UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

X		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the Quarterly Period ended June 30, 2016
OR
_		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the Transition Period from _________to_________

Commission File No. 000-51907

Independence Bancshares, Inc.
(Exact name of registrant as specified in its charter)

South Carolina	20-1734180
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification No.)

500 East Washington Street
Greenville, South Carolina 29601
(Address of principal executive offices)

(864) 672-1776
(Registrant's telephone number, including area code)
________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ] No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act).

Large accelerated filer [   ]       Accelerated filer [   ]       Non-accelerated [   ]       Smaller reporting company [ X ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [ X ]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 20,502,760 shares of common stock, par value $.01 per share, were issued and outstanding as of August 10, 2016.

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Independence Bancshares, Inc.

Part I - Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets

		June 30, 2016			December 31, 2015
		(unaudited)			(audited)
Assets
Cash and due from banks		$	1,583,673		$	5,453,795
Federal funds sold			7,162,000			8,446,000
Cash and cash equivalents			8,745,673			13,899,795
Interest-bearing deposits in other institutions			1,750,000			1,500,000
Investment securities available for sale			10,472,437			10,687,851
Non-marketable equity securities			380,050			392,500
Loans, net of allowance for loan losses of $853,137 and $1,139,509,
respectively			63,126,243			66,402,246
Accrued interest receivable			242,753			232,215
Property, equipment, and software, net			2,111,493			2,198,796
Other real estate owned and repossessed assets			2,952,667			1,910,220
Bank owned life insurance			2,500,000			-
Other assets			227,506			243,683
Total assets		$	92,508,822		$	97,467,306
Liabilities
Deposits:
Noninterest bearing		$	10,899,905		$	13,010,209
Interest bearing			69,114,772			70,557,116
Total deposits			80,014,677			83,567,325
Securities sold under agreements to repurchase			49,357			113,080
Accrued interest payable			9,198			7,909
Accounts payable and accrued expenses			723,099			1,134,833
Total liabilities			80,796,331			84,823,147
Commitments and contingencies
Shareholders’ equity
Preferred stock, par value $.01 per share; 10,000,000 shares
authorized; 8,425 Series A shares issued and outstanding			84			84
Common stock, par value $.01 per share; 300,000,000 shares
authorized; 20,502,760 shares issued and outstanding			205,028			205,028
Additional paid-in capital			43,053,601			43,043,473
Accumulated other comprehensive income			257,644			113,846
Accumulated deficit			(31,803,866)			(30,718,272)
Total shareholders’ equity			11,712,491			12,644,159
Total liabilities and shareholders’ equity		$	92,508,822		$	97,467,306

The accompanying notes are an integral part of these consolidated financial statements.

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Independence Bancshares, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)
(unaudited)

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2016			2015			2016			2015
Interest income
Loans		$	845,207		$	830,994		$	1,675,420		$	1,658,458
Investment securities			65,886			84,908			134,084			179,546
Federal funds sold and other			16,224			12,744			32,865			22,032
Total interest income			927,317			928,646			1,842,369			1,860,036
Interest expense
Deposits			80,289			79,930			158,903			154,886
Borrowings			60			3,052			78			13,387
Total interest expense			80,349			82,982			158,981			168,273
Net interest income			846,968			845,664			1,683,388			1,691,763
Provision for loan losses			-			-			(68,000)			-
Net interest income after provision
for loan losses			846,968			845,664			1,751,388			1,691,763
Non-interest income
Service fees on deposit accounts			21,512			19,845			46,715			40,896
Residential loan origination fees			55,771			76,478			99,926			109,352
SBA loan fees			-			-			119,306			-
Gain on sale of investment securities			-			-			-			41,148
Other income			9,091			12,846			18,862			61,979
Total non-interest income			86,374			109,169			284,809			253,375
Non-interest expenses
Compensation and benefits			646,856			738,580			1,306,963			1,385,307
Real estate owned activity			355,216			250,838			364,312			258,953
Occupancy and equipment			163,939			155,933			318,813			315,786
Insurance			57,203			52,507			115,177			106,941
Data processing and related costs			77,902			83,159			165,774			164,972
Professional fees			245,465			216,040			473,153			330,963
Product research and development expense			76,708			733,238			177,190			929,170
Other			95,217			81,805			200,409			168,874
Total non-interest expenses			1,718,506			2,312,100			3,121,791			3,660,966
Loss before income tax expense			(785,164)			(1,357,267)			(1,085,594)			(1,715,828)
Income tax expense			-			-			-			5,080
Net loss		$	(785,164)		$	(1,357,267)		$	(1,085,594)		$	(1,720,908)
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on investment securities available for
sale, net of tax			72,777			(205,561)			143,798			(182,599)
Reclassification adjustment included in net loss,
net of tax			-			-			-			41,148
Other comprehensive income (loss)			72,777			(205,561)			143,798			(141,451)
Total comprehensive loss		$	(712,387)		$	(1,562,828)		$	(941,796)		$	(1,862,359)
Net loss per common share – basic and diluted		$	(.04)		$	(.07)		$	(.05)		$	(.08)
Weighted average common shares outstanding – basic and
diluted			20,502,760			20,502,760			20,502,760			20,502,760

The accompanying notes are an integral part of these consolidated financial statements.

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Independence Bancshares, Inc.

Consolidated Statements of Changes in Shareholders’ Equity
(unaudited)

															Accumulated other
		Preferred stock					Common stock					Additional			comprehensive			Accumulated
		Shares		Amount			Shares		Amount			paid-in capital			income (loss)			deficit			Total
December 31, 2014		-		$	-		20,502,760		$	205,028		$	35,124,151		$	1,154		$	(25,919,753)		$	9,410,580
Compensation expense
related to stock
options granted		-			-		-			-			303,829			-			-			303,829
Issuance of preferred
stock –net of
expenses		8,425			84		-			-			7,615,493			-			-			7,615,577
Net loss		-			-		-			-			-			-			(4,798,519)			(4,798,519)
Other comprehensive
income		-			-		-			-			-			112,692			-			112,692
December 31, 2015		8,425		$	84		20,502,760		$	205,028		$	43,043,473		$	113,846		$	(30,718,272)		$	12,644,159
Compensation expense
related to stock
options granted		-			-		-			-			10,128			-			-			10,128
Net loss		-			-		-			-			-			-			(1,085,594)			(1,085,594)
Other comprehensive
income		-			-		-			-			-			143,798			-			143,798
June 30, 2016		8,425		$	84		20,502,760		$	205,028		$	43,053,601		$	257,644		$	(31,803,866)		$	11,712,491

The accompanying notes are an integral part of these consolidated financial statements.

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Independence Bancshares, Inc.

Consolidated Statements of Cash Flows
(unaudited)

		Six Months Ended
		June 30,
		2016			2015
Operating activities
Net loss		$	(1,085,594)		$	(1,720,908)
Adjustments to reconcile net loss to cash used in operating activities
Reversal of provision for loan losses			(68,000)			-
Depreciation			105,857			107,509
Amortization of investment securities discounts/premiums, net			79,069			106,107
Stock option expense related to stock based compensation			10,128			191,695
Net changes in fair value and (gains) losses on other real estate owned and
repossessed assets			178,842			212,162
Gain on sale of investment securities			-			(41,148)
(Increase) decrease in other assets, net			5,639			(345,097)
Decrease in other liabilities, net			(484,522)			(1,405,876)
Net cash used in operating activities			(1,258,581)			(2,895,556)
Investing activities
Net decrease in loans			2,086,714			2,683,581
Repayments of investment securities available for sale			354,220			587,441
Maturities and sales of investment securities available for sale			-			533,287
Purchases of interest bearing deposits in other institutions			(250,000)			-
Purchases of investment securities available for sale			-			(300,000)
Redemption of non-marketable equity securities, net			12,450			204,050
Purchase of property, equipment and software			(18,554)			(10,356)
Proceeds from sale of other real estate owned and repossessed assets			36,000			582,295
Purchase of bank owned life insurance			(2,500,000)			-
Net cash (used in) provided by investing activities			(279,170)			4,280,298
Financing activities
(Decrease) increase in deposits, net			(3,552,648)			4,751,575
Repayments on borrowings			-			(5,000,000)
Repayments on note payable			-			(450,226)
Issuance of preferred stock			-			7,615,577
Decrease in securities sold under agreements to repurchase			(63,723)			(120,171)
Net cash (used in) provided by financing activities			(3,616,371)			6,796,755
Net (decrease) increase in cash and cash equivalents			(5,154,122)			8,181,497
Cash and cash equivalents at beginning of the period			13,899,795			10,904,080
Cash and cash equivalents at end of the period		$	8,745,673		$	19,085,577
Supplemental information:
Cash paid for
Interest		$	157,692		$	167,347
Income taxes		$	-		$	5,080
Schedule of non-cash transactions
Unrealized gain (loss) on securities available for sale, net of tax		$	143,798		$	(182,599)
Loans transferred to other real estate owned and repossessed assets		$	1,257,289		$	300,000

The accompanying notes are an integral part of these consolidated financial statements.

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Notes to Unaudited Consolidated Financial Statements

NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION

Independence Bancshares, Inc. (the “Company”) is a South Carolina corporation organized to operate as a bank holding company pursuant to the Federal Bank Holding Company Act of 1956 and the South Carolina Banking and Branching Efficiency Act of 1996, and to own and control all of the capital stock of Independence National Bank (the “Bank”). The Bank is a national association organized under the laws of the United States and opened for business on May 16, 2005. It is primarily engaged in the business of banking and providing services related to banking including accepting demand deposits and savings deposits insured by the Federal Deposit Insurance Corporation (the “FDIC”), and providing commercial, consumer and mortgage loans, principally in Greenville County, South Carolina.

On May 31, 2005, the Company sold 2,085,010 shares of its common stock in its initial public offering. All shares were sold at $10.00 per share. The offering raised approximately $20.5 million, net of offering costs. On December 31, 2012, the Company sold 17,648,750 shares of its common stock at $0.80 per share to certain accredited investors in a Private Placement (the “Private Placement”) for gross proceeds of $14.1 million. On August 1, 2013, the Company sold 769,000 shares of its common stock at a price of $0.80 per share to certain existing shareholders in a follow-on offering for gross proceeds of approximately $615,200 (the “Follow-on Offering”). On May 14, 2015, the Company issued 8,425 shares of Series A convertible preferred stock (the “Series A Shares”) to certain institutional investors and members of the Company’s management team at a price of $1,000 per share for gross proceeds of approximately $8,425,000 (the “Series A Private Placement”). Each Series A share is convertible, at the holder’s option, into 1,250 shares of common stock and each Series A Share ranks senior to our common stock with respect to dividends, distributions and liquidation preferences. The Series A shares have a liquidation preference of $1,000 per share. Also on May 14, 2015, the Company entered into a license agreement with MPIB Holdings, LLC (“MPIB”) pursuant to which it received a non-exclusive, non-transferable, non-licensable, worldwide license to use certain intellectual property of MPIB related to mobile payments and digital transactions. On January 4, 2016, the parties amended and restated the license agreement (the “Amended and Restated License Agreement”) pursuant to which MPIB agreed to make the license perpetual, subject to termination rights of the parties set forth in the Amended and Restated License Agreement, in exchange for the Company’s payment of a license fee of $275,000. On September 25, 2015, the Company suspended development of its digital banking, payments and transaction services business, and in conjunction with the suspension, the Company terminated the employment of the employees who were primarily engaged in developing the digital banking, payments and transaction services business, including the Company’s former Chief Executive Officer, effective as of September 25, 2015. No Bank employees were terminated, and there have been no material changes to the Bank’s operations. On October 4, 2015, the board of directors appointed Lawrence R. Miller, the president and chief executive officer of the Bank, as the Company’s interim Chief Executive Officer. The Company’s board of directors is currently exploring strategic alternatives for the Company and the digital banking, payments and transaction services business. The Company may not have sufficient working capital to pursue certain strategic alternatives and therefore may need to raise additional capital.

The Bank continues to provide community banking services in Greenville County, South Carolina, fulfilling the financial needs of individuals and small business owners by providing traditional checking and savings products and commercial, consumer and mortgage loans, as well as ATM and online banking, cash management, and safe deposit boxes. The Company seeks to maintain capital resources at both the Bank and at the Company, as well as at any future subsidiary, to adequately finance their operations.

