Attached files
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| EX-32 - EXHIBIT 32 - Citizens Independent Bancorp, Inc. | v462276_ex32.htm |
| EX-31.2 - EXHIBIT 31.2 - Citizens Independent Bancorp, Inc. | v462276_ex31-2.htm |
| EX-31.1 - EXHIBIT 31.1 - Citizens Independent Bancorp, Inc. | v462276_ex31-1.htm |
| EX-23 - EXHIBIT 23 - Citizens Independent Bancorp, Inc. | v462276_ex23.htm |
| EX-21 - EXHIBIT 21 - Citizens Independent Bancorp, Inc. | v462276_ex21.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|
FORM 10-K |
þ Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 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 Number 333-191004
CITIZENS INDEPENDENT BANCORP, INC.
(Exact name of registrant as specified in its charter)
| OHIO | 31-1441050 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
| 188 West Main Street Logan, OH | 43138 |
| (Address of principal executive offices) | (zip code) |
Registrant’s telephone number, including area code: (740) 385-8561
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No þ
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, and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (Check one):
Large accelerated filer ¨ Accelerated filer ¨ Non-Accelerated filer ¨ Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Based on the closing book price of the registrant’s common shares as of June 30, 2014, the aggregate value of the voting common shares held by non-affiliates was $5,337,000.
As of March 20, 2017, 691,288 shares of the registrant’s no par value common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
INDEX
FORM 10-K
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ITEM 1 - DESCRIPTION OF BUSINESS
General
Citizens Independent Bancorp, Inc. (“Bancorp”) was organized under the laws of the State of Ohio in 1994 to be the bank holding company for The Citizens Bank of Logan (“Citizens Bank” or “Bank”). As a bank holding company, Bancorp is subject to regulation by the Federal Reserve Bank of Cleveland (“FRB”). The FRB regulates the types of banking and nonbanking activities in which the Company may engage. At this time, the Company is not directly engaged in any permissible nonbanking activities. The term “Company” is used in this Form 10-K to refer to Bancorp and Citizens Bank, collectively.
Chartered in 1961, the Bank is an independent, community bank headquartered in Logan, Ohio, offering a broad range of financial services. The Bank is regulated by the Federal Deposit Insurance Corporation (“FDIC”) and the Ohio Division of Financial Institutions (“DFI”).
The Bank operates through its home office, located at 188 West Main Street, Logan, Ohio 43138, and two other branch offices located in Athens and Hocking Counties in Ohio. We seek to deliver exceptional quality service while providing innovative products. Our priority has been, and continues to be, to create shareholder value by establishing an attractive commercial banking franchise and providing valuable service through relationship-oriented employees who are committed to the communities that we serve and to building lasting customer relationships.
As of December 31, 2016, the Company had consolidated net assets of $179.5 million, total loans (net of allowance for loan losses, referred to as “net loans”) of $152.1 million, total deposits of $156.1 million, and shareholders’ equity of $19.2 million.
Primary Lines of Business
The Bank is a full service bank offering a wide variety of services to satisfy the needs of the consumer and commercial customers in our market area. Fundamental to our business are skilled bankers building full banking relationships with high quality customers. We believe that there is no substitute for knowing and understanding your customer when seeking attractive risk-adjusted returns in the extension of credit. We plan to continue to evaluate and adapt our services and product offerings as our customer base grows and the needs of the marketplace evolve.
The Bank currently offers banking services of traditional, independent community banks including demand deposit accounts, savings accounts, and certificates of deposit. The Bank’s loans are for any legitimate purpose, which includes commercial and industrial loans, real estate loans, including commercial income-producing real estate loans, construction and development loans, residential real estate loans, and consumer loans. Consumer loans offered include loans for the purpose of purchasing automobiles, recreational vehicles, personal residences, household goods, home improvements, or for educational needs. The Bank’s business is not seasonal in any material respect.
The principal risk associated with each category of loans we make is the creditworthiness of the borrower. Borrower creditworthiness is affected by general economic conditions and the attributes of the borrower’s market or industry segment. Attributes of the relevant business market or industry segment include the competitive environment, customer and supplier power, threat of substitutes, and barriers to entry and exit. Our credit policy requires that key risks be identified and measured, documented and mitigated, to the extent possible, to seek to ensure the soundness of our loan portfolio.
Our credit policy also provides detailed procedures for making loans to individuals along with the regulatory requirements to ensure that all loan applications are evaluated subject to our fair lending policy. Our credit policy addresses the common credit standards for making loans to individuals, the credit analysis and financial statement requirements, the collateral requirements, including insurance coverage where appropriate, as well as the documentation required. Our ability to analyze a borrower’s current financial health and credit history, as well as the value of collateral as a secondary source of repayment, when applicable, are significant factors in determining the creditworthiness of loans to individuals.
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As of December 31, 2016, less than 2.4% of our total loan portfolio was unsecured, representing loans made to borrowers considered to be of sufficient financial strength to merit unsecured financing. As of December 31, 2016, approximately 28.6% of our total portfolio was fixed rate loans and approximately 71.4% of our total portfolio was variable rate loans.
Commercial and Industrial Loans. Our lending activities focus primarily on providing small and medium-sized businesses, agricultural businesses, and farms in our market area with commercial business loans. These loans are both secured and unsecured and are made available for general operating purposes, acquisition of fixed assets including real estate, equipment and machinery, lines of credit collateralized by inventory, and accounts receivable, as well as any other purposes considered appropriate by our executive management. For loans secured by accounts receivable or inventory, principal is typically repaid as the assets securing the loan are converted into cash. Typically, we make equipment loans for a term of three to five years at fixed or variable interest rates with the loan amortized over the term. Equipment loans are generally secured by the financed equipment at advance ratios that we believe are appropriate for the equipment type.
In our credit underwriting process, we carefully evaluate the borrower’s industry, operating performance, liquidity, and financial condition. We underwrite credits based on multiple repayment sources, including operating cash flow, liquidation of collateral, and guarantor support, if any. As of December 31, 2016, approximately 82.5% of our commercial and industrial loans were secured and a significant portion of those loans were supported by personal guarantees. We closely monitor the operating performance, liquidity and financial condition of borrowers through analysis of periodic financial statements and meetings with the borrower’s management. As part of our credit underwriting process, we also review the borrower’s total debt obligations on a global basis.
Commercial Real Estate Loans. We make commercial real estate loans, or CRE loans, on income-producing properties. The primary collateral for CRE loans is a first lien mortgage on multi-family, office, warehouse, hotel, or retail property plus assignments of all leases related to the properties. Our CRE loans generally have maturity dates and amortization schedules of 15 to 25 years, nearly all with floating rates of interest. We seek to reduce the risks associated with commercial mortgage lending by focusing our lending in our target markets and obtaining financial statements, tax returns or both from borrowers and guarantors at regular intervals. In underwriting commercial real estate loans, we consider the borrower’s financial strength, cash flow, liquidity, and credit. In the event there is more than one borrower on the loan, we analyze global cash flow of all borrowers.
We also make construction and land development loans generally to local builders, developers, or persons who will ultimately not occupy the property being developed. We have no loans to national developers. Our construction and land development loans are intended to provide interim financing on the property and the principal amounts are based on percentages of the cost or as-completed appraised value of the property securing the loans. Additionally, when underwriting the loan, we consider the operating performance, liquidity, financial condition, and the reputation of the borrower and any guarantors, the amount of the borrower’s equity in the project, independent appraisals, cost estimates, and pre-construction sale information. The ratio of the loan principal to the value of the collateral as established by independent appraisal typically does not exceed regulatory guidelines. Construction and land development loan funds are disbursed periodically at pre-specified stages of completion of construction and only after the project has been inspected by an experienced construction lender or third-party inspector. We carefully monitor these loans with on-site inspections and by closely monitoring disbursements.
CRE loans are secured by business and commercial properties. Typically our loan-to-value benchmark for these loans is below 80% at inception, with satisfactory debt service coverage ratios as well. As of December 31, 2016, we had $68.6 million in CRE loans outstanding, comprising approximately 44.5% of our total loan portfolio. In line with our strategic direction, these loans were down from last year when they totaled $69.3 million, or 46.4%, of the loan portfolio.
Residential Real Estate Loans. Our lending activities include the origination of first and second lien loans secured by residential real estate that is located primarily in our target markets. These customers primarily include branch and retail banking customers. Typically our loan-to-value benchmark for these loans is below 90% at inception, with satisfactory debt-to-income ratios as well. As of December 31, 2016, we had a total of $43.7 million in outstanding residential real estate loans, comprising 28.4% of our total loan portfolio, up from $43.4 million, or 29.1% of the loan portfolio at December 31, 2015.
Personal Loans and Credit. We make personal loans and lines of credit available to consumers for various purposes, such as the purchase of automobiles, boats, and other recreational vehicles and the making of home improvements and personal investments. At December 31, 2016, we had $30.2 million in personal loans, which represented 19.6% of total loans. The December 31, 2015 loan portfolio had $23.7 million of personal loans, or 15.9% of the portfolio.
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Deposit Generation. We generate deposits primarily through offering a broad array of deposit products to individuals, businesses, associations, financial institutions, and government entities in our geographic market. We generally seek a full banking relationship from our lending customers. This often includes encouraging a new customer to consider both business and personal checking accounts and other deposit services. Our deposit services include checking, savings, and money market accounts, certificates of deposit, direct deposit services, and telephone and internet banking. As of December 31, 2016, the Bank had total deposits of $156.1 million.
Stock Offering
On October 25, 2013, we commenced an offering for the sale of up to 369,754 of our common shares, without par value, at a subscription price of $15.39 per share (up to $5,690,514), which subscription price was intended to be equal to 90% of the book value per share of the Company on September 30, 2013. This price was later amended to $14.49 per share. The offering had two components, a rights offering, which expired on January 31, 2014, followed by a public offering which expired on June 25, 2014. At the close of the public offering, the Company had sold and issued a total of 238,057 shares of common stock with 119,003 accompanying warrants.
Common Stock Warrants
In the rights offering, for each two shares purchased by a shareholder, the Company issued to the shareholder, for no additional consideration, a warrant entitling the shareholder to purchase, upon exercise of the warrant, one additional common share. These warrants entitled the holder to purchase a share of the Company’s common stock at 90% of the prior month’s closing book value. Valid for a period of two years, the warrants expired June 25, 2016. Allocated value of these common stock warrants was based on the Black Scholes methodology. A total of 74,687 of the 119,003 total warrants issued were exercised.
Employees
Bancorp does not have any employees. As of December 31, 2016, the Bank had 55 full-time employees and 4 part-time employees, a reduction of 3 FTE from the December 31, 2015 level. The future success of the Bank depends, in part, on its ability to attract, retain, and motivate highly qualified management and other personnel, for whom competition is intense. The Bank believes that its employees are critical to the success of the institution. The Bank provides group health, dental, life, and disability insurance for its employees. The Bank’s employees are not represented by a collective bargaining agreement and the Bank has never experienced a strike or similar work stoppage. The Bank considers its relationship with its employees to be satisfactory.
Market
We consider our primary market area to be Hocking and Athens Counties, Ohio. The Bank serves this market through three full service locations, which include the Bank’s main office located at 188 West Main Street, Logan, Hocking County, Ohio. In a move to significantly lower delivery costs and improve visibility and service to the community, during the 2016 fiscal year we constructed a new full service branch replacing an existing full service branch and a limited service branch. We also closed an additional full service location in an unprofitable market sector. The principal economic activities in the Bank’s market area include manufacturing, the service sector for local universities, tourism, construction, healthcare, retailing, and food services.
Competition
Competition in originating non-residential mortgage and commercial loans comes mainly from commercial banks with banking center offices in the Company’s market area. Competition for the origination of mortgage loans arises mainly from savings associations, commercial banks, and mortgage companies. The distinction among market participants is based on a combination of price, the quality of customer service and name recognition. The Company competes for loans by offering competitive interest rates and product types and by seeking to provide a higher level of personal service to borrowers than is furnished by competitors. The Bank has a significant market share of the lending markets in which it conducts operations.
Management believes that the Bank’s most direct competition for deposits comes from local financial institutions. The distinction among market participants is based on price, quality of customer service, and name recognition. The Bank’s cost of funds fluctuates with general market interest rates. During certain interest rate environments, additional significant competition for deposits may be expected from corporate and governmental debt securities, as well as from money market mutual funds. The Bank competes for conventional deposits by emphasizing quality of service, extensive product lines and competitive pricing.
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Supervision and Regulation
Bancorp and the Bank are subject to extensive regulation by federal and state agencies. The regulation of bank holding companies and their subsidiaries is intended primarily for the protection of consumers, depositors, borrowers, the FDIC’s Deposit Insurance Fund and the banking system as a whole and not for the protection of shareholders. Applicable laws and regulations restrict permissible activities and investments and require actions to protect loan, deposit, brokerage, fiduciary, and other customers, as well as the FDIC’s Deposit Insurance Fund. They also may restrict Bancorp’s ability to repurchase its common shares or to receive dividends from the Bank and impose capital adequacy and liquidity requirements.
Bancorp is registered with the FRB as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). As a bank holding company, Bancorp is subject to regulation under the Bank Holding Company Act and to inspection, examination, and supervision by the FRB.
The Bank, as an Ohio commercial bank, is subject to regulation, supervision, and examination by the DFI and FDIC.
The following information describes selected federal and state statutory and regulatory provisions and is qualified in its entirety by reference to the full text of the particular statutory or regulatory provisions. These statutes and regulations are continually under review by the United States Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations, or regulatory policies applicable to Bancorp and the Bank could have a material effect on their respective businesses.
Regulation of Bank Holding Companies. As a bank holding company, Bancorp’s activities are subject to extensive regulation by the FRB. Bancorp is required to file reports with the FRB and such additional information as the FRB may require, and is subject to regular examinations by the FRB.
The FRB also has extensive enforcement authority over bank holding companies, including, among other things, the ability to:
| • | assess civil money penalties; | |
| • | issue cease and desist or removal orders; and | |
| • | require that a bank holding company divest subsidiaries (including a subsidiary bank). |
In general, the FRB may initiate enforcement actions for violations of laws and regulations and unsafe or unsound practices.
Under FRB policy, a bank holding company is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support such subsidiary bank. Under this policy, the FRB may require a bank holding company to contribute additional capital to an undercapitalized subsidiary bank and may disapprove of the payment of dividends to the shareholders if the FRB believes the payment of such dividends would be an unsafe or unsound practice.
The Bank Holding Company Act requires the prior approval of the FRB in any case where a bank holding company proposes to:
| • | acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority-owned by it; | |
| • | acquire all or substantially all of the assets of another bank or another financial or bank holding company; or | |
| • | merge or consolidate with any other financial or bank holding company. |
The Gramm-Leach-Bliley Act of 1999 (“GLBA”) permits a qualifying bank holding company to become a financial holding company and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature and not otherwise permissible for a bank holding company. Bancorp is not a financial holding company.
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Each subsidiary bank of a bank holding company is subject to certain restrictions imposed by the Federal Reserve Act on the maintenance of reserves against deposits, extensions of credit to the bank holding company or any of its subsidiaries, investments in the shares or other securities of the bank holding company or its subsidiaries, and the taking of such shares or securities as collateral for loans to any borrower. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property, or furnishing of any services. Various consumer laws and regulations also affect the operations of these subsidiaries.
Transactions with Affiliates, Directors, Executive Officers, and Shareholders. Sections 23A and 23B of the Federal Reserve Act and FRB Regulation W generally:
| • | limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate; | |
| • | limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with all affiliates; and | |
| • | require that all such transactions be on terms substantially the same, or at least as favorable to the bank or subsidiary, as those provided to a non-affiliate. |
An affiliate of a bank is any company or entity which controls, is controlled by, or is under common control with the bank. The term “covered transaction” includes the making of loans to the affiliate, the purchase of assets from the affiliate, the issuance of a guarantee on behalf of the affiliate, the purchase of securities issued by the affiliate, and other similar types of transactions.
A bank’s authority to extend credit to executive officers, directors, and greater than 10% shareholders, as well as entities such persons control, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder by the FRB. Among other things, these loans must be made on terms (including interest rates charged and collateral required) substantially the same as those offered to unaffiliated individuals or be made as part of a benefit or compensation program and on terms widely available to employees, and must not involve a greater than normal risk of repayment. In addition, the amount of loans a bank may make to these persons is based, in part, on the bank’s capital position, and specified approval procedures must be followed in making loans which exceed specified amounts.
Regulation of Ohio Banks. Regulation by the DFI affects the internal organization of Citizens Bank, as well as its depository, lending, and other investment activities. Periodic examinations by the DFI are usually conducted on a joint basis with the FDIC. Ohio law requires that Citizens Bank maintain federal deposit insurance as a condition of doing business. The ability of Ohio chartered banks to engage in certain state-authorized investments is subject to oversight and approval by the FDIC.
The ability of Citizens Bank to engage in any state-authorized activities or make any state-authorized investments, as principal, is limited if such activity is conducted or investment is made in a manner different than that permitted for, or subject to different terms and conditions than those imposed on national banks. Engaging as a principal in any such activity or investment not permissible for a national bank is subject to approval by the FDIC. Such approval will not be granted unless certain capital requirements are met and there is not a significant risk to the FDIC insurance fund. Most equity and real estate investments (excluding office space and other real estate owned) authorized by state law are not permitted for national banks. Certain exceptions are granted for activities deemed by the FRB to be closely related to banking and for FDIC-approved subsidiary activities.
Any mergers involving acquisitions of control of Ohio banks must be approved by the DFI. The DFI may initiate certain supervisory measures or formal enforcement actions against Ohio chartered banks. Ultimately, if the grounds provided by law exist, the DFI may place an Ohio chartered bank in conservatorship or receivership.
In addition to being governed by the laws of Ohio specifically governing banks, Citizens Bank is also governed by Ohio corporate law, to the extent such law does not conflict with the laws specifically governing banks.
Federal Deposit Insurance Corporation. The FDIC is an independent federal agency which insures the deposits, up to prescribed statutory limits, of federally-insured banks and savings associations and safeguards the safety and soundness of the financial institution industry.
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Insurance premiums for each insured depository institution are determined based upon the institution’s capital level and supervisory rating provided to the FDIC by the institution’s primary federal regulator and other information the FDIC determines to be relevant to the risk posed to the Deposit Insurance Fund by the institution. The assessment rate determined by considering such information is then applied to the amount of the institution’s average assets minus average tangible equity to determine the institution’s insurance premium. An increase in the assessment rate could have a material adverse effect on the earnings of the affected institution(s), depending on the amount of the increase.
Insurance of deposits may be terminated by the FDIC upon a finding that the insured depository institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition enacted or imposed by the institution’s regulatory agency.
Regulatory Capital. The FRB has adopted risk-based capital guidelines for bank holding companies and state member banks. The Office of the Comptroller of the Currency (the “OCC”) and the FDIC have adopted risk-based capital guidelines for national banks and state non-member banks, respectively. The guidelines provide a systematic analytical framework which makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy, and minimizes disincentives to holding liquid, low-risk assets. Capital levels as measured by these standards are also used to categorize financial institutions for purposes of certain prompt corrective action regulatory provisions.
Effective January 1, 2015, the new minimum capital requirements became effective, including a new capital conservation buffer and deductions from common equity capital phase in from January 1, 2016, through January 1, 2019.
The new rules include (a) a new common equity tier 1 capital ratio of at least 4.5 %, (b) a tier 1 capital ratio of at least 6.0 %, rather than the former 4.0 %, (c) a minimum total capital ratio that remains at 8.0 %, and (d) a minimum leverage ratio of 4.0%.
Common equity for the common equity tier 1 capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions.
Tier 1 capital includes common equity as defined for the common equity tier 1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus and trust preferred securities that have been grandfathered (but which are not permitted going forward), and limited amounts of minority interests in the form of additional Tier 1 capital instruments, less certain deductions.
Tier 2 capital, which can be included in the total capital ratio, includes certain capital instruments (such as subordinated debt) and limited amounts of the allowance for loan and lease losses, subject to new eligibility criteria, less applicable deductions.
The deductions from common equity tier 1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels).
Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Some of the risk weightings were changed effective January 1, 2015.
The new rules also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the company does not hold a capital conservation buffer of greater than 2.5 % composed of common equity tier 1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5 % at the beginning of the quarter. The capital conservation buffer phases in starting on January 1, 2016 and increases by 0.625% each year through January 1, 2019.
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In addition to the capital adequacy requirements set forth above, every financial institution is classified into one of five categories based upon the institution’s capital ratios, the results of regulatory examinations of the institution and whether the institution is subject to enforcement agreements with its regulatory authorities. The categories are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A bank with a capital level that might qualify for well-capitalized or adequately-capitalized status may nevertheless be treated as though the bank is in the next lower capital category if the bank’s primary federal banking supervisory authority determines that an unsafe or unsound condition or practice warrants that treatment. A bank’s operations can be significantly affected by its capital classification under the prompt corrective action rules. For example, a bank that is not well capitalized generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market without advance regulatory approval. At each successively lower capital category, an insured depository institution is subject to additional restrictions. Undercapitalized banks are required to take specified actions to increase their capital or otherwise decrease the risk to the federal deposit insurance fund. Bank regulatory agencies generally are required to appoint a receiver or conservator within 90 days after a bank becomes critically undercapitalized.
Effective January 1, 2015, in order to be “well-capitalized,” a bank must have a common equity tier 1 capital ratio of at least 6.5%, a total capital ratio of at least 10%, a Tier 1 capital ratio of at least 8%, and a leverage capital ratio of at least 5%, and the bank must not be subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level or any capital measure.
Dividends and Distributions. Shareholders of an Ohio corporation are entitled to dividends when, as, and if declared by the corporation’s board of directors. Bancorp’s ability to obtain funds for the payment of dividends and for other cash requirements depends on the amount of dividends that may be paid by the Bank to Bancorp. Under Ohio law, a dividend may be declared by a bank from surplus, meaning additional paid-in capital, with the approval of the DFI and the holders of two-thirds of the bank’s outstanding shares. Superintendent approval is also necessary for payment of a dividend if the total of all cash dividends in a year exceeds the sum of (i) net income for the year and (ii) retained net income for the two preceding years. The FDIC also may restrict the Bank’s ability to pay a dividend if the FDIC has reasonable cause to believe that the payment of the dividend would constitute an unsafe and unsound practice.
The FRB expects Bancorp to serve as a source of strength to the Bank, which may require Bancorp to retain capital for further investment in the Bank rather than pay dividends to the Bancorp shareholders. The FRB has issued a policy statement with regard to the payment of cash dividends by bank holding companies. The policy statement provides that, as a matter of prudent banking, a bank holding company should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends, and the prospective rate of earnings retentions appears to be consistent with the bank holding company’s capital needs, asset quality, and overall financial condition. Accordingly, a bank holding company should not pay cash dividends that exceed its net income or can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. Under certain circumstances, a bank holding company is required by such policy statement to provide advance notice to the FRB before paying a dividend.
Fiscal and Monetary Policies. The business and earnings of Bancorp and the Bank are affected significantly by the fiscal and monetary policies of the United States government and its agencies. Citizens Bank is particularly affected by the policies of the FRB, which regulates the supply of money and credit in the United States. These policies are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits.
Privacy Provisions of Gramm-Leach-Bliley Act. Under the GLBA, federal banking regulators were required to adopt rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party.
Patriot Act. In response to the terrorist events of September 11, 2001, the Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”) was signed into law in October 2001. The Patriot Act gives the United States government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. Title III of the Patriot Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions. Among other requirements, Title III and related regulations require regulated financial institutions to establish a program specifying procedures for obtaining identifying information from customers seeking to open new accounts and establish enhanced due diligence policies, procedures, and controls designed to detect and report suspicious activity. Citizens Bank has established policies and procedures that are believed to be compliant with the requirements of the Patriot Act.
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Dodd-Frank Act. On July 21, 2010, President Obama signed the Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) into law. The Dodd-Frank Act, amongst other things, created the Consumer Financial Protection Bureau, permitted the payment of interest on commercial demand deposit accounts, and increased the standard maximum amount of deposit insurance per customer to $250,000.
Executive and Incentive Compensation. In June 2010, the FRB, the OCC, and the FDIC issued joint interagency guidance on incentive compensation policies (the “Joint Guidance”) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. This principles-based guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should: (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks; (ii) be compatible with effective internal controls and risk management; and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.
Pursuant to the Joint Guidance, the FRB and FDIC will review as part of a regular, risk-focused examination process, the incentive compensation arrangements of financial institutions such as Bancorp and Citizens Bank. Such reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination and deficiencies will be incorporated into the institution’s supervisory ratings, which can affect the institution’s ability to make acquisitions and take other actions. Enforcement actions may be taken against an institution if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and prompt and effective measures are not being taken to correct the deficiencies.
Regulatory Matters. Under applicable laws, the FDIC and the DFI, as the Bank’s primary regulators, and the FRB, as Bancorp’s primary federal regulator, have the ability to impose substantial sanctions, restrictions, and requirements on us if they find, upon examination or otherwise, weaknesses with respect to our operations.
In October 2012, the Bank entered into publicly available Consent Orders with the FDIC and the DFI (collectively referred to as the Orders), which required the Bank to take a number of actions. In October 2015, the Orders were lifted and the Bank entered into a memorandum of understanding (the “2015 MOU”) with the FDIC and DFI. Significant among the ongoing required actions was the development of a capital plan resulting in the Bank meeting and maintaining its level of Tier 1 capital as a percentage of its adjusted average total assets at a minimum of 8.00% and its level of qualifying total capital as a percentage of risk-weighted assets at a minimum of 11.50%. The Bank was also required to obtain approval from the FDIC and DFI prior to the payment of any dividends. In August 2016, both the FDIC and the DFI released the Bank from the 2015 MOU without restriction. The Bank is no longer required to seek prior approval of any dividends.
On July 5, 2011, the Bancorp entered into a memorandum of understanding (the “FRB 2011 MOU”) with the FRB. The FRB 2011 MOU prohibited the Bancorp, without prior approval of the FRB, from declaring or paying cash dividends; taking dividends or any other form of payment representing a reduction in the Bank’s capital; incurring, increasing, or guaranteeing any debt; or purchasing or redeeming any shares. On August 18, 2016 the FRB released the Bancorp from the FRB 2011 MOU without restriction. Bancorp may declare and pay cash dividends; take dividends or any other form of payment representing a reduction in the Bank’s capital; incur, increase, or guarantee any debt; or purchase or redeem any shares as approved by the board of directors without prior approval of the FRB.
