Exhibit 99.1

 

Independent Auditor’s Report

Board of Directors

Community First Bancshares, Inc.

Harrison, Arkansas

We have audited the accompanying consolidated financial statements of Community First Bancshares, Inc. and its subsidiary, which comprise the consolidated balance sheets as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Community First Bancshares, Inc. and its subsidiary as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

Little Rock, Arkansas

March 23, 2016

 

6311 Ranch Drive

Little Rock, Arkansas 72223

501.868.7486

fax 501.868.7750

www.erwinco.com

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COMMUNITY FIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2015 and 2014

 

		2015				2014
ASSETS
Cash and due from banks		$	17,095,692			$	28,591,842
Investment securities available-for-sale			74,017,211				79,159,919
Investment securities held-to-maturity			6,640,943				6,811,257
Investment in White River Bancshares Company			7,985,528				7,761,727
Investment in Federal Home Loan Bank stock, at cost			908,400				1,625,500
Loans held-for-sale			1,043,463				427,000
Loans, net of allowance for loan losses			347,419,512				343,686,531
Premises and equipment, net			12,480,917				13,051,363
Accrued interest receivable			2,057,108				2,249,843
Foreclosed assets held for sale			5,336,212				8,529,451
Deferred income taxes			2,997,773				3,330,024
Other assets			1,953,709				1,493,822
		$	479,936,468			$	496,718,279
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing demand		$	34,473,980			$	35,663,810
Interest bearing demand			205,327,388				191,831,319
Savings			48,288,878				46,700,807
Time deposits under $100,000			64,674,084				66,210,176
Time deposits $100,000 and over			41,209,362				49,498,546
Total deposits			393,973,692				389,904,658
Borrowings—Federal Home Loan Bank			17,562,726				29,677,211
Borrowings—other			10,012,146				10,743,388
Subordinated debentures			5,155,000				5,155,000
Accrued interest payable			397,940				391,518
Other liabilities			959,492				1,044,386
Total liabilities			428,060,996				436,916,161
Stockholders’ equity:
Preferred stock, Series A			—				899
Preferred stock, Series B			—				55
Common stock			38,535				42,244
Surplus			11,336,115				24,812,941
Retained earnings			40,774,186				34,976,019
Accumulated other comprehensive loss			(273,364	)			(30,040	)
Total stockholders’ equity			51,875,472				59,802,118
		$	479,936,468			$	496,718,279

See accompanying notes

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COMMUNITY FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

For the years ended December 31, 2015 and 2014

 

		2015				2014
Interest income:
Loans, including fees		$	20,341,923			$	20,349,694
Investment securities			2,252,640				2,436,718
Federal funds sold and time deposits in other institutions			19,204				14,301
Other			5,552				5,481
Total interest income			22,619,319				22,806,194
Interest expense:
Deposits			1,912,450				1,994,995
Borrowings			847,970				1,004,783
Total interest expense			2,760,420				2,999,778
Net interest income			19,858,899				19,806,416
Provision for loan losses			140,000				837,500
Net interest income after provision for loan losses			19,718,899				18,968,916
Non-interest income:
Service charges on deposits			1,735,426				1,836,693
Fees and commissions			1,519,505				1,741,399
Equity in earnings of White River Bancshares Company			339,977				176,166
Net gains on investment securities			66,384				62,221
Losses on foreclosed assets held for sale			(839,340	)			(1,736,035	)
Other			819,065				677,727
			3,641,017				2,758,171
Non-interest expense:
Salaries and benefits			7,904,316				7,789,274
Occupancy			1,070,596				1,037,838
Furniture and equipment			1,296,686				1,380,412
Advertising and public relations			293,098				271,126
Outside services			1,311,189				1,156,796
Loan and collection			355,638				970,478
Stationary and supplies			220,350				201,153
Telephone			125,648				112,492
Postage and freight			200,018				200,352
Directors’ fees			183,800				181,700
FDIC and state assessments			446,877				471,073
Other			998,940				996,060
			14,407,156				14,768,754
Income before income taxes			8,952,760				6,958,333
Provision for income taxes			2,598,618				1,503,317
Net income		$	6,354,142			$	5,455,016

See accompanying notes

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COMMUNITY FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the years ended December 31, 2015 and 2014

 

		2015				2014
Net income		$	6,354,142			$	5,455,016
Other comprehensive income (loss):
Net unrealized holding gains (losses) on investment securities arising during the year, net of deferred income taxes of $(86,983) and $861,485, respectively			(168,850	)			1,672,293
Reclassification adjustment for realized gains included in net income, net of deferred income taxes of $22,571 and $21,155, respectively			(43,813	)			(41,066	)
Other comprehensive loss attributable to investment in White River Bancshares Company			(30,661	)			171,599
Other comprehensive income (loss)			(243,324	)			1,802,826
Comprehensive income		$	6,110,818			$	7,257,842

See accompanying notes

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COMMUNITY FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the years ended December 31, 2015 and 2014

 

		Preferred Stock								Common Stock				Surplus				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total
		Series A				Series B
Balance—December 31, 2013		$	1,273			$	64			$	42,109			$	29,070,258			$	30,848,000			$	(1,832,866	)		$	58,128,838
Comprehensive income																			5,455,016				1,802,826				7,257,842
Sale of 1,350 shares of common stock											135				159,165												159,300
Preferred stock dividends																			(1,040,510	)							(1,040,510	)
Common stock dividends																			(265,287	)							(265,287	)
Net accretion of net preferred stock discount															21,200				(21,200	)							—
Repurchase of preferred stock			(374	)			(9	)							(3,835,617	)											(3,836,000	)
Impact of equity transactions of White River Bancshares Company															(602,065	)											(602,065	)
Balance—December 31, 2014			899				55				42,244				24,812,941				34,976,019				(30,040	)			59,802,118
Comprehensive income																			6,354,142				(243,324	)			6,110,818
Sale of 1,000 shares of common stock											100				128,900												129,000
Preferred stock dividends																			(23,700	)							(23,700	)
Common stock dividends																			(532,275	)							(532,275	)
Repurchase of common stock											(3,809	)			(3,996,165	)											(3,999,974	)
Repurchase of preferred stock			(899	)			(55	)							(9,524,047	)											(9,525,001	)
Impact of equity transactions of White River Bancshares Company															(85,514	)											(85,514	)
Balance—December 31, 2015		$	—			$	—			$	38,535			$	11,336,115			$	40,774,186			$	(273,364	)		$	51,875,472

See accompanying notes

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COMMUNITY FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2015 and 2014

 

		2015				2014
Cash flows from operating activities:
Net income		$	6,354,142			$	5,455,016
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			140,000				837,500
Provision for losses on foreclosed assets			756,024				1,483,119
Depreciation and amortization			902,805				987,517
Deferred income taxes			441,805				(390,958	)
Net amortization of investment securities discounts and premiums			387,121				330,674
Realized gains on disposition of investment securities			(66,384	)			(62,221	)
Equity in earnings of White River Bancshares Company			(339,977	)			(176,166	)
(Gains) losses on dispositions of premises and equipment, foreclosed assets, and other assets			(255,537	)			273,522
(Increase) decrease in accrued interest receivable and other assets			(345,966	)			36,710
(Increase) decrease in loans held-for-sale			(616,463	)			512,300
Decrease in accrued interest payable and other liabilities			(78,472	)			(150,261	)
Net cash provided by operating activities			7,279,098				9,136,752
Cash flows from investing activities:
Purchases of investment securities available-for-sale			(27,800,860	)			(14,966,126	)
Purchases of investment securities held-to-maturity			—				(1,343,500	)
Proceeds from disposition of investment securities available-for-sale			32,300,614				19,961,322
Proceeds from calls and maturities of investment securities held-to-maturity			170,314				123,743
Net increase in loans			(2,905,353	)			(12,681,342	)
Net (purchases) dispositions of other investments			721,659				(367,700	)
Net dispositions of time deposits in other institutions			—				95,000
Purchases of premises and equipment			(372,046	)			(706,891	)
Proceeds from sales of premises and equipment and other assets			97,980				24,475
Proceeds from sales of foreclosed assets held for sale			1,741,087				1,070,927
Net cash provided (used) by investing activities			3,953,395				(8,790,092	)
Cash flows from financing activities:
Increase (decrease) in non-interest bearing demand deposits			(1,189,830	)			3,885,727
Increase in interest bearing demand deposits			13,496,069				34,588,214
Increase in savings deposits			1,588,071				2,370,669
Decrease in time deposits			(9,825,276	)			(21,847,368	)
Borrowings from Federal Home Loan Bank			21,336,683				26,000,000
Repayments of Federal Home Loan Bank borrowings			(33,451,168	)			(22,035,166	)
Net repayments of other borrowings			(731,242	)			(640,461	)
Repurchase of common stock			(3,999,974	)			—
Repurchase of preferred stock			(9,525,001	)			(3,836,000	)
Preferred stock dividends paid			(23,700	)			(1,040,510	)
Proceeds from sale of common stock			129,000				159,300
Common stock dividends paid			(532,275	)			(265,287	)
Net cash provided (used) by financing activities			(22,728,643	)			17,339,118
Net increase (decrease) in cash and cash equivalents			(11,496,150	)			17,685,778
Cash and cash equivalents, beginning of year			28,591,842				10,906,064
Cash and cash equivalents, end of year		$	17,095,692			$	28,591,842