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of the Company and the Bank. In consolidation, all significant intercompany transactions have been eliminated. The accounting and reporting policies conform to accounting principles generally accepted in the United States and to general practices in the banking industry. The foregoing discussion is a summary only and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 10-K”) as filed with the Securities and Exchange Commission (the “SEC”) and Management’s Discussion and Analysis in this Quarterly Report on Form 10-Q. Operating results for the three and six month periods ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

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Reclassifications

Certain amounts have been reclassified to state all periods on a comparable basis. Reclassifications had no effect on previously reported shareholders’ equity or net loss.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of income and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, other real estate owned, fair value of financial instruments, evaluating other-than-temporary impairment of investment securities and valuation of deferred tax assets.

Business Segments

The Company reports its activities as four business segments - Community Banking, Transaction Services, Asset Management and Parent Only. In determining proper segment definition, the Company considers the materiality of a potential segment and components of the business about which financial information is available and regularly evaluated, relative to a resource allocation and performance assessment. Please refer to “Note 8 – Business Segments” for further information on the reporting for the four business segments.

Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management performed an evaluation to determine whether or not there have been any subsequent events since the balance sheet date, and concluded that no subsequent events had occurred requiring accrual or disclosure through the date of this filing.

NOTE 2 – LIQUIDITY AND CAPITAL CONSIDERATIONS

The Company

The Company’s cash balances, independent of the Bank, were approximately $1.8 million and its real estate held for sale was $600,000 at June 30, 2016 compared to cash balances of approximately $2.9 million and real estate held for sale of $631,320 at December 31, 2015. The decrease in liquid assets of approximately $1.2 million is due primarily to the repayment of accrued liabilities during the quarter, approximately $180,000 in expenses incurred related to the transaction services segment, approximately $117,000 in other real estate owned expenses incurred related to the asset management segment, and approximately $510,000 in professional fees and data processing expenses incurred at the Company. See “Note 8 – Business Segments” for additional information related to the Company’s business segments. The foregoing discussion is a summary only and should be read in conjunction with the 2015 Form 10-K as filed with the SEC and Management’s Discussion and Analysis in this Quarterly Report on Form 10-Q. The Company’s board of directors is currently exploring strategic alternatives for the Company and the digital banking, payments and transaction services business. The Company may not have sufficient working capital to pursue certain strategic alternatives and therefore may need to raise additional capital.

The Bank

Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity at the Bank. We currently have $8.9 million in cash and federal funds sold. If our cash needs at the Bank exceed that, we plan to liquidate temporary investments and generate deposits within our market. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. Our investment securities available for sale at June 30, 2016 amounted to $10.5 million, or 11.4% of total assets. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. At June 30, 2016, $2.5 million of our investment portfolio was pledged against outstanding debt. Therefore, the related debt would need to be repaid prior to the securities being sold and converted to cash.

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The Bank is a member of the Federal Home Loan Bank of Atlanta (“FHLB”), from which applications for borrowings can be made for leverage purposes. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. At June 30, 2016, we had collateral that would support approximately $34.1 million in additional borrowings. We are subject to the FHLB’s credit risk rating policy which assigns member institutions a rating which is reviewed quarterly. The rating system utilizes key factors such as loan quality, capital, liquidity, profitability, etc. Our ability to access our available borrowing capacity from the FHLB in the future is subject to our rating and any subsequent changes based on our financial performance as compared to factors considered by the FHLB in their assignment of our credit risk rating each quarter.

The Bank also pledges collateral to the Federal Reserve Bank’s Borrower-in-Custody of Collateral program, and our available credit under this program was $12.1 million as of June 30, 2016.

The Bank has a $2.0 million federal funds purchased line of credit through a correspondent bank that is unsecured, but has not been utilized.

We believe our liquidity sources are adequate to meet our operating needs at the Bank. However, we continue to carefully focus on liquidity management during 2016. Comprehensive weekly and monthly liquidity analyses serve management as vital decision-making tools by providing summaries of anticipated changes in loans, investments, core deposits, and wholesale funds. These internal funding reports provide management with the details critical to anticipate immediate and long-term cash requirements, such as expected deposit runoff, loan pay downs and amount and cost of available borrowing sources, including secured overnight federal funds lines with our various correspondent banks.

The Consolidated Company

The Company’s level of liquidity is measured by the cash, cash equivalents, and investment securities available for sale to total assets ratio which was 22.7% at June 30, 2016 compared to 26.8% as of December 31, 2015. The decrease in liquidity is due primarily to the decrease in cash and due from bank and federal funds sold.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

For further information refer to the consolidated financial statements and footnotes thereto included in our 2015 Form 10K as filed with the SEC.

Cash and Cash Equivalents - For purposes of reporting cash flows, cash and cash equivalents include cash, amounts due from banks and federal funds sold. Generally, federal funds are sold for one-day periods. Due to the short term nature of cash and cash equivalents, the carrying amount of these instruments is deemed to be a reasonable estimate of fair value.

At June 30, 2016 and December 31, 2015, the Company had restricted cash totaling $2,000 with the FHLB. The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant.

Net Loss per Common Share - Basic loss per common share represents net loss divided by the weighted average number of common shares outstanding during the period. Diluted loss per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options and warrants and are determined using the treasury stock method. For the three and six month periods ended June 30, 2016 and June 30, 2015, as a result of the Company’s net loss, all of the potential common shares were considered anti-dilutive.

Research and Development – All costs incurred to establish the technological feasibility of computer software to be sold, leased or otherwise marketed as research and development are expensed as incurred. Once technological feasibility has been established, the subsequent costs of producing, coding and testing the products should be capitalized. The expensing of computer software costs is discontinued when the product is available for general release for customers. The Company has not achieved technological feasibility and has expensed all computer software purchases and development expenses related to research and development of its digital banking, payments and transaction services business and on September 25, 2015 the Company suspended further development of its digital banking and payments and transaction services business.

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Fair Value Measurements - The Company determines the fair market values of its financial instruments based on the fair value hierarchy established in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”), which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. ASC Topic 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available for sale investment securities) or on a nonrecurring basis (for example, impaired loans).

ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 – Valuations are based on quoted prices in active markets for identical assets or liabilities.

Level 2 – Valuations are based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Valuations include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Income Taxes - The Company accounts for income taxes in accordance with FASB ASC Topic 740, “Income Taxes". Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce deferred tax assets if it is determined to be “more likely than not” that all or some portion of the potential deferred tax asset will not be realized.

We did not recognize any income tax benefit or expense for the three and six month periods ended June 30, 2016 due to our net operating loss carryforward position. For the six month period ended June 30, 2015, we recognized $5,080 in state income tax expense related to our net operating income in 2014 at the Bank. We did not recognize any income tax benefit or expense for the three month period ended June 30, 2015 due to our net loss in 2015 at the Bank. Accounting literature states that a deferred tax asset should be reduced by a valuation allowance if, based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. In making such judgments, significant weight is given to evidence that can be objectively verified. We will continue to analyze our deferred tax assets and related valuation allowance on a quarterly basis, taking into account performance compared to forecasted earnings as well as current economic and internal information.

The Company believes that its income tax filing positions taken or expected to be taken in its tax returns will more likely than not be sustained upon audit by the taxing authorities, and does not anticipate any adjustments that will result in a material adverse impact on the Company’s financial condition, results of operations, or cash flows. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740.

Recently Issued Accounting Pronouncements - The following is a summary of recent authoritative pronouncements that may affect our accounting, reporting, and disclosure of financial information:

In May 2014 and August 2015, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a modified retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

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In January 2015, the FASB issued guidance to eliminate from the U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring. Under the new guidance, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company will apply the guidance prospectively to all periods presented in the financial statements. The company does not expect these amendments to have a material effect on its financial statements.

In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly changes the consolidation analysis required under the U.S. GAAP. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous consolidation conclusions. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted (included during an interim period), provided that the guidance is applied as of the beginning of the annual period containing the adoption date. The Company does not expect these amendments to have a material effect on its financial statements.

In August 2015, the FASB issued amendments to the Interest topic of the Accounting Standards Codification to clarify the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.

In January 2016, the FASB amended the Financial Instruments topic of the ASC to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its financial statements.

In February 2016, the FASB amended the Leases topic of the ASC to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments will be effective for the Company for annual periods beginning after December 15, 2016. The Company does not expect these amendments to have a material effect on its financial statements.

In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

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NOTE 4 – INVESTMENT SECURITIES

Investment securities classified as “Available for Sale” are carried at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity (net of estimated tax effects). Realized gains or losses on the sale of investments are based on the specific identification method. The amortized costs and fair values of investment securities available for sale are as follows:

		June 30, 2016
		Amortized			Gross Unrealized						Fair
		Cost			Gains			Losses			Value
Government-sponsored mortgage-backed		$	3,901,892		$	83,918		$	(18,507)		$	3,967,303
Municipals, tax-exempt			4,876,446			261,852			(1,769)			5,136,529
Municipals, taxable			1,303,730			64,875			-			1,368,605
Total investment securities		$	10,082,068		$	410,645		$	(20,276)		$	10,472,437
		December 31, 2015
		Amortized			Gross Unrealized						Fair
		Cost			Gains			Losses			Value
Government-sponsored mortgage-backed		$	4,290,680		$	66,350		$	(44,581)		$	4,312,449
Municipals, tax-exempt			4,916,379			140,335			(17,267)			5,039,447
Municipals, taxable			1,308,298			27,657			-			1,335,955
Total investment securities		$	10,515,357		$	234,342		$	(61,848)		$	10,687,851

The following table presents information regarding securities with unrealized losses at June 30, 2016:

		Securities in an Unrealized						Securities in an Unrealized
		Loss Position for Less than						Loss Position for More than
		12 Months						12 Months							Total
		Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
		Value			Losses			Value			Losses			Value			Losses
Government-sponsored mortgage-backed		$	-		$	-		$	738,480		$	18,507		$	738,480		$	18,507
Municipals, tax-exempt			-			-			324,441			1,769			324,441			1,769
Total temporarily impaired securities		$	-		$	-		$	1,062,921		$	20,276		$	1,062,921		$	20,276

The following table presents information regarding securities with unrealized losses at December 31, 2015:

		Securities in an Unrealized						Securities in an Unrealized
		Loss Position for Less than						Loss Position for More than
		12 Months						12 Months						Total
		Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
		Value			Losses			Value			Losses			Value			Losses
Government-sponsored mortgage-backed		$	627,542		$	5,569		$	764,462		$	39,012		$	1,392,004		$	44,581
Municipals, tax-exempt			323,796			6,249			1,074,440			11,018			1,398,236			17,267
Total temporarily impaired securities		$	951,338		$	11,818		$	1,838,902		$	50,030		$	2,790,240		$	61,848

At June 30, 2016, investment securities with a fair value of approximately $1.1 million and unrealized losses of $20,276 had been in a continuous loss position for more than twelve months. All remaining investment securities were in an unrealized gain position. The Company believes, based on industry analyst reports and credit ratings that the deterioration in the fair value of these investment securities available for sale is attributed to changes in market interest rates and not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary. The Company has the ability and intent to hold these securities until such time as the values recover or the securities mature. At December 31, 2015, investment securities with a fair value of $951,338 and unrealized losses of $11,818 had been in a continuous loss for less than twelve months. At December 31, 2015, investment securities with a fair value of approximately $1.8 million and unrealized losses of $50,030 had been in a continuous loss position for more than twelve months. All remaining investment securities were in an unrealized gain position.

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The amortized costs and fair values of investment securities available for sale at June 30, 2016, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers have the right to prepay the obligations.

		June 30, 2016
		Amortized			Fair
		Cost			Value
Due within one year		$	—		$	—
Due after one through three years			—			—
Due after three through five years			—			—
Due after five through ten years			1,303,730			1,368,605
Due after ten years			8,778,338			9,103,832
Total investment securities		$	10,082,068		$	10,472,437

NOTE 5 – LOANS

At June 30, 2016, our gross loan portfolio consisted primarily of $30.5 million of commercial real estate loans, $18.3 million of commercial business loans, and $15.3 million of consumer and home equity loans. Our current loan portfolio composition is not materially different than the loan portfolio composition disclosed in the footnotes to the consolidated financial statements included in our 2015 10-K.

During the quarter ended June 30, 2016, three nonaccrual loans at the Bank were transferred to other real estate owned for $1,257,289. Specific reserves for each of these loans were included in the December 31, 2015 allowance accounts. During the period ended June 30, 2015, one nonaccrual loan at the Bank for $343,266 was transferred to other real estate owned for $300,000, net of a specific reserve, which includes $34,327 in selling costs, of $43,266.