The Company is subject to risks inherent to the Company’s business. The material risks and uncertainties that management believes affect the Company are described below. These risks are not all inclusive. Additional risks and uncertainties that management is not aware, focused on, or currently deems immaterial may also impair the Company’s business operations. If any of the following risks occur, the Company’s financial condition could be materially and adversely affected.
| 10 |
Governmental regulation and regulatory actions against us may impair our operations or restrict our growth.
Bancorp is subject to significant governmental supervision and regulation. These regulations are intended primarily for the protection of depositors’ funds, federal deposit insurance funds, and the banking system as a whole, not security holders. These regulations affect our lending practices, capital structure, investment practices, dividend policy, and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations, and policies for possible changes. Statutes and regulations affecting our business may be changed at any time and the interpretation of these statutes and regulations by examining authorities may also change.
There can be no assurance that such changes to the statutes and regulations or to their interpretation will not adversely affect our business. Such changes could subject us to additional costs, limit the types of financial services and products Bancorp may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things.
If our allowance for loan losses is not sufficient to cover our actual loan losses, our ability to remain profitable will be adversely affected.
At December 31, 2016, our non-performing loans totaled $0.8 million, representing 0.5% of total loans and 0.4% of total assets. In addition, loans that management has classified as either substandard, doubtful or loss totaled $4.9 million, representing 3.2% of total loans and 2.7% of total assets. At December 31, 2016, our allowance for loan losses was $1.8 million, representing 240.6% of non-performing loans. In the event our loan customers do not repay their loans according to their terms and the collateral securing the payment of these loans is insufficient to pay any remaining loan balance, Bancorp may experience significant loan losses, which could have a materially adverse effect on our operating results. Bancorp makes various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, Bancorp reviews loans and our loss and delinquency experience, and evaluates economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable losses in our loan portfolio, resulting in additions to our allowance. The additions to our allowance for loan losses would be made through increased provision for loan losses, which would reduce our income.
Bank regulators periodically review Citizens Bank’s allowance for loan losses and may require it to increase the allowance for loan losses. Any increase in the allowance for loan losses as required by these regulatory authorities could have a material adverse effect on Bancorp’s results of operations and financial condition.
A large percentage of our loans are collateralized by real estate, and deterioration in the real estate market may result in additional losses and adversely affect our financial results.
Our results of operations have been, and in future periods will continue to be significantly impacted by the economy in Ohio. Deterioration of the economic environment Bancorp is exposed to, including a continued decline or worsening declines in the real estate market and single-family home re-sales or a material external shock, may significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. In the event of a default with respect to any of these loans, amounts received upon sale of the collateral may be insufficient to recover outstanding principal and interest on the loan. In the past, material declines in the value of the real estate assets securing many of our commercial real estate loans led to significant credit losses in the portfolio.
The same deterioration noted above can affect our real estate owned portfolio, and if the economic environment declines, it could significantly impair the value of the portfolio and our ability to sell the properties in a timely manner.
Changes in economic and political conditions could adversely affect Bancorp’s earnings through declines in deposits, loan demand, the ability of its customers to repay loans and the value of the collateral securing its loans.
Bancorp’s success depends, in part, on economic and political conditions, local and national, as well as governmental fiscal and monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy and other factors beyond Bancorp’s control may adversely affect its deposit levels and composition, demand for loans, the ability of its borrowers to repay their loans and the value of the collateral securing the loans it makes. Economic turmoil in Europe and Asia and changes in oil production in the Middle East affect the economy and stock prices in the United States, which can affect Bancorp’s earnings and capital and the ability of its customers to repay loans. Because Bancorp has a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral and Bancorp’s ability to sell the collateral upon foreclosure.
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Volatility in the economy may negatively impact the fair value of our shares.
The market price for Bancorp’s common shares has been volatile in the past, and several factors could cause the price to fluctuate substantially in the future, including:
| • | announcements of developments related to our business; | |
| • | fluctuations in our results of operations; | |
| • | sales of substantial amounts of our securities into the marketplace; | |
| • | general conditions in our markets or the worldwide economy; | |
| • | a shortfall in revenues or earnings compared to securities analysts’ expectations; | |
| • | our inability to pay cash dividends; | |
| • | changes in analysts’ recommendations or projections; and | |
| • | our announcement of other projects. |
Changes in interest rates could adversely affect our financial condition and results of operations.
Our results of operations depend substantially on our net interest income, which is the difference between (i) interest income on interest-earning assets, principally loans and investment securities, and (ii) interest expense on deposit accounts and borrowings. These rates are highly sensitive to many factors beyond our control, including general economic conditions, inflation, recession, unemployment, money supply, and the policies of various governmental and regulatory authorities. While Bancorp has taken measures intended to manage the risks of operating in a changing interest rate environment, there can be no assurance that these measures will be effective in avoiding undue interest rate risk.
Increases in interest rates can affect the value of loans and other assets, including our ability to realize gains on the sale of assets. Bancorp originates loans for sale and for our portfolio. Increasing interest rates may reduce the volume of origination of loans for sale and consequently the volume of fee income earned on such sales. Further, increasing interest rates may adversely affect the ability of borrowers to pay the principal or interest on loans and leases, resulting in an increase in non-performing assets and a reduction of income recognized.
We rely, in part, on external financing to fund our operations and the availability of such funds in the future could adversely impact its growth strategy and prospects.
The Bank relies on deposits, advances from the Federal Home Loan Bank (the “FHLB”), and other borrowings to fund its operations. Although the Company considers such sources of funds adequate for its current capital needs, the Company may seek additional debt or equity capital in the future to achieve its long-term business objectives. The sale of equity or convertible debt securities in the future may be dilutive to the Company shareholders, and debt refinancing arrangements may require the Company to pledge some of its assets and enter into covenants that would restrict its ability to incur further indebtedness. Additional financing sources, if sought, might be unavailable to Bancorp or, if available, could be on terms unfavorable to it. If additional financing sources are unavailable, not available on reasonable terms or the Company is unable to obtain any required regulatory approval for additional debt, the Company’s growth strategy and future prospects could be adversely impacted.
Credit risks could adversely affect our results of operations.
There are inherent risks associated with our lending activities, including credit risk, which is the risk that borrowers may not repay outstanding loans or that the value of the collateral securing loans may decrease. Bancorp extends credit to a variety of customers based on internally set standards and judgment. Bancorp attempts to manage credit risk through a program of underwriting standards, the review of certain credit decisions, and an on-going process of assessment of the quality of the credit already extended. However, conditions such as inflation, recession, unemployment, changes in interest rates, money supply, and other factors beyond our control may increase our credit risk. Such adverse changes in the economy may have a negative impact on the ability of borrowers to repay their loans. Because Bancorp has a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral. In addition, substantially all of our loans are to individuals and businesses in Ohio. Consequently, any decline in the economy of this market area could have a materially adverse effect on our financial condition and results of operations.
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We operate in extremely competitive markets, and our business will suffer if we are unable to compete effectively.
In our market area, the Company encounters significant competition from other commercial banks, savings associations, savings banks, insurance companies, consumer finance companies, credit unions, other lenders and with the issuers of commercial paper and other securities, such as shares in money market mutual funds. The increasingly competitive environment is a result primarily of changes in regulation and the accelerating pace of consolidation among financial service providers. Many of our competitors have substantially greater resources and lending limits than the Company does and may offer services that the Company does not or cannot provide.
The preparation of financial statements requires management to make estimates about matters that are inherently uncertain.
Management’s accounting policies and methods are fundamental to how the Company records and reports our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods in order to ensure that they comply with generally accepted accounting principles and reflect management’s judgment as to the most appropriate manner in which to record and report our financial condition and results of operations. The most critical estimates are the level of the allowance for loan losses, other real estate owned valuation, and the valuation allowance on the deferred tax asset. Due to the inherent nature of these estimates, Bancorp cannot provide absolute assurance that it will not significantly adjust the allowance for loan losses or valuations due to uncertainties.
Our organizational documents may have the effect of discouraging a third party from acquiring us.
Our articles of incorporation and code of regulations, as amended, contain provisions that make it more difficult for a third party to gain control over or acquire us. The current provisions that may have anti-takeover effects include: (a) the elimination of cumulative voting in the election of directors; (b) the requirement that shareholder nominations for election to the Board of Directors be made in writing and delivered or mailed to the president of the Company within specified time frames; (c) the requirement that directors may be removed only by the affirmative vote of holders of not less than 80% of the voting power of the Company entitled to vote at an election of directors; (d) the requirements that certain business combinations be approved by at least 80% of the voting power of the Company, depending on the nature of the recommendation of the Board of Directors with regard to the relevant acquisition; (e) the lack of a provision opting out of application of the Ohio Merger Moratorium statute and its restrictions on persons who become the beneficial owner of ten percent or more of the shares of the Company and; (f) the classification of the Board of Directors into three classes with staggered terms. These provisions of our governing documents may have the effect of delaying, deferring, or preventing a transaction or a change in control that might be in the best interest of our shareholders.
Consumers may decide not to use banks to complete their financial transactions.
Technology and other changes are allowing parties to utilize alternative methods to complete financial transactions that historically have involved banks. For example, consumers can now maintain funds in brokerage accounts or mutual funds that would have historically been held as bank deposits. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.
We may be named as a defendant from time to time in a variety of litigation and other actions.
Bancorp or its subsidiary may be named as a defendant from time to time in a variety of litigation arising in the ordinary course of their respective businesses. Such litigation is normally covered by errors and omissions or other appropriate insurance. However, significant litigation could cause the Company to devote substantial time and resources to defending its business or result in judgments or settlements that exceed insurance coverage, which could have a material adverse effect on the Company’s financial condition and results of operation. Further, any claims asserted against Bancorp or Citizens Bank, regardless of merit or eventual outcome may harm the Company’s reputation and result in loss of business. In addition, the Company may not be able to obtain new or different insurance coverage, or adequate replacement policies with acceptable terms.
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Our ability to use net operating loss carry forwards to reduce future tax payments may be limited or restricted.
Bancorp has generated net operating losses (“NOLs”) as a result of our recent losses. Bancorp generally is able to carry NOLs forward to reduce taxable income in future years. However, our ability to utilize the NOLs is subject to the rules of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). Section 382 generally restricts the use of NOLs after an “ownership change.” An ownership change generally occurs if, among other things, the shareholders (or specified groups of shareholders) who own or have owned, (directly, indirectly, or constructively under Section 382 and the Treasury regulations) 5% or more of a corporation’s common shares or are otherwise treated as 5% shareholders under Section 382 and the Treasury regulations caused an increase in their aggregate percentage ownership of that corporation’s stock by more than 50 percentage points over the lowest percentage of the shares owned by these shareholders over a three-year rolling period. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of taxable income a corporation may offset with NOL carry forwards. This annual limitation is generally equal to the product of the value of the corporation’s shares on the date of the ownership, multiplied by the long-term tax-exempt rate published monthly by the Internal Revenue Service. Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOL carry forwards.
Bancorp cannot ensure that our ability to use our NOLs to offset income will not become limited in the future. As a result, Bancorp could pay taxes earlier and in larger amounts than would be the case if our NOLs were available to reduce our federal income taxes without restriction.
Potential misuse of funds or information by the Bank’s employees or by third parties could result in damage to our customers for which we could be held liable, subject the Company to regulatory sanctions and otherwise adversely affect our financial condition and results of operations.
Our employees handle a significant amount of funds, as well as financial and personal information. Although the Company has implemented systems to minimize the risk of fraudulent taking or misuse of funds or information, there can be no assurance that such systems will be adequate or that a taking or misuse of funds or information by employees, by third parties who have authorized access to funds or information, or by third parties who are able to access funds or information without authorization will never occur. We could be held liable for such an event and could also be subject to regulatory sanctions. We could also incur the expense of developing additional controls to prevent future such occurrences. Although the Company has insurance to cover such potential losses, we cannot provide assurance that such insurance will be adequate to meet any liability. In addition, any loss of trust or confidence placed in the Company by our clients could result in a loss of business, which could adversely affect our financial condition and results of operations.
The Company could suffer a material adverse impact from interruptions in the effective operation of, or security breaches affecting, our computer systems.
The Bank relies heavily on information systems to conduct our business and to process, record, and monitor transactions. Risks to the system result from a variety of factors, including the potential for bad acts on the part of hackers, criminals, employees and others. As one example, in recent years, some banks have experienced denial of service attacks in which individuals or organizations flood the bank’s website with extraordinarily high volumes of traffic, with the goal and effect of disrupting the ability of the bank to process transactions. We are also at risk for the impact of natural disasters, terrorism and international hostilities on its systems or for the effects of outages or other failures involving power or communications systems operated by others. These risks also arise from the same types of threats to businesses with which we deal.
Potential adverse consequences of attacks on the Company’s computer systems or other threats include damage to our reputation, loss of customer business, litigation and increased regulatory scrutiny, which might also result in financial loss and require additional efforts and expense to attempt to prevent such adverse consequences in the future.
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The absence of a highly liquid trading market in our common shares may adversely affect your ability to resell shares at prices that you find attractive, or at all.
Our common shares are quoted on the over-the-counter market “pink sheets”, but are not traded on any other national securities exchange and we do not intend to apply for listing on any national securities exchange or stock market. In the absence of a highly liquid trading market, investors may be unable to liquidate their investment or make any profit from the investment. Furthermore, it may be difficult for holders to resell their shares at prices they find attractive, or at all.
We may issue additional common shares or convertible securities that will dilute the percentage ownership interest of existing shareholders and may dilute the book value per common share and adversely affect the terms on which we may obtain additional capital.
Our authorized capital includes 2,000,000 common shares and 100,000 preferred shares. As of December 31, 2016, we had 691,287 common shares and no preferred shares outstanding. Although we presently do not have any intention of issuing additional common shares, we may do so in the future in order to meet our capital needs and regulatory requirements, and we may be able to do so without shareholder approval. Our Board of Directors generally has the authority, without action by or vote of the shareholders, to issue all or part of any authorized, but unissued, common shares for any corporate purpose, including issuance of equity-based incentives under or outside of our equity compensation plans. We plan no immediate activity. Any issuance of additional common shares or convertible securities will dilute the percentage ownership interest of our shareholders and may dilute the book value per common share.
ITEM 1B. - UNRESOLVED STAFF COMMENTS
No response required.
The Company conducts business from three office locations. The Bank’s main office is located at 188 West Main Street, Logan, Ohio 43138. The main office is housed in a Bank-owned 4,000+ square foot building with drive-up lanes and a detached ATM. The Bank’s offices are located in Logan, Ohio (main office and 1 branch), and Athens, Ohio (1 branch). The Company currently operates from the following locations, which are owned by the Bank:
|
Locations | |
| · Main Office 188 West Main Street Logan, Ohio 43138 |
· Branch Logan. Ohio 43138 |
| · Branch 20 East Stimson Avenue Athens, Ohio 45701 | |
In September, 2015, an in-store, limited service, bank branch in Athens, Ohio was closed, and in July, 2016 a full service branch in Nelsonville, Ohio was also closed. Analysis indicated that these particular locations were not profitable and bank resources could be better deployed elsewhere. In both cases, incremental cost savings more than offset the costs of the lease buyout. In September, 2016, an in-store branch in Logan, Ohio was closed and in November, 2016 a full service branch in Logan, Ohio was also closed. These two leased branches were merged into a newly constructed, bank owned, branch in Logan. Management believes that the site of the new branch is highly advantageous in comparison to the two branches replaced, will result in significantly reduced costs, and will enhance the business model. Cost reductions resulting from lower maintenance, energy expenses, and personnel costs make the project accretive to earnings.
From time to time, we are involved in routine litigation that arises in the normal course of business. However, neither Bancorp nor the Bank is currently involved in any litigation that management believes, either singularly or in the aggregate, could be reasonably expected to have a material adverse effect on its business, financial condition or results of operation.
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ITEM 4 – Mine Safety Disclosures
Not applicable.
ITEM 5 – Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Beginning on October 5, 2016, our common shares started being quoted for trading on the Over-The-Counter Pink Sheets (“OTC Pink”) Bulletin Board under the symbol “CZID.” The number of record holders of the Company’s common shares as of March 20, 2017 was 658. The following quotations obtained from the OTC Pink since our shares became listed reflect the high and low bid prices for our common shares based on inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
| High Bid | Low Bid | ||||||||
| Quarter ended: | |||||||||
| March 31 | N/A | N/A | |||||||
| June 30 | N/A | N/A | |||||||
| September 30 | N/A | N/A | |||||||
| December 31 | $ | 26.50 | $ | 18.30 | |||||
The last cash dividend was paid in December 2010. Our shareholders are entitled to receive distributions out of legally available funds as, and when, declared by the Board, in its sole discretion.
| 16 |
ITEM 6 – SELECTED FINANCIAL DATA
| (Dollars in thousands) | ||||||||
| Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||
| Summary Income Data: | ||||||||
| Total interest income | $ | 8,047 | $ | 8,172 | ||||
| Total interest expense | 818 | 1,225 | ||||||
| Net interest income | 7,229 | 6,947 | ||||||
| Provision for loan losses | - | (250 | ) | |||||
| Noninterest income | 1,737 | 1,491 | ||||||
| Noninterest expense | 7,116 | 7,802 | ||||||
| Income before income taxes | 1,850 | 886 | ||||||
| Income tax expense (benefit) | 622 | 232 | ||||||
| Net income | $ | 1,228 | $ | 654 | ||||
| Per Share Income Data: | ||||||||
| Earnings per common share | $ | 1.80 | $ | 1.01 | ||||
| Book value per share | $ | 27.82 | $ | 26.00 | ||||
| Outstanding shares | 691,287 | 667,618 | ||||||
| Selected Balance Sheet Data (period end): | ||||||||
| Total assets | $ | 179,497 | $ | 183,795 | ||||
| Securities available for sale | 8,237 | 14,013 | ||||||
| Loans, net of allowance for loan losses (1) | 152,273 | 147,153 | ||||||
| Allowance for loan losses | (1,848 | ) | (2,078 | ) | ||||
| Deposits | 156,138 | 162,325 | ||||||
| Shareholders' equty | 19,230 | 17,359 | ||||||
| Performance Ratios (averages): | ||||||||
| Return on shareholders' equity | 6.66 | % | 3.93 | % | ||||
| Return on assets | 0.68 | % | 0.34 | % | ||||
| Net interest income to total assets | 4.01 | % | 3.59 | % | ||||
| Shareholders' equity to total assets | 10.22 | % | 8.60 | % | ||||
| Asset Quality Data: | ||||||||
| Nonperforming assets to total assets | 0.43 | % | 0.86 | % | ||||
| Nonperforming assets to capital | 3.99 | % | 9.15 | % | ||||
| Nonperforming loans to total loans | 0.50 | % | 0.90 | % | ||||
| Nonperforming loans to allowance for loan losses | 41.56 | % | 64.97 | % | ||||
| Allowance for loan losses to total loans | 1.20 | % | 1.39 | % | ||||
| Ratio of net charge-offs to total loans | 0.15 | % | 1.03 | % | ||||
| (1) Includes loans held for sale | ||||||||
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ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Forward-Looking Statements
Certain statements in this Form 10-K, which are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act , Section 21E of the Exchange Act, and the Private Securities Litigation Reform Act of 1995. Words such as “anticipate,” “estimates,” “may,” “feels,” “expects,” “believes,” “plans,” “will,” “would,” “should,” “could,” and similar expressions are intended to identify these forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. Factors that might cause such a difference include, but are not limited to:
| · | the success, impact, and timing of the implementation of the Company’s business strategies, including the successful integration of the recently completed acquisitions, the expansion of consumer lending activity, and rebranding efforts; |
| · | competitive pressures among financial institutions or from non-financial institutions may increase significantly, including product and pricing pressures and the Company’s ability to attract, develop, and retain qualified professionals; |
| · | changes in the interest rate environment due to economic conditions and/or the fiscal policies of the U.S. government and FRB, which may adversely impact interest margins; |
| · | changes in prepayment speeds, loan originations, and charge-offs, which may be less favorable than expected and adversely impact the amount of interest income generated; |
| · | adverse changes in the economic conditions and/or activities, including impacts from the implementation of the Budget Control Act of 2011 and the American Taxpayer Relief Act of 2012, as well as continuing economic uncertainty in the U.S., the European Union, and other areas, which could decrease sales volumes and increase loan delinquencies and defaults; |
| · | legislative or regulatory changes or actions, including in particular the Dodd-Frank Act and the regulations promulgated and to be promulgated thereunder by the FDIC, the FRB and others, that may subject the Company to a variety of new and more stringent legal and regulatory requirements which adversely affect their respective businesses; |
| · | deterioration in the credit quality of the Company’s loan portfolio, which may adversely impact the provision for loan losses; |
| · | changes in accounting standards, policies, estimates, or procedures, which may adversely affect the Company’s reported financial condition or results of operations; |
| · | adverse changes in the conditions and trends in the financial markets, including political developments, which may adversely affect the fair value of securities within the Company’s investment portfolio and interest rate sensitivity of the Company’s consolidated balance sheet; |
| · | Bancorp’s ability to receive dividends from its subsidiary; |
| · | the Company’s ability to maintain required capital levels and adequate sources of funding and liquidity; |
| · | the impact of larger or similar sized financial institutions encountering problems, which may adversely affect the banking industry and/or the Company’s business generation and retention, funding, and liquidity; |
| · | the costs and effects of regulatory and legal developments, including the outcome of potential regulatory or other governmental inquiries and legal proceedings and results of regulatory examinations; |
| · | the Company’s ability to secure confidential information through the use of computer systems and telecommunications networks, including those of the Company’s third-party vendors and other service providers, may prove inadequate, which could adversely affect customer confidence in the Company and/or result in the Company incurring a financial loss; |
| 18 |
| · | the overall adequacy of the Company’s risk management program; and |
| · | other risk factors relating to the banking industry or the Company as detailed from time to time in the Company’s reports filed with the SEC, including those risk factors included in the disclosure under "ITEM 1A - RISK FACTORS" of this Form 10-K. |
All forward-looking statements speak only as of the filing date of this Form 10-K and are expressly qualified in their entirety by the cautionary statements. Although management believes the expectations in these forward-looking statements are based on reasonable assumptions within the bounds of management’s knowledge of Bancorp’s business and operations, it is possible that actual results may differ materially from these projections. Additionally, Bancorp undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the filing date of this Form 10-K or to reflect the occurrence of unanticipated events except as may be required by applicable legal requirements. Copies of documents filed with the SEC are available free of charge at the SEC’s website at www.sec.gov and/or from Bancorp’s website – www.tcbol.com under the “About Us” section.
The following discussion and analysis of the Company’s Consolidated Financial Statements is presented to provide insight into management's assessment of the financial results and condition for the periods presented. This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto, as well as the ratios and statistics, contained elsewhere in this Form 10-K.
Overview. The Company’s profitability, as with most financial institutions, is significantly dependent upon net interest income, which is the difference between interest received on interest earning assets, such as loans and securities, and the interest paid on interest bearing liabilities, principally deposits and borrowings. During a period of economic slowdown, the lack of interest income from nonperforming assets and additional provision for loan losses can greatly reduce profitability. Results of operations are also impacted by noninterest income, such as service charges on deposit accounts and fees on other services, income from lending services, as well as noninterest expense such as salaries and employee benefits, occupancy expense, professional and other services, and other expenses.
For the year ended December 31, 2016, the Company recorded net income of $1.2 million or $1.80 per share, compared to net income of $0.7 million, or $1.01 per share as of December 31, 2015. Return on average assets and return on average common equity were 0.68% and 6.66%, respectively, for year-end 2016, compared to 0.34% and 3.93% for year-end 2015.
Profitability in 2016 was largely the result of the continuation of diligent loan monitoring and the application of enhanced credit review. Many of the lower credit quality loans made in prior years have been returned to current status, been foreclosed and the collateral liquidated, or refinanced elsewhere. Aggressive stewardship of those loans in the prior year resulted in higher costs for that period, but those credit related costs continued to moderate in 2016. The prior year’s results were impacted by costs associated with the declining credit quality of loans originated over a six year period beginning in 2003 and emanated from large commercial loans to industries, including horticulture nurseries, biofuel production, and speculative commercial real estate. Several loans were made to borrowers outside the Company’s primary footprint. Of the $1.7 million of gross charge offs during 2015, 36.5% came from large commercial loans originated prior to 2009. Stricter monitoring of loan origination limited gross charge offs in 2016 to $0.3 million.