See accompanying notes

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COMMUNITY FIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015 and 2014

(1) SIGNIFICANT ACCOUNTING POLICIES:

Nature of operations –

Community First Bancshares, Inc. (Company) provides a full range of financial services to individuals and commercial customers in Harrison, Arkansas and surrounding areas through its wholly-owned subsidiary, Community First Bank (Bank). The Bank’s primary deposit products are interest-bearing checking accounts and certificates of deposit. Its primary lending products are real estate, commercial, and industrial loans. The Bank operates under a state bank charter and is subject to regulation by the Arkansas State Bank Department and the Federal Deposit Insurance Corporation (FDIC).

Community First Title, Inc. (CFT) was formed to provide title insurance and closing services to customers in the Harrison, Arkansas area. Effective August 26, 2015, the assets of CFT were sold and its operations were discontinued.

West View Apartments, L.P. (West View) owns and operates a 12-unit housing facility in Berryville, Arkansas for low income individuals.

East View Apartments, L.P. (East View) owns and operates a 26-unit housing facility in Green Forest, Arkansas for low income individuals.

Basis of presentation and use of estimates –

The consolidated financial statements include the accounts of the Company, the Bank, its wholly-owned subsidiary, Community First Title, Inc., and its 99.98% owned subsidiaries, West View Apartments, L.P. and East View Apartments, L.P. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accounting policies of the Company and the methods of applying them conform with U.S. generally accepted accounting principles (GAAP) and practices within the banking industry. The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) became effective during the Company’s fiscal year ending December 31, 2009. At that time, the ASC became FASB’s officially recognized source of authoritative GAAP applicable to all nongovernmental entities, superseding previously existing accounting and reporting standards.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and cash equivalents –

For purposes of reporting cash flows in the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold.

The Bank is required by the Federal Reserve to maintain minimum balances of cash or non-interest bearing deposits with its primary correspondent. At December 31, 2015, the Bank’s required minimum reserve balance was approximately $334,000.

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Federal funds sold generally mature within one to four days from the transaction date. At times, the Bank’s federal funds sold to and deposits with correspondent banks may significantly exceed the FDIC insurance limit. It is the Bank’s policy to only sell funds to and place deposits with institutions it considers to be of high credit quality. At December 31, 2015, uninsured balances due from banks totaled approximately $1,254,000.

Investments securities –

Investment securities classified as held-to-maturity are those securities the Company has the intent and ability to hold until they mature regardless of changes in market conditions, liquidity needs, or changes in general economic conditions. These securities are carried at amortized cost. Investment securities classified as available-for-sale are those securities the Company intends to hold for an indefinite period of time, but not necessarily to maturity. The Company could decide to sell a security classified as available-for-sale for various reasons, including movement in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, and other similar factors. Securities available-for-sale are carried at fair value, with the unrealized gains and losses, net of deferred taxes, reported as increases or decreases in accumulated other comprehensive income, a separate component of stockholders’ equity.

The amortized cost of investment securities is adjusted for amortization of premiums and accretion of discounts to the expected maturity date, or in the case of mortgage-backed securities, over the life of the security. Such amortization and accretion is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary are included in current earnings. The cost of securities sold for purposes of recognizing gains or losses is based on the specific identification method.

Investment in White River Bancshares Company –

The Company’s non-controlling 23.09% investment in White River Bancshares Company is accounted for using the equity method of accounting and earnings are considered to be permanently reinvested.

Investment in Federal Home Loan Bank stock –

All Federal Home Loan Bank of Dallas (FHLB) stockholders are required to maintain a minimum investment based on total assets, loan and investment portfolio components, and desired levels of borrowings. Accordingly, the Company’s rights to sell or exchange this investment are restricted. Because of the limited market for this stock, it is carried at cost. The stock serves as collateral for borrowings from the FHLB.

Loans and allowance for loan losses –

Loans held for sale are carried at the lower of cost or fair value less estimated costs to sell. The Bank enters into forward commitments for the sale of its mortgage loan originations in order to reduce its market risk on such originations in process. Gains and losses from the sales of mortgage loans are recognized when the loan is sold to investors.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income on loans is recognized over the term of the loan and is calculated using the simple interest method on daily balances of principal amount outstanding. Loan origination fees and costs are generally deferred and recognized over the life of the loan as an adjustment to yield. Each borrower’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the customer. The nature of collateral required varies and may include deposit accounts, securities, accounts receivable, inventories, equipment, and real estate.

Generally, the accrual of interest is discontinued on loans which are greater than ninety days delinquent, unless the loan is both well secured and in the process of collection, or earlier when management believes the

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collection of all principal and interest is unlikely. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans and income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable.

The allowance for loan losses is maintained at a level believed to be adequate by management to absorb losses inherent in the loan portfolio as of the balance sheet date and is based on management’s evaluation of various factors affecting the loan portfolio including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, regulatory guidance, general economic conditions, and other observable data. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows or collateral values for specific impaired loans, estimated losses on homogeneous loan groups that are based on historical loss experience and consideration of current economic factors and trends, all of which may be susceptible to significant change. Loans, or portions thereof, that are considered uncollectible are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is charged to operations based on management’s periodic evaluation of the factors previously described, as well as other pertinent factors. Evaluations are conducted at least quarterly and more often if deemed necessary.

The Company considers a loan to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and 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. The Company evaluates impaired loans with smaller balances that are of a similar nature collectively and evaluates all other impaired loans individually when determining the adequacy of the allowance for impaired loans. Estimated losses on internally risk-rated loans, exclusive of specific impaired loans, is based on applying an allowance factor that is higher for homogeneous groups of impaired loans than for homogeneous groups of unimpaired loans, due to management’s concerns regarding collectability or management’s knowledge of particular elements regarding the borrower. Because of the uncertainties associated with the estimation process, it is reasonably possible that management’s estimate of credit losses inherent in the loan portfolio and the amount of the related allowance may change in the near term. Loans for which the terms have been modified and for which the borrower is experiencing financial difficulties are considered troubled debt restructurings (TDR’s) and are included in impaired loans. The most common TDR concessions that were granted by the Company involved reductions of interest rates and rescheduling payments of principal and interest over longer amortization periods.

At times, the Company may sell participating interests in loans to other financial institutions to allow the Company to service customers with needs in excess of the Company’s limit on loans to a single borrower. The Company accounts for the transfer of such a participating interest as a sale since control over the participating interest has been relinquished. Control is deemed to be relinquished when the participating interest has been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or sell the participating interest, and the Company does not maintain effective control over the participating interest through an agreement to repurchase it prior to maturity. Under such a participation agreement, the Company continues to service the loan for a nominal fee and the buyer receives its share of principal collected together with interest at an agreed-upon rate. Generally, no gain or loss is recognized upon the sale of a participating interest in a loan or during the related servicing period.

Foreclosed assets held for sale –

Foreclosed assets held for sale represents assets acquired in satisfaction of debt and are generally valued at the lower of the recorded investment in the loan or fair value less estimated cost to sell. Subsequent write-downs and net losses realized on sales of foreclosed assets are included in non-interest income in the accompanying statements of income.