Certain credit quality statistics related to our loan portfolio have improved over the past several quarters, including reductions of in-migration of nonaccrual loans and reductions in the aggregate level of nonperforming assets. To the extent such improvement continues, we may continue to reduce our allowance for loan losses in future periods based on our assessment of the inherent risk in the loan portfolio at those future reporting dates. A reduction in the allowance for loan losses would result in a lower provision for loans losses being recorded in future periods. Conversely, there can be no assurance that loan losses in future periods will not exceed the current allowance for loan losses amount or that future increases in the allowance for loan losses will not be required. Additionally, no assurance can be given that our ongoing evaluation of the loan portfolio, in light of changing economic conditions and other relevant factors, will not require significant future additions to the allowance for loan losses, thus adversely impacting our business, financial condition, results of operations, and cash flows.

Loan Performance and Asset Quality

Generally, a loan will be placed on nonaccrual status when it becomes 90 days past due as to principal or interest (unless the loan is well-collateralized and in the process of collection), or when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful. When a loan is placed in nonaccrual status, interest accruals are discontinued and income earned but not collected is reversed. Cash receipts on nonaccrual loans are not recorded as interest income, but are used to reduce principal. Loans are removed from nonaccrual status when they become current as to both principal and interest and when concern no longer exists as to the collectability of principal or interest based on current available information or as evidenced by sufficient payment history, generally six months.

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The following table summarizes delinquencies and nonaccruals, by portfolio class, as of June 30, 2016 and December 31, 2015.

		Single and
		multifamily			Construction			Commercial
		residential			and			real estate -			Commercial
		real estate			development			other			business			Consumer			Total
June 30, 2016
30-59 days past due		$	-		$	-		$	-		$	-		$	-		$	-
60-89 days past due			-			-			-			-			-			-
Nonaccrual			141,045			-			193,188			-			-			334,233
Total past due and nonaccrual			141,045			-			193,188			-			-			334,233
Current			13,394,244			9,203,748			21,101,586			18,314,397			1,810,698			63,824,673
Total loans (gross of		$	13,535,289		$	9,203,748		$	21,294,774		$	18,314,397		$	1,810,698		$	64,158,906
deferred fees)
Deferred fees																		(179,526)
Loan loss reserve																		(853,137)
Total Loans, net																	$	63,126,243
		Single and
		multifamily			Construction			Commercial
		residential			and			real estate -			Commercial
		real estate			development			other			business			Consumer			Total
December 31, 2015
30-59 days past due		$	75,890		$	-		$	-		$	-		$	-		$	75,890
60-89 days past due			63,702			250,378			-			-			-			314,080
Nonaccrual			168,879			40,500			1,390,013			65,798			-			1,655,190
Total past due and nonaccrual			308,471			290,878			1,390,013			65,798			-			2,055,160
Current			16,126,251			6,995,581			24,169,930			16,961,256			1,369,224			65,622,242
Total loans (gross of		$	16,434,722		$	7,286,459		$	25,559,943		$	17,027,054		$	1,369,224		$	67,677,402
deferred fees)
Deferred fees																		(135,647)
Loan loss reserve																		(1,139,509)
Total Loans, net																	$	66,402,246

At June 30, 2016 and December 31, 2015, there were nonaccrual loans of approximately $334,000 and $1.7 million, respectively. Foregone interest income related to nonaccrual loans equaled $49,567 for the six months ended June 30, 2016. Foregone interest income related to nonaccrual loans equaled $10,535 for the six months ended June 30, 2015. No interest income was recognized on nonaccrual loans during the six months ended June 30, 2016. At June 30, 2016 and December 31, 2015, there were no accruing loans which were contractually past due 90 days or more as to principal or interest payments.

As part of the loan review process, loans are given individual credit grades, representing the risk the Company believes is associated with the loan balance. Credit grades are assigned based on factors that impact the collectability of the loan, the strength of the borrower, the type of collateral, and loan performance. Commercial loans are individually graded at origination and credit grades are reviewed on a regular basis in accordance with our loan policy. Consumer loans are assigned a “pass” credit rating unless something within the loan warrants a specific classification grade.

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The following table summarizes management’s internal credit risk grades, by portfolio class, as of June 30, 2016 and December 31, 2015.

		Single and
		multifamily			Construction			Commercial
		residential			and			real estate -			Commercial
June 30, 2016		real estate			development			other			business			Consumer			Total
Pass Loans		$	8,512,881		$	2,446,006		$	-		$	-		$	1,810,698		$	12,769,585
Grade 1 - Prime			-			-			-			-			-			-
Grade 2 - Good			-			-			-			-			-			-
Grade 3 - Acceptable			2,014,227			1,421,868			10,547,646			7,599,571			-			21,583,312
Grade 4 – Acceptable w/ Care			2,804,836			5,124,617			9,863,187			9,644,840			-			27,437,480
Grade 5 – Special Mention			62,300			72,803			-			838,382			-			973,485
Grade 6 - Substandard			141,045			138,454			883,941			231,604			-			1,395,044
Grade 7 - Doubtful			-			-			-			-			-			-
Total loans (gross of		$	13,535,289		$	9,203,748		$	21,294,774		$	18,314,397		$	1,810,698		$	64,158,906
deferred fees)
		Single and
		multifamily			Construction			Commercial
		residential			and			real estate -			Commercial
December 31, 2015		real estate			development			other			business			Consumer			Total
Pass Loans		$	8,340,816		$	1,350,332		$	-		$	-		$	1,369,224		$	11,060,372
Grade 1 - Prime			-			-			-			-			-			-
Grade 2 - Good			-			-			-			-			-			-
Grade 3 - Acceptable			4,479,116			809,004			8,121,125			7,667,706			-			21,076,951
Grade 4 – Acceptable w/ Care			3,382,209			4,759,864			14,724,468			8,199,385			-			31,065,926
Grade 5 – Special Mention			63,702			76,381			611,189			846,106			-			1,597,378
Grade 6 - Substandard			168,879			290,878			2,103,161			313,857			-			2,876,775
Grade 7 - Doubtful			-			-			-			-			-			-
Total loans (gross of		$	16,434,722		$	7,286,459		$	25,559,943		$	17,027,054		$	1,369,224		$	67,677,402
deferred fees)

Loans graded one through four are considered “pass” credits. At June 30, 2016, approximately 96% of the loan portfolio had a credit grade of “pass” compared to 93% at December 31, 2015. For loans to qualify for this grade, they must be performing relatively close to expectations, with no significant departures from the intended source and timing of repayment. Consumer loans are assigned a “pass” credit rating unless something within the loan warrants a specific classification grade. As of June 30, 2016 and December 31, 2015, we had loans totaling approximately $973,000 and $1.6 million, respectively, classified as special mention. This classification is utilized when an initial concern is identified about the financial health of a borrower. Loans are designated as such in order to be monitored more closely than other credits in the loan portfolio. At June 30, 2016, substandard loans totaled approximately $1.4 million, with all loans being collateralized by real estate compared to $2.9 million at December 31, 2015. Substandard credits are evaluated for impairment on a quarterly basis.

The Company identifies impaired loans through its normal internal loan review process. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loans on the Company's problem loan watch list are considered potentially impaired loans. Generally, once loans are considered impaired, they are moved to nonaccrual status and recognition of interest income is discontinued. However, loans may be considered impaired strictly based on a decrease in the underlying value of the collateral securing the loan while the loan is still considered to be performing, thus preventing the need to move the loan to nonaccrual status. Impairment is measured on a loan-by-loan basis based on the determination of the most probable source of repayment which is usually liquidation of the underlying collateral, but may also include discounted future cash flows, or in rare cases, the market value of the loan itself.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

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At June 30, 2016, impaired loans totaled $1.2 million, all of which were valued on a nonrecurring basis at the lower of cost or market value of the underlying collateral. Impaired loans decreased $1.2 million from December 31, 2015 due to three loans being transferred to other real estate owned for $1,257,289 and approximately $178,000 in loan balance reductions through pay downs, partially offset by one loan being deemed impaired with a recorded investment of approximately $138,000 during the six months ended June 30, 2016. Market values were obtained using independent appraisals, updated in accordance with our reappraisal policy, or other market data such as recent offers to the borrower. As of June 30, 2016, we had loans totaling approximately $232,000 that were classified in accordance with our loan rating policies but were not considered impaired. The following table summarizes information relative to impaired loans, by portfolio class, at June 30, 2016 and December 31, 2015.

		Unpaid									Average			Year to date
		principal			Recorded			Related			impaired			interest
		balance			investment			allowance			investment			income
June 30, 2016
With no related allowance recorded:
Single and multifamily residential real estate		$	-		$	-		$	-		$	205,715		$	-
Construction and development			138,454			138,454			-			157,751			5,191
Commercial real estate - other			690,754			690,754			-			634,825			16,844
Commercial business			-			-			-			31,007
With related allowance recorded:
Single and multifamily residential real estate			141,045			141,045			99,445			205,957			-
Construction and development			-			-			-			126,353			-
Commercial real estate - other			193,188			193,188			28,189			580,095			-
Commercial business			-			-			-			9,070			-
Consumer			-			-			-			-			-
Total:
Single and multifamily residential real estate			141,045			141,045			99,445			411,672			-
Construction and development			138,454			138,454			-			284,104			5,191
Commercial real estate - other			883,942			883,942			28,189			1,214,920			16,844
Commercial business			-			-			-			40,077			-
Consumer			-			-			-			-			-
		$	1,163,441		$	1,163,441		$	127,634		$	1,950,773		$	22,035
December 31, 2015
With no related allowance recorded:
Single and multifamily residential real estate		$	-		$	-		$	-		$	411,430		$	21,667
Construction and development			-			-			-			177,047			-
Commercial real estate - other			905,968			905,968			-			415,488			29,423
Commercial business			-			-			-			62,015			-
Consumer			-			-			-			-			-
With related allowance recorded:
Single and multifamily residential real estate			236,938			236,938			163,138			270,668			-
Construction and development			40,500			40,500			10,500			239,206			727
Commercial real estate - other			1,197,193			1,197,193			201,793			805,654			46,761
Commercial business			-			-			-			18,139			2,119
Consumer			-			-			-			-			-
Total:
Single and multifamily residential real estate			236,938			236,938			163,138			682,098			21,667
Construction and development			40,500			40,500			10,500			416,253			727
Commercial real estate - other			2,103,161			2,103,161			201,793			1,221,142			76,184
Commercial business			-			-			-			80,154			2,119
Consumer			-			-			-			-			-
		$	2,380,599		$	2,380,599		$	375,431		$	2,399,647		$	100,697

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TDRs are loans which have been restructured from their original contractual terms and include concessions that would not otherwise have been granted outside of the financial difficulty of the borrower. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges in the current economic environment. The purpose of a TDR is to facilitate ultimate repayment of the loan.

Our policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms; continued accrual of interest at the restructured interest rate is likely. If a borrower was materially delinquent on payments prior to the restructuring, but shows capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual going forward. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status. We will continue to closely monitor these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms.

At June 30, 2016 the principal balance of TDRs was approximately $138,000. At December 31, 2015, the principal balance of TDRs was zero as the one loan constituting our sole TDR had been transferred to other real estate owned. As of June 30, 2016, the carrying balance consisted of one performing loan. The loan defaulted in 2015 but was made current in 2016. There were no changes to the loan terms as the loan is scheduled to mature in July 2016.

There were no loans modified TDRs within the previous 12-month period for which there was a payment default during the six months ended June 30, 2016.

Provision and Allowance for Loan Losses

An allowance for loan losses is maintained at a level deemed appropriate by management to adequately provide for known and inherent losses in the loan portfolio. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The provision and allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of both a specific and a general component. The specific component relates to loans that are impaired loans as defined in FASB ASC Topic 310, “Receivables.” For such loans, an allowance is established when either the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors.

The following table summarizes activity related to our allowance for loan losses for the six months ended June 30, 2016 and 2015, by portfolio segment.