Key items affecting the Company’s results in 2016 compared to 2015 include:
| • | During the 2016 fiscal year, the Company recorded no provision for loan losses as the existing allowance for loan and lease losses (ALLL) is deemed adequate. The Company recaptured $250 thousand from the ALLL in fiscal year 2015. Valuation adjustments made to the other real estate owned (OREO) portfolio totaled $15 thousand in 2016 versus OREO valuation adjustments of $138 thousand during 2015. During 2016, net loan charge offs totaled $0.2 million compared to 2015 net loan charge offs of $1.5 million. Principal transfers to OREO totaled $22 thousand in 2016 versus $150 thousand in 2015. | |
| • | Net interest income increased $282 thousand, or 4.1% to $7.2 million for the year ended December 31, 2016 from $6.9 million for the year ended December 31, 2015. A $0.1 million year-over-year decline in interest income was offset by a $0.4 million reduction in interest expense. |
| 19 |
| • | The Company’s capital position increased with the capital campaign as well as the profitability of 2016. Shareholders’ equity at Bancorp increased $1.8 million (10.8%) to $19.2 million on December 31, 2016 from $17.4 million on December 31, 2015. Leverage capital and total capital at the Bank were 8.52% and 12.40% as of December 31, 2016 compared to 8.23% and 13.14% as of December 31, 2015. |
Comparison of Results of Operations for the Years Ended December 31, 2016 and December 31, 2015
For the year ended December 31, 2016, the Company recorded net profit of $1.2 million, or $1.80 per share, an increase of $0.6 million from the net profit of $0.7 million, or $1.01 per share, for the year ended December 31, 2015. Improved profitability in 2016 can primarily be attributed to lower noninterest expense owing to better loan quality, and more efficient operations. Legal expenses and OREO related expenses were down a combined $0.5 million in 2016 relative to 2015 as nonaccrual loans declined by $0.6 million and OREO fell from $0.2 million to zero.
| 20 |
Distributution of Assets, Liabilities, and Shareholders' Equity
For the years ended December 31,
| (Dollars in thousands) | ||||||||||||||||||||||||
| 2016 | 2015 | |||||||||||||||||||||||
| Average Balance | Interest | Yield / Rate | Average Balance | Interest | Yield / Rate | |||||||||||||||||||
| Interest-Earning Assets: | ||||||||||||||||||||||||
| Loans receivable (1), (2), (4) | $ | 148,060 | $ | 7,817 | 5.28 | % | $ | 143,596 | $ | 7,764 | 5.41 | % | ||||||||||||
| Securities (3) | 9,077 | 164 | 1.81 | % | 16,034 | 346 | 2.16 | % | ||||||||||||||||
| Fed Funds Sold | 5,188 | 30 | 0.57 | % | 12,225 | 26 | 0.21 | % | ||||||||||||||||
| FHLB stock | 859 | 36 | 4.19 | % | 859 | 36 | 4.19 | % | ||||||||||||||||
| Total interest-earning assets | 163,184 | 8,047 | 4.93 | % | 172,714 | 8,172 | 4.73 | % | ||||||||||||||||
| Non-interest-earning assets | 17,215 | 20,961 | ||||||||||||||||||||||
| Total Assets | $ | 180,399 | $ | 193,675 | ||||||||||||||||||||
| Interest-Bearing Liabilities | ||||||||||||||||||||||||
| Interest-bearing deposits | 121,696 | 708 | 0.58 | % | 146,127 | 891 | 0.61 | % | ||||||||||||||||
| Fed Funds Purchased | 229 | 2 | 0.87 | % | - | - | 0.00 | % | ||||||||||||||||
| Other borrowings | 1,775 | 108 | 6.08 | % | 4,900 | 334 | 6.82 | % | ||||||||||||||||
| Total interest-bearing liabilities | 123,700 | 818 | 0.66 | % | 151,027 | 1,225 | 0.81 | % | ||||||||||||||||
| Non-interest-bearing liabilities | 36,507 | 24,379 | ||||||||||||||||||||||
| Total including non-interest-bearing demand deposits | 160,207 | 818 | 175,406 | 1,225 | ||||||||||||||||||||
| Other non-interest liabilities | 1,747 | 1,619 | ||||||||||||||||||||||
| Total Liabilities | 161,954 | 177,025 | ||||||||||||||||||||||
| Shareholders' equity | 18,445 | 16,650 | ||||||||||||||||||||||
| Total liabilities and shareholders' equity | $ | 180,399 | $ | 193,675 | ||||||||||||||||||||
| Net interest income; interest rate spread | $ | 7,229 | 4.27 | % | $ | 6,947 | 3.92 | % | ||||||||||||||||
| Net interest margin | 4.43 | % | 4.02 | % | ||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities | 131.92 | % | 114.36 | % | ||||||||||||||||||||
| (1) Loan fees are immaterial amounts | |
| (2) Non-accrual loans are included in average loan balance | |
| (3) Interest income for tax-exempt securities is not calculated on a tax-exempt basis | |
| (4) Loans receivable includes loans held for sale |
| 21 |
Volume and Rate Analysis
2016 Compared to 2015
| At December 31, | (Dollars in thousands) | |||||||||||
| Total | Volume | Rate | ||||||||||
| Increase (Decrease) in | ||||||||||||
| Interest Income | ||||||||||||
| Overnight Funds Sold | $ | 4 | $ | (15 | ) | $ | 19 | |||||
| Investment Securities | (182 | ) | (157 | ) | (25 | ) | ||||||
| Loans | 53 | 241 | (188 | ) | ||||||||
| Total Interest Income | (125 | ) | 69 | (194 | ) | |||||||
| Interest Expense | ||||||||||||
| Deposits | $ | (183 | ) | $ | (149 | ) | $ | (34 | ) | |||
| Overnight Funds Purchased | 2 | - | 2 | |||||||||
| Borrowed Funds | (226 | ) | (213 | ) | (13 | ) | ||||||
| Total Interest Expense | (407 | ) | (362 | ) | (45 | ) | ||||||
| Net Interest Income | $ | 282 | $ | 431 | $ | (149 | ) | |||||
Interest income for the year ended December 31, 2016 was $8.0 million, a $0.1 million, or 1.5%, decrease from that earned during the year ended December 31, 2015. The yield on earning assets increased 20 basis points (bps) to 4.93% for the year ending December 31, 2016 from 4.73% for the prior year ended December 31, 2015. Interest income earned from the loan portfolio increased approximately $0.1 million when compared to 2015. The small increase in interest income from the loan portfolio can be attributed to growth in average loan balances of $4.5 million partially offset by a 13 bps reduction in average annual yield on those loans. A combination of loan originations during a historically low rate cycle and the continued downward repricing of variable rate loans drove the reduction in average yield.
Interest income from the investment portfolio was down $0.2 million for the year ended December 31, 2016 and relative to the year ending December 31, 2015. A year-over-year decline of $7.0 million (43.4%) in average investment portfolio balances and a year-over-year decrease in average yield of 35 bps (from 2.16% in 2015 to 1.81% in 2016) drive this decrease. During 2016, a total of $4.0 million of investment securities were sold, consisting of $1.0 million of US government securities, yielding 0.43%, and $3.0 million of US government federal agencies, yielding 1.19%. During 2015, a total of $3.1 million of investment securities were purchased, consisting of $1.8 million of municipal securities, yielding 1.88%, and $1.3 million of US government federal agencies, yielding 2.02%.
Interest expense for the year ended December 31, 2016 was $0.8 million, a $0.4 million or 33.2% decrease from the $1.2 million paid for the year ended December 31, 2015. Interest expense for deposits declined $0.2 million to $0.7 million for 2016 from $0.9 million for 2015. The decrease resulted, in part, from a new pricing strategy of setting competitive deposit rates on retail CD’s (less than $100 thousand) but not necessarily being the market leader as had been the case in prior years.
Interest expense for other borrowings was $108 thousand in 2016 and $334 thousand in 2015. This interest expense is related to loans to the holding company which were paid off and retired in the fourth quarter of 2016. These loans totaled $2.6 million as of December 31, 2015. Please refer to “Other Borrowings” below for details regarding these loans.
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Provision for Loan Losses. The Company establishes an allowance for loan losses through charges to earnings, which are shown in the consolidated statements of income as the provision for loan losses. Through the provision for loan losses, an allowance is maintained that reflects management’s best estimate of probable incurred loan losses related to specifically identified loans as well as the inherent risk of loss related to the remaining portfolio. In evaluating the allowance for loan losses, management considers various factors that include loan growth, the amount and composition of the loan portfolio, (including non-performing and potential problem loans), diversification, or conversely, concentrations by industry, geography, or collateral within the portfolio, historical loan loss experience, current delinquency levels, the estimated value of the underlying collateral, prevailing economic conditions, and other relevant factors. Loan charge-offs are recorded to this allowance when loans are deemed uncollectible, in whole or in part. Impacting the provision for loan losses in any accounting period are several factors including the amount of loan growth during the period, broken down by loan type, the level of charge-offs during the period, the changes in the amount of impaired loans, changes in risk ratings assigned to loans, specific loan impairments, credit quality, and ultimately, the results of management’s assessment of the inherent risks of the loan portfolio.
The absence of any loan loss provision expense in 2016 compares to the recovered provision of $250 thousand in 2015. The absence of a provision expense for loan losses was largely driven by a decrease in nonperforming loans and increases in the collateral values for impaired loans. Management considers the allowance for loan losses at December 31, 2016 adequate to cover loan losses based on its assessment of various factors affecting the loan portfolio, including the level of problem loans, overall delinquencies, business conditions, estimated collateral values, and loss experience. A further decline in local and national economic conditions, or other factors, could result in a material increase in the allowance for loan losses which could adversely affect the Company’s financial condition and results of operations. At December 31, 2015, the Company had determined that an excess existed in the allowance for loan and lease losses and $250 thousand was recaptured to income.
Noninterest Income. Noninterest income, which consists primarily of fees and commissions earned on services that are provided to the Company’s banking customers, and to a lesser extent, gains on sales of OREO and other repossessed assets, and other miscellaneous income, increased $246 thousand, or 16.5%, to $1.7 million for the year ended December 31, 2016 from $1.5 million for the year ended December 31, 2015. The increase can mostly be attributed to 2016 gains from the sales of repossessed assets of $532 thousand. Gains on the sale of investment securities were down $153 thousand in 2016 relative to 2015. The following is a discussion of significant year-over-year changes in other material noninterest income categories:
| • | Services charges for deposit accounts decreased by $2 thousand to $407 thousand for the year ended December 31, 2016 from $409 thousand for the year ended December 31, 2015. These fees were expected to decline as the Bank changed the procedure used to process account overdrafts to a more customer based methodology, limiting the number of charged overdrafts fees per customer. | |
| • | The Company recorded $60 thousand in secondary market sales fees as the initiative to originate loans and sell them in the secondary markets gained traction in 2016. This fee income was an increase of 114.3% over the $28 thousand earned in 2015. | |
| • | Income for credit and debit cards increased by $11 thousand, or 3.1%, to $361 for the year ended December 31, 2016 from $350 thousand for the year ended December 31, 2015. The Bank continues to emphasize credit and merchant card issuance and fees. | |
| • | Other noninterest income from the gain on sale of OREO properties increased by $287 thousand to $532 thousand for the year ended December 31, 2016 from a gain of $245 thousand for the year ended December 31, 2015. Much of the 2016 gain was attributable to a single relationship. | |
| • | Sales of investment securities generated gains of $15 thousand in 2016 versus $168 thousand in 2015. Sales of investment securities totaled $4.0 million in 2016 and $14.4 million in 2015. | |
| • | Other noninterest income was up $71 thousand, or 24.4%, to $362 thousand for the year ended December 31, 2016 from $291 thousand for the year ended December 31, 2015. Noninterest income primarily increased due to a $107 thousand increase in the cash surrender value of bank owned life insurance. Purchased in September, 2015, the insurance accrued for an entire year in 2016 versus only a quarter of 2015. The sale of three distressed loans to a third party purchaser resulted in gains of $56 thousand, which were only partially offset by a $28 thousand decline in mortgage broker commissions in 2016 versus 2015. |
Noninterest Expense. Noninterest expense, which consists primarily of personnel, occupancy, equipment and other operating expenses, decreased by $686 thousand, or 8.8%, to $7.1 million for the year ended December 31, 2016 from the $7.8 million in expense for the year ended December 31, 2015. The year-over-year decrease was realized in branch consolidation expenses (down $260 thousand) and loan credit quality and OREO related components (down $459 thousand) offset by higher expenses associated with consumer delivery systems such as mobile banking.
| 23 |
The following is a discussion of significant year-over-year changes for other material noninterest expense categories:
| • | Salary and benefit expense increased by $0.2 million, or 5.4%, to $3.4 million for the year ended December 31, 2016 from $3.2 million for the year ended December 31, 2015. Increases in salary expense of $0.2 million were offset by a reduction of $0.1 million in required pension fund contributions as the pension fund was fully funded in 2015. | |
| • | Costs related to repossessed assets fell by $145 thousand, or 65.0%, for the year ended December 31, 2016 relative to the year ended December 31, 2015. Costs related to the preservation and care of OREO properties dropped as a result of a decline in the number and value of OREO properties held by the Bank. At December 31, 2016. the Bank held no OREO property versus properties valued at $0.2 million at December 31, 2015. In 2016, $15 thousand was required to write down existing OREO properties to market value versus an expense of $138 thousand in 2015. | |
| • | Reflecting the higher credit quality of the loan portfolio, legal and other professional expenses decreased by $314 thousand, or 56.2%, to $245 thousand as of December 31, 2016 from $559 thousand as of December 31, 2015. The decrease can be attributed to the decline in average delinquent loans from the prior year. The four quarters average of delinquent loans fell from $4.2 million in 2015 to $2.0 million for 2016. On a point-to-point basis, delinquent loans increased by $0.2 million, or 12.0%, at December 31, 2016 versus December 31, 2015. Legal services to assist in the resolution of regulatory issues also declined in 2016 as the regulatory climate surrounding the bank normalized. | |
| • | Costs associated with examinations and audits increased $44 thousand, 15.3%, to $332 thousand at December 31, 2016 relative to the year ended December 31, 2015. The Company incurred the full costs associated with public registration and auditing in 2016. | |
| • | The program to consolidate and update physical locations continued in 2016, including the closure of both an in-store branch and two full service branches. The Company disposed of many obsolete assets and wrote down the carrying values of many more. During the year ended December 31, 2016, the write down and disposal of fixed and worthless assets and lease buyout costs totaled $88 thousand, a decrease of $260 thousand from the $348 thousand recorded in 2015. | |
| • | The dues and subscriptions expense category increased $157 thousand, or 95.2%, from $165 thousand in the 2015 fiscal year to $322 thousand in the 2016 fiscal year. Customer related services such as internet banking, automatic bill pay, and remote check capture have been added over these past two years, greatly enhancing our product offerings, but also increasing costs. | |
| • | Other noninterest expense decreased by $49 thousand, or 9.0%, to $494 thousand for the year ended December 31, 2016 from $543 thousand for the year ended December 31, 2015. The Ohio Financial Institutions Tax increased by $42 thousand year-over-year as our equity position increased. The increased emphasis on employee education and training resulted in an additional $17 thousand in 2016 relative to 2015. Miscellaneous costs in 2016 were down $109 thousand from 2015, as calendar year 2015 included one time, nonrecurring charges of $60 thousand related to the repurchase of a mortgage loan sold in a prior year and $25 thousand in settlement of litigation. |
Income Taxes. Accounting Standards Codification 740, Income Taxes, requires companies to assess whether a valuation allowance should be established against deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. If it is determined that the company is “less likely than not” to utilize existing deferred tax assets within the prescribed statutory period, the company is obligated to write the deferred tax assets down accordingly.
| 24 |
The Company expects to realize $4.6 million of deferred tax assets related to net operating loss carryforwards well in advance of the statutory carryforward period. At December 31, 2016, $0.2 million of existing deferred tax assets were not related to net operating losses and therefore have no expiration date.
The valuation allowance could be reinstated should future events dictate and could fluctuate in future periods based on the assessment of the positive and negative evidence. Management’s conclusion at December 31, 2016 that it is more likely than not that the net deferred tax assets of $4.5 million will be realized is based on management’s estimate of future taxable income. Management’s estimate of future taxable income is based on internal forecasts which consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment. If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, a valuation allowance may need to be recognized for some or all of the deferred tax asset. Such an increase to the deferred tax asset valuation allowance could have a material adverse effect on the Company’s financial condition and results of operations.
Changes in Condition from December 31, 2015 to December 31, 2016. Total assets decreased $4.3 million, or 2.3%, to $179.5 million on December 31, 2016 from $183.8 million on December 31, 2015. This reduction in asset size is in line with our strategic objective.
Loan Portfolio. Gross loans increased $4.8 million, or 3.2%, to $154.0 million as of December 31, 2016 from a balance of $149.2 million on December 31, 2015. The increase can be attributed, in part, to $34.2 million of new loan originations, partially offset by net loan charge offs/charge downs of $0.2 million, transfers to OREO of less than $0.1 million, troubled loan sales of $0.6 million, and principal repayments of $28.6 million (includes repayments on revolving lines of credit). The new originations were primarily consumer loans, with mortgage and construction originations totaling $8.9 million and consumer titled loan originations of $9.1 million. The emphasis on consumer lending is part of a strategic initiative to re-balance the loan portfolio to be more equally weighted between commercial and consumer loans. This trend is expected to continue into 2017 and is a centerpiece of the 2017 profit plan.
| Loan Portfolio Distribution | ||||||||
| (Dollars in thousands) | ||||||||
| At December 31, | 2016 | 2015 | ||||||
| Amount | Amount | |||||||
| Commercial | $ | 80,087 | $ | 82,147 | ||||
| Real estate | 43,675 | 43,401 | ||||||
| Consumer | 30,224 | 23,683 | ||||||
| $ | 153,986 | $ | 149,231 | |||||
The Company’s loan portfolio represents the largest and highest yielding assets. The fundamental lending business of the Company is based on understanding, measuring, and controlling the credit risk inherent in the loan portfolio. The Company’s loan portfolio is subject to varying degrees of credit risk. Credit risk entails both general risks, which are inherent in the process of lending, and risk specific to individual borrowers. The Company’s credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry, or collateral type. Typically, each consumer and residential lending product has a generally predictable level of credit losses based on historical loss experience. Home mortgage and home equity loans and lines generally have the lowest credit loss experience, while loans secured by personal property, such as auto loans, are generally expected to experience more elevated credit losses. Credit risk in commercial lending can vary significantly, as losses as a percentage of outstanding loans can shift widely during economic cycles and are particularly sensitive to changing economic conditions. Generally, improving economic conditions result in improved operating results on the part of commercial customers, enhancing their ability to meet their particular debt service requirements. Improvements, if any, in operating cash flows can be offset by the impact of rising interest rates that may occur during improved economic times. Declining economic conditions have an adverse effect on the operating results of commercial customers, reducing their ability to meet debt service obligations.
| 25 |
To control and manage credit risk, management has a credit process in place to ensure credit standards are maintained along with strong oversight and review procedures. The primary purpose of loan underwriting is the evaluation of specific lending risks and involves the analysis of the borrower’s ability to service the debt as well as the assessment of the value of the underlying collateral. Oversight and review procedures include the monitoring of portfolio credit quality, early identification of potential problem credits, and the aggressive management of problem credits. Executive management has implemented the following measures to proactively manage credit risk in the loan portfolios:
| 1) | Reviewed all underwriting guidelines for various loan segments and have strengthened underwriting guidelines where needed; |
| 2) | Evaluated outside loan review parameters, engaging the services of a well-established firm to continue with such loan review, addressing not only specific loans but underwriting analysis, documentation, credit evaluation, and risk identification; |
| 3) | Increased the frequency of internal reviews of past due and delinquent loans to assess probable credit risks early in the delinquency process to minimize losses; |
| 4) | Aggressively seeks ownership and control, when appropriate, of real estate properties, which would otherwise go through time-consuming and costly foreclosure proceedings to effectively control the disposition of such collateral; |
| 5) | Aggressively obtaining updated financial information on commercial credits and performing analytical reviews to determine debt source capacities in business performance trends; and |
| 6) | Engaged a well-established auditing firm to analyze the Company’s loan loss reserve methodology and documentation. |
The following is a schedule of loan maturities (including those held for sale) and repricing based on contract terms as of December 31, 2016.
Scheduled Loan Maturities/Repricings
| (Dollars in thousands) | ||||||||||||||||
| Due | Due | Due | ||||||||||||||
| <1 Year | 1 - 5 Years | > 5 Years | Total | |||||||||||||
| Total Gross Loans | $ | 37,692 | $ | 75,877 | $ | 40,552 | $ | 154,121 | ||||||||
Of the loans included in the preceding schedule, 71.4% are adjustable rate and 28.6% are fixed rate to maturity.
Allowance for Loan Loss. The ALLL represents management’s estimate of losses inherent in the loan portfolio. The allowance is actively managed to ensure future earnings are not impacted by credit losses. Reserves are based on historical loss analysis, assessment of current portfolio, and market conditions, and any identified loss potential in specific credits. Reserve levels are recommended by senior management on a quarterly basis and approved by the Board of Directors.
The ALLL is managed to create a reserve that is adequate and conservative, but not excessive. The ALLL is composed of a reserve to absorb probable and quantifiable losses based on current knowledge of the loan portfolio and a reserve to absorb losses which are not specifically identified, but can be reasonably expected.
Following the guidelines set forth in GAAP, Interagency Policy Statements on the Allowance for Loan and Lease Losses, and all other relevant supervisory guidance, the adequacy of the ALLL is ensured by applying consistent methods of identification, analysis, computation, documentation, and reporting.
The Bank’s ALLL has two components, the general reserve and the specific reserve. Included in the general reserve is the environmental reserve.
The general reserve is calculated by applying annualized net loan losses taken during a 36 month rolling look back period to the current loan portfolio, less any loans considered in the specific reserve analysis. To reflect the variations in risk of different loan products, the portfolio is segmented by collateral type, borrower type, and underwriting process.
The specific reserve is the calculated impairment of all loans classified as impaired, with a minimum outstanding principal balance of $100,000. A loan is classified as impaired when it is probable that the Bank will not be able to collect all amounts due according to the loan agreement’s contractual terms. All loans classified as Troubled Debt Restructurings are also evaluated in the specific reserve. Impairment is measured based on one of the three following methods:
| • | Present value of expected future cash flows discounted at the loan’s effective interest rate; |
| 26 |
| • | Loan’s observable market price; or |
| • | Fair value of the collateral if the loan is collateral dependent. |
The environmental reserve allows management to consider qualitative or environmental factors that are likely to cause estimated credit losses to differ from historical loss experience. The Bank’s environmental reserve considers 11 risk factors which are evaluated as minimal, low, moderate, or high risk. As the overall risk level of the environmental factors increases, the proportion of the loan portfolio held in reserve also increases. Risk factors considered in the analysis are:
| • | Lending experience, with particular attention paid to new lenders; |
| • | Exceptions to loan policy; |
| • | Rate of total portfolio delinquency; |
| • | Growth rate of loan portfolio; |
| • | Exposure to loan concentrations; |
| • | Exposure to “watch list” loans; |
| • | Consumer sentiment; |
| • | Local economic conditions; |
| • | Regulatory risk; |
| • | Unemployment, with particular attention paid to local unemployment; and |
| • | Vintage risk, with particular attention paid to underwriting procedures at time loans were made. |
Percentage of Each Loan Segment to Total Loans. Summary of the allowance for loan losses allocated by loan segment at December 31,
| % of loan segments to total loans | (Dollars in thousands) | |||||||||||||||
| 2016 | 2015 | |||||||||||||||
| Allowance Amount | Total Loans | Allowance Amount | Total Loans | |||||||||||||
| Loan Type | ||||||||||||||||
| Commercial | $ | 1,477 | 52.0 | % | $ | 1,629 | 55.0 | % | ||||||||
| Real Estate | 143 | 28.4 | % | 240 | 29.1 | % | ||||||||||
| Consumer | 228 | 19.6 | % | 209 | 15.9 | % | ||||||||||
| Total Loans | $ | 1,848 | 100 | % | $ | 2,078 | 100 | % | ||||||||
The Bank’s ALLL level was 1.20% of total loans as of December 31, 2016 and 1.39% of total loans as of December 31, 2015.
The general reserve, less the environmental components, comprised 39% of the total allowance at December 31, 2016, compared to 47% at December 31, 2015, while the specific allowance accounted for 27% of the total allowance at December 31, 2016, compared to 9% at December 31, 2015. The severity of estimated losses on impaired loans can differ substantially from actual losses. The general reserve is calculated in two parts based on an internal risk classification of loans within each portfolio segment. General reserves on loans considered to be “classified” under regulatory guidance are calculated separately from loans considered to be “pass” rated under the same guidance. This segregation allows the Company to monitor the reserves related to higher risk loans separate from the remainder of the portfolio in order to better manage risk and ensure the sufficiency of reserves. The ALLL decreased $0.2 million, or 11.1%, year-over-year to $1.9 million as of December 31, 2016 from $2.1 million on December 31, 2015. The decrease resulted from the net effect of charge-offs totaling $350 thousand, offset by $120 thousand in recoveries.
| 27 |
Summary of Allowance for Loan Losses. The following schedule summarizes the charge-offs and recoveries by loan segment, charged to the allowance for loan losses for the year ended December 31:
| (Dollars in thousands) | ||||||||||||||||
| Commercial | Real Estate | Consumer | Total | |||||||||||||
| December 31, 2016 | ||||||||||||||||
| Beginning balance - January 1, 2016 | $ | 1,629 | $ | 240 | $ | 209 | $ | 2,078 | ||||||||
| Charge-offs | (233 | ) | (1 | ) | (116 | ) | (350 | ) | ||||||||
| Recoveries | 76 | 3 | 41 | 120 | ||||||||||||
| Net (charge-offs) recoveries | (157 | ) | 2 | (75 | ) | (230 | ) | |||||||||
| Provision | 5 | (99 | ) | 94 | - | |||||||||||
| Ending balance - December 31, 2016 | $ | 1,477 | $ | 143 | $ | 228 | $ | 1,848 | ||||||||
| December 31, 2015 | ||||||||||||||||
| Beginning balance - January 1, 2015 | $ | 3,491 | $ | 195 | $ | 183 | $ | 3,869 | ||||||||
| Charge-offs | (1,443 | ) | (42 | ) | (187 | ) | (1,672 | ) | ||||||||
| Recoveries | 86 | 2 | 43 | 131 | ||||||||||||
| Net (charge-offs) recoveries | (1,357 | ) | (40 | ) | (144 | ) | (1,541 | ) | ||||||||
| Provision | (505 | ) | 85 | 170 | (250 | ) | ||||||||||
| Ending balance - December 31, 2015 | $ | 1,629 | $ | 240 | $ | 209 | $ | 2,078 | ||||||||
Management has established procedures to address problem loans and has implemented a credit infrastructure to prevent nonperforming loans and charge-offs from reaching the levels of the past few years in the future.
To understand and address existing weaknesses in the loan portfolio, the loan monitoring process has been centralized and additional qualified staff has been hired to review the loan portfolio and ensure that credits are appropriately graded and adequate levels of loan loss reserve are established. All large loan relationships have been analyzed to identify cash flow, collateral, and structural weaknesses. Such monitoring is being done on an ongoing basis according to the following timeframe: $250 thousand to $1 million exposure, annually; $1 million exposure, semiannually; watch list loans with aggregate exposure >$100 thousand are analyzed each quarter.
Underwriting has also been largely centralized and is an independent function of lending. All commercial loan requests > $25 thousand, all consumer loan requests > $50 thousand, and all unsecured loan requests > $10 thousand are centrally underwritten. Additionally, any loan request of a customer with aggregate exposure > $100 thousand requires centralized underwriting. Underwriting provides an approve/deny recommendation and loans with a deny recommendation cannot be approved outside the Officers’ Loan Committee.
In addition to centralizing the account monitoring and underwriting processes, the Bank has significantly strengthened its lending policy. Loan approval levels have been adjusted downward and customers with loan exposure in excess of $1.5 million require approval from the Board of Directors.