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Premises and equipment –

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives of 10 to 40 years for buildings and improvements and 3 to 10 years for equipment, furniture and fixtures. Leasehold improvements are capitalized and amortized using the straight-line method over the term of the respective leases or the estimated useful lives of the improvements, whichever is shorter.

Income taxes –

The Company recognizes deferred income taxes 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 determined based on the difference between the values of the assets and liabilities reflected in the financial statements and their related tax basis using enacted tax rates in effect for the year or years in which the differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company files consolidated income tax returns with the Bank and CFT and includes its allocable portion of taxable income and deductions for East View and West View in those returns. The Company is no longer subject to federal or Arkansas income tax audits by tax authorities for years prior to 2012.

Advertising costs –

Advertising costs are charged to expense as incurred. Advertising costs for the years ended December 31, 2015 and 2014 totaled approximately $104,000 and $75,000, respectively.

Stock-based compensation –

The Company has a stock-based employee compensation plan which is described more fully in Note 14. The Company applies the fair value method of recording stock-based compensation for stock options granted after December 31, 2005, as prescribed by ASC Topic 715. The cost of stock-based awards is recognized over the period during which the employee is required to provide service in exchange for the award. No stock-based compensation is reflected in income for stock options granted prior to January 1, 2006.

Subsequent events –

The Company has evaluated subsequent events through March 23, 2016, the date these financial statements were available to be issued.

Recent accounting pronouncements –

In May 2014, the FASB issued Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. In July 2015, the FASB deferred the required effective date of ASU 2014-09 to years beginning after December 15, 2018. Early adoption is permitted for years beginning after December 15, 2016. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company has not yet selected a transition method nor has it determined the impact, if any, that the adoption will have on its financial statements.

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In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Topic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 will require equity investments (other than those accounted for under equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized through net income. ASU 2016-01 will also eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. ASU 2016-01 is effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted for entities beginning after December 15, 2017. The Company does not expect the adoption of ASU 2016-01 to have a material impact its financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 will generally require lessees to recognize assets and liabilities associated with leases (other than those leases with terms of 12 months or less, for which the entity is permitted to elect to not recognize lease assets and lease liabilities) on the lessee entity’s balance sheet. ASU 2016-02 will also require certain quantitative and qualitative financial statement disclosures regarding the amount, timing and uncertainty of cash flows from leases. Upon adoption, ASU 2016-02 will require the recognition and measurement of leases at the beginning of the earliest period presented using a modified retrospective approach which includes a number of practical expedients that entities may elect to apply. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018 for public business entities and periods beginning after December 15, 2019 for entities that are not public business entities. Early adoption is permitted for all entities. The Company has not yet determined the impact that adoption of ASU 2016-02 will have on its financial statements.

(2) INVESTMENT SECURITIES:

Following is a summary of available-for-sale and held-to-maturity securities:

 

		Available-for-Sale
December 31, 2015:		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
U.S. Government and agency obligations		$	4,998,432			$	1,326			$	59,100			$	4,940,658
Obligations of states and political subdivisions			27,409,719				427,600				139,232				27,698,087
Mortgage-backed securities			41,989,430				38,773				649,737				41,378,466
		$	74,397,581			$	467,699			$	848,069			$	74,017,211
		Held-to-Maturity
December 31, 2015:		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Obligations of states and political subdivisions		$	6,640,943			$	26,140			$	—			$	6,667,083

 

		Available-for-Sale
December 31, 2014:		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
U.S. Government and agency obligations		$	5,998,223			$	—			$	179,747			$	5,818,476
Obligations of states and political subdivisions			31,039,995				543,094				183,848				31,399,241
Mortgage-backed securities			42,179,855				187,896				425,549				41,942,202
		$	79,218,073			$	730,990			$	789,144			$	79,159,919

---

		Held-to-Maturity
December 31, 2014:		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Obligations of states and political subdivisions		$	6,811,257			$	85,860			$	—			$	6,897,117

The amortized cost and estimated fair value of investment securities by contractual maturity at December 31, 2015 are presented below. Actual maturities may differ from contractual maturities due to the existence of call or prepayment options.

 

		Available-for-Sale								Held-to-Maturity
		Amortized Cost				Estimated Fair Value				Amortized Cost				Estimated Fair Value
Due in one year or less		$	74,982			$	74,527			$	—			$	—
Due in one to five years			6,407,606				6,441,007				—				—
Due in five to ten years			12,799,151				12,763,822				45,000				45,418
Due more than ten years			13,126,412				13,359,389				6,595,943				6,621,665
			32,408,151				32,638,745				6,640,943				6,667,083
Mortgage-backed securities			41,989,430				41,378,466				—				—
		$	74,397,581			$	74,017,211			$	6,640,943			$	6,667,083

Gross realized gains and losses on sales and calls of investment securities for the years ended December 31, 2015 and 2014 were as follows:

 

		2015				2014
U.S. Government and agency obligations
Gross realized losses		$	14,738			$	20,133
Obligations of states and political subdivisions
Gross realized gains			13,063				58,074
Gross realized losses			—				900
Mortgage-backed securities
Gross realized gains			107,700				34,398
Gross realized losses			39,641				9,218

Investment securities with carrying values of approximately $66,377,000 and $67,440,000 at December 31, 2015 and 2014, respectively, were pledged to secure certain public deposits or for other purposes.

Information pertaining to investment securities with gross unrealized losses at December 31, 2015 and 2014, aggregated by investment category and length of time that individual investment securities have been in a continuous unrealized loss position, follows:

 

		Less than 12 months								More than 12 months								Total
December 31, 2015		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
U.S. Government and agency obligations		$	1,979,609			$	20,391			$	1,959,723			$	38,709			$	3,939,332			$	59,100
Obligation of states and political subdivisions			694,894				1,130				461,880				138,102				1,156,774				139,232
Mortgage-backed securities			27,529,041				335,885				10,418,522				313,852				37,947,563				649,737
		$	30,203,544			$	357,406			$	12,840,125			$	490,663			$	43,043,669			$	848,069

---

		Less than 12 months								More than 12 months								Total
December 31, 2014		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
U.S. Government and agency obligations		$	—			$	—			$	5,818,477			$	179,747			$	5,818,477			$	179,747
Obligation of states and political subdivisions			594,994				7,076				2,729,858				176,772				3,324,852				183,848
Mortgage-backed securities			10,997,523				42,252				16,344,056				383,297				27,341,579				425,549
		$	11,592,517			$	49,328			$	24,892,391			$	739,816			$	36,484,908			$	789,144

At December 31, 2015, four of the Company’s U.S. Government and agency obligations, nine of its obligations of states and political subdivisions, and thirty-five of its mortgage-backed securities had fair values that were less than their carrying values. However, only two of its U.S. Government agency obligations, five of its obligations of states and political subdivisions, and ten of its mortgage-backed securities had been in a continuous unrealized loss position for twelve months or more.

In evaluating the Company’s unrealized loss positions for other-than-temporary impairment, management considers the credit quality of the issuer, the nature and cause of the unrealized loss, and the severity and duration of the impairments. At December 31, 2015 and 2014, management determined that substantially all unrealized losses were the result of fluctuations in interest rates or other temporary market conditions and did not reflect deteriorations of the credit quality of the investments. Accordingly, management has determined that all of its unrealized losses on investment securities are temporary in nature and that the Company has both the intent and ability to hold the securities to maturity or until fair value recovers above cost.

(3) LOANS AND ALLOWANCE FOR LOAN LOSSES:

The major categories of outstanding loans, net of deferred fees, at December 31, 2015 and 2014 are summarized as follows:

 

		2015				2014
Real estate loans:
Residential 1-4 family		$	123,586,577			$	119,379,378
Non-farm/non-residential			91,436,268				90,880,565
Construction/land development			34,212,001				39,987,483
Agricultural			24,903,502				24,247,178
Residential multifamily			14,051,901				16,684,574
Commercial and industrial loans			35,430,718				32,636,992
Consumer			21,149,417				19,657,789
Agricultural loans (non-real estate)			7,880,916				6,104,424
Other			422,901				622,376
			353,074,201				350,200,759
Less: allowance for loan losses and amortization			5,654,689				6,514,228
		$	347,419,512			$	343,686,531

Deferred fees, net of deferred costs, totaled $380,740 and $366,980 at December 31, 2015 and 2014, respectively.