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		Single and
		multifamily			Construction			Commercial
		residential			and			real estate -			Commercial
		real estate			development			other			business			Consumer			Total
June 30, 2016
Allowance for loan losses:
Balance, beginning of period		$	265,797		$	184,130		$	439,830		$	244,679		$	5,073		$	1,139,509
Provision (reversal of provision) for			(30,000)			(60,000)			45,000			(28,000)			5,000			(68,000)
loan losses
Loan charge-offs			-			(10,500)			(209,045)			-			(139)			(219,684)
Loan recoveries			-			-			-			-			1,312			1,312
Net loans charged-off			-			(10,500)			(209,045)			-			1,173			(218,372)
Balance, end of period		$	235,797		$	113,630		$	275,785		$	216,679		$	11,246		$	853,137
Individually reviewed for impairment		$	99,445		$	-		$	28,189		$	-		$	-		$	127,634
Collectively reviewed for impairment			136,352			113,630			247,596			216,679			11,246			725,503
Total allowance for loan losses		$	235,797		$	113,630		$	275,785		$	216,679		$	11,246		$	853,137
Gross loans, end of period:
Individually reviewed for impairment		$	141,045		$	138,454		$	883,942		$	-		$	-		$	1,163,441
Collectively reviewed for impairment			13,394,244			9,065,294			20,410,832			18,314,397			1,810,698			62,995,465
Total loans (gross of deferred fees)		$	13,535,289		$	9,203,748		$	21,294,774		$	18,314,397		$	1,810,698		$	64,158,906
June 30, 2015
Allowance for loan losses:
Balance, beginning of year		$	160,797		$	234,130		$	363,097		$	184,679		$	90,073		$	1,032,776
Provision (reversal of provision) for			(5,980)			(39,833)			(6,043)			133,496			(81,640)			-
loan losses
Loan charge-offs			-			-			(43,267)			-			-			(43,267)
Loan recoveries			-			-			-			-			-			-
Net loans charged-off			-			-			(43,267)			-			-			(43,267)
Balance, end of period		$	154,817		$	194,297		$	313,787		$	318,175		$	8,433		$	989,509
Individually reviewed for impairment		$	-		$	9,636		$	24,008			23,745		$	-		$	57,389
Collectively reviewed for impairment			154,817			184,661			289,779			294,430			8,433			932,120
Total allowance for loan losses		$	154,817		$	194,297		$	313,787		$	318,175		$	8,433		$	989,509
Gross loans, end of period:
Individually reviewed for impairment		$	718,873		$	39,636		$	925,879		$	85,138		$	-		$	1,769,526
Collectively reviewed for impairment			15,953,696			8,039,307			22,386,799			16,625,621			1,361,248			64,366,671
Total loans (gross of deferred fees)		$	16,672,569		$	8,078,943		$	23,312,678		$	16,710,759		$	1,361,248		$	66,136,197

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Portions of the allowance for loan losses may be allocated for specific loans or portfolio segments. However, the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged-off. The general reserve as a percentage of loans collectively reviewed for impairment has decreased to 1.15% at June 30, 2016 from 1.17% at December 31, 2015, following our reversal of loan loss provision in the amount of $68,000 as of June 30, 2016. The reversal was directly attributable to a recovery on a loan that was specifically reserved for in the quarter ended September 30, 2015. The general reserve was also impacted by the charge off of one loan which was specifically reserved at December 31, 2015. While management utilizes the best judgment and information available to it, the ultimate adequacy of the allowance for loan losses depends on a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates, and the view of the regulatory authorities toward loan classifications. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period.

Maturities and Sensitivity of Loans to Changes in Interest Rates

The information in the following tables summarizes the loan maturity distribution by type and related interest rate characteristics based on the contractual maturities of individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below, because borrowers have the right to prepay obligations with or without prepayment penalties.

NOTE 6 – FAIR VALUE

Assets and Liabilities Measured at Fair Value

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines the fair values of its financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are detailed in Note 2.

Available-for-sale investment securities ($10,472,437 and $10,687,851 at June 30, 2016 and December 31, 2015, respectively) are carried at fair value and measured on a recurring basis using Level 2 inputs. Fair values are estimated by using bid prices and quoted prices of pools or tranches of securities with similar characteristics.

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We do not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific reserve within the allowance for loan losses is established or the loan is charged down to the fair value less costs to sell. At June 30, 2016, all impaired loans were evaluated on a nonrecurring basis based on the market value of the underlying collateral. Market values are generally obtained using independent appraisals or other market data, which the Company considers to be Level 3 inputs. The aggregate carrying amount, net of specific reserves, of impaired loans carried at fair value at June 30, 2016 and December 31, 2015 was $1.0 million and $2.0 million, respectively.

Other real estate owned and repossessed assets, generally consisting of properties or other collateral obtained through foreclosure or in satisfaction of loans, are carried at the lower or market value and measured on a non-recurring basis. Market values are generally obtained using independent appraisals which are generally prepared using the income or market valuation approach, adjusted for estimated selling costs which the Company considers to be Level 3 inputs. The carrying amount of other real estate owned and repossessed assets carried at fair value at June 30, 2016 and December 31, 2015 was $2,952,667 and $1,910,220, respectively. The Company utilizes two methods to determine carrying values, either appraised value, or if lower, current net listing price.

The Company has no assets whose fair values are measured using Level 1 inputs. The Company also has no liabilities carried at fair value or measured at fair value.

For Level 3 assets measured at fair value on a non-recurring basis as of June 30, 2016, the significant observable inputs used in the fair value measurements were as follows:

		Fair Value
		at
		June 30,				Significant
Description		2016		Valuation Technique		Unobservable Inputs
Other real estate owned and repossessed assets		$    2,952,667		Appraised value		Discounts to reflect current
						market conditions, abbreviated
						holding period, and estimated
						costs to sell
Impaired loans		$    1,035,807		Internal assessment based on		Adjustments to estimated
				external third party appraised		value based on recent sales
				value		of comparable collateral

For Level 3 assets measured at fair value on a non-recurring basis as of December 31, 2015, the significant unobservable inputs used in the fair value measurements were as follows:

		Fair Value at
		December 31,				Significant
Description		2015		Valuation Technique		Unobservable Inputs
Other real estate owned and repossessed assets		$    1,910,220		Appraised value		Discounts to reflect current
						market conditions and estimated
						costs to sell
Impaired loans		$    2,005,168		Internal assessment based on		Adjustments to estimated
				external third party		value based on recent sales of
				appraised value		comparable collateral

Disclosures about Fair Value of Financial Instruments

FASB ASC Topic 825, “Financial Instruments” requires disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. FASB ASC Topic 825 defines a financial instrument as cash, evidence of an ownership interest in an entity or contractual obligations which require the exchange of cash or other financial instruments. Certain items are specifically excluded from the disclosure requirements, including the Company’s common stock, property, equipment and software, and other assets and liabilities.

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Fair value approximates carrying value for the following financial instruments due to the short-term nature of the instrument: cash and due from banks, federal funds sold, and securities sold under agreements to repurchase. Investment securities are valued using quoted market prices. No ready market exists for non-marketable equity securities, and they have no quoted market value. However, redemption of these stocks has historically been at par value. Accordingly, the carrying amounts are deemed to be a reasonable estimate of fair value. Fair value of loans is based on the discounted present value of the estimated future cash flows. Discount rates used in these computations approximate the rates currently offered for similar loans of comparable terms and credit quality. Fair value of bank owned life insurance is based on the cash surrender value of the policies, as determined by the issuer.

Fair value for demand deposit accounts and interest bearing accounts with no fixed maturity date is equal to the carrying value. Fair value of certificate of deposit accounts are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments. Fair value for FHLB advances is based on discounted cash flows using the Company’s current incremental borrowing rate.

The Company has used management’s best estimate of fair value based on the above assumptions. Thus, the fair values presented may not be the amounts that could be realized in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses, which would be incurred in an actual sale or settlement, are not taken into consideration in the fair value presented.

The estimated fair values of the Company’s financial instruments at June 30, 2016 and December 31, 2015 are as follows:

		Carrying
June 30, 2016		Amount			Fair Value			Level 1			Level 2			Level 3
Financial Assets:
Cash and due from banks		$	1,583,673		$	1,583,673		$	1,583,673			-			-
Interest bearing deposits in
other institutions			1,750,000			1,750,000			-			1,750,000			-
Federal funds sold			7,162,000			7,162,000			7,162,000			-			-
Investment securities
available for sale			10,472,437			10,472,437			-			10,472,437			-
Non-marketable equity
securities			380,050			380,050			-			380,050			-
Loans, net			63,126,243			63,318,181			-			-			63,318,181
Bank owned life insurance			2,500,000			2,500,000			-			2,500,000			-
Financial Liabilities:
Deposits			80,014,677			79,986,119			-			79,986,119			-
Securities sold under
agreements to repurchase			49,357			49,357			-			49,357			-
		Carrying
December 31, 2015		Amount			Fair Value			Level 1			Level 2			Level 3
Financial Assets:
Cash and due from banks		$	5,453,795		$	5,453,795		$	5,453,795		$	-		$	-
Interest-bearing deposits in
other institutions			1,500,000			1,500,000			-			1,500,000			-
Federal funds sold			8,446,000			8,446,000			8,446,000			-			-
Investment securities
available for sale			10,687,851			10,687,851			-			10,687,851			-
Non-marketable equity
securities			392,500			392,500			-			392,500			-
Loans, net			66,402,246			66,873,213			-			-			66,873,213
Financial Liabilities:
Deposits			83,567,325			83,538,827			-			83,538,827			-
Securities sold under
agreements to repurchase			113,080			113,080			-			113,080			-

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NOTE 7 – STOCK COMPENSATION PLANS

On July 26, 2005, the Company adopted the Independence Bancshares, Inc. 2005 Stock Incentive Plan (the “2005 Incentive Plan”) for the benefit of the directors, officers and employees. The 2005 Incentive Plan initially reserved up to 260,626 shares of the Company’s common stock for the issuance of stock options and contained evergreen provision, which provided that the maximum number of shares to be issued under the 2005 Incentive Plan would automatically increase each time the Company issues additional shares of common stock such that the total number of shares issuable under the 2005 Incentive Plan would at all times equal 12.5% of the then outstanding shares of common stock.

In February 2013, our board of directors amended the 2005 Incentive Plan to cap the number of shares issuable thereunder at 2,466,720 and adopted the Independence Bancshares, Inc. 2013 Equity Incentive Plan (the “2013 Incentive Plan”) which was subsequently approved by the Company’s shareholders at the 2013 annual shareholders’ meeting. The 2013 Incentive Plan is an omnibus equity incentive plan which provides for the granting of various types of equity compensation awards, including stock options, restricted stock, and stock appreciation rights, to the Company’s employees and directors.

As of June 30, 2016 and December 31, 2015, 3,097,255 total options were outstanding at a weighted average price of $1.11. Of the 3,097,255 options outstanding, 3,022,255 options were vested.

Compensation expense related to stock options granted was $10,128 and $191,695 for the six months ended June 30, 2016 and June 30, 2015, respectively. Compensation expense is based on the fair value of the option estimated at the date of grant using the Black-Scholes option-pricing model. Compensation expense is recognized on a straight line basis over the vesting period of the option.

NOTE 8 – BUSINESS SEGMENTS

The Company reports its activities as four business segments - Community Banking, Transaction Services, Asset Management and Parent Only as defined in Note 1. In determining proper segment definition, the Company considers the materiality of a potential segment and components of the business about which financial information is available and regularly evaluated, relative to a resource allocation and performance assessment.

The following table presents selected financial information for the Company’s reportable business segments for the three and six months ended June 30, 2016 and 2015.

					Holding Company
		Community			Transaction			Asset			Parent
		Banking			Services			Management			Only (1)			Total
For the three months ended
June 30, 2016
Interest income		$	927,317		$	—		$	—		$	—		$	927,317
Interest expense			80,349			—			—			—			80,349
Net interest income			846,968			—			—			—			846,968
Reversal of provision for loan losses			—			—			—			—			—
Noninterest income			86,614			—			—			(240)			86,374
Noninterest expense			1,265,020			76,709			122,620			254,157			1,718,506
Loss before income taxes			(331,438)			(76,709)			(122,620)			(254,397)			(785,164)
Income taxes			—			—			—			—			—
Net loss		$	(331,438)		$	(76,709)		$	(122,620)		$	(254,397)		$	(785,164)

       (1)     Excludes equity in earnings of wholly-owned Bank subsidiary.

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					Holding
					Company
		Community			Transaction			Asset			Parent
		Banking			Services			Management			Only (1)			Total
For the six months ended
June 30, 2016
Interest income		$	1,842,369		$	—		$	—		$	—		$	1,842,369
Interest expense			158,981			—			—			—			158,981
Net interest income			1,683,388			—			—			—			1,683,388
Reversal of provision for loan
losses			(68,000)			—			—			—			(68,000)
Noninterest income			285,049			—			—			(240)			284,809
Noninterest expense			2,314,942			177,190			117,110			512,549			3,121,791
Loss before income taxes			(278,505)			(177,190)			(117,110)			(512,789)			(1,085,594)
Income taxes			—			—			—			—			—
Net income (loss)		$	(278,505)		$	(177,190)		$	(117,110)		$	(512,789)		$	(1,085,594)

(1)	Excludes equity in earnings of wholly-owned Bank subsidiary.