Nonaccrual & Impaired Loans. Before loans are charged off, they typically go through a phase of nonperforming status. Various stages exist when dealing with such nonperformance. The first stage is simple delinquency, where customers consistently start paying late, 30, 60, 90 days at a time. These accounts may then be put on a list of loans to “watch” as they continue to under-perform according to original terms. Loans are placed on nonaccrual status when management believes the collection of the principal and interest is doubtful. A delinquent loan is generally placed on nonaccrual status when principal and/or interest is past due 90 days or more or if the financial strength of the borrower has declined, collateral value has declined, or other facts would make the repayment of the loan suspect, unless the loan is well-secured or in the process of collection. When a loan is placed on nonaccrual, all current interest which has been accrued is charged back against current earnings as a reduction in interest income, which adversely affects the yield on loans in the period of reversal. Interest accrued in prior years, which remains uncollected, is charged off against the allowance for loan losses, No additional interest is accrued on the loan balance until collection of both principal and interest becomes reasonably certain. Loans placed on nonaccrual status may be returned to accrual status after payments are received for a minimum of six consecutive months in accordance with the loan documents, and any doubt as to the loan’s full collectability has been removed or the troubled loan is restructured and evidenced by a credit evaluation of the borrower’s financial condition and the prospects for full payment.
| 28 |
Management considers a loan to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the observable market price of the loan, except when the sole (remaining) source of repayment for the loan is the liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs when foreclosure is probable, instead of discounted cash flows. If management determines the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs and deferred loan fees or costs), impairment is recognized through an allowance estimate or a charge-off to the allowance. When management determines an impaired loan is a confirmed loss, the estimated impairment is directly charged-off to the loan rather than creating a specific reserve for inclusion in the allowance for loan losses. However, not all impaired loans are in nonaccrual status because they may be current with regards to the payment terms. Their determination as an impaired loan is based on some inherent weakness in the credit that may, if certain circumstances occur or arise, result in an inability to comply with the loan agreement’s contractual terms. Impaired loans exclude large groups of smaller-homogeneous loans that are collectively evaluated for impairment such as consumer real estate and installment loans.
Summary of Impaired Loans. The following schedule summarizes impaired and non-performing loans at December 31,
| (Dollars in thousands) | ||||||||
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| Impaired loans | $ | 4,917 | $ | 3,171 | ||||
| Loans accounted for on a nonaccrual basis | $ | 768 | $ | 1,350 | ||||
| Accruing loans, which are contractually past due 90 days or more as to interest or principal payments | - | - | ||||||
| Total non performing loans | $ | 768 | $ | 1,350 | ||||
| Nonperforming loans to allowance for loan losses | 41.6 | % | 65.0 | % | ||||
Nonperforming loans, comprised of loans on nonaccrual status along with loans that are contractually past due 90 days or more but have not been classified as nonaccrual, totaled $0.8 million at December 31, 2016, a decrease of $0.6 million, or 43.1%, compared to nonperforming loans of $1.4 million at December 31, 2015. The decrease in nonperforming loans was primarily due to management’s proactive approach to identify and resolve nonperforming loans and to the reclassification of less than $0.1 million of principal to OREO, the sale of $0.6 million of nonaccrual loans, the payoffs and paydowns of $0.3 million, $0.3 million which was subsequently upgraded, and the charge-off/charge-down of $0.1 million, offset by the addition of $0.7 million. Nonperforming loans to total net loans was 0.50% at December 31, 2016 and 0.92% at December 31, 2015. Nonperforming loans represented 0.43% of total assets at December 31, 2016 compared to 0.86% at December 31, 2015.
The allowance for loan losses, specifically related to impaired loans was $0.5 million at December 31, 2016 and $0.2 million at December 31, 2015, and related to loans with principal balances of $4.9 million and $3.2 million respectively. The Company’s financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on the loan portfolio, unless a loan is placed on nonaccrual status. Amounts received on nonaccrual loans generally are applied first to principal and then to interest only after all principal has been collected.
Troubled Debt Restructurings. In certain circumstances, the Company may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near term. In most cases, the modification is either a concessionary reduction in interest rate, extension of the maturity date, or reduction in the principal balance that would otherwise not be considered. Concessionary modifications are classified as troubled debt restructurings unless the modification results in only an insignificant delay in the payments to be received. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be collateral dependent, the loan is reported at the fair value of the collateral. All such restructured loans are considered impaired loans and may either be in accruing or nonaccruing status. If the borrower has demonstrated performance under the previous terms and the Company’s underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. The Company continues to work with customers to modify loans for borrowers who are experiencing financial difficulties.
| 29 |
Troubled debt restructured loans totaled $3.8 million at December 31, 2016 and $1.8 million as of December 31, 2015. Of those balances, $3.6 million was on accrual basis as of December 31, 2016 and $1.2 million as of December 31, 2015. During 2016, 16 loan relationships totaling $3.0 million in principal were restructured.
There are no commitments to lend additional amounts to borrowers with loans that are classified as troubled debt restructurings as of December 31, 2016.
Other Real Estate Owned. As of December 31, 2016, the Bank has no OREO properties. At December 31, 2015, the Bank’s OREO portfolio consisted of 7 properties with a cost basis of $418 thousand and a nominal valuation allowance bringing the carrying value to $238 thousand.
Investment Portfolio. The Company’s available for sale investment portfolio decreased $5.8 million, 41.2%, to $8.2 million as of December 31, 2016 from $14.0 million as of December 31, 2015. The decrease resulted from maturity and principal payments totaling $2.7 million and sales of $4.0 million offset by purchases of $1.0 million, and reduced market value and amortization of less than $0.1 million, each. As of December 31, 2016, the investment portfolio reported an unrealized loss of $104 thousand versus an unrealized loss of $82 thousand at December 31, 2015.
| Carrying Values of Investment Securities | ||||||||
| (Dollars in thousands) | ||||||||
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| Securities available for sale | ||||||||
| U.S. government securities | $ | - | $ | 1,005 | ||||
| U.S. government federal agencies | 1,982 | 6,535 | ||||||
| State and local governments | 2,734 | 1,783 | ||||||
| Mortgage backed securities | 3,521 | 4,690 | ||||||
| Total | $ | 8,237 | $ | 14,013 | ||||
At December 31, 2016, there were no concentrations of securities of any one issuer whose carrying value exceeded 10% of shareholders’ equity.
Maturity Schedule of Investment Securities. Maturity schedule (by contractual maturity or, if applicable, earliest call date) of the Company’s investment securities, by carrying value, and the related weighted average yield at December 31, 2016:
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Maturing
in One Year or Less | Maturing
After One Year Through Five Years | Maturing
After Five Years Through Ten Years | Maturing
After Ten Years | |||||||||||||||||||||||||||||
| Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||||||
| U.S. government securities | $ | - | 0.00 | % | $ | - | 0.00 | % | $ | - | 0.00 | % | $ | - | 0.00 | % | ||||||||||||||||
| U.S. government federal agencies | - | 0.00 | % | 1,982 | 1.16 | % | - | 0.00 | % | - | 0.00 | % | ||||||||||||||||||||
| State and local governments | - | 0.00 | % | 1,107 | 1.76 | % | 626 | 2.09 | % | 1,001 | 4.25 | % | ||||||||||||||||||||
| Mortgage backed securities | - | 0.00 | % | - | 0.00 | % | 17 | 6.43 | % | 3,504 | 2.37 | % | ||||||||||||||||||||
| Total | $ | - | 0.00 | % | $ | 3,089 | 1.38 | % | $ | 643 | 2.20 | % | $ | 4,505 | 2.78 | % | ||||||||||||||||
The weighted average interest rates are based on interest rates for investments purchased at par value and on effective interest rates considering amortization or accretion if the investment and mortgage backed securities were purchased at a premium or discount. The weighted average yield on tax-exempt obligations has been determined on a tax equivalent basis. Other investment securities consisting of Federal Home Loan Bank stock that bears no stated maturity or yield is not included in this analysis. Maturities are reported based on stated maturities and do not reflect principal prepayment assumptions. Yields are based on amortized cost balances.
| 30 |
Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. The mortgage backed securities may mature earlier than their contractual maturities because of principal prepayments.
Cash and Cash Equivalents. Cash and cash equivalents totaled $4.9 million as of December 31, 2016, a $4.5 million, or 47.7%, decrease from the December 31, 2015 balance of $9.4 million.
Premises and Equipment. Premises and equipment increased $1.4 million, or 45.4%, to $4.3 million at December 31, 2016 from $3.0 million at December 31, 2015. The increase was attributable to the addition of a new full service branch building and associated furnishings and equipment totaling $1.5 million reduced by depreciation expense of $301 thousand and write-downs and disposals of $88 thousand, partially offset by building improvements and purchases of $230 thousand during 2016.
Other Assets. Other assets decreased $0.3 million during the period December 31, 2015 to December 31, 2016. Prepaid expenses increased by $0.1 million and the cash surrender value of existing BOLI policies increased $0.1 million over the period. Conversely, the net change in the Company’s deferred tax asset was a decrease of $0.6 million from December 31, 2015 to December 31, 2016.
Deposits and Borrowings. The Company’s primary source of funds is customer deposits. The Bank offers a variety of deposit products in an attempt to remain competitive and respond to changes in consumer demand. The Company relies primarily on its high quality customer service, sales programs, customer referrals, and advertising to attract and retain these deposits. Deposits provide the primary source of funding for the Company’s lending and investment activities and the interest paid for deposits must be carefully managed to control the level of interest expense.
The deposit portfolio decreased $6.2 million, or 3.8%, to $156.1 million as of December 31, 2016 from $162.3 million as of December 31, 2015. The loss of six customers accounted for $6.0 million of the decline in deposit totals. A single customer, representing nearly half of the total, redirected their deposits to an investment brokerage account of a type not offered by the bank. Absent these deposit losses, and the transfer to noninterest bearing, interest bearing balances were flat. Noninterest bearing accounts were up $6.2 million relative to December 31, 2015, as a result of the reclassification of interest bearing accounts, which no longer met the criteria to earn interest, to noninterest bearing accounts. Management does not expect these disintermediation trends to repeat in 2017.
Large Time Deposits. The following table sets forth the maturities of the Bank’s certificates of deposit having principal amounts of at least $250,000 at December 31:
Large Time Deposits
| (Dollars in thousands) | ||||||||
| Certificates of deposit maturing in quarter ending: | 2016 | 2015 | ||||||
| Three months or less | $ | - | $ | 250 | ||||
| Over three months through six months | 1,639 | 1,566 | ||||||
| Over six months through twelve months | 1,500 | 1,552 | ||||||
| Over twelve months | 7,532 | 3,890 | ||||||
| Total | $ | 10,671 | $ | 7,258 | ||||
| 31 |
Average Deposits. Average deposit balances and average rates paid are summarized as follows for the years ended December 31:
| Average Deposits | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| 2016 | 2015 | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
| Noninterest bearing demand deposits | $ | 36,507 | 0.00 | % | $ | 24,379 | 0.00 | % | ||||||||
| Interest bearing demand deposits | 10,422 | 0.16 | 25,711 | 0.11 | ||||||||||||
| Savings deposits | 54,159 | 0.20 | 55,263 | 0.16 | ||||||||||||
| Time deposits | 57,115 | 1.02 | 65,153 | 1.18 | ||||||||||||
| Total | $ | 158,203 | 0.45 | % | $ | 170,506 | 0.52 | % | ||||||||
The Bank had no brokered deposits as of December 31, 2016 or 2015.
Overnight Funds Purchased. At December 31, 2016, overnight borrowings totaled $2.7 million versus no overnight borrowings at December 31, 2015.
Other Borrowings. Borrowed funds totaled $2.6 million at December 31, 2015, consisting of three separate loans to Bancorp which originally totaled $6.1 million. During the first quarter of 2015, Bancorp was able to renegotiate a substantial portion of the debt due December 29, 2015, achieving terms more favorable to Bancorp. A portion of the $5.0 million note totaling $2.3 million was exchanged for 28,675 shares of Bancorp common stock and a new $1.6 million note with a more favorable interest rate and a maturity date of August 2021.
In October, 2016, a $1.6 million dividend was paid from the Bank to the Holding Company. This dividend, along with cash on hand at the Holding Company, was sufficient to retire all of the long term debt outstanding as of that date.
No FHLB borrowings were outstanding as of December 31, 2016 or December 31, 2015. The Bank had an approved FHLB line-of-credit of $53.0 million as of December 31, 2016, of which $14.8 million was pledging public funds. In addition, the Company has a collateralized federal funds line of $10.2 million with the FRB and $5.0 million unsecured line with United Bankers Bank. The United Bankers Bank line was utilized for $2.7 million in overnight borrowings. The FRB line was not drawn upon as of December 31, 2016. The FHLB line was secured via the pledge of mortgage loans totaling $82.6 million and the Federal Reserve federal fund line is secured via the pledge of $13.8 million of automobile loans.
Accrued Interest Payable. Accrued interest payable on deposits decreased by $178 thousand, or 23.5%, from $0.8 million at December 31, 2015 to $0.6 million at December 31, 2016. This decrease is the result of, and in line with, the lower year-over-year rates paid on certificates of deposit.
Other Liabilities. Other liabilities increased $0.1 million from December 31, 2015 to December 31, 2016. Payments due on the new branch construction, and awaiting architect approval, increased $0.1 million compared to December 31, 2015.
Concentrations of Credit Risk. Financial institutions such as the Bank generate income primarily through lending and investing activities. The risk of loss from lending and investing activities includes the possibility that losses may occur from the failure of another party to perform according to the terms of the loan or investment agreement. This possibility is known as credit risk.
Lending or investing activities that concentrate assets in a way that exposes the Company to a material loss from any single occurrence or group of occurrences increases credit risk. Diversifying loans and investments to prevent concentrations of risks is one way a financial institution can reduce potential losses due to credit risk. Examples of asset concentrations would include multiple loans made to a single borrower and loans of inappropriate size relative to the total capitalization of the institution. Management believes adherence to its loan and investment policies allows it to control its exposure to concentrations of credit risk at acceptable levels. Citizens Bank’s loan portfolio is concentrated geographically in central Ohio. Management has identified lending for non-owner occupied residential real estate as a lending concentration. Total loans for these properties totaled $30.8 million at December 31, 2016 versus $28.9 million at December 31, 2015. At December 31, 2016, non-owner occupied residential real estate represented 20.0% of the loan portfolio, up from 19.4% of the Bank’s loan portfolio at December 31, 2015. Management believes it has the skill and experience to manage any risks associated with this type of lending. Loans in this category are generally paying as agreed without any unusual or unexpected levels of delinquency. The delinquency rate in this category, which is any loan 30 days or more past due, was 2.1% at both December 31, 2016 and December 31, 2015.
| 32 |
Liquidity and Capital Resources
The Company’s primary source of liquidity is its core deposit base, raised through the Bank’s branch network, along with wholesale sources of funding and its capital base. These funds, along with investment securities, provide the ability to meet the needs of depositors while funding new loan demand and existing commitments.
Cash provided by operating activities was $1.2 million in the year ended December 31, 2016 versus $0.3 million used by those activities in the year ended December 31, 2015. The major adjustment made to reconcile net income to cash provided by or used in operations during the periods presented was the $0.6 million decrease in deferred income taxes offset by the adjustment related to gain on sale of OREO properties during 2016.
The primary investing activity of the Bank is lending, which is funded with cash provided from operating and financing activities, as well as proceeds from payment on existing loans and proceeds from maturities of investment securities. In considering the more typical investing activities, during 2016, $6.7 million was generated from the combination of maturity, pay-downs, calls, or sale of available for sale investment securities and was principally used to fund new loan originations. During 2015, $20.2 million was generated by the combination of maturity, pay-downs, calls, or sale of available for sale investment securities and $3.1 million used to purchase available for sale securities, and $3.0 million was used to purchase bank owned life insurance policies on key executives.
For 2016, total deposits decreased by $6.2 million versus a decline of $15.6 million during 2015. The Company had no activity in FHLB advances during either 2016 or 2015. The Company borrowed $2.7 million in overnight funds at December 31, 2016 versus no overnight borrowings at December 31, 2015. For additional information about cash flows from the Bank’s operating, investing, and financing activities, see the Consolidated Statements of Cash Flows included in the Consolidated Financial Statements.
As disclosed in Note J of the notes to consolidated financial statements, the Company has also entered into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit. As a result of the Company’s off-balance sheet arrangements for 2016 and 2015, no material revenue, expenses, or cash flows were recognized. In addition, the Company had no other indebtedness or retained interests nor entered into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit.
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
| 33 |
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| 34 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the Board of Directors and Shareholders of
Citizens Independent Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Citizens Independent Bancorp, Inc. and subsidiary (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2016. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Citizens Independent Bancorp, Inc. and subsidiary as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
/s/ Suttle & Stalnaker, PLLC
Parkersburg, West Virginia
March 31, 2017
| F-2 |
CITIZENS INDEPENDENT BANCORP, INC.
Logan, Ohio
CONSOLIDATED BALANCE SHEETS
December 31, 2016 and 2015
| (Dollars in thousands) | ||||||||
| 2016 | 2015 | |||||||
| ASSETS | ||||||||
| Cash and cash equivalents | ||||||||
| Cash and amounts due from depository institutions | $ | 4,899 | $ | 5,307 | ||||
| Federal funds sold | - | 4,064 | ||||||
| Total cash and cash equivalents | 4,899 | 9,371 | ||||||
| Securities available for sale | 8,237 | 14,013 | ||||||
| Other investment securities | 859 | 859 | ||||||
| Loans held for sale | 135 | - | ||||||
| Loans | 153,986 | 149,231 | ||||||
| Allowance for loan losses | (1,848 | ) | (2,078 | ) | ||||
| Net loans | 152,138 | 147,153 | ||||||
| Premises and equipment, net | 4,330 | 2,977 | ||||||
| Accrued interest receivable | 258 | 285 | ||||||
| Other real estate owned | - | 238 | ||||||
| Other assets | 8,641 | 8,899 | ||||||
| TOTAL ASSETS | $ | 179,497 | $ | 183,795 | ||||
| LIABILITIES | ||||||||
| Deposits | ||||||||
| Noninterest bearing | $ | 32,282 | $ | 26,116 | ||||
| Interest bearing | 123,856 | 136,209 | ||||||
| Total deposits | 156,138 | 162,325 | ||||||
| Overnight funds purchased | 2,699 | - | ||||||
| Borrowed funds | - | 2,569 | ||||||
| Accrued interest payable | 581 | 759 | ||||||
| Other liabilities | 849 | 783 | ||||||
| TOTAL LIABILITIES | 160,267 | 166,436 | ||||||
| SHAREHOLDERS' EQUITY | ||||||||
| Cumulative preferred stock of no par value; 100,000 shares authorized, 0 shares issued and outstanding | - | - | ||||||
| Common stock of no par value; 2,000,000 shares authorized and 745,667 shares issued and 691,287 shares outstanding at December 31, 2016 and 721,998 shares issued and 667,618 shares outstanding at December 31, 2015 | 14,964 | 14,296 | ||||||
| Common stock warrants, 0 warrants issued and outstanding at December 31, 2016 and 119,003 warrants issued and 67,985 warrants outstanding at December 31, 2015 | - | 108 | ||||||
| Retained earnings | 11,340 | 10,112 | ||||||
| Treasury stock, at cost, 54,380 shares at December 31, 2016 and at December 31, 2015 | (6,590 | ) | (6,590 | ) | ||||
| Accumulated other comprehensive income (loss) | (484 | ) | (567 | ) | ||||
| TOTAL SHAREHOLDERS' EQUITY | 19,230 | 17,359 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 179,497 | $ | 183,795 | ||||
See notes to consolidated financial statements
| F- 3 |
CITIZENS INDEPENDENT BANCORP, INC.
Logan, Ohio
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2016 and 2015
| (Dollars in thousands, except per share data) | ||||||||
| 2016 | 2015 | |||||||
| INTEREST INCOME | ||||||||
| Interest and fees on loans | $ | 7,817 | $ | 7,764 | ||||
| Interest and dividends on investment securities | 200 | 382 | ||||||
| Interest on federal funds sold | 30 | 26 | ||||||
| TOTAL INTEREST INCOME | 8,047 | 8,172 | ||||||
| INTEREST EXPENSE | ||||||||
| Interest on deposits | 708 | 891 | ||||||
| Interest on overnight funds purchased | 2 | - | ||||||
| Interest on borrowed funds | 108 | 334 | ||||||
| TOTAL INTEREST EXPENSE | 818 | 1,225 | ||||||
| NET INTEREST INCOME | 7,229 | 6,947 | ||||||
| Provision for loan losses | - | (250 | ) | |||||
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 7,229 | 7,197 | ||||||
| NONINTEREST INCOME | ||||||||
| Service charges | 407 | 409 | ||||||
| Net gain on sale of securities | 15 | 168 | ||||||
| Net gain on sale of loans | 60 | 28 | ||||||
| Net gain on sale of repossessed assets | 532 | 245 | ||||||
| Credit card income and fees | 361 | 350 | ||||||
| Other | 362 | 291 | ||||||
| TOTAL NONINTEREST INCOME | 1,737 | 1,491 | ||||||
| NONINTEREST EXPENSES | ||||||||
| Salaries and employee benefits | 3,344 | 3,174 | ||||||
| Net occupancy and equipment expenses | 823 | 929 | ||||||
| Other real estate owned expense | 78 | 223 | ||||||
| FDIC insurance expense | 189 | 242 | ||||||
| Legal and professional fees | 245 | 559 | ||||||
| Data processing | 363 | 366 | ||||||
| Advertising | 170 | 198 | ||||||
| Examinations and audits | 332 | 288 | ||||||
| Telephone, postage, and supplies | 254 | 263 | ||||||
| Lease buyout and worthless asset writedowns | 88 | 348 | ||||||
| Other professional fees | 96 | 175 | ||||||
| Director fees | 220 | 215 | ||||||
| Dues and subscriptions | 322 | 165 | ||||||
| Other insurance | 98 | 114 | ||||||
| Other operating expenses | 494 | 543 | ||||||
| TOTAL NONINTEREST EXPENSES | 7,116 | 7,802 | ||||||
| INCOME BEFORE INCOME TAXES | 1,850 | 886 | ||||||
| Income tax expense | 622 | 232 | ||||||
| NET INCOME | $ | 1,228 | $ | 654 | ||||
| Basic earnings per common share | $ | 1.80 | $ | 1.01 | ||||
| Diluted earnings per common share | $ | 1.80 | $ | 1.00 | ||||
See notes to consolidated financial statements
| F- 4 |
CITIZENS INDEPENDENT BANCORP, INC.
Logan, Ohio
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2016 and 2015
| (Dollars in thousands) | ||||||||
| 2016 | 2015 | |||||||
| Net income | $ | 1,228 | $ | 654 | ||||
| Other comprehensive income (loss), net of tax: | ||||||||
| Change in unrecognized actuarial loss on pension plan, net of income taxes of $51 and ($3) for the years ended December 31, 2016 and 2015, respectively | 97 | (5 | ) | |||||
| Net unrealized holding gain (loss) on securities available for sale, net of income taxes of ($2) and $33 for the years ended December 31, 2016 and 2015, respectively | (4 | ) | 64 | |||||
| Reclassification for gains recognized on sale of securities available for sale, net of income taxes of $5 and $57 for the years ended December 31, 2016 and 2015, respectively | (10 | ) | (111 | ) | ||||
| Other comprehensive income (loss) | 83 | (52 | ) | |||||
| Comprehensive income | $ | 1,311 | $ | 602 | ||||
See notes to consolidated financial statements
| F- 5 |
CITIZENS INDEPENDENT BANCORP, INC.
Logan, Ohio
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2016 and 2015
| (Dollars in thousands) | ||||||||||||||||||||||||
| Common stock | Common stock warrants | Retained earnings | Treasury stock | Accumulated other comprehensive income | Total | |||||||||||||||||||
| Balances at January 1, 2015 | $ | 12,297 | $ | 187 | $ | 9,458 | $ | (6,590 | ) | $ | (515 | ) | $ | 14,837 | ||||||||||
| Comprehensive Income: | ||||||||||||||||||||||||
| Net income | 654 | 654 | ||||||||||||||||||||||
| Other comprehensive income, net of tax: | ||||||||||||||||||||||||
| Change in unrealized gain (loss) on securities available for sale | (47 | ) | (47 | ) | ||||||||||||||||||||
| Change in unrecognized gain (loss) on pension | (5 | ) | (5 | ) | ||||||||||||||||||||
| Common stock warrants exercised -50,268 warrants | 1,229 | (79 | ) | 1,150 | ||||||||||||||||||||
| Common stock issued - 33,175 shares | 770 | 770 | ||||||||||||||||||||||
| Balances at December 31, 2015 | $ | 14,296 | $ | 108 | $ | 10,112 | $ | (6,590 | ) | $ | (567 | ) | $ | 17,359 | ||||||||||
| Comprehensive Income: | ||||||||||||||||||||||||
| Net income | 1,228 | 1,228 | ||||||||||||||||||||||
| Other comprehensive income, net of tax: | ||||||||||||||||||||||||
| Change in unrealized gain (loss) on securities available for sale | (14 | ) | (14 | ) | ||||||||||||||||||||
| Change in unrecognized gain (loss) on pension | 97 | 97 | ||||||||||||||||||||||
| Common stock warrants exercised -23,669 warrants | 597 | (37 | ) | 560 | ||||||||||||||||||||
| Common stock warrantts expired -44,316 warrants | 71 | (71 | ) | - | ||||||||||||||||||||
| Common stock issued - 0 shares | - | |||||||||||||||||||||||
| Balances at December 31, 2016 | $ | 14,964 | $ | - | $ | 11,340 | $ | (6,590 | ) | $ | (484 | ) | $ | 19,230 | ||||||||||
See notes to consolidated financial statements
| F- 6 |
CITIZENS INDEPENDENT BANCORP, INC.
