafts, and other revolving credit loans. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures. The loan department and executive management team as a whole are involved in the credit risk management process and assess the accuracy of risk ratings, the quality of the portfolio and the estimation of inherent credit losses in the loan portfolio. This process also assists in the prompt identification of problem credits. The Bank has implemented many processes and procedures to manage the portfolios and reduce risk. 15

20 NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) The Bank s credit risk management process includes defined policies, accountability and routine reporting to manage credit risk in the loan portfolio segments. Credit risk management is guided by loan policies that provide for a consistent and prudent approach to underwriting and approvals of credits. Within the Loan Policy, procedures exist that elevate the approval requirements as credits become larger and more complex. All loans are individually underwritten, risk-rated, approved, and monitored. Responsibility and accountability for adherence to underwriting policies and accurate risk ratings lies in each portfolio segment. For the consumer portfolio segment, the risk management process focuses on managing customers who become delinquent in their payments. For the commercial and real estate portfolio segments, the risk management process focuses on underwriting and, on an ongoing basis, monitoring the credit of the portfolios, including a complete review of all relationships over $250,000 on an annual basis or more frequently as needed. To insure problem credits are identified on a timely basis, an independent loan review is performed annually to assess the larger adversely rated credits for proper risk rating and accrual status and, if necessary, to ensure such individual credits are properly graded by management. All loans are graded on an eight-point scale and reviewed periodically for compliance with the defined criteria for each grade level. Credit quality and trends in the loan portfolio are measured and monitored regularly. Detailed reports by past due status, grade and accrual status are reviewed by the executive management, Loan Committee and the Board of Directors. The following presents credit quality indicators for the loan portfolio classes as of December 31, 2016 and These categories are utilized to develop the associated allowance for loan losses using historical losses adjusted for current economic conditions and other qualitative factors and are defined as follows: Pass - includes obligations with low or average risk qualities where the probability of default is considered low. Other Assets Especially Mentioned (OAEM) - includes obligations that are currently protected but have a high potential to become weak credits. These loans have weaknesses which may, if not checked or corrected, threaten the integrity of the assets or inadequately protect the Bank s credit position at some future date. Substandard - includes obligations that are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action. The weaknesses may include, but are not limited to: high debt to worth ratios, declining or negative earnings or cash flow trends, declining or inadequate liquidity, improper loan structure, questionable repayment sources, lack of well-defined secondary repayment source, and unfavorable competitive comparisons. Such loans are no longer considered to be adequately protected due to the borrower's declining net worth, lack of earnings capacity, declining collateral margins and/or unperfected collateral positions. Doubtful - includes obligations that are not presently protected by the current sound worth or paying capacity of the borrower or by means of the collateral pledged to the extent that as substantial amount of the principal may be lost if immediate actions to protect the Bank s position are not taken. Identifiable losses are calculated by taking the loan amount and subtracting the value of any collateral. 16

21 NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) The following tables summarize the risk category of the Bank s loan portfolio based upon on the most recent analysis performed as of December 31, 2016 and 2015: Pass OAEM Substandard Doubtful Total December 31, 2016: Real estate: Construction and land development $ 13,881,188 $ 154,001 $ - $ - $ 14,035, family closed-end 8,870,379 63,522 29,911-8,963,812 Commercial 23,263, ,944-23,681,824 Other 4,721, ,721,527 Commercial 4,188,568 87, ,000 4,575,978 Consumer 600, ,813 Total $ 55,526,355 $ 304,933 $ 447,855 $ 300,000 $ 56,579,143 December 31, 2015: Real estate: Construction and land development $ 9,658,718 $ 156,259 $ - $ - $ 9,814, family closed-end 9,010,542 73, ,083,608 Commercial 17,442,252 2,897, ,944-20,793,318 Other 3,747,925-54,857-3,802,782 Commercial 3,577,209 97, ,249 4,299,925 Consumer 666, ,557 Total $ 44,103,203 $ 3,223,914 $ 508,801 $ 625,249 $ 48,461,167 The following tables present an aging analysis of days past due for each portfolio class as of December 31, 2016 and 2015: Past Due Status (Accruing Loans) Total Past Due Non- Accrual Current Days 90+ Days Total December 31, 2016: Real estate: Construction and land development $ 13,881,188 $ 154,001 $ - $ 154,001 $ - $ 14,035, family closed-end 8,963, ,963,812 Commercial 23,263, ,944 23,681,824 Other 4,721, ,721,527 Commercial 4,275, ,000 4,575,978 Consumer 600, ,813 Total $ 55,707,198 $ 154,001 $ - $ 154,001 $ 717,944 $ 56,579,143 17

22 NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) Past Due Status (Accruing Loans) Total Past Due Non- Accrual Current Days 90+ Days Total December 31, 2015: Real estate: Construction and land development $ 9,814,977 $ - $ - $ - $ - $ 9,814, family closed-end 9,083, ,083,608 Commercial 20,339, ,944 20,793,318 Other 3,778, ,113 3,802,782 Commercial 4,299, ,299,925 Consumer 666, ,557 Total $ 47,982,643 $ 467 $ - $ 467 $ 478,057 $ 48,461,167 The following tables detail the change in the allowance for loan losses for the years ended December 31, 2016 and 2015 by portfolio segment. Year Ended December 31, 2016 Real Estate Commercial Consumer Unallocated Total Allowance for loan losses: Balance, beginning of year $ 284,983 $ 338,130 $ 5,514 $ 91,559 $ 720,186 Provision for (reallocation of) loan losses 96, ,359 (726) 58, ,024 Loans charged-off (12,903) (323,392) (1,250) - (337,545) Recoveries 24, ,840 Ending Balance $ 393,848 $ 413,097 $ 3,558 $ 150,002 $ 960,505 Ending balance: individually evaluated for impairment $ - $ 300,000 $ - $ 300,000 Ending balance: collectively evaluated for impairment $ 393,848 $ 113,097 $ 3,558 $ 150,002 $ 660,505 Loans: Ending Balance $ 51,402,352 $ 4,575,978 $ 600,813 $ 56,579,143 Ending balance: individually evaluated for impairment $ 3,257,261 $ 300,000 $ - $ 3,557,261 Ending balance: collectively evaluated for impairment $ 48,145,091 $ 4,275,978 $ 600,813 $ 53,021,882 18