		Community
		Banking			Holding Company (2)			Eliminations			Total
As of June 30, 2016
Cash and due from banks		$	1,700,651		$	1,757,581		$	(1,874,559)		$	1,583,673
Federal funds sold			7,162,000			—			—			7,162,000
Interest-bearing deposits
in other institutions			1,750,000			—			—			1,750,000
Investment securities			10,472,437			—			—			10,472,437
Loans receivable, net			63,126,243			—			—			63,126,243
Other real estate owned			2,352,667			600,000			—			2,952,667
Property and equipment, net			2,030,807			80,686			—			2,111,493
Bank owned life
insurance			2,500,000			—			—			2,500,000
Other assets			837,607			12,702			—			850,309
Total assets		$	91,932,412		$	2,450,969		$	(1,874,559)		$	92,508,822
Deposits		$	81,889,236		$	—		$	(1,874,559)		$	80,014,677
Securities sold under
agreements to repurchase			49,357			—			—			49,357
Accrued and other			353,873			378,424			—			732,297
liabilities
Shareholders’ equity			9,639,946			2,072,545			—			11,712,491
Total liabilities and shareholders’ equity		$	91,932,412		$	2,450,969		$	(1,874,559)		$	92,508,822

(2)	Excludes investment in wholly-owned Bank subsidiary.

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					Holding Company
		Community			Transaction			Asset			Parent
		Banking			Services			Management			Only (1)			Total
For the three months ended
June 30, 2015
Interest income		$	928,646		$	—		$	—		$	—		$	928,646
Interest expense			79,995			—			—			2,987			82,982
Net interest income			848,651			—			—			(2,987)			845,664
Reversal of provision for loan losses			—			—			—			—			—
Noninterest income			109,150			—			—			19			109,169
Noninterest expense			1,237,721			713,590			5,206			355,583			2,312,100
Income (loss) before income taxes			(279,920)			(713,590)			(5,206)			(358,551)			(1,357,267)
Income taxes			—			—			—			—			—
Net income (loss)		$	(279,920)		$	(713,590)		$	(5,206)		$	(358,551)		$	(1,357,267)

       (1)     Excludes equity in earnings of wholly-owned Bank subsidiary.

					Holding Company
		Community			Transaction			Asset			Parent
		Banking			Services			Management			Only (1)			Total
For the six months ended
June 30, 2015
Interest income		$	1,860,036		$	—		$	—		$	—		$	1,860,036
Interest expense			155,703			—			—			12,570			168,273
Net interest income			1,704,333			—			—			(12,570)			1,691,763
Reversal of provision for loan losses			—			—			—			—			—
Noninterest income			218,711			33,327			—			1,337			253,375
Noninterest expense			2,220,904			990,022			(3,678)			453,718			3,660,966
Income (loss) before income taxes			(297,860)			(956,695)			3,678			(464,951)			(1,715,828)
Income taxes			5,080			—			—			—			5,080
Net income (loss)		$	(302,940)		$	(956,695)		$	3,678		$	(464,951)		$	(1,720,908)

       (1)      Excludes equity in earnings of wholly-owned Bank subsidiary.

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		Community
		Banking			Holding Company (2)			Eliminations			Total
As of June 30, 2015
Cash and due from banks		$	5,082,338		$	5,065,754		$	(5,066,515)		$	5,081,577
Federal funds sold			14,004,000			—			—			14,004,000
Investment securities			14,587,793			—			—			14,587,793
Loans receivable, net			65,011,086			—			—			65,011,086
Other real estate owned			1,308,900			754,100			—			2,063,000
Property and equipment, net			2,081,110			205,744			—			2,286,854
Other assets			915,616			481,676			—			1,397,292
Total assets		$	102,990,843		$	6,507,274		$	(5,066,515)		$	104,431,602
Deposits		$	92,692,753		$	—		$	(5,066,515)		$	87,626,238
Securities sold under
agreements to repurchase			33,432			—			—			33,432
Note payable			—			149,774			—			149,774
Accrued and other liabilities			148,983			1,117,682			—			1,266,665
Shareholders’ equity			10,115,675			5,239,818			—			15,355,493
Total liabilities and
shareholders’ equity		$	102,990,843		$	6,507,274		$	(5,066,515)		$	104,431,602

(2)       Excludes investment in wholly-owned Bank subsidiary

NOTE 9 — NOTE PAYABLE

In September 2014, the Company closed a $600,000 one-year borrowing. The loan was provided by a board member of the Bank and as a result needed to comply with Regulation O. Proceeds of the loan were used primarily to fund the research and development effort in the Transaction Services business segment. The loan was collateralized by a first perfected security interest in certain real estate assets of the Company. The loan was fully drawn at closing, and carried an annual interest rate of 7% per annum for the first six months on any outstanding borrowings and then stepped up to 8% per annum for the remaining six months of the term. On March 18, 2015, one of the parcels of real estate was sold and a payment was made on the loan so that the outstanding balance of the loan was $149,774, which was equal to the balance on June 30, 2015. The outstanding balance of $149,774 plus accrued interest was repaid in its entirety on September 3, 2015.

NOTE 10 — BANK OWNED LIFE INSURANCE AND PRE-RETIREMENT BENEFIT PLAN

In June of 2016, the Bank purchased two bank owned life insurance policies with aggregate death benefits of $2,500,000 for investment purposes. The Bank is responsible for paying all premiums and is the owner and beneficiary of the policies.

In connection with the purchase of the bank owned life insurance, the Bank offered pre-retirement death benefits to selected employees of the Bank. The policies are not transferrable to the employees and are not impacted by a change in control. The pre-retirement death benefits are indirectly funded by the bank owned life insurance.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion reviews our results of operations and assesses our financial condition. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements. The commentary should be read in conjunction with the discussion of forward-looking statements, the financial statements, and the related notes and the other statistical information included in this report.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including information included or incorporated by reference in this document, contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may relate to our financial condition, results of operation, plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “believe,” “continue,” “assume,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in our forward-looking statements include, but are not limited, to the following:

●	suspension of business divisions or segments, including the digital banking, payments, and transaction services business;
●	strategies for growth and sources of new operating revenues;
●	operating revenues, expenses, effective tax rates, and other results of operations;
●	current and future products and services and plans to develop and promote them;
●	capital expenditures and our estimates regarding our capital expenditures;
●	liquidity, working capital requirements and access to funding;
●	cybersecurity risks, business disruptions or financial losses and changes in technology;
●	our shareholder relations;
●	defense of litigation brought by current and/or former officers, directors and/or shareholders;
●	mergers and acquisition activity;
●	use of proceeds from sales of our securities;
●	our ability to comply with regulations;
●	relations with federal and state regulators;
●	listing our shares, including any listing on a national securities exchange;
●	changes in economic conditions;

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●	credit losses;
●	the rate of delinquencies and amount of loans charged-off;
●	allowances for loan losses and loan loss provisions;
●	the lack of loan growth in recent years;
●	our ability to attract and retain key personnel;
●	our ability to protect, use, develop, market and otherwise exploit our proprietary technology and intellectual property;
●	our ability to retain our existing customers;
●	increases in competitive pressure in the banking and financial services industries;
●	adverse changes in asset quality and resulting credit risk related losses and expenses;

All forward-looking statements in this report are based on information available to us as of the date of this report. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee you that these expectations will be achieved. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Critical Accounting Policies

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our audited consolidated financial statements as of December 31, 2015, as filed in our 2015 Form 10-K.

Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

Allowance for Loan Losses

We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgments and estimates used in preparation of our consolidated financial statements. Some of the more critical judgments supporting the amount of our allowance for loan losses include judgments about the credit worthiness of borrowers, the estimated value of the underlying collateral, the assumptions about cash flow, determination of loss factors for estimating credit losses, the impact of current events and conditions, and other factors impacting the level of probable inherent losses. Under different conditions or using different assumptions, the actual amount of credit losses incurred by us may be different from management’s estimates provided in our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a more complete discussion of our processes and methodology for determining our allowance for loan losses.

Other Real Estate Owned and Repossessed Assets

Real estate and other property acquired in settlement of loans is recorded at the lower of cost or fair value less estimated selling costs, establishing a new cost basis when acquired. Fair value of such property is reviewed regularly and write-downs are recorded when it is determined that the carrying value of the property exceeds the fair value less estimated costs to sell. Recoveries of value are recorded only to the extent of previous write-downs on the property in accordance with FASB ASC Topic 360 “Property, Plant, and Equipment”. Write-downs or recoveries of value resulting from the periodic reevaluation of such properties, costs related to holding such properties, and gains and losses on the sale of foreclosed properties are charged against income. Costs relating to the development and improvement of such properties are capitalized.

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Income Taxes

We use assumptions and estimates in determining income taxes payable or refundable for the current year, deferred income tax liabilities and assets for events recognized differently in our consolidated financial statements and income tax returns, and income tax benefit or expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. Management exercises judgment in evaluating the amount and timing of recognition of resulting tax liabilities and assets. These judgments and estimates are reevaluated on a continual basis as regulatory and business factors change. Valuation allowances are established to reduce deferred tax assets if it is determined to be “more likely than not” that all or some portion of the potential deferred tax asset will not be realized. No assurance can be given that either the tax returns submitted by us or the income tax reported on the financial statements will not be adjusted by either adverse rulings by the United States Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service. We are subject to potential adverse adjustments, including, but not limited to, an increase in the statutory federal or state income tax rates, the permanent non-deductibility of amounts currently considered deductible either now or in future periods, and the dependency on the generation of future taxable income, including capital gains, in order to ultimately realize deferred income tax assets.

Research and Development

All costs incurred to establish the technological feasibility of computer software to be sold, leased or otherwise marketed as research and development are expensed as incurred. Once technological feasibility has been established, the subsequent costs of producing, coding and testing the products should be capitalized. The expensing of computer software costs is discontinued when the product is available for general release for customers. The Company has not achieved technological feasibility and has expensed all computer software purchases and development expenses related to research and development of its digital banking, payments and transaction services business. On September 25, 2015 the Company suspended further development of its digital banking and payments and transaction services business.

Overview

The following discussion describes our results of operations for the three and six month periods ended June 30, 2016 and 2015 and also analyzes our financial condition as of June 30, 2016.

The Consolidated Company

At June 30, 2016, we had total assets of $92.5 million, a decrease of $5.0 million, or 5.1%, from total assets of $97.5 million at December 31, 2015. The largest components of our total assets are net loans, investment securities available for sale, other real estate owned, federal funds sold and cash and due from banks, which were $63.1 million, $10.5 million, $3.0 million, $7.2 million and $1.6 million, respectively, at June 30, 2016. Comparatively, our net loans, investment securities available for sale, other real estate owned, federal funds sold and cash and due from banks totaled $66.4 million, $10.7 million, $1.9 million, $8.4 million and $5.5 million, respectively, at December 31, 2015.

Our liabilities and shareholders’ equity at June 30, 2016, totaled $80.8 million and $11.7 million, respectively, compared to liabilities of $84.8 million and shareholders’ equity of $12.6 million at December 31, 2015. The principal component of our liabilities is deposits, which were $80.0 million and $83.6 million at June 30, 2016 and December 31, 2015, respectively.

Our net loss was $785,164 for the three months ended June 30, 2016, or $0.04 per share, an improvement of $572,103, or 42.2%, compared to a net loss of $1.4 million, or $0.07 per share, for the three months ended June 30, 2015. This decrease in net loss was primarily driven by decreases in product research and development expenses as a result of the Company’s decision to suspend development of its digital banking, payments and transaction services business on September 25, 2015.

Our net loss was $1.1 million for the six months ended June 30, 2016, or $0.05 per share, an improvement of $635,314, or 36.9%, compared to a net loss of $1.7 million, or $0.08 per share, for the six months ended June 30, 2015. This decrease in net loss was primarily driven by decreases in product research and development expenses as a result of the Company’s decision to suspend development of its digital banking, payments and transaction services business on September 25, 2015, as well as due to the recovery of provision for loan losses of $68,000.

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The Bank

Like most community banks, we derive the majority of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.