---

Changes in the allowance for loan losses by segment for the years ending December 31, 2015 and 2014 are summarized as follows:

 

December 31, 2015		Balance, Beginning of Year				Charge-offs				Recoveries				Provision				Balance, End of Year
Real estate:
Residential 1-4 family		$	922,175			$	(152,768	)		$	43,588			$	(151,241	)		$	661,754
Non-farm/non-residential			1,103,018				(934,922	)			24,783				451,999				644,878
Construction/land development			759,331				(7,767	)			38,000				(148,321	)			641,243
Agricultural			140,262				(57,600	)			8,847				27,272				118,781
Residential multifamily			91,642				—				30,000				(70,538	)			51,104
Commercial and industrial			1,248,348				(13,965	)			134,713				(656,783	)			712,313
Consumer			302,510				(161,624	)			49,176				98,001				288,063
Agricultural (non-real estate)			17,510				—				—				1,944				19,454
Other			132				—				—				(68	)			64
Unallocated			1,929,300				—				—				587,735				2,517,035
		$	6,514,228			$	(1,328,646	)		$	329,107			$	140,000			$	5,654,689

 

December 31, 2014		Balance, Beginning of Year				Charge-offs				Recoveries				Provision				Balance, End of Year
Real estate:
Residential 1-4 family		$	1,539,994			$	(273,116	)		$	77,481			$	(422,184	)		$	922,175
Non-farm/non-residential			957,715				(190,998	)			44,421				291,880				1,103,018
Construction/land development			495,911				(65,892	)			4,190				325,122				759,331
Agricultural			276,546				(52,676	)			26,162				(109,770	)			140,262
Residential multifamily			193,448				(10,323	)			30,000				(121,483	)			91,642
Commercial and industrial			1,267,217				(246,956	)			46,373				181,714				1,248,348
Consumer			330,543				(244,645	)			36,988				179,624				302,510
Agricultural (non-real estate)			12,658				(7,634	)			2,080				10,406				17,510
Other			104				—				—				28				132
Unallocated			1,427,137				—				—				502,163				1,929,300
		$	6,501,273			$	(1,092,240	)		$	267,695			$	837,500			$	6,514,228

The Company’s credit quality indicators consist of an internal grading system analysis used to assign grades to all loans. The grade for each individual loan is determined by the account officer and other approving officers at the time the loan is made and changed from time to time to reflect an ongoing assessment of loan risk. Grades on specific loans rated moderate or greater are reviewed monthly. The following categories of credit quality are used by the Company:

 

Pass –		Loans in this category are considered to be an acceptable credit risk and are generally considered to be collectible in full. This category includes loans graded Excellent, Good, Satisfactory and Moderate.
Watch –		Loans in this category are presently protected from apparent loss; however, weaknesses do exist which could cause future impairment of repayment of principal or interest.
Substandard –		Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action and posing the risk of some loss.
Doubtful –		Loans in this category exhibit the same weaknesses found in the substandard category; however, the weaknesses are more pronounced. These loans have deteriorated to a point where collection in full is improbable.

---

A summary of loans, net of deferred fees, by credit quality indicators as of December 31, 2015 and 2014 follows:

 

December 31, 2015		Pass				Watch				Substandard				Doubtful				Total
Real estate:
Residential 1-4 family		$	121,643,225			$	117,766			$	1,825,586			$	—			$	123,586,577
Non-farm/non-residential			83,832,032				1,800,484				5,803,752				—				91,436,268
Construction/land development			30,836,135				—				3,375,866				—				34,212,001
Agricultural			24,867,571				—				35,931				—				24,903,502
Residential multifamily			14,051,901				—				—				—				14,051,901
Commercial and industrial			30,777,134				4,200,000				453,584				—				35,430,718
Consumer			20,791,559				—				357,858				—				21,149,417
Agricultural (non-real estate)			7,880,916				—				—				—				7,880,916
Other			422,901				—				—				—				422,901
		$	335,103,374			$	6,118,250			$	11,852,577			$	—			$	353,074,201

 

December 31, 2014		Pass				Watch				Substandard				Doubtful				Total
Real estate:
Residential 1-4 family		$	115,282,896			$	633,673			$	3,462,809			$	—			$	119,379,378
Non-farm/non-residential			82,534,669				—				8,345,896				—				90,880,565
Construction/land development			35,844,451				—				4,143,032				—				39,987,483
Agricultural			23,932,423				—				314,755				—				24,247,178
Residential multifamily			16,684,574				—				—				—				16,684,574
Commercial and industrial			31,890,499				11,909				734,584				—				32,636,992
Consumer			19,050,334				44,788				562,667				—				19,657,789
Agricultural (non-real estate)			6,103,214				—				1,210				—				6,104,424
Other			622,376				—				—				—				622,376
		$	331,945,436			$	690,370			$	17,564,953			$	—			$	350,200,759

An aging analysis of past due loans, net of deferred fees, as of December 31, 2015 and 2014 follows:

 

December 31, 2015		30-89 Days Past Due				Over 90 Days Past Due				Total Past Due				Current				Total Loans
Real estate:
Residential 1-4 family		$	1,742,696			$	504,582			$	2,247,278			$	121,339,299			$	123,586,577
Non-farm/non-residential			3,257,442				351,566				3,609,008				87,827,260				91,436,268
Construction/land development			2,162,192				—				2,162,192				32,049,809				34,212,001
Agricultural			319,951				35,915				355,866				24,547,636				24,903,502
Residential multifamily			—				—				—				14,051,901				14,051,901
Commercial and industrial			59,650				221,189				280,839				35,149,879				35,430,718
Consumer			85,604				3,407				89,011				21,060,406				21,149,417
Agricultural (non-real estate)			50,159				—				50,159				7,830,757				7,880,916
Other			—				—				—				422,901				422,901
		$	7,677,694			$	1,116,659			$	8,794,353			$	344,279,848			$	353,074,201

---

December 31, 2014		30-89 Days Past Due				Over 90 Days Past Due				Total Past Due				Current				Total Loans
Real estate:
Residential 1-4 family		$	2,386,054			$	548,646			$	2,934,700			$	116,444,678			$	119,379,378
Non-farm/non-residential			2,840,211				1,396,269				4,236,480				86,644,085				90,880,565
Construction/land development			7,728				166,051				173,779				39,813,704				39,987,483
Agricultural			111,617				18,575				130,192				24,116,986				24,247,178
Residential multifamily			—				—				—				16,684,574				16,684,574
Commercial and industrial			10,590				225,681				236,271				32,400,721				32,636,992
Consumer			140,287				15,941				156,228				19,501,561				19,657,789
Agricultural (non-real estate)			—				—				—				6,104,424				6,104,424
Other			—				—				—				622,376				622,376
		$	5,496,487			$	2,371,163			$	7,867,650			$	342,333,109			$	350,200,759

A summary of impaired loans as of December 31, 2015 and 2014 follows:

 

December 31, 2015		Unpaid Principal Balance				Recorded Investment				Related Allowance				Average Recorded Investment				Interest Income Recognized
With a related allowance:
Real estate:
Residential 1-4 family		$	976,018			$	977,586			$	63,989			$	1,177,860			$	51,319
Non-farm/non-residential			2,489,886				2,492,969				52,736				5,396,865				128,384
Construction/land development			5,837,180				5,846,094				494,746				6,481,735				112,220
Agricultural			317,741				318,511				6,996				311,247				17,522
Commercial and industrial			307,260				307,488				293,370				434,090				7,014
Consumer			35,063				35,020				5,259				67,867				4,279
Agricultural (non-real estate)			—				—				—				612				—
Total with a related allowance			9,963,148				9,977,668				917,096				13,870,276				320,738
With no related allowance:
Real estate:
Residential 1-4 family			789,625				789,625				—				1,110,682				16,121
Non-farm/non-residential			3,150,000				3,150,021				—				2,321,740				182,954
Construction/land development			—				—				—				617,855				—
Commercial and industrial			—				—				—				84,439				—
Total with no related allowance			3,939,625				3,939,646				—				4,134,716				199,075
Total impaired loans		$	13,902,773			$	13,917,314			$	917,096			$	18,004,992			$	519,813