23 NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) Year Ended December 31, 2015 Real Estate Commercial Consumer Unallocated Total Allowance for loan losses: Balance, beginning of year $ 252,673 $ 30,238 $ 4,525 $ 331,578 $ 619,014 Provision for (reallocation of) loan losses 71, ,892 1,401 (240,019) 141,000 Loans charged-off (41,061) - (412) - (41,473) Recoveries 1, ,645 Ending Balance $ 284,983 $ 338,130 $ 5,514 $ 91,559 $ 720,186 Ending balance: individually evaluated for impairment $ - $ 312,625 $ - $ 312,625 Ending balance: collectively evaluated for impairment $ 284,983 $ 25,505 $ 5,514 $ 91,559 $ 407,561 Loans: Ending Balance $ 43,494,685 $ 4,299,925 $ 666,557 $ 48,461,167 Ending balance: individually evaluated for impairment $ 3,375,179 $ 625,249 $ - $ 4,000,428 Ending balance: collectively evaluated for impairment $ 40,119,506 $ 3,674,676 $ 666,557 $ 44,460,739 The following tables present details related to the Bank s impaired loans as of December 31, 2016 and Loans deemed to be impaired generally include nonaccrual loans and TDRs. All impaired loans are evaluated for impairment on an individual basis. Loans that have been fully charged-off are not included in the table. The related allowance represents reserves needed to cover any cash flows not expected to be collected or any collateral shortfall discovered upon individual evaluation of each loan deemed impaired. The tables show impaired loans with and without specific reserves as of December 31, 2016 and Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized in Year December 31, 2016: With No Allowance Recorded: Real estate: Commercial $ 3,257,261 $ 3,387,125 $ - $ 3,304,163 $ 108,431 Total with no allowance recorded $ 3,257,261 $ 3,387,125 $ - $ 3,304,163 $ 108,431 With Allowance Recorded: Commercial 300, , , ,000 - Total with allowance recorded 300, , , ,000 - Total impaired loans $ 3,557,261 $ 3,687,125 $ 300,000 $ 3,604,163 $ 108,431 19

24 NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized in Year December 31, 2015: With No Allowance Recorded: Real estate: Commercial $ 3,351,066 $ 3,480,930 $ - $ 3,414,598 $ 134,555 Other 24,113 24,113-26,513 - Total with no allowance recorded $ 3,375,179 $ 3,505,043 $ - $ 3,441,111 $ 134,555 With Allowance Recorded: Commercial 625, , , ,249 - Total with allowance recorded 625, , , ,249 - Total impaired loans $ 4,000,428 $ 4,130,292 $ 312,625 $ 4,066,360 $ 134,555 The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. In assessing whether or not a borrower is experiencing financial difficulties, the Bank considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy; and (iv) the debtor s projected cash flow is sufficient to satisfy contractual payments due under the original terms of the loan without a modification. The Bank considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Bank include the debtor s ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan. The most common concessions granted by the Bank generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt, (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (iii) a temporary period of interest-only payments, and (iv) a reduction in the contractual payment amount for either a short period or remaining term of the loan. 20

25 NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) There were no loans that were modified as a TDR during the year ended December 31, 2015 and the following table summarizes the loans that were modified as a TDR during the year ended December 31, 2016: Troubled-Debt Restructurings Recorded Recorded Investment Investment Impact on the Number Prior to After Allowance for of Loans Modification Modification Loan Losses December 31, 2016: Commercial 1 $ 571,233 $ 300,000 $ 271,233 Total 1 $ 571,233 $ 300,000 $ 271,233 There were no loans modified as a TDR that subsequently defaulted (i.e. 90 days or more past due following modification) within one year of restructure during the years ended December 31, 2016 and At December 31, 2016 and 2015, the Bank had loans totaling $717,944 and $3,375,179, respectively that were modified in troubled debt restructurings. At December 31, 2016 and 2015, TDRs totaling $717,944 and $478,057 were included in nonaccrual loans. In the ordinary course of business, the Bank has granted loans to certain related parties, including directors, executive officers, and their affiliates. The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan. Changes in related party loans for the years ended December 31, 2016 and 2015 are as follows: Years Ended December 31, Balance, beginning of year $ 1,214,048 $ 1,420,386 Advances 63, ,469 Repayments (44,169) (511,807) Balance, end of year $ 1,233,519 $ 1,214,048 NOTE 4. FORECLOSED ASSETS A summary of foreclosed assets is as follows: Years Ended December 31, Balance, beginning of year $ 3,372,256 $ 3,750,728 Proceeds from sales (395,000) (250,882) Internally financed sales (261,429) (412,060) Write-downs of foreclosed assets - (2,000) Net gain on sale of foreclosed assets 345, ,470 Balance, end of year $ 3,061,037 $ 3,372,256 21