At June 30, 2016, we had total assets at the Bank of $91.9 million compared to $96.7 million at December 31, 2015. The largest components of total assets at the Bank are net loans, investment securities available for sale, other real estate owned, federal funds sold, and cash and due from banks, which were $63.1 million, $10.5 million, $2.4 million, $7.2 million and $1.7 million, respectively, at June 30, 2016. Comparatively, our net loans, investment securities available for sale, other real estate owned, federal funds sold and cash and due from banks totaled $66.4 million, $10.7 million, $1.3 million, $8.4 million and $5.5 million, respectively, at December 31, 2015. At June 30, 2016, we had total liabilities at the Bank of approximately $82.3 million compared to approximately $86.8 million at December 31, 2015. The largest components of total liabilities at the Bank are deposits, which were $81.9 million and $86.5 million at June 30, 2016 and December 31, 2015, respectively.

The Company

The Company’s cash balances, independent of the Bank, were approximately $1.8 million and its real estate held for sale was $600,000 at June 30, 2016 compared to cash balances of approximately $2.9 million and real estate held for sale of $631,320 at December 31, 2015. The decrease in liquid assets of approximately $1.2 million is due primarily to the repayment of accrued liabilities during the quarter as well as approximately $177,000 in expenses incurred related to the transaction services segment, approximately $117,000 in expenses related to other real estate owned incurred related to the assets management segment, and approximately $276,000 in professional fees, $150,000 in consulting fees and $72,000 in data processing expenses incurred at the Company. See “Note 8 – Business Segments” for additional information related to the transaction services segment.

Transaction Services

We began offering digital banking, payments and transaction services in October 2013 on a limited basis through the Bank’s Mobiliti application and until September 2015 we focused on expanding and growing this line of business (the “digital banking business”). On September 25, 2015, we suspended further development of our digital banking business and payments and transaction services business as the board of directors explores strategic alternatives for this line of business and the Company. The Bank continues to offer its customers its existing services through the Mobiliti application, but may not expand its digital banking business as originally planned.

Results of Operations

Three months ended June 30, 2016 and 2015

We recorded a net loss of $785,164, or $0.04 per diluted share, for the quarter ended June 30, 2016, compared to a net loss of $1.4 million, or $0.07 per diluted share, for the quarter ended June 30, 2015. This decrease in net loss between comparable periods was primarily driven by decreases in research and development and compensation expense, partially offset by increases in professional fees and expenses related to real estate owned. Each of these components is discussed in greater detail below.

The following table sets forth information related to our average balances, average yields on assets, and average costs of liabilities for the three months ended June 30, 2016 and 2015. We derived these yields by dividing annualized income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. The net amount of capitalized loan fees are amortized into interest income on loans.

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		For the Three Months Ended June 30,
		2016								2015
		Average			Income/			Yield/		Average			Income/			Yield/
		Balance			Expense			Rate		Balance			Expense			Rate
Federal funds sold and other		$	9,286,750		$	16,223		0.70%		$	7,667,525		$	12,744		0.67%
Investment securities			10,540,497			65,886		2.51			14,960,953			84,908		2.28
Loans (1)			64,465,159			845,208		5.26			66,795,796			830,994		4.99
Total interest-earning assets		$	84,292,406		$	927,317		4.41%		$	89,424,274		$	928,646		4.17%
NOW accounts		$	8,634,931		$	2,547		0.12%		$	8,444,540		$	2,568		0.12%
Savings & money market			32,874,510			20,039		0.24			35,718,242			20,966		0.24
Time deposits (excluding brokered
time deposits)			27,255,453			57,704		0.85			30,203,451			56,396		0.75
Total interest-bearing deposits			68,764,894			80,290		0.47			74,366,233			79,930		0.43
Borrowings			149,346			59		0.16			303,183			3,052		4.04
Total interest-bearing liabilities		$	68,914,240		$	80,349		0.47%		$	74,669,416		$	82,982		0.45%
Net interest spread								3.94%								3.72%
Net interest income/ margin					$	846,968		4.03%					$	845,664		3.79%

(1)     Nonaccrual loans are included in average balances for yield computations.

For the three months ended June 30, 2016, we recognized $927,317 in interest income and $80,349 in interest expense, resulting in net interest income of $846,968, an increase of $1,304, or 0.2%, over the same period in 2015. Average earning assets decreased to $84.3 million for the three months ended June 30, 2016 from $89.4 million for the three months ended June 30, 2015, a decrease of $5.1 million, or 5.7%. This decrease in earning assets was primarily due to a $4.4 million decrease in average investment securities and a $2.3 million decrease in average loans between periods as a result of payoffs and repayments exceeding originations, partially offset by an $1.6 million increase in average federal funds sold and other interest-bearing balances. Average interest bearing liabilities decreased to $68.9 million during the quarter ended June 30, 2016, from $74.7 million for the three months ended June 30, 2015, a decrease of $5.8 million, or 7.7%. Net interest margin, calculated as annualized net interest income divided by average earning assets, increased from 3.79% for the quarter ended June 30, 2015 to 4.03% for the quarter ended June 30, 2016, primarily due to an increase in yield on earning assets from 4.17% to 4.41% between periods and an increase in cost of funds from 0.45% to 0.47% between periods due to the mix of liabilities and the timing of their repricing.

We did not recognize any provision for loan losses for the quarters ended June 30, 2016 and 2015. The allowance as a percentage of gross loans decreased to 1.33% as of June 30, 2016 compared to 1.50% at June 30, 2015. Specific reserves were approximately $128,000 on impaired loans of $1.2 million as of June 30, 2016 compared to specific reserves of approximately $57,000 on impaired loans of $1.8 million as of June 30, 2015. As of June 30, 2016 and December 31, 2015, the general reserve allocation was 1.15% and 1.17%, respectively, of gross loans not impaired.

For the three months ended June 30, 2016, noninterest income was $86,374 compared to $109,169 for the three months ended June 30, 2015, a decrease of $22,795, or 20.9%. Other noninterest income for the three months ended June 30, 2016 and 2015 was derived from service charges on deposits, customer service fees, and mortgage origination income. The primary contributor for this quarter’s decrease was due to a decrease in mortgage origination income of $20,707.

During the quarter ended June 30, 2016, we incurred noninterest expenses of $1.7 million, compared to noninterest expenses of $2.3 million for the quarter ended June 30, 2015, a decrease of $593,594, or 25.7%. This decrease in noninterest expenses for the three month period ended June 30, 2016 primarily resulted from a decrease in product research and development expenses of $656,530 and a decrease in compensation and benefits expense of $91,724, partially offset by an increase of $104,378 in real estate owned activity which includes expenses to carry other real estate, gains and losses on sales of other real estate, and write-downs on real estate owned, and an increase in professional fees of $29,425. Compensation and benefits decreased $91,724 due to changes in staffing levels year over year for the quarter ended June 30, 2016.

We did not recognize any income tax benefit or expense for the three month period ended June 30, 2016 due to our net operating loss carryforward position. We did not recognize any income tax benefit or expense for the three months ended June 30, 2015 due to our net operating loss in 2015 at the Bank. Accounting literature states that a deferred tax asset should be reduced by a valuation allowance if, based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The determination of whether a deferred tax asset is realizable is based on weighing all available evidence, including both positive and negative evidence. In making such judgments, significant weight is given to evidence that can be objectively verified. We will continue to analyze our deferred tax assets and related valuation allowance on a quarterly basis, taking into account performance compared to forecasted earnings as well as current economic and internal information.

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Six months ended June 30, 2016 and 2015

We recorded a net loss of $1.1 million or $0.05 per diluted share, for the six months ended June 30, 2016, a decrease in loss of $635,314 compared to a net loss of $1.7 million, or $0.08 per diluted share, for the six months ended June 30, 2015. This decrease in loss between comparable periods was primarily driven by decreases in product research and development expense and compensation expense real estate owned activity as well as due to an increase in non-interest income and the reversal of provision for loan losses. Each of these components is discussed in greater detail below.

The following table sets forth information related to our average balances, average yields on assets, and average costs of liabilities for the six months ended June 30, 2016 and 2015. We derived these yields by dividing annualized income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. The net amount of capitalized loan fees is amortized into interest income on loans.

		For the Six Months Ended June 30,
		2016								2015
		Average			Income/			Yield/		Average			Income/			Yield/
		Balance			Expense			Rate		Balance			Expense			Rate
Federal funds sold and other		$	10,015,928		$	32,865		0.66%		$	5,606,078		$	22,032		0.79%
Investment securities			10,618,273			134,084		2.54			15,195,669			179,546		2.39
Loans (1)			65,181,990			1,675,420		5.17			67,574,879			1,658,458		4.96
Total interest-earning assets		$	85,816,191		$	1,842,369		4.32%		$	88,376,626		$	1,860,036		4.26%
NOW accounts		$	8,660,208		$	5,139		0.12%		$	8,046,969		$	4,814		0.12%
Savings & money market			33,501,068			40,892		0.25			35,908,680			41,783		0.24
Time deposits (excluding brokered
time deposits)			27,356,012			112,872		0.83			29,397,861			108,289		0.74
Total interest-bearing deposits			69,517,287			158,903		0.46			73,353,510			154,886		0.43
Borrowings			104,917			78		0.15			976,516			13,387		2.77
Total interest-bearing liabilities		$	69,622,204		$	158,981		0.46%		$	74,330,026		$	168,273		0.46%
Net interest spread								3.86%								3.80%
Net interest income/ margin					$	1,683,388		3.94%					$	1,691,763		3.87%

(1)     Nonaccrual loans are included in average balances for yield computations.

For the six months ended June 30, 2016, we recognized $1.8 million in interest income and $158,981 in interest expense, resulting in net interest income of $1.7 million, a slight decrease of $8,375, or 0.5%, over the same period in 2015. Average earning assets decreased to $85.8 million for the six months ended June 30, 2016 from $88.4 million for the six months ended June 30, 2015 a decrease of $2.6 million, or 2.9%. This decrease in earning assets was due to a $4.6 million decrease in average investment securities and a decrease in average loans of $2.4 million between periods as a result of payoffs and repayments exceeding originations, partially offset by a $4.4 million increase in average federal funds sold. Average interest bearing liabilities decreased to $69.6 million for the six months ended June 30, 2016 from $74.3 million for the six months ended June 30, 2015 a decrease of $4.7 million, or 6.3%. Net interest margin, calculated as annualized net interest income divided by average earning assets increased to 3.94% for the six months ended June 30, 2016, primarily due to a slight decrease in yield on earning assets from 4.26% to 4.32% between periods.

We recognized a reversal of provision for loan losses of $68,000 for the six months ended June 30, 2016. No provisions for loan losses were recognized for the six months ended June 30, 2015. The provision for loan losses is discussed further below under “Provision and Allowance for Loan Losses.”

For the six months ended June 30, 2016, noninterest income was $284,809 compared to $253,375 for the six months ended June 30, 2015, an increase of $31,434, or 11.0% between comparable periods. Noninterest income for the six months ended June 30, 2016 and 2015 was derived from service charges on deposits, customer service fees, rental income, and mortgage origination income. In addition, noninterest income for June 2016 was positively impacted by the collection of SBA loan fees of $119,306. Noninterest income for June 2015 was also impacted by the recognition of gains on sales of investment securities recognized in the six month period.

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During the six months ended June 30, 2016, we incurred noninterest expenses of $3.1 million, compared to noninterest expenses of $3.7 million for the six months ended June 30, 2015, a decrease of $539,175, or 14.7%. This decrease in noninterest expenses resulted primarily from a decrease in product research and development expenses of $751,980 and a decrease in compensation and benefits of $78,344, partially offset by an increase in real estate owned activity of $105,359 and an increase in professional fees of $142,190 due to an increase in consulting fees at the Company. Compensation and benefits decreased by $78,344 due to shortages in personnel at the Bank.

We recognized $5,080 in income tax expense for the six months ended June 30, 2015 due to our net operating income at the Bank. We did not recognize any income tax benefit or expense for the six months ended June 30, 2016 due to our net operating loss carryforward position.