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December 31, 2014		Unpaid Principal Balance				Recorded Investment				Related Allowance				Average Recorded Investment				Interest Income Recognized
With a related allowance:
Real estate:
Residential 1-4 family		$	1,377,368			$	1,378,134			$	206,605			$	2,549,766			$	67,854
Non-farm/non-residential			8,274,230				8,300,760				778,865				6,646,771				382,202
Construction/land development			7,093,172				7,117,376				1,242,995				6,603,653				192,463
Agricultural			303,989				303,983				45,598				391,791				3,751
Commercial and industrial			560,434				560,691				515,943				432,090				26,442
Consumer			100,730				100,714				15,109				129,564				8,969
Agricultural (non-real estate)			1,210				1,224				182				14,747				182
Total with a related allowance			17,711,133				17,762,882				2,805,297				16,768,382				681,863
With no related allowance:
Real estate:
Residential 1-4 family			1,429,163				1,538,827				—				1,543,104				53,629
Non-farm/non-residential			1,490,405				3,384,482				—				3,462,487				72,123
Construction/land development			1,226,254				3,508,352				—				4,992,432				77,824
Agricultural			—				7				—				4				—
Commercial and industrial			165,000				168,878				—				84,439				—
Consumer			5,927				5,937				—				2,969				290
Total with no related allowance			4,310,822				4,329,785				—				6,386,315				87,351
Total impaired loans		$	22,021,955			$	22,092,667			$	2,805,297			$	23,154,697			$	769,214

A summary of the recorded investment in impaired loans and related allowance for loan losses by method of evaluation as of December 31, 2015 and 2014 follows:

 

		Individually Evaluated								Collectively Evaluated
December 31, 2015		Recorded Investment in Impaired Loans				Related Allowance for Loan Losses				Recorded Investment in Impaired Loans				Related Allowance for Loan Losses
Real estate:
Residential 1-4 family		$	789,625			$	—			$	977,586			$	63,989
Non-farm/non-residential			5,354,708				—				288,282				52,736
Construction/land development			3,235,484				458,375				2,610,610				36,371
Agricultural			—				—				318,511				6,996
Commercial and industrial			284,675				284,379				22,813				8,991
Consumer			—				—				35,020				5,259
		$	9,664,492			$	742,754			$	4,252,822			$	174,342

---

		Individually Evaluated								Collectively Evaluated
December 31, 2014		Recorded Investment in Impaired Loans				Related Allowance for Loan Losses				Recorded Investment in Impaired Loans				Related Allowance for Loan Losses
Real estate:
Residential 1-4 family		$	1,431,738			$	—			$	1,378,134			$	206,605
Non-farm/non-residential			7,867,320				482,687				1,926,899				296,178
Construction/land development			3,335,727				494,020				5,017,359				748,975
Agricultural			—				—				303,983				45,598
Commercial and industrial			669,620				500,397				59,949				15,546
Consumer			—				—				100,714				15,109
Agricultural (non-real estate)			—				—				1,224				182
		$	13,304,405			$	1,477,104			$	8,788,262			$	1,328,193

A summary of nonaccrual loans, net of deferred fees, as of December 31, 2015 and 2014 follows:

 

		2015				2014
Real estate:
Residential 1-4 family		$	1,194,397			$	1,545,372
Non-farm/non-residential			3,501,587				1,509,423
Construction/land development			2,096,141				2,501,158
Agricultural			35,915				303,983
Commercial and industrial			221,189				269,118
Consumer			35,020				100,714
Agricultural (non-real estate)			—				1,224
		$	7,084,249			$	6,230,992

At December 31, 2015 and 2014, there were no loans greater than ninety days delinquent and still accruing interest.

The following table summarizes TDR’s that occurred during the year ended December 31, 2015 and 2014:

 

		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
December 31, 2015
Real estate:
Residential 1-4 family			1			$	179,336			$	174,815
December 31, 2014
Real estate:
Residential 1-4 family			4			$	561,881			$	558,907
Non-farm/non-residential			1				1,485,600				1,485,600
			5			$	2,047,481			$	2,044,507

During the years ended December 31, 2015 and 2014, there were no payment defaults on loans that had been modified as TDR’s within 12 months prior to the payment default.

Interest income for the years ended December 31, 2015 and 2014 includes $5,833 and $67,254, respectively, representing the change in present value of TDR’s attributable to the passage of time.

---

During the years ended December 31, 2015 and 2014, there were no transfers of participating interests in loans to other financial institutions. Outstanding loans for which the Company has transferred participating interests to other financial institutions as of December 31, 2015 and 2014 are summarized as follows:

 

		2015				2014
Participating interests sold		$	240,770			$	380,186
Retained interests			85,542				140,179
Total unpaid principal balance		$	326,312			$	520,365

(4) PREMISES AND EQUIPMENT:

The major categories of premises and equipment at December 31, 2015 and 2014 are summarized as follows:

 

		2015				2014
Land		$	1,401,618			$	1,401,618
Buildings and improvements			13,488,134				13,466,370
Equipment, furniture and fixtures			5,491,415				5,335,140
Leasehold improvements			974,987				974,987
			21,356,154				21,178,115
Less: accumulated depreciation			8,875,237				8,126,752
		$	12,480,917			$	13,051,363

(5) INVESTMENT IN WHITE RIVER BANCSHARES COMPANY:

Following is summarized financial information for the Company’s 23.09% investment in White River Bancshares Company (WRBC) as of and for the years ended December 31, 2015 and 2014:

 

		2015				2014
Cash and cash equivalents		$	22,387,763			$	29,481,557
Investment securities			47,307,868				46,662,626
Loans, net of allowance for loan loss			396,779,879				390,179,369
Other assets			37,987,941				39,852,286
Total assets		$	504,463,451			$	506,175,838
Deposits		$	407,620,719			$	405,541,325
Borrowings			35,901,507				42,297,011
Other liabilities			2,207,436				2,600,053
Stockholders’ equity			58,733,789				55,737,449
Total liabilities and stockholders’ equity		$	504,463,451			$	506,175,838
Interest income		$	22,356,667			$	21,811,414
Interest expense			(3,845,010	)			(3,939,800	)
Provision for loan losses			(200,000	)			(1,775,000	)
Other income			1,900,478				2,541,344
Operating expenses			(15,163,570	)			(15,138,603	)
Income tax provision			(1,989,852	)			(1,403,221	)
Net income		$	3,058,713			$	2,096,134

During 2014, the Company reduced its investment in WRBC by approximately $900,000 to reflect its proportionate share of WRBC’s preferred stock dividends in arrears as if those dividends had been paid. WRBC’s preferred stock was issued as part of the United States Department of the Treasury’s Capital Purchase Program.

---

The Company was also granted stock options upon the formation of White River Bancshares Company. At December 31, 2014, the Company had outstanding options to purchase 6,792 shares at an exercise price of $100 per share. The Company was 100% vested in all options and the options expired in May 2015.

(6) OTHER INVESTMENTS:

Included in other assets in the consolidated balance sheets are other investments, which are carried at cost as fair value is not readily determinable. Other investments consist of the following at December 31, 2015 and 2014:

 

		2015				2014
First National Bankers Bankshares, Inc. common stock		$	109,470			$	109,470
Mobius Technology Consulting, LLC			3,483				3,468
		$	112,953			$	112,938

(7) TIME DEPOSITS:

Scheduled maturities of time deposits at December 31, 2015 are as follows:

 

2016		$	58,154,407
2017			27,845,377
2018			7,612,102
2019			6,967,422
2020			4,804,586
Thereafter			499,552
		$	105,883,446

(8) BORROWINGS:

Borrowings under a line of credit agreement with the Federal Home Loan Bank of Dallas (FHLB) as of December 31, 2015 consist of amortizing and fixed term advances totaling $2,562,726 and $15,000,000, respectively. Advances bear interest at rates ranging from 0.560% to 5.553% and are secured by the Bank’s cash on deposit at the FHLB, the Bank’s investment in FHLB stock, and certain loans with carrying amounts of approximately $113,659,000 at December 31, 2015.

Scheduled maturities of FHLB advances at December 31, 2015 are as follows:

 

2016		$	3,367,910
2017			343,228
2018			2,311,362
2019			110,639
2020			10,098,778
Thereafter			1,330,809
		$	17,562,726

Under its agreement with the FHLB, the Bank has approximately $71,600,000 of unused borrowing capacity available at December 31, 2015. At December 31, 2015, the Bank had a $24,500,000 letter of credit issued by the FHLB on the Bank’s behalf to secure a customer deposit.