Logan, Ohio
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2016 and 2015
| (Dollars in thousands) | ||||||||
| 2016 | 2015 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income | 1,228 | 654 | ||||||
| Adjustment to reconcile net income to net cash provided by operating activities | ||||||||
| Provision for loan losses | - | (250 | ) | |||||
| Depreciation and amortization | 301 | 291 | ||||||
| Deferred income taxes | 622 | 232 | ||||||
| Investment securities amortization (accretion), net | 50 | 121 | ||||||
| Provision for loss on real estate owned | 15 | 138 | ||||||
| Change in cash surrender value of bank owned life insurance | (107 | ) | (39 | ) | ||||
| Net (gain) loss on sale of other real estate owned | (532 | ) | (245 | ) | ||||
| Net (gain) loss on sale of investments | (15 | ) | (168 | ) | ||||
| Net (gain) loss on sale of substandard loans | (56 | ) | - | |||||
| Net (gain) loss on disposition of premises and equipment | 88 | 132 | ||||||
| Net (gain) on sale of loans | (60 | ) | (28 | ) | ||||
| Proceeds from sale of loans | 2,625 | 1,121 | ||||||
| Loans originated for sale | (2,700 | ) | (1,093 | ) | ||||
| Net change in: | ||||||||
| Accrued interest receivable | 27 | 63 | ||||||
| Accrued interest payable | (178 | ) | (733 | ) | ||||
| Other assets | (299 | ) | 78 | |||||
| Other liabilities | 213 | (604 | ) | |||||
| Net cash provided by (used in) operating activities | 1,222 | (330 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of available for sale securities | (1,000 | ) | (3,083 | ) | ||||
| Proceeds from maturities of available for sale securities | 2,679 | 5,792 | ||||||
| Proceeds from the sale of available for sale securities | 4,040 | 14,418 | ||||||
| Proceeds from the sale of substandard loans | 651 | - | ||||||
| Purchase of bank owned life insurance | - | (3,000 | ) | |||||
| Net changes in loans | (5,602 | ) | (4,496 | ) | ||||
| Proceeds from the sale of other real estate owned | 777 | 1,087 | ||||||
| Purchases of premises and equipment | (1,742 | ) | (350 | ) | ||||
| Net cash provided by (used in) investing activities | (197 | ) | 10,368 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Net change in deposits | (6,187 | ) | (15,642 | ) | ||||
| Payments on loans payable | (2,569 | ) | (2,921 | ) | ||||
| Proceeds of funds borrowed overnight | 2,699 | - | ||||||
| Proceeds from issuance of common stock and warrants | 560 | 1,263 | ||||||
| Net cash provided by (used in) financing activities | (5,497 | ) | (17,300 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | (4,472 | ) | (7,262 | ) | ||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 9,371 | 16,633 | ||||||
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 4,899 | $ | 9,371 | ||||
See notes to consolidated financial statements
| F- 7 |
Notes to Consolidated Financial Statements
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Citizens Independent Bancorp, Inc. (the Bancorp) is a bank holding company whose wholly-owned bank subsidiary, The Citizens Bank of Logan (the Bank), together referred to as the Company, is engaged in the business of commercial and retail banking services with operations conducted through offices in Hocking and Athens counties. These communities and surrounding areas are the source of substantially all the Company’s deposit and loan activities. Secured loans are secured by business assets, consumer assets, residential real estate, and non-residential real estate. The majority of Company income is derived from commercial, real estate, and retail lending activities and investments. Other financial instruments which potentially represent concentrations of credit risk include deposit accounts in other financial institutions and federal funds sold.
In October 2012, the Bank entered into publicly available Consent Orders with the Federal Deposit Insurance Corporation (FDIC) and the Ohio Division of Financial Institutions (DFI) (collectively referred to as the Orders), which required the Bank to take a number of actions. In October 2015, both the FDIC and DFI lifted their respective Consent Orders.
Basis of Financial Statement Presentation
The accounting and reporting policies of the Bancorp and the Bank conform with accounting principles generally accepted in the United States of America and to general practices followed within the banking industry.
To conform to the 2016 presentation, certain reclassifications have been made to prior amounts, which had no impact on net income, comprehensive income, or shareholders’ equity.
Principles of Consolidation
The consolidated financial statements include the accounts of the Bancorp and the Bank. All significant intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of 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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Investment Securities
Debt securities are classified as held-to-maturity when management has the positive intent and ability to hold the securities to maturity. Securities held-to-maturity are carried at amortized cost. The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the period to maturity.
Debt securities not classified as held-to-maturity are classified as available for sale. Securities available–for-sale are carried at fair value with unrealized gains and losses, net of the deferred income tax effect, reported in accumulated other comprehensive income. Realized gains (losses) on securities available for sale are included in noninterest income (expense) and, when applicable, are reported as a reclassification adjustment, net of income tax, in other comprehensive income. Gains and losses on sales of securities are determined on the specific-identification method.
Declines in the fair value of individual held to maturity and available for sale securities below their cost that are other than temporary result in writedowns of the individual securities to their fair value. The related writedowns are included in earnings as realized losses of which none have been reported in the periods presented.
| F- 8 |
Loans
Loans are stated at unpaid principal balances, less the allowance for loan losses and unearned discounts. Interest on loans is accrued based on principal amounts outstanding.
The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Personal loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
Interest accrued in the current year but not collected for loans that are placed on nonaccrual or charged off is reversed against current interest income and unpaid interest accrued in prior years is charged to the allowance for loan losses. The interest on nonaccrual loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Consistent with the Bank’s existing method of income recognition for loans, interest on impaired loans, except those classified as nonaccrual, is recognized as income using the accrual method.
Loans Held for Sale
Mortgage loans originated and held for sale in the secondary market are carried at the lower of cost or market value determined on an aggregate basis. Net unrealized losses are recognized in a valuation allowance through charges to income. Gains and losses on the sale of loans held for sale are determined using the specific identification method.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of 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 specific, general, and environmental components. The specific component relates to loans that are classified as doubtful, substandard, or troubled debt restructurings (TDRs). For such loans that are also classified as impaired, an allowance is established when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.
A loan is considered impaired when, based on current information and events, it is probable that the Bank 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. 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. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected 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.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.
| F- 9 |
Troubled Debt Restructurings (TDRs)
Management classifies loans as TDRs when a borrower is experiencing financial difficulties and the Bank has granted a concession. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Bank’s internal underwriting policy.
Management’s policy is to modify loans by extending the term or by granting a temporary or permanent contractual interest rate below the market rate. TDRs are separately identified for impairment disclosures and are measured by the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported at the fair value of the collateral.
Premises and Equipment
Land is carried at cost. Other premises and equipment are recorded at cost net of accumulated depreciation. Depreciation is computed using the straight-line method based principally on the estimated useful lives of the assets. Useful lives are revised when a change in life expectancy becomes apparent. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains or losses on dispositions are included in current operations as realized.
Other Real Estate Owned (OREO)
OREO is recorded at fair value less anticipated selling costs (net realizable value) and consists of property acquired through loan foreclosure. If the net realizable value is below the carrying value of the loan at the date of transfer, the difference is charged to the allowance for loan losses. Subsequent declines in the fair value of real estate are classified as OREO devaluations, which are reported as adjustments to the carrying value of OREO and are recorded as a charge to operations included in noninterest expense. In certain circumstances where management believes the devaluation may not be permanent in nature, the Company utilizes a valuation allowance to record OREO devaluations, which is also expensed through noninterest expense. Costs relating to development and improvement of such properties are capitalized (not in excess of fair value less estimated costs to sell) and costs relating to holding the properties are charged to expense.
Bank Owned Life Insurance
The Bank had previously purchased a life insurance policy on one retired executive. In September 2015, the Bank purchased additional life insurance policies on ten members of senior management. Bank owned life insurance is recorded at its cash surrender value, or the amount that can be realized. Increases in the asset value are recorded as earnings in other income.
| F- 10 |
Accumulated Other Comprehensive Income
The accumulated other comprehensive income component of equity results from the unrealized gains and losses on available for sale securities and from the unrecognized actuarial loss of the pension plan.
| (Dollars in thousands) | ||||||||
| 2016 | 2015 | |||||||
| Securities available for sale | $ | (68 | ) | $ | (54 | ) | ||
| Unrecognized actuarial loss of the pension plan | (416 | ) | (513 | ) | ||||
| Accumulated other comprehensive income | $ | (484 | ) | $ | (567 | ) | ||
Employee Benefit Plans
Pension expense is the net of service and interest cost, return on plan assets, and amortization of gains and losses not immediately recognized. 401(k) plan expense is based on the Company’s annual contribution.
Earnings Per Common Share
Earnings per common share are net income available to common shareholders divided by the weighted average common shares outstanding during the period. The factors used in the earnings per share computation follow:
| (Dollars in thousands, except per share data) | ||||||||
| 2016 | 2015 | |||||||
| Net income (loss) | $ | 1,228 | $ | 654 | ||||
| Weighted average common shares outstanding | 682,600 | 645,849 | ||||||
| Basic earnings per common share | $ | 1.80 | $ | 1.01 | ||||
| Total shares and warrants | 682,600 | 652,478 | ||||||
| Diluted earnings per common share | $ | 1.80 | $ | 1.00 | ||||
Warrants offered in conjunction with the 2014 common stock offering totaled 119,003 warrants, each entitling the holder to purchase 1 share of common stock at a discount to book value. At December 31, 2015, there were 67,985 warrants outstanding and at December 31, 2016 the offering had expired and no warrants were outstanding. At December 31, 2015, 51,018 warrants had been exercised and an additional 23,669 warrants were exercised in 2016.
Income Taxes
Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of securities available for sale, allowance for loan losses, subsequent loss writedowns on other real estate owned, accumulated depreciation, nonaccrual interest on loans, and accrued employee benefits. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets or liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Bancorp files consolidated income tax returns with the Bank.
Advertising
Advertising costs are charged to operations when incurred.
Statements of Cash Flows
The Company considers cash and amounts due from depository institutions, and federal funds sold, all of which have an original maturity of 90 days or less, to be cash and cash equivalents for purposes of the statements of cash flows. The following are supplemental disclosures for the years ended December 31, 2016 and 2015, respectively.
| F- 11 |
| (Dollars in thousands) | ||||||||
| 2016 | 2015 | |||||||
| Cash paid during the year for interest | $ | 996 | $ | 1,958 | ||||
| Non cash investing and financing activities | ||||||||
| Transfer of loans to real estate owned | 22 | 150 | ||||||
| Short term debt converted to common stock | - | 656 | ||||||
Industry Segments
While the Bancorp’s chief decision makers monitor the revenue streams of various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable segment.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The core principle will be achieved using a five step process. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606)” which amends the effective date for the Company from January 1, 2017 to January 1, 2018. The adoptions of ASU No. 2014-09 and ASU No. 2015-14 are not expected to have a material impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities". The new standard significantly revises an entity's accounting related to 1) the classification and measurement of investments in equity securities and 2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. The amendment requires equity investments (excluding investments accounted for under the equity method or that result in consolidation) to be measured at fair value, with changes in fair value recognized in net income. This ASU will become effective for the Company on January 1, 2018. The adoption will require a cumulative effect to the statement of financial position as of the beginning of the first reporting period. The Company has not determined the expected effect of the adoption of ASU No. 2016-01.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This standard requires organizations to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing requirements for leases that were historically classified as operating leases under previous generally accepted accounting principles. This ASU will become effective for the Company for interim and annual periods on January 1, 2019. Management is currently evaluating the potential impact of ASU No. 2016-02 on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326).” This standard replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The new Current Expected Credit Losses model (CECL) will apply to the allowance for loan losses, available-for-sale and held to maturity debt securities, purchased financial assets with credit deterioration, and certain off-balance sheet credit exposures. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. This ASU will become effective for the Company for interim and annual periods on January 1, 2020. Management is currently evaluating the potential impact of ASU No. 2016-13 on the Company’s consolidated financial statements.
| F- 12 |
NOTE B - RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain certain daily cash and due from bank reserve balances in accordance with regulatory requirements. The balance maintained under such requirements was $775,000 and $1,064,000 as of December 31, 2016 and 2015, respectively.
As of December 31, 2016, the Bank was required to maintain a minimum balance of $825,000 with United Bankers Bank.
NOTE C - INVESTMENT SECURITIES
The amortized cost of securities and their estimated fair values are as follows:
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| December 31, 2016 | December 31, 2015 | |||||||||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||||
| U.S. government securities | $ | - | $ | - | $ | - | $ | - | $ | 1,005 | $ | - | $ | - | $ | 1,005 | ||||||||||||||||
| U.S. government federal agencies | 1,990 | - | (8 | ) | 1,982 | 6,571 | 3 | (39 | ) | 6,535 | ||||||||||||||||||||||
| State and local governments | 2,759 | - | (25 | ) | 2,734 | 1,774 | 9 | - | 1,783 | |||||||||||||||||||||||
| Mortgage backed securities | 3,592 | 2 | (73 | ) | 3,521 | 4,745 | 4 | (59 | ) | 4,690 | ||||||||||||||||||||||
| Total | $ | 8,341 | $ | 2 | $ | (106 | ) | $ | 8,237 | $ | 14,095 | $ | 16 | $ | (98 | ) | $ | 14,013 | ||||||||||||||
| F- 13 |
The following is a summary of maturities of securities available for sale as of December 31, 2016:
| (Dollars in thousands) | ||||||||
| Amortized Cost | Fair Value | |||||||
| Amounts maturing in: | ||||||||
| One year or less | $ | - | $ | - | ||||
| After one year through five years | 3,111 | 3,089 | ||||||
| After five years through ten years | 653 | 644 | ||||||
| After ten years | 4,577 | 4,504 | ||||||
| Total | $ | 8,341 | $ | 8,237 | ||||
Mortgage backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by issuers of the securities. The amortized cost and fair value of mortgage backed securities are presented in the available for sale category by contractual maturity in the preceding table.
Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
In 2016, the Bank sold $4.0 million of investment securities for total proceeds of $4.0 million and a realized gain of less than $0.1 million. In 2015, the Bank sold $14.2 million of the investment securities portfolio for total proceeds of $14.4 million, with a realized gain of $0.2 million. There were no losses on sales of investments in 2016 or 2015.
There were no securities transferred between classifications during either 2016 or 2015.
Investment securities with a carrying amount of approximately $1,740,000 and $2,848,000 were pledged to secure deposits as required or permitted by law at December 31, 2016, and 2015, respectively.
The caption “Other investment securities” in the consolidated balance sheets consists of Federal Home Loan Bank stock. This equity security is carried at cost since it may only be sold back to the Federal Home Loan Bank or another member at par value.
Information pertaining to securities with gross unrealized losses at December 31, 2016 and 2015 aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:
| F- 14 |
| (Dollars in thousands) | ||||||||||||||||||||||||
| Less than 12 months | 12 months or greater | Total | ||||||||||||||||||||||
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||
| December 31, 2016 | ||||||||||||||||||||||||
| U.S. government federal agencies | $ | 1,982 | $ | (8 | ) | $ | - | $ | - | $ | 1,982 | $ | (8 | ) | ||||||||||
| State and local governments | 1,734 | (25 | ) | - | - | 1,734 | (25 | ) | ||||||||||||||||
| Mortgage backed securities | 2,675 | (44 | ) | 828 | (29 | ) | 3,503 | (73 | ) | |||||||||||||||
| Total | $ | 6,391 | $ | (77 | ) | $ | 828 | $ | (29 | ) | $ | 7,219 | $ | (106 | ) | |||||||||
| December 31, 2015 | ||||||||||||||||||||||||
| U.S. government federal agencies | $ | 4,981 | $ | (39 | ) | $ | - | $ | - | $ | 4,981 | $ | (39 | ) | ||||||||||
| State and local governments | - | - | - | - | - | - | ||||||||||||||||||
| Mortgage backed securities | 3,115 | (28 | ) | 1,388 | (31 | ) | 4,503 | (59 | ) | |||||||||||||||
| Total | $ | 8,096 | $ | (67 | ) | $ | 1,388 | $ | (31 | ) | $ | 9,484 | $ | (98 | ) | |||||||||
The investment portfolio contains unrealized losses of direct obligations of U.S. government agencies securities, including mortgage-related instruments issued or backed by the full faith and credit of the United States government or are generally viewed as having the implied guarantee of the U.S. government, and debt obligations of a U.S. state or political subdivision. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary.
Management evaluates securities for other than temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any recovery in fair value.
| F- 15 |
NOTE D - LOANS AND ALLOWANCE FOR LOAN LOSSES
The following tables provide information on the activity in the allowance for loan losses by the respective loan portfolio segment for the periods indicated:
| (Dollars in thousands) | ||||||||||||||||
| Commercial | Real Estate | Consumer | Total | |||||||||||||
| December 31, 2016 | ||||||||||||||||
| Beginning balance - January 1, 2016 | $ | 1,629 | $ | 240 | $ | 209 | $ | 2,078 | ||||||||
| Charge-offs | (233 | ) | (1 | ) | (116 | ) | (350 | ) | ||||||||
| Recoveries | 76 | 3 | 41 | 120 | ||||||||||||
| Net (charge-offs) recoveries | (157 | ) | 2 | (75 | ) | (230 | ) | |||||||||
| Provision | 5 | (99 | ) | 94 | - | |||||||||||
| Ending balance - December 31, 2016 | $ | 1,477 | $ | 143 | $ | 228 | $ | 1,848 | ||||||||
| December 31, 2015 | ||||||||||||||||
| Beginning balance - January 1, 2015 | $ | 3,491 | $ | 195 | $ | 183 | $ | 3,869 | ||||||||
| Charge-offs | (1,443 | ) | (42 | ) | (187 | ) | (1,672 | ) | ||||||||
| Recoveries | 86 | 2 | 43 | 131 | ||||||||||||
| Net (charge-offs) recoveries | (1,357 | ) | (40 | ) | (144 | ) | (1,541 | ) | ||||||||
| Provision | (505 | ) | 85 | 170 | (250 | ) | ||||||||||
| Ending balance - December 31, 2015 | $ | 1,629 | $ | 240 | $ | 209 | $ | 2,078 | ||||||||
The following tables present the recorded investment with respect to loans and the related allowance by portfolio segment at the dates indicated:
| (Dollars in thousands) | ||||||||||||||||||||||||
| Collectively Evaluated | Individually Evaluated | Total | ||||||||||||||||||||||
| Allowance for loan losses | Recorded investment in loans | Allowance for loan losses | Recorded investment in loans | Allowance for loan losses | Recorded investment in loans | |||||||||||||||||||
| December 31, 2016 | ||||||||||||||||||||||||
| Commercial | $ | 1,011 | $ | 76,251 | $ | 466 | $ | 3,836 | $ | 1,477 | $ | 80,087 | ||||||||||||
| Real estate | 132 | 43,558 | 11 | 117 | 143 | 43,675 | ||||||||||||||||||
| Consumer | 212 | 30,111 | 16 | 113 | 228 | 30,224 | ||||||||||||||||||
| Total | $ | 1,355 | $ | 149,920 | $ | 493 | $ | 4,066 | $ | 1,848 | $ | 153,986 | ||||||||||||
| December 31, 2015 | ||||||||||||||||||||||||
| Commercial | $ | 1,479 | $ | 80,293 | $ | 150 | $ | 1,854 | $ | 1,629 | $ | 82,147 | ||||||||||||
| Real estate | 196 | 42,993 | 44 | 408 | 240 | 43,401 | ||||||||||||||||||
| Consumer | 209 | 23,683 | - | - | 209 | 23,683 | ||||||||||||||||||
| Total | $ | 1,884 | $ | 146,969 | $ | 194 | $ | 2,262 | $ | 2,078 | $ | 149,231 | ||||||||||||
As part of its monitoring process, the Bank utilizes a risk rating system which quantifies the risk the Bank estimates it has assumed when entering into a loan transaction and during the life of that loan. The system rates the strength of the borrower and the transaction and is designed to provide a program for risk management and early detection of problems. Loans are graded on a scale of 1 through 8, with a grade of 4 or below classified as “Pass” rated credits. Following is a description of the general characteristics of risk grades 5 through 8:
5 – Special Mention
The weighted overall risk associated with this credit is considered higher than normal (but still acceptable) or the loan possesses deficiencies which corrective action by the Bank would remedy, thereby reducing risk.
| F- 16 |
6 – Substandard
The weighted overall risk associated with this credit (based on each of the Bank’s creditworthiness criteria) is considered undesirable, the credit demonstrates a well-defined weakness or the Bank is inadequately protected and there exists the distinct possibility of sustaining some loss if not corrected.
7 – Doubtful
Weakness makes collection or liquidation in full (based on currently existing facts) improbable.
8 – Loss
This credit is of little value and not warranted as a bankable asset. Accordingly, the Bank does not carry any loans on the books that are graded 8 – loss, instead these loans are charged off.
The Bank’s strategy for credit risk management includes ongoing credit examinations and management reviews of loans exhibiting deterioration of credit quality. Such monitoring is being done on an ongoing basis according to the following timeframe: $250,000 to $1,000,000 exposure, annually; $1,000,000 exposure, semiannually; watch list loans with aggregate exposure >$100,000 are analyzed each quarter. A deteriorating credit indicates an elevated likelihood of delinquency. When a loan becomes delinquent, its credit grade is reviewed and changed accordingly. Each downgrade to a classified credit results in a higher percentage of reserve to reflect the increased likelihood of loss for similarity graded credits. Further deterioration could result in a certain credit being deemed impaired resulting in a collateral valuation for purposes of establishing a specific reserve which reflects the possible extent of such loss for that credit.
The following tables present the risk category of loans by class of loans based on the most recent analysis performed at December 31, 2016 and December 31, 2015.
Commercial Credit Exposure
Credit risk profile by credit worthiness category
| Commercial Credit Exposure | (Dollars in thousands) | |||||||||||||||
| Commercial Mortgage | Commercial Other | |||||||||||||||
| 12/31/16 | 12/31/15 | 12/31/16 | 12/31/15 | |||||||||||||
| Category | ||||||||||||||||
| Pass | $ | 63,760 | $ | 61,612 | $ | 10,884 | $ | 12,123 | ||||||||
| 5 | 879 | 984 | 38 | 186 | ||||||||||||
| 6 | 3,932 | 6,686 | 594 | 557 | ||||||||||||
| 7 | - | - | - | - | ||||||||||||
| Total | $ | 68,571 | $ | 69,282 | $ | 11,516 | $ | 12,866 | ||||||||
| F- 17 |
Consumer Credit Exposure
Credit risk profile by credit worthiness category
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Residential Real Estate | Consumer Equity | Consumer Auto | Consumer Other | |||||||||||||||||||||||||||||
| 12/31/16 | 12/31/15 | 12/31/16 | 12/31/15 | 12/31/16 | 12/31/15 | 12/31/16 | 12/31/15 | |||||||||||||||||||||||||
| Category | ||||||||||||||||||||||||||||||||
| Pass | $ | 43,372 | $ | 42,690 | $ | 13,585 | $ | 10,049 | $ | 15,078 | $ | 11,999 | $ | 1,525 | $ | 1,512 | ||||||||||||||||
| 5 | - | 373 | - | 59 | - | 38 | - | - | ||||||||||||||||||||||||
| 6 | 303 | 338 | - | 7 | 36 | 18 | - | - | ||||||||||||||||||||||||
| 7 | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total | $ | 43,675 | $ | 43,401 | $ | 13,585 | $ | 10,115 | $ | 15,114 | $ | 12,055 | $ | 1,525 | $ | 1,512 | ||||||||||||||||
Loans evaluated for impairment include loans classified as troubled debt restructurings and non-performing commercial, mortgage, and consumer loans. Impairment is evaluated in total for smaller balance loans of a similar nature, and on an individual loan basis for other loans. The following tables set forth certain information regarding the Bank’s impaired loans, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of the periods indicated:
| F- 18 |
| (Dollars in thousands) | ||||||||||||
| Recorded Investment | Unpaid Principal Balance | Related Allowance | ||||||||||
| December 31, 2016 | ||||||||||||
| With no related allowance recorded: | ||||||||||||
| Commercial mortgage | $ | 559 | $ | 588 | $ | - | ||||||
| Commercial other | 115 | 115 | - | |||||||||
| Residential real estate | 289 | 289 | - | |||||||||
| Consumer equity | - | - | - | |||||||||
| Consumer auto | 55 | 55 | - | |||||||||
| Subtotal | 1,018 | 1,047 | - | |||||||||
| With an allowance recorded: | ||||||||||||
| Commercial mortgage | 3,077 | 3,107 | 444 | |||||||||
| Commercial other | 592 | 592 | 22 | |||||||||
| Residential real estate | 117 | 119 | 11 | |||||||||
| Consumer equity | 113 | 113 | 16 | |||||||||
| Consumer auto | - | - | - | |||||||||
| Subtotal | 3,899 | 3,931 | 493 | |||||||||
| Total | $ | 4,917 | $ | 4,978 | $ | 493 | ||||||
| December 31, 2015 | ||||||||||||
| With no related allowance recorded: | ||||||||||||
| Commercial mortgage | $ | 1,324 | $ | 1,886 | $ | - | ||||||
| Commercial other | 38 | 37 | - | |||||||||
| Residential real estate | 315 | 316 | - | |||||||||
| Consumer equity | - | - | - | |||||||||
| Consumer auto | 89 | 90 | - | |||||||||
| Subtotal | 1,766 | 2,329 | - | |||||||||
| With an allowance recorded: | ||||||||||||
| Commercial mortgage | 997 | 1,100 | 150 | |||||||||
| Commercial other | - | - | - | |||||||||
| Residential real estate | 408 | 409 | 44 | |||||||||
| Consumer equity | - | - | - | |||||||||
| Consumer auto | - | - | - | |||||||||
| Subtotal | 1,405 | 1,509 | 194 | |||||||||
| Total | $ | 3,171 | $ | 3,838 | $ | 194 | ||||||
| F- 19 |
The following tables present the average recorded investments in impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio class for the periods indicated.
| (Dollars in thousands) | ||||||||||||||||||||||||
| No Related | With Related | |||||||||||||||||||||||
| Allowance Recorded | Allowance Recorded | Total | ||||||||||||||||||||||
| Average Recorded Investment | Total Interest Income Recognized | Average Recorded Investment | Total Interest Income Recognized | Average Recorded Investment | Total Interest Income Recognized | |||||||||||||||||||
| December 31, 2016 | ||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||
| Mortgage | $ | 881 | $ | 10 | $ | 1,769 | $ | 74 | $ | 2,650 | $ | 84 | ||||||||||||
| Other | 87 | 2 | 238 | - | 325 | 2 | ||||||||||||||||||
| Residential real estate | 302 | 14 | 344 | 6 | 646 | 20 | ||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Equity | - | - | 68 | 1 | 68 | 1 | ||||||||||||||||||
| Auto | 57 | 2 | - | - | 57 | 2 | ||||||||||||||||||
| Other | - | - | - | - | - | - | ||||||||||||||||||
| TOTAL | $ | 1,327 | $ | 28 | $ | 2,419 | $ | 81 | $ | 3,746 | $ | 109 | ||||||||||||
| December 31, 2015 | ||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||
| Mortgage | $ | 3,036 | $ | 6 | $ | 2,040 | $ | 37 | $ | 5,076 | $ | 43 | ||||||||||||
| Other | 48 | 2 | 53 | - | 101 | 2 | ||||||||||||||||||
| Residential real estate | 247 | 16 | 443 | 8 | 690 | 24 | ||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Equity | 31 | - | 91 | - | 122 | - | ||||||||||||||||||
| Auto | 104 | 6 | - | - | 104 | 6 | ||||||||||||||||||
| Other | - | - | - | - | - | - | ||||||||||||||||||
| TOTAL | $ | 3,466 | $ | 30 | $ | 2,627 | $ | 45 | $ | 6,093 | $ | 75 | ||||||||||||
| F- 20 |
The following table summarizes information relative to troubled debt restructured (TDR) loans which were modified during the years ended December 31, 2016 and 2015.
| (Dollars in thousands) | ||||||||||||
| Number | Pre- Modification Outstanding | Post- Modification Outstanding | ||||||||||
| of | Recorded | Recorded | ||||||||||
| TDRs | Investment | Investment | ||||||||||
| December 31, 2016 | ||||||||||||
| Commercial mortgage | 13 | $ | 2,824 | $ | 2,824 | |||||||
| Residential real estate | - | - | - | |||||||||
| Consumer | 3 | 201 | 201 | |||||||||
| Total | 16 | $ | 3,025 | $ | 3,025 | |||||||
| December 31, 2015 | ||||||||||||
| Commercial mortgage | 2 | $ | 478 | $ | 478 | |||||||
| Residential real estate | 3 | 239 | 239 | |||||||||
| Consumer | 8 | 177 | 177 | |||||||||
| Total | 13 | $ | 894 | $ | 894 | |||||||
A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Bank offers various types of concessions when modifying a loan. Loan terms that may be modified due to a borrower’s financial situation include, but are not limited to, a reduction in the stated interest rate, a reduction in the face amount of the debt, a reduction of the accrued interest, temporary interest-only payments, or re-aging, extensions, deferrals, renewals and rewrites. In mitigation, additional collateral, a co-borrower or a guarantor may be requested.