Assets and Liabilities

General

Total assets as of June 30, 2016 and December 31, 2015 were $92.5 million and $97.5 million, respectively, a decrease of $5.0 million. Loans, net of allowance decreased $3.3 million due to loan repayments and transfers to other real estate owned during the quarter. Other real estate owned increased $1.0 million due to three loan transfers for $1.3 million, partially offset by the sale of one piece of real estate during the period for proceeds of $36,000 as well as the writedown of one loan of $183,522. Investment securities available for sale decreased $215,414 as a result of $354,220 in paydowns and $79,069 in amortization, partially offset by a $217,875 change in unrealized gains. Cash and cash equivalents decreased $3.9 million and federal funds sold decreased $1.3 million. At June 30, 2016, our total assets consisted principally of $1.6 million in cash and due from banks, $7.2 million in fed funds sold, $1.8 million in interest-bearing deposits in other institutions, $10.5 million in investment securities, $63.1 million in net loans, $2.1 million in property and equipment and $3.0 million in other real estate owned and repossessed assets. Our management closely monitors and seeks to maintain appropriate levels of interest-earning assets and interest-bearing liabilities so that maturities of assets are such that adequate funds are provided to meet customer withdrawals and demand.

Liabilities at June 30, 2016 totaled $80.8 million, representing a decrease of approximately $4.0 million compared to December 31, 2015, and consisted principally of $80.0 million in deposits and $723,099 in accounts payable and accrued expenses. At June 30, 2016, shareholders’ equity was $11.7 million compared to $12.6 million at December 31, 2015. Shareholders’ equity decreased due to the recognition of net loss of $1.1 million, and stock option expense of $10,128, as well as an increase of $143,798 in unrealized gains on investment securities available for sale.

Loans

Since loans typically provide higher interest yields than other types of interest-earning assets, we invest a substantial percentage of our earning assets in our loan portfolio. At June 30, 2016, our gross loan portfolio consisted primarily of $30.5 million of commercial real estate loans, $18.3 million of commercial business loans, and $15.5 million of consumer and home equity loans. Our current loan portfolio composition is not materially different than the loan portfolio composition disclosed in the footnotes to the consolidated financial statements included in our 2015 Form 10-K. We experienced net repayments of $2.1 million during the six months ended June 30, 2016 as a result of payoffs and repayments exceeding originations, while continuing to carefully consider liquidity needs and credit risk management.

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The composition of net loans by major category is as follows:

		June 30, 2016			% of Total
Real estate:
Commercial		$	21,294,774		33.3%
Construction and development			9,203,748		14.4
Single and multifamily residential			13,535,289		21.1
Total real estate loans			44,033,811		68.8
Commercial business			18,314,397		28.6
Consumer			1,810,698		2.8
Deferred origination fees, net			(179,526)		(0.2)
Gross loans, net of deferred fees			63,979,380		100.0%
Less allowance for loan losses			(853,137)
Loans, net		$	63,126,243
		December 31, 2015			% of Total
Real estate:
Commercial		$	25,559,943		37.8%
Construction and development			7,286,459		10.8
Single and multifamily residential			16,434,722		24.3
Total real estate loans			49,281,124		72.9
Commercial business			17,027,054		25.2
Consumer			1,369,224		2.1
Deferred origination fees, net			(135,647)		(0.2)
Gross loans, net of deferred fees			67,541,755		100.0%
Less allowance for loan losses			(1,139,509)
Loans, net		$	66,402,246

The largest component of our loan portfolio at June 30, 2016 was $21.3 million of commercial real-estate loans, which represented 33.3% of the portfolio. The remainder of our loan portfolio consisted primarily of $13.5 million of single and multifamily residential loans, $9.2 million of construction and development loans, and $18.3 million of commercial business loans.

Loan Performance and Asset Quality

The downturn in general economic conditions during the late 2000s resulted in increased loan delinquencies, defaults and foreclosures within our loan portfolio, although the last 24 months have seen a stabilization in delinquencies, defaults and foreclosures and an increase in recoveries. The declining real estate market had a significant impact on the performance of our loans secured by real estate. In some cases, the downturn resulted in significant impairment to the value of our collateral and our ability to sell the collateral upon foreclosure. Although the real estate collateral provides an alternate source of repayment in the event of default by the borrower, collateral values deteriorated during the downturn, resulting in credit losses. There is a risk that this trend will continue, which could result in additional loss of earnings, increases in our provision for loan losses and loan charge-offs.

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Past due payments are often one of the first indicators of a problem loan. We perform a continuous review of our past due report in order to identify trends that can be resolved quickly before a loan becomes significantly past due. We determine past due and delinquency status based on the contractual terms of the note. When a borrower fails to make a scheduled loan payment, we attempt to cure the default through several methods including, but not limited to, collection contact and assessment of late fees. Generally, a loan will be placed on nonaccrual status when it becomes 90 days past due as to principal or interest (unless the loan is well-collateralized and in the process of collection), or when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful. When a loan is placed in nonaccrual status, interest accruals are discontinued and income earned but not collected is reversed. Cash receipts on nonaccrual loans are not recorded as interest income, but are used to reduce principal.

Refer to Note 5, Loans, for a table summarizing delinquencies and nonaccruals, by portfolio class, as of June 30, 2016 and December 31, 2015. Total delinquent and nonaccrual loans decreased from $2.1 million at December 31, 2015 to $334,233 at June 30, 2016, a decrease of $1.7 million, or 83.7%. Nonaccrual loans decreased during the six months due to the transfer of three loans during the period. At June 30, 2016, nonaccrual loans represented 0.5% of gross loans compared to 2.46% of gross loans as of December 31, 2015. Loans past due 30-89 days are considered potential problem loans and amounted to $389,970 at December 31, 2015. There were no loans past due 30-89 days for the six months ended June 30, 2016.

Another method used to monitor the loan portfolio is credit grading. As part of the loan review process, loans are given individual credit grades, representing the risk we believe is associated with the loan balance. Credit grades are assigned based on factors that impact the collectability of the loan, the strength of the borrower, the type of collateral, and loan performance. Commercial loans are individually graded at origination and credit grades are reviewed on a regular basis in accordance with our loan policy. Consumer loans are assigned a “pass” credit rating unless something within the loan warrants a specific classification grade. Refer to Note 5, Loans, for a table summarizing management’s internal credit risk grades, by portfolio class, as of June 30, 2016 and December 31, 2015.

Loans graded one through four are considered “pass” credits. At June 30, 2016, approximately 96% of the loan portfolio had a credit grade of “pass” compared to 93% at December 31, 2015. For loans to qualify for this grade, they must be performing relatively close to expectations, with no significant departures from the intended source and timing of repayment. Consumer loans are assigned a “pass” credit rating unless something within the loan warrants a specific classification grade.

Loans with a credit grade of five are not considered classified; however they are categorized as a special mention or watch list credit, and are considered potential problem loans. This classification is utilized by us when we have an initial concern about the financial health of a borrower. These loans are designated as such in order to be monitored more closely than other credits in our portfolio. We then gather current financial information about the borrower and evaluate our current risk in the credit. We will then either reclassify the loan as “substandard” or back to its original risk rating after a review of the information. There are times when we may leave the loan on the watch list, if, in management’s opinion, there are risks that cannot be fully evaluated without the passage of time, and we determine to review the loan on a more regular basis. Loans on the watch list are not considered problem loans until they are determined by management to be classified as substandard. As of June 30, 2016 and December 31, 2015, we had loans totaling $973,485 and $1.6 million, respectively, on the watch list. Watch list loans remained relatively constant as no new loans were downgraded during the quarter.

Loans graded six or greater are considered classified credits. At June 30, 2016 and December 31, 2015, classified loans totaled $1.4 million and $2.9 million, respectively. The decrease in this category of $1.5 million, or 51.5%, during the six months ended June 30, 2016 is primarily due to three loans moving to other real estate owned for $1.3 million as well as approximately $178,000 in loan paydowns. Classified credits are evaluated for impairment on a quarterly basis.

A loan is considered impaired when, based on current information and events, we conclude it is probable that we will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan-by-loan basis by calculating either the present value of expected future cash flows discounted at the 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 resultant shortfall is charged to provision for loan losses and is classified as a specific reserve. When an impaired loan is ultimately charged-off, the charge-off is taken against the specific reserve.

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At June 30, 2016, impaired loans totaled $1.2 million, all of which were valued on a nonrecurring basis at the lower of cost or market value of the underlying collateral. Market values were obtained using independent appraisals, updated in accordance with our reappraisal policy, or other market data such as recent offers to the borrower. As of June 30, 2016, we had one loan totaling $231,603 that was classified in accordance with our loan rating policies but was not considered impaired. Refer to Note 5, Loans, for a table summarizing information relative to impaired loans, by portfolio class, at June 30, 2016 and December 31, 2015.

TDRs are loans which have been restructured from their original contractual terms and include concessions that would not otherwise have been granted outside of the financial difficulty of the borrower. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges in the current economic environment. The purpose of a TDR is to facilitate ultimate repayment of the loan.

At June 30, 2016 the principal balance of TDRs was approximately $138,000. At December 31, 2015, the principal balance of TDRs was zero as the one loan constituting our sole TDR had been transferred to other real estate owned. As of June 30, 2016, the carrying balance consisted of one performing loan. The loan defaulted in 2015, but was made current in 2016. There were no changes to the loan terms as the loan is scheduled to mature in July 2016.

Provision and Allowance for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged to expense on our consolidated statement of operations. At June 30, 2016, the allowance for loan losses was $853,137, or 1.33% of gross loans, compared to $1.1 million at December 31, 2015, or 1.68% of gross loans. The allowance for loan loss decreased due to the reversal of provision of $68,000 that was recognized during the first quarter of 2016, as well as due to a small recovery on loan loss of $1,312 and due to the charge off of one loan for $209,045 which was specifically reserved at December 31, 2015.

The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. We strive to follow a comprehensive, well-documented, and consistently applied analysis of our loan portfolio in determining an appropriate level for the allowance for loan losses. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on what we believe are all significant factors that impact the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, economic conditions that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider subjective issues such as changes in lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and Board of Director oversight, concentrations of credit, and peer group comparisons.

Our allowance for loan losses consists of both specific and general reserve components. The specific reserve component relates to loans that are impaired loans as defined in FASB ASC Topic 310, “Receivables”. Loans determined to be impaired are excluded from the general reserve calculation described below and evaluated individually for impairment. Impaired loans totaled $1.2 million at June 30, 2016, with an associated specific reserve of $127,634. See Note 5, Loans, as well as the above discussion under “Loan Performance and Credit Quality” for additional information related to impaired loans.

The general reserve component covers non-impaired loans and is calculated by applying historical loss factors to each sector of the loan portfolio and adjusting for qualitative environmental factors. Qualitative adjustments are used to adjust the historical average for changes to loss indicators within the economy, our market, and specifically our portfolio. The general reserve component is then combined with the specific reserve to determine the total allowance for loan losses.

Refer to Note 5, Loans, for a table summarizing activity related to our allowance for loan losses for the quarter ended June 30, 2016 and 2015, by portfolio segment. As of June 30, 2016, the allowance for loan losses was $853,137, or 1.33% of gross loans, compared to $1.1 million, or 1.68% of gross loans, as of December 31, 2015 and $989,509, or 1.50% of gross loans, as of June 30, 2015. We recognized a reversal of provision for loan losses of $68,000 for the six months ended June 30, 2016. We did not recognize any provision for loan losses for the six months ended June 30, 2015. Net charge-offs for the six months ended June 30, 2016 were $219,684. A net recovery of $1,312 was recognized for the six months ended June 30, 2016. The charge-offs during the six months ended June 30, 2016 related to the write-down of collateral to fair value, against specific reserves, at the time of repossession. Partial charge-offs were based on recent appraisals and evaluations on commercial real estate loans in the process of foreclosure. Loans with partial charge-offs are typically considered impaired loans and remain on nonaccrual status.