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At December 31, 2015, the Company also had approximately $32,906,000 of borrowing capacity available from the Federal Reserve Bank (FRB) borrower-in-custody program. The Company has pledged to the FRB certain commercial and consumer loans with outstanding balances totaling approximately $41,000,000 at December 31, 2015 as collateral for advances under this program.

(9) OTHER BORROWINGS:

Other borrowings consist of the following at December 31, 2015 and 2014:

 

		2015				2014
Fixed rate bank term note payable		$	9,336,485			$	10,062,627
West View fixed rate note payable			300,000				300,000
East View fixed rate note payable			375,661				380,761
		$	10,012,146			$	10,743,388

The fixed rate note requires monthly payments of principal and interest of $96,945 with an interest rate of 5.00% maturing in May 2015. During 2015, the maturity date of the note was extended until May 2018 and the interest rate was reduced to 4.00%. The note is secured by all outstanding shares of Bank common stock. The debt agreement contains various covenants including the maintenance of certain financial ratios. Failure to comply with these covenants could result in an increase in the interest rate. At December 31, 2015, the Company was in compliance with all debt covenants.

The notes payable by West View Apartments, L.P. (West View) and East View Apartments, L.P. (East View) to the Arkansas Development Finance Authority are collateralized by the 12-unit and 26-unit housing facilities. Under the West View note payable, principal and interest payments at 4.65% are due annually, subject to the maintenance of cash reserves. The note matures in September 2023. Under the East View note payable, principal and interest payments at 5.29% are due annually. The note matures in August 2041.

Scheduled maturities of other borrowings at December 31, 2015, assuming no surplus cash for the West View note for the next five years, are as follows:

 

2016		$	809,822
2017			843,260
2018			7,700,554
2019			6,217
2020			6,553
Thereafter			645,740
		$	10,012,146

(10) SUBORDINATED DEBENTURES:

Community First AR Statutory Trust I (Trust), a Connecticut business trust, was formed during 2002 and is owned by the Company. The Company’s investment in and advances to the Trust are carried at a cost of $155,000, and is included in other assets in the consolidated balance sheets at December 31, 2015 and 2014. During 2002, the Trust sold floating rate capital and common securities to investors. The proceeds of $5,155,000 were used to purchase an equal principal amount of floating rate subordinated debentures issued by the Company that adjust quarterly to 3-month LIBOR plus 3.25%. The Company has fully and unconditionally guaranteed all obligations of the Trust on a subordinated basis with respect to the capital securities. The sole asset of the Trust is the subordinated debentures issued by the Company to the Trust and related accrued interest receivable thereon. At December 31, 2015 and 2014, the Trust had $5,000,000 of capital securities outstanding,

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and the Company had $5,155,000 of subordinated debentures outstanding that were held by the Trust. The subordinated debentures mature in December 2032. However, both the capital securities and subordinated debentures may be prepaid, subject to regulatory approval, at the Company’s election after five years. Subject to certain limitations, portions of the subordinated debentures qualify as Tier 1 capital for regulatory capital adequacy purposes. At December 31, 2015 and 2014, the interest rate for these subordinated debentures was 3.853% and 3.505% respectively.

(11) INCOME TAXES:

The provision for income taxes included in the accompanying consolidated statements of income for the years ended December 31, 2015 and 2014 consists of the following:

 

		2015				2014
Current:
Federal		$	1,768,276			$	1,486,226
State			388,537				408,049
			2,156,813				1,894,275
Deferred:
Federal			355,522				(320,950	)
State			86,283				(70,008	)
			441,805				(390,958	)
		$	2,598,618			$	1,503,317

The effective tax rate differs from the statutory federal income tax rate primarily due to tax-exempt interest income, equity method earnings, state income taxes, and non-deductible expenses.

The tax effect of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts that give rise to deferred tax assets and liabilities at December 31, 2015 and 2014 are as follows:

 

		2015				2014
Deferred tax assets:
Differences in accounting for loan losses		$	2,165,181			$	2,494,298
Interest on nonaccrual loans			143,822				122,346
Differences in accounting for foreclosed assets			1,059,278				1,252,320
Unrealized net losses on investments			129,326				19,772
Other			158,199				179,166
Valuation allowance			(245,943	)			(245,943	)
			3,409,863				3,821,959
Deferred tax liabilities:
Differences in depreciation methods			231,906				312,031
Prepaid expenses			94,943				112,737
Other			85,241				67,167
			412,090				491,935
Net deferred tax asset		$	2,997,773			$	3,330,024

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(12) CAPITAL STOCK:

Information regarding the Company’s capital stock at December 31, 2015 and 2014 follows:

 

		2015												2014
						Preferred												Preferred
		Common				Series A				Series B				Common				Series A				Series B
Par value per share		$	0.10			$	0.10			$	0.10			$	0.10			$	0.10			$	0.10
Number of shares:
Authorized			1,000,000				12,725				636				1,000,000				12,725				636
Issued			385,345				—				—				422,440				8,975				550
Outstanding			385,345				—				—				422,440				8,975				550

On March 10, 2009, the Company’s Board of Directors authorized the issuance of 12,725 shares of Series A fixed rate, cumulative perpetual preferred stock and 636 shares of Series B fixed rate, cumulative perpetual preferred stock to the United States Department of the Treasury (Treasury) as part of the Treasury’s Capital Purchase Program.

On April 3, 2009, the Company entered into a purchase agreement with the Treasury and sold the newly issued Series A preferred stock and a warrant to purchase the newly issued Series B preferred stock (which was immediately exercised) to the Treasury for an aggregate purchase price of $12,725,000. The proceeds of the issuance were allocated on a pro rata basis to the Series A preferred stock and the Series B preferred stock based on their relative fair values. The fair values of the Series A and Series B preferred stock were estimated using a discounted cash flow methodology and a discount rate of 12%. As a result, the Company assigned $12,004,337 of the proceeds to the Series A preferred stock and $720,663 to the Series B preferred stock. The resulting net discount of $636,000 was accreted over the five-year expected life of the preferred stock up to the $13,361,000 combined redemption value, with the accretion being reported as additional preferred stock dividends.

All shares of preferred stock are non-voting (other than voting rights on certain matters that could adversely affect the preferred stock) and have liquidation preferences of $1,000 per share. Dividends on the Series A preferred stock were computed at an annual rate of 5% for each of the first five years and 9% for each year thereafter. Dividends on the Series B preferred stock were computed at an annual rate of 9% at all times. No dividends could be paid to common shareholders without the Treasury’s approval while the preferred stock was outstanding. Both the Series A and Series B preferred stock qualified as Tier 1 capital.

During 2013, the Company requested approval from the Federal Reserve to redeem the preferred stock; however, the request was denied. In January 2014, the Treasury offered for sale and sold its preferred stock in an auction proceeding.

On December 30, 2014, the Company repurchased 3,750 shares of Series A preferred stock and 86 shares of Series B preferred stock. The remaining 8,975 of Series A and 550 of Series B preferred stock were repurchased in January 2015.

(13) EMPLOYEE BENEFIT PLANS:

The Company sponsors an employee stock ownership plan (ESOP) which covers all full-time employees who work at least 1,000 hours during a plan year and are age 21. The Company makes annual discretionary contributions to the ESOP as determined by the Board of Directors. Employees must be employed on December 31 in order to receive an allocation of the employer contribution. ESOP participants vest over two to six years, although shares are not distributed until employment is terminated. During 2015 and 2014, the ESOP acquired 1,000 and 1,350 shares of Company common stock, respectively. At December 31, 2015 and 2014, shares of Company stock held by the ESOP totaled 8,201 and 7,201 shares, respectively. The Company

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recognized compensation expense under the ESOP of $250,000 for each of the years ended December 31, 2015 and 2014. At December 31, 2015 and 2014, shares of Company common stock allocated to ESOP participants totaled 8,201 and 7,201, respectively.