During 2016, loans were modified by either a reduction in interest rates, a change in the contractual maturity date of the note, or a final payment modification. The interest rate on ten loans was reduced, often in concert with an extended amortization period. Three loans maintained the original interest rate, but the amortization period was extended. Three loans were changed to interest only payments with a balloon payment due at the maturity.
During 2015, loans were modified by either a reduction in interest rates, a change in the contractual maturity date of the note, or a final payment modification. The interest rate on nine loans was reduced, often in concert with an extended amortization period. Three loans maintained the original interest rate, but the amortization period was extended. A single loan was changed to interest only payments with a balloon payment due at the maturity.
Loans modified in a TDR may already be on nonaccrual status and partial charge-offs may have in some cases been taken against the outstanding loan balance. The allowance for impaired loans that has been modified in a TDR is measured based on the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent or on the present value of expected future cash flows, discounted at the loan’s original effective interest rate. Management exercises significant judgment in developing these determinations.
There were no loans which were modified as a TDR within the previous twelve months that have subsequently re-defaulted as of December 31, 2016.
As of December 31, 2016, there are no commitments to lend additional funds to any borrower whose loan terms have been modified as a TDR.
| F- 21 |
The following table presents the loan portfolio summarized by aging categories, at December 31, 2016 and 2015:
| (Dollars in thousands) | ||||||||||||||||||||||||||||
| Recorded | ||||||||||||||||||||||||||||
| Investment | ||||||||||||||||||||||||||||
| 30-59 | 60-89 | >90 | >90 Days | |||||||||||||||||||||||||
| Days | Days | Days | Total | Total | and | |||||||||||||||||||||||
| Past Due | Past Due | Past Due | Past Due | Current | Loans | Accruing | ||||||||||||||||||||||
| December 31, 2016 | ||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||
| Mortgage | $ | 272 | $ | 331 | $ | 381 | $ | 984 | $ | 67,587 | $ | 68,571 | $ | - | ||||||||||||||
| Other | 1 | 4 | - | 5 | 11,511 | 11,516 | - | |||||||||||||||||||||
| Residential Real Estate | 972 | - | - | 972 | 42,703 | 43,675 | - | |||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Equity | 10 | - | - | 10 | 13,575 | 13,585 | - | |||||||||||||||||||||
| Auto | 154 | 13 | 21 | 188 | 14,926 | 15,114 | - | |||||||||||||||||||||
| Other | 11 | 1 | - | 12 | 1,513 | 1,525 | - | |||||||||||||||||||||
| Total | $ | 1,420 | $ | 349 | $ | 402 | $ | 2,171 | $ | 151,815 | $ | 153,986 | $ | - | ||||||||||||||
| December 31, 2015 | ||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||
| Mortgage | $ | 628 | $ | 433 | $ | 196 | $ | 1,257 | $ | 68,025 | $ | 69,282 | $ | - | ||||||||||||||
| Other | 11 | - | - | 11 | 12,855 | 12,866 | - | |||||||||||||||||||||
| Residential Real Estate | 449 | 33 | - | 482 | 42,919 | 43,401 | - | |||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Equity | 23 | - | - | 23 | 10,092 | 10,115 | - | |||||||||||||||||||||
| Auto | 138 | 17 | - | 155 | 11,900 | 12,055 | - | |||||||||||||||||||||
| Other | 2 | 9 | - | 11 | 1,501 | 1,512 | - | |||||||||||||||||||||
| Total | $ | 1,251 | $ | 492 | $ | 196 | $ | 1,939 | $ | 147,292 | $ | 149,231 | $ | - | ||||||||||||||
The following summarizes loans on nonaccrual status at December 31, 2016 and 2015.
| (Dollars in thousands) | ||||||||
| December 31, | December 31, | |||||||
| 2016 | 2015 | |||||||
| Commercial: | ||||||||
| Mortgage | $ | 739 | $ | 1,334 | ||||
| Other | - | 3 | ||||||
| Residential Real Estate | - | 3 | ||||||
| Consumer: | ||||||||
| Equity | - | - | ||||||
| Auto | 29 | 10 | ||||||
| Other | - | - | ||||||
| Total | $ | 768 | $ | 1,350 | ||||
Management has identified lending for non-owner occupied residential real estate as a lending concentration. Total loans for these properties totaled $30.8 million at December 31, 2016 versus $28.9 million at December 31, 2015. At December 31, 2016, non-owner occupied residential real estate represented 20.0% of the loan portfolio, up from 19.4% of the Bank’s loan portfolio at December 31, 2015. Management believes it has the skill and experience to manage any risks associated with this type of lending. Loans in this category are generally paying as agreed without any unusual or unexpected levels of delinquency. The delinquency rate in this category, which is any loan 30 days or more past due, was 2.1% at both December 31, 2016 and December 31, 2015.
| F- 22 |
In the ordinary course of business, the Bancorp and the Bank have and expect to continue to have transactions, including borrowings, with their officers, directors, and their affiliates. In the opinion of management, such transactions were on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the time of comparable transactions with other customers and did not involve more than a normal credit risk of collectability or present any other unfavorable features to the Bancorp and the Bank. Loans to such borrowers are summarized as follows:
| Related Party Loans | ||||||||
| (Dollars in thousands) | ||||||||
| 2016 | 2015 | |||||||
| Balance, January 1, | $ | 158 | $ | 11 | ||||
| New loans granted | 41 | 148 | ||||||
| Principal payments | (4 | ) | (1 | ) | ||||
| Principal draws | 84 | - | ||||||
| Balance, December 31, | $ | 279 | $ | 158 | ||||
NOTE E - PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 2016 and 2015 follows:
| (Dollars in thousands) | ||||||||
| 2016 | 2015 | |||||||
| Land | $ | 2,038 | $ | 1,334 | ||||
| Buildings and improvements | 3,714 | 3,291 | ||||||
| Furniture, fixtures, and equipment | 2,949 | 2,594 | ||||||
| $ | 8,701 | $ | 7,219 | |||||
| Accumulated depreciation and amortization | (4,371 | ) | (4,242 | ) | ||||
| Total | $ | 4,330 | $ | 2,977 | ||||
The Company has no lease arrangements at December 31, 2016. The total rental expense charged to operations was $91,000 for the year ended December 31, 2016 and $126 thousand for the year ended December 31, 2015.
NOTE F – BANK OWNED LIFE INSURANCE
In 2015, the Bank invested in whole life insurance contracts on the lives of ten current officers who have provided positive consent allowing the Bank to be named beneficiary of these insurance contracts. An existing policy on a former employee is also in place. These policies are recorded at their cash surrender values which are presented in the consolidated balance sheets in “Other assets.” These contracts are insurance products of Massachusetts Mutual Life Insurance Company, New York Life Insurance Company, and the First Penn-Pacific and consist of (21) policies. These policies have a stated aggregate death benefit of $9.7 million and aggregate cash surrender values of $3,427,000 and $3,320,000 as of December 31, 2016 and 2015, respectively.
The initial policy was funded by a premium payment of $121 thousand. The Bank purchased additional policies in September, 2015 for $3.0 million. Cash surrender value increases to the carrying amounts of the policies are recognized as income of $107,000 and $39,000 for the years ended December 31, 2016 and 2015, respectively.
| F- 23 |
NOTE G - DEPOSITS
Deposit account balances at December 31, 2016 and 2015, are summarized as follows:
| (Dollars in thousands) | ||||||||
| 2016 | 2015 | |||||||
| Non-interest bearing checking accounts | $ | 32,282 | $ | 26,116 | ||||
| Interest-bearing checking accounts | 11,055 | 25,721 | ||||||
| Savings accounts | 55,104 | 54,277 | ||||||
| Certificates of deposit | 57,697 | 56,211 | ||||||
| Total | $ | 156,138 | $ | 162,325 | ||||
The aggregate amount of jumbo certificates of deposit with a minimum denomination of $250,000 was $10,671,000 and $7,258,000 at December 31, 2016 and 2015, respectively.
At December 31, 2016, scheduled maturities of certificates of deposit are as follows:
| (Dollars in thousands) | ||||
| 2017 | $ | 23,769 | ||
| 2018 | 8,793 | |||
| 2019 | 9,299 | |||
| 2020 | 7,237 | |||
| 2021 | 8,579 | |||
| 2022 and after | 20 | |||
| $ | 57,697 | |||
The Bank held deposits of approximately $794,000 and $544,000 for executive officers and directors at December 31, 2016 and 2015, respectively.
| F- 24 |
NOTE H – BORROWED FUNDS
Borrowed funds are comprised of the following at December 31:
| (Dollars in thousands) | ||||||||
| 2016 | 2015 | |||||||
| 4.25% note payable to bank in monthly installments of $9,925 through 06/25/2019, unsecured | $ | - | $ | 385 | ||||
| 4.75% note payable to bank in monthly installments of $12,615 through 11/21/2019, unsecured | - | 540 | ||||||
| 8.00% note payable to company, of which a signidicant owner is a shareholder of Bancorp, in monthly installments of interest only through 12/29/2015, secured by real estate | - | - | ||||||
| 6.00% note payable to individual who is a significant shareholder of Bancorp, in monthly installments of interest only through 08/04/2021, secured by real estate | - | 1,644 | ||||||
| Total borrowed funds | $ | - | $ | 2,569 | ||||
Borrowed funds totaled $2.6 million at December 31, 2015, consisting of three separate loans to Bancorp which originally totaled $6.1 million. During the first quarter of 2015, Bancorp was able to renegotiate a substantial portion of the debt due December 29, 2015, achieving terms more favorable to Bancorp. A portion of the $5.0 million note totaling $2.3 million was exchanged for 28,675 shares of Bancorp common stock and a new $1.6 million note with a more favorable interest rate and a maturity date of August 2021.
In October, 2016, a $1.6 million dividend was paid from the Bank to the Holding Company. This dividend, along with cash on hand at the Holding Company, was sufficient to retire all of the long term debt outstanding as of that date.
Federal Home Loan Bank (FHLB) advances are collateralized by all shares of FHLB stock owned by the Bank (totaling $859,000) and by 100% of the Bank’s qualifying 1 – 4 family mortgage loans in the amount of $82.6 million. Based on the collateral capacity as of December 31, 2016, total FHLB advances are limited to approximately $53.0 million. There were no FHLB borrowings outstanding at December 31, 2016 or 2015. In addition, the FHLB has issued $14,800,000 of standby letters of credit for the Bank.
In addition, the Company has a collateralized federal funds line of $10.2 million with the Federal Reserve Bank and an unsecured $5.0 million line with United Bankers’ Bank. The Federal Reserve federal funds line is secured via the pledge of $13.8 million of automobile loans and the United Bankers’ Bank line is unsecured.
Overnight borrowings of $2.7 million were drawn on the United Bankers' Bank line at December 31, 2016, and the FHLB line was not utilized. Information concerning overnight funds purchased is summarized as follows:
| (Dollars in thousands) | ||||||||
| 2016 | 2015 | |||||||
| Amount outstanding | $ | 2,699 | $ | - | ||||
| Year-end rate | 1.125 | % | 0 | % | ||||
| Average outstanding | 229 | - | ||||||
| Average rate | 0.875 | % | 0 | % | ||||
| Maximum amount outstanding | 4,465 | - | ||||||
| F- 25 |
NOTE I - FEDERAL INCOME TAXES
The consolidated provision for income taxes consists of the following for the years ended December 31:
| (Dollars in thousands) | ||||||||
| 2016 | 2015 | |||||||
| Income tax expense | ||||||||
| Current tax expense | $ | - | $ | - | ||||
| Deferred tax expense | 622 | 232 | ||||||
| Total | $ | 622 | $ | 232 | ||||
The consolidated provision for federal income taxes differs from that computed by applying federal statutory rates to income before federal income tax expense as indicated in the following analysis:
| (Dollars in thousands) | ||||||||
| 2016 | 2015 | |||||||
| Federal statutory income tax at 34% | $ | 629 | $ | 301 | ||||
| Tax exempt income | (82 | ) | (66 | ) | ||||
| Other | 75 | (3 | ) | |||||
| Total | $ | 622 | $ | 232 | ||||
The deferred tax assets and deferred tax liabilities are comprised of the following at December 31:
| (Dollars in thousands) | ||||||||
| 2016 | 2015 | |||||||
| Deferred Tax Assets | ||||||||
| Pension accounting | $ | (13 | ) | $ | 19 | |||
| Allowance for loan losses | 3 | 16 | ||||||
| Deferred compensation | 10 | 13 | ||||||
| OREO accounting | 133 | 687 | ||||||
| Nonaccrual loan interest | 8 | 38 | ||||||
| NOL carryforward | 4,586 | 4,680 | ||||||
| Available for sale securities | 35 | 28 | ||||||
| Other | 43 | 7 | ||||||
| Deferred tax assets | 4,805 | 5,488 | ||||||
| Deferred Tax Liabilities | ||||||||
| Depreciation | 144 | 164 | ||||||
| FHLB stock | 166 | 166 | ||||||
| Deferred tax liabilities | 310 | 330 | ||||||
| Net deferred tax asset | $ | 4,495 | $ | 5,158 | ||||
At year-end 2016, the Company had federal net operating loss carryforwards of approximately $13,488,000 which will begin to expire in the year 2032.
The Company is subject to U.S. federal income tax. The Company is no longer subject to examination by taxing authorities for years before 2013.
Realization of deferred tax assets is dependent on generating sufficient taxable income prior to their expiration.
The net deferred tax asset of $4.5 million is recorded in other assets.
The Company expects to realize $4.6 million of deferred tax assets related to net operating loss carryforwards well in advance of the statutory carryforward period. At December 31, 2016, $0.2 million of existing deferred tax assets were not related to net operating losses and therefore have no expiration date.
| F- 26 |
Accounting principles generally accepted in the United States of America require management to evaluate tax positions taken by the Bancorp and its Subsidiary and recognize a tax liability (or asset) if the Bancorp and its Subsidiary have taken an uncertain position that more-likely-than-not would not be sustained upon examination by the Internal Revenue Service. Management has analyzed tax positions taken by the Bancorp and its Subsidiary, and has concluded that as of December 31, 2016, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the consolidated financial statements.
NOTE J- FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
In the normal course of business, the Bank has outstanding commitments, contingent liabilities, and other financial instruments, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated balance sheets.
Financial instruments whose contract amount represents credit risk at December 31, 2016 and 2015 were as follows:
| (Dollars in thousands) | ||||||||||||||||||||||||
| 2016 | 2015 | |||||||||||||||||||||||
| Fixed | Variable | Total | Fixed | Variable | Total | |||||||||||||||||||
| Home equity lines | $ | 986 | $ | 6,799 | $ | 7,785 | $ | 1,553 | $ | 5,359 | $ | 6,912 | ||||||||||||
| Credit card lines | 3,104 | - | 3,104 | 3,405 | - | 3,405 | ||||||||||||||||||
| Secured by real estate | 1,913 | 3,168 | 5,081 | 848 | 723 | 1,571 | ||||||||||||||||||
| Other unused commitments | 5,926 | 945 | 6,871 | 5,585 | 914 | 6,499 | ||||||||||||||||||
| Standby letters of credit | 11 | 5 | 16 | 11 | - | 11 | ||||||||||||||||||
| Total | $ | 11,940 | $ | 10,917 | $ | 22,857 | $ | 11,402 | $ | 6,996 | $ | 18,398 | ||||||||||||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount and type of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, real estate, or income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.
The Bank has not incurred any losses on its commitments in either 2016 or 2015.
NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES
The Bancorp and Bank periodically are subject to claims and lawsuits which arise in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial statements of the Company.
| F- 27 |
NOTE L – RISKS AND UNCERTAINTIES
Total balances of due from bank balances which were in excess of $250,000 were with the following banks as of December 31, 2016:
| (Dollars in thousands) | ||||
| United Bankers' Bank | $ | 3,078 | ||
| Federal Reserve Bank | 373 | |||
| Federal Home Loan Bank | - | |||
| Total | $ | 3,451 | ||
NOTE M - RESTRICTION ON DIVIDENDS
The payment of dividends to shareholders by the Bancorp is not encumbered by any restrictive provisions. There are, however, limitations set by law on the amount of funds available to the Bancorp from its Subsidiary Bank. Dividends may be paid out of funds legally available, which provides that prior approval is required if the total of all dividends declared by a state bank in any calendar year will exceed the bank's net profits for that year combined with its retained net profits for the preceding two years. The amount of funds legally available for distribution of dividends by the Bank to the Bancorp without prior approval from regulatory authorities for 2016 was $5,907,000 less $1,600,000, which was distributed by December 31, 2016.
NOTE N – EMPLOYEE BENEFIT PLANS
The Bank has a qualified noncontributory, defined benefit pension plan which covers certain employees. The benefits are primarily based on years of service and earnings.
The following is a summary of the plans funded status as of December 31, 2016 and 2015:
| (Dollars in thousands) | ||||||||
| 2016 | 2015 | |||||||
| Change in benefit obligation: | ||||||||
| Projected benefit obligation at beginning of year | $ | 1,409 | $ | 1,459 | ||||
| Interest Cost | 57 | 53 | ||||||
| Actuarial gain (loss) | (67 | ) | (76 | ) | ||||
| Benefits paid | (51 | ) | (27 | ) | ||||
| Projected benefit obligation at end of year | $ | 1,348 | $ | 1,409 | ||||
| Change in plan assets: | ||||||||
| Fair value of plan assets at beginning of year | $ | 1,363 | $ | 726 | ||||
| Actual return on plan assets | 87 | (108 | ) | |||||
| Employer contributions | - | 772 | ||||||
| Benefits paid | (51 | ) | (27 | ) | ||||
| Fair value of plan assets at end of year | $ | 1,399 | $ | 1,363 | ||||
| Funded status (included in accrued liabilities) | $ | 51 | $ | (46 | ) | |||
| Unrecognized actuarial loss in accumulated other comprehensive income (before taxes) | $ | (630 | ) | $ | (778 | ) | ||
| F- 28 |
Amounts recognized in the consolidated statements of income consist of:
| (Dollars in thousands) | ||||||||
| Year ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Net periodic pension cost: | ||||||||
| Interest cost on projected benefit obligation | $ | 57 | $ | 53 | ||||
| Expected return on plan assets | (80 | ) | (43 | ) | ||||
| Net amortization of deferral of (gains) losses | 74 | 68 | ||||||
| Net periodic pension cost | $ | 51 | $ | 78 | ||||
Other changes recognized in other comprehensive income include:
| (Dollars in thousands) | ||||||||
| Year ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Change in unrecognized net actuarial loss | $ | 148 | $ | (8 | ) | |||
| Tax effect | (51 | ) | 3 | |||||
| Total recognized in other comprehensive income | $ | 97 | $ | (5 | ) | |||
Weighted-average assumptions used to determine benefit obligation at December 31, 2016 and 2015:
| 2016 | 2015 | |||||||
| Discount rate | 4.00 | % | 3.75 | % | ||||
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31, 2016 and 2015:
| 2016 | 2015 | |||||||
| Discount rate | 4.00 | % | 3.75 | % | ||||
| Expected return on plan assets | 6.00 | % | 6.00 | % | ||||
The actuarial assumptions used in the pension plan valuations are reviewed annually. The Bank’s expected return on plan assets is determined by the plan assets’ historical long-term investment performance, current asset allocation, and estimates of future long-term returns by asset class.
As of January 1, 2016, the Bank retained Robert W. Baird & Co. as third party trustee to manage the assets of The Citizens Bank of Logan pension plan. The Bank’s investment policy for Plan assets is to manage the portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio through the full investment of available funds.
The portfolio is to be diversified by investing in multiple types of investment-grade securities. Target allocation percentages for each major class of Plan assets are as follows:
Equity Securities – 85%
Fixed Income Securities – 15%
| F- 29 |
The Bank’s pension plan weighted-average asset allocations at December 31, 2016 and 2015 by asset category are as follows:
| 2016 | 2015 | |||||||
| Asset category: | ||||||||
| Equity securities | 41 | % | 9 | % | ||||
| Debt securities | 45 | % | 0 | % | ||||
| Cash and cash equivalents | 14 | % | 91 | % | ||||
| Total | 100 | % | 100 | % | ||||
| Citizens Independent Bancorp, Inc. common stock to total plan assets | 4 | % | 4 | % | ||||
The fair values of the Bank’s pension plan assets presented by asset class within the fair value hierarchy, as defined in Note P – Fair Value of Financial Instruments, at December 31, 2016 and 2015 are as follows:
| (Dollars in thousands) | ||||||||||||||||
| Fair Value Measurements | ||||||||||||||||
| Quoted Prices in Active Markets for Identical | Significant Other Observable | Significant Unobservable | ||||||||||||||
| Asset Class | Total | Assets/Liabilities (Level 1) | Inputs (Level 2) | Inputs (Level 3) | ||||||||||||
| December 31, 2016 | ||||||||||||||||
| Cash Equivalents | $ | 193 | $ | - | $ | 193 | $ | - | ||||||||
| Fixed Income | 637 | 637 | - | - | ||||||||||||
| Equity Securities | 516 | 516 | - | - | ||||||||||||
| $ | 1,346 | $ | 1,153 | $ | 193 | $ | - | |||||||||
| CIB Common Stock | 53 | 53 | - | - | ||||||||||||
| Total Plan Assets | $ | 1,399 | $ | 1,206 | $ | 193 | $ | - | ||||||||
| December 31, 2015 | ||||||||||||||||
| Cash Equivalents | $ | 1,240 | $ | - | $ | 1,240 | $ | - | ||||||||
| Fixed Income | 69 | 69 | - | - | ||||||||||||
| Equity Securities | - | - | - | - | ||||||||||||
| $ | 1,309 | $ | 69 | $ | 1,240 | $ | - | |||||||||
| CIB Common Stock | 54 | - | 54 | - | ||||||||||||
| Total Plan Assets | $ | 1,363 | $ | 69 | $ | 1,294 | $ | - | ||||||||
The Company does not anticipate making any contributions to the pension plan during the fiscal year ending December 31, 2017. These contributions would be required to meet ERISA’s minimum funding standards and the estimated quarterly contribution requirements during the period. The amount of the unrecognized net actuarial loss included in accumulated other comprehensive income expected to be recognized in net periodic pension cost during the fiscal year ended December 31, 2017 is $51,226. Participants are 100% vested.
| F- 30 |
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
| (Dollars in thousands) | ||||
| 2017 | $ | 66 | ||
| 2018 | 128 | |||
| 2019 | 25 | |||
| 2020 | 97 | |||
| 2021 | 52 | |||
| 2022-2026 | 246 | |||
| Total | $ | 614 | ||
The Company offers a 401(k) profit sharing plan covering substantially all employees. Beginning in January 2016, the existing plan was replaced by a “Safe Harbor” plan as defined by the IRS. The Company matches voluntary employee contributions at a 100% rate up to 3% of individual compensation, then at a 50% rate on the next 2% of individual compensation, for a maximum contribution of 4%. Both employee and Company contributions are 100% vested at all times. Expense associated with the plan included in salaries and employee benefits was approximately $59,000 in 2016 and $27,000 in 2015.
During 2015, the Company entered into an agreement with the current President and CEO to provide future retirement compensation to that executive through a Supplemental Executive Retirement Plan (SERP) agreement. Following retirement, at the normal retirement age of 65, the SERP will provide equal annual payments over the next ten year period of $27,500 per year. The Bank recognized expense of $12,916 in connection with this SERP agreement during the year ended December 31, 2016 and $3,467 in the year ended December 31, 2015.
NOTE O - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the Federal Deposit Insurance Corporation (FDIC). Failure to meet minimum regulatory capital requirements can initiate certain mandatory, and possible additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank and the Company’s consolidated financial statements. Under 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. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total capital, Tier I capital and common equity tier 1 capital to risk-weighted assets (as defined in the regulations), and leverage capital, which is tier 1 capital to adjusted average total assets (as defined).
Management believes, as of December 31, 2016 and 2015, that the Bank meets all the capital adequacy requirements to which it is subject.