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Other Real Estate Owned and Repossessed Assets

At June 30, 2016 and December 31, 2015, we had approximately $3.0 and $1.9 million in other real estate owned, respectively. During the six months ended June 30, 2016, we completed the sale of one parcel of real estate. The sale of that parcel of real estate resulted in a gain of approximately $4,680 and is included in the loss below. The following table summarizes changes in other real estate owned and repossessed assets for the six months ended June 30, 2016 and 2015:

As of June 30, 2016, other real estate owned consisted of commercial land valued at $1.1 million, commercial office space valued at $1.9 million and residential land valued at approximately $30,000. During 2015, other real estate owned for the Company decreased due to the sale of real estate owned that were purchased from the Bank for proceeds of approximately $455,000, which resulted in a gain of approximately $17,000 to the Company. Real estate owned also decreased due to the sale of two pieces of real estate held by the Bank for proceeds of approximately $143,000, which resulted in a loss of approximately $5,200. In addition, the Company recognized writedowns on real estate owned of approximately $377,000 during 2015. The remaining pieces of real estate owned that were purchased from the Bank are being actively marketed for sale. One piece of real estate was moved to other real estate owned in March for $300,000, and subsequently written down by $30,000. On January 28, 2016, proceeds of $36,000 were received from the sale of one piece of real estate held by the Company. A loss of $4,680 was recognized as a result of this transaction. In March 2016, one piece of real estate was moved to other real estate owned for $233,767. In May 2016, two pieces of real estate were moved to other real estate owned for $1.0 million. In addition, the Company recognized writedowns on real estate owned of approximately $184,000 during 2016. These assets are being actively marketed with the primary objective of liquidating the collateral at a level which most accurately approximates fair value and allows recovery of as much of the unpaid principal loan balance as possible upon the sale of the asset within a reasonable period of time. Based on currently available valuation information, the carrying value of these assets is believed to be representative of their fair value less estimated costs to sell, although there can be no assurance that the ultimate proceeds from the sale of these assets will be equal to or greater than their carrying values, particularly in the current real estate environment.

Deposits

Our primary source of funds for loans and investments is our deposits. At June 30, 2016, we had $80.0 million in deposits, representing a decrease of $3.6 million compared to December 31, 2015. Deposits at June 30, 2016 consisted primarily of $20.1 million in demand deposit accounts, $31.4 million in money market accounts and $28.5 million in time deposits. As brokered deposits and advances have matured, we have not replaced these funds with wholesale funding as we have sought to reduce our reliance on brokered time deposits and other noncore funding sources. Our loan-to-deposit ratio was 78.9% and 79.4% at June 30, 2016 and December 31, 2015, respectively.

Borrowings

We use borrowings to fund growth of earning assets in excess of deposit growth. At June 30, 2016 and December 31, 2015, there were $49,357 and $113,080, respectively, in borrowings representing customer repurchase agreements.

Liquidity

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.

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The Consolidated Company

The Company’s level of liquidity is measured by the cash, cash equivalents, and investment securities available for sale to total assets ratio and was 22.7% at June 30, 2016 compared to 26.7% as of December 31, 2015. The decrease in liquidity is due primarily to the decrease in cash and due from bank and federal funds sold.

The Bank

Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity at the Bank. We currently have $8.9 million in cash and fed funds sold. If our cash needs at the Bank exceed that, we plan to liquidate temporary investments and generate deposits within our market. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. Our investment securities available for sale at June 30, 2016 amounted to $10.5 million, or 11.4% of total assets. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. At June 30, 2016, $2.5 million of our investment portfolio was pledged against outstanding debt. Therefore, the related debt would need to be repaid prior to the securities being sold and converted to cash.

The Bank is a member of the FHLB, from which applications for borrowings can be made for leverage purposes. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. At June 30, 2016, we had collateral that would support approximately $34.1 million in additional borrowings. We are subject to the FHLB’s credit risk rating policy which assigns member institutions a rating which is reviewed quarterly. The rating system utilizes key factors such as loan quality, capital, liquidity, profitability, etc. Our ability to access our available borrowing capacity from the FHLB in the future is subject to our rating and any subsequent changes based on our financial performance as compared to factors considered by the FHLB in their assignment of our credit risk rating each quarter.

The Bank also pledges collateral to the Federal Reserve Bank’s Borrower-in-Custody of Collateral program, and our available credit under this program was $12.1 million as of June 30, 2016.

The Bank has a $2.0 million federal funds purchased line of credit through a correspondent bank that is unsecured, but has not been utilized.

We believe our liquidity sources are adequate to meet our operating needs at the Bank. However, we continue to carefully focus on liquidity management during 2016. Comprehensive weekly and monthly liquidity analyses serve management as vital decision-making tools by providing summaries of anticipated changes in loans, investments, core deposits, and wholesale funds. These internal funding reports provide management with the details critical to anticipate immediate and long-term cash requirements, such as expected deposit runoff, loan pay downs and amount and cost of available borrowing sources, including secured overnight federal funds lines with our various correspondent banks.

The Company

The Company’s cash balances, independent of the Bank, were approximately $1.8 million and its real estate held for sale was $600,000 at June 30, 2016 compared to cash balances of approximately $2.9 million and real estate held for sale of $631,320 at December 31, 2015. The decrease in liquid assets of approximately $1.2 million is due primarily to the repayment of accrued liabilities during the quarter as well as approximately $180,000 in expenses incurred related to the transaction services segment, approximately $117,000 in other real estate owned expenses incurred related to the asset management segment, and approximately $510,000 in professional fees and data processing expenses incurred at the Company. See “Note 8 – Business Segments” for additional information related to the transaction services segment. The foregoing discussion is a summary only and should be read in conjunction with the 2015 Form 10-K as filed with the SEC and Management’s Discussion and Analysis in this Form 10-Q.

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Impact of Off-Balance Sheet Instruments

Through the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At June 30, 2016, we had issued commitments to extend credit of $8.2 million through various types of lending arrangements. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.

Capital Resources

Total shareholders' equity decreased from $12.6 million for December 31, 2015 to $11.7 million for June 30, 2016 due to a net loss of $1.1 million and stock option expense of $10,128, as well as an increase of $143,798 in unrealized gains on investment securities available for sale. The foregoing discussion is a summary only and should be read in conjunction with the 2015 Form 10-K as filed with the SEC and Management’s Discussion and Analysis in this Form 10-Q.

Our Bank and Company are subject to various regulatory capital requirements administered by the federal banking agencies. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.

The Basel III capital rules, which were released in July 2013, implement new capital standards and apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies with $500 million or more in total consolidated assets. The requirements of the rules began to phase in on January 1, 2015 for the Bank, and the requirements of the rules will be fully phased in by January 1, 2019. Under the rules, the following minimum capital requirements apply to the Bank:

●	a new common equity Tier 1 risk-based capital ratio of 4.5%,
●	a Tier 1 risk-based capital ratio of 6% (increased from the former 4% requirement),

●	a total risk-based capital ratio of 8% (unchanged from the former requirement), and
●	a leverage ratio of 4% (also unchanged from the former requirement).

Because the Company’s total assets were less than $500 million at December 31, 2015, the Company is not subject to the new capital requirements established by the Basel III capital rules. In addition, pursuant to the Federal Reserve’s Small Bank Holding Company Policy, which was amended in 2014, the Federal Reserve exempts certain bank holding and savings and loan holding companies from the capital requirements discussed above. The exemption applies only to bank holding companies with less than $1 billion (formerly $500 million) in consolidated assets that: (i) are not engaged in significant nonbanking activities either directly or through a nonbank subsidiary; (ii) do not conduct significant off-balance sheet activities (including securitization and asset management or administration) either directly or through a nonbank subsidiary; and (iii) do not have a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the SEC. The Company qualifies for this exemption and, thus, is required to meet applicable capital standards on a bank-only basis. However, bank holding companies with assets of less than $1 billion are subject to various restrictions on debt including requirements that debt be retired within 25 years of being incurred, that the debt to equity ratio is 0.30 to 1 within 12 years of the incurrence of debt and that dividends generally cannot be paid if the debt to equity ratio exceeds 1 to 1.

Under the rule, Tier 1 capital is redefined to include two components: Common Equity Tier 1 capital and additional Tier 1 capital. The new and highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital includes other perpetual instruments historically included in Tier 1 capital, such as noncumulative perpetual preferred stock. Tier 2 capital consists of instruments that currently qualify in Tier 2 capital plus instruments that the rule has disqualified from Tier 1 capital treatment. Cumulative perpetual preferred stock, formerly includable in Tier 1 capital, is now included only in Tier 2 capital. Accumulated other comprehensive income (AOCI) is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. The rule provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI. We made this opt-out election and, as a result, will retain the pre-existing treatment for AOCI.

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In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three measurements (Common Equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer will be phased in incrementally over time, becoming fully effective on January 1, 2019, and will consist of an additional amount of common equity equal to 2.5% of risk-weighted assets. As of January 1, 2016, the Bank is required to hold a capital conservation buffer of 0.625%, increasing by that amount each successive year until 2019.

Under the regulations adopted by the federal regulatory authorities, the Bank will be categorized as:

●

Well capitalized if the institution (i) has total risk-based capital ratio of 10% or greater, (ii) has a Tier 1 risk-based capital ratio of 8% or greater, (iii) has a common equity Tier 1 risk-based capital ratio of 6.5% or greater, (iv) has a leverage capital ratio of 5% or greater, and (v) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.

●

Adequately capitalized if the institution (i) has a total risk-based capital ratio of 8% or greater, (ii) has a Tier 1 risk-based capital ratio of 6% or greater, (iii) has a common equity Tier 1 risk-based capital ratio of 4.5% or greater, and (iv) has a leverage capital ratio of 4% or greater.

●	Undercapitalized if the institution (i) has a total risk-based capital ratio of less than 8%, (ii) has a Tier 1 risk-based capital ratio of less than 6%, (iii) has a common equity Tier 1 risk-based capital ratio of less than 4.5% or greater, or (iv) has a leverage capital ratio of less than 4%.
●	Significantly undercapitalized if the institution (i) has a total risk-based capital ratio of less than 6%, (ii) has a Tier 1 risk-based capital ratio of less than 4%, (iii) has a common equity Tier 1 risk-based capital ratio of less than 3% or greater, or (iv) has a leverage capital ratio of less than 3%.
●	Critically undercapitalized if the institution has a ratio of tangible equity to total assets that is equal to or less than 2%.

In addition, the Bank may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. The Bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the Bank’s overall financial condition or prospects for other purposes.

The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements at June 30, 2016 and December 31, 2015. It is management’s belief that, as of June 30, 2016, the Bank met all capital adequacy requirements under Basel III on a fully phased-in basis if such requirements were currently in effect.

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												To be well capitalized
												under prompt
							For capital adequacy					corrective action
							purposes					provisions
		Actual					Minimum					Minimum
		Amount			Ratio		Amount			Ratio		Amount			Ratio
As of June 30, 2016
Total Capital (to risk
weighted assets)		$	10,235,000		13.1%		$	6,263,000		8.0%		$	7,829,000		10.0%
Tier 1 Capital (to risk
weighted assets)			9,382,000		12.0			3,132,000		4.0			4,698,000		6.0
Tier 1 Capital (to
average assets)			9,382,000		10.3			3,661,000		4.0			4,576,000		5.0
Common Equity Tier
1 Capital (to risk
weighted assets)			9,382,000		12.0			3,523,000		4.5			3,523,000		4.5
As of December 31, 2015
Total Capital (to risk
weighted assets)		$	10,598,000		14.1%		$	6,029,000		8.0%		$	7,536,000		10.0%
Tier 1 Capital (to risk
weighted assets)			9,653,000		12.8			3,014,000		4.0			4,521,000		6.0
Tier 1 Capital (to
average assets)			9,653,000		10.0			3,875,000		4.0			4,844,000		5.0
Common Equity Tier
1 Capital (to risk
weighted assets)			9,653,000		12.8			3,391,000		4.5			3,391,000		4.5

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management, including our interim Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our interim Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our interim Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the quarter ended June 30, 2016, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II - Other Information

Item 1. Legal Proceedings

We are a party to claims and lawsuits arising in the ordinary course of business. Management is not aware of any material pending legal proceedings against the Company which, if determined adversely, would have a material adverse impact on the Company’s financial position, results of operations or cash flows.

Item 1A. Risk Factors

As a “smaller reporting company”, as defined in Rule 12b-2 of the Exchange Act, the Company is not required to provide the information requested by Part II, Item 1A of Form 10-Q.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable

Item 3. Default Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable

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Item 6. Exhibits

The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index attached hereto and are incorporated by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Date: August 10, 2016	By:	/s/Lawrence R. Miller
		Lawrence R. Miller
		Interim Chief Executive Officer
		(Principal Executive Officer)
		By:	/s/Martha L. Long
		Martha L. Long
		Chief Financial Officer
		(Principal Financial Officer and Accounting Officer)

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EXHIBIT INDEX

Exhibit
Number		Description
31.1		Rule 13a-14(a) Certification of the Principal Executive Officer.
31.2		Rule 13a-14(a) Certification of the Principal Financial Officer.
32		Section 1350 Certification.

101 The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, formatted in eXtensible Business Reporting Language (XBRL); (i) Consolidated Balance Sheets at June 30, 2016 and December 31, 2015, (ii) Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2016 and 2015, (iii) Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended June 30, 2016 and 2015, (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015, and (v) Notes to Consolidated Financial Statements.

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