Effective July 1, 1999, the Company established a 401(k) plan for the benefit of employees who have attained age 18. Eligible employees may contribute to the plan a portion of their salary on a pre-tax or after-tax basis subject to Internal Revenue Code limitations. Discretionary Company contributions to the plan totaled $167,035 and $142,355 for 2015 and 2014, respectively.

(14) STOCK OPTION PLAN:

The Company sponsors a qualified stock option plan under which shares of Company common stock are reserved for grant primarily to executive officers and other key employees of the Bank and its subsidiaries. Plan participants, upon approval by the Board of Directors, become vested and eligible to purchase Company common stock based on the terms of each individual option agreement. The agreements expire after ten years and provide for vesting periods ranging from three to five-year graded vesting. The purchase price of the stock is equivalent to 100% of the market price (determined by the Board of Directors) at the time of grant. All of the options issued qualify as incentive stock options for income tax purposes.

The fair value of each stock option granted is estimated on the date of the grant using the Black-Scholes option-pricing model based. Because there is no active internal or external market for Company common stock, the Company uses the historical volatility of the FBR Small Cap Financial Fund (representing the primary industry in which the Company and its affiliates operate) as a basis for calculating the estimated volatility. The expected term of the options is based, in part, on historical employee exercise and termination behavior and estimates of future behavior. No stock options were granted during 2015 or 2014.

A summary of the status of shares under option at December 31, 2015 and 2014 and changes during the years then ended is presented below:

 

		2015								2014
		Number of Shares				Weighted Average Exercise Price				Number of Shares				Weighted Average Exercise Price
Beginning of year			1,000			$	115.00				1,250			$	115.00
Granted			—				—				—				—
Exercised			—				—				—				—
Forfeited or expired			(1,000	)			115.00				(250	)			115.00
End of year			—			$	—				1,000			$	115.00
Options exercisable, end of year			—			$	—				1,000			$	115.00

The aggregate intrinsic value of options outstanding at December 31, 2014 totaled $14,000. At December 31, 2014, all outstanding stock options were fully vested and there was no unrecognized compensation cost related to nonvested options.

All options outstanding were granted prior to January 1, 2006, therefore no compensation cost was charged to operations during the years ended December 31, 2015 and 2014.

(15) LEASE COMMITMENTS:

The Company leases certain land, buildings, and equipment under non-cancelable operating leases with terms from 1 to 50 years. The leases generally require the Company to pay property taxes and insurance on the

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property. The Company also leases various storage, parking facilities, and billboard advertising space under month to month leases or under leases with terms expiring within one year. Total rent expense for all operating leases during 2015 and 2014 totaled $194,116 and $187,577, respectively. Sublease rental income totaled $59,640 and $52,190 for the years ended December 31, 2015 and 2014, respectively.

Following are future minimum lease payments required under operating leases with initial or remaining non-cancelable terms in excess of one year at December 31, 2015:

 

2016		$	175,764
2017			155,064
2018			154,524
2019			137,493
2020			126,671
Thereafter			2,008,994
		$	2,758,510

(16) COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK:

The consolidated financial statements do not reflect various commitments and contingent liabilities which arise in the normal course of the Company’s business and which involve elements of credit risk, interest rate risk and liquidity risk. A summary of these commitments and contingent liabilities at December 31, 2015 and 2014 follows:

 

		2015				2014
Lending-related commitments:
Commitments to extend credit		$	36,402,324			$	34,824,725
Letters of credit			1,185,626				2,168,448
Mortgage loans sold with recourse			11,700,912				4,929,733
Credit card loans sold with recourse			364,650				272,800

Commitments to extend credit, credit card arrangements, and letters of credit all include some exposure to credit loss in the event of nonperformance by the customer. The Company’s credit policies and procedures for credit commitments and financial guarantees are the same as those for extensions of credit that are recorded in the consolidated financial statements. Because these instruments have fixed maturity dates, and because many of them expire without being drawn upon, they do not generally present any significant liquidity risk to the Company. Mortgage loans sold with recourse represent amounts sold to investors in the secondary market. The correspondent agreements with investors contain clauses under which the Company could be obligated to repurchase a previously sold loan if certain events set forth in the agreements occur within defined timeframes.

Substantially all of the Company’s loans, commitments to lend, and letters of credit have been granted to customers in its trade area who are also depositors of the Bank. The concentrations of credit by type of loan are set forth in Note 3. The distribution of commitments to extend credit approximates the distribution of loans outstanding.

The Bank has multiple agreements with a third party to provide data processing services for the Bank. The Bank may terminate the contracts with written notice in advance of a renewal date. Early termination is subject to a fee equal to the average monthly fees for the prior twelve months, multiplied by the number of months remaining under the agreement. At December 31, 2015, the cost to terminate these contracts was approximately $2,239,000.

The Bank also has a three-year agreement with a third party to provide ATM and debit card services for the Bank. At December 31, 2015, cancellation of the contract would require a termination payment to the third party totaling approximately $213,000.

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In the ordinary course of business, there are various legal proceedings involving the Company and its subsidiaries, most of which are considered litigation incidental to the conduct of business. These proceedings may include, among other matters, collection and foreclosure actions and defense of routine corporate, employment and banking related litigation. Management, after consulting with legal counsel and based on the facts available and proceedings to date, is of the opinion that the ultimate resolution of these proceedings will not have a material adverse effect on the consolidated financial position or results of operations of the Company.

The Company’s asset base is exposed to risk, including the risk resulting from changes in interest rates, market values of collateral for loans to customers and changes in the timing of cash flows. The Company monitors the effect of such risk by considering the mismatch of the maturities of its assets and liabilities in the current interest rate environment and the sensitivity of assets and liabilities to changes in interest rates. The Company’s management has considered the effect of significant increases and decreases in interest rates and believes such changes, if they occurred, would be manageable and would not affect the ability of the Company to hold its assets to maturity. However, the Company is exposed to significant market risk in the unlikely event of significant and prolonged interest rate changes.

West View Apartments, L.P. and East View Apartments, L.P. operate in a heavily regulated environment. Their operations are subject to administrative directives, rules and regulations of federal, state, and local regulatory agencies, including, but not limited to, the U.S. Department of Housing and Urban Development.

(17) RELATED PARTY TRANSACTIONS:

The Company has extended credit to certain directors, executive officers, significant shareholders, and their affiliates. Such transactions are made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers and do not, in management’s opinion, involve more than a normal credit risk or present other unfavorable features. The aggregate activity of loans to such related parties during 2015 and 2014 is as follows:

 

		2015				2014
Balance – beginning of year		$	10,527,676			$	11,104,636
New loans			1,496,825				506,221
Repayments and other decreases			(7,559,777	)			(1,083,181	)
Balance – end of year		$	4,464,724			$	10,527,676

At December 31, 2015 and 2014, the aggregate amount of deposits held at the Bank for officers, directors and related interests totaled approximately $2,648,000 and $1,104,000, respectively. Non-interest bearing demand deposits held at the Bank for the Company totaled $578,603 and $583,908 at December 31, 2015 and 2014, respectively.

Payments to directors of the Company for services provided to the Bank totaled approximately $315,000 and $301,000 during 2015 and 2014, respectively.

The Bank has outstanding loan participations purchased from another financial institution for which the Company is an investor, totaling $6,721,197 and $17,813,003 at December 31, 2015 and 2014, respectively.