As of December 31, 2016, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To remain categorized as well capitalized, the Bank will have to maintain minimum total capital, common equity tier 1 capital, tier 1 capital, and leverage capital ratios as disclosed in the following table. There are no conditions or events since the most recent notification that management believes have changed the Bank's prompt corrective action category.
| F- 31 |
The following table outlines the regulatory components of the Company and the Bank’s capital and capital ratios as of December 31, 2016 and 2015, respectively.
| (Dollars in thousands) | ||||||||||||||||||||||||
| To Be Well | ||||||||||||||||||||||||
| Capitalized Under | ||||||||||||||||||||||||
| For Capital | Prompt Corrective | |||||||||||||||||||||||
| Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| As of December 31, 2016: | ||||||||||||||||||||||||
| Total capital | ||||||||||||||||||||||||
| (to risk-weighted assets) | ||||||||||||||||||||||||
| Consolidated | $ | 16,916 | 12.46 | % | $ | 10,861 | > 8.00 | % | $ | N/A | $ | N/A | ||||||||||||
| Subsidiary Bank | 16,586 | 12.40 | % | 10,698 | > 8.00 | % | 13,372 | > 10.00 | % | |||||||||||||||
| Tier 1 capital | ||||||||||||||||||||||||
| (to risk-weighted assets) | ||||||||||||||||||||||||
| Consolidated | 15,219 | 11.21 | % | 8,146 | > 6.00 | % | N/A | N/A | ||||||||||||||||
| Subsidiary Bank | 14,900 | 11.14 | % | 8,023 | > 6.00 | % | 10,698 | > 8.00 | % | |||||||||||||||
| Common equity tier 1 capital | ||||||||||||||||||||||||
| (to risk-weighted assets) | ||||||||||||||||||||||||
| Consolidated | 15,219 | 11.21 | % | 6,109 | > 4.50 | % | N/A | N/A | ||||||||||||||||
| Subsidiary Bank | 14,900 | 11.14 | % | 6,017 | > 4.50 | % | 8,692 | > 6.50 | % | |||||||||||||||
| Leverage capital | ||||||||||||||||||||||||
| (to adjusted average total assets) | ||||||||||||||||||||||||
| Consolidated | 15,219 | 8.65 | % | 7,035 | > 4.00 | % | N/A | N/A | ||||||||||||||||
| Subsidiary Bank | 14,900 | 8.52 | % | 6,998 | > 4.00 | % | 8,747 | > 5.00 | % | |||||||||||||||
| As of December 31, 2015: | ||||||||||||||||||||||||
| Total capital | ||||||||||||||||||||||||
| (to risk-weighted assets) | ||||||||||||||||||||||||
| Consolidated | $ | 14,365 | 11.24 | % | $ | 10,222 | > 8.00 | % | $ | N/A | $ | N/A | ||||||||||||
| Subsidiary Bank | 16,504 | 13.14 | % | 10,049 | > 8.00 | % | 12,561 | > 10.00 | % | |||||||||||||||
| Tier 1 capital | ||||||||||||||||||||||||
| (to risk-weighted assets) | ||||||||||||||||||||||||
| Consolidated | 12,768 | 9.99 | % | 7,667 | > 6.00 | % | N/A | N/A | ||||||||||||||||
| Subsidiary Bank | 14,905 | 11.87 | % | 7,537 | > 6.00 | % | 10,049 | > 8.00 | % | |||||||||||||||
| Common equity tier 1 capital | ||||||||||||||||||||||||
| (to risk-weighted assets) | ||||||||||||||||||||||||
| Consolidated | 12,768 | 9.99 | % | 5,750 | > 4.50 | % | N/A | N/A | ||||||||||||||||
| Subsidiary Bank | 14,905 | 11.87 | % | 5,652 | > 4.50 | % | 8,165 | > 6.50 | % | |||||||||||||||
| Leverage capital | ||||||||||||||||||||||||
| (to adjusted average total assets) | ||||||||||||||||||||||||
| Consolidated | 12,768 | 6.77 | % | 7,541 | > 4.00 | % | N/A | N/A | ||||||||||||||||
| Subsidiary Bank | 14,905 | 8.23 | % | 7,243 | > 4.00 | % | 9,054 | > 5.00 | % | |||||||||||||||
| F- 32 |
NOTE P - FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value is defined as the exchange price that would be received to sell 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. Accounting guidance also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under this guidance are described below.
Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets and liabilities.
Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on 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 asset or liability.
Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Accordingly, investment securities available for sale (and loans held for sale) are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record other assets at fair value on a nonrecurring basis, such as impaired loans and other real estate owned. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or writedowns of individual assets.
The following describes the valuation techniques used to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements.
Investment securities available for sale - Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange or traded by dealers or brokers in active over-the-counter markets. Level 2 securities include securities issued by government sponsored entities, mortgage-backed securities, and municipal bonds. Level 3 securities include those with unobservable inputs. Transfers between levels can occur due to changes in the observability of significant inputs.
Loans held for sale - Loans held for sale are carried at fair value. These loans currently consist of one-to-four-family residential loans originated for sale in the secondary market. Fair value is based on the committed market rates or the price secondary markets are currently offering for similar loans using observable market data.
| F- 33 |
The following are assets and liabilities that were accounted for or disclosed at fair value on a recurring basis:
| (Dollars in thousands) | ||||||||||||||||
| Fair Value Measurements Using | ||||||||||||||||
| Quoted Prices in | Significant | |||||||||||||||
| Active Markets | Other | Significant | ||||||||||||||
| for Identical | Observable | Unobservable | ||||||||||||||
| Fair | Assets/Liabilities | Inputs | Inputs | |||||||||||||
| Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| December 31, 2016 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Securities available for sale | ||||||||||||||||
| U.S. government securities | $ | - | $ | - | $ | - | $ | - | ||||||||
| U.S. government federal agencies | 1,982 | - | 1,982 | - | ||||||||||||
| State & local governments | 2,734 | - | 2,734 | - | ||||||||||||
| Mortgage backed securities | 3,521 | - | 3,521 | - | ||||||||||||
| Total securities available for sale | $ | 8,237 | $ | - | $ | 8,237 | $ | - | ||||||||
| Loans held for sale | $ | 135 | $ | - | $ | 135 | $ | - | ||||||||
| December 31, 2015 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Securities available for sale | ||||||||||||||||
| U.S. government securities | $ | 1,005 | $ | 1,005 | $ | - | $ | - | ||||||||
| U.S. government federal agencies | 6,535 | - | 6,535 | - | ||||||||||||
| State & local governments | 1,783 | - | 1,783 | - | ||||||||||||
| Mortgage backed securities | 4,690 | - | 4,690 | - | ||||||||||||
| Total securities available for sale | $ | 14,013 | $ | 1,005 | $ | 13,008 | $ | - | ||||||||
The following describes the valuation techniques used to measure certain financial assets and liabilities recorded at fair value on a nonrecurring basis in the financial statements.
Impaired loans - The Bank does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses may need to be established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment. As of December 31, 2016, the fair value of substantially all of the impaired loans was estimated based on the fair value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Bank records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Bank records the impaired loan as nonrecurring Level 3. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.
Other real estate owned (OREO) - OREO consists of real estate acquired in foreclosure or other settlement of loans. Such assets are carried on the consolidated balance sheet at the lower of the investment in the real estate or its fair value less estimated selling costs. The fair value of OREO is determined on a nonrecurring basis generally utilizing current appraisals performed by an independent, licensed appraiser applying an income or market value approach using observable market data (Level 2). However, if a current appraisal is not available, the original appraised value is discounted, as appropriate, to compensate for the estimated depreciation in the value of the real estate since the date of its original appraisal. Such discounts are generally estimated based upon management’s knowledge of sales of similar property within the applicable market area and its knowledge of other real estate market-related data as well as general economic trends (Level 3). Upon foreclosure, any fair value adjustment is charged against the allowance for loan losses. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense in the consolidated statements of income.
| F- 34 |
The following are assets and liabilities that were accounted for or disclosed at fair value on a nonrecurring basis:
| (Dollars in thousands) | ||||||||||||||||
| Fair Value Measurements Using | ||||||||||||||||
| Quoted Prices in | Significant | |||||||||||||||
| Active Markets | Other | Significant | ||||||||||||||
| for Identical | Observable | Unobservable | ||||||||||||||
| Fair | Assets/Liabilities | Inputs | Inputs | |||||||||||||
| Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| December 31, 2016 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Impaired loans | ||||||||||||||||
| Commercial mortgage | $ | 3,192 | $ | - | $ | - | $ | 3,192 | ||||||||
| Commercial other | 685 | - | - | 685 | ||||||||||||
| Residential real estate | 395 | - | - | 395 | ||||||||||||
| Consumer equity | 97 | - | - | 97 | ||||||||||||
| Consumer auto | 55 | - | - | 55 | ||||||||||||
| Total impaired loans | $ | 4,424 | $ | - | $ | - | $ | 4,424 | ||||||||
| December 31, 2015 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Impaired loans | ||||||||||||||||
| Commercial mortgage | $ | 2,171 | $ | - | $ | - | $ | 2,171 | ||||||||
| Commercial other | 38 | - | - | 38 | ||||||||||||
| Residential real estate | 679 | - | - | 679 | ||||||||||||
| Consumer equity | - | - | - | - | ||||||||||||
| Consumer auto | 89 | - | - | 89 | ||||||||||||
| Total impaired loans | $ | 2,977 | $ | - | $ | - | $ | 2,977 | ||||||||
| Other real estate owned | ||||||||||||||||
| Residential | 15 | - | - | 15 | ||||||||||||
| Commercial | 223 | - | - | 223 | ||||||||||||
| Total other real estate owned | $ | 238 | $ | - | $ | - | $ | 238 | ||||||||
| F- 35 |
The quantitative information about Level 3 fair value measurements for financial assets and liabilities measured at fair value on a nonrecurring basis is as follows (dollars in thousands):
| (Dollars in thousands) | ||||||||||||
| Fair Value | Valuation Technique | Significant Unobservable Input | Range | |||||||||
| December 31, 2016 | ||||||||||||
| Impaired loans | ||||||||||||
| Commercial mortgage | $ | 3,192 | Appraisal of Collateral | Appraisal Adjustment | Up to 12% | |||||||
| Commercial other | 685 | Appraisal of Collateral | Appraisal Adjustment | Up to 3% | ||||||||
| Residential real estate | 395 | Appraisal of Collateral | Appraisal Adjustment | Up to 3% | ||||||||
| Consumer equity | 97 | Appraisal of Collateral | Appraisal Adjustment | Up to 14% | ||||||||
| Consumer auto | 55 | Appraisal of Collateral | Appraisal Adjustment | * | ||||||||
| December 31, 2015 | ||||||||||||
| Impaired loans | ||||||||||||
| Commercial mortgage | $ | 2,171 | Appraisal of Collateral | Appraisal Adjustment | Up to 6% | |||||||
| Commercial other | 38 | Appraisal of Collateral | Appraisal Adjustment | * | ||||||||
| Residential real estate | 679 | Appraisal of Collateral | Appraisal Adjustment | Up to 6% | ||||||||
| Consumer auto | 89 | Appraisal of Collateral | Appraisal Adjustment | * | ||||||||
| Other real estate owned | ||||||||||||
| Residential | 15 | Appraisal of Property | Appraisal Adjustment | * | ||||||||
| Commercial | 223 | Appraisal of Property | Appraisal Adjustment | Up to 45% | ||||||||
| * There are no related allowances for these classifications | ||||||||||||
The following methods and assumptions were used to estimate the fair value disclosures for other financial instruments as of December 31, 2016 and 2015:
Cash and cash equivalents - The fair value of cash and cash equivalents is estimated to approximate the carrying amounts.
Other investment securities - Other investment securities consist of restricted equity securities in the Federal Home Loan Bank (FHLB) and are carried at cost. Because there is no market, the carrying values of restricted equity securities approximate fair values based on the redemption provisions of the FHLB.
Loans - The fair value of loans is calculated by discounting estimated cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The estimated cash flows do not anticipate prepayments.
Management has made estimates of fair value discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, management has no basis to determine whether the fair value presented for loans would be indicative of the value negotiated in an actual sale.
Accrued interest receivable and payable - The carrying amounts of accrued interest approximate fair value.
Bank owned life insurance - The fair value of bank owned life insurance approximates the cash surrender value of the policies.
Deposits - The fair value of deposits with no stated maturity, such as noninterest bearing and interest bearing demand deposits, regular savings, and certain types of money market accounts, is equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
Borrowed funds - the carrying amounts of borrowed funds which mature within 90 days approximate their fair values. The fair values of other borrowed funds are estimated using discounted cash flow analysis that applies interest rates currently offered on similar instruments.
Off-balance-sheet instruments - The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of agreements and the present credit standing of the counterparties. The amounts of fees currently charged on commitments to extend credit and standby letters of credit are deemed insignificant, and therefore, the estimated fair values and carrying values are not shown.
| F- 36 |
The estimated fair value of the financial instruments is as follows:
| (Dollars in thousands) | ||||||||||||||||||||
| Fair Value Measurements at Reporting Date Using: | ||||||||||||||||||||
| Quoted Prices in | ||||||||||||||||||||
| Active Markets | Other | Significant | ||||||||||||||||||
| for Identical | Observable | Unobservable | ||||||||||||||||||
| Carrying | Fair | Assets/Liabilities | Inputs | Inputs | ||||||||||||||||
| Amount | Value | (Level 1) | (Level 2 | (Level 3) | ||||||||||||||||
| December 31, 2016 | ||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 4,899 | $ | 4,899 | $ | - | $ | 4,899 | $ | - | ||||||||||
| Securities available for sale | 8,237 | 8,237 | - | 8,237 | - | |||||||||||||||
| Other investment securities | 859 | 859 | - | - | 859 | |||||||||||||||
| Loans held for sale | 135 | 135 | - | 135 | - | |||||||||||||||
| Net loans | 152,138 | 156,202 | - | - | 156,202 | |||||||||||||||
| Accrued interest receivable | 258 | 258 | - | - | 258 | |||||||||||||||
| Bank owned life insurance | 3,427 | 3,427 | - | 3,427 | - | |||||||||||||||
| Financial liabilities | ||||||||||||||||||||
| Noninterest bearing deposits | $ | 32,282 | $ | 32,282 | $ | - | $ | 32,282 | $ | - | ||||||||||
| Interestbearing deposits | 123,856 | 122,869 | - | 122,869 | - | |||||||||||||||
| Overnight funds purchased | 2,699 | 2,699 | - | 2,699 | - | |||||||||||||||
| Borrowed funds | - | - | - | - | - | |||||||||||||||
| Accrued interest payable | 581 | 581 | - | - | 581 | |||||||||||||||
| December 31, 2015 | ||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 9,371 | $ | 9,371 | $ | - | $ | 9,371 | $ | - | ||||||||||
| Securities available for sale | 14,013 | 14,013 | 1,005 | 13,008 | - | |||||||||||||||
| Other investment securities | 859 | 859 | - | - | 859 | |||||||||||||||
| Net loans | 147,153 | 149,355 | - | - | 149,355 | |||||||||||||||
| Accrued interest receivable | 285 | 285 | - | - | 285 | |||||||||||||||
| Bank owned life insurance | 3,320 | 3,320 | - | 3,320 | - | |||||||||||||||
| Financial liabilities | ||||||||||||||||||||
| Noninterest bearing deposits | 26,116 | 26,116 | - | 26,116 | - | |||||||||||||||
| Interest bearing deposits | 136,209 | 137,174 | - | 137,174 | - | |||||||||||||||
| Borrowed funds | 2,569 | 2,569 | - | 2,569 | - | |||||||||||||||
| Accrued interest payable | 759 | 759 | - | - | 759 | |||||||||||||||
| F- 37 |
NOTE Q – PARENT COMPANY FINANCIAL STATEMENTS
The following are condensed parent company only financial statements for Citizens Independent Bancorp, Inc.
CONDENSED BALANCE SHEETS
December 31, 2016 and 2015
| (Dollars in thousands) | ||||||||
| 2016 | 2015 | |||||||
| Assets | ||||||||
| Cash | $ | 176 | $ | 346 | ||||
| Investment in subsidiary | 17,008 | 17,411 | ||||||
| Other assets | 2,057 | 2,179 | ||||||
| Total assets | $ | 19,241 | $ | 19,936 | ||||
| Total Liabilities | $ | 11 | $ | 2,577 | ||||
| Total shareholders' equity | 19,230 | 17,359 | ||||||
| Total liabilities and equity | $ | 19,241 | $ | 19,936 | ||||
| F- 38 |
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31, 2016 and 2015
| (Dollars in thousands) | ||||||||
| 2016 | 2015 | |||||||
| Income | ||||||||
| Dividends from subsidiaries | $ | 1,600 | $ | 1,300 | ||||
| Other | 512 | 308 | ||||||
| 2,112 | 1,608 | |||||||
| Expenses | ||||||||
| Other | 273 | 523 | ||||||
| Income (loss) before income taxes and equity in undistributed earnings of subsidiary | 1,839 | 1,085 | ||||||
| Income tax expense (benefit) | 125 | (73 | ) | |||||
| Equity in undistributed earnings (loss) of subsidiary | (486 | ) | (504 | ) | ||||
| Net income | 1,228 | 654 | ||||||
| Other comprehensive income (loss) | 83 | (52 | ) | |||||
| Comprehensive income | $ | 1,311 | $ | 602 | ||||
CONDENSED STATEMENT OF CASH FLOWS
Years ended December 31, 2016 and 2015
| (Dollars in thousands) | ||||||||
| 2016 | 2015 | |||||||
| Cash flows from Operating Activities | ||||||||
| Net income | $ | 1,228 | $ | 654 | ||||
| Adjustments to reconcile net income to cash from operations | ||||||||
| Equity in undistributed (earnings) loss of subsidiaries | 486 | 504 | ||||||
| Deferred income tax | 125 | (73 | ) | |||||
| Change in other assets and other liabilities | 1 | (2 | ) | |||||
| Net cash provided by (used in) operating activities | 1,840 | 1,083 | ||||||
| Cash flows from financing activities | ||||||||
| Payments on loan payable | (2,569 | ) | (2,921 | ) | ||||
| Issuance of common stock | 560 | 1,263 | ||||||
| Net change from financing activities | (2,009 | ) | (1,658 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | (169 | ) | (575 | ) | ||||
| Cash and cash equivalents at beginning of year | 346 | 921 | ||||||
| Cash and cash equivalents at end of year | $ | 176 | $ | 346 | ||||
| F- 39 |
NOTE R – STOCK SUBSCRIPTION
As of June 25, 2014, the Company had sold and issued a total of 238,057 shares of common stock with 119,003 accompanying warrants. As of June 25, 2016, all warrants remaining unexercised, expired. A total of 74,687 warrants had been exercised and an additional 74,687 shares of common stock had been issued.
ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A – CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2016, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2016, in timely alerting them to material information required to be in the Company’s (including its consolidated subsidiary) periodic SEC filings.
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Under the supervision and with the participation of management, including principal executive and principal financial officers, an evaluation of the effectiveness of internal control over financial reporting was conducted based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, as required by paragraph (c) of §240.13a-15 of the Exchange Act. Based on the evaluation under Internal Control – Integrated Framework (2013), management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2016. This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this filing. There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ending December 31, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Not applicable.
ITEM 10 – DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
The following sets forth certain information about each of the Company’s directors who is up for election in 2017:
| Name and Age |
Company Director Since |
| Robert Lilley (72) | 2013 |
| Robert C. Wolfinger, Jr. (66) | 2013 |
| Donald P. Wood (72) | 2012 |
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Robert L. Lilley, an inactive attorney, had a private law practice in Logan since 1973. He retired from that practice in December, 2016. He has served as an assistant attorney general for the Ohio Attorney General’s Office, acting municipal court judge, the City of Logan law director and is an Army veteran. Mr. Lilley is a member of the Logan-Hocking Board of Health, Logan Rotary Club and member of the Brighten Your Future Foundation board. He is a graduate of The Ohio State University Moritz College of Law and has a B.F.A. from Ohio University. Mr. Lilley’s professional expertise and long term active involvement in the community are valuable assets to the Board.
Robert C. Wolfinger, Jr. is the treasurer of the City of Lancaster and served as senior vice president of National City Bank, where he was employed for 36 years. He received his bachelor’s degree from Ohio University and is a banking school graduate of Rutgers University. He has served on several boards in the Fairfield County area, including Lancaster Area Community Improvement Corporation, Ohio University Alumni Association, Lancaster Festival, Inc., Fairfield County Economic Development Committee, Lancaster Port Authority, Fairfield Medical Center, and Lancaster-Fairfield Chamber of Commerce. Mr. Wolfinger’s banking and finance experience provide the Board with additional banking regulatory and financial insights.
Donald P. Wood has owned and operated his own business for 29 years. He is the chair and CEO of Don Wood, Inc., automobile businesses in the Logan and Athens areas. His 16 years of banking experience includes serving as the district president of Bank Ohio’s Cambridge/Zanesville area in 1983, before becoming lead assistant director for branch administration of Florida National Bank in 1985. He has served on a publicly-traded bank board for the past 11 years. Mr. Wood is a University of Rio Grande board member, past board chair and past president. He also served as the president of the Hocking College Foundation Board. He joined Citizens as Board of Directors Chairman, President and CEO in 2012. He has an advanced degree in banking from the American Institute of Banking. Mr. Wood received an honorary master’s degree and honorary doctorate from the University of Rio Grande. Mr. Wood’s experience as a senior level banking officer, a successful entrepreneur and a leader in various roles in regional institutions provides valuable banking and leadership knowledge for the Board.
The following table sets forth certain information concerning directors continuing in office:
| Name and Age | Company Director Since | |
| Billy Jo King (70) | 2013 | |
| Jerry Don Johnson (50) | 2013 | |
| Daniel Stohs (66) | 2013 | |
| William J. Mauck (69) | 2013 | |
| Daniel C. Fischer (56) | 2015 |
Billy Jo King retired in 2013 after 41 years as manager of The King Lumber Co. in Logan and has been the owner of Georgian Manner Bed & Breakfast since October 2002. He is a Navy veteran and received a B.S. degree from The Ohio State University in marketing and industrial production. Mr. King served on the Kachelmacher Memorial Trust fund for 23 years and is an original board member of The Village Mountain Mission, which builds houses and conducts medical clinics in the Dominican Republic. He also serves on the board of the Hocking County Historical Society. Mr. King’s lifelong association with the area as a small business owner provides a unique perspective on the needs and challenges of local businesses to the Board.
William J. Mauck is a General Electric retiree after 26 years of service, most recently as Logan Glass Plant manager and Circleville Lamp Plant manager. During his time with GE, he contributed in all areas of manufacturing including non-union and union relations, staffing, quality improvement programs, budgeting and compliance. He also is a Vietnam Army veteran and member of Kline Memorial United Methodist Church. He has a B.S. of Science from the University of Iowa. Mr. Mauck’s strong ties with the community and career in management provide enhanced understanding of general management concerns and valuable community
relations for the Board.
Jerry Don Johnson is a retired local business owner of Fancy Plants landscaping from 1985 to 2010. He is currently a landscape designer and consultant for Southern Pines Nursery, an employee at The Dress Code and manages his family farm. He has served on several local boards and clubs including Hocking County Children Services, Logan-Hocking School District Advisory, Hocking Valley Community Hospital Foundation, Hocking County Community Improvement Corporation and Logan-Hocking Chamber of Commerce. Mr. Johnson’s experience as a small business owner and his involvement in the community provides the Board with valuable insight into Citizens’ customers and community.
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Daniel J. Stohs is an inactive attorney and former accountant in the Logan area. He also is a managing member of Rempel Partner, LLC (operator of Midwest Glassware Outlet) since 2005 and shareholder and former board member of Olde Dutch Restaurant. He currently serves as a member of the City of Logan Board of Zoning Appeals. He has a B.A. of Social Sciences from The Ohio State University and is a graduate of The Ohio State University Moritz College of Law. Mr. Stohs’ long experience living and working in the area along with his professional expertise as a lawyer provide the Board with oversight skills, knowledge of the region and business experience.
Daniel C. Fischer was appointed Chief Executive Officer and President of the Company and Bank in January 2015 and director of the Company in May 2015. Mr. Fischer is a veteran bank executive. Most recently, Mr. Fischer was Sales Manager for Wells Fargo Home Mortgage in Cincinnati, Ohio from February 2012 to December 1, 2014. Prior to that, he was a Vice President with Union Savings Bank of Cincinnati, Ohio from April 1, 2011 to February 17, 2012. His other experience includes holding positions as Chairman, President and CEO of Urban Trust Bank in Lake Mary, Florida; Executive Vice President of Regional Banking at Associated Bancorp in Green Bay, Wisconsin; Dayton District President for Key Bank; and Senior Vice President of Retail Banking for Fifth Third Bank in Cincinnati, Ohio. Mr. Fischer has a B.S. degree in business and communications from Syracuse University, Syracuse, New York. Mr. Fischer’s 30 years of experience in the banking industry, over 15 years serving as a senior executive and familiarity with the Company and the Bank contribute valuable banking and leadership insight to the Board.
Executive Officers
The executive officers of the Company are elected by the Board of Directors of the Company at the annual meeting of the Board of Directors and hold office until the next annual meeting of the Board of Directors or until their successors are chosen and qualify. The following information is supplied for certain of the Company’s and the Bank's current executive officers.
| Name and Age | Position with Bank | Position with Company | Executive
Officer Since | |||
| Daniel C. Fischer (56) | CEO and President | CEO and President | 2015 | |||
| James V. Livesay (64) | Chief Financial and Accounting Officer | Chief Financial Officer | 2013 |
Mr. Fischer’s background is set forth above.
James V. Livesay was appointed Chief Financial and Accounting Officer of the Bank in September 2013 and Chief Financial Officer of the Company in November 2013. Prior to joining the Bank, Mr. Livesay previously was Controller at United Midwest Savings Bank near Columbus, Ohio for a period of nearly nine years. Previous assignments included Manager of Investment Operations at Fifth Third Bank in Cincinnati, Ohio from January 2002 to April 2003 and Vice President and Manager of Finance and Accounting of the Treasury Division at Huntington Banks in Columbus, Ohio from 1987 to January 2002. A CPA, Mr. Livesay earned a Bachelor of Mechanical Engineering at The Ohio State University and a Masters degree in Finance and Accounting at the University of Chicago.
Certain Committees of the Board of Directors
The following table identifies the Company’s standing committees and their respective members as of December 31, 2016. All members of each committee, except Mr. Wood and Mr. Fischer, are independent in accordance with NASDAQ listing standards. Current charters for each of the Board of Directors’ committees are available for review at http://www.tcbol.com/policies_and_charters.
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| Director | Executive /Loan Committee | Audit Committee | Compensation, Personnel/ Corporate Governance and Nominating Committee | ALCO Committee | ||||||||||||
| Donald P. Wood | X | |||||||||||||||
| Jerry Don Johnson | X | * | ||||||||||||||
| Billy Jo King | X | X | ||||||||||||||
| Daniel Stohs | X | X | * | |||||||||||||
| Robert Lilley | X | X | ||||||||||||||
| William J. Mauck | X | X | * | |||||||||||||
| Daniel C. Fischer | X | X | ||||||||||||||
| Corby Leach | X | X | ||||||||||||||
| Robert C. Wolfinger, Jr. | X | * | ||||||||||||||
| Number of Meetings in fiscal 2016 | 4 | 5 | 2 | 4 | ||||||||||||
* Denotes Chairman
Audit Committee
The Company has a separately designated Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The purpose of the Audit Committee is to assist the Board in its oversight of the Company’s financial statements and oversee compliance with legal and regulatory requirements. During the fiscal year ended December 31, 2016, the Audit Committee met periodically to examine and approve the audit report prepared by the Company’s independent registered public accounting firm, to review and appoint the independent registered public accounting firm to be engaged by the Company and to review the Company’s internal audit function. The Audit Committee also provides guidance on the Company’s risk management policies, including reporting, key credit risks, market risks, and steps taken by management to monitor and mitigate such risks. In addition, the Audit Committee oversees procedures for the receipt, retention and treatment of complaints on accounting and auditing. All committee members are deemed “independent,” as such term is defined for audit committee members under applicable NASDAQ listing standards. The Board has determined that Daniel Stohs has the attributes listed in the definition of “audit committee financial expert” set forth in Item 407(d)(5)(ii) of Regulation S-K and in the NASDAQ listing requirements. The Board of Directors has adopted a written charter for the Audit Committee, the Audit Committee and the Board of Directors review the charter periodically to ensure the scope of the charter is consistent with the Audit Committee’s expected role.
Compensation, Personnel/ Corporate Governance and Nominating Committee
The Compensation, Personnel/Corporate Governance and Nominating Committee (the “Compensation and Nominating Committee”) is responsible for establishing and administering policies governing (a) the Board’s organization, membership and function, (b) procedures and criteria for evaluating the suitability of director nominees, (c) committee structure, membership and operations, (d) succession planning for executive officers of the Company, (e) the Company’s Corporate Governance Policy, (f) compensation of the Company’s executive officers, including the Named Executive Officers, (g) oversight of personnel matters and (h) other matters relating to compensation, personnel, corporate governance and the rights and interests of the Company’s shareholders. The Compensation and Nominating Committee operates under a written charter that establishes the Committee’s responsibilities. The Compensation and Nominating Committee and the Board review the charter periodically to ensure the scope of the charter is consistent with the Compensation and Nominating Committee’s expected role.
The Compensation and Nominating Committee nominates directors to be voted on at the annual meeting and recommends nominees to fill any vacancies on the Board of Directors. Individuals who are nominated for election to the Board must possess certain minimum qualities, including personal integrity, demonstrated achievement, and a general appreciation and understanding of the major issues facing financial companies of a size and operational scope similar to the Company.
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The Compensation and Nominating Committee believes that each nominee and current member of the Board possesses a strong and unique set of skills, qualities, and experiences, which gives the Board as a whole, competence and experience in a wide range of areas, including banking industry experience, executive management, accounting and finance, government and community experience and leadership, corporate governance, and board service.
It is the policy of the Compensation and Nominating Committee to consider director candidates recommended by shareholders who appear to be qualified to serve on the Board of Directors. The Board may choose not to consider an unsolicited recommendation if no vacancy exists on the Board and the Board does not perceive a need to increase in size. In order to avoid the unnecessary use of the Board of Directors’ resources, the Board will consider only those director candidates recommended in accordance with the procedures set forth in Section 2.03 of the Regulations. Pursuant to this section, nominations for the election of directors at an annual meeting, other than those made by or on behalf of the existing Board of Directors of the Company, must be made in writing and must be received by the President of the Company not less than 14 days nor more than 50 days prior to any meeting of shareholders called for the election of directors; provided, however, that if less than 21 days’ notice of the meeting is given to shareholders, such nomination shall be delivered to the President of the Company not later than the close of business on the seventh day following the day on which the notice of meeting was mailed. Such notification must contain the following information:
| · | the name and address of each nominee; |
| · | the principal occupation of each nominee; |
| · | the total number of shares of capital stock of the Company that will be voted for each proposed nominee; |
| · | the name and residence address of the notifying shareholder; and |
| · | the number of shares of capital stock of the Company beneficially owned by the notifying shareholder. |
All director nominees for the Company are subject to approval by the Federal Reserve Bank of Cleveland. All directors for the Bank are subject to the approval of the Federal Deposit Insurance Corporation and the Ohio Division of Financial Institutions
Code of Ethics. The Company has adopted a Code of Ethics (the “Code of Ethics”) that applies to all directors, officers, and employees’ of the Company and its subsidiary. The Code of Ethics is included in Exhibit 14 to this Annual Report on Form 10-K.
ITEM 11 – EXECUTIVE COMPENSATION
Directors’ Compensation
Meetings of the Board of the Company and the Board of the Bank are held regularly each month. Effective January 1, 2016, the directors of the Bank began receiving fees of $24,000 per year in cash and are not paid any additional fee for Board or committee participation, or special assignments. Directors do not receive compensation for their service on the Company’s Board.
The following table sets forth for the fiscal year ended December 31, 2016 certain information as to the total compensation we paid to the Company’s directors.
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| Name | Fees Earned or Paid in Cash($) | All Other Compensation ($) | Total($) | |||||||||
| Jerry Don Johnson | 24,000 | 0 | 24,000 | |||||||||
| Billy Jo King | 24,000 | 0 | 24,000 | |||||||||
| Daniel Stohs | 24,000 | 0 | 24,000 | |||||||||
| Robert Lilley | 24,000 | 0 | 24,000 | |||||||||
| William J. Mauck | 24,000 | 0 | 24,000 | |||||||||
| Robert C. Wolfinger, Jr. | 24,000 | 0 | 24,000 | |||||||||
| Donald P. Wood | 30,000 | 0 | 30,000 | |||||||||
| Michael J. Shawd (1) | 16,000 | 0 | 16,000 | |||||||||
| Corby Leach (2) | 24,000 | 0 | 24,000 | |||||||||
| (1) | Mr. Shawd resigned his position as director effective August 18, 2016. |
| (2) | Mr. Leach resigned his position as a director effective January 31, 2017. |
Executive Compensation
Compensation of Employees. The Named Executive Officers, as identified in the Summary Compensation Table, were compensated by the Bank for their positions as officers of the Bank. Officers and employees of the Bank are compensated based on a number of merit-based factors. Our executive officers also received other benefits, such as reimbursement of certain fees and expenses. We do not maintain any equity based compensation plans.
Base Salary. Base salary represents the primary component of annual compensation paid to the Bank’s executive officers. When recommending an executive officer’s salary within the pay range established by peer group comparison data, the Compensation and Nominating Committee primarily considers the executive officer’s job performance and contribution to the objectives of the Company. These factors are determined in the subjective judgment of the Compensation and Nominating Committee for the Chief Executive Officer and with the benefit of performance reviews and salary recommendations by the Chief Executive Officer for other executive officers of the Company and the Bank. In addition, the Compensation and Nominating Committee also considers local and national economic conditions and future business prospects of the Bank in setting base salary levels.
Discretionary and Performance Bonuses. The Bank occasionally awards discretionary cash bonuses to its executive officers to attract new executive officers, to reward exceptional job performance, or to address special circumstances. Discretionary bonuses are awarded on a limited basis and are not contemplated or anticipated when setting annual compensation for the Bank’s executive officers. Mr. Fischer’s employment agreement provides that in addition to his annual salary, Mr. Fischer may receive a yearly performance bonus not to exceed 25% of his base salary. Such bonus awards are subject to the discretion of the Board based upon certain yearly performance bonus goals and objectives mutually agreed upon by the Board and Mr. Fischer.
Compensation Pursuant to Employee Benefit Plans. We maintain a 401(k) plan that matches 100% of the first 3% contributed by employees and 50% of the next 2% contributed. The plan is a Safe Harbor plan in that both employee and employer contributed funds are immediately vested and available to the employee. We also maintain health, life and accidental death & dismemberment insurance as well as both short and long term disability insurance. Further, the Company has purchased life insurance policies on certain key executives. The Company owned life insurance is recorded at its cash surrender value, or the amount that can be realized.
Supplemental Executive Retirement Plan. On October 27, 2015, the Bank adopted the Citizens Bank of Logan Supplemental Executive Retirement Plan (the “SERP”) for Mr. Fischer. The SERP entitles Mr. Fischer to 120 equal monthly payments of the Accrued Liability Balance upon his termination. The SERP is an unfunded, unsecured promise to pay benefits. The Employment Agreement provided that Mr. Fischer would receive an annual deferred compensation amount of not less than $25,000 each year in the SERP. Mr. Fischer’s interest in the SERP vests at the rate of 20% per year, with full vesting occurring on December 31, 2019; provided, however, that Mr. Fischer becomes fully vested in the SERP upon a change of control (as defined in his Employment Agreement described below) and that there is a separate, lesser lump sum payment provided in lieu of termination benefits until Mr. Fischer is fully vested in the SERP.
Pension Plan. The Company offered a defined benefit retirement plan to eligible personnel employed prior to December 2009, when the plan was frozen for both new participants and the accrual of additional benefits. As of December 31, 2016, 29 current and former employees are due benefits from the plan with a projected liability of $1.3 million. The plan currently requires no additional funding. Management believes that a plan has been put in place to ensure the pension plan remains fully funded over the next ten years.
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Employment and Change of Control Agreement On October 27, 2015, Citizens and the Bank entered into an Employment Agreement with Mr. Fischer that provides for a base salary of not less than $189,650 and Mr. Fischer’s ability to receive during the term of the Employment Agreement a performance bonus as described above. The Employment Agreement entitles Mr. Fischer to a relocation bonus of $33,750 if certain terms are met, the SERP, and a car allowance. Mr. Fischer has agreed to purchase $25,000 worth of Citizens stock. Upon the completion of the purchase, Citizens will grant Mr. Fischer one share of restricted stock for every two shares of stock he purchased, which stock will vest in 3 equal installments, beginning on the grant date.
Under the Employment Agreement, Mr. Fischer’s employment may be terminated by the Company for Cause, Disability (both as defined in the agreement), or death. The Employment Agreement also may be terminated at any time by either party without cause upon 30 days’ prior written notice. Mr. Fischer is not entitled to any further payments under the Employment Agreement other than any accrued salary and benefits less any amounts owed to the Company (the “net accrued benefits”) if he terminates his employment or if the Company terminates it for Cause, death or Disability. If his employment had been terminated by the Company without Cause on or before December 31, 2016, Mr. Fischer would be entitled to three months’ salary, and if such a termination occured after December 31, 2016, he was entitled to six months’ salary.
The Employment Agreement includes covenants regarding non-competition, non-solicitation and non-disclosure, which covenants extend for a period of one year after the termination of Mr. Fischer’s employment.
On October 27, 2015, the Bank also entered into a Change of Control Agreement with Mr. Fischer. Mr. Fischer’s change of control agreement provides that if he is terminated without cause within six months after a change of control over the Bank or Company, he would receive severance payments to be calculated as follows:
| · | For termination on or prior to December 31, 2016, Mr. Fischer’s then current salary would continue for 24 months after termination; |
| · | For termination after December 31, 2016 and before December 31, 2017, Mr. Fischer’s then current salary would continue for 24 months after termination, and he would receive his target bonus for the year in which he is terminated; and |
| · | For termination after December 31, 2017, Mr. Fischer’s then current salary would continue for a period of 24 months after termination, and he would receive his target bonus for the year in which he is terminated and the following year. |
Change of control is defined as any of the following events: acquisition of or power to vote more than fifty percent of the voting stock of the Bank or Company; merger or consolidation of the Bank or Company with or into another corporation; or merger of another corporation into the Bank or Company, provided that less than 50 percent of the total voting power of the Bank or Company remains with its former shareholders. Severance payments provided under the above agreements are mutually exclusive. In the event that Mr. Fischer is entitled to receive severance under the change of control agreement, the Company has no obligation to pay him any further amounts.
Tax Considerations
Under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), a limitation is placed on the tax deductibility of executive compensation paid by publicly-held corporations for individual compensation to certain executive officers in excess of $1,000,000 in any taxable year. No executive officer of the Company received compensation during the Company’s 2016 fiscal year that would be non-deductible under Section 162(m).
SUMMARY COMPENSATION TABLE
The following table summarizes compensation for the Company’s chief executive officer and the two most highly compensated executive officers, referred to collectively as the “Named Executive Officers,” for the fiscal years ended December 31, 2016 and 2015:
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| Name & Principal Position | Year | Salary ($) | All Other Compensation ($) | Total ($) | ||||||||||
| Daniel C. Fischer | 2016 | 248,532 | 13,244 | 261,776 | ||||||||||
| President and Chief Executive Officer | 2015 | 242,208 | 17,931 | 260,139 | ||||||||||
| James V. Livesay | 2016 | 125,000 | 4,423 | 129,423 | ||||||||||
| Chief Financial and Accounting Officer | 2015 | 115,192 | 0 | 115,192 | ||||||||||
All Other Compensation Table
| Name & Principal Position | Year | 401(k) Match ($) | Auto Allowance/Use of Company Owned Vehicle | Consulting Fees | Board Fees | Total | ||||||||||||||||
| Daniel C. Fischer | 2016 | 7,244 | 6,000 | 0 | 0 | 13,244 | ||||||||||||||||
| President and Chief Executive Officer | 2015 | 0 | 6,177 | 11,754 | 0 | 17,931 | ||||||||||||||||
| James V. Livesay | 2016 | 4,423 | 0 | 0 | 0 | 4,423 | ||||||||||||||||
| Chief Financial and Accounting Officer | 2015 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||
ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth the beneficial ownership of our common shares by: (1) each of our directors, (2) each executive officer named in the Summary Compensation Table above (the “Named Executive Officers”), (3) all the directors and executive officers of the Company as a group as of March 20, 2017, and (4) each person, group or entity known to us to own beneficially more than 5% of our outstanding common shares.
Beneficial ownership is determined according to the rules of the SEC and generally includes any shares over which a person possesses sole or shared voting or investment power and options that are currently exercisable or exercisable within 60 days. The ownership information of each director and officer, as the case may be, is based upon our records with respect to beneficial ownership. Except as otherwise indicated in the footnotes to this table, we believe that the beneficial owners of common shares listed below have sole investment and voting power with respect to their shares.
The table lists applicable percentage ownership based on 691,288 common shares outstanding as of March 20, 2017. Unless otherwise noted, (i) the address for each shareholder listed below is the same as our address, and (ii) all shares are owned solely by the individual.
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| Number of Shares | Percent of Class | |||||||
| Donald P. Wood | 15,938 | 2.31 | % | |||||
| Daniel Fischer | 470 | * | ||||||
| Jerry Don Johnson | 11,910 | (1) | 1.72 | % | ||||
| Billy Jo King | 4,776 | (2) | * | |||||
| Robert Lilley | 7,399 | (3) | 1.07 | % | ||||
| James V. Livesay | 375 | * | ||||||
| William J. Mauck | 3,226 | (4) | * | |||||
| Daniel Stohs | 11,153 | 1.61 | % | |||||
| Robert Carl Wolfinger, Jr. | 2,000 | * | ||||||
| All current directors and executive officers as a group (9 persons) | 57,247 | 8.28 | % | |||||
| Alan Stockmeister | 57,643 | 8.34 | % | |||||
| 213 Redondo Drive | ||||||||
| Jackson, Ohio 45640 | ||||||||
| Evergreen National Indemnity, fbo Edward Kilbarger | 48,600 | 7.03 | % | |||||
| MLPF&S | ||||||||
| 8425 Pulsar Place, St 2000 | ||||||||
| Columbus, Ohio 43240 | ||||||||
* Less than 1% of the outstanding shares.
| (1) | All share are jointly held by Mr. Johnson and his spouse. |
| (2) | Includes 1,194 shares held by his daughter and 2,388 shares held by his grandchildren and for which Mr. King has voting power. |
| (3) | Includes 1,562 shares held by his spouse’s trust for which Mr. Lilley is the trustee, and 100 shares held in Mr. Lilley’s revocable trust |
| (4) | Includes 3,225 shares held jointly by Mr. Mauck and his spouse. |
ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Related Party Transactions
The Board is responsible for reviewing and overseeing the procedures designed to identify “related party” transactions that are material to the Company’s consolidated financial statements or otherwise require disclosure under applicable laws and rules adopted by the SEC, and the Board has the authority to approve such “related party” transactions. In addition, as of December 31, 2016, each director and executive officer of the Company must complete a Director and Officer Questionnaire that requires disclosure of any transaction, arrangement or relationship with the Company or the Bank during the last fiscal year in which the director or executive officer, or any member of his or her immediate family, had a direct or indirect material interest. Any transaction, arrangement or relationship disclosed by a director or executive officer in the questionnaire is reviewed and considered by the Board in making independence determinations with respect to directors and resolving any conflicts of interest that may be implicated.
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During the Company’s 2016 fiscal year, the Bank entered into banking-related transactions in the ordinary course of business with certain executive officers and directors of the Company (including certain executive officers of the Bank), members of their immediate families and corporations or organizations with which they are affiliated. It is expected that similar transactions will be entered into in the future. All loans made to directors and executive officers (i) were made in the ordinary course of business; (ii) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to Citizens; and (iii) did not involve more than the normal risk of collectability or present other unfavorable features. The outstanding principal balance of loans to directors, executive officers, and principal shareholders of the Company (including certain executive officers of the Bank) and their associates as a group at December 31, 2016, was $279,000. As of the date of this Proxy Statement, all of these loans were performing loans.
During 2015, the Company renegotiated an existing promissory note in which it had previously borrowed $5.0 million from WLPM LLC, an Ohio limited liability company. Alan Stockmeister, a holder of over 5% of the Company’s outstanding stock and the brother-in-law of one of the Company’s former directors, Michael Shawd, is a managing member of WLPM LLC. The promissory note had an annual interest rate of 8.0%, a portion of which was paid by the Company each month, and a maturity date of December 31, 2015. In February 2015, the note was split into two pieces, a $2.3 million portion, held by Mr. Stockmeister, and a $2.7 million piece held by other members of WLPM LLC (“Note A”). The $2.3 million Stockmeister piece was subsequently replaced by a $1,644,546.60 note paying 6.00% interest and due August 4, 2021 (“Note B”) and 28,675 shares of the Company’s common stock. Terms of Note A were unchanged. The Company made payments of $400,000 in interest for the year ended December 31, 2014 and $185,000 in interest for the year ended December 31, 2015 on the WLPM note. In addition to monthly principal payments from available cash, in September 2015, the Company made a principal payment of $1.0 million on Note A and in December 2015, the Company retired Note A with a final principal payment of $1.4 million. Interest payments through the end of 2015 on Note B held by Mr. Stockmeister were approximately $100,000 with no principal due.
During 2016, the Company made periodic principal payments on Note B and, in October 2016, Note B was repaid in full and retired. Interest payments through the end of 2016 on Note B held by Mr. Stockmeister were approximately $70,000.
The Board reviewed this arrangement and concluded that it was not inconsistent with the Company’s best interests and did not constitute a conflict of interest.
In the normal course of business, the Company makes rebate payments to various automobile dealers for the placement of indirect automobile loans with the Bank. During 2016, the Company made such rebate payments to Don Wood Automotive, principally owned by Donald P. Wood, in the amount of $162,000. The Board reviewed this arrangement and concluded that it was not inconsistent with the Company’s best interests and did not constitute a conflict of interest.
Director Independence. The information required by Item 407(a) of SEC Regulation S-K is incorporated herein by reference from Item 10 above under the caption “Certain Committees of the Board of Directors”.
ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES
Fees Paid to Independent Registered Public Accounting Firms
Fees billed for services rendered by Suttle & Stalnaker, PLLC (“Suttle”) for each of the years ended December 31, 2016 and 2015 were as follows:
| 2016 | 2015 | |||||||
| Audit Fees | $ | 150,000 | $ | 150,700 | ||||
| Audit-Related Fees | $ | 0 | 0 | |||||
| Tax Fees | $ | 6,500 | $ | 8,250 | ||||
| All Other Fees | $ | 1,000 | 1,000 | |||||
| Total | $ | 157,500 | $ | 159,950 | ||||
Audit Fees represent fees for professional services rendered by Suttle in connection with the integrated audit of the Company’s annual consolidated financial statements, statutory audits, reviews of the unaudited interim consolidated financial statements included in the Company’s Quarterly Reports on Form 10-Q and other services provided in connection with statutory and regulatory filings or engagements.
Tax Fees represent fees relating to customs and tax compliance matters.
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All of the services rendered by Suttle to the Company and its subsidiaries during 2016 and 2015 were pre-approved by the Audit Committee.
ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) The following financial statements appear in Part II of this Annual Report:
(a) Report of Independent Registered Public Accounting Firm;
(b) Consolidated Balance Sheets as of December 31, 2016 and 2015;
(c) Consolidated Statements of Income for the years ended December 31, 2016 and 2015;
(d) Consolidated Statements of Comprehensive Income for the years ended December 31, 2016 and 2015;
(e) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2016 and 2015;
(f) Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015;
and
(g) Notes to Consolidated Financial Statements;
(a)(2) Financial Statement Schedules
Financial statement schedules have been omitted either because they are not applicable or because the required information is provided in the consolidated financial statements or in the notes thereto.
(a)(3) Exhibits
The following exhibits are filed with or incorporated by reference in this Annual Report on Form 10-K:
| Exhibit No. | Description | ||
| 3.1 | Articles of Incorporation of Citizens Independent Bancorp, Inc., as amended (Incorporated by reference to Exhibit No. 3.1 to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004)) | ||
| 3.2 | Code of Regulations of Citizens Independent Bancorp, Inc. (Incorporated by reference to Exhibit No. 3.2 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004)) | ||
| 4.1 | Specimen Common Share Certificate of Citizens Independent Bancorp, Inc. (Incorporated by reference to Exhibit No. 4.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004)) | ||
| 4.2 | Form of Warrant Certificate (Incorporated by reference to Exhibit No. 4.2 to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004)) | ||
| 4.3 | Form of Rights Certificate (Incorporated by reference to Exhibit No. 4.3 to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004)) |
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| 10.1 | 2012 Consent Order (Incorporated by reference to Exhibit No. 10.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004)) | ||
| 10.2 | Employment Agreement with Daniel C. Fischer (Incorporated by reference to Exhibit No. 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016) | ||
| 10.3 | Change of Control Agreement with Daniel C. Fischer (Incorporated by reference to Exhibit No. 10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016) | ||
| 10.4 | Supplemental Executive Retirement Plan with Daniel C. Fischer (Incorporated by reference to Exhibit No. 10.3 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016) | ||
| 14 | Citizen’s Independent Bancorp, Inc. Code of Ethics (Incorporated by reference to Exhibit No. 14 of the Corporation’s Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission on March 17, 2015.) | ||
| 16 | Letter from Dixon, Davis, Bagent & Co. to the Securities and Exchange Commission dated November 27, 2013 regarding change in Company’s Certifying Accountant. (Incorporated by reference to Exhibit No. 16.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 2, 2013 (File No.333-191004)) | ||
| 21 | Subsidiary of Citizens Independent Bancorp, Inc. (filed herewith) | ||
| 23 | Consent of Suttle & Stalnaker (filed herewith) | ||
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification – Principal Executive Officer (filed herewith) | ||
| 31.2 | Rule 13a-14(A)/15d-14(a) Certification – Principal Financial Officer (filed herewith) | ||
| 32 | Section 1350 Certification – Principal Executive Officer and Principal Financial Officer (filed herewith) | ||
| 101 | The following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Shareholders’ Equity (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Comprehensive Income, and (vi) the Notes to Consolidated Financial Statements. |
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Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Logan, State of Ohio, on March 31, 2017.
| Citizens Independent Bancorp, Inc. | ||
| By: | /s/ Daniel C. Fischer | |
| Daniel C. Fischer, President and Chief Executive Officer | ||
Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
| By: | /s/ Donald P. Wood | By: | /s/ William J. Mauck | |
| Donald P. Wood, Chairman of the Board | William J. Mauck, Director |
| Date: | March 31, 2017 | Date: | March 31, 2017 |
| By: | /s/ Robert Lilley | By: | /s/ Daniel Stohs | |
| Robert Lilley, Director | Daniel Stohs, Director |
| Date: | March 31, 2017 | Date: | March 31, 2017 |
| By: | /s/ BJ King | By: | /s/ Jerry Johnson | |
| BJ King, Director | Jerry Johnson, Director |
| Date: | March 31, 2017 | Date: | March 31, 2017 |
| By: | /s/ Robert Wolfinger | By: | /s/ James V. Livesay | |
| Robert Wolfinger, Director | James V. Livesay, EVP and Chief Financial Officer |
| Date: | March 31, 2017 | Date: | March 31, 2017 |
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EXHIBIT INDEX
| Exhibit No. |
Description | Location | ||
| 3.1 | Articles of Incorporation of Citizens Independent Bancorp, Inc., as amended | Incorporated by reference to Exhibit No. 3.1 to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004) | ||
| 3.2 | Code of Regulations of Citizens Independent Bancorp, Inc. | Incorporated by reference to Exhibit No. 3.2 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004) | ||
| 4.1 | Specimen Common Share Certificate of Citizens Independent Bancorp, Inc. | Incorporated by reference to Exhibit No. 4.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004) | ||
| 4.2 | Form of Warrant Certificate | Incorporated by reference to Exhibit No. 4.2 to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004) | ||
| 4.3 | Form of Rights Certificate | Incorporated by reference to Exhibit No. 4.3 to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004) | ||
| 10.1 | 2012 Consent Order | Incorporated by reference to Exhibit No. 10.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004) | ||
| 10.2 | Employment Agreement with Daniel C. Fischer | Incorporated by reference to Exhibit No. 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016) | ||
| 10.3 | Change of Control Agreement with Daniel C. Fischer | Incorporated by reference to Exhibit No. 10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016) | ||
| 10.4 | Supplemental Executive Retirement Plan with Daniel C. Fischer |
Incorporated by reference to Exhibit No. 10.3 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016) | ||
| 14 | Citizen’s Independent Bancorp, Inc. Code of Ethics | Incorporated by reference to Exhibit No. 14 of the Corporation’s Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission on March 17, 2015. | ||
| 16 | Letter from Dixon, Davis, Bagent & Company to the Securities and Exchange Commission dated November 27, 2013 regarding change in Company’s Certifying Accountant. | Incorporated by reference to Exhibit No. 16.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 2, 2013 (File No.333-191004) | ||
| 21 | Subsidiary of Citizens Independent Bancorp, Inc. | Filed herewith |
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| 23 | Consent of Suttle & Stalnaker | Filed herewith | ||
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification – Principal Executive Officer | Filed herewith | ||
| 31.2 | Rule 13a-14(A)/15d-14(a) Certification – Principal Financial Officer | Filed herewith | ||
| 32 | Section 1350 Certification – Principal Executive Officer and Principal Financial Officer | Filed herewith | ||
| 101 | The following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Shareholders’ Equity (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Comprehensive Income, and (vi) the Notes to Consolidated Financial Statements. | Filed herewith |
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