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(18) SUPPLEMENTAL CASH FLOW INFORMATION:

Supplemental cash flow information for the years ended December 31, 2015 and 2014 is as follows:

 

		2015				2014
Cash paid for interest		$	2,753,998			$	3,027,109
Cash paid for income taxes			2,685,000				1,910,000
Non-cash investing and financing activities:
Real estate and other assets acquired in settlement of loans			610,524				2,103,818
Proceeds from sales of foreclosed assets funded by loans			1,328,152				917,205

(19) REGULATORY MATTERS:

The Bank is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum regulatory capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital to average assets (as defined). In July 2013, the OCC and other federal banking regulators approved final rules to implement the revised capital adequacy standards of the Basel Committee on Banking Supervision (Basel III) that established a new capital framework for insured depository institutions. Basel III increased existing risk-based capital requirements, introduced new requirements, and changed various capital component definitions. Basel III requires the Bank to maintain a new ratio of common equity Tier 1 capital (as defined) to risk-weighted assets. Basel III became effective for the Bank on January 1, 2015, with full compliance with all of the requirements phased-in over a multi-year schedule through January 1, 2019. Management believes that, as of December 31, 2015, the Bank would meet all capital adequacy requirements under Basel III on a fully phased-in basis if such requirements were currently effective. The actual and required regulatory capital ratios for the Bank at December 31, 2015 and 2014 are as follows:

 

		Actual				Required				To Be Well Capitalized
December 31, 2015
Total capital to risk-weighted assets			16.61	%			8.00	%			10.00	%
Tier 1 capital to risk-weighted assets			15.36	%			6.00	%			8.00	%
Common equity Tier 1 capital to risk-weighted assets			15.36	%			4.50	%			6.50	%
Tier 1 capital to average assets			11.89	%			4.00	%			5.00	%
December 31, 2014
Total capital to risk-weighted assets			19.40	%			8.00	%			10.00	%
Tier 1 capital to risk-weighted assets			18.14	%			4.00	%			6.00	%
Tier 1 capital to average assets			13.49	%			4.00	%			5.00	%

The Company and the Bank are subject to dividend restrictions set forth by their regulators. Under such restrictions, the Company and the Bank may not, without prior approval, declare dividends in excess of 75% of its current year’s net income plus 75% of the retained income for the immediately preceding year.

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(20) FAIR VALUE MEASUREMENTS AND DISCLOSURES:

The Company measures certain of its assets and liabilities on a fair value basis using various valuation techniques and assumptions, depending on the nature of the asset or liability. Fair value is defined by ASC Topic 820, Fair Value Measurements and Disclosures, as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Assets and liabilities that are recorded at fair value are grouped by three input levels based on the markets in which the financial instruments are traded and the reliability of the assumptions used to determine their fair values. These input levels are:

 

Level 1			–			Quoted prices for identical financial instruments in active markets.
Level 2			–			Quoted prices for similar financial instruments in active markets; quoted prices for identical or similar financial instruments in markets that are not active; and model-derived valuations whose inputs are observable.
Level 3			–			Unobservable inputs for determining the fair values of financial instruments that reflect the entity’s own assumptions about the assumptions market participants would use in pricing financial instruments.

The following table presents the Company’s significant assets and liabilities that are measured at fair value as of December 31, 2015 and 2014:

 

December 31, 2015		Level 1				Level 2				Level 3				Total
Investment securities:
U.S. Government and agency obligations		$	—			$	4,940,658			$	—			$	4,940,657
Obligations of states and political subdivisions			—				27,698,087				—				27,698,088
Mortgage-backed securities			—				41,378,466				—				41,378,467
Loans held-for-sale			—				—				1,043,463				1,043,463
Impaired loans			—				—				8,244,340				8,244,340
Foreclosed assets held for sale			—				—				5,336,212				5,336,212
December 31, 2014		Level 1				Level 2				Level 3				Total
Investment securities:
U.S. Government and agency obligations		$	—			$	5,818,476			$	—			$	5,818,476
Obligations of states and political subdivisions			—				31,399,241				—				31,399,241
Mortgage-backed securities			—				41,942,202				—				41,942,202
Loans held-for-sale			—				—				427,000				427,000
Impaired loans			—				—				11,128,394				11,128,394
Foreclosed assets held for sale			—				—				8,529,451				8,529,451

The following valuation methods and assumptions are used for the Company’s financial and non-financial assets recorded at fair value:

Investment securities – Investment securities available-for-sale are accounted for using fair value measurements on a recurring basis. The Company utilizes an independent third party as its principal pricing source for determining fair value of investment securities. The Company’s principal markets for its securities portfolio are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets. Fair values are based upon quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable investment securities, broker quotes or other observable inputs for similar investment securities. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs. In obtaining such valuation information from third party providers, the Company has evaluated the valuation methodologies used to develop the fair values in order to determine whether such valuations are representative of an exit price in the Company’s principal markets.

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Loans held for sale – Loans held for sale are carried at the lower of cost or estimated fair values, less estimated selling costs, and are subject to nonrecurring fair value adjustments. Estimated fair value is based on existing commitments, the current market value of similar loans, or other unobservable inputs.

Impaired loans – Impaired loans that are collateral dependent are accounted for using fair value measurements and are subject to nonrecurring fair value adjustments. The fair value of the underlying collateral is determined through the use of independent appraisals or other unobservable inputs. At December 31, 2015 and 2014, the carrying value of the Company’s impaired loans was reduced by $1,349,511 and $1,627,306, respectively, to an estimated fair value of $8,244,340 and $11,128,394. These reductions to the carrying values of impaired loans during 2015 and 2014 consisted of $606,756 and $150,202, respectively, of partial charge-offs and $742,755 and $1,477,104, respectively, of specific allocations within the allowance for loan losses.

Foreclosed assets held for sale – Foreclosed assets held for sale are initially accounted for at the lower of the recorded investment in the loan or fair value less estimated selling costs at the date of repossession or foreclosure and are subject to nonrecurring fair value adjustments. Valuations of these assets are periodically reviewed by management with the carrying values adjusted through non-interest income to the estimated fair value, less estimated selling costs, if lower at the date of review until disposition. Estimated fair values are generally based on independent appraisals or other unobservable inputs.

The Company recognizes transfers into and out of input levels at the end of the reporting period. During 2015 and 2014, there were no transfers of assets or liabilities measured at fair value between input levels.

ASC Topic 825 requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate that value. In cases where quoted market values are not available, fair values are based on estimates using present value, discounted cash flows, or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. ASC Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value at December 31, 2015 and 2014:

Cash and cash equivalents –

The carrying amount of cash and cash equivalents approximates fair value.

Investment securities –

As described previously, fair values of investment securities are estimated using quoted market prices, quoted market prices of comparable securities, broker quotes or other observable inputs for similar securities. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs.

Investment in Federal Home Loan Bank stock –

The carrying amount for FHLB stock is believed to approximate fair value.

Loans held for sale –

The carrying value of mortgage loans originated for sale approximates fair value due to the short holding periods for these loans.

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Loans –

The fair value of unimpaired loans and non-collateral dependent impaired loans not held for sale is estimated by discounting the expected future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for similar remaining maturities. The fair value of collateral dependent impaired loans is estimated based on the underlying collateral value. Loan fair value estimates involve judgments regarding future expected loss experience and risk characteristics.

Deposit liabilities –

The fair value of non-interest bearing demand, interest bearing demand, and savings deposits is equal to the amount payable on demand at the reporting date. Fair values for fixed rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently offered on time deposits to a schedule of aggregated expected monthly maturities on those deposits. The fair value of variable rate time deposits approximates their carrying value.

Borrowings—Federal Home Loan Bank –

For short-term and floating rate borrowings, the fair value of borrowings from the FHLB approximates the recorded liability. For long-term fixed-rate borrowings, fair value is estimated based on the current rates available to the Company for borrowings with similar terms and remaining maturities.

Other borrowings and subordinated debentures –

The fair value of other borrowings is estimated based on the current rates available to the Company for borrowings with similar terms and remaining maturities. For the Company’s floating rate subordinated debentures, the recorded liability approximates its fair value.

Off-balance-sheet instruments –

The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The carrying value of mortgage loans in process of origination and mortgage and credit card loans sold with recourse is a reasonable estimate of fair value.

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The carrying values and estimated fair values of the Company’s significant financial instruments at December 31, 2015 and 2014 are as follows (amounts in thousands):

 

		2015								2014
		Carrying Value				Fair Value				Carrying Value				Fair Value
Financial assets:
Cash and cash equivalents		$	17,096			$	17,096			$	28,592			$	28,592
Investment securities			80,658				80,684				85,971				86,057
Investment in FHLB stock			908				908				1,626				1,626
Loans held for sale			1,043				1,043				427				427
Loans			347,420				344,758				343,687				343,161
Financial liabilities:
Deposits			393,974				394,587				389,905				390,787
Borrowings – FHLB			17,563				17,334				29,677				29,848
Other borrowings			15,167				15,167				15,898				15,898
Off-balance sheet instruments:
Commitments to extend credit			36,402				36,402				34,825				34,825
Letters of credit			1,186				1,186				2,168				2,168
Mortgage loans sold with recourse			11,701				11,701				4,930				4,930
Credit card loans sold with recourse			365				365				